FINAL PROJECT

PEL – An Operations Management Study

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Executive Summary
PEL manages its production operations based on demand forecast plans delivered by the marketing
team. These plans are secured from their retailers and partner business brands in advance.
Inventory is ordered in advance to account for the lead time, and managed through POQ model.
Kaizen and theory of wastes is applied in operations. Productivity figures are higher than ever due
to the improved layout and automation. Capacity plan is flexible that helps adjust to demand trends.
Location is pivotal for their retailer network. Important business-to-business relationships are
contributing to the growth of company. Operations are currently only in the local market. PEL has
become a market leader in terms of technology and quality, due to its efficient operations.

Introduction
PEL is an electronics company that manufactures different electronic products. Their operations
are vast and its management is complex. In an effort to understand how different operations are
executed in PEL, we visited their factory to interview the production engineer responsible for
assembling their deep freezers, Mr. Ali Haider.

Deep freezers are one of the most successful products of PEL. They currently provide supply of
deep freezers to big corporations like PepsiCo and Engro Foods Limited (Omore), among other
notable brands. The company enjoys a good reputation in the market, which they have worked
towards over the previous decades.

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Organization’s Profile
Since its inception, PEL has been operating keeping in view the philosophy of innovation and
advancement. It has consistently contributed in the development of engineering sector in Pakistan,
keeping in mind the National interest and consumer welfare. It has introduced a range of quality
electrical equipment and home appliances by producing hundreds of engineers, skilled workers
and technicians through its apprenticeship schemes and training programs. Until the acquisition
by Saigol Group, PEL was solely catering the power equipment market but in 1981 the company
ventured into home appliances market in 1981 as a part of Group’s long term strategy of
diversification.

PEL contributes in the lives of its consumers every day, by providing them not just appliances for
a better lifestyle, but with Power products like transformers, switch gears and energy meters. They
are the pioneers of electrical manufacturing in Pakistan and they are here to make a difference in
the lives of their customers, whether it is through taking care of their home, lifestyle, making their
day to day activities easier or by helping them save energy.

Over the years, PEL has formed alliances with several international giants, including General
Electric, Fujitsu and Hitachi. The company also became the sole distributor of LG Corporation's
home appliances in 2009. They have further alliances with leading technology brands like Carrier,
GANZ, Pauwels, and AEG.

In the public sector, PEL has agreements with WAPDA and KESC for supplying power
transformers, in addition to a power contract with the Government of Pakistan.

In 2014, PEL reported the highest number of sales in the history of appliance division market.

PEL has certifications for quality from UKAS, CE and Pakistan Standards.

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Mission Statement
PEL’s mission statement is mentioned below:

“To provide quality products and services to the complete satisfaction of our customers and
maximize returns for all stakeholders through optimal use of resources. To promote good
governance, corporate values and safe working environment with strong sense of social
responsibility.”

Vision Statement
PEL’s mission statement is mentioned below:

“To excel in providing engineering goods and services through continuous improvement.”

Company Objectives

 To increase the Brand Image of PEL in Split AC product.

 To provide the good quality of product and gain market share at least half of its main
competitor by the end of next season.
 Minimize the cost of Split AC to provide it at lower cost as it is possible to get competitors
edge.

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Production And Operations In The
Organization – Appliance Division
There are two divisions in the company:

1. Appliance Division
2. Power Division

Since, our current concern is with the appliance division of PEL, we will discuss it in detail.

PEL’s Appliances Division is the flag carrier of the Saigol Group involved in home appliances
manufacturing.

PEL Air Conditioners

PEL window-type air conditioners were introduced in 1981 in technical collaboration with General
Corporation of Japan. Ever since their launch, PEL air conditioners have a leading position in the
market. Recognizing the shift in consumers' preference from window-type to split-type air
conditioners, PEL has focused its manufacturing efforts on split-type air conditioners.

PEL Refrigerators

The manufacturing of refrigerators started in 1986-87 in technical collaboration with M/s IAR-
SILTAL of Italy. Like air conditioners, PEL's refrigerators are also in great demand. Today, PEL
Crystal has 30% market share across Pakistan.

PEL Deep Freezers

PEL deep freezers were introduced in 1987 in technical collaboration with M/s Ariston of Italy.

The case discussion will now be based on the deep freezer production of PEL, in the current
summer season of 2019.

Productivity
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The unit employs 315 people. The daily production rate is 400 units of deep freezers. Total shift
time is 10 hours. The daily productivity of PEL’s deep freezer plant is 1.27 units and monthly
productivity is at 38.1 units (30 working days), as per labor. According to time, the productivity is
40 units.

Mr. Ali pointed out the following bottlenecks faced in production:

 Supply of raw materials: Lead time for imported parts is 4 months, which is a major
bottleneck to production.
 Exchange Rate:Production costs take a hit due to the volatile exchange rate of our
currency.
 Skilled Labor: It is hard to find labor with exact skills required for the job.
 Seasonal Employment: Due to fluctuating demand, labor is hired on seasonal basis. They
have to be trained every time they are hired, which is time consuming and costly.
 Absenteeism: Productivity declines due to absenteeism.

In order to remove some of these bottlenecks, following steps are taken:

 Hiring the pool of previously trained professionals, depending on their availability.

 Buffer inventory is kept to avoid delays caused due to the long lead time of overseas
suppliers.
 Salary deduction policies for absentees.

To boost productivity, following measures have been taken by management:

 Automation: The previously manual production unit was able to produce only 150 units
in a day. Since switching to an automated system, productivity has increased to more than
triple the volume (explained later in capacity management section).
 Labor Addition: Labor capacity has increased over time, as more skilled labor is
employed.
 Training: Labor goes through an extensive process of training to ensure high productivity
rates.
 Facility Expansion: The plant’s size has increased during this time, which has allowed the
automation to take place.

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Capacity Planning
Capacity planning is the process of determining the production capacity needed by an
organization to meet changing demands for its products] In the context of capacity planning,
design capacity is the maximum amount of work that an organization is capable of completing in
a given period. Effective capacity is the maximum amount of work that an organization is
capable of completing in a given period due to constraints such as quality problems, delays,
material handling, etc. The phrase is also used in business computing and information
technology as a synonym for capacity management. IT capacity planning involves estimating the
storage, computer hardware, software and connection infrastructure resources required over
some future period of time. A common concern of enterprises is whether the required resources
are in place to handle an increase in users or number of interactions. Capacity management is
concerned about adding central processing units (CPUs), memory and storage to a physical or
virtual server. This has been the traditional and vertical way of scaling up web applications,
however IT capacity planning has been developed with the goal of forecasting the requirements
for this vertical scaling approach. A discrepancy between the capacity of an organization and the
demands of its customers results in inefficiency, either in under-utilized resources or unfulfilled
customers. The goal of capacity planning is to minimize this discrepancy. Demand for an
organization's capacity varies based on changes in production output, such as increasing or
decreasing the production quantity of an existing product, or producing new products. Better
utilization of existing capacity can be accomplished through improvements in overall equipment
effectiveness (OEE). Capacity can be increased through introducing new techniques, equipment
and materials, increasing the number of workers or machines, increasing the number of shifts, or
acquiring additional production facilities.

Design Capacity
The design capacity of deep freezer plant is 800 units per day.

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Effective Capacity
Due to constraints, the management is hopeful to produce 600-700 units per day in peak demand
season.

Actual Capacity
The current demand requires an operating capacity level of 400 units per day, which can be
increased based on increased orders.

Company rarely faces situations where demand exceeds supply or supply exceeds demand, due to
effective demand based production method of the company. Production is made based on received
orders only. Complimentary demand products ensure that the plant is in work mode during low
demand periods. The prices are maintained on a market level, and do not fluctuate according to
demand conditions.

Location Planning
Location planning decisions are very important for all types of business units. This is because it
affects the cost, selling price, and demand of the product. It is a non-recurring heavy expenditure.
Large companies take the help of different professionals like lawyers, accountants,
environmentalist, etc. for selecting the proper location of plant.

There is a need or importance of location planning because it aids in:

 Expansion
 Cost advantages
 Discovery of raw-material
 Additional facilities
 Mergers
 Political and social changes
 Increasing product demand
 Avail tax benefits.

Mr. Ali states that their factory location holds great importance in their operations. It is centrally
situated in a commercial area. Labor can access the factory easily, through local, personal or
factory transportation means. The location is ideal to supply finished goods to their customers,

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which include businesses, and retailers. Local suppliers are situated nearby, which reduces their
lead time for providing raw material.

Location was selected back in 1956, when the company started its operations. The model
application during that time is unknown; however, with respect to operations it was optimal. The
only drawback of the location is that the space is limited. Company cannot expand its factory, as
the space nearby is occupied by other companies.

Inventory Management
Inventory management is a complex process, particularly for larger organizations, but the basics
are essentially the same regardless of the organization's size or type. In inventory management,
goods are delivered into the receiving area of a warehouse in the form of raw materials or
components and are put into stock areas or shelves. Compared to larger organizations with more
physical space, in smaller companies, the goods may go directly to the stock area instead of a
receiving location, and if the business is a wholesale distributor, the goods may be finished
products rather than raw materials or components. The goods are then pulled from the stock areas
and moved to production facilities where they are made into finished goods. The finished goods
may be returned to stock areas where they are held prior to shipment, or they may be shipped
directly to customers. Inventory management uses a variety of data to keep track of the goods as
they move through the process, including lot numbers, serial numbers, cost of goods, quantity of
goods and the dates when they move through the process.

During the visit we were able to view sign boards explaining KAIZEN and 7 Inventory Wastes.
Production order quantity model is followed by PEL in this production unit. Inventory is ordered
according to the purchase order draft. Demand for items from inventory is continuous and at a
constant rate. Production runs to replenish inventory are made at regular intervals based on the
quantity of orders received. During a production run, the production of items is continuous and at
a constant rate. Production set-up/ordering cost is fixed. The lead time is also fixed. The inventory
is replenished incrementally.

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Wastage is very low, due to the nature of inventory. Main factor that causes waste is breakage.
Careful handling procedures are implemented to reduce breakage.

Oracle was introduced during the automation process. This implementation has helped in optimal
maintenance of inventory. It notifies well in time when a particular item is low in quantity, so it
can be reordered. Accurate record of inventory is also present.

Their ability to manage inventory to meet the demand on time is a directly contributing factor to
their market goodwill. Hence, they take inventory management very seriously.

Demand Forecast
Demand forecasting is a combination of two words; the first one is Demand and another
forecasting. Demand means outside requirements of a product or service. In general, forecasting
means making an estimation in the present for a future occurring event. Here we are going to
discuss demand forecasting and its usefulness. It is a technique for estimation of probable demand
for a product or services in the future. It is based on the analysis of past demand for that product
or service in the present market condition. Demand forecasting should be done on a scientific basis
and facts and events related to forecasting should be considered. Therefore, in simple words, we
can say that after gathering information about various aspect of the market and demand based on
the past, an attempt may be made to estimate future demand. This concept is called forecasting of
demand.

Demand forecast is done through taking surveys from retailers and partner brands, well in advance,
to ensure that an overproduction or underproduction situation is avoided at all time. All actions in
this regards is taken by the marketing team. A demand priority hierarchy is present in the company.
Demand from businesses is prioritized and demand from retailers takes a back seat. This is done
to ensure demand and supply is always in harmony, based on order volume.

Demand forecast accuracy has been very high in the past, thanks to the model in place. Exchange
rates and improvements in technology are some main factors that affect demand forecast at times.
Complimentary demand products are present; however, production units are different. In times of
low demand, labor is laid off.

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Layout Planning
The systematic layout planning (SLP) is a tool used to arrange a workplace in a plant by locating
areas with high frequency and logical relationships close to each other. The process permits the
quickest material flow in processing the product at the lowest cost and least amount of handling.

The assembly line is laid out in a hall area, where the conveyer belt runs through different specialty
units. Freezers are engineered and developed on the belt; body is installed after tubs are placed on
the frame. The belt then moves on to painting phase, for brands like PepsiCo. Upon completion,
freezer units are packed and placed in storage area.

The assembly line runs in a parallel line form, and takes curvy turns on the edges which are
strategically placed to make the most of available space. There is space in between the lines where
labor can easily work on the units. There is ample space to fit huge numbers of workers.

The throughput time from manual to automated assembly has improved from 15 units per hour to
40 units per hour. The current layout plan was adopted to meet the increasing demand, reducing
costs, and staying up to date with technological changes in the market. The major challenge faced
in implementing the new system was training the labor to adapt to the new environment. Most of
the labor was inexperienced with the new machinery. So, it was a challenge to prepare them for
the new layout design.

The current layout plan is highly flexible. It can be expanded and reduced. Capacity can lead up
to 800 at its peak.

Global Operations and Competitive

Advantage

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The company, as of yet, has not started to operate globally with respect to their product. The scope
of their global operations is limited to importing inventory from other countries.

The domestic operations are dependent on the supply of raw materials from suppliers overseas.
So, their global operations hold high importance for the optimal operations of their domestic
operations.

PEL’s competitive advantage is its goodwill, which has helped in cultivating healthy business-to-
business relations with PepsiCo, etc.PEL has the most sophisticated dealer network in the market,
which places it above all other brands. A high focus on sales services helps take an advantage over
competition, as well. Research and development operations of PEL are very strong, which
contribute to their high quality products.

Efficient relationships with suppliers and sophisticated dealer networks help PEL in its cost
leadership strategy. Dawlance is considered by PEL as their main competitor and they are trying
to beat them in all areas of business.

Conclusion
Layout design and automation are of pivotal importance to productivity and throughput time of
the current operations. Plant is not producing at its effective or design capacity due to reduced
demand trends. Labor capacity is managed on seasonal basis, which reduces costs but creates
productivity bottlenecks. Storage for inventory and finished goods is a huge cost that the company
is currently bearing, but it is not used to its full potential. PEL is a recognized brand in the market;
they are cashing in on their goodwill and are seemingly fine with their slowed market growth rate,
due to reduction in demand levels.

Recommendations

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Mr. Ali pointed out that there are long period of times when demand is not a good match to the
production capacity of the company’s operations. They have to lay off labor, slow down operations
and maintain low prices to stay competitive.

Observing this scenario, it seems that PEL can benefit from expanding in to the global market.
They can utilize their production capacity to furnish the demand that exists in foreign markets. If
not, they will be unable to reap full potential profits of their current operations. Expanding
operations globally will also help in reducing lead times of suppliers and costs will reduce that are
currently high due to exchange rate differences.

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Following are the questions being asked to Mr.Saleem:

Productivity

- What are your current productivity figures?

Employees: 315 , units: 400 per day
- What are the bottlenecks you face in production abilities?
Supply of raw material
exchange rate
Skilled labor
Seasonal employment
absenteeizm
- How do you remove such bottlenecks?
Employ previous pool of labor
Buffer inventory
Salary deduction for non permanent labor

- What policies ensure higher productivity in your company?

150 units initially
Automation
Labor increase
Facility expansion
Training labor

Capacity Planning

- What is your design capacity?

800 units per day
- What is your effective capacity?
On the basis of demand
- What is your actual capacity?
400 units per day
- How do you deal with situations where demand exceeds supply?
Complementary demand prioritize
Price doesn’t fluctuate
- How do you deal with situations where supply exceeds demand?

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 Purchase order

Location Planning

- What is the importance of your location for your operations?

With the city labor can reach easily
- How did you select this location?
1956 selection
- Which was the preferred model, in selection of location?
n/a
- What challenges do you face with respect to location?
Can’t expand with in

Inventory Management

- Which model of inventory management is applied in your company?

Monthly plan MSML
- Do you face the problem of wastage?
spoilage and breakage
- How do you reduce waste?
Shift to automation and oracle has reduced waste
- What is the significance of the inventory management model that you use?
Direct impacts goodwill
- How does it help you tackle demand and supply related issues?
Preplanning helps
- Please, explain your inventory management process
As above.

Demand Forecast

- How do you forecast demand?

Forecasting is done by marketing
- How do you cater to periods when demand is low?
Labor is label off etc, overheads reduced.
- How accurate have your forecasts been?
Positive demand
- What are some factors that affect your forecast of demand?

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 Exchange rate, New appliances in mass construction
- Do you consider complimentary demand?
Yes

Layout Planning

- Please, share the features of the layout plans of your assembly line.
Layout is manipulated according to face
- How has your layout improved the throughput time?
40.5 hours and 400 units
- Why did you adopt your current layout plan?
Check under units and mass construction
- What challenges do you face related to your layout plan?
Flexibility
- - Is your layout plan flexible or rigid?
No of operations / only suppliers

Global Operations and Competitive Advantage

- Please, share an overview of your global operations

Check under units and mass construction
- What are your competitive advantages?
No. of SKU’s capacity
- Which features build up your cost leadership?
Check under units and mass construction
- Which brands do you consider as your direct competitors and how do you strategize to compete
with them on several grounds?
Dawlance, cost leadership, Quaterly performance

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Images From The Visit

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