QE 8004

PRODUCTION AND INVENTORY

MANAGEMENT

UNIT I

Process Management
Dr. R. Raju
Professor and Head
DoIE, AU.

INTRODUCTION TO PRODUCTION MANAGEMENT

In any manufacturing system, the job of the production Manager is to

Manage the process of converting inputs into the desired outputs.

Production is an organized activity of transforming raw materials into

finished products.

Production Management can be defined as the Management of the

conversion process, which converts land, Labour, Capital, and
Management inputs into desired outputs of goods and services.

Operations Management is concerned with the design and the

operation of Systems for manufacture, transport, supply or service.

Production Function

Production function shows the relationship between the input and the
output of an organization.

The production function can be represented by the simple

mathematical equation which relates the outputs as the function of
inputs, that is :
Y = f (X1, X2 .Xn) where
Y = Units of output
X1 = Unit of Labour; X2 = Unit of machinery, and so on

Productivity :

Productivity is nothing but the reduction in wastage of resources

such as Labour, Machines, Materials, Power, time, Capital, etc.,

Productivity can also be defined as a human endeavor (effort) to

produce more and more with less and less inputs of resources so
that the products can be purchased by a large number of people
at affordable price.

Productivity implies development of an attitude of mind and a

constant urge to find better, cheaper, easier, quicker, and safer
means of doing a job, manufacturing a product and providing
service.

Productivity aims at the maximum utilization of resources for

yielding as many goods and services as possible, of the kinds
most wanted by consumers at lowest possible cost.

Productivity processes more efficient works involving less fatigue

to workers due to improvements in the Layout of plant and work,
better working conditions and simplification of work. In a wider
sense productivity may be taken to constitute the ratio of all
available goods and services to the potential resources of the
group.

It is a matter of common knowledge that Higher productivity leads to a

reduction in cost of production, reduces the sales price of an item,
expands markets, and enables the goods to complete effectively in the
global market.

Productivity yields more wages to the workers, shorter the working

hours and greater leisure time for the employees.

In fact, the strength of a Country, prosperity of its economy, standard

of living of the people and the wealth of the nation are very largely
determined by the extent and measure of its production and
productivity.

By enabling and increase in the output of goods or services for existing

resources, productivity decrease the cost of goods per unit, and makes
it possible to sell them at lower prices, thus benefiting the Consumers
while at the same time leaving a margin for increase in the wages of
the workers.

DIFFERENCE BETWEEN PRODUCTION AND PRODUCTIVITY:

Production of any commodity or service is the volume of output

irrespective of the quantity of resources employed to achieve the level
of output.

Production in an industry can be increased by employing more labour,

installing more machinery, and putting in more materials, regardless
of the Cost of Production

Increase of production does not necessarily mean increase in

productivity.

Higher productivity results when we put in production system an

element of efficiency with which the resources are employed.

The combined input of a number of factors such as Land, Materials,

Capital and Labour gives an output in an industry

The ratio between output and one of these factors of input is usually
known as productivity of the factor Considered.

Productivity may also be considered as a measure of performance of

the economy as a whole.
Output Value
Mathematically, Productivity =
-------------------Input Value
Output due to the factor
Factor productivity
=
---------------------------------Input factor employed

In order to assure that productivity measurement captures what the

company is trying to do with respect to such vague issues as customer
satisfaction and quality.

Some firms redefined productivities as effectiveness or value to

customer divided by efficiency or cost to producer.

TYPES OF PRODUCTIVITY:

Partial productivity measurement is used when the firm is interested

in the productivity of a selected input factor. It is the ratio of output
values to one class of input.
Outputs
Outputs
Outputs
PPM = ------------------or
-------------------or
------------Labour Input
Material Input
Capital

Multi-factor Productivity Measurement is used when the firm is

interested to know the productivity of a group of input factors but not
all input factors.
Outputs
Outputs
MF PM = ---------------------- or ------------------------Labour+Capital
Labour + Material

Total Productivity measures deals about composite productivity when it

is interested to know about the overall productivity of all input factors.
This technique will give us the productivity of an entire organization or

Outputs
Goods and Services Provided
TPM =
---------------------or
----------------------------------------Inputs
All resources
used
EFFECTIVENESS VS EFFICIENCY:

Effectiveness is the degree of accomplishment of the objectives that is

: How well a set of result is accomplished? How well the resources
utilized? Effectiveness is obtaining the desired results. It may reflect
output quantities, perceived quality or both.

Effectiveness can also be defined as doing the right things.

Efficiency occurs when a certain output is obtained with a minimum of

inputs.

The desired output can be increased by minimizing the down times as

much as possible (down times are coffee breaks, machine failures
waiting time, etc.)

But as we decrease downtimes the frequency of occurrence of

defective products will increase due to fatigue.

Efficiency can be defined as doing things right. Operational efficiency

refers to a ratio of outputs to inputs (like land, capital etc.)

PRODUCTION SYSTEM:

The collection of all inter related activities involved in producing goods

and services is called a production system.

Principle components of Production system are: Input, Conversion

process, output, feedback and Managers.

An important aspect of a Production system is to determine the

relative rules of people and machines.

The biggest challenge before a production Manager is to Manage

Human-Machine Interface.

Production Management is Concerned with proper management and

utilization of those enterprise resources which are required to produce
goods and / or services.

A production Manager should have the ability to handle the strategic

aspects of operations management consistently.

Production manager rely more on verbal communication.

The requirement for an effective production management is to

document all the activities so that it may be possible to systematically
review the production problems and to incorporate them into the
strategies.

The role of Production Manager is viewed as short term and reactive.

For all operations, the goal is to create some kind of value added, so
that the outputs are worth more to consumers than just the sum of the
individual inputs.

CHARACTERISTICS OF PRODUCTION SYSTEM:

System discrimination

Interrelationship among systems

Stratum formulations

Specialization of functions

Increase of Entropy

ISO finality

CONTROL MECHANISMS:

Feed back

Feed forward

DISTINCTION BETWEEN MANUFACTRING AND SERVICE:

Manufacturing is Characterized by tangible outputs (Products),

Outputs that Customers Consume over time, Jobs that use less
labour and more equipment, little customer contact, no customer
participation in the conversion process (In production) and
sophisticated methods for measuring production activities and
resource consumption as products are made.

Service is characterized by intangible outputs, outputs that

customers consume immediately, jobs that use more labour and
less equipment, direct customer contact, frequent customer
participation in the conversion process, and elementary methods
for measuring conversion activities and resource conversion.

Some service is equipment based like computer software

services, Internet services, Telephone services, etc.

Some service is people-based like tax accounting services, hair

styling and golf instruction.

Production Management became the more widely accepted term from

1930s through the 1950s.

As the Service sector became more prominent the change from

production to operations emphasized the broadening of our field to
service organizations.

These days, organizational goals are more focused to meet Customers

needs throughout the world.

Quality concepts like TQM, ISO-9000, QFD, etc., are all examples of
this attitude of Management.

OPERATIONS STRATEGY
STRATEGY

Strategy should describe how a firm intends

to create and sustain value for its
shareholders.
Strategy consists of operations
effectiveness, customer management, and
product innovation.
Operations effectiveness relates to the core
business process that are needed to run the
business.
Customer management relates to
understanding and customer relationships

Operations strategy
It

is concerned with setting broad policies and

plans for using the resources of a firm to best
support its long term competitive strategy.
An operations strategy involves decisions that
relate to the design of a process and the
infrastructure needed to support the process.
Process design includes the selection of appropriate
technology, sizing the process over time, the role of
inventory in the process, and locating the process.
The infrastructure decisions involve the logic
associated with the planning and control systems,
quality assurance and control approaches, were
payment structure, and the organization of the
operating function.

Four Steps for Strategy

Formulation
Defining

a primary task

What is the firm in the business of doing?

Assessing

core competencies

What does the firm do better than anyone else?

Determining

qualifiers

order

winners

and

order

What wins the order?

What qualifies an item to be considered for
purchase?

Positioning

the firm

How will the firm compete?

Copyright 2006 John Wiley & Sons,
Inc.

215

The corporate strategy design

process

Robert Kaplan and David Nortons Generic Map:

1) Financial perspective
Build Franchise

Revenue growth
strategy

Improved
Increase customer value
share
holder
Improve cost structure
Improve Asset utilization

Productivity
strategy

value

2) Customer perspective
Product leadership
Customer intimacy
Operational excellence

3) The Internal perspective

Innovation process(Build franchise)
Customer management process(increase customer
value)
Achieve operational excellence(operational
processes)
Regulatory and environmental processes(be a good
citizen)

4) The learning and growth perspective

Strategic competencies
Strategic technologies
Climate for action

5)

Developing a manufacturing
strategy
Segment the market according to the
product group
Identify the product requirements,
demand patterns, and profit margins of
each group.
Determine the order winners and order
qualifiers for each group.
Convert order winners into specific
performance requirements.

Operations Role in
Corporate Strategy
Operations

provides support for a

differentiated strategy
Operations serves as a firms
distinctive competence in executing
similar strategies better than
competitors

Copyright 2006 John Wiley & Sons,

Inc.

219

Strategic Management

The process of making decisions about

their future in this complex and
changing environment is called
strategic management.
Strategic management involves
making those decisions that define the
organizations missions and objectives,
determine the organizations most
effective utilization of its resources and
seek to assure the effectiveness of the
organization within its environment.

Strategic

management has two

phases:
Strategic formulation
Defining the organization philosophy and mission
Establishing long and short-range objectives to achieve mission
Selecting the strategy to be used in achieving the objectives.

Strategy implementation
Aligning the organizational structure, system and processes with
the chosen strategy.

Hierarchy of Strategies

Mission
Defines its line or lines of business
Identifies its products and services
Specifies the markets it serves at present and
will serve with in a time frame of 3 to 5 years

Objectives
Long term objectives specify the result
desired in pursuing the mission
Short terms are performance targets to
measure the progress towards the
achievements of long term objectives

Corporate

strategies

Established at the highest level

Involve a long range time horizon
Stable growth strategy
Concentration on a single product or
service
Concentric, vertical, Horizontal and
conglomerate diversifications
End game strategies
Retrenchment strategies like turnaround,
disinvestments and liquidation
Combination strategies

Generic

competitive strategies

Overall cost leadership strategy

Differentiation strategy
Focus strategy
Functional

strategies

Marketing
Financial
Personal and production/ manufacturing
strategies

TYPES OF PRODUCTION SYSTEM

There are eight types of Production which may be classified in three

broad groups according to the quantities of Production involved
(Samuel Eilon)
I. Job Shop Production System
1)

A small Number of items, produced only once.

2) A small number of items produced intermittently when the need is

felt.
3) A small number of items, produced periodically at known time
interval.
II. Batch Production
4)

A batch of items produced only once.

5)

A batch of item Produced at irregular intervals when a need is felt.

6) A batch of items Produced periodically at known intervals to satisfy

the continuous demand.
III. Continuous Production
7)

Mass Production

8)

Flow Production

JOB PRODUCTION

This is the oldest method of Production on a very small scale.

This is also popularly known as Job-Shop or Unit Production.

In this, each job order stands alone end may not be repeated.
Examples :

manufacturing of Aircrafts. Ships, Space

Vehicles, Bridge and Dam Construction

FEATURES OF JOB SHOP PRODUCTION:

Job sop has a lot of flexibility of operation, and hence general purpose
machines are required.

Generally no automation is used in this system, but computer-aided

design (CAD) is used.

It deals with low volume and large variety production. It can cater to
specific customer order or job of one kind at a time.

It is known for rapid value addition.

ADVANTAGES:

Low risk of loss to the factory adopting this type of production. Due to
flexibility, there is no chance of failure of factory due to reduction in
demand. It can always get one or the other job orders to keep it
going.

Requires less money and is easy to start.

Less or no management problem because of very small work force.

DISADVANTAGES:

For handling different types of jobs, only workers with multiple skills
are needed. This increases the labour cost.

Low equipment utilization

As the raw materials are purchased in less quantity, the cost of

material is high.

BATCH PRODUCTION:

The batch production system is generally adopted in medium size

enterprises.

Batch production is a stage in between mass production and job-shop

production.

As in this system, two or more types of products are manufactured in

lots or batches at regular intervals.

FEATURES OF BATCH PRODUCTION:

A batch production turns into flow production when the rest period
vanishes.

Batch production is bigger in scale than job production, but smaller

than that of mass production.

Material handling may be automated by robots as in case of CNC

Machining Centers.

A medium size lots (5 to 50) of same items is produced in this system.

Lot may be produced once in a which or on regular interval generally
to meet the continuous customer demands.

Plant capacity generally is higher than demand.

ADVANTAGES:

It is flexible in the sense that it can go from one job to another with
almost zero cost. It needs general purpose machine having high
production rate.

If demand for one production decreases then production rate for

another product may be increased thus the risk of loss is very less.

Most suitable for computer-aided-manufacturing.

DISADVANTAGES:

As the raw materials to be purchased are in similar quantity than in

case of mass production, the benefits of discount due to large lot
purchasing is not possible.

It needs specially designed jigs and fixtures.

CONTINOUS PRODUCTION:

In this, the production activity continues for 24 hrs or on three shifts a

day basis.

A steel plant, for example, belongs to this type.

Other exemplas include bottling plant, soft drink industry, fertilizer

plant, power plant, etc.

Mass production and Flow production belong to continuous type only.

In Mass production, a large number of identical items, is produced,

however the equipment need not be designed to produce only this
type of items. Press shop is an example.

In Flow production, the plant, its equipment, and layout have been
chiefly designed to produce a particular type of product.

Automobiles, engines, chemical plants etc. are examples of flow shop

production.

If the management decides to switch over to a different type of

product it will result in extensive change in tooling, layout and
equipment.

FEATURES OF CONTINUOUS PRODUCTION:

It is very highly automated and highly Capital Intensive. Items move

from one stage to another automatically in a continuous manner.

No flexibility. Fixed Layout for a particular product.

Heavy Material handling. Use of cranes, conveyors, etc. are needed.

Work-in-Process (WIP) is zero,

ADVANTAGES:

It gives better quality, large volume but less variety of products.

Wastage is minimum

As the raw materials are purchased on a large scale, higher margin of

profit can be made on purchase.

Only a few skilled, and many semi-killed workers are required. This
reduces the labour cost substantially.

DISADVANTAGES:

During the period of less demand heavy losses on invested capital

may take place.

Because all the machines are dedicated and special purpose type, the
system is not changeable to other type of production.

Most of the workers handle only a particular operation repetitively,

which can make them feel monotonous.

As this type of production is on the large scale, it cannot fulfill

individual taste.

OBJECTIVES:

OPERATIONS MANAGEMENT OBJECTIVES:

Quality
Productivity
Cost
Delivery

CORPORATE OBJECTIVES:
Profit
Return on Investment
Survival
Growth

Process Management

33

Wisdom from Texas

Instruments
Unless you change the process,
why would you expect the results
to change

34

Scope of Process
Management
Process

Management: planning
and administering the activities
design, control, and
improvement necessary to
achieve a high level of
performance
Four types of key processes
Design processes
Production/delivery processes
Support processes

35

AT&T Process
Management Principles

Focus on end-to-end process

Mindset of prevention and continuous
improvement
Everyone manages a process at some level
and is a customer and a supplier
Customer needs drive the process
Corrective action focuses on root cause
Process simplification reduces errors
36

Control vs. Improvement

Out-of-control

Controlled
process

Improvement

New zone
of control

Time

37

Leading Practices
Translate

(1 of 2)

customer requirements and

internal capabilities into product and
service design requirements early in the
process
Ensure that quality is built into products
and services and use appropriate tools
during development
Manage product development process to
enhance communication, reduce time, and
ensure quality
Define, document, and manage important
38

Leading Practices

(2 of 2)

Define

performance requirements for

suppliers and ensure that they are met
Control the quality and operational
performance of key processes and use
systematic methods to identify variations,
determine root causes, and make
corrections
Continuously improve processes to
achieve better quality, cycle time, and
overall operational performance
Innovate to achieve breakthrough
performance using benchmarking and
reengineering

39

Product Development
Paradigms
Traditional
Approach
Design the
product
Make the product
Sell the product

Demings Approach
Design the product
Make it with
appropriate tests
Put it on the
market
Conduct consumer
research
Redesign with
improvements
40

Product Development
Process
Idea
Idea
generation
generation
Concept
Concept
development
development
Product &
process design
Full-scale
Full-scale
production
production
Product
Product
introduction
introduction
Market
Market
evaluation
evaluation
41

Quality Engineering
System

Design

Functional performance
Parameter

Design

Nominal dimensions
Tolerance

Design

Tolerances

42

Loss Functions
Traditional
View

loss

no loss

loss

nominal
tolerance

Taguchis
View

loss

loss

43

Taguchi Loss Function Calculations

L(x) = k(x - T)2

xample: Specification = .500 .020
ailure outside of the tolerance range costs $50
o repair. Thus, 50 = k(.020)2. Solving for k
ields k = 125,000. The loss function is:
L(x) = 125,000(x - .500)2

xpected loss = k(2 + D2) where D is the deviation

om the target.
44

Design Objectives
Cost,

Manufacturability,
Quality, Public Concerns
Tools and Approaches
Design for Manufacturability
Design for Environment

45

Streamlining Product
Development
Competitive

need for rapid

product development
Concurrent engineering - a
process in which all major
functions involved with bringing
a product to market are
continuously involved with the
product development from
conception through sales
Design reviews
46

House of Quality
Interrelationships

Customer
requirement
priorities
Technical requirements

Voice of
the
customer

Relationship
matrix

Technical requirement
priorities

Competitive
evaluation
47

Quality Function
Deployment

technical
requirements
component
characteristics
process
operations
quality plan

48

Motorolas Approach
to Process Design
1.
2.
3.
4.
5.
6.

Identify the product or service

Identify the customer
Identify the supplier
Identify the process
Mistake-proof the process
Develop measurements and
control, and improvement goals.
49

Evaluating a Process
Are

steps arranged in logical sequence?

Do all steps add value? Can some be
eliminated or added? Can some be combined?
Should some be reordered?
Are capacities in balance?
What skills, equipment, and tools are required
at each step?
At which points might errors occur and how
can they be corrected?
At which points should quality be measured?
What procedures should employees follow
where customer interaction occurs?

50

Projects
Project

initiation direction,
priorities, limitations, and
constraints
Project plan blueprint and
resources needed
Execution produce deliverables
Close out evaluate customer
satisfaction and provide learning
for future projects
51

Basic Components of
Services
Physical

facilities, processes,
and procedures
Employee behavior
Employee professional
judgment

52

Key Service Dimensions

Customer contact and interaction

Labor intensity
Customization
53

Control
The

continuing process of evaluating

process performance and taking corrective
action when necessary
Components of control systems
Standard or goal
Means of measuring accomplishment
Comparison of results with the standard as
a basis for corrective action

A well-controlled system is predictable

54

After Action Review

What was supposed to
happen?
2. What actually happened?
3. Why was there a difference?
4. What can we learn?
1.

55

Supplier and Partnering

Processes
Recognize

the strategic
importance of suppliers
Develop win-win relationships
through partnerships
Establish trust through
openness and honesty

56

Supplier Certification
Systems
Certified

supplier one
that, after extensive
investigation, is found to
supply material of such
quality that routine testing on
each lot received is
unnecessary

57

Benefits of Effective Supplier Process Management

Reduced

costs
Faster time to market
Increased access to
technology
Reduced supplier risk
Improved quality

58

Process Improvement
Productivity

improvementTraditional
Work simplification
Industrial
Planned methods change
Engineering
Kaizen

New
approaches
Stretch goals
Benchmarking from the total
Reengineering quality movement
59

Kaizen
Gradual

and orderly continuous

improvement
Minimal financial investment
Involvement of all employees
Exploit the knowledge and
experience of workers
60

Agility
Flexibility

the ability to adapt

quickly and effectively to
changing requirements
Cycle time the time it takes
to accomplish one cycle of a
process
Benefits
Improve customer response
Force process streamlining and
simplification

61

Breakthrough
Improvement
Discontinuous

change resulting from

innovative and creative thinking
Benchmarking the search of
industry best practices that lead to
superior performance
Competitive benchmarking
Process benchmarking
Strategic benchmarking
Reengineering

processes

radical redesign of
62

Process Management
in the Baldrige Award Criteria
The Process Management Category examines the
key aspects of an organizations process
management, including customer-focused design,
product and service delivery, key business, and
support processes. This Category encompasses all
key processes and all work units.
6.1 Product and Service Processes
a. Design Processes
b. Production/Delivery Processes
6.2 Business Processes
6.3 Support Processes
63

Outsourcing
The

even increasing completion in todays global markets,

introducing of new products with shorter life cycles, faster
dissemination and proliferation of information, and higher
expectations of customers have forced enterprises to
invest in and focus attention on the entire chains.
Sourcing is the act of transferring work from one entity to
another.
Outsourcing is the act of transferring work to an external
party.
Organizations are continuously facing the decision whether
to expand resources to create the assess resource product
or services and design to make or buy it from external
source.
An outsourcing initiative calls for the transfer of factors of
production, the resources used to perform the work and
the decision rights or responsibilities for making decisions.

Make or Buy Decision

The

make or buy decision is the act of making a strategic choice

between producing a product internally (in-house) or buying it
externally (from an outside provider).
Making the right choice can be the key factor in sustaining a
company competitive advantage and is one of the most
important task of a successful management.
Make- or buy decisions are often made purely on the basis of
costs.
Instead of comparing cost, there should be a decision making
process that can provide managers with a way of managing the
make- or-buy decisions more effectively.
The key objectives that arise from the defined purpose are first to
describe the set of factors which affect the make-or-buy process.
Secondly, to understand between the challenges and barriers
that companies face when deciding whether or not to outsource a
component or process.
Third, to suggest some tools and methods for addressing the
make-or- buy decision process.

PROCESS OF MAKE-OR- BUY DECISION

Make

or buy is a decision not to be made only on the basis of

economic considerations, since acquisition or less of core
competitions may also be involved.
Make or buy decision can affect companys production
methods working capital, cost of borrowing or competitive
position.
Outsourcing provides companies with the freedom to
concentrate their energies on key activates that are critical
to maintaining their competitive edge.
For activates eligible for outsourcing, the key strategic
question is whether the firm can perform those activates on
a level that is comparable with the best organizations in the
world.
To make the best make or buy decision, companies must
determine how that decision will affect the fixed product
quality and the companys technology.

PLANNING STAGE:

The project team assess the risk and the resourcing information and
management skills needed to mitigate those risks, while the
outsourcing advisor levels the playing field with the outsourcing
providers.

Because outsourcing involves a number of strategic issues as well as

significant risks and rewards senior managements clean and
unequivocal stated support is prerequisite.

User perspectives and objectives are essential for setting the scope and
assessing the results.

Before selecting the project team and advisors the organization must
inform also the employees about the outsourcing initiative.

The role of the outsourcing project leader to complex and challenging.

In selecting the individuals for this position, the following

characteristics should be considered:

Ability to embrace and champion change

Earned credibility across the organization

The ability to build trust

Strong communication skills

Strong negotiaions skills

Strategic planning skills

Project and team management skills

Marketing skills

Choosing

team members is a critical step. The skills and

characteristics of team members are:
Motivation to participate
A record of delivering on promises
Strong communication skills
Ability to think creatively and strategically
Solid performance evaluations
Relevant specifications within the organization
Wide experience from outside the organization
Team members should represent a cross- section of the
organizations functions and should have access to and full cooperation of the individuals in the areas to be considered for outsourcing.
The team can be quite small in the planning phase and expected
when the analysis begins.
Independent outsourcing advisors can help avoid failures.
Lack of planning, lack of follow-up in execution, miscommunication,
not understanding cultural differences, poor process, etc., are just a
few of the areas that an outsider can help with.
Independent advisors can most certainly help in establishing,
repairing, maintaining, and improving client/ provider relationships.

EVALUATION

STAGE:
Early in the outsourcing evaluation process, the customer must find
out and understand how outsourcing can fit with in the organizations
strategies.
To achieve long term growth, companies need to develop, protect, and
leverage their core competencies and consider out sourcing any
activities that do not confer a competitive advantage.
Core competencies are not strong candidate for outsourcing.
Companies that rush into outsourcing without fully understanding what
they hope to gain soon final themselves in a mire of contractual battle
or not receiving improved services.
It is essential to know and clearly define the objectives of the company
and to document what the company expects from outsourcing.
Clear objectives help lead to a sound decision on what to outsource
and what not to out- sourcing.
-Concentration on core- business
- Investment reduction
-Restructuring of the supply chain
- Cost reduction and service improvements.

7) Objectives also provide the basis for evaluating provider

proposals.

8) Scope of the outsource must also be defined.

ANALYSIS

STAGE:
The goals of this phase are to develop detailed cost analysis of the
target function.
When considering outsourcing part the following associate costs
need to be taken into account:
Salaries, benefits, training/Evaluation, specialized software, travel,
phone charges, depreciation, mail costs and postage, office
supplies, equipment, management time, information costs,
occupancy charges, etc.,
It is essential that the project team conducts activity- based
analysis in order to understand the current costs of the activities
that might be outsourced and those that are staying.
The project team must estimate which costs do not disappear with
outsourcing and what new costs will be incurred as a result of outsourcing.
Without a good idea of future needs and the costs of meeting
these needs, it is difficult to outsource effectively and efficiently.
Current performance should also be measured and analyzed, since
performance improvement is often a reason for out-sourcing.
Simple cost analysis, Economic analysis and Break- even analysis
are used for conducting analysis.

SELECTING

STAGE:
The ways in which the potential providers identified are
as follows:
Open a dialogue with outside organizations the
company is already doing business with use of the
organizations professional network
Direct Research
Use Consultants
The project team lists the criteria for qualified
providers based on the reasons for outsourcing.
Potential providers are identified and further
investigations are made to determine their qualification.
Short list the providers and form this short list the prime
provider is selected.
The final goal is to review the information gathered and
to consider the recommendation on whether service
should be made internally or outsourced.

APPROACHES FOR MAKE OR BUY

DECISION
The types of approach followed in
make or buy decision are as follows
Simple cost analysis
Economic analysis
Break even analysis
SIMPLE COST ANALYSIS
In this analysis, cost of making a
product and that of buying a product
are calculated. Then, the alternative
which involves the minimum cost is
suggested for implementation. This
concept is illustrated using an

Example 1.
An automobile company has extra capacity that
can be used to produce gears that the company
has been buying for Rs.300 each. If the
company makes the gears, it will incur materials
cost of Rs.90 per unit, labor cost of Rs.120 per
unit and variable overhead cost of Rs.30 per unit.
The annual fixed cost associated with the unused
capacity is Rs.240000. Demand over the next
year is estimated at 4000 units.
Would it be profitable for the company to make
the gears?
Suppose the capacity could be used by another
department for the production of some
equipment that would cover its fixed and
variable cost and contribute Rs.90000 to profit.
Which would be more advantages, gear

Solution.
Cost to make,
Variable cost/unit = Material cost + labour+ overhead
Rs.90+Rs.120+Rs.30 =Rs.240
Total Variable cost =(4000 units) * (Rs.240/unit)
=Rs.960000
Fixed Cost
Total cost
Cost to Buy,
Purchase cost

=Rs. 240000
=Rs.1, 200,000
= (4000 units) * (Rs.300/unit)
=Rs.1,200,000

Fixed Cost
=Rs. 240000
Total cost
=Rs.1, 440,000
Therefore cost of making the gears is less than that of
buying gears from outside. Hence, making is
advantages

In this section , the company has the following alternatives:

Make the gears within the company.
Buy the gears from an outside supplier and utilize the existing
capacity of the company to manufacture agricultural equipment.
The cost calculation for each of the above alternatives is
summarized in the following table:
From the above table it is clear that the net cost of the second
alternative is less than that of first alternative .Hence it is
advisable to produce agricultural equipment using the existing
capacity of the company and buy the gears from a supplier.

Make Gears

Total variable cost

(Rs.)
Fixed cost (Rs.)

960,000

Purchase Gears and

make agricultural
Equipment
1,200,000

240,000

Total cost (Rs.)

1,200,000

1,200,000

Contribution to
profit (Rs.)
Net relevant cost
()Rs.

90,000

1,200,000

1,110,000

ECONOMIC ANALYSIS:
The following inventory models are considered to illustrate the
concept of economic analysis:
Purchase model
Manufacturing model
The formula for calculating economic order quantity and total cost
for each given below model are below:
Where,
D -demand/year
P-purchase price/unit
CC-carrying cost/unit/year
Co-ordering cost/order
S- setup cost/setup
EOQ economic order qty(size)
R- Production rate (units/year)
Q1-economic order size
Q2-economic production size
Purchase Model

Manufacturing Model

Q1 =

Q2 =)

TC = D*P+(DCo/Q1) + (Q1*Cc)/2

TC = D*P+(DS/Q2) + Cc(R-D)(Q2/
(2*R)

Example.
An item has yearly demand of 1000
units. The different costs with regard
to make and buy options, are as
follow:
Buy option,
D=1000
Co=Rs.10
Cc=Rs.1.32/unit/year
Q1 =(2*1000*10/1.32) =123 units
(approx.)
TC = D*P+(DCo/Q1) + (Q1*Cc)/2
= (1000*6)+ ((1000*10)/123)+

Buy
((123*1.32)/2)
Item cost/unit(Rs)
6
=Rs.6162.48

Make
5.90

Procurement
cost/order(Rs)
Setup cost/setup

10

50

Annual carrying
cost/item/year(22%
of item cost)

1.32

1.30

Production rate/
year

6000 units

Make option,
Q2 =(2SD/Cc(1-(D/R)))
= Q2 =(2*50*1000/1.3(1-(1000/6000))) = 304 (approx.)
TC = D*P+(DS/Q2) + Cc(R-D)(Q2/(2*R)
= (1000*5.90) +((1000*50)/304) + 1.3 (6000-1000) (304/
(2*6000))
= Rs. 6229.14
Result: The cost of buying is less than the cost of making. Hence,
go for the buy option.
Q2 =)

TC = D*P+(DS/Q2) + Cc(R-D)(Q2/(2*R)

BREAK EVEN ANALYSIS:

Actually in any business organization, for manufacturing a product,
there are two major costs, namely fixed cost and variable cost. The
sum of these two costs is known as the total cost of the product. The
fixed cost is constant irrespective of production volume of a product
which is manufactured by the organization. But, the variable cost is a
function of the production volume of the product. For low volume of
the production, the sales revenue of the product will be less than the
total cost and after reaching a certain level of production volume, it
will be more than the total cost. The point at which the sales revenue
becomes equal to the total cost is known as the break-even point. At
this point, there is no loss or gain to the organization. This analysis is
termed as break even analysis.
Total Cost (TC)= Fixed Cost + Variable cost
Break Even Point = FC/(S.P-VC)

Example:
A manufacturer of motor cycles buys side box at Rs.240 each. In
case he makes it himself, the fixed and variable cost would be
Rs.300,000 and Rs.90 per side box, respectively. Should the
manufacturer make or buy the side box if there is a demand for 2500
side boxes?
Solution:
Selling Price =Rs 240
Variable cost/unit=Rs.90
Fixed cost = Rs.300,000
B.E.P= 300000/(240-90) = 2000 units
Since the demand (2500 units) is more than the break-even point,
the company can manufacture the side boxes.

Example:
There are three alternatives available to meet the demand of a
particular product. They are as follows:
Making the product using process A
Making the product using process B
Buying the product
The details are as follows:
The annual demand for the product is 10,000 units.
Should be the company makes the product using process A or B, or
Buy it?
At what annual volume should the company switch from buying to
making using process A ?
At what annual volume should the company switch from process A
Making using
Buying
toCost
B? Elements Making using
Process A

Process B

Fixed
100,000
Cost/year (Rs.)
Variable
75
cost/unit(Rs.)

300,000

70

Purchase
price/unit (Rs.)

80

Solution:
a). compute the annual cost for each alternative.
Annual cost of process A = FC+(VC *Volume)
=100,000+(75*10,000)
=Rs.850,000
Annual cost of process B = FC+(VC *Volume)
=300,000+(70*10,000)
=Rs.1,000,000
Annual cost of buying

=Purchase price/unit *Volume

=80 *10000
=Rs.800,000

Since, the annual cost of buying is minimum among all alternative

costs, the company should by the product.

b).Let
Q be the volume at which the company switches from buying to

making, using process A .

Total Annual cost of process A
100,000+ (Q*75)

Total annual cost of buying

Q *80

100,000 5Q
5Q 100,000
Q 20,000 units
Thus, if the volume of the production is more than 20,000 units the
company should switch from buying to making option using process A.
c). Let Q be the volume at which the company switches from making
using process A to making using process B is preferable.
Total Annual cost of process A

Total Annual cost of

process B
100,000+ (Q*75)

300,000+ (70*Q)
5Q 200,000

Q 40,000 units
Thus, if the volume of the production is more than 40,000 units the

Criteria for Make or Buy

Criteria for Make.
The following are the criteria for making for making:
1. Finished product can be made by the firm than by outside suppliers.
2. Finished product is being manufactured only by a limited number of
outside firms which are unable to meet the demand.
3. The part has an importance for the firm and requires extremely strict
quality control.
4. The part can be manufactured with the firms existing facilities for
other items in which the company has manufacturing experiences.
Criteria for Buy.
The following are the criteria for making for buying:
5. High investments on facilities which are already available at the
suppliers plant.
6. The company does not have facilities to make it, and there are more
profitable opportunites for investing the companys capital.
7. Existing facilities can be used more economically to make other
parts.
8. The skill of personnel employed by the company cannot be readily
utilized to make the part.

What is BPR?
Business Process Re-engineering or BPR
is
the analysis and redesign of
workflow and processes
within and between
Organizations
- Michael Hammer & James Champy, 1993

Reengineering Is ...
Extremist's
Extremist'sView
View

Obliterate

what you have now

and start from scratch.
Transform every aspect of your
organization.
Source: Michael Hammer, Reengineering Work: Dont Automate, Obliterate,
Harvard Business Review, July-August, 1990, pp. 104-112.

A Definition of BPR
BPR is the
Fundamental rethinking and
Radical redesign of
Business Processes
to achieve Dramatic improvements in
critical measures of performance
.. such as Cost, Quality, Service and Speed.

What is a Business
Process (BP)?
BP

is a collection of activities that takes

one or more kinds of input and creates
an output that is of value to customers

Examples

of BP:
Issuance of a Driving License or
Passport
Registration of a Company
Audit of a Tax Return
Release of a Grant

Reengineering is not .
Automation

of existing ineffective

processes
Sophisticated computerization of
obsolete processes
Playing with organization structures
Downsizing doing less with less

Effectiveness Vs Automation
Automation

: use technology to
automate the AS IS process to
make it happen faster - often
wrongly perceived as eGovernment.

Effectiveness:

To improve service
and satisfy customer needs, while
lowering costs.

Automation & BPR

Automation

is using technological
tools to perform OLD processes,
in a NEW way.
Like putting OLD Wine in a NEW
bottle.

BPR

is about Innovation

Making NEW Wine and putting it in a

NEW bottle

BPR & Quality Initiatives

Quality

Initiatives attempt continuous

improvement
Six Sigma
TQM (Total Quality Management)

BPR

attempts a radical redesign or

transformation
Big Bang approach
Quantum Leap

Why BPR?

Problem Statement
The Problem is that
we are governing in the 21st century
with Processes and Organizations
designed in the 19th Century
to work well in the 20th Century!
We need entirely different
PROCESSES & ORGANIZATIONS
for Governance in the 21st Century

Problem restated
All

processes are simple & efficient when

originally designed
User-friendly
Deploying contemporary tools & techniques

Processes

become complex & inefficient with

passage of time
with addition of sub-processes to handle
exceptions
with changes in environment and
We need to
with increase in customer expectations Reinvent
the
with increase in volumes
processes

Symptoms of Poor
Governance
Air

of Mystification about procedures

Long Queues at delivery points
Multiple Visits to Government Offices
Pillar-to-Post

Outcome

is in Suspense

OK or NOT OK !

Gatekeepers

at every turn
Poor Quality of Service
Service is a Mercy - not a Right
Too many Intermediaries, Shortcuts

5 Symptoms of Poor
Processes
1.

Extensive information exchange, data

redundancy and re-keying

2.

Huge inventory, buffers and other assets

3.

Too many Controls and Checks

4.

Rework, Iteration & Duplication of work

5.

Complexity, Exceptions & Special cases

Root Causes of
Poor Service Delivery

Legislative
Intent

Process
Problems

Delivery
Channel
Problems

Delivery
Problems

BPR is an important part of the Solution

3 Goals of BPR
1.

Customer Friendliness

2.

Effectiveness

3.

Meeting customer requirements closely

Providing convenience
Outcome-based approach
Gaining loyalty of customers
Image and branding

Efficiency

Cost
Time
Effort

12 Attributes of
Customer-friendly Services
1.
2.
3.
4.
5.

Simple
Need-based
Certainty
Speed
Convenience

Place
Time
Channel

Equitable
7. Responsive
8. Customercentric
9. Quality of
Service
10. Cost-effective
11. Accessible
12. Assisted
6.

Principles &
Methodologies of BPR

7 Basic Principles of BPR

1.
2.

3.
4.
5.
6.
7.

Organize around outcomes, not tasks.

Identify all the processes in an organization
and prioritize them in order of redesign
urgency.
Integrate information processing work into
the real work that produces the information.
Treat geographically dispersed resources as
though they were centralized.
Link parallel activities in the workflow instead
of just integrating their results.
Put the decision point where the work is
performed, and build control into the process.
Capture information once and at the source.

The essence of BPR is

Transformation

A 4-Pronged Approach to
Transformation
Transforming Process

Eliminate
Simplify
Automate
Base on Trust
Integrate
Join Up
Legislate

Transformation

Using Technology

Transforming Channels

Enterprise Architecture
Standards
Unified Databases
Unified Networks
SOA
Portals

Multiple Channels
24x7
Access
Common Service Centres
Mobile
Self-Service
Licensed Intermediaries

Transforming
People

Training
Change Management
CRM skills
Consultation
Empowerment
Education
Awareness

4 Steps in BPR
1.

Understanding the Current Processes

2.

Inventing a NEW Process (TO BE Process)

3.

Survey of Best Practices

Consultation of Stakeholders

Constructing the NEW Process

4.

AS IS study mapping current processes

Analysis of Root Causes for Inefficiencies
Identifications of Problems, Issues

Bringing in new Laws and Rules

Adopting Disruptive Technologies

Selling the NEW way of functioning

Change Management
Communication Strategy

BPR Methodology
Continuous Improvement
Core Processes
Without Issues

Strategy

Core Processes
With Issues

Reengineering - Breakthrough

Improved
Process
Improvement
Plan

Goals, Roles
Boundaries

Implementation
Plan

Challenges,
Critical Success Factors &
Critical Failure Factors
in BPR

Challenges in a BPR
Exercise

1.
2.
3.
4.
5.
6.
7.
8.

Identifying Customer Needs & Performance

Problems in the current Processes
Reassessing the Strategic Goals of the
Organization
Defining the opportunities for Reengineering
Managing the BPR initiative
Controlling Risks
Maximizing the Benefits
Managing Organizational Changes
Implementing the re-engineered Processes

1.

9 Changes occasioned by
BPR
Work
Units change

2.

Jobs change

3.

from protective to productive

Organizational Structures change

9.

from performance to ability

Values change

8.

from activity to results

Criteria for career advancement change

7.

from training to education

Measures of Performance & compensation change

6.

from controlled to empowered

Job preparation changes

5.

from simple tasks to multi-dimensional work

Peoples roles change

4.

from functional departments to process teams

from hierarchical to flat

Executives change

from scorekeepers to leaders

Critical Success Factors in

BPR
1.
2.
3.
4.
5.
6.
7.
8.

Clear Vision for Transformation

Top management commitment
Identification of Core Processes
for BPR
Ambitious BPR team
Knowledge of Reengineering
techniques
Engaging external consultants
Tolerance of genuine failures"
Change Management

Critical Failure Factors in

BPR

Trying to Fix a process instead of Changing it

2. Lack of focus on Business-critical Processes
3. Lack of holistic approach
4. Willingness to settle for minor results
5. Quitting too early
6. Limiting the scope of BPR by existing
constraints
7. Dominance of existing corporate culture
8. Adopting bottom-up approach
9. Poor leadership
10. Trying to avoid making anyone unhappy
11. Dragging the BPR exercise too long.
1.

Examples of BPR

Ford Accounts Payable Process*

Purchasing
Purchasing

Vendor
Vendor

Purchase order

Receiving
Receiving

Goods

Copy of
purchase
order

Accounts
Accounts
Payable
Payable

Receiving
document

Invoice

?
PO = Receiving Doc. =

Payment
*Source: Adapted from Hammer and
Champy, 1993

Trigger for Fords AP

Reengineering
Mazda

only uses 1/5 personnel to do the

same AP. (Ford: 500; Mazda: 5)
When goods arrive at the loading dock at
Mazda:
Use bar-code reader is used to read delivery
data.
Inventory data are updated.
Production schedules may be rescheduled if
necessary.

Ford Procurement Process

Purchasing
Purchasing

Vendor
Vendor

Purchase order

Receiving
Receiving

Goods

Purchase
order
Goods
received

Data base

Accounts
Accounts
Payable
Payable

Payment

Ford Accounts Payable

Before
Before
More

than 500 accounts payable clerks matched

purchase order, receiving documents, and invoices
and then issued payment.
It was slow and cumbersome.
Mismatches were common.

After
After

Reengineer procurement instead of AP process.

The new process cuts head count in AP by 75%.
Invoices are eliminated.
Matching is computerized.
Accuracy is improved.

Land Records in India

Existing System (AS IS)

Legacy of British System

Land Records created mainly for Land Revenue

Based on Presumptive Ownership of land parcels

Managed by multiple departments

Title
Survey
Registration
Local Government

Processes & services, mostly manual

Citizens have to visit several offices & wait for months for
title changes

Existing System Land Transactions

Buyer &
Seller

Registration of
deeds

Complete
Documents
Submit
Appln.
Pay fees

Cannot verify
ownership

Verify
documents
and register

Buyer &
Seller

Buyer gets proof

of transaction

Land Title Office

Buyer

Complete
application

Submit
Appln for
Mutation.

Verify and
change
records

Buyer

Buyer gets
ownership
records

Buyer

Buyer gets
boundary
info.

Land Surveyor

Buyer

Complete
appl.

Submit
Appln for
Sub-division

Sub-divide
the parcel
and change
records

International Best Practices in

Land Records Management
a. New Zealand
Land Information Online
b. Canada
Land Title & Survey Authority
c. Singapore
Singapore Land Authority
d. Australia
Land Victoria

Vision of BPR Integrated Land Information

Conclusion
BPR

is about Radical Redesign of

business processes

BPR

brings Efficiency, Effectiveness &

Customer-friendliness

BPR

needs adoption of a structured

methodology

Top

management commitment & Change

Management are critical to success

Thank You