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Introduction to Operations Management

Team Optumiz

Table of Contents
1. Operations Management ........................................................................... 2
2. Forecasting .................................................................................................... 5
3. Product and Service Design ..................................................................... 8
4. Capacity Planning .................................................................................... 10
5. Process Selection ..................................................................................... 12
6. Facility Layout ........................................................................................... 15
7. Quality Management ............................................................................... 17
8. Supply Chain Management .................................................................... 19
9. Inventory Management .......................................................................... 22
10. Lean Operation ....................................................................................... 25
11. Theory of Constraints ........................................................................... 27
12. Project Management ............................................................................. 28
13. Logistics Management .31
14. MRP and ERP ........................................................................................... 34

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1. Operations Management
Why Operations Management?
Every aspect of business revolves around operations. There is a significant amount
of interaction and collaboration amongst the functional areas of finance, operations and
marketing. Operations Management enables us to solve complex business problems
related to the journey of products and services from the manufacturer or provider to the
end customer. Help us gain an understanding of the techniques required for managing
and improving the integration of design, resources, processes and customer
requirements.
Operations Management can be defined as the management of systems or
processes that create goods and provide services. The purpose of the operations function
is to add value during the transformation process.

Goods are physical items that include raw materials, parts, subassemblies, and final
products e.g. Automobile, Computer, Oven, Shampoo
Services are activities that provide some combination of time, location, form or
psychological value e.g. Air travel, Education, Haircut, Legal counsel
The scope of operations management ranges across the organization. The
operations function includes many interrelated activities such as:

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Forecasting

Capacity planning and Scheduling

Managing inventories

Assuring quality

Locate Planning etc.

Decision Making
Most operations decisions involve many alternatives that can have quite different
impacts on costs or profits. Typical operations decisions include:

What: What resources are needed, and in what amounts?

When: When will each resource be needed? When should the work be
scheduled? When should materials and other supplies be ordered?

Where: Where will the work be done?

How: How will the product or service be designed? How will the work be
done? How will resources be allocated?

Who: Who will do the work?

Decision Area

What the Decisions Affect

Product and service design

Costs, quality, liability, and environmental issues

Capacity

Cost, structure, flexibility

Process selection and layout

Costs, flexibility, skill level needed, capacity

Work design

Quality of work life, employee safety, productivity

Location

Costs, visibility

Quality

Ability to meet or exceed customer expectations

Inventory

Costs, shortages

Maintenance

Costs, equipment reliability, productivity

Scheduling

Flexibility, efficiency

Supply chains

Costs, quality, agility, shortages, vendor relations

Projects

Costs, new products, services, or operating systems

The primary function of the operations manager is to guide the system by decision
making.

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System Design Decisions

System Operation Decisions

Agile operations: A strategic approach for competitive advantage that emphasizes the
use of flexibility to adapt and prosper in an environment of change. It involves the
blending of several core competencies:

Cost

Quality

Reliability

Flexibility

The Balanced Scorecard Approach: A top-down management system that

organizations can use to clarify their vision and strategy and transform them into action.

Develop objectives

Develop metrics and targets for each objective

Develop initiatives to achieve objectives

Identify links among the various perspectives

Finance

Customer

Internal business processes

Learning and growth

Productivity: A measure of the effective use of resources, usually expressed as the ratio
of output to input. Productivity measures are useful for

Tracking an operating units performance over time

Judging the performance of an entire industry or country

 
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2. FORECASTING
Demand Forecasting can be defined as a process to estimate sales and use of
products so that they can be purchased, stocked or manufactured in advance to meet the
demand at the right time. The primary goal operations and supply chain management is
to match supply to demand. A demand forecast is essential for determining how much
supply will be needed to match demand.

Seasonality

Time Series

Trend
Projection

Smoothing

Quantitative
Forecasting
Method
Qualitative
Causal

The forecasting can be broadly classified into the following:

1. Quantitative method: Quantitative forecasting methods are used when we have the
past information of the variable which can be quantified and assumed to follow the same
pattern over the future for example the prediction of quarter sales volume. The demand
forecasting tools for such analysis are the time series method and the causal method.
2. Qualitative method: If the historical data is unavailable or is deemed unfit to
extrapolate, we use qualitative method. For example, phasing out subsidies on LPG can
raise questions about the validity of past data to use for future LPG sales prediction.

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Delphi method, Expert Judgment, Scenario Writing and Intuitive Approaches are the
popular method used for Qualitative analysis.
3. Time series method: As discussed above, times series method make prediction based
on a set of observations on a variable measured at successive points in time and over
successive periods of time. This historical data forms a time series. A time series has four
components which are trends, cyclical, seasonal and irregular. Trend component of a time
series depicts the long term gradual shift to a higher or lower value. The cyclical
component captures the recurring sequence of points above and below the trend line
which lasts more than one year. The seasonal component is the regularly repeated
pattern which can be attributed to seasonal influences. The irregular component
accounts for the deviations of the actual time series values from those expected given the
effects of trend, cyclical and seasonal component.
Based on the above components, following forecasting methods are devised:
Smoothing Methods: It is used to smooth out the random fluctuations caused by the
irregular component of the time series. These methods are appropriate for stable time
series i.e. which does not have a seasonal, trend or a cyclical component. There are three
ways in which it can be done. First is the moving average method which uses the average
of the most recent n data values in the time series as forecast for the next period.
Weighted average method assigns different weightage for each data values and computes
the weighted average of the most recent n values as the forecast. The weights can be
assigned based on the accuracy of data for a particular period of time. Exponential
smoothing uses weighted average of past time values as the forecast. It is a special case
of weighted average where we assign only one weight to the most recent observation
and the weights for other observation is automatically calculated(the sum of weights is
always 1) and become smaller as the observation moves farther into the past.
Trend Projection: They are used to forecast a time series which have long term linear
trend which is not stable and hence smoothing methods cannot be applied.
Trend and Seasonal Components: This forecasts a time series that has both trend and
seasonal components. It involves removing of the seasonal effect which is done by
deseasonalizing time series and applying regression analysis on the deseasonalized data
to estimate trend.
Causal Method: Causal forecasting methods are based on the assumption that the
variable we are forecasting has a cause effect relationship with one or more than one
independent variables. For example, sales volume (dependent variable) for many
products is influenced by advertising expenditures. For this, regression analysis may be
used to develop the relation between the dependent and independent variables and we
can make a forecast by substituting the values of the independent variables in the
regression equation. Regression analysis in which the independent variables are
previous values of the time series is referred to as autoregressive models.

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The better forecasts are, the more able organizations will be to take advantage of
future opportunities and reduce potential risks. A worthwhile strategy is to work to
improve short-term forecasts

Accurate up-to-date information can have a significant effect on forecast accuracy:

o Prices
o Demand
o Other important variables
Reduce the time horizon forecasts have to cover
Sharing forecasts or demand data through the supply chain can improve forecast
quality

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3. Product and Service Design

Effective product and service design can help the organization achieve
competitive advantage:

Increasing emphasis on component commonality

Packaging products and ancillary services to increase sales

Using multiple-use platforms

Implementing tactics that will achieve the benefits of high volume while
satisfying customer needs for variety

Continually monitoring products and services for small improvement

opportunities

Reducing the time it takes to get a new or redesigned product or service to the
market

Product Life Stage Strategies

Introduction

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Weigh trade-offs between eliminating bugs and getting the product or

service to the market at an advantageous time

Accurate demand forecasts are important to ensuring adequate capacity

availability

Growth

Demand forecasts are important to ensuring a continued adequate capacity

availability

Design improvements

Emphasis on improved product or service reliability and lower cost

Maturity

Relatively few design changes

Emphasis is on high productivity and low cost

Decline

Continue or discontinue product or service

Identify alternative uses for product or service

Continued emphasis on high productivity and low cost

Phases in Design & Development

Idea
generation

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Feasibility
analysis

Product
specifications

Process
specifications

Prototype
development

Follow-up
evaluation

Product
introduction

Market test

Design
review

4. Capacity Planning
Capacity planning impacts all areas of the organization
It determines the conditions under which operations will have to function
Flexibility allows an organization to be agile
It reduces the organizations dependence on forecast accuracy and reliability
Many organizations utilize capacity cushions to achieve flexibility
Bottleneck management is one way by which organizations can enhance their
effective capacities
Capacity expansion strategies are important organizational considerations
Expand-early strategy
Wait-and-see strategy
Capacity contraction is sometimes necessary
Capacity disposal strategies become important under these conditions

Capacity decisions

impact the ability of the organization to meet future demands

affect operating costs

are a major determinant of initial cost

often involve long-term commitment of resources

can affect competitiveness

affect the ease of management

are more important and complex due to globalization

need to be planned for in advance due to their consumption of financial and

other resources

Design capacity: The maximum output rate or service capacity an operation, process, or
facility is designed for.
Effective capacity: Design capacity minus allowances such as personal time and
maintenance.

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Capacity Strategies
Leading: Build capacity in anticipation of future demand increases
Following: Build capacity when demand exceeds current capacity
Tracking: Similar to the following strategy, but adds capacity in relatively small
increments to keep pace with increasing demand

Steps in Capacity Planning

Estimate future capacity requirements
Evaluate existing capacity and facilities; identify gaps
Identify alternatives for meeting requirements
Conduct financial analyses
Assess key qualitative issues
Select the best alternative for the long term
Implement alternative chosen
Monitor results

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5. Process Selection
The main issue in designing process layouts concerns the relative placement of the
departments. A major objective in designing process layouts is to minimize transportation cost,
distance, or time.

The five key decisions in process management are:

I.

Process Choice

II.

Vertical Integration

III.

Resource Flexibility

IV.

Customer Involvement

V.

Capital Intensity

These decisions are critical to the success of any organization and must be based on
determining the best was to support the competitive priorities of the enterprise.
Process selection
It refers to the deciding on the way production of goods or services will be
organized. It has major implications for

Capacity planning

Layout of facilities

Equipment

Design of work systems

Process selection criteria

Variety
Volume
Equipment Flexibility

Process Choice
The first choice typically faced in process management is that of process choice.
Manufacturing and service operations can be characterized as one of the following:
1. Project: A project process is characterized by a high degree of job customization, the
large scope of each project, and the release of substantial resources, once a project is
completed. E.g. building a shopping center, planning a major event, running a political
campaign
2. Job Shop: A job shop process creates the flexibility needed to produce a variety of
products or services in significant quantities. Customization is relatively high and volume

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for any one product or service is low. E.g. custom metal processing shop, hospital
emergency rooms
3. Batch Flow: In a batch flow process same or similar products or services are provided
repeatedly with a narrower range of products or services. Variety is achieved more
through an assemble-to-order strategy than the job shops make-to-order strategy. A
third difference is that production lots or customer groups are handled larger quantities
(or batches) than they are with job shop processes. E.g. scheduling air travel,
manufacturing garments, furniture manufacturing
4. Line Flow: A line flow process lies between the batch and continuous processes,
volumes are high, and products or services are standardized, which allows resources to
be organized around a product or service. E.g. automobiles, appliances, fast-food
restaurants.
5. Continuous Flow: A continuous process is the extreme end of high-volume,
standardized production with rigid line flows and tightly linked process segments. Its
name derives from how materials move through the process. E.g. petroleum refineries,
chemical plants
Layout is the configuration of departments, work centers, and equipment, with
particular emphasis on movement of work (customers or materials) through the system
Facilities layout decisions arise when:

Designing new facilities

Re-designing existing facilities

Basic Layout Types

Product layouts: Product layouts arrange activities in a line according to the

sequence of operations that need to be performed to assemble a particular
product

Process layouts: Process layout that groups similar activities together in

departments of work centers according to the process or function that they
perform characteristic of operations that serve different customers different
needs

Fixed-Position layout: Fixed-Position layouts are layouts are used in projects in

which the product is too fragile, bulky, or heavy to move. E.g. ships, houses, aircraft

Combination layouts

FMS (Flexible Manufacturing System): A group of machines designed to handle

intermittent processing requirements and produce a variety of similar products

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CIM (Computer Integrated Manufacturing): A system for linking a broad range of

manufacturing activities through an integrated computer system
Line balancing: The process of assigning tasks to workstations in such a way that the
workstations have approximately equal time requirements.
Why is line balancing important?

It allows us to use labor and equipment more efficiently.

To avoid fairness issues that arise when one workstation must work harder
than another.

Scheduling:
It establishes the timing of the use of equipment, facilities and human activities in
an organization.
Sequencing
Determine the order in which jobs at a work center will be processed
Priority rules for sequencing
Simple heuristics used to select the order in which jobs will be processed

FCFS - first come, first served

SPT

EDD - earliest due date

CR - critical ratio

S/O - slack per operation

Rush emergency

- shortest processing time

Queuing theory - Mathematical approach to the analysis of waiting lines

Littles Law

For a stable system the average number of customers in line or in the system is equal to
the average customers arrival rate multiplied by the average time in the line or system

Options for reducing wait times:

Work to increase processing rates, instead of increasing the number of servers
Use new processing equipment and/or methods
Reduce processing time variability through standardization
Shift demand

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6. Facility Layout
Location decisions arise for a variety of reasons:
Addition of new facilities
1. As part of a marketing strategy to expand markets
2. Growth in demand that cannot be satisfied by expanding existing facilities
Location decisions are based on:

Profit potential or cost and customer service

Finding a number of acceptable locations from which to choose
Position in the supply chain
Web-based retail organizations are effectively location independent
Supply chain management issues such as supply chain configuration

Service and Retail Location Considerations:

Nearness to raw materials is not usually a consideration
Customer access is a

Prime consideration for some: restaurants, hotels, etc.

Not an important consideration for others: service call centers, etc.

Tend to be profit or revenue driven, and so are

Concerned with demographics,

patterns, and convenience

competition,

traffic/volume

Evaluating Location Alternatives

Locational cost-volume-profit analysis: Technique for evaluating location choices in
economic terms. The steps involved in this analysis are:

Determine the fixed and variable costs for each alternative

Plot the total-cost lines for all alternatives on the same graph

Determine the location that will have the lowest total cost (or highest profit)
for the expected level of output

Factor rating analysis: General approach to evaluating locations that includes

quantitative and qualitative inputs. The procedure for the analysis is as follows:

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Determine which factors are relevant

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Assign a weight to each factor that indicates its relative importance compared
with all other factors.

Decide on a common scale for all factors

Score each location alternative

Calculate weighted factor sum for each alternative

Choose the alternative that has the highest composite score

Center of gravity method: Method for locating a distribution center that minimizes
distribution costs

Treats distribution costs as a linear function of the distance and the quantity
shipped

The quantity to be shipped to each destination is assumed to be fixed

The method includes the use of a map that shows the locations of destinations

The map must be accurate and drawn to scale

A coordinate system is overlaid on the map to determine relative locations

Transportation model: It involves finding the lowest-cost plan for distributing stocks of
goods or supplies from multiple origins to multiple destinations that demand the goods.

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7. Quality Management
Quality is a strategic imperative for organizations where customers are very
concerned with the quality of goods and services they receive. It is a never-ending journey
where most organizational members understand and buy into this idea.
Customer satisfaction customer loyalty
Quality needs to be incorporated throughout the entire supply chain, not just the
organization itself. Quality is the ability of a product or service to consistently meet or
exceed customer expectations

Determinants of Quality

Design
Conformance to Design
Ease of Use
After-Sale Service

Costs of Quality

Failure Costs: Costs incurred by defective parts/products or faulty services.

Appraisal Costs: Costs of activities designed to ensure quality or uncover defects

Prevention Costs: All TQ training, TQ planning, customer assessment, process

control, and quality improvement costs to prevent defects from occurring

Total Quality Management

A philosophy that involves everyone in an organization in a continual effort to
improve quality and achieve customer satisfaction.

Six Sigma
A business process for improving quality, reducing costs, and increasing customer
satisfaction
Statistically

Having no more than 3.4 defects per million

Conceptually

Program designed to reduce defects

Requires the use of certain tools and techniques

Seven basic quality tools:

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Flowcharts

Checksheets

Histograms

Pareto Analysis

Scatter Diagrams

Control Charts

Cause-and-Effect Diagrams

Process Capability

Once a process has been determined to be stable, it is necessary to determine if

the process is capable of producing output that is within an acceptable range

Tolerances or specifications

Process variability

Range of acceptable values established by engineering design or

customer requirements

Natural or inherent variability in a process

Process capability

Process variability relative to specification

UTL - LTL
6
where

Cp =

UTL = upper tolerance (specification) limit

LTL = lower tolerance(specification) limit

Control Chart

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8. Supply Chain Management

Supply Chain
It is the sequence of organizations - their facilities, functions, and activities - that
are involved in producing and delivering a product or service. It is also referred to as
value chains.

Supply Chain Management (SCM)

The strategic coordination of business functions within a business organization and
throughout its supply chain for the purpose of integrating supply and demand
management
Effective supply chains are necessary for organizational success

Requires integration of all aspects of the chain

Supplier relationships are a critical component of supply chain strategy

Lean operations and six sigma are being employed to improve supply chain
success

The goal of SCM is to match supply to demand as effectively and efficiently as possible

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Key issues:

Determining appropriate levels of outsourcing

Managing procurement

Managing suppliers

Managing customer relationships

Being able to quickly identify problems and respond to them

Managing risk

Trends affecting supply chain design and management:

Re-evaluation of outsourcing

Risk management

Inventory management

Lean supply chains

Sustainability

The purchasing department is responsible for obtaining the materials, parts, and
supplies and services needed to produce a product or provide a service. The goal of
procurement
Develop and implement purchasing plans for products and services that support
operations strategies

Supply Chain Performance Metrics

Financial

Return on assets

Cost

Cash flow

Profits

Suppliers

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Quality

On-time delivery

Cooperation

Flexibility

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Operations

Productivity

Quality

Inventory

Average value

Turnover

Weeks of supply

Order fulfillment

Order accuracy

Time to fill orders

% of incomplete orders shipped

% of orders delivered on time

Customers

Customer satisfaction

% of customer complaints

The Bullwhip Effect

The bullwhip effect can be explained as an occurrence detected by the supply
chain where orders sent to the manufacturer and supplier create larger variance then the
sales to the end customer. These irregular orders in the lower part of the supply chain
develop to be more distinct higher up in the supply chain. This variance can interrupt the
smoothness of the supply chain process as each link in the supply chain will over or
underestimate the product demand resulting in exaggerated fluctuations.

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9. Inventory Management
Inventory refers to goods and materials that a business holds.
Why is inventory required?
Maintaining inventory is important to keep service time and lead time in check.
Differences in lead times of individual machines and fluctuations in demand, supply and
movements of goods necessitates maintain buffer inventory. At the same time placing
orders in bulk has economies of scale from both ordering and logistical aspects.
Problems with inventory:
Maintaining inventory involves holding costs like warehouse costs, store keeping
costs, cost due to damaged, deteriorated and obsolete goods.
Inventory management:
Inventory management is basically about what to keep, where to keep and how
much to keep. It involves determining the optimum level of inventory by comparing the
costs of too less with the cost of excessive inventory. Inventory may exist at various stages
of the supply chain- warehouse, in-process, dealer, distributor and retailer. Inefficient
inventory management ties-up cash and leads to supply chain inefficiency.
Although its sounds very simple, Inventory management can make or break
companies. Increasing size, global suppliers, geographically spread stores, warehouses
and factories have forced some of the worlds biggest and the best companies to focus all
their might towards inventory management. This is simply because managing inventory
can help them improve their bottom-line, improve customer response time by reducing
lead times and maintain quality levels.
Improving inventory processes can offer significant cost reduction and customer
satisfaction benefits
Types of inventory:

Raw material inventory

Work-in-process inventory
Finished goods inventory.

Just-In-Time (JIT): This is the most important widely used method of managing
inventory. In this system, companies plan to receive items as they are needed rather than
maintaining high inventory levels, and materials requirement planning, which schedules
material deliveries based on sales forecasts.

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Inventory Costs
Holding (carrying) costs

Cost to carry an item in inventory for a length of time, usually a year

Ordering costs

Costs of ordering and receiving inventory

Shortage costs

Costs resulting when demand exceeds the supply of inventory; often

unrealized profit per unit

Basic EOQ Model (Economic Order Quantity)

used to find a fixed order quantity that will minimize total annual inventory costs

2 DS
=
H

Q* =

2 ( annual demand)(or der cost)

annual per unit holding cost

Economic Production Quantity (EPQ)

Economic production quantity (EPQ) is the quantity of a product that should be
manufactured in a single batch so as to minimize the total cost that includes setup costs
for the machines and inventory holding costs.

Reorder point

When the quantity on hand of an item drops to this amount, the item is
reordered.

Determinants of the reorder point

1.

The rate of demand

2.

The lead time

3.

The extent of demand and/or lead time variability

4.

The degree of stockout risk acceptable to management

ROP = d x LT
Where d = demand rate
LT = Lead Time

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Safety stock
Stock that is held in excess of expected demand due to variable demand and/or lead
time. The amount of safety stock that is appropriate for a given situation depends upon:

The average demand rate and average lead time

Demand and lead time variability

The desired service level

Methods of inventory analysis:

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Pareto analysis
VED analysis
ABC analysis

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10. Lean Operation

Lean operation: A flexible system of operation that uses considerably less resources
than a traditional system. They tend to achieve:

Greater productivity

Lower costs

Shorter cycle times

Higher quality

Muda

Waste and inefficiency

A manual system that signals the need for parts or materials

Kanban

Pull system

Replacing material or parts based on demand

Workload leveling

Continuous improvement of the system

Quality at the source (worker)

Heijunka

Kaizen

Jidoka

Poka-yoke

Safeguards built into a process to reduce the possibility of errors

Team concept

Use of small teams of workers for process improvement

The degree to which leans ultimate goal is achieved depends upon how well its
supporting goals are achieved:

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Eliminate disruptions

Make the system flexible

Eliminate waste, especially excess inventory

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Value stream mapping

A visual tool to systematically examine the flows of materials and information

Its purpose is to help identify waste and opportunities for

improvement

Factor

Traditional

Lean

Inventory

Much to offset forecast

errors, late deliveries

Minimal necessary to operate

Deliveries

Few, large

Many, small

Lot sizes

Large

Small

Setup; runs

Few, long runs

Many, short runs

Vendors

Long-term relationships are

unusual

Partners

Workers

Necessary to do the work

Assets

The 7 Types of Waste (muda)

1. Defects
2. Overproduction of things not demanded by actual customers
3. Inventories awaiting further processing or consumption
4. Unnecessary over-processing (for example, relying on inspections rather than
designing the process to eliminate problems)
5. Unnecessary motion of employees
6. Unnecessary transport and handling of goods
7. Waiting for an upstream process to deliver, or for a machine to finish
processing, or for a supporting function to be completed, or for an interrupted
worker to get back to work...

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11. Theory of Constraints

The purpose of Theory of Constraints (TOC) is for an organization to be an ever
flourishing company which aims at continuously increasing its value for all its stakeholders
(employees, clients and shareholders) now and in the future by capitalizing on a decisive
competitive edge in the market. For this, TOC principle follows the strategy of Build,
Capitalize and sustain the decisive competitive edge (DCE) in such a manner that it
satisfies the significant needs of significant customers which no other significant
competitor can match. The DCEs that the market demands are: Quality, Price,
Reliability and Responsiveness. TOC focuses on building a strong DCE on reliability and
responsiveness.
TOC states that a supply chain is no stronger than its weakest link. TOC tries to identify
the weakest link to thereby improve upon productivity of the entire supply chain. The
Five focusing steps of Theory of Constraints are:
1. Identify the system's constraint (The bottleneck the set of operation/s which
gives the least amount of output). This is recognized as the drum which run the
entire operations.
2. Exploit the system's constraint (Create Buffer before the Constraint to ensure
maximum exploitation of the system constraint).
3. Subordinate other processes to the above decision (A rope which ties all the
operations activity to the above decision).
4. Elevate the system's constraint (make necessary changes required to improve the
capacity of the constraint).
5. If in the previous steps, a constraint has been broken go back to step 1.
The Theory of constraints can thus be reduced into three steps i.e. Drum-Buffer-Rope
(DBR). This process is used to improve the throughput of the entire system thereby
helping the organization build upon a DCE of higher responsiveness and reliability. The
theory was introduced by Eliyahu M. Goldratt.
He later went to construct a Simplified-Drum-Buffer-Rope which resolved the problem of
shifting constraints (as we went through the process of Five Focussing Steps we realize
that the bottleneck has shifted in the supply chain link creating a problem of shifting
contraints/bottlenecks). This move stated that instead of identifying a constraint we can
fix the constraint The Market demand.
The process of capitalizing and sustaining the decisive competitive edge is done through
a process called POOGI (Process of on-going improvement). This is done in such a fashion
that no significant competitor can match the DCE that the organization has built on.

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12.

Project Management

Project management is the discipline of planning, organizing and managing

resources to bring about the successful completion of specific project goals and
objectives.
Objectives of Project Management
Make strategic business decisions
Control the minute detail that is necessary to finish projects
Understand current resource demands, set priorities, and evaluate long-term
staffing requirements
Use skilled resources effectively
Reorganize projects
Process of project management is guided by three key principles:
Planning
Controlling
Managing
Planning a project
The first step in project management is to define your project.
1. What is the scope of the work? What activities will make up the project and what
is their relationship to each other? Youll also want to identify the major
milestones that will help you monitor the projects progress.
2. What is the project duration? What are the dates when the project will begin and
end?
3.

What resources are available to the project? Beyond labor, think about all the
types of resources you will require.

4.

Who will perform what tasks? Determining your labor resources and their
available work hours is a key part of building a successful project. Youll need to
plan for downtime and holidays and determine the regular workweek for various
staffing types.

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5.

How much will the project cost? What are the costs per resource? Are there any
hidden project costs?

6.

What is the estimated budget? Establishing a project budget estimate in advance

helps you monitor possible cost overruns.

The answers to these questions form the framework of your project.

Controlling a project
Once you have built your project and estimated your budgeting needs, you save
this original plan as a baseline, or target schedule, to help you control the project. A
baseline provides a solid point of reference as your schedule changes over time. It allows
you to compare the original schedule to the current one and identify significant changes
and develop contingency plans.
You control a project to keep it heading in the right direction. Youll want to track
work progress and costs, compare them to your baseline, and then recommend what
actions should be taken.
Effective project control reaps many benefits. It allows you to keep a close eye on
possible problems before they become critical. It lets the project team and senior
management view cost and scheduling timeframes based on the reality of the schedule.

Managing a project
The process of guiding a project from start to finish is the responsibility of a
project manager. A good project manager wears many hats, acting at various times as a
motivator, communicator, coordinator, and advisor. As you control the projects progress,
it is your job to keep your team aware of changes to the schedule and possible
consequences. In many ways, you are the projects ambassador, ensuring that your
project organization is carrying out its responsibilities for the best possible outcome.
To be an effective project manager also requires consistency when you update
your projects. Select a day each week, or biweekly, when you will regularly update
projects. This regular update will include progress on values such as
Dates on which activities started or finished
Dates when resources are consumed
Changes to resource rates
Determine a standard policy for the update and scheduling procedure, and for
reporting progress.

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PERT (program evaluation and review technique) and CPM (critical path method) are
two techniques used to manage large-scale projects

Risks are an inherent part of project management

Risks relate to occurrence of events that have undesirable consequences such

as
Delays
Increased costs
Inability to meet technical specifications

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Good risk management involves

Identifying as many risks as possible

Analyzing and assessing those risks

Working to minimize the probability of their occurrence

Establishing contingency plans and budgets for dealing with any that do
occur

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13. Logistics Management

Logistics is complementary to Supply Chain. While Supply Chain management deals with
the flow of various materials/information/money from one partner to other, logistics is
the medium for facilitating this transfer.
Logistics Management can hence be defined as the task of coordinating material flow and
information flow across the supply chain.
Logistics were initially employed by one of the authors of military theory, Baron Antoine
Henri Jomini (1779-1869), a French general. According to him, Logistics was a theory of
movement, provisioning and accommodation of armies. After World War II, logistic
activities were extended for the solution of analogical problems in civilian use which
paved the way for the beginning of Business Logistics.
The institute of Logistics defines Logistics as ensuring the availability of

the right product,

in the right quantity and
right condition,
at the right place,
at the right time,
for the right customer,
at the right costs.

The objective of Logistics Strategy are minimize cost, minimize investment and maximize
customer service

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Commonly used terms:

Total Logistics Cost: Expenses associated with transportation, materials handling and
warehousing, inventory, stockouts, order processing, and return goods handling.
Cross-docking: Practice of unloading products from suppliers, sorting products for
individual stores, and quickly reloading products onto trucks for a particular store.
3PL/Third-Party Logistics Providers: Firms that perform most or all of the logistics
functions that manufacturers, suppliers, and distributors would normally perform
themselves.
Reverse Logistics: A process of reclaiming recyclable and reusable materials, returns,
and reworks from the point of consumption or sue for repair, remanufacturing,
redistribution, or disposal.
Intermodal Transportation: Combining different transportation modes to get the best
features from each.
Freight Forwarders: Firms that accumulate small shipments into larger lots and then
hire a carrier to move them, usually at reduced rates.
Vendor-Managed Inventory: An inventory management system whereby the supplier
determines the product amount and assortment a customer (such as a retailer) needs and
automatically delivers the appropriate items.
Lead Time: Lag from ordering an item until it is received and ready for use or sale. Also
called order cycle time or replenishment time.
Intermodal Transportation: Combining different transportation modes to get the best
features from each.

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The Incoterms rules or International Commercial Terms are a series of pre-defined

commercial terms published by the International Chamber of Commerce (ICC) that are
widely used in International commercial transactions or procurement processes.

INCOTERMS Acronyms:
CFR - Cost and freight
CIF - Cost, insurance and freight
CIP - Carriage and insurance paid to
CPT - Carriage paid to
DAF - Delivered at frontier
DDP - Delivered duty paid
DDU - Delivered duty unpaid
DEQ - Delivery ex quay
DES - Delivery ex ship
EXW - Ex works
FAS - Free alongside ship
FCA - Free carrier
FOB - Free on board

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14. MRP and ERP

Material Resource Planning (MRP): It is an approach to inventory planning,
manufacturing scheduling, supplier scheduling, and overall corporate planning. The
material requirements planning (MRP) system provides the user with information about
timing (when to order) and quantity (how much to order), generates new orders, and
reschedules existing orders as necessary to meet the changing requirements of
customers and manufacturing.
MRP Inputs

Master schedule: It states which end items are to be produced, when these are
needed, and in what quantities. It should cover a period that is at least equivalent
to the cumulative lead time

Bill of Materials (BOM): A listing of all of the raw materials, parts, subassemblies,
and assemblies needed to produce one unit of a product

Inventory records: Includes information on the status of each item by time

period, called time buckets. Information about

Gross requirements

Scheduled receipts

Expected amount on hand

Cumulative lead time

The sum of the lead times that sequential phases of a process require, from ordering of
parts or raw materials to completion of final assembly.
MRP processing takes the end item requirements specified by the master schedule and
explodes them into time-phased requirements for assemblies, parts, and raw materials

Lot sizing

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Choosing a lot size for ordering or production

Common lot sizing rules:

Lot-for-Lot (L4L) ordering

Economic Order Quantity (EOQ)

Fixed Period Ordering

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Enterprise resource planning (ERP)

ERP was the next step in an evolution that began with MRP and evolved
into MRPII

Represents an expanded effort to integration financial, manufacturing, and

human resources on a single computer system

ERP systems are composed of a collection of integrated modules

ERP strategic implications

High initial cost

High cost to maintain

Need for future upgrades

Intensive training required

ERP as a strategic planning tool

Optimum

Can improve supply chain management

Stronger links between their customers and their supplier

Makes the organization more capable of satisfying changing customer

requirements

Offers opportunities for continuous improvement

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