DECISION MAKING IN PRODUCTION

The success of supply chain management depends on the strategic decisions made at various Stages of the supply chain, and especially at that part of the chain that affects the actual Production. In view of this, the availability of information required to make optimal decisions becomes critical. With the advent of innovations in information technology (IT) and the increased use of enterprise resource planning (ERP) systems, the situation is vastl y improved in many areas. However, there are some areas such as making decisions on dropping/adding a product or business segment, replacing/keeping equipment or implementing alternate processes/type of technology automated systems are not that effective. In this paper we examine the information requirements for making these strategic decisions in the production environment. INTRODUCTION In order for managers to accurately evaluate the profitability of their operations, they must receive useful revenue and cost information on a timely basis. Major changes in cost accounting occurred in the 1980s and 1990s (Weber, 1997) and (Cooper, 1998). Manufacturers converted tothe Just-In-Time (JIT) approach to manufacturing and the accountants changed their approach to gathering cost information. The implications of cost management from a total supply chain perspective are being considered increasingly by managers. Today, organizations are expanding the scope of cost-reduction initiatives to include both upstream (supplier) and downstream (customer) members of their supply chains (Handfield, 2002). According to Barry [Barry (2003)], by optimizing the financial supply chain, supply managers and their enterprises can reduce their working capital needs by as much as 20-25 percent by using better invoicing control and cash-flow management. Before the introduction of e-commerce, in order to run an efficient physical supply chain, it was necessary to encounter excess working inventory and excess working capital to cope with the uncertainty of demand. The strategy consisted of having excess inventory, capacity and labor to compensate demand forecasting limitations, inefficient distribution and lack of supply chain visibility (Barry, 2003). With the increased use of the Internet and the Extensible Markup Language, the degree of automation in supply chain 575 transactions is bound to go up. To minimize disruptions during the change over to automation, it is necessary that companies must incorporate e-business concepts into their overall business strategies. Prior to the arrival of JIT manufacturing, the accounting function tracked inventories from receipt until the final units were produced. Theoretically in a JIT environment raw materials are received only when needed and there is little or no work in process used as buffers between work stations. To meet the needs of the new environment, the accounting profession developed a cost accounting approach called Backflush Accounting. In this approach, the accountants would no longer track inventories. Rather, the manufacturing people would instead provide reports that the accountants then would use to prepare the statements that would describe the movement of inventories through the manufacturing process. A classic example was the Hewlet t Packard Companys adoption of JIT. HP eliminated receiving reports, material requisitions, and work orders. Thus, most of the documentation and inventory reporting that management needed was eliminated. This did not remove managements need for real time information about their inventory. Since the requirement still existed, HP instituted an ABC inventory control system to provide the needed information and periodic physical counts were made to determine the number of units on hand (Kaplan, 1997), (Weygandt, 2002), (Hongren, 2000), (Edmonds, 2003), (Garrison, 2003), and (Neuman, 1986). Today, the managerial accounting function is promoting Activity Based Costing (ABC) as theappropriate means for valuing inventories. Financial Accounting Standards require t hat all inventory be valued at their full cost of production. In this approach, costs generated by activities that are not directly connected with manufacturing are allocated to the cost of the final product. Where only one product is produced in a plant, the identification of a unit cost during a given time period is rather simple. One just has to divide the total overhead incurred by the total units produced to arrive at the overhead allocation per unit produced. The allocation is more complex when the manufacturing facility is a multi-product plant. Then, costs are allocated through the use of cost drivers. The cost driver could be something like the number of purchase orders generated in the purchasing department. In this way a portion of the purchasing departments costs will be allocated to the value of the inventory (Weygandt, 2002), (Hongren, 2000), (Atkinson, 2001), (Edmonds, 2003), and (Garrison, 2003). EXAMPLE OF ABC ACCOUNTING VERSUS TRADITIONAL METHOD The ABC system of overhead cost allocation has simplified and possibly improved the determination of more accurate product costs for inventory purposes. However, it is highly questionable that the ABC system has in effect identified the true cause of factory overhead costs and as a result identified the cause and effect relationship between units produced and those costs. By definition, overhead is a capacity cost that is an indirect cost of goods manufactured and can never be truly identified with a particular unit of product. To further compound this problem of relating plant burden costs to units produced, researchers are reporting that most factory overhead costs are fixed in nature (Hongren, 2000). With the increase in more automated factories, there are fewer costs of production directly related to units produced.For the valuation of inventories, the ABC system of cost accounting is a step in the right direction. From a financial accounting

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perspective, improved inventory valuation should enhance the correctness of the stockholders report. The new system, however, is not a great leap forward in providing information to managers for the strategic decision making process. Management is faced with numerous strategic decision making situations. Chief among these include: 1. Special order 2. Drop/add a product or business segment 3. Replace/keep equipment 4. Alternate processes/type of technology 5. Eliminate an unprofitable segment 6. Make or buy a component 7. Analysis of performances (margin analysis) All of these decisions require that cost information must be provided on a fixed and variable cost basis. A strategic decision of importance to decision makers is the possible elimination of a product in a multi-product production operation. The product may be unprofitable from a full cost basis. In this decision, however, the question to be answered is the effect on profitability by the elimination of the product. As long as a product has a positive contribution margin (price variable cost per unit), it is reducing the fixed cost burden that ot her products would have to bear. An example would be the overhead burden from the typical purchasing department of today. In these operations, organizations are using the Internet (fixed cost), computers (fixed cost), and B2B or ERP (Enterprise Resource P lanning) software (fixed cost) systems to provide material resources for the production process. Purchase orders are typically driven by an ERP system and are released to vendors over the Internet. The primary purpose of people in the purchasing department is to ensure that the system continues to operate. In short the system is automated and people are primarily observers. As long as the product is making a positive contribution, it is enhancing the profitability of the organization. The question to be answered at his point is any replacement product going to improve profitability to a greater extent then the product currently being produced. If not and the current product has a positive contribution margin it should be kept even though it is not profitable on a full cost basis. For example, if a company decides to drop a losing division, the basic tenet of ABC that all costs are variable could bring a serious negative impact to the company instead of the proposed benefit of eliminating the loser. If the production has a positive contribution margin and fixed costs are not discretionary, the result will be a lowering of company profits by eliminating the division showing a net loss. In Exhibit A, Division X has a net loss of $100,000 and a segment margin o f a positive $100,000. If Division X is eliminated, the allocated common costs will go on and be assigned to other products. The result may be to create additional Divisions with a net loss position. To compound this situation further, if Division Xs direct fixed costs are not discretionary but committed, the company will have to continue bearing the direct fixed costs in some manner. The actual result will be to reduce overall profitability of the company by the amount of the lost contribution margin, $400,000. 577 Exhibit A Division X Income Statement For the Year Ended 12/31/05 Sales $1,000,000 Variable Costs 600,000 Contribution Margin $ 400,000 Direct Fixed Costs 300,000 Segment Margin $ 100,000 Allocated 200,000 Net Loss $ 100,000 Another type of a strategic decision making problem would be the selection of the type of technology to be used in an operating process. The decision in this case would be to select between a labor intensive and a capital-intensive process. In the labor-intensive process, fixed costs would be low and labor costs per unit of production would be high. While in the capitalintensive process, fixed costs would be high and labor costs per unit of production would be low. Each would have an advantage given a particular environment. The critical decision would depend on the anticipated demand for the product. In a high demand situation, the capitalintensive process would result in lower total costs. In a low demand situation, the laborintensive process would result in lower total costs. Thus, the important factor in this decision situation would be to match the relevant technology with the anticipated demand. INFORMATION INFRASTRUCTURE In each of the decisions, the information system for supporting strategic decision -making must provide information that will allow managers to make these decisions correctly. The current use of financial accounting

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data does not adequately support this process. A mistake that many people make is the assumption that all costs are variable in the long run. In the long run all costs are changeable. The short run definition of variable costs implies that there are different possible operating levels with the given set of production facilities. In the long run, managers have choices about the fixed factors that they are going to operate in the short run. They can make decisions with regard to plant capacity, technology, location, etc. But, once these decisions have been made, managers must recognize that while their strategic decisions are made for the longterm, organizations operate in the short-term. As a result, managers must understand that some costs are variable in the short-term while others are fixed. Second, the concept of distinguishing between committed and discretionary fixed costs must be brought into the analysis. If a fixed cost can be eliminated without penalty to the firm, it is a discretionary fixed cost. However, many fixed costs are not discretionary. They cannot be removed without penalty and the firm must continue to incur them in one form or another. The practice of transferring them from the operations accounts to the income statement does not truly reduce the total expense. It simply advances the recognition of it. A classic example of this is transferring production from one plant to another and closing the first plant. In accounting, the cost of this closing is not charged hand it makes operating costs look smaller, but the reality is a huge expense and a significant impact on current income. CONCLUSION As supply chain management becomes more involved in strategic decisions, it is critical that we have reliable information sources (Ogden, 2005). Jim Shepherd of AMR Research states the following in a recent report: The notion that a company can transform itself into an e-business by simply using a piece of software and adding it to its existing infrastructure is wrong and dangerous. In order to fully realize the positive impact of IT, it is necessary to integrate physical, informational and financial supply chains. In this paper, we have studied several strategic decision making scenarios in the production environment and developed a framework that enables extraction of relevant information that is needed for optimal decision making. Future research involves the study of RFID technology in the context of inventory management and its effect on some types of strategic decision making.

Decision making in production DECISION-MAKING IN PRODUCTION Operations managers are required to make a series of decisions in the production function They plan, organize, staff, direct and control all the activities in the process of converting all the inputs into finished products. At each level, operating managers are expected to make decisions and implement them too. The decisions made by operations managers about the activities of production systems tend to fall into three general categories viz., y Strategic decisions relating to products ,processes and manufacturing facilities. These decisions are major ones, having strategic importance and long-term significance for the organization. Operating decisions relating to planning production to meet demand. These decisions are necessary in order to ensure that ,the ongoing production of goods and services meets the market demand and provides reasonable profits for the organization. Control decisions relating to planning and controlling operations. These decisions concern the day to day activities of workers ,quality of products and services ,production and overhead costs and maintenance of machines.

The table given below shows the type of decisions and the areas of their involvement Type of decisions Area of Involvement <span style="mso-spacerun: yes"> Nature of Activities</span

DECISION MAKING IN PRODUCTION

I. Strategic Decisions (Planning Products, Processes and <span style="mso-spacerun: yes"> </span Facilities)<span style="mso-spacerun: yes"> </span

1.Production Processes 2.Production Technology 3.Facility Layout 4.Allocating Resources to Strategic Alternatives 5.Long Range Capacity

Developing long range production plans Including process design Selecting and managing production Technology. Planning the arrangement of facilities Planning for the optimal distribution of Scare resources among product lines or

Planning and Facility Location

Business units. Answering the hoe much and where questions about long range production capacity.. Aggregate planning and master Production scheduling

II. Operating Decisions (Planning Production to Meet Demand)

1.Production Planning Systems 2.Independent Demand Inventory Demand 3.Resource requirements Planning Systems 4.Shop Floor Planning and Control 5.Materials Management 1.Productivity and Employees 2.Total Quality Control 3.Project Planning and Control Techniques 4.Maintenance Management

Planning and controlling finished goods Inventories. Planning materials and capacity Requirements. Short range decisions about what to produce and when to produce at each Work centre. Managing all facts of materials system. Planning for the effective and efficient Use of human resources in operations. Planning and controlling the quality of products and services. Planning and controlling projects. Planning for maintaining the machines and facilities of production

III Control Decisions (Planning and Controlling Operations)

and Reliability Decision Making Objectives must first be established

DECISION MAKING IN PRODUCTION

Objectives must be classified and placed in order of importance Alternative actions must be developed The alternative must be evaluated against all the objectives The alternative that is able to achieve all the objectives is the tentative decision The tentative decision is evaluated for more possible consequences The decisive actions are taken, and additional actions are taken to prevent any adverse consequences from becoming problems and starting both systems (problem analysis and decision making) all over again There are steps that are generally followed that result in a decision model that can be used to determine an optimal production plan. [5] Decision-Making Stages Developed by B. Aubrey Fisher, there are four stages that should be involved in all group decision making. These stages, or sometimes called phases, are important for the decision-making process to begin Orientation stage- This phase is where members meet for the first time and start to get to know each other. Conflict stage- Once group members become familiar with each other, disputes, little fights and arguments occur. Group members eventually work it out. Emergence stage- The group begins to clear up vague opinions by talking about them. Reinforcement stage- Members finally make a decision, while justifying themselves that it was the right decision. [edit] Decision-Making Steps When in an organization and faced with a difficult decision, there are several steps one can take to ensure the best possible solutions will be decided. These steps are put into seven effective ways to go about this decision making process (McMahon 2007). The first step - Outline your goal and outcome. This will enable decision makers to see exactly what they are trying to accomplish and keep them on a specific path. The second step - Gather data. This will help decision makers have actual evidence to help them come up with a solution. The third step - Brainstorm to develop alternatives. Coming up with more than one solution ables you to see which one can actually work. The fourth step - List pros and cons of each alternative. With the list of pros and cons, you can eliminate the solutions that have more cons than pros, making your decision easier. The fifth step - Make the decision. Once you analyze each solution, you should pick the one that has many pros (or the pros that are most significant), and is a solution that everyone can agree with. The sixth step - Immediately take action. Once the decision is picked, you should implement it right away. The seventh step - Learn from, and reflect on the decision making. This step allows you to see what you did right and wrong when coming up, and putting the decision to use. 8.6 PRODUCTION PLANNING AND CONTROL Once the entrepreneur has taken the decisions regarding the product design and production processes and system, his next task is to take steps for production planning and control, as this function is essentially required for efficient and economical production. One of the major problems of small scale enterprises is that of low productivity small scale industries can utilise natural resources, which are otherwise lying.Small scale sector can play an important role, similar to the one played by small scale industries in other developed countries. Planned production is an important feature of the small industry. The small entrepreneur possessing the ability to look ahead, organize and coordinate and having plenty of driving force and capacity to lead and ability to supervise and coordinate work and simulates his associates by means of a programme of human relation and organization of employees, he would be able to get the best out of his small industrial unit.

DECISION MAKING IN PRODUCTION

Gorden and Carson observe production; planning and control involve generally the organization and planning of manufacturing process. Especially it consists of the planning of routing, scheduling, dispatching inspection, and coordination, control of materials, methods machines, tools and operating times. The ultimate objective is the organization of the supply and movement of materials and labour, machines utilization and related activities, in order to bring about the desired manufacturing results in terms of quality, quantity, time and place. Production planning without production control is like a bank without a bank manager, planning initiates action while control is an adjusting process, providing corrective measures for planned development. Production control regulates and stimulates the orderly how of materials in the manufacturing process from the beginning to the end. 8.6.1 BENEFITS TO SMALL ENTREPRENEUR Production planning and control can facilitate the small entrepreneur in the following ways (1) Optimum Utilisation of Capacity: With the help of Production Planning and Control [PPC] the entrepreneur can schedule his tasks and production runs and thereby ensure that his productive capacity does not remain idle and there is no undue queuing up of tasks via proper allocation of tasks to the production facilities. No order goes unattended and no machine remains idle. (2) Inventory control: Proper PPC will help the entrepreneur to resort to just - in- time systems and thereby reduce the overall inventory. It will enable him to ensure that the right supplies are available at the right time. (3) Economy in production time: PPC will help the entrepreneur to reduce the cycle time and increase the turnover via proper scheduling. (4) Ensure quality: A good PPC will provide for adherence to the quality standards so that quality of output is ensured. To sum up we may say that PPC is of immense value to the entrepreneur in capacity utilization and inventory control. More importantly it improves his response time and quality. As such effective PPC contributes to time, quality and cost parameters of entrepreneurial success. 121 8.6.2 STEPS OF PRODUCTION PLANNING AND CONTROL Production Planning and Control (PPC) is a process that comprises the performance of some critical; functions on either side, viz., planning as well as control. Production planning production control y Planning y Routing y Scheduling y Loading production control y Dispatching y Following up y Inspection y corrective Production planning: Production planning may be defined as the technique of foreseeing every step in a long series of separate operations, each step to be taken at the right time and in the right place and each operation to be performed in maximum efficiency. It helps entrepreneur to work out the quantity of material manpower, machine and money requires for producing predetermined level of output in given period of time. Routing: Under this, the operations, their path and sequence are established. To perform these operations the proper class of machines and personnel required are

DECISION MAKING IN PRODUCTION

also worked out. The main aim of routing is to determine the best and cheapest sequence of operations and to ensure that this sequence is strictly followed. In small enterprises, this job is usually done by entrepreneur himself in a rather adhoc manner. Routing procedure involves following different activities. (1) An analysis of the article to determine what to make and what to buy. (2) To determine the quality and type of material (3) Determining the manufacturing operations and their sequence. (4) A determination of lot sizes (5) Determination of scrap factors (6) An analysis of cost of the article (7) Organization of production control forms. Scheduling: It means working out of time that should be required to perform each operation and also the time necessary to perform the entire series as routed, making allowances for all factors concerned. It mainly concerns with time element and priorities of a job. The pattern of scheduling differs from one job to another which is explained as below: Production schedule: The main aim is to schedule that amount of work which can easily be handled by plant and equipment without interference. Its not independent decision as it takes into account following factors. (1) Physical plant facilities of the type required to process the material being scheduled. (2) Personnel who possess the desired skills and experience to operate the equipment and perform the type of work involved. (3) Necessary materials and purchased parts. Master Schedule: Scheduling usually starts with preparation of master schedule which is weekly or monthly break-down of the production requirement for each product for a definite time period, by having this as a running record of total production requirements the entrepreneur is in better position to shift the production from one product to another as per the changed production requirements. This forms a base for all subsequent scheduling acclivities. A master schedule is followed by operator schedule which fixes total time required to do a piece of work with a given machine or which shows the time required to do each detailed operation of a given job with a given machine or process. Manufacturing schedule: It is prepared on the basis of type of manufacturing process involved. It is very useful where single or few products are manufactured repeatedly at regular intervals. Thus it would show the required quality of each product and sequence in which the same to be operated Scheduling of Job order manufacturing: Scheduling acquires greater importance in job order manufacturing. This will enable the speedy execution of job at each center point. 123 As far as small scale industry is concerned scheduling is of utmost importance as it brings out efficiency in the operations and s reduces cost price. The small entrepreneur should maintain four types of schedules to have a close scrutiny of all stages namely an enquiry schedule, a production schedule, a shop schedule and an arrears schedule out of above four, a shop schedule is the most important most suited to the needs of small scale industry as it enables a foreman to see at a glance. 1. The total load on any section 2. The operational sequence 3. The stage, which any job has reached. Loading: The next step is the execution of the schedule plan as per the route chalked out it includes the assignment of the work to the operators at their machines or work places. So loading determines who will do the work as routing determines where and scheduling determines when it shall be done. Gantt Charts are most commonly used in small industries in order to determine the existing load and also to foresee how fast a job can be done. The usefulness of their technique lies in the fact that they compare what has been done and what ought to have been done. Most of a small scale enterprise fail due to non -adherence to delivery schedules

DECISION MAKING IN PRODUCTION

therefore they can be successful if they have ability to meet delivery order in time which no doubt depends upon production of quality goods in right time. It makes all the more important for entrepreneur to judge ahead of time what should be done, where and when thus to leave nothing to chance once the work has begun. Production control: Production control is the process of planning production in advance of operations, establishing the extract route of each individual item part or assembly, setting, starting and finishing for each important item, assembly or the finishing production and releasing the necessary orders as well as initiating the necessary follow-up to have the smooth function of the enterprise. The production control is of complicated nature in small industries. The production planning and control department can function at its best in small scale unit only when the work manager, the purchase manager, the personnel manager and the financial controller assist in planning production activities. The production controller directly reports to the works manager but in small scale unit, all the three functions namely material control, planning and control are often performed by the entrepreneur himself production control starts with dispatching and ends up with corrective actions. Dispatching: Dispatching involves issue of production orders for starting the operations. Necessary authority and conformation is given for: 1. Movement of materials to different workstations. 2. Movement of tools and fixtures necessary for each operation. 3. Beginning of work on each operation. 4. Recording of time and cost involved in each operation. 124 5. Movement of work from one operation to another in accordance with the route sheet. 6. Inspecting or supervision of work Dispatching is an important step as it translates production plans into production. Follow up: Every production programme involves determination of the progress of work, removing bottlenecks in the flow of work and ensuring that the productive operations are taking place in accordance with the plans. It spots delays or deviations from the production plans. It helps to reveal detects in routing and scheduling, misunderstanding of orders and instruction, under loading or overloading of work etc. All problems or deviations are investigated and remedial measurer are undertaken to ensure the completion of work by the planned date. Inspection: This is mainly to ensure the quality of goods. It can be required as effective agency of production control.Corrective measures: Corrective action may involve any of those activities of adjusting the route, rescheduling of work changing the workloads, repairs and maintenance of machinery or equipment, control over inventories of the cause of deviation is the poor performance of the employees. Certain personnel decisions like training, transfer, demotion etc. may have to be taken. Alternate methods may be suggested to handle peak loads.

Narrate the objectives and elements of production and operation Management? Answer: - The last century particularly the later half of it, has seen as upsurge in industrial activity. Now industries are producing a variety of products. Industries are producing a variety of products. Consumerism has been on steep rise. People, all over the world, have been demanding more and better products. The development in technology, particularly in the areas of telecommunications, internet, mass media and transpo rt have made it possible for products Production involves the things which are essential for the manufacture of products. The objective of the production management is to produce goods services of right quality and quantity at the right time and right manufacturing cost. 1. RIGHT QUALITY The quality of product is established based upon the customers needs. The right quality is not necessarily best quality. It is determined by the cost of the product and the technical characteristics as suited to the sp ecific requirements.

DECISION MAKING IN PRODUCTION

2. RIGHT QUANTITY The manufacturing organization should produce the products in right number. If they are produced in excess of demand the capital will block up in the form of inventory and if the quantity is produced in short of dema nd, leads to shortage of products. 3. RIGHT TIME Timeliness of delivery is one of the important parameter to judge the effectiveness of production department. So, the production department has to make the optimal utilization of input resources to achieve its objective. 4. RIGHT MANUFACTURING COST Manufacturing costs are established before the product is actually manufactured. Hence, all attempts should be made to produce the products at pre-established cost, so as to reduce the variation between actual and the standard (pre-established) cost. ELEMENTS OF PRODUCTION OPERATION Managing operations can be enclosed in a frame of general management function as shown in Fig. 1.3. Operation managers are concerned with planning, organizing, and controlling the activities which affect human behavior through models. PLANNING Activities that establishes a course of action and guide future decision -making is planning. The operations manager defines the objectives for the operations subsystem of the organization, and the policies, and procedures for achieving the objectives. This stage includes clarifying the role and focus of operations in the organizations overall strategy. It also involves product planning, facility designing and using the conversion process. ORGANIZING Activities that establishes a structure of tasks and authority. Operation managers establish a structure of roles and the flow of information within the operations subsystem. They determine the activities required to achieve the goals and assign authority and responsibility for carrying them out. CONTROLLING Activities that assure the actual performance in accordance with planned performance. To ensure that the plans for the operations subsystems are accomplished, the operations manager must exercise control by measuring actual outputs and comparing them to planned operations management. Controlling costs, quality, and schedules are the important functions here. BEHAVIOUR Operation managers are concerned with how their efforts to plan, organize, and control affect human behavior. They also want to know how the behavior of subordinates can affect managements planning, organizing, and controlling actions. Their interest lies in decision -making behavior. MODELS As operation managers plan, organize, and control the conversion process, they encounter many problems and must make many decisions. They can simplify their difficulties using models like aggregate planning models for examining how best to use existing capacity in short-term, break even analysis to identify break even volumes, linear programming and computer simulation for capacity utilization, decision tree analysis for long -term capacity problem of facility expansion, simple median model for determining best locations of facilities et c.