BASIC CONCEPTS

OF OPERATIONS

PREP TEAM
List of Interns
 Amazon
 Tata Steel
 Aditya Navali
 Sayantan Das
 Tanuj Madan

 Bosch
 Flipkart  Abhishek Katiyar
 Ravi Teja Palla
 Phani Kiran
 ABG
 Global E-Procure  Tejas Kulkarni
(GEP)
 Rohit Mennon
BASIC CONCEPTS
 OPERATIONS MANAGEMENT

 PROCESS ANALYSIS

 SUPPLY CHAIN MANAGEMENT

 INVENTORY MANAGEMENT

 THEORY OF CONSTRAINTS
Operations Management
 Business function responsible for planning,
coordinating and controlling the resources needed
to produce products and services for a company.
Services Manufacturers
Intangible Product Tangible product
No inventory Inventory costs
High customer contact Low customer contact
Short response time Longer response time
Labor intensive Capital intensive
Difficulty in measuring output Quantifiable output
Operations and supply strategy
 Setting broad policies and plan for using resources of a firm to best support
its long term competitive strategy.
 Competition dimensions could be:
 Cost or Price
 Make the product or deliver the service cheap
 Quality
 Make a great product or deliver a great service
 Delivery Speed
 Make the product or deliver the service quickly
 Delivery Reliability
 Deliver it when promised
 Coping with changes in demand
 Change its volume
 Flexibility & new product introduction speed
 Change it
Order Qualifiers & Winners
 Order qualifiers are the basic criteria that permit
the firms’ product to be considered as candidates
for purchase by customers

 Order Winners are the criteria that differentiates

the products & services of one from another
 Process Analysis – Basic Definitions

 Bottleneck: Governs the output rate of the process

 Setup Time: Time required to prepare a machine to make an item
 Operation Time: Sum of the setup time and run time for a batch
of parts
 Waiting Time: Time spent waiting to be taken up for operation
 Throughput Time: It is the average time for a unit to move
through the system. Sum of operation time and waiting time.
 Cycle Time: Time between completion of 2 units of output
 Capacity: Maximum a system can produce in a given time period
 Capacity Utilization: Actual output/Capacity
 Output Rate: Total time/Cycle Time
Process Classification
 Make to Order process is activated only in
response to an actual order (Job Shop)

 Make to Stock process produces standard products

that can be delivered quickly (Assembly Line)

 Hybrid process combines the above two such that

a generic product is made and stocked and then
finished based on actual orders
Process – Shop Floor
 Job Shop: Marked by low volume of high variety of
goods & services. Work includes small jobs, each
with somewhat different processing requirements
 Assembly Line: Used when higher volumes of
standardized goods or services are needed. Repetitive
processing
 Project: Marked by a number of activities to be
performed in a defined sequence. End of all activities
mark the end of the project. Project is typically a one
shot affair
Lean Six Sigma
Reducing Variation
Classifications of Operations Planning

 Long Range Planning : 5-10 years

 Medium Range Planning : 1 year
 Short Range Planning : less than 1 year (SKU
Level)

 The medium range planning (critical) is termed as

Aggregate Production Planning (APP). In such
cases the demand is assumed to be dynamic.
 The goal of aggregate planning is to achieve a
production plan that will effectively utilize the
organization’s resources to satisfy expected demand.
Production Planning Framework

APP MPS MRP

Demand
Aggregate Master Material Day to Day
Forecastin
Production Production Requireme Scheduling
g
Planning Scheduling nt Planning
Porter’s 5 Forces Porter’s Value
chain

• Framework to analyze • Chain of activities in a firm

competition • Strive for Competitive advantage
• To know attractiveness of a) Cost & b) Differentiation advantage
Industry
 Supply Chain Management
 Supply Chain (SC): the sequence of
business processes and information that
provides a product or service from suppliers
through manufacturing and distribution to
the ultimate customer.
 Supply Chain Management (SCM): is a
set of approaches utilized to efficiently
integrate suppliers, manufactures,
warehouses, and stores, so that merchandise
is produced and distributed at right
quantities, to the right locations, and at the
right time, in order to minimize system wide
costs while satisfying service level
requirements
Evolution of Supply Chain Philosophy

SCM PHILOSOPHY

• The entire supply chain is a

single, integrated entity

• The cost, quality &

delivery requirements are
central

• Supply tuned to demand

• Need for system level

optimization
 Issues in SCM
 Decisions in SCM
A. Operational level : day to day decisions Ex : Scheduling, loading
B. Tactical level : Every quarter & year Ex : Purchasing, inventory
C. Strategic level : Long lasting effect Ex : Productdesign, outsourcing

 Few Issues in SCM

o Distribution network configuration

o Inventory Control
o Supply Contracts
o Supply Chain Integration and Strategic Partnering
o Outsourcing and Off sourcing
o Information Technology and Decision- support systems
o Supply side and Demand side risks
New Concepts & Trends in SCM

 ERP (MRP) Systems, Supplier Scorecards

 Just In Time (JIT)
 Offshore outsourcing
 Vendor Managed Inventory
 ISO certified suppliers
 RFID ( Radio Frequency Identification)
Inventory Management : Why?
 Economics involved in producing or purchasing in
batches
 Uncertainty in both demand and supply
 Seasonality in demand pattern
 Availability of different transportation and
distribution models
Inventory Management : Types & Key Terms

 Inventory in Supply Chain :

a) Raw Material Inventory
b) Work In Process (WIP) Inventory
c) Finished Product

Key Terms :
 Service level

 Safety stock

 Cost of over stocking

 Cost of under stocking

Effective Inventory Policy- Factors
 Customer Demand – Forecasting, Variability
 Replenishment lead time – certain or uncertain?

 Number of different Products/SKUs

 Service level requirements

 The length of the planning horizon

 Costs – a) Order cost –large order , smaller price

b) Inventory Holding Cost Ex : State taxes,

insurance on inventories, Maintenance costs &
opportunity costs
Inventory Control Policies

 Inventory control answers the following questions

 What should be the order quantity (Q)?
 When should an order be placed, called reorder point
(ROP)?
 How much safety stock (SS) should be maintained?
 Two categories of Inventory control policies
Inventory Control Continuous Review Periodic Review
Policy
Order Quantity Constant Variable
Time between orders Variable Constant
When to Order? When inventory drops to At the end of T period
ROP
Economic Order Quantity (Q)
 Order quantity of inventory that minimizes total cost
of inventory management
 Balances two costs - inventory carrying costs and
ordering costs
 Total inventory cost = Ordering cost + Carrying cost
 Drives low ordering costs due to high batch sizes
 May lead to high inventory levels that increase:
 Rework costs
 Lost or broken items
 Obsolescence
 Assumptions ?? Different Models ??
ABC Analysis

 Classification of all consumption items, based on the

“Consumption Value”
 Consumption Value = D X C
 D= annual demand in units C= cost per unit in Rs.
 Based on CV, inventory of a number of items can be
separated into A, B and C classes
 A items: Top 10% items account for 70% of CV
 B items: Next 20% items account for 20% of CV
 C items: Bottom 70% items account for 10% of CV
Pareto Rule (80/20)
Named after the Italian economist, Vilfredo Pareto
● He observed that 80% of the income in Italy, was received by
20% of the Italian population.
● This became the famous 80/20 ‘rule’
● 20% of clients are responsible for 80% of sales volume
● 80% of stock movements are for 20% of our products
The assumption is that ‘most of the results in any situation are
determined by a small number of causes’.
● Are most of our problems (process variation) caused by a
limited number of things (variables)?
● Pareto analysis can help see if this is true
● Note: Don’t think that the percentages will always be 80/20
● You’re just looking for something ‘that stands out’
THEORY OF
CONSTRAINTS

Short-term Capacity Optimization 26

 Theory of Constraints
27

 Significance of bottlenecks
 Maximum speed of the process is the speed of the
slowest operation
 Any improvements will be wasted unless the
bottleneck is relieved
 Bottlenecks must be identified and improved if the process
is to be improved
 Theory of Constraints
28

 Purpose is to identify bottlenecks or other constraints

and exploit them to the extent possible
 Identification of constraints allows management to take
action to alleviate the constraint in the future
 Reduce cycle time
 Time from receipt of customer order to shipment
 Improve manufacturing cycle efficiency (MCE)
 Processing time / total cycle time
 Assumes current constraints cannot be changed in the
short-run
 What should be produced now, with current resources, to
maximize profits?
 Theory of Constraints
29

 Constraining resource must be maximized

 All other operations must be geared toward this goal
 May require sub-optimization in other areas
 Upstream operations must provide only what the constraint can handle
 Downstream operations will only receive what the constraint can put
out
 Constraint must be kept operating at its full capacity
 If not, the entire process slows further
 Focus is on maximizing throughput
 Sales – totally variable costs
 All other costs treated as fixed operational expenses
 Cannot vary much in the short-run
 Theory of Constraints
30

 Based on the concepts of drum, buffer and ropes

 Drum
 Output of the constraint is the drumbeat
 Sets the tempo for other operations
 Tells upstream operations what to produce
 Tells downstream operations what to expect
 Buffer
 Stockpile of work in process in front of constraint
 Precaution to keep constraint running if upstream operations are interrupted
 Rope
 Sequence of processes prior to and including the constraint
 Want to “pull” the rope at the maximum speed
 Speed of the constraint
 Theory of Constraints
31
 Steps in the TOC Process
1. Identify the system constraints
 Internal  External
 Process constraints  Material constraints
 Machine time, etc.  Insufficient materials
 Policy constraints  Market constraints
 No overtime, etc.  Insufficient demand

 How is a constraint identified?

32
 Steps in the TOC Process
33

2. Decide how to exploit the constraint

 Produce the most profitable product mix
 Want it working at 100%
 How much of a buffer?
 Holding costs
 Including risk, quality costs

 Stock-out costs

3. Subordinate everything else to the preceding decision

 Plan production to keep constraint working at 100%
 May need to change performance measures to conform
upstream activities to the “rope” speed
 Steps in the TOC Process
34

Product 1 Product 2
Demand per month 1,000 600
Price per unit $ 900 $ 1,500
Material cost per unit $ 400 $ 800

Hours required per unit

Test components 0.25 0.40

Assemble components 1.00 1.50
Install electronics 0.50 0.50
Final inspection and test 1.25 1.00
Package and ship 0.10 0.10

Identify the constraint

Hours
available Slack
Product 1 Product 2 Total per month hours
Test components 250 240 490 640 150
Assemble components 1000 900 1900 2240 340
Install electronics 500 300 800 800 0
Final inspection and test 1250 600 1850 1760 (90)
Package and ship 100 60 160 160 0
 Steps in the TOC Process
35

Identify the best use of the constraint

Price per unit $900 $1,500

Material cost per unit $400 $800
Throughput per unit $500 $700
Constaint time per unit 1.25 1.00
Throughput per hour $400 $700

Identify the most profitable product mix

Total demand 1,000 600

Units produced in best mix 928 600
Unmet demand 72 -

Throughput generated
Units produced 928 600
Throughput per unit $ 500 $ 700
Total throughput $ 464,000 $ 420,000 $ 884,000
 Steps in the TOC Process
36

4. Alleviate the constraint

 Determine how to increase its capacity
5. Repeat the process
 Always a new constraint
 Evaluation of TOC
37

 Advantages
 Improves capacity decisions in the short-run
 Avoids build up of inventory
 Aids in process understanding
 Avoids local optimization
 Improves communication between departments
 Evaluation of TOC
38

 Disadvantages
 Negative impact on non-constrained areas
 Diverts attention from other areas that may be the next
constraint
 Temptation to reduce capacity
 Ignores long-run considerations
 Introductionof new products
 Continuous improvement in non-constrained areas
 May lead organization away from strategy