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PREFACE
Operations management has been recognised as an important factor in a country’s ec
onomic growth. The traditional view of manufacturing management is the concept o
f Production Management with the focus on economic efficiency in manufacturing.
Later the new name Operations Management was identified, as service sector becam
e more prominent. Rapid changes in technology have posed numerous opportunities
and challenges, which have resulted in enhancement of manufacturing capabilities
through new materials, facilities, techniques and procedures. Hence, managing a
service system has become a major challenge in the global competitive environme
nt. Operations Management has been a key element in the improvement and producti
vity in business around the world. Operations Management leads the way for the o
rganisations to achieve its goals with minimum effort. Hence, the study of the s
ubject at undergraduate and postgraduate level has more significance. This book
on ‘Operations Management’ covers the complete syllabus of Bachelor of Engineering o
f Visvesvaraya Technical University, Karnataka, however the coverage is wide eno
ugh to include the requirements of Bachelor and Master Degree courses of other I
ndian universities and professional courses like MBA, PGDCA, BBA. Being student
friendly is the unique feature of this book. The subject matter has been present
ed systematically in ten chapters, which can enable the reader master the topics
covered without any additional guidance. Complete care has been taken to make t
he book error free. However, mistakes might have crept inadvertently. Readers fi
nding any error are requested to bring it to our notice, for enabling us to rect
ify them in our future editions. We are grateful to Mr. Saumya Gupta, Managing D
irector and Mr. Sudarshan of New Age International (P) Limited Publishers for th
eir commitment and encouragement in bringing out this book in time with good qua
lity and for providing us the opportunity to share our knowledge with you.
vi vi
Contents Preface
The authors wish to express their sincere thanks to Principals and Managements o
f respective colleges. Our acknowledgements are also due to Dr. Poornima Anil Ku
mar and Mrs. Bharathi Suresh without whose support and sacrifice this work would
not have been completed by the deadline. Finally, our acknowledgement is due to
the Almighty who has blessed us with the knowledge, required for writing this b
ook. S. Anil Kumar N. Suresh
Contents
vii
CONTENTS
Preface 1. OPERATIONS MANAGEMENT CONCEPTS 1.1 1.2 1.3 1.4 1.5 Introduction Histo
rical Development Concept of Production Production System Classification of Prod
uction System 1.5.1 Job-Shop Production 1.5.2 Batch Production 1.5.3 Mass Produc
tion 1.5.4 Continuous Production Production Management 1.6.1 Objectives of Produ
ction Management Operations System 1.7.1 A Framework of Managing Operations Oper
ations Management Operations Management Objectives The Strategic Role of Operati
ons Strategic Planning 1.11.1 Strategic Planning for Production and Operations 1
.11.2 Strategic Planning Approaches for Production/Operations 1.11.3 Strategic P
lanning—Forced Choice Model 1.11.4 A Strategic Planning Operations Model The Trend
: Information and Non Manufacturing Systems Productivity 1.13.1 Modern Dynamic C
oncept of Productivity 1.13.2 Factor Productivity and Total Productivity 1.13.3
Productivity Analysis
v 1–26 1 1 3 3 4 4 5 5 6 7 7 7 8 9 11 13 15 15 15 15 16 17 18 18 18 19
1.6 1.7 1.8 1.9 1.10 1.11
1.12 1.13
viii
Contents
1.14 1.15 1.16 1.17
Factors Affecting Productivity International Dimensions of Productivity The Envi
ronment of Operations Scope of Operations Management Exercise References
19 20 20 21 25 26 27–51 27 27 28 28 30 30 30 31 31 33 35 35 35 43 45 46 49 51 53–60
53 53 54 55 55 57 60 60 61–103 61 61 66
2. OPERATIONS DECISION-MAKING 2.1 2.2 2.3 2.4 2.5 Introduction Management as a S
cience Characteristics of Decisions Framework for Decision-Making Decision Metho
dology 2.5.1 Complete Certainty Methods 2.5.2 Risk and Uncertainty Methods 2.5.3
Extreme Uncertainty Methods 2.5.4 Decision-Making Under Uncertainty 2.5.5 Decis
ion-Making Under Risk Decision Support System Economic Models 2.7.1 Break-even A
nalysis Statistical Models 2.8.1 Equations for Discrete and Continuous Data Deci
sion Tree Exercise References
2.6 2.7 2.8 2.9
3. SYSTEMS DESIGN AND CAPACITY 3.1 3.2 3.3 3.4 3.5 3.6 Introduction Manufacturin
g and Service Systems Design and Systems Capacity Capacity Planning Process of C
apacity Planning Importance of Capacity Decisions Exercise References
4. FACILITY LOCATION AND LAYOUT 4.1 Introduction and Meaning 4.2 Need for Select
ing a Suitable Location 4.3 Factors Influencing Plant Location/Facility Location
Contents
ix
4.4 4.5
4.6 4.7
4.8
4.9 4.10 4.11 4.12
4.3.1 General Locational Factors 4.3.2 Specific Locational Factors for Manufactu
ring Organisation 4.3.3 Specific Locational Factors for Service Organisation Loc
ation Theories Location Models 4.5.1 Factor Rating Method 4.5.2 Weighted Factor
Rating Method 4.5.3 Load-distance Method 4.5.4 Centre of Gravity 4.5.5 Break-eve
n Analysis Locational Economics Plant Layout 4.7.1 Objectives of Plant Layout 4.
7.2 Principles of Plant Layout Classification of Layout 4.8.1 Process Layout 4.8
.2 Product Layout 4.8.3 Combination Layout 4.8.4 Fixed Position Layout 4.8.5 Gro
up Layout (or Cellular Layout) Design of Product Layout Design of Process Layout
Service Layout Organisation of Physical Facilities Exercise
66 70 71 72 73 73 74 75 77 78 80 81 81 82 82 82 83 84 85 85 87 91 94 95 102 105–12
8 105 105 105 106 106 106 112 113 114 114 117 119 119 125 128
5. FORECASTING DEMAND Introduction Forecasting Objectives and Uses Forecasting D
ecision Variables Forecasting Methods 5.4.1 Opinion and Judgmental Methods 5.4.2
Time Series Methods 5.5 Exponential Smoothing 5.5.1 Adjusted Exponential Smooth
ing 5.6 Regression and Correlation Methods 5.6.1 Regression 5.6.2 Correlation 5.
7 Applications and Control of Forecast 5.7.1 Forecast Controls Exercise Referenc
es 5.1 5.2 5.3 5.4
x
Contents
6. PRODUCT DEVELOPMENT AND DESIGN 6.1 Introduction 6.2 Purpose of a Product Desi
gn 6.3 Product Analysis 6.3.1 Marketing Aspect 6.3.2 The Product Characteristics
6.3.3 Economic Analysis 6.3.4 Production Aspect 6.4 A Framework for Process Des
ign 6.4.1 Product Planning 6.4.2 Process Design : MACRO 6.4.3 Process Design : M
ICRO 6.5 Design for Manufacture (DFM) 6.6 Design for Excellence 6.6.1 Concurrent
Development Activities Exercise References 7. MATERIALS MANAGEMENT 7.1 Introduc
tion and Meaning 7.2 Scope or Functions of Materials Management 7.3 Material Pla
nning and Control 7.3.1 Techniques of Material Planning 7.4 Purchasing 7.4.1 Obj
ectives of Purchasing 7.4.2 Parameters of Purchasing 7.4.3 Purchasing Procedure
7.4.4 Selection of Suppliers 7.4.5 Special Purchasing Systems 7.5 Stores Managem
ent 7.5.1 Codification 7.6 Inventory Control or Management 7.6.1 Meaning of Inve
ntory 7.6.2 Reasons for Keeping Inventories 7.6.3 Meaning of Inventory Control 7
.6.4 Objectives of Inventory Control 7.6.5 Benefits of Inventory Control 7.6.6 T
echniques of Inventory Control 7.6.7 Inventory Model 7.7 Standardization 7.7.1 A
dvantages of Standardization 7.7.2 Disadvantages of Standardization
129–160 129 129 130 131 133 136 150 150 150 152 153 153 156 158 160 160 161–190 161
161 163 163 164 164 165 167 169 173 174 175 176 176 176 176 177 177 177 179 183
183 185
Contents
xi
7.8 Simplification 7.8.1 Advantages of Simplification 7.9 Value Analysis 7.9.1 V
alue Analysis Framework 7.9.2 Steps in Value Analysis 7.10 Ergonomics (Human Eng
ineering) 7.10.1 Objectives of Human Engineering 7.11 Just-in-Time (JIT) Manufac
turing 7.11.1 Seven Wastes 7.11.2 Benefits of JIT Exercise 8. AGGREGATE PLANNING
AND MASTER SCHEDULING 8.1 8.2 8.3 8.4 8.5 8.6 Introduction Variables Used in Ag
gregate Planning Aggregate Planning Strategies Mixed Strategies Mathematical Pla
nning Models Master Scheduling 8.6.1 Master Scheduling Planning Horizon 8.6.2 Ma
ster Scheduling Format 8.6.3 Available-to-Promise Quantities Exercise References
185 185 185 186 186 187 187 188 188 189 190 191–216 191 192 195 198 200 202 203 20
4 205 213 216 217–235 217 219 219 219 224 227 227 231 231 232 233 234 235
9. MATERIAL AND CAPACITY REQUIREMENTS PLANNING (MRP AND CRP) 9.1 MRP and CRP Obj
ectives 9.2 MRP Inputs and Outputs 9.2.1 Bill of Materials 9.2.2 Low-level Codin
g 9.3 MRP Logic 9.4 System Refinements 9.5 Safety Stock, Lot Sizing and System U
pdating 9.6 CRP Inputs and Outputs 9.7 Loading 9.7.1 Steps in the Loading 9.7.2
Loading Concepts Exercise References
xii
Contents
10. SCHEDULING AND CONTROLLING PRODUCTION ACTIVITIES 10.1 10.2 10.3 10.4 10.5 10
.6 10.7 10.8 10.9 Introduction Concept of Single Machine Scheduling Measures of
Performance Shortest Processing Time (SPT) Rule WSPT Rule Earliest Due Date (EDD
) Rule Minimizing the Number of Tardy Jobs Flow Shop Scheduling Johnson’s Problem
10.9.1 Johnson’s Algorithm 10.9.2 Extension of Johnson’s Rule CDS Heuristic Job-Shop
Problem Types of Schedules Heuristic Procedures Priority Dispatching Rules Two
Jobs and M Machines Scheduling Exercise References Glossary
237–257 237 237 238 239 240 241 241 244 246 246 247 249 251 252 253 253 254 256 25
7 259–277
10.10 10.11 10.12 10.13 10.14 10.15
Operations Management Concepts
1
1
OPERATIONS MANAGEMENT CONCEPTS
CHAPTER OUTLINE
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Introduction Historical Development Con
cept of Production Production System Classification of Production System Product
ion Management Operations System Operations Management Operations Management Obj
ectives The Strategic Role of Operations 1.11 Strategic Planning 1.12 The Trend:
Information and Non Manufacturing System 1.13 Productivity 1.14 Factors Affecti
ng Productivity 1.15 International Dimensions of Productivity 1.16 The Environme
nt of Operations 1.17 Scope of Operations Management • Exercise • References
1.1
INTRODUCTION
Operation is that part of as organization, which is concerned with the transform
ation of a range of inputs into the required output (services) having the requis
ite quality level. Management is the process, which combines and transforms vari
ous resources used in the operations subsystem of the organization into value ad
ded services in a controlled manner as per the policies of the organization. The
set of interrelated management activities, which are involved in manufacturing
certain products, is called as production management. If the same concept is ext
ended to services management, then the corresponding set of management activitie
s is called as operations management. 1.2 HISTORICAL DEVELOPMENT
For over two centuries operations and production management has been recognized
as an important factor in a country’s economic growth. The traditional view of man
ufacturing management began in eighteenth century when Adam Smith recognised the
economic benefits of specialization of labour. He recommended breaking of jobs
down into subtasks and recognises workers to specialized tasks in which they wou
ld become highly skilled and efficient. In the early twentieth century, F.W. Tay
lor implemented Smith’s theories
2
Operations Management
and developed scientific management. From then till 1930, many techniques were d
eveloped prevailing the traditional view. Brief information about the contributi
ons to manufacturing management is shown in the Table 1.1. Production Management
becomes the acceptable term from 1930s to 1950s. As F.W. Taylor’s works become mo
re widely known, managers developed techniques that focused on economic efficien
cy in manufacturing. Workers were studied in great detail to eliminate wasteful
efforts and achieve greater efficiency. At the same time, psychologists, sociali
sts and other social scientists began to study people and human behaviour in the
working environment. In addition, economists, mathematicians, and computer soci
alists contributed newer, more sophisticated analytical approaches. With the 197
0s emerge two distinct changes in our views. The most obvious of these, reflecte
d in the new name Operations Management was a shift in the service and manufactu
ring sectors of the economy. As service sector became more prominent, the change
from ‘production’ to ‘operations’ emphasized the broadening of our field to service org
anizations. The second, more suitable change was the beginning of an emphasis on
synthesis, rather than just analysis, in management practices.
Table 1.1 Historical summary of operations management Date Contribution Contribu
tor Adam Smith Eli Whitney & 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.Romi
ng P.M.Blacker & others John Mauchlly and J.P.Eckert G.B.Dantzig, Williams & oth
ers A.Charnes, W.W.Cooper & others L.Cummings, L.Porter W.Skinner J.Orlicky & G.
Wright W.E. Deming & J.Juran
1776 Specialization of labour in manufacturing 1799 Interchangeable parts, cost
accounting 1832 Division of labour by skill; assignment of jobs by Skill; basics
of time study 1900 Scientific management time study and work study Developed; d
ividing planning and doing of work 1900 Motion of study of jobs 1901 Scheduling
techniques for employees, machines Jobs in manufacturing 1915 Economic lot sizes
for inventory control 1927 Human relations; the Hawthorne studies 1931 Statisti
cal inference applied to product quality: quality control charts 1935 Statistica
l Sampling applied to quality control: inspection sampling plans 1940 Operations
research applications in world war II 1946 Digital Computer 1947 Linear Program
ming 1950 Mathematical programming, on-linear and stochastic processes 1960 Orga
nisational behaviour: continued study of people at work 1970 Integrating operati
ons into overall strategy and policy Computer applications to manufacturing, sch
eduling, and control, Material Requirement Planning (MRP) 1980 Quality and produ
ctivity applications from Japan: robotics, CAD-CAM
1951 Commercial digital computer: large-scale computations available Sperry Univ
ac
Operations Management Concepts
3
1.3
CONCEPT OF PRODUCTION
Production function is ‘the part of an organisation, which is concerned with the t
ransformation of a range of inputs into the required outputs (products) having t
he requisite quality level’. Production is defined as ‘the step-by-step conversion o
f 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 additi
on. 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 fabricat
ion works for selected customers, etc., and manufacturing standardized products
like, car, bus, motor cycle, radio, television, etc. 1.4 PRODUCTION SYSTEM
The production system is ‘that part of an organisation, which produces products of
an organisation. It is that activity whereby resources, flowing within a define
d system, are combined and transformed in a controlled manner to add value in ac
cordance with the policies communicated by management’. A simplified production sy
stem is shown below:
Fig.1.1 Schematic production system
The production system has the following characteristics: 1. Production is an org
anised activity, so every production system has an objective. 2. The system tran
sforms 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 activi
ties, which is essential to control and improve system performance.
4
Operations Management
1.5
CLASSIFICATION OF PRODUCTION SYSTEM
Production systems can be classified as Job-shop, Batch, Mass and Continuous pro
duction systems.
Fig. 1.2 Classifications of production systems
1.5.1 Job-Shop Production Job-shop production are characterised by manufacturing
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 i
s low volume and high variety of products. A job-shop comprises of general-purpo
se machines arranged into different departments. Each job demands unique technol
ogical requirements, demands processing on machines in a certain sequence. Job-s
hop Production is characterised by 1. High variety of products and low volume. 2
. Use of general purpose machines and facilities. 3. Highly skilled operators wh
o 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 priorit
ies. 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 lear
ning opportunities. 3. Full potential of operators can be utilised. 4. Opportuni
ty exists for Creative methods and innovative ideas.
Operations Management Concepts
5
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 sp
ace requirements. 1.5.2 Batch Production American Production and Inventory Contr
ol Society (APICS) defines Batch Production as a form of manufacturing in which
the job pass through the functional departments in lots or batches and each lot
may have a different routing. It is characterised by the manufacture of limited
number of products produced at regular intervals and stocked awaiting sales. Bat
ch Production is characterised by 1. Shorter production runs. 2. Plant and machi
nery are flexible. 3. Plant and machinery set up is used for the production of i
tem in a batch and change of set up is required for processing the next batch. 4
. Manufacturing lead-time and cost are lower as compared to job order production
. Advantages Following are the advantages of Batch Production: 1. Better utilisa
tion of plant and machinery. 2. Promotes functional specialisation. 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. Limitations Following are the limitations
of Batch Production: 1. Material handling is complex because of irregular and l
onger flows. 2. Production planning and control is complex. 3. Work in process i
nventory is higher compared to continuous production. 4. Higher set up costs due
to frequent changes in set up. 1.5.3 Mass Production Manufacture of discrete pa
rts or assemblies using a continuous process are called Mass Production. This pr
oduction system is justified by very large volume of production. The machines ar
e arranged in a line or product layout. Product and process standardisation exis
ts and all outputs follow the same path.
6
Operations Management
Mass Production is characterised by 1. Standardisation of product and process se
quence. 2. Dedicated special purpose machines having higher production capacitie
s and output rates. 3. Large volume of products. 4. Shorter cycle time of produc
tion. 5. Lower in process inventory. 6. Perfectly balanced production lines. 7.
Flow of materials, components and parts is continuous and without any back track
ing. 8. Production planning and control is easy. 9. Material handling can be com
pletely automatic. Advantages Following are the advantages of Mass Production: 1
. Higher rate of production with reduced cycle time. 2. Higher capacity utilisat
ion due to line balancing. 3. Less skilled operators are required. 4. Low proces
s inventory. 5. Manufacturing cost per unit is low. Limitations Following are th
e limitations of Mass Production: 1. Breakdown of one machine will stop an entir
e production line. 2. Line layout needs major change with the changes in the pro
duct design. 3. High investment in production facilities. 4. The cycle time is d
etermined by the slowest operation. 1.5.4 Continuous Production Production facil
ities are arranged as per the sequence of production operations from the first o
perations to the finished product. The items are made to flow through the sequen
ce of operations through material handling devices such as conveyors, transfer d
evices, etc. Continuous Production is characterised by 1. Dedicated plant and eq
uipment with zero flexibility. 2. Material handling is fully automated. 3. Proce
ss follows a predetermined sequence of operations. 4. Component materials cannot
be readily identified with final product. 5. Planning and scheduling is a routi
ne action. Advantages Following are the advantages of Continuous Production: 1.
Standardisation of product and process sequence. 2. Higher rate of production wi
th reduced cycle time. 3. Higher capacity utilisation due to line balancing. 4.
Manpower is not required for material handling as it is completely automatic.
Operations Management Concepts
7
5. Person with limited skills can be used on the production line. 6. Unit cost i
s lower due to high volume of production. Limitations Following are the limitati
ons of Continuous Production: 1. Flexibility to accommodate and process number o
f products does not exist. 2. Very high investment for setting flow lines. 3. Pr
oduct differentiation is limited. 1.6 PRODUCTION MANAGEMENT
Production management is ‘a process of planning, organising, directing and control
ling the activities of the production function. It combines and transforms vario
us resources used in the production subsystem of the organization into value add
ed product in a controlled manner as per the policies of the organization’. E.S.Bu
ffa defines production management as follows: ‘Production management deals with de
cision-making related to production processes so that the resulting goods or ser
vices are produced according to specifications, in the amount and by the schedul
e demanded and out of minimum cost’. 1.6.1 Objectives of Production Management The
objective of the production management is ‘to produce goods and services of Right
Quality and Quantity at the Right time and Right manufacturing cost’. 1. Right Qu
ality: The quality of product is established based upon the customers need. The
right quality is not necessarily being the 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 capit
al will block up in the form of inventory and if the quantity is produced in sho
rt of demand, leads to shortage of products. 3. Right Time: Timeliness of delive
ry is one of the important parameter to judge the effectiveness of production de
partment. So, the production department has to make the optimal utilization of i
nput resources to achieve its objective. 4. Right Manufacturing Cost: Manufactur
ing costs are established before the product is actually manufactured. Hence, al
l 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.
1.7 OPERATIONS SYSTEM
An operation was defined in terms of the mission it serves for the organisation,
technology it employs and the human and managerial processes it involves. Opera
tions in an organisation can be categorised into Manufacturing Operations and Se
rvice Operations. Manufacturing Operations is a conversion process that includes
manufacturing yields a tangible output: a product, whereas, a conversion proces
s that includes service yields an intangible output: a deed, a performance, an e
ffort.
8
Operations Management
Operations system converts inputs in order to provide outputs, which are require
d by a customer. It converts physical resources into outputs, the function of wh
ich is to satisfy customer wants. Everett E. Adam & Ronald J. Ebert defines as ‘An
operating system is the part of an organisation that produces the organistion’s p
hysical goods and services’. Ray Wild defines operations system as ‘a configuration
of resources combined for the provision of goods or services’. In some of the orga
nisation the product is a physical good (breakfast in hotels) while in others it
is a service (treatment in hospitals). Bus and taxi services, tailors, hospital
and builders are the examples of an operations system. The basic elements of an
operation system show in Figure 1.3 with reference to departmental stores. A de
partmental store s has an input like land upon which the building is located, la
bour as a stock clerk, capital in the form of building, equipment and merchandis
e, management skills in the form of the stores manager. Output will be serviced
customer with desired merchandise. Random fluctuations will be from external or
internal sources, monitored through a feedback system.
Late delivery Labour tumover
Fig.1.3 Operations system for department stores
1.7.1 A Framework of Managing Operations Managing Operations can be enclosed in
a frame of general management function as shown in figure 1.3. Operation manager
s are concerned with planning, organising, and controlling the activities, which
affect human behaviour through models. Planning is the activity that establishe
s a course of action and guide future decision-making. The operations manager de
fines the objectives for the operations subsystem of the organisation, and the p
olicies, and procedures for achieving the objectives. This stage includes clarif
ying the role and focus of operations in the organization’s overall strategy. It a
lso involves product planning, facility designing and using the conversion proce
ss. Organizing is the activities that establish a structure of tasks and authori
ty. Operation managers establish a structure of roles and the flow of informatio
n within the operations subsystem. They determine the activities required to ach
ieve the goals and assign authority and responsibility for carrying them out. Co
ntrolling is the activities that assure the actual performance in accordance wit
h planned performance. To ensure that the plans for the operations subsystems ar
e accomplished, the operations
Operations Management Concepts
9
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. 1. Behaviour: Operations managers are concerned with
the activities, which affect human behaviour through models. They want to know t
he behaviour of subordinates, which affects managerial activities. Their main in
terest lies in the decision-making behaviour. 2. Models: Models represents schem
atic representation of the situation, which will be used as a tool for decision-
making. Following are some of the models used. Aggregate planning models for exa
mining how best to use existing capacity in short term, break-even analysis to i
dentify break-even volumes, Linear programming and computer simulation for capac
ity utilisation, Decision tree analysis for long-term capacity problem of facili
ty expansion, simple median model for determining best locations of facilities,
etc.
Fig. 1.4 General model for managing operations
1.8
OPERATIONS MANAGEMENT
Joseph G .Monks defines Operations Management as the process whereby resources,
flowing within a defined system, are combined and transformed by a controlled ma
nner to add value in accordance with policies communicated by management.
10
Operations Management
The operations managers have the prime responsibility for processing inputs into
outputs. They must bring together under production plan that effectively uses t
he materials, capacity and knowledge available in the production facility. Given
a demand on the system work must be scheduled and controlled to produce goods a
nd/or services required. Control must be exercised over such parameters such as
costs, quality and inventory levels. The definition of the operations Management
contains following keywords: Resources, Systems, transformation and Value addit
ion Activities.
RESOURCES
Resources are the human, material and capital inputs to the production process.
Human resources are the key assets of an organisation. As the technology advance
s, a large proportion of human input is in planning and controlling activities.
By using the intellectual capabilities of people, managers can multiply the valu
e of their employees into by many times. Material resources are the physical fac
ilities and materials such as plant equipment, inventories and supplies. These a
re the major assets of an organisation. Capital in the form of stock, bonds, and
/or taxes and contributions is a vital asset. Capital is a store of value, which
is used to regulate the flow of the other resources.
SYSTEMS
Systems are the arrangement of components designed to achieve objectives accordi
ng to the plan. The business systems are subsystem of large social systems. In t
urn, it contains subsystem such as personnel, engineering, finance and operation
s, which will function for the good of the organisation. A systems approach to o
perations management recognises the hierarchical management responsibilities. If
subsystems goals are pursued independently, it will results in sub-optimization
. A consistent and integrative approach will lead to optimization of overall sys
tem goals. The system approach to specific problems requires that the problem fi
rst be identified and isolated from the maze of the less relevant data that cons
titute the environment. The problem abstracted from the overall (macro) environm
ent. Then it can be broken into manageable (micro) parts and analysed and soluti
ons proposed. Doing this analysis is advantageous before making any changes. If
the solution appears to solve the problem in a satisfactory way, changes can be
made to the real system in an orderly and predictable way. The ability of any sy
stem to achieve its objective depends on its design and its control. System desi
gn is a predetermined arrangement of components. It establishes the relationship
s that must exist between inputs, transformation activities and outputs in order
to achieve the system objectives. With the most structured design, there will b
e less planning and decision-making in the operations of the system. System cont
rol consists of all actions necessary to ensure that activities conform to preco
nceived plans or goals. It involves following four essential elements: 1. Measur
ement by an accurate sensory device. 2. Feedback of information in a timely mann
er. 3. Comparison with standards such as time and cost standards. 4. Corrective
actions by someone with the authority and ability to correct.
Operations Management Concepts
11
A closed loop control system can automatically function on the basis of data fro
m within its own system.
TRANSFORMATION AND VALUE ADDING ACTIVITIES
The objective of combining resources under controlled conditions is to transform
them into goods and services having a higher value than the original inputs. Th
e transformation process applied will be in the form of technology to the inputs
. The effectiveness of the production factors in the transformation process is k
nown as productivity. The productivity refers to the ratio between values of out
put per work hour to the cost of inputs. The firms overall ratio must be greater
than 1, then we can say value is added to the product. Operations manager shoul
d concentrate improving the transformation efficiency and to increase the ratio.
Fig. 1.5 Schematic model for operations/production system
1.9
OPERATIONS MANAGEMENT OBJECTIVES
Joseph G . Monks defines Operations Management as the process whereby resources,
flowing within a defined system, are combined and transformed by a controlled m
anner to add value in accordance with policies communicated by management. Objec
tives of Operations Management can be categorized into Customer Service and Reso
urce Utilisation.
CUSTOMER SERVICE
The first objective of operating systems is to utilize resources for the satisfa
ction of customer wants. Therefore, customer service is a key objective of opera
tions management. The operating system must provide something to a specification
, which can satisfy the customer in terms of cost and timing. Thus, providing th
e ‘right thing at a right price at the right time’ can satisfy primary objective.
12
Operations Management
These aspects of customer service – specification, cost and timing – are described f
or four functions in Table 1.1. They are the principal sources of customer satis
faction and must therefore be the principal dimension of the customer service ob
jective for operations managers. Generally, an organisation will aim reliably an
d consistently to achieve certain standards and operations manager will be influ
ential in attempting to achieve these standards. Hence, this objective will infl
uence the operations manager’s decisions to achieve the required customer service.
Table 1.2 Aspects of customer service Principal function Manufacture Principal c
ustomer wants Primary considerations Goods of a given, requested or acceptable s
pecification 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. C
ost, i.e. cost of movements. Timing, i.e. 1. Duration or time to move. 2. Wait o
r delay from requesting to its commencement. Cost, i.e. purchase price or cost o
f 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. Duration or time require
d for treatment. 2. Wait or delay from requesting treatment to its commencement.
Transport
Management of a given, requested or acceptable specification
Supply
Goods of a given, requested or acceptable specification
Service
Treatment of a given, requested or acceptable specification
RESOURCE UTILISATION
Another major objective of operating systems is to utilize resources for the sat
isfaction of customer wants effectively. Customer service must be provided with
the achievement of effective operations through efficient use of resources. Inef
ficient use of resources or inadequate customer service leads to commercial fail
ure of an operating system. Operations management is concerned essentially with
the utilisation of resources, i.e. obtaining maximum effect from resources or mi
nimising their loss, under utilisation or waste. The extent of the utilisation o
f the resources’ potential might be expressed in terms of the proportion of availa
ble time used or occupied, space utilisation, levels of activity, etc. Each meas
ure 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 concerned with the achievement of both satisfactory customer serv
ice and resource utilisation. An improvement in one will often give rise to dete
rioration in the other. Often both cannot be maximized, and hence a satisfactory
performance must be achieved on both objectives. All the activities of operatio
ns management must be tackled with these two objectives in
Operations Management Concepts
13
mind, and because of this conflict, operations managers’ will face many of the pro
blems. Hence, operations managers must attempt to balance these basic objectives
. The Table 1.3 summarizes the twin objectives of operations management. The typ
e of balance established both between and within these basic objectives will be
influenced by market considerations, competitions, the strengths and weaknesses
of the organization, etc. Hence, the operations managers should make a contribut
ion when these objectives are set.
Table 1.3 The twin objectives of operations management The customer service obje
ctive i.e. to provide agreed/adequate levels of customer service (and hence cust
omer satisfaction) by providing goods or services with the right specification,
at the right cost and at the right time. The resource utilizations objective i.e
. to achieve adequate levels of resource utilizations (or productivity) e.g. to
achieve agreed levels of utilizations of materials, machines and labour.
1.10
THE STRATEGIC ROLE OF OPERATIONS
Primary goals of the organisations are related market opportunities. Economy and
efficiency of conversion operations are the secondary goals, which will be pred
ominant with the study and practice of operations management.
A STRATEGIC PERSPECTIVE
In figure 1.1 provides the basic downward flow of strategy influence leading to
managing conversion operations and results. The general thrust of the process is
guided by competitive and market conditions in the industry, which provide the
basis for determining the organization’s strategy. Where is the industry now, and
where it will be in the future? What are the existing and potential markets? Wha
t market gaps exist, and what competencies do we have for filling them? A carefu
l analysis of market segments and the ability of our competitors and ourselves t
o meet the needs of these segments will determine the best direction for focusin
g an organization’s efforts. After assessing the potential within an industry, an
overall organizational strategy must be developed, including some basic choices
of the primary basis for competing. In doing so, priorities are established amon
g the following four characteristics: • Quality (product performance). • Cost effici
ency (low product price). • Dependability (reliable, timely delivery of orders to
customers). • Flexibility (responding rapidly with new products or changes in volu
me). In recent years, most organizations cannot be best on all these dimensions
and, by trying to do so, they end up doing nothing well. Furthermore, when a com
petency exists in one of these areas, an attempt to switch to a different one ca
n lead to a downfall in effectiveness (meeting the primary objectives). Time is
emerging as a critical dimension of competition in both manufacturing and servic
e industries. In any industry the firm with the fastest response to customer dem
ands has the potential to achieve an overwhelming market advantage. In an era of
time-based competition, a firm s
14
Operations Management
competitive advantage is defined by the total time required to produce a product
or service. Firms able to respond quickly have reported growth rates over three
times the industry average and double the profitability. Thus the pay-off for q
uick response is market dominance. These basic strategic choices set the tone fo
r the shape and content of the operations functions.
OPERATIONS OBJECTIVES
The overall objective of the operations subsystem is to provide conversion capab
ilities for meeting the organization’s goals and strategy. The sub-goals of the op
erations subsystem, must specify the following: 1. Product/service characteristi
cs. 2. Process characteristics. 3. Product/service quality. 4. Efficiency Effect
ive employee relations and cost control of labour. Cost control of material. Cos
t control in facility utilization. 5. Customer service (schedule) Producing quan
tities to meet expected demand. Meeting the required delivery date for goods or
services. 6. Adaptability for future survival. The priorities among these operat
ions’ sub-goals and their relative emphases should be direct reflections of the or
ganization’s mission. Relating these six operations sub-goals to the broader strat
egic choices above, it is clear that quality, efficiency, and dependability (cus
tomer service) are reflected in the sub-goals. Flexibility encompasses adaptabil
ity but also relates to product/service and process characteristics: Once choice
s about product and process are made, boundaries for meeting the other operation
s objectives are set.
OPERATIONS ALTERNATIVES AND TRADEOFFS
The operations sub-goals can be attained through the decisions that are made in
the various operations areas. Each decision involves important tradeoffs between
choices about product and process versus choices about quality, efficiency, sch
edule and adaptability. Once a decision is made, it leads to many choices. Where
should facilities be located? How large should they be? What degree of automati
on should be used? How skilled must labour be to operate the automated equipment
? Will the product be produced on site? How do these decisions impact quality, e
fficiency, schedule (customer service), and adaptability? Are we prepared for ch
anges in product or service, or do these decisions lock in our operations? These
are examples of the tough, crucial tradeoffs that are at the heart of understan
ding the choices that must be made when planning strategically and tactically.
Operations Management Concepts
15
1.11
STRATEGIC PLANNING
Strategic planning is the process of thinking through the current mission of the
organization and the current environmental conditions facing it, then setting f
orth a guide for tomorrow’s decisions and results. Strategic planning is built on
fundamental concepts: that current decisions are based on future conditions and
results. 1.11.1 Strategic Planning for Production and Operations In the producti
on or operations function, strategic planning is the broad, overall planning tha
t precedes the more detailed operational planning. Executives who head the produ
ction and operations function are actively involved in strategic planning, devel
oping plans that are consistent with the firm’s overall strategies as well as such
functions as marketing, finance accounting and engineering. Production and oper
ations strategic plans are the basis for (1) operational planning of facilities
(design) and (2) operational planning for the use of these facilities. 1.11.2 St
rategic Planning Approaches for Production/Operations Henry Mintzberg suggests t
hree contrasting modes of strategic planning: the entrepreneurial, the adaptive,
and the planning modes. In the entrepreneurial mode, one strong, bold leader ta
kes planning action on behalf of the production/operations function. In the adap
tive mode, a manager’s plan is formulated in a series of small, disjointed steps i
n reaction to a disjointed environment. The planning model uses planning essenti
als combined with the logical analysis of management science. There are many app
roaches to strategic planning. The key point is that operations strategies must
be consistent with the overall strategies of the firm. Operations typically util
ize the overall corporate approach to strategic planning, with special modificat
ions and a focus upon operations issues and opportunities. One general approach
to strategic planning is a forced choice model given by Adam and Ebert. 1.11.3 S
trategic Planning—Forced Choice Model One of many planning models that have been u
sed in strategic planning is a forced choice model, shown in Figure 1.6 (on page
16). In-group sessions or individually, analysts assess environmental considera
tions together with the organization’s current production/operations position, thu
s forcing management to develop strategic options for operations.
16
Operations Management
Fig.1.6 A forced choice model of strategic planning for operations
Source: Charles, N. Greene, Everett E. Adam, Jr., and Ronald J. Ebert, Managemen
t for Effective Performance (Prentice Hall 1985)
1.11.4 A Strategic Planning Operations Model Professor Chris A. Voss of the Lond
on Business School, England, has set forth a framework for strategy and policy d
evelopment in manufacturing. Concept is that manufacturing strategy tries to lin
k the policy decisions associated with operations to the marketplace, the enviro
nment, and the company’s overall goals. A simplified framework for examining opera
tions strategy is shown in Figure 1.7. One feature of this approach that is cruc
ial to competitiveness is market-based view of strategic planning. It suggests t
hat any strategic business unit of a company operates in the context of its corp
orate resources, the general and competitive industry environment, and the speci
fic corporate goals of the company. In any area in which the company chooses to
compete is a set of specific market-based criteria for success. A low-cost, high
productivity operation makes efficiency possible. Minimum use of scarce resourc
es while sustaining high outputs is the key to productivity. Effectiveness is ho
w well a company is able to meet specific criteria such as delivery schedules an
d technical capability. Quality is the degree to which the product or services m
eets customer and organisation expectations.
Operations Management Concepts
17
Quality reflects the ‘goodness’ of the product or services to the customer. Flexibil
ity is the adoptability, the capability to change as business conditions change.
Fig. 1.7 Operations strategy framework
1.12
THE TREND: INFORMATION AND NON MANUFACTURING SYSTEMS
An increasingly significant trend in the Indian economy is the gradual shift of
productive effort from manufacturing (industrial) to service and information bas
ed products. With this, the demand for communication and information based produ
ct is gradually restructuring the society. Traditional ways of doing things are
being replaced by efficient methods. Computers play a major role in this transit
ion along with fiber optics, microwaves, lasers and other communication technolo
gies. Following characteristics can be considered for distinguishing Manufacturi
ng Operations with Service Operations: 1. Tangible/Intangible nature of output 2
. Production and consumption 3. Nature of work (job) 4. Degree of customer conta
ct 5. Customer participation in conversion 6. Measurement of performance 7. Qual
ity of output 8. Inventory accumulated.
18
Operations Management
Manufacturing is characterized by tangible outputs (products). Consumption of ou
tputs at overtime. Jobs useless labour and more equipment, little customer conta
ct, no customer participation in the conversion process (in production). Sophist
icated methods for measuring production activities and resource consumption as p
roduct are made. Service is characterized by intangible outputs. In addition, it
possess a potential for high variability in quality of output. Production and c
onsumption occurs simultaneously. Jobs use more labour and less equipment, direc
t consumer contact, frequent customer participation in the conversion process. E
lementary methods for measuring conversion activities and resource consumption a
re used. 1.13 PRODUCTIVITY
Productivity is defined in terms of utilization of resources, like material and
labour. In simple terms, productivity is the ratio of output to input. For examp
le, productivity of labour can be measured as units produced per labour hour wor
ked. Productivity is closely inked with quality, technology and profitability. H
ence, there is a strong stress on productivity improvement in competitive busine
ss environment. Productivity can be improved by (a) controlling inputs, (b) impr
oving process so that the same input yields higher output, and (c) by improvemen
t of technology. These aspects are discussed in more detail in the lesson on Pro
ductivity Management. Productivity can be measured at firm level, at industry le
vel, at national level and at international level. 1.13.1 Modern Dynamic Concept
of Productivity Productivity can be treated as a multidimensional phenomenon. T
he modern dynamic concept of productivity looks at productivity as what may be c
alled “productivity flywheel”. The productivity is energized by competition. Competi
tion leads to higher productivity, higher productivity results in better value f
or customers, this results in higher share of market for the organization, which
results in still keener competition. Productivity thus forms a cycle, relating
to design and products to satisfy customer needs, leading to improved quality of
life, higher competition i.e. need for having still higher goals and higher sha
re of market, and thereby leading to still better designs.
Fig. 1.8 Dynamic concept of productivity
1.13.2 Factor Productivity and Total Productivity When productivity is measured
separately for each input resource to the production process it is called factor
productivity or partial productivity. When productivity is measured for all the
factors of production together, it is called total factor productivity.
Operations Management Concepts
19
Generally factor productivity calculations are required at firm level and indust
ry level, whereas total factor productivity calculations are made for measuring
productivity at national and international level. Productivity of materials can
be measured as output units per unit material consumed. It can also be measured
in terms of value generated per unit expenditure in materials. For measuring pro
ductivity of different groups of operatives, different ratios can be used, which
are indicative of output/input relationship. For example, the productivity of a
ssembly line work can be measured as output units per man-hour or alternatively,
the value of good produced per cost of labour on assembly line. 1.13.3 Producti
vity Analysis For the purposes of studies of productivity for improvement purpos
es, following types of analysis can be carried out: 1. Trend analysis: Studying
productivity changes for the firm over a period of time. 2. Horizontal analysis:
Studying productivity in comparison with other firms of same size and engaged i
n similar business. 3. Vertical analysis: Studying productivity in comparison wi
th other industries and other firms of different sizes in the same industry. 4.
Budgetary analysis: Setting up a norm for productivity for a future period as bu
dget, based on studies as above, and planning strategies to achieve it. 1.14 FAC
TORS AFFECTING PRODUCTIVITY
Economists site a variety of reasons for changes in productivity. However some o
f the principle factors influencing productivity rate are: 1. Capital/labour rat
io: It is a measure of whether enough investment is being made in plant, machine
ry, and tools to make effective use of labour hours. 2. Scarcity of some resourc
es: Resources such as energy, water and number of metals will create productivit
y problems. 3. Work-force changes: Change in work-force effect productivity to a
larger extent, because of the labour turnover. 4. Innovations and technology: T
his is the major cause of increasing productivity. 5. Regulatory effects: These
impose substantial constraints on some firms, which lead to change in productivi
ty. 6. Bargaining power: Bargaining power of organized labour to command wage in
creases excess of output increases has had a detrimental effect on productivity.
7. Managerial factors: Managerial factors are the ways an organization benefits
from the unique planning and managerial skills of its manager. 8. Quality of wo
rk life: It is a term that describes the organizational culture, and the extent
to which it motivates and satisfies employees.
20
Operations Management
1.15
INTERNATIONAL DIMENSIONS OF PRODUCTIVITY
Industrialized nations are developing two strategies to remain competitive in th
e business. 1. Moving to a new and more advanced products, and 2. Employing bett
er and more flexible system.
NEW PRODUCTS
High Volume Products like steel, textiles, etc. with constitute an industrial ba
se are not secure. Nations such as Japan, France and West Germany are shifting t
heir industrial base towards products and processes that make better use of thei
r research capabilities and skilled workers. Their future lies in microelectroni
cs, precision manufactured castings, specialty steels, custom fabrics, fiber opt
ics, lasers, etc.
TREND TOWARDS MORE FLEXIBLE SYSTEMS
The production runs of these higher valued specialty items and custom designed p
roducts are often much shorter than for traditional mass produced goods. But the
non-productive time (downtime) required to set up equipment for producing diffe
rent options, new models and new products are very costly. So production facilit
ies must be designed with the utmost flexibility to accommodate change overs in
rapid fashion. This is where computers, robotics come into play. German executiv
es understand the need for a strong technological focus and the dangers of hiera
rchical bureaucracies and paper profits. Studies reveal that over 50 per cent of
Germany’s large manufacturing firms are managed by Ph.D.’s with technical backgroun
ds. In recent years, the managerial techniques and productivity methods in Japan
ese firms have attracted worldwide attention. The following are some of the char
acteristics of the Japanese firm as compared with the American firms. 1. Corpora
te objectives: Employees and customers are given priority over shareholders. Hon
esty in business is important. 2. Time horizon: Long-term viability is more impo
rtant than short-term profits. 3. Production systems: Automated systems with ext
ensive use of microprocessors and robotics. Quality is paramount, and things hap
pen on schedule. 4. Employment relations: Long-term employment of loyal workers.
Unions cooperate to benefit total firm. Politeness and harmony are emphasized.
5. Materials: Resources are limited. Space is used efficiently and inventories a
re kept to a bare minimum. 6. Financing: More use is made of debt capital and le
ss of equity capital. 7. Training: Employees are thoroughly trained and rotated
to learn a variety of skills. 8. Worker participation: Employees are thoroughly
trained and rotated to learn a variety of productivity improvements via suggesti
ons, quality circles and consultation with supervisors. 1.16 THE ENVIRONMENT OF
OPERATIONS
One of the most encompassing influences on productivity is the environment in wh
ich organization operates. The social impact of an organization is a reflection
of the values held by top management.
Operations Management Concepts
21
It evolves from the religious and cultural norms of society, from childhood trai
ning, education, and reflection on the purpose of life and the value of one’s self
and of others. The preferred values of the society reflect purpose, integrity a
nd a respect for the life and humanity of others. Every facet of our economic an
d social environment regulated and controlled by law designed to protect general
public. The figure illustrates some of the laws impact on the productivity of t
he firms. 1.17 SCOPE OF OPERATIONS MANAGEMENT
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 organizational objectives of effectiveness, efficiency and ad
optability. It distinguishes itself from other functions such as personnel, mark
eting, finance, etc. by its primary concern for ‘conversion by using physical reso
urces’. Following are the activities, which are listed under Production and Operat
ions Management functions: 1. Location of facilities. 2. Plant layouts and Mater
ial Handling. 3. Product Design. 4. Process Design. 5. Production and Planning C
ontrol. 6. Quality Control. 7. Materials Management. 8. Maintenance Management.
Fig. 1.9 Environment of operations
22
Operations Management
Fig. 1.10 Scope of production and operations management
LOCATION OF FACILITIES
Location of facilities for operations is a long-term capacity decision, which in
volves a long-term commitment about the geographically static factors that affec
t a business organisation. It is an important strategic level decision-making fo
r 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, l
ocation of plant should be based on the company’s expansion plan and policy, diver
sification plan for the products, changing sources of raw materials and many oth
er factors. The purpose of the location study is to find the optimal location th
at will results in the greatest advantage to the organization.
PLANT LAYOUT AND MATERIAL HANDLING
Plant layout refers to the physical arrangement of facilities. It is the configu
ration 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. According to J
ames More ‘Plant layout is a plan of an optimum arrangement of facilities includin
g personnel, operating equipment, storage space, material handling equipments an
d all other supporting services along with the design of best structure to conta
in all these facilities’.
Operations Management Concepts
23
‘Material Handling’ refers to the ‘moving of materials from the store room to the mach
ine and from one machine to the next during the process of manufacture’. It is als
o defined as the ‘art and science of moving, packing and storing of products in an
y 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, op
eration and maintenance of material handling devices. Material handling devices
increases the output, improves quality, speeds up the deliveries and decreases t
he cost of production. Hence, material handling is a prime consideration in the
designing new plant and several existing plants.
PRODUCT DESIGN
Product design deals with conversion of ideas into reality. Every business organ
isation have to design, develop and introduce new products as a survival and gro
wth strategy. Developing the new products and launching them in the market is th
e biggest challenge faced by the organizations. The entire process of need ident
ification to physical manufactures of product involves three functions— Design and
Marketing, Product, Development, and manufacturing. Product Development transla
tes the needs of customers given by marketing into technical specifications and
designing the various features into the product to these specifications. Manufac
turing has the responsibility of selecting the processes by which the product ca
n be manufactured. Product design and development provides link between marketin
g, customer needs and expectations and the activities required to manufacture th
e product.
PROCESS DESIGN
Process design is a macroscopic decision-making of an overall process route for
converting the raw material into finished goods. These decisions encompass the s
election of a process, choice of technology, process flow analysis and layout of
the facilities. Hence, the important decisions in process design are to analyse
the workflow for converting raw material into finished product and to select th
e workstation for each included in the workflow.
PRODUCTION PLANNING AND CONTROL
Production planning and control can be defined as the process of planning the pr
oduction in advance, setting the exact route of each item, fixing the starting a
nd finishing dates for each item, to give production orders to shops and to foll
ow-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 include Planning, Ro
uting, Scheduling, Dispatching and Follow-up. Planning is deciding in advance wh
at 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 t
o occur which would not otherwise happen. Routing may be defined as the selectio
n of path, which each part of the product will follow, which being transformed f
rom raw material to finished products. Routing determines the most advantageous
path to be followed for department to department and machine to machine till raw
material gets its final shape.
24
Operations Management
Scheduling determines the programme for the operations. Scheduling may be define
d 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 st
arting the processes. It gives necessary authority so as to start a particular w
ork, which has been already been planned under ‘Routing’ and ‘Scheduling’. Therefore, di
spatching 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 performanc
e.
QUALITY CONTROL (QC)
Quality Control may be defined as ‘a system that is used to maintain a desired lev
el of quality in a product or service’. It is a systematic control of various fact
ors that affect the quality of the product. Quality Control aims at prevention o
f defects at the source, relies on effective feedback system and corrective acti
on procedure. Quality Control can also be defined as ‘that Industrial Management t
echnique by means of which product of uniform acceptable quality is manufactured’.
It is the entire collection of activities, which ensures that the operation wil
l produce the optimum quality products at minimum cost. The main objectives of Q
uality Control are: 1. To improve the companies income by making the production
more acceptable to the customers i.e. by providing longlife, greater usefulness,
maintainability, etc. 2. To reduce companies cost through reduction of losses d
ue to defects. 3. To achieve interchangeability of manufacture in large-scale pr
oduction. 4. To produce optimal quality at reduced price. 5. To ensure satisfact
ion of customers with productions or services or high quality level, to build cu
stomer good will, confidence and reputation of manufacturer. 6. To make inspecti
on prompt to ensure quality control. 7. To check the variation during manufactur
ing.
MATERIALS MANAGEMENT
Materials Management is that aspect of management function, which is primarily c
oncerned with the acquisition, control, and use of materials needed and flow of
goods and services connected with the production process having some predetermin
ed objectives in view. The main objectives of Material Management are: 1. To min
imise material cost. 2. To purchase, receive, transport and store materials effi
ciently and to reduce the related cost. 3. To cut down costs through simplificat
ion, standardisation, value analysis, import substitution, etc. 4. To trace new
sources of supply and to develop cordial relations with them in order to ensure
continuous supply at reasonable rates. 5. To reduce investment tied in the inven
tories for use in other productive purposes and to develop high inventory turnov
er ratios.
Operations Management Concepts
25
MAINTENANCE MANAGEMENT
In modern industry, equipment and machinery are a very important part of the tot
al productive effort. Therefore their idleness or downtime becomes are very expe
nsive. Hence, it is very important that the plant machinery should be properly m
aintained. The main objectives of Maintenance Management are: 1. To achieve mini
mum breakdown and to keep the plant in good working condition at the lowest poss
ible 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 e
nsure the availability of the machines, buildings and services required by other
sections of the factory for the performance of their functions at optimal retur
n on investment.
EXERCISE
1. Define Operations management. Explain the key concepts of Operations manageme
nt with a schematic diagram. 2. Distinguish between manufacturing and service op
eration with example. 3. What is strategic planning? Explain the role of models
in strategic planning. 4. Define the term operations management. Briefly explain
the strategic role of operations. 5. Write a note on system view of operations.
6. Explain, how the considerations of environtnenta1 assessment and organisatio
nal position provide a modeling framework for the strategic planning of operatio
ns. 7. Briefly explain how service producers differ from goods producers in impo
rtant aspects of their operations. 8. State the important objectives of producti
on management. 9. Define the term productive system. 10. Give two examples for t
he productive systems concerned to service and manufacturing respectively. 11. “Op
erations strategy”—A key element in corporate strategy. Briefly explain. 12. Explain
what do you understand by product-focused systems and process-focused systems.
13. Differentiate between Production Management and Operations Management. 14. E
xplain the historical evaluation of production function up to 21st century. 15.
What are the various decisions and their applications made by operations manager
in a POM system? 16. Briefly explain the importance of operations management in
the corporate management. 17. Explain the concept of productivity.
26
Operations Management
REFERENCES
1. Everett, E. Adam, Jr.Ronald J.Ebert, Production and Operations Management, Pr
entice-Hall of India Private Limited, 5th Edition, 1994. 2. R. Pannerselvam, Pro
duction and Operations Management, Prentice-Hall of India Private Limited, 9th p
rint, 2004. 3. Joseph, G. Monks, Theory and Problems of Operations Management, T
ata McGraw-Hill Publishing Company Limited, 2nd Edition, 2004. 4. Joseph, G. Mon
ks, Operations Management, McGraw-Hill International Edition, 3rd Edition. 5. S.
Anil Kumar, N. Suresh, Production and Operations Management, New Age Internatio
nal (P) Limited Publishers, 2nd Edition, 2008.
Operations Decision-Making
27
2
OPERATIONS DECISION-MAKING
CHAPTER OUTLINE
2.1 2.2 2.3 2.4 2.5 2.6 Introduction Management as a Science Characteristics of
Decisions Framework for Decision-Making Decision Methodology Decision Support Sy
stem 2.7 Economic Models 2.8 Statistical Models 2.9 Decision Tree • Exercise • Refer
ences
2.1
INTRODUCTION
Thousand of business decisions are made everyday. Not all the decisions will mak
e or break the organisation. But each one adds a measure of success or failure t
o the operations. Hence decisionmaking essentially involves choosing a particula
r course of action, after considering the possible alternatives. This chapter ex
amines management as a science and the characteristics of decisions. The use of
economic and statical models is discussed along with decision trees. 2.2 MANAGEM
ENT AS A SCIENCE
Management scientists hold that, education, scientific training and experience c
an improve a person’s ability to make decisions. Scientific decision-making rests
upon organized principles of knowledge and depends largely upon the collection o
f empirical data and analysis of the data in a way that repeatable results will
be obtained. The association of management with the scientific method involves d
rawing objective conclusions from the facts. Facts come from the analysis of dat
a, which must be gathered, compiled and digested into meaningful form, such as g
raphs and summary statistics. Computers are helpful in these tasks because they
can easily store data and us with the more sophisticated and statistical analysi
s. But not all variables are quantifiable, so decision-makers must still use som
e value-based judgments in a decision process. Thus management as a science is c
haracterised by Organised principle of knowledge.
28
Operations Management
Use of empirical data. Systematic analysis of data. Repeatable results. 2.3 CHAR
ACTERISTICS OF DECISIONS
Operations decision range from simple judgments to complex analyses, which also
involves judgment. Judgment typically incorporates basic knowledge, experience,
and common sense. They enable to blend objectives and sub-objective data to arri
ve at a choice. The appropriateness of a given type of analysis depends on The s
ignificant or long lasting decisions, The time availability and the cost of anal
ysis, and The degree of complexity of the decision. The significant or long last
ing decisions deserve more considerations than routine ones. Plant investment, w
hich is a long-range decision, may deserve more thorough analysis. The time avai
lability and the cost of analysis also influence the amount of analysis. The deg
ree of complexity of the decision increases when many variables are involved, va
riables are highly independent and the data describing the variables are uncerta
in. Business decision-makers have always had to work with incomplete and uncerta
in data. Fig. 2.1 below depicts the information environment of decisions. In som
e situations a decisionmaker has complete information about the decision variabl
es; at the other extremes, no information is available. Operations management de
cisions are made all along this continuum. Complete certainty in decision-making
requires data on all elements in the population. If such data are not available
, large samples lend more certainty than do small ones. Beyond this, subjective
information is likely to be better than no data at all.
Fig. 2.1 Information continuum
2.4
FRAMEWORK FOR DECISION-MAKING
An analytical and scientific framework for decision implies the following system
atic steps Defining the problem. Establish the decision criteria. Formulation of
a model. Generating alternatives .
Operations Decision-Making
29
Evaluation of the alternatives. Implementation and monitoring.
DEFINING THE PROBLEM
Defining the problem enables to identify the relevant variables and the cause of
the problem. Careful definition of the problem is crucial. Finding the root cau
se of a problem needs some questioning and detective work. If a problem defined
is too narrow, relevant variable may be omitted. If it is broader, many tangible
aspects may be included which leads to the complex relationships.
ESTABLISH THE DECISION CRITERIA
Establish the decision criterion is important because the criterion reflects the
goals and purpose of the work efforts. For many years profits served as a conve
nient and accepted goal for many organisations based on economic theory. Nowaday
s organisation will have multiple goals such as employee welfare, high productiv
ity, stability, market share, growth, industrial leadership and other social obj
ectives.
FORMULATION OF A MODEL
Formulation of a model lies at the heart of the scientific decision-making proce
ss. Model describes the essence of a problem or relationship by abstracting rele
vant variables from the real world situation. Models are used to simplify or app
roximate reality, so the relationships can be expressed in tangible form and stu
died in isolation. Modeling a decision situation usually requires both formulati
ng a model and collecting the relevant data to use in the model. Mathematical an
d statistical models are most useful models for understanding the complex busine
ss of the problem. Mathematical models can incorporate factor that cannot readil
y be visualized. With the aid of computers and simulation techniques, these quan
titative models reflexible.
GENERATING ALTERNATIVES
Alternatives are generated by varying the values of the parameters. Mathematical
and statistical models are particularly suitable for generating alternatives be
cause they can be easily modified. The model builder can experiment with a model
by substituting different values for controllable and uncontrollable variable.
EVALUATION OF THE ALTERNATIVES
Evaluation of the alternatives is relatively objective in an analytical decision
process because the criteria for evaluating the alternatives have been precisel
y defined. The best alternative is the one that most closely satisfies the crite
ria. Some models like LPP model automatically seek out a maximising or minimisin
g solution. In problems various heuristic and statical techniques can be used to
suggest the best course of action.
IMPLEMENTATION AND MONITORING
Implementation and monitoring are essential for completing the managerial action
. The best course of action or the solution to a problem determined through a mo
del is implemented in the business world. Other managers have to be convinced of
the merit of the solution. Then the follow-up procedures are required to ensure
about appropriate action taken. This includes an analysis and evaluation of the
solution along with the recommendations for changes or adjustments.
30
Operations Management
2.5
DECISION METHODOLOGY
The kind and amount of information available helps to determine which analytical
methods are most appropriate for modeling a given decision. Figure 2.2 illustra
tes some useful quantitative methods that are classified according to the amount
of certainty that exists with respect to the decision variables and possible ou
tcomes. These analytical techniques often serve as the basis for formulating mod
els, which help to reach operational decisions.
(All information)
Algebra: Break-even Benefit/cost Calculus Mathematical programming: Linear Non-l
inear Integer Dynamic Goal
(Some information)
Statistical analysis: Objective and subjective probabilities Estimation and test
s of hypothesis Bayesian statistics Decision theory Correlation and regression A
nalysis of variance Non-parametric methods Queuing theory Simulation Heuristic m
ethods Network analysis techniques: Decision trees PERT and CPM Utility theory
(No information)
Game theory Flip coin
Fig. 2.2 Quantitative methods as a function of degree of certainty
The degree of certainty is classified as complete certainty, risk and uncertaint
y and extreme uncertainty. 2.5.1 Complete Certainty Methods Under complete certa
inty conditions, all relevant information about the decision variables and outco
mes is known or assumed to be known. Following are some of the methods used: Alg
ebra: This basic mathematical logic is very useful for both certainty and uncert
ainty analysis. With valid assumptions, algebra provides deterministic solutions
such as break-even analysis and benefit cost analysis. Calculus: The branch of
mathematics provides a useful tool for determining optimal value where functions
such as inventory costs, are to be maximised or minimised. Mathematical program
ming: Programming techniques have found extensive applications in making a produ
ct mix decisions; minimising transportation costs, planning and scheduling produ
ction and other areas. 2.5.2 Risk and Uncertainty Methods In risk and uncertaint
y situations, information about the decision variables or the outcomes is probab
ilistic. Following are some of the useful approaches:
Operations Decision-Making
31
Statistical analysis: Objective and subjective probabilities with the use of pro
bability and probability distribution, Estimation and tests of hypothesis, Bayes
ian statistics, Decision theory, Correlation and regression technique for foreca
sting demand and Analysis of variance are some of the techniques used for decisi
on-making. Queuing theory: The analysis of queues in terms of waiting-time lengt
h and mean waiting time is useful in analysing service systems, maintenance acti
vities, and shop floor control activities. Simulation: Simulation duplicates the
essence of an activity. Computer simulations are valuable tools for the analysi
s of investment outcomes, production processes, scheduling and maintenance activ
ities. Heuristic methods: Heuristic methods involve set of rules, which facilita
te solutions of scheduling, layout and distribution problems when applied in a c
onsistent manner. Network analysis techniques: Network approaches include decisi
on trees, CPM and PERT methods. They are helpful in identifying alternative cour
se of action and controlling the project activities. Utility theory: Utility the
ory or preference theory allows decision-makers to incorporate their own experie
nce and values into a relatively formalized decision structure. 2.5.3 Extreme Un
certainty Methods Under extreme uncertainty, no information is available to asse
ss the likelihood of alternative outcomes. Following are some of strategies to s
olve this: Game theory: Game theory helps decision-makers to choose course of ac
tion when there is no information about what conditions will prevail. Coin flip:
Flipping a coin is sometimes used in situation where the decision-makers are wh
olly indifferent. 2.5.4 Decision-Making Under Uncertainty No information is avai
lable on how likely the various states of nature are under those conditions. Fou
r possible decision criteria are Maximin, Maximax, Laplace, and Minimax regret.
These approaches can be defined as follows: Maximin: Determine the worst possibl
e pay-off for each alternative, and choose the alternative that has the “best wors
t.” The Maximin approach is essentially a pessimistic one because it takes into ac
count only the worst possible outcome for each alternative. The actual outcome m
ay not be as bad as that, but this approach establishes a “guaranteed minimum.” Maxi
max: Determine the best possible pay-off, and choose the alternative with that p
ay-off. The Maximax approach is an optimistic, “go for it” strategy; it does not tak
e into account any pay-off other than the best. Laplace: Determine the average p
ay-off for each alternative, and choose the alternative with the best average. T
he Laplace approach treats the states of nature as equally likely. Minimax regre
t: Determine the worst regret for each alternative, and choose the alternative w
ith the “best worst.” This approach seeks to minimize the difference between the pay
-off that is realized and the best pay-off for each state of nature.
32
Operations Management
ILLUSTRATION 1: Referring to the pay-off table, determine which alternative woul
d be chosen under each of these strategies: (a) Maximin, (b) Maximax, and (c) La
place.
Possible future demand in Rs. Alternatives Small facility Medium facility Large
facility Low 10 7 (4) Moderate 10 12 2 High 10 12 16
SOLUTION (a) Using Maximin, the worst pay-offs for the alternatives are: Small f
acility: Rs.10 million Medium facility: 7 million Large facility: –4 million Hence
, since Rs.10 million is the best, choose to build the small facility using the
maximum strategy. (b) Using Maximax, the best pay-offs are: Small facility: Rs.1
0 million Medium facility: 12 million Large facility: 16 million The best overal
l pay-off is the Rs.16 million in the third row. Hence, the Maximax criterion le
ads to building a large facility. (c) For the Laplace criterion, first find the
row totals, and then divide each of those amounts by the number of states of nat
ure (three in this case). Thus, we have:
Raw total (Rs.Million) Small facility Medium facility Large facility 30 31 14 Ra
w average (Rs.Million) 10.00 10.33 4.67
Because the medium facility has the highest average, it would be chosen under th
e Laplace criterion. ILLUSTRATION 2: Determine which alternative would be chosen
using a Minimax regret approach to the capacity-planning programme.
Operations Decision-Making
33
SOLUTION: The first step in this approach is to prepare a table of opportunity l
osses, or regrets. To do this, subtract every pay-off in each column from the be
st pay-off in that column. For instance, in the first column, the best pay-off i
s 10, so each of the three numbers in that column must be subtracted from 10. Go
ing down the column, the regrets will be 10 – 10 = 0, 10 – 7 = 3, and 10 – (– 4) = 14. I
n the second column, the best pay-off is 12. Subtracting each pay-off from 12 yi
elds 2, 0, and 10. In the third column, 16 is the best pay-off. The regrets are
6, 4, and 0. These results are summarized in a regret table:
Regrets (in Rs. million) Alternative Small facility Medium facility Large facili
ty Low 0 3 14 Medium 2 0 10 High 6 4 0 Worst 6 4 14
The second step is to identify the worst regret for each alternative. For the fi
rst alternative, the worst is 6; for the second, the worst is 4; and for the thi
rd, the worst is 14. The best of these worst regrets would be chosen using Minim
ax regret. The lowest regret is 4, which is for a medium facility. Hence, that a
lternative would be chosen. 2.5.5 Decision-Making Under Risk Between the two ext
remes of certainty and uncertainty lies the case of risk: The probability of occ
urrence for each state of nature is known. (Note that because the states are mut
ually exclusive and collectively exhaustive, these probabilities must add to 1.0
0.) A widely used approach under such circumstances is the expected monetary val
ue criterion. The expected value is computed for each alternative, and the one w
ith the highest expected value is selected. The expected value is the sum of the
pay-offs for an alternative where each pay-off is weighted by the probability f
or the relevant state of nature. ILLUSTRATION 3: Determine the expected pay-off
of each alternative, and choose the alternative that has the best-expected pay-o
ff. Using the expected monetary value criterion, identify the best alternative f
or the previous pay-off table for these probabilities: low = 0.30, moderate = 0.
50, and high = 0.20. Find the expected value of each alternative by multiplying
the probability of occurrence.
Possible future demand in Rs. Alternatives Small facility Medium facility Large
facility Low 10 7 (4) Moderate 10 12 2 High 10 12 16
34
Operations Management
SOLUTION: For each state of nature by the pay-off for that state of nature and s
umming them: EVsmall = 0.30 (Rs.10) + 0.50 (Rs.10) + 0.20 (Rs.10) = Rs.10 EVmedi
um = 0.30 (Rs.7) + 0.50 (Rs.12) + 0.20 (Rs.12) = Rs.10.5 EVlarge = 0.30 (–4) + 0.5
0 (Rs.2) + 0.20 (Rs.16) = Rs. 3 Hence, choose the medium facility because it has
the highest expected value. ILLUSTRATION 4: Global Telecom Corp. must choose on
e of three partnering firms (X Co., Y Co., or Z Co.) with which to develop a per
sonal communicator. The possible states of nature are that future demand may be
low, medium, or high. Estimated dollar pay-offs (in net present value terms) for
each alternative under each state of nature are shown in the accompanying Table
. Which partnering firm should be chosen under the criterion of (a) maximax, (b)
Maximin, and (c) Laplace? SOLUTION (a) Maximax: Choose the alternative that off
ers the best possible (highest) pay-off. The highest pay-off is Rs.140 million w
ith Z Co. Therefore choose Z Co. (b) Maximin: For each alternative, locate the w
orst possible pay-off. Then choose the best of these “worst” values. The best of the
worst is X Co. with a minimum profit of Rs.10 million. (c) Laplace: Find the av
erage pay-off for each alternative, and choose the alternative with the best. Th
e highest average is Z Co. [(0 + 20 + 140)/3 = Rs.0.53.3 m]. Choose Z Co.
Pay-off Table Profit (Rs. million) If Future Demand Is Alternatives X Co. partne
r Y Co. partner Z Co. partner Low 10 –10 0 Medium 50 44 20 High 70 120 140
When probability values, P(X), are assigned to the states of nature of a pay-off
table, two additional decision criteria can be considered: maximum probability
and expected monetary value. The expected monetary value approach utilizes the h
ighest average, or expected value, E (X). E(X) = Σ [X.P(X)]. ILLU TRATION 5: For t
he data in illustration 8, assume probabilities of: P (low demand) = 0.3 P(mediu
m demand) = 0.5P (high demand) = 0.2 Which partnering firm should be chosen unde
r the criterion of (a) maximum probability and (b) Expected Monetary Value (EMY)
?
Operations Decision-Making
35

OLUTION (a) Maximum probability: Find the most likely state of nature, and choo
se the best alternative within that state. Most likely is [P(medium demand) = 0.
5]. Choose X Co., where pay-off is Rs.50 m. (b) Expected monetary value: For eac
h alternative, multiply the value of each possible outcome (X) by its probabilit
y of occurrence, P (X). Then sum across all outcomes, i.e., L [X. P(X)] to get t
he expected value, E(X), of each alternative. The alternative with the highest e
xpected outcome is designated the expected monetary value, EMV*. E(X Co.) = 10(0
.3) + 50(0.5) + 70(0.2) = 42 E(Y Co.) = –10(0.3) + 44(0.5) + 120(0.2)
  = 43 EMY*
 =
Rs. 43 m E(Z Co.) = 0(0.3) + 20(0.5) + 140(0.2) = 38 2.6 DECI ION UPPORT Y TEM

Decision support system (D ) is computer-based systems designed to aid decision
-makers of any stage of the decision process in the development of alternatives
and evaluation of possible course of action. Their purpose is to provide the inf
ormation and analytical support that enables managers to better control and guid
e the decision process. Emphasis is given for giving useful informationand appr
opriate quantitative models that support the manager’s skills. Thus, D are a log
ical extension of the managerial decision processes. This helps the managers to
learn better, how to apply data processing and modeling capabilities of computer
s to the analysis of ill-structured and value based decisions. 2.7 ECONOMIC MODE
L
Break-even Analysis is an economic model describing cost-price-volume relationsh
ips. It is a complete certainty type of model because costs and revenues are kno
wn quantities. 2.7.1 Break-even Analysis One of the techniques to study the tota
l cost, total revenue and output relationship is known as Break-even Analysis. ‘A
Break-even Analysis indicates at what level of output, cost and revenue are in e
quilibrium’. In other words, it determines the level of operations in an enterpris
e where the undertaking neither gains a profit nor incurs a loss.
    
NOTATION AND TERMINOLOGY A U ED IN BREAK-EVEN ANALY I
Break-even chart (BEC): It is a graph showing the variation in total costs at di
fferent levels of output (cost line) as well as the variation in the total reven
ues at various levels of output. Break-even point: It is that point of activity
(sales volume) where total revenues and total expenses are equal. It is point of
zero profit, i.e. stage of no profit and no loss. BEP can be used to study the
impact of variations in volume of sales and cost of production on profits. Angle
of incidence: It is an angle at which total revenue line intersects total cost
line. The magnitude, of this angle indicates the level of profit. Larger the ang
le of incidence, higher will be the profits per unit increase in sales and vice
versa.
36
Operations Management
Margin of safety: It is excess of budgeted or actual sales over the break-even s
ales volume i.e. margin of safety = (actual sales minus sales at BEP)/actual sal
es. A high margin of safety would mean that even with a lean period, where sales
go down, the company would not come in loss area. A small margin of safety mean
s a small reduction in sale would take company to cross BEP and come in red zone
.
CALCULATION OF BEP
Relationship between costs and activity level (AL) is also assumed to be linear.
For every elemental cost, actual cost figures at different activity levels are
plotted, and by ‘least square analysis’ a ‘line of best fit’ is obtained. This would giv
e a fixed cost component and a variable cost component for the elemental cost. T
his analysis is carried out for all elemental costs. The total cost function wou
ld give total fixed cost and total variable cost for the company. The Break-even
Point is that volume where the fixed and variable costs are covered. But no pro
fit exists. Thus at BEP, the total revenues equal to the total costs. If F – Fixed 
Costs, which are independent on quantity produced a – Variable Cost per unit b – e
lling Price per unit Q – Quantity (Volume of output) The total costs are given
 by
Total
 Cost (TC) = Fixed Cost + Variable
 Cost TC = (F + a⋅ Q) ales Revenue ( R) =
elling price per unit  Quantity R = b.Q The point of Intersection of Total Cost
line and the sales
 revenue is the
 Break-even Point i.e. at Break-even Point, To
tal Cost (TC) = ales Revenue ( R) F+a⋅Q = b⋅Q F = Q (b – a) Q =
F in units (b – a )
...(1)
In terms of the number of units sold the break-even point is given by :
QBEP =
 
F Unit (b – 1) Contribution ⋅ Margin ales. Revenue ales. Revenue – Total Variable  Cost
ales. Re venue
Profit
 volume ratio (PVR) is defined as the ratio between Contribution Margin an
d ales Revenue. i.e. Profit Volume Ratio (f) = =
Operations Decision-Making
37
Q (b – a ) b⋅Q b⋅Q From Equation 1, F = Q ⋅ (b – a), Hence Equation 2 can be written as Q ⋅
(b – a ) F φ = = b ⋅Q b⋅Q F i.e. b ⋅ Q = Q So BEP can also be given by F F = QBEP = PV ⋅ Ra
io φ φ =
=
(b ⋅ Q – a ⋅ Q )
(2)
(3)
Fig. 2.3
Margin o  sa ety (MOS) is de ined as the ratio between Operating Pro it and Cont
ribution Margin. It signi ies the ractional reduction in the current activity l
evel required to reach the breakeven point. Sales turnover (STO) is de ined as r
atio between Sales Revenue and the Capital Employed. It represents the number o 
times capital employed is turned over to reach the sales revenue level that is
called Operating management per ormance [OMP].
IMPROVING OMP
A company interested in improving its OMP will have to improve its operating pro
it. Following any o  the strategies given below or a combination o  them can do
this: (a) By reducing variable costs (b) By reducing ixed costs
38
Operations Management
(c) By increasing sales price (d) By increasing the activity level. (a) A reduct
ion in variable costs will bring down BEP, increase PV ratio and increase margin
o  sa ety. To achieve a required Targeted Pro it (Z), variable cost would have
to be controlled at V=SR – (F+Z )
Fig. 2.4
(b) A reductin in ixed costs will bring down BEP and increase margin o  sa ety.
It will have no e ect on PV ratio. To achieve a required TP by controlling ix
ed cost alone, the ixed cost would have to be controlled as F=(SR – V) – Z
Fig. 2.5
Operations Decision-Making
39
(c) An increase in selling price will bring BEP down, it will increase PV ratio
and it will also increase the margin o  sa ety. To get the targeted pro it level
the increase required in selling price is given by
(F + Z ) b ' = (b − a ) × b
Fig. 2.6
(d) An increase in activity level will of course have no effect on BEP, it will
not change PV ratio, but will increase the margin of safety. The new activity le
vel required to achieve the desired TP is given by
NewSR =
(F + Z )
PV Ratio
or
(F + Z ) ( SR – V )
× SR
If now is the existing activity level, the activity level required in terms of n
umber of units Nnew to achieve a targeted profit is given by
N New =
( F + Z ) or ( F + Z ) × N CM (SR – V ) New
With the help of this analysis, discreet decisions regarding control of variable
costs, fixed costs, fixing sales price and activity level can be taken to achie
ve the desired targeted profit. ILLUSTRATION 6: The owner of shop is contemplati
ng adding a new product, which will require additional monthly payment of Rs. 6,
000. Variable costs would be Rs. 2.00 per new product, and its selling price is
Rs. 7.00 each.
40
Operations Management
(a) How many new products must be sold in order to break even? (b) What would th
e profit (loss) be if 1,000 units were sold in a month? (c) How many units must
be sold to realize a profit of Rs.4,000? SOLUTION Fixed Cost (F) = Rs. 6,000, Va
riable Cost (a ) = Rs. 2 per unit, Sales Price (b) = Rs.7 per unit
6000 F = = 1200 units/month (b − a ) (7 − 2) (b) For Q = 1000, Operating Profit (Z)
= Q (b – a) – F = 1000 (7 – 2) – 6000 = Rs. (1000) (c) Operating Profit (Z) = Rs. 4000:
solve for Q
(a) QBEP =
Q =
(Z + F )
(b − a )
=
( 4000 + 6000 )
(7 − 2)
= 2000 units.
ILLUSTRATION 7: A manager has the option of purchasing one, two, or three machin
es. Fixed costs and potential volumes are as follows:
Number of machines 1 2 3 Total annual fixed costs (Rs.) 9600 15000 20000 Corresp
onding range of output 0 to 300 301 to 600 601 to 900
Variable cost is Rs.10 per unit, and revenue is Rs.40 per unit. (a) Determine th
e break even point for each range. (b) If projected annual demand is between 580
and 660 units, how many machines should the manager purchase? SOLUTION (a) Comp
ute the break even point for each range using the formula
QBEP =
F (b − a )
F 9600 = = 320 units (b − a ) (40 − 10) [Not in range, so there is no BEP] F 15000 =
= 500 units For two machines QBEP = (b − a ) (40 − 10) F 20000 = = 666.67 units For
three machines QBEP = (b − a ) (40 − 10)
For one machine
QBEP =
Operations Decision Making
41
(b) Comparing the projected range of demand to the two ranges for which a break 
even point occurs, we can see that the break even point is 500, which is in the
range 301 to 600. This means that even if demand were at the low end of the rang
e, it would be above the breakeven point and thus yield a profit. That is not tr
ue of range 601 to 900. At the top end of projected demand, the volume would sti
ll be less than the break even point for that range, so there would be no profit
. Hence, the manager should choose two machines. ILLUSTRATION 8: For an existing
product that sells for SP = Rs.650 per unit, FC = Rs.82,000 and VC = Rs. 240 pe
r unit. (a) What is the BEP? (b) What volume is needed to generate a profit of R
s.10,250? SOLUTION (a)
F 82000 = = 200units (b − a) (650 − 240) (b) The volume needed for a specific profit
can be computed as:
QBEP =
Z + F 10250 + 82000 = = 225 units b−a (650 − 240) Note: For volumes > BEP, all contr
ibution of (Rs.650 – 240 = Rs.410/unit) goes into profit. Thus the additional volu
me needed is Rs.10,250 ÷ Rs.410/unit = 25 units.
QBEP =
ILLUSTRATION 9: Process X has fixed costs of Rs. 20,000 per year and variable co
sts of Rs. 12 per unit, whereas process Y has fixed costs of Rs. 8,000 per year
and variable costs of Rs. 22 per unit. At what production quantity (Q) are the t
otal costs of X and Y equal? SOLUTION X Fx + Vx.Q Rs. 20,000 + Rs. 12Q Rs. 10Q Q
= = = = = Y F y + V y⋅ Q Rs. 8,000 + Rs. 22Q Rs. 12,000 1,200 units.
ILLUSTRATION 10: Cover-the-Globe Paint Co. produces 9,000 paint sprayers per yea
r and obtains Rs. 675, 000 revenue rom them. Fixed costs are Rs. 210,000 per ye
ar, and total costs are Rs. 354,000 per year. How much does each sprayer contrib
ute to ixed costs and pro it? SOLUTION Contribution Margin(CM) = SP – VC Where Wh
ere Sales  Price =
675000 Total Variable Cost = Rs. 75 per unit and VC = Quantity 9000 TVC = Total
Cost – Fixed Cost = Rs. 354,000 – Rs. 210,000 = Rs. 144,000
42
Operations Management
144000 = Rs. 16 per unit 9000 There ore, C = Rs. 75 – Rs.16 = Rs. 59/unit
= ILLUSTRATION 11: A irm has annual ixed costs o  Rs.3.2 million and variable
costs o  Rs.7 per unit. It is considering an additional investment o  Rs. 800,00
0, which will increase the ixed costs by Rs. 150,000 per year and will increase
the contribution by Rs. 2 per unit. No change is anticipated in the sales volum
e or the sales price o  Rs.15 per unit. What is the break-even quantity i  the n
ew investment is made? SOLUTION: The Rs. 2 increase in contribution will decreas
e variable cost to Rs.7 – Rs.2 = Rs. 5 per unit. The addition to ixed cost makes
them Rs. 3.2 million + Rs.150,000 = Rs. 3,350,000.
QBEP =
F 3350000 = = 335000 units. b − a (15 − 5)
ILLUSTRATION 12: A producer of air conditioners sells the industrial model for R
s. 175 each. The production costs at volumes of 2,000 and 4,000 units are as sho
wn in Table. The company does not know the fixed cost at zero volume and realize
s that some of its costs are “semivariable.” Nevertheless, it wishes to prepare a br
eak even chart and determine the BEP.
2,000 units Labour Materials Overhead Selling and administrative Depreciation an
d other FC Total Rs. 40,000 90,000 70,000 80,000 70,000 Rs. 350,000 4,000 units
Rs. 80,000 180,000 80,000 90,000 70,000 Rs. 500,000
SOLUTION: This is a more realistic situation, because the fixed cost and variabl
e cost are determined from actual production volumes. Plot the total cost at bot
h volumes as seen in Fig. 2.7. The slope of the total cost line (∆Y / ∆X) is the est
imated variable cost per unit.
Variable Cost (a ) =
500000 − 350000 Change in Cost = = Rs.75 unit 4000 − 2000 Changein Units
By subtracting 2,000 units of variable cost from the total cost at 2,000 units,
we can evaluate the implied fixed costs as follows: FC = total cost @ 2,000 volu
me – (2,000 units) (variable cost/unit) = Rs. 350,000 – 2,000 units (Rs.75 unit) = R
s. 200,000.
Operations Decision Making
43
Therefore,
BEP =
2,00,000 Fixed Cost = = 1000 units (175 – 75) Contribution per Unit
5,00,000 3,50,000 BEP
Costs 0
1000
2000
3000
4000
Quantity
Fig. 2.7
ILLUSTRATION 13: A professional sports promoter leases a 40,000 seat stadium for
soccer games. Tickets sell for an average of Rs.14 each. If fixed costs per sea
son (four games) are Rs.1720,000 and variable costs are Rs. 2 per spectator, wha
t is the break even point in number of seats filled per game? SOLUTION
QBEP = QBEP = F 720000 = = 60000 seats/season b−a (14 − 2)
60000 seats =15000 seats/games 4 games
2.8
STATISTICAL MODELS
Most business decisions are made with only limited or incomplete information. St
atistical theory can help to control error associated with the amount of data us
ed in the decision process. Decision makers utilize probabilities, which are the
most basic measures of uncertainty. Probabilities attach a quantitative value (
between 0 and 1) to the occurrence of an event. Events are called independent if
the occurrence of one in no way affects any other one. Mutually exclusive event
s automatically preclude each other, such as classifying an item as good or defe
ctive. Following are the rules for applying probabilities.
44
Operations Management
Complement P(A) = 1 – P( A ) Multiplication P (A and B) = P(A) P(B/A) = P(A) ⋅ P(B)
(i  independent) Addition P (A or B) = P(A) + P(B) (i  mutually exclusive) Bayes’
rule P (A/B) =
P ( A and B ) P ( A) P ( B / A) = P( B) P ( A) P ( B / A) + P ( A ) P ( B / A )
There are three types of probabilities. Namely classical, empirical, and subject
ive probabilities. (a) Classical probabilities are based upon equally likely out
comes that can be calculated prior to an event on the basis of mathematical logi
c. (b) Empirical probabilities are based upon observed data and express the rela
tive frequency of an event in the long run. (c) Subjective probabilities are bas
ed upon personal experience or judgment and are sometimes used to analyse one ti
me occurrences. ILLUSTRATION 14: Market research data on a company’s product has s
hown that during the first 3 years of use, 10 per cent of the products had a mec
hanical difficulty and 40 per cent had an electrical problem. The probability of
an electrical problem, given some mechanical difficulty, is 0.6. What is the pr
obability that a product will have either a mechanical difficulty or an electric
al problem, or both? SOLUTION Probability of Mechanical defect is P (M) = 0.10 P
robability of Electrical defect is P (E) = 0.40 Probability of an electrical pro
blem, with mechanical defect P(E/M) = 0.60 Probability that a product will have
either a mechanical difficulty or an electrical problem is given by P (M or E) =
P (M) + p (E) – P (M and E) Where P (M and E) = P (M) P (E/M) = (0.10)(0.60) = 0.
06 P (M or E) = 0.10 + 0.40 – 0.06 = 0.44. ILLUSTRATION 15: Three molding machines
(X, Y and Z) are used to produce 600 computer terminal keys that are rushed (wi
thout inspection) to a customer. The number of good (G) and defective (0) keys f
rom each machine is as shown in Table.
Machine X Good (G) Not good (G) Total 45 5 50 Machine Y 225 25 250 Machine Z 270
30 300 Row total 540 60 600
When customer receives the keys, they are randomly selected for installation at
the probability that a key selected (a) is defective, (b) was produced by machin
e Z and good, (c) was either produced by machine Z or is good? (d) Is the probab
ility of selecting a good key independent of the machine from which the key was
made?
Operations Decision Making
45
SOLUTION: Given the data, we can estimate the empirical probabilities as follows
:
P (G ) = P(Z ) = Number of good 540 = = 0.900 Total number keys 600
Number from Z 300 = = 0.500 Total number keys 600 P(G l Z), which is read “Good, g
iven it is from Z,” is found as follows: Number from Z that are good 270 = = 0.900
P (G / Z ) = Total number from Z 300 Now, using the rules of probability we hav
e: (a) P (G) =1– P (g) =1 – 0.90 = 0.10 (b) P (Z and G)=P (Z) P (G/Z) = (0.50)(0.90)
= 0.45 (c) P (Z or G) = P (Z) + P (G) – P (Z and G) = 0.50 + 0.90 – 0.45 = 0.95 (d)
The P (G) does not depend on whether the key is from machine X, Y, or Z: P (G)
= P (G/X) = P (G/Y) = P (G/Z) = 540/600 = 225/250 = 0.90
2.8.1 Equations for Discrete and Continuous Data Frequency data that are grouped
into classes and used to express probabilities are either discrete or continuou
s. Discrete data stem from countable populations and are often expressed in term
s of proportions (p’s). Continuous data are obtained from measurable populations a
nd are often classified as variables data (designated x). Discrete probabilities
result from summations (Σ) of individual event probabilities, whereas continuous
probabilities are obtained from an integration
( ∫ ) of the
area under a continuous probability function. The distinction between discrete a
nd continuous distributions is important because it affects the sample sizes and
the risks of error associated with work sampling,
 quality control, and other pr
oductive activities. Following table give the ummary of the statistical equatio
ns used for computing measures of central value and dispersion for populations,
samples, and sampling distributions. 
Discrete
 (countable: attributes data) Population Central value tandard deviatio
n ample Central value Proportion p Mean X Proportion π
δ= π(1 − π ) δ=

Continuous (measurable: variables ata)
Mean µ
∑ ( X − X )2
N

cont .
46
S = q
Oerations Management
  
Stan ar eviation
S=
∑ ( X − X )2
n −1

Where q = 1 –  Samling istribution Central value Average roortion 
 
S = q n
Mean of Mean X
 
Stan ar error
SX =
S n

ILLUSTRATION
 16: In 400 observations of a comuteroerator, an analyst
 foun hi
m i le 32 times. Fin (a) the samle roortion an (b) the stan ar error of r
oortion.
 SOLUTION (a)
no.i le 32 = = 0.08 = P total no. 400
(b)
S =
q (0.08)(0.92) = = 0.014 . n 400
 
ILLUSTRATION
 17: In astu y to fin the time to service
 customers,
 a bank teller
worke 60minutes an serve 36 customers. A recor of the in ivi ual service t
imes showe Σ (X – X)2 = (0.79 minutes)2. Find (a) the sample
 mean time and (b) the
standard
  error of the mean. (a) (b) Therefore, 2.9 DECI ION TREE Mean X =
X = X =
60
 = 1.67 min/customer 36
n n

where =
= 0.15 36
∑ ( X − X )2
n −1
=
79 = 0.15 min 36 − 1
= 0.025 min .

A ecision tree isa schematic reresentation of the alternatives available to a
ecision maker an their ossible
 consequences. The term gets its name from
 the
tree like aearance of the iagram (see Figure 2.8 below). Although tree iagr
ams can be use in lace of a ay off table, 
 they are articularly
 useful for an
alyzing situations that involve sequential ecisions. A ecision tree is comose
 
of a number of
 noes that  have branches emanating from them (see Figure 2.8 be
low). Square no es enote ecision oints, an circular noes enote chance even
 
ts. Rea the tree from left to right. Branches
 leaving square no es reresent al
ternatives; branches leaving circular no es reresent chance events (i.e., the 
ossible states of nature).
Oerations Decision Making
47
 
After the tree hasbeen rawn, it is analyze  from rightto left; that is, start
ing with the last ecision  that might be ma e. For each ecision, choose the alt
ernative thatwill yiel the greatest return (or the lowest cost). If chance  eve
nts follow a ecision, choosethe alternative that has the highest execte mone
tary value (or lowest execte cost).

Fig. 2.8 A schematic reresentation of the available alternatives an their oss
ible consequences
   
ILLUSTRATION 18: A managermust eci e on the size of a vi eo arca e to construc
t. The manager  hasnarrowe the  choices
 to two: large or small. Information
 has
been
 collecte on ay
  offs, an a ecision tree has been constructe
 . Analyze th
e ecisiontree an etermine  which initial alternative
 (buil small or buil la
rge) shoul be chosen in or er to maximize execte monetary value. SOLUTION:  An
alyze the ecisions from right to  left: 1. Determine which alternative woul be

selecte for each ossible secon  ecision. For a small facility
 with high eman
an. Because exan
 , there are three choices: o nothing,
 work overtime,
 an ex 
has the highest ayoff, you woul choose it. In icate this by lacing a ouble
slash through
  each of the other alternatives.  Similarly,
  for a large facility  w
ith low eman , there are two choices: o nothing an re uce rices.  You woul c
hoose reuce rices because it has the higher execte  value, so a ouble slash
is lace
 on the other branch. 2. Determine the ro uct of the chance 
robabilit

 
iesan their res ective ay offs  for  the remaining branches:  Buil small  Low  e
man 0.4 (Rs.40) = Rs.16:  High eman 0.6(Rs. 55) = 33 Buil large Low eman 0.
4 (Rs.50) = 20: High eman 0.6 (Rs.70) = 42 3. Determine the execte value of
 
each initial alternative: Buil small Rs. 16 + Rs. 33 = Rs. 49 Buil large Rs. 2
0 + Rs. 42 = Rs. 62
48
Oerations Management
 
Hence, the choice shoul be to buil the large facility because it has a larger

ex ecte value than the small facility.

Fig. 2.9 Decision tree iagram

ILLUSTRATION 19: A manufacturer of small ower  tools is face with foreign com
 e
tition, which necessitates that it either mo ify 
  (automate) its existing ro uct
or aban on it an market a new ro uct. Regar less of which course of action it
follows, it will have the oortunity to ro or raise rices if it exeriences
   
a low initial eman . Pay off an robability values associate  with the altern
 
ative courses of action are shown in Fig. 2.10. Analyze the ecision tree,  an

etermine which course of action shoul be chosen to maximize the ex ecte moneta
ry value. (Assume monetary amounts are resentvalue rofits.)
 SOLUTION: Analyze
the tree from right to left by calculating the execte values forall ossible
courses of actionan choosing
 the branch with the highest execte value. Begin
with the to (mo ify ro uct) branch. At chance event 2 Dro rice branch: E(X)
 
= Rs. 20,000(0.2) + Rs.150,000(0.8) = Rs.124,000 Raise rice branch: E(X) = Rs.

40,000(0.9) + Rs. 200,000(0.1) = Rs.56,000 Therefore, choose to ro rice an
use Rs.124,000
 as the value of this branch
 at Decision
 2. Note: The Rs.124,000 i
s an execte monetary value (EMV) an can be entere above the square box un er
Decision 2. Place slash marks through the other (non usable) alternative.
Oerations Decision Making
49
Rs. 124, 000 (0.3) = Rs. 37,200 400,000 (0.7) = Rs. 280, 000 E (X) = Rs. 317, 20
0 Therefore, use Rs. 317,200 as the value of this branch at Decision 1. Similarl
y,for the bottom (new ro uct) branch, the values are Rs. 86,000 at Decision 2
an [Rs. 86,000 (0.5) + Rs. 600,000 (0.5)
 ] Rs. 343,000
 at Decision
 1. The new 
ro uct branch thus has a higher 
 ex ecte value an is selecte as the best cours
e of action un er the execte value criteria.
   
At chance event 1 If low eman : If high eman :

Fig. 2.10 Decision tree iagram
EXERCISE 
 
1. 2. 3. 4. 5. 6. 7. 8. 9. List the ste s in a systematic ecision making roces
s. I entify some major a vantages of using mo els. Whatty es of mo els are most

 for o erations management ecision making? How o the characteristics
useful  of
the ecision situation affect the choice of a technique to  use in ecision anal
ysis? What factors contribute most to the comlexity of a ecision situation? Wh
 even analysis? What is contribution? What is
atis break  a ecision tree? What k
in s of ecision situations are articularly well suite to analysis by the use
of ecision analysis?
50
Oerations Management

10. Distinguish between (a) classical, (b) emirical, an (c) subjective robabi
 
lities. 11. Ex lain the two conce ts un erlying statistical inference of (a) sam
ling istribution an (b) the central limit theorem. 12. What is the ifference
    
between the stan ar error of roortion
 an stan ar error of mean? 13. Ten ob
servations taken of the time require
 to assemble a sofa frame in a furniture l
ant
 were asshown
 below (min). Fin the (a) mean time, (b) stan ar eviation, a
n (c) stan ar error of the mean.
Observation (X – X) (X – X) 2 4.7 – 0.3 0.09 4.2 – 0.8 0.64 5.1 0.1 0.01 4.8 –0.2 0.04 5.5
0.5 0.25 5.4 0.4 0.16 5.8 0.8 0.64 4.8 – 0.2 5.0 0.0 4.7 –0.3 1.96 50.0
0.04 0.00 0.09
 
14. Fixe costs are Rs. 40,000 er year, 
 variable costs are Rs. 50 er unit, an
the selling 
 rice is Rs. 90 each. Fin the BEP.  [Ans. 1,000 units] 15. Flori a
Citrus ro uce 40,000 boxes of fruit that sol for Rs. 3 er box. The total var
iable costs for the 40,000 boxes were Rs. 60,000, an the fixe costs were Rs.75
,000.
 (a) What was the break even quantity? (b) How much rofit (or loss) result
e ? [Ans. (a) 50,000 boxes an (b) Rs.15, 000loss] 16. A travel agencyhas an e
xcursion ackage that sells for Rs. 125. Fixe costs are Rs. 80,000; an at the
resent volume of 1,000 customers, variable costs are Rs. 25,000 an rofits are
 
Rs. 20,000. (a) What is the break  even oint volume? (b) Assumingthat fixe co
sts remain constant, how many a itional customers will be require for the agen
cy to increase rofit by Rs.1000?  [Ans. (a) 800 units (b) 10 customers] 17. Last 
year, Dever Furniture Co. ro uce 200 male ressers (attern 427) that  sol f
or Rs. 210 each. The comany inclu  e labour  costs of Rs. 42 er unit an
 materi
al costs of Rs.18  er unit, an it allocate Rs. 80  er unit of overhea costs t
   er cent fixe an
o
 each resser. Cost recor s reveal that overhea costs are 60
40 er cent variable. What was the total annual contribution from attern 427?
[Ans. Rs.118 er unit, or Rs. 23, 600 total] 18. Given the ay off table below
showing the rofit (resent value Rs.in lakhs), a firm mightexectin a foreign
country for three alternative factory investments   (X, Y, an Z) un er ifferent
levels of inflation. Economists have assigne robabilities
 of 0.2, 0.3,
 0.4, a
n 0.1to the ossible inflation levels A, B, C an D, resectively. Fin the r
eferre investment
 alternative using  criteria of(a) Maximax, (b) Maximin, (c) L
alace, ( )Maximum robability, an (e) Execte monetary value. Finally, (f) u
se your “ju gment.”  
State of nature: Amount of inflation A = 2% Buil factory X Buil factory Y Leas

e lant Z 10 40 10 B = 5% 30 50 40 C =10% 50 60 80 D =15% 120 70 10
  
19. Frozen Pizza Co. isconsi ering whether it shoul allocate fun s for researc

h on an instant freeze  ry rocess for home use. If the research is successful (
an the R&D manager 
  feels there is a 75 er cent chance it will be), the firm co
ul market the ro uct at a Rs.4 million rofit. However, if the research
Oerations Decision Making
51
 
is unsuccessful, the, firm will
 incur a Rs.6 million loss. What is the ex ecte

monetary value (EMV) of rocee ing with the research?[Ans. Rs.1.5 million] 20.
Theoerations manager of a large
 air

 ort is concerne with the
roblem of havin
  

g a equate ersonnel to offer in ivi 
 ual assistance to han ica e assengers u
ring rush hours.
 Data were
 collecte onthe number of requests for assistance u
ring 20 ran omly selecte rush hours an reveale the information shown in Table
.
Hour no. No. of requests Hour no. No. of requests 1 40 11 49 2 42 12 47 3 42 13
34 4 30 14 57 5 38 15 42 6 48 16 52 7 42 17 56 8 44 18 44 9 37 19 50 10 38 20 48
    
Determine (a) Mean, (b) Stan ar Deviation, an (c) Stan ar Error of the mean.
 
Ans. (a) 44 requests er hour (b) 7 requests er hour (c) 1.57
REFERENCES 
1. Joseh, G. Monks, Theory an Problems
  of Oerations Management, Tata McGraw H

ill Publishing Com any Limite , 2n E ition, h, G. Monks, Oeratio
 2004. 2. Jose

ns Management,McGraw Hill
 International E ition, 3r E ition. 3. S.Anil Kumar,
N.
 Suresh, Pro uction
  an O erations Management, New Age International (P) Limit
e Publishers, 2n E ition, 2008.
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Systems Design an Caacity
53
3
SYSTEMS DESIGN AND CAPACITY
CHAPTER OUTLINE   
3.1 3.2 3.3 3.4 Intro uction Manufacturing an Service Systems Design an System
   
s Ca acity Ca acity Planning 3.5 Process of Ca acity Planning 3.6 Im ortance of
Caacity Decisions • Exercise • References
3.1
INTRODUCTION
  
Before ro ucts can flow into a market, someone must esign an invest in the fa
cilities an organisation  This cha ter concerns the lanning of

  to ro uce  them.
the systems
 nee e to ro uce goo s an services. Caacity

 Planning
 for manufac
turing an service  systems are ifferent. Both must
 be esigne with caacity li
mitations in min . The a roaches for long term an short term ca acity lanning
 
will hel the managers to make best use of resources. 3.2 MANUFACTURING AND SER
VICE SYSTEMS
 
Manufacturing an service  systems
 are arrangements
 offacilities,
 equiment, an
eole to ro uce goo s an services un er controlle con itions. Manufacturing
      
systems ro uce stan ar ize  ro ucts in large volumes. This lant an machiner
yhave a finite  
   ca acity an contribute  fixe costs that must be borne by the r
o ucts ro uce . Variable costs are a e as labour is em loye to combine or r
ocess the raw materials an other com onents. Value aition will takes lace u
 
ring the ro uction rocess for the ro uct. The cost of outut relative  to the
cost of inut can be measure , as the actual cost is known i.e. ro uctivity is
measurable quantity.
 Service systems resent   more  uncertainty
 with resect to bo
th ca acity an costs. Services are ro uce an consume in the resence of the
 

customer
 an there is little or no oortunity to store value, as in a finishe
goo s inventory.
 As a result caacity of service systems like hositals,  restau
rants an many  other
 services
 must be sufficiently flexible to accommo
  ate a hig
hly variable eman . In a ition, many services  such as legal an me ical involv
 
esrofessional or intellectual
 services ju gments that  are not easily stan ar i
ze . This makes more ifficult to accumulate costs an measure the ro uctivity 
of the services.
54
Oerations Management
3.3
DESIGN AND SYSTEMS CAPACITY
  lanning for the inuts, transformation activ
Pro uction
 systems esign involves

ities, an out uts of a ro uction oeration.
 


Design lays a major
 role
 because
they entail significant investment of fun s an establish cost an ro uctivity
atterns that continue in future. The caacity of the manufacturing unit can be
 
exresse in number of units   
 of out ut er erio . In some situations
 measuring
ca acity is more com licate when they manufacture multile ro ucts. In such si
 
tuations, the caacity is exresse as man hours or machine hours. The relations
hi between caacity an outut is shown in the Figure 3.1.

Fig. 3.1 Caacity an outut relationshi
DESIGN CAPACITY  
Designe
 caacity of 
 a facility is the lanne or engineere  rate of outut of g
oo s or services le, t
  un er normal or full 
scale o erating con itions.
  For exam
he esigne ca acity of the cement lant is 100 TPD (Tonnes er ay). Ca acity o
f the sugarfactory
 is 150 tonnes of sugarcane crushing er ay. The uncertainty
of future eman is one    
 of themost er lexing roblems face by new facility
lanners. Organisation
  oes not lan for enough  regular
 ca
 acity to satisfy all t
heir imme iate eman s. Design for a minimum eman woul   result in high utilisa
tion of facilitiesbut results in inferior  service an issatisfaction of custom
ers because of ina equate caacity. The esign caacity shoul reflect managemen

t’s strategy for meeting the eman . The best aroach is to lan for some in betw
een level of caacity. System/effective

 
 ca acity: System ca acity is the  maximum
 
out ut of the s ecific  ro uct or  ro uct mix the system of workers an machine
  
s is caable of ro ucing as an integrate whole. System caacity is less  than
esign caacity or at the most equal 
 it because of the limitation of ro uct mix,

quality s ecification, an break owns. The actual  is even less because of many
factors affecting the outut such as actual eman , owntime ue to machine/equi
ment failure, unauthorize absenteeism. The system caacity is less than esign
caacity
 because of long range uncontrollable factors.

 The actualout ut is sti
ll re uce because of short term effects such as break own of equi ment,

Systems Design an Caacity
55
 
inefficiency
 of labour. The system efficiency
 is ex resse as ratio of actual me
asure out  
 ut to the system ca acity. These ifferent measures of ca acity are u
seful in efining two measures of system effectiveness: efficiency an utilizati
on. Efficiency is the ratio of actual
 outut to effective caacity. Utilization
is the ratio of actual out ut to esign caacity. Efficiency = Utilization =


Actual outut Effective caacity


Actual outut Design caacity It is common for managers to focus  exclusively on
efficiency, but in many instances, thisemhasis  can be mislea ing. This haens
when effective caacity is lowcomare with esign caacity. In those cases,  h
igh efficiency woul seem to in icate effective use of resources when it oes no
t.
3.4 CAPACITY PLANNING

Design of the ro uction  
 system involves lanning for the in uts, conversion
ro
 
cess an out uts of ro uction o eration. The effective management of ca acity i 
s the most imortant resonsibility of ro uction management. The objective of c
aacity management (i.e. lanning  an control of caacity) is to match the level

of o erations to the level of eman . Ca acity lanning is to be carrie out ke
  
eing in min future growth an exansion lans, market tren s, sales forecastin
g, etc. It is asimle task to lan the ca acity in case of stable eman. But i
  
n ractice the  eman will be sel om stable. The fluctuation of eman  creates


roblems 
 regar ing the rocurement of resources to meet the customer eman . Ca a
city ecisions are strategic in nature. Caacity is the rate of ro uctive caab
ility of a facility.
 Caacity is usually exresse  as volume of outut er erio
of time. Pro uction managers are more concerne 
about the ca acity for
  the  fol
lowing reasons: Sufficient caacity is require to meet the customers eman in
time.  the cost efficiency of oerations. Caacity affects the s
 Ca acity affects 
che uling system. Ca acity creation requires  an investment.
 Caacity lanning
 is
the first ste when an organisation eci es to ro uce more or new ro ucts. 3.
 
5 PROCESS OF CAPACITY PLANNING
  
Caacity lanning is concerne with efining the long term an the short term ca
acity nees of an organisation an etermining how those nees will be satisfie
 lanning ecisions are taken base uon the consumer eman an this
. Caacity
 
is merge with the human, material an financial resources of the organisation.

Ca acity requirements can be evaluate from two ersectives—long term caacity s

trategies an short term caacity strategies.  1. Long term caacity strategies:

 term
Long  caacity requirements are more ifficult to etermine because the futu
re eman an technology are uncertain. Forecasting for five or ten years
56
Oerations Management
    
into the future is more risky an ifficult. Even sometimes comany’s to ay’s   ro uc
Long range 
ts may not be existing in the  future.
 ca acity requirements are e en
ment an life cycle of the rouct. Long
ent on marketing lans, ro uct evelo  
term caacity lanning is concerne with accommo ating major changes that affec

toverall level of the out ut in long term. Marketing environmental assessment a
n imlementing the long term caacity lans in a systematic manner are the majo
r resonsibilities of management. Following arameters will affect long range ca
acity ecisions. Multile roucts: Comany’s rouce more than one rouct using

the same facilities in or er to increase the rofit. The manufacturing of multi
le roucts will reuce the risk of failure. Having more than on rouct hels
 roucts are in ifferent stag
the caacity lanners to o a better job. Because 
es of their life cycles, it is easy to sche ule themto get maximum  caacity uti

lisation. Phasingin ca acity: In high technology in ustries, an in in ustries
where technology eveloments are very fast, the rate of obsolescence is high. T
he ro ucts shoul be brought  into the market quickly. The time  to construct the
facilities
  will be long an there is no much time, as the ro ucts shoul be in
tro uce into the market quickly. Here the solution is hase in caacity on mou
    
lar basis. Some  commitment is ma e for buil ing fun s an men towar s facilities
over a erio of 3 5 years. This is an effective way of caitalizing on technol
ogical breakthrough. Phasing out ca 
  acity: The out ate manufacturing facilities
act of closures is not lim
cause
 excessive  lant closures an  own time. The im 
ite to only fixe costs of lant an machinery. Thus, the hasing out here is
one with humanistic way without affecting the community. The hasing out otions
makes alternative arrangements for men like shifting them to other jobs or to o
ther locations, comensating the emloyees, 

etc. 2. Short term ca acity strategi
es: Managers often use forecasts 
of ro uct eman to estimate the short term wo
 
rkloa the facility must hanle. Managerslooking ahea u to 12 months, antici
ate outut requirements for ifferent ro ucts, an services.  Managers then com
are requirements with existing 
   ca acity an then take ecisions as to when the c
erios of u to one year, funam
aacity a justments are  nee e . For short term 

ental ca acity is fixe . Major  facilities will not bechange . Many short term a
justments for  increasing
 or ecreasing ca acity are ossible. The a justments t
o be require een uon the conversionrocess like whether  it is caital inte
nsive or labour intensive  Caital
   or whether
ro uct can be store as
  inventory.

intensive rocesses e en on hysical facilities, lant an equi ment. Short t
erm caacity can be mo ifie by oerating these facilities more or less intensiv
rocesses short term caacity can be change
ely than normal. In labourintensive 
by laying off or hiring eole or  by giving overtime toworkers. The strategie 
s for changing caacity also een uon how long the ro uct can be store as i

  The short term ca acity strategies
nventory.  are:
 1. Inventories: Stock finishe
eak erio. 2. Backlog: D
goo s uring slack  erio s to meet the eman uring   
uring eak erio  s, the willing  customers
   are requeste to wait an their or ers
are fulfille 
after a eak eman erio . 3. Em loyment  level (hiring or firing
 loyees uring eak eman erio an layoff emloyees as 
): Hire
  a itional em
eman ecreases.

Systems Design an Caacity
57
4. Emloyee training: Develo  multi skille emloyees through training so that t
  
hey can be rotate among ifferent jobs. The multi skilling hel  s as an alternat
ive to hiring em loyees. 5. Subcontracting: During eak erio s,hire the caaci
  
tyof other firms temorarily to make   
 the com onent arts or ro ucts. 6. Proces
s esign: Change job contents by re esigning the job. 3.6 IMPORTANCE OF CAPACITY
DECISIONS 1. Caacity ecisions  havea real imact on the ability of the organi
sation to meet future eman s for ro ucts an services; caacity essentially li
mits the rate of outut ossible. Having caacity to satisfy eman can allow a
 
comany to take a vantage  of tremen ous o  ortunities.
 2. Caacity ecisions aff
 
ect o erating costs. I eally, ca acity an eman requirements will be matche ,
which  
 will ten to minimize
  o erating  costs. In ractice, this is not always ach
ecte eman or tens to vary
ieve because actual eman either iffers  from ex 
(e.g., cyclically). Insuch  cases, a ecision might be ma e to attemt to balan
 
ce the costs of over an un er ca acity. 3. Ca acity is usually amajor etermin
ant of initial cost. Tyically,  the greater the caacity of a ro uctive unit, t
he greater its cost. This oes not necessarily imly a one for one relationshi;
  
larger units ten to cost ro ortionately less than smallerunits. 4. Ca acity
ecisions often involve  long term commitment of resources an the  fact that, onc
e they are imlemente , it may be ifficult or imossible to mo ify those ecisi
ons without incurring major costs. 5. Caacity ecisions 
 can affect com etitiven

ess. If a firm has excess ca acity, or can quickly a ca acity, that fact may s
erve as a barrier to entry by other firms. Then too, caacity can affect eliver
 
y see , which can be a cometitive a vantage. 6. Caacity affects the ease of m
anagement; having
 aroriate caacity makes management easier than when caacit
y is mismatche
 . ILLUSTRATION 1: Given the information below, comute the effici
ency an the   caacity = 50
  utilization ofthe vehicle re airDe artment: Design 
trucks er ay Effective ca acity = 40 trucks er ay Actual out ut = 36 trucks
er ay SOLUTION Efficiency = Utilisation =
 er ay Act
Actual outut 36 trucks er ay = = 90% Effective caacity 40 trucks

ual outut 36 trucks er ay = = 72% Design caacity 50 trucks er ay

ILLUSTRATION
 2: The esign caacity for engine reair in our

 com any is 80truck

s er ay. The effective  
ca acity is 40 engines er ay an the actual out ut is

36 engines er ay. Calculate the utilization
 an efficiency of the oeration.

If the efficiency for next month is ex ecte to be 82%, what is the execte out

ut?
58
Oerations Management
SOLUTION Utilization =
Actual outut 36 = = 45% Design caacity 40 Actual outut 36 = = 90% 40 Effectiv
e caacity
Efficiency =

Execte outut = (Effective caacity)(Efficiency)
 = (40)(0.82) = 32.8 engines 
er ay ILLUSTRATION
 3: Given: F = Fixe Cost = Rs. 1000, V = Variable cost = Rs.
2 er unit an P = Selling rice = Rs. 4 er unit, Fin the break even oint in
Rs. an in units. Develo the break even chart. SOLUTION
F 1000 1000 = = = $2,000 V 2 0.5 1− 1− P 4 F 1000 = = 500 Break even oint( x ) = BE
P( x ) = P −V 4 − 2 Break even oint($) = BEP($) =
Fig. 3.2

ILLUSTRATION 4: Jack’s Grocery is manufacturing a “store bran ” item that has
 a variab
le cost of Rs. 0.75 er unit an a selling rice of Rs. 1.25 er unit. Fixe cos
ts are Rs. 12,000. Current volume is 50,000 units. The Grocery can substantially
imrove the rouct quality by aing a new iece of equiment at an aitional
 
fixe cost of Rs. 5,000. Variable cost
 woul increase to Rs. 1.00,  but theirvo
lume shoul increase to 70,000 units ue to the higher quality ro uct. Shoul t
he comany buy the new equiment? What are the break even oints (Rs. an units)
for the two rocesses? Develo a break even chart.

Systems Design an Caacity
59
SOLUTION Profit = TR – TC Otion A: Current
 Equiment BEP Sales in value (Rs.) BEP
Sales in Quantity (Units) O tion B: A ing New Equiment BEP Sales in value (Rs

.) BEP Sales in Quantity (Units) Profit = 50000 * (1.25 – 0.75) –12000 = Rs.13000. O
tion B: A equiment: Profit = 70000 * (1.25 – 1.00) – 17000 = Rs.500. Therefore,

the comany shoul continue as is with the resent equiment as this returns a h
igher rofit. Using current equiment:


BEP(sales is value) =
F 12, 000 12, 000 12,000 = = = = Rs. 30,000 0.75 1 − 0.60 V 0.40 1− 1− 1.25 P
BEP(is
 quality) =
A ing a new equiment:
F 12, 000 = = 24, 000 units P − V 1.25 − 0.75
BEP (sales is value) =
F 17,000 17,000 17,000 = = = = Rs. 85,000. 1.00 1 − 0.80 V 0.2 1− 1− 1.25 P F 17,000 1
7,000 = = = 68,000 units BEP(is quality) = P − V 1.25 − 1.00 0.25
Fig. 3.3
60
Oerations Management
EXERCISE 
  caacity an
1. What is meant by ‘ hasing in’ ca acity? 2. Distinguish  between esign

system ca
 acity.
 3. How the following organizations a just to the aily fluctu
ations in eman ? (a) Airlines, (b) Restaurants, (c) Dentists. 4. A manufacturer
of  rouce. Dem
 TV watches uses three TRS7 electronic chi s in each TV watches

an estimates for the number of TV watches that coul be sol next year are show
n 
Deman X P (X) 20000 0.30 40000 0.50 50000 0.20
     
(a) Assuming the
 firm eci esto ro uce on an ex ecte value basis, how many TR

S7 chis shoul they lan to ro uce for next year’s sales? (b) What caacity is r
    
equire to meet 150 ercent of execte eman ? 5. The in ivi ual comonent caa

cities (in units er ay) for an assembly line that consists of five activities
are as shown in the accomanying iagram. (a) What isthe system caacity? (b) W
hat is the efficiency of the system? 6. An automatic rive in teller at American
National Bank has the caacity of hanling 2,000 entries er regular banking a
 
y (accor ing
 to the firm that sol it to the bank). However, because of limitati
ons imose by automobile access,  the teller is available only 
 60 er cent of th

e time. It is actually being use for about 800 entries er ay. What is the sys
tem efficiency?
REFERENCES 
1. Joseh, G. Monks, Theory an  Problems
  of Oerations Management, Tata McGraw H

ill Publishing Com any Limite , 2n E ition, h, G. Monks, Oeratio
 2004. 2. Jose

ns Management, McGraw Hill
 International E ition, 3r E ition. 3. S. Anil Kumar,
N. Suresh, Pro uction an Oerations Management, New Age International (P) Limi
  
te Publishers, 2n E ition, 2008.

Facility Location an Layout
61
4
FACILITY LOCATION AND LAYOUT
CHAPTER OUTLINE
  
4.1 Intro uction an Meaning 4.2 Nee for Selecting a Suitable Location 4.4 Loca
tion Theories 4.5 Location Mo els 4.6 Locational
 Economics 4.7 Plant Layout 4.8
Classification of Layout 4.9 Design of Pro uct Layout 4.11 Service Layout 4.12 O
rganisation of Physical Facilities • Exercise 4.3 Factors Influencing Plant/Facili
ty Location 4.10 Design of Process Layout
4.1
INTRODUCTION AND MEANING
Plant
 location or the facilities location roblem is an imortant strategic leve
l ecisionmaking for an organisation. One of the key features of a conversion r
ocess (manufacturing system) is the efficiency with which 
  the ro ucts (services
) are transferre to the customers. This fact will inclu e the etermination  of
where to lace the lant orfacility.The selection  of location is a key  ecisio

n as large investment is ma e in buil ing lant an machinery. It is not a visab
le or not ossible to change the location very often. So an imroer location of
lant may lea to waste of all the investments mae in builing an machinery,
 
equi ment.
 Before a location for a lant is selecte , long range forecasts shoul
be ma e anticiating future nee s of the  comany.The lant location shoul be
     
base on the com any’s ex ansion lan an olicy, iversification lan for the r
o ucts, changing market con itions, the changing sources ofraw materials an ma
ny other factors that  influence the choice of the location ecision. The urose
of the location 
stu y is to fin an o timum location one that will result in th

e greatest a vantage to the organization. 4.2 NEED FOR SELECTING A SUITABLE LOCA
TION

The nee for selecting a suitable location arises because of three situations.
62
Oerations Management
I. When starting a new organisation, i.e., location choice for the first time. I
I. In case of existing organisation. III. In case of Global Location. I. In Case
of Location Choice for the First Time or New Organisations Cost economies  are a
lwaysimortant while selecting a location for the first time, but shoul kee i
n min the cost of long term business/organisational
 objectives. The following a
re the factors
 to be consi ere while selecting the location for the new organis
ations: 1. I entificationof region: The organisational objectives along with th
e various long term consi erations about marketing, technology,  internal organis
ational strengths an weaknesses, regionsecific resourcesan business environm
ent, legal governmental environment, social environment an geograhical environ
ment suggest a suitable region for locating the oerations  facility.
 2. Choice o
f a site within a region: Once the suitable region is i entifie , the nextste
is choosing the best site from an available set. Choice of a site is less een
ent on the organisation’s
 long term strategies. Evaluation of alternative sites fo
r their tangible an intangible costs will resolve facilities location roblem.
  
The roblem of location  of a site within the region can be a roache with the f
ollowing cost oriente non interactive mo el, i.e., imensional analysis. 3. Dim
ensional
 analysis: If all the costs were tangible an quantifiable, the comaris 
on an selection of a site is easy. The location with the least cost is selecte
. In most of the cases intangible costs which are 
 ex resse in relative terms th
an inabsolute terms. Their relative merits an emerits ofsites can also  be  co
mare easily. Since bothtangible an intangible costs  nee to be consi ere fo
r a selection of a site, imensional analysis is use . Dimensional analysis cons
ists in comuting the relative merits (cost ratio) for each of the cost items fo
r two alternative sites.  
 For each of the ratios an  a ro riate weightage by mean
s of ower is given an multi lying these weighte ratios to come u with a com

rehensive figureon the relative merit oftwo alternative sites, i.e.,  C1M, C2M,
…, CzM are the ifferent costs  associate with a site  M on the ‘z’ ifferent
 cost ite
ms. C1N, C2N, …, CzN are the ifferent costs associate with a site N an W1, W2,
W3, …, Wz are the weightage given to these cost items, then relative merit of the
M an site N is given by:
(C
M 1
N /C1
)
W1
N × C M /C 2 2
(
)
W2
N ,.,C M /C z .. z
(
)
Wz

If this is > 1,site N is suerior an vice versa. When starting a new factory,
lant location ecisions are very imortant because they have irect bearing on
 
factors like, financial, emloyment an istribution atterns. In the long run,

relocation of lant may even benefit the organization. But, the relocation of th
 
e lant involves stoage of ro uction, an also cost for shifting
 the faciliti
es to a new location. In a ition to these things, it will intro uce some inconv
enience in the normal functioning
 of the business. Hence, at the time of startin
g any in ustry, one shoul generate several alternate sites for 
 locating the la
nt. After a critical analysis, the best site is to be selecte for commissioning

the lant. Location of warehouses an other facilities are also having irect b
 
earing on the o erational erformance of organizations.

Facility Location an Layout
63
 
The existing firms will seek new locations in or er to exan the caacity or to
lace the existing facilities. When the eman for rouct increases, it will g
  
ive rise to following ecisions: Whether to exan 
 the existing ca acity an fac
ilities. Whether to look for new locations  for a itional facilities. Whether to
close own existing facilities to take a vantage of some new locations. II. In
Case of Location Choice for Existing Organisation In this case a manufacturing 
   
lant has to fit into a multi  lanto erations strategy. That is, a itional lan
t location in the same remises an elsewere uner following circumstances: 1. P
 roucts. 2. Manufacturing lant sulying to secif
lant manufacturing istinct   
ic market area. 3. Plant ivi e on the basis ofthe rocess or stages in manufa
cturing. 
4. Plants em hasizing flexibility. The ifferent oerations strategies
   
un er the above circumstances coul be: 1. Plants manufacturing istinct ro uct

s: Each lant services the entire market area for the organization. This strateg

y is necessary
 where the
 nee s of technological
 an resource inuts are seciali
ze or istinctively ifferent  for the ifferent ro uct  lines. For exam le,

a h
igh quality recision ro uct line shoul not be locate along with other ro uc
 
t line requiring
 little emhasis on recision.
  It
 
 may not be ro er to have  too 

many contraictions suchas so histicate an ol equi ment, highly skille an
 
rocesses an those that coul ermit rough ha
 skille ersonnel,
semi  elicates
 
n lings, all un er  one roof an one  set of managers.
 Such a setting lea s tomuc
h confusion regar ing the require emhasis an the management olicies. Pro uct
secialization may be necessary in a highly cometitive market. It may be neces
sary    
 to ex loit  the s ecial resources of a articular geogra hical area. The mor
e ecentralize these airs are in terms of the management an in terms of their
hysical location, the better woul be the lanning an control an the utiliza
tion of the resources. 2. Manufacturing lants sulying to a secific market ar
ea: Here, each lant manufactures almost all of the com any’s roucts. This tye
 
of strategy
 is useful where
 market roximity consi eration ominates  the resourc

es an technology consi erations. This strategy requires great eal of coor inat
ionfrom the cororate office. An extreme  exam

le of this strategy is that of so
ft rinks bottling lants. 3.Plants ivi e on the basis of the rocess or stag

es in manufacturing: Each ro uction rocess or stage of manufacturing may requi
re istinctively ifferentequiment caabilities, labour skills, technologies,
an managerial olicies an emhasis. Since the ro ucts lant fee into
  of one
the other lant, this strategy requires much centralize coor ination  of
 the man
ufacturing activities from the cororate office that are execte to un erstan
the various technological as ects   
 of all the lants. 4. Plants em hasizing flexi
lants to meet the changing nee
bility:
 This requires much coor ination between 
s an at the same time ensure efficient use of  the facilities an resources. Fre
quent changes in the long term strategy in or er to im rove be efficiently temo

rarily, are not healthy for the organization. In any facility location roblem t
he central question is: ‘Is this a location at which the comany can remain comet
itive for a long time?’
64
Oerations Management
  
For an establishe organization in or er to a on to the caacity, following ar
e the ways: (a)  
 Ex ansion of the facilities at the existing site: This is acce t
able when it oes not violate the basic business an managerial outlines, i.e.,
hilosohies, uroses, strategies an caabilities. For examle, exansion shou
 
l not comromise quality,
 elivery, or customer service. (b) Relocation of the
facilities (closing own the existing ones): This is a rastic ste which can be
 
calle as ‘Urooting an Translanting’. Unless there are very 
 com elling reasons,
relocation is not one. The reasons will be  either bringing ra ical changes in t
echnology, resource availability or other estabilization. All these factors are
alicable
 to service organizations,
 whose objectives, riorities an strategie
s may iffer from those of har core manufacturing organizations. III. In Case of
Global Location Because of globalisation,
   multinational cororations
 are settin
g u their organizations in In ia an In ian com anies are exten ing their oera
 
tions in other countries. In case of global locations there is scoe for virtual
roximity an virtual factory.

VIRTUAL PROXIMITY

With the a vance in telecommunications technology, a firm can be in virtual rox
imity to its customers. For a software services firm much of its logistics is th
rough the information/
 communication athway. Many firms use the communications
highway for con ucting a large ortion oftheir business transactions. Logistics
is certainly an imortant factor in eci ing on a location—whether in thehome co
untry or abroa . Markets have to be reache . Customers have to be contacte . Hen
ce, a market resence in the country of the customers is quite necessary.
VIRTUAL FACTORY  
Many firms base in USA an UK in the service sector an in the manufacturing se
ctor often
 out sources art of their business rocesses to foreign
 locations suc
h as In ia. Thus, instea of one’s own o  erations, a firm coul use itsbusiness a
ssociates’ oerations facilities. The In ian BPO firm is a foreign base comany’s ‘vi
rtual service factory’. Soa location coul be one’s own or one’s business associates.
The location ecision nee not always necessarily ertain to own oerations.
REASONS FOR A GLOBAL/FOREIGN LOCATION A. Tangible Reasons  
The tangible reasons for setting u an oerations facility abroa coul be as fo
llows: Reaching the customer: One obvious reasonfor locating
  a facility abroa
is that of caturing ashare of the market exan ing worl wi e. The henomenal g
rowth of the GDP of In ia is a big reason for the multinationals to have their o
erations facilities in our country. An imortant reason is that of roviing se
rvice to the customer romtly an economically which is logistics eenent. Th

erefore, costan case of logistics is a reason for setting u manufacturing fac
ilitiesabroa . By logistics set of activities closes the ga between rouction
   
of goo s/services an reaching of these inten e goo s/services to the customer
to hissatisfaction. Reaching
 the customer
  is thus the mainobjective. The tang
ible an intangible gains an costs een uon the comany  efining for itself 
as to what that ‘reaching’ means. The tangible costs coul be the logistics relate
costs; the intangible costs may 
 be the risk of o erating is a foreign country. T
he tangible gains are
 the imme iate gains; the intangible
 gains are an outcome o
f what the comany efines the concets of reaching an customer for itself.

Facility Location an Layout
65

The other tangible
 reasons coul be as follows: (a) The host country may offer s
ubstantial tax a vantages com are to the home country. (b) The costs of manufac
 erations may be substantially less in that foreign country.
turing an running
 o
This may be ue to lower labour costs, lower raw material cost, better availabi
lity of the inuts like materials, energy, water, ores, metals, key ersonnel et
c. (c) The comany may overcome the tariff barriers by setting u a manufacturin
g lant in a foreign country rather than exorting the items to that country.
B. Intangible Reasons  
The intangible reasons for consi ering setting u an oerations facility abroa

coul be as follows: 1. Customer relate Reasons (a) With an o erations facility
in the foreign country, the firm’s customers may feel secure that the firm is mor
e accessible. Accessibility is an imortant ‘service quality’ eterminant. (b) The f
irm may be able to give aersonal tough.
 (c)The firm may interact more intimat

ely with its
 customers an may thus un erstan their requirements better. ( ) It
may also iscover other 
 otential customers in the foreign  location.
 2. Organis
ational Learning relate Reasons (a) The  firm can learn a vance technology. For
examle, it is ossible that cutting e ge technologies can be learn by having o
erations in an technologically more a vance country. The firm can learn from a
 
vance research laboratories/universities in that country. Such learning may he
l the entire

ro uct line of the comany. (b) The firm can learn from its custo

mers abroa . A hysical location there may be essential towar s this goal. (c) I
t can also learn from its cometitors oerating in that country.  For this reason
, it may have to be hysically resent where the action is. ( ) The firm may als
o learn from its suliers abroa . If the firm has a manufacturing lant there,
it will have intensive interaction with the 
 su liers in that country from whom
roriate technology, moern
there may be muchto learn
 in terms
 of mo ern an a  
management metho s, an new tren s in business worl wi e. 3. Other Strategic Re
asons (a) The firm  resent in the host country may gain some
 bybeing hysically  
‘local
 boy’ kin of sychological a vantage. The  firm is no more a ‘foreign’ com any ju

st sen ing its ro ucts across international bor  ers. This may hel the firm in
lobbying with the government of that country
 an with the business associations
in that country. (b) The firm may avoi ‘olitical risk’ by having oerations  in mul
tile countries. (c) By being in the foreign country,
 the firm can buil alterna
tive sources of suly. The firm coul , thus, re uce its suly risks.
66
Oerations Management
  
( ) The firm coul hunt for human caital in ifferent countries by having oera
tions in those countries. Thus, the firmcan gather thebest of eole from acro 
ss the globe. (e) Foreign locations in a ition to the omestic locations woul
lower the market risks for the firm. If one market goes slow the other may be o
ing well, thus lowering the overall risk. 4.3 FACTORS INFLUENCING PLANT LOCATION
/FACILITY LOCATION

Facility location is the rocess of etermining a geograhic site for a firm’s oe
rations. Managers of both service
 an manufacturing organizations must weigh man
y factors when assessing the esirability of a articular site, incluing roxim
 
ity to customers an suliers,
 labour costs,an transortation costs. Location
 
con itions are com lex an each com rises a ifferent Characteristic of a tangi
ble (i.e. Freight rates, ro uction costs) an non  tangible (i.e.
 reliability, F
requency security,
 quality) nature. Location
 con
 itions are har to measure.
 Tan
gible cost base factors such as wages an ro ucts costs can be quantifie  rec
isely into what makes locations better to comare. On the other han non tangibl 
e features, which refer to such  characteristics
 as reliability, availability an
security, can only be measure along an or inal or even nominal scale. Other no
n tangible features like the ercentage of emloyees that are unionize can be m
  
easure as well.  To sum this u non tangible features
  are very im ortant for bus
 
iness location ecisions. It is a ro riate to ivi e the factors, which influen
ce the lant location or facility location on the basis of the nature of the  org
anisation as: 1. General locational factors, which inclu e controllable an unco
ntrollable factors for  2. Secific locational factors
  all ty e of organisations.

s ecifically require  for
 manufacturing an service organisations. Locationfac
tors
 can be further ivi e into two categories: Dominant  factors are those
 eri
ve from cometitive riorities (cost, quality, time,an flexibility) an have
a articularly strong imact on sales or costs. Secon ary factors also are imor
tant, but management may ownlay or even ignore some of them if other factors a
re more imortant.
 4.3.1 General Locational Factors Following are the general fa
ctors require for location of lant in case of all tyes of organisations.
CONTROLLABLE FACTORS
1. 2. 3. 4. 5. Proximity to markets Su 
ly of materials Trans ortation facilitie
s Infrastructure availability Labour an wages

Facility Location an Layout
Fig. 4.1 Factors influencing lant location
67
68
Oerations Management
6. External economies 7. Caital.
UNCONTROLLABLE FACTORS   
8. Government olicy
 9. Climate con

 itions 10. Su orting in ustries an service
s 11. Community an labour attitu es 12. Community Infrastructure.
CONTROLLABLE FACTORS 
1.Proximity   to serve its customers by ro
 tomarkets: Every com any isex  ecte

vi ing goo s an services at the time nee e an at reasonable rice organizatio 
ns may
 choose to locate facilities close to the market or away from the market

   
e ening u on the ro uct. When the buyers for the ro uct are concentrate , it
is a visable to locate the facilities  close to the market.
 Locating nearer to th
e market is referre if • The ro ucts are  elicate an suscetible to soilage. •
Aftersales services are rom tly require very often. • Transortation cost is hi
 
gh an increase the cost significantly. • Shelf life 
  of the ro uct is  low.
 Nearne
ss to the market ensures a consistent su ly of goo s to customers an re uces t
he cost of transortation. 2. Suly of raw material:  It is essential
 for the or
ganization to get
 raw material in right qualities an time in or er to have an u
ninterrute ro uction. This factor becomes very imortant if the materials are
erishable an cost of transortation is very high. General guielines suggeste
 
by Yaseen regar ing effects
 of raw materials on lant location are: • When a sin
gle raw material is use without loss of weight, locate the lant at the raw mat
erial source, 
 at the
 market or atany oint in between. • When weight loosing raw
material is eman e , locate the lant at the raw material source. • When raw mate
rial is universally
 available, locate close to the market area. • If the  raw mater
ials are rocesse from variety of locations, the lant may be situate so as to
minimizetotal transortation costs. Nearness to 
 raw material is im ortantin c
ase of in ustries such  as sugar, cement, jute an cotton textiles. 3. Trans orta
tion facilities: See  y transort facilities ensure timely suly of raw materia
 
ls to the comany an finishe goo s to the customers. The transort facility is
a rerequisite for

Facility Location an Layout
69
 
the location of the lant. There are five basic mo es of hysical trans 
ortation
, air, roa , rail, water an i eline. Goo s that are mainly inten e for exort
 
s eman   
 a location near to the ort  orlarge air ort. The choice of trans ort m
etho an hence the location will e en on relative   costs, convenience, an sui
tability. Thus transortation cost to value a e is one of the criteria for la
nt location. 4. Infrastructure availability: The basic infrastructure facilities
like ower, water an waste isosal, etc., become the rominent factors in ec
 
i ing the location.
 Certain
 tyes of  in ustries are
ower hungry e.g., aluminum
an steel an they shoul be locate close 
to the ower station or location wher

e uninterrute ower suly is assure throughout the  year. The non availabilit

y of ower may become a survival roblem for such in ustries. Process in ustries
 
like a er, 
 chemical,
 cement,  etc., require continuous. Su ly of water in larg
ortant fac
e amount an goo quality, an mineral content  of water becomes an im
tor. A waste isosal facility for rocess in ustries  is an imortant factor, wh
ich  5. Labour an wages: The roblem of securing
 influences the lant location.   
a equate number of labour an with skills secificis a factor to be consi ere
both at territorial as well asat community lant location. Imorti
 level uring 
ng labour is usually costly an involve a ministrative roblem. The history of l
abour relationsina ros ective community is to be stu ie. Prosective communi
 
ty is to be stu ie . Pro uctivity of labour is also an im  ortant factor to be  co

nsi ere . Prevailing wage attern, cost of living an in ustrial relation an ba
rgaining ower of the unions’ forms in imortant consi  erations.
 6. External econo
mies of scale: External economies of scale can  be escribe as urbanization an
locational economies of scale. It refers to a vantages of a comany by setting u
 oerations in a large city while the secon one refers to the “settling own” amon
  
g other com anies of relate In ustries. In the case of urbanization economies,
firms erive from locating in larger cities rather than in smaller ones in a sea
rch of having access to a large ool of labour, trans 
ort facilities, an as wel

l to 
 increase their markets for selling their ro ucts an have access to a much
wi er range of business  services. Location  economies of scale  in the manufactur
ing sector have evolve over time an have mainly increase cometition ue to 
  
ro uction
 facilities an lower ro  uction costs as aresult of lower trans ortat

ion an logistical 
  costs. This le to manufacturing istricts where many com ani
es of relate in ustries are locate more or less in the same area. As large cor
orations have realize that inventories an warehouses have become a major cost
   
factor, they have trie re ucing inventory costs by launching “Just  in Time” ro uc
tion system (the so calle Kanban System). This high efficient ro uction system 
was one main factor in the Jaanese car in ustry for being so successful. Just
intime ensures to get sare arts from suliers within just a few hours after
or ering. To fulfill these criteria cor orations have to be locate in the same

area increasing their market an service  for large cororations. 
 7. Ca ital: By

looking at ca ital 
 asa location con  ition,  it is im ortant to istinguish the
ment from financial caital. Fi
hysiology
 of fixe ca ital in buil
 ings an equi
xe caital costs as buil ing  an construction costs  vary from region to region.
Buton the other han buil ings can also be rente an existing lants can be e
     
x an e . Financial ca ital is highly mobile an oes not very much influence ec
 
isions. For exam le, large Multinational Cor orations such as Coca 
70
Oerations Management
 
Cola oerate in many
 ifferent countries an can raise caital where interest ra

tes are lowest an con itions are most suitable. Ca ital becomes a main factor w
hen it comes to venturecaital. In that case young, fastgrowing (or not) high
tech firms are concerne which usually have notmany fixe assets. These 
    firms
articularly nee access to financial ca ital an also skille e ucate em loyees
.
UNCONTROLLABLE FACTORS  
8. Government olicy: Theolicies  of the state governments an local boies con
cerning labour laws, buil ing co es,safety, etc., are the factors that eman a
ttention.
 In or er to have a balance regional growth of in ustries, both centra
l an state governments in our country offer the ackage of incentives to entre
reneurs in articular locations.
 The 
 incentive ackage may be in the form of exe

m tion from a safes tax an excise uties for a secific erio, soft loan from
  
financial institutions, subsi y in electricity charges an investment subsi y. S
 
ome ofthese incentives may tem t to locate the lant to avail  these facilities
 
offere . 9. Climatic con itions:
 The geology
 of the area nee s to be consi ere
together with climatic con 
 itions (humi ity, tem erature). Climates greatly infl
ecific climatic
uence
 human efficiency an behaviour. Some in ustries
 require s 
con
 itions e.g., textile
 mill will require humi ity. 10. Suorting in ustries a
n services:
  Now a ay the manufacturing
 organisation will notmake all the com
onents an arts by itself an it subcontracts the work to ven ors. So, the sour
ce of suly of comonent arts will be the one of the factors that influences t
he location. The various services
 like communications, banking services rofessi
onal consultancy services an other civil amenities services will lay a vital r
 
ole in selection
 of a location. 11.Community an labourattitu es: Community at
titu e towar s their work an towar s the  ective in ustries can make or mar
  ros 
the in ustry. Community attitu es towar s suorting tra e union activities  are
imortant criteria. Facility location in secific locationis not esirable eve
n though all factors are favouring because  of labour attitu e towar s management
, which
 brings very often the strikes an lockouts. 12. Community infrastructure
an amenity: All manufacturing activities  require access to a community infrast
ructure, most notably economic overhea caital, such as roas, railways, ort f
   
acilities, ower lines an service facilities an social overhea   ca ital like  s
chools, universities an hos  itals. These factors are also nee e to be consi
   er
e by location ecisions as infrastructure is enormously exensive to buil an
for most manufacturing activities the existing stock of infrastructure rovi es
hysical restrictions on location ossibilities. 4.3.2 Secific Locational Facto
rs for Manufacturing Organisation
DOMINANTFACTORS 
Factors ominating location ecisions for new manufacturing lants can be broal
 
y classifie in six grou s. They are liste in the or er of their imortance as

follows.

Facility Location an Layout
71
1. 2. 3. 4. 5.
Favourable
 labour climate Proximity to markets
 Quality of life Proximity to su
liers an resources Utilities, taxes, an real estate costs
1. Favourable labour climate:
 A favorable labour climate may be the most imorta
nt factor in location ecisions for labour intensive firms in in ustries  such as
textiles furniture an consumer  electronics.
 Labour climate inclu es wage rates
, training requirements attitu es towar work, worker rouctivity an union str

ength. Many executives
 consi er weak unions or al low robability of union  organ
izing efforts as a
 istinct a vantage.
 2. Proximity to markets: After eterminin
g where the eman for goo s an services is greatest,   management must select a
location for the facility that will sulythat eman . Locating near markets is
articularly imortant when the final goo s are bulky or heavy an outboun tra

nsortation rates are high. Forexam le,
 manufacturers of ro ucts such as last
  
ic i e an heavy metals all em hasize roximity to their markets.  3. Quality of
life: Goo schools, recreational facilities, cultural events, an an attractive
lifestyle contribute to qualityof life. This factor is 
 relatively unim ortant
on its own, but it can make the ifference in location ecisions. 4. Proximity t
o suliers an resources: In many comanies, lants  su ly arts to other facil
ities or rely on other facilities
 for management an staff suort.  These requir 
e frequent coor ination an communication,  which can become more ifficult as i
stance increases. 5. Utilities, taxes, an real estate costs: Other 
   im ortant fa
ctors that may emerge inclu e utility costs (tele  hone, energy, an water), loca
l an state taxes, financing
 incentives offere by local or state governments, r
elocation costs, an lan costs.
SECONDARY FACTORS     
There are some other factors nee e to be consi ere , inclu ing room for exansi
on, construction costs, accessibility
 to multile mo es of transortation, the c
ost of shuffling eo le an materials betweenlants, cometition from other fir
 
ms for the workforce, community attitu es, an many 
   others. Forglobal o eration
s, firms are em hasizing local em loyee skills an e ucation an the local infra
structure. 4.3.3 Secific Locational Factors for Service Organisation
DOMINANT FACTORS   
The factors consi ere are also alie to service roviers,
  for manufacturers
 
with one im ortant a ition — the im act of location on sales an customer satisfa
ction. Customers usually look about
 how close a service facility is, articularl

y if the rocess requires consi erable customer contact.
72
Oerations Management
PROXIMITY TO CUSTOMERS 
Location is a key factor in etermining how conveniently customers can carry on
business with a firm. For examle, few eole woul like to go to remotely locat
 
e ry cleaner or suermarket if anotheris more convenient. Thus the influence
of location on revenues ten s to be the ominant factor.
TRANSPORTATION COSTS
 AND PROXIMITY TO MARKETS 
For warehousing an istribution oerations, transortation costs an roximity

to markets are extremely im ortant. With awarehouse nearby, manyfirms can hol

inventory closer to the customer, thus re ucing elivery time an romoting sal
es.
LOCATION OF COMPETITORS 
One comlication in estimating the sales otential at ifferent location is the
 
im act of com etitors. Management must not only consi er the current location of
cometitors but also try to anticiate their reaction to the firm’s new location.
Avoi ing areas where cometitors are alreay well establishe often ays. Howev
  
er, in some in ustries, such as new car sales showrooms an fastfoo chains, loc
ating near cometitors is actually a vantageous. Thestrategy is to create a cri
tical mass, whereby several cometing firmsclustere in one location attract mo

re customers than the total number who woul sho at the same stores at  scattere
locations. Recognizing this effect, some firms use a follow –the lea er strategy
when selecting new sites.
SECONDARY FACTORS   
Retailers also must
 consi er the level of retail activity, resi ential ensity,
traffic flow, an
 site
 visibility. Retail activity in the area is imortant, as

sho ers often eci e on imulse to go shoing or to eat in a restaurant. Traff

ic flows an visibilityare imortant because businesses
 customers arrive
 in car 
s. Visibility involves
 istance
 from the street an size
 of nearby
 buil ings an
signs. High resi ential ensity ensures night time an weeken business
 when th
e oulation in the area fits the firm’s cometitive riorities an target market
segment. 4.4 LOCATION THEORIES
ALFRED
 WEBER’S THEORY OF THE LOCATION OF INDUSTRIES 
Alfre Weber (1868–1958), with theublication  of Theory of the Location of In ust
ries in 1909,  
ut forth the first evelo e general theory of in ustrial locatio

n. His mo el took into account several satial factors for fin ing the otimal l
ocation an minimal cost for manufacturing lants.  The oint for locating an in

ustry that minimizes costs of trans ortation an labourrequires analysisof thr
ee factors: 1. The oint
 of otimal transortation base on the costs of istanc
e to the ‘material in ex’—the ratio of weight to interme iate roucts (raw materials)
  
to finishe ro uct. 2. The labour istortion, in which more favourable sources
of lower cost of labour may justify greater transort istances. 3. Agglomerati
 
on an egglomerating.

Facility Location an Layout
73
Agglomeration
  or concentration of firms in a locale occurs when there is suffici
ent eman for suort services for the comany an labour force, incluing new

investments in
 schools
 an hositals. Also suorting comanies, such as facilit
ies that buil an service machines an financial services, refer closer contac
t with their customers. Degglommeration occurs when comanies an services leave
  
because of over concentration of in ustries
 or of the wrong ty es of in ustries

, or shortages of labour, 
ca ital, affor able
   lan , etc. Weber also examine fac
tors lea ing to the iversification of an in ustryin the horizontal relations b
etween rocesseswithin the lant. The issue of in ustry location is increasingl
y relevant to to ay’s global marketsan transnational
 cororations. Focusing
 only
on the mechanics of the Weberianmo el coul justify greater transort istance 
s for chea labour an 
 unex loite raw  materials. When resources are exhauste o
r workers revolt, in ustries move to ifferent countries. 4.5 LOCATION MODELS
  
Various mo elsare available which hel to i entify
 the i eal location. Some of
 
the o ular
 mo els are:1. Factor rating metho 2. Weighte factor rating metho
3. Loa  istance metho 4. Centre of gravity metho 5. Break even analysis. 4.5
.1 Factor Rating Metho
The rocessof selecting a new facility location involves a series of following

stes: 1. I entify the imortant location factors. 2. Rate each factor accor ing
to its relative imortance, i.e., higher
 the ratings is in icative of rominent
factor. 3. Assign each location accor ing to the merits of the location for eac
hfactor. 4. Calculate the rating for each location by multi lying factor assign
   
e to each
 location with basic
 factors consi ere . 5. Fin the sum of ro uct ca
lculate for each factor an select best location having highest total score. IL
LUSTRATION
  Health care, is to be l
1: Let us assume that a new me ical facility,
ocate in Delhi. The location factors, factor rating an scores for two otentia
l sites are shownin the following table. Which is the best location base on fa
ctor rating metho ?
74 Sl. No. Location factor Factor rating 8 5 6 3 5
Oerations Management
Rating Location 1 3 4 4 1 5 Location 2 5 3 5 2 3
1. 2. 3. 4. 5.

Facility
 utilization Total atient er month Average time er emergency tri Lan
an construction costs Emloyee references
SOLUTION
Sl. No. Location factor Facility
 utilization Total atient er month Average tim
e er emergency tri Lan an construction costs Emloyee references Factor rat
 
ing (1) 8 5 6 3 5 Location 1 (Rating) Total= (2) (1) . (2) 3 4 4 1 5 Total 24 20
24 3 25 96 Location 2 (Rating) Total (3) = (1) . (3) 5 3 5 2 3 Total 40 15 30 6
15 106
1. 2. 3. 4. 5.
The total score for location 2 is higher  than that of location
 1. Hence location

2, is the best choice.
 4.5.2 Weighte Factor Rating Metho In this metho to me
rge quantitative an qualitative
 factors, factors are assigne weights base on
relative imortance an weightage score for eachsite using a reference  matrix
is calculate . The site with the highest weighte score  is selecte as the best
choice. ILLUSTRATION
 2: Let us assume that a new me ical facility,
 Health care,
is to be locate in Delhi. The location factors, weights, an scores (1 = oor,
5 = excellent) 
 for two otential sites are shown in the following table. What is
the weighte score for these sites? Which is the best location?
Sl. No. Location factor Weight Scores Location 1 1. 2. 3. 4. 5. Facility   utiliza
tion Total atient km er month Average time er emergency tri Lan an constru
ction costs Emloyee references 25 25 25 15 10 3 4 3 1 5 Location 2 5 3 3 2 3

Facility Location an Layout
75
 
SOLUTION: The weighte score for this articular
 site is calculate by multilyi
ng each factor’s weight by its score an a ing the results: Weighte score locati 
on 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 × 5 = 75 + 100 + 75 + 15 + 50 = 315 Weighte
score location 2 = 25 × 5 + 25 × 3 +25 × 3 + 15 × 2 +10 × 3 = 125 + 75 + 75 + 30 + 30 =
335 Location
 2 is the
 best site base
 on total weighte scores.4.5.3 Loa  ist
ance Metho The loa  istance metho is a mathematical mo el use to evaluate lo
cations base on roximityfactors.
 The objective
 is to select a location that
 m
inimizes the total weighte loa s moving into an out of the facility. The
 ista
nce between two oints is exresse by assigning the oints to  gri coor inates
 
on a ma . An alternative a roach is to use time rather than istance.
DISTANCE MEASURES 
Suose that a new warehouse is to be locate to serve Delhi. It will receive in
 
boun shi ments fromseveral su liers, inclu  ing one in Ghaziaba . If the new w
arehouse were locate at Gurgaon, what woul be the istance between the two fac
ilities? If shiments travel by truck, the istance eens on the highway syste

m an the secific route taken. Comuter software is available for calculating t
heactual mileage between any two locations in the same county.
 However, for loa

 istance metho , a roughcalculation
 that
 is either Eucli ean or rectilinear

istance measure may be use . Eucli ean istance is the straight line istance, o
r shortest ossible ath, between two oints.

Fig. 4.2 Distance between oint A an oint B
  
The oint A on the gri reresents the sulier’s location in Ghaziaba  , an the 
oint B reresents
 the ossible warehouse location at Gurgaon. The istancebetwe

en oints A an B is the length of the 
 hy otenuse of a right triangle,
 or AB =
Sqrt ((XA
 – XB)2 +
 (YA – YB)2) where AB XA
 YA XB YB = = = = = istance
 between oin
ts A an B x coor inate of oint A y coor inate of oint A x coor inate of oint
 
B y coor inate of oint B
76
Oerations Management
  
Rectilinear istance measures istance  between two oints with a series  of
 90° tur
ns as city blocks. Essentially, this istance is the sum of the two ashe lines
reresenting the base an sie of the triangle in figure. The istance travelle
   
in the x  irection is the absolute value of the
 ifference in x coor inates. A
ing this result to the absolute value of the ifference in the y coor inates g
ives DAB = |XA – XB| + |YA – YB|
CALCULATING A LOAD DISTANCE SCORE
Suose 
 that a firm lanning
 a new location wants to select a site that minimize 
s the istances that  loa s, articularly
 thelarger ones, must travel to an fro
 
m the site. De en ing on the in ustry, a loa may be shi ments from su liers, b 
etween lants, or to customers, or it may be customers or  emloyees travelling t
o or from the facility. The firm seeks to minimize its loa istance, generally b
 choosing a location
y so that large loa s go short istances. To calculate a loa
otential location, we use either of the istance measures an
  istance for any   
simly multily the loa s flowing to an from the facility by the istances tr
avelle . These loa s may be exresse as tones or number of tris er week. This
calls for a ractical examle to areciate the relevance of the concet. Let u
s visit a new Health care  facility, once again. ILLUSTRATION 3: The new Health c
are facility is targete to serve seven census tracts in Delhi. The table given
below shows the coor inates for the centre of each census tract, along with the
rojecte oulations, measure in thousans. Customers will travel from the sev

en census tract centres
  to the new facility when they nee health  care. Two loca
tions being consi ere for the new facility are at (5.5, 4.5) an (7, 2), which
are the  centres
 of census tracts C an F. Details of seven census tract centres,
co or inate istances along with theoulation
 for each centre
 are given below
. If we use the oulation as the loa s an use rectilinear istance, which loca
tion is better in terms of its total loa  istance score?
Sl. No. 1 2 3 4 5 6 7 Census tract A B C D E F G (x, y) (2.5, 4.5) (2.5, 2.5) (5
.5, 4.5) (5, 2) (8, 5) (7, 2) (9, 2.5) Poulation (l) 2 5 10 7 10 20 14
  
SOLUTION: Calculate the loa  istance score for  each location. Using the coor in
ates from the above table. Calculate the loa  istance score for each tract. Usi
ng the formula DAB = |XA – XB| + |YA – YB|

Facility Location an Layout
Census tract A B C D E F G (2.5, 4.5) (2.5, 2.5) (5.5, 4.5) (5, 2) (8, 5) (7, 2)

(9, 2.5) (x, y) Po ulation (l) 2 5 10 7 10 20 14 Locate at (5.5, 4.5) Distance
( ) 3 + 0 = 3 3 + 2= 5 0 + 0 = 0 0.5 + 2.5 = 3 2.5 + 0.5 = 3 1.5 + 2.5 = 4 3.5
+ 2 = 5.5 Total Loa istance 6 25 0 21 30 80 77 239 Locate at (7, 2) Distance (
) 4.5 + 2.5 = 7 4.5 + 0.5 = 5 1.5 + 2.5 = 4 2 + 0 = 2 1 + 3 = 4 0 + 0 = 0 2 + 0.
5 = 2.5 Total
77

Loa istance 14 25 40 14 40 0 35 168
 
Summing the scores forall tracts gives a total loa   istance score of 239 when
the facility is locate at (5.5, 4.5) versus a loa  istance score of 168 at loc
ation (7, 2). Therefore, the location in census tract F is a better location. 4.
5.4 Centre of Gravity
  
Centre
 of gravity is base rimarily on costconsi erations. This metho can be
use to assist  managers in balancing cost an service objectives.
 The centre of
gravity metho takesinto account the locations of lants an markets, the volum
e of goo s move , an transortation costs in arriving at the best  location for
a single interme iate warehouse. The
  centre of gravity is efine to be the loca
tion that minimizes the weighte istance between the warehouse an its suly a
  oints, where the istance is weighte by the number of tones su
n istribution
lie or consume. The first ste in this roceure is to lace the locations o

   
n a coor inate system. The origin of the  coor inate system an scale use are ar
bitrary, just as long as the relative  istancesare correctly reresente . This
can be easily one by lacing a gri over an or inary ma. The centre of gravity

is etermine by the formula. CX = where Cx Cy Dix Diy = = = =
 
x coor inate of the centre ofgravity y coor inate of the centre of gravity x co
or inate of location i y coor inate of location i
∑ D .W ∑W
ix i
i
CY =
∑ D .W ∑W
iy i
i

ILLUSTRATION 4: The new Health care facility is targete to serve seven census t
racts in Delhi. The table given below shows the coor inates for
 the centreof ea
ch census tract, along with the rojecte oulations, measure in thousan s. Cu
stomers will
 travel from the seven census tract centres
  to the new facility when
they nee health  care. Two locations being consi ere for the new facility
 are
at (5.5, 4.5) an (7, 2), which are the  centres
 of census tracts C an F. Detail
s of seven census tract centres, coor  
 inate istances along with the o ulation
for each centre are given below. Fin the target area’s centre of gravity for the
Health care me ical facility.
78 Sl. No. 1 2 3 4 5 6 7 Census tract A B C D E F G (x, y) (2.5, 4.5) (2.5, 2.5)
(5.5, 4.5) (5, 2) (8, 5) (7, 2) (9, 2.5)
Oerations Management Poulation (l) 2 5 10 7 10 20 14
SOLUTION: To calculate the centre of gravity,
 start with the following informati
on, where oulation is given in thousan s.
Sl. No. 1 2 3 4 5 6 7 Census tract A B C D E F G (x, y) (2.5, 4.5) (2.5, 2.5) (5
.5, 4.5) (5, 2) (8, 5) (7, 2) (9, 2.5) Total Poulation (l) 2 5 10 7 10 20 14 68
Lx 5 12.5 55 35 80 140 126 453.50 Ly 9 12.5 45 14 50 40 35 205.50
 
Next we fin Cx an Cy. Cx = 453.5/68 = 6.67 Cy = 205.5/68 = 3.02 The centre of
gravity is (6.67, 3.02). Using the centre of gravity as starting oint, managers
can now search in its vicinity for the otimal location. 4.5.5 Break even Analy
sis
Break even analysis imlies that at some oint in the oerations,
 total revenue
equals total cost. Break even analysis is concerne with fin ing the oint at wh
 
ich revenues an costs agree exactly. It is calle ‘Break even Point’. The Fig. 4.3
ortrays the Break Even Chart: Break even oint is the volume of outut at which
 
neither a rofit is ma
 e nor a loss is incurre . The
 Break Even Point (BEP) in
units can be calculate by using the relation: Fixe Cost Fixe Cost F = = units
BEP = Contribution er unit Selling Price 
 − Variable Cost er unit S− V The Break
Even Point (BEP) in Rs. can be calculate by using the relation: Fixe Cost Fixe
Cost F BEP = = = Rs. PV Ratio Sales – Variable Cost φ Sales
Facility Location and Layout
79
Break-even point
Fig. 4.3 Units o  output or percentage o  capacity
Plotting the break even chart or each location can make economic comparisons o 
locations. This will be help ul in identi ying the range o  production volume o
ver which location can be selected. ILLUSTRATION 5: Potential locations X, Y and
Z have the cost structures shown below. The ABC company has a demand o  1,30,00
0 units o  a new product. Three potential locations X, Y and Z having ollowing
cost structures shown are available. Select which location is to be selected and
also identi y the volume ranges where each location is suited?
Location X Fixed Costs Variable Costs Rs. 150,000 Rs. 10 Location Y Rs. 350,000
Rs. 8 Location Z Rs. 950,000 Rs. 6
SOLUTION: Solve or the crossover between X and Y: 10X + 150,000 = 8X + 350,000
2X = 200,000 X = 100,000 units Solve or the crossover between Y and Z: 8X + 350
,000 = 6X + 950,000 2X = 600,000 X = 300,000 units There ore, at a volume o  1,3
0,000 units, Y is the appropriate strategy. From the graph (Fig. 4.4) we can int
erpret that location X is suitable up to 100,000 units, location Y is suitable u
p to between 100,000 to 300,000 units and location Z is suitable i  the demand i
s more than 300,000 units.
80
Operations Management
Fig. 4.4 BEP chart
4.6
LOCATIONAL ECONOMICS
An ideal location is one which results in lowest production cost and least distr
ibution cost per unit. These costs are in luenced by a number o  actors as disc
ussed earlier. The various costs which decide locational economy are those o  la
nd, building, equipment, labour, material, etc. Other actors like community att
itude, community acilities and housing acilities will also in luence the selec
tion o  best location. Economic analysis is carried out to decide as to which lo
cate best location. The ollowing illustration will clari y the method o  evalua
tion o  best layout selection. ILLUSTRATION 6: From the ollowing data select th
e most advantageous location or setting a plant or making transistor radios. S
ite X Rs. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Total initial investment Tot
al expected sales Distribution expenses Raw material expenses Power and water su
pply expenses Wages and salaries Other expenses Community attitude 2,00,000 2,50
,000 40,000 70,000 40,000 20,000 25,000 Indi erent Poor Site X Rs. 1,95,000 Sit
e Y Rs. 2,00,000 3,00,000 40,000 80,000 30,000 25,000 40,000 Want business Excel
lent Site Y Rs. 2,15,000 Site Z Rs. 2,00,000 2,50,000 75,000 90,000 20,000 20,00
0 30,000 Indi erent Good Site Z Rs. 2,35,000
(ix) Employee housing acilities SOLUTION Total expenses [Add (iii) (iv) (v) (vi
) and (vii)]
Facility Location and Layout
81
Rate o  return (RoR), % = RoR or Site X =
Total sales − Total exenses ×100 Total investment
2 , 50, 000 − 1, 95, 000 ×100 2 , 00, 000 = 27.5% 3, 00, 000 − 2 ,15, 000 ×100 2 , 00, 0
00 = 42.5%
RoR for Site Y =

2 , 50, 000 − 2 , 35, 000 ×100 2 , 00, 000 = 7.5% Location Y can be selecte because
of higher rate of return.
RoR for Site Z = 4.7 PLANT LAYOUT
Plant layout refers to   
 the hysical arrangement of
 ro uction facilities. It is
the configuration of e artments, work centres an equi ment in the conversion
rocess. Itis a floor lan of the hysical facilities, which are use in ro uct
ion. Accor ing to Moore “Plant layout is a lan of an otimum arrangement of facil
ities inclu ing ersonnel, oerating equiment, storage sace, material hanling
 
equiment an all other suorting services along with the esign of best struc
ture to contain all these facilities”. 4.7.1 Objectives of Plant Layout
The rimary goal of the lant layout isto maximise the rofit by arrangement of
 
all the lant facilitiesto the best a vantage of total manufacturing of the r
o uct. The objectives of lant layout are: 1. Streamline the flow of materials t
hrough the lant. 2. Facilitate the manufacturing rocess.
 3. Maintain
 high turn
over of in rocess inventory. 4. Minimise
 materials han ling an cost. 5. Effect
ive utilisation of men, equiment an sace. 6. Make effective utilisation of cu
bic sace. 7. Flexibility of manufacturing oerations an arrangements. 8. Provi
 
e for emloyee convenience, safety
 an comfort. 9. Minimize investment in equi
ment. 10. Minimize overall ro uction time. 11. Maintain flexibility of arrangem
ent an oeration. 12. Facilitate the organizational structure.
82
Oerations Management
4.7.2
Princiles of Plant Layout

1. Princile of integration: A goo layout is one that
 integrates men, materials

, machines an su orting services an others in or er to get the otimum utilis
  
ation of resources an maximum effectiveness. 2. Princi le of minimum istance:

This rincile is concerne with the minimum  travel (or movement)  of man an mat
erials. The facilities
 shoul bearrange such that, the total istance travelle
by the men an materials shoul be minimum an as far as ossible straight lin
  
e movement shoul be referre . 3. Princi le ofcubic s aceutilisation: The goo
layout is one that utilise both horizontal  an vertical s ace. Itis not only
enough if only the floor sace is utilise o timally but the thir imension, i.
e., the height is also to be utilise effectively. 4. Princi 
  le of flow: A goo
layout is one that makes the materials  to move in forwar irection towar s the
comletion stage, i.e., there shoul not be any backtracking. 
 5. Princi le of ma
ximum
 flexibility: The goo layout is onethat can be altere without much  cost
an time, i.e., future requirements shoul be taken intoaccount while esigning 
the resent layout. 6. Princileof safety, security an satisfaction:  A goo l
ayout is one that gives ue consi eration to workers safety an satisfaction an
safeguars the lantan machinery against fire, theft, etc. 7. Princi 
le of mi
nimum han ling: A goo layout is one that re uces the material  han ling to the m
inimum. 4.8 CLASSIFICATION OF LAYOUT Layouts  can be classifie into the followin
g five
 categories: 1. Process layout 2. Pro uct layout 3. Combination layout 4.
Fixe osition layout 5. Grou layout 4.8.1 Process Layout
  
Process layout is recommen e forbatch ro uction. All machines erforming simi
lar tye of oerations are groue at one location
 in the rocess layout e.g.,
 a
ll lathes, milling machines, etc. are grou e in the sho will be clustere in l

ike grous. Thus, in rocess layout the arrangement of facilities are groue to
gether accor ing to their functions. A tyical rocess layout is shown in Fig. 4
.5. The flow aths of material
 through
 the facilities from one functional
 area t
o another vary from ro uct to ro uct. Usually the aths are long an there wil
l be ossibility of backtracking. Process layout is normally use when the rou

ction volume is not sufficient
 to justify a ro uct 
 layout. Ty ically,
 job sho s


em loy  
rocess layouts ue to the variety of ro ucts manufacture an their lo

w ro uction volumes.

Facility Location an Layout
83
Fig. 4.5 Process layout
  
A vantages 1. In rocess layout machines arebetter utilize an fewer machines
are require . 2. Flexibility of equi ment an ersonnel is ossible in rocess l
  
ayout.
 3. Lower investment on account of comaratively less number of machines a
n lower cost of general urose machines. 4. Higher utilisation of rouction f
  
acilities. 5. A high egree of flexibility
 with regars to work istribution to
machineries an workers.
 6. The iversity of tasks an variety of job makes the
job challenging an interesting. 7. Suervisors will become highly knowlegeable
  
about the functions un er their eartment. Limitations 1.Backtracking an lon 
g movements may occur in the han  ling of materials thus,re ucingmaterial han l
ing efficiency. 2. Material  han ling  cannot be mechanise which a s to cost. 3.
Process time is rolonge which   uce the inventory
re  turnover an increases the
inrocess inventory. 4. Lowere  ro uctivity ue to number of set us. 5. Throu 
 
gh ut (time ga between in an out in the rocess)  
    time is longer. 6. S ace an
ca ital are tie u by work in  rocess. 4.8.2 Pro uct Layout
  
In this tye of layout, machines an auxiliary services are locate  accor ing to
the rocessing
 sequence of the ro uct. If the volume 
 of ro uction of one or m

ore ro ucts islarge, the facilities can be arrange to achieve efficient flow

of materials an lower cost er unit. Secial urose machines  are use which e

rform the require function 
quickly an reliably. The ro uct layout is selecte
 
when the volume of ro uction of a ro uct  is high such that
 
 a se arate ro uct
ion line to manufacture
  it can bejustifie . In a strict ro uct layout, machine
s are not share by ifferent ro ucts. Therefore, the ro uction volume must be 
sufficient to achieve satisfactory utilisation of the equiment. A tyical ro
uct layout is shown in Fig. 4.6.

Fig. 4.6 Pro uct layout
84
Oerations Management
  
A vantages 1. The flow of ro uct will be smooth an logical in flow lines. 2. I
 
n  rocess inventory is less.
 3. Through ut time is less. 4. Minimum material han
ling cost. 5. Simlifie ro uction, lanning  an control systems are ossible.
 
6. Less sace 
 is occu ie
 by work transit

 an for tem orary storage. 7. Re uce
material han ling cost ue to mechanise han ling systems  an straight flow. 8.
Perfect line balancing which eliminates bottlenecks an i le caacity. 9. Manuf

acturing cycle is short ue to uninterrute flow of materials. 10.  Small amount
of work in  rocess inventory. 11. Unskille workers can learn an manage the r
   
o uction. Limitations 1. A break  own of one machine in a ro uct line may  cause

stoages of machines in the ownstream of the line. 2. A change in ro  uct esi

gn may require major alterations in the layout. 3. The line out ut is eci e by
the  
 bottleneck machine. 4. Com arativelyhigh  investment in equi ments is requi
re . 5. Lack of flexibility. A change in ro uct may require the facility mo ifi
cation. 4.8.3 Combination Layout
  
A combination of rocess an ro uct layouts combines the a vantages of both  ty


es of layouts. A combination layout is ossible where an item is being ma e in

ifferent tyes an sizes. Here machinery is arrange in a rocess layout but the
rocess grouing is then arrange in a sequence to manufacture various tyes an
  
sizes of ro ucts. It is to be note  that the sequence of oerations remains s

ame with the variety of ro ucts an sizes. 
 Figure 4.7 shows a combination ty e
of layout for manufacturing ifferent size gears.
 
Fig. 4.7 Combination layout for making ifferent tyes an sizes of gears

Facility Location an Layout
85
4.8.4

Fixe Position Layout

This is also calle the roject tye of layout.  In thistye of layout, the mate
rial, 
or major com onents remain in a fixe location an tools, machinery, men a

n other materials are broughtto this location.This tye of layout is suitable  
when one or a few ieces of i entical heavy ro ucts are to be manufacture an

when the assembly consists of large number of heavy arts, the cost of trans or 
tation of these arts is very high.

Fig. 4.8 Fixe osition layout

A vantages  
The major
 a vantages of this tye of layout are: 1. Hel s in job enlargement an
 
u gra es the skills of the o erators. 2. The workers i entify themselves with a
rouct in which they take interest an rie in oing the job. 3. Greater flex
ibility with this tye of layout. 4. Layout caital investment is lower. 4.8.5 G
rou Layout (or Cellular Layout)

There is atren now to bring an element offlexibility into manufacturing syste
m as regar s to variation in batch sizes an sequence of oerations. A grouing
of equiment  
 for erforming a sequenceof o erations on family of similar comon
 
ents or ro ucts has become all the im ortant. Grou Technology (GT) is the anal
ysis an comarisons of items
 to grou them into families with similar character

istics. GT canbe use to evelo a hybri between ure rocess layout an ure
  ro
flow line ( ro uct)

layout. This technique is very useful for com  anies that
uce variety of arts in small batches to enable them to take a vantage an econ
omics of flow line layout.The alication of grou technology involves twobasi
c stes; first ste is to etermine comonent families or grous. The secon ste
 in alying grou technology is to arrange the lants equiment use to roces
s a articular family of com onents.
 
This re resents small lants within the 
la
 
nts. The grou technology re uces ro uction lanning time forjobs. It re uces 
the set u time. Thus grou layout
 is a combination of the ro uct layout an r
ocess layout.
 It combines the a vantages of both layout systems. If there are m 
machines an n comonents, in a grou  layout (Grou

 Technology Layout), the m ma
chines an n comonents will be ivi e into istinct
86
Oerations Management

number of machine comonent cells
 (grou) such that all the comonents assigne

to a cell are almost rocesse within that cell itself. Here, the objective is t
o minimize
 the intercell movements. The basic aim of a grou technology layout i
s to i entify families of comonents that
 require similar of satisfying all the
requirements of the machines are groue into cells. Each cell is caable of sat
isfyingall the requirements
 of the comonent family assigne
 to it. The layout
esign rocess consi ers mostly a single objective while esigning layouts.In 
rocess layout, the objective is to minimize the total cost of materials han ling
. Because of the nature of the layout,
 the cost of equiments will be the minimu
 
m in this ty e of layout. In ro uct layout, the cost of materials han ling will
be at the absolute minimum. But the cost of equiments woul not be at the mini

mum if the equiments are not fully utilize . In grou technology
 layout, the ob
jective is to minimize thesum of the cost of transortation an the cost of equ
iments. So, this is calle as multi objective layout. A tyical rocess layout
is shown in Fig. 4.9.
Fig. 4.9 Grou layout or Cellular layout

A vantages of Grou Technology Layout   
Grou Technology layout can increase— 1. Comonent stan ar ization an rationaliza
tion. 2. Reliability of estimates. 3. Effective machine oeration an rouctivi

  
ty. 4. Customer service. It can ecrease the— 1. Paer work an overall ro uction
time. 2. Work in rogress an work movement. 3. Overall cost.

Facility Location an Layout
87
Limitations of Grou Technology Layout 
This tye of layout may not be feasible for all situations. If the ro uct mix i

s com letely issimilar, then we may not have meaningful cell formation. 4.9 DES
IGN OF PRODUCT LAYOUT
 ment or eartments are eicate to a articular rouc
In ro uct layout, equi   
t line, u licate equi ment is emloye to avoi

  backtracking, an a straight li
ne flow of material movement is achievable. 
A o ting a ro uct layout makes sens
e when the batch size of a given rouct or art is large relative to the number
       
of ifferent ro ucts or arts ro uce . Assembly lines are a s ecial case of 
ro uct layout.In a general sense, the 
 term  assembly line refers to rogressive
assembly linke by some materialhan ling evice. The usual assumtion is that s
ome form of acing is resent an the 
 allowable rocessing time is equivalent fo
r all workstations. Within this broa efinition, there are im ortant ifference
 
s among line tyes.  A few of these are material han ling evices (belt or roller
conveyor, overhea crane); line configuration (U sha e, straight, 
      branching);
acing (mechanical, human); ro uct mix (one ro uct or multi le ro ucts);  works
tation characteristics
 (workers may sit, stan , walk with the line, or ri e the
line); an length of the line (few or many workers). The range of roucts arti
   
ally or com
 letely assemble on linesinclu es toys, a liances, autos, clothing
an a wi e variety of electronic com onents. In fact, virtually any rouct tha
 
thas multile arts an is ro uce in large volume uses assembly lines to some
egree. A more challenging roblem is the etermination of the otimum configur
  
ation
 of oerators
 an buffers in a ro uction flow rocess. A major esign cons
i eration in ro uction lines  is the assignment
 of oeration
 so that all stages
are more orless equally loa e . Consi er the case of tra itional assembly lines
illustrate in Fig. 4.10.

Fig. 4.10 Tra itional assembly line
In this examle, arts move along a conveyor at a rate of one art er minute to
three grou oeration requires 3minutes er unit;
 s of workstations. The first

the secon o eration requires 1 minute er unit; an the thir requires 2 minute
s er unit. The first workstation consists of three oerators; the secon , one o
erator; an the thir, two oerators. An oerator removes a art from the conve
 
yor an erforms
 some assembly task
 at his or
 her workstation. The comlete ar
 
t is returne to the conveyor an trans orte to the next o eration. The  number
of oerators at each workstation was chosen so that the line is balance . Since
three oerators work simultaneously at the first workstation, on the average one
art will be comlete each
88
Oerations Management
minute. This is also true for other two stations.
 Since the arts arrive at a ra
  
te of one er minute, arts are also com lete at this rate. Assembly line syste
 erform the i
ms
 work
 well when there is a low variance in the times require to
n ivi ual subassemblies. If the tasks aresomewhat comlex, thus resulting in a
higher assembly time variance, oerators own the line may not be able to kee u
 with the flow of arts from the receing workstation or may exerience excess
 
ive i le time. An alternative
 to a conveyor ace assembly line is a sequence of
workstations linke by gravity conveyors, which act as buffers between successi
ve oerations.
LINE BALANCING 
Assembly line balancing often has imlications for layout.This woul occur when
, for balance   
 ur oses, workstation size or the number use woul have to be hy
sically mo ifie . The most common assembly line is a moving  conveyor that asses
a series of workstations in a uniform time interval calle the workstation  cycl
e time (which is also the time between successive  units coming
 off the en
 of th
e line). At each workstation, work is erforme on a ro uct either by a ing a
rts or by com leting assembly oerations. The work erforme at each station is
  
ma e u of many
 bits of work, terme tasks, elements, an work units. Such tasks
are escribe by motion time analysis. Generally, they are grouing that cannot
    
be sub ivi e on the assembly
  line without aying a enalty in extra motions. T
he total work to be erforme at a workstation is equal to the sum of the tasks
assigne to that workstation. The line balancing roblem is one of assigning all
tasks
 to a series of workstations so thateach workstation has no  more than can
be one in the workstation cycle time, an so that the unassigne (i le) time a
cross all workstations is minimize . The roblem is comlicate by the relations
  
hi
s among tasks
 imose by ro uct esign an rocess technologies. This is cal
le the rece
 ence relationshi, which secifies the or er in which tasks must b
e erforme in the assembly rocess. The stes in balancing an assembly
 line are
: 1. Secify the sequential relationshi s among tasks using a receence iagram

. 2. Determine the require workstation cycle time C, using the formula
   
Pro uction time er ay Require outut er ay (inunits) 3. Determine the theo
retical minimum number of workstations (Nt) require to satisfy the workstation
cycle time constraint using the formula
C =
Sum of task times (T) Cycle time (C) 
  4. Select a rimary rule by which tasks are
to be assigne to workstations, an a secon ary rule to break ties. 5. Assign t
asks, once at a time, to the first workstation until the sum of the task times i
s equal to the workstation cycle time, or no other tasks are feasible because of
time or  
 sequence restrictions. Re eat the rocess for workstation 2, workstatio
n 3, an so on  until all tasks are assigne . 6. Evaluate the efficiency of the b
alance erive using the formula
Nt =

Facility Location an Layout
89
Efficiency =
Sum of task times (T) Actual number of workstations (N a ) × Workstations cycle ti
me (C)
 
7. If efficiency is unsatisfactory, rebalance using  a ifferent ecision rule.  I
LLUSTRATION
 7: The MS
  800
 car is to be assemble on a conveyor belt. Five hun re
cars are require er ay. Pro uction time er ay is 420 minutes, an the ass
 
embly stes an times for the wagon are given below. Fin the balance  that minim
izes the number of workstations, subject to cycle timean rece ence constraint
s. Task A B C D E FG H I J K SOLUTION 1. Draw a rece ence iagram as follows:
Task time (in secons) 45 11 9 50 15 12 12 12 12 8 9 Descrition Position rear a
xle suort an han fasten Four screws to nuts Insert rear  axle Tighten rear ax
le suort screws to nuts Position front axle assembly an han Fasten withfour
screws to nuts Tighten front axle assembly screws Position rear wheel 1 an fas
ten hubca Position rear wheel 2 an fasten hubca Position front wheel 1 an fa
sten hubca Position front wheel 2 an fasten hubca Tasks that must rece e A B
D C C E E F, G, H, I J
2. Determine workstation cycle time. Here we  
  haveto convert ro uction
 time to
secon
 s because
 our task times are in secon s Pro uction time er ay C = Requir
e outut er ay (in units) =
420 min × 60 sec 25200 = 50.4 secs = 500 cars 500
90
Oerations Management

3. Determine the theoretical minimum  number of workstations
  require (the actual
number may be greater) T 195 secon s = = 3.87 = 4 (roun e u ) Nt = C 50.4 seco
 
n s 4. Select assignment rules. (a) Prioritize tasks in or er of the largest num
ber of following tasks: Task A B or D C or E F, G, H, or I J K Number of followi
ng tasks 6 5 4 2 1 0
 
Our secon ary rule, to be invoke where ties exist from our rimary  rule, is (b)

Prioritize tasks in orer of longest
 task time. Note that D shoul be assigne
before B, an E assigne before C ue to this tie breaking rule. 5. Make task as
signments
 to form workstation 1, workstation 2, an so forth until all tasks are
assigne . It is im ortant to meet receence an cycle time requirements as the

assignments
 are ma e. Station Task Task time Remaining Feasible (in sec) unassi
gne remaining  time (in sec) tasks 4550 11 15 9 12 12 1212 8 9 5.4 0.4 39.4 24
.4 15.4 3.4 i le 38.4 26.4 14.4 6.4 i le 41.4 i le I le I le C, E C, H, I F, G,
H, I None H, I I J None None H, I H, I Task with Task with most longest oefollo
wers ration time None None C, E C F, G, H, I F, G, H, I E
Station 1 Station 2 Station 3
A D B E C F
Station 4
G H I J
Station 5
K
6. Calculate the efficiency.

Facility Location an Layout
91
Efficiency =
T 195 = = .77 or 77% N a C 5 ´ 50.4

7.Evaluate the solution. An efficiency of 77 er cent in icates an imbalance or

i le time of 23 er cent (1.0 – .77) across the entire line. In a ition to balan

cing a line for a given cycle time, managers must also consi er
 four other otio

ns: acing, behavioural factors, 
number of mo els ro uce , an cycle times. Pac
ing is the movement of rouct from one station to the next after the cycle time
 
has elase . Pace lines have 
 no buffer inventory. Un ace lines require invent

ory storage areas to be lace between stations.
BEHAVIOURAL FACTORS
The most controversial    is behavioural resonse. Stu ies

  as ect of rouct layout 
have shown
 that ace ro uction  an high s ecialization
 lower job satisfaction
. One stu y has shown that ro uctivity increase on unace lines. Many comani
  
es are exloring job enlargement an rotation to increase job  variety
 an re uce
excessive secialization.
 For examle, New York Life has re esigne the jobsof
workers who rocess an evaluate claimsalications. Instea

 of using a ro uc
 
tion line a roach with several workers oing s ecialize tasks, New York Life h
as ma e each worker solely resonsible  for 
 an entire a lication. This a roach


increase worker res onsibility an raise morale. In manufacturing, at its lan
  
t in Koh a, Ja an, Sony Cor oration  ismantle the conveyor belts on which as ma
ny as 50 eole assemble camcor  ers. It set u tables  for workers to assemble a
n entire camera themselves, oing everything from sol ering to testing. Outut 
er worker is u 10 er cent,
 because the aroach frees efficient assemblers to

make more ro ucts instea of limiting them to conveyor belt’s see. An if somet
 
hing goes wrong, only a small section  ofthe lant is affecte . This aroach al
so allows the line to match actual eman better an avoi frequent shut own bec
ause of inventory buil us.
NUMBEROF MODELS PRODUCED
A mixe mo el line rouces several items belonging to the same family. A single
       
mo el line ro uces one mo el with no variations.
 Mixe mo el ro uction enable
  
s a lant to achieve  volume ro uction
 both high  an ro  uct variety. However, i
t comlicates sche uling an increases the nee for goo communication about the
secific arts to be ro uce at each station.
CYCLE TIMES    
A line’s cycle time een s on the esire outut rate (or sometimes on the maximu
m number
 of workstations allowe ). In turn,
 the maximum line efficiency varies c
onsi erably with the cycle time selecte . Thus, exloring a range of cycle times
makes
 sense. A manager might go with a articularly efficient solution even if
it oes not match the outut rate. The manager can comensate for the mismatch b
y varying the number of hours the line oerates through overtime, extening shif

ts, or a ing shifts. Multile lines might even be the answer. 4.10 DESIGN OF PR
OCESS LAYOUT
   
The analysis involve in the esign of ro uction lines an assembly
 lines relat
es rimarily to timing, coor ination, an balance among in ivi ual stages in the
rocess.
92
Oerations Management
 
For rocess layouts, the relative arrangement of eartments an machines
 is the
critical factor because of the large amount of trans ortation an han ling invo

lve .
PROCEDURE FOR DESIGNING
  PROCESS LAYOUTS
Process layout esign etermines the best relative locations of functional work
centres. Work centres that interact frequently, with movement of material or eo
le, shoul be locate close together, whereas those that have little interactio
 
n can be s  
atiallyse arate . One a roach  of esigning an efficient functional
layout is escribe below.
 1. List an escribe each functional  work centre. 2.
Obtain a rawing an escrition ofthe facility being esigne . 3. I entify an
estimate
 the amount of material
 an ersonnel  flow among work centres 4. Use  st 
ructure analytical metho s toobtain a goo general layout. 5. Evaluate an mo
ify the layout, 
incor orating etails such as machine orientation, storage area
 ment access. The first ste in the layout rocess is to ient
location,
  an equi   
ify an escribe each work centre. The escrition shoul inclu e the rimary fu
nction of the work centre; rilling, new accounts, or 
   cashier;

its major com one

nts, inclu ing equi ment an number of ersonnel; an the s ace require . The e
scrition shoul also inclu e any secial access nee s (such as access to runnin
g water or an elevator) or restrictions (it must be in a clean area or away from
heat). For 
 a new facility, the s atial  configuration
 of the work centres an th
e size an sha e of the facility are etermine simultaneously. Determining the
locations of secial structures an fixtures such as elevators, loaing ocks, a

n bathrooms
 becomes art of the layout rocess. However, in many cases the faci
lity an its characteristics are given.In these  situations,
 it is necessary to
obtain a rawing of the facility being esigne , inclu ing shae an imensions,
 
locations of fixe structures, an restrictions  on activities, such as weight l
imits on certain arts of a floor or foun ation.

Fig 4.11 Relationshi flow iagram
  
To minimize transort times an material han ling costs, we woul like to lace 
close together those work centres that have the greatest flow of materials an 

eo le between them.

Facility Location an Layout
93

To estimatethe flows between work centres, it is helful to begin by rawing re
lationshi  iagram as shown in Fig. 4.11. For manufacturing systems, material fl

ows an trans orting costs can be estimate reasonably well using
 historical rou
tings for ro ucts or through work samling techniques alie to workers or job
s. The flow of eo  
 le, es ecially in
 a service system
 such as a business office
or a university a ministration buil ing, may be ifficult to estimate recisely,


although work sam ling can be use to obtain rough estimates. The amounts an /o
 
r costs of flows among work centres are usually resente using a flow matrix, a
flow cost matrix, or a roximity chart.
1. Flow Matrix 
A flow matrix is a matrix of the estimate amounts 
  of flow between each air of
workcentres. The flow may be materials (ex resse as the number of loa s trans
orte ) or eole who move between centres. Each work centre corresons to one r

ow an one column, an the element fij esignates the amount of flow from work c
entre (row) I to work centre (column) j. Normally, the irectionof flow between
work
 centres
 is not imortant, only the total amount, so fij an fji can be com
bine an the flows reresente using only the uer right half of a matrix. Flo
w Matrix Table Work centre A A B C D E F G H I B 25 C 32 20 D 0 10 0 E 80 30 10
35 F 0 75 50 0 20 G 30 0 45 25 80 0 H 5 7 60 90 0 150 50 I 15 10 0 120 70 20 45
80 Daily flows between work centres
2. Flow cost Matrix
A basic assumtion of facility layout is that the cost of moving
 materials or e

o le between work centers is a function of istance travelle . Although more com
licate cost functions can be accommoate, often we assume that the er unit c
   
ost of material an ersonnel flows between work centres is ro ortional to the
air of ea
istance between
 the centres. So for each ty e of flow between
 each
rtments, i an j, we estimate the cost er unit er unit istance, cij.
94
Oerations Management
Flow cost Matrix Table Work centre A A B C D E F G H I B 25 C 32 40 D 0 10 0 E 8
0 90 10 35 F 0 75 50 0 20 G 30 0 45 50 80 0 H 5 7 60 90 0 150 150
 I 15 10 0 240
70 20 45 80 Daily cost for flows between work centres (Rs. er ay er 100 ft)
3. Proximity Chart   
Proximity charts (relationshi charts)
 are istinguishe from  flow an flow cost 
matrices by the fact that they escribe qualitatively the  esirability or nee
for work centres to be close together, rather 
than rovi
   ing quantitative measur
es of flow an cost. These charts are use when it is ifficult to measure or es
timate recise amounts or costs of flow  among work centres. This is common when
the rimary flows involve eole an o not have a irect  cost but rather an in
irect cost, such as when emloyees in a cororate hea quarters move among eart
ments (ayroll, rinting, information systems) to carry out their work. 4.11 SER
VICE LAYOUT
    
The major
 factors consi ere for service rovi ers, is an im act of location on
sales an customer satisfaction. Customers usually look about  how close a servic
e facility is, articularly if the rocess  requires
 consi erable customer contac
t. Hence, service facility layouts shoul rovi e for easy entrance to these fac
ilities fromthe freeways.
 Well organize acking areas, easily accessible facil
ities, well esigne walkways an arking areas are some of the requirements   of
service facility layout.Service facilitylayout will be esigne base on egre
e of customer contact an the service nee  e by a customer. These service layout
s follow
 conventional
 layouts
 as require . For examle, for car service station,
ro uct layout is a ote , where the activities for servicing a car follows a s
equence of oeration 
  irres ective of the tye of car. Hosital serviceis the be

st exam le for a a tation 
 of rocess layout. Here, the service require for a cu
ath. The layout of car servicing an hosital
stomer will follow an in e en ent
is shown in Figs. 4.12 an 4.13.

Facility Location an Layout
95
Fig. 4.12 Service layout for car servicing
Fig. 4.13 Layout for hositality service
4.12
ORGANISATION OF PHYSICAL FACILITIES

The following
 are the most imortant hysical
 facilities to be organise : 1. Fac
tory buil ing 2. Lighting 3. Claimatic con itions 4. Ventilation 5. Work relate
welfare facilities.
I. FACTORY BUILDING
  
Factory
 buil ing is a factorwhich is the most
 im ortant consi
 eration for every

in ustrial enter rise. A mo em factory buil ing is require to rovie rotecti

on for men, machines, materials, ro ucts
96
Oerations Management
 
or even the com any’s secrets. It has to serve  as a art of the ro uction facilit
ies an as a factor to maximise economy an efficiency in lant  
  o erations. It s
houl offer a leasant
  an comfortable working
 environment an
 roject the manag
ement’s image an restige. Factory buil ing is like skin an bones of
 a living bo
y for an organisation. It is for these reasons thatthe factory  buil ing acquir

es great imortance. Following factors are consi
 ere for an In ustrial Buil
 ing
: A. Design of the buil ing. B. Ty es of buil ings. A. Design of the Buil ing Th
    
e buil ing shoul esigne so as to rovi e a number of facilities—such   as lunch r
ooms, cafeteria,
 locker rooms, crèches, libraries, first  ai  an ambulance rooms,
materials han ling facilities, heating, ventilation, air con itioning,  etc. Foll
owing factors are consi erations in the esigning of a factory buil ing: 1. Flex
ibility: Flexibility is one of the 
 im ortant
 consi erations because the buil ing
is likely to become obsolete an rovi es greater oerating efficiency even whe
n rocesses an technology change. Flexibility  is necessary because it is not al
waysfeasible an economical to buil a new lant, every time a new  firm isorga
nise or the layout is
 change . With minor alternations, the buil ing shoul be
able to accommo ate ifferent ty es of oerations. 2. Prouct an equiment: The
  
tye of ro uct that is to  be manufacture
 , etermines  column sacing, tye of
floor, ceiling, heating an air con itioning. 
A ro atemorary nature ma
   uct of 
y call for a less ex ensive buil ing  an thatwoul be a ro  uct of a more  erma
nent nature. 
Similarly, a heavy ro uct eman s a far more ifferent
  buil ing th
an a ro uct which is light in weight. 3. Exansibility: Growth  an exansion ar
e natural to any manufacturing enterrises. Theyare the in icators  of the ros
 
erity of a business. The following factors shoul be borne in min if the future
exansion of the concern is to be rovie for: (i) The area of the lan which
    
is to be acquire shoul be  large enough to  rovi e forthe future ex ansion  nee
s of the firm an accommo ate current nee s. (ii) The esign of the buil ing sh
oul
 be in a rectangular shae. Rectangularshaes facilitate  exansion on any s
i e. (iii) If verticalex   foun ations, suorters
  ansion is ex ecte , strong  ecte , the sie wa
an
columns must be rovi e. (iv) If horizontal  ex ansion is ex
lls mustbe ma e non loa bearing to rovi e for easy  removal. 4. Emloyee facil
   
itiesan service area: Em loyee facilities must fin a ro er lace in the buil
rofounly affect the morale, comfort an rouctivity.
ing esign because they  
The buil ing lan shoul  inclu e facilities for lunch rooms, cafeteria, water c

oolers, arking area an the like. The rovision of some of these facilities is
   
a legal requirement.
 Others
 make goo working con itions ossible. An a goo wo
rking con ition is goo business.

Facility Location an Layout
97
Service areas, such 
 as the tool room, the su ervisor’s office,
 the maintenance roo
m, receiving an is atching stations,
  the stock
 room
 an facilities for scra
is 
 osal, shoul also be inclu e in the
 buil ing esign. B. Ty es of Buil ings I
es: 1. Single storey builings,
n ustrial buil ings may be grou
 e un er two ty
2. Multi storey  
  buil ings. The ecisionon choosing  a suitable ty e for  a artic
ular firm e en s on the manufacturing rocess an the area of lan an the cost
of construction.
1. SINGLE STOREY
 BUILDINGS    
Mostof the in ustrial buil
 ings manufacturing which  are now esigne an constr
ucte are single storeye , articularly where lan s are available at reasonable
rates. Single storey buil ings offer several oerating
 a vantages. A single stor
eyconstruction is referable when materialshan ling  is ifficult because
 the 
rouctis big or heavy, natural lighting is esire , heavy floor loa s are requi
re an frequent changes in layout are anticiate. Avantages Avantages of sin
  
gle storey buil ing are: 1. There is a greater flexibility in layout an ro uct
ion routing.
 2.The maintenance cost resulting from the vibration of machinery  i
s re uce consi erably because
 of the housing of the machinery on the groun . 3.
Exansion is easily ensure
  by the removal of walls. 4. The cost of

 trans ortat
ion of materials is re uce because of the absence of materials han ling equime
nt between
 floors. 5. All the equiment is on the same level, making for an  easi
er an more effective layout suervision an control. 6. Greater floor loa bear
ing caacity for heavy equiment is ensure. 7. The anger of fire hazars is re
    
uce
 because of the lateral s rea of the buil ing. Limitations Single  storey b
uil ings suffer from some limitations. These are: 1. Highcost of lan , articul 
arly in the city. 2. High cost of heating, ventilating
 an cleaning of win ows.
3. High cost of trans 
 ortation for moving men an materials to the factory which
is generally locate far from the city.
2. MULTI STOREY BUILDINGS    
Schools, colleges, shoing comlexes, an resi ences, an for service in ustrie
s like Software, BPO etc. multi storey
 structures are generally oular, articu
larly in cities. Multi storey buil
 ings are  useful in manufacture oflight ro u
cts, when 
 the acquisition of lan becomes ifficult an ex ensive an when the f
loor loa is less.
98
Oerations Management
   
A vantages When  constructe for in ustrial use, multi storey buil ings offer  the
following a vantages: 1. Maximum o erating floor s ace ( er sq. ft. of lan ). T
 
his is best suite in areas
  where lan is very costly.
 2. Lower cost  of heating
an ventilation. 3. Re uce cost of materials han ling because the a vantageof
the use of gravity for the flow  of materials. Limitations Following are the isa
vantages
 of multi storey buil
 ing: 1. Materials han ling becomes very comlicat
e . A lot of  time is waste in moving them  between floors. 2. A lotof floor sa
ce is waste onelevators, stairways an fire escaes.  3. Floor loa bearing ca

acity is limite , unless s ecial construction is use , which is very ex ensive. 
 Natural lighting
4.  is oor in the centres of the sho, articularly when the wi
th of  the buil ing is somewhat great. 5. Layout changes cannot be effecte easi
ly an quickly. Generally seaking, textile mills, foo inustries, etergent l
   
ants, chemical in ustries an software in ustry use these tyes of buil ings.
II. LIGHTING
  
It isestimate that80 er cent of the information require  in oing job  is er

ceive  
visually. Goo visibility of the equi ment, the ro uct an the ata invo
 ro uction, reu
lve in the work rocess  is an essential
 factorin accelerating 
cing the number  
 of efective ro ucts, cutting own wastean reventing visual 
fatigue an hea aches among the workers. It may also  be a e thatboth ina equa
te visibility
  an glare arefrequently causes acci ents. In rinci le, lighting
shoul
 be a a te to the ty e of work. However, the level  of illumination, measu
re in shoul be increase not only in relation to the egree of recision or mi
niaturization
 of the work but also in relation tothe worker’s age. The accumulati
on of ust an the wear of the light sources cut own the level of illumination 
by 10–50 er cent ofthe original  level. This gra ual ro in the level shoul the
refore be comensate for when esigning the lighting system. Regular cleaning o
f lighting fixture is obviously  essential. Excessive  contrastsin lighting level  
s between the worker’s task an  the general  surroun ings shoul also  be avoi e . T
he use of natural light shoul be encourage   . This can be achieve by installing 
win owsthat oen, which are recommen e to have anarea equal to the time of
ay, the istance of workstations from the win ows an the resence or absence of
blin s. For this reason it is essential  to have artificial lighting, will enabl
e eole to maintain roer vision an will ensurethat the lighting intensity r
atios between
 the task, the surroun ing objects an the general environment are
maintaine .

Facility Location an Layout
99
CONTROL
 OF LIGHTING
In or er  
 to make the best use of lighting in the work lace, the following oint
s shoul
 be taken into account: 1. For uniform light istribution, install  an in
e en ent switch for the row of  lighting
 fixtures
  closest to the win ows. This a
llows the lights to be switche on an off e  en ing on whether or not natural l
ight is sufficient. 2. To 
 revent glare,avoi using highlyshiny,  glossy work s
urfaces. 3. Use localize lighting in or er to achieve the  esire level for a
articular
 fine job. 4. Clean light fixtures
 regularly an follow a maintenance
  s
che ule so as to revent flickering
  of ol bulbs an electrical hazar s ue to w
orn out cables.
 5. Avoi irect eye contact with the light  sources. This is usua
lly achieve by ositioning them roerly. The use of iffusers is also quite ef

fective.
III. CLIMATIC CONDITIONS
   
Control of the climatic
 con itions at the work lace is aramount im
 ortance to t

he workers health an comfort an to the maintenance of higher ro uctivity. Wit
hexcess heator col , workers may  feel very
 uncomfortable, an their efficiency
ros. In a ition, this can lea to acci ents. This human bo y functions in su
ch a way as to kee the central nervous system an the internal organs at a cons
tant temerature. It maintains the necessary thermal balance  by continuous heat 
exchange
 with the environment. It is essential  to avoi excessive heat or col  ,
an wherever ossible to kee the climatic con itions otimal so that the bo y c
an maintain a thermal balance.
WORKING IN A HOT ENVIRONMENT 
Hot working environments are foun almost everywhere.
 Work remise in troical c
ountries may, on account of general climatic con itions, be naturally hot. When
source of heat such as furnaces, kilns or hot rocesses are resent, or when the
hysical workloa is heavy, the human boy may also have to eal with excess he
 
at. It shoul be note that in such hot working environments sweating is almost

the only way in which the bo y can lose heat. As thesweatevaorates, the boy
cools. There is a relationshi between the amount an see of evaoration an a
feelingof comfort. The more intense the evaoration, the quicker the boy will
 
cool an feel refreshe . Evaoration increases with a equate ventilation.
WORKING IN A COLD
 ENVIRONMENT 
Working
 in col environments was once
 restricte to non troical or highly eleva
te regions. Now as a result of mo ern refrigeration,
 various grous of workers,

even in tro ical  Exosure to col
  countries, are
ex
 ose to a col environment.

for short erio s of time can ro uce serious effects,  es ecially when workers 
are exose to temeratures below 10°C. The lossof bo y heatis uncomfortable   an
quickly affects
 work efficiency. Workers in col climates an refrigerate rem
ises shoul be well rotecte against the col by wearing suitable clothes, incl
  
u ing footwear,
  gloves
 an , most imortantly, a hat. Normally, ressing in layer
 
s tra s ea air an serves as an insulation layer, thus kee ing the worker warm
er.
100
Oerations Management
CONTROL OF THE THERMAL ENVIRONMENT
There are many ways of controlling thethermal environment. It is relatively eas
y toassess the effects of thermal con itions, esecially when excessive heat or
col is an obvious roblem. To solve the roblem, however, consistent efforts u
sing a variety of available measures are usually necessary. This is because the
roblem is linke with the general climate, which greatly affects the worklace
  
climate,  ro uction technology, which is often the source of  heat or col
 an va

rying con itions of the work remises as well as work metho s an scheules. Per
sonal factors such as clothing, nutrition, ersonal habits, an age an iniviu
  
al ifferences in resonse to the given thermal con itions also nee to be taken

into account in the attem t to attain the thermal comfort of workers. In contro
lling the thermal environment, one or more of the following rinciles may be a
lie: 1. Regulating workroom temerature by reventing outsie heat or col fro
  
m entering
 (im
 rove esign of the roof, insulation material or installing an ai
r con itione workroom. Air con itioning is costly, esecially in factories. But
it is sometimes a worthwhile investment if an aroriate tye is chosen); 2. 
rovision of ventilation in hot worklaces  by increasing natural ventilating thro
ugh oenings or installing ventilation evices; 3.searation of heat sources fr
om the working area, insulationof hot surfaces an ies, or lacement  of barri
ers between the heat sources an the workers; 4. control of humi ity with a view
to keeing it at low levels, for examle by reventing the escae of steam from
ies an equiment; 5. Provision of aequate ersonal rotective clothing an
  
equiment for workers exose to excessive ra iant heat or excessive   col (heat 
rotective clothing with high insulation value may not be recommen e for jobs w

ith longexosure to mo erate or heavy work as it revents evaorative heat loss
); 6. Re uction of exosure  time, for examle, by mechanization, remote control 
or alternating work sche ules; 7. Insertion  of
 rest auses between work erio s,

with comfortable,
   if ossible air con itione , resting facilities;8. Ensuring 
a su ly of col rinking  water
 for workers in a hot environment an of hot rin
ks for those exose to a col environment.
IV. VENTILATION

Ventilation is the ynamic arameter that comlements the concet of air sace.
For a given number of workers, 
 the smaller the work remises the more shoul be
laces
the ventilation.
 Ventilation iffers from air circulation. Ventilation re
contaminate air by fresh air, whereas as the air circulation   merely moves the a
ir without renewing it. Where the air temerature an humi ity are high, merely
to circulate the air is not only ineffective but also increases 
     heat absor tion.
Ventilation is erses  the heat  generate by machines an eo le at work. A equa
te ventilation shoul be looke uon as an imortant factor in maintaining the w
 
orker’s health an ro uctivity.

Facility Location an Layout
101

Excet for confine saces, all working remises have some minimum ventilation.
However, to ensure the necessary air flow (which shoul not be lower than 50 cub
ic metres of air er hour er worker), air usually nee s to be change between f
our to eight times er hour in offices or for seentary workers, between eight a
 
n 12 times er hour inworkshos an as much as 15 to 30 or more times er hour
 
for ublic remises an where high levels of atmos 
  there are  heric ollution
 or
humi ity. The air s ee use for work  lace ventilation
 shoul be a a te to the
air temerature an the energy exen iture: for se entary work it  shoul excee

0.2metre er secon , but for a hot  
 environment the o timum s ee is between 0.
5 an 1 metre er secon. For hazar ouswork it may be even higher.  Certain ty e
s of hot work can be ma e tolerable  by irecting a stream of col air at the wor
kers. Natural ventilation, obtaine by oening winows or wall or roof airvents,
may rouce significant air flows but can normally be use only in relatively m
    
il climates.  The effectiveness of this ty e of ventilation
 e en s largely on e
xternal con
 itions.
 Where natural ventilation
 is ina equate, artificial ventilat
ion shoul be use . A choice may be ma e between a blown air system, an exhaust
air system or a combination of both (‘ush ull’ ventilation). Only ‘ush ull’ ventilat
ion systems allow for better regulation of air movement.
V. WORK RELATED WELFARE FACILITIES
 
Work relate welfare facilities offere at or through the work lace can be

 im or
tant factors.
 Some facilities are very basic, but often ignore , such as rinkin
g water an toilets. Others may seem less necessary, but usually have an imorta
nce to workers far greater than their cost to the enterrise.
1. DRINKINGWATER
Safe, cool rinking water is essential for all ty  
  es of
 work,
 es ecially in aho
t environment.
 Without itfatigue increases ra i ly an ro uctivity falls. A eq
uate rinkingwater shoul be rovie an maintaine at convenient oints, an
 
clearly marke as“Safe rinking
 water”.
 Where ossible it shoul be ket in suitabl
e vessels,   
 renewe at least aily, an all ractical ste s taken to reserve the
water an the vessels from contamination.
2. SANITARY FACILITIES 
Hygienic sanitary facilities shoul exist in all worklaces. They are articular

ly im ortant where chemicals or other angerous substances are use . Sufficient
toilet facilities, with searate facilities for men an women workers, shoul be
    
installe
 an conveniently locate . Changingrooms an cloakrooms
 shoul be rov

i e . Washing facilities, such as washbasins with soa an towels, or showers, s
houl be lace either within changing rooms or close by.
3. FIRST AID AND MEDICAL
 FACILITIES
  
Facilities
 for ren ering first ai an me ical care at the worklace in  case of
acci ents or unforeseensickness are irectly relate to the  health an safety o
f the workers.
 First ai boxes shoul be clearly marke an conveniently
   locate

. They shoul contain only firstai requisites of a rescribe  stan ar an sho
 
 be in the charge of qualifie  erson. A art from firstai boxes,it
ul is also
ersons t
esirable to have a stretcher an suitable  means to trans ort injure
o a centre where me ical care can be rovi e .
102
Oerations Management
4. REST FACILITIES  
Rest facilities can inclu e seat, restrooms, waiting rooms an shelters.They h

el workers to recover from fatigue an to get away from a noisy, ollute or is

olate workstation.
 A sufficient
 number
 of suitable
 chairs or benches with backr
ests shoul be rovi e an maintaine  , inclu ing seats for occasional rest of w
orkers who are oblige to work stan ing u. Rest rooms enable workers to recover
 
uring meal an rest breaks.
5. FEEDING FACILITIES  
It is now well recognize that
 the health an work caacity of workers to have l
ight refreshments are 
 nee e . A full meal at the work lace in necessary when the
workers live some istance away an when the hours of work are so organize tha
t the meal breaks
 areshort. A snack bar, buffet or mobile trolleys can rovi e
tea, coffee an soft rinks, as well as light refreshments. Canteens or a restau
rant can allow workers to urchase a chea, well cooke an nutritious meal for

a reasonable rice an eat in a clean, comfortable lace, away from the workstat
ion.
6. CHILD CARE FACILITIES
 
Many emloyers fin that working mothers are esecially loyal an effective work
ers, but they often face  
 the s ecial roblems of  carrying for chil
 ren. It is fo
r this reason that
  chil care facilities,
 inclu ing crèches an
 ay care centres,
shoul be rovi e . These shoul be in secure, airy, clean  an well
 lit 
remises

. Chil ren shoul be looke after  ro erly by qualifie staff an offere foo ,
   
rink e ucation an lay at very low cost.
7. RECREATIONAL FACILITIES 
Recreational facilities offer workers the oortunity
 to sen their leisure tim
e in activities likely to increase hysical an mental well being. They may also
hel to imrove social relations within the enterrise. Such facilities can inc
      
lu e halls for recreation an for in oor an out oor sorts, rea ing rooms
 an l
ibraries, clubs for hobbies, icnics an cinemas.
 Secial e ucational an vocati
onal training courses can also be organize .
EXERCISE
Section A 
1. 2. 3. 4. 5. 6. 7. What o you mean by lant location? What 
 is virtual roximi
ty? What is virtual factory? What is agglomeration? What is egglomeration? What
is lant layout? Mention any four objectives of lant layout.
Section B 
1. Exlain ifferent oerations strategies in case of location
 choice for existi
ng organisation. 2. Exlain the factors to be consi ere while selecting the loc
ation for the new organisation.

Facility Location an Layout
103
3. 4. 5. 6. 7. 1. 2. 3. 4.
Exlain Exlain Exlain Exlain Exlain Exlain Exlain Exlain Exlain
the the the the the the the the the

reasons
 for global or foreign location. Alfre Weber’s theory of the location of i
n ustries.    
  objectives  of lant layout.
 main
 rinci les of lant layout. factors
consi ere for an in ustrial buil ing. nee for selecting a suitable location. f
actors influencing lant location. ifferent tyes of layouts. hysical faciliti

es require in an organisation/factory.
Section C
This age intentionally left blank
5
FORECASTING DEMAND
CHAPTER OUTLINE 
5.1 5.2 5.3 5.4 
 5.5 Intro uction Forecasting Forecasting Forecasting Ex onential

Objectives an Uses Decision Variables
 Metho s Smoothing 5.6 Regression an Cor

relation Metho s 5.7 A lications an Control of Forecast • Exercise • References
5.1
INTRODUCTION
Forecasts 
  are essential for the smooth o erations of business organizations. The
y rovi e information that can assist managers in gui ing future activities towa
r organizational goals. 5.2 FORECASTING OBJECTIVES AND USES

Forecasts are estimates of the occurrence, timing, or magnitu e of uncertain fut
ure events. Forecasts 
 are essential for the smooth o erations of business organi
zations. Theyrovi e information that can assist managers in gui ing future act 
ivities towar organizational
  goals. Oerations managers are rimarily concerne
with forecasts of eman —which are often ma e by (or in conjunction with) marketi
ng. However, managers also use forecasts to estimate
 raw material rices, lan f
  
or a ro riate levels of ersonnel, hel  eci e how much inventory to carry, an
a host of other activities. This results  
   in better use of ca acity, more res on
sive service to customers, an im rove rofitability. 5.3 FORECASTING DECISION
VARIABLES
 
Forecasting activities are a function of (1) thetye of forecast (e.g., eman,
technological), (2)the time horizon (short, me ium, or long range), (3) the a
tabase available, an (4) the metho ology emloye (qualitative or quantitative)
       s
. Forecasts of eman are base rimarily on non ran om tren s an relationshi
 

, with an allowance for ran om com onents. Forecasts for  
grou s of ro ucts ten
 
to be more accurate than those for single ro ucts, an short term forecasts ar
e more accurate than long term forecasts
 (greater than five years). Quantificati
on also enhances the objectivity an recision of a forecast.
106
Oerations Management
5.4
FORECASTING METHODS
    
There are numerous metho s to forecasting een ing on thenee of the ecision  

maker. These can becategorize in two ways: 1. O inion an Ju gmental Metho s o
r Qualitative
 Metho s. 2. Time  Series or Quantitative
  Forecasting Metho s. 5.4.1
Oinion an Ju gmental Metho s Someoinion an
  ju gment forecasts are largely
intuitive, whereas others integrate ata an erha s even mathematical or statis
  
tical techniques. Ju gmental forecasts  often consist  of (1) forecasts byin ivi
ual sales   
eo le, (2) Forecasts by ivision or ro uct line managers, an (3) co

mbine estimates of the  two. Historical analogy relies on comarisons;  Delhi re
lies on the best metho  
   from a grou of forecasts. All these metho s can incor o
rate
 ex eriences an ersonal insights. However, results may iffer from one in
ivi ual to the next an they are not all amenable to analysis.So there may be l
ittle basis for imrovement over time. 5.4.2 Time Series Metho s A time series  i
s a set of observations of a variable at regular intervals over time. In ecomo
sition
 analysis, the comonents of a time series are generally classifie as tre
n T, cyclical C, seasonal S,an ran  om or irregular R. (Note: Autocorrelation
effects
 are sometimes
 inclu e as an a itional
 factor.)
 Time series are tabulat
e or grahe to showthe nature of the time e en ence. The forecast value (Ye)
is commonly exresse as a multi licative or aitive function of its comonent
  
s; examles here will be base uon the commonly use multilicative  mo el.Yc =
T. S. C. R multi licative mo el (5.1) (5.2) Yc = T + S + C + R a itive mo el w
   
here T is Tren
 , S isSeasonal, C isCyclical, an R is Ran om com  onents of a s
eries. Tren is a gra ual long term irectional movement in the ata (growth or
oning
ecline). Seasonal effects are similar variations occurring uring corres
erios, e.g., December retail sales. Seasonal can be quarterly, monthly, weekl
 
y, aily, or even hourly in exes. Cyclicalfactors are the long term  swings abou
t the tren line. They are often associate with business cycles
 an  may exten
out toseveral years in   
 length. Ran om com onent are s ora ic (un re ictable) ef
fects
 ue to chance  an unusual occurrences. They  are the resi ual after the tre
n , cyclical, an seasonal variations are remove .
SUMMARY
 OF FORECASTING
  METHODS
Metho Oinion an ju gment (qualitative)
 Sales force comosites Executive
 oini

on (an /or anels)  
Estimates from fiel sales eo le are aggregate Marketing, f

inance, an ro uction managers jointly reare forecast SR MR SR LR L M L M Des
crition Time Relative horizon cost

cont .

Forecasting
 Deman
  
Fiel sales  an ro uct line management Estimates  from regional sales eole are
 
reconcile with national rojections from ro uct line managers Historical anal 
ogy Delhi Market surveys Time series (quantitative) Naive Moving average Tren
rojection Decomosition Exonential smoothing Box Jenkins Associative (quantita
   
tive) Regression an correlation (an lea ing in icators) Econometric Time serie
s (quantitative) Naive Moving average Tren rojection Decomosition Exonential

smoothing Box Jenkins Forecast equals latest value or latest lus or minus some
ercentage Forecast is average of n most recent erios (can also be weighte)
  
Forecast
  is linear,ex onential, or other rojection   of ast tren Time series i

s ivi e into tren , seasonal, cyclical, an ran om com onents Forecast is an e
xonentially weighte moving  average,where latest values carry  most weight
 A ti
me series regression mo el is roose , statistically teste , mo ifie , an rete
ste until satisfactory SR SR MR LR SR LR SR MR LR Use one or more associate var
iables to forecast via a least squares equation (regression) or via a close asso
ciation (correlation) with an exlanatory variable SR MR Forecast equals latest
value orlatest lus or minus some 
ercentage Forecast is average of n most rece

nt erio s (can also  
  be weighte ) Forecast
  is linear,ex onential, or other roj 
ection
 of ast tren Time series is ivi e into tren , seasonal, cyclical, an
 
ran om com onents Forecast is an ex onentially weighte moving average, where la

test values carry most weight SR SR MR
   LRSR LR SR Forecast from com arison with
similar ro uct reviously intro
 uce Ex erts answer a series of questions (ano
nymously),
 receive fee back, an revise estimates Questionnaires/interviews for
ata to learn about consumer behaviour MR SR LR LR MR LR
107
M L M M H H
L L L L L M H
      
 seriesregression mo el is ro ose , statistically MR LR teste , mo ifie
A time
, an reteste until satisfactory
M H
Use simultaneous solution of multile regression SR LR equations that relate to
broa range of economic activity
H
L L L L L M H
   
Associative (quantitative) Regression an correlation (an lea ing in icators) E
conometric Use one or more associate variables to forecast via a least squares e
quation (regression) or via a close association (correlation) with an exlanator
y variable SR MR M H

Use simultaneous solution of multile regression
 equations that relate to broa
range ofeconomic activity Key: L = low, M = me ium, H = high, SR = short range,
MR = me ium range, LR = long range.
SR LR
H
108
Oerations Management
FORECASTING PROCEDURE FOR USING TIME SERIES 
Following are the stes in time series forecasting: 1. Plot historical  ata to c
onfirm relationshi  (e.g., linear, ex onential). 2. Develo  a tren equation (T)
   a seasonal inex (SI, e.g., monthly inex valu
to escribe the ata.  3. Develo 
es).4. Project tren into  the future (e.g.,
 monthly tren values). 5. Multily

tren values by corres on ing seasonal in ex values. 6. Mo ify rojecte values
 ate irregular
by any knowle ge of: (C) Cyclical
 business
 con itions,
 (R) Antici
effects.
 Tren : Three metho s for escribing tren are: (1) Moving average, (2)
Han fitting, an (3) Least squares.
1. MOVINGAVERAGE  
A centere moving average (MA)
 is obtaine by summing an averaging the  values f
rom a given number of  erio s re  etitively, each time eleting the ol est value
  
an a ing a new value. Moving averages can smooth  out fluctuations in any ata,

while reserving the general 
 attern of  the ata (longer averages result
 in mor
e smoothing). However, they o not  yiel a forecasting equation, nor o they gen
erate values for the en s of the ata series.

∑x MA = Number
 of Perio 
A weighte moving average (MAw) allows some values to be emhasize by varying t
he weights assigne to each comonent of the average. Weights can be either erc
entages or a real number.
MA wt =
∑ (Wt ) X ∑Wt
  
I LLUSTRATION 1: Shiments (in tons) of wel e tube by an aluminum ro ucer are
shown below: Year Tons 1 2 2 3 3 6 4 10 5 8 6 7 7 12 8 14 9 14 10 18 11 19
 
(a) Grah the ata, an comment
 on therelationshi. (b) Comute a 3 year moving

average, lot it as a otte line, an use it 
 to forecast shi ments in year 12.
(c)
 Using a weight of 3 for the most recent ata, 2 for the next, an 1 for the
ol est, forecast shiments in year 12.

Forecasting
 Deman
Deman 20 18 16 14 12 Tons 10 8 6 4 2 0 1 2 2 3 6 10 8 7 13 14 14
109
18
19
3
4
5 6 Years
7
8
9
10
11
Table 5.1 3 year moving average Year 1 2 3 4 5 6 7 8 9 10 11 Shiments (tonns) 2
3 6 10 8 7 13 14 14 18 19 3 year moving total 11 19 24 25 27 33 40 46 51 3 year
moving average 3.7 6.3 8.0 8.3 9.0 11.0 13.3 15.3 17.0 

(a)The ata oints aear relatively linear. (b) See Table 5.1 for 
 com utations

an Fig. 5.2 for lot of the MA. The MA forecast for year 12 woul be that of t
he latest average, 17.0 tons. (c)
MA wt =
∑ (Wt ) X ∑Wt
=
(1) (14) + (2) (18) + (3) (19) = 17.8 tons 1+ 2 + 3
2. HAND
 FITTING 
A han fit or freehan curve is sim   
 lya lot of a re resentative
 line that (sub
jectively) seems to best fit the ata oints. For linear ata, the forecasting  e
quation will be of the form: Yc = a + b (X) (signature) where Yc is the tren va
lue, a is the intercet (where line crosses the vertical axis), b is the sloe (
the rise, ∆ y, divided by the run, ∆ x), and X is the time value (years, quarters, e
tc.). The “signature” identifies the point in time when X = 0, as well as the X and
Y units.
110
Operations Management
I LLUSTRATION 2: (a) Use a hand fit line to “develop a forecasting equation for th
e data in Fig. 5.2. State the equation, complete with signature. (b) Use your eq
uation to forecast tube shipments for year 12. (a) Select points some distance a
part. A straight line connecting the values for years 3 and 8 might be a good Fr
ee hand representation of the data. From this we can determine the slope and int
ercept:
∆Y Y −Y 14 − 6 = 2 1 = = 1.6 tons ∆X X 2 − X 1 8 − 3 Intercept: a = 0.5 tons (Note: This is
the estimated Y value at X = 0 from graph.)
Slope : b =
Equation: YC = 0.5 + 1.6X (b) For year 12: Yc
(Yr 0 = 0, X = yrs, Y = tons)
=0.5 + 1.6(12) = 19.7 tons.
3. LEAST SQUARES
Least squares are a mathematical technique of fitting a trend to data points. Th
e resulting line of best fit has the following properties: (1) the summation of
all vertical deviations about it is zero, (2) the summation of all vertical devi
ations squared is a minimum, and (3) the line goes through the means X and Y. Fo
r linear equations, the line of best fit is found by the simultaneous solution f
or a and b of the following two normal equations:
∑Y ∑ XY
= na + b∑ X = a ∑ X + b∑ X
2
The above equations can be used in the form shown above and are used in that for
m for regression. However, with time series, the data can also be coded so that
then dropout, and the equations are simplified to:
∑ X = 0 . Two terms
∑Y ∑ XY
= na = b∑ X 2
a=
∑Y
n
b=
∑ XY . ∑X
2
To code the time series data, designate the center of the time span as X = 0 and
let each successive period be 1 more unit away. (For an even number of periods,
use values of 0.5, 1.5, 2.5, etc.). I LLUSTRATION 3: Use the least square method
to develop a linear trend equation for the data from illustration 1. State the e
quation and forecast a trend value for year 16.
Forecasting Demand
Table 5.2 Year 1 2 3 4 5 6 7 8 9 10 11 X year coded –S –4 –3 –2 –1 0 1 2 3 4 5 0 Y shipmen
ts (tons) 2 3 6 10 8 7 12 14 14 18 19 113 XY – 10 – 12 – 18 – 20 –8 0 12 28 42 72 95 181 X
2 25 16 9 4 1 0 1 4 9 16 25 110
111
we have:
a =
n 11 The forecasting equation is of the form Y = a + bX.
∑ Y = 113 = 10.30
b=
∑ XY ∑X
2
=
181 = 1.6 110
Y = 10.3 + 1.6 X (year 6 = 0, X = years, Y = tons). Seasonal indexes: A seasonal
index (SI) is a ratio that relates a recurring seasonal variation to the corres
ponding trend value at the given time. In the ratio to moving average method of
calculation monthly (or quarterly) data are typically used to compute a 12 month
(or 4 quarter) moving average. (This dampens out all seasonal fluctuations.) Ac
tual monthly (or quarterly) values are then divided by the moving average value
centered on the actual month. In the ratio to trend method, the actual values ar
e divided by the trend value centered on the actual month. The ratios obtained f
or several of the same months (or quarters) are then averaged to obtain the seas
onal index values. The indexes can be used to obtain seasonalized forecast value
s, Ysz (or to deseasonalize actual data). Ysz = (SI) Yc. I LLUSTRATION 4: Snowsp
ort International has experienced low snowboard sales in July, as shown in Table
5.3. Using the ratio to trend values, calculate a seasonal index value for July
and explain its meaning.
112 Table 5.3 Yr 5 July actual sales July trend value, Yc Ratio (actual 22 170 0
.13 Yr 6 30 190 0.16 Yr 7 18 210 0.09 Yr 8 26 230 0.11 Yr 9 45 250 0.18
Operations Management
Yr 10 36 270 0.13
Yr 11 40 290 0.14
Yr l2
÷
trend)
Total = 0.94. (a) A third row has been added to Table 5.3 to show the ratio of a
ctual to trend values for July. Using a simple average, the July index is SIJuly
= 0.94 ÷ 7 = 0.13. This means that July is typically only 13 per cent of the tren
d value for July in any given year. Winter months are likely quite high. I LLUST
RATION 5: The forecasting equation for the previous example, centered in July of
year 4 with X units in months, was Yc = 1800 + 20X (July 15, Yr 4 = 0, X = mo,
Y = units/yr). * Use this equation and the July seasonal index of 0.13 to comput
e (a) the trend (deseasonalized) value for July of year 12 and (b) the forecast
of actual (seasonalized) snowboard sales in July of year 12. (a) July of year 12
is (8)(12) = 96 months away from July of year 4, so the/trend value is: Yc = 18
00 + 20(96) = 3,240 units/yr or 3,240 units/yr 12 mo/yr = 310 units/mo (b) The a
ctual (seasonalized) forecast is Ysz = (SI) Yc = (0.13)(310) = 40 units. 5.5 EXP
ONENTIAL SMOOTHING
Exponential smoothening is a moving average forecasting technique that weights p
ast data in an Exponential manner so that most recent data carry more weight in
the moving average. With simple Exponential smoothening, the forecast Ft is made
up of the last period forecast Ft–1 plus a portion, α, of the difference between th
e l st periods ctu l dem nd At–1 nd l st period forec st Ft–1. F t = Ft–1 + (At–1– Ft–1).
I LLUSTRATION 6: A firm uses simple exponenti l smoothing with α = 0.1 to forec st
dem nd. The forec st for the week of Febru ry 1 w s 500 units, where s ctu l d
em nd turned out to be 450 units. ( ) Forec st the dem nd for the week of Febru 
ry 8. (b) Assume th t the ctu l dem nd during the week of Febru ry 8 turned out
to be 505 units. Forec st the dem nd for the week of Febru ry 15, Continue fore
c sting through M rch 15, ssuming th t subsequent dem nds were ctu lly 516, 48
8, 467, 554 nd 510 units. SOLUTION ( ) F t = Ft–1 + α (At–1– Ft–1) = 500 + 0.1(450 – 500)
495 unit (b) Arr nging the procedure in t bul r form, we h ve
Forec sting Dem nd
T ble 5.4 Week Feb. 1 8 15 22 M r. 1 8 15 Actu l dem nd At – 1 450 505 516 488 467
554 510 Old forec st Ft – 1 500 495 496 498 497 494 500 Forec st error At – 1 – Ft – 1 –
50 10 20 – 10 – 30 60 10
113
Correction New forec st (At – 1 – Ft – 1) (Ft)Ft – 1 + (At – 1– Ft –1) α –5 1 2 –1 –3 6 1 4
497 494 500 501
The smoothing const nt, α, is  number between 0 nd 1 th t enters multiplic tivel
y into e ch forec st but whose influence declines exponenti lly s the d t  beco
me older. Typic l v lues r nge from 0.01 to 0.40. An Ion α gives more weight to th
e p st ver ge nd will effectively d mpen high r ndom v ri tion. High α v lues r
e more responsive to ch nges in dem nd (e.g., from new-product introductions, pr
omotion l c mp igns). An α of 1 would reflect tot l djustment to recent dem nd, 
nd the forec st would be l st period’s ctu l dem nd. A s tisf ctory α c n gener lly
be determined by tri l- nd-error modeling (on computer) to see which v lue mini
mizes forec st error. Simple exponenti l smoothing yields only n ver ge. It do
es not extr pol te for trend effects. No α v lue will fully compens te for  trend
in the d t . An α v lue th t yields n pproxim tely equiv lent degree of smoothi
ng s  moving ver ge of n periods is: 2 α = n +1 5.5.1 Adjusted Exponenti l Smoo
thing Adjusted exponenti l smoothing models h ve ll the fe tures of simple expo
nenti l smoothing models, plus they project into the future (for ex mple, to tim
e period t + 1) by dding  trend correction ˆ increment, Tt, to the current perio
d smoothed ver ge, Ft .
ˆ ˆ Ft +1 = Ft + Tt Figure 5.1 depicts the components of  trend- djusted forec st t
h t utilizes  second smoothing coefficient β . The β value determines the extent to
which the trend adjustment relies on the latest ˆ ˆ difference in forecast amounts
( F − F ) versus the previous trend T Thus:
t t −1
t–1
ˆ ˆ Ft = α At −1 + (1 − α) Ft −1 + Tt −1
(
)
ˆ ˆ Tt = β( Ft − Ft −1 ) + (1 − β)Tt −1
A low β gives more smoothing of the trend and may e useful if the trend is not we
ll esta lished. A high β will emphasize the latest trend and e more responsive to
recent
changes in trend. The initial trend adjustment Tt–1 is sometimes assumed t
o e zero.
114
Operations Management
Fig. 5.1 Components of trend adjusted forecast
Self adaptive models: Self adjusting computer models that change the
values of t
he smoothing coefficients α s nd β s in an adaptive fashion have een developed; th
ese models help to minimize the amount of forecast error. 5.6 REGRESSION AND COR
RELATION METHODS

Regression and correlation
techniques quantify the statistical association etwe
en two or more varia les. (a) Simple regression expresses
the relationship etwe
en a dependent varia le Y and a independent varia le X in terms of the slope and
intercept of the line of est fit relating the two varia les. ( ) Simple correl

ation expresses the degree or closeness of the relationship etween two varia le
s in terms
of a correlation coefficient that provides an indirect measure of the
varia ility of points from the line of est fit. Neither regression nor correla
tion gives proof of a cause effect relationship.
5.6.1 Regression The simple lin
ear
regression model takes the form
Yc = a + X, where Yc is the dependent varia
le and X the independent varia le. Values for the slope and intercept α re obt
ined by using the norm l equ tions written in the convenient form:
b =
∑ XY − nXY ∑ X 2 − nX 2
(1) (2)

a = Y − X
In Equations. (1) and (2), X = (∑
X ) / n and Y = ( ∑ Y ) / n Y are the means of the
independent
and dependent varia les respectively, and n is the num er of pairs
of o servations made.
Forecasting Demand
115

I LLUSTRATION 7: The general manager
of a uilding materials production plant fe
els that the demand for plaster oard shipments may e related to the num er of c
onstruction permits issued in the county
during the previous quarter. The manage

r has collected the data shown in Ta le 5.5. (a) Compute values
for the slope
and intercept
a. ( ) Determine a point estimate for plaster oard shipments when
the
num er of construction permits is 30.
Ta le 5.5 Construction permits (X) 15 9 40 20 25 25 15 35 Plaster oard shipments
(Y) 6 4 16 6 13 9 10 16
SOLUTION:
(a)
Ta le 5.6 X 15 9 40 20 25 25 15 35 184 Y 6 4 16 6 13 9 10 16 80 XY 90 36 640 120
325 225 150 560 2,146 X2 225 81 1,600 400 625 625 225 1,225 5,006 Y2 36 16 256
36 169 81 100 256 950

n = 8 pairs of o servations
X =
(∑ X ) / n
(∑ Y / n)
or or
X= Y=
or
184 = 23 8 80 = 10 8

Y =
=
∑ XY − nXY ∑ X 2 − nX 2

=
2146 − 8(23)(10) = 0.395 5006 − 8(23)(23)
116
Operations Management

a = Y − X
or
a = 10 − 0.395(23) = 0.91

( )
The regression equation is Yc = 0.91 + 0.395 X (X = permits, Y = shipments) Then
, letting X = 30, Yc = 0.91 + 0.395(30) = 12.76 ~ 13 shipments.
STANDARD DEVIATION OF REGRESSION

A regression
line descri es the relationship etween a given value
of the indepe

ndent varia le X and µy – x the mean of the corresponding
pro a ility distri ution o
f the dependent varia le Y. We assume the distri ution of Y values is normal for
any given X value. The point estimate, or forecast, is the mean of that distri
ution for any given value of X. The standard deviation of regression S y – x is a
measure of the dispersion of data points around the regression line. For simple
regression, the computation of S y – x has n – 2 degrees of freedom.
S y− x =

∑ Y 2 − a ∑ Y − ∑ XY
n−2
.
I LLUSTRATION 8: Using the data from illustration 7, compute the Standard Deviat
ion of Regression. SOLUTION
S y− x = S y− x =

∑ Y 2 − a ∑ Y − ∑ XY
n−2 950 − (0.91)(80) − (0.396)(2146) = 2.2 shipments. 8−2
I LLUSTRATION 9: Using the data from illustrations 7 and 8,develop a 95 per cent
prediction interval estimate for the specific num er of shipments to e made wh
en 30 construction
permits were issued during the previous quarter. Note: X = 23
for the n = 8 o servations, and ∑ (X – X)2 = 774. Also, from Illustration 7, Yc = 1
3 shipments, where X = 30; and from Illustration 8, Sy – x = 2.2 shipments. SOLUTI
ON Prediction interval = Yc  tSind where the t value for n – 2 = 8 – 2 = 6 degrees of
freedom = 2.45 and where
S ind
(3)
1 ( X − X )2 S y− x 1 + + = n ∑ ( X − X )2
1 (30 − 23) 2 2.2 1 + + = 2.4 shipments S ind = 8 774 ∴ Production interval = 13  2.4
5 (2.4) = 7.1 to 18.90 (use 7 to 19 shipments).
Forecasting Demand
117

For large
samples (n ≥ 100), Equation 3 can e approximated y using the normal (Z
) distri ution rather than the t, in the form of Yc  ZSy–x (Note:
For 95 per cent
c
onfidence, the Z value is the same as t with ∞ df, which from Ta le 5.7 (given el
ow) equals 1.96.) Also, the significance of
the regression
line slope coefficien
t ( ) can e tested using the expression: tcalc = S where
S = S y − x 1
∑ ( X − X )2

If the value
of tcalc > tdf from the t ta le, the relationship etween the X and
Y varia les is statistically
significant.
Ta le 5.7 t Distri ution values (for 90 per cent and 95 per cent confidence) df
t05 (90%) t10 (95%) 5 2.02 2.57 6 1.94 2.45 7 1.90 2.37 8 1.86 2.31 9 1.83 2.26
10 1.81 2.23 12 1.78 2.17 15 1.75 2.13 20 1.73 2.08 30 1.70 2.04 00 1.65 1.96

5.6.2 Correlation The simple linear correlation coefficient r is a num er etwee
n –1 and + 1 that tells how well a linear equation descri es the relationship etw
een two varia les. As illustrated in Fig. 5.2 r is designated as positive if Y i
ncreases as X increases,
and negative if Y decreases as X increases.
An r of zer
o indicates an a sence of any relationship etween the two varia les.
Fig. 5.2 Interpretation of correlation coefficient
The deviation of all points (Y ) from the regression line (Yc ) consists of devi
ation accounted for y the regression line (explained) and random deviation (une
xplained). Fig. 5.3 illustrates this for one point, Y. Squaring the deviation we
have variation.
118
Operations Management

Fig. 5.3 Deviation of dependent varia le
Total variation = explained + unexplained = ∑ (YC − Y )2 + ∑ (Y − YC )2 The coefficient
of determination r2 is the ratio of explained variation to total variation:
r2 =
∑ (Y − Y )2
∑ (YC − Y )2 ∑ (Y − Y )2
The coefficient of correlation r is the square root of the coefficient of determ
ination:
r =
∑ (YC − Y )2 ∑ (Y − Y )2
When the
sample size is sufficiently large (e.g., greater than 50), the value of
r can e computed more directly form: n∑ XY − ∑ X .∑ Y r = n ∑ X 2 − ( ∑ X ) 2 n ∑ Y 2 −
LLUSTRATION 10: A study to determine the correlation etween plaster oard shipm
ents X and construction permits Y revealed the following:
(
)
∑ X = 184 ∑Y = 80’ n=8 2 2 ∑ X = 5,006 ∑Y = 950 ∑ XY = 2,146 Compute the correlation coeffi
ient.
r =
r =
− ( ∑ X ) 2 n ∑ Y 2 − (∑ Y ) 2 8 (2146) − (184) (80) 2448 = = 0.90. 7430, 400 [8(50
2 ][8(950) − 802 ]
2
( n∑ X
n∑ XY − ∑ X .∑ Y
)

The significance of any value of r can e statistically tested under a hypothesi
s of no correlation.
Forecasting Demand
119

To test, the computed value of r is compared with a ta led value of r for a give
n sample size and significance level. If the computed value exceeds the ta led v
alue, the correlation is significant. 5.7 APPLICATIONS AND CONTROL OF FORECAST
5.7.1 Forecast Controls A simple measure of forecast error is to compute the dev
iation of
the actual from the forecast values. Deviations will vary from plus to
minus, ut they should tend to average out near zero if the forecast is on targ
et. Forecast error = actual demand – forecast demand. The individual forecast erro
rs are usually
summarized in a statistic such as average error, mean squared err
or, or mean a solute deviation (MAD).

n The estimate of the MAD can e continually updated y using an exponential smo
othing technique. Thus the current MADt is: MADt = ∝ ( ctu l – forec st) + (1 – ∝) MADt–1
where ∝ is  smoothing const nt. Higher v lues of α will m ke the current MAD, more
responsive to current forec st errors. When the ver ge devi tion (MAD) is divid
ed into the cumul tive devi tion [ ∑ (Actu l − forecast) ], the result is a tracking
signal: MAD Tracking signals are one way of monitoring how well a forecast is p
redicting actual values. They express the cumulative deviation
(also called the
running sum of forecast error, RSFE) in terms of the num er of average deviation
s (MADs). Action limits for tracking signals commonly range from three to eight.
When the signal goes eyond this range, corrective action may e required.
ILLUSTRATION
11: A high valued item
has a tracking signal action limit of 4 and
has een forecast as shown in Ta le 5.8. Compute the tracking signal, and indica
te whether some corrective action is appropriate.
Ta le 5.8 Period 1 2 3 4 5 6 Actual 80 92 71 83 90 102 Forecast 78 79 83 79 80 8
3 Totals Error (A – F) 2 13 –12 4 10 19 36 |Error| 2 13 12 4 10 19 60 (Error)2 (A– F)
A 169 144 16 100 361 794
MAD =
∑ Error
Tracking signal =
∑ (Actual − forecast)
120
Oerations Management
MAD =
Tracking signal =
∑ Error
n
=
60 = 10 6
 
MAD 10 Action limit of 4 is not excee e . Therefore, no action is necessary. Con
trol charts are a secon way of monitoring forecast
 error. Variations of actual
from
  forecast (or average) values are quantifie in terms of the estimate stan
ar eviation of
   forecast SF . n −1 Control limits are then set, erhas at two or
three stan ar eviations away from the forecast average X or the 2SF or 3SF li
mits are use as maximum 
  acce table limits for forecast error. Note that the lim
its are base on in ivi ual
 forecast values, so you assume that the errors are n
ormally istribute aroun the forecast average. 
I LLUSTRATION 12 (a) Comute the 2SF control limits for the ata given in Illust
ration 11. (b) Are all forecast errors within these limits? (a) Control limits a
bout the mean CL = X  2SF Where
SF =
∑ (Actual − forecast) = 36 = 3.6
∑ (Actual − Forecast )2
X =
78 + 79 + 83 + 79 + 80 + 83 = 80 6
SF =
∑ (Actual − Forecast)2
n −1
=
794 = 196 = 14 6−2
 
Therefore, CL = 80  2(14)
 = 52 to 108 (roun e to integer values). (b) All foreca
st errors (as calculate in Illustration5.11) are within the ::t:: 28 error
 lim
it. Note: Since n is less than 30, this istribution of forecast errors oes not
wholly satisfy the normality assumtion.
FORECAST APPLICATION

Forecasts shoul
 be sufficiently accurate to lan for future activities.
  acc
Low
uracy metho s may suffice; higher
 accuracy usually costs more
 to esign
 an
 iml
 
ement. Long term forecasts—use for location, ca acity, an new  ro uct ecisions 
require
 techniques
 with long term horizons. Short term
 forecasts— such as those fo
r ro uction an inventory control, labour levels, an cost controls–can rely more
on recent history. I LLUSTRATION  
 13:
 A foo rocessing
 com any uses a moving av
erage to forecast next month’s eman . Past actual eman (in units) is as shown i
n Table 5.9.

Forecasting Deman
121
 
(a) Comute a simle 5 month moving average to forecast eman for month 52. (b)

Com ute a weighte 3 month
 moving
 average, where
 the weights are highest for th
e latest months an escen in or er of 3, 2 an 1.  
Table 5.9 Month 43 44 45 46 47 48 49 50 51 Actual eman 105 106 110 110 114 121
130 128 137
SOLUTION (a) 
114 + 121 + 130 + 128 + 137 ∑X = 126 units MA = Number of Perio = 5
(b)
MA wt =
∑ ( wt ) X ∑Wt
=
3 × 137 + 2 × 128 + 1 × 130 797 = = 133 units 6 6
   
I LLUSTRATION 14: For N = 7 years of (Co e ) time series ata, an
∑X
∑ Y = 56, ∑ XY
= 70,
2
= 28.
 t an sloe of the linear tren line. (b) Forecast the Y va
(a) Fin the interce

lue for 6 years istant from the origin. SOLUTION (a) (b) Intercet =
Y 56 = = 8.0 Sloe = N 7
∑ XY = 70 = 2.5 ∑ X 2 28
Yc = a + b (X) = 8.0 + 2.5 (6) = 23.0.
 
I LLUSTRATION 15: The
 following forecasting equation
  has been erive by a least

squares metho to escribe the shi ments of wel e aluminum tube. Yc = 10.27 +
1.65X (1996 = O, X = years, Y = tons/yr)
122
Oerations Management
Rewrite the equation by (a) shifting the origin to 2001; (b) exressing X units

in months, retaining Y in tons er year; (c) exressing X units in months, an Y

in tons er month. SOLUTION (a) Yc = 10.27 + 1.65(X + 5) = 18.52 + 1.65X (yr 20
01 = 0, X = years, Y = tons er year) 1.65 X Yc = 10.27 + 12 = 10.27 + 0.14X (Ju
ly 1, 1996 = 0, X = months, Y = tons er year) 10.27 + 0.14 X Yc = 12 = 0.86+0.0
1 X (July 1, 1996 = 0, X = months, Y = tons er month)
(b)
(c)
    
I LLUSTRATION 16: Quarterly tren values for units eman e have been comute  a
s Ql = 620, Q 2 = 655,Q3 = 690, an Q4 = 725. The corres  on ing seasonal in exes
 
for the quarters  are 0.72, 1.33, 1.05, an 0.90, res ectively. Forecast the act
ual (seasonalize ) sales for Q3 an Q4. SOLUTION For Q3: Ysz = (SI) Yc = (1.05)(
690) =725 units For Q4: Ysz = (SI) Yc = (0.90)(725)=
 653 units. I LLUSTRATION 17
: A sortswear manufacturer wishes to use ata from a 5 year erio to evelo s
   
easonal inexes. Tren values an ratios of actual A to tren T for most months
have alrea y been comute as shown in Table 5.10. Aril an May actual an tren
 
 
values are shown in Tables 5.11 an 5.12.
Table 5.10 Month Ratio AIT Jan. Feb. 0.72 0.58 Mar. Aril 0.85 May June 1.43 Jul
y 1.21 Aug. 1.05 Set. 0.98 Oct. 0.92 Nov. 0.88 Dec. 1.12

Comute 
 the seasonal relatives for A ril an May, correct the total to equal 12.
00, an etermine the resulting seasonal  in exes. See Tables 5.11 an 5.12.
Table 5.11 Year Aril actual Aril tren Aril A/T 1 382 400 0.96 2 401  436 0.92
3 458 472 0.97 4 480 508 0.94 5 533 544 0.98 Year May actual May tren May A/T
I 485 403 1.20 2 530 439 1.21 Table 5.12 3 560 475 1.18 4 592 511 1.16 5 656 547
1.20
SOLUTION Aril total = 4.77 Aril average = 4.77 ÷ 5 = 0.95 May total = 5.95 May a
verage = 5.95 ÷ 5 = 1.19

Forecasting Deman
123
Month Ratio A/T
Jan. Feb.
Mar.
Aril May 0.95 1.19
June July 1.43 1.21
Aug. Set. Oct. Nov. 1.05 0.98
Dec. 12 month.
0.72 0.58 0.85
0.92 0.88 1.12 11.88
12 = 1.01 11.88 Multilying each month’s ratio by the correction factors, we get
Correction factor =
Month Ratio A/T Jan. Feb. Mar. Aril May 0.96 1.20 June July 1.44 1.22 Aug. Set
. Oct. Nov. 1.06 0.99 Dec. 12 month.
0.73 0.59 0.86
0.93 0.89 1.13 12.00
I LLUSTRATION 18: The rouction manager of the sortswear firm in the revious
roblem has rojecte tren values for next summer (June, July, August) of 586,

 
589 an 592.  Using
 the seasonal
 in exes given (1.44, 1.22, 1.60), what actual se
asonalize ro uction shoul the manager lan for? SOLUTION June: Ysz= SI Yc = (
1.44)(586) = 844 July: Ysz = (1.22)(589) =719 August: Ysz = (1.06)(592) = 628 I

LLUSTRATION
 
19: Lakesi
  ital hasuse a 9 month, moving average forecastin
e Hos
g metho to re ict rug an surgical ressing inventory requirements. The actua
l eman for one item is as shown in Table 5.13 Using the revious moving averag
e ata, convert to an exonential smoothing forecast for month 33.
Table 5.13 Month Deman 24 78 25 65 26 90 27 71 28 80 29 101 30 84 31 60 32 73
SOLUTION 
Number of Perio Thus, assume the revious forecast was Ft–1 = 78.
MA =
∑X
=
78 + 65 + …. + 73 9
= 78 units
Then estimate ∝ s α =
2 2 = = 0.2 n + 2 9 +1 So, Ft = Ft–1+ ∝ (At–1 – Ft–1) = 78 + 0.2 (73 – 78) = 77 units.
I LLUSTRATION 20: A shoe m nuf cturer, using exponenti l smoothing with ∝ = 0.1, h
s developed  J nu ry trend forec st of 400 units for  l dies’ shoe. This br nd
h s se son l indexes of 0.80, 0.90, nd 1.20, respectively, for the first 3 mont
hs of the ye r. Assuming th t
124
Oper tions M n gement
ctu l s les were 344 units in J nu ry nd 414 units in Febru ry, wh t would be
the se son lized ( djusted) M rch forec st? SOLUTION ( ) Dese son lize ctu l J 
nu ry dem nd. Dem nd =
344 = 430 units 0.80
– Ft–1)
(b) Compute the dese son lized forec st. F t = Ft–1 + α ( A
t–1
= 400 + 0.1 (430 – 400) = 403 (c) Se son lized ( djusted) Febru ry forec st would
be: F t(sz) = 403 (0.90) = 363 Repe ting for Febru ry, we h ve: ( ) (b) (c) Dem 
nd =
414 = 460 0.90
F t = 403 + 0.1(460 – 403) = 409 F t(sz) = 409 (1.20) = 491
I LLUSTRATION 21: Develop n djusted exponenti l forec st for the week of 5/14
for  firm with the dem nd shown in T ble 5.14. Let α = 0.1 nd β = 0.2. Begin with
a previous ˆ average of Ft –1 = 650, and let the initial trend adjustment, Tt–1 = 0.
Ta le 5.14 Week Demand 3/19 700 3/26 4/2 685 648 4/9 717 4/16 713 4/23 /30 728 7
54 5/7 762
SOLUTION We have: Week 3/19: F t = ∝At–1 + (1 – ∝) (Ft–1+ Tt–1) = 0.1(700) + 0.9(650 + 0) =
655.00 T t = β (Ft – Ft–1) + (1 – β) Tt–1 F t+1 = Ft + Tt = 655 + 1 = 656.000 The 656.00 is
the adjusted forecast for week 3/26. Week 3/26: F t = 0.1(685) + 0.9(655 + 1.0)
= 658.90
Forecasting Demand
125
T t = 0.2(658.9 655) + 0.8(1.0) = 1.58 Therefore
F t+1 = 658.9 + 1.58 = 660.48 T
he remainder of the calculations is in Ta le 5.15. The trend adjusted forecast f
or the week of 5/14 is 711.89 = 712 units
Ta le 5.15 (1) Week (2) Previous average (3) Actual demand At–1 700 685 648 717 71
3 728 754 762 770 (4) Smoothed average (5) Smoothed trendTt Tt 1.00 1.58 1.33 2.
46 3.35 4.39 5.74 7.01 (6) Nextperiod projection
ˆ Ft –1
Mar19 26 Apr. 2 9 16 23 30 May 7 14 650.00 655.00 658.90 659.23 660.20 673.09 68
1.60 692.79
ˆ Ft
655.00 658.90 659.23 666.20 673.09 681.60 691. 79 704.88
ˆ Ft –1
656.00 660.48 660.56 669.06 676.44 685.99 698.53 711.89
EXERCISE
What are forecasts? What are the costs associated with forecasting–or not forecast
ing? Summarize the key features of the more commonly used forecasting method. Wh
at is a time
series, and what are the components of a time series? Explain the (
a) trend, ( ) seasonal, (c) cyclical, and (d) random components of a series. Wha
t steps are involved in using time series data to make a forecast? What is expon
ential smoothing? Distinguish etween, (a) simple regression,
and ( ) simple cor
relation.
Forecast demand for March was 950 units, ut actual demand turned out
to e only 820. If the firm is using a simple exponential smoothing technique wi
th a = 0.2, what is the forecast for April? [Ans. 924 units] 10. Using the resul
ts from Pro lem 1, assume the April demand was actually 980 units. Now what is t
he forecast for May? [Ans. 935 units] 11. A forecaster is using an exponential s
moothing model with a = 0.4 and wishes to convert to a moving average. What leng
th of moving average is approximately equivalent? [Ans. 4 periods] 1. 2. 3. 4. 5
. 6. 7. 8. 9.
126
Operations Management
12. A university registrar has adopted a simple exponential smoothing model ( a
= 0.4) to forecast enrollments
during the three regular terms (excluding summer)
. The results are shown in Ta le 5.16 (a) Use
the data to develop an enrollment
forecast for the third quarter of year 2. ( ) What would e the effect of increa
sing
the smoothing constant to 1.0?
Ta le 5.16 Year Quarter Actual Enrollment (000) 20.50 21.00 19.12 20.06 22.00 Ol
d Forecast (000) 20.00 Forecast Error (000) 0.5 New Forecast (000) 20.20
Correction (000) 0.20
1
1st 2nd 3rd
2
1st 2nd 3rd

[Ans. (a) 20,800, ( ) Forecast would reflect the total amount of variation of pr
evious demand from previous forecast—therefore, no smoothing.]
13. A firm producin
g photochemical has a weekly demand pattern as shown in Ta le 5.17. Using a smoo
thing constant of = 0.5 for oth original data and trend, and eginning
with wee
k I, (a) compute the simple exponentially smoothed forecast and ( ) compute the
adjusted exponentially smoothed forecast for the first five periods.
trend
Ta le 5.17 Week Demand 1 30 2 34 3 22 4 16 5 10 6 10 7 14 8 20 9 30 10 36 11 30
12 10 13 12 14 20 15 30
14. Find the regression equation resulting from the values
∑X
= 70,
∑Y
= 90,
∑ XY =
660,
∑X
2 = 514, n = 10.
[Ans. Yc = 0.25 + 1.25X]
15. A producer of roofing materials has collected data relating interest rates t
o sales of asphalt shingles and found that the unexplained variation = 680, and
explained variation = 2840. (a) Find the correlation coefficient. ( ) Explain it
s meaning. [Ans. (a) r = 0.90 ( ) 81 per cent of the variation in shingle sales
is associated
with interest
rate levels.] 16. The Carpet Cleaner Co.
is attempti
ng to do a etter jo of inventory management
y predicting
the num er of vacuum
s the company will sell per week on the asis of the num er of customers who res
pond to magazine advertisements in an earlier
week. On the
asis of a sample of
n = 102 weeks, the following data were o tained: a = 25 = 0.10
∑ (Y – Y ) ∑ (Y – Y )
c c
2
= 22,500 = 45,000
2
Forecasting Demand
127

(a) Provide a point estimate of the num er of vacuums sold per week when 80 inqu
iries were received in the earlier week. ( ) Estimate (at the 95.5 per cent leve
l) the num er of vacuums sold per week when 80 inquiries were received the week
earlier. (c) State the value of the coefficient
of determination. (d) Explain th
e meaning of your r2 value. [Ans. (a) 33, ( ) Using the large sample approximati
on, the interval
is 3 to 63 ecause Sy–x=15 (c) 0.5 (d) 50 per cent of the variati
on in num er of vacuums sold is explained y the magazine advertisements.]
17. A
recreation operations planner has had data collected on automo ile traffic at a
selected location Y on an interstate highway in hopes that the information can
e used to predict weekday demand for state: operated camposites 200 miles away.
Random samples of 32 weekdays during the camping season resulted in data from w
hich
the following
expression was developed: Yc = 18 + 0.02X.
where X is the num
er of automo iles passing the location and Y is the num er of camposites demand
ed that day. In addition, the unexplained variation is
∑ (Y – Y )
c
2
= 1,470, and the total variation is
∑ (Y – Y )
2
=
4,080. (a). What is the value of the coefficient of determination?

( ) Explain, in words; the meaning of the coefficient of determination.
(c) What
is the value of the coefficient of correlation? [Ans.(a) 0.64 ( ) It tells the
percentage of variation in camposites demanded that is associated with automo il
e traffic at the selected site. (c) 0.80.] 18. Allan’s Underground Systems install
s septic systems for new houses constructed outside the city limits.
To help for
ecast his demand,
Mr. Allan has collected the data shown in Ta le on the num er

of country
uilding permits issued per month, along with the corresponding num e
r of id requests he has received over a 15 month period.
Ta le 5.18 Month 1 2 20 7 3 48 8 4 60 4 5 55 18 6 58 40 7 50 48 8 45 54 9 34 47
10 38 42 11 10 30 12 13 14 5 12 29 15 50 3
No. Building permits 8 No. Bid requests 20
22 10 4

(a) Compute the simple correlation
coefficient r etween the num er of uilding
permits issued and the num er of id requests received in that month. Use all 15
periods of data. ( ) Use the first
12 months of data for uilding permits, and
compute
r etween the num er of uilding permits issued in a month and the num
e
r of id requests received 2 months later (i.e., a 2 month lag). (c) Repeat ( ),
ut use a 3 month lag. (d) Which type of regression model would e est to fore
cast id requests: a same month model, a 2 month lag model, or a 3 month lag mod
el? [Ans. (a) 0.08 ( ) 0.84 (c) 0.96 (d) A 3 month lag model is est. It permits
Allan to explain 93 per cent of the variation in num er of id requests.] 19. T
wo experienced managers have resisted the introduction of a computerized exponen
tial smoothing system, claiming that there judgmental forecast are “much etter th
an any
impersonal computer could do.” There past record of prediction is as shown
in Ta le 5.19.

128 Ta le 5.19 Week 1 2 3 4 5 6 7 8 9 10 Actual Demand 4,000 4,200 4,200 3,000 3
,800 5,000 5,600 4,400 5,000 4,800
Operations Management
Forecast 4500 5,000 4,000 3,800 3,600 4,000 5,000 4,800 4,000 5,000

(a) Compute the MAD. ( ) Compute the tracking signal. (c) On the asis of your c
alculations, is the judgmental system performing satisfactorily? [Ans. (a) 570 (
) 0.53 (c) yes]
REFERENCES
1. Joseph,
G. Monks, Theory and Pro lems of Operations Management, Tata McGraw H
ill Pu lishing Company Limited, 2nd Edition, 2004. 2. Joseph, G. Monks, Operatio
ns Management, McGraw Hill International Edition, 3rd Edition. 3. S. Anil Kumar,
N. Suresh,
Production and Operations Management, New Age International (P) Limi
ted Pu lishers, 2nd Edition, 2008.
Product Development and Design
129
6
PRODUCT DEVELOPMENT AND DESIGN
CHAPTER OUTLINE
6.1 6.2 6.3 6.4 Introduction Purpose of a Product Design Product Analysis A Fram
ework for Process Design 6.5 Design for Manufacture (DFM) 6.6 Design for Excelle
nce • Exercise • References
6.1
INTRODUCTION
Product design is the mother of all operations processes in an organisation. The
processes for manufacture, the planning of production, the processes and checks
for quality depend upon the nature of the product. One may say that it all star
ts with the design of the product. Even the logistics
or plain shipment of the p
roduct
depends upon how or what the product has een designed for. Design gives
the lueprint. When the design engineer keys in the computer aided design or whe
n a product design artist draws lines on a sheet of paper, it starts a train of
activities. 6.2 PURPOSE OF A PRODUCT DESIGN
Is product design a creative designer’s fancy? In popular perception, the term des
igner conjures up images of a maverick yet highly creative artist who in his fit
s of imagination comes up with a hitherto not seen product. What is design witho

ut creativity in it? Indeed, designs are ‘creative’ in nature and they should e so.
However,
in an organisational
context, the design should serve the organisation
al o jectives while eing creative. Since an organisation has a purpose, the pro
duct design should help to serve
that larger purpose. Design starts with concept
ualisation which has to have a asis. Providing value to the customer, the retur
n on investment
to the company and the competitiveness of the company should for
m the asis of the product design effort. What separates a product designer from
a freelance artist is the former’s orientation towards these organisational o jec
tives. A product’s design has tremendours
impact on what materials and components
would e used, which suppliers will e included, what machines
or what type of p
rocesses will e used to manufacture it, where it will e stored, how it will e
transported.
Since a customer does not necessarily imply an already tied up cus
tomer, ut also
a potential one, what and how will the general yet target custom
er community e informed depends upon what the design of the product is. For ins
tance, a simple
130
Operations Management
product
like toothpaste which is also designed to act as a mouth freshner needs
to e placed, advertised, promoted and priced differently. Thus, marketing is al
so impacted y product design. A product design reflects a company’s overall strat
egy. Product development and design is primarily governed y management decision
s with respect to quality and pricing policy. A development programme and a mark
et survey can provide information
as to market
potentialities as well as functio
nal, operational, dependa ility, and dura ility requirements and possi ilities.
Selection of the functional scope and application of standardization, simplifica
tion, and specialization principles are
closely related to plant efficiency and
to its net profit and must therefore e an integral part of management policy. T
he economics
of a proposed new product or new model have to e analyzed in order
to esta lish the market size that would justify
production. Aesthetic considera
tions come normally at an advanced stage, ut may sometimes e a dominant factor
in design,
especially with consumer goods. Finally, product development and des
ign must e carried out with close liaison with the production departments, in o
rder to ensure that the right materials and processes are utilized and that thei
r implications are considered at a fairly early stage. 6.3 PRODUCT ANALYSIS

Many factors have to e analyzed in connection with development and design, fact
ors varying in character and complexity, factors affiliated with
different field
s in production and industrial engineering. Some of these may e grouped as foll
ows: 1. Marketing aspect 2. Product
characteristics
(i) Functional aspect, (ii)
Operational aspect, (iii) Dura ility and dependa ility aspects, and (iv) Aesthet
ic aspect. 3. Economic analysis (i) The profit consideration, (ii) The
effect of
stardardization, simplification, and specialization, and (iii) The reak even a
nalysis.
4. Production aspect
All these factors are interrelated and each presents many i
ssues that have to e carefully considered, as indicated y Figure 6.1. Market r
esearch may guide product engineers in their work to improve existing products o
r to develop new ones. The
design and its characteristics have to undergo an eco
nomic analysis and must e studied in the light of availa le production faciliti
es and techniques. A costing analysis
is naturally dependent
on the sales volume
; hence the suggested
design has to e re evaluated y market research so that
a
sales forecast can e worked out. This expected sales volume provides the asis
for a further
study from the production methods aspect, and the economic analys
is has to e rechecked and perhaps modified. Thus product development and design
is an excellent example of interdependence of a multitude of factors that have
to e reconciled and integrated into a final composition.
Product Development and Design
131
Fig. 6.1 Some interrelations involved in product design

6.3.1 Marketing Aspect First, it is necessary to esta lish that the proposed pro
duct will satisfy a demand in the market,
that what it
is supposed to do and the
services it can offer are oth desira le and accepta le. If no consumption is e
nvisaged, there is no point in proceeding with product design.
132
Operations Management
The demand for the product in the market may already exist, and its volume can t
hen e assessed y consumer research and sales figures for identical or similar
commodities.
Demand can also e created with the introduction of a new product,
either y filling in a gap in the market or y offering new properties, such as
novelty, appearance, or some other specific merits. The volume of such a demand
is more difficult to forecast. Market research is a useful tool in these cases,
ut experience and sound judgment are required to evaluate and apply the results
of such research, and in some cases a certain amount of speculation is inevita
le. We shall discuss some pro lems connected with market research in the next ch
apter. The volume of demand is a function of a multitude of factors, some of whi
ch are closely related to local conditions and are sometimes difficult to define
or measure. It is therefore essential for an enterprise to keep in touch with t
he market and “feel” its trends, especially when this market is remote and different
in character from the local one. This is of particular importance to firms depe
nding on export markets for the distri ution of their products. If we analyze, f
or example, the case of an American manufacturer of automo iles, we shall find t
hat the percentage of output destined for export is rather small, and design pol
icy would therefore e mainly dictated y American tastes and preferences. A Bri
tish manufacturer, however, who sells a su stantial proportion of automo iles ou
tside Great Britain, has to watch carefully the trends in export markets in orde
r to try and amalgamate the requirements and tastes of the various foreign and h
ome markets in an accepta le design. Another pertinent question related to produ
ct design is : Should the customer get what he wants or should he e offered wha
t he is supposed to want? Basically this is an economic question. If management
wants to achieve maximum satisfaction and sets itself as a target to supply the
customer with what he wants, it may e faced with the possi ility of having to p
roduce an infinite variety of models to suit every taste. On the other hand, wer
e management to ignore the customer’s wishes or to maintain that he does not reall
y know what he wants and should therefore
e told what is good for him, the desi
gner’s task would
ecome far simpler, ut the sales department would have to face
an unpredicta le market. In practice, product design is a result of some sort of
compromise etween infinite variety on one hand and the designer’s concept of the
ideal design on the other. In order to try selling this compromise to potential
customers, management resorts to an advertising campaign the policy of which is
dependent on the characteristics of the “compromised design” and on how far it conf
orms to, or differs from, the expressed desires of the market to which such a ca
mpaign is directed.
Generally, the main o jective of advertising is to expand th
e market, this eing achieved y: Providing general information a out the existe
nce of the product. Providing technical information a out its functional charact
eristics or utilitarian purposes. Drawing the customer’s attention to those
attri
utes
of the product which he wants. Winning undecided customers y exhi iting po
ssi le attractions (such as colour, design, novelty, and price) that may persuad
e him to prefer the product to one offered y competitors. Creating demand among
a passive population of customers. Educating the customer, or telling him what
he should want.
Product Development and Design
133
Apart from these direct techniques, management may have
some additional aims, su
ch as increasing the prestige of the firm as a whole, anking
on the popularity
of one product to strengthen or introduce another or to pu licize one aspect of
the firm’s activity for the purpose of raising money or deviating attention
from o
ther activities, and so on. Once the design features
of a product have een asce
rtained, appropriate advertising methods can e selected. 6.3.2 The Product Char
acteristics
FUNCTIONAL ASPECT
When the marketing
possi ilities have een explored, the functional scope of the
product
has to e carefully analyzed and properly defined. The definition of th
e o jective itself rarely tells us very much a out the functional scope envisage
d. A washing machine, for example, has a clearly defined o jective: to wash clot
hing. This does not state,
however,
how the washing should e carried out, wheth
er the machine should e capa le of heating the water prior to washing, whether
rinsing or drying, or oth, are to e done y the machine, and if so y what met
hod, and what should the proportion e etween automatic functioning and manual
supervision. A functional analysis of this kind o viously affects the design of
the machine, its complexity,
its appearance, and its price. Sometimes functional
aspects are detacha le, and usage can e left to the customer’s decision. A steam
iron is a case in point. The additional function of dampening the cloth when re
quired, prior to or during ironing, is incorporated in the steam iron, the main
duty of which is to iron the cloth. The customer can decide whether and when to
exploit this characteristic of the apparatus.
There is a trend to offer function
al versatility
of the product, there y increasing the range of applications and
sometimes com
ining several tools in one. A food mixer, for example, allows for
a large num er of attachments to e added for a variety of duties. Basically
the
mixer housing contains a power unit and a speed regulator, ut it has to e des
igned so as to serve all the attachments, and the customer has to decide and def
ine for himself the functional scope to e compati le with his needs, his taste,
and his pocket. Household power tool sets are designed on very much the same pr
inciple:
The hand drill is the asic unit, and with attachments it can ecome a
ta le drill, a lathe, a polisher, a hedge cutter, etc. Versatility of production
machinery may quite often result
in su stantial savings in floor space and capi
tal expenditure, and this may ecome one of the fundamental factors affecting de
sign policy. Another example of versatility in design is shown in Figure 6.2.
OPERATIONAL ASPECT
After determining the functional aspect, the operational aspect has then to e c
onsidered. Not only must the product function properly, it must e easy to handl
e and simple to operate. Sometimes it has to e adapta le to various operational
conditions, and very often it is su jected
to varying degrees of skill of poten
tial operators. The designer’s
pro lem ecomes all the more critical with
the tren
d for increased versatility
ecause this
characteristic
implies using asic atta
chments as elements for uilding suita le com inations for specific purposes. Th
is requires a certain amount of operator intelligence and skill, which increases
with the complexity of the machine. The scarcity of skill is a prohi itive limi
tation in this respect on the product designer.
134
Operations Management

Fig. 6.2 Desk com inations (simplification
of design). Variety achieved
through
standardization: With a limited num er of components (one piece ta le to without

joined corners or seams, legs made of seamless steel tu es, and interchangea le
drawers) the designer managed to offer 36 possi le com inations while exhi itin
g a pleasant style and functional simplicity (Courtesy: N.V. Wed. J. Ahrend & Zo
on—N.V. “Oda” Stallwerk–Amsterdam, Holland. Designer: Friso Kramer, 1958).

The ‘get ready’
stage efore the operation proper and the ‘put away’ time (including cle
aning) should e carefully analyzed with respect to the excepted skill of the op
erator. Too often one finds ingenious
gadgets (for example, in the field of hous
ehold equipment) that are capa le of performing an operation in a fraction of th
e time normally required ut which involve such complicated preparations or such
lengthy cleaning and ‘put away’ su sequent
operations, that the ratio of net machin
e time
to overall machine time ecomes a surdly small. The eneficial features a
ttri uted to the gadget
in such cases are rather questiona le. Versatility
of eq
uipment should
also e analyzed in this light. Especially when su sequent operat
ions are to e carried out with the aid of different attachments, the designer s
hould always ear in mind the time required for an operator to perform the chang
e over and should make certain that this time is in reasona le proportion to the
operation time.
DURABILITY AND DEPENDABILITY
These are two factors closely related to the selection of materials and class of
workmanship and hence to the design of the product and the economical analysis
of its cost. Quality
is not always a simple characteristic to define, ut dura i
lity and dependa ility are
two factors that often
determine quality and
have to
e carefully considered y the designer. Dura ility is defined mainly y the len
gth of
the active life, or endurance, of the product under given working conditi
ons, ut a measure of the product capa ility to idle or withstand storage
is als
o often considered in assessing dura ility. Dura ility need not always e associ
ated with selection
of good materials.
The actual working life of a match or a r
ocket motor may e rather limited, ut that does not mean that materials for the
se articles may e of low quality. An additional criterion, therefore, has to e
considered, that of
Product Development and Design
135

dependa ility,
or the capa ility of the product
to function when called upon to
do its jo . Returning
to our matches, dependa ility may e related to the num er
of duds in a ox, and while the manufacturer
is eager to reduce this num er to
a minimum, he need not choose the very est raw materials to ensure that not eve
n one match will fail. Dependa ility of rocket motors, however, may e more rigi
dly defined, and first class materials are chosen in spite of the short active l
ife that is envisaged for them in some applications. Another aspect of dura ilit
y is that of maintenance and repair. The amount of repair and preventative maint
enance required for some products is closely related to quality and design polic
y. This is of particular importance when the equipment is supposed to operate co
ntinuously and when any repair involves a loss of running time. Pro lems of conv
enience and accessi ility in operating the equipment have already een discussed
, and the same remarks are valid for maintenance and repair. Easy accessi ility
is a fundamental principle
in a sound design,
and thorough knowledge on the part
of the operational
dura ility, dependa ility, and maintenance
requirements of t
he product are a solutely essential to ensure a well  alanced design within the
policy outlined y higher management.
AESTHETIC ASPECT
In what way does the appearance of a product affect its design? In most cases, w
here the functional scope, dura ility, and dependa ility have already een defin
ed, the aesthetics are mainly concerned with molding the final shape around the
asic skeleton. This molding of shape may very often e severely limited in scop
e, and what finally emerges is sometimes termed a ‘functional shape’. The view that
functional shape is necessarily divorced from aesthetics, especially where engin
eering structures or equipment are concerned, is well exemplified y ridges, lo
comotives, or machines of the late nineteenth or early twentieth century (see, f
or
example, Fig. 6.1. However, a study of the gradual changes in shape of these
o jects in the past few decades would convince us that there has een an increas
ing recognition of the role
of aesthetics in design. This is perhaps
partly due
to man’s aesthetic taste eing reconciled to accepting
these o jects as an integra
l part of the landscape or everyday life, there y leading to a modification of t
he original attitude that these “Monstrosities” are hopelessly ugly and should e le
ft alone.
Functional shape is a concept in its own right among designers. Those
who elieve in functional shape argue that compati ility of function with shape
is logical and should therefore e accentuated and exploited, rather than covere
d up. A standard lamp is first and foremost a lamp and not a flying saucer, and
there is nothing wrong with its looking like a lamp. This approach is referred t
o in Fig. 6.2, where the aesthetic aspects are dealt with at the design stage, a
fter all the other aspects of the proposed product have een analyzed. In some c
ases, however, molding of shape may have financial implications;
for instance, w
hen special materials have to e used or added to those asically required from
the functional point of view or when additional processes are involved. Such cas
es will call for a careful cost analysis of the aesthetic aspects. In extreme ca
ses, aesthetics are the governing factor in design and completely
dominate it. T
his is especially true for many consumer goods, such as automo iles and househol
d equipment, or fashion goods. The functional scope, though more or less defined
and accepted, may also e widened
136
Operations Management
to accentuate the novelty of the new model. But the idea of the new design start
s with the concept of its shape, from which the idea evolves and grows. The tech
nical considerations have to e somehow fitted in at a later stage, this eing i
n complete contrast to the conventional sequence shown in Fig. 6.1. When styling
is a dominant factor in product design, it is often used as a means to create d
emand. Changes in fashion and taste, evolution of form, and the introduction of
new ideas quickly outdate previous designs. If the market is psychologically rec
eptive and eager to discard former designs in favour of new ones, styling ecome
s a race against
time, a race that determines the sala ility of the product. Man
y tools can e utilized y the designer to ring out aesthetic characteristics.
Some of these are: 1. Use of the special materials, either for the parts of the
housing or as additional decorations.
Nota le is the use of chromium strips, pla
stics, wood, glass, and fa rics for the purpose. 2. Use of colour, either natura
l colour of the material concerned or y use of paints, plating, spraying, or ev
en lighting. Composition and contrast of colours is of great importance to the i
ndustrial designer in facilitating convenient operation and attractive appearanc
e. 3. Texture supplements colour, either y appropriate treatment of the given s
urfaces
or coatings. Surface finish and requirements of rightness as determined
y styling may in turn affect the production processes in the finishing stages.
4. Shape denoted y outer contours and similarity to familiar o jects. Shape ca
n e exploited to accentuate particular features, to create a sense of spaciousn

ess or illusions of size, richness and dependa ility. 5. Line is used to reak t
he form, also for the purpose of emphasizing parts of it, or to give a sense of
continuity, graciousness, and sta ility. 6. Scaling the product, either to a lo
wn up size or to a small size (modeling). This creates novelty and a sense of co
mpleteness.
The success of styling of some popular small automo iles in Europe m
ay e partly due to the designer’s talent in creating a feeling of still having th
e full size version, with all its features. 7. Packaging, especially for small i
tems. Novelty and attractiveness
of packaging is often transferred in the mind o
f the customer, attri uting perhaps non existent values to the contents. In extr
eme cases packaging may assume an apprecia le portion of the total production co
sts and ecome the center of the design project. Aesthetic molding, especially w
hen governed y the selection of material, colour, texture, and sometimes even l
ine, has great economic advantages,
since great variety can e achieved at a com
paratively
low cost. The asic product remains the same, and variety is o tained
y finishing processes alone. Henry Ford’s maxim that the customer may choose any
colour he likes, provided it is lack, is no longer
valid. Modern production co
ntrol techniques allow for a vast num er of com inations of colours and textures
to e offered with little difficulty. Aesthetics have een fully recognized as
an integral part of design, and no designer worth his mettle can afford to ignor
e their implications, their tools, and their enefits. 6.3.3 Economic Analysis A
s shown in Figure 6.1, an economic analysis is the key to management decision in
product design policy. Having o tained sufficient information a out customers’ re
quirements and market potentialities
Product Development and Design
137

on the one hand and a detailed study a out the functional, operational, and qual
ity aspects of the proposed product on the other, the economic analysis can proc
eed y seeking an answer to the following questions: What capital expenditure is
required for manufacturing the new product?
What total production costs per pie
ce are envisaged? What is the reasona le margin of profit that can e expected?
Do the price (= total costs + profit) and the features of the product render it
competitive in the market? In what num ers is the product
expected to e sold? H
ere, again, the interdependence of varia
les should e strongly emphasized. Not
one single question in this list can e isolated and solved independently of the
others. The economic analysis is in fact a cyclic and repetitive procedure.
Eac
h question is weighted in the light of the answer and the data provided y the p
revious
question, and all the answers are checked when their turn comes again to
e re evaluated in the following cycles, until a state of equili rium is reache
d and no further modifications to these answers are required.
PROFIT AND COMPETITIVENESS
The measure of competitiveness of the product corresponds to the portion of the
market it succeeds in capturing. This is largely dependent on the value the cust
omer is prepared to put on the product, and on the ratio of this value to the pr
ice. As customer assessment of value is not universally uniform ut su ject to p
reference of features, performance, or taste, ratios of values to prices vary wi
th customers. A state of equili rium is formed in which the market is divided e
tween different preferences.
This equili rium may change: If the ratio of value
to price of the product ecomes more favoura le, when compared with other produc
ts, the product increases its portion of the market and ecomes more competitive
. Such an equili rium is shown in Fig. 6.3 where the total costs include set up,
materials, overheads, storage, and distri ution. The total profit is determined
y the margin of profit per unit and y the sales volume. If the organization s
eeks to increase its profit, it can try one of the following methods 6.3: (a) In
crease the margin of profit per unit, hence the sales price, ut leave the total
production to costs unchanged.
If such a course would not affect the sales volu
me, the total profit would e proportional to the increase in the margin of prof
it per unit. Such
an increase, however, can upset the market equili rium unfavou
ra ly, in that oth the ratio of customers’ value of the product to its price will
deteriorate and the products of competitors will ecome more attractive. The ma
rket may shrink, and the total profit, far from attaining the expected value, ma
y in extreme
cases fall elow its original level. ( ) Leave the total costs unch
anged, ut try to improve the ratio of
value to price and thus widen the market.
This can e done (1) y producing a etter or more attractive product at the sa
me cost, (2) y launching an intense advertising campaign in order to oost the
customer’s assessment of the product value, or (3) y reducing the sales price at
the expense of the margin of profit per unit, in the hope that the market will e
xpand enough to increase total profit. Too marginal a profit per unit is, howeve
r, undesira le, as it allows little
protection from possi le fluctuations in
the
market, and even slight insta ilities may turn a small profit into a sizea le l
oss.
138
Operations Management
Fig. 6.3 Methods for increasing total profit

(c) Reduce the total production costs and
pass some of the enefit to customers
in the form of reduced sales
prices. If oth the profit per piece and the size o
f the market increase, a su stantial improvement in total profits will
e achiev
ed. This
course calls for a continuous search after
etter methods, etter proce
sses, etter materials and their utilization, and etter management to reduce ov
erheads. There are, however, some limitations to the rate of improvement one can
attain, such as
Product Development and Design
139

asic la our and material costs and limited resources or credit hampering expend
iture
on new equipment and machines. Minimum requirements of quality should also
e studied and met, as a reduction in price at the expense of quality is easy e
nough; customer’s assessment of the product value, however, deteriorates according
ly. But reducing production costs and there y expanding the market, while sustai
ning accepted quality standards, offers a challenge to the production engineer.

Pro a ly the most characteristic feature of this process is that it is oth dyna
mic and continuous, that each success is a further advance along the spiral of i
ncreasing productivity and standard of living (see Figure 6.4).
Fig.6.4 Spiral of increasing productivity and standard of living (Courtesy: The
British Productivity Council, Report on Metulworking Machine Tools, 1953).
THE THREE S’S
The three
S’s refer to standardization, simplification and specialization—three rela
ted su jects that are at the root of any economic analysis of product design. Th
e three S’s can e defined as follows: Standardization is the process of defining
and applying the
“conditions” necessary to ensure that a given range
of requirements
can normally e met with a minimum
of variety and in a reproduci le and economi
c manner on the asis of the est current technique. Simplification is the proce
ss of reducing the num er of types of products within a definite range. Speciali
zation is the process where y particular firms concentrate on the manufacture of
a limited num er of products or types of products.
140
Operations Management
The three processes are usually linked together and develop as a logical sequenc
e. From a wide range of requirements it is first necessary to sort out the essen
tial features, define them, and then work out in a scientific manner, the minimu
m variety required to meet these essentials. This is a process of standardizatio
n, and it is mainly an engineering process. Within a given
range, whether covere
d y standards or not, a process of simplification can e carried out with the v
iew of reducing
the variety of products or materials that are produced or purcha
sed. This is oth an economic and an engineering process, and specialization is
one of its natural outcomes.
STANDARDIZATION
Standardization covers a wide field of activity, which may e descri ed y the f
ollowing main categories: Physical dimensions and tolerances of components withi
n a defined range. Rating of machines or equipment (in units of energy, temperat
ure, current, speed, etc.). Specification of physical and chemical properties of
materials. Methods of testing characteristics or performance. Methods of instal
lation to comply with minimum precautionary measures and convenience of use. The
first three categories relate to limitation of the num er of sizes or grades an
d some aspects of quality,
one of the important aims eing interchangea ility of
components or assem lies. Adherence to standards of raw materials is one of the
fundamentals of product design, since any deviation from the standards in this
respect may cause a su stantial increase in the cost of materials. Industry is r
ich with examples in which designers specify “special” materials wheareas the standa
rd grades can do just as well. Standardization and interchangea ility impose cer
tain limitations on the designer and demand higher skill and effort in planning.
It is easy enough when designing a new component to decide that no standard rea
lly meets
the special requirements of the case in hand and that a special part h
as to e specified. What designers seem to forget is that one of the purposes of
standards is to provide solutions to relieve
them of the task of having to solv
e afresh
some asic pro lems, and there y allow them more time to concentrate
on
the roader aspects of the design. Another prerequisite of interchangea ility i
s the precision required of the manufacturing process in order to o tain product
ion
within the specified tolerances. This implies that production control has to
e tightened so that any deviations from the given standards will e immediatel
y noticed and appropriate action can e taken to avoid the process getting out o
f control. Standardization
has, however, many advantages,
some of which may e
riefly listed elow: Reduction of material waste and o solescence. Concentration
of effort in manufacturing;
hence, simplification and specialization. Reduction
in inventories,
oth of materials, semifinished, and finished products. Reducti
on in ookkeeping and other paper work. Lowering the grades of skill required in
manufacture and assem ly. Reduction in price; hence expansion of the market. Re
duction of repair and maintenance costs.
Product Development and Design
141
SIMPLIFICATION
Simplification is a constant source of disagreement etween the sales department
and the production personnel. A production engineer prefers little variety, min
imum set ups, and long runs (Figure 6.5). Simplification ena les the production
department to improve planning, achieve higher
Fig. 6.5 Effect of variety on scheduling
rates of production and machine utilization, and simplify control
procedures. Th
e salesman,
on the other hand, strives to satisfy the customer y giving him a c
hoice or y offering him the nearest to what he wants. The pro’s and con’s simplific
ation are given in the accompanying listing.
Pro simplification Reduce inventories of materials and finished products. Reduce
investment
in plant and equipment. Pro variety Satisfy a wide range of demand.
Ena le etter contact with the market to study
its tastes and requirements. Avoi
d losing orders for more sala le products ecause the customer directs all his o
rders to other vendors. Create demand.
Save storage space.
Simplify planning and production methods. Simplify inspection and control. Reduc
e required technical personnel.
Reduce sales price (through production simplific
ation. and reduction of distri ution costs); hence expand. the market and the pl
ant. Shorten or eliminate order queues.
The last point in favour of variety deserves, perhaps, some further clarificatio
n. Some sales people claim that variety encourages consumption and that, especia
lly where consumer goods are concerned, the psychological effect of plenty creat
es demand. Furthermore, market research y some firms seems to suggest that in s
ome cases similar products tend to capture roughly the same portion of a given m
arket. The prospects of increasing total demand
on the one hand and the firm’s por
tion of the market on the other, may have een the main causes for oosting vari
ety to the extent
142
Operations Management
found nowadays in industry. From the customer’s point of view this is a very unsat
isfactory state of affairs. A flood of variety confuses the customer, who ceases
in many cases to appreciate the fine differences etween similar products and h
as either to make a haphazard
choice or to invest effort, time, and study (and q
uite often money) to ena le him to make an intelligent choice. This is undesira
le for the firm as well. Apart from missing all the advantages listed a ove when
simplification is applied, an analysis of the market sometimes shows that varie
ty
has long passed the saturation point and that an increase in variety will not
e even noticed in the market. Also, the division of the market etween too lar
ge a num er of products makes each portion so small that prices have to e kept
at high levels to avoid losses.

Fig. 6.6 Analysis of sales y products

When a great variety exists, a sales analysis can e made to esta lish the sala
ility of the products. When the accumulative sales income is plotted against the
num er of products
offered for sale, it is very often revealed that a comparati
vely small num er of products contri utes very little in this respect (Figure 6.
5). This is sometimes referred to in industry as the “25% to 75%” relationship ecau
se in many cases it was found that 25 per cent of the products rought in 75 per
cent of the income, although in some extreme cases studies revealed as small as
10 to 90 per cent relationships.
This leads to unnecessary drain
of the firm’s ef
forts, which
should e directed to promoting
the more profita le products. A mor
e desira
le situation is when responsi ility for income is more evenly distri ut
ed etween products (i.e., when the curve is “flat” as is the lower one in (Figure 6
.6), which is achieved
through reduction of variety. The effect of quantity on t
he profit contri ution of the product is illustrated in Figure. 6.6, where the s
ales income
is represented y the straight line Q, in which Q is the quantity s
old and is the income per unit. The costs to the firm consist of: Fixed costs
F, which are independent of the quantity produced and include executive salaries
, depreciation of plant and equipment, etc.
Product Development and Design
143

Varia le costs aQ,
where a respresents the constant total costs per unit, includ
ing materials,
la our, and other direct costs
that vary with the plant activity.
The varia le costs are shown in Figure 6.7 y the straight line aQ.

Fig. 6.7 A reak even chart

The division into fixed and varia le costs represents
only an approximate interp
retation of the total costs function
and may not e valid for a very
wide range
of Q. The total costs are given y the summation of fixed and varia le costs (F
+ aQ),
and the point of intersection of this line with that of sales income is t
he reak even point (BEP) corresponding to a sales volume Q1 gives profit. At th
e point of intersection,

F = aQ1 = Q1 F −a
hence
Q1 =
(6.1)
If a plant is operating at point Q2, it is working with a margin of safety (deno
ted y ∆), which can be defined as follows:
∆ =
and it can be shown that
Q2 − Q1 Q = 2 −1 Q1 Q1
(6.2 a)
∆=
Z F
(6.2 b)
144
Operations Management
where Z is the profit of the plant. The desirable level of the plant activity ca
n be expressed in terms of the safety margin or the profit as
Z Q2 = Q1 (1 + ∆ ) = Q1 1 + F
(6.3)
Fig. 6.8 An annual break even chart
The break even chart may be either on a monthly (Figure 6.8) or yearly (Figure 6
.8) basis. A low BEP is hightly desirable because it increases the safety margin
of the product. From Eqn.(6.1) it is obvious that the BEP can be lowered by thr
ee methods (see also Figure 6.9) as follows: Reduce the fixed costs from F to F′,
thus lowering the BEP to
Q1′ = Q1 F′ F b−a b − a′ b−a b′ − a
Reduce the variable costs coefficient a to a′; hence
Q1′ = Q1
Increase the slope of the income line from b to b′, the new BEP being
Q1′ = Q1
Product Development and Design
145
Fig. 6.9 Methods for lowering the break even point
146
Operations Management
A similar diagram to the break even chart, called the profit volume chart is sho
wn in Figure 6.10, where the fixed costs are marked as a negative quantity on th
e ordinate. The BEP is given by the intersection of the income line with the abs
cissa. Operation below the abscissa incurs a loss; operations above it, a profit
.
Fig. 6.10 An annual profit volume chart
The profitability of the product is indicated by the slope of the income line, c
alled the P/V (ProfitVolume) ratio and denoted by ϕ:
ϕ= Fixed costs (Profit) + (Fixed costs) F = = =b−a Volume at BEP Volume Q1
and the profit
Z = (b − a) Q − F = ϕQ − F
(6.4)
THE ECONOMICS OF A NEW DESIGN
When the launching of a new design or model is contemplated, a careful analysis
of the economics of the proposed project has to be undertaken. The purpose of in
troducing a new model to the market may be two fold: 1. To increase the profit o
f the organization. 2. To avoid decline in sales of an existing model due to ser
ve competition. Such a situation calls for incorporating novelty and new feature
s in the company’s products; even when no immediate increase in the profit is envi
saged, it is aimed to achieve such an increase on a long term basis.
Product Development and Design
147
The profit of an existing product is computed, using Eqn. 6.5, as (6.5a) Z 1 = ϕ1Q
1 − F where Q1 is the number of pieces sold. If a new design is to be put into pro
duction, preparation costs incurred will include: Design and engineering. Produc
tion planning. Tooling, jigs, and fixtures; resetting of machines, etc. Purchase
of special machines or equipment. Changes in layout. These preparation and “chang
eover” costs (symbolized as s) will have to be returned by the new design, so that
the new profit should be Z 2 = j2Q2 – F – s (6.6) It has been assumed here that the
fixed costs are mainly dependent on the existing machinery of the organization
and are therefore not likely to change very much. It is desirable that the new p
rofit will be larger than, or at least equal to, the existing one or Z2 ≥ Z1
hence,
Z2 – Z1 = ϕ2Q2 – ϕ1Q1 – s ≥ 0.
This condition tells us how many units of the new design ought to be sold in ord
er to ensure that total profit does not decline: Q2 ≥ or where D stands for the ra
tio
ϕ s + 1 Q1 ϕ2 ϕ2 s ϕ2 ≥ 1 + D ϕ1 Z1 + F P/V ratio of old design ϕ1 = ϕ2 P/V ratio
(6.7)
D=
(6.8)
It is clear that unless the P/V ratio of the product can be greatly improved, th
e organization will have to sell more in order to justify the capital investment
required for the introduction of the new design. If, for example, the P/V ratio
of the new design remains at the same level as that of the old one, D=1 hence,
or
s Q2 ≥ +1 Z1 + F Q1
Q2 > Q1
This fact is illustrated in the profit volume chart shown in Figure 6.11. Line c
ircle represents the existing product, yielding profit Z1 when Q1 units are sold
.
148
Operations Management
Fig. 6.11 Effect of P/V ratio on the required market size of a new design
For a new design, the preparation costs are added to the fixed costs F. If the P
/V ratio is 2 unchanged (line 2), it is necessary to sell Q2 units to obtain the
same profit. From the similarity of triangles it is easy to see that in this ca
se
Q2 s + Z1 + F = +1 Q1 Z1 + F
which is what we obtain from Eqn. 6.7 when D = 1. If an increase in the market i
s not envisaged, the P/V ratio must be increased (line 3). It is possible to ach
ieve the original profit at Q3 < Q1 if the P/V ratio is steep enough (line 3). H
owever, even when the number of pieces sold is to remain unchanged (Q4 = Q1), it
is necessary to have a higher P/V ratio than the existing one (line 4), while a
decrease in the P/V ratio will increase appreciably the required sales volume (
line 5). Example The annual fixed costs of a product are known to be $200,000 an
d the annual net profit $40,000 the average monthly sale being 820 units. A new
design is contemplated, involving an expenditure for preparations amounting to $
80,000, to be returned in two years. It is expected that with new production me
thods the P/V ratio may be increased by 5 per cent. What should the annual sales
figure for the new design be (i) so that the same net profit will be realized;
(ii) so that in addition to this profit a yield of 10 per cent on the capital in
vested will be obtained? SOLUTION (i) The ratio D = 1.00/1.05 = 0.95. The additi
onal expenditure per year s = 80,000/2 = $40,000.
Product Development and Design
149
40,000 Q2 s ≥ 1 + 0.95 = 1.11 D = 1 + 40,000 + 200,000 Q1 Z1 + F Annu
ed: Q ≥ 1.11Q1 = 1.11 × 12 × 820 = 10920 units. (ii) In the first year 10 per cent of
the investment (i.e., $8,000) has to be added to the profit, or Z2 = $48,000. Th
e following expression for Q2/Q1 can be obtained by use of Eqns.6.5a and 6.6. S
+ Z2 + F Q2 ×D = Z1 + F Q1
Hence,
Q2 = Q1
40.000 + 48.000 + 200.000 0.95 = 1.14 40.000 + 200.000
or Q2 ≥ 1.14 × 12 × 820 = 11,220 units. Similarly, in the second year, Z2 = 40,000 + 4
,000 = $44,000 Q2 40,000 + 44,000 + 200,000 = 0.95 = 1.12 and 40,000 + 200,000 Q
1 or Q2 ≥ 1.12 × 12 × 820 = 11,020 units. The case where the same profit should be rea
lized by an unchanged volume of sales deserves special attention. It is often ve
ry difficult to forecast, let alone ascertain, an increased market for a new des
ign, and considerations of “change over” have to be based on the assumption that the
sales volume will remain constant, i.e., Q1 = Q2. As already mentioned, this wi
ll require an improvement in the P/V ratio, which can be quantitatively determin
ed by
s 1 + D=1 Z1 + F This relation is shown in Figure 6.12. Any point on the curve r
fers to a resultant profit equal to the existing one, while for any point below
the curve, an increased profit is implied.
Fig. 6.12 Required improvement of the P/V ratio when Q1 – Q2 to yield a profit Z2
> Z1.
150
Operations Management
6.3.4 Production Aspect Last but not least in the list of factors influencing de
sign is the production aspect. The product need not only be well planned on the
drawing board, but its design must also be capable of being eventually translate
d into palpable fact. The designer must therefore face a multitude of practical
production problems. “Design for production” has become a motto among designers. The
following three aspects of production engineering have to be weighed: 1. Select
ion of processes that will be the most suitable and economical for the purpose.
Such a selection will have to consider: (i) The production quantities involved.
Some processes are very expensive to operate unless used for a suitable producti
on run. (ii) Utilization of existing equipment. Such considerations may override
acquisition of equipment for an ideally more suitable process. (iii) Selection
of jigs and fixtures and other production aids, the use of which may affect the
design of components. (iv) Sequence of operations and methods for subassembling
and assembling. (v) Limitation of skill. The selection of a process must be comp
atible with available skill and sometimes may be solely governed by it. Mechaniz
ed and push button equipment is particularly suitable to non skilled or semiskil
led operators, but it is usually expensive to install and must be justified by l
ong runs. (vi) Application of new production processes. The designer has to cons
ider not only conventional techniques but also the latest developments and resea
rch into newer production methods. 2. Utilization of materials and components wi
th the view of (i) Selection of materials having appropriate specifications. (ii
) Selection of method or design to reduce waste and scrap. (iii) Using standard
components and assemblies. (iv) Having interchangeability of components and asse
mblies with in the product. 3. Selection of appropriate workmanship and toleranc
es that satisfy quality requirements, but which are at the same time compatible
with the precision and quality that can be attained through the available proces
ses. Specification of quality may also affect the selection of processes. 6.4 A
FRAMEWORK FOR PROCESS DESIGN
Process design can be viewed as an interative exercise. That is, problems are so
lved one at a time and sequentially; then after each stage, or perhaps after sev
eral stages, the previous stages are reexamined to see if later steps have affec
ted the best way in which these steps should have been designed. This procedure
is illustrated in Fig. 6.13. 6.4.1 Product Planning Product planning serves as a
n input to process design. However, in most cases the responsibility for this ph
ase rests with groups, such as marketing and engineering, which are generally fo
und outside the domain of process design. It is early in this stage that the per
ceived needs of the consumer are
Product Development and Design
151
identified. If the process is service oriented, thesee needs will be reflected i
n the proposed quality, speed, cost, and reliability of the service. If, on the
other hand, the process will be manufacturingoriented, then these needs will be
reflected in the product’s proposed quality, cost, function, reliability and appea
rance. When these service or product parameters are transformed into a product,
design, it is essential that a cross functional alliance between product, planni
ng and process design groups be established in order to ensure that the product
objectives can indeed be profitably met. Otherwise only local goals may be pursu
ed. For example, the marketing and engineering departments working alone may des
ign a product which is very costly to manufacture and very difficult to service.
In short, the transformation process should be considered well before the desig
n is finalized. This can usually be accomplished in the following way: Informati
on from the product development stage can be directed to those responsible for p
rocess R&D. They in turn can determine if the process capability for this produc
t now exists within the firm, whether it exists outside the firm or whether rese
arch and development effort would be necessary to meet the specified objectives.
Rough cost estimates would also be made for each alternative identified. In lar
ge firms a special process R&D department may be organized just for this purpose
. In smaller firms this function is less formalized and more reliance would be p
laced on outside suppliers of processing equipment and company engineers.
Fig. 6.13 The process planning task. (From Howard L. Timma and Michael F. Pohlen
, The Production Function in Business, Richard D. Irwin, Inc., Homewood, (II., 1
970, p. 302.)
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Operations Management
As the process R&D phase progresses, information is feedback to the product deve
lopment group. If the R&D group will be able to comply with the product specific
ations, then the product final design stage can begin. If there are problems, ho
wever, in complying with product specifications, then modifications in the produ
ct development stage must occur. Information from both product final design and
process R&D are inputs to the process design stage. The purpose of this stage is
to generate alternative ways of meeting the objectives formalized in the final
design stage, determine the criteria by which they will be evaluated, and make t
he final selection. 6.4.2 Process Design : MACRO Process design : macro is compo
sed of two aspects: the choice of work station and the choice of work flow. Work
station selection involves the choice of machines to be included in the process
, whereas work flow analysis concerns the flow of work between these stations. I
t is here that the decision is made as to whether the process will be continuous
, intermittent, or some combination of both. In continuous processing, the proce
ss is in constant operation and usually involves a high capital to labour ratio.
Typical of a continuous process orientation are the automobile industry, chemic
al processing, plastics, some high volume electronic manufacturers, and some uti
lities such as telephone, power and gas transmission. Also characteristic of con
tinuousprocess industries is a product layout where all the work stations are de
voted exclusively to a single product and are grouped according to the processin
g requirements of that product. In more cases than not, the machines found at th
ese work stations are special purpose and costly and have little versatility out
side their own product line. Work flow is largely specified by the physical char
acteristics that the product layout takes. Often a conveyor system is used. An e
xample of this kind of process is an assembly line for machining engine blocks a
t an automotive plant. At the other end of the spectrum we find intermittent pro
cessing. Here production or service for any one job is carried on intermently, n
ot continuously. There is a high mix of products which use the facility, and por
tions of the process may be in operation several times during the day or only oc
casionally during the month. Usually the relatively low demand for each product
or service does not warrant the high investment in a continuous process. Typical
of intermittent processes are job shops, emergency rooms in hospitals, hospital
laboratories, most office work, many educational processes, and most services.
The predominant plant layout that one expects in intermittent processing is a pr
ocess layout. In a process layout, machines or services of the same category are
grouped together. We therefore find lathes, milling machines, inspection statio
ns, and so on, in one location. A characteristic of the process layout is that t
he particular sequence of operations that one job follows is seldom repeated by
other jobs flowing through the process. For example, the sequence from admittanc
e to discharge in a hospital is seldom the same from one patient to the next. A
patient may or may not have X rays, may or may not have surgery, may or may not
undergo physical therapy, etc. Consequently the work flow is not nearly as predi
ctable as in the continuous process case, and we therefore find variable path eq
uipment, such as forklift trucks, employed in processes of this type. The criter
ia used to make the choice between these two layouts include investment costs, m
aterial handling costs, direct labour costs, space requirements, equipment flexi
bility in meeting changes in output quantity, system reliability and maintenance
costs. These economic and noneconomic factors must, in turn, be weighed before
making the final decision.
Product Development and Design
153
6.4.3 Process Design : MICRO In the next stage attention shifts to the details t
hat make up the work at each station. Concern is with the operational content an
d operational method of The task Operational content focuses on the appropriate
combination of steps that should be assigned to a work station. Operational meth
od, on the other hand, is concerned with the efficient execution of these steps.
PLANT PLANNING SYSTEM
If a new plant will be built, then process planning proceeds in a relatively con
straint free setting. If, however, the process must be installed in existing pla
nt, then a set of special constraints must be observed. Therefore, the process p
lanning system must interact with the plant planning system to ensure feasible l
ayouts.
PROCESS DESIGN AS AN ONGOING ACTIVITY
Process design is not strictly limited to new design. Whenever the costs of inpu
ts change by a substantial amount, or whenever output levels or quality objectiv
es change, process review should be initiated. If the reason for the reexaminati
on is a price change in an input factor, then a new input mix reflecting the dif
ferent price ratio of the substitute inputs may be desirable. For example, if wa
ge rates increase substantially as a result of a new labour contract, it might b
e possible that automated sequences in the production line which were inefficien
t uses of capital before might now be profitable. Process design, then, should b
e a continuous activity—not one which is precipitated only when new products or se
rvices are introduced. Since it is continuous, the question of how much money to
spend in its pursuit is of utmost importance. The amount which should be spend
depends, of course, upon the benefits accured. At the limit, effort should conti
nue as long as the marginal benefits from the improvement are greater than the m
arginal costs. Again we use the word marginal, since it is only those costs that
change which are relevant. Fixed costs and some semivariable costs, to the exte
nt that they are not affected by the redesign, are irrelevant. For firms at the
continuous process end of the spectrum, considerable effort can be channeled in
this direction. Small improvements made in the process are magnified when the vo
lume going through each stage is large. Cost savings in the automotive industry,
for example, are measured in fractions of a cent per unit. In the service indus
tries, on the other hand, savings are usually measured in dollars, but the volum
e through each station is, of course, much less. If redesign requires investment
, it seems reasonable to subject the investment to the review of the capital bud
geting process. Therefore, this investment, along with all the other which the f
irm is considering, must face the final selection process in which only the most
profitable survive. 6.5 DESIGN FOR MANUFACTURE (DFM)
Competing on time has much to do with the manufacturing/operations flow times. I
t is obvious that a proper planning of the production processes, their workload
distribution, the scheduling decisions planning of the required materials and me
n, and removing bottlenecks would result in improved throughputs. However, what
is not obvious is the fact that a good product design can help substantially tow
ards the reduction in the manufacturing flow time.
154
Operations Management
A good product design would be such that it makes many or all of the manufacturi
ng related functions to be done in less time, less effort, and with less cost. S
uch a product design would facilitate the manufacturing function. The manufactur
ing related operation include: Material procurement, Material handling, Product
conversion (e.g. machining processes), Changeovers and set ups, and Quality cont
rol procedures. All of these, if not handled properly, could lead to increased l
ead times. A good product design takes the facts or realities of these operation
s into consideration, incorporates them into the design and thereby facilitated
these operations.
WHAT IS DFM?
The idea behind a DFM effort is to modify the existing product’s (and/or its compo
nents’) design or have a new product designed in such a way that the processes to
manufacture the same are easier, quicker and or less expensive. Reducing the man
ufacturing time is a major consideration. This, of course, has to be achieved wi
thout compromising on quality. DFM, as a concept, is not new although its huge i
mportance has dawned on the manufacturers only lately because of the intensity o
f competition in the present times. It was Eli Whitney (and Le Blanc) in the Wes
tern part of the world, who developed system 200 years ago for manufacturing mus
kets that incorporated the concept of interchangeable parts. Earlier, all musket
s were handmade. This was cumbersome in addition to being expensive. It was also
terribly time consuming and made the immediate availability in large number a d
ifficult task. Whitney redesigned each part to a specific dimension with a limit
ed tolerance. This paved the way for mass manufacture of muskets. Thus, he desig
ned the musket (and its components) for large scale manufacturability. Henry For
d seemed to have grasped the concept of DFM about 90 years ago. The following st
atement by him, about Model T succinctly expresses the idea behind DFM. “...It was
up to me, the designer, to make the car so completely simple...The less complex
the article, the easier it is to make, the cheaper it may be sold...We start wi
th the consumer, work back through the design, and finally arrive at manufacturi
ng.”* Product design influences the efficiency of manufacturing. Thereby it influe
nces the flexibility of marketing strategies and the organisation’s success in a c
ompeting business world. Cultural barrier: It is indeed surprising that despite
the emphasis during the last several decades on increasing efficiency in manufac
turing, the importance of product design for manufacturing efficiency has not be
en appreciated. A majority of the organisations have had the design department a
nd the manufacturing department hardly ever interacting. Product designers in so
me manufacturing industries have been sitting in ivory towers. They are highly r
espected, as their job is perceived to be creative like that of an accomplished
artist, whereas, the manufacturing executive is seen as a rough and tough person
who has risen from the ranks, and therefore lacking in such finer abilities. A
cultural barrier seems to separate the designer of the product and the person ma
nufacturing the product.
Product Development and Design
155
‘Over the Wall’ syndrome: Product designer believe that their job is over once they
release their drawings. They, so to say, throw their designs ‘over the wall’, for th
e manufacturing person to do the next job of producing it. Manufacturing enginee
rs then struggle to produce the product that is ‘dumped into their laps’. At their b
est, design and development people have been more concerned with how a particula
r feature requested by marketing may be translated into a physical parameter. Ho
w it may be produced, what it may cost and in what time, have not been much of t
heir concern. As a result there are several engineering changes after the design
has been released, because the design gives multitudinous problems when taken u
p for manufacture. The solution of these problems wastes precious time, and by t
he time the company has made the product it is too late as the market has shifte
d. It would have been so much better if the two departments—design and manufacturi
ng—had sat together during the early stages of product design and exchanged notes.
With the heat of the global competition intensifying, companies have now starte
d to seriously think as to how their products could remain competitive in a dyna
mic market. The Japanese companies such as Toyota, Honda, Mitsubishi and several
others have been the forerunners in manufacturing products that were of high qu
ality, yet inexpensive and available at short notice. They have done this consis
tently over the years, have been quite profitable all through and growing in the
international markets, notably in the Western markets. They achieved this despi
te the fact that it was the West that had been the harbinger of computer technol
ogy and automation, While it was Whitney and Henry Ford who had initiated the co
ncept, their message was lost because of the preoccupation with technological su
periority. The Japanese have much automation in their factories too; however, th
ey seem to have grasped the value of simplicity in the plants—fewer parts, same or
similar parts and parts that are simpler to manufacture. Table 6.1 presents som
e DFM principles for assemblies.
Table 6.1 DFM Principles for Assemblies
I. Minimise the number of parts (i) Reduce the absolute requirement of the varie
ty of parts. Design the product in such a way that it consists of very few parts
. Use a different technology, if necessary. (ii) Combine parts where feasible Pa
rts can be combined with other parts when: They are of the same material. They d
o not move relative to other parts in the assembly. Their combination would not
affect the assembly of other parts. After sales service does not require these t
o be separated. II. Standardise designs Standardise wherever possible: Parts, mo
dules, sub assemblies, manufacturing processes and systems may be standardised.
Where the parts cannot be the same, see if they can be similar. Apply ‘group techn
ology’ concept of ‘families’ of parts. Where possible use standard catalog components.
156
Operations Management
III. Minimise number of operations is the assembly IV. Modify the part/s with si
mplification of assembling in mind Even minor modifications yield greater Assemb
ly simplification Slight changes in a part’s geometry can reduce the difficulty in
grasping, positioning and inserting a part. The effort and time taken can reduc
e significantly. Human errors of putting a wrong part or of orienting it wrongly
can be reduced.
Fig. 6.14 Facilitation of insertion of parts by the use of funnel shaped opening
s and tapered ends,
Source : Bralla, J.G., Design for Excellence, McGraw Hill, New York, 1996.
V. Use modules This allows for more standardisation and speeds up the assembly p
rocess. VI. Minimise ‘new’ ness Minimise: new parts new processes new suppliers new
machines New things—particularly too many new things—introduce many imponderables an
d increase uncertainty and, consequently, errors resulting in unacceptable quali
ty and time delays in assembling. VII. Use ‘Poka Yoke’ or fool proofing Design in su
ch a way that the parts cannot be assembled incorrectly. 6.6 DESIGN FOR EXCELLEN
CE
While designing for manufacturability, the product design team should keep in it
s consideration the entire product family. Unitary approach may only result in s
ub optimiation. Moreover, by the same logic, the designer/team should look beyon
d its own organisation to other associated organisations in the value chain. Des
ign being a strategic activity, the design effort should not only improve the pr
esent efficiencies but should also keep the future in view while making the desi
gn and other changes. Finally, customer service should be the motto that should
drive the product design effort in any organisation. Hence product design should
be an all round exercise, contributing to the overall excellence of the organis
ation. DFM is only about one aspect amongst many. Truly, the efforts should be t
owards design for excellence or DFX (X ≡Excellence).
Product Development nd Design
157
A key p rt of ny product re liz tion process is the robustness of the design. “De
sign for” initiatives such as Design for Assem ly, Design for Cost, Design for Man
ufacturing, Design
for Test, Design for Logistics, Design for Performance, and s
o on are now eing referred to as Design for Excellence (DFX). It was found that
Japanese design emphasizes two key areas; the overall development process and c
oncurrent engineering. As shown in Figure 6.15 there is a strong customer focus
at the product planning phase and in the product evaluation phase of the product
development process. The overall product development process is rooted in what
Japanese firms call the “marketin”.
Market in refers to having a clear set of custom
er driven requirements as the asis for product development. This is a fundament
al requirement for DFX. Concurrent engineering of product design and development
activities provides the second main step in achieving DFX.
Fig. 6.15 Japan’s product development activities (Toyoda Machine Tool Co.)
“In order to effectively deploy a timely design, thorough testing of the design an
d process training are considered a must. A successful DFX process requires care
fully managed design of new products. As shown in Figure 6.16 there are numerous
activities that must e coordinated in order to develop and implement a success
ful product realization
effort. Information must e gathered and analyzed from
r
egions of the glo e in which products will e introduced, and products must e m
arket tested in those specific regions.
An engine
controller for use in an Ameri

can version of a Japanese automo ile, would, y necessity, receive its relia ili
ty testing in the United States.
158
Operations Management

Products that are targeted glo
ally also get tested in Japan in order to careful
ly control the products’ glo alization. Technology development activities must ope
rate in parallel with product technology planning and market development plannin
g to assure timely development and introduction of new products.
Fig. 6.16 Concurrent development requirements (Sony Corp.)
6.6.1 Concurrent Development Activities Focus on concurrent engineering is preva
lent in all the organizations. The primary o jective is to get the overall desig
n right at the lowest cost. This requires making critical decisions as to produc
t features/functions, manufactura ility, and most importantly, cost. Firms use a
variety of concurrent engineering schematics to depict product, process, and eq
uipment development efforts. For a firm with a core material competence, the pro
duct is often a new material, and its schematic would show concurrent developmen
t of materials, process, and equipment. Concurrent engineering is a culture in J
apan. New products and materials are developed simultaneously with the processes

and equipment needed to produce them. Japanese firms first attempted to reak d
own functional arriers as part of the TQM (total quality management) activities
initiated to incorporate quality into product design activities. This was the
eginning of what is today referred to as concurrent engineering. MITI descri ed
the first functional integration model ased on teams, as shown in Figure 6.17.
This approach is a minimum requirement for competitive success in product develo
pment and for facilitating
rapid product introductions. MITI points out that clo
se coordination etween functions dramatically cuts time to market. The pro lem
with this model is that anyone of the functions can still ecome a ottleneck to
development activities ecause of shared resources.
Product Development and Design
159
Fig. 6.17 Functional Integration required for technological innovations (MITI)

Going eyond team developments, the concept of concurrent engineering is eing p
racticed in Japan under TQM systems. To shorten time to market for new technolog
ies, firms
are working simultaneously to develop component and insertion technol
ogies to e introduced at the time the product is prototyped. As shown in Figure
6.18 concurrent engineering requires parallel implementation of all functional
activities.
Fig. 6.18 Concurrent engineering for product innovation (MITI)
160
Operations Management
EXERCISE
1. How does a good product design increase Organisational efficiencies? 2. Shoul
d the product design concern itself with Organisational efficiencies? Discuss. 3
. Why did, in your opinion, Henry fords message on product design get lost for s
o many decades? Discuss. 4. ‘DFM is value engineering for manufacturing.’ Do you agr
ee with this statement? Explain. 5. Discuss the merits and demerits of using pla
stic parts in a product. 6. Would DFM suppress creativity
in a firm? Discuss. 7.
Several functions in the companies are getting to e strategic, product design
eing one of them. If that is the case, how should the organisation cope with th
is situation of multiple strategic functions? 8. “A Good Product Design Contri ute
s To “TQM” in the Organisation.” Explain how this may happen. 9. Wouldn’t relia ility co
ncerns clash with DFM concerns? Discuss. 10. What is DFX? What
all is included i
n DFX? 11. Time
is money. How can a product design project e hastened? 12. What
are the pro lems, if any, with concurrent Engineering? 13. How will you incorpo
rate environmental
concerns into product design? Discuss. 14. Can there e a des
ign for disassem ling? Where could this concept e useful? Give your tips for su
ch a design.
REFERENCES
1. S.N.
Chary, Production and Operation Management, 3rd Edition, Tata McGraw Hil
l Pu lishing Company Limited,
2004. 2. Eilon, Samuel, Elements of Production Pla
nning and Control, Bom ay Universal Book Co. 1985. 3. Barry Shore, Operations Ma
nagement, McGraw Hill Pu lication, 1973.
7
MATERIALS MANAGEMENT
CHAPTER OUTLINE
7.1 Introduction and Meaning 7.2 Scope or Functions of Materials Mangement 7.3 M
aterial Planning and Control 7.4 Purchasing 7.5 Stores Management 7.6 Inventory
Control or Management 7.7 7.8 7.9 7.10 7.11 Standardization Simplification Value
Analysis Ergonomics (Human Engineering) Just in Time (JIT) Manufacturing • Exerci
se
7.1
INTRODUCTION AND MEANING
Materials management is a function, which aims for integrated approach
towards t
he management of materials in an industrial undertaking. Its main o jective is c
ost reduction and efficient handling of materials at all stages and in all secti
ons of the undertaking. Its function includes several important aspects connecte
d with material, such as, purchasing, storage, inventory control, material handl
ing, standardisation etc. 7.2 SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT

Materials management is defined as “the function responsi le 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 mi
nimum cost”. From the definition it is clear that the scope of materials managemen
t is vast. The functions of materials management can e categorized in the follo
wing ways: (as shown in Fig. 7.1.) 1. Material Planning and Control 2. Purchasin
g 3. Stores Management 4. Inventory Control or Management 5. Standardisation 6.
in Time (JIT) All the a
Simplification 7. Value Analysis 8. Erogonomics 9. Just
ove mentioned functions of materials management has een discussed in detail in
this chapter.
162
Operations Management
Fig. 7.1 Scope of materials management
1. Materials planning and control: Based on the sales forecast and production pl
ans, the materials planning and control is done. This involves estimating the in
dividual requirements of parts, preparing materials udget, forecasting the leve
ls of inventories, scheduling the orders and monitoring the performance in relat
ion to production and sales. 2. Purchasing: This includes selection of sources o
f supply finalization in terms of purchase, placement of purchase orders, follow
up, maintenance of smooth relations with suppliers, approval of payments to sup
pliers, evaluating and rating suppliers. 3. Stores management or management: Thi
s involves
physical control of materials, preservation of stores, minimization o
f o solescence and damage through timely disposal and efficient handling, mainte
nance of stores records, proper location and stocking. A store is also responsi
le for the physical verification of stocks and reconciling them with ook figure
s. A store plays a vital role in the operations of a company. 4. Inventory contr
ol or management: Inventory generally refers to the materials in stock. It is al
so 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 o
they are in the form of materials, which are yet to e utilized. The interval
r
etween receiving the purchased parts and transforming them into final products
varies from industries to industries depending upon the cycle time of manufactur
e. It is,
therefore, necessary to hold inventories of various kinds to act as a
uffer etween supply and demand for efficient operation of the system. Thus, an
effective control on inventory is a must for smooth and efficient running of th
e production cycle with least interruptions. 5. Other related activities (a) 3S
(i) Standardization: Standardization means producing maximum variety of products
from the minimum
variety of materials, parts, tools and processes. It is the pr
ocess of esta lishing standards or units
of measure y which extent, quality, qu
antity, value, performance etc. may e compared and measured. (ii) Simplificatio
n: The concept of simplification is closely related to standardization. Simplifi
cation is the process of reducing the variety of products manufactured.
Simplifi
cation is concerned with the reduction of product range, assem lies, parts, mate
rials and design. (iii) Specifications: It refers to a precise statement that fo
rmulizes the requirements of the customer. It may relate to a product, process o
r a service. Example: Specifications of an axle lock are Inside Dia. = 2  0.1 cm
, Outside Dia. = 4  0.2 cm and Length = 10  0.5 cm.
Materials Management
163

( ) Value analysis: Value analysis is concerned with the costs added due to inef
ficient or unnecessary specifications and features. It makes its contri ution in
the last stage of product cycle, namely, the maturity
stage. At this stage rese
arch and development no longer make positive contri utions in terms of improving
the efficiency of the functions of the product or adding new functions to it. (
c) Ergonomics (Human Engineering): The human factors or human engineering is con
cerned with man machine system. Ergonomics is “the design of human tasks, man mach
ine system, and effective accomplishment of the jo , including displays for pres
enting information to human sensors,
controls for human operations and complex m
an machine systems.” Each of the a ove functions are dealt in detail. 7.3 MATERIAL
PLANNING AND CONTROL
Material planning is a scientific technique of determining in advance the requir
ements
of raw materials, ancillary parts and components, spares etc. as directed
y the production programme. It is a su system in the overall planning activity
. There are many factors, which influence the activity of material planning. The
se factors can e classified as macro and micro systems. 1. Macro factors:
Some
of the micro factors which affect material planning, are price trends, usiness
cycles Govt. import policy etc. 2. Micro factors: Some of the micro factors that
affect material planning are plant capacity utilization, rejection rates, lead
times, inventory levels, working capital, delegation of powers and communication
. 7.3.1 Techniques of Material Planning

One of the techniques of material planning is ill of material
explosion. Materi
al planning through ill of material explosion is shown elow in Fig. 7.2.
Fig. 7.2 Material planning
164
Operations Management

The asis for material planning is the forecast demand for the end products. For
ecasting techniques such as weighted average method, exponential smoothening and
time series
models are used for the same. Once the demand forecast is made, it
is possi le to go through the excerse of material planning. Bill of materials is
a document which shows list of materials required, unit consumption
location co
de for a given product. An explosive
chart is a series of ill of material group

ed in a matrix form so that com ined requirements for different components can
e done requirements
of various materials are arrives at from the demand forecast
, using ill of materials,
through explosion charts. Thus material requirement p
lan will lead to e the development of delivery schedule of the materials and pu
rchasing of those material requirements. 7.4 PURCHASING
Purchasing is an important function of materials management. In any industry pur
chase means uying of equipments, materials, tools, parts etc. required for indu
stry. The importance of the purchase function varies with nature and size of ind
ustry. In small industry, this function is performed y works manager and in lar
ge manufacturing
concern; this function is done
y a separate department. The mo
ment a uyer places an order he commits a su stantial portion of the finance of
the corporation which
affects the working capital and cash flow position. He is
a highly responsi
le person
who meets various salesmen and thus can e considere
d to have
een contri uting to the pu lic relations efforts of the company. Thus
, the uyer can make or mar the company’s image y his excellent
or poor relations
with the vendors. 7.4.1 O jectives of Purchasing The asic o jective of the pur
chasing function is to ensure continuity of supply of raw materials, su contrac
ted items and spare parts and to reduce the ultimate cost of the finished goods.
In other words,
the o jective is not only to procure the raw materials at the l
owest price ut to reduce the cost of the final product. The o jectives of the p
urchasing department can e outlined as under: To avail the materials, suppliers
and equipments at the minimum possi le costs: These are the inputs in the manuf
acturing operations. The minimization of the input cost increases the productivi
ty and resultantly the profita ility of the operations. To ensure the continuous
flow of production through continuous supply of raw materials, components, tool
s etc. with repair and maintenance service. To increase the asset turnover: The
investment in the inventories should e kept minimum in relation to the volume o
f sales. This will increase the turnover of the assets and thus the profita ilit
y of the company. To develop an alternative source of supply: Exploration of alt
ernative
sources of supply of materials increases the argaining
a ility of the
uyer, minimisation of cost of materials and increases the a ility to meet the e
mergencies. To esta lish and maintain the good relations with the suppliers: Mai
ntenance of good relations with the supplier helps in evolving a favoura le imag
e in the usiness circles. Such relations are eneficial to the uyer in terms o
f changing the reasona le price, preferential allocation of material in case of
material shortages, etc.
Materials Management
165
To achieve maximum integration with other department of the company: The purchas
e function is related with production department for specifications and flow of
material, engineering department for the purchase of tools, equipments and machi
nes, marketing department for the forecasts of sales and its impact on procureme
nt of materials, financial department for the purpose of maintaining levels of m
aterials and estimating the working capital required, personnel department for t
he purpose of manning and developing the personnel of purchase department and ma
intaining good vendor relationship. To train and develop the personnel: Purchasi
ng department is manned with varied types of personnel. The company should try t
o uild the imaginative employee force through training and development. Efficie
nt record keeping and management reporting: Paper processing is inherent in the
purchase function.
Such paper processing should e standardised so that record k
eeping can e facilitated. Periodic reporting to the management a out the purcha
se activities justifies the independent existence of the department. 7.4.2 Param
eters of Purchasing The success of any manufacturing activity is largely depende
nt on the procurement of raw materials of right quality, in the right quantities
, from right source, at the right time and at right price popularly known as ten
‘R’s’ of the art of efficient purchasing. They are descri ed as the asic principles
of purchasing. There are other well known parameters such as right contractual t
erms, right material, right place, right mode of transportation and right attitu
de are also considered for purchasing. 1. Right price: It is the primary concern
of any manufacturing
organization to get an item at the right price. But right
price need not e the lowest price. It is very difficult to determine the right
price; general guidance
can e had from the cost
structure of the product. The ‘te

nder system’ of uying is normally used in pu lic sector
organizations ut the o j
ective should e to identify the lowest ‘responsi le’ idder and not the lowest idd
er. The technique of ‘learning curve’ also helps the purchase agent to determine the
price of items with high la our content. The price can e kept low y proper pl
anning and not y rush uying. Price negotiation also helps to determine the rig
ht
prices. 2.
Right quality: Right
quality implies that
quality should e availa
le, measura le and understanda le as far as practica le. In order to determine
the quality of a product sampling schemes will e useful. The right quality is d
etermined y the cost of materials and the technical characteristics as suited t
o the specific requirements. The quality particulars are normally o tained from
the indents. Since the o jective of purchasing is to ensure continuity of supply
to the user departments, the time at which the material is provided to the user
department assumes great importance. 3. Right time: For determining the right t
ime, the purchase manager should have lead time information for all products and
analyse
its components for reducing the same. Lead time is the total time elaps
ed etween the recognition of the need of an item till the item arrives and is p
rovided for use. This covers the entire duration of the materials cycle and cons
ists of pre contractual administrative lead time, manufacturing and transporting
lead time and inspection
lead time. Since the inventory increases with higher l
ead time, it is desira le to analyse each component of the lead time so as to re
duce the first and third components which are controlla le. While determining th
e purchases, the
166
Operations Management

uyer has to consider emergency situations like floods,
strikes, etc. He should
have ‘contingency plans’ when force major clauses ecome operative, for instance, th
e material is not availa le due to strike, lock out, floods, and earthquakes.
4.
Right source:
The source from which the material is procured
should e dependa
le and capa le of supplying items
of uniform quality. The uyer has to decide wh
ich item should e directly o tained from the manufacturer. Source
selection, so
urce development and vendor rating play an important role in uyer seller relati
onships. In emergencies, open market purchases and azaar purchases are restored
to. 5. Right quantity: The right quantity is the most important parameter in u
ying. Concepts, such as, economic order quantity, economic
purchase quantity, fi
xed period and fixed quantity systems, will serve as road guidelines. But the
uyer has to use his knowledge, experience and common sense to determine the quan
tity after considering
factors such as price structure, discounts,
availa ility
of the item, favoura le reciprocal relations, and make or uy consideration.
Fig. 7.3 Purchase parameters
6. Right attitude: Developing the right attitude too, is necessary as one often
comes across such
statement: ‘Purchasing knows the price of everything and value o
f nothing’; ‘We uy price and not cost’; ‘When will our order placers ecome purchase ma
nagers?’; ‘Purchasing acts like a post ox’. Therefore, purchasing should keep ‘progress’
as its key activity and should e future oriented.
Materials Management
167

The purchase manager should e innovative and his long term o jective should e
to minimise the cost of the ultimate product. He will e a le to achieve this if
he aims himself with techniques, such as, value analysis, materials intelligenc
e, purchases research, SWOT analysis, purchase udget lead time analysis, etc. 7
. Right contracts: The uyer has to adopt separate policies and procedures for c
apital and consumer items. He should e a le to distinguish
etween indigenous a
nd international purchasing procedures. He should e aware of the legal and cont
ractual aspects in international practices. 8. Right material: Right type of mat
erial required for the production is an important parameter in purchasing. Techn
iques, such as, value analysis will ena le the uyer to locate the right materia
l. 9. Right transportation: Right mode of transportation have to e identified a
s this forms a critical segment in the cost profile of an item. It is an esta li
shed fact that the cost of the shipping of ore, gravel, sand, etc., is normally
more than the cost of the item itself. 10. Right place of delivery: Specifying t
he right place of delivery, like head office or works, would often minimize the
handling
and transportation cost. 7.4.3 Purchasing Procedure The procedure descr
i es the sequence of steps leading to the completion of an identified specific t
ask. The purchasing procedure comprises the following steps as indicated in Fig.
4.4. 1. Recognition of the need: The initiation of procedure starts with the re
cognition of the need y the needy section. The demand is lodged with the purcha
se department in the prescri ed Purchase Requisition Form forwarded y the autho
rised person either directly or through the Stores Department. The purchase requ
isition clearly specifies the details, such as, specification of materials, qual
ity and quantity, suggested supplier, etc. Generally, the low value sundries and
items of common use are purchased for stock while costlier and special items ar
e purchased according the production programmes. Generally, the corporate level
executives
are authorized signatories to such demands. Such purchases are approv
ed y the Board of Directors. The reference of the approval is made on requisiti
on and a copy of the requisition is sent to the secretary for the purpose of ove
rall planning and udgeting. 2. The Selection of the supplier: The process of se
lection of supplier involves two asic aspects: searching for all possi le sourc
es and short listing out of the identified sources. The complete information a o
ut the supplier is availa le from various sources, such as, trade directories, a
dvertisement in trade journals, direct mailing y the suppliers, interview with
suppliers, salesmen, suggestions from usiness associates, visit to trade fair,
participation in industries
convention, etc. Identification of more and more sou
rces helps
in selecting etter and
economical
supplier. It should e noted that
the low idder is not always
the est idder. When everything except price is eq
ual, the low idder will e selected. The important considerations in the select
ion are the price, a ility to supply the required quantity, maintenance of quali
ty standards, financial standing etc. It should e noted that it is not necessar
y to go for this process for all types of purchases. For the repetitive orders a
nd for the purchases of low value, small lot items, generally the previous suppl
iers with good records are preferred. 3. Placing the order: Once the supplier is
selected the next step is to place the purchase order. Purchase order is a lett
er sent to the supplier asking to supply the said material. At least six copies
of purchase order are prepared y the purchase section and each copy is separate
ly signed
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Operations Management

y the purchase officer. Out these copies, one copy each is sent to store keeper
, supplier, accounts section, inspection department
and to the department placin
g the requisition and one copy is retained y the purchase department for record
.
Fig. 7.4 Purchasing procedure

4. Follow up of the order: Follow up procedure should e employed wherever the c
osts and risks resulting from the delayed deliveries of materials are greater th
an the cost of follow up procedure,
the follow up procedure tries to see that th
e purchase order is confirmed y the supplier and the delivery is promised. It i
s also necessary to review the outstanding orders at regular intervals and to co
mmunicate with the supplier in case of need. Generally, a routine urge is made t
o the supplier y sending a printed post card or a circular letter asking him to
confirm that the delivery is on the way or will e made as per agreement. In a
sence of any reply or unsatisfactory reply, the supplier may e contact through
personal letter, phone, telegram and/or even personal visit. 5. Receiving and in
spection
of the materials: The receiving department receives the materials suppl
ied y the vendor. The quantity are verified and tallied with the purchase order
. The receipt of the materials is recorded on the specially designed receiving s
lips
or forms which also specify the name of the vendor and the purchase order n
um er. It also records any discrepancy, damaged condition of the consignment or
inferiority of the materials. The purchase department is informed immediately a
out the receipt of the materials. Usually a copy of the receiving slip is sent t
o the purchase department.
Materials Management
169
6. Payment of the invoice: When the goods are received in satisfactory condition
, the invoice is checked efore it is approved for the payment. The invoice is c
hecked to see that the goods were duly authorised to purchase, they were properl
y ordered, they are priced as per the agreed terms, the quantity and quality con
firm to the order, the calculations are arithmetically correct etc. 7. Maintenan
ce of the records: Maintenance of the records is an important part and parcel of
the efficient purchase function. In the industrial firms, most of the purchases
are repeat orders and hence the past records serve as a good guide for the futu
re action. They are very useful for deciding the timings of the purchases and in
selecting the est source of the supply. 8. Maintenance of vendor relations: Th
e quantum and frequency of the transactions with the same key suppliers provide
a platform for the purchase department to esta lish and maintain good relations
with them. Good relations
develop
mutual trust and confidence in the course of t
he time which is eneficial to oth the parties. The efficiency of the purchase
department can e measured y the amount of the goodwill it has with its supplie
rs. 7.4.4 Selection of Suppliers

Selection of the right supplier is the responsi ility of the purchase department

. It can contri ute su stantially to the fundamental o jectives of the usiness
enterprise. Different strategies are required for acquiring different types of m
aterials. The selection of supplier for standardised products will differ from n
on standardised products. Following factors are considered for the selection of
suppliers:
A. SOURCES
OF SUPPLIER
The est uying is possi le only when the decision maker is familiar with all po
ssi le sources of supply and their respective terms and conditions. The purchase
department should try to locate the appropriate sources of the supplier of vari
ous types of materials. This is known as ‘survey stage’. A survey of the following w
ill help in developing the possi le sources
of supply: 1. Specialised trade dire
ctories. 2. Assistance
of professional odies or consultants.
3. The uyer’s guide
or purchase hand ook. 4. The manufacturer’s or distri utor’s catalogue. 5. Advertis
ements
in dailies. 6. Advertisement in specialised trade journals. 7. Trade fair
exhi itions.
B. DEVELOPMENT OF APPROVED LIST OF SUPPLIERS
The survey stage highlights the existence of the source. A usiness inquiry is m
ade with the appropriate supplier. It is known as ‘Inquiry Stage’. Here a short list
ing is made out of the given sources of suppliers in terms of production facilit
ies and capacity, financial standing, product quality, possi ility of timely sup
ply, technical competence, manufacturing efficiency, general usiness policies
f
ollowed, standing in the industry, competitive attitude, and interest in uying
orders etc.
C. EVALUATION AND SELECTION OF THE SUPPLIER
The purchase policy and procedure differ according to the type of items to e pu
rchased. Hence, evolution
and selection
of the supplier differ accordingly. In t
he ‘purchasing hand ook’ edited y
170
Operations Management

Aljian, it has een descri ed that the following varia les to e considered whil
e evaluating the quotations of the suppliers: 1. Cost factors: Price, transporta
tion cost, installation cost if any, tooling and other operations cost, incidenc
e of sales tax and excise duty, terms of payment and cash discount are considere
d in cost factor. 2. Delivery: Routing and F.O.B. terms are important in determi
ning the point at which the title to the goods passes from vendor to the uyer a
nd the responsi ility for the payment of the payment charges. 3. Design and spec
ification factors: Specification compliance, specification deviations, specifica
tion advantages, important dimensions and weights are considered in line with th
e demonstration of sample, experience of other users, after sale services etc. 4
. Legal factors: Legal factors include warranty, cancellation provision, patent
protection, pu lic lia ility, federal laws and reputation compliance. 5. Vendor
rating: The evaluation of supplier or vendor rating provides valua le informatio
n which help in improving the quality of the decision. In the vendor rating thre
e asic aspects
are considered namely quality, service and price. How much weigh
t should e given to each of these factors is a matter of judgment and is decide
d according to the specific need of the organization. Quality would e the main
consideration
in the manufacturing of the electrical equipments while price woul
d e the prime consideration in the product having a tense competitive market an
d for a company procuring its requirements
under the
lanket contract
with agree
d price, the supplier rating would e done on the asis of two varia les namely
quality and delivery. The Development Project Committee of the National Associat
ion of Purchasing Agents (U.S.A.) has suggested following methods for evaluating
the performance
of past suppliers. (a) The categorical plan: Under this method
the mem ers of the uying staff related with the supplier like receiving section
, quality control department, manufacturing department etc., are required to ass
ess the performance of each supplier. The rating sheets are provided with the re
cord of the supplier,
their product and the list of factors for the evaluation p
urposes. The mem ers of the uying staff are required to assign the plus or minu
s notations against each factor. The periodic meetings, usually at the interval
of one month, are held y senior man of the uying staff to consider the individ
ual rating
of each section. The consolidation of the individual rating is done o
n the asis of the net plus value and accordingly, the suppliers are assigned th
e categories such as ‘preferred’, ‘neutral’ or ‘unsatisfactory’. Such ratings are used for
he future guidance. This is a very simple and inexpensive method. However, it is
not precise. Its quality heavily depends on the experience and a ility of the
uyer to judge the situation. As compared to other methods, the degree of su ject
ive judgment is very high as rating is ased on personal whim and the vague impr
essions of the uyer. As the quantitative data supported y the profits do not e
xist, it is not possi le to institute any corrective action with the vendor. The
rating is done on the asis of memory, and thus it ecomes only a routine exerc
ise without any critical analysis. ( ) The weighted point method: The weighted p
oint method provides the quantitative data for each factor of evaluation. The we
ights are assigned to each factor of evaluation according
Materials Management
171

to the need of the organization, e.g., a company decides the three factors to e
considered— quality, price and timely delivery. It assigns the relative weight to
each of these factors as under: Quality Price Timely delivery ……… ……… ……… 50 points 30 poi
points
The evaluation of each supplier is made in accordance with the aforesaid factors
and weights and the composite weighted points are ascertained for each supplier
s—A, B and C—are
rated under this method. First of all the specific rating under eac
h factor will e made and then the consolidation of all the factors will e made
for the purpose of judgment. (c) Quality rating: Percentage of quantity accepte
d among the total quantity is called quality rating. In other words, the quality
of the materials is judged on the asis of the degree of acceptance and rejecti
ons. For the purpose of comparison, the percentage degree of acceptance will e
calculated in relation to the total lots received. Price rating is done on the
asis of net price charged y the supplier. Timely delivery rating will e done c
(d) The cost ratio
omparing with the average delivery schedule of the supplier.
plan: Under this method, the vendor rating is done on the asis of various costs
incurred for procuring the materials from various suppliers. The cost ratios ar
e ascertained
delivery etc. The cost ratios are ascertained for the different ra
ting varia les such as quality, price, timely delivery etc. The cost ratio is ca
lculated in percentage on the asis of total individual
cost and total value of
purchases. At the end, all such cost ratios will e adjusted with the quoted pri
ce per unit. The plus cost ratio will increase the unit price while the minus co
stratio will decrease the unit price. The net adjusted unit price will indicate

the
vendor rating. The vendor with the lowest net adjusted
unit price will e th
e est supplier and so on. Certain quality costs can e inspection cost, cost of
defectives, reworking costs
and manufacturing losses on rejected items etc. Cer
tain delivery costs can e postage and telegrams, telephones and extra cost for
quick delivery etc.
VENDER RATING ILLUSTRATIONS
I LLUSTRATION 1: The following information
is availa le on 3 vendors: A, B and C
. Using the data
elow, determine the est source of supply under weighed point
method and su stantiate your solution. Vendor A: Delivered ‘56’ lots,‘3’ were rejected, ‘2’
were not according to the schedule. Vendor B: Supplied ‘38’ lots,‘2’ were rejected, ‘3’ wer
late. Vendor C: Finished ‘42’ lots,‘4’ were defective,‘5’ were delayed deliveries. Give 40
for quality and 30 weightage for service. SOLUTION Quality performance (weightag
e 40%) =
Quality accepted × 40 Total quantity supplied
172
Operations Management
DELIVERY PERFORMANCE
X, Adherence to time schedule (weightage 30%) =
No. of delivery made on the scheduled date × 30 Total no. of scheduled deliveries
Y, Adherence to quantity schedule (weightage 30%) No. of correct lot size delive
ries × 30 = Total no. of scheduled deliveries Total vendor rating = X+Y 53 54 × 40 +
× 30 = 66.78 Vendor A = 56 56 Vendor B Vendor C = =
36 35 × 40 + × 30 = 65.52 38 38

38 37 × 40 + × 30 = 62.62 42 42 Vendor ‘A’ is selected
with the est rating.
ILLUSTRATION 2: The following information is availa le from the record of the in
coming material department of ABC
Co. Ltd.
Vendor code A B C No. of lots su mitted 15 10 1 No. of list accepted 12 9 1 Prop
ortion defectives in lots 0.08 0.12 – Unit price in Rs. 15.00 19.00 21.00 Fraction
of delivery commitment 0.94 0.98 0.90
The factor weightage for quality, delivery and price are 40%, 35% and 25% as per
the decision of the mar. Rank the performance of the vendors on the QDP asis a
nd interpret the result. SOLUTION Formal mode: =

No. of lots accepted × (weightage for quality) No. of lots su mitted
+ +

No. of accepted lots × ( weightage for delivery ) No.of lots su mitted with time L
owest Price × (weightage for price) Price of lot
Materials Management
173
Total vendor rating = Quality performance + Delivery performance rating + Price
rating Vendor A = Vendor B =
12 15 × 40 + 0. 94 × 35 + × 25 = 89.90 15 15
9 15 × 40 + 0. 98 × 35 + × 25 = 90.036 10 19 15 × 25 = 89.357 Vendor C = 1 × 40 + 0. 90 × 3
+ 21 Vendor B is selected with higher rating.
7.4.5 Special Purchasing Systems

The following
are some of the importnat purchasing systems: 1. Forward uying: F
orward uying or committing an organization far into the future, usually for a y
ear. Depending upon the availa ility of the item, the financial policies, the ec
onomic order quantity, the quantitative discounts, and the staggered delivery, t
he future commitment
is decided. This type of forward uying is different from s
peculative
uying where the motive is to make capital out of the price changes,
y selling the
purchased items. Manufacturing organizations normally do not indu
lge in such uying.
However, a few organizations do ‘Hedge’, particularly
in the com
modity
market y selling or uying contracts. 2. Tender
uying: In pu lic, all s
em lance of favouritism, personal preferences should e avoided. As such, it is
common for government departments and pu lic sector undertakings to purchase thr
ough tenders. Private sector organizations
adopt tender uying if the value of p
urchases is more than the prescri ed limits as Rs. 50000
or
Rs. 100000. The step
s involved are to esta lish a idders’ list, solicit ids y comparing quotations
and place the order with the lowest idder. However, care has to e taken that t
he lowest idder is responsi le party and is capa le of meeting the delivery sch
edule and quality requirements. Open tender system or advertisement in newspaper
s is common in pu lic sector organizations. As advertising ids is costly and ti
me consuming, most private
sector organizations solicit tenders only from the re
nowned suppliers capa le of supplying the materials. 3. Blanket order system: Th
is system minimizes the administrative expenses and is useful for ‘C’ type items. It
is an agreement to provide a required quantity of specified items, over a perio
d of time, usually
for one year, at an agreed price. Deliveries are made dependi
ng upon the uyer’s needs. The system relieves the uyers from routine work, givin
g him more time for focusing attention on high value items. It requires fewer pu
rchase orders and thus reduces
clerical work. It often achieves lower prices thr
ough quantity discounts y grouping the requirements. The supplier, under the sy
stem maintains adequate inventory to meet the lanket orders. 4. Zero stock: Som
e firms try to operate on the asis of zero stock and the supplier holds the sto
ck for these firms. Usually, the firms of the uyer and seller are close to each
other so that the raw materials of one is the finished products of another. Alt
ernatively, the system could work well if the seller holds the inventory and if
the two parties
work in close coordination. However, the price per item in this
system will e slightly higher as the supplier will include the inventory carryi
ng cost
174
Operations Management

in the price. In this system, the uyer need not lock up the capital and so the
purchasing routine is reduced. This is also significantly reduces o solescence o
f inventory, lead time and clerical efforts in paper work. Thus, the seller can
devote his marketing efforts to other customers and production scheduling ecome
s easy. 5. Rate contract: The system of rate contract is prevalent in pu lic sec
tor organizations and government departments. It is common for the suppliers to
advertise that they are on ‘rate contract’ for the specific period. After negotiatio
ns, the seller and the uyer agree to the rates of items. Application of rate co
ntract has helped many organizations to cut down the internal administrative lea
d time as individual firms need to go through the central purchasing departments
and can place orders directly with the suppliers. However, suppliers
always
dem
and higher prices for prompt delivery, as rate difficulty has een avoided y en
suring the delivery of a minimum quantity at the agreed rates. This procedure of
fixing
a minimum quantity
is called the running contract and is eing practised

y the railways. The uyer also has an option of increasing the quantity y 25%
more than the agreed quantity under this procedure. 6. Reciprocity: Reciprocal

uying means purchasing from one’s customers in preference to others. It is ased
on the principle “if you kill my cat, I will kill your dog”, and “Do unto your custome
rs as you would have them do unto
you”. Other things, like soundness from the ethi
cs and economics point of view eing equal, the principles of reciprocity can e
practiced. However, a purchasing executive should not indulge in reciprocity on
his initiative when the terms and conditions are not equal with other suppliers

. It is often sound that less efficient manufacturers and distri utors gain y r
eciprocity what they are una le to gain y price and quality. Since this tends t
o discourage competition
and might lead to higher
process and fewer suppliers, r
eciprocity should e practised on a selective asis. 7. Systems contract: This i
s a procedure intender to help the uyer and the sellers to reduce administrativ
e expenses and at the same time
ensure suita le controls. In this system, the or
iginal indent, duly approved y competent authorities, is shipped ack with the
items and avoids the usual documents like purchase orders, materials requisition
s, expediting letters and acknowledgements, delivery period price and invoicing
procedure, Car orandum company in the US claims drastic reduction in inventory a
nd elimination of 40000 purchase orders y adopting the system contracting proce
dure. It is suita le for low unit price items with high consumption. 7.5 STORES
MANAGEMENT
Stores play a vital role in the operations of company. It is in direct touch wit
h the user
departments in its day to day activities. The most important purpose
served y the stores is to provide uninterrupted service to the manufacturing di
visions. Further, stores are often equated directly with money, as money is lock
ed up in the stores.
FUNCTIONS OF STORES
The functions of stores can e classified as follows: 1. To receive raw material
s, components, tools, equipment’s and other items and account for them. 2. To prov
ide adequate and proper storage and preservation to the various items.
Materials Management
175

3. To meet the demands of the consuming departments y proper issues and account
for the consumption. 4. To minimise o solescence, surplus and scrap through pro
per codification, preservation
and handling. 5. To highlight stock accumulation,
discrepancies and a normal consumption and effect control measures. 6. To ensur
e good house keeping so that material handling, material preservation, stocking,
receipt and issue can e done adequately. 7. To assist in verification and prov
ide supporting information for effective purchase action. 7.5.1 Codification It
is one of the functions
of stores management. Codification is a process of repre

senting each item y a num er, the digit of which indicates the group, the su g
roup, the type and the dimension of the item. Many organizations in the pu lic a
nd private sectors, railways have their own system of codification, varying from
eight to thirteen digits. The first two digits represents the major groups, suc
h as raw materials, spare parts, su contracted items, hardware items, packing
m
aterial, tools, oil, stationery etc. The next two digits indicate the su groups
, such as, ferrous, non ferrous etc. Dimensional characteristics of length, widt
h, head diameter etc. constitute further three digits and the last digit is rese
rved for minor variations. Whatever
may e the asis, each
code should uniquely

represent one item. It should e simple and capa le of eing understood y all.
Codification should e compact, concise, consistent and flexi le enough to accom
modate new items. The groupings should e logical, holding similar parts near to
one another. Each digit must e significant enough to represent some characteri
stic of the item.
OBJECTIVES
OF CODIFICATION
The o jectives of a rationalized
material coding system are: 1. Bringing all ite
ms together. 2. To ena le putting up of any future item in its proper place. 3.
To classify an item according to its characteristics.
4. To give an unique code
num er to each item to avoid duplication and am iguity. 5. To reveal excessive v
ariety and promote standardization and variety reduction. 6. To esta lish a comm
on language for the identification of an item. 7. To fix essential parameters fo
r specifying an item. 8. To specify item as per national and international stand
ards. 9. To ena le data processing and analysis.
ADVANTAGES OF CODIFICATION
As a result of
rationalized codification, many firms have reduced the num er of
items.
It ena les systematic grouping of similar items and avoids confusion caus
ed y long description of items since standardization of names is achieved throu
gh codification, it serves as the starting point of simplification and standardi
zation. It helps
in avoiding duplication of items and results in the minimisatio

n of the num er of items, leading to accurate
record. Codification ena les easy
recognition of an item in stores, there y reducing clerical efforts to the minim
um. If items are coded according to the sources,
176
Operations Management

it is possi le to ulk the items while ordering. To maximise the aforesaid advan
tages, it is necessary to develop the codes as concerned, namely, personnel from
design, production, engineering, inspection, maintenance and materials. 7.6 INV
ENTORY CONTROL OR MANAGEMENT
7.6.1 Meaning of Inventory Inventory generally refers to the materials in stock.
It is also called the idle resource of an enterprise. Inventories represent tho
se items which are either stocked for sale or they are in the process of manufac
turing or
they are in the form of materials, which are yet to e utilised. The i
nterval etween receiving the purchased parts and transforming them into final p
roducts varies from industries to industries depending upon the cycle time of ma
nufacture.
It is, therefore, necessary to hold inventories of various kinds to a
ct as a uffer etween supply and demand for efficient operation of the system.
Thus, an effective control on inventory is a must for smooth and efficient runni
ng of the production cycle with least interruptions. 7.6.2 Reasons for Keeping I
nventories 1. To sta ilise production: The demand for an item fluctuates ecause
of the num er of factors, e.g., seasonality, production schedule etc. The inven
tories (raw materials and components) should e made availa le to the production
as per the demand failing which results in stock out and the production stoppag
e takes place for want of materials. Hence, the inventory is kept to take care o
f this fluctuation so that the production is smooth. 2. To take advantage of pri
ce discounts: Usually the manufacturers offer discount
for ulk uying and to ga
in this price advantage the materials are ought in ulk even though it is not r
equired immediately. Thus, inventory is maintained to gain economy in purchasing
. 3. To meet the demand during the replenishment period: The lead time for procu
rement of materials depends upon many factors like location of the source, deman
d supply condition, etc. So inventory is maintained to meet the demand during th
e procurement (replenishment) period. 4. To prevent loss of orders (sales): In t
his competitive scenario, one has to meet the delivery schedules at 100 per cent
service level, means they cannot afford to miss the delivery schedule which may
result in loss of sales. To avoid the organizations have to maintain inventory.
5. To keep pace with changing market conditions: The organizations have to anti
cipate the changing market sentiments and they have to stock materials in antici
pation of non availa ility of materials or sudden increase in prices. Sometimes
the organizations have to stock materials due to other reasons like suppliers mi
nimum quantity condition, seasonal availa ility of materials or sudden increase
in prices. 7.6.3 Meaning of Inventory Control Inventory control is a planned app
roach of determining what to order, when to order and how much to order and how
much to stock so that costs associated with uying and storing are optimal witho
ut interrupting
production and sales.
Inventory control asically deals with two
pro lems:
(i) When should an order e placed? (Order level), and (ii) How much
should e ordered? (Order quantity).
Materials Management
177

These questions are answered y the use of inventory models. The scientific inve
ntory control system strikes the alance etween the loss due to non availa ilit
y of an item and cost of carrying the stock of an item. Scientific inventory con
trol aims at maintaining optimum level of stock of goods required y the company
at minimum cost to the company. 7.6.4 O jectives of Inventory Control 1. To ens
ure adequate supply of products to customer and avoid shortages as far as possi
le. 2. To make sure that the financial investment in inventories is minimum (i.e
., to see that the working capital is locked to the minimum possi le extent). 3
. Efficient purchasing, storing, consumption and accounting for materials is an
important o jective. 4. To maintain timely record of inventories of all the item
s and to maintain the stock within the desired limits 5. To ensure timely action
for replenishment. 6. To provide a reserve stock for variations
in lead times o
f delivery of materials. 7. To provide a scientific ase for oth short term and
long term planning of materials. 7.6.5 Benefits of Inventory Control

It is an esta lished fact
that through the practice of scientific inventory cont
rol, following are the enefits of inventory control: 1. Improvement in customer’s
relationship ecause of the timely delivery of goods and service. 2. Smooth and
uninterrupted production and, hence, no stock out. 3. Efficient utilisation of
working capital. Helps in minimising loss due to deterioration, o solescence
dam
age and pilferage. 4. Economy in purchasing. 5. Eliminates the possi ility of du
plicate ordering. 7.6.6 Techniques of Inventory Control

In any organization,
depending on the type of usiness, inventory is maintained.
When the num er of items in inventory is large and then large amount of money i
s needed to create such inventory, it ecomes the concern of the management to h
ave a proper control
over its ordering, procurement, maintenance and consumption
. The control can e for order quality and order frequency. The different techni
ques of inventory control are: (1) ABC analysis, (2) HML analysis, (3) VED analy
sis, (4) FSN analysis, (5) SDE analysis, (6) GOLF analysis and (7) SOS analysis.
The most widely used method of inventory control is known as ABC analysis. In t
his technique, the total inventory is categorised
into three su heads and then
proper exercise is exercised for each su heads. 1. ABC analysis: In this analys
is, the classification of existing inventory
is ased on annual consumption and
the annual value of the items. Hence we o tain the quantity
of inventory item co
nsumed during the year and multiply it y unit cost to o tain annual usage cost.
The items are then arranged in the descending order of such annual usage cost.
The analysis is carried out y drawing a graph ased on the cumulative num er of
items and cumulative usage of consumption cost. Classification is done as follo
ws:

178 Ta le 7.1 Category A B C Percentage of items 10–20 20–30 60–70
Operations Management
Percentage of annual consumption value 70–80 10–25 5–15

The classification of ABC analysis is shown y the graph given as follows (Fig.
7.5).
Fig. 7.5 ABC classification

Once ABC classification has een achieved, the policy control can e formulated
as follows: (a) A Item: Very tight control, the items eing
of high value. The c
ontrol need e exercised at higher level of authority. ( ) B Item: Moderate cont
rol, the items eing of moderate value. The control need e exercised at middle
level of authority. (c) C Item: The items eing of low value, the control can e
exercised at gross root level of authority, i.e., y respective user department
managers. 2. HML analysis: In this analysis, the classification of existing inv
entory is ased on unit price of the items. They are classified as high price, m
edium price and low cost items. 3. VED analysis: In this analysis, the classific
ation of existing inventory is ased on criticality of the items. They are class
ified as vital, essential and desira le items. It is mainly used in spare parts
inventory. 4. FSN analysis: In this analysis, the classification of existing inv
entory is ased consumption of the items. They are classified as fast moving, sl
ow moving and non moving items.
Materials Management
179

5. SDE analysis: In this analysis, the classification of existing inventory is
ased on the items. 6. GOLF analysis: In this analysis, the classification of exi
sting inventory is ased sources
of the items.
They are classified as Government
supply, ordinarily availa le, local availa ility and foreign source of supply i
tems. 7. SOS analysis: In this analysis, the classification of existing inventor
y is ased nature of supply of items. They are classified
as seasonal and off se
asonal items. For effective inventory control, com ination of the techniques of
ABC with VED or ABC with HML or VED with HML analysis is practically used. 7.6.7
Inventory Model
ECONOMIC ORDER QUANTITY (EOQ)
Inventory models deal with idle resources like men, machines, money and material
s. These models are concerned with two decisions: how much to order (purchase or
produce) and when to order so as to minimize
the total cost. For the first deci
sion—how much to order, there are two asic costs are considered namely, inventory
carrying costs and the ordering or acquisition costs. As the quantity ordered i
s increased, the inventory carrying cost increases while the ordering cost decre
ases. The ‘order quantity’ means the quantity produced
or procured during one produc
tion cycle. Economic order quantity is calculated y alancing the two costs. Ec
onomic Order Quantity (EOQ) is that size of order which minimizes total costs of
carrying and cost of ordering. i.e., Minimum Total Cost occurs
when Inventory
C
arrying Cost = Ordering Cost. Economic
order quantity can e determined y two m
ethods: 1. Ta ulation method. 2. Alge raic method.
Fig. 7.6 Inventory cost curve

1. Determination of EOQ y ta ulation (Trial & Error)
method This method involve
s the following steps: Select the num er of possi le lot sizes to purchase. Dete
rmine average inventory carrying cost for the lot purchased.
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Operations Management

(a) Determine the total ordering cost for the orders placed. ( ) Determine the t
otal cost for each lot size chosen which is the summation of inventory carrying
cost and ordering cost. (c) Select the
ordering quantity, which minimizes the to
tal cost. The data calculated in a ta ular column can plotted showing the nature
of total cost, inventory cost and ordering cost curve against the quantity orde
red as in Fig. 7.6. I LLUSTRATION 3: The XYZ Ltd. carries a wide assortment of i
tems for its customers. One of its popular
items has annual demand of 8000 units
. Ordering cost per order is found to e Rs. 12.5. The carrying cost of average
inventory is 20% per year and the cost per unit is Re. 1.00. Determine the optim
al economic quantity and make your recommendations. SOLUTION
No. of orders/ year (1) 1 2 4 8 12 16 Lot size (2) 8000 4000 2000 1000 666.667 5
00 Average inventory (3) 4000 2000 1000 500 333.333 250 Carrying cost (4) 800.00
400.00 200.00 100.00 66.67 50.00 Ordering cost (5) 12.5 25 50 100 150 200 Total
cost/ year (6) =(4) + (5) 812.50 425.00 250.00 200.00 216.67 250.00

The ta le and the graph indicates that an order size of 1000 units will gives th
e lowest total cost among the different alternatives. It also shows that minimum
total cost occurs when carrying cost is equal to ordering cost.
Materials Management
181

2. Determination of EOQ y analytical method In order to derive an economic lot
size formula following assumptions
are made: (a) Demand is known and uniform. (
) Let D denotes the total num er of units purchase/produced and Q denotes the lo
t size in each production run. (c) Shortages are not permitted, i.e., as soon as
the level of the inventory reaches zero, the inventory is replenished. (d) Prod
uction or supply of commodity is instantaneous. (e) Lead time is zero. (f) Set u
p cost per production run or procurement cost is C3. (g) Inventory carrying cost
is C1 = CI, where C is the unit cost and I is called inventory carrying cost ex
pressed as a percentage
of the value of the average inventory. This fundamental
situation can e shown on an inventory time diagram, (Fig. 7.7) with Q on the ve
rtical axis and the time on the horizontal axis. The total time period (one year
) is divided into n parts.
Fig. 7.7
The most economic point in terms of total inventory cost exists where, Inventory
carrying cost = Annual ordering cost (set up cost) Average inventory = 1/2 (max
imum level + minimum level) = (Q + 0)/2 = Q/2 Total inventory carrying cost = Av
erage inventory× Inventory carrying cost per unit …(1) i.e., Total inventory carryin
g cost = Q/2 × C1 = QC1/2 Total annual ordering costs = Num er of orders per year ×
Ordering cost per order …(2) i.e., Total annual ordering costs = (D/Q) × C3 = (D/Q)C
3 Now, summing up the total inventory cost and the total ordering cost, we get t
he total inventory cost C(Q). i.e., Total cost of production run = Total invento
ry carrying cost + Total annual ordering costs …(3) C(Q) = QC1/2 + (D/Q)C3 (cost e
quation) But, the total cost is minimum when the inventory carrying costs ecome
s equal to the total annual ordering costs. Therefore,
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Operations Management
QC1/2 = (D/Q)C3 or or or QC 1 = (2D/Q)C3 Q 2 = 2C 3D/C1 Q=
2C3 D C1
2C3 D C1
...(4)
i.e.,
Optimal quantity (EOQ), Q0 =

D Optimum num er of orders, (N0) = Q 0
Optimum order interval, (t0) = Average yearly cost (TC) =
...(5)
1 Q0 365 in days = N in years or (t0) = ...(6) D N0 0
2C3 DC1
…(7)

I LLUSTRATION 4: An oil engine manufacturer purchases lu ricants
at the rate of
Rs. 42 per piece from
a vendor. The requirements of these lu ricants are 1800 pe
r year. What should e the ordering quantity per order, if the cost per placemen
t of an order is Rs. 16 and inventory
carrying
charges per
rupee per year is 20
paise. SOLUTION Given data are: Num er of lu ricants to e purchased, D = 1800 p
er year Procurement cost, C3 = Rs. 16 per order Inventory carrying cost, CI = C1
= Rs. 42 × Re. 0.20 = Rs. 8.40 per year Then, optimal quantity (EOQ), Q0 =
2C3 D C1
Q 0=

2 × 16 × 1800 = 82.8 or 83 lu ricants (approx). 8.4
I LLUSTRATION 5: A manufacturing company purchase 9000 parts of a machine for it
s annual requirements ordering for month usage at a time, each part costs Rs. 20
. The ordering cost per order is Rs. 15 and carrying charges are 15% of the aver
age inventory per year. You have een assigned to suggest a more economical purc
hase policy for the company. What advice you offer and how much would it save th
e company per year?
Materials Management
183

SOLUTION Given data are: Num er of lu ricants to e purchased, D Cost of part, C
s Procurement cost, C3 Inventory carrying cost, CI = C1 = = = = = 9000 parts per
year Rs. 20 Rs. 15 per order 15% of average inventory per year Rs. 20 × 0.15 = Rs
. 3 per each part per year
Then, optimal quantity (EOQ), Q0 = Q0 = and Optimum order interval, (t0) =
2C3 D C1 2 × 15 × 9000 = 300 units 3
1 300 Q0 in years = = years 30 9000 D 1 × 365 days = 122 Days = 30
2C3 DC1 = 2 × 3 ×15 × 9000 = Rs. 900
Minimum average cost =
If the company follows the policy of ordering every month, then the annual order
ing cost is = Rs 12 × 15 = Rs. 180 Lot size of inventory each month = 9000/12 = 75
0
Q = 750/2 = 375 2 Therefore, storage cost at any time = 375 × C1 = 375 × 3 = Rs. 112
5 Total annual cost = 1125 + 180 = Rs. 1305 Hence, the company should purchase 3
00 parts at time interval of 1/30 year
instead of ordering 750 parts each month.
The net saving of the company will e = Rs. 1305 – Rs. 900 = Rs. 405 per year.
Average inventory at any time = 7.7 STANDARDIZATION
Standardization means producing maximum variety of products from the minimum
var
iety of materials, parts, tools and processes. It is the process of esta lishing
standards or units
of measure y which extent, quality, quantity, value, perfor
mance etc., may e compared and measured. 7.7.1 Advantages of Standardization

All the sections of company will e enefited from standardization as mentioned
elow. 1. Benefits to Design Department (a) Fewer specifications, drawings and p
art list have to prepared and issued.
184
Operations Management
2.
3.
4.
5.
6.
7.

( ) More time is availa le to develop new design or to improve esta lished desig
n. (c) Better resource allocation. (d) Less qualified personnel can handle routi
ne design work. Benefits to Manufacturing Department (a) Lower unit cost. ( ) Be
tter
quality products. (c) Better methods and tooling. (d) Increased interchange
a ility of parts. (e) Better utilization of manpower and equipment. (f) Accurate
delivery dates. (g) Better services of production control, stock control, purch
asing, etc. (h) More effective training. Benefits to Marketing Department (a) Be
tter quality
products of proven design at reasona le cost leads to greater sales
volume.
( ) Increased margin of profit. (c) Better product delivery. (d) Easy a
vaila ility of sales part. (e) Less sales pressure of after sales services. Bene
fits to Production
Planning Department (a) Scope for improved methods, processes
and layouts. ( ) Opportunities for more efficient tool design. (c) Better resou
rce allocation. (d) Reduction in pre production activities. Benefits to Producti
on Control
Department (a) Well proven design and methods improve planning and co
ntrol. ( ) Accurate delivery promises. (c) Fewer delays arise from waiting for m
aterials, tools, etc. (d) Follow up of small atches consumes less time. Benefit
s to Purchase and Stock Control Department (a) Holding of stock of standard item
s leads to less paper work and fewer requisitions and orders. ( ) Storage and pa
rt location can e improved. (c) Newer techniques can e used for etter control
of stocks. (d) Because
of large purchase quantities involved, favoura le purcha
se contracts can e made. Benefits to Quality
Control Department (a)
Better insp
ection and quality control is possi le. ( ) Quality standards can e defined
mor
e clearly. (c) Operators ecome familiar with the work and produce jo s of consi
stent quality.
Materials Management
185

8. Other Benefits (a) Work study section is enefited
with efficient
reak down
of operations
and effective work measurement. ( ) Costing can
o tain etter cont
rol y installing standard costing. (c) More time is availa le to the supervisor
s to make useful records and preserve statistics. (d) Reduced reductions and scr
ap. (e) Helps supervisors to run his department efficiently and effectively. 7.7
.2 Disadvantages of Standardization

Following are the disadvantages of standardization:
1. Reduction in choice ecau
se of reduced variety and consequently loss of usiness or customer.
2. Standard
once set, resist change and thus standardization may ecome
an o stacle to prog
ress. 3. It tends to favour
only large companies.
4. It ecomes very difficult t
o introduce new models ecause of less flexi le production facilities and due to
high cost of specialised production equipment. 7.8 SIMPLIFICATION
The concept of simplification is closely related to standardization. Simplificat
ion is the process of reducing the variety of products manufactured.
Simplificat
ion is concerned with the reduction of product range, assem lies, parts, materia
ls and design. 7.8.1 Advantages of Simplification Following are the advantages o
f simplification: 1. Simplification involves fewer, parts, varieties
and changes
in products; this reduces manufacturing operations and risk of o solescence. 2.
Simplification reduces variety, volume of remaining
products may e increased.
3. Simplification provides quick delivery and etter after sales services. 4. Si
mplification reduces inventory and thus results in etter inventory control. 5.
Simplification lowers the production costs. 6. Simplification reduces price of a
product. 7. Simplification improves product quality. 7.9 VALUE ANALYSIS

Value engineering or value
analysis had its irth during the World War II Lawren
ce D. Miles was responsi le for developing the technique and naming it. Value an
alysis is defined as “an organized creative approach which has its o jective, the
efficient identification of unnecessary cost cost which provides neither quality
nor use nor life nor appearance nor customer features.” Value
analysis focuses en
gineering, manufacturing and purchasing attention to one o jective equivalent pe
rformance at a lower cost.
186
Operations Management
Value analysis is concerned with the costs added due to inefficient or unnecessa
ry specifications and features. It makes its contri ution in the last stage of p
roduct cycle, namely, the maturity
stage. At this stage, research and developmen
t no longer make positive contri utions in terms of improving the efficiency of
the functions of the product or adding new functions to it. Value is not inheren
t in a product,
it is a relative
term, and value can change with time and place.
It can e measured only y comparison with other products which perform the sam
e function. Value is the relationship etween what someone wants and what he is
willing to pay for it. In fact, the heart of value analysis technique is the fun
ctional approach. It relates
to cost
of function whereas others relate cost to p
roduct. It is denoted y the ratio etween function and cost. Value = 7.9.1 Valu
e Analysis Framework The asic framework
for value analysis approach is formed
y the following questions, as given y Lawrence D. Miles: 1. What is the item? 2
. What does it do? 3. What does it cost? 4. What else would do the jo ? 5. What
would the alternative cost e? Value analysis requires these questions to e ans
wered for the successful implementation of the technique. 7.9.2 Steps in Value A
nalysis
Function . Cost

In order to answer the a ove questions, three asic steps are necessary: 1. Iden
tifying the function:
Any useful product has some primary function which must e
identified—a ul to give light, a refrigerator to preserve food, etc. In additio
n it may have secondary functions such as withstanding
shock, etc. These
two mus
t e identified. 2. Evaluation of the function
y comparison: Value eing a rela
tive term, the comparison approach must e used to evaluate functions.
The asic
question is, ‘Does the function accomplish relia ility at the est cost’ and can e
answered only comparison. 3. Develop alternatives: Realistic situations must e
faced, o jections should
overcome and effective engineering manufacturing and o
ther alternatives must e developed. In order to develop effective alternatives
and identify unnecessary cost the following thirteen
value analysis principles m
ust e used: Avoid generalities. Get all availa le costs.
Materials Management
187

Use information only from the est source. Brain storming sessions. Blast, creat
e and refine: In the last stage, alternative productive products, materials, pr
ocesses or ideas are generated. In the ‘create’ stage the ideas generated in the la
st stage are used to generate alternatives which accomplish the function almost
totally. In the refining stage the alternatives
generated are sifted and refined
so as to
arrive at the final alternative to e implemented. Identify and overco
me road locks. Use industry specialists to extend specialised knowledge. Key to
lerance not to e too light. Utilise the pay for vendors’ skills techniques. Utili
se vendors’
availa le functional products. Utilise speciality processes. Utilise a
pplica le standards. Use the criterion ‘Would I spend my money this way?’ 7.10 ERGON
OMICS (HUMAN ENGINEERING)
The word ‘Ergonomics’ has its origin in two Greek words Ergon meaning laws. So it is
the study
of the man in relation to his work. In USA and other countries it is
called y the name ‘human engineering or human factors engineering”. ILO defines hum
an engineering as, “The application of human iological sciences along with engine
ering sciences to achieve optimum mutual adjustment of men and his work, the en
efits eing measured in terms of human efficiency and well  eing.” The human facto
rs or human engineering is concerned with man machine system. Thus another defin
ition which highlights the man machine system is: “The design of human tasks, man 
machine system, and effective accomplishment of the jo , including displays for
presenting information to human sensors, controls for human operations and compl
ex man machine systems.” Human engineering focuses on human eings and their inter
action with products, equipment facilities and environments used in the work. Hu
man engineering seeks to change the things
people use and
the environment in whi
ch they use the things to match
in a etter way the capa ilities, limitations an
d needs of people. 7.10.1 O
jectives of Human Engineering Human engineering (erg
onomics) has two roader o jectives: 1. To enhance the efficiency and effectiven
ess with which the activities (work) is carried out so as to increase the conven
ience of use, reduced errors and increase in productivity. 2. To enhance certain
desira le human values including safety reduced stress
and fatigue and improved
quality of life. Thus, in general the scope and o jective of ergonomics is “desig
ning for human use and optimising working and living conditions”. Thus human facto
rs (ergonomics) discover and apply information
188
Operations Management

a out human ehaviour. A ilities and limitations and other characteristics to th
e design of tools, machines, systems, tasks, jo s and environment for productive
, safe, comforta le and effective human use. Ergonomics aims at providing comfor
t and improved working conditions so as to channelise the energy, skills of the
workers into constructive productive work. This accounts for increased productiv
ity, safety and reduces the fatigue. This helps to increase the plant utilisatio
n. 7.11 JUST IN TIME (JIT) MANUFACTURING
Introduction Just in Time (JIT) Manufacturing is a philosophy rather than a tech
nique. By eliminating all waste and seeking continuous improvement, it aims at c
reating manufacturing system that is response to the market needs. The phase jus
t in time is used to ecause this system operates with low WIP (Work In  Process
inventory
) and often with very low finished
goods inventory. Products are assem
led
just efore they are sold, su assem
lies are made
just efore
they are asse
m led and components are made and fa ricated just efore su assem lies are made.
This leads
to lower WIP and reduced lead times. To achieve this organizations h
ave to e excellent in other areas e.g. quality. According to Voss, JIT is viewe
d as a “Production methodology which aims to improve overall productivity through
elimination of waste and which leads to improved quality”. JIT provides an efficie
nt production in an organization and delivery of only the necessary parts in the
right quantity, at the right time and place while using the minimum facilities”.
7.11.1 Seven Wastes Shiego Shingo, a Japanese JIT authority and engineer at the
Toyota Motor Company identifies seven wastes as eing the targets of continuous
improvement in production process. By attending to these wastes, the improvement
is achieved. 1. Waste of over production
eliminate y reducing set up times, sy
nchronizing quantities and timing etween processes, layout pro lems.
Make only
what is needed now. 2. Waste of waiting eliminate ottlenecks and alance uneven
loads y flexi le work force and equipment. 3. Waste of transportation esta lis
h layouts and locations to make handling and transport unnecessary if possi le.
Minimise transportation and handling if not possi le to eliminate. 4. Waste of p
rocessing itself question regarding the reasons for existence of the product and
then why each process is necessary. 5. Waste of stocks reducing all other waste
s reduces stocks. 6. Waste of motion study for economy and consistency. Economy
improves productivity and consistency improves quality. First improve the motion
s, then mechanise or automate otherwise. There is danger of automating the waste
.
Materials Management
189
Fig. 7.8 Wastes in operations
7. Waste of making
defective products develop the production process to prevent
defects from eing produced, so as to eliminate inspection. At each process, do
not accept defects and makes no defects. Make the process fail safe. A quantify
process
always yield quality product. 7.11.2 Benefits of JIT The most significan
t enefit is to improve the responsiveness of the firm to the changes in the mar
ket place thus providing an advantage in competition. Following are the enefits
of JIT: 1. Product cost—is greatly reduced due to reduction of manufacturing cycl
e time, reduction of waste and inventories
and elimination of non value added op
eration. 2. Quality—is improved ecause of continuous quality improvement programm
es. 3. Design—Due
to fast response to engineering change, alternative designs can
e quickly rought on the shop floor. 4. Productivity improvement. 5. Higher pro
duction system flexi ility. 6. Administrative and ease and simplicity.
190
Operations Management
EXERCISE
Section A
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 1. 2. 3. 4. 5. 6. 7. 8. 9. 1. 2. 3. 4. 5. 6.
What do you mean y materials management? What is material
planning and udgetin
g? What do you
mean y purchasing? What do you mean y ‘Inventory Management’?
What
do you mean y ‘Inventory Control’?
What is codification? What do you mean y ‘Standar
disation’?
What do you mean y ‘Simplification’? What is ‘Value Analysis’? What do you mea
n y ‘Ergonomics’? What is EOQ? Explain the o jectives of materials management. What
are the functions of stores? Explain the reasons for keeping inventories. What
are the o jectives of inventory control? What are the enefits of inventory cont
rol? What are the o jectives
of codification? What are the advantages
of simplif
ication? Explain the asic steps in value analysis. Explain the o jective of ‘Ergo
nomics’. Discuss the scope of materials management. Discuss the parameters of purc
hasing. Discuss the ten ‘R’s’ of purchasing. Discuss the purchasing procedure. Discuss
the selection of suppliers. Discuss the enefits of standardisation.
Section B
Section C
Aggregate Planning and Master Scheduling
191
8
AGGREGATE PLANNING AND MASTER SCHEDULING
CHAPTER OUTLINE
8.1 8.2 8.3 8.4 Introduction Varia les Used in Aggregate Planning Aggregate Plan
ning Strategies Mixed Strategies 8.5 Mathematical Planning Models 8.6 Master Sch
eduling • Exercise • References
8.1
INTRODUCTION
Aggregate planning is the process of planning the quantity
and timing of output
over the intermediate range (often 3 to 18 months)
y adjusting
the production r
ate, employment, inventory, and other controlla le varia les. Aggregate planning
links long range and short range planning activities. It is “aggregate” in the sens
e that the planning activities at this early stage are concerned with homogeneou
s categories (families) such as gross volumes of products or num er of customers
served. Master scheduling follows aggregate planning and expresses the overall
plan in terms of the amounts of specific
end items to produce and dates to produ
ce them. It uses information from oth forecasts and orders on hand, and it is t
he major control (driver) of all production activities. Figure 8.1 illustrates a
simplified
aggregate plan and master schedule.
Ta le 8.1 Aggregate plan and master schedule for electric motors Aggregate Plan
Month Num er of motors J 40 F 25 M 55 A 30 M 30 J 50 J 30 A 60 S 40
Master Schedule Month AC motors 5hp 25hp DC motors 20hp WR motors 10hp 5 – – 15 15 5
– 20 10 – – – – – – 10 10 – 15 20 – 25 30 25 – 15 – 15 30 15 – 20 – 30 10 20 J F M A M J J
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Operations Management
8.2
VARIABLES USED IN AGGREGATE PLANNING

Aggregate planning is a complex pro lem largely ecause of the need to coordinat
e interacting varia les in order for the firm to respond to the (uncertain)
dema

nd in an effective way. Ta le 8.2 identifies some of the key varia les availa le
to
planners and the costs associated with them.
Ta le. 8.2 Decision varia le 1. Varying size of work force 2. Using overtime or
accepting idle time 3. Varying inventory levels 4. Accepting ack orders 5. Su c
ontracting work to others 6. Changing the use of existing capacity 1. 2. 3. 4. 5
. 6. Associated cost Hiring, training, and layoff costs Wage premiums and non pr
oductive
timecosts Carrying and storage costs Stockout costs of lost orders High
er la our and material costs Delayed response and higher fixed costs

To est understand the effect of changes in these varia les, it is useful to fir
st focus
upon the impact of a change in only one varia le at a time, with other
varia les held constant. The examples that follow show the effect on production
costs of (isolated) changes in the decision varia les. They are presented in a s
implified format in order to est convey the underlying concept; more realistic
examples follow in later sections. ILLUSTRATION 1: Paris Candy Company has estim
ated its quarterly demand (cases)
as shown in Ta le 8.3 and Figure 8.1. It expec
ts the next demand cycle to e similar
to this one and wishes to restore ending
inventory,
employment, etc., to eginning levels accordingly.
Ta le 8.3
Demand Quarter 1st 2nd 3rd 4th Units 500 900 700 300
Fig. 8.1 Histogram of demand
Aggregate Planning and Master Scheduling
193

Each quarterly change of 200 units output has an incremental la our cost of Rs.
2,000 and ending levels must e restored to initial levels. What is the cost ass
ociated
with changing the work force size? SOLUTION
Ta le 8.4 Period 1 2 3 4 Demand 500 900 700 300 Work force required 3 5 4 2 Chan
ge of work 1 2 1 2 Cost 2000 4000 2000 4000

Six changes of work force have to e made. Employment change cost = 6 (Rs.2,000)
= Rs.12,000.
ILLUSTRATION 2: (Overtime and idle time) Maintain a sta le work fo
rce capa le of producing 600 units per quarter, and use OT (at Rs. 5 per unit) a
nd IT (at Rs. 20 per unit). SOLUTION
Ta le 8.5 Period 1 2 3 4 Demand 500 900 700 300 OT production (units) 300 100 To
tal cost Idle Time (IT) capacity (units) 100 300 Cost in Rs. 2000 1500 500 6000
10000

As shown in Ta le 8.5, 400 units will
e produced on overtime, and workers will
e idle when 400 units could have een produced. Total
cost is Rs.10000.
ILLUSTR
ATION 3: Vary inventories: Vary inventory levels, ut maintain a sta le work for
ce producing at an average requirement rate (of 2,400 units
+ 4 quarters = 600 u
nits per quarter) with no OT or IT. The carrying cost ( ased on average inventor
y) is Rs. 32 per unit per year, and the firm can arrange to have whatever invent
ory
level is required efore period I at no additional cost. Annual storage cost
( ased on maximum inventory) is Rs. 5 per unit.
194
Operations Management
SOLUTION

Ta le 8.6 Quarter 1 2 3 4 Total Forecast 500 900 700 300 2400 Rate of production
600 600 600 600 Change in inventory 100 –300 –100 300 Cls. alance 100 –200 –300 0 End
alance 400 100 0 300 800

As shown in Ta le 8.6, inventory is accumulated during quarters 1 and 4, and dep
leted in quarters 2 and 3. The preliminary inventory alance column
shows a nega
tive inventory of 300 in quarter 3, so 300 must e on hand at the eginning of q
uarter 1 to prevent any shortage. The average inventory on hand is the ending a
lance total of 800 units divided y 4 quarters = 200 units. Carrying cost, Cc (o
n avg. inventory) = (Rs. 32 per unit yr) (200 units) = Rs. 6,400 Storage cost,Cs
(on max. inventory) = (Rs. 5 per unit) (400 units) = Rs. 2,000 Total inventory
cost (Cc + Cs) = Rs. 8,400 ILLUSTRATION 4: Back orders: Produce
at a steady rate
of 500 units per period, and accept a limited num er of ack orders when demand
exceeds 500. The Stockout cost of lost sales is Rs. 20 per unit. SOLUTION: A a
ck order is an arrangement to fill a current order during a later period. Stocko
ut costs occur when some sales (or customers) are lost ecause products are not
immediately availa le. In this example, 200 units of the excess demand in period
2 are placed on ack order for delivery in period 4. The other 200 units demand
ed in period 2 are lost, alongwith the 200 in period 3. Stockout cost = (200 + 2
00) (Rs.20 per unit) = Rs. 8,000 ILLUSTRATION
5: Su contract: Produce at a stead
y rate of 300 units per period, and su contract for excess requirements at a mar
ginal cost of Rs. 8 per unit. SOLUTION: The firm must su contract 200
units in p
eriod 1, 600 in period 2, and 400 in period 3, as shown in ta le. Su contract co
st = (1200)(Rs. 8 per unit) = Rs.9,600 of the five decision varia les considered
a ove, accepting ack orders results in the least cost (Rs. 8,000).
Aggregate Planning and Master Scheduling
Qt. 1 2 3 4 Demand unit 500 900 700 300 Rs. 300 300 300 300 Total Su contract 20
0 600 400 400 1200
195
8.3
AGGREGATE PLANNING STRATEGIES

Several different strategies have een employed to assist in aggregate planning.
Three “pure” strategies are recognized. The pure strategies stem from early models
that depicted production results
when only one of the decision varia les was per
mitted to vary all others eing held constant. Three focussed strategies are: 1.
Vary production to match demand y changes in employment (Chase demand strategy
): This strategy permits hiring and layoff of workers, use of overtime, and su c
ontracting as required in each period. However, inventory uild up is not used.
2. Produce at a constant rate and use inventories. (Level production strategy):
This strategy retains a sta le work force producing at a constant output rate. I
nventory can e accumulated to satisfy
peak demands. In addition, su contracting

is allowed and ack orders can e accepted. Promotional programmes may also e
used to shift
demand. 3. Produce with sta le workforce ut vary the utilization

rate (Sta le work force strategy): This strategy retains a sta le work force ut
permits
overtime, part time, and idle time. Some versions of this strategy perm
it ack orders, su contracting, and use of inventories. Although this strategy u
ses overtime, it avoids the detrimental effects of layoff. We can use the follow
ing data
in Figs. 8.2 and 8.3 to illustrate the three focussed strategies descri
ed a ove. These figures display a histogram of a 9 month forecast for motors. T
he total requirement for the 9 months is 360 motors. This works out to an averag
e (mean) of 40 motors per month, which is shown as a dotted line in Figure 8.2.
Ta le 8.7 Month Forecast Cumulative Demand Jan. 40 40 Fe . 25 65 Mar. 55 120 Apr
il 30 150 May 30 180 June 50 230 July 30 260 Aug. 60 320 Sept. 40 360 Total 360
196
Average demand Monthly demand
Operations
Management
Jan. Fe . March April May June July Aug. 1 Months Sept.
70 60 50 Demand 40 30 20 10 0
Fig. 8.2
1. Chase Strategy: If the production planner designed a plan to exactly match th
e forecast of demand shown in Figure 8.2, y adding or laying off employees to c
hange the level of production, the planner would e using a chase strategy. Some
overtime or su contracting might also e used, ut no inventories would e accu
mulated. 2. Level Production Strategy: The graph in Figure 8.2 shows (visually)
that the demand exceeds the average requirement in some months and is elow aver
age in others. A production plan could e developed to produce at the constant r
ate of 40 motors per month, accumulating inventory in months 2, 4, 5, and 7, and
using
that inventory to meet the a ove average demands in months 3, 6, and 8. T
a le shows that the cumulative demand (forecast) never exceeds the cumulative av
erages (production), so no initial inventory is needed to prevent shortages. How
ever, if there were shortages, some ack orders could e allowed under a level p
roduction, or inventory strategy. 3. Sta le Work Force Strategy: Referring to Fi
gure 8.2, suppose the firm has a sta le work force capa le of producing 36 motor
s per month on regular time. Production might go as high as 60 motors per month
y using overtime,
ut if demand falls to less than 36 motors per month, some wo
rkers would e idle. Using overtime and idle time to meet demand would e employ
ing a sta le work force strategy.
As part of this strategy, however, it seems li
kely that planners would uild up some inventory during what might otherwise e
idle time periods. ILLUSTRATION 6: An aggregate plan is to e developed for the
forecast of demand covering nine periods shown in Ta le 8.8. Other relevant prod
uction and cost information is also provided. Find the cost associated with an a
ggregate plan that involves varying the size of the work force in order to have
a production rate that matches demand. Note: Since this plan does not allow for
any inventory uild up, a decision has een made to carry 10 units of safety sto
ck, ut no overtime or su contract la our is used.
Ta le 8.8 Demand, production, and cost information Month Forecast Jan. 40 Fe . 2
5 Mar. 55 April 30 May 30 June 50 July 30 Aug. 60 Sept. 40 Total 360
Aggregate Planning and Master Scheduling

Production information Current num er workers Worker time/month Time to produce
one unit Individual worker output: (160 hr/mo/40 hr/unit) Safety stock of invent
ory required 4 units 10 units 10 160 hr 40 hr Cost information
Hiring cost Layof
f cost Regular time cost Overtime cost Su contract la or cost Inventory carrying
cost
197
Rs.600/employee Rs.500/employee Rs. 30/hr Rs. 45/hr Rs. 50/hr Rs. 35/period
SOLUTION:
The cost associated
with changing the employment level is calculated i
n Ta le 8.9. The num er of workers required is first determined y dividing the
forecast
amount y the worker output of 4 units per month. Fractional values hav
e een rounded
up. Beginning with the current level of 10 workers, the num er th
at must e hired, or laid off, is then determined. Costs are then computed for (
1) regular time hours, (2) hiring and layoff, and (3) carrying safety stock. The
se are added to get the total plan cost of Rs. 470,450.
Ta le 8.9 Cost calculations for varying work force to match demand PERIOD Produc
tion forecast (units/mo) WORK FORCE
SIZE DATA
No. Workers required
(fost./o/p of
4 units/wk mo) (a) No. hired @ eg. of mo ( )No. laid off @ eg. of mo COSTS Re
gular time cost, Rs. (No. Wkr)(Rs.30/wkr
hr) (l60 hr/wkr mo) Hiring or layoff co
st, Rs.: @(a) (Rs.600) or ( ) (Rs.500) Inventory carrying cost (10 units) (Rs.35
/unit period) 48, 000 33,600 67,200 38,400 38,400 62,400 38,400 72,000 10 0 0 7
0 3 14 7 0 8 0 6 8 0 0 13 5 0 8 0 5 15 7 0 10 0 5 1 40 2 25 3 55 4 30 5 30 6 50
7 30 8 60 9 40
0 350
1,500 350
4,200 350
3,00
0
3,000 2,500 350 350
4,200 350
2,500 350
350 350
Total cost for plan = SRegular time employment + SHiring and layoff + SInventory
carrying cost = Rs. 446,400 + Rs. 20,900 + Rs. 3,150 = Rs. 470,450

ILLUSTRATION 7: Produce at a constant rate: Using the demand shown in Ta le 8.8
(plus 10 more units in periods 8 and 9), develop an aggregate plan ased upon th
e use of the 10 regular time production workers at a constant rate, with invento
ries used to satisfy peak demand. The inventory carrying
cost is Rs. 35 per unit
per period. Some su contracting can e used at a la our cost of Rs. 50 per hour
if necessary. Assume
a constant output rate of 40 units
per period. No safety s
tock is required, ut total demand of 380 units must e met.
198
Operations Management
The costs associated with producing at a constant
rate and using—inventories to he
lp meet nonuniform demands are shown in Ta le 8.10. Note that the constant produ
ction rate of 40 units per period yields 360 units, which is 20 units short of t
otal demand. Insofar as the additional demand is in periods 8 and 9—when demand al
ready consumes all production
 the additional demand
will e su contracted out in
these two periods. The la our cost for each su contracted unit is (40 hours per
unit) (Rs. 50 per hour) = Rs. 2,000 per unit, so for the 10 units in periods 8
and
9, the su contracting costs are Rs. 20,000 in each period.
Ta le 8.10 Costs calculation for using inventories to meet demand Period Product
ion forecast PRODUCTION DATA Output: Regular time Su contract Output forecast In
ventory: Beginning of period End of period Average inventory COSTS Regular time
cost, Rs. (L0)(Rs.30/hr)(L60 hr) Su contract (@ Rs. 2,000/per unit) Inventory ca
rrying cost (avg. inv.) (Rs.35/period) 48,000 48,000 48,000 48,000 48,000 48,000
– 0 – 263 – 263 – 175 – 525 – 525 48,000 – 525 48,000 48,000 20,000 20,000 350 0 0 0 0 0 1
.5 15 0 7.5 0 10 5 10 20 15 20 10 15 10 20 15 20 0 10 0 0 0 40 – 0 40 – 15 40 – –15 40 – 1
0 40 – 10 40 – –10 40 – 10 40 10 –20 40 10 0 1 40 2 25 3 55 4 30 5 30 6 50 7 30 8 70 9 50

Total cost for plan = SRegular time employment + SSu contract cost + SInventory
carrying cost = Rs. 432,000 + Rs. 40,000 + Rs. 2,826 = Rs. 474,826

Inventory costs under this format are computed y first determining how many uni
ts go into (or out of) inventory.
This amount (i.e., the output minus production
forecast) is shown in the ta le. For period 1, where forecast and output are o
th 40 units, it is zero. For period 2, when 40 units are produced and only 25 ar
e needed, 15 go into inventory. The eginning  and end of period inventory rows
in the ta le show how the inventory alance fluctuates. Average inventory is the
sum of eginning  plus end of period inventory divided y two. The inventory ca
rrying cost is the average amount multiplied y the Rs. 35 per period carrying c
harge. 8.4 MIXED STRATEGIES

The num er of mixed strategy alternative production plans is almost limitless.
H
owever, the realities of the situation will most likely limit the num er of prac
tical solutions. These can e evaluated on a trial and error asis to find which
plan est satisfies the requirements, taking cost, employment policies, etc., i
nto account.
Aggregate Planning and Master Scheduling
199
ILLUSTRATION 8: Custom Furniture Co. currently has 100 employees and has forecas
t quarterly demand as shown in Ta le 8.11. The historical average
production rat
e is 40 units per employee per quarter, and the firm has a eginning (safety sto
ck) inventory of 1,000 units. The hiring and training cost is Rs. 400 per employ
ee, and the layoff cost is Rs. 600 per employee. Inventory is carried at a cost
of Rs. 8 per unit per quarter. Use the data to develop an aggregate plan that us
es varia le employment and inventory to meet demand.
Ta le 8.11 Quarterly demand forecast for furniture manufacture Quarter Demand 1
3,500 2 5,000 3 4,000 4 3,450 Total 15,950

SOLUTION: One alternative
plan is shown in Ta le 8.12. (Many others, including
etter ones, are possi le.) The planner has chosen to uild some extra inventory
in quarter 1 with the workers already on the payroll. Producing at a rate of 40
units per employee, the first quarter production of 4,000 units is 500 more than
demand (3,500), so the ending inventory equals the eginning 1,000 plus 500, or
1,500 units. This results in a carrying cost of Rs.8 (1,500) = Rs.12,000. Twent
y employees are hired at the eginning of quarter 2 to help meet the larger dema
nd during the quarter.
This results in a hiring cost of Rs.400 (20) = Rs.8,000.
Employment is cut ack again at the eginning of quarter 3, as the firm dips int
o safety stock, and employment is restored to its original level at the eginnin

g of quarter 4. (Note: This firm ases inventory cost on ending inventory alanc
e.)

Ta le 8.12 Aggregate plan for varying work force and inventory levels (1) Qtr. (
2) Fcst. or demand 3,500 5,000 4,000 3,450 (3) No. of empl. 100 120 80 100 (4) C
hange in empl. – + 20 – 40 +20 (5) Total prodn. 4,000 4,800 3,200 4,000 (6) Cum. pro
dn. 4,000 8,800 12,000 16,000 (7) Cum. demand 3,500 8,500 12,500 15,950 (8) Endi
ng inv. 1,500 – 1,300 500 1,050 Totals (9) Inv. cost @Rs.8 12,000 10,400. . 4,000
8,400 34,800 (10) Empl. chg cost @Rs.400 or Rs. 600 – 8,000 24,000 8,000 40,000
1 2 3 4
The total (comparative) cost for this is Rs. 34,800 + Rs. 40,000 = Rs. 74,800. N
ote that inventory and employment costs are not well alanced, and employment is
the lowest during quarter 3 when demand is relatively high. With some additiona
l trials, the planner could undou tedly develop a plan that would result in a lo
wer total cost. Large fluctuations in production often result in more pro lems (
and higher costs) than more steady state operations.
200
Operations Management
8.5
MATHEMATICAL PLANNING MODELS
Mathematical
models attempt to refine or improve upon the trial and error approa
ches. Ta le 8.13 identifies four mathematical approaches. The value from some of
these models is more theoretical than practical. The LDR is not easily understo
od, nor are the outputs always realistic.
The management coefficients model is n
on optimal and not easily transfera le, whereas the computer search models do no
t necessarily yield a “glo al” minimum cost.
Ta le 8.13 A summary of some mathematical aggregate planning models Approach Lin
ear programming Minimizesx cost of employment, overtime, and inventories su ject
to meeting demand. Linear decision rule (LDR) Uses quadratic cost functions to
derive rules for workforce size and num er of units. Management coefficients Com
puter search models
Application
Develops regression
Computer routine model that incorporate searches numerous ma
nagers’ past com inations of decisions to predict capacity and selects capacity ne
eds. the one of least cost.
PP
A useful version of the linear programming
model (the transportation algorithm)
views the aggregate planning pro lem as one of allocating capacity (supply) to m
eet forecast requirements
(demand) where supply consists of the inventory on han

d and units that can e produced using regular time (RT), overtime (OT), and su
contracting (SC), etc. Demand consists of individual period requirements plus an
y desired ending inventory. Costs associated with producing units in the given p
eriod or producing them
and carrying them in inventory until a later period are
entered in the small oxes inside the cells in the matrix, as is done in the sta
ndard transportation linear programming format. ILLUSTRATION
9: Given the accomp
anying supply, demand, cost, and inventory data (Ta les 8.14, and 8.15) for a fi
rm that has a constant work force and wishes to meet all demand (that is, with n
o ack orders), allocate production capacity to satisfy demand at minimum cost.
Ta le 8.14 Supply capacity (units) Period 1 2 3 4 Regular time (Rs. 100/unit) 60
50 60 65 Overtime (Rs. 125/unit) 18 15 18 20 Su contract (Rs. 130/unit) 1,000 1
,000 1,000 1,000

*50
per cent of cost is la our.
Ta le 8.15 Demand and inventory Demand: Period Units Initial = 20, Final = 25 1
100 2 50 3 70 unit period 4 80
Carrying cost = Rs. 2 per
Aggregate Planning and Master Scheduling
201

The initial linear programming matrix in units of capacity is shown in ta le 8.1
6, with entries determined as explained elow. Because total capacity exceeds
de
mand, a slack demand of unused capacity is added to achieve the required alance
in
supply versus demand.
Ta le 8.16 Linear programming format for scheduling Supply units from Initial in
ventory
Period 2 Period 1
Demand, Units for Period 1 0 100 125 130 100 125 130 100 125 130 100 125 130 100
5 70 105 102 127 102 127 104 129 Period 2 2 102 127 Period 3 4 104 129 Period 4
6 106 131 8 50 0 0 50 0 0 50 0 0 50 0 0 4001

Capacity Unused Total availa le 20 16 18 1000 50 15 1000 60 18 1000 65 20 1000 4
326

Regular Overtime Su contract
Regular Overtime Su contract Regular Overtime Su co
ntract Regular Overtime Su contract
Demand

Initial inventory: There are 20 units availa le at no additional cost if used in
period 1. Carrying cost is Rs. 2 per unit per period if units are retained unti
l period 2, Rs. 4 per unit until period 3, and so on. If the units are unused du
ring any of the four periods, the result is Rs.6 per unit cost, plus Rs. 2 per u
nit to carry it forward to the next planning horizon, for Rs. 8 total if unused.
Regular time: Cost per unit month is Rs.100 if units are used in the month prod
uced; otherwise, a carrying cost of Rs. 2 per unit month is added on for each mo
nth the units are retained. Unused regular time costs the firm 50 per cent of Rs
. 100 = Rs. 50. Overtime: Cost per unit is Rs. 125 if the units are used in the
month produced; otherwise, a carrying cost of Rs. 2 per unit month is incurred,
as in the regular time situation. Unused overtime has zero cost. Su contracting:
Cost per unit is Rs.130 plus any costs for units carried forward. This latter s
ituation is unlikely, however,
ecause
any reasona le demand can e o tained whe
n needed, as indicated y the ar itrarily high num er (1,000) assigned to su con
tracting capacity. There is no cost for unused capacity here. Note: If the initi
al allocations are made so as to use regular time as fully as possi le, the solu
tion
procedure is often simplified.
Overtime and su contracting amounts can also
e allocated on a minimum
cost asis. Final inventory: The final inventory
requ
irement (25 units) must e availa le at the end of period 4 and has een added t
o the period 4, demand of 80 units to o tain a total of 105 units. Since no ack
orders are permitted, production in su sequent months to fill demand in a curre
nt month is not allowed. These unavaila le cells, along with the cells
associate
d with carrying forward
any su contracted units, may therefore e lanked out, s
ince they are infeasi le. The final solution,
Period 4
Period 3
202
Operations Management

following normal methods of distri ution linear programming, is shown in ta le.
8.17.
This result flows from a least cost allocation.
Ta le 8.17 Master Schedule for Furniture Company Supply units from Initial inven
tory 20 Regular
Period 1
Demand, Units for Period 1 0 100 60 125 18 130 2 100 50 125 130 100 60 125 10 8
130 100 65 125 20 130 0 100 5 70 105 0 1000 50 0 0 100 4001 102 127 102 127 12 1
04 129 3 0 100 50 0 Period 2 2 102 127 Period 3 4 104 129 Period 4 6 106 131 8 5
0 0 0 50 0

Capacity Unused Total availa le 20 16 18 1000 50 15 1000 60 18 1000 65 20 1000 4
326

Overtime Su contract Regular
Period 2

Overtime Su contract Regular
Period 3

Overtime Su contract Regular
Period 4

Overtime Su contract
Demand

The optimal solution values can e taken directly from the cells. Thus in period
2, the planners will schedule the full 50 units to e produced on regular time
plus 12 units on overtime to e carried forward to period 4. This leaves 3 units
of unused overtime capacity and no su contracting during that period. Because o
f the similar carrying cost for units produced on regular time or overtime, it d
oes not matter which physical units are carried forward,
once overtime productio
n
is required. Thus, different optimal solutions ( ut with identical costs) may
e o tained. 8.6 MASTER SCHEDULING
The Master Production Schedule (MPS) formalizes the production plan and translat
es it into specific end item requirements over a short to intermediate planning
horizon. The end items are then exploded
Aggregate Planning and Master Scheduling
203

into specific material and capacity requirements y the Material Requirements Pl
anning (MRP) and Capacity Requirements Planning (CRP) systems. Thus, the MPS ess
entially drives the entire production and inventory system. The major inputs to
the master production schedule are: 1. Forecasts of demand, e.g., of end items a
nd service parts. 2. Customer orders, i.e., including any warehouse and interpla
nt needs. 3. Inventory on hand from the previous period. Forecasts of demand are
the major input for make to stock items.
However, to e competitive, many make 
to order
firms must anticipate orders y using forecasts time item
for long lead
s
and y matching the forecasts with customer orders as the orders ecome availa
le. 8.6.1 Master Scheduling Planning Horizon The time horizon of master schedul
ing depends upon the type of product, volume of production,
and component lead t
imes. It can e weeks, months, or some com ination, ut the schedule must normal
ly extend far enough into the future so that the lead times for all purchased an
d assem
led components are adequately encompassed. Master schedules frequently h
ave oth firm and flexi le (or tentative) portions. Ta le 8.18 illustrates an MP
S for a furniture company that has one such schedule where the firm and flexi le
portions have een marked. The firm portion encompasses the minimum lead time n
ecessary
and is not open to change.
Ta le 8.18 Master schedule for furniture company Week Item R28 ta le R30 ta le L
7 lamp 20 1 50 80 20 (Firm) (Emergency changes only) 2 3 50 4 50 20 60 10 20 5 6
40 80 80 20 20 7 8 9 40 10 40 60 10 20 20 20 (Open) 11 12 40 13 40 80 14 15 16
40 17 18

(Flexi le)
(Capacity firm and material ordered) (Additions and changes OK)

Two time fence can e identified in MPS: A demand and a planning time fence. (a)
A demand time fence is the firm or ‘frozen’ portion of the master schedule ( eginni
ng with the current period) during
which no changes can e made to the schedule
without management approval. ( ) A planning time fence is the portion of the mas
ter schedule (also eginning with the current period) during which changes will
not automatically e made (i.e., via
computer) to accommodate demand. This gives
the master scheduler a managea le ase to work from and still allows some discr
etion in overriding the constraint. Question: How does master scheduling differ
under manufacturing strategies of (a) make tostock, ( ) assem le to order, and (
c) make to order? See Figure 8.3 where the shorter line segments represent fewer
items. In (a) make to stock
204
Operations Management
operations, the (fewer) end items are stocked, to support customer service, and
the master
production schedule (MPS) is structured
around those end items. In (
) assem le to order plants, such
as in automo ile manufacturing, the master sche
duling is done for the major su assem ly level items. In (c) make to order prod
ucts, such as customized furniture, there are fewer raw materials than end items
; the end items may even e one of a kind. Here, the master schedule is typicall
y structured around the raw material usage.
No.of end items MPS

No.of major assem lies
MPS

No.of raw Material (a) Make to stock ( ) Assem le to order
MPS (c) Make to order
Fig. 8.3 Location of master scheduling activities
8.6.2 Master Scheduling Format Planning production that integrates a forecast of
demand, incoming customer
orders, and current inventory levels is difficult–espec
ially when it must e done over a multi week period. These difficulties are ampl
ified as hundreds
or thousands of items ecome involved. Numerous computer progr
ammes have een designed to assist in the scheduling and to provide detailed rep
orts and graphs for analyzing and testing proposed master schedules. Although th
e extras differ from one programme to another, much of the logic is similar. It
consists of (l) incorporating
the forecast and customer orders, (2) determining
whether the inventory alance is sufficient to satisfy the larger of either the
forecast or the orders on hand for the period, and (3) scheduling the production
of a predetermined lot size in periods whenever the inventory alance is inadeq
uate. ILLUSTRATION 10: Use the master schedule shown in Ta le 8.19 to answer the
following: (a) Does this product appear to e made primarily for stock, or is i
t made to
order? ( ) How long is the planning period, and how many production ru
ns will e scheduled in response to demand? (c) Why
is no production run schedul
ed for week 1, and how is the projected availa le alance determined? (d) How ma
ny end items will e "exploded" into component parts in the MRP system as a resu
lt of the MPS requirements during week 3? (e) Does the capacity appear to e ful
ly utilized during the 6 week planning period?
Aggregate
Planning and Master Scheduling

Ta le 8.19 Master schedule for TR28
lood analyzer unit Lead time 0 On hand 30 P
eriod Forecast Customer orders ( ooked) Projected availa le alance Master produ
ction schedule 10 15 25 20 25 0 5 25 10 25 1 Lot size 2 20 25 3 20 4 20 Demand t
ime fence 0 Planning time fence 6 5 20 6 20 7 20 8
205
Safety stock 0
9

SOLUTION (a) Product appears to e made for stock in response to a forecast; no
customer orders are shown. ( ) The planning time fence is 6 weeks, and the sched
ule calls for four production runs (i.e., of 25 units each
in weeks 2, 3, 5, and
6). (c) No production is needed in week 1 ecause the eginning inventory of 30
is more than enough to meet the forecast demand of 20 needed in week 1. Project
ed Availa le Balance = Previous availa le alance + MPS – Current period requireme
nts (@ end of period) = 30 + 0 – 20 = 10 units. (Note: No changes are normally acc
epted up to the Demand Time Fence (DTF). Prior to the DTF the Projected Availa l
e Balance is ased upon customer orders only, and disregards
the forecast.) (d)
The MPS amount in week 3 (25 units). All MPS items ecome projected requirements
in the MRP system. (e) We cannot tell the extent to which capacity is utilized
without additional information from the capacity planning system. One of the use
s of the MPS is to provide the information to drive rough cut capacity planning.
However, no production of lood analyzer
units is scheduled for weeks 1 and 4,
so the production facilities might e idle at that time unless they are eing us
ed for another product. 8.6.3 Availa le to Promise Quantities In make to order o
perations, as actual customer orders are received, they essentially take the pla
ce of an equivalent amount in the forecast, or consume the forecast. For this re
ason, the scheduled production of a lot is initiated y the larger demand of eit
her the forecast amount or the actual ( ooked) customer orders. As new orders ar
e evaluated (and received), it is important to provide marketing with realistic
promises of when shipments can e made. In well designed master scheduling syste
ms, this information is provided y a simple calculation that yields an availa l
e at promise inventory. Availa le to Promise (ATP) inventory is that portion of
the on hand inventory plus scheduled production that is not already committed
to
customer orders. For the first (current) period, the ATP includes the eginning
inventory plus any MPS amount in that period, minus the total
of ooked orders
up to the time when the next MPS amount is availa le. In su sequent periods, the
ATP inventory consists of the MPS amount in that period, minus the actual custo
mer orders already received
for that period and all other periods until the next
MPS amount is availa le.
206
Operations Management
ILLUSTRATION
11: Find the ATP inventory values for the master schedule shown in
Ta le 8.20.
Ta le 8.20 Master
schedule for tractor
levellers
On hand 23 Period Forecast Cust
omer
orders ( ooked) Projected availa le alance Master production schedule Avai
la le to promise 1 10 13 10 Lot size 25 2 10 5 0 3 10 3 15 25 4 10 1 5 10 25 15
25 Planning time fence 6 5 20 6 20 7 8 9

Availa le to Promise values are computed for the current period (1) and for othe
r periods when the MPS shows that a lot will e produced. For period 1. ATP1 = (
On hand Inv.) – (orders in periods 1 and 2) = 23 – (13 + 5) = 5 2. ATP3 = (MPS amoun
t in 3) – (orders in periods 3 and 4) = 25 – (3 + 1) = 21 3. ATP5 = (MPS amount in 5
) – (orders in period 5) = 25 – 0 = 25 4. ATP6 = (MPS amount in 6) – (orders in period
6) = 25 – 0 = 25 The last row should have values of 5, 21, 25 and 25 in the colum
ns for periods 1, 3, 5 and 6 respectively.
ADDITIONAL ILLUSTRATIONS
ILLUSTRATION 12: From the following forecast determine the monthly
inventory al
ances required to follow a plan of letting the inventory a sor all fluctuations
in demand.
In this case, we have
a constant work force, no idle time or overtim
e, no ack orders, no use of su contractors, and no capacity adjustment. Assume
that
the firm does not use safety stock or cushion inventory to meet the demand.
Ta le 8.21 Month Forecast demand Production days Jan. 220 22 Fe . 90 18 Mar. 210
21 Apr. 396 22 May 616 22 June 700 20 July 378 21 Aug. 220 22 Sept. 200 20 Oct.
115 23 Nov. 95 19 Dec. 260 20
SOLUTION
total demand 3500 = 14 units per day. Average requirements = = 250 total product
ion days
The firm can
satisfy demand y producing at an average requirement (14 units per
day) and y accumulating inventory during periods of slack demand and depleting
it
during periods of strong demand. Disregarding any safety stock, the inventor
y alance is:
Aggregate Planning and Master Scheduling
207

Inventory alance = Σ (production – demand). ee Table 8.22 for the solution. The pa
ttern of demand is such that column 4 reveals a maximum negative balance of 566
units at the end of July, so 566 additional units must be carried in stock initi
ally if demand is to be met. Column 5 shows the resulting inventory balances req
uired.
Table 8.22 Month (1) Production at 14 units/day 308 252 294 308 308 280 294 308
280 322 266 280 3,500 (2) Forecast demand 220 90 210 396 616 700 378 220 200 115
95 (3) Inventory change +88 +162 +84 -88 -308 -420 -84 +88 +80 +207 +171 +20 (4
) Ending inventory balance 88 250 334 246 -62 -482 -566 -478 -398 -191 -20 0 (5)
Ending balance with 566 as on Jan. 1st 654 816 900 812 504 84 0 88 168 375 546
566

January February March April May June July August eptember October November Dec
ember

ILLU TRATION 13: Given the data of Illustration 12, suppose the firm has determi
ned that to follow a plan of meeting demand by varying the size of the work forc
e would result in hiring and layoff costs estimated at Rs.12,000. If the units c
ost Rs.100 each to produce, the carrying costs per year are 20 per cent of the a
verage inventory value, and the storage costs (based on maximum inventory) are R
s. 90 per unit, which
 plan results in the lower cost: varying inventory, or vary
ing employment? OLUTION: From Illustration 12 Maximum inventory requiring stora
ge = 900 units (from Table 8.22, column 5) Average inventory balance = ≅
654 + 816 + 900 + ...... + 566 ≅ 460 units 12
Plan 1 (varying inventory): Inventory cost = carrying cost + storage cost = (0.2
0)(460)(Rs.100) + (Rs.0.90)(900) = Rs.10,010 Plan 2 (varying employment): Rs.12,
000 Therefore, varying inventory is the strategy with the lower cost.
208
Operations Management

ILLU TRATION 14: Michigan manufacturing produces a product that has a 6-month de
mand cycle, as shown in Table 8.23. Each unit requires 10 worker-hours to produc
e, at a labour cost of Rs. 6 per hour regular rate (or Rs. 9 per hour overtime).
The total cost per unit is estimated at Rs. 200, but units can be subcontracted
at a cost of Rs. 208 per unit. There are currently 20 workers employed in the s
ubject department, and hiring and training costs for additional workers are Rs.
300 per person, whereas layoff costs are Rs. 400 per person. Company policy is t
o retain a safety stock equal to 20 per cent of the monthly forecast, and each m
onth s safety stock becomes the beginning inventory for the next month. There ar
e currently 50 units in stock carried at a cost of Rs. 2 per unit-month. Unit sh
ortage, or stockouts, has been assigned a cost of Rs. 20 per unit month.
Table 8.23 January Forecast demand Workdays Work hr at 8 per day 300 22 176 Febr
uary 500 19 152 March 400 21 168 April 100 21 168 May 200 22 176 June 300 20 160
Three aggregate plans are proposed. Plan 1: Vary work force size to accommodate
demand. Plan 2: Maintain constant work force of 20, and use overtime and idle ti
me to meet demand.
 Plan 3: Maintain constant work force of 20, and build invento
ry or incur tockout cost. The firm must begin January with the 50-unit inventor
y on hand. Compare the costs of the three plans in table form. OLUTION: We must
first determine what the production requirements are, as adjusted to include a
safety stock of 20 per cent of next month s forecast. Beginning with a January i
nventory of 50, each subsequent month s inventory reflects the difference betwee

n the forecast demand and the production requirement of the previous month. ee
Table 8.24. The costs of the three plans are shown in Tables 8.25, 8.26, and 8.2
7.
Table 8.24 Forecast demand January February March April May June 300 500 400 100
200 300 Cumulative demand 300 800 1,200 1,300 1,500 1,800 afety stock
20 per
cent forecast 60 100 80 20
 40 60 Beginning inventory 50 60 100 80 20 40 Producti
on requirement (fest. + – beg. inv.) 300 + 60 – 50 = 310 500 + 100 – 60 = 540 400 +
80 – 100 = 380 100 + 20 – 80 = 40 200 + 40 – 20 = 220 300 + 60 – 40 = 320

Aggregate Planning and Master cheduling

Table 8.25 Plan 1(Vary Work-force ize) January 1. Production required 2. Produc
tion hours Required (1  10) 3. Hours available per Worker at 8/day
 4. Number of w
orkers Required (2/3) 5. Number of workers Hired 6. Hiring cost (  Rs. 300) 7. N
umber of workers Laid off 8. Layoff cost (7  Rs. 400) Table 8.26 Plan 2 (Use Over
time and Idle Time) January 1. Production required 2. Production hours Required
(1  10) 3. Hours available. per Worker at 8/ day 4. Total hours available (3  20)
5. Number of OT hours Required (2 – 4) 6. OT prem.* (5  Rs. 3) 7. Number IT hours (
4–2) 420 8. IT cost (7  Rs.6) Rs. –2,520 Rs. 17,760 Rs. 7,920 2,960 1,320 Rs.28,200 3
10 3,100 176 3,520 2,360 Rs. 7,080 February 540 5,400 152 3,040 440 Rs. 1,320 Ma
rch 380 3,800 168 3,360 April 40 400 168 3,360 May 220 2,200 176 3,520 0 0 Rs. 8
,400 June 320 3,200 160 3,200 2 Rs. 800 February 310 3,100 176 18 March 540 5,40
0 152 36 18 April 380 3,800 168 23 May 40 400 168 3 June 220 2,200 176 13 10 Tot
al 320 3,200 160 20 7
209
Rs. 5,400 13 Rs. 5,200
Rs. 3,000 20 Rs. 8,000
Rs. 2,100
Rs. 10,500
Rs. 14,000
Total
*Incremental cost of OT = overtime cost – regular time cost = Rs. 9 – Rs. 6 = Rs. 3.
210
Operations Management 
Table 8.27 Plan 3 (Use Inventory and tockout Based on Constant 20-Worker Force)
January February 540 850 3,040 304 656 194 Rs. 3,880 42 Rs. 84 March 380 1,230
3,360 336 992 238 Rs. 4,760 58 190 190 Rs. 380 Rs. 960 Rs. 8,640 April 40 1,270
3,360 336 1,328 May 220 1,490 3,520 352 1,680 June 320 1,810 3,200 320 2,000 Tot
al
1. Production required 2. Cumulative production Required 3. Total hours availabl
e at 20 workers
 4. Units produced (3/10) 5. Cumulative production 6. Units short
(2 – 5) 7. hortage cost (6  Rs. 20) 8. Excess units (5 – 2) 9. Inventory cost (8  Rs
. 2)
310 310 3,520 352 352
Rs. 116 Rs. 380

Note that plan 3 assumes that a tockout cost is incurred if safety stock is not
maintained at prescribed levels of 20 per cent of forecast. The firm is in effe
ct managing the safety-stock level to yield a specific degree of protection
 by a
bsorbing the cost of carrying the safety stock as a policy decision. ummary Pla
n 1: Rs. 10,500 hiring + Rs. 14,000 layoff = Rs. 24,500 Plan
 2: Rs. 8,400 overti
me + Rs. 28, 200 idle time = Rs. 36,600 Plan
 3: Rs. 8,640 tockout + Rs. 960 inv
entory = Rs. 9,600 (least-cost plan) ILLU TRATION 15: Use the data from Illustra
tion 14 except modify as follows: Monthly demand and number of workdays per mont
h are as shown below, employees work 8 hours per day, and time to produce one un
it is 40 hours. Regular-time cost is (Rs.30 per hour) (40 hours per unit) = Rs.1
,200 per unit, and subcontract time cost is (Rs.50 per hour) (40 hours per unit)
= Rs.2,000 per unit. Produce with a (minimal) constant work force of
 six worker
s on regular time and subcontract to meet additional requirements. OLUTION
Table 8.28 (1) Month (2) Forecast (3) Workdays/mo (4) Prod. hr avail. =[3](6 wkr
s) (8 hr) 1056 864 1008 1056 1056 960 1008 1056 960 Jan. 40 22
 Feb. 25 18 Mar. 5
5 21 April 30 22 May 30 22 June 50 20 July 30 21 Aug. 60 22 ept. 40 20 Total 36
0
contd.

Aggregate Planning and Master cheduling 
(5) Reg.-time prod. 26.4 [4] 740 hr/unit (6) Units subcon’t (2)-(3) (7) ubcon’t cos
t (6) (Rs.2,000) (8) Reg.-time cost(5) (Rs.1,200) 31,680 27,200 6,800 59,600 7,2
00 7,200 13.6 3.4 29.8 3.6 3.6 26.0 4.8 33.6 16.0 21.6 25.2 26.4 26.4 24.0 25.2
26.4 24.0
211
52,000 9,600 67,200 32.000 268,800
25,920 30,240 31,680 31,680 28,800 30,240 31,680 28,800 270,720
The total cost of this plan is Rs. 268,800 + Rs. 270,720 = Rs. 539,520.

ILLU TRATION 16: Idaho Instrument Co. produces calculators in its Lewiston plant
and has forecast demand over the next 12 periods, as shown in Table 8.29. Each
period is 20 working days (approximately 1 month). The company maintains a const
ant work force of 40 employees, and there are no subcontractors available who ca
n meet its quality standards. The company can, however, go on overtime if necess
ary and encourage customers to back-order calculators. Production and cost data
follow.
Table 8.29 Period 1 2 3 4 Units 800 500 700 900 Period 5 6 7 8 Units 400 300 400
600 Period 9 10 11 12 Units 1,000 700 900 1,200
Production capacity: Initial inventory: 100 units (final included in period 12 d
emand) RT hours: (40 employees)(20 days/period)(8 hr/day) = 6,400 hr/period
 OT h
ours: (40 employees) (20 days/period) (4 hr/day) = 3,200 hr/period tandard labo
r hours per unit: 10 hr Costs: Labor: RT = Rs. 6/hr OT = Rs. 9/hr Material and o
verhead: Rs. 100/unit produced Back-order costs: apportioned at Rs. 5/unit-perio
d (and increasing in reverse) Inventory carrying cost: Rs. 2/unit-period Assume
that five periods constitute a full demand cycle, and use the transportation lin
ear programming approach to develop an aggregate plan based on the first five pe
riods only. (Note: A planning length of five periods is useful for purposes of m
ethodology, but in reality the planning horizon should cover a complete cycle, o
r else the plan should make inventory, personnel, and other such allowances for
the whole cycle.)
212
Operations Management

OLUTION RT capacity, avail. /period = 6,400 hr/10 hr/unit = 640 units OT capaci
ty, avail./period = 3,200 hr/10 hr /unit = 320 units RT cost = (10 hr/unit)(Rs.
6/hr) + Rs. 100 mat s. And OH = Rs. 160/unit OT cost =(10 hr/unit)(Rs. 9/hr)+Rs.
100 mat I. And OH=Rs. 190/unit
Table 8.30 upply units from Initial inventory 100
Period 1
Demand, Units for Period 1 Period 2 Period 3 0 160 640 190 165 60 195 170 200 17
5 205 180 210 800 2 162 192 160 500 190 165 195 170 200 175 205 500 4 164 194 16
2 60 192 160 640 190 165 195 170 200 700 Period 4 6 166 196 164 20 194 162 192 1
60 640 190 165 195 900 Period 5 8 168 198 166 196 164 194 162 192 160 400 190 40
0 Unused 10
Capacity Total available 100 60 640 0 320 60 640 0 320 80 640 0 320 60 640 0 320
60 640 0 320 1600 320 4900 320 320 320 320
Regular Overtime Regular Overtime Regular Overtime Regular Overtime Regular Regu
lar Demand
 
ILLU TRATION 17: Taiwan hoe Company schedules running shoe production in lot si
zes of 40 units (each of which consists of a carton of pairs). They have a begin
ning inventory of 45 units and have developed a forecast of demand as shown in T
able 8.31. The company has received orders for 22 units in week 1, 9 units in we
ek 2, 4 units in week 3, 15 units in week 4, and 5 units in week 5. et up a mas
ter production schedule, and find the ATP inventory values for weeks 1 through 8
.
Period 5
Period 4
Period 3
Period 2

Aggregate Planning and Master cheduling
Table 8.31 Master chedule for Running hoe Production On-hand 45 Period Forecas
t Customer orders (booked) Projected available balance Master production schedul
e Available-to-promise 1 20 22 23 Lot size 40 2 20 9 3 3 30 4 13 40 Planning tim
e fence 8 4 20 15 33 40 5 20 5 13 0 25 40 6 13 7 15
213
8 20
5

OLUTION
Period Available-to-promise 1 14 2 3 36 4 20 5 6 7 40 8

ee Table 8.31. The period 1 balance is 45–22 (i.e., 22, because orders are larger
than forecast) = 23, and period 2 balance is 23 – 20 = 3. Period
 3 balance would
be a negative (3 – 30), so a lot size of 40 goes into the MP in week 3, resulting
in a balance of (3 + 40) – 30 = 13. For period 1, ATP = (On-hand Inv.) – (Orders in
periods 1 and 2) = 45 – (22 + 9) = 14; and ATP3 = (MP amount in 3) – (Orders for p
eriod 3) = 40 – (4) = 36. For week 4, ATP4 = (MP amount in 4) – (Orders for periods
4, 5 and 6) = 40 – (15 + 5) = 20.

EXERCI E
What is aggregate planning? What is scheduling, and does it differ from aggregat
e planning? What focused strategies are employed by production planners to meet
nonuniform demands? What are the major inputs to master production schedule? Wha
t determines the planning horizon length (time span) of a master schedule? How d
o firms accommodate changes in their master schedule? What is meant by the terms
(a) demand time fence and (b) planning time fence? How does master scheduling d
iffer under manufacturing strategies of (a) make-to-stock, (b) assemble-to-order
, and (c) make-to-order? 9. What is available-to-promise inventory, and it is de
termined? 10. Rainwear Manufacturing, Inc., produces outdoor apparel that has a
demand projected to be as shown in Table 8.32. The plant has a 2-week vacation s
hutdown in July, so the available production days per month are 22, 19, 21, 21,
22, 20, 12, 22, 20, 23, 19, and 21, respectively. 1. 2. 3. 4. 5. 6. 7. 8.
214 Table 8.32 January February March 4,400 4,750 6,300 April May June 6,300 4,4
00 2,000 July August eptember 1,200 3,300 5,000
Operations Management
October November December
9,200 7,600 7,350
(a) Prepare a chart showing the daily production requirements. (b) Plot the dema
nd as a histogram and as a cumulative requirement over time. (c) Determine the p
roduction rate required meeting average demand, and plotting this as a dotted li
ne on your graph. Ans. (a) Chart should show January through December daily dema
nds of 200, 250, 300, 300, 200, 100, 100, 150, 250, 400, 400 and 350. (b) Histog
ram should show cumulative production days on x-axis, production rate (units per
day) on yaxis. Cumulative requirement should show cumulative production days
 on
x-axis and cumulative demand (units) on y-axis. (c) 255.4 units 11. The peedee
Bicycle Co. makes 3-speed bikes that sell for Rs. 100 each. This year s demand
forecast is shown in Table 8.33. Units not sold are carried in stock at a cost o
f 20 per cent of the average inventory value per year, and storage costs are Rs.
2 per bike per year, based upon maximum inventory. 
Table 8.33 Bike demand forecast Quarter Units First 30 econd 120 Third 60 Fourt
h 70
(a) Plot the demand as a histogram on a quarterly basis,
 and show the average re
quirement as a dotted line on your graph. (b) Assume peedee wishes to maintain
a steady work force and to produce at a uniform rate (that is, with no overtime,
back orders, subcontracting, or capacity changes) by letting inventories absorb
all fluctuations. How many bikes must they have on hand on January 1 in order t
o meet the forecast demand throughout
 the year? (c) For an incremental amount of
Rs. 400 in labor costs (total), peedee can vary its work-force size so as to p
roduce exactly to demand. Compare the costs of producing at a uniform versus var
iable rate, indicate which plan is less costly, and show the net difference in c
ost. Ans. (a) Histogram should show quarters on x-axis and production rate (unit
s per quarter) on y-axis. (b) 10 (c) Variable rate is Rs.50 per year less costly
12. An aggregate planner at Duotronix has estimated the demand requirements (Ta
ble 8.34) for forthcoming work periods, which represent one complete demand cycl
e for them. The company is a "going concern" and expects the next demand cycle t
o be similar to this one. Five plans are being considered.
Table 8.34 Period 1 2 3 4 5 Forecast 400 400 600 800 1,200 Period 6 7 8 9 10 For
ecast 1,200 600 200 200 400
Plan 1: Vary the labour force from
 an initial capability of 400 units to whateve
r is required to meet demand. ee Table 8.35.

Aggregate Planning and Master cheduling
Table 8.35 Amountof of change 200 units 400 units 600 units Incremental cost to
change labour force Increase Rs. 9,000 15,000 18,000 Decrease Rs. 9,000 18,000 3
0,000
215
Plan 2: Maintain a stable work force capable of producing 600 units per period,
and meet demand by overtime at a premium of Rs. 40 per unit. Idle-time costs are
equivalent to Rs. 60 per unit. Plan 3: Vary inventory levels, but maintain a st
able work force producing at an average requirement rate with no overtime or idl
e time. The carrying cost per unit per period is Rs. 20. Plan 4: Produce at a st
eady rate of 400 units per period and accept a limited
 number of back orders dur
ing periods when demand exceeds 400 units. The tockout cost of lost sales is Rs
.110 per unit. Plan 5: Produce at a steady rate of 200 units per period, and sub
contract for excess requirements at a marginal cost of Rs.40 per unit. Graph the
forecast in the form of a histogram, and analyze and relevant costs of the vari
ous plans. You may assume the initial (period 1) work force can be set at a desi
red level without incurring additional cost. ummarize your answer in the form o
f a table showing the comparative costs of each plan. Ans. Graph shows period on
x-axis and demand level on y-axis. Plan costs are as follows: plan 1 = Rs. 90,0
00, plan 2 = Rs. 140,000, plan 3 = Rs. 160,000, plan 4 = Rs. 220,000, plan 5 = R
s. 160,000. 5 shown in Table 8.36 is the expected demand for an end item X, whic
h has a beginning inventory of 30 units. The production lot size is 70 units, an
d the firm maintains a safety stock of 5 units.

Table 8.36 Week number 1 Customer forecast ervice forecast International orders
Warehouse orders 5 – – – 2 5 – – 5 3 5 20 – – 4 30 – 30 10 5 15 – – 20 6 5 20 25 – 7 25 –

Complete a master schedule by determining the projected inventory balance, MP e
ntries, and the ATP amounts.
216
Operations Management

REFERENCE
1. Joseph G. Monks, Theory and Problems of Operations Management, Tata McGraw-Hi
ll Publishing Company Limited, 2nd Edition, 2004. 2. Joseph G. Monks,
 Operations
Management,
 McGraw-Hill International Edition, 3rd Edition. 3. . Anil Kumar, N
. uresh, Production and Operations Management, New Age International Publishers
, 2nd Edition, 2008.

MATERIAL AND CAPACITY REQUIREMENT PLANNING (MRP AND CRP)
CHAPTER OUTLINE 
9.1 9.2 9.3 9.4 9.5 MRP
 and CRP Objective
 MRP
 Inputs and Outputs MRP Logic yste
m Refinements afety tock, Lot izing and ystem Updating 9.6 CRP Inputs and Ou
tputs 9.7 Loading • Exercise • References
9
9.1

MRP AND CRP OBJECTIVE
The demand for a finished good tends to be independent and relatively stable. Ho
wever, firms typically make more than one product on the same facilities, so pro
duction is generally done in lots, e.g., of different end items or models. The q
uantities and delivery times for the materials needed to make those end items ar
e determined by the production schedule. Material Requirements Planning (MRP) is
a computer-based technique for determining the quantity and timing for the acqu
isition of dependent demand items needed to satisfy the master schedule requirem
ents. By identifying precisely what, how many, and when components are needed, M
RP systems are able to reduce inventory costs improve scheduling effectiveness,
and respond quickly to market changes. Capacity Requirements Planning (CRP) is t
he process of determining what personnel and equipment capacities (times) are ne
eded to meet the production objectives embodied in the master schedule and the m
aterial requirements plan. MRP focuses upon the priorities of materials, whereas
CRP focuses primarily upon time. Although both MRP and CRP can be done manually
and in isolation, they are typically integrated within a computerized system, a
nd CRP (as well as production activity control) functions are often assumed to b
e included within the concept of “an MRP system.” Computerized MRP systems can effec
tively manage the flow of thousands of components throughout a manufacturing fac
ility. Following are some of the terminology used to describe the functioning of
MRP systems. • MRP: A technique for determining the quantity and timing dependent
demand items.
218 • • • • • • • • •
Operations Management
Dependent demand: Demand for a component that is derived from the demand for oth
er items. Parent and component items: A parent is an assembly made up of basic p
arts, or components. The parent of one subgroup may be a component of a higher-l
evel parent. Bill of materials: A listing of all components (subassemblies and m
aterials) that go into an assembled item. It frequently includes the part number
s and quantity required per assembly. Level code: The level on which an item occ
urs in the structure, or bill-of-materials format. Requirements explosion: The b
reaking down (exploding) of parent items into component parts that can be indivi
dually planned and scheduled. Time phasing: cheduling to produce or receive an
appropriate amount (lot) of material so that it will be available in the time pe
riods when needed-not before or after. Time bucket: The time period used for pla
nning purposes in MRP-usually a week. Lot size. The quantity of items required f
or an order. The order may be either purchased from a vendor or produced in-hous
e. Lot sizing is the process of specifying the order size. Lead-time offset: The
supply time, or number of time buckets between releasing an order and receiving
the materials.
Fig. 9.1 Material and capacity planning flowchart
Material and Capacity Requirements Planning (MRP and CRP)
219
Figure 9.1 describes MRP and CRP activities in schematic form. Forecasts and ord
ers are combined in the production
 plan, which is formalized in the master produ
ction schedule (MP ). The MP , along with a bill-of-material (BOM) file and inve
ntory status information, is used to formulate the material-requirements plan. T
he MRP determines what components are needed and when they should be ordered fro
m an outside vendor or produced in-house. The CRP function translates the MRP de
cisions into hours of capacity (time) needed. If materials, equipment, and perso
nnel are adequate, orders are released and the workload is assigned to the vario
us work centers. End items, such as TV sets, have an independent demand that is
closely linked to the ongoing needs of consumers. It is random but relatively co
nstant. Dependent demand is linked more closely to the production process itself
. Many firms use the same facilities to produce different end items because it i
s economical to produce large lots once the set-up cost is incurred. The compone
nts that go into a TV set, such as 24-inch picture tubes, have a dependent deman
d that is governed by the lot size. Dependent demand is predictable. MRP systems
compute material requirements and specify when orders should be released so tha
t materials arrive exactly when needed. The process of scheduling
 the receipt
 of
inventory as needed over
 time is time phasing. 9.2 MRP INPUT AND OUTPUT
Table 9.1 Inputs • MP of end items required. • Inventory status file of on-hand and
on-order items, lot sizes, lead times, etc. • Product structure (BOM) file of wha
t components and subassemblies go into each end product. Outputs • Order release d
ata to CRP for load profiles
 • Orders to purchasing and in-house production shops.
• Rescheduling data to MP . • Management reports and inventory updates.
The essential inputs and outputs in an MRP system are listed below:
9.2.1 Bill of Materials A bill of materials (BOM) is a listing of all the materi
als, components, and subassemblies needed to assemble one unit of an end item. M
ajor function of the bill of materials is to provide the product structure hiera
rchy that guides the explosion process. Different methods of describing a BOM ar
e in use. Figure 9.2 shows (a) a product structure tree, and (b) an indented BOM
. Both are common ways of depicting the parent-component relationships on a hier
archical basis. Knowledge of this dependency structure reveals clearly and immed
iately what components are needed for each higher-level assembly. A third method
(c) is to use single-level bills of material. 9.2.2 Low-level Coding Figure 9.2
also includes level coding information. Level 0 is the highest (e.g., the end-i
tem code) and level 3 the lowest for this particular BOM. Note that the four cla
mps
220
Operations Management
(C 20) constitute a subassembly that is combined with base (A 10) and two spring
s (B 11) to complete the end-item bracket (Z 100). However, the same clamp (C 20
) is also a component of the base (A 10). To facilitate the calculation of net r
equirements, the product tree has been restructured from where the clamp compone
nts might have been (shown dashed) to the lower level consistent with the other
(identical) clamp. This low-level coding enables the computer to scan the produc
t structure level-by-level, starting at the top, and obtain an accurate and comp
lete count of all components needed at one level before moving on to the next. B
ill of materials for Z 100 bracket is shown below:
Be
Fig. 9.2 Product structure tree Table 9.1(a) Indented bill of materials Bill of
Materials Item: Z 100 Bracket Part No. C20 E30 A10 C20 E30 D21
 F31 G32 B11 Descr
iption Clamp Handle Base Clamp Handle Housing Bearing haft pring NO. 4 1 1 1 1
2 2 1 2 Level 0 Level 2 3 1 2 3 2 3 3 1
Material and Capacity Requirements Planning (MRP and CRP)
221

INGLE-LEVEL BOM
Table 9.1 (a) depicts a single-level bill of materials for Z 100 bracket. It is
a less intuitive but more efficient means of storing the information on computer
. In the single-level bill each entry (on the left) contains only an item or par
t number followed by a list of the part numbers and quantities of components nee
ded to make up the parent item only. This type of listing avoids the searches fo
r duplicate items down through several levels of a tree. On the other hand, it n
ecessitates that the computer search through many single-level bills to find all
the components that are included in a product that has several levels of code.
ingle-level bills frequently contain “pointers” to link the records of components w
ith their parents and accommodate the retrieval of a complete bill of materials
for an item. 
Table 9.1 (b) ingle-level BOM Number Zl00 A10 (1) B 11 (2) C20 (4) Al0 C20(1) D
21 (2) C20 E30 (1) D21 F31 (2) G32(1) Description
 Bracket Base pring Clamp Base
Clamp Housing Clamp Handle Housing Bearing haft

ILLU TRATION 1: Determine the quantities of A10, B11, C20, D2l, E30, F3l, and G3
2 needed to complete 50 of the Z100 brackets depicted in Fig. 9.2. OLUTION
Table 9.2 Determining BOM requirements Component A (base) B (spring) C (clamp) D
(housing) E (handle) F (bearing) G (shaft) Dependency Effect 1A per Z 2B’s per Z
(IC per A)’ (IA per Z) + (4C’s per Z) (2D’s per A)’ (IA per Z) (IE per C) (IC per A)’ (IA
per Z) + (IE per C)’ (4C’s per Z) (2F’s per D) . (2D’s per A) . (IA per Z) (IG per D) .
(2D’s per A) . (lA per Z) Requirements 1 2 5 2 5 4 2
222
Operations Management
First determine the requirements for one bracket as shown in Table 9.2, and then
multiply by 50. Note that parts C and E are used in two different subassemblies
, so their separate amounts must be summed. For 50 brackets, each of the require
ments column amounts must be multiplied by 50 to obtain the gross requirements.
ILLU TRATION 2: 1. Given the product structure tree shown in Figure 9.3 for whee
lbarrow W099, develop an indented bill of materials.
Fig. 9.3 Table 9.3 Part No. W099: Wheelbarrow Part No. 1011 1020 2022 2025 1030
2031 2032 2035 3026 1042 Description Box: deep size, aluminum Handlebar assembly
Aluminum bars Grips: neoprene Wheel assembly Axle Bearing: normal-duty Wheel Ti
re: size A Paint: blue Quantity/Assembly 1 1 2 2 1 1 2 1 1 1 Units Each Each Eac
h Each Each Each Each Each Each Pint Level: 0 Level 1 1 2 2 1 2 2 2 3 1
Material and Capacity Requirements Planning (MRP and CRP)
223

ILLU TRATION 3: Design an indented bill of materials for the flashlight in Illus
tration 3. (Note: Assign appropriate four-digit part numbers to the components.)
Table 9.4 Bill of Materials Item:0010 flashlight Part No. 1001 2001 4001 2002 20
03 3001 3002 2004 1002 1003 2005 3903 4002 4003 3004 3005 4001 2006 Description
Head assembly Plastic head Plastic
 powder Lens Bulb assembly Bulb Bulb holder Re
flector Batteries Body assembly hell assembly
 On-off switch Knob Metal slides C
onnector bars Plastic shell Plastic powder pring No. 1 1 1 1 1 1 1 1 2 1 1 1 1
2 2 1 3 1 Level: 0 Level 1 2 4 2 2 3 3 2 1 I 1 2 3 4 4 3 3 4 2
Gross requirements are the total quantities needed to produce the 200 flashlight
s, whereas net requirements are the quantities needed in addition to existing in
ventory levels (or scheduled receipts). The net requirements must therefore take
into account the components already assembled (or hidden) in completed assembli
es. We shall first determine the gross requirements by taking account of all dep
endencies. For example the gross requirements of connector bars (No. 3004) are (
2 connector bars per shell assembly) times (1 shell assembly per body assembly)
times (1 body assembly per flashlight) times (200 flashlights), or 2  1  1  200 = 4
00. ee Table 9.5. Then we complete the on-hand inventory by totaling both the i
ndividual stock items on hand plus any units of the same item that are already i
n subassemblies or assemblies. For example, the onhand inventory of lenses consi
sts of 12 lenses in stock plus 10 lenses already installed in the head assemblie
s. Requirements will be computed on a level-by-level basis so that components us
ed in more than one subassembly (such as the plastic powder, no. 4001) can be co
mbined.
224 Table 9.5 PartNo. 0010 1001 1002 1003 2001 2002 2003 2004 2005 2006 3001 300
2 3003 3004 3005 4001 4002 4003 Description Flashlight Head
 assembly Batteries
 B
ody assembly Plastic head Lens Bulb assembly Reflector hell assembly pring Bul
b Bulb holder On-off switch Connector bars Plastic shell Plastic powder Knob Met
al slides Gross requirements 200 1  200 = 200 2 200 = 400 1  200 = 200 (1  1  200) = 2
00 1  1  200 = 200 1  1  200 = 200 1  1  200 = 200 1  1  200 = 200 1  1  200 = 20
00 = 200 1  1  1  200 = 200 1  1  1  200 = 200 2  1  l  200 = 400 1  1  1  200
200) + (3 “  1  1  1  200) = 800 1  1  1  1  200 = 200 2  l  l  l  200 = 400 15
0 0 0 10 22 10 10 0 50 10 10 15 0 0 10
Operations Management
Net requirements 200 190 400 200 190 178 190 190 200 150 190 190 185 400 200 790
185 370
9.3
MRP LOGIC
Following are some of the terms frequently used on (computerized) MRP planning f
orms. Note, however, that not all programs use the same terms or provide the sam
e detail of information. 1. Gross requirements: Projected needs for raw material
s, components, subassemblies, or finished goods by the end of the period shown.
Gross requirements come from the master schedule (for end items) or from the com
bined needs of other items. 2. cheduled receipts: Materials already on order fr
om a vendor or in-house shop due to be received at the beginning
 of the period.
MRP form shows quantity and projected time of receipt. (Note: ome MRP forms inc
lude planned receipts here too.) 3. On hand/available: The quantity of an item e
xected to be available at the end of the time period in which it is shown. This
includes amount available from previous period plus planned-order receipts and s
cheduled receipts less gross requirements. 4. Net requirements: Net amount neede
d in the period. This equals the gross requirements less any projected inventory
available from the previous period along with any scheduled receipts. 5. Planne
d-order receipt: Materials that will be ordered from a vendor or in-house shop t
o be received at the beginning of the period. Otherwise similar to a scheduled r
eceipt.
Material and Capacity Requirements Planning (MRP and CRP)
225
6. Planned-order release: The planned amount to be ordered in the time period ad
justed by the lead-time offset so that materials will be received on schedule. O
nce the orders are actually released, the planned-order releases are deleted fro
m the form and the planned-order receipts they generated are changed to schedule
d receipts. The master production schedule dictates gross or projected requireme
nts for end items to the MRP system. Gross requirements do not take account of a
ny inventory on hand or on order. The MRP computer program then “explodes” the end-i
tem demands into requirements for components and materials by processing all rel
evant bills of materials on a level-by-level (or single-level) basis. Net requir
ements are then calculated by adjusting for existing inventory and items already
on order as recorded in the inventory status file. Net requirements = gross req
uirements – (on hand/available + scheduled receipts) … 9.1 Order releases are planne
d for components in a time-phased manner (using lead-time data from the inventor
y file) so that materials will arrive precisely when needed. At this stage the m
aterial is referred to as a planned-order receipt. When the orders are actually
issued to vendors or to in-house shops, the planned receipts become scheduled re
ceipts. The inventory on hand at the end of a period is the sum of the previous
period on-hand amount plus any receipts (planned or scheduled) less the gross re
quirements. On hand/available
 = on hand at end of previous period + receipts – gro
ss requirements …9.2 ILLU TRATION 4: A firm producing wheelbarrows is expected to
deliver 40 wheelbarrows in week 1, 60 in week 4, 60 in week 6, and 50 in week 8.
Among the requirements for each wheelbarrow are two handlebars, a wheel assembl
y, and one tire for the wheel assembly. Orders quantities, lead times, and inven
tories on hand at the beginning of period 1 are shown in Table 9.6.
Table 9.6 BOM and inventory data for wheelbarrow components
Part Handlebars Wheel assemblies* Tires
Order quantity 300 200 400
Lead time 2 week 3 week 1 week
Inventory on hand 100 220 50
*90 wheel assemblies are also needed in period 5 for a garden tractor shipment.
A shipment of 300 handlebars is already scheduled to be received at the beginnin
g of week 2 (i.e., a scheduled receipt). Complete the MRP for the handlebars, wh
eel assemblies, and tires; and show what quantities or orders must
 be released a
nd when they must be released to satisfy the master schedule. OLUTION: Table 9.
7 depicts the master schedule and component part schedules. We shall assume that
the customer completes the final assembly, so no time allowance is required the
re. Note that because each wheelbarrow requires two handlebars, the gross requir
ements for handlebars are double the number of end products. Thus the gross requ
irements in period 1 are 40  2 = 80 units.
226
Operations Management
Table 9.7 Master schedule and MRP component plans for wheelbarrows
Master schedule (wheelbarrow)
Week number
1
2
3
4
5
6
7
8

Quantity Item ID: HB Level code:
 1 On hand: 100 Lot size: 300 LT (wk): 2 afety
stock: 0 Gross requirements cheduled receipts On hand/Available Net requirement
s Planned-order receipts Planned-order release
40 80 300 20 320 320
60 120
60 120
50 100
200
200
80
80
280 20 300
300

Item ID: WA Level code: 1 On hand: 220 Lot size: 200 LT (wk): 3 afety stock: 0

Gross requirements cheduled receipts On hand/Available Net requirements Planned
-order receipts Planned-order releases
40
60
90*
60
50
180
180
180
120
30
170 30 200
170
120
200

Item ID: Tire Level code: 2 On hand: 50 Lot size: 400 LT (wk): 1 afety stock: 0

Gross requirements cheduled receipts On hand/Available Net requirements Planned
-order receipts Planned-order releases 400 50 50
200
250 150 400
250
250
250
250
250
* Requirements from another product (garden tractor) that uses the same wheel as
sembly. The 100 handlebars on hand at the beginning of period 1 are adequate to
supply the gross requirement of 80 handlebars, leaving 20 on hand at the end of
period 1. With the (scheduled) receipt of 300 handlebars in period 2, the on-han
d inventory remains adequate until the end of week 8, when 80 units are on hand.
However, the gross requirement for 100 units in period 9 exceeds the on-hand in
ventory. This results in net requirements (using Eq. 9.1) of 100 – 80 = 20 units.
To satisfy this, a planned-order receipt for the standard order quantity (300) i
s scheduled for the beginning of period 8. In so far as the handlebars have a 2
week lead-time, the planned order for the handlebars must be released 2 weeks ea
rlier (week 6). The planned order receipt will result in a projected end-of-peri
od on-hand inventory (using Eq. 9.2) of 80 + 300 – 100 = 280 units.
Material and Capacity Requirements Planning (MRP and CRP)
227
9.4
  
Y TEM REFINEMENT
Key features of MRP systems are (1) the generation of lower-level requirements,
(2) time phasing of those requirements, and (3) the planned-order releases that
flow from them. Note particularly that planned-order releases of parent items ge
nerate gross requirements at the component level (e.g., tires). Additional featu
res of many MRP systems are their capability to handle (a) simulations, (b) firm
-planned
 orders, (c) pegging, and (d) the availability of planning bills of mate
rial. imulation: The simulation capability allows planners to “trial fit” a master
schedule onto the MRP system before the schedule is actually accepted and releas
ed. With this feature, a planner can “try” a potential customer order on the system
to see if materials and delivery dates can be met even before the order is accep
ted. If lead times, materials, and capacities are sufficient, the order can be a
ccepted; otherwise, changes in quantities or delivery times may have to be negot
iated, or the order may even have to be turned down. Firm-Planned Orders: ometi
mes the “normal” manufacturing times are not enough to meet an emergency, secure a s
pecial order, or service a valued customer. Firm-planned order capability enable
s planners to instruct the computer to accept certain requirements, even though
normal MRP logic would automatically delay or reschedule such orders. By designa
ting certain orders as “firmplanned orders,” planners can ensure that the computer w
ill not automatically change the release date, the planned-order receipt date, o
r the order quantity. In addition, the system can establish a “time fence” around th
e planned-order release date to preclude the scheduling of other orders near tha
t time so as to ensure that resources are available to do the special job. Peggi
ng: Pegging refers to the ability to work backward from component requirements t
o identify the parent item, or items that generated those requirements. For exam
ple, suppose an automobile manufacturer learned that some of the brake materials
(already used in production) were defective. The “where used” pegging file would al
low production analysts to trace requirements upward in the product structure tr
ee to determine what end-item models contained the defective components. Modular
and Planning Bills: Modular bills of materials describe the product structure f
or basic subassemblies of parts that are common to different end items. For exam
ple, several models of a manufacturer’s automobiles may contain the same transmiss
ion, drive train, air-conditioning, and braking systems. By scheduling these ite
ms as (common) modules, production can
 sometimes
 be more
 effectively
  “smoothed” and
inventory investment minimized. 9.5 AFETY TOCK, LOT IZING AND Y TEM UPDATING

afety stock: Note that the MRP component plan shown in Table 9.7 includes space
for an entry of safety stock. Although one of the reasons for using MRP to mana
ge dependent demand inventory items is to avoid the need for safety stock, in re
ality firms may elect to carry safety stock on some items for a variety of reaso
ns: afety stock amounts are sometimes deducted before showing the On hand/Avail
able quantities. Following are some of the reasons for carrying
 safety stock of
components on an MRP format 1. Not all demand is dependent. ome items (e.g., re
pair parts) may have a service requirement that has an independent demand compon
ent.
228
Operations Management
2. Variable lead times from suppliers are a common source of uncertainty to many
firms. 3. Firms may experience machine breakdowns, scrap losses, and last-minut
e customer changes. Lot sizing: Order quantities are not always specified in adv
ance. Different lot-sizing methods are in use, they are (1) fixed-order quantity
amounts, e.g., 300 handlebars; (2) EOQ or ERL amounts; (3) lot for lot, which i
s ordering the exact amount of the net requirements for each period; (4) fixedpe
riod requirements, e.g., a 2-month supply; and (5) various least-cost approaches
, e.g., least-unit cost, least-total cost. The part-period algorithm is a method
that uses a ratio of ordering costs to carrying costs per period, which yields
a part-period number. Then requirements for current and future periods are cumul
ated until the cumulative
 holding cost (in part-period terms) is as close as pos
sible to this number. ystem updating: MRP system designs typically use one of t
wo methods to process data, update files, and ensure that the system information
is valid and conforms with actual: (1) regenerative processing or (2) net chang
e processing. Regenerative MRP systems: use batch processing to replan the whole
system (full explosion of all items) on a regular basis (e.g., weekly). Net cha
nge MRP systems: are online and react continuously to changes from the master sc
hedule, inventory file, and other transactions. Early MRP installations were lar
gely of the regenerative type, but then as net change systems became perfected,
more firms began installing them. However, being “activity driven,” net change syste
ms are sometimes “nervous” and tend to overreact to changes. The major disadvantage
of regenerative systems is the time
 lag that exists until updated information is
incorporated into the system. ystem application: Although MRP systems are wide
ly used, they are most beneficial in manufacturing environments where products a
re manufactured to order, or assembled to order or to stock. MRP does not provid
e as much advantage in low-volume, highly complex applications or in continuous
flow processes, such as refineries. It does, however, enjoy wide application
 in
metals, paper, food, chemical, and other processing applications. ILLU TRATION 4
: Clemson Industries produces products X and Y, which have demand, safety stock,
and product structure levels as shown in Fig. 9.4. The on hand inventories are
as follows: X = 100, Y = 30, A = 70, B = 0, C = 200, and D = 800. The lot size f
or A is 250, and the lot size for D is 1,000 (or multiples of these amounts); al
l the other items are specified on a lot-for-lot (LFL) basis (that is, the quant
ities are the same as the net requirements). The only scheduled receipts are 250
units of X due in period 2. Determine the order quantities and order release da
tes for all requirements using an MRP format. (Note: Assume safety stock amounts
are to be included in the on hand/Available).
Products
1 X Y 50 30 2 3 300 Demand in period 4 5 6 200 400 7 8 250
Material and Capacity Requirements Planning (MRP and CRP)
229
Fig. 9.4 Product structure with BOM
First, establish the codes (lowest level) applicable to each product as shown in
Table 9.8. Items C and D appear both at level 1 in product Y and at level 2 in
product X, so they are assigned to level 2. Thus their requirements are not nett
ed out until all level 0 and 1 requirements have been netted out.
Table 9.8 Item Low-Level Code 0 Y A B 2 D 2 0 1 1
Next, set up an MRP format for all items (see Table 9.9), and enter the end-item
gross requirements for X and Y. They both have low-level codes of 0 and so can
be netted out using order quantities that match their requirements (preserving s
afety stocks, of course). This results in plannedorder releases of 200 and 250 u
nits for X (periods 4 and 6) and 400 units of Y (period 4). Next, explode the pl
anned-order releases for X and Y (that is, multiply them by the quantities requi
red of the level l items, A and B). (Note that C and D are not level l items.) P
rojected requirements for A (200 and 250 units) are direct results of the planne
d-order releases for X. Two units of B are required for each X, so item B’s projec
ted requirements in periods 4 and 6 are 400 and 500, respectively. Items A and B
are then netted, and the order release dates and amounts are set. Next, explode
the level 2, planned-order releases to the level 3 items. The arrows in Table 9
.9 show that requirements for C and D come from planned-order releases for both
B and Y. End item Y requires 4 units of D, so the projected requirements in peri
od 4 are 2,100 units, with 1,600 from Y (that is, 4  400) and 500 from B. Togethe
r, they generate a planned-order release for 2,000 units of D in period 2.
230 Table 9.9 Week number Item ID: X Level code:
 0 On hand: 100 Lot size: LFL LT
(wk): 2 afety stock: 50 Gross requirements cheduled receipts On hand/Availabl
e Net requirements Planned-order receipts Planned-order releases 300 50 50 50 50
1 300 2 3 4
Operations Management
5
6 300
7
8 200
50
50 150 200 250
50
50 200 250

Item ID: Y Level code: 0 On hand: 30 Lot size: LFL LT (wk): 3 afety stock: 30

Gross requirements cheduled receipts On hand/Available Net requirements Planned
-order receipts Planned-order releases 400 30 30 30 30 30 30
400
30 400 400
30

Item ID: A Level code: 1 On hand: 30 Lot size: 250 LT (wk): 3 afety stock:

Gross requirements cheduled receipts On hand/Available Net requirements Planned
-order receipts Planned-order releases 250 250 70 70 70
200
250
120 130 250
120
120 130 250
120
120

Item ID: B Level code: 1 On hand: 0 Lot size: LFL LT (wk): 2 afety stock:

Gross requirements cheduled receipts On hand/Available Net requirements Planned
-order receipts Planned-order releases 400 0 0 0
400
500
0 400 400 500
0
0 500 500
0
0

Item ID: C Level code: 2 On hand: 200 Lot size: LFL LT (wk): 1 afety stock:

Gross requirements cheduled receipts On hand/Available Net requirements Planned
-order receipts Planned-order releases 200 200
400
900
0 200 200
0
0 900 900
0
0
0
0
900
contd.
Material and Capacity Requirements Planning (MRP and CRP) 
Item ID: D Level code:
 2 On hand: 800 Lot size: 1000 LT (wk): 2 afety stock: Gr
oss requirements cheduled receipts On hand/Available Net requirements Planned-o
rder receipts Planned-order releases 2000 800 400 400 300 1700 2000 300 300 300
400 2100
231
300
9.6
 
CRP INPUT AND OUTPUT
Capacity is a measure of the productive capability of a facility per unit of tim
e. In terms of the relevant time horizon, capacity management decisions are conc
erned with the following: l. Long range-resource planning of capital facilities,
equipment, and human resources.
 2. Medium
 range-requirements planning of labor
and equipment to meet MP needs. 3. hort range-control of the flow (input-outpu
t) and sequencing of operations. Capacity-requirements planning (CRP) applies pr
imarily to medium-range activities. The CRP system receives planned and released
orders from the material-requirements planning system and attempts to develop l
oads for the firm’s work centers that are in good balance with the work-center cap
acities. Like MRP, CRP is an iterative process that involves planning, revision
of capacity (or revision of the master schedule), and replanning until a reasona
bly good load profile is developed. Planned-order releases (in the MRP system) a
re converted to standard hours of load on key work centers in the CRP system. Fo
llowing are the essential inputs and outputs in a CRP system:
Inputs • Planned and released orders from the MRP system • Loading capacities from t
he work-center status file • Routing data from the routing file • Changes that modif
y capacity, give alternative routings, or alter planned orders • • • • Outputs Verificat
ion reports to the MRP system Load reports of planned and released orders on key
work centers Rescheduling data to the MP Capacity modification data
9.7
LOADING
There are two basic techniques for planning the control of a production system.
One of these is loading; the other is scheduling. Of the two loading is the easi
er to do. But scheduling can give more control and is more detailed, although it
is usually done for a shorter time period. A load is the amount of work assigne
d to a facility work centre or operator, and loading is the assignment of work.
Loading does not specify the sequence in which the work is done or when it is to
be done. Loading is the aggregate assignment of jobs to specific entities. Inpu
ts necessary for loading include:
232
Operations Management

• Routing • tandard hours per operation or work centre • Gross machine/man-hour avail
able • Efficiency factors • Due date. Loading is closely tied to capacity planning i
n the sense that
 loading is the first indication that capacity levels need adjus
ting. 9.7.1 teps in the Loading Typically, the loading process considered as a
six step procedure. tep I through 4 is managerial decision steps that usually d
o not change week to week or month to month. The last two steps are required on
a periodic basis as an input to scheduling.
1. Choose load centers; • • • Department Group Machine/Work-center 5. 6. 4. Choose loa
ding method • • • To infinite capacity To finite capacity Combination
2. Develop efficiency factors by load centers 3. Determine capacity by centers
Load schedule orders into load centers Unload completed hours
 
tep 1: The first step in machine loading is to choose the load centers. ome co
mpanies load by department only if all the machines are interchangeable. When di
fferent machine centers within the department have different capacities, the typ
ical approach is to break the machines down into similar machine groups. For exa
mple, all 24 inch boring machines might be included in the same group, if jobs a
re interchangeable among the machines. The trend is to group as many machines to
gether as possible since doing so will
 reduce the complexity of the loading prob
lem and tend to stabilize the load. tep 2: The second step is to develop effici
ency factors by load centers/work stations. A load center with two people is the
oretically capable of 80 hours of production per week, but actual output might b
e considerably less than 80 hours of production per week, indirect activities, o
r other nonvalue adding activities. If they are working on incentives,
 they coul
d be turning out more than 80 standard hours of production. tep 3: The third st
ep is to determine the gross capacity by load centers. This capacity is either h
uman or machine dependent. A center is machine dependent if all machines have at
least one operator assigned. A center is human dependent if there are more work
ers than machines and machine stand idle while all workers are busy. With the nu
mber of people or machine as an input, the gross capacity is the gross number of
hours that the resources are available per planning period. The center’s capacity
is then the gross capacity times of the efficiency factor. tep 4: The fourth s
tep is to choose the loading method, which may be either to finite or to infinit
e capacity. Infinite capacity loading means showing the work for a work center i
n the time
Material and Capacity Requirements Planning (MRP and CRP)
233
period required, regardless of the work center’s capacity. Finite capacity loading
means
 putting no more work into a work center than it can be expected to execut
e. tep 5: The fifth step is to load the scheduled orders into the load centers

while at the same time considering the capacity and other restrictions. tep 6:
The sixth step is to select the unloading technique. Unloading is the process of
removing the planned work from the work center load as jobs are partially or to
tally completed. Manual systems may require shortcuts, such as considering a job
to be completed when the first lot of pieces is reported. This saves posting ma
ny partial lots and recalculating load balances, but the load is always understa
ted by the number of hours remaining on jobs unloaded. Another short-cut relieve
s the load only when the last lot is completed, giving a load constantly oversta
ted by the hours completed but not removed. The number of hours to be unloaded m
ust be equal to the number of hours loaded for each job. A work center load, bas
ed on the actual work order released, is a good short-tenn technique for highlig
hting the under load or overloads on work centers and showing the need for overt
ime, temporary transfer, subcontracting or other short-range adjustments. 9.7.2
Loading Concepts Why use loading? The major reason is that it can predict some f
uture events. A chart tells of an overload, and it tells this in advance. ‘This sa
me chart can warn of excess capacity before the machine and workers are idle. Th
erefore, loading is most useful to dispatchers, supervisors, and production sche
dulers planning shop work. Loading can be used to smooth the workload from month
to month or between the work centers. It is an aid in identifying the critical
departments or machines and in judging the effect of break-downs, rush orders, a
nd new products. It is also useful for documenting the requirements for more or
less capacity.
INFINITE LOADING
Infinite capacity loading means showing the work for a work center in the time p
eriod required, regardless of the work center’s capacity. When using infinite load
ing to create the schedule, it is necessary to check the load to determine wheth
er there is sufficient capacity available in the time period in which the work i
s required.
FINITE LOADING
Finite capacity loading means putting no more work into a work center than it ca
n be expected to execute. Loading to finite capacity by operation is more comple
x than infinite capacity. A facility activity that does not go according to sche
dule may require that the load be recalculated, and therefore, loads will fall i
n different time periods. Finite loading also requires that the company establis
h priority for loading the jobs. In practice, finite loading is unsatisfactory s
ince it assumes that the present capacity is all that is available and does not
show the time period in which overloads will occur if an attempt is made to meet
desirable schedules.
COMBINATION LOADING
A good machine loading system involves a combination of both techniques. Orders
are first scheduled and loaded to infinite capacity to see where overload will o
ccur, then rescheduled to level the load based on available capacity after corre
ctive actions have been taken wherever possible.
234
Operations Management
Companies have successfully used computer machine loads over longer planning per
iods to assist capacity planning. Forecasts of individual finished products to b
e manufactured during this period can be exploded into detailed requirements of
production hours for each of major work centers. The machine hours based on thes
e aggregate hours will give dependable data on the average capacity required to
meet the forecasted demand on manufacturing facilities. The work may be assigned
by the nature of the job. If the work can be done by more than one center, it m
ust be assigned to just one. If it can be done by only one work center, then the
re is no alternative, but to one work center. The work may be assigned on an ind
ividual job basis, but if the jobs are
 repetitive, they may be assigned on a sta
ndard basis by the use of routings. tandard routings shows all operations that
must be done to make the part or assembly. If the standard routings are not avai
lable, someone must assign the individual jobs to the facilities and must estima
te the work content of the assignments. The work contents must be in terms that
are comparable between jobs. Measures that can be used are hours, pieces, batche
s, gallons and so on per hour, per shift, per day and so on. Work assignments mu
st be accumulated by the facility in order to calculate the load on each facilit
y. One method is to use a ledger in which the job members and job loads are ente
red by each facility. When the job is completed, it is marked off. The jobs are
then added periodically to obtain the load on the facility. Another method is to
accumulate the assignments in ‘buckets’ one bucket for each facility. The bucket ma
y be box, a file, a peg and so on. A ticket is prepared for each job assigned to
the facility and is placed in the bucket. A perpetual total of the facility loa
d may be kept for each bucket. Job tickets, as added to the bucket are added to
this total. When completed and removed from the bucket, they are deducted from t
he total. If a computer is available, bucket may be computer file. If standard r
outings are available, these can be kept as computer files.

EXERCI E
1. (a) What is meant by “time phasing” (b) What is a “time
 bucket”? 2. (a) Why is the BO
M file sometimes called a product structure tree? (b) uppose a 5-level BOM has
one subassembly (AX205) on level 2 and another (BY407) on level 4. Which subasse
mbly has a level code nearest the end item? 3. Why do MRP programs use single-le
vel BOMs? 4. What is the advantage of low-level coding? 5. What are the three es
sential sources of data for an MRP program? 6. What must take place to change a
planned-order release to a scheduled receipt? 7. By using a time-phased plan for
component inventories, a firm can reduce average inventory levels from 105 unit
s to 42.5 units. If the average component value is Rs.12 and the reduction appli
es to 4,000 components, how much of a saving would result? Use inventory-carryin
g costs of 30 per cent per year. 8. Determine the net requirements for the three
items shown in table.
Material
 and Capacity Requirements Planning (MRP and CRP)
witches Gross requirements On-hand Inventory Inventory on order (scheduled rece
ipt) 55 18 12 Microprocessor 14 2 12 Keyboards 28 7 10
235

Ans: 25 witches, 0 Microprocessors and 11 Keyboards 9. Given the product struct
ure tree shown in table compute the net requirements for A, B, C, D, and E, to p
roduce 50 units of X.
Components Inventory on hand and on order A 20 B 10 C 15 D 30 E 100

REFERENCE
1. Everett, E. Adam, Jr. Ronald J. Ebert, Production and Operations Management,
PrenticeHall of India Private Limited, 5th Edition, 1994. 2. R. Pannerselvam, Pr
oduction and Operations Management, Prentice-Hall of India Private Limited, 9th
print, 2004. 3. Joseph, G. Monks, Theory and Problems of Operations Management,
Tata McGraw-Hill Publishing Company Limited, 2nd Edition, 2004. 4. Joseph G. Mon

ks, Operations Management,
 McGraw-Hill International Edition, 3rd Edition. 5. .
Anil Kumar, N. uresh, Production and Operations Management, New Age Internatio
nal Publishers, 2nd Edition, 2008.
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CHEDULING AND CONTROLLING PRODUCTION ACTIVITIE
CHAPTER OUTLINE 
10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Introduction Concept of ingle Mach

ine cheduling Measures of Performance hortest Processing Time ( PT) Rule W PT
Rule
 Earliest Due Date (EDD) Rule Minimizing the Number of Tardy Jobs Flow hop
cheduling
 Johnson s Problem
 10.10 10.11 10.12 10.13 10.14 10.15 CD Heuristic J
ob hop Problem Types of chedules
 Heuristic Procedures Priority Dispatching Rul
es Two Jobs and M Machines cheduling • Exercise • References
10
10.1
INTRODUCTION

cheduling is the allocation of starts and finish time to each particular order.
Therefore scheduling can bring productivity in shop floor by providing a calend
ar for processing a set of jobs. The single machine-scheduling problem consists
of n jobs with the same single operation on each of the jobs, while the flow sho
p-scheduling problem consists of n jobs with m operations on each of the jobs. I
n this problem, all the jobs will have the same process sequences. The job shops
cheduling problem contains n jobs with m operations on each of the jobs; but, in
this case, the process
 sequences of the jobs will be different from each other.
10.2 CONCEPT OF INGLE MACHINE CHEDULING
The basic single machine scheduling problem is characterized by the following co
nditions: 1. A set of independent,
 single-operation jobs is available for proces
sing at time zero.
 2. et-up time of each job is independent of its position in
jobs sequence. o, the set-up time of each job can be included in its processing
time. 3. Job descriptors are known in advance. 4. One machine is continuously a
vailable and is never kept idle when work is waiting. 5. Each job is processed t
ill its completion without break.
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Operations Management
Under these conditions, one can see one-to-one correspondence between a sequence
of the n jobs and a permutation of the job indices 1, 2, ... n. The total numbe
r of sequences in the basic single machine problem is n! which is the number of
different permutation of n elements. The following three basic data are necessar
y to describe jobs in a deterministic single machine-scheduling problem. Process
ing time (tj ): It is the time required to process job j. The processing time, t
j will normally include both actual processing time and set-up time. Ready time
(rj ): It is the time at which job j is available for processing. The ready time
of a job is the difference between the arrival time of that job and the time at
which that job is taken for processing. In the basic model, as per condition I,
rj = 0 for all jobs. Due date (dj ): It is the time at which the job j is to be
completed. Completion time (Cj ): It is the time at which the job j is complete
d in a sequence. Performance measures for evaluating schedules are usually funct
ion of job completion time. ome, sample performance measures are Flow time, Lat
eness, Tardiness, etc. Flow time (Fj ): It is the amount of time job j spends in
the system. Flow time is a measure, which indicates the waiting time of jobs in
a system. This in turn gives some idea about in-process inventory due to a sche
dule. It is the difference between the completion time and the ready time of the
job j. i.e. Fj = Cj – rj. Lateness (Lj): It is the amount of time by which the co
mpletion time of job j differs from the due date (Lj = Cj – d). Lateness is a meas
ure which gives an idea about conformity of the jobs in a schedule to a given se
t of due dates of the jobs. Lateness can be either positive lateness or negative
lateness. Positive lateness of a job means that the job is completed after its
due date. Negative lateness of a job means that the job is completed before its
due date. The positive lateness is a measure of poor service. The negative laten
ess is a measure of better service. In many situations, distinct penalties and o
ther costs are associated with positive lateness, but generally, no benefits are
associated with negative lateness. Therefore, it is often desirable to optimize
only positive lateness. Tardiness (Tj ): Tardiness is the lateness of job j if
it fails to meet its due date, or zero, otherwise T j = max {O, Cj – dj} = Max {O,
Lj }. 10.3 MEA URE OF PERFORMANCE
The different measures of performance which are used in the single machine sched
uling are listed below with their formulas.
1 n Mean flow time: F = n ∑ F j j =1 1 n Mean tardiness: T = n ∑ T j j =1
Maximum flow time: Fmax = Maximum tardiness: Tmax =
Max{Fj }
1≤ j ≤ n
Max{T j }
1≤ j ≤ n

cheduling and Controlling Production Activities
239
Number of tardy jobs: NT = where
∑ f (T )
j j =1
n
  
f (Tj) = I, if Tj > 0, and f (Tj) = 0, otherwise. 10.4 HORTE T PROCE ING TIME
( PT) RULE
In single machine scheduling problem, sequencing the jobs in increasing order of
processing time is known as the shortest processing time ( PT) sequencing. ome
times we may be interested in minimizing the time spent by jobs in the system. T
his, in turn, will minimize the in-process inventory. Also, we may be interested
in rapid turnaround/throughput times of the jobs. The time spent by a job in th
e system is nothing
 but its flowtime, and
 the ‘rapid turnaround time’ is its mean fl
ow time
 (F). hortest processing time ( PT) rule minimizes the mean flow time. I
LLU TRATION 1: Consider the following single machine-scheduling problem.
Job (j) Processing time (t) (hrs) 1 15 2 4 3 5 4 14 5 8
Find the optimal sequence, which
 will minimize the mean flow time and also obtai
n the
 minimum mean flow time. OLUTION No. of jobs = 5 Arrange the jobs as per t
he PT ordering
Job (j) Processing time (t) (hrs) 2 4 3 5 5 8 4 14 1 15
Therefore, the job sequence, which will minimize the mean flow time, is 2-3-5-4-
1. Computation of Fmin
Job (j) Processing time (t) (hrs) Completion time (Cj) (Fj) 2 4 4 3 5 9 5 8 17 4
14 31 1 15 46

ince, the ready time rj = 0 for all j, the flow time (Fj) is equal to Cj for al
l j.
1 n 1 1 ∑ Fj = 5 (4 + 9 + 17 + 31 + 46) = 5 (107) = 21.4 hours n j =1 Therefore, t
he optimal mean flow time = 21.4 hours.
F =
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Operations Management
10.5

W PT RULE

ometimes, the jobs in a single machine-scheduling problem will not have equal i
mportance. Under such situation, each job is assigned a weight, wj . The mean fl
ow time, which is computed after considering wj is called, weighted mean flow ti
me, which is shown below:
∑w
Fw =
j =1 n j =1
n
j
⋅ Fj
j
∑w
In single machine scheduling problem, sequencing the jobs in increasing order
 of
weighted processing time is known as Weighted hortest Processing Time (W PT) s
equencing. The weighted processing time of a job is obtained by dividing its pro
cessing time by its weight. I LLU TRATION 2: Consider the following single machi
ne-scheduling problem with weights:
Job (j) Processing time (tj) Weight (w) 1 15 1 2 4 2 3 5 1 4 14 2 6 8 3
Determine the sequence, which will minimize the weighted
 mean flow time of the a
bove problem. Also find the weighted mean flow time. OLUTION
Job (j) Processing time (t) (hrs) Weight (wj) T/wj 1 15 1 15 2 4 2 2 3 5 1 5 4 1
4 2 7 5 8 3 2.67

Arrange the jobs in the increasing order of tj / wj (i.e. W PT ordering). From t
he above table, we get the following relation. t2/w2 ≤ t5/w5 ≤ t3/w3 ≤ t4/w4 ≤ t1/w1 The
refore optimal sequence, which will minimize the weighted mean flow time, is, 2 –
5 – 3 – 4 – 1. Fw Calculation:
Job (j) Tj Cj (Fj) Fj * W j 4 4 4 2 5 9 9 3 8 17 17 5 14 31 31 4 15 46 46 1

cheduling and Controlling Production Activities
n
241
∑ w .F
j
j
Fw =
j =1 n
∑w
j =1
=
(8 + 36 + 17 + 62 + 46) 169 = = 18.78 hours. (2 + 3 + 1 + 2 + 1) 9
j
10.6

EARLIE T DUE DATE (EDD) RULE
The lateness (Lj) of a job is defined as the difference between the completion t
ime and the due date of that job. Lj can be either positive or negative values.
L j = C j – dj The maximum job lateness (Lmax) and the maximum job tardiness (Tmax
) are minimized by Earliest Due Date sequencing. In a single machining schedulin
g problem, sequencing of
 jobs in increasing order of due date is known as ‘Earlies
t Due Date Rule’. ILLU TRATION 3: Consider the following single machining scheduli
ng problem:
Job (j) Processing time (tj) Due date (dj) 1 10 15 2 8 10 3 8 12 4 7 11 5 12 18
6 15 25
Determine the sequence which will minimize the maximum
 lateness (Lmax). Also, de
termine Lmax with respect to the optimal sequence. OLUTION: Arrange the jobs as
per EDD rule (i.e. in the order of their due dates). The EDD sequence is 2-4-3-
1-5-6.This sequence
 gives a minimum value for Lmax.
Job (j) (EDD equence) Processing time (tj) Completion Time (Cj) Due Date (dj) L
ateness (Lj) 2 8 8 10 –2 4 7 15 11 4 3 8 23 12 11 1 10 33 15 18 5 12 45 18 27 6 15
60 25 35
From the table, the maximum is 35. This is the optimal value for Lmax. The Lmax
of any other nonEDD
 sequence will not be less than 35. 10.7 MINIMIZING THE NUMBE
R OF TARDY JOB
If a job is completed beyond its due date, then it is called tardy job; otherwis
e it is called non-tardy job. In many organizations, the objective may be to min
imize the total number of tardy jobs.
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Operations Management
If the EDD sequence yields zero tardy, or it yields exactly one tardy job, then
it is an optimal sequence for minimizing the total number of tardy jobs (NT), If
it yields more than one tardy job, the EDD sequence may not yield the optimal s
olution. An exact algorithm for the general case is given below. The final seque
nce consists of two streams of jobs as given below: (a) First, a set (E) of earl
y jobs, in EDD order. (b) Then, a set (L) of late jobs, in any order. This algor
ithm gives optimal sequence, which will result in minimum number of tardy jobs (
NT).
 
HODG
 ON’ ALGORITHM TO MINIMIZE NT
tep 1:
 Arrange the jobs in EDD order and assume this, as set E. Let set L be em
pty. tep 2: If no jobs in E are late, then stop. Find the union of E and L (Not
e: The remaining jobs in E should be in EDD order. But the jobs in L can be
 in a
ny order); otherwise, identify the first late job in E. Let it be job K. tep 3:
Identify the longest job, among the first K jobs in the sequence. Remove this j
ob from E and place it in L. Revise the completion times of the jobs remaining i
n E and return,
 to tep 2. This algorithm is demonstrated using the following pr
oblem. ILLU TRATION 4 A computer systems consulting company is under contract to
carry out seven projects, all with deadliness assured in days from now. The con
sultants are a small group and they work together on each project, so that the p
roject will be started and completed sequentially. Under the terms of contract,
the consultants will receive Rs. 24,000 for each project completed on time, but
they will incur Rs. 40,000 in penalties for each project completed late. Each pr
oject has an, associated duration, which is the anticipated number of days requi
red to carry out the project as shown below. How should the projects be sequence
d in order to maximize net revenues?
Project ID Duration (Dj) Deadlines (d) 1 2 6 2 4 12 3 6 30 4 8 19 5 10 12 6 12 1
8 7 14 24

OLUTION: From the statement of the problem, one can identify that the objective
is to maximize net revenues. This can be achieved by simply obtaining a sequenc
e, which will minimize the
 number of tardy jobs (NT), Hence, we apply Hodgson’s al
gorithm to minimize NT. tep 1: The earliest due date order is shown below:
a ij Project (j) 2 1 12 2 12 5 18 6 19 4 24 7 30 3
Place
 the above sequence of projects
 which is in EDD order in set E. Therefore,
et E = (1, 2, 5, 6, 4, 7,3) et L = (Empty).

cheduling and Controlling Production Activities
243

tep 2: The lateness of the projects are checked as shown below:
Project (j) Duration (tj) Completion time (Cj) Due date (d) Tardy/non-tardy (1/0
) 1 2 2 6 0 2 4 6 12 0 5 10 16 12 1 6 12 28 18 1 4 8 36 19 1 7 14 50 24 1 3 6 56
30 1
In the above table, in the last row, 0 means that the project is non-tardy and 1
means that the project is tardy. As per the sequence in the set E, there are fi
ve tardy
 projects. The first tardy project is 5, which is in the third position
[3]. tep 3: The project with the largest duration among the first-three project
s in the sequence is 5. Remove this project and append it to L. Therefore L = {5
} E = {1, 2, 6, 4, 7, 3}. The completion times of the projects in the set E are
revised as shown below:
Project (j) Duration (t) Completion time (Cj) Due date (d) Tardy/non-tardy 1 2 2
6 0 2 4 6 12 0 6 12 18 18 0 4 8 26 19 1 7 14 40 24 1 3 6 46 30 1
 
tep 2: From tep 3, it is clear that there are three tardy projects. The first
tardy
 project is 4, which is in the fourth position of the sequence in the set E
. tep 3: The project with the longest duration among the first-four projects is
6. Remove the project-6 from the set E and append it to the set L. Therefore E
= {1, 2, 4, 7, 3} L = {5, 6}. The completion times of the projects in the set E
are revised as shown:
Project (j) Duration (tj) Completion time (Cj) Due date (dj) Tardy/non-tardy 1 2
2 6 0 2 4 6 12 0 4 8 14 19 0 7 14 28 24 1 3 6 34 30 1
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Operations Management
 
tep 2: From the table shown in tep 3 it is known that there are two tardy proj
ects.
 The first tardy project is 7, which is at the fourth position in the set E
. tep 3: The project with the longest duration. Among the first-four projects i
n the set E are 7. Remove this job from the set E and append it to the set L. E
= {1, 2, 4, 3} L = {5, 6, 7}. The completion times of the projects are revised a
s shown below:
Project (j) Duration (t) Completion time (Cj) Due date (dj) Tardy/non-tardy 1 2
2 6 0 2 4 6 12 0 4 8 14 19 0 3 6 20 30 0

tep 2: From the table in the previous step, it is clear that all the projects a
re non-tardy jobs. Hence, we reached the optimal sequence in E. Now merge E and
L to get the complete sequence. Final sequence = E L={1,2,4,3,5,6,7} In the abov
e optimal sequence,
 total
 number of tardy projects is 3, which is the minimum va
lue. 10.8 FLOW HOP CHEDULING
In flow shop scheduling problem, there are n jobs; each require processing on m
different machines. The order in which the machines are required to process a jo
b is called process sequence of that job. The process sequences of all the jobs
are the same. But the processing times for various jobs on a machine may differ.
If an operation is absent in a job, then the processing time of the operation o
f that job is assumed as zero. The flow-shop scheduling problem can be character
ized as given below: 1. A set of multiple-operation jobs is available for proces
sing at time zero (Each job requires m operations and each operation requires a
different machine). 2. et-up times for the operations are sequence independent,
and are included in processing times. 3. Job descriptors are known in advance.
4. m different machines are continuously available. 5. Each individual operation
of jobs is processed till its completion without break. The main difference of
the flow shop scheduling from the basic single machine scheduling is that the in
serted idle time may be advantageous in flow shop scheduling. Though the current
machine is free, if the job from the previous machine is
 not released to the cu
rrent machine, we cannot start processing on that job. o, the current machine h
as to be idle for sometime. Hence, inserted idle time on some machines would lea
d to optimality.

cheduling and Controlling Production Activities
245
For example, consider the following flow-shop problem:
Job 1 2 3 4 Machine 1 5 3 6 7 Machine 2 4 1 2 8
If the sequence of the job is 2-1-4-3, then the corresponding makespan is comput
ed as shown in Fig.10.1. Here the makespan is 25. Also, note the inserted idle t
imes on machine 2 are from 0 to 3, 4 to 8 and 12 to 15.
Machine 2
Machine 1
JFJ
Fig. 10.1 Gantt chart for sequence 2-1-4-3
Machine 2
Machine 1
Fig. 10.2 Gantt chart for sequence 3-4-1-2
Consider another sequence say 3-4-1-2. The Gantt chart for this sequence is show
n in Fig 10.2. The makespan for the schedule in Fig. 10.2 is 26. The machine 2 h
as idle time from 0 to 6 and from 8 to 13. This problem has 4 jobs. Hence, 4! se
quences are possible. Unlike in single machine scheduling, in flow shop scheduli
ng, inserted idle time would minimize the makespan.
246
Operations Management
In the above two sequences, 2-1-4-3 and 3-4-1-2, the first sequence has lesser m
akespan. Like this, one can enumerate all 4! sequences,
 then select the sequence
with the minimum makespan as the optimal sequence. ince, n! grows exponentiall
y with n, one needs some efficient procedure to solve the problem. For large siz
e of n, it would be difficult to solve the
 problem.
 Under such situation we can
use some efficient heuristic. 10.9 JOHN ON’ PROBLEM
As mentioned in the earlier section, the time complexity function for a general
flow shop problem is exponential in nature. This means, the function grows expon
entially with an increase in the problem size. But, for a problem with 2 machine
s and n jobs, Johnson had developed a polynomial algorithm to get optimal soluti
on, i.e., in a definite time, one can get the optimal solution. Consider the fol
lowing flow shop problem:
Job 1 2 3 n Machine 1 t11 t21 t31 tn1 Machine 2 t12 t22 t32 tn2
In the above table, tij represents the processing time of the job i on the machi
ne j.
 10.9.1 Johnson’s Algorithm tep 1: Find the minimum among various ti1 and ti
2. tep 2a: If the minimum processing time requires machine 1, place the associa
ted job in the first available position in sequence. Go to tep 3. tep 2b: If t
he minimum processing time requires machine 2, place
 the associated job in the l
ast available position in sequence. Go to tep 3. tep 3: Remove the assigned jo
b from consideration and return to tep 1 until all positions in sequence are fi
lled. (Ties may be broken randomly.) The above algorithm is illustrated using th
e following problem: ILLU TRATION 5: Consider the following two machines and six
jobs flow shop-scheduling problem. Using Johnson’s algorithm, obtain the optimal
sequence, which will minimize the makespan.
Job 1 2 3 4 5 6 Machine 1 5 2 13 10 8 12 Machine 2 4 3 14 1 9 11

cheduling and Controlling Production Activities
247

OLUTION: The workings of the algorithm are summarized in the form of a table, w
hich
 is shown below:
tage 1 2 3 4 5 6 Unscheduled jobs 1, 2, 3, 4, 5, 6 1, 2, 3, 5, 6 1, 3, 5, 6 3,
5, 6 3, 6 3 Minimum tik T42 T21 T12 T51 T62 T31 Assignment 4 = [6] 2 = [1] 1 = [
5] 5 = [2] 6 = [4] 3 = [3] Partialsequence 4 2 4 2 14 25 14 25 614 253614
The optimal sequence is 2-5-3-6-1-4. The makespan is determined as shown below.
In the following table: [Time-in on M/c 2 = max [M!c 1 Time-out of the current j
ob, M/c 2 Time-out of the previous job]
Processing time Job 2 5 3 6 1 4 0 2 10 23 35 40 Machine 1 Time-in Time-out 2 10
23 35 40 50 2 10 23 37 48 52 Machine 2 Time-in Time-out 5 19 37 48 52 53 2 5 4 0
0 0 Idle time on machine
The makespan for this schedule is 53. 10.9.2 Extension of Johnson’s Rule Consider
a ‘three machines and n jobs’ flow shop scheduling problem as shown in Table 10.1.
Table 10.1 Processing time Job 1 2 3 4 5 . i . . n Machine 1 t11 t21 t31 t41 t51
. ti1 . . 1 Machine 2 t12 t22 t32 t42 t52 . ti2 . . tn2 Machine 3 t11 t11 t11 t
11 t11 . ti3 . . tn3
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Operations Management
One can extend Johnson’s algorithm to the problem shown in Table 10.1 if anyone of
the following two conditions is satisfied. If min ti1 ≤ max ti2 or if min ti3 ≤ max
ti2 If anyone of the above conditions is satisfied then, we can extend the John
son’s algorithm in the following way. Create a hypothetical problem with two machi
nes and n jobs as shown in Table 10.2. The objective is to obtain optimal sequen
ce for the data given in the Table 10.2. Later, the makespan is to be determined
for the optimal sequence by using the data of the original problem shown in tab
le. This concept of extending Johnson’s algorithm to this type of problem is demon
strated using an example problem.
Table 10.2 Hypothetical problem for the problem in Table 10.1 Job 1 2 3 . i . n
M/c c–A t11 + t12 t21 + t22 t31 + t32 . ti1 + ti2 . tn1 + tn2 tn2 + tn3 M/c c–B t12
+ t13 t22 + t23 t32 + t33 ti2 + ti3

ILLU TRATION 6: Consider the following 3 machines and 5 jobs flow shop problem:
Processing time Job 1 2 3 4 5 M/c–1 8 10 6 7 11 M/c–2 5 6 2 3 4 M/c–3 4 9 8 6 5
 
OLUTION In the above table, Min (til)=6 Max (ti2) = 6 ince the condition min (
ti l) ≤ max (ti 2) is satisfied, we can extend the Johnson’s algorithm to this probl
em. o the modified problem may be given as follows:
Job 1 2 3 4 5 Machine A 13 16 8 10 15 Machine B 9 15 10 9 9

cheduling and Controlling Production Activities
249
The following is the optimal sequence for the above problem: 3-2-5-1-4 The makes
pan of the above sequence is determined as shown below:
Processing time (in hour) M/c-1 M/c-2 M/c-3 Idle time on M/c-2 In 6 16 27 35 42
Out 8 22 31 40 45 In 8 22 31 40 45 Out 16 31 36 44 51 6 8 5 4 2 8 6 0 4 1 Idle t
ime on M/c-3
Job 3 2 5 1 4
In 0 6 16 27 35
Out 6 16 27 35 42
 
The makespan for this problem is 51 units of time. 10.10 CD HEURI TIC For large
size problems, it would be difficult to get optimum solution in finite time, si
nce the flow shop scheduling is a combinatorial problem. This means the time com
plexity function of flow shop problem is exponential in nature. Hence, we have t
o use efficient heuristics for large size problems. CD (Campbell, Dudek and
 mi
th) heuristic is one such heuristic used for flow shop scheduling. The CD heuri
stic corresponds to multistage use of Johnson’s rule applied to a new problem form
ed from the original processing time. At stage 1 t1j1= tji and t1j2= tjm In othe
r words, Johnson’s rule is applied to the first and mth operations and intermediat
e operations are ignored. At stage 2 T2j1= tji + tj2 and t2j2= tjm + tj m–1 That i
s, Johnson’s rule is applied to the sum of the first two and the last two operatio
n processing times. In general at stage i, tiji = Σ ji and tij2 = Σtj,m-k+1 For each
stage i (i = 1, 2, ... m – 1), the job order obtained is used to calculate a make
span for the original problem.
 After m – 1, stages, the best makespan among the m –
1 schedule is identified. ( ome of the m – 1 sequences may be identical).
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Operations Management
 
ILLU TRATION 6: Find the makespan using the CD heuristic for the following flow
shop problem:
Job j 1 2 3 4 t j1 4 3 1 3 t j2 3 7 2 4 t j3 7 2 4 3 t j4 8 5 7 2

OLUTION
Job (j) 1 2 3 4 M/c–1 tj1 4 3 1 3 M/c–1 tj2 8 5 7 2
The optimal sequence for the above problem is as shown below: 3-2-1-4 The makesp
an calculation for the above schedule is shown below:
Processing time (in hour) Job M/c–1 In 3 2 1 1 0 1 4 8 Out 1 4 8 11 In 1 4 11 14 M
/c–2 Out 3 11 14 18 M/c–3 In 3 11 14 21 Out 7 13 21 24 M/c–4 In 7 14 21 29 Out 14 19 2
9 31

Makespan of this problem = 31. tage 2
Job (j) 1 2 3 4 M/c–1 T j1 7 10 3 7 M/c–2 t j2 15 7 11 5
After applying Johnson s algorithm to the above problem, we get the sequence, 3-
1-2-4. The makespan calculation is summarized in the following table:

cheduling and Controlling Production Activities
Processing time (in hour) Job M/c–1 In 3 1 2 4 0 1 5 8 Out 1 5 8 11 In 1 5 8 15 M/
c–2 Out 3 8 15 19 M/c–3 In 3 8 15 19 Out 7 15 17 22 M/c–4 In 7 15 23 28 Out 14 23 28 3
0
251

The makes pan for the sequence 3-1-2-4 is 30. tage 2
M/c–1 Job T j1 1 2 3 4 14 12 7 10 T j2 18 14 13 9 M/c–2
The application of Johnson’s algorithm to the above data yields the sequence 3-2-1
-4. The determination of the corresponding makespan is shown below:
M/c–1 Job In 3 2 1 4 stage 1 2 3 0 1 4 8 Out 1 4 8 11 In 3 11 14 21 Makespan 31 30
31 Out 7 13 21 24 In 7 14 21 29 Out 14 19 29 31 M/c–2 M/c–3
sequence 3-2-14 3-1-2-4 3-2-1-4

The best sequence is 3-1-2-4, which has the makespan of 30. 10.11 JOB- HOP PROBL
EM In job-shop problem, we assume that each job has m different operations. If s
ome of the jobs are having less than m operations, required number of dummy oper
ations with zero process times is assumed. By this assumption, the condition of
equal number of operations for all the jobs is ensured. In job-shop scheduling p
roblem, the process sequences of the jobs are not the same. Hence, the flow of e
ach job in job-shop scheduling is not undirectional.
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Operations Management
The time complexity function of the job shop problem is combinatorial in nature.
Hence, heuristic approaches are popular in this area. Unlike the flow shop mode
l, there is no initial machine that performs only the first operation of a job n
or there is a terminal machine that performs only the last operation of a job. I
n the flow shop, an operation number in the operation sequence of a job may be s
ame as the position number of the required machine. Hence, there is no need to d
istinguish between them. But, in the job shop case, different jobs will have dif
ferent operation sequences. o, we cannot assume a straight flow for the job sho
p problem. Each operation j in the operation sequence of the job i in the job sh
op problem will be described with triplet (i, j, k) where k is the required mach
ine for processing the jth operation of the ith job. Consider the following data
of a job shop scheduling involving four jobs, three operations and hence three
machines. The first table consists of operation processing times and the second
table consists of operation (process) sequences of the jobs. The set of machines
required for a given job constitute a routing. For example, job 4 has a routing
of 1-3-2.
Processing times (hrs) Operations 1 Job 1 Job 2 Job 3 Job 4 2 4 2 3 2 3 4 2 3 3
4 1 3 1 Job 1 Job 2 Job 3 Job 4 1 1 3 2 1 Routing Operations 2 2 2 3 3 3 3 1 1 2
  
10.12 TYPE OF CHEDULE In general, infinite number of feasible schedules is po
ssible for any job shop problem, because one can insert any arbitrary amount of
idle time at any machine between adjacent pairs of operations. These idle times
are not useful in any sense. In fact, these will lead to non-optimal solution wh
ile minimizing makespan measure. In the Gantt chart shown in Fig., one should tr
y to move various operation blocks to the left as much as possible on each machi
ne. This will help us to have a compact schedule, which will generally minimize
the famous makespan measure. Adjusting the start time of some operations towards
left without affecting the operations sequences will minimize the unwanted idle
time. Adjusting the start time of some operations this way is equivalent to mov
ing an operation block to the left of the Gantt chart while preserving the opera
tion sequences. This type of adjustment is called local-left -shift, or a limite
d-left-shift. Given an operation sequence for each machine, there is only one sc
hedule in which no local-left-shift can be made. The set of all schedules in whi
ch no local-left-shift can be made is called the set of semi-active schedules an
d is equivalent to the set of all schedules that contain none of the unwanted id
le time described above. This set dominates the set of all schedules, which mean
s that it is sufficient to consider only semi-active schedules to optimize any r
egular measure of performance. The number of semi-active schedules is finite and
is less than the total number of possible schedules. In a semi-active schedule,
the start time of a particular operation is constrained either by (a) processin
g a different job on the same machine or (b) by processing the directly precedin
g

cheduling and Controlling Production Activities
253
operation on n different machines. In the former case, where the completion of a
n earlier operation on the same machine is constrained, it may still be possible
to find obvious means of improvement. Even when no local-shifts are possible, a
better schedule can obviously be devised by shifting operations to the left and
beyond other operations already scheduled on some machine. This type of adjustm
ent in which some operation. is begun earlier without delaying any other operati
on is called a global left-shift or simply a left-shift. The set of all schedule
s in which no global left-shift can be made is called the set of active schedule
s. It is clearly a subset of the set of semi-active schedules. The set of active
schedules dominates the set of semi-active
 schedules in terms of optimizing any
regular measure of performance. o it is sufficient to consider only active sch
edules. If no machine is kept idle at a time when it could begin processing some
operation then it is called a non-delay schedule. We can identify a subset of s
chedules from the set of active schedules satisfying this property, which is kno
wn as a set of non-delay schedules. All non-delay schedules are active schedules
, since no left-shift is possible. There is no guarantee that the non-delay subs
et will contain an optimum. The Venn diagram showing the relative sizes between
different types of schedules is shown in the following Fig. 10.3. There will be
at least
 one optimal schedule in the set of
 active schedules.

All -A A ND Note: All–All the schedules – em-active chedules A–Active schedules ND–No
n-delay schedules
Fig. 10.3 Venn diagram showing different schedules
  
10.13 HEURI TIC PROCEDURE ince, the job shop problem comes under combinatorial
category, the time taken to obtain optimum solution will be exponential in natu
re. In this type of problem, the number of feasible schedules will grow exponent
ially, even for small increment in problem size. As a result, it will be impossi
ble to solve large size problems optimally. Hence, we should
 resort to heuristic

approach to get near optimal solution. 10.14 PRIORITY DI PATCHING RULE In comp
lete enumeration procedure or branch and bound procedure, the number of schedule
s generated before reaching an optimal schedule would be enormous. But, heuristi
c procedures will generally aim to generate only one full schedule. Whenever, th
ere is a tie (conflict) in selecting an operation from among competing operation
s, we will have to use a priority rule. If there are ties at different levels, t
hen we need more than one priority rule to break deep ties. For a given priority
rule R, a heuristic
 based on the active
 schedule generation is given below: Heu
ristic Active chedule Generation tep 1: Let t = 0 and assume Pt = {φ}. S t = {Al
l operations with no predecessors}. Step 2: Determine q* = min {qj} and the corr
esponding machine m* on which q* could be realized. j E S.
254
Operations Management
Step 3: For each operation which belongs to S, that requires machine m* and sati
s ies the condition Pj < q*, identi y an operation according to a speci ic prior
ity and add this operation to PI as early as possible, thus creating only one pa
rtial schedule, PI +1 or the next stage. Step 4: For each new partial schedule
PI + 1 created in Step 3, update the data set as ollows: (a) Remove operation j
rom SI. (b) Form SI + I by adding the direct successor o  operation j to SI. (
c) Increment t by one. Step 5: Repeat rom Step 2 to Step 4 or each PI + 1 crea
ted in Step 3 and continue in this manner until all active schedules are generat
ed. Similarly, another heuristic can be devised rom the non-delay schedule gene
ration algorithm by replacing the condition Pj < q* with Pj = p* in Step 3. Thes
e two heuristic algorithms (one or active dispatching and the other or non-del
ay dispatching) may construct di erent schedules. The quality o  the solution o
btained by these heuristics mainly depends on the e ectiveness o  priority rule
s which are used in them. A sample set o  priority rules are presented below: (a
) SPT (shortest processing time): Select the operation with the minimum processi
ng time. (b) FCFS ( irst come irst served): Select the operation that entered S
I earliest. (c) MWKR (most work remaining): Select the operation associated with
the job having the most work remaining to be processed. (d) MOPNR (most operati
ons remaining): Select the operation that has the largest number o  successor op
erations. (e) LWKR (least work remaining): Select the operation associated with
the job having the least work remaining to be processed. ( ) RANDOM (Random): Se
lect the operation at random. 10.15 TWO JOBS AND M MACHINES SCHEDULING Two jobs
and M machines scheduling is a special problem under job shop scheduling. The pr
oblem consists o  2 jobs, which require processing on M machines. The processing
sequences o  the jobs are not the same. Since, this is a special kind under the
job shop scheduling like, Johnson’s pro lem (n jo s and 2 machines) under flow sh
op scheduling, we have a graphical procedure to get optimum schedule. The graphi
cal procedure consists of the following steps:
Step 1: Construct a two dimension
al graph in which x axis represents the jo 1, its sequence of operations and th
eir processing times, and y axis represents the jo 2, its sequence of operation
s and their processing times (use same scale for oth x axis and y  axis). Step 2
: Shade each region where a machine
would
e occupied
y the two jo s simultaneo
usly. Step 3: The processing of oth jo s can e shown y a continuous line cons
isting of horizontal, vertical and 45 degree diagonal lines. The line is drawn f
rom the origin and continued to the
upper right corner y avoiding the regions.
A diagonal line means that oth jo s can e performed simultaneously. So, while
drawing the line from the origin to the top right corner, we should try to maxim
ize the length of diagonal travel (sum of the lengths of 45 degree lines), which
will minimize the makespan of the pro lem. Using trial and error method, one ca
n draw the final line, which has the maximum diagonal portion. This concept is d
emonstrated using a numerical pro lem.
Scheduling and Controlling Production Activities
255
ILLUSTRATION 8: Use graphical method to minimize the time needed to process
the
following
jo s on the machines shown (i.e. for each machine, find the jo which
should e scheduled first). Also, calculate the total time elapsed to complete
oth
jo s.
Jo 1 Sequence Time (hrs). Jo 2 Sequence Time (hrs) A 3 B 5 B 4 C 4 C 2 A 3 D 6
D 2 E 2 E 6

SOLUTION: As per the procedure stated, the a ove data is presented in the form o
f a graph as shown in Figure 10.4. The line from the origin to the top right cor
ner shows the processing
details and makespan. The makespan (time taken
to compl
ete oth the jo s) is 22 hours. The start and completion times for oth jo s are
given in Ta le 10.2.
Start and completion times of jo s Start and completion times of jo s Jo 1 (tim
e) Machine A B C D E Start 0 5 9 14 20
Jo 1 20 E 14 D 12 A C 5 B B Jo 2 0 A 3 B 7 C 9 E 15 F 17 9 C A D E

Jo 2 (time) End 3 9 11 20 22 Machine B C A D E Start 0 5 9 12 14 End 5 9 12 14
20

Fig. 10.4 Schedule for 2 jo s and % machines
256
Operations Management

Based on Figure and Ta le one can easily o serve that the total idle for jo 1 is
5 hours (2+3). Hence the total for completing the jo 1 is its sum of the proce
ssing times plus its idle time, i.e. 17 hrs + 5hrs = 22 hrs. For jo 2, there is
no idle time. Hence the total time taken to complete the jo 2 is its sum of th
e processing times, i.e. 20 hrs. The makespan is the maximum of these two quanti
ties. Therefore, Max (22,20) = 22 hrs.
EXERCISE
1. Briefly discuss different
measures of performance in single machine schedulin
g with independent jo s. 2. Consider the following pro lem in single machine sch
eduling
with independent jo s.
jo Processing time (tj) Due date (dj) Weight (wj) 1 5 10 2 2 12 16 1 3 8 11 1 4
10 16 2 5 3 6 3 6 15 25 4 7 8 12 2 8 6 14 3

O tain the optimal schedule for
each of the following performance measures: (a)
To minimize mean flow time. ( ) To minimize the maximum lateness. (c) To minimiz
e weighted mean flow time. 3. Distinguish etween single machine scheduling and
flow scheduling. 4. What are the assumptions
in flow shop scheduling? 5. Conside
r the following two machines and 6 jo s flow shop pro lem.
Jo 1 2 3 4 5 6 Machine 1 5 10 8 9 6 12 Machine 2 7 8 13 7 11 10

O tain the optimal schedule and the corresponding makespan for the a ove pro lem
. 6. Consider the following
3 machines and 5 jo s flow shop pro lem. Check wheth
er Johnson’s rule can e extended to this pro lem. If so, what is the schedule and
the
corresponding makespan?
Jo 1 2 3 4 5 Machine 1 11 13 15 12 20 Machine 2 10 8 6 7 9 Machine 3 12 20 15 1
9 7
Scheduling and Controlling Production Activities
257

7. Consider the following flow shop pro lem:
Jo 1 2 3 4 Machine 1 10 8 12 15 Machine 2 15 10 7 20 Machine 3 23 7 10 6

Find the optimal schedule for the a ove flow shop pro lem using ranch and ound
technique. Also, determine
the corresponding makespan. 8. Explain the following
: (a) Active schedule. ( ) Semi active schedule. (c) Non delay schedule. 9. Writ
e short notes on dispatching rules.
10. Use graphical method to minimize the nee
ded to process
the following
jo s on the machines shown (i.e. for each machine f
ind the jo which should e scheduled first). Also, calculate the total time ela
psed
to complete oth jo s.
Jo 1 Sequence Time (hrs) Jo 2 Sequence Time (hrs) A 2 C 6 B 6 B 5 C 5 D 7 D 4
A 4 E 7 E 8
REFERENCES
1. Everett, E. Adam, Jr. Ronald J.E ert, Production and Operations Management, P
renticeHall of India Private Limited, 5th Edition, 1994. 2. R.Pannerselvam, Prod
uction and Operations Management, Prentice Hall
of India Private Limited, 9th pr
int, 2004. 3. Joseph,
G.Monks, Theory and Pro lems of Operations Management, Tat
a McGraw Hill Pu lishing Company Limited, 2nd Edition, 2004.

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GLOSSARY
ABC classification: Classification of inventory into three groups: an A group co
mprising items with a large dollar volume; a B group comprising items with moder
ate volume and moderate dollar volume; and a C group comprising
items with a lar
ge volume and small dollar volume. Acceptance num er: The num er of sample units
specified
in a sampling plan that must conform to specifications if the shipmen
t is to e accepted. Acceptance sampling: A statistical quality control techniqu
e used in deciding to accept or reject a shipment of input or output. Accounting
life: Length of an asset’s life determined for the purpose of a depreciation sche
dule. Action ucket: In the MRP record for the current week, a cell calling for
immediate
action to meet
the MPS goal. Activity: In PERT, project work needed to
e accomplished, sym olized y an arc. Activity charts: A graphic tool to analy
ze and time the small, physical actions of worker and machine in performing a ro
utine, repetitive, worker machine task so that idle time can e identified. Adap
tive exponential
smoothing: An average method in which a smoothing coefficient
i
s not fixed ut is set initially and then allowed to fluctuate over time ased u
pon changes in the demand pattern. Aggregate capacity planning: The process of t
esting, the feasi ility of aggregate output plans and evaluating overall capacit
y utilization. Aggregate output planning: The process of determining output leve
ls (units) of product groups over the coming 6 to 18 months on a weekly or month
ly asis; the plan identifies the overall level of outputs in support of the us
iness plan. Allocated quantity: The quantity
of an item in inventory that has e
en committed for use and is not availa le to meet
future requirements. Allowance
fraction: The fraction of time lost on a jo ecause of workers’ personal needs,
fatigue,
and other unavoida le delays; the remaining fraction
of time is the ava
ila le fraction. Andon: A warning light used as a visi le control technique in t
otal quality control. Applied research: Research for the advancement of scientif
ic knowledge that has specific commercial uses. Appraisal costs: Costs of evalua
ting, measuring, or inspecting for quality at the plant and in the field. Arc: I
n network
modeling, an arrowed line segment; the sym ol for a project activity.
Assem ly line technology: A process technology suita le for a narrow range of st
andardized products in high volumes.
260
Operations Management

Assignment algorithm: A linear program to assign jo s so that a specific criteri
on is optimized.
Attri ute characteristic:
A product characteristic that can e
measured y a rating of good or ad. Availa le fraction of time: The fraction of
time remaining after accounting for time lost on a jo ecause of worker’s person
al needs, fatigue, and other
unavoida
le delays. Availa le quantity: The quantit
y of an item expected to e: availa le at the end of a time period to meet requi
rements in succeeding periods. Calculated as scheduled receipts plus planned ord
er receipts minus gross requirements for the period, plus amounts availa le from
the previous period. Back orders: Outstanding or unfilled customer orders. Back
ward scheduling: Determining the start and finish times for
waiting jo
s y assi
gning them to the latest availa le time
slot that will ena le each jo to e com
pleted just when it is due, ut not efore. Base stock level: The inventory leve
l up to which stocks are replenished, fixed y a periodic inventory control oper
ating doctrine. Basic research: Research for the advancement of scientific knowl
edge that is not intended for specific commercial uses. Batch production: Americ
an Production and Inventory Control Society (APICS) defines atch production as
a form of manufacturing
in which the jo pass through the functional departments
in lots or atches and each lot may have a different routing define atch produ
ction. It is characterized y the manufacture of limited num er of products prod
uced at regular intervals
and stocked awaiting sales. Batch technology: A proces
s technology suita le for a variety of products in varying volumes. Behavioral m
anagement: One
of three primary theories of management, emphasizing human relati
ons and
the ehavioral science.
Behavioral
science: A science that explores how
human ehavior is affected y varia les such as leadership, motivation, communic
ation, interpersonal relationships and attitude change. Bias: A forecast error m
easure that is the average of forecast error with regard to direction and shows
any tendency consistently to over or under forecast; calculated as the sum of th
e actual forecast error for all periods divided y the total num er of periods e
valuated.
Bill of materials: A document descri ing
the details of an item’s produc
t uild up, including all component items, their uild up sequence, the quantity
needed for each, and the work centers that perform the uildup sequence. Blanke
t rule: A general policy for inventory control that can e modified as needed in
light of total inventory costs. Bottleneck operation: The station on an assem l
that requires the longest task time. Break even analysis: A graphical and
y line
alge raic representation of the relationships among volume of output, costs and
revenues. Break even point: The level of output volume for which total costs eq
ual total revenues.
Breakthrough: A solution to a chronic pro lem; a dramatic ch
ange for the etter in quality, stimulated y concentrated, analytic, company wi
de quality improvement programs. Buffer stock: Inventories to protect against th
e effects of unusual product demand and uncertain lead time. Business plan: A st
atement of an organization’s overall level of usiness activity for the coming 6 t
o 18 months, usually expressed in terms of dollar volume of sales for its variou
s product groups.
Glossary
261

Capacity: A facility’s maximum productive capa ility, usually expressed as volume
of output per period of time. Capacity planning: Design of the production system
involves planning for the inputs, conversion process and outputs of production
operation. Capacity requirement planning (CRP): A capacity requirement planning
is an iterative process of modifying the MPS or planned resources to make capaci
ty consistent with the production schedule. Cardex file system: A manually opera
ted inventory control system in which an inventory card represents each stock it
em with transactions kept on the card. Carrying (holding) costs: Costs of mainta
ining the inventory warehouse and protecting the inventoried items. Causal forec
asting models: A statistical
forecasting model ased on historical demand data a
s well as on varia les elieved to influence demand. Cellular layout: The arrang
ement of a facility so that equipment used to make similar parts or families of
parts is grouped together.
Central limit theorem: A statistical hypothesis that
the sampling distri ution approaches
normality as the size of the samples increa
ses, regardless of the distri ution of the measurements of individual sample uni
ts. Chance event: An event leading potentially to several different outcomes, on
ly one of which will definitely occur; the decision maker has no control over wh
ich outcome will occur. Change agent:
The facilitator
of change; the role of the
production/operations
manager in ringing
a out ehavioral changes in other peo
ple. Chronic pro lem: A long
term pro lem that causes continually poor quality,
usually addressed through reakthrough measures. Classical management: One of th
ree primary theories of management, emphasizing efficiency at the production cor
e, the separation of planning and doing work, and management principles and func
tions. Codification: It is a process of representing
each item y a num er, the
digit of which indicates the group, the su group, the type and the dimension of
the item. Com ination layout: This is also called the hy rid or mixed type of l
ayout usually a process layout is com ined with the product layout. For example,
refrigerator manufacturing uses a com ination layout. The process or functional
layout is used to produce various operations like stamping, welding, heat treat
ment are
carried out in different work centres as per the requirement. The final
assem ly of the product is done in a product type layout. Company wide quality
control
(CWQC): A management philosophy and set of activities characterized y m
o ilizing
the entire work force in the pursuit of quality, y statistical thinki
ng, and y preventing errors. Computer search: A set of directions that systemat
ically guides a computer in evaluating alternative aggregate plans. Computer aid
ed manufacturing (CAM): Manufacturing systems utilizing computer software progra
ms that control the actual machine on the shop floor. Computer aided design (CAD
): Computer software programs that allow a designer to carry out geometric trans
formations rapidly. Computer integrated manufacturing (CIM): Computer informatio
n systems utilizing a shared manufacturing data ase for engineering design, manu
facturing engineering, factory production, and information management.
262
Operations Management

Consumer’s risk (type II error) ( ): The risk or pro a ility of incorrectly conclu
ding that the conversion
process is in control. Continuous operations: Operation
s characterized y standardized,
high volume,
capital  intense products made to
store in inventory; y small product mix; y special purpose equipment; and y c
ontinuous product flow. Continuous technology: A process technology suita le for
producing a continuous flow of products. Control chart: A chart of sampling dat
a used to make inferences a out the control status of a conversion process. Cont
rol limits: (Cl) Upper (UCL) and lower (LCL) oundaries defining the range of va
riation in a product characteristic such that the conversion process is in contr
ol. Controlling: Activities that assure that actual performance is in accordance
with
planned performance. Conversions process: The process of changing inputs o
f la or, capital, land, and management into outputs of goods and services. Conti
nuous production: Production facilities are arranged as per the sequence of prod
uction operations from the first operations to the finished product. The items a
re made to flow through the sequence of operations through material handling dev
ices such as conveyors, transfer devices etc. Critical fractile: In ratio of sho
rtage costs to the sum of shortage and overstock for the perisha le goods invent
ory situation. Critical path: In PERT, a path whose activities are expected to c
onsume the most time. Critical ratio: The ratio of inspection costs to per cent
defective. Custom shop service technology: A process technology suita le for cap
ital intensive, high customer contact services. Cycle counting: Counting on hand
inventories at regular intervals
to verify inventory quantities shown in the MR
P. Cycle time: Time elapsing etween completed units coming off an assem ly line
. Decision tree: A diagram used to structure and analyze a decision pro lem; a s
ystematic, sequential laying out of decision points, alternatives, and chance ev
ents. Decision varia le: A numerical, controlla le parameter that, if modified,
yields a variety of results. Decoupling: Using inventories to reak apart operat
ions so that the supply of one operation is independent of the supply of another
. Degeneracy: A quality of a linear transportation
 programming pro lem such that
there are too few occupied cells to ena le evaluation of the empty cells. Delph
i technique: A qualitative forecasting technique in which a panel of experts wor
king separately
and not meeting, arrive at a consensus through the summarizing o
f ideas y a skilled coordinator. Demand pattern: General shape of a time series
; usually
constant, trend, seasonal, or some com ination of these shapes. Demand
sta ility: Tendency of a time series to retain the same general pattern
overtim
e. Demand  ased forecasting models: A statistical forecasting model ased solely
on historical demand data.
Deming’s 14 points for management: Guidelines for impr
oving quality proposed y Dr. W. Edwards Deming, as part of total quality contro
l.
Glossary
263

Dependent demand: Demand for an item that can e linked to the demand for anothe
r item. Depreciation: An accounting procedure to recover expenditures for an ass
et over its lifetime. Design specifications: The important, desired characterist
ics of a product or service specified in detail during the design phase. Designa
ted truncation time: Predetermined length of time a jo is allowed to wait efor
e it is assigned top priority for processing (see truncated shortest processing 
time rule). Detailed capacity planning: An iterative process of modifying the MP
S or planned resources to make capacity consistent with the production Schedule
. Detailed scheduling:
Determining start times, finish times, and worker assignm
ents
for all jo s at each work centres. Deterministic model: A model in which va
ria le values are known with certainty. Development: Technical activities concer
ned with translating asic applied research results into products or processes.
Direct time study: A work measurement technique that involves o serving the jo ,
determining the jo cycle, stopwatch timing the jo cycle, and calculating a pe
rformance standard. Disaggregation: The process of translating aggregate plans f
or product groups into detailed operational plans for individual products. Dou l
e sampling: Acceptance sampling ased on a first, small sample and, if results a
re inconclusive, a second, larger sample.
Dummy activity: In PERT, a fictitious
activity consuming no time, sym olized y a dashed arc. Earliest
eginning time:
In
PERT, the minimum amount of time that must e consumed efore an activity ca
n egin. Earliest due date rule (EDD): Priority rule that gives top priority to
the waiting jo whose due date is earliest. Economic life: Length of time an ass
et is useful. Economic order quantity (EOQ): The optimal order quantity, fixed
y a Q/R inventory control operating doctrine. Efficiency: A measure (ratio) of o
utputs to inputs. Empirical rational change strategy:
A strategy for change that
assumes people change their ehavior when they elieve it is in their own self 
interest to do so. Ergonomics (human engineering): ILO defines human engineering
as — ‘The application of human iological sciences along with engineering sciences
to achieve optimum mutual adjustment of men and his work, the enefits eing mea
sured in terms of human efficiency and well  eing. Event: In PERT, the eginning
or ending of an activity, sym olized y a node. Expected eginning time (TB):
I
n PERT, the amount of time expected to e consumed efore an activity can egin.
Expected completion time (Tc): In PERT, the amount of time expected to e consu
med once an activity egins. Expected time (te): In PERT, the amount of time an
activity is expected to consume Expediting: Tracking a jo ’s progress and taking s
pecial actions to move it through the facility. Exponential smoothing: An averag
ing method that exponentially decreases the weighting of old demands.
264
Operations Management

Factory uilding: Factory uilding is a factor, which is the most important cons
ideration for every industrial enterprise. A modem factory uilding is required
to provide protection for men, machines, materials,
products or even the company’s
secrets. External failure costs: Costs attri uta le to the failure of products
in the field. Factor ratings: A decision procedure in which each alternative is
rated according to each factor relevant to the decision, and each factor is weig
hted according to importance. Feasi le (infeasi le) solutions: Solutions that sa
tisfy (do not satisfy) the restrictions of a linear programming pro lem. Feed ac
k: Information in the control process that allows management to decide whether o
rganizational activities
need adjustment. Finite loading: A scheduling procedure
that assigns
jo s into work centers and determines their starting and completio
n dates y considering the work centers’ capacities. Firm planned order: A planned
order release scheduled within the MRP time fence. First come first served rule
(FCFS): Priority rule that gives top priority to the waiting jo that arrived e
arliest in the production system. Fish one (cause and effect) diagram: A schemat
ic model of quality pro lems and their causes; used to diagnose and solve these
pro lems. Fixed position layout: The arrangement of a facility so that the produ
ct stays—in
one location; tools, equipment, and workers are rought to it as neede
d. Flexi ility: The capa ility of a manufacturing system to adapt successfully
t
o changing environmental conditions and process requirements. Flexi le manufactu
ring system (FMS): A computer controlled process technology suita le for produci
ng, a moderate variety of products in moderate volumes. Flow diagram: Flow Diagr
am is a drawing, of the working area, showing the location of the various activi
ties identified y their num ered sym ols and are associated with particular flo
w process chart either man type or machine type. Flow process chart: A graphic t
ool to analyze and categorize interstation activities so that the flow of the pr
oduct throughout the overall production process is represented. Flow time: The t
otal time that a jo is in the system; the sum of waiting time and processing ti
me. Forecast: Use of past data to determine future events, an o jective computat
ion. Forecast error: The numeric difference of forecasted demand and actual dema
nd. Forward scheduling: Determining the start and finish times for waiting jo s
y assigning them to the earliest availa le time slots at the work center. Fract
ion defective: The ratio of defective units to total units. Gang process chart:
A graphic tool
to trace the interaction of several workers with one machine. Gan
tt chart: A ar chart showing the relationship of project activities in time. Ga
ntt load chart: A graph showing work loads on a time scale. Gantt scheduling cha
rt: A graph showing the time requirements of waiting jo s; scheduled for product
ion at machines and work centers.
Glossary
265
Governmental industrial planning: Activities of the Japanese Ministry of Interna
tional Trade and Industry that formulate industrial policy and determine the pat
terns of future growth and decline among the various industries, comprising the
Japanese economy.
Gradual
replacement models: A deterministic inventory model ch
aracterized y demand eing withdrawn while production is underway; no stockouts
, constant and known demand, lead time and unit costs. Graphical planning proced
ure: Two dimensional model relating cumulative demand to cumulative output capac
ity. Gross requirements: The overall quantity of an item needed during a time pe
riod to meet planned output levels. Planned output for end items is o tained fro
m the MPS. Planned output for lower level items is o tained from the MRP. Group
technology: A way of organizing and using data for components that have similar
properties and manufacturing requirements. Heuristic: A procedure in which a set
of rules is systematically applied; an algorithm. Histogram: A ar graph of fre
quency distri utions. Homogeneous resources: Resources for which units supplied
y one source are qualitatively equivalent to units supplied y any other source
. Human relations: Phenomenon recognized y ehavioral scientists that people ar
e complex and have multiple needs and that the su ordinate supervisor relationsh
ip directly affects productivity. Implementation: Activities concerned with desi
gning and uilding pilot models, equipment, and facilities for, and with initiat
ing the marketing channels for, products or services emerging from research and
development.
In control process: A process for which all variations are random.
Indented ill of materials: A chart showing an end item’s components, level y lev
el, with increasing indentations to reflect the lower levels. Independent demand
: Demand for an item that occurs separately of demand for any other item. Indivi
dual risk taking propensity: The degree to which an individual tends to take or
avoid risks. Infinite loading: Assigning jo s to work centers without considerin
g the work center’s capacity (as if the capacity were infinite). Initial solution:
The feasi le solution
tested first using the simplex method in solving a linear
programming pro lem. Input/output control: Activities to monitor actual versus
planned utilization of a work center’s capacity. Inputs: La or, capital, land, or
management resources
changed y a conversion process into goods or services. Ins
pection: The o servation and measurement of inputs and outputs. Intermittent
ope
rations: Operations characterized y made to order, low volume,
la or intense pr
oducts; y a large product mix; y general purpose equipment; y interrupted pro
duct flow; and y frequent schedule changes. Internal failure costs: Costs attri
uta le defects in production at the plant. Internal rate of return: Interest ra
te at which the present value of outflows equals the present value of inflows. I
ntuitive forecasts: Forecasts that essentially are a manager’s guesses and judgmen
ts concerning future events; qualitative forecasting methods.
266
Operations Management
Inventory: Stores of goods and stocks, including raw materials, work in process,
finished products, or supplies. Inventory control: Activities that maintain sto
ck keeping items at desired levels. Inventory modeling: A quantitative, method f
or deriving a minimum cost operating doctrine. Inventory status file: The comple
te documentation of the inventory status of each item in the product structure,
including item identification, on hand quantity, safety stock level, quantity al
located, and lead time. Iso profit line: Points in the solution space of a linea
r programming pro lem whose corresponding profits are identical. Item level: The
relative position of an item in the product structure; end items are upper leve
l; preliminary items in the product structure are lower level. Jo : A group of r
elated tasks to activities that needs to e performed to meet organizational
o j
ectives. Jo design: Activities that specify the content of each jo and determi
ne how work is distri uted within the organization. Jo enrichment: Redesigning
jo s to give more meaning and enjoyment to the jo y involving employees in pla
nning, organizing, and controlling their work. Jo rotation: Moving employee int
o a jo for a short period of time and then out again. Jo satisfaction: Employe
e perceptions
of the extent to which their work fulfills or satisfies
their need
s. Jo shop production: Jo shop production are characterized y manufacturing o
f one or few quantity of products designed and produced as per the specification
of customers within prefixed time and cost. Jo shop technology: A process tech
nology suita le for variety of custom designed products in small volumes. Just i
n time (JIT):
A manufacturing system whose goal it is to optimize processes and
procedures y continuously pursuing waste reduction. Kaizen: The Japanese concep
t of continuous improvement in all things. Kan an: Literally a ‘visual record’ a met
hod controlling material flow through a JIT manufacturing system y using cards
to authorize a work station to transfer or produce materials. La or efficiency:
The ratio of outputs to la or input, the la or actually
worked to achieve their
output; a partial factor productivity measure. La or standard: A quantitative cr
iterion reflecting the output expected from an average worker under average cond
itions for a given time period. La or turnover: A measure of the sta ility or ch
ange in an organization’s
work force; the net result of employee terminations and
entrances.
Latest eginning time (TL):
In PERT, the maximum amount of time that
can e consumed efore an activity egins, if the project is to e completed on
time. Layout: Physical location or configuration of departments, work centers, a
nd equipment in the conversion process; spatial arrangement of physical resource
s used to create the product. Lead time: The time passing etween ordering and r
Lead  time
eceiving goods. demand: Units
of stock demanded during lead time; can
e descri ed y a pro a ility distri ution in stochastic situations. Lead time o
ffsetting: The process of determining the timing of a planned order release; ac
king off from the timing of a planned order receipt y the length of lead time.
Glossary
267

Least slack rule (LS): A priority rule that gives top priority to the waiting jo
whose slack time is least; slack time is the difference etween the length of
time remaining until the jo is due and the length of its operation time. Level
output rate plan: An aggregate plan calling for a constant rate of output for al
l time periods
of production. Line alancing pro lem: Assigning tasks among work
ers
at assem ly line stations so that performance times are made as equal as pos
si le. Linear decision rules (LDRs): A set of equations for calculating optimal
work force, aggregate output rate, and inventory level. Linear programming: Math
ematical method for selecting the optimal allocation of resources to maximize pr
ofits or minimize costs. Load: The cumulative amount of work currently assigned
to a work center for future processing. Load distance model: An algorithm for la
ying out work centers to minimize product  flow, ased on the num er of loads mov
ed and the distance etween each pair of work centers. Longest operation time (L
OT) rules: A line  alancing heuristic that gives top assignment priority to the
task that has the longest operation time. Lot splitting: Processing only part of
a jo at one time, then the rest of the jo at a later time. Lot for lot orderi
ng: A lot sizing policy in which order quantity equals net requirements for the
period. Machine life: Length of time an asset is capa le of functioning. Managem
ent coefficients model: A set of equations that represent historical patterns of
a company’s aggregate planning decisions. Manufacturing resources planning (MRPII
): An integrated information system that shares data among and synchronizes the
activities of production and the other functional areas of the usiness. Manufac
turing accounting and production information control system (MAPICS): IBM’s comput
erized common data ase system for manufacturing information and control. Margin
al efficiency of capital (MEC): A concept from finance espousing that a firm sho
uld invest in opportunities whose return is greater than the cost of capital. Ma
rkup: The ratio
of profits to sales. Mass production: Manufacture of discrete pa
rts or assem lies using a continuous
process are called Mass production. This pr
oduction system is justified y very large volume of production. The machines ar
e arranged in a line or product layout. Product and process standardizations exi
st and all outputs
follow
the same path. Mass service technology: A process tech
nology suita le for la or intensive, low customer contact services. Master produ
ction scheduling (MPS): A schedule showing week y week how many of each product
must e produced according to customer orders and demand forecasts. Material re
quirements planning (MRP): A system of planning and scheduling the time phased m
aterials requirements for production operations. Material handling: Haynes defin
es ‘Material
handling em races the asic operations in connection with the movemen
t of ulk, packaged and individual products in a semi solid or solid state y me
ans of gravity manually or power actuated equipment and within the limits of ind
ividual producing, fa ricating, processing or service esta lishment’.
268
Operations Management
Materials management: Activities relating to managing the flow of materials into
and through an organization. Mathematical
modeling: Creating and using mathemat
ical representations of management pro lems and organizations to predict outcome
s of proposed courses of action.
Matrix organization: An organization that com i
nes functional and project ases for groupings of organization
units. Maximum al
lowa le cycle time: Maximum time allowed to elapse etween completed units comin
g off an assem ly line, if. 9 given capacity is to e achieved. Mean a solute de
viation (MAD): A forecast error measure that is the average
forecast error witho
ut regard to direction; calculated
as the sum of
the a solute value of forecast
error for all periods divided y the total num er of periods evaluated. Mechaniz
ation: The process of ringing a out the use of equipment and machinery in produ
ction and operations. Method study: is the systematic recording and critical exa
mination of existing and proposed ways of doing work, as a means of developing a
nd applying easier and more effective methods and reducing costs. According to B
ritish Standards Institution (BS 3138): “Method study is the systematic recording
and critical examination or existing and proposed ways or doing work as a means
or developing and applying easier and more effective methods and reducing cost.” M
ethods time measurement: A widely accepted form of predetermined time study. Min
istry of international
trade and industry (MITI): The unit of Japanese governmen
t responsi le for industrial planning for the activities that formulate industri
al policy and determine the patterns of future growth and decline among the vari
ous industries comprising the Japanese economy. Mixed strategy: Aggregate planni
ng strategy that incorporates or com ines some elements from each of the pure ag
gregate planning strategies. Modeling management: One of three primary theories
of management, emphasizing decision making, systems, and
mathematical modeling.
Modular design: The creation of products from some com ination of asic, preexis
ting su systems. Most likely time (tm): In PERT, the single est guess of the am
ount of time an activity is expected to consume. Multiechelon inventories: Produ
cts stocked at various levels—factory, warehouse, retailer, customer in a distri u
tion system. Multiple activity chart: It is a chart where activities of more tha
n su ject (worker or equipment) are each recorded on a common time scale to show
their inter relationship. Multiple sampling: Acceptance sampling ased on many
small samples. Multistage inventories: Parts stocked at more than one point of t
he sequential
production process. Natural limits: Three standard deviations a ov
e and elow the average of sample unit measurements.’ Net change method: Method fo
r updating the MRP system in which only those portions of the previous plan dire
ctly impacted y informational changes are reprocessed. Net present value: The r
esult of discounting all cash flows of an investment ack to their present value
s and netting out the inflows against the outflows. Net requirements: The net qu
antity of an item that must e acquired to meet the scheduled output for the per
iod. Calculated as gross requirements minus scheduled receipts for the period mi
nus amounts availa le from the previous period.
Glossary
269

Network: in PERT: the sequence of all activities, sym olized y nodes connected
y arcs. Network modeling: Analyzing the precedence
relationships of project act
ivities and depicting them graphically. Next  est rule (NB): A priority rule tha
t gives top priority to the waiting jo whose, setup cost is least. Node: In net
work modeling, a circle at one end of an arc; the sym ol for the eginning or en
ding of a project activity. Noise: Dispersion of demand a out a demand pattern.
Nominal group technique: A qualitative forecasting technique in which a panel of
experts working together in a meeting, arrive at a consensus through discussion
and ranking of ideas. Normal time: The average cycle time for a jo , adjusted
y a worker rating to account for variations in normal performance. Normative ree
ducative
change strategy: A strategy for change that assumes people change their
ehavior only after changing their attitudes and values. O jective function: A
mathematical equation that measures the value of all proposed decision alternati
ves, a linear programming equation. Occupational safety and health administratio
n (OSHA): A division of the U. S. government created y the Williams Steiger Occ
upational Safety and Health Act of 1970 to develop and enforce standards for jo
related safety and health. Office automation (OA): Computer  ased systems for ma
naging information resources. Open order: A customer order (jo ) that has een l
aunched into production
and is in process. Operant conditioning: A technique to
modify ehavior y direct rewards and punishments. Operating
characteristic (OC)
curve: Given a sampling plan, the graph of the pro a ility of accepting a shipm
ent as a function of the quality of the shipment. Operating doctrine: Inventory
control policies concerning when and how much stock to reorder. Operating system
: An operating system (function) of an organization is the part of an organizati
on that produces the organization’s physical goods and services. Operation chart:
A graphic tool to analyze and time elementary motions of the right and left hand
in performing a routine, repetitive task. Operation set  ack chart: A time scal
ed chart showing the sequence, component, of product uild up. Operations
manage
ment: Management of the conversion process, which converts land, la or, capital,
and management inputs into desired
outputs of goods and services. Operations sp
litting: Processing part of a jo at one work center and the rest at another. Op
erations system: The part of an organization that produces the organization’s phys
ical goods or services. Operation process chart: It is also called outline proce
ss chart. An operation process chart gives the ird’s eye view of the whole proces
s y recording only the major activities and inspections involved in the process
. Opportunity costs: Returns that are lost or forgone as a result of selecting o
ne alternative over another. Optimistic time (to): In PERT, the least amount of
time an activity is expected
to consume. Organization development (OP): Managing
organizational
change y applying knowledge from psychology, sociology, and oth
er ehavioral sciences. Optimized production
technology (OPT): A production plan
ning system that emphasizes identifying ottleneck work centers, and careful man
agement of materials and resources related to those ottlenecks, to maximize out
put and reduce inventories.
270
Operations Management
Order
quantity: As part of the operating doctrine, the amount of stock that shou
ld e reordered. Organizing: Activities that esta lish a structure of tasks and
authority. Out of control process: A process for which
some variations are nonra
ndom
(sporadic). Outputs: Goods or services changed y a conversion process from
la or, capital, land or management resources. P  chart: A control chart using s
ample fractions defective. PERT language:
The terms and sym ols specific to PERT
. Pareto analysis: Frequency distri utions of quality cost sources. Part period
method: A lot sizing policy in which order quantity varies according to a compar
ison of holding versus ordering costs. Path: In PERT, a portion of the network,
including the first and last activities, for which each activity has a single im
mediate successor. Path time (Tp): In PERT, the amount of time expected to e co
nsumed y activities on a path. Pay ack period: Length of time required to recov
er one’s investment; the ratio of net income to net annual income from investment.
Parameters of purchasing: The success of any manufacturing activity is largely
dependent on the procurement of raw materials of Right quality, in the Right qua
ntities, from Right source, at the Right time and at Right price popularly known
as five ‘R’s’ of the efficient purchasing. Pegging: The process of tracing through th
e MRP records and all levels in the product structure to identify how changes in
the records of one component will affect the records of other components. Perce
nt defective: The per cent of units that are defective. Periodic inventory syste
m: An operating doctrine for which reorder points and order quantities vary; sto
cks are replenished up to a fixed ase stock level after a fixed time period has
passed. Pessimistic time (tp): In PERT, the greatest amount of time an activity
is expected to consume. Physical distri ution: Activities relating to materials
management
as well as to storing and transporting finished products through
the
distri ution system to customers. Planned order: A customer order
(jo ) that is
on the ooks and planned for production ut that has not yet een launched into
production. Planned order receipts: The quantity
of an item that is planned to
e ordered so that it will e received at the eginning of the time period to me
et net requirements for the period. The order has not yet een placed. Planned o
rder release: The quantity of an item that is planned to e ordered and the plan
ned period for releasing this order that will result in the order
eing received
when needed. It is the planned order receipt offset in time y the item’s lead ti
me. When this order is placed (released), it ecomes a scheduled receipt and is
deleted from planned
order receipts and planned order releases. Planning: Activi
ties that esta lish a course of action and guide future decision making. Plannin
g for operations: Esta lishing a program of action for converting
resources into
goods or services. Planning the conversion system: Esta lishing a program of ac
tion for acquiring the necessary physical facilities to e used in the conversio
n process. Plant layout: Plant layout refers to the physical arrangement of prod
uction facilities. It is the configuration of departments, work centres and equi
pment in the conversion process. It is a floor plan of the physical facilities,
which are used in production. According to Moore, “Plant layout is a plan of an op
timum
Glossary
271
arrangement of facilities including personnel, operating equipment, storage spac
e, material handling equipment and all other supporting services along with the
design of est structure to contain all these facilities.” Poke a yoke: Literally,
“fool proofing.” Total quality control techniques that foolproof production from de
fects. Power coercive change strategy: A strategy for change that makes use of p
olitical, economic, or other forms of influence to force ehavioral changes in o
ther people. Pre automation: An analysis that is performed efore automating a p
roduction
process to reveal unnecessary equipment and activities so that they ca
n e eliminated
rather than automated. Predecessor task: A task that must e per
formed efore performing another (successor) task. Predetermined time study: A w
ork measurement
technique that involves
o serving or thinking through a jo , rec
ording jo elements, recording reesta lished motion units, and calculating a per
formance standard. Prediction: Su jective estimates of the future. Prevention co
sts: Costs of planning, designing, and equipping a quality control program. Prev
entive maintenance: (PM) JIT philosophy espousing daily, extensive check ups and
repairs for production equipment, lengthening their useful life well eyond the
traditional time frame. Principles of motion economy: A road set of guidelines
focusing on work arrangements, the use of human hands and ody, and the use of
tools. Priority sequencing
rule: A systematic procedure for assigning
priorities
to waiting
jo s, there y determining the sequence in which jo s will e process
ed. Pro a ilistic PERT: A modification of PERT to consider the variance se2 and
the mean mp of the expected times. Process layout: The arrangement of a facility
so that work centers or departments
are grouped together according to their fun
ctional type. Process capa ility: The a ility of a conversion process to produce
a product that conforms to design specifications; a range of variation from the
design specifications under normal working conditions. Process design: Process
design is a macroscopic decision making of an overall process route for converti
ng the raw material into finished goods. Process management: One of several theo
ries of classical management, emphasizing management as a continuous process of
planning, organizing, and controlling to influence the others’ actions. Process te
chnology: Equipment, people, and systems planning activities that esta lish a co
urse of action and used to produce a firm’s products and services. Product layout:
The arrangement of a facility so that work centers or equipment are in a line t
o afford a specialized sequence of tasks. Product explosion: The process of dete
rmining from the product structure and planned order releases the gross requirem
ents for components. Product
group (family): A set of individual products that s
hare or consume common locks of capacity in the manufacturing process. Product
life cycle: Pattern of demand throughout the Product’s life; similar patterns and
stages can e identified for the useful life of a process. Product mix pro lem:
A decision situation
involving limited resources that can e used to produce any
of several com inations of products.
272
Operations Management

Product relia
ility: The pro a ility that a product will perform as intended for
a prescri ed lifetime under specified operating conditions. Product structure:
The levels of components to produce an end product. The end product is on level
0, components required for level 0 are on level, and so on. Production smoothing
: Production planning that reduces drastic period to period changes in levels of
output or work force. Productivity: Efficiency; a ratio of outputs to inputs. T
otal factor productivity is the ratio of outputs to the total inputs of la or, c
apital, materials, and energy; partial factor productivity is the ratio of outpu
ts to one, two, or three of these inputs. Productivity gain sharing: Rewarding e
mployees for increases in organization wide group performance. Production manage
ment: Deals with decision making related to production processes so that the res
ulting goods or services are produced according to specifications, in the amount
and y the schedule demanded and out of minimum cost. Production planning and c
ontrol: Production planning and control can e defined as the process of plannin
g the production in advance, setting the exact route of each item, fixing the st
arting 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 pro
duction planning and control lies in the statement ‘First Plan Your Work and then
Work on Your Plan’. Production system: The production system of an organization is
that part, which produces products of an organization. It is that activity wher
e y resources, flowing within a defined system, are com ined and transformed in
a controlled manner to add value in accordance with the policies communicated y
management. Product development and design: is the process of developing a new
product with all the features, which are essential for effective use in the fiel
d, and designing it accordingly. At the design stage, one has to take several as
pects of design like, design for selling, design for manufacturing and design fo
r usage. Professional service technology: A process technology suita le for la o
r intensive, high customer contact services. Program evaluation and review techn
ique (PERT): An application of network modeling originally
designed for planning
and controlling the U.S. Navy’s Polaris nuclear su marine project. Progress repor
ting: Monitoring the time and cost variances during the progress of a project an
d depicting them graphically, including actual costs of work completed (ACWC),
udgeted costs of work completed (BCWC), and udgeted costs of work scheduled
(BC
WS). Project: A one time only set of activities that have a definite
eginning a
nd ending point in time. Project planning: Activities that esta lish a course of
action for a project. Project scheduling: Activities that esta lish the times a
the sequence of project tasks. Project technology: A process technology suita
nd
le for producing one of a kind products. Pull manufacturing system: A system of
production in which products is produced only as they are ordered y customers
or to replace those taken for use. A JIT system. Purchasing: Activities relating
to procuring materials and supplies consumed during production. Push manufactur
ing system: A system of production in which products are produced
according
to a
schedule derived from anticipated product demand. An MRP  ased or EOQ ased sys
tem.
Glossary
273
Q/R inventory system: An operating doctrine for which an optimal reorder point R—t
he trigger level—and an optimal order quantity Q—the economic order quantity are fix
ed. Quality: The degree to which the design, specifications for a product or ser
vice are appropriate to its function and use, and the degree to which a product
or, service conforms to its design specifications. Quality circle (QC): A small
group of employees who meet frequently to resolve company pro lems meet frequent

ly to resolve company pro lem. Quality control (QC): Quality Control may e defi
ned as ‘a system that is used to maintain a desired level of quality in a product
or service’.
Quality control can also e defined as
‘that industrial management tech
nique y means of which product of uniform accepta le quality is manufactured’. It
is the entire collection of activities that ensures that the operation will pro
duce the optimum quality products at minimum cost. Quality loss function (QLF):
A qualitative measure of the effectiveness of quality control, often in terms of
the economic losses a customer suffers after purchasing an imperfect product. Q
uality motivation: Programs to motivate workers to improve quality, including in
centive and merit pay systems. Quantity discount: A policy of allowing item cost
to vary with the volume ordered; usually the item cost decreases as volume incr
eases due to economies of scale in production and distri ution. Quasi manufactur
ing technology: A process technology suita le for capital intensive, low custome
r contact services. Queue: A waiting line. Queuing theory: Concepts and models t
o descri e and measure patterns of jo arrivals and patterns of servicing custom
ers and to evaluate the effectiveness of serving customers who wait in lines (qu
eues) to e served. R chart: A control chart using sample ranges. Random fluctua
tions: Unplanned or uncontrolla le environmental influences (strikes, floods, et
c.) that cause planned and actual output to differ. Receiving inspection: The in
spection of inputs. Regenerative method: A procedure, used at regular intervals,
to update the MRP y completely reprocessing the entire set of information and
recreating the entire MRP. Regression analysis: A causal forecasting
model in wh
ich,
from historical data, a functional relationship
is esta lished etween vari
a les and then used to forecast dependent varia le values. Reinforcement schedul
e: A more or less formal specification of the timing of a reinforcer for a respo
nse sequence. Reorder point: As part of the operating doctrine, the inventory le
vel at which stock should e reordered. Research and development (R&D): Organiza
tional
efforts directed toward product and process innovation; includes stages o
f asic research, applied research, development, and implementation. Restriction
s:
Restraints
on the values
of the decision varia les of a linear programming pr
o lem. Ro ot: A programma le machine capa le of moving materials and performing
routine, repetitive tasks. Ro ust product: A product that can perform under a wi
de range of environmental conditions without failing. Rough cut capacity plannin
g: The process of testing the feasi ility of master production schedules in term
s of capacity.
274
Operations Management
Route sheet: A document that shows the routing of a component, including the wor
k centers and operation times, tough its production processes. Routing: The proc
essing steps or stages needed to create a product or to do a jo . Salvage value:
Income from selling an asset. Sample: A set of representative units of output s
elected and measured as part of sampling. Sample range: The arithmetic differenc
e of the highest and lowest measurement for a sample. Sample unit: A representat
ive unit of output selected and measured as part of sampling. Sampling: The proc
ess of selecting and measuring representative units of output. Sampling inspecti
on: In this method randomly selected samples are inspected. Samples taken from d
ifferent patches of products are representatives.
Sampling plan: A plan
for acce
ptance sampling specifying the num er of units to sample and the num er of sampl
e units that must conform to specifications if the shipment
is to e accepted. S
cheduled receipts: The quantity of an item that will e received from suppliers
as a result of orders that have een placed (open orders). Scientific management
: One of several theories of classical management, emphasizing economic efficien
cy at the production core through management rationality, the economic motivatio
n of workers, and the separation of planning and doing work. Service level: A tr
eatment policy for customers when there are stockouts; commonly esta lished eith
er as a ratio of customers served to customers demanding or as a ratio of units
supplied to units demanded. Setup cost: The cost of revising and preparing a wor
k center for processing
a jo . Shingo’s seven wastes: Seven sources of manufacturi
ng wastes identified y Shigeo Shingo as targets for reduction through continuou
s improvements in the production process. Shop floor control: Activities that ex
ecute and control shop operations; includes loading, sequencing, detailed schedu
ling, and expediting jo s in production. Short processing
time rule (SPT): A pri
ority rule that gives top priority to the waiting jo whose operation time at a
work center is shortest. Simple average: Average of demands occurring in all pre
vious periods; the demands of all periods are equally weighted. Simple lot size
formula (Wilson formula): A deterministic inventory model characterized y one s
tock point, no stockouts, and constant and known demand, lead time, and unit cos
t. Simple median model: A quantitative method for choosing an optimal facility l
ocation, minimizing costs of transportation ased on the median load. Simple mov
ing average: Average of demands occurring in several of the most recent periods;
most recent periods are added and older ones dropped to keep calculations
curre
nt. Simplex method: An algorithm
for solving a linear programming pro lem y suc
cessively choosing feasi le solutions and testing them for optimality. Single sa
mpling: Acceptance sampling ased on a single sample. Slack time: The difference
of the length of time remaining until a jo is due and the length of its operat
ion time. Slack time (Ts): In PERT, the
amount of leeway time an activity can co
nsume and still allow the project to e completed on time.
Glossary
275

Slack varia le: A varia le in a linear programming pro lem representing the unus
ed quantity of a resource. Smoothing coefficient: A numerical parameter that det
ermines the weighting of old demands in exponential smoothing. Solution space: T
he possi le (meaningful)
values of varia les in a linear programming pro lem. Sp
ecialization of la or: Breaking apart jo s into tasks and assigning tasks to dif
ferent workers according to their special skills, talents, and tools. Specificat
ion limits (SL) upper (USL) and lower (LSL): Boundaries defining the limits of v
ariation in a product characteristic such that the product is fit for use; outpu
t measuring
outside these limits is unaccepta le. Sporadic pro lem: A short term
pro lem that causes sudden changes for the worse in quality, usually addressed

through control measures. Standard: A quantitative criterion esta lished as a a
sis for comparison in measuring
or judging output. Standard time: The ratio of n
ormal time to the availa le fraction of time. Standard usage: An esta lished ind
ustrial engineering time standard. Statistical forecasting models: Casting forwa
rd past data in some systematic method; used in time series analysis and project
ion. Statistical process control (SPC): The use of sample statistics to detect a
nd eliminate nonrandom (sporadic) variations in the conversion process. Stepping
stone procedure: An algorithm of the transportation method of linear programmin
g that uses a set of occupied cells to evaluate the effect on costs if an empty
cell was
to ecome occupied. Stochastic model: A model in which varia le values
are pro a ilistic. Stock (storage) point: A location of inventory stock keeping
an item of inventory. Stockless production system: A system of production that a
llows no (or as small as possi le) inventories of raw materials, work in process
, or finished goods; goes hand in hand with JIT philosophy. Stockout costs: Cost
s associated with demand when stocks have een depleted; generally lost sales or
ackorder costs. Stores management: This involves
physical control of materials
, preservation of stores, minimization of o solescence and damage through timely
disposal and efficient handling, maintenance of stores records, proper location
and stocking. Strategic planning: A process of thinking through the organizatio
n’s current mission and environment and then setting forth a guide for tomorrow’s de
cisions and results. String diagram: The string diagram is a scale layout drawin
g on which, length of a string is used to record the extent as well as the patte
rn of movement of a worker working within a limited area during a certain period
of time. Su culture: Regional or ethnic variations of a culture. Sunk costs: Pa
st expenditures that
are irrelevant to current decision. System: A collection of
o jects related y regular interaction and interdependence. System dynamics: A
computer  ased simulation methodology for developing and analyzing models of sys
tems and their ehavior. Taguchi method of quality control: A method of controll
ing quality, developed y Dr. Genichi Taguchi that emphasizes ro ust product des
ign and the quality loss function.
276
Operations Management

Task: The smallest group of work that can e assigned to a workstation. Task sha
ring: Assigning one task each to two workers and assigning a third task to e sh
ared etween the two, there y reducing idle time. Technology: The level of scien
tific sophistication in plant, equipment, and skills in the conversion process.
Templates: Two dimensional cutouts of equipment drawn to scale for planning the
facility layout. Thaw move refreeze model: A widely accepted model of the change
process that accounts for the need to thaw the environment, that is, get it rea
dy for change, and to refreeze the environment, that is, make the change take ho
ld. Theory Z: An approach to management preffered y William Ouchi that synthesi
zes traditional American and current Japanese methods, and stresses the contri u
tion of every employee in solving pro lems through group consensus. Throughputs:
Items going through the conversion process, contrasted with outputs coming out
of the conversion process. Time fence:
A designated length of time that must pas
s without changing the MPS, to sta ilize the MRP system; afterward, the MPS is a
llowed to change. Time measurement unit (TMU): A unit of time, equivalent to 0.0
0001 hours, used as a asis for methods time measurement (MTM), a widely accepte
d form of predetermined time study. Time series analysis: In forecasting pro lem
s, analysis of demand data plotted on a time scale to reveal patterns of demand.
Time value of money: The potential for money to generate revenue over time. Tot
al quality control (TQC): The Japanese approach to quality control, stressing co
ntinuous improvement through attention to manufacturing detail rather than attai
nment of a fixed quantitative quality standard. Transportation method: A special
linear programming formulation for determining how sources should ship resource
s to destinations so that total shipping costs are minimized. Trigger level: The
optimal reorder point, fixed y a Q/R inventory control operating doctrine. Tru
ncated shortest processing
time (TSPT) rule: A priority rule that gives top prio
rity to the waiting jo that has waited longer than a predetermined designated t
runcation time; if no jo has waited that long, the SPT rule applies. Turnover:
The ratio of sales to assets. Uniform load scheduling (level scheduling): A meth
od of scheduling in which small quantities of each product
are produced each day
, throughout the day. Value system: An individual’s eliefs or conceptions a out w
hat is desira le, good, or ad. Value added: When lending inputs into a product
or service, the increased value of outputs compared to the sum of the values of
inputs.
Value analysis is defined as ‘an organised creative approach, which has i
ts o jective, the efficient identification of unnecessary cost—cost which provides
neither quality nor use nor life nor appearance nor customer features’. Value add
ed manufacturing: A method of manufacturing that seeks to eliminate wastes in pr
ocessing, adhering to the edict that a stage of the process that does not add va
lue to the product for the customer should e eliminated.
Glossary
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Varia le characteristic:
A product characteristic that can e measured on a cont
inuum. Varia le output rate (chase) plan: An aggregate plan that changes period 
to period output to correspond with the demand fluctuations. Visi le control: A
total quality control technique to make defects, as well as records of quality
c
ontrol,
clearly visi
le to all employees so that company resources may e rough
t to ear on pro lems as they arise. Visual load profile: A graph comparing work
loads and capacities on a time scale. Weighted moving average:
An averaging meth
od that allows for varying weighting
of old
demands. Work reakdown structure (W
BS): A methodology for the level  y level reakdown of a project into successive
ly more detailed su component activities and tasks. Work center: A facility, set
of machines,
or workstation that provides a service or transformation needed y
a jo (order). Work measurement is the application or techniques designed
to es
ta lish the time for a qualified worker to carry out a specified jo at a define
d level or performance. Work sampling: A work measurement
technique that involve
s defining the state of ‘working,’ o serving the jo over time, and computing the po
rtion of time the worker is ‘working’. Work study is a generic term for those techni
ques, method study and work measurement which are used in the examination of hum
an work in all its contexts. And which lead systematically to the investigation
of all the factors which affect the efficiency and economy of the situation ein
g reviewed, in order to effect improvement. Worker rating in determining normal
time, a factor of adjustment to account for variations in ‘normal’ worker performanc
e. Work in process inspection: The inspection of a product at one or more stages
of production. X chart: A control chart using sample
averages. Zero defects: A
program to change workers’ attitudes a out quality y stressing error free perform
ance.