1

PRODUCTION
MANAGEMENT
CORE-18 Module-1
 Module-1-Contents
2

Introduction to Production and

Operations Functions, Interaction of
Operations Management with other
functional areas of Management
Manufacturing and Non Manufacturing
operations and their Classifications
Operations Strategy as a part of
Corporate Strategy Operations
Planning and Control Operations
Forecasting: Forecasting methods.
 Production and Operations Management
3

Production

Production is an intentional act of producing something in

an organized manner.

Transformation Process

Every organization be it a product or service, transforms certain

inputs into outputs.

For getting the desired output, the quality of the inputs has to be
monitored.

The quality of the actual output obtained also has to be

continually compared with the desired output.
 Product and Services
4

Manufacturing provides a tangible and identifiable

product, which is obtained as a result of transformation
processes subject to it.
In Services the end product is often intangible-
amusement in a theme park, hospitality in a hotel, good
education, etc.
Some organizations may be considered as offering a
hybrid of products and services to its customers.
For Example ,in a restaurant , a expects good preparation
of the food offered( a product) and good ambience of the
place, good behaviour and quick service of part of the
waiter(a service).
Similarly , while flying in an aeroplane, a customer gets a
product for use( a seat in the plane) and services such as
 Product and Services
5

Products Services
Products are visible Services are invisible

There may be a time gap Services do not exist until they

between the production and are provided at the call of the
consumption of the product. customer

They have physical dimensions They take up no space, cannot

and attributes , take up space be inventoried and have no shelf
in inventory , depreciate and life
often wear out

Products can be perishable Services can never be

perishable
Products can be evaluated Service quality is evaluated
against specifications and against the satisfaction of the
criteria. customer.
 The Product/Process Continuum
6

Various organisations can be placed on a

continuum, whose extreme limits are product
orientation(the emphasis is on what customer
buys) and process orientation (the emphasis is
on how its is provided).
The two extreme represent the pure
manufacturing and pure service industries.
 The
Photocopie
Product/Process Continuum
r
manufactu Consultanc
rers and Banks ies
service
Automobil
e Automobil Restaurant
providers
e retailers s Airlines Undertaker
manufactu s
rers

Process
Product
orientat
orientat
ion
ion
Fig 1 Organizations on a product/process continuum
7
 The Product/Process Continuum
8

The automobile manufacturers are shown at the

product orientation extreme of the continuum.
Next are the photocopier manufacturers and
service providers .After-sales service is crucial for the
customer in these cases as the parts of the photocopier
are very expensive and available only with the
manufacturing company .The secondary market does
not exist for such parts and service personnel are not
available as freelancers. Therefore , process orientation
is present to some extent in this case as compared to
automobile manufacturers.
 The Product/Process Continuum
9

Next on the continuum are the automobile retailers, who

are mainly involved providing information to potential
buyers through their sales staff in showrooms.
They also after-sales services, warranty services, mobile
service vans(providing on-site services), etc.
Restaurants lie midway on the continuum as they provide
food(product) as well as services to their customers.
Consultancies and undertakers lie on the process
orientation extreme of the continuum.
 Transformation Process
10

Quality of Quality of
inputs Random outputs
monitored Disturbances monitored

Inputs Output
Men Transformat Goods
Materials ion Process &services
Machines
Informatio
n
Energy
Feedback
Mechanims

Figure 2
 Transformation Process
11

Feedback Mechanisms are required to monitor the

performance of the transformation process.
There may be some random disturbances hampering
the transformation process of converting the inputs
into desired outputs.
The random disturbances are unexpected and
sometimes not planned for. They are mostly due to
the external environment
Transformation Process for a Purely Service
Organisation-Educational Institution
Random Quality of
Quality of
outputs Output
inputs Disturbances Enlightened
monitored
monitored Strikes of Students with
students , Good
Inputs teachers or communicat
Raw minds
staff ion skills
(Students) Leadership
Teachers Transformat Qualities
Administra ion Process Good
tive staff
Feedback analytical
Class
Mechanism ability
rooms Teams spirit
Computer Success at
placement Decision
labs
Interviews making
Library
Grades abilities
Projectors(
obtained in Computer
OHP,LCD
examinations skills
etc)
Rising career
12 graph of Figure 3
alumni in
Transformation Random
Disturbances
Process for a High turnover
purely of workers and
manufacturing managers
Inputs Recession Quality of
organisation
Machines
Quality of
Government outputs
inputs
and monitored taxation policy monitored
equipments Strikes
Component
instigated by Output
s , parts,
sub- unions
Transformat Goods
assemblies ion Process &services
Feedback
Office Mechanisms
Infrastructu Rising Sales
re Volume
(computers Lesser customer
, furniture complaints
etc) Positive response
Building of customers in
Workers Figure 3
the feed back
Managers forms
13 Productivity
 Production and Operations Management
14

Production and operations management (POM) is

defined as the design , operation, and improvement
of the transformation process, which converts the
various inputs into the desired outputs of products and
services.
The Operation process from the Point of View of an Entrepreneur
Operations Strategy

New product development

Business process outsourcing

and offshoring

Facility location Facility layout planning Facility capacity planning

Planning

Inventory Project Management Total productive

Management maintenance
MRP/JIT/SCM

Aggregate production/operations
planning

Work design Operations Scheduling Quality Management

Demand forecasting

15 Service operations management

 A Systems View of Operations: Defining the
Sub System
16

System: is a collection of objects related by regular

interaction and interdependence. For example Systems can
vary from large-nationwide communication networks to
small systems like processing paper work in an office.
Production Systems: Production systems are one of the
subsystems of Larger organisational systems which has many
other subsystems like marketing, finance, personnel
departments
Each organisational subsystems are independent at the
same time they are interdependent. They are independent
in the sense that each functional subsystem has its own
objectives and goals and at the same time they are
functionally related with other subsystems of the
organisation.
A Systems View of Operations: Defining the Sub
System
17

The organisational system shown has an objective and

various elements that constitute the organisational systems
are finance, production, marketing and personnel
subsystems
Production : To manufacture the products of right quality
and right quantity at predetermined cost at pre-established
time.
Marketing : To create the demand for the companys
product and / or services and satisfy the needs of the
customer through companys products through various
activities like market research, market planning, sales
administration and advertising.
Finance : To plan and allocate the finance to various
activities of the organisation an to meet the long -term and
short-term financial requirements of the enterprise. The
A Systems View of Operations: Defining the Sub
System
18

Personnel: The objective of the personnel function is to

match the jobs and skills of the personnel and create
harmonious climate where each and every individual in the
organisation contributes positively towards the
achievement of organizational objectives.

The functions include Recruitment , compensation,

promotion and training
 Subsystems of Organisational Systems
Legal aspects Technology

Production Finance

Marketing Personnel

19
Suppliers Government
 Interface between Production and
Marketing
20

The Production department seeks the following

information from marketing department
Needs of the customer with respect to companys
product and services.
The demand for the product and likely market trend
for the future period.
The special features required by the customer
regarding products
The delivery requirement of the products from
production as per customer requirements.
 Interface between production and
marketing
21

The marketing department requires following information

from production department
Production Status of products
Performance characteristics of the products
Delivery schedules as per production plan based upon the
forecasted demand
Product features and specifications
 Interface between Production and Finance
22

Finance is the bloodline of business

The production department has to invest in physical
facilities raw materials and component parts , have
to pay wages and salaries and pay for utilities.
Thus the finance department has to make provisions
for both long term and short-term requirement of
funds to make the smooth running of production.
 Interface between Production and
Personnel
23

The success of the production department

depends upon the quality, attitude and skills of
the people.
The responsibility of the matching the job and
the person lies with personnel department.
The personnel department has to keep the
records for the development of workers, identify
their training needs, manpower utilisation.
 Managing the Operations Subsystem
24

We have described the operations subsystem , the real

challenge , however is not identify it but to operate
effectively.
The conversion process must be someone , and that
someone is the operations manager.
Operations managers is to manage the process of
converting inputs into desired outputs.
 Manufacturing Operations Classifications
25

Production processes can be classified into

Project
Batch
Mass
Continuous
 Manufacturing Operations Classifications
26

Project: A project takes a long time to complete,

involves a large investment of funds and resources
and produces one item at a time to customer order.
Examples include construction projects, shipbuilding ,
new product development and aircraft
manufacturing .
 Manufacturing Operations Classifications
27

Batch production : Batch production processes

many different jobs through the production
system at the same time in groups or batches.
Products are typically made to customer order,
volume is low and demand fluctuates. Examples
of batch production include printers, bakeries,
machine shops and furniture making .
 Manufacturing Operations Classifications
28

Mass Production: Mass production produces

large volumes of a standard product for mass
market . The product demand is stable and
production volume is high. Goods that are mass
produced include automobiles , televisions ,
personal computers, fast food and most
consumer goods.
 Manufacturing Operations Classifications
29

Continuous production: Continuous production

is used for very high-volume commodity products
that are very standardised. The system is highly
automated and is typically in operations
continuously 24 hours a day. Examples Refined
oil, paints, chemicals and food stuffs are
produced by continuous production.
 Product Process Matrix
30

The process chosen to create the product or

service must be consistent with product and
service characteristics.
The most important product characteristic( in
terms of process choice) are degree of
standardization and demand volume.
Figure 4 shows a product- process matrix that
matches product characteristics with process
choice.
 Product-Process Matrix

31
 Non Manufacturing operations
32

Services are classified based on the degree of

customization and degree of labour
intensity.
Non manufacturing operations can be classified
into
Professional Service
A Service shop
Mass Service
Service Factory
 Non Manufacturing operations
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Professional Service: A professional service such as

accountant, lawyer or doctor is highly customized and
very labour intensive.
Service Shop: A service schools and hospitals is less
customised and labour intensive but still attentive to
individual customers.
Mass Service : A mass service , such as retailing and
banking offers the same basic services to all
customers and allows less interaction with the service
provider.
 Service Process Matrix

34
 Forecasting
35

Forecasts are vital to every business organisation

and for every significant management decision.
Forecasting is the basis of corporate long-run
planning.
In the functional areas of finance and
accounting , forecasts provide the basis for
budgetary control.
Marketing relies on sales forecasting to plan
new products, compensate sales personnel and
make other key decisions.
Production and operations personnel use
forecasts to make periodic decisions involving
process selection, capacity planning and
 Types of Forecasting
36

Depending upon the period for which the forecast is

made, it is classified as long-term forecasting and
short-term forecasting.
Short-term forecasting : The forecasts which cover
the periods less than one year is termed as short-term
forecasting . Ex forecasts made for material control ,
loading and scheduling.
Long-term forecasting : The forecasts which cover
the period over one year (5 years or 10 years) are
termed as long-term forecasts.
Ex forecasts made for the purpose of product
diversification, sales and advertising budgets, capacity
planning and investment planning.
 Types of Forecasting Methods
37

Forecasting Methods can be classified into four basic

types.
Qualitative
Time Series Analysis
Casual relationships
Simulation
 Components of Demand
38

The demand for product or services can be broken

into six components.

Secular Trend(T)
Seasonal Movements(S)
Cyclical Movement (C)
Irregular Variations (I)
 Components of Demand
39

These components may be combined in different

ways. It is usually assumed that they are multiplied
or added, i.e.,
yt =TCSI
yt =T+C+S+I

Secular Trend : The trend is the long term pattern of a

time series. A trend can be positive or negative depending
on whether the time series exhibits an increasing long term
pattern or a decreasing long term pattern. If a time series
does not show an increasing or decreasing pattern then the
series is stationary in the mean.
Examples : Changes in technology, Populations,
Wealth etc.
 Components of Demand
40

Secular Trend
 Components of Demand
41

Cyclical component : Any pattern showing an up and

down movement around a given trend is identified as a
cyclical pattern. The duration of a cycle depends on the
type of business or industry being analysed .
Examples : A business cycle showing these oscillatory
movements has to pass through five phases Expansion,
peak, recession, trough and recovery.
 Components of Demand
Seasonal component :Seasonality occurs when the time
series exhibits regular fluctuations during the same month (or
months) every year, or during the same quarter every year.

Examples : For instance, retail sales peak during the month

of December, Weather conditions, social customs, religious
customs Within 12 months

42
 Components of Demand
43

Irregular variations: This component is

unpredictable. Every time series has some
unpredictable component that makes it a random
variable. In prediction, the objective is to model" all
the components to the point that the only component
that remains unexplained is the random component.
Examples :Unforeseen events such as strikes,
hurricanes, and floods
 Qualitative Techniques in Forecasting
44

Qualitative techniques in forecasting have been

classified into the following.
Grass roots
Market Research
Panel consensus
Historical analogy
Delphi Method
 Qualitative Techniques in Forecasting
45

Grass roots : Derives a forecast by compiling input

from those at the end of the hierarchy who deal with
what is being forecast. For example , an overall sales
forecast may be derived by combining the inputs from
each sales person who is closest to his or her own
territory.
Market research : Sets out to collect data in a variety
of ways(surveys, interviews and so on) to test the
hypothesis about the market . This is typically used to
forecast long-range and new product sales.
Panel Consensus : Free open exchange at meetings.
The idea is that discussion by the group will produce
better forecasts than one individual. Participants may
 Qualitative Techniques in Forecasting
46

Historical Analogy : Ties what is being forecast to

a similar item. Important in planning new product
where a forecast may be derived by using the history
of a similar product. Example toasters and coffee
pots
Delphi Method : Group of experts responds to
questionnaire. A moderator compiles the results and
formulates a new questionnaire that is submitted to
the group . Thus there is a learning process for the
group as it receives new information and there is no
influence of the group pressure or dominating
individuals.
 Time Series Analysis
47

Time series forecasting models try to predict

the future based on past data. For example sales
figures collected for the past six weeks can be used
to forecast sales for the seventh week.
Quarterly sales figures collected for the past
several years can be used to forecast future
quarters.
 A Guide to selecting an Appropriate
Forecasting Method
48

Forecasting Amount of Forecast Horizon

Method Historical Data
Simple moving 6 to 12 months, Short to medium
average weekly data are
often used.
Weighted 5 to 10 Short
moving average observations
and simple needed to start.
exponential
smoothing
Exponential 5 to 10 Short
Smoothing with observations
trend needed to start.
Linear 10 to 20 Short to medium
Regression observations
 Forecast Horizon
49

Forecast horizon is categorised into three

Short-term : refers to under 3 months.

Medium-term : Three months to 2 years.
Long-term : Greater than 2 years
 Choice of Forecasting Model
50

Which forecasting model a firm should choose

depends on

Time horizon to forecast.

Data availability.
Accuracy required.
Size of forecasting budget
Availability of qualified personnel.
 Simple Moving Average

51
 Simple Moving Average

52
 Simple Moving Average
53

What is the forecasted demand for the

31st week according to 3 week and 9
week simple moving average?
Ans : 2333 ( 3 week simple moving
average) .
: 2344( 9 week simple moving
average) .
 Weighted Moving Average
54

The simple moving average gives equal weight to

each component of the moving average database.
The weighted moving average allows any
weights to be placed on each element , providing of
course , that sum of all weights equals 1.
 Weighted Moving Average-Example
55

A departmental store may find that in a four

month period , the best forecast is derived by
using 40 percent of the actual sales for the most
recent month , 30 percent of two months ago,20
percent of three months ago and 10 percent of
four months ago. If the actual sales experience
was Month Month Month Month Month
1 2 3 4 5

100 90 105 95 ?

The forecast for month 5 would be

F5 = 0.40(95)+0.30(105)+0.20(90)+0.1(100)
= 97.5
 Weighted Moving Average
56

The formula for a weighted moving average is

Ft = w1At-1 +w2At-2+ + wnAt-n

W1 = Weight to be given to the actual occurrence

for period t-1
W2 = Weight to be given to the actual occurrence
for period t-2
Wn = Weight to be given to the actual occurrence
for period t-n
 Problem 1
57

The past data on the load on weaving machines is

shown below: Mont Load(Hr
h s)
May- ----
96
June- 585
96
July- 610
96
Aug- 675
96
a) Compute the load on the weaving
Sep- 750
machine center using 5 th

moving average for the 96

month of December 1996.
b) Compute a weighted three months
Oct-96 860 average for December ,
1996 where the weightsNov-
are 0.5 for the latest month,0.3 and
970
0.2 for the other months96respectively.
 Problem 1
58

Solution a) Five months moving average forecast for

Dec 1996
= 970+860+750+675+610 = 773 hrs
5
b) A three month weighted average moving forecast
for Dec 1996
= 970 0.5 + 860 0.3 + 750 0.2
= 893 machine hours
 Exponential Smoothing Method
59

One of the disadvantages of the moving average

forecasting is the laborious operation of
maintaining the data for all the previous years.
Exponential smoothing method requires only the
current demand and the forecasted demand for
the current month.
Simple moving average method gives equal
weightage to all the periods.
Exponential Smoothing is distinguished by the fact
that it assigns weights to all the previous data and
pattern of weights assigned are of exponential form.
Demand for the recent data is given more weightage
and the weights assigned to older periods decrease
exponentially.
 Exponential Smoothing Method
60

Simple exponential smoothing model estimates the average

forecast for the next period by using the actual and
forecasted demand for the previous period.
Forecast for period t
Ft = Forecasted demand for the last period + ( Actual
demand for the last period Forecasted demand for the last
period).
Ft = Ft-1 + (Dt-1+ Ft-1 ).

The value of the selected is small (0.05 to 0.1), If the

demand pattern is smooth or stable and large value of is
used for the fluctuating demand.
 Problem 2
61

The demand for the disposable plastic tubing for a

general hospital is 300 units and 350 units for
September and October respectively . Using 200 units
as the forecasted demand for September , compute
the forecast for the month of November. Assume the
value of as 0.7.
Forecast for October can be computed as
Ft = 200 + ( 300-200) = 200+0.7(100) = 270 units
Forecast for November can be computed as
Ft+1 = 270+ ( 350-270) = 270+0.7(80) = 326 units
 Casual Forecasting Method
64

Casual methods try to identify the factors which

causes the variation of demand and try to
establish a relationship between demand and
these factors.
Popularly used methods are
Regression and Correlation analysis
 Regression Analysis
65

Regression analysis is a forecasting technique

that establishes the relationship between
variables.
Historical Data establishes a functional
relationship between two or more correlated
variables.

Types of regression
Linear regression
Multiple regression
 Linear regression
66

Linear regression refers to the special class of

regression where the relationship between
variables form a straight line.
Linear regression is of the form Y = a+bX

Where Y is the value of the dependent variable ,a

is the Y intercept , b is the slope and X is the
independent variable.
Linear regression is useful for long term
forecasting .
The major restriction in using linear regression
forecasting is as the name implies that past data
and future projections are assumed to fall about a
 Multiple regression
67

Multiple Regression Analysis : Another forecasting

method is multiple regression .Here we consider
one dependent variable and more than two
independent variables.
Multiple regression is of the form
Y = a+b1X1+b2X2+b3X3+..
 Correlation
68

Correlation analysis is determining the degree of

closeness of relationships between two variables.
Types of Correlation
Positive and Negative Correlation

Simple and Multiple Correlation

Linear and non-linear Correlation

 Forecasting Using a Causal relationship
69

The carpet city store in New Delhi has kept

records of its sales(in square meter) each year,
along with the number of permits for new houses
in its area.
Year Permits (Sales in Sq
meters)
1997 18 13000
1998 15 12000
1999 12 11000
2000 10 10000
2001 20 14000
2002 28 16000
2003 35 19000
2004 30 17000
2005 20 13000
 Forecasting Using a Causal relationship
70

Suppose there are 25 permits for houses to be

built in 2006. The sales for year 2006 is ?
 Seasonal Adjustments
71

A Seasonal pattern is a repetitive increase and

decrease in demand.
Many demand items exhibit seasonal behaviour.
Seasonal patterns can also occur on a month,
weekly or even daily basis.
There are several methods for reflecting seasonal
patterns in a time series forecast.
One of the simpler methods is using a seasonal
factor.
 Seasonal Adjustments
72

A seasonal factor is a numerical value that is

multiplied by the normal forecast to get a
seasonally adjusted forecast.

Si = Di / D

Di is the demand for each seasonal period.

D is the total annual demand
 Seasonal Adjustments
73

Wishbone Farms grows turkeys to sell to a meat-

processing company throughout the year. However,
its peak season is obviously during the fourth quarter
of the year, from October to December. Wishbone
Farms has experienced the demand for turkeys for the
past three years shown in the following table.
Demand for Turkeys at Wishbone
Demand(1000s) Farms
per Quarter
Year 1 2 3 4 Total
2002 12.6 8.6 6.3 17.5 45
2003 14.1 10.3 7.5 18.2 50.1
2004 15.3 10.6 8.1 19.6 53.6
Total 42.0 29.5 21.9 55.3 148.7
 Seasonal Adjustments
74

S1 = D1/ D = 42/ 148.7 = 0.28

S2 = D2/ D = 29.5/148.7 = 0.2
S3 = D3/ D = 21.9/148.7 = 0.15
S4 = D4/ D = 55.3/148.7 = 0.37

If the forecast for year 2005 is 58.17 or 58170 turkeys

according to linear regression. Find the seasonally adjusted
forecasts for the year 2005.

SF1 = S1 F5 = 0.28 58.17 = 16.28

SF2 = S2 F5 = 0.2 58.17 = 11.63
SF3 = S3 F5 = 0.15 58.17 = 8.73
SF4 = S4 F5 = 0.37 58.17 = 21.53
 Forecast error
75

Forecast error is the numerical difference between the

forecasted demand and the actual demand.
The error should be minimum as possible.
Mean Absolute Deviation: is the average of the
absolute value of difference between the actual
and forecasted value.
Mean Absolute Deviation can be computed by the
following formula.
MAD = absolute value( Dt- Ft)/n

t =time period number

Dt = demand in period t
Ft = forecast for period t
 Problem
76

KR bakeries sell half kg loaves to chain of food

stores in Bangalore. It is facing errors in forecast .
The company has Saturday weekly holiday and
hence Friday production should take care of
Saturday and Sunday market demand.
The demand4 figures3 of bread 2 are as follows:
Last
month months months Month
ago ago ago
Monday 2000 2200 2100 2300
Tuesday 1800 1900 2000 2100
Wednesd 2100 2200 2100 2300
ay
Thursday 1700 1800 1700 1800
Friday 1800 1700 1900 1800
 Problem
77

Calculate the forecast for the month based on

following:
a) Using 3 months moving average
b) Using a weighted average of 0.4 0.3, 0.2 and
0.10 for last 4months.
c) KR bakeries is planning the purchase of raw
materials. If bread demand has been forecast at
20000 nos and only 19000 were actually
demanded what would be the forecast for this
month using exponential smoothing = 0.10.
d) In the case forecast made in c) ; this months
demand turns out to be 20500. What would be
the new forecast for the next month.
 Solutions
78

a)Monday = (2200+2100+2300)/3 = 2200

Tuesday = (1900+2000+2100)/3 = 2000
Wednesday = (2200+2100+2300)/3 =2200
Thursday =(1800+1700+1800)/3 = 1767
Friday = (1700+1900+1800)/3 = 1800
Saturday & Sunday = (2500+2800+2700)/3 =
2667
 Solutions
79

b)
 Solutions
80

c) Ft = 20000+ 0.1(19000-20000) =
19900
d) Ft+1 = 19900+ 0.1( 20500-19900) =
19960