GOOD AND SERVICES IN OPERATION MANAGEMENT

1. What Is Operation Management?

Operations Management can be understood as an area of management which is concerned with the
government of system, processes and functions that manufacture goods and renders services to the
end user, to provide desired utilities to them while adhering to other objectives of the concern, i.e.
efficiency, effectiveness, and productivity.

Many people wonder what exactly is the field of Operations Management.

Operations Management can be defined in different ways.
In formal terms we can say that Operations Management deals with the management of processes
that transform inputs to outputs and create value in the form of goods and services.

In simpler terms we can say operations is the function in an organization that creates goods and
services. Operations Management is both a science and art which creates and delivers goods and
services to customers.

2. Main functions in an organization

The three main functions in an organization producing goods or services are:
a. Marketing
b. Production/ Operations
c. Finance/ Accounting

3. Objectives of Operations Management

Customer Service: The primary objective of operations management, is to utilize the resources of the
organization, to create such products or services that satisfy the needs of the consumers, by
providing “right thing at the right price, place and time”.

Resource Utilization: To make the best possible use of the organisation’s resources to satisfy the
wants of the consumers, is another important objective of the operations management.

In operations management, the formation of goods or services encompasses conversion of inputs

into outputs, wherein different inputs such as capital, labour, material, machinery and information
are combined and used to create output, by using the conversion process. For this purpose, the
organization measures different points in the process and then compares the same with the set
standards, to ascertain whether corrective action is required or not.

Scope of Operations Management

a. Location of Facilities: The most important decision with respect to the operations
management is the selection of location, a huge investment is made by the firm in acquiring
the building, arranging and installing plant and machinery. And if the location is not suitable,
then all of this investment will be called as a sheer wastage of money, time, and efforts.
 b. So, while choosing the location for the operations, company’s expansion plans,
diversification plans, the supply of materials, weather conditions, transportation facility and
everything else which is essential in this regard should be taken into consideration.
c. Product Design: Product design is all about an in-depth analysis of the customer’s
requirements and giving a proper shape to the idea, which thoroughly fulfils those
requirements. It is a complete process of identification of needs of the consumers to the final
creation of a product which involves designing and marketing, product development, and
introduction of the product to the market.
d. Process Design: It is the planning and decision making of the entire workflow for
transforming the raw material into finished goods, It involves decisions regarding the choice
of technology, process flow analysis, process selection, and so forth.
e. Plant Layout: As the name signifies, plant layout is the grouping and arrangement of the
personnel, machines, equipment, storage space, and other facilities, which are used in the
production process, to economically produce the desired output, both quality wise and
quantity wise.
f. Material Handling: Material Handling is all about holding and treatment of material within
and outside the organization. It is concerned with the movement of material from one go
down to another, from go down to machine and from one process to another, along with the
packing and storing of the product.
g. Material Management: The part of management which deals with the procurement, use and
control of the raw material, which is required during the process of production. Its aim is to
acquire, transport and store the material in such a way to minimize the related cost. It tends
to find out new sources of supply and develop a good relationship with the suppliers to
ensure an ongoing supply of material.
h. Quality Control: Quality Control is the systematic process of keeping an intended level of
quality in the goods and services, in which the organization deals. It attempts to prevent
defects and make corrective actions (if they find any defects during the quality control
process), to ensure that the desired quality is maintained, at reasonable prices.
i. Maintenance Management: Machinery, tools and equipment play a crucial role in the process
of production. So, if they are not available at the time of need, due to any reason like
downtime or breakage etc. then the entire process will suffer.
Hence, it is the responsibility of the operations manager to keep the plant in good condition, as well
as keeping the machines and other equipment in the right state, so that the firm can use them in
their optimal capacity.

In operations management, the operations manager plays an effective role as a decision maker, with
respect to the decisions regarding – What resources are needed and in what amounts? Where will
the process take place? Who will perform the work? When are the resources required? How will the
products be designed and developed?

In summary, Operations Management involves the following:

 Design of goods and services
 Design of the processes that create goods and services. A process is a sequence of activities
to produce a result
 Management of the processes
 Continuous improvement of goods, services and processes
 Operations Managers are the people who determine the most efficient and cost effective ways to
deliver the goods and services of the company. They aim to increase the productivity of the
organization and balance costs and revenue and increase profits.

4. Good and Services

Operations Management is applicable to both goods and service industries

Creation of goods and services is called production.
Goods are physical products which can be touched, seen and consumed. Goods can be
classified as
 Durable goods: which last minimum three years; non-perishable
 Non-durable goods: which  last less than three years; perishable

Service is an action carried out to satisfy a requirement; it does not directly produce a
physical product.

a. Examples – goods and services

 In manufacturing firms tangible products or goods such as automobiles or
cell phones are produced.

 In service sector no tangible products are produced. Service firms

deliver services which are intangible. Examples are a hair cutting saloon or
income tax filing consultant.

b. Similarities – goods and services

 Provides value as well as satisfaction to customers
 Can be standardized or customized

c. Differences- goods and services

 Goods are tangible; services are not
 Goods can be stored as inventory; services are not
 Customers participate in service creation activities whereas they are not
involved in production of goods
 As a result service locations should be near the customer; Goods
manufacturing factories need not be near the customer
  Patents can protect goods not services

d. Customer Benefit Package (CBP)

Goods and services combined as a package to provide value to customer is called

Customer Benefit Package. It consists of a primary good or service packaged with
other/ secondary goods and/or services.

Whether it is goods or services, the production activities are called operations.

VALUE CHAIN
1. What Is a Value Chain?
A value chain is a business model that describes the full range of activities needed to create a
product or service. For companies that produce goods, a value chain comprises the steps that
involve bringing a product from conception to distribution, and everything in between—such as
procuring raw materials, manufacturing functions, and marketing activities.

A company conducts a value-chain analysis by evaluating the detailed procedures involved in

each step of its business. The purpose of a value-chain analysis is to increase production
efficiency so that a company can deliver maximum value for the least possible cost.

Manufacturing companies create value by acquiring raw materials and using them to produce
something useful. Retailers bring together a range of products and present them in a way that's
convenient to customers, sometimes supported by services such as fitting rooms or personal
shopper advice. And insurance companies offer policies to customers that are underwritten by
larger re-insurance policies. Here, they're packaging these larger policies in a customer-friendly
way, and distributing them to a mass audience.

The value that's created and captured by a company is the profit margin:

Value Created and Captured – Cost of Creating that Value = Margin

The more value an organization creates, the more profitable it is likely to be. And when you
provide more value to your customers, you build competitive advantage.

Understanding how your company creates value, and looking for ways to add more value, are
critical elements in developing a competitive strategy. Michael Porter discussed this in his
influential 1985 book "Competitive Advantage," in which he first introduced the concept of the
value chain.
A value chain is a set of activities that an organization carries out to create value for its
customers. Porter proposed a general-purpose value chain that companies can use to examine all
of their activities, and see how they're connected. The way in which value chain activities are
performed determines costs and affects profits, so this tool can help you understand the sources
of value for your organization.

2. Elements in Porter's Value Chain

Rather than looking at departments or accounting cost types, Porter's Value Chain focuses on
systems, and how inputs are changed into the outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities common to all businesses, and he divided them
into primary and support activities, as shown below.

2.1. Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a
product or service. They consist of the following:
2.1.1. Inbound logistics – These are all the processes related to receiving, storing,
and distributing inputs internally. Your supplier relationships are a key factor
in creating value here.
2.1.2. Operations – These are the transformation activities that change inputs into
outputs that are sold to customers. Here, your operational systems create
value.
2.1.3. Outbound logistics – These activities deliver your product or service to your
customer. These are things like collection, storage, and distribution systems,
and they may be internal or external to your organization.
2.1.4. Marketing and sales – These are the processes you use to persuade clients to
purchase from you instead of your competitors. The benefits you offer, and
how well you communicate them, are sources of value here.
2.1.5. Service – These are the activities related to maintaining the value of your
product or service to your customers, once it's been purchased.

2.2. Support Activities

These activities support the primary functions above. In our diagram, the dotted lines show that
each support, or secondary, activity can play a role in each primary activity. For example,
procurement supports operations with certain activities, but it also supports marketing and sales
with other activities.

2.2.1. Procurement (purchasing) – This is what the organization does to get the
resources it needs to operate. This includes finding vendors and negotiating
best prices.
2.2.2. Human resource management – This is how well a company recruits, hires,
trains, motivates, rewards, and retains its workers. People are a significant
source of value, so businesses can create a clear advantage with good HR
practices.
 2.2.3. Technological development – These activities relate to managing and
processing information, as well as protecting a company's knowledge base.
Minimizing information technology costs, staying current with technological
advances, and maintaining technical excellence are sources of value creation.
2.2.4. Infrastructure – These are a company's support systems, and the functions
that allow it to maintain daily operations. Accounting, legal, administrative,
and general management are examples of necessary infrastructure that
businesses can use to their advantage.

Companies use these primary and support activities as "building blocks" to create a valuable product
or service.

3. Using Porter's Value Chain

To identify and understand your company's value chain, follow these steps.

3.1. Step 1 – Identify sub activities for each primary activity. For each primary activity,
determine which specific sub activities create value. There are three different types of
sub activities:
3.1.1. Direct activities create value by themselves. For example, in a book
publisher's marketing and sales activity, direct sub activities include making
sales calls to bookstores, advertising, and selling online.
3.1.2. Indirect activities allow direct activities to run smoothly. For the book
publisher's sales and marketing activity, indirect sub activities include
managing the sales force and keeping customer records.
3.1.3. Quality assurance activities ensure that direct and indirect activities meet the
necessary standards. For the book publisher's sales and marketing activity,
this might include proofreading and editing advertisements.
3.2. Step 2 – Identify sub activities for each support activity. For each of the Human
Resource Management, Technology Development and Procurement support activities,
determine the sub activities that create value within each primary activity. For example,
consider how human resource management adds value to inbound logistics, operations,
outbound logistics, and so on. As in Step 1, look for direct, indirect, and quality assurance
sub activities.

Then identify the various value-creating subactivities in your company's infrastructure.

These will generally be cross-functional in nature, rather than specific to each primary
activity. Again, look for direct, indirect, and quality assurance activities.
3.3. Step 3 – Identify links. Find the connections between all of the value activities you've
identified. This will take time, but the links are key to increasing competitive advantage
from the value chain framework. For example, there's a link between developing the
sales force (an HR investment) and sales volumes. There's another link between order
turnaround times, and service phone calls from frustrated customers waiting for
deliveries.
 Operations Strategies 
Operations strategies drive a company’s operations, the part of the business that
produces and distributes goods and services. Operations strategy underlies overall
business strategy, and both are critical for a company to compete in an ever-changing
market. With an effective ops strategy, operations management professionals can
optimize the use of resources, people, processes, and technology.

In the book Operations Strategy, authors Nigel Slack and Michael Lewis define the term.
“Operations strategy is the total pattern of decisions which shape the long-term
capabilities of any type of operations and their contribution to the overall strategy,” they
write.

Technology and business models are rapidly changing, so businesses must keep pace
and look to the future. 

“Those who get stuck on their own paradigms…perish,” says Tim Lewko, CEO and
Managing Partner of Thinking Dimensions Global.

Operations strategies drive a company’s operations, the part of the business that
produces and distributes goods and services. Operations strategy underlies overall
business strategy, and both are critical for a company to compete in an ever-changing
market. With an effective ops strategy, operations management professionals can
optimize the use of resources, people, processes, and technology.

In the book Operations Strategy, authors Nigel Slack and Michael Lewis define the term.
“Operations strategy is the total pattern of decisions which shape the long-term
capabilities of any type of operations and their contribution to the overall strategy,” they
write.

Technology and business models are rapidly changing, so businesses must keep pace
and look to the future. 

“Those who get stuck on their own paradigms…perish,” says Tim Lewko, CEO and
Managing Partner of Thinking Dimensions Global.

This article will provide an overview of operations strategy including purpose, examples,
types, process, and how to write a plan. You’ll also hear in-depth insights from seven
professionals, including a look at what the future may bring.

Types of Operations Strategies

We can broadly categorize major operations decisions as structure or infrastructure.
Structure means the physical attributes of operations, while infrastructure refers to the
people, systems, and software.
Structural decisions include facilities, capacity to produce, process technology, and
supply network. An example of a decision many companies face is how much to
outsource vs. handle in-house. The structural decision on whether to build or expand a
facility is an expensive one that could affect the company for years to come.

Infrastructure decisions include planning and control systems, quality management,

work organization, human resources, new product development, and performance
management of employees.

Operations strategy has a vertical relationship with overall business/corporate strategy,

and it has a horizontal relationship with other functional strategies, such as strategies for
marketing, sales, finance, IT, and HR. 

Another way to categorize operations strategies is top-down or bottom-up. That is,

operations strategies might come down from business strategy, supporting it. Or,
strategies might arise over time as a pattern of decisions within operations.

Also, operations strategy can be market-led or operations-led. When it’s market-led,

operations strategy derives from a response to the market conditions. When it’s
operations-led, excellence in operations in a particularly savvy company drives the
strategy.

Operations Strategy Framework

Operations strategy provides the ability to improve products, services, and processes. To
develop the strategy, consider the business/corporate strategy and a market/needs
analysis. Then, consider the competing priorities of cost, quality, time, and flexibility —
and how you’ll handle them.

To exist in the market, you need to have acceptable quality, price, reputation/years in
business, and reliability. To actually win more orders in the market, the factors change a
bit. You need winning quality, price, speed of delivery, consistency of delivery, and
reliability.

These factors combine like this to provide an operations strategy framework, as outlined
by lean transformation consultant Anand Subramanian:

 We start with the business/corporate strategy, laying out objectives, such

as return on investment (ROI), profit, and growth.
 We move to marketing strategy, where we consider factors such as
customer segments, standardization vs. customization, innovation level,
and leader-vs.-follower alternatives.
 Next comes order-winning criteria such as quality, price, delivery speed,
design, and after-sales support.
  Last comes operations/manufacturing strategy, which includes choices of
structure (such as facilities and process) and infrastructure (such as
planning/control systems and work organization). Feeding into that
strategy are the elements of product/process design, inventory, quality
management, human resources and job design, and maintenance.

In a similar vein, Slack and his co-authors outlined five performance objectives in their
2004 book, Operations Management: 

 Cost: Ability to compete on low price

 Quality: Ability to compete on high quality
 Speed: Ability to compete on fast delivery
 Dependability: Ability to compete on reliable delivery
 Flexibility: Ability to compete with new products or services, wide
selection, and timing

Authors Henry Mintzberg and James A. Waters wrote about how organizations form
strategies in their 1985 book, Of Strategies, Deliberate and Emergent. Organizations start
with an intended strategy, but only some of that is realized through deliberate strategy.
Some intentions are left unrealized, such as those that didn’t adequately consider
operational feasibility. Meanwhile, emergent strategies develop as patterns of actions
taken in the organization — most often by the operations department. The deliberate
strategies and emergent strategies feed into the realized strategies. This process shows
the importance of operations details in the big picture.

Steps to Write a Strategic Operations Plan

Below are 15 straightforward steps for writing a solid strategic operations plan:

1.Choose the Right People: Select those with the right knowledge to compile
the operations strategy plan, sometimes just called an operations plan.
Some businesses provide more strategy than others in their ops strategy
plan.
2. Study the Overall Business Strategy Plan: Sometimes the operations
strategy plan is included as a section of the overall business plan. In any
case, the ops strategy plan should align with the business plan.
3. Develop Measurable Operations Goals: These should match up with the
business plan. Don’t do KPIs in a vacuum. Ensure that stakeholders have a
say and agree to the numbers. 
4. Gather Key People to Brainstorm Strategies: Work on strategies
(approaches to reach goals) and underlying tactics (specific steps and
tasks to implement the strategy). 
5. Outline Your Major Points to Maintain Your Plan’s Focus: Use headings,
subheadings, and bulleted lists for clear organization. These will carry
over to your fully written plan, providing clear structure and easy
scanning. Your plan might have elements of a SWOT analysis: strengths,
weaknesses, opportunities, and threats.
6. Keep Your Audience in Mind: Write so that they will understand it. The
plan is all about communication.
7. Include an Index: Use this for easy scanning of the plan and its sections.
8. Use an Appendix: Use this for supplementary material or for items too
detailed for the whole audience.
9. Include the Operations Budget: Include it, or cross-reference or cross-link
it in your operations strategy plan. Show the rationale for key budget
items, especially large expenses.
10. Include a “Stage of Development” Section: Give an overview of the
current state of operations and what you’re trying to accomplish and
improve. Provide a high-level view of how you make your product, your
supply chain, and quality control. Identify risks and how you’ll monitor
them.
11. Include a Production Process Section: This goes into detail on the daily
production process, and demonstrates that you’ve worked out the
necessary specifics. For manufacturing, you would list plant details,
equipment, assets, materials, special requirements, inventory, and quality
control steps. For a startup, you might include prototype and testing
details.
12. If Necessary, Divide Other Sections by Product Family: You can also
divide them by product, service, or different areas of operations. You
might include overall strategies and tactics and/or consider them by
section.
13. Use Flowcharts: Use these images and other graphics to make it more
easily understandable.
14. Build in Flexibility: Explain how you might adjust operations based on a
changing market.
15. Regularly Monitor Your Goals: Do this to see how your strategies and
tactics are working. Adjust as necessary to keep ahead of the curve. A
strong operations strategy plan is key to your success.
 Business Strategy

Definition: Business strategy can be understood as the course of action or set of decisions which
assist the entrepreneurs in achieving specific business objectives. It is nothing but a master plan that
the management of a company implements to secure a competitive position in the market, carry on
its operations, please customers and achieve the desired ends of the business.

In business, it is the long-range sketch of the desired image, direction and destination of the
organization. It is a scheme of corporate intent and action, which is carefully planned and flexibly
designed with the purpose of:

1. Achieving effectiveness,
2. Perceiving and utilising opportunities,
3. Mobilising resources,
4. Securing an advantageous position,
5. Meeting challenges and threats,
6. Directing efforts and behaviour and
7. Gaining command over the situation.

A business strategy is a set of competitive moves and actions that a business uses to attract
customers, compete successfully, strengthening performance, and achieve organisational goals. It
outlines how business should be carried out to reach the desired ends.

Business strategy equips the top management with an integrated framework, to discover, analyze
and exploit beneficial opportunities, to sense and meet potential threats, to make optimum use of
resources and strengths, to counterbalance weakness.

Levels of Business Strategy

1. Corporate level strategy: Corporate level strategy is a long-range, action-oriented,
integrated and comprehensive plan formulated by the top management. It is used to
ascertain business lines, expansion and growth, takeovers and mergers,
diversification, integration, new areas for investment and divestment and so
forth.Corporate-Level Strategy refers to the top management’s approach or game
plan for administering and directing the entire concern. These are based on the
company’s business environment and internal capabilities. It also called as Grand
Strategy.

It reflects the combination and pattern of business moves, actions and hidden goals,
in the strategic interest of the concern, considering various business divisions,
product lines, customer groups, technologies and so forth.

Salient Features of Corporate Level Strategy

 Corporate Level Strategies is developed by the company’s highest level of
management considering the company’s overall growth and opportunities in
future.
 It describes the orientation and direction of the enterprise in the long run and
the overall boundaries which acts as the basis for formulating the company’s
middle and low-level strategies, i.e. business strategies and functional
strategies.
 While formulating corporate-level strategies, the company’s available
resources and environmental factors are kept in mind.
 It is concerned with the decisions regarding the two-way flow of company’s
information and resources between the various levels of management.

In better words, corporate-level strategy implies the topmost degree of strategic

decision making, which covers those business plans which are concerned with the
company’s objective, procurement and optimal allocation of resources and
coordination of business strategies of different units and divisions for satisfactory
performance.

The corporate-level strategies are classified into four parts:

1.1. Stability Strategy: Stability is a critical business goal which is required to

defend the existing interest and strengths, to follow the business objectives,
to continue with the existing business, to keep the efficiency in operations,
etc.
 In the stability strategy, the firm continues with its existing business and
product markets, as well as it maintains the current level of endeavor as
the firm is satisfied with the marginal growth.

1.2. Expansion Strategy: Also called a growth strategy, wherein the company’s
business is reevaluated so as to extend the capacity and scope of business
and considerably increasing the overall investment in the businesses.
In the expansion strategy, the enterprise looks for considerable growth,
either from the existing business or product market or by entering a new
business, which may or may not be related to the firm’s existing business.
Basically, it encompasses diversification, merger and acquisitions,
strategic alliance, etc.
1.3. Retrenchment Strategy: This is pursued when the company opts for
decreasing its scope of activity or operations. In retrenchment strategy, a
number of business activities are retrenched (cut or reduced) so as to
minimize cost, as a response to the firm’s financial crisis. Sometimes, the
business itself is dropped by selling out or liquidation.
Therefore, areas where there is a problem is identified and reasons for
those problems are diagnosed, after that corrective or remedial steps are
taken to solve those problems. So, when the firm concentrates on the
ways to reverse the process of decline, it is called a turnaround strategy.
However, if it drops the loss-making venture or part of the company or
minimizes the functions undertaken, it is called a divestment or
divestiture strategy. If nothing works, then the firm may choose for
closing down the firm, it is called a liquidation strategy.

1.4. Combination Strategy: In this strategy, the enterprise combines any or all of
the three corporate strategies, so as to fulfil the firm’s requirements. The firm
may choose to stabilize some areas of activity while expanding the other and
retrenching the rest (loss-making ones).
The primary focus on corporate-level strategies is on the “directing” the
managers on ‘how to manage the scope of various business activities’
and ‘how to make optimum utilization of firm’s resources (material,
money, men, machinery), etc. on different business activities’.

2. Business level strategy: The strategies that relate to a particular business are known
as business-level strategies. It is developed by the general managers, who convert
mission and vision into concrete strategies. It is like a blueprint of the entire business.
Business level strategies refer to the combined set of moves and actions taken with
an aim of offering value to the customers and developing a competitive advantage,
by using the firm’s core competencies, in the individual product or service market. It
determines the market position of the enterprise, in relation to its rivals.

Business-Level Strategies are mainly concerned with the firms having multiple
businesses and each business is considered as Strategic Business Unit (SBU).

It determines how the firm is going to compete in the market within each Line of
Business, i.e. SBU. Further, it focuses on how the firm will compete successfully in
each line of business and how to effectively manage the interest and operations of a
specific unit.

So, these strategies are the course of action selected by a firm for each line of
business or SBU individually and intend to attain competitive advantage, in separate
lines of business, which the firm is having in its portfolio currently.

Business level strategies deal with the following issues:

 Satisfying the needs of the customers.

 Achieving an edge over its rivals.
 Avoiding a competitive disadvantage.

Strategies at this level are concerned with meeting competition, defending market
share while making a profit.

A firm is said to have a competitive advantage if it can attract the target customers,
as well as survive the competitive forces better, as compared to the rivals.

Business Level Strategies

Effective Business-Level Strategies entails developing distinctive competencies and

implementing them in order to have an upper hand over its rivals. Michael Porter has
propounded three business-level strategies in the year 1998, which are discussed as
under:business-level-strategy

2.1. Cost Leadership: This strategy stresses on manufacturing standardized

products, at a low cost for the price-sensitive consumers.
Cost leadership strategy tends to focus on the broad mass market. And for
this, the firm continuously and rigorously strives for cost reduction in
different areas, whether it is procurement, production, packaging, storage,
distribution of the product while achieving economies in overheads.

To gain cost leadership, firms often follow forward, backward and horizontal
integration.
2.1.1. Ways to achieve Cost leadership
2.1.1.1. Quick demand forecasting for the product or service.
2.1.1.2. Effective utilization of the firm’s resources to avoid
wastage.
2.1.1.3. Attaining economies of scale which results in lower per-
unit cost.
 2.1.1.4. Investing in high-end technology for smart working.
2.1.1.5. Product standardization for mass production, which
leads to economies of scale.
2.2. Differentiation: As the name suggests, differentiation strategy aims at
producing and offering industry-wide distinctive products and services to the
customers, so as to target price-insensitive customers.
This strategy is also directed for the broad mass market, which encompasses
the development of a unique product. Unique means uniqueness with
respect to design, brand image, specifications, customer service, technology
used, etc.
Further, this strategy may or may not lead to competitive advantage, mainly
because the customer’s needs are satisfied by standard products or if the
rivals imitate the product or service quickly.
Hence, the strategy should be followed after proper market research and
study of the buyers to ascertain their needs and preferences and adding
differentiating features to the product.
2.2.1. Ways to achieve Differentiation
2.2.1.1. Providing utility to the customers that match their taste
and preference.
2.2.1.2. Increasing product performance.
2.2.1.3. Product innovation
2.2.1.4. Setting up product prices on the basis of differentiated
features of the product and affordability of the
customers.
2.3. Focus: This strategy is used by the firms to produce products and services,
which fulfills the need of small consumer groups. The strategy relies on the
segment of the industry which is considerable in size, higher growth potential
and not important to the success of the rivals.
This is commonly used by small or medium-sized enterprises. This strategy
works only when consumers have varied tastes and competitors does not try
to specialize in that particular segment.
2.3.1. Ways to achieve Focus
2.3.1.1. Choosing a particular niche, often avoided by cost
leaders and differentiators.
2.3.1.2. Excel in catering to the specific niche.
2.3.1.3. High-efficiency generation to serve those niche.
2.3.1.4. Creating new ways for the value chain management.

Business-Level Strategy shows the choices made by the firm with regard to the
way in which the firm contemplates to compete in the market.

The firm’s core competencies should focus on the needs and wants of the customers,
with an aim or attaining extraordinary returns. And to attain this, business-level
strategies play an important role.

Business level strategies aims at developing the competitive advantage, ascertaining

responses with respect to the changing market trends, allocation of resources within
the SBU.
3. Functional level strategy: Developed by the first-line managers or supervisors,
functional level strategy involves decision making at the operational level concerning
particular functional areas like marketing, production, human resource, research and
development, finance and so on.Functional Level Strategy can be defined as the day
to day strategy which is formulated to assist in the execution of corporate and
business level strategies. These strategies are framed as per the guidelines given by
the top level management.

Functional Level Strategy is concerned with operational level decision making, called
tactical decisions, for various functional areas such as production, marketing,
research and development, finance, personnel and so forth.

As these decisions are taken within the framework of business strategy, strategists
provide proper direction and suggestions to the functional level managers relating to
the plans and policies to be opted by the business, for successful implementation.

3.1. Role of Functional Strategy

3.1.1. It assists in the overall business strategy, by providing information
concerning the management of business activities.
3.1.2. It explains the way in which functional managers should work, so
as to achieve better results.

Functional Strategy states what is to be done, how is to be done and when is to be

done are the functional level, which ultimately acts as a guide to the functional staff.
And to do so, strategies are to be divided into achievable plans and policies which
work in tandem with each other. Hence, the functional managers can implement the
strategy.

3.2. Functional Areas of Business

There are several functional areas of business which require strategic decision
making, discussed as under:
Functional level strategy

3.2.1. Marketing Strategy: Marketing involves all the activities

concerned with the identification of customer needs and making
efforts to satisfy those needs with the product and services they
require, in return for consideration. The most important part of a
marketing strategy is the marketing mix, which covers all the
steps a firm can take to increase the demand for its product. It
 includes product, price, place, promotion, people, process and
physical evidence.
For implementing a marketing strategy, first of all, the company’s
situation is analysed thoroughly by SWOT analysis. It has three
main elements, i.e. planning, implementation and control.
There are a number of strategic marketing techniques, such as
social marketing, augmented marketing, direct marketing, person
marketing, place marketing, relationship marketing, Synchro
marketing, concentrated marketing, service marketing,
differential marketing and demarketing.

3.2.2. Financial Strategy: All the areas of financial management, i.e.

planning, acquiring, utilizing and controlling the financial
resources of the company are covered under a financial strategy.
This includes raising capital, creating budgets, sources and
application of funds, investments to be made, assets to be
acquired, working capital management, dividend payment,
calculating the net worth of the business and so forth.
3.2.3. Human Resource Strategy: Human resource strategy covers how
an organization works for the development of employees and
provides them with the opportunities and working conditions so
that they will contribute to the organization as well. This also
means to select the best employee for performing a particular
task or job. It strategizes all the HR activities like recruitment,
development, motivation, retention of employees, and industrial
relations.
3.2.4. Production Strategy: A firm’s production strategy focuses on the
overall manufacturing system, operational planning and control,
logistics and supply chain management. The primary objective of
the production strategy is to enhance the quality, increase the
quantity and reduce the overall cost of production.
3.2.5. Research and Development Strategy: The research and
development strategy focuses on innovating and developing new
products and improving the old one, so as to implement an
effective strategy and lead the market. Product development,
concentric diversification and market penetration are such
business strategies which require the introduction of new
products and significant changes in the old one.

For implementing strategies, there are three Research and

Development approaches:
 To be the first company to market a new technological
product.
 To be an innovative follower of a successful product.
 To be a low-cost producer of products.

Functional level strategies focus on appointing specialists and

combining activities within the functional area.
In business, there is always a need for multiple strategies at various levels as a single strategy is not
only inadequate but improper too. Therefore, a typical business structure always possesses three
levels.

Nature of Business Strategy

A business strategy is a combination of proactive actions on the part of management, for the
purpose of enhancing the company’s market position and overall performance and reactions to
unexpected developments and new market conditions.

The maximum part of the company’s present strategy is a result of formerly initiated actions and
business approaches, but when market conditions take an unanticipated turn, the company requires
a strategic reaction to cope with contingencies. Hence, for unforeseen development, a part of the
business strategy is formulated as a reasoned response.

Strategy Formulation

Definition: Strategy Formulation is an analytical process of selection of the best suitable course of
action to meet the organizational objectives and vision. It is one of the steps of the strategic
management process. The strategic plan allows an organization to examine its resources, provides a
financial plan and establishes the most appropriate action plan for increasing profits.

It is examined through SWOT analysis. SWOT is an acronym for strength, weakness, opportunity and
threat. The strategic plan should be informed to all the employees so that they know the company’s
objectives, mission and vision. It provides direction and focus to the employees.

Steps of Strategy Formulation

The steps of strategy formulation include the following:

Process of strategy formulation

1. Establishing Organizational Objectives: This involves establishing long-term goals of an

organization. Strategic decisions can be taken once the organizational objectives are
determined.
2. Analysis of Organizational Environment: This involves SWOT analysis, meaning identifying
the company’s strengths and weaknesses and keeping vigilance over competitors’ actions to
understand opportunities and threats.
 Strengths and weaknesses are internal factors which the company has control over.
Opportunities and threats, on the other hand, are external factors over which the company
has no control. A successful organization builds on its strengths, overcomes its weakness,
identifies new opportunities and protects against external threats.
3. Forming quantitative goals: Defining targets so as to meet the company’s short-term and
long-term objectives. Example, 30% increase in revenue this year of a company.
4. Objectives in context with divisional plans: This involves setting up targets for every
department so that they work in coherence with the organization as a whole.
5. Performance Analysis: This is done to estimate the degree of variation between the actual
and the standard performance of an organization.
6. Selection of Strategy: This is the final step of strategy formulation. It involves evaluation of
the alternatives and selection of the best strategy amongst them to be the strategy of the
organization.

Strategy formulation process is an integral part of strategic management, as it helps in framing

effective strategies for the organization, to survive and grow in the dynamic business environment.

Levels of strategy formulation

There are three levels of strategy formulation used in an organization:

Corporate level strategy: This level outlines what you want to achieve: growth, stability, acquisition
or retrenchment. It focuses on what business you are going to enter the market.

Business level strategy: This level answers the question of how you are going to compete. It plays a
role in those organization which have smaller units of business and each is considered as the
strategic business unit (SBU).

Functional level strategy: This level concentrates on how an organization is going to grow. It defines
daily actions including allocation of resources to deliver corporate and business level strategies.

Hence, all organizations have competitors, and it is the strategy that enables one business to
become more successful and established than the other.

Competitive Strategy

Competitive Strategy can be defined as the firm’s long term action plan that formulated by
considering several external factors, that helps the company to achieve competitive advantage,
increase the share in the market and overpower rivals. Competitive advantage is the result of the
firm’s excellence in performing activities.
The firm’s external environment, has the potential to influence the company’s internal environment,
especially the economic and technical elements. The company should have an idea of its market
position, in relation to its competitors, which assists the company in competing in the market.

Dynamics of Competitive Strategy

1. Competitive Landscape: It tends to identify and understand the competition deeply

while cognizing the vision, mission, objectives, strengths, weakness, opportunities
and threats of the enterprise. While analysing the competition, the firm also keeps an
eye on the competitor’s overall position in the market, to choose the right strategy
for the enterprise.

2. Strategic Analysis: It implies the detailed examination of various components of the

firm’s business environment. It is important for strategy formulation, strategy
implementation and strategic decision making.
3. Industry and Competitive Analysis: The analysis in which a number of methods are
used to have a clear view of the basic industry practices, the intensity of competition,
strategies of competitors and their share in the market, change drivers, profit
prospects and so forth, is called as Industry and Competitive Analysis. It assists the
company in strategically observing the condition of the industry.
4. Core Competence: Core competencies of the company are those capabilities which
help the company in defeating its competitors by gaining a competitive advantage. It
is a blend of company’s technical and managerial know-how, skills, knowledge,
experience, strategy, resources, manpower, etc.
5. Competitive Advantage: Competitive Advantage assist the firm in defeating its rival
organization, through its core competencies which include a combination of
distinguishing characteristics of the firm and the product offered by it, which is
considered as outstanding, that has the edge over its competitors.Simply put,
competitive advantage is when the profitability of an organization is comparatively
higher than the average profitability of the other companies operating in the same
industry.
 6. Portfolio Analysis: It is a management tool which helps the company to analyze its
product lines and business units, from which good returns are expected. In other
words, it identifies and evaluates those products and strategic business units which
help the company to survive and grow in the market.
7. SWOT Analysis: SWOT Analysis is the analysis of the firm’s strengths, weakness,
opportunities and threats, to generate strategic alternatives. It aims at facilitating the
management in developing a business model, which accurately aligns the firm’s
resources and capabilities, according to the business environment.
8. Globalization: In basic terms, globalization refers to the process through which a
business or any other organization creates its presence across the world and begins
its operations on an international scale.

A competitive strategy is used to attract customers, gain an edge over its competitors,
increase market share and strengthen its position, and expand the business to a larger
scale.

DEMAND FORECASTING
3.3. Definition: Demand Forecasting refers to the process of predicting the future demand for the firm’s
product. In other words, demand forecasting is comprised of a series of steps that involves the
anticipation of demand for a product in future under both controllable and non-controllable
factors.

The business world is characterized by risk and uncertainty, and most of the business decisions
are taken under this scenario. An organization come across several risks, both internal or
external to the business operations such as technology, attrition, unrest, employee grievances,
recession, inflation, modifications in the government laws, etc.

3.4. Predicting the future demand for a product helps the organization in making decisions in one of
the following areas:

2.1. Planning and scheduling the production and acquiring the inputs accordingly.
2.2. Making the provisions for finances.
2.3. Formulating a pricing strategy.
2.4. Planning advertisement and implementing it.

Demand forecasting holds significance in the businesses where large-scale production is

involved. Since the large-scale production requires a long gestation period, a good deal of
forward planning should be done. Also, the potential future demand should be estimated to
avoid the conditions of overproduction and underproduction. Most often, the firms face a
question of what would be the future demand for their product as they have to acquire the input
(labor and raw material) accordingly.

3. The objective of demand forecasting is attained only when the forecasting is done systematically
and scientifically. Thus, the following steps in demand forecasting are followed to facilitate a
systematic estimation of future demand for product:

3.1. Specifying the Objective

3.2. Determining the Time Perspective
3.3. Choice of method for Demand Forecasting
 3.4. Collection of Data and Data Adjustment
3.5. Estimation and Interpretation of Results

Thus, demand forecasting is a systematic process that assumes greater significance in large-scale
producing firms. Demand forecasting may not be a serious issue for the small scale firms which
supply a small portion of total demand or produces the product that caters to the short demand
or seasonal demand. Such firms can plan their production on the basis of the business skills and
their past experiences.

4. Steps in Demand Forecasting

4.1. Definition: Demand Forecasting is a systematic process of predicting the future demand
for a firm’s product. Simply, estimating the potential demand for a product in the future
is called as demand forecasting.

The demand forecasting finds its significance where the large-scale production is
involved. Such firms may often face difficulties in obtaining a fairly accurate estimation of
future demand. Thus, it is essential to forecast demand systematically and scientifically to
arrive at desired objective. Therefore, the following steps are taken to facilitate a
systematic demand forecasting:

4.1.1. Specifying the Objective: The objective for which the demand forecasting is to be
done must be clearly specified. The objective may be defined in terms of; long-term
or short-term demand, the whole or only the segment of a market for a firm’s
product, overall demand for a product or only for a firm’s own product, firm’s overall
market share in the industry, etc. The objective of the demand must be determined
before the process of demand forecasting begins as it will give direction to the whole
research.
4.1.2. Determining the Time Perspective: On the basis of the objective set, the demand
forecast can either be for a short-period, say for the next 2-3 year or a long period.
While forecasting demand for a short period (2-3 years), many determinants of
demand can be assumed to remain constant or do not change significantly. While in
the long run, the determinants of demand may change significantly. Thus, it is
essential to define the time perspective, i.e., the time duration for which the demand
is to be forecasted.
4.1.3. Making a Choice of Method for Demand Forecasting: Once the objective is set and
the time perspective has been specified the method for performing the forecast is
selected. There are several methods of demand forecasting falling under two
categories; survey methods and statistical methods.

The Survey method includes consumer survey and opinion poll methods, and the
statistical methods include trend projection, barometric and econometric methods.
Each method varies from one another in terms of the purpose of forecasting, type of
data required, availability of data and time frame within which the demand is to be
forecasted. Thus, the forecaster must select the method that best suits his
requirement.

4.1.4. Collection of Data and Data Adjustment: Once the method is decided upon, the next
step is to collect the required data either primary or secondary or both. The primary
data are the first-hand data which has never been collected before. While the
secondary data are the data already available. Often, data required is not available
and hence the data are to be adjusted, even manipulated, if necessary with a purpose
to build a data consistent with the data required.
 4.1.5. Estimation and Interpretation of Results: Once the required data are collected and
the demand forecasting method is finalized, the final step is to estimate the demand
for the predefined years of the period. Usually, the estimates appear in the form of
equations, and the result is interpreted and presented in the easy and usable form.

Thus, the objective of demand forecasting can only be achieved only if these steps
are followed systematically.

4.2. Methods of Demand Forecasting

There are several methods of demand forecasting applied in terms of; the purpose of
forecasting, data required, data availability and the time frame within which the demand
is to be forecasted. Each method varies from one another and hence the forecaster must
select that method which best suits the requirement.
The methods of forecasting can be classified into two broad categories:

4.2.1. Survey Methods: Under the survey method, the consumers are contacted directly
and are asked about their intentions for a product and their future purchase plans.
This method is often used when the forecasting of a demand is to be done for a short
period of time. 

4.2.1.1. Consumer Survey Method

 Consumer Survey Method is one of the techniques of demand forecasting that
involves direct interview of the potential consumers.

Consumer Survey Method includes the further three methods that can be used
to interview the consumer:
4.2.1.1.1. Complete Enumeration Method: Under this method, a
forecaster contact almost all the potential users of the product
and ask them about their future purchase plan. The probable
demand for a product can be obtained by adding all the
quantities indicated by the consumers. Such as the majority of
children in city report the quantity of chocolate (Q) they are
willing to purchase, then total probable demand (Dp) for
chocolate can be determined as:
Dp = Q1+Q2+Q3+Q4+……+Qn
Where, Q1, Q2, Q3 denote the demand indicated by children 1, 2,3
and so on.
4.2.1.1.2. One of the major limitations of this method is that it can
only be applied where the consumers are concentrated in
a certain region or locality. And if the population is widely
dispersed, then it can turn out to be very costly. Besides
this, the other limitation is that the consumers might not
know their actual demand in future. Due to this, they may
give a hypothetical answer that may be biased according
to their own expectations regarding the market
conditions.

4.2.1.1.3. Sample Survey: The sample survey method is often used

when the target population under study is large. Only the
sample of potential consumers is selected for the
interview. A sample of consumers is selected through a
sampling method. Here, the method of survey may be a
direct interview or mailed questionnaires to the selected
sample-consumers. The probable demand, indicating the
response of the consumers can be estimated by
using the following formula:

Where Dp = probable demand forecast; H = Census

number of households from the relevant market; Hs =
number of households surveyed or sample households;
HR = Number of households reporting demand for a
product; AD = Average Expected consumption by the
 reporting households (total quantity consumed by the
reporting households/ Number of households.

This method is simple, less costly and even less time-

consuming as compared to the comprehensive survey
methods.  The sample Survey method is often used to
estimate a short-run demand of business firms,
households, government agencies who plan their future
purchases. However, the major limitation of this method
is that a forecaster cannot attribute more reliability to the
forecast than warranted

4.2.1.1.4. End-use Method: The end-use method is mainly used to

forecast the demand for inputs. This method of demand
forecasting has a considerable theoretical and practical
value. Under this method, a forecaster builds the schedule
of probable aggregate future demand for inputs by
consuming industries and several other sectors. In this
method, during the estimation of a demand the changes
in technological, structural and other factors that
influence the demand is taken into the consideration.

The end-use method helps in determining the future

demand for an industrial product in details by type and
size. Also, with the help of end-use method, a forecaster
can pinpoint or trace at any time in the future as to where,
why and how the actual consumption has been deviated
from the estimated demand.
Thus, these are some of the most commonly used consumer survey methods,
wherein the customers are directly asked about their intentions about the
product and their future purchase plans.

4.2.1.2. Opinion Poll Method

Definition: The Opinion Poll Methods are used to collect opinions of those who
possess the knowledge about the market, such as sales representatives,
professional marketing experts, sales executives and marketing consultants.

The Opinion poll methods include the following survey methods:

4.2.1.2.1. Expert-Opinion Method: Companies with an adequate

network of sales representatives can capitalize on them
in assessing the demand for a target product in a
 particular region or locality that they represent. Since
sales representatives are in direct touch with the
customer, are supposed to know the future purchase
plans of their customers, their preference for the product,
their reaction to the introduction of a new product, their
reactions to the market changes and the demand for rival
products.

Thus, sales representatives are likely to provide an

approximate, if not accurate, estimation of demand for a
target product in their respective regions or areas. In the
case of firms, which lack in sales representatives can
collect information regarding the demand for a product
through professional market experts or consultants, who
can predict the future demand on the basis of their
expertise and experience.

4.2.1.2.2. Delphi Method: The Delphi method is the extension of the

expert opinion method wherein the divergent expert
opinions are consolidated to estimate a future demand.
The process of the Delphi technique is very simple. Under
this method, the experts are provided with the
information related to estimates of forecasts of other
experts along with the underlying assumptions. The
experts can revise their estimates in the light of demand
forecasts made by the other group of experts. The
consensus of experts regarding the forecast results in a
final forecast.

4.2.1.2.3. Market Studies and Experiments: Another alternative

method to collect information regarding the current as
well as future demand for a product is to conduct market
studies and experiments on the consumer behavior under
actual, but controlled market conditions. This method is
commonly known as Market Experiment Method.

The alternative method to market experiments is

the Consumer Clinics or Controlled Laboratory
Method wherein the consumers are given some money to
make purchases in stipulated store goods with different
prices, packages, displays, etc. This experiment displays
the responsiveness towards the changes made in the
prices, packaging and a display of the product. One of the
major limitations of market experiment method is that it
is too expensive and cannot be afforded by small firms.
Also, this method is based on short-term controlled
conditions which might not exist in the uncontrolled
market. Therefore, the results may not be applicable in
the long term uncontrolled conditions.Thus, these are
some of the opinion poll methods that are used to gather
expert opinions of those who are closely related to the
market with an aim to estimate a future demand for the
product.
4.2.2. Statistical Methods: 

The statistical methods are often used when the forecasting of demand is to be done
for a longer period. The statistical methods utilize the time-series (historical) and
cross-sectional data to estimate the long-term demand for a product. The statistical
methods are used more often and are considered superior than the other techniques
of demand forecasting due to the following reasons:
 There is a minimum element of subjectivity in the statistical methods.
 The estimation method is scientific and depends on the relationship between the
dependent and independent variables.
 The estimates are more reliable
 Also, the cost involved in the estimation of demand is the minimum.

The statistical methods include:

4.2.2.1. Trend Projection Methods

The Trend Projection Method is the most classical method of business
forecasting, which is concerned with the movement of variables through
time. This method requires a long time-series data.
The trend projection method is based on the assumption that the factors
liable for the past trends in the variables to be projected shall continue to
play their role in the future in the same manner and to the same extent as
they did in the past while determining the variable’s magnitude and
direction.

In predicting demand for a product, the trend projection method is

applied to the long time-series data. A long-standing firm can obtain such
data from its departments (such as sales) and the books of accounts.
While the new firms can obtain data from the old firms operating in the
same industry. The trend projection method includes three techniques
based on the time-series data. These are:

4.2.2.1.1. Graphical Method: It is the most simple statistical method

in which the annual sales data are plotted on a graph, and
a line is drawn through these plotted points. A free hand
line is drawn in such a way that the distance between
points and the line is the minimum. Under this method, it
is assumed that future sales will assume the same trend as
followed by the past sales records. Although the graphical
method is simple and inexpensive, it is not considered to
be reliable. This is because the extension of the trend line
may involve subjectivity and personal bias of the
researcher.
4.2.2.1.2. Fitting Trend Equation or Least Square Method: The least
square method is a formal technique in which the trend-
line is fitted in the time-series using the statistical data to
determine the trend of demand. The form of trend
equation that can be fitted to the time-series data can be
determined either by plotting the sales data or trying
different forms of the equation that best fits the data.
 Once the data is plotted, it shows several trends. The
most common types of trend equations are:
4.2.2.1.3. Linear Trend: when the time-series data reveals a rising or
a linear trend in sales, the following straight line equation
is fitted:
S = a + bT
Where S = annual sales; T = time (years); a and b are
constants.
4.2.2.1.4. Exponential Trend: The exponential trend is used when
the data reveal that the total sales have increased over
the past years either at an increasing rate or at a constant
rate per unit time.
4.2.2.1.5. Box-Jenkins Method: Box-Jenkins method is yet another
forecasting method used for short-term predictions and
projections. This method is often used with stationary
time-series sales data. A stationary time-series data is the
one which does not reveal a long term trend. In other
words, Box-Jenkins method is used when the time-series
data reveal monthly or seasonal variations that reappear
with some degree of regularity.

Thus, these are the commonly used trend-projection methods that tell about
the trend of demand for a product and are based on a long and reliable time-
series data.

4.2.2.2. Barometric Methods

Definition: The Barometric Method of Forecasting was developed to
forecast the trend in the overall economic activities. This method can
nevertheless be used in forecasting the demand prospects, not
necessarily the actual quantity expected to be demanded.
Often, the barometric method of forecasting is used by the
meteorologists in weather forecasting. The weather conditions are
forecasted on the basis of the movement of mercury in a barometer.
Based on this logic, economists use economic indicators as a barometer
to forecast the overall trend in the business activities.
The Barometric Method of forecasting was first developed in 1920’s, but,
however, was abandoned due to its failure to predict the Great
Depression in 1930’s. The Barometric technique was, however, revived,
reformed and developed further by the National Bureau of Economic
Research (NBER), USA in the late 1930’s.
The barometric method is based on the approach of developing an index
of relevant economic indicators and forecasting the future trends by
analyzing the movements in these indicators. A time-series of several
indicators is developed to study the future trend. These can be classified
as:

4.2.2.2.1. Leading Series: The leading series is comprised of

indicators which move up or down ahead of some other
series The most common examples of leading indicators
are- net business investment index, a new order for
durable goods, change in the value of inventories,
corporate profits after tax, etc.
 4.2.2.2.2. Coincidental Series: The coincidental series include
indicators which move up and down simultaneously with
the general level of economic activities. The examples of
coincidental series – the rate of unemployment, the
number of employees in the non-agricultural sector, sales
recorded by manufacturing, retail, and trading sectors,
gross national product at constant prices.
4.2.2.2.3. Lagging Series: A series consisting of those indicators,
which after some time-lag follows the change. Some of
the lagging series are- outstanding loan, labor cost per
unit production, lending rate for short-term loans, etc.

The following are the criteria on which the indicators are chosen:

 The economic significance of the indicator; such as greater the

significance the greater is the score of the indicator.
 Time Series- statistical adequacy; a higher score is given to the
indicator provided with adequate statistics.
 Conformity with the movement in overall economic activities.
 Immediate availability of the time series.
 The consistency of the series to the turning points in overall
economic activities.
 Smoothness of the series.

The problem of indicator selection may arise if some indicators appear in

more than one class of the indicators.

The only advantage of the barometric method of forecasting is that is helps

to overcome the problem of finding the value of an independent variable
under regression analysis. The major limitations of this method are; First,
Often the leading indicator of the variable to be forecasted is difficult to find
out or is not easily available. Secondly, the barometric technique can be used
only for a short-term forecasting.

4.2.2.3. Econometric Methods

The Econometric Methods make use of statistical tools and economic
theories in combination to estimate the economic variables and to
forecast the intended variables.
The econometric model can either be a single-equation regression model
or may consist a system of simultaneous equations. In most commodities,
the single-equation regression model serves the purpose.
But, however, in the case where the explanatory economic variables are
so interdependent or interrelated to each other that unless one is defined
the other variable cannot be determined, a single-equation regression
model does not serve the purpose. And, therefore in such situation, the
system of simultaneous equations is used to forecast the variable.
The econometric methods are comprised of two basic methods, these
are:
4.2.2.3.1. Regression Method: The regression analysis is the most
common method used to forecast the demand for a
product. This method combines the economic theory
with statistical tools of estimation. The economic theory is
 applied to specify the demand determinants and the
nature of the relationship between product’s demand and
its determinants. Thus, through an economic theory, a
general form of a demand function is determined. While
the statistical techniques are applied to estimate the
values of parameters in the projected equation.

Under the regression method, the first and the foremost

thing is to determine the demand function. While
specifying the demand functions for several commodities,
one may come across many commodities whose demand
depends by or large, on a single independent variable. For
example, suppose in a city, the demand for items like tea
and coffee is found to depend largely on the population of
the city, then the demand functions of these items are
said to be single-variable demand functions.

On the other hand, if it is found out that the demand for

commodities like sweets, ice-creams, fruits, vegetables,
etc., depends on a number of variables like commodity’s
own price, the price of substitute goods, household
incomes, population, etc. Then such demand functions
are called as multi-variable demand functions.

Thus, for a single variable demand function, the simple

regression equation is used while for multiple variable
functions, a multi-variable equation is used for estimating
the demand for a product.

4.2.2.3.2. Simultaneous Equations Model: Under simultaneous

equation model, demand forecasting involves the
estimation of several simultaneous equations. These
equations are often the behavioral equations, market-
clearing equations, and mathematical identities.

The regression technique is based on the assumption of

one-way causation, which means independent variables
cause variations in the dependent variables, and not vice-
versa. In simple terms, the independent variable is in no
way affected by the dependent variable. For example, D =
a – bP, which shows that price affects demand, but
demand does not affect the price, which is an unrealistic
assumption.

On the contrary, the simultaneous equations model

enables a forecaster to study the simultaneous
interaction between the dependent and independent
variables. Thus, simultaneous equation model is a
systematic and complete approach to forecasting. This
method employs several mathematical and statistical
tools of estimation.
 The econometric methods are most widely used in forecasting the demand for
a product, for a group of products and the economy as a whole. The forecast
made through these methods is more reliable than the other forecasting
methods.
5. Sales Forecasting

5.1. Definition: Sales Forecasting is the projection of customer demand for the goods and
services over a period of time. In other words, it is the process that involves the
estimation of sales in a physical unit that a company expects within a plan period.
5.2. There are a variety of methods available to the firm for forecasting sales or demand of a
company; these are listed below:

5.2.1. Jury Method

The Jury Method also called as an Executive Opinion Method is a sales forecasting
method, wherein the executives from different departments come together and
forecast sales for the given period, on the basis of their experience and
specialization.

5.2.2. Survey of Expert’s Opinions

In Survey of Expert’s Opinions, the specialized group of people in the concerned
fields, from both inside and outside the organization, are approached and asked to
give their opinions on sales trend. The Survey of Expert’s Opinions is the most
common method of sales forecasting, employed by the organizations. This method is
also based on the judgment of experienced people but is different from the jury
method.

5.2.3. Delphi Method.

The Delphi Technique refers to the systematic forecasting method used to gather
opinions of the panel of experts on the problem being encountered, through the
questionnaires, often sent through mail. In other words, a set of opinions pertaining
to a specific problem, obtained in writing usually through questionnaires from several
experts in the specific field is called as a Delphi technique.
In a Delphi technique, the group facilitator or the change agent aggregates all the
anonymous opinions received through the questionnaires, sent two or three times to
the same set of experts. The experts are required to give justification for the answers
given in the first questionnaire and on the basis of it, the revised questionnaire is
prepared and is again sent to the same group of experts.

5.2.4. Sales Force Composite Method

 The Sale Force Composite Method is a sale forecasting method wherein the sales
agents forecast the sales in their respective territories, which is then consolidated at
branch/region/area level, after which the aggregate of all these factors is
consolidated to develop an overall company sales forecast.

5.2.5. End-use Method

Under the End Use Method, also called as the User Expectation Method, the list of
several users of the product under forecasting is prepared first, who are then asked
about their individual purchasing patterns and then from such information the
complete product demand forecast is ascertained. Simply, the method used to know
the buyer’s likely consumption of the product, his future buying plans and likely the
market share of the company is called as end use method. Since the intentions of the
buyers are taken into the consideration, this method is also called as the “Survey of
Buyer’s Intentions”.
The End Use Method is particularly suitable for Industrial Products such as raw
materials or intermediary products because unlike consumer goods these are limited
in number and can be surveyed exhaustively. Also, the buyers are substantial in the
case of the industrial goods, whereas in the case of the consumer goods, several
thousands of buyers contribute towards the total sales, where each accounts for a
very small quantity.

5.2.6. Market Share Method

The Market Share Method is yet another sales forecasting method, wherein the
company first works on the industry forecast, then applies the market share factor
and then finally arrive at the company’s forecast. Simply, the company’s sales
forecast is deduced from the data gathered on the industry sales and from the
market share of the company.
The market share of the firm is the key factor in this method, and it can be
determined through the past sales records, company’s present position – its plans for
future, competitor’s sales records – its plans and marketing strategies, customer’s
brand preferences, etc.

5.2.6.1. All this information can be collected through a detailed marketing audit.
What is Marketing Audit? A marketing audit is the systematic and
comprehensive analysis and interpretation of the business marketing
environment (both internal and external), firm’s goals, objectives,
strategies and principles that help in identifying the area of problem and
recommending the solutions thereto.Through a marketing audit, the firm
can realize its relative brand image, market share and strengths and
weaknesses with respect to its competitors in the industry. Not only
through the marketing audit the firm can access to the competitor’s
plans, policies and activities through a market intelligence system.
5.2.6.2. What is Market intelligence system? It refers to the systematic collection
of the relevant marketing data from all the possible sources and then
converting it into the meaningful information. Through this, the complete
information about the competitors could be gained from the channel
partners, who are closely associated with the market and have all the
details about all the industry players.

Thus, the market share method includes the complete study of the
industry forecast and the market share of the company, that helps in
deducing the final company’s sales forecast. This conversion from
industry forecast to the company specific sales forecast is quite difficult
 and hence requires the expertise. Once the market share is determined,
the data is consolidated to reach to the company’s forecast.

5.2.6.3. The limitations of the market share method are:

5.2.6.3.1. The conversion of industry forecast to the company
specific sales forecast is quite tedious and hence requires
the expertise.
5.2.6.3.2. It is a complex process as the entire business environment
is scrutinized before reaching to the final forecast.
5.2.6.3.3. The wrong information about the marketing environment
may result into a wrong sales forecast.
5.2.6.3.4. One of the advantages of this method is that it uses the
market share to reach to the company’s sales forecast,
and this market share is deduced from a detailed study of
the business marketing environment and hence, is
considered to be the most reliable forecast.
5.2.7. Substitution Method
In Substitution Method or a Replacement Method, the management first works on
the sales forecast of the existing product, using any methods of forecasting and then
uses this data to forecast the sales of a new product that will be launched as a
substitute for the old product.

Simply, the method used to forecast the sales of a new product on the basis of the
sales forecast of the old existing product in the market is called as the substitution
method. This method is based on the premise that the new product often displaces
the old product, or old use patterns and hence the buying patterns of the old product
can be studied thoroughly to estimate the demand for its substitute product.

Under this method, first of all, the marketing team works on the sales forecast of the
existing products and then on the basis of that prepares the list of products and
markets that are open for the substitution by the new product. The estimated
demand for the existing product can help in determining the maximum limit for the
demand for the new product in the same category. However, it has been seen in
many cases that the new product might not displace the old product totally and in all
the categories of uses. This can be substantiated through an example given below:

Example: Nylon was very new to the Indian markets and the promoters of such
product knew that they will be able to displace the old use patterns of cotton, rayon,
jute and the like but were not certain about its precise quantity that will bring such a
change. By doing so, it was realized that however, the nylon was not able to take up
the 100% share in either of the segments, but was able to grab a reasonable market
share in the textile and tyre industries.

One of the prime advantages of the substitution method is the companies who are
planning to launch a new product can use this method to forecast the sales of a new
product on the basis of the sales of the existing product in the same category.

However, this method does have loopholes, firstly, it is not necessary that the
demand forecasted for a new product on the basis of an existing product stand true
in the real situations. Secondly, it has been seen that the new product does not
totally displace the old product and hence the planned market share could not be
achieved. Finally, the method requires a lot of study of the existing market and the
 old product before a new product could be launched and hence requires a team of
experts for this.

5.2.8. Market Test

The Market Test is an experiment conducted before the commercialization (launch)
of a new product to find out the facts about the product such as Is the product the
right one? Is the product reasonably priced? etc. On the basis of such findings, the
firm may either accept or drop the product idea.

The Test Marketing is one of the methods used under the Market Test. What is Test
Marketing? The Test Marketing is yet another method of sales forecasting, wherein
the new product is launched in the selected geographical areas, the representative of
the final market, to check the viability of the product and its demand among the
selected group of people.

The test marketing is the most reliable method of sales forecasting wherein the
product is launched in a few selected cities/town to check the response of customers
towards the product. On the basis of such response, the firm decides whether to
commercialize the product on a large scale or not. The test marketing must be
performed with utmost care; the marketers must select those areas for testing that
depicts the true image of the overall market.

The test marketing is the common method of sales forecasting and is often employed
by the firms due it several benefits. Firstly, it helps the firms to test and try the
product beforehand. Secondly, test marketing enables the firms to look at the pros
and cons of the product at the early stage and make decisions on whether to
continue with the product or drop the product idea very much before the
commercialization.

Though the test marketing proves to be a very helpful sales forecasting tool, it is not
free from the limitations. Firstly, it is a time-consuming process as it is required to be
carried out for a long period of time in order to obtain the reasonable results.
Secondly, due to such a long time gap, the competitors may manipulate the test
marketing process and make the results unreliable. Thirdly, there are chances of the
wrong selection of the geographical areas that might not represent the true picture
of the whole market.

5.2.9. Analytical and Statistical Methods

There are several Analytical and Statistical methods of sales forecasting, that a firm
can employ on the basis of its forecasting needs. These methods are listed below:
5.2.9.1. Simple Projection Method: Under this method, the firm forecast the
current year’s sales by simply adding up the expected growth rate to the
last year’s sales. This growth rate can be determined by either
considering the industry’s growth rate or by taking the growth rate
achieved by the top company (leader) in the industry. Often the
companies use the following formula to arrive at the sales projection:

Next year’s sales = (Current Year’s Sales)2 / Last Year’s Sales

This method proves to be fruitful for only those firms whose sales are
relatively stable or show an increasing trend.
5.2.9.2. Extrapolation Method: The extrapolation method is again a project/trend
method, but is quite complex than the simple projection method. Here,
the sales figures of past several years are plotted on graph paper and the
points are connected via a line which is further stretched to obtain the
future sales figures.It is assumed that the future sales will follow the
same pattern as followed by the past sales trend and observes the same
curve on a graph. This method can be applied effectively where the firms
have the steady past sales and expect no abrupt disruptions in the future.

5.2.9.3. Moving Averages Method: The moving averages method is used to

predict future sales more accurately by eliminating the effects of
seasonality and other irregular trends in sales. This method provides the
time series of moving averages. Here, each time series point is the
arithmetical or the weighted average of a number of preceding
consecutive points. Minimum two years past sales data are required in
case the seasonal effects on the sales persists.

5.2.9.4. Exponential Smoothing: The exponential smoothing is yet another

projection method and works on the similar guidelines of the moving
averages methods. Here also, each point of time series is the arithmetical
average of preceding consecutive points and where the heaviest weight
is assigned to the most recent data. This method is often used in the
situation where the data under forecast is large. The exponential
smoothing has the stable response to change, and the response can be
changed accordingly.

5.2.9.5. Time Series Analysis: The time series analysis is yet another most
extensively used sales forecasting method wherein the sales of several
continuous years are chronologically ordered, and the pattern is studied
thereafter. The time series method helps in analyzing the following:

5.2.9.5.1. The Seasonal Variation, i.e. the change in the sales due to
the seasonal variations.
5.2.9.5.2. The Cyclical Patterns, i.e. the sales pattern that repeat
itself after every year.
5.2.9.5.3. Trends in Data
5.2.9.5.4. The Growth Rate, i.e. the rate at which the sales grow
with each year.
This method is based on the assumption that the factors affecting the
sales do not change much over a period of time and hence the future is
derived from the past.

5.2.9.6. Regression Analysis: This method is adopted to study the functional

relation of those factors that influence sales. The sale is the dependent
variable while the factors that influences sales are explanatory or causal
variables. Thus, in this method, the relationship between the dependent
variable (sales forecast) and the causal variable is measured. The
following regression equation shows the different relationships between
the sales and the factors influencing the sales:
Y = a+b1x1+b2x2+…..+bnxn
Where, Y = sales,
x1,x2 …..xn represents the causal factors
 b1,b2….bn are the constants that show the extent to which the causal
factors contribute towards the sales.

5.2.9.7. Complex Econometric Models: This is an another analytical method of

sales forecasting wherein the economic theories are expressed in the
mathematical terms so that these can be verified by the statistical
methods. This method is used to predict the future events by measuring
the impact of one economic variable upon another.The econometric
model depends on the following principles:
5.2.9.7.1. Sales of any product depend on several variables.
5.2.9.7.2. The sale is the dependent variable while the casual factors
are the independent variables.
5.2.9.7.3. There is a constant interaction between the sales and the
causal factors.
5.2.9.7.4. Also, there is a constant interaction among the
independent variables themselves.
5.2.9.7.5. There are two types of independent variables: exogenous
variables (constitutes non-economic forces, such as
nature, or politics) and endogenous variables (economic
forces, such as income, price, employment, etc.)
5.2.9.7.6. The interrelationship between sales and the independent
variables can be determined through the statistical
analysis of the past data.

Thus, a company can use either of these methods to forecast the demand for goods
and services and set the sales objectives accordingly.

5.2.10. Market Survey Method

Market Survey is another most widely used sales forecasting method which is used to
gather information related to the market that cannot be collected from the
company’s internal records or the external published sources of data.

The market survey method is typically employed in the situations where the primary
data or first-hand data is required to forecast the demand. Such situation exists when
the company wants to introduce a new product or a new variant into the market;
then it resorts to the primary data.

Similarly, the company entering into a new business relies on the market survey to
forecast its demand or sales. Since, there are no past records available with the firm,
so it has to collect information from the market or from the customers directly to
forecast the sales. Usually, the companies conduct the survey among the sample of
consumers to understand their purchasing capacity, attitudes and purchasing habits.

Sometimes, the channel partners are also surveyed to know their attitudes, likely
purchases, and the overall industry trend. Often the market survey is used as a
synonym of market research or market analysis, but this is not correct. In fact, the
market survey is one of the techniques being used in the market research.

The main advantage of the market survey method is that it helps in gathering the
original or primary data specific to the problem concerned. But however, a collection
of primary data could be time-consuming as well as expensive.
 5.3. The future is uncertain, and the sales cannot be predicted with certainty, and hence the
management must study the following factors that influence the sales forecast:
5.4. The general economic conditions Viz inflation and a recession that has a considerable
impact on the sales. The manager must study thoroughly about the political, economic,
social, technological changes to forecast sales more accurately. Here, the past market
trends, consumer’s preferences, national income, disposable personal income, etc. must
be considered before projecting the sales for the successive period.
5.5. The demographics of consumers such as age, sex, education, occupation, income, etc.
must be given due consideration before projecting the demand for certain goods and
services. The social groups such as family or peers also influence the purchase behavior
of an individual. Thus, all these factors must be studied carefully before estimating the
sales for a given period.
5.6. There are several competitors in the market that deals in similar kinds of products and
services. Thus, the marketing team must study their pricing strategy, product design,
technological improvements, promotional schemes, advertising campaign, etc. very
carefully so as to meet the competition. Also, the firm must keep a close watch on
the new entrant, who can alter the market share of the existing firms significantly.
5.7. The changes within the firm can also affect the sales. Such as changes in the advertising
campaigns, promotional schemes and pricing policy can bring a significant change in the
sales figure. Thus, the management is required to study every change in relation to its
effect on the overall sales of the firm.

Thus, the sales forecasting is a backbone of marketing that provides not only the sales figure but also
helps the management to identify the customer’s needs, tastes, and preferences. It also helps in
exploring the market opportunities that could be matched with the company’s marketing efforts.

What is a Key Performance Indicator (KPI)?

Key Performance Indicators (KPIs) are the critical (key) indicators of progress toward an intended
result. KPIs provides a focus for strategic and operational improvement, create an analytical basis for
decision making and help focus attention on what matters most. As Peter Drucker famously said,
“What gets measured gets done.”

Managing with the use of KPIs includes setting targets (the desired level of performance) and
tracking progress against that target. Managing with KPIs often means working to improve leading
indicators that will later drive lagging benefits. Leading indicators are precursors of future success;
lagging indicators show how successful the organization was at achieving results in the past.

Good KPIs:

 Provide objective evidence of progress towards achieving a desired result

 Measure what is intended to be measured to help inform better decision making
 Offer a comparison that gauges the degree of performance change over time
 Can track efficiency, effectiveness, quality, timeliness, governance, compliance, behaviors,
economics, project performance, personnel performance or resource utilization
 Are balanced between leading and lagging indicators

The relative business intelligence value of a set of measurements is greatly improved when the
organization understands how various metrics are used and how different types of measures
contribute to the picture of how the organization is doing. KPIs can be categorized into several
different types:
 1. Inputs measure attributes (amount, type, quality) of resources consumed in processes that
produce outputs
2. Process or activity measures focus on how the efficiency, quality, or consistency of specific
processes used to produce a specific output; they can also measure controls on that process,
such as the tools/equipment used or process training
3. Outputs are result measures that indicate how much work is done and define what is
produced
4. Outcomes focus on accomplishments or impacts, and are classified as Intermediate
Outcomes, such as customer brand awareness (a direct result of, say, marketing or
communications outputs), or End Outcomes, such as customer retention or sales (that are
driven by the increased brand awareness)
5. Project measures answer questions about the status of deliverables and milestone progress
related to important projects or initiatives

Every organization needs both strategic and operational measures, and some typically already exist.
Figure 2 depicts strategic, operational and other measures as described below:

1. Strategic Measures track progress toward strategic goals, focusing on intended/desired

results of the End Outcome or Intermediate Outcome. When using a balanced scorecard,
these strategic measures are used to evaluate the organization’s progress in achieving its
Strategic Objectives depicted in each of the following four balanced scorecard perspectives:  
a. Customer/Stakeholder
b. Financial
c. Internal Processes
d. Organizational Capacity
2. Operational Measures, which are focused on operations and tactics, and designed to inform
better decisions around day-to-day product / service delivery or other operational functions
3. Project Measures, which are focused on project progress and effectiveness
4. Risk Measures, which are focused on the risk factors that can threaten our success
5. Employee Measures, which are focused on the human behavior, skills, or performance
needed to execute strategy.
6. An entire family of measures, including those from each of these categories, can be used to
help understand how effectively strategy is being executed.  
 GOOD AND SERVICES PROCESS

Good and services Selection:

 Organizations exist to provide goods or services to society

 Great products are the key to success
 Top organizations typically focus on core products
 Customers buy satisfaction, not just a physical good or particular service
 Fundamental to an organization's strategy with implications throughout the operations function
 Goods or services are the basis for an organization's existence
 Limited and predicable life cycles requires constantly looking for, designing, and developing new
products
 New products generate substantial revenue

Product Decision:

The objective of the product decision is to develop and implement a product strategy that meets the
demands of the marketplace with a competitive advantage.

Product life cycle

May be any length from a few days to decades. The operations function must be able to introduce new
products successfully

1. Introduction
2. Growth
3. Maturity
4. Decline

1. Introductory Phase : Fine tuning may warrant unusual expenses for

 Research
 Product development
 Process modification and enhancement
 Supplier development
2. Growth Phase
 Product design begins to stabilize
 Effective forecasting of capacity becomes necessary
 Adding or enhancing capacity may be necessary
3. Maturity Phase
 Competitors now established
 High volume, innovative production may be needed
  Improved cost control, reduction in options, paring down of product line
4. Decline Phase
 Unless product makes a special contribution to the organization, must plan to terminate
offering

Negative cash flow Introduction Growth Maturity Decline Sales,cost,andcashflow Cost of development and
production Cash flow Net revenue (profit) Sales revenue Loss Figure 5.2

Product Value Analysis

 Lists products in descending order of their individual dollar contribution to the firm
 Lists the total annual profit contribution of the product
 Helps management evaluate alternative strategies

Generating new product

1. Understanding the customer
2. Economic change
3. Sociological and demographic change
4. Technological change
5. Political and legal change
6. Market practice, professional standards, suppliers, distributors

Product Development
 The creation of products with new or different characteristics that offer new or additional benefits
to the customer.
 Product development may involve modification of an existing product or its presentation, or
formulation of an entirely new product that satisfies a newly defined customer want or market
niche.

Issue for product Development

 Robust design: Products are designed so that they may be manufactured uniformly and
consistently despite adverse manufacturing and environmental conditions.
 Time-based competition: Product life cycles are becoming shorter. Faster developers of new
products gain on slower developers and obtain a competitive advantage
 Modular design : Products designed in easily segmented components known as modular designs,
Adds flexibility to both production and marketing (Examples: , Airbus – wings , Fast food – buns,
vegetables, etc. , Computers)
 Computer-aided design: Designing products at a computer terminal or work station . Design
engineer develops rough sketch of product . Uses computer to draw product, Often used with CAM
(Computer Aided Manufacturing) © 1995 Corel Corp.
 Value analysis Focuses on design improvement during production , Seeks improvements leading
either to a better product or a product which can be more economically produced
  Environmentally friendly design Benefits : Safe and environmentally sound products ,Minimum
raw material and energy waste ,Product differentiation , Environmental liability reduction, Cost-
effective compliance with environmental regulations , Recognition as good corporate citizen
 “Green” manufacturing: Make products recyclable, Use recycled materials , Use less harmful
ingredients , Use lighter components , Use less energy  Use less material

Design Capacity, Effective Capacity, Utilization and Efficiency Capacity

Planning (CP), and Capacity Requirement Planning (CRP)

Capacity is the throughput or number of units a facility can hold, receive, store, or
produce in a period of time. Design capacity is the theoretical maximum output of a
system in a given period under ideal conditions. For many companies designing
capacity can be straightforward, effective capacity is the capacity a firm expects to
achieve given its current operating constraints. It is often lower than design capacity
because the facility may have been designed for an earlier version of the product or a
different product mix than is currently being produced.

Capacity available is the capacity of a system or resource to produce a quantity of

output in a given time period. It is affected by (1) product specifications change, the
work content (work required to make the product) will change, thus affecting the
number of units that can be produced,(2) product mix where the product has its own
work content measured in the time it takes to make the product. If the mix of products
being produced changes the total work content (time) the mix will change, (3) plant
and equipment which relates to the methods used to make the product, and (4) work
effort, which relates to the speed or pace at which the work is done; if the workforce
changes pace, perhaps producing more in a given time, the capacity will be altered.

To measure capacity we need units of output. If the variety of products produced at a

work center or in a plant is not large, it is often possible to use a unit common to all
products. We also need standard time which is expressed as the time required for
making the product using a given method of manufacturing. Utilization is the
available time that is the maximum hours we can expect from the work center; the
percentage of time that the work center is active. Efficiency is how the work center is
used in comparison with standard.

Available time is the number of hours a work center can be used.

Available time = the number of machines x the number of workers x the hours of
operations.

The other measures:

1. Utilization = Actual output / Design capacity, this is a percent of design

capacity. Also measured as:
Utilization = (Hours actually worked / available hours) x 100%
2. Efficiency = Actual output / Effective capacity, this is an actual output as a
percent of effective capacity. Also measured as:
Efficiency = (Actual rate of production / Standard rate of production) x 100%

These measures are important for an operations manager, but they often need to know
the expected output of a facility or process. Also referred to as rated capacity:
Rated Capacity = (Available time) x (Utilization) x (Efficiency)
Capacity considerations for a good capacity are:

1. Forecasts demand accurately

2. Understand the technology and capacity increments
3. Find the optimum operating level (volume)
4. Build for change

Even with good forecasting and facilities built in to the forecast, there may be a poor
match between the actual demand that occurs and available capacity. There are some
options for managing demand:

1. Demand exceeds capacity by raising prices, or scheduling long lead times.

2. Capacity exceeds demand by price reductions or aggressive marketing.
3. Adjusting to seasonal demands or cyclical pattern of demands.
4. Tactics for matching capacity to demand by

a. Making staffing changes (increasing or decreasing the number of

employees or shifts)
b. Adjusting equipment (purchasing additional machinery or selling or
leasing out existing equipment)
c. Improving processes to increase throughput
d. Re-designing products to facilitate more throughput
e. Adding process flexibility to better meet changing pr5oduct preferences
f. Closing facilities
Supply Chain and Supply Chain Management

What is Supply Chain?

The business of supplying products to customers consists of a long chain of events. It starts with
sourcing of raw materials and ends with delivery of products to a retailer or customer. This chain of
events is called the supply chain.

The Basic stages of a Supply Chain are the following:

Elements of a Supply Chain

 Sourcing of raw materials, parts and sub-assemblies

 Procurement of raw materials, parts and sub-assemblies
 Shipping of items to manufacturing sites
 Production of items
 Shipping of items to warehouses
 Storage or inventory of items
 Distribution of products to retailers/ customers
 Providing customer service, product- repair and return services