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BBA – 305 PRODUCTION & OPERATION MANAGEMENT

(V-Semester : Indraprastha University)

UNIT - I : Introduction to Operation Management & Forecasting of


Demand- – Why study O.M. ; 5 P’s of Production ; Types of
Transformation ; Forecasting ;
Qualitative & Quantitative Techniques in Forecasting.

Effective management of internal operations is increasingly being recognized


as crucial to the growth of the organization. In a situation where substantial
investments are made for establishing an industry the need for optimum
utilization of the resources becomes extremely important.

1. Historical Evolution of Operations Management:

Production management is more than 200 years old and has passed through
various stages from original concept to reach the present level.
This was initiated by Adam Smith in 1776 in his book titled “The Wealth of
Nation”.He advocated division of labour for following major benefits-
(i) Performing work in repetition lead to attaining higher skill and getting
speed.
(ii) Results in time saving as changing from one activity to other are
avoided.
(iii) Being engaged in one task specialization acquired leads to improvement
in production methods.

Charles Babbage in 1883 in his book titled “The economy of Machinery &
Manufacture” agreed to the principals of Adam Smith. He further stressed on the
benefits of specializations.

F.W.Taylor known as father of scientific management gave the concept of


“Functional Management”, in early nineteenth century. From the concept
forwarded by him - method study, work measurement, selection, training,
placement & industrial relations were subsequently developed. Taylor also did
remarkable work on direct advantage to production management. He envisaged
motion study as a complimentary technique of time study.

Frank Gilbreth is considered to be father of work study. He emphasized the


importance of relationship between operators output & physical efforts in his
book titled “Motion Study” in 1911 and “Applied Motion Study” in 1917.

Henry Ford furnished the concept of mass production & workstation in 1913.
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Henry Gantt introduced a visual diagrammatic tool popularly known as Gantt
chart that is in use even today for charting production schedules & machine load
schedules.
Harrington Emeson emphasized labour efficiency as a basis of payment of wages
that were forwarded in his book titled “Efficiency as a basis for Operation &
Wages” in 1911 & “The Twelve Principles of Efficiency” in 1917.
F.W Haris developed the first economic order quantity model in 1914 which are
till popular in inventory control system.

Walter Shewhart introduced the concept of Statistical Quality Control to the


industry in 1924. He pioneered the concept of control charts for monitoring the
quantity of production processes.

L.H.C. Tippett developed the concept of work sampling to determine the


machine and manpower utilization for setting performance standards.

During the later half of nineteenth century lot of major developments including
Operation Research (OR) & Value Engineering (VE) revolutionized the concept.
OR is the application of scientific methods to study & devise solutions to
managerial problems in decision areas of resource allocation, production
schedule etc.
VE is an organized approach to identify unnecessary costs of products for
elimination without affecting the quality, reliability & acceptability.

Application of computer in Industrial Engineering started to handle large data


efficiently & quickly. The concept of CPM & PERT were introduced for analysis
of large projects. The service sector was also embraced in operation management
without restricting only to production facilities. More recently there has been a
major thrust on adoption of Japanese system like JIT for production scheduling
& inventory problems. Besides TQM is introduced to involve all levels &
department of employees.

Nature / Scope / Introduction :


• Know the production & operation function as process of value addition.
• Recognize the distinction between product & services.
• Understand all organizations as conversion system whether in
manufacturing or service sectors.
• Identify problems of decision making in operations management.
• Distinguish functions & requirements of different departments.
• Facilities required for production & operation.
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Definition: Conversion of inputs to outputs using resources with the purpose
of value addition to achieve desired utilities / products with minimum cost.
The essential features of the production & operation
Inputs function are to deploy Men, Machines & Materials to
- Land provide goods & services satisfying the needs of the
- Labour people.
-Capital
Management Transformation Process Model : Inputs, Process &
Outputs

Conversion
Output
• Goods
Process • Services
Comparison
Adjustment_ • Actual
• Desired

Output Goods &


Services
Productivity of Conversion Process=---------=---------------------------------
Input Capital, Men, Machines &
Materials

The higher the productivity the more efficient is the production system.
Another way of looking at the concept of productivity is the amount of waste
generated in the system. Typical examples of wastes of the conversion
process are:
• Idling of the Resources (e.g. materials waiting in the form of inventory
in stores, machines waiting to be loaded, job orders awaiting
processing, etc.)
• Production of Defective Goods & Services (e.g. products not
conforming to specifications, wrongly delivered letters, etc.)
• Higher conversion costs (e.g. inefficient methods, poor quality of tools,
bad conditions of machines, wrong selection of materials, poorly
trained operators, ineffective supervision, etc.)
In an efficient production system, wastes should be eliminated or at least
reduced.
Every organization or system has a purpose, certain objectives and goals to
achieve. It is important that these objectives are clearly identified, properly
structured & explicitly stated. In general terms, the objective of an
organization may be to produce the goods or services in required quantity &
of quality as per schedule and at a minimum cost. Thus quality, quantity and
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time schedule are the objectives that determine the extent of customer
satisfaction. Various objectives can be grouped as – performance objectives
and cost objectives.

The performance objectives may include:


• Efficiency or Productivity as output per unit of input.
• Effectiveness concerns whether a right set of outputs is being produced.
Where efficiency may refer to doing things right, effectiveness may mean
doing the right things.
• Quality is the extent to which a product or service satisfies the
customer needs. The output has to conform to quality specifications
laid down prior to acceptance.
• Capacity utilization may be defined as the actual capacity achieved
against the rated or designed capacity.
• Flexibility of producing a combination of outputs which may satisfy
variety of customer needs.
Attaining high degree of customer satisfaction on performance front must be
coupled with lower cost of the goods or rendering the services. Thus cost
minimization is an important parameter.

The cost objective may include explicit ( visible ) or implicit ( invisible or


hidden)
1. Explicit costs
• Material cost
• Direct & indirect labour cost
• Scrap / rework cost
• Maintenance cost
2. Implicit costs
• Inventory carrying cost
• Cost of shortages, lost sales, etc.
• Cost of delayed deliveries
• Material handling cost
• Cost of inspection
• Cost of dissatisfaction, grievances
• Downtime cost
• Opportunity cost
Management can be considered as a process of Planning, Organizing, Monitoring
& Control. Production & Operation Management is essentially a function
concerning decision making with respect to a production / operation system so as
to render the necessary customer satisfaction at lower cost.
All the decisions concerning the production system may be divided as:
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• Periodic decisions which include selection, design and updating of
resources, structures, systems & procedures with respect to Products,
Processes, Equipment, Workforce, Location, Layout, Wage-payment,
Operating & Control systems, etc.
• Continual decisions which are required in day to day operation & control
of production systems with respect to Setting targets, Scheduling &
Monitoring, Inventory control, Quality control, Production control, Cost
control, Maintenance, etc.
Another way to group these decisions are:
• Strategic decisions have a long term impact, influences a larger part of
the system & is difficult to undo once implemented. Some examples
are furnished below:
1. Product selection & design: What products or services are to be
offered constitute a crucial decision. A wrong choice or poor
design of the product may render system operations ineffective
& non-competitive. A careful evaluation of product/service
alternatives on the multiple objective basis can help in choosing
right products.
2. Process selection & planning: Choosing optimal process of
conversion systems is an important decision concerning choice
of technology, equipment & machines including automation.
3. Facilities location: It concerns decision regarding location of
production system or services. A poor location may spell
operating disadvantage on a permanent basis.
4. Facilities layout & material handling: These are concerned with
relative location of one department (activity center) with another
in order to facilitate material flow, reduce handling cost, delays
& congestion, provide good house-keeping, facilitate co-
ordination, etc. A detailed layout plan indicates how actual
factors of production are to be integrated.
5. Capacity planning: Capacity is the maximum available amount
of output over some specified time span. This is decided by
projection of market demand of the product selected. Capacity
planning includes expansion & contraction of major facilities
required in conversion process in case of seasonal demands,
economics of multiple shift operation, etc. which is dependent on
break even analysis.
• Operational decisions are directed to short term planning & control
problems.
1. Production planning, scheduling & control: The optimum
schedule, sequence of operations, economic batch quantity machine
alignment, dispatching priorities, etc.
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2. Inventory planning & control: Determination of optimal
inventory levels of raw material, goods in process and finished goods
stages of the production system. How much to order, when to order
and where to order are some typical decision involving inventories.
3. Quality assurance: Quality is an important aspect of production
system. Ensure that whatever product or service is generated satisfy
the quality requirements of the customer at lowest cost.
4. Work & job design: These are concerning with design of work
methods, systems & procedures, methods improvement, elimination
of avoidable delays, work measurement, etc.
5. Maintenance & replacement: These involves decisions
regarding optimal policies for preventive, scheduled and breakdown
maintenance of the machines, repair policies & replacement
decisions. The capacity utilization can be improved only through a
effective maintenance management.
6. Cost reduction & control: The role of cost reduction is
prominent because through effective control of total cost of
production, more competitive products & services can be offered.
7. Monitoring & control: In every system, the actual
accomplishment of objectives may not be as planned for various
reasons. It is therefore very important to monitor the actual
performance with standard parameters. Following steps can be
taken---
• Establish standards of performance or output
• Measure actual performance
• Compare the difference between actual with standard/planned
• Take appropriate remedial actions by changing inputs, revising
plans, reallocating priorities, expediting progress, etc.

Need for Review & Up-dating decisions:


When we plan or design our production system, the process of
planning assumes certain external & internal environment of work. In
a dynamic system there may be changes in external parameters which
may make previous decisions out of date or even irrelevant. In such a
situation, the previous decisions are to reviewed, revised & up-dated.

Five – P’s of Production

PLANT : Locating New Plants ; Adding or Expanding Existing Ones.

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PEOPLE : Setting or Revising work Standards ; Quality Improvement ;
Learning Curve Analysis.
PARTS : Make or Buy decisions ; Vendor Selection.
PROCESSES : Technology Evaluation & Selection ; Process Improvement ;
Re-engineering.
PLANNING & CONTROL : Supply Chain Management ; Material
Requirement Planning ; Shop Floor Control ;
Warehousing & Control.

Types of Transformation / Production System / Classification of Operations:

It is the process of changing inputs to outputs with value addition at minimum


cost meeting customer requirements. However this depends on the type of
products, capacity of production, availability of skills, technology, infrastructure,
resources, etc. Thus, on the basis design of the system the production system can
be grouped into following categories:

Types of Operation

Intermittent Operation Continuous Operation


______________________ _____________________

Project Job Batch Mass & Flow Process


Production Production Production Production Production

Intermittent Production – The goods are manufactured specially to fulfill


specific orders made by customers. Here the flow of materials is intermittent &
production facilities are flexible enough to handle a wide variety of products.

Features of Intermittent Production –


• Products are manufactured in quantities as per demand, which can be
discontinuous.
• All operational stages may not be balanced.
• Flexible to suit production varieties.
• Large work in progress.
• Cost per unit of production is more.
• Elaborate sequencing & scheduling is required.
Project Production - Where a single assignment of complex nature is undertaken
for completion within the given period and cost viz. bridge construction, setting
up a factory, dam construction, ship building, etc.

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Job Production – Where one or few units of a product are produced specific to
customer’s requirement within the given date & price fixed prior to contact.

Batch Production – Where limited quantity of each type of product is authorized


for manufacture at a time. New batch is undertaken for production when entire
jobs of earlier batch are complete. As for example: Pharmaceutical industry
where different types of medicines are manufactured, Printing press, etc.

Continuous Production – involves continuous physical flow of material


producing standardized items in large quantities. Before manufacturing sales
forecast based on market demand, inventory level, etc. are estimated.

Characteristics of Continuous Production –


• Standard products are manufactured having large demand throughout the
year.
• Standardized - inputs, sequence of operations, equipments & tools are
used.
• Balanced flow of work & minimum material handling.
• Reduced labour cost & less supervision.
• Better & uniform quality resulting to less wastage.
• Higher maintenance cost.

Mass & Flow Production - Where a production run is conducted to manufacture


large number of a product at a time and stacked in warehouse awaiting sales e.g.
car assembly, T.V. sets, etc.

Process production : Where production run is conducted continuously for an


identical product using same set of machineries. However these plants are shut-
down either for preventive or breakdown maintenance viz. power plants, steel
plants, fertilizer plants, etc.

Comparison between Intermittent & Continuous Production systems:

1. Manufacturing Costs – The increasing order of costs can be arranged as


process, mass, batch & job systems.
2. Capital Investment – The requirement of capital varies according to the
nature & capacity of the product. The ascending order of investment are
job, batch, mass & process systems.
3. Size of the Plant – In job & batch system same equipment / machine can
be used to manufacture different types of items. So the size of the plant is
likely to be smaller than mass & process systems where production
process is arranged in a predetermined sequence of operations.
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4. Flexibility of Production – Job & batch systems using general purpose
machines can easily adjust to changes in the requirement of the consumers
without incurring any heavy expenditure. But in mass & process systems
using special purpose machines we can produce one single product and
with change in demand of products the system cannot be adjusted easily.

Sl. Intermittent System Continuous System


No.
1. Wide range of products can be Same product is produced continuously.
manufactured.
_________________________________________________________________
2. Items produced against specific Items produced against sales forecast
Orders. and stocked.
_________________________________________________________________
3. Flexible Inflexible
_________________________________________________________________
4. Smaller scale Larger scale
5. Planning & control operation Planning & control operation
complicated & tedious simple & easy.
_________________________________________________________________
6. Low capital investment. High capital investment.
7. Higher unit cost of production. Lower unit cost of production.
8. Lower accuracy as products less Higher accuracy as products more
standardized. standardized.

Responsibilities of Operation Manager:

The operations manager may be at different levels depending on the type & size
of the organization.
The responsibilities of operation manager broadly encompass production
scheduling within budget & time, manpower allocation including over-time or
extra shift necessity, arranging equipment & machineries, quality control to
avoid any deviations from specification, identify the reasons of any deviations
and rectify them at shortest possible time to minimize rejections, monitor
inventory level to eliminate stoppage of production for non- availability of raw-
materials & keeping inventory carrying cost within a reasonable figure, co-
ordination of production activities with other departments, etc.

Thus the role of operations manager can be broadly defined as follows : -

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 Defines the policies, programs & procedures for achieving the objectives
of the organization including product planning, facilities designing, and
using the conversion process.
 Co-ordinates the resources & activities to meet production & services
targets.
 Establishes a structure of roles & flow of information. Assigns authority
& responsibility for carrying out the defined goals.
 Exercise control by measuring actual outputs & comparing them to
planned outputs including quality, quantity, cost, etc.
 Maintain good human relations and seek employee participation in
attaining the set objectives.

New Product Development:


Product Development may be divided into 2 categories –

Introduction of new products with the purpose:


• Fill the gap in the incomplete range of products viz. intermediate
capacity refrigerator.
• Utilize the idle resources.
• Meet new requirements of customers.

Improvement of existing product which is a continuous activity towards:


• Provide new look to the product.
• Stimulate sales by providing new advantages.
• Increase market share.
• Reduced cost of manufacture.

Selection & Design of Products / Services:

Selection of Products / Services are to be carefully done as this being a long-term


decision cannot be changed easily. This will depend on number of factors like –
• Supply & demand position in the market.
• Availability of resources – capital, raw materials, etc.
• Technology, Manpower, Infrastructure, etc. considerations.
• Detail feasibility / project report indicating cost of production, cash flow,
price structure, break-even point, etc.
• Facilities location.
• Capacity planning.
• Marketing zone.

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Product design & service design involve development of detail specification /
description of a product / services encompassing research & development.
The manufacturing activities can be initiated based on design. In other words the
task of manufacturing is to convert the design into physical entities.

Requirement of good design:


• Function - the product must meet customers expectations & perform
the function for which it is designed.
• Reliability – products are to be designed to be reliable meeting
customer satisfaction and function normally without failure for the
expected duration.
• Cost – Good product design must ensure minimum manufacturing
cost considering target customer.
• Quality – quality of the new design should be high within cost
constraints. Quality cost money & excessive quality will increase the
cost & reduce the demand whereas inadequate quality will affect the
performance leading to complaints and fall in demand.
• Maintainability – a good product should be easy to repair with
minimum down time.
• Simplification – simpler the design of the product the easier it is to
produce with lower cost & higher reliability i.e. producible with ease
& speed.
• Standardization – depend on market forces as variety is essential to
meet different market segments.
• Environmental impact – design should be such that the environment is
not deteriorated.
• Timing – available as per requirement of the customer.
• Accessibility – can be obtained without difficulty.

Stages in the Design :


• Conception – the purpose is to translate market requirements into basic
inputs of design. Minimum information to be provided on design
specification are requirements of performance – reliability –
maintainability – safety - delivery, estimated quantity, price limitations,
etc.
• Acceptance – the specification may be accepted to proceed to the next
stage, modified from a realistic angle.
• Execution – the proposal is converted to a physical entity with check on
manufacturing feasibility & the different requirements.
• Evaluation – this concerns with economic review of the design.

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• Production – the production may be started based on the accepted design
specification.

Forecasting:

A forecast is an estimate of an event which will happen in future. The event may
be demand of a product, rainfall, population, etc. The forecast value is not a
deterministic quantity as it is only an estimate based on past data related to a
particular event. As such proper care should be taken in estimation.
In any industrial enterprise, forecasting is the first level of decision activity i.e.
the demand of a particular item must be available before taking up other
decisions like material planning, scheduling, type of production system to be
adopted, etc. by functional managers.
The correctness of data is very vital for forecasting which may be obtained from
company records, published literature, journal, surveys, internet, etc.

Techniques in Forecasting:
Can be classified as Qualitative & Quantitative techniques:

Qualitative techniques used subjective approaches. These are useful when no


data is available and are useful for new products. This can be divided to –

1. Delphi Method : In Delphi method several knowledgeable persons are asked


to provide subjective estimate of demand or forecast based on their experiences.
Based on the opinions of the experts, a consensus will be arrived about the
demand of the product.
The essential precautions are –
• Panel members must be unknown to each other
• Questionnaire must be unambiguous
After getting the opinions from the panel members, they are compared for
similarity. The panel members whose opinions differ significantly will be asked
to reconsider their opinions. So the Delphi method is a repetitive process until
the panel converges on a specific value or a range of values as defined by the
required accuracy.

2. Nominal Group Technique : A panel of experts working together in a


meeting, arrive at a consensus through discussion & ranking of ideas.

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Unlike Delphi technique, this provides opportunity for discussion among the
experts. The keys of this technique are clearly identifying the question, allowing
creativity, encouraging discussion & ultimately heading for consensus.

3. Market Surveys : Collect data in a variety of ways like interview,


questionnaire, survey & so on to know about the market trend. This is popular
for new products.

Quantitative techniques –
1. Simple Moving Average (SMA) Method :

The formula for computing is


y + y + + y + y + y
y = ----------------------------------------------------------------------
n

Where y = Simple moving average at the end of period t+1


i.e. forecast for period t + 1

y = Actual demand in period t

n = Number of periods included in each average

However, equal weights are assigned to all periods in the computation.

2. Weighted Moving Average (WMA) Method :

Equal weights were assigned to all demands in the computation of the simple
moving average. Weighted moving average assigns more weight to some
demand values (usually more recent ones) than to others.
In the earlier example – assigning 50 % weightage for year 1998, 30 % for year
1997 & 20 % for year 1996:
0.5 X 14 + 0.3 X 12 + 0.2 X 11
The forecast for 1999 = -------------------------------------------- = 12.8
0.5 + 0.3 + 0.2

3. Exponential Smoothening :

Here the forecast for next month (new forecast) is based on the forecast of the
previous month (old forecast) and actual value of the previous month.
New estimate= Old estimate + (Latest demand -- Old estimate of last actual
demand)
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F = F (D -- F ) = F + e

Where F = Smooth average forecast for period t or Forecast for next period
demand
F = Previous period forecast or Forecast for most recent period.
= Smoothing Constant (0 < < 1)
D = Previous period demand or Actual demand for most recent
period
If = 1, Then latest forecast is equal to previous period demand
The preferred range of = 0.1 to 0.3

4. Regression Analysis:
It determines the relationship between a dependent variable (e.g. demand for an
item) and an independent variable (e.g. time).
The simplest form of regression model assumes that the dependent variable
varies linearly with the independent variable : y = a + bx

y = Dependent variable
x = Independent variable
a = Intercept
b = Slope (trend)

a ---------------------------------------------
______________________________
x

The formula to compute the constants are :


x y -- n x y x y
a = y – b x ; b = -------------------- where x = --------- ; y = ------
x -- n x n n

n = number of pairs of observations made

In simple regression, only one independent variable is used whereas in multiple


regression two or more independent variables are involved.

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(Numerical Examples Separately Prepared)

5. Time Series Analysis :


This is based on the idea that data relating to past demand can be used to predict
future demand.
Analysts plot demand data on a time scale, study the plots & look for consistent
shapes or patterns such as trend, seasonal or cyclical influences.

Linear

Seasonal
Demand
Units

------------------------------------------------------------ Constant

________________________________________
Time
Demand Pattern

Forecast Error :

This is the numeric difference of Forecasted demand & Actual demand.


Mean absolute deviation (MAD) is a average forecast error measure without
regard to direction.
Sum of absolute value of forecast -- Error for all period
MAD = ------------------------------------------------------------------------------
Number of periods

(Forecast error) ! (Forecast demand -- Actual demand )


= ------------------------------ = -------------------------------------------
n n

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