OPERATIONS

MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
BASICS OF SUPPLY CHAIN MANAGEMENT
 SCOPE
Explain what is meant by Supply Chain Management?
Flows in supply chain
Variations in Supply Chain
Relationship between SCM and OM
 CONCEPTS OF SUPPLY CHAIN
BASIC SUPPLY CHAIN MODEL

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

 CONCEPTS OF SUPPLY CHAIN
BASIC SUPPLY CHAIN MODEL

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

 Distributor can also be called Wholesaler

 Products are sent from one to another by a transporter

 In some cases a warehouse is utilised to store the items for limited

term storage
 CONCEPTS OF SUPPLY CHAIN
FLOWS IN SUPPLY CHAIN

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

INFORMATION
 CONCEPTS OF SUPPLY CHAIN
FLOWS IN SUPPLY CHAIN

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

PRODUCT
 CONCEPTS OF SUPPLY CHAIN
FLOWS IN SUPPLY CHAIN

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

FUNDS
What is a supply chain?
 The supply chain consists of suppliers of raw materials,
manufacturer, transporters, distributors, warehouses,
retailers, and even customers themselves.

 A supply chain hence consists of all parties involved,

directly or indirectly, in fulfilling a customer request.
What is a supply chain?
Within each organization, such as a manufacturer, the
supply chain includes all functions involved in receiving
and fulfilling a customer request. These functions include,
but are not limited to, new product development,
marketing, operations, distribution, finance, and customer
service.
Objective of supply chain
 Maximise overall value generated.

 Ddifference between the value of the final product to the

customer and the costs the supply chain incurs in fulfilling
the customer’s request.

Supply Chain Surplus = Customer Value – Supply Chain Cost

 Are there variations in this chain?

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

Process of purchase of car
 Process of purchase of car

SUPPLIER CUSTOMER
Purchase of Aircraft
 Purchase of aircraft

SUPPLIER MANUFACTURER CUSTOMER

Supply Chain Components
The supply chain is made of three distinctive entities:
1. In-bound supply chain
◦ The inbound supply chain pertains mainly to providing raw materials and components to an
organization

2. In-house supply chain

◦ The in-house component of the supply chain relates to the physical configuration of the
conversion process.

3. Out-bound supply chain

◦ The out-bound supply chain pertains to the distribution of goods and services to the end
customers.
WHAT IS OPERATIONS MANAGEMENT?
Operations management is a systematic
approach to addressing issues in the
transformation
INPUTS process that converts inputs
OUTPUT
into
useful, revenue-generating outputs.
WHAT ARE INPUTS AND OUTPUTS?
INPUTS
MATERIALS
LABOUR
CAPITAL
INPUTS
OUTPUT
EQUIPMENT

OUTPUT
GOODS
SERVICES
Relationship between SCM and OM
Commonality
Both help in revenue maximisation
Improve efficiency
SCM - Acquire raw material, supply it for production as
per schedule, move the final product to customer
OM - Design the product, identify location and decide
layout, make the product
Relationship between SCM and OM
 SCM -Role closely same in many industries, reduced
comparatively in service industry
 OM- Role industry specific and important in product or
service
QUESTIONS?
OPERATIONS
MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
MATERIAL REQUIREMENT PLANNING
 SCOPE
Review of basics of Supply Chain Management
What is Material Requirement Planning?
Elements of MRP
Bill of Materials
Master Production Schedule
 CONCEPTS OF SUPPLY CHAIN
BASIC SUPPLY CHAIN MODEL

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

 Supply of Raw Materials

SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER

Concept of Material Requirement
Planning

SUPPLIER MANUFACTURER

Requirements for manufacture

• Availability of raw materials
• Right quantity
• Right time
What is Material Requirement Planning?
MRP is a structured approach that develops
schedules for launching orders for materials in any
manufacturing system. It ensures the availability of
raw materials at the right place and right time.
 Concept of Material Requirement
Planning
To make MRP-
1. Production
schedule,
Quantity and SUPPLIER MANUFACTURER
time
2. Breakup of
Requirements for manufacture
the product • Availability of raw materials
into individual • Right quantity
materials • Right time
Master Production Schedule
Master production schedule (MPS) disaggregates
information in aggregate plan
MPS links it to specific varieties being manufactured.
MPS specifies the exact timing of requirement
Eg Three AC varieties….
 Splitting AOP to MPS
High Cool Split AC company
Tonnage/Week 1 2 3 4 5 6 7 8

Aggregate 1800 units 2000 units

production
1.0T
1.5T
2.0T
 Splitting AOP to MPS
High Cool Split AC company
Tonnage/Week 1 2 3 4 5 6 7 8

Aggregate 1800 2000

1.0T 225 100 225 100 250 100 250 100
1.5T 200 200 200 200 250 200 250 200
2.0T - 175 - 175 - 200 - 200
Bill of Materials
A list of all parts, ingredients or materials required to
assemble or put together one unit of product.
It consists of complete list of each part in the product
structure, the components used to make that part and the
quantity of each component used to make that particular
part.
It also includes a short description and unit of measure of
each part.
Split Air conditioner: Bill of Materials (BOM)
AC Remote
Develop Bill of Materials
Bill of Materials
A list of all parts, ingredients or materials required to
assemble or put together one unit of product.
It consists of complete list of each part in the product
structure, the components used to make that part and the
quantity of each component used to make that particular
part.
It also includes a short description and unit of measure of
each part.
Product breakup split AC
Levels of break up ( On board)

Methods of break up
Single
Indented
Modular
Introduction of calculations
Earlier stock in hand
Ordering raw materials
Lead time to get the raw materials.
What is Material Requirement Planning?
MRP is a structured approach that develops
schedules for launching orders for materials in any
manufacturing system. It ensures the availability of
raw materials at the right place and right time.
Summarise
MRP

BOM

MPS
QUESTIONS?
OPERATIONS
MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
 NUMERICALS ON
MATERIAL REQUIREMENT PLANNING
 SCOPE
Review of Material Requirement Planning?
Review of Elements of MRP
Numericals
What is Material Requirement Planning?
MRP is a structured approach that develops
schedules for launching orders for materials in any
manufacturing system. It ensures the availability of
raw materials at the right place and right time.
Bill of Materials
A list of all parts, ingredients or materials required to
assemble or put together one unit of product.
It consists of complete list of each part in the product
structure, the components used to make that part and the
quantity of each component used to make that particular
part.
It also includes a short description and unit of measure of
each part.
Master Production Schedule
Master production schedule (MPS) disaggregates
information in aggregate plan
MPS links it to specific varieties being manufactured.
MPS specifies the exact timing of requirement
Eg Four AC varieties….
 Numerical 1- Materials Requirement Planning
1. Construct the Materials requirement planning for the given 8 weeks demand requirement.
Beginning inventory is 150 units, EOQ is 300 units and lead time is one week.
Begin.
Period (Weeks) Inventory
1 2 3 4 5 6 7 8

Demand
(Projected 100 - 150 140 200 140 - 500
requirements)

Receipts

Stock on hand
150

Planned order
release
Terminology in MRP
 EOQ
Lead time
Beginning inventory
Stock on hand
Planned release
Receipts
Total inventory cost
 Numerical 1- Materials Requirement Planning
Construct the Materials requirement planning for the given 8 weeks demand requirement.
Beginning inventory is 150 units, EOQ is 300 units and lead time is one week.
Begin.
Period (Weeks) Inventory
1 2 3 4 5 6 7 8

Demand
(Projected 100 150 140 200 140 500
requirements)
Receipts 300 300 600
(150-100) (300+50) 200-140 (300+60) 160-140 (600+20)
350-150 360-200 620-500
Stock on hand
150 50 50 200 60 160 20 20 120

Planned order
300 300 600
release
 Numerical 1 contd…- Materials Requirement Planning
Q2, If ordering cost per order is Rs. 50 and carrying cost per unit per week is Rs.2 then what is the total inventory cost?

Total inventory cost = Total Ordering cost + Total Carrying cost

Total ordering cost = No. of orders x Cost per order
= 4 x 50
= Rs. 200
Total carrying cost = No. of units carried by inventory x Carrying cost per unit per week
= (150+50+50+200+60+160+20+20+120) x 2

= 830 x 2

= Rs. 1660

Total inventory cost = 200 + 1660

= Rs. 1860
Numerical 2- Materials Requirement Planning

A company manufactures iron box. The initial stock on hand is

150 units. The carrying cost is Rs. 3 per unit per week and the
lead time is one week. The ordering cost per order is Rs. 200. The
MPS of the final assemble is as shown below.
1. Develop a Material Requirement Plan (MRP I) by using EOQ method.
2. Determine the total inventory cost

Week 1 2 3 4 5 6 7 8
Projected requirements - 350 300 450 250 300 350 400
Calculation of EOQ

EOQ = √ 2 D Co / Cc

D = 350 + 300 + 450 + 250 + 300 + 350 + 400

= 2400

EOQ = √ (2 x 2400 x 200) / 3

= 565.69 ≈ 566 Units
 Completion of the MPS table
0 6 7
Week 1 2 3 4 5 8

Projected
- 350 300 450 250 300 350 400
requirements

Scheduled receipts 566 566 566

Stock on hand 150 150 366 66 182 498 198 414 14

Planned order release 566 566 566

 Calculation of total inventory cost
Total inventory cost = Total ordering cost + Total carrying cost

Total ordering cost= Ordering cost x No. of orders

= Rs 200 x 3
= Rs 600
 Calculation of total carrying cost

Total carrying cost = Carrying cost x No. of units

No. of units = 150 + 366 + 66 + 182 + 498 + 198 + 414 + 14
= 1888
Total carrying cost = Rs 3 x 1888
= Rs 5664
Calculation of total inventory cost

Total inventory cost = Rs 600 + Rs 5664

Total inventory cost = Rs. 6,264/-

QUESTIONS?
OPERATIONS
MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
PURCHASE MANAGEMENT & TYPES OF
PURCHASING SYSTEMS
 SCOPE
What is purchase management systems
Types of purchase
Objectives and principles
Process of purchase
Purchase Management
Purchase management is a system that creates customised
approval rules providing the ability to hasten approvals
and order placement for the timely receipt of inventory
stock.
Purchase management streamlines the purchasing and
inventory control process of an organisation for greater
efficiency and lower costs.
Objectives of Purchase Management
Lower costs
Reduce risk
Ensuring smooth operations / production
Managing relationships
Coordinating supply chain activities
Logistics and transportation
Principles of purchase management
5Rs of Purchasing
Right price (Negotiation skills)
Right quality (Superior quality)
Right quantity
Right place (Suppliers / Vendors)
Right time (With respect to lead time)
Types of purchase sytems
Forward buying
◦ In Forward buying, the purchasing decision for a period (say 1 year) will be
taken in advance and the organization will commit accordingly in terms of
order quantity, rate and delivery schedule, by taking into consideration the
availability of funds and the requirements.
◦ Generally, this is used for public buying to avoid favoritism to a specific
vendor.
Tender buying
◦ Purchasing the materials by placing a requirements in public media or personal
communications and selecting the suppliers who offer best cost and services
Types of purchase sytems
Rate contract
◦ Rate contract is very much used in public sectors and government
departments.
◦ The suppliers are on 'rate contract' with DGS&D for a specific
period.
◦ The organizations can place orders straightaway with such firms
without going through the lengthy procedure of purchasing
Process of purchase management
Pre purchase
Purchase
Post purchase
Pre purchase system
Identifying suppliers
Trade fairs
Tenders
Websites
Letters and emails
Making requisitions
Pre purchase system
Evaluating and rating suppliers.
Selection of suppliers.
Finalization of terms of purchase.
Making contract
Purchasing system
The details of purchase order (PO) form are listed as.
◦ Purchase order reference number.
◦ Description of the materials and detailed specifications.
◦ Quantity required and delivery schedule.
◦ Price and discounts.
◦ Shipping instructions.
◦ Location where the materials are to be shipped.
◦ Signature of the materials manager.
◦ Detailed terms of conditions.
Purchasing system
Follow-up
◦ Receiving and acknowledging the PO
◦ Arranging and sending the materials by the suppliers
◦ Transportation
Receiving of materials- inspection
Acknowledging the receipt of materials
Post purchase system
Acknowledging the acceptance / return of materials
Approval of payments to the accounts dept.
Processing of invoice by Accounts dept.
Releasing of payment
Payment acknowledgement
Performance evaluation
QUESTIONS?
OPERATIONS
MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
STORES MANAGEMENT
SCOPE
What is stores
What are the functions of stores
Types of layout
Location
Accounting methods
What is stores?
The place for storage of raw materials purchased for
production, other spares of machines, consumables etc.. In
a factory or firm
They are issued for production as per the MPS
Spares are issued to maintain/repair machines used in
production
Required to be close to manufacturing facility
Functions of stores
Receive
Store
Maintain
Issue
Account – at receive, storage and issue stages
Functions of stores
Classification and codification system
to minimize obsolescence, surplus and scrap of items.

Provides information reports

to support purchase activities to take place at right
times.
Location criteria for stores
 Location nearby to ensure minimum distance movement of both
man and materials.
Prioritize its supply of materials in terms of quantity, frequency etc.,
Gravity location could be identified.
If production plant wants to maintain separate warehouse out of
production plant premises, it has to be ensure basic facilities such as
transportation, road, nearness to the supplier and production plant,
communication facilities etc.
Factory

Store

Factory Factory Store

Store
Factory
Factory
Store

Factory
Layout of stores
Layout of stores
An efficient store layout would assist proper stocking of raw
materials and items
Quick retrieval of items at the time of issue.
Some modern concept may be used in designing stores layout.
Vertical height – Cubic space utilization of the store should be used
to the fullest extent subject to the capability of handling equipment
which are employed in the store.
Layout of stores
The stores layout must have proper clearance for movement of the
handling equipment.
Stores layout should ensure proper lighting and ventilation.
It is also highly essential to follow all safety measures in the stores
mainly to avoid accident. Stores layout should ensure the same.
Typical store
Typical store
Layout of modern stores
Nowadays, the stocking of items and issue of items in stores are
done by 'pick and place' robot.
Automatic guiding vehicles are also used for automatic materials
handling.
They even take the items from the store and deliver them in the
demanding work stations of the factory.
Stores layout should support for these systems if it is available.
Operational Systems in Stores
Receipt system

Stocking system

Issue system

Instore items verification and maintenance

Receipt Systems in Stores
The receipt system maintains proper document about items which
are received at the stores.
Checklist should be prepared and verified while receiving items.
Checklist may contain quantity, quality specifications, dates, supplier
details etc.
After receipt of the materials stock register should be updated as
opening balance, receipts and closing balance
Stocking system
Stocking should be done systematically.
Stocking should ensure easy stocking, handling and accessing of
materials whenever required.
Bin-cards may be used for getting instant information on stock.
Separate bin-cards are placed on individual stock and it has all
basic information about stock such as quantity, specifications, date
of receiving, etc.
Issue system
Issue system start with receiving of indent from required
department.
After receiving the indent, get the approval from concerned
authority, prepare the stock and transportation system.
After dispatching the materials, stock register should be updated
as opening balance, receipts and closing balance
Store Accounting
The product cost consists of materials costs, labour costs and
machine hour costs.
Stores accounting is very much useful in determining the materials
cost of a product.
The different elements of cost of the material received are material
price, freight charges, insurance and taxes.
Store Accounting Methods
 First In First Out (FIFO) method
 Last In First Out (LIFO) method
 Average Cost method
 Standard Cost method
 Market Price method
Store accounting Methods
In FIFO method, the assumption is that the old stock is depleted first. This means that the rate
pertaining to that will be applied while accounting issues.
In LIFO method, the assumption is that the most recent receipts are issued first.
In Average Cost method, the issues to the production department are divided into equal
batches from each shipment at stock.
In Standard Cost method, a standard rate for the material is fixed based on the detailed analysis
of market prices. This cost would be used for a fixed period, say six months or above.
In Market Price method, the prevailing market rate of the material is applied for costing the
material at the time of issue.
Obsolete, Surplus and Scrap
Faulty planning, over estimation of demand and wrong indenting
Faulty purchase procedure. Just to avail quantity discount,
seasonal availability, some industry will make bulk purchase. But,
this will introduce surplus and scrap.
Change in product design.
Obsolete, Surplus and Scrap
◦ Rationalization of raw materials so as to minimize variety and
simplify procurement procedure.
◦ Cannibalization - which is due to the usage of components of failed
machinery which are not in operation for a long time, in order to
rectify some of the similar machinery which are actively used in
production process. This will make the old machines obsolete after
some time because of missing components.( Christmas Tree)
Measures to avoid obsolete, surplus and
scrap items
Periodically, items can be classified into moving and non-
moving items. If some items are not moving for longer
duration action may be initiated to dispose of such items.
If there is any change in the design, then the corresponding
details must be circulated among concerned departments, so
that they can avoid placing orders on such items which are
currently used.
 Effort should be made to recycle the scrap or scrap sale to the
extent possible.
Measures to avoid obsolete, surplus and
scrap items
If there is a possibility of salvaging the scrap into some useful
components/ products, there would be a significant improvement
in its materials productivity.
It is possible to generate substantial amount of money by way
of disposing scrap by using optimal methods. Though it is a
scrap in the present factory, it may be vital raw material for
some other factory. Hence, the responsibility of the store is
to identify such potential customers and dispose the scrap at
an attractive price. (Online)
Conclusion
 What is stores
What are the functions of stores
Types of layout
Location
Accounting methods
Obsolete, scrap, surplus – avoidance and disposal
Questions?
OPERATIONS
MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
MAINTENACE MANAGEMENT
SCOPE
What is Maintenance Management
Functions
Objectives
Types of Plant Maintenance
Cost Balance Curve
Types of Failures and Bath-Tub Curve
What is maintenance?
 Maintenance consists of actions taken to keep it in
proper working order.

It can consist of activities to

 Prevent a device or component from failing
 Repair normal equipment degradation experienced with
the operation of the device.
Functions of Maintenance
management
Ensuring smooth operating conditions of all equipment in the
production plant and in the organization
Proper planning and scheduling of maintenance activities
Executing the safety measures
Analysing the breakdown and other failures of the system and
building preventive measures
Functions of Maintenance
management
Carryout corrective measures as quick as possible.
Classifying the items under obsolescence, scrap, and plan for
disposal
Replacing the equipment at right time
Maintain clean and hygiene environment
Objectives of maintenance
management
To ensure smooth operating conditions of equipment and machines
at all time
To minimize numbers of breakdowns
To minimize the down time
To minimize maintenance cost
To increase equipment and machine effectiveness and efficiency
Objectives of maintenance
management
To increase the life of machines and equipment
To ensure safety and security of employees and organization
To increase organizational productivity through proper maintenance
activities (by minimizing time waste, product waste, etc.)
To replace the machines and equipment at right time
Types of maintenance activities
Maintenance activity can be classified into two types, viz.
Breakdown / Corrective maintenance
Preventive maintenance
Breakdown maintenance is the repair which is generally done after
the equipment has attained down state.
Preventive maintenance (PM) is the periodical inspection and service
activities which are aimed to detect potential failures and perform
minor adjustments or repairs which will prevent major operating
problems in future.
Eg.
Classification of preventive maintenance
Daily / Routine maintenance: The first step in machine care and in
extending the productive life of any machine is the establishment of
a daily maintenance programme and checklist.
Periodic / Scheduled / Shut-down maintenance (time-based
maintenance): Significant activities carried out regularly (according
to a predetermined schedule) to maintain the condition or
operational status of a building, equipment, machine, plant or
system. (Weekly, monthly, quarterly, annual maintenance activities)
Eg.
Classification of preventive maintenance
Predictive maintenance (condition-based maintenance): This type
of maintenance practice is initiated on the basis of the knowledge
about the condition of a part/component that comes from routine or
continuous monitoring. The basic idea of predictive maintenance is
to track some kind of warning signals indicating the necessity of
replacement or overhauling.
Maintenance cost balance curve
Breakdown maintenance is often of an emergency nature which will have
associated penalty in terms of expediting cost of maintenance and down time
cost of equipment.
Preventive maintenance will reduce such cost up to a point.
Beyond that point, the cost of preventive maintenance will be more when
compared to the down time cost.
Under such situation, a firm can opt for break-down maintenance.
These concepts are shown in following cost balance curve
If a company increase their preventive maintenance cost, they
could minimize the break down maintenance cost.
Both together balance the total maintenance cost through which
they could determine capital recovery cost.
Maintenance balance curve
Types of failures- stages of failures
Early failures:
◦ Failures observed immediately after the purchase of equipment for correcting teething issues during
warranty period.
◦ Frequency of failure (No. of failures) rate would be decreased with respect to time

Rare / Constant / Random failures:

◦ Failures observed during regular usage
◦ Frequency of failure (No. of failures) rate would be less and constant with respect to time

Wear-out failures:
◦ Failures observed during end stage of the equipment life, which suggest the replacement of equipment
◦ Frequency of failure (No. of failures) rate would be increased with respect to time
Bath tub curve
OPERATIONS
MANAGEMENT
R.LAKSHMINARAYANAN
PROF. OPERATIONS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT.
MACHINE REPLACEMENT
SCOPE
Review of preventive and breakdown maintenance
Concept of Machine Replacement
 Applications
 Problems on individual machine replacement
Preventive and Breakdown Maintenance
Reasons for machine replacement
Physical impairment (Eg..)
Change in physical condition
Decline in value of service
Increased operating cost
Increased maintenance cost
 Obsolescence (Eg..)
Technology
Tools improvement
Replacement of machines that
deteriorate( fail) with time
Average Capital recovery cost
Economic life
Average Operating and Maintenance cost(O&M)
Example
Graph
Economic life
Chart Title

12000

10000

8000
Costs

6000

4000

2000

0
1 2 3 4 5 6 7 8 9 10 11 12

Life of the machine

Numerical
1. Cost of equipment = Rs 10000
2. Annual maintenance cost= Rs Zero first year, increase by Rs 500 every year thereafter
(a) When should the machine be replaced?? Interest 0%
(b) Calculate same for interest 12%