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St. Peters Institute of Higher Education and Research (Declared Under Section 3 of the UGC Act, 1956) AVADI, CHENNAI 600 054 TAMIL NADU


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Copyright 2011, Upendra Kachru

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Page Scheme of Examinations Syllabus of Total Quality Management Model Question Paper vi x xi

Unit I: Introduction to Production and Operation Management Lesson 1 Lesson 2 Lesson 3 Lesson 4 Production and Operations Management: An Introduction Communication in Production & Operations Management Computer Integrated Manufacturing and Services Systems Global Trade Operations and Supply Network Applications Unit II: Material and Inventory Management Lesson 5 Lesson 6 Lesson 7 Materials Management Inventory Management Enterprise Resource Planning Unit III: Planning and Forecasting Lesson 8 Lesson 9 Lesson 10 Production and Operations Planning Product and Product Design Forecasting Techniques Unit IV: Scheduling and Project Management Methods Lesson 11 Lesson 12 Scheduling Project Management Unit V: Facility, Layout Location and Work Measurement Lesson 13 Lesson 14 Facility Planning and Layout Work Measurement 307 357 237 264 147 168 202 71 87 129 3 22 42 54

Scheme of Examinations
I Semester Code No. 109MBT11 109MBT12 109MBT13 109MBT14 109MBT15 109MBT16 109MBT17 Course Title Theory Management Principles & Organisational Behaviour Economic Analysis for Business Decisions Statistics for Management Applied Operation Research for Management Financial and Management Accounting Legal Environment of Business Executive Communication Total II Semester Code No. 209MBT21 209MBT22 209MBT23 209MBT24 209MBT25 209MBT26 209MBT27 209MBP01 Course Title Theory Production & Operation Management Financial Management Decisions Marketing for Managers Human Resource Management Computer Applications and Management Information System Total Quality Management Applied Research Methods in Management Computer Lab for Business Administration Record Total 3 3 2 2 2 2 3 1 18 Credit EA 100 100 100 100 100 100 100 90 10 800 Marks Total 100 100 100 100 100 100 100 100 800 3 3 2 3 3 2 2 18 Credit EA 100 100 100 100 100 100 100 700 Marks Total 100 100 100 100 100 100 100 700

III Semester Code No. 309MBT01 309MBT02 E1*** E2*** E3*** E4*** E5*** E6*** Course Title Theory International Business Management Strategic Management Electives I Electives II Electives III Elective IV Elective V Elective VI Total 3 3 2 2 2 2 2 2 18 Credit EA 100 100 100 100 100 100 100 100 800 Marks Total 100 100 100 100 100 100 100 100 800

*** Any one group of electives from Marketing, Finance, Human Resource Management and System is to be chosen.

IV Semester Code No. 409MBT01 409MBT02 409MBP01 Course Title Theory Marketing Research and Consumer Behaviour Entrepreneurship Development Project and Vivavoce * Total 6 6 6 18 Credit EA 100 100 100 300 Marks Total 100 100 100 300

* In lieu of Project and Vivavoce, 409MBT03 - E-Commerce Technology and Management (6 Credits) is offered for Distance Education Students.

MARKETING ELECTIVES Code No. 309MBT03 309MBT04 309MBT05 309MBT06 309MBT07 309MBT08 Retail Management Services Marketing Advertising and Sales Promotion International Marketing Brand Management Rural and Social Marketing Total FINANCE ELECTIVES Code No. 309MBT09 309MBT10 309MBT11 309MBT12 309MBT13 309MBT14 Course Title Theory Security Analysis and Portfolio Management Merchant Banking and Financial Services International Trade Finance Strategic Financial Management Corporate Finance Derivatives Management Total 2 2 2 2 2 2 12 Credit EA 100 100 100 100 100 100 600 Marks Total 100 100 100 100 100 100 600 Course Title Theory 2 2 2 2 2 2 12 Credit EA 100 100 100 100 100 100 600 Marks Total 100 100 100 100 100 100 600

HUMAN RESOURCE MANAGEMENT ELECTIVES Code No. 309MBT15 309MBT16 309MBT17 309MBT18 309MBT19 309MBT20 Course Title Theory Managerial Behaviour and Effectiveness Organisational Change & Intervention Strategy Industrial Relations and Labour Welfare Labour Legislations Strategic Human Management and Development Corporate Governance & Corporate Social Responsibility Total SYSTEM ELECTIVES Code No. 309MBT21 309MBT22 309MBT23 309MBT24 309MBT25 309MBT26 Course Title Theory Software Development Database Management Systems Enterprise Resource Planning for Management Software Project and Quality Management Decision Support System Information Technology for Management Total 2 2 2 2 2 2 12 Credit EA 100 100 100 100 100 100 600 Marks Total 100 100 100 100 100 100 600 2 2 2 2 2 2 12 Credit EA 100 100 100 100 100 100 600 Marks Total 100 100 100 100 100 100 600


Syllabus UNIT I: INTRODUCATION TO PRODUCTION AND OPERATION MANAGEMENT Production and Operations Management (POM) - Need, History, System, Types, Functions and Communication in POM. Computer Integrated Manufacturing and Services system. Global/trade operations and supply network applications. UNIT II: MATERIAL AND INVENTORY MANAGEMENT Material Management (MM) - Handling Technology (Robots, Automated storage and retrieval systems (ASRS) and methods (JIT, Kanban, ABC Systems) Independent Demand Inventory Models - Fixed order system, Basic EOQ, EBQ: Models, Quantity discount models. Dependent Demand Inventory models - MRP and MRP.II systems introduction to ERP, e-business and e-operations strategies. UNIT III: PLANNING AND FORECASTING Introduction to Strategic, Tactical, Operational, Aggregate and Capacity Planning. Planning product design and development - Applications of CAD, Expert systems, Standardisation, Group Technology (GT) and Research and Development. Forecasting-types, methods (Qualitative and Quantitative), Types of variation in data, Minimising. Forecasting error and selection of forecasting methods. UNIT IV: SCHEDULING AND PROJECT MANAGEMENT METHODS Johnsons Algorithm for job sequencing (n job thro' 2 machines, n jobs thro' 3 machines, n jobs throm machines and 2 jobs thro'm machines). Use of Gantt charts, Queuing analysis and Critical Ratios as methods for job scheduling, PERT/CPM - Drawing the network, computation of processing time, floats and critical 'Path. Resource leveling techniques. UNIT V: FACILITY, LAYOUT LOCATION AND WORK MEASUREMENT Facility location Decisions (FLD) - Selections of country, region and site. Facility layout decision (FlyD) - Types (Fixed Position, and Production, Process, flexible), Methodologies (Distance Minimizing, Computer software systems (CRAFT, COREL, CORELAP, ALDEEP) Line Balancing and performance ratios, work measurement (WM), Method Study, Time study, Time measurement, Work Sampling, White color measurement and learning curves, Using WM to increase productivity. TEXT BOOKS: 1. R. Paneer Selvam, Production and Operations Management, Prentice Hall of India. 2. Sang M. Lee and Marc J Schniederjans, Operation Management, Publishers "utors, First Indian edition 1997. 3. Robert H.'Lowson, Strategic Operations Management (The competitive advantage), Vikas Publishing House, First Indian reprint, 2003. 4. Upendra Kachru, Production & Operation Management, Excel Books, 1st edition, New Delhi. REFERENCES: 1. Thomas E. Morton, Production and Operations Management, Vikas Publishing House, First Indian reprint 2003. 2. Mahapatra P.B., Computer Aided Production Management, Prentice Hall of India, 2001. 3. Martand T. Telsang, Production Management, S Chand and Company, First edition, 2005.


(Regulations 2009)

Time: 3 Hours Answer ALL the questions PART A 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Define Production and Operation Management. What is Computer Integrated Manufacturing? Briefly explain Kanban System. Define EOQ. What is Capacity Planning? Briefly explain Cellular Manufacturing. What are Latest Finish and Latest Start in Project Management? Briefly explain Critical Path. What is Work Sampling? Define Productivity. PART B 11. (a) (b) 12. (a) (b) 13. (a) (b) Explain the different types of Production System. or Discuss the Historical Evolution of Operations Management. Discuss the components of Integrated Materials Management. or Explain the E-business and ERP Concept. Explain the various factors affecting Demand Forecast. or Explain the Aggregate Planning Strategies.

Maximum: 100 marks

(10 2 = 20 Marks)

(5 16 = 80 Marks)


(a) (b)

Discuss the terms used in Project Management. or Consider the following three machines and five jobs flow shop scheduling problem. Using Johnsons algorithm, obtain the optimal sequence which will minimize the makespan.
Job i 1 2 3 4 5 1 8 10 6 7 11 Machine Number 2 5 6 2 3 4 3 4 9 8 6 5


(a) (b)

Discuss the objectives of Plant Layout. or Explain the concept of Work Measurement.

1 Production and Operations Management: An Introduction

Unit I Introduction to Production and Operation Management

2 Production and Operation Management


STRUCTURE 1.0 1.1 1.2 1.3 1.4 Objectives Introduction History Concept of Production Production System 1.4.1 1.5 1.6 1.7 Classification of Production System

3 Production and Operations Management: An Introduction

Production Management Operating System Operations Management 1.7.1 1.7.2 A Framework for Managing Operations Objectives of Operations Management

1.8 1.9

Managing Global Operations Scope of Production and Operations Management 1.9.1 1.9.2 1.9.3 1.9.4 1.9.5 1.9.6 1.9.7 1.9.8 Location of Facilities Plant Layout and Material Handling Product Design Process Design Production Planning and Control Quality Control Materials Management Maintenance Management

1.10 1.11 1.12 1.13

Let us Sum up Glossary Suggested Readings Questions

4 Production and Operation Management

After studying this lesson, you should be able to:

Explain the meaning and concept of production and operation management State the historical developments in the field of production and operations management Describe the production system and management Explain and discuss the operating system and operations management Discuss global operations management and scope of production and operations management

Production and operations management concerns itself with the conversion of inputs into outputs, using physical resources, so as to provide the desired utility/utilitiesof form, place, possession or state or a combination thereofto the customer while meeting the other organisational objectives of effectiveness, efficiency and adaptability. It distinguishes itself from the other such functions such as personnel, marketing, etc. by its primary concern for conversion by using physical resources. Of course, there may be and would be a number of situations in either marketing or personnel or other functions which can be classified or sub-classified under production and operations management. For example, (i) the physical distribution of items to the customers, (ii) the arrangement of collection of marketing information, (iii) the actual selection and recruitment process, (iv) the paper flow and conversion of the accounting information usable by the judge in a court of law, etc. can all be put under the banner of production and operations management. The conversion here is subtle, unlike manufacturing which is obvious. While in case (i) and (ii) it is the conversion of place and possession characteristics of the product, in (iv) and (v) it is the conversion of the state characteristics. And this conversion is effected by using physical resources. This is not to deny the use of other resources such as information in production and operations management. The input and/or output could also be non-physical such as information, but the conversion process uses physical resources for the conversion process is what distinguishes production and operations management from other functional disciplines. Often production and operations management systems are described as providing physical goods or services. Perhaps, a sharper distinction such as the four customer utilities and physical/non-physical nature of inputs and/or outputs would be more appropriate. A clear demarcation is not always possible between operations systems that provide physical goods and those that provide service, as an activity deemed to be providing physical goods may also be providing service, and vice versa. We may also say that the actual production and operations management systems are quite complex involving multiple utilities to be provided to the customer, with a mix of physical and non-physical inputs and outputs and perhaps with a multiplicity of customers. Today, our customers need not only be outsiders but also our own inside staff. In spite of these variations in (i) input type (ii) output type, (iii) customers serviced, and (iv) type of utility provided to the customers, production and operations management distinguishes itself in terms of conversion effected by the use of physical resources such as men, materials, and machinery.

For over two centurys operations and production management has been recognized as an important factor in a countrys economic growth. The traditional view of manufacturing management began in eighteenth century when Adam Smith recognized the economic benefits of specialization of labor. He recommended breaking of jobs down into subtasks and recognizes workers to specialized tasks in which they would become highly skilled and efficient. In the early twentieth century, F.W. Taylor implemented Smiths theories and developed scientific management. From then till 1930, many techniques were developed prevailing the traditional view. Brief information about the contributions to manufacturing management is shown in the Table 1.1.
Table 1.1 Historical Summary of Operations Management
Date 1776 1799 1832 1900 1900 1901 1915 1927 1931 1935 1940 1946 1947 1950 1951 1960 1970 Event Specialization of labor in manufacturing Interchangeable parts, cost accounting Division of labor by skill; assignment of jobs by skill; basics of time study Scientific management time study and work study developed; dividing planning and doing of work Motion of study of jobs Scheduling techniques for employees, machines jobs in manufacturing Economic lot sizes for inventory control Human relations; the Hawthorne studies Statistical inference applied to product quality: quality control charts Statistical sampling applied to quality control: inspection sampling plans Operations research applications in World War II Digital computer Linear programming Mathematical programming, on-linear and stochastic Commercial digital computer: large-scale computations available. Organisational behaviour: continued study of people at work Integrating operations into overall strategy and policy, Computer applications to manufacturing, Scheduling and control, Material requirement planning (MRP) Quality and productivity applications from Japan: robotics, CAD-CAM Adam Smith Eli Whitney and others Charles Babbage Frederick W. Taylor Frank B. Gilbreth Henry L. Gantt F.W. Harris Elton Mayo W.A. Shewart H.F. Dodge & H.G. Roming P.M. Blacker and others. John Mauchlly and J.P. Eckert G.B. Dantzig, Williams & others A. Charnes, W.W. Cooper processes & others Sperry Univac L. Cummings, L. Porter W. Skinner J. Orlicky and G. Wright W.E. Deming and J. Juran. Initiator

5 Production and Operations Management: An Introduction


Production management becomes the acceptable term from 1930s to 1950s. As F.W. Taylors works become more widely known, managers developed techniques that focused on economic efficiency in manufacturing. Workers were studied in great detail to eliminate wasteful efforts and achieve greater efficiency. At the same time, psychologists, socialists and other social scientists began to study people and human behaviour in the working environment. In addition, economists, mathematicians, and computer socialists contributed newer, more sophisticated analytical approaches.

6 Production and Operation Management

With the 1970s emerges two distinct changes in our views. The most obvious of these, reflected in the new name operations management was a shift in the service and manufacturing sectors of the economy. As service sector became more prominent, the change from production to operations emphasized the broadening of our field to service organisations. The second, more suitable change was the beginning of an emphasis on synthesis, rather than just analysis, in management practices. Lessons Learned from History Economic history and history of operations management are both important in the sense that these would suggest some lessons that can be learnt for the future. History helps us to know the trends and to take a peek at the future. If the 21st century organisations have manage their operations well, they will have to try to understand the what and how of the productivity improvements in the past and what led to the various other developments in the field of production and operations management. The past could tell us a thing or two about the future if not everything. Looking at the speed with which technology, economics, production and service systems, and the societys values and framework seem to be changing, one may tend to think that unprecedented things have been happening at the dawn of this millennium. However, there seems to be a common thread running all through. Limiting ourselves to history of production or manufacturing, we see that the effort has always been on increasing productivity through swift and even flow of materials through the production system. During Taylor era, the production activities centered on an individual. Hence, methods has to be found to standardize the work and to get the most out of the individual thus making the manufacturing flows even and fast. Fords assembly line was an attempt at further improving the speed and the evenness of the flows. Thereafter, quality improvements reduced the bottlenecks and the variability in the processes considerably, thus further facilitating the even and rapid flow of goods through the production system. The attempt has always been to reduce the variability, because variability could impede the pace and the steadiness of the flow. Earlier, variability came mostly through the variability in the work of the workers. However, in the later decades the variability came from the market. Customers started expecting a variety of products. Manufacturers, therefore, started grouping more easily; this helped in quickly attending to bottlenecks, if any, and in ensuring a speedy and even flow through the maintenance system. Cellular manufacturing or Group Technology was thus born. Materials Requirement Planning (MRP) and Enterprise Resource Planning (ERP) were other efforts at reducing the variability by integrating various functions within the operations system and the enterprise as a whole, respectively. The customer expectations from the manufacturing system increased further. They started asking for a variety in the products that had to be supplied just in time. In order to realise this, the manufacturing company had to eliminate the unevenness or variations within its own plant as also limit the variations (unevenness) in the inputs that came form outside. This required the outside system to be controlled for unevenness in flow despite the requirements of varied items in varied quantities at varied times. This should not be done effectively unless the outsider became an insider. Therefore, the entire perspective of looking at suppliers and other outside associates in business changed. As we notice, the scope of production and operations management has been expanding and the discipline is getting more inclusivefrom employees to business associates in supply chains to external physical environment to the society at large. Its concerns are widening from a focus on employees efficiency to improvement in management systems and technological advances to human relationships to social issues.

The inroads made by the service element have been subtle and the impacts have been profound. It unfolded an overwhelming human and social perspective. Organisations are realising that what is advantageous to the larger society, is advantageous to the organisation. This does not mean that individual employee efficiencies, operations planning and control techniques, systems and strategies are less relevant; in fact, they are as relevant or more so today in the larger social context. Materials and supply management was important in yesteryears; it is even more important in the light of environmental and other social concerns which production and operations management discipline has to address today. It is also extremely important to take adequate cognizance of further developments in science and technology, the changes in value systems and in the social structures that are taking place worldwide. Developments in science and technology gives rise to certain social mores, like, for instance, the mobile phones are doing today. Similarly, the changed social interactions and value systems give rise to changed expectations from the people. The type of products and services that need to be produced would, therefore, keep changing. Today a product represents a certain group of characteristics; a service represents certain other utility and group of characteristics. These may undergo changes, perhaps fundamental changes, in the days to come. We may see rapid shifts in the lifestyles. So, whether it is for consumption or for the changed lifestyle, the type of products demanded and the character of services desired may be quite different. Production and operations management as a discipline has to respond to these requirements. That is the challenge before the modern day organisations.

7 Production and Operations Management: An Introduction


Production function is that part of an organisation, which is concerned with the transformation of a range of inputs into the required outputs (products) having the requisite quality level. Production is defined as the step-by-step conversion of one form of material into another form through chemical or mechanical process to create or enhance the utility of the product to the user. Thus production is a value addition process. At each stage of processing, there will be value addition. Edwood Buffa defines production as a process by which goods and services are created. Some examples of production are: manufacturing custom-made products like, boilers with a specific capacity, constructing flats, some structural fabrication works for selected customers, etc., and manufacturing standardized products like, car, bus, motor cycle, radio, television, etc.


The production system of an organisation is that part, which produces products of an organisation. It is that activity whereby resources, flowing within a defined system, are combined and transformed in a controlled manner to add value in accordance with the policies communicated by management. A simplified production system is shown in Figure 1.1. The production system has the following characteristics: 1. Production is an organised activity, so every production system has an objective. 2. The system transforms the various inputs to useful outputs. 3. It does not operate in isolation from the other organisation system. 4. There exists a feedback about the activities, which is essential to control and improve system performance.

8 Production and Operation Management

Figure 1.1: Schematic Production System

1.4.1 Classification of Production System

Production systems can be classified as Job Shop, Batch, Mass and Continuous Production systems.

Figure 1.2: Classification of Production Systems

Job Shop Production Job shop production are characterized by manufacturing of one or few quantity of products designed and produced as per the specification of customers within prefixed time and cost. The distinguishing feature of this is low volume and high variety of products. A job shop comprises of general purpose machines arranged into different departments. Each job demands unique technological requirements, demands processing on machines in a certain sequence. Characteristics The Job-shop production system is followed when there is: 1. High variety of products and low volume. 2. Use of general purpose machines and facilities. 3. Highly skilled operators who can take up each job as a challenge because of uniqueness.

4. Large inventory of materials, tools, parts. 5. Detailed planning is essential for sequencing the requirements of each product, capacities for each work centre and order priorities. Advantages Following are the advantages of job shop production: 1. Because of general purpose machines and facilities variety of products can be produced. 2. Operators will become more skilled and competent, as each job gives them learning opportunities. 3. Full potential of operators can be utilised. 4. Opportunity exists for creative methods and innovative ideas. Limitations Following are the limitations of job shop production: 1. Higher cost due to frequent set up changes. 2. Higher level of inventory at all levels and hence higher inventory cost. 3. Production planning is complicated. 4. Larger space requirements. Batch Production According to the American Production and Inventory Control Society (APICS) Batch production is defined as a form of manufacturing in which the job passes through the functional departments in lots or batches and each lot may have a different routing. It is characterized by the manufacture of limited number of products produced at regular intervals and stocked awaiting sales. Characteristics Batch production system is used under the following circumstances: 1. When there is shorter production runs. 2. When plant and machinery are flexible. 3. When plant and machinery set up is used for the production of item in a batch and change of set up is required for processing the next batch. 4. When manufacturing lead time and cost are lower as compared to job order production. Advantages Following are the advantages of batch production: 1. Better utilisation of plant and machinery. 2. Promotes functional specialization. 3. Cost per unit is lower as compared to job order production. 4. Lower investment in plant and machinery. 5. Flexibility to accommodate and process number of products. 6. Job satisfaction exists for operators.

9 Production and Operations Management: An Introduction

10 Production and Operation Management

Limitations Following are the limitations of batch production: 1. Material handling is complex because of irregular and longer flows. 2. Production planning and control is complex. 3. Work in process inventory is higher compared to continuous production. 4. Higher set up costs due to frequent changes in set up. Mass Production Manufacture of discrete parts or assemblies using a continuous process are called mass production. This production system is justified by very large volume of production. The machines are arranged in a line or product layout. Product and process standardization exists and all outputs follow the same path. Characteristics Mass production is used under the following circumstances: 1. Standardization of product and process sequence. 2. Dedicated special purpose machines having higher production capacities and output rates. 3. Large volume of products. 4. Shorter cycle time of production. 5. Lower in process inventory. 6. Perfectly balanced production lines. 7. Flow of materials, components and parts is continuous and without any back tracking. 8. Production planning and control is easy. 9. Material handling can be completely automatic. Advantages Following are the advantages of mass production: 1. Higher rate of production with reduced cycle time. 2. Higher capacity utilisation due to line balancing. 3. Less skilled operators are required. 4. Low process inventory. 5. Manufacturing cost per unit is low. Limitations Following are the limitations of mass production: 1. Breakdown of one machine will stop an entire production line. 2. Line layout needs major change with the changes in the product design. 3. High investment in production facilities. 4. The cycle time is determined by the slowest operation.

Continuous Production Production facilities are arranged as per the sequence of production operations from the first operations to the finished product. The items are made to flow through the sequence of operations through material handling devices such as conveyors, transfer devices, etc. Characteristics Continuous production is used under the following circumstances: 1. Dedicated plant and equipment with zero flexibility. 2. Material handling is fully automated. 3. Process follows a predetermined sequence of operations. 4. Component materials cannot be readily identified with final product. 5. Planning and scheduling is a routine action. Advantages Following are the advantages of continuous production: 1. Standardization of product and process sequence. 2. Higher rate of production with reduced cycle time. 3. Higher capacity utilisation due to line balancing. 4. Manpower is not required for material handling as it is completely automatic. 5. Person with limited skills can be used on the production line. 6. Unit cost is lower due to high volume of production. Limitations Following are the limitations of continuous production: 1. Flexibility to accommodate and process number of products does not exist. 2. Very high investment for setting flow lines. 3. Product differentiation is limited.

11 Production and Operations Management: An Introduction


Production management is a process of planning, organising, directing and controlling the activities of the production function. It combines and transforms various resources used in the production subsystem of the organisation into value added product in a controlled manner as per the policies of the organisation. Objectives of Production Management The objective of the production management is to produce goods services of right quality and quantity at the right time and right manufacturing cost. 1. Right Quality: The quality of product is established based upon the customers needs. The right quality is not necessarily best quality. It is determined by the cost of the product and the technical characteristics as suited to the specific requirements. 2. Right Quantity: The manufacturing organisation should produce the products in right number. If they are produced in excess of demand the capital will block up in

12 Production and Operation Management

the form of inventory and if the quantity is produced in short of demand, leads to shortage of products. 3. Right Time: Timeliness of delivery is one of the important parameter to judge the effectiveness of production department. So, the production department has to make the optimal utilisation of input resources to achieve its objective. 4. Right Manufacturing Cost: Manufacturing costs are established before the product is actually manufactured. Hence, all attempts should be made to produce the products at pre-established cost, so as to reduce the variation between actual and the standard (pre-established) cost. Check Your Progress 1 Fill in the blanks: 1. The traditional view of manufacturing management began in eighteenth century when recognized the economic benefits of specialization of labor. 2. Production function is that part of an organisation, which is concerned with the of a range of inputs into the required outputs (products) having the requisite quality level. 3. The production system of an organisation is that part, which produces . of an organisation. 4. Manufacture of discrete parts or assemblies using a continuous process are called . 5. Production management is a process of planning, organising, directing and controlling the activities of the production .


Operating system converts inputs in order to provide outputs which are required by the ultimate customer. It converts physical resources into outputs, the function of which is to satisfy customer wants i.e., to provide some utility for the customer. In some of the organisation the product is a physical good (hotels) while in others it is a service (hospitals). Bus and taxi services, tailors, hospital and builders are the examples of an operating system. Concept of Operations An operation is defined in terms of the mission it serves for the organisation, technology it employs and the human and managerial processes it involves. Operations in an organisation can be categorized into manufacturing operations and service operations. Manufacturing operations is a conversion process that includes manufacturing yields a tangible output: a product, whereas, a conversion process that includes service yields an intangible output: a deed, a performance, an effort. Distinction between Manufacturing Operations and Service Operations Following characteristics can be considered for distinguishing manufacturing operations with service operations: 1. Tangible/Intangible nature of output 2. Consumption of output

3. Nature of work (job) 4. Degree of customer contact 5. Customer participation in conversion 6. Measurement of performance. Manufacturing is characterized by tangible outputs (products), outputs that customers consume overtime, jobs that use less labor and more equipment, little customer contact, no customer participation in the conversion process (in production), and sophisticated methods for measuring production activities and resource consumption as product are made. Service is characterized by intangible outputs, outputs that customers consumes immediately, jobs that use more labor and less equipment, direct consumer contact, frequent customer participation in the conversion process, and elementary methods for measuring conversion activities and resource consumption. Some services are equipment based namely rail-road services, telephone services and some are people based namely tax consultant services, hair styling.

13 Production and Operations Management: An Introduction


1.7.1 A Framework for Managing Operations
Managing operations can be enclosed in a frame of general management function. Operation managers are concerned with planning, organising, and controlling the activities which affect human behaviour through models.

Planning: Activities that establishes a course of action and guide future decision-making is planning. The operations manager defines the objectives for the operations subsystem of the organisation, and the policies, and procedures for achieving the objectives. This stage includes clarifying the role and focus of operations in the organisations overall strategy. It also involves product planning, facility designing and using the conversion process. Organising: Activities that establishes a structure of tasks and authority. Operation managers establish a structure of roles and the flow of information within the operations subsystem. They determine the activities required to achieve the goals and assign authority and responsibility for carrying them out. Controlling: Activities that assure the actual performance in accordance with planned performance. To ensure that the plans for the operations subsystems are accomplished, the operations manager must exercise control by measuring actual outputs and comparing them to planned operations management. Controlling costs, quality, and schedules are the important functions here. Behaviour: Operation managers are concerned with how their efforts to plan, organise, and control affect human behaviour. They also want to know how the behaviour of subordinates can affect managements planning, organising, and controlling actions. Their interest lies in decision-making behaviour. Models: As operation managers plan, organise, and control the conversion process, they encounter many problems and must make many decisions. They can simplify their difficulties using models like aggregate planning models for examining how best to use existing capacity in short-term, break even analysis to identify break even volumes, linear programming and computer simulation for capacity utilisation, decision tree analysis for long-term capacity problem of facility expansion, simple median model for determining best locations of facilities etc.

14 Production and Operation Management

1.7.2 Objectives of Operations Management

Objectives of operations management can be categorized into customer service and resource utilisation.

Customer Service: The first objective of operating systems is the customer service to the satisfaction of customer wants. Therefore, customer service is a key objective of operations management. The operating system must provide something to a specification which can satisfy the customer in terms of cost and timing. Thus, primary objective can be satisfied by providing the right thing at a right price at the right time. These aspects of customer servicespecification, cost and timingare described for four functions in Table 1.2. They are the principal sources of customer satisfaction and must, therefore, be the principal dimension of the customer service objective for operations managers.
Table 1.2: Aspects of Customer Service
Principal Function Manufacture Principal Customer Wants Primary Considerations Goods of a given, requested or acceptable specification Management of a given, requested or acceptable specification Other Considerations Cost, i.e., purchase price or cost of obtaining goods. Timing, i.e., delivery delay from order or request to receipt of goods. Cost, i.e., cost of movements. Timing, i.e., 1. 2. Supply Goods of a given, requested or acceptable specification Treatment of a given, requested or acceptable specification Duration or time to move. Wait or delay from requesting to its commencement.


Cost, i.e., purchase price or cost of obtaining goods. Timing, i.e., delivery delay from order or request to receipt of goods. Cost, i.e., cost of movements. Timing, i.e., 1. 2. Duration or time required for treatment. Wait or delay from requesting treatment to its commencement.


Generally an organisation will aim reliably and consistently to achieve certain standards and operations manager will be influential in attempting to achieve these standards. Hence, this objective will influence the operations managers decisions to achieve the required customer service.

Resource Utilisation: Another major objective of operating systems is to utilise resources for the satisfaction of customer wants effectively, i.e., customer service must be provided with the achievement of effective operations through efficient use of resources. Inefficient use of resources or inadequate customer service leads to commercial failure of an operating system. Operations management is concerned essentially with the utilisation of resources, i.e., obtaining maximum effect from resources or minimizing their loss, under utilisation or waste. The extent of the utilisation of the resources potential might be expressed in terms of the proportion of available time used or occupied, space utilisation, levels of activity, etc. Each measure indicates the extent to which the potential or capacity of such resources is utilised. This is referred as the objective of resource utilisation.

Operations management is also concerned with the achievement of both satisfactory customer service and resource utilisation. An improvement in one will often give rise to deterioration in the other. Often both cannot be maximized, and hence a satisfactory performance must be achieved on both objectives. All the activities of operations management must be tackled with these two objectives in mind, and many of the problems will be faced by operations managers because of this conflict. Hence, operations managers must attempt to balance these basic objectives. Table 1.3 summarizes the twin objectives of operations management. The type of balance established both between and within these basic objectives will be influenced by market considerations, competitions, the strengths and weaknesses of the organisation, etc. Hence, the operations managers should make a contribution when these objectives are set.
Table 1.3: The Twin Objectives of Operations Management
The customer service objective To provide agreed/adequate levels of customer service (and hence customer satisfaction) by providing goods or services with the right specification, at the right cost and at the right time. The resource utilisation objective To achieve adequate levels of resource utilisation (or productivity) e.g., to achieve agreed levels of utilisation of materials, machines and labor.

15 Production and Operations Management: An Introduction


The term globalisation describes businesses deployment of facilities and operations around the world. Globalisation can be defined as a process in which geographic distance becomes a factor of diminishing importance in the establishment and maintenance of cross border economic, political and socio-cultural relations. It can also be defined as worldwide drive toward a globalised economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments. There are four developments, which have spurred the trend toward globalisation. These are: 1. Improved transportation and communication technologies; 2. Opened financial systems; 3. Increased demand for imports; and 4. Reduced import quotas and other trade barriers. When a firm sets up facilities abroad it involve some added complexities in its operation. Global markets impose new standards on quality and time. Managers should not think about domestic markets first and then global markets later, rather it could be think globally and act locally. Also, they must have a good understanding of their competitors. Some other important challenges of managing multinational operations include other languages and customs, different management style, unfamiliar laws and regulations, and different costs. Managing global operations would focus on the following key issues:

To acquire and properly utilise the following concepts and those related to global operations, supply chain, logistics, etc. To associate global historical events to key drivers in global operations from different perspectives.

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To develop criteria for conceptualisation and evaluation of different global operations. To associate success and failure cases of global operations to political, social, economical and technological environments. To envision trends in global operations. To develop an understanding of the world vision regardless of their country of origin, residence or studies in a respectful way of perspectives of people from different races, studies, preferences, religion, politic affiliation, place of origin, etc.


Production and operations management concern with the conversion of inputs into outputs, using physical resources, so as to provide the desired utilities to the customer while meeting the other organisational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from other functions such as personnel, marketing, finance, etc., by its primary concern for conversion by using physical resources. Following are the activities which are listed under production and operations management functions:

1.9.1 Location of Facilities

Location of facilities for operations is a long-term capacity decision which involves a long term commitment about the geographically static factors that affect a business organisation. It is an important strategic level decision-making for an organisation. It deals with the questions such as where our main operations should be based? The selection of location is a key-decision as large investment is made in building plant and machinery. An improper location of plant may lead to waste of all the investments made in plant and machinery equipments. Hence, location of plant should be based on the companys expansion plan and policy, diversification plan for the products, changing sources of raw materials and many other factors. The purpose of the location study is to find the optimal location that will results in the greatest advantage to the organisation.

1.9.2 Plant Layout and Material Handling

Plant layout refers to the physical arrangement of facilities. It is the configuration of departments, work centres and equipment in the conversion process. The overall objective of the plant layout is to design a physical arrangement that meets the required output quality and quantity most economically. Material Handling refers to the moving of materials from the store room to the machine and from one machine to the next during the process of manufacture. It is also defined as the art and science of moving, packing and storing of products in any form. It is a specialized activity for a modern manufacturing concern, with 50 to 75% of the cost of production. This cost can be reduced by proper section, operation and maintenance of material handling devices. Material handling devices increases the output, improves quality, speeds up the deliveries and decreases the cost of production. Hence, material handling is a prime consideration in the designing new plant and several existing plants.

1.9.3 Product Design

Product design deals with conversion of ideas into reality. Every business organisation have to design, develop and introduce new products as a survival and growth strategy.

Developing the new products and launching them in the market is the biggest challenge faced by the organisations. The entire process of need identification to physical manufactures of product involves three functions: marketing, product development, and manufacturing. Product development translates the needs of customers given by marketing into technical specifications and designing the various features into the product to these specifications. Manufacturing has the responsibility of selecting the processes by which the product can be manufactured. Product design and development provides link between marketing, customer needs and expectations and the activities required to manufacture the product.

17 Production and Operations Management: An Introduction

1.9.4 Process Design

Process design is a macroscopic decision-making of an overall process route converting the raw material into finished goods. These decisions encompass selection of a process, choice of technology, process flow analysis and layout of facilities. Hence, the important decisions in process design are to analyse workflow for converting raw material into finished product and to select workstation for each included in the workflow. for the the the the

1.9.5 Production Planning and Control

Production planning and control can be defined as the process of planning the production in advance, setting the exact route of each item, fixing the starting and finishing dates for each item, to give production orders to shops and to follow up the progress of products according to orders. The principle of production planning and control lies in the statement First Plan Your Work and then Work on Your Plan. Main functions of production planning and control includes planning, routing, scheduling, dispatching and follow-up.

Planning is deciding in advance what to do, how to do it, when to do it and who is to do it. Planning bridges the gap from where we are, to where we want to go. It makes it possible for things to occur which would not otherwise happen. Routing may be defined as the selection of path which each part of the product will follow, which being transformed from raw material to finished products. Routing determines the most advantageous path to be followed from department to department and machine to machine till raw material gets its final shape. Scheduling determines the programme for the operations. Scheduling may be defined as the fixation of time and date for each operation as well as it determines the sequence of operations to be followed. Dispatching is concerned with the starting the processes. It gives necessary authority so as to start a particular work, which has already been planned under Routing and Scheduling. Therefore, dispatching is release of orders and instruction for the starting of production for any item in acceptance with the route sheet and schedule charts. The function of follow-up is to report daily the progress of work in each shop in a prescribed proforma and to investigate the causes of deviations from the planned performance.

1.9.6 Quality Control

Quality Control (QC) may be defined as a system that is used to maintain a desired level of quality in a product or service. It is a systematic control of various factors that affect the quality of the product. Quality control aims at prevention of defects at the source, relies on effective feed back system and corrective action procedure.

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Quality control can also be defined as that industrial management technique by means of which product of uniform acceptable quality is manufactured. It is the entire collection of activities which ensures that the operation will produce the optimum quality products at minimum cost. The main objectives of quality control are:

To improve the companies income by making the production more acceptable to the customers i.e., by providing long life, greater usefulness, maintainability, etc. To reduce companies cost through reduction of losses due to defects. To achieve interchangeability of manufacture in large scale production. To produce optimal quality at reduced price. To ensure satisfaction of customers with productions or services or high quality level, to build customer goodwill, confidence and reputation of manufacturer. To make inspection prompt to ensure quality control. To check the variation during manufacturing.

1.9.7 Materials Management

Materials management is that aspect of management function which is primarily concerned with the acquisition, control and use of materials needed and flow of goods and services connected with the production process having some predetermined objectives in view. The main objectives of materials management are:

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

1.9.8 Maintenance Management

In modern industry, equipment and machinery are a very important part of the total productive effort. Therefore, their idleness or downtime becomes are very expensive. Hence, it is very important that the plant machinery should be properly maintained. The main objectives of maintenance management are: 1. To achieve minimum breakdown and to keep the plant in good working condition at the lowest possible cost. 2. To keep the machines and other facilities in such a condition that permits them to be used at their optimal capacity without interruption. 3. To ensure the availability of the machines, buildings and services required by other sections of the factory for the performance of their functions at optimal return on investment.

Check Your Progress 2 Fill in the blanks: 1. Operating system converts inputs in order to provide outputs which are required by a .. 2. Operations in an organisation can be categorized into manufacturing operations and . operations. 3. Managing operations can be enclosed in a frame of general .. function. 4. The first objective of is the customer service to the satisfaction of customer wants. 5. When a firm sets up facilities abroad it involve some added in its operation.

19 Production and Operations Management: An Introduction


This lesson discusses the historical background, definition and the basic concepts of Operations Management. We will also examine the responsibilities of the Operation Manager and Operations Managements interface with other functions. In the last section, we will identify the future challenges that will impact this discipline. Todays consumers have high expectations, and these are on the rise every day. Consumers demand an increasing variety of products with new and improved features that meet their changing needs; products that are defect-free, have high performance, are reliable and durable, and are easy to repair. They demand rapid and excellent service for the products they buy. A focus on the issues central to operations management will soon carry us beyond existing technologies and provide the catalyst for developing new ones. The set of challenging problems is boundless, as is the upside potential in this new era. Although ultimately it is the problems facing managers that will define objectives and techniques, there are already visible broad outlines of potentially new and exciting developments. These include agile production and mass customization which will enable firms to make products better, cheaper, and faster than their competitors and facilitate innovation and increased product variety. Nonetheless, transforming operations from stable, rigid systems to operations that support agility will continue to be a difficult challenge. Service organisations are a large and growing part of the world economy. Services are difficult to inventory so that variability must be buffered by capacity or time. The search for the distinctive attributes of service operations will continue. Financial services and call centres already have their own literature. It is clear that health-care operations will be of increasing economic importance. There will be major developments on how to design, deploy, and operate systems offering new services, or old services via new technologies. These organisations will also have to meet the demands of future customers in many of their attributes. When customers go to buy services, they expect indeed demand short waiting and processing times, availability when needed, courteous treatment from employees, consistency, accessibility and convenience, accuracy, and responsiveness to unexpected problems. The rapid rate of the evolution of systems of operations management in both physical and organisational dimensions; the evolution of legal structures that constrain the

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terms of trade and pollution, and trade structures that raise challenging issues of globalizationall these provide vast opportunities to be addressed. These will throw up unanswered and as-yet-unposed questions. Many of these will involve broader decision scope, more decision makers, inclusion of higher risk and greater recognition of business realities that have often been ignored. The challenges before us are great, and these will call for creativity and dedication. However, there is always hope for the future because "better, faster, cheaper" defines the heart and soul of Operations Management. This suggests that Operations Management principles and tools will keep providing benefits to all functional managers in the foreseeable future.

Production and Operations Management: Planning, coordination and controlling of an organisation's resources to facilitate the production process. POM is an extremely important management area. Issues such as the location of production facilities, labor and transportation costs, and production forecasting are extremely important considerations. Operations Management: Operations management focuses on carefully managing the processes to produce and distribute products and services. Performance: It is defined by the cumulative benefits that will result if the product is purchased and used as intended. Functionality: Functionality is a measure of the extent the product, when properly used, is able to accomplish the intended feat. Quality: It is defined as the extent to which a product or service is delivered consistent with what the customer expects. Operations Research (OR): Operations research is the application of scientific methods to improve the effectiveness of operations, decisions and management, by means, such as analysing data, creating mathematical models and proposing innovative approaches. Goods: These are tangible items that are usually produced in one location and purchased in another. They can be transferred from one place to another and stored for purchase by a consumer at a later time. Services: Services are intangible products that are consumed as they are created. Direct customer contact is a key characteristic of services.

Check Your Progress: Answers

CYP 1 1. Adam Smith 2. transformation 3. products 4. mass production 5. function

CYP 2 1. customer 2. service 3. management 4. operating systems 5. complexities

21 Production and Operations Management: An Introduction


Chase, R. B., Aquilano, N. J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Chopra, S. and Meindl, P., Supply Chain Management, Prentice Hall, 2001. Griffin, Ricky W., Management, 3rd ed., Houghton Mifflin, 1990. Hall, R.W., Attaining Manufacturing Excellence; Just in Time, Total Quality, Total People Involvement, The Dow Jones-Irwin/APICS Series in Production Management, 1987. Hayes, R. H., Wheelwright, S. C., Clark, K. B., Dynamic Manufacturing; Creating the Learning Organisation, The Free Press, 1988. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Hopp, M.L. and Spearman, W. J., Factory Physics, McGraw-Hill, 2000. Japan Management Association, Kanban. Just-in-time at Toyota, Productivity Press, 1989. Kanawaty, G. (Ed.), Introduction to Work Study, International Labour Office, Geneva, 1957 (4th. Ed. 1992). Krajewski, L. J. and Ritzman, L. P., Operations Management: Strategy and Analysis, (fifth edition), Addison-Wesley, 1999. Meredith, J. R. and Shafer, S. M., Operations Management for MBAs, J. Wiley, 2002.

1. Briefly explain the production system and its characteristics. 2. What is job shop production? What are its characteristics, advantages and limitations? 3. What is continuous production? What are its characteristics, advantages and limitations? 4. Explain in brief the objectives of production management. 5. Explain in brief the objectives of operations management. 6. Distinguish between manufacturing operations and service operations. 7. Explain the key issues to be considered for managing global operations. 8. Explain the different types of production systems. 9. Explain the framework of managing operations. 10. Explain the scope of production and operations management.

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STRUCTURE 2.0 2.1 2.2 2.3 Objectives Introduction The Communication Process Barriers to Effective Communication 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.3.6 2.3.7 2.3.8 2.3.9 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 Filtering Selective Perception Information Overload Emotional Disconnects Lack of Source Credibility Semantics Gender Differences Avoiding Biased Language Multicultural Communication

Poor Listening and Active Listening Communication Channels Information Richness Business use of E-Mail Direction of Communication within Organisations External Communications Transfer of Management Practices Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

23 Communication in Production & Operations Management

Define communication Understand the communication process Understand different ways that the communication process can be sidetracked Understand the problem of poor listening and how to promote active listening Compare and contrast different types of communication Compare and contrast different communication channels

Communication supports each of a managers POLC (Planning, Organising, Leading and Controlling) functions. Communication is vital to organisationsits how we coordinate actions and achieve goals. It is defined in the Merriam-Websters dictionary as a process by which information is exchanged between individuals through a common system of symbols, signs, or behavior. We know that 50% - 90% of a managers time is spent communicating and that communication ability is related to a managers performance. In most work environments, a miscommunication is an annoyanceit can interrupt workflow by causing delays and interpersonal strife. And in some work arenas, like operating rooms and airplane cockpits, communication can be a matter of life and death. So, just how prevalent is the problem of miscommunication in the workplace? You may be surprised to learn that the relationship between miscommunication and negative outcomes is strong. Poor communication can also lead to lawsuits. For leaders and organisations, poor communication costs money and wastes time. One study found that 14% of each workweek is wasted on poor communication. In contrast, effective communication is an asset for organisations and individuals alike. Effective communication skills, for example, are an asset for job seekers. A recent study of recruiters at 85 business schools ranked communication and interpersonal skills as the highest skills they were looking for, with 89% of the recruiters saying they were important. Good communication can also help a company retain its star employees. Surveys find that when employees think their organisations do a good job of keeping them informed about matters that affect them and they have ready access to the information they need to do their jobs, they are more satisfied with their employers. So, can good communication increase a companys market value? The answer seems to be yes.


Communication fulfills three main functions within an organisations production and Operations management field: (1) transmitting information, (2) coordinating effort, and (3) sharing emotions and feelings. All these functions are vital to a successful organisation. Transmitting information is vital to an organisations ability to function. Coordinating effort within the organisation helps people work toward the same goals. Sharing emotions and feelings bonds teams and unites people in times of celebration and crisis. Effective communication helps people grasp issues, build rapport with coworkers, and achieve consensus. So, how can we communicate effectively? The first step is to understand the communication process.

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We all exchange information with others countless times a day, by phone, e-mail, printed word, and of course, in person. Lets take a moment to see how a typical communication works using the Process Model of Communication as a guide.

Figure 2.1: The Process Model of Communication

A Sender, such as a boss, co-worker, or customer, originates the Message with a thought. For example, the bosss thought could be: Get more printer toner cartridges! The Sender encodes the Message, translating the idea into words. The boss may communicate this thought by saying, Hey you guys, we need to order more printer toner cartridges. The medium of this encoded Message may be spoken words, written words, or signs. The receiver is the person who receives the Message. The Receiver decodes the Message by assigning meaning to the words. In this example, our Receiver, Bill, has a to-do list a mile long. The boss must know how much work I already have. the Receiver thinks. Bills mind translates his bosss Message as, Could you order some printer toner cartridges, in addition to everything else I asked you to do this weekif you can find the time? The meaning that the Receiver assigns may not be the meaning that the Sender intended because of such factors as noise. Noise is anything that interferes with or distorts the Message being transformed. Noise can be external in the environment (such as distractions) or it can be within the Receiver. For example, the Receiver may be highly nervous and unable to pay attention to the Message. Noise can even occur within the Sender: the Sender may be unwilling to take the time to convey an accurate Message or the words she chooses can be ambiguous and prone to misinterpretation. Picture the next scene. The place: a staff meeting. The time: a few days later. The boss believes her Message has been received. Are the printer toner cartridges here yet? she asks. You never said it was a rush job! the Receiver protests. But! But!

Miscommunications like these happen in the workplace every day. Weve seen that miscommunication does occur in the workplace. But how does a miscommunication happen? It helps to think of the communication process. The series of arrows pointing the way from the Sender to the Receiver and back again can, and often do, fall short of their target.

25 Communication in Production & Operations Management


Communicating can be more of a challenge than you think, when you realise the many things that can stand in the way of effective communication. These include filtering, selective perception, information overload, emotional disconnects, lack of source familiarity or credibility, workplace gossip, semantics, gender differences, differences in meaning between Sender and Receiver, and biased language. Lets examine each of these barriers.

2.3.1 Filtering
Filtering is the distortion or withholding of information to manage a persons reactions. Some examples of filtering include a manager who keeps her divisions poor sales figures from her boss, the vice president, fearing that the bad news will make him angry. The old saying, Dont shoot the messenger! illustrates the tendency of Receivers (in this case, the vice president) to vent their negative response to unwanted Messages on the Sender. A gatekeeper (the vice presidents assistant, perhaps) who doesnt pass along a complete Message is also filtering. The vice president may delete the e-mail announcing the quarters sales figures before reading it, blocking the Message before it arrives. As you can see, filtering prevents members of an organisation from getting a complete picture of the way things are. To maximize your chances of sending and receiving effective communications, its helpful to deliver a Message in multiple ways and to seek information from multiple sources. In this way, the effect of any one persons filtering the Message will be diminished. Since people tend to filter bad news more during upward communication, it is also helpful to remember that those below you in an organisation may be wary of sharing bad news. One way to defuse the tendency to filter is to reward employees who clearly convey information upward, regardless of whether the news is good and bad. Here are some of the criteria that individuals may use when deciding whether to filter a Message or pass it on:

Past experience: Was the Sender rewarded for passing along news of this kind in the past, or was she criticized? Knowledge, perception of the speaker: Has the Receivers direct superior made it clear that no news is good news? Emotional state, involvement with the topic, level of attention: Does the Senders fear of failure or criticism prevent him from conveying the Message? Is the topic within his realm of expertise, increasing his confidence in his ability to decode it, or is he out of his comfort zone when it comes to evaluating the Messages significance? Are personal concerns impacting his ability to judge the Messages value?

Once again, filtering can lead to miscommunications in business. Each listener translates the Message into his or her own words, creating his or her own version of what was said.

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2.3.2 Selective Perception

Selective perception refers to filtering what we see and hear to suit our own needs. This process is often unconscious. Small things can command our attention when were visiting a new placea new city or a new company. Over time, however, we begin to make assumptions about the way things are on the basis of our past experience. Often, much of this process is unconscious. We simply are bombarded with too much stimuli every day to pay equal attention to everything so we pick and choose according to our own needs. Selective perception is a time-saver, a necessary tool in a complex culture. But it can also lead to mistakes. Think back to the earlier example conversation between Bill, who was asked to order more toner cartridges, and his boss. Since Bill found his bosss to-do list to be unreasonably demanding, he assumed the request could wait. (How else could he do everything else on the list?) The boss, assuming that Bill had heard the urgency in her request, assumed that Bill would place the order before returning to the other tasks on her list. Both members of this organisation were using selective perception to evaluate the communication. Bills perception was that the task of ordering could wait. The bosss perception was that her time frame was clear, though unstated. When two selective perceptions collide, a misunderstanding occurs. A field study found that managers can expect, on average, to do only three minutes of uninterrupted work on any one task before being interrupted by an incoming e-mail, instant message, phone call, coworker, or other distraction.

2.3.3 Information Overload

Information overload can be defined as occurring when the information processing demands on an individuals time to perform interactions and internal calculations exceed the supply or capacity of time available for such processing. Messages reach us in countless ways every day. Some are societaladvertisements that we may hear or see in the course of our day. Others are professionale-mails, and memos, voice mails, and conversations from our colleagues. Others are personalmessages and conversations from our loved ones and friends. Add these together and its easy to see how we may be receiving more information than we can take in. This state of imbalance is known as information overload. Experts note that information overload is A symptom of the high-tech age, which is too much information for one human being to absorb in an expanding world of people and technology. It comes from all sources including TV, newspapers, and magazines as well as wanted and unwanted regular mail, e-mail and faxes. It has been exacerbated enormously because of the formidable number of results obtained from Web search engines. Other research shows that working in such fragmented fashion has a significant negative effect on efficiency, creativity, and mental acuity.

2.3.4 Emotional Disconnects

Emotional disconnects happen when the Sender or the Receiver is upset, whether about the subject at hand or about some unrelated incident that may have happened earlier. An effective communication requires a Sender and a Receiver who are open to speaking and listening to one another, despite possible differences in opinion or personality. One or both parties may have to put their emotions aside to achieve the goal of communicating clearly. A Receiver who is emotionally upset tends to ignore or distort what the Sender is saying. A Sender who is emotionally upset may be unable to present ideas or feelings effectively.

2.3.5 Lack of Source Credibility

Lack of source familiarity or credibility can derail communications, especially when humor is involved. Have you ever told a joke that fell flat? You and the Receiver lacked the common context that could have made it funny. (Or yes, it could have just been a lousy joke.) Sarcasm and irony are subtle, and potentially hurtful, commodities in business. Its best to keep these types of communications out of the workplace as their benefits are limited, and their potential dangers are great. Lack of familiarity with the Sender can lead to misinterpreting humor, especially in less-rich information channels like e-mail. Similarly, if the Sender lacks credibility or is untrustworthy, the Message will not get through. Receivers may be suspicious of the Senders motivations (Why am I being told this?). Likewise, if the Sender has communicated erroneous information in the past, or has created false emergencies, his current Message may be filtered. Workplace gossip, also known as the grapevine, is a lifeline for many employees seeking information about their company. Researchers agree that the grapevine is an inevitable part of organisational life. Research finds that 70% of all organisational communication occurs at the grapevine level. Employees trust their peers as a source of Messages, but the grapevines informal structure can be a barrier to effective communication from the managerial point of view. Its grassroots structure gives it greater credibility in the minds of employees than information delivered through official channels, even when that information is false. Some downsides of the office grapevine are that gossip offers politically minded insiders a powerful tool for disseminating communication (and self-promoting miscommunications) within an organisation. In addition, the grapevine lacks a specific Sender, which can create a sense of distrust among employeeswho is at the root of the gossip network? When the news is volatile, suspicions may arise as to the person or persons behind the Message. Managers who understand the grapevines power can use it to send and receive Messages of their own. They also decrease the grapevines power by sending official Messages quickly and accurately, should big news arise.

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2.3.6 Semantics
Semantics is the study of meaning in communication. Words can mean different things to different people, or they might not mean anything to another person. For example, companies often have their own acronyms and buzzwords (called business jargon) that are clear to them but impenetrable to outsiders. For example, at IBM, GBS is focusing on BPTS, using expertise acquired from the PwC purchase (which had to be sold to avoid conflicts of interest in light of SOX) to fend other BPO providers and inroads by the Bangalore tiger. Does this make sense to you? If not, heres the translation: IBMs Global Business Services (GBS) division is focusing on offering companies Business Process Transformation Services (BPTS), using the expertise it acquired from purchasing the management consulting and technology services arm of PricewaterhouseCoopers (PwC), which had to sell the division because of the Sarbanes-Oxley Act (SOX, enacted in response to the major accounting scandals like the Enron). The added management expertise puts it above business process outsourcing (BPO) vendors who focus more on automating processes rather than transforming and improving them. Chief among these BPO competitors is Wipro, often called the Bangalore tiger because of its geographic origin and aggressive growth. Given the amount of Messages we send and receive every day, it makes sense that humans try to find shortcutsa way to communicate things in code. In business, this

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code is known as jargon. Jargon is the language of specialized terms used by a group or profession. It is common shorthand among experts and if used sensibly can be a quick and efficient way of communicating. Most jargon consists of unfamiliar terms, abstract words, nonexistent words, acronyms, and abbreviations, with an occasional euphemism thrown in for good measure. Every profession, trade, and organisation has its own specialised terms. At first glance, jargon seems like a good thinga quicker way to send an effective communication, the way text message abbreviations can send common messages in a shorter, yet understandable way. But thats not always how things happen. Jargon can be an obstacle to effective communication, causing listeners to tune out or fostering ill-feeling between partners in a conversation. When jargon rules the day, the Message can get obscured. A key question to ask before using jargon is, Who is the Receiver of my Message? If you are a specialist speaking to another specialist in your area, jargon may be the best way to send a message while forging a professional bondsimilar to the way best friends can communicate in code. For example, an Information Technology (IT) systems analyst communicating with another IT employee may use jargon as a way of sharing information in a way that reinforces the pairs shared knowledge. But that same conversation should be held in standard English, free of jargon, when communicating with staff members outside the IT group.

2.3.7 Gender Differences

Gender differences in communication have been documented by a number of experts, including linguistics professor Deborah Tannen in her best-selling book You Just Dont Understand: Women and Men in Conversation. Men and women work together every day. But their different styles of communication can sometimes work against them. Generally speaking, women like to ask questions before starting a project, while men tend to jump right in. A male manager whos unaware of how many women communicate their readiness to work may misperceive a ready employee as not ready. Another difference that has been noticed is that men often speak in sports metaphors, while many women use their home as a starting place for analogies. Women who believe men are only talking about the game may be missing out on a chance to participate in a divisions strategy and opportunities for teamwork and rallying the troops for success. It is important to promote the best possible communication between men and women in the workplace, notes gender policy adviser Dee Norton, who provided the above example. As we move between the male and female cultures, we sometimes have to change how we behave (speak the language of the other gender) to gain the best results from the situation. Clearly, successful organisations of the future are going to have leaders and team members who understand, respect and apply the rules of gender culture appropriately. Being aware of these gender differences can be the first step in learning to work with them, as opposed to around them. For example, keep in mind that men tend to focus more on competition, data, and orders in their communications, while women tend to focus more on cooperation, intuition, and requests. Both styles can be effective in the right situations, but understanding the differences is a first step in avoiding misunderstandings based on them. Differences in meaning often exist between the Sender and Receiver. Mean what you say, and say what you mean. Its an easy thing to say. But in business, what do those words mean? Different words mean different things to different people. Age, education, and cultural background are all factors that influence how a person interprets words. The less we consider our audience, the greater our chances of

miscommunication will be. When communication occurs in the cross-cultural context, extra caution is needed given that different words will be interpreted differently across cultures and different cultures have different norms regarding non-verbal communication. Eliminating jargon is one way of ensuring that our words will convey real-world concepts to others. Speaking to our audience, as opposed to about ourselves, is another. Nonverbal Messages can also have different meanings. Managers who speak about long-term goals and profits to a staff that has received scant raises may find their core Message (Youre doing a great joband that benefits the folks in charge!) has infuriated the group they hoped to inspire. Instead, managers who recognize the contributions of their staff and confirm that this work is contributing to company goals in ways that will benefit the source of our success our employees as well as executives, will find their core Message (Youre doing a great jobwe really value your work) is received as opposed to being misinterpreted. Biased language can offend or stereotype others on the basis of their personal or group affiliation. The figure below provides a list of words that have the potential to be offensive in the left-hand column. The right-hand column provides more neutral words that you can use instead.

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2.3.8 Avoiding Biased Language

Avoiding biased language is very important in the workplace. One should consider the following things:
Avoid Black attorney Businessman Chairman Cleaning lady Manpower Secretary Attorney business person Chair or chairperson Cleaner or maintenance worker Staff or personnel assistant or associate Consider using

Effective communication is clear, factual, and goal-oriented. It is also respectful. Referring to a person by one adjective (a brain, a diabetic, an invalid) reduces that person to that one characteristic. Language that belittles or stereotypes a person poisons the communication process. Language that insults an individual or group based on age, ethnicity, sexual preference, or political beliefs violates public and private standards of decency, ranging from civil rights to corporate regulations. The effort to create a neutral set of terms to refer to heritage and preferences has resulted in a debate over the nature of political correctness. Proponents of political correctness see it as a way to defuse the volatile nature of words that stereotyped groups and individuals in the past. Critics of political correctness see its vocabulary as stilted and needlessly cautious. Many companies offer new employees written guides on standards of speech and conduct. These guides, augmented by common sense and courtesy, are solid starting points for effective, respectful workplace communication. Tips for appropriate workplace speech include but are not limited to

Alternating the use of he and she when referring to people in general. Relying on human resourcesgenerated guidelines.

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Remembering that terms that feel respectful or comfortable to us may not be comfortable or respectful to others.

2.3.9 Multicultural Communication

The ethos of multiculturism is determined by the interactions of ordinary people in their formal and informal encounters as they go about their daily lives, a large proportion of which is spent in the workplace. Culture can be defined as the sum total of all the attributes, materials as well as spiritual, or a given people, according to Mersham & Skinner. It involves all aspects of our daily lives and our interaction with other people. It is really all the things that we take for granted, but also all the things we need to change and adapt, such as our values, our ideas and the way we behave. Ersasmus-Kritizinger, Swart & Mona and Krizan et al. list the following general skills that are necessary for multicultural communication.

Get rid of external barriers: One should not focus on differences like skin color, accent, body language, social behavior and manners. Rather focus on those things that human beings have in common, like the need to be respected, to be successful, to be loved and to be accepted. Accept that cultural differences exist, that all people are different, but that we also have quite a lot in common. Understand your own culture: Improve communication with others by increasing awareness of your own culture and its influences on your beliefs, values and behaviour patterns. Recognize that your cultural background and experiences shape how you think, what you value and how you communicate. Consider how you might have different beliefs and behaviours if you had been born a member or the opposite sex or a different race. Improve you knowledge of other cultures: The more you know about other cultures around you, the more you will understand the way the members of these cultures behave and think, the less tension and anxiety there will be in the relationship. The best way to learn more about other cultures is to talk to colleagues or friends from other cultures. Talk openly and constructively about the differences you discover. Identify the recipient/target audience: In any communication situation, it is important to know who your target audience/recipient is, i.e., the person you are talking to. In this way, you can adjust your message, gestures, facial expressions, register and tone accordingly and so accommodate the recipient better. This will enable you to communicate effectively. Have a positive attitude: In a multicultural communication situation, this means that you should realise that your culture is different from, and not superior to, other cultures that other cultures are interesting, not strange. Provide feedback: By providing feedback, e.g., by way of a smile, frown, question or answer, you can indicate to the sender that you are understanding or not understanding the message. This will make communicating much easier, since both parties can monitor the process. Pay attention to language: Use a language understandable to both parties. Use simple, clear language and check whether you attach the same meaning to words or concepts used (remember different items could be called the same name). Learn how that cultures verbal and non-verbal languages differ from your own. Observe and learn the meaning of non-verbal communication signals such as facial expressions, social distance for conversing and hand gestures.

Listen: It is important to be an attentive and appreciative listener in a multicultural communication situation. Attentive listening means that you pay attention to the speaker and show this by making eye contact and providing feedback. This will make the sender feel special and comfortable, thus encouraging him/her to communicate more freely. Appreciative listening means that you listen with an open mind, and without prejudice, ethnocentricity and having stereotypes in mind. Maintain good conduct: Your conduct should be adjusted to the culture involved in a particular communication situation. One should therefore be aware of the culture of ones communication partner and behave accordingly. A good idea is to try to greet the person in his/her mother tongue and to avoid body language or signs that might be offensive to that person.

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Communication across cultures is complex. Participants may be using a different set of symbols, or the same symbols, but with different understandings of their meanings. We are more likely to be conscious of the negotiated nature of the interaction, and we may experience far more difficulty in achieving similar understandings. Additional difficulties are caused by the non-verbal dimension of intercultural communication. The main point is that if we accept the existence of the cultural variable and work with this in an open, honest way, it can enhance relationships and empower our consciousness. If we do not, or are unaware, this affects our interactions and leaves us victims of cultural variables to various degrees. Like anything hidden or unconscious in communication, it can hinder the ultimate success and authenticity of the process. Check Your Progress 1 Fill in the blanks: 1. The ability to effectively communicate is a necessary condition for successfully , organising, leading, and controlling. 2. For leaders and organisations, poor communication costs money and . time. 3. Coordinating effort within the organisation helps people work toward the same ... 4. Noise is anything that interferes with or distorts the Message being . 5. Filtering is the distortion or . of information to manage a persons reactions.


Research shows that listening skills are related to promotions. A Sender may strive to deliver a Message clearly. But the Receivers ability to listen effectively is equally vital to effective communication. The average worker spends 55% of her workdays listening. Managers listen up to 70% each day. But listening doesnt lead to understanding in every case. Listening takes practice, skill, and concentration. The consequences of poor listening are lower employee productivity, missed sales, unhappy customers, and billions of dollars of increased cost and lost profits. Poor listening is a factor in low employee morale and increased turnover because employees do not feel their managers listen to their needs, suggestions, or complaints. Clearly, if you hope to have a successful career in management, it behooves you to learn to be a good listener.

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How can you improve your listening skills? The Roman philosopher Cicero said, Silence is one of the great arts of conversation. How often have we been in conversation with someone else where we are not really listening but itching to convey our portion? This behavior is known as rehearsing. It suggests the Receiver has no intention of considering the Senders Message and intends to respond to an earlier point instead. Clearly, rehearsing is an impediment to the communication process. Effective communication relies on another kind of listening: active listening. Active listening can be defined as giving full attention to what other people are saying, taking time to understand the points being made, asking questions as appropriate, and not interrupting at inappropriate times. Active listening creates a real-time relationship between the Sender and the Receiver by acknowledging the content and receipt of a Message. As weve seen in the Starbucks example, repeating and confirming a Messages content offers a way to confirm that the correct content is flowing between colleagues. The process creates a bond between coworkers while increasing the flow and accuracy of messaging. Carl Rogers, founder of the person-centered approach to psychology, formulated five rules for active listening:

Listen for message content Listen for feelings Respond to feelings Note all cues Paraphrase and restate

The good news is that listening is a skill that can be learned. The first step is to decide that we want to listen. Casting aside distractions, such as by reducing background or internal noise, is critical. The Receiver takes in the Senders Message silently, without speaking. Second, throughout the conversation, show the speaker that youre listening. You can do this nonverbally by nodding your head and keeping your attention focused on the speaker. You can also do it verbally, by saying things like, Yes, Thats interesting, or other such verbal cues. As youre listening, pay attention to the Senders body language for additional cues about how theyre feeling. Interestingly, silence plays a major role in active listening. During active listening, we are trying to understand what has been said, and in silence, we can consider the implications. We cant consider information and reply to it at the same time. Thats where the power of silence comes into play. Finally, if anything is not clear to you, ask questions. Confirm that youve heard the message accurately, by repeating back a crucial piece like, Great, Ill see you at 2 p.m. in my office. At the end of the conversation, a thank you from both parties is an optional but highly effective way of acknowledging each others teamwork. Active listening creates a more dynamic relationship between a Receiver and a Sender. It strengthens personal investment in the information being shared. It also forges healthy working relationships among colleagues by making Speakers and Listeners equally valued members of the communication process.


The channel, or medium, used to communicate a message affects how accurately the message will be received. Verbal, written, and nonverbal communications have different strengths and weaknesses. In business, the decision to communicate verbally or in written form can be a powerful one. In addition, a smart manager is aware of the

nonverbal messages conveyed by either type of communicationas noted earlier, only 7% of verbal communication comes from the words themselves. Effective communication is required at various levels and for various aspects in an production and operations system of an organisation such as: For manager employee relations: Effective communication of information and decision is an essential component for management-employee relations. The manager cannot get the work done from employees unless they are communicated effectively of what he wants to be done? He should also be sure of some basic facts such as how to communicate and what results can be expected from that communication. Most of management problems arise because of lack of effective communication. Chances of misunderstanding and misrepresentation can be minimized with proper communication system. For motivation and employee morale: Communication is also a basic tool for motivation, which can improve morale of the employees in an organisation. Inappropriate or faulty communication among employees or between manager and his subordinates is the major cause of conflict and low morale at work. Manager should clarify to employees about what is to be done, how well are they doing and what can be done for better performance to improve their motivation. He can prepare a written statement, clearly outlining the relationship between company objectives and personal objectives and integrating the interest of the two. For increase productivity: With effective communication, a manager can maintain a good human relation in the organisation and by encouraging ideas or suggestions from employees or workers and implementing them whenever possible, you can also increase production at low cost. For employees: It is through the communication that employees submit their work reports, comments, grievances and suggestions to their seniors or management. Organisation should have effective and speedy communication policy and procedures to avoid delays, misunderstandings, confusion or distortions of facts and to establish harmony among all the concerned people and departments. Importance of written communication: Communication may be made through oral or written. In oral communication, listeners can make out what speakers is trying to say, but in written communication, text matter in the message is a reflection of your thinking. So, written communication or message should be clear, purposeful and concise with correct words, to avoid any misinterpretation of your message. Written communications provides a permanent record for future use and it also gives an opportunity to employees to put up their comments or suggestions in writing. So, effective communication is very important for successful working of an organisation.

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Channels vary in their information richness. Information-rich channels convey more nonverbal information. As you may be able to guess from our earlier discussion of verbal and written communications, verbal communications are richer than written ones. Research shows that effective managers tend to use more information-rich communication channels than less effective managers. The table below illustrates the information richness of different information channels.

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Table 2.1: Information Richness

Information Channel Face to face conversation Videoconferencing Telephone conversation E-mails Handheld devices Blogs Written letters and memos Formal written documents Spreadsheets High High High Medium Medium Medium Medium Low Low Information Richness

Like face-to-face and telephone conversation, videoconferencing has high information richness because Receivers and Senders can see or hear beyond just the wordsthey can see the Senders body language or hear the tone of their voice. Handheld devices, blogs, and written letters and memos offer medium-rich channels because they convey words and pictures/photos. Formal written documents, such as legal documents, and spreadsheets, such as the divisions budget, convey the least richness because the format is often rigid and standardized. As a result, nuance is lost. In business, the decision to communicate verbally or in written form can be powerful. In addition, a smart manager is aware of the nonverbal messages conveyed by either type of communicationas noted earlier, only 7% of a verbal communication comes from the words themselves. When determining whether to communicate verbally or in writing, ask yourself: Do I want to convey facts or feelings? Verbal communications are a better way to convey feelings. Written communications do a better job of conveying facts. Picture a manager making a speech to a team of 20 employees. The manager is speaking at a normal pace. The employees appear interested. But how much information is being transmitted? Not as much as the speaker believes! Humans listen much faster than they speak. The average public speaker communicates at a speed of about 125 words a minute. And that pace sounds fine to the audience. (In fact, anything faster than that probably would sound weird. To put that figure in perspective, someone having an excited conversation speaks at about 150 words a minute.) On the basis of these numbers, we could assume that the employees have more than enough time to take in each word the manager delivers. And thats the problem. The average person in the audience can hear 400-500 words a minute. The audience has more than enough time to hear. As a result, they will each be processing many thoughts of their own, on totally different subjects, while the manager is speaking. As this example demonstrates, oral communication is an inherently flawed medium for conveying specific facts. Listeners minds wander! Its nothing personalin fact, its totally physical. In business, once we understand this fact, we can make more intelligent communication choices based on the kind of information we want to convey. The key to effective communication is to match the communication channel with the goal of the communication. For example, written media may be a better choice when the Sender wants a record of the content, has less urgency for a response, is physically separated from the Receiver, doesnt require a lot of feedback from the Receiver, or the Message is complicated and may take some time to understand. Oral communication, however, makes more sense when the Sender is conveying a sensitive or emotional Message, needs feedback immediately, and does not need a permanent

record of the conversation. Use the guide provided for deciding when to use written versus verbal communication.
Table 2.2: Guide for When to Use Written Versus Verbal Communication
Use written communication when Conveying facts The message needs to become part of a permanent file There is little time urgency You do not need immediate feedback The ideas are complicated Use verbal communication when conveying emotions and feelings The message does not need to be permanent There is time urgency Your need immediate feedback The ideas are simple or can be made simple with explanations

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The growth of e-mail has been spectacular, but it has also created challenges in managing information and an ever-increasing speed of doing business. Over 100 million adults in the United States use e-mail regularly (at least once a day). Internet users around the world send an estimated 60 billion e-mails every day, and many of those are spam or scam attempts. That makes e-mail the second most popular medium of communication worldwide, second only to voice. A 2005 study estimated that less than 1% of all written human communications even reached paperand we can imagine that this percentage has gone down even further since then. To combat the overuse of e-mail, companies such as Intel have even instituted no e-mail Fridays where all communication is done via other communication channels. Learning to be more effective in your e-mail communications is an important skill. To learn more, check out the business e-mail dos and donts. Business E-Mail Dos and Donts


Dont send or forward chain e-mails. Dont put anything in an e-mail that you dont want the world to see. Dont write a Message in capital lettersthis is the equivalent of shouting. Dont routinely cc everyone all the time. Reducing inbox clutter is a great way to increase communication. Dont hit Send until you spell-check your e-mail. Do use a subject line that summarizes your Message, adjusting it as the Message changes over time. Do make your request in the first line of your e-mail. (And if thats all you need to say, stop there!) Do end your e-mail with a brief sign-off such as, Thank you, followed by your name and contact information. Do think of a work e-mail as a binding communication. Do let others know if youve received an e-mail in error.


An important, although often ignored, rule when communicating emotional information is that e-mails lack of richness can be your loss. As we saw in the chart above, e-mail is a medium-rich channel. It can convey facts quickly. But when it

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comes to emotion, e-mails flaws make it far less desirable a choice than oral communicationthe 55% of nonverbal cues that make a conversation comprehensible to a listener are missing. E-mail readers dont pick up on sarcasm and other tonal aspects of writing as much as the writer believes they will, researchers note in a recent study. The Sender may believe she has included these emotional signifiers in her Message. But, with words alone, those signifiers are not there. This gap between the form and content of e-mail inspired the rise of emoticonssymbols that offer clues to the emotional side of the words in each Message. Generally speaking, however, emoticons are not considered professional in business communication. You might feel uncomfortable conveying an emotionally laden message verbally, especially when the message contains unwanted news. Sending an e-mail to your staff that there will be no bonuses this year may seem easier than breaking the bad news face-to-face, but that doesnt mean that e-mail is an effective or appropriate way to deliver this kind of news. When the Message is emotional, the Sender should use verbal communication. Indeed, a good rule of thumb is that the more emotionally laden messages require more thought in the choice of channel and how they are communicated.


Information can move horizontally, from a Sender to a Receiver, as weve seen. It can also move vertically, down from top management or up from the front line. Information can also move diagonally between and among levels of an organisation, such as a Message from a customer service representative up to a manager in the manufacturing department, or a Message from the chief financial officer sent down to all department heads.

Upward to a supervisor

Diagonally to a different department


Laterally to a co-worker

Downward to a subordinate

Figure 2.2: Communication Flows in Many Different Directions within an Organisation

There is a chance for these arrows to go awry, of course. In large organisations the dilution of information as it passes up and down the hierarchy, and horizontally across departments, can undermine the effort to focus on common goals. Managers need to keep this in mind when they make organisation design decisions as part of the organising function. The organisational status of the Sender can affect the Receivers attentiveness to the Message. For example, consider: A senior manager sends a memo to a production

supervisor. The supervisor, who has a lower status within the organisation, is likely to pay close attention to the Message. The same information, conveyed in the opposite direction, however, might not get the attention it deserves. The Message would be filtered by the senior managers perception of priorities and urgencies. Requests are just one kind of communication in business. Other communications, both verbal or written, may seek, give, or exchange information. Research shows that frequent communications with ones supervisor is related to better job performance ratings and overall organisational performance. Research also shows that lateral communication done between peers can influence important organisational outcomes such as turnover.

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Figure 2.3: Time spent in Communicating with people at Work


External communications deliver specific business messages to individuals outside an organisation. They may announce changes in staff or strategy, earnings, and more. The goal of an external communication is to create a specific Message that the Receiver will understand and share with others. Examples of external communications include the following: Press Releases Public relations professionals create external communications about a clients product, services or practices for specific Receivers. These Receivers, it is hoped, will share the Message with others. In time, as the Message is passed along, it should appear to be independent of The Sender, creating the illusion of an independently generated consumer trend, public opinion, and so on. The Message of a public relations effort may be b2b (business to business), b2c (business to consumer), or media related. The Message can take different forms. Press releases try to convey a newsworthy message, real or manufactured. It may be constructed like a news item, inviting editors or reporters to reprint the Message in part, or as a whole, with or without acknowledgment of the Senders identity. Public relations campaigns create Messages over time, through contests, special events, trade shows, and media interviews in addition to press releases. Ads Advertising places external business Messages before target Receivers through media buys. A media buy is a fee that is paid to a television network, Web site, or magazine by an advertiser for an on-air, site, or publication ad. The fee is based on the perceived

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value of the audience who watches, reads, or frequents the space where the ad will appear. In recent years, Receivers have begun to filter advertisers Messages, a phenomenon that is perceived to be the result of the large amount of ads the average person sees each day and a growing level of consumer wariness of paid Messaging. Advertisers, in turn, are trying to create alternative forms of advertising that Receivers wont filter. The advertorial is one example of an external communication that combines the look of an article with the focused Message of an ad. Product placements in videos, movies, and games are other ways that advertisers strive to reach Receivers with commercial Messages. Web Pages A Web pages external communication can combine elements of public relations, advertising, and editorial content, reaching Receivers on multiple levels and in multiple ways. Banner ads, blogs, and advertiser-driven click-through areas are just a few of the elements that allow a business to deliver a Message to a Receiver online. The perceived flexibility of online communications can impart a less formal (and, therefore, more believable) quality to an external communication. A Message relayed in a daily blog post will reach a Receiver differently than if it is delivered in an annual report, for example. The popularity and power of blogs is growing, with 11% of Fortune 500 companies having official blogs (up from 4% in 2005). The real-time quality of Web communications may appeal to Receivers who might filter out a traditional ad and public relations message because of its prefab quality. Despite their spontaneous feel, many online pages can be revisited in perpetuity. For this reason, clear and accurate external communications are as vital for online use as they are in traditional media. Customer Communications Customer communications can include letters, catalogs, direct mail, e-mails, text messages, and telemarketing messages. Some Receivers automatically filter bulk messages like these. Others will be receptive. The key to a successful external communication to customers is to convey a business message in a personally compelling waydramatic news, a money-saving coupon, and so forth. Check Your Progress 2 Fill in the blanks: 1. The consequences of poor listening are lower . productivity, missed sales, unhappy customers, and billions of dollars of increased cost and lost profits. 2. Active listening creates a real-time relationship between the Sender and the Receiver by acknowledging the .and receipt of a Message. 3. The channel, or medium, used to communicate a message affects how the message will be received. 4. In business, the decision to .. verbally or in written form can be powerful. 5. The key to effective communication is to match the communication channel with the of the communication.


Communication is both the solution and the problem. Communication within companies continues to be an age-old challenge, but some radical new solutions can help. Most organisations consist of departments resembling a crude caste system, with each area insulating itself from other functional areas. These perceptual walls separate design engineering from production, production from marketing, and so forth. Communication solutions today revolve around much greater data sharing and exchange of information among and within departments. As already noted, teams are used widely today. "Concurrent engineering" is one such team approach that involves bringing in a wider range of departments and people into the product and production design stage. There are also several ways in which open communication can be used to enhance employee relations and productivity. One such example of a company using open communication as a competitive weapon is General Electric. GE is a diversified organisation consisting of 14 divisions with business involved in medical systems, engineering, plastics, major appliances, financial services, aircraft engineers, and even an NBC television station. If ever there were a risk of communication problems, it would be in this $55 billion organisation. Recognizing the need for constant improvement, GE's executives have experimented with team management and programs for eliminating and simplifying work procedures with a program called "Work Out." One particularly effective system they use is called "Integrated Diversity." Jack Welch, the company's CEO, uses this term to describe how GE tries to coordinate its 14 separate businesses. The idea behind integrated diversity is that each business division is supposed to help the others rather than operating separate fiefdoms. Welch notes that most diversified companies do a good job of transferring technical resources and dollars across their business, and some do a good job of transferring human resources. He believes that GE does the best job of transferring management practices across its businesses, including the best techniques, systems, and management principles to produce growth and profitability. GE is able to transfer these management practices and enhance cooperation and communication by several means. One of the simplest is the linkage with the CEO. GE's 14 separate business leaders report directly to the CEO or the two vice-chairmen. This helps eliminate communication problems because it allows direct communication between the CEO and the leaders of the 14 businesses. As a result, there are very short cycle times for decisions and little interference from corporate staff. Welch says that decisions that sometimes took a year now take a few days.

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Communication is vital to organisations. Poor communication is prevalent and can have serious repercussions. Communication fulfills three functions within organisations: transmitting information, coordinating, and sharing emotions and feelings. Noise can disrupt or distort communication. Many barriers to effective communication exist. Examples include filtering, selective perception, information overload, emotional disconnects, lack of source familiarity or credibility, workplace gossip, semantics, gender differences, differences in meaning between Sender and Receiver, and biased language. The Receiver can enhance the probability of effective communication by engaging in active listening, which involves (1) giving ones full attention to the Sender and (2) checking for understanding by repeating the essence of the Message back to the Sender. Types of communication include verbal, written, and nonverbal. Surprisingly, 55% of face-to-face communication comes from non-verbal

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cues such as tone or body language. Different communication channels are more or less effective at transmitting different kinds of information. In addition, communication flows in different directions within organisations.

Communication: Communication is an activity in which a sender transmits a message, with or without the aid of media and vehicles, to one or more receivers, and vice versa. Communication Process: The way in which communication takes place is referred to as the communication process. The ideal form of communication is a two way process aimed at mutual understanding, sharing of values and action. Communication Plan or Strategy: A communication plan or strategy sets the communication goals, chooses the right media and messages and sets out the method of evaluation. External Communication: All forms of communication that are geared towards external target groups. There are two types of external communication: press communication (or media relations) and communication aimed at the general public or specific external target groups. Formal Communication: Formal communication in general is exchange of information that adheres to the rules and standards that apply to the formal relation between organisations or between the organisation and the individual. Informal Communication: Informal communication in general is exchange of information on a personal basis and adheres less to the rules and standards that apply to the formal relation between organisations or between the organisation and the individual. Internal Communication: All forms of communication within an organisation. Internal communication has a strong link with the corporate culture. It is geared towards the interests both of the organisation and of its staff. It takes the form of both formal and informal communication. Message: The message of communication is the content one sends to the receiver. In communication planning one formulates the message in terms of the desired residue of the communication in the mind of the receiver.

Check Your Progress: Answers

CYP 1 1. planning 2. wastes 3. goals 4. transformed 5. withholding CYP 2 1. employee 2. content

3. accurately 4. communicate 5. goal

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Farid Elashmawi, Competing Globally, Mastering Multicultural Management and Negotiation, Butterworth-Heinemann (2001) Farid Elashmawi, Philip R. Harris, Multicultural Management 2000, Gulf Publishing Company, Houston, TX USA (1998) Philip R. Harris and Robert T. Moran, Managing Cultural Differences: Leadership Strategies for a New World of Business, 5th ed., Gulf Professional Publishing Company, Houston, TX USA (2000) Geert Hofstede, Uncommon Sense about Organisations: Cases, Studies and Field Observations, Sage Publications, 2455 Teller Road, Thousand Oaks, CA 91320 USA (1994) Terence Jackson, Cross-Cultural Management, Butterworth-Heinemann, Linacre House, Jordan Hill, Oxford OX2 8DP, U.K. (1993) Grimshaw, Jeff and Mike, Barry. How Mature is Your Internal Communication Function? Strategic Communication Management, (2008) Bower, Joseph L. and Christensen, Clayton, Disruptive Technologies: Catching the Wave, Harvard Business Review, (1995)

1. Explain how miscommunication might be related to an accident at work. 2. Give an example of noise during the communication process. 3. Most people are poor listeners. Do you agree or disagree with this statement? Please support your position. 4. Please share an example of how differences in shared meaning have affected you. 5. Give an example of selective perception. 6. Do you use jargon at or in your classes? If so, do you think it helps or hampers communication? Why or why not? 7. In your experience, how is silence used in communication? How does your experience compare with the recommended use of silence in active listening? 8. How aware are you of your own body language? Has your body language ever gotten you in trouble while communicating with someone? 9. In your experience, how is silence used in communication? 10. If the meaning behind verbal communication is only 7% words, what does this imply for written communication? 11. How could you use your knowledge of communication richness to be more effective in your own communications? 12. What are the three biggest advantages and disadvantages you see regarding technology and communications?

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STRUCTURE 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 Objectives Introduction Origin of Computer Integrated Manufacturing Benefits of Computer Integrated Manufacturing and Services System Computer Integrated Manufacturing Plan Conceptual Design Managing a Computer Integrated Manufacturing Computer Control Systems Techniques and Applications in Manufacturing Systems Manufacturing Control System Requirements 3.8.1 3.8.2 3.8.3 3.8.4 3.9 3.10 3.11 3.12 3.13 Quality Autonomy Flexibility Modularity

Quality in the Manufacturing Control System Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

Explain the system of computer integrated manufacturing and its benefits Describe the computer integrated manufacturing plan Identify the essentials of managing a computer integrated manufacturing Discuss the computer control systems techniques and applications in manufacturing systems Identify the requirements of the manufacturing control systems Report on the significance of maintaining quality in the manufacturing control systems

The role of computers in manufacturing is currently as important, if not more so, than that of machine tools. Islands of automation are now bridged by computers, and manufacturing personnel have to be conversant with the diverse technologies cementing this network. This lesson presents a useful coverage of the different technologies involved in Computer Integrated Manufacturing. Computer-integrated manufacturing (CIM) is the use of computer techniques to integrate manufacturing activities. These activities encompass all functions necessary to translate customer needs into a final product. Computer Integrated Manufacturing starts with the development of a product concept that may exist in the marketing organisation; includes product design and specification, usually the responsibility of an engineering organisation; and extends through production into delivery and aftersales activities that reside in a field service or sales organisation. Integration of these activities requires that accurate information be available when needed and in the format required by the person or group requesting the data. Data may come directly from the originating source or through an intermediate database according to Jorgensen and Krause. Computer Integrated Manufacturing systems have emerged as a result of the developments in manufacturing and computer technology. According to Kusiak the computer plays an important role integrating the following functional areas of a Computer Integrated Manufacturing system:

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Part and product design: There are four phases that are crucial in part and product design. They include preliminary design, refinement, analysis, and implementation. Tool and fixture design: Tooling engineers using Computer-aided Design (CAD) tools to develop the systems or fixtures that produce the parts. Process planning: The process planner designs a plan that outlines the routes, operations, machines, and tools required. He or she also attempts to minimize cost, manufacturing time, and machine idle time while maximizing productivity and quality. Programming of numerically controlled machines and material handling systems. Production planning: There are two concepts used here including Materials Requirement Planning (MRP) and machine loading and scheduling. Machining: This is part of the actual manufacturing process, including turning, drilling, and face milling for metal removal operations. Assembly: After they are manufactured, parts and subassemblies are put together with other parts to create a finished product or subassembly. Maintenance: Computers can monitor, intervene, and even correct machine malfunctions as well as quality issues within manufacturing. Quality control: This involves three steps including system design, parameter design, and tolerance design. Inspection: This stage determines if there have been errors and quality issues during the manufacturing of the product. Storage and retrieval: These tasks involve raw materials, work-in-process inventory, finished goods, and equipment.

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The term computer-integrated manufacturing was coined by Dr. Joseph Harrington in his 1974 book bearing that name. Until the 1970s, the most aggressive and successful automation was seen in production operations. Discrete parts manufacturing used highly mechanized machines that were driven and controlled by cams and complex devices such as automatic screw machines. Process manufacturers made use of these cam-driven controllers and limit switches for operations such as heat treating, filling and canning, bottling, and weaving states Robert Thacker of the Society of Manufacturing Engineers. The historical approach to automation focused on individual activities that result in the incorporation of large amounts of computerized activities. In the 1980s, managing information became an important issue.


According to the U.S. National Research Council, Computer Integrated Manufacturing improves production productivity by 40 to 70 percent, as well as enhances engineering productivity and quality. Computer Integrated Manufacturing can also decrease design costs by 15 to 30 percent, reduce overall lead time by 20 to 60 percent, and cut work-in-process inventory by 30 to 60 percent. Managers who use Computer Integrated Manufacturing believe that there is a direct relationship between the efficiency of information management and the efficiency and the overall effectiveness of the manufacturing enterprise. Thacker's view is that many Computer Integrated Manufacturing programs focus attention on the efficiency of information management and the problems that come with it instead of developing new and more sophisticated manufacturing machines, material transformation processes, manufacturing management processes, and production facilities. Computer-integrated manufacturing can be applied to non-manufacturing organisations by changing the manufacturing focus toward a service orientation. Computer Integrated Manufacturing and Job Definition Format (JDF) are becoming increasingly beneficial to printing companies to streamline their production process.


A plan for a Computer Integrated Manufacturing system should provide a description of projects for automating activities, assisting activities with technology, and integrating the information flows among these activities. The planning process includes six crucial steps: 1. Project activation 2. Business assessment 3. Business modeling 4. Needs analysis 5. Conceptual design 6. Computer Integrated Manufacturing plan consolidation and economic analysis This process, according to Jorgensen and Krause, also acts as a building block for the future of the organisation integrating these functions in order to diminish them as an impediment to integration.


The conceptual design of a Computer Integrated Manufacturing environment consists of individual systems that fulfill the required capabilities, an overall architecture incorporating the systems and the communication links, and a migration path from the current systems architecture. Functional requirements must be compared to the current inventory of systems and available technology to determine system availability. Jorgensen and Krause state that the following techniques are used in satisfying system requirements:

45 Computer Integrated Manufacturing and Services Systems

exploiting unused and available functional capabilities of current systems; identifying functional capabilities available for, but not installed on, current in-house systems; locating systems that are commercially available but not currently in-house; recognizing state-of-the-art technology that is not immediately commercially available on a system; foreseeing functional capabilities of systems on the technical horizon; and determining whether the requirement is beyond the capabilities of systems on the technical horizon. Check Your Progress 1 Fill in the blanks: 1. Computer-integrated manufacturing is the use of computer techniques to integrate activities. 2. Computer Integrated Manufacturing systems have emerged as a result of the developments in manufacturing and .. technology. 3. The term computer-integrated manufacturing was coined by in 1974. 4. The conceptual design of a CIM environment consists of individual systems that fulfill the required ., and a migration path from the current systems architecture. 5. Computer-integrated manufacturing can be applied to non-manufacturing organisations by changing the manufacturing focus toward a . orientation.


Managers must understand that short-term goals must support the long-term goal of implementing a Computer Integrated Manufacturing. Top management establishes long-term goals for the company and envisions the general direction of the company. The middle management then creates objectives to achieve this goal. Upper management sees the focus as being very broad, whereas middle management must have a more narrow focus. In deciding to implement a Computer Integrated Manufacturing, there are three perspectives that must be considered: the conceptual plan, the logical plan, and the physical plan. The conceptual plan is used to demonstrate a knowledgeable understanding of the elements of Computer Integrated Manufacturing and how they

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are related and managed. Thacker goes on to say that the conceptual plan states that by integrating the elements of a business, a manager will produce results better and faster than those same elements working independently. The logical plan organizes the functional elements and logically demonstrates the relationships and dependencies between the elements. Thacker details that it further shows how to plan and control the business, how to develop and connect an application, communications, and database network. The physical plan contains the actual requirements for setting the Computer Integrated Manufacturing system in place. These requirements can include equipment such as hardware, software, and work cells. The plan is a layout of where the computers, work stations, robots, applications, and databases are located in order to optimize their use within the Computer Integrated Manufacturing and within the company. According to Thacker, sooner or later it becomes the Computer Integrated Manufacturing implementation plan for the enterprise. Computer Integrated Manufacturing is challenged by technical and cultural boundaries. The technical challenge is first complicated by the varying applications involved. Thacker claims that it is also complicated by the number of vendors that the Computer Integrated Manufacturing serves as well as incompatibility problems among systems and lack of standards for data storage, formatting, and communications. Companies must also have people who are well-trained in the various aspects of Computer Integrated Manufacturing. They must be able to understand the applications, technology, and communications and integration requirements of the technology. Computer Integrated Manufacturing cultural problems begin within the division of functional units within the company such as engineering design, manufacturing engineering, process planning, marketing, finance, operations, information systems, materials control, field service, distribution, quality, and production planning. Computer Integrated Manufacturing requires these functional units to act as whole and not separate entities. The planning process represents a significant commitment by the company implementing it. Although the costs of implementing the environment are substantial, the benefits once the system is in place greatly outweigh the costs. The implementation process should ensure that there is a common goal and a common understanding of the company's objectives and that the priority functions are being accomplished by all areas of the company according to Jorgensen and Krause.


Reliable operations, quality assurance, reactivity and modularity are essential to ensure economic interest in the manufacturing system facilities. These aims can be achieved by integrating control loop functions into each manufacturing level, including the design of the product, the maintenance of the means of production and, in particular, the manufacturing process ensure immediate remedy once a fault is detected. The integration of these functions allows us to search for a global optimization of the production quality. This integration needs a suitable structure which must be distributed since the intelligence of the various functions is geographically distributed. This requires methods and efficient tools for the use and maintenance of: 1. integration in a Computer Integrated Manufacturing (CIM) structure; 2. databases which store this information and achieve their coherence and consistency;

3. real-time, distributed and reusable computer control systems which have to work and cooperate permanently; 4. communication networks which transmit all types of information. The presentation of these control functions is limited to the level of a flexible manufacturing cell. The main concepts are: 1. quality management in the manufacturing system; 2. maximum flexibility of the system related to the shop floor level, products and control; 3. quality information system using entity-relationship modeling; and 4. distribution and modularity of the control system by means of the definition of a conceptual model and its implementation with the ISO standard manufacturing message specification. The following sections are dedicated to these concepts and their application in a flexible manufacturing cell, paying attention to quality management and reusability features.

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3.8.1 Quality
Many firms are being confronted with increasing market pressures induced by competitiveness, reduced prices, better qualities, minimal response times and a rise in product diversity. In the last few decades, the increasing development in flexible manufacturing systems and cells has emerged to simultaneously fulfill the requirements of efficiency, quality and flexibility. Manufacturing systems are large, as well as complex systems that are made up of a variety of numerically controlled machine tools, Coordinate Measuring Machines (CMM), machining centers, storage-loading-unloading-clamping-unclamping areas and pallet transport systems. Manufacturing cells are reduced-scale manufacturing systems controlled as automation islands dedicated to the manufacturing of small sets of product classes, and acting as computer controlled stand alone entities of an overall manufacturing system. Flexible manufacturing systems and cells are considered as the shop floor start-up of a Computer Integrated Manufacturing architecture involving contributions and effort from all the departments of a company. As one of the major goals in manufacturing systems, quality concerns the whole life-cycle of both product and process, thus covering all quality management activities, including quality planning, control and monitoring with appropriate feedback actions. The quality objective stands on horizontal and vertical integration flows in a Computer Integrated Manufacturing structure. For the horizontal viewpoint, in-process quality assurance and process certification methods require the significant use of in-process quality sensors and deterministic metrology methods supported by a reactive architecture. The QIA (Quality in automation) project has made big efforts on this subject. Vertical integration of quality assurance operates from the manufacturing system automation stage to the Computer Aided Design (CAD) stage by means of an information system with quality management features. Quality control has to be integrated into the whole manufacturing process, as close to the production operations as possible to induce feedback actions on the operational and/or informational stages of the system.

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Optimal management of manufacturing operations requires the setting up of feedback control-loops within the system architecture. To achieve this, the system must be equipped with loop-controlled functions. The difficulty here is to survey manufacturing control loop solutions using existing and heterogeneous equipment, to specify necessary modifications for their integration, and to propose adaptable and reconfigurable solutions for various types of equipment. Thus, a solution based on a centralized production control organisation, as well as coordinating NC machines without initiative would be implemented easily but would prove much too sensitive to perturbations: the smallest equipment failure can lead the manufacturing system towards a degraded and sometimes incoherent functioning mode. For these reasons, a distributed computer control solution that attempts to grant more intelligence and also more autonomy to the machines is preferred. Many studies have demonstrated the profitability of such an approach.

3.8.2 Autonomy
To increase the autonomy of manufacturing system, the production management of the shop floor and the cell must be coupled as closely as possible. The manufacturing orders can be created differently, either from: 1. information received from a next cell (Kanban), 2. information determined by the shop floor (MRP), or 3. (hi) information decided by the cell (OPT). These differences alter the data flow consequences. Once the cell has received the manufacturing orders, it can sequence them, but only in a very short-term way. The integration of defects and manufacturing exceptions into the planning of computing time is quite impossible. It does not take into account the due dates which are computed by the MRP (material requirement planning) as priorities, and thus the FIFO criterion is used. As for the Kanban and the OPT, the estimated processing time of the manufacturing operations may serve to compute the due dates. The cell may also use the Kanban or the OPT criteria, or any other criterion, in maintaining both its autonomy and the decisional framework defined by the entire manufacturing orders. The cell may decide to perform more quality control tasks especially if it is not overloaded or if it is not a bottleneck. The cell also fulfills the reporting activity, which concerns both the executed tasks and the obtained qualities. Nevertheless, the reports must be suited to the production management method because this method does not consider the same indicators.

3.8.3 Flexibility
The manufacturing abilities and control must be able to manage varying manufactured articles (for example, using a group technology configuration), or different products conceived to match the customer's requests. The equipment flexibility in the manufacturing system is managed by the product system design and the control flexibility by the chosen control architecture. The former is related to the integrated management of the quality, and the latter needs modular software and hardware. In the long term, control system reconfiguration depends on the facility to substitute the software in the computers, the numerical controllers, and the programmable logic controllers. In the manufacturing process, the new incoming product should be able to: 1. explain the manufacturing specification using the design stage information (the CAD/CAM product data exchange standards enable the consistency of data format from the design stage to the manufacturing and inspection stage);

2. perform the report of the adapted manufacturing, at least to satisfy Statistical Process Control (SPC) methodology. The manufacturing system adjusts itself on the control variation following the quantity and the due date in JIT (just in time) and OPT ways. The manufacturing capabilities must change with the control estimates. That is not within the cell's power, but it affects the manufacturing management method applied in the factory or the shop floor. On the other hand, the control criterion relative to this order can progress along with the methods and the manufacturing systems. Thus the manufacturing control system must be adaptive: its programming is parameterized by the criterion.

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3.8.4 Modularity
A manufacturing system is composed of a computer-controlled collection of communicating and generally distributed groups of modular, automated material handling systems and interchangeable numerically controlled machine tools. These various and heterogeneous components are all connected by communication links and integrated by a hierarchical network of computers. They simultaneously contribute to the efficient manufacture of a variety of parts at low to medium-sized volumes. Three essential components of a manufacturing system must consequently be taken into account. They are: 1. The CNC machine tools to process the parts; 2. The material handling systems to move the parts and tools; and 3. An overall control system to manage the manufacturing components. The overall control system manages the various manufacturing components and coordinates their activities to provide a cohesive structure that can react deterministically to the events occurring on the shop floor. It therefore carries out several activities such as detailed planning, direct control as well as the monitoring of all manufacturing components and establishes a link between them and the superior functions found in the shop floor. The important criteria to structure the manufacturing control activities and their relations are abstraction, decisional autonomy and modularity. With regards to these principles, a distributed control solution is a natural way to grant more intelligence and therefore more autonomy and flexibility to the manufacturing components. In a distributed control solution, a manufacturing system acts as an adaptive, dynamic system in which a wide variety of jobs are continuously and randomly introduced. These jobs are broken down into operations which then have to be scheduled on various manufacturing components. The computers in a manufacturing system carry out different levels of planning and control using heterogeneous, intelligent, autonomous, and spatially distributed processors that share a common goal: 1. At the highest level, the facility level deals with manufacturing engineering and production management; 2. The shop level manages, coordinates and monitors the cell in the shop floor; 3. The cell level manages, coordinates and monitors the stations in the cell; 4. The station level deals with local planning, coordination and monitoring of the equipment within the station; and 5. The equipment level directly controls and monitors manufacturing resources such as robots, machine tools and devices. Each level handles a set of manufacturing components. To model a manufacturing system in an abstract manner, these manufacturing components can be described by

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generic elements which are called reception posts. Each reception post is interfaced to a physical location in a manufacturing system and is represented by a machine state graph. It thus informs the manufacturing control system when the component is available, occupied or unavailable. Moreover, several reception posts can be regrouped in a reception zone if they are handled by a same level (for example, in the case of several pallets on a conveyor). These concepts of reception post and reception zone provide an external and abstract image of the various manufacturing components of a manufacturing system. Indeed, a manufacturing control system captures a view of each manufacturing component by observing its associated reception zone without knowing its internal functioning.


One of the main difficulties in implementing quality in manufacturing control systems is the structuring of information flows. The quality circles are useful if the quality measurements and the improvements are correctly performed, but this condition is not always satisfied for the following tasks: 1. Gathering of the quality data; 2. Their analysis; 3. The communication of proposed corrections; and 4. Their applications in the manufacturing process. Quality management methods are clearly defined but are difficult to apply in a coherent way when the manufacturing system is not structured. If the product lifecycle is not totally controlled, the quality function cannot be handled. The following parameters must be safeguarded: 1. The product design specifications on the process design; 2. The design adjustments; 3. The qualities relative to the products and processes; and 4. The difficulties which occurred during the manufacturing stage. The computer aided design and manufacturing (CAD/CAM) level and the shop floor level transmit dated objectives and quality to the manufacturing system. The manufacturing system objectives are: 1. To obtain the required qualities; and 2. To report non-quality. Thus, the control loop architecture joins the PDCA cycle (plan-do-check-action). According to this cycle, the quality control function ensures that every manufacturing task is well performed, and that the required quality of each operation is obtained. The relationships with both CAD/CAM and the manufacturing management include the feedback loops, which reconsider the design specifications, and the planning of work in progress. The corrective actions of the manufacturing cell depend on the CAD/CAM and the manufacturing management capabilities. Inside the cell, the control loop architecture has effects on the manufacturing control system. This must be able to take into account the manufacturing exceptions, and to verify the effects of its orders. Then the non-quality relative to the parts or to the equipment induces reactions. The main problem is to organise these reactions into a coherent architecture, which includes informational and decisional abilities. Relative to product and process design, the cell receives the design specifications, and then executes them according to

the shop floor manufacturing orders. Inside the manufacturing cell, the control system initially proposes a set of functions which process work in progress, equipment, actions and their sequencing. The control function is therefore distributed throughout the whole manufacturing system, and is as close as possible to the equipment level. The control of the parts and equipment must review their design and process plans as often as is necessary. The control of the actions (handling, machining, for instance) must adjust their progress in real-time, if possible. The control of the action monitoring modifies the real-time control of the handling inside the cell, depending on the problems encountered. In the case of a default and in order to avoid the intervention of an operator, the manufacturing control system must be able to interpret any risk, to know which operation has to be corrected, and then determine the corrective action. Check Your Progress 2 Fill in the blanks: 1. Top management establishes long-term goals for the company and envisions the general .. of the company. 2. The conceptual plan is used to demonstrate a knowledgeable understanding of the .of Computer Integrated Manufacturing and how they are related and managed. 3. The logical plan organises the functional elements and logically demonstrates the relationships and ..between the elements. 4. Reliable operations, quality assurance, reactivity and modularity are essential to ensure ..interest in the manufacturing system facilities. 5. Optimal management of manufacturing operations requires the setting up of feedback control-loops within the system..

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In order to support the evolution and adaptation to the manufacturing requirements, generic and reusable manufacturing control system are required. Many researches have established that the application of a general architecture is an efficient support to provide reusability for manufacturing control systems. An approach based on the definition of a generic conceptual model and its implementation for a particular manufacturing system, contributes to systemize design-and-build reusable systems. The central aspect of this approach relies both on its organisational and generic properties which allow us on one hand to perfectly specify the design cycle of a manufacturing control system and on the other hand to make an abstraction of the manufacturing system configuration or reconfiguration. Indeed, it results in a modeling which ensures control system genericity and the harmonization of the presentation and access of the manufacturing components information. It thus facilitates the integration and the addition or removal of new functionalities or new manufacturing components, without reconsidering the existing control system, and in this fact, the reusability of the manufacturing control system. Finally, the interests of this approach are not only a great flexibility in the control system implementation but also in the portability of the implemented control system.

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Cellular Manufacturing: In a manufacturing "cell," all operations necessary to produce a component or subassembly are performed in close proximity, thus allowing for quick feedback between operators when quality problems and other issues arise. Computer-aided Design (CAD): Computer-based systems for product design that may incorporate analytical and "what-if" capabilities to optimize product designs. Computer-aided Manufacturing (CAM): Computerized systems in which manufacturing instructions are downloaded to automated equipment or to operator workstations. Computer-aided Process Planning (CAPP): Software-based systems that aid manufacturing engineers in creating a process plan to manufacture a product whose geometric, electronic, and other characteristics have been captured in a CAD database. Computer-integrated Manufacturing (CIM): A variety of approaches in which computer systems communicate or interoperate over a local-area network. Typically, CIM systems link management functions with engineering, manufacturing, and support operations. Computerized Maintenance Management Systems (CMMS): Software-based systems that analyse operating conditions of production equipment vibration, oil analysis, heat, etc. and equipment-failure data, and apply that data to the scheduling of maintenance and repair inventory orders and routine maintenance functions. Kanban Signal: A method of signaling suppliers or upstream production operations when it is time to replenish limited stocks of components or subassemblies in a justin-time system.

Check Your Progress: Answers

CYP 1 1. manufacturing 2. computer 3. Dr. Joseph Harrington 4. capabilities 5. service CYP 2 1. direction 2. elements 3. dependencies 4. economic 5. architecture


Cagle, E., Awaiting the Big Payoff, Printing Impressions 47, no. 6 (November 2004): 5456. Kusiak, Andrew, Intelligent Manufacturing Systems, Englewood Cliffs, NJ: Prentice Hall, 1990. Mahmood, T., Real-time Computer Integrated Manufacturing, Circuits Assembly 6, no. 3 (March 1995): 5860. Rehg, James A., and Henry W. Kraebber, Computer Integrated Manufacturing, Upper Saddle River, NJ: Pearson Prentice Hall, 2004. Ruey-Chyi, W., C. Ruey-Shun, and C.R. Fan, Design an Intelligent CIM System Based on Data Mining Technology for New Manufacturing Processes, International Journal of Materials and Product Technology 2, no. 6 (2004): 487504. Thacker, Robert M. A New CIM Model. Dearborn, MI: Society of Manufacturing Engineers, 1989.

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1. What do you mean by Computer Integrated Manufacturing? 2. Explain the benefits of computer integrated manufacturing. 3. Explain the significance of computer integrated manufacturing plan. 4. Explain the procedure and considerations in managing a computer integrated manufacturing system. 5. What are the computer control systems techniques and applications in manufacturing systems? 6. What is the significance of quality in the manufacturing control systems?

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STRUCTURE 4.0 4.1 4.2 Objectives Introduction Choice of Operations Strategy 4.2.1 4.2.2 4.2.3 4.2.4 4.3 International Operations Strategy Multi-domestic Operations Strategy Global Low Cost Operations Strategy Transnational Operations Strategy

Sourcing and Procurement Operations Strategies 4.3.1 4.3.2 4.3.3 4.3.4 Role of Strategic Sourcing and Procurement as an Operations Strategy Sourcing Strategy Internal Strategy for the Role of the Purchasing Process The Process of Purchasing and Supply


Supplier Relationship Management 4.4.1 4.4.2 4.4.3 4.4.4 Supplier Relationship Management and Performance Assessment Supplier Relationship Management and Development Supplier Relationship Management and Information Sharing: Open-book Negotiation Supplier Relationship Management: Policy and Strategy

4.5 4.6 4.7 4.8

Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

Discuss the driving forces for global and international trade Analyse the types of international strategy

Appreciate the importance of sourcing and procurement as an operations strategy Consider the advantages and disadvantages of offshore and domestic sourcing Consider the history and evolution of the supply network Understand the nature of both supply network and supply chain operations strategies

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The growth in world trade and the extension of operational activities beyond the boundaries of the firm has clear implications for competitiveness and the dimensions of a Global operations strategy. Operations has a crucial role to play in international competitiveness. Strategic operations decisions are necessary regarding such issues as the responsiveness and flexibility of domestic supply compared with outstanding to low cost, low wage producers offshore; the appropriate locations for international facilities; the output capacity of plants; and the labour-technology trade-offs in each location. There are six primary characteristics of the transformation system that are crucial when making such decisions:

Efficiency or doing the thing right: Measured as output per unit of input. The problem comes in making comparisons, finding meaningful comparisons and choosing the right measures for these inputs and outputs. Effectiveness or doing the right thing: Are the right sets of outputs being produced? Are we focused on the right task? Capacity: The maximum rate of output that is attainable. Here, a balance must be struck between capacity and efficiency. Quality: Are the quality levels of the output right and can they be consistently attained? Response Time: How quickly can the output be produced? Or preferably, can the output levels be set to respond to the exact nature of real time demand? Flexibility: Can the transformation system produce other, different outputs? How easily? How fast? What variety of levels of customisation are possible?


The choice of an operation strategy can reflect two important variables:

The levels of cost reduction necessary; The levels of flexibility and responsiveness required.

Figure 4.1 demonstrates the operations strategies that might be applied depending upon the objectives of the enterprise.

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Source: Adapted from Hill and Jones (1998) and Hitt et al. (1999)

Figure 4.1: Cost and Flexibility Considerations in Choosing a Global Operations Strategy

The matrix in figure 4.1 details the two variables above. The vertical axis shows the operational cost of a particular strategy, the horizontal axis the degree of flexibility and responsiveness. The implications for each international operations strategy are critical for both trade and competitive edge. We can now look at the various types of strategy and compare their advantages and disadvantages in terms of flexibility, responsiveness and cost.

4.2.1 International Operations Strategy

Here, the domestic enterprise imports and exports goods and services from its home country to another, abroad a strategy relying upon the granting of licenses and agents abroad. In this instance, the firm operates in high cost and low responsiveness mode. It is the least advantageous, with little local responsiveness or flexibility and little cost advantage because the transformation process are some distance from the market. However, as an international strategy, it is sometimes the easiest to establish with little change in existing operations and risk exposure mainly taken by the licensees. These agents are, nevertheless, based in the offshore markets concerned and they will understand the local market.

4.2.2 Multi-domestic Operations Strategy

In this instance operational decisions are decentralized and taken in each particular country concerned. Organisationally, the firms involved are usually strategic business units, subsidiaries, franchises, outsourcing partners or joint ventures with suppliers. Local producers in local markets maximize response and flexibility and encourage differentiation and variety high degrees of mass customization to accommodate local tastes are often also an option. Control and coordination are also easier using this strategy, as the firm is not just exporting a product but also managing the processes.

There are, however, few cost advantages using this multi-domestic approach. The advantages and disadvantages of this type of operations strategy can also be applied to sourcing from domestic vendors rather than offshore.

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4.2.3 Global Low Cost Operations Strategy

Applied to standardized products and process that can be produced in bulk (often in advance of a sales season) by large manufacturers operating in low wage economies such as Asia. Economies of scale are possible due to long runs and the size of operations. Coordination is often a problem as control over the numerous offshore suppliers can be difficult; there is also a degree of instability in these arrangements. The strategy also lacks responsiveness and flexibility to demand.

4.2.4 Transnational Operations Strategy

This strategy seeks to achieve the best of both worlds. It exploits economies of scale and learning as well as pressure for responsiveness, by recognizing that core competencies, capabilities or processes do not just reside in the domestic or home country. The strategy is transnational as it moves people, processes, material and ideas that transgress national boundaries. These firms can then pursue differentiation, low cost and response simultaneously. We think of such firms as world companies whose country of origin is unimportant because they possess an independent network of worldwide operations. Key activities are neither centralized nor decentralized; instead the resources and activities are dispersed, but specialized, so as to be both efficient and flexible. In summary, global operations strategies increase the challenges and opportunities for most organisations. Many domestic firms have chosen to develop internationally for strategic reasons such as cost and supply network improvement. However, there are also problems in terms of providing sufficiently flexible and responsive operations that can provide a variety of goods. Some of these costs and benefits are now explored, as we examine in a little detail one specific operations strategy that is widely used across a number of disparate industries and sectors. Check Your Progress 1 Fill in the blanks: 1. The growth in world trade and the extension of operational activities beyond the boundaries of the firm has clear implications for and the dimensions of a Global operations strategy. 2. The implications for each international operations strategy are critical for both trade and competitive. 3. Local producers in local markets maximize response and flexibility and encourage and variety high degrees of mass customization to accommodate local tastes are often also an option. 4. Global, low cost operations strategy to demand. lacks responsiveness and

5. Transnational operations strategy moves people, processes, material and ideas that transgress .. boundaries.

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Many organisations are increasingly attempting to source goods and services on a global basis. With the growth of communications technology and political events such as the enlargement of the European Union and the opening of trade links with many former Soviet Union states, procurement decisions now involve much wider geographic possibilities when dealing with suppliers from a number of countries. This particular type of operations strategy forms an important input to the organisation and involves strategic decisions. We will now examine two of the most important, yet often conflicting, objectives in strategic sourcing: cost versus flexibility and response. Organisations often make use of lower-priced goods supplied by foreign vendors. Taking advantage of low wages, such suppliers are able to undercut competitors operating in domestic markets. However, by their very nature, many of the consumer goods clothing, footwear, food, drink, toys, furniture, electrical, electronic, household goods, etc. and services involved have behaviors that are dynamic and complex, usually being sold in discrete seasons. Low cost, although important, may not be the only strategic purchasing criteria for either end consumer or retail buyer. In this section, we endeavor to establish, using empirical research, exactly what the advantages and disadvantages are for an operations strategy using foreign producers as opposed to domestic suppliers. Further, we examine all the various trade-offs concerned for both and analyse the true costs involved.

4.3.1 Role of Strategic Sourcing and Procurement as an Operations Strategy

Purchasing and supply management as operations strategies have developed from adversarial, clerical transactions between supplier-customer, to strategic, co-operative, buyer-seller relationships. This has subsequently led to the rise in strategies of supply base reduction (a restructuring in the way firms do business with key suppliers in order to gain competitive advantage). Typically, low cost seems to be the primary purchasing requirement for many organisations with the strategic operational objective of a supplier relationship being cost reduction. Stuart and McCutcheon (2000) identify four primary mechanisms to achieve this:

Lower production costs of the suppliers; Improved conformance quality (consistently meeting specifications); Material/location substitution; Lower transaction costs, including the costs of incoming materials inspections, vendor searches and evaluations, corrected supplier problems, and communications with suppliers.

But is low cost the only strategic objective? And are these strategic supply decisions made in full knowledge of all the cost/benefit trade-offs involved? We now address these and other questions.

4.3.2 Sourcing Strategy

Much has been written about ways of deciding where to procure products and services. The most well-respected modern approach was published in the Harvard Business Review as long ago as 1983, by Peter Kraljic, a senior member of the consultants, McKinsey. Kraljics sourcing tool is shown in Figure 4.2. Kraljics argument is that, for any item, the risk of being caught without it (and thus, for

example, stopping the production line or failing to fill an order) may be high or low. Kraljic calls this risk of exposure.

59 Global Trade Operations and Supply Network Applications

Source: adapted from Kraljic, 1983

Figure 4.2: Kraljics Sourcing Tool

The cost to the organisation (of the procured item) may also be dichotomized into high and low. Cost may include many factors in addition to purchase price for example, the cost of acquiring, storing, insuring and maintaining the item. Combining these two factors enables the supply strategist to decide on what approach should be taken to managing the item; those in the top right-hand box may be treated as strategically important and thus managed through close collaboration with the supplier, while those in the bottom left may be dealt with via, say, automated buying and stock control. Taking its origins clearly from such ideas as the famous Pareto 8020 effect (which observes, in this context, that 80 per cent of expenditure on goods and services supplied to the organisation will probably be accounted for by 20 per cent of the suppliers from whom these things are bought), Kraljics tool has encouraged supply managers in many sectors to consider more than the immediate aspects of their sourcing decisions. Its simplicity has appealed to supply strategists over two decades and many modern strategies consist of little more than this diagram almost always with different wording, as the analysis has been customized to a specific organisations situation. Anyone wishing to be taken seriously as a professional purchaser must be able to recognize and use this tool as a basic skill. As with all two-by-two analysis methods, the tool is open to criticism for oversimplification there are other variables involved in sourcing. There has also been recent discussion over the appropriateness of the boxes an item that is low in cost and has little risk of exposure attached to it may still be a vital part, without which the organisation cannot function the traditional halfpennys worth of tar which (by its absence) spoiled the ship.

4.3.3 Internal Strategy for the Role of the Purchasing Process

Having built a strategy for supply itself and a way of understanding the management of sourcing decisions, the supply strategist must decide how purchasing is conducted within the organisation. This has two parts: location and process. Location where purchasing actually takes place depends upon the way in which the organisation is structured. In a general sense, the organisation may be set up to run with functional departments, each of which contains career specialists who are both

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the operational competence of the organisation and also its eyes and ears in that specialism (i.e. they ensure that the organisations competence in their area is up to date). These vertical, functional pillars within the organisation (sometimes called silos, after the agricultural storage device in which materials such as animal foodstuffs are delivered into the top of an upright cylinder, and drawn off as needed from the bottom) form its structure. Across them (i.e. from one functional area to another) flow the processes of the organisation product development and order fulfillment being the two basic activities. In recent years, many firms have removed their functional silos and organised themselves along process lines, supporting the processes with the necessary functional expertise at the appropriate points. The operational manifestation of this is cross-functional teams, in which experts with a variety of functional and commercial skill are put together (often co-located in one office) to take responsibility for a specific process such as bringing a new product to market on time. Thus, purchasing, as the traditional home of responsibility for supply management, may be located as a separate functional department, with processes passing into and out of it (in which case the management role is to ensure that the interfaces with other departments do not delay communications or add cost to the process) or as part of a cross-functional team within a process-oriented organisation, where there are no clear departments. There are, of course, many hybrid arrangements. Either way, the organisation will need a strategy for the way in which the purchasing process takes place, which will influence the way in which it is organised.

4.3.4 The Process of Purchasing and Supply

The purchasing and supply process is one of responding to demand for products and services from within the organisation by providing the necessary resources to specification. This involves competences, action and knowledge. Identification of the services and products that the organisation requires, and their sources, may stem from any of three directions. The first is the user of the product or service. Clearly, a designer of a product will be concerned for the parts that fit within it and will keep a close eye on the possible sources of supply. Similarly, budget holders who want items of capital equipment will have clear ideas of the models they would like to get. The manager of a hotel within a global group will know which laundry service works best for him or her; the catering manager at a company restaurant will be aware of the best place to buy fresh vegetables. The risk here is that the budget holder may not be in touch with the commercial consequences of specifying a particular supplier for the parts; the same may apply to the purchase of capital equipment (it is less likely that the problem would arise for the hotelier or catering manager, who may be expected to be very much in touch with the immediate commercial consequences of their sourcing decisions). However, the user is the traditional origin of the requirement for purchased resource and will often go beyond identifying the generic resource, suggesting or even specifying the supplier of the item with whom purchasing should place the contract for supply. The commercial problems of this should be obvious: the suppliers know that the buyer must get the item from them and will negotiate accordingly. It is not surprising, therefore, that it is the dream of every sales representative in the manufacturing industry to have their component specified by the designer of a product before purchasing becomes involved. The potential problem may be addressed strategically by deciding that purchasing should be involved early, perhaps advising the designer on potential suppliers that might be considered. The strategic supply manager must thus develop and maintain a knowledge of the supply market as good as that concerning the sales market which would be expected of a marketing manager. If this is done, the supply manager becomes a genuine source

of ideas in the decisions about what resources to use in the organisations business. The third origin of ideas for such resources comes from outside the organisation the supply base. Suppliers of services and products to an organisation are often able to use their expertise, developed from working with a variety of customers, to the benefit of the organisation. Managing this resource must be done with care, since the organisation must retain its own strategic choice, rather than become dependent upon suppliers for its resource management. Others within the organisation may suspect the supply managers introduction of a suppliers idea into, say, a design discussion (especially if it conflicts with the preference of the designer, even without technical problems) and tension in the internal relationships between functional specialists is apparent in practice in almost any case of integrating external and internal resource management. Nevertheless, if the full strategic advantages of a properly managed supply process are to be realized, the ideas and expertise of the supply base must be tapped. As Gene Richter, Head of Global Procurement at IBM, told every one of his 2400 staff (by e-mail) in December 1997: Our suppliers are often more aware than we of technology developments, what our competitors are doing, and where the industry is going. We must learn to listen to them and act on what they tell us. At the time, this was seen as a new responsibility for supply managers. Most of their training has been to do with telling the supplier what to do and managing the problems that result from this rather arrogant posture. Suppliers, after all, work with lots of customers and know their own business (service or product) well: if the customer tries to manage them, they are likely to defend themselves against the cost and strategic implications of the customers demands, setting up a traditional relationship battlefield. In mass production this was the general modus operandi: a battle of wits in which the supplier (who may be assumed to be in league with other suppliers, through trade associations and other mechanisms) would build-in costs to the transaction to pay for the difficulties the customer caused through arrogance. In post-mass production days, where customers demand what they want, rather than accept what providers offer, the costs of this battlefield may be punitive for the supply chain. The listening to suppliers that Richter evangelized has become a common aim for purchasers.

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In the following discussion of this lesson we shall look at the ways in which supply managers try to deal with their relationships with other organisations (suppliers of materials, components and services to the organisation) and explore some ways in which these may need to be developed in order to ensure the supply chain is effective. This is known as supplier relationship management, or SRM, and has a direct resemblance to CRM, or customer relationship management, which is a core feature of marketing. In doing so, we shall touch upon the principles of lean supply the supply management activity necessary to provide a lean supply chain within a lean production system. We shall not concern ourselves with semantic differences between lean, agile and mass customization for these purposes: the focus is on developing strategies to ensure that supply functions perfectly. The three aspects of SRM that we shall use in exploring the move from mass production thinking to lean supply are: how performance in the supply chain is assessed; how development is approached and conducted; how information and knowledge are shared within the supply chain. Sometimes this relationship places enormous stress on suppliers, as the following case demonstrates.

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4.4.1 Supplier Relationship Management and Performance Assessment

Measurement of performance is an important part of strategy. This requires prior identification of the criteria for success, disciplined monitoring of performance against the criteria and their component parts, and careful interpretation of results. In the field of supply management, this process has become established over three decades and is typified by schemes that are generally known as supplier (or vendor) assessment. The principle of supplier assessment is that the customer sets up an articulation of its expectations and requirements, monitors the suppliers performance against them and then converts the results into an assessment of the suppliers performance, complemented in some cases by suggested paths towards improvements. Supplier assessment began in the 1960s, tracing its origins to the quality management movement that grew from the work of Walter Shewart in North America in the 1930s. The development of quality management in Japan following the Second World War was supported by the American consultants such as Deming and Juran, itself leading to a renaissance of concern for quality in the West. Part of this concern focused upon the quality of incoming goods and materials. In the defence (aerospace) and automotive industries, schemes began to appear for, typically, supplier quality assurance. These schemes generally employed some statistical analysis of data concerning performance criteria set by the customer hoops through which the supplier must jump. The focus on product quality was gradually replaced (on both sides of the Atlantic and in the other areas of the industrialized world that took their steer from the USA and Europe) by a focus on service and on appropriate management approaches in the supplier organisations. Thus, schemes emerged with complex algorithms for calculating the suppliers performance, often accompanied by annual reward ceremonies and all the trappings of celebration that are associated with project management. In the 1980s, some companies began to institute schemes that involved two-way assessment: the customer would tell the supplier how well or poorly they were performing and seek the suppliers view of them as a customer in return. Suppliers would naturally tend to be complimentary, fearing retribution from the customer for a criticism, and the resultant good feedback from suppliers would encourage organisations to refer to themselves, rather naively, as preferred customers. Supplier assessment, however, has a basic flaw: responsibility for the performance of the supply activity cannot simply be laid at the door of the supplier. The manner in which the customer (and not just its purchasing department) conducts itself in the transaction is also heavily influential on the smooth running, or otherwise, of supply and the related costs. Thus, vendor assessment, born of a time when the cracks in the mass production paradigm were beginning to show, results not in the improvements in supply that are expected (and may indeed be shown and measured by proud customers), but in a systemic corruption of the process, as suppliers learn how to deal with dozens of different customers assessment schemes, managing by guile to avert the commercial disaster that full compliance with all of them would almost certainly entail. The principle of supplier assessment is logical but limited. There are many different types of scheme in operation and it is clear that, in some cases, the suppliers are actually helped by them. However, the area of assessment is thus one in which supply strategists should be employing their imagination and creativity. If it is not worthwhile to measure the individual performance of the supplier (which results, almost always, in a game of blame and defence) nor even that of the two separate parties (customer and supplier again, this becomes a game of blame and counter blame, if, indeed, it

ever moves beyond the blame and pleasantry model), then some other focus must be found for the performance measurement that is a critical part of strategic management. One approach to this has been to use a facilitator between the two parties who provides the rationale in assessment. The Relationship Positioning Tool, developed by academic consultants at Glasgow Business School in the 1980s, does just this (Macbeth and Ferguson, 1994). Using a common framework for assessment, the performance of each organisation is mapped independently (by the consultant/facilitator) and then a comparison and discussion takes place to identify ways forward. A further development of this is to manage the unique relationship that is shared by the two parties as an entity itself; that is, the overlap of operational value adding between one stage in the chain and the next is seen as a jointly owned activity with fuzzy responsibility instead of a clean division, at least for operational purposes. The legal difficulties with this may be small or great, depending upon the situation. In the early 1990s the expression partnership became popular within this context, with organisations professing mutual interest embodied in the relationship of partners. This served well in terms of awareness of shared responsibility but raised potential problems, especially when things went wrong. In the UK, under the 1891 Partnership Act, any two parties acting as if they are one entity become jointly responsible for one anothers liabilities (as partnerships in, say, the legal profession do). Two companies acting this way may therefore incur unwanted liabilities even if they do not actually call their relationship a partnership, or even claim that it is not (the interpretation is left to the courts). It may be that the only way around this is actually to form a third party a joint venture company. When the stakes are high, this is precisely what some firms have done. Assuming that the customer and supplier do not need to go to quite these lengths, it is reasonable to view the joint operation of organising supply as a shared responsibility, and measuring its performance becomes a mutual interest. Since the activity of either party to the relationship (customer or supplier) might affect the performance, there is clearly no point in one of them simply blaming the other (other than as a tactical ploy in the competition part of the relationship). Instead, the two can jointly assess the relationship and take appropriate action to reduce the difficulties it is experiencing, thereby improving the efficiency and cost-effectiveness of the value-adding process. This technique was pioneered by researchers at the University of Bath, in the form of the Relationship Assessment Process (RAP), and subsequently, in the UK aerospace industry, as the Relationship Assessment Process. The RAP is shown in Figure 4.3. In the early years of the new century, the field of management consultancy in purchasing and supply abounds with relationship assessment models: a good example of practice (via consultancy!) following academic research by about ten years.

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4.4.2 Supplier Relationship Management and Development

The development of supplier assessment over three decades reveals a worrying assumption on the part of supply strategists that Gordon Selfridges famous aphorism The customer is always right is a truism rather than the retailing sales tactic that it really is. The extension of this suggestion to commercial and industrial supply has left a legacy of techniques in which the customer assumes the role of infallible despot, while the suppliers become wily and resourceful, living on their wits and tricks. As supplier assessment needs revision for post-mass production supply strategy, so its close cousin, supplier development, is also ripe for new perspectives. The idea that the customer could blame the supplier for all the shortcomings in the supply process led not only to the assessment mentality, but also to a view that customers might tell suppliers how to run their businesses under the banner of development. Growing in popularity on the back of supplier assessment in the 1980s, this approach meant that

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by the mid-1990s many customers were seeking to develop their suppliers in industries far from the origins of the approach (once again, aerospace and automotive). While some logic may be seen in, say, a global automotive company telling a small components manufacturer how do adopt statistical process control, the rationale for an airline telling its bakery supplier how to make its bread rolls is difficult to see. The latter example is real, however, and illustrates how far a fashionable idea can drift from its relevant basis.

Source: adapted from Lamming et al., 1996

Figure 4.3: The Relationship Assessment Process

Supplier development is actually a developing countries strategy used when an organisation from a developed country wants to set up supply lines in a new, foreign venture. This also applies in the case of redeveloping economies and was evident in the strategies of the Japanese television manufacturers moving into South Wales in the 1980s. The UK television industry at the time was in ruins and the arrival of three of the top Japanese manufacturers in an area replete with labour recently made redundant by the closure of coal mines and steelworks resulted in fundamental regeneration of industrial wealth (coupled, as it was, with a similar development in the automotive industry in the region). The technique of supplier development consists of the customer providing an indication of what is to be achieved, in terms of performance characteristics and attributes, often packaged into a campaign identified by a catchy title or acronym. This is usually integrated with a supplier assessment scheme (with all its potential flaws, as discussed above). The customer may opt for a generic scheme, such as the ISO 9000 series, considering that accreditation of the suppliers systems would be sufficient guarantee of performance. There are two observed approaches to supplier development: they have been called cascade and intervention (Lamming, 1996). In the first, the customer organisation develops a new concept that it would like to have adopted throughout its supply chain, formulates it in some way (often with the help of consultants) and cascades it down to its direct, or first-tier, suppliers. It is either implicitly or explicitly expected that the direct suppliers will cascade the idea on downwards to their own suppliers (the supposed third tier). The mechanisms for doing this vary, but are seldom more than documentation and presentation (sometimes given at the award for supplier of the year, as part of the supplier assessment programme). Suppliers see many of these

schemes and have to adopt a strategy that enables them to survive in the messy and sometimes contradictory combination of them all: the supplier may be expected to develop expertise in dealing with such complexity, appearing to comply with all but in fact approximating each to a common model. The second strategy has the same basis as the first the good idea (perhaps termed best practice) stems from the customer and is passed on down to the suppliers. However, in this case, the customer intervenes into the business of the supplier, actually working at the operating level to help the supplier to develop specific skills. In this case, the customer is clearly making a real investment in the process, and this is likely to be more respected by the supplier as a valuable contribution (rather than simply issuing edicts ex cathedra). From the customers point of view, it may actually be possible to make ideas stick, by working alongside the suppliers personnel in implementation. The problem with intervention strategies is that the supplier may simply become dependent upon the customer for new ideas a sheep. The strategy should be used with care, therefore, and for a limited period only. This path was followed by the Japanese vehicle assemblers on coming to the UK and the USA: the intervention was for a limited period, following which the supplier was expected to develop their own competences, although the customer still brought new challenges and initiatives, to ensure the suppliers (of components, materials and services) were aware of the pressures in the end markets, which had to be transmitted all the way back along the supply chain. In the course of time, one might expect the advanced supply strategist to construct a way of capturing the learning available from the interaction with suppliers so that the customer also sought to develop, not just the supplier. This might be a two-way, vertical activity or perhaps, recognizing the complexity of the actual situation, a case of network development, where any player might learn from, and help to develop, any other. Whichever ways the development of skills, knowledge, learning and techniques is fitted into a supply strategy, it is important not to lose sight of the degree to which the customer, as well as the supplier, should seek to improve in all aspects; not to do so represents a waste of resources something that lean supply cannot tolerate. It is a question of retaining strategic autonomy in both the supplier and the customer, recognizing the fundamental competition that exists between the supply chain partners, and managing the limitations to both so that each exploits the business opportunity to the level necessary to ensure their continued, combined activity. One way of approaching this problem is through mimicking the Japanese technique of bringing suppliers together into a supplier association (the Japanese word is kyoryokukai). In this approach, the customer sets up a series of meetings between suppliers that it wants to form into a development group the objective being to improve the overall situation in supply for the customers products (with consequent benefits for all in the supply chain). These meetings may take place on neutral territory, and it may be necessary for the customer to be absent, at least after an initial bonding has taken place.

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4.4.3 Supplier Relationship Management and Information Sharing: Openbook Negotiation

Recently, the practice of requiring a supplier to reveal all sorts of sensitive information to the customer, in the interests of joint competitive position, has become popular. The principle is that, if the supplier shows the customer how the costs are structured for a particular product or service (including, sometimes, their profit margins), the customer will be able to help the supplier to reduce costs, and thus prices. Sometimes this is dressed up as part of a joint effort, i.e. amid claims that the customers own product or service might become more competitive in the

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market-place, thus ensuring the suppliers business too. The principle of open-book negotiation is sound, but in practice it appears to be flawed something the supply strategist must clearly understand. The supplier must manage resources to meet corporate objectives generally a matter of shareholder value and return on capital employed. To do so, it has to manage risk and reward. Business is all about taking risks (i.e. making investments) and then ensuring that the reward is sufficient to justify having done so. When two parties compete, one will try to ensure that the other does not receive adequate reward for the risk and suffers accordingly. If they are collaborating, however, it is in the interests of both that they each receive appropriate reward although for truly strategic operations to be conducted, each party must be free to decide its own rate or return. In the supply chain, the organisations are both competing and collaborating. Thus, they must ensure that each makes appropriate reward, but there will be constant tension over who actually takes what risk and how the rewards (which are clearly jointly generated each party is dependent upon the other) are shared. A supply strategy that requires one side of a supply relationship to take a risk while the other does not, with the second seeking to articulate in heroic terms what the reward should (or might) be for the former, appears unlikely to succeed. When a customer stipulates to a supplier, therefore, that private information must be revealed (i.e. the supplier must take a very great risk) and also what the reward should be (i.e. the supplier is not allowed the strategic determination of the vital riskreward business balance), it is probable that the supplier will take the only sensible business action, and cheat. Information will be distorted and misrepresented, incomplete and arcane. The customer, believing that they have extracted valuable information, will act accordingly and may only find after some time that they are not deriving the value from the transaction that they expected. The only solution to this is to manage the risk in some way, so that it makes economic sense for the supplier to share information. If the customer takes a risk, as well as requiring the supplier to do so, there may be a chance of genuine information and knowledge emerging. Thus, for a worthwhile supply strategy, exchange of sensitive information must be two-way the customer must share information as well as demand it. Such transparency may result in focused activity towards real improvements, but it will often require a great deal of confidence on the part of the supplier, that the customer has really taken a risk. Research on this has developed the management technique of value transparency now in use in manufacturing firms in the UK and USA and under consideration in the healthcare industry.

4.4.4 Supplier Relationship Management: Policy and Strategy

Equipped with a policy, general strategy, structure plan, internal strategy for the purchasing and supply process, and set of techniques for managing relationships, the supply strategist can make a significant contribution to operations strategy in both financial and technical terms. The structure of the organisation may change fundamentally as a result, perhaps leading to more dissipated, decentralized activity, in which case the activity of supply management becomes even more important. This may challenge or even threaten some traditional approaches to strategy and organisational analysis. When it is stripped of its mass production baggage, however, supply management consists of a cold logic and pragmatism that cannot be ignored for long.

Check Your Progress 2 Fill in the blanks: 1. Organisations often make use of lower-priced goods supplied by vendors. 2. Low cost, although important, may not be the only strategic ..criteria for either end consumer or retail buyer. 3. The purchasing and supply process is one of responding to demand for products and services from within the organisation by providing the necessary specification. 4. Measurement of performance requires prior identification of the criteria for success, disciplined monitoring of performance against the criteria and their parts, and careful interpretation of results. 5. The principle of supplier assessment is logical but..

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The strategic management of supply is a critical part of managing the operations of an organisation, and may represent the most critical part. The supply process is not a chain it is a network, possibly even a mess. It is not possible to manage it in a straightforward manner; it may only be possible to manage within it, pursuing strategies for ones own activities that influence rather than control the activities of others. The term supply chain management is in common parlance and may be used as an approximation to the actual situation, as a point of departure. In fact, supplier relationship management offers a more realistic focus for managing the process of supply. The organisations within a supply chain are both competitors and collaborators. Their operations are interdependent but they must also compete for the available value-adding business from which profit may be made. The structuring of supply bases may include assumptions and expectations that are not backed up in practice. Simply calling a supplier first tier may not bring the benefits expected of a structure supply base, such as that observed in post-war Japan. In order to develop a supply strategy, it is necessary to have a policy on how the organisation should behave in the supply chain, a strategy to implement that policy, an internal strategy for the positioning of the purchasing and supply process, and a set of techniques for managing relationships within the supply chain. Some currently available and practised techniques for supplier relationship management are based upon mass production thinking and may not be appropriate for the post-mass production era. Techniques that form parts of lean supply the removal of noise or waste from the supply relationship and process can provide alternatives to such outdated approaches, especially those based on the mass production idea that the customer is always right.

Economies of Scale: The manner in which the costs of running an operation decrease as it gets larger. Diseconomies of Scale: A term used to describe the extra costs that are incurred in running an operation as it gets larger. Outsourcing: The practice of contracting out to a supplier work previously done within the operation. Location: The geographical position of an operation or process.

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Check Your Progress: Answers

CYP 1 1. competitiveness 2. edge 3. differentiation 4. flexibility 5. national CYP 2 1. foreign 2. purchasing 3. resources 4. component 5. limited


Carmel, E. and Tjia, P., Offshoring Information Technology: Sourcing and Outsourcing to a Global Workforce, Cambridge University Press, Cambridge. (2005) Chopra, S. and Meindl, P., Supply Chain Management: Strategy, planning and operations, Prentice Hall, NJ. (2000) Dell, M. (with Fredman, C.) Direct From Dell: Strategies that revolutionized an industry, Harper Business. (1999) Ferdows, K., Making the most of foreign factories, Harvard Business Review, March April. (1997) Schniederjans, M.J., International Facility Location and Acquisition Analysis, Quorum Books. (1998) Vashistha, A. and Vashistha, A., The Offshore Nation: Strategies for Success in Global Outsourcing and Offshoring, McGraw-Hill Higher Education. (2006)

1. Describe the four classifications of a global strategy. What are the key differences between them? 2. What are the advantages and disadvantages of (a) offshore sourcing and (b) domestic sourcing from responsive suppliers? 3. Give examples of the hidden and inflexibility costs involved with foreign sources of supply. 4. Discuss the main differences between a supply network and supply chain operations strategy. 5. In what ways are customers and suppliers competitors and collaborators? How would this apply if one of them has a monopoly?

69 Materials Management

Unit II Material and Inventory Management

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71 Materials Management

STRUCTURE 5.0 5.1 5.2 Objectives Introduction Materials Handling 5.2.1 5.2.2 5.3 5.4 Objectives of Material Handling Principles of Material Handling

Selection of Material Handling Equipments Evaluation of Material Handling System 5.4.1 5.4.2 Equipment Utilisation Ratio Material Handling Equipments

5.5 5.6 5.7

Guidelines for Effective Utilisation of Material Handling Equipments Relationship between Plant Layout and Material Handling Automated Storage and Retrieval System (ASRS) and Methods 5.7.1 5.7.2 5.7.3 Common Benefits of Automated Storage & Retrieval Systems (ASRS) JIT/Kanban ABC System

5.8 5.9 5.10 5.11

Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

Explain the meaning and significance of material management Discuss the procedure of selection of material handling systems Describe the significance and method of material handling systems evaluation Identify the equipment utilisation ratio Describe the materials handling equipments Discuss the relationship between plant layout and material handling Report on the automated storage system and retrieval system and method

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Materials management is a function, which aims for integrated approach towards the management of materials in an industrial undertaking. Its main objective is cost reduction and efficient handling of materials at all stages and in all sections of the undertaking. Its function includes several important aspects connected with material, such as, purchasing, storage, inventory control, material handling, standardization etc. Materials management is defined as the function responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a minimum cost. From the definition it is clear that the scope of materials management is vast. The functions of materials management can be categorized in the following ways: 1. Material Planning and Control 2. Purchasing 3. Stores Management 4. Inventory Control or Management 5. Standardisation 6. Simplification 7. Value Analysis 8. Erogonomics 9. Just-in-Time (JIT) All the above mentioned functions of materials management has been discussed in detail in this lesson. 1. Materials planning and control: Based on the sales forecast and production plans, the materials planning and control is done. This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales. 2. Purchasing: This includes selection of sources of supply finalization in terms of purchase, placement of purchase orders, follow-up, maintenance of smooth relations with suppliers, approval of payments to suppliers, evaluating and rating suppliers. 3. Stores management or management: This involves physical control of materials, preservation of stores, minimization of obsolescence and damage through timely disposal and efficient handling, maintenance of stores records, proper location and stocking. A store is also responsible for the physical verification of stocks and reconciling them with book figures. A store plays a vital role in the operations of a company. 4. Inventory control or management: Inventory generally refers to the materials in stock. It is also called the idle resource of an enterprise. Inventories represent those items, which are either stocked for sale or they are in the process of manufacturing or they are in the form of materials, which are yet to be utilised. The interval between receiving the purchased parts and transforming them into final products varies from industries to industries depending upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of various kinds to

act as a buffer between supply and demand for efficient operation of the system. Thus, an effective control on inventory is a must for smooth and efficient running of the production cycle with least interruptions. 5. Other related activities: Other related activities constitutes the following:

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Standardization: Standardization means producing maximum variety of products from the minimum variety of materials, parts, tools and processes. It is the process of establishing standards or units of measure by which extent, quality, quantity, value, performance etc. may be compared and measured. Simplification: The concept of simplification is closely related to standardization. Simplification is the process of reducing the variety of products manufactured. Simplification is concerned with the reduction of product range, assemblies, parts, materials and design. Specifications: It refers to a precise statement that formulizes the requirements of the customer. It may relate to a product, process or a service. Example: Specifications of an axle block are Inside Dia. = 2 0.1 cm, Outside Dia. = 4 0.2 cm and Length = 10 0.5 cm.

Value analysis: Value analysis is concerned with the costs added due to inefficient or unnecessary specifications and features. It makes its contribution in the last stage of product cycle, namely, the maturity stage. At this stage research and development no longer make positive contributions in terms of improving the efficiency of the functions of the product or adding new functions to it. Ergonomics (Human Engineering): The human factors or human engineering is concerned with man-machine system. Ergonomics is the design of human tasks, man-machine system, and effective accomplishment of the job, including displays for presenting information to human sensors, controls for human operations and complex man-machine systems. Each of the above functions are dealt in detail.


Haynes defines Material handling embraces the basic operations in connection with the movement of bulk, packaged and individual products in a semi-solid or solid state by means of gravity manually or power-actuated equipment and within the limits of individual producing, fabricating, processing or service establishment. Material handling does not add any value to the product but adds to the cost of the product and hence it will cost the customer more. So the handling should be kept at minimum. Material handling in Indian industries accounts for nearly 40% of the cost of production. Out of the total time spent for manufacturing a product, 20% of the time is utilised for actual processing on them while the remaining 80% of the time is spent in moving from one place to another, waiting for the processing. Poor material handling may result in delays leading to idling of equipment. Materials handling can be also defined as the function dealing with the preparation, placing and positioning of materials to facilitate their movement or storage. Material handling is the art and science involving the movement, handling and storage of materials during different stages of manufacturing. Thus the function includes every consideration of the product except the actual processing operation. In many cases, the

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handling is also included as an integral part of the process. Through scientific material handling considerable reduction in the cost as well as in the production cycle time can be achieved.

5.2.1 Objectives of Material Handling

Following are the objectives of material handling: 1. Minimize cost of material handling. 2. Minimize delays and interruptions by making available the materials at the point of use at right quantity and at right time. 3. Increase the productive capacity of the production facilities by effective utilisation of capacity and enhancing productivity. 4. Safety in material handling through improvement in working condition. 5. Maximum utilisation of material handling equipment. 6. Prevention of damages to materials. 7. Lower investment in process inventory.

5.2.2 Principles of Material Handling

Following are the principles of material handling: 1. Planning principle: All handling activities should be planned. 2. Systems principle: Plan a system integrating as many handling activities as possible and co-coordinating the full scope of operations (receiving, storage, production, inspection, packing, warehousing, supply and transportation). 3. Space utilisation principle: Make optimum use of cubic space. 4. Unit load principle: Increase quantity, size, weight of load handled. 5. Gravity principle: Utilise gravity to move a material wherever practicable. 6. Material flow principle: Plan an operation sequence and equipment arrangement to optimize material flow. 7. Simplification principle: Reduce combine or eliminate unnecessary movement and/or equipment. 8. Safety principle: Provide for safe handling methods and equipment. 9. Mechanization principle: Use mechanical or automated material handling equipment. 10. Standardization principle: Standardize method, types, size of material handling equipment. 11. Flexibility principle: Use methods and equipment that can perform a variety of task and applications. 12. Equipment selection principle: Consider all aspect of material, move and method to be utilised. 13. Dead weight principle: Reduce the ratio of dead weight to pay load in mobile equipment. 14. Motion principle: Equipment designed to transport material should be kept in motion.

15. Idle time principle: Reduce idle time/unproductive time of both MH equipment and man power. 16. Maintenance principle: Plan for preventive maintenance or scheduled repair of all handling equipment. 17. Obsolescence principle: Replace obsolete handling methods/equipment when more efficient method/equipment will improve operation. 18. Capacity principle: Use handling equipment to help achieve its full capacity. 19. Control principle: Use material handling equipment to improve production control, inventory control and other handling. 20. Performance principle: Determine efficiency of handling performance in terms of cost per unit handled which is the primary criterion.

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Selection of Material Handling equipment is an important decision as it affects both cost and efficiency of handling system. The following factors are to be taken into account while selecting material handling equipment.

Properties of the Material: Whether it is solid, liquid or gas, and in what size, shape and weight it is to be moved, are important considerations and can already lead to a preliminary elimination from the range of available equipment under review. Similarly, if a material is fragile, corrosive or toxic this will imply that certain handling methods and containers will be preferable to others. Layout and Characteristics of the Building: Another restricting factor is the availability of space for handling. Low-level ceiling may preclude the use of hoists or cranes, and the presence of supporting columns in awkward places can limit the size of the material-handling equipment. If the building is multi-storeyed, chutes or ramps for industrial trucks may be used. Layout itself will indicate the type of production operation (continuous, intermittent, fixed position or group) and can indicate some items of equipment that will be more suitable than others. Floor capacity also helps in selecting the best material handling equipment. Production Flow: If the flow is fairly constant between two fixed positions that are not likely to change, fixed equipment such as conveyors or chutes can be successfully used. If, on the other hand, the flow is not constant and the direction changes occasionally from one point to another because several products are being produced simultaneously, moving equipment such as trucks would be preferable. Cost Considerations: This is one of the most important considerations. The above factors can help to narrow the range of suitable equipment, while costing can help in taking a final decision. Several cost elements need to be taken into consideration when comparisons are made between various items of equipment that are all capable of handling the same load. Initial investment and operating and maintenance costs are the major cost to be considered. By calculating and comparing the total cost for each of the items of equipment under consideration, a more rational decision can be reached on the most appropriate choice. Nature of Operations: Selection of equipment also depends on nature of operations like whether handling is temporary or permanent, whether the flow is continuous or intermittent and material flow pattern-vertical or horizontal.

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Engineering Factors: Selection of equipment also depends on engineering factors like door and ceiling dimensions, floor space, floor conditions and structural strength. Equipment Reliability: Reliability of the equipment and supplier reputation and the after sale service also plays an important role in selecting material handling equipments. Check Your Progress 1 Fill in the blanks: 1. Based on the sales forecast and production planning and control is done. plans, the

2. A store plays a vital role in the . of a company. 3. The interval between receiving the purchased parts and transforming them into final varies from industries to industries depending upon the cycle time of manufacture. 4. Standardization means producing maximum variety of products from the minimum variety of parts, tools and processes. 5. Selection of Material Handling equipment is an important decision as it affects both cost and of handling system.


The cost factors include investment cost, labor cost, and anticipated service hours per year, utilisation, and unit load carrying ability, loading and unloading characteristics, operating costs and the size requirements are the factors for evolution of material handling equipment. Other factors to be considered are source of power, conditions where the equipment has to operate and such other technical aspects. Therefore, choices of equipments in organisation will improve the material handling system through work study techniques. They usually result in improving the ratio of operating time to loading time through palletizing, avoiding duplicative movements, etc. Obsolete handling systems can be replaced with more efficient equipments. The effectiveness of the material handling system can be measured in terms of the ratio of the time spent in the handling to the total time spent in production. This will cover the time element. The cost effectiveness can be measured by the expenses incurred per unit weight handled. It can be safely said that very few organisations try to collate the expenses and time in this manner so as to objectively view the performance and to take remedial measures. Some of the other indices which can be used for evaluating the performance of handling systems are listed below:

5.4.1 Equipment Utilisation Ratio

Equipment utilisation ratio is an important indicator for judging the materials handling system. This ratio can be computed and compared with similar firms or in the same over a period of time. In order to know the total effort needed for moving materials, it may be necessary to compute Materials Handling Labor (MHL) ratio. This ratio is calculated as under:
Material Handling Labour ratio = Personnel assigned to Materials Handling Total Operating Work Force

In order to ascertain whether is the handling system delivers materials work centres with maximum efficiency, it is desirable to compute direct labor handling loss ratio. The ratio is:
DLHL = Material handling time lost of labour Totaldirect labour time

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The movements operations ratio which is calculated after dividing total number of moves by total number of productive operations indicates whether the workers are going through too many motions because of poor routing. It should, however, be emphasized that the efficiency of materials handling mainly depends on the following factors: (i) efficiency of handling methods employed for handling a unit weight through a unit distance, (ii) efficiency of the layout which determines the distance through which the materials have to be handled, (iii) utilisation of the handling facilities, and (iv) efficiency of the speed of handling. In conclusion, it can be said that an effective material handling system depends upon tailoring the layout and equipments to suit specific requirements. When a large volume has to be moved from a limited number of sources to a limited number of destinations the fixed path equipments like rollers, belt conveyors, overhead conveyors and gauntry cranes are preferred. For increased flexibility varied path equipments are preferred.

5.4.2 Material Handling Equipments

Broadly material handling equipments can be classified into two categories, namely:

Fixed path equipments which move in a fixed path. Conveyors, monorail devices, chutes and pulley drive equipments belong to this category. A slight variation in this category is provided by the overhead crane, which though restricted, can move materials in any manner within a restricted area by virtue of its design. Overhead cranes have a very good range in terms of hauling tonnage and are used for handling bulky raw materials, stacking and at times palletizing. Variable path equipments have no restrictions in the direction of movement although their size is a factor to be given due consideration trucks, forklifts mobile cranes and industrial tractors belong to this category. Forklifts are available in many ranges, they are maneuverable and various attachments are provided to increase their versatility.

Material Handing Equipments may be classified in five major categories. 1. Conveyors: Conveyors are useful for moving material between two fixed workstations, either continuously or intermittently. They are mainly used for continuous or mass production operationsindeed, they are suitable for most operations where the flow is more or less steady. Conveyors may be of various types, with rollers, wheels or belts to help move the material along: these may be power-driven or may roll freely. The decision to provide conveyors must be taken with care, since they are usually costly to install; moreover, they are less flexible and, where two or more converge, it is necessary to coordinate the speeds at which the two conveyors move. 2. Industrial Trucks: Industrial trucks are more flexible in use than conveyors since they can move between various points and are not permanently fixed in one place. They are, therefore, most suitable for intermittent production and for handling various sizes and shapes of material. There are many types of truck petrol-driven, electric, hand-powered, and so on. Their greatest advantage lies in the wide range

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of attachments available; these increase the trucks ability to handle various types and shapes of material. 3. Cranes and Hoists: The major advantage of cranes and hoists is that they can move heavy materials through overhead space. However, they can usually serve only a limited area. Here again, there are several types of crane and hoist, and within each type there are various loading capacities. Cranes and hoists may be used both for intermittent and for continuous production. 4. Containers: These are either dead containers (e.g. Cartons, barrels, skids, pallets) which hold the material to be transported but do not move themselves, or live containers (e.g. wagons, wheelbarrows or computer self-driven containers). Handling equipments of this kind can both contain and move the material, and is usually operated manually. 5. Robots: Many types of robot exist. They vary in size, and in function and maneuverability. While many robots are used for handling and transporting material, others are used to perform operations such as welding or spray painting. An advantage of robots is that they can perform in a hostile environment such as unhealthy conditions or carry on arduous tasks such as the repetitive movement of heavy materials. The choice of material-handling equipment among the various possibilities that exist is not easy. In several cases the same material may be handled by various types of equipments, and the great diversity of equipment and attachments available does not make the problem any easier. In several cases, however, the nature of the material to be handled narrows the choice.


The following guidelines are invaluable in the design and cost reduction of the materials handling system: 1. As material handling adds no value but increases the production cycle time, eliminate handling wherever possible. Ideally there should not be any handling at all! 2. Sequence the operations in logical manner so that handling is unidirectional and smooth. 3. Use gravity wherever possible as it results in conservation of power and fuel. 4. Standardize the handling equipments to the extent possible as it means interchangeable usage, better utilisation of handling equipments, and lesser spares holding. 5. Install a regular preventive maintenance programme for material handling equipments so that downtime is minimum. 6. In selection of handling equipments, criteria of versatility and adaptability must be the governing factor. This will ensure that investments in special purpose handling equipments are kept at a minimum. 7. Weight of unit load must be maximum so that each handling trip is productive. 8. Work study aspects, such as elimination of unnecessary movements and combination of processes should be considered while installing a material handling system.

9. Non-productive operations in handling, such as slinging, loading, etc., should be kept at a minimum through appropriate design of handling equipment. Magnetic cranes for scrap movement and loading in furnaces combination of excavators and tippers for ores loading and unloading in mines are examples in this respect. 10. Location of stores should be as close as possible to the plant which uses the materials. This avoids handling and minimizing investment in material handling system. 11. Application of OR techniques such as queuing can be very effective in optimal utilisation of materials handling equipments. 12. A very important aspect in the design of a material handling system is the safety aspect. The system designed should be simple and safe to operate. 13. Avoid any wasteful movements-method study can be conducted for this purpose. 14. Ensure proper coordination through judicious selection of equipments and training of workmen.

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There is a close relationship between plant layout and material handling. A good layout ensures minimum material handling and eliminates rehandling in the following ways: 1. Material movement does not add any value to the product so, the material handling should be kept at minimum though not avoid it. This is possible only through the systematic plant layout. Thus a good layout minimizes handling. 2. The productive time of workers will go without production if they are required to travel long distance to get the material tools, etc. Thus a good layout ensures minimum travel for workman thus enhancing the production time and eliminating the hunting time and travelling time. 3. Space is an important criterion. Plant layout integrates all the movements of men, material through a well designed layout with material handling system. 4. Good plant layout helps in building efficient material handling system. It helps to keep material handling shorter, faster and economical. A good layout reduces the material backtracking, unnecessary workmen movement ensuring effectiveness in manufacturing. Thus a good layout always ensures minimum material handling.


Materials storage systems are used to store a variety of materials like raw materials, finished goods, tooling, spare parts, etc. An automated storage/retrieval system can be defined as a storage system that performs storage system that performs storage and retrieval operations with speed and accuracy under a defined degree of automation. The performance of any manufacturing firm depends largely on its material handling and storage system. The vertical storage systems are important in the sense because less floor space is required to store a large number of goods. Material storage can be performed manually but the automated methods for storing and retrieving materials are more efficient and these are integral part of computer integrated manufacturing. Suppose the capacity of the designed automated storage and retrieval system to store various parts is fifteen. The developed Pallet Rack AS/RS system consists of five rows

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and three columns to store parts in vertical direction to utilise the floor space efficiently. The designed AS/RS also works with dual command cycle in which it performs the storage and retrieval operations in same cycle. The designed AS/RS system has computerized data base to store the position of materials in all storage locations and also it can determine whether a particular storage location is full or empty. When a command is dispatched for the storage or retrieval of an item to a particular location the system first checks the status of the location in the data base either it is filled or empty. The storage retrieval machine will be actuated after determining this status to perform the assigned task. Random storage location strategy is employed in this system and it can store unit load of certain designed dimensions. The improved inventory management, space efficiency, reduced labor costs and reduced costs of loss by theft and misplacing are some of the advantages of automated storage and retrieval system through which the efficiency of material handling and inventory control can be enhanced. Material handling operations are labor intensive and are of repetitive nature. Although very few handling systems are completely automated, the automation, control and mechanization play a significant role in designing and operating effective and efficient handling systems. Automated Storage/Retrieval (AS/R) systems, carousels/rotary racks, Automated Guided Vehicles (AGV) systems, and robotic systems are some of the most commonly used material handling systems in manufacturing industries. Material handling systems are the backbone of computer integrated manufacturing systems and flexible manufacturing systems where the assignment of storage and retrieval of parts is based on the needs of manufacturing operations which can increase not only the performance of the automated storage/retrieval system (AS/RS) but also the performance of the production system. Picking cart, tote picking, man-onboard system, various kinds of truck are some of the equipments used in automated storage and retrieval systems and most of these can enable the racks to conduct only up-and-down conveyance at the fixed range of track, but they cannot move to another aisle. A typical AS/RS is composed of storage racks, Storage/Retrieval (S/R) machines and Pickup/Drop-off (P/D) stations. Based on volume of inventory level and size several types of AS/RS are unit-load, mini-load, man on-board, deeplane, automated itemretrieval system and flow rack systems. Dual commands dispatching of a class-based unit-load automated storage and retrieval system using multi-pass simulation with generic algorithm has been studied in reference. The adoption of automated storage and retrieval system in flexible manufacturing system with optimal random storage location strategy is studied in reference.

5.7.1 Common Benefits of Automated Storage & Retrieval Systems (ASRS)

Storage capacity: It can be measured as the total volumetric space available or the total number of storage compartments available in the system for items or loads. Storage density: It is the volumetric space available for actual storage relative to total volumetric space in the storage facility. Unit load: It is simply the mass that is to be moved or otherwise handled at one time. Single command cycle: In this cycle storage or retrieval transactions alone are performed. Dual command cycle: In this cycle the storage and retrieval transactions are performed in one cycle.

Randomized storage: In this storage system the items are storage are at any available location. Dedicated storage: In this storage system items are assigned to specific locations. Uninterrupted operations: Operation without interruptions, distractions, break, vacations or shift premiums Less Product damage: Gentler handling of the inventory with less product damage from transit, misstacking or collisions. Increases worker productivity: Worker productivity is increased by the elimination of non-value adding material handling tasks from their work scope.

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5.7.2 JIT/Kanban
JIT (Just-in-time) enables a company to produce the products its customers want, when they want them, in the amount they want. Under conventional mass production approaches, large quantities of identical products are produced, and then stored until ordered by a customer. JIT techniques work to level production, spreading production evenly over time to foster a smooth flow between processes. Varying the mix of products produced on a single line, provides an effective means for producing the desired production mix in a smooth manner. JIT frequently relies on the use of physical inventory control cues (or Kanban) to signal the need to move raw materials or produce new components from the previous process. In some cases, a limited number of reusable containers are used as Kanban, assuring that only what is needed gets produced. Many companies implementing lean production systems are also requiring suppliers to deliver components using JIT. The company signals its suppliers, using computers or delivery of empty, reusable containers, to supply more of a particular component when they are needed. The end result is typically a significant reduction in waste associated with unnecessary inventory, WIP, and overproduction. Method and Implementation Approach Key elements of JIT, and techniques for achieving JIT, are discussed below. Load Leveling: This technique involves determining appropriate quantities and types of products needed in a given day to meet customer orders. This technique allows organisations to produce products with a variety of customer specifications each day (using a daily schedule), in a smooth sequence that minimizes inventory and delay. Takt time is critical to the daily scheduling required in leveled production described above. It is the rate at which each product must be completed to meet customer needs, expressed in amount of time per part. Production Sequencing: This involves calculating the pattern for making each product type in the required amount for any given day, by calculating the takt time for the daily quantity of each type. Kanban, often referred to as the "nervous system" of lean production, Kanban is a key technique that determines a processes production quantity, and in doing so, facilitates JIT production and ordering systems. Contrary to more traditional "push" methods of mass production which are based on an estimated number of expected sales, Kanban's "pull" system creates greater flexibility on the production floor, such that the organisation only produces what is ordered. More specifically, a Kanban is a card, labeled container, computer order, or other device used to signal that more products or parts are needed from the previous process step. The Kanban contain information on the exact product or component

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specifications that are needed for the subsequent process step. Kanban are used to control work-in-progress (WIP), production, and inventory flow. In this way, Kanban serves to ultimately eliminate overproduction, a key form of manufacturing waste. Different types of Kanban include: supplier Kanban (indicate orders given to outside parts suppliers when parts are needed for assembly lines); in-factory Kanban (used between processes in a factory); and production Kanban (indicate operating instructions for processes within a line). Kanban are a critical part of a JIT system. In implementing a Kanban system, organisations typically focus on four important "rules".

Kanban works from upstream to downstream in the production process (i.e., starting with the customer order). At each step, only as many parts are withdrawn as the Kanban instructs, helping ensure that only what is ordered is made. The necessary parts in a given step always accompany the Kanban to ensure visual control. The upstream processes only produce what has been withdrawn. This includes only producing items in the sequence in which the Kanban are received, and only producing the number indicated on the Kanban. Only products that are 100 percent defect-free continue on through the production line. In this way, each step uncovers and then corrects the defects that are found, before any more can be produced. The number of Kanban should be decreased over time. Minimizing the total number of Kanban is the best way to uncover areas of needed improvement. By constantly reducing the total number of Kanban, continuous improvement is facilitated by concurrently reducing the overall level of stock in production.

Implications for Environmental Performance Potential Benefits: JIT/Kanban systems help eliminate overproduction. Overproduction affects the environment in three key ways: 1. increases the number of products that must be scrapped or discarded as waste; 2. increases the amount of raw materials used in production; 3. increases the amount of energy, emissions, and wastes (solid and hazardous) that are generated by the processing of the unneeded output.

JIT/Kanban systems reduce the amount of necessary in-process and post-process inventory, thereby reducing the potential for products to be damaged during handling and storage, or through deterioration or spoilage over time. Such damaged inventory typically ends up being disposed of as solid or hazardous waste. Frequent inventory turns can also eliminate the need for degreasing processes for metal parts, since the parts may not need to be coated with oils to prevent oxidization or rust while waiting for the next process step. JIT typically require less floor space for equal levels of production ("this is a factory, not a warehouse"). Reductions in square footage can reduce energy use for heating, air conditioning, and lighting. Reduced square footage can also reduce the resource consumption and waste associated with maintaining the unneeded space (e.g., fluorescent bulbs, cleaning supplies). Even more significantly, reducing the spatial footprint of production can reduce the need to construct additional production facilities, as well as the associated environmental impacts resulting from construction material use, land use, and construction wastes.

JIT/Kanban systems also help facilitate worker-lead process improvements, as workers are more motivated to make product improvements when there is no excess inventory remaining to be sold. Excess inventory results in increased energy use associated with the need to transport and reorganise unsold inventory. JIT can result in more frequent "milk runs" for parts and material inputs from sister facilities or suppliers, leading to an increased number of transport trips. This can contribute to traffic congestion, as well as environmental impacts associated with additional fuel use and vehicle emissions. Through efficient load planning, however, the environmental implications of increased milk runs can be significantly reduced or eliminated. JIT/Kanban may not succeed at reducing or eliminating overproduction and associated waste if the products produced have large and/or unpredictable market fluctuations. JIT, when not implemented throughout the supply chain, can just push inventory carrying activities up the supply chain, along with the associated environmental impacts from overproduction, damaged goods, inventory storage space heating and lighting, etc.

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Potential Shortcomings:

5.7.3 ABC System

The ABC classification process is an analysis of a range of objects, such as finished products, items lying in inventory or customers into three categories. It's a system of categorization, with similarities to Pareto analysis, and the method usually categorizes inventory into three classes with each class having a different management control associated: A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for a control scheme. Each category can and sometimes should be handled in a different way, with more attention being devoted to category A, less to B, and still less to C. Popularly known as the "80/20" rule ABC concept is applied to inventory management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory remains in about 20% of the items. This rule, in general, applies well and is frequently used by inventory managers to put their efforts where greatest benefits, in terms of cost reduction as well as maintaining a smooth availability of stock, are attained. The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20 concept. Here, Rupee/Dollar value of each individual inventory item is calculated on annual consumption basis. Thus, applied in the context of inventory, it's a determination of the relative ratios between the number of items and the currency value of the items purchased/consumed on a repetitive basis:

10-20% of the items ('A' class) account for 70-80% of the consumption the next 15-25% ('B' class) account for 10-20% of the consumption and the balance 65-75% ('C' class) account for 5-10% of the consumption

'A' class items are closely monitored because of the value involved (70-80%).

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High value (A), Low value (C), Intermediary value (B)

20% of the items account for 80% of total inventory consumption value (Qty consumed X unit rate) Specific items on which efforts can be concentrated profitably Provides a sound basis on which to allocate funds and time A,B & C , all have a purchasing / storage policy - "A", most critically reviewed , "B" little less while "C" still less with greater results.

ABC Analysis is the basis for material management processes and helps define how stock is managed. It can form the basis of various activity including leading plans on alternative stocking arrangements (consignment stock), reorder calculations and can help determine at what intervals inventory checks are carried out (for example A class items may be required to be checked more frequently than c class stores Inventory Control Application: The ABC classification system is to grouping items according to annual issue value, (in terms of money), in an attempt to identify the small number of items that will account for most of the issue value and that are the most important ones to control for effective inventory management. The emphasis is on putting effort where it will have the most effect. All the items of inventories are put in three categories, as below:

A Items: These Items are seen to be of high Rupee consumption volume. "A" items usually include 10-20% of all inventory items, and account for 50-60% of the total Rupee consumption volume. B Items: "B" items are those that are 30-40% of all inventory items, and account for 30-40% of the total Rupee consumption volume of the inventory. These are important, but not critical, and don't pose sourcing difficulties. C Items: "C" items account for 40-50% of all inventory items, but only 5-10% of the total.

Rupee consumption volume: Characteristically, these are standard, low-cost and readily available items. ABC classifications allow the inventory manager to assign priorities for inventory control. Strict control needs to be kept on A and B items, with preferably low safety stock level. Taking a lenient view, the C class items can be maintained with looser control and with high safety stock level. The ABC concept puts emphasis on the fact that every item of inventory is critical and has the potential of affecting, adversely, production, or sales to a customer or operations. The categorization helps in better control on A and B items. In addition to other management procedures, ABC classifications can be used to design cycle counting schemes. For example, A items may be counted 3 times per year, B items 1 to 2 times, and C items only once, or not at all. Check Your Progress 2 Fill in the blanks: 1. The effectiveness of the material handling system can be measured in terms of the ratio of the . in the handling to the total time spent in production. 2. Equipment utilisation ratio is an important indicator for judging the . handling system.

3. Conveyors are useful for moving material between two fixed , either continuously or intermittently. 4. Materials storage systems are used to store a variety of materials like raw materials, .., tooling, spare parts, etc. 5. Material handling operations .nature. are labor intensive and are of

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Materials management is part of logistics and refers to the location and movement of the physical items or products. In this lesson we focused on all the aspects of material handling like objectives of materials handling, principles of material handling, selection of material handling equipments, evaluation of material handling system, equipment utilisation ratio, material handling equipments like cranes, trucks etc., guidelines for effective utilisation of material handling equipments, relationship between plant layout and material handling, automated storage system and retrieval system and methods like JIT/Kanban, ABC system. In next lessons we will focus on other aspects of inventories and their management.

Activity based Costing: Usually refers to costing method that breaks down overhead costs into specific activities (cost drivers) in order to more accurately distribute the costs in product costing. Automated Storage and Retrieval Systems: A system of rows of rack, each row having a dedicated retrieval unit that moves vertically and horizontally along the rack picking and putting away loads. Container: Although a container can be anything designed to hold (contain) materials for storage or transport, the most common definition for Container in logistics refers to the specific types of containers used for intermodal transportation, often referred to as "Ocean Containers". Distribution: Describes the process of storing, shipping, and transporting goods. Also describes the facilities (distribution operations, distribution centers) that conduct these activities. Forklift-free Plants: A strategy to eliminate or reduce forklift use in operations. Used mainly in manufacturing operations, forklift-free usually involves finding ways to eliminate forklift use in specific areas (mainly the production areas). JITJust-in-time: JIT is a process for optimizing manufacturing processes by eliminating all process waste including wasted steps, wasted material, excess inventory, etc. Kanban: Used as part of a Just-In-Time production operation where components and sub-assemblies are produced based upon notification of demand from a subsequent operation. Lift Truck: Vehicles used to lift, move, stack, rack, or otherwise manipulate loads. Material handling workers use a lot of terms to describe lift trucks; some terms describe specific types of vehicles, others are slang terms or trade names that people often mistakenly use to describe trucks.

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Check Your Progress: Answers

CYP 1 1. materials 2. operations 3. products 4. materials 5. efficiency CYP 2 1. time spent 2. materials 3. workstations 4. finished goods 5. repetitive


Ackerman, K. B., Practical Handbook of Warehousing, 4th ed., Springer, New York. (1997) Ackerman, K. B., Auditing Warehouse Performance, Ackerman Publications, Columbus, (2004) Aminoff, A. and Kettunen O., Research on factors affecting warehousing efficiency, International Journal of Logistics: Research and Applications, 5(1), p. 45- 57. (2002) Apple, J., Plant Layout and Material Handling, 3rd ed. John Wiley, New York. (1977) Apte, U. M. and Viswanathan, S., Effective cross-docking for improving distribution efficiencies. International Journal of Logistics: Research & Applications, 3(3), p. 291-302., (2000) Lahmar, M., Facility Logistics: Approaches and Solutions to Next Generation Challenges, Auerbach, Boca Raton, FL., (2007) Tarn, J. M., Razi, M. A., Wen, H. J. and Perez Jr. A. A., E-fulfillment: the strategy and operational requirements. Logistics Information Management, 16(5), p. 350-362., (2003) Tompkins, J. A., Enhancing the Warehouses Role through Customisation, Warehouse Education and Research Council Special Report, Oak Brook. (1997) Tompkins, J. A. and Smith, J. D., editors, The Warehouse Management Handbook. 2nd ed. Tompkins Press, Raleigh, (1998)

1. Explain the objectives of material handling. 2. Explain the principles of material handling. 3. How do you evaluate the material handling system? 4. What are the relationship between plant layout and material handling? 5. Discuss the factors to be considered while selecting material handling equipment. 6. Discuss the different material handling equipments. 7. Discuss the guidelines for effective utilisation of material handling equipments. 8. Explain the objectives of materials management.


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STRUCTURE 6.0 6.1 6.2 6.3 6.4 Objectives Introduction Functions of Inventory Inventory Costs Inventory Control by Classification Systems 6.4.1 6.4.2 6.5 6.6 ABC Classification and Analysis Other Classification Systems

Inventory Control Elementary Inventory Models 6.6.1 6.6.2 6.6.3 6.6.4 6.6.5 Single Period Models Multiple Period Inventory Models Fixed-time Period Models Fixed-time Period Model with Safety Stock Manufacturing Model without Shortages Quantity Discounts or Price-Break Models Model with Specified Service Levels


More Complex Models 6.7.1 6.7.2

6.8 6.9

Characteristics of Control Systems MRP Inventory Management 6.9.1 6.9.2 6.9.3 6.9.4 Independent versus Dependent Demand Inputs from Master Production Schedule Outputs The Materials Requirement Plan Capacity Requirement Planning Distribution Requirements Planning (DRP) Distribution Resource Planning (DRP II)


MRP in Service Organisations 6.10.1 6.10.2

6.11 6.12 6.13 6.14

Let us Sum up Glossary Suggested Readings Questions

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After studying this lesson, you should be able to:

Explain the meaning and significance of inventory Paraphrase the functions of inventory and identifying the inventory costs Describe the method of inventory control by classification systems Describe various inventory control models Identify the characteristics of control systems

The term 'inventory' means any stock of direct or indirect material (raw materials or finished items or both) stocked in order to meet the expected and unexpected demand in the future. A basic purpose of supply chain management is to control inventory by managing the flows of materials. It sets policies and controls to monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be tackled. Inventory is a stock of materials used to satisfy customer demand or support the production of goods or services. By convention, inventory generally refers to items that contribute to or become part of an enterprise's output. There are different types of inventory, however, the most commonly identified types of inventory are:

Raw Materials Inventory: Parts and raw materials obtained from suppliers that are used in the production process. Work-in-process (WIP) Inventory: This constitutes semi-finished parts, components, sub-assemblies or modules that have been inducted into the production process but not yet finished. Finished Goods Inventory: Finished product or end-items. Replacement Parts Inventory: Maintenance Parts meant to replace other parts in machinery or equipment, either the company's own or that of its customers. Supplies Inventory: Parts or materials used to support the production process, but not usually a component of the product. Transportation (pipeline) Inventory: Items that are in the distribution system but are in the process of being shipped from suppliers or to customers.

Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process. In services, inventory generally refers to the tangible goods to be sold and the supplies necessary to administer the service. In simple terms, inventory is an idle resource of an enterprise comprising physical stock of goods that is kept by an enterprise for future purposes.


Though inventory is an idle resource, it is almost essential to keep some inventory in order to promote smooth and efficient running of business. To maintain independence of operations, a supply of materials at a work center allows that center flexibility in operations. Consider the casean enterprise that does not have any inventory. Clearly, as soon as the enterprise receives a sales order, it will have to order for raw materials to complete

the order. This will keep the customers waiting. It is quite possible that sales may be lost. The enterprise may also have to pay a high price for various other reasons. Another aspect relates to the costs for making each new production set up. Independence of workstations is desirable in intermittent processes and on assembly lines as well. As the time that it takes to do identical operations varies from one unit to the next, inventory allows management to reduce the number of setups. This results in better performance. Consider the case of seasonal items. Any fluctuation in demand can be met if possible, by either changing the rate of production or with inventories. However, if the fluctuation in demand is met by changing the rate of production, one has to take into account the different costs. The cost of increasing production and employment level involves employment and training, additional staff and service activities, added shifts, and overtime costs. On the other hand, the cost of decreasing production and employment level involves unemployment compensation costs, other employee costs, staff, clerical and services activities, and idle time costs. By maintaining inventories, the average output can be fairly stable. The use of seasonal inventories can often give a better balance of these costs. Inventory can be used, among other things, to promote sales by reducing customer's waiting time, improve work performance by reducing the number of setups, or protect employment levels by minimizing the cost of changing the rate of production. Therefore, it is desirable to maintain inventories in order to enhance stability of production and employment levels. If the demand for the product is known precisely, it may be possible (though not necessarily economical) to produce the product to exactly meet the demand. However, in the real world this does not happen and inventories become essential. Inventories also permit production planning for smoother flow and lower cost operation through larger lot-size production. They allow a buffer when delays occur. These delays can be for a variety of reasonsa normal variation in shipping time, a shortage of material at the vendor's plant, an unexpected strike in any part of the supply chain, a lost order, a natural catastrophe like a hurricane or floods, or perhaps a shipment of incorrect or defective materials. Broadly speaking, some other functions of inventories are: 1. To protect against unpredictable variations (fluctuations) in demand and supply. 2. To take advantage of price discounts by bulk purchases. 3. To take advantage of batches and longer production run. 4. To provide flexibility to allow changes in production plans in view of changes in demands, etc. and 5. To facilitate intermittent production. Only when considered in the light of all quality, customer service and economic factors from the viewpoints of purchasing, manufacturing, sales and finance does the whole picture of inventory become clear. No matter what the viewpoint, effective inventory management is essential to organisational competitiveness.

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As inventory is a necessary but idle resource, inventory costs in manufacturing need to be minimized. The heart of inventory decisions lies in the identification of inventory costs and optimizing the costs relative to the operations of the organisation. Therefore,

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an analysis of inventory is useful to determine the level of stocks. The resultant stock keeping decision specifies: 1. When items should be ordered, and 2. How large the order should be. 3. "When" and "how many to deliver". It must be remembered that inventory is costly and large amounts of stocks are generally undesirable. Inventory can have a significant impact on both a company's productivity and its delivery time. Large holdings of inventory also cause long cycle times which may not be desirable as well. What are the costs identified with inventory? The following costs are generally associated with inventories: Holding (or Carrying) Costs It costs money to hold inventory. Such costs are called inventory holding costs or carrying costs. This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favour low inventory levels and frequent replenishment. There is a differentiation between fixed and variable costs of holding inventory. Some of the costs will not change by increase or decrease in inventory levels, while some costs are dependent on the levels of inventory held. The general break down for inventory holding costs has been shown in Table 6.1.
Table 6.1: Fixed and Variable Holding Costs
Fixed Costs Capital costs of warehouse or store Cost of operating the warehouse or store Personnel costs Variable Cost Cost of capital in inventory Insurance on inventory value Losses due to obsolescence, theft, spoilage Cost of renting warehouse or storage space

Cost of Ordering Although it costs money to hold inventory, it also, unfortunately, necessary to replenish inventory. These costs are called inventory ordering costs. Ordering costs have two components: (a) One component that is relatively fixed, and (b) Another component that will vary. It is good to be able to clearly differentiate between those ordering costs that do not change much and those that are incurred each time an order is placed. The general breakdown between fixed and variable ordering costs is as follows:
Table 6.2: Fixed and Variable Ordering Costs
Fixed Costs Staffing costs (payroll, benefits, etc) Fixed costs on IT systems Office rental and equipment costs Fixed costs of vendor development Shipping costs Cost of placing and order (phone, postage, order forms) Running costs of IT systems Receiving and inspection costs Variable costs of vendor development Variable Costs

One major component of cost associated with inventory is the cost of replenishing it. If a part or raw material is ordered from outside suppliers, and orders are placed for a

given part with its supplier three times per year instead of six times per year, the costs to the organisation that would change are the variable costs, generally not the fixed costs. There are costs incurred in maintaining and updating the information system, developing vendors, and evaluating capabilities of vendors. Ordering costs also include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs. This includes phone calls, typing, postage, and so on. Though vendor development is an ongoing process, it is a very expensive one. With a good vendor base, it is possible to enter into longer-term relationships to supply needs for perhaps the entire year. This changes the "when" to "how many to order" and brings about a reduction both in the complexity and costs of ordering. Set up (or Production Change) Costs In the case of sub-assemblies, or finished products that may be produced in-house, ordering cost is actually represented by the costs associated with changing over equipment from producing one item to producing another. This is usually referred to as set-up costs. Set-up costs reflect the costs involved in obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of materials, in making each different product. If there were no costs or loss of time associated in changing from one product to another, many small lots would be produced, permitting reduction in inventory levels and the resultant savings in costs. Shortage or Stock-out Costs When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be canceled. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stock out. The costs that are incurred as result of running out of stock are known as stock-out or shortage costs. As a result of shortages, production as well as capacity can be lost, sales of goods may be lost, and finally customers can be lost. In this context, it is important to understand the difference between dependent and independent demand that we discussed in the last lesson. In manufacturing, inventory requirements are primarily derived from dependent demand, however, in retailing the requirements are basically dependent on independent demand. Inventory systems are predicated on whether demand is derived from an end item or is related to the item itself. Because independent demand is uncertain, extra inventory needs to be carried to reduce the risk of stocking out. To determine the quantities of independent items that must be produced, firms usually use a variety of techniques, including customer surveys, and forecasting. These were discussed in the lesson on forecasting. However, a balance is sometimes difficult to obtain, because it may not be possible to estimate lost profits, the effects of lost customers, or penalties for delayed order fulfillment. Where the unfulfilled demand for the items can be satisfied at a later date (back order case), in such a case, the cost of back-orders are assumed to vary directly with the shortage quantity (in rupee value) and the cost involved in the additional time required to fulfill the backorder (Rs./Rs./year). However, if the unfulfilled demand is lost, the cost of shortages is assumed to vary directly with the shortage quantity

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(Rs./unit shortage). Frequently, the assumed shortage cost is little more than a guess, although it is usually possible to specify a range of such costs. Check Your Progress 1 Fill in the blanks: 1. Inventory is a stock of materials used to satisfy customer demand or support the .. of goods or services. 2. In services, inventory generally refers to the .. goods to be sold and the supplies necessary to administer the service. 3. To maintain independence of operations, a supply of materials at a work center allows that center .. in operations. 4. Effective inventory management . is essential to organisational

5. The heart of inventory decisions lies in the .. of inventory costs and optimizing the costs relative to the operations of the organisation.


It is useful to visualize the inventory of a medium sized business organisation. The inventory would comprise thousands of items, each item with different usage, price, lead time and specifications. There could be different procurement and technical problems associated with different items. In order to escape this quagmire, many selective inventory management techniques are used.

6.4.1 ABC Classification and Analysis

Vilfredo Pareto postulated the 80-20 rule, surprisingly, inventory also seems to follow that rule. In other words, typically only 20 percent of all the items account for 80 per cent of the total rupee usage, while the remaining 80 percent of the items typically account for remaining 20 per cent of the rupee value. This truth leads to the ABC classification. The ABC classification is based on focusing efforts where the payoff is highest, i.e., high-value, high-usage items must be tracked carefully and continuously. As these items constitute only 20 per cent, the ABC analysis makes the task relatively easier. After calculating the rupee usage for each inventory item, the items are ranked by rupee usage, from highest to lowest. The first 20 per cent of the items are assigned to class 'A'. These are the items that warrant closest control and monitoring through a perpetual inventory system. One of the major costs of inventory is annual carrying costs, and your money is invested largely in class 'A'. Tight control, sound operating doctrine, and attention to security on these items would allow you to control a large rupee volume with a reasonable amount of time and effort. The next 30 per cent of the items are classified as 'B' items. These deserve less attention than 'A' items. Finally, the last 50 per cent of items are 'C' items. These have the lowest rupee usage and can be monitored loosely, with larger safety stocks maintained to avoid stock outs. They should have carefully established but routine controls.

Table 6.3: ABC Analysis of Chest of Drawers

Item Stock Number B 101 H 107 F 105 J 109 A 100 G 106 D 103 M 112 L 111 C 102 I 108 E 104 K 110 N 113 O 114 P 115 Description Annual Rupee Usage Sides Drawer sides Drawer front Drawer back Top Drawer front Frame rail Web frame end Web frame rail Frame rail Drawer sides Toe kick Drawer back Nails Screws Knobs Total 43600 31000 25215 20020 15000 13080 12075 11000 7000 6250 6000 4140 4000 80 55 40 198555.00 Percent of Total Rupee Usage 21.96 15.61 12.70 10.08 7.55 6.59 6.08 5.54 3.53 3.15 3.02 2.09 2.01 0.04 0.03 0.02 21.96 37.57 50.27 60.35 67.91 74.50 80.58 86.12 89.64 92.79 95.81 97.90 99.91 99.95 99.98 100.00 A A A A B B B B C C C C C C C C Cumulative Usage ABC Classification

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The 'chest of drawers' that we used as an example earlier has been used as an example here also. The ABC Analysis shows that in the 16 items in the BOM, the first 20 per cent have a rupee usage of 60.35 per cent, the next thirty per cent have a rupee usage of 25.77 per cent, and the last 50 per cent have a rupee usage value of only 13.88 per cent. You can also see that only 4 items fall in the 'A' category, 4 items in the 'B' category, and the remaining 8 items fall in the 'C' category. Though, the example does not show the 80-20 rule because this is a made-up example, it does indicate a trend towards the 80-20 rule. This classification is commonly used by companies, as very often they need not keep extremely accurate track of all inventory items. For instance, high-value, high-usage items must be tracked carefully and continuously but certain parts with a relatively low value or infrequent use can be monitored loosely. Controls For Class 'A' Items: All Class 'A' items require close control. However, where stock out costs are high, special attention is required. Raw materials that are used continuously, in extremely high volume, are often purchased at rates that match usage rates. Contracts are often executed with vendors, with penalty clauses, for the continuous supply of these materials. Buffer stocks that provide excellent service levels are justified for such items. Where purchase of inventory items is not guided by either economical quantities or cycles, the items need careful monitoring. It is possible to achieve significant savings by changing the rate of flow periodically as demand and inventory positions change. Minimum supplies need to be ensured to guard against demand fluctuations and possible interruptions of supply. For the balance of Class 'A' items, normally reports are generated on a weekly basis, to provide the necessary close surveillance over inventory levels. Close surveillance reduces the risk of a prolonged stock out. Depending upon the inventory system used, time triggered or event triggered orders are released.

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Control for Class 'B' Items: These items are generally monitored and controlled by a computer-based exception reporting system. Periodic review by the management is necessary, but model parameters are reviewed less often than with Class A items. Normally, stock out costs for Class B items should be moderate to low, and buffer stocks should provide adequate control for stock outs, even though the ordering may occur less often. However, for items that are scarce, lead time analysis and purchasing strategies can be critical. This is also true for a number of items that may have to be imported and in addition to normal transportation times, time required for clearance through customs may not be highly predictable. Controls for Class 'C' Items: Class C items account for the bulk of inventory items. In many cases, reorder point system is designed in such a way that it does not require a physical stock evaluation, for example using a "two-bin" system. The inventory is physically separated into two bins one of which contains an amount equal to the reorder inventory level. Stock is drawn from the second bin. For each item, action is triggered when the bin gets empty. Routine controls adequately cover the requirements for this class of inventory. Semiannual or annual review of the system parameters should be performed to update usage rates, re-establish supply lead times, and the reorder points. Cost savings might result in changes in EOQ, but they may not be significant.

6.4.2 Other Classification Systems

Material items are classified based upon their commercial importance, demand patterns (regular, sporadic etc.) and supply reliability (of both raw material suppliers and own manufacturing), etc. Most of these systems operate in a similar manner to the ABC Classification. A brief description and comparison of these classifications are given in Table 6.4.
Table 6.4: Comparison of Different Classification Systems
S.No. 1. Title ABC (Level of Usage) Basis Value of consumption Unit price of the material Consumption pattern of the component Problems faced in procurement Source of the material Criticality of the component Nature of suppliers Value of items in storage Main Uses To control raw material components and work-in-progress inventories in the normal course of business. Mainly to control purchase. To control obsolescence.

2. 3.

HML (High, medium, low usage) FSND (Fast moving, Slow moving, Non-moving, Dead items) SDE (Scarce, difficult, easy to obtain items) Golf (Government, Ordinary, Local, Foreign Sources) VED (Vital, Essential, Desirable) SOS (Seasonal, Offseasonal) XYZ ( Value of Stock)

4. 5. 6. 7.

Lead time analysis and purchasing strategies. Procurement strategies. To determine the stocking levels of spare parts. Procurement/holding strategies for seasonal items like agriculture products. To review the inventories and their use scheduled intervals.


Other similar types of classifications are the XYZ Classification, VED Classification, and the HML classification of inventory. The basic difference between the ABC

Classification and the XYZ Classification is that it is based on the inventory in stock rather than usage. The VED Classification is based on the criticality of the inventory item. In normal practice, items in the 'V' category are often monitored manually; in addition to the computer monitoring that may be in place. The HML reflects a classification based on the unit price of the item. Obviously, the 'H' category items require additional attention, especially if the lead times are long, as it may often be in imported components. The 'time' triggered reorder system has some advantages in production cycling, in such high value items. All these techniques are used to focus management attention in deciding on the degree of control necessary for different items in the inventory. However, it should be kept in mind that changes in the business environment, e.g., customer demand patterns or material costs, can cause material item classifications to change. This, in turn, can affect key 'planning and scheduling' decisions.

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Recent industry reports show that inventory costs as a per cent of total logistics costs are increasing. Despite this rise, many organisations have not taken full advantage of ways to lower inventory costs. There are a number of proven strategies that will provide payoff in the inventory area, both in customer service and in financial terms. Some of these strategies involve having fewer inventories while others involve owning less of the inventory. ERP and information technology solutions have been able to provide solutions, not only for inventory management but also for aggregate planning, material requirement planning and operations scheduling. Regardless of which technique or solution one employs, proactive inventory management practices make a measurable difference in operations. In this supplement, we will cover some of the important inventory models and their characteristics, which are used in many of these ERP solutions. Inventory Metrics Managing inventory at manufacturing and service companies is critically important. Too much or too little, or the wrong inventory, all have detrimental impacts on operational and financial results. Inventory represents a tremendous capital investment and also is an idle resource. Companies that can operate with lesser inventory are considered to operate more efficiently. Inventory measures reflect, in part, the success in structuring supplier relationships to optimize inventory at the buying company. Several aggregate performance measures can be used to judge how well a company is utilising its inventory resources. Average Inventory Investment The rupee value of a company's average level of inventory is one of the most common measures of inventory. The information is easily available and it is easy to interpret. It represents the average investment of the company. However, it does not take into account the differences between companies. For example, a larger company will generally have more inventory than a smaller company, though it could be using its inventory more efficiently. This makes it difficult for the company to make comparisons with other companies.

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Inventory Turnover Ratio In order to overcome this problem, inventory turnover ratio is used. This measure allows for better comparison among companies. This is calculated as a ratio of the company's sales to its average inventory investment: Inventory turnover = annual cost of goods sold/average inventory investment This is a measure of how many times during a year the inventory turns over. Because it is a relative measure, companies of different sizes can be more easily compared. A higher turnover ratio reflects there are less idle resources in the company, and therefore the company is using its inventory efficiently. This ratio can only be used in this manner to compare companies that are similar. For example, even in the same industry depending on the distribution channels, a retailer would have a much lower inventory turnover ratio than the wholesaler or distributor. Days of Inventory A measure that tries to overcome the disadvantage, to a limited degree, and is closely related to inventory turnover is 'days of inventory'. This measure is an indication of approximately how many days of sales can be supplied solely from inventory. The lower this value, the more efficiently inventory is being used if customer demands are being met in full. There are two ways of calculating 'days of inventory'. It can be directly calculated, or inventory turnover can be converted to days of inventory. Both procedures are shown below: Days of inventory = avg. inventory investment/(annual cost of goods sold/days per year) Days of inventory = days per year/inventory turnover rate Detailed measures of inventory accuracy and availability are very important in order to maximize manufacturing and non-manufacturing efficiency and financial results. In companies where consignment inventory programs have an important role, it is important to measure the performance of these programs. Inventory obsolescence measures can be very important for items with short shelf lives, due to aging or technological changes. Finally, collecting accurate data on which to construct inventory measures can be challenging. Processes have to be in place to ensure that inventory is counted accurately and on a timely basis.


Inventory models seek to optimize the costs associated with investing in an idle resource. There are 'single period' and 'multiple period' inventory models. We will begin with single period inventory models.

6.6.1 Single Period Models

This is a special case of periodic inventory system, as opposed to a perpetual inventory system. Consider the problem that a florist stationed outside a 5-Star hotel has. Every morning, the wholesaler's truck comes to him and he has to decide how many flowers to buy. If he does not have enough flowers in the stand, some customers will not be able to purchase flowers and the florist will lose the profit associated with these sales. On the other hand, if he stocks too many flowers he will not be able to sell them tomorrow as they will spoil. He will have to pay for flowers that remain unsold, adversely impacting the day's profits.

Actually, this is a very common type of problem for all products that are perishable or have very low shelf lives. This includes both goods as well as services. A simple way to think about this is to consider how much risk we are willing to take for running out of inventory. The classical case illustrated in most texts is the 'newspaper seller's dilemma'. Let's take the example where the newspaper vendor has collected data over a few months that show that each Sunday, on an average, 100 papers were sold with a standard deviation of 10 papers. With this data, it is possible for our newspaper vendor to state a service rate that he feels is acceptable to him. For example, the newspaper vendor might want to be 90 per cent sure of not running out of newspapers each Sunday. In the lesson on forecasting, we described a normal distribution. If we assume that the distribution is normal and the newspaper vendor stocked exactly 100 papers each Sunday morning, the risk of stock running out would be 50 per cent. The demand would be expected to be less than 100 newspapers 50 per cent of the time, and greater than 100 the other 50 per cent. To be 90 per cent sure of not stocking out, he needs to carry a few more papers. From the "standard normal distribution", we know that we need to have additional papers to cover 1.282 standard deviations, in order to ensure that the newspaper vendor is 90 per cent sure of not stocking out. A quick way to find the exact number of standard deviations needed for a given probability of stocking out is provided by Microsoft Excel. Press 'insert' and you will find 'functions'. Click on 'function' and select the category 'statistical'. You can then use the NORMSINV (probability) function to get the answer. NORMSINV returns the inverse of the standard normal cumulative distribution. In this case, (NORMSINV (.90) = 1.281552. This means that the number of extra newspapers required by the vendor would be 1.281552 10 = 12.81552, or 13 papers. This result is more accurate than what we can get from the tables and is sometimes very useful. If we know the potential profit and loss associated with stocking either too many or too few papers on the stand, we can calculate the optimal stocking level using marginal analysis. The optimal stocking level occurs at the point where the expected benefits derived from carrying the next unit are less than the expected costs for that unit. This can be mathematically expressed as follows: If Co = Cost per unit of demand overestimated, and Cu = Cost per unit of demand overestimated and the probability that the unit will be sold is 'P'; the expected marginal cost equation can be represented as: P (Co) < (1P)Cu Here (1P) is the probability of the newspaper not being sold. Solving for P, we obtain P < [Cu/(Co + Cu)] This equation states that we should continue to increase the size of the order so long as the probability of selling what we order is equal to or less than the Ratio Cu/(Co+Cu). Single-period inventory models are useful for a wide variety of service and manufacturing applications. This mode is very useful and is used for many service sector problems, such as in yield analysis.

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6.6.2 Multiple Period Inventory Models

Multi-period inventory systems are designed to ensure that an item will be available on an ongoing basis throughout the year. There are two general types of systems and these inventory systems can be distinguished on the basis of the ordering criteria. The models of these two systems are; (a) Fixed-Order Quantity Models (also called the

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Economic Order Quantity models) and (b) Fixed-Time Period Models (also referred to as the Periodic System or P-models). The basic difference between the two systems is that the fixed-order quantity models are "event triggered" and fixed time period models are "time triggered". In other words, at an identified level of the stock the fixed-order quantity model initiates an order. This event may take place at any time, depending on the demand for the items considered. In contrast, the fixed time period models review the stocks at time intervals that are fixed and orders are placed at the end of predetermined time periods. In these models, only the passage of time triggers action. Table 6.5 makes a comparison of the two systems and brings out the significant differences.
Table 6.5: Fixed-Order Quantity and Fixed-Time Period Differences
Feature Order quantity When order to place Fixed Order Quantity Model The same amount ordered each time Reorder point when inventory position dips to a predetermined level Each time a withdrawal or addition is made Less than fixed-time period model Higher due to perpetual record keeping Higher priced, critical, or important items. Fixed Time Period Model Quantity varies each time order is places Reorder when the review period arrives Counted only at review period Larger than fixed-order quantity

Record keeping Size of inventory model Time to maintain Type of items

The models that emanate from this system are for perpetual systems that require continual monitoring of inventory. Every time a withdrawal from inventory or an addition to inventory is made, records must be updated. Generally, the Fixed-Order Quantity models are favoured when:

Items are more expensive items because average inventory is lower. Items are critical, e.g., repair parts, because there is closer monitoring and therefore quicker response to potential stock out.

The models that emanate from this are similar to batch processing systems, counting takes place only at the review period. The Fixed-Time Period models require a larger average inventory because it must also protect against stock out during the review period, while the fixed-order quantity model has no review period. These differences and the nature of operations tend to influence the choice of the inventory system that is more appropriate. Fixed-Order Quantity Modeling In this section, we will consider Fixed-Order Quantity i.e., inventory models in which demand is assumed to be fixed and completely predetermined. The heart of inventory analysis resides in the identification of relevant costs. The basic approach to determining fixed order sizes are shown by the Economic Order Quantity (EOQ) models. The basic EOQ model is concerned primarily with the cost of ordering and the cost of holding inventory.

A Fixed-Order Quantity system is shown in Figure 6.1.

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Waiting for demand

Demand occurs, units withdrawn from inventory or backorder No

Is position < Reorder point?

Yes Issue an order for exactly Q units

Figure 6.1: Fixed-Order Quantity System

The notations that will be used in the models for this system are given below: 'D' - Annual demand 'v' - Unit purchase cost or unit cost of production (Rs./unit) 'A' - Ordering or Set up cost (Rs./year) 'r' - Holding cost per Rs. per year (Rs./Rs./year) (Inventory carrying charges factor) 'b' - Shortage cost per Rs. short per unit time (Rs./Rs./year) 'Q' - Order quantity (to be determined) The basic assumptions in the model are as follows: 1. The rate of demand for the item is deterministic and is a constant 'D' units per annum independent of time. 2. Production rate is infinite, i.e., production is instantaneous. 3. Shortages are not allowed. 4. Lead time is zero or constant and it is independent of both demand as well as the quantity ordered. 5. The entire quantity is delivered as a single package (or produced in a single run).

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Figure 6.2: Schematic Representation of the EOQ Model

The objective of the model is to minimize the average annual variable costs, and it provides a solution to the problem of determining when an order should be placed and how much should be ordered. The schematic representation of the EOQ Model is given in Figure 6.2. It shows the 'inventory level' vs. 'time' relationship. In developing the EOQ model, we will attempt to minimize total annual costs by varying the order quantity, or lot size. From the figure, it is obvious that since the inventory is consumed at uniform rate and since maximum inventory level is Q, the average inventory will be 'Q / 2'. Hence, average Investment in Inventory will be = 'Q v/2' And the Average Inventory Holding Cost will be = '(Q v r)/2 Hence, the total annual variable cost (TC) = Ordering Cost + Inventory Holding Cost. Therefore, TC = (A D)/Q + (Q v r)/2 If 'QEOQ' is the order quantity at which the total cost is minimum, then mathematically the relationship can be expressed as: Q = QEOQ = v (2AD /rv), This equation is known as the EOQ formula. From this formula, the optimal time between orders can be derived. TEOQ = D/Q = (1/D) (2 A D/ r v) The Minimum Total Annual Cost (TC) of holding inventory is given by the formula: TC = 2 A D r v Ordering cost and holding cost can be imagined as two children on a see saw. When one goes up, the other goes down, and vice versa. The way out of this dilemma is to combine the two costs as total annual variable costs and worry only about minimizing that cost. Figure 6.3 shows the relationship between order quantity and (a) Annual ordering cost; (b) Inventory Holding Cost; and (c) Total Annual Cost. You can see that there is just one point at which total costs are minimized.

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Figure 6.3: Total Annual Variable Costs

EOQ Model with 'Lead Time' In the above discussion, we considered that lead time is zero. However, if lead time is constant, the above results can be used without any modification.

Figure 6.4: EOQ with a Fixed Lead Time Reorder Level

If lead time is constant and equal to 'L' (in weeks), then during lead time, the consumption is LD units. This means order will have to be released for quantity QEOQ. The new order will arrive exactly after time period 'L' at which time inventory level will be zero and the system will repeat itself. The inventory level at which the order is released is known as reorder level, as shown in Figure 6.4. It can be mathematically expressed by the equation: Reorder Level = Ro = L D Let us work out an example to understand the EOQ Model and all that has been said earlier in this section on fixed order quantity policies: A company, for one of its class 'A' items, placed 8 orders each for a lot of 150 numbers, in a year. Given that the ordering cost is Rs. 5,400.00, the inventory holding cost is 40 per cent, and the cost per unit is Rs. 40.00. Find out if the company is making a loss in not using the EOQ Model for order quantity policies. What are your recommendations for ordering the item in the future? And what should be the reorder level, if the lead time to deliver the item is 6 months? 'D' = Annual demand = 8 150 = 1200 units

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'v' = Unit purchase cost 'A' = Ordering Cost 'r' = Holding Cost QEOQ

= Rs. 40.00 = Rs. 5400.00 = 40%

Using the Economic Order Equation: = (2 A D/rv) = (2 5400 1200)/(0.40 40) = 900 units. Minimum Total Annual Cost (TC) = 2 A D r v = 2 5400 1200 0.40 40 = Rs. 14,400.00 The Total annual Cost under the present system = Rs. (1200 5400/150 + 0.40 40 150/2) = Rs. (43,800 + 1200) = Rs. 45,000.00 The loss to the company = Rs. 45,000 Rs. 14,400 = Rs. 30,600.00 Reorder Level = Ro = L D = (6/12) 1200 = 600 units The company should place orders for economic lot sizes of 900 units in each order. It should have a reorder level at 600 units. Sensitivity Analysis In the models that we have discussed in this section, we have assumed as if the various parameters are used such as demand 'D', inventory carrying charges factor 'r' ordering or set up cost 'A', are known. In real life situations, the value that is used is often an estimate which may be different from the real value due to a number of causes. Due to practical reasons, it is important to test the results of the EOQ model and find how sensitive the results are to the changes in various parameters. The sensitivity can be explored in various ways. Let us assume that the estimated values of parameters differ from "true" values by some factor 'k'. The average inventory will be 'I'. The estimated holding cost is 'mr' and the estimated ordering cost is 'l A'. The estimated purchasing cost is 'n v'. Then the ratio of the estimated optimal cost and the "true" optimal cost will be given by the equation: TCe / TC = (1/2) [ ( m n/l k) + (l k/m n) To examine the sensitivity of the costs to the errors in estimation of parameters, let us consider a situation where the estimates of 'A', 'r' and 'v' are correct, i.e., they all correspond to the "true" value. This means, l = m = n = 1. However, the estimate of demand turns out to be 50 per cent higher than the true demand, i.e., 'k = 1.5'. Now putting these values into the equation, we can find the ratio of actual cost to "true" cost for this case. TCe / TC = [ 1.5/1 + 1/1.5] = 1.015 If the same example is considered, but if we assume that demand is 50 per cent on the lower side of "true demand then, 'k = 0.5' we already know that l = m = n = 1 as before we then get TCe / TC = [ 0.5/1 + 1/0.5] = 1.060

The results show that if the estimate of demand is 50% on the high side of the "true" value of demand, the increase in cost over the "true" optimal cost is only 2.0 per cent, and if estimated demand is 50 per cent on the lower side, then the increase in cost over "true" optimal cost will be 6.00 per cent. It shows that in the EOQ model, cost is quite insensitive to the errors on the higher or lower side of demand estimation. However, it is also clear from the calculations that insensitivity is more for the same magnitude of error on the higher side than for the error on the lower side. Also, as the parameters are symmetrically arranged in the 'TCe / TC equation', the same conclusion can be drawn for the other parameters, i.e., l, m and n. Since k l and m n appear in ratio in 'TCe / TC equation', any error in the numerator or denominator of the same magnitude and direction will cancel each other out, whereas errors in the opposite direction will be magnified. Therefore, it will be advantageous to overestimate 'm' and 'n', if 'k' and 'l' are likely to be overestimated and underestimated if 'k' and 'l' are likely to be underestimated. We can see from the mathematical derivations of the EOQ equations that: 1. For similar magnitudes, overestimation is preferable to underestimation of parameters. 2. If 'k' and 'l' are likely to be overestimated, then it is better to overestimate 'm' and 'n', since errors cancel out when they are in same direction. 3. In general, the total cost is quite insensitive to errors in estimation of parameters. Economic Order Quantity (EOQ) Model with Shortages: This model considers the situation when back orders are allowed, i.e., stock out is allowed for some period in the system. In case of shortage, demand is assumed to reflect as a back-order and is not lost. The model assumes three costs, unlike the earlier model that assumed only the first two costs shown below: 1. Ordering or set up cost, 2. Inventory holding cost, and 3. Shortage or stock out cost. The shortage cost is denoted by 'b' rupees per Rs. short per unit time, i.e., Rs./Rs./Year. The total average annual cost (TC) can be written as, TC = Ordering cost +Inventory holding cost + Cost of back orders Assuming order quantity to be 'Q', then the number of orders per annum equals 'D/Q'. And hence ordering cost equals 'A(D/Q)'. Total Annual Cost (with backorders permitted) = [(QS)2vr/2Q] + A(D/Q) + S2 b/2QEOQ

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104 Production and Operation Management

Figure 6.5: EOQ Model with Shortages

The average inventory and stock out can be derived using Figure 6.5. The average inventory during period T1 will be 'I' (as consumption is at uniform rate) and the inventory level during T2 is negative and hence, in practice, on hand inventory will be zero. Thus, average inventory through period T will be Average Inventory Average Inventory Holding Cost And, QEOQ = (2AD/(rv)((rv+b)/b) If shortages are not allowed, then b = The above equation will be reduced to: Q = QEOQ = 2 A D/r v This is the same equation that we had derived earlier, i.e., optimal order quantity for the EOQ model. Let us try another exercise to demonstrate the EOQ model. The demand for an item is equal to 600 units per year. The per unit cost of the item is Rs. 50 and the cost of placing an order is Rs.5. The inventory carrying cost is 20% of inventory per annum and the cost of shortage is Re. 1 per unit per month. Find the optimum ordering quantity if stock outs are permitted. If stock outs are not permitted, what would be the loss to the company? D = Annual demand v = Unit purchase cost A = Ordering Cost r = Holding Cost b = Shortage Cost QEOQ = 600 units = Rs. 50.00 = Rs. 5.00 per order = 20% per annum = Rs. 12 per annum = (2 A D/r v) ((r v + b)/ b) = (2 5 600/0.20 50) ((0.20 50 +12)/12) = 600 1.833 = 33.16 units = say 33 units Max. Number of backorders = S* = QEOQ (r v/(r v + b) = 33 (0.20 50/((0.20 50) +12) = 15 units = (Q S)2/2Q = [(Q S)2/2Q] v r

Total Annual Cost (with backorders permitted) = [(QS)2 vr /2Q ] + A (D/Q) + S2 b/2 QEOQ = [(33 15)2 (0.2050) / (233)] + (6005)/33 + 151512/ (233) = Rs. 181 If stock outs and backorders are not permitted, the economic order quantity is: Q = QEOQ TC = 2AD/rv = 26005/ (0.2050) = 24.5 units = Ordering Cost + Ave. Holding Cost = [DA/ QEOQ] + QEOQ rv/2 = [6005/ 24.5)] + 24.50.2050/2 = Rs. 254.00 Therefore, additional cost when backordering is not allowed = 254.00 181.00 = Rs. 73.00

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6.6.3 Fixed-time Period Models

In many retail merchandising systems, a fixed-time period system is used. Sales people make routine visits to customers and take orders for their complete line of products. Inventory, therefore, is counted only at particular times, such as every week or every month or when the supplier's visit is due. Sometimes, this is also resorted to in order to combine orders to save transportation costs. Fixed-time period models generate order quantities that vary from period to period, depending on the usage rates. A Fixed-Period Quantity system is shown in Figure 6.6. These generally require a higher level of safety stock than fixed-order quantity systems, which require continual tracking of inventory on hand and replenishing stock when the reorder point is reached. In contrast, the standard fixed-time period models assume that inventory is counted only at the time specified for review. The risk associated with this system is that it is possible that some large demand will draw the stock down to zero right after an order is placed. There is no remedy for such a situation and the condition could go unnoticed until the next review period. Even after placement of new orders, the item may still take time to arrive. This highlights the high probability of being out of stock throughout the entire review period and order lead time. Safety stock, therefore, is an extremely important requirement for these systems and is used to effectively protect against the high probability of stock outs.

6.6.4 Fixed-time Period Model with Safety Stock

Continuing our discussions on Fixed-time Period models, it is essential that 'safety stock' is a consideration in model building. We will discuss below a fixed-time period system with safety stock.

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Figure 6.6: Fixed-Time Period Quantity System

The notations that will be used in the model are given below: q = Quantity to be ordered T = Number of days between reviews L = Lead time in days (time between placing an order and receiving it) D = Forecast average daily demand z = Number of standard deviations for a specified service probability T + L = Standard deviation of demand over the review and lead time I = Current inventory level (includes items on order) Reorders are placed at the time of review 'T', and the safety stock has to be a function of the level of service desired and lead time. Accordingly, the quantity that must be reordered is: Safety Stock = z T+L

Figure 6.7: Fixed Time Period Model with Safety Stock

Figure 6.7 shows a fixed-time period system with a review cycle of 'T' and constant lead time of 'L'. Demand is assumed to be normally distributed and randomly distributed about a mean 'd' and the quantity to order 'q', is given by the relationship: Order Quantity = Average demand over the vulnerable period + safety stock Inventory currently on hand Or q = d(T + L) + z T+L I In this model, demand (d) can be forecast and revised each review period if desired or the yearly average may be used if appropriate. The value of z is dependent on the probability of stocking out and can be found using the Excel NORMSINV function discussed earlier. A comparison between the two systems; (a) Fixed-order Quantity System and (b) Fixed-time Quantity System is given in Table 6.6.
Table 6.6: Comparison of Different Inventory Ordering Systems
S.No. 1. 2. 3. 4. 5. Fixed Order Quantity System The order quantity is fixed. The order is placed when the inventory drops tore-order level. It is most suitable when carrying cost is measurable and significant. It is preferred when the supplier places a minimum order quantity restriction. It is suitable for A class items having a high unit cost. Fixed Time Quantity System The re-order data is fixed. The re-order quantity varies according to inventory on hand. It is suitable when the carrying cost is meaningless and insignificant. It is preferred when the supplier will only ship at fixed date. It is suitable for B and C class items.

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6.6.5 Manufacturing Model without Shortages

If a company manufactures its component which is required for its main product, then the corresponding model of inventory is called Manufacturing Model. This model will be with shortages or without shortages. The rate of consumption of items is uniform throughout the year. The cost of production per unit is same irrespective of production lot size. Let, r k Co Cc P be the annual demand of an item be the production rate of the item (Number of units produced per year). be the cost per set up. be the carrying cost per unit per period. be the cost of production per unit.

EBQ be Economic Batch Quantity The operation of the manufacturing model without shortages is shown in Figure 6.8.

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Figure 6.8: Manufacturing Model without Stockout

During the period t1, the item is produced at the rate of k units per period and simultaneously it is consumed at the rate of r units per period. So, during this period, the inventory is built at the rate of k-r units per period. During the period t2, the production of the item is discontinued but the consumption of that item is continued. Hence, the inventory is decreased at the rate of r units per period during this period. The various formulas for this situation are given below.


2Co r Cc (1 r / k )

t1* = Q* / k
* t2 =

Q*[1 r / k ] r

* * Cycle time = t1 + t2

If a product is to be manufactured within the company, the details are as follows: r = 24,000 units/year k = 48,000 units/year Co = Rs. 200 per set-up Cc = Rs. 20 unit/year EBQ and cycle time will be found in the following manner.


2Co r Cc (1 r / k )
2 200 24, 000 20(1 24, 000 / 48, 000)

= 980 units (Approx.)

Q* t = k
* 1

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= 980/48,000 = 0.02 year = 0.24 month

Q* r t = 1 r k
* 1

980 24, 000 1 24, 000 48, 000

= 0.02 year = 0.24 moth Therefore,

* * The cycle time = t1 + t2

= 0.24 + 0.24 = 0.48 month


For simple inventory models, we assumed that future demand is known with certainty. Generally, however, this is not the case for companies like BPCL. The demand varies from day to day as well as from period to period. Making things, even more complex is the fact that BPCL provides a principle product that is not distinguishable from similar products provided by other 'oil' companies. In such cases, Stochastic Inventory Models need to be used. But before that we will look into stochastic models where the selling price of an item varies with the order size, and how this is handled in inventory management.

6.7.1 Quantity Discounts or Price-break Models

Each of us has purchased goods in larger quantities than we immediately need so that we could pay a lower unit price. When demand is certain, delivery is instantaneous (no stock outs), and item cost varies with volume ordered, the result is a modified simple lot size situation called the quantity volume case or price break model. The model assumes a discrete or step change rather than a per-unit change. For example, a Classic cigarette sold from an open packet will cost Rs. 3.50 each. If purchased as a packet of 20, it would cost Rs. 65.00. However, if you buy a carton of 10 packets, it will only cost Rs. 600.00. To determine the optimal quantity of cigarettes you want to buy, the model simply solves for the economic order quantity for each price and at the point of price change. Figure 6.8 represents this concept. For 3 items, A, B, and C, a manufacturer offers price discounts. For items 'A' and 'B' at quantities equal to or greater than 'Q1' and for item 'C' for a quantity equal to or greater than 'Q2'. The average annual variable costs are reflected by the curves 'AA', 'BB' and 'CC'.

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Figure 6.9: Quantity Discounts: Price Breaks are given at Quantities Q1 and Q2

The general procedure for determining the order quantity starts by checking the lowest cost curve for an optimal QEOQ. If that is unsuccessful, each higher cost curve is systematically checked until the optimal QEOQ is found. The total cost for each feasible economic order quantity and price-break order quantity is tabulated, and the Q that leads to the minimum cost is the optimal order size or the QEOQ for the given item. If the holding costs of the company are based on a percentage of unit prices, the largest order quantity, which is also the lowest unit price, is solved first. The QEOQ that is determined should be valid. If it is not, the next-largest order quantity is examined till a feasible solution is found. The cost of this QEOQ is compared to the cost of using the order quantity at the price break, and the lowest cost determines the QEOQ. Variable Demand and Constant Lead Time We will now examine a moderately complex quantity/reorder point model in which lead time does not vary, but demand does. This model is shown in Figure 6.8. In this model, we take into account the possibility of a stock out. The model establishes buffer stocks that adequately protect service to customers when demand is uncertain. The notations that are used in the model are given below: = demand during lead time, a random variable u = standard deviation of demand during lead time = expected demand during lead time d = expected average daily demand d = standard deviation of expected daily demand D = expected annual demand B = buffer stock z = number of standard deviations needed for a specified confidence level

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Figure 6.10: Variable Demand with Constant Lead Time Model

You can see from Figure 6.10 that the expected lead-time demand 'u' plus the buffer stock 'B' equals the reorder level Ro. Second, we also know that the lead time 'L' is constant, which is an assumption for the model. And, the buffer stock is a function of the variation in demand 'u' and the protection level specified to maintain the confidence level, i.e., 'z'. Therefore, the expected lead, time demand equals expected demand times lead time: Ro = B, and 'B' is 'zu' for the specified service level and = d L, Therefore, R = d L + zu The order quantity is simply the simple lost size formula with expected annual demand substituted for annual demand: Q = QEOQ = 2A D/rv Generally, average demand is used for this model regardless of the distribution of the demand function. Uncertainty in Demand and Lead Time Inventory systems have to cope with uncertainty. You have to decide on when to order and how much to order with a view minimization of costs, maximization of profit, or maximization of service level i.e., the objectives stated by the organisation. The most common way to estimate demand is to collect data about past experience and forecast future demand based on that data. However, in re-order point models the probability distribution of demand during the lead time is an important characteristic in inventory management. There is also uncertainty in demand, in costs, in lead time and in supplied quantity. It is often assumed that demand for an item is formed from a large number of smaller demands from individual customers. As a result, the resulting demand is continuous and follows a Normal distribution. For fast moving items a Normal distribution is appropriate, especially for items with average lead time demand higher than 10. Demand can then be measured using:

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1. The average usage rate from historical data, and 2. The standard deviation of usage about the average. Using the Normal distribution for a demand distribution can be questioned because: 1. The distribution is defined both on the positive and negative axes, and 2. It is symmetrical. The demand may take on many shapes. While the Normal distribution could be approximately correct in many cases, it cannot be used in computer simulation if and when negative demand is generated, which may be generated at random. When of relevance, one should rather look for a distribution, which is defined only for nonnegative values and allows for skewness. The Poisson distribution has been found to provide a reasonable fit when demand is very low (only a few pieces per year). Less attention has been paid to irregular demand. This type of demand is characterized by a high level of variability, but may be also of the intermittent type, i.e., demand peaks follow several periods of zero or low demands. In such a situation, forecasting demand is considered difficult. For example, normal distribution describes many inventory situations in manufacturing and the negative exponential and the Poisson describe many of the wholesale and retail level situations. Some of the common forecasting methods used are simple exponential smoothing, and moving average method. These methods are used to cope with the uncertainty in demand, in costs, in lead time and in supplied quantity.

Figure 6.11: Relative Frequency Distribution of Demand and Lead Times

The distribution may be normal, Poisson, negatively exponential distribution or any other form. Therefore, a simple way in which it becomes easier to identify the distribution is to use frequency distribution to identify the variability. To illustrate this approach, relative frequencies for demand and lead time of a hypothetical example are shown in Figure 6.11. Since in most cases demand is probabilistic, in such cases policies are based on expected costs rather than actual costs. Expected costs are obtained by multiplying the actual costs for a particular occurrence with the probability of the occurrence of the event. This type of model is called the 'Christmas tree problem'. In the cases of discrete probabilities, the manner in which frequency distributions can be used to decide on order quantities is explained with this example. Say, a television dealer finds that cost of holding a television in stock for a week is Rs. 30 and the cost

of unit shortage is Rs. 70. For one particular model of television, the probability distribution of weekly sales is given in Table 6.7.
Table 6.7: Probability Distribution of Weekly Sales
Weekly sales Probability 0 0.05 1 0.10 2 0.20 3 0.25 4 0.20 5 0.15 6 0.05

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How many units per week should the dealer order? The procedure to solve this problem is as follows: Step 1: Determine the cumulative probabilities for the demand for the item 'D', such that the probability 'p' = DQ, i.e., probability of 'D' should be greater than or equal to 'Q'. Step 2: Let Ch=holding cost per unit for the period and, Cb = under-ordering or shortage cost per unit for the period. Calculate the ratio, 'k', known as critical probability, such that k = Ch/(Ch+Cb). Step 3: Compare the cumulative probabilities with the critical probability 'k'. Identify the largest value of 'Q' for which the cumulative probability is equal to, or greater than, the critical probability value. This will give the required ordering quantity. In general terms, the optimal ordering quantity, Q* is determined as: Q*= Max. 'p' (DQ)>k Where, k = Ch/ (Ch+Cb). In our example the results are shown in Table 6.8. Comparing the cumulative probabilities with 'k', we find that the maximum value of 'Q' where 'p' (DQ)> k is '4'. In this example, the optimum policy is to stock 4 units. In case of continuous distributions, a similar method can also be used.
Table 6.8: Critical Probability and Order Quantity
Demand (in units) 1 1 2 3 4 5 6 Prob. the demand will be at this level 0.15 0.10 0.10 0.25 0.20 0.15 0.05 Prob. that demand will be at this level or greater P(d>Q) 1.00>0.30 0.95>0.30 0.85>0.30 0.65>0.30 0.40>0.30 0.20>0.30 0.05

A similar logic and approach can be used in the case when lead times are probabilistic. Such problem types are encountered more frequently for costly spare parts, perishable goods, seasonal items like in fashions and room heaters, air-conditioners etc.

6.7.2 Model with Specified Service Levels

Looking closely at the data in Table 6.7, there are several relationships that can be imputed. One such is the service level. If we want to provide a 95 per cent assurance of being able to meet customer demand until the new shipment is received, there is a cost involved. This will reflect in higher levels of average inventory than there would

114 Production and Operation Management

otherwise have been. This cost is critical and is optimized with the expected stock out costs. The expected stock out cost, a key calculation in the total inventory cost, is the expected probability of a stock out times and the stock out costs that are incurred regardless of the number of units short. The complementary cumulative function can also be used to set buffer stocks for the allowable number of stock outs per year. The expected number of stock outs for a demand level is found by multiplying the number of orders in a year (D/Q) times the probability of a stock out. Variable Demands and Lead Times When both demand and lead times are probabilistic, the basic procedure for finding operating doctrines is a convergence procedure. This is a directed trial and error method. For the quantity/reorder point model, the order quantity is computed assuming constant demand. Then the reorder point is calculated using the computed order quantity. This value is then used to recalculate the order quantity and recalculate the reorder point. Eventually, the order quantity and the reorder point coverage revert to their optimal values. This type of trial and error computation is best carried out using a computer.


An effective inventory control system should provide satisfactory answers to three questions: 1. How often should the assessment of stock on hand be made? 2. When should a replenishment order be placed? 3. What should be the size of the replenishment order? In fixed quantity systems, the parameters that define a fixed reorder quantity system are 'Q', the fixed amount ordered at one time, and reorder point. These systems are common where a perpetual inventory record is kept or where the inventory level is under sufficiently close surveillance so that notice can be given when the reorder point has been reached. In a 'time' triggered system, the inventory status is reviewed on a periodic basis, and an order is placed for an amount that will replenish inventories to a planned maximum level. The reorder quantity therefore varies from one review period to the next. The economic reorder cycle would then be EOQ/R, where R is the annual requirement. For example, if EOQ = 10,000 units and annual requirements are R=120,000 units, then the economic cycle would be 10,000/120,000 = 1/12 or 1 month. One advantage of this system is that it sometimes makes operating efficiencies possible by reviewing the status of all items at the same time. However, inventory holding costs are usually higher than those associated with the continuous review system. The following facts describe the important differences that determine the choice of the system that should be used. 1. The time triggered system requires less manpower to control. In the event triggered system, each item must be counted as it is issued or demanded. In the time triggered system, physical inventory count is taken only at the end of the period. This system is especially good for fast moving raw materials and supplies.

2. The time triggered system requires less calculating time than the event triggered system. In the event triggered system, each issue or demand from stock must be recorded and accounted for. Systemic costs i.e., the costs of running the system are generally less with the time triggered system. 3. The time triggered system may require more buffer stock to protect against uncertain demand and lead time. The reorder time is often non-optimal as it is fixed either weekly or monthly, and not based solely on economics, resulting in higher physical inventory costs. 4. The time triggered system runs the risk in more stock outs when unusually high fluctuation in demand occurs. When one or successive periods of unusually large demand occur, the event triggered system can react more quickly because it keeps track of net inventory with each unit demanded. Control systems sometimes combine regular review cycles and order points. In such systems, stock levels are reviewed on a periodic basis, but orders are placed only when inventories have fallen to a predetermined reorder level. Such systems combine the advantages of 'event' triggered and 'time' triggered review systems. These have the lowest total costs.

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The MRP (material Requirement Plan) is applicable to any manufacturing system that involves discrete, engineered products involving assembling and part fabrication is dependent on the demand situation. Since MPS is essentially an input to the system, MRP could be regarded primarily as a component requirement planning system. The basis for MRP design is based on a concept of dependent demand and a time phasing approach. The approach combines three principles: 1. The inventory system deals with dependent demand. 2. Component demand can be precisely determined from the master schedule. 3. The optimum levels of inventory can be determined by time phasing, i.e., segmenting inventory status data by time. Time phasing means adding the dimension of time to inventory data. The status is established by recording and storing information on either specific dates or planning periods with which the inventory are associated. The main aim of time phasing is to provide answers to questions related to manufacturing inventory management. It answers all questions related to when the material is required.

6.9.1 Independent versus Dependent Demand

Inventory is also classified according to the type of demand it is meant to serve. The type of demand determines the methods used to manage the inventory. Independent Demand Independent demand is demand that is not controlled directly by the company, such as demand from customers.

Independent demand items usually include finished products, such as different octane petrol, high speed and low speed diesel, or lubricants manufactured by, say, BPCL. In industrial products, this would also include the replacement parts of the product that the company sells to customers.

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Demand for such items is generally independent of a company's own production plans.

Dependent Demand

Dependent demand is usually demand for an item that is generated by a company's own production process. One example would be the different distillation fractions BPCL produces to manufacture petrol. The fraction obtained after removing Liquefied Petroleum Gas (LPG) is petrol. Petrol consists of two components known as light-straight-run naphtha (LSR) and heavy-straight-run naphtha (HSR). HSR has a low octane rating, unsuitable for direct blending into high-octane petrol. The molecular structure of this fraction is changed under high temperature and pressure to provide high octane reformate suitable for petrol manufacture. LSR has a higher octane rating than HSR and can be blended directly into petrol. BPCL knows that from each ton of crude, what fractions are extracted and depending upon the output of the different octane petrol in a given week, it will then need 'x' amount of distillates and blends that week. Thus, the demand for distillates and blends depends on the production of petrol. The inventory system must deal with dependent demand, i.e., directly related to or derives from the demand for another inventory item or product. This dependency may be 'vertical' such as when a component is needed in order to build a sub-assembly or product, or 'horizontal' as in the case of an attachment or owner's manual shipped with the product. To manage inventory for dependent demand items, companies use Materials Requirements Planning (MRP).

Let us illustrate the concept with an example of the manufacture of a 'chest of drawers'. Assume that we have translated the current demand for the 'chest of drawers' into a master schedule and that they are to be produced in lots of 100 every two weeks. The bill of materials for a 'chest of drawers' is shown as Table 6.9. Normally, we can assume that the firm is a multi-product organisation. It not only manufactures the chest of drawers, but other products as well. It uses its resources, i.e., workers and machines, for other sizes and designs including the other products, e.g., chairs and tables, etc. Therefore, we can assume that the chest of drawers will be produced periodically, in lots. Like the other products in its product range, the firm will determine the production schedule of this product based on the market demand.
Table 6.9: BOM for a Chest of Drawers
Part Number A B C D E F Part Description Top Sides Frame rail Frame rail Toe kick Drawer front Qty 1 2 4 1 1 3 Thickness 3/4 3/4 3/4 3/4 3/4 3/4 Width 18 1/2 18 1 1/4 1 1/4 3 8 1/8 Length 26 37 24 24 1/2 24 24 Lumber 4/4 Red Oak 4/4 Red Oak 4/4 Red Oak 4/4 Red Oak 4/4 Red Oak 4/4 Red Oak Bd Ft 3.8 10.6 1.0 0.2 0.6 4.7 Cost (Rs.) 199.00 427.50 62.50 120.75 41.50 222.15 Contd..


Drawer front Drawer sides Drawer sides Drawer back Drawer back Web rail Web end frame frame

1 6 2 3 1 5 10

3/4 1/2 1/2 1/2 1/2 3/4 3/4 Total

6 3/8 7 3/4 6 7 3/4 6 1 1/4 1 1/4

24 15 3/4 15 3/4 23 1/4 23 1/4 24 15 3/4

4/4 Red Oak 4/4 Y. Poplar 4/4 Y. Poplar 4/4 Y. Poplar 4/4 Y. Poplar 4/4 Y. Poplar 4/4 Y. Poplar

1.2 5.8 1.5 4.3 1.1 1.2 1.6 37.6

130.80 300.65 60.50 200.20 40.00 70.00 110.00 1985.55

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There are several alternatives. From the bill of materials, it is apparent that the chest of drawers can be manufactured as a unit or we can produce enough top, sides, frame rails, drawer fronts, drawer sides, drawer back, web frames, etc., to assemble 100 chests of drawers every two weeks. However, because set up costs and variable production costs for the various operations are different, we may be able to produce more efficiently by considering the manufacture of each component individually. For example, we might produce 'tops' every four weeks in lots of 800 to match the requirements of the master schedule. Let us consider the schedule for producing 'tops' every two weeks in lots of 100 and 'drawers' every four weeks in lots of 800. Because the demand for 'tops' is entirely dependent on the production schedule for the 'chest of drawers', the time phasing of the 'drawer' lots with respect to 'top' lots has a very important impact on the in-process inventory. Therefore, the problem is not simply to produce 'tops' in lots of 800 every 4 weeks, but to time phase the production of 'tops' and 'drawers' with respect to the production of the 'chest of drawers', the primary item. Though the demand for 'chest of drawers' is dependent on market factors, the production of 'tops' and 'drawers' becomes a requirement as soon as the 'chest of drawers' production schedule is set. If the proper time phasing is ignored, the price will be paid in terms of higher in-process inventory of components for the product. Also, the components, sub-assemblies and assemblies requirements are not uniform and consumption is not constant. Therefore, inventory depletion tends to occur in discrete measures due to lot sizing. Where there are subsequent stages of manufacture, inventory depletion also depends on the subsequent stages. As the example shows, dependent demand is not forecasted, as it can be precisely determined from the master schedule. The requirements are derived directly from the production schedules. In case of inventory that is subject to both dependent and independent demand, such as service parts, etc., the independent demand, which is forecast, is added on to the dependent demand that has been calculated to arrive at the total demand figure. Techniques of MRP system are expressly designed for dealing with dependent, discontinuous, non-uniform demand, which is characteristic of manufacturing environments, although it does assume certain characteristics of the product and of the process used in its manufacture. When is forecasting applicable? Forecasting is applicable to the primary demand for the chest of drawers, not to the dependent components and raw materials.

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6.9.2 Inputs from Master Production Schedule

The inputs to the MRP system come from the MPS. The MPS expresses the overall production plan and the span of time covered by it is termed the planning horizon. The planning horizon of the MPS usually covers a time span large enough to contain recurring requirements for a given end item. In the development of lot requirements, component inventories are allocated according to the sequence of all the end item lots. The sequence of end item lots affects both the quantities and the timing of requirements in an MRP system. The MRP deals with this through level-by-level and time phasing techniques. A change in end item lot sequence affects not only the timing but also the quantities of requirements. This may create severe problems because the sequence of the lots of all products in MPS normally keeps changing. This needs to be kept in mind. Other System Inputs In addition to the MPS, the MRP also requires information on,

Orders for components originating from sources external to the plant using the system, and The forecasts for items subject to independent demand.

The inventory record file is used to obtain information on the status data required for determination of size and timing of planned orders namely, item lead time, safety stock (if any), scrap allowances, lot sizing algorithms, etc. The product structure file (bill of materials) contains information on relationships of components and assemblies that are necessary to prepare the MRP. Some areas of special concern are the product structure, the lot sizing and the item lead times. These are discussed below: Product Structure

In determining net requirements for a low-level inventory item, the quantity that exists under its own identity, as well as any quantities existing as (consumed) components of parent items must be accounted for. Net requirements are developed by allocating (reallocating) quantities in inventory to the quantities of gross requirements, in a level-by-level process. The downward progression from one product level to another is called an explosion. The bill of material file guides the explosion process.

Lot Sizing Lot sizing techniques in MRP are meant to determine planned order quantities. Lot sizing is also another reason why the top-to-bottom, level-by-level procedure must be followed. For an MRP to be able to carry out a complete explosion, lot-sizing algorithms must be incorporated into the computer program that controls the requirement computation.

Lot sizing techniques can be categorized into those that generate fixed, repetitively ordered quantities and those that generate varying order quantities. The factors that are generally considered in the design of such techniques include:

Variability of demand; Length of the planning horizon;

Size of the planning period; and Ratio of set up and unit costs.

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In the more commonly used procedures described below, the first two procedures are demand-rate oriented; the others are discrete lot sizing techniques. Fixed Order Quantity (FOQ) The fixed order quantity policy maintains the same order quantity each time an order is issued. This may be specified for any item under an MRP system, but in practice is limited to a few items with high ordering cost. However, this rule is also used when quantity discounts, truckload capacity or minimum purchase quantities are specified by suppliers. During the steel control regime in the 1970's, steel could only be ordered in wagonloads. Economic Order Quantity (EOQ) This model is a demand rate oriented model and will be discussed in detail in the next lesson. This technique is unsuited to discrete, discontinuous, non-uniform demand situations and is generally used for continuous and assembly-line type operations only. Fixed Period Requirements (FPR) This is a converse technique to the FOQ; the user specifies how many periods of coverage every planned order should provide. The ordering interval is specified and the quantity is allowed to vary. Period Order Quantity (POQ) It is modified EOQ for use in discrete demand situation. Using the schedule to know future net requirements, EOQ is computed. Based on this, the number of orders per year to be placed are determined. Similar to the FPR, the ordering interval is computed, and supplies are ordered accordingly. A potential difficulty with discontinuous net requirements could be their distribution. In case where for several periods (coinciding with ordering interval) there are zero requirements, a predetermined order interval would prove inoperative. Lot for Lot Ordering (L4L) It is the simplest of all the different procedures, though it is a special case of POQ. It provides period-by-period coverage of net requirements and the planned order quantity always equals the quantity of net requirements being covered. The projected on-hand inventory combined with the new order so that it will equal zero at the end of each period. This technique minimizes inventory-carrying cost, and is suitable for expensive items, purchased or manufactured, with highly discontinuous demand. Least Unit Cost In this technique, the lot size as well as the ordering interval, are allowed to vary. The set up plus inventory carrying cost per unit is calculated and the requirements to be covered by the order are based upon the least 'unit cost'. This may turn out to be larger than required in the planning period. The criteria still remains the lot size with the least unit cost. The main drawback of the technique is that it considers only one lot at a time. Least Total Cost (LTC) This technique is based on the rationale that sum of the set up and inventory carrying costs (total cost) for all lots within the planning horizon should be minimized.

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For items using this criterion the two costs should be as equal as possible. The order quantities, at which the set up cost per unit and the carrying cost per unit are most nearly equal, are selected. The measure of the least total cost is the Economic Part Period (EPP). This is the cost of one unit of the item carried in inventory for one period, and follows logically from the assumption that the carrying cost of the inventory item should equal the set-up cost. EPP = Set up Cost/ Inventory Cost per Unit per Period This procedure allows the lot size and the ordering interval to vary with time, depending upon the inventory carrying costs. The technique is generally biased toward larger order quantities. However, its major drawback is the assumption that least cost occurs when set up cost and inventory costs are equal. Wagner-Whitin Algorithm (W-W Method): This algorithm is a dynamic programming approach to determine optional lot sizes, in discrete, discontinuous and non-uniform demand situations. The technique minimizes the combined (total) cost of set up and of carrying inventory and is normally used as a standard for measuring relative effectiveness of other discrete lot-sizing techniques. However, in the real world there is little evidence that with changing requirements and planning horizons, a dynamic programming approach will guarantee optimality. In recent years, however, several more advanced techniques are available for determining dynamic optimal lot sizes. The main disadvantages of these techniques including W-W method are: 1. They require sophisticated software, e.g., sophisticated ERP software to be effective; 2. As the techniques deal with dynamic programming they are difficult for the average MRP user to understand. A recomputation of a parent planned order quantity will often mean that component item open orders have to be rescheduled, in addition to recomputing and/or retiming planned orders. There is some merit in 'freezing' an order quantity, once established and only changing its timing as required by changing net requirements. The planned order quantity determined by any of the lot sizing techniques is subject to certain adjustments dictated by practical considerations such as: 1. Warehousing and limitations 2. Scrap allowances 3. Multiple usages 4. Raw material wastage and cutting factors, and 5. Coiling constraints in the case of some raw materials. In some cases, there is a clear direction, for example, where there are significant set up costs, POQ, LTC or LUC could provide satisfactory results. However, there does not appear to be one 'best' lot-sizing algorithm that could be selected for a given manufacturing environment for a class of items in most cases, even for a single specific item. Item Lead Times The individual inventory item lead times determine the timing of release of orders and schedules. If the lead time for manufacturing a component or a part is variable, then stock outs could occur if a batch is not scheduled for production sufficiently in advance of actual requirements. The effect of item lead time is solved by time

phasing. Positioning the planned order release ahead of the time of the net requirements is called setting the lead-time. The timing of requirements is calculated and deliveries determined by the lead times supplied to the MRP system. The requirements are derived from the explosion of the bill of materials and data used in aligning the requirements and planned order dates. The computation of requirements is complicated by the factors we have discussed earlier. One is the structure of the product, containing several manufacturing levels of materials, component parts and sub-assemblies. The second is lot sizing, i.e., the ordering of inventory items in quantities exceeding net requirements, for reasons of economy or convenience. Very often these complications arise because of multiple requirements for an inventory item due to commonality, i.e., usage in the manufacture of a number of other items, multiple requirements for an inventory item due to its recurrence on several levels of a given end items, and the recurrence of requirements within a time span across a large planning horizon. Other complicating factors relate to the different individual lead times of inventory items that make up the product with provisions made for safety lead times, safety stocks, and buffer stocks. These are discussed below.

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Safety Lead Time: Suppose that 10 per cent of the time, the paint and shop is behind the schedule and 5 per cent of the time it is ahead of the schedule. Now in this situation, if management desires that stock outs do not occur even 1 per cent of the time, then it will need to hold inventory to meet both these possibilities. This would result in higher inventory holding costs. The determination of lead time should therefore balance the cost of holding inventory and cost of stock outs. Attempts should also be made to reduce the variability in lead time by proper scheduling and coordinated production control systems. Safety Stock: In some situations, sales forecast errors, customer order changes, production variability in upstream departments, adjustment for rejects, scraps, and the like make it necessary to provide for safety stock. This is needed to guard against such variability. Safety stock is determined by considering the cost of stock outs and cost of holding excess inventories. Once a safety stock level is determined, the lot size policies can be modified to start production when net requirements fall to the level of the safety stock. Buffer Stocks in Requirements Systems: Though dependent items are not subject to the kinds of random variations in demand that characterize primary product demand, buffer stocks in requirements systems are designed to absorb random variations in the supply schedule. The time required for processing orders through the system often varies due to factors as delays, breakdowns, rejections, scrap and plan changes. In addition, the actual quantity delivered from production is variable because of scrap.

Buffer stocks due to the compounding effects of inflated sales forecasts, pessimistic production lead times, and incorrect ordering, could produce very large raw material and work-in-process inventories. This defeats the primary purpose of materials requirements planning systems. Efforts are required in identifying, isolating, and correcting the causes of these variations so that buffer stocks can be kept at a minimum just to absorb variations in supply time and in the quantity actually delivered.

6.9.3 Outputs The Materials Requirement Plan

The common objective of all MRP systems is to determine (gross and net) requirements, i.e., discrete period demands for each item of inventory, so as to be able to generate information needed for correct action in ordering inventory, i.e., relating to

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procurement and production. The action is either new action (release of an order) or a revision of previous action. The essential data elements that are required for any action to be taken are: 1. Item Identity (part number) 2. Order Quantity 3. Date of Order Release 4. Date of Order Completion (due date) Once the order has been placed, the types of order action that are required when revising an action taken previously, are limited to the following: 1. Increase in Order Quantity. 2. Decrease in Order Quantity. 3. Order cancellation. 4. Advancement of Order Due Date. 5. Deferment of Order Due Date. 6. Order suspension (indefinite deferment). MRP systems meet their objective by computing net requirement for each inventory item. The term component in MRP covers all inventory items other than products or end items. Requirements for end items are stated in the MPS. The latter are derived from forecasts, customer orders, field warehouse requirements, interplant orders, etc. Requirements for all component items (including raw material) and their timings are derived from the MPS by the system. After determining the net requirements, these are time phased to ensure their proper coverage. Therefore, MRP converts the gross requirements into net requirements. The net requirements are always related to time, i.e., to some date or period. These are covered by planned orders. Their quantities and timing are determined by any of the lot sizing techniques. MRP signals, if necessary, the need to reschedule any of these orders forward or backward in time, so that the net requirements are directly related and are correctly timed with shop orders and purchase orders. Capacity considerations are taken into account in determining MPS; this is not the role determined by MRP. All the inputs received above enable determination of correct inventory status of each item under the control of MRP. The MPS expresses the overall production plan and the span of time covered by it. This is termed the planning horizon. Item lead time, safety stock (if any), scrap allowances, lot-sizing algorithms, etc., are available from the inventory record file. This is used to determine the size and timing of the planned orders. The product structure file contains information on relationships of components and assemblies. The MRP system uses these inputs to provide a number of important outputs. These outputs can be classified as primary and secondary outputs. The primary outputs of an MRP system are: 1. Order-release notices: These determine the orders that need to be placed and the system makes the call for placement of planned order. 2. Rescheduling notices: Based on the feedback from manufacturing, it firms up requirements on open order due dates. 3. Cancellation notices: Wherever necessary, it calls for cancellation or suspension of open orders.

4. Item status analysis: It provides back-up data on the item. The output of the MRP includes the following information: (a) Requirements, (b) Coverage of requirements, and (c) Product structure. 5. Planned orders: It identifies factors considered for planning and on that basis schedules for releases of notices in the future. The system is also capable of providing to provide a number of secondary outputs. Apart from the primary outputs an MRP System can be used for: 1. Inventory order action 2. Re-planning order quantities 3. Safeguarding priority integrity 4. Performance control, and 5. Reporting errors, incongruities and out-of-bounds situations in the system Some of the secondary outputs that can be provided by the MRP system are: 1. Exception notices reporting errors, incongruities, and out-of-bound situations 2. Inventory level projections 3. Purchase commitment reports 4. Tracing demand sources 5. Performance reports An MRP system that is properly designed, implemented and used will also contain valid and timely information that can assist in the functioning of the organisation on three separate levels: 1. Planning and control of inventories. 2. Planning of 'open order' priorities. 3. Inputs to the capacity requirements planning system. Priority Planning The validity and integrity of shop scheduling, loading, despatching and job assignments are based on operational priorities. The priorities in a MRP system are derived from the MPS. Each shop order entails a number of operations that must be performed to complete the order. In order to complete these operations, there are priorities in two areas: 1. Order priority. 2. Operation priority. Where there are valid open-orders, priority planning and priority control are the basis for decisions on due dates, re-planning of order quantities and releases of schedules in the future. But to be valid, they must derive from valid order priorities, i.e., valid order due date. An MRP system has the capability to establish valid order priorities at the time of order release and maintain them up-to-date and valid. In priority assignment and updating, the concept of dependent priority is very useful. The 'dependent priority' concept recognizes that the real priority of an order depends on the time of order completion and the availability of all inventory items that are required not only for the operation but also for previous operations. This can be thought of as vertical priority dependence. Due date-oriented priority ratios have been developed and are being used successfully in many MRP systems.

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124 Production and Operation Management

Dynamic updating of operation priority is based on the critical ratio and not due dates and established relative priorities. The 'dependent priority' procedure computes the value of the critical ratio for the next operation to be performed on every open shop order, as follows: Ratio A = Quantity On-hand/Order Point Ratio B = Lead time for Balance Work/Total Lead time Critical Ratio = A/ B Ratio 'A' is a measure of need and represents the degree of stock depletion. Ratio 'B' is a measure of the response and reflects the degree of work completion. A critical ratio of '1' signifies that work on the order has kept pace with the rate of stock depletion the order is on 'Schedule'. A value, lower than '1', indicates an order 'ahead of schedule'. The priority of the job becomes higher as the value of critical ratio falls or becomes lower. In the case of assembly products, horizontal dependence exists. In such a situation, the MRP system must re-plan requirements and dates of need for the component orders in question, in case of change or rescheduling in parent product requirements. However, in independent demand situations, ratio 'A' is meaningless.

6.9.4 Capacity Requirement Planning

As the master schedule is developed, rough-cut capacity planning is used to check capacity requirements against capacity availability. But rough-cut capacity planning does not take into account lead time off setting, or the amount ahead of time component parts must be made to meet the master schedule for the end items. MRP forms the basis for detailed capacity calculations. The output of the MRP system indicates what component items will have to be produced and when, and this output can therefore be converted into the capacities required to produce these items. The explosion of the MPS results in details on machine load, or workload projections. The MRP then compares this with available departmental and work center capacities to answer such question as relating to overtime work, inter-departmental transfer of work/people, sub-contracting of work, starting new shifts, hiring more manpower, etc. This exercise by using the routing sheet, which indicates the sequence of machines or work centers a part must go through during processing and the labour standards, makes it possible to determine capacity requirements at each operation. The total capacity requirements placed on a work centre during a given time period are called the load. The output of Capacity Requirements Planning (CRP) is usually in the form of load report, or load profile, which is a graphical representation of the load on each work centre by time period. This report provides visibility into future and is based on valid order priorities. Hence, it facilitates capacity requirement planning by providing essential inputs for the capacity requirement planning system to function effectively.


Many service organisations carry inventoryall service organisations have to plan for capacity. Although MRP was originally developed for manufacturing companies, it can also be applied to service organisations. Instead of the master schedule representing goods to be produced, it can represent services to be provided. For example, Nirula's, a fast food chain in Delhi, could use master schedules for production and delivery of its food items to its various outlets in the city.

The materials required to provide that service would be the inputs for the meals of its customers, and so forth. Likewise, hospitals can develop a master schedule of the number of different types of surgeries each week. In the retail setting, a variant of MRP, called Distribution Requirements Planning (DRP), has been developed that applies the MRP planning logic to requirements for retail outlets or warehouses.

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6.10.1 Distribution Requirements Planning (DRP)

Distribution networks in the retail business consist of a network of outlets, distribution centers and warehouses. Regional warehouses are fed by a national distribution center, the regional centers feed the regional outlets, and these, in turn, feed the distribution chains at the local level. By thinking of each level in the distribution network as a level in a bill of materials, orders placed by the service centers will generate gross requirements at the different levels in the network, from local to regional and, finally, national. This structure is captured in the DRP for determining material requirement and capacity planning.

6.10.2 Distribution Resource Planning (DRP II)

Just as Manufacturing Resources Planning (MRP II) expands the role of MRP to generating requirements for personnel, capital, and so forth, DRP II expands the role of DRP. DRP II, just like its counterpart MRP II, generates requirements for warehouse space, workers, vehicles, capital, etc. MRP was essentially aimed at the planning and control of production and inventory in manufacturing businesses. However, the concepts have been extended to other areas of the business. This extended concept was termed MRP II by Oliver Wight, one of the founders of MRP. Wight defined MRP II as a game plan for planning and monitoring all the resources of a manufacturing company: manufacturing, marketing, finance and engineering. Technically it involves using the closed-loop MRP system to generate the financial figures. Without MRP II integrated systems, separate databases are held by different functions. For example, a product structure or bill of materials is held in engineering and also in materials management. If engineering changes are made to the design of products, both databases have to be updated. It is difficult to keep both databases entirely identical and discrepancies between them cause problems, which often are not apparent until a member of staff is supplied with the wrong parts to manufacture the product. Similarly, cost information from finance and accounting, which is used to perform management accounting tasks such as variance analysis against standard costs, needs to be reconciled with changes made elsewhere in the operation, such as changes in inventory-holding or process methods. MRP II is based on one integrated system containing a database which is accessed and used by the whole company according to individual functional requirements. However, despite its dependence on the information technologies which allow such integration, MRP II still depends on people-based decision making to close the loop. Check Your Progress 2 Fill in the blanks: 1. Inventory represents a tremendous capital . and also is an idle resource. 2. Detailed measures of inventory accuracy and availability are very important in order to maximize manufacturing and non-manufacturing efficiency and ..results.

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3. Inventory models seek to optimize the costs associated with investing in an resource. 4. Multi-period inventory systems are designed to ensure that an item will be .on an ongoing basis throughout the year. 5. Fixed-time period models generate order quantities that vary from period to period, depending on the ..rates.


The manufacturing business environment, in most cases, is inherently unstable and turbulent. Change is the rule. The solution to minimizing inventory costs lies not in methods to stabilize and freeze the system but rather in an enhancement of the ability to accept change and to respond to it promptly and correctly. MRP systems backed by availability of computers provide just a unique such ability to respond to change. This idea has been incorporated in all ERP packages. These packages allow access to other databases or, ideally, the use of one common database. Separate databases create problems and delays in appropriate actions. Suppose we need to know the status of an order. The marketing database will probably show only information specific to marketing, such as the date the order was entered. If that order is in production, then production would be able to provide the status because that information would ordinarily not be in the marketing database. If the order has been completed and shipped, the shipping information would be with distribution or logistics. Because of the separate databases, no one in any area of the company has access to all company information. Another problem with separate databases is that they may contain conflicting information, due to many possible reasons. The purpose of ERP is to avoid these problems by combining all these separate databases into one common database for the entire organisation, and possibly even for the entire supply chain. The advantages that accrue from this approach is that any one any where within the organisation has access to all information and there is an increase speed in retrieving information. Extending this idea to an entire supply chain, the advantages become obvious. All members of the supply chain have access to the same information and can utilise the same information for purposes of planning and execution. Not only does this make planning and forecasting simpler, some companies report reducing inventory levels through to the supply chain by 50 per cent or more. In the brave new world of networking data, we are moving from point of purchase to point of use, which gets buyers and sellers much closer to what they both want and need. Global manufacturing excellence will soon be measured against anticipation how early can you know what consumers want? How early can you deliver it? That's the new demand-driven supply chain, and the global future.

Single-Period Inventory Models are a special case of periodic inventory systems based on how much risk we are willing to take for running out of inventory. These models are useful for a wide variety of service and manufacturing applications. Fixed Order Quantity Systems: These are multiple period inventory models that are "event triggered", at an identified level of the stock the fixed-order quantity model initiates an order.

Economic Order Quantity (EOQ) Models: The basic approach to determining fixed order sizes are the Economic Order Quantity (EOQ) models. The basic EOQ model is concerned primarily with the cost of ordering and the cost of holding inventory. Re-order Level: The inventory level at which the order is released is known as the reorder level. Fixed Time Quantity Systems: These systems are "time triggered", at an identified fixed time the fixed-time quantity model initiates an order to replenish the stock. Price-Break Models: When item cost varies with volume ordered, the result is a modified simple lot size situation called the quantity volume case or price break model. Christmas Tree Problem: This type of problem occurs where demand is probabilistic. In such cases policies are based on the probability of the occurrence of the particular event rather than actual costs.

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Check Your Progress: Answers

CYP 1 1. production 2. tangible 3. flexibility 4. competitiveness 5. identification CYP 2 1. investment 2. financial 3. idle 4. available 5. usage


Chase, R.B., Aquilano, N.J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Hall, R.W., Attaining Manufacturing Excellence; Just in Time, Total Quality, Total People Involvement, The Dow Jones-Irwin/APICS Series in Production Management, 1987. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Krajewski, L.J. and Ritzman, L.P., Operations Management: Strategy and Analysis, (fifth edition), Addison-Wesley, 1999. Meredith, J.R. and Shafer, S.M., Operations Management for MBAs, J. Wiley, 2002. Nahmias, S., Production and Operations Analysis, McGraw-Hill International Editions, 1997. Schmenner, R.W., Production/Operations Management; Concepts and Situations, MacMillan. 1989. Silver, E.A., Pyke, D.F. and Peterson, R., Inventory Management and Production Planning and Scheduling, J. Wiley, 1998. Waters, C.D.J., An introduction to Operations Management, Addison-Wesly, 1991.

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1. What is economic order quantity (EOQ)? Explain the EOQ model of inventory with its simplifying assumptions. How is the model of inventory used by a manufacturer different from a retailer? 2. Inventory control system may need to be modified as demand, costs, and competitive pressures changes. What are the parameters that should be reviewed for the fixed reorder quantity and periodic reorder systems? 3. What is the cost of uncertainty in demand during lead time? 4. 'Shortages are undesirable, but some organisations create shortages intentionally' How is this justified from an economic point of view? Derive an expression for total cost in the inventory model for intentional shortages. 5. Nuvyug Industries Ltd. has an annual requirement of 5,000 pieces of brake cylinders for its popular brand of golf carts. Each brake cylinder has a carrying cost of Rs. 25 per unit per year. The Ordering Cost per order is Rs. 800. Calculate the total inventory cost for the following values of number of orders: 5, 10, 20, and 25. Plot the various costs with respect to these orders on a graph and use it to find the EOQ. 6. A price discount schedule for an item that we purchase is offered as follows: Rs. 1.00 per unit in quantities below 800, Rs. 0.95 per unit in quantities of 800 to 1599, and Rs. 0.90 per unit in quantities of 1600 or more. The requirement is 1600 units per year; the purchase order cost is Rs. 50.00 per order; and inventory holding costs are 10 per cent of the average inventory value per year, or Rs. 0.10 per unit per year at the Rs. 1.00 per unit price. The value of EOQ is 400 units. What should the purchase quantity be in order to take advantage of the price discount? 7. Hindustan Lever is a manufacturer of the Surf detergent powder. A 100-g pack of its detergent powder is priced at Rs. 30 for its suppliers. One of its suppliers purchases 16,000 packs per annum. The supplier incurs an ordering cost of Rs. 350.00 per order and has a carrying cost of 12% of the inventory value. Hindustan Lever offers discounts for the following ranges of bulk purchases to its suppliers: 0.5% for 3,000 6,999 units, 0.75% for 7000 9,999 units and 1 % for 10,000 and more units. Which discount option should the supplier choose? What is the EOQ in this case?


129 Enterprise Resource Planning

STRUCTURE 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14 7.15 7.16 Objectives Introduction Definition of ERP Benefits of ERP ERP changes the Way Companies do Business Why did Companies invest in ERP? Supply Chain ERP Optimised Production Technology (OPT) OPT Principles E-operations Strategy E-commerce Third-wave B2B Marketplace Models Scope of E-commerce Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

Define and explain ERP Enumerate the benefits of ERP Describe the advantages of ERP in organisations and businesses Explain the Supply Chain ERP Discuss Optimized Production Technology and its principles Discuss the e-operations strategy Explain the B2B marketplace models Explain the significance and benefits of e-commerce

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One of the most important issues in planning and controlling operations is managing the sometimes vast amounts of information generated by the activity. It is not just the operations function that is the author and recipient of this information, almost every other function of a business will be involved. So, it is important that all relevant information that is spread throughout the organisation is brought together. Then it can inform planning and control decisions such as when activities should take place, where they should happen, who should be doing them, how much capacity will be needed and so on. This is what Enterprise Resource Planning (ERP) does. It grew out of a set of calculations known as Material Requirements Planning (MRP), which is also described in this lesson. An easy way of thinking about enterprise resource planning is to imagine that you have decided to hold a party in two weeks time and expect about 40 people to attend. As well as drinks, you decide to provide sandwiches and snacks. You will probably do some simple calculations, estimating guests preferences and how much people are likely to drink and eat. You may already have some food and drink in the house which you will use, so you will take this into account when making your shopping list. If any of the food is to be cooked from a recipe, you may have to multiply up the ingredients to cater for 40 people. Also, you may wish to take into account the fact that you will prepare some of the food the week before and freeze it, while you will leave the rest to either the day before or the day of the party. So, you will need to decide when each item is required so that you can shop in time. In fact, planning a party requires a series of interrelated decisions about the volume (quantity) and timing of the materials needed. This is the basis of materials requirement planning. It is a process that helps companies make volume and timing calculations (similar to the party, but on a much larger scale, and with a greater degree of complexity). But your planning may extend beyond materials. You may want to rig up a sound system borrowing a friends speakers you will have to plan for this. The party also has financial implications. You may have to agree a temporary increase to your credit card limit. Again, this requires some forward planning and calculations of how much it is going to cost and how much extra credit you require. Both the equipment and financial implications may vary if you increase the number of guests. But if you postpone the party for a month, these arrangements will change. There are also other implications of organising the party. You will need to give friends, who are helping with the organisation, an idea of when they should come and for how long. This will depend on the timing of the various tasks to be done (making sandwiches, etc.). So, even for this relatively simple activity, the key to successful planning is how we generate, integrate and organise all the information on which planning and control depends. Of course, in business operations it is more complex than this. Companies usually sell many different products to many hundreds of customers who are likely to vary their demand for the products. This is a bit like throwing 200 parties one week, 250 the next and 225 the following week, all for different groups of guests with different requirements who keep changing their minds about what they want to eat and drink. This is what ERP does it helps companies forward plan these types of decisions and understand all the implications of any changes to the plan.


Enterprise resource planning has been defined as a complete enterprise-wide business solution. The ERP system consists of software support modules such as marketing and sales, field service, product design and development, production and inventory

control, procurement, distribution, industrial facilities management, process design and development, manufacturing, quality, human resources, finance and accounting, and information services. Integration between the modules is stressed without the duplication of information. ERP is very much a development out of MRP II, which itself was a development out of MRP. Its aim is to integrate the management of different functions within the business as a whole in order to improve the performance of all the interrelated processes in a business. As usual, the improvement of processes can be measured using the operations performance objectives (quality, speed, dependability, flexibility and cost).

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ERP is generally seen as having the potential to very significantly improve the performance of many companies in many different sectors. This is partly because of the very much enhanced visibility that information integration gives, but it is also a function of the discipline that ERP demands. Yet this discipline is itself a double-edged sword. On one hand, it sharpens up the management of every process within an organisation, allowing best practice (or at least common practice) to be implemented uniformly through the business. No longer will individual idiosyncratic behaviour by one part of a companys operations cause disruption to all other processes. On the other hand, it is the rigidity of this discipline that is both difficult to achieve and (arguably) inappropriate for all parts of the business. Nevertheless, the generally accepted benefits of ERP are usually held to be the following:

Because software communicates across all functions, there is absolute visibility of what is happening in all parts of the business. The discipline of forcing business process-based changes is an effective mechanism for making all parts of the business more efficient. There is better sense of control of operations that will form the basis for continuous improvement (albeit within the confines of the common process structures). It enables far more sophisticated communication with customers, suppliers and other business partners, often giving more accurate and timely information. It is capable of integrating whole supply chains including suppliers suppliers and customers customers.

In fact, although the integration of several databases lies at the heart of ERPs power, it is nonetheless difficult to achieve in practice. This is why ERP installation can be particularly expensive. Attempting to get new systems and databases to talk to old (sometimes called legacy) systems can be very problematic. Not surprisingly, many companies choose to replace most, if not all, of their existing systems simultaneously. New common systems and relational databases help to ensure the smooth transfer of data between different parts of the organisation. In addition to the integration of systems, ERP usually includes other features which make it a powerful planning and control tool:

It is based on a client/server architecture; that is, access to the information systems is open to anyone whose computer is linked to central computers. It can include decision-support facilities which enable operations decision makers to include the latest company information. It is often linked to external extranet systems, such as the electronic data interchange systems which are linked to the companys supply chain partners.

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It can be interfaced with standard applications programs which are in common use by most managers, such as spreadsheets, etc. Often, ERP systems are able to operate on most common platforms such as Windows or UNIX or Linux.


Arguably the most significant issue in many companies decision to buy an off-theshelf ERP system is that of its compatibility with the companys current business processes and practices. The advice emerging from the companies that have adopted ERP (either successfully or unsuccessfully) is that it is extremely important to make sure that their current way of doing business will fit (or can be changed to fit) with a standard ERP package. In fact, one of the most common reasons for companies to decide not to install ERP is that they cannot reconcile the assumptions in the software of the ERP system with their core business processes. If, as most businesses find, their current processes do not fit, they can do one of two things. They could change their processes to fit the ERP package. Alternatively, they could modify the software within the ERP package to fit their processes. Both of these options involve costs and risks. Changing business practices that are working well will involve reorganisation costs as well as introducing the potential for errors to creep into the processes. Adapting the software will both slow down the project and introduce potentially dangerous software bugs into the system. It would also make it difficult to upgrade the software later on.


If one accepts only some of the criticisms of ERP outlined in the critical commentary box, it does pose the question as to why companies invested such large amounts of money in it. Partly it was the attraction of turning the companys information systems into a smooth running and integrated machine. The prospect of such organisational efficiency is attractive to most managers, even if it does presuppose a very simplistic model of how organisations work in practice. After a while, although organisations could see the formidable problems in ERP implementation, the investments were justified on the basis that even if we gain no significant advantage by investing in ERP, we will be placed at a disadvantage by not investing in it because all our competitors are doing so. There is probably some truth in this; sometimes businesses have to invest just to stand still. Far from being the magic ingredient which allows operations to fully integrate all their information, ERP is regarded by some as one of the most expensive ways of getting zero or even negative return on investment. For example, the American chemicals giants Dow Chemical spent almost $500 million and seven years implementing an ERP system which became outdated almost as soon as it was implemented. One company, FoxMeyer Drug, claimed that the expense and problems which it encountered in implementing ERP eventually drove it into bankruptcy. One problem is that ERP implementation is expensive. This is partly because of the need to customize the system, understand its implications for the organisation and train staff to use it. Spending on what some call the ERP ecosystem (consulting, hardware, networking and complementary applications) has been estimated as being twice the spending on the software itself. But it is not only the expense which has disillusioned many companies, it is also the returns they have had for their investment. Some studies show that the vast majority of companies implementing ERP are disappointed with the effect it has had on their businesses. Certainly many companies find that they have to (sometimes fundamentally) change the way they organise their operations in order to fit in with ERP systems. This organisational impact of ERP

(which has been described as the corporate equivalent of root-canal work) can have a significantly disruptive effect on the organisations operations. Perhaps the most important justification for embarking on ERP is the potential it gives the organisation to link up with the outside world. For example, it is much easier for an operation to move into internet-based trading if it can integrate its external internet systems into its internal ERP systems. However, as some critics of the ERP software companies have pointed out, ERP vendors were not prepared for the impact of e-commerce and had not made sufficient allowance in their products for the need to interface with internet-based communication channels. The result of this has been that whereas the internal complexity of ERP systems was designed to be intelligible only to systems experts, the internet has meant that customers and suppliers (who are non-experts) are demanding access to the same information. So, important pieces of information such as the status of orders, whether products are in stock, the progress of invoicing, etc. need to be available, via the ERP system, on a companys website. One problem is that different types of external company often need different types of information. Customers need to check the progress of their orders and invoicing, whereas suppliers and other partners want access to the details of operations planning and control. Not only that, but they want access all the time. The internet is always there, but web integrated ERP systems are often complex and need periodic maintenance. This can mean that every time the ERP system is taken off-line for routine maintenance or other changes, the website also goes off-line. To combat this some companies configure their ERP and ecommerce links in such a way that they can be decoupled so that ERP can be periodically shut down without affecting the companys web presence. Check Your Progress 1 Fill in the blanks: 1. ERP is generally seen as having the potential to very significantly improve the of many companies in many different sectors. 2. The integration of several databases lies at the heart of ERPs power, it is nonetheless difficult to in practice. 3. New common systems and relational databases help to .. the smooth transfer of data between different parts of the organisation. 4. Changing business practices that are working well will involve reorganisation . as well as introducing the potential for errors to creep into the processes. 5. One problem is that ERP implementation is expensive, because of the need to customize the system, understand its implications for the organisation and train use it.

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The step beyond integrating internal ERP systems with immediate customers and suppliers is to integrate all the ERP and similar systems along a supply chain. Of course, this can never be straightforward and is often exceptionally complicated. Not only do different ERP systems have to communicate, they have to integrate with other types of system. For example, sales and marketing functions often use systems such as customer relationship management which manage the complexities of customer requirements, promises and transactions. Getting ERP and CRM systems to

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work together is itself often difficult. Sometimes the information from ERP systems has to be translated into a form that CRM and other e-commerce applications are able to understand. Nevertheless, such web integrated ERP or c-commerce applications are emerging and starting to make an impact on the way companies do business. Although a formidable task, the benefits are potentially great. The costs of communicating between supply chain partners could be dramatically reduced and the potential for avoiding errors as information and products move between partners in the supply chain is significant. Yet as a final warning note, it is well to remember that although integration can bring all the benefits of increased transparency in a supply chain, it may also transmit systems failure. If the ERP system of one operation within a supply chain fails for some reason, it may block the effective operation of the whole integrated information system throughout the chain.


Other concepts and systems have been developed which also recognize the importance of planning to known capacity constraints rather than overloading part of the production system and failing to meet the plan. Perhaps the best known is the Theory of Constraints (TOC) which has been developed to focus attention on the capacity constraints or bottleneck parts of the operation. By identifying the location of constraints, working to remove them, then looking for the next constraint, an operation is always focusing on the part that critically determines the pace of output. The approach which uses this idea is called Optimized Production Technology (OPT). Its development and the marketing of it as a proprietary software product were originated by Eliyahu Goldratt. In some ways it is difficult to know where to place OPT in this book. We have placed it alongside ERP because of the importance it places on capacity. Yet it can be seen as being the third approach to operations planning and control. However, along with JIT, OPT takes a more improvementoriented approach than ERP. OPT is a computer-based technique and tool which helps to schedule production systems to the pace dictated by the most heavily loaded resources, that is, bottlenecks. If the rate of activity in any part of the system exceeds that of the bottleneck, then items are being produced that cannot be used. If the rate of working falls below the pace at the bottleneck, then the entire system is under-utilized. There are principles underlying OPT which demonstrate this focus on bottlenecks.


1. Balance flow, not capacity. It is more important to reduce throughput time rather than achieving a notional capacity balance between stages or processes. 2. The level of utilization of a non-bottleneck is determined by some other constraint in the system, not by its own capacity. This applies to stages in a process, processes in an operation and operations in a supply network. 3. Utilization and activation of a resource are not the same. According to the TOC a resource is being utilized only if it contributes to the entire process or operation creating more output. A process or stage can be activated in the sense that it is working, but it may only be creating stock or performing other non-value-added activity. 4. An hour lost (not used) at a bottleneck is an hour lost for ever out of the entire system. The bottleneck limits the output from the entire process or operation, therefore the under-utilization of a bottleneck affects the entire process or operation.

5. An hour saved at a non-bottleneck is a mirage. Non-bottlenecks have spare capacity anyway. Why bother making them even less utilized? 6. Bottlenecks govern both throughput and inventory in the system. If bottlenecks govern flow, then they govern throughput time, which in turn governs inventory. 7. You do not have to transfer batches in the same quantities as you produce them. Flow will probably be improved by dividing large production batches into smaller ones for moving through a process. 8. The size of the process batch should be variable, not fixed. Again, from the EBQ model, the circumstances that control batch size may vary between different products. 9. Fluctuations in connected and sequence-dependent processes add to each other rather than averaging out. So, if two parallel processes or stages are capable of a particular average output rate, in parallel they will never be able to achieve the same average output rate. 10. Schedules should be established by looking at all constraints simultaneously. Because of bottlenecks and constraints within complex systems, it is difficult to work out schedules according to a simple system of rules. Rather, all constraints need to be considered together. OPT should not be viewed as a replacement to MRP; nor is it impossible to run both together. However, the philosophical underpinnings of OPT outlined above do show that it could conflict with the way that many businesses run their MRP systems in practice. While MRP as a concept does not prescribe fixed lead times or fixed batch sizes, many operations run MRP with these elements fixed for simplicity. However, demand, supply and the process within a manufacturing operation all present unplanned variations on a dynamic basis; therefore, bottlenecks are dynamic, changing their location and their severity. For this reason, lead times are rarely constant over time. Similarly, if bottlenecks determine schedules, batch sizes may alter throughout the plant depending on whether a work centre is a bottleneck or not. OPT uses the terminology of drum, buffer, rope to explain its planning and control approach. Briefly, the bottleneck work centre becomes a drum, beating the pace for the rest of the factory. This drum beat determines the schedules in non-bottleneck areas, pulling through work (the rope) in line with the bottleneck capacity, not the capacity of the work centre. A bottleneck should never be allowed to be working at less than full capacity; therefore, inventory buffers should be placed before it to ensure that it never runs out of work. Some of the arguments for using OPT in MRP environments are that it helps to focus on critical constraints and that it reduces the need for very detailed planning of nonbottleneck areas, therefore cutting down computational time in MRP. The effect of this is to concentrate on major areas of inefficiency such as bottlenecks, quality, set-up times and so on. Nor does it necessarily require large investment in new process technology. Because it attempts to improve the flow of products through a system, it can release inventory that in turn releases invested capital. Claims of the financial payback from OPT are often based on this release of capital and fast throughput.

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E-business or e-commerce is the execution of business transactions over the internet. E-business and e-commerce are terms used interchangeably; we can and should differentiate between them. Certain strands of the literature do attempt a distinction.

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Chaffey (2002) for example, considers e-commerce to be a subset of e-business using the following definitions:

Electronic commerce (e-commerce): All electronically mediated information exchanges between an organisation and its external stakeholders. Electronic business (e-business): All electronically mediated information exchanges, both within the organisation and with external stakeholders supporting the range of business processes.

According to Chaffey, then, e-commerce involves external transactions only and is a subset of e-business. The latter being both internal and external processes and, presumably, wider than just commercial exchanges (selling and buying). E-business then, can include:

E-commerce E-integration E-banking E-marketing E-mailing E-operations E-directions E-directories E-trading or e-tailing

There is a wide array of definitions used to describe business-to-business (B2B) and business-to-consumer (B2C) E-commerce, the two forms that are relevant to operations management. Business-to-consumer is the exchange of services, information and/or products from a business to a consumer, as opposed to business-tobusiness which is between one business and another. Some studies have used a fairly strict definition that requires that business is done electronically without any human involvement. In the narrow definition of e-commerce, it would require that firms have extensive websites linked to ERP, SCM, and/or CRM systems. Other definitions used by the European Commission and the United Nations have been fairly broad, stating that B2B and B2C e-commerce are any commercial transaction done between two businesses or between businesses and consumers using some form of electronic technology. This includes the sharing of various forms of business information by any electronic means (such as electronic mail or messaging, World Wide Web technology, electronic bulletin boards, smart cards, electronic funds transfers, and electronic data interchange) among suppliers, customers, governmental agencies, and other businesses in order to conduct and execute transactions in business, administrative, and consumer activities. Early electronic commerce was the preserve of large companies because the systems required large investments to build or lease mainframes, with complex, purposespecific software, proprietary networks and massive systems integration. Today, however, users of all kinds need only a PC and a phone line to take advantage of the growing number of public and private networks that use standard protocols such as TCP/IP. E-commerce is not limited to the Internet and Web-based systems to perform transactions, because it includes proprietary services also. This "scalability" and "choice" has put small businesses on an equal footing with large corporations and

created opportunities for buyers, sellers, and new intermediaries to create value in electronic channels. It offers enormous opportunities for both developed and modernizing countries alike.
Table 7.1: Scope of E-commerce
Business-to-business Services Traditional E-commerce EDI and EFT Messaging/E-mail Fax Online information services, e.g. America Online, CompuServe Electronic marketplaces/transactions, e.g. Internet home shopping Business-to-consumer Services Messaging services E-mail Fax

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Online Information services, eg Lexis-Nexis Electronic marketplace/transactions, e.g. industry, Net, electronic malls

Examples of the application of e-commerce are shown in Table 7.1. E-commerce means more choices, convenience and lower prices for consumers. It also provides new ways for businesses to grow and meet customer needs, and important benefits and cost-savings for governments and the people they serve. Its growth has been phenomenal. In 2000, the total investment in infrastructure exceeded $200 billion. By 2002, global revenues associated with electronic commerce had crossed $500 billion. This investment and growth is attributed to the value created by B2B marketplaces to:

Expand everyone's market reach. Generate lower prices for buyers from the ability of buyers to reach more suppliers or the most efficient supplier and from increased price competition and, in some cases, access to surplus inventory stocks, Cut the cost of the buyers' operations by providing services that significantly reduce the cost of B2B procurement processes, which traditionally consume much staff time and effort, and Finally, help these marketplaces identify industrys best practices.

The first wave of e-commerce was the establishment of independent online companies such as Paper Exchange and E-Steel who used a readily understood business model charge a small fee for matching up buyers and sellers. By some estimates, more than 1,000 such E-marketplaces for products that ranged from commodities such as lumber to specialized components such as airplane parts managed to receive funding. These marketplaces were initially designed to reduce bid-ask spreads and to bring down transaction costs by matching buyers with suppliers and enabling suppliers to trade with one anotherthe very kinds of procurement-based benefit that would be expected of an efficient marketplace. Most independent, fee-based marketplaces could not provide real economic value as they were not able to achieve scale volumes. As volumes can be achieved only if suppliers and buyers invest to integrate their systems and to manage the change process actively in their buying organisations, in the second wave of B2B, large incumbents took matters into their own hands, banding together into consortia with their current trading partners and competitors. During the year 2000, an estimated $10 billion investment in B2B was made for public consortiabacked e-marketplaces alone. This included GM-Ford-Daimler Chrysler who banded together into consortia with their current trading partners and competitors, a joint venture now called Covisint. Other well-known examples include Forest Express and Aero Exchange International, in the forest products and airline industries, respectively.

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There are three types of traditional B2B marketplaces:

Controlled by sellers, Controlled by buyers, and Controlled by neutral third parties.

Marketplaces controlled by sellers are usually set up by a single vendor seeking many buyers. Its aim is to create or retain value and market power in any transaction. For example, Cisco Systems has set up a corporate website that enables buyers to configure their own routers, check lead times, prices, and order and shipping status, and confer with technical experts. The site generates $3 billion in sales a year. Marketplaces controlled by buyers are set up by or for one or more buyers with the aim adding value to the buyer and providing negotiating power. Many involve an intermediary, but some buyers have developed marketplaces for themselves. For example, Japan Airlines, a big purchaser of in-flight consumable items such as plastic rubbish bags and disposable cups, posts procurement notices online in order to find the most attractive suppliers. Marketplaces controlled by neutral parties involve third-party intermediaries who match many buyers to many sellers. For example, Fast Parts is one such intermediary. It operates an anonymous spot market for the trading of overstocked electronic components. It receives notice of available stock from sellers, and then matches buyers to sellers at an online auction. Sellers get higher prices than they would through a traditional broker; buyers get market-driven prices that are lower than brokers', plus guaranteed quality because Fast Parts inspects the products; and Fast Parts earns up to 8 per cent commission. All parties benefit.


Using a different classification, Mckinsey in a survey identified five distinct E-marketplace models that differ in the services they provide. The classification is based on the focus and the capabilities that the e-marketplace delivers. Two of the models focus on collecting and distributing information, three on bringing down purchase costs and improving transactional efficiencies. The classification is as follows:

Liquidity Creators: Create liquid dynamic markets between commodity products traded between buyers and sellers. Supply Consolidators: Identify relevant supply base and conduct purchases. Project/Specification Managers: Aid in planning and managing complex projects or processes. Transaction Facilitators: Transact and execute purchases. Aggregators: Combine demand within and across buying enterprises to use the resulting market power to achieve lower prices from suppliers.

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Figure 7.1: Different Types of E-marketplace Models

Marketplaces that exemplify the information-based model help buyers and suppliers cut costs by helping to set appropriate specifications and by streamlining interactions among the parties constituting the value chains. They can also help them collaborate on design and other high-value decisions. Marketplaces for supply consolidators offer search capabilities based on different parameters as well as price data. This information helps customers trade-off cost against quality. Both project/specification managers and supply consolidators develop and control information that would be very hard to duplicate; in addition, supply consolidators offer highly customized, difficult-to-replicate tools. A new model used by aggregators is that of the "e-distributor". Like distributors in the off-line world, e-distributors take title to the goods they sell, and aggregate those goods for the convenience of buyers. In addition, E-distributors perform a critical service for sellers by reaching hard-to-find buyers, such as small ones. The result, in many cases, is significant extra value for buyers and decent profits for sellers. The marketplaces based on the other three models for liquidity creators, aggregators, and transaction facilitators focus on benefits such as reducing waste and supplier margins and increasing the efficiency of transactions. For example, TPN Register, a joint venture between GE Information Services and Thomas Publishing, grew out of an initiative within GE Lighting to consolidate purchases. It was then extended across

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all divisions. Finally, TPN Register expanded beyond GE to include other leading corporations in a buying consortium. The results have been a reduction in processing costs and in order processing time (from a week to one day for GE Lighting), and a 10 to 15 per cent reduction in prices. One hallmark of third-wave B2B approaches seems to be the idea of choosing a different model for each kind of transaction. Companies purchasing a commodity, for example, might value the liquidity, the transparency, and the price orientation of an online bourse. By contrast, companies making highly specialized purchases might value the possibilities for customization offered by the traditional bilateral relationship between buyer and seller. To use this tailored-solutions approach, buyers must know which category to choose. They must develop a deep understanding of the cost structures of all their various purchases. The rewards of these models of e-commerce are split three ways. Sellers can reach more customers, gather better information about them, target them more effectively, and serve them better. The marketplaces also create value for the third-party intermediaries that typically organise them. Intermediaries can earn transaction commissions and fees for value-added services such as information capture and analysis, order and payment processing, the integration of buyers' and sellers' IT systems, and consulting services. The best rewards go to buyers, however.


As e-commerce spreads through an industry, those that understand and use the economics of the electronic marketplace will gain competitive advantage over those that do not. For most incumbents, e-commerce will require broad changes in organisational approach and structure, as well as in skills, mindset, human resources, and measures of economic success. Many will have to cannibalize existing businesses or channels and risk demotivating the traditional organisation while building the new. Success will involve piloting new approaches, mastering new technologies, challenging conventional market definitions, surviving an initial period of low revenues, and perhaps cannibalizing core businesses. But the potential rewards are greata new platform and set of tools for competing in a new and dynamic marketplace. The business processes and decision support systems have a direct impact on the costs and revenue of organisations. However, many companies that own information think it gives them a crucial competitive advantage and therefore fear sharing it freely. This information might include supply-and-demand forecasts, reports of inventory levels at points along the supply chain, and market-tested predictions, the price of futures, etc. Such information would benefit companies up and down the supply chain. Exchanges will deliver all their benefits, when the idea of confiding financial data to an exchange does not generate skepticism. Dell Computer and Wal-Mart, for example, derive a competitive advantage from their exclusive collaborations and from the proprietary sharing of information with their suppliers. E-marketplaces have encountered problems in seeking to streamline tasks (such as production planning, inventory control, and scheduling) that lie closer to the heart of supply chain management. To devise solutions, it will be necessary to analyse what exchanges can and can't do. They will never reduce the time it takes to deliver goods physically. But since the information flow in supply chains is typically linear, fragmented, and inaccurate, they can make a vast difference in this area. Consortia, stand-alone marketplaces, and perhaps other, as yet undeveloped online structures hold out the promise of facilitating every kind of collaboration between

buyers and sellers. Such marketplaces might even help buyers and sellers partially integrate their operations, allowing them to improve their supply chains, and to work jointly on product designs, as is already apparent from developments like world-wide sourcing. The unifying feature of collaboration on this model is the sharing of real time information and building sustainable partnerships. Benefits of E-business

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Consumer-centric as opposed to production-centric collaborating with consumers to identify their needs and then provide tailored solutions using holistic business approaches rather than discrete functions. E-business allows true collaboration with customers, leading eventually to mass customization in which the customer is an active player in the design of products and services. It also allows collaboration with suppliers through the sharing of data and information. Interoperability not only between a firms internal systems, but also those of its partners both inside and outside its industry (in the supply network). Disintermediation (cutting out the middle man) as a means to bypass channel partners to remove sales and infrastructure cost and increase speed of response. An enabling device for Customer Relationship Management (CRM) that can record customers purchasing activities and preferences, problems and other information that can be used in determining individual current and future needs and values. This in turn will allow one-to-one marketing, knowledge management, e-analytics (or data mining) and better customer support. Improved lower-cost information flows that make buyers and sellers more knowledgeable and can drive down industry costs. Low industry entry cost. Increased information sharing. Increased availability, both geographically and time of day. Information availability expanding the market for buyers and sellers. Reduction in cost of creating, processing, distributing, storing and retrieving information. Reduction in cost of communication. Richer communication flows than traditional media. Fast delivery of digitized products. Faster delivery of digitized products. Faster ordering of goods. Increased flexibility of locations from which service can be provided or purchase made. Less paper work, fewer manual processes, instant availability of information, reduced transaction costs and quicker cycle times.

Limitations of E-business

Lack of system security, flexibility and standards Lack of privacy Insufficient band width slowing many transactions.

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Back end systems for fulfillment still rely on traditional methods and are thus slow compared with front end ordering. Integrating e-business software with existing systems and databases remains a problem. Lack of trust in (a) unknowns at the other end of transaction, (b) integrity of the transaction itself, and (c) electronic money that is in reality only bits and bytes. Check Your Progress 2 Fill in the blanks: 1. The step beyond integrating internal ERP systems with immediate customers and suppliers is to integrate all the ERP and similar systems along a ... 2. The Theory of Constraints (TOC) has been developed to focus attention on the constraints or bottleneck parts of the operation. 3. OPT is a computer-based technique and tool which helps to schedule .. to the pace dictated by the most heavily loaded resources, that is, bottlenecks. 4. A bottleneck should never be allowed to be working at less than therefore, inventory buffers should be placed before it to ensure that it never runs out of work. 5. Marketplaces controlled by sellers are usually set up by a single . seeking many buyers.


This lesson has presented the final strategy application. Here, it was suggested that those organisations adopting elements of e-business will benefit from the adoption of an operations strategy for those particular business processes. We also briefly, discussed the latest conceptual research suggesting an operations strategy may also prove a useful policy deployment vehicle an interface between business strategy and tactical and daily activities. In other words, as with continuous improvement initiatives, a method by which to cascade the business strategy throughout the daily operations of the firm.

Enterprise Resource Planning (ERP): The integration of all significant resource planning systems in an organisation that, in an operations context, integrates planning and control with the other functions of the business. Web-integrated ERP: Enterprise resource planning that is extended to include the ERP type systems of other organisations such as customers and suppliers. Theory of Constraints (TOC): Philosophy of operations management that focused attention on capacity constraints or bottleneck parts of an operation; uses software known as optimized production technology (OPT). Optimized Production Technology (OPT): Software and concept originated by Eliyahu Goldratt to exploit his theory of constraints (TOC). E-business: the use of internet-based technologies either to support existing business processes or to create entirely new business opportunities.

Check Your Progress: Answers

CYP 1 1. performance 2. achieve 3. ensure 4. costs 5. staff CYP 2 1. supply chain 2. capacity 3. production systems 4. full capacity 5. vendor

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Curran, T., Keller, G. and Ladd, A., Business Blueprint: Understanding SAPs R/3 Reference Model, Prentice Hall, NJ. A practitioners guide, 1998 Davenport, T.H., Putting the Enterprise into the Enterprise System, Harvard Business Review, JulyAugust, 1998 Vollmann, T.W., Berry, D.C., Whybark, F.R. and Jacobs, F.R., Manufacturing Planning and Control Systems for Supply Chain Management: The Definitive Guide for Professionals, McGraw-Hill Higher Education, 2004 Wallace, T.F. and Krezmar, M.K., ERP: Making it happen, Wiley. Another practitioners guide but with useful hints on the interior mechanisms of MRP, 2001

1. Distinguish between e-business and e-commerce. 2. What are the benefits and limitations of e-business? 3. What are the main impacts of e-business on an operations strategy? 4. How can an operations strategy provide a method by which to deploy policies throughout the organisation?

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Unit III Planning and Forecasting

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STRUCTURE 8.0 8.1 8.2 Objectives Introduction Strategic Planning 8.2.1 8.2.2 8.2.3 8.2.4 8.2.5 8.2.6 8.2.7 8.3 8.4 8.5 Strategic Analysis Setting Strategic Direction Action Planning Situational Analysis Goals, Objectives and Targets Mission Statements and Vision Statements Basic Approach to Strategic Planning

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Tactical Planning Operational Planning Aggregate Planning 8.5.1 8.5.2 8.5.3 8.5.4 Aggregate Planning Strategies Techniques for Aggregate Planning Mathematical Approaches to Aggregate Planning Aggregate Planning in Services Long-term Capacity Planning Short-term Capacity Planning Capacity Planning Techniques


Capacity Planning 8.6.1 8.6.2 8.6.3

8.7 8.8 8.9 8.10

Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

Explain the meaning and significance of strategic planning in production and operations Discuss the steps involved in making strategic plans

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Explain the meaning and significance of tactical planning Discuss the components of operational planning in regard to production and operations Explain the concept of aggregate planning in production and operations Explain the meaning of capacity planning and techniques of capacity planning

The planning process within an organisation is dynamic and continuous. It is nothing but deciding future courses of action of the organisation well in advance so that executives at different level will play their role as per these guidelines. In any organisation, the following type of decisions are taken.

Strategic decisions which are taken at top level management. Tactical decisions which are taken at middle level management. Operational decision which are taken at bottom level management.


Simply put, strategic planning determines where an organisation is going over the next year or more and how it's going to get there. Typically, the process is organisationwide, or focused on a major function such as a division, department or other major function. (The descriptions on this page assume that strategic planning is focused on the organisation.) Strategic planning is an organisation's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. Various business analysis techniques can be used in strategic planning, including SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats ) and PEST analysis (Political, Economic, Social, and Technological analysis) or STEER analysis involving Socio-cultural, Technological, Economic, Ecological, and Regulatory factors and EPISTEL (Environment, Political, Informatics, Social, Technological, Economic and Legal). Strategic planning is the formal consideration of an organisation's future course. All strategic planning deals with at least one of three key questions:

"What do we do?" "For whom do we do it?" "How do we excel?"

In business strategic planning, the third question is better phrased "How can we beat or avoid competition?" In many organisations, this is viewed as a process for determining where an organisation is going over the next year or more -typically 3 to 5 years, although some extend their vision to 20 years. In order to determine where it is going, the organisation needs to know exactly where it stands, then determine where it wants to go and how it will get there. The resulting document is called the "strategic plan". It is also true that strategic planning may be a tool for effectively plotting the direction of a company; however, strategic planning itself cannot foretell exactly how the market will evolve and what issues will surface in the coming days in order to plan your organisational strategy. Therefore, strategic innovation and tinkering with the

'strategic plan' have to be a cornerstone strategy for an organisation to survive the turbulent business climate. Planning typically includes several major activities or steps in the process. Different people often have different names for these major activities. They might even conduct them in a different order. Strategic planning often includes use of several key terms. Different people might use apply different definitions for these terms, as well. One interpretation of the major activities in strategic planning activities is that it includes:

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8.2.1 Strategic Analysis

This activity can include conducting some sort of scan, or review, of the organisation's environment (for example, of the political, social, economic and technical environment). Planners carefully consider various driving forces in the environment, for example, increasing competition, changing demographics, etc. Planners also look at the various strengths, weaknesses, opportunities and threats (an acronym for this activity is SWOT) regarding the organisation. Some people take this wide look around after they've identified or updated their mission statement, vision statement, values statement, etc. Other people conduct the analysis before reviewing the statements. Note: that in the past, organisations usually referred to the phrase "long-range planning". More recently, planners use the phrase "strategic planning". This new phrase is meant to capture the strategic (comprehensive, thoughtful, well-placed) nature of this type of planning.

8.2.2 Setting Strategic Direction

Planners carefully come to conclusions about what the organisation must do as a result of the major issues and opportunities facing the organisation. These conclusions include what overall accomplishments (or strategic goals) the organisation should achieve, and the overall methods (or strategies) to achieve the accomplishments. Goals should be designed and worded as much as possible to be specific, measurable, acceptable to those working to achieve the goals, realistic, timely, extending the capabilities of those working to achieve the goals, and rewarding to them, as well. (An acronym for these criteria is "SMARTER".) At some point in the strategic planning process (sometimes in the activity of setting the strategic direction), planners usually identify or update what might be called the strategic "philosophy". This includes identifying or updating the organisation's mission, vision and/or values statements. Mission statements are brief written descriptions of the purpose of the organisation. Mission statements vary in nature from very brief to quite comprehensive, and including having a specific purpose statement that is part of the overall mission statement. Many people consider the values statement and vision statement to be part of the mission statement. New businesses (for-profit or nonprofit) often work with a state agency to formally register their new business, for example, as a corporation, association, etc. This registration usually includes declaring a mission statement in their charter (or constitution, articles of incorporation, etc.). It seems that vision and values statements are increasingly used. Vision statements are usually a compelling description of how the organisation will or should operate at some point in the future and of how customers or clients are benefitting from the organisation's products and services. Values statements list the overall priorities in how the organisation will operate. Some people focus the values statement on moral values. Moral values are values that suggest overall priorities in how people ought to

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act in the world, for example, integrity, honesty, respect, etc. Other people include operational values which suggest overall priorities for the organisation, for example, to expand market share, increase efficiency, etc. (Some people would claim that these operational values are really strategic goals. Don't get hung up on wording for now.)

8.2.3 Action Planning

Action planning is carefully laying out how the strategic goals will be accomplished. Action planning often includes specifying objectives, or specific results, with each strategic goal. Therefore, reaching a strategic goal typically involves accomplishing a set of objectives along the way in that sense, an objective is still a goal, but on a smaller scale. Often, each objective is associated with a tactic, which is one of the methods needed to reach an objective. Therefore, implementing a strategy typically involves implementing a set of tactics along the way in that sense, a tactic is still a strategy, but on a smaller scale. Action planning also includes specifying responsibilities and timelines with each objective, or who needs to do what and by when. It should also include methods to monitor and evaluate the plan, which includes knowing how the organisation will know who has done what and by when. It's common to develop an annual plan (sometimes called the operational plan or management plan), which includes the strategic goals, strategies, objectives, responsibilities and timelines that should be done in the coming year. Often, organisations will develop plans for each major function, division department, etc., and call these work plans. Usually, budgets are included in the strategic and annual plan, and with work plans. Budgets specify the money needed for the resources that are necessary to implement the annual plan. Budgets also depict how the money will be spent, for example, for human resources, equipment, materials, etc. Note: there are several different kinds of budgets. Operating budgets are usually budgets associated with major activities over the coming year. Project budgets are associated with major projects, for example, constructing a building, developing a new program or product line, etc. Cash budgets depict where cash will be spent over some near term, for example, over the next three months (this is very useful in order to know if you can afford bills that must be paid soon). Capital budgets are associated with operating some major asset, for example, a building, automobiles, furniture, computers, etc.

8.2.4 Situational Analysis

When developing strategies, analysis of the organisation and its environment as it is at the moment and how it may develop in the future, is important. The analysis has to be executed at an internal level as well as an external level to identify all opportunities and threats of the external environment as well as the strengths and weaknesses of the organisations. There are several factors to assess in the external situation analysis: 1. Markets (customers) 2. Competition 3. Technology 4. Supplier markets

5. Labor markets 6. The economy 7. The regulatory environment It is rare to find all seven of these factors having critical importance. It is also uncommon to find that the first two markets and competition are not of critical importance. Analysis of the external environment normally focuses on the customer. Management should be visionary in formulating customer strategy, and should do so by thinking about market environment shifts, how these could impact customer sets, and whether those customer sets are the ones the company wishes to serve. Analysis of the competitive environment is also performed, many times based on the framework suggested by Michael Porter.

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8.2.5 Goals, Objectives and Targets

Strategic planning is a very important business activity. It is also important in the public sector areas such as education. It is practiced widely informally and formally. Strategic planning and decision processes should end with objectives and a roadmap of ways to achieve those objectives. The following terms have been used in strategic planning: desired end states, plans, policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap and fail to achieve clarity. The most common of these concepts are specific, time bound statements of intended future results and general and continuing statements of intended future results, which most models refer to as either goals or objectives (sometimes interchangeably). One model of organising objectives uses hierarchies. The items listed above may be organised in a hierarchy of means and ends and numbered as follows: Top Rank Objective (TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the objective in a lower rank answers to the question "How?" and the objective in a higher rank answers to the question "Why?" The exception is the Top Rank Objective (TRO): there is no answer to the "Why?" question. That is how the TRO is defined. People typically have several goals at the same time. "Goal congruency" refers to how well the goals combine with each other. Does goal A appear compatible with goal B? Do they fit together to form a unified strategy? "Goal hierarchy" consists of the nesting of one or more goals within other goal(s). One approach recommends having short-term goals, medium-term goals, and long-term goals. In this model, one can expect to attain short-term goals fairly easily: they stand just slightly above one's reach. At the other extreme, long-term goals appear very difficult, almost impossible to attain. Strategic management jargon sometimes refers to "Big Hairy Audacious Goals" (BHAGs) in this context. Using one goal as a stepping-stone to the next involves goal sequencing. A person or group starts by attaining the easy short-term goals, then steps up to the medium-term, then to the long-term goals. Goal sequencing can create a "goal stairway". In an organisational setting, the organisation may co-ordinate goals so that they do not conflict with each other. The goals of one part of the organisation should mesh compatibly with those of other parts of the organisation.

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8.2.6 Mission Statements and Vision Statements

Organisations sometimes summarize goals and objectives into a mission statement and/or a vision statement. While the existence of a shared mission is extremely useful, many strategy specialists question the requirement for a written mission statement. However, there are many models of strategic planning that start with mission statements, so it is useful to examine them here.

A Mission statement tells you the fundamental purpose of the organisation. It concentrates on the present. It defines the customer and the critical processes. It informs you of the desired level of performance. A Vision statement outlines what the organisation wants to be. It concentrates on the future. It is a source of inspiration. It provides clear decision-making criteria.

Many people mistake vision statement for mission statement. The Vision describes a future identity while the Mission serves as an ongoing and time-independent guide. The Mission describes why it is important to achieve the Vision. A Mission statement defines the purpose or broader goal for being in existence or in the business and can remain the same for decades if crafted well. A Vision statement is more specific in terms of both the future state and the time frame. Vision describes what will be achieved if the organisation is successful. A mission statement can resemble a vision statement in a few companies, but that can be a grave mistake. It can confuse people. The vision statement can galvanize the people to achieve defined objectives, even if they are stretch objectives, provided it can be elucidated in SMART (Specific, Measurable, Achievable, Relevant and Time-bound) terms. A mission statement provides a path to realize the vision in line with its values. These statements have a direct bearing on the bottom line and success of the organisation. Which comes first? The mission statement or the vision statement? That depends. If you have a new start up business, new program or plan to re engineer your current services, then the vision will guide the mission statement and the rest of the strategic plan. If you have an established business where the mission is established, then many times, the mission guides the vision statement and the rest of the strategic plan. Either way, you need to know your fundamental purpose the mission, your current situation in terms of internal resources and capabilities (strengths and/or weaknesses) and external conditions (opportunities and/or threats), and where you want to go the vision for the future. It's important that you keep the end or desired result in sight from the start. Features of an effective vision statement include:

Clarity and lack of ambiguity Vivid and clear picture Description of a bright future Memorable and engaging wording Realistic aspirations Alignment with organisational values and culture.

To become really effective, an organisational vision statement must (the theory states) become assimilated into the organisation's culture. Leaders have the responsibility of communicating the vision regularly, creating narratives that illustrate the vision, acting as role-models by embodying the vision, creating short-term objectives

compatible with the vision, and encouraging others to craft their own personal vision compatible with the organisation's overall vision. In addition, mission statements need to conduct an internal assessment and an external assessment. The internal assessment should focus on how members inside the organisation interpret their mission statement. The external assessment which includes all of the businesses stakeholders is valuable since it offers a different perspective. These discrepancies between these two assessments can give insight on the organisation's mission statement effectiveness. Entrepreneurs and business managers are often so preoccupied with immediate issues that they lose sight of their ultimate objectives. That's why a business review or preparation of a strategic plan is a virtual necessity. This may not be a recipe for success, but without it a business is much more likely to fail. A sound plan should:

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Serve as a framework for decisions or for securing support/approval. Provide a basis for more detailed planning. Explain the business to others in order to inform, motivate & involve. Assist benchmarking & performance monitoring. Stimulate change and become building block for next plan.

For inspiration (and a few smiles), have a look at some of the quotations and examples of bad advice included in other pages! A strategic plan should not be confused with a business plan. The former is likely to be a (very) short document whereas a business plan is usually a much more substantial and detailed document. A strategic plan can provide the foundation and frame work for a business plan. A strategic plan is not the same thing as an operational plan. The former should be visionary, conceptual and directional in contrast to an operational plan which is likely to be shorter term, tactical, focused, implementable and measurable. As an example, compare the process of planning a vacation (where, when, duration, budget, who goes, how travel are all strategic issues) with the final preparations (tasks, deadlines, funding, weather, packing, transport and so on are all operational matters). A satisfactory strategic plan must be realistic and attainable so as to allow managers and entrepreneurs to think strategically and act operationally.

8.2.7 Basic Approach to Strategic Planning

A critical review of past performance by the owners and management of a business and the preparation of a plan beyond normal budgetary horizons require a certain attitude of mind and predisposition. Some essential points which should to be observed during the review and planning process include the following:

Relate to the medium term i.e. 2/4 years Be undertaken by owners/directors Focus on matters of strategic importance Be separated from day-to-day work Be realistic, detached and critical Distinguish between cause and effect Be reviewed periodically Be written down.

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As the precursor to developing a strategic plan, it is desirable to clearly identify the current status, objectives and strategies of an existing business or the latest thinking in respect of a new venture. Correctly defined, these can be used as the basis for a critical examination to probe existing or perceived Strengths, Weaknesses, Threats and Opportunities. This then leads to strategy development covering the following issues discussed in more detail below:

Vision Mission Values Objectives Strategies Goals Programs

As already mentioned above the strategic decisions and plans are made and implemented at top level management. Some examples of strategic decisions are warehouse location, distribution systems, building a new plant, mergers and acquisitions, new product planning. Compensation planning, quality assurance planning, Research and Development planning, forming new technology department, dropping a product from the existing product mix, social responsibility planning, etc. The type of decisions taken at this level is often highly unstructured in nature. Check Your Progress 1 Fill in the blanks: 1. Strategic planning is an organisation's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its and people. 2. Strategic planning is the formal consideration of an organisation's course. 3. Moral values are values that suggest overall in how people ought to act in the world. 4. Action planning is carefully laying out how the goals will be accomplished. 5. The Vision describes a future identity while the Mission serves as an ongoing and


Tactical Planning is the process of taking the strategic plan and breaking it down into specific, short-term actions and plans. The relative length of the planning horizon will vary from one market to another but typically the strategic plan will cover a period greater than three years while the tactical plan covers the period from today through to the end of year three. The content of any business plan will depend on why the plan is being produced. Some plans are for internal use only and act as a common reference during the preparation of budgets and appraisals. Some plans are basically sales documents aimed at persuading banks to provide loans and investors to provide equity.

The process of producing a useable tactical plan is not easy as some flexibility is required to allow response to unplanned events. There are a large variety of strategic planning models and organisations that provide strategic planning consulting. Some of these are useful and can be used a check lists to ensure completeness and as facilitators to ask the awkward questions that people would prefer to leave unanswered. It is important that the tactical plan should be checked to ensure it is aligned with the strategic plan and that all activities are aimed at moving closer to the goals defined in the strategic plan. It is very easy for the tactical plan to diverge at a tangent because of someone's interests or disagreement with the strategic plan. Tactical decisions and plans as already mentioned above are made at the middle level management. Some examples of strategic decisions are pricing a product, product improvement through value analysis, maintenance crew size determination, preventive maintenance policy, budget analysis, short-term forecasting, make or buy analysis, credit evaluation, plant layout, project scheduling, reward system design, negotiating, buying equipments etc. The type of decision taken at this level is mostly semi-structured in nature.

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Operations planning, also called "operations scheduling" or "operations management," is an important consideration for any business. While rather broad in focus, operations planning can be simply defined as the planning of optimum resource use. Effectiveness in operations scheduling is necessary for a company to be successful, regardless of its industry. Focus Operations scheduling focuses on everything from the optimal inventory levels to detailed scheduling (both of machines and people) to meet customer demands of quantity, quality and delivery. The breadth of its focus may seem overwhelming, yet operations scheduling is really nothing more than managing the resources of a company to their optimum potential. This should not be equated with maximum potential. Neither machines nor people can operate at maximum output for very long before quality suffers. Capacity Planning Capacity planning involves the estimation of what that maximum output is and a formulation of what the optimal level of production is. This type of focus is on the efficient use of resources and, at its most basic, looks to match production to customer demand without incurring shortage costs or storage costs. Capacity planning, although useful as a framework, is based largely on assumptions of customer demand and delivery, assumptions that may not always be accurate. We will further discuss the capacity planning under an independent head. Static Planning Static plans, such as capacity planning, are based on assumptions that the process can be defined in its entirety and demand can be estimated accurately. An example of a static plan is a clothing manufacturer. Styles and demand are estimated up to one year in advance; production has already completed a full run before those assumptions of demand are found to be correct or not. Although necessary for certain industries, such as clothing manufacturers, this risk should be acknowledged.

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Dynamic Planning By contrast, dynamic planning involves the assumption that demand will change, so little is produced until the orders are received. This approach, also called "just-intime," is extremely effective in environments where a high level of customization is required, such as a bakery or automobile company. Frequently, dynamic planning is used in tandem with static planning. This means that a small amount of product is produced based upon assumptions of customer demand and trends, but the plant is organised to quickly provide specialized products as requested. Production Planning Production planning encompasses the mixture of static and dynamic planning. Although highly related to operations planning, production planning is focused solely on production, not the overall operations. As a result, production planning produces specific plans that focus more on the capabilities of the plant rather than the demand. This mitigation of assumption is effective so long as a "rolling horizon" is used. A rolling horizon means that the production plan is implemented but adjusted periodically as customer demand and delivery fluctuate.


Aggregate planning is the process of developing, analysing, and maintaining a preliminary, approximate schedule of the overall operations of an organisation. The aggregate plan generally contains targeted sales forecasts, production levels, inventory levels, and customer backlogs. This schedule is intended to satisfy the demand forecast at a minimum cost. Properly done, aggregate planning should minimize the effects of shortsighted, day-to-day scheduling, in which small amounts of material may be ordered one week, with an accompanying layoff of workers, followed by ordering larger amounts and rehiring workers the next week. This longer-term perspective on resource use can help minimize short-term requirements changes with a resulting cost savings. In simple terms, aggregate planning is an attempt to balance capacity and demand in such a way that costs are minimized. The term "aggregate" is used because planning at this level includes all resources "in the aggregate;" for example, as a product line or family. Aggregate resources could be total number of workers, hours of machine time, or tons of raw materials. Aggregate units of output could include gallons, feet, pounds of output, as well as aggregate units appearing in service industries such as hours of service delivered, number of patients seen, etc. Aggregate planning does not distinguish among sizes, colors, features, and so forth. For example, with automobile manufacturing, aggregate planning would consider the total number of cars planned for not the individual models, colors, or options. When units of aggregation are difficult to determine (for example, when the variation in output is extreme) equivalent units are usually determined. These equivalent units could be based on value, cost, worker hours, or some similar measure. Aggregate planning is considered to be intermediate-term (as opposed to long- or short-term) in nature. Hence, most aggregate plans cover a period of three to 18 months. Aggregate plans serve as a foundation for future short-range type planning, such as production scheduling, sequencing, and loading. The Master Production Schedule (MPS) used in Material Requirements Planning (MRP) has been described as the aggregate plan "disaggregated." Steps taken to produce an aggregate plan begin with the determination of demand and the determination of current capacity. Capacity is expressed as total number of units per time period that can be produced (this requires that an average number of units be

computed since the total may include a product mix utilising distinctly different production times). Demand is expressed as total number of units needed. If the two are not in balance (equal), the firm must decide whether to increase or decrease capacity to meet demand or increase or decrease demand to meet capacity. In order to accomplish this, a number of options are available. Options for situations in which demand needs to be increased in order to match capacity include: 1. Pricing: Varying pricing to increase demand in periods when demand is less than peak. For example, matinee prices for movie theaters, off-season rates for hotels, weekend rates for telephone service, and pricing for items that experience seasonal demand. 2. Promotion: Advertising, direct marketing, and other forms of promotion are used to shift demand. 3. Back ordering: By postponing delivery on current orders demand is shifted to period when capacity is not fully utilised. This is really just a form of smoothing demand. Service industries are able to smooth demand by taking reservations or by making appointments in an attempt to avoid walk-in customers. Some refer to this as "partitioning" demand. 4. New demand creation: A new, but complementary demand is created for a product or service. When restaurant customers have to wait, they are frequently diverted into a complementary (but not complimentary) service, the bar. Other examples include the addition of video arcades within movie theaters, and the expansion of services at convenience stores. Options which can be used to increase or decrease capacity to match current demand include: 1. Hire/lay off: By hiring additional workers as needed or by laying off workers not currently required to meet demand, firms can maintain a balance between capacity and demand. 2. Overtime: By asking or requiring workers to work extra hours a day or an extra day per week, firms can create a temporary increase in capacity without the added expense of hiring additional workers. 3. Part-time or casual labor: By utilising temporary workers or casual labor (workers who are considered permanent but only work when needed, on an on-call basis, and typically without the benefits given to full-time workers). 4. Inventory: Finished-goods inventory can be built up in periods of slack demand and then used to fill demand during periods of high demand. In this way no new workers have to be hired, no temporary or casual labor is needed, and no overtime is incurred. 5. Subcontracting: Frequently firms choose to allow another manufacturer or service provider to provide the product or service to the subcontracting firm's customers. By subcontracting work to an alternative source, additional capacity is temporarily obtained. 6. Cross-training: Cross-trained employees may be able to perform tasks in several operations, creating some flexibility when scheduling capacity. 7. Other methods: While varying workforce size and utilisation, inventory buildup/backlogging, and subcontracting are well-known alternatives, there are other, more novel ways that find use in industry. Among these options are sharing

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employees with counter-cyclical companies and attempting to find interesting and meaningful projects for employees to do during slack times.

8.5.1 Aggregate Planning Strategies

There are two pure planning strategies available to the aggregate planner: a level strategy and a chase strategy. Firms may choose to utilise one of the pure strategies in isolation, or they may opt for a strategy that combines the two. Level Strategy A level strategy seeks to produce an aggregate plan that maintains a steady production rate and/or a steady employment level. In order to satisfy changes in customer demand, the firm must raise or lower inventory levels in anticipation of increased or decreased levels of forecast demand. The firm maintains a level workforce and a steady rate of output when demand is somewhat low. This allows the firm to establish higher inventory levels than are currently needed. As demand increases, the firm is able to continue a steady production rate/steady employment level, while allowing the inventory surplus to absorb the increased demand. A second alternative would be to use a backlog or backorder. A backorder is simply a promise to deliver the product at a later date when it is more readily available, usually when capacity begins to catch up with diminishing demand. In essence, the backorder is a device for moving demand from one period to another, preferably one in which demand is lower, thereby smoothing demand requirements over time. A level strategy allows a firm to maintain a constant level of output and still meet demand. This is desirable from an employee relations standpoint. Negative results of the level strategy would include the cost of excess inventory, subcontracting or overtime costs, and backorder costs, which typically are the cost of expediting orders and the loss of customer goodwill. Chase Strategy A chase strategy implies matching demand and capacity period by period. This could result in a considerable amount of hiring, firing or laying off of employees; insecure and unhappy employees; increased inventory carrying costs; problems with labor unions; and erratic utilisation of plant and equipment. It also implies a great deal of flexibility on the firm's part. The major advantage of a chase strategy is that it allows inventory to be held to the lowest level possible, and for some firms this is a considerable savings. Most firms embracing the just-in-time production concept utilise a chase strategy approach to aggregate planning. Most firms find it advantageous to utilise a combination of the level and chase strategy. A combination strategy (sometimes called a hybrid or mixed strategy) can be found to better meet organisational goals and policies and achieve lower costs than either of the pure strategies used independently.

8.5.2 Techniques for Aggregate Planning

Techniques for aggregate planning range from informal trial-and-error approaches, which usually utilise simple tables or graphs, to more formalized and advanced mathematical techniques. William Stevenson's textbook Production/Operations Management contains an informal but useful trial-and-error process for aggregate planning presented in outline form. This general procedure consists of the following steps: 1. Determine demand for each period.

2. Determine capacity for each period. This capacity should match demand, which means it may require the inclusion of overtime or subcontracting. 3. Identify company, departmental, or union policies that are pertinent. For example, maintaining a certain safety stock level, maintaining a reasonably stable workforce, backorder policies, overtime policies, inventory level policies, and other less explicit rules such as the nature of employment with the individual industry, the possibility of a bad image, and the loss of goodwill. 4. Determine unit costs for units produced. These costs typically include the basic production costs (fixed and variable costs as well as direct and indirect labor costs). Also included are the costs associated with making changes in capacity. Inventory holding costs must also be considered, as should storage, insurance, taxes, spoilage, and obsolescence costs. Finally, backorder costs must be computed. While difficult to measure, this generally includes expediting costs, loss of customer goodwill, and revenue loss from cancelled orders. 5. Develop alternative plans and compute the cost for each. 6. If satisfactory plans emerge, select the one that best satisfies objectives. Frequently, this is the plan with the least cost. Otherwise, return to step 5. An example of a completed informal aggregate plan can be seen in Table 8.1. This plan is an example of a plan determined utilising a level strategy. Notice that employment levels and output levels remain constant while inventory is allowed to build up in earlier periods only to be drawn back down in later periods as demand increases. Also, note that backorders are utilised in order to avoid overtime or subcontracting. The computed costs for the individual variables of the plan are as follows: Output costs: Regular time = Rs.5 per unit Overtime = Rs.8 per unit Subcontracted = Rs.12 per unit Other costs: Inventory carrying cost = Rs.3 per unit per period applied to average inventory Backorders = Rs.10 per unit per period Cost of aggregate plan utilising a level strategy: Output costs: Regular time = Rs.5 1,500 = Rs.7,500 Overtime = Rs.8 0 = 0 Subcontracted = Rs.10 0 = 0 Other costs: Inventory carrying cost = Rs.3 850 = Rs.2,400 Backorders = Rs.10 100 = Rs.1,000 Total cost = Rs.10,900 A second example, shown in Table 8.2, presents the same scenario as in Table 8.1 but demonstrates the use of a combination strategy (i.e., a combination of level and chase) to meet demand and seek to minimize costs.

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Table 8.1
Period Forecast Output Regular Overtime Subcontract Output forecast Inventory Beginning Ending Average Backlog Output: Regular time = Rs. 5 1500 = Rs. 7500 Overtime = Rs. 8 0 = 0 Subcontracted = Rs. 10 0 = 0 Inventory carrying cost = Rs. 3 850 = 2550 Backorders = Rs. 10 100 = 1000 Total Cost Rs. 11060 0 0 150 75 0 150 250 200 0 205 200 255 0 200 150 175 0 150 0 75 100 0 100 50 0 150 100 -50 -50 -250 100 250 250 250 250 250 250 1 100 2 150 3 300 4 300 5 500 6 150

Cost of aggregate plan utilising a level strategy:

For this example, let's assume that company policy prevents us from utilising backorders and limits our plan to no more than 50 units of overtime per period. Notice that the regular output level is constant, implying a level workforce, while overtime and subcontracting are used to meet demand on a period by period basis (chase strategy). One will notice that the cost of the combination plan is slightly lower than the cost of the level plan. Output costs: Regular time = Rs.5 1,200 = Rs.6,000 Overtime = Rs.8 100 = 800 Subcontracted = Rs.12 250 = 2,500 Other costs: Inventory carrying cost = Rs.3 325 = 975 Backorders = Rs.10 0 = 0 Total cost = Rs.10,275

8.5.3 Mathematical Approaches to Aggregate Planning

The following are some of the better known mathematical techniques that can be used in more complex aggregate planning applications. Linear Programming Linear programming is an optimisation 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 limitations known as constraints. A special type of linear programming known as the Transportation Model can be used to obtain aggregate plans that would allow balanced capacity and demand and the minimization of costs.

However, few real-world aggregate planning decisions are compatible with the linear assumptions of linear programming. Mixed-integer Programming For aggregate plans that are prepared on a product family basis, where the plan is essentially the summation 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. Linear Decision Rule Linear decision rule is another optimising technique. It seeks to minimize total production costs (labor, overtime, hiring/lay off, inventory carrying cost) using a set of cost-approximating functions (three of which are quadratic) to obtain a single quadratic equation. Then, by using calculus, two linear equations can be derived from the quadratic equation, one to be used to plan the output for each period and the other for planning the workforce for each period. Management Coefficients Model The management coefficients model, formulated by E.H. Bowman, is based on the suggestion that the production rate for any period would be set by this general decision rule:
Table 8.2
Period Forecast Output Regular Overtime Subcontract Output forecast Inventory Beginning Ending Average Backlog Output: Regular time = Rs. 5 1200 = Rs. 6000 Overtime = Rs. 8 100 = 800 Subcontracted = Rs. 12 250 = 3000 Inventory carrying cost = Rs. 3 325 = 975 Backorders = Rs. 10 0 = 0 Total Cost Rs. 10775 0 0 100 50 0 100 150 125 0 150 50 100 0 50 0 25 0 0 0 0 100 0 50 25 0 100 50 -100 -50 200 200 200 200 50 200 50 250 0 50 200 1 100 2 150 3 300 4 300 5 500 6 150

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P t = aW t-1 bI t -1 + cF t+1 + K where, P t = the production rate set for period t W t - 1 = the workforce in the previous period

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I t-1 F t+1

= the ending inventory for the previous period = the forecast of demand for the next period

a, b, c, and K are constants It then uses regression analysis to estimate the values of a, b, c, and K. The end result is a decision rule based on past managerial behavior without any explicit cost functions, the assumption being that managers know what is important, even if they cannot readily state explicit costs. Essentially, this method supplements the application of experienced judgment. Search Decision Rule The search decision rule methodology overcomes some of the limitations of the linear cost assumptions of linear programming. The search decision rule allows the user to state cost data inputs in very general terms. It requires that a computer program be constructed that will unambiguously evaluate any production plan's cost. It then searches among alternative plans for the one with the minimum cost. However, unlike linear programming, there is no assurance of optimality. Simulation A number of simulation models can be used for aggregate planning. By developing an aggregate plan within the environment of a simulation model, it can be tested under a variety of conditions to find acceptable plans for consideration. These models can also be incorporated into a decision support system, which can aid in planning and evaluating alternative control policies. These models can integrate the multiple conflicting objectives inherent in manufacturing strategy by using different quantitative measures of productivity, customer service, and flexibility. Functional Objective Search Approach The Functional Objective Search (FOS) system is a computerized aggregate planning system that incorporates a broad range of actual planning conditions. It is capable of realistic, low-cost operating schedules that provide options for attaining different planning goals. The system works by comparing the planning load with available capacity. After management has chosen its desired actions and associated planning objectives for specific load conditions, the system weights each planning goal to reflect the functional emphasis behind its achievement at a certain load condition. The computer then uses a computer search to output a plan that minimizes costs and meets delivery deadlines.

8.5.4 Aggregate Planning in Services

For manufacturing firms the luxury of building up inventories during periods of slack demand allows coverage of an anticipated time when demand will exceed capacity. Services cannot be stockpiled or inventoried so they do not have this option. Also, since services are considered "perishable," any capacity that goes unused is essentially wasted. An empty hotel room or an empty seat on a flight cannot be held and sold later, as can a manufactured item held in inventory. Service capacity can also be very difficult to measure. When capacity is dictated somewhat by machine capability, reasonably accurate measures of capacity are not extremely difficult to develop. However, services generally have variable processing requirements that make it difficult to establish a suitable measure of capacity. Historically, services are much more labor intensive than manufacturing, where labor averages 10 percent (or less) of total cost. This labor intensity can actually be an advantage because of the variety of service requirements an individual can handle.

This can provide quite a degree of flexibility that can make aggregate planning easier for services than manufacturing.

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Capacity planning has seen an increased emphasis due to the financial benefits of the efficient use of capacity plans within material requirements planning systems and other information systems. Insufficient capacity can quickly lead to deteriorating delivery performance, unnecessarily increase work-in-process, and frustrate sales personnel and those in manufacturing. However, excess capacity can be costly and unnecessary. The inability to properly manage capacity can be a barrier to the achievement of maximum firm performance. In addition, capacity is an important factor in the organisation's choice of technology. Capacity is usually assumed to mean the maximum rate at which a transformation system produces or processes inputs. Sometimes, this rate may actually be "all at once"as with the capacity of an airplane. A more usable definition of capacity would be the volume of output per elapsed time and the production capability of a facility. Capacity planning is the process used to determine how much capacity is needed (and when) in order to manufacture greater product or begin production of a new product. A number of factors can affect capacitynumber of workers, ability of workers, number of machines, waste, scrap, defects, errors, productivity, suppliers, government regulations, and preventive maintenance. Capacity planning is relevant in both the long term and the short-term. However, there are different issues at stake for each.

8.6.1 Long-term Capacity Planning

Over the long term, capacity planning relates primarily to strategic issues involving the firm's major production facilities. In addition, long-term capacity issues are interrelated with location decisions. Technology and transferability of the process to other products is also intertwined with long-term capacity planning. Long-term capacity planning may evolve when short-term changes in capacity are insufficient. For example, if the firm's addition of a third shift to its current two-shift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility (long-term alternatives).

8.6.2 Short-term Capacity Planning

In the short-term, capacity planning concerns issues of scheduling, labour shifts, and balancing resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only a few days but may run as long as six months. Alternatives for making short-term changes in capacity are fairly numerous and can even include the decision to not meet demand at all. The easiest and most commonlyused method to increase capacity in the short-term is working overtime. This is a flexible and inexpensive alternative. While the firm has to pay one and one half times the normal labor rate, it foregoes the expense of hiring, training, and paying additional benefits. When not used abusively, most workers appreciate the opportunity to earn extra wages. If overtime does not provide enough short-term capacity, other resourceincreasing alternatives are available. These include adding shifts, employing casual or part-time workers, the use of floating workers, leasing workers, and facilities subcontracting.

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Firms may also increase capacity by improving the use of their resources. The most common alternatives in this category are worker cross training and overlapping or staggering shifts. Most manufacturing firms inventory some output ahead of demand so that any need for a capacity change is absorbed by the inventory buffer. From a technical perspective, firms may initiate a process design intended to increase productivity at work stations. Manufacturers can also shift demand to avoid capacity requirement fluctuation by backlogging, queuing demand, or lengthening the firm's lead times. Service firms accomplish the same results through scheduling appointments and reservations. A more creative approach is to modify the output. Standardizing the output or offering complimentary services are examples. In services, one might allow customers to do some of the process work themselves (e.g., self-service gas stations and fast-food restaurants). Another alternativereducing qualityis an undesirable yet viable tactic. Finally, the firm may attempt to modify demand. Changing the price and promoting the product are common. Another alternative is to partition demand by initiating a yield or revenue management system. Utilities also report success in shifting demand by the use of "off-peak" pricing.

8.6.3 Capacity Planning Techniques

There are four procedures for capacity planning; Capacity Planning using Overall Factors (CPOF), capacity bills, resource profiles, and Capacity Requirements Planning (CRP). The first three are rough-cut approaches (involving analysis to identify potential bottlenecks) that can be used with or without Manufacturing Resource Planning (MRP) systems. CRP is used in conjunction with MRP systems. Capacity using overall factors is a simple, manual approach to capacity planning that is based on the master production schedule and production standards that convert required units of finished goods into historical loads on each work center. Bills of capacity is a procedure based on the MPS. Instead of using historical ratios, however, it utilises the bills of material and routing sheet (which shows the sequence or work centers required to manufacture the part, as well as the setup and run time). Capacity requirements can then be determined by multiplying the number of units required by the MPS by the time needed to produce each. Resource profiles are the same as bills of capacity, except lead times are included so that workloads fall into the correct periods. Capacity Requirements Planning (CRP) is only applicable in firms using MRP or MRP II. CRP uses the information from one of the previous rough-cut methods, plus MRP outputs on existing inventories and lot sizing. The result is a tabular load report for each work center or a graphical load profile for helping plan-production requirements. This will indicate where capacity is inadequate or idle, allowing for imbalances to be corrected by shifts in personnel or equipment or the use of overtime or added shifts. Finite capacity scheduling is an extension of CRP that simulates job order stopping and starting to produce a detailed schedule that provides a set of start and finish dates for each operation at each work center. A failure to understand the critical nature of managing capacity can lead to chaos and serious customer service problems. If there is a mismatch between available and required capacity, adjustments should be made. However, it should be noted that firms cannot have perfectly-balanced material and capacity plans that easily accommodate emergency orders. If flexibility is the firm's competitive priority, excess capacity would be appropriate.

Check Your Progress 2 Fill in the blanks: 1. Tactical Planning is the process of taking the strategic plan and breaking it down into specific, short-term ..and plans. 2. Operations scheduling focuses on everything from the optimal inventory levels to detailed scheduling (both of machines and people) to meet customer demands of quantity, quality and .. 3. Capacity planning involves the estimation of what that maximum output is and a formulation of what the level of production is. 4. Dynamic planning involves the assumption that demand will change, so little is produced until the . are received. 5. Aggregate planning is the process of developing, analysing, and maintaining a preliminary, approximate schedule of the overall .. of an organisation.

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Production planning is the function of establishing an overall level of output, called the production plan. The process also includes any other activities needed to satisfy current planned levels of sales, while meeting the firm's general objectives regarding profit, productivity, lead times, and customer satisfaction, as expressed in the overall business plan. The managerial objective of production planning is to develop an integrated game plan where the operations portion is the production plan. This production plan, then, should link the firm's strategic goals to operations (the production function) as well as coordinating operations with sales objectives, resource availability, and financial budgets. The production-planning process requires the comparison of sales requirements and production capabilities and the inclusion of budgets, pro forma financial statements, and supporting plans for materials and workforce requirements, as well as the production plan itself. A primary purpose of the production plan is to establish production rates that will achieve management's objective of satisfying customer demand. Demand satisfaction could be accomplished through the maintaining, raising, or lowering of inventories or backlogs, while keeping the workforce relatively stable. If the firm has implemented a just-in-time philosophy, the firm would utilise a chase strategy, which would mean satisfying customer demand while keeping inventories at a minimum level. The term production planning is really too limiting since the intent is not to purely produce a plan for the operations function. Because the plan affects many firm functions, it is normally prepared with information from marketing and coordinated with the functions of manufacturing, engineering, finance, materials, and so on. Another term, sales and operations planning, has recently come into use, more accurately representing the concern with coordinating several critical activities within the firm. Production planning establishes the basic objectives for work in each of the major functions. It should be based on the best tradeoffs for the firm as a whole, weighing sales and marketing objectives, manufacturing's cost, scheduling and inventory objectives, and the firm's financial objectives. All these must be integrated with the strategic view of where the company wants to go.

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The production-planning process typically begins with an updated sales forecast covering the next 6 to 18 months. Any desired increase or decrease in inventory or backlog levels can be added or subtracted, resulting in the production plan. However, the production plan is not a forecast of demand. It is planned production, stated on an aggregate basis. An effective production-planning process will typically utilise explicit time fences for when the aggregate plan can be changed (increased or decreased). Also, there may be constraints on the degree of change (amount of increase or decrease). The production plan also provides direct communication and consistent dialogue between the operations function and upper management, as well as between operations and the firm's other functions. As such, the production plan must necessarily be stated in terms that are meaningful to all within the firm, not just the operations executive. Some firms state the production plan as the dollar value of total input (monthly, quarterly, etc.). Other firms may break the total output down by individual factories or major product lines. Still other firms state the plan in terms of total units for each product line. The key here is that the plan be stated in some homogeneous unit, commonly understood by all, that is also consistent with that used in other plans.

Capacity: For a process or activity, the maximum throughput that can be sustained. Acquisition: Typically the purchase of a company or a significant business asset. In the defense industry, acquisition means the purchase of products and systems. Backlog: The amount of actual demand, orders or contracts that are in the pipeline for future sales. Can be expressed in units of production time or dollars. Aggregate planning: A term used to mean medium-range operations planning. A first rough-cut approximation at determining how existing resources of people and facilities should be used to meet projected demand.

Check Your Progress: Answers

CYP 1 1. capital 2. future 3. priorities 4. strategic 5. time-independent CYP 2 1. actions 2. delivery 3. optimal 4. orders 5. operations


Chase, R. B., Aquilano, N. J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Chopra, S. and Meindl, P., Supply Chain Management, Prentice Hall, 2001. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Meredith, J. R. and Shafer, S. M., Operations Management for MBAs, J. Wiley, 2002. Slack, N. and Lewis, M., Operations Strategy, Prentice Hall, 2003. Slack, N. et al., Operations Management, Prentice Hall, 2001. Taylor, Bernard W., Introduction to Management Science, Prentice Hall, 1996. Tersine, Richard J., Production/Operations Management, North-Holland, 1985. Vollmann, T. E., Berry W. L., and Whybark, D. C., Manufacturing Planning and Control Systems, Richard D. Irwin, Inc.. Waters, C.D.J., An Introduction to Operations Management, Addison-Wesly, 1991. Waters, D., A practical introduction to management science, 2nd, Addison-Wesly, 1998.

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1. What is strategic planning and how is it useful in making production and operations decisions? 2. What do you mean by tactical planning? 3. Explain the steps in aggregate planning? 4. What do you mean by capacity planning? Explain the fundamentals of long term and short-term capacity planning. 5. Explain the techniques of capacity planning techniques.

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STRUCTURE 9.0 9.1 9.2 9.3 9.4 9.5 Objectives Introduction Typology of Products Product Lifecycle Technology Lifecycle 9.4.1 9.5.1 9.5.2 9.5.3 9.5.4 9.6 9.6.1 9.6.2 9.6.3 9.6.4 9.6.5 9.6.6 9.7 9.7.1 9.7.2 9.7.3 9.7.4 9.8 9.9 9.10 9.11 9.12 9.13 Product Lifecycle and Technology Lifecycle Product Development Detailed Engineering Design Physical Evaluation Product and Process Development Fields of Use History Software Providers Today Capabilities Software Technologies Hardware and OS Technologies Building Blocks of Expert Systems Applications of Expert Systems Benefits to End Users Expert Systems Business Product Development Process

Applications of CAD

Expert System

Standardisation Group Technology (GT) Product Research and Development Let us Sum up Glossary Suggested Readings Questions

After studying this lesson, you should be able to:

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Differentiate between the typology of products: goods, services and contracts Explain the concept of product lifecycle and technology lifecycle in the development of new products Describe the World Bank model on the organisation's technological capabilities Explain the different stages of the product development cycle Discuss the factors that one needs to look into while determining the product architecture Explain the concepts involved in Design for Manufacturability (DFM) and Value Analysis/Value Engineering

Product decisions often make or break companies. Studies indicate that nearly two out of three new products fail after launch. In addition, companies in many sectors are under continual pressure to speed up the pace of product developmenteven to adapt products that are still in the pipeline to the demands of a constantly changing marketplace. This lesson will discuss product design and process selection, which are crucial areas in operations management.


Operations Management is fundamental to an organisation's achievement of its mission and competitive goals. It is involved in creating value in the products. Products can be tangible or intangible. Tangible products are called 'goods', while intangible products include 'services' and 'contracts'. These are collectively referred to as products. Effective Operations Management is critical for organisations that provide goods as well as to organisations that provide services and contracts. A firm's success or failure can depend on how it manages operations on a daily basis. Goods: are tangible items that are usually produced in one location and purchased in another. They can be transferred from one place to another and stored for purchase by a consumer at a later time. Examples of goods are products such as cars, washing machines, televisions, packaged foods, etc. Services: are intangible products that are consumed as they are created. Services now dominate the economies of most industrialized nations. Service organisations include hotels, hospitals, law offices, educational institutions, and public utilities. They provide such services as a restful and satisfying vacation, responsive health care, legal defence, knowledge enrichment, and safe drinking water. Services also include 'back-office' support for internal customers of an organisation, such as IT support, training, and legal services. Services take place in direct contact between a customer and representatives of the service function. Customer contact is a key characteristic of services. A high quality of customer contact is characteristic of a good service organisation. This is vital to retain current customers as well as for attracting new ones. Most service organisations, though they seldom carry finished inventory, do have supporting inventory. Hospitals keep drugs,

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surgical supplies, emergency supplies and equipment spares; banks have forms, cheque books, and other supplies. Contracts: are business exchanges in which neither services nor goods are transferred; instead, there is an implicit understanding between the customer and the provider that goods and services will be provided on an 'as needed' basis. With a contract, the customer pays a fee and is then entitled to manufactured goods or services. Many goods and services are now evolving into contracts. Historically, manufacturing organisations have operated tertiary and often secondary activities on contracts. Today, many businesses are increasingly moving to contractbased transactions. For example, Internet and Applications Service Providers (ASPs); security organisations; maintenance, health care and many other businesses design their operations based on contracts. Service and contracts require more attention and better planning than manufacturing. A manufacturing defect can always be reworked before despatch. Service, however, occurs in the presence of the service provider, making it difficult to manage capacity and control quality since inventory cannot be stored and inspected prior to the service encounter. Contractual transactions can be even more complicated. The complication arises because it is difficult to enhance capacity overnight and all customers may choose to exercise their options at the same time. Many recent thinkers have suggested that most manufacturing firms are better off thinking of their output in terms of the service bundle they provide to the customer. For example, Mercedes has announced that it is developing a system that will connect the car's software via the Internet to a customer assistance center. This system will be able to detect, diagnose and repair the problem. Another example is Xerox. It has 'redefined' its product as facilitating communications rather than just selling copy machines. In its strategy to be the 'Document Company', Xerox now offers products that can copy handwritten documents, convert them to electronic form, and e-mail them. Such products have allowed Xerox to increase the services related to document management in its output bundle. This type of transition creates significant challenges for Operations Management. Today, organisations are increasingly trying to grow their presence in the market and earn a competitive edge over competition by mixing goods, services and contracts. This brings in a number of permutations and combination, significantly changing the landscape of operations.
Table 9.1: Comparison among Goods, Services and Contracts
Operations Factors Value Goods Value is provided by physical processing during manufacturing. Services Value is provided by availability of the service, leading to sensory or psychological satisfaction. Services are intangible; operational characteristics are difficult to specify; and services cannot be inspected for quality prior to consumption. Contracts Value is provided by the promise (guarantee) of availability of a product or service when the contract is exercised. Intangibility is often accompanied by an absence of customer presence for long periods of time.


Goods are tangible; specifications are easily defined; and goods can be inspected for quality.


Process design

Manufacturing can be isolated from the customer and designed for efficiency. Products can be stored for later consumption

The service process must be designed to occur in the presence of the customer. Services are consumed as they are created.

The process must be designed to accommodate batches and surges in demand. Many operations can be conducted offline, or not in the presence of the customer. Capacity must be flexible to accommodate periods of low and high demand. Quality is perceived only when the option is exercised, and may be influenced by time and availability. Centralization and economies of scale are more likely.

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Manufacturing capacity can be designed for average demand. Manufacturing processes can achieve a high level of precision and repeatability. Facilities can be located to minimize operations and transportation costs.

Capacity must be designed for maximum demand.


Consistency of human performance is more difficult to maintain; customer perceptions are subjective Service facilities must be located near the customer.


Table 9.1 summarizes some key differences and operational consequences among goods, services, and contracts across several factors that shape operational decisions in organisations.


The product lifecycle model is a simple representation of the cumulative impact of changes in the business environment on the life of a manufactured product. It is an important management tool to understand the product and its finite lifespan and develop the understanding of the situation so that strategies for survival and growth can be effectively advanced. A product category goes through four stages of development. Stage 1: Product Introduction Stage During this stage, the product is new to the market and the consumers have to be motivated to try and accept the product. This is a stage when the product volumes are low and profit is normally down. Stage 2: Growth Stage As the product finds market acceptance, it goes into the growth stage. During this period, there is an exponential growth of the volumes accepted by the market. New competitive products are introduced and there is a significant change in the product features due to continuous improvements. Stage 3: Maturity Stage The third stage or the maturity stage sees the product as an established product and the demand and quality of the product does not undergo much change. However, this is the stage of cut-throat competition, with competitors competing on the basis of providing value to the product.

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Stage 4 In this stage, new product categories are introduced into the market that provide better value to the consumer for that particular need or there is a change in the needs of the consumer.

Figure 9.1: Product Lifecycle

A number of factors impact the product category when it is introduced. Factors that impact the introduction stage of consumer products positively are: 1. Relative Advantage 2. Compatibility (values and experience of adopters) 3. Divisibility (ability to try on a limited basis) 4. Communicability, i.e., ability to describe advantages. Factors that impinge negatively are: 1. Complexity 2. Perceived Risk In the case of industrial products, though the principles involved are similar, the mechanism by which it works is different. It has been found that the rate of diffusion in industrial markets, during the 'introduction stage', is related to the competitive intensity of the supplier industry, the reputation of the supplier industry, and the vertical co-ordination between supplier and adopter industries.


Statistical regularities show that the product lifecycle can be used to forecast the way the product attributes, demand, production and competition will change as the product matures. A related and more useful concept is the technological lifecycle. This links market growth and technology.

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Figure 9.2: Technology Lifecycle

It has been seen that technological change generally follows the course described by the 'technology lifecycle' graph. By plotting the market volume over time for any industry, one can identify the changes in the industry. This is called technological aging of the industry. This exercise can be carried out both for the product as well as the process and has been depicted in Figure 9.2. When a new industry based on new technology is begun, there will come a point in time that one can mark as the inception point of the technology. Lets us discuss the various phases of technological aging/lifecycle by taking up the example of the automobile industry. In 1887, Gottlieb Daimler manufactured the first gasoline-powered automobile. Phase I - Technology Development

Then the first technological phase begins with the rapid development of the new technology. This phase is called the Technology Development phase. In the case of the automobile, it would be from 1887 to 1902, as experiments with steam, electric and gasoline powered vehicles were conducted. This is an exciting time, because product improvements continue and improved processes for producing cheaper, better products are innovated. This is the time of eliminating weak competitors. For example, in 1909 there were 69 auto-manufacturing firms in USA. Only half the firms survived by 1916.

Phase II - Applications Launch

This phase is the creative period of product experimentation. This lasts till the time a standard design has been worked out and rapid growth of the market begins. This occurred with Ford's Model T design. During this phase, failure rate of firms in the industry continues to be high, but successful firms grow. Corporate R&D becomes important to maintain incremental model improvements. For example, by 1923 only eight major American firms had remained in the automobile industry, capturing 99 per cent of the market.

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Phase III - Applications Growth

During this phase there is a rapid growth in the penetration of technology into markets. After some time, however, the innovation rate slows down and the market peaks; no new markets are created.

Phase IV - Mature Technology

In this phase, process innovations are dominant. Very few firms survive, of the original lot. Competition is primarily on price and segmented market lines. Production is specialized and efficient. Economies of scale and marketing dominance continue to whittle down competitors, to the final few. For example, by 1965, only General Motors, Ford, Chrysler, and American Motors had survived in the American automobile industry.

A mature industry can continue indefinitely. Competitors with more abundant resources, cheaper labour or subsidized capital can obtain a competitive advantage. When market saturation is taking place, it is important to continue technological innovation to extend the product life and delay market saturation. Innovation succeeds in: (a) Creating succeeding performance, generation products with significantly improved

(b) Creating multiple applications, (c) Lowering of price to facilitate ownership of multiple copies of the product for convenience. Phase V Finally, competing or substituting technologies overrun the mature technology and the last phase is reached. At this stage, the industry has run out of significant innovation. Changes in demography, replacement and foreign markets now primarily determine the market size.

9.4.1 Product Lifecycle and Technology Lifecycle

The length and pattern of the Product Lifecycle can vary significantly. There is no reason to believe that all products inevitably pass through all four stages, e.g., fad items, consumer resistance, and introduction of superior new product. Though the Product Lifecycle diagram has been designed for product categories, it has limited use to management, as it may not reflect the life of their 'Product Form', or 'Brand'. The reliability and the interpretation of the Product Lifecycle for analysis of product brands is a serious limitation of this instrument. However, it can be used for 'product forms' quite successfully. Examples of product form and product brand are:

Product Form, e.g., Filter Cigarettes. Product Brand, e.g., Classic Mild.

The Product Lifecycle concept is extremely useful. It shows how customers tend to be much more knowledgeable about the product class as the lifecycle progresses; product performance typically improves over the cycle and the relative differences in brands competing for the same segment decline as successful ideas are copied. This leads to

increased competition based on price, image, service, durability, reliability, etc., which results in increased value to the consumer. Simultaneously, with the technological changes in the lifecycle of the product, changes also take place in the process. The changes are slow at first during the period that the product volumes increase, but are maximized during the phase that the product reaches the maturity stage. In other words, the growth stage of the process technology normally coincides with the maturity stage of the product. The growth stage of the technological process is between the lines AA and BB in Figure 9.2, which coincides with the maturity stage of the product technology. Technology improvements take place until such time that the process becomes so efficient that any marginal increase in the parameters of the process would not provide the required returns. As improvements continue, the investment in small improvements becomes so large that they are not economically justified. This reflects the downturn in the process technology curve. The fact that the rates of technological innovation affect the competitive conditions of an industry means that management should plan different strategies for different phases of the technology lifecycle. For example, it is suggested that in times of changing technology, management should use the technology lifecycle model to arrive at decisions regarding the technologies, new products, etc., that it requires for its future growth and survival. A general strategy of phasing new products in and phasing old products out sustains the existing process capacity. However, transitions are not smooth rarely does capacity remain constant. This is especially true as technologies to process different products are not identical. During the growth stage, the market grows with the increase in the number of first-time users. Added sales are from repeat purchases and replacement purchases. Initially, the growth is exponential and then it reaches a linear rate of rapid advance. During the maturity phase, repeat purchases and replacement purchases form the bulk of the volume. The decline stage reflects:

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Change in preference Substitution by another product Change in demographic factors.

The growth period can be prolonged through the introduction of innovations either in the product or the process. The product lifecycle and technology lifecycle is exemplified in the case of Maruti Udyog Limited. Maruti Udyog launched Maruti 800 and also two utility vehicles, Omni and Gypsy in 1984-85. In 1984-85, the production was 30,000. The volume of production increased dramatically, reaching 1,20,000 vehicles in 1988. In 1998, in the car market, which was 4,01,002 units, the Maruti 800 along with the Omni accounted for 75 per cent of unit sales. Maruti Udyog production volume had reached 3,00,000 units. These models had become market leaders in their respective segments with the possible exception of the Gypsy. However, both the Maruti 800 and the Omni started losing their sheen in the 1990s as newer players emerged in the market. To counter this and to exploit the changing market conditions, Maruti Udyog introduced the Esteem in 1993. This was motivated due to the fact that the entry-level segment had ceased to be the center of action due to easy car finance availability. The lure of Maruti 800 users to try out new cars that were more comfortable and luxurious had become apparent. Though more expensive, these automobiles had become affordable with the new philosophy of credit expansion by the banking sector.

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By the mid-nineties, the Maruti 800 had reached the maturity phase. To promote growth, Maruti Udyog reduced the prices of Maruti 800 and Zen by about Rs. 24,000 and Rs. 51,000 respectively in December 1998. This resulted in a drop of Rs. 300 crore in net profit for the year 1998-99. The move was an attempt to 'redefine the price-value equation.' This was designed to create an incremental growth of the model. Maruti Udyog adopted a two-pronged strategy,

It introduced new models like Baleno, WagonR and Alto; It decided to increase the number of variants rapidly, offering an upgraded variant with every increase of Rs 25,000. Maruti Udyog also actively increased its promotion of the 800 in semi-urban and rural areas, to compensate for the declining urban sales.

Faced with competition, Maruti Udyog has been competing on price. This has had its impact on its profitability. In 1993-04, its turnover was Rs. 2,792 crore and its pre-tax profit Rs. 136 crore. In 2002-03, while its turnover had risen to Rs. 9,063 crore, its pre-tax profit had grown to just Rs. 282 crore. Between 1998 and 2002, its net profit margins slipped from 10 per cent to 1.30 per cent before rising to 3 per cent. The product pyramid base of Maruti Udyog is occupied by low-price, high-volume products like the Maruti 800 and Omni, where the margins are slim. The apex of the pyramid is occupied by high-price, low-volume products such as the Maruti Esteem VX. Although profits are concentrated near the top, the base has played a crucial role. It has created an entry-barrier for competitors, and insulated the profitable area near the top from competition. However, it needs to rethink its strategy as the Maruti 800 has now almost reached the end of the maturity phase. The technology lifecycle concept is an effective tool that provides management the necessary indications on the following:

Which technologies to develop, How to manage the transition from one technology to another, How to prepare the firm for technological change.

An industry is innovative in the beginning and middle phases of its technological history but un-innovative in the last phases. In the last phases, new technology creates new products and services hence new business opportunities. Check Your Progress 1 Fill in the blanks: 1. A firm's success or failure can depend on how it manages on a daily basis. 2. Customer contact is a key characteristic of . 3. Service and contracts require more attention and better planning than . 4. The product lifecycle model is a simple representation of the cumulative impact of changes in the business environment on the life of a . product. 5. Statistical regularities show that the product lifecycle can be used to forecast the way the product attributes, demand, production and . will change as the product matures.


Without products, there would be no customers. Without customers, there would be no revenue. Developing a new product is a major activity. Thomas Alva Edison, with as many as 1,300 inventions and 1,100 patents to his credit, said about the product development process, "Genius is 1 per cent inspiration and 99 per cent perspiration." Product development requires more of perspiration and less of genius to be successful. Leaders today still use four key components of Edison's product development model:

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Lofty Goals: For example, the ability of the bulb to stay lit for long periods of time. Right to Left Process: Start with customers and move backward through operations to design. Structure: Have experimentation. 'clear targets' instead of daydreaming and aimless

Fluidity: Be driven by talent, not hierarchy.

Many designers do not understand these issues and, as a result, often propose products that cannot be produced or service designs that cannot be delivered because of inadequate technology or operational capabilities. The approach to product development has to start with an evaluation of the capabilities and resources of the organisation. The new product strategy of the organisation is decided on the basis of organisational capabilities and resources. Organisations should develop explicit product-development strategies to co-ordinate all of the major business processes that contribute to product innovation. The need to be fast when competing in high clock-speed industries makes this an absolute necessity.

9.5.1 Product Development

With a new regime of patents and legal protection against copying ideas, designs, or productsthere have been changes in the approach to new product development. Organisations are more concerned about being the first to develop an idea or design a product so that they can protect their markets. Being able to design, develop, and introduce a new product quickly gives a firm 'fast to market' capabilities. There are two types of fast to market activities. 1. Fast to customisation: The first activity is being able to develop products to meet the specific needs of a customer. This is called fast to customisation. Producing such a product with the participation of the customer, may give a firm a competitive advantage. 2. Fast to design: The second type relates to developing products to meet the needs of a cluster of customers. Fast to design product innovation can be used in MTS, ATO, and MTO market orientations. For example, Nokia introduced cell phones that incorporate cameras. Seeing that there was a cluster of customers for this product all manufacturers now offer this product. Nokia has a first mover's lead in this segment of the market.

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Figure 9.3: New Product Development Process

In other situations, being fast to market may not be less important. It depends on how quickly a product's design becomes stale. Mercedes-Benz traditionally had customers that valued good design more than a model a year. For some products, being fast to market may not be in your firm's best interest. A creative advertising executive always makes his clients wait a week or two, even though he thought of the copy for the ad in a day. Likewise, if a gourmet restaurant that serves your meal five minutes after you order, you know that they must be using a microwave oven. If they make you wait for 30 minutes, then the same judgment cannot be made. Another important type of product innovation involves refining or rejuvenating products within the existing product line. For some companies, this is an annual event, as is the case with the automotive industry. Major redesigns in the automobile industry can take years and costs billions. This becomes a Catch-22 situation. Since it costs so much to develop new models, auto

companies often try to sell as many copies of the new product as possible, even if it takes four or five years. But the older a car's design gets, the greater the chance that it will lose market share to competitors with fresher models. And worse yet, if it takes five years to develop a new model and a company wants to sell that model for another five years, then it must project what the customer's preferences are likely to be ten years from now. This is not only a tremendous challenge, it requires a leap of faith to take it to its logical conclusion. The product-development process and its identifiable stages are shown in Figure 9.3. Product development includes a number of processes. The steps that follow are given below: Clarification of the Task The search for ideas starts from and is based on the 'new product' strategy. The ideas that fit in with the strategy have to be identified. The customer needs have to be determined. This should provide pointers towards the functional requirements of the product. Simultaneously, the organisation should be evaluating its resources and time schedules to identify and specify constraints. Based on this exercise, the general specifications of the product or service are drawn up. The product idea must demonstrate that it fulfills some consumer need, and that existing products do not already fulfill. Concept Generation The specifications are the basis for concept generation. At the concept level, the organisation should identify essential problems and propose the function structure of the product or service. This should generate proposals and solution principles that are combined and refined into concept variants. The concept should be evaluated against technical and economic data. If the results are found satisfactory, the concept has reached the stage for screening. Screening is a management process. Each idea is analysed and its risks and potential are scrutinized, both technically and business wise. Those having potential are identified. Most of the ideas are killed or die at the screening level. The business analysis includes preliminary market analysis, creating alternative concepts for the product, clarifying operational requirements, establishing design criteria and their priorities, and estimating logistic requirements for producing, distributing and maintaining the product in the market. Embodiment Design After they have cleared screening, the ideas are developed in their preliminary configuration and an introductory analysis is conducted. The best preliminary design(s) are:

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selected and refined. evaluated against technical and economic criteria. The preliminary design(s) are refined and the configuration completed.

Detailed analysis is conducted of refined design(s). The design is reviewed for errors, manufacturability and cost. The preliminary design and alternate designs are evaluated according to critical parameters to determine the design support that will be required including analytical testing, experimentation, and physical modeling. Based on the results and trade-offs, the conceptual design is firmed up.

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This is followed by:

Preparation of preliminary parts list, and Fabrication design for the basic elements of the conceptual design.

This completes the stage of firming up the definitive design of the new product or service.

9.5.2 Detailed Engineering Design

This stage involves engineering a detailed definition of the product, including its components, materials, sizes, shapes, etc. The product design is:

analyzed, experimented upon, and data collected to determine if the design meets the design objectives.

Trade-offs are inevitable in the optimal design, since objectives often conflict with each other. The final design, whether computer generated or compiled manually, includes drawings, specifications and other documentations necessary to form the basis of product and process development. GM and IBM began work in the sixties to develop a system of Computer Aided Design (CAD); today, it has become a commonly used tool. Originally, CAD was envisaged as a sophisticated drafting system. Today, final analysis and verification is conducted through computer analysis and simulations. Complete and detailed drawings and production documents are then generated. Prototypes are used to establish the detailed engineering design before the details are finalized. In some cases, especially in defence related products or products whose unit value is extremely high, prototypes are often virtual prototypes.

9.5.3 Physical Evaluation

Concurrently with the development of detailed engineering design, physical evaluation is carried out. This includes:

Fabricating a working prototype of the product. Testing and evaluation to confirm that it represents the solution.

Very often, the duration of this stage can be reduced if certain tasks are done simultaneously by the organisation fully utilising the benefits of cross-functional thinking. Computer simulations often precede physical evaluation. In currently available CAD systems, the designer can view the part in any orientation, any scale or any cross section. The parts and the product can be seen in the form of three dimensional images, rotated, moved, and the response to different stress patterns seen visually on the computer screen, without building a physical prototype.


Product A in-market Product design time Develop Product A reduced by CAD Design and Build Ramp-Up Manufacturing system System Lead Time

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Produce A for 10-20 years

Develop Product C GOAL Develop Product B Product A in-market Product A Produce A&B Reconfiguration Produce B&C

Develop Product A

Figure 9.4: Product Design Cycle

9.5.4 Product and Process Development

Once the detailed engineering is under way, the detailed product design provides the operations team the basis for preparing plans for:

Materials acquisitions, and Production.

This involves suppliers also. Suppliers are playing an increasingly important role with the increase in outsourcing. Operations activities involve:

Planning for production and control systems, Computer information systems, and Human resource systems.


Computer-aided design (CAD) is the use of a wide range of computer-based tools that assist engineers, architects and other design professionals in their design activities. It is the main geometry authoring tool within the Product Lifecycle Management process and involves both software and sometimes special-purpose hardware. Current packages range from 2D vector based drafting systems to 3D parametric surface and solid design modelers. CAD is sometimes translated as "computer-assisted", "computer-aided drafting", or a similar phrase. Related acronyms are CADD, which stands for "computer-aided design and drafting", CAID for Computer-aided Industrial Design and CAAD, for "computer-aided architectural design". All these terms are essentially synonymous, but there are some subtle differences in meaning and application.

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Figure 9.5: CAD Design and Uses

CAD is used to design and develop products, these can be goods used by end consumers or intermediate goods used in other products. CAD is also extensively used in the design of tools and machinery used in the manufacture of components. CAD is used throughout the engineering process from conceptual design and layout, through detailed engineering and analysis of components to definition of manufacturing methods.

9.6.1 Fields of Use

AEC (Architecture Engineering and Construction) Building engineering MCAD Mechanical

Automotive Aerospace Consumer Goods Machinery Ship Building

ECAD Electronic and Electrical Manufacturing process planning In designing digital circuits

Architecture The software package may produce its results in several formats, but typically provides a graphically-based result which is then able to be used to create concept sketches for assessment and approval, and eventually working drawings. An example would be a structural design package used to assess the integrity of a steel-framed building by performing all the calculations necessary to determine the size and strength of the components, and the effect of such things as wind-loading. The output

commonly is a schedule of materials and some basic sketches which can be transferred to a computer-aided drafting package for final production of construction working drawings. Computer-aided drafting, however, commonly refers to the actual technical drawing component of the project, using a computer rather than a traditional drawing board. The input into this aspect of the design process may come from specialized calculation packages, from pre-existing component drawings, from graphical images such as maps, from photos and other media, or simply from hand-drawn sketches done by the designer. The operator's task is to use the CAD software to meld all the relevant components together to produce drawings and specifications which can then be used to estimate quantities of materials, determine the cost of the project and ultimately provide the detailed drawings necessary to build it. The spectrum of architectural and engineering projects commonly documented with computer-aided drafting is broad, and includes architectural, mechanical, electrical, structural, hydraulic, interior design, civil construction. CAD may also provide input to other forms of design communication such as 3D visualizations, model construction, animated fly-throughs, to name a few. Computer-aided drafting software is also a basic tool used in other disciplines related to Architecture, for example Civil Engineering, for site design, for instance roads, grading and drainage, in mapping and cartography, in the production of plans and sketches for a variety of other purposes (such surveyor's plans and legal descriptions of land), and as the input format to geographic and facilities information systems. Additionally, landscape architecture and interior design is often also commonly performed using CAD software. Mechanical CAD is used in a variety of ways within engineering companies. At its simplest level it is a 2D Wireframe package that is used to create engineering drawings. This has however over the last 20 years been overtaken by 3D parametric feature based modeling. Component forms are created either using Freeform surface modeling or solid modeling or a hybrid of the two. These individual components are then assembled into a 3D representation of the final product; this is called bottom-up design. These assembly models can be used to perform analysis to assess if the components can be assembled and fit together as well as for simulating the dynamics of the product. FEA can also be performed on the components and assemblies to assess their strength. Over the last few years, methods and technology have been developed to do top-down design within CAD. This involves starting with a layout diagram of the product; which is broken down into sub-systems with ever increasing detail until the level of single components is reached; geometry in each level being associative with the level above. Detailed design of the individual components is then completed before building up the final product assembly. In general the 3D models are used to generate a 2D technical drawing, this has, however, been slowly replaced by direct transfer of the data to CAM, CNC , Rapid prototyping and Product visualization systems, non geometric information being communicated to down-stream processes with the aid of PMI. Electrical and Electronic Electronic Design Automation (EDA) includes PCB design, intelligent wiring diagrams (routing) and component connection management.

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Manufacturing Process Planning 2D and 3D CAD systems are sometimes used for graphically represented of plant layout, usually with the aid of specific machine geometry libraries and layout tools. Although this is often done with specialist real-time process simulation tools based on Product visualization and Manufacturing Process Management technologies.

9.6.2 History
Designers have long used computers for their calculations. Initial developments were carried out in the 1960s within the aircraft and automotive industries in the area of 3D surface construction and NC programming, most of it independent of one another and often not publicly published until much later. Some of the mathematical description work on curves was developed in the early 1940s by Isaac Jacob Schoenberg, Apalatequi (Douglas Aircraft) and Roy Liming (North American Aircraft), however probably the most important work on polynomial curves and sculptured surface was done by Pierre Bezier (Renault), Paul de Casteljau (Citroen), S.A. Coons (MIT, Ford), James Ferguson (Boeing), Carl de Boor(GM), Birkhoff(GM) and Garabedian(GM) in the 1960s and W. Gordon (GM) and R. Riesenfeld in the 1970s. It is argued that a turning point was the development of SKETCHPAD system in MIT in 1963 by Ivan Sutherland (who later created a graphics technology company with Dr. David Evans). The distinctive feature of SKETCHPAD was that it allowed the designer to interact with computer graphically: the design can be fed into the computer by drawing on a CRT monitor with a light pen. Effectively, it was a prototype of graphical user interface, an indispensable feature of modern CAD. First commercial applications of CAD were in large companies in the automotive and aerospace industries, as well as in electronics. Only large corporations could afford the computers capable of performing the calculations. Notable company projects were at GM (Dr. Patrick J. Hanratty) with DAC-1 (Design Augmented by Computer) 1964; Lockhead projects; Bell GRAPHIC 1 and at Renault (Bezier) UNISURF 1971 car body design and tooling. The most influential event in the development of CAD was the founding of MCS (Manufacturing and Consulting Services Inc.) in 1971 by Dr. P. J. Hanratty, who wrote the system ADAM (Automated Drafting And Machining) but more importantly supplied code to companies such as McDonnell Douglas (Unigraphics) Computervision(CADDS), Calma, Gerber, Autotrol and Control Data. As computers became more affordable, the application areas have gradually expanded. The development of CAD software for personal desk-top computers was the impetus for almost universal application in all areas of construction. Other key points in the 1960s and 1970s would be the foundation of CAD systems United Computing, Intergraph, IBM, Intergraph IGDS in 1974 (which led to Bentley MicroStation in 1984). CAD implementations have evolved dramatically since then. Initially, with 2D in the 1970s, it was typically limited to producing drawings similar to hand-drafted drawings. Advances in programming and computer hardware, notably solid modelling in the 1980s, have allowed more versatile applications of computers in design activities. Key products for 1981 were the solid modelling packages-Romulus (ShapeData) and Uni-Solid (Unigraphics) based on PADL-2 and the release of the surface modeler Catia (Dassault). Autodesk was founded 1982 by John Walker, which led to the 2D system AutoCAD. The next milestone was the release of Pro/Engineer in 1988, which heralded greater usage of feature based modeling methods. Also of importance to the development of CAD was the development of the B-rep solid

modeling kernels (graphics engines) Parasolid (ShapeData) and ACIS (Spatial Technologies) at the end of the 1980s beginning of the 1990s, both inspired by the work of Ian Braid. This led to the release of mid-range packages such as SolidWorks in 1995 SolidEdge (Intergraph) in 1996. Today CAD is not limited to drafting and rendering, and it ventures into many more "intellectual" areas of a designer's expertise.

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9.6.3 Software Providers Today

This is an ever changing industry with many well known products and companies being taken over and merged with others. There are many CAD software products currently on the market. More than half of the market is however covered by the four main PLM corporations Autodesk, Dassault Systems, PTC, and UGS Corp., but there are many other CAD packages with smaller user bases or covering niche user areas. Packages can be classified into 3 types: 2D drafting systems (e.g. AutoCAD, Microstation); mid-range 3D solid feature modelers (e.g. SolidWorks, SolidEdge, Alibre); and high-end 3D hybrid systems (e.g. CATIA, NX (Unigraphics)). However these classifications cannot be too strictly taken as many 2D systems have 3D modules, the mid-range systems are increasing their surface functionality, and the high-end systems have developed their user interface in the direction of interactive Windows systems.

9.6.4 Capabilities
The capabilities of modern CAD systems include:

Wireframe geometry creation 3D parametric feature based modeling, Solid modeling Freeform surface modeling Automated design of assemblies, which are collections of parts and/or other assemblies Create Engineering drawings from the solid models Reuse of design components Ease of modification of designs of model and the production of multiple versions Automatic generation of standard components of the design Validation/verification of designs against specifications and design rules Simulation of designs without building a physical prototype Output of engineering documentation, such as manufacturing drawings, and Bills of Materials to reflect the BOM required to build the product Import/Export routines to exchange data with other software packages Output of design data directly to manufacturing facilities Output directly to a Rapid Prototyping or Rapid Manufacture Machine for industrial prototypes Maintain libraries of parts and assemblies Calculate mass properties of parts and assemblies Aid visualization with shading, rotating, hidden line removal, etc...

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Bi-directional parametric associatively (modification of any feature is reflected in all information relying on that feature; drawings, mass properties, assemblies, etc... and counter wise) Kinematics, interference and clearance checking of assemblies Sheet metal Hose/cable routing Electrical component packaging Inclusion of programming code in a model to control and relate desired attributes of the model Programmable design studies and optimisation Sophisticated visual analysis routines, for draft, curvature, curvature continuity...

9.6.5 Software Technologies

Originally software for CAD systems were developed with computer language such as Fortran, but with the advancement of Object-oriented programming methods this has over the last decade or so radically changed. The development of a typical modern Parametric feature based modeler and freeform surface systems are built around a number of key, C programming language, modules with their own APIs. A CAD system can be seen as built up from the interaction a GUI with an Associative engine and Geometry constraint engine controlling BREP, CSG and NURBS geometry via a Geometric modeling kernel.

9.6.6 Hardware and OS Technologies

Today most CAD computer workstations are Windows based PCs; some CAD systems also run on hardware running with one of the Unix operating systems and a few with Linux. Generally no special hardware is required with the exception of a high end OpenGL based Graphics card; however for complex product design machines with high speed (and possibly multiple) CPUs and large amount of RAM are recommended. The human-machine interface is generally via a computer mouse but can also be via a pen and digitizing graphics tablet. Manipulation of the view of the model on the screen is also sometimes done with the use of a spacemouse/spaceball. Some systems also support stereoscopic glasses for viewing the 3D model.


Expert Systems are computer programs that are derived from a branch of computer science research called Artificial Intelligence (AI). AI's scientific goal is to understand intelligence by building computer programs that exhibit intelligent behavior. It is concerned with the concepts and methods of symbolic inference, or reasoning, by a computer, and how the knowledge used to make those inferences will be represented inside the machine. Of course, the term intelligence covers many cognitive skills, including the ability to solve problems, learn, and understand language; AI addresses all of those. But most progress to date in AI has been made in the area of problem solving concepts and methods for building programs that reason about problems rather than calculate a solution. AI programs that achieve expert-level competence in solving problems in task areas by bringing to bear a body of knowledge about specific tasks are called knowledgebased or expert systems. Often, the term expert systems is reserved for programs

whose knowledge base contains the knowledge used by human experts, in contrast to knowledge gathered from textbooks or non-experts. More often than not, the two terms, Expert Systems (ES) and Knowledge-based Systems (KBS), are used synonymously. Taken together, they represent the most widespread type of AI application. The area of human intellectual endeavor to be captured in an expert system is called the task domain. Task refers to some goal-oriented, problem-solving activity. Domain refers to the area within which the task is being performed. Typical tasks are diagnosis, planning, scheduling, configuration and design. Building an expert system is known as knowledge engineering and its practitioners are called knowledge engineers. The knowledge engineer must make sure that the computer has all the knowledge needed to solve a problem. The knowledge engineer must choose one or more forms in which to represent the required knowledge as symbol patterns in the memory of the computer that is, he (or she) must choose a knowledge representation. He must also ensure that the computer can use the knowledge efficiently by selecting from a handful of reasoning methods. The practice of knowledge engineering is described later. We first describe the components of expert systems.

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9.7.1 The Building Blocks of Expert Systems

Every expert system consists of two principal parts: the knowledge base; and the reasoning, or inference, engine. The knowledge base of expert systems contains both factual and heuristic knowledge. Factual knowledge is that knowledge of the task domain that is widely shared, typically found in textbooks or journals, and commonly agreed upon by those knowledgeable in the particular field. Heuristic knowledge is the less rigorous, more experiential, more judgmental knowledge of performance. In contrast to factual knowledge, heuristic knowledge is rarely discussed, and is largely individualistic. It is the knowledge of good practice, good judgment, and plausible reasoning in the field. It is the knowledge that underlies the "art of good guessing." Knowledge representation formalizes and organises the knowledge. One widely used representation is the production rule, or simply rule. A rule consists of an IF part and a THEN part (also called a condition and an action). The IF part lists a set of conditions in some logical combination. The piece of knowledge represented by the production rule is relevant to the line of reasoning being developed if the IF part of the rule is satisfied; consequently, the THEN part can be concluded, or its problem-solving action taken. Expert systems whose knowledge is represented in rule form are called rule-based systems. Another widely used representation, called the unit (also known as frame, schema, or list structure) is based upon a more passive view of knowledge. The unit is an assemblage of associated symbolic knowledge about an entity to be represented. Typically, a unit consists of a list of properties of the entity and associated values for those properties. Since every task domain consists of many entities that stand in various relations, the properties can also be used to specify relations, and the values of these properties are the names of other units that are linked according to the relations. One unit can also represent knowledge that is a "special case" of another unit, or some units can be "parts of" another unit. The problem-solving model, or paradigm, organises and controls the steps taken to solve the problem. One common but powerful paradigm involves chaining of IF-THEN rules to form a line of reasoning. If the chaining starts from a set of conditions and moves toward some conclusion, the method is called forward chaining.

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If the conclusion is known (for example, a goal to be achieved) but the path to that conclusion is not known, then reasoning backwards is called for, and the method is backward chaining. These problem-solving methods are built into program modules called inference engines or inference procedures that manipulate and use knowledge in the knowledge base to form a line of reasoning. The knowledge base an expert uses is what he learned at school, from colleagues, and from years of experience. Presumably the more experience he has, the larger his store of knowledge. Knowledge allows him to interpret the information in his databases to advantage in diagnosis, design, and analysis. Though an expert system consists primarily of a knowledge base and an inference engine, a couple of other features are worth mentioning: reasoning with uncertainty, and explanation of the line of reasoning. Knowledge is almost always incomplete and uncertain. To deal with uncertain knowledge, a rule may have associated with it a confidence factor or a weight. The set of methods for using uncertain knowledge in combination with uncertain data in the reasoning process is called reasoning with uncertainty. An important subclass of methods for reasoning with uncertainty is called "fuzzy logic," and the systems that use them are known as "fuzzy systems." Because an expert system uses uncertain or heuristic knowledge (as we humans do) its credibility is often in question (as is the case with humans). When an answer to a problem is questionable, we tend to want to know the rationale. If the rationale seems plausible, we tend to believe the answer. So it is with expert systems. Most expert systems have the ability to answer questions of the form: "Why is the answer X?" Explanations can be generated by tracing the line of reasoning used by the inference engine (Feigenbaum, McCorduck et al. 1988). The most important ingredient in any expert system is knowledge. The power of expert systems resides in the specific, high-quality knowledge they contain about task domains. AI researchers will continue to explore and add to the current repertoire of knowledge representation and reasoning methods. But in knowledge resides the power. Because of the importance of knowledge in expert systems and because the current knowledge acquisition method is slow and tedious, much of the future of expert systems depends on breaking the knowledge acquisition bottleneck and in codifying and representing a large knowledge infrastructure. Knowledge Engineering Knowledge engineering is the art of designing and building expert systems, and knowledge engineers are its practitioners. Gerald M. Weinberg said of programming in The Psychology of Programming: "'Programming,' like 'loving,' is a single word that encompasses an infinitude of activities" (Weinberg 1971). Knowledge engineering is the same, perhaps more so. We stated earlier that knowledge engineering is an applied part of the science of artificial intelligence which, in turn, is a part of computer science. Theoretically, then, a knowledge engineer is a computer scientist who knows how to design and implement programs that incorporate artificial intelligence techniques. The nature of knowledge engineering is changing, however, and a new breed of knowledge engineers is emerging. Today there are two ways to build an expert system. They can be built from scratch, or built using a piece of development software known as a "tool" or a "shell." Before we discuss these tools, let's briefly discuss what knowledge engineers do. Though different styles and methods of knowledge engineering exist, the basic approach is the same: a knowledge engineer interviews and observes a human expert or a group of experts and learns what the experts know, and how they reason with their knowledge.

The engineer then translates the knowledge into a computer-usable language, and designs an inference engine, a reasoning structure, that uses the knowledge appropriately. He also determines how to integrate the use of uncertain knowledge in the reasoning process, and what kinds of explanation would be useful to the end user. Next, the inference engine and facilities for representing knowledge and for explaining are programmed, and the domain knowledge is entered into the program piece by piece. It may be that the inference engine is not just right; the form of knowledge representation is awkward for the kind of knowledge needed for the task; and the expert might decide the pieces of knowledge are wrong. All these are discovered and modified as the expert system gradually gains competence. The discovery and cumulation of techniques of machine reasoning and knowledge representation is generally the work of artificial intelligence research. The discovery and cumulation of knowledge of a task domain is the province of domain experts. Domain knowledge consists of both formal, textbook knowledge, and experiential knowledge the expertise of the experts. Tools, Shells, and Skeletons Compared to the wide variation in domain knowledge, only a small number of AI methods are known that are useful in expert systems. That is, currently there are only a handful of ways in which to represent knowledge, or to make inferences, or to generate explanations. Thus, systems can be built that contain these useful methods without any domain-specific knowledge. Such systems are known as skeletal systems, shells, or simply AI tools. Building expert systems by using shells offers significant advantages. A system can be built to perform a unique task by entering into a shell all the necessary knowledge about a task domain. The inference engine that applies the knowledge to the task at hand is built into the shell. If the program is not very complicated and if an expert has had some training in the use of a shell, the expert can enter the knowledge himself. Many commercial shells are available today, ranging in size from shells on PCs, to shells on workstations, to shells on large mainframe computers. They range in price from hundreds to tens of thousands of dollars, and range in complexity from simple, forward-chained, rule-based systems requiring two days of training to those so complex that only highly trained knowledge engineers can use them to advantage. They range from general-purpose shells to shells custom-tailored to a class of tasks, such as financial planning or real-time process control. Although shells simplify programming, in general they don't help with knowledge acquisition. Knowledge acquisition refers to the task of endowing expert systems with knowledge, a task currently performed by knowledge engineers. The choice of reasoning method, or a shell, is important, but it isn't as important as the accumulation of high-quality knowledge. The power of an expert system lies in its store of knowledge about the task domain the more knowledge a system is given, the more competent it becomes. Bricks and Mortar The fundamental working hypothesis of AI is that intelligent behavior can be precisely described as symbol manipulation and can be modeled with the symbol processing capabilities of the computer. In the late 1950s, special programming languages were invented that facilitate symbol manipulation. The most prominent is called LISP (LISt Processing). Because of its simple elegance and flexibility, most AI research programs are written in LISP, but commercial applications have moved away from LISP.

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In the early 1970s another AI programming language was invented in France. It is called PROLOG (PROgramming in LOGic). LISP has its roots in one area of mathematics (lambda calculus), PROLOG in another (first-order predicate calculus). PROLOG consists of English-like statements which are facts (assertions), rules (of inference), and questions. Here is an inference rule: "If object-x is part-of object-y then a component-of object-y is object-x." Programs written in PROLOG have behavior similar to rule-based systems written in LISP. PROLOG, however, did not immediately become a language of choice for AI programmers. In the early 1980s it was given impetus with the announcement by the Japanese that they would use a logic programming language for the Fifth Generation Computing Systems (FGCS) Project. A variety of logic-based programming languages have since arisen, and the term prolog has become generic.

9.7.2 Applications of Expert Systems

The spectrum of applications of expert systems technology to industrial and commercial problems is so wide as to defy easy characterization. The applications find their way into most areas of knowledge work. They are as varied as helping salespersons sell modular factory-built homes to helping NASA plan the maintenance of a space shuttle in preparation for its next flight. Applications tend to cluster into seven major classes. Diagnosis and Troubleshooting of Devices and Systems of All Kinds This class comprises systems that deduce faults and suggest corrective actions for a malfunctioning device or process. Medical diagnosis was one of the first knowledge areas to which Expert Systems technology was applied, but diagnosis of engineered systems quickly surpassed medical diagnosis. There are probably more diagnostic applications of Expert Systems than any other type. The diagnostic problem can be stated in the abstract as: given the evidence presenting itself, what is the underlying problem/reason/cause? Planning and Scheduling Systems that fall into this class analyze a set of one or more potentially complex and interacting goals in order to determine a set of actions to achieve those goals, and/or provide a detailed temporal ordering of those actions, taking into account personnel, materiel, and other constraints. This class has great commercial potential, which has been recognized. Examples involve airline scheduling of flights, personnel, and gates; manufacturing job-shop scheduling; and manufacturing process planning. Configuration of Manufactured Objects from Subassemblies Configuration, whereby a solution to a problem is synthesized from a given set of elements related by a set of constraints, is historically one of the most important of expert system applications. Configuration applications were pioneered by computer companies as a means of facilitating the manufacture of semi-custom minicomputers (McDermott 1981). The technique has found its way into use in many different industries, for example, modular home building, manufacturing, and other problems involving complex engineering design and manufacturing. Financial Decision Making The financial services industry has been a vigorous user of expert system techniques. Advisory programs have been created to assist bankers in determining whether to make loans to businesses and individuals. Insurance companies have used expert systems to assess the risk presented by the customer and to determine a price for the

insurance. A typical application in the financial markets is in foreign exchange trading. Knowledge Publishing This is a relatively new, but also potentially explosive area. The primary function of the expert system is to deliver knowledge that is relevant to the user's problem, in the context of the user's problem. The two most widely distributed expert systems in the world are in this category. The first is an advisor which counsels a user on appropriate grammatical usage in a text. The second is a tax advisor that accompanies a tax preparation program and advises the user on tax strategy, tactics, and individual tax policy. Process Monitoring and Control Systems falling in this class analyse real-time data from physical devices with the goal of noticing anomalies, predicting trends, and controlling for both optimality and failure correction. Examples of real-time systems that actively monitor processes can be found in the steel making and oil refining industries. Design and Manufacturing These systems assist in the design of physical devices and processes, ranging from high-level conceptual design of abstract entities all the way to factory floor configuration of manufacturing processes.

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9.7.3 Benefits to End Users

Primarily, the benefits of Expert Systems to end users include:

A speed-up of human professional or semi-professional work typically by a factor of ten and sometimes by a factor of a hundred or more. Within companies, major internal cost savings. For small systems, savings are sometimes in the tens or hundreds of thousands of dollars; but for large systems, often in the tens of millions of dollars and as high as hundreds of millions of dollars. These cost savings are a result of quality improvement, a major motivation for employing expert system technology. Improved quality of decision making. In some cases, the quality or correctness of decisions evaluated after the fact show a ten-fold improvement. Preservation of scarce expertise. Expert Systems are used to preserve scarce know-how in organisations, to capture the expertise of individuals who are retiring, and to preserve corporate know-how so that it can be widely distributed to other factories, offices or plants of the company. Introduction of new products. A good example of a new product is a pathology advisor sold to clinical pathologists in hospitals to assist in the diagnosis of diseased tissue.

9.7.4 Expert Systems Business

Expert system technology is widespread and deeply imbedded. As expert system techniques matured into a standard information technology in the 1980s, the increasing integration of expert system technology with conventional information technology data processing or management information systems grew in importance. Conventional technology is mostly the world of IBM mainframes and IBM operating systems. More recently, this world has grown to include distributed

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networks of engineering workstations. However, it's also the world of a wide variety of personal computers, particularly those running the MS DOS operating system. Early in its history, commercial expert systems tools were written primarily in LISP and PROLOG, but more recently the trend has been to conventional languages such as C. Commercial companies dedicated to one language or the other (e.g., Symbolics, Lisp Machines Inc., Quintus Prolog) have gone into bankruptcy or have been bought out by other companies. Finally, the connection of expert systems to the databases that are managed by conventional information technology methods and groups is essential and is now a standard feature of virtually all expert systems.


Finding a universal definition for Group Technology (GT) is not an easy task since many have been introduced by a number of people who have written about it. However, the following definition that is given by Solaja helps to clarify its main concepts: Group Technology is the realisation that many problems are similar and that, by grouping similar problems, a single solution can be found to a set of problems, thus saving time and effort. The objectives of Group Technology are best achieved in business concerned with small to medium batch production; these represent a major part of manufacturing industry. The traditional approach to this type of manufacture is to make use of a functional layout in the factory, i.e. similar machines are grouped according to type. Thornley wrote that as a result of this form of machine layout, where only machining operations of a particular type may be performed in a limited area of the workshop, the workpiece itself must travel a considerable distance around the workshop before all the operations are performed upon it. This usually leads to a long throughput time. The planning of process route becomes an extremely difficult task since a number of similar machine tools may be considered at each point in the sequence of manufacturing operations. Also the scheduling and control in such a system are difficult because numerous alternatives are available. As a result, a different concept of manufacturing organisation and layout has been developed to overcome the difficulties. This is the Group Technology concept whose emphasis lies in reducing the dimension of the situation to be controlled. Instead of being functionally laid out, the factory is divided into smaller cells in such a way that each cell is equipped with all the machines and equipment needed to complete a particular family of components. It has been found that by switching to this type of cellular manufacture, many benefits of flowline production can be attained in a batch production system. The general achievements of Group Technology have been formulated by Thornley and are illustrated in Figure 9.6. The application of GT to a traditional manufacturing system can usually result in a simpler material flow system (see Figure 9.7), so that a higher transfer rate and easier production planning and control functions can usually be achieved.

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Figure 9.6: General Achievements of Group Technology

Development of Group Technology The basic thinking behind Group Technology can be attributed to the Russians, who carried out initial investigations during the 1920s. The progress of GT since then and its gradual adoption in other countries has been traced by Grayson. The early work stressed the importance of industrial classification and initial applications were limited to the medium and large batch productions. The work was extended during the war years by Mitrofanov to include workpieces produced in small batches. His major publication on Group Technology first appeared in 1959 and was translated into English in 1966. Mitrofanov proposed that it was possible to produce a theoretical composite component which incorporated all the major features of components belonging to a family, and that a machine could be tooled up to produce the composite component, thus providing the set-ups required for each component in the family.

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Figure 9.7: GT Results in Simpler Material Flow


Product Development Strategy requires a capability of the organisation to correctly evaluate product concepts so that there is support to design new products or to introduce product improvements in keeping with the market requirements. There are a number of different strategies used for product development, depending on the organisational capabilities. Internal development: Internal development involves developing the necessary skills among existing staff and acquiring the necessary production capacity. Though this may seem the most logical move and provide the advantage to maximizing the value addition, this option is more suited to technology driven organisations. The risks are

lower than for other methods. The main disadvantage is that this takes time, during which competitors may move fasteror opportunities may be lost in other ways. Internal development means that the organisation's strategic managers decide to grow the business by adding the needed assets (people, buildings, machinery, or whatever) from inside rather than outside sources. The Internal Development Strategy requires a strong research and development group within the company that creates the technology that the company uses. This manner of internal development has significant advantages:

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The firm knows the product from a hands-on perspective. It understands the technologies used in the product. When the product fails or when related activities are discovered in the market, the firm can react quickly. The products tend to be unique, as the firm has created the technology and the product. This also gives it a basis for competitive advantage. When a competitor develops an improved version of the product, the firm is better able to understand the technology behind it and create an even better one. In addition, internal R&D has the advantage, that in many countries, it attracts tax deductions and other incentives from the government. Failure to develop the necessary technology is a risk that is always there. The more difficult the project, the greater is the risk. Developing technology normally takes longer than buying out the technology. Not only may it take longer; the length of time is also unknown. In-house development is often more expensive than acquiring technology externally.

Internal technology acquisition has three major disadvantages:

Reverse Engineering: One of the most common methods of internal development, in developing countries, is through reverse engineering. Reverse engineering is determining the technology embedded in a product through rigorous study of its attributes. It entails the acquisition of a product containing a technology that the company thinks is an asset, disassembling it, and subjecting its components to a series of tests and engineering analysis to ascertain how it works and the engineering design criteria used in the product's creation. The tests used depend on the technologies involved. Reverse engineering requires a very good understanding of the application of the product being studied so that the tests used to determine the design criteria are appropriate. It also requires strong engineering capability. This technique is a serious discipline in the automobile and machinery industries. Before designing competing products, companies' reverse engineer their competitor's products to ascertain their strengths and weaknesses. New designs maintain the strengths and solutions are developed for the weaknesses. This results in a competing product that is better than the original. Reverse engineering is less risky, less costly, and takes less time to market compared to internal R&D. On the negative side, it has the potential to result in a product that is viewed essentially the same as the competitor's and therefore not facilitating a switch from the competitor. There is also the risk that the reverse engineering team did not understand the product properly, and the resulting product design is actually poorer than the original.

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An additional risk is that the reverse engineered product may infringe on patents or other legal protection the original product has, leading to complications. Collaborative Development: The internal R&D work with an external agency to jointly develop a technology. This enhances the ability of the firm to enter into technology areas, where it might not be able to do so singly. Collaborative development has the same advantages and disadvantages as internal R&D. The basic difference is that the results are jointly owned, and an effective mechanism to co-ordinate the efforts of the teams are necessary. This approach actually improves the company's external acquisition capabilities. This often uncovers technology options that might not be considered by the firm from its internal R&D. Contracted Out R&D: Companies choose to contract out R&D for a variety of reasons. It is an ideal option for those who do not have the necessary facilities and expertise to carry out the work and yet would like to maintain control and own the results exclusively. It allows short-term access to world-class personnel and facilities that would normally be beyond the company's means. With the selection of the right team for the work required, it should be able to assemble a more capable team than it could assemble internally. Contracting R&D reduces the company's hands-on experience with the technology. This can be quite risky if the application of the technology is in areas with no in-house expertise. The risk of breach of confidentiality may be high in some cases. The ownership of the technology and what constitutes the technology needs to be carefully defined in the documentation. Consulting Engineering Firms are often a source of technology. Obtaining technology from consulting engineering firms is another form of contracted out R&D. This is generally used in the case of process design, and seldom for product design. It has the problems associated with contracted out R&D as well as its advantages. Licencing: Licencing is a third form of contractual arrangement. Licencing existing technology is a popular and effective form of technology acquisition. It enables the firm to move directly into the implementation of the project. Its major advantage is the reduction in time to market the product, relative to forms of technology acquisition that require development. If the payment is in the form of royalty, the provider of the technology shares the risks of financial performance. It has the appearance of being low risk or almost risk free. This is true if the company's application is identical to the one for which the technology was developed. However, there is implementation risks involved, in such cases. When the application is not similar or the variables change significantly, the risks can be serious. Some of the variables that one should consider include scale of operations, climate, and legal requirements to reduce import content, quality of local inputs, skill level of acquiring organisation, and level of codification of the technology. Though this is often the lowest cost option to the firm, the major risk in the technology transfer mechanism is the inability of the firm to develop the internal technical strength to absorb the technology. Alternatively, the reluctance of the technology supplier to create this competence in the firm can result in higher risks and often failure of the project. This route has been used by a number of corporations to establish their products or brands in India. Daimler Benz had a licencing agreement with Telco, GE and Siemens had a number of licencing agreements with BHEL. There are many such examples. This can allow quick growth by avoiding the need to build manufacturing or distribution capability. Licencing is probably most frequent in high technology

businesses particularly in foreign countries or specialized markets where volumes of business may be too low to justify a permanent presence. Such contracts normally have a defined duration. Difficulties with this mode include conflicts of interest when the same agent acts for competing principles, develops competitive products or is simply inert. Joint Ventures: In a joint venture, two or more organisations form a separate legal undertaking, which is an independent organisation for strategic purposes. The partnership is usually focused on a specific market objective. They may last from a few months to a few years, and often involve a cross-border relationship. One organisation may purchase a percentage of the stock in the other partner, but not a controlling share. Entering into a joint venture agreement with a technology provider is another form of external acquisition that can be very effective. This form is extremely advantageous when it is contracted between a company with technology and a company with market access. It normally takes the form of a new company with each of the partners owning shares in the company. For example, General Motors came into India in a joint venture with Hindustan Motors and set up its manufacturing facilities at Halol, in Gujarat. The risk in such ventures is low. It has other advantages of licencing agreement. The disadvantage of technology absorption is largely removed. Due to the ongoing relationship between the companies, the opportunity to learn on both sides exists. However, the disadvantage is that neither partner can make decisions of their own. The joint venture announced between Germany's Bertelsmann AG and America's Barnes and Noble demonstrates these common joint venture traits. Joint ventures have been a major source of technology acquisition in developing countries. For example, Escorts Limited had a joint venture with JCB of the UK to manufacture small excavators. Escorts again, entered into a joint venture with Hughes Communications of USA for manufacture of communication equipment. More recently, Mahindra and Mahindra have tied up with a Chinese manufacturing of small, inexpensive tractors, in order to tap the low end of the market. Producer-Customer: This is normally done in the form of buying a piece of production machinery with embedded technology. This is perhaps the quickest form of technology transfer because the technology is already packaged and ready to use. It is low risk because the equipment has been proven to work technically and evidence can be acquired from other users to back-up the producer's claims. In addition, the producer normally would be glad to provide implementation support in the form of setting up the machine and in the training of personnel. Manufacturing Sub-contracting: Most firms do not manufacture all the systems that are required for the product. There are specialized firms that have the technology and designing capability to supply the system to the firm's specifications. For example, an automotive manufacturer has headlights and the electrical system manufactured by its sub-contractors. In complex products, this is the best option. The cost of developing technology in areas that the firm has questionable strength is both an expensive and high-risk exercise. In some cases, sub-contracting is used as a cost reduction option, as the costs of technology and development by sub-contracting firms may be lower than that of the firm. In such cases, the ownership of the technology is not with the firm. A comparison of the different product development strategies has been tabulated in Table 9.2. As the various sources for acquisition of technologies present different

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advantages and disadvantages, benefits and risks, and cost to the firm, these factors have been compared.
Table 9.2: Comparison of Different Strategies for Product Development
Technology Option Internal Development Advantages and Benefits Develop knowledge in company, stronger company exclusivity, competitive advantage, Tax and other Government incentives, Disadvantages and Risks Long time to market, Generally more expensive than external acquisition, Risk of failure, loss of investment and time. May not have R & D expertise, equipment etc. Collaborative or R&D with Networking Develop knowledge in company, stronger company exclusivity, competitive advantage, Tax and other Government incentives, Staff exposed to other sources of ideas, R&D Contract/ Consulting Engineers No investment in facilities, Low investment on staff, Own technology, unique product. Long time to market (shortened somewhat), Networking costs added, overall costs down, Risk of failure reduced (better knowledge base), Inventiveness can be curtailed. Do not have hands-on knowledge in-house, Harder to keep confidential, Same time, cost and risk issues as in Internal R&D. Risk in applying technology to new application, Very little support available. Market risks Do not have control, have to agree with partner Does not develop technical strength Competitive advantage issues Possible implementation problems Builds little technical strength May have to adapt technology to needs May acquire negative baggage May have merger problems Contd.. Staff to understand technology, manage contracts, Contractor fees may be lower than R&D. R & D Staff, equipment, and space, Attending trade shows, conferences, Reading relevant journals, magazines. Cost Factors R & D Staff, Equipment, Office, Laboratory and Shop space.


Reduced risks due to known technology, Reduced time to market, Develops internal capability.

Searching, networking, Some internal technical staff, Adaptation/adoption costs. Up-front investment in new business Ongoing operational costs Training costs

Joint Venture

Immediately implementable Proven technology, low risk Probably, exclusivity in the region Learn from provider

Manufacturing Sub-contract/ Producercustomer

Quickest, ready to use Lowest risk, proven technology Implementation support Non-exclusive

Up-front payment Training costs Should be less than developing because development costs shared by many Depends on purchase price of company Should be proportional to technological assets

Acquisition of a Company with Technology

Short time to market, perhaps already in market Low risk Could buy good image

Reverse Engineering

Less costly, less risky, less time compared to internal R&D Opportunity to improve product to gain competitive advantage

Me-too-product Risk of not fully understanding original design Some legal risks

Strong Engineering capability Some office, laboratory, shop space Possible legal costs

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Check Your Progress 2 Fill in the blanks: 1. Product development requires more of . and less of genius to be successful. 2. The new product strategy of the organisation is decided on the basis of organisational and resources. 3. CAD is used to design and develop products, these can be goods used by . or intermediate goods used in other products. 4. Expert Systems are computer programs that are derived from a branch of computer science research called 5. Knowledge representation .. formalizes and organises the


Studies indicate that nearly two out of three new products fail after launch. Nonetheless, companies in many sectors are under continual pressure to speed up the pace of product development even to adapt products that are still in the pipeline to the demands of a constantly changing marketplace. Product development is facing a fundamental challenge. Most companies are under pressure to bring new products to market more and more quickly, and companies in many sectors must work harder to ensure that they address the needs of ever-narrower customer segments. Industries are setting ambitious targets for new products, which are often unrealistic because companies need management skills and organisational structure necessary for success. These pressures are particularly acute in fast clock-speed industries, such as those for high-tech, medical, and consumer goods, and in competitive markets for complex products that require large investments and long development times, such as automobiles and airplanes.

Products are artifacts that provide value to the customer. They can be tangible or intangible. Goods are tangible items that are usually produced in one location and purchased in another. Services are intangible products that are consumed as they are created. Contracts are business exchanges in which neither services nor goods are transferred; instead, there is an implicit understanding between the customer and the provider that goods and services will be provided on an 'as needed' basis.

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The Product Lifecycle model is a simplistic representation of the cumulative impact of changes in the business environment on the life of a manufactured product. Technological Life Cycle is a representation of the cumulative impact of changes in market growth and technology. Technological Capability is a detailed rendering of the different technological skills of the organisation. Fixed Costs are those costs that remain constant irrespective of changes in the volume of output. Variable Costs are all the costs, which vary directly (proportionately) with output. Design for Manufacturability (DFM) is the process of designing a product for efficient production maintaining the highest level of quality. Value Engineering is an organised creative technique directed at analyzing the functions of a product, service or system with the purpose of achieving the required functions at the lowest overall cost consistent with all the requirements, which comprise its value, such as performance, reliability, maintainability, appearance, etc. Concentric Diversification: The acquisition or internal development of a business outside of, but in some way related to a company's existing scope of operations. Conglomerate Diversification: Conglomerate Diversification is where a firm diversifies into unrelated areas. It is the acquisition or internal development of a business outside of, and in no way related to a company's existing scope of operations. Reverse Engineering is determining the technology embedded in a product through rigorous study of its attributes. Licensing is an arrangement between two or more organisations that enter a legal contract for a specific business purpose. It is generally a technology transfer transaction and the intellectual property rights for the invention are retained by the licencee. "Worldwide sourcing" is a system used by multinational companies of integrating the supply chain by operating supplier's plants abroad and integrating those plants to manufacture components as subdivisions of a globally organised production process.

Check Your Progress: Answers

CYP 1 1. operations 2. services 3. manufacturing 4. manufactured 5. competition CYP 2 1. perspiration 2. capabilities 3. end consumers 4. Artificial Intelligence 5. knowledge


Chase, R.B., Aquilano, N.J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Chopra, S. and Meindl, P., Supply Chain Management, Prentice Hall, 2001. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Meredith, J. R. and Shafer, S. M., Operations Management for MBAs, J. Wiley, 2002. Slack, N. and Lewis, M., Operations Strategy, Prentice Hall, 2003. Slack, N. et al., Operations Management, Prentice Hall, 2001. Taylor, Bernard W., Introduction to Management Science, Prentice Hall, 1996. Tersine, Richard J., Production/Operations Management, North-Holland, 1985. Vollmann, T.E., Berry W.L., and Whybark, D.C., Manufacturing Planning and Control Systems, Richard D. Irwin, Inc. Waters, C.D.J., An Introduction to Operations Management, Addison-Wesly, 1991. Waters, D., A practical introduction to management science, 2nd, Addison-Wesly, 1998.

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1. How do you classify products? What are the factors that provide value to the product? Explain. 2. Why is the area of product development so important to the future of the company? Can you categorise industries on the basis of the pressures they feel due to product development? Explain. 3. What are the steps and stages of product development? Is it possible to reduce the time and the number of stages and come out with a new product and service? Give details of procedures and techniques. 4. Differentiate between fixed costs and variable costs and explain how they help in determining the breakeven point. 5. Explain the following in relation to new product development: (a) Standardisation (b) Simplification (c) Speed to Market (d) Activity Based Costing (e) Value Engineering (f) Modular Design 6. How does Design for Manufacturability (DFM) work? How are DFM and Value Engineering different? Explain with examples. Work out the design of any simple object of your choice using the principles of DFM? 7. How do product development strategies relate to the other organisational strategies (i.e., competitive and functional)? What is the difference between single and multi-business organisations? Provide examples.

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STRUCTURE 10.0 10.1 10.2 10.3 Objectives Introduction Forecasting in Operations Characterising Demand 10.3.1 10.3.2 10.4 10.5 Patterns of Demand Demand Management

Developing a Model Modeling Demand 10.5.1 Quantitative Methods

10.6 10.7 10.8

Forecast Errors Forecast Control Decomposition of a Time Series 10.8.1 10.8.1 10.8.2 10.8.3 Seasonal Index Seasonal Adjustment Trend Effects in Exponential Smoothing Cyclical Analysis


Using Standard Computer Programs

10.10 Qualitative Methods 10.10.1 Historical Analogy Method 10.10.2 Executive Opinion Method 10.10.3 Survey Methods 10.10.4 Delphi Method 10.10.5 Special Long-term Forecast Methodologies 10.11 Let us Sum up 10.12 Glossary 10.13 Suggested Readings 10.14 Questions

After studying this lesson, you should be able to:

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Know the fundamental concepts of forecasting and demand management Understand the different concepts behind forecasting Learn the basics of quantitative forecasting methods, which include:

Moving average method Weighted moving averages Exponential smoothing Regression analysis Correlation analysis Qualitative techniques like the Delphi technique Basics of scenario building and simulation techniques

Forecasts are needed throughout an organisation and forecasting is a continuous process. Decisions are based on forecasts of future conditions as they become operational in future. As time moves on, the impact of the forecasts on actual performance is measured; original forecasts are updated; and decisions are modified, and so on. That is the reason Mr. Guzder wanted a high level of accuracy in the forecasts, so that the major decisions could be taken correctly by DHL. Our vision of the future guides us in deciding what product to provide, what process to use, and what values are to be provided to the customers. We need to be able to see around the corner to ensure that things do not go out of hand. To do so, we require a variety of tools. Forecasting tools help in the analysis of the environment and provide inputs on how the organisation can use its resources for maximum leverage. This lesson will explore some of these forecasting techniques.


In business and economics, forecasting has various meanings. There are two distinct quantities involved in forecasting, a forecast and a prediction. A prediction is a broader concept. It is an estimate of a future event achieved through subjective considerations other than just past data; this subjective consideration need not occur in any predetermined way. In operations management, we adopt a rather specific definition of a forecast, which is given below: A forecast is an estimate of a future event achieved by systematically combining and casting forward, in a predetermined way, data about the past. Either the estimate of future value is based on an analysis of factors which are believed to influence future values, i.e., the explanatory method, or else the prediction is based on an inferred study of past general data behaviour over time, i.e., the extrapolation method. For example, the belief that the sale of air-conditioners will increase from current levels because of a recent advertising blitz rather than proximity to summer, illustrates

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the difference between the two philosophies. It is possible that both approaches will lead to the creation of accurate and useful forecasts, but the former method is often more difficult to implement and validate than the latter. In addition, forecasting is often substituted freely for economic forecasting. It should be kept in mind that 'economic forecasting' is a combination of forecasting and prediction. It implies some combination of objective calculations and subjective judgment. Both these techniques are used in business models, and Table 10.1 compares the two.
Table 10.1: Differences between Forecasting and Prediction
S.No. 1. Forecasting Forecasting involves the projection of the past into the future. The forecast involves estimating the level of demand on the basis of factors that generated the demand. Forecasting is based on a theoretical model. Forecasting is objective. The concept used in forecasting is the throw ahead technique. Requires a pattern in data. Error analysis is possible. Forecasting results are replicable. Prediction Prediction reflects managements judgment after taking all available information into account. Prediction involves anticipated changes in the future that may or may not have generated that demand. Prediction may be based on intuition. Prediction can be biased. The concept used in prediction is the saying ahead technique. Can be used to predict from random data also. No error analysis. Prediction is based on unique representations.


3. 4. 5.

6. 7.

'Operations' normally requires forecasting from an internal business viewpoint. The internal business process perspective provides a view of what the company must excel at to be competitive. The focus of this perspective, then, is the translation of customer-based measures into measures reflecting the company's internal operations. The forecast should be able to help create a model for measuring success and setting goals from financial and operational viewpoints. The resulting model should tell if we have met our goals with respect to the following four parameters: 1. Goals: What do we need to achieve to become successful? 2. Measures: What parameters will we use to know if we are successful? 3. Targets: What quantitative value will we use to determine success of the measure? 4. Initiatives: What will we do to meet our goals? Operations managers try to forecast a wide range of future events, to produce an instrument to document and monitor success. However, the primary area of interest is to forecast the demand for products and services. They may require long-run estimates of overall demand or short-run estimates of demand for each individual product. Sometimes, even more detailed information is useful for demand of specific components or sub-assemblies that go into the products. One way to characterize different kinds of forecasting can be based on how far into the future they focus. Detailed forecasts for individual items are used to plan the short-run decisions. Aggregate product-demand forecasts are used to plan for capacity, location and layout over a much longer time span.

In Figure 10.1 different types of planning decisions and information with their forecasting time horizons, or the future times which are derived by forecasting are depicted. Short-term is normally considered as covering up to three months into the future. Short-term forecasts are used for current operations and supplier schedules, etc. Medium-term is considered to encompass forecasts that cover a period between three months and two years. These types of forecasts are necessary to plan for capacities of personnel, materials and equipment required satisfying the annual plans.

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Figure 10.1: Forecasting Requirements in Operations

Long-term forecasts exceed a time horizon of two years. And, long-term forecasts relate to the need to create new capacity, locations, changing product and service mix, and the development of new products and services.


At the root of all business decisions is the challenge of forecasting and managing customer demand. Demand is one of the critical drivers for making decisions of how to deploy resources, for success in utilising production capacities, success of the supply chain, inventory planning, etc. Forecasting demand, to a large extent, covers the quantitative aspects of management and makes it possible for managers to analyse situations and take action, both in the short-term and the long-term. It provides objective criteria for decision-making. Demand management is used to coordinate and control all sources of demand with the objective that the productive system is used efficiently and the product is delivered on time. If the prime objective of forecasting is to predict demand, what are the factors that impact demand? The factors that impact demand can be divided into two main categories:

External factors are those factors that are beyond the control of the organisation but affect the demand of the product or service. For example, certain economic activities such as changes in interest rates, government regulations, budgetary allocations, rate of unemployment, etc.

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Internal factors are those factors that the organisation controls. These may be decisions about the product and service, price, after-sales service, advertising and promotions, publicity, packaging design or incentives, etc.

10.3.1 Patterns of Demand

Figure 10.2: Different Patterns of Demand (Time Series)

Past history may also be a determinant of future demand. Historical data may have different patterns; these patterns are called a 'time series'. Figure 10.2 shows the different types of patterns. There are five basic patterns that have been identified:

Horizontal: The demand fluctuates around a constant mean. Trend: There is a systematic increase or decrease in the mean of the series over a period of time. Seasonal: There is a pattern of increase or decrease for the product or service, depending on the season or time of day, week or month. Cyclical: There is a gradual increase or decrease in demand with a change in direction after a period of time. Cycles are normally of long duration. Random: There is no discernible pattern in the change in demand.

The first four patterns of demand either independently or in different combinations horizontal, trend, seasonal and cyclicaldefine the demand characteristics for most products and services. However, the last pattern, i.e., random variation is due to fortuitous causes and cannot be predicted using an underlying time pattern for demand. The turning point is the point at which the demand will change. This occurs when there is seasonal or cyclical change in demand. Although it is difficult to predict the exact timing of turning points, some estimates can be established that are useful in establishing demand. The factors affecting demand can also be described in terms of the turning point. Turning points have been indicated with arrows in Figure 10.2. Leading indicators are factors with turning points that typically precede the peaks and troughs of a business cycle. Coincident indicators are factors with turning points that coincide with the business cycle. Lagging indicators are those factors that follow after the turning points. For example, an increase in interest rates might precede a downturn in spending for consumer durablesthis would be a leading indicator. An example of a lagging indicator could be the impact of electricity tariffs on the prices of aluminium metal.

Another way to determine demand is to find a relationship between demand and other indicators. Demand can be dependent on one or more independent factors like price, income, advertising and promotion, tastes and preferences etc. These are called 'casual relationships'the relationship can be used to forecast demand through regression analysis.

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10.3.2 Demand Management

Internal factors are controlled by management through demand management. Demand management describes the process of influencing the volume or consumption of the product or service through management decisions. Air-conditioner and refrigerator manufacturers offer discounts for their products in winter, when the demand for the products falls. Electricity tariffs in Delhi are designed on slabs based on consumption. The idea is to provide incentive for reducing the consumption of electricity. Demand management helps organisations to use their resources and production capacity more effectively. As the demand for a particular product is high during the peak time, the costs are also high. Many organisations avoid this situation by offering price incentives or use promotional strategies so that customers make purchases before or after traditional periods of peak demand. The idea is to shift demand without losing the custom. Many organisations that provide perishable products or services use demand management as a strategy. Sahara Airlines offers seats on its aircrafts through the bidding process; many hotels provide discounts to late check-ins. Demand management is also used to spread demand more evenly. Telephone companies, world over, give offers for calls made during late hours or at night; for instance, MTNL offered a 50 per cent discount for calls made after 10 p.m. at night but before 6 a.m. in the morning. The same principle is involved when doctors and other professionals require prior appointments to meet their patients and clients. There are a number of reasons where an organisation may not try to change demand but simply accept what happens. Going back to the DHL case, it is apparent that they do not want to do anything about demand. They would like an accurate forecast of demand so that they can create the capacity to meet customer requirements, without compromising on the quality of service. The objective of DHL is to obtain an effective and efficient planning forecast. Check Your Progress 1 Fill in the blanks: 1. There are two distinct quantities involved in forecasting, a forecast and a .. 2. A forecast is an estimate of a future event achieved by systematically and casting forward, in a predetermined way, data about the past. 3. The internal business process perspective provides a view of what the company must excel at to be . 4. The forecast should be able to help create a model for measuring . and setting goals from financial and operational viewpoints. 5. At the root of all business decisions is the challenge of . and managing customer demand.

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The uncertainty of the future and unpredictability of the course of environmental forces that determine events impacts all organisations. This lack of precision whether we realise it exists or not, needs to be resolved. In order to reduce the uncertainty, the organisation has to realize that these environmental forces exist and also find means to understand how these forces will impact its business. Not all factors will be relevant to every organisation. Environmental forces that are important to one organisation may not be important for another. A small scale or medium scale manufacturer may be interested in demand in the local market, governmental plans in infrastructure development, cost and availability of power, etc. The DHL Division was interested in assessing accurately the demand for its various value added services, since its quality of service depended on anticipating the needs of its customers. Analysis of the environmental forces has three goals:

Forecasting Modeling Characterization

The 'logical order' in which these three goals are to be tackled depends on the objective of the organisation. Often, modeling and forecasting proceed in an iterative way; however, there is no 'logical order' in the broadest sense. The process of forecasting and decision-making is shown in Figure 10.3.

Figure 10.3: Forecasting and Decision Making

Forecasting is the start of any planning activity. The main purpose of forecasting is to estimate the occurrence, timing or magnitude of future events. Forecasting is not precise because of the interaction between many factors or environmental forces that lead to the events. The effect of these interactions is increased uncertainty. This often leads to indecision. Is this an oxymoron? It need not be so. We must remember that indecision and delays are the parents of failure. In order to avoid indecision and delays in decision making, we need to use forecasting which can play a pivotal role in assisting decision-making. Interactions among the different environmental forces generally follow certain logical rules. This makes it possible to use mathematical functions to represent the cause-andeffect relationship among inputs, resources, forecasts, and the outcome. The relationships are captured in a model which reflects how these environmental forces impact the future. There should be no compromise in the quality of the model. The model establishes a link between planning, controlling systems and the forecasts necessary for planning, scheduling, and controlling the system for an efficient output.

Models reflect the realization of the uncertainty in forecasting and reflect the level of sophistication and accuracy required for effective decision-making. Therefore, in building a model, it is essential that the model provides satisfaction on these two critical questions: 1. Is the model adequate? 2. Is the model stable? This also means that the model should reflect the objectives of the Operations Management. For example, the type of model that will be adequate for short-term forecasts may not be adequate for long-term forecasts. In order that the model forecasts are stable, it will have to reflect and compensate for the actual performance. This is done by developing a model so that the forecast is an iterative process, which means the forecasts are updated so as to form a feedback loop to correct the original forecast.

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Figure 10.4: Modeling for Forecasting

Figure 10.4 highlights the systematic development and the relationship between the modeling and forecasting and highlights the relationship between the model and the forecast. Even simple business problems require good models. For example, your boss calls you. He wants you to make a sales forecast for the next two years for the major products manufactured and marketed by your organisation. At first glance, this seems to be a very easy exercise. In a static world, perhaps, you can take last year's sales figures and add an appropriate internal growth to these figures and arrive at the projections. But the world is dynamic. Things change and any projection should consider the changes that have taken place and the changes that are expected in the business environment. You know that the figures you give your boss will be used to determine the resources of your department. Therefore, you would like the figures to reflect the real situation on the ground. Knowing that it is more important for organisations to grow their market share rather than just try to protect the sales volumes, the model should reflect this reality. If the

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historical growth of the market was 5 per cent and it is projected to grow at 10 per cent, your historical sales figures will not be a good guide for the future, as this would result in a reduction of market share. So, if you need to protect your market share, you need different forecasting models to determine the parameters within which you will operate. Let us use some more examples. Assume DHL has reports that two new products competing with their product line are being introduced in the market within the next six months. These new products are based on a new generation of technology that makes it possible to reduce costs by at least 10 per cent compared to the current technology. What impact will this have on DHL? If DHL wants to compete on price, perhaps DHL needs to look internally at their costing, their competencies, and other performance parameters. If DHL decides to stay in the business activity, they may require value chain analysis to assess their competitiveness. In order to compete on product differentiation basis, they need to look at their product development capabilities and competencies and their advertising and marketing strategies to determine their ability to protect their market share, etc. Suppose, airfreight industry sources believe that the government is planning to tax export consignments, what happens then? The problem becomes even more complex. Assume that currently, export consignments account for 20 per cent of DHL sales. We will have to determine their impact on sales targets. We need forecasting models to help us build the operational and demand data under the changed conditions. So far, we have only looked at the present day environment and seen the complexity of factors that can have an influence on the growth and profitability of an organisation. Over a period, the importance of different components of environmental forces can change. As the pace of change is increasing, an organisation will need to look to the future with a greater amount of forethought. Accuracy and Validation Assessments All models need to be validated and verified. Validation is concerned with the question "Are we building the right system?" Verification, on the other hand, seeks to answer the question "Are we building the system right?" Since validation is used for the purpose of establishing a model's credibility, it is important that the method used for the validation is, itself, credible. Features of time series, which might be revealed by examining its graph, with the forecasted values, and the residuals behaviour, condition forecasting modeling. An effective approach to modeling forecasting validation is to hold out a specific number of data points for estimation validation (i.e., estimation period), and a specific number of data points for forecasting accuracy (i.e., validation period). The data, which are not held out, are used to estimate the parameters of the model, the model is then tested on data in the validation period, if the results are satisfactory, then the forecasts are generated beyond the end of the estimation and validation periods. A good model should have small error measures in both the estimation and validation periods and its validation period statistics should be similar to its own estimation period statistics. Holding data out for validation purposes is probably the single most important diagnostic test of a model; it gives the best indication of the accuracy that can be expected when forecasting the future. It is a rule that one should hold out at least 20 per cent of data for validation purposes. A note of caution: though forecasting is an important component of strategic and operational planning, we should not immerse ourselves in the techniques of forecasting and lose track of the reasons for forecasting.


There are generally two approaches to modeling demand. Models can be based on: 1. Quantitative approach, and 2. Qualitative approach.

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10.5.1 Quantitative Methods

Though qualitative methods are most commonly used models, there is an increasing trend of using quantitative methods for forecasting in large organisations. For the convenience of the better understanding we will first discuss quantitative method. Qualitative method will be discussed later in this lesson. There are two principal methods to the quantitative approach to forecasting. (a) One approach is the projection of historical data, known as the Extrapolation Method or Time Series, and (b) The other is to develop the relationship between a dependent an, independent variable, and is called Casual Forecasting or Regression Analysis. Time Series Time series is a characterization of change that takes place over a period of time. It is a quantitative model that reflects the change in demand for goods and services and the pattern in the order of occurrence, using historical data. These patterns or characteristics of the change process are known as a 'times series'. Extrapolation is one of the simplest ways to forecast. For example, if we know the past values, say of demand, we could estimate demand by joining the points on a graph paper and extending the line to arrive at the demand for the next period. Moving Average Method The simplest form of time series is the moving average method. In this type of model, the raw data is converted into a moving average that reflects the trend in change of demand. The moving average is an arithmetic average of data over a period of time. By averaging historical data, the attempt is to remove the random fluctuations. In this method, the data is updated regularly by replacing the item in the average by the new item. This type of model is especially useful when demand has no pronounced trend or seasonal influence. It is generally used to study this type of data, which is superior to the raw data because it eliminates or smoothens out the irregularity in the time series. The general formula for moving average is: Ft+1 = (At + At-1 + At-2 + At-3 + + At-n+1) / n Where: Ft+1 is the moving average for the period t+1, At, At-1, At-2, At-3 etc. are actual values for the corresponding period, and n is the total number of periods in the average. For example, suppose the prices for a product are given for 12 months and a five monthly average is to be computed. Each month sequentially designated as A1, A2, A3, A4, A5.etc.

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Then the first 5-month moving average would be; F5 = F6 = And so on: The last item would be the average: F12 = [(A8 + A9 + A10 + A11 + A12)/5] [(A1 + A2 + A3 + A4 + A5)/5] [(A2 + A3 + A4 + A5 + A6)/5]

The second moving average of the next five months would be;

The stability of the series often determines how many periods to include in the moving average. Large values of n should be used when the series is relatively stable. Including more historical data in the average results in a forecast that is less susceptible to random variations. However, where the individual values are prone to change, small values of n are recommended. Simple Moving Averages (MA) is an effective and efficient approach to forecasting the future provided the time series is stationary in both mean and variance. This is important and needs to be ascertained. Also, if there is a trend in the data, the moving average has the adverse characteristic of lagging the trend. Weighted Moving Averages In a simple moving average, each period has the same weight. However, very often it may be desirable to emphasize specific elements more than others; for example, you may decide that recent demand needs more emphasis over earlier demand. In such a case, weights can be placed on each element as desired, subject to the condition that the total of the weights should add up to 1. The general formula for the weighted moving average then changes to: Ft+1 = [(wtAt + wt-1At-1 + wt-2At-2 + wt-3At-3 + + wt-n+1At-n+1) / n Where: Ft+1 is the weighted moving average for the period t+1, wt is the weighing factor, and tn=1 wt = 1 For example, if n is 5, we could weight the moving average as follows: w1 = 5/ (1 + 2 + 3 + 4 + 5) = 5/15 = 1/3; w2 = 4/15; w3 = 3/15 = 1/5; w4 = 2/15 and w5 = 1/15. w = 1/3 + 4/15 + 1/5 + 2/15 + 1/15 = 1 In this example, the most recent period has the highest weight compared to the earlier periods. The weight progressively reduces as the period increases. An advantage of this model is that it allows one to compensate for seasonality or any unusual event by carefully fitting the coefficients, wAt. However, it must be remembered that the choice of the coefficient has to be made by management and this choice is critical to the applicability of the model.

An illustrative numerical example: Company ABC wants to forecast the sale for the next 12 months based upon a Simple Moving Average and Weighted Moving Average, using five previous periods as the database, to find out which method will provide it with more accurate forecasts. For the data given in Table 8 and the weights given above, there would be insufficient data to determine either the moving average or the weighted moving average for the first four months. The moving average would be: F5 = (1824 + 1980 + 1560 + 1600 + 1204) 1/5 = 1633.6 However, the weighted moving average for the 5th month would be: F5 = 1824 1/3 + 1980 4/15 + 1560 1/5 + 1600 2/15 + 1204 1/15 =1741.6 The moving average and weighted moving average of order five, for a period of twelve months, are calculated in Table 10.2.
Table 10.2: Moving Average and Weighted Moving Average
Month 1 2 3 4 5 6 7 8 9 10 11 12 Sales 1204.0 1600.0 1560.0 1980.0 1824.0 2134.0 2504.0 2798.0 3072.0 2952.0 3348.0 3272.0 Total of 5 Periods Moving Average (MA) Weighted MA

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8168.0 9098.0 10002.0 11240.0 12332.0 13460.0 14674.0 15442.0

1633.6 1819.6 2000.4 2248.0 2466.4 2692.0 2934.8 3088.4

1741.6 1908.4 2136.5 2402.4 2677.1 3123.5 3057.6 3170.0

It will be seen from the results in columns 3 and 4 of Table 10.2 that with this data stream, the weighted moving average provides a more accurate forecast than the moving average. Exponential Smoothing Exponential smoothing models are very popularly used in Operations Management to produce a smoothed time series when the forecasting horizon is relatively short and when there is little information about cause and effect relationship between the demand of an item and the independent factors that influence it. Unlike regression models, exponential smoothing does not make use of information from series other than the one being forecast. These models are also readily available in standard computer software and require limited data storage and computational capacity. The Exponential Smoothing method is:

Easy to adjust for past errors, Easy to prepare follow-on forecasts from, and Ideal for situations where many forecasts need to be prepared.

Since exponential smoothing is an iterative process, we only need to define an initial value.

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Single Exponential Smoothing: The Single Exponential Smoothing method calculates the values for a smoothed series. You choose a damping coefficient which is called the weighting factor. This factor is used to smooth the data. It can have a value ranging from 1 to 0 and determines the sensitivity of the smoothing effect. The exponential relationship that was shown earlier can now be written using standard notations: Ft+1 = Dt + (1 ) Ft Where: Dt is the actual value Ft is the forecasted value is the weighting factor, which ranges from 0 to 1 t is the current time period. Since Ft+1 = Dt + (1 ) Ft Ft = Dt-1 + (1 ) Ft-1 and so on Therefore Ft+1 = Dt + (1 ) ( Dt-1 + (1 ) Ft-1). Ft+1 = Dt + (1 )Ft-1 + (1 )2Ft-2 + (1 )3Ft-3. Thus, the forecast for the next period is the algebraic sum of the forecast for the last period and is times error in forecast in the last period. Exponential Smoothing assigns exponentially decreasing weights as the observation gets older. In other words, recent observations are given relatively more weight in forecasting than the older observations. A small provides a detectable and visible smoothing, while a large provides a fast response to the recent changes in the time series but provides a smaller amount of smoothing. The data in Table 10.2 has been taken and the values have been smoothed exponentially using weighting factors of 0.1, 0.5 and 0.9, in Table 10.3. Notice that the smoothed value becomes the forecast for period t + 1. Also, only three items of data are required for the analysis, unlike the moving averages where the first value is for the fifth week. It is interesting to note how for this particular series, the moving average, the weighted moving average and simple exponential smoothing smooth out the seasonality. The difference between the different weighting factors is increasingly visible as the number of reading increases.
Table 10.3: Moving Average, Weighted Moving Average and Exponential Smoothing
Sales 1204.0 1600.0 1560.0 1980.0 1824.0 2134.0 2504.0 2798.0 3072.0 2952.0 3348.0 3272.0 1633.6 1819.6 2000.4 2248.0 2466.4 2692.0 2934.8 3088.4 1741.6 1908.4 2136.5 2402.4 2677.1 3123.5 3057.6 3170.0 1204.0 1560.4 1560.0 1938.0 1835.4 2104.1 2464.0 2764.6 3041.3 2960.9 3309.3 1204.0 1402.0 1481.0 1730.5 1777.2 1955.6 2229.8 2513.9 2792.9 2872.4 3110.2 1204.0 1243.6 1275.2 1345.7 1393.5 1467.6 1571.2 1693.9 1831.7 1943.7 2084.1 MA WMA = 0.1 Exponential Smoothing = 0.5 = 0.9

The basic decision that needs to be taken by the manager is the selection of the smoothing constant. How should it be taken? The constant has to be either equal to or between the value range of 0 and 1. There are no specific rules of selecting the value for . If more weight has to be given to recent data, then the value should be closer to 1. Values between 0.1 and 0.3 are most commonly used. The best value of alpha has the smallest mean absolute error. Looking at Table 10.3, it would seem that a value of between 0.1 and 0.3 would provide the best forecast using the single exponential smoothing method. This will be apparent later when we make a comparison of the error in the forecasts. An exponentially weighted moving average with a smoothing constant , corresponds roughly to a simple moving average of length (i.e., period) n, where and n are related by: = 2/(n+1) or n = (2 - )/ . Thus, for example, an exponentially weighted moving average with a smoothing constant equal to 0.1 would correspond roughly to a 19-day moving average. And a 40-day simple moving average would correspond roughly to an exponentially weighted moving average with a smoothing constant equal to 0.04878. Simple moving average techniques are a special case of exponential smoothing and will generate forecasts having the same average age of information if moving average of order n is the integer part of (2- )/ . Double Exponential Smoothing: An exponential smoothing over an already smoothed time series is called double-exponential smoothing. Double exponential smoothing allows forecasting data with trends. This method is better at handling trends that are not stationary. Double-exponential smoothing applies the process of exponential smoothing to a time series that is an exponentially smoothened series to account for linear trend in the forecasted value. The extrapolated series has a constant growth rate, equal to the growth of the smoothed series at the end of the data period. Triple Double Exponential Smoothing: In the case of nonlinear trends, it might be necessary to extend it even to a triple-exponential smoothing. Triple Exponential Smoothing is better at handling parabola trends and is normally used for such data. While simple exponential smoothing requires stationary conditions in the demand parameters, the double-exponential smoothing can capture when the demand is changing in a linear trend, and triple-exponential smoothing can handle almost all other business time series. Unlike regression models (which are discussed later), exponential smoothing does not impose any deterministic model to fit the series other than what is inherent in the time series itself. It can be modified efficiently to use effectively for time series with seasonal patterns. Whereas in moving averages the past observations are weighted equally, Exponential Smoothing assigns exponentially decreasing weights as the observations get older. Regression Analysis Regression Analysis is a method of predicting the value of one variable based on the value of other variables. It reflects the casual relationship underlying the demand being forecast and an independent variable. Examples of casual relationships are, say, relationships between income levels and disposable income, cost and demand, etc.

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216 Production and Operation Management

Regression analysis is of two types, (a) Simple Linear Regression: A regression using only one predictor is called a simple regression, and (b) Multiple Regressions: Where there are two or more predictors, multiple regression analysis is employed. Simple Linear Regression: These models are based on functional relationships between variables that define the environment. The value of one variable is based on the value of other variables. To make predictions or estimates, we must identify the effective predictors of the variable of interest. We need to identify variables that are important indicators and can be measured at the least cost to use for the forecast.

Figure 10.5: Simple Regression and Correlation Model

Figure 10.5 shows a simple forecasting model, reflecting an independent and dependent variable having a relationship, y = f (x). The data that has been used in this relationship is the example and data given in Table 10.3. There are two types of variables, one that is being forecasted and one from which the forecast is made. The first one is known as the dependent variable, the latter as the independent variable. In the examples given above, income levels and cost, are the independent variables and disposable income and demand are the dependent variables. The functional relationship between the two can be visualized within a system of coordinates where the dependent variable is shown on the y and independent variable on the x-axis. y = f (x) or y = a + bx Where, Y is the dependent variable, a is the Y intercept, b is the slope of the line, and x is the time period In addition to the two types of variables an additional type, the intervening variable, needs to be kept in mind. The intervening variable carries only a little information or is redundant or has little effect on the dependent variables magnitude. This variable type is not considered in the decision space of the forecast. A major restriction in using this method is that, it assumes that the past data and projects of future data fall in a straight line. This limitation is often overcome using shorter periods for forecasts during which the relationship between the variables approximates that of a straight line. Many relationships that have an exponential form

can also be handled by using a log and log-log relationship, which converts the function into a straight line. Regression analysis can be used to forecast both time series and cross-sectional data. When the dependent variable, normally represented by the y axis, changes with time, which is the independent variable, it is a time series analysis. With time series, this analysis is often used to estimate the slope of a trend line. Goodness of Fit The equation given in Table 10.4 is a time series and has been generated by the least squares method. The data has been taken from Table 10.3 for which we have already worked out the moving average, the weighted moving average and series of exponential smoothing forecasts. The pairs of data based on actual sales have been plotted in the graph above and are represented by the zigzag line. Though, we can say there is a linear relationship between the pair of x and y values, it is difficult to draw a straight, through all the points. This type of dispersion of points is common to almost all data and the pattern of dispersion is normally called a scatter diagram, i.e., the points lie within a band described by parallel lines. The points do not fall in a straight line and we need to determine the relationship between the points. To predict the mean y-value for a given x-value, we need a line which passes through the mean value of both x and y. This is achieved through the least squares method. Take the equation: y = a + bx The least square method tries to fit the data such that it minimizes the sum of the distance between each of the points and the predictive line. Such an approach should result in a line, which we can call a best fit to the sample data. It calculates the minimum average squared deviations between the sample Y points and the points on the estimated line, y. If y is known, it is possible to find the values of the intercept a and the slope b. (y1 - Y1)2 + (y2 - Y2)2 + (y3 - Y3)2 + (y4 - Y4)2 +..+ (yi - Yi)2 = minimum Where: Y is the sample points of the dependent variable y is the actual value of the dependent variable We know: y = na + b x, and xy = a x + b x2 This reduces to the solution of simultaneous linear equations. Solving the two equations for y and xy, we calculate the values of y. One of the most common uses of this procedure is for determining the value of the intercept and the slope of a trend line. The solution below has been worked out for the example given in Table 10.2, using a tabular methodology. The figures for sale (y) have been taken from column 2 of table 10.2 and time (x) has been taken from column 1 of the table. The results are calculated in the Table 10.4 below:

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218 Production and Operation Management

Table 10.4: Calculating a Least Square Regression Line

x 1 2 3 4 5 6 7 8 9 10 11 12 78 y 1204 1600 1560 1980 1824 2134 2504 2798 3072 2952 3348 3272 28248 xy 1204 3200 4680 7920 9120 12804 17528 22384 27648 29520 36828 39264 212100 x2 1 4 9 16 25 36 49 64 81 100 121 144 650 y2 1449616 2560000 2433600 3920400 3326976 4553956 6270016 7828804 9437184 8714304 11209104 10705984 72409944 Y 1258.307 1457.524 1656.74 1855.957 2055.174 2254.391 2453.608 2652.824 2852.041 3051.258 3250.475 3449.692

a= b=

78/12 = 6.5 28248/12 = 2354 1059.091 199.2168 a = y b* x , b = (xy n* x * y ) / x2 x* x 2 therefore, Y = 1059.09 + 199.21x

By adding the figures in column 1 and dividing by the number of readings, we get the value. Similarly, the value is obtained. With the and the values, the values of a and b can be calculated. The value for Y can now be calculated. This result could also have been obtained using the formulae that have been discussed earlier and also shown in the last 2 rows of Table 10.4. The final results are: a = 1059.09 b = 199.22 The standard error of estimate or how well the line fits the data is calculated as follows:
n yx i 1

y y1

/ n 2



= 95.12

These results are also shown in the graphical representation in Table 10.4. Multiple Regressions: Though it is always better to use as few variables as predictors as necessary to get a reasonably accurate forecast, in many cases this may not give accurate results. With multiple regressions, we can use more than one predictor. The forecast takes the form: Y= Where,
0 0

X1 +

X2 + . . .+


is the intercept, and

1, 2, . . . n are coefficients representing the contribution of the independent variables X1, X2,..., Xn.

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Multiple regressions are used when two or more independent factors are involved, and it is widely used for short to intermediate term forecasting. They are used to assess the factors which have to be included or excluded. They can be used to develop alternate models with different factors.


The error in a forecast is the difference between the forecast value and the actual value. The forecast value should be within confidence limits. The error can be measured by or described by the standard error, the mean absolute deviation, or the variance.
Mean Absolute Deviation (MAD) is the average of the absolute value of difference between the actual and forecasted value.

MAD In this equation: Dt is the actual demand in period t Ft is the forecasted demand in period t, and n is the number of periods used to calculate the demand. | | denotes the absolute value When the error is less than three standard deviations, it is considered as an acceptable forecast.
= (/2) x MAD 1.25 MAD

Where is the standard deviation In other words, if the forecast error value is within 3.75 MAD, either on the positive or negative side, the error is within acceptable limits.
Table 10.5: Error on Moving Average and Weighted Moving Average
Sales 1204.0 1600.0 1560.0 1980.0 1824.0 2134.0 2504.0 2798.0 3072.0 2952.0 3348.0 3272.0 1633.6 1819.6 2000.4 2248.0 2466.4 2692.0 2934.8 3088.4 MADma MADwma 1741.6 1908.4 2136.5 2402.4 2677.1 3123.5 3057.6 3170.0 335.6 225.5 -190.4 -314.4 -503.6 -550 -605.6 -260 -413.2 -183.6 -82.4 -225.6 -367.5 -395.6 -394.9 171.5 -290.4 -102 MA WMA

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Table 10.6 is a computation of the error in the Moving Averages given in Table 10.5. In this particular case, the Weighted Moving Average shows a smaller error than does the Moving Average.
Table 10.6: Error on Exponential Smoothing
Sales 1204.0 1600.0 1560.0 1980.0 1824.0 2134.0 2504.0 2798.0 3072.0 2952.0 3348.0 3272.0 1204.0 1560.4 1560.0 1938.0 1835.4 2104.1 2464.0 2764.6 3041.3 2960.9 3309.3 MAD = 0.1 MAD = 0.5 MAD = 0.9 1204.0 1402.0 1481.0 1730.5 1777.2 1955.6 2229.8 2513.9 2792.9 2872.4 3110.2 232.0 331.2 832.5 1204.0 1243.6 1275.2 1345.7 1393.5 1467.6 1571.2 1693.9 1831.7 1943.7 2084.1 -396 0.4 -420 114 -298.6 -399.9 -334 -307.4 89.3 -387.1 37.3 -2302 -396 -158 -499 -93.5 -356.8 -548.4 -568.2 -558.1 -159.1 -475.6 -161.8 -3974.5 -396 -316.4 -704.8 -478.3 -740.5 -1036.4 -1226.8 -1378.1 -1120.3 -1404.3 -1187.9 -9989.8 Exponential Smoothing a = 0.1 a= 0.5 a= 0.9 a= 0.1 Error a= 0.5 a= 0.9

Table 10.6 compares the errors between the three values of in computing the forecast in the sales data. The lowest error is seen when the value of is 0.1. However, even in the best case, the error is higher than the error obtained from the weighted moving average method. Using the same formula to calculate the error using regression analysis mode, the standard error is: Standard Error 154.55 Observations 12.00 This error is even lower than the standard error shown by the other methods. A comparison of Tables 10.5 and 10.6 and the calculations on the regression analysis, all these indicate that the final result depends on the characteristics of the stream of data, rather than on the method used.


Forecasting is a prediction of what will occur in the future, and it is an uncertain process. Because of the uncertainty, the accuracy of a forecast is as important as the outcome predicted by forecasting the independent variables X1, X2,..., Xn. A forecast control must be used to determine if the accuracy of the forecast is within acceptable limits. Two widely used methods of forecast control are a tracking signal, and statistical control limits.
Tracking signal: It is computed by dividing the total residuals by their MAD. This should normally stay within 3 standard deviations, as the tracking signal that is within 3.75 MAD is often considered to be good enough as an acceptable forecast.

Statistical Control Limits: The standard error is a measure of performance of the forecast. The sample mean for a time-series, has:

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Syx2 S / n , but = S [(1-r) / (n-nr)] Where: Syx2 is the standard error

S is the sample standard deviation, n is the length of the time-series, and r is its first order correlation.

Beside the Standard Error, if the forecast error is stable, then the distribution of it is approximately normal. With this in mind, we can plot and then analyse the on the control charts to see if there might be a need to revise the forecasting method being used. To do this, if we divide a normal distribution into zones, with each zone one standard deviation wide, then one obtains the approximate percentage we expect to find in each zone from a stable process. Statistical control limits are calculated in a manner similar to other quality control limit charts; however, the residual standard deviation is used. Control limits could be one-standard-error, or two-standard-error. Any point beyond these limits (i.e., outside of the error control limit) is an indication that the forecasting process needs to be revised.
Correlation Analysis and Coefficient of Determination

Correlation analysis measures the degree of relationship between two variables. The degree of correlation between normally distributed dependent and independent variables is signified by the correlation coefficient r. The coefficient of determination, symbolized by r2 gives the proportion of variation in the dependent variable, which is explained by the independent variable in the regression analysis. The coefficient of determination is a pure number and can have a value ranging from 0 to 1. Similarly, the coefficient r is a pure number and is constrained by a value of 1. Mathematically, correlation coefficient is defined by:

r = 1

2 S xy 2 Sy

And the coefficient of determination is defined by: r2 = [1 - (Syx2 / Sy2 ) Where: Syx2 is the standard error of the estimated regression equation of the y values on x, and Sy2 is the standard error for the y values The correlation coefficient and coefficient of determination have been calculated for the example given in Table 10.2. Correlation Coefficient Coefficient of Determination 0.98 0.96

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According to the interpretation of the results, more than 96 per cent of the variation in sales volume is accounted by the time variable. There is also a high positive correlation between the variables.


Historical data of the time series, which the user may have, often needs to be filtered to provide reliable statistical estimates. Historical data may represent more than one component of demand. Based on professional judgment, when more than one component of demand is present in the data, the data has to be separated into each component pattern so that it can be used to project the future. De-seasoning and smoothing operations on data eliminates disruptive elements that can compromise the accuracy of forecasts. For example, spot electricity prices exhibit strong seasonality on the annual, weekly and daily level and sometimes infrequent, but large jumps, due to outages, etc. These spikes are normally quite short-lived, and prices fall back to a normal level. Undesirable characteristics can be removed from series by de-seasoning and smoothing operations. Decomposition of a time series means separating these components. The first question, however, is as to how they relate to each other. The seasonal variation can be additive or multiplicative. An additive variation means that the seasonal component is a constant, no matter what the trend or average amount is. In the multiplicative seasonal variation, the size of the seasonal variation depends on the trend. It increases with increasing values of the variables. This type of seasonal variation is usually encountered. The nature of the variation is shown in Figure 10.6.

Figure 10.6: Multiplicative Seasonal Variation

When demand data contains both seasonal and trend effects at the same time, we need to know how they relate to each other and how to separate their impacts.

10.8.1 Seasonal Index

Seasonality is a pattern that repeats for each period. For example annual seasonal pattern is 4 periods long if the periods are quarters. Seasonal index represents the extent of seasonal influence for a particular segment of the year. The calculation involves a comparison of the expected values of that period to the grand mean. To get an accurate estimate for the seasonal index, we need to compute the average of the first period of the cycle, and the second period, etc., and divide each by the overall average. The formula for computing seasonal factors is: Si = Di/D,

where: Si = the seasonal index for ith period, Di = the average values of ith period, D = grand average, i = the ith seasonal period of the cycle. For example, a seasonal index of 1.00 for a particular month indicates that the expected value of that month is 1/12 of the overall average.

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10.8.1 Seasonal Adjustment

Seasonal Adjustment is the process of removing recurrent and periodic variations over a short time frame. The seasonal adjustment data is obtained by simply dividing each time series observation by the corresponding seasonal index. Let us work out the example given in the Table 10.7 below. The sales data for two years are given with the sales data aggregated in periods of two months.
Table 10.7: Sales Data for ABC Corporation
Month, 2003 Jan - Feb Mar- April May - June Jul Aug Sep Oct Nov - Dec Sales 109.0 104.0 150.0 170.0 120.0 100.0 Deseasoned Demand Month, 2004 Sales 115.0 112.0 159.0 182.0 126.0 106.0 Average 112.0 108.0 154.5 176.0 123.0 103.0 Seasonal Factor 0.87 0.83 1.19 1.36 0.95 0.80 Deseasoned Demand 132.18 130.12 133.61 133.82 132.63 132.50

125.29 Jan - Feb 125.30 Mar - Apr 126.05 May - June 125.00 Jul - Aug 126.32 Sept -Oct 125.00 Nov -Dec

The initial information given has been shown in columns 1, 2, 4 and 5. The first step is to add the total sale of the periods i.e. data in column 2 and column 5 are added up, and the average is determined by dividing it by the number of periods. In the case of data in Table 10.7, the average sales per period, during the two years under consideration, comes to 129.42. Then, find the average sales for the same period for the two years under consideration. This is accomplished by adding data in column 2 and column 5 and dividing the total by 2 (in this case). The seasonal factor can now be obtained. The seasonal factor is obtained by dividing the average given in column 6 by the general average, which has been computed earlier (129.42). The data is now ready to be deseasoned. Deseasoning is carried out by dividing the actual sales by the seasonal factor, i.e., dividing data in column 2 by column 7 for the year 2003 and data in column 5 by column 7 for the year 2004. You can cross check your calculations by adding up the actual demand and the deseasoned demand for the total period. The two totals should be the same. After deseasoning has been carried out, a new regression line can be constructed using the values in columns 3 and 8 to construct a trend line independent of the variations due to seasonal demand.

10.8.2 Trend Effects in Exponential Smoothing

The exponential forecast just, like the moving averages, has the adverse characteristic of lagging the trend. Exponentially smoothed forecasts can be corrected somewhat by introducing a trend correction adjustment. In this case, the equation is modified to add an additional smoothing constant .

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The exponential smoothing equation now changes to: FITt+1 = [ Dt + (1 Where: Tt+1 = Tt + (Ft+1 FITt) Here: FITt+1 is Forecast including trend = Smoothing Constant = Trend Smoothing Constant Tt+1 = Correction Factor for time period t+1 ) Ft] + Tt+1

10.8.3 Cyclical Analysis

The cycles can be easily studied if the trend itself is removed. This is done by expressing each actual value in the time series as a percentage of the calculated trend for the same date. The resulting time series has no trend, but oscillates around a central value of 100.


Microsoft Excel provides for Simple Moving Average, Single Exponential Smoothing, correlation, and regression. In order to use this provision, on the MS Excel toolbar, click on the Tools Menu. In the menu that is pulled down, click on Add-Ins. This will show a number of options including Analysis ToolPak, Analysis ToolPak - (VBA) and Solver Add-in. Select these three, i.e., Analysis ToolPak, Analysis ToolPak - (VBA) and Solver Add-in. When you open the tools menu again, it will have an additional option Data Analysis, now you can click on Data Analysis and access any of these forecasting tools. In order to perform regression analysis, some of the terms used in the dialog box are given below: Input Y Range: Enter the reference for the range of dependent data. The range must consist of a single column of data. Here the sales data is the y range. Input X Range: Enter the reference for the range of dependent data. Microsoft Excel orders independent variables from this range in ascending order from left to right. The maximum number of independent variables is 16. In this question, the inputs have to be specified for each of the regression calculation separately. Labels: Select if the first row or column of your range or ranges contain labels. Clear if your input has no labels; Microsoft Excel generates appropriate data labels for the output table. Confidence Level: Select to include an additional level in the summary output table. In the box, enter the confidence level you want applied in addition to the default 95 per cent level. Constant is Zero: Select to force the regression line to pass the origin. Output Range: Enter the reference for the upper-left cell of the table. Allow at least seven columns for the summary output table, which includes an anova table, coefficients, standard error of y estimate, r2 values, number of observations and standard error of coefficients. Residuals: Select to include standardized residuals in the residuals output table. Residual Lots: Select to generate a chart for each independent variable versus the residual.

Line Fit Plots: Select to generate a chart for predicted values versus the observed values. Normal Probability Plots: Select to generate a chart that plots normal probability.

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There is an excellent help menu that assists one in using the various options of these forecasting methods. Multiple regressions and Double and Triple Exponential Smoothing are best models with commercial packages such as SAS or SPSS.
User Interface

In order that the model is both valid and legitimate, it has to strike a balance between the level of model sophistication/complexity and the competence level of the users. The model must be adapted both to the task at hand, the cognitive capacity of the users, and the various preferences prevailing in the organisation. This is important since the interpretation and the use of the model will vary according to the dominant preferences of the various organisational actors. In addition, the possible uses of the model should be well documented so that the users are quite knowledgeable and are comfortable with the contents and the working of the model.


There are many qualitative models that include the historical analogy method, the executive opinion method, survey methods, etc., but the most well known one is the Delphi Technique. These models are described below:

10.10.1 Historical Analogy Method

W.W. Rostow propounded his theory of economic evolution to explain the several stages of growth before a market reaches the stage of take-off and mass consumption. The principle of identifying analogous events or the performance of an ancestor of the product or service and using this information to forecast future events is the basis of the historical analogy method. Once the event or ancestor product has been identified, this method uses the life cycle analysis for arriving at its conclusions. For example, the forecast of demand for cars in India can be based on the analogy of demand for automobiles in the U.S.A. in 1940s, based on the assumption that the conditions now obtaining in India in the automotive sector are very much like the conditions that prevailed in the U.S.A. during the 1940s. Because of the logical association used, only broad trends of long-term growth are indicated by such analogous comparisons. Such methods often provide a guideline in the initial planning phases, and need testing and verification by other methods as actual demand becomes known.

10.10.2 Executive Opinion Method

When a new product or service is planned, the sales force may not be able to make accurate demand forecasts. The executive opinion method attempts to pool the knowledge, experience and judgment of managers inside the enterprise, by asking them their opinion on the likely sales of the product or service. The executives can be interviewed individually or collectively. They may be asked to explain the basis of their forecasts. The method could also be used as an adjunct to other forecasting methods. This method is especially useful for technological forecasting, especially in high clock-speed industries. The quick pace of technological change makes it difficult to keep abreast of the latest advances. By using a method of exploration and consensus,

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many of the gaps can be plugged in. Using this method existing sales forecasts can also be handled effectively in the face of unusual circumstances.

10.10.3 Survey Methods

Market surveys and analysis of consumer behaviour have developed into sophisticated techniques and are often extremely valuable inputs for predicting market demand. There are different types of surveys: census type surveys and sample survey. Surveys can be of different magnitudes: from large-scale nation-wide surveys to that of a target population. Data can be obtained through specifically designed surveys by means of questionnaires and interviews. The data can be analysed to test predetermined hypotheses and also making predictions and future estimates of demand. A popular method to estimate the demand for a new product is by using a sample of respondents who are knowledgeable about the product or service, such as wholesalers, retailers, salesmen, etc. The sample of respondents and its size, method of sampling, and the means of collecting the information, etc., need to be carefully determined, as these can impact the results of the survey. This field is a speciality by itself and beyond the scope of this book. However, we need to keep in mind that the data so collected needs to be processed with care for making forecasts as the data is often based on certain conditions over which the study may have limited or no control. Market research may be used to forecast demand for the short term with excellent accuracy. However, medium and long-term forecasts tend to be less accurate.

10.10.4 Delphi Method

The Delphi Method and its extensions is the most widely used and accurate method of technological forecasting. The Delphi method has been based on the assumption that the best sources of technological forecasts are the opinions of experts in a given technology. The best way to make a forecast is to ask the experts in the field to make it. At least five conditions must be present before the decision to use a group should be made: 1. No known or right answers exist (that is, acceptable forecasts do not exist or are not available); 2. Equally reputable persons disagree about the nature of the problem, the relative importance of various issues, and the probable future; 3. The questions to be investigated can cross disciplinary, political, or jurisdictional lines and no one individual is competent enough to cope with so many subjects; 4. Cross-fertilization of ideas seems worthwhile and possible; and 5. A credible method exists for defining group consensus and evaluating group performance. A panel of experts in the field is created and a consensus is sought. Typically, a panel should have 10 to 50 members. Normally, the experts are required to participate anonymously so that no member of the expert group becomes dominant. The approach is iterative and each iteration is called a round. In each round, a panel of experts is questioned individually and confidentially by means of a questionnaire. They are required to forecast certain hypothetical future events. Lateral interactions between panel members are forbidden. The whole process typically takes four rounds but sometimes more rounds are necessary, especially if the opinions of the panel members have not converged sufficiently to constitute consensus.

The questionnaire for the first round is unstructured and open-ended. It requires panelists to provide a forecast on developments over the period and within the area under study. The results from the initial round of forecasting are collated and summarized and the data is fed back to all participants. They are invited to rethink their original answers in light of the responses from the group as a whole. If, for example, the participants have individually estimated an events probability by some future year, the intermediary might compute the mean or median response, the inter quartile range or upper and lower envelopes of the estimates, the standard deviation, and so forth, and pass these data back to the panelists for their consideration in making a new estimate. The second round is based on the results of the first round. The results are compiled and the panelists are asked to suggest estimated dates when each of these events may occur. They are free to negate the occurrence of the event. In each case, they are asked to provide their reasoned justification for each estimate. From the answers, a statistical summary of the distribution of dates is prepared for each event. The median, lower and upper quartile dates for each event are calculated. The third round presents this data to the panelists as well as the reasons advanced for the extreme event dates. After reviewing the information provided, they are asked to provide revised event dates and reasons for their response. The revised statistical data, along with the pros and cons cited are presented to the experts again. Based on the new information, they are free to change their previous forecasts. The results are then consolidated and the results of this final round constitute the reported forecast. The process of eliciting judgments and estimates (deriving the group response, feeding it back, and asking for re-estimates in light of the results obtained so far) should be continued until either of two things happens: The consensus within the group is close enough for practical purposes, or the reasons why such a consensus cannot be achieved have been documented. The Delphi technique has the following characteristics: anonymity between panel members, iteration with controlled feedback, and statistical group response. In this method, the selection of the expert panel is extremely important. The promise of Delphi is that if these characteristics are preserved, consensus within the panel would sharpen and the opinions or forecasts derived by the process would be closer to the exact answer than forecasts derived by other judgmental approaches.

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10.10.5 Special Long-term Forecast Methodologies

In addition, Simulation or Scenario Building methods are also used for long-term forecasting. Both, simulation and scenario building use a combination of forecasting and prediction concepts, though simulation can often be highly quantitative using system dynamics methodology. These methods are described below:
Scenario Planning

Scenario planning is a highly popular long-range forecasting tool. It looks at whats going to happen tomorrow, where change is unpredictable and the future is uncertain. The purpose of scenario planning is not to pinpoint future events but to highlight large-scale forces that push the future in different directions. Its about making these forces visible, so that if they do happen, the planner will at least recognize them. Its about helping make better decisions today. Scenarios can play a critical role in environmental analysis systems. The Shell method helped the Anglo-Dutch firm to become an oil giant. It makes 20-year-scenario plans,

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which are updated every three years. Shell uses a dual global scenario structure. One of Shells most recent efforts is to chart energy markets out to 2050, featuring two distinct scenarios: one in which renewable energy sources gain popularity very slowly over time and another in which new fuel technologies, such as hydrogen fuel cells, are quickly accepted. The term scenario, taken from the world of theater and film, refers to a brief synopsis of the plot of a play or movie. In the Strategic Management context, scenarios can be described as stories of possible futures that might be encountered. Scenarios are graphic and dynamic, revealing an evolving future. They are holistic, combining Social, Technological, Economic, Environmental, and Political (STEEP) trends and events, the qualitative as well as the quantitative. They focus attention on potential contingencies and discontinuities, thereby stimulating us to think more creatively and productively about the future. It is possible to create scenarios in-house. The methodology involves a relatively straightforward six-step process with two important elements. The first is the decision focus of the scenarios. The starting point for the process is the very specific decision(s) that confront the organisation. Scenarios should be designed specifically to help make those decisions. The other key element is the scenario logic. This gives scenarios a kind of organising principle or logical structure. The logic of a scenario comes from a theory, assumption, or belief about change. Each distinct scenario logic is an argument about the future, a different interpretation of the uncertainties in the underlying forces that lead to a different view of the future. The steps are:
Step 1: Identify and Analyse the Organisational Issues that will Provide the Decision Focus: Clarifying the decision focus of the whole process is the first task. The decisions that form the scenario focus tend to be strategic rather tactical in nature. Virtually any decision or area of strategic concern in which external factors are complex, changing, and uncertain can be appropriate for treatment by scenarios. As a general rule, the narrower the scope of the decision or strategy, the easier is scenario construction and its interpretation. Developing scenarios for broader strategic concerns the long-range positioning is substantially more difficult than for a straightforward investment decision. Step 2: Specify the Key Decision Factors: Having thought through the strategic decision(s), we then need to examine the key decision factors. In simple language, we would like to know about these key factors and their future in order to make a decision. Though we cannot actually know the future; it would still be helpful to have some fix on the future course and value (or range of values) for these factors.

Decision factors for an anticipated major expansion of manufacturing facilities, for example, might include market size, growth, volatility; substitutes resulting from new technology; long-range economic conditions and price trends; future government regulations; capital availability and cost; technology availability and capacity.
Step 3: Identify and Analyse the Key Environmental Forces: The next step is to identify the external forces that determine the future course and value of the r key decision factors. Here an environmental scanning/monitoring system can be used to scan for signals of change in the task, industry, and macro environment. The objective is to start building a good conceptual model of the relevant environment, one that is as complete as possible, including all the critical trends and forces, and that, which maps out the key cause-and-effect relationships among these forces.

The trends and developments that are relatively predictable and those which have an element of uncertainty attached to them need to recognised. An impact/uncertainty

matrix, with a simple high-medium-low scoring system, can position each of these forces on the matrix in terms of (1) the level of its impact on the key decision factors (obviously, all the forces are presumed to have some impact, but some are more important than others) and (2) the degree of uncertainty we feel about the direction, pace, or fact of its future course.
Step 4: Establish the Scenario Logics: This step is the heart of the scenario development process. Here, a logical rationale and structure for the scenarios we select to develop is established. The central challenge in this step is to develop a structure that will produce a manageable number of scenarios and do so logically.

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For example, economic growth will be driven by expanding trade or hobbled by increasing protectionism; competition in our markets will be marked by growing consolidation or restructured by the entry of new players.
Step 5: Select and Elaborate the Scenarios: The objective is not to cover the whole envelope of our uncertainty with a multiplicity of slightly varying futures, but rather to push the boundaries of plausibility using a limited number of starkly different scenarios.

1. The selected scenarios must be plausible, that is, they must fall within the limits of what logic says. 2. They should be structurally different, that is, not so close to one another that they become simply variations of a base case. 3. They must be internally consistent, that is, the combination of logics in a scenario must not have any built-in inconsistency that would undermine the credibility of the scenario. 4. They should have decision-making utility, that is, each scenario, and all the scenarios as a set should contribute specific insights into the future which help in making decisions. 5. The scenarios should challenge the organisations conventional wisdom about the future. Once the scenarios have been selected, they then have to be elaborated. There are many ways to elaborate the description of scenarios, but there are three important features: 1. A highly descriptive title: Each scenario should have a short but descriptive title which conveys the essence of what is happening in the scenario. 2. Compelling story lines: A scenario should tell a story, which should be dramatic, compelling, logical, and plausible. 3. A table of comparative descriptions: This provides planners and decision makers with details along specific dimensions. These three features can always be embellished with charts, graphs, and other visual material to help to bring the scenarios to life. The guiding principle in determining the extent of this elaboration is, as always, the requirement of the decision focus.
Step 6: Interpret the Scenarios for their Decision Implications: This final step in the scenario process can develop some initial and valuable strategic insights. There are two major questions and their answers provide an initial assessment of the core competencies that the organisation needs in order to succeed in the conditions portrayed in the scenarios.

First, which opportunities and threats are common to all (or nearly all) the scenarios? These are the ones on which presumably our strategic thinking should be focused.

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The second question is that how well prepared are we to seize those opportunities and obviate (or minimize) the threats? Bringing together the answers to these two questions suggests some discrete strategy options (though not yet an integrated strategy) that deserve more disciplined analysis. Scenario planning is especially useful in circumstances where it is important to take a long-term view; where there are limited numbers of key factors influencing the success of that strategy; but where there is a high level of uncertainty about such influences. There are two main benefits of such an exercise. 1. Management can examine strategic options against the scenarios and test the sensitivity of possible strategies. 2. The scenarios can be used to challenge the assumptions about the environment in which the organisation operates. This is particularly important where change is unpredictable and the future is uncertain.

Simulation generally uses System Dynamics (SD) or econometrics as tools. In the SD approach, the modeling tools are mainly the dynamic systems of differential equations and simulation. Econometrics is more tightly bound to the data and the models it explores. By comparison, econometric methods are simpler. This does not mean that the one is better than the other. Properly understood and combined, they are complementary. Econometrics examines historical relationships through correlation and least squares regression model to compute the fit. In contrast, consider a simple growth scenario analysis; the initial growth portion of say, population is driven by the amount of food available. So there is a correlation between population level and food. However, the usual econometrics techniques are limited in their scope. For example, changes in the direction of the growth curve for a time population is hard for an econometrics model to capture. However, from a philosophy of social science perspective, SD is deductive and econometrics is inductive. SD is less tightly bound to actuarial data and thus is free to expand out and examine more complex, theoretically informed, and postulated relationships.
Check Your Progress 2

Fill in the blanks: 1. The main purpose of forecasting is to the occurrence, timing or magnitude of future events. 2. A good model should have small error measures in both the estimation and validation periods and its validation period statistics should be to its own estimation period statistics. 3. Time series is a characterization of .. that takes place over a period of time. 4. Regression Analysis is a method of the value of one variable based on the value of other variables. 5. Mean Absolute Deviation (MAD) is the of the absolute value of difference between the actual and forecasted value.


Forecasts are needed to aid in determining what resources are needed, scheduling existing resources, and acquiring additional resources. Accurate forecasts would allow DHL to use capacity efficiently and reduce customer response time. This enables sales teams (and customers) to develop demand forecasts as input to inventory and production planning, revenue planning, and service planning processes. Forecasts are more accurate if a set of assumptions about technology, competitors, pricing, marketing expenditures, and sales efforts are given. The data collected for making forecasts can also be used to measure performance characteristics. FedEx, for instance, uses historical data to generate 10 different factors to measure its service quality, e.g., percentage of accurate invoices; time waiting for service; number of lost parcels; number of complaints; mistakes per week; cost of rush shipments; percentage of shipments on time; time between system crashes; etc. Each factor is given a weight. The weights reflect the relative importance of each failure. Losing a package, for instance, is more serious than delivering it a few minutes late. The index is reported weekly and summarized on a monthly basis. At the end of the day, it is not the sophistication of the forecasting technique but the ability to recognize the pattern of data accurately and to put it to use effectively. This determines the best forecasting method.

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Forecast: A forecast is an estimate of a future event achieved by systematically combining and casting forward in a predetermined way data about the past. Prediction: A prediction is an estimate of a future event achieved through subjective considerations other than just past data; this subjective consideration need not occur in any predetermined way. Turning Point: The turning point is the point at which the demand will change. This occurs when there is seasonal or cyclical change in demand. Leading Indicators: Leading indicators are factors with turning points that typically precede the peaks and troughs of a business cycle. Coincident Indicators: Coincident indicators are factors with turning points that coincide with the business cycle. Lagging Indicators are those factors that follow after the turning points. Demand Management describes the process of influencing the volume or consumption of the product or service through management decisions. Casual Forecasting or Regression Analysis reflects the cause and effect relationship underlying the relationship between the demand being forecast and an independent variable. The Degree of Correlation between normally distributed dependent and independent variables is signified by the correlation coefficient.

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Check Your Progress: Answers


1. prediction 2. combining 3. competitive 4. success 5. forecasting


1. estimate 2. similar 3. change 4. predicting 5. average


Chase, R.B., Aquilano, N.J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Chopra, S. and Meindl, P., Supply Chain Management, Prentice Hall, 2001. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Meredith, J.R. and Shafer, S.M., Operations Management for MBAs, J. Wiley, 2002. Slack, N. and Lewis, M., Operations Strategy, Prentice Hall, 2003. Slack, N. et al., Operations Management, Prentice Hall, 2001. Taylor, Bernard W., Introduction to Management Science, Prentice Hall, 1996. Tersine, Richard J., Production/Operations Management, North-Holland, 1985. Vollmann, T.E., Berry W.L., and Whybark, D.C., Manufacturing Planning and Control Systems, Richard D. Irwin, Inc.. Waters, C.D.J., An Introduction to Operations Management, Addison-Wesly, 1991. Waters, D., A practical introduction to management science, 2nd, Addison-Wesly, 1998.

1. What type of demand would you expect for new services for DHL? Identify these services and explain why these requirements will emerge. Based on your observations, recommend the forecasting model to Mr. Guzder that DHL should use. What would be the reasons and what main characteristics you would expect the model to demonstrate? 2. When are qualitative techniques more useful as compared to quantitative techniques? Draw up a comparison and rate of each of the techniques on different parameters. 3. Distinguish between moving average, exponential smoothing, and trend projection methods of forecasting.

4. Use exponential smoothing technique to compute forecasts for the following series data under two situations, when smoothing constant is 0.3, and when smoothing constant is 0.7. Which forecast will you accept and why?

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Observation: 27 30 32 31 28 27 30 33 33 31

Work out a 3 period moving average and weighted moving average with weights reducing with time for the observations. Calculate the errors in all the cases and determine the best method that fits this data. 5. The following data shows the exports of raw cotton and the value of imports of manufactured goods into India for 7 years.
Exports: Imports:

42 44 58 55 89 98 60 56 49 53 58 67 76 58

All values above are in Crores of Rupees. Ascertain the regression equation of imports on exports and estimate the import when export in a particular year was to the value of Rs. 60 crores. 6. Forecast the production for the next two years when the production quantities, given in 000 tonnes, for the last 10 years are as follows: 250, 265, 265, 255, 275, 290, 305, 325, 320, 324 Use the following methods and explain the significance of the results by the different methods: (a) Simple Average (b) Weighted Moving Average (c) Moving Average (3 years and 5 years) (d) Exponential smoothing (for smoothing constants, 0.2, 0.5, and 0.8) 7. Distinguish clearly between correlation and regression as concepts used in statistical analysis. 8. A record of maintenance cost is kept on 6 identical machines of different ages. Management wants to determine whether there is a functional relationship between machine age and maintenance cost. The following data are obtained. Machine Machine Age (X) Maintenance Cost in Rs. (Y) 1 2 70 2 1 40 3 3 100 4 2 80 5 2 30 6 3 100

Find the regression equation of Y on X. What should be the maintenance cost of a 4 year old machine? 9. Why are special techniques used for long-term forecasting? How do these differ from other forecasting methods and why?

235 Scheduling

Unit IV Scheduling and Project Management Methods

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237 Scheduling

STRUCTURE 11.0 11.1 11.2 Objectives Introduction Operations Scheduling Models 11.2.1 11.2.2 11.2.3 11.2.4 11.3 11.3.1 11.3.2 11.4 11.5 Hard Ceilings Soft Ceilings Loading Sequencing Expediting Input-Output Control

Detailed Scheduling

Gantt Charts Job Shop Scheduling 11.5.1 11.5.2 11.5.3 11.5.4 Scheduling of 'n' Jobs on 1 Machine (n/1 Scheduling) Johnson's Rule for Optimal Sequence of 'n' Jobs on 2 Machines Flow Shops Scheduling Dynamic Job Shops Non-cyclic Personnel Schedules Scheduling Rules for the Workforce-Cyclic Personnel Schedules


Labour-Limited Environments 11.6.1 11.6.2

11.7 11.8 11.9

Scheduling in Services Managing Planning and Scheduling Let us Sum up

11.10 Glossary 11.11 Suggested Readings 11.12 Questions

After studying this lesson, you should be able to:

Explain scheduling, its significance, procedure and Gantt Charts Discuss how does scheduling is carried out in job shops, flow shops and continuous processes

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Explain scheduling in complex systemsTheory of Constraints Report on scheduling methods in labour limited environments Describe the procedure and methods of scheduling for service organisations

Plant scheduling has indeed come a long way. It used to be some form of variation of order-point scheduling. You take an order's due date and work backwards through the bills of materials, subtracting the times associated with producing that order, including material delivery, production, and shipping. These calculations resulted in a start date for that customer order. This process, called backward scheduling, is an approach based on averages, it doesn't consider the daily fluctuations and operating factors and conditions on the factory floor. Scheduling is the problem of assigning a set of tasks to a set of resources subject to a set of constraints. Examples of scheduling constraints include deadlines (e.g., job 'i' must be completed by time 't'), resource capacities (e.g., there are only four drills), precedence constraints on the order of tasks (e.g., a piece must be sanded before it is painted), and priorities on tasks (e.g., finish job 'j' as soon as possible while meeting the other deadlines). Examples of scheduling domains include classical job-shop, manufacturing, and transportation scheduling. The early 1960s saw the emergence of the concept of MRP. It used backward scheduling to highlight material shortages and then generate production and purchase orders to avoid those shortages. With the emergence of IT, the computerization of MRP automated the process and work associated with material requisition. These new tools rekindled the interest in plant scheduling problem and a new system, MRP II, emerged. MRP II introduced the concept called the Master Production Schedule (MPS). MPS was a layer added on top of MRP. It also marked the end of ordering inventory based on past usage. Instead, MPS focused on sales and marketing's best guess of the future need for products. This best guess was then passed to the next planning function, namely, the next MRP run. Both MRP and MPS assume certain ideal characteristics about the imperfect world of production and the plant floor:

Infinite resources (machine capacity and labour) are always available and do not change. Material resources will arrive as scheduled in the right quantities. Any variances, or missed incoming shipments, were expedited manually until the next MRP run. Customer orders and products have the same priority. MRP aggregates demand (customer orders) into lots and outputs. Lead times (production and material delivery) are fixed or proportional to lot size. Scheduling on a weekly basis will meet planning requirements.

Scheduling starts with the Master Production Schedule (MPS), which defines current and future (forecasted) resource requirements based on current and forecasted customer orders. Completing these orders is the goalthe MPS provides production targets toward reaching that goal. In doing so, it takes into account the technical requirements of the task and available capacity and matches it with the forecasted demand. Everything else in the planning system works from the MPS. The result is a set of purchasing and manufacturing orders with start and due dates, and a list of the minimum quantities of inventory to satisfy the MPS.

The planning system also initiates operations scheduling through capacity requirements planning.

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It starts by determining whether the enterprise has the production capacity available to build what's listed in the MPS. The finished product is decomposed into required resources labour, equipment, and even operational times lead times are then calculated. The gross requirements, called rough-cut capacity, are eventually mapped against the available resources. If resources are in short supply, the planning system flags the affected customer and manufacturing orders so that the MPS can be recalculated. This information tells the enterprise when to order new materials, when to start making products from those materials, and when to distribute the finished products to end customers.


People face scheduling problems and opportunities every day. For example, at the railway station, someone is responsible for assigning platforms to the different trains that come in and go out. Or in a manufacturing facility, someone is in charge of assigning jobs to machines. How does one build a model that can be used under these circumstances? To build a model is quite simple. The main components of a planning and scheduling model require that you define the variables. These could include the following:

When are people, machines, vehicles, etc., available to do work? What product needs to be made or service needs to be performed? What is the process to make the product or perform the service? What resources are required to complete or perform the process (i.e., machines, people, tooling, materials, etc.)? How many parts do we need to make for each customer, or what services does the customer need? When do they need the products delivered or the services performed? Operations scheduling assigns jobs to machines or workers to jobs. In manufacturing, operations scheduling is crucial because many performance measures, such as, on-time delivery, inventory levels, the manufacturing cycle time, cost, and quality, relate directly to the scheduling of each production lot. Workforce scheduling determines when employees work. In service organisations, workforce scheduling is equally crucial because measures of performance such as customer waiting time, waiting-line length, utilisation, cost, and quality are related to the availability of the servers. What is the capacity? How do you balance load and capacity?

There are two basic types of scheduling exercises:

Perhaps the most fundamental questions in scheduling are:

Capacity has two basic types of constraintsa hard ceiling and a soft ceiling.

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11.2.1 Hard Ceilings

Hard ceilings are where the capacity is extremely difficult to flex. For example, a major piece of capital equipment which runs at a fixed rate such as a heat treatment process, where process times are fixed, or production line where the track rate is fixed. In this case, all you can do is maximize utilisation, avoid breakdowns and quality problems, and ensure that it is always working to customer needs. Or a hard ceiling may be due to a job requiring a scarce skill that is difficult to train, such as is often encountered in tool making or maintenance. There is a limit to how much overtime can be worked to meet demand, and the training program to reach basic skills is protracted. In both cases, it is difficult to increase output above a given level and sub-contracting is not practicable for quality reasons, or lack of availability of suitable sources.

11.2.2 Soft Ceilings

Soft ceilings can be flexed by scheduling manpower, buying additional inexpensive plant machinery, recruiting unskilled or semiskilled staff, or sub-contracting, or overtime. The essential differences between the two types of capacity constraint are cost and leadtime, which need to be built into the calculations. In addition, we also need to define the rules that are to be used to assign work to the resources (schedule) in the model. These rules could be very simple such as:

Select the task that is due the soonest (earliest due date). Select the task that requires the least amount of time to complete (shortest processing time). Select the task that requires the least amount of set up time or clean up time or travel time.

In the real world, it is usually the case that the rules are not very simple. These could also be very complex such as:

Select the task that is due the soonest unless there are any tasks to be completed for Customer A, in which case all tasks for Customer A should be completed first. Select the task that uses the same tooling, has the same colour, and the same due date as the last task completed by a particular resource. Select the task that allows the resource used to be completed or prepared for another task by a certain time. Select the resource that best meets all skill requirements to complete the specific task (i.e., allocate repairmen to service calls where each service call will require a certain skill set and the repairman will have that skill set).

Complex rules are very often just a combination of or exceptions to the simple rules. These combinations and exceptions make planning and scheduling a difficult task. Scheduling models can be broadly classified into two categoriescontinuous or intermittent conversion processes. A continuous or assembly type system is one where a large number or indefinite numbers of homogenous units are produced. On the other hand, an intermittent system produces a variety of products either one at a time or in batches. Some processes have the characteristics of both these types of systems, they are neither strictly continuous nor intermittent. The operations schedule is that part of the planning system designed to implement the MPS by focusing on how best to use existing capacity, taking into account technical production constraints. The output plan of either of these systems needs to be translated into operations, timing and schedule on the shop floor. This involves

loading, sequencing, and detailed scheduling expediting and input/output control. In intermittent or job shop operations, sequencing is critical to the efficiency and effectiveness of the system.

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11.2.3 Loading
In continuous processes, different sub-assemblies have to be loaded to bring out the final product. In intermittent processes, each customer job order has its unique product specifications. This requires the routing to be unique, and certain operations need to be performed on various work centers or facilities. During each planning period, jobs orders are assigned on facilities, thereby establishing how much of a load each work center must carry. This ultimately determines the workload or jobs to be performed in a planned period. This assignment is known as machine loading. There is a concept of finite and infinite loading.

When the loading is determined by the maximum capacities of the machines, it is called finite loading. In infinite loading, the maximum capacity of the machines is not the basis for assigning tasks to it. This option is applied when excess load can be handled by overtime, sub-contracting or by shifting to other work centers or time slots.

11.2.4 Sequencing
When numbers of jobs are waiting in queue before an operational facility (such as, a milling machine or assembly-line), there is a need to decide the sequence of processing the waiting jobs. Sequencing is basically an order in which the jobs, waiting before an operational facility, are processed. It specifies the order required for the adoption of priority sequencing. In addition, it also requires an in-depth knowledge of processing time, etc.


Detailed times and dates are specified once the priority rule of job and/or operations sequencing is known. Calendar times are specified to sequence the job orders, employees, inputs as well as outputs. This order determines which job is done first, which is the next one's and so on. In detailed scheduling, estimates are prepared regarding set up and processing time at which a job is due to start and finish.

11.3.1 Expediting
A job's progress needs monitoring. The job has to keep moving through the facility on time to avoid a deviation from the schedule. In case of deviation from the schedule, the causes of deviation are immediately attended to. Manufacturing or service operations disruption, for example, due to machine breakdown, non-availability of a tool, unavailable materials, etc., and, sometimes last minute priority changes, all require last minute deviations from plans and schedules. In order to minimize disruptions in schedules, continuous follow up or expediting is needed. When lead times are not managed, overloads will occur. What happens is illustrated in the following diagram. This shows that as capacity is reached, the manufacturing system starts to 'thrash'. 'Thrashing' is the problem of the system keeping itself busy re-planning rather than producing, which effectively reduces capacity. This results in problems similar to mainframe computers where this problem was first documented, lots of expediting, customer panics and increased changeovers. The result is an

242 Production and Operation Management

effective reduction in batch sizes, as you spend more time changing over than producing due to batch splitting.

Figure 11.1: 'Thrashing' - Impact on Lead Time and Capacity

Figure 11.1 shows a gradual increase in lead time as load increases up to the point where 'thrashing' occurs and where lead times go through the roof.

11.3.2 Input-Output Control

Output plans and schedules call for certain levels of capacity at a work center and those jobs are completed at a specific time on every facility. In a real world situation, the utilisation of the capacity of a facility may be different from the plans underutilisation of capacity means wasted resources and over-utilisation may cause disruption, failure, and delays. These differences are monitored through input-output reports.

Figure 11.2: Thrashing due to 'Failure to Adjust'

These reports form the basis for adjustments to the schedule. If arrears are not rescheduled in conjunction with the customer, they create a short-term overload of equal due dates, which induce 'thrashing'. The customers are still expecting their order, unless the adjustments are communicated to customers. Figure 11.2 shows the impact of arrears on scheduling causing 'thrashing'. The solution is to reschedule arrears, in conjunction with customers and manage lead times.


Gantt charts were developed in the 1910's by Henry Gantt (1861-1919), a mechanical engineer, management consultant, and industrial advisor. The chart takes two basic forms: 1. The job or activity progress chart and 2. The machine chart.

Both types of Gantt charts present the ideal and the actual use of resources over time. The progress chart graphically displays the current status of each job relative to its scheduled completion date. A visual tool, the charts allow us to obtain a bird's eye view of the process in its totality. From beginning to end the charts force us to: 1. Make a realistic assessment of the end-time of the process. 2. Sequence our tasks (or phases, or activities)one after the other, as well as in parallel. 3. Think in terms of task dependencieswhich task is dependent on what. 4. Concentrate on the necessary resources, both when and where, throughout the run of the process. There are many ways to create a Gantt chart. For example, Microsoft Project, a taskplanning program, makes it easy to track and chart project timeliness with a built-in Gantt chart view. Another option is to use Excel. Excel does not contain a built-in Gantt chart format, however, you can create a Gantt chart in Excel by customizing the stacked bar chart type. The procedure for making a Gantt chart using MS Excel is given below. Step 1: The first step is to enter the sample data Open a new worksheet in Excel and enter the following values in cells A1 through D6:
Table 11.1: Data for the Gantt Chart
A 1 2 Task 1 3 Task 2 4 Task 3 5 Task 4 6 Task 5 B Start Date 08/01/2000 10/15/2000 12/15/2000 02/06/01 05/06/01 C Completed 205 200 140 44 0 D Remaining 10 120 200 345 380

243 Scheduling

The values in columns C and D (Completed and Remaining) represent numbers of days. You can select cell B2 and format with the date format you want to use for the chart by clicking Cells on the Format menu, and then clicking the Number tab. Click Date in the Category list, and select the format you want to use in the Type list. Step 2: Create a stacked bar chart 1. Select cells A1:D6 and click Chart Wizard. 2. In step 1, click Bar under Chart Type, and then click the Stacked Bar sub-type (you can see the name of each chart sub-type at the bottom of the dialog box). 3. Click Next, Next, and then Finish. Step 3: Make the chart look like a Gantt chart

Double-click the first series in the chart. This is the series for start date. If default colours are set in Excel 2002, this series is blue. On the Patterns tab of the Format Data Series dialog box, click None for Border and None for Area, and then click OK.

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Double-click the category (x) axis, which in a bar chart is the vertical axis. (In a bar chart, the traditional x and y-axis are reversed.) Click the Scale tab, and select the Categories in reverse order check box. Click the Font tab, click 8 under Size, and then click OK. Double-click the value (y) axis, which in a bar chart is the horizontal axis. After completing the last step, this axis should be located at the top of the chart plot area. Click the Scale tab and type the following values3 in the appropriate boxes: Minimum: 36739; Maximum: 37441; Major unit: 61; Minor unit: 1. Also on the Scale tab, select the Category (X) axis crosses at maximum value check box. Click the Alignment tab, and under Orientation, type 45 in the Degrees box. Click the Font tab, and under Font style, click Bold. Under Size, click 8, and then click OK. Right-click the legend, and click Format Legend on the shortcut menu. Click the Placement tab, and click Bottom. Within the legend, click Start Date so that it is selected, and then press DELETE.

After completing these steps, you should have a chart that looks similar to the example in Figure 11.3. You may need to resize the chart using the mouse to see all the labels present in the chart. Additional formatting can be added as needed. What has been described is for a simple project. Ideally, tasks in simple projects would not go beyond a single page, which makes them manageable. Often, and especially in complex manufacturing schedules, each task may be broken into smaller and more easily manageable subtasks. These subtasks may be moved to subordinate charts, with their own timelines. In management terminology, the process of breaking up of these tasks into independent unit-tasks that can be completed on their own has been given an exotic name of WBS, or 'Work Breakdown Structure'. This process enables the manager's mind to grasp the process in its entirety as well as to think in terms of allocating resources, assign responsibilities, and measure and control the schedule, for every task and sub-task.

Figure 11.3: A Gantt Chart made using MS Excel

Once the Gantt charts are drawn up, we start comparing our actual, ground-level performance against what was planned. This comparison is possible by checking the progress reports against the Gantt charts. Check Your Progress 1 Fill in the blanks: 1. Scheduling is the problem of assigning a set of tasks to a set of resources subject to a set of . 2. Scheduling starts with the Master Production Schedule (MPS), which defines current and future (forecasted) resource requirements based on current and forecasted .. orders. 3. Hard ceilings are where the is extremely difficult to flex. 4. Soft ceilings can be flexed by scheduling manpower, buying additional inexpensive plant machinery, recruiting unskilled or semiskilled staff, or , or overtime. 5. The operations schedule is that part of the planning system designed to implement the MPS by focusing on how best to use existing capacity, taking into account technical constraints.

245 Scheduling


The Gantt chart gives a relationship among different activities in a production process in terms of their completion time. However, a Gantt chart does not provide an optimal sequence of jobs. Many jobs in industry and elsewhere require completing a collection of tasks while satisfying temporal and resource constraints. Temporal constraints say that some tasks have to be finished before others can be started; resource constraints say that two tasks requiring the same resource cannot be done simultaneously (e.g., the same machine cannot do two tasks at once). The objective is to create a schedule specifying when each task is to begin and what resources it will use that satisfy all the constraints while taking as little overall time as possible. This is the jobshop scheduling problem. In its general form, there is probably no efficient procedure for exactly finding shortest schedules for such problems. However, by giving the scheduling tools some flexibility and guidance, it is possible to produce a schedule that best uses the existing capacity. We will discuss some algorithms in the following paragraphs. It should be kept in mind that these algorithms that are applicable to job shops are also applicable to all flow shops that have similar characteristics. To identify the performance measures, we will introduce some new measures, makespan and utilisation. Makespan: The total amount of time required to complete a group of jobs is called makespan. This is the sum total of the flow time for individual jobs. Utilisation: The per cent of work time productively spent by a machine or worker is called utilisation. Utilisation for more than one machine or worker can be calculated by adding the productive work times of all machines or workers and dividing by the total work time they are available. Makespan = Time of completion of last job Starting time of first job Utilisation = Productive work time/Total work time available

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These performance measures are often interrelated. For example, in a job shop, minimizing the mean job flow time tends to reduce work-in-process inventory and increase utilisation. In a flow shop, minimizing the makespan for a group of jobs tends to increase facility utilisation. An understanding of the interactions of job flow time, makespan, past due, WIP inventory, total inventory, and utilisation can make scheduling easier.

11.5.1 Scheduling of 'n' Jobs on 1 Machine (n/1 Scheduling)

This type of scheduling problem is called the (N/1) scheduling problem. When many jobs are waiting before an operational facility, we must have some heuristic or rule to decide the priority while sequencing. Generally, this type of scheduling is done using simple scheduling procedures. For scheduling simple jobs, some of the basic procedures that are used are First Come First Served (FCFS), Shortest Production Time (SPT), Due Date (D Date), Last Come First Served (LCFS), Random, and Slack Time Remaining (STR) rules. First Come First Served and Last Come Last Served These terms reflect exactly what they say. In the former, jobs are scheduled on the basis of their arrival. In the latter, the last arrival is scheduled first and the first arrival scheduled last. Shortest Processing Time Procedure A schedule obtained by sequencing jobs in increasing order of processing times is called a Shortest Processing Time (SPT) rule. This schedule minimizes mean flow time, F. In addition, the SPT rules also minimize mean lateness and mean waiting time. The mean flow time is computed by simply adding the flow time for each job and dividing by the number of jobs. Due Date Procedure: In the due date procedure, jobs are sequenced in the order of decreasing due dates. The job with the earliest due date will be sequenced first. The due date procedure minimizes the maximum tardiness. Random: Jobs are chosen randomly. There is no apparent logical method of scheduling jobs. Slack Time Remaining: The STR is the difference between the time remaining before the due date and the remaining processing time. The 'SPT sequencing rule' shows better performance, compared to the other scheduling rules, when there are many jobs for a single machine. SPT minimizes the total flow time, average flow time, and average tardiness of jobs, etc., in most cases. An example will make it easier to visualize the impact of the different rules on scheduling. Before going to the example, let us define some of the terms that we are going to use. Each job in a one machine-scheduling model (n/1 scheduling) is described by two parameters, where 'i' is the number of the sequence of the job. pi = Processing time for the 'i'th job di = Due date of the 'i'th job The definition of pi includes set up time for job 'i'. If job 'i' is defined as a lot of several identical pieces, then pi will denote the time required to process the complete batch. The due date is the time by which a job must be completed, otherwise, the job will be deemed late.

Fi is the 'flow'; it is the amount of time the 'ith' job spends in the system. The 'makespan' is the cumulative time it takes the shop to complete all the jobs. Lateness, Li is the amount of time by which the completion time of job 'i' exceeds its due date. Lateness is designated as 'Li'. As lateness can be either positive or negative, a positive lateness, i.e., when the due date is not met is called tardiness, Ti. Thus, tardiness is a measure of the deviation of the completion time from the due date. Since there is often a penalty associated with not meeting due dates, the tardiness measure is important. Flow Time Makespan Mean flow time Lateness of Job Tardiness of Job Total Tardiness = Fi = Ci ri = F(i-1) + pi
n = Total flow time = 1 =0 F i

247 Scheduling

n = Total flow time/Number of jobs = 1 =0 F i /n

= Li = Fi di. = Ti = Fi di if Fi > dn otherwise Ti = 0

n = 1 =0 Li

n Average Tardiness = 1 =0 Li / n

In our example, we assume there are five products waiting for getting processed on a machine. Their sequence of arrival, processing time and due-date are given in the table on the next page. We will try to schedule the jobs for the different products, P1, P2, P3, P4, and P5 using the different scheduling rules, i.e., FCFS, SPT, D Date, LCFS, Random, and STR rules. We will then compare the results.
Table 11.2: n/1 Scheduling for Job Shop
Job (In Sequence of Arrival) P1 P2 P3 P4 P5 Processing Time = pi (Days) 3 3 5 7 4 Due Date = di (i.e., Days From Now) 6 8 8 10 4

The calculations are shown in Tables 11.3 and 11.4. To make the calculations easier to understand, a column of 'sequence' that reflects the results of the selection criteria, has been inserted before the calculations of each of the techniques. We can follow the calculations shown in the tables more clearly, by calculating the flow and tardiness in the case of the First Come First Served rule. The calculations are shown below:
n Makespan = 1 i = 3 + 6 + 11 + 18 + 22 = 60 days =0 F

Mean flow time = 60/5 = 12 days Total lateness of job = 0 + 0 + 3 + 8 + 18 = 29 days Average lateness of job = 29/5 = 5.8 days

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Similarly, calculations can be made for the other procedures. The calculated values are given in the two tables that follow.
Table 11.3: Scheduling Parameters for our Example (1)
FCFS Sequence P1 P2 P3 P4 P5 Totals Flow Time 3 6 11 18 22 60 Tardiness 0 0 3 8 18 29 Sequence P1 P2 P5 P3 P4 SPT Flow Time 3 6 10 15 22 56 Tardiness 0 0 0 7 12 19 Sequence P5 P1 P2 P3 P4 D Date Flow Time 4 7 10 15 22 58 Tardiness 0 1 2 7 12 22

Table 11.4: Scheduling Parameters for our Example (2)

LCFS Sequence P5 P4 P3 P2 P1 Flow Time 4 11 16 19 22 72 Tardiness 0 1 3 11 16 31 Sequence P3 P1 P4 P5 P2 Random Flow Time 5 8 15 19 22 69 Tardiness 0 2 5 11 16 34 Sequence P5 P1 P4 P3 P2 STR Flow Time 4 7 14 19 22 66 Tardiness 0 0 6 11 16 33

Table 11.5 is a comparison of the different scheduling procedures which we have considered above. It will be seen that no other sequence can produce a better mean flow time than the sequence obtained by the SPT rule. Also, the 'average tardiness' is the lowest using the STP procedure. The optimality of the SPT rule can be mathematically proved. By finishing the shorter jobs first, both the turnaround time and the work-in-process inventory are reduced. The SPT procedure is simple to implement and provides good results even in the more complex scheduling situations.
Table 11.5: Comparison of Scheduling Procedures
Scheduling Rule FCFS STP D Date LCFS Random STR Makespan (days) 60 56 58 72 69 66 Mean Flow Time (days) 12.0 11.2 11.6 14.4 13.8 13.2 Average Tardiness 29/5 19/5 22/5 31/5 34/5 33/5

However, STP could increase total inventory value because it tends to push all work to the finished state. It also tends to produce a large variance in past due hours because the larger jobs might have to wait a long time for processing. As it provides no opportunity to adjust schedules when due dates change, the advantage of this procedure over others diminishes as the load on the shop increases.

11.5.2 Johnson's Rule for Optimal Sequence of 'n' Jobs on 2 Machines

In many situations, there is more than one machine and a job consists of several operations that are to be performed in a specific order. Moving from a single machine job shop to a multiple machine job shop poses a formidable challenge. Let us take a special case of a job shop in which the flow of work is unidirectional and there are 'n' jobs on 2 machines. We will determine a production sequence for a group of jobs so as to minimize the makespan. This provides two advantages: 1. The group of jobs is completed in minimum time. 2. Utilisation of the two-station flow shop is maximized. Utilising the first workstation continuously until it processes the last job minimizes the idle time on the second workstation. Johnson's Rule gives us the unique methodology to determine the optimal sequence of n jobs on 2 machines (n/2 sequencing problem). The principle behind Johnson's Rule of n/2 sequencing problem is minimization of total elapsed time by the n jobs. The following steps are followed. Step 1: Scan the processing times at each workstation and find the shortest processing time among the jobs not yet scheduled. If there is a tie, choose one job arbitrarily. Step 2a: If the minimum processing time occurs on workstation 1, place the associated job in the first available position in the sequence. Proceed to step 3. Step 2b: If the minimum processing time occurs on workstation 2, place the associated job in the last available position in sequence. Proceed to step 3. Step 3: Eliminate the last job scheduled from further consideration. Repeat steps 1 and 2 until all jobs have been scheduled. Let us look at a problem to understand Johnson's Rule. Suppose we have 'n' jobs that are to be processed on two parallel machines. The processing time of all jobs (tij) is known. Here, 'i' denotes jobs and 'j' denotes machines. For n/2 problem, I = 1, 2, n. and j = 1, 2. The problem is to sequence the jobs on both the machines so that the total elapsed time (T) is minimized. In Step 1, you select the minimum processing time, tij, among all the available values of processing times. In case, two operations contain least processing time, break the tie arbitrarily and select any one of them. Step 2 is the key operation. It leads you to look at the following five situations, and the decisions that you need to take according to Johnson's Rule is explained in Table 11.6.
Table 11.6: Five Situations and Related Decisions in Johnson's Rule
Situation 1. 2. 3. Minimum processing time is on first machine (say, M1) for the pth job. Minimum processing time is on second machine (say, M2) for the qth job. Processing time of two jobs, one on machine M1 and other on machine M2, is equal and both are minimum, i.e., tp = tq2. Two jobs have the same processing time on machine M1, which is also the minimum processing time. Two jobs have the same processing time on machine M2, which is also the minimum processing time.

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Decision in Johnsons Rule Place p job in the beginning of the sequence. Place qth job at the end of the sequence. Place pth job at the beginning of the sequence and qth job at the end of the sequence. Sequence any of the two jobs at the beginning of sequence. The other job is placed after this job. Sequence any of the two jobs at the beginning of sequence. The other job is placed before the first one.



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In Step 3 you remove the jobs, already sequenced in Step 2, and proceed with the remaining jobs. Repeat Step 1 and 2 till all jobs are sequenced. Let us take a specific exercise to understand the use of Johnson's rule to schedule jobs in a machine shop. Table 11.7 provides the processing time (in minutes) of five jobs on two machines. Let us use Johnson's rule to schedule these jobs.
Table 11.7: Scheduling 5 Jobs on 2 Machines
Jobs Machine M1 Machine M2 J1 4 5 J2 6 6 J3 7 1 J4 3 3 J5 1 10

Job J5 has the minimum processing time of 1 minute on machine M1 and J3 has a minimum time of 1 minute on machine M2. According to step 1 of Johnson's rule, the first job on machine M1 should be J5 and the last job should be J3. After removing J3 and J5 from our consideration, we have the following jobs to schedule, as given in Table 11.8.
Table 11.8: Applying Johnson's Rule Stage 2
Jobs Machine M1 Machine M2 J1 4 5 J2 6 6 J4 3 3

Of the remaining jobs, J4 on M2 has the least processing time of 3 minutes. This should be placed at the end of the sequence, because it has the least processing time on M2 and not on M1. But because it also has the least processing time on M1, it is placed as the next job. Therefore, the job J1 has to be placed as the last job. The remaining job, J2 gets the last slot. The result of the scheduling exercise that we have now is as given in Table 11.9:
Table 11.9: The Final Schedule
Jobs J5 J4 J2 J1 J3 0 1 4 10 16 Machine 1 Time in Time out 1 4 10 15 23 1 11 15 21 26 Machine 2 Time in Time out 11 15 21 26 27

Makespan = Time of completion of last job Starting time of first job = 27 minutes 1. Idle time for machine M1 = (Total elapsed time) (Total busy time for machine M1) = T 5 i = 0 t i1 = 27 26 minutes = 1 minute 2. Idle time for machine M2 = T 5 i = 0 t i2 = 27 (5 + 6 + 1+ 3 + 10) minutes = 27 25 minutes = 2 minutes.

Johnson's algorithm has been extended by Jackson for 'n' jobs and 3 machines problem. Jackson's solution is applicable if the following conditions are satisfied: 1. Minimum processing time of the 'i'th job on machine '1' should be greater or equal to the maximum processing time of the job on machine '2', and 2. Minimum processing time of the 'i'th job on machine '3' should be greater or equal to the maximum processing time of the job on machine '2'.

There are a number of algorithms that have been developed to solve such problems of increasing complexity. An example is Hodgen's Algorithm, which is used for multiple jobs on multiple machines. In addition, some graphical methods have also been developed for such problems. These are beyond the scope of this book.

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11.5.3 Flow Shops

Figure 11.4 shows the configuration of a flow shop. In Figure 11.4(a) each job goes to each machine. This is called a pure flow shop. In Figure 11.4(b) the flow between the machines is interrupted, though for each type of job the flow is the same and the sequence of operations is the same. This job configuration is called a general flow shop.

Figure 11.4: (a) A Pure Flow Shop Production (b) General Flow Shop

A flow shop is special type of job shop in which there are 'm' machines, and a job may require a maximum of 'm' operationsone operation on each machine. Further, for every job the flow is unidirectional, if an operation precedes operation 'c', then the machine required for operation 'b' has a lower number than the machine required for operation 'c'. An example of flow shop is an assembly line where work progresses from one stage to the next in the same direction. In several manufacturing situations (e.g., the manufacture of automobiles), the product follows a fixed path. Like the continuous flow process, an assembly-line process usually produces a limited number of products, and the routings are usually the same. In many cases of the general flow shop genre of products, the manufacturing operations can be divided into stages. One stage is like a pure flow shop with all jobs having the same sequence, whereas another stage requires a more complex routing of operations. Furniture manufacture is an example of such a process. The front end can be a pure flow shop and at the back end of the manufacturing process the upholstery, paint, and the like are customized.

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The assignment algorithm, which has been covered earlier, can be useful for solving loading problems where 'm' jobs have to be assigned on 'm' machines. This method also requires that each machine be assigned only one job. Furthermore, the basis of assigning the machines and jobs must be specified by some quantified criterion, e.g., profits, operating costs, or completion time. This method is used for discrete, discontinuous, non-uniform arrival of jobs and cannot be used where jobs are arriving continuously. Let us explore this procedure for solving a loading problem using the Reynolds Company case as an example. The Supervisor of the machine shop of the Reynolds Corporation has four rush jobs, which are to be processed through a particular kind of lathe machine. He has identified four lathe machines that can be assigned for the processing of these rush jobs. However, all these machines differ in speed and time taken in processing. The time estimate of processing the jobs on the designated machines is given in Table 11.10.
Table 11.10: Estimated Processing Time in Minutes on Various Machines
Jobs Machines A B C D E 15 21 16 20 F 20 21 16 18 G 19 20 14 16 H 17 17 17 15

Step 1: The supervisor wants to assign the machines to the jobs so as to minimize the total processing time. For the Reynolds Company Problem, this is depicted in Table 11.11.
Table 11.11: The Assignment Table
Jobs Machines A B C D E 15 21 16 20 F 20 21 16 18 G 19 20 14 16 H 17 17 17 15

Step 2: Find the smallest number in each row in the assignment table and subtract it from every number in that row. The smallest number in:

Row A = 15; Row B = 17; Row C = 14; Row D = 15 Subtracting these numbers from the relevant row numbers, we get Table 11.12.
Table 11.12: Row Opportunity Costs Table
Jobs Machines A B C D E 0 4 2 5 F 5 4 2 3 G 4 3 0 1 H 2 0 3 0

Step 3: Perform the test of optimality using straight lines covering all the zeroes. There are three lines only, whereas the number of the rows/columns is four. Therefore, optimum assignments cannot be made at this stage.

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Let us apply the forced choice method to show that optimum assignments cannot be made at this stage. Look at rows which have only one zero. In row 'A' there is a single zero. So, there is no alternative except to assign Machine 'A' to Job 'E'. Again, there is a single zero in Row 'C'. There is thus no alternative to assigning machine 'C' to Job 'G'. Jobs 'E' and 'G' have now been assigned to machines 'A' and 'C', respectively. Now, look at Row 'B'. It also has a single zero in the row but there are two zeroes in Column 'H'. It means that either Machine 'B' or Machine 'D' can be assigned to Job 'H'. Let us assign Machine 'B' to Job 'H'. Now Machine 'D' cannot be assigned to any job as the only zero in Row 'D' is in Column 'H'. Job F has also remained unassigned to any machine. It means that optimum assignment cannot be made at this stage. We, therefore, move to Step 4.
Step 4: Find the smallest number in the row (opportunity costs table) in every column and then subtract it from every number in that column. The table resulting from these operations is the total opportunity costs table. Let us do it for the Reynolds problem in Table 11.13.
Table 11.13: Total Opportunity Costs
Jobs Machines A B C D E 0 4 2 5 F 3 2 0 1 G 4 3 0 1 H 2 0 3 0

The smallest number that has been subtracted from other numbers in the same column, in Table 11.14, is E = 0; F = 2; G = 0; H = 0
Step 5: Perform the test of optimality. There are only three lines, whereas the number of rows/columns is four. Therefore, optimum assignments cannot be made at this stage.

Applying the forced choice method, we find that there are single zeroes in row A and B. So, there is no alternative to assigning Machine A to Job E and Machine B to Job H. Going to row C, we find that it has two zeroes, one in column F and the other in column G. Therefore, Machine C can be allotted either to Job F or Job G. Let us allot Machine C to Job F. In row D, the only zero is in column H, but Machine H has already been allotted to Job B. Now, Machine D and Job G have remained un-allotted. Since optimum assignment cannot be made at this stage, let us go to Step 6.
Step 6: This is done by finding the smallest number among the numbers not covered by any straight line in the table of total opportunity costs and subtracting that number from all the numbers not covered by any straight line, and adding that number to the numbers lying at the intersection of the straight lines.

The smallest uncovered number in Table 11.14 is 1. This is subtracted from all the uncovered numbers. Next, it is added to the numbers lying at the intersection of the straight lines (2 in Row A Column H and 3 in Row C Column H). The revised opportunity costs are given in Table 11.14.

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Table 11.14: Revised Opportunity Costs

Jobs Machines A B C D E 0 3 2 4 F 3 1 0 0 G 4 2 0 0 H 3 0 4 0

Step 7: Perform the test of optimality: The straight lines covering all the zeroes are four in number that is equal to the number of the rows/columns. Thus, optimum assignments can now be made.

We again apply the forced choice method. Starting with Row 'A', we find a single zero in it, and no other zero in the same column. Assign Machine 'A' to Job 'E'. Now go to Row 'B'. There is a single zero in that row but there are two zeroes in the same column. It, therefore, makes no difference whether Machine 'B' or 'D' is assigned to Job 'H'. Let us assign Machine 'B' to Job 'H'. In Row 'C', there are two zeroes, and in both cases, there is another zero in the same column. It makes no difference whether Machine 'C' is assigned to Job 'F' or 'G' as opportunity cost is zero in both the cases. Let us assign Machine 'C' to Job 'F'. There are three zeroes in Row 'D'. It is immaterial whether Machine 'D' is assigned to Job 'F', 'G' or 'H'. But Jobs 'F' and 'H' have already been assigned to Machines 'C' and 'B', respectively. So we assign Machine 'D' to Job 'G'. Now, all the assignments have been made, such that (1) Each job has been assigned to a single machine; and (2) Each machine has been assigned to a single job. The assignments and time are shown in Table 11.15.
Table 11.15: Optimum Assignments and Time
Jobs E H F G Machines A B C D Total Time Time 15 minutes 17 minutes 16 minutes 16 minutes 64 minutes

11.5.4 Scheduling Dynamic Job Shops

For the single machine case, we found that the Shortest Processing Time (SPT) rule was optimal with respect to the critical measurement parameters. Several studies have been conducted to evaluate the relative performance of various rules (often called despatching rules) for dynamic job shops. A clear conclusion of over a dozen studies is that the SPT rule performs the best if the objective is to minimize shop congestion as measured by the mean flow time or the mean number of jobs in the system. As the mean flow time and mean number of jobs in the system is optimized, it results in improved turnaround. When customer service is a dominant concern, then tardiness-based criteria, such as the proportion of jobs tardy or the mean tardiness may be relevant. With this as the measurement criteria, surprisingly the SPT rule does very well. This result is surprising but true, though the SPT rule ignores the due dates. Improved turnaround, lower work-in-process inventories and lower tardiness can together

provide a considerable competitive advantage to the organisation. However, one has to be careful as a few longer jobs may encounter very long delays as they can get stuck in the system. However, SPT may not be the best selection, as the selection of best rule critically depends on such factors as the level of the shop load, the procedure for setting due dates, and the tightness of the due dates. Depending on the specific situation of the organisation, the best scheduling rule needs to be determined.

255 Scheduling


In our discussion so far, we have assumed that a job never has to wait for lack of a worker; that the limiting resource is the number of machines or workstations available. However, in the real world, the more typical situation is where the resource constraint is the amount of labour available, not the number of machines or workstations. In a labour-limited environment, one must not only decide which job to process next at a particular workstation but also assign workers to their next workstations. In labour-limited environments, the labour-assignment policies, as well as the despatching priority rules, affect performance.
Constraints: The scheduler can use priority rules to make these decisions. But there are technical constraints imposed on the workforce schedule. The resources provided by the staffing plan and the requirements placed on the operating system are major constraints. Other constraints include legal and behavioural considerations.

For example, it is not possible to hire and fire workers under the existing laws in India. Similarly, in a hospital there must be an emergency ward with a qualified doctor and paramedics on duty at all times. Such constraints limit management's flexibility in developing workforce schedules. A workforce is made up of people. Constraints are imposed by the psychological needs of workers. This complicates scheduling. Labour laws also determine some of the constraints. For example, it is not permissible to allow a worker more than 4 hours overtime, if the worker has worked in a previous full 8-hour shift. Some of these constraints may also be written into labor agreements, e.g., provisions that govern allocation of annual leave, days off for holidays, or rotating shift assignments. In addition, preferences of the employees themselves need to be considered. The use a rotating schedule, which alternates employees through a series of workdays or hours, provides a level of fair play in the eyes of workers, as it gives each employee the next employee's schedule the following week. In contrast to a fixed schedule which calls for each employee to work the same days and hours each week, constraints are more amenable to handling when using a rotating schedule.

11.6.1 Non-cyclic Personnel Schedules

Demand variations are often caused by trend and seasonal factors, holidays, etc. Depending on the nature of the particular operations, suppose that we are faced with labor requirements that vary from hour to hour, day to day, week to week, and so on. Staffing this operation would require continuous adjustment to the changing requirements. These types of personnel scheduling use the 'first-hour' principle. The principle can be stated as follows: "Assign the work in the first period to a number of workers equal to the number required for that period. For each subsequent period, assign the exact number of

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additional workers needed to meet requirements. When workers come to the end of their shifts, do not replace them if they are not needed". This procedure is best exampled with the aid of an example. The sequence of worker requirements for the first 12 hours of a continuous operation (one assigned, workers continue working for an 8-hour shift) are given in Rows '1' and '2' of Table 11.16.
Table 11.16: Requirement and Assignment of Workers
Period Requirements, Ri Assigned, Xi On duty , Wi 1 6 6 6 2 6 6 3 8 2 8 4 8 8 5 10 2 10 6 10 10 7 15 5 15 8 14 15 9 12 3 12 10 12 12 11 14 4 14 12 14 14

Using the 'first-hour' principle, Xi = 6 workers are assigned in period 1 to work 8 hours. No additional workers are needed in period 2 because the requirement of 6 workers does not change. However, 2 additional workers must be assigned in period 3 to meet the total requirements of 8. In period 8, a total of WI = 15 workers are on duty. The 6 workers who were assigned in period 1 complete their shifts at the end of period 8, leaving a residential of 9 workers who continue into period 9. But 12 workers are required in period 9, so 3 additional workers must be assigned to start their shifts. In period 11, the requirement for workers goes up to 14, but 2 workers have completed their 8-hour shift, so 4 new workers are assigned. The assignment procedure continues in the same way, in an endless chain, as new requirements become known.

11.6.2 Scheduling Rules for the Workforce-Cyclic Personnel Schedules

One way to manage capacity in a scheduling system, with a stable situation in which the requirements pattern repeats itself, is to specify labour-assignment rules. The following are some examples of labour-assignment rules.

Assign personnel to the workstation having the job that has been in the system longest. Assign personnel to the workstation having the most jobs waiting for processing. Assign personnel to the workstation having the largest standard work content. Assign personnel to the workstation having the job that has the earliest due date.

Determining the workdays for each employee does not make the staffing plan operational. Daily workforce requirements, stated in aggregate terms in the staffing plan, must also be satisfied. In addition, customers demand quick response and reality is that total demand cannot be forecast with reasonable accuracy. The capacity needs adjustment to meet the expected loads. Therefore, the workforce capacity available each day must meet the daily workforce requirements. If it does not and no such schedule can be found, management might have to change the staffing plan and authorize more employees, overtime hours, or larger backlogs. Optimal solutions to cyclic staffing problems can be developed by applying the firsthour principle successively to the requirements schedule until the assignment pattern repeats. Suppose that we are interested in developing an employee schedule for a company that operates seven days a week and provides each employee one day off. The objective is to identify the days off for each employee that will minimize the amount of total slack capacity. The work schedule for each employee, then, is the six

days that remain after one day off has been determined. The procedure involves the following steps.
Step 1

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From the schedule of net recruitments for the week, find all the days that exclude the maximum daily requirements. Select the day that has the lowest total requirements. Select the day with the lowest total requirements. Suppose that the numbers of employees required are. Monday: Saturday: 8 8 Tuesday: Sunday: 9 4 Wednesday: 12 Thursday: 12 Friday: 10

The maximum capacity requirement is 12 employees, on Wednesday. The lowest total requirement is on Sunday with 4 workers.
Step 2

If a tie occurs, choose any one of the tied days. The tie could be broken by asking the employee who is being scheduled to make the choice.
Step 3

Assign the employee the selected day off. Subtract the requirements satisfied by the employee from the net requirements for each day the employee is to work.

In this case, the employee is assigned Sunday off. After requirements are subtracted, Monday's recruitments are 7, Tuesday's is 8, Wednesday's is 11, Thursday's is 11, Friday's is 9, and Saturday's is 7. Sunday's requirements do not change because no employee is yet scheduled to work on those days.
Step 4

Repeat steps 1-3 until all requirements have been satisfied or a certain number of employees have been scheduled. This method reduces the amount of slack capacity assigned to days having low requirements and forces the days having high recruitments to be scheduled first.


There are some basic distinctions between manufacturing and services. These differences effect scheduling. Service operations cannot create inventories to buffer demand uncertainties. Also service operations demand is often less predictable. Demand for service is often initiated by unplanned events. If my computer starts misbehaving, a service engineer is required. Customers may decide on the spur of the moment that they need a dosa or a haircut. Thus capacity, often in the form of manpower and skills, is crucial for service providers. In this section, we discuss various ways in which scheduling systems can facilitate the capacity management of service providers.
Scheduling Customer Demand

Where demand is known in advance or can be forecast, a way to manage capacity is to schedule customers for arrival times and definite periods of service time. This is a level strategy option that was discussed in the last chapter. Capacity remains fixed and

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demand is leveled to provide timely service and utilise capacity. Three methods are commonly used: backlogs, reservations, and appointments.
Backlogs: Very often organisations allow backlogs to develop so that they can plan their capacities better. Various priority rules can be used to determine which order to process next. The usual rule is first come, first served. But in a service industry custom and previous experience often changes the order of priority.

For example, your tailor shop will not tell you exactly when service will commence. You give your measurements (service request) to a tailor (order taker), who adds it to the waiting line of orders already in the system and he gives you a date for trying out the outfit.
Reservations: In many industries like in the hospitality and travel trades, reservations have become a norm. Reservations systems, although quite similar to appointment systems, are used when the customer actually occupies or uses facilities associated with the service.

The major advantage of reservation systems is the lead time they give service managers to plan the efficient use of facilities. Reservations often are complicated by the problem of no-shows. Yield management techniques have been developed to enhance demand for services as well as minimize the negative impacts of reservation systems.
Appointments: An appointment system assigns specific times for service to customers. The advantages of this method are:

Timely customer service and High utilisation of servers.

Hospitals are examples of service providers that use appointment systems. Surgeons can use the system to schedule part of their day to see patients and part of the day for their surgery. The quality of service is determined by the care taken to control delays in appointments so that individual customer needs are satisfied. Fortunately, many service products have soft ceilings. Soft ceilings can be flexed by buying additional inexpensive plant, recruiting unskilled or semiskilled staff, or sub-contracting, or of course short term overtime. Such service products can also use a 'chase strategy'. However, jobs requiring a scarce skill that is difficult to train such as toolmakers, or maintenance operatives, there is a limit to how much overtime can be worked to meet demand and the training program to reach basic skills is protracted.


The operations manager has a major responsibility in planning and implementing the schedules. This is the key to his success and failure. Most companies have in place operating-performance practices. Operating performance is driven by 'vertical' linemanagement processes. By improving operating performance, a company can respond to today's challenges and can maximize chances of closing the gap between the shortand long-term expectations of shareholders and management. Organisations, by focusing on performance, put in place initiatives that allow fundamental adaptations in the organisation. Initiatives, particularly those that could adapt the company's core business model to changing circumstances are essential. Such initiatives might include major technology projects, the redesign of the company's core operations model, and outsourcing decisions. Designing such initiatives into operations entails making choices in seven areas. It requires specifying:

What results are to be produced, Deciding who should perform the necessary activities, Where they should be performed, And when Determining under which circumstances (whether) each of the activities should or should not be performed, What information should be available to the performers, and How thoroughly or intensively each activity needs to be performed.

259 Scheduling

Often, managers are disappointed by the results of their changes in organisational structure, design and control processes because they fail to realize that another key ingredient of implementation is information. Information is the glue that holds together the structure of all business organisations. The ability to gather, arrange, and manipulate information with the computer has given organisations greater strength and new tools for management. Data processing tools have not only enabled executives to do the same tasks better, they have also changed the very concepts of what a business is and what managing means.
Check Your Progress 2

Fill in the blanks: 1. The Gantt chart gives a relationship among different activities in a production process in terms of their time. 2. The per cent of work time productively spent by a machine or worker is called .. 3. Constraints are imposed by the needs of workers. 4. Optimal solutions to cyclic staffing problems can be developed by applying the first-hour principle successively to the requirements until the assignment pattern repeats. 5. The major advantage of reservation systems is the lead time they give to plan the efficient use of facilities.


Information is the raw material the input used to make decisions. Organisations gain a competitive advantage from information by providing the right information to the right person at the right time. In the past decade, there have been significant advances in communications, software and computers. These have opened entirely new possibilities of sharing knowledge and information rapidly and efficiently. Those organisations that have made investments in information technology, to provide its employees information useful to their jobs, for the most part have found that their investments have paid off handsomely. This is what Crompton Greaves has experienced. Information technology has an extremely important role in assessing whether an organisation has missed milestones or exceeded thresholds. While deciding if any negative variances or missed targets have occurred may be a relatively simple task, but deciding what this data might mean may not be so simple. Decision-makers must assess the extent and criticality of exceptions, an interpretational process heavily dependent on what they might consider extenuating circumstances.

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Information technology needs to be combined with proper selection, training, and the willingness of managers to rethink their jobs. If they are successful, they have the potential for literally transforming organisations, changing forever what has been thought of as the role of management. Information technology provides organisations with a mode of interaction among themselves, their business partners, and their customers that promotes, in Gary Hamel's words, "collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies".

Material Requirements Planning System, narrowly defined, consists of a set of logically related procedures, decision rules and records designed to translate a Master Production Schedule into net requirements and the planned coverage of such requirements, for each component inventory item needed to implement this schedule. Manufacturing Resource Planning (MRP II) is concerned with the manufacturing aspects of resource planning which includes conventional Material Requirements Planning and Scheduling. They are integrated into purchasing functions, sales order, costing, accounts receivable and payable, general ledger, etc. The Master Production Schedule (MPS) is an authoritative statement translating the aggregate plan into how many and how items are to be produced, and when. Modular Bill of Materials: It is an artificial grouping of items in bill of materials format, which expresses the relationship of multiple product features, variants and options, where inventory items are arranged in terms of product modules each of which can be planned as a group. Manufacturing Inventory is defined as consisting of raw materials in stock, component parts, semi-finished and finished component parts in process and stock, and sub-assemblies in process and in stock. Product Level: It is the product structure where components of each assembly and sub-assembly link together to form the product, resulting in a hierarchical, and pyramid-like structure with different levels. Lot Sizing Techniques are meant to determine planned order quantities in the MRP. Economic Order Quantity (EOQ): This model is a demand rate oriented model where order quantities are determined on the basis of economic modeling. Fixed Order Quantity (FOQ): The FOQ policy maintains the same order quantity each time an order is issued. Period Order Quantity (POQ): It is modified EOQ for use in discrete demand situation. Based on EOQ calculation, the number of orders per year to be placed is determined. Similar to the FPR, the ordering interval is computed, and supplies are ordered accordingly. Least Total Cost (LTC): This technique is based on the rationale that sum of the set up and inventory carrying costs (total cost) for all lots within the planning horizon should be minimized. Lead Time: Positioning the planned order release ahead of the time of the net requirements is called setting the lead-time. Order-release notices: These determine the orders that need to be placed and the system makes the call for placement of planned order.

Rescheduling notices: Based on the feedback from manufacturing, it firms up requirements on open order due dates. Cancellation notices: Wherever necessary, it calls for cancellation or suspension of open orders. 'Dependent Priority' is a concept that recognizes that the real priority of an order depends on the time of order completion and the availability of all inventory items that are required not only for the operation but also for previous operations. This can be thought of as 'vertical priority' dependence. Load: The total capacity requirements placed on a work center during a given time period are called the load. Scheduling is the problem of assigning a set of tasks to a set of resources subject to a set of constraints. Hard Ceilings for capacity are limits that make the capacity extremely difficult to flex. Sequencing is basically an order in which the jobs, waiting before an operational facility, are processed. Thrashing is the problem of the system keeping itself busy re-planning rather than producing, which effectively reduces capacity. Gantt chart is a visual tool that takes two basic formsthe job or activity progress chart and the machine chart. Both types of Gantt charts present the ideal and the actual use of resources over time. Shortest Processing Time (SPT) Procedure is a schedule obtained by sequencing jobs in increasing order of processing times. A positive lateness, i.e., when the due date is not met is called tardiness, where lateness is the amount of time by which the completion time of job exceeds its due date, can be either positive or negative.

261 Scheduling

Check Your Progress: Answers


1. constraints 2. customer 3. capacity 4. sub-contracting 5. production


1. completion 2. utilisation 3. psychological 4. schedule 5. reservation 6. service managers

262 Production and Operation Management


Chase, R.B., Aquilano, N.J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Chopra, S. and Meindl, P., Supply Chain Management, Prentice Hall, 2001. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Meredith, J.R. and Shafer, S.M., Operations Management for MBAs, J. Wiley, 2002. Slack, N. and Lewis, M., Operations Strategy, Prentice Hall, 2003. Slack, N. et al., Operations Management, Prentice Hall, 2001. Taylor, Bernard W., Introduction to Management Science, Prentice Hall, 1996. Tersine, Richard J., Production/Operations Management, North-Holland, 1985. Vollmann, T. E., Berry W.L., and Whybark, D.C., Manufacturing Planning and Control Systems, Richard D. Irwin, Inc.. Waters, C.D.J., An Introduction to Operations Management, Addison-Wesly, 1991. Waters, D., A practical introduction to management science, 2nd, Addison-Wesly, 1998.

1. Explain the MRP system. What are the logics used in MRP? Explain its methodology. 2. What are the inputs and outputs required for an effective MRP system? 3. MRP and MRP II are different animals. Do you agree? Give the rationale and justification for your answer. Also show how the differences are reflected in an organisation's operations? 4. Give short descriptions on the following: (a) Inventory Items (b) Bill of Materials (c) Product Structure 5. What is a job shop (intermittent system)? Outline and describe the critical parameters of the job-shop scheduling problem. 6. Is job-shop scheduling a planning activity or a control activity? Would you call these four activities loading, sequencing, detailed scheduling, and input-output control as shop floor control? Explain. 7. What are priority-sequencing rules in scheduling labour? Why do most organisations settle for sequencing rules that yield satisfactory, but not optimal, system performance? Please explain with examples. 8. Jainsons has a major tailoring outfit at their Connaught Place branch in Delhi. Jobs arriving at Jainsons are to be processed and due as shown.
Waiting jobs (numbered in order of arrival) Processing time (in days) Due date (in days from now) 101 10 18 102 16 20 103 14 17 104 2 8

(a) How many processing sequences are possible for these four jobs? (b) Apply the first-come-first-served priority-sequencing and the shortest processing time rules, and calculate the average job lateness. Which rule is better in terms of average job lateness? Will that always be the better rule regardless of the data? Why? 9. Five jobs wait for processing in a machine shop. The set up costs of the different machines for the different jobs are shown below. Determine the sequence for these jobs so that the set up costs are minimized.
Job No. Machine I JI J II J III J IV JV 150 1,000 100 300 500 Set up Costs (in Rupees) Machine II 1,000 200 500 800 600 Machine III 300 300 450 900 600 Machine IV 900 700 1,100 400 300 Machine V 600 600 900 400 200

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264 Production and Operation Management


STRUCTURE 12.0 12.1 12.2 12.3 Objectives Introduction Importance of Project Management Project Management Basics 12.3.1 12.3.2 12.4 12.4.1 12.4.2 12.4.3 12.4.4 12.4.5 12.5 12.5.1 12.5.2 12.5.3 12.5.4 12.6 12.7 12.8 Work Breakdown Structure (WBS) Classification of Project Schedules Advantage of Critical Path Critical Path Method Deciding Critical Path of the Network Calculation of Earliest Expected Time of an Event Calculation of Latest Start and Latest Finish Times General Methodology Activity Slack Analysing Cost-time Trade-offs Cost to Crash

Network Representation of a Project

Identification of the Critical Path

Using Project Software Introducing Probability with PERT Project Planning Scheduling and Control System (PPSCS) 12.8.1 12.8.2 12.8.3 12.8.4 12.8.5 Uses of PPSCS Task Oriented vs. Resource Oriented Planning and Control System Task Oriented System Resource Oriented System Assumptions in CPM Methods


Multilevel Scheduling Systems

12.10 Let us Sum up 12.11 Glossary 12.12 Suggested Readings 12.13 Questions

After studying this lesson, you should be able to:

265 Project Management

Explain what is Project Management Discuss the planning fundamentals for projects Describe the project lifecycle basics Explain how to develop the Work Breakdown Structure (WBS) Differentiate between the schedules used for Project Management Discuss the critical path method and how to compute the critical path Explain the procedure of using software for project planning Discuss the constructing networks with probability Explain the control systems for projects Discuss the assumptions and limitations of Critical Path Method (CPM) Explain what are multi-project scheduling systems

Project Management addresses activities to achieve project objectives while projects are activities that cannot be addressed within the organisation's normal operational limits, but are necessary for the survival of the organisation. In this lesson we will examine the different methods used to manage and control projects for competitive advantage. To begin, a project is a multitask job that has performance, time, cost, and scope requirements and that is done only one time. It is not repetitive. A project should have definite starting and ending points (time), a budget (cost), a clearly defined scope, and specific performance requirements that must be met. Projects are more scheduleintensive than most of the activities that general management handles. Although projects are generally one-time occurrences, the fact is that many projects can be repeated or transferred to other settings or products. The result will be another project output. For example, a contractor building houses at different locations can effectively consider each of these as projects.


Sound Project Management in today's fast-paced world, has become essential because:

Competition is rapidly becoming time-based, i.e., if you can get a product or service to market faster than anyone else, you have an edge on your competition. Competition is also becoming cost-based, i.e., if you can control the costs of your work better than others, you can offer your products or services at lower costs.

India has had an enviable record for Project Management in areas relating to software development, business process outsourcing, product development and research and development. With the focus of most organisations moving towards research and development and developing new products, those organisations that practice sound Project Management methods have a competitive advantage. A large number of international companies are flocking to India to participate in the excellence demonstrated in these knowledge related areas. In areas related to development, industry and construction etc., India is far behind in its counterparts in

266 Production and Operation Management

other countries. The uncertainties that haunt most development and construction projects require to be understood. In this lesson, we shall discuss these aspects of Project Management. We will discuss the planning process and then go on to discuss in detail some common tools for carrying out the functions of scheduling and controlling. We will focus on methodologies and frameworks for developing overall and detailed schedules of project activities. The aim is to have an integrated approach to planning and scheduling of project activities. Most of the examples in this lesson are from development and construction projects. However, it must be understood that the theory and concepts that will be covered are equally applicable to knowledge-based industries.


During the 1950's, two different organisations were faced with Project Management problems that were not easily solvable with the existing techniques. The US Navy faced the problem of coordinating the activities of over 3000 contractors involved in the Polaris missile project. DuPont, on the other hand, wanted to determine the shortest possible time to complete the maintenance of its chemical processing plants. Plant shutdowns that were required on a regular basis were expensive. It wanted to reduce these costs and also wanted to identify the activities that were critical to the earliest completion of the project so that they could control the maintenance process. Both the organisations came out with solutions. The Navy, with Booz, Allen, and Hamilton Consulting Group, developed a method that was called 'Program Evaluation and Review Technique' (PERT) which permitted uncertain time estimates to be used. Dupont took the help of Remington-Rand and came up with a solution that did not use probabilities and called it the 'Critical Path Method' (CPM). Today, these techniques are called PERT/CPM and form the heart of Project Management techniques. Project Management has its objective optimising system implementation. There are four basic components:

Cost Performance Time Scope

This concept can be expressed as a mathematical equality where Cost is a function of Performance, Time and Scope: C = f (P, T, S) Where: 'C' is cost; 'P' is performance; 'T' is time, and 'S' is scope. Graphically, this concept is visualized as a triangle, in which 'P', 'C', and 'T' are the sides and 'S' is the area. If we know the area and the lengths of two sides, we can compute the length of the remaining side. This translates into a very practical rule of Project Management; if values are assigned to any three variables, Project Management optimizes the remaining one.

"Project Management is facilitating the planning, scheduling, and controlling of all activities that must be done to achieve project objectives", is a definition that has found general acceptance. In essence, a project is a series of related jobs usually directed toward some major output and requiring a significant period of time to perform. Project Management can be seen as planning, directing, and controlling resources (people, equipment, and material) to meet the technical, cost, and time constraints of the project.

267 Project Management

Figure 12.1: Project Management and Basic Management

Dr. J.M. Juran, a quality guru, defines Project Management as, 'a problem scheduled for solution'. Projects deal with both positive and negative kinds of problems and they deal with scheduling solutions. For example, developing a new product is a problem, but a positive one, while an environmental clean-up project deals with a negative kind of problem. Both involve the preparation of a project work plan. A project work plan: (1) describes the various project tasks and activities (2) indicates how the tasks will be accomplished and managed and (3) identifies the resources necessary to carry out the various project activities. Projects come up for different reasons. A project may be initiated due to market demand. Reliance is building an extension to its refinery to increase its capacity. It may be due to organisational need. IIM (A) is authorizing projects to create new courses to increase its academic area. It may be due to customer request. The Ramky Group has asked Andhra Electricity Board to set up an electrical sub-station for its new industrial estate near Vizagapatnam. It could also be due to legal requirements. Associated Cement Company has authorized a number of projects for bagging plants and electrolytic precipitators to control the emission of particulate matter in the air as required by law. It could also be due to technological advances. J&K Bank has decided to implement projects to computerize a large part of its retail network. As you can see, all these projects are activities that cannot be addressed within the organisation's normal operational limits, but are necessary for the survival of the organisation. There are many different phases a project goes through during its lifecycle. The lifecycle model is shown in Figure 12.2. Concept Every project begins as a concept. The project team must have a clear understanding of the concept. Definition With the concept clearly defined, it must formalize the definition of the job before doing any work. Project Management involves solving a problem on a large scale, and the way you define a problem determines how you will solve it. The definition of the job evolves into the mission and vision for the job that everyone shares.

268 Production and Operation Management

Concept Marketing Input Survey of competition

Definition Define Problem Develop Vision Write Mission statement

Planning Execution Development Do all work Strategy Monitor Progress Implementation Planning Corrective Risk Action Management

Close out Financial Reports Lessons Learned Review


Figure 12.2: Project Management Lifecycle

Planning Once the project is defined, you can plan how to do the work. There are three components to the plan: strategy, tactics, and logistics. The importance of strategy is illustrated by this example. The traditional way to build the ship was in an upright position. However, ships built from steel required welding in the bottom, or keel area of the boat, and this was very difficult to do in the traditional model. During World War II, Avondale Shipyards, decided to build its ships upside down, to make the welding easier. They would then turn the welded structure over to complete the structures above the top deck. This strategy was so effective that it could build boats faster, cheaper, and of higher quality than its competitors, and the strategy is still being used today, nearly sixty years later. The implementation-planning phase includes tactics and logistics. Tactics deals with determining the sequence in which the work will be done, who will do what, and how long each step will take. It will be necessary to think through what each party involved must do, as well as to schedule all events that may affect the meeting of the overall schedule. Planning for more complex projects, which may include several components or in which several contractors may participate, usually involves the preparation of several subsidiary schedules. These schedules would contain all necessary details, while the master schedule would show only those events that would permit an assessment of the overall progress, for the purpose of overall Project Management control. Logistics deals with making sure the team has the materials and other supplies needed to do its job.
Table 12.1: Components of a Project Plan
Plan Logistic Plan Procurement plan Manpower Plan Financial Plan Construction Plan Contracting Plan Evaluation Plan Contents Materials and equipment required, including transportation, warehousing and site arrival sequence, and as appropriate, acquisition of land for structures. Procurement and contracting events for obtaining projects, goods and services. Recruitment, training and personnel placement activities. Sequence for commitment of funds and timing of project expenditures. Preparation of work packages and scheduling activities leading to the awareness of contracts. Preparation of work packages and scheduling activities leading to the award of contracts. Data collection activities and timing of review actions.

Table 12.1 gives the components of the Project Plan. Once you have established your objectives, you can develop plans for how to achieve them. Unfortunately, the best plans sometimes don't work. You have to also think about the risks in critical objectives that could threaten the success of the job. The first rule of planning is to be prepared to replan. Risk management is the systematic process of identifying, analysing, and responding to project risk. The simplest way to conduct a risk analysis is to ask, "What could go wrong"? or "What could keep us from achieving our objective"? It is usually best to list the risks first, and then think about contingencies for dealing with them. Unexpected obstacles will crop up. Develop plan B just in case plan A doesn't work. Plan B will also have weaknesses, but they must be different from those in plan A. That has to be the characteristic of a back-up plan. Each milestone should have criteria established that will be used to determine whether the preceding phase of work is actually finished. If no deliverable is provided at a milestone, then exit criteria become very important. Execution Once the plan has been developed and approved, it must be implemented. The team can begin work. This is the execution phase. This phase also includes control; while the plan is being implemented, someone must ensure that the work is progressing according to the plan. To facilitate control, tasks should, where possible, be broken down into their component parts. These component parts should be identifiable, measurable, manageable units. Such a level of detail is necessary so that slippages may be predicted and remedial action taken. Plans are developed to achieve the end result successfully. Unless you monitor your progress, you cannot be sure you will succeed. If a deviation from the plan is discovered, you must ask what must be done to get back on track or, if that seems impossible, how the plan should be modified to reflect the new realities. Close Out Once the project is finished, the final step is an audit. The point is to learn something from what you just did. The questions we should ask ourselves are: What was done well? What should be improved? What else did we learn?

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Figure 12.3: Steps in Managing a Project

12.3.1 Work Breakdown Structure (WBS)

At the heart of every project planning system is the project Work Breakdown Structure (WBS). WBS is needed because:

The WBS defines the project scope. The WBS reflects as accurately as possible the physical project to be completed. It is a detailed breakdown of the overall project into component parts called work packages. It does this by identifying all the tasks that must be performed in order to achieve the project objectives and defines the project in a structured format.

The idea behind the WBS is simple: You can subdivide a complicated task into smaller tasks. The breakdown is continued until a work package level is reached at which distinct tasks are small enough for detailed planning. It does this till you reach a level that cannot be further subdivided. At that point, it is usually easier to estimate how long the small task will take and how much it will cost to perform than it would have been to estimate these factors for the higher levels. Each work package is a complete entity, separate and distinct from all other elements and under well-defined management responsibility. All the facilities and task

requirements to build the facilities, or the contracts required to complete construction of the facilities are identified. A sample codified WBS of the Garden Project is illustrated in Figure 12.4.

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Figure 12.4: A WBS for a Project to Clean the Garden

A coding structure should be established for each element of the WBS. Its purpose is to provide a means for easily referring to the work element for management or administrative control purposes. It assigns a particular number as a basic number to each of the upper level elements of the breakdown structure. It extends the coding structure to the different levels by changing certain digits or adding additional digits to the element's basic number, when assigning numbers to the lower level subtasks of the elements. This is illustrated in Figure 12.4. At the second level, there are 5 elements. At the next level, the codification reflects the relationship with the higher level. A key issue in constructing a WBS for a project is the depth to which the WBS should be extended. Limit the WBS development to subdivision of work to the work package level only. Two principles are particularly important to note: 1. Each part of the WBS should be subdivided to the number of levels useful for managing the project and 2. No effort should be made to extend the QWBS to the same number of levels for all project tasks.

Figure 12.5: Break-up of a Project

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The typical WBS has three to six levels, and these can be named as shown in Figure 12.5. It is, of course, possible to have projects that require a lot more levels. Twenty levels are considered to be the upper limit, and that is a huge project.

Level 1 is called the program level while the project is one degree lower. The project is broken down into tasks and the tasks into subtasks. Detailed project planning and assignment of responsibilities for planning and management are performed at the work package level. A work package, depending upon the level of effort, is assigned to individuals or contractors with budgets in monetary terms, man-hours, or other measurable units. The duration of a work package is usually short. A short duration makes an objective measurement of the work components easier. It is desirable that the management of a project should not have too many work packages. However, the Project Management should not be constrained from subdividing work into a larger number of work packages in areas that are complex, high risk, or other wise critical to project success.

A WBS dictionary is generally attached to a WBS. The dictionary defines each of the different project elements. It provides descriptions that fully explain what the item is, where it fits into the project, what the material for the item consists of, what functions are included in the item (i.e. design, procurement or construction). Sometimes, where it is needed for clarity, it specifies exclusions in the work element. A sample WBS dictionary description for a WBS element 'piping' is shown below.
Element Dictionary Description: PIPING The piping component element refers to all system piping in this plot area regardless of whether the piping is for a utility or process system. Both above ground and underground piping are included. Above ground piping may be broken down at the next WBS element level, by piping block or groupings of piping blocks, depending on the number of categories of blocks that are best for internal management control of the work. Types of piping material include carbon steel, stainless steel, alloy steel, concrete and other non-metallic piping, as well as piping supports. Above ground piping includes the following systems: creaking and quench, gas compression and treating, propylene refrigeration, ethylene refrigeration, flare stem distribution /water treating, fuel supply, instrument, air, and cooling water. Underground piping includes the fire, sewer and cooling water systems. The work for above ground piping encompasses detail design from routing and planning studies through completion of the bill of material and vendor print checks. It also encompasses the vendor provided piping materials and all assembly work starting with prefabrication and ending with the final check of each of the system lines. The work for underground piping encompasses all assembly work starting with the installation of the piping and ending with the final check of each of the system lines.

In addition to WBS based on the physical structure, alternative Work Breakdown Structures can be developed for a project depending upon the requirements. For example, it is common to see the following types of WBS in projects: 1. Hardware-software oriented 2. Agency oriented 3. Function oriented The hardware-software approach often provides the basic framework for project planning and implementation. Since project hardware is built only through software, establishment of the linkage between hardware and software is important and enables

the design of project work system. A WBS that is developed on assumptions of work assignment is an agency oriented WBS. This can be developed only after a decision has been taken regarding work distribution. Work can also be broken down using a function-oriented approach. This is often the approach used by contractors for distributing in-house work, which is normally organised along functional lines. The WBS should assign responsibilities for all identified efforts to specific organisations and organisational elements, while conforming to the reporting requirements of the organisations involved. There are no standard solutions for developing a WBS for a project. However, there are some general guidelines that make the WBS into an effective tool in organising the work into logical groupings:

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The WBS should be established early in the project life. It should subdivide the total effort into discrete and logical sub elements. The WBS should provide detailed work plans and estimate the resources required, with cost estimates of those resources. It should also establish schedules for the conduct of the work plans and use of these resources. It should describe the project completely, be compatible and continuous and this needs to be regularly checked. Make sure that the WBS satisfies both functional and project requirements. A responsibility chart illustrating this is shown as Table 12.2.
Table 12.2: Responsibility Chart

12.3.2 Classification of Project Schedules

Scheduling is certainly a major tool used to manage projects. It puts into perspective the shared understanding of what the project is supposed to accomplish and the Work Breakdown Structure (WBS). The best way to classify the project schedules is by the uses they are put to. Thus, there are schedules for tendering, purchase, engineering, construction, erection and commissioning etc. As already discussed, different schedules involve different levels of project WBS.

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One popular way of schedule classification is therefore based on the level on which the respective schedules are used. On this basis, there are 3 categories of schedules as described in Table 12.3. We shall briefly consider each.
Table 12.3: Categories of Schedules
Category i) Description of Schedules System schedules or overall Schedules or Master project schedules. Purpose of Schedules Prepared for the project as a whole. Comprises major system/components of the project. Identify the primary milestones to be achieved in the project. Help integrate inputs-outputs and resources leading to the achievement of the overall objectives of the project. Prepared for each contractor, vendor or functional department. Help establish resource requirement and decide commitment so that maximum throughput is achieved with optimal commitment of resources. Help set targets for different agencies and thus monitor their work, cost and time. Help determine payment schedules. Help list each and every input and output like drawing, equipment, etc., so that these can be tracked for completion as well as adherence to stipulated time/cost /work targets.


Resource schedules/Agency Schedules /Functional Schedules.


Input-output schedules/work package schedules/production schedules.

System Schedules: System schedules establish the overall project completion target, individual system target, and important milestones. For example, in case of a construction project, this will take into account the process of location, site selection, design and the construction sequence and interrelationship between various systems comprising the electrical, sanitary engineering, sewage treatment, water and water treatment, and other utilities and off site facilities. This serves as the 'mother document' for development of further detailed schedules. These schedules are known as master project schedules. Resource Schedules: The resources that are required in the form of money, manpower, equipment and materials etc., are identified in this schedule. The schedules would, on the basis of the work load involved in execution by each of the agencies, stipulate the progress to be achieved month by month and allocate resources to be deployed. The purpose is two-fold: 1. Assess and provide adequate resources, and 2. Ensure the fullest utilisation of resources. The resource requirement is assessed from input-output schedules and targets and priorities from system schedules. Resource schedule therefore provides a link between the system schedule and the input-output schedule. Resource schedules show the performance expected to be achieved month by month. When related to the financial budget, it becomes a performance plan. Input-output Schedule: The outputs produced by the various agents are identified in physical terms or activities and target dates are affixed against each. For example, the physical items may be drawings, purchase orders, foundations, road laying etc., and the activities may be design, evaluation, excavation, concreting, etc. Subsidiary Schedules: In addition, there may be other subsidiary schedules. The preparation and monitoring of the subsidiary schedules should be done by the functional unit responsible for a specific type of activity. The integration of the subsidiary schedules into a master schedule must be done by a central planning team, to ensure uniformity and consistency.

Check Your Progress 1 Fill in the blanks: 1. A project is a multitask job that has performance, time, cost, and scope requirements and that is done only time. 2. Project Management is facilitating the planning, scheduling, and controlling of all . that must be done to achieve project objectives. 3. The implementation-planning phase includes tactics and 4. Risk management is the systematic process of identifying, analysing, and . to project risk. 5. Plans are developed to achieve the end . successfully.

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There are basically two methods of scheduling, the Critical Path Method (CPM) and the Program Evaluation and Review Technique (PERT). In a sense, the CPM techniques owe their development to the widely used predecessor, the Gantt Chart. But the Gantt Chart has certain limitations:

The Gantt Chart has limitations in visualizing. It cannot work for projects that include more than 25 activities. Also, the Gantt Chart provides no direct procedure for determining the Critical Path, which is of great practical value to identify bottlenecks and/or delays.

The Critical Path is defined as the longest series of activities (that can't be done in parallel) and which therefore governs how early the project can be completed.

12.4.1 Advantage of Critical Path

The Critical Path is of great importance in Project Management as it determines whether or not a deadline, which is imposed on most projects, can be met. Furthermore, since the Critical Path Method helps identify which activities will determine the end date, it also helps to guide how the project should be managed. Knowing where the critical path is in a project allows one to determine the impact on the project of a scope or priority change. You know which activities will be impacted most heavily and what might need to be done to regain lost time. In addition, managers can make informed decisions when one can tell them the impact of changes on the project.

Thus, CPM can be an invaluable tool, when used properly. In managing a project, there are important relationships among various activities that are often better presented visually. An overall Project Network Diagram schedules the work packages in order of precedence for the projects. For example, certain activities may not begin before others are completed, while some activities may go on simultaneously.

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Figure 12.6: Network Arrow Diagrams

CPM and PERT, both use 'arrow diagrams' to capture the sequential and parallel relationships among project activities. To show the sequence in which work is performed, diagrams like those in Figure 12.6 are used. In these diagrams, task A is done before B, while task C is done in parallel with them. The network in the left half in Figure 12.6 has used an activity-on-node notation. This shows the work or activity as a box or node, and the arrows show the sequence in which the work is performed. Events are not shown in activity-on-node networks unless they are milestones-points in the project at which major portions of the work are completed. The network in the right half uses activity-on-arrow notation, in which the arrow represents the work being done and the circle represents an event. The arrows represent the beginning point and the end points of events. As you will notice, we have assigned numbers to the nodes, thereby designating them as events. An activity is, therefore, not only represented by the arrow but also by the events that begin and end it.
Table 12.4: Relationships between Event Oriented and Activity Oriented Network Diagrams

Table 12.4 shows the relationships between Event Oriented and Activity Oriented Network Diagrams. Different relationships between activities are shown both in the arrow and node modes.

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Figure 12.7: Dummy Activity and Dummy Node

Dummy activities are those activities which consume no time. However, these are added in the network to satisfy precedence relationships. Similar is the case for dummy nodes. The network that is shown in the figure above shows how a dummy activity finds application. If activity 'A' is followed by 'C', while activity 'B' is followed by both 'C' and 'D' but before activity 'E', how can this be represented? The problem comes for activity 'E' as its precedence activity is both C and D. This situation can be handled by using a dummy activity (4-5), which takes zero time to complete. Another way to handle this is to use a dummy node. A dummy activity and a dummy node are shown in Figure 12.7. Table 12.5 shows 5 activities, 'A', 'B', 'C', 'D', and 'E'. It also provides the precedence relationships between the activities. How does one draw the network correctly?
Table 12.5: Network Relationships
Task Precedence Task A B C A D B E A, B

Figure 12.8: Drawing a Network Diagram

Three network diagrams are shown in Figure 12.8. Please note that (a) and (b) have not been correctly drawn. The correctly drawn network diagram is shown in (c).

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An event is binary; that is, it has either occurred or it has not. This is a special use of the word event in Project Management. In scheduling terminology, an event is a specific point in time where something has just started or has just been finished. An activity, on the other hand, can be partially complete. The two forms of diagrams simply happen because the two systems were developed by different practitioners. Both forms are still used, although activity-on-node is used a bit more than the other. This is simply because much of today's personal computer software is programmed to use node notation.

12.4.2 Critical Path Method

There are certain rules for drawing a network diagram. We will first discuss the Fulkerson rule, formulated by D.R. Fulkerson, which determines the numbering sequence. These rules are used for numbering the events on a network: 1. Start with the initial event. This event will have arrow(s) coming out of it and none will enter it. Number this "I"it is the initial event. In any network, there will be only one initial event. 2. Delete all arrow emerging out of the event already numbered. This will create at least one more initial event. 3. Number these new events as "2, 3" 4. Repeat step (ii) till an event is obtained from which there is no arrow emerging. This is the end event. Once we can number events, the other basic guidelines to construct a network have been given below: 1. Prepare a list of all activities required to complete the project. Decide their time relationship. Represent each activity by an arrow. 2. Determine the precedence relationship (logical order) of all activities. For this, use these three questions for each activity: (a) Which activity precedes this activity? This answers which activities, must be completed before the start of activity under consideration. (b) Which activity follows this activity? The answer would show activities that cannot start before completion of the activity under consideration. (c) Which activity should take place simultaneously with this activity? This would be a list of activities which should be performed simultaneously while the activity under consideration is being performed. It would also provide guidance about the use of dummy activities, if any. 3. Draw the arrow diagram for the network on the basis of precedence relationship. Encircle the starting and finishing of the activities. 4. Number each node as per Fulkerson rule. 5. Check the correctness of the number, using the following guidelines: (a) Number at the head of any row is always greater than the node number at its tail. (b) No node is numbered until its all-preceding events are numbered. (c) There is only one starting and one finishing node. (d) All activities are uniquely represented by one starting and one finishing event. (e) There is no duplicate number for a number.

Let us discuss the Garden project for which we developed the WBS. The background of the project is that Bhan Farms rents its gardens during the marriage season for marriage celebrations. Normally, during the season the gardens are fully booked. The old occupant vacates the premises by 9 AM and the new occupant is handed over the garden by noon. The garden has to be cleaned and trimmed before it is handed over to the next occupant. Mr. Bhan was interested how early the cleaning-up and preparation of the garden can be completed so that the garden could be handed over to the new occupant. This small garden project might be thought of as having three phases:

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Preparation Execution Clean-up Pick up trash Fill fuel in equipment and Get out hedge clipper etc. Bag the grass Collect trash and Disposal

There are three preparation tasks:

The cleanup tasks include:

In making this schedule diagram, we have used a basic rule of scheduling i.e., diagram what is logically possible and then deal with resource limitations. For the Garden project, if your gardener is working alone, then there really can be no parallel paths. On the other hand, if you are helping your gardener or you have other help for the work, then parallel paths are possible. There are two rules to follow here. The first is to go ahead and schedule as if it were possible to get help. This is especially important in most work settings. The second is to keep all times in the same units. Don't mix years, months, weeks, days, hours and minutes-schedule everything in one unit. It is always possible to convert the unit as a last step. For example, in this schedule, time has been given in minutes. It is good to keep in mind that there is no single right solution, but a diagram can be said to be wrong if it violates logic.

12.4.3 Deciding Critical Path of the Network

Scheduling usually means trying to fit the work between two fixed points in time. Whatever the case, we still want to know how long the project will take to complete; if it won't fit into the required time frame, then we will have to do something to shorten the critical path. Activity durations are a function of the level of resources applied to the work. Therefore, resource allocation is necessary to determine what kind of schedule is actually achievable. Once the critical path in the schedule is determined, we need to assess what kind of latitude is available for non-critical work, under ideal conditions. The ideal situation is one in which unlimited resources are available. Using this assumption, time estimates for each task are made by using historical data or best estimates of how long each activity will take. When the time estimate of each activity is known and network is constructed, it is necessary to calculate the project duration and the critical path. We need to know the

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earliest expected time (of an event) as a measure from the start of the project, and latest allowable completion time (of an event) as a measure from end of the project.

Figure 12.9: CPM Diagram for Garden Project

For the Garden project example, we will use node notations. Let us construct the network diagram. This diagram has been shown in Figure 12.9. First, let us examine the node boxes in the schedule. Each has the notation ES, LS, EF, LF, and DU. These notations mean the following: ES = Early Start LS = Late Start EF = Early Finish LF = Late Finish DU = Duration (of the task) Consider a single activity in the network, such as picking up trash from the yard. The duration (DU) is given in the right hand top corner node box. It takes fifteen minutes to complete this activity. Each node box also is identified with an activity and duration of the task. The activities for the garden project have been shown in a tabular form in Table 12.6.
Table 12.6: Activity Chart for Garden Project
Activity A B C D E F G H I J K Description Pick up Trash Fill Fuel Fetch Hedge Clipper Trim Weeds Mow Front Edge Sidewalk Trim Hedge Mow Backyard Bag Grass Collect Trash To Disposal A, B A, B A, B C E H, D, F, G H, D, F, G I, J A-D A-E A-F C-G A-E-H A-E-H-I A-E-H-I A-E-H-I-K Predecessor Activity Network Path Time (Min.) 15 5 5 30 45 15 30 30 30 15 45

12.4.4 Calculation of Earliest Expected Time of an Event

Once a suitable network has been drawn, with durations assigned to all activities, it is necessary to determine where the longest path is in the network and to see whether it will meet the target completion date. Since the longest path through the project determines minimum project duration, any activity on that path that takes longer than planned will cause the end date to slip accordingly, so that path is called the critical path. In order to compute network start and finish times, only two rules apply to all networks. These are listed as rules 1 and 2. Other rules are sometimes applied by the scheduling software itself. Such rules are strictly a function of the software and are not applied to all networks. Rule 1: Before a task can begin, all tasks preceding it must be completed. Rule 2: Arrows denote logical precedence. Start from the starting event,

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Early Start (ES) for the first event (i.e., A) is zero, as the starting time is zero. For the next events, the activity times are the summation for each possible path, leading from the starting event to the given event. The largest sum is the earliest expected time for that event. For the scheduling computations in the Garden project, for example, we assume that it starts at time = zero, it can finish as early as fifteen minutes later. Thus, we can enter 15 in the cell labeled EF. Putting fuel in the grass mower and collecting the hedge clipper and other equipment takes only five minutes each.

The logic of the diagram says that both of these tasks must be completed before we can begin trimming weeds, cutting the front grass, and edging the sidewalk. The earliest finish time for activities, P and Q, is calculated as: EFQ = Max {ESP + tPQ} Where, ESP = Earliest Start time for activity 'P' (predecessor) tPQ = Expected completion time for activity P Q In our Garden project example, for the initial events: EFA = 0 +15 = 15 minutes EFb = 0 + 5 = 5 minutes EFc = 0 + 5 = 5 minutes The Earliest Start (ES) time for an activity is the Earliest Finish (EF) time of the immediately preceding activity. For example, if we consider Activity D in our example, there are two preceding activities. Activity B has an EF of 5 minutes while Activity A has an EF of 15 minutes. For activities with more than one preceding activity, ES is the largest of the EF of the preceding activities. This is the time at which an event can occur without delaying the scheduled completion date of the project, if all succeeding events are completed as per plan. We use backward pass or backward calculation from the finishing point of the network. The clean-up task takes fifteen minutes, whereas the fueling-up activity takes only five minutes. How soon can the following activities start? Not until the clean-up has been

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finished, since it is the longest of the preceding activities. The Early Finish for cleanup becomes the Early Start for the next three tasks. The longest path determines how early subsequent tasks can start. Following this rule, we can fill in Earliest Start times for each task. The project will take a total of 165 minutes to complete, if all work is conducted exactly as shown. EFD = Max (ESA + 30) = 15 + 30 = 45 minutes EFE = 15 +45 = 60 minutes EFF = 15 +15 = 30 minutes EFG = Max (ESC + 30) = 5 + 30 = 35 minutes Similarly, for the other activities the EF can be calculated: EFH = 60 + 30 = 90 minutes EFI = 90 + 30 = 120 minutes EFJ = 90 + 15 = 105 minutes EFK = 120 + 45 = 165 minutes

12.4.5 Calculation of Latest Start and Latest Finish Times

To obtain the Latest Start and Latest Finish times, we must work backward from the finish node. We start by setting the Latest Finish time of the project equal to the Earliest Finish time of the last activity on the critical path. The Latest Finish time (LF) for an activity is the Latest Start time of the activity immediately following it. For activities with more than one activity immediately following, LF is the earliest of the Latest Start times of those activities. The Latest Start time (LS) for an activity equals its Latest Finish time minus its estimated duration, 't'. LSP = LFP tP In our example, let us start calculating the Latest Start and Latest Finish times for each activity, starting with the last activity. LSK = LFK tK = 165 45 = 120 minutes If activity 'K' must start no later than 120 minutes, activities 'I' and 'J' must finish no later than 120 minutes. Therefore, LFI = 120 minutes and; LFJ = 120 minutes LSJ = LFJ tJ = 120 15 = 105 minutes LSI = LFI tI = 120 30 = 90 minutes Similarly, LFH = 90 minutes as activity 'I' has to start by 90 minutes, for the total time to add up to 145 minutes. If activity 'I' is delayed, the project cannot be completed by 145 minutes. Other predecessor activities to 'I' are 'D', 'F' and 'G'. Therefore, LFD = 90 minutes, LFF = 90 minutes, LFG= 90 minutes while the predecessor activity for 'E' is activity 'H' and LFE = 60 minutes LSH = LFH tH = 90 30 = 60 minutes LSG = LFG tG = 90 30 = 60 minutes

LSF = LFF tF = 90 15 = 75 minutes LSE = LFE tE = 60 45 = 15 minutes LSD = LFD tD = 90 30 = 60 minutes The predecessor activity for 'C' is 'G'. The LFC is therefore 60 minutes, and the predecessor activities for 'A' and 'B' are 'D', 'E' and 'F'. Therefore, LFA = LFB and is 15 minutes. LSC = LFC tC = 60 5 = 55 minutes LSB = LFB tB = 15 5 = 10 minutes LSA = LFA tA = 15 15 = 0 minutes

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The critical path activities have no latitude. They must be completed as scheduled, or the entire project will take longer than 165 minutes. Knowing where the critical path is tells a manager where his attention must be applied. The final network for the Garden project is shown in Figure 12.10.

Figure 12.10: Garden Project Showing Critical Path

Note that some tasks have the same EF and LF times, as well as the same ES and LS times. These tasks are on the critical path. In Figure 12.10, they are shown with bold outlines, to indicate exactly where the critical path lies.

12.5.1 General Methodology

For a detailed analysis, we use the following time estimates for the forward pass (i.e., start from the beginning activity) 1. Set the ESA for the initial activity equal to the start time of the project (set it equal to zero). 2. For each subsequent activity; ESP = Max {EF for all immediate predecessor of (P)} and 3. EFP = ESP + tP A backward pass is made through the network to compute the Latest Start and Latest Finish times for each activity in the network. To do that, we must decide how late the

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project can finish. Conventionally we generally don't want a project to end any later than its earliest possible completion. 1. Set the latest finish time for the terminal (last) activities equal to the scheduled completion time of the project. The scheduled completion time (t) of the project is the earliest occurrence time for the last or completion event, i.e., t = Max {EF for all terminal activity} 2. LFP = Min {LS for all immediate successors of (P)}; Since, LSP = LFP tP, LFP = Min {LFP - tP} If Hauling Away Trash has a Late Finish of 165 minutes and has duration of forty-five minutes, what is the latest that it could start? Clearly, if we subtract 45 from 165, we have 120 minutes, which is the Latest Start for the task. Proceeding in this manner, we get LS times for bagging grass and bundling clippings of 90 and 105 minutes, respectively. One of these two numbers must be the LF time for each of the preceding activities. Which one? Well, assume we try 105 minutes. If we do that, it would say that bagging grass could start as late as 105-minutes, since as soon as preceding tasks are finished subsequent tasks can begin. But if we add 30 minutes for bagging to the 105-minute ES time, we will finish at 135 minutes, which is later than the 120-minutes previously determined, and we will miss the 165-minute end time for the project. Therefore, when we are doing backward-pass calculations, the Latest Finish for a preceding task will always be the smallest of the Late Start times for the subsequent tasks. (A simpler way to say this is: always use the smallest number!) Rule: When two or more activities follow another, the latest time when that (preceding) activity can be achieved is the smaller of the times.

12.5.2 Activity Slack

Slack is the amount of schedule slippage that can be tolerated for an activity before the entire project will be delayed. It highlights activities that need close attention. Activities on the critical path have zero slack. The other tasks have latitude, which is called float or slack. This does not mean that they can be ignored, but they have less chance of delaying the project if they encounter problems.
Table 12.7: Critical Path and Slack
Activity A B C D E F G H I J K Fill Fuel Fetch Hedge Clipper Trim Weeds Mow Front Edge Sidewalk Trim Hedge Mow Backyard Bag Grass Collect Trash To Disposal Description Pick up Trash ES 0 0 0 15 15 15 5 60 90 90 120 EF 15 5 5 45 60 30 35 90 120 105 165 LS 0 10 55 60 15 75 60 60 90 105 120 LF 15 15 60 90 60 90 90 90 120 120 165 Slack 0 10 10 45 0 60 55 0 0 15 0

Slack as an activity is reduced when the estimated time duration of an activity is exceeded or when the scheduled start time for the activity must be delayed because of resource considerations. The project team should be encouraged to keep float times in reserve as insurance against bad estimates or unforeseen problems.

People tend to wait until the latest possible start time to start a task; then, when problems occur, they miss the end date. If there is no float left, when the task takes longer than originally planned, it will impact the end date for the entire project, since once a task runs out of float, it becomes part of the critical path. For example, activity G in the Garden project is estimated to have 55-minutes of slack. Suppose that the hedge clipper cannot be located within 5-minutes, the activity's earliest Start Date, and then if it is not found within 60-minutes, the late Start Time, the activity exceeds 90-minutes, consuming all the slack and making activity G critical. You must be careful that the hedge trimmer is available before the Late Start time to avoid delaying the entire project. You can often manipulate slack to overcome scheduling problems. Slack information helps the project team make decisions regarding the reallocation of resources. When resources are scarce, the slack from several different activities in a project can be delayed until the slack is used up. There are two types of activity slack: 1. Total slack for an activity is a function of the performance of activities leading to it. It can be calculated in one of two ways for any activity: S = LS ES or S = LF EF 2. Free slack is the amount of time that an activity's earliest finish time can be delayed without delaying the earliest start time of any activity immediately following it. The start date for an activity with free slack can be delayed without affecting the schedules of other activities.

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12.5.3 Analysing Cost-time Trade-offs

Project Management has as its objective, optimizing a system where "Cost is a function of performance, time, and scope". By determining the network and the critical path, the scope of the project has been completely defined, as the assumption in developing the CPM network has been that resources are available. However, once you have determined that the end date can somehow be met, you must see whether your unlimited resource assumption has overloaded your available resources. When you assess your resources, remember that nobody is available to do productive work more than 80 per cent of a workday. You lose 20 per cent to personal time, fatigue, and delays. You also need to examine the network to keep project costs at acceptable levels. This is almost always as important as meeting schedule dates. There are always Time-Cost Trade-offs. If you want to schedule within the available float, it is called time-critical resource leveling, because time is of essence for your project. If you minimize resources and continue sliding tasks over until resources become available, even if it means slipping the end date, it is called resource-critical leveling. For example, a project can often be completed earlier than scheduled by hiring more workers or running extra shifts or using additional equipment. Such actions could be advantageous if savings or additional revenues accrue from completing the project early. There are a number of possibilities. There are some areas to examine.

You should first see whether any task has enough float to allow it to be delayed until resources become available. You should also ask whether you can reduce scope, change the time limit, or reduce performance. Usually performance is not negotiable, but the other areas

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may be. For example, sometimes you can reduce scope, and the project deliverable will still be acceptable to the client.

12.5.4 Cost to Crash

Total project costs are constituted of direct costs, indirect costs, and penalty costs. The sum of these costs is the total project cost. These costs depend on activity times and project completion times.

Direct costs include labour, materials, equipment and any other costs directly related to project activities. Indirect costs include administration, depreciation, financial costs, and other variable overheads. Indirect costs can be avoided by reducing total project time. The shorter the duration of the project, the lower will be the indirect costs. Penalty clauses are often part of project contracts if the project extends beyond some specific date. Sometimes a bonus may be provided for early completion. Some activities can be expedited to reduce overall project completion time and total project costs.

Time cost Trade-off procedures make use of some special terms. Some of these are explained here below: Normal Activity Time-Cost-Point Is the lowest point on a time-cost graph and represents the absolute minimum cost for accomplishing the activity in normal time. Normal Time is the shortest time to perform the activity within the constraint of minimum direct cost. Feasible Activity Time-cost Trade-off Points Represent the various combinations of minimum direct costs and their corresponding least timings for one individual activity only. There can be few or several of these points and they can be best represented on a graph showing cost versus timings: 1. The project duration is too long. 2. The customer wants to know the additional costs for saving part of the project completion time. 3. The company may like to minimize the sum of direct and indict project costs without disturbing the stipulated duration time. Because the project indirect costs can be easily determined through existing accounting practices, Time-Cost Trade-off procedures are mostly used for minimizing direct costs for the given project duration times only. The procedure for 'Feasible Activity Time Cost Trade-off' consists in collecting first cost data for the network and rescheduling of all the critical and near critical activities, again collecting second cost data and rescheduling the new critical or sub-critical activities and so on. A systematic procedure has been developed by Burgess. 1. Starting with the bottom activity, the method makes comparisons between the sums of squares of daily resource requirements and selects the one with minimum sum. 2. The target always being toward reducing the project duration time with minimum increase Direct Costs. 3. The process is continued till a step is reached when increase in Direct Cost is less than the decrease in Indirect Costs. That means no further decrease in Total Costs is possible.

4. This method of choosing the schedule, leads to the least variation in resource requirements. This is also called crashing. For example, in the Garden project the critical path is A-E-H-I-K. The corresponding activities are 'Pick up Trash', 'Mow Front', 'Mow Backyard', 'Bag Grass' and 'Disposal'. You would damage the mower if you start mowing without removing the trash. So, activity 'A' would be difficult to crash. However, you can mow the front lawn and the back lawn simultaneously, if 1. You invest in an additional mower, and 2. Add an additional man to run the second lawn mower. Suppose the cost of renting the lawn mower is Rs. 250.00 each day and the cost of an extra gardener is Rs. 150.00. By crashing activity E, we can reduce the total time to 135 minutes. However, we would be able to do this at a crash cost of Rs. 400.00. The revised critical path has been shown in Table 12.8.
Table 12.8: Crashing the Garden Project
Activity A B C D E F G H I J K Fill Fuel Fetch Hedge Clipper Trim Weeds Mow Front Edge Sidewalk Trim Hedge Mow Backyard Bag Grass Collect Trash To Disposal Description Pick up Trash ES 0 0 0 15 15 15 5 15 60 60 90 EF 15 5 5 45 60 30 35 45 90 75 135 LS 0 10 10 30 15 45 30 15 60 75 90 LF 15 15 15 60 60 60 60 60 90 90 135 Slack 0 10 10 15 0 30 25 15 0 15 0

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To assess the benefit of crashing certain activities, the following times and costs need to be known: 1. The normal time (Tn) is the time to complete the activity under normal conditions. 2. The normal cost (Cn) is the activity cost associated with the normal time. 3. The crash time (Tc) is the shortest possible time to complete the activity. 4. The crash cost (Cc) is the activity cost associated with the crash time. Our cost analysis is based on the assumption that direct costs increase linearly as activity time is reduced from its normal time. This assumption implies that for every unit of time the activity time is reduced, direct costs increase by a proportional amount. For any activity, the cost to crash an activity by one unit of time is: Cost to crash = Cc Cn / (Tn - Tc) There is a trade-off curve between the project completion time and the additional cost. To construct the time/cost trade-off curve, parameter 't' is varied. This is shown in Figure 12.11. Such a curve can be constructed for any project.

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Figure 12.11: Activity Time/Cost Trade-off Curve

As the Garden project example shows, you start with the activity which is on the critical path and also has the least cost-time slope, which means that the time can be bought down from this activity at the cheapest price. The possible augmentation is affected and new times and slacks are calculated. Augmentation from activity-to-activity is continued till it is found that after updating, the network critical path goes sub-critical. Then find another activity (on some nearcritical path) having the least cost-time slope and then to make the desirable augmentation. Special care must be taken when the project network has two or more critical paths. The incremental augmentation procedure to adjust activity time for producing the time/cost trade-off curve does not necessarily provide an optimal solution. Linear programming is most effectively used in order to guarantee the lowest additional cost for completing the project by a specified target date. nP = Normal time for activity 'P' mP = Crash time for activity 'P' sP = Cost per unit time of reduction for activity 'P' yP = number of units of time by which activity 'P' is shortened xP = Finish time for activity 'P' Then, we wish to minimize the cost 'SPYP' by crashing subject to the precedence constraints, the target date completion time constraint, and constraints on amount of crashing permitted. The general minimum cost solution for a target completion time of 't' will be given by the solution of the linear program: Minimize Subject to:
P X P A P x P A P




Yp )

(precedence constraints) (target date constraint)



(n P

mp )

(constraints on amount of crashing permitted)

This approach is used for medium-sized projects, as it may be computationally expensive for a large network.


For large projects, assistance of computer software is essential. The software creates a project schedule by superimposing project activities, with their precedence relationships and estimated duration time, on a time line. It provides information on the specific tasks, and milestones to know whether the project is on target, headed in the right direction, and on time. People doing the work will find it much easier to see when they are supposed to start and finish their jobs if you give them a bar chart compared to the arrow diagram. Scheduling software always allows you to print a bar chart, even though a CPM network is used to find the critical path and to calculate floats. Microsoft Office Project Professional 2003 is a popular software used to plan projects, though many experts are critical of it. The software schedules a task's Start and Finish. It takes into account many factors, including task dependencies, constraints, and interruptions, such as holidays or vacation days.
How to Use

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To start a typical project click on File in the toolbar and then select New. A dialog box appears on the screen asking you whether to start a blank project or not. Click on OK. A new dialog box appears asking you to fill in the project information. Upon clicking the OK button in the Project Information dialog box we have the Gantt chart on the screen. Enter tasks in the order they will occur. Then estimate how long it will take to complete each task. In the Duration field, type the amount of time each task will take in months, weeks, days, hours, or minutes, not counting non-working time. Microsoft Project uses durations to calculate the amount of work to be done on the task. When you start a new project in Microsoft Project, you can enter your project's start or finish date, but not both. Double-click on the first row of the field Task Name. A dialog box appears asking for Task Information. Information about predecessors, resources, etc., has to be keyed in. You link tasks by defining a dependency between their finish and start dates. For example, the "Pick up Trash" task must finish before the start of the "Mow Front" task in the Garden project. There are four kinds of task dependencies in Microsoft Project: Finish-to-start (FS) Start-to-start (SS) Finish-to-finish (FF) Start-to-finish (SF) Task (B) cannot start until task (A) finishes. Task (B) cannot start until task (A) starts. Task (B) cannot finish until task (A) finishes. Task (B) cannot finish until task (A) starts.

You can schedule your tasks most effectively by entering task durations, creating dependencies between tasks, and then letting Microsoft Project calculate the start and finish dates for you. You can also specify lags between activities.

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As you keep on filling the information about the tasks, the Gantt chart is automatically created. You can track actual work using the time-phased fields in Microsoft Project. To keep your project on schedule, make sure that tasks start and finish on schedule. The Tracking Gantt view helps find trouble spots, tasks that vary from the baseline plan. You can then adjust task dependencies, reassign resources, or delete some tasks to meet your deadlines. The Tracking Gantt view pairs the current schedule with the original schedule for each task. When you've saved the project with a baseline, but before you've entered actual data on progress, the Tracking Gantt view shows tasks with the baseline bars and the scheduled or actual bars synchronized. When you update your schedule, you can compare the baseline plan to your actual progress to identify variances. You can click the Network Diagram button on the left on the main screen and the network diagram will be displayed. We have used MS Project to provide the network diagram for the crashed version of the 'Garden project. This is shown as Figure 12.12.

Figure 12.12: The Garden Project Crashed

If you click on the Resource Sheet button given in the left column of the screen, the resource sheet is displayed. You can fill in your resource requirements. It takes the maximum number of units of a resource, by default, as unity (100%). It has a feature called Resource Leveling. In the Gantt chart view, click on the Tools pull-down menu. Choose the Resource Leveling option. A dialog box appears, choose the Automatic radio button. There are three leveling options are given. Click on the Level Now button after choosing one or more leveling options and program reallocates resources, which can be seen both in the Gantt chart as well as the resource sheet.

If you schedule tasks based on the availability of resources, track the progress of your tasks by updating the work completed on a task. Using this approach, you can track the work that each resource is performing.

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Many factors may cause time taken to complete a task to vary. Parkinson's Law says that work always expands to fill the time allowed. That means that tasks may take longer than the estimated time, but seldom take less. One reason is that when people find themselves with some time left, they tend to refine what they have done. Another is that people fear that if they turn work in early, they may be expected to do the task faster the next time or that they may be given more work to do. In addition, we also have to understand variation. If the same person types a page on a word processor, the typing times will vary. Sometimes it will take ten minutes, while other times it will take fifteen. The average may be twelve, but we may expect that half the time it will take twelve minutes or less and half the time it will take twelve minutes or more. In recent years, a new method of estimating time duration for/by knowledge work has been developed. Rather than have individuals estimate task durations, at least three people are asked to estimate each activity in the project. They do this without discussing their ideas with one another. They then meet to find out what they have put on paper. Time estimates often vary because objectivity has not been properly applied. Assumptions and tolerances are not properly codified. There are some guidelines for documenting estimates:

Show the percent tolerance that is likely to apply. Tell how the estimate was made and what assumptions were used. Specify any factors that might affect the validity of the estimate (such as timewill the estimate still be valid in six months).

To deal with possible variations, the Program Evaluation and Review Technique (PERT) uses the beta probability distribution. The PERT charts remain exactly the same as for single-time estimate. The variability associated with activity performance times is considered for computing completion time probabilities only. The beta distribution, unlike the normal probability distribution, allows the most likely time estimate to be close to the pessimistic time, close to the optimistic time, or anywhere in between. It is not symmetrical like the normal distribution. By obtaining three time-estimates for each activity, it is possible to calculate the expected duration of each activity and the standard deviation of that duration. Those values can then be used to determine an expected completion time for the project, as well as the probability of completing the project within a given time period. The three time-estimates used to calculate expected activity time are: 1. Optimistic time(a): the shortest time the activity will reasonably take. 2. Most likely time(m): the time this activity would take most of the time. 3. Pessimistic time(b): the longest time the activity would be expected to take. Using these three values, it is possible to calculate the expected duration of an activity. The formula is given as: te = (a + 4m + b) / 6

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The variance of activity duration is given by the formula:

2 = [(ba) / 6]2

Where, 'te' is the expected time '2' is the variance 'a' is the optimistic time estimate 'm' is the most likely time estimate 'b' is the pessimistic time estimate For determining the probable dates of completion, the network is drawn and variance for all the events falling on the critical path is computed. The variance of a particular event is calculated, assuming zero variance for initial event and then adding the variance of the activity (or of activities) on the critical path up to the event. Similarly, expected duration up to a particular event can be calculated by adding up all the mean times for the activities on the path, from the start to this event. The variance and statistical-mean-time for a particular event can be calculated using the Control Limit Theorem, which states: Event Expected Duration = TE = (te )1-2 + (te )2-3+. Variance of time for the event = VTE = Vt1-2 + Vt2-3+ It is assumed that standard normal curve is applicable to the distribution of actual occurrence time of the event. For knowing the probability of accomplishing an event at a particular time, the normal curve area tables are used. These tables give probability values for all the possible different units (a measure in terms of standard deviation 'z'). Therefore, it becomes necessary to calculate 'z' before referring to the normal curve area tables. In case of PERT network charts, 'z' can be calculated with the formula: z = (TS TE ) / (VTE ) Where z = units in terms of standard deviation, TS = the scheduled time for the completion of the event, and TE = the event meantime computed using Control Limit Theorem like above. Finally, the probability values for any particular completion time of any of the events can directly be read for the normal curve tables against the calculated values of 'z'. In the Garden project (example in Table 12.6), we have used only one time estimate for each activity, the most likely time. However, we want to take probabilities into account. This is done by including optimistic and pessimistic times and assigning a probability to each estimate. Table 12.9 shows those three time estimates for each activity.
Table 12.9: Garden Project with Expected Times
Activity Description Optimistic Time (a) A B Pick up Trash Fill Fuel 12 5 Pessimistic Time (b) 18 5 15 5 Most Likely Time (m) Expected Time (te) 15 5 Variance ( ) 1.00 0


Fetch Hedge Clipper Trim Weeds Mow Front Edge Side walk Trim Hedge Mow Back Yard Bag Grass Collect Trash To Disposal

3 30 40 14 30 25 20 15 40

10 30 55 16 35 40 30 15 50

5 30 45 15 30 30 30 15 45

5.5 30 45.83 15 30.83 30.83 28.33 15 45

0.25 0 6.25 0.026 0.69 6.25 2.76 0 2.76

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Notice in some case that all three time estimates are the same. Those are activities that will always take a set amount of time, without any variation. The expected time for each activity is calculated, using the formula introduced previously. For example, the expected time for activity 'C' will be te = (a + 4m + b) / 6 = (3 + 4 5 + 10) / 6 = 5.5 minutes The variance in that completion time will be
2 = [(ba) / 6]2 = [(10 7)/ 6]2= 0.25 minutes

To determine the probability of completing the critical-path activities within a certain time, the completion time is assumed to be normally distributed. Although a large number of activities may not be on the critical path, the normal distribution is still a good approximation. The probability of completion of the project, by time 'TS', is determined by using the Normal Probability Table. Suppose Mr. Bhan wants to know the expected activity times of the Garden project. He is keen to determine that if he gets possession of the garden by 9.00 AM, what is the probability the garden will be ready by noon? The time required to prepare the garden will be the total of the critical path activities that consist of A, E, H, I and K. TE = (te)1-2 + (te)2-3+= 15 + 45.83 + 30.83 + 28.33 + 45 = 164.99 minutes This gives an expected project completion time of 164.99 minutes. The sum of variances for activities on the critical path will be: VTE = Vt1-2 + Vt2-3+= 1 + 6.25 + 6.25 + 2.76 + 2.76 = 19.02 minutes Then the 'z' value will be z = (TS TE) / (VTE) = (180 164.99) / v19.02 = 15.01/4.36 =3.442 Referring to the Normal Probability Distribution table, the probability corresponding to a 'z' value of 3.442 is larger than 99.99 per cent. Mr. Bhan can be assured that if he gets the activities started at 9.00 AM, he will be in a position to hand over the premises to the new occupant by noon.
Joint Probabilities and Multiple Critical Paths

The procedure we have just described assumes only one critical path. However, there may be more than one. When there are two or more critical paths simultaneously all their activities can be placed under two categories:
Category I - includes all those activities which are common for all the critical paths, and Category II - includes those activities, which are different for different critical paths.

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For category II activities, try various combinations and use your judgment. Further, check if a path that is not critical may have greater variance than the critical path does. If it does, it is possible for that path to end up being critical before the project is completed. Therefore, we need to consider the 'z' values of various combinations in the project. Though, there is a very low probability that the other paths would take longer than the critical path. However, this probability is non-zero. Calculation of a more accurate estimate can become very complex because the separate paths share some activities and, thus, are not independent of one another.


Just like WBS is the heart of every project planning system, Project Planning, Scheduling and Control System (PPSCS) is the backbone of Project Management.

12.8.1 Uses of PPSCS

It enables time phasing of the project activities/work packages. It develops the resource requirements and allocation plan as well as the cash-flow plan. It identifies specific milestone events. It is a prerequisite for monitoring of the project at various levels. By using the PPSCS system, specific responsibilities for time and cost can be assigned to those concerned with managing the project.

Figure 12.13 gives the conceptual model of a PPSCS system clearly showing the relationships between the different elements.

Figure 12.13: Conceptual Model of PPSCS

The different elements of the conceptual PPSCS model include: (a) Objective, (b) Planning, (c) Scheduling, (d) Implementation (e) Monitoring, (f) Updating, (g) Progress Reporting and (h) Control. Let us briefly consider each element of the conceptual model. 1. Objective: all activities connected with the project are undertaken to achieve certain time, cost and performance objectives. Hence, the PPSCS must aim at achievement of these objectives. 2. Planning: This involves devising a scheme of operations that achieves the objectives with optimal utilisation of the resources, in the face of constraints and resource limitations. Planning is therefore linked to objective through resources and constraints. The objective dictates the resources such as money, manpower etc., that may be required, and constraints stipulate their availability. It focuses on the choice of workable alternatives. In addition, planning depends on the project structure as brought out through the Work Breakdown Structure (WBS). This does not show in the conceptual model. However, it is the WBS, which enables formulation of detailed plans for various subsystems of the project. The WBS also integrates them with the overall project planmaking it an essential prerequisite for formulating project plans. 3. Scheduling: Scheduling is the link between the plan and its implementation. It involves allocation of responsibilities, arrangement of resources, decisions on priorities, fixation of targets for work packages and identification of responsibility centers. Scheduling arranges the plan on a time-frame, which enables commitment of resources and thus makes the plan a workable reality. The two terms are often used synonymously as it is difficult to segregate planning and scheduling during the implementation phase. 4. Implementation: Once the schedule is finalized, project implementation begins. It starts with creating an organisation for execution of the project schedules. 5. Monitoring: This is a system that provides continuous feedback from the project, enabling revision and control of the schedules to keep them dynamic. 6. Updating: Updating normally refers to information/actual occurrence of events in the project schedules. It also incorporates new decisions/information on the part of the schedule yet to be started. Thus, updating may add new activities, delete completed and redundant ones and incorporate changes in the logic and activity durations. 7. Progress Report(s): Monitoring is linked with implementation through a feedback report which may be called Progress Report. This gives the status of activities under completion. The progress report originates from implementation and connects implementation and monitoring. 8. Control: Control implies corrective actions based on the monitoring and feedback. The control system can initiate action that may result in revision of the project objectives, reworking of the project time and cost estimates as well as resource requirements.

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12.8.2 Task Oriented vs. Resource Oriented Planning and Control System
The owners and their contractors point of view design on project planning and control system is different. The owner's control system is often known as task oriented system, whereas the contractor's system is known as resource oriented system.

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12.8.3 Task Oriented System

In a Task Oriented Planning and Control System, the objective is to minimize time delays. An owner trying to complete a project within a given time is mainly concerned with avoiding time delays at the interfaces. In large projects, this is reflected as a problem of coordination with several turnkey contractors. In addition, the focus is on interdependency of tasks; agencies that have been awarded contracts in one area must not create delays in work affecting other agencies, which may affect the project completion and the ultimate cost of the project. One option that is commonly used is to appoint a monitoring agency to ensure careful co-ordination. Since a network is the best technique for integrating such diverse activities leading to a common objective, a full network-based scheduling and monitoring system is invariably chosen for this purpose. This system puts emphasis on coordination of the agencies with a view to control the time aspect of the project. This type of system is termed as a Task Oriented System, since the completion of the task is the overriding consideration.

12.8.4 Resource Oriented System

A turnkey contractor, on the other hand, is more focused on ensuring fullest utilisation of his resources, rather than being concerned about the total project interfaces. A progressive turnkey contractor with well developed systems and procedures can adopt a time control system that also tracks details of his part of the job. In practice, most contractors lay emphasis on measurement of the progress and reporting of the same.

Figure 12.14: A Typical Planning, Scheduling and Monitoring System

This type of the system is termed as a Resource Oriented Planning and Control System, since fullest utilisation of the resources is the overriding consideration in the design of the control system. The system shown in Figure 12.14 is a typical planning, scheduling and monitoring system. Where the contracts are of reimbursable type, the onus of ensuring optimum utilisation of resources will rest fairly and squarely with the owner. The owner in that case would try to ensure that not only the various agencies are coordinating properly but also their sources of contractors are being optimally utilised. This type of system would be essential in such a case. If a Project Management Company manages the project on behalf of the owner, this would be a balanced system that could be adopted to take care of the requirements of the owner, vendor and contractor.

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12.8.5 Assumptions in CPM Methods

Several assumptions need to be made to use project critical path analysis. As projects become larger, however, and as the number of jobs and paths through the network increases, the procedure becomes more and more difficult to follow because of the rapidly expanding number of alternatives to be evaluated at each step. In addition, project activities are generally identified as entities. This means that there is a clear beginning and ending point for each activity. However, in reality complex projects change in content over time. The initial formulation of the network may be highly inaccurate later. One should also look at near-critical paths that are paths that do not share any activities with the critical path. Near-critical paths exist when there is parallelism in a network. Conversely, the more a network approximates a single series of activities, the less likely it is to have near-critical paths. One particularly difficult point for operating personnel sometimes is to understand the statistics involved. Three time estimates are used. The beta distribution is used for activity-times and activity variances, and the normal distribution is used to arrive at project completion probabilities. These are all potential sources of misunderstandings. This should not lead to misunderstandings and obstruct any phase of the project. Management must be sure that the people charged with monitoring and controlling activity performance understand the statistics. Though planning the network is based on identifying the longest-time-consuming path (or the path with zero slack), this very often does not remain the critical path for the project. What often happens as the project progresses is that some activity not on the critical path becomes delayed to such a degree that it extends the entire project. It is important to determine the critical path and the expected time values along the critical path, but ultimately events need to be monitored constantly to determine project completion time. Sequence relationships cannot always be specified beforehand, especially in conditions prevailing in the Indian environment where governmental permissions are required. In some projects, the orders in which certain activities are specified are contingent on previous activities. CPM analysis, in the basic form, has no provision for treating this problem. However, there are some other techniques that allow the project manager several contingency paths, given different outcomes from each activity. The specified activities, when the network is initially formalized, should not limit the flexibility that is required to handle changing situations as the project progresses. The Critical Path Method was originally developed to solve scheduling problems in an industrial setting. For this reason, probably, it was less concerned with the uncertainty

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problems that PERT attempted to cope with and more concerned with costs of project scheduling and how to minimize them. Thus, unlike PERT, CPM does not make use of probabilistic job times; it is a 'deterministic' rather than a 'probabilistic' model. It does, however, allow for variations in job times, not as a result of random factors (bad luck or good luck) but as the planned and expected outcome of resource assignments. Project Management in India, outside the knowledge disciplines, has always been very uncertain. Though, theoretically, control should focus on the critical path, attention should center on those activities that have a high potential variation. These may or may not lie on the critical path or on a 'near-critical path'. For example, the Enercon project was to cost the customer Rs. 600 million. A delay beyond September 30 would result in reduced depreciation benefits to the customer and penalties to Enercon. Delays seemed to be the order of the day. It started with the Nawapur site itself. The project was on private land and Enercon needed to negotiate with each landowner. Though the land acquisition took about four to five months, as this was seen as speeding up of the process, the villagers raised land prices. EIL paid about 30-35 per cent more than normal rates for the land. By the time the land acquisition process was nearing completion, the monsoon set in. Heavy rains disrupted the movement of the trailers carrying WEC equipments from Daman and new roads needed to be built and the earlier ones strengthened before the trailers could deliver their loads. By the middle of August, the rains had subsided and work was on at full steam. The villagers were then instigated that the project would harm their crops. This resulted in an agitation at the work site and resulted in the slowing down of work.


In view of the uncertainty associated with project execution, in the face of the need to keep the project on schedule, a dual scheduling approach is often advocated. Such an approach calls for preparation of two types of schedules: Realistic Activity Time Schedules (RATS) and Compressed Activity Time Schedules (CATS). The former is used for all commitments; the latter is used to drive the internal project organisation. 'CATS' are used to chase the 'RATS'. CATS determine the minimum time required for implementing the project, if all goes well. The time difference between the two schedules gives a cushion to absorb unforeseen delays. The feasibility report, detailed project report, budgeting and marketing plans, etc., are based on RATS. However, CATS is released to the projectimplementing agency. The RATS/CATS approach can be suitably integrated with multilevel scheduling. In the RATS/CATS, scheduling and monitoring can also be done at multi levels, covering all executing agencies and the entire project organisation, using the system shown in Figure 12.14. The dotted lines in the system diagram show that the system could be broken down by separate agencies into different levels to implement and monitor the project, by separating it into parts pertaining to the resources utilisation, monitoring, etc. This system can also be broken up into a part that the owner would like the contractor to adopt, a part that would be adopted by the owner, and a part of the system that would be jointly or individually used by both. In multilevel scheduling systems, master networks for the top management are prepared to coordinate the various functional plans, to identify the interface events and

to provide the top management with a means to authorize and control work and expenditure. The 'two schedule approach' of keeping cushion time by having the internal execution and control network on optimistic time estimates is adopted. All the schedules and milestones are drawn on the 'optimistic network'. Area wise network (Level II) are prepared to coordinate the various functional plans. Detailed Level III network programs for execution of all activities under each program, i.e., civil work; mechanical erection, etc. are prepared. Contract-wise and item-wise Level IV networks are prepared to control site activities. For each contractor, weekly/monthly programs are finalised in consultation with them to achieve targets of networks. Detailed monthly reports highlight the actual progress against planned, hold-ups, critical areas, support/action required. The system incorporates resource schedules and input-output schedules. It is clear that for each level of organisation there is a schedule, and based on the schedule, there is a review. Necessarily, the schedule will cover only those items for which that particular level assumes responsibility. All the schedules are drawn using the 'top-down' approach; they are updated using the bottom-up approach. The information on the physical progress achieved at the ground may be picked up by database, or reported through a feedback report. This information, when processed against the backdrop of relevant schedules will provide information suitable for intervention by different levels of management.
Scheduling for Repetitive Systems

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In scheduling of projects which have repetitive systems, it is possible to standardize many of the components as is done in the case of manufacturing companies. Research in regard to optimising work schedules of projects having repeated work cycles is important. First a chart is prepared for one complete cycle. Taking the common activities, make comparisons between the sums of squares of daily resource requirements and select the one with minimum sum. Attempt minimisation of the sum of squares for a few other orderings of activities and finally choose the best from the optimums obtained from different cycles. This permits making any other required adjustment for the factors not taken into account earlier. Then certain decision rules in the light of constraints or needs, can be made and finally, a consolidated bar chart for the system is prepared. Repetitive systems are common in case of road construction, multi-story buildings, bridges, etc., and similar projects.
Multi-project Scheduling

Where more than one project is being scheduled at the same time, a number of common resources are used in the different projects. The efforts of the planner are mainly directed towards leveling the requirements of various resources, so as to optimise their use. For example, in the case of Enercon that was discussed earlier, they were already using 4 out of the 6 numbers of 220 tonne cranes available. The option was for the maintenance department to repair the crane immediately or else the different projects would start competing for the same limited resources. Principles of multi-project scheduling require that in case where common resources have to be used, the objectives of allocating resources are determined such that:

Project completion delays are to be avoided,

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Resource requirements should not get exceeded, and Idle resources are to be kept at minimum.

In cases where resources are limited, certain activity durations might have to be elongated while always trying to keep the project duration time at its minimum. Wherever possible, activities should be delayed. The constraint may, for example, be that the number of bricklayers is limited due to harvesting season, when there is a large migration back to the villages. This constraint will no longer remain when the season is over and skilled and semi-skilled workers return to work. This is a temporary constraint. In such cases, one should look at the possibility of delaying activities. The activities with slacks are stretched as much as possible for reducing resource requirements. If the requirement still remains excessive, the activities on critical path are studied and their durations extended. This process is gone through for all the activities starting with the top activity and then working down the list of activities on the critical path. Elongating first the schedule of slack path activities and then that of critical path activities is continued till the available resources suffice for the requirements. Sometimes, activities can be split. This may not give the best schedule, but an experienced PERT planner can come very near to the optimum. Such resource constraints are quite common in construction industry. For example, in the Enercon project Mr. Chauhan gave a directive to his team to split activities and use a 60 tonne crane for all work that could be done with that equipment, so that the services of the 220 tonne crane would be used for the remaining jobs and completed at full steam once the crane is ready, buying time.
Check Your Progress 2

Fill in the blanks: 1. Dummy activities are those activities which consume 2. Scheduling usually means trying to fit the work between two points in time. 3. Resource allocation is necessary to .. is actually achievable. determine what kind of

4. When two or more activities follow another, the latest time when that (preceding) activity can be achieved is the of the times. 5. Total project costs are constituted of direct costs, indirect costs, and costs.


In spite of the great potential for Project Management in India, especially as we move ahead to develop our infrastructure, we need to pay more attention to our ability to improve implementation of projects in development and construction projects. According to an Asian Development Bank report, many public sector projects are behind schedule. The key causes of implementation delays in the projects have included complex and prolonged government internal procedures, lengthy procurement approvals, ineffective contract supervision, weak project supervisory personnel and inexperience of domestic contractors. Many projects continue to suffer from delays, thereby adversely impinging on the projects' developmental impact.

Project Management Systems, Tools and Practices will have to be looked at with diligence. Systems will be fully integrated with corporate Information Systems. Project Management software will need to be developed that will be more specialized to fit project categories or types. There will have to be an increase in Web-enabled Project Management that will be used by all. For this, virtual teams will become commonplace. In the future, we will see Project Management merge into General Management, and become a required competency for top executives. Project and Operations Management will be integrated through a corporate-wide Project/Operations Planning and Control System. These developments and challenges are on the anvil and project management will require changing and transforming itself to successfully exploit its potential in India.

301 Project Management

Project Management is facilitating the planning, scheduling, and controlling of all activities that must be done to achieve project objectives. 'Work Breakdown Structure' (WBS) defines the project in a structured format breaking down the overall project into component parts called work packages, identifying the tasks that must be performed in order to achieve the project objectives. System Schedules establish the overall project completion target, individual system target and important milestones. The resources that are required in the form of money, manpower, equipment and materials, etc., are identified in the Resource Schedule. Critical Activity: An activity with zero slack, i.e., an activity, which in case of deviation or slips will delay project completion. Critical Path: The sequence or chain of critical activities for the project constitutes critical path. It is the longest duration path through the network. CPM: Project Management technique that is used when activity times are deterministic (Critical Path Method). Earliest Finish (EF) Time: The earliest time that an activity can finish, from the beginning of the project. Earliest Start (ES) Time: The earliest time that an activity can start, from the beginning of the project. Event: It is the beginning, completion point, or milestone accomplishment within the project. An activity begins and ends with events. An event triggers an activity of the project. Expected Activity Time: The average activity time that is used in the project scheduling. Free Slack (Float): The length of time up to which an activity can be delayed for channeling resources or readjustments, without affecting the starts of the succeeding activities. Latest Finish (LF) Time: It is the latest time that an activity can finish, from the beginning of the project, without causing a delay in the completion of the project. Latest Start (LS) Time: It is the latest time that an activity can start, from the beginning of the project, without causing a delay in the completion of the project. Optimistic Time (To ): It is the time for completing an activity if everything in the project goes well (used in PERT).

302 Production and Operation Management

Pessimistic Time (Tp ): It is the time for completing an activity if everything in the project goes wrong (used in PERT). Program Evaluation and Review Technique (PERT): It is the Project Management technique used when activity times are probabilistic. Resource Allocation Methods: Allocation of resources to the activities so that project completion time is as small as possible and resources are well utilised. Slack: It is the amount of time that an activity or a group of activities can be delayed without causing a delay in the completion of the project. An activity having slack cannot be a critical activity.

Check Your Progress: Answers


1. one 2. activities 3. logistics 4. responding 5. result


1. no time 2. fixed 3. schedule 4. smaller 5. penalty


Chase, R.B., Aquilano, N.J., Jacobs, F.R., Production and Operations Management; Manufacturing and Services, Richard D. Irwin, Inc., 1998. Chopra, S. and Meindl, P., Supply Chain Management, Prentice Hall, 2001. Hill, T., Production/Operations management: text and cases, Prentice Hall, 1991. Meredith, J.R. and Shafer, S.M., Operations Management for MBAs, J. Wiley, 2002. Slack, N. and Lewis, M., Operations Strategy, Prentice Hall, 2003. Slack, N. et al., Operations Management, Prentice Hall, 2001. Taylor, Bernard W., Introduction to Management Science, Prentice Hall, 1996. Tersine, Richard J., Production/Operations Management, North-Holland, 1985. Vollmann, T.E., Berry W.L., and Whybark, D.C., Manufacturing Planning and Control Systems, Richard D. Irwin, Inc.. Waters, C.D.J., An Introduction to Operations Management, Addison-Wesly, 1991. Waters, D., A practical introduction to management science, 2nd, Addison-Wesly, 1998.

1. Differentiate between Project Management and general management. How would you possibly integrate the two? Discuss. 2. Take any project of your choice. What are you trying to achieve with the project? What need does it satisfy for your customer? Who exactly is going to actually use the project deliverable(s) when it is finished? (That is, who is your real customer?) What will distinguish your deliverables from those already available to the customer? 3. The following is a list of tasks to be performed in preparation for a camping trip. Draw a WBS that places the tasks in their proper relationship to one another. Describe the project, identifying the beginning and ending points, the activities, and the time sequencing of the activities in relation to each other and the calendar. (a) Select campsite (b) Make site preparations (c) Make site reservation (d) Arrange time off from work (e) Select route to site (f) Prepare menu for meals (g) Identify source of supplies and equipment (h) Load car (i) Pack suitcases (j) Purchase supplies (k) Arrange camping trip (project). 4. For the WBS given in the figure, draw an arrow diagram.

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5. What is the importance of a critical path in a network diagram? Is it possible to have a dummy activity or dummy event along the critical path? Explain. 6. What are the circumstances when you would use PERT as opposed to CPM in Project Management. Give examples of projects where each would be more applicable than the other. 7. PERT has characteristics of both a mathematical model and a schematic model. Explain. 8. What is slack? Construct an example and show how you can use the knowledge of slacks for better Project Management. 9. Explain how a time/cost tradeoff could exist in a project involving the construction, staffing, and opening of a restaurant in an existing hotel.

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10. What do you understand by 'crashing' of a project? What are the direct and indirect costs in a project? What impact does crashing have on these costs? 11. What are the underlying assumptions of minimum-cost scheduling? Explain how resource usage can be leveled for a project. 12. E&R Software Ltd. is developing a new ERP package for a mid-sized brewery near Ghaziabad in U.P. for winning a bid on a large project. The accompanying table shows the activities, times, and sequences required for the development of a new system:
Activity A B C D E F G H I Immediate Predecessor A A A, B B C,D D,F D E,G,H Time (weeks) 4 2 4 4 6 6 8 3 3

(a) Draw the network diagram. (b) What is the critical path? (c) Find the free and independent floats for all the activities in the project. (d) Suppose you want to shorten the completion time as much as possible, and you have the option of shortening any or all of B, C, D, and G each by one week. Which would you shorten? Why? (e) What is the new critical path and earliest completion time?

305 Facility Planning and Layout

Unit V Facility, Layout Location and Work Measurement

306 Production and Operation Management