Production and Operations Management Unit 1

Unit 1 Production Management

Structure:
1.1 Introduction
Objectives
1.2 Integrated Production Management
Production management and production control
Inventories
Material control and material handling
1.3 System Productivity
1.4 Capital Productivity
Outsourcing strategies
Balancing of workstations
Quality tools
Rationalisation of packaging methods
1.5 Labour Productivity
Balancing operations in assembly line
Reallocation of workers
Setting up productivity norms
1.6 Personnel Productivity
1.7 Training
1.8 Summary
1.9 Glossary
1.10 Terminal Questions
1.11 Answers
1.12 Case Study

1.1 Introduction
Production refers to the creation of goods and services for consumption by
the society. Such creation typically involves converting inputs to desired
outputs using different conversion or transformation processes. In fact, the
first step is to decide upon the desired outputs and then to identify the inputs
and the corresponding conversion processes. Production management
encompasses all those activities that enable conversion of a set of inputs
into outputs which are useful to meet the human needs. Figure 1.1 depicts a
diagrammatic representation of production management.

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Production
Inputs Output
Management

Fig. 1.1: Diagrammatic Representation of Production Management

It is also important to have a feedback loop connecting the information from

output to input stages to ensure that the desired type of output has been
produced. This also ensures the right quantity and the right quality.
The below table 1.1 shows some of the examples of production systems.
Table 1.1: Examples of production systems

Production Inputs Transformation Outputs

System processes

University Students, lecturers, Knowledge Graduates,

staff, facilities, labs, dissemination, qualified persons
library evaluation,
administration
Banks Accountants, Transaction, money Money instruments,
cashiers, equipment, exchange, financial services,
staff, client request accounting, tallying satisfied customers
Laundry Dirty clothes, soap, Cleaning, washing, Neat and clean
water, energy, rinsing, soaking, clothes, dry
equipment, drying pressed clothes

Production management involves the following activities:

 Identification of the requisite materials, acquiring the knowledge of the
processes, and installation of equipments necessary to convert or
transform the materials to products.
 Further, the quantities to be produced have to be ascertained, processes
established, specifications detailed out, quality maintained, and products
delivered in time to meet the demands.
 Decisions need to be taken about:
o Location of the facility

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o Variety of machineries required to be installed

o Technologies to be deployed
o Recruitment of workforce with adequate training to perform the tasks
o Facilities to be provided
o Items to be produced in-house and those outsourced
These decisions will help to achieve productivity with utmost efficiency.
Constraints on resources and competition demands that optimisation be
obtained in all functions at all levels. In addition, attempts are made to
improve output quality, increase yield, and develop systems that are not
harmful to the society.
 Different types of materials have to be procured, stored, and transported
inside the organisation for transformation using processes. Information
flows throughout the cycle to instruct, monitor, and to control the
processes to establish and control the relevant costs and to look for
opportunities for continuous improvement. All these functions generate
their own subsystems which help in the establishment of accountability
and the recognition of performance necessary for improvement.
 Strategies at various levels will have to be formulated with appropriate
implementation procedures established with checks and balances.
 Flexibility will have to be designed into the system to take care of
fluctuations in the market – both for purchased items and the in-house
production based on demand.
 Technological changes have to be accommodated – both as challenges
and opportunities for development to be abreast of the global
environment.
You will learn about these aspects of production and understand the
intricacies involved so that you will be able to adapt yourself to a production
environment.
Objectives:
After studying this unit, you should be able to:
 define production management
 list the various functions involved in production management
 explain the significance of inventories and material handling
 define productivity

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 describe the role of quality circles in achieving quality

 explain the methods of balancing workstations and their impact on
productivity
 identify the importance of training
In this module, you will learn about the methods and strategies deployed for
ensuring productivity. You will realise the importance of balancing loads on
various workstations and how setting up norms and evaluation of personnel
improves productivity. The concepts behind quality circles, methods
improvement, and training will become clear to you.

1.2 Integrated Production Management

The set of interrelated management activities, which are involved in
manufacturing certain products, is called as production management.
The various functions involved in production management are:
 Procuring the materials
 Moving the material for transformation, that is, to adapt processes which
change their characteristics and attributes to make them suitable for the
product
 Training and deploying the workforce
 Implementing the procedures for systematic loading of machines
 Maintaining the inventories
 Maintaining the machines
 Establishing the methods of inspection to ensure quality
 Packaging the products for safe distribution and dispatch
Planning, both long and short term, requires information about the
production capacities of different facilities. Many items need to be
purchased, some partially manufactured, and some partially processed. The
quantities of each of these have to be assessed for procurement, storage,
quality, and receipt. Information flow at every stage helps to identify the
value additions that are taking place.
A faithful record of the various stages, the time consumed, costs involved,
and their impact on other processes helps in identifying the bottlenecks and
also the opportunities for improvement. It has been widely recognised that
inventories such as raw materials, work-in-process, and finished goods cast

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a heavy burden on profitability. In the modern times, when there is pressure

on margins from all sides, it is mandatory to keep inventories to the
minimum. So the concepts of Just-In-Time (JIT) and lean manufacturing are
applied to utilise the resources to the best advantage and also to minimise
or eliminate inventories.
Integrated production manufacturing is expected to address these concerns
and offer methodologies to make the production system efficient.
1.2.1 Production management and production control
Production management typically starts with aggregate planning. The data
for this planning comes from the marketing department which forecasts the
demand and determines the quantities of various products needed to fulfill
the orders. The delivery schedules are also established. The available
stocks and buffer stocks needed to meet the exigencies are also
considered.
In aggregate planning, all inputs that are required to meet the targets such
as, machinery, raw materials, number of machines and their types, work
force, storage space, facilities for movement and storage, and policy options
like sub-contracting, overtime, hiring, and laying off workers are considered.
Make or buy decisions have to be taken to meet the varying demands to
avoid the deficits or excesses by two well known methods - matching
demand and level capacity. Figure 1.2 depicts the make or buy decisions.

Fig. 1.2: Make or Buy Decisions

In the matching method, the production capacity is adjusted to match the

forecast demand by varying the level of the work force by hiring or laying off.

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The advantage of this method is that there will be no finished goods

inventory.
In the level capacity method, the production capacity is held constant at an
optimum level. The varying demands are met by maintaining the inventory,
backlog, overtime, or subcontracting. The choice between the two is
determined by the capacities available, availability of part-time labour,
reliability of subcontractors, and management’s policies.
Master production schedule sets the quantity of each end item to be
completed during each time period of the short-range planning. The details
are arrived at after verifying the progress of the schedules of work, expected
receipts, available stocks from inventory, and the needs of assembly shops
to meet the demands. Constant reviewing makes for successful scheduling
which results in economies as well as high rate of order completion.
The functions of production planning are broadly classified into three. They
are estimating, routing, and scheduling.
Figure 1.3 depicts the production planning.

Production
Planning

Estimating Routing Scheduling

Fig. 1.3: Production Planning

 Estimating – Estimating involves identifying the manpower
requirements, machine capacity, and materials required to meet the
planned production targets.
 Routing – Routing is the process of determining the sequence of
operations. It tackles the problem of moving materials in specific steps to
work centers. It keeps a close track to verify the completion of operations
as per the specifications, confirms that inspections have been carried out
at every stage, and informs about the next operation.

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 Scheduling – Scheduling fixes the priorities for various jobs and is

mainly concerned with the completion of jobs at pre-set times. This helps
in balancing loads on work centres as well as utilising the labour time.
This function is important for ensuring delivery as per schedule and
achieving cost effectiveness.
The functions of production control are dispatching and expediting. Figure
1.4 depicts the production control function.

Production Control

Dispatching Expediting

Fig. 1.4: Production Control Function

 Dispatching – Dispatching is concerned with setting production

activities in motion. The production activities include issuing material
release orders and moving materials from work centre to work centre,
meeting the requirements of routing and scheduling. This also includes
such activities like releasing the necessary tools and equipment,
instruments, and inspection devices for the purpose of production. Even
machine setups will be included.
 Expediting – Expediting function ensures that the progress is
satisfactory and the path of the production process is cleared of
constraints and the workflow is smooth. It helps in situations when out of
turn deliveries are required to meet the market demands. It may also be
necessary to speed up the process by facilitating extra resources to
meet the deadlines.
1.2.2 Inventories
Inventories are materials and any other items held at various locations in a
production system. They are either planned or unplanned inventories.

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Planned inventories are for the purposes of building up buffer stocks to cater
to unexpected demands or anticipated disruptions in the manufacturing flow
lines. However, they introduce costs which the management has to accept
for the safety it provides. But inventories cover up inefficiencies and
therefore have to be brought under control. Inventories also help in
decoupling the successive stages if, in case, any stage runs short of items.
Just-in-time and lean manufacturing methodologies were developed to
minimise wastage across the organisation. If a firm is optimistic about the
demand, then that firm increases their planned inventories. On the other
hand, if the demand is weak when compared to the expectations, then that
firm’s unplanned inventories are high.
1.2.3 Material control and material handling
Material control is a management function whereby procurement, storage,
and issuance of the storage material for purposes of manufacturing the
products or consumption are conducted. Typically, material control involves:
 Formulating the policies regarding selection of suppliers
 Determining the quantities to be ordered
 Fixing the prices
 Formulating the terms of delivery
 Checking for obsolescence and unusable materials
 Classifying the material using different criteria for better monitoring
Material handling refers to the activities that are conducted to provide
suitable and sufficient space for the materials that are stored either before
starting their usage or during their usage. It is also concerned with the
movement of materials. The equipments range from hand trolleys, forklifts,
hoists, cranes to automatic handling devices.

Self Assessment Questions

1. Information flow at every stage identifies the ____ that are taking place.
2. The quantities of each of the items have to be assessed for
procurement, storage, _________ and __________.
3. Just-In-Time and lean manufacturing methodologies were developed to
_________ across the organisation.
4. _________ sets the quantity of each end item to be completed each
week of the short-range planning.

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1.3 System Productivity

Productivity is generally expressed as the ratio of outputs to inputs.

Output
Productivi ty 
Input

While the above ratio may imply efficiency, productivity is the value added
for every unit of investment. Thus, it is value added upon cost.
Enhancement of productivity is achieved by either reducing the inputs for
the same output or increasing the output by using the same input.
Productivity can be calculated for:
 A single operation
 A functional unit
 A department or division
 A plant
Productivity is a measure of the efficiency of the system and looks at the
economies achieved during the processes. Every process will have a
number of contributors which help in achieving the maximum productivity.
The processes are people, machines, facilitating goods, ancillary
equipments, and technology. Each of these elements attempts to enhance
the contribution of other elements.
Opportunities exist at all stages of the workflow in the entire system to
introduce measures for increasing the productivity. However in actual
manufacturing situations, the inefficiencies will have a cascading effect in
hampering the productivity. Communication, effective review processes, and
innovative methods will ensure optimisation of resources. Building up
reliability into the equipments and managing the supply chain to economise
on the cost factors improves productivity.
Quite often, productivity may suffer because of several problems associated
with different elements of production. In such cases, quality circles are very
efficient in executing low cost projects by using non-intrusive methods of
improving productivity and quality throughout the organisation.
Quality circles:
 Voluntary groups of employees who develop solutions to various
problems with less additional resources
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 Involve all persons who are actually involved in the production system
and the information they elicit and bring about improvements that are
highly cost effective
 Unveil creativity and encourage team work and bring about
improvements almost on a day-to-day basis
 Bring continuous incremental changes in a harmonious way instead of
dramatic changes
 Encourage identification of possible failures and seek methods of
preventing things going wrong

1.4 Capital Productivity

Capital deployed in plant, machinery, buildings, and the distribution systems
as well as working capital are the components of the cost of manufacturing.
Demand fluctuations, uncertainties of production owing to breakdowns, and
inventories being created drag the productivity down. Therefore, strategies
are needed to maximise the utilisation of the funds allotted towards capital.
The strategies included are:
 Outsourcing strategies
 Methods improvement
 Balancing of workstations
 Quality circles
 Rationalisation of packaging methods
Let us now discuss in detail about each strategy in this section.
1.4.1 Outsourcing strategies
When capacity requirements are determined, it is easy to figure out whether
some goods or services can be outsourced. Outsourcing can reduce the
capital and manpower requirements. Also, the available capacities can be
used to augment the core competencies thus reducing the cost of the
product or service to the customer. Further, outsourcing also helps in
improved product design and even enables better networking and
collaborations. However, lack of expertise, quality considerations, nature of
demand, and cost factors may restrict outsourcing.
 Lack of expertise – The outsourced firm may not have the requisite
expertise to do the job required.

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 Quality considerations – Loss of control over operations may result in

lower quality.
 Nature of demand – When the load is uniform and steady, it may not be
worthwhile to outsource. Absence of supervision and control may be a
hindrance to meet any urgent requirements of the customer. This affects
the business, especially if no production facilities are built in the
organisation.
 Cost – It may not be worthwhile when the fixed costs that go along with
making the product does not get reduced considerably.

Case-let
In 1992, IBM in collaboration with an outsourced agent started the
TeleServices Center to provide customer services. Through this service
centers, IBM has provided an integrated and comprehensive marketing
service. It was organised into three groups.
1) The Customer Service Group handles simple enquiries and provides
customers with technical support and assistance solving complex
problems
2) The Telesales Group handles account management and sales of IBM
products and services that do not require field sales support
3) The Direct Marketing Group is responsible for generating new product
leads, upgrades, service contracts, and seminar attendance
The integration of the TeleSerivces Center within IBM has:
 Reduced the cost of customer contact from $500 to $15. This is almost
a 97% reduction
 Shrunk the field sales cycles up to 80%
 Generated 125% of goal for leads
 Exceeded customer expectations almost 80% of the time – according
to a customer service satisfaction survey
Similarly, Siemens ROLM in collaboration with an outsourced agent,
designed and implemented an on-site Client Call Center. Within a period
of six months, the company generated 116% of goals for sales leads,
grossed over $4.2 million in MAC sales and produced leads valued as
high as $1M.
[Source: http://callcentres.com.au/outsourcadv.htm]

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Methods improvement
Methods improvement starts with methods analysis. The focus of this
process is to find out how a job is done and breaking it down to the
elemental tasks so that they are amenable for analysis. This is done for both
running jobs and new jobs. For a new job, the description becomes the input
for analysis. For current jobs, the analyst depends on observations, records,
and suggestions of the persons involved in the job. When improved
methods are suggested, they are implemented and records are created for
assessing the consequences of the methods improvement procedures.
The analyst should involve all concerned persons in the process so that
acceptance becomes possible and opportunities open up for further
improvements. Moreover, the people actually involved would be interested
in improving their productivity and will help the analyst in the process.
1.4.2 Balancing of workstations
Assembly lines carry out operations in a sequence so that the product gets
completed in stages. Since the workflow has to be uniform and operations
may require different periods for completion, the necessity of line balancing
is felt. Capacities at workstations are so adjusted that a product takes
approximately the same amount of time during each stage in the process of
assembly. The core part of line balancing involves establishing the suitable
cycle time and balancing the individual work stations in terms of the cycle
time.
1.4.3 Quality tools
Kaoru Ishikawa is the originator of fishbone diagrams to identify the root
cause of any problem. Figure 1.5 depicts an example of a fishbone diagram.
The causes for the existence of a problem are classified as pertaining to the
material, processes or method, or any factor that goes into production. The
matter is further investigated and pursued till the exact cause is determined.
Ishikawa further mentioned that the bulk of the quality related problems can
be solved by using 7 QC (Quality Control) tools, which include:
a. Flow charts
b. Pareto diagrams
c. Cause and effect diagrams
d. Control charts
e. Scatter diagram

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f. Check sheet
g. Histogram

Fig. 1.5: Example of a Fishbone Diagram

Quality circles use these principles in solving problems. A quality circle is

composed of a small group of employees who genuinely care about others
and who preferably does similar work, that is:
 Meeting voluntarily with a leader on a regular basis
 Identifying the problems
 Analysing the causes
 Recommending their solutions to management
 Implementing the solutions, wherever possible
The teams select projects as per these problems and implement the actions
to achieve improvement in the processes with a view to improve quality.
Since these activities are carried out without affecting the regular work and
involve little involvement of the managers, team work gets reinforced and
results in continuous improvement in methods and quality. The capital
deployed is minimal and therefore, productivity is enhanced.
The case study that follows shows how quality circle and cross functional
task force helps in improving the quality of products.

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Case Study 1
Rookz Motors is one of the leading car manufacturers in India. The quality
and variety of cars manufactured enriched a stronghold in the Indian
market. In the year 1998, Rookz faced strong competition from foreign and
other automobile players who offered varied designs, products as well as
better technology. The only advantage that Rookz Motors had over the
other car companies was the cost factor. The prices of Rookz cars were
relatively less than those of its competitors. Finally, Rookz Motors began
to lose its market share.
The CEO of Rookz Motors called a meeting of the engineers and other
department leaders to discuss the market condition and the strengths and
weaknesses of Rookz and their competitors were discussed. To take the
company forward in a highly competitive market, he suggested that the
firm bring out new designs and models that would cater not only to the
middle class market but also increase the market share.
The new project was handed over to Rahul. Rahul asked the CEO for 4
months to analyse the financial needs and seek for the coordination of the
other departments. Rahul invited the other department officials to
participate and give suggestions regarding the time and resources needed
to produce such a car. However, Rahul was not ready with the design, and
he concluded that he did not have enough finance. He also stated that the
cooperation from the employees of the other department was lacking. The
CEO was disappointed.
The work was then handed over to Kiran Kumar. He was a specialist in
computer-aided design. When the work was assigned to him, the first task
that he undertook was to form a quality circle consisting of members from
the design, production, and other departments. The team consisted of ten
members. The members with their knowledge and coordination were able
to submit the design for a car model in two months. Their designed car
would cost around two lakh rupees. The CEO appreciated the efforts of
Kiran and his team and advocated the formation of more quality teams
that would not only help the firm in improving the quality of products but
also in increasing the coordination between the various departments.

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1.4.4 Rationalisation of packaging methods

With logistics becoming an important function of the supply chain and
outsourcing becoming the norm, packaging has become an important
aspect. Space is at a premium and therefore stacking and storing have to be
more scientific. Movements inside the premises from one location to another
location are being done with automated systems. Also, there is a need for
the packaging systems to be designed for safe transit and continuous
monitoring – both for quantities and operations need to be there. In case of
outsourced products, the materials used and their design should facilitate
reuse of the same, which brings about economy.

1.5 Labour Productivity

Labour productivity is measured by calculating the number of products per
hour for an individual.

Number of products produced

Labour productivity 
Hour

Measurement of time required for any task is measured using motion study
and work measurement methods.
 Motion study is an analysis of a specific job in an effort to find the most
efficient method in terms of time and effort.
 Work measurement is the use of accurate observation and recording to
determine the time it would take for a qualified worker to complete a
specific job to a required level of performance.
Standards are set taking into consideration the differences in performance
by different workers and allowances for accommodating relaxation needs of
human beings. Periods during changeover of jobs, taking trials, inspecting,
and adjusting the tools are all factors that should be considered.
Monotony, difficult conditions, and complexity of work contribute to lesser
production. Reducing the stresses induced by these is a part of superior job
design. There are three steps involved in increasing the labour productivity.
1. Balancing operations in assembly line
2. Reallocation of workers
3. Setting up productivity norms and evaluation of production operations
Let us now discuss these three steps in detail.

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1.5.1 Balancing operations in assembly line

Productivity increases when the product moves through the various
operations toward completion without any holdover. Balancing a variety of
operations is the major concern which is addressed by the design and
allocation of machines at workstations. Employing extra persons where
bottlenecks are observed or anticipated is a strategy for facilitating the
workflow. Relaxation and personal needs take away the worker from the
process area; additional workers should keep the flow smooth thus
facilitating increase in productivity. However, care must be taken to see that
this provision is used effectively.
Other methods like improving the jigs and fixtures, adopting new methods,
and redesigning are allocated to workers. This is done on the basis of an
effort to match the job design/job description to the competencies that would
have been mapped.
However, job requirements may need reallocation of workers to provide the
skills required for efficient handling of jobs. Often, to break the monotony,
job rotation is resorted to. This enables more workers to be exposed to
many jobs. Bottlenecks have to be identified and methods to ease them will
have to be devised and implemented. The main focus will be on balancing
the time taken at all the stages of assembly or the manufacturing process so
that the product/work flows with minimum delay. This also helps in
minimising the inventory.

Case Study 2
Anil and Ravi have a small company to assemble chairs from pre-cut chair
‘kits’. They hired three workers. There are three process involved in
assembling a chair:
1. Assembling the back rest
2. Assembling the frame (seat and arm rest)
3. Attaching the back rest and the frame
Each worker was assigned the task of assembling all the three processes
of the chair. They were each given a target of 30 chairs a week. Therefore,
the weekly target was 90 chairs a week. The workers could meet that
target.

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The company flourished and the demand for chairs increased. To meet
the increasing demand with the same amount of workers, Anil and Ravi
had to devise a strategy.
According to their strategy, each worker was allocated the task of
assembling any one of the three processes. This strategy helped each
worker to specialise in the task he/she was performing, thereby, improving
the efficiency of the job. Thus, Anil and Ravi could increase production by
an additional 15 chairs a week.

1.5.2 Reallocation of workers

Allocation of workers should be made when operations start. The allocation
should be based on the job description, requirements on the machining
centres, and the skills of the workers. Bottlenecks get cleared only when the
rate of production at different work stations have been equalised by
increasing the capacities at intermediate positions. This happens by either
improving the tooling or adding another machine or by allocating an
additional worker. A skilled worker may be substituted by a less skilled
worker. Similarly, the skilled worker may be located at a more suitable
position. This process may involve training. This process of relocation
should result in better utilisation of equipment and smoother throughput.

Case Study 2 (Continued...)

Let us consider the previous case study. Let us take a scenario where the
worker who performs step one of the manufacturing processes is on leave
for 10 days. In that case, to run the production smoothly and to meet the
demand, Anil and Ravi asked the remaining two workers to help each
other in assembling the back rest and then to perform their respective
steps (assembling the frame and attaching the back rest). They also
bought an advanced drilling machine to make their work easy.
As a result, instead of any loss due to the absence of the worker who
performs the first step, the remaining two workers could finish the job
smoothly. This is because Anil and Ravi properly reallocated the work to
the two workers who were skilled. Also the usage of the advanced drilling
machine at the right time made their work easy.

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1.5.3 Setting up productivity norms and evaluation of production

operations
Productivity norms are done by various methods of time and motion studies
which use Predetermined Motion Time System (PMTS).
Time and motion study is a method of finding the best way of performing a
complex task by breaking the task into small steps and measuring the time
taken to perform each step. This enables the standards of performance to
be set. These standards can then be used to plan and control production,
estimate prices and deliver times, and devise incentive schemes.
The standards were set after a lot of documentation and research to fix the
basic times for various operations. The norms are set for different jobs
based on the basic motions and the time required for them. System
efficiency is also taken into consideration while fixing the productivity norms.
Production operations are conducted and measured in terms of quantities
and time requirements. It is important to make an estimate of both of them
to assure deliveries. The operations are based on sequencing, loading, and
dispatching. Expediting is done with the purpose of ensuring that the
operations are smooth. Shortfalls will have to be made up either by overtime
or subcontracting. Evaluation has to be on a continuous basis so that
deadlines are met.
Self Assessment Questions
5. Productivity is generally expressed as the ratio of outputs to inputs
(True / False)
6. ____________ a is voluntary group of employees who develop
solutions to various problems with less additional resources
7. Kaoru Ishikawa is the originator of fishbone diagrams to identify the
____________ of any problem.
8. Labour productivity is measured by calculating the number of products
per hour for an individual. (True / False)

1.6 Personnel Productivity

To differentiate the persons who actually work on machines and who do not,
but facilitate the operations in other ways, we use the word personnel. The
term “personnel” refers to people who:

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 Facilitates the operations

 Coordinates between various operations in identifying the jobs that have
to be done
 Checks the setups
 Verifies that proper jigs and fixtures are provided
 Inspects the allocated machines
These personnel are equipped with a variety of skills that are required to
manage and sort out the problems on a day-to-day basis. Measuring their
performance for provision of reward is a daunting task for the manager.
Their productivity cannot be directly measured. However, it is necessary that
their functions are recognised and evaluated for purposes of training and
compensation. The middle management relies upon the performance of
these personnel for information, communication, and implementation of any
production-enhancing activities. Personnel will be the ones who will motivate
the workforce during the implementation of change programme, quality
enhancement activities, and methods improvement. Their productivity is
indirectly measured in terms of the productivity in the functions and
workforce to which they are aligned.

1.7 Training
Job descriptions provide the details about the contents of a job which need
to be performed with efficiency. The person should be evaluated for his or
her knowledge level, skill level, and the behavioural aspect (attitude). Any
shortfall has to be corrected, and it is this process that we call training.
When the task is performed systematically under supervision and guidance,
the job gets done. The purpose of training is to enhance the performance so
that the overall objective of achieving the desired productivity is achieved.
Needs are assessed, gaps are measured, and the remedial actions are
planned. New methods, advanced technology, and latest equipments call for
training for those who use these. Training programmes enhance motivation,
which is an important attribute of a productive employee. It gives an
assurance to the manager and confidence to the employee. Different
methods are employed depending upon the needs, time, and budget.

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Training also adds value to the workers’ contribution and thus paves the
way for career development, which every employee looks forward to. This is
a motivating factor and thus reduces attrition and assures better
performance. Entropy hampers the efficiency and training is necessary to
maintain even the existing levels of efficiency. When expansion
development is on the anvil, training is an efficient tool to make the process
efficient. Implementation of TQM and other change management
programmes depend on training for their success.
Self Assessment Questions
9. The personnel are equipped with a variety of skills that are required to
manage and sort out the problems on a day-to-day basis. (True / False)
10. The purpose of training is to enhance___________.

1.8 Summary
Let us recapitulate the important concepts discussed in this unit:
 Production management encompasses all those activities that enable
conversion of a set of inputs into outputs
 Production operations involve conversion of materials into saleable
products.
 Productivity is generally expressed as the ratio of outputs to inputs.
 Getting the maximum productivity depends on the utilisation of machines
most efficiently with a well-trained and motivated workforce.
 Transferring of materials inside the operations area also has to be
optimised for efficiency.
 Job descriptions are important to select, train, and deploy the personnel.

1.9 Glossary
 Lean Manufacturing: Lean manufacturing involves never ending efforts
to eliminate or reduce ‘waste’ or any non-value adding activity in design,
manufacturing and distribution processes
 Inventory: Quantity of goods and materials on hand; stock
 Assembly line: An arrangement of workers, machines, and equipment
in which the product being assembled passes consecutively from
operation to operation until completed.

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1.10 Terminal Questions

1. Define production management.
2. What are the various functions involved in production management?
3. What is meant by productivity? Explain.
4. What are the factors that restrict outsourcing?
5. Explain the purpose and importance of training.

1.11 Answers

Self Assessment Questions

1. Value additions
2. Inspection, receipt
3. Minimise the wastages
4. Master production schedule
5. True
6. Quality circle
7. Root cause
8. True
9. True
10. Productivity

Terminal Questions
1. Production management encompasses all those activities that enable
conversion of a set of inputs into desired outputs. Refer section 1.1 and
1.2 for more details.
2. Procurement, manufacturing, maintenance, inventory management are
some of the functions of production management. Refer to 1.1 and 1.2.
3. Productivity is expressed as the ratio of outputs to inputs. Refer to 1.3.
4. Lack of expertise, quality considerations, nature of demand, and cost
factors may restrict outsourcing. Refer to 1.4.1.
5. The purpose of training is to enhance the performance so that the
overall objective of achieving the desired productivity is achieved. Refer
to 1.7.

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1.12 Case Study

Productivity Challenges – Indian Scenario
India started off quite early in the quest for improving productivity and
formalizing it through professional associations and training programs.
Milestones in the journey of productivity
1952-54 Govt. of India invites team of experts from International Labour
Organization
Proposes to establish Productivity Centre
1957 Committee on Productivity, formed under the chairmanship of Dr.
Vikram Sarabhai
Visit to Japan to study working and administration of Productivity
Centre of Japan
1958 National Productivity Council established
1982 Indian Productivity Year observed
But it is not a happy state of affairs as of now. Consider the following:
India's bane: Low productivity
Despite the 9.4 per cent growth in Indian GDP in 2006-07, the country still
lags way behind other Asian economies in a crucial, even critical,
parameter-labour productivity.
Indian workers are unlikely to catch up with their counterparts in other
countries over the next two decades.
There's some good news, though. Their productivity has improved more
than 50 per cent since 1995, the second-fastest rate of improvement after
China.
(Source: Rishi Joshi, “India's bane: Low productivity”, Business Today,
September 3, 2007)

Discussion Questions:
 What do you think are the reasons for low productivity in India?
 What suggestions do you offer to improve the situation?
 Can you compare and analyze India’s productivity with respect to other
countries?

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Reference:
 Rishi Joshi. India's Bane: Low productivity. Business Today. September
3, 2007

E-Reference:
 http://callcentres.com.au/outsourcadv.htm. Retrieved on 25, November
2011.

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Unit 2 Operations Management

Structure:
2.1 Introduction
Objectives
2.2 Operations Management and Strategy
Strategic management process
Strategic decision making
Differentiation strategies
2.3 Tools for Implementation of Operations
Implementation of operations
Tools for implementation
2.4 Industry Best Practices
Pragmatic benchmarking
2.5 Summary
2.6 Glossary
2.7 Terminal Questions
2.8 Answers
2.9 Case Study

2.1 Introduction
In the previous unit, we dealt with integrated production management,
system productivity, capital productivity, labour productivity, personnel
productivity, and training. In this unit, we will deal with operations strategy,
tools for implementation of operations, and industry best practices.
Operation management is the systematic design, direction, and control of
the processes that transform inputs into services and products for the
customers. It goes from one side with suppliers and ends with customers. It
covers the entire value chain. It encompasses all management activities
using resources such as:
 Plants – The factory and the location where all the activities take place.
It includes machinery and heavy equipments
 People – Direct or indirect workforce
 Parts – The components, sub-assemblies, or even products

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 Processes – Methodologies, technology, tooling, and fixtures for

establishing, maintaining, and improving productivity
 Planning and control – This is an information management system
which initiates, directs, monitors, and collects feedback to enable
efficient use of all the other resources
Optimisation of operations is vital to enable the firm to be competitive.
Manufacturing systems have to be established to enable the organisation to
be competitive. To achieve excellence, the processes are benchmarked with
industry best practices and international certification is sought.
In this unit, you will learn the strategies and tools used by the companies to
balance these factors.
Objectives:
After studying this unit, you should be able to:
 describe operations management
 explain the scope of operations management
 outline the different strategies used in operations management to make
better decisions during implementation
 recall the tools used for the implementation of operations management
 recognise the industries’ best practices to take the road to excellence

2.2 Operations Management and Strategy

Operations management is one of the major functions of any business
organisation. Marketing discovers the destination for the product or service
that is produced. Operations provide the deliverables by utilising the
resources and producing the same. All equipments, facilities, technology,
information, human resources, and finance should be tuned to make
operations most efficient to derive the maximum advantage and be
competitive. Operations function should, therefore, be guided by strategies
which are consistent with the organisation strategy. For example, Intel
Corporation, USA, has superior computer chip design. This is because of its
technological expertise in producing microchip. Walmart emphasises on
“everyday low prices” and thus focuses on inexpensive outsourcing for
products.

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Competitiveness is at the core of all strategies. Even among them, priorities

tend to bring the organisation’s focus on the areas to be dealt with in terms
of allocation of resources – people, money, and time. This means that
different functional areas with their own capabilities and constraints have to
be integrated for the overall corporate strategy. Flexible strategies and an
adaptive production process help to achieve high productivity and also to
satisfy the needs of customers, thereby improving the deliverables.
Innovation should occur at all stages. For example, one-hour paper printing
and one-hour screen printing services on the cover and ‘same-day’ flex
printing and binding services.
Corporate strategy, functional area strategies, market analysis, competitive
priorities, competitive capabilities, and new service/product design are the
main operations strategies in any organisation. Operations strategy is
formulated to leverage the advantages, absorb the consequences of the
variable nature of various functions, and provide a dependable
implementation programme. Effective and timely communication is a vital
factor to involve and coordinate people at various stages and monitor the
progress. Figure 2.1 depicts the links between the factors of operations
management.
Formulation of a strategy depends on the following:
 Assessment of strengths
 Understanding of the weaknesses
 Nature of external environment
 Resilience of the internal environment

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1
Fig. 2.1: Links between the Factors of Operations Management

The policies derived from the operations strategy should be amenable to go

along with the other functions. Organisation strategy should be such that the
strategies of different functions are designed to lend support to one another.
Culture of the organisation should be established and nurtured in such a
way that conflicts are resolved with the overall organisation strategy in view.
Operations strategy takes under its umbrella the quality, time, and flexibility.
Figure 2.2 depicts the phases of operations strategy.

1
Operations Management, Krajewski and Ritzman – Prentice Hall India (7th Edition, 2004)

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Fig. 2.2: Phases of Operations Strategy

 Quality – Quality is the driving factor for any organisation. When buying
a product, a customer will always think about the value of the money he
or she is investing. Even if the price of the product is high, the quality of
the product will provoke the customer to buy it. Typical examples of
companies focusing on quality are Amway, Coco-Cola, Pepsi,
Tupperware, Sony, BMW, etc. Many Indian companies coming under
Tata group and automotive products manufacturers like Maruti Suzuki,
Rane (Madras) have won awards for providing high quality products.
Quality also includes cost competitiveness by various methods like Just-
In-Time (JIT), lean manufacturing, Total Quality Management (TQM),
and Total Productive Maintenance. Quality enables the firm to be
competitive, but more importantly, helps the company to remain stable.
 Time – Time aspect considers that deliveries are made on time to meet
the customers’ expectations. Time taken to develop and market new
products is becoming very critical in the global environment. To seek
more business, organisations should reduce the time taken for each
factor during operations. The organisations mainly focus on reducing the
time for the elements. Time is also interpreted as “speed of response” to
any call from the customer, be it for post-sales service or new product
development or maintenance. Figure 2.3 depicts the factors to be
reduced during operations.

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Fig. 2.3: Factors to be Reduced during Operations

 Flexibility – Flexibility enables a firm to meet the changing demands of

the customers in order to develop new processes and materials and to
make the organisation more agile in its manufacture. For example,
Photon Inc, a European computer component manufacturer, produces
components which are not fixed to particular configurations. This
enables production lines to be reconfigured within hours or days to make
new and different products. This flexibility has allowed Photon to expand
from manufacturing a few products for a single customer to making
hundreds of products for over 50 different companies. Flexibility can be
under different categories like operational flexibility, storage flexibility,
transportation flexibility, and material flexibility.

Remember
Operations strategy takes under its umbrella the quality of the product or
service, time taken to deliver the product, and flexibility to meet the
changing demands of the customers.

2.2.1 Strategic management process

Strategy formulation and development has been historically analysed and
debated in different fields of study. While strategy formulation is largely
influenced by the situational forces, the core practices like value addition,
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customer focus, total quality, and concern for environment will always be
followed. A business strategy is the result of a decision taken at the highest
level. This outlines how the resources are deployed to achieve the goals in
an environment. A general framework to guide and activate the think-tanks
in the organisation is to come up with proposals. Action plans with time
frames, authority hierarchies, and feed-back mechanisms are formulated
and designed. At this stage, detailed scenarios as to the likely
consequences are considered and contingency plans are worked out for
implementation, if situations call for the same. Being in readiness with
alternatives is a good way of assuring the success of any plan.
For example, the production of a model of motor cycle is to be increased by
25% and the price is to be reduced by 10%. This decision would have been
taken as a strategy to meet the increasing demands which are real in order
to fulfil the following:
 Enter a niche market of the competitor
 Augment marketing department’s claim after a vigorous sales campaign
 Any other reason
The strategy for the marketing function would be many like promising
freebies, making the commission attractive for the dealer, or opening more
service outlets. The objective of an operations strategy is to achieve the
long-term goals established by the business strategy. The operations
strategy would consider the following constraints:
 Subcontracting or including additional machinery
 Improving productivity using different methods
 Revamping assembly lines
 Motivating the employees
 Promoting existing employees or hiring new ones
 Identifying and developing new suppliers
 Looking for opportunities to reduce costs as scaling up provides scope
The above measures will be under consideration at all times. When a
change is considered, identification of areas of cooperation and
collaboration becomes easy. Opportunities arise for understanding and
resolution of problems. Setting up visible targets to meet the deadlines
encourages application of ‘constancy of purpose’ as per Deming. This in
itself would be a strategy for improving quality and productivity. In addition, it

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is relevant to note the current trends and changes and switch over to
appropriate actions.
2.2.2 Strategic decision making
Decision making is the most crucial management function. Decisions
commit the organisation and its members to activities which have financial
repercussions and affect the functioning of other departments or divisions.
Therefore, decisions are taken after lots of deliberations which involve steps
like data gathering, analysis, and predicting outcomes. Figure 2.4 depicts
planning and decision making.
Accuracy of data and their relevance for the matter under consideration are
the factors which affect the quality of decisions. In addition, the following
factors also form the basis of decision making:

Fig. 2.4: Planning and Decision Making

 Environmental scanning – The business environment of any

organisation includes the industry, marketplace, governmental agencies,
society, ecology, technology, and others. Organisations should be aware
of the business environment in which the firm exists, and have to
compete continually by exhibiting potential for opportunities and threats.
Being aware of those, and their impact on the firm by a process of
analysis, is called environmental scanning. Let us now consider the
potential exhibited by business environment:
o Competitors may be gaining an edge by diversification, making
forays into the firm’s niche market by making new and better
products

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o Suppliers could be forming cartels and preparing to drive hard

bargains
o Government could be passing laws and issuing orders which could
affect the supply of materials or restrictions on import and export or
even employment conditions
Adaptation to these dynamic factors by environment scanning and basic
strategic decisions is vital.
Typically it used to be SWOT (Strengths, Weaknesses, Opportunities,
and Threats) analysis. Now there is also PESTLE analysis which stands
for analysis of Political, Environmental, Social, Technological, Legal and
Economic environments. These analyses help in shaping the operations
strategies.
 Core competencies – Each organisation is started by an entrepreneur
or a small group of entrepreneurs. The objective is to use their unique
strengths to create and develop an organisation. These unique strengths
are the core-competencies of the organisation. For example, IKEA, the
Swedish furniture maker has the core competency in design. IBM’s core
competency lies in research. Apple is known for innovation. Reliance
group’s core competency is handling mega projects. However, many-a-
time, it becomes necessary to augment the existing business with some
additional strengths or competencies. Such developments and
improvements in core competencies provide an edge over the
competitors who would have to grapple with these competencies. These
build ups are usually through collaborations and acquisitions or joint
ventures.
Core processes of an organisation are determined by the core
competencies. Four main core processes are mentioned below. Figure
2.5 depicts the core competency process.
o Customer relationship
o New product/service development
o Supplier relationship
o Order fulfilment
The emphasis on these processes depends on:
o The type of industry
o The length of its existence
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o The consequent strengths built up in certain areas

o The way earlier successes have been achieved
o The reinforcement they have given to the organisation
One should remember that the environment is always dynamic and the
strategy formulation needs to be constantly updated for making effective
implementation. Ultimately, every organisation depends on the core
competencies which give it an advantage over the competitors.

Fig. 2.5: Core Competency Processes

2.2.3 Differentiation strategies

Differentiation is a process by which a company distinguishes itself from its
competitors and their offerings. The process includes adding a set of
differentiators, which are meaningful, and adds value for the customer. The
differences should be perceived by the customer as important, distinctive,
superior, and affordable. Further, the differentiators have to make the
company’s offerings (the products and services) profitable.
To derive a competitive advantage, the study of the processes is important.
Here, we are not considering the situation of an entirely new product but
those which are already contributing to the company revenues.
“Companies have different potential in terms of manoeuvrability along with
target market, place (channels), promotion, and price. These are affected by
the company’s position in the market, and the industry structure.”
– According to Miland Lele, (Miland M.Lele, Creating Strategic Leverage:
New York, John Wiley 1992)

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Boston Consulting Group (BCG) has classified four types of industries and
the approaches available. Figure 2.6 depicts the classification of industries
according to BCG.

Fig. 2.6: BCG’s Classification

Another useful framework to identify the product portfolio is the BCG matrix
that classifies the product offerings along a two dimensional matrix in terms
of growth and market share. This analysis enables a company to prioritise
its product mix to ensure growth and revenue. (Source: QuickMBA.com)
Size of advantage vs. number of approaches to achieve advantage
When the volume of the industry is large, the advantage for a firm is high,
but the number of approaches is small. On the other hand, if it is
fragmented, the size of the advantage is small, and the approaches are
many. The options available and the quantum of advantage are the
considerations for any strategy. For products differentiation, we consider
form, features, and the quality of performance. By form, we mean the
shapes, dimensions, and aesthetics which determine the physical aspects of
the product.
The components and parts that are integral to the product may not be visible
but will have suitable and easy forms for assembly, identification, extraction,
insertion, and inspection. This is necessary for making a product serviceable
and repairable to meet the customers’ needs. The dimensions are optimised
for safe use, safety, and durability.

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Aesthetics is the ultimate differentiator to attract the customer and make him
comfortable using it. Features contribute for differentiation to a large extent.
It addresses the requirements of the customer in such a way as to make the
products meet them in a way that the competitors do not. Again,
performance is looked at from the point of view of reliability, durability, and
reparability.
Any organisation in the manufacturing or the service sector has to develop a
strategy and ensure sustainability through competitive environment.
Strategy is not static but varies with time and changes in environment.
Particularly when changes are occurring rapidly, strategy needs to be
frequently revised and modified. This further demands innovative abilities
and persistence.
Self Assessment Questions
1. ____________ is the systematic design, direction, and control of the
processes that transform inputs into services and products for the
customers.
2. A business strategy is the result of a decision taken at the highest level
which outlines how the resources are deployed to achieve the goals.
(True / False)

2.3 Tools for Implementation of Operations

All functions in the organisation including administration, finance, materials,
purchase, marketing, production, logistics, communication, and others can
be considered as operations. The reason is that all of them use some inputs
like materials or information either on a person-to-person basis or through a
flow line. They are required to use some process and convert them into
outputs usable in the next stage of the value chain. For example, when an
invoice is received for payment, it contains information about the following:
 Material or a service
 Person who needed the invoice
 Price to be paid
 Supplier
 Transportation
 Insurance
 Quantity
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 Tax to be paid
 Others
The bills payable section will have to verify the data regarding the above
and seek the inspection reports from the quality control department/user.
Before the actual payment is made, verifications such as the terms of
payment and availability of funds are done. Verification will help you to
notice the following:
 Information is sought or given
 Materials received and transferred
 Papers/instructions are received/issued for initiating activities
All these are also operations. However, for our study, we will limit our focus
to operations involving manufacturing. We identify a set of specialised
techniques. We call them tools which can be standardised for ease of
implementation and control. In the recent times, operations are considered
from end to end of value chain which means the operations that start from
sourcing of materials and other inputs to successful delivery of products to
customers or end users.
2.3.1 Implementation of operations
Implementation is the process of executing the planned operations. When
planning and controlling functions are put together, we call it as
Implementation of Operations.
The planning is the process of estimating, routing, and scheduling. The
controlling functions are conducted while the manufacturing is going on, like
dispatching and expediting. Figure 2.7 depicts the implementation of
operations.

Fig. 2.7: Implementation of Operations

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 Estimating – Estimating gives the quantities to be made at each

workstation depending on the sales forecast, provision for buffer stock,
quantities bought out, services outsourced, likely shortfalls, and others.
It is made on the basis of capacity.
 Routing – Routing determines the sequence of operations and the
machines that do them, so that work flow, as determined by the
processes, is smooth resulting in minimum inventory.
 Scheduling – Scheduling is mainly concerned with allocating time slots
for different jobs. It specifies as to when the jobs start and end at
particular workstations. The purpose is to prevent the imbalances
among work centres and to utilise the labour hours in such a way that
established lead times are maintained.
 Dispatching – Dispatching is concerned with moving of the materials
with tools, jigs, and fixtures to specific machines along with the drawings
and ensuring inspections at specific nodes, so that the materials move in
the supply chain.
 Expediting – Expediting ensures that all the above are being done
properly. Reports are generated and any bottleneck that gets created is
removed.
2.3.2 Tools for implementation
Gantt charts developed by Henry Gantt long back for the purpose of
visualising the work assignments and sequence and timings are used to
record progress comparing the actual against the planned activities and to
keep track of the flow of the material. In its simplest form, a Gantt chart
consists of horizontal bar graphs on time scales.
Line balancing and line of balance are two more tools to ensure that
machining centres are loaded as uniformly as possible to prevent build up
stocks at intermediate stages.
Simulation models are used to predict utilisation of machines and production
levels. Various inventory models help us to determine when to order and
how many to order. It also gives us an insight to the risks and opportunities
that come up for our consideration.
Proper maintenance and analysis of records help us to see the gaps that
have crept into the operations system. Checking across functions will make
the tools being used to be modified realistically and increase efficiency. ERP
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software, especially SAP, have many modules that store, sort, and analyse
data and make them available to the staff across the globe in many plants,
enabling managers to streamline their operations. Software specific to
functions, applications, or organisation can be obtained. Microsoft
Operations Manager 2005 is a useful tool in this regard. Figure 2.8 depicts
Microsoft Operations Manager 2005.

Fig. 2.8: Microsoft Operations Manager 2005

Case-let 1
MakTel is a national telecom provider. The customer utilisation of ISDN
was less; therefore, the company faced poor sales of ISDN services for
several years. Also, the quality of service delivery was low. The company
applied Pareto analysis to extract the reasons for the failures in service
delivery. The analysis showed that the problem is poor quality of network
terminals and unqualified technicians for provisioning of the ISDN
service. MAkTel rectified the problems and energised the company sales.

Case-let 2
In the recent times, technology is intensively used to track the processes
that are part of the value chain. Radio Frequency Identification (RFID)
helps in tracking and monitoring the flow of goods as they travel through
the entire line. Gillete company uses RFID exclusively for razor blade
movement in cases and pallets from manufacturing centres to customers’
place through distribution centres. The company claims an operational
savings of more than 20%. As stated in infoworld.com, dated 15-08-2005,
Gillette, RFID has improved order processing, streamlined inventory
management systems, and increased shipment accuracy, according to
Dick Cantwell, the company's vice president of global value chain.
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Self Assessment Questions

3. ______ is mainly concerned with allocating time slots for different jobs.
4. ___________ is a process by which a company distinguishes itself
from its competitors and their offerings.
5. _________ determines the sequence of operations and the machines
that do them, so that work flow is smooth.
6. __________ is used for the purpose of visualising the work
assignments and to know the progress of work by comparing the actual
against the planned activities
7. Dispatching is concerned with moving of the materials with tools, jigs,
and fixtures to specific machines along with the drawings.
(True / False)

2.4 Industry Best Practices

Each industry would have progressed over the years or decades improving
their processes and products. During this development, the materials would
have changed and processes would have changed. As all products or
services are meant to serve the needs of the customers, they undergo
continuous changes both in configuration and features.
Materials and methods go on improving incessantly because of the research
that is conducted. The companies that were at the front innovate to stay in
business as new entrants would be adopting the latest techniques that the
pioneers had taken decades to establish. Various firms in any industry
would end up adopting almost similar methods of getting an output as
required, but only a few among them would reach great heights because of
different practices that lead to superb performance. Such practices would
get refined to a great extent giving rise to what we call industry best
practices. These tend to get stabilised or changed owing to the development
of new equipments which are designed. A very commonly quoted example
is the Toyota Production System (TPS) adopted by various companies world
over in the pursuit of excellence.
A manufacturer, with an eye on growing markets, demands higher quality
and reduced prices. Industry best practices open up the field for
benchmarking by companies which need to improve their performance.

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2.4.1 Pragmatic benchmarking

Pragmatic benchmarking is a method of measuring a company’s processes,
methods, and procedures in a way that all functions in great detail.
Benchmarking, in its simplest form, is understood as a process of
comparison with a superior performer anywhere in the world to improve
quality and is used to understand how these practices can be brought into
the system and what circumstances brought them about. It is a learning
process with a view to find out whether some of the reasons have changed
and to bring in new processes for improvement. The metrics that could be
used are the:
 Number of pieces per hour
 Cost per unit
 Number of breakdowns per week
 Customer alienation during a week
 Return on investment
 Number of returns from customers in a month
 Inventory turnover
The figures obtained from the above determine the efficiency of the
organisation. To keep focused, many organisations, especially the large
ones, select a few processes for purposes of benchmarking. This helps in
ensuring constant and deep attention to those aspects which are to be dealt
with. The following are the types of benchmarking considered by various
firms:
 Process benchmarking – business process
 Financial benchmarking
 Performance benchmarking
 Product benchmarking
 Strategic benchmarking
 Functional benchmarking
Benchmarking is usually classified into two groups namely internal and
external benchmarking. Internal benchmarking refers to comparison within
the organisation or industry and external benchmarking refers to comparison
with outsiders. Any measurable parameter or entity can be benchmarked.

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Steps in benchmarking
Planning, analysis, integration, and action are the four steps recognised in
the process of benchmarking. The select criteria are compared with the
performance parameters of the company which is considered the best in the
industry. Targets are set and activities are conducted to reach them. Let us
discuss in detail about the steps which are necessary for conducting a
benchmarking operation.
 Planning – Planning determines the process, service, or the product to
be benchmarked on which metrics are assigned for collection of data.
 Analysis – Analysed data gives inputs for comparison with the target
company’s performance on the parameter benchmark on which data
was collected. Measuring gaps helps in identifying the process which
should be improved for reaching the benchmark.
 Integration – Resources are required across all functions to achieve the
target needs. Integration involves putting together resources like people,
equipments, and communication, so that, progress is unhindered and all
activities reach their logical conclusions without loss of initiative or time.
 Action – When changes are needed, actions have to be planned
according to the steps earlier stated. The teams are provided with
necessary leadership, authority, and supporting facilities to enable them
to complete all activities within the time frame set for the purpose. Since
benchmarking is done in specific areas, it is necessary to maintain the
focus and implement actions without losing initiative, so that, results
become demonstrable.

It is necessary to set achievable targets keeping in view the availability of

resources, technology, and to spread awareness about the importance of
what is attempted and how success improves the image of the company.
This approach is recommended by the Total Quality Management (TQM)
guru Edwards Deming.
This approach can be called pragmatic because building up knowledge-
based analysis of data and achieving the targets set the tone of continuous
improvement and move the organisation towards excellence which was the
reason we started benchmarking. Many times, benchmarking is done
internally. When an enterprise has a number of plants and some of them
adopt similar processes, it is likely that one group may have developed
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techniques and methodologies of doing them better than others. Internal

benchmarking is resorted to as a measure of identifying the strengths in the
organisation. By internal benchmarking, knowledge, and skills are shared
and complemented taking the organisation to a leadership position. The
most important point for the successful adoption of benchmarking is a
willingness to learn from someone better and the ability to translate such
learning into improvement initiatives.

Remember
Pragmatic benchmarking is a method of measuring a company’s
processes, methods, and procedures in a way that all functions in great
detail.

Self Assessment Questions

8. ___________ is resorted to as a measure of identifying the strengths in
the organisation.
9. Pragmatic benchmarking is a method of measuring a company’s
processes, methods, and procedures in a way that all functions in great
detail. (True / False)

2.5 Summary
Let us recapitulate the important concepts discussed in this unit:
 Operation management is the systematic design, direction, and control
of the processes that transform inputs into services and products for the
customers.
 Optimisation of operations is vital to enable the firm to be competitive.
 Operations function should be guided by strategies which are consistent
with the organisation strategy.
 Strategy is very important for the operations because it guides the
managers in implementing policies which have long-term implications for
productivity, quality, and customer satisfaction.
 It is imperative that we measure up to the best in the industry by
benchmarking and being competitive.

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2.6 Glossary
 Strategy: plan for achieving the goals and objectives in best possible
way
 Environmental scanning: monitoring of organisation’s internal and
external environment for detecting opportunities and threats
 Core competencies: unique ability that the organisation acquires that
cannot be easily imitated

2.7 Terminal Questions

1. What is operations management?
2. What do you mean by operations strategy? Explain in brief.
3. Explain the importance of decision making in organisation. What are the
factors affecting decision making?
4. What is meant by differentiation? Explain.
5. Write a brief note on “implementation of operations”.
6. What do you understand by ‘industry best practice’?

2.8 Answers

Self Assessment Questions

1. Operation management
2. True
3. Scheduling
4. Differentiation
5. Routing
6. Gantt charts
7. True
8. Internal benchmarking
9. True

Terminal Questions
1. Refer 2.1 and 2.2
2. Refer 2.2 and 2.2.1
3. Refer 2.2.2
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4. Refer 2.2.3
5. Refer 2.3 and 2.3.1
6. Refer 2.4

2.9 Case Study

Competition Strategies – From Collaboration to Acquisition

The Indian tractor market has seen tremendous growth during the last two
decades and currently the battle for supremacy in the market is between two
companies, John Deere and Mahindra and Mahindra.
The manufacturing of tractors started in India in the post-independence era
in 1960’s. For a long time, Punjab Tractors was the leading manufacturer
and their brand “Swaraj” was very popular in the northern part of India.
Down south, Tractors and Farm Equipment (TAFE) happen to be the
leading manufacturer of tractors. Mahindra and Mahindra stood at number
three.
In the year 2001, Mahindra and Mahindra decided to improve their position
and become the market leader. The company benchmarked its productivity
and financials against the best in the class namely Punjab Tractors Limited
which used to take money in advance and deliver the tractors later.
However, Punjab Tractors’ market share slumped from 18.6% in 1999-2000
to 8.1% in 2006-2007. At that time, Mahindra and Mahindra decided to go
after the company and acquired Punjab Tractors. After about three years,
the turnaround happened and the company was able to post healthy figures.
According to Pawan Goenka (President, Automotive and Farm Sector,
M & M), Punjab Tractors had done better than expected. The target of
doubling the turnover and tripling the profit has been achieved and the
merger has proved highly beneficial to Mahindra and Mahindra.
The strategy of acquiring and merging Punjab Tractors has proved to be
successful to Mahindra and Mahindra. They also used the customer
feedback effectively in improving the tractor design and looks.
Mahindra Tractors is now the world's largest tractor company by volume.
For over two decades, the company has been the leader in the Indian
tractor market, which is also the largest tractor market in the world.

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However the competitors are not quietly watching. The second biggest
tractor manufacturer, TAFE group, had a decent growth of 17%, led by its
most famous brand Massey Ferguson (also the name of its partner). This
brand enjoys very good brand equity among tractor buyers. TAFE’s
acquisition of Eicher’s Tractor Division (way back in 2005) has also helped it
to grow both in terms of volumes and technology.
(Sources:
 http://www.researchandmarkets.com/reports/607322/tractor_market_in_india_
an_analysis
 http://www.mahindratractorworld.com/
 Bhandar, Bhupesh (2010), Collaborative Competition, The Strategist, Business
Standard, 27 December 2010.)

Discussion Questions:
1. What are the objectives that Mahindra and Mahindra had in mind when
they noticed their position in the tractors’ market?
2. What strategies are followed by Mahindra and Mahindra in reaping
success in the tractors’ market?
3. What other strategies might have been followed by Mahindra and
Mahindra to accomplish their objectives?
4. Is “merger and acquisition” a good strategy? Under what
circumstances? Discuss with relevance to operations management.

References:
 Krajewski and Ritzman, (2004) Operations Management, 7th Edition,
Prentice Hall India.
 Operations Management, Krajewski and Ritzman – Prentice Hall India
(7th Edition, 2004)
 Miland M.Lele, Creating Strategic Leverage: New York, John Wiley
1992)

E-References:
 www.QuickMBA.com. Retrieved on 23, November 2011.

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Production and Operations Management Unit 3

Unit 3 Operations Strategy

Structure:
3.1 Introduction
Objectives
3..2 Operations Strategy
3. 3 Competitive Capabilities and Core Competencies
3. 4 Operations Strategy as a Competitive Weapon
Product/service expertise
Quick delivery
Flexibility in production
Low cost production and processes
Product variety and product mix
Quality
3.5 Linkage Between Corporate, Business, and Operations Strategy
3.6 Developing Operations Strategy
3.7 Elements or Components of Operations Strategy
Designing of the production system
Facilities for production and services
Product or service design and development
Technology selection and process development
Allocation of resources
Facility, capacity, and layout planning
3.8 Competitive Priorities
Cost
Quality
Time
Flexibility
3.9 Manufacturing Strategies
Make-to-stock strategy
Assemble-to-order strategy
Make-to-order strategy
3.10 Service Strategies
3.11 Global Strategies and Role of Operations Strategy
Strategic alliance
Locating the operations abroad and after sales support
3.12 Case-let 1

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3.13 Case-let 2
3.14 Summary
3.15 Glossary
3.16 Terminal Questions
3.17 Answers
3.18 Answers to Caselets 1 & 2

3.1 Introduction
In the previous unit, we dealt with operations management and strategy,
tools for implementation of operations, and industry best practices. In this
unit, we will deal with operations strategy as a competitive weapon;
competitive capabilities and core competencies; linkage between corporate,
business, and operations strategy; developing operations strategy; elements
or components of operations strategy; competitive priorities; manufacturing
strategies; service strategies; and global strategies and role of operations
strategy.
To succeed in a competitive business environment, organisations should
evolve sound strategies with which they can achieve their business
objectives. The strategies that are planned for implemention should be long
term and broad based to achieve the set of objectives. The normal practice
is to develop organisational strategies at three levels of operations namely
a) corporate level, b) business level, and c) functional level.
While the corporate strategy looks into organisational goals, developing the
core competence and achieving the competitive advantage for their
products, the business level strategy looks at market segmentation and
competitive priorities to be considered for their products or services. The
functional level strategy looks at operations to produce these products by
managing the capability, productivity, quality, flexibility, cost of production,
delivery, and finally after sales and services.
Organisations achieve competitive advanatge over its competitors by
providing products or services that meet the customer requirements of cost,
quality, performance, durability, etc. The corporate strategy determines the
customers to be served, the new products or services to be produced, and
the suitable strategies to be met in competitions from both domestic and
international markets.

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Hence, the operations strategy is a set of decisions taken across the

organisation to help support the implementation of the competitive business
strategies. The operations strategy links both its long-term and short-term
operational decisions to corporate strategy. Operations strategy is a process
by which the key operations decisions are made and should always be
consistent with the overall strategic objectives of the organisation.
Objectives:
Affter studying this unit, you should be able to:
 explain why organisations formulate and develop startegies to gain
competitive advantage
 describe the linkage that exists between corporate strategy, business
level strategy, and functional and operations strategy
 outline the role of operations strategy as a competitive weapon in
domestic and global markets
 explain the formation and development of operations strategy
 describe the elements of operations strategy and linking operations and
marketing strategy
 explain how to set competitive priorities
 identify the operations strategies in manufacturing and services
 describe global strategies

3.2 Operations Strategy

Operations strategy is defined as the set of decisions that are warranted in
the operational processes in order to support the competitive strategies of
the business. The objectives stated above will give the firm a competitive
advanatage in the products or services that are served to the customers.
Operations strategy is a long-range business plan for the company’s
products and will provide a road map for the operational functions to be
pursued. Therefore, the strategic decisions include the capacity to be built
into the production system, the type of processess and manufacturing
technology to be adopted, the nature of products to be produced, and the
type of material flow and other logistics required to achieve the level of
performance.

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Planning of operations strategy is very essentail as it will enable the

organisation to respond to the market needs in an effective manner. It also
gives the opportunity to align the resources and manufacturing activities to
produce and deliver the products and become successful in the market.

3.3 Competitive Capabilities and Core Competencies

The operations strategies are evolved based on the business strategies.
Some of the business strategies that has a direct bearing to manufacture
are:
 To serve a defined product to the stable market
 To provide high product variety and customise the design to meet the
specific requirements
 To provide rapid response to the market through in-built flexibility and
produce different products to keep abreast with the environmental
changes
To serve these business strategies, the firm should emphasise on achieving
quality, productivity, flexibility, low cost, constant innovation in designs, and
short development cycle for introducing new products and being highly
responsive to the changes in that competitive environment.
Building core competencies and gaining competitive advantage for its
products are great strategies. The core competencies are the unique
resources and strengths that are required to be developed, practised, and
constantly improved upon. This competence becomes the capability when
the strategy is successful and the set objectives of competing is met.
To achieve the competitive advantage, the organisations must provide the
customers with what they want, know when they want, what quality they
prefer and what cost, and how better they serve the customer than their
competitors.

3.4 Operations Strategy as a Competitive Weapon

The important objective of any business is to occupy a position from where
the organisation is able to attract more customers than its competitors. For
this, they should identify the distictive competencies that will give the leading
position in the market segments.
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Competitiveness is one of the crucial factors that decides the survival and
growth of a firm. This competitiveness is how effectively an organisation
meets the needs of its consumers as compared to its immediate
competitors. For such competitions, the organisations look into their
operational strengths and equip themselves effectively to use their strengths
and opportunities as competitive weapons.
These competitive weapons are explained below in detail.
3.4.1 Product/services expertise
Expertise gained through operational strengths in the areas of functionalities
and process capabilities will make them the market leaders for such
products.
3.4.2 Quick delivery
The flexible capacity built into the production line and the process adopted
to produce and supply in time will all together provide the much desired
customer satisfaction. This strategy will help sustain the product and its
market lead.
3.4.3 Flexibility in production
The organisation has to develop a capability for change. The adaptation to
change begins with environmental scanning by which trends can be
monitored to suit the needs of the society. There may be a threat to the
product if competotors gain an edge over the broadening product lines,
improved quality, or lowering costs. New entrants into the market or
competiitors offering substitute product may also throw challenges to the
dominant product. To counter this, the desired flexibilty in production must
be built in and operations strategy must be modified accordingly.
3.4.4 Low cost production and processes
The unit cost of each product is required to be lowered to meet the
competition. The cost review on labour, material, and overhead costs of
production lines are to be assessed. An organisation with an efficient and
effective production system will provide such feasibilities to reduce costs.
The operations strategy should also facilitate the processing of products at
lower costs.

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3.4.5 Product variety and product mix

The organisations are producing multiple products to provide variety to
customers. Here the size of operations matters. Higher the volume, lower
the production costs. Accordingly, operational strategy is to be fine tuned to
suit the desired product mix.
3.4.6 Quality
The operations strategy should ensure that the desired quality level is
maintained, and it meets the customer needs. Competing in the quality of
the product is one of the most important corporate strategies.

3.5 Linkage Between Corporate, Business, and Operations

Strategy
The mission statement is unique to an organisation. It contains a set of long-
range goals. It details the kind of business the company wants to be in, the
type of customers they serve, the basic beliefs of their business, and the
expected goals and profitability.
Similarly, business strategy is a long-range plan and serves as a raod map
to achieve the above-said corporate mission. These plans encompass many
functional areas like production, marketing, finance, human resources, etc.
Operations strategy translates all the decision processes that supports the
business strategy. How these operating strategies work under the corporate
strategies and serve the business strategy is explained in ‘Developing
Operations Strategy‘ below.

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3.6 Developing Operations Strategy

Fig. 3.1: Developing Operations Strategy

Figure 3.1 above depicts how the operations strategy is developed under
the umbrella of the corporate strategy. It shows the factors that go into the
operations strategy and shows the link between the corporate, business,
and the competitive priorities under the operations strategy. Here, the long-
term operation’s strategic decisions are directly connected to developing
new products, determining production capacity, establishing facilities,
adopting new technologies, locating plants appropriately, and taking suitable
decisons on building and sustaining the quality of products.
The operations strategy translates the product plans and competitive
priorities into decision making processes. The operation decisions
determine the processes required to handle the volume and variety to be

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produced for each market segement. Hence, these decisions govern the
design of the processes, systems, and the procedures that help the
operations strategy.
Selection of the market is another key element. To suit the market
requirements, operation managers develop appropriate processes and
designs to achieve the set objectives. The operations strategy should be
flexible enough to support a product or service throughout its life cycle and
for future changes in the market demand. The operations strategy should
also be consistent with the other functional strategies of marketing, finance,
and human resources.

3.7 Elements or Components of Operations Strategy

The six elements of operations strategy are:
1) Designing of the production system
2) Facilities for production and services
3) Product or service design and development
4) Technology selection, development, and process development
5) Allocation of resources
6) Focus on facilities planning
3.7.1 Designing of the production system
The designing of the production system involves the selection of the type of
product design, processing system, inventory plan for finished goods, etc.
The product design has two varieties. They are:
 Customised product design – The design is customised when the
volume is low and special features are inbuilt. Examples: Industrial
products like turbines, boilers, air compressors, etc.
 Standard product design – The designer adopt a universal design so
that the product will have wide acceptance across the customers. Also
the demand is more and quantity is high. Examples: Air conditioners,
TV, fans, etc.
There are two types of production systems. They are product focussed and
process focussed. Product-focussed system is adopted where there is mass
production by using a group of machines. For example, products like

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automobiles, computers, etc. In the process-focussed system, the design is

based on a single task like painting, packing, heat treatment, etc.
3.7.2 Facilities for production and services
Certain specialisation in production allows the firm to provide the customers
with products of lower cost, faster delivery, on-time delivery, high product
quality, and flexibility. Here, overheads will be less and the firm can
outperform compared to the competitors. While planning the specialised
lines, the economies of scale and the continuous demand are to be looked
into. For example, Nikon Cameras plan and establish special lines for each
model and manufacture huge quantities for the global market. Here, the
economies of scale and the continuous demand matters.
3.7.3 Product or service design and development
The stages followed in developing a product are:
1. Generating the idea
2. Creating the feasiblity reports
3. Designing the prototype and testing
4. Preparing a production model
5. Evaluating the economies of scale for production
6. Testing the product in the market
7. Obtaining feedback
8. Creating the final design and starting the production.
Any product designed and introduced into the market has its own life cycle.
The various stages of life cycle are:
1) Introduction stage
2) Growth stage
3) Maturity stage
4) Decline stage
Let us now discuss these stages in brief.
In the introduction stage, the sales depends on promotion and marketing
efforts. The product which is successful at this stage will enter the next
stage of growth, where the organisation takes the decisions on the capacity
to be augmented and the investments to be made. During the maturity
stage, the organisation focuses on improving the efficiency of the
processes, minimising the costs, etc. At declining stage, the product may

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meet the obsolesence both in technology and in customer requirments, thus

warranting the stop of production. There are many products that lost its
market after going through athe above stages. For example, pagers, floppy
drives, tapes for recording and palying, click-type cameras, typewriters, etc.
3.7.4 Technology selection and process development
A product selected for production will be analysed for the process and the
applicable technology for optimal production. There are many challenges
faced by the operations managers in this decision as the alternatives are
many. The techno-economic analysis for each alternatives will help to
decide the required technology. Combining high technology production
equipments with conventional machines and using robotics, flexible
manufacturing systems, automated devices for material movements, etc
have given an edge to the production units to excel in quality, flexibility,
production at economic costs, etc thus enabling the firm to meet the
competitions.
3.7.5 Allocation of resources
The production units face continuous problems of allocating the scarce
resources like capital, machines, equipments, materials, manpower,
services, etc. Allocation at the right time to the right place of production
indicates the efficiency of the production planners. Optimal use of resources
will enable economical production. Minimising waste, optimal utilisation of
resources, and the best quality product demand a sound operations
strategy.
3.7.6 Facility, capacity, and layout planning
The location, layout, and facilities creation for the production are the key
decision areas for the operations manager. These are critical for achieving
the competitiveness. The decision also influences the future expansion of
the plant. While evaluating the aternatives, the operations manager will
consider the availbility of raw materials, access to market, etc. Enormous
capital requirement is required and the planning is always long range. Here,
the production process adopted and the technology pursued dictates the
volume, quality, and cost of production.

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3.8 Competitive Priorities

Operations stategy reflects the long-term goals of an organisation in its
corporate strategy. To achive good results, a clear understanding of the
operating advantages and a good cross functional coordination between
functional areas of marketing, production, finance, and human resources
departments are required. Operating advantages depend on its processes
and competitive priorities considered while establishing the capabilities. The
basic competitive priorities are:
 Cost
 Quality
 Time
 Flexibility
3.8.1 Cost
Cost is one of the primary considerations while marketing a product or a
service. Being a low cost producer, the product accepted by the customer
offers sustainability and can outperform competitors. Lower price and better
quality of a product will ensure higher demand and higher profitability. To
estimate the actual cost of production, the operations manager must
address labour, materials, scrap generations, overhead and other initial cost
of design and development, etc.
3.8.2 Quality
Quality is defined by the customer. The operations manager looks into two
important aspects namely high performance design and consisitent quality.
High performance design includes superior features, greater durability,
convenience to services, etc where as consistent design measures the
frequency with which the product meets its design specifications and
performs best.
3.8.3 Time
Faster delivery time, on-time delivery, and speedy development cycle are
the time factors that operations strategy looks into. Faster delivery time is
the time lapsed between the customer order and the delivery. On-time
delivery is the frequecy with which the product is delivered on time. The
developemnt speed is the elapsed time from the idea generation up to the
final design and production of products.

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3.8.4 Flexibility
Flexibility is the ability to provide a wide variety of products, and it measures
how fast the manufacturer can convert its process line used for one product
to produce another product after making the required changes. The two
types of flexibilities are:
 Customisation
 Volume flexibility
While customisation is the ability of the firm to satisfy the specific needs of
each its customer, the volume flexibility is the ability to accelerate or
decelerate the rate of production to handle the fluctuations in demand. For
example, the production of fertilisers of different specifications and
applications.

3.9 Manufacturing Strategies

There are many types of competitive priorities for processes used in the
manufacturing of products. The manufacturing industry adopts systems
based on demand. The production systems practised are:
 Batch production
 Mass production
 Customised production
 Assemble products, test them, and supply
For these, the manufacturing strategies adopted are decided by the
operations manager. The manufacturing strategies differ from industry to
industry and the applicable situation’s demand and supply. The following are
the three dominant manufacturing strategies:
 Make-to-stock
 Assemble-to-order
 Make-to–order
Let us now discuss these strategies in detail.
3.9.1 Make-to-stock strategy
The manufacturing firms adopt this strategy to ensure immediate delivery of
the products, thereby minimising the delivery times. This straegy is feasible
for standardised products with high volumes and where forecast is
reasonably accurate. To accomplish this, the production units should hold
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good inventory of stocks. For example, chemicals, soft drinks, electronic

components, etc.
3.9.2 Assemble-to–order strategy
This strategy serves as a competitive priority of customisation and ensures
fast delivery. This goes with the approach to produce customised products
from sub-assemblies and components after the customer orders are
received. This involves assembly processes, fabrication processes, painting,
cleaning, etc. Here, the appropriate inventory of parts and aggregates are
created for smooth functioning of processes. The operations manager
should ensure that the optimal finsihed goods inventory is mainatained as
excess inventory increases the inventory carrying cost and less finished
goods inventory may hamper the delivery of products in time to the
customers. For example, paints to colours, furnitures, fabricated structures,
etc.
3.9.3 Make-to-order strategy
When products are manufactured to the customer specification, the
tendency is to follow the strategy of ‘make-to-order‘. The firms evolve a set
of processes that suits the manufacture based on the customer
requirements. This strategy gives a higher degree of customisation, one of
the major competitive priority. The firm can accommodate flexibility and
offer variety. For example, special medical equipments, forgings and
castings, house construction, etc.

3.10 Service Strategies

Here too, the standardised services, customised services, and assemble-to-
order strategies are used for processing as in the case of manufacturing.
The service strategy is the use of processes that provides little variety in
high volumes and mostly customised. For example, FedEx, postal servcies,
etc.
The strategy adopted for designing the operations is to include the
processes that produce a set of standardised services to specific customers.
For example, credit cards, Internet, etc.

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3.11 Global Strategies and Role of Operations Strategy

A global strategy pursued by organisations at the corporate level may
include buying foriegn parts or servcies and combat traditional domestic
competitions. The firms should also ward off threats from foreign markets as
they can directly supply to the domestic customers. Hence, identifying the
opportunities and threats and evolving the operations strategy require a
global perspective. The other factors to be analysed are the market
segmentation like demographic factors, psychological factors, industry
factors, etc and also identify the needs of product, delivery, volume, and any
other need of the customer.
While evolving the business strategy, the business units considers the
prevailing global conditions along with their existing strengths, weaknesses,
and competencies. The global conditions include factors like market
potential; existing competitions; and economic, political, technological, and
social developments across the countries being considered for their
business strategy.
Two effective strategies adopted by the firms exposed to products being
marketed world over are strategic alliance and locating operations abroad
and after sales service.
3.11.1 Strategic alliance
A strategic alliance is an agreement between the two parties as joint
partners to promote the products. This alliance may be in any form, but
widely accepted are 1) collaboration, 2) joint venture, and 3) technology
transfer and licencing.
Collaboration
A collaboration arrangement beween two parties arises when one firm is
having core competency in a particular product which the other firm wants to
promote in its country. Instead of duplicating the product with their own
design, the local firm and the collobarator join together for their mutual
interest and promote the product. Invariably, the operations strategy
followed by the collaborated company is followed by the domestic company
to keep up the reputation of products. For example, Nikon, IBM, HP, etc.

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Joint venture
Joint venture is an agreement between the two firms to produce jointly. This
approach is used to gain access to foreign markets and quickly promote
their interest. Here, the outside firm supplies the technology and expertise
and the local firm provide the required resources for the operations,
processing, human resoucres, infrastructure, etc. For example, Maruti
Suzuki, Hero Honda, etc.
Technology transfer and licencing
Technology transfer is the term used to describe the processes by which
technological knowledge moves within or between organisations. The
technological knowledge that is transferred can assume various forms. It
can be embodied in goods (including physical goods, plant and animal
organisms), services and people, and organisational arrangements, or
codified in blueprints, designs and technical documents.
Licensing is a business arrangement in which one company gives another
company permission to manufacture its product for a specified payment.
While licensing agreements are mainly used in commercialization of a
technology, they are also used by franchisers to promote sales of goods and
services.
3.11.2 Locating the operations abroad and after sales support
Locating the manufacturing operation in a foreign country is another way of
penetrating the new markets. Since economical and political environment
will be different and the customer’s needs vary, it is essential for firms to
have a detailed techno-economic survey before planning the entry. The
operations strategy will be different from what the company is presently
practising. If it is a standardised product to be sold in the foriegn country, the
methodology and operational strategy could be the same. For example,
McDonalds, Domino’s Pizza, etc.
Self Assessment Questions
1. Select correct answer out of the alternatives given
i. While formulating the corporate objectives, the manager considers
a) Market conditions
b) Political and social environments
c) Economic environment
d) All the above

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ii. Nirma manufactures different varieties of soaps for the market and
the production system followed is a
a) Customised production
b) Standardised production
c) Stock-to-order
d) Assemble-to-order
iii. When products are produced well in advance and stored for
marketing, the operations strategy is known as
a) Produce-to-stock
b) Produce-to-order
c) Custom-to-order
2. Which of these is not an operation strategy?
a) Production systems
b) Product plans
c) Collaboration for production
d) Process decisions
e) Capacity decisions
3. Fill up the blanks with appropriate word/words
i. Operations strategy is defined as the set of decisions that are
warranted in the operational processes, which supports the
_____________ of the business.
ii. The six elements of operations strategy that has a direct bearing on
the corporate strategy are:
1) Designing of the production system
2) Facilities for production and services
3) ________________________________
4) Technology selection, development, and process development
5) Allocation of resources
6) Focus on facilities planning
iii. The following three manufacturing strategies are dominant in
industries:
1) Make-to-stock
2) ____________________
3) Make-to-order

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iv. A strategic alliance is an agreement betwen the two parties as joint

partners to promote the products. This alliance may be in any of the
forms, but widely accepted are:
1) Collaboration
2) ______________
3) Technology transfer and licencing

3.12 Case-let 1

Strategic Decisions of Microsoft

Microsoft operates in a very competitive industry. It was dominating in the
DOS and held almost 90% of the market in PC operating system. It
invested futher in developing the next generation OS like Windows 95,
Windows NT, etc to keep the lead and to take advantage of the
profitability in this evergreen DOS segment. Before the competition builds
up for DOS, Microsoft had two thoughts whether to harvest the existing
DOS as it is like a cash cow or bring in different systems to keep away
the competitors. Bill Gates, the co-founder and CEO of Microsoft realised
that if his company is not replacing its own product with a better product,
some other company like IBM would come out and they may loose the
market leadership position. They decided to go forward aggressively to
the next competitive advantage before any other competitors does and
introduced many new products. Microsoft still enjoys the market
leadership position in the operating system.
Discussion Questions:
a) The strategic decision to develop new products to keep the market
leadership - is it a corporate strategy or a business strategy? Discuss
b) The strategy of developing new products to counter the anticipated
competition instead of harvesting their existing cash cow product - is
this correct and in this decision, what is the strategy that is involved?
c) Explain briefly why Bill Gates believed in the aggressive strategy to
gain the competitive advantage and how has it benefitted the
company?

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3.13 Case-let 2

Tata Motors-Development of New Products to Gain Competitive

Advantage
Designing indegenously, building and marketing a new car is a very
complex process and very few corporates take such a decision. Tata
motors, one of the leading manufacturers of automobiles in India, took
this drive forward in developing the first indegenously designed and
developed car in ‘Indica‘ as a competing model to the then prevailing cars
like Maruti 800 and Zen. This strategy by Tata was a tradeoff between
the price and the features.
Indica car was a success story, and it did give the desired competition to
Maruti Suzuki. The target audiance for Tata was the middle class and
fuel efficiency and price were the other primary considerations to woo the
customers. After the design and test runs were satisfactorily done,
benchmarking Indica car for final pricing and positioning in the market
was again a big challenge. Here, the operations strategy adopted was to
offer the first indigenous car at the lowest price possible and with the best
quality. Hence the investment, processes, systems, and procedures for
manufacture of such a car required a total relook by their operations
manager, it was a really big task for the entire Tata Motors.
With the confidence reposed after the success of designing, developing,
and marketing Indica cars to Indian roads, Tata Motors embarked on
another ambitious project of their chairman in bringing the prestigious
people’s car, Nano, to Indian roads. Here, the decision to bring out a
people’s car from Tata Motors’ stable was purely based on the sale price
of Rs. one lakh per car. This challenge was taken up seriously by the
operations managers and the task was accomplished successfully by
offering Nano cars at the declared price.
In the above two success stories,
a) What do you feel are the corporate strategies?
b) What manufacturing priorities might have been pursued by the
operation managers?

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3.14 Summary
Let us recapitulate the important concepts discussed in this unit:
 Operations strategy is a decision making process of selecting the
suitable manufacturing strategies and manufacturing priorities. This
exercise will enable the organisation to respond to the market needs in
the most effective manner by aligning the resources and activities of the
organisation to deliver the products that are likely to succeed in the
market.
 Operations strategy involves planning, organising, and allocating of all
the resources to gain the competitive advantage.
 Operations strategy is defined as the set of decisions that are warranted
in the operational processes which supports the competitive strategies
of the business. It is a long-range business plan for the company’s
products and will provide a road map for the operational functions to be
pursued for achieving business strategies.
 Strategic decisions include capacity building; evolving production
systems, type of processes, manufacturing technology to be adopted,
nature of products to be produced, type of material flow and other
logistics, and the means to achieve the required level of performance.
 Corporate strategy involves monitoring and making changes to suit the
external environment and exploiting the core competencies.
 Competitiveness is one of the crucial factors that decides the survival
and growth of a firm. Organisations will look into their operational
strengths and use them effectively as competitive weapons.
 There are six elements of operations. They are designing of the
production system; facilities for production and services; product or
service design and development; technology selection, development,
and process development; allocation of resources; and focus on facilities
planning.
 Operating strategy should also analyse the competitive priorities like
cost, quality, time, and flexibility which are the capabilities to be built in
to meet the market expectations.
 The three dominant manufacturing strategies are make-to-stock
strategy, assemble-to-order strategy, and make-to-order strategy. These
systems are practised for categories of batch production; mass

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production; customised production; and assemble the product, test it,

and supply.
 A global strategy pursued at the corporate level may include buying
foriegn parts or servcies and combat traditional domestic competitions.
Other factors analysed here are the market segmentation like
demographic factors, psychological factors, industry factors, etc and
identify the needs of product, delivery, volume, and any other
requirement of the customer.

3.15 Glossary
 Cash cow products: Cash cow products provide lots of cash for the
firms. They have high market share, and they are always in the growing
market.
 Competitive advantages: Organisations achieve competitive
advantages by providing their customers what they want and better or
more effective products than their competitors and take the lead
 Core competence: The organisation’s resources and capabilities are
the sources of their unique competencies
 Customisation: Customisation is the ability of a firm to satisfy the
specific needs of each customer.

3.16 Terminal Questions

1. What is meant by operations strategy? How is it related to corporate
strategy?
2. What is meant by core competence and competitive advantage?
3. What are the types of competitive weapons that a firm can use to meet
the objectives of the operations strategy?
4. How do you develop operations strategy? Explain briefly the relationship
that exists between corporate strategy, business strategy, and
operations strategy.
5. Explain briefly the elements of operations strategy.
6. Explain the basic competitive priorities considered while formulating
operations strategy by a firm?
7. What are the manufacturing strategies that can be applied by a firm to
meet the operations strategy?

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8. Under global strategies, explain the salient features of the collaboration

arrangement and the joint venture policies for gaining competitive
advantage.

3.17 Answers

Self Assessment Questions

1. (i) d. All the above
(ii) b. Standardised production
(iii) a. Produce-to-stock
2. c. Collaboration for production
3. (i) Competitive strategies
(ii) 3. Product design and development
(iii) 2. Assemble-to-order
(iv) 2. Joint venture
Terminal Questions
1. Refer section 3.2
2. Refer section 3.3
3. Refer section 3.4
4. Refer section 3.5 & 3.6
5. Refer section 3.7
6. Refer section 3.8
7. Refer section 3.9
8. Refer section 3.11

3.18 Answers to Caselets 1 & 2

Caselet-1 a It is a corporate strategy, planned with a long-term

vision, not only to sustain the existing business but also
to keep the competitive advantage.
b Todays cash cow product may not be so in the future.
The development lead time required to immediately
bring new product should be borne in mind. Hence, the
decision taken to bring new versions made Microsoft to
keep the competitive edge over its competitors.

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c Bill Gates’ aggressive policy of keeping the competitive

advantage has benefitted the company as they are,
even today, the front runners and has many first-mover
products to their credit.
Caselet-2 a The vital decision to indigenously design and develop a
new car, Indica and compete with the existing models
and also bringing out similarly the Nano as the people‘s
car with the price band fixed at Rs. one lakh per car
are the corporate strategies.
b Low cost, high volume production of cars to suit the
Indain roads, and also build with many features for
satisfying the customer, that too, within the price band
fixed were all the challenges faced by the operations
manager. To achieve this, they created facilities,
production systems, and all other procedures.

References:
 Frazier, G., and Gaither, N. (2002). Operations Management . South
Western/Thomson Learning.
 Ronald, E. J. And Everett, A.E. (2009). Production & Operations
Management. Phi Learning.

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Unit 4 Forecasting

Structure:
4.1 Introduction
Objectives
4.2 What is Forecasting?
4.3 The Strategic Importance of Forecasting
Human resources
Capacity
Supply chain management
4.4 Why Forecasting is required?
Benefits from forecasts
Cost implications of forecasting
Decision making using forecasting
4.5 Classification of Forecasting Process
4.6 Methods of Forecasting
4.7 Forecasting and Product Life Cycle
4.8 Selection of the Forecasting Method
4.9 Qualitative Methods of Forecasting
4.10 Quantitative Methods
What is time series?
Naïve method
Moving average method
Weighted moving average
Exponential smoothing method
4.11 Associative Models of Forecasting
4.12 Accuracy of Forecasting
Mean Absolute Deviation (MAD)
Standard Error (SE) of estimate
4.13 Summary
4.14 Glossary
4.15 Terminal Questions
4.16 Answers
4.17 Case Study

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Before we start forecasting, take a look at these famous quotes:

“With over 50 foreign cars already on sale here, the Japanese auto industry
isn't likely to carve out a big slice of the U.S. market.”
Business Week, 1958.
“I think there is a world market for about five computers.”
Thomas J. Watson, 1943, Chairman of the Board of IBM.
Do you want to forecast?
____________________________________________________________

4.1 Introduction
In the previous unit, we have dealt with the concepts of operations strategy,
competitive capabilities and core competencies, operations strategy as a
competitive weapon, linkage between corporate, business, and operations
strategy, developing operations strategy, elements or components of
operations strategy, competitive priorities, manufacturing strategies, service
strategies, and global strategies and role of operations strategy. In this unit,
we will deal with the concepts of forecasting, the strategic importance of
forecasting, why forecasting is required, classification of forecasting
process, methods of forecasting, forecasting and product life cycle, selection
of the forecasting method, qualitative and quantitative methods of
forecasting, associative models of forecasting, and accuracy of forecasting.
Every business activity aims to satisfy some needs and wants of the society
and hence tries to gauge the demand. Only when the demand is properly
understood and predicted with sufficient accuracy, it becomes possible to
develop and utilise the resources to cater to such demands. Thus, for any
business activity to be started, the first step would be to predict the demand
and then to develop the plans towards meeting the demand either partially
or fully. Hence, it is correctly said that forecasting the demand is the first
step and demand forecasting drives all the other activities of production
systems which include human resource planning, aggregate planning,
capacity planning, and scheduling. Even if a company decides to position
itself in a certain way, it has to have done forecasting. Thus good forecasts
are of critical importance in all aspects of a business.

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The forecast is the only estimate of demand until the actual demand
becomes known. However, forecasts are seldom perfect because the
demand for a certain product or service is a complex function influenced by
a multitude of variables. Many of these variables are not controllable and
even not properly evaluated in terms of magnitude and frequency. This
means that outside factors which are not known to us or properly predicted
or controlled impact the forecast tremendously. Hence, it is essential to
allow for this reality. In other words, expecting an accurate forecast is self-
defeating.
Most forecasting techniques assume that there is some underlying stability
in the system, which is not the case always. Hence, product family and
aggregated forecasts are more accurate than individual product forecasts.
Objectives:
After studying this unit, you should be able to:
 define forecasting
 explain the importance of forecasting
 explain when to use the qualitative models
 apply the different methods of forecasting and compare the results
 compute the measures of forecast accuracy
 identify special cases like causal and seasonal models
 use a tracking signal for checking the accuracy and efficiency of
forecasting

4.2 What Is Forecasting?

As stated in Heizer and Render (2010), forecasting is the art and science of
predicting the future events. Forecasting is an art because subjective
assessment coupled with historical and contemporary judgment is required
to improve the accuracy of forecasts. It is a science because a wide variety
of numerical methods are used to obtain a number or several numbers and
further analysed using mathematical models to ascertain the accuracy of
forecast.
In most of the cases, forecasting may involve taking historical data and
projecting them into the future with some sort of mathematical model. It may
be a subjective or an intuitive prediction. Many times, the forecasting may

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even resemble a kind of a wild guess or may involve extensive data analysis
involving several parameters. Sometimes, it may involve a combination of a
mathematical model adjusted by a manager’s good judgment.
Forecasting is synonymous with estimating and prediction, though
forecasting is considered to be more scientific rather than a crude or vague
guesswork.

4.3 The Strategic Importance of Forecasting

Forecast is very much required for all types of industrial activity and also for
those industries which are purely in the service sector like healthcare and
education. Good forecasts are of critical importance in all aspects of a
business: The forecast is the only estimate of demand until the actual
demand becomes known. Therefore, forecast is said to drive decisions in
many business areas. Forecast influences three key activities. They are:
 Human resources
 Capacity
 Supply chain management
Let us now discuss these three activities in detail.
4.3.1 Human resources
Typically, the number of persons required is a function of the production
output which, in turn, depends on demand forecasting. Hence hiring,
training, and laying off workers, all depend on the anticipated demand.
When fresh workers are hired anticipating a rise in the demand, it is
expected that they can quickly get into the required job. However, training is
required apart from developing good relations with the existing workers.
Similarly, if workers are removed, it sets a demoralising atmosphere.
Further, the removed workers will spread the news, and the industry will
suffer due to bad reputation and poor image.
4.3.2 Capacity
Capacity refers to the ability to meet the demand in terms of resources and
the preparedness on the part of the company. When the demand pattern is
well recognised and indicates a rise, the capacity build up happens and
ensures that there are no lost sales for want of product. On the other hand,
if the demand is showing a decline, it signals a decrease in capacity. Thus,

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unnecessary investments are not made. Both for capacity-lead and

capacity-lag decisions, demand forecasting is vital.
4.3.3 Supply chain management
Supply chain management refers to all the activities that enable the right
product at the right place at the right price. Hence, demand forecasting has
to be done with utmost care to help identifying the vendors, pricing choices,
and material options. When the demand is properly forecasted, it is easy to
plan for the suppliers, logistics, and other intermediaries to ensure the
delivery of the product at the right time.
Self Assessment Questions
1. Forecasting is both art and science of predicting the future events.
(True/ False)
2. Demand forecasting is vital both for capacity-lead and capacity-lag
decisions. (True / False)
3. Forecasts are not always perfect because the demand for a certain
product or service is a complex function influenced by a multitude of
variables. (True / False)

4.4 Why Forecasting is Required?

Forecasting is required for:
 Production planning
 Financial planning
 Personnel planning
 Scheduling planning
 Facilities planning
 Process design and planning
4.4.1 Benefits from forecasts
Forecasting basically helps to overcome the uncertainty about the demand
and thus provides a workable solution. Without the forecast, no production
function can be taken up. Hence, it can be stated that forecasting helps to:
 Improve employee relations
 Improve materials management
 Get better use of capital and facilities
 Improve customer service

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4.4.2 Cost implications of forecasting

Forecasting requires special efforts and involves inputs from experts which
cost a lot to the companies. Well-trained experts and associations
substantially invest in human resources and hence charge their clients for
the service rendered. Thus, forecasting done in-house or carried out
externally requires significant investments. Thus, it can be said that more
the efforts put for forecasting, more will be the cost of forecasting. Because
of improved accuracy and better judgment, the losses that would occur
because of poor forecasting would decrease as more efforts are put in for
forecasting. Hence, higher the efforts, lower will be the losses. Because
effort is a direct function of forecasting, this cost goes up with increase in the
forecasting efforts. Figure 4.1 depicts the forecasting – cost implications
graphically.

Fig. 4.1: Forecasting – Cost Implications

From figure 4.1, it is to be understood that to keep the total cost of

forecasting to a minimum, it is necessary that the forecasting effort has to be
raised up to a level at which certain uncertainty is acceptable and hence,
there is preparedness for some possible loss. On the other hand, it doesn’t
make sense to increase the effort to improve the accuracy of forecasting
because the forecasts are subject to market dynamics and many other
unpredictable parameters which will not be known or controllable. For

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example, the government’s import policy drastically affects the capacity and
thus any industry hoping of increasing the demand and expanding the
capacity will face a major threat and possible loss.
4.4.3 Decision making using forecasting
Forecasts are always subject to uncertainty because of the changing
environment and hence, any attempt to improve the forecast accuracy only
increases the cost but not the accuracy. Keeping this in mind, the
managerial decision makers adopt the following rule:
Actual decision = Decision assuming forecasting is correct + Allowance for
forecast error.
Further to account for the uncertainty and provide allowance, it is necessary
that the forecast output contains two numbers as follows:
1) Best estimate of the demand + 2) Error
Again the question, how much of error can creep in the forecast? It is
difficult to answer. However, the error in forecast is easy to calculate once
the actual demand is known.
Forecast error = Actual demand - Forecast demand
Figure 4.2 depicts the process of forecasting and the associated factors.

Fig. 4.2: Forecast Generation and Revision

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What is being forecasted is called as the variable of interest

In the forecasting jargon, traditionally, it is assumed that it is the demand
that is always connected with sales. However in a general way, forecast
may refer to several things including the outcome of any process, naturally
occurring or created for a specific purpose. For example, election results,
material requirement, population, economic growth, weather, and even
tourists visiting a certain place.
Further, while forecasting, it helps to ask the following to improve the
accuracy of forecast:
 Input elements involved
 Process generating the variable
 Availability of data
 Stability of the process
 Accuracy of data
 Adequacy of data
 Representativeness of the data

4.5 Classification of Forecasting Process

According to Heizer and Render (2008), the forecasting methods can be
classified based on the context or focus. The different forecasting methods
are discussed below.
Based on the type of database, the forecasting methods can be classified
into 2. They are:
 Quantitative (Statistical forecasting)
 Qualitative (Subjective estimation)
Based on the forecast time period, the forecasting methods can be
classified into 3. They are:
 Short range – up to 1 year
 Medium range – 1 to 3 years
 Long range – 5 years or more
Based on the methodology, the forecasting methods can be classified into 3.
They are:
 Time – series methods
 Causal methods

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 Predictive methods (Qualitative methods)

Let us now discuss these methods in brief.
When forecasting for an existing product or similar to it, historical data will
be available and hence statistical methods can be applied. These include
simple time series models to very extensive methods like response surface
methodology. If no numerical data is available, then the opinion-based data
containing qualitative descriptions like good, bad, acceptable, etc will have
to be used. Also in some methods, the expert’s opinion or panel’s comments
will be used. Regarding the time horizon, it is obvious that some elements or
variables of interest will have to be predicted over long ranges like housing
development or global warming effects. In some cases, particularly for short
periods, some parameters like fuel prices, material availability, labour
availability, etc have to be predicted. Keeping these situations, several
methods of forecasting have been proposed and not all of them will be
relevant or useful under all situations. Thus, the decision maker has to make
a careful evaluation of all the choices before choosing the method.
Self Assessment Questions
4. Forecasting basically helps to overcome the ________ about the
demand and thus provides a workable solution.
5. Forecasting whether done in-house or carried out externally requires
significant investments. (True / False)
6. Forecast error = ___________ - Forecast demand.

4.6 Methods of Forecasting

The different methods of forecasting can be classified as follows:
Qualitative methods
 Market surveys
 Nominal group testing
 Historical analysis
 Jury of executive opinion
 Life cycle analysis
 Delphi method

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Quantitative methods
Table 4.1: Quantitative methods classification
Time series analysis Causal methods

 Moving averages  Regression analysis

 Exponential moving averages  Input – output model
 Box – Jenkins method  Leading indicators
 Trend projections  Simulations model
 Fourier series  Economic models

Case-let

Demand for Light Commercial Vehicles (LCV) in India

At present, Tata Motors dominates the market of LCV in India with a market
share of about 52% owing the success largely to their model, Tata Ace.
Mahindra group enjoys around 25% and the other players are Ashok
Leyland, Piaggio, and Eicher Motors.
The demand for LCVs is affected by rising interest rates, decreasing
industrial output, and a considerable increase in the vehicle prices. The
operating cost and environment too have changed significantly affecting the
sales.
In view of the decreasing demand, the manufacturers have to face the
challenge of reduced capacity utilisation. With freight rates almost stagnant,
the market seems to be dull in the short run. However, the long-term growth
holds promise as there will be economic changes. The LCV industry is
expected to grow by 17-18% in the financial year 2011-12. According to the
research conducted by J.D. Power Asia Pacific, India will be the third largest
LCV market by 2020. The report also says that given India’s poor road
infrastructure and concerns about fuel consumption, micro-van and mini
truck models in the LCV segment are likely to be popular.
th
(Source: Patel, J, LCV Industry – Begging to Differ, Business India, 4 march
2012, page 30)

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Discussion Questions:
a. What forecasting method might be suitable for the LCV segment?
b. How do you differentiate between poor growth in the short term and
promising growth in the long term?

4.7 Forecasting and Product Life Cycle

The demand for a product keeps changing as it passes through different
stages in its life cycle. The demand starts with zero value and keeps rising
as the product moves along the life cycle and gradually diminishes once the
product is outdated or obsolete. For example, iPad and iPhone are currently
in the growth stage and hence, the forecast can be trend based and on the
rise. But a product like a fixed telephone instrument is in the decline stage
and already being phased out. Hence, its forecast has to be carefully done
keeping in mind the decreasing sales. If methods are applied mechanically
without observing the current stage of the product, the forecast is bound to
be erroneous and leads to catastrophe. Figure 4.3 depicts the product life
cycle and volume of demand graphically.

Fig. 4.3: Product Life Cycle and Volume of Demand

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Similarly, many of the web or internet-based transactions like online broking,

mail ordering, voice messaging, and online banking are witnessing a surge
in the demand and more people will start availing the service. In the banking
sector, the IT-enabled services are growing rapidly and hence have
decreased the demand for staff. Hence, when forecasting in such cases,
people need to understand the possible life left in the product and estimate
the demand. Further, there are also instances where the new product has
not gone through all the stages but became a failure after it was launched.
For example, pagers had a short life before giving way to mobile phones.

4.8 Selection of the Forecasting Method

Given the fact that several methods are available, the question is how to
select the right method for forecasting. Because cost, time, and skills are
involved, the choice of a forecasting method is based on several factors.
They are:
 Form of forecast required
 Forecast horizon, period, and interval
 Data availability
 Accuracy required
 Behaviour of process being forecasted (demand pattern)
 Cost of development, installation, and operation
 Case of operation
 Management comprehension and cooperation

4.9 Qualitative Methods of Forecasting

The different qualitative methods of forecasting are as follows:
 Market surveys
 Nominal group testing
 Historical analysis
 Jury of executive opinion
 Life cycle analysis
 Delphi method

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Let us now discuss these qualitative methods in detail.

Market surveys
Conducting surveys among the prospective buyers or users is a very old
method of forecasting. Here, a questionnaire is prepared and circulated
among the people and their responses are obtained. The responses are
collated and analysed to reveal possible clues towards acceptance or
otherwise about a new product or service. Based on the overall decision, the
forecasting is done. This method is typically done for new products or at
new places where a product is to be launched. In this method, the number
of respondents and how responses are gathered like through oral
interviews, personal talks, internet based, postal ballots, etc, have to be
established before survey. The common limitations are the sample size and
the way of drawing the sample like random, convenient, or judgmental.
Sample bias is not completely ruled out.
Nominal group testing
In the nominal group testing method, the product or service may be given a
trial use to a specified group like students, employees, neighbors, etc and
their responses are collected and analysed.
Historical analysis
The historical analysis method is based on the fact that the past is an
indicator of the future. People try to associate the events that happened
earlier with the events that are likely to happen in the future.
Jury of executive opinion
In the jury of executive opinion method, the opinion of a group of experts is
collected and used as an estimate to obtain the forecast.
Life cycle analysis
In the life cycle analysis method, an assessment of the life cycle stage in
which the product lies is made first and an opinion is formed.
Delphi method
In the Delphi method, the experts give their opinions which are collected by
the coordinator and several rounds of discussion may be held before a
consensus is reached. This forms the basis for forecasting.

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4.10 Quantitative Methods

Under the quantitative methods, adequate data is collected and different
statistical techniques are applied to reveal some patterns which will serve as
forecast. Because these methods heavily rely upon the data, it is essential
that the collected data is free from errors and bias so that proper
conclusions can be made. Another advantage is the availability of several
softwares including MS Excel which help to analyse the data extensively
which makes these methods easy to learn and apply.
The quantitative methods are divided into two groups. They are time series
analysis and causal methods.
Table 4.2: Classification of Quantitative methods

Time series analysis Causal methods

 Moving averages  Regression analysis

 Exponential moving averages  Input – output model
 Box – Jenkins method  Leading indicators
 Trend projections  Simulations model
 Fourier series  Economic models

In the time series methods, one set of data or several sets are analysed to
obtain the forecast. In the causal methods, the association between two
variables forms the basis for forecasting.
4.10.1 What is a time series?
A time series is defined as a set of values pertaining to a variable collected
at regular intervals (weekly, quarterly, or yearly). For example, the
temperature recorded every one hour is time series. Similarly, the annual
rainfall or agricultural output forms a time series. However, it is to be noted
that to draw a reasonable conclusion, at least observations should be
available. With very little number of values, say 7 or 8, the forecasts will not
be accurate.
A time series consists of four components namely:
1) Trend
2) Cyclic
3) Seasonality
4) Random
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Let us now discuss these components in brief.

Trend refers to the gradual upward or downward movement of data over a
long period of time. Cycles are repetitions of data in a certain pattern at
regular intervals like several years. Business cycles are very commonly
used to understand the mood of the markets. Seasonal pattern is also a
repetitive pattern but observed at much lesser frequency. The season length
could be every hour in a day, a day, a week, or months. Variations are
noticed at each time period and patterns are observed. Random variations
are difficult to predict and are caused by chance factors or unusual events.
For example, tsunami wrecked the tourist inflow at several popular holiday
destinations all over the world. Figure 4.4 depicts the four components of a
time series.

Fig. 4.4: Components of a Time Series

4.10.2 Naïve method

In the naive method, a set of observations pertaining to a certain variable
like sales, production, or consumption is observed and the forecast is taken
as the same value as that of the most recent period.

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For example, as stated in www.icra.in the number of small car offerings is

given in the table 4.3 below.

Table 4.3: Number of small car offerings

1 2 3 4 5 6 7
Year 2007 2008 2009 2010 2011 2012 2013

Number of small
9 14 17 23 26 31 35
car offerings

The forecast as given by ICRA is 35 for the year 2013.

Fig. 4.5: Graph showing number of small car offerings

Using the naïve method, the forecast for the year 2013 is 31.

4.10.3 Moving average method

A moving average is obtained by summing and averaging the values of a
time series over a given number of periods repetitively, each time deleting
the oldest value and adding a new value. Usually, the number of time
periods chosen will be an odd number like 3 or 5 or 7. Rarely, there will be a
need to go beyond 7 periods.
Consider the same example as given before.
The three-year moving average for the first three periods = (9+14+17)/3 =
13.33

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Every time an old period data is dropped and the new period data is
included to get the average. Therefore, the next three-year moving average
= (14+17+23)/3 = 18
This calculation is continued.
Similarly, the five-year moving average for the first five periods =
(9+14+17+23+26)/5 = 17.8
The next five-year moving average = (14+17+23+26+31)/5 = 22.2
Table 4.4: Moving averages
1 2 3 4 5 6 7
Year 2007 2008 2009 2010 2011 2012 2013
Number of small
9 14 17 23 26 31 35
car offerings
Moving average
13.333 18 22 26.667 30.667
3 periods
Moving average
17.8 22.2 26.4
5 periods

To decide upon the number of time periods, the following guide line may be
used:
(AP = Averaging Period)
Table 4.5: Guide line
Noise Dampening
Impulse Response Accuracy
Ability
AP = 3 Low High Low
AP = 5 Medium Medium High
AP = 7 High Low Medium

Noise dampening refers to the ability to smooth out the variations. Impulse
response enables to detect immediate changes and accuracy implies
minimum forecast error.
Drawbacks of moving average methods:
 All the past periods in the averaging period are weighted equally
 No provision is made for seasonal patterns

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 Several periods of historical data must be carried forward from period to

period for calculating the forecasts
4.10.4 Weighted moving average
In the simple moving average, all the past periods in the averaging period
are weighted equally and hence, the forecast is sometimes influenced by
bigger values. Secondly, older values are not relevant, particularly in the
changing environments. Hence, to reflect those changes, the simple moving
average method is modified by using different weights to different time
periods. A weighted average generally gives more weight to recent
observations than older ones. This has an advantage over simple moving
averages that, older values are given less importance than more recent
values of a series and that the number of values included in the average can
be large while still achieving responsiveness to changes through judicious
selection of weights. However, the choice of weights is somewhat arbitrary
and is often based on trial and error approach.
For example consider the following data:
Table 4.6: Data showing the sales for six months

Sales in lakhs of
Month
Rupees
Jan 90
Feb 70
Mar 80
Apr 85
May 82
June ?
Simple moving average (4 months average)
Forecast for the month of June = ¼ [70+80+85+82] = 79.25 lakh of Rupees
Here the weights are = 1/4 for all the values.
Weighted moving average (Using weights 0.1, 0.2, 0.3, 0.4)
Forecast for the month of June
= 0.1 X 70 + 0.2 X 80 + 0.3 X 85 + 0.4 X 82 = 81.3 lakh of rupees
This simple modification to the moving average method allows forecasters
to specify the relative importance of past periods of data.

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4.10.5 Exponential smoothing method

This method is a modified weighted moving average method using weights
in an exponentially increasing way. The name exponential smoothing is
derived from the way the weights are assigned to historical data: The most
recent values receive most of the weight and weights decrease
exponentially as we go back in the periods.
Each new forecast is based on the previous forecast plus a percentage of
the difference between that forecast and the actual value of the series at
that point.
New forecast = Old forecast + α [Actual value - old forecast value]
Where α = a percentage and (actual – old forecast) = an error
Mathematically,
Ft =Ft-1 + α (At –1 –Ft-1)
Where Ft = Forecast for the period t
Ft-1 = forecast for the period (t-1)
α = Smoothing constant, varying from 0 to 1
At-1 = Actual value for the period (t-1)
Typically values of α range from 0.01 to 0.50. Higher values of α respond
more rapidly to any discrepancies, i.e., the changes in time series are more
closely tracked by higher values of α.
One important limitation of simple exponential smoothing is that it is ill–
suited for data that includes long-term upward or downward movements (i.e.
trend). Use of simple exponential smoothing in such instances would
produce forecasts that are too low for upward movements and too high for
downward movements. Therefore, when trend is present in time series data,
simple exponential smoothing should not be used, instead, exponential
smoothing adjusted for trend should be used.
Exponentially weighted moving averages is the term used for exponential
smoothing.
Sometimes α is calculated as 2/(AP +1), where AP = Averaging Periods
Exponential smoothing methods have been further extended to include
other possible variations and two such methods are:
1. Double Smoothing 2. Box – Jenkins methods
These methods are beyond the scope of the present topic.

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Self Assessment Questions

7. Forecasting is broadly classified as __________ and _____________.
8. Delphi method is a _________ method of forecasting.
9. A _________ is defined as a set of values pertaining to a variable
collected at regular intervals (that is weekly, quarterly, or yearly).
10. The ________ method of forecasting is based on the fact that the past
is an indicator of the future

4.11 Associative Models of Forecasting

The methods earlier discussed analysed the data pertaining to a single
variable and applying statistical methods developed the forecast. But in
industries, it has been observed that there are many situations where the
data values of one variable have some association with the data values of
another variable. Though this is not exactly a cause and effect situation, it is
possible to find out the extent of association and hence, when one variable’s
value is known, the value of the other variable can be estimated using the
mathematical relationship. Correlation and regression analyses are
commonly used to establish such relationships and also help to obtain the
forecast.
Regression and correlation techniques are means of describing the
association between two or more such variables. Regression means
“dependence” and correlation measures the degree of dependence. Using
the regression equation, it is possible to estimate the value of a ‘dependent’
variable, Y, from an ‘independent‘ variable, X.
Two types of regressions are possible:
a) Simple regression involves only one independent variable which affects
the dependent variable. For example, the gold price is influenced by,
say, rising income.
b) Multiple regressions involve two or more independent variables
influencing the dependent variable. For example, the real estate price is
influenced by rising income, shortage of land, and urban migration.
Regression is also categorised as linear and non–linear regression based
on the severity of relationship and characteristics. The following table 4.7
shows the examples.

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Table 4.7: Linear and non–linear regression

Simple Multiple
Linear Y= a +b x Y=a+bx1+cx2+dx3
Non-linear Y= a+bx2 Y=A+BX1+CX22+DX33
The forecasting procedures using regression involves the following steps:
1. The variables are plotted along Cartesian or rectangular coordinates
2. A trend equation is developed
3. The equation is used for forecasting
4. The variables are not necessarily related on a time basis
The most popular form of the simple linear regression equation is Y = a+bX,
where
Y= Dependent variable
X= Independent variable
a = Y intercept
b = Slope
For a unit change in the value of X, a change in the value of Y occurs in a
straight line manner and hence, it is easy to predict the values.
To find the values of constants a and b, the following equations are used:
∑y = na + b∑x
∑xy = a ∑x +b∑x2
Solving the above two equations, the values of a and b are obtained and
then substituted into the regression equation along with the value of X and
the value of Y is determined.
Example:
A departmental store has collected data about sales figures and profits
during the last 12 months. Obtain a regression line for the data and predict
the profit when sale is 10 Rs. lakh.

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Table 4.8: Data on sales

Sales X
7 2 6 4 14 15 16 12 14 20 15 7
(Rs. Lakh):
Profit Y
(Rs. 15 10 13 15 25 27 24 20 27 44 24 17
thousands)

First plot the data and decide if a linear model is reasonable (i.e. do the
points seem to scatter around a straight line?) Next compute the quantities
∑x, ∑y, ∑xy and ∑x2.
Let linear regression equation is Y = a+bX, where
Y= Dependent variable, profit
X= Independent variable, sales
a = Y intercept
b = Slope
The following table is constructed:
Table 4.9: Table Construction for regression
2 2
X Y XY X Y Ŷ
7 15 105 49 225 16.15
2 10 20 4 100 8.186
6 13 78 36 169 14.558
4 15 60 16 225 11.372
14 25 350 196 625 27.302
15 27 405 225 729 28.895
16 24 384 256 576 30.488
12 20 240 144 400 24.116
14 27 378 196 729 27.302
20 44 880 400 1936 36.86
15 34 510 225 1156 28.895
7 17 119 49 289 16.15
Total ∑ 132 271 3529 1796 7159

Solving for a and b, we get a = 5.06 and b = 1.593

Therefore, the regression line is
Y = 5.06 + 1.593 x
When sales X=10,
Y = 5.06 +1.593 X = 20.99 Rs. Thousands

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Self Practice Problem

Maxwell Motors has collected the following data on annual spare parts sales
and new car registrations:
Table 4.10: Data on annual spare parts
Annual spare parts sales 1.0 1.4 1.9 2.0 1.8 2.1 2.3
(in million $)
New car registrations (in 10 12 15 16 14 17 20
thousands)
Develop the linear regression equation and estimate the spare parts sales
when new car registrations are 22,000.
Answer:
Linear Regression equation:
Y = -0.16 + 0.13 X
Spare parts sales when new car registrations are 22,000 = 2.7 million $

4.12 Accuracy of Forecasting

Finally, we come to an important question. How accurate are the forecasts
obtained by the different methods. Any forecast method results in values
that may not exactly match the actual values. Hence, deviations are
expected. Higher the deviation, more will be the error. Several measures of
error in forecast have been developed to examine the issue of error in
forecast. Here, we look at two widely used and popular measure applicable
to a wide variety of methods. These two measures are: (1) Mean Absolute
Deviation (MAD), and (2) Standard Error of Estimate (SE).
4.12.1 Mean Absolute Deviation (MAD)
In short range forecasting, MAD is often used to measure how closely
forecast values are matching the actual data. MAD is computed as follows:
MAD = Sum of absolute deviations for n periods / number of periods.
Here deviation = Difference between the actual value and the forecast
value.
These deviations are added and divided by the number of time periods to
get the MAD.

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4.12.2 Standard Error (SE) of estimate

The standard error of estimate measures the variability or scatter of the
observed values around the regression line.
The formula for calculating SE is given below:

where
y = values of the dependent variable
yest = Estimated values from the estimating equation that correspond to each
Y value.
n = number of data points used to fit the regression line.
It is important to note that the error values should be as low as possible
while making comparison and selection.

4.13 Summary
Let us now summarise the key learnings of this unit:
 For any business activity to be started, the first step would be to predict
the demand and then to develop the plans towards meeting the demand
either partially or fully. This process of estimating is called forecasting
 Forecasting basically helps to overcome the uncertainty about the
demand and thus provides a workable solution.
 Supply chain management refers to all the activities that enable the right
product at the right place at the right price. Hence, demand forecasting
has to be done with utmost care to help identifying the vendors, pricing
choices, and material options.
 Forecasting is broadly classified as quantitative and qualitative
 Market survey, Delphi method, historical analysis are some of the
qualitative methods of forecasting
 The quantitative methods are divided into two groups. They are time
series analysis and causal methods.

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 Several measures of error in forecast have been developed to examine

the issue of error in forecast. There are two widely used and popular
measure applicable to a wide variety of methods. These two measures
are: (1) Mean Absolute Deviation and (2) Standard Error of Estimate.

4.15 Glossary
 Survey: A detailed study of a market or geographical area to gather
data on demand for a product or service, attitudes, opinions, satisfaction
level, etc
 Questionnaire: A form containing a set of questions submitted to
people to gain statistical information

4.16 Terminal Questions

1. What is meant by forecasting?
2. Discuss the role of forecasting in modern business context.
3. List the benefits of forecasting.
4. Distinguish between moving average method and weighted moving
average method. What are the advantages and disadvantages of these
methods?
5. How do you measure the accuracy of forecast? Describe one measure
of error used in forecasting.

4.17 Answers

Self Assessment Questions

1. True
2. True
3. True
4. Uncertainty
5. True
6. Actual demand
7. Quantitative, qualitative
8. Qualitative
9. Time series
10. Historical analysis

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Terminal Questions
1. Refer to section 4.2
2. Refer to section 4.3 and 4.4
3. Refer to section 4.4.1
4. Refer to section 4.10
5. Refer to section 4.12

4.17 Case Study

Plastic Junction – The Road Ahead

Today, it may not be an overstatement to say that we are living in a plastic
world. With metal and wood, which were the most commonly used materials
for all types of products for centuries, now being replaced by plastic; we
cannot imagine life without plastic. You name the product, it is there: bottles,
door, furniture, credit card, containers, auto parts, and the list go on. These
growing applications of plastic are very encouraging to the plastic
manufacturers world over, and the Indian manufacturers are no exception.
Plastic manufacturing in India made a humble beginning in India in 1957
when the commercial production of polystyrene started. This was followed
by production of LDPE (Low Density Poly Ethylene) in 1959, PVC (poly
Vinyl Chloride) in 1961, HDPE (High Density Poly Ethylene) in 1968, and
polypropylene in 1978.
Indian plastic manufacturing industry largely consists of small and medium
enterprises numbering over 30,000 and in the post-liberalisation era after
1991 saw a spurt in joint ventures, foreign investments, and technology
acquisitions. This has created a tremendous capacity even in excess of
demand in certain segments. With even big industries starting their units
related to plastic products manufacturing, the overall industry growth has
been quite encouraging.
As stated by Yogesh Shaw, President of All India Plastic Manufacturers’
Association, plastics is a Rs. 85,000 crore turnover industry in India,
employing directly and indirectly 3.5 million people and yielding revenues of
Rs. 7300 crore to the government annually. He projects plastic production to
increase by 60% to reach 12.75 million tones by 2012. It is also expected
that the per capita consumption of plastic will double up from the present

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eight kg in the next five years. In comparison, China is 17 kg, US and

Europe well over 80 kg, and the world average 23 kg.
The plastic production is boosted by the increase in the availability of raw
material which comes from petrochemicals industry because of the capacity
additions. A yearly growth of 15% is expected to continue for some more
time.
The major threat to the Indian plastic industry is from China which exports
huge quantity of plastic to many countries including India. With cost of
acquisition low, Indian promoters also favour using China plastic. In the
recent times, the environment consciousness among the people is
pressurising the government and the industries to reduce the consumption
of plastic and also not to promote the plastic industry. Some major changes
too have been brought in by the ruling governments to curb the use of
plastic. “Plastic Free Zone” is the new sign board people have to watch.
(Source: Bana, S. (2011). “It’s a plastic world”, Business India, August 21, 2011, pp
106-108)

Discussion Questions:
1. Which model of forecasting do you suggest for plastic industry?
2. How do you factor in the Chinese threat and the environmental issues in
the growth of the industry?
3. If you are a manager in the plastic manufacturing industry, how do you
react to the positive and negative factors to the growth of the industry?

References:
 Heizer, J. H. and Render, B. (2008). Operations Management. Flexible
Version, Pearson Prentice Hall, 2008.
 Bana, S. (2011). It’s a plastic world, Business India. August 21, 2011.
pages 106-108

E-References:
 www.icra.in . Retrieved on 23, November 2011.
 saber.uca.edu. Retrieved on 23, November 2011.

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Production and Operations Management Unit 5

Unit 5 Location Strategies

Structure:
5.1 Introduction
Objectives
5.2 Location Planning Process
Planning the location of the plant
General factors
Special factors
Rating methods
5.3 Summary
5.4 Glossary
5.5 Terminal Questions
5.6 Answers
5.7 Case Study

5.1 Introduction
In the previous unit, forecasting, we studied that forecasting the demand is
the first step for any business activity and demand forecasting drives all the
other activities of production systems which include human resource
planning, aggregate planning, capacity planning, and scheduling. A plant
location cannot be changed frequently since a large capital needs to be
invested to build the plant and machinery in the selected area. Therefore,
before selecting a plant location, a long range forecasting is to be made to
foresee the future needs of the company. In this unit, location strategies, we
will learn about the various methodologies used to select the location of the
plant, the flexibility in location choice, the trends and practices across the
globe and also techniques available to determine the location for a particular
type of industry.
Location identification for an organisation is an important strategic level
decision taken by the top management. It involves planning and
management of the plant location. Location decisions are strategic decisions
that bind the organisation to a certain place. Hence utmost care has to be
taken while selecting the location.

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Location decisions are made on the basis of parameters which make it

suitable for various considerations of suppliers and markets. While locating
a plant, the following long range forecasting needs are to be considered:
 The company’s expansion plan and policy
 Diversification plan for the products
 Changing market conditions
 The changing sources of raw materials
 Many other factors that influence the choice of the location decision
The main concern of the operations manager will be the extent of flexibility
he/she has. This can be determined by raising such questions like:
 What is the volume of production of different products?
 What operations have to be outsourced?
 How to deal with surge or decline in demand?
 What will be the growth potential in that place?
Materials need to be stocked and moved to various locations for operations
and today it is common to see plants being operated at multiple locations.
Since decisions have long term implications, thorough analysis and
involvement of senior managers from all departments is essential. Multi-
locations for manufacturing and distribution to exploit situations of supplier
availability or market requirements are now a common practice among
Indian companies. This trend in the recent times has lead to Indian
companies being called by a new name, ‘Indian MNCs’.
Objectives:
After studying this unit, you should be able to:
 explain the significance of location decision
 list the various factors influencing plant location
 describe the general and special factors that influence the plant location
 analyse the various rating methods

5.2 Location Planning Process

Planning is the most important function of management, especially, when
we have to deal with lands, buildings, and machineries. Lands, buildings
and machineries are costly and once fixed cannot be moved easily.
Planning, therefore, requires a lot of thought, data gathering, and estimates

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for the future. These considerations are vital for the success of any firm. To
deeply understand the importance of planning in operations management,
we consider the planning of the location first and later planning of the layout
in the next unit.
Before looking at the planning process
Selecting a location to a large extent is governed by the flexibility factor
based on the type of industry or service. While some industries are
completely dependent upon the location for survival, other industries may
have varied degrees of flexibility. Flexibility in choice is obviously an
advantage and a better decision can be taken. Figure 5.1 depicts the
flexibility in choice.

Flexibility in choice is high

• Electronics and light • Hospitality
manufacturing • Professional (legal, computer)
• Textile, furniture • Transportation and
• Heavy machinery and communication
equipment • Education and non-profit
• Petroleum, chemical and organisations
plastics • Governmental organisations
• Mining, lumber and • Medical and emergency
agriculture services

Flexibility in choice is low

Fig. 5.1: Flexibility in choice

5.2.1 Planning the location of the plant

We will now study about planning for the location of a plant. We will also
study the various factors that affect the economics of competing locations
which helps in choosing the most optimal location.
Factors influencing plant location can be broadly divided into two types
namely: general factors and special factors. Figure 5.2 depicts the factors
influencing a plant location.

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Fig. 5.2: Factors Influencing Plant Location

In this section, let us study in detail about the factors influencing plant
location.
5.2.2 General factors
The general factors that influence the plant location are listed as follows:
 Availability of land – Availability of land plays an important role in
determining the plant location. On several occasions, our plans,
calculations and forecasts suggest a particular area as the best to start
an organisation. However, availability of land may be in question. In
such cases, we will have to choose the second best location.
 Availability of inputs – While choosing a plant location, it is very
important for the organisation to get the labour at the right time and good
quality raw materials. The plant should be located:
 Near to the raw material source
 At the market place
 Close to the market when universally available, so as to minimise the
transportation cost

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Figure 5.3 depicts the general factors influencing a plant location.

Fig. 5.3: General Factors Influencing Plant Location

 Closeness to market places – Organisations can choose to locate the

plant near to the customers’ market or far from them, depending upon
the product they produce. It is advisable to locate the plant near to the
market place, when:
 The projected life of the product is low
 The transportation cost is high
 The products are delicate and susceptible to spoilage
 After sales services have to be prompt
The advantages of locating the plant near to the market place are:
 Consistent supply of goods to the customers
 Reduction of the cost of transportation
 Communication facilities – Communication facility is also an important
factor which influences the location of a plant. Regions with good
communication facilities namely postal and telecommunication links
should be given priority for the selection of sites.

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 Infrastructure – Infrastructure plays a prominent role in deciding the

location. The basic infrastructure needed in any organisation are:
 Power – For example, industries which run day and night require
continuous power supply. So, they should be located near the
power stations and should ensure continuous power supply
throughout the year.
 Water – For example, process industries such as, paper, chemical,
and cement, require continuous water supply in large amount. So,
such process industries need to be located near the source of
water supply.
 Waste disposal – For example, for process industries such as,
paper and sugarcane industries, facility for disposal of waste is the
key factor.
 Transport – Transport facility is a must for facility location and layout of
location of the plant. Timely supply of raw materials to the company and
supply of finished goods to the customers is an important factor. The
basic modes of transportation are by air, road, rail, water, and pipeline.
The choice of location should be made depending on these basic
modes. Cost of transportation is also an important criterion for plant
location.
 Government support – The factors that demand additional attention for
plant location are the policies of the state governments and local bodies
concerning labour laws, building codes, and safety.
 Housing and recreation – Housing and recreation factors also
influence the plant location. Locating a plant with or near to the facilities
of good schools, housing and recreation for employees will have a
greater impact on the organisation. These factors seem to be
unimportant, but there is a difference as they motivate the employees
and hence the location decisions.
5.2.3 Special factors
The special factors that influence the plant location are:
 Economic stability – outside investments
 Cultural factors
 Wages

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 Joint ventures – support of big time players

Location decision sequence

Location decisions start from the national level, and move to the site level
after moving through regional level and the community level. This means
that, first the country of choice is to be selected, followed by regional
choices and finally community levels have to be selected.
5.2.4 Rating methods
In the case of general factors or special factors – each factor has its own
importance in determining the location of a plant. Therefore, ranking them
and giving weightage for them is one of the ways of determining the
location. The methods which determine the most likely location are:
 Rating plan method
 Factor rating method
 Point rating method
 Break-even analysis
 Centre of gravity method
In this section, we will study in detail the methods to determine the most
likely location.
The score or points for each location for each factor considered can be a
raw score on an arbitrary scale for example, 0 to 100. Here the analyst or
the decision maker allots the score based on perception. The number of
factors considered varies on the type of industry and also the relevant
factors based on the location. On the other hand, the scores can be also
weighted. This is due to the fact that the factors considered may have their
own relative importance expressed as percentage weight. Then the
weighted score is calculated by multiplying the raw score by the
corresponding factor weight. The location with the highest total will be the
final choice.
Rating plan method – In rating plan method, the various factors for locating
a plant are given ratings depending upon the perception of the
management. The location which gets the maximum rating, considering all
the factors, is chosen for locating the plant.

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Case-let 1
Pavan is planning to start an industry in India. He has four options to
locate the plant, Chandigarh, Bhopal, Bangalore, and Cochin. He used
the rating plan method to select the best location suitable for his business
needs. Pavan initially listed important factors of the business need (See
column 1 of table 5.1). According to the rating plan method, in column 2
of the same table, he has given the proportional values for each factor in
percentages. For example, the proportionate values given to the factors
are 20%, 15%, 20%, 15%, etc. The total of the proportionate value is
100%. Table 5.1 depicts the rating plan approach used by Pavan.
Table 5.1: Rating Plan Approach
Proportional
Factors Chandigarh Bhopal Bangalore Cochin
Value % age
Availability of 20 20 10 15 05
labour
Raw material 15 15 10 15 10
sources
Market 20 20 20 15 10
proximity

Site 15 10 10 15 10
Government 10 5 10 5 10
policies
Infrastructure 10 10 5 10 5
for employees
Scope for 10 10 10 5 5
expansion
Total 100 90 85 80 55

When individual ratings are given to the factors for each city (See
Column 3, 4, 5 & 6 of Table 5.1) we see that Chandigarh has maximum
rating (90 out of 100) and therefore, Pavan has chosen, Chandigarh for
locating the plant.

Factor rating method – In factor rating method, each of the factors for
location is rated and the rating of the competitive locations is considered.

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Then, the products of the rating are added and the location which gets the
maximum product of rating is selected.
Now, let us consider an example for better understanding the factor rating
method. Table 5.2 depicts the factor rating and location rating of three
locations.

Example 1
Table 5.2: Example of Factor Rating Method

Location Product of
Sl. Factor rating rating
Factor
No. rating
A B C A B C

1 Suitability of labour 6 8 6 5 48 36 30

2 Proximity to suppliers 7 6 9 6 42 56 42

3 Transportation facilities 5 8 7 9 40 35 45

4 Tax advantage 4 3 8 7 12 32 28

5 Power 7 8 6 9 56 42 63

6 Water 6 8 8 8 48 48 48

7 Housing 3 5 7 9 15 21 27

8 Education 4 6 6 8 24 24 32

9 Climate 3 5 9 6 15 27 18

10 Community 3 5 6 5 15 18 15

11 Availability of land 5 6 8 7 30 40 35

12 Owner’s preference 3 4 6 5 12 18 15
Total score : 357 397 398

Column 3 - of table 5.2 shows the factor rating of each factor as

determined by the managers. For example, the factor rating of housing is
determined to be 3. Similarly for remaining factors the manager has listed
the factor ratings.
Column 4 – Location rating, displays the ratings of location A, B, and C
as determined by the managers. For example, for suitability of labour
factor, the manager has rated 8 for Location A, 6 for Location B, and 5 for

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Location C. Similarly, the location rating for remaining factors is listed in

the table.
Column 5 – Product of rating, lists the product of ratings of location A, B,
and C. For example, the calculation of product of rating for the factor
suitability of labour is as follows:
 Product of rating A: Factor rating x Location rating A = 6 x 8 = 48
 Product of rating B: Factor rating x Location rating B = 6 x 6 = 36
 Product of rating C: Factor rating x Location rating C = 6 x 5 = 30
When we add product of ratings of location A, B & C, you can see that
the total of location C got the maximum product of rating, 398, when
compared to A and B.

However, we find that both B and C have almost the same total. In such
cases, personal preference or reconsideration of any of the factors may be
advisable. So, one of these places for setting up the plant is chosen. This
rating method is amenable to the consideration of various other factors
which are relevant for locating the plant. The decision may even be
changed, looking into the expansion programmes or the development of
nearby places, which may be suitable for a particular industry.

Case-let 2
Ravi is planning to start a new industry in India. For locating the plant, he
tabulated the factor rating and the location rating of 2 locations - Goa and
Cochin. Find the best location based on the factor rating method with the
details depicted in table 5.3.
Table 5.3: Factor Rating Approach

Sl. Location factor Factor Rating

No. rating Goa Cochin
1 Facility utilisation 7 3 5
2 Total production per month 4 4 3
3 Tax advantage 7 4 5
4 Land and construction costs 5 1 2
5 Employee preferences 3 5 3

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Solution
Table 5.4 depicts the factor rating of the locations - Goa and Cochin.
Table 5.4: Product Rating

Sl. Location factor Factor Location rating Product of rating

No. rating Goa Cochin Goa Cochin
1 Facility utilisation 7 3 5 21 35
2 Total production 4 4 3 16 12
per month
3 Tax advantage 7 4 5 28 35
4 Land and 5 1 2 5 10
construction costs
5 Employee 3 5 3 15 9
preferences
Total 85 101

The total score for Cochin is higher than that of Goa. Hence location
Cochin is the best choice.

Point rating method - In point rating method, we apportion a fraction of a

suitably selected total rating and see how many points we can allocate to
the locations under consideration. We should compare the totalled ratings
and decide the preference.

Example 2
Consider the data in table 5.5. In column 3, max points, if we decide to
have 1000 points as the maximum possible score considering all factors,
we can then evaluate each location and allocate points. Column 4, 5, 6, &
7 indicates the maximum rating for each factor. By adding the given
ratings for factors of each location, we get 540 for Location A, 670 for
Location B, 690 for Location C, and 745 for Location D. The location
which gets the maximum rating would be chosen, that is, location D is
chosen. Table 5.5 depicts the point rating method used for various
locations.

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Table 5.5: Point Rating Method

Sl. Max Location Location Location Location

Factor
No. points A B C D
1 Proximity to 250 150 120 200 175
suppliers
2 Proximity to 350 200 300 250 250
customers
3 Labour 200 100 150 150 175
availability
4 Educational 100 60 60 30 70
facilities
5 Climate 100 30 40 60 75
Total 1000 540 670 690 745

Case-let 3
A chain of auto components store wishes to build a new distribution
centre to serve the southern region of a country. It is considering three
possible locations namely Gopalpur, Kalyan Nagar and Penwar. Table
5.6 depicts the factors, weights, and ratings being considered. Which city
should they choose?

Table 5.6: Various Factors versus Ratings for Three Locations

Ratings

Factor Weights Gopalpur Kalyan Nagar Penwar

Nearness to 20 4 7 5
markets

Labour cost 5 8 8 4

Taxes 15 8 9 7

Nearness to 10 10 6 10
suppliers

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Table 5.7 depicts the ratings and weighted ratings for the three locations.
Table 5.7: Factors versus Ratings and Weighted Ratings

Ratings Weighted Ratings

Weig- Kalyan Kalyan
Factor Gopalpur Penwar Gopalpur Penwar
hts Nagar Nagar
Nearness 20 4 7 5 80 140 100
to markets
Labour 5 8 8 4 40 40 20
cost
Taxes 15 8 9 7 120 135 105
Nearness 10 10 6 10 100 60 100
to
suppliers
Sum of Weighted ratings: 340 375 325

Therefore based upon the weighted rating, Kalyan Nagar should be

chosen.

Break-even analysis – Every manufacturing company will have three major

contributors to cost:
1. Investments made for land, plant and machinery resulting in interest
and depreciation
2. Recurring expenses, which are not proportional to the quantity of
production
3. Variable costs, which are directly proportional to the quantities
produced
For our calculations, we combine the first two costs together and call them
fixed costs. We call those costs that depend on the quantity of production as
variable costs. (See Figure 5.4 Categories of cost)
We compare the total costs for different locations on estimated amounts per
annum and select whichever location costs the least. However, we will have
to consider the possible variations in production levels during the
foreseeable time spans and take a decision. Figure 5.4 depicts the
categories of cost for every manufacturing company.

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Fig. 5.4: Categories of Cost

It may be noted that what are considered as fixed costs at one time will not
remain so for any length of time, though they are not influenced by the
production volume. For example, the rent may remain constant only for one
or two years and will change later. However for calculation purpose we can
consider the costs as fixed over the planning horizon.
Kote Steel company is considering building a plant in one of three possible
locations. They have estimated the following parameters for each location.
Identify the volume for which each location would be suitable. Table 5.8
depicts the fixed cost versus variable cost for three locations.
Table 5.8: Various Parameters for the Three Locations

Location Fixed Cost Variable Cost

Belladur 300,000 5.75
Kisanganj 800,000 2.75
Shafypet 100,000 8.00

Transition between Belladur and Kisanganj:

300, 000  (5.75 x)  800, 000  (2.75 x)
3 x  500, 000
x  166, 000

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Transition between Belladur and Shafypet:

300, 000  (5.75 x)  100, 000  (8.00 x)
200, 000  2.25 x
88,888  x
Hence from 0 to 88888 units, Shafypet is suitable
From 88888 to 166000 units, Belladur is suitable
From 166000 units onwards Kisanganj would be suitable.
Practice problem
Suvarna enterprises are planning to set up a new plant and are considering
three locations namely Pantnagar, Ganganagar, and Goripara. Table 5.9
depicts the estimated fixed and variable costs. For what range of output
each location will be suitable. If the company has a target volume of units,
which location is best?
Table 5.9: Fixed Cost versus Variable Cost for Three Locations

Location Fixed cost in Rs. Variable cost in Rs.

Pantnagar 200000 50
Ganganagar 400000 30
Goripara 700000 15

Solution
From 0 to 10,000 units, Pantnagar is suitable
From 10,000 to 20,000 units, Ganganagar is suitable
Above 20,000 units, Goripara is suitable.
Centre of gravity method – This method is used mainly when:
 Transportation costs, either for distribution of products or collection of
materials from different suppliers, is the main criterion
 Production rates are high
 The volume and weights of materials that have to be moved are huge
 Time taken, either to receive material from suppliers or delivery to
customers, is critical
It is better to locate the facility at such a place, which caters to the different
points most optimally. The vital factor is the load, that is, number of items, or

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the weights that need to be moved from the central location to the existing
or demanding points. We use this method when, both distance and load
have to be considered for optimality in terms of cost.

Example 3
Table 5.10 depicts the tonnages that would be supplied from five
locations to a plant.
Table 5.10: Loads and Coordinates of Five Locations
Load Coordinates (X, Y)
Location A 2100 (50, 250)
Location B 3800 120,500
Location C 3200 475, 610
Location D 1200 680,370
Location E 2500 470,120
Locate the five places in a graph using the x and y coordinates and then
locate the centre of gravity point P. We will calculate the x and y co-
ordinates of the central location (P) such that the cost of shipment from
such central location gives the minimum cost in the following way:

CX 
L i Xi
CY 
L i Yi
SLi SLi

Table 5.11 depicts the calculations of LX and LY of locations A, B, C, D, &

E.
Table 5.11: Calculating LX and LY

Location Coordinates
(X, Y)
Load (Li) Lx (or) L i Xi Ly (or) L i Yi

Location A (50, 250) 2100 105000 525000

Location B (120,500) 3800 456000 1900000
Location C (475, 610) 3200 1520000 1952000
Location D (680,370) 1200 816000 444000
Location E (470,120) 2500 1175000s 300000
Total 12800 3977500 5121000

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From the respective table 5.11, we get the centre of gravity CX and CY.

CX 
L i Xi
CY 
L i Yi
SLi SLi
3977500 5121000
CX   318 CY   400
12800 12800

Figure 5.5 depicts the graphical representation of all the five locations A, B,
C, D, and E, and centre of gravity point P.

Fig. 5.5: Centre of Gravity Point

Case-let 4

A new facility is going to be established in Bangalore. Customers will

travel from the seven locations to the new facility when they need
service. The co-ordinates for the centre of each location, along with the
projected populations, measured in thousands are given here. Table 5.12
depicts the details of the seven centres and co-ordinate distances along
with the population for each centre. Find the target area’s centre of
gravity for the new facility.

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Table 5.12: Example of Centre of Gravity Method

Sl. No Centres Co-ordinate distances (xi, yi) Population (L)
1 A (3, 4.5) 6
2 B (2.2, 5) 5
3 C (10,4.5) 2
4 D (5,2) 14
5 E (6, 6) 8
6 F (9, 3) 18
7 G (9,4) 15

Solution
To calculate the centre of gravity, first calculate co-ordinates of loads of
each centre (LX, LY). Table 5.13 depicts the tabulated calculations.

Table 5.13: Calculating LX and LY

Sl. No. Centres (x, y) Population (L) Lx Ly
1 A (3, 4.5) 6 18 27
2 B (2.2, 5) 10 22 50
3 C (10,4.5) 2 20 9
4 D (5, 2) 14 70 28
5 E (6, 6) 8 48 48
6 F (9, 3) 18 162 54
7 G (9, 4) 15 135 60
Total 73 475 276

Next we find, the target areas centre of gravity co-ordinates, CX and CY.

CX 
L i Xi
SLi
475
CX   6.5
73

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CY 
L i Yi
SLi
276
CY   3.78
73
The centre of gravity calculated is (6.5, 3.78). Managers can now search
in the vicinity for the optimal location using the centre of gravity as
starting point.
Note: Ranking the factors and giving weight age for them is one of the
ways of determining the plant location. The methods used to determine
the location are ‘rating plan method’, ‘factor rating method’, ‘point rating
method’, ‘break-even analysis’, and ‘centre of gravity method’.

Rating method is largely dependent on the decision maker’s choice of

factors and weights. Hence, it is quite possible that two different persons
may come out with their individual ratings and the ratings may not
necessarily tally with each other.
Break-even analysis on the other hand assumes that in the foreseeable
future the cost value do not change significantly. It also assumes the
relationships to be linear. However, it is well known that the cost values with
higher volumes do not rise in the same proportion.
Self Assessment Questions
1. Location identification for an organisation is an important ________
level decision taken by the top management.
2. Location decisions are made on the basis of parameters which make it
suitable for various considerations of suppliers and markets.
(True / False)
3. Location decisions are important because lands, buildings and
machineries are costly and once fixed cannot be moved easily.
(True / False)
4. The plant should be located near the source of the raw material.
(True / False)
5. The basic modes of transportation should be considered while making
the location decision. (True / False)

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6. In ________ method, the various factors for locating a plant are given
ratings.

5.3 Summary
Let us recapitulate the important concepts discussed in this unit:
 Location identification for an organisation is an important strategic level
decision taken by the top management.
 Location decisions are made on the basis of various parameters.
 Planning the facilities for manufacturing is a very crucial activity
involving, huge amounts of finance and thus requiring top management
decisions.
 The way the machines are laid out is important to achieve the maximum
productivity and minimum movement of materials inside the plant.
 Different types of layouts are considered depending on the variety of
products and their volumes.

5.4 Glossary
 Plant location: The selection of a place for locating a plant; here plant
is the term used for the land, buildings, and equipment used in carrying
on an industrial undertaking.
 Plant location decision: Plant location decision may be understood as
the function of determining where the plant should be located for
maximum operating economy and effectiveness
 Break-even analysis: An analysis to determine the point at which
revenue received equals the costs associated with receiving the
revenue.

5.5 Terminal Questions

1. Explain the significance of plant location decision.
2. State the important considerations for locating an automobile plant.
3. What is the location decision sequence?
4. Describe the general factors that influence the plant location decision.

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5.6 Answers

Self Assessment Questions

1. Strategic
2. True
3. True
4. True
5. True
6. Rating plan
Terminal Questions
1. Refer section 5.1 and 5.2
2. Refer section 5.2.2 and 5.2.3
3. Refer 5.2.3
4. Refer 5.2.2

5.7 Case Study

Indian Companies finding Locations outside India – Tata Steel in
Vietnam
In the last several years Indian companies have shown interest in setting up
plants outside the country to expand their business operations. These
foreign units are set up as joint ventures or established through mergers, tie-
ups, or acquisitions.
Tata Group of Companies, the most respected among the business houses
in India has made its presence across the globe by opening up a production
facility or as a joint venture or subsidiary or associate. The group has also
set up Global Development Centres and R & D Centres at various countries.
Tata Steels is one of the most commonly seen and the oldest company in
the Tata Group. The company is among the top ten steel manufacturers in
the world. It operates in more than 20 countries and has a commercial
presence in over 50.
The company was established in Jamshedpur, India, in 1907. In the past
few years, Tata Steel has invested in Corus (UK, renamed Tata Steel
Europe), Millennium Steel (renamed Tata Steel Thailand) and NatSteel

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Holdings (Singapore). With these, the company has created a

manufacturing and marketing network in Europe, South East Asia and the
Pacific-rim countries. It has the capacity to produce over 30 million tonnes of
crude steel every year.
In the Asian continent, Tata Steels has production facilities at China, Oman,
Thailand, Malaysia, and Singapore. However Tata Steels entry to Vietnam
has been dragged for more than four years. The tripartite venture between
Tata Steel, Vietnam Steel Corporation, and Vietnam Cement Industries is to
develop a steel plant in the coastal province of Ha Tinh, making India one of
the top ten investors in Vietnam. Tata Steel holds a sixty five per cent stake
in this venture and this joint venture is expected to have an output of 4.5
million metric ton a year. The terms of agreement stipulate that through this
venture Tata Steel would have a thirty per cent stake in the Thach Khe iron
mines.
Tata Steel has not yet been able to acquire an investment license and land
clearance for the venture. As per Vietnamese law, the local government has
to bear the cost of land clearance. The investor is not expected to incur this
cost, though as per reports the investor is somehow made to pay for it. This
project requires 725 hectares of land and the cost of getting land clearance
is close to US$200 million. However citing budgetary constraints, the
Vietnamese government is delaying the processing allotting the land and
subsequently the project is yet to take off.
The deadlock over this project has been raised at all bilateral visits between
India and Vietnam in the past four years. This was done most recently at the
India-Vietnam business forum in New Delhi where President Truong Tan
Sang assured that he would look into the matter. According to the political
observers it is more to do with China than any other issue. The Chinese
government has put an indirect pressure that the Indian company should not
be entertained. China considers Vietnam as major destination for Chinese
companies.
(Source: Amruta Karambelkar, “The Curious Case Of Tata Steel In Vietnam –
Analysis”, Written by: IPCS)
(http://www.eurasiareview.com/08122011-the-curious-case-of-tata-steel-in-vietnam-
analysis/).

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Discussion Questions:
1. Should Tata Steel now consider other countries and start negotiating?
2. In the rating method, are “political” factors more relevant than other
factors in developing the overall score of the locations?
3. Will time delays kill profitability?

References:
 Amruta Karambelkar, The Curious Case Of Tata Steel In Vietnam –
Analysis. Written by: IPCS
 Panneerselvam R. Production and Operations Management. PHI
Learning Pvt. Ltd.

E-References:
 http://www.eurasiareview.com/08122011-the-curious-case-of-tata-steel-
in-vietnam-analysis/.Retrieved on 16, December 2011.
 www.ipcs.org. Retrieved on 16, December 2011.
 www.tata.com. Retrieved on 16, December 2011.

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Production and Operations Management Unit 6

Unit 6 Facility or Layout Planning and Analysis

Structure:
6.1 Introduction
Objectives
6.2 Objectives of Layout
6.3 Classification of Facilities
6.4 Basis for Types of Layouts
6.5 Why Layout Decisions are Important
6.6 Nature of Layout Problems
6.7 Redesigning of a Layout
6.8 Manufacturing Facility Layouts
6.9 Types of Layouts
Process layout
Product layout
Group technology layout
Fixed position layout
Hybrid layout
6.10 Layout Planning
6.11 Evaluating Plant Layouts
6.12 Assembly Line Balancing
6.13 Material handling
6.14 Summary
6.15 Glossary
6.16 Terminal Questions
6.17 Answers
6.18 Case-let

6.1 Introduction
In the previous unit, we learnt about the various methodologies used to
select the location of the plant, the flexibility in location choice, the trends
and practices across the globe and also techniques available to determine
the location for a particular type of industry. In this unit we will study about
facility or layout planning and analysis.
Production systems whether manufacturing a product or being responsible
for providing a service need a specific place to carry out their operations.
These systems also need an arrangement of machines, equipment, and

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pathways for people to move. In addition, space is required to store

materials, tools, and other accessories and also to provide necessary
support services like dining, parking of vehicles, resting, health care, and
space to interact with customers. Keeping these diverse requirements a
specific area of space is identified and neatly divided and allocated for
various activities and movements. This arrangement in general is called a
“layout” and represents typically a floor plan and also additional details.
Typically, a layout refers to the arrangement of facilities connected with
production, support, customer service, and other activities. It involves the
physical arrangement of work centers, storage, space for material handling
and movement, utility areas and other essential spaces required for
production and operations.
Plant layout is also defined as the organization of a company's physical
facilities to promote the efficient use of equipment, material, people and
energy
How does a layout differ from a floor plan?
A floor plan refers to two dimensional space; namely length and breadth for
different functional requirements whereas a layout looks at three
dimensional requirements, that is, the layout also looks for utilisation of
volumetric space.
Objectives:
After studying this unit, you should be able to:
 define plant layout
 list and describe the types of layout
 explain the objectives of layout
 describe manufacturing facility layouts
 explain the concept of material handling

6.2 Objectives of Layout

The primary objective of plant layout is to increase productivity and also to
ensure employee satisfaction and lowering the costs. The major objectives
of a good plant layout are:
 Reduced risk to health and safety of employees
 Improved morale and worker satisfaction

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 Increased output
 Fewer production delays
 Savings in floor space - production, storage, and service
 Reduced material handling
 Greater utilization of machinery, manpower, and service
 Reduced inventory-in-process
 Shorter manufacturing time
 Reduced clerical work and indirect labor
 Easier and better supervision
 Less congestion and confusion
 Easier adjustment to changing conditions
 Facilitate the overall production process.
 Minimize material handling costs
 Increase production throughout
 Effective utilization of available space
 Improve employee morale
 Utilize labor effectively
 Avoid unnecessary capital investment
 Provide flexibility
 Reduce in-process inventories

6.3 Classification of Facilities

The facilities in a manufacturing organisation can be classified as follows:
 Production facilities – Workshops, tool room, machine shop, assembly,
heat treatment, painting, testing and inspection.
 Support facilities – Storage, packing, administrative, library, service
centre, reception.
 Employee utilities – Vehicles’ parking, canteen, healthcare, rest room.
 Additional facilities – Conference hall, board room, customer service,
training hall.
The facilities in a service industry are almost similarly developed for various
activities. For example, in an airport the layout consists of:
 Runways for landing and take-off
 Parking area for employees and passengers

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 Cargo area
 Baggage collection and retrieval
 Counters
 Security check area
 Canteens
 Administrative offices
 Storage area
 Health care
 Restrooms

6.4 Basis for Types of Layouts

The type of layout is generally determined by the following:
 Type of product – Different products and services require different
areas for various processes and support functions. For example, an
electronic product manufacturing layout is smaller and simpler compared
to a tractor manufacturing unit.
 Types of production processes – Different production processes
require different size of areas for operations. For example, a machining
process for an automobile component requires a larger area compared
to a sheet punching for a utensil.
 Volume of production – The space requirements are directly
proportional to the volume of production.

6.5 Why Layout Decisions are Important

Layout decisions are important for three basic reasons:
 They require substantial investments of both money and effort
 They involve long term commitments which make mistakes difficult to
overcome
 They have a significant impact on the cost and efficiency of short-term
operations
Further layout once set, may be difficult to change, because layout changes
are resisted by personnel, who would have adjusted to the existing layout
and many times such changes often require them to alter daily routines or to
undergo retraining. Hence, people normally wish to continue with existing

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arrangements. Secondly, making any changes involves substantial

investment in time and money, also disturbs the existing schedule and may
even lead to temporary shutdown of operations till the new layout becomes
fully operational. This eventually leads to loss of revenue for quite some
time.
Many occasions demand a redesign of existing layout both due to
expansion of capacity and due to technical reasons. Most common reasons
for redesign of layouts include the following:
 Inefficient operations (for example, high cost, bottlenecks)
 Accidents or safety hazards
 Changes in the design of products or services
 Introduction of new products or services
 Changes in volume of output or mix of outputs
 Changes in the methods or equipment
 Changes in environmental or other legal requirements
 Morale problems

Self Assessment Questions

1. A _________ represents typically a floor plan and the additional details.
2. The main objective of plant layout is to __________ and also to ensure
employee satisfaction
3. The type of layout is generally determined by the __________,
____________ and ___________.

6.6 Nature of Layout Problems

The kinds of plant layout problems fall into four classes:
 Planning a complete new plant – Arranging all the facilities to work as
an integrated whole. The challenge is when a company goes into
production of a new product or moves to a new area. This is usually
handled by a team of specialists.
 Expanding or moving to an existing plant – Here the buildings and
services already exist posing limitations to the free-hand of the layout
engineer. The problem is, one of adapting the product, facilities, and
personnel of an existing organisation to a different but existing plant.

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This is the time for abandoning old practices and equipment and
changing to improvement methods.
 Rearranging a present layout – This involves new and efficient
methods and equipment. The problem is one of using as much of the
existing facilities as is consistent with new plans and methods. The
problem occurs often with changes in model or style of products or with
modernisation of productive equipment.
 Minor adjustments in existing layouts – Reasons are changes in
operating conditions; changes in design of certain parts, increase in
sales volume, addition of new but similar product, adopting new
equipment, or new conveyor, or inspection changes. All these mean
adjustments are in the arrangement of work areas, personnel, and
material placement. These adjustments present the most frequent layout
problems. Here the layout engineer must build into or onto an existing
arrangement, various improvements without changing the over-all layout
plan and with a minimum of costly interruptions or adjustments to the
existing installation.

6.7 Redesigning of a Layout

There are several reasons as to why a redesigning of an existing layout may
be required. These are as follows:
 Building not suited for requirements
 Product design or process changes made without making necessary
changes in the layout
 Installation of additional equipment without considering relationship to
the existing flow pattern
 Unexplainable delays and idle time
 Stock control difficulties
 Decreased production in an area
 Crowded conditions
 Many people are moving material
 Bottlenecks in production
 Backtracking
 Excessive temporary storage
 Obstacles in materials flow
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 Scheduling difficulties
 Wasted cubic space
 Idle people and equipment
 Excessive time in process
 Poor housekeeping

6.8 Manufacturing Facility Layouts

The layout developed for a manufacturing purpose has to primarily favour
easy and smooth operations to enable the desired level of output. It is
equally important to take into account the possible expansions in volume
and variety of output. In addition, productivity, quality, and safety related
issues are given due importance to ensure the desired output with the
assured quality.
Therefore, factors considered while developing layouts for manufacturing
operations are as follows:
 The required capacity per time period of the facility
 The size, number and sequence of the machines that are necessary
 Technology of the productive processes
 Safety precautions, health care provisions, comfort needs, personal care
needs
 Accommodations for employees
 Building and size constraints
 The expected growth trends of the organisation
 The size, shape, weight, bulkiness, fragility, and other characteristics of
the material.

6.9 Types of Layouts

The four basic varieties of layouts for manufacturing facilities are:
 Process layout
 Product layout
 Group technology layout
 Fixed position layout

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6.9.1 Process layout

This type of layout is concerned with the grouping of machines, process, or
services according to their function. This grouping of machines by function is
characteristic of job shops and batch type production facilities. Hence this
type of layout is also called as functional layout. Process layout typically
uses general purpose machines that can be changed over rapidly to new
operations for different product designs.
Consider a car service and repair centre. There may be several
departments or functional areas which are arranged based on space and
technical requirements like number of persons working, machines installed,
number of vehicles coming on an average, and other requirements. Each
car entering into the service centre will follow the following steps:
 Arrival at office
 Customer informs about the type of problem
 Front office guides the customer to drive the car to the required
departments
 Car is given the necessary service
 Customer returns to front office and makes payment
 Car exits from the service centre
Figure 6.1 depicts the various departments in a car service centre.

Fig. 6.1: Car Service Centre

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6.9.2 Product layout

Product layout commonly referred to as 'line layout', focuses on the
sequence of production or assembly operations required for manufacturing
or assembling a part or a product. These are used in mass or continuous
production. Examples are automobile assembly, cement manufacturing, oil
refining.
In contrast to process layouts, they are not flexible as they are specifically
designed for making or assembling one product. These layouts typically use
specialised machines that are set up once to perform a specific operation for
a long period of time on one product. Figure 6.2 depicts the various
machines in a component manufacturing layout.

Fig. 6.2: Component Manufacturing Layout

6.9.3 Group technology layout

In group technology, machines are grouped into a cell. The cell acts like a
product layout which is land within a larger process layout environment. It
requires that each cell process is a family of parts that have many common
characteristics, such as machining operations, similar machine set - ups and
common raw materials. Due to these common characteristics, the parts can
be produced in a different path through a cell much like a product layout.
Figure 6.3 depicts the facilities arrangement in a group technology layout.

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Fig. 6.3: Facilities Arrangement in a Group Technology Layout

(Source: tutor.com)

6.9.4 Fixed position layout

In this type of layout, the product is located in a fixed position and all the
resources like workers, materials, machines and equipment's are
transported to that location. Missile assembly, large aircraft assembly, ship
construction and bridge construction are examples of fixed-position
layouts. These layouts are used when a product is bulky, large, heavy or
fragile. These minimise the amount of product movement required.
Figure 6.4 depicts a large aircraft assembly.

Fig. 6.4: Aircraft Assembly

6.9.5 Hybrid layout

Most manufacturing facilities use a combination of layout types. For
example, one may basically adopt a process layout with one section of the
facility using an assembly line, or vice versa. Such combinations of layouts
are called hybrid layouts.

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6.10 Layout Planning

When to select product layout or process layout?
Table 6.1 depicts certain factors and logic that we go by while designing the
type of layout.
Table 6.1: Differences between Product and Process Layout

Product layout Process layout

1. Mass production of one product 1. A large variety of' products with low
or similar types of products to medium demand
2. Standardised product with little 2. Emphasis is on special orders or
or no design changes products having significant and
frequent design changes
3. Possibility of achieving good 3. Difficult to achieve good equipment
equipment and labour balances and labour balances
4. Minimum requirement of in- 4. Many inspections are required in a
process inspection sequence of operations
5. Use of special purpose 5. Use of general purpose machines
machines
6. Materials or products permit 6. Materials or product are too large or
bulk or continuous handling by heavy and used in small quantities
mechanical means
7. The same machine or work 7. Frequent need to use the same
station is seldom used for more machine or work station for two or
than one operation more different operations
8. Production of stock i.e. for 8. Production for individual orders
steady demand
9. Movement of equipment is 9. Expensive machinery which is
generally not very costly costly to move is involved

When to use Fixed Position Layout:

This type of layout is preferred when
 The operation or process requires only hand tools and/or simple or light
machines
 The cost of moving major components is very high
 There is a demand for skill
 Production of product is only at specified times

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As stated in Systematic layout planning by Muther R. (1984), there are

four levels of detail in a plant layout design:
 Site layout – shows how the building should be located
 Block layout – shows the sizes of departments in buildings and their
relative location
 Detailed layout – shows the arrangements of machines and
workstations in the departments
 Workstation layout – shows locations of every part of the workstation
There are essentially two types of approaches in designing a new layout. In
the first method; the departments or functional areas to be located adjacent
or non-adjacent are identified, using a closeness rating suggested by
Richard Muther. In the second method; the total distance traveled becomes
the focal point, and the departments are organised essentially to minimise
the total distance traveled by materials and or by people.
According to Richard Muther’s, simplified systematic layout planning,
following steps are suggested for developing new layouts:
 Chart the relationships
 Establish space requirements
 Diagram activity relationships
 Draw space relationships
 Evaluate alternative arrangements
 Detail the selected layout plan
The closeness between pairs of departments is based on the following
criteria:
 Departments use same equipment or facilities
 Departments share the same personnel or records
 Common sequence of work flow in the departments
 Ease of communication
 Similar work performed
Closeness is avoided if departments:
 Have unsafe or unpleasant conditions
 Operations in one department disturbs the neighboring department
The “closeness rating” is expressed using a letter code and later converted
to a number to simplify the calculations.
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Example 1
The letter codes stated here help to express the degree of closeness
between two departments taken as a pair:
A – Absolutely necessary = 16
E – Essential or especially important = 8
I – Important = 4
O – Ordinarily important or okay = 1
U – Unimportant = 0
X – Undesirable = -80
The example here is taken from www.resourcesystemconsulting.com.
Figure 6.5 depicts the closeness ratings given using a special chart known
as REL chart.

Fig. 6.5: Present Layout

Figure 6.6 depicts an improved arrangement of the layout.

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Fig. 6.6: Improved Rearrangement

Figure 6.7 depicts the improvement appreciated by converting the closeness

codes into mathematical scores.

Fig. 6.7: Closeness Codes Converted into Mathematical Scores

Figure 6.8 depicts the current layout and proposed layout with mathematical
scores.

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Fig. 6.8: Current Layout versus Proposed Layout

Example 2
Consider six departments numbered 1 to 6 and the closeness rating as
depicted in Figure 6.9.

Fig. 6.9: Six Departments with the Closeness Rating

To start with, highest priority is given for two ratings namely A and X. Hence
the departments with these ratings are listed separately.

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“A” rating: 1-2, 1-3, 2-6, 3-4, 4-6, 5-6

“X” rating: 1-4, 3-4, 3-6
Assuming a 2 (rows) by 3 (columns) grid for the department configuration,
the following solution is generated as depicted in table 6.2:
Table 6.2: Solution for the Department Configuration

Department configuration Solution

1 2 6
3 5 4

6.11 Evaluating Plant Layouts

A layout once developed must be evaluated for its effectiveness or
efficiency. No one measure of success can be identified for this purpose and
to a large extent several measures may have to be used to evaluate or
compare layouts. Each layout problem is quite unique and hence, there is
no general procedure readily available which can be used for evaluating a
layout. For instance, in a case where material handling is the primary
problem in establishing a new layout, total distance moved by a product
could perhaps be considered as a measure of effectiveness. One overall
measure that is often used is the return on investment.
Techniques for evaluating layout may be generally classified as:
 Systematic
 Optimising .
Systematic technique provides an organised approach to selecting the best
layout whereas the optimising techniques enable the determination of a
solution which is the best.
The following methods are applicable:
 Cost comparison
 Productivity evaluation
 Space and/or volume utilisation evaluation
One common technique that is helpful in determining the magnitude of
product flow is the materials handling between departments. The tool is
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called the travel chart or the load-distance matrix, which assists in designing
a new layout and valuating a layout.
A typical travel chart will show; how many items or how much material is
being transported or how many people are moving between departments,
and it is necessary to find out what is the corresponding total time or
distance. This is usually done by multiplying the load by the distance
traveled and is used as a measure to evaluate the layout. Typically called as
the load x distance analysis, it also helps to find busy routes and also
indicates how much of backward movement or reverse flow takes place in
the given layout. Table 6.3 depicts
Table 6.3: Travel Chart
To: A B C D E
From
A 15 20 6
B 3 12 14
C 20 10 6
D 18 4 12
E 14 18
All diagonal elements will be zero indicating nothing can go to a department
from the same department. For example from A to A it is zero units
transported. The values above the diagonal indicate the movement in the
forward direction, and the values below the diagonal represent possible
back tracking and attempt should be made to eliminate or minimise this. The
units or numbers used in the travel chart represent an amount of material
handling for example, pallet loads per day, frequency of trips, etc. The
calculation procedure enables the evaluation of different layouts; to find out
the total load times, the distance for each layout, and the results are
tabulated. It is to be remembered that while the load remains the same the
other variable namely; the distance keeps depending on the relative location
of the departments. In a linearly arranged layout as depicted in the
figure 6.10, the distance increases as the departments are added.

A B C D E
Fig. 6.10: Linearly Arranged Layout

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How are the distances measured?

The department or area identified for each operation is assumed to be
rectangular in most of the cases though this may not be the case always.
Rarely irregular shapes may also be encountered. Firstly, in all the cases
the distance from one room or one department to another room or
department is measured from geometrical centre to geometrical centre, as
the average distance considering the various possible locations within the
given area. Secondly, the distances are always assumed to be along the
straight paths, and the travel is along the straight (rectilinear) direction only
disregarding diagonal movements though possible in some cases. Further,
in many cases, it is assumed that the departments are all of the same size
to simplify the measurements and the calculations.
Two data tables are usually provided to calculate the load-distance values.
One table gives the load or quantity moved between the departments and
other table or figure gives the distances.
Example 3
A small workshop has four departments A, B, C, and D, each measuring
10 metres by 10 metres. The initial layout is depicted in figure 6.11. The
number of trips between each pair of departments is: A and B = 50, A and
C = 20, A and D = 30, B and C = 10, B and D = 25, and C and D = 40.
1. Determine the total load distance in the given layout.
2. Suggest one improved layout, which is the total load distance for this
layout should be less than the total load distance of the original layout.

10 A B

10 C D
10 10

Fig. 6.11: Initial Layout

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Table 6.4 depicts the load x distance between various departments.

Table 6.4: Distance between various departments

Between Load Distance Load X Distance

A and B 50 10 500
A and C 20 10 200
A and D 30 20 600
B and C 15 20 300
B and D 20 10 200
C and D 40 10 400
Total 2200

From the calculations it is clear that two major values namely 600 and 500
are between A and C, and A and D. A and C are adjacent and hence, C and
D will be interchanged to make A and D adjacent to each other. Then the
resultant layout will be as depicted in the figure 6.12.

Fig. 6.12: Resultant Layout

Again the load-distance calculations are carried out and the results are
depicted in the table 6.5.
Table 6.5: Long Distance Calculations
Between Load Distance Load X Distance
A and B 50 10 500
A and C 20 20 400
A and D 30 10 300
B and C 15 10 150
B and D 20 20 400
C and D 40 10 400
Total 2150

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We notice that the total load distance has decreased from 2200 to 2150 and
hence, this change is justifiable.
Example 4
Four departments A, B, C, and D are to be located in four rooms marked 1,
2, 3, and 4 as depicted in the figure 6.13. The centre to centre distance
between adjacent rooms is 20 feet. The flows between the departments are
as depicted in the table 6.6. The supervisor, Mr. Jeff wants department B to
be in Room 2 only. Obtain the layout satisfying this condition and find the
total cost of movement?
Suppose Mr. Jeff agrees to give up his choice and wants a layout with the
minimum total cost of movement, what will be the new layout and its total
movement cost? What improvement do you see?

1 2 3 4
Fig. 6.13: Layout
Table 6.6: Flow between Departments in Units

To → A B C D
From ↓
A - 25 30 20
B - - 15 25
C 35 - - 50
D 40 - - -

Example 5
Six departments marked A, B, C, D, E, and F are to be located in six
production areas marked 1, 2, 3, 4, 5 and 6. The quantity moved between
the departments is depicted in the table 6.7. Obtain the layout that
minimises the total distance traveled. The adjacent departments are located
at a distance of 1 unit (say equal to 20 feet). Figure 6.14 depicts the six
production areas.
1 2 3
4 5 6
Fig. 6.14: Six Production Areas

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Table 6.7: Quantity Moved between Departments

From – To A B C D E F
A 50 100 20
B 30 50 10
C 20 100
D 50
E
F

Answer: Figure 6.15 depicts the optimum solution.

A C F
B D E
Fig. 6.15: Optimum Solution

The total load X distance is = 490 units

6.12 Assembly Line Balancing

Assembly line refers to a special arrangement of facilities typically along a
straight line or a u-shaped line, exclusively to produce assemblies or
finished products. The assembly starts in the form of a skeleton at one end
and passes through several “work stations” where; different operations are
performed and components are added, and the final assembly is obtained
after passing through successive stages. The line is arranged so as to
produce a specified number of products over a certain time period. To
facilitate easy mounting of components and fast operations, the assembly
moves at certain speed and rolls over at the end of the line.
Concept of line balancing
A simple line (typically set up for the purpose of assembly) consists of a
series of work stations, and the total work content of the product, which is
expressed in terms of the total time is divided among these workstations
equally. For example, consider five operations performed at A, B, C, D, and
E. Each one can be a workstation or more than one operation can be
combined at a single workstation. In a simple line like this it is easy to
visualise the flow and also to make out the work allocation. Figure 6.16
depicts a simple line flow indicating the work stations.

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Fig. 6.16: Simple Line Flow Indicating the Work Stations

As the items move along the line, the work is progressed intermittently and
leaves the line as a finished product. Typically the objective is, to divide the
work content equally among the workstations so that the workstations are
loaded as evenly as possible. This is known as balancing. Firstly, if such a
balance is not achieved, a certain amount of inefficiency will arise because
some stations will have more work to perform than others, and all the
stations are expected to process same number of items per period of time.
Secondly, unequal work content at different workstations leads to unequal
work distribution and also formation of queue of items. Hence, to ensure a
smooth flow, all the workstations are given the same time to process the
items. The entire line typically, on a manual or power-driven conveyor
moves from workstation to workstation at a constant rate.
The time required to complete the work allotted to each station is known as
the “service time” and the time available at each station is known as the
“cycle time”, normally longer than the service time. The cycle time includes
both the productive as well as the non-productive time along with idle time if
any. Non productive time includes time for movement, handling and
inspection time. The manner in which the work content is allocated to the
station is influenced by the technological sequence of the assembly and
expressed by precedence requirements, that is, one operation must be
completed before the other operation can start. Such constraints limit the
ability to achieve complete or perfect balance while allocating work to
stations.
The allocation of work elements to a workstation may also be influenced by
“zoning” constraints which occurs in two ways: positive zoning constraint
demands that certain operations have to be clubbed together because of
certain sharing of resources, and negative zoning which insists that certain
operations should be clubbed together because of interference or conflict.
All these constraints make it very difficult or impossible to achieve perfect
line balance and hence, a certain amount of balancing delay or balancing
loss is inevitable. Balance delay is defined as the total time available to

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complete the given job and the total time required. In other words, the
balance delay is the difference in time between the service time and the
cycle time, expressed as a percentage of the cycle time.
The objective of line balancing is that, given a desired cycle time, the
attempt is to assign work elements to workstations to:
 Minimise idle time or balancing delay
 Minimise the number of work stations
 Distribute balancing delay evenly between stations
 Avoid violating any constraints
As it is difficult to achieve all these objectives simultaneously at least one
objective has to be satisfied. Based on this premise, several researchers
have proposed different heuristic methods to realise the desired goal.
Discussing all the different approaches is beyond the scope of this topic and
hence a few methods are illustrated.
Several calculations are involved in line balancing. The different terms and
corresponding calculations are stated here as follows:
Cycle time, C

1
C=
r
Where, c = cycle time in hours per unit, and r = desired output rate in units
per hour
Theoretical minimum number of workstations:

TM =
t (to be rounded up)
c

Where, t  total time required to assemble each unit, and c = cycle

time

Idle time  nc   t

Where, n = number of stations, and c = cycle time

Total time required to assemble oneunit  t=

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(%) Efficiency=
 t 100 
nc
Balance delay (%) = 100 – Efficiency
Assigning the operations or tasks to workstations is based on heuristics as
given here:
 Longest task time – Choose the available task with the longest task time
 Most following tasks – Choose the available task with the largest
number of following tasks
 Ranked positional weight – Choose the available task for which the sum
of following task times is the longest
 Shortest task time – Choose the available task with the shortest task
time
 Least number of following tasks - Choose the available task with the
least number of following tasks
Practice problems (Ref: Heizer and Render (2008) Operations
Management)
An assembly line is to operate eight hours per day with a desired output of
240 units per day. Table 6.8 depicts the task times and precedence
relationships.
Table 6.8: Task Times and Precedence Relationships

Immediate
Task Task time (seconds)
predecessor
A 60 None
B 80 A
C 20 A
D 50 A
E 90 B, C
F 30 C, D
G 30 E, F
H 60 G
Draw the precedence diagram. What is the cycle time? Balance this line
using the “longest task time” rule. Find the efficiency and the balance delay.

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First we draw the precedence diagram. Figure 6.17 depicts the precedence
diagram.

Fig. 6.17: Precedence Diagram

Cycle time c = production time per day/ required output per day
= (8 hour/day) (3600 seconds / hour) / 240 units per day =
120 seconds per unit
After drawing the precedence diagram, the next step is to assign the tasks
to the workstations. First we calculate the theoretical minimum number of
workstations as follows:
Minimum number of workstations n = total task time / Cycle time
= 420 / 120 = 3.5 or rounded as 4 (Workstations cannot be a fraction)
Now using this number of workstations the tasks have to be assigned
without violating the precedence relationships. Furthermore, in each
workstation the total task time cannot exceed the cycle time.
Starting from workstation 1, task A has a task time of 60 seconds and can
only be clubbed with another task such that the total time doesn’t exceed
120 seconds.
A + B = 60 + 80 = 140 (Not feasible because exceeds 120)
A + C = 60 + 20 = 80 (Feasible)
A + D = 60 + 50 = 110 (Feasible)
Between the two feasible combinations, A + D is selected using the rule
“longest task time”.
Similarly, other tasks are assigned and line is balanced. The final allocation
of tasks to the four workstations is depicted in the Table 6.9.

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Table 6.9: Final Allocation of Tasks to the Work Stations

Work station Task Task time Idle time

A 60
I
D 50 10
B 80
II
C 20 20
E 90
III
F 30 0
G 30
IV
H 60 30

The workstations are marked in the precedence diagram also as depicted in

the Figure 6.18.

Fig. 6.18: Precedence Diagram

The Efficiency=
 t 100  = 420
= 0.875 or 87.5%
nc 4(120)
And balance delay = 1- Efficiency = 1- 0.875 = 0.125 or 12.5%

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Activity 1
The desired output for an assembly line is 360 units which operates 450
minutes per day. Table 6.10 depicts information about task times and
precedence relationships. Draw the precedence diagram. What is the
cycle time? Balance this line using the “largest number of following
tasks” rule. Find the efficiency.
Table 6.10: Task Times and Precedence Relationships
Immediate
Task Task time (seconds)
predecessor
A 30 None
B 35 A
C 30 A
D 35 B
E 15 C
F 65 C
G 40 E, F
H 25 D, G

6.13 Material Handling

In a typical manufacturing organisation, apart from the people it is the flow of
materials in various forms that will be moving through the layout, as the
materials undergo different types of processing. Traditionally materials in a
manufacturing environment are classified as (1) raw material, (2) work-in-
process or semi finished goods, and (3) finished goods. It is very common to
see these materials being moved from place to place either manually or by
power driven equipment. Due, to the volume and variety today it is very
common to see the materials being moved through automated systems
along guided paths. They are even remotely controlled and monitored. Any
layout that is designed for manufacturing operations; should take into
account the required material handling, and movements, and accordingly
provide the necessary space and convenience for the people to handle the
same. In addition, safety and speed of movement should also be
considered. Further, enough space may be necessary in between the
workstations for temporary storage and subsequent movement. With space

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becoming a major concern, it is necessary that material handling might be

done in limited space with a critical look on safety and efficiency issues. In
addition, due to developments in technology, a wide variety of material
handling equipment is available in the market and hence, the production
managers have to make a careful choice to minimise capital investment and
reasonable returns.
Selection and types of material handling equipments
Following are the types of equipments that help us in bringing efficiency to
the process:
1) Horizontal travel: Horizontal travels are in the aisle. The picker is a
worker, who walks or rides a vehicle, and picks the item or product, and
puts into the cart or vehicle. He/she may also pick and place the item on
a conveyor. The storage system could be one of the following:
 Pallet racks
 Shelves
 Storage drawers
 Gravity flow racks
The pallet racks can have only one or two levels.
2) Person aboard: In person aboard system, the picker is on a platform of
the vehicle. He/she can move up and also horizontally along the aisle.
3) Part to picker: Part to picker is a mechanised system. Here a
storage/retrieval device carries the trays or bins to the person picking.
These act on the instructions received through a remote control device
with the picker. More than one picker can also access the system.
4) Special equipment: For high throughput and space efficiency, special
equipment are made which are in the form of:
 Moveable shelves
 Rotary racks
 Mobile shuttles that travel in lanes
 Automatic item picker which has dispensing mechanisms that eject
items on a conveyor belt
5) Workplace equipment – Items can be kept on a work bench and be
picked up. The carts are also used to keep items for being picked up.

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It should be noted that any of the systems described above have to suit the
purpose and economies that can be derived. Before implementing any of
these, a detailed study of alternatives, a plan for expansion or reduction in
the requirement of a particular product or a probable shifting of the location,
etc will have to be undertaken.
Some of the factors affecting the selection of equipment are listed here:
(See Figure 6.19)
Material properties
 Size, weight and nestability
 Carton counts, pallet counts
 Value
 Fragility
 Environment – temperature, humidity
System requirements for the product
 Volume per product
 Number of order to be shipped
 Response time
 Supporting processes – labelling, pricing
 Growth factors
Economic factors
 Investment required
 Project life
 Rate of return

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Figure 6.19 depicts the factors affecting the selection of equipment

Fig. 6.19: Factors Affecting the Selection of Equipment

Self Assessment Questions

4. A _________ layout is concerned with the grouping of machines,
process, or services according to their function
5. In group technology, machines are grouped into ________.
6. Missile assembly, large aircraft assembly, ship construction and bridge
construction are examples of _________ type of layouts.

6.14 Summary
Let us now summarise the key learnings of this unit:
 A layout refers to the arrangement of facilities connected with
production, support, customer service, and other activities
 The primary objective of plant layout is to increase productivity and also
to ensure employee satisfaction and lowering the costs.
 The type of layout is generally determined by the type of product,
volume of production and types of production process.
 The layout developed for a manufacturing purpose has to primarily
favour easy and smooth operations to enable the desired level of output
 Process layout is concerned with the grouping of machines, process, or
services according to their function.

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 Product layout focuses on the sequence of production or assembly

operations required for manufacturing or assembling a part or a product
 Any layout that is designed for manufacturing operations; should take
into account the required material handling, and movements, and
accordingly provide the necessary space and convenience for the
people to handle the same

6.15 Glossary
 Process: Set of activities to accomplish a task
 Work station: Assigned location for an employee to perform his or her
job, and which is equipped with all the required tools and facilities.

6.16 Terminal Questions

1. What are the objectives of layout?
2. Why layout decisions are considered crucial in a plant design?
3. Why redesign of layouts may be necessary?
4. How do you classify the layouts?
5. What do you understand by “line balancing”? What happens if balance
doesn’t exist?

6.17 Answers

Self Assessment Questions

1. Layout
2. Increase productivity
3. Type of product, volume of production, types of production process
4. Process layout
5. Cells
6. Fixed-position
Terminal Questions
1. Refer to section 6.2
2. Refer to section 6.1 and 6.4
3. Refer to section 6.7

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4. Refer to section 6.9

5. Refer to section 6.12

6.18 Case-let
Layout in a seminar hall
Seminar halls are very commonly constructed as a part of the academic
building in universities and institutes of higher learning. The seating capacity
may vary from 50 to 300 and typically people gather to listen and discuss
topics of common interest. They may also be used to conduct training. Here
the most important point is the convenience for the speaker and also the
participants. Because nowadays, the sessions are more interactive in nature
rather than monologues from one speaker, it is necessary that the layout is
carefully set.
Discussion Question:
1. What are the reasons for redesigning the layout in a seminar hall?

References:
 Heizer, J. & Render, B. Operations Management, 10th Edition, Prentice
Hall, USA.2010.
 Krajewski, L. J. & Ritzman, L.P. Operations Management: Strategy and
Analysis, 6th Edition, New Delhi: Pearson Education Asia, 2005.
 Gaither, N. Production and Operations Management: Problem Solving
and Decision Making Approach, 4th Edition. - Chicago: Dryden Press,
1990.
 Chase, R.B., Jacobs, R.F. & Aquilano, N.J. Operations Management for
Competitive Advantage, 10th Edition – New Delhi: Tata McGraw-Hill
Publishing Company Limited, 2003.

E-Reference:
 www.resourcesystemconsulting.com.

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Production and Operations Management Unit 7

Unit 7 Total Quality Management

Structure:
7.1 Introduction
Objectives
7.2 Meaning and Dimensions of Quality
Dimensions of quality
Systems view of quality
7.3 Quality Control Techniques
Quality at the source
Quality control tools
Acceptance sampling
7.4 Quality Based Strategy
7.5 Total Quality Management (TQM)
Approaches to total quality management
7.6 Towards TQM – ISO 9000 as a Platform – Working with Intranet
7.7 Total Productive Maintenance (TPM)
7.8 Summary
7.9 Glossary
7.10 Terminal Questions
7.11 Answers
7.12 Case Study

7.1 Introduction
In the previous unit, facility or layout planning and analysis, we studied
about a layout which refers to the arrangement of facilities connected with
production, support, customer service, and other activities. It involves the
physical arrangement of work centres, storage, space for material handling
and movement, utility areas and other essential spaces required for
production and operations. In this unit, total quality management, we will
study about the definition of quality and quality control as a system. We will
also study about quality control techniques, quality based strategy and total
quality management.
Quality has become a very important aspect of operations management and
even regarded as a critical success factor. Producing the items in required
quantities at the right time is not enough to satisfy the customers as

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customers demand that quality be incorporated in the product and in the

service that goes along with it. Without quality every other thing loses
relevance. Thus, quality is a strategy for survival and for improving the
position and share in the markets. Quality is a strategy to enter a market or
to compete with existing manufacturers. Quality is the foundation for
achieving customer’s satisfaction and brands get created only due to high
quality.
Following are the important aspects which improve the quality of a product:
Performance and services – The basis of quality lies in the performance of
the product and the perception of service. The ingredients or components
which improve the performance of the product have to be built into the
design processes and operations. Also, proper care has to be taken while
delivering services either independently or as a part of the product.
 Identifying defects – Statistical tools are used to identify sources of
defects in the processes. They are eliminated in a systematic method,
keeping records of the improvements. Every opportunity to improve the
system is used. Identifying the defects at the operating levels even
before they occur improves the performance and the quality of the
product. This encourages involvement and commitment, which are
essential for improving quality on a continuous basis. This helps the
organisation to get better feedback from the customers.
 Efficiency – As cost and value for money has become a major
dimension of customer satisfaction, efficiency has to be built in all
operations. Production, material handling, maintenance, marketing,
packaging, supply chain, and after sales service have to become
efficient by adopting quality policies.
 Innovation – Innovation has become vital to the development and
progress of the organisations. This enables an organisation to aspire to
be a leader in its field. This is possible with commitment for quality
across all functions and all activities of the organisation. The principles
involved and the processes implemented to achieve them, form the part
of the study of total quality management.
 Certification – Certification is another aspect of quality as it gives public
recognition to the company’s attainments. It improves consistency in

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compliance to the processes and improves performance of the

employees. As measurements and observations are made by a
competent and neutral body, namely, the certification agency, the
implementation of quality systems are seen to be transparent.
Objectives:
After studying this unit, you should be able to:
 define “quality”
 explain the importance of quality
 explain the dimensions of quality
 illustrate the different methods by which quality is sought to be achieved
using various tools and techniques
 recognise the concepts of total quality management
 describe the concept of total productive maintenance

7.2 Meaning and Dimensions of Quality

“Quality” has been defined in many different ways and as such there is no
commonly agreed definition of quality. Different experts and “gurus” have
given definitions based on their observations, experience, and philosophies.
While some definitions are simple and easy to understand, some definitions
appear to be elaborate and comprehensive.
As per ISO 9000 standards, quality is defined as “totality of characteristics
and features of a product/service that bear on its ability to satisfy the stated/
implied needs”. This definition is now used in all industry and business
related activities.
As stated by the Chartered Quality Institute, UK, in its broadest sense,
quality is a degree of excellence: the extent to which something is fit for its
purpose.
In the narrow sense, product or service quality is defined as follows:
 conformance with requirement
 freedom from defects or contamination or
 a degree of customer satisfaction.
In quality management, quality is defined as all of the characteristics of a
product or service that affect its ability to do its stated and implied functions.

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7.2.1 Dimensions of quality

Quality is inherent in the product or service that is rendered to the customer.
Since we are attempting to measure the same, we will look into those
aspects of quality, called dimensions of quality. (See Figure 7.1 for
Dimensions of quality)
 Quality of design – A product is designed keeping in view the
customers’ requirement. For designing a product, the manufacturer or
service provider should be aware of the specifications of different
features required to incorporate in the product. Some of the features to
be known for designing a product include – material, dimensions, and
characteristics. The quality of the product is introduced by the design of
these features. Inspection of the manufacturing processes is of utmost
importance in ensuring quality of performance.
 Conformance to design – Conformance to design is the degree to
which the manufactured product or delivered service meets the
parameters that have been incorporated in the design. It verifies that the
variability in the process is within acceptable limits so as not to
compromise the functionalities that the designer wanted.
 Utilisation conditions – Utilisation conditions refer to the necessity of
the customer being informed or trained so that, the purpose for which the
product was made is realised by the customer in total, thus enhancing
the customer’s satisfaction. Instructions, manuals, help-lines, and on-site
training by the manufacturers’ personnel improve the perception of
quality.
 After sales service – There are so many reasons why products do not
function to the expected levels. It may be improper use, unexpected or
additional demands, improper assembly or even manufacturing defects.
There is a need to rectify these and make products or services perform
up to the expected standard. The firm should put in place a system by
which these possibilities are anticipated and attended to give customer
satisfaction. This is an important, but often neglected dimension of
quality. Figure 7.1 depicts the various dimensions of quality.

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Fig. 7.1: Dimensions of Quality

7.2.2 Systems view of quality

A system consists of a number of elements which have specific functions of
their own. They give support and receive support from one another to
deliver outputs. Structure, organisation, hierarchies, and integration go to
make it effective. To make the system efficient, design ensures that
information flow, feedback and monitoring takes place. Quality control is
exercised mainly by two methods – design and process.
 Design – Designing the equipments, processes, manufacturing
methods, and technologies to ensure that quality parameters are
obtained without fail. Robustness is built into all aspects so that the
inputs or extreme working conditions do not affect the quality
characteristics.
 Process – Variability is inherent in any process. All processes have
equipments, tools, methodologies, movements, facilitating goods, and
people who have their behaviours exhibited depending on their
knowledge, skills, and abilities. To anticipate and plan for their proper,
designed performance within the permissible deviations so as not to
affect quality is the mechanism for assuring quality. Procedures have to
be established, data collected, evaluations made available at all nodal
points, for dissemination of information for implementing actions
necessary, to monitor the variables and bring them to acceptable levels.
This is the quality control system.

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Self Assessment Questions

1. ___________ is inherent in the product or service that is rendered to
the customer.
2. As per ISO 9000 standards, quality is defined as “totality of
characteristics and features of a product/service that bear on its ability
to satisfy the stated/ implied needs”. (True / False)
3. ____________ is the degree to which the manufactured product or
delivered service meets the parameters that have been incorporated in
the design

7.3 Quality Control Techniques

Quality control techniques are specific activities and procedures adopted
using data, for determining a particular aspect of quality to arrive at
decisions which are conclusive. Each technique developed and tested by
senior personnel or consultants will be simple enough to be understood,
implemented, and interpreted by the personnel for their immediate use. The
techniques to be used, the criteria to be adopted and the way of interpreting
data are handed over to them for use. Some of the quality control
techniques are:
 Quality at the source
 Quality control tools
 Acceptance sampling
7.3.1 Quality at the source
The concept of quality makes the production worker responsible for
inspecting his/her own work and for taking corrective actions. Since
inspection is done immediately after a job is done, finding the cause of the
error with clarity aids in faster rectification.
Every worker has the authority to stop production, if he/she finds some
serious defect. This puts responsibility for quality on the workers and gives
them pride in their work. Help should always be available from the quality
control personnel to help workers understand the implications of the above
actions. This brings in cooperation and improves the achievement of quality.
The information generated may be used to effect improvements at the
suppliers’ end also. The entire process brings in openness, commitment,
participation and helps in achieving quality.
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7.3.2 Quality control tools

The most popular and widely used tools are called as 7 QC tools. These
include flow chart, check sheet, histogram, pareto analysis, scatter diagram,
control chart, and cause and effect diagram. These are the basic seven
quality control tools used for achieving or improving quality. Figure 7.2
depicts the quality control tools.

Fig. 7.2: Quality Control Tools

1) Flow chart – Flow chart is a visual representation of a process showing

the various steps. It helps in locating the points at which a problem exists
or an improvement is possible. Detailed data can be collected, analysed,
and methods for correction can be developed using flow charts. The
various steps include:
 Listing out the various steps or activities in a particular job
 Classifying them as a procedure or a decision
Each decision point generates alternatives. Criteria and consequences
that go with decisions are amenable to evaluate for purposes of
assessing quality. The flow chart helps in pin-pointing the exact points at
which errors have crept in.

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Figure 7.3 depicts a sample flow chart.

Inspect Inspect
Open Open Pack

Reject Reject

Fig. 7.3: Sample Flow Chart

2) Check sheet - Check sheets are used to record the number of defects,
types of defects, locations at which they are occurring, times at which
they are occurring, and workmen by whom they are occurring. The sheet
keeps a record of the frequencies of occurrence with reference to
possible defect causing parameters. It helps to implement a corrective
procedure at the point where the frequencies are more. Table 7.1 depicts
a sample check sheet.
Table 7.1 Sample Check Sheet
No. of
Defects 1 2 3 4 5
Day

1 // /// /// ///// //

2 / //// /// //// ///
3 // ////// //// // //
4 // //// /// // //
5 /// ////// /// / ///
6 // //// /// /// //

The table shows that the number of defects 1 and 5 are not many as
compared to defect number 2 which increased over the days and appears to
be stabilising at the higher side and therefore needs to be attended
immediately. The column which shows days can be changed to observed by
the hour, if need be. A check list is a special type of check sheet which
enables to provide a set of standardised activities or actions to be taken up
while performing a task and to ensure quality.

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3) Histogram – Histograms are graphical representations of distribution of

data. They are generally used to record huge volumes of data about a
process. They reveal whether the pattern of distribution has a single
peak, or many peaks and also the extent of variation around the peak
value. This helps in identifying whether the problem is serious. The
various types of visual patterns have been established along with
relevant interpretations which help us to identify the problem. Figure 7.4
depicts a sample histogram chart.

100
90
80
70
FREQUENCY

60
50
50
40 32
27 29
30
20
20 14
10
0
A B C D E F

Fig. 7.4: Sample Histogram Chart

The values shown are the number of observations made regarding a

quality parameter. Sometimes, the percentages are shown to
demonstrate the relative contribution of each of the parameters.
4) Pareto analysis – Pareto analysis is a tool for classifying problem areas
according to the degree of importance and attending to the most
important ones. Pareto principle, verbally stated as “vital few; trivial
many” is also called as 80-20 rule, because it is observed that 80
percent of the problems that we encounter arise out of 20 percent of
items. For example, if we find that, in a day, we have 184 assemblies
having problems and there are 11 possible causes, it is observed that 80
percent of them, that is, 147 of them have been caused by just 2 or 3 of
them. It will be easy to focus on these 2 or 3 and reduce the number of
defects to a great extent. When the causes of these defects have been
attended, we will observe that some other defect becomes
predominantly observed and if the process is continued, we are
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marching towards zero defects. Pareto diagrams are vertical bar charts
drawn to indicate the extent of each category of problems in descending
order of magnitude of the problem. Typically Pareto diagrams are drawn
both before and after the quality initiative to visualise the improvement.
5) Scatter diagram – Scatter diagram is used when we have two variables
and want to know the degree of relationship between them. We can
determine if there is a relationship between the variables and also the
degree of extent over a range of values of the variables. Sometimes, we
can observe that there is no relationship, in which we can change one
parameter being sure that it has no effect on the other parameter.
Further if there is a relationship between the variables, it also reveals the
type of relation namely positive or negative. Figure 7.5 depicts a sample
scatter diagram.

VARIABLE 2
Fig. 7.5: Sample Scatter Diagram

We can see that the change in variable 2 does not have much effect on
variable 1. The other interpretation can be that for a small change in
variable 1, the effect on variable 2 is more.
6) Control charts – Control charts are used to verify whether a process is
under statistical control. This means the process is subject to variations
due to random causes and there are no variations due to assignable
causes. Variables, when they remain within a range, will render the
desired quality in the product and maintain the specifications. This is
called the quality of conformance. The range of permitted deviations is
determined by design parameters. Samples are taken and the mean and
range of the variable of each sample (subgroup) is recorded. The mean
of the means of the samples is taken as the central line, and deviations

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equal to three times the standard deviation corrected for sample size,
are used to determine the control limits. The control above the mean line
is called the Upper Control Limit (UCL) and the control limit below the
mean line is called the Lowe Control Limit (LCL). Assuming normal
distribution, we expect 99.97 percent of all values to lie within the Upper
Control Limit (UCL) and Lower Control Limit (LCL) – corresponding to +
3. The graphical representation of data helps in changing settings to
bring back the process closer to the target. As long as all the plotted
values taken from samples in chronological order fall within the control
limits, the process is considered to be under control. If one or more
points fall outside the control limits, the process is considered to be out
of control and subject to variations due to assignable causes. In addition,
the pattern of points whether; continuously raising or lowering, close to
the central line, closer to the limits, five points continuously ascending or
descending, clustering of points around central line or limits, erratic
variation, and other such patterns, indicate that the process is not fully
under control and hence demands investigation. Once the out of control
signal is received the process stops and the investigation begins. It
should be noted that based on sample size the limits are calculated
using constants.
Figure 7.6 depicts a control chart.

Fig. 7.6: Control Chart

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Example 1
A shaft is to be made with a diameter of 25mm. The area required to be
ground is between +0.01 and -0.02mm by a process of centre less
grinding. A sample of 5 numbers is taken every hour and the
observations are recorded as under. Table 7.2 depicts a sample check
sheet.
Table 7.2: Sample Check Sheet

Samples
Time 1 2 3 4 5

9 AM 24.98 24.99 25.00 25.04 25.01

10 AM 25.01 25.02 25.00 25.01 25.00
11 AM 24.99 24.98 25.02 25.02 24.97
12 Noon 24.97 24.99 25.01 25.04 25.03
2 PM 25.01 25.02 25.00 25.03 25.01
3 PM 24.99 24.98 25.02 24.97 25.00
4 PM 24.97 24.99 25.01 25.04 25.03
5 PM 25.01 25.02 25.00 25.03 25.01

The method to be followed is as under.

1. Draw a line diagram taking the means of every hour
2. Draw the R chart and X charts and determine whether the process
is under control.
The procedure to find the range for the sample readings of each hour is:

1. Find the mean of the readings of each hour, that is, x

2. Add all the means calculated above and take the mean of the means.
Then you will get the mean for all samples. (See Table 7.3 for Mean of
all samples)
(Cont. in next page)

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(Cont. from previous page)

3. The UCL  x  3 where,  is the standard deviation of the

means of dimensions obtained on the dimensions of samples
obtained every hour. However, in drawing the control charts it is
customary to range and a constant that depends on the size of
the sample to calculate the UCL and LCL. The formulas are as
under.

3R 3R
UCL  x  LCL  x 
d2 n d2 n

d2 – values depend on the sample size

Table 7.3 depicts the mean for all samples.
Table 7.3: Mean of All Samples
Samples
Time 1 2 3 4 5
x
9 AM 24.98 24.99 25.00 25.04 25.01 25.02
10 AM 25.01 25.02 25.00 25.01 25.00 25.00
11 AM 24.99 24.98 25.02 25.02 24.97 24.99
12 Noon 24.97 24.99 25.01 25.04 25.03 25.00
2 PM 25.01 25.02 25.00 25.03 25.01 25.01
3 PM 24.99 24.98 25.02 24.97 25.00 24.99
4 PM 24.97 24.99 25.01 25.04 25.03 25.00
5 PM 25.01 25.02 25.00 25.03 25.01 25.01
Mean for all samples 25.00

On a graph sheet y-axis represents the dimension. The mean value is

drawn as a horizontal line near the middle of the y-axis, while the
horizontal axis represents the serial number of the samples. Variations of
the dimensions get marked on both sides of the mean line.

7) Cause and effect diagram – Cause and effect diagram represents all
the possible causes which lead to a defect on quality characteristics. The
effect is indicated at the end of the arrow and all the causes

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systematically categorised are indicated along branches and sub-

branches. These are arranged in such a way that different branches
representing causes connect the stem in the direction of the discovery of
the problem. When each of them is investigated thoroughly we will be
able to pin-point some factors which cause the problem. We will also
observe that a few of them can have cumulative effect or even a
cascading effect. Figure 7.7 depicts a sample and cause effect diagram.

Fig. 7.7: Sample Cause and Effect Diagram

When we observe that we have excessive defects from a machine, we try to

identify all possible sources of the causes of defects. We make a study of
each of them and try to correct it. Usually the causes are identified by
brainstorming and by experimentation.
7.3.3 Acceptance sampling
Acceptance sampling is also known as end of line inspection and
categorising the products based on sample based inspection. In acceptance
sampling method of quality control, the supplier and customer agree upon
accepting a lot, by inspecting a small number taken randomly from the bulk
supply. Out of the sample, if a small number as agreed upon by the parties
or as validated by a sampling scheme, is determined as defective, the lot is
accepted. If the number of defectives is more than the agreed size, the
entire lot is rejected. Obviously, risks for the producer and buyer exist. As
the sample size increases and the number of acceptable defectives
decreases, the risk for the buyer decreases. And the converse is true. That
is the reason these numbers cannot be fixed as they depend on the
customer’s requirements. Sometimes parties go for a doubling sampling

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plan. In this case a range of defectives is fixed. If defectives are less, the lot
is accepted. If it is more than the higher number, the lot is rejected. If the
number of defectives falls between the above two numbers, another sample
of a higher size is taken for inspection and if the total number of defectives
is less than another determined number, the lot is accepted. Acceptance
sampling is not quality improvement or correction, but only a way of
ensuring that the number of defectives is within a certain permitted number.

7.4 Quality Based Strategy

Strategy means planning and supplementing a series of activities based on
the evaluation of both internal and external environment, so as to maximise
the yield. Essentially short term and long term objectives are in the horizon.
The available resources, both present and future, are evaluated and within
the restraints they place on the system, the most beneficial activities are
planned. Most importantly, an assessment of the competitors in all these
aspects is made; to either confront it, or bypass it for reaching the goals.
Unless these are not based on the quality of the product or service, the
effort is meaningless. Quality in design, manufacture, packing, delivery,
pricing and after sales service acts as an advantage and plays an important
role is ensuring customer satisfaction. So, the foundation of any strategy
should be quality. These days, price is also a component of quality.
However, care should be taken not to interpret quality and price as a direct
relationship. To achieve quality at low prices, process should be improved
and waste should be minimised. This is where we have lean manufacturing,
just-in-time, flexible manufacturing systems, and many others playing a vital
role in controlling costs. Working for quality awards like Deming and
Malcolm Baldrige awards, increases awareness and attention towards
quality in all the processes in the organisation and builds confidence among
the customers.

7.5 Total Quality Management (TQM)

Total quality management is viewed from many angles – as a philosophy, as
an approach and as a journey towards excellence. The main thrust is to
achieve customer satisfaction by involving everybody in the organisation,
across all functions with continuous improvement driving all activities. Total

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quality management systems are designed to prevent defects from

occurring. The following steps are implemented to achieve total quality:
1. Identify what the customer wants. Develop methods that generate facts
which can be used for decision making. Do not ignore the internal
customer which means the next person in the process.
2. Convert the wants into design specifications, which meet or exceed
customer expectations.
3. Design processes so that they facilitate doing the job right the first time.
Incorporate elements that make it impossible to make mistakes. It is
called fail-safing or fool-proofing. The Japanese call it Pokayoke.
4. Keep records of all occurrences, procedures followed, and
consequences. They help in validating the processes so that continuous
improvement becomes possible. Most importantly any gaps can be seen
and rectified immediately.
Total quality management helps to improvise every aspect of the business
process such as finance and operations management. Search must be
continuous to find ways and means to improve the business. Complacency
should never be allowed to creep in at any time. In this aspect, culture plays
an important role. All these require commitment and leadership from top
management.
7.5.1 Approaches to total quality management
Total quality management (TQM) has different approaches towards its
achievement. The basic thrust of each of these is realising excellence. All
the approaches have a lot in common; however, the emphasis shifts from
one to other. Needless to say, each organisation will use any of these or
even a combination to suit its structure, culture, and need. Some emphasise
on the philosophy of total quality management and the role of management
and employees in being aware, committed and active. Some use statistics
more intensely. Some use an ‘integrated approach’. Following are some of
the approaches to TQM:
A) Deming wheel
Edward Deming is regarded as the American who taught the Japanese
about quality improvement. Deming's philosophy helps organisations to
improve the quality of the products and services they offer . Deming’s
approach is summarised in 14 points:

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1. Constancy of purpose for continuous improvement

2. Adopt the total quality management philosophy for economic
purposes
3. Do not depend on inspection to deliver quality
4. Do not award any business based on price alone
5. Improve the system of production and service constantly
6. Conduct meaningful training on the job
7. Adopt modern methods of supervision and leadership
8. Remove fear from the minds of everyone connected with the
organisation
9. Remove barriers between departments and people
10. Do not exhort, repeat slogans, and put up posters
11. Do not set-up numerical quotas and work standards
12. Give pride of workmanship to the workmen
13. Education and training to be given vigorously
14. State and exhibit top management’s commitment for quality and
productivity
Using the above principles, Deming gave a four step approach to ensure a
purposeful journey of total quality management (See Figure 7.8 for Deming
Wheel). These steps have to be performed in the same sequence
repeatedly to sustain and improve quality. The slope is shown to indicate
that if efforts are let up the programme will roll back.
 Plan – means that a problem is identified, processes are determined and
relevant theories are checked out.
 Do – means that the plan is implemented on a trial basis. All inputs are
correctly measured and recorded.
 Check – means that the trials taken according to the plan are in
accordance with the expected results.
 Act – means when all the above steps are satisfactory, regular
production is started so that quality outcomes are assured.

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Figure 7.8 depicts a Deming wheel.

Fig. 7.8: Deming Wheel

B) Juran’s quality trilogy

Joseph Juran like Edward Deming is considered as a legendary quality guru
and is also regarded as a proponent in spreading total quality management
culture. According to Juran, the definition of quality is “Fitness for use” and
is considered as most adequate. Juran uses his famous universal
breakthrough sequence to implement quality programmes. The universal
breakthrough sequences are:
 Proof of need – There should be a compelling need to make changes.
 Project identification – Here what is to be changed is identified.
Specific projects with time frames and the resource allocation are
decided.
 Top management commitment – Commitment of the top management
is to assign people and fix responsibilities to complete the project.
 Diagnostic journey – Each team will determine whether the problems
result from systemic causes or are random or are deliberately caused.
Root causes are ascertained with utmost certainty.
 Remedial action – This is the stage when changes are introduced.
Inspection, testing, and validation are also included at this point.
 Holding on to the gains – The above steps result in beneficiary results.
Having records or all actions and consequences will help in further
improvements. The actions that result in the benefits derived should be
the norm for establishing standards.

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Juran’s argument says that:

 Quality is the result of good planning, considering the needs of both
internal and external customers and develops processes to meet them.
The processes are also planned to meet them. (See Figure 7.9 for
Juran’s quality triology)
 Quality is built into the system of manufacture, inputs and processes that
are on stream like raw material, spare parts, labour, machine
maintenance, training, warehousing, inspection procedures, packaging,
and others. All these have to follow standards and control exercises to
make sure those mistakes do not occur often and that if mistakes do
occur then they are corrected at the source. (See Figure 7.9 for Juran’s
quality triology)
 Quality improvement measures are essential to keep the quality culture
alive. Newer methods will be found, some operations can be eliminated,
improved technology are made available. In short, as experience is
gained things can always be done better. It is for the management to
take the initiative and encourage the employees to be on the lookout for
opportunities for improvement.
Figure 7.9 depicts Juran’s quality triology.

Fig. 7.9: Juran’s Quality Triology

C) Crosby’s absolutes of quality

Philip Crosby is internationally known for the “Zero Defects” concept of
quality. Like Deming, Crosby also lays emphasis on top management
commitment and responsibility for designing the system, so that defects are
not inevitable. He urged that there be no restriction on spending for
achieving quality. In the long run, maintaining quality is more economical

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than compromising on its achievement. His absolutes can be listed as

follows:
 Quality is conformance to requirements, not ‘goodness’
 Prevention, not appraisal, is the path to quality
 Quality is measured as the price paid for non-conformance and as
indices
 Quality originates in all factions. There are no quality problems. It is the
people, designs, and processes that create problems
Crosby also has given 14 points similar to those of Deming. His approach
emphasises on measurement of quality, increasing awareness, corrective
action, error cause removal and continuously reinforcing the system, so that
advantages derived are not lost over time. He stated that the quality
management regimen should improve the overall health of the organisation
and prescribe a vaccine. The ingredients are:
 Integrity – Honesty and commitment help in producing everything right
first time, every time
 Communication – Flow of information between departments, suppliers,
customers helps in identifying opportunities
 Systems and operations – These should bring in a quality environment
so that nobody is comfortable with anything less than the best
Philip Crosby also emphasises on the fact that “quality is free” meaning that,
quality should not demand additional resources and hence there should be
no cost.
D) Taguchi’s quality loss function
Genichi Taguchi is a Japanese quality guru and unlike other experts sees
quality from a perspective of loss. He is not in favour of just meeting the
specifications, but contends that the quality characteristics should always be
close to the nominal or target value. Taguchi’s contention is that quality
comes from design. He advocated a wide use of design of experiments for
experimentation on variables and obtains specifications which will result in
high quality of the product. It helps in bringing cost effective improvements
in quality. He believed that, designers should make robust designs so that,
product can withstand the variability which tends to be persistent and give
quality for longer periods. His objective in giving the loss function is to make
manufacturers realise that it is the target value of the specification that
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should be sought to be achieved and not the permissible deviations. The

loss caused is the square of the deviation multiplied by a cost constant.

L  CX  T 
2

Where,
L = Total loss
C= Cost constant
X = Average value of the quality characteristic
T = Target value of the characteristic
Taguchi also talks about losses to society because of a dent in quality - both
the manufacturers and users in society will have to endure the
consequences of reduced performance as long as the product is used.
Self Assessment Questions
4. ___________ is a visual representation of a process showing the
various steps.
5. ___________ are used to record the number of defects, types of
defects and locations at which they are occurring.
6. ____________ is used when we have two variables and want to know
the degree of relationship between them.
7. According to Juran, the definition of quality is “Fitness for use”. (True /
False)

7.6 Towards TQM - ISO 9000 as a Platform – Working with

Intranet
In this unit, so far we have seen a number of methods of achieving quality
and also the prescriptions of the quality gurus. No particular model or
methodology might be completely useful to any organisation. However, with
the knowledge gained by becoming aware of the various tools, a company
should be in a position to implement the steps which will be suitable for
them. In this direction, ISO 9000 set standards which details out
requirements to be adhered to for certification – helps the organisation to be
on track in the journey towards total quality management. International
Standards Organisation in Geneva brought out a set of standards to the
practice of methods which assure quality. The objectives can be briefly
stated as follows:

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 To maintain product quality in relationship to requirements and to

reinforce the organisational systems to improve
 To give confidence to the management and other stakeholders,
especially the customers, that the organisation is run on quality lines
 To instil a sense of pride in the employees which motivates them to
perform better
The key elements of ISO 9000 detail many functions of the organisation and
procedures that are to be adhered. Documents that are being followed have
to be formulated and the personnel trained to use them. Documentation is a
very important requirement. It means everyone will have to write what has to
be done, and do what he or she has promised to do. Certification is done by
accredited agencies that are specially trained to do the various inspections
required before an organisation is certified. During the process of
implementation, a number of opportunities open up for improving quality.
Since documentation is done for all activities, the records act as a guide for
analysing problems and solutions can be sought. The team work that is
required results in better communication.
ISO 9000 acts as a starting point towards higher efforts for achieving total
quality management. The benefits of better communication with intranet
cannot be overlooked. Capturing data, analysis of them and distribution of
relevant data to users is an important facilitation process which intranet
provides. Verification, guidance, and monitoring become easy and all
processes whether design, manufacture or dispatch, can be conducted
efficiently with proper authorisations sought and received instantly. With
video-conferencing, the inconvenience of putting people at one place for
discussion and decision making is avoided. Documents can be transferred,
edited and be effective almost instantaneously. The time, energy, and
money saved can be utilised for other activities, thus enhancing efficiency of
all the people concerned. All these enhance the quality of work of all
personnel.

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Case-let
Bank of America is the world largest bank. Their goal is to be number
one in customer satisfaction. The bank achieved its goal by enhancing
enterprise-wide quality system. The quality system focused on:
 Aligning the company from top-to-bottom by organising the customer
segments.
 Linking the performance plans to strategic goals.
 Improving business process excellence
 Identifying critical business processes
 Using six sigma across business
 Hiring external six sigma master black belts and black belts to build
workforce
 Eliminating errors in core processes
 Expanding six sigma into sales environment for improving revenue
growth
Within 2 years of implementing quality control Bank of America has
achieved:
 20% growth in customer delight
 2.3 million Customer households
 29% reduction in customer complaints
 52% rise in stock value
 29% increase in earnings per share
 Rated number one company in 2002

– (Source:http://www3.best-in-class.com/)

Cost of quality
Since olden days attempts have been made to find out the cost of quality
and many researchers have examined different situations involving quality.
Cost of quality is understood as the cost that would be incurred, if quality is
not maintained. However; in the modern context it is considered, as the total
cost required to provide desired quality, and the cost that would be incurred
to check quality along with the cost of failure. Thus, the cost of quality is
divided into four categories as follows:

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Prevention costs – Prevention costs are costs of all activities that are
designed to prevent poor quality from arising in products or services.
Examples include the costs for:
 quality planning
 supplier evaluation
 new product review

Appraisal costs – Appraisal costs are costs; that occur because of the
need to control products and services, to ensure a high quality level in all
stages, conformance to quality standards and performance requirements.
Examples include the costs for:
 checking and testing purchased goods and services
 in-process and final inspection/test
 field testing

Internal failure costs – Internal failure costs are costs that are caused by
products or services, not conforming to requirements or customer/user
needs, and are found before delivery of products and services to external
customers. They would have otherwise led to the customer not being
satisfied. Deficiencies are caused both by errors in products and
inefficiencies in processes. Examples include the costs for:
 rework
 delays
 re-designing
 shortages
 failure analysis
 re-testing
 downgrading

External failure costs – External failure costs are costs that are caused by
deficiencies found, after delivery of products and services to external
customers, which lead to customer dissatisfaction. Examples include the
costs for:
 complaints
 repairing goods and redoing services
 warranties
 customers’ bad will
 losses due to sales reductions

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7.7 Total Productive Maintenance (TPM)

Maintenance is a function in any operations system. Maintenance keeps the
equipments in good condition. Generally, equipments deteriorate because
usage causes wear and tear to the parts causing inaccuracies to the
products made by them. When the deterioration produces components
which exceed the permitted deviations rendering them unacceptable,
maintenance is undertaken to bring back the machine to produce
acceptable components. Sometimes the failure is sudden and serious and
the equipment stops working. Disruption of production and emergency
repair work are costly and schedules are missed causing delays in supplies
and consequent losses. These breakdowns occur because the equipment
was carrying hidden defects which were not apparent. All these are
attended to by the maintenance department. Historical records indicate the
probability of failures over different periods thus, enabling us to plan to
attend to them. With progress in automation, we have costly equipments.
We have flow lines and any one machine breaking down causes a series of
machines to be idle. So, we have to move towards zero breakdowns like we
want to move towards zero defects by implementing total quality
management tools.
Total productive maintenance puts the responsibility of maintenance where
it belongs to and on the operator who uses the equipment. It is a company-
wide activity which involves all the people. The main thrust is eliminating all
break downs. The focus is on the operating personnel because they would
know about malfunctioning earlier more than anybody else. They work on
the machine and are aware of the slightest variations that occur and thus,
should be able to remove the cause before it becomes serious. So, every
planned maintenance activity reduces the probability of a breakdown.
Ownership of the operation and machine increases the commitment of the
workmen. Autonomy is the starting point for learning and excellence. The
worker can suggest better ways of improving quality, productivity, and
design. This helps in continuous improvement. Team work and participation
improves the quality culture. The principles of 5S – the housekeeping
activities which improve efficiency at workplace, is considered a measurable
standard to aid the implementation of total productive maintenance even in
the office rooms.

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Self Assessment Questions

8. Prevention costs are costs of all activities that are designed to prevent
poor quality from arising in products or services. (True / False)
9. __________ are costs that are caused by products or services, not
conforming to requirements.

7.8 Summary
Let us recapitulate the important concepts discussed in this unit:
 Quality has become a very important aspect of operations management
and even regarded as a critical success factor
 As per ISO 9000 standards, quality is defined as “totality of
characteristics and features of a product/service that bear on its ability to
satisfy the stated/ implied needs”.
 Achievement of quality is not limited to the production department or the
quality control department.
 Modern concepts of quality go beyond maintaining dimensions and
making the products work well.
 Quality is to be incorporated into all functions of management along with
transport, accounting, and packaging.
 Total quality envisages where suppliers and customers are treated as
partners to achieve total quality.
 Implementations of concepts like six-sigma assure enhanced customer
satisfaction.

7.9 Glossary
 Efficiency: ability to accomplish a job with a minimum expenditure of
time and effort.
 Conformance: Certification or confirmation that a good or service meets
the requirements of accepted practices and prescribed rules and
regulations
 Acceptance sampling: the statistical procedure employed in
determining whether to accept or reject a production batch

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7.10 Terminal Questions

1. Define the term quality.
2. Describe dimensions of quality
3. Explain the concept of quality at source.
4. Which are the quality control tools?
5. Why is acceptance sampling made?
6. Describe the various approaches to TQM.

7.11 Answers

Self Assessment Questions

1. Quality
2. True
3. Conformance to design
4. Flowchart
5. Check sheet
6. Scatter diagram
7. True
8. True
9. Internal failure cost
Terminal Questions
1. Refer to section 7.1 and 7.2
2. Refer to section 7.2.1
3. Refer 7.3.1
4. Refer 7.3.2
5. Refer 7.3.3
6. Refer 7.5.1

7.12 Case Study

Is Cost of Quality too high for Tata Nano?
Tata Nano has been in news ever since it was released in 2009. The
favourite project of Mr. Ratan Tata who took a personal interest in
developing India’s first car to be sold under Rs.100,000, Nano is now
making news unfortunately for the wrong reasons.

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Ever since the project was announced by the company Tata Motors that
they are going to release a car that is affordable to the average Indian
middle class family, there were more sceptics than before who expected the
cost boundary of Rs. One Lakh to be impossible to achieve. But the
company proved the myth wrong and delivered to the market a car what
was a dream buy for the average middle class families.
True to its capacity and efficiency Tata Motors reduced the cost as much as
they can through “homegrown engineering” cutting the cost by efficient
design and eliminating all the frills but maintaining only the essentials. The
car thus was proved to be cost effective and of course affordable to the
Indian middle class families.
There were several hiccups after the loss the most important one being
safety. As if to prove the safety factor is low, a couple of accidents raised
doubts about the car’s strengths and weaknesses. The company no doubt
tried to convince the customers by drawing their attention to the fact that the
cars were tested for all types of failure.
Tata Nano enjoyed a roller coaster drive in sales since inception and after
about 1,40,000 vehicles had been sold in around two years’ time came the
jolt.
As reported in the media, particularly Business Standard, Tata Motors is
taking 1,40,000 Nano cars off the roads to replace the starter motor free of
cost. This is seen as the biggest recall in the Indian auto market.
The exercise of recall is to replace the starter motor - an electrical
component - in the world's cheapest car and is expected to cost the
company around Rs.115 crore.
"The replacement will cover the entire lot of Nanos produced since the
launch of the mini car in 2009 and sold till November 21 this year," the
company's spokesperson said. However, it excludes the Nano 2012 model
which rolled off the Tata assembly line on November 21 this year.
Will the company face a severe crunch financially because of this massive
recall is the question on everyone’s mind. Thought the spirit of Nano seems
to be unfazed as seen through the launch of new model for the year 2012,
there is no gainsaying in the fact that the image while already shaky has
taken a big hit.
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TQM advocates “Do it the first time, next time and every time”. Has this
policy been corroborated by Nano?
(Source:http://www.autofocusasia.com/management/tata_nano.htm,
http://in.reuters.com/article/2009/03/30/idINIndia-38567520090330,
timesofindia.indiatimes.com/speednewsshow/8167915.cms)

Discussion Questions:
1. What might be the reasons for Tata Nano’s recall?
2. Is the company right in this action?
3. Does this incident affect the image of the company?
4. What cost of failure is involved here?
5. What lessons are there for manufacturers?
Reference:
 Gaither.N, Frazier.G, “Operations Management” (9th Edition), South-
Western/Thomson Learning

E-References:
 http://www3.best-in-class.com/.Retrieved on 20, December 2011.
 www.businessdictionary.com. Retrieved on 20, December 2011.
 http://www.autofocusasia.com/management/tata_nano.htm. Retrieved on
20, December 2011.
 http://in.reuters.com/article/2009/03/30/idINIndia-38567520090330.
Retrieved on 20, December 2011.
 timesofindia.indiatimes.com/speednewsshow/8167915.cms. Retrieved
on 20, December 2011.

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Production and Operations Management Unit 8

Unit 8 Business Process Modelling

Structure:
8.1 Introduction
Objectives
8.2 Importance of Business Process Modelling
8.3 Business Process Modelling
Logical process modelling
Physical process modelling
8.4 Data Driven Approach to Process Definition
Constructing the process model diagram
8.5 Logical vs. Physical Database Modelling
8.6 Business Process
The ingredients
Business analyst
Workflow vs. business process modelling
Impact on process modelling
8.7 The Way Forward
8.8 Summary
8.9 Glossary
8.10 Terminal Questions
8.11 Answers
8.12 Case Study

8.1 Introduction
In the previous unit, total quality management, we studied about quality
control as a system; the various quality controlling techniques, and quality
based strategy. We also learnt about total quality management and the
various approaches to it. In this unit, business process modelling, we will
see the role of business process modelling (BPM) in achieving the overall
business objectives. It refers to a set of activities undertaken to optimise the
business process.
A process is a set of elements that repeatedly act to result in an output. It is
also coordinating a set of activities to produce a specific outcome. There is a
process involved in almost everything we do like preparing tea, sending a
mail, etc.

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A business process is a process designed to achieve a particular business

objective, and different techniques and activities are used as part of the
business process management discipline. Management objectives get
reflected in corporate governance and strategic management. The
operational component of management consists of workflow across the
functions, which realise the objectives of the business. In this context,
modelling acts as a guide for identifying the gaps in the processes and thus
undertakes measures to align them.
Processes have a tendency of deviating because of the dynamics of the
business and also due to changes in the surroundings. Models act as
anchors to stabilise the responses to keep the processes on track. Business
process modelling is a change process.
Objectives:
After studying this unit, you should be able to:
 define the related terms of business processes
 explain the different models of business processes
 recognise how dataflow improves processes
 explain how modelling improves response to the dynamics of business

8.2 Importance of Business Process Modelling

Business process is a total response that a business undertakes utilising the
resources and delivering the outputs that create a value for the customer.
The business process:
 has a goal
 uses specific inputs
 delivers specific outputs
 collects resources
 performs a number of activities in some order
 creates value for the customer
Business process modelling refers to a set of activities undertaken to
optimise the business process.
The reasons for optimising the business process are to:
 Improve the performance of the process
 Deliver better value for the customer

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 Maximise the earnings of the organisation

 Stabilise, sustain and improve the processes to beat the competition
from outsiders
Figure 8.1 depicts the various reasons for optimising the business process

Fig. 8.1: Reasons for Optimising the Business Process

The business system involves a combination of people and the applications

organised to meet the business objectives. The applications are automated
so that it is timely and efficient; to enable the information and reporting
system to be accurate. To meet the business objectives:
 Designers and programmers – The designers and programmers of
the modelling process:
 Put together the data and processes to provide optimum benefits
 Put in place the architecture which is capable of addressing these
needs
 Architecture – It is the overall structure that should be flexible to adapt
to new methods, processes, and business plans.
All the elements of the business process have to be structured and
controlled for the purpose of analysis, evaluation, modification,
implementation, and correction. Some of the elements are activities, parts,
products, data, people, processes, software tools, delivery systems, and
performance measurement.

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We will study all of these under business process modelling. It is

synonymously used even for the software tools, because of the extensive
use of various software programmes for all the activities seen as mentioned.
Self Assessment Questions
1. The business system contains a combination of ____________
organised to meet business objectives.
2. ________ is used synonymously for the software tools as well.
The business process spectrum
Table 8.1 depicts a business process spectrum.
Table 8.1: Business Process Spectrum Matrix

Simple, static Complex, dynamic

processes processes
Moderate business
Tend to be fluid, difficult
value. Volume matters,
Core and primary to coordinate, unique to
standard practices,
activities the firm, focus on
requires support, focus
continuous improvement
on collaboration
Lower business value,
supported across Customised processes,
Context and
business partners, scope for outsourcing,
support activities
focus on automation costs to be watched
and standardisation

What companies really want is; best practices for increasing efficiency and
unique, often home-grown superior processes, to claim uniqueness and
create competitive advantage. Every company can assess and categorise
the processes as per the spectrum shown in the matrix and then try to build
the competitive advantage.
(Source: Howard Smith and Peterr Fingar, “Business Process Management”,
Megan Kiffer Press, USA, 2003)

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8.3 Business Process Modelling

Business process modelling can be categorised into two parts – Logical
processing modelling and physical process modelling. Figure 8.2 depicts the
types of modelling.

Fig. 8.2: Types of Modelling

In this section, let us know more in detail of the two processes of modelling.
8.3.1 Logical process modelling
Logical process modelling is the representation of putting together all the
activities of business process in detail and making a representation of them.
The initial data collected has to be arranged in a logical manner so that,
links are made between nodes for making the workflow smooth. The steps
to be followed to make the work smoother are given as follows:
1. Capture relevant data in detail to be acted upon
2. Establish controls and limit access to the data during process execution
3. Determine which task in the process is to be done and also the
subsequent tasks in that process
4. Make sure that all relevant data is available for all the tasks
5. Make the relevant and appropriate data available for that task
6. Establish a mechanism to indicate acceptance of the results after every
task or process. This is to have an assurance that flow is going ahead
with accomplishments in the desired path
Some of these activities may occur in a sequential order whereas; some of
them may run parallel. There may even be circular paths, like re-work loops.
Complexities arise when the process activities are not connected together.

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Logical process model consists of only the business activities and shows the
connectivity among them. The process model is a representation of the
business activities and is different from the technology dependent ones.
Thus, we have a model that is singularly structured only for business
activities. Computer programmes are also present in the total system. This
allows the business oriented executives to be in control of the inputs,
processes and outputs. The logical process model improves control on the
access to data. It also identifies, who is in possession of data at different
nodes in the dataflow network that has been structured.
A few of the logical modelling formats are as follows:
 Process descriptions with task sequences and data addresses
 Flow charts with various activities and relationships
 Flow diagrams
 Function hierarchies
 Function dependency diagrams
Every business activity, when considered as a logical process model, can
be represented by a diagram. It can be decomposed and meaningful names
can be given to the details. Verb and noun form combinations can be used
to describe each level. Nouns give the name of the activity uniquely and are
used for the entire model meaning the same activity.
Figure 8.3 depicts the ways of representing logical process modelling.

Fig. 8.3: Ways of Representing Logical Process Modelling

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8.3.2 Physical process modelling

Physical process modelling is concerned with the actual design of database
meeting the requirements of the business.
Physical modelling deals with the conversion of the logical model into a
relational model. Objects get defined at the schema level. The objects here
are tables created on the basis of entities and attributes. A database is
defined for the business. All the information is put together to make the
database software specific. This means that the objects during physical
modelling vary on the database software being used. The outcomes are
server model diagrams showing tables and relationships with a database.
Self Assessment Questions
3. Every business activity can be considered as a __________ and
represented by a ________.
4. Physical process modelling is concerned with the design of ______
meeting the requirements of the business and is represented using
_________.

8.4 Data Driven Approach to Process Definition

In business process modelling, the purpose of the process is to be written in
a statement. The statement should carefully include only those purposes
that are relevant and capable of being achieved. Using this as a reference,
the business analyst will make notes regarding the inputs that are required.
When the purpose is referred to as continuous, irregularities come to light
either because the inputs are insufficient or the purpose may not be
achievable.
The activities stated above, are concerned with collecting data and verifying
whether they are sufficient or not. Before, we attempt to define the business
process; the data collected should be set in a logical order, making the
logical data model complete in all respects.

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Figure 8.4 depicts the steps to set the data in a logical order.

Fig. 8.4: Steps to Set Data in a Logical Order

The following steps should be considered for setting the data in a logical
order.
1. Check whether the participants in the process that is, people, teams,
and electronic applications are sufficient or, any changes and additions
need to be made.
2. Ensure that all the data expected is included or not. Generally, we start
with an initial set of data which we have. When we check them with the
requirements of the process for the desired outcomes, we find gaps.
These gaps help us in determining which subset of the data is
appropriate at each task in the process.
3. Check whether the data is sufficient for the implementation of the
process. This can be achieved by answering the following questions:
1. What is the path the process should take?
2. What decisions are to be made at any point in the process?
3. Are data available at those points?

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4. State the rules used to define the various parts of the process. At
this stage, the naming conventions are also included. This is
important to be included at the process definition stage.
5. Determine the disposition of data at the end of the process and
decide the following:
a. Do we plan to keep the data or delete them?
b. If they are to be stored, where and in what form will be used?
c. What are the measures of security for access?
6. Determine the other elements depending upon the business process
and the need. The elements added must be questioned to collect a
detail data. It is better to go deeper into the details and collect data, and
make them available at this initial stage, so that a better model can be
prepared. Then, the processes will be more successful in delivering the
desired output. Process definition enables us to go into details at every
stage of the process and verify the adequacy of data, the sequential
steps in the process and fill the gaps before attempting implementation.
The purpose of setting the data in a logical order is to, locate deficiencies
and remove them. Therefore, the decisions about process and sequence
can be taken and a model can be designed which is useful in all
perspectives.
8.4.1 Constructing the process model diagram
We have seen how the process has to be defined. The business analyst can
now use process modelling software to construct diagrams and graphically
represent the business process under consideration. The following are
included in the diagrams:
 The starting point of the process – It is possible that we have multiple
beginnings and different activities starting simultaneously and running
parallel.
 Tasks during process execution – The tasks that are done during
process execution and their sequence and dependencies.
 Nodes in the path – Nodes in the path show the activities that should
be completed before starting further activities.
 Decision points – Decision points help in taking a decision between
choosing the path or whether the process should continue or not.

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 Process path – The points, at which the process path divides, creating
two or more paths for activities, combine and lead to another activity.
 More points – At the end of the process, we may have one or more
points.
The model is built upon the following constraints:
 data that get input at various stages of the process
 data that get accumulated at nodes for further distribution
 identifying activities that go along the path
All through the diagrams, we ensure that data is available and desired
results are being obtained. Once the model is certified, software application
will take care of the implementation of the process. Logical process
modelling will be of great assistance to system architects and developers, to
produce efficient and scalable applications.
Self Assessment Questions
5. The data collected will be set in ________ making the logical data model
complete in all respects before we attempt to define the process.
6. _________ enables us to go into details at every stage of the process
and verify the _________.

8.5 Logical vs. Physical Database Modelling

Models are constructed to represent the proposed database in the visual
form, so that, business requirements can be easily associated with database
objects. Diagrams are produced to illustrate business processes,
organisational units, rules, and entities.
An Entity Relationship Diagram (ERD) represents the entities or clusters of
information and their relationships maintained for the business.
Process flow diagrams represent various processes and the flow of
information, within and between different processes and entities. These are
called database models.
The logical model focuses upon the needs of the business, its activities,
their flow, and the data entities they create and are defined. Logical
modelling is concerned about the performance and the administration of the
database that is implemented.
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The physical model is the creation of database, by developers in association

with the business analyst, to generate diagrams and documentation for
initiating physical modelling. This model is concerned about the server
model diagrams showing tables and relationships with a database.
The outcomes of the above, logical model and physical model, are called
the entity relationship diagrams and business process diagrams.

8.6 Business Process

In its widest sense, a business is a system which exists in a society. It uses
its resources to transform and produce consumable products and services.
This transformation is done by using processes, which yield profits to itself
and value for the rest. A process is the composition of a number of co-
ordinated activities which result in a specific outcome. Preparing a meal,
constructing a building or passing an examination are examples of
processes.
A process is said to be a successful process when:
 resources are optimally consumed
 activities are effectively conducted
 outcomes are close to expectations
In the earlier parts of this section, we described how modelling helps us to
make business process efficient. At every stage, decision making is critical
for success. So to improve this ‘process’, we studied various methods.
Implementing them is called business process management. We will see
some of the important concepts for better understanding.
8.6.1 The ingredients
The ingredients that might be used in a business process can be briefly
outlined as follows:
 The data which accomplishes the desired business objective
 Acquisition, storage, distribution, and control of data which undertakes
the process across tasks
 Persons, teams, and organisational units which helps to perform and
achieve the tasks
 Decisions which enhance the value of data during the process

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We also have some behavioural aspects of the business process, mainly

the decision making process where humans are involved. Decision failures
are common and research has shown that, the failure of decisions is due to:
 biases in perception and fallacies in reasoning
 tendency to act on assumptions, even when data are available easily for
verification and/or confirmation
 tendency to bring out of memory the facts that reinforce our assumptions
and biased evaluation
 tendency to accept evidence or fact as absolute which support our
hypothesis
These listed factors result in faulty decision making. Being aware and
avoiding them consciously improves the processes of the business.
8.6.2 Business analyst
The responsibility of a business analyst is to:
 Collect in detail, the business problems and the requirements of the
business people
 Format the requirements and problems of the business
 Facilitate best solutions, satisfying the business need and the business
people
To identify the best solutions for the business need of an organisation, the
analyst has to:
 act as a go-between the business people to break down data
 see through the logical steps that need to be taken
 fill the gaps to enable the experts in technology to provide solutions
The analyst should:
 Lead the team members to a consensus
 Identify or gather the requirements of the business process that are
critical. To do this, the analyst needs to do the following tasks:
 question concern people
 verify the statements that are made
 locate any gaps
 arrange them in the logical process for creating uninterrupted
dataflow

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 identify the core requirements

 question business area experts and seek relevant information
 make sure that the requirements can be subjected to tests and the
results are verifiable. Analyst’s most important skill will be in his/her
capacity to separate the grain from the chaff, that is, to know which are
the critical, vital and important bits of information from a huge mass of
data their confronted with.
For better forecasting the business needs, the analyst should have the
necessary skills, knowledge, and functions.
Figure 8.5 depicts the skills, knowledge and functions required for a
business analyst.

Fig. 8.5: Skills, Knowledge and Functions Required for Business Analyst

8.6.3 Workflow vs. business process modelling

Workflow contains a number of entities in a unidirectional path with nodes.
Each of these nodes may contain a number of elements – material, data,
attributes, and value. They all come together for integration or even for
division and will have transformation going on. The activities that make
these transformations are the sub-processes. So, there will be changes
taking place along the path and at the end, we have a completed process.
Every detail will be worked out, the outcomes verified and corrected and
brought into the flow so that nothing untoward occurs.

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The only thing lacking is the flexibility that business situations demand all
the time. This is because, the enterprise has to perform and excel in
conditions of uncertainty, improvement, and competition. Fortunately these
are exceptions. While majority of the repeated tasks goes on smoothly, we
need to manage these exceptions. Notably, exceptions create new
processes, opportunities and help us get new insights into the processes. It
has been found that 80% of process costs arise out of managing
exceptions. These happen at many points in the value chain. Managing all
these is business process management.
Workflow does not offer options in the way processes are conducted. They
have fixed routes, activities, and schedules. Actually, there is not much
‘management’. Business process modelling goes ahead not on a fixed track,
but on bumpy roads, turning sharply to avoid collisions and overtaking the
vehicles that are ahead. It calls for all management skills.
8.6.4 Impact on process modelling
If business process modelling is not flexible in the path, then the activities or
the entities need to be aligned to make it more flexible. Therefore, it is not
any more necessary to define the total process initially. The flow of the
activities need not be fitted into a ‘model’ to be followed continuously, but
can be adapted to suit the situations the process is in. The user has choices
of subsequent activities and can take advantage of the flexibility the process
is allowed to have.

8.7 The Way Forward

Business process management has come a long way in a short period. The
reason is the development in information, technology, and the tools
available for incorporating the scientific concepts. With businesses going
global, services becoming more valuable, usage of resources have to be
optimised. In this direction, we have Just-In-Time (JIT), Total Productive
Maintenance (TPM), and Total Quality Management (TQM) making
operations cost effective. Business process management is another
concept, when implemented makes workflow more productive.
The following points explain the business process as to what it is, what it
does and what it promises.

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Figure 8.6 depicts what we should know about business processes.

What all should we know about business processes?

 Definition of the firm’s business process
 Differences between process view and functional view
 Advantages of the process view
 The size and complexity of the process
 The relationships between processes

Fig. 8.6: Knowledge of Business Processes

Figure 8.7 depicts how to model the business process.

How do we model the business process?

 Identify the various steps of the process
 Prepare an overview of the various techniques of modelling rules
and guidelines of modelling
 Prepare documents to support the modelling process

Fig. 8.7: How to Model the Business Process

Figure 8.8 depicts how to improve the business process.

How to improve the business process using model ‘As-is’

business process?
 Identify the problems or triggers that call for a change
 Analyse the problem
 Find if there are inappropriate workflows
 Find if any inadequate information technology support activities
 Formulate the new ‘to-be’ business process
 Make the new ‘to-be’ business process acceptable

Fig. 8.8: As-is Business Process

Figure 8.9 depicts the conversion of the business modelling stage to system
requirement for implementation.

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How to convert the new ‘to-be’ process from the business

modelling stage to specifying system requirement for
implementation?
 Identify the information technology support requirements
 Document the above integration of process modelling,
requirements definition and systems development
 Identify the skills required
 Provide training to get ready for managing change

Fig. 8.9: Convert Business Modelling Stage to System Requirement

Self Assessment Questions

7. Managing ____________ is business process management.
8. Business process management is another concept, when implemented
makes workflow more productive. (True/False)

8.8 Summary
Let us recapitulate the important concepts discussed in this unit:
 Business process consists of a number of coordinated activities to result
in outcomes which add value to the customer. It consists of data that are
needed to know what the activities are, how they are done, how close it
is to the customer’s requirement.
 Business process model is composed of a logical process and a
physical process.
 Logical process modelling deals with identifying the business
requirements, and produces diagrams and charts, to show relationship
between business processes having parent-child relationships among
people, activities and data.
 Physical process modelling is the design of the database to meet the
requirements of the logical model.
 The business analyst’s job is to understand the requirements of the
business and work with technology experts to create databases which
interface with the applications in software.

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 Workflow ensures the flow of activities, sub-processes and data in a

systematic manner. However, the dynamics of a business needs the
flexibility that business process modelling offers.

8.9 Glossary
 Entity: A person, a unit, organization, or business that has a legal and
separately identifiable existence
 Reinforce: to strengthen

8.10 Terminal Questions

1. What is meant by business process?
2. What is logical process modelling?
3. What is physical modelling?
4. Explain the ingredients of a business process.
5. What are the functions of a business analyst?

8.11 Answers

Self Assessment Questions

1. Activities
2. Business process modelling
3. Logical process model, diagram
4. Database, tables
5. Logical order
6. Process definitions, adequacy of data
7. Information and workflow
8. True
Terminal Questions
1. Refer to section 8.2
2. Refer to section 8.3.1
3. Refer to section 8.3.2
4. Refer to section 8.6.1
5. Refer to section 8.6.2

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8.12 Case Study

Yummy Bakes is one of the leading bakers in India with more than
10,000 outlets spread over. The goal of Yummy Bakes is to serve tasty
food and fast delivery to customers at each outlet by fine-tuning its
operations. However, with the increasing outlets, the goals were not
achieved to the mark. This is due to management failure. The customers
were upset with lousy food, slow service, and surly employees. Yummy
Bakes realised it, when the customer complaints were growing more
frequently and the sales rate went down by 12%.
To optimise the business process, Yummy Bakes appointed a new
business analyst to solve the business problems. The business analyst
scrutinised every detail of the business requirements and problems, its
operation procedures, data, present earnings of the business, and many
other details related to the business.
With a zeal for measuring customer satisfaction, the act of go-between
the business people and sharing the data freely with operators, the
analyst pulled off a turnaround that stunned everyone in the business
with its speed and scope. With the data, the analyst formatted the
business problems and provided solutions according to the need.
Solution
The solutions provided for the improvement of the business are listed as
follows:
 Installing the massive Customer Relationship Management (CRM)
system along with Internet based data management system. The goal
was to scrutinise every detail of its business in real time.
 Initiatives were appointed to collect performance measures and
revamp Yummy Bakers processes to reach customers expectations.
 Mystery shoppers were sent to the restaurants to conduct anonymous
reviews using a hard-number scoring system.
 Mystery dinners from outside survey firms jot down on a paper, check
list their grades for: speed of service; food temperature; presentation
and taste; cleanliness of the counter; tables and condiment of the
island; even whether the counter crew person smiles at dinners.

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 Training for six-months and year-to-date results are posted on an

internal website so that owners can compare their scores with regional
averages.
 400 operations missionaries were sent into the field; each visiting
stores multiple times, to fine-tune processes while also conducting
day-long seminars, where store managers could share tips from
corporate kitchen gurus.
 Yummy Bakes restored the more expensive ingredients in the Yum
Bake sauce and changed the salt-and-pepper seasoning in the
chicken patties.
 The process was changed back to toasting buns rather than
microwaving them, and lengthened the toasting time by 6 seconds,
giving them an even sweeter caramelised flavour.
 Outdoor menu boards now have more pictures and fewer words.
 Initiatives were taken on Yummy Bakes fast lane. 6 seconds were
shaved-off on the weight time. The change has added a percentage
point to sales growth.
 LED display confirms what customers say, reducing confusion later on.
 Premium sandwiches are put in boxes than in paper wrappers, saving
a few seconds.
 Boxes are colour coded by sandwich to improve speed and accuracy.
 Professional order takers with strong communication skills were
located at remote call-centers to handle drive-through orders.
 The orders were better taken and the on-sight Yummy Bakes
employees can focus on delivery thereby, improving customer
services.
When customer stopped going to Yummy Bakes, so did investors. Now
that sales are on rise, the stock has regained its sizzle. By the start of
2009, the stock had more than doubled in 2 years. Performance
measurement and improving process to increase customer values pays-
off. To serve close to the customer, Yummy Bakes is now planning to
increase more and more branches.

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Reference:
 Howard Smith and Peterr Fingar (2003), Business Process
Management, Megan Kiffer Press, USA

E-References:
 www.forbes.com. Retrieved on 20, December 2011.
 www.developer.com. Retrieved on 20, December 2011.

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Unit 9 Project Management – Planning Process

Structure:
9.1 Introduction
Objectives
9.2 Project Management
Understanding project management
Definitions related to project management
Need for project management
9.3 Project Management Principles
Project management knowledge areas
The project manager (PM) and responsibilities of PM
Project failure
9.4 Essentials of Project Management Philosophy
Characteristics of project mindset
Project evaluation and selection criteria
Typical characteristics of a project
Project parameters for negotiation
Value addition of project management
Project management players, their roles and responsibilities
9.5 Project Planning
Scoping
Work Breakdown Structure (WBS)
9.6 Project Process Flows
Project processes
Process groups
Process interactions
Customisation
9.7 Summary
9.8 Glossary
9.9 Terminal Questions
9.10 Answers
9.11 Case Study

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9.1 Introduction
In the previous unit you learnt about business process modelling, logical
process modelling and physical process modelling. In this unit, you will learn
about project management and its principles and significance.
Project management is well recognised as a part of ‘Operation
Management’ and managing projects is considered as an essential skill
required for any management professional. Project management typically
deals with resource allocation to reach the specified objectives while
working within a certain time frame.
In this unit, you will learn Project Management by way of definitions and
explanations of the various steps involved. You will also understand the
important issues related to Human Resources, which forms a much greater
part of Project Management. It is to be remembered that, people have to
take the initiative to drive processes. Only then the system will take the
initiative to drive the people.
Objectives:
After studying this unit, you should be able to:
 explain the definitions and terminology of project management
 recall the fundamentals of project management
 explain the importance of project management
 list the principles of project management
 describe the project management philosophy

9.2 Project Management

Managing a project is the practice of controlling the use of resources, such
as cost, time, manpower, hardware, and software involved in the project. It
usually starts with a problem statement and ends with delivery of a complete
product. Figure 9.1 depicts project management. Project management
involves understanding the scope and various processes in a project cycle.

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Fig. 9.1: Project Management

Some of the definitions of project management are as follows:

“Project management is the complete set of tasks, techniques, and tools
applied during project execution.”
– DIN 69901 (German Organisation for Standardisation)

“Project management is the application of knowledge, skills, tools, and

techniques to project activities to meet project requirements.”
– PMBOK (Project Management Body of Knowledge, defined by
Project Management Institute (PMI))

9.2.1 Understanding project management

The economy of India has been growing over the last few years. It has been
a booming market for the evolution of industries in various sectors. Lots of
money is being invested in various projects. The government is always
looking for growth of the country. In this perspective, it becomes very
important for managers to manage the projects effectively in order to
complete them on time within the budgets and maximise the returns.
Managing a project has various challenges and hence the need of proper
and effective project management. This profession, therefore, requires
efficient and effective project managers.

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More and more companies across the globe are adopting the practices of
managing projects, looking out for skilled managers and practitioners,
thereby increasing the demand for project managers globally. An
organisation understands a project as an activity that starts with a
description of a mission and ends with the completion of a deliverable or
product. An effective project management will result in identifying the tasks
required to achieve the goals of the project and preparing an effective plan
by considering the manpower, material, cost, and time, which will help to
complete the project smoothly.
9.2.2 Definitions related to project management
Project
A project is a temporary endeavour with a finite completion date undertaken
to create a unique product or service. Projects bring form or function to
ideas or needs.
A project is a set of activities which are networked and aimed towards
achieving a common goal. Upon completion of all the activities, the goals of
the project would have been achieved. A project is undertaken to achieve a
purpose. Some examples of projects are listed below:
 Commissioning a new industrial unit
 Construction of a house
 Setting up of an office
 Developing a technology
 Launching a new product in the market
Management
Management is the technique of understanding the problems, needs, and
controlling the use of resources such as cost, time, manpower and
materials.
Project cycle
A project cycle consists of the various activities of operations, resources,
and the limitations imposed on them.
Process
A process is part of the project which consists of simple and routine
instructions to achieve a desired result of any activity of the project.

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A process is responsible for bringing about the changes in the inputs fed to
the process and giving out the desired output.
Resource
The resource of a project refers to manpower, machinery, money, and
materials which are required in the project.
Scope
Scope of the project refers to the various parameters that affect the project
in its planning, formulation, and execution.
Project cost
Project cost is the budgeted expenditure of the project.
Project Classes and definitions
Project Classes and definitions are as depicted in the table 9.1 below
Table 9.1: Project Classes and definitions

Type Duration Risk Complexity Technology Problems

A > 18 Months High High Breakthrough Certain
B 9-18 Months Medium Medium Current Likely
C 3-9 Months Low Low Best Some None
D < 3 Months Very low Very low Practical

9.2.3 Need for project management

Project management is considered a minimum skill area for any person
involved in any business. Project Management is necessary because:
 A project requires huge investments which should be properly utilised
and not resulting in waste.
 A loss in any project would have direct or indirect impact on the society
and may lead to failure of the organisation
 Failures may occur during the process of production (project
management prevents any failures and enables the project to run
smoothly).
 Scope of the project activity may undergo a change.
 Technology used may change during the course of project execution.
 Consequences of negativity in project related problems could be very
serious.
 Changes in economic conditions may affect a project.

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The five constraints that operate on every project are:

 Scope
 Quality
 Cost
 Time
 Resources

Self Assessment Questions

State True or False
1. A project is a set of activities which are networked and aimed towards
achieving a common goal. (True/False)
2. A process is part of the project which consists of complex instructions
to achieve a desired result of any activity of the project. (True/False)
3. Project management involves understanding its scope and various
processes in the project cycle. (True/False).

9.3 Project Management Principles

Project management can be considered to have five dimensions which are
necessary to be managed. The dimensions are Features, Quality, Cost,
Schedule, and Staff. Figure 9.2 depicts the five dimensions.

Fig. 9.2: Dimensions of Project Management

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The five dimensions of project management are dependent of one another.

For example, if you add staff, the schedule may shorten and the cost might
increase. The trade-offs among the five dimensions of project management
are not linear. For each project, you need to decide which dimensions are
critical and how to balance the others to achieve the key project objectives.
Each of the five dimensions can take one of three roles on any given
project:
1. Driver: A driver is a key objective of the project. It has low flexibility
towards the project team.
2. Constraint: A constraint is the limiting factor beyond the control of
project team. It gives the project team virtually no flexibility.
3. Degree of Freedom (DoF): Any project dimension that is neither a
driver nor a constraint becomes a degree of freedom. A degree of
freedom provides wider latitude towards the project team for balancing
that dimension against the other four.
An important aspect of this model is the relative priorities of the dimensions
that has to be negotiated in advance by the project team, customers, and
management; and not which of the five dimensions turn out to be drivers or
constraints on any given project. A graphical way to depict these points is to
use a ‘Kiviat diagram’ which is popularly known as radar chart, polar chart,
and spider chart as depicted in figure 9.3.
1
A radar chart is a graphical method of displaying multivariate data in the
form of a two-dimensional chart of three or more quantitative variables
represented on axes starting from the same point. A Kiviat diagram is a
graph which allows us to plot several values of a project. The Kiviat graph is
a useful tool in project management to compare the relative flexibility of the
parameters considered. In this case, the five parameters (features, quality,
cost, schedule, and staff) of project management can be graphically
represented as an irregularly shaped polygon on a set of normalised axes.
The position of each point on its axis indicates the relative degree of
flexibility of that dimension for a particular project. It is plotted on an arbitrary
scale of 0 – 10.

1
http://en.wikipedia.org/wiki/Radar_chart,
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Production and Operations Management Unit 9

 ‘0’ would indicate – completely constrained

 ‘10’ would indicate - completely flexible

Fig. 9.3: Kiviat Graphical Representation

9.3.1 Project management knowledge areas

The Project Management Body of Knowledge (PMBOK) is a collection of
processes and knowledge areas generally accepted as best practice within
the project management discipline. The knowledge areas of project
management are the following:
 Project integration management, cost management, and
communications management.
 Project scope management, quality management, and risk
management.
 Project time management, human management, and procurement
management.

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Figure 9.4 depicts the project management knowledge areas.

Project
management

Project Project Project

Integration Scope Time
Management Management Management

Project Project Project

Cost Quality HR
Management Management Management

Project Project Executing

Communication Risk Processes
Management Management

Fig. 9.4: Project Management Knowledge Areas

For a project to be successful, it is necessary to understand its relationship

with other management disciplines. Other management supporting
disciplines are business legal issues, strategic planning, logistics, human
resource management, and domain knowledge.
9.3.2 The Project Manager (PM) and responsibilities of PM
A project manager is a person who is in charge of all aspects of the project
and is responsible for carrying out all the tasks of a project. Responsibilities
of the project manager are:
 Budgeting and cost control
 Scheduling tasks
 Allocating resources
 Tracking project expenditures
 Ensuring technical quality
 Managing relations with the customer and company
Life cycle of a project manager overlaps with the development life cycle in
the middle. However, the duties of a project manager start before the
development and continue after delivery of the product. The project
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manager is a person who is identified with a project, no matter if it is a

success or failure. A good example is Mr. E. Sridharan who is associated
with Kolkata Metro, Konkan Railway, and Delhi Metro projects. Similarly, the
Unique Identification Authority of India (UIDAI) is an agency of the
Government of India responsible for implementing the AADHAAR scheme, a
unique identification project and Mr. Nandan Nilekani, former co-chairman of
Infosys Technologies, was appointed as the first Chairman of the authority
in June 2009.
9.3.3 Project failure
A project may fail because of one or more of the following reasons:
 Failure at critical stages
 Factors contributing to a project’s success not properly taken care of
during all the stages
 Emphasis on Information and Communication Technology (ICT) projects
 Common problems encountered during projects.
Let us know more in detail the reasons for the failure of a project in this
section.
 Failure at critical stages: The incidents of project failure are due to
following reasons:
 Projects being initiated at random at all levels
 Project objective not in line with business objective
 Project management not observed
 Project manager with no prior experience in the related project
 Non-dedicated team
 Lack of complete support from clients
 No emphasis of factors contributing to project success:
 Project objective in alignment with business objective
 Working within the framework of project management methodology
 Effective scoping, planning, estimation, execution, controls and
reviews, closure intertwined with quality
 Proactive approach towards project bottlenecks
 Communication and managing expectations effectively with clients,
team members, and stake holders
 Prior experience of project manager in a similar project

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 No emphasis of Information and Communication Technologies

(ICT) projects:
 Involve information and communications technologies such as the
World Wide Web, e-mail, fibre-optics, and satellites
 Enable societies to produce, access, adapt and apply information in
greater amounts, more rapidly and at reduced costs
 Offer enormous opportunities for enhancing business and economic
viability
 Common problems encountered during projects:
 No prioritisation of project activity from an organisational position
 One or more of the stages in the project mishandled
 Less qualified/non-dedicated manpower
 Absence of smooth flow of communication between the involved
parties

Remember
 The dimensions of project management are Features, Quality, Cost,
Schedule, and Staff. They are dependent of one another.
 The Kiviat graph is a useful tool in project management to compare the
relative flexibility of the parameters considered.

Self Assessment Questions

4. The project management dimensions are dependent on one another.
(True/False)
5. A graphical way to depict the project management dimensions is to use
a ‘Kiviat diagram’. (True/False)
6. Project management dimensions are: features, quality, _____, ____
and _____.
7. ICT Offer enormous opportunities for enhancing ______ and _______
viability.

9.4 Essentials of Project Management Philosophy

9.4.1 Characteristics of project mindset
Project management is all about the mindset. Figure 9.5 depicts all the
major characteristics of a project mindset.

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Fig. 9.5: Characteristics of Project Mindset

a) Time: It is an important parameter in framing the right mindset. It is

possible to improve the pace of the project by reducing the time frame of
the process. The mindset is normally to work out a comfort mode by
stretching the time limits.
b) Responsiveness: Responsiveness refers to quickness of response of
an individual. The vibrancy and liveliness of an individual or an
organisation are proportional to its capabilities to respond to evolving
processes and structure.
c) Information sharing: Information is power. Information is the master
key to today’s business. Information sharing is an important
characteristic of the project mindset today. A seamless flow of
information is the key to build a healthy mindset among various
stakeholders in a project.
d) Processes: Project mindset lays emphasis on flexible processes. The
major difference in a process and a system is in its capabilities of
providing flexibility to different situational encounters. Flexible processes
greater capabilities of adaptability.

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e) Structured planning: Structured planning based on project

management life cycle enables one to easily and conveniently work
according to the plan. It also enables efficient use of project resources
and prioritisation of the activities based on resource planning.
Hence, having a right mindset and flexible processes in place is very
important for sound project management.
9.4.2 Project evaluation and selection criteria
During project evaluation, the following nine criteria may be considered
important:
 Relevance:
 Is the project relevant to the defined scope in terms of the deliverable
product and service?
 State-of-the-art technical methodologies:
 Check if the state-of-the-art methodologies are adequately described?
 Relevance to market:
 Has any market analysis been done?
 Is there any documentation of the various market opportunities?
 Creativity:
Creativity is required to understand and develop a project as
innovatively as possible and should be well described in its documents.
The project objectives may be creatively quantified for its
measurements.
 Are the outcomes of each such objective task clearly defined?
 Potential:
 Is there an adequate description of the project methodologies and its
dissemination which would be used in future?
 Are the potential products or services of future identified?
 Project management and work plan:
 Is there a project management and work plan?
 Are the roles and responsibilities of each project member clearly
defined?
 Effort justification:
 Are the efforts in-line with the work and the objectives to be achieved?
 Is there enough competence for doing research?
 Is there any value addition to the project?

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9.4.3 Typical characteristics of a project

A project is a temporary endeavour with a finite completion date undertaken
to create a unique product or service. Projects bring form or function to
ideas or needs. Project has a start and an end date. Also, a project is:
 A programme of non-routine work bringing about a beneficial change.
 Guided by at least one well-engaged sponsor who has both adequate
authorities and resources to charter the project effort.
 A multi-disciplinary team brought together for the project.
 Scope of work that is well defined.
 Constrained by cost, time, and quality.
9.4.4 Project parameters for negotiation
During the course of a project, a team negotiates for one or more of the
following constraints:
 Scope, cost and schedule objectives
 Changes to scope, cost or schedules
 Contract terms and conditions
 Resources
9.4.5 Value addition of project management
Projects may be completed with one or more of the following undesirable
outcomes:
 Stretched deadlines
 Over stressed team
 Wasted resources
 Unmet customer functional requirements
 Overshot budget
A good project management methodology provides a framework for the
processes. It provides guidelines for the execution of the project that greatly
increases the chances of the project being successful, and therefore
provides value to the project. Some of the steps of a good project
management are listed below.
 Define the project
 Set manageable tasks
 Obtain resources
 Build a team

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 Plan and allocate the tasks

 Monitor and control the work
 Report progress to higher officials
 Close down the project when completed
 Review the project
9.4.6 Project management players, their roles and responsibilities
The players
Project management players are individuals and organisations who are
involved in the project. The players of the project management are:
 Project manager: Project manager is the individual responsible for
managing the project.
 Customer: Customer is the individual or organisation that will use the
product, that is, the end result of the project.
 Performing organisation: Performing organisation is the enterprise
whose employees are most directly involved in doing the work of the
project.
 Sponsor: Sponsor is the individual or group within or external to the
performing organisation which funds the project.
These players are also called ‘stakeholders’ of the project. The individual
players are actively involved in the project and play an important role to
successfully complete the project. The players’ interest may be affected
(positively or negatively) by the outcome (success or failure) of the project.
Thus, they have influence over the project and its results.
Roles and responsibilities
The roles and responsibilities of players while managing projects are given
below:
 There are a number of projects which an organisation works on. It is not
possible for one individual to manage all the projects. There is a team of
managers who manage the projects.
 There may be different teams working on different projects.
 An experienced project manager and his/her team may manage more
than one project at a time.

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 The project team is responsible for ensuring that the project upon
completion, shall deliver the gain in the business for which it is intended
for.
 The project team has to properly coordinate with each other working on
different aspects of the project.
 The team members are responsible for the completion of the project as
per the plans of the project.

Remember
 Time, information sharing, processes, and structured planning are the
main characteristics of project mindset.
 During project evaluation, the following nine criteria may be
considered important – relevance, state-of-the-art technical
methodologies, relevance to market, creativity, potential, project
management and work plan, and effort justification.
 Project manager, customer, performing organisation, and sponsor are
the players of project management.

Self Assessment Questions

State True or False
8. A good project management methodology provides a framework for the
processes. (True/False)
9. Time is not a characteristic of project mindset. (True/False)
10. Project mindset does not lay emphasis on flexible processes.
(True/False)

9.5 Project Planning

9.5.1 Scoping
The main objective of scoping is to:
 Define the project boundaries.
 State the objectives that the project will cover.
 Provide directions to the project and to enable assessment of the final
products quality.

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Scoping of project enables the manager to prepare an outline of the project

plan.
Outline of the project plan
For any project work to be undertaken, it is good practice to prepare an
outline of the project. The outline is the template of the project preparation. It
comprises the following aspects:
 Context for the project: Describe the relevant economic, technological,
and political aspects of the business context, as well as business
strategy, objectives, issues or problems, and a listing of the past events
pertaining to the project.
 Purpose and objectives of the project: The purpose of the project
indicates the reasons for undertaking the project, its benefits, goals, and
other aspects of the project deal. The objectives of the project are the
mean things that will be done to achieve the purpose.
 Tasks, milestones, and deliverables: The project manager decides
the tasks, milestones, and deliverables of the project. He/she would
make a list of all the tasks pertaining to the project, identify the person in
charge for each, duration for each task, along with the target time of
completing each such listed task.
A typical outline of the task is:
 Development of plan and approval of the plans
 Literature survey
 Data collection
 Data analysis
 Findings
 Interpretation and conclusions
 Recommendation on the project and presentation
 Documentation of report
 Uncertainties, risks and opportunities, and planned responses: prepare
a list of all such events that occurred in the past and their chances of
occurrences in future, which may have negative or positive impact on
completion of the project
 Critical success factors: identify at least four to five factors which must
go right for the project to succeed
 Use GANTT chart of tasks to monitor and control the project deliverables
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GANTT chart
“A GANTT chart is a graphical representation of the duration of tasks
against the progression of time.”
Source: http://www.ganttchart.com/

A Gantt chart as depicted in figure in 9.6 is a useful tool for planning and
scheduling projects as well as for monitoring and controlling the project
deliveries.

Fig. 9.6: GANTT Chart

There are a number of advantages of Gantt charts such as:

 A GANTT chart uses a ’fill in the bar’ method to indicate the progress of
the project.
 It lays out the order in which the tasks need to be carried out.
 It helps in planning the time required for completion of a project.
 A GANTT chart shows dependencies between tasks.
 It shows all the tasks to be achieved at any point of time.
 It allows planning for the remedial actions, if any delay, to complete the
project back on time.

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 Along with a ‘milestone chart’, helps you to represent the planned bar
which indicates the deadlines and other significant events of the project.
Figure 9.7 representing progress bar and planned bar.

Fig. 9.7: GANTT Chart Representing Progress Bar and Planned Bar

How ICICI Bank used Gantt chart for setting up a branch

ICICI Bank, a popular name among the private banks in India is also known
for rapid expansion in terms of establishing new branches. The process of
setting up and running a branch is standardised using the popular project
management tool Gantt chart. Accordingly, the whole job of setting up a
branch is completed in 30 working days. The longest activity is
manufacturing of furniture off the site spanning 21 days and the shortest
activity is pest control which spans one day. The different civil and electrical
works are carried out partially sequentially and partially concurrently to
speed up the process. The last day is kept for cleaning of site. A partial view
of the Gantt chart is shown here.
[Sources: www.icicibank.com and ’Business Today’, 3 December 2007]

Fig. 9.7 a: GANTT Chart

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Tasks involved in scoping

The tasks involved for the project manager while scoping of project are
listed below. He/she has to:
 Establish project objectives which could be identified from clients
through workshops and interviews. This will ensure project alignment
with the business direction of the organisation. Project objectives may
be formulated as S.M.A.R.T:
 S – Specific
 M – Measurable
 A – Achievable (recently Acceptable is used regularly as well)
 R – Relevant
 T – Time terminated (bounded)
 Establish scope of investigation in order to determine the dimension that
applies to the project and to identify the constraints, specific limitation or
exclusions pertaining to the project. Record any assumptions made in
defining the scope.
 Identify initial requirement and validate them against the project
objective(s).
 Identify the criteria for assessing the success of both the final project
and the process used to create it.
 Outline the solution to illustrate the feasibility of achieving the defined
business requirements for the project.
 Identify training requirement to determine the probable client training
and technical writing.
 Review project scope by first reviewing the objectives, statements and
scope definition documents and then verifying it to check if it has met the
standards.
Using the project plan
A project plan is a preliminary document that guides the execution of a
project.
The key stages work plans and the actual performance should be compared
with the project plan prepared for a particular stage. The project plan should
be tracked throughout for which various checklists could be used. The value
of certain key parameters must be measured. Issues such as how the task,
the effort and the defects are tracked, what tools are used, what reporting

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structure and frequency are followed are decided at various stages. In case
of differences, the reasons behind the changes are analysed and the
deliverable in terms of cost, schedule, and effort are altered accordingly.
Planning tools
There are several planning tools which may prove useful for coordinating a
project successfully. In this section we will discuss each of these tools.
 Project organisation and structure:
 Identifying the key personnel
 Identifying the business areas that are within the scope or directly
interface with the scope boundary
 Listing the business areas in the ‘Business area’ column of the project
assignment worksheet
a. Project management team: A senior management team will be
accountable for the project. They identify project sponsor, client
representative, and technical representative. A project management
team consists of:
 Stage managers who plan and manage the project on a day-to-day
basis for this stage.
 Project coordinators such as client coordinator and technical
coordinator who define these coordination, control activities and
identify the suitable personnel to carry them out.
b. Key stakeholders: It is important to identify management level
personnel who are critical to the success of the project. The
responsibilities of the key stakeholders must be documented.
c. Stage teams: For each stage of project management life cycle,
appropriate personnel should be identified. After allocation of staff to the
stage, the team structure is defined and team leaders appointed. It is
important to document the time commitment and responsibilities to be
performed by the team members.
d. Key resources: Individuals assigned to a key resource role may work
towards gathering ‘Business key resources’ and ‘Technical key
resources’. They are project coordinators and team invitees.

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e. Determine training requirements: Training involves:

 Assessing the capabilities and skills of all those identified as part of
the project organisation.
 Establishing a training plan to acquaint the project team members with
the methodologies, technologies, and business areas under study.
 Updating the project schedule to incorporate the scheduled training
activities.

Remember
A GANTT chart is a graphical representation of the duration of tasks
against the progression of time. Planning, scheduling, monitoring, and
controlling the project deliveries are represented graphically.
The planning tools which may prove useful for coordinating a project
successfully are project organisation and structure, project management
team, key stakeholders, stage teams, key resources, and determine
training requirements.

9.5.2 Work Breakdown Structure (WBS)

The entire process of a project may be considered to be made up on
number of sub process placed in different stage called the Work Breakdown
Structure (WBS). A typical example of a WBS of a recruitment process is
depicted in figure 9.8.
WBS is the technique to analyse the content of work and cost by breaking it
down into its component parts. Project key stages form the highest level of
the WBS, which is then used to show the details at the lower levels of the
project. Each key stage comprises many tasks identified at the start of
planning and later this list will have to be validated.
WBS is produced by identifying the key elements, breaking each element
down into component parts and continuing to breakdown until manageable
work packages have been identified. These can then be allocated to the
appropriate person. The WBS does not show dependencies other than a
grouping under the key stages. It is not time based; there is no timescale on
the drawing.

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Fig. 9.8: Example of Work Breakdown Structure

What are Lead Time and Lag Time?

Lead time: It is an amount of time, which a successor task can
overlap with its predecessor task i.e., the time before the completion
of the predecessor at which the successor can start.
Lag time: An amount of time, between a predecessor and a
successor task i.e., the time after the completion of the predecessor
that the start of the successor is delayed.

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Self Assessment Questions

Fill in the blanks:
11. A project plan is a preliminary document that guides the _______ of a
project.
12. _______ is a technique to analyse the content of work and cost by
breaking it down into its component parts.

9.6 Project Process Flows

Project management is composed of interacting processes organised in
groups:
 Project processes
 Process groups
 Process interaction
 Customisation
9.6.1 Project processes
A project process is a series of activities to achieve the target. Project
process is classified into two main categories:
1. Project management process: Project management process is defined
by the organisation. It describes and organises the work of the project.
2. Product oriented process: Product oriented process is defined by the
life cycle. It specifies and creates products and related works.
9.6.2 Process groups
Project management processes can be categorised under five process
groups – initiating processes, planning processes, executing processes,
controlling processes, and closing processes. The connection between
process groups in a phase is depicted in figure 9.9.
1. Initiating processes: Initiating processes give recognition to start and
establishing commitment.
2. Planning processes: Planning processes are meant for devising and
maintaining a workable scheme to accomplish the business needs.
Proper planning is essential to increase the efficiency and effectiveness
of the resources.

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3. Executing processes: Executing processes are used for coordinating

people and resources to carry out the plan. As described earlier,
improper execution even with a good planning will result into project
failure.
4. Controlling processes: Controlling processes monitor and measure
progress on continuous basis and take necessary remedial actions. This
helps in ensuring that the project is on schedule and under budget. Any
major deviations are also addressed as a part of this process.
5. Closing processes: Closing processes formalise acceptance and
bringing project to an orderly end.

Planning
Initiating
Processes
Processes

Executing
Controlling
Processes
Processes

Closing
Processes

Fig. 9.9: Connection between Process Groups in a Phase

9.6.3 Process interactions

These individual processes are linked by inputs and outputs. Central to
them are the tools and techniques. This is depicted in figure 9.10:

Fig. 9.10: Process Interactions

 Inputs: Inputs refer to the client documents converted to action plans to

be acted upon. They also contain other necessary information required
to be acted upon in a particular process.

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 Tools and techniques: They refer to the mechanisms applied on to the

inputs to create desired outputs. There are various standard tools and
techniques available for each of the processes. Organisation may use
them or customise one according to their needs.
 Outputs: Outputs refer to the documents that are the results of the
process. These in turn may again act as an input for next process.
Let us now look at the interactions of each of the process groups.
Initiating processes
Every process is initiated by management group decisions which results in
the next phase of the project.
Planning processes
Interactions focus on planning. Planning processes are highly
interdependent. Hence, this makes it more important that things are planned
properly. If there is an overrun on one parameter, the entire project may be
in jeopardy. For example, if the cost is unacceptable, scope and time may
need to be redefined.
Executing processes
Interactions in this group depend on the nature of the work. They are
dynamic and dependent on team innovations and responsiveness.
Controlling processes
The interactions are aimed at measuring project performance (time, cost,
quality) and identifying the variances from the plan. Tracking the project
performance is a continuous process. In case of deviation from the planned
project, plans are updated and corrective actions are taken.
Closing processes
The interactions revolve around review of the project, findings and analysis
of the project performance with respect to various processes.
9.6.4 Customisation
At times, project management processes need to be customised based on
the requirement of the product. The following are some examples of
customisation:
 Large projects may need details – A detailed project management
plan might be necessary to indicate every detail in the initial stages.

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 Smaller projects may need relatively less details – A detailed plan

may not be required in the initial stages.
 Process details might change for other reasons – Resource
identification might be required for scope definition.
On the whole, it may be possible to represent the processes in general as a
model. The ‘Schematic Flow’ diagram of the processes can be represented
as a flow chart as depicted in figure 9.11.

Fig. 9.11: Flow Chart of the Processes

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Self Assessment Questions

Fill in the blanks:
13. Process groups consist of _______, planning, _______, controlling,
and ________ processes.
14. In the customisation process, smaller projects may need relatively
______ details.

Case-let

The cost of an oil refinery facility usually runs into billions of dollars. The
budgeting for these enormous projects involves many complex
engineering and materials considerations. Fluor Corporation - a
multinational engineering, construction and project management firm in
the oil and gas sector - has recently bought an expensive risk
management solution from Palisade. The company project managers
feel the investment in risk management was necessary for them to deal
with the ‘billion dollar uncertainties’ in its estimates for clients.

9.7 Summary
Let us recapitulate the important concepts discussed in this unit:
 A project is a set of activities which are networked and aimed towards
achieving a common goal.
 Project management is the application of knowledge, skills, tools, and
techniques to project activities to meet project requirements
 Project management can be considered to have five dimensions which
are necessary to be managed. The dimensions are Features, Quality,
Cost, Schedule, and Staff
 Project management players are individuals and organisations who are
involved in the project
 The entire process of a project may be considered to be made up on
number of sub process placed in different stage called the Work
Breakdown Structure (WBS).
 Project management processes can be categorised under five process
groups – initiating processes, planning processes, executing processes,
controlling processes, and closing processes

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9.8 Glossary
 Customisation: to produce or make something according to a
customer's individual requirements
 Multivariate data: Data having or involving more than one variable

9.9 Terminal Questions

1. Define project management.
2. What do you mean by project cycle and project scope.
3. What are the reasons for failure of a project?
4. What are the various roles and responsibilities of various players in
project management?
5. What are the objectives and tasks involved in scoping?
6. Explain WBS.

9.10 Answers

Self Assessment Questions

1. True
2. False
3. True
4. True
5. True
6. Cost, schedule and staff
7. Business and economic
8. True
9. False
10. False
11. Execution
12. WBS
13. Initiating, executing, closing
14. Less

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Terminal Questions
1. Refer 9.2
2. Refer 9.2.2
3. Refer 9.3.3
4. Refer 9.4.6
5. Refer 9.5.1
6. Refer 9.5.2

9.11 Case Study

Project Management – Critical Success Factor for Indian IT Companies
Traditional project management, as it's used in construction or
manufacturing, deals with solid, tangible elements. But IT projects are
mainly to do with completion of intangible products with strict deadlines.
Basically they involve developing business solutions through a software or
software and hardware combination. These products are constantly under
the threat of becoming quickly obsolete due to fast developments in
technology. Hence the deadlines are sacrosanct. Indian IT companies earn
bulk of their revenue through international IT projects outsourced to them.
These projects are short-term efforts to create a unique product, service or
environment, such as removing old servers, developing a custom e-
commerce site, creating new web sites or merging databases. Most
interestingly IT projects are executed round the clock as they are broken
down into different segments and worked out at different places across the
globe. Because of the time difference between different geographical
regions across the world the IT project never sleeps!
According to a survey, about one third of IT projects are completed
successfully. The reasons are: They face unique technology challenges,
from hardware, operating system, network or database problems, to security
risks, compatibility issues, and the frequent changes manufacturers make to
their hardware and software configurations. Hence project managers in
charge of IT project need to acquire special skills to tackle the unique issues
of IT projects.
[Source: http://www.cio.com/article/40342]

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Discussion Questions:
1. What special skills might be required for successful completion of IT
projects?
2. IT projects are geographically scattered but electronically connected all
through the duration of the project. Comment on the importance of
communication, coordination and documentation.

Reference:
 Gaither. N, Frazier. G, Operations Management (9th Edition), South-
Western/Thomson Learning.

E-Reference:
 http://www.cio.com/article/40342. Retrieved on 20, December 2011.

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Production and Operations Management Unit 10

Unit 10 Project Implementation,

Control and Closure
Structure:
10.1 Introduction
Objectives
10.2 Project Management Life Cycle
Phases of project management life cycle
10.3 Project Monitoring and Control
Steps for monitoring and controlling a project
Use of network diagrams in project management
Program Evaluation Review Technique (PERT) chart
Project control process
10.4 Change Control
Changing project management process
Tools for changing process
10.5 Risk Management
10.6 Project Closure
Completion of all activities and benefits
Post implementation review
Final project reporting and documentation
10.7 Summary
10.8 Glossary
10.9 Terminal Questions
10.10 Answers

10.1 Introduction
In the previous unit you studied about project management and planning
process. You learnt the principles of project management and the essentials
of project management philosophy. In this unit you will learn the
implementation of projects.
Project managers have to keep in mind the various problems that may be
encountered during the project. Associated with the project could be the
risks that may deter the project processes. Careful monitoring and regular
supervision is required all through the project.

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It is therefore necessary for project managers to understand the controls

that are required to manage a project. The manager must first understand
the change processes in a project to bring changes smoothly
The important aspect of any such process introduction or any change is to
execute it correctly and then to review the process post execution with
proper documentation. In this unit all these aspects are explained.
Objectives:
After studying this unit, you should be able to:
 explain the project management life cycle and its phases
 identify the risks in a project
 analyse the procedure to monitor and control the project
 list the ways of conducting reviews on project completion
 explain the documentation procedure of project reports on completion of
project

10.2 Project Management Life Cycle

A life cycle of a project consists of the following activities:
 Understanding the scope of the project
 Establishing objectives of the project
 Formulating and planning various activities
 Executing the project
 Monitoring and controlling the project resources
 Closing and post completion analysis
10.2.1 Phases of project management life cycle
Project management life cycle has six phases:
1. Analysis and evaluation phase
2. Marketing phase
3. Design phase
4. Execution phase
5. Control – inspecting, testing, and delivery phase
6. Closure and post completion analysis phase
In this section, we will learn about the six phases of project management life
cycle in detail. Figure 10.1 depicts a project management life cycle.

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Fig. 10.1: Project Management Life Cycle

Analysis and evaluation phase

Analysis and evaluation phase is the initial phase of any project. In this
phase, information is collected from the customer pertaining to the project.
From the collected information, the requirements of the project are
analysed. According to the customer requirement, the entire project is
planned in a strategic manner. The project manager conducts the analysis
of the problem and submits a detailed report to the top management.

Project manager analysis report

The report should consist of:
 details of the project justification
 details on the problem
 methods of solving the problem
 list of the objectives to be achieved
 estimation of project budget
 success rate of completing the project
 information on the project feasibility
 information of the risks involved in the project

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The important tasks of the project manager during the phase of analysis and
evaluation include:
 Specification Requirements Analysis (SRA): SRA has to be
conducted to determine the essential requirements of a project in order
to achieve the target.
 Feasibility study: Feasibility study has to be conducted to analyse
whether the project is technically, economically, and practically feasible
to be undertaken.
 Trade-off analysis: Trade-off analysis has to be conducted to
understand and examine the various alternatives which could be
considered for solving the problem.
 Estimation: Before starting a project, estimation has to be conducted on
the project cost, effort required for the project, and the functionality of
various processes in the project.
 System design: According to the customer requirement, a general
system design has to be chosen to fulfil the requirements.
 Project evaluation: The project has to be evaluated in terms of
expected profit, cost, and risks involved.
Marketing phase
A project proposal is prepared by a group of people including the project
manager. This proposal has to contain the strategies adopted to market the
product to the customers.
Design phase
Design phase involves the study of inputs and outputs of the various project
stages. Figure 10.2 depicts the study of inputs and outputs in design phase.
 Inputs received consist of: project feasibility study, preliminary project
evaluation details, project proposal, and customer interviews.
 Outputs produced consist of: system design specifications, functional
specifications of the project, design specifications of the project, and
project plan.

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Fig. 10.2: Study of Inputs and Outputs in Design Phase

Execution phase
In execution phase, the project manager and the team members work on
the project objectives as per the plan. At every stage during the execution,
reports are prepared.
Control – inspecting, testing and delivery phase
During this phase, the project team works under the guidance of the project
manager. The project manager has to ensure that the team is implementing
the project designs accurately. The project has to be tracked or monitored
through its cost, manpower, and schedule. The project manager has to
ensure ways of managing the customer and marketing the future work, as
well as ways to perform quality control work.
Closure and post completion analysis phase
Upon satisfactory completion and delivery of the intended product or
service, the staff performance has to be evaluated. The project manager
has to document the lessons from the project. Reports on project feedback
get prepared and analysed. A project execution report is prepared.
Let us have a quick recap of what is involved in the above phases.
 Analysis and evaluation phase: The preparation stage involves the
preparation and approval of project outline, project plan, and project
budget.
 Assigning task to the team members: The next stage involves
selecting and briefing the project team about the proposals, followed by

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discussions on the roles and responsibilities of the project member and

the organisation.
 Feasibility study: The feasibility or research stage establishes whether
the project is feasible or not and establishes the risk factors likely to be
faced during the course of the project execution and the related key
factors to overcome the problems.
 Execution phase: A detailed definition and plan for the project and its
execution is prepared by the team and coordinated by the project
manager.
 Implementation stage: The implementation stage involves the
execution of the project as per the plan. This also involves careful
monitoring of the project progress and managing the changes, if any,
within the scope of the project framework.
 Closure and post completion analysis phase: The final stage involves
satisfactory delivery of the product/service to the customers. Upon
completion, a project review is conducted by the project manager along
with team members, sponsors, and customers. A project review process
involves discussions about the progress, performance, hurdles that were
overcome and problems faced, so that, such instances could be avoided
in future projects.
Implementation and control activities:
 Initiating work
 Monitoring and tracking progress
 Comparing schedules and budgets to plans
 Analysing impact of changes and progress
 Coordinating activities and people
 Making adjustments to the plan as required
 Completing the project
 Assessing project results

Self Assessment Questions

State True or False.
1. A life cycle of a project consists of monitoring and controlling the
project resources as one of the phase. (True/False)

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2. SRA has to be conducted to determine the non-essential requirements

of a project in order to achieve the target. (True/False)

10.3 Project Monitoring and Control

Any project aimed at delivering a product or a service has to go through
phases in a planned manner, in order to meet the requirements. It is
possible to work according to the project plan only by careful monitoring of
the project progress. It requires establishing control factors to keep the
project on the track of progress. The results of any stage in a project,
depends on the inputs to that stage. It is therefore necessary to control all
the inputs and the corresponding outputs from a stage. A project manager
may use certain standard tools to keep the project on track. The project
manager and the team members should be fully aware of the techniques
and methods to rectify the factors influencing delay of the project and its
product.
To analyse the project, methodologies such as, Programme Evaluation
Review Technique (PERT) and Critical Path Method (CPM) may be used.
 In the PERT method, one can find out the variance and use the variance
to analyse the various probabilistic estimates pertaining to the project.
 Using the CPM, one can estimate the start time and the finish time for
every event of the project in its WBS (Work Breakdown Structure).
The analysis charts can be used to monitor, control, track, and execute a
project.
10.3.1 Steps for Monitoring and Controlling a Project
The various steps involved in monitoring and controlling a project from start
to end are depicted in figure 10.3.

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Fig. 10.3: Steps for Monitoring and Controlling a Project

1. Preliminary work: The team members must understand the project

plans, project stage schedule, progress controls, tracking schedules,
summary of the stage cost and related worksheets. All the members
have to understand the tolerances in any change and maintain a change
control log. They must realise the need and importance of quality for
which they have to strictly follow a quality review schedule and
frequently discuss the quality agendas. They must understand the stage
status reports, stage end reports, stage end approval reports.
2. Project progress: The members must keep a track of the project
progress and communicate the same to other related members of the
project. They must monitor and control project progress, through the use
of regular check points, quality charts, and statistical tables. The
members must control the quality factors which are likely to deviate from
expected values as any deviation may result in changes to the stage
schedule. The project manager ensures that these changes are made
smoothly and organises review meeting with the project management
group. Thus, all the members are aware about the progress of the
project at all times. This helps them to plan well in advance for any
exigency arising due to deviation from planned schedule.
3. Stage control: The project manager must establish a project check
point cycle. For this, suitable stage version control procedures may be

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followed. The details are to be documented stage wise. Project files

have to be frequently updated with suitable version control number and
revision status should be maintained for each change. Team members
are identified who will exercise controls at various points of the project.
4. Resources: The project manager has to plan the resources required for
various stages of the project. He has to brief both the project team and
the key resources about the objectives of every stage, planned activities,
products, organisation metrics, and the project controls. This increases
the visibility into the project performance and hence, quality control can
be achieved. Allocating a right resource at the right place and the right
time significantly enhances the efficiency and effectiveness of the
resource.
5. Quality control: Quality control is very important in any project. Quality
control is possible if the project members follow the quality charts and
norms very strictly. Figure 10.4 depicts the possible ways to control
quality.

Fig. 10.4: Phases of Quality Control

 Schedule quality review: Project members are recommended to

schedule the quality review at the beginning and also the end of
every stage. This helps the project manager and team members to
plan well in advance for any unforeseen deviation.

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 Agenda for quality review: The project manager should create and
distribute a quality review agenda specifying the objectives,
products, logistics, roles, responsibilities, and time frames. This
increases the effectiveness of the review and also reduces the time
gap.
 Conduct quality review: The quality review is conducted in a
structured and formal manner. Quality review focuses on product
development and its quality factors. The project members check
whether the review meets the prescribed quality standards.
 Follow-up: Quality review complete product status is to be revised
from ‘In Progress’ to ‘Quality review Complete’. Actions planned are
strictly followed up to ensure conformity to the standards.
 Review quality control procedures: The project members verify
that the quality objectives for each product are appropriate. They
also ensure that all participants are satisfied both with the process
and its outcome.
6. Progress control: The progress control of a project can be achieved by
considering the following aspects. Figure 10.5 depicts the phases of
progress control.

Fig. 10.5: Phases of Progress Control

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 Monitor performance: The first step for any project control

mechanism is to monitor the progress. There are numerous ways to
monitor and measure various project parameters. For example, the
team members log in details of actual start date, actual finish date,
actual hours worked per task, estimated hours to complete the task,
elapsed time in hours to complete the task, any miscellaneous costs
incurred during a stage. These inputs become the base to monitor
the performance of the project and its stages.
 Update schedule: Update the schedule for:
 Actual start date for tasks started
 Actual finish date for tasks finished
 Actual hours worked per task
 Latest estimated work in hours to complete the task
 Update costs: Update the stage cost summary worksheet with
actual costs incurred during the period and estimated remaining
costs. Miscellaneous costs automatically get updated from the
scheduler, since they are calculated from actual work.
 Re-plan stage schedule: Review the tracking Gantt and cost
workbook and identify any deviation from the baseline. Analyse the
cause of the deviation. Refer back to the project control factors to
help determine the appropriate corrective action and adjust the
schedule accordingly. Determine if the stage has exceeded the
progress, cost and quality tolerance levels agreed with the project
management team. Review status of open issues and determine any
further action required on these issues. Review the status of any
outstanding quality reviews. Review any new change requests.
 Conduct team status review: Conduct a status meeting with the
project team. This is important to bring everyone on the same page
of the project progress. Typically, items for discussion are:
 Achievements of the completed activities
 Planned activities that are incomplete or overdue
 Activities for the next period
 New issues identified in the current period
 Issues closed in the current period
 Summary of results of quality reviews
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 Summary of schedule and cost status

 Suggested revisions to the plan
 Create status report: The status report provides a record of current
achievement and immediate expectations of the project. The status
has to be effectively communicated to all concerned parties.
 Create flash report: Summarise the accomplishments for the
month, schedule status, upcoming tasks for the month and any
major issues. Distribute the same to all project team members and
stakeholders.
 Project status reports: As discussed earlier, the status report
provides a record of current achievements and immediate
expectations of the project. This is generated on a regular basis
depending upon the type, requirements and phase of the project.
Typically it is generated for a week. A weekly status report may
include:
 Accomplishments during the period
 Items not completed during the period
 Proposed activities for the next period
 Any predicted slippage to the stage schedule, along with cause
and corrective action
 Any predicted cost overrun along with cause and corrective
action
7. Approvals: In any project, it is important to have top management or
project sponsors into confidence about all the aspects of the project.
This project stage reviews the decisions taken and actions planned and
get it approved by the top management. The goals of such review are to
improve quality by finding defects and to improve productivity by finding
defects in a cost effective and timely manner. The group review process
includes several stages like planning, preparation, overview of a group
review meeting, rework recommendations and follow-up.
10.3.2 Use of network diagrams in project management
Project management essentially uses network diagrams which consist of
circles or rectangles connected by arrows. These diagrams help in
visualising the flow of activities and establish the relationships between

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activities. They also serve the purpose of illustrating the various activities
and their inter dependence.
Historically, two types of network representations based on different
fundamental element have been in existence. They are PERT (Program
Evaluation and Review Technique and CPM (Critical Path Method).
Advantages of network diagrams
 Networks generated provide valuable project documentation and
graphically point out various project activities
 Applicable to a wide variety of projects and industries
 Useful in monitoring not only schedules, but costs as well
 Network diagrams like PERT and CPM show interdependencies and
precedence among the activities of a project
Benefits of PERT/CPM
 Useful at many stages of project management
 Mathematically simple
 Uses graphical displays
 Gives critical path and slack time
 Provides project documentation
 Useful in monitoring costs
10.3.3 Program Evaluation Review Technique (PERT) chart
A PERT chart is a project management tool. It is used to schedule,
organise, and coordinate tasks within a project.
PERT chart is a popular project management charting method. Using PERT
chart, the collection of series and parallel tasks performed in complex
projects can be represented as a network diagram. It represents the
activities and milestones of the project. Project network models represent
activities and milestones by arcs and nodes as depicted in figure 10.6 which
is an example of a PERT chart.

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Fig. 10.6: Example of PERT Chart

From the figure, we can observe that the:

 Numbered rectangles are nodes and represent events or milestones.
 Directional arrows or arcs represent dependent tasks that must be
completed sequentially.
 Diverging arrow directions (1-2 & 1-3) indicate possibly concurrent tasks.
 Dotted lines (6-9) indicate dependent tasks that do not require
resources.
PERT chart is very useful for expecting project completion time and the
probability of completion before a specified date. It is used to estimate the
start and end dates of an activity. The six steps involved in PERT planning
process are depicted in figure 10.7.

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Fig. 10.7: Steps Involved in PERT Planning Process

1. Identify the specific activities and milestones: The project manager
should identify and list the specific activities and milestones of a project.
Activities are the tasks required to complete the project. Milestones are
the events marking the start and end of one or more activity.
2. Determine the proper sequence of the activities: The identified tasks
of a project should be planned in sequence to determine the activities to
be performed. Tabulate the sequenced activities to be performed for
estimating the duration of the activities.
3. Construct a network diagram: Draw a network diagram representing
the serial and parallel activities, using activities sequence information.
4. Estimate the time required for each activity: The features of the
PERT for estimating the time required for each activity chart are:
 tO: Optimistic time
 tM: Most likely time
 tP: Pessimistic time

t o  4t m  t p
 tE: Expected time = t E 
6

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 Variance for each activity completion time is given as

2
 tp  to 
V   
 6 
 

 Standard deviation SD is given as SD  V

5. Determine the critical path: Critical path is determined by adding the
times for the activities in each sequence and determining the longest
path in the project. Critical path determines the Earlier Start Time (EST)
and Latest Completion Time (LCT) using the expected time for the
relevant activity.
6. Update the PERT chart as the project processes: According to the
project processes, update the PERT chart reflecting the new situations
of the project process.

Case-let
A project consists of the 7 activities and the details of the activities are
listed in the table 10.1.
Table 10.1: Project Details

Activity Predecessor Probabilistic Time Estimate (wks)

to tm tp

1-2 - 10 13 16

1-3 - 2 5 8

1-4 - 4 6 14

3-2 1-3 5 6 7

3-4 1-3 4 5 6
2-5 1-2, 3-2 10 11 18

4-5 1-4, 3-4 7 9 11

Determine the project completion time, critical path, and find out the
probability of completing the project in 23 weeks by the variance
method.

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Solution:
Based on the information given in the table on activities and their
predecessors the network is represented as depicted in the figure 10.8:
PERT chart.

1
3 5

Fig. 10.8: PERT Chart

t o  4t m  t p
Calculate the tE for each activity by the formula: t E 
6
Similarly calculate variance and standard deviation (SD) using the
formulas given below:
2
 tp  to 
V   

 6 

SD  V

The values of tE, V, and SD are tabulated in Table 10.2.

Table 10.2: Values of tE, V, and SD
Probabilistic Time
Activity tE (d) V SD
Estimate (wks)
to tm tp
1-2 10 13 16 13 1 1
1-3 2 5 8 5 1 1
1-4 4 6 14 7 2.78 1.67
3-2 5 6 7 6 0.11 0.33
3-4 4 5 6 5 0.03 0.17
2-5 10 11 18 12 1.78 1.33
4-5 7 9 11 9 0.44 0.67

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Calculate the EST and LCT for each node.

Forward Pass Computation:
Backward Pass Computation:
For the first node - 1, consider EST = 0,
Then,
EST2 = EST1 +d12
EST2 = 0 + 13 = 13 wks
If at any node, there is more than one predecessor, calculate EST for
each one and take the maximum.
Similarly calculate EST for other nodes and tabulate.
EST of node 5 = 25 wks
Now calculate LCT,
LCT2 = LCT5 - d25
LCT2 = 25 - 12 = 13 wks
ESTj = ESTi + dij

LCTi = LCTj - dij

Similarly, calculate LCT for other nodes and tabulate.

If at any node, there is more than one successor, calculate LCT for
each one and take the minimum.
Obtain the slack at each node. The slack at a node is given as:

Slack = LCT – EST

Table 10.3, tabulates the values of EST, LCT, and Slack of the five
nodes.
Table 10.3: Values of EST, LCT, and Slack
Critical(C) /
NODE EST LCT Slack
Non Critical(NC)
1 0 0 0 C
2 13 13 0 C
3 5 7 2 NC
4 10 16 6 NC
5 25 25 0 C

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The activities connecting the critical nodes with slack=0 are the critical
activities. Therefore the critical path is: 1 – 2 – 5

The project completion time is the EST or LCT of node 5. In this

problem, it is 25 weeks.

To determine the probability of completing the project in 23 weeks,

consider, TS= 23.

Consider, TE = 25, that is, the project completion time estimated. SD

along the critical path can be calculated as:

SD   Variance :along  critical  path

SD  11.78  1.67

Then, calculate Z (normal deviate),

TS  TE
z
sdcp

23  25
z  1.2
1.67
From normal distribution table,
Area corresponding to z = -1.2 is 11.5
Therefore the probability of completing the project in 23 weeks is 0.115,
which is very low.

10.3.4 Project control process

 The key to effective project control is to measure actual progress and
compare it to planned progress on a timely and regular basis and to take
necessary corrective action immediately.
 Establish a regular reporting period.
 During each reporting period, collect:
 data on actual performance

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 information on any changes to project scope, schedule and budget.

 If changes are incorporated, a new plan must be established.

Self Assessment Questions

State True or False
3. The project members must keep a track of the project progress and
need not communicate to other related members of the project.
(True/False)
4. Project files have to be frequently updated with suitable version control
number and revision status should be maintained for each change.
(True/False)

10.4 Change Control

Uncertainties are a part and parcel of any project and hence, we need to be
adaptive and flexible enough to accommodate such changes. Controlling
the changes in the project is possible through a proper change management
process and using necessary tools for controlling the change. Change
control is necessary to control the increase of work at various stages of
project and to manage effectively the disruptions in the stages, if any. These
factors may affect the progress of the project, resulting in deviations from
the stage schedules, project and stage cost and project scope.
10.4.1 Changing project management process
The project members should be responsive enough to handle the changes
demanded by the situation. The following are the processes involved in
bringing about a change as depicted in figure 10.9.
a) Request for a change: The need for the change is identified first.
Based on the need a formal request is made. This request can come
from either a member of the project team or a client or a coordinator or
key stakeholder.
b) Identify alternate solutions: Evaluate the change request and identify
several alternative solutions. Assess the alternatives with respect to the
functional scope, schedule, effort, and cost.

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c) Decide on the actions for the change: Present the change request,
alternative solutions and recommendation to the project management
team. The project management team is required to accept the
recommendation, choose an alternative solution, or request further
investigation. Based on this, a final action plan for the change is
selected.
d) Implement change: Once the project management approves a solution
for the change, make appropriate schedule and other project plan
adjustments to accommodate the change, communicate these to team
members, monitor progress, and execute quality control on the changes.

Fig. 10.9: Steps for Changing Project Management Process

10.4.2 Tools for changing a process

There are various tools which can be used to bring about a change in a
process. All such tools can be mainly classified into two types – change
management system and configuration management as depicted in figure
10.10.

Fig. 10.10: Tools for Changing a Process

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1. Change Management System (CMS): CMS is a methodology which

requires collection of all formal documented procedures, defining:
 how project performance is monitored and evaluated
 how project plans are updated
 how various measures are implemented to control the change
process
These procedures may be unique to an organisation based on their
project needs. It also includes procedures to handle the changes that
may be approved without prior review, so that the evolution of baseline
can be documented.
2. Configuration Management (CM): Configuration management
involves:
 Identifying the configuration items
 Defining the naming and numbering scheme
 Structuring the changes
 Defining a backup procedure
 Following the methods for tracking the status of configuration items
 Defining the responsibility and authority of the CMS.

Self Assessment Questions

Fill in the blanks:
5. ______ is necessary to control the increase of work at various stages
of project.
6. _______ is a methodology which requires collection of all formal
documented procedures, defining how project performance will be
monitored and evaluated.

10.5 Risk Management

What is Risk?
Risks are those events or conditions that may occur and whose occurrence
has a harmful or negative impact on a project.
What is Risk Management?
Risk management aims to identify the risks and then take actions to
minimise their effect on the project.
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Risk management entails additional cost. Hence, risk management can be

considered cost-effective only if the cost of risk management is considerably
less than the cost incurred if the risk materialises.
Four important components in risk management are risk assessment, risk
control, risk prioritising, and risk mitigation as depicted in figure 10.11.

Fig. 10.11: Components of Risk Management

1. Risk assessment: Risk assessment identifies the possible risks and

assesses the consequences by means of checklists of possible risks,
surveys, meetings and brainstorming, and reviews of plans, processes
and products. The project manager can also use the process database
to get information about risks and risk management on similar projects.
2. Risk control: Identify the actions needed to minimise the risk
consequences. This is also known as risk mitigation. Develop a risk
management plan. Focus on the highest prioritised risks. Prioritisation
requires analysing the possible effects of the risk event, in case it
actually occurs. This approach requires a quantitative assessment of the
risk probability and the risk consequences. For each risk, determine the
rate of its occurrence and indicate whether the risk is low, medium or of
high category. If necessary, assign probability values in the ranges as
prescribed based upon experience. If necessary assign a weight on a
scale of 1 to 10.

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3. Risk prioritising: Rank the risks based on the probability and effects on
the project. For example, a high probability, high impact item will have
higher rank than a risk item with a medium probability and high impact.
4. Risk mitigation: Select the top few risk items for mitigation and tracking.
Refer to a list of commonly used risk mitigation steps for various risks
from the previous risk logs maintained by the project manager and
select suitable risk mitigation step. The risk mitigation steps must be
properly executed by incorporating them into the project schedule. In
addition to monitoring the progress of the planned risk mitigation steps,
periodically revisit the risk perception for the entire project. The results of
this review are reported in each milestone analysis report. To prepare
this report, make fresh risk analysis to determine whether the priorities
have changed.
Self Assessment Questions
State True or False
7. Risks are those events or conditions that may occur and whose
occurrence has a harmful or negative impact on a project. (True/False)
8. The risk mitigation step must be properly executed by incorporating
them into the project schedule. (True/False)

10.6 Project Closure

Any project that is planned properly and executed as per the plan will also
close successfully. For successful completion of a project, every aspect of
the project should be monitored and controlled. Such aspects include the
resources used, time and efforts invested and the cost analysis.
Type of closure
 Normal – as planned
 Premature – early even if not complete
 Perpetual – runaway, never ending
 Failed – unsuccessful – cost of completion
 Changed Priority – due to resource constraints, misjudged values,
needs changes.

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Effective closure
 Ensure all deliverables are installed
 Handover documentation
 Stakeholder acceptance of deliverables
 Post-implementation review/audit
 Celebrate success
Project failure
Major Reasons for project failure
 Incomplete, ambiguous, inconsistent specifications
 Poor or no planning and/or estimating
 No clear assignment of authority and responsibility
 Not enough or wrong user involvement
 Lack of adequate tools and techniques
 Dependence on external sources (vendors, subcontractors)
 High staff turnover or inadequate training
Why projects fail?
Most failures have been put down to:
 Poor project specification
 Unrealistic timescales
 Timescales that are too long
 Inappropriate staff
 Failure to manage user expectations
 Failure to manage the change required
Source: Gido and Clements. Successful Project Management. Vikas Publishing
House. New Delhi, 2003

10.6.1 Completion of all activities and benefits

The closure of a project is followed by its analysis and performance
measured against its scheduled baseline version. The closure of a project
may result in the following benefits
 It implies that on successful completion of a project, it has not drifted
from its intended course and plans. Otherwise, it would have resulted in
a change and may also kick start another project affecting the main
project.

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Production and Operations Management Unit 10

 The project members are acknowledged for the completion of the

project, motivating them to take up more projects, wherein, the members
would be able to confidently handle and take care of all the problems
based upon their learning from earlier project.
 It results in setting up of processes for continued development and
improvement of the final product of any project forthcoming.
 It results in setting up of improved standard process and estimating
models for this type of future projects.
 It enables resource re-deployment.
Moreover, the deliverable at the end of each stage could be:
 A set of specified outputs for each stage of the project
 New products or modified existing product
 Items that may be less easy to distinguish like parameter setup data
transfer, staff training, etc.
10.6.2 Post implementation review
After every stage of a project is implemented, it may so happen that there
could be a minor change or modification which has to be reviewed. This is
known as post implementation review. The review is performed in four parts
as depicted in figure 10.12.
1. Final product review: The product obtained after every stage must
meet the requirements of that stage. If it completely meets the stated
objectives, then focus on the issues of maintenance of the processes
and product performance. If the final product does not completely meet
the objectives then identify the variations in the product and analyse the
variation. Study the factors responsible for the change and evaluate
each one separately.
2. Outstanding project work review: Many times it is found that there
may be some item of the project which is still not in its finished form. It
may be insignificant as it may be a by-product of that stage which may
not be required immediately for the next stage. Then the items that are
open should be resolved and necessary steps be taken to close such
open items.
3. Project review: Every aspect of a project from start to end has to be
reviewed. The objectives, performance criteria, financial criteria,

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resource utilisation, slips and gains of time, adherence to the project

definition, and plans have to be reviewed. All such review details and
reports have to be well documented for future use.
4. Process review: Every process is important in any project. One may
review the process to see, if any changes can be made to improve its
performance.

Fig. 10.12: Post Implementation Review

Tools for post implementation review

There are various tools for post project implementation review that may be
considered for improving and developing processes of the project. Reports
are prepared on the same which becomes the basis for all future discussion.
Some of the tools that may be considered for post implementation review
are the final product evaluation, outstanding project work evaluation, project
review questionnaire, and project evaluation as depicted in figure 10.13.
1. Final product evaluation: Final product evaluation may be done
through regularly organised meetings and quality reviews.
2. Outstanding project work evaluation: All outstanding works of a
project can be reviewed to check its output quality and performance.
3. Project review questionnaire: Project review questionnaire may
become important if the reviews are to be structured. Group discussion
may be initiated depending upon the points to be discussed.

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4. Process evaluation: Evaluation of any process is one of the key issues

of project.

Fig. 10.13: Tools of Post Implementation Review

10.6.3 Final project reporting and documentation

After completion of a project stage and the project as a whole, it is
documented. Reports are prepared to indicate the details. The objectives of
the stage and the project and the corresponding plans should be reviewed
and items that are still open should then be closed or resolved. The
outstanding items should be passed on to the person responsible for the
subsequent work. It is necessary to document every stage of the project.
Every review meeting by the project team and any other members of the
project organisation and follow-ups have to be well documented. The risks
that were managed have to be analysed and documented. Also, various
metrics could have been used during the course of the project and during
necessary changes in the stages. Effects of these on the process and on
the corresponding metrics should be evaluated and documented.

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Final project documenting

Some of the outcomes that need to be well documented are:
1. Key stages of the project
2. Project logic diagram
3. Key stages responsibility chart
4. Estimates for all key stages
5. Optimised project GANTT chart
6. Updated and reviewed project risk log
7. Risk management forms for new high risks and project operating
budget
This serves as a baseline for future project reference.

Self Assessment Questions

State True or False.
9. The deliverable at the end of each stage could be a set of specified
outputs for each stage of the project. (True/False)
10. For successful completion of a project every aspect of the project should
be monitored and controlled. (True/False)

10.7 Summary
Let us recapitulate the important concepts discussed in this unit:
 Project managers have to keep in mind the various problems that may
be encountered during the project.
 Feasibility study has to be conducted to analyse whether the project is
technically, economically, and practically feasible to be undertaken
 The project has to be evaluated in terms of expected profit, cost, and
risks involved.
 Controlling the changes in the project is possible through a proper
change management process and using necessary tools for controlling
the change
 Risk management aims to identify the risks and then take actions to
minimise their effect on the project.

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 After completion of a project stage and the project as a whole, it should

be documented

10.8 Glossary
 Feasibility: something which is able to be done or put into effect or
something which is capable of being accomplished
 Mitigation: to reduce or to make (something which is bad) less severe
or serious
 Risk mitigation: A systematic reduction in the extent of exposure to a
risk or the likelihood of its occurrence

10.9 Terminal Questions

1. Explain the various phases in project management life cycle.
2. What are the various steps in project monitoring and controlling a
project?
3. Explain change management systems and configuration management.
4. Explain risk management and its various components.
5. Explain the tasks to be done at end of a project.

10.10 Answers

Self Assessment Questions

1. True
2. False
3. False
4. True
5. Change control
6. CMS
7. True
8. True
9. True
10. True

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Terminal Questions
1. Refer 10.2.1
2. Refer 10.3.1
3. Refer 10.4.2
4. Refer 10.5
5. Refer 10.6

Reference:

 Gido and Clements. Successful Project Management. Vikas Publishing

House. New Delhi, 2003. Retrieved on 29, December 2011.

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Production and Operations Management Unit 11

Unit 11 Aggregate Planning

Structure:
11.1 Introduction
Objectives
11.2 Requirement of Aggregate Plan
11.3 Steps in Developing an Aggregate Plan
11.4 Advantages of Aggregate Plan
Master schedule
Hierarchal planning system
11.5 Aggregate Planning Strategies
Pure strategies
Features of three strategies
Mixed strategies
Mathematical planning models
11.6 Planning Options
Capacity options
Demand options
11.7 Selecting the Method in Aggregate Planning
11.8 Aggregate Planning in Services
11.9 Illustrative Examples
11.10 Summary
11.11 Glossary
11.12 Terminal Questions
11.13 Answers
11.14 Case Study

11.1 Introduction
In the previous unit you learnt about project management, project monitoring
and control, risk management. In this unit, you will study about aggregate
planning. In any manufacturing or service organisation, it is necessary that a
broad plan is prepared for a specified period which indicates how the target
is reached. This plan tells how the planned output is reached and what
options are followed. Aggregate planning is the process of planning the
quantity and timing of output over the intermediate range (often 3 to 18
months) by adjusting the production rate, employment, inventory, and other
controllable variables. Aggregate planning links long-range and short-
range
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planning activities. It is ‘aggregate’ in the sense that the planning activities at

this early stage are concerned with gross volumes of products or number of
customers served. After the aggregate plan, a master schedule is developed
which expresses the overall plan in terms of the amounts of specific end
items to produce and dates to produce them. It uses information from both
forecasts and orders on hand, and it is the major control of all production
activities.
An aggregate plan is developed using the following four inputs:
 A logical overall unit for measuring sales and output.
 A forecast of demand for a reasonable intermediate planning period in
these aggregate terms.
 A method for determining the costs associated with the options followed.
 A model to combine forecasts and costs so that scheduling decisions
can be made for the planning period.
Example of aggregate plan in an electrical motor manufacturing company is
depicted in table 11.1.
Table 11.1: Aggregate Plan for a Motor Manufacturing Company
Month J F M A M J J A S
Number of motors 40 25 55 30 30 50 30 60 40
Master Schedule
Month J F M A M J J A S
AC motors
5hp 15 – 30 – – 30 – 20 10
25hp 20 25 25 15 15 15 20 30 20
DC motors
20hp 5 – – 15 15 5 10 10 10
Objectives:
After studying this unit, you should be able to:
 define aggregate planning
 explain the advantages of aggregate plan
 identify optional strategies for developing an aggregate plan
 develop an aggregate plan via different options

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11.2 Requirement of Aggregate Plan

Aggregate plan helps in production management by developing an overall
plan. This overall plan helps the managers to ensure that the required
output is obtained at different time periods as laid out in the plan. It is to be
understood that in any manufacturing organisation all the output is not
obtained by only one method of resource allocation. This means the
company may follow different strategies to achieve the planned output in the
specified time by a combination of suitable strategies. Aggregate plan is
developed using the forecast demand as the input. Since the demand varies
from period to period the aggregate plan helps in arranging production
resources to satisfy the demand by a combination of strategies.

11.3 Steps in Developing an Aggregate Plan

The following steps are involved in developing an aggregate plan:
1. Start with a forecast for each product that indicates the quantity to be
produced during each time period.
2. Combine the individual demands into one single aggregate demand. It
is important to observe that the individual units have to be
homogeneous so that they can be combined.
3. The aggregate demand for each time period is translated into the
required production resources in terms of people, machines, facilities,
and materials.
4. The available production capacity is checked against the required or
planned output and a suitable decision is taken with an objective of
minimising total cost or minimising total time or maximising capacity
utilisation.
Several plans are developed and the choice is made among the alternatives
which best satisfies the demand and supply options. As a result of
aggregate planning, decisions and policies are made concerning overtime,
hiring, layoff, sub contracting, and inventory levels. While developing the
aggregate plan it is assumed that the facilities are fixed and cannot be
expanded or contracted. Each of the aggregate plans developed suggests a
suitable mix of resource inputs which need to be examined for the purpose
of satisfying a certain objective.

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Aggregate planning is the primary responsibility of the operations

department. However, it requires cross functional coordination and
cooperation with all other departments of the company, which includes
accounting, finance, human resources and marketing.

11.4 Advantages of Aggregate Plan

A well developed aggregate plan helps in developing a good operational
budget followed by a workable production plan. In addition, it provides an
overall picture of the different possible scenarios for a specific period of
about 3 to 18 months. Further, the aggregate plan helps the operations
managers to be well prepared to meet the challenges of hiring of new
workers, temporarily laying off workers, sub contracting, extending the
operation hours and building up of inventory.
11.4.1 Master schedule
 State at which actual orders are incorporated into scheduling system.
 Aggregate outputs are broken down into individual end items.
Main concerns:
 Does schedule meet production plan?
 Does schedule meet demand forecasts?
 Are there priority or capacity conflicts?
 Are other constraints violated?
 Does schedule conform to policy?
 Does schedule conform to laws and rules?
 Does schedule provide flexibility?
11.4.2 Hierarchical planning system
Table 11.2: Hierarchical planning system
Production
Items Capacity planning Resource level
Planning
Product lines Resource
Aggregate plan Plants
or families requirements
Master
Individual Critical work
Production Rough cut capacity
products centres
Schedule

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Material
Capacity
Components Requirements All work centres
requirements Plan
Plan
Manufacturing Manufacturing Individual
Shop floor schedule
operations operations machines

Self Assessment Questions

1. Aggregate planning links long-range and short-range planning activities
(True / False)
2. Aggregate plan helps in production management by developing
___________.
3. Aggregate plan is developed using the _________ as the input.

11.5 Aggregate Planning Strategies

Several different strategies have been employed to assist in aggregate
planning. The strategies are divided into two groups namely ‘pure strategies’
and ‘mixed strategies’. The pure strategies involve taking up only one type
of approach and the production is obtained when only one of the decision
variables is permitted to vary while all others are held constant. Details are
explained later in the unit.
Under the mixed strategies, the production targets are achieved by a
combination of approaches which seeks to utilise resources both in-house
and as well external to the organisation. Again, there are several
possibilities because different combination can be developed to meet the
production requirements. Then the question is, “what is the overall
objective?” It is understood that traditionally, the total cost of an aggregate
plan is taken into consideration to decide about its acceptance when several
plans are developed. However, it is also possible that the total time can also
be seen as an objective if meeting the timelines becomes the major issue
rather than the cost.
In addition, contractual obligations, union guidelines, in-house policies, and
business trends can also dictate the way the aggregate plan is to be
developed.

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11.5.1 Pure strategies

Three focused or pure strategies are:
 Vary production to match demand by changes in employment
(Chase demand strategy): This strategy permits hiring and layoff of
workers as required. When the output is to be increased more workers
are added and when the output is to be decreased, workers are
removed.
 Produce at a constant rate and use inventories (Level production
strategy): This strategy retains a stable work force producing at a
constant output rate. Inventory can be accumulated to satisfy peak
demands. Promotional programs may also be used to shift demand.
However, by producing at a constant rate, it is possible that the entire
demand is not met leading to sales loss in some periods while excess
production results in inventory build-up in some cases.
 Produce with stable workforce but vary the utilisation rate (Stable
work-force strategy): This strategy retains a stable work force but
permits overtime, part-time, and idle time. Some versions of this
strategy leads to a combination of back orders, subcontracting, and use
of inventories. This strategy avoids the detrimental effects of layoff and
hence is seen as a stable strategy. Typically, information technology
companies follow this strategy.
11.5.2 Features of three strategies
Heizer and Render (2008) have provided a good summary of features of
different strategies.
Chase demand strategy:
In this strategy the production output is increased or decreased according
the demand. This is possible if workers are added or removed to vary the
input capacity. It also means that if the system is dominantly automated then
it will be either under- utilised or over-utilised as the situation demands.
Some overtime or subcontracting might also be used, but no inventories
would be accumulated.
Level production strategy:
In this case, the production output is held constant irrespective of the
changes in demand from period to period. Usually, the average demand is
taken as the constant output. When the demand exceeds the
average
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output, in some months there is shortage and when the output is above the
average there is surplus and build-up of inventory. However, wherever
possible excess output can be used to accumulate inventory and that
inventory be used to meet the above average demands other time periods.
No initial inventory is maintained. In case of shortages, some back orders
could be allowed under a level production, or inventory strategy. If
backorder is not allowed then the result is loss in sales.
Stable work-force strategy:
In this strategy, the work force is maintained at the same level on regular
time. Production output is varied either by overtime or by building up
inventory. However, if the demand falls then the production output is
decreased and some workers may become idle. Thus, using overtime and
idle time to meet demand would be a stable work-force strategy.
11.5.3 Mixed strategies
In mixed strategies, the aggregate planner has a wide variety of choices by
mixing two or more strategies. The number of mixed strategies in
alternative production plans is almost limitless. However, based on the
realities of the situation, the number of practical solutions is limited. These
can be evaluated on a trial-and-error basis to find which plan best satisfies
the requirements, taking cost, employment policies, etc. into account.
11.5.4 Mathematical Planning Models
Mathematical models attempt to refine or improve upon the trial-and-error
approaches. However, the solution generated may not be feasible and need
to be refined. A popular technique is the application of transportation
algorithm which is a special case of the linear-programming model. It views
the aggregate planning problem as the problem of allocating capacity
(supply) to meet forecast requirements (demand) where supply consists of
the inventory on hand and units that can be produced using regular time
(RT), overtime (OT), and subcontracting (SC), etc.
Demand consists of individual-period requirements plus any desired ending
inventory. Costs associated with producing units in the given period or
producing them and carrying them in inventory until a later period are
analysed. Cost is obtained, as in the standard transportation linear-
programming format and a least total cost solution.

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11.6 Planning Options

The mixed strategies allow the possibility of influencing capacity or
influencing demand. While capacity variations are largely to do with the
internal facilities and resources, influencing demand is largely an external
orientation.
11.6.1 Capacity options
Under this option, the company decides to vary the production output by
varying the time, workforce, or by outsourcing. A company can choose from
the following basic capacity (production) options:
a) Changing inventory levels: Under this option the inventory is increased
during periods of low demand to meet high demand in future periods. If
this strategy is selected, costs associated with storage, insurance,
handling, obsolescence, pilferage, and capital invested increase. These
costs typically range from 15 percent to 40 percent of the value of an
item annually. On the other hand, when the firm enters a period of
increasing demand, shortages can result in sales loss due to inability to
produce quickly by assembling all the resources resulting in poorer
customer service.
b) Varying workforce size by hiring or layoffs: One way to meet demand
is to hire or lay off production workers to match production rates.
However, new employees often need to be trained and the average
productivity drops temporarily as they are absorbed into the firm. Layoffs
or terminations, of course, lower the morale of all workers and can lead
to lower productivity. Further, it is not correct to expect people to be
available whenever there is a requirement and to terminate their services
when not required. It is seen as anti- people policy.
c) Varying production rates through overtime or idle time: It is
sometimes possible to keep a constant workforce while varying working
hours, reducing the number of hours worked when demand is low and
increasing them when it rises. However, when there is a large or high
demand there is a limit on how much overtime is possible. Also, such
overtime work requires incentives and extra pay which is at least one
and a half times more than the normal pay. Further, willingness on the
part of the employees, union agreements also have to be considered.
Too much overtime can wear out the workers that overall productivity

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drops off and quality also becomes a casualty. Overtime also implies the
increased overhead needed to keep a facility open. On the other hand,
when there is a period of decreased demand, the company must
somehow absorb workers’ idle time; usually a difficult process. Though
such options like plant shutdown, maintenance work and social events
are organised during such lean periods, they cannot be carried over a
long time.
d) Subcontracting: A firm can acquire temporary capacity by
subcontracting work during peak demand periods. Subcontracting,
however, has several pitfalls. First, it may be expensive; second, it risks
opening the client’s door to a competitor. Third, it is often hard to find the
perfect subcontract supplier, one who always delivers the quality product
on time. However, of late outsourcing has become a complete business
policy and cost of operations may be cited as the main reason. Thus, it is
possible to partly produce the items outside or completely procure from
outside. Depending on who is stronger and controlling the whole process
the subcontracting costs will vary and could be even low.
e) Using part-time workers: Part-time workers can fill unskilled labour
needs, especially in the service sector. This practice is common in
restaurants, retail stores, and supermarkets. There are many
organisations where part time workers sometimes called as ‘temps’ work
almost full time but with less compensation than that of a regular
employee. Again, the question of getting the right type of temporary
workers is a major issue and there are many agencies who specialise in
supplying temporary workers.
11.6.2 Demand options
The basic demand options are:
Influencing demand: When demand is low, a company can try to increase
demand through advertising, promotion, personal selling, and price cuts.
Airlines and hotels have long offered weekend discounts and off-season
rates; telephone companies charge less at night; some colleges give
discounts to senior citizens; and air conditioners are least expensive in
winter. However, even special advertising, promotions, selling, and pricing
are not always able to balance demand with production capacity.

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Back ordering during high-demand periods: Back orders are orders for
goods or services that a firm accepts but is unable (either on purpose or by
chance) to fill at the moment. If customers are willing to wait without loss of
their goodwill or order, back ordering is a possible strategy. This is a good
strategy if the company’s products command a premium and the customers
are ready to wait. However, with choices available to customers, some firms
which practice back order have to take a risk as the approach often results
in loss of sales.
Counter-seasonal product and service mixing: A widely used active
smoothing technique among manufacturers is to develop a product mix of
counter-seasonal items. Examples include companies that make both
furnaces and air conditioners or lawn mowers and snow blowers. Here, the
idea is to produce products that are suited for each season based on the
demand and seasonal change. The company however has to have
adequate resources for both types of products. It is common to see a
company producing air conditioners, heaters, and air coolers, to maintain
the product demand during all seasons. However, companies that follow this
approach may find themselves involved in products or services beyond their
area of expertise or beyond their target market.
These eight options, along with their advantages and disadvantages, are
summarised and depicted in table 11.3 as given by Heizer and Render
(2008).
Table 11.3: Aggregate Planning Options: Advantages and Disadvantages
Option Advantages Disadvantages Some
Comments
Changing Changes in human Inventory holding Applies
inventory levels resources are costs may mainly to
gradual or none; increase. production,
no abrupt Shortages may not service
production result in lost sales operations.
changes
Varying workforce Avoids the costs of Hiring, layoff, and Used where
size by hiring or other alternatives. training costs may size of labor
layoffs be significant. pool is large.

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Varying Matches seasonal Overtime Allows

production rates fluctuations without premiums; tired flexibility
through overtime hiring/training workers; may not within the
or idle costs. meet demand. aggregate
time plan.

Subcontracting Permits flexibility Loss of quality Applies

and smoothing of control; reduced mainly in
the firm’s output. profits; loss of production
future business. settings.

Using part-time Is less costly and High Good for

workers more flexible than turnover/training unskilled
full-time workers. costs; quality jobs in areas
suffers; scheduling with large
difficult. temporary
labor pools.
Influencing Tries to use Uncertainty in Creates
demand excess capacity. demand. Hard to marketing
Discounts draw match demand to ideas.
new customers. supply exactly. Overbooking
used in
some
businesses.
Back ordering May avoid Customer must be Many
during high- overtime. Keeps willing to wait, but companies
demand periods capacity constant. goodwill is lost. back order.

Counter-seasonal Fully utilizes May require skills Risky finding

product and resources; allows or equipment products or
service mixing stable workforce. outside firm’s services with
areas of expertise. opposite
demand
patterns.

11.7 Selecting the Method in Aggregate Planning

It is clear from the table 11.3 that several choices are available for
companies to choose the aggregate plan. It is necessary that a combination
of suitable strategies need to be made. Most firms go for a combination of
the eight options (called a mixed strategy) and try to achieve minimum cost.
However, because there are a huge number of possible mixed strategies,

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Production and Operations Management Unit 11

managers find that aggregate planning can be a challenging task. Finding

the one ‘optimal’ plan is not always possible.
Some companies have no formal aggregate planning process and use the
same plan from year to year, making adjustments up or down just enough to
fit the new annual demand. This method certainly does not provide much
flexibility; if the original plan was sub-optimal, the entire production process
could be locked into sub-optimal performance. As long as a company’s
objectivists are fulfilled, it does not matter which strategy the company is
using and hence a judicial mix of strategies should be carefully followed.
Self Assessment Questions
4. Aggregate planning strategies are divided into two groups namely
__________ and __________.
5. In _____________ strategy the production output is increased or
decreased according the demand
6. In _________ strategy, the production output is held constant
irrespective of the changes in demand from period to period.
7. Under ____________ option, the company decides to vary the
production output by varying the time, workforce, or by outsourcing.

11.8 Aggregate Planning in Services

Service organisations develop the aggregate plan in the same way as the
top manufacturing organisations. However, in the service organisations it is
largely managing the human resources than any other physical resource.
Hence, in many service organisations it is common to see extra people hired
during peak periods and less number of people used during lean periods.
Further, using technology support it is possible to obtain the required service
from remote locations.
In a typical service organisation, controlling the labour becomes most
important requirement. Here, the concern is towards utilising the labour
force without violating the union code and also provide the necessary
subsistence to the labourers.

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11.9 Illustrative Examples

Problem 1
Armand Associates manufactures special alloy products for which the
forecast for the next 12 months is given in the Table 11.4. Excess
production is maintained as inventory at a monthly inventory carrying cost of
Rs. 4.00 per unit per month. Examine the strategy of producing as per the
average demand.
Table 11.4: Data for example problem 1
Month Demand in 000's Month Demand in 000's
January 45 July 40
February 31 August 30
March 40 September 47
April 55 October 65
May 66 November 70
June 50 December 61

Solution:
Stable workforce strategy or level strategy
The total demand is obtained by adding the monthly demands.
Hence total demand = 600 and average demand = 50.
Based on the production strategy average monthly production = 50
Because the demand is more than 50 in 6 months and less than 50 in
another 6 months, it is necessary to maintain inventory and meet the
demand through regular production and inventory. Whenever the actual
demand is less than the average demand, there will be excess production
and some units have to be carried out as inventory. These excess units are
pulled out of inventory whenever the production during a month is not
capable of meeting the actual demand. This assumes that the product
quality remains stable even though it is kept in the inventory. This is typically
the case of auto components and assemblies.
Aggregate planning problems are ideally suited for spreadsheet applications
like MS Excel, because we follow the tabular format for all the calculations.

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Table 11.5: Construction of table of inventory for example problem 1

Beginning Added during Ending

Month Demand in 000's
Inventory the month inventory

January 45 0 50 5
February 31 5 50 24
March 40 24 50 34
April 55 34 50 29
May 66 29 50 13
June 50 13 50 13
July 40 13 50 23
August 30 23 50 43
September 47 43 50 46
October 65 46 50 31
November 70 31 50 11
December 61 11 50 0
Average
50 Total 272
Demand

We construct a Table showing the original data and add three columns. The
beginning inventory column shows the stock on hand at the beginning of the
month. If the company is carrying any stock from the previous period it is
reflected the column. The next column indicates the addition to the inventory
by virtue of the current month’s production.
Then the ending inventory is calculates as:
Ending inventory = (Beginning inventory + Current month’s production) –
Current month’s demand.
Because the company has decided to produce an average demand of 50
per month the production quantity added during every month is 50. Since
the demand is varying, less than 50 during January, February, March, and
again during July, August, and September, the quantity produced will be in
excess of demand and hence goes towards inventory. This quantity will be
utilised to meet the demand when more than 50 units are demanded during
a given month.

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When we reach the end of the final period we find that the ending inventory
is zero. This is because the entire annual demand was spread over 12
months in an equal manner.
The inventory carried over from month to month attracts a price which is
called inventory carrying cost. This is usually given as Rs. per month per
unit.
Thus inventory cost = Rs. 4.00 per unit per month X 272 = Rs. 1088.00
Problem 2
Chase demand strategy
Consider the previous problem. The company decides to vary the workforce
according to the demand. On average the output per worker is 5000 units
per month. Fractions are rounded up. Whenever a worker is laid off there is
a cost of Rs. 5000.00 and whenever a worker is hired it costs Rs.6000.00 to
the company. To start with, there are 10 workers in the beginning of
January. Find the total cost of the plan.
Solution:
Table 11.6: Construction of table of inventory & workforce for example
problem 2
Demand in Workers Number in Number Number
Month
000's required the beginning hired laid-off
January 45 9 10 1
February 31 7 9 2
March 40 8 7 1
April 55 11 8 3
May 66 14 11 3
June 50 10 14 4
July 40 8 10 2
August 30 6 8 2
September 47 10 6 4
October 65 13 10 3
November 70 14 13 1
December 61 13 14 1
Total 15 12

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Total cost of hiring and laid off is calculated as follows:

Table 11.7: Cost of hiring
Hired Laid off
Total 15 12
Cost per worker 6000 5000
Total cost 90000 60000
Therefore, total cost of the plan = 90000 + 60000 = Rs. 150,000.00
Problem 3 (Self Practice)
The demand for a product is shown in the table 11.8. Beginning inventory is
400 units. Develop a level output plan that yields zero inventory at the end
of period 4.
Table 11.8: Data for problem 3 – Demand for a product
Period 1 2 3 4
Demand 4000 3200 2000 2800
The different costs are:
Regular production cost = Rs 10 per unit
Overtime production unit = Rs. 12 per unit
Regular Production rate = 3000 units per period
Inventory cost based on ending inventory = Rs. 2 per unit per period
Backlog cost = Rs. 5 per unit per period
What is the total cost of the plan?

11.10 Summary
Let us now summarise the key learning of this unit:
 Aggregate planning is the process of planning the quantity and timing of
output over the intermediate range (often 3 to 18 months) by adjusting
the production rate, employment, inventory, and other controllable
variables.
 Since the demand varies from period to period the aggregate plan helps
in arranging production resources to satisfy the demand by a
combination of strategies
 While developing the aggregate plan it is assumed that the facilities are
fixed and cannot be expanded or contracted

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 The aggregate plan helps the operations managers to be well prepared

to meet the challenges of hiring of new workers, sub contracting,
extending the operation hours and building up of inventory
 The strategies employed to assist in aggregate planning are divided into
two groups namely ‘pure strategies’ and ‘mixed strategies’.
 In mixed strategies, the aggregate planner has a wide variety of choices
by mixing two or more strategies.
 There are two main types of planning options for aggregate planning.
They are capacity options and demand options.

11.11 Glossary
 Master schedule: part of production planning which sets the quantity of
each end item to be completed in each week
 Layoff: suspension or termination of employment (with or without notice)
by the employer or management

11.12 Terminal Questions

1. Define aggregate planning.
2. What are the steps involved in developing an aggregate plan?
3. What are the advantages of aggregate plan?
4. Describe the pure strategies employed to assist in aggregate planning.
5. Explain the ‘mathematical planning model’ used in aggregate planning
6. Describe the capacity option used for aggregate planning

11.13 Answers

Self Assessment Questions

1. True
2. An overall plan
3. Forecast demand
4. ‘pure strategies’, ‘mixed strategies’
5. Chase demand
6. Level production
7. Capacity

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Terminal Questions
1. Refer section 11.1
2. Refer section 11.3
3. Refer section 11.4
4. Refer section 11.5.1
5. Refer section 11.5.4
6. Refer section 11.6.1

11.14 Case Study

Maruti Suzuki Limited – The Success Continues
Maruti Suzuki India started as Maruti Udyog Limited in 1981 and was set up
for the specific purpose of producing a small car affordable in the Indian
market. The company was formed as a state enterprise in 1981, and signed
a car-production agreement with Suzuki in 1982. The company has a plant
in Gurgaon and a plant in Manesar (both near the capital, New Delhi), which
have combined annual production capacity of 1.2 million units. In line with
market growth, the company is building two more plants in Manesar. The
two new plants are scheduled to be completed in 2012 and 2013 and will
each be able to produce about 250,000 units per year. Maruti Suzuki India
plans to have maximum production capacity of about 1.7 million units per
year in 2013.
The first compact car model, the Maruti 800, reached the Indian market in
1983. The company, now named Maruti Suzuki India, has since produced,
and marketed models such as the Omni, Gypsy, Wagon R, Alto, Swift, SX4,
A-star, and some luxury models. Production at Maruti Suzuki India reached
10 million units in a span of about three decades from the start of
production.
Maruti Suzuki Milestones
Table 11.9: Milestones- Maruthi Suzuki
1982 October License and Joint Venture agreement signs between
Maruti Udyog Ltd. and Suzuki Motor Corporation
(SMC) Japan
1983 December Maruti800 launched
1986 April Installed capacity increases to 100,000 units
1994 March Aggregate production volume reaches 1 million units

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1997 October Aggregate production volume reaches 2 million units

2000 June Aggregate production volume reaches 3 million units
2002 May Suzuki acquires majority stake in Maruti Udyog Ltd
2003 April Aggregate production volume reaches 4 million units
2005 April Aggregate production volume reaches 5 million units
2006 October New car plant and the diesel engine facility
commences operations at Manesar, Haryana

2007 September Maruti Suzuki adopts a new name. Maruti Udyog

Limited becomes Maruti Suzuki India Limited.
2010 March 1 million cars produces in a financial year
2011 March Aggregate production volume reaches 10 million
units.

(Source: http://www.globalsuzuki.com/globalnews/2011/0315.html)

Discussion Questions:
1. How do you see the growth of company with respect to the changes in
Indian car market?
2. What strategies might have been followed by the company to develop
or market different models?
3. What kind of capacity strategy has been followed by the company?
References:
 Jay, Heizer, & Barry, Render. Operations Management. 10th Ed.
Prentice Hall, USA.
 Lee, J. Krajewski, & Ritzman, Larry, P. Operations Management:
Strategy and Analysis. 6th Ed. - New Delhi: Pearson Education Asia.
 Russel, Roberta, S. & Taylor, Bernard, W. Operations Management:
Quality and Competitiveness in a Global Environment. 5th Ed. Wiley:
U.S.A.
 Schroeder, Roger, G. (2009). Operations Management. 3rd Ed. Tata
McGraw Hill.

E-Reference:
 http://www.globalsuzuki.com/globalnews/2011/0315.html. Retrieved on
12, January 2012.

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Production and Operations Management Unit 12

Unit 12 Supply Chain Management

Structure:
12.1 Introduction
Objectives
12.2 Domain Applications
12.3 SCM – The Breakthrough Article
Supply chain decisions
Supply chain modelling approaches
12.4 Supply Chain Management
A global perspective
How SCM works?
Definitions of SCM and ISCM
The imperatives
The seven principles
12.5 Views on Supply Chain
12.6 Bullwhip Effect in SCM
12.7 Collaborative Supply Chain
Internet and supply chain
12.8 Inventory Management in Supply Chain
12.9 Financial Supply Chain – A New Revolution within the SCM Fold
12.10 Summary
12.11 Glossary
12.12 Terminal Questions
12.13 Answers
12.14 Case Study

12.1 Introduction
In the previous unit you learnt about aggregate planning, advantages of
aggregate planning and hierarchical planning system. In this unit, you will be
studying about Supply Chain Management (SCM). SCM is the term used to
describe the management of materials and information across the entire
supply chain, from supplier to component producers to final assemblers to
distribution (warehouses and retailers), and ultimately to the consumer. It
often includes the after-sales service and returns or recycling.

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Supply Chain Management (SCM) is considered by many experts worldwide

as the ultimate solution towards efficient enterprise management. Many
management failures have been attributed to the lack of a system to bind
various sub-systems within a geographically widespread enterprise, which
true to modern trends, also includes an umbrella of customers, suppliers
and associates. Managers of tomorrow are therefore, expected to raise
themselves above the level of perpetual crisis management to one of
proactive, predictive, and performance-oriented management.
Need and objectives
SCM is required by an enterprise as a tool to enhance management
effectiveness with the following organisational objectives:
 Reduction of inventory
 Enhancement of participation level and empowerment level
 Increase in functional effectiveness of existing systems like Enterprise
Resource Planning (ERP), Accounting Software, and Documentation
such as Financial reports/ Statements/ISO 9000 Documents
 Effective integration of multiple systems like ERP, communication
systems, documentation system and security
 Design / Research & Development (R&D) systems
 Better utilisation of resources like men, material, equipment, and money
 Optimisation of money flow cycle within the organisation as well as from
external agencies
 Enhancement of value of products, operations, and services. These
enhancements will consequently enhance the profitability of organisation
 Enhancement of satisfaction level of customers and clients, supporting
institutions, statutory control agencies, suppliers and vendors,
employees and executives
 Enhancement of flexibility in the organisation to help in easy
implementation of schemes involving modernisation, expansion and
diversification – even divestments, mergers and acquisitions
 Enhancement of coverage and accuracy of management information
systems

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Objectives:
After studying this unit, you should be able to:
 define supply chain management
 identify the domain applications of SCM
 explain the various views of SCM
 recognise the inventory management in SCM
 explain collaborative supply chain

12.2 Domain Applications

SCM can be easily applied and integrated with:
a. ERP systems
b. Design systems like auto-CAD, Pro-E
c. R&D systems
d. ISO 9000 systems
e. Accounting and financial systems
f. Costing systems
g. Manufacturing systems
SCM implementation involves the certain steps as depicted in figure 12.1:

Fig. 12.1: Steps Involved for Implementation of SCM

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1. Study the strengths and weaknesses within the enterprise as well as of

external agencies involved.
2. Understand the organisation objectives.
3. Study the existing systems and identify the gaps and propose solutions
to plug the loopholes.
4. Evolve consensus and test fire individual solutions.
5. Integrate solutions which are adjudged successfully into the mainstream.
6. Study overall impact after all proposals in a section are implemented,
review consensus.
7. Finalise SCM document, circulate, and implement the same.

Self Assessment Questions

State True or False
1. Supply chain management is considered by many experts worldwide
as the ultimate solution towards efficient enterprise management.
(True/False)
2. The geographic placement of production facilities, stocking points, and
sourcing points is the last step in creating a supply chain. (True/False)
3. SCM implementation involves test firing individual solutions as one of
the steps. (True/False)

12.3 SCM – The Breakthrough Article

No book on SCM can be complete without a reproduction of the path
breaking article from two great names in SCM – Ram Ganeshan and Terry
P Harrison from the Department of Management Science and Information
Systems in Penn State University, University Park, USA.
A supply chain is a network of facilities and distribution options that performs
the function of procurement of materials, transformation of these materials
into intermediate and finished products, and the distribution of these finished
products to customers. Supply chains exist in both service and
manufacturing organisation, although the complexity of the chain may vary
greatly from industry to industry and from firm to firm.
Shown below is an example of a very simple supply chain for a single
product, where raw material is procured from vendor, transformed into

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finished goods in a single step and then transported to distribution centres,

and ultimately to the customers.
Step 1: Raw materials procured from vendors.
Step 2: Transformed to finished goods.
Step 3: Transported to distribution centres.
Step 4: Supplied to customers.
Realistic supply chains have multiple end products with shared components,
facilities, and capacities. The flow of materials is not always along a defined
path in a network, various modes of transportation may be considered, and
the bill of materials for the end items may be both deep and large.
Traditionally, marketing, distribution, planning, manufacturing, and the
purchasing organisations along the supply chain operated independently.
These organisations have their own objectives and these are often
conflicting. Marketing objectives of high customer service and maximum
sales often conflict with manufacturing and distribution goals. Many
manufacturing operations are designed to maximise throughput and lower
costs with little consideration for the impact on inventory levels and
distribution capabilities. Purchasing contracts are often negotiated with very
little information beyond historical buying patterns. The result of these
factors is that there is no single integrated plan for the organisation, but
there are as many plans as businesses. Clearly there is a need for a
mechanism through which these different functions can be integrated
together. Supply Chain Management (SCM) is a strategy through which
such integration can be achieved. SCM is typically viewed to lie between
fully vertically integrated firms, where the entire material flow is owned by a
single firm and those where each channel member operates independently.
Therefore coordination between various players in the supply chain is the
key in its effective management.
12.3.1 Supply chain decisions
We classify the decisions for supply chain management into two broad
categories: Strategic and Operational Decisions as depicted in figure 12.2.

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Fig. 12.2: Supply Chain Decisions

 Strategic decisions are made typically over a longer time horizon.

These are closely linked to the corporate strategy and guide supply
chain policies from a design perspective.
 Operational decisions are short term and focus on activities over a
day-to day basis. The effort in these types of decisions is to effectively
and efficiently manage the product flow in the strategically planned
supply chain.
There are four major decision areas in supply chain management: location,
production, inventory, and transportation. There are both strategic and
operational elements in each of these decision areas as depicted in
figure 12.3.

Fig. 12.3: Decision Areas in SCM

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1. Location decision: The geographic placement of production facilities,

stocking points, and sourcing points is the natural first step in creating a
supply chain. The location of facilities involves a commitment of
resources to a long term plan. Once the size, number, and location of
the production are determined, the possible paths of product supply to
the final customer can be determined. These decisions are of great
significance to a firm since they represent the basic strategy for
accessing customer markets. They will have a considerable impact on
revenue, cost, and level of service. These decisions should be
determined by an optimisation routine that considers production costs,
taxes, duties and duty drawback, tariffs, local content, distribution costs,
and production limitations. Although location decision is primarily
strategic, they also have implications on an operational level.
2. Production decision: The strategic decisions include what products to
produce and which plants to produce, in allocation of suppliers to plants,
plants to distribution control system (DCS), and then DCS to customer
markets. As mentioned earlier, these decisions have a big impact on the
revenues, costs, and customer service levels of the firm. These
decisions assume the existence of the facilities, but determine the exact
path through which a product flows to and from these facilities. Another
critical issue is the capacity of the manufacturing facilities – and this
largely depends on the degree of vertical integration within the firm.
Operational decisions focus on detailed production scheduling. These
decisions include the construction of the master production schedules,
scheduling production on machines, and equipment maintenance. Other
considerations include workload balancing and quality control measures
at a production facility.
3. Inventory decisions: Inventory decisions refer to means by which
inventories are managed. Inventories exist at every stage of the supply
chain as either raw material, semi-finished or finished goods. They can
also be in process between locations. Their primary purpose is to buffer
against any uncertainty that might exist in the supply chain. Since
holding of inventories can cost anywhere between 20 to 40 percent of
their value, their efficient management is critical in supply chain
operations. It is strategic in the sense that top management sets goals.
However, most researchers have approached the management of

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inventory from an operational perspective. These include deployment

strategies control policies – the determination of the optimal levels of
order quantities and reorder points, and setting safety stock levels, at
each stocking location. These levels are critical, since they are primary
determinants of customer service levels.
4. Transportation decisions: Transportation decisions are closely linked
to the inventory decisions, since the best choice of the mode is often
found by trading-off the cost of using the particular mode of transport
with the indirect cost of inventory associated with that mode. While air
shipments may be fast, reliable, and warrant lesser safety stocks, they
are expensive. Meanwhile, shipping by sea or rail may be much
cheaper, but they necessitate holding relatively large amounts of
inventory to buffer against the inherent uncertainty associated with them.
Therefore, customer service levels and geographic location play vital
roles in such decisions. Since transportation is more than 30 percent of
the logistics costs, operating efficiently makes good economic sense.
Shipment sizes, routing and scheduling of goods are the keys in
effective management of the firm’s transport strategy.
12.3.2 Supply chain modelling approaches
Clearly each of the above two levels of decisions require a different
perspective. The strategic decisions are, for the most part, global or ‘all
encompassing’ in that they try to integrate various aspects of the supply
chain. Consequently, the models that describe these decisions are huge
and require a considerable amount of data. Often due to the enormity of
data requirement and the broad scope of decisions, these models provide
approximate solutions to the decisions they describe. The operational
decisions meanwhile address the day-to-day operation of the supply chain.
Due to their narrow perspective, these models often consider great details
and provide very good, if not optimal solutions to the operational decisions.
To facilitate a concise review of the literature, and at the same time attempt
to accommodate the above polarity in modelling, we divide the modelling
approaches into three areas:
1. Network design methods
2. Rough cut methods
3. Simulation based methods

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The network design methods for the most part, provide normative models
for the more strategic decisions. These models typically cover the four major
decision areas described earlier and focus more on the design aspect of the
supply chain, the establishment of the network and the associated flows.
Rough cut methods on the other hand give guiding policies for the
operational decisions. These models typically assume a single site and add
supply chain characteristics to it, such as explicitly considering the sites’
relation to the others in the network.
Simulation method is a method by which a comprehensive supply chain
model can be analysed, considering both strategic and operational
elements. However, one can only evaluate the effectiveness of a pre-
specified policy rather than develop new ones. Let us discuss in detail the
three modelling approaches in this section.
1. Network design methods: As the name suggests, these methods
determine the location of production, stocking and sourcing facilities and
paths for the delivery. Such methods tend to be large scale, and are
used generally at the inception of the supply chain. The earliest work in
this area, although the term supply chain was not in vogue, was by
Geoffrion and Graves (1974). They introduced a multi commodity
logistics networks design model for optimising annualised finished
product flows from plants to the DCS and from DCS to the final
customers. Breitman and Lucas (1987) attempted to provide a
framework for a comprehensive model of a production distribution
system, Planets, that is used to decide what products to produce, where
and how to produce it, which markets to pursue and what resources to
use. Parts of this ambitious project were successfully implemented at
General Motors. These network design methods add value to the firm in
that they lay down the manufacturing and distribution strategies far into
the future.
2. Rough cut methods: These models deal with the more operational or
tactical decisions. The thrust or the rough cut models is the development
of inventory control policies, considering several levels or echelons
together. These models have come to be known as multi level or multi
echelon inventory control models. Current research in multi-echelon

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based supply chain inventory problems show considerable promise in

reducing inventories with increased customer service.
3. Internet and supply chain: Before widespread expansion of the
Internet, most supply chains were operated according to the so called
traditional model, where companies doing business together did so
directly.
With the Internet emerging as an important way to conduct business, an
alternative model has emerged, often called the net model, in which
intermediate nodes link many buyers and sellers. These internet nodes
can be exchanges or e-hubs.
Using the Internet for information, sharing and coordination generally
results in lower inventory levels; a variety of factors lead to this result. To
the extent that the Internet speeds up the administrative portion or
ordering, reduced lead times tend to reduce safety stocks required in the
systems. In addition, if partners in the chain do collaborative forecasting
then, forecast errors would be expected to drop, again reducing safety
stocks.
The auction and reverse auction aspects of e-market places provide the
opportunity for lower prices of purchased materials and components.
Various companies have had experience in this area, and for standard
parts and components the Internet has provided the buyer with an
opportunity to reach a much larger set of potential suppliers.
Another way to achieve cost reduction is to improve logistics
management. The Internet makes it possible to share real-time or
dynamic information with all parties. Let us take an example. Satya
Instruments have recently implemented an extensive planning and
supply demand matching optimisation tool using the Internet. Every two
days they do a global supply/demand match for over 45,000 products
produced in 56 factories worldwide. 70 percent of their customer orders
are now online. They provide real time order status information. Their
system has factory level planning optimisation with global inventory
visibility.
The results of this improvement are a two-week reduction in customer
delivery times and an increase in factory utilisation of 2 percent. A two

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week reduction in customer delivery times is clearly beneficial from a

competitive stand point. Also, while the increase in factory utilisation
may sound small, the impact of such a change on profitability is much
larger than 2 percent since one is earning additional revenue without
any increase in corresponding production capacity costs.

Self Assessment Questions

State True or False
4. The decisions for supply chain management are classified into two
broad categories – strategic and operational. (True/False)
5. The strategic decisions are, for the most part, global or ‘all
encompassing’ in that they try to integrate various aspects of the supply
chain. (True/False)

12.4 Supply Chain Management (SCM)

12.4.1 A global perspective
SCM is the practice of coordinating the flow of goods, services, information,
and finances as they move from raw materials to parts supplier, to
manufacturer to wholesaler, to retailer and to consumer. This process
includes order generation, order taking, information feedback and the
efficient and timely delivery of goods and services. In the simplest terms,
SCM lets an organisation get the right goods and services to the place they
are needed at the right time, in the proper quantity and at an acceptable
cost. Efficiently managing this process involves overseeing relationships
with suppliers and customers, controlling inventory, forecasting demand and
getting constant feedback on what is happening at every link in the chain.
12.4.2 How SCM works?
The supply chain involves several elements such as, location, production,
inventory, and transportation as depicted in figure 12.4.

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Fig. 12.4: Elements of Supply Chain

 Location: It is important to know where production facilities, stocking

points, and sourcing points are located. These determine the paths
along which the goods flow.
 Production: An organisation must decide what products to create at
which plants, which suppliers will service those plants, which plants will
supply specific distribution centres and sometimes, how goods will get to
the final customer. These decisions have a big impact on revenue, costs
and customer service.
 Inventory: Each link in the supply chain has to keep a certain inventory
or raw materials, parts, subassemblies and other goods on hand as a
buffer against uncertainties and unpredictability. Shutting down an
assembly plant because an expected part shipment does not arrive is
expensive. But inventory costs money too, so it is important to manage
deployment strategies, determine efficient order quantities and reorder
points, and set safety stock levels.
 Transportation: How do materials, parts, and products get from one link
in the supply chain to the next? Choosing the best way to transport
goods often involves trading off the shipping cost against the indirect
cost of inventory. For example, shipping by air is generally fast and
reliable. Shipping by sea or rail will likely be cheaper, especially for bulky

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goods and large quantities, but slower and less reliable. So, if you ship
by sea or rail, you have to plan further in advance and keep larger
inventories than you do if you ship by air.
Managing the chain: Once you have determined all the elements in the
supply chain, how do you manage the chain? There are three main paths in
the process: product flow, information flow, and financial flow. Figure 12.5
depicts managing the chain.
1. Product flow includes the movement of goods from a supplier to a
customer, as well as customer returns.
2. Information flow involves transmitting orders and updating the status of
delivery.
3. Financial flow consists of credit terms, payments and payment
schedules, plus consignment and title ownership.
Juggling these elements involves record-keeping, tracking, and analysis by
many departments. Supply chain softwares, especially large, integrated
packages, combine many different technologies to give a single view of
supply chain data that can be shared with others. SCM applications fall into
two main categories – planning applications and execution applications.
Planning applications determine the best way to route materials and the
quantities of goods needed at specific points. When such applications work
well, they make possible the Just-In-Time delivery of goods. Execution
applications track financial data, the physical status and flow of goods, and
ordering and delivery of materials.

Fig. 12.5: Managing the Chain

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A relatively new SCM option involves web based software with a browser
interface. Several major websites now offer auctions and other electronic
marketplaces for buying and selling goods and materials. Also, web-based
application service providers are now promising to provide part or all of the
SCM services for companies that rent their services.
SCM is so big that it can be difficult to plan the deployment of such a
system. Just remember, a chain connects one link to the next and an SCM
implementation can proceed similarly. Each added link brings more
efficiency.
When all the links are in place and when the information, goods, and
finances are flowing properly, the benefits are enormous. This is truly a case
in which the whole is greater than the sum of its parts.
Implementation of SCM: Implementation is in the form of various
interconnected functional blocks of an organisation through which a smooth
flow of the product development is possible. A list of few of such functions is
given as business processes, sales and marketing, logistics, financing,
purchasing, Customer Relationship Management (CRM), manufacturing
strategy, costing, demand planning, trade-off analysis, environmental
requirements, process stability, integrated supply, supplier management,
product design, suppliers, customers, and material specifications.
12.4.3 Definitions of SCM and ISCM
Supply chain is an integrated process where raw materials are transformed
into final products, then delivered to customers.
– Beamon (1999)
A system whose constituent parts include material supplies, production
facilities, distribution services and customer linked together by feed forward
flow of materials and feedback flow of information.
– Berry (1995)
An integrating process based on flawless delivery of basic and customised
services.
– Kalakota (2000)
Supply chain is a process of strategically managing the movement and
storage of materials, parts and finished inventory from suppliers through the
firm and on to the customers.
– Johnson (1995)
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Supply chain is a network of facilities and distribution options that performs

the functions of procurement of materials, transformation of these materials
into intermediate and finished products, and distributions of products to
customers.
– Ganeshan and Harrison (1999)
Integrated Supply Chain Management (ISCM): ISCM is the process to
integrate and manage the SCM as one entity. Its constituent parts include
suppliers, production, distribution, services, and customers. These entities
are linked together by the feed forward flow of material and feedback flow of
information, to satisfy customer needs at reasonable cost and best practices
involved in the fields related to these constituent parts.
12.4.4 The imperatives
The important aspects of SCM that require great attention by managers
working on SCM are:
 The level of competition existing in the market and the impact of
competitive forces on the product development.
 Designing and working on a strategic logic for better growth through
value innovation.
 Working out new value curve in the product development along with
necessary break point.
 Using IT to analyse markets and the economies in product design.
 Time, customer, quality of product and the concept of survival of fittest.
12.4.5 The seven principles
Seven principles of SCM are:
1. Group customer by needs: Effective SCM groups customers by
distinct service needs, regardless of industry and then tailors services to
those particular segments.
2. Customise the logistics network: In designing their logistics network,
companies need to focus on the service requirement and profit potential
of the customer segments identified.
3. Listen to signals of market demand and plan accordingly: Sales and
operations planners must monitor the entire supply chain to detect early
warning signals of changing customer demand and needs. This demand
driven approach leads to more consistent forecast and optimal resource
allocation.

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4. Differentiate the product closer to the customer: Companies today

no longer can afford to stockpile inventory to compensate for possible
forecasting errors. Instead, they need to postpone product differentiation
in the manufacturing process closer to actual consumer demand. This
strategy allows the supply chain to respond quickly and cost effectively
to changes in customer needs.
5. Strategically manage the sources of supply: By working closely with
organisation’s key suppliers to reduce the overall costs of owning
materials and services, SCM maximises profit margins both for
organisations and their suppliers.
6. Develop a supply chain wide technology strategy: As one of the
cornerstones of successful SCM, information technology must be able to
support multiple levels of decision making. It also should afford a clear
view and ability to measure the flow of products, services, and
information.
7. Adopt channel spanning performance measures: Excellent supply
chain performance measurement systems do more than just monitor
internal functions. They apply performance criteria to every link in the
supply chain – criteria that embrace both service and financial metrics.
Self Assessment Questions
Fill in the blanks.
6. ______ is the practice of coordinating the flow of goods, services,
information and finances as they move from raw materials to parts
supplier to manufacturer to wholesaler to retailer to consumer.
7. ______ is the process to integrate and manage the SCM as one entity.

12.5 Views on Supply Chain

The important views on supply chain are:
 SCM is an integrated process transforming raw materials into finished
products which are then delivered to the customer.
 SCM is a system consisting of material supplies, production facilities,
distribution services, and customers which are tied together resulting in
material flow and information flow in the system.

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 SCM is a dynamic system of interconnected and interdependent

individuals, groups, companies, organisation, and relationships aimed at
satisfying the customers.
 SCM optimises information and product flows from the purchase of raw
materials to the delivery of finished goods with a vision of achieving
significant strategic objectives involving productivity, quality, innovative
service, and collaborations.
 SCM is a process of strategically managing the movement and storage
of materials, parts and finished inventory from suppliers through the firm
and on to the customers or an integrating process based on flawless
delivery of basic and customised services.
Overview of postponement
The concept of postponement lies in the organising the production and
distribution of products in such a way that the customisation of these
products is made as close as possible to the point when the demand is
known. Postponement belongs to a set of levers used in inventory
management to attack the variability of demand and supply. This set of
levers can be divided into proactive and reactive. Proactive levers directly
attack the causes of variability, reactive levers help to cope with its
consequences. Postponement is a reactive lever along with substitution,
specialisation, and centralisation.

12.6 Bullwhip Effect in SCM

An organisation always goes through ups and downs. It is necessary that
the managers of the organisation keep track of the market conditions and
analyse the changes. They must take decisions on the resources and make
necessary changes within the organisation to meet the market demands.
Failing to do so may result in wild swings in the orders. This may adversely
affect the functioning of the organisation resulting in lack of coordination and
trust among supply chain members. The changes may affect the information
and may lead to demand amplification in the supply chain. The Bullwhip
effect is the uncertainty caused from distorted information flowing up and
down the supply chain. This affects almost all the industries, poses a risk to
firms that experience large variations in demand, and also those firms which

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are dependent on suppliers, distributors and retailers. A Bullwhip effect may

arise because of the following factors:
 Increase in the lead time of the project due to increase in variability of
demand
 Increase in the stocks to accommodate the increasing demand arising
out of complicated demand models and forecasting techniques
 Reduced service levels in the organisation
 Inefficient allocation of resources
 Increased transportation cost
Four rational factors create the bullwhip effect:
1. Demand signal processing: If demand increases, firms order more in
anticipation of further increases, thereby by ordering more than they
need.
2. The rationing game: There is or may be a shortage, so a firm orders
more than the actual forecast in the hope of receiving a larger share of
the items in short supply.
3. Order batching: Fixed cost at one location lead to batching orders.
4. Manufacturer price variations: This usually encourages bulk orders.
The last two factors generate large orders that are followed by small orders,
which implies increased variability at upstream locations.
How to prevent it?
Bullwhip effect may be avoided by one or more of the following measures:
 Avoid multiple demand forecasting
 Breaking the single orders into number of batches of orders
 Stabilise the prices, avoid the risk involved in overstocking by
maintaining a proper stock
 Reduce the variability and uncertainty in Point Of Sale (POS) and
sharing information
 Reduce the lead time in the stages of the project
 Always keep analysing the past figures and track current and future
levels of requirements
 Enhance the operational efficiency and outsourcing logistics to a
capable and efficient agency

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Self Assessment Questions

8. The _____ is the uncertainty caused from distorted information flowing
up and down the supply chain.

12.7 Collaborative Supply Chain

An organisation has to manage the flow of all the items in its supply chain.
Supply chain is the flow of materials, information, money, and services from
various sources to the customers. The total supply chain process can be
categorised into three types: upstream supply chain, internal supply chain,
and downstream supply chain.
1. Upstream supply chain (or) inbound logistics: Upstream supply
chain involves the activities of a manufacturing company with its
suppliers.
2. Internal supply chain (or) in-house processes: Internal supply chain
involves activities that are undergone with-in the manufacturing
company for transformation of the inputs from the suppliers to the
outputs.
3. Downstream supply chain (or) outbound logistics: Internal supply
chain involves activities in delivering the products to the final customers.
What is Vendor Managed Inventory (VMI)?
Vendor Managed Inventory (VMI) is a process in which a supplier generates
orders for its distributor based on demand information sent by the
distributor.
VMI was first applied to the grocery industry, between companies like
Procter & Gamble (supplier) and Wal-Mart (distributor).
With VMI, suppliers generate orders based on mutually agreed upon
objectives for inventory levels, fill rates and transaction costs, and demand
information sent by their distributor customers.
In this process, the buying function moves from the distributor back to the
supplier, who takes over responsibility for placing orders.
With VMI, suppliers and distributors can both focus on the same issue - how
to sell more product to the end-user more efficiently. This changes the
supplier's focus from how to get the distributor to buy more, to how to get
the distributor to sell more.
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This change in the supplier/distributor relationship is the most exciting

feature of vendor managed inventory.
How does Vendor Managed Inventory work?
The distributor sends sales and inventory data to the supplier on a pre-
arranged schedule (typically daily).
VMI system determines what should be ordered based on the criteria the
supplier and distributor have established.
The supplier monitors the inventory status information to make sure that the
distributor always has the appropriate amount of stock on hand when
needed.
The distributor can override the system when necessary, for example, if they
anticipate increased market demand.
12.7.1 Internet and supply chain
In the present scenario, it is difficult for any organisation to meet the pace of
the industry to meet and supply the demanded service or product.
Technology has become one of the integral components of any organisation
to help in keeping up with the pace of ever growing demands. Internet is one
such technological invention which has benefitted organisations to a large
extent. It is necessary for organisations to realise the significance of
Internet and its advantages and collaborate with various agencies to get the
best service for their product.
The collaborative use of technology to improve the operations of supply
chain activities as well as the management of supply chains is known as
collaborative supply chain. The success of the supply chain depends on the
following factors:
1. The ability of all supply chain partners to view partner collaboration as a
strategic asset.
2. Information visibility along the entire supply chain and help in integrating
the supply chain elements.
3. Collaboration for the purpose of achieving efficient consumer response.
Some of the characteristics of good collaborators are that they are
flexible, proactive, dependable, professional, dedicated, efficient,
innovative, have problem solving attitude, and good after sales service

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Electronic tools used in communication helps the companies to store

information and demonstrate their product capabilities to the world through
their website. Companies can use the Internet technology to network their
units located at different geographical locations situated thousands of
kilometres away and share information within fraction of seconds as though
they are sitting inside on building. Such is the power of the Internet.
Organisations can think of setting up special networks to manage their
operations on the net. Issues such as broadband connectivity, compatibility,
security and scalability can be easily addressed with the technology
available. Corporate portals can be set up, which can then offer employees,
business partners and customers an organised focal point for their
interactions with the firm. Portals may be generic (for customers, and
employees) in nature or functional (storing, retrieving, and querying) or
collaborative.

12.8 Inventory Management in Supply Chain

Inventory refers to a detailed list of all the items in the stock. It refers to the
working capital. It is necessary to manage the uncertainty and risks involved
in the usage of the stock items. Inventory refers to any stored resource
which is used to satisfy a current or a future need, also known as normal
inventory for current needs and buffered inventory for future needs.
Inventory is an expensive and important resource management technique.
Many times companies minimise costs by reducing the inventory levels.
However, often the customers become highly dissatisfied with it because of
stock-out. Companies could make a balance between extreme levels of
inventory by balancing the costs and gains. Inventories protect against
demand and lead time uncertainties. Suitable methods can be adopted to
manage the inventory. Methods are usually deterministic or non-
deterministic in nature. Probabilistic models can also be considered to
analyse an inventory problem. Economic Order Quantity (EOQ) may be
computed which enables a company to maintain a balance between holding
cost and ordering or carrying cost. For analysis, one may consider the ABC
analysis, VED (Vital, Essential, Desirable) analysis, and HML (High,
Medium, Low) analysis for managing the inventory. These techniques add
value to the supply chain.

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Self Assessment Questions

State True or False
9. The collaborative use of technology to improve the operations of supply
chain activities as well as the management of supply chains is known
as collaborative supply chain. (True/False)
10. Inventory management is necessary to manage the certainties involved
in the usage of the stock items. (True/False)

12.9 Financial Supply Chain – A New Revolution within the SCM

Fold
It is not possible to realise an effective SCM without streamlining the
balance among inflows, outflows, and parking of funds. The main objective
of financial supply chain management is:
1. Fiscal discipline and control: To create awareness among
functionaries regarding the need to realise the importance of
conservation of funds and maintain their own internal system and to
exercise as system of scientific control of utilisation of funds.
2. Integrated networking of information: A well designed SCM could be
made to function better through a scientifically designed system of
information networking.
3. Multi-dimensional financial management cockpit: While it is
extremely difficult for the most efficient finance manager to take
decisions, SCM would be in a position to place him a management
cockpit to take decisions easily.
4. Control of inventory and idling of assets: SCM integration with
finance will provide an ideal platform for clarity with regard to the exact
level of inventory which is the bane of any organisation. The top
management will then have greater clarity with regard to the balance
between justified and unjustified inventory. The finance manager
through SCM would be in a position to provide proactive guidelines to
various functionaries.

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Self Assessment Questions

Fill in the blanks.
11. ________ may be avoided by multiple demand forecasting.
12. With the Internet emerging as an important way to conduct business,
an alternative model has emerged, often called the ______, in which
intermediate nodes link many buyers and sellers.

Case-let 1

In the 2000, Whirlpool expanded worldwide. Due to the expansion and

acquisition, the company has high inventories and low customer
satisfaction. The supply of the products was reduced to a greater extent.
Also, inventories began to rise. Company’s supply systems such as, SAP
ERP system was not well integrated.
Whirlpool felt it was necessary to get a foothold on supply chain system. In
2001, Whirlpool implemented an Advanced Planning and Scheduling
(APS) system. The suit consists of supply chain integration and
optimisation tools from i2 -- Supply Chain Planner for master scheduling,
deployment planning and inventory planning. The three modules
overhauled the supply chain system.

12.10 Summary
Let us recapitulate the important concepts discussed in this unit:
 SCM is the term used to describe the management of materials and
information across the entire supply chain, from supplier to component
producers to final assemblers to distribution (warehouses and retailers),
and ultimately to the consumer
 SCM lets an organisation get the right goods and services to the place
they are needed at the right time, in the proper quantity and at an
acceptable cost
 Inventory refers to a detailed list of all the items in the stock
 The supply chain involves several elements such as, location,
production, inventory, and transportation
 The Bullwhip effect is the uncertainty caused from distorted information
flowing up and down the supply chain

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12.11 Glossary
 Economic Order Quantity: it is the order quantity that minimizes total
inventory holding costs and ordering costs
 Just-In-Time: An inventory strategy companies employ to increase
efficiency and decrease waste by receiving goods only as they are
needed in the production process, thereby reducing inventory costs
 Product differentiation: process of distinguishing a product or offering
from others, to make it more attractive

12.12 Terminal Questions

1. What do you mean by supply chain?
2. Define the term Supply chain management.
3. Explain the operational and strategic classification of SCM decision
making.
4. What are the seven principles of SCM?
5. Explain what is meant by ‘Bullwhip effect’ and how to prevent it.
6. What is the significance of collaborative SCM?

12.13 Answers

Self Assessment Questions

1. True
2. False
3. True
4. True
5. True
6. SCM
7. ISCM
8. Bullwhip effect
9. True
10. False
11. Bullwhip effect
12. Net Model

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Terminal Questions
1. Refer 12.3
2. Refer 12.4.1 and 12.4.3
3. Refer 12.3.1
4. Refer 12.4.5
5. Refer 12.6
6. Refer 12.7

12.14 Case Study

SCM in practice – Case study in the food retail sector
Food sector in India is a fast growing sector and traditionally regulated by
the government on one side but largely controlled by unorganised
individuals and private agencies. In the recent times the food retailing has
become a major business and a large number of private companies are
dealing with one or the other type of food retailing. Food retailing industry
was traditionally dominated by ‘grocery stores’ and has gradually become
an organised sector attracting several big private companies who have
established their retail outlets. In this case study we look at the progress and
development made by leading players in the field with emphasis on an
Indian company.
The first visible sign of the change in food retailing was seen in mid-eighties.
Around that time a few new food stores were set up in all metro cities in
India. At that time, couple of leading food stores started operating such as
’Morning Stores’ and ‘Modern Stores’ in Delhi, ‘Nilgiri’ in Bangalore, ‘Food
Land’ in Mumbai, and ‘Spencers Food Stores’ in Chennai. Spencers were
the first to tie up with a Singapore based large retail chain – ‘Dairyland’ and
set up the food stores in Chennai. This was a technology tie up. In Mumbai,
Garware group during the late eighties had set up a large food store, which
is now reported to have been closed down.
To ensure food safety and maintain product integrity from the source to the
customer, the food retailing companies establish a totally integrated
infrastructure and services package. This connects and maintains the flow
of food from the source (farmers/food growers, farm service centres, market
yards, processors and importers) to the customer (food service outlets, food

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processing units, food retailers and food exporters). This helps eliminate or
prevent identified hazards or reduces them to acceptable levels. This trend
is slowly beginning to take shape with the efforts to integrate and
consolidate the supply chain in Indian food retailing.
The Codex, HACCP (Hazard Analysis Critical Control Point), ISO 22000,
Bar coding (adoption of EAN systems) and food-hygiene standards have
been increasingly adopted by the food processing units in India as
prerequisites for becoming a vendor for big retail chains.
FoodWorld
FoodWorld which is a pioneer in Indian organised retail business became
India’s first national chain of supermarkets. It was started as a division of
Spencer & Co., a part of the RPG Group, in May 1996, and opened its 1st
supermarket in Chennai. In August 1999, FoodWorld hived off as a separate
company with 51-49 percent joint venture between Spencer & Co. and Dairy
Farm International of the Jardine Matheson Group, a US $ 4.5 billion retail
giant. FoodWorld enjoys 62 percent of the organised retail market in cities in
where FoodWorld operates.
FoodWorld was a division of Spencer’s, the retailing company under RPG
Enterprises (RPG). RPG’s asset base was over 75 billion rupees in 1997.
RPG’s business interests spanned a variety of sectors including power,
tyres, agribusiness, telecommunications, retailing and others including
financial services. RPG got into retailing with the acquisition of Spencer’s &
Co. in 1989. It had a large number of partnerships with international
companies, which included Fortune 500 companies.
In late 1994, RPG Enterprises, decided to explore retailing as a new area of
business activity. Several retail formats were considered and food retailing
was seen as the most promising entry vehicle into the Indian market.
Spencer & Co. was chosen to spear head these retailing efforts. Spencer’s
entered into a partnership with Dairy Farm International Holdings, a
US$ 12 billion Australasian food retailer to initiate food retailing activities.
By the end of 1998, 19 FoodWorld stores had proliferated in three major
cities of Southern India, namely Chennai (six stores), Bangalore (eight
stores) and Hyderabad (five stores). FoodWorld executives believed that
given their self service oriented merchandising strategy, the ideal store size

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was 4500 sq. ft. However, due to constraints on real estate and/or property
availability in the residential high streets, stores of smaller sizes were also
opened. Some of the larger stores had bakeries and fast food centres, with
a view to provide a pleasant shopping ambience and outstanding service.
Distribution/supply chain strategy
The key elements of FoodWorld’s distribution/supply chain strategy were as
follows:
1. Minimum suppliers to take advantage of economies of scale (in
purchasing and supply logistics), reduced overheads and control
requirements, and easier vendor development.
2. Creation of regional hubs with three regional offices (Chennai,
Bangalore and Hyderabad) to address the state-wise requirements. This
facilitated over 90 percent central distribution. The remaining 10 percent
(mostly perishable items like fruits and vegetables, bakery etc.) were
supplied direct to store.
3. Replenishment frequency was about desired servicing of stores from the
warehouses was daily, while the supply frequency for any specific SKU
was twice a week. The desired ordering and servicing frequency from
suppliers to the warehouses was weekly. Hardware and general
merchandise items were treated as exceptions, to be indented and
ordered as required.
4. Sourcing with minimum intermediaries with the idea to source from as
‘upstream’ as possible in the supply chain, in order to reduce losses and
increase margins.
The chain for dry groceries like rice, dal, sugar, and spices was very long,
often with six or seven links from the farmer to the retailer. FoodWorld had
to an extent managed to integrate two of these links in buying directly from
the miller. It provided the consumer with a pre-weighted, pre-cleaned and
‘trust-marked’ standard product, at prices that were no greater than the local
grocer. Consumer’s positive response is attested by the fact that 20% of
FoodWorld’s throughput is dry groceries under the ‘FoodWorld’ brand.
Manufacturers of branded products had also responded well to jointly
managing the chain to provide greater value to the consumer. Initiatives like
the centralised servicing of FoodWorld by Hindustan Lever, the creation of a
‘special accounts manager’ in the Proctor and Gamble marketing/sales
hierarchy, and the launching of new products/variants from FoodWorld,
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were all pointers to the fact that the FMCG distribution system, geared to
servicing the needs of 5 million small shops, had begun to adapt itself to the
needs of the modern retailer.
Challenges and constraints
Organised retail food stores face competition from emerging value-based
formats and from independent modern stores who provide a better value
proposition. Investments made in areas like IT, back end administration, and
customer relationship management, do not provide immediate returns.
Unorganised sector has started getting organised –‘Bombay Bazaar’ and ‘E-
foodmart’ have also been formed which are aggregations of the local grocer.
Challenges in the area of infrastructure, supply chain, warehousing, and
local legislation are still prevalent. Key concerns are as follows:
 Supply chain structuring
 Inventory planning and replenishment management
 Warehouse management
 Customer order fulfilment
 Logistics - temperature controlled
 Total kilometre run per month
 Perishable tonnage handled per month
The organised food chain is slowly consolidating and moving towards
becoming a major industry. Foodworld, although not able to maintain its
dominance is making all efforts to improve the service and sustaining its
position.
Discussion Questions:
1. What are the real issues in food supply chains?
2. How have the food retail chains penetrated rural areas?
3. What are the reasons for food world’s growth and success?
4. Should food retail chains be controlled by government?

References:
 Ajaiy K Gupta. Food Retail and Branding In India. Retrieved November 9,
2009, from International Showcase of Food Sector
 B Banerjee, G. R. Foodworld C: The Road Ahead.
 FoodWorld, Case from ECCH.

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E-References:
 http://www-personal.umich.edu/.Retrieved on 12, January 2012.
 www.chillibreeze.com/articles_various/Food-Retail-industry.Retrieved on
12, January 2012.
 http://www.on-line-foods.com/tech_paper/Ajay_Gupta.pdf. Retrieved on
12, January 2012.
 stdwww.iimahd.ernet.in. Retrieved on 12, January 2012.
 www.slideshare.net. Retrieved on 12, January 2012.
 http://www.supplychainonline.com/.Retrieved on 12, January 2012.

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Production and Operations Management Unit 13

Unit 13 Operations Scheduling

Structure:
13.1 Introduction
Objectives
13.2 Purpose of Operations Scheduling
13.3 Factors Considered while Scheduling
13.4 Scheduling Activity under PPC
13.5 Scheduling Strategies
Detailed scheduling
Cumulative scheduling
Cumulative-detailed combination
Priority decision rules
13.6 Scheduling Guidelines
13.7 Approaches to Scheduling
Forward scheduling
Backward scheduling
13.8 Scheduling Methodology [Quantitative]
Charts and boards
Priority Decision Rules
13.9 Scheduling in Services
13.10 Summary
13.11 Glossary
13.12 Terminal Questions
13.13 Answers

13.1 Introduction
In the previous unit, we have dealt with the concepts of supply chain
management, domain applications, views on supply chain, bullwhip effect in
SCM, collaborative supply chain, inventory management in supply chain,
and financial supply chain. In this unit, we will deal with the purpose of
operations scheduling, factors considered while scheduling, scheduling
activity under PPC, scheduling strategies, scheduling guidelines,
approaches to scheduling, scheduling methodology, and scheduling in
services.

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Production is the transformation of inputs to the desired outputs. The

highest efficiency of the production is obtained by manufacturing the
required quantity, to the required quality, at the required time, and with the
best processes. To achieve these, the production management employs
Production Planning and Control department, known as PPC, whose
function is to coordinate all the production activities.
As the name of PPC represents, planning activity is the choice from several
alternatives of utilising the existing resources to achieve the desired
objectives and the control is monitoring of performance through the
feedback by comparing the results accomplished against the target and
taking corrective actions to improve the performance. Operations are the
processes performed on machines to achieve the desired results. Hence,
PPC is a tool for directing all manufacturing operations, coordinating and
ensuring the end results of desired quantity, quality, time, and cost of
production. PPC functions are wide spread in planning and control of
materials, methods, machines, manpower, routing, estimating, scheduling,
dispatching, expediting, and evaluating the output.
Scheduling is the assignment of work to the production units with detailed
specifications of the times and the sequence of manufacturing until the end
product is rolled out and ready for dispatch. It also provides the performance
yardsticks on the time required to perform each operation and for the entire
series of activities as routed. Scheduling refers to firming up processing
times so that all the jobs/tasks are completed by the time they are due for
delivery to customers.
Objectives:
After studying this unit, you should be able to:
 describe how scheduling aims at achieving the required output with
minimum of delay and disruption in processing
 explain how it provides the means to maximise utilisation of men,
machines, and materials by maintaining free flow of materials along the
production lines and units
 identify how it helps to prevent the unbalanced allocation of time among
work centres with the view to eliminate idle capacity
 recognise how it keeps the production cost to minimum

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 describe how it achieves the rate of output and maintain the finished
goods inventory to levels predetermined and meet the marketing
requirements.

13.2 Purpose of Operations Scheduling

Scheduling is basically a day-to-day planning of operations with details of
a) which work centre will do which Job, b) When should an operation/job be
started and ended, c) On which equipment should it be done and by whom,
and d) What is the sequence in which job operations need to be handled
through a set of machines or work centres? Scheduling basically assigns
different jobs to different facilities called shop loading, sequencing the jobs
and operations, and then monitoring and revising the schedules through
controlling.

13.3 Factors Considered While Scheduling

Scheduling is governed by the following factors:
 External factors:
o Customer demand
o Customer delivery dates
o Dealer and retailer inventories
 Internal factors:
o Finished Goods Inventory (FIG)
o Process intervals
o Availability of equipment
o Availability of materials
o Manufacturing facilities
o Economic production runs

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13.4 Scheduling Activity under PPC

Table No 13.1: Terminologies
Routing Routing is the planning activity undertaken to determine the
best route for manufacturing a product. It lays down the flow
of work in the plant and determines what work is to be done,
where, and how. Routing considers plant layout, storage
space for inventory, and material handling. Route sheets
are developed for each job.
Scheduling Determines the order of processing jobs at each work
centre and establish their start and finish times (Discussed
in detail below)
Dispatch Allow production to commence through supply of materials
and work orders
Follow up Monitor progress and take corrective actions to minimise
deviations

13.5 Scheduling Strategies

Scheduling strategy differs from organisation to organisation as it depends
on the quantum of production, size and type of production, company’s
policy, priorities, etc. Most of these strategies are concerned with job shop
production since the problems encountered is more when more than one
product is produced in the same plant.
Following are the classifications:
 Detailed scheduling
 Cumulative scheduling
 Cumulative-detailed scheduling
 Priority decision rules
Let us now discuss these classifications in detail.
13.5.1 Detailed scheduling
All job orders from customers are scheduled to the last details. This may not
be practical in case disruptions are there in production line like machine
breakdown, absenteeism, etc. (Possible in airlines, hotels, etc)

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13.5.2 Cumulative scheduling

The customer orders are pooled to form a cumulative work load and then
matched with the capacity. The work load is then allocated in such a way
that immediate periods get allocated to maximum capacity.
13.5.3 Cumulative-detailed combination
This combines both the earlier strategies of firm and flexible nature of work
load. Cumulative work load projections can be used to plan for capacity as
needed. As changes happen during the week, the materials and capacity
requirements are updated. The actual time allocated to the specified job at
each work centre is as per the standard hours needed. This is tuned further
with the requirements of the master schedule.
13.5.4 Priority decision rules
When a set of orders are to be executed, the question of prioritising arises.
These priority decision rules are scheduling guidelines used independently
or in conjunction with any one of the above three strategies. These are
discussed later in section 13.8.2.

13.6 Scheduling Guidelines

1) Provide a realistic schedule
A schedule should be realistic rather than idealistic considering all the
practical possibilities.
2) Allow adequate time for operations
Enough time should be allowed for production.
3) Allow adequate time before, between, and after operations
Enough time should be allowed to queuing and transit of Work in
Progress or FIG.
4) Don’t release all available jobs to the shop
Releasing all the available jobs as and when they are received
overloads the capacity. It also increases the lead time and excess work-
in-process inventory.
5) Don’t schedule all available capacity in the shop
Some excess capacity should be available to handle emergencies and
sudden alteration in jobs or to accommodate a totally new but profitable
order.

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6) Load only selected work centres

Only those work centres which are fit are selected for operations.
7) Allow for necessary changes
Schedules should be open to necessary changes and alterations in the
products.
8) Gear up the entire shop to be responsible for the schedule
It is the worker’s responsibility to cooperate and meet the schedule.

13.7 Approaches to Scheduling

There are two types of approaches to scheduling. They are forward
scheduling and backward scheduling. These are used to ensure that the
lead time for manufacture is kept to a minimum and the products are
supplied to the customers as quickly as possible.
13.7.1 Forward scheduling
Forward scheduling is an approach where the customer orders are
immediately processed as soon as they come in even if their due dates are
far away. With forward scheduling, the scheduler selects a planned order
release date and schedules all the activities from this point forward and
ready within time.
13.7.2 Backward scheduling
With backward scheduling, the scheduler begins with a planned receipt date
or due date and moves backward in time according to the required
processing times. It is an approach where the customer orders are
processed as late as possible so that they are finished and delivered exactly
on their due dates. Here the starting time of the processing job is
determined by “setting back” the number of days required for its processing,
from finish date.
Illustration 1: Suppose all processes required for a component takes 20
days, then forward and backward scheduling can be executed as follows:

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Forward scheduling
End of operations Delivery due date
Work forward
Opns 01 02 03 04 05 06 07 08 (Finished Goods Inventory
Days: 2 5 6 9 11 13 15 17 (three days left for delivery)

Backward Scheduling:
Start of Operations (start late by three days) Delivery due date
End of operations

Operations 01 02 03 04 05 06 07 08 FGI
Days: 2 5 6 9 11 13 15 17
Work backward

Fig. 13.1: Forward and backward scheduling

13.8 Scheduling Methodology [Quantitative]

There are many types of scheduling and the methodologies used in
production. Specific methods used depend on the type of industry,
organisation, products, and level of sophistication in the production.
However the scheduling methodology can be classified as (i) charts and
boards and (ii) priority decision rules.
13.8.1 Charts and boards
a) Gantt load chart
b) Gantt progress chart
c) Schedule boards
d) Computer graphics
Let us now discuss these methodologies in brief.
a) Gantt load chart
A Gantt load chart shows the amount of cumulative workload that each work
centre has in a manufacturing unit. It is a graph showing individual and total
estimated workloads of each work centre on a time scale.
Uses of Gantt chart
 Total workload shown graphically is simple, clear, and easy to
understand.

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 It indicates the need for more resources or for reassigning or resources

when the load at one work centre becomes too large.
 In case some work centres are overloaded, employees from a low-load
work centre may be temporarily shifted to high load centres.
Limitations of Gantt chart
 Gantt load chart does not account for delays and disruptions at the work
centres
 It does not give information regarding the due date requirements of each
job
 Chart must be updated periodically for new jobs
Illustration 2
Work Centre Cumulative Work Loads
Sheet A (5) B(16) C(14) D(9) E(11)
Metal 0 5 21 35 44 55
Sheering A(4) B(12) D(24)
Bending
0 4 16 40
Painting A(5) B(7) C(12) D(4) E(6)
0 5 12 24 28 34
Brazing C(8) E(16)
0 8 16
Fig. 13.2: Work centres & the cumulative work load

In a production facility where five jobs to be processed through one or more

of the four work centres, the cumulative work load can be shown in the chart
given above (Fig 13.2). The work centre “Sheet Metal” has cumulative work
load of 55 days to complete all the five jobs (A to E). Similarly the
cumulative load for completion of three jobs in work centre ‘Shearing and
Bending’ is 40 days. The painting section having 5 jobs will take 34 days
and brazing section for only two jobs will have cumulative work load of 16
days. This chart will indicate only the cumulative workloads for each job and
to what extent the work centres are to be scheduled.
b) Gantt schedule and progress chart
A Gantt schedule and progress chart indicates the scheduled starting and
completion dates for each job as well as the current status of each job. The

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chart shows an immediate comparison between the schedule and reality

with respect to each job at work centres.
Illustration 3
There are five machines with four jobs to be finished. The work schedule for
sheet metal work and soldering on job X is 4 and 4 days. The schedule for
braze on Y job is 5 days, Z job is scheduled for sheet metal wok for 6 days
and a finishing job of soldering a job F is of 3 days. (See Fig 13.3)

Job Machine 1 2 3 4 5 6 7 8 9 10 11
X(4) Sheet
work-1
X(4) Solder
Y(5) Braze
Z(6) Sheet
work-2
F(3) Solder
Fig. 13.3: Progress chart

Jobs are shown in Column one and the work completed on a particular days
in the progress chart above, is shown
As against 4 days of sheet metal work-1 of X component, the operation has
completed up to 3.5 days, and hence there is half a day work pending on
that day.
a) Job X requires half day of change over on 5th day-shown as Black
square and then, soldering operation is continued for next four days.
b) Job Y Brazing continued for five days and as on this day it is as per
schedule, i.e., it has taken 5 days to complete as scheduled.
c) Since component X requires half day for completion before component
Z starts its operation on the sheet metal machine, six days required for
this Z will take completion date to 10.5 days.
d) Soldering operation on component F has already taken half a day extra
for completion (3.5 days instead of 3 days).

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This is how the progress charts shows the present day status of the job on
hand, jobs completion, jobs within the schedules, and jobs outside the
schedule.
c) Schedule boards
Shop floor personnel need to know the information as to how they are
processing components in production and this can be reflected in a simple
schedule board inside the production shops. Content of these boards are
updated daily by the progress department. The boards contain simple bar
graphs to represent the actual status of components/products.
d) Computer graphics
Computer graphics and reports have replaced the mechanical boards and
charts. With the help of computers, PPC keep track of hundreds of items
and can revise the schedules.
13.8.2 Priority decision rules
A priority decision rules shown below are the systematic procedures for
assigning priorities to waiting jobs, and determining the sequence in which
jobs are required to be processed.
The major criteria for applying rules are set up costs, idle time of machine
and labor, in-process inventory, percentage of jobs that are late, average
number of jobs waiting in queue, average time to complete job, and
standard deviation of time to complete job.
Classifications of priority decision rules
A. Single-criteria rules
B. Combined criteria rules (Johnson’s rule)
C. Critical ratio scheduling
D. Index method of scheduling
E. Critical path method
Let us now discuss these classifications in detail.
A) Single-criteria rules
Here the jobs are assigned to the production division by considering single
and important criteria. These criteria’s are:
 First come first served (the job that comes first is served by scheduling
first)
 Earliest due date (here the job with the earliest due date is processed)

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 Least slack available for production (here priority is given to the waiting
job whose slack time is least. Slack time is calculated as the difference
of the length of time remaining until the job is due and the length of its
operation time. For example, if a job requires 6 days and time left is 8
days, then the slack for that job is 2 days.)
 Shortest processing time (job requires least of shortest time is
processed first)
 Longest processing time (job that requires the longest time is processed
first)
 Preferred customer order (priority to orders coming from favorite
customers)
 Random selection (Jobs are selected at random and purely a chance for
any job)

Illustration - 4
The illustration below details how the above said priority rules are applied
while scheduling. It also explains the different methods available for PPC
department.
Five jobs are to be processed at a Fabricating unit. The processing time in
days and the due date in days are given below.
Table 13.1: Data for illustration 4
Job A B C D E
Processing time in days 8 21 18 13 15
Due date in days 10 24 22 16 16
Determine:
a) The sequence of job according to the shortest processing time
b) Calculate total completion time
c) Calculate mean flow time or average completion time
d) Calculate average number of jobs in the system each day
e) Calculate average lateness
Solution
a) The sequence as is ABCDE, where as the sequence with the shortest
flow time is ADECB

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Table 13.2: Computation of flow time days and late days

Job Processing Total Flow Due days Late

Sequence Time in days time days from now (days)
A 8 8 10 -2
B 21 29 (8+21) 24 5
C 18 47 (29+18) 22 25
D 13 60 (47+13) 16 44
E 15 75 (60+15) 16 59
Total 75 219
b) Total completion time = Total process days = 75 days
c) Average number of jobs running at a time = Total cumulative flow time in
sequence at a time/total process days required. Here when the first job
is processed other four jobs are waiting. Similarly when the first job is
delivered, the second job is processed and the other three jobs are
waiting. This type of elimination goes ahead until all the five jobs are
completed.
Therefore, the average number of jobs in the system each day:
Avg No. of Jobs = [ (5x8) + (4x21) + (3x18) + (1x15) ] / (75)
= 2.92 jobs in the system/day
d) Sequencing jobs using short processing time (SPT)
This can be can be evolved by rearranging the above table as
ascending order of the processing time. This ascending order will be
ADECB, as shown below:
Table 13.3: Computation of flow time days and due days
Processing Flow time in
Waiting Job -SPT Due Date
time days
A 8 8 10
D 21 29 (8+21) 24
E 18 47 (29+18) 22
C 13 60 (47+13) 16
B 15 75 (60+15) 16
Total 75 219

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Average/Mean Flow time = Total cumulative flow time in

days/number of sequences
= 219/5
= 43.8 days.
This means the average job in the production line is 43.8 days.
e) Average job lateness = Cumulative late in days/no of sequences
= [0+5+25+44+59] / 5 = 26.6 days.
Here for A the lateness is (-2), i.e., produced 2 days earlier, hence
lateness is zero.
B) Combined criteria rules (Johnson’s rule)
Johnson’s rule is used to determine the sequence of order for a series of
jobs to be processed on a fixed number of machines. The basis for the
sequencing is that the total time required to complete all the jobs should be
minimum thereby reducing the idle time of all machines. Johnson’s rule is a
procedure that minimises the total cycle time in scheduling a group of jobs
on two workstations and the sequence of the jobs at the two work stations
should be identical and hence priority assigned to a job should be the same
at both. This type of production sequence for a group of jobs to minimise the
time has two advantages:
1) The group of jobs is completed in minimum time
2) Utilisation of two station flow shop is maximised
Steps used to adopt Johnson’s rule
Step - 1: List the processing/operation times from ‘n’ jobs on the two
work centres/machines.
Step - 2: Scan all the processing/operation times for the ‘n’ jobs on both
machines and select the shortest processing/operation time in
either work centre.
Step - 3: If the shortest processing/operation time happens to be for a
job on the first work centre/machine, place that job first in the
sequence. If it is at the second work centre/machine, then
place the job last in the sequence.

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Step - 4: Remove the job assigned to the sequence in step 3 from

further consideration (i.e. cross off both times for the assigned
job).
Step - 5: Repeat steps 2, 3, and 4 until all the jobs are assigned into the
sequence.
Note: In case of a tie (i.e. a job having the same operation time on both the
machines or two jobs having the same operation time on either of the
machines), choose the job with the smallest subscript first for assigning into
sequence (i.e. when job A and job B has the same time on either machine
M1 and M2, choose job A first as compared to job B). On the other hand if
any job has the same processing/operation time on machines M1 and M2,
then give preference to the processing time/operation time on M1 to be
considered first for assigning that job into the sequence. The above rules
are known as ‘Thumb Rule’ to be followed in case of tie between two jobs or
between two machines.
Illustration - 5
Two machines working for six jobs to be produced whose time for two
operations are given below. Sequence them for scheduling by adopting
Johnson’s rule and find the minimum elapsed time and idle time on each
machine.
Table 13.4: Data for illustration 5
Machine A Machine B
Job
Time in hours Time in hrs
1 7 12
2 16 14
3 9 13
4 6 10
5 13 7
6 15 5
Applying the Johnson’s rule for the above machines:
1) Among all the processing time, irrespective of which machine, the
shortest processing time is selected. In the given table, the shortest time
is for job 6 on machine B, and hence place this job as late as possible,
i.e., last.

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6
2) The next shortest time is for job 4 on machine A. So place job as early
as possible.

4 6
3) The next shortest time is a tie between 1 and 5 (both 5 hours). Select
any one. Place job 1 as early as possible among the remaining jobs.

4 1 6
4) The next shortest time from the tie above is 5; therefore place it as late
as possible among the remaining slots.

4 1 5 6
5) The next shortest time for job 3 on machine A (7 hours), place it as early
as possible among the remaining slots.

4 1 3 5 6
6) The last remaining job is 2 goes to the vacant slot.

4 1 3 2 5 6
Hence the best sequence for scheduling jobs is 4, 1, 3, 2, 5, 6.
C) Critical ratio scheduling
This establishes and maintains priority among jobs.

Critical ratio greater than one means the job can be completed ahead of
schedule, equal to unity means the job needs close watch, and less than
unity means special measures are to be taken to complete the job on due
date. Here, a quantity called as the critical ratio is calculated for each job
and the jobs with lower critical ratios are given priority to be processed first.
Critical Ratio = Time remaining for due date of the job/Time needed to
complete the job.

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Illustration - 6
In the following table, four jobs are shown with its operation time, due dates,
number of operations remaining, and shop remaining time. Calculate the CR
sequence schedule.
Table 13.5: Data for illustration 6
Time Number of
Operating Shop time Answer
Job remaining operations
time (hrs) remaining CR
due days remaining
1 5 14 8 9 1.55
2 10 11 2 10 1.1
3 8 20 10 17 1.176
4 14 8 6 11 0.72
Answer:
Using CR to schedule, CR = [time remaining to due date]/shop time
remaining CR for first reading =14/9 = 1.55. Similar calculation and readings
are filled in the CR column. Arranging sequence is the lowest CR first and
then ascending order and hence sequence of job loading is 4, 2, 3, 1.
D) Index method of scheduling
This assigns job to the best machine until its capacity is exhausted and then
remaining jobs are assigned to the next best machine, etc. Here, the jobs
are assigned to the best work centre till it is fully loaded to capacity and the
remaining jobs are assigned to the next best if processing time is the
criterion. If the jobs can be processed in different work centres, “indices” are
calculated for the different likely process time with the lowest index time
of 1.0.
Illustration - 7
Solve the following shop loading problem by using index method.
Table 13.6: Data for illustration 7
Job WC-1 WC-2 WC-3 WC-4
A 10 9 8 12
B 3 4 5 2
C 25 20 14 16
D 7 9 10 9
E 18 14 16 25
No. of days available 20 20 20 20

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The following table 13.6 shows the indices. The days corresponding to a job
assigned is with bold letter and underlined. Bold number and underlined is
the minimum number of days in each centre.
Table 13.7: Indices for illustration 7
WC1 WC2 WC3 WC4
Days Index Days Index Days Index Days Index
A 10 1.25 9 1.13 8 1.00 12 1.5
B 3 1.5 4 2.00 5 2.5 2 1.00
C 25 1.78 20 1.42 14 1.00 16 1.14
D 7 1.00 9 1.28 10 1.42 9 1.28
E 18 1.28 14 1.00 16 1.14 25 1.78
No of 20 20 20 20
Days
Days 7 14 22 2
assign

Indices are decided as: Job A has a minimum processing time of 8 days at
centre 3, and hence, this index is 1.00, i. e., the processing times of 10, 9,
and 12 at centres at 1, 2, and 4 are divided by 8 to find out the indices. This
procedure is followed for all jobs and their indices are indicated in the
column.
Assignment of the jobs to work centres based on the index equal to 1 is as
follows:
Table 13.8: Assignment of the jobs to work centres for illustration 7
Jobs A B C D E
Work centre assigned 1 4 3 1 2
[Additional Job of C can be assigned to work centre 4 as sufficient time
available]
E) Critical path method
It is used for scheduling large and unique projects in which the relationship
between the activities is quite intricate. The method overcomes the
deficiencies of Gantt chart.
Here a network of work centres and processing routes of each job is drawn
graphically. PERT/CPM charts are made to identify the critical path.

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13.9. Scheduling in Services

There are distinctive difference between the scheduling followed for
manufacturing and services. All these differences have a direct impact on
scheduling. These differences are:
 Service operations cannot create inventories to provide buffer for
demand uncertainties
 Demand in service operations cannot be predicted accurately
 Demand for service are initiated mostly as unplanned event and hence,
there may be certain distortions in scheduling
 Providing the required manpower and skills for the sudden demand in
scheduling a service activity is challenging and sometimes becomes
crucial
Scheduling customer demand
Normally the service centre capacity is fixed, but the demand will be varying.
Forecasting the demand in advance for service activities is difficult and
scheduling such variable demand poses certain problems. In order to
provide timely service and utilise the capacity to the maximum extent, the
scheduler has to adopt certain systems/methodologies.
There are three methods normally used by the scheduler in services. They
are
 Backlogs
 Reservations
 Appointments

Let us now discuss these methods in brief.

Backlogs
Service centres allow backlogs to develop so that they can plan their
capacity better. Priority rules can be applied to determine which order to
process next. The usual rule is first come first served. Industry customs and
previous experience often changes the priority. For example, servicing of
cars, two wheelers, etc.
Reservations
Services provided by hospitals, travels, trades, etc. The reservation for the
services in advance is the norm. This system is used when the customer
uses service facilities based on their requirements.

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Appointments
Here the customer is specified with the time of services. The advantage is
that the service is customised and utilisation of the capacity will be high. The
individual customer needs are satisfied. Service activities are determined
and planned for the customer. For example, surgery in hospitals.

Self Assessment Questions

1. Which of the following is not a characteristic of forward scheduling?
a) Production starts after the job order is received
b) Start and finish time is found by the earliest time slot available at a
work centre
c) Jobs starts in advance as per the latest available time slot in work
centre
2. In which of the following, the Gantt chart application is not there?
a) Used to track performance of shop floor employees
b) Used to reflect work load levels for machines and workstations
c) Can adopt change in scheduling each work centre
3. While job sequencing, _________ the critical ratio, __________ the
priority is given.
a) higher, higher
b) higher, lower
c) lower, higher
4. Which of the following is not a priority rule?
a) Shortest processing time rule
b) Allow longest slack time
b) Earliest due date processing rule
c) Critical ratio rule
5. Which one of these is not a scheduling activity?
a) Dispatch
b) Routing
c) Scheduling
d) Facility planning
6. Fill up the blanks with appropriate word/words
a) A priority decision rule is a systematic procedure for _________
_________ to waiting jobs, and determining the sequence in which
jobs are required to be processed.

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b) __________ rule is used to determine the sequence of order for a

series of jobs to be processed on a fixed number of machines.
c) Critical ratio = [Time remaining for due date] / [ ________________ ]

13.10 Summary
Let us summarise the key learnings of this unit:
 PPC focus on operation control through the process of scheduling.
Scheduling helps in operational controls in manufacturing and service
systems. The factors that greatly influence scheduling are the number of
jobs, the number of machines as well as the complexity of the machining
operations in the line.
 There are two types of approaches to scheduling. They are forward
scheduling and backward scheduling. These are used to ensure that the
lead time for manufacture is kept to a minimum and the products are
supplied to the customers as quickly as possible.
 The scheduling methodology adopted as well as its complexity differ
from production shop to shop and also in the systems like job shops,
process shops, mass production lines, fully automated plants, etc. There
are many types of scheduling and the methodologies used in production.
Specific methods used depend on the type of industry, organisation,
products, and level of sophistication required in the production.
 The scheduling methodology can be classified as charts and boards
(Gantt load and progress chart, scheduled boards, and computer
graphics) and priority decision rules like single and double criteria rules,
critical ratio scheduling, index method, and critical path method. Each
one of these has its own specific applications and PPC will decide based
on the type of scheduling required to accomplish the job with the
minimum time possible, thus saving costly machine hours.
 Workforce scheduling reflects the staffing plan into a specific work
schedule for each employee. Scheduling should ensure proper loading
of jobs based on the skills available within the workforce.

13.11 Glossary
Critical path: The critical path is the path which has the largest amount of
time associated with the activities and this represents the minimum time

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required to be considered while scheduling. This critical path time, which is

the minimum required time, has to be included while calculating the lead
time for delivery of products.
Queuing system: Just like queuing for a railway ticket in front of the
counter, the customer waiting in line for the supplies to be made is
considered while preparing an optimal scheduling model in order to ensure
minimum queuing of the customers.

13.12 Terminal Questions

1. What are the factors to be considered by PPC while scheduling?
2. Explain briefly the four classification of scheduling strategies?
3. Distinguish between forward scheduling and backward scheduling?
4. Explain in brief the uses and limitations of Gantt charts used in
Scheduling?
5. Distinguish between Gantt load charts and Gantt scheduling chart?
6. What is priority sequencing and what are the various criteria used in it?

13.13 Answers

Self Assessment Questions

1. (c)
2. (a)
3. (c)
4. (b)
5. (d)
6. a. Assigning priorities
b. Johnson’s
c. Time needed to completed the job
Terminal Questions
1. Refer 13.3
2. Refer 13.5
3. Refer 13.7
4. Refer 13.8.1
5. Refer 13.8.1
6. Refer 13.8.2

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Reference:
 Frazier, G., & Gaither, N. (2002). Operations Management. South-
Western/Thomson Learning.
 Ronald, E. J., & Everett, A. E. (2009). Production And Operations
Management: Concepts, Models And Behavior. Phi Learning

E-Reference:
 www.enotes.com. Retrieved on 18, January 2012.
 www.som.umass.edu. Retrieved on 22, January 2012.

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Production and Operations Management Unit 14

Unit 14 Value Engineering

Structure:
14.1 Introduction
Objectives
14.2 Value Engineering/Value Analysis
14.3 Relevance of VE in Modern Manufacturing
14.4 Process of Value Analysis
14.5 VE – Approaches and Aim
Pre-sourcing
Supplier evaluation and certification
14.6 Providing Value to the Customers
14.7 Benefits
14.8 Summary
14.9 Glossary
14.10 Terminal Questions
14.11 Answers

14.1 Introduction
In the previous unit, we dealt with the purpose of operations scheduling,
factors considered while scheduling, scheduling activity under PPC,
scheduling strategies, guidelines and methodology, approaches to
scheduling, and scheduling in services. In this unit, we will deal with the
concepts of value engineering and value analysis, the relevance of value
engineering in modern manufacturing, the process of value analysis, the
approaches and aim of value engineering, providing value to the customers,
and the main benefits of the application of value engineering.
Value engineering and/or value analysis has gained importance in today’s
manufacturing field because of the necessity of making all components as
economically as possible. Every unnecessary component and every
unwanted operation have to be eliminated for economising. Materials may
have to be changed and tolerances in manufacturing have to be relaxed
because value can be created in terms of reduced volume, increased
strength, or longer service. Involving the supplier and utilising their
knowledge and experience are crucial for the company’s success.
Let us learn about value engineering in this unit.
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Objectives:
After studying this unit, you should be able to:
 define value engineering and/or value analysis
 recognise the importance of value engineering/value analysis for a
manufacturing concern
 describe the involvement of suppliers in realising the advantages of
value analysis
 recognise that design changes can affect the usage and utility of the
product and at the same time, reduce the cost
 explain how customers will be benefited by value engineering and bring
us increased volumes of business

14.2 Value Engineering/ Value Analysis

Value Engineering (VE) or value analysis is a methodology by which we try
to minimise the cost and improve the revenue of a product or an operation.
The concept of value engineering originated during the second world war. It
was developed by General Electric Corporations (GEC). Value engineering
has gained popularity due to its potential for gaining high Returns on
Investment (ROI). This methodology is widely used in business re-
engineering, government projects, automakers, transportation and
distribution, industrial equipment, construction, assembling and machining
processes, health care and environmental engineering, and many others.
Value engineering process calls for a deep study of a product and the
purpose for which it is used such as the raw materials used, the processes
of transformation, the equipment needed, and many others. It also questions
whether what is being used is the most appropriate and economical. This
applies to all aspects of the product.

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Example 1
Let us consider a component which needs a
round brass rod as raw material of diameter
21.5mm. The component has to perform
seven operations: cutting, drilling,
chamfering, boring, milling, plating, and
polishing.
Value analysis considers all aspects of each of these and investigates
whether any of them can be substituted by another material, a different
size, a different tool, a different machine, a different cut sequence, a
different tool for an operation, a different chemical, a different
concentration, a different voltage, shorter time or processing.

For the above example, studies can be conducted to verify whether any
operation can be eliminated. Simplification of processes reduces the cost of
manufacturing. Every piece of material and the process should add value to
the product so as to render the best performance. Thus, there is an
opportunity at every stage of the manufacturing and delivery process to find
the alternatives which will increase the functionality or reduce the cost in
terms of material, process, and time. It also includes analysing the methods
used and the tools and equipments involved.
The different aspects of value engineering can be encapsulated into a
sequence of steps known as a ‘Job Plan’. Value engineering in any
organisations helps to identify:
 The problem or situation that needs to be changed/improved
 All that is good about the existing situation
 The improvements required in the situation
 The functions to be performed
 The ways of performing each function
 The best ways among the selected functions
 The steps to be followed to implement the function
 The person who executes the function
It should be remembered that we are not seeking a cost reduction sacrificing
quality. It has been found that there will be an improvement in quality when
systematic value analysis principles are employed.

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Remember
Value engineering or value analysis is a methodology by which we try to
find substitutes for a product or an operation. It finds alternatives for
increasing the functionality or reducing the cost in terms of material,
process, and time by simplification, variety reduction, and parts reduction.

14.3 Relevance of VE in Modern Manufacturing

Modern manufacturing can be seen from two important perspectives. One is
the management approach which consists of adopting techniques like TQM,
JIT, Kanban, concurrent engineering, lean manufacturing, TPM, group
technology, cellular manufacturing, and others. These have basic
philosophies based on which techniques, tools, and methodologies are
developed. To aid the process, we have computers and software written to
collect data, process them, distribute them, and analyse them. We have
Management Information Systems which help in decision making, and this
can be stated as the second important perspective.
Optimisation at every level looks into the aspects of cost and benefit.
Modern machines like automatic machines, special purpose machines, and
robots are built to produce highly accurate components at reduced costs.
New materials and processes have resulted in great advances in the variety
of products available to large numbers of people.
With globalisation, procurement and distribution are being conducted over
great distances. The main thrust is on quality and timely delivery at the least
price. These are the values that we put in the product.
Value analysis looks at the manufacturing activities with a view to make the
components simpler, processes faster, and the products better. Since huge
investments are made on the machines, it is mandatory that every
component/part used is made as economically as possible. Fabrication,
erection, and installation being costly and having long term implications,
assessment of utility of the materials used and processes adopted is
important.
In the manufacturing activities, many machine elements work with one
another to obtain the transformation on the materials that result in parts,
components, and subassemblies. Using machines with appropriate

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capabilities in terms of power, voltage, distances moved, lifting, and placing

them – all provide opportunities for value analysis. Modifications may be
made to effect savings.
Four basic types of value
 Use value – The properties or characteristics of an item or service that
enables performance to satisfy the customer.
 Esteem value – The properties or characteristics of an item or service
that makes it desirable to possess.
 Exchange value - The properties or characteristics of an item or service
that enables its exchange with another item.
 Cost value – The total of materials, labour, and other costs that make
up a product or service.

Self Assessment Questions

1. __________ of processes reduces the cost of manufacture.
2. Special purpose machines and robots are built to produce _________
components at greatly ________.

14.4 Process of Value Analysis

The process of value analysis can be divided into the following four steps:
1. Data gathering
2. Analysis and valuation of functions
3. Idea generation and evaluation of substitutes
4. Implementation and regulation
Figure 14.1 depicts the process of value analysis.

Fig. 14.1: Process of Value Analysis

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Let us now discuss each step of value analysis in detail.

Step 1: Data gathering
All relevant information concerned with the product and the parts that go to
make it are collected. The concerns at this stage are the raw materials used,
its dimensions, characteristics, availability, lead time, price, mode of
transport, storage, and the rate of consumption. All questions regarding
each of them are asked. The available information is recorded and when
information is not available, tags can be attached for information gathering
at a later date. No information should be considered unimportant or
irrelevant. It will be advantageous to record the source of information.
Classification will be helpful. Table 14.1 depicts a brief about the key
questions, techniques, and tasks that need to be performed in step 1.
Table 14.1: Data Gathering
Phase Data gathering
Objective Gather information about the product
Key questions  What is the product?
 Who is best able to gather information?
 What must be known to gather information?
 Whom to ask for the information?
Techniques  Solicit ideas
 Identify low/value/high cost areas
 Record available information
 Tag non-available information
 Allocate resources
Tasks  Select product
 List the product parts
 Classify relevant information
 Question to gather information
 Record the available information
 Submit to the management
Step 2: Analysis and valuation of functions
The function of each part is listed. They are categorised as basic functions
and secondary functions. The description should be cryptic – two or three
words. If there are many functions that any part has to perform – weightage

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may be given to each of them. Considered with the cost of the part and the
weight, each function gets a value attached to it. Table 14.2 depicts a brief
about the key questions, techniques, and tasks that need to be performed in
step 2.
Table 14.2: Analysis and Valuation of Functions
Phase Analysis and valuation of functions
Objective Analyse function and costs
Key  What is the worth of the basic function?
questions  What is the worth of secondary functions?
 What are high cost areas?
 Can any function be eliminated?
Techniques  Evaluate by comparison
 Put costs on specifications and requirements
 Put costs on key tolerances and finishes
 Put costs on key standards
Tasks  Analyse costs
 Analyse functions
 Evaluate value of function/cost
 Evaluate project potential
 Select specific study areas
Step 3: Idea Generation and Evaluation of Substitutes
Having collected the data and analysed them and knowing the relative
importance of the functions, the next step is to identify the material or
process that is amenable to the application of value engineering. Since
there are a number of factors to be considered and to break away from the
conventional thinking, brain storming is preferred. Ideas are allowed to be
submitted to the group for discussion. A few of them will turn out to be worth
more detailed evaluation. Debates about suitability or disadvantage of any
particular change envisaged are conducted. Facts are analysed and
consensus arrived as to what can be attempted. Many times, the existing
material or process will be ideal and nothing needs to be done. But a
discussion and decision about this confirms that the maximum value is
being derived. Table 14.3 depicts a brief about the key questions,
techniques, and tasks that need to be performed in step 3.

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Table 14.3: Idea Generation and Evaluation of Substitutes

Phase Evaluation
Objective Evaluate alternatives
Key  How might each idea work?
questions  What might be the cost?
 Will each idea perform the basic function well?

Techniques  Choose evaluation criteria

 Refine ideas
 Put approximate probable cost on each main idea
 Evaluate by comparison
Tasks  Speculate on evaluation criteria
 Evaluate alternatives
 Select the best alternative

Step 4: Implementation and Regularisation

The decision taken after evaluation is conveyed to the top management and
clearances are obtained for implementation. Teams are formed for each
implementation and concerned persons are involved and educated about
the impending change. Their cooperation is necessary for the change to be
effective. If any small changes are necessary when a few trials are taken,
they should be considered. After successful implementation, the change –
material change or the process change becomes the new norm or standard
for further operations. The methodology adopted is on the lines of
continuous improvement. Table 14.4 depicts a brief about the key questions,
techniques, and tasks that need to be performed in step 4.
Table 14.4: Implementation and Regularisation
Phase Implementation
Objective Implement alternatives
Key questions  Who is to implement change?
 How to amend present plans/contracts?
 Have all resources been allocated?
Techniques  Translate plan into action
 Overcome problems
 Monitor project
Tasks  Develop change document
 Implement approved alternatives
 Evaluate process

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Remember
The process of value engineering can be divided into:
1. Data Gathering
2. Analysis and valuation of functions
3. Idea generation and evaluation of substitutes
4. Implementation and regularisation

14.5 VE – Approaches and Aim

Now-a-days, the principles of value engineering starts at the product
concept and design and is carried down the ‘value chain’. The aim of value
engineering is to effect economies by investigating every opportunity and
discovering new materials and methods to achieve high quality
performance.
The aims of value engineering can be listed as:
 Product simplification
 Better and less costly materials
 Improved product design
 High efficiency in the processes
 Economy in all activities

Case-let 1
The concept of value engineering originated in 1947 in
General Electricals Corporation (GEC) when a
substitute for asbestos for flooring had to be found.
Specialised dealers could provide an equally good
‘material’ at a lesser price.
Initially, the practitioners were the people in charge of purchasing who
tried to locate a substitute material which would be equally good, if not
better, at a lower price. This is the first and basic approach to value
engineering. As the concept percolated to the manufacturing
departments, the engineers applied the same principles and found that
they could use alternate materials which were cheaper giving the same
performance. It was also found that dimensions and tolerances could be
altered without affecting the performance of the part or the product. The
investigations took them on the path of eliminating some operations. The
focus was on the value of each bit of material and each operation. This
approach led to the design stage.

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14.5.1 Pre-sourcing
The process of involving suppliers from the design stage is called pre-
sourcing.
As an extension of the internal processes where a higher value is sought to
be realised for the same cost, suppliers of materials and services are
involved at the design stage. Suppliers are in a position to provide
suggestions for design changes that will help making the operations more
efficient. Their inputs will help in ensuring higher quality at lower costs.
Sometimes, suppliers are given total responsibility for design, procurement
of materials, processing, quality, and deliveries as per schedules. If a group
of them act in coordination, a number of parts that go in for assembly get
sourced, so that, guaranteed supplies are assured. The cost effectiveness
of such arrangements is considerable. This procedure of involving suppliers
from the design stage is called pre-sourcing.
However, careful analysis of the systems followed by the supplier and their
robustness in terms of capacity, capability, and commitment is compulsory.
14.5.2 Supplier evaluation and certification
To ensure reliable supplies, firms adopt procedures for supplier evaluation
and certification. Evaluation is done for the processes and quality assurance
measures. It will be necessary to augment their equipment, training
programmes, and inspection methods and instruments. At first hand,
assessment by a team should look into the following facilities which are part
of the manufacturing system:
 Material procurement procedures
 Inspection and issue procedures
 Production planning and control systems
 Quality control methods
 Process of design and evaluation
 Management Information Systems
 Labour relations and compensation systems
 Culture of productivity and quality

Some organisations empower their suppliers with self-certification which

means that the inspection conducted by the supplier is accepted as the
inspection done by the organisation’s inspectors. The confidence placed
gets converted to responsibility.

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You will note that the above process tries to bring the environment of the
supplier organisation as close to the firm’s. The result is that, we will be able
to treat the supplier as our partner and this enhances the involvement and
cooperation and the resultant synergy produces quality.

Self Assessment Questions

3. Since there are a number of factors to be considered and to break away
from the conventional thinking, _____________is preferred
4. Engineering starts at the product concept and design and is carried
down the ___________.

14.6 Providing Value to the Customers

The industries with VE approach will reduce the cost and improve the quality
of a product or service. The cost and quality of a product play a major role in
determining the value, productivity, and effectiveness of the product and
also the industry. However, in a broader perspective, implementing VE or
value analysis alone does not provide a sharp competitive edge. Industries
should think beyond value management to suit the customers’ priorities.
Here are some of the practices which all industries need to implement to
achieve the same:
 Promote employee involvement in value work – Let us consider an
example which explains the promoting of employee involvement in value
work adding a great value to the company. In Bharat Heavy Plates and
Vessels (BHPV), a group of employees implemented various value
promoting practices and achieved reduction of the cycle times of some
of their critical processes. BHPV aimed at exploiting the creativity of their
employees and thus achieved a great solution to their problems.
Therefore, involving employees in value work serves a great deal in
achieving growth in organisation and also customer satisfaction.
 Act on customer’s voice – It is proved that the organisations that listen
to the customers’ priorities and needs and modify their businesses
accordingly can achieve value and profits to their organisation. Let us
consider some of the organisations like MRF and Mahindra & Mahindra.
The top executives will personally visit their dealers and listen to them.

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Such strong relationship with their customers enabled them to achieve

the heights of success in the leading market.
 Enhance product reliability – Value analysis approach enables
organisations to evolve as a world-class company by improving the
customer satisfaction and inventory returns. Organisations should also
try to enhance reliability and performance of their products along with
customer satisfaction.
 Ensure efficient procurement practices for better value – Most
companies are achieving greater success by restoring to outsourcing.
Efficient procurement practice enables organisations to strengthen their
core-competencies. For example, suppliers of Honda have suggested a
few modifications in the design of Honda Accord. These few change
once incorporated in the design has helped to reduce the production
cost of the car to a greater extent.
 Streamline business processes for quicker response –
Organisations should undertake practice to promote customer goodwill
by reducing process cycle time for quicker response.
 Provide comparative value mapping – Advertising about the
company’s product helps the customers to understand about the product
quality and prices. These days, it is very important for companies to
update their profile to the customers to be competitive with the outside
market.

14.7 Benefits
The main benefits of the application of VE are:
 Cost reduction
 Overall cost consciousness
 A culture of effecting savings across organisation
 Streamlining of administration and creation of transparency in all
dealings even with outsiders
 Development of reliable suppliers

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When to implement value analysis?

It is better to implement Value Analysis (VA) at the product design and
development stage itself. Implementing VA at the product design and
development stage will help to analyse the engineering drawings of
projected products. This will help to achieve efficient, effective, and
reliable designs; reduces the cost; avoids unwanted operations; and
improves the quality at the initial stage itself.

. Does implementing value analysis alone reduce unnecessary costs?

Value analysis is helpful in reducing unnecessary costs. However, in
some cases, even traditional VA tends to fail proper balance of cost. In
such cases, VA along with DFMA approach (Design for
Manufacturability and Assembly) is used to attain a good balance of
cost.
DFMA helps to minimise the number of components in various
assemblies of a product. It enhances the design efficiency, quality, and
reliability. Value analysis and DFMA together help enhance the product
value and reduce the cost of production and improve the performance.

Case-let 2
In implementation of VA, Ashok Leyland changed the
gear material from phosphor bronze to a less
expensive cast iron and eliminated frequent field
complaint of gear seizure in trucks.

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Case-let 3
T.V. Sundaram Iyenger & Sons (TVS) Limited is one of the
largest automobile distribution companies in India.

During the mid 1940s to 1960s, TVS, based in Madurai, was ranked as the best
bus transportation system in India. It could manage to run the fleets for about
96% of the time.
TVS used the VE approach to restore the mobility of buses that had broken
down. They stocked their garage with some critical assemblies of a bus.
Whenever a part or an assembly failed of a bus, they replaced it immediately
with a new one, thus restoring mobility within a couple of hours.
When compared to the traditional method, this approach has gained much more
benefits to the company. It helped to save time, reduce cost, and to become
efficient, quicker, and competitive.

Case-let 4
4 Hospital & Health Network in Pennsylvania approached Strategic Value
Analysis (SVA) solutions to find a right solution in reducing their non-salary
expenses. Strategic Value Analysis in Healthcare (SVAH) took it as a challenge
to determine any non-salary opportunities of the Health Network system.
SVAH, with their systematic approach, analysed each and every part of the
Hospital Network and came out with the solution. The solution was to implement
teaching healthcare organisations and give advanced tools, training, strategies,
and tactics. This solution was very helpful to manage and control 4 Hospital &
Health Network non-salary expenses more successfully.
4 Hospital & Health Network were convinced with the solution and implemented
SVAH’s Strategic Value Analysis System and e-Value Analysis Software. To
enhance the Health Network’s value management, SVAH provided three months
of consulting, coaching, and facilitation services. SVAH’s Strategic Value
Analysis System has improved the Health Network’s strategic plan and trained
the Health Network’s value team leaders, team members, and coordinators. The
e-value software helped to manage the members and the process of the 4
Hospital & Health Network.
Finally, after 3 months of successful completion of the Health Network’s value
management program, 4 Hospital & Health Network could manage to save 2.3
million dollars in non-salary expenses.
(Source: http://www.strategicva.com/)

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Case-let 5
A cosmetic company came across the case of an empty packet of a
cream tube. A customer raised a complaint on that company, stating that
there was no cream tube in the packed box.
When the complaint came to the notice of the company officials, the
authorities isolated the problem to the assembly line engineers. The
management asked engineers to solve the problem. Engineers worked
hard and found a solution for the problem. They devised a high-resolution
X-ray machine which would help to monitor all the packed boxes that
pass through the assembly line. Though, the X-ray devise was costly,
management compromised to buy the devise. Management felt that the
devise would help them to avoid such unforeseen errors.
Engineers ordered the floor managers to fix the X-ray machines at the
assembly line to ensure all packaged boxes have cream tube in it before
delivering to the delivery department. Also, two employees were
appointed to check the flow line and to maintain the record of the empty
boxes.
When the two employees were working on it, one of them got a better
solution for the problem. He thought that his idea would solve the
problem much better and it involves less costly equipment. The idea was
to place a strong industrial electric fan near to the assembly line, which
would blow off the empty boxes passing through the line, if any, thereby
ensuring zero errors.
When his idea was placed in front of the management he was awarded
for his intellectual skills.
Here are a few companies that implemented value engineering for providing
value to their customers.

Example 2
Modi Xerox designed the VE-d low cost copier
1025 ST, which uses a single tray. The advantage
of the new design is that it is easy to operate and
the cost is also very low.

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The Six Sigma quality is deployed in Motorola to

enhance value to customers.

Sundaram Fastener incorporated ‘Zero defect

approach’ to enhance the product quality. This
approach also enhanced to achieve zero deviation
from delivery schedules.

In order to provide the customers with exceptional

handling, fuel economy, majestic style, and easy
maintenance, Maruthi Zen employed the ‘Value-for-
Money approach’.

Titan Watches introduced new designs by adopting

a ‘strategy of innovation’.

ITC Welcome Group implemented the ‘time guaranteed’

room service strategy. This was done to enhance
customer satisfaction.

14.8 Summary
Let us recapitulate the important concepts discussed in this unit:
 Value Engineering (VE) or value analysis is a methodology by which we
try to minimise the cost and improve the revenue of a product or an
operation
 Value engineering process calls for a deep study of a product and the
purpose for which it is used
 Value analysis looks at the manufacturing activities with a view to make
the components simpler, processes faster, and the products better
 The process of value analysis can be divided into the following four
steps: Data gathering, Analysis and valuation of functions, Idea
generation and evaluation of substitutes, Implementation and regulation

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14.9 Glossary
 Returns on Investment: performance measure used to evaluate the
efficiency of an investment
 Lead time: time between the initiation of a process and its completion

14.10 Terminal Questions

1. What is value engineering?
2. What are the benefits of value engineering?
3. What are the steps involved in VA?
4. What are the objectives of VE?

14.11 Answers

Self Assessment Questions

1. Simplification
2. Highly accurate, reduced costs
3. Brain storming
4. Value chain

Terminal Questions
1. Refer to 14.2
2. Refer to 14.2 and 14.7
3. Refer to 14.4
4. Refer to 14.5

References:
 Evans J. R., Collier D. A., Operations Management: Concepts,
Techniques and Applications. (2007). South Western- Cengage
Learning.

E-Reference:
 http://www.strategicva.com/.Retrieved on 12, January 2012.

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Production and Operations Management Unit 15

Unit 15 Just-In-Time
Structure:
15.1 Introduction
Objectives
15.2 Characteristics of JIT
Concept of ‘5S’
15.3 Key Processes to Eliminate Waste
Kanban for material flow
High quality production
Small and uniform workloads
Suppliers as partners
Flexible workforce and training
Total productive maintenance
15.4 Implementation of JIT
Pre-requisites for implementation
Shop floor control
Purchasing
Vendor-managed inventory
15.5 JIT Inventory and Supply Chains
15.6 Summary
15.7 Glossary
15.8 Terminal Questions
15.9 Answers
15.10 Case Study

15.1 Introduction
In the previous unit, we have dealt with the concepts of value engineering
and value analysis, the relevance of value engineering in modern
manufacturing, the process of value analysis, the approaches and aim of
value engineering, providing value to the customers, and the main benefits
of the application of value engineering. In this unit, we will deal with the
characteristics of JIT, key processes to eliminate waste, implementation of
JIT, and JIT inventory and supply chains.
Toyota Motor Corporation, with annual sales of over 9 million cars and
trucks, is the largest vehicle manufacturer in the world. Two techniques,

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just-In-Time (JIT) and the Toyota Production System (TPS), have been
instrumental in this post-world war II growth. Toyota, with a wide range of
vehicles, competes head-to-head with successful and long-established
companies in Europe and the U.S. Taiichi Ohno, the former vice president of
Toyota, created the basic framework for the world’s most discussed systems
for improving productivity, JIT and TPS.
Just-In-Time (JIT) is an approach of continuous and forced problem solving
via a focus on throughput and reduced inventory. The Toyota Production
System (TPS), with its emphasis on continuous improvement, respect for
people, and standard work practices, is particularly suited for assembly
lines.
Just-In-Time (JIT) manufacturing is a process by which companies don't
keep excess inventory; instead, they manufacture a product as an order
comes in. It is a management philosophy of continuous and forced problem
solving.
The objective of JIT manufacturing system is to:
 Eliminate waste, that is, minimise the amount of equipment, materials,
parts, space, and worker’s time, which adds great value to the product
 Increase productivity
JIT means making what the market demands when it is needed. It
incorporates the generic elements of lean systems. Lean production
supplies customers with exactly what the customer wants, when the
customer wants, without waste, and through continuous improvement.
Deploying JIT results in decrease of inventories and increases the overall
efficiencies. Decreasing inventory allows reducing wastes which, in turn,
results in saving lots of money. There are many advantages of JIT. They are
as follows:
 Increases the work productivity
 Reduces operating costs
 Improves performance and throughput
 Improves quality
 Improves deliveries
 Increases flexibility and innovativeness

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For industrial organisations to remain competitive, cost efficiencies have

become compulsory. JIT helps in this process. It is extended to the shop
floor and also the inventory systems of the vendors. JIT has been further
understood as continuous improvement. These principles are being applied
to the fields of engineering, purchasing, accounting, and data processing.
However, for organisations to completely implement JIT manufacturing
system, they need to have a proper commitment along with the following
basic facilities - proper material, quality, equipment, and people
involvement.

What are the challenges of JIT?

One of the main challenges for JIT is frequent changes in production

schedules owing to the changes in demand. This causes the
procurement plans to change. In the present day scenario, disruptions
have a cascading effect, because most manufacturing concerns
depend upon a number of suppliers, who in turn may outsource parts
and services. However, there is a limit to the agility that a company can
build into the system. Communication, right through the supply chain,
helps in reducing inventories and keeps the flow lines smooth. Success
of JIT depends upon a lot of preparation and committed
implementation.

In this unit, you will know more about JIT, its key elements, the processes of
eliminating waste, the applications, the process of implementing, and its
failures and successes.
Objectives:
After studying this unit, you should be able to:
 identify the key elements of JIT
 explain the key processes to eliminate wastes according to JIT
 recognise the key business practices and applications of JIT
 explain how JIT is implemented
 recognise how organisations fail or succeed by implementing JIT

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15.2 Characteristics of JIT

In this section, we will study the different methods by which inefficiency is
reduced and unproductive time is minimised. The consequent savings are to
be utilised for reducing cost and rendering better service to the customer.
Shigeo Shingo, an authority on JIT at Toyota, classifies the wastes to be
eliminated as follows. (See Figure 15.1 Seven wastes)
The seven wastes to be eliminated according to JIT are:
 Over production
 Inventory
 Waiting time
 Movement
 Effort
 Defective products
 Over processing
Figure 15.1 depicts the seven wastes that need to be eliminated as per JIT.

Fig. 15.1: Seven Wastes

Let us now discuss each of these seven wastes in detail:

 Over production – Over production is to manufacture products before it
is actually needed. If the demand for that product decreases, the extra
parts or products produced may not be useful or needed. Also over
production results in high storage costs and is also difficult to detect
defects. So, over production is considered a waste.

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 Inventory – Excess procurement or production builds up stock of

materials which are not immediately used, thus locking space and funds
carrying heavy costs. Figure 15.2 depicts the inventories at different
levels of an organisation – supplier distribution, production, and
customer distribution.

Fig. 15.2: Inventories in an Organisation

 Waiting time – Wastage of time happens when goods are not moving or
being processed. The operator, the machine, or the part will either be
not working or be worked upon. The duration of waiting can be said to
be unproductive and may create more serious consequences.
 Movement – Any unnecessary movement is a waste of energy; it
causes blockages, disrupting movements, and delaying the flow of other
items creating delays.
 Effort – The people who work do not make a study as to how the
products on which they are making are utilised and do not realise the
purpose for which they are made. This lack of education will lead to
waste of resources. Finally, they end up in shortage of resources when
needed.
 Defective products – The defective products lead to a tremendous loss
to the company. This is because they use up the same equipments,
workmen, and the time that would be used to make good products.
Thus, defective products use up resources and result in losses.

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 Over processing – Some steps like unnecessary processing or

production do not add value to the final output. As a result, it is a waste
of all the inputs that go into the process.
In the recent times, an 8th waste has been identified. It is unused or
underutilised employee potential. This means, if the employees are not used
to their fullest potential or capability, the organisation will suffer. This also
means the potential of the employees has to be understood so as to utilise it
to the maximum extent.
Since these wastes have to be eliminated, a thorough study of how they
occur and what steps would result in their elimination is of paramount
importance. The next section focuses on some of them.
15.2.1 Concept of “5S”
Historically, production managers have used “housekeeping” for a neat,
orderly, and efficient workplace and as a means of reducing waste.
Operations managers have improvised “housekeeping” to include a
checklist commonly known as the 5Ss. The Japanese developed the initial
5Ss where each S stands for a Japanese word.
The 5Ss are as follows:
 Sort/segregate – Keep what is needed and remove everything else
from the work area; when in doubt, throw it out. Identify non-value items
and remove them. Getting rid of these items makes space available and
usually improves the work flow.
 Simplify/straighten – Arrange and use analysis tools to improve the
work flow and reduce wasted motion. Consider long-run and short-run
ergonomic issues. Label and display for easy use only what is needed in
the immediate work area.
 Shine/sweep – Clean daily; eliminate all forms of dirt, contamination,
and clutter from the work area.
 Standardise – Remove variations from the process by developing
standard operating procedures and checklists; develop good standards.
Standardise equipment and tooling so that cross-training time and cost
are reduced. Training and retraining the work team eliminate deviations.
 Sustain/self-discipline – Review periodically to recognise the efforts
and motivate the workforce to sustain progress. Use visuals wherever
possible for easy communication and implementation.
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Later U.S. managers added two more Ss namely:

 Safety – Build good safety practices into the above five activities.
 Support/maintenance – Reduce variability, unplanned downtime, and
costs.

15.3 Key Processes to Eliminate Waste

The key processes to eliminate the waste are listed below:
 Kanban for material flow
 High quality production
 Small and uniform workloads
 Suppliers as partners
 Flexible workforce and training
 Total productive maintenance
 Reduced cycle time
Let us discuss in brief about each processes in this section.
15.3.1 Kanban for material flow
Controlling material flow using cards through the manufacturing system
implementing JIT is called Kanban. These cards are used to tell a work
station to perform a certain function on materials.
Kanban means a ‘visible card’ and also ‘signal’ in Japanese language.
These cards are used for communicating the quantities required at the
customer’s point for his or her use. This means that the operator next in line,
who is the customer, decides how many units he or she needs and asks for
them. The operator who receives the card should make only that many and
supply. Similarly, the operator makes a demand on his predecessor by a
‘Kanban’ and receives only the required quantity. This is called the pull
system.
Figure 15.3 depicts the operation of the pull/Kanban system. It controls the
flow of resources in a production process when and where a customer order
is placed. This system helps to eliminate waste in handling, storing, and
delivering the product to the customer.

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Fig. 15.3: Example of a Kanban Signal Flow

The containers used in the material flow are designed to hold specific
components in certain numbers. Kanban system is a physical control
system which uses cards and containers, that is, materials must not be
removed without posting a card at the receiving post.
Advantages of Kanban processes are listed below:
 The orders are controlled and triggered from defined locations
 Inventory costs and Work In Progress (WIP) are reduced
 The control of stock in the inventory will be improved
 The lead time to deliver is reduced
 The process demand can be visualised
 The process of deviation escalation and rectification of root cause of the
deviations in production can be improved
15.3.2 High quality production
JIT production is meant for products which are repetitive in nature. The
system has its origin in providing a solution to a manufacturing process,
where the finished product is obtained by a number of parts that get
assembled. The problems in such situations will be to keep the arrival of
parts, components, and sub-assemblies so that no shortages will occur
during production. Therefore, it becomes vital that all parts are of high
quality, so that the assembly does not get held up.
For JIT to be successful, the inventories have to be kept to the minimum
and every component produced must represent the highest quality. It is
relevant to mention Taguchi’s insistence on achieving the target value to
realise quality. The permitted tolerances do not ensure high quality.
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Controlling variability by strict adherence to best processes with built-in

robustness to achieve Six Sigma standards ensures high quality. These
help in realising JIT, which has economy in focus and provide an additional
factor for competitiveness. So, high quality production helps in reducing the
waste of inventory space to the maximum extent.
15.3.3 Small and uniform workloads
Manufacturing facilities have to produce a number of parts to meet the
requirements of a number of products. Offering variety in terms of products
is a strategy that most businesses practice.
Manufacturing all the products in large volumes and maintaining stocks at
various distribution centres is highly uneconomical and no organisation
would contemplate such a plan. The input resources like the raw materials,
bought-out-items, transportation, storage, and funds lay a heavy burden on
the system. Added to that, the costs and the operations involved in the
transformation process become unthinkable.
The solution is to produce a variety of products in small numbers and plan
the production schedules in such a way that the production facilities become
more adept in meeting the market demands. The aim is to reduce the
inventories, but at the same time not to lose business. So, a small load on
various work centres, both at in-house facilities as well as those of sub-
contractors, is the answer.
Achieving uniformity of loading is important to avoid piling up of work in
process. However, any decision will have a trade off. The frequent changes
in set ups, increased transportation, and the production hold ups owing to
mismatch of the production of different parts. The costs involved on both
counts have to be weighed and then decisions are to be taken.
15.3.4 Suppliers as partners
Suppliers are those companies which undertake supplying the
manufactured products of an organisation. Suppliers can be the dealers for
organisations or conduct some transformation activity on the materials
delivered by organisations to them. In all cases, since organisations do
business with them, they will have a profit for the service rendered by them.

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If the technology they have is superior, if the equipments they use are
optimal and the workforce is efficient, the benefits would increase for them
at a cost to the organisation.
If there are a number of suppliers, the organisations would exploit the
situation and decrease the cost by choosing the one who charges the least.
With this exploitative environment, there are some disadvantages to the
organisation, such as:
 Commitment to meet the organisation needs is less
 Giving the benefit of their learning to the organisation has fewer chances
 Transferring organisation knowledge to the suppliers for improved
service would be absent
 Likelihood of quality suffers
As explained earlier, to be able to implement JIT, we need to change
schedules quite often either delaying or hastening the production of some
items almost on a daily basis, if not hourly. The main concern in such
situations will be a build up of inventory or stock out positions. Problems of
communication add to the difficulties. The following ways will ensure
cooperation of the suppliers and timely delivery of supplies with good
quality:
 Treating suppliers as a part of the organisation’s business and sharing
information
 Providing technical and financial assistance
 Seeking supplier’s help in improving process
 Building up rapport between the employees of the supplier organisation
 Assuring business
Many times, the supplier, owing to his or her specialised operations, may
contribute to the organisation’s productivity. Quality enhancement
programmes can be implemented simultaneously for faster and better
results.
15.3.5 Flexible workforce and training
Flexible workforce consists of workmen who are capable of performing
many tasks. It may be at their specified workstations or at other workstations
where the skills required may be quite different from those which they use

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regularly. Based on this, cross-functional training is commonly provided

under JIT systems.
The operational managers can look for personnel’s who have an attitude for
learning other skills. They should give the personnel training so that when
shortages occur, they can be utilised to get over stoppages of work and
disruption in workflow. This flexibility ensures reliable customer service and
overcomes bottlenecks.
Part time and temporary employees also enable the company to overcome
surges in demand. In such cases, specially trained regular workers can be
asked to take over tasks which require high skills and the non-regular
employees can be given jobs which are simple and can be handled by them
without causing any disturbance in the production.
15.3.6 Total productive maintenance
Maintenance of equipment is a fundamental requirement to increase the
productivity in required quantities with high quality. The presumption that
machines deliver these is the basis to JIT philosophy.
Generally, periodic and preventive maintenance is conducted by the
operator, sometimes with the help of the supervisor. These activities help
them to understand the machine better and give an opportunity to sense
when the equipment may need a major repair or reconditioning. This is to be
done to bring back the machine to give the required quantities and not have
any impermissible variations.
Break downs generally occur as the symptoms are neglected. In total
productivity maintenance, the worker is trained to:
 Maintain the machine from any forced deterioration
 Keep the machine clean and lubricated
 Keep record of the parts to be replaced on a periodic basis
 Inspect the machine for minor abnormalities and adjust it
This helps the worker to maintain his or her machine in a perfect order
without breakdown. It will be his or her responsibility to maintain the
machine and his or her assistance to others should be available. With these
responsibilities, the worker will also have the autonomy to undertake
measures to ensure productivity and quality.

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15.3.7 Reduced cycle time

Cycle time refers to the time involved in completing a set of operations or
processes to convert input to output. By eliminating delays and improving
productivity, it is possible to reduce the cycle time which, in turn, ensures
better utilisation of facilities and equipment.

15.4 Implementation of JIT

JIT, Total Quality Management (TQM) and other developmental measures,
are possible only with top management commitment and a learning culture
in the organisation. The main handicap to any programme is the resistance
by the organisational members, even at the top, to make changes. This
resistance may take the form of non-cooperation and may enlarge to
become sabotage. These usually show up at the implementation stage. So,
communication of the goals is to be realised and the objectives of each
team are to be framed effectively. Initially, a milestone chart helps in
establishing the various steps to be taken and correcting the activities as the
process is on. This is the best way of ensuring success. It is well to remind
you at this stage that JIT is not a destination, but an ongoing continuous
improvement programme in the process of achieving TQM.
15.4.1 Pre-requisites for implementation
Like any advanced method of production and quality improvement, some
pre-requisites are needed to be in place, so that, implementation is easy
and the results are identifiable. Table 15.1 depicts the requirements from the
design process to the measurement of performance.
Table 15.1: Pre-requisites for Measurement of Performance

A Design Flow Process 1. Link operations

2. Balance workstation capacities
3. Relay-out for flow
4. Emphasise preventive
maintenance
5. Reduce lot sizes
6. Reduce set-up and changeover
times

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B Total Quality Control 1. Worker responsibility for quality

2. Measure – SQC
3. Enforce compliance
4. Fail-safe methods
5. Automatic inspection
C Stabilise Schedule 1. Level schedule
2. Under utilise capacity
D Kanban Pull 1. Demand pull
2. Back flush
3. Reduce lot sizes
E Work with Vendor 1. Reduce lead times
2. Frequent deliveries
3. Project usage requirements
4. Quality expectation
F Reduce Inventories 1. Look for other areas
2. Stores
3. Transit
4. Carousels
5. Conveyors
G Improve Product Design 1. Standard product configuration
2. Standardise and reduce number of
parts
3. Process design with product design
4. Quality expectations
The above activities lead to:
 Solving problems concurrently
o Root cause
o Solve permanently
o Team approach
o Line and specialist responsibility
o Continual education
 Measuring performance
o Emphasise improvement
o Track trends

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You will observe that when the above requirements are met, we achieve JIT
to a very close extent.
15.4.2 Shop floor control
Realistic planning and scheduling takes the frequency with which setups
have to be changed to manage the material flow without building up
inventories into consideration and leads to JIT manufacturing.
SMED (Single-Minute Exchange of Die) gives flexibility for production
process. Advocated by Shigeo Shingo, SMED method calls for designing,
making fixtures, and tooling which are instrumental in changing setups so
that, changes are to be effected within a minute. In other words, this helps in
reducing the setup time on the machines when changeover of products
takes place. The de-clamping and clamping elements should be made for
this purpose. Some of these operations are carried outside the machine
without stopping the machine.
Application of Kanban, wherever suitable, is another mechanism for
controlling the flow of material. Maintenance of machines and periodic shop
floor inspection is necessary. Verifying whether the processes are delivering
components within the tolerances specified is needed.
15.4.3 Purchasing
The essence of JIT purchasing lies in treating the purchaser as a participant
in your activities. Cooperative relationship leads to the development of the
supplier who understands the company’s requirements and in situations
where he or she confronts any difficulty, he or she should be in a position to
approach the company for its solution. Being open and trusting helps the
organisations to identify the problems and go to the source which is like
implementing TQM.
Every problem or discovery of a defect is considered an opportunity in which
the supplier and the company together get a deeper understanding of the
problem, and the solutions will not only solve that problem but also the ones
that were hidden. It is also the practice of many companies who procure a
large number of parts manufactured from their vendors to have supplies
made to the assembly in specific quantities to meet the needs just in time.
Self-certification by the vendor is resorted to ensure quality of the material.
The actual users are given autonomy to demand from the supplier, the

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quantities required as well as the time of its need. Any change in demand is
conveyed and complied. This requires cooperation and trust between the
supplier and the customer. This is how JIT purchases work.
15.4.4 Vendor-managed inventory
The very purpose of JIT is to reduce inventory at all places in the supply
chain. Inventory is considered a waste because inventory is created by
using materials, machines, and efforts of persons. All of these are resources
which have already been used up and that portion of it which is not
consumed and sent up the value chain causes a drag in the system.
However, inventories are inevitable because uncertainties exist at every
stage, making it necessary to provide a buffer so that demands do not go
unfilled. The challenge is to keep it to the minimum. To make this happen,
the calculations involving the following are necessary:
 Forecasts of the market demand
 Capacities of the equipments
 Worker absenteeism
 Supplier’s lead times
 Quality of the produced components
Each of these will have many factors which affect them. JIT depends upon
the accurate assessment of them and based on the decisions taken,
activities are initiated. These should result in holding materials as small as
the number of components or products as feasible to maintain the flow of
material without disruption. Many companies make their suppliers hold their
inventories and request them to make timely supplies. This may be done at
a cost. The most important requirement for a successful vendor-managed
inventory system is a good communication system.

Case-let 1
Anode Electronics produces different kinds of electronic products like
TVs and tape recorders. Since the world market of electronics was
moving towards high variety of products and the delivery of the orders
was getting shorter, the top managers of Anode Electronics were under
great pressure to increase the competitive position of the company in the
market. One of the executive managers of Anode Electronics suggested

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implementing a system called JIT with the hope that inventory levels
would be reduced and quality production would increase.
The main aspect in introducing the JIT manufacturing system in a
company is to educate the staff about JIT. Four middle level managers
were asked to attend a seminar conducted by a company called
Electrode Combinations who have already implemented this system, so
that they could explain the whole company about JIT manufacturing
system. A group of managers, one from each department, were a part of
the team who discussed what is to be done and how to implement JIT in
their company. According to their discussions, the following 5 activities
were called the 5 JIT principles:
 Classify materials on the shop floor based on its usefulness
 Place the value-added materials in handy positions
 Clean up the non-value-added materials
 Maintain the factory in a good looking shape
 Let the employees in the company have good habits and follow the
rules
With these activities, the working environment in Anode Electronics was
improved and the safety, quality, and productivity were increased. As the
JIT system was newly implemented in Anode Electronics, the company
started continuously improving the quality of the products.
The managers of each department formed an improvement committee to
look after the implementation of JIT in the different areas of the company,
especially the shop floor. All necessary materials were posted with a ‘red
card’ and deposited for further rework. Thus, all materials have been
identified in terms of their names, places, quantities, etc. The concept of
visual management, which is management simply by eye sight, has been
strongly motivated and encouraged.
Tremendous resistance from suppliers and workers was faced during the
early stage of developing the JIT system. High level commitments of top
manager, determination of pushing JIT system and supplier’s
involvement have helped to achieve JIT material flow. With this, the
Anode Electronics Company has laid down a solid foundation for the JIT
system so that the production system can be operated smoothly to

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improve safety, quality, and productivity over the years. The quality and
productivity problems ‘under the water’ have shown up and have been
solved.
A major success in the implementation of JIT system showed the
reduction in the amount of inventory and workers. Inventory level has
been reduced by 63%, parts inventory has been reduced by 50%, and
the number of workers has been reduced from 1020 to 865 during the
past four years. The growth rate of the company has increased by 5%
every year.
Self Assessment Questions
1. Break downs generally occur as the symptoms are neglected. (True /
False)
2. The very purpose of JIT is to reduce inventory at all places in the
supply chain. (True/False)

15.5 JIT Inventory and Supply Chains

Supply chain consists of a number of entities like organisations,
departments, workstations, and counters in sequence that produces and
delivers the products or services. The sequence starts from the basic
suppliers of raw materials and runs through the sequence of the following:
 Transporters
 Warehouses
 Stores
 Sub-stores
 Machining centres
 Packaging department
 Wholesale dealers
 Retailers
 Consumers
The supply chain creates a value chain along its path. The functions and
activities that move the material along the chain are listed below:
 Forecasting
 Purchasing
 Inventory, that produces and delivers products or services
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 Production scheduling
 Inspection
 Distribution
 Retailing
These are the subjects of study and management. Note that information
flows along with the materials and is the content for collection,
dissemination, analysis, and decision making. The purpose is to measure
the value that gets added and the costs involved in the progression. One of
the factors that add cost and not value is the hold-ups that occur along the
path. This is the inventory cost.
Forecasting determines the quantities to be produced at specified intervals
of time. All other functions get initiated and the managers concerned try to
derive maximum value at the least cost. So, production scheduling is
meticulously done taking into consideration all the uncertainties. The better
the information the manager has, better the analysis and more efficient the
implementation and greater the value added for lesser cost.
The ideal situation, which JIT envisages, is that there should not be any
bottlenecks and no extra material lying at any of the points in the supply
chain. Different companies adopt different strategies depending on the
following:
 Products
 Type of outsourcing they are able to develop and manage
 Extent of reach they have for customers
 Competition they face
Managing the supply chain efficiently helps in achieving JIT completely or as
much of it as possible.
Self Assessment Questions
3. The supply chain creates a _______ along its path.
4. There should no bottlenecks and no extra martial lying at any of the
points in the ________.

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15.6 Summary
Let us recapitulate the important concepts discussed in this unit:
 JIT is a system that lays emphasis in achieving cost efficiencies by the
principles of waste reduction.
 JIT depends on the pull system of supply, manufacture, and delivery to
reduce inventory stage.
 JIT requires the use of a flexible force to overcome production hold ups,
even with lesser number of workers.
 JIT is possible only when parts and products are of high quality so that
all those produced are fit for use.
 Total productive maintenance is one of the essential requirements for
JIT.
 Economy of movement is necessary ensuring smooth throughput which
helps in reducing inventory.
 Cooperation of suppliers is vital for the success of JIT and they help in
managing inventories.
 Information flow is an inseparable activity of the supply and its efficient
management is the basis for successful implementation of JIT.

15.7 Glossary
 Procurement: acquisition of goods or services
 Kanban: system for visualizing work, making it flow, reducing waste,
and maximizing customer value; it is a means to achieve Just-in-time
(JIT) production.

15.8 Terminal Questions

1. What are the characteristics of JIT?
2. What are the conditions for implementation of the JIT system with
success?
3. What do you understand by Vendor-Managed Inventory (VMI)?

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15.9 Answers

Self Assessment Questions

1. True
2. True
3. Value chain
4. Supply chain
Terminal Questions
1. Refer to 15.2
2. Refer to 15.4
3. Refer to 15.4.4

15.10 Case Study

JIT after the Fire
Toyota Motor Company has a worldwide presence, with Toyota’s investment
in North America alone exceeding $ 12 billion in 10 manufacturing plants. It
is also operating in several Asian and European countries. Toyota is a
benchmark for lean operations and a showcase of JIT. Operations people
from all over the world visit Toyota to see how JIT works.
But early one Saturday morning in February, a fire roared through the huge
Aisin Seiki in Kariya, Japan. The fire damaged the main source of crucial
brake valve that Toyota buy’s from Aisin and uses in most of its cars. Aisin
has long been a supplier of the critical brake and supplies 99% of Toyota’s
requirements for the valve. About 80% of Aisin’s total output goes to Toyota.
As the smoke cleared, the extent of the disaster was clear – most of the 506
special machines used to manufacture the P–valves were useless. A few
might be repaired in 2 weeks, but most would need to be replaced – and the
lead-time was 6 weeks. Both Aisin and Toyota had been operating at full
capacity.
Consistent with JIT practices. Toyota maintained only a 4-hour supply of the
valve. The Toyota plants in Japan build 14,000 cars a day. Without that
valve, production would come to a rapid halt. Kosuke Ikebuchi, a Toyota
senior managing director, was found at 8 A.M at a golf course clubhouse
and was informed about the fire tragedy.

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Discussion Questions:
1. If you are Mr. Ikebuchi, What will you do?
2. What does this experience tell you about just–in–time?
3. What actions will you have to take to handle such cases in the future?
th
(Source: Render and Heizer, Operations Management, 9 Edition, Prentice Hall,
USA.)

References:

 Chase R. B., Aquilano N. J., and Jacobs F. R., Production and

Operations Management. Eighth Edition. Irwin McGraw-Hill Publications.
 Render and Heizer. Operations Management. 9th Edition, Prentice Hall,
USA.

_________________________

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