UNIVERSITY OF TOMORROW

Operations and Material

Management
Course Design

Advisory Council

Chairman
Mr. Sharad Mehra

Members
Dr. Sunil Rai Dr. Ram Sharma Mr. Manish Madaan
Chancellor Vice Chancellor Registrar

Dr. Samir Ranjan Dr. Priya Mary Mathew Mr. Piyush Arora
Dean - Academics Head - Academics Head Online

SLM Development Team

Mr. Tarun Batra
Assistant Director

Author
Dr. Rajesh Gupta

Course Code : LSCM7027D

Course Name : Operations & Material Management
Version : Jul-21
Contents
Unit 1 Introuction to Operations & Material Management 1
Unit 2 Decision Making 10
Unit 3 Productivity 18
Unit 4 Forecasting - Techniques and Errors 30
Unit 5 Location Selection 42
Unit 6 Layout Planning 48
Unit 7 Capacity Planning 54
Unit 8 Process Selection 62
Unit 9 Product and Service Design 67
Unit 10 Aggregate Planning 78
Unit 11 Inventory Control 85
Unit 12 Statistical Quality Control 94
Unit 13 Maintenance 100
Unit 14 Material Management 105
Unit 15 Management of Projects 111
Unit 16 Sustaining and Improving Operations 133
 Unit 1

Introduction to
Operations Management

Learning Objectives Introduction

By the end of this unit, you will be Operations Management is the function of an organization
able to: that creates a product or offers a service. This function
uses resources like manpower, material and machine, for
● Discuss operation management
producing goods. Operations Management can be defined
● Explain the objectives of operation
as the combination of tools and techniques to maximize
management
operational efficiency and effectiveness through optimum
● Describe the scope of operations utilization of resources.
management

● Discuss the importance of operation

management in different functions
of the organization

● Analyze the responsibilities of

operation manager

● Explain differences in
manufacturing and services
 Goods and Services
● Goods are tangible physical items that can be ● Services are activities that are experience
touched, seen and experienced. based and provide various combinations of
time, place, characteristics or psychological
● They include raw materials, work in progress
value.
material, assemblies, sub-assemblies.
● They include psychological value and
For example, Central Processing Unit (CPU) experience.
that gets assembled into computers and final
products such as cell phones and automobiles. For example, these are achieved from whatever
we do, eat, travel, rest, and wear.

The optimum situation for any organization is to on the supply side are, operations and supply
match supply and demand of goods or services. chains and on the demand side, there are sales and
Having excess supply or excess capacity results marketing.
in wastage and high costs, whereas, having too
less means losing the battle in the marketplace Production is the use of raw material and other
and possible opportunity that results in customer resources for producing goods, which may involve
dissatisfaction. In both the situations, the several stages of processes.
organization loses the market. The key functions

2 Introduction to Operations Management

A service does not produce anything tangible but Objectives of Operations Management
only provides a feel or experience to the user.
The operations must work to achieve the above-
Customer must be physically present most of
mentioned objectives. Operations mainly affect
the times and be a part of service delivery. It is
management and its functions. Management is a
completely experience based and the customer will
science of decision making hence, decision making
remember the experience after using that service.
is a basic process of operations management.
The operations in services are different than in the
manufacturing sector.

The objectives of operations management include performance objectives and cost objectives:
Performance Objectives

Efficiency:
01
The measure
Quality:
of output
The output 02
versus
acceptability
capacity
to the defined
norms

Effectiveness:
03 To what extent
operations are in
Lead-time: 04
alignment with
The time taken
organization
in converting the
goals
input to output

05 Capacity
Utilization:
Flexibility:
Extent of 06
A measure of how
utilization of
responsive the
resources
operations are to
changing customer
requirements

3 Introduction to Operations Management

 1. Visible Cost or Direct Cost
• Raw material

• Rework

• Labour cost

• Maintenance cost

Cost Objectives
2. Invisible Cost or Indirect Cost
• Inventory

• Non-availability of goods

• Late delivery

• Material handling cost

• Appraisal cost

• Machine stoppage time

These decisions are affected by operations and Continual / Operational

can be categorized into:
The decisions that can be structured are routine and
can be reversed are called continual or operational
Periodic / Strategic
decisions.
The decisions that are taken occasionally and
cannot be reversed easily are called periodic/ Generally, strategic decisions are taken by top
strategic decisions. management like location planning, layout decision

4 Introduction to Operations Management

and capacity decisions. The routine decisions are quality control, inventory management, employee
taken by functional managers like inventory levels motivation, forecasting and planning, geographical
and production plans. location management and many more. The scope of
operations management can be better understood
with an example.
The Scope of Operations Management
Different organizations have a different scope for Let’s take an example of a travel-based
operations management. Personnel engaged in company running its own buses. Following
Operations management handle a vast array of activities come under the purview of a travel
tasks, which may sometimes overlap also, such as company:

Locating
01 Forecasting
Facilities
08

Motivating and
02 Capacity Planning
Training
07

Facilities and Assuring

03 Layout Quality
06

Managing
04 Scheduling
Inventories
05

1. Forecasting: It is about various important factors 3. Facilities and Layout: It is essential to ensure
such as weather conditions, a seasonal spike in effective utilization of personnel and equipment.
demand for tickets and growth prospects for
4. Scheduling: Various schedules need to be
road travel.
managed properly to ensure optimum efficiency
2. Capacity Planning: It is imperative for a travel of operations. Routine maintenance; roster
company to have a smooth cash flow and of drivers and co-drivers and scheduling of
decent profit margins because having too many maintenance staff, office staff and counter staff.
idle buses or selection of less busy routes will
5. Managing Inventories: It is essential to ensure
ultimately have a bearing on profits

5 Introduction to Operations Management

 optimal inventory levels for food and beverage, by managers on the cities to serve, location for
newspapers and magazines, pillows and blankets, maintenance facilities and major and minor
first aid equipment and other essentials. hubs.

6. Assuring Quality: Delivering high quality service

every time and in every aspect is essential for Importance of Operations Management
smooth operations over an extended period.
Attention to quality should be paid in those areas
where the emphasis is on quality, such as the Operations
behavior of Drivers and Conductor, dealing with
customers, telephone and online reservations in
flying and maintenance operations.
Finance Marketing
7. Motivating and Training: All employees shall be
properly trained and highly motivated in various
aspects of operations management.
Figure: Overlapping Functions of an Organization
8. Locating Facilities: It involves taking decisions
Finance, Marketing and Operations are three major
functions of any business organization, which
overlap each other. All other functions viz. Public
Relation, Legal, Information Technology, Purchasing
and Human Resource and so on support the main
functions.

Among the service jobs that are closely related

to operations are financial services (e.g., stock
market analyst, broker and investment banker),
marketing services (e.g., market analyst, marketing
researcher, advertising manager and product

6 Introduction to Operations Management

 Why managers shall study operations management?

● Operations are the backbone of the organization, human resource, marketing and others are all
which converts customers’ requirement into interrelated with operations management.
deliveries.
● The activities under operations are repetitive
● The activities in all other areas of business and non-repetitive. The main part is the flawless
organizations such as finance, accounting, execution of the activities.

manager), accounting services (e.g. corporate Operations as a Value-Added Process or

accountant, public accountant, and budget analyst) Transformation Process
and information services.
Operations can be understood as a value-adding
process or transformation process. A process
Operations function is the backbone of every
has an input, an output and a conversion system,
manufacturing and services based business and is
which converts the input into output. All processes
an intrinsic part of organizational culture.
consume resources. It is important that processes

Responsibilities of an Operations Manager

Operations Managers are responsible for

playing a
helping in
helping in the significant role in
understanding the
identifying and queuing management
sequencing and
categorizing the types and absorb ing the
prioritizing
of problems feedbacks in the
processes
processes

helping in inventory
ensuring more control and quality
precise demand control. It ensures
forecasting for the best use of
the product or resources and
services offered thereby effective
capacity
utilization

7 Introduction to Operations Management

add value. The formula has been transformed from The processes must ensure the value addition, i.e.
input to output. value of inputs should be lower than the value of
output.
Consumes Resources

Manufacturing and Services Industries

Conversion Operations can be broadly divided into two
Input System Output
categories:

● Manufacturing

Figure: Process of Conversion ● Services

The difference between manufacturing and services has been classified below:

System Characteristics Production Services

Output Tangible Intangible

Inventory Can be stored Immediate

Work More equipment More labor

Customer contact Low High

Participation of customer Low High

Performance measurement Complicated Simple

Location Ease of manufacturing Location of users

8 Introduction to Operations Management

Summary
● Operations Management is an important aspect of
management which involves optimum designing
and management of production processes and
restructuring business functioning related to the
production of goods and services.

● It influences a vast array of sectors like banking,

hospitality, travel, hospitals, etc.

● Operations Management is an essential function

of every organization as it involves management
of long-term as well as the daily production of
goods and services.

9 Introduction to Operations Management

 Unit 2

Decision Making

Learning Objectives Introduction

By the end of this unit, you will be Decision-making is an integral part of modern management.
able to: Decisions play important roles as they determine both
organizational and managerial activities. Decisions are
● Appreciate various decision
made to sustain the activities of all business activities and
environments
organizational functioning.
● Understand various decision-making
techniques

● Practice rational decision making

Operations Management and Decision decisions involve selection of the optimum solution
Making from many options that may have an impact on
costs, profits and output. But it must be made sure
As a key decision maker and planner in an
that decisions are made post due diligence.
organization, the Operations Manager has a
significant role to play in ensuring the achievement
The types of decisions that are taken by operations
of company goals and objectives. Most of the
managers are as below:

What What quantities of which resources are required?

When When to replenish inventory? When to schedule work? When to take

corrective actions? When are specific resources required?

Where Where is the work to be done (place)?

How How to do the work? How to design products and services? How to allocate resources?

Who Who will complete the work?

Decision Making
11
 01

Identify problem
requiring a
decision.

05
02
Select the best
alternative as per Define criteria
defined criteria. for choosing an
Steps in
Decision-making alternative.

Process

04
03
Analyze and compare
alternatives on the Identify all
basis of defined alternatives.
Criteria.

Decision Environments

The environments in which managers make the decision are as under:

Certainty Risk Uncertainty

A condition in which A condition in which A condition in which the

certainty of outcomes of all probability of all possible probability of outcomes is not
alternatives is known. outcomes is known. known.

Decision Making
12
Decision-making under Certainty A condition where the probability of various
outcomes of all alternatives is known. Consider the
A condition is certain when the outcomes of all
example below for decision making under certainty
alternatives are certain in nature.
when the outcomes of three alternatives are not
known.
Decision-making under Risk

Example: Following is the example of a payoff table. The values in brackets indicate the probability of a
future condition to happen.

Alternative /market Payoff

High (0.4) Moderate (0.1) Low (0.5)

1 50 40 10

2 20 60 20

3 30 40 5

Expected payoff = ∑ px Alternative 2 = 0.4 × 20 + 0.1 × 60 + 0.5 × 20 = 24

Where p is probability and x is a payoff Alternative 3 = 0.4 × 30 + 0.1 × 40 + 0.5 × 5 = 18.5

So expected payoff for alternative 1 = 0.4 × 50 + 0.1 × 40 So, decision is in favor of alternative 1, which gives
+ 0.5 × 10 = 29 the highest payoff that is expected.

Decision-making under Uncertainty

• Maximin – The substitute with the best out of the

worst payoffs is selected.

• Maximax – The substitute with the maximum out

of highest pay-offs is selected.

• Laplace – The substitute with the best average

payoff out of any of the Alternatives is selected.

• Minimax Regret – The substitute that has the

smallest out of the highest Regrets is selected.

• The Principle of Insufficient Reason – Equal

probability is allocated to all conditions and the
alternative with maximum expected value is
selected.

Decision Making
13
 Example: Check the payoff table below:

Alternative /market Payoff

High Moderate Low

1 50 40 10

2 20 60 20

3 30 40 5

Maximin: Identify the minimum payoff for each alternative:

Alternative /market Payoff Minimum payoff

High Moderate Low

1 50 40 10 10

2 20 60 20 20

3 30 40 5 5

Identify the maximum out of minimum payoff, Maximum out of maximum payoff is 60 for
which is 20 for alternative 2. So on the basis of alternative 2. So, on the basis of Maximax principle,
maximin principle, alternative 2 is preferable. alternative 2 is preferable.

Maximin: Identify the maximum payoff for each alternative:

Alternative /market Payoff Maximum payoff

High Moderate Low

1 50 40 10 50

2 20 60 20 60

3 30 40 5 40

Laplace Calculate average expected payoff for each alternative.

Alternative /market Payoff Average payoff

High Moderate Low

1 50 40 10 33.3

2 20 60 20 33.3

3 30 40 5 25

Decision Making
14
 Alternative /market Payoff Expected value

High 1/3 Moderate 1/3 Low 1/3

1 50 40 10 33.3

2 20 60 20 33.3

3 30 40 5 25

Identify the maximum of average payoff which is × 40 + 1 / 3 × 10 = 33.3

33.3 for alternative 1 and 2. So, based on Laplace
principle, alternative 1 and 2 are equally preferable. Expected value for alternative 2 = 1 / 3 × 20 + 1 / 3
× 60 + 1 / 3 × 20 = 33.3
The Principle of Insufficient Reason
Expected value for alternative 3 = 1 / 3 × 30 + 1 / 3
Allot equal probability to each future state of
× 40 + 1 / 3 × 5 = 25
nature and calculate an expected value for each
alternative. Since there are 3 possible states of
Identify the maximum of expected value which is
nature, so a probability of 1/3 is allotted to each.
33.3 for alternative 1 and 2. So, based on principle
of Insufficient Reason alternative 1 and 2 are
Expected value for alternative 1 = 1 / 3 × 50 + 1 / 3

Decision Making
15
 Alternative /market Payoff

High Moderate Low

1 50 40 10

2 20 60 20

3 30 40 5

equally preferable. The regret for alternative 3 will be:

Minimax Regret 50 – 30 = 20 for high market

In this method, the regret for each alternative for

60 – 40 = 20 for moderate market
each future state of nature is determined. Regret
for each pair is equal to the difference of payoff
20 – 5 = 15 for low market
of that combination and the combination with the
highest payoff or that state of nature.
The regret table is then created, and maximum
regret for each alter native is identified.
The regret for alternative 1 will be:

The decision is made based on a minimum of

50 – 50 = 0 for high market
maximum regret. So, alternatives 1 and 3 are
equally preferable as they have the lowest regret of
60 – 40 = 20 for moderate market
20.

20 – 10 = 10 for low market

The regret for alternative 2 will be:

50 – 20 = 30 for high market

60 – 60 = 0 for moderate market

20 – 20 = 10 for low market

Alternative /market Regret Maximum Regret

High 1/3 Moderate 1/3 Low 1/3

1 50 40 10 20

2 20 60 20 30

3 30 40 5 20

Decision Making
16
Summary
● Decision-making is the process of identifying
and choosing alter- natives based on the values,
preferences and beliefs of the decision-maker.

● It is required in all phases of life and in all fields.

Every single action that we make is the result of
a decision.

● Moreover, decision-making plays an important

role in various fields of management.

● It is a significant tool for all businesses as it helps

make efficient decisions during planning thereby
reducing risks.

Decision Making
17
 Unit 3

Productivity

Learning Objectives Introduction

By the end of this unit, you will be Productivity can be described as the degree of efficient
able to: utilization of resources and is normally described as an
output to input ratio. It measures output per unit of input in
● Appreciate the importance of
monetary terms. All the processes consume resources. The
productivity
resources could be manpower, material, machine, energy,
● Calculate partial and multifactor
money or any other resources, which are consumed for
productivity
producing output.
● Identify scope of productivity
improvement Productivity collectively measures the trends in labour
growth, technology improvement and how effectively the
● Understand the concept of
resources are utilized.
competitiveness

● Describe the various aspects of

operations strategy
Productivity = output / input of labour × no. of hours in a shift) So, productivity =
100 / 100 = 1 unit per labour hour
Example

Consider the following data: The productivity with respect to machine = output /

A manufacturing company produces 100 units of a

product in 10 hours shift. The resources consumed
are as under:

No. of Labour 10

Machines 5

Raw material 100 kg

Energy 500 KW

Now, the productivity with respect to labour = output

/ labour hours × labour hours = 10 × 10 = 100 (no.
Productivity
19
machine hours Machine hours = 5 × 10 = 50 The productivity with respect to energy = output /
energy So, productivity = 100 / 500 = 0.2 unit per
So, productivity = 100 / 50 = 2 unit per machine hour KW

The productivity with respect to material = output You can see that only one input has been considered
/ raw material So, productivity = 100 / 100 = 1 unit at a time for calculating productivity. These are
per kg of material called partial measures of productivity. So partial
measures of productivity are as under:

Multifactor Measures productivity, it is called multifactor productivity.

If more than one input is used for calculation of

For example,

Productivity
20
However, since the inputs have different units, so Labour cost = 100 × 10 = 1000
they have to be converted into monetary value for
calculating productivity. It is explained below with Machine hours = 5 × 10 = 50
an example.
So, operating cost = 50 × 50 = 2500
Example
Material cost = 100 × 20 = 2000
A manufacturing company produces 100 units of a
product in 10 hours shift. The resources consumed
Energy cost = 500 × 20 = 10000
are as under:

Total cost = 1000 + 2500 + 2000 + 10000 = 15500

Labour 10

Multifactor productivity = 100 / 15500 units per

Rs. 10 per labour hour Machines 5
Rupee spent

Operating cost Rs. 50 per machine hour

The Scope of Improvement in
Raw material 100 kg @Rs. 20 per kg Productivity

Energy 500KW@Rs.20per KW There are the many areas, on the identification of

which results in the improvement of productivity.
Labour hours = 10 × 10 =100 Few of the examples are:

The main objective of any organization is to sell Competitiveness is affected by marketing in various
competitive products in the market. Competitiveness ways such as pricing, promotion, advertising and
has an important role in determining whether an identification of customer wants.
organization would grow, barely get-by or would
1. Identification of Consumer Wants or Needs: It
fail. Different business organizations compete on
plays a vital role in establishing competitiveness
the basis of a combination of key factors such as
of business and plays a vital role in the decision-
price, delivery time, quality, differentiation points.
making process. Every company strives to
achieve the perfect balance between customer

Productivity
21
 needs and company offerings. financial capabilities, operations capability and
supply chain capacities. Innovation and time-to-
2. Price and Quality: This is essential to comprehend
market are two other critical factors affecting
the trade-off decisions made by the consumers
consumer decision making.
amongst quality and price as it plays a crucial
role in the final purchase decision. 2. Cost: It is significant and so the efforts to reduce
the cost of products and services is an ongoing
3. Promotions and Advertising: These are used
process in every organization as it has a direct
by companies to inform consumers about the
bearing on pricing policies and profit margins.
features and benefits of their products and
Firms who possess higher productivity rates
develop a special place in their minds.
have a distinct competitive advantage over its

Operations of a company are influenced by a host competitors. To reduce costs and boost output,

of co-related parameters such as cost, quality, companies adopt the outsourcing strategy for

inventory, supply chain, product/service, post-sales some of its operations.

service, location and various others. 3. Location: It plays a vital role and so having a

1. Product and Service Design: This is a key strategically important location is half the battle

factor that consumers consider while making won for firms as it provides numerous benefits,

a purchase decision is unique features and for instance, location near raw material helps

characteristics of a product or service. In reduce transportation costs and delivery lead

order to ensure the presence of such unique times. Location is also important as it is directly

characteristics, it is essential that the various associated with customer convenience as well

departments of the firm work together and as establish competitive superiority in terms of

establishes harmony between consumer wants, cost, visibility and distribution costs. It assumes

Productivity
22
 even greater importance in retail sectors. unique place in the customers mind.

4. Quality: It has a very important role to play in 7. Inventory Management: It is a company’s ablity
a consumer purchase decision as consumers to ensure a steady supply of goods without
analyze any product or service they buy based enhancing its dead stocks, so that it has a distinct
on the perception if it satisfies their requirement. competitive advantage over its competitors.
If a product or service is able to establish
8. Supply Chain Management: It is efficient
superior quality competitiveness in the mind
management of the supply chain ensures timely
of the customers, customers are willing to pay
and cost-effective distribution and delivery
more for that.
services in coordination with buyers and
5. Quick Response: It is the parameter that has suppliers.
very serious implications for a company and
9. After-sale Service: These are value addition
if handled correctly can establish competitive
activities that enhance the user experience such
superiority. Companies should try and introduce
as delivery, warranty, repair and replacement and
new products in the market quickly and also try
technical support. It also is effective during the
to deliver the products and services to customers
sales process which helps grab the customer
as quickly as possible. Another important aspect
attention such as attention to detail, regular flow
is to quickly redress customer grievances.
of information, etc.
6. Flexibility: Highly flexible companies enjoy a
10.Service Quality: It is a highly critical key
competitive advantage in a dynamic environment
differentiator, it ensures that businesses which
as they are able to incorporate changes in their
are more careful towards extending superior
products and services quickly and establish a

Productivity
23
 service quality to the customer are ensured more that cover every possible functional area of the
profits and faster growth as compared to others organization. In a nutshell, functional strategies
who lack in it. should complement the organizational strategies
and organizational strategies should support over-
11.Most importantly the human resources that are
all goals and missions of the company.
managers, workers and labors: They are highly
skilled and knowledgeable manpower greatly
Tactics can be defined as “the actions and
enhances the company products and provides
techniques used for successful implementation
a unique advantage over competitors with their
and execution of strategies. They are more specific
skills.
than strategies, and they provide guidance and
direction for carrying out actual operations,
Strategies and Tactics which need the most specific and de- tailed plans
and decision making in an organization. For a
Strategies and tactics lay the roadmap for
process, the tactics would include “how to” such
an organization to achieve its goals through
as how to increase sales, how to ensure customer
highly efficient decision making. Organizational
satisfaction. In case of operations, tactics include
strategies encompass most of the activities of an
the actual doing part of the process.”
organization but vary from business to business,
e.g. For a company like Tata, its organizational
Strategies and Fundamental capabilities need to be
strategies could be divided on the basis of its
in sync to ensure effective implementation. Table
business verticals such as Auto, Software, IT,
3.1 enlists various instances where organizations
Power, etc. These organizational strategies are
have successfully deployed strategic tactics.
themselves developed from functional strategies

Productivity
24
 Business strategies can be divided into three categories:

Low cost Responsiveness Differentiation from

Competitors
The organization may The organization responding
decide to penetrate the quickly to market demand and The organization at times
market by keeping the customer needs or complaints differentiates their product
cost of their product or can have a competitive or service from competitors
service lowest among its advantage. A great responsive by price, features, after
competitive products in strategy should include the sakes services, quality or by
order to differentiate their following three actions: its design. They may offer
products or services. the competitive products or
● introducing new and
service at a lower price with
improved products and
more upgraded features. They
services quickly
can provide free after sales
● ensuring prompt deliveries of service for more period of
existing products time than by their competitors.

● responding quickly to
customer complaints and
grievances

Productivity
25
 Table: Organizations and Applied Strategies

Types of Strategies Operations Strategy Organizational Examples

U.S. first-class postage
Low price Low cost Wal-Mart
Southwest Airlines
McDonald’s restaurants
Short processing time Express Mail, UPS, FedEx
Responsiveness One-hour photo
Domino’s Pizza
On-time delivery
FedEx
Differentiation
High-performance Design Sony TV
Performance
High-Quality Processing Lexus
Disneyland
Five-star restaurants or hotels
Differentiation: High quality
Consistent quality Coca-Cola, PepsiCo
Wegmans
Electrical power
3M, Apple
Differentiation: Newness Innovation
Google
Flexibility Burger King (“Have it your way”)
Hospital emergency room
Differentiation: Variety McDonald’s (“Buses welcome”)
Volume
Toyota
Supermarkets (additional checkouts)
Disneyland
Amazon
IBM
Nordstrom
Differentiation: Service Superior customer service
Supermarkets, dry cleaners
Mall stores
Service stations
Banks, ATMs

Productivity
26
Operations Strategy narrower in scope as it deals with the operational
aspects of the organization. It deals with key
Organizational strategy has a broad scope and
issues such as quality, costs, processes, products,
encompasses the whole organization and provides
resources, lead times and scheduling, etc. But in
the overall direction whereas Operations Strategy is
order to ensure the effectiveness of Operations
Strategy, it is imperative to link it to organizational
strategies as they both go hand in hand and
complement each other.

While formulating organizational strategy,

competitor’s strengths and weaknesses should be
taken into account to ensure that organization’s
strengths are capitalized and weaknesses are
addressed to. Likewise, Operations Strategy
should be in sync with the functional units of the
organization as well as with the organizational
strategy. It is required on the part of senior managers
to work in co-ordination with the functional units to
ensure that each individual strategy complements

Productivity
27
the organizational strategy. This will foster a feeling Table provides a comparison of an organization’s
of co-operation amongst the various functional mission, its overall strategy and its operations
units of an organization to ensure the benefits of strategy, tactics and operations.
synergy and co-operation.

Table: Comparison of an Organization’s Mission

Management Time Scope Level of Relates to

Level Horizon Detail

The overall Mission Top Long Broad Low Survival, profitability

organization Strategy
Senior Long Broad Low Growth rate, market
share

Operations Strategic Senior Moderate Broad Low Product design,

to long choice of location,
choice of technology,
new facilities

Tactical Middle Moderate Moderate Moderate Employment levels,

output levels,
equipment, selection,
facility layout

Operational Low Short Narrow High Scheduling

personnel,
adjusting output,
rates, inventory
management,
purchasing

Productivity
28
Summary
● Productivity encompasses the various
parameters to measure the efficiency of an
organization and plays a vital role in enhancing
production performance of the company as well
as the nation.

● An increase in the national productivity ensures

improvement in the standard of living of the
people and improves their purchasing power to
afford important products and services including
better housing, good education, nutritious food
and leisure, etc.

● Growth inproductivity assists business in

enhancing their profitability.

Productivity
29
 Unit 4

Forecasting: Techniques
and Errors
Learning Objectives Introduction
By the end of this unit, you will be The success of an organization depends on its capability
able to: to anticipate the future conditions and align the operations
accordingly. Hence, forecasting of future markets and
● Discuss the importance of
demand becomes important to the effectiveness of an
forecasting in operations
organization.
management

● Select a suitable forecasting

Forecasts form a major component of every decision-
technique
making process under operations management and their
● Apply forecasting technique importance is paramount as they offer vital inputs regarding
future demands. The anticipation of demand is necessary for
● Monitor and control various types of
every organization to plan accordingly to fulfill that demand
forecasting techniques
and this is where Forecasting comes in handy as future trends and plan accordingly.
it helps determine the future requirements. For
instance, Operation Department needs the forecasts Forecasts are regularly used while handling various
about the expected demand to formulate budgets, essential functions of an organization such as
purchase additional equipment, recruit necessary sales, production, budgeting, inventory, purchase
personnel, prepare purchase requirements and and capacity planning. The unique aspect about
share them with the vendors and help supply chain forecasts is that they are made according to time
partners with the planning process. horizons, i.e.:

Forecast encompasses two important aspects

that are “expected demand and relative degree of
accuracy that could be assigned to the forecast
(potential size of forecast error). Estimated
demand levels can be a function of some structural
variations, such as seasonal variation and Forecast
Accuracy is a function of forecasters which enables
them to correctly model various parameters such Short-term forecasts relate to ongoing operations
as demand, chance variations in demand and whereas long- term forecasts are essential tools for
unexpected situations that might impact demand.” strategic planning. Long-term forecasts are useful
in the development of new products, equipment,
Forecasting plays a critical role in the planning facilities and services which will take a long time to
process as they enable the managers to predict develop and implement.
Forecasting: Techniques and Errors
31
 Types of Forecasting
Forecasting could be categorized on various criteria as under:

Economic has economic relevance like demand

Noneconomic has no economic relevance, e.g., political and weather

Macro industry or economy level forecasting

Micro firm level forecasting

Active forecast for planned actions

Passive extrapolation of previous year’s data

impact of the change in independent variable upon dependent variable.

Conditional The change in an independent variable may bring changes in the dependent
variable.

Non conditional estimation of change in independent variable

Long run strategic

Short run operational

Forecasting: Techniques and Errors

32
 Forecasting in Operations

Steps in Demand Forecasting time

The steps involved in forecasting are as under: 4. Cyclical movements: change in demand pattern
over a long span of time
● Identifying the nature of the product
5. Random error: chance variations in demand
● Deciding the nature of the forecast

● Enlisting the factors affecting demand It is necessary to understand the types of demand

● Analyzing the factors affecting demand because the demands of certain products are
dependent on the demand for its complementary
● Selecting the forecasting technique
product. Consider an example of razors and blades.
● Verifying the accuracy of forecasting Both are complementary products to each other.
So, to be able to predict the demand for razors it
Components of Demand

There are 5 components of demand.

1. Average: the average of all past demands

2. Trend: a continuous increase or decrease in

demand over time

3. Seasonal influence: an increase or decrease in

demand during different identifiable phases of

Forecasting: Techniques and Errors

33
 Types of Demands for Forecasting are:

has become imperative to predict the requirements ● Based on time series

for blades. ● Associative forecast

Techniques of Forecasting
Techniques Based on the Judgment
The techniques of forecasting can be broadly
divided into three categories: 1. Executive Opinion: A group of senior-level
managers meets and develop a forecast. It is
● Based on judgments
used for long-term planning and new product

development. ● Direct information

2. Direct Consumer Contact Composites: ● Drawback

Forecasting based on views of direct sales staff
● Expensive and time-consuming
or customer service staff.
● Low response rate

Drawback

● Failure to differentiate amid what consumers

want to do and what they would actually do

● Influenced by recent experience

● Salesmen have an advantage in providing low

sales estimates

3. Consumer Surveys

Advantages

Forecasting: Techniques and Errors

34
4. Delphi: Delphi involves forecasting based on a forecast of succeeding period.
questionnaires to a group of managers and
experts. The questionnaires are modified, and Example:
responses sought till the consensus arrives.
Consider the following data, which is available for
the past 6 periods for a manufacturing firm
Drawbacks

● It is a time taking process. Period Actual Demand D

● Evidence of high degree of accuracy does not 1 55
exist. 2 37

● The poorly designed questionnaire may result in 3 62

false conclusions. 4 31
5 33
5. Nominal group
6 48
● It involves sharing of ideas by the experts. The
ideas are ranked by the experts and rankings are
subject to mathematical derivations. The forecast for period 7 on the basis of the naïve
forecast would be 48 as it is the actual demand for
the last period.
Techniques Based on Time Series
2. Simple Average
1. Naïve Forecast
“A simple average is the average of demands/
The actual demand for any period is considered as prices incurring in all given periods.”
Forecasting: Techniques and Errors
35
 sum of demands for all time periods 100 + 120 + 80 + 90 + 110 + 70 / 6 = 570 / 6 = 95
SA =
Number of periods 3. Simple Moving Average

The major benefit that simple average extends A simple moving average is a basic type of moving

is in the form of a reduction in chances of being average. It is derived by considering a series of

swayed by gross fluctuation which may take place prices or demands, then adding these prices or

in a fixed period. The disadvantage is that in case, demands and then dividing the total by the total

the defined pattern changes over time, the simple data points
sum of demands for periods
average method will not be able to find out this
MA =
change. the chosen number of periods

Example:
Example:

Period Actual Demand D Period Actual Demand D

1 100 1 50
2 120 2 60
3 80 3 40
4 90 4 45

5 110 5 55

6 70 6 50

The forecast for period 7 based The forecast for period 7 based on 5 period simple
on simple average will be moving averages will be

Forecasting: Techniques and Errors

36
60 + 40 + 45 + 55 + 50 / 5 = 250 / 5 = 50 previous forecast)

The forecast for period 7 based on 3 periods simple Ft = F t-1 + α (Dt-1 − Ft-1)
moving average will be
Or Ft = α Dt-1 + (1− α) Ft-1
45 + 55 + 50 / 3
α = smoothing constant that represents a
= 150 / 3 = 50 percentage of forecast error

4. Weighted Moving Average

0<α<1
A moving average forecast makes use of a set of
most current and real data figures for generation Example:
of a forecast while the recent forecasts are allotted
the weights. Period Actual Demand D Forecast
1 100 120
Example: 2 120 100
3 80 95
Period Actual Demand D
4 90 100
1 100
5 110 135
2 120
6 70 80
3 80
4 90 Calculate demand for period 7 if smoothing
5 110 coefficient = 0.2.
6 70
Forecast for period 7
Calculate the 3-period weighted moving average if
weights are 0.3, and 0.5 (0.3 being the weight of = α Dt-1 + (1 − α) Ft-1
most recent period). Weighted moving average will
be: = 0.2 × 70 + 0.8 × 80

0.3 × 70 + 0.2 × 110 + 0.5 × 90 = 14 + 64 = 78

= 21 + 22 + 45 = 88

5. Exponential Smoothing

Exponential smoothing uses a part of past period

demand and a part of the past period forecast
to predict demand for succeeding period. Next
forecast = previous forecast + α (actual demand –

Forecasting: Techniques and Errors

37
 7. Selecting the Value of Smoothing Coefficient

Smoothing coefficient is:

8. Incorporating Trend Period t Actual Demand D

1 5
The trend is the effect of long-term factors in the 2 8
series. 3 9
4 12
Trend Equation 5 16
6 70
“Y = a + bt”
As we can see the demand is an increasing trend,
“t = specified number of periods trend equation will be used to forecast for period 6.

Y = forecast for period t a = value of Y at t =0

b = slope of line”

n ∑ ty − ∑ t ∑ y
b=
n ∑ t2 – (∑ t)2

y–b∑t
a=
n

Example

Consider the following data:

Forecasting: Techniques and Errors

38
 Period t Demand D ty T2

1 5 5 1

2 8 16 4

3 9 27 9

4 12 48 16

5 16 80 25

∑ t = 15 Forecasting Error

forecast error
∑ y = 50 MAD =
n
∑ ty = 176 forecasted demand – actual demand
=
n
∑ t2 = 55
forecast error
N=5 BIAS =
n
n ∑ ty − ∑ t ∑ y
b= (forecasted demand – actual demand)
n ∑ t2 – (∑ t)2 =
n
= 880 – 750 / 275 – 225
(actual demand – forecast)2
MSE =
= 130 / 50 = 2.6
n
∑y – b ∑ t
a= Sources of Forecast Errors
n
● The omission of an important variable
= 50 – 39 / 5 = 11 / 5
● Irregular variations due to unpredictable
circumstances
= 2.2
● Incorrect use of forecasting technique
So, D = a + bt D = 2.2 + 2.6 t ● Misinterpretation of results

For t = 6,
Tracking Signal (TS)
D = 2.2 + 2.6 × 6
Tracking signals are used to monitor forecast
accuracy.
= 2.2 + 15.6 = 17.8
(actual demand – forecast)
TS =
= 18 (approx.) MAD
Forecasting: Techniques and Errors
39
When the specified characteristics of demand vary
Period Forecast Actual demand
from the original one but the forecasting model
doesn’t do the tracking, the signal goes out of 1 170 155
control.
2 140 160

Normally tracking signal should be within ± 4 3 165 130

4 170 185
If the forecasting model is working accurately, the
5 180 170
tracking signal will be close to zero.
6 155 125
Example:

Comment on the suitability of the forecasting

Following is the data of actual and forecasted
technique being used.
demand:

Period Actual Forecast A−F RSFE ∑ Bias ∑ IA− FI MAD IA− TS RSFE /
Demand )(A−F (A−F) / n FI / n MAD

1 170 155 15 15 15 15 15 1

2 140 160 −20 −5 = 2 / −5 20 10 −2

2.5

3 165 130 35 30 10 35 11.7 2.56

4 170 185 −15 15 3.75 15 3.75 4

5 180 170 10 25 5 10 2 12.5

6 155 125 30 55 9.1 30 5 11

Since the value of TS exceeds 4 in period 5 and 6, the forecasting technique is no more suitable.
Forecasting: Techniques and Errors
40
Summary
● Forecasting is the technique of giving estimates
regarding the future based on analysis of past
and present data along with analyzing various
trends.

● With markets becoming highly competitive

Forecasting has found a wide range of
applications in multiple fields which are highly
competitive.

● Forecasting comes handy in various situations

where analysis of future data is essential:

○ Product Forecasting

○ Political Forecasting

○ Credit Score Forecasting

○ Weather Forecasting

○ Economic Forecasting

○ Outcome Forecasting and

○ Supply Chain Management

● But it should be remembered that not everything

can be forecasted reliably if the factors that
relate to what is being forecast are known and
well understood.

● There is a significant amount of data that can be

used and a very reliable forecasts can often be
obtained.

Forecasting: Techniques and Errors

41
 Unit 5

Location Selection

Learning Objectives Introduction

By the end of this unit, you will be Location planning is one of the strategic decisions, which an
able to: operations manager makes. Deciding location is important
because this decision is very difficult to reverse. The main
● Explain strategic importance of
factors that affect location decisions are geographic factors,
location decision
regional factors, different group considerations and site-
● Discuss the factors affecting the
related factors. Group factors are related to the community
location
that consists of quality of life, services and perceptions,
● Explain various sites for various types of taxes, environmental regulations and
understanding location selection development support system.
models
Location decisions are taken under following ● Change in the geography of demand
circumstances:

● Establishment of new facility Factors Affecting Location

● Growing volume of business
Following is a list of factors that affect decisions
● Expansion of existing facility related to territory and site selection. The territory

● Dispersal of industry is the broad geographical area whereas site is a

specific piece of land in a given geographical area.
● Economic, political, legal or social change

Location Selection
43
Selection Decision Based on Subjective Factors ● A common scale is established for comparison.

Some decisions are based on subjective factors. ● Factor points are allocated to each site for each
These factors are discussed below: factor.

● The total points are determined.

Factor Point Rating
● Site with the highest total is selected.
● The factors affecting location are identified.

Example:

Poor Fair Adequate Good Excellent

F1 Supply of water −15 −12 0 6 10

F2 Facility provided to community −3 −1 0 1 2

F3 Attitude of a community −6 −3 0 3 6

S1 S2 S3 S4

F1 Adequate 0 Fair −12 Good 6 Adequate 0

F2 Adequate 0 Poor −3 Excellent 3 Fair 1

F3 Adequate 0 Adequate 0 Adequate 0 Adequate 0

Rating of sites 0 −15 9 −1

Location Selection
44
Site S 3 is selected as it has the maximum total
rating.

Equal Weight Method

● All factors affecting location are evaluated as

being equally important.

Example:

S1 S2 S3 S4

F1 2 5 9 2

F2 3 3 8 3 Variable Weight Method

F3 6 2 7 3 ● Each factor is allocated a weight as per its

Rating of importance.
11 10 24 8
sites ● The scale is established as per weight.

● Total of weights are calculated.

Hence, Site S 3 is selected as it has the maximum
total rating. Example:

Maximum points S1 S2 S3 S4

F1 300 200 250 250 50

F2 100 50 70 80 100

F3 150 5 50 10 40

Rating of sites 255 370 340 190

Hence, Site S 2 is selected as it has the maximum

total rating.

Weight cum Rating Method

● Weight is allocated as per importance of factors.

● A common scale is established for comparison.

● Weighted total is calculated for factor point

ratings.

Location Selection
45
Example:

Weights S1 S2 S3 S4

F1 5 2 5 9 2

F2 3 3 3 8 3

F3 2 6 2 7 3

Site rating 31 38 83 25

Hence, Site S 3 is selected as it has the maximum Where Q = quantity produced

total rating.
Total revenue = RQ
Selection Decision Based on Cost
Break-even is the point where total cost equals total
Cost Volume Profit (breakeven) Analysis revenue.

F = fixed cost RQ = F + VQ

V = variable cost per piece Or

F
R = revenue per piece Q=
R−V

Total cost = fixed cost + variable cost Example:

= F + VQ The fixed and variable costs for various plants of a

manufacturing company are shown below:

Site Fixed Cost per Year Variable Cost per Unit

Karnataka 1, 25,000 6

Andhra Pradesh 75,000 5

Tamil Nadu 1, 00,000 4

Kerala 50,000 12

Sale price 20

For Karnataka, = 125000 / 14 = 8928

BEQ = 125000 / 20 – 6 For Andhra Pradesh, 75000 / 15 = 5000

Location Selection
46
For Tamil Nadu, 100000 / 16 = 6250

For Kerala, 50000 / 8 = 6250

So, Andhra Pradesh is a preferable location as it

has the lowest break-even quantity of 5000.

Summary
● Whether it be the government or businesses, site
selection involves carrying out of new location
facilities and is in extensive use now-a-days.

● Post completion of internal site selection

procedures, the Indian government needs
development of new facilities.

● Though the practice is not widespread, most

of the state governments and their agencies
have published their personalized site selection
guides.

● Services of independent advisors or in-house

staff can be employed for the purpose by the
businesses as well as the government.

● Most of the big corporations take services of

internal site selection teams for ongoing new
facility needs.

Location Selection
47
 Unit 6

Layout Planning

Learning Objectives Introduction

By the end of this unit, you will be Layout refers to the arrangement of equipment, departments
able to: and work centers to ensure smooth movement of customers
and materials within the system.
● Understand the meaning of layout
planning
It describes the main types of layout selections and the
● Discuss the objectives of layout
models used to evaluate selection alternatives. Plant layout
planning
is the selection of a production or service facility, which
● Explain the different types of layouts includes an arrangement of various machines, storage space,
etc. However, only knowing the concept of layout planning
● Understand how to select a suitable
is not sufficient. You also need to know the objectives of
process layout
layout planning. The primary objectives of layout planning
● Compare between process and
are discussed further.
product layout

● Recognize the importance of layout

decisions

● Know the criteria for a good layout

● Understand the Reliability (REL)

charts
 Fewer inventories in
Highest equipment utilization
process

Effective supervision
Delay is minimized
and control
Objectives of
Layout Planning Worker convenience
Low manufacturing time
The primary objectives of layout and satisfaction
planning are listed:
Minimum material
Safety
handling the cost

Effective space utilization Minimum waste

The layout can be of different types depending on layout are important for an organization.
various factors.
Product Layout
Some of these types are discussed below.
● One type of product in one area

● Work centers in sequence of operations

Types of Layout
● High production volume
The different types of layout are product layout, ● Standardization
process layout, hybrid layout, cellular layouts and
● Stable product demand
fixed position layout. Indeed, all types of process

Figure: Product Layout

Layout Planning
49
Figure shows raw material delivered to Station 1 Process Layout
for storage, which is then delivered to Station 2
Non-standardized products are which the
for storage. It is further delivered to Station 3 for
organization produces without standard
storage and then, finally to Station 4 where the
specifications.
finished product is produced.

Selecting Process Layout the information is acquired, and layout is formed.

The following information is required for process
The process layout selection is a process in which
layout.

Requirement of space There must be adequate information regarding the amount of space required
to construct the layout.

Space availability Information on the space that is available for layout should also be taken into
consideration.

Closeness factors Information on all the activities among all sets of groups or departments.

Other restraints Other restraints such as a specific depart- ment must be located at a specific
suitable place. For example, reception must be near the entry.

Layout Planning
50
Comparison between Product and Process Layout layout can be understood with the help of the
flowchart given below:
The comparison between product and process

Figure: Comparison between Product and Process Layout

Hybrid Layout

● Combination of product and process layouts

Cellular Layouts

● Facilities clubbed together in cells

● High flexibility

● Each cell performs similar types of functions

Importance of Layout Decisions
for a group of products
The need for layout planning arises both in the
Fixed Position Layout process of selecting the new facilities and in
● Project like systems reselectioning the existing facilities. Following are
some of the major causes of reselection of layouts:
● Major components kept fixed

Layout Planning
51
● Operational Inefficiency
Maximum Coordination
● Introduction of New Products and Services
Maximum Accessibility
● Modification of Output Volumes
Maximum Flexibility
● Changes in Methods and Equipment
Minimum Distance
● Environmental and Legal Changes
Minimum Handling
● Accidental Hazards
Minimum Discomfort
● Changes in Product and Service Selection
Maximum Visibility

However, only taking the right decisions for the Inherent Safety

formation of a lay- out does not make it a good Efficient Process Flow
one. There are many other factors, which affect a
layout. The other criteria that make a good layout
The REL chart or the Reliability chart is an important
are discussed below.
tool in the process of layout planning.

Criteria for a Good Layout

REL Chart
The list below provides the various criteria that
The REL indicates the relation between pairs of
make a good layout. It is important for you to
departments in terms of closeness depending
consider each factor as an important requisite
upon the activities of the department as:
while forming a layout.

REL CHART

Figure: REL Chart

Layout Planning
52
Summary
● Layout planning is planning on the most efficient
physical arrangement of resources consuming
space in a facility.

● Layout planning is a critical part of overall

organizational planning as it helps enhance the
effectiveness of production process and meeting
the employee needs.

● The importance of a layout would be better

appreciated if one understands the influence of
an efficient layout on the manufacturing function
as it makes it smooth and efficient.

Layout Planning
53
 Unit 7

Capacity Planning

Learning Objectives Introduction

By the end of this unit, you will be The quantity that a plant can produce at a specified time
able to: is called its capacity. The two most important functions
of capacity planning are selection capacity and effective
● Know about efficiency and
capacity.
utilization

● Learn the concept of utilization

capacity

● Determine utilization capacity

● Understand the factors affecting

capacity planning

● Classify capacity planning

● Know the steps in capacity planning

● Learn the strategies for capacity

planning
These two functions of capacity can be used to In the above example, the actual output of 36 units
find the efficiency and utilization. The formulae for per day looks efficient in comparison with the
calculating these are given below: effective capacity of 40 units per day. But when
actual output of 36 units is compared with the
Actual Output
Efficiency = × 100% selection capacity of 50 units per day, it might look
Effective Capacity less impressive but is more meaningful.

Actual Output The real key to improve capacity utilization, with

Utilization = × 100%
Design Capacity effective capacity acting as a ceiling on actual
output, is through:

● Maintaining equipment in good condition

Example of Selection
● Training eEmployees
With the following information, calculate the
● Correction of quality problems
efficiency and utilization of vehicle maintenance
department: ● Using redundant equipment

Capacity Planning
55
It is necessary to understand what factors are Capacity Planning
constraining effective capacity to improve the
As an Operations Manager, itIt is important for
effective capacity as maximization of utilization
you to know that an operation may have different
depends on it.
levels of capacity. However, when an operation
has the lowest capacity, it’s worth analyzing. When
The purpose of studying about capacity is fruitful,
an operation has the lowest capacity, it is called
only when the capacity of utilization is clear to you.
a bottleneck operation. An operation that has the
So, first, let us know what capacity utilization is.
lowest capacity of any sequence of operations
or the operation that takes the maximum time in
Capacity Utilization (CU) a facility and limits the system’s output is called
bottleneck operation. To consider that an operation
As the name suggests, capacity utilization is the
has the highest and efficient capacity, it is important
degree to which resources are being used. The
to fulfill the necessary steps in the process of
formula used to find the capacity utilization is given
capacity planning. Let us quickly study the steps in
below:
capacity planning.
Average Output Rate
Capacity
= × 100%
Utilization Maximum Capacity

Capacity Planning
56
 Factors Affecting Capacity Planning Decision

The factors that affect capacity planning decisions are as follows:

1. Product/service market demand

2. Capital to be invested

3. Desired levels of automation

4. Level of integration (i.e., vertical integration)

5. Type of technology selected

Dynamic nature of all factors affecting the determination of plant capacity, such as changes in the
6.
product selection, process technology, market conditions and product life cycle, etc.

Capacity Planning Classification ● Production Capacity: It defines the maximum

possible output output from the equipment in a
Based on the timeline, capacity planning can be
day under normal working conditions.
categorized into three major divisions:
● Sustainable Capacity: It ddefines the maximum
Long-Term Capacity possible output achievable in realistic work
conditions after making provision for normal
Production capacity, sustainable capacity, and
hiccups.
effective capacity determine the long-term capacity
of an organization: ● Effective Capacity: It defines the optimal output
levels under pre-defined work-schedules and
● Selection Capacity: It defines the maximum
making provisions for machinery breakdown,
possible output under ideal working conditions as
maintenance schedules, etc.
described by the manufacturer of the equipment.

Capacity Planning
57
Medium Term Capacity

Sstrategic capacity planning with a time frame of

two to three years is covered under medium-term
capacity planning.

Short-Term Capacity

Strategic capacity planning with a short time

frame such as hours, days or weeks falls under the
purview of short-term capacity planning.

Steps in Capacity Planning 2. Identify the key resources to be measured: After

The steps in capacity planning are listed below: the selection, the process owner’s primary task
is the identification of infrastructural resources
1. Selection of a suitable process owner for
whose performance needs to be measured. This
capacity planning: Selection of an adequately
decision is based on the knowledge of which
suitable individual is the initial step towards
resources are most critical for meeting future
the development of a strong capacity planning
capacity requirements.
process. This person would act as the process
and owner and would be responsible for 3. Measure the utilization or performance of the
selection, implementation, and maintenance of resources: Performance of resources which
the process. His powers also include carrying have been previously identified would now be
out negotiations with developers and relevant measured. Two important bits of information are
support groups. derived from this information:

Capacity Planning
58
 6. Update forecasts and utilization: Capacity
planning is an on-going process, and in order to
derive its maximum benefits there is always a
need to update, at least once a year, continuously
to keep it up to date.

The Complexity

The complexity of market forces and technology,

makes capacity planning a difficult task as it involves
both short-term and long-term deliberations. Long-
4. Compare utilizations to maximum capacities:
term deliberations affect the whole capacity levels
This step is used to determine the available
of the organization, such as facility size; Short-
excess capacity for selected components. The
term deliberations relate to possible disparities
performance of every component has to be
in capacity requirements caused by seasonal,
compared with the maximum practical capacity
irregular or random fluctuations in demand. Due to
of that component. It should be remembered
the difference in nature of various industries, time
that maximum usable capacity is always going
interval covered by these considerations can vary
to be less than maximum possible.
significantly as such it would be not wise to put
5. Collect workload forecasts from developers and time on intervals.
users: This is one of the most critical steps in the
entire capacity planning process, and it is the one
over which you have the least control.

Capacity Planning
59
 The lead strategy it is an aggressive The lag strategy it is an exact opposite of
approach wherein the capacity is lead strategy and is highly conservative
enhanced in anticipation of an increase in in approach and includes the addition of
demand. This is done to attract customers capacity only after the existing capacity has
from competitors through improved been fully utilized due to increase in demand.
service and reduced lead times as it Though it reduces the risk of wastage,
eliminates situations of stock out. The it presents a far greater risk in the form
excess capacity thus generated can be of stock-out situations and losing out on
rented out to other organizations. customers.

Strategies for Capacity

Planning

Capacity planning can be

classified into the following
major categories:

Adjustment strategy under this strategy

capacity is adjusted in small or large
Match strategy is a moderate strategy amounts due to consumer demand or
wherein capacity is changed in response major changes in product or organizational
to the present demand in the market. changes.

Capacity Planning
60
Summary
● Capacity planning involves planning for the
optimum quantity at optimal time as per business
requirements for lower is the capacity, poorer
would be the response time and severe would be
issues with performance.

● On the other hand, higher is the capacity, higher is

the cost of production and wastage of resources.

● Therefore, optimal capacity is quintessential for

optimum usage of resources.

● Capacity planning is an integral part of planning

related to development of infrastructure.

● To conclude, capacity planning must ensure that:

○ All functions can be perfectly performed

by infrastructure components and can be
accommodated.

○ Growth forecast is neither exaggerated nor

uneconomical.

○ Efficient functioning of components.

Capacity Planning
61
 Unit 8

Process Selection

Learning Objectives Introduction

By the end of this unit, you will be Process Selection is a method through which goods and
able to: services that have been produced are delivered affecting
various organizational aspects such as capacity planning,
● Understand the concept of process
facilities layout, equipment selection, work system selection
selection
and capacity layout. Process selection is used for planning
● Know the factors affecting process
of new products or services that is related to technological
selection
advancements and competition. Process selection is
● Be aware of considerations in dependent on the strategies in process, which has two main
process selection components viz. capital intensity and process flexibility.

● Recognize the different types of

processes

● Know about the different

characteristics of different types of
processes

● Understand the tools used in

process analysis
 Figure: Process Selection and Capacity Planning
Above figure shows the process of capacity of an organization that affect them are facilities
planning and process selection as interrelated and equipment, layout and work selection.
to each other. The inputs of an organization that
affect them are forecasting, product and service However, there are certain factors that affect the
selection and technological changes. The outputs process of selection.

Factors Affecting Process Selection

The factors that affect process selection 03
are listed below.
04 Flexibility needs
Level of in the process
automation
required
The degree
02
of vertical
integration
05 Level of
quality
required

Customer
requirements
Not only these, but there
are also certain other
01
considerations involved in
process selection.

Process Selection
63
Considerations in Process Selection use.

The considerations in process selections are as ● Resource Flexibility: It considers how flexible the
follows: process of selection of resources is.

● Volume and Variety: It involves considering the ● Capital Intensity: The amount of capital required
volume of stock available in hand and the volume for successfully accomplishing the selection
of stock required. process is also considered.

● Produce to Stock or Produce to Order: It is

Process selection is further classified into different
important to consider whether goods are to be
types. They are listed below.
produced for fulfilling customer needs or for own

Types of Processes

Figure: Product or Service Flexibility Variety and Equipment Flexibility

Process Selection
64
Characteristics of Different Types of Processes are mentioned below on the basis of different
parameters. Consider the chart given below:
The characteristics of different types of processes

Table: Characteristics of Different Types of Processes

Project Job shop Batch Assembly line Continuous

Size Variable Small Moderate Large Large

Process flow No pattern Several Few Rigid Rigid

Speed Variable Slow Moderate Fast Fast

Run length Short Short Moderate Long Long

Rate of change Slow Slow Moderate High High

Labor High High Variable Low Low

Skill High High Mixed Low Variable

While studying the process of selection, having an process improvement is quite important.
idea about the terms process re-engineering and

Process Re-engineering and Process Improvement

Tools of Process Analysis

The tools used for process analysis are as follows:

A diagrammatic representation of the sequential flow of

Flow diagrams
processes showing the flow of material and information.

A pictorial representation of separate steps of a process in

Flow charts sequential order, including inputs and outputs, key decisions,
involved people, time involved and process measurements.

A systematic method of recording activities undertaken by

Process charts
workers for carrying out the operations.

Process Selection
65
There are few symbols used in making a flow chart.
These symbolsare shown below:

Summary
● Operations management can be described as
tactical overlooking of production methods and
human resources to ensure maximization of
output, minimization of errors and continuous
enhancement in product quality.

● Facility layout covers the aspects as to how

organizations work equipment such as
machinery, workstations, machinery, etc. and
human resources are positioned at the work
facility.

● Process selection encompasses tactical

choice of work processes to be included in the
production process.

● Process selection and facility layout form a

critical part of operations management.

● A thorough understanding of each of them, as

well as their inter-relation, helps ensure improved
efficiency of production processes.

Process Selection
66
 Unit 9

Product and
Service Design

Learning Objectives Introduction

By the end of this unit, you will be Product and Service designs are the beginning points of
able to: customer satisfaction process. The product or service
produced in the market should have added value for the
● Elaborate on the meaning of service
consumer from a market point of view. Product and service
and product design
selection is a long-term decision that decides strategic
● Discuss the reason for product and
formulation and implementation in any organization. Every
service design
functional area of an organization is involved in it, but
● Describe product lifecycle marketing and operations play a significant role in product

● Explain product reliability and service design development. It is pertinent to understand

the meaning of product design and service design while if a
● Discuss how to measure product
deeper understanding is required.
reliability

● Discuss standardization and mass

customization

● Explain product design and

development

● Elaborate the difference between

product and service
Meaning of Product and Service Design It involves the interaction of service provider,
customer, and the customers’ experience. The
Product Design
service design is greatly affected by the degree of
Analytical processes are used to create effective variations in requirements and customer contacts,
product designs to be sold to a customer. Various which determines the extent of standardization of
techniques and methods are utilized by organizations the service. The selling opportunity remains high
to create product and service designs to have a until the degree of customer contact is also high.
competitive advantage in the market. They may
opt to follow strategies like standardization, mass Reason for Product and Service Design
customization, robust or modular design, delayed
Implementation of strategies involves a significant
differentiation, etc. The selection of strategy and
role of service and product design because there
method plays a very crucial role in target market
are direct consequences for progress and success
because opting the right method results in higher
of a company.
productivity and efficient ways of operations.

The product and service designing decisions are

Service Design
not only fundamental but also create an impact
Service design is an effort of organizing or planning on the future activities. Market Opportunities and
of people, material, and their communication to threats are the chief forces that initiate a designing
serve the customer with better service quality. process.

Product and Service Design

68
 Technological factor Economic factor

06 01

The following are

the factors that Social and
Cost factors
05 give rise to market 02 Demographic
opportunities and factor
threats:

04 03

Competitive factors Political or legal

factors

The following are the factors that give rise to market issues, etc.
opportunities and threats:
● Competitive factors: It includes the factors like
● Economic factor: It includes the factors like low new products or services, a new advertisement,
demand, excessive warranty claims, reduction in new promotion methods, etc.
cost, etc.
● Cost factors: It includes the factors like availability
● Social and Demographic factor: It includes the of raw materials, components or labour, etc.
factors like change in preferences, population
● Technological factor: It includes the factors like
shift, etc.
availability of better technology for manufacturing,
● Political or legal factors: It includes the factors product’s components processing, etc.
like new regulations, government changes, safety

Product and Service Design

69
Each of these factors seem to be obvious and has Product Lifecycle
strategic implications for the success of products
A product lifecycle encompasses various stages
and services during their different stages of life
in a product or service’s life. It explains various
cycle. Since the demand does not remain the same
stages that a product goes through from the
in all the stages of a product’s lifecycle, different
initial introduction in the market till it completely
strategies should be taken into consideration to
disappears from the market. Understanding the
attain optimum performance of products and
stage of a product in its life cycle is vital for a
services during their useful life.
manager to make rational decisions, as each stage
requires a unique and specific strategy.

Figure: Product Life Cycle

Product and Service Design
70
 in the middle phases of this stage and new
competitors enter to control the market. Many
businesses focus on marketing activities and lose
huge amounts of money in this stage since they
lose loyal customers to their competitors.

4. Product Decline Stage

The product decline stage is the last stage of

the product lifecycle. This phase occurs when
companies do not take necessary preventive
measures in the late-maturity stage. Once this phase
is reached, the product would never recover again
The product life cycle comprises of four stages that or grow and would slowly be obsolete. Sometimes,
are discussed below: the decline of a product is inevitable, especially in
consumer technology goods. In such industries,
1. Product Introduction/Development Stage the companies need to be very responsive and
It is the first stage of the product lifecycle. It prompt in foreseeing changes or shifts. Staying
includes idea generation, new product designing, relevant, launching innovative products and being
re-engineering and the entire manufacturing at the forefront of change is more important for
process. In this stage, the product is given a name the leaders than smaller players as they have made
and a complete brand identity that differentiates it much bigger investments. CD player makers have
from competitors. continued to launch innovative products like Blue
Ray players and UHD players to stay relevant, but
2. Product Growth Stage more and more people watch movies on their
phones and tablets. TV industry is in the maturity
In this stage, rapid growth in sales and revenue
stage and innovations like curved TV do not see
is observed. Growth is attained when number of
huge adoption.
consumers appreciate the worth and advantages
offered by a product. It takes several years to attain
growth. Sometimes, the product might even vanish Product Reliability
from the market without a rise in its demand.
Product Reliability can be defined as the chances of
Therefore, it becomes essential to establish
a product performing the desired functions during
demand at the introductory stages with good
its useful life as described by the manufacturers.
marketing plans.
In case of repairable product it can be quantified
as Mean Time Between Failures (MTBF) and if
3. Product Maturity and Saturation Stage
the products are non-repairable, then it can be
At this stage, the product attains full market quantified as Mean Time To Failure (MTTF).
potential, and the business becomes highly
profitable. It is observed that growth slows down

Product and Service Design

71
How to Measure Product Reliability vs. time from inception till the end, which shall be
observed if waiting period is long and a record for
Figure uses ‘The Bathtub Curve’ to demonstrate the
given a set of items.
product reliability through immediate failure rates

Figure: The Famous Bathtub Curve

Product and Service Design
72
Initial Failure slope of the curve which is a result of product or
service becoming outdated and chances of failure
This is the first period, which is depicted by flatting
are high. So, these are the different periods that
out of the slope of the curve on the left side. It marks
help in understanding the failure rate of a product
decreasing failure rate in the first period. It shows
and service. The organization may opt to follow
that during early stages of in a product or service’s
any of the strategies like standardization, mass
life it is more likely to fail against well-established
customization, robust or modular design, delayed
products and services.
differentiation, etc., while keeping in mind the
characteristics discussed in the curve.
Useful Life

The second period of the graph is used to depict Standardization

the ‘useful life’ of a product through the flat bottom
Standardization is one of the important strategies
curve which shows the random occurrence of
for an organization, which helps in creating
products and services over a period. Here, it is a
products. It is so because the manufacturers are
little hard to predict which failure mode will occur,
not available with many options to make them
though the chances of failure remain predictable.
unique and lowering the price. Standardization
offers many significant advantages along with a
Wearout Failure
few disadvantages.
The third period, ‘wearout’ is depicted by the rising

Product and Service Design

73
Mass Customization into modular designs, which is another form of
standardization. Product or services are customized
Mass customization is a strategy widely used
to individual preferences and may not have long
by companies to establish a harmony between
lives. The life of a non-customized service may be
standardization and customization, which helps
very small. Alternatively, a customized product may
in cost reduction and at the same time adding
last for longer time. Thus, the different phases of
to the variety. Mass customization is realized
product development also play a very important
through differentiation and modular designing.
role in the designing of a product and service.
In case customer preferences are ambiguous
and unknown, the company can opt for delayed
differentiation in order to finish off the product Product Design and Development
later on. In order to enable convenient replacement
Product design and development generally follows
or interchangeability, components are grouped
a series of phases:

Figure: Stages in Product Design and Development

Product and Service Design
74
● Feasibility Analysis: It warrants co-operation is required.
between various organizational functions such
● Prototype development: In order to find out any
as marketing, finance, operations, accounting,
flaws in the product a few units are prepared
etc. It includes demand analysis, cost analysis,
as samples so that any shortcomings may be
and technical analysis. It is also imperative to
addressed.
have knowledge of company’s missions and
● Design review: At this stage any required changes
requirements.
are incorporated into the product, or if that is not
● Product specifications: It specifies in-depth
possible, then the product is abandoned entirely.
analysis to find out about customer expectations
This decision is taken in consultation with
from a product and it warrants collaboration
marketing, finance, operations, engineering and
between various organizational departments.
design.
● Process specifications: After setting up product
● Market test: A market test is used to gauge
specifications, it is entirely up to the operations
customer preferences and get the required
managers to suggest the processes which will
feedback. Once the feedback is received, the
be required for the production of the product.
product is resent to design review phase where
All possible alternatives should be listed and
another session of brainstorming starts.
analyzed in terms of cost, resource availability,
● Product introduction: Marketing department
quality and profitability. Close interaction
introduces the product into the market and
between operations and accounting departments

Product and Service Design

75
 conducts necessary promotion activities. 6. Choice of location is highly relevant to service
design and Service design and Location are
● Follow-up evaluation: On the basis of feedback
intricately related to ensuring convenience for
received from customers, necessary changes
the customers.
are made and forecasts are adjusted.
7. Product designs do not have significant customer
contact whereas in case of service design there is
Differences between Service Design
little to the very high degree of customer contact.
and Product Design
Service systems range from those with little or
Though a product and service perform the same no customer contact to those that have a very
function of satisfaction of consumer needs, there high degree of customer contact e.g., Insulated
are multiple differences between them. So, it technical core, Little customer contact (software
becomes quite essential for operations managers development), Personalized service (haircut,
to understand the differences between them and medical service), Consumer participation
then deal with the issues related to products and (diet programs, dance classes), self-service
services separately. Following are the certain (supermarkets). If there is no customer contact
differences between a product and a service: than service design is almost similar to product

1. Services are intangible and focus on factors design.

such as ambiance and experience whereas 8. Variability in demand can lead to extreme
products are tangible and focus on factor such situations, either waiting for lines or idle
as packaging and appearance of the product. resources. If variability in demand is a critical

2. Services are generally created and delivered factor, process designers can take either of the

simultaneously for, e.g., a car wash, a haircut, etc. following approaches:

Whereas in case of products prior planning and ● Cost and Efficiency (it is basically a product
inventory management are required to ensure design approach)
timely delivery to the consumers.
● Customer Service (it is basically a service
3. It is not possible to prepare an inventory of design approach)
services. As a result, the flexibility and capacity
are restricted whereas in case of products a Designers try to limit customer participation during
proper inventory can be easily managed. process designing as it can lead to unpredictability
in demand process.
4. Services should be developed with a
consideration that they are highly visible to the
customers, which adds an additional dimension
to the design process, which is generally not the
case with the product design.

5. As services have low entry and exit barriers which

required innovation and cost-effectiveness for the
service design to retain competitive advantage.

Product and Service Design

76
Summary
● Product and service design are the most
important factors to be considered during the
introduction of a new product or service.

● It is imperative to satisfy basic principles to

accomplish a successful design, which includes:

○ Identification of Needs and Wants of

Customers

○ Refining existing Products and Services

○ Development of new Products and Services

○ Establish Quality Parameters

○ Manage Production and Delivery Costs

○ Development of Samples

○ Formulation of Product Specification

● As the designing process has a critical impact on

an organization it is necessary that it is in line
with organizational strategy and goals (long term
and short term).

● There are multiple levels in the designing process

including:

○ Motivation

○ Improvement Scope

○ Organizational Capabilities

○ Forecasting

Product and Service Design

77
 Unit 10

Aggregate Planning

Learning Objectives Introduction

By the end of this unit, you will be Capacity decisions of an organization are made on three
able to: levels:

● Understand the aggregate planning ● Long Term: These decisions are closely associated with
and its types product and service selection and include determination
of product and service offering, Location and Layout of
● Analyze the dimensions of
the facility and Equipment decisions. They determine the
aggregate planning
capacity constraints within which intermediate planning
● Discuss the objectives and
functions.
significance of aggregate planning
● Intermediate Term: These decisions are related to medium
● Appreciate the strategies involved in
term objectives such employment levels, Output levels
aggregate planning

● Know about the cost involved in

aggregate planning

● Recognize the factors affecting

aggregate planning
 and Inventory levels. These decisions layout the levels of organizational operations. It involves
boundaries within which short-term planning is minimization of costs and balancing of capacity.
to be done. As the name suggests, it involves all the resources
of an organization such as raw material, personnel,
● Short Term: These decisions are done within the
machine hours, etc. It is essentially a medium-term
constraints specified by intermediate and long-
planning process ranging from a period of three
term decisions and are concerned with the best
months to twelve months.
method to achieve desired results through job
scheduling, arranging for requisite equipment
Dimensions of Planning
and workers.

Planning is the process of deciding and organizing

Aggregate Planning organizational activities to achieve the desired
results. Certain dimensions are to be taken into
Aggregate planning can be defined as the process of
consideration while planning, such as:
developing, analyzing and maintaining the desired

Aggregate Planning
79
Objectives of Aggregate Planning Strategies for Aggregate Planning

The goals of aggregate planning involve the ● Vary the number of employees: The employees
production in line with business plan, optimum are hired and laid off as per requirement in this
utilization of capacity and consistency with strategy.
company’s policy regarding employees. These ● Vary workforce utilization: The utilization of
goals are made on an aggregate level and the regular work- force is done on overtime in this
planning of aggregate is done by summing up all strategy.
the above-mentioned dimensions.
● Vary the size of inventory: A constant production
rate is adopted so that inventory is accumulated
The Significance of Aggregate Planning
when demand is less and is consumed when
● It helps in the minimization of production cost. It demand is high.
results in better and maximized customer service
experience. The Cost involved in Aggregate Planning
● It helps in accomplishing financial objectives by ● Regular Time Cost: The cost of wages to regular
diminishing variable cost. workers on rolls.
● It helps in the maximization of the available ● Overtime Cost: The additional cost of utilizing
production facility. regular employees on overtime.

Aggregate Planning
80
● Hiring and Layoff Cost: The cost of hiring and
laying off workers as per requirement.

● Inventory Holding Cost: The cost involved

in storing and maintenance of products in
warehouses.

● Backorder and Stockout Cost: The cost incurred

when an organization is unable to fill an order and
not being able to meet an internal or external
demand from the current inventory.

Types of Aggregate Planning

Level Output: A stable rate of output is sought

throughout the planning period which means
ensuring stability in output rate while handling
variations in demand.

Figure: Level of Output Planning

The above figure shows the relationship between Chase Plan: Under this plan monthly demand is
the cumulative demand and cumulative days. It expected to be met by the management of monthly
shows the level output planning changes with output. In order to match the capacity with demand,
respect to change in cumulative demand and the planned output is set at expected demand levels
cumulative days. for a specific period.

Aggregate Planning
81
 Figure: Level of chase planning

The above figure shows the relationship between month.

cumulative demand and cumulative days for chase
planning. Business Plan: A business plan involves analyzing
data related to the profit of a business. It considers
Intermediate Plan: This type of aggregate planning forecast sale, product costs and labor costs. A
focuses changing output rates only as and when business plan helps a business to be profitable in
required, instead of changing the output rate every the long run.

Aggregate Planning
82
Factors Affecting Aggregate Planning strategic planning with short-term production
success and as such is a crucial operational activity
Aggregate planning aims to balance long-term
for an organization.

Before beginning with the aggregate

Following inputs are essential for successful
planning process following factors should be
aggregate planning:
considered:

● Comprehensive knowledge of production ● Forecasts about the aggregate demand for

facilities and raw material availability the specific period.

● Accurate Medium range demand forecasts ● Evaluating all resources for capacity planning
(sub-contracting, outsourcing, etc.)
● Financial planning for production costs
including labor, raw materials, and inventory ● The operational status of the workforce,
inventory levels and production efficiency
● Organization policies for management of
labour, quality assurance, etc.

Aggregate planning ensures that organizational management of workforce levels, production rates
goals and objectives can be fulfilled with the and inventory levels.

Aggregate Planning
83
Summary
● Aggregate planning is a medium-term planning
process for production capacity and spans over
a maximum period of twelve months with an
objective to keep the costs of operations low.

● Organizations do aggregate planning to make

decisions on their capacity because the demands
for seasonal variations are difficult to forecast
precisely.

● The primary objective of the organizations is to

complete utilization of available resources to
meet the expected demand.

● This objective can be accomplished by

considering the factors such as employment
levels, inventory levels, decisions on output rates,
overtime, back orders and subcontracting work.

Aggregate Planning
84
 Unit 11

Inventory Control

Learning Objectives Introduction

By the end of this unit, you will be Inventory serves a link to fill the gap between production and
able to: distribution process and as such ensures smooth functioning
of organizational activities. There is a time lag involved in the
● Understand the concept of inventory
realization of want, and its accomplishment, the greater is
control
this time lag, higher is the need for inventory. It is very crucial
● Demonstrate the knowledge of
to have control over the level of inventories as a large part of
characteristics of inventory
an organization’s working capital is invested in inventories.
● Appreciate the benefits of holding The main purpose of inventory control is to ensure enough
inventory stocks to meet periodic fluctuations in demand and if

● Learn about the risks of holding required clear out the inventory levels. Generally, Inventory

inventories implies stock of finished products only, but in certain cases,

● Analyze the objectives of inventory

management

● Discuss the factors that affect the

process of inventory control

● Explain the application of Economic

Order Quantity in inventory control
 Consumables
Work in Finished
Progress Goods

Raw
03
Material
02 04 Spares

01 Characteristics of 05
Inventory

it may also include raw materials, work in process that are the rate of consumption and time for
and store materials. replenishment.

● Work in Progress: Work in process is that stage

Characteristics of Inventory
of production wherein the raw materials have
● Raw Material: Raw material is essential to carry been consumed in the process of production but
out the production activities and constitute a have not yet taken the shape of finished goods.
major input for the organization. The quantity of
● Consumables: These are supplementary
raw material required depends on two factors
material or catalysts, which are not required in

Inventory Control
86
 the production as a raw material, but they are of machines and equipment necessary for
essential for smoothening of the production production. Stocking policies for spares vary
process. between industries.

● Finished Goods: When the production process

There are certain benefits of holding inventories.
is completed, finished goods are obtained. It
Let us discuss these benefits in detail.
is necessary for companies to have adequate
stock of finished goods to cater to the market
Purpose/Benefits of Holding Inventors
requirements smoothly.

● Spares: Spares are also an important part There are three chief objectives of holding

of inventory and ensure smooth functioning inventories, namely:

Inventory Control
87
Risk and Costs of Holding Inventors in the form of paper-work or communication with
the supplier. It is a necessary cost of maintaining
The holding of inventories involves blocking of a
inventory levels. Total annual cost of ordering
firm’s funds and incurrence of capital and other
can be obtained by cost per order multiplied with
costs and exposure to certain risks. Different costs
a number of orders placed.
and risks involved in holding inventories have been
mentioned below: ● Cost of Stock-outs: Stock-out is a situation which
occurs when the firm does not have enough
● Capital Costs: To maintain adequate inventory
inventory for a product, but there is a demand for
levels, it is necessary for the firm to invest a
it from the customers. There is a significant cost
significant portion of their financial resources.
of stock-outs because it results in loss of orders
This can lead to cash crunch for daily operations,
or loss of customers.
and the firm must resort to arrange for additional
funds, either from own sources or from external ● Risk of Price Decline: In uncertain market

sources. situations there is an inherent risk of reduction

in prices of inventories. This reduction may be
● Cost of Ordering: Every time an order is placed with
due to market conditions, stiff competition or
the suppliers, a certain cost is involved, it could be
increased supplies in the market.

Inventory Control
88
● Risk of Obsolescence: There are certain risks ● Perpetual inventory control to ensure that
involved in case of technology related items such material is reflected in the stock registers tally
as obsolescence due to technological changes, with the actual material present in the stores.
changes in consumer tastes, etc.
● Avoid overstocking and stock-out costs.
● Risk of deterioration in Quality: Storing materials
● Minimize losses through wastage, pilferage and
for longer periods can result in deterioration in
damages.
the quality of inventories.
● Ensure optimum investment in inventories as per
sales and operational activities
Objectives of Inventory Management
● To keep control material cost so that overall
Following are the major objectives of inventory
reduction in costs of production can be achieved.
management:
● Make sure that optimum quality goods at
● Ensure smooth flow of goods into the market, so
optimum prices.
that customer requirements are met and there is
no loss of sales.
When inventory processes are being managed
● Control of inventory levels and short-term and a wide variety of factors are to be considered
long-term planning. including both internal as well as external factors.

Inventory Control
89
It is very important to keep control of these factors types of products that are required for production.
as they can have a huge impact on inventory Some products have a short shelf life and should
management. Let’s have a look at the major factors be ordered in limited quantities only.
that affect inventory processes:
Economic order quantity holds a lot of importance
Factors Affecting Inventory in inventory management as it defines that quantity
at which holding and ordering costs are minimized.
Financial Factors: These are factors such as the
cost of borrowing money or cost of maintaining
inventories that have a significant impact on Economic Order Quantity
inventory management.
In order to get better control of inventory, a model
Suppliers: Trustworthy suppliers are required for has been developed to find out the desired or
planning to spend on materials and managing optimum quantity or levels of materials to be
inventories efficiently. maintained and purchased at the time of every
purchase. The model determines the required
Lead Time: It is the time taken for material to
working stock level to be maintained. Every time an
arrive after orders have been placed. Lead time
order is placed, the company incurs several costs.
varies according to industries as well as nature
In order to minimize the costs of purchasing or
of the product. Any changes in lead times require
ordering cost, the company can buy in bulk quantity
immediate changes in inventory management.
to meet the complete need for the due course year
Product Type: Due consideration must be given to at one time, resulting into only the cost of one order.

Inventory Control
90
 Marketing
Planned cost
Consumers
advertisements
growth rate
and promotion

Market Seasonal

trends impact on
demand
Factors Affecting Accurate
Demand Forecasting

Previous
Economic
year's sales
conditions
record

Number of orders D/Q

Q+0
Average inventory
2

Total Cost = SD / Q + IC Q / 2

Where SD = set up cost * Demand IC =carrying cost

d TC / D Q = –SD / Q 2 + IC / 2

TC is minimum when d TC / d Q = 0 OR Q* = 2DS / IC R=0

2 If lead time is L

–SD / Q + IC / 2 = 0 R = buffer stock + lead time demand

Inventory Control
91
= 0 + Dl Holding cost = 10%

= L dl Unit cost = 200

Hence, EOQ can be considered as an important tool Lead time = 3 days

for management to minimize the cost of inventory
and the amount of cash tied up in the inventory Working days in a year = 250
balance.
EOQ = √2SD/iC
Example:
= √2 × 500 × 10000 / 0.1 × 200
Calculate Economic Order Quantity (EOQ) and
Reorder point for the following data = 707

Annual total demand = 10,000 units Daily demand = 10000 / 250 = 40 ROP = L dl = 3 ×
40 = 120
Ordering cost = 500 per order

Inventory Control
92
Summary
● Inventory control is an important aspect of the
growth of the company as it ensures smooth
functioning of company operations.

● Inventory control is necessary to ensure that

the stocks of all the products are maintained at
optimum levels.

● In operations management, logistics and supply

chain management, software programmes are
necessary for inventory management.

● Inventory control also helps in reduction of

overall costs without hurting sales.

Inventory Control
93
 Unit 12

Statistical Quality
Control

Learning Objectives Introduction

By the end of this unit, you will be Statistical Quality Control (SQC) is used for analysis of
able to: quality related problems and their solution through a set
of statistical tools by professionals for monitoring and
● Understand the concept of
maintaining the quality of products and services. Quality
statistical control
control is checking the product at any stage to decide its
● Identify the steps in the control
conformance to acceptable standards and segregating the
process
good from bad. Quality assurance is ensuring that defectives
● Comprehend the tools of statistical are not produced by controlling the process. It involves
quality control process control in place of quality control.

● Recognize the objectives of the

statistical quality control

● Know the applications of statistical

quality control

● Analyze the use of statistics in

process control

● Apply variable and attribute control

charts
 Setting Performance Standards

Measurement of Actual Performance

Steps in the Control Comparing Actual Performance with

Process Standards

Analyzing Deviations

Taking Corrective Action

Statistical Quality Control

95
Steps in the Control Process ● Analyzing Deviations: This step involves analysis
of any deviations present. In order to ensure
The steps in the control process are as follows:
the longevity of the business, it is important to
● Setting Performance Standards: Performance address any deviations in key areas.
standards are required to be set up to start the
● Taking Corrective Action: This is the last but
controlling process as the actual performance
also the most important steps. If deviations are
is measured against these standards. Example:
within the prescribed limits, no corrective actions
Revenues to be earned, Costs to be incurred.
are required but if they are beyond the prescribed
● Measurement of Actual Performance: After limits, they should be brought to the notice of
setting the standards, the next step involves management and immediate corrective action
the use of various techniques, such as sample should be taken.
checking and personal observation, for
measuring the actual performance. Example:
Appraisal reports. Tools of Statistical Process Control

● Comparing Actual Performance with Standards: All SQC tools are really helpful in evaluating the
This step involves comparison of actual service quality and it uses diverse tools for analysis
performance with the specified standards. of the quality problem.

Statistical Quality Control

96
1. Descriptive Statistics: These are used to explain ● Employee Participation
quality characteristics and relationships and
● Management leadership,
includes statistics such as the mean, standard
● Continuous improvement
deviation, range, etc.
● Prompt response
2. Statistical Process Control (SPC): It answers
the question if a process is functioning properly ● Fact-based actions
or not. It involves checking a random sample of ● Management Commitment and
output and decide if the process is producing
● Quality driven culture.
products with all the required specifications that
fall within a specified range.
The primary objectives of the quality control module
3. Acceptance Sampling: This process involves are to control:
random inspection of a small lot of goods and
● Receiving Materials
taking a decision if the lot is acceptable or not
based on the results. ● Rejecting Materials

● Customers
Objective of Statistical Quality Control
● Claims
Quality Control is a significant tool for every
● Providers
company, comprising of the following parameters:
● Evaluations
● Service Quality

Statistical Quality Control

97
The development and use of performance pointers Application of Statistical Process Control (SPC)
are associated either directly or indirectly, to buyer
There are three main phases of activity for the
requirements and gratification, as well as to the
application of SPC:
management.

Control Charts Control chart for variables monitors measurable

characteristics with a continuum of values such as
Statistical Process Control commonly makes use
weight, height or volume, etc.
of control charts, to measure any characteristic
of a product such as weigh of a packet of chips,
A control chart is a graphical technique that
number of cigarettes in a pack. The characteristics
records process variation and gives a signal when
that can be measured using control charts can be
the variation exceeds natural limits.
divided into two groups, Variables, and Attributes.

The General Layout of a Control Chart The following are the types of control charts for
attributes:
There are certain attributes and variables for which
control charts are prepared:
P-chart
• Variables: A product property that can be
P-charts help with measurement of defective
measured and possesses a continuum of values.
proportion from a sample. The calculation of
e.g., area, volume, density, etc.
center line along with the upper and lower control
• Attributes: A product characteristic with a distinct
limits is like computation in other types of control
value and non-countable. e.g., color, weight.
charts. Centre line is obtained by taking random
observation samples and computing the value of
Control Chart for Attributes

Statistical Quality Control

98
p across all samples and it reflects the average
defective proportion of the population.

C-chart

C-charts are employed for calculating a number

of defects per unit such as meals returned in a
restaurant, bacteria per ml of water, etc.

Summary
● Using statistical methods for monitoring and
controlling a process, Statistical Process Control
(SPC) is an efficient method for quality control.

● It lowers wastage percentage by ensuring efficient

operation of a process and more specification
compliant products being manufactured.

● SPC can be applied to any process where

specification compliant products can be
measured.

● SPC makes use of certain tools such as control

charts, run charts, focus on improvement and
design of experiments.

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99
 Unit 13

Maintenance

Learning Objectives Introduction

By the end of this unit, you will be Maintenance is the set of those activities that keep facilities
able to: and equipment in normal order of working and making
necessary repairs when breakdowns occur so that the
● Understand the importance of
process can run without any hindrance or disruptions.
maintenance

● Identify the results of breakdowns

Importance of Maintenance
● Understand the types and
importance of maintenance Let us now look at the importance of maintenance.

● Explain the approaches used to deal ● Effective maintenance can improve profits and decrease
with breakdowns cost.

● Efficient maintenance adds value through better utilization

 of resources. ● There are quality issues; product may be defective

● Maintenance should be considered as an ● Adverse impact on product quality

organizational function that functions in parallel
● Safety threats for workers
with production.

● Maintenance significantly affects multiple Types of Maintenance

aspects of production costs.
The different types of maintenance are as follows:
● Implementing effective maintenance into
production is an investment, not a limiting ● Breakdown Maintenance
constraint.
It is the repair of equipment in the event of a failure
while in operation.
Results of Breakdowns

The breakdowns in the production process lead to ● Preventive Maintenance

the following:
It is the periodic check of the equipment as
● Reduced production and delayed deliveries per a predetermined schedule. The preventive
● The increased cost of production maintenance reduces the chances of failures of
equipment in the plant.

101 Maintenance
● Predictive Maintenance Some organizations have workers perform
preventive maintenance on the machines they
Predictive maintenance identifies the need for
work on, rather than use separate maintenance
machine repair on the basis of signals before the
personnel for that task. This is called total
damage gets bigger. It uses historical information
productive maintenance.
and technical data analysis to predict when
equipment or part is about to fail. If failures are
This approach is consistent with Just in Time (JIT)
estimated in a predictive model, there will be more
systems and lean operations, where employees are
effective preventive maintenance.
given greater responsibility for quality, productivity
and the general functioning of the system. JIT is
Approaches Used to Deal with a concept that believes the work to be done just
Breakdowns before the due time to avoid any undue gap between
tasks. There are a variety of derived concepts like
● Spare equipment to ensure continued production
JIT purchasing, JIT assembling and execution are
in the event of equipment failure
associated to remove the gaps between a variety
● Inventories of spare parts
of tasks within one function and between various
● Operators skilled in minor repairs of the functions.
equipment

Maintenance
102
The risk of a breakdown can be reduced by an ● Inventories of spare parts that can be installed
effective preventive maintenance program. But as needed, thereby avoiding lead times involved
sometimes breakdowns still occur. Organizations in ordering parts and buffer inventories, so that
with good preventive practices have a lesser need other equipment will be less likely to be affected
for breakdown programs. However, organizations by short-term downtime of a particular piece of
that rely less on preventive maintenance have a equipment.
greater need for effective ways of dealing with ● Operators who are able to perform at least minor
breakdowns. repairs on their equipment.

● Repair people who are well trained and readily

In preventive maintenance, management cannot
available to diagnose and correct problems with
schedule break- downs but must deal with them on
equipment.
an irregular basis, whenever they occur.

The degree to which an organization pursues

The main approaches used to deal with breakdowns
any or all of these approaches depends on how
are the following:
important a particular piece of equipment is to the
● Standby or backup equipment that can be quickly
overall operations system. At one extreme, it could
pressed into service.
be equipment that is the focal point of a system

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103
e.g., printing presses for a newspaper, or vital
operating parts of a car, such as brakes, steering,
transmission, ignition, and engine. At the other
extreme, it could be equipment that is seldom used,
because it does not perform an important function
in the system and also equipment for which
substitutes are readily available.

Summary
● Maintenance is a system of maintaining and
improving the integrity of production and quality
systems through the machines, equipment,
processes and employees that add business
value to an organization.

● It focuses on keeping all equipment in top

working condition to avoid breakdowns and
delays in manufacturing processes.

● It is an important factor that is required in several

fields, such as maintenance of an organism,
aircraft maintenance, car maintenance, railroad
track maintenance, software maintenance and
property maintenance.

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104
 Unit 14

Materials Management

Learning Objectives Introduction

By the end of this unit, you will be The material can be defined as a tangible object that goes
able to: into the making of a physical object.

● Understand the concept of materials

Materials management is responsible for the coordination
management
of planning, sourcing, purchasing, moving, storing and
● Explain the materials management
controlling materials in an optimum manner to efficiently
cycle
provide a service to the consumers at lowest possible cost.
● Analyze the objectives of materials
management Materials management process involves short-range
decisions about supplies, inventories production levels,
● Comprehend the tasks of materials
schedules and distribution.
management

● Discuss the concept of outsourcing

● Appreciate the vendor rating and

evaluation

● Know the concept of vendor

management
Materials Management Cycle Acquisition of Raw Materials: This involves
acquiring or buying raw materials to be used for the
The materials management cycle involves
manufacturing of finished products. e.g., A cloth
purchasing raw mate- rials, storing them for
manufacturer would acquire raw materials such as
future, converting them finished goods and then
fabric, threads, dye, etc.
distributing the finished goods to the end users.
● Storage: Once the raw materials are purchased,

Let us have a look at the materials management they need to be stored in a manner that it does

cycle in Figure below. not get damaged until the time of production.
Example, an ice-cream manufacturer would buy
fruits in advance. So, it will be important for him
to store and refrigerate them such that they do
not get destroyed.

● Conversion: This involves the actual process of

production wherein goods are transformed from
raw materials to finished products.

● Storage: Once the finished goods are

Figure: Material Management Cycle manufactured, it is important that the

106 Materials Management

 manufacturer stores and packs them properly logistics and storage of materials in an efficient
until they are delivered to the end user. way

● Distributor: The manufacturer is ought to find 3. Using simplification, standardization, value

distributors who would deliver the goods to the analysis, import substitution and related aspects
retailers who in turn would deliver the finished to cut down the costs
goods to end users or customers.
4. Maintaining continuous supply at reasonable
and durable rates by identifying new sources
Objectives of Materials Management
of supply and establishing an amicable relation
The main objectives of material management are: with the suppliers

1. Minimizing material costs 5. Developing and maintaining high inventory

turnover ratios by reducing more investments
2. Reducing the cost of purchasing, receiving,
into inventories

Materials Management
107
Tasks of Materials Management Outsourcing
The various tasks in materials management are Outsourcing refers to acquiring the products
listed below: or services from external sources rather than
producing in-house.

Importance of Outsourcing

● External suppliers provide materials better,

cheaper and more efficiently because of their
expertise and economy of scale.

● Expertise and knowledge of vendor becomes

available to the Organization.

● Production of the part may be restricted by a

patent.

Materials Management
108
● Outsourcing offers added flexibility. the vendor after deep evaluation and recognizing

● The organization can focus on the core activity. their overall capabilities. There are two different
scenarios in front of a buyer.

Risks in Outsourcing 1. The performance of the vendor has to be

● The control on production and quality is lost. evaluated before the delivery. This concept is
known as vendor evaluation.
● Greater dependency on suppliers may lead to
production plan Disruptions. 2. The performance should be evaluated after the
delivery of the products. This is known as vendor
Vendor Rating and Evaluation rating.

It is necessary that supplies are obtained from Factors for Vendor Evaluation

Vendor Development The main features of vendor management are

mentioned below:
Vendor development is one of the popular
techniques of strategic sourcing, which improves ● Communication of essential and helpful
the value we receive from suppliers. Vendor information like design, specifications, standards,
Development can be defined as any activity that practices, etc.
a Buying Firm undertakes to improve a Supplier’s ● Communication of engineering changes
performance and capabilities to meet the Buying
● Developing methods for detecting deviations
Firms’ supply needs.
Materials Management
109
 from standard promptly

● Helping the vendors in resolving quality problems

● Rendering necessary technical assistance

● Providing quality data in lieu of incoming

inspection

● Reviewing vendor’s performance periodically and

providing feedback

Summary
● Materials management involves planning and
designing for delivery, distribution, storage,
collection and removal of materials and services.

● It is usually an additional service that is offered as

part of a campus planning process or a building
design project.

● It is highly useful for educational, healthcare and

corporate environments.

● Materials management takes care of the planning

and designing considerations required to support
effective delivery and movement of goods and
services that support occupant activity.

Materials Management
110
 Unit 15

Management of
Projects

Learning Objectives Introduction

By the end of this unit, you will be Consider the following activities:
able to:
● An underpass is constructed in a city.
● Understand the importance of
● Metro rail is built in Hyderabad.
projects in an organization
● A plane is built for Airforce.
● Know about the characteristics of
● A new hospital is being constructed.
projects of an organization

● Analyze the project life cycle Do you see anything common in all these activities?
concept in various organizations
Now consider some more activities:
● Review the network analysis and
Critical Path Method ● A company launches a new product development program.

● Comprehend the program Evaluation

and Review Technique

● Discuss various intricacies related

to project management
● A manufacturing organization launches a survey of projects.
for assessing customer satisfaction with its
products. A project can be defined as a temporary endeavor
to achieve a specific well-defined objective.
● A manufacturing organization constructs a new
warehouse.
Projects in Contemporary Organizations
● A new machine is procured and installed.
Initially, the projects were considered different
Do you see anything common in all these activities? to the conventional manufacturing systems. The
Do you see anything common in first set and second word project was associated with large projects
set of activities? like infrastructure, shipbuilding, construction, etc.
But in due course of time, it was realized that if
You can observe that although these activities conventional manufacturing systems could adopt
are entirely different from each other, they are project methodology, it would result in higher
temporary in nature, that is, they have a start and efficiency for the organization.
a finished timeline, unlike the mass manufacturing
operations, which are perpetual. So, the project method comprises of three major
entities:
All the activities described above fall in the category

Figure: Projects in Contemporary Organizations

Management of Projects
112
The parent organization selects the team leader The projects have a purpose: Each project has a
and the team members from its different divisions well-defined purpose or objective e.g., the project of
as per requirement of skills and qualifications new product development may have the objective of
for the project. The project team is responsible achieving a competitive edge. The construction of a
for interacting with customer and ensure that flyover on the road may have a purpose of reducing
the outcome must meet the requirements of the traffic congestion. The purpose of constructing an
customer for that project. underpass on the road may be to provide a safe
road for the pedestrians to cross.
Note that the customer for the product may be the
● Projects have a life cycle: The projects are
parent organization itself e.g., development of IT
temporary endeavors. While the projects are in
system for a company’s operations or construction
progress, they pass through some well-defined
of a new warehouse or installation of new
stages of life cycle.
technology.
● Each project produces a unique product: The
projects are not repetitive manufacturing
Characteristics of Projects activities. The product of a project is unique. The

The projects differ from traditional forms of same specifications of a product will never be

production and are characterized by some unique created by future projects.

features as follows: ● Interdependence: Each project is comprised of

Management of Projects
113
 a number of tasks. All the tasks involved in a endeavors and characterized by a life cycle.
project are independent, unique entities but they Although the projects differ in size, nature, product
depend on each other for their performance e.g., and requirements, the life cycle of all projects is
a specific task might not start unless some of typically similar. The phases in the life cycle of
the preceding tasks have been completed. projects are shown in the form of a graph below.
The X-axis of the graph indicates the time and the
Y-axis indicates the level of effort required during
Project Life Cycle
various stages.
One of the characteristics of projects are temporary

Figure: Stages in the Life Cycle of a Project

● Conception: During this stage, the management organizational goals.

of the parent organization comes across various
● Selection: The scarcity of resources may prohibit
ideas of projects, each project having its own
the management to launch all screened projects
necessity and significance. The project ideas
simultaneously. The projects to be undertaken
are generally the outcome of brainstorming or
are then selected by the management on various
other means of idea generation. The ideas so
criteria like management priorities, competitive
generated are subjected to the screening on the
necessity, the significance of the project e.g.,
basis of management’s priorities, organizational
the management may consider a project for new
needs and importance of the project to achieve
product development more significant than the

Management of Projects
114
 construction of a new warehouse. A number of life and planning to counter these risks in the
numeric and non-numeric techniques are used event of them becoming a reality.
by the management for the purpose of project
● Scheduling: The project time schedules are
selection. The numeric techniques include the
developed during this phase. The project is
financial assessment of projects and also the
broken into smaller tasks and work packages and
comparative scoring.
time required for the individual task is assessed.
● Planning: The selection phase is followed by The breaking of the project into smaller tasks
planning for the project. During this phase, and work packages is called work breakdown
various aspects relating to the project are structure (WBS). The interdependence of the
planned, which include scope definition, resource tasks is also established during this phase. The
requirement planning, skills required for the time required to complete the project is then
project, manpower requirement, procurement assessed using the compiled information of tasks
requirement, financial planning and specification interdependence and task time requirements.
definition. The outcome of this process is a
● Monitoring and Control: Once the project is in the
project plan, which is a roadmap to the project.
process, it is essential to ensure that the various
The project plan is also used as a tool for project
activities are completed in scheduled time and
control. Another important aspect of this phase
within decided budget. Exceeding time or cost will
is identifying the risks involved during the project

Management of Projects
115
 lead to schedule overrun or cost overrun. Since different stages of project progress.
the projects are also characterized by scarcity
of resources and the simultaneous demand for The during project progress evaluation provides the
resources by different tasks and work packages, basis for taking corrective actions if needed and the
it becomes essential to apply techniques for end of project evaluation is carried out to learn from
rational and optimum utilization and allocation of the completed project so as to perform the future
the resources in such a manner that the impact projects in a more efficient and effective manner.
on project objectives is minimum. The process The technique generally used for evaluation is
of comparing the project progress with plans called project audit.
refers to monitoring. Control refers to identifying ● Termination: The project comes to the finishing
deviations and acting to minimize the impact of part at this stage. This phase identifies the
deviations. need of terminating a project. Please note that
● Evaluation: Evaluation refers to analyzing the termination does not always mean successful
project performance and making sure that completion of the project. Termination of the
the objectives are fulfilled for the project. project may be a result of project failure or
Evaluation involves schedule performance, changed management priorities or lack of
cost performance, specifications achievement, funds and resources. A final accounting of
actions taken to respond to risks, resource use project is carried out in this phase and project
and allocation and management of outsourcing is closed. The project assets are distributed
and contracting. The evaluation is carried out among different divisions, and the project team
after completion of the project and during members are returned to their parent divisions. If

Management of Projects
116
 Figure: Project Life Cycle

the termination is due to successful completion Project Management: A Managerial

of the project, the product is handed over to the Approach
customer.
● Slow Beginning: The projects typically
begin slowly. The specifications are under
It is also important to understand the life cycle
development and negotiations and changes are
of the project with reference to the speed of
being incorporated at this time. The project is a
the project. Typically, the projects have a slow
new one, the requirement of resources is being
beginning followed by quick momentum and finally
assessed. Since the team members are drawn
a slow finish. It can be explained by the graph given
from different divisions of the organization, there
in the above figure.
is a lot of confusion and conflict regarding the

Management of Projects
117
 authority and reporting hierarchy. analysis and inspection of each part before it is
integrated. This phase may also require minor
● Quick Momentum: As the aspects related to
changes to the parts of the project outcomes.
project become clear, and direction is established
and the project gains speed. This is the phase
Project Objectives
of quick momentum. The speed increases fast
and reaches a peak. This is the phase when A project will be called successful if it is able to
monitoring and control of the project are in achieve the project objectives. There are three
existence. criteria for defining and evaluating the success of
● Slow Finish: As the project approaches the finish, a project.
the various parts of project output now need
integration. The integration may require careful The planned measures of the following three
criteria make the target for the project.

Figure: Project Success Criteria

● Performance: The product of project must resources. Each project is associated with a
perform what it was intended for. The budget in totality and a budget for each part
specifications of project output must meet the of the project. For a project to be termed as
planned and agreed specifications. Performance successful, it is essential that the project is
is generally one of the aspects leading to conflict completed within defined budget. The reasons
between client and project team leader. It is causing cost overrun need to be identified at the
essential to clearly define the project objectives planning stage and controls need to be applied to
in the planning phase leaving no scope of the avoid such circumstances to arise.
dispute. Performance is the essential criteria for
● Time: Finishing in scheduled time is an important
the successful completion of a project.
aspect of projects. Schedule overruns not only
● Cost: No project can be provided with unlimited cause intangible losses like loss of reputation

Management of Projects
118
 and trust and customer dissatisfaction but also Two notations are used for drawing of the network:
leads to cost overrun. Many times the schedule
over runs lead to financial compensations to
the customer apart from additional expense
in resources. A project for being termed as
An event is a specific moment in time when
successful needs to be completed in scheduled
something has been accomplished. Completion of
time.
each activity leads to an event. The project network
starts with an event denoting that nothing has
So, a project is successful if it is able to achieve its
been accomplished so far. The network ends with
performance objectives within scheduled time and
a single event denoting that all activities involved
allotted budget or cost.
in the project have been finished and the project is
completed.
Let us now have a look at the network analysis
which also plays an important role in project
Let us understand the use of circle and arrow for
management.
drawing the network of the project.

Network Analysis We need to follow some basic rules for developing

the network.
Network analysis is the most widely used technique
for project scheduling. The technique involves ● The network typically flows from left to right.
identifying the precedence relation between various ● An activity cannot begin unless all immediately
activities of the project and drawing a network of preceding activities are completed.
the activities in accordance with their precedence
● It’s not allowed to loop in.
relationship. An Activity A is the predecessor to
another Activity B if Activity B cannot be started ● Conditional activities are not allowed.
unless A is complete. ● An activity is represented by a single arrow.

Management of Projects
119
● A pair of events cannot be connected by more project network.
than one activity.
The length of the arrow is NOT proportional to
● There must be a single start and single end to the
activity time.

Management of Projects
120
Example:

Following is the information related to a software development project.

S.No. Task Task code Predecessors

1 Specification development A -

2 Process mapping B -

3 Developing software for process components C A, B

4 Testing of software D C

5 Developing hardware specifications E B

6 Procurement of hardware F E

7 Integration of software components G C

8 Installation of software on hardware H F, G

9 Pilot test I H

10 Training of users J I

Develop a network for the project.

Solution

Management of Projects
121
Example:

Following is the information related to a construction project.

S.No. Task Task code Predecessors

1 Design development A -

2 Design approval B A

3 Vendor identification C A

4 Procurement of construction material D B, C

5 Laying foundation E D

6 Raising pillars F E

7 Structure development G F

8 Finishing H G

9 Electrical work I G

10 Inspection J I

Develop a network for the project. CPM involves the following steps:

1. Making a drawing of the project network.

2. Identifying the paths leading from the first stage

to finish.

3. Calculating the total time elapsed along each

Critical Path Method (CPM) path.

After the development of the network, the ● The path with maximum total took time is
interrelation of the various activities involved in called as the critical path.
the project is established. The next process is ● The activities those are done during this path
establishing a time for the activities. The time are known as critical activities.
estimation has already been discussed in previous
sections. The establishment of time taken by
activities becomes the basis of the further analysis,
which involves determination time for competing
for project and lack of activities.

Critical path method is the technique of analyzing

and determining the project work and its completion
time.

Management of Projects
122
Example: time taken by an activity.

Apply CPM to identify the project completion time

A – E – F – H 15
for the following data:

B – E – F – H 17
Activity Predecessor Activity time

A – 3 C – D – G – H 14

B – 5
C – D – F – H 15
C – 7
The critical path is the longest path in the network.
D C 3

E A, B 7 BEFH with a time requirement of 17 days is the

critical path as it has taken the maximum time.
F E, D 3
The time required by critical path is called as
G D 2 project completion time and is equal to 17 days for
H F, G 2 this project.

However, the method requires physically identifying

Let us see a network development in a project:
all paths and calculating the time required by
each path. If the number of activities is more, the
network gets complicated and it becomes almost
impractical to identify each path by observation. So,
a more scientific technique is required to identify a
critical path on the network.
Let us try to identify all paths on the network for
reaching the finish from the start. The direction of The technique involves identifying 4 values for each
arrows should be taken care of. activity:

● Early Start: The earliest time to start an activity.

We can identify four paths along this network.
It depends upon earliest accomplishment time of
all predecessor activities.
A–E–F–H
● Early Finish: The earliest time for finishing the
B–E–F–H activity is obtained by adding the activity time
to the earliest start. e.g., if the earliest start of
C–D–G–H activity is 32 and time required by activity is 4, the
early finish will be 32+4=36.
C–D–F–H ● Late Start: The latest time by which an activity
must start to complete the project in time. To
Calculate the time taken by each path by adding the calculate it, the activity time is subtracted from

Management of Projects
123
 the late finish time of the activity. G can start after completion of D, so it’s ES is 10
and EF is 12.
● Late Finish: The latest time by which an activity
must finish. It depends on the late start of all
The last activity H can start after F and G that is at
succeeding activities. Each activity must finish
15 (ES) and finishes at 17.
latest by the time of late start of the succeeding
activities to ensure that project is completed in
As the time of last activity for the early finish is 17,
time.
the project cannot be completed in less than 17
time periods. Hence, 17 is the project completion
Let us try to determine Early Start (ES), Early Finish
time.
(EF), Late Start (LS) and Late Finish (LF) for the
activities in above network.
Let us now find out the LS and LF for all activities.

Activities A, B and C have no predecessor, so they

Since we would like to finish the project at the
can start at time zero. The activity time is 3, 5 and
earliest, the LF of last activity is equal to its EF. So,
7 respectively, so early finish for these activities is
LF for H is 17. Since H has to finish at 17, it must
3, 5 and 7.
start at 17–2=15 (LS).

D can start after C is completed, so D cannot start

F and G must be completed before H starts, so both
before 7, that is ES of D is 7 and its activity time
F and G must finish at 15. LS of succeeding activity
being 3, its EF is 7+3=10.
is equal to LF of all earlier activities. The LS of F and
G is therefore 12 and 13 respectively.
Activity ES EF LS LF
A 0 3 The LF of E is equal to LS of F that is 12, therefore
B 0 5 its LS is 12–7=5.

C 0 7
Activity ES EF LS LF
D 7 10
A 0 3 2 5
E 5 12
B 0 5 0 5
F 12 15
C 0 7 2 9
G 10 12
D 7 10 9 12
H 15 17
E 5 12 5 12

Activity E can start after both activities A and B F 12 15 12 15

are completed. So, E can start earliest at 5 and its G 10 12 13 15
activity time being 7, its EF is 5+7=12.
H 15 17 15 17

F can start after completion of D and E, so it starts

Now consider Activity D. the start of Activity F and
at 12 (ES) an finishes at 12+3=15.
G depends on completion of Activity D. LS of F and
Management of Projects
124
G is 12 and 13, respectively. To allow both F and G Activities A, C, D, and G are not equal, so they are
to start at their LS, D must finish by 12 and so must non-critical activities. The non-critical activities can
start by 9. be deferred to some extent so that they should not
affect the accomplishment time of the project but
The LF of Activities A and B are equal to LS of E that the delay in any critical activities leads to project
is 5. So, their LS are 2 and 0 respectively. Similarly, delay.
LF of C is 9 (LF of D), and its LS is 9–7=2.
Example:
Observe the ES and LS of all activities. The Activities
B, E, F, and G have equal LS and ES. They are critical The time required for completion of activities is as
activities, so BEFH is the critical path. LS and ES of under.

Time (in
S. No. Task Task code Predecessors
days)
1 Specification development A - 20
2 Process mapping B - 15
3 Developing software for process components C A, B 90
4 Testing of software D C 5
5 Developing hardware specifications E B 5
6 Procurement of hardware F E 25
7 Integration of software components G C 30
8 Installation of software on hardware H F, G 10
9 Pilot test I H 10
10 Training of users J I 30

Determine the project completion time.

Solution

Let us start with developing the project network.

125 Management of Projects

Let us now determine ES, EF, LS and LF for all Project Evaluation and Review
activities. Technique (PERT)
The estimate of time used in CPM is deterministic.
S. No. Task ES EF LS LF
However, in real time projects, deterministic time
code
for all activities is least expected. There are various
1 A 0 20 0 20 factors which affect the time taken by each activity.
2 B 0 15 5 20 The time of activities is dependent on several
uncertainties, which cannot be ascertained precisely
3 C 20 110 20 110
e.g., a construction project may have uncertainties
4 D 110 115 165 170 related to weather, transport time, manpower
5 E 15 20 110 115 availability, etc. A software development project
may need redesigning because of unacceptable
6 F 20 45 115 140
test results, leading to increasing in time. On the
7 G 110 140 110 140 contrary, if the situations governing the activity
8 H 140 150 140 150 time are highly favorable, the activity may even take
less time than expected.
9 I 150 160 150 160

10 J 160 170 160 170 So, the time estimates of various activities in a
project are in general probabilistic rather than
So, the critical path is ACGHIJ and project deterministic. The technique used for network
completion time is 170 days. analysis when activity time is probabilistic is called
PERT.

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Three different time estimates are determined for project and standard deviation of the project. This
each activity of the project viz. Pessimistic Time information helps in anticipating probability of the
(PT), Optimistic Time (OT) and Most Likely Time project being completed in a specific time.
(MLT).
(PT + 4 MLT + OT)
● PT: The time activity will take under adverse Expected time =
6
conditions.
(PT – OT)
● OT: The time activity will take if conditions are Standard Deviation =
6
favorable.
(PT – OT) 2
● MLT: The time activity will take with the highest Variance =
2
probability.

The probable time and standard deviation of the Example

events are calculated, which is then used to derive
the completion time, which is expected of the The time estimates and precedence requirements
of activities involved in a project are as under.

Immediate Time estimate (days)

S. No. Task code
predecessors Optimistic time Most likely time Pessimistic time

1 A - 1 3 5

2 B - 1 3 11

3 C A, B 2 5 8

4 D C 3 4 11

5 E C 4 7 16

6 F D 1 2 3

7 G E 4 6 14

8 H F, G 1 1 1

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Determine the expected completion time, standard deviation and variance for all activities.

Standard
Time estimate (days) ET Variance
Task Deviation
S.No.
code Optimistic Most likely Pessimistic (PT + 4 MLT + OT) (PT – OT) (PT – OT) 2
time time time 6 6 2

1 A 1 3 5 3 4/6=1/3 1/9
2 B 1 3 11 4 10 / 6 = 5 / 3 25 / 9
3 C 2 5 8 5 6/6=1 1
4 D 3 4 11 5 8/6=4/3 16 / 9
5 E 4 7 16 8 12 / 6 = 2 4
6 F 1 2 3 2 2 / 6 =1 / 3 1/9
7 G 4 6 14 7 10 / 6 = 5 / 3 25 / 9
8 H 1 1 1 1 0/6=0 0

The expected time estimates can now be used ● Identify critical activities.
to estimate the expected completion time of the ● Calculate variance for all the critical activities.
project on the same lines as in case of CPM. With
● Calculate the summation of it.
the above-mentioned data, the standard deviation
can also be calculated for the completion time of ● Calculate the standard deviation of the
the project. The standard deviation of the project completion time of the Project.
completion will depend upon the standard deviation
of critical activities. Example:

Determine the approximate time for project

To estimate project completion standard deviation:
completion and standard deviation for example
● Draw a network for the project.

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128
Solution:

ET Standard Deviation Variance

Immediate
S.No. Task code
Predecessors (PT + 4 MLT + OT) (PT – OT) (PT – OT) 2
6 6 2

1 A - 3 4/6=1/3 1/9
2 B - 4 10 / 6 = 5 / 3 25 / 9
3 C A, B 5 6/6=1 1
4 D C 5 8/6=4/3 16 / 9
5 E C 8 12 / 6 = 2 4
6 F D 2 2 / 6 =1 / 3 1/9
7 G E 7 10 / 6 = 5/3 25 / 9
8 H F, G 1 0/6=0 0

Let us draw the network for the project. The time indicated for each activity is the Expected time for the
activity.

The paths from start to finish in the network and Sum of variances of the critical activities
the time required on each path can be identified as
= 25/9+1+4+25/9+0
● A – C – D – F – H (3+5+5+2+1=16)

● A – C – E – G – H (3+5+8+2+1=19) = 95/9=10.56
● B – C – D – F – H (4+5+5+2+1=17)
Standard deviation is equal to square root of the
● B – C – E – G – H (4+5+8+2+1=20)
variance of project completion time

BCEGH being the longest path, becomes the critical

Standard deviation =√10.56 = 3.25
path for the above network and activities are critical
activities for this path. The project completion time
The project completion time determined in the
is equal to the time required by longest path that is
above example is Expected Time and Actual
20 days.

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129
Time taken by the project may vary. The extent This the approximate completion time of the
of variation will be determined after finding the project.
standard deviation. If the standard deviation is high
for the project time, the variation can be high as σ is the SD (Standard Deviation) of completion time
well in the actual project completion time. of the project.

Now, let’s look at the calculation of probability for To find out the relevant area under the curve for the
the project completion time. The variation in the probable completion time of a project.
project completion time is expected to follow a
normal distribution. For determining the probability The area indicates the probability of project
of project completion in a specific time T, normal completion in a specific time period.
variant Z needs to be calculated:
Example:
T – Te
Z=
σ
What is the probability of completing the project
Where T is the time period. in 17 days considering the information is given in
Example below?

Solution:

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130
Standard deviation = 3.25 days So, the total shaded area = 0.5–0.3907=0.1093
T – Te
Z= The probability of the project being completed in 24
σ
days is thus 0.1093.
17 – 20
Z= = 0.92
3.25
Example
The value of the area under the curve for Z = 0.92
(from normal distribution table) is 0.3212. This is Calculate the probability of completion of the project
the area between Te and T. The area on the left side in 19 days to 22 days considering the information is
of Te is 0.5. The normal curve being the symmetrical given in Example below?
and total area under the curve is 1.0.
Solution:

Te= 20 days The value of area under the curve for Z = 0.62 (from
normal distribution table) is 0.2324 and for Z = 0.31,
T1 = 19 days the value is 0.1217. So, area between 20 and 22 is
0.2324 and area between 19 and 20 is 0.1217. The
T2 = 22 days total shaded area is 0.2324+0.1217=0.3541

Standard deviation = 3.25 days The probability of project being completed in 19

T – Te days to 22 days is thus 0.3541.
Z=
σ
The value of area under the curve for Z = 0.62 (from
22 – 20
Z1= = 0.62 normal distribution table) is 0.2324 and for Z = 0.31,
3.25
the value is 0.1217. So, area between 20 and 22 is

19 – 20 0.2324 and area between 19 and 20 is 0.1217. The

Z2= = 0.31 total shaded area is 0.2324+0.1217=0.3541
3.25

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131
The probability of project being completed in 19
days to 22 days is thus 0.3541.

Summary
● Project management involves planning and
organization of a company’s resources to move
a specific task, event or duty toward completion.

● It typically involves a one-time project rather

than an ongoing activity and resources managed
include personnel, finances, technology and
intellectual property.

● A project manager helps to define the goals

and objectives of the project and determines
when the various project components are to be
completed and by whom.

● He also creates quality control checks to ensure

completed components meet a certain standard.

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 Unit 16

Sustaining and Improving

Operations

Learning Objectives Improvement

By the end of this unit, you will be Improvement is an effort towards making the processes
able to: better in terms of performance. An improvement process
involves studying the current process, measuring its
● Explain the objectives of process
performance and analyzing improvement opportunities.
improvement

● Discuss the importance of:

○ PDCA Cycle

○ Fishbone Diagram

○ Value Analysis

○ Kaizen

○ Business Process Reengineering

(BPR)
The objective of improving the various operational
activities can be achieved by several methods,
which are discussed as follows.

PDCA Cycle
PDCA implies ‘Plan Do Check Act’. It is one of the
most straightforward and unassuming techniques
for process control and ongoing improvement. It
helps in improving the process and performance of
operational activities in a staged and steady manner.
It is primarily used in manufacturing and service
industries for development of latest products and
is used in software development lifecycle. Figure: PDCA Cycle

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134
There are four steps in the cycle: technique of identifying the root cause of a problem.
Because of its shape, it is also called fishbone
1. Plan: Identify need for improvement and establish
diagram. It was developed by Ishikawa, so it is
the improvement plan specifying objectives.
also called as Ishikawa diagram. It systematically
2. Do: Carry out the improvement plan. Collect data
categorizes the reasons of problems and
to analyze the extent of improvement.
investigates deeper into all reasons that cause the
3. Check: Carry out an evaluation of data and verify problem, till it reaches the root cause.
that the improvement results are as per the plan.
Figure below shows the Fishbone diagram with
4. Act: If results are not achieved, analyze the plan
all the possible reasons marked on different
and make the necessary changes.
branches, collectively proceeding towards the root

Fishbone Diagram or the Cause and Effect Diagram cause. The diagram investigates the causes of the
reason for material, method, machine, manpower,
A ‘cause and effect’ diagram offers a pictorial measurement and environment.

Figure: Fishbone Diagram

Value Analysis
Value analysis refers to the critical investigation
of the function of components and materials of a
product with an objective to reduce the cost and
enhance the performance of the product.

Steps for Value Analysis

1. Identify a product whose cost is high and needs

to be reduced.

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135
2. Identify all parts and components of the product. ○ Is a combination of two parts possible?

3. The question each part and component. ○ Seek suggestions from employees to reduce
cost.
○ Does the component add value or can it be
eliminated? 4. Analyse the answers to the above questions and
plan for improvement change.
○ Can the component be replaced by some other
cheaper alternative?

○ Can the part be manufactured instead of Kaizen

purchasing the same?
Kaizen is a philosophy of continuous improvement.
○ Can specifications be changed to save cost or
time? It is reiterates the fact that “Improvement is always

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136
possible and work can always be done in a better There should be standard rules and regulations
manner tomorrow than it is being done today.” It related to the usage of the things.
involves all personnel of the organization to strive
5. SHITSUKE or Self Discipline: It is the most
for small changes in the process without going for
crucial factor to achieve success. Individual self-
large investments and make the process better and
discipline can create wonders.
more efficient with present resources.

‘If it is not broken, do not fix it’ changes to ‘Just Business Process Re-engineering
because it is nit broken does not mean it cannot be (BPR)
fixed.’ The 5 S of Kaizen are as follows:
Dramatic improvement in performance by
1. SEIRI: It means Sort Out. It is the sorting out fundamental rethinking and radical redesign of
and discarding of unnecessary items in the business processes is termed as BPR. BPR is
workplace. based on innovative thinking and creation rather

2. SEITION: This means to organize. After sorting, than small improvement.

they should organize.

A process subjected to re-engineering should be a
3. SEISO: This word means to shine the workplace.
core business process of the firm. Re-engineering
Keep your belongings neat and clean.
focuses on the complete process in totality rather
4. SEIKETSU-SEIKETSU: It refers to Standardization. than focusing on the part of the process.

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137
Some aspects of BPR are as under: to accomplish key business objectives with
specific projects. In the business world, six-sigma
● Cross-functional Teams: BPR is a team work,
programmes have become a key way to improve
which requires personnel from various cross-
quality, save time, cut costs, and improve customer
functional departments.
satisfaction.
● Critical Processes: The focus should be on
improving the core and critical processes in
Six-sigma programmes can be employed in design,
totality.
production, service, inventory management and
● Information Technology: Use of IT plays a vital delivery. It is important for six-sigma projects to be
role in BPR efforts. aligned with organizational strategy.

● Strong Leadership: Strong leadership and

It includes the following points:
motivation are necessary for BPR effort.
● Designing the processes and strategies related
Six Sigma to it.

Six Sigma is a business process that aims to improve ● Measuring the parameters that are important for
quality, reduce costs and enhance customer quality.
satisfaction. Statistically, six sigma means reducing ● Analyzing and developing substitute of superior
the number of defects during any process, product quality.
or service per million opportunities to less 3.4 .
● Designing the processes and its complete
detailing.
Conceptually, the term is much broader; it aims
to reduce the instances of defects so that lower ● Verifying the process and implementing the
costing is achieved and customer satisfaction same.
is improved, through a well-developed program ● Controlling the process at the same time so that
based on usage of specific tools and techniques, they should not surpass the limitations.

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138
Summary
● The success of the business will become more
efficient if they can improve their operations
management.

● If any organization wants to achieve success in

modern day highly competitive environment, it
has to pursue Operational Improvement.

● In addition, it plays an enormous role in driving

growth and profitability.

● The organization always tends to decrease

waste, reduce costs, and set up maintainable
programs for achievement of reliable results.

● For this, Overall Equipment Effectiveness (OEE) is

used by organizations as it is a key performance
indicator, for analyzing operational efficiency.

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139