OPERATIONS

MANAGEMENT

UNIT 1
INTRODUCTION

Production is one of the fundamental functional area of any business. A business organization exists to
satisfy customers through offering products or services. These products or services cannot be offered
without making or developing them in a production system. "A production system is one where value is
added to raw materials through successive processing to convert it in a desired goods or services." In a
manufacturing environment mechanically or chemically, raw material is treated to change the shape of
original input as well as to get desired functionality. Similarly, in a service environment, service provider
offers services to customer using equipment and knowledge / skills of provider itself. It should be noted
that the finished product of one manufacturing unit does not always furnish a ready-made product for the
ultimate consumption. In a chain of manufacturing activities, the finished product of the one organization
sometimes becomes the raw material or component for the manufacturing firms falling next in the
sequence. Operations management is a systematic approach to address issues in the conversion process of
inputs into useful, revenue- generating outputs.

DEFINITIONS OF OPERATIONS MANAGEMENT

Operations management is the administration of business practices to create the highest level of
efficiency possible within an organization. It is concerned with converting materials and labour into
goods and services as efficiently as possible to maximize the profit of an organization.

Operations management is the design, execution, and control of operations that convert resources into
desired goods and services, and implement a company's business strategy.

Operations management is an area of management concerned with designing and controlling the
process of production and redesigning business operations in the production of goods or services.

It is concerned with managing an entire production system which is the process that converts inputs (in
the forms of raw materials, labour, and energy) into outputs (in the form of goods and/or services), as
an asset or delivers a product or services

THE ORGANISATION

The three major functional areas of organizations are

Finance: responsible for securing financial resources at favourable prices and allocating those resources
throughout the organization, as well as budgeting, analysing investment proposals, and providing funds for
operations.
Marketing: responsible for assessing consumer wants and needs, and selling and promoting the
organizations goods and services.

Operations: management of systems or processes that create goods and/or provide services.

Value-Added Process

The operations function involves the conversion of inputs into outputs

Ways That You Can Add Value To Your Product Or Service

In today's market place where so many products and services are viewed as a commodity, the ability to add
value to your product or service is an absolute necessity. There is no doubt that in the absence of value-
added components virtually any product or service can be driven down to the most bottom line - price.
When you are only selling price you'll never be able to sell any degree of high margin sales and that is
where profitability, long term growth and sales success resides.

1. Providing expert advice and a tremendously high level of professionalism.

Lots of consulting organizations, accounting firms and even medical professionals are paid a tidy sum for
the level of advice that they provide. However, for you as a sales professional, in order for you to be able to
provide value, what you need to do is to understand that you have to provide a level of advice that is
significantly higher, more sophisticated and a lot more valuable than that of your competition. What this
means is a higher level of sophistication, wisdom and understanding about what it is that you do.
2. Bundling and packaging. It is not only about the way your product or service actually looks, It is also
about being able to put together desirable packages, purchasing levels and a series of added benefits that
are significant in value and are, themselves, a whole lot more valuable than simply the product is by itself.

3. Service levels. It is possible for you to differentiate yourself not only by providing a higher level of
service but by adding different levels of service based upon someone's size, frequency or amount of
purchase. For example, you may want to have gold or platinum or silver levels of service that people
qualify for, are willing to pay for, and receive when they do business with you.

4. Frequent buyer programs. This is tied into the concept that the more someone buys from you the more
valuable service, pricing, benefits and related items they receive. It is somewhat like frequent flyer miles
with an airline. I know people who actually fly thousands of miles out of their way to stay on one particular
airline only because they want to build up the miles!

5. Transition and education. As new customers come on stream with your organization you may want to
provide action or transition teams to help them to be better able to utilize the products or services that you
sell them. By the same token, the more education they have related to those products or services the more
capable they'll be at utilizing them.

6. Recognition and reward levels. This is somewhat different from frequent buyer programs in that with
this particular concept behind value-added you actually provide recognition to clients or customers based
upon their ability to utilize your product or service, maximize its potential, buy certain levels from you, etc.
What this means is that they themselves are recognized for being outstanding customers. Several years ago
we included a Hall of Fame in our newsletter and we had lots of clients very interested in appearing and
becoming a part of our Hall of Fame. It's a fantastic way to utilize good relationships and good will.

7. Qualitative preference. Based upon someone's level of purchase, involvement or interaction, you
provide higher quality of products, perhaps a more sophisticated level of service, dedicated personnel,
dedicated phone lines, fax lines, or the like, that gives them a greater opportunity to be treated better than
the run of the mill customer happens to be. You may even be able to use this for introductory customers as
a value-added component.

8. Dedicated personnel. This works particularly well if you have a technical product or service or one that
requires support. It is not difficult to understand that the more someone is familiar with another person's
account, products, machinery, equipment or way of doing business, it is far easier to do business with that
organization. In this scenario, you simply assign dedicated account people to handle your customer's
accounts personally.

9. Speed of service or delivery. One of the ways to differentiate yourself is to guarantee some sort of on
time or faster delivery. It is very well known and accepted that on time delivery is a key component for
charging full or maximum pricing. It is also a component as it relates to providing value-added services and
products.

10. Insider information. This is very common when people are selling information as it relates to stocks,
bonds, financial information or anything related to information or time specific data. Utilizing this process
you may want to consider a regular newsletter (electronic or printed) that updates customers on a regular
basis as it relates to very key and important information that they have to have

Goods-service Continuum

The dichotomy between physical goods and intangible services is an oversimplification; these are not
discrete categories. Most business theorists see a continuum with pure service at one endpoint and pure
commodity goods at the other endpoint. Most products fall between these two extremes. Goods are
normally structural and can be transferred in an instant while services are delivered over a period of time.
Goods can be returned while a service once delivered cannot. Goods are not always tangible and may be
virtual

GOODS VERSUS SERVICE

SERVICE VERSES MANUFACTURING

Service: low percentage of goods, High percentage service, intangible output

Manufacturing: high percentage of goods, low percentage service, tangible output

A service is an act. Service job category include Service job categories

Government, Wholesale/retail, Financial services, Healthcare, Personal services, Business services,

Education etc.
KEY DIFFERENCES BETWEEN SERVICE AND PRODUCTION

1. Customer contact

2. Uniformity of input

3. Labour content of jobs

4. Uniformity of output

5. Measurement of productivity

6. Production and delivery

7. Quality assurance

8. Amount of inventory

9. Evaluation of work

10. Ability to patent design

Challenges of Managing Services

 Service jobs are often less structured than manufacturing jobs

 Customer contact is higher
 Worker skill levels are lower
 Services hire many low-skill, entry-level workers
 Employee turnover is higher
 Input variability is higher
 Service performance can be affected by worker’s personal factors
 Real-time communication and resource location
 Customer demand and high expectation

The operations function includes many interrelated activities, such as forecasting, capacity planning,
scheduling, managing inventories, assuring quality, motivating employees, deciding where to locate
facilities, and more. The operations function consists of all activities directly related to producing goods or
services.

What is the nature of the Operation Manager’s job?

The primary function of the operation manager is to guide the system by decision making. He/she is the
key figure in the system. He or she has the ultimate responsibility for the creation of goods or provision of
services.
Operations Manager Responsibilities and Duties

 Manage and direct operations team to achieve business targets.

 Assist in developing or updating standard operating procedures for all business operational activities.
 Build strong relationship by addressing customer issues and complaints in a timely manner.
 Assist in employee appraisals, promotions, compensation and termination based on the performance
review.
 Provide operational support and guidance to staff.
 Assist in developing operating and capital budgets.
 Monitor and control expense according to allotted budget.
 Assist in interviewing, recruiting and training candidates.
 Manage work assignment and allocation for staff.
 Conduct performance review and provide performance feedback to staff.
 Maintain accurate and clear documentation for operational procedures and activities.
 Work in compliance with company policies and procedures.
 Ensure team follows standard operating procedures for all operational functions.
 Conduct regular meetings with team to discuss about issues, concerns, updates etc.
 Support operational risk and audit process for the purpose of preventive maintenance

SCOPE OF OPERATIONS MANAGEMENT

Operations Management concern with the conversion of inputs into outputs, using physical resources, so
as to provide the desired utilities to the customer while meeting the other organizational objectives of
effectiveness, efficiency and adoptability. It distinguishes itself from other functions such as personnel,
marketing, finance, etc. by its primary concern for ‘conversion by using physical resources’.
Production and Operations Management functions:
1. Location of facilities.
2. Plant layouts and Material Handling.
3. Product Design.
4. Process Design.
5. Production Planning and Control.
6. Quality Control.
7. Materials Management.
8. Maintenance Management.
LOCATION OF FACILITIES
Location of facilities for operations is a long-term capacity decision, which involves a long-term
commitment about the geographically static factors that affect a business organization. It is an important
strategic level decision-making for an organization. It deals with the questions such as ‘where our main
operations should be based?’
The selection of location is a key-decision as large investment is made in building plant and machinery.
An improper location of plant may lead to waste of all the investments made in plant and machinery
equipment. Hence, location of plant should be based on the company’s expansion plan and policy,
diversification plan for the products, changing sources of raw materials and many other factors. The
purpose of the location study is to find the optimal location that will results in the greatest advantage to
the organization.
PLANT LAYOUT AND MATERIAL HANDLING
Plant layout refers to the physical arrangement of facilities. It is the configuration of departments, work
centers and equipment in the conversion process. The overall objective of the plant layout is to design a
physical arrangement that meets the required output quality and quantity most economically.
According to James More ‘Plant layout is a plan of an optimum arrangement of facilities including
personnel, operating equipment, storage space, material handling equipment and all other supporting
services along with the design of best structure to contain all these facilities’.
‘Material Handling’ refers to the ‘moving of materials from the store room to the machine and from one
machine to the next during the process of manufacture’. It is also defined as the ‘art and science of
moving, packing and storing of products in any form’. It is a specialized activity for a modern
manufacturing concern, with 50 to 75% of the cost of production. This cost can be reduced by proper
section, operation and maintenance of material handling devices. Material handling devices increases the
output, improves quality, speeds up the deliveries and decreases the cost of production. Hence, material
handling is a prime consideration in the designing new plant and several existing plants.

PRODUCT DESIGN
Product design deals with conversion of ideas into reality. Every business organization have to design,
develop and introduce new products as a survival and growth strategy. Developing the new products and
launching them in the market is the biggest challenge faced by the organizations. The entire process of
need identification to physical manufactures of product involves three functions; Design and Marketing,
Product, Development, and manufacturing. Product Development translates the needs of customers
given by marketing into technical specifications and designing the various features into the product to
these specifications. Manufacturing has the responsibility of selecting the processes by which the
product can be manufactured. Product design and development provides link between marketing,
customer needs and expectations and the activities required to manufacture the product.
PROCESS DESIGN
Process design is a macroscopic decision-making of an overall process route for converting the raw
material into finished goods. These decisions encompass the selection of a process, choice of technology,
process flow analysis and layout of the facilities. Hence, the important decisions in process design are to
analyze the workflow for converting raw material into finished product and to select the workstation for
each included in the workflow.
PRODUCTION PLANNING AND CONTROL (PP&C)
Production planning and control can be defined as the process of planning the production in advance,
setting the exact route of each item, fixing the starting and finishing dates for each item, to give
production orders to shops and to follow-up the progress of products according to orders.
The principle of production planning and control lies in the statement ‘First Plan Your Work and then
Work on Your Plan’. Main functions of production planning and control include Planning, Routing,
Scheduling, Dispatching and Follow-up.
Planning is deciding in advance what to do, how to do it, when to do it and who is to do it.
Planning bridges the gap from where we are, to where we want to go. It makes it possible for things to
occur which would not otherwise happen.

Routing may be defined as the selection of path, which each part of the product will follow, which being
transformed from raw material to finished products. Routing determines the most advantageous path to
be followed for department to department and machine to machine till raw material gets its final shape.
Scheduling determines the program for the operations. Scheduling may be defined as 'the fixation of
time and date for each operation' as well as it determines the sequence of operations to be followed.
Dispatching is concerned with the starting the processes. It gives necessary authority so as to start a
particular work, which has been already been planned under ‘Routing’ and ‘Scheduling’.
Therefore, dispatching is ‘Release of orders and instruction for the starting of production for any item in
acceptance with the Route sheet and Schedule Charts’.
The function of Follow-up is to report daily the progress of work in each shop in a prescribed proforma
and to investigate the causes of deviations from the planned performance.
QUALITY CONTROL (QC)
Quality Control may be defined as ‘a system that is used to maintain a desired level of quality in a
product or service’. It is a systematic control of various factors that affect the quality of the product.
Quality Control aims at prevention of defects at the source, relies on effective feedback system and
corrective action procedure.
Quality Control can also be defined as ‘that Industrial Management technique by means of which
product of uniform acceptable quality is manufactured’. It is the entire collection of activities, which
ensures that the operation will produce the optimum quality products at minimum cost. The main
 objectives of Quality Control are:
1. To improve the companies' income by making the production more acceptable to the customers i.e.
by providing long life, greater usefulness, maintainability, etc.
2. To reduce companies cost through reduction of losses due to defects.
3. To achieve interchangeability of manufacture in large-scale production.
4. To produce optimal quality at reduced price.

5. To ensure satisfaction of customers with productions or services or high quality level, to build
customer good will, confidence and reputation of manufacturer.
6. To make inspection prompt to ensure quality control.
7. To check the variation during manufacturing.
MATERIALS MANAGEMENT
Materials Management is that aspect of management function, which is primarily concerned with the
acquisition, control, and use of materials needed and flow of goods and services connected with the
production process having some predetermined objectives in view.
The main objectives of Material Management are:
1. To minimize material cost.
2. To purchase, receive, transport and store materials efficiently and to reduce the related cost.
3. To cut down costs through simplification, standardization, value analysis, import substitution, etc.
4. To trace new sources of supply and to develop cordial relations with them in order to ensure
continuous supply at reasonable rates.
5. To reduce investment tied in the inventories for use in other productive purposes and to develop high
inventory turnover ratios.
MAINTENANCE MANAGEMENT
In modern industry, equipment and machinery are a very important part of the total productive effort.
Therefore their idleness or downtime becomes are very expensive. Hence, it is very important that the
plant machinery should be properly maintained.
The main objectives of Maintenance Management are:
1. To achieve minimum breakdown and to keep the plant in good working condition at the lowest
possible cost.
2. To keep the machines and other facilities in such a condition that permits them to be used at their
optimal capacity without interruption.
3. To ensure the availability of the machines, buildings and services required by other sections of the
factory for the performance of their functions at optimal return on investment.
Types of Operations

Operations Examples
Goods producing Farming, mining, construction
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking
renting, leasing, library, loans
Entertainment Films, radio and television
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites

Current Trends in Operations Management

Some of these have been around a while, but they remain popular trends in operations management: 

 Business process reengineering, or BPR, which helps companies revamp their organizations from the
ground up
 Lean manufacturing, Six Sigma, and Agile are disciplines focused on efficient, adaptable production
and continue to be mainstay approaches
 Reconfigurable manufacturing systems, designed for flexibility with sudden market changes
 Behavioural operations management, which focuses on human behaviour as it relates to operations
management
 Sustainability, or maintaining ecologically minded practices, under changing laws.

UNIT 2

PRODUCTION CONCEPT
2.0 INTRODUCTION
Operation is that part of as organisation, which is concerned with the transformation of a range
of inputs into the required output (services) having the requisite quality level. Management is the
process, which combines and transforms various resources used in the operations subsystem of
the organisation into value added services in a controlled manner as per the policies of the
organisation.

The set of interrelated management activities, which are involved in manufacturing certain
products, is called as production management. If the same concept is extended to services
management, then the corresponding set of management activities is called as operations
management.

2.1 Difference between Production and Operations Management

Production Management

E.S.Buffa defines production management as follows: ‘Production management deals with decision-
making related to production processes so that the resulting goods or services are produced according to
specifications, in the amount and by the schedule demanded and out of minimum cost’.

                         FIG: Areas of Production Management

Operations Management
Joseph G .Monks defines Operations Management as the process whereby resources, flowing with in a
defined system, are combined and transformed by a controlled manner to add value in accordance with
policies communicated by management.

2.2 Key Differences Between Production and Operation Management

1. Production Management can be defined as the administration of the set of activities concerning the
creation of goods or transformation of raw material into finished goods. Conversely, Operations
Management is used to mean that branch of management which deals with the administration both
production of goods and provision of services to the customers.
2. In production management, the manager has to make decisions regarding the design, quality,
quantity and cost of the product manufactured by the department. On the contrary, the scope of operations
management is larger in comparison to the production management wherein the operations manager looks
after the product design, quality, quantity, process design, location, manpower required, storing,
maintenance, logistics, inventory management, waste management, etc.
3. Production Management can only be found in the firms where production of goods is undertaken.
Unlike, one can find operations management in every organization, i.e. manufacturing concerns, service-
oriented firms, banks, hospitals, agencies, etc.
4. The basic objective of production management is to provide the right quality goods in the right
quantity at right time and best price. In contrast, operations management aims at making the best possible
use of organization’s resources, in order to fulfill the customer’s wants.

2.3 Productivity, Work Study, Productivity Measurement, Factors affecting Productivity

A. PRODUCTIVITY

Productivity is an overall measure of the ability to produce a good or service. More specifically,
productivity is the measure of how specified resources are managed to accomplish timely objectives as
stated in terms of quantity and quality. Productivity may also be defined as an index that measures output
(goods and services) relative to the input (labour, materials, energy, etc., used to produce the output). As
such, it can be expressed as: as a ratio of output to inputs. It can be expressed as units of a product (e.g.
cars) per worker-hour (total number of hours worked by all workers on that car). Given the cost of the
worker-hour, productivity can also measure the efficiency of a company.

Hence, there are two major ways to increase productivity: increase the numerator (output) or decrease the
denominator (input). Of course, a similar effect would be seen if both input and output increased, but
output increased faster than input; or if input and output decreased, but input decreased faster than output.

Organizations have many options for use of this formula, labour productivity, machine productivity, capital
productivity, energy productivity, and so on. A productivity ratio may be computed for a single operation, a
department, a facility, an organization, or even an entire country.
Productivity is an objective concept. As an objective concept it can be measured, ideally against a universal
standard. As such, organizations can monitor productivity for strategic reasons such as corporate planning,
organization improvement, or comparison to competitors. It can also be used for tactical reasons such as
project control or controlling performance to budget.

Productivity is also a scientific concept, and hence can be logically defined and empirically observed. It
can also be measured in quantitative terms, which qualifies it as a variable. Therefore, it can be defined and
measured in absolute or relative terms. However, an absolute definition of productivity is not very useful; it
is much more useful as a concept dealing with relative productivity or as a productivity factor.

B. FACTORS AFFECTING PRODUCTIVITY

Factors influencing productivity can be classified broadly into two categories:

1. Controllable (or internal) factors

2. Un-controllable (or external) factors.

1. Controllable For Internal Factors

(I) Product factor: In terms of productivity means the extent to which the product meets output
requirements product is judged by its usefulness. The cost benefit factor of a product can be enhanced by
increasing the benefit at the same cost or by reducing cost for the same benefit.

(II) Plant and equipment: These play a prominent role in enhancing the productivity. The increased
availability of the plant through proper maintenance and reduction of idle time increases the productivity.
Productivity can be increased by paying proper attention to utilization, age, modernization, cost,
investments etc.
(III) Technology: Innovative and latest technology improves productivity to a greater extent. Automation
and information technology helps to achieve improvements in material handling, storage, communication
system and quality control. The various aspects of technology factors to be considered are:

 Size and capacity of the plant,

 Timely supply and quality of inputs,
 Production planning and control,
 Repairs and maintenance,
 Waste reduction, and
 Efficient material handling system.

(IV) Material and energy: Efforts to reduce materials and energy consumption brings about considerable
improvement in productivity.

 Selection of quality material and right material.

 Control of wastage and scrap.
 Effective stock control.
 Development of sources of supply.
 Optimum energy utilization and energy savings.

(V) Human factors: Productivity is basically dependent upon human competence and skill. Ability to
work effectively is governed by various factors such as education, training, experience aptitude etc., of the
employees. Motivation of employees will influence productivity.

(VI) Work methods: Improving the ways in which the work is done (methods) improves productivity,
work study and industrial engineering techniques and training are the areas which improve the work
methods, which in term enhance the productivity.

(VII) Management style: This influence the organizational design, communication in organization, policy
and procedures. A flexible and dynamic management style is a better approach to achieve higher
productivity.

2. Uncontrollable (Or) External Factors

(I) Structural adjustments: Structural adjustments include both economic and social changes. Economic
changes that influence significantly are:
 Shift in employment from agriculture to manufacturing industry,
 Import of technology, and
 Industrial competitiveness.

(II) Natural resources: Manpower, land and raw materials are vital to the productivity improvement.

(III) Government and infrastructure: Government policies and program are significant to productivity
practices of government agencies, transport and communication power, fiscal policies (interest rates, taxes)
influence productivity to the greater extent.

C. WORK STUDY

“Work study is a generic term for those techniques, method study and work measurement which are used in
the examination of human work in all its contexts. And which lead systematically to the investigation of all
the factors which affect the efficiency and economy of the situation being reviewed, in order to effect
improvement.”

Advantages of Work Study

1. It helps to achieve the smooth production flow with minimum interruptions.

2. It helps to reduce the cost of the product by eliminating waste and unnecessary operations.
3. Better worker-management relations.
4. Meets the delivery commitment.
5. Reduction in rejections and scrap and higher utilization of resources of the organization.
6. Helps to achieve better working conditions.
7. Better workplace layout.
8. Improves upon the existing process or methods and helps in standardization and simplification.
9. Helps to establish the standard time for an operation or job which has got application in manpower
planning, production planning.

D. PRODUCTIVITY MEASUREMENT

1. Total Productivity Measure (TPM)

It is based on all the inputs. The model can be applied to any manufacturing organization or service
company.

Total productivity =Total tangible output +Total tangible input

Total tangible output = Value of finished goods produced + Value of partial units produced + Dividends
from securities + Interest+ Other income

Total tangible input = Value of (human + material + capital + energy+ other inputs) used. The word
tangible here refers to measurable.

The output of the firm as well as the inputs must be expressed in a common measurement unit. The best
way is to express them in rupee value.

2. Partial Productivity Measures (PPM)

Depending upon the individual input partial productivity measures are expressed as

Partial productivity =Total output% Individual input

Labour productivity =Total output%Labour input (in terms of man hours)

Capital productivity =Total output% Capital input

Material productivity =Total output% Material input

Energy productivity =Total output% Energy input

One of the major disadvantages of partial productivity measures is that there is an over emphasis on one
input factor to the extent that other input are underestimated or even ignored.

2.4 PRODUCTION TECHNOLOGY – TYPES OF MANUFACTURING PROCESSES

A. Production Technology

In the simplest sense, production technology is the machinery that makes creating a tangible physical
product possible for a business. To the small business, this means a workshop at the very least, with more
elaborate operations making use of machines and assembly lines. Choosing a production scale model
within a company’s capital means is important; simpler workshops tend to lead to lower production volume
but cost less to assemble, while higher output operations require more complex and costly machines, which
are sometimes cost prohibitive.

B. Components of Production Technology

1. The Modern Artisan Workshop

The artisan workshop represents the basic minimum effective level of modern production technology. An
artisan workshop builds upon the traditional workshops of craftsmen from before the industrial revolution
and replaces most of the simple hand tools used with time-saving electrically driven tools. These tools offer
the skilled tradesperson the advantage he needs in order to more quickly produce goods to the same level of
quality he would otherwise make with hand tools. The tablesaw, drill press and belt sander are all examples
of modern variations on simple hand tools used to save the modern craftsman time. Artisan workshops
focus on low or medium output of higher than average quality goods to maintain a competitive advantage
over large-scale factory-produced items of similar type.

2. CNC Machining and Extending the Artisan Workshop

A computer number-controlled or CNC machine – also referred to as computer-aided manufacturing –

further extends the capability of an artisan workshop, allowing the skilled craftsman to program the device
to perform highly detailed repetitive tasks such as router and drill operation. CNC machines are expensive
investments; however, when used to address the more time-consuming steps of producing an item in the
standard artisan workshop, they can significantly improve the overall profitability of that manufacturing
business. Because of their high initial cost when compared to manually operated shop tools, CNC machines
are generally unavailable to all but the most successful small business. Investing in a CNC machine is a
pivotal decision for a small business and should be done with careful consideration of how much the
machine will actually boost profits when compared to continuing with the manual method.
3. Automated Assembly Line-Style Mass Production

Automated assembly-line mass production represents the apex of modern industrial production, and is the
driving force behind industrial titans such as automobile manufacturers and the makers of household
appliances. The higher the degree of mechanization and use of robotics in the assembly line process, the
fewer human workers are required to produce a product; however, in replacing human laborers with robots,
the initial investment cost rises dramatically. The extremely high initial cost of automated assembly line
mass production places such production methods far beyond the grasp of small business owners as far as
practicality is concerned. Maintaining advanced automated assembly lines also requires the professional
services of highly skilled robotics technicians, again making practical implementation difficult for the
small business owner.

4. Practicality Considerations for Small Business

When it comes to investing in production technology, a small business’s focus should be on generating the
best dollar return on capital investment within the confines of the company’s reasonable budget. The IRS
states that small businesses are a success when they generate profit at least three out of every five years.
This general rule means that for the small business person, if it takes more than two years to pay off the
initial capital investment in production technology, the businesses likely exceeded its ideal maximum
production technology budget. This doesn’t mean that smaller to medium businesses have to abandon
advanced production methods entirely; instead, they can adapt some practices from larger-scale industry
that suit their own needs and capabilities. For example, small and medium businesses looking to capitalize
upon the mass production method of industrial manufacturing can take a page out of Henry Ford’s book
and use a simple conveyor belt line along with labor division to simplify and speed up the production
process while still using artisan shop-style manually operated tools.

C. TYPES OF MANUFACTURING PROCESS

The four main types of manufacturing are casting and molding, machining, joining, and shearing and
forming.

Molding in Manufacturing

If the products you’re creating start out as liquid, chances are the manufacturer uses molding. One popular
type of molding is casting, which involves heating plastic until it becomes liquid, then pouring it into a
mold. Once the plastic cools, the mold is removed, giving you the desired shape. You can also use casting
to make plastic sheeting, which has a wide variety of applications. There are four other types of molding:
injection molding, which melts plastic to create 3-D materials such as butter tubs and toys; blow molding,
used to make piping and milk bottles; compression molding, used for large-scale products like car tires;
and rotational molding, used for furniture and shipping drums.

Machining in Manufacturing

It would be difficult to make products like metal parts without the use of some type of machine.
Manufacturers use tools like saws, sheers and rotating wheels to achieve the desired result. There are also
tools that use heat to shape items. Laser machines can cut a piece of metal using a high-energy light beam,
and plasma torches can turn gas into plasma using electricity. Erosion machines apply a similar principle
using water or electricity, and computer numerical control machines introduce computer programming into
the manufacturing mix.

Joining in Manufacturing

You can only get so far with molds and machines. At some point you need to be able to put multiple parts
together to make one piece. Otherwise, just about all you can create is IKEA-like furniture that needs to be
assembled, part by part. Joining uses processes like welding and soldering to apply heat to combine
materials. Pieces can also be joined using adhesive bonding or fasteners.

Shearing and Forming in Manufacturing

When dealing with sheet metal, shearing comes into play. Shearing uses cutting blades to make straight
cuts into a piece of metal. Also known as die cutting, you’ll often see shearing used on aluminum, brass,
bronze and stainless steel. Another metal-shaping process is forming, which uses compression or another
type of stress to move materials into a desired shape. Although forming is often used with metal, it also can
be used on other materials, including plastic.
 UNIT 3
OPERATIONS CONCEPT

3.0 DIFFERENCE BETWEEN PRODUCT AND SERVICE

Products Are Tangible: They are physical in nature such that they can be touched, smelled, felt and even
seen. Services are intangible and they can only be felt not seen.

Need vs. Relationship: A product is specifically designed to satisfy the needs and wants of the customers
and can be carried away. However, with a service, satisfaction is obtained but nothing is carried away.
Essentially, marketing of a service is primarily concerned with creation of customer relationship.

Perish-Ability: Services cannot be stored for later use or sale since they can only be used during that
particular time when they are offered. On the other hand, it can be seen that products are perishable. For
example, fresh farm and other food products are perishable and these can also be stored for later use or
sale.

Quantity: Products can be numerically quantified and they come in different forms, shapes and sizes.
However, services cannot be numerically quantified. Whilst you can choose different service providers, the
concept remains the same.

Inseparability: Services cannot be separated from their providers since they can be consumed at the same
time they are offered. On the other hand, a product can be separated from the owner once the purchase has
been completed.

Quality: Quality of products can be compared since these are physical features that can be held. However,
it may be difficult to compare the quality of the services rendered by different service providers.

Return-Ability: It is easier to return a product to the seller if the customer is not satisfied about it. In turn,
the customer will get a replacement of the returned product. However, a service cannot be returned to the
service provider since it is something that is intangible.

Value Perspective: The value of a service is offered by the service provider while the value of the product
is derived from using it by the customer. Value of a service cannot be separated from the provider while the
value of a product can be taken or created by the final user of the product offered on the market.
Shelf Line: A service has a shorter shelf line compared to a product. A product can be sold at a later date if
it fails to sell on a given period. This is different with regard to a service that has a short shelve line and
should be sold earlier.

3.1TABLE SHOWING THE DIFFERENCES BETWEEN A PRODUCT AND SERVICE

PRODUCT SERVICE
A product is tangible, it is physical and can be A service is intangible, can only be felt and not
held, seen and movable touched
Product value is derived by the customer Value of service is offered by the service provider
Customer care forms critical component of
Customer care of the product is limited
marketing a service
A service is perishable and cannot be stored for
A product can be stored for future use
later use or sale
A service cannot be owned by the consumer once
Product can be owned
payment has been made
Quality of a service depends on the service
The quality of a product depends its nature
provider who shapes it
A product can be returned to the seller A service cannot be returned to the seller
It is difficult to compare the quality of services
It is easy to compare quality of products
offered
Services cannot be quantified in terms of numbers
Products can be quantified numerically

3.2 PRODUCT AND SERVICE DESIGN

The starting point for any business or organization is to cater to the desires or wants of humans (like us),
which keep changing with time, cultural changes and any developments in a country. For example, demand
for different cell phones or choice of network connectivity. Human wants are characterized with wants or
desires which are multiple and grow continuously, while businesses cater to these wants, can provide
(potential) satisfaction, can create employment opportunities and can improve the standard of living.
Accordingly, organizations conduct thorough planning on producing or servicing a product or service thus
preparing a suitable design reflective of their customers’ wants or desires. Key basic principles followed by
organizations which translate customers’ wants or desires that can cater to or create demand for product or
service includes the following:

Refine existing products/services: Based on recommendations or changes suggested by customers’ in

accordance to the changing tastes and preferences could lead businesses to change or improve existing
products
Develop new products/services: Businesses can develop new products or services in accordance to
changes in technology, tastes and preferences and develop or create new products/services (Refer to
Demand-pull and Invention-Push Innovations)

Formulate quality goals: Organizations should plan quality standards, assurances and specifications to
create quality-driven products/services

Construct prototypes for trials and tests: To target towards the right audience, specifications for trials
and testing of products/services should be maintained (and mentioned)

Create document specifications: Documentation of production and operations related activities should be
maintained by the organization

Translate product/service specification into process specifications: Documentation of product/services

in accordance to their usage and utility should be provided by the organizations

1. Formulate Cost targets: With reference to the above mentioned points, organizations should take
costs into consideration for identifying relevant risks, benefits or consequences.

Design for a product and service can be created innovatively based on “Demand-Pull” or “Invention-Push”
theories. Demand-pull theories emerged from innovation studies conducted in Europe during the 1960s.
Demand-pull studies have characterized with conducting Research and Development (R&D) and
improving project management. These two characteristics enabled understanding the needs of the
customers and implementing manageable and measurable business practices, which encouraged efficiency
during production (or provisions) and were further marketed as per the needs of the market. Alternatively,
invention-push (also known as technology push) pushed a new invention through R&D, production, sales
functions onto the market without considering whether it satisfies a customer’s need. The origins of
technology push can be linked with the Austrian economist, Joseph Schumpeter who argued that
development was the result of innovative ability of the entrepreneur and the introduction of new methods
of production. (Identify real-life examples for demand-pull and invention-push)

3.3 DESIGN CHOICES

There are significant differences between product and service design. Service design is an intangible aspect
while product design is tangible. Services are generally created and delivered at the same time and cannot
be held in inventory like actual products. Also, services are relatively visible to customers than products
(with reference to actual production). Based on the requirements or innovations introduced in the market
there are multiple design choices in products and services available for entrepreneur/s.
Choices in Product Design include

Standardization: The process of developing and implementing standards to produce or provide a

particular product or service is called standardization. Accordingly, standardization involves establishing
and formalizing guidelines to interact with people and/or to bring about modernization, centralization
and/or homogenization of products/services

Customization: A process involved to make or alter something as per the customers’ needs and
requirements is called customization. In addition, a large-scale system that produces these customized
products/services is called mass customization (Are Apple products mass customized or simply
customized?). These processes include producing multiple product items in large-scale to cater to needs of
different customers. (Any resemblance with the automobile or food industry?)

Delayed Differentiation: A generic or family product that is later differentiated into a specific end-product
is called delayed differentiation or postponement. For example, knitted sweaters by Benetton were initially
white and then dyed into different colours only as per changes in seasons or customer preferences. Another
example, colour of iPods, different apps in existing mobile phones, etc.

Modular Design: Modular design is to organise a complex system as a set of distinct components that can
be developed independently and then plugged together. For example, a personal computer consists of a
monitor, CPU, keyboard, mouse and other accessories whose functionalities are different but are connected
together for its relevant use. Similarly, an organisational set up can also have complex systems like a
hydro-electric set up has complex components like the dam with water-run turbines generating heat in
generators, transformed into transformers (that are separate units placed at a designated place away from
the turbines) to create electricity in different voltages.

Robust Design: This design was formulated by Dr. Genichi Taguchi who defined it as a process that
reduces variation in a product without eliminating the causes of the variation (also referred to as noise).
There are three types of variations – Internal, external and unit-to-unit variations. Internal variation can be
caused due to wear and tear of a machine and aging of materials whereas external variation can be caused
by factors relating to environmental conditions such as temperature, humidity and dust and unit-to-unit
variation are variations caused in between certain processes like variations in material, processes and
equipment. (Identify examples from your projects and explain?)

Choices in service design are based on communication and interaction with individuals supported by
relevant media tools like newspapers, television, radio, Internet, face-to-face interactions, etc. Key factors
that influence communication and interaction in services are the degree of variation and degree of customer
contact. Degree of variation refers to the potential deviations in requirements of customers while degree of
customer contact determines the level of standardization required in a service to be able cater to the needs
of diverse type of customers (in terms of demographic characteristics, socio-economic environment,
technology adaptation, etc).

3.4 CHARACTERISTICS OF SERVICE, CLASSIFICATION OF SERVICE

Important Characteristics of Services

(i) Perish-Ability

Service is highly perishable and time element has great significance in service marketing. Service if not
used in time is lost forever. Service cannot stored.

(ii) Fluctuating Demand

Service demand has high degree of fluctuations. The changes in demand can be seasonal or by weeks, days
or even hours. Most of the services have peak demand in peak hours, normal demand and low demand on
off-period time.

(iii) Intangibility

Unlike product, service cannot be touched or sensed, tested or felt before they are availed. A service is an
abstract phenomenon.

(iv) Inseparability

Personal service cannot be separated from the individual and some personalised services are created and
consumed simultaneously.

For example hair cut is not possible without the presence of an individual. A doctor can only treat when his
patient is present.

(v) Heterogeneity

The features of service by a provider cannot be uniform or standardised. A Doctor can charge much higher
fee to a rich client and take much low from a poor patient.
(vi) Pricing of Services

Pricing decision about services are influenced by perish-ability, fluctuation in demand and inseparability.
Quality of a service cannot be carefully standardised. Pricing of services is dependent on demand and
competition where variable pricing may be used.

(vii) Service quality is not statistically measurable

It is defined in form of reliability, responsiveness, empathy and assurance all of which are in control of
employee’s direction interacting with customers. For service, customer’s satisfaction and delight are very
important. Employees directly interacting with customers are to be very special and important. People
include internal marketing, external marketing and interactive marketing.

3.5 CLASSIFICATIONS OF SERVICES

In order to be able to make a clear and relevant classification of services, we would first need to
understand the concept of the word itself. Services usually refer to processes and not physical products.
Some services may include people whereas other services (like online services) may including objects
which are managed by people.

Examples of services which include people can be a hair salon, education, theater, restaurants, public
transportation. On the other hand services that include objects include repairs and maintenance, dry
cleaning, banking, legal services, insurance, etc.

1. Classification of service based on Tangible Action

Wherever people or products are involved directly, the service classification can be done based on
tangibility.

(i) Services for people – Like Health care, restaurants and saloons, where the service is delivered by
people to people.

(ii) Services for goods – Like transportation, repair and maintenance and others. Where services are given
by people for objects or goods.
Classification of services based on Intangibility

There are objects in this world which cannot be tangibly quantified. For example – the number of
algorithms it takes to execute your banking order correctly, or the value of your life which is forecasted by
insurance agents. These services are classified on the basis of intangibility.

(i) Services directed at people’s mind – Services sold through influencing the creativity of humans are
classified on the basis of intangibility.

(ii) Services directed at intangible assets – Banking, legal services, and insurance services are some of
the services most difficult to price and quantify.

The most intangible form of service output is represented by information processing. The customer’s
involvement in this type is service is not required. Generally, customers have a personal desire to meet face
to face but there is no actual need in terms of the operational process. Consultancy services can be an
example of this type of services where the relationship can be built or sustained on trust or telephone
contact. However, it is more indicated to have a face-to-face relationship in order to fully understand
the needs of the customer.

A more general classification of services based on the type of function that is provided through them can be
as follows:

 Business services.
 Communication services.
 Construction and related engineering services.
 Distribution services.
 Educational services.
 Environmental services.
 Financial services.
 Health-related and social services.
 Tourism and travel-related services.
 Recreational, cultural, and sporting services.
 Transport services.
 Other services not included elsewhere.
3.6 Factors Affecting Service Operations

1. Not being available right here and right now

No matter whether you assist your customers in live chat, by phone or offer only email support, your
customers expect you to provide great customer service. Furthermore, when they get automated email
replies, stumble upon your auto responder or no one accepts their chat requests they think you do not care
and your business is either dead or close to this.

In fact it’s really easy to deal with this situation. For phone support indicate hours when you are available
to assist your customers. For email support try to minimize the usage of automated responses. Instead, let
your customer know how long it will take you to handle their emails. In live chat never miss chat requests
when you are online. If you are not available to assist your customers, turn the live chat off and offer your
website visitors a possibility to leave you a message.

2. Low quality of customer service team training

If your team members are not ready to start assisting your customers, improve their training.  Ensure that
they will deliver superior customer experience and will take the responsibility for handling issues of your
customers. Low customers service quality, slow responses and inability to resolve issues will do more harm
than good.

3. Lack of personal touch

Sometimes I feel that I am talking to a robot while interacting with a customer service representative. Your
customers expect a friendly approach. They will feel disappointed if your customer service agent starts
sending canned responses or does not recognize customers who have been loyal to your company.

Inability to ditch the script demonstrates low quality of customer service agents education. In addition to
this it shows that they cannot take responsibility and provide personalized customer experience.

4. No “3 R” rule

I call the “3 R” rule an ability of a company to take responsibility, treat customers with respect and offer
fast resolution of issues. However, if your company does not follow at least one of these rules, your
business may become among those ones that lost their customers and reputation due to low customer
service quality.

5. You take loyal customers for granted

It costs five times as much to attract a new customer, than to keep an existing one. Check this infographic
to see how important the true customer loyalty is. If you cannot keep your loyal customers, you will not be
able to stay beyond competition. For this reason take more effort to reward those customers who have been
staying with your company for a long time.

6. Misuse of technology

In order to satisfy customers companies should keep up with the latest technological advances and always
improve customer service and purchasing experience. However, if you miss out on this while your
competitors don’t, your may lose those customers who get easily attracted by latest technological trends.
On the other hand proper usage of technology will help you to improve your customer service quality level
and facilitate your team’s workflow.

7. You don’t care about your customers’ needs

Showing customers that your company cares is critical to keep them satisfied. On the other hand not
listening to their opinion and demonstrating that you do not care makes people mad. Just let your customers
know that you value their feedback and show what you do to improve their experience.

8. No social media activity

Customers tend to share their experiences with companies on social media, both negative and positive
ones. In the meantime other network members listen to them. This is called the word of mouth. If you
monitor what your customers are saying about your brand and respond to their comments and feedback,
they will definitely appreciate this. Moreover, they will share the positive experience they had with your
company.

9. No teamwork

If there is no collaboration within your team, there is no fast way to resolve those issues which require
attention of different specialists. When the interaction between departments takes too long your customers
will not wait and take a look at the offer of competitors.

10. Employee burnout

Too many complaints, multitasking and negative atmosphere can lower a person’s level of commitment
and move their positive and helpful attitude to an apathetic one. In order to avoid such situations you need
to plan your team schedule properly, avoid multitasking and motivate them with positive examples and
quotations. Sometimes short meetings where you discuss all problems your team has faced will help to
release the pressure and will give your employees an opportunity to discuss their ideas with you
3.7 SERVICE CAPACITY PLANNING

Ability of a service system to deliver the intended service and to match customer demand. Service capacity
is perishable and can be intangible. Service capacity cannot be inventoried & hence cannot be transferred
from one customer to other. We cannot prepare the service package in advance to deliver it at the later
point of time.

Service capacity has to be managed in a highly dynamic environment where service organizations face
more personalized demand due to the presence of customer than in manufacturing sector. Meeting
personalized demand directly affects the service quality perceived by the customer.

Capacity of a service is also attributed to the highest possible amount of output that may be obtained in a
specified period of time with a predefined level of staff, installations and equipment (Lovelock, 1992).
Managing capacity can be viewed as minimizing waiting time while avoiding idle capacity to meet the
demand in the most efficient way.

Elements of Service Capacity

Capacity of service organization effectively and to provide a good quality service. Many strategies can be
proposed to manage capacity in services if some organization understands the importance of all the
elements presented. Altering human resources can be good capacity management strategy provided what
kind of demand an organization is targeting to meet, whether demand is seasonal or cyclical. Are there any
opportunities to automate the service where customers can utilize the technology from anywhere by
avoiding personal visits to the service organizations. It is equally important to understand the knowledge
level of customer. For example the internet penetration in India especially in rural India is very low. So,
providing service through online mode may not help in such situations. The number of facilities, their
locations and the possible considerations of facility expansion helps in managing the demand fluctuations.

3.8 SERVQUAL MODEL OF MEASURING SERVICE QUALITY

The SERVQUAL Model is an empiric model by Zeithaml, Parasuraman and Berry to compare service
quality performance with customer service quality needs. It is used to do a gap analysis of an
organization’s service quality performance against the service quality needs of its customers. That’s why
it’s also called the GAP model.

It takes into account the perceptions of customers of the relative importance of service attributes. This
allows an organization to prioritize.

There are five core components of service quality:

1. Tangibles: physical facilities, equipment, staff appearance, etc.
2. Reliability: ability to perform service dependably and accurately.
3. Responsiveness: willingness to help and respond to customer need.
4. Assurance: ability of staff to inspire confidence and trust.
5. Empathy: the extent to which caring individualized service is given.

The four themes that were identified by the SERVQUAL developers were numbered and labelled as:

1. Consumer expectation – Management Perception Gap (Gap 1):

Management may have inaccurate perceptions of what consumers (actually) expect. The reason for this gap
is lack of proper market/customer focus. The presence of a marketing department does not automatically
guarantee market focus. It requires the appropriate management processes, market analysis tools and
attitude.

2. Service Quality Specification Gap (Gap 2):

There may be an inability on the part of the management to translate customer expectations into service
quality specifications. This gap relates to aspects of service design.
3. Service Delivery Gap (Gap 3):

Guidelines for service delivery do not guarantee high-quality service delivery or performance. There are
several reasons for this. These include: lack of sufficient support for the frontline staff, process problems,
or frontline/contact staff performance variability.

4. External Communication Gap (Gap 4):

Consumer expectations are fashioned by the external communications of an organization. A realistic

expectation will normally promote a more positive perception of service quality. A service organization
must ensure that its marketing and promotion material accurately describes the service offering and the
way it is delivered

5. These four gaps cause a fifth gap (Gap 5)

Which is the difference between customer expectations and perceptions of the service actually
received Perceived quality of service depends on the size and direction of Gap 5, which in turn depends on
the nature of the gaps associated with marketing, design and delivery of services. So, Gap 5 is the product
of gaps 1, 2, 3 and 4. If these four gaps, all of which are located below the line that separates the customer
from the company, are closed then gap 5 will close.

3.8 How to measure Service Quality?

1. Mystery Shopping

This is a popular technique used for retail stores, hotels, and restaurants, but works for any other service as
well. It consists out of hiring an ‘undercover customer’ to test your service quality – or putting on a fake
moustache and going yourself, of course.

The undercover agent then assesses the service based on a number of criteria, for example those provided
by SERVQUAL. This offers more insights than simply observing how your employees work. Which will
probably be outstanding — as long as their boss is around.

2. Post Service Rating

This is the practice of asking customers to rate the service right after it’s been delivered.
With Userlike’s live chat, for example, you can set the chat window to change into a service rating view
once it closes. The customers make their rating, perhaps share some explanatory feedback, and close the
chat.

Something similar is done with ticket systems like Help Scout, where you can rate the service response
from your email inbox.

It’s also done in phone support. The service rep asks whether you’re satisfied with her service delivery, or
you’re asked to stay on the line to complete an automatic survey. The latter version is so annoying, though,
that it kind of destroys the entire service experience.

Different scales can be used for the post service rating. Many make use of a number-rating from 1 – 10.
There’s possible ambiguity here, though, because cultures differ in how they rate their experiences.

3. Follow-Up Survey

With this method you ask your customers to rate your service quality through an email survey – for
example via Google Forms. It has a couple advantages over the post-service rating.

For one, it gives your customer the time and space for more detailed responses. You can send a
SERVQUAL type of survey, with multiple questions instead of one. That’d be terribly annoying in a post-
service rating.

It also provides a more holistic overview of your service. Instead of a case-by-case assessment, the follow-
up survey measures your customers’ overall opinion of your service.

It’s also a useful technique if you didn’t have the post service rating in place yet and want a quick overview
of the state of your service quality.

4. In-App Survey

With an in-app survey, the questions are asked while the visitor is on the website or in the app, instead of
after the service or via email. It can be one simple question – e.g. ‘how would you rate our service’ – or it
could be a couple of questions.

Convenience and relevance are the main advantages. SurveyMonkey offers some great tools for
implementing something like this on your website.

5. Customer Effort Score (CES)

This metric was proposed in an influential Harvard Business Review article. In it, they argue that while
many companies aim to ‘delight’ the customer – to exceed service expectations – it’s more likely for a
customer to punish companies for bad service than it is for them to reward companies for good service.

While the costs of exceeding service expectations are high, they show that the payoffs are marginal. Instead
of delighting our customers, so the authors argue, we should make it as easy as possible for them to have
their problems solved.

That’s what they found had the biggest positive impact on the customer experience, and what they propose
measuring.

6. Social Media Monitoring

This method has been gaining momentum with the rise of social media. For many people, social media
serve as an outlet. A place where they can unleash their frustrations and be heard.

And because of that, they are the perfect place to hear the unfiltered opinions of your customers – if you
have the right tools. Facebook and Twitter are obvious choices, but also review platforms like TripAdvisor
or Yelp can be very relevant. Buffer suggests to ask your social media followers for feedback on your
service quality.

Two great tools to track who’s talking about you are Mention and Google Alerts.

7. Documentation Analysis

With this qualitative approach you read or listen to your respectively written or recorded service records.
You’ll definitely want to go through the documentation of low-rated service deliveries, but it can also be
interesting to read through the documentation of service agents that always rank high. What are they doing
better than the rest?

The hurdle with the method isn’t in the analysis, but in the documentation. For live chat and email support
it’s rather easy, but for phone support it requires an annoying voice at the start of the call: “This call could
be recorded for quality measurement”.

8. Objective Service Metrics

These stats deliver the objective, quantitative analysis of your service. These metrics aren’t enough to
judge the quality of your service by themselves, but they play a crucial role in showing you the areas you
should improve in.
 Volume per channel. This tracks the amount of inquiries per channel. When combined with other
metrics, like those covering efficiency or customer satisfaction, it allows you to decide which channels to
promote or cut down.
 First response time. This metric tracks how quickly a customer receives a response on her inquiry.
This doesn’t mean their issue is solved, but it’s the first sign of life – notifying them that they’ve been
heard.
 Response time. This is the total average of time between responses. So let’s say your email ticket
was resolved with 4 responses, with respective response times of 10, 20, 5, and 7 minutes. Your response
time is 10.5 minutes. Concerning reply times, most people reaching out via email expect a response within
24 hours; for social channels it’s 60 minutes. Phone and live chat require an immediate response, under 2
minutes.
 First contact resolution ratio. Divide the number of issues that’s resolved through a single
response by the number that required more responses. Forrester research showed that first contact
resolutions are an important customer satisfaction factor for 73% of customers.
 Replies per ticket. This shows how many replies your service team needs on average to close a
ticket. It’s a measure of efficiency and customer effort.
 Backlog Inflow/Outflow. This is the number of cases submitted compared to the number of cases
closed. A growing number indicates that you’ll have to expand your service team.
 Customer Success Ratio. A good service doesn’t mean your customers always finds what they
want. But keeping track of the number that found what they looked for versus those that didn’t, can show
whether your customers have the right ideas about your offerings.
 ‘Handovers’ per issue. This tracks how many different service reps are involved per issue.
Especially in phone support, where repeating the issue is necessary, customers hate HBR identified it as
one of the four most common service complaints.
 Things Gone Wrong. The number of complaints/failures per customer inquiry. It helps you
identify products, departments, or service agents that need some ‘fixing’.
 Instant Service / Queuing Ratio. Nobody likes to wait. Instant service is the best service. This
metric keeps track of the ratio of customers that were served instantly versus those that had to wait. The
higher the ratio, the better your service.
 Average Queueing Waiting Time. The average time that queued customers have to wait to be
served.
 Queueing Hang-ups. How many customers quit the queueing process. These count as a lost service
opportunity.
 Problem Resolution Time. The average time before an issue is resolved.
 Minutes Spent Per Call. This can give you insight on who are your most efficient operators.
Some of these measures are also financial metrics, such as the minutes spent per call and number of
handovers. You can use them to calculate your service costs per service contact. Winning the award for the
world’s best service won’t get you anywhere if the costs eat up your profits.

Some service tools keep track of these sort of metrics automatically, like Talkdesk for phone and User like
for live chat support. If you make use of communication tools that aren’t dedicated to service, tracking
them will be a bit more work.

One word of caution for all above mentioned methods and metrics: beware of averages, they will deceive
you. If your dentist delivers a great service 90% of the time, but has a habit of binge drinking and pulling
out the wrong teeth the rest of the time, you won’t stick around long.

A more realistic image shapes up if you keep track of the outliers and standard deviation as well. Measure
your service, aim for a high average, and improve by diminishing the outliers.

UNIT 4

MATERIAL AND INVENTORY MANAGEMENT

4.0 Types of Production Planning

If you work in a manufacturing plant as a supervisor you have heard the words “production planning”
many times. This is the procedure that they use to decide just how many goods to manufacture. For the
company to be successful efficiency is important. They do not want to over produce products and then have
them just sit in the warehouse. That is profits down the drain, so to speak. A company wants to make sure
that they are producing enough products to meet the demands. There are many different forms of
production planning that goes under various titles in the world of business. There are three main types that
many businesses use.

1. Batch Production Planning

This type of production planning involves producing many identical individual products from the same
batch of raw material. For example, a seamstress would take some cloth and produce five individual
identical dresses. In a manufacturing plant that produces many different products this can advance the
efficiency of the employees and machines to produce one large batch of an individual product at the same
time. In a factory, for example, the machines may be set up to produce a group of peas in cans, followed by
a group corn in cans. Setting up the machines to follow this schedule is more efficient than changing the
machines to produce a can one at a time as they are needed.

2. Job-or Project-Based Production Planning

This type is generally used in smaller businesses where one team or one person does the production of
services or goods. A jewelry maker that makes custom engagement and wedding rings is an example of this
type of production planning. Film production is a team so this is the type of planning they would use. Job-
and project planning is very customizable to meet the requirements of the business and the customer. It
should not be used if you are creating a flow of production that is consistent.

3. Continuous or Mass Production Planning

This one is used often to create products that are massed-produced and generally used by large factories to
produce a steady flow of products. For this process to be cost-efficient, a demand for this product must be
regular. The production services must also be streamlined. This is so the products go from one-step of the
making the product to the next step effortlessly. This requires demanding pre-planning of production flow
and layout.

Conclusion: In production planning, determining the right method for a business will normally depend on
mathematical calculations and market forecasting. Some companies will use production planning software
to capitalize on the company’s production capacity and to measure planning strategies cost-effectiveness.
Through control, the methods of planning are often made to make the most of on the company’s potential.

4.1 PROCESS OF PRODUCTION PLANNING AND CONTROL (PPC) ROUTING,

SCHEDULING, LOADING, JUST-IN-TIME (JIT)

Procedures for Production Planning

PLANNING

For planning of productive operations in detail, the planning department will receive full information from
management about the quantity to be produced and the dates when delivery has been promised to
customers. The planning department will also get the necessary engineering and drawing specifications
from the engineering department.

ROUTING

Routing involves the determination of the path that work shall follow and the order in which various
operations will be carried out. The objective of routing is to find out the best and the cheapest sequence of
operations. While preparing the route card, it must be kept in mind that machines in the plant are operated
at their full capacity; and manpower and other facilities are best utilized.

SCHEDULING

Scheduling is the determination of the time that should be required to perform each operation and also the
time necessary to perform the entire series, as routed, making allowance for factors concerned. It involves
the preparation of a time-table, indicating the total time needed for the manufacture of a product as also the
time expected to be spent at each machine and process.

In preparing schedules, the persons concerned will have to take into consideration the various types of
orders on hand and the dates by which their completion has been promised. Some orders may be such as
will require over-time work; because completion is not possible according to the delivery dates set for
them, in the regular course of production.

LOADING

Loading involves assigning jobs to work centers and to various machines in the work centers. If a job can
be processed on only one machine, no difficulty is presented. However, if a job can be loaded on multiple
work centers or machines, and there are multiple jobs to process, the assignment process becomes more
complicated. The scheduler needs some way to assign jobs to the centers in such a way that processing and
setups are minimized along with idle time and throughput time.

Two approaches are used for loading work centers: infinite loading and finite loading. With infinite loading
jobs are assigned to work centers without regard for capacity of the work center. Priority rules are
appropriate for use under the infinite loading approach. Jobs are loaded at work centers according to the
chosen priority rule. This is known as vertical loading.
Finite loading projects the actual start and stop times of each job at each work center. Finite loading
considers the capacity of each work center and compares the processing time so that process time does not
exceed capacity. With finite loading the scheduler loads the job that has the highest priority on all work
centers it will require. Then the job with the next highest priority is loaded on all required work centers,
and so on. This process is referred to as horizontal loading. The scheduler using finite loading can then
project the number of hours each work center will operate. A drawback of horizontal loading is that jobs
may be kept waiting at a work center, even though the work center is idle. This happens when a higher
priority job is expected to arrive shortly. The work center is kept idle so that it will be ready to process the
higher priority job as soon as it arrives. With vertical loading the work center would be fully loaded. Of
course, this would mean that a higher priority job would then have to wait to be processed since the work
center was already busy. The scheduler will have to weigh the relative costs of keeping higher priority jobs
waiting, the cost of idle work centers, the number of jobs and work centers, and the potential for
disruptions, new jobs and cancellations

DISPATCHING

Dispatching literally means sending something towards a particular destination. Here, it means taking all
such steps, as are necessary to implement the programme of production chalked out as per routing and
scheduling steps.

In particular, dispatching refers to:

(i) Procurement of necessary tools, jigs and fixtures etc.; before they are actually required by the workmen.

(ii) Giving workers the necessary work orders, instructions, drawings etc. for initiating the work.

FOLLOW-UP (OR CHECKING THE PROGRESS)

Follow-up is the control aspect of production planning and control. It involves taking steps to check up
whether work proceeds according to plans and how far there are variances from standards; and also taking
necessary corrective steps to set things in order.

INSPECTION

Inspection is the quality control aspect of production planning and control. It ensures that goods produced
are of the right quality. The inspectors may inspect materials, semi-finished and finished products either at
the work bench or in special laboratories or testing rooms.
To ensure maintenance of high standards of quality, a programme of SQC (Statistical Quality Control) may
be fused with a system of production planning and control.

JUST-IN-TIME (JIT)

Just-In-Time (JIT) Manufacturing is a philosophy rather than a technique. By eliminating all waste and
seeking continuous improvement, it aims at creating manufacturing system that is response to the market
needs.

The phase just in time is used to because this system operates with low WIP (Work-In-Process) inventory
and often with very low finished goods inventory. Products are assembled just before they are sold,
subassemblies are made just before they are assembled and components are made and fabricated just before
subassemblies are made. This leads to lower WIP and reduced lead times. To achieve this organizations
have to be excellent in other areas e.g. quality.

According to Voss, JIT is viewed as a “Production methodology which aims to improve overall
productivity through elimination of waste and which leads to improved quality”.

4.2 JIT in Production and Operation Management

JIT provides an efficient production in an organization and delivery of only the necessary parts in the right
quantity, at the right time and place while using the minimum facilities”.

Benefits of JIT

The most significant benefit is to improve the responsiveness of the firm to the changes in the market place
thus providing an advantage in competition. Following are the benefits of JIT:

(i) Product cost: is greatly reduced due to reduction of manufacturing cycle time, reduction of waste and
inventories and elimination of non-value added operation.

(ii) Quality: is improved because of continuous quality improvement programs.

(iii) Design: Due to fast response to engineering change, alternative designs can be quickly brought on the
shop floor.
(iv) Productivity improvement.

(v) Higher production system flexibility.

(vi) Administrative and ease and simplicity.

4.4 KANBAN

KANBAN is a concept that relates to obtaining materials or required items “just in time” for their
introduction into the assembly or process. The system of JIT or the just in time process was initiated by the
Japanese firm Toyota in the 1940s.

KANBAN is a system to signal a need for action. This can be done by cards on a board (which is the
traditional way) or by other devices that are used as markers, indicating the need to take action. Taiichi
Ohno, the man who conceptualized the JIT system, says KANBAN is the means to achieve JIT.

Toyota felt the need in the 1940s to reduce costs by introducing proper inventory stocking techniques of
required assembly parts. First, they studied supermarkets to understand how supermarkets ensure their
shelves are always stocked with the materials that the customers want and in the required amount.
Customers could always be assured of a constant supply of product and only pick up the number of items
that they immediately required. They knew a future supply of wanted product would be available whenever
desired. Toyota reasoned that if they could ensure this same supermarket guarantee of required parts for
their assembly lines, there would be less of a need to maintain high inventories which in turn, drive up
costs and storage requirements. Toyota also began maintaining strict controls on defective products, which
in turn were kept from entering the process.

KANBAN controls the rate of production by passing the demand for raw materials through a system of
customer-store processes, which ensures that materials are received only when required. With Kanban,
each process identifies only those products that are required for that exact process until that process is
complete. Each subsequent process continues by only using products that are required for the next step of
processing, and so on. Thus, production is equalized in all processes and stabilizes the production by fine-
tuning inventory demand and requirement processes.

The Three Bin System

A very simple method of implementing KANBAN is the use of a three bin system. One bin is available on
the floor of the production unit using the product. A second bin is available at the inventory department of
the factory where the production staff obtains raw materials. Finally, a third bin is available at the premises
of the supplier who has been selected to deliver the materials. Each bin contains cards with detailed
information showing inventory numbers available within the bins and the date which they were received.

During the process, the factory floor uses the materials from the bin and, once the bin is depleted, its
KANBAN card is returned to the inventory department. The inventory department immediately replaces
the bin with a full bin obtained from the supplier or vendor. In turn, the inventory department sends the
empty bin to the vendor or supplier for replenishment of materials. Suppliers and vendors stay on top of
replenishing needed materials at their location, keeping them ready for the next exchange. This three bin
method, therefore, doesn’t require on-site storage of materials until they are required.

Such bins, represented by KANBAN cards, are created for each of the items required in the production
process. The number of KANBAN cards depends upon the actual number of the items required during each
stage of the process. The control during the assembly is achieved by identifying every KANBAN card
needed to complete the assembly or production. Hence, KANBAN is considered an effective tool in the
Just In Time inventory process within an assembly line production.

4.5 TYPES OF INVENTORIES

An inventory is a stock of goods maintained for the purpose of future production or sales. In broad sense,
the term inventory refers to all materials, parts, supplies, tools, in-process or finished products recorded in
the books by an organization and kept in its stocks, warehouse or plant for some period of time. It is a list
or schedule of materials held on behalf of an enterprise.

Types/Classification of Inventory
1. Direct Inventories

Direct inventories are those inventories that play a major role in the production and constitute a vital part of
finished goods. These inventories can be easily assigned to specific physical units. Direct inventories may
be categorized into four groups.

(i) Raw materials

Raw materials are the physical resources to be used in the manufacture of finished products. They include
materials that are in their natural or raw form. For example, cotton in the case of textile mill, sugarcane in
the case of sugar factory, oil seeds in the case of an oil mill etc. The chief objective of keeping raw material
is to ensure uninterrupted production in the event of delays in delivery and also to enjoy the economies of
large scale buying.

(ii) Semi-finished Goods

Semi-finished goods are those materials which are not cent per cent (100%) complete in all respects i.e.,
some processing still remains to be done before the product can be sold. For example, a person who is
engaged in the manufacture of furniture, may purchase unpolished furniture from market and sell it after
polishing the same.

(iii) Finished Goods

Finished goods are complete products that are ready for sale or distribution. For instance, in case of a
hosiery factory, sweaters, shawls etc. are finished products.

(iv) Spare Parts

Spare parts means duplicate parts of a machine. Usually, almost all the industrial concerns maintain spare
parts of various machines which they use for manufacture. This will enable them to ensure smooth running
of machines which in turn provide for uninterrupted production.

2. Indirect Inventories
Indirect inventories include those items which are necessary for manufacturing but do not become
component of the finished goods. They normally include petrol, maintenance materials, office materials,
grease, oil lubricants etc. These inventories are used for ancillary purposes to the business and cannot be
assigned to specific, physical units. These inventories may be used in the factory, the office or the selling
and distribution divisions.

4.6 FACTORS AFFECTING PLANT LOCATION

Eight Factors Affecting Plant Location

1. SELECTION OF REGION

The selection of a region or area in which plant is to be installed requires the consideration of the
following:

(i) Availability of Raw Materials: Proximity of sources of raw materials is the obvious explanation of the
location of majority of sugar mills in Uttar Pradesh. This means that the raw material should be available
within the economical distance. Easy availability of supplies required for maintenance and operation of the
plant should also be considered.

(ii) Proximity to Markets: Cost of distribution is an important item in the overhead expenses. So it will be
advantageous to be near to the center of demand for finished products. Importance of this is fully realized if
the material required for the manufacturing of products are not bulk and fright charges are small.

(iii) Transport Facilities: Since freight charges of raw materials and finished goods enter into the cost of
production, therefore transportation facilities are becoming the governing factor in economic location of
the plant. Depending upon the volume of the raw materials and finished products, a suitable method of
transportation like rail, road, water transportation (through river, canals or sea) and air transport is selected
and accordingly plant location is decided. Important consideration should be that the cost of transportation
should remain fairly small in comparison to the total cost of production.

(iv) Availability of Power, Fuel or Gas: Because of the wide spread use of electrical power the
availability of fuel or gas has not remained a deciding factor in most of the cases for plant location. The
location of thermal power plants (like Bokaro Thermal Plant) and steel plants near coal fields are for
cutting down cost of the fuel transportation. The reliability of continuous supply of these facilities is an
important factor.
(v) Water Supply: Water is required for processing as in chemical, sugar and paper industries and is also
used for drinking and sanitary purposes. Investigation for quality and probable source of supply is
important, since the cost of treating water is substantial so the chemical properties like hardness, alkalinity
and acidity.

(vi) Disposal Facility for Waste Products: Thorough study should be made regarding disposal of water
like effluents, solids, chemicals and other waste products likely to be produced during the production
process.

(vii) Availability of Labour: Potential supply of requisite type of labour governs plant location to major
extent. Some industries need highly skilled labour while other need unskilled and intelligent labour. But the
former type is difficult in rural areas in comparison with industrially developed location.

2. TOWNSHIP SELECTION

The factors to be considered regarding township selection are:

(i) Availability of men power of requisite skill

(ii) Competitive wage rates of workers

(iii) Other enterprises which are complementary or supplementary regarding raw materials, other input,
labour and skill required.

(iv) Moderate taxes and the absence of restricting laws.

(v) Favourable cooperative and friendly attitude towards the industry.

(vi) Favourable living conditions and standards keeping in view the availability of medical and educational
facilities, housing, fire service, recreational facilities, cost of living etc.

3. QUESTION OF URBAN AND RURAL AREA

Question of urban and rural area should be decided in view of the following:

Advantages of Rural Area:

(i) The initial cost of land, erection cost of building and plant is less in rural area as compared to urban or
city area.
(ii) Acquisition for additional area for extension work expansion of plant is possible without much
difficulty whereas urban area being congested; the additional land is not easily available.

(iii) Rural areas are free form labour trouble which is most common in towns and cities.

(iv) Over crowding of working class population in cities is avoided.

Advantages of Urban Area:

(i) Better modes of transportation for collection and distribution of materials and finished products.

(ii) Availability to requisite type of labour for special and specific jobs is there.

(iii) Utilities like water, power, fuels etc. are easily available.

(iv) Industries do not need to construct colonies to provide residential facilities to their workers since
houses are available on rental basis whereas in rural areas, houses have to be build for workers.

4. LOCATION OF A FACTORY IN A BIG CITY

Generally factories are located in big cities for obvious reasons of skilled labour, market proximity for both
raw materials and end products.

Its advantages and disadvantages are mentioned below:

(i) Existence of educational and recreational facilities is advantageous for children and dependents of
workers.

(ii) Facilities for technical/ industrial education and training for children of workers are available.

(iii) Evening classes facilities are available.

(iv) Discussion opportunities and facilities for exchange of thoughts are available for interested people in
societies and clubs.

(v) All types of skilled man power is available.

(vi) Repair, maintenance and service facilities for various utilities are available in abundance.

(vii) Banking facilities regarding finance (loan etc.) for industry in case of necessity are available.
(ix) Big markets for sale of products available.

(x) Better transport facilities for movement of raw materials, finished products and workers are available.

5. LOCATION OF AN INDUSTRY IN SMALL TOWN

There are some industries which are located in the rural areas or small towns specifically for the want of
raw material and cheap labour.

Its advantages and disadvantages are mentioned below:

(i) Less labour trouble and co-ordinal employee-employer relation.

(ii) Suitable land for current and future requirements easily available.

(iii) Local bye laws do not impose problem in working of the unit.

(iv) No resistance from existing industries.

(v) Possibility of tax exemptions exist.

(vi) Not much congestion.

(vii) Lower rents in comparison to big cities and urban areas.

(viii) Lower wage rates for labour/ employees / workers.

(ix) Less fire risks.

(x) Noise not much problem.

6. SITE SELECTION

The third step is to select the exact plant site with the following considerations:

(i) The cheap availability of land for current and future requirements, soil characteristics sub soil water,
availability or possibility of economic drainage and waste disposal system are desirable parameters.

(ii) The site should be easily accessible to various modes of transport as required so that apart from input
materials, employees can also reach the site conveniently.
(iii) The site should be free from zonal restrictions like from railways or civil aviation restrictions.

7. CURRENT TRENDS IN PANT LOCATION

(I) Location in Proximity of Cities: First tendency is to locate the industries or enterprises in the
proximity of cities rather than in rural or urban areas. These sub-urban sites offer today practically all
advantages, facilities and services available in cities and towns with the added advantage of land required
for future expansion on cheap rates.

(II) Planned Industrial Centers: While industrial towns may be planned and developed by big industrial
houses or govt., the late trend is to develop areas as industrial estates and sell these to people interested in
starting their units at various places. Noida and Faridabad are the examples of this type of development.

(III) Competition for Development of Industries: In order to generate the employment opportunities the
state and central govt. offer concessions to attract industrialists to set up industries in their states or
territories.

8. THE DESIGN OF FACTORY PLANT BUILDING

After a plant location has been decided upon, management’s next problem deals with the design of
building. A building is designed and built to protect the property and employees of an organization. This
basic fact is mostly overlooked in planning the requirement for building structures.

For those plants where employees, materials and infrastructure facilities require protection, the problems
involved in designing and constructing effective and economical structures are many.

4.7 INVENTORY CONTROL TECHNIQUES- EOQ, ABC AND OTHERS

Five Techniques of Inventory Control

1. Economic Order Quantity

A problem which always remains in that how much material may be ordered at a time. An industry making
bolts will definitely would like to know the length of steel bars to be purchased at any one time.

This length is called “economic order quantity” and an economic order quantity is one which permits
lowest cost per unit and is most advantages.

This can be calculated by the following formula:

Q = √2AS/I

Where Q stands for quantity per order

A stands for annual requirements of an item in terms of rupees

S stands for cost of placement of an order in rupees; and

I stand for inventory carrying cost per unit per year in rupees.

2. Inventory Models

Inventory models determine when and how inventory to carry.

(i) Inventory models handle chiefly two decisions:

 How much to order at one time.

 When to order this quantity to minimize total costs.

(ii) Lowest-cost decision rules for inventory management pertain to either buying products from outside or
producing then within the company.

(iii) Single inventory models assume no delivery delay and that demand is known.

(iv) Probabilistic models handle situations of risks and uncertainty.

3. ABC Analysis

In order to exercise effective control over materials, A.B.C. (Always Better Control) method is of immense
use. Under this method materials are classified into three categories in accordance with their respective
values. Group ‘A’ constitutes costly items which may be only 10 to 20% of the total items but account for
about 50% of the total value of the stores.

A greater degree of control is exercised to preserve these items. Group ‘B’ consists of items which
constitutes 20 to 30% of the store items and represent about 30% of the total value of stores.

A reasonable degree of care may be taken in order to control these items. In the last category i.e. group ‘Q’
about 70 to 80% of the items is covered costing about 20% of the total value. This can be referred to as
residuary category. A routine type of care may be taken in the case of third category.
This method is also known as ‘stock control according to value method’, ‘selective value approach’ and
‘proportional parts value approach’.

If this method is applied with care, it ensures considerable reduction in the storage expenses and it is also
greatly helpful in preserving costly items.

4. Material Requirements Planning

MRP is a computational technique that converts the master schedule for end products into a detailed
schedule for raw material and components used in the end products. The detailed schedule indentifies the
quantities of each raw material and component items. It also tells when each item must be ordered and
delivered so as to meet the master schedule for the final products.

5. VED Analysis

Vital essential and desirable analysis is used primarily for the control of spare parts. The spare parts can be
divided into three categories:

(i) Vital

(ii) Essential

(iii) Desirable

(i) Vital: The spares the stock out of which even for a short time will stop production for quite some time
and future the cost of stock out is very high are known as vital spares.

(ii) Essential: The spare stock out of which even for a few hours of days and cost of lost production is high
is called essential.

(iii) Desirable: Spares are those which are needed but their absence for even a week or so will not lead to
stoppage of production.

4.8 TYPES OF PLANT LAYOUT

Four Main Types of Plant Layout

1. Product or Line Layout

2. Process or Functional Layout.
3. Fixed Position Layout.
4. Combination type of Layout.

1. PRODUCT OR LINE LAYOUT

If all the processing equipment and machines are arranged according to the sequence of operations of the
product, the layout is called product type of layout. In this type of layout, only one product of one type of
products is produced in an operating area. This product must be standardized and produced in large
quantities in order to justify the product layout.

The raw material is supplied at one end of the line and goes from one operation to the next quite rapidly
with a minimum work in process, storage and material handling. Fig. 8.3 shows product layout for two
types of products A and B.

Advantages offered by Product Layout:

(i) Lowers total material handling cost.

(ii) There is less work in processes.

(iii) Better utilization of men and machines,

(iv) Less floor area is occupied by material in transit and for temporary storages.

(v) Greater simplicity of production control.

(vi) Total production time is also minimized.

Limitations of Product Layout:

(i) No flexibility which is generally required is obtained in this layout.

(ii) The manufacturing cost increases with a fall in volume of production.

(iii) If one or two lines are running light, there is a considerable machine idleness.

 (iv) A single machine break down may shut down the whole production line.

(v) Specialized and strict supervision is essential.

2. PROCESS OR FUNCTIONAL LAYOUT

The process layout is particularly useful where low volume of production is needed. If the products are not
standardized, the process layout is more low desirable, because it has creator process flexibility than other.
In this type of layout, the machines and not arranged according to the sequence of operations but are
arranged according to the nature or type of the operations. This layout is commonly suitable for non
repetitive jobs.

Same type of operation facilities are grouped together such as lathes will be placed at one place, all the drill
machines are at another place and so on. See Fig. 8.4 for process layout. Therefore, the process carried out
in that area is according to the machine available in that area.

Advantages of Process Layout

(i) There will be less duplication of machines. Thus, total investment in equipment purchase will be
reduced.

(ii) It offers better and more efficient supervision through specialization at various levels.

(iii) There is a greater flexibility in equipment and man power thus load distribution is easily controlled.

(iv) Better utilization of equipment available is possible.

(v) Break down of equipment can be easily handled by transferring work to another machine/work station.

(vi) There will be better control of complicated or precision processes, especially where much inspection is
required.

Limitations of Process Layout

(i) There are long material flow lines and hence the expensive handling is required.

(ii) Total production cycle time is more owing to long distances and waiting at various points.

(iii) Since more work is in queue and waiting for further operation hence bottle necks occur.

(iv) Generally, more floor area is required.

(v) Since work does not flow through definite lines, counting and scheduling is more tedious.

(vi) Specialization creates monotony and there will be difficult for the laid workers to find job in other
industries.
3. FIXED POSITION LAYOUT

This type of layout is the least important for today’s manufacturing industries. In this type of layout the
major component remain in a fixed location, other materials, parts, tools, machinery, man power and other
supporting equipment’s are brought to this location.

The major component or body of the product remain in a fixed position because it is too heavy or too big
and as such it is economical and convenient to bring the necessary tools and equipment’s to work place
along with the man power. This type of layout is used in the manufacture of boilers, hydraulic and steam
turbines and ships etc.

Advantages Offered by Fixed Position Layout

(i) Material movement is reduced

(ii) Capital investment is minimized.

(iii) The task is usually done by gang of operators, hence continuity of operations is ensured

(iv) Production centers are independent of each other. Hence, effective planning and loading can be made.
Thus total production cost will be reduced.

(v) It offers greater flexibility and allows change in product design, product mix and production volume.

Limitations of Fixed Position Layout

(i) Highly skilled man power is required.

(ii) Movement of machines equipment’s to production centre may be time consuming.

(iii) Complicated fixtures may be required for positioning of jobs and tools. This may increase the cost of
production.

4. COMBINATION TYPE OF LAYOUT

Now a days in pure state any one form of layouts discussed above is rarely found. Therefore, generally the
layouts used in industries are the compromise of the above mentioned layouts. Every layout has got certain
advantages and limitations. Therefore, industries would to like use any type of layout as such.

Flexibility is a very important factory, so layout should be such which can be molded according to the
requirements of industry, without much investment. If the good features of all types of layouts are
connected, a compromise solution can be obtained which will be more economical and flexible.

UNIT 5
 SUPPLY CHAIN MANAGEMENT

5.0 CONCEPTUAL MODEL OF SCM

Supply chain acts as a connecting chain of materials from the suppliers to the manufacturer to the
distributor to the retailer to the ultimate customers. In a supply chain the flow of demand information is in a
direction opposite to the flow of materials. Thus, the information flow on demand is from the customer to
the retailer to the distributor to the manufacturer to the supplier.

It may be noted that the supply chain is not a linear chain but takes the form of a network. It consists of a
network of facilities and distribution options that perform the functions of procurement of materials,
transformation of these materials into intermediate and finished products, and the distribution of these
finished products to customers in the right time and of the right quantity and quality.

The complete SCM has three sections at the macro level Supply Relationship Management: The segment
of the chain which is concerned with the supply of raw materials, components and sub-assemblies .This
segment is called the SRM which plays the role of supplier relations.  The Conversion system within a
factory which is done by the production and operations management function. This macro system is often
called the Internal Supply Chain Management or ISCM.

CRM or customer relations management macro system. The CRM Sytem takes care of the market, Selling,
Call centre and order management. The management of the three macro level systems have been very
efficiently taken care by leading software corporations like the SAP. ,Oracle ,BAAN and other Enterprise
Resource Planning Systems. Since the Customer Relationship management is focused towards the
marketing ,Sales and service.
Supply chain management can be seen as the process of strategically managing the procurement,
movement and storage of materials, parts and finished inventory and related information flows through the
organization and its marketing channels in such a way that current and future profitability are maximized
through the cost effective fulfillment of orders.

Supply chain management (SCM), thus, is the process of trying to appropriately manage this network of
activities and flows. More formal definitions of SCM include the following points:
SCM coordinates and integrates all the supply chain activities into a seamless process and links all of the
partners in the chain, including departments within an organization as well as the external suppliers,
transporters, third-party companies, and information system providers.

SCM enables manufacturers to actively plan and collaborate across a distributed supply chain, to ensure
that all parties are aware of commitments and schedules. By actively collaborating as a virtual corporation,
manufacturers and their suppliers can source, produce, and deliver products with minimal lead time and
expense.

5.1 CONCEPTUAL MODEL OF SCM

In sum, we can say that SCM works in a demand driven situation, encourages flow-type production with
small batches, reduces idle inventory and idle time in any business by improving overall customer- centric
approach.

The conceptual model of SCM is based on the five basic elements called Pillars of SCM. It includes:

 Customization philosophy
 Outsourcing of items in which the supplier has competency
 Multi-tier supplier partnership
 Third or Fourth party logistics
 Use of modern IT systems

5.2 SUPPLY CHAIN DRIVERS

Supply Chain Capabilities are guided by the decisions you make regarding the five supply chain drivers. 
Each of these drivers can be developed and managed to emphasize responsiveness or efficiency depending
on changing business requirements. As you investigate how a supply chain works, you learn about the
demands it faces and the capabilities it needs to be successful. Adjust the supply chain drivers as needed to
get those capabilities.
The five drivers provide a useful framework for thinking about supply chain capabilities. Decisions made
about how each driver operates will determine the blend of responsiveness and efficiency a supply chain is
capable of achieving. The five drivers are illustrated in the diagram below:

1. PRODUCTION: This driver can be made very responsive by building factories that have a lot of
excess capacity and use flexible manufacturing techniques to produce a wide range of items. To be even
more responsive, a company could do their production in many smaller plants that are close to major
groups of customers so delivery times would be shorter.  If efficiency is desirable, then a company can
build factories with very little excess capacity and have those factories optimized for producing a limited
range of items.  Further efficiency can also be gained by centralizing production in large central plants to
get better economies of scale, even though delivery times might be longer.
2. INVENTORY: Responsiveness can be had by stocking high levels of inventory for a wide range of
products. Additional responsiveness can be gained by stocking products at many locations so as to have the
inventory close to customers and available to them immediately. Efficiency in inventory management
would call for reducing inventory levels of all items and especially of items that do not sell as frequently. 
Also, economies of scale and cost savings can be gotten by stocking inventory in only a few central
locations such as regional distribution centers (DCs).
3. LOCATION: A location decision that emphasizes responsiveness would be one where a company
establishes many locations that are close to its customer base. For example, fast-food chains use location to
be very responsive to their customers by opening up lots of stores in high volume markets. Efficiency can
be achieved by operating from only a few locations and centralizing activities in common locations. An
example of this is the way e-commerce retailers serve large geographical markets from only a few central
locations that perform a wide range of activities.
4. TRANSPORTATION: Responsiveness can be achieved by a transportation mode that is fast and
flexible such as trucks and airplanes. Many companies that sell products through catalogs or on the Internet
are able to provide high levels of responsiveness by using transportation to deliver their products often
within 48 hours or less. FedEx and UPS are two companies that can provide very responsive transportation
services. And now Amazon is expanding and operating its own transportation services in high volume
markets to be more responsive to customer desires.  Efficiency can be emphasized by transporting products
in larger batches and doing it less often.  The use of transportation modes such as ship, railroad, and
pipelines can be very efficient. Transportation can also be made more efficient if it is originated out of a
central hub facility or distribution center (DC) instead of from many separate branch locations.
5. INFORMATION: The power of this driver grows stronger every year as the technology for
collecting and sharing information becomes more wide spread, easier to use, and less expensive.
Information, much like money, is a very useful commodity because it can be applied directly to enhance
the performance of the other four supply chain drivers. High levels of responsiveness can be achieved
when companies collect and share accurate and timely data generated by the operations of the other four
drivers. An example of this is the supply chains that serve the electronics market; they are some of the most
responsive in the world.  Companies in these supply chains, the manufacturers, distributors, and the big
retailers all collect and share data about customer demand, production schedules, and inventory levels. This
enables companies in these supply chains to respond quickly to situations and new market demands in the
high-change and unpredictable world of electronic devices (smartphones, sensors, home entertainment and
video game equipment, etc.).
5.3 DEMAND FORECASTING IN SUPPLY CHAIN, SIMPLE MOVING AVERAGE, WEIGHTED
MOVING AVERAGE, EXPONENTIAL SMOOTHENING METHOD

Demand Forecasting facilitates critical business activities like budgeting, financial planning, sales and
marketing plans, raw material planning, production planning, risk assessment and formulating mitigation
plans. Outlined below are the impacts of Demand Forecasting on Supply Chain Management:

(i) Improved supplier relations and purchasing terms: Demand Forecasting drives the raw material
planning process which facilities the Purchasing Managers to release timely purchase plan to suppliers.
Visibility and transparency of raw material demand improve supplier relations and empowers Purchasing
Managers to negotiate favorable terms for their companies.

(ii) Better capacity utilization and allocation of resources: Based on the current inventory levels, raw
material availability and expected customer orders, production can be scheduled effectively. This leads to
improved capacity utilization and judicious allocation of manufacturing resources.

(iii) Optimization of inventory levels: A proper Demand Forecast provides vital information for driving
the desired raw material, WIP and finished goods inventory levels. This reduces the Bullwhip effect across
the Supply Chain, leading to optimization of inventory levels and reduction in stock-out or over-stocking
situations.

(iv) Improved distribution planning and logistics: Apart from small businesses, this is particularly
evident in businesses dealing with multiple SKUs and wide distribution networks. Distribution and
Logistics Managers are enabled to balance inventory across the network and negotiate favorable terms with
Transporters.

(v) Increase in customer service levels: With optimized inventory levels and improved Distribution
Planning and Logistics, customer service metrics like on-time delivery (OTD), on-time in-full (OTIF),
case-fill/fill-rate, etc. are improved due to right sizing and right positioning of inventory.

(vi) Better product lifecycle management: Medium to long range Demand Forecasts provide better
visibility of new product launches and old product discontinuations. This drives synchronized raw material,
manufacturing and inventory planning to support new product launches and most importantly, reducing the
risk of obsolescence of discontinued products.

(vii) Facilitates performance management: Management can set KPIs and targets for various functions
like Sales, Finance, Purchase, Manufacturing, Logistics, etc. based on the medium to long range plans
derived from the Demand Forecasting process. Organizational efficiency, effectiveness, and improvement
initiatives can be designed for key areas of the company.

5.4 MOVING AVERAGES METHOD OF SALES FORECASTING

In this method the sales forecasting is obtained by taking average of past sales over a desired number of
past periods (may be years, months or weeks). Extending the moving average to include more periods may
increase the smoothening effect but decreases the sensitivity of forecast.

1. Simple Moving Average

A simple moving average is formed by computing the average price of a security over a specific number of
periods. Most moving averages are based on closing prices.

The simple moving average (SMA) calculates an average of the last n prices, where n represents the
number of periods for which you want the average:

Simple moving average = (P1 + P2 + P3 + P4 + … + Pn) / n

For example, a four-period SMA with prices of 1.2640, 1.2641, 1.2642, and 1.2641 gives a moving
average of 1.2641 using the calculation [(1.2640 + 1.2641 + 1.2642 + 1.2641) / 4 = 1.2641].

2. Weighted Moving Averages

The moving averages as calculated in the preceding part are known as un-weighted because the same
weight is assigned to each of the numbers whose average is being ascertained. Some enterprises base their
forecast on a weighted moving average.

Let us assume that the number of customers who visit during two weeks interval provides a sound basis for
third week forecast and let us further assume that first week is less important than second and consequently
we assign weights of 0.4 to first week and 0.6 to second week. The weighted average for 9th week would
be

0.4 X 549 + 0.6(474) = 220 + 284 = 504

Similarly the weighted moving averages for other weeks are enlisted in the following table:

A forecast based on weighted moving averages for number of customers.

Advantages of the Moving Average Method

(i) This technique is simpler than the method of least squares.

(ii) This method is not affected by personal prejudice of the people using it.

(iii) It the period of moving average is equivalent to the period of the cycle. The cyclic variations are
eliminated.

(iv) If the trend in the data if any is linear the moving average gives a good picture of long term movement
in data.

(v) The moving average technique has the merit of flexibility i.e., if a few years are added the entire
calculations are not changed due to adoption of new conditions.

Limitations of the Moving Average Method

(i) It does not result in mathematical relations which may be used for sales forecasting.

(ii) There is a tendency to cut corners which results in the loss of data at the ends

(iii) A great deal of care is needed for the selection of the period of moving average since the wrong
periods selected would not give the correct picture of the trend.

(iv) In case of the sharp turns in the original graph, the moving average would reduce the curvature.

(v) It is very sensitive even to small movement in the data.

3. Exponential Smoothing and Moving Average Method

This method of sales forecasting is a modification of the moving average method or in better words it IS an
improvement over the moving average method of forecasting. This method tries to eliminate the limitations
of moving averages and removes the necessity of keeping extensive past data it also tries to remove the
irregularities in demand pattern.

This method represents a weightage average of the past observations. In this case most recent observations
is assigned the highest weightage which decreases in geometric progression as we move towards the older
observations.

Since the most recent observations which are likely to reflect more up- to-date information or average of
the series are given more weightage so it becomes one of the most accurate statistical method of sales
forecasting. This method keeps a running average of demand and adjusts it for each period in proportion to
the difference between the latest actual demand figure and the latest value of the average.

When there is no trend in the demand for a product or service, sales are forecasted for the next period, by
means of the exponential smoothing method by using the expression

Forecast for the next period = a (latest actual demand) + (1 – α) old estimate of latest actual demand where
a represents the value of a weighting factor which is referred to as a smoothing factor.

This method follows the equation

Fn= Fn -1 + α (D n-1 – F n-1)

where Fn= forecast for the next period

Fn-1 = forecast for previous period

D n-1 = demand in previous period.

If a is equal to 1. then the latest forecast would be equal to previous period actual demand In practice, the
value of a is generally chosen between 0.1 and 0.3. The application of technique is demonstrated by using
data of moving averages method of sales forecasting on page 78. In the application of the method, we
would use the value of a as 0.10.

If the actual demand for 3rd week is 487, the forecast for the 4th week will be

0.10(487) + (1.00 – 0.10)550 = 544

Similarly, if the actual demand for 4th week is 528 customers, the forecast for the 5th week will be
0.10 (528) + (1.00 – 0.10) (544) = 542

If this procedure had been applied during the entire 8 week period the results are shown in the following
table. The unadjusted forecast error is also indicated under column D = B – C. If the value of a is not given;
it can be determined by an approximate relation of a.

α = 2/ Number of periods in moving average + 1

The weight factors a is concerned, it can assume a minimum value 0 and a maximum value of 1. The
greater the value of a, the greater is the weight placed on recent data. When the value of a is 1, the forecast
will be equal to the demand experienced during the last period.

Although the value of a varies from product to product but most organization have found that a value
between 0 06 to 0.20 usually proves to be satisfactory.

When attempting to find out what value of a should be used for a product or service the
organization/enterprise can select various values, examine the past forecasts with the use of these values
and adopt for future use the one which would have minimized forecast errors in the past.

In this way we go close of the description of exponential smoothing as it is applied when a trend in
sales/service is available. In case trend exist, a trend adjustment can be made with this technique but its
application becomes bit difficult.

5.5 SUPPLY CHAIN EFFICIENCY, CORE AND REVERSE SUPPLY CHAIN

Supply chain efficiency is related to whether a company’s processes are harnessing resources in the best
way possible, whether those resources are financial, human, technological or physical. Notice that the
definition of efficiency says nothing about improving customer service. You might have a very efficient
supply chain that minimizes costs for materials and packaging but leaves your customers fuming when the
product they receive is not up to their specifications. The term efficiency is also a very abstract one. People
have different definitions, and again…what may be deemed “efficient” in one part of your supply chain
may adversely affect another area of your business.

Five WAYS TO IMPROVE SUPPLY CHAIN EFFICIENCY

1. Communicate Efficiently

Making a commitment to weekly big picture meetings and daily task force meetings gives your team an
opportunity address upcoming logistics situations in advance. We suggest face-to-face meetings whenever
possible to avoid miscommunications and vague overviews.

2. Train Your Workforce Comprehensively

A training program should teach your professionals more than where the break room is and what daily
tasks they should perform. Take the opportunity to share your company’s comprehensive plan to increase
productivity while reducing costs. Teach them about the importance of internal and external customer
service.

Give your workforce an incentive to act in accordance with your business’ vision, mission and values.
Sharing this and training will drive a successful organization by creating aligned goals while improving
supply chain productivity.

3. Increase Information Sharing and Visibility

Make your logistics processes more transparent to your workforce and your clients. Eliminate slow,
unreliable spreadsheets to provide information. Share the most up-to-date information through current
technology solutions.

Other ways to increase information sharing include taking advantage of big data analytics available to you,
measuring supply chain metrics regularly and involving employees in finding inefficiencies in the system.
By informing your workforce and your clients, you create opportunities for innovation.

4. Analyze Information to Meet Customer Needs

Extend the belief that supply chains begin at the warehouse and end in a store because all products sent
through your supply chain eventually reach an end user. Analyze transportation data to better inform your
customer of trends and opportunities.
5. Nurture Innovation in Partnerships

Supply chain managers should evaluate which suppliers possess capabilities they can tap into to help
produce innovations in products, services or go-to-market strategies. They should play a key role by
becoming less of a process executer and more of a process enabler. Looking for opportunities to improve
current processes by leveraging supplier capabilities empowers both parties while benefiting the ultimate
consumer.

5.6 REVERSE SUPPLY CHAIN

Reverse Supply Chain stands for all operations related to the reuse of products and materials. It is “the
process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-
process inventory, finished goods and related information from the point of consumption to the point of
origin for the purpose of recapturing value or proper disposal. More precisely, reverse logistics is the
process of moving goods from their typical final destination for the purpose of capturing value, or proper
disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse
logistics.” The reverse logistics process includes the management and the sale of surplus as well as
returned equipment and machines from the hardware leasing business. Normally, logistics deal with events
that bring the product towards the customer. In the case of reverse logistics, the resource goes at least one
step back in the supply chain. For instance, goods move from the customer to the distributor or to the
manufacturer.

When a manufacturer’s product normally moves through the supply chain network, it is to reach the
distributor or customer. Any process or management after the sale of the product involves reverse logistics.
If the product is defective, the customer would return the product. The manufacturing firm would then have
to organise shipping of the defective product, testing the product, dismantling, repairing, recycling or
disposing the product. The product would travel in reverse through the supply chain network in order to
retain any use from the defective product. The logistics for such matters is reverse logistics.
5.7 INTERNATIONAL SUPPLY CHAIN

International Supply Chain is defined as the distribution of goods and services throughout a trans-
national companies’ global network to maximize profit and minimize waste. Essentially, global supply
chain-management is the same as supply-chain management, but it focuses on companies and organizations
that are trans-national. Global supply-chain management has six main areas of concentration: logistics
management, competitor orientation, customer orientation, supply-chain coordination, supply
management, and operations management. These six areas of concentration can be divided into four
main areas: marketing, logistics, supply management, and operations management. Successful management
of a global supply chain also requires complying with various international regulations set by a variety of
non-governmental organizations (e.g. The United Nations).

Global supply chain management can be impacted by several actors who impose policies that regulate
certain aspects of supply chains. Governmental and non-governmental organizations play a key role in the
field as they create and enforce laws or regulations which companies must abide by. These regulatory
policies often regulate social issues that pertain to the implementation and operation of a global supply
chain (e.g. labour, environmental, etc.). These regulatory policies force companies to obey the regulations
set in place which often impact a company’s profit.

Operating and managing a global supply chain comes with several risks. These risks can be divided into
two main categories: supply-side risk and demand side risk. Supply-side risk is a category that includes
risks accompanied by the availability of raw materials which effects the ability of the company to satisfy
customer demands. Demand-side risk is a category that includes risks that pertain to the availability of the
finished product. Depending on the supply chain, a manager may choose to minimize or take on these risks.
Successful global supply-chain management occurs after implementing the appropriate framework of
concentration, complying with international regulations set by governments and non-governmental
organizations, and recognizing and appropriately handling the risks involved while maximizing profit and
minimizing waste.

5.8 AGGREGATE PLANNING

An organization can finalize its business plans on the recommendation of demand forecast. Once business
plans are ready, an organization can do backward working from the final sales unit to raw materials
required. Thus annual and quarterly plans are broken down into labor, raw material, working capital, etc.
requirements over a medium-range period (6 months to 18 months). This process of working out
production requirements for a medium range is called aggregate planning.

Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization as it looks to balance long-term
strategic planning with short term production success. Following factors are critical before an aggregate
planning process can actually start;

 A complete information is required about available production facility and raw materials.
 A solid demand forecast covering the medium-range period
 Financial planning surrounding the production cost which includes raw material, labor, inventory
planning, etc.
 Organization policy around labor management, quality management, etc.

For aggregate planning to be a success, following inputs are required;

 An aggregate demand forecast for the relevant period

 Evaluation of all the available means to manage capacity planning like sub-contracting,
outsourcing, etc.
 Existing operational status of workforce (number, skill set, etc.), inventory level and production
efficiency.

Importance of Aggregate Planning

 Achieving financial goals by reducing overall variable cost and improving the bottom line
 Maximum utilization of the available production facility
 Provide customer delight by matching demand and reducing wait time for customers
 Reduce investment in inventory stocking
 Able to meet scheduling goals there by creating a happy and satisfied work force

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for organization to choose from. They are
as follows.

1. Level Strategy

As the name suggests, level strategy looks to maintain a steady production rate and workforce level. In this
strategy, organization requires a robust forecast demand as to increase or decrease production in
anticipation of lower or higher customer demand. Advantage of level strategy is steady workforce.
Disadvantage of level strategy is high inventory and increase back logs.

2. Chase Strategy

As the name suggests, chase strategy looks to dynamically match demand with production. Advantage of
chase strategy is lower inventory levels and back logs. Disadvantage is lower productivity, quality and
depressed work force.

3. Hybrid Strategy

As the name suggests, hybrid strategy looks to balance between level strategy and chase strategy.

5.9 INBOUND AND OUTBOUND SCM

Inbound logistics refers to the transport, storage and delivery of goods coming into a business. Outbound
logistics refers to the same for goods going out of a business. Inbound and outbound logistics combine
within the field of supply-chain management, as managers seek to maximize the reliability and efficiency
of distribution networks while minimizing transport and storage costs. Understanding the differences and
correlation between inbound and outbound logistics can provide insight for developing a comprehensive
supply-chain management strategy.

Supply-Chain Partners
Companies work with different supply-chain partners on the inbound and outbound side of logistics. The
inbound side concerns the relationship between companies and their suppliers, while the outbound side
deals with how companies get products to their customers. Regardless of the source or destination,
companies may work directly with third-party distributors on either side as well. A wholesaler, for
example, might work with a distributor to receive products from an international supplier, while using their
own fleet to deliver goods to their domestic customers.

Damage and Liability

Transport agreements between suppliers and customers specify which party is financially responsible for
the cost of any damage occurring in transit at different points, according to specific terms. For example,
Free on Board (FOB) shipping terms specify that the recipient — the one on the inbound side of logistics
— is responsible for shipping costs after the shipment is loaded onto a transport carrier, or when it reaches
a specified location. The International Chamber of Commerce defines several alternative terms, such as
“Delivered Duty Paid,” which specifies that international suppliers deliver goods to buyers after providing
for all import costs and requirements.

Tools and Materials

Inbound logistics cover anything that your company orders from suppliers, which can include tools, raw
materials and office equipment in addition to inventory. Outbound logistics, on the other hand, deals almost
exclusively with your end products. Tools, materials and equipment only fall into the outbound category if
your company sells them as a main line of business. Inbound logistics for a furniture manufacturer, for
example, can include wood, cloth materials, glue, nails and safety glasses, while the manufacturer’s
outbound logistics would likely only cover finished furniture products.

Supply Chain Integration

Vertical integration occurs when one company acquires or merges with its own suppliers or customers. A
vertical integration strategy can greatly increase supply-chain efficiency and produce competitive cost
advantages, due to the single source of strategic control over multiple players in the supply chain. A fully
integrated supply chain can synchronize both inbound and outbound logistics with automatic ordering and
order-fulfillment systems, shared fleet vehicles and drivers, and close cooperation between managers at
different child companies on pricing agreements, volume contracts, delivery terms and even custom
product design.

5.10 BULLWHIP EFFECT IN SCM

The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies
in a supply chain to order more goods to meet the new demand. The bullwhip effect is a distribution
channel phenomenon, rather problem, in which demand forecasts yield supply chain inefficiencies. This
mostly happens when retailers become highly reactive to consumer demand, and in turn, intensify
expectations around it. This results into inefficient asset allocations and high inventory fluctuations,
moving down in the supply chain.

 The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials supplier.
 This effect can be observed through most supply chains across several industries; it occurs because
the demand for goods is based on demand forecasts from companies, rather than actual consumer demand.
 The bullwhip effect can be explained as an occurrence detected by the supply chain where orders
sent to the manufacturer and supplier create larger variance then the sales to the end customer.
 These irregular orders in the lower part of the supply chain develop to be more distinct higher up in
the supply chain.

How Do we minimize the bullwhip effect?

Every industry has its own unique supply chain, inventory placements, and complexities. However, after
analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30
percent can be reduced and 15 to 35 percent reduction in instances of stock out situations and missed
customer orders can be achieved. Below are some of the methods to minimize the bullwhip effect.
1. Accept and understand the bullwhip effect

The first and the most important step towards improvement is the recognition of the presence of the
bullwhip effect. Many companies fail to acknowledge that high buffer inventories exist throughout their
supply chain. A detailed stock analysis of the inventory points from stores to raw material suppliers will
help uncover idle excess inventories. Supply chain managers can further analyze the reasons for excess
inventories, take corrective action and set norms.

2. Improve the inventory planning process

Inventory planning is a careful mix of historical trends for seasonal demand, forward-looking demand, new
product launches and discontinuation of older products. Safety stock settings and min-max stock range of
each inventory point need to be reviewed and periodically adjusted. Inventories lying in the entire network
need to be balanced based on regional demands. Regular reporting and early warning system need to be
implemented for major deviations from the set inventory norms.

3. Improve the raw material planning process

Purchase managers generally tend to order in advance and keep high buffers of raw material to avoid
disruption in production. Raw material planning needs to be directly linked to the production plan.
Production plan needs to be released sufficiently in advance to respect the general purchasing lead times.
Consolidation to a smaller vendor base from a larger vendor base, for similar raw material, will improve
the flexibility and reliability of the supplies. This, in turn, will result in lower raw material inventories.

4. Collaboration and information sharing between managers

There might be some inter-conflicting targets between purchasing managers, production managers,
logistics managers and sales managers. Giving more weight to common company objectives in
performance evaluation will improve collaboration between different departments. Also providing regular
and structured inter-departmental meetings will improve information sharing and decision-making process.

5. Optimize the minimum order quantity and offer stable pricing

Certain products have high minimum order quantity for end customers resulting in overall high gaps
between subsequent orders. Lowering the minimum order quantity to an optimal level will help provide
create smoother order patterns. Stable pricing throughout the year instead of frequent promotional offers
and discounts may also create stable and predictable demand.
5.11 LATEST TRENDS IN PRODUCTION AND OPERATION LEAN MANUFACTURING,
AGILE MANUFACTURING

There are a number of recent trends in productions and operations management, as the discipline is
evolving and the world of business is changing.

1. Sustainability

Consumers are growing ever more aware of the impact that companies have on the environment and they
are able to use their purchasing power to incentivize companies to reduce the negative impact on the
environment. This leads to greater adoption of operations management practices like Lean Production and
Just-In-Time, whereby products are made to order rather than large amounts of raw materials and inventory
being stocked and wasted. It is also in the interest of companies to implement these practices as it enables
faster incrementally changes to their product to better suit customer needs – which can be a source of
competitive advantage.

Total Quality Management (TQM) also reduces the amount of waste in the production process and is a
continual commitment to improving the quality of products. This also means products are more durable and
have a longer life-time, which means there is less consumer-end waste.

2. Ethics

Similarly, globalization has made consumers very aware of the impact that companies have on society and
the world. With some companies more economically powerful than a lot of countries (World Bank, 2016
The world’s top 100 economies: 31 countries; 69 corporations), they have the power to positively impact
the world, and consumers are beginning to expect that from them. This is putting pressure on companies to
audit their supply chains to maintain good and ethical standards and practices. Nike and Primark were both
negatively affected by poor supply chain management when their suppliers’ workers were seen to be
treated poorly.

3. Servitization

Manufacturing organizations are now looking to servitize their offerings. In other words, companies are
giving away their goods as a means to sell a service. Rolls-Royce is a good example of this: they give their
airplane engines away for free by charging a fee for the maintenance. In fact, Rolls-Royce actually charge
airlines “Power by the Hour”, which means that the airlines only pay whilst the airplane is in the sky.
Rolls-Royce has sufficient confidence in the quality of their engines that it absorbs the maintenance costs.
In brief, the recent trends of operations management are:

(1) Lean and agile production methods with Total Quality Management to react to changes in customer
needs and increasing quality expectations, whilst also satisfying the customers’ environmental concerns.

(2) A greater focus on supply chain management to maintain high ethical standards all around the world,
due to globalization.

(3) The servitization of goods, whereby, manufacturers are using products to sell services.

LEAN MANUFACTURING

Sometimes called “lean production,” lean manufacturing is a series of methods designed to minimize the
waste of material and labor while maintaining or increasing levels of production. This results in a net
improvement in total productivity.

Lean manufacturing’s roots lie in Japanese manufacturing with the Toyota Production System. Lean
principles pioneered by Toyota include “just-in-time” manufacturing, where inventory is kept at low “as-
needed” levels; automation supervised by human workers to maintain quality control (known as jidoka);
minimization of downtime and transportation, and others.

Ultimately, lean manufacuring is about eliminating that which does not add value, and delivering the best
possible product to the customer as quickly and with as few barriers as possible.

The Benefits of Lean Manufacturing

Lean manufacturing improves efficiency, reduces waste, and increases productivity. The benefits,
therefore, are manifold:

 Increased product quality: Improved efficiency frees up employees and resources for innovation
and quality control that would have previously been wasted.
 Improved lead times: As manufacturing processes are streamlined, businesses can better respond
to fluctuations in demand and other market variables, resulting in fewer delays and better lead times.
 Sustainability: Less waste and better adaptability makes for a business that’s better equipped to
thrive well into the future.
 Employee satisfaction: Workers know when their daily routine is bloated or packed with
unnecessary work, and it negatively affects morale. Lean manufacturing boosts not only productivity, but
employee satisfaction.
 Increased profits: And, of course, more productivity with less waste and better quality ultimately
makes for a more profitable company.

AGILE MANUFACTURING

Agile manufacturing is a term applied to an organization that has created the processes, tools, and training
to enable it to respond quickly to customer needs and market changes while still controlling costs and
quality.

An enabling factor in becoming an agile manufacturer has been the development of manufacturing support
technology that allows the marketers, the designers and the production personnel to share a common
database of parts and products, to share data on production capacities and problems—particularly where
small initial problems may have larger downstream effects. It is a general proposition of manufacturing that
the cost of correcting quality issues increases as the problem moves downstream, so that it is cheaper to
correct quality problems at the earliest possible point in the process.

Agile manufacturing is seen as the next step after lean manufacturing in the evolution of production
methodology.[citation needed] The key difference between the two is like between a thin and an athletic
person, agile being the latter. One can be neither, one or both. In manufacturing theory, being both is often
referred to as leagile. According to Martin Christopher, when companies have to decide what to be, they
have to look at the customer order cycle (COC) (the time the customers are willing to wait) and the
leadtime for getting supplies. If the supplier has a short lead time, lean production is possible. If the COC is
short, agile production is beneficial
 UNIT 6

PRODUCTIVITY AND QUALITY

6.0 TOTAL QUALITY MANAGEMENT (TQM)

Total Quality Management (TQM)

Total Quality Management (TQM) is the continual process of detecting and reducing or eliminating errors
in manufacturing, streamlining supply chain management, improving the customer experience, and
ensuring that employees are up to speed with their training. Total quality management aims to hold all
parties involved in the production process accountable for the overall quality of the final product or service.

A total approach to quality is the current thinking of today; which is popularly called total quality
management (TQM).

TQM is a philosophy that believes in a company-wide responsibility toward quality via fostering a quality
culture throughout the organization; involving continuous improvement in the quality of work of all
employees with a view to best meeting the requirements of customers.
Advantages of TQM

(i) Sharpens Competitive Edge of the Enterprise

TQM helps an organization to reduce costs through elimination of waste, rework etc. It increases
profitability and competitiveness of the enterprise; and helps to sharpen the organization’s competitive
edge, in the globalized economy of today.

(ii) Excellent Customer Satisfaction

By focusing on customer requirements, TQM makes for excellent customer satisfaction. This leads to more
and more sales, and excellent relations with customers.

(iii) Improvement in Organisational Performance

Through promoting quality culture in the organization, TQM lead to improvements in managerial and
operative personnel’s performance.

(iv) Good Public Image of the Enterprise

TQM helps to build an image of the enterprise in the minds of people in society. This is due to stress on
total quality system and customers’ requirements, under the philosophy of TQM.

(v) Better Personnel Relations

TQM aims at promoting mutual trust and openness among employees, at all levels in the organization. This
leads to better personnel relations in the enterprise.

6.1 LIMITATIONS OF TQM

The philosophy of TQM suffers from the following major limitations

(i) Waiting for a Long Time

TQM requires significant change in organization; consisting of:

1. Change in methods, processes etc. of organization.

2. Change in attitude, behaviour etc. of people

Launching of TQM and acceptance of the philosophy of TQM requires a long waiting for the organization.
It is not possible to accept and implement TQM overnight.

(ii) Problem of Labour Management Relations

Success of TQM depends on the relationships between labour and management; because participation of
people at all levels is a pre-requisite for TQM programme implementation. In many organizations, here and
abroad, labour-management relations are quite tense. As such, launching, acceptance and implementation
of TQM programme is nothing more than a dream for such organizations.

6.2 BASIC PRINCIPLES OF TQM

In TQM, the processes and initiatives that produce products or services are thoroughly managed. By this
way of managing, process variations are minimized, so the end product or the service will have a
predictable quality level.

Following are the key principles used in TQM

(i) Top management – The upper management is the driving force behind TQM. The upper management
bears the responsibility of creating an environment to rollout TQM concepts and practices.

(ii) Training needs – When a TQM rollout is due, all the employees of the company need to go through a
proper cycle of training. Once the TQM implementation starts, the employees should go through regular
trainings and certification process.
(iii) Customer orientation – The quality improvements should ultimately target improving the customer
satisfaction. For this, the company can conduct surveys and feedback forums for gathering customer
satisfaction and feedback information.

(iv) Involvement of employees – Pro-activeness of employees is the main contribution from the staff. The
TQM environment should make sure that the employees who are proactive are rewarded appropriately.

(v) Techniques and tools – Use of techniques and tools suitable for the company is one of the main factors
of TQM.

(vi) Corporate culture – The corporate culture should be such that it facilitates the employees with the
tools and techniques where the employees can work towards achieving higher quality.

(vii) Continues improvements – TQM implementation is not one time exercise. As long as the company
practices TQM, the TQM process should be improved continuously.

6.3 DEMING’S 14 PRINCIPLES, CONTINUOUS IMPROVEMENT (KAIZEN)

Kaizen, also known as continuous improvement, is a long-term approach to work that systematically seeks
to achieve small, incremental changes in processes in order to improve efficiency and quality. Kaizen can
be applied to any kind of work, but it is perhaps best known for being used in lean manufacturing and lean
programming. If a work environment practices kaizen, continuous improvement is the responsibility of
every worker, not just a selected few.

Kaizen can be roughly translated from Japanese to mean “good change.” The philosophy behind kaizen is
often credited to Dr. W. Edwards Deming. Dr. Deming was invited by Japanese industrial leaders and
engineers to help rebuild Japan after World War II. He was honored for his contributions by Emperor
Hirohito and the Japanese Union of Scientists and Engineers.

In his book “Out of the Crisis,” Dr. Deming shared his philosophy of continuous improvement:-

Deming has given his views on management and its relationship with quality in his 14 points for
management.

These points are summarized as under

1. Create consistency of purpose towards improvement of product and service with an aim to become
competitive and thus to stay in business and to provide jobs.
2. Adopt the new philosophy for economic stability. Management needs to take leadership for change
and we no longer live with delays, mistakes, defective materials and defective workmanship.
3. Eliminate the need for mass inspection by building quality into the product in the first place.
4. End the practice of awarding business on price tag alone. Rather total cost should be minimized.
Select a single supplier for any item on a long term relationship of trust and loyalty.
5. Improve constantly the system of production and service, to improve quality and productivity and
thus leading to the decrease in cost.
6. Institute better methods of training and education for all the employees including management to
make effective use of all the employees.
7. Adopt and institute better leadership to help the people to perform a job in a better way.
8. Drive out fear so that everyone works for the company effectively without any tension.
9. Break down barriers between different departments. People in different departments must work as a
team to tackle the problems of production that may be encountered with the product or service.
10. Eliminate slogans, exhortations and numerical targets for the workforce. They never help the
workers to do the job in a better way. Let the workers develop their own slogans and work accordingly.
11. Eliminate work standards and numerical quotas. Eliminate management by objectives and also
eliminate management by numbers. These are usually a guarantee of inefficiency and high costs. A person,
in order to hold a job, will try to meet a quota at any cost including doing damage to his company.
12. Remove barriers in taking pride in workmanship. Usually, incompetent supervisors, defective
materials and faulty equipment’s are stumbling blocks in the way of good performance. These barriers
must be eliminated.
13. Introduce a vigorous programme of education and self development. Both the management and the
work force will have to be educated in the new knowledge and understanding, including teamwork and
statistical techniques.
14. Take proper action to accomplish the transformation. Top management has to constitute a team
with a plan of action to carry out the quality mission.

6.4 PDCA Cycle

Plan, Do, Check, Act (PDCA) – is a well-known and respected approach to helping teams plan and
implements a solution to a problem, often testing it on a micro scale and reviewing the results before
agreeing how to proceed.
PDCA encourages an engaged, problem-solving workforce – the method is not limited to managers, but
can be used across the organizational structure, using combined knowledge and experience. This helps
business to innovate through creative problem solving.

The easiest way to think of it is a prototyping model. But it can be used for larger projects, where testing is
not feasible – for example, if a business has already bought new, expensive equipment to solve a problem,
then the implementation has to be on a large scale.

Usually the Problem Solving Group (PS) has already identified what they want to solve and the changes
they would like to make. This may include how outcomes will be measured, or a specification. PDCA
would then drop into any planning and implementation phases.

The 4 steps of the PDCA Cycle

Plan

This first stage clarifies the objectives of the chosen solution, and will identify which processes need to
change (the problem will have already been defined, and a solution proposed using other problem solving
techniques).
The PS group will plan how the solution is tested, and forecast what is expected to happen during the
PDCA the cycle. This will result in a set of outputs, and usually set a baseline for improvement.

Focused work at this stage includes agreeing what data is to be collected, what resources are needed, and
the actions that will take place and when. The PS group will then decide where the trial run will be held. At
this stage ‘before’ data is collected for later comparison in the ‘Check’ step.

Do

This involves physically implementing the solution, and collecting data for analysis in the next step,
observation and project management.
This step should also include oversight to ensure that the solution is implemented as per the specification.

Check

This step is about analyzing ‘before’, ‘during’, and ‘after’ data to see what can be learned. (Another name
for this step is ‘Study’). ‘During’ data is easy to overlook, but any plan is implemented in phases, and if
issues are to be found and identified quickly, these actions need to be measured.
Not only will the process be observed qualitatively as well as quantitatively, feedback can be gathered from
the end users of the solution.

The data from the observations, and feedback from staff is analyzed, and compared to the baseline. Issues
and successes are identified.

Act

If the ‘Check’ demonstrates that the ‘Plan’ phase was implemented effectively and improvements can be
seen on the baseline, then a new baseline is created and the cycle returns to ‘Plan’, using the new baseline.
If ‘Check’ results infer that there has been no improvement from the ‘Do’ phase, then the existing baseline
continues in place. In either scenario, if ‘Check’ reveals something different from expected (whether it has
out-performed or underperformed), then it identifies that more learning is needed.

This may even result in the returning to the overarching problem solving technique, and the process of
problem identification and definition, using the chosen problem-solving model. Adjustments or corrective
actions should not be undertaken at this stage, and should never be done without a formal ‘Plan’ phase.
Additionally, the baseline should not be changed from verified one, discovered in ‘Act’.

Advantages

 Staff is more willing to try a new solution, if they know it is not a fait accompli – especially if
modifications are based on user’s feedback and views, as well as measurement.
 The method creates acceptance and ownership in the end user as confidence in the solution grows
quickly, as mistakes are rectified as part of the process.
 The model allows potential solutions to be implemented on a small scale, and ascertain how
effective they are.
 Importantly this model provides an opportunity for learning why something isn’t working before it
is fully implemented.
 It involves a wide range of people across the organization, and provides a range of perspectives.
6.5 QUALITY CIRCLES

Quality Circle

A quality circle is a volunteer group composed of workers, usually under the leadership of their supervisor,
who are trained to identify, analyze and solve work-related problems and present their solutions to
management in order to improve the performance of the organization, and motivate and enrich the work of
employees. When matured, true quality circles become self-managing, having gained the confidence of
management.

Participative management technique within the framework of a company wide quality system in which
small teams of (usually 6 to 12) employees voluntarily form to define and solve a quality or performance
related problem. In Japan (where this practice originated) quality circles are an integral part of enterprise
management and are called quality control circles.

“A Quality Circle is volunteer group composed of members who meet to talk about workplace and service
improvements and make presentations to their management with their ideas.” (Prasad, L.M, 1998).

Quality circles enable the enrichment of the lives of the workers or students and creates harmony and high
performance. Typical topics are improving occupational safety and health, improving product design, and
improvement in the workplace and manufacturing processes.

Objectives of Quality Circle

The perception of Quality Circles today is ‘Appropriateness for use1 and the tactic implemented is to avert
imperfections in services rather than verification and elimination. Hence the attitudes of employees
influence the quality. It encourages employee participation as well as promotes teamwork. Thus it
motivates people to contribute towards organizational effectiveness through group processes. The
following could be grouped as broad intentions of a Quality Circle:

1. To contribute towards the improvement and development of the organization or a department.

2. To overcome the barriers that may exist within the prevailing organizational structure so as to foster
an open exchange of ideas.
3. To develop a positive attitude and feel a sense of involvement in the decision making processes of
the services offered.
4. To respect humanity and to build a happy work place worthwhile to work.
5. To display human capabilities totally and in a long run to draw out the infinite possibilities.
6. To improve the quality of products and services.
7. To improve competence, which is one of the goals of all organizations?
8. To reduce cost and redundant efforts in the long run.
9. With improved efficiency, the lead time on convene of information and its subassemblies is
reduced, resulting in an improvement in meeting customers due dates.
10. Customer satisfaction is the fundamental goal of any library. It will ultimately be achieved by
Quality Circle and will also help to be competitive for a long time.

BENEFITS OF QUALITY CIRCLES

There are no monetary rewards in the QC’s. However, there are many other gains, which largely benefit the
individual and consecutively, benefit the business. These are:

(i) Self-development: QC’s assist self-development of members by improving self-confidence, attitudinal

change, and a sense of accomplishment.

(ii) Social development: QC is a consultative and participative programme where every member
cooperates with others. This interaction assists in developing harmony.

(iii) Opportunity to attain knowledge: QC members have a chance for attaining new knowledge by
sharing opinions, thoughts, and experience.

(iv) Potential Leader: Every member gets a chance to build up his leadership potential, in view of the fact
that any member can become a leader.

(v) Enhanced communication skills: The mutual problem solving and presentation before the
management assists the members to develop their communication skills.

(vi) Job-satisfaction: QC’s promote creativity by tapping the undeveloped intellectual skills of the
individual. Individuals in addition execute activities diverse from regular work, which enhances their self-
confidence and gives them huge job satisfaction.

(vii) Healthy work environment: QC’s creates a tension-free atmosphere, which each individual likes,
understands, and co-operates with others.

(viii) Organizational benefits: The individual benefits create a synergistic effect, leading to cost
effectiveness, reduction in waste, better quality, and higher productivity
6.6 7QC TOOLS AND ITS ADVANCEMENTS

The seven basic tools of quality is a designation given to a fixed set of graphical techniques identified as
being most helpful in troubleshooting issues related to quality. They are called basic because they are
suitable for people with little formal training in statistics and because they can be used to solve the vast
majority of quality-related issues.

Once the basic problem-solving or quality improvement process is understood, the addition of quality tools
can make the process proceed more quickly and systematically. Seven simple tools can be used by any
professional to ease the quality improvement process: flowcharts, check sheets, Pareto diagrams, cause and
effect diagrams, histograms, scatter diagrams, and control charts.

1. FLOWCHARTS

Flowcharts describe a process in as much detail as possible by graphically displaying the steps in proper
sequence. A good flowchart should show all process steps under analysis by the quality improvement team,
identify critical process points for control, suggest areas for further improvement, and help explain and
solve a problem.

The flowchart is a simple production process in which parts are received, inspected, and sent to
subassembly operations and painting. After completing this loop, the parts can be shipped as subassemblies
after passing a final test or they can complete a second cycle consisting of final assembly, inspection and
testing, painting, final testing, and shipping.
2. CHECK SHEETS

Check sheets help organize data by category. They show how many times each particular value occurs, and
their information is increasingly helpful as more data are collected. Check sheets minimize clerical work
since the operator merely adds a mark to the tally on the prepared sheet rather than writing out a figure. By
showing the frequency of a particular defect (e.g., in a molded part) and how often it occurs in a specific
location, check sheets help operators spot problems.

The check sheet example shows a list of molded part defects on a production line covering a week’s time.
One can easily see where to set priorities based on results shown on this check sheet. Assuming the
production flow is the same on each day, the part with the largest number of defects carries the highest
priority for correction.

3. PARETO DIAGRAMS

The Pareto diagram is named after Vilfredo Pareto, a 19th-century Italian economist who postulated that a
large share of wealth is owned by a small percentage of the population. This basic principle translates well
into quality problems—most quality problems result from a small number of causes. Quality experts often
refer to the principle as the 80-20 rule; that is, 80% of problems are caused by 20% of the potential sources.

A Pareto diagram puts data in a hierarchical order, which allows the most significant problems to be
corrected first. The Pareto analysis technique is used primarily to identify and evaluate nonconformities,
although it can summarize all types of data. It is perhaps the diagram most often used in management
presentations.

4. CAUSE AND EFFECT DIAGRAMS

The cause and effect diagram is sometimes called an Ishikawa diagram after its inventor. It is also known
as a fish bone diagram because of its shape. A cause and effect diagram describes a relationship between
variables. The undesirable outcome is shown as effect, and related causes are shown as leading to, or
potentially leading to, the said effect. This popular tool has one severe limitation, however, in that users
can overlook important, complex interactions between causes. Thus, if a problem is caused by a
combination of factors, it is difficult to use this tool to depict and solve it.
A fish bone diagram displays all contributing factors and their relationships to the outcome to identify areas
where data should be collected and analyzed. The major areas of potential causes are shown as the main
bones, e.g., materials, methods, people, measurement, machines, and design. Later, the subareas are
depicted. Thorough analysis of each cause can eliminate causes one by one, and the most probable root
cause can be selected for corrective action. Quantitative information can also be used to prioritize means
for improvement, whether it be to machine, design, or operator.

5. HISTOGRAMS

The histogram plots data in a frequency distribution table. What distinguishes the histogram from a check
sheet is that its data are grouped into rows so that the identity of individual values is lost. Commonly used
to present quality improvement data, histograms work best with small amounts of data that vary
considerably. When used in process capability studies, histograms can display specification limits to show
what portion of the data does not meet the specifications.
After the raw data are collected, they are grouped in value and frequency and plotted in a graphical form. A
histogram’s shape shows the nature of the distribution of the data, as well as central tendency (average) and
variability. Specification limits can be used to display the capability of the process.

6. SCATTER DIAGRAMS

A scatter diagram shows how two variables are related and is thus used to test for cause and effect
relationships. It cannot prove that one variable causes the change in the other, only that a relationship exists
and how strong it is.
 

In a scatter diagram, the horizontal (x) axis represents the measurement values of one variable, and the
vertical (y) axis represents the measurements of the second variable.

7. CONTROL CHARTS

A control chart displays statistically determined upper and lower limits drawn on either side of a process
average. This chart shows if the collected data are within upper and lower limits previously determined
through statistical calculations of raw data from earlier trials.
The construction of a control chart is based on statistical principles and statistical distributions, particularly
the normal distribution. When used in conjunction with a manufacturing process, such charts can indicate
trends and signal when a process is out of control. The center line of a control chart represents an estimate
of the process mean; the upper and lower critical limits are also indicated. The process results are
monitored over time and should remain within the control limits; if they do not, an investigation is
conducted for the causes and corrective action taken. A control chart helps determine variability so it can
be reduced as much as is economically justifiable.

In preparing a control chart, the mean upper control limit (UCL) and lower control limit (LCL) of an
approved process and its data are calculated. A blank control chart with mean UCL and LCL with no data
points is created; data points are added as they are statistically calculated from the raw data.

6.7 ISO 9000-2000 CLAUSES

ISO

ISO is an independent, non-governmental international organization with a membership of 162 national

standards bodies.

Through its members, it brings together experts to share knowledge and develop voluntary, consensus-
based, market relevant International Standards that support innovation and provide solutions to global
challenges.
ISO 9000

The ISO 9000 family of quality management systems standards is designed to help organizations ensure
that they meet the needs of customers and other stakeholders while meeting statutory and regulatory
requirements related to a product or service. ISO 9000 deals with the fundamentals of quality management
systems, including the seven quality management principles upon which the family of standards is based.
ISO 9001 deals with the requirements that organizations wishing to meet the standard must fulfill.

Five Objectives of ISO 9000

1. Gives businesses with useful, globally recognized models for operating a quality management
system.
2. Achieve, maintain and aim to regularly enhance product quality (the standards define “product” as
the output of any process. Therefore, this word will also apply to “services,” whether internal or external to
the business).
3. Primary objective of getting these standards is to boost the goodwill of organization. Customer can
compare the quality of two companies , one is with ISO standard and other is without ISO standard .
Goodwill could be in form of rise in sale or more promotion of product of company.
4. To create a compliance standard which is followed 24 hours-a-day, 7 days-a week, 52 weeks-a-
year.
5. Offer confidence to internal management as well as other workers that requirements for quality are
being fulfilled and maintained, and that quality improvement is taking place.

ISO 2000

Quality system standards adopted in 1987 by international organization for standardization; revised in 1994
and 2000.

Technical specifications and criteria to be used as rules, guidelines, or definitions of characteristics to

ensure that materials, products, processes, and services are fit for their purpose.

ISO 9000:2000 Standards

 Fundamental Requirements
 Guidelines for Performance Improvement

ISO 9000:2000
1. Customer Focus
2. Leadership
3. Involvement of people
4. System approach to management
5. Continuous improvement
6. Factual approach to decision making
7. Mutually beneficial supplier relationship

ISO 9000-2000 clauses

6.8 SIX SIGMA

Six Sigma is a business management strategy which aims at improving the quality of processes by
minimizing and eventually removing the errors and variations. The concept of Six Sigma was introduced
by Motorola in 1986, but was popularized by Jack Welch who incorporated the strategy in his business
processes at General Electric. The concept of Six Sigma came into existence when one of Motorola’s
senior executives complained of Motorola’s bad quality. Bill Smith eventually formulated the methodology
in 1986.

Quality plays an important role in the success and failure of an organization. Neglecting an important
aspect like quality, will not let you survive in the long run. Six Sigma ensures superior quality of
products by removing the defects in the processes and systems. Six sigma is a process which helps in
improving the overall processes and systems by identifying and eventually removing the hurdles which
might stop the organization to reach the levels of perfection. According to sigma, any sort of challenge
which comes across in an organization’s processes is considered to be a defect and needs to be eliminated.

Organizations practicing Six Sigma create special levels for employees within the organization. Such levels
are called as: “Green belts”, “Black belts” and so on. Individuals certified with any of these belts are often
experts in six sigma process. According to Six Sigma any process which does not lead to customer
satisfaction is referred to as a defect and has to be eliminated from the system to ensure superior
quality of products and services. Every organization strives hard to maintain excellent quality of its brand
and the process of six sigma ensures the same by removing various defects and errors which come in the
way of customer satisfaction.

The process of Six Sigma originated in manufacturing processes but now it finds its use in other businesses
as well. Proper budgets and resources need to be allocated for the implementation of Six Sigma in
organizations.

Following are the two Six Sigma methods

 DMAIC
 DMADV

DMAIC focuses on improving existing business practices. DMADV, on the other hand focuses on creating
new strategies and policies.

DMAIC has Five Phases

D – Define the Problem. In the first phase, various problems which need to be addressed to are clearly
defined. Feedbacks are taken from customers as to what they feel about a particular product or service.
Feedbacks are carefully monitored to understand problem areas and their root causes.

M – Measure and find out the key points of the current process. Once the problem is identified,
employees collect relevant data which would give an insight into current processes.
A – Analyze the data. The information collected in the second stage is thoroughly verified. The root cause
of the defects are carefully studied and investigated as to find out how they are affecting the entire process.

I – Improve the current processes based on the research and analysis done in the previous stage. Efforts
are made to create new projects which would ensure superior quality.

C – Control the processes so that they do not lead to defects.

DMADV Method

D – Design strategies and processes which ensure hundred percent customer satisfactions.

M – Measure and identify parameters that are important for quality.

A – Analyze and develop high level alternatives to ensure superior quality.

D – Design details and processes.

V – Verify various processes and finally implement the same.

6.9 TOTAL PRODUCTIVE MAINTENANCE (TPM)

Total Productive Maintenance (TPM) is a system of maintaining and improving the integrity of

production and quality systems through the machines, equipment, processes, and employees that
add business value to an organization.

TPM focuses on keeping all equipment in top working condition to avoid breakdowns and delays in
manufacturing processes.

Objective of TPM

 Improving the effectiveness of machines

 Improving the efficiency, reliability and effectiveness of maintenance of machine
 Scheduling maintenance for avoiding early maintenance
 Involving operation team also in smaller scale maintenance, such as machine checklist inspection
before starting and after closing the machines
 Arrangement of training for amending the skills of employees
The Eight(8) pillars of TPM

1. Autonomous Maintenance: Operators monitor the condition of their own equipment and work
areas
2. Process & Machine Improvement: Team leaders collect information from operators and work
areas, then prioritize preventative maintenance and improvements
3. Preventative Maintenance: Operators and team leaders share preventative maintenance tasks and
schedules
4. Early Management of New Equipment: Team leaders anticipate and plan for parts of equipment
lifecycles and report to mangers, based on maintenance reports
5. Process Quality Management: Shared responsibility for operation and maintenance encourages
quality improvement ideas from all areas of work
6. Administrative Work: Managers prioritize data from the previous pillars and share outcomes with
team leaders and work areas
7. Education & Training: Continuous improvement includes operator and work area education and
training which improves morale, retention and efficiency
8. Safety & Sustained Success: Facility-wide safety is prioritized, which positively impacts sustained
success of the TPM program

As maintenance is traditionally considered an inevitable and “not-for-profit” function, TPM is considered

the most difficult lean manufacturing tool to implement. Shifting cultural beliefs within a facility, from the
CEO to machinists and janitors, may take years but the pay off for both the finished product and employee
morale is worth the investment.

6.10 5S

Ever notice how much better you work when the space you work in is organized? The 5S approach is a
Japanese process that’s about promoting an efficient, effective workplace that helps companies eliminate
waste.

Benefits of 5S

 Reduced costs
 Higher quality
 Increased productivity
 Greater employee satisfaction
 A safer work environment
The 5S Approach to Waste Elimination for Lean Businesses. The steps are:

1. Sort
2. Set
3. Shine
4. Standardize
5. Sustain

Often, these steps are represented on a process chart where the first four steps are located around the
perimeter of the chart and the fifth step (sustain) is placed inside the process. This is because the first four
steps lead into each other, while ”sustain” is something that must be done at every step.

There are five 5S phases. They can be translated from the Japanese as “sort”, “set in order”, “shine”,
“standardize”, and “sustain”. Other translations are possible.

1. Sort (Seiri)

Sort is sorting through all items in a location and removing all unnecessary items from the location.

Goals:

 Reduce time loss looking for an item by reducing the number of items.
 Reduce the chance of distraction by unnecessary items.
 Simplify inspection.
 Increase the amount of available, useful space.
 Increase safety by eliminating obstacles.

Implementation:

 Check all items in a location and evaluate whether or not their presence at the location is useful or
necessary.
 Remove unnecessary items as soon as possible. Place those that cannot be removed immediately in
a ‘red tag area’ so that they are easy to remove later on.
 Keep the working floor clear of materials except for those that are in use to production.

2. Set in order (Seiton)

Set is putting all necessary items in the optimal place for fulfilling their function in the workplace.

Goal:

 Make the workflow smooth and easy.

Implementation:

 Arrange work stations in such a way that all tooling / equipment is in close proximity, in an easy to
reach spot and in a logical order adapted to the work performed. Place components according to their uses,
with the frequently used components being nearest to the workplace.
 Arrange all necessary items so that they can be easily selected for use. Make it easy to find and pick
up necessary items.
 Assign fixed locations for items. Use clear labels, marks or hints so that items are easy to return to
the correct location and so that it is easy to spot missing items.

3. Shine/Seiso

Shine is sweeping or cleaning and inspecting the workplace, tools and machinery on a regular basis.

Goals:

 Prevent deterioration.
 Keep the workplace safe and easy to work in.
 Keep the workplace clean and pleasing to work in.
 When in place, anyone not familiar to the environment must be able to detect any problems within
50 feet in 5 sec.

Implementation:

 Clean the workplace and equipment on a daily basis, or at another appropriate (high frequency)
cleaning interval.
 Inspect the workplace and equipment while cleaning.

4. Standardize (Seiketsu)

Standardize is to standardize the processes used to sort, order and clean the workplace.

Goal:
 Establish procedures and schedules to ensure the repetition of the first three ‘S’ practices.

Implementation:

 Develop a work structure that will support the new practices and make it part of the daily routine.
 Ensure everyone knows their responsibilities of performing the sorting, organizing and cleaning.
 Use photos and visual controls to help keep everything as it should be.
 Review the status of 5S implementation regularly using audit checklists.

5. Sustain/Self-discipline (Shitsuke)

Sustain or sustain the developed processes by self-discipline of the workers. Also translates as “do without
being told”.

Goal:

 Ensure that the 5S approach is followed.

Implementation:

 Organize training sessions.

 Perform regular audits to ensure that all defined standards are being implemented and followed.
 Implement improvements whenever possible. Worker inputs can be very valuable for identifying
improvements.
 When issues arise, identify their cause and implement the changes necessary to avoid recurrence.