Professional Documents
Culture Documents
OPERATIONS
NOTES
Structure
1.0 Introduction
1.1 Unit Objectives
1.2 Operations Management : A system's Perspective
1.3 Operations Management Function
1.4 Challenges in Operations Management
1.5 Competitiveness and Operations Management
1.6 Summary
1.7 Key Terms
1.8 Questions and Exercies
1.9 Further Reading and References.
1.0 Introduction
Production is one of the fundamental functional area of any business. A business
organization exists to satisfy customers through offering products or services. These
products or services can not be offered without making or developing them in a
production system. "A production system is one where value is added to raw materials
through successive processing to convert it in a desired goods or services." In a
manufacturing environment mechanically or chemically, raw material is treated to change
the shape of original input as well as to get desired functionlity. Similarly, in a service
environment, service provider offers services to customer using equipments and
knowledge / skills of provider itself. It should be noted that the finished product of one
manufacturing unit does not always furnish a ready-made product for the ultimate
consumption. In a chain of manufacturing activities, the finished product of the one
organization sometimes becomes the raw material or component for the manufacturing
firms falling next in the sequence.
Operations management is a systematic approach to address issues in the
conversion process of inputs into useful, revenue- generating outputs.
Basic inputs as shown in figure 1, in a operating system are labour, material and
capital.
Second important element of this system is processing unit. This includes the
various activities that an operating system undertakes to convert the raw material into
useful products for customers. This part includes activities such as product and process
design, purchasing and inventory control, operations planning and control, material
and capacity planning etc.
The output of operation system consists of goods and services. An organization
that manufactures two - wheelers will provide many variants of the two- wheelers. On
the other hand, a hair - dresser may provide various styles of hair design. In several
manufacturing organizations, services are also offered in the form of after- sales support
and warranty.
Finally, an operation system also has feedback loop. In any system, the feedback
loop serves the purpose of identifying the deviation paths and highlighting the areas
that need immediate correction. In a common operation system three feedback loops,
namely, quality management, maintenace management, and process improvements are
available. These activities provide checkpoints to identify the areas requiring
improvement and ensure that corrective measures are indeed taken.
Demand of goods and services plays inportant role in design of operation system.
From a systems perspective, the demand is an exogenous variable. However, planning
for production, and capacity is directly depended on demand data. Estimating future
demand of products with respect to different time horizon is an important aspect of
operation management.
Operations management is not merely the conversion process that takes place on
the shop floor, but a large number of activities before and after it, till the product leaves
the organization. Thus operations is a more comprehensive activity and includes
activities, such as materials management, equipment and tooling, material handling,
planning, information systems and human resources. Each of these activities is important
and must be done well to achieve operational excellence. For continued success in a
competitive market, continuous improvement in all areas of activity is essential.
Every organization has a strategic intent. This can be providing products at low
cost or to provide high degree of customization. Some organizations have combination
of these intents. For example Wall- Mart offers wide variety of products at relatively
low cost. The strategic intent influences the overall corporate strategy of an organization,
which in turn, shapes its operations strategy. Operations strategy plays key role in
achieving a competitive advantage for the organization. Japanese organizations got
Production & Operations tremendous success because of clear operations strategy focussed on quality. Chiness
Management : 4
organizations are giving tough competition to Indian companies because of low cost Nature and Scope of
strategy. Clearly a focussed operations strategy helpes organizations to gain Operations Management
competitiveness.
NOTES
1.6 Conclusion
NOTES
SERVICE SYSTEMS
NOTES
Structure
2.0 Introduction
2.1 Unit Objectives
2.2 Product Strategies
2.3 Product Life Cycle
2.4 Production System Types
2.4.1 Process Foucssed System
2.4.2 Product Focused Systems
2.4.3 Production of Stock Vs. Prodcution to Orda
2.5 Distinctive Features of Service Systems
2.6 A Classification of Service Systems
2.7 Summary
2.8 Key Terms
2.9 Questions and Exercies
2.10 Further Reading and References.
2.0 Introduction
We use a wide variety of products from sugar, salt, petrol, diesel, power to jewelry,
pizza, mobile phones, bikes and cars. With this large variety of products, it is
unreasonable that the production systems that manufacture these products could have
common characteristics – the materials vary widely; the sizes, shapes, and weights are
diverse; and the applications and uses are equally variegated. But if there were no
common characteristics among systems for diverse products- if each system were entirely
unique- we could learn nothing transferable by studying productions management, and
such is not the case. By examining the nature of the product demand in its growth from
introduction to maturity and by relating it to the competitive criteria of cost, quality,
on-time delivery, and flexibility we can develop logical types of manufacturing systems
that match marketplace needs.
This unit discusses different types of production systems for manufacturing
organizations as well as different types of service organizations.
PRODUCT
Mobile
Sales Phones
Industrial
Dishwasher
Growth
The basic managerial strategies adopted for the productive system must be in
accordance with the product strategies. Obviously, it would be inappropriate to use a
laboratory facility for testing purpose to make commercial products. Again, we should
think in terms of alternative strategies of the extremes as well as for the middle ground.
2.4.1 Process- Focused System
Process focused system is used for making customized products. A production
system for custom products must be flexible. It must have the ability to produce according
to customer or client specifications. For example, a tool room machines tools as per
requirement of a particular machine. The equipment and personnel must be capable of
meeting the individual component specifications and of assembling the component in
the special configurations of the custom product.
Physical facilities in the plant are organized around the nature of the processes,
and personnel are specialized by generic process type. For example, in a machine shop
we might expect to find milling machine departments, lathe departments, drill
departments and so on. The flow of the item being processed in such productive systems
is dictated by individual product requirements, so the routes through the system are
variable. Figure 3 shows a Process focused system in a machine shop.
Row Material
Receving M/c1 M/c2 M/c3
Finished Product
Exit M/c6 M/c5 M/c4
Services are integral part of economic development in any country. Rather over a
period, share of services in GDP is increasing (see table 1).
The service sector does not consist of a homogeneous group of services. The
industries within the service sector are too heterogeneous for a common frame of
analysis. We will use here a classification scheme proposed by Baumol (1984) with
some modifications. The services can be classified into four categories:
1. Stagnant personal services
2. Substitutable personal services
3. Progressive services
4. Explosive services
Stagnant Personal Services
These services frequently require direct contact between the customer and the
service provider. Some examples are haircutting, live artistic performance, psychiatric
counseling, and teaching. Since the quality of such a service is highly correlated with
labor time, it is difficult to realize significant productivity gains for these services
without an appreciable reduction in quality. It seems evident, for instance, that the
amount of time required for a haircut cannot be decreased substantially without some
drastic implications. These services offer low innovations potential and are difficult to
standardize.
The challenge in managing stagnant personal services is to improve their
effectiveness through better management. A substantial gain in productivity in the
supporting activities necessary for providing the service can often be realized. For
example, copying facilities, overhead projectors, and computers have all contributed
to improving the productivity of teachers. Even live artistic performance have benefited
Production & Operations
Management : 14 from jet travel, which has reduced the total number of artist hours performance
considerably even though actual rehearsal and performance time remains constant over Types of Characteristics of
time. Manufacturing Systems
Although productivity gains are minimal in stagnant personal services, the
operations manager has several options for strategically placing the service that are
NOTES
consistent with corporate goals. All haircutting shops, for instance, are not alike. One
may emphasize low cost with little customization, whereas another may emphasize
customization and charge a higher price. Both firms may be successful if managed
well, as they cater to different segments of the market.
Substitutable Personal Services
These services also require direct personal contact, and they have characteristics
similar to stagnant personal services. However, it is possible to substitute for these
services with technological or other alternatives. An example would be the services of
a guard that can be replaced by electronic surveillance systems. In the twenty first
century, we have seen ovens, washers and dryers, and other household appliances
substituted for personal servants. Some types of teaching, such as real estate licensing
course work, are now conducted using cassettes, tapes, and videos, and the demand for
the live instructors has decreased correspondingly.
A great leap in productivity in substitutable personal services is provided by
technological innovation. For example, electronic mail may improve the productivity
of the mail delivery system manifold. Television provides access to millions of people
of special events that can be viewed in person by only a few thousand.
It should be noted that while the substitutes for personal services are often less
costly, they are often also inferior. A personal cook cannot be compared with an
assortment of kitchen devices that make cooking easy. Similarly, watching a concert or
a sporting event on TV is not the same as the live performance.
Progressive Services
These services have two components. One component requires little labor and
considerable cost reductions are possible with it. The second component is highly labor
intensive and is much like stagnant personal services. An example is computation service.
In a simplified aggregate view, computation services can be conceptualized as
consisting of hardware and software. The cost of hardware per computation has declined
steadily; conversely, the cost of software has risen. This is because software is produced
by human labor and offers limited productivity growth.
Another example is television broadcasting, where the two components are the
transmission and the production of a program. Transmission cost have steadily decreased
with advances in the electronics and space industries. However, the production of a
television program, is highly labor intensive and consequently, the associated cost
continues to increase. Research and development can also be thought of as consisting
of two dichotomous components: equipments and human thought.
Progressive services can exhibit phenomenal productivity growth and cost
reductions initially. This is due to the relatively important contribution of the first
technology intensive component. For example, computer hardware contributes
significantly to computations cost; thus, decreases in hardware cost per computation Production & Operations
Management : 15
Types of Characteristics of lead to overall cost educations. Since the costs per unit of output for the second, labor
Manufacturing Systems intensive component are increasing, the decline in total cost cannot be sustained for
long periods. In this sense, productivity growth is self-extinguishing. This happens
because, in due course of time, the relative contribution of the second component exceeds
NOTES that of the first component. The stagnant nature of the second component dampens
productivity growth.
Progressive services pose a special challenge to operations managers, as the
management of the two components of the service will require careful coordination.
The rational expectations for these services should not be guided by the initial cost
decline and productivity growth but by a longer range view. In the long run, the emphasis
should be on improving the performance of the service system as overall costs will not
be likely to go down. This has been demonstrated in electronic libraries, where the
quality of the service has improved but expected cost savings have not occurred.
Explosive Services
Explosive services involve virtually no contact between customers and production
labor. Telephone communications is one example of such a service. These services
offer high innovation potential as technological advances decrease cost substantially.
In telephone communications, the technology has progressed from open wires to
microwaves, coaxial cables, satellite transmissions, and digital technology. The
productivity growth has been connections as clear as those for local city calls. In the
future, services such as airlines reservations, banking, and shopping may be conveniently
conducted using home computer. These services better experience and explosive growth
in productivity commensurate with associated technological advances. The benefits to
the consumer will be greater variety of services at declining costs.
2.7 Summary
Make to-stock : Scheduling Production for the purpose of replenishing stock to some
predetermined level.
Production & Operations Make to-order : Scheduling production after order is placed. It is used by those
Management : 16
organizations that typically manufacture products with high variety and low Types of Characteristics of
valumes. Manufacturing Systems
Process focussed system : Manufacturing System with focus on various processes.
This system is capable of producing large variety of products.
NOTES
Product Focussed system : Manufacturing system with focus on a product. This system
is preferred for making standardized products.
Stagnant personal services : Services requiring direct contract of customer with service
provider. e.g. haircutting, classroom teaching etc.
Substitutable personal services : Services where role of human in providing the service
can be substituted by some technology. e.g. Electronic surveillance systems.
Progressive services : Services with two component human role and technology. e.g.
Making a movie.
Explosive services : Almost no contract between customer and provider. e.g. mobile
phone services.
Baumol, W.J., (1984), “Productivity Policy and the Service Sector,” Discussion
Paper #1, Fishman- Davidson Center for the study of the Service Sector, University of
Pennsylvania, Philadelphia
3.0 Introduction
Product development process provides a broad set of tools techniques and concepts
that enable an organization to provide competitive advantage in its offering by
introducing new products and services faster and at a lower cost.
Cost
Regulatory requirements
Production & Operations
Acceptable performance standards
Management : 18
The Product Devlopement
Three designs were presented, finally one was picked in mid 2005. Tata Motors
Process
announces that the small car will be produced in Singur in West Bengal. Design
house IDEA does final refinement to the design and finally a Nano style is frozen
in mid 2006. The Rs1 lakh car, named the Nano, is unvield at the Delhi Auto Expo
NOTES
and witnessed an explosion of media interest. Mid 2008, the project moves from
Singur to Sanand in Gujrat.
Check Your Progress
Ratan Tata says during launching of the Nano, “ We are happy to present the 1. Identify three examples
people’s car in India and we hope it brings the joy, pride and utility of owning a car of new product
to families who need personal mobility.” development.
Source: http://www.tatanano.com accessed on May 27, 2013
Various benefits are possible through sound product development process. The
most important one is getting a competitive advantage for the organization. We can
classify benefits in four important dimensions. Customers get better product to meet
their expectations. This gives positive and significant impact on the customer for whom
the product/services are designed. The second dimension is related to sustained
performance. Sustained performances mean addressing environmental issues, reduced
life- cycle cost, and user friendliness to the society. The third dimensions of benefit
pertains to operational advantage obtained in the product development process. These
are normally related to simplification of manufacturing process, simplification of
assembly process and minimizing the need for revisions and changes. As a fourth
dimension organization take strategic advantage by faster new product introductions,
lower cost and mass customization. Production & Operations
Management : 19
The Product Devlopement Customer happiness
Process
NOTES
Sound
Sustained Product Development Stategic
Performance Process advantage
Operational advantage
such as simplified manufacturing process
assembly process
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The basis for concurrent engineering is the significant overlap among the different
phases of product development. A significant number of companies are already
identifying where there is a need to communicate and work together both within the
company divisions and with other organizations so as to reduce the time between the
finalization of the definitive design and the introduction of the product or service.
Check Your Progress
In high clock-speed industries, this is critical. Many companies, in this category, 3. Identify examples
use the concurrent engineering approach to speed up the product development process. of use of concurrent
Teams are constituted that integrate the CE program. There can be three types of teams; Engineering in new
(i) Program management team, (ii) technical team and (iii) design-build team. product
Concurrency involves the parallel completion of project phases. development.
With an integration team ensuring the exchange of information between the teams
working on different aspects, it is possible to considerably reduce development times
and create high quality product designs that meet customer expectation. Using this
techniques, some companies boast that they have reduced, by a third or more, the time
Production & Operations
needed to develop and launch new products. They have injected more customer-related
Management : 21
The Product Devlopement information into the process and to make it flow better.
Process
Development of Scorpio-Sport utility vehicle (SUV) by Mahindra & Mahindra
(M&M) is a very good example of CE. M&M used a team of 120 people for the
development of Scorpio. These persons were divided into 19 cross functional teams.
NOTES
Design work was done in the USA, Korea, Japan, France, Austria, and the UK.
Coordination was done from Mumbai office at Kandivili. Using CE design teams worked
closely with the suppliers resulting in less development time and rework of the design.
Simultaneously, at each state of the development process customer feedback was also
included. This helped M&M to be as close as possible to the market expectations when
product was launched in the market. Through various initiatives, M&M priced the
vehicle between Rs. 5.5 lacks and Rs. 6.5 lacks. This was much less as compared to
competitors’ vehicle of the same segment.
Several tools and techniques are under development for new product development.
Organizations are continuously in a mad race of introducing new products.
Note: Students should prepare timeline of some of the companies with respect to
introduction of new products.
Different tools are available to help the organization at different stages of the new
product development process. The first step is understanding the customer needs.
Market Research is normally done to understand customer needs. Using a
structured questionnaire and after identifying an appropriate sample, information is
collected which is subjected to statistical analysis. Focus group meetings can also be
arranged for market research. It is not a quantitative method like data collection through
questionnaire. Qualitative research is also in practice now a days. In-depth qualitative
interviews are conducted the number of respondents are much less as compared to
structured questionnaire respondents. The data collected in the form of interviews is
subjected to extensive analysis. Irrespective of the method adopted, the exercise must
eventually lead to creating a bundle of attributes that customers are looking for in the
product.
Competitor analysis is also a part of stage one of development process. It is done
to understand current offerings and to determine gaps. It is done in those cases where it
is difficult to reach customers directly. Reverse engineering can be performed for
knowing the materials, their specification and to understand the manufacturing process
by dismantling the product. Perceptual maps can also be used for competitor analysis.
It is graphical representation of the various competitor offerings and that of one’s own
proposed products.
Quality Function Deployment helps in making inferences from customer
requirement for design, process planning, and manufacturing specifications using a
four stage process. This approach uses interfunctional teams from marketing, design
engineering, and manufacturing. The first stage links customer needs to the design
attributes. Second stage gives actions based on design attributes. The third stage gives
Production & Operations
Management : 22 specific decisions to be implemented based on the identified actions. Finally, in the
fourth stage, the implementation decision drive the process plans to be deployed. The Product Devlopement
Customer requirement information forms the basis for a matrix called the house of Process
quality.
NOTES
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x x
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Different types of data are used in house of quality. Customer requirements such
as faster cooling, etc. is an important requirement. Next we list product characteristics
and the relationship of these product characteristics with customer requirements. There
can be strong positive or strong negative correlation between customer requirements
and product characteristics. Our product is benchmarked against competitors’ products Production & Operations
also. Management : 23
The Product Devlopement Value Engineering helps in simplifying the products. Its objective is to achieve
Process equivalent or better performance at a lower cost while maintaining all functional
requirements defined by the customer. Unnecessary costs are identified and eliminated.
Questions such as “Does the item have any design features that are not necessary?”,
NOTES “can two or more parts be combined into one?”, “ How can we cut down the weight?”,
“Are there nonstandard parts that can be eliminated” are asked in brainstorming sessions.
Check Your Progress
in value engineering.
4. Prepare a house of
quality matrix for Design for Manufacturing (DFM) is a structured approach to ensure that
developing a new manufacturing requirements and preferences are considered fairly early in the design
washing machine. process without the need for extensive coordination between the two departments.
Objectives of DFM are to reduce variety, develop operational convenience and reduce
cost.
3.7 Summary
4.0 Introduction
When the location of an industrial unit is preplanned, many factors are taken into
consideration. The factors of location planning can be divided into the following categories:
Primary Factors
1. Supply of Raw Materials : It is necessary to consider the adequate supply of raw
materials and the nature of raw materials. The cost of raw materials are an important
element of the total cost of production. If the supply of raw materials is not regular,
it may lead to frequent stoppages and breakages in production. The time and the
cost of transporting raw materials is also important. Therefore, industrial units are
located near sources of raw materials.
2. Nearness to market : Every producer wants to sell his product in the market.
Nearness to market is important from the point of view of his control over the
market. In those industries where raw materials are obtained from different sources,
nearness to the source of raw materials is not as important as nearness to the
market. Nearness to the market is important for supplying goods to the customers
in a minimum period of time adjusting supply according to changes in demand
and gaining control over the market.
3. Transport Facilities : Speedy transport facilities are needed for the regular and
timely supply of raw materials at low cost and for transporting finished products
Check Your Progress on time to the market. Transport facilities are important for getting control over
foreign markets.
2. Enumerate various
primary factors for 4. Supply of Labor : The supply of labor at low cost is important. The importance
opening a food of labour supply has not lessened in spite of mechanization .
prrocessing plant at 5. Power : Power is necessary for the process of production and for transporting
Maharashtra. finished goods and raw materials. Power may be electrical, diesel and tropic energy.
Power shortages lead to tremendous losses due to the stoppage of machinery.
Therefore, industries must have sufficient and regular supply of power if continuity
Production & Operations in production is to be maintained and if industries are to operate at the full capacity.
Management : 28
6. Supply of Capital : Industries require capital for initial promotion and expansion. Facilities Planning :
Therefore, a capital market must be developed in industrial centers. Location
7. Government Subsidies and Facilities : The government may encourage the
dispersal of industries in underdeveloped areas by making capital, land, water
NOTES
and power available at subsidized rates.
Secondary Factors
8. Facilities : An enterprising spirit, innovation, technical know-how and an
industrious nature of population- all these factors taken together and a favorable
government policy create a favorable atmosphere for the purpose of the
establishment of industries.
9. Natural Factors : Land, water, climate, sources of raw materials and agricultural
climate are some natural factors which are important for some industries like
cotton textile, sugar nd jute. These industries depend on a good climate and source
of natural raw materials.
10. Political Factors : The government’s policy of licensing and encouraging the
development of industries in underdeveloped regions also determines the location
of industries.
11. Historical and Religious Factors : Some industrial cities are of historical
importance. Some of them are having religious importance – e.g., Benaras, Prayag,
Kolhapur, Nasik, etc,. Industries grow at these religious centre because these are
places of historical importance.
12. Initial Start and Goodwill : Some industries get located at a place because some
industrialists start the industry at that place at an early stage—e.g., Jamshedpur
(Tatas) was developed into’ an industrial city; the iron and steel industry received
its initial start there.
13. Personal Factors : In business history, it is found that personal considerations
have decidedly affected the location of certain industrial units. There is no rationale
for such considerations, however, when there is possibility of multiple locations,
this factor plays a decisive role in vocational consideration. Henry Ford started
the automobile industry in Detroilt (U.S.A) because it was his home town.
14. Miscellaneous Factors : The following factors also affect the location of the
industrial unit:
(i) Sufficient water supply, if water is consumed in large quantities in the
production processes.
(ii) Disposal of waste water.
(iii) Strategic factors like dangers of air-attacks.
(iv) Availability of fire-fighting facilities.
(v) Availability of recreational, medical and educational facilities.
(vi) Quality of life because of facilities like schools, hospitals, post-office, parks
etc enjoyed by the community.
(vii) Community attitudes.
(viii)Ecological and environmental considerations.
(ix) Regional aspirations of people and their political satisfaction . Production & Operations
Management : 29
Facilities Planning :
Location 4.5 Economic Survey of Site Selection
The necessary factors in the selection of plant location vary from industry to
NOTES industry and with changing technical and economic conditions. Therefore, a location
survey must be carried out based on the specific requirements of a given enterprise.
Check Your Progress
The aim of such an economic survey is to find out whether or not the location
3. Enumerate various
meets first the primary, and then the secondary requirements. The relative importance
secondary factors for
of the necessary factors can be determined on the basis of their proportionate share in
opening a steel factory
the unit cost of production and distribution.
in Maharashtra.
Production & Operations Now, with respect to each of the three locations, we will give each of these factors
Management : 30
another rating, called the location rating. Location rating depends on the benefits a Facilities Planning :
particular location offers. Rating for location varies from 1 to 10. Rating of 1 and 10 Location
denotes least beneficial and most beneficial respectively.
Table 4.2 gives the location ratings for the food processing unit
NOTES
Factor FactorLocation Ratings
ratings NASIK NAGPUR AURANGABAD
Close proximity to raw food items 5 9 8 5
Transportation facility 4 8 9 7
Availability of cheap/ efficient labour 4 8 8 6
Colod Storage Availabity 3 7 8 8
Basic amenities 2 7 7 7
Low Construction Cost 1 2 5 5
For each location, let us find the product of factor and location ratings :
NASHIK NAGPUR AURANGABAD
5 X 9 = 45 5 X 8 = 40 5 X 5 = 25
4 X 8 = 32 4 X 9 = 36 4 X 7 = 28
4 X 8 = 32 4 X 8 = 32 4 X 6 = 24
3 X 7 = 21 3 X 8 = 24 3 X 8 = 24
2 X 7 = 14 2 X 7 = 14 2X 7 = 14
1X2=2 1X5=5 5 X 5= 25
146 151 140
Hence, we Observe that the total score of Nagpur is the highest, followed by
Nashik. This tecnhique is used for screening locations with higher scores, which are
then subjected to final analysis for finding the best loaction option.
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Figure 4.2 adds one more line in figure 4.1. This is total revenue (TR) line. Rev-
enue is the money that comes into a firm when it sells its products at sales price.
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Fig 4.2
Figure 4.2 shows three important things, namely, loss region, profit regions and
break even point. The region where at any level at production TR is less than TC, it is
loss region, if TR is more than TC, it is profit region and at a particular level of produc-
tion, where TR = TC, it is the break-even point. In figure 4.2, this breack even point is
shown as V BE . Break even point is that level of production where we have no profit or
less. At BEP loss region converts into profit region. It is always preferred to have low
BEP so that organization can quickly come into profit region.
In facility location planning, a location at which the break-even volume is lower,
is preferred. At different locations, fixed costs may be different because of lant cost.
Variable costs may also be different at different location because of differest cost of
labour at different places. Cost of labour in India is much less than cost of labour in
USA. Therefore a MNC will like to open a new unit in India.
Three different locations arre having different combinations of fixed and variable
costs. these will give different values of break-even point.
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Fig 4.4
From figures 4.4 (a) and (b), we see that the break-even volume for X is 20,000
units as compared to 24,000 units for Y. Therefore, X is a better location according to
break-even criterion.
This model is used for the final selection of the best location options. This Model
minimizes total transportation cost between the new facility and the existing facilities.
This model assumes movement fo goods only in two directions, the X and Y axes. No
diagonal movement is allowed. Let us take an example to understand. Table 4.3 gives
information about the existing facilities of a steel factory.
Table 4.3
Facility (F) Coordinate Cost (c) of moving one unit Annual Load (L)
location (X,Y) by unit distacne (Rs.) Units.
Nashik (10, 80) 10 452
Aurangabad (30, 60) 10 678
Nagpur (80, 50) 10 400
Gondia (50, 10) 10 700
2230
These existing facilites may be the factories, warehouses, or markets of the com-
pany. The compnay wants to know location of new plant. The annual load (in units) is
the goods to be moved between a facility (F) and the new plant (NP).
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Fig 4.5
To use simple medain model, first we find median laod. This is the sum of annual
loads for all the existing facilites. Then we determine median load. Then we find X and
Y coordinates of the new plant. To determine X coordinate we move form origin to
positive X axis. The mean load here is 2230/2 = 1115. As we move to positive X axis
crossing nashik to Aurangabad to Gondia to Nagpur, we can check that median load
will pass through Aurangabad. So X coodinate of new plant will be same as of
Aurangabad. To get Y Coordinate, we move from origin to positive upward. We corass
Gondia then Nagpur then Aurangabad and finalley Nashik. 1-700 units are at Godia,
701 to 1100 units are at Nagpur. 1101 to 1178 units are at Aurangabad which include
median load (1115) also. So Y Coordinate of new plant will be same as of Aurangabad.
Therefore new plant will be located at Aurangabad only.
The Centre of Gravity Method :
According to Centre of gravity method coordinates (XNP, YNP) are determined as
follows :
ΣXiLi
______________ ΣYiLi
____________
XNP = YNP =
ΣLi ΣLi
Where (Xi, Yi) are the coordinates of existing facilities and Li represents the
loads to be transported between the existing facilities and the new plant.
Using data available in table 4.3, XNP, and YNP can be determined as follows :
NOTES
9. Solve problem 8 with data available in Table 4.4 using the centre of gravity method.
5.0 Introduction
The output of layout decisions tells determining the placement of departments,
work groups within the departments, workstations, machines, and stock- holding points
within a production facility. The objective is to arrange these elements in a way that
ensures a smooth work flow or a particular traffic pattern. Specification of the objectives
and corresponding criteria to be used to evaluate the design, estimates of product or
service demand on the system, processing requirements in tems of number of operations
and amount of flow between the elements in the layout are some of the important
inputs for layout decisions.
Production & Operations
Management : 38
This unit introduces various layouts and their formats. The focus is more on Facilites Layout and
quantitative techniques, but qualitative aspects are also discussed. Material Handling
Men, machines and materials are the three basic inputs in the manufacturing
processes. Generally men and machines tend to remain static while the materials move
from one work station to another for the purpose of processing. The raw materials pass
trough various paths till they are converted into finished products. The pattern of
movement of materials inside the plant area is prescribed under different types of floor
systems. The pattern of material flow is an important consideration in the plant layout
decision because good layout aims at minimizing the flow of materials. The pattern of
the flow of the materials is largely decided by the type of layout. In the product layout,
the material flow is short and smooth while in the process layout it is long and involves
many complexities. The flow pattern of the material is closely related to the type of the
material handling equipment and the cost of material handling. It also decides the need
for temporary storing, sports of bottleneck or rushing. The operating cycle period has a
close relation with the flow pattern of materials.
Production & Operations
Management : 40
The flow pattern of the materials helps in eliminating bottlenecks, rushing, back- Facilites Layout and
tracking and ensures good supervision and control. It also helps in minimizing the Material Handling
material handling cost , effective utilization of plant capacity, reduction in the operating
cycle and resultantly profitable returns on the investments. Even without changing the
process flow, the system can be speeded up, and waiting time reduced, by simple NOTES
streamlining and de-bottlenecking the flow. If necessary the shop floor can be relocated.
New lines can be added. We can introduce automation and reprioritization. In short, the
flow of work can be reorganized.
The material flow system is broadly divided into two categories on the basis of
the nature of the availability of floor space as under:
1 Horizontal flow system,
2 Vertical flow system. Check Your Progress
5.3.1 Horizontal flow system 2. Give. example of
The horizontal flow systems are devised in the single storey building when the horizontal and veritcal
flat floor area is available. The starting point is the “receiving” (R) of the raw materials flow system.s
and the terminal point is the “shipment” (S) of finished goods. In between these two
points. The materials move form one work station to another for the purpose of
processing. The horizontal flow system is denoted by the alphabetic letters as under:
Characteristics
(i) Shortest route
(ii) Must have roads on both sides.
(iii) Plant area has long lengths but short width.
(iv) Difficulty in returning empty containers.
(v) Absence of rising of outside transportation.
(vi) Unsuitable for longer production lines.
5.3.2 Vertical flow system
The vertical flow system arises in the case of multi storey buildings. Multi-storey
building are used where limited land area is available and the processing is done the
materials with the help of light machines. The advantages of gravity flow can be tapped,
however, it first requires the availability of materials at the top floor.
The popular types of plant layout are (1) Process layout (2) Product layout (3)
Combined layout (4) Static product layout or Project layout (5) Job Shop layout. Each
layout is explained in brief in the following paragraphs:
5.4.1 Process Layout
It is also called functional layout. All machines performing similar type of
operations are grouped at one location in the process layout e.g., all lathes, milling,
machines, cutting machines etc. in the engineering shop will be clustered in their like
groups. Thus all forging will be done in one area and all the lathes will be placed in Production & Operations
another area. In this layout, several products may share a machine to make its full use. Management : 41
Facilites Layout and The sequential arrangement of the machine group is generally, but not necessarily made
Material Handling on the basis of labor operations. In this type of layout, the process rather than the
product has dominating role. The product is given secondary consideration and is moved
for the purpose of operations to the process section with like machines stationed at a
NOTES particular point. This type of layout is more suitable to job order type of production. In
such production the operation differ from product of product. So, it is desirable to
arrange the machines on the basis of process rather than on the products. The typical
arrangement of the machines in the process layout will be as under:
55 minutes / hour
=
550 munit / hour
A - 0.32
B A 0.18
C A 0.12
D B,C 0.51
E D 0.42
F E 0.80
G F 0.90
H F 0.70
I G,H 1.00 Production & Operations
Management : 45
Facilites Layout and Solution : (i) Total task time = sum of individual task times = 0.32 + 18 + .12
Material Handling + .51 + .42 + .80 + .90 + .70 + 1.00 = 4.95 minutes
55
(ii) Cycle time, using formula A, = .1 minutes / unit
NOTES 550
(iii) Minimum number of workstations, using formula B,
4.95
= = 49.50 workstations.
.1
(iv) Precedence diagram
B G
A D E F I
C H
Fig. 3
(v) Assignment of tasks to work centres using incremental utilization heuristic :
We will combine tasks to a workcentre strictly in accordance of precedence
diagram to achieve 100% utilization at workcentre. Utilization will be
calculated for workcenters by using formula,
Number of workstations required
x 100
Actual number of workstations working
Sometime 100% utilization of not possible, and utilization may fall by adding
new tasks, so maximum utilization is taken and tasks accordingly are grouped to one
workstations.
Table 5.2 below gives detail calculations for knowing number of workstations at
each workcentre and tasks grouped at each workstations.
Table 5.2 : Calculation for number of workcentres and workstations
49.5
Utilization is X 100
50
= 99%
(See here that all individual task times are more than cycle time of 0.1 minute so
incremental utilization heuristic is more suitable.)
Example 5.2 Following information is available for an assembly line.
Table 5.3 : Data for Example 5.2
A - 0.32
B A 0.18
C B 0.12
D C 0.51
E D 0.42
F D 0.37
G E,F 0.65
Total = 2.57
Using this additional information that 75 units are required per hour and productive
time per hour is 50 minutes, balance the line using longest task time heuristic.
Solution
50
(i) Cycle time = .67 minutes
75
2.57
(ii) Theoretical number of workstations= = 3.83
.67
(iii) Precedence diagram
E
B C D G
A F
Fig. 4
(iv) Task assignment to workstations using longest task time heuristic
2 D .51 .16
3 E .42 .25
4 F .37 .30
5 G .65 .02
Table 5.4 shows that some unassigned time at each workstation. This can not be
used as next task in line, if assigned at these workstations, will increase the time at the
workstation beyond cycle time limit.
3.83
Utilization = x 100 = 76.60%
5
Example 5.3 : A manufacturer is interested in creating a cellular manufacturing
layout with its current machines. The chart below in figure 5.5 shows the machines
required by each part. Organize the machines and parts into cells.
Parts
1 2 3 4 5 6 7 8
A x x
B x x
C x x x
D x x
E x x
F x x x
G x
H x x x
I x x
Figure 5.5
Solution : Rearrange the rows :- First, place the machines that produce the same
parts in adjacent rows.
E x x
B x x
C x x x
F x x x
D x x
I x x
Rearrange the columns : Next rearrange the columns such that parts requiring the
same machines are put in adjacent columns.
1 4 3 5 8 2 6 7
A x x
H x x x
E x x
B x x
C x x x
F x x x
D x x
I x x
Further fine arranging will lead to following matrix :
Parts
1 4 3 5 8 2 7 6
A x x
H x x x
E x x
F x x x
B x x
C x x x
D x x
I x x
D
NOTES Cell 1 Part 1 and 4
I
F
Cell 2 B Part 3, 5 and 8
C
A
Cell 3 H Part 2, 7 and 6
E
Fig.5.6
We can have three cells containing different machines as shown in figure 5.6. See
that part 6 requires operations on machine H, E and F. Machines H and E are grouped
in cell 3 while machine F is grouped in cell 2. Now it depends on volume of part 6. If
volume is not very high, we can take semi- finished 6 to cell 2 for processing of these
items on machine F. If volume is very high we can install one machine F in cell 3 also.
We can also take a decision to keep one machine F separately without assigning it to
any cell. Part 6 as well as part 3 and 8 also go to this dedicated machine for working on
this machine.
5.4.3 Mixed or Combined Layout
Generally pure process or pure layout is not found in practice. Both process and
product are mutually exclusive. Proper compromise reaping the benefits of both the
layouts is possible to some extent. So efforts are made to have the combined layout
incorporating the benefits of process and product layout. Combined layout is developed
as under :
(i) Product layout for the main product with a process layout for joint or by
product tapping the idle capacity of product layout along with marginal
investments required in process layout.
(ii) To diversify the production with a view to tap the idle capacity of the product
layout. Products with complete negative correlation with the product line
can make the maximum use of idle capacity of the product layout.
(iii) In the product layout, some process may be segregated from the product line
e.g., objectionable, hazardous, requiring special treatment and repetitive
performance etc.
5.4.4 Static Product Layout or Project Layout
The manufacturing operation require the movements of men, machines and
materials. Generally few inputs tend to be static while the others are moving. In the
Production & Operations product layout and process layout generally the machines have fixed installations and
Management : 50
the operators are static in terms of their specified work stations. It is only the materials Facilites Layout and
which move form operation to operation for the purpose of processing. But where the Material Handling
product is large in size and heavy in weight, it tends to be static, e.g., ship building. In
such a production system, the product remains static and the men and machines move
performing the operations on the product. The production characteristics are sufficient NOTES
enough to treat it as a separate type of layout, viz. static product layout.
5.4.5 Cellular or Group Layout
Here an attempt is made to introduce some of the advantages of a line layout into
a situation where pure line layout is not practicable. Here machines are placed in groups.
Each machine group makes maximally of parts which require similar treatment. This
layout lies between process layout and line layout. It is easier to control than a strictly
process layout and has more flexibility into the manufacturing system as regards the
batch size variations and the differing operations sequences.
Specify:
1. Type of chart.
2. Job concerned and whether it is the present or proposed method.
3. Date of study and name of observer.
4. Where chart begins and ends.
Include
5. Adequate and accurate description of all activities on the right-hand side of
the symbol concerned.
6. Number each activity for identification purposes by placing the number
with in the symbol. The convention for doing this is implied by the chart.
(a) Each class of symbol is numbered in its own sequence.
(b) Numbering begins on the main line of activities which is always placed on
the right- hand side of the chart.
(c) The numbering sequence continues until there is a junction with a subsidiary
line, when it jumps to the top of this subsidiary and proceeds downwards
Production & Operations
form there. Management : 51
Facilites Layout and The same convention is applied when meeting all other junctions. When combined
Material Handling symbols are used, the first number applies to the outer symbol.
7. Date concerning time, distance, weight, or quantity are shown on the left-
hand sid of the symbol it refers to.
NOTES
8. A summary of activities is shown at the bottom left hand side of the chart.
9. Use the same scale of breakdown in the analysis of activities so that the
comparison of present and proposed methods will not be distorted by
appearances.
10. Neatness and clarity in the layout of the chart help to simplify the process of
critical examination
5.2.2 Flow Process Chart
A process chart setting out the sequence of the flow of a product or a procedure
by recording all events under review using the appropriate process chart symbols.
(a) Man Type : A flow process chart which records what the worker does
(b) Material Type :A flow process chart which records what happens to material.
(c) Equipment Type :A flow process chart which records how the
equipment is used.
Present Proposed
No Time No Time
Operations 3 120
Transportation 2 nil
Inspections 1 20
Delays 2 40
Storages 3 nil
Distance Travelled 18 M
Fig..
It is also called from to chart, since it depicts the entire material flows amongst
the departments taken as source and destination. We present here in the fig. a typical
travel chart. The travel chat is of significant help in process type layout design. However,
it has no importance in product layout. It shows the material interface between
department. The higher the interface, the closer the departments are placed. It avoids
unnecessary materials handling. Though the theoretical ideal is not attainable in practice,
it is approximated as far as possible. The travel chart becomes a compact matrix of
materials flow. It is possible to computerize it. It can carry additional details about bulk
material handle, material handling equipment, method of material handling etc. to make
it more helpful. The entries in the chart are scattered on both the sides of the diagonal.
A to B and B to A departments’ travel requirements may be different. The sum of each
column (i.e., jobs entering the department and leaving the same department are equal).
It exercises a constraint on the continuity of the system. This is not valid for the first
and last department. The sum of first and last row exactly balance the sum of first and
last column.
Travel chart has the following merits.
1. Useful tool of materials movement analysis.
2. Useful to locate activities.
3. Alternative flows and layouts could be compared.
4. Relationship of activities in terms of volume of movement becomes clear.
5. Shows quantitative relationship and hence useful in computerization/Or
5.9 Summary
NOTES
Using incremental utilization heuristic, balance the line with minimum number
of workstations.
(9) The time to perform each task and the tasks that must immediately precede
are shown below :
Task Task that immediatly precede Time to perform task (minutes)
A - 0.25
B A 0.08
C B 0.12
D B 0.17
E C, D 0.06
F E 0.05
G E 0.09
H E 0.11
I F,G,H 0.16
J I 0.08
If 150 products are to be produced per hour and 50 minutes per hour are productive:
(a) Draw a precedence diagram.
(b) Determine cycle time.
(c) Determine minimum number of workstations required.
(d) Using longest task- time heuristic, belance the line. Determine Utilization
also.
(10) In a company, 5 parts are to be manufactursed. These 5 parts require machining
on 5 different machines. Requirement of various machines for making a part
is listed below :-
Part No Machines Required
1 A, D
2 B, C, E
3 A, D
4 B, C, E
5 A, B, C, E
Arrange this information on a matrix of parts and machine combination, as shown Production & Operations
Management : 55
Facilites Layout and in example 5.3.
Material Handling
Make cells for these parts so that to minimize the number of exceptional parts.
6.0 Introduction
Production & Operations Qualitative methods are used when neither historical data is available nor
Management : 58
independent variables can be easily identified. In qualitative or judgemental methods, Forecasting
we rely on experts opinion in making a forecast. These methods are useful for medium
to long- range forecasting.
NOTES
6.4 Extrapolative or Time Series Methods
Extrapolative methods are pattern finding in past data of demand. Past data may
contain different types of characteristics. These are known as components of past data.
These are horizontal, trend, seasonal and cyclic variations.
(a) Horizontal Component :- Here demand data fluctuates about average demand.
The average demand remains constant and does not consistently increase or
decrease.
(b) Trend Component :- Here demand data shows characteristics of sustained
increase or decrease from one period to the next. Demand of a product shows
positive trend during growth stage of product life cycle while it shows negative
trend in decline stage of product life cycle.
(c) Seasonal Component :- In some products, demand is either positively or
negatively affected by seasonal factors. For example, the sales of umbrellas
will be higher in mansoon period and lower in rest of the year, indicating a
positive seasonal component in the demand of umbrellas during mansoon
period.
(d) Cyclical Component :- Cyclical component is similar of seasonal factor except
in frequency and duration of occurrence. Seasonal component is visible at
regular intervals and is of constant length, whereas the cyclic component
varies in both time and duration of occurrence.
6.4.1 Moving Average Method
Moving average method is the simplest extrapolative method.
The process of determining forecast using moving average method is as follows_
(i) Select the number of periods (N) for which moving avarage will be computed.
(ii) Take the average demand for the most recent N periods.
(iii) Average calculated in step (ii) above is forecast for next period.
Example : Demand of mobile phones from a retail outlet at Nasik for January
2013 to June 2013 is 90, 80, 100, 110, 100 and 120 respectively. What is the forecast
for the month of July 2013?
Solution :
(i) We need to select a value for moving avarage period, say N=3.
(Note : Larger N values will have a greater smoothing effect on random
fluctuations in demand. Smaller N values will emphasize the more recent
demand history.)
(ii) Take average demand for the most recent 3 periods.
Moving Average = Demand for June, May and April
3 Production & Operations
Management : 59
Forecasting 120+100+110
= = 110 Units
3
(iii) The Forecast for July is therefore 110 Units.
NOTES (Students should check forecast for July using N = 4 and N = 5)
Now, Take the actual demand for July as 112 Units. Using N = 3, the forecast for
August will be computed by taking the average demand for May, June and July.
Limitations of Moving Average Method
(i) Moving average method requires the storage of demand data for N periods
for each item. It is advised to keep large values of N for greater smoothing
effect on ramdom fluctuations, therefore in a production situation where
forecasts for a large number of items are to be made, the data storage
requirements are significant.
(ii) Simple moving average method is not suitable for trend or seasonality
component in data.
(iii) It gives equal weight to the demand in each of the most recent N periods.
6.4.2 Weighted Moving Average Method
Weighted moving average method is improvement over simple average method
by assigning a different weight to each previous period. Steps are as follows :-
(i) Select period of moving average (N).
(ii) Assign Weights w1, w2,.... wn to these most recent N periods in such a way
that w1 > w2 > wN ..... > wN and w1 + w2 + ..... + wN = 1 Where w1is the weight
attached with most recent demand and wN is the weight attached to the demand
of Nth period from the most recent.
(iii) Calculate Weighted Moving Average using following expression.
Weighted Moving Average = W1D1+ .... + wNDN
(iv) Weighted moving average calculated in step (iii) above is the forecast for
next period.
Example 2 : Demand data is as follows :
7 85
8 102
9 110
Take moving average period N = 3. Weights are.50, .30 and .20 from most recent
(9 Week) to 7 th Week, respectively.
th
0 t
Time Fig. 1
In basic exponential smoothing model, the updated base for current period is
forecast for the next period.
The demand of current period is a result of average demand and fluctuations
which can be attributed to change in the base and random noise.
Updated base for current period is, therefore calculated as follows :
New Base or updated base = Previous Base + α (Demand for Current period -
Previous Base)
Where α is smoothing constant. Values of α can be between 0 to 1, but for most
practical purposes α varies between 0.01 to 0.30
In symbols, St=St-1 + α (Dt-St-1)
and Ft+1 = St
Example : Demand of a product in the month of April was 75 Units, while base
for month of march was 70 Assume α = .20, what will be forecast for May?
Solution : Forecast for May will be updated base for April.
SApril= α DApril + (1-α) Smarch
=.20 (75) + .80 (70)
= 15 + 56 = 71 Units Production & Operations
Management : 61
Forecasting Expontial smoothing methods are simple and resolve the issue of large data storage
of historical data.
Only current demand and base of immediate past period is enough for forecast.
NOTES In exponential methods, choice of α allows us to control the weighting of the new
demand. Small values of α have a stronger smoothing effect than large values. On the
other hand, large values of α reflect real changes in actual demand more quickly. Thus,
if fluctuations in demand are primarily due to randomness, small α should be taken. If
fluctuations in demand are due to a changing base, then a higher α should be chosen.
(Students can discuss effects of two extreme cases when α = 0 and α = 1.)
6.4.3.2 Exponential Smoothing with Trend Component
In past data, presence of trend component is very common. Trend can be positive
or negative. In a positive trend, demand increases over the periods while in negative
trend demand decreases over the periods.
Trend can be linear or ratio. The apparent linear trend is exponentially smoothod
averages is the difference between the successive values, St-S t-1. Ratio trend is
exponentially smoothed averages is the ratio of the successive values,
St
St-1
In case trend is present in our data, we will use one additional smoothing constant
(β) to smooth the St-St-1 Series. Values of β will also range between 0 ot 1. These values
may or maynot be similar to α values.
The process of calculation of forecast for next periods will require updated base
and updated trend.
Updated base will be calculated as follows :
St= α Dt+ (1- α) (St-1 + Tt-1) -A
Where Tt-1is trend of previous period.
The updated trend Tt=β (St-St-1) + (1-β) Tt-1 -B
Therefore forecast for next period = Ft, 1 = St+ Tt -C
and forecast for m period ahead = Ft,m = St+ mT -D
Example : Following demand data is available for a product for past six months:
Jan 19.50
Feb 24.00 Assume initial base of 20.00 and trend 0,
determine forecast for the month of July.
March 30.00
Take α = .2 and β = .1
April 32.00
May 29.00
June 35.00
Production & Operations
Management : 62
Solution : Using equations A and B, we can determine updated base and trend for Forecasting
various months from January to June.
Given S0 =20, T0 = 0
SJan = α DJan + (1- α) (S0 + T0)
1 10 10 10
2 30 50 50
3 50 50 60
4 10 10 20 Production & Operations
Management : 63
Forecasting Consider α = γ = .3
Solution : Here data of 2010 will be used for getting initial seasonality indices
for different quarters.
NOTES Average demand for 2010 = 25
So (I1)2010 = 10/25 = 0.4
(I2) 2010 = 30/25 = 1.2
(I3) 2010 = 50/25 = 2.0
(I4) 2010 = 10/25 = 0.4
Assume Base for fourth quarter of 2010 as 15.
= .3 ( 10
0.4
) + .7 (15) = 18
and (I1)2011 = .3 ( D1, 2011
S1, 2011
) + .7 (I 1, 2010
)
(S2)2011= α ( D2,2011
I2,2010
)+ (1-α) S 1, 2011
= .3 ( 50 )1.2+ .7 (18) = 25.1
and (I2)2011= γ ( D2,2011
S2, 2011
) + (1-γ) (I 2, 2010
) =.3 ( 50
25.1
) + .7 (1.2) = 1.44
(S3)2011= α ( DI 3,2011
)+ (1-α) S 2, 2011
= .3 ( 2.050 ) + .7 (25.1) = 25.07
3, 2010
a = Y - b x-
ΣX 60
X= = =6
n 10
ΣY 180
Y= = = 18
n 10
Σ XY - nxY 1159 - 10 (6) (18)
b= = = 1.717
Σ X - nx
2 2
406 - 10 (6)2
a = y- - bx- = 18 - 1.717 (6) = 7.698
The regression line is Y = 7.698 + 1.717 x
The regression line equation will yield forecasted values corresponding to any
value of independent variable 'x'.
The value of independent variable 'x' is known from some sources which are
independent.
Scatter diagram for the data in exhibit 2
22
18
16
Indian 14
Sales 12
10
8
6
4
2
0
0 1 2 3 4 5 6 7 8 9 10
Global Sales
Production & Operations
Fig. 3 : Scatter Diagram Management : 67
Forecasting In causal method, we have considered an independent variable 'X' to forecast 'Y'.
But in most of the situations all variations of 'Y' can not be explained by single 'X' only.
Ideally 'X' should be able to explain all variations of 'Y', but a measure known as
coefficient of determination (r2) is designed to know the strength of the linear relationship
NOTES between the two variables. There are three types of variations in Y : total, explained,
and unexplained.
Total variation = Explained variation + unexplained variation
Σ (Y-Y)2 Σ (Y - Y)2 + Σ (Y - Y)2
The Total variation is the sum of the squared deviations of each value of y from
its mean y-.
The explained variation is the sum of the squared deviation of Y values that lie on
the trend line from y-.
The unexplained variation is the sum of the squared deviations of y from Y values
on the trend line.
Coefficient of determination is determined by the ratio of explained variation to
total variation :
Explained variation Unexplained variation
r2 = = 1-
Total Variation Total Variation
For some data if r2= .85, This means that 85% of the variations can be explained
by the variation in independent variable 'X' and 15% has not been explained. If r2 is
low, then we should either look for another independent variable or include other
variables in the analysis.
Reliability of Forecasts :
Y
Figure 4 presents scattering of two
sets of data point, represented by 0 and
around same trend line. It is evident that,
on an average, the deviation between the
forecasted value and the actual value will
be points are widely scattered around the
line, as in case of 0 data set and smaller if
Fig. 4 Scattering of data points X
the data points are close to the line, as in
around Trend line
case of
Standard error of estimate, Sy.x, is a measure to know the extent to which data
points are scattered around a trend line.
__________
Sy.x=
√ Σ (Y - Y) 2
__________
n-2
Where Y and Y are the observed and the estimated values of the dependent variable.
If Sy.x is small relative to the forecast, past data points have been tightly grouped
about the trend line.
Production & Operations Simple regression analysis has its limitations in developing forecasts with high
Management : 68
accuracy in the real business world. In many such situations, multiple regression analysis Forecasting
is used when two or more independent variables are used in regression equation.
Consider an equation Y = 20 + 3.2X1+12.2 X2 - 0.6 X3
This is a multiple regression equation involving three independent variables x1, NOTES
x2 and x3.
Multiple regression analysis is used for forecosting for longer terms, as when
new products and services are contemplated or when new facility locations and capacities
are being considered. Multiple regression analysis requires considerable time and cost
because various hypotheses about the effect of various variables may need to be tested.
Now a days, standard computer programs are available easing the application of multiple
regression analysis.
In many situations it is very likely that neither we have enough past data to develop
a time series analysis nor we have knowledge of independent variables affecting demand
of the product in future. In these cases qualitative or judgemental methods are the most
scientific approoch to bring as much order as possible to judgements of experts. Some
of the important qualitative methods are delphi technique, market survey, historical
analogy and life cycle analysis and scenario based forecasting.
The Delphi Method : The delphi method is a consensus building process among
a panel of experts in a way that eliminates the potential dominance of the most verbal
expert. The result of Delphi method is a pooled judgement, in which both the range of
opinion and the reasons for differences of opinion can be seen.
Some experts from inside and outside the organization are taken. Each panel
member is an expert on some aspect of the problem, but no one is an expert on the
entire problem.
In this method, each expert in the group makes independent predictions in the
form of brief statements. The co ordinator of panel edits and larifies these statements.
Based on the feedback supplied by experts of the panel, co-ordinator provides a series
of written questions to the experts. Experts again make predictions in light of feedback
supplied by co-ordinator and process is repeated till a convergence is obtained. This
converged / consensus prediction is the forecast.
Delphi Techniques are suitable for longest term forecasting.
Market Surveys : Market surveys are costly and time consuming efforts for
forecasting. It tests market through questionnaires, surveys, tests of trial products etc.
There are a lot of sophistication in area of market surveys which is mostly discussed in
courses of statistics and market research.
Historical Analogy and Life Cycle Analysis :- These methods are used to
supplement market research studies. This method used product life cycle curve (S-
Curve) analysis of an ancestor of the product or service under consideration.
Production & Operations
Management : 69
Forecasting
6.8 How to have a successful forecasting system
6.9 Summary
NOTES
Week No. 1 2 3 4 5 6 7 8 9 10
(a) Determine forecast for 11th Week using 3, 5 and 7 week moving average.
(b) Also determine forecast for 8th, 9 th and 10th Weeks using three different
moving avarages, i. e. 3 week, 5 week and 7 week. Production & Operations
Management : 71
Forecasting (c) Determine MAD in case of three different forecasts as obtained in step (b)
for 8th, 9 th and 10th Weeks.
2. Consider following data for last two years, given on monthly basis.
NOTES Month No of Crimes Month No of Crimes Month No of Crimes
Reports Reports Reports
1 16 9 51 17 63
2 25 10 56 18 57
3 16 11 67 19 48
4 24 12 45 20 55
5 38 13 53 21 61
6 46 14 61 22 51
7 54 15 55 23 56
8 52 16 69 24 53
(a) Develop a moving average forecast for the past 5 months (Months 20-24)
with period of moving average = 3, 5, and 7 months.
(b) Which moving average results in the minimum MAD?
(c) Consider a 5 month weighted MA model with weights .45, .25, .15, .10 and
.05 in order of most recent period. Develop forecast for months 20- 24.
(d) Determine MAD for (c) and compare with MAD obtained step (b) above.
3. Assume an initial starting forecost of 100 units, a linear trend of 10 units, α =
.20, β =.30. If actual demand is 115. Determine forecast for the next period.
1.
7.0 Introduction
Have you ever gone shopping in a Big Bazaar, Easyday, Reliance Mart, Vishal
Mega Mart? The concept behind these stores is to offer high quality goods at high
volume and low cost in modest surroundings. It is entirely feasible to buy a 5kg potatoes
/ tomatoes/seasonal vegetable at a very reasonable price (lower than open market).
Does that sound tempting to you? All right, maybe potatoes / tomatoes / seasonal
vegetable aren’t the most glamorous food in the world, but you’ve got to admit that
prices these stores offers are quite a bargain. Suppose you bought all your food at such
a place. Most of the products come packaged in discount packs, like a 6-pack of soaps,
or 4-pack of Parle biscuits, or 2-pack of Colgate pastes, or 2-pack of a Real / Tropicana
Juice, 2l bottle of soft drink etc. Maybe such a store is 5-10 km from your home. If you
only get into the area once a month, those big packages might be just right. Come on,
wouldn’t you be tempted to make a once-a-month trip to the store to load up on all your
favorites? Production & Operations
Management : 73
Inventory Management Well, maybe not. What if you live in an apartment with a kitchen the size of a
cabinet? Where would you put everything? Or maybe you have one of those small
refrigerators. Then again, if you are student, maybe your cash flow is slower than
you’d like, and dropping Rs. 1000 at a time is a pretty big deal. Maybe you’d even
NOTES have to get a loan if you needed Rs. 1000. Then there’s all those vegetables / grocery /
daily needs items sitting, waiting, s-l-o-w-l-y wasting away. After all, how much of
that stuff can you eat? Still, running to the nearby store every other day to buy high-
priced daily needs items is no bargain, and the thought of getting all your shopping
done at once, saving time / conveyance cost by making one trip, the lower prices for
the higher quantity. One common thing that everyone may observe after visiting these
shopping malls is, they does not offer any thing unique which is not available in near
by small shops but these shopping malls differentiate themselves with other in terms of
HUGE STOCK OF ITEMS at a time. In nutshell, one can conclude that AMOUNT OF
STOCK provides a competitive dimension to these shopping malls.
NOTES
Figure 7.1
Industrial managers are hesitant towards inventories. On the one hand, inventories
are costly, blocking up considerable amounts of working capital. They are also risky
because items held in stock could deteriorate, become obsolete or just get lost, and,
furthermore, they take up valuable space in the organization. On the other hand, they
provide some security in a complex and uncertain environment. Knowing that one
have the items in stock, should customers or production schedules demand them, is a
comforting insurance against the unexpected. Certainly when a customer goes elsewhere
because just one item is out of stock, or when a major project is waiting for just one
small part, the value of inventories seems indisputable. This is the tight spot of inventory
management, in spite of the cost and the other disadvantages associated with maintaining
stocks, inventories do facilitate the smoothing of supply and demand. In fact inventories
only exist because supply and demand are not in harmony with each other.
Inventory is a stock of items held to meet future demand. Any item available with
us which is not being used right now, is inventory. The best examples of inventory are
at our home. We keep inventory of water, vegetables, milk, and grocery. One can observe
all these items at our home are kept in excess of our immediate requirement, they are
being stocked in anticipation of demand i.e. over the time these items may be required.
Similarly shops, retail stores, companies and industries keep inventory of various items
in anticipation of demand. Any organization whether buys parts and products or produces
them, is faced with decisions about inventory. Inventories are neither totally good nor
totally bad. Adequate inventories facilitate production activities and help to assure
customers of good service. The types of inventory and reasons for keeping them put
the foundation for inventory management practices. This chapter is primarily concerned
with general inventory management practices, and more specifically with minimizing
inventory costs.
Inventory can be defined as a stock of materials maintained to overcome
future demand.
Inventories are idle stocks of any kind that possesses economic value and
held for future use.
NOTES
Figure 7.4
Elements Types of carrying cost
i. Financing, Interest on money invested in inventory, and loss of positive cash
flow.
ii. Direct storage costs, like rent, heating, cooling, lighting, security, refrigeration,
record keeping, and internal transportation.
iii. Protection / security cost.
iv. Depreciation and obsolescence.
v. Product deterioration and spoilage, breakage, and pilferage.
vi. Taxes and insurance.
Methods of calculating carrying cost:
Summing all the individual costs just mentioned and assigning them on a per-unit
basis per time period, such as Rupees 20 per unit per year. Carrying costs can be
expressed as a percentage of cost of inventory item by summing all the individual costs
and assigning them on a percentage basis, such as 15% of cost of item per year to hold
inventory
Ordering costs
Ordering Costs are basically the cost of getting the item into the firm’s inventory.
They are occurred each time an order is placed and are expressed in revenue such as
Rupees or $ per order. Ordering Costs start with the requisition sent to purchasing
office, includes all cost of issuing to purchase order and of following it up, continue Production & Operations
with such steps as receiving the goods and placing them into inventory, and end with Management : 79
Inventory Management the buying firm’s paying the supplier. Salaries constitute the major ordering cost,
stationary is another ordering cost. Ordering cost per unit of item decreases as number
of units ordered in single order increases. Or as the number of orders per year increases,
the annual ordering cost increases, i.e. number of units ordered in single order decreases
NOTES (Is it a good idea to order a single pencil each time someone in the company needs
one?)
Figure 7.5
Types of ordering costs:
i. Salary of purchasing department employees,
ii. Paperwork associated with order placement, invoicing, and payment
iii. Transportation and shipping from the supplier.
iv. Receiving and inspection.
v. Handling and storage.
vi. Accounting and auditing costs.
Method of calculating ordering cost:
Usually the above costs are summed and applied on a “per order” basis.
Shortage or stockout cost — temporary or permanent loss of sales when demand
cannot be met because of insufficient inventory.
Later, we’ll see that the question of how much to order is based on the concept
that inventory carrying costs react inversely to inventory ordering cost. We’ll find the
optimal amount to order to avoid excess carrying cost and excess ordering cost.
Concept of Average Inventory
If a firm buys an item only once for the coming year, if use of the item is constant,
and if the last of the item is used on the last day of the year, then the firm’s average
inventory equals one-half of the amount bought; this is the same as saying one-half of
the beginning inventory. Fig.7.6 shows average inventory under conditions of constant
use.
In this mode of inventory system an order is placed after a fixed amount of time
period for a variable amount of items. The level of inventory is not contionously
monitored. The level inventory is cheked after fixed time period only. In many items Production & Operations
this kind of system is used, eg. distribution of bread, coke, pepsi, medicines. FMCG Management : 81
Inventory Management products by respective companies are ordered after fixed amount of time period.
Advantage
Orders for many items occur at the same time, which can result in economies in
NOTES processing and shipping orders.
Disadvantages
(a) Lack of control between reviews.
(b) The need to protect against shortages between review periods by carrying
extra stock.
(c) The need to make a decision on order quantities at each review
Here we keep two containers of inventory and reorder takes place when the first
is empty. The advantage of this system is that there is no need to record each withdrawal
from inventory; the disadvantage is that the reorder card may not be turned in for a
variety of reasons.
Tracking System
Universal Product Code (UPC) bar code printed on a label has information about
the item to which it is attached. Bar coding represents an important development for
other sectors of business besides retailing. In manufacturing, bar codes attached to
parts, subassemblies, and finished goods greatly facilitate counting and monitoring
activities.
NOTES
A 70-80 5-15
B 15-20 20-30
C 5-10 50-60
There are several variations of the EOQ model depending on the assumptions
made about the inventory system. In this section various quantitative formulas for
determining how much inventory to order and when to order will be developed. Once
basic EOQ model is developed, further EOQ model shall be modified to remove some
of the assumptions that may limit the application of the EOQ model i.e. the EOQ
model with non instantaneous receipt and the EOQ model with shortages
Basic EOQ Model
The EOQ model is the oldest and the best-known inventory model. Its origine
Production & Operations
date all the way back to the 1915 and is credited to Ford Harris, an employee at Management : 83
Inventory Management Westinghouse, USA. The purpose of using the EOQ model is to find that particular
quantity to order which minimises total inventory costs. EOQ is essentially a single
formula for determining the optimal order size that minimises the sum of carrying
costs and ordering costs.
NOTES
EOQ is the optimal order quantity that will minimize total inventory costs.
To understand the EOQ model, refer figure 7.9. The sketch shows inventory levels
plotted against time. The value, “Q,” represents the quantity of items ordered each
period. Notice that it spikes up on a regular basis, and then shows a linear decrease
Q
until it reaches 0. The average inventory on hand during an order interval is ,
2
because at any give time maximum inventory is Q and at any given time the minimum
inventory is 0. Therefore, average
Q
will be :
2
D
Co = Annual ordering cost
Q
TC = total cost of inventory per year
Q
=Length of order Cycle
D
To define annual inventory costs, recall that shortage cost is zero because no
shortages are allowed by our assumptions. That leaves total annual inventory cost
composed of inventory carrying cost and inventory ordering cost. Refer figure-7.12,
which shows the total annual inventory cost plotted against order quantity. Notice the
straight line representing carrying cost. It starts from zero and increases at a constant
rate (also refer figure – 6.4). This should make sense to you, as the quantity of items
ordered increases for each order, the annual inventory carrying cost increases because
more space, financing, etc. are needed. The opposite is true of the ordering cost line.
When a small quantity of items is purchased in each order, the ordering costs will be
high because there will be a large number of orders over the year. When a large quantity
is purchased, the number of orders will be low, so the annual ordering cost will be low,
(also refer figure – 7.5). The third line on the graph is gotten by adding the carrying
cost and ordering cost at each quantity to get total inventory cost. Notice that it starts
high, decreases, levels out, then increases and ends up high. The point where it levels
out is the point where total inventory cost is minimized.
NOTES
The annual carrying cost is gotten by applying the per unit carrying cost, Cc, to
Q
the average inventory held during the order interval :
2
Q
Annual carrying cost = × Cc
2
If the number of units demanded for the whole year is DDand the quantity purchased
in each order is Q, then the number of orders for the year is By applying the cost per
Q
order, Co, to the number of orders, the total annual ordering cost can be defined:
D
Annual ordering cost = × Co
Q
The total annual inventory cost is the sum of the carrying cost and the ordering
cost:
⎛Q ⎞ ⎛D ⎞
TC = ⎜ × Cc ⎟ + ⎜ × C o ⎟
⎝2 ⎠ ⎝Q ⎠
One can also solve for Q by noting that the minimum total cost occurs at the point
where carrying cost equals ordering cost.
Q D
× Cc = × C o
2 Q
Q D × Co
=
2 Q × Cc
2 × D × Co
Q2 =
Cc
2 × D × Co
Q=
Cc
The optimal order quantity necessary to minimize total inventory cost is defined
by the above equation, know as the economic order quantity:
2DCo
Qoptimal or EOQ =
Cc
⎛Q ⎞ ⎛ D ⎞
Total Annual Inventory Cost minimum = ⎜ optimal × Cc ⎟ + ⎜ × Co ⎟
⎠ ⎜⎝ Qoptimal ⎟ Production & Operations
⎝ 2 ⎠ Management : 87
Inventory Management Method 2
Slope of any point is zero. From calculus one can get the slope of the total cost
line by taking the derivative of the equation that defines that line. Since the slope at the
minimum point is horizontal, or equal to zero. Therefore, optimal order quantity is
NOTES
found by equating the derivative of total annual cost of inventory (TC) with respect to
quantity (Q) equal to zero and further solving for Q.
Total annual inventory cost is given by:
Q D
TC= × Cc + × Co
2 Q
The derivative of TC with respect to Q is:
d(TC) dQ D
= Cc + Co
d(Q) 2 dQ
d(TC) ⎛ Cc ⎞ ⎛ D ⎞
= ⎜ ⎟ + ⎜ − 2 Co ⎟
d(Q) ⎝ 2 ⎠ ⎝ Q ⎠
As minimum cost point is lying on a point, therefore set the derivative of TC
d(TC)
i.e. = 0 and solve for Q.
dQ
⎛C ⎞ ⎛ D ⎞
0= ⎜ c ⎟ + ⎜ − 2 Co ⎟
⎝ 2 ⎠ ⎝ Q ⎠
Cc D
= Co
2 Q2
2DCo
Q2 =
Cc
2DC o
Q=
Cc
2DCo
Qoptimal or EOQ=
Cc
⎛Q ⎞ ⎛ D ⎞
Total Cost minimum = ⎜ optimal × Cc ⎟ + ⎜ × Co ⎟
⎝ 2 ⎠ ⎜⎝ Qoptimal ⎟
⎠
It is important to understand the concepts that underlie the EOQ model:
i. Annual inventory cost is minimized at the order quantity where carrying
cost exactly equals ordering cost.
ii. The EOQ represents the optimal order quantity that minimizes total inventory
cost.
Production & Operations
Management : 88 iii. The EOQ tells how much to order.
iv. The number of orders for the year is represented by D/Q. Dividing the year Inventory Management
by the number of orders tells when to order (based on the constant demand
rate assumed in the model).
v. The EOQ can be adapted for use in production problems. Qoptimal corresponds
NOTES
to production lot size and Co corresponds to set-up cost.
The next example illustrates these concepts:
Example 7.1
Check Your Progress
A paint shop wants to order the optimal quantity of paint tins to minimize its
6. List donw various
inventory costs. The estimated annual demand for the paint tins is 10,000, the carrying
assumptions in
cost is Re.0.75 per tin, and the ordering cost is Rs.150 per order. What is the quantity to
developing basic EOQ
order, the annual inventory cost, number of orders, and time between orders?
model.
Solution
Given,
D=10000
Cc=Rs.0.75 per tin
Co=Rs.150 per order
Qoptimal D
Total Cost minimum = Cc + Co
2 Qoptimal
The total inventory cost is Rs. 1500. Note that the carrying cost equals the ordering
cost.
D 10000
Number of orders per year = Q = = 5 orders / year
optimal 2000
The paint shop is open 311 days annually, so the order cycle time, or number of
shop-days between orders is:
= 100 units
D 1000
(ii) Number of orders per year = Q = = 10 orders / year
optimal 100
Q 100
(iii) Cycle Length = = = 0.1 per year = 0.1 x 360 days/year = 36 days i.e.
D 1000
after 36 days order is being placed.
Qoptimal D
Total Annual Inventory Cost minimum = Cc + Co
2 Qoptimal
NOTES
⎛Q⎞
Imax = (p - u) × ⎜ ⎟
⎝p⎠
Minimum inventory level = 0
Total annual inventory cost = Annual Carrying Cost + Annual Ordering Cost
⎡⎛ Q ⎞ ⎛ p - u ⎞⎤ ⎛D ⎞
TC = ⎢⎜ ⎟ × ⎜ ⎟ ⎥ × Cc + ⎜ ⎟ × Co
⎣⎝ 2 ⎠ ⎝ p ⎠⎦ ⎝Q⎠
Similar to basic EOQ model, set the derivative of total annual inventory cost
(TC) with respect to amount of inventory (Q) equal to zero and solve for Q.
or
⎛D ⎞ ⎛p-u⎞
⎜ Q 2 ⎟ × Co = ⎜ 2p ⎟ × C c
⎝ ⎠ ⎝ ⎠
or
⎛ 2DCo ⎞ ⎛ p ⎞
Q2 = ⎜ ⎟×⎜ ⎟
⎝ Cc ⎠ ⎝ p - u ⎠
or
⎛ 2DCo ⎞ ⎛ p ⎞
EOQ non instantaneous or Q NI = ⎜ ⎟×⎜ ⎟
⎝ C c ⎠ ⎝p-u⎠
QNI
Cycle Time = time between beginning of range
u
Q NI
Run time = production phase of the cycle
p
Example 7.3
A toy manufacturer uses 48,000 rubber wheels per year for its popular dump
truck. The firm makes its own wheels, which it can produce at a rate of 800 per day.
The toy trucks are assembled uniformly over entire year. Carrying cost is $ 1 per wheel
a year. Setup cost of production run of wheels is $45. The firm operates 240 days per
year. Determine the:-
(a) Optimal Run Size.
(b) Minimum total annual cost for carrying and setup.
(c) Cycle time for the optimum run size.
(d) Run time.
Solution
Given
D = 48,000 wheels per year
Co= $ 45
Cc= $ 1 per wheel per year
P = 800 wheels per day
U = 48,000 wheel per 240 days or 200 wheels per day
2 DS p 2(48000)45 800
Qp = . . =2400 wheels
H p−u 1 800 − 200
I max D
TCmin = .H + .S so we first must find I
2 Q max
Qp 2400
.( p − u ) .(800 − 200) = 1800 wheel
p 800
Q p 2400
Run time = = = 3 days NOTES
p 800
Qopt =
TCmin = + + PD
Qopt = = = 100
This is the optimal quantity to order if there is no quantity discount. We’ll compare
the inventory cost of ordering this optimal amount with the cost of ordering the lowest
quantity necessary to get the next lowest card price, $0.90.
The price of cards for an order of 100 is $1.00 per card:
TC100 = + + PD
Production & Operations
Management : 96
Inventory Management
TC100 = + + ($1.00)(500)
TC100 = $510
NOTES
To get a price of $0.90, an order of 150 must be placed. The total inventory cost
is computed if 150 cards is ordered:
TC150 = + + PD
TC150 = + + ($0.90)(500)
TC150 = $460.48
The calculations so far show that it makes sense to order the larger amount, 150.
e. An order of 200 cards will cost $0.80 per card. What is the total inventory cost
for an order of 200?
f. Does it make sense to place an order for 200?
e. Answer: $412.50
f. Yes, the total inventory cost is lower because of the quantity discount
7.7.3 Reorder Point
In previous calculations we determined how much to order, the number of orders
to place annually, and the number of days between orders. We can also calculate when
an order should be placed based on how much inventory is left in stock. As inventory
is used, the quantity is depleted to a level known as the reorder point. An order must be
placed at this point so that inventory will not run out before the next order arrives. The
equation for reorder point is:
R = dL
where
d = demand rate per period
l = lead time
Example 7.5
The annual demand for the carpet is 10,000 yards. The store is open 311 days per
year. If the lead time to receive an order is 10 days, what is the reorder point?
Inventory Level
Q
Reorcer
Point, R
0 LT LI
Time
Fig. 7.15 : Variable Demand with a Recorder Point
As a hedge against stockouts when demand is uncertain, a safety stock of inventory
is frequently added to the expected demand during lead time.
NOTE: Safety stock is not added to EOQ (the amount of inventory ordered). It
is added to the re-order point, meaning an order is placed sooner than it would be if
demand was certain.
Service Level
The amount of safety stock needed is determined by the service level desired by
the company. The service level is the probability that the amount of inventory on hand
during the lead time is sufficient to meet expected demand — that is, the probability
that a stockout will not occur. A service level of 90 percent means that there is a .90
probability that demand will be met during lead time.
7.7.4 Reorder Point with Variable Demand
To compute the reorder point with a safety stock that will meet a specific service
level, the following equations are used:
R= L+z
where
= average daily demand
L = lead time
s d = standard deviation of daily demand
z = number of standard deviations for desired service level
z = safety stock
Production & Operations The term in this formula for the reorder point is the square root of the sum
Management : 98
of the daily variances during lead time: Inventory Management
Variance = (daily variances) x (number of days of lead time) = s d2L
Standard Deviation = s d
The Figure below illustrates the added quantity necessary for safety stock. The NOTES
blue area on the bottom is safety stock. Notice that the “dip” for cycle two is covered
by the safety stock on this graph.
Inventory Level
Q
Reorcer
Point, R
0 LT LI
Time
Fig. 7.17 : Reorder Point with a Safety Stock
This Figure 7.17 depicts a normal probability curve for demand during lead time.
The average demand during lead time is at the center of the normal curve. The unshaded
area under the curve represents the probability of a stock out.
For a service level of 95 percent, a normal probability chart shows z = 1.65. To
get the value, recall that the entire area under the curve is 1.0. The unshaded area is
0.05. Because normal probability charts, like the one in Appendix A show only the
values of z for the right-hand side of the curve, only the area under the curve on the
right-hand side must be used to derive z-values. The total area on the right-hand side of
the normal probability curve is one-half of the total area, or one-half of 1, or 0.50. The
shaded portion of the right-hand side of the curve for a stockout probability of 0.05 is
0.50 - 0.05, or 0.45. In the chart in Appendix A, look for 0.45 in the columns of numbers
to the right of the Z-column. The values 0.4495 and 0.4505 occur where Z = 1.6 looking
horizontally across to the left. Looking vertically above, the columns for 0.4495 and
0.4505 are headed with the numbers 0.04 and 0.05, respectively, so 0.45 occurs at
about 0.045. This value is added to Z = 1.6, to get Z = 1.645.
Fig. 7.17 :L Recorder Point for a Service Level Production & Operations
Management : 99
Inventory Management Example 7.7
For the carpet store, assume the daily demand for carpet is normally distributed
with an average daily demand of 30 yards and a standard deviation of 5 yards per day.
The lead time is 10 days. Determine the reorder point and safety stock if the store
NOTES wants a service level of 95 with the probability of a stockout equal to 5%.
Solution
= 30 yards per day
L = 10 days
SD = 5 yards per day
For a 95% service level, the value of z is 1.645. The reorder point is calculated as:
R= L+z
R = (30)(10) + 1.645
R = 326.1
Carpet should be re-ordered when the level of inventory is depleted to 326.1
yards.
The safety stock is the amount:
Safety stock = z = 1.645 = 26.1 yards
8.0 Introduction
In an organization, operations system is responsible to fulfill demand of market
by producing products at the right time. A motorbike company takes a conscious decision
to produce 1,00,000 bikes monthly. Changing the monthly production rate is not simple
and instantaneous decision.
Operating systems require different types of resources such as labour, resources,
market and materials etc. Effective production planning is the key to successful
operations in a production system. Planning is possible from strategic level to operational
level, time horizon becomes shorter.
Here in this unit we understand aggregate planning. Aggregate planning is an
intermediate term planning approach. Here operations manager develops medium- range
plans of how they will produce products for next 9 to 12 months. These plans specify
the amount of labour, subcontracting, and other sources of capacity to be used.
We will study meaning of aggregate planning, some known aggregate planning
strategies such as the level strategy, the chase stratety, and the mixed strategy. It also
discusses master production schedule, meterial requirement planning, manufacturing
Production & Operations resource planning (MRPII) and enterprise resoure planning (ERP) concepts in brief.
Management : 104
MBA 108 unit 7
Production Planning
8.1 Unit Objectives : and Contral
5200
4500 3600 4700
Aggregate
Demand
Demand 2000
1500 1300 `D’
1400
1200 `C’
1200 1000
1000 `A’
1000 1000
800 800 800
1 2 3 4
Seasons
Figure 8.2 : Aggregating individual product demand into aggregate demand
8.3.1 Casts associated with Aggregate Plans
1 Straight - time labour cost :- Straight time labour rates are paid to labours. Normally
8 hrs. per day for a six day week are considered straight time. The sources of
labour are full time and part time present employees, new hires, and workers who
have been laid off and can be recalled.
2 Overtime Cost :- Cost associated with payments for overtime work. Overtime
work is done after normal working hours. Rates of overtime is normally more
than straight time rates.
3 Inventory holding Cost :- Cost assoiciated with holding extra production in
previous periods for shipment in later time periods.
4 Subcontracting Cost :- Cost associated with production of products by suppliers.
5 Back ordering Cost :- Cost in terms of penalties for fulfilling previous periods
demand in subsequent periods.
Traditional aggregate planning techniques are based upon three factors number
of workers, utilization of workers, and inventory size. In different techniques, one NOTES
factor is variable while two factors are kept constant.
Level strategy and chase strategy are two basic types of aggregate planning Check Your Progress
technique. 1. Prepare aggregate
8.4.1 Level Strategy demand of four
important products (in
In the level strategy, production capacity is held constant over the planning period.
units) of a nearby shop.
Therefore inventory size becomes variable keeping number of workers and utilization
of workers constant. During months of low demand, the excess production are kept as
inventory. During high demand months, demand is fulfilled from inventory.
In this strategy cost of hiring and training new workers is zero, cost of laying off
is also zero.
8.4.2 Chase Strategy
This is opposite of level strategy where no inventory is kept. Production capacity
is varied in each period to exactly match the forecasted aggregate demand in that period.
During periods of high demand, additional workers are hired, the number of working
hours is increased, overtime is done and more capacity is obtained by outsourcing the
unmet demand. During periods of low demand, some workers are laid off, and some
may be asked to work for less than straight time hours. This approach is more suitable
when stocking of inventory is not possible.
8.4.3 Mixed Strategies
Level and Chase Strategies are generic strategies for aggregate production
planning. Mixed Strategies are combinations of two pure strategies in different ways.
Sometimes no hiring or fining is done, but production rate is adjusted by varying the
number of shifts or by subcontracting etc.
In most cases, we maintain level production during periods of low demand by
stocking inventory and chase the demand by additional alternatives during periods of
high demand.
Additional alternatives are selected on the basis of total cost structure. Following
examples will help us to compute total cost of pure strategies as well as mixed strategies.
Example 7.1 : Shri Sai computers is a PC assembling company based at Nasik.
Company is in the process of making APP for next year. Every worker assembles two
computers a day. The overtime cost is Rs. 25 per day per unit in excess of the maximum
capacity of the company. i. e. 100 units. The company wants to find the total cost
involved in the following plans :
(a) Level output plan
(b) Chase plan
Table 7.2 gives forecast for next year with working days in each month.
Demand 500 200 240 300 250 400 500 550 600 400 300 200
NOTES
(in units)
Month Demand No. of Output Monthly Begining Net addition Ending Average
(in units) working Rate Output Inventory or subtraction Inventory Inventory
Days (Units/day) (Units)
(6)+(8)
_____
(1) (2) (3) (4) (5)=(3)x(9) (6) (7)=(5)-(2) (8)=(6)+(7) (9)
2
Total Cost of level output rate plan is total of inventory cost and backorder cost=
Rs. 2405.
Column (3) of table 8.4 gives no. of units backordered in a period. Backorder will
exist if monthly output is less than demand and no inventory is available to fulfill the
demand. e. g. in month of Junuary, output is 391 units while demand is 500 and no
beginning inventory, so backorders are 109 units. In June, July, August also production
was less than the demand, but inventory from earlier periods helped in fulfilling the
demand, resulting in zero backorders for these periods. In september, production is
short by 226 units. Begnning inventory was 137 units. So back order of 89 units is
shown in this month
For Chase output plan, the production output is planned so as to follow the demand
forecasts in every period (month). Change in output rate every month will result in
hiring and firing of workers. In this case cost of inventory and backorders will not be Production & Operations
Management : 109
Production Planning present, but cost of training of hired workers and cost of compensation for fired workers
and Contral will be involved. Assume cost of hiring a new worker Rs. 500 per worker and cost of
firing is Rs. 1000 per worker. Table 8.5 gives calculations of number of new hired and
fired workers. We will start calculation assuming 11 workers in the company. This
NOTES number is obtained as follows :-
Demand of January = 500 units
No of working days in January = 23
Daily production required = 500/23 = 21.74 units.
Output rate of individual worker = 2 units / day
Therefore, number of workers required in January = 21.74 / 2
= 10.87
= say 11
Table 8.5 : Chase plan for example 8.1
Month Demand No. of Daily New Laid No. of workers Cost of Hiring Cost of
(units) working Production Hired off available new workers Firing
(1) (2) Days (2)
_____ (5) (6) required (8) = (5) x Rs. 500 (9) = (6)xRs 1000
(3) (4) (7)
(3)
The total cost of chase plan is Rs. 21,000. In table 8.5 we have not included
calculation of inventory. Ideally, in a chase plan, no inventory will be developed, but
some inventory will be there due to rounding off problems.
Comparing cost structures of level output rate (Rs. 2405) and chase plan (Rs.
21,000), clearly we will select level strategy. It is dependent on the availability of
workers, space for inventory and related factors.
Example 8.2 : A manufacturer of T- Shirts is preparing an aggregate production
plan for next six months from April to September. Table 8.6 gives monthly forecasted
Production & Operations demand and number of working days.
Management : 110
MBA 108 unit 7
Table 8.6 : Data for example 8.2 Production Planning
and Contral
Month April May June July August Sept
The manufacturer currently works on a single shift basis and employs 30 workers.
One T- Shirt requires 10 hrs of manufacturing time. There is no opening stock of
inventory and manufacturer chooses to devise a chase production strategy. The following
additional information is available :
1. Overtime costs are Rs. 50 per hour and undertime costs are Rs. 25 per hour.
2. Hiring and training expenses are Rs. 1500 per worker and laying- off costs are
Rs. 2000 per worker.
Evaluate the following options for chase strategy and offer your suggestions to
the garment factory owner.
(a) Utilizing overtime and undertime alternatives.
(b) Using hiring and laying- off alternatives for capacity adjustments.
Solution :- (a) chase strategy using overtime (OT) / under time (UT) in this
strategy, the demand- supply mismatch is addressed through use of OT during periods
of high demand and UT during periods of low demand. Take case of month of June,
demand is 300 units, i. e. requirement of working hours = 300 X 10 = 3000 Hours,
available capacity with 30 hours working 8 hours a day for 21 working days in June =
30 X 8 X 21 = 5040 Hours. Therefore 2040 hours of UT will be allowed during June at
the rate of Rs. 25 per hour.
As explained in example 8.1 also, chase strategy does not result in carrying
inventory, there will be no inventory carrying cost. By computing the extent of OT /
UT required and the costs associated with this in every month one can arrive at the cost
of the plan. Table 8.7 shows all relevant calculations.
Table 8.7 : Calculation of OT / UT costs for example 8.2
28 - 2 152 7800=2X2000+152X25
36 8 - 136 15400=8X1500+136X25
18 - 18 24 36600= 18X2000+24X25
16 - 2 172 8300=2X2000+172X25
15 - 1 40 3000=1X2000+40X25
11 - 4 136 11400=4X2000+136X25
Comparing two cost structures, it is advised to choose chase strategy with hire-
lay off system.
Note :- In many cases cost of hire- lay off is higher than any other alternative.
Moreover there are other costs that are hard to measure. For instance, frequent hire /
lay off may not be feasible in several sectors involving skilled workers. The training
costs and lost productivity during the learning phase would have been grossly under
- estimated. Moreover, such practices could result in low morale / motivation among
the workers, leading to productivity and quality problems. These costs are difficult to
quantify.
Example 8.3 : Consider example 8.2. assume that on the basis of earlier
calculations the company has come up with a plan with following alternatives.
(a) Hire 5 more workers at the beginning of April.
(b) Lay off 20 workers at the end of May.
(c) Maintain constant working hours (1 shift of 8 hours.)
(d) Absorb the demand - supply mismatch by building inventory during periods
of loan demand and by resorting to OT during periods of excess demand.
Evaluate the cost of this plan.
Solution :- 5 workers are hired at the beginning of April and 20 are laid off at
the end of May. This means during April and May 35 workers are available while 15
workers are available from June to September. Table 8.9 gives capacity available in
each month.
Table 8.9 : Calculation of available capacity for example 8.3
Intercompany orders 20 10 10
Branch Warehouse orders 20
R & D orders 5 5
Customer Demand 15 15 15 15 15
Intercompany orders 10 10
Branch Warehouse orders 20
R & D orders 5 5
Customer Demand 25 25 25 20 20
The safety level is the minimum level of planned inventory. The safety stock for
A is 10 and for B is 20 units. The fixed lot size for A is 25 units and for B is 35 units.
The starting inventory for A is 10 units and for B it is 20 units. Prepare MPS for these
two products.
Solution :- For each product, take the total demands, consider beginning, inventory,
determine in which weeks ending in ventory would fall below the safety stock (SS) and
this require production, and schedule a lot of the product to be produced during those
weeks.
Table 8.12 : Calculation of production requirements and ending inventory
for products For product 'A' Check Your Progress
Week Beginning Total Balance Required Ending 3. What do you
(1) inventory Demand (4)=[(2)-(3)] production (5) inventory understand by master
(2) (3) (Fixed lot size (6) production schedule?
if (4) is less than [(2) + (5) - (3)]
SS; if not, then zero)
1 10 15 (5) 25 20
2 20 40 (20) 50 30
3 30 40 (10) 25 15
4 15 25 (10) 25 15
5 15 25 (10) 25 15 Production & Operations
Management : 115
Production Planning Note : For product A, SS is 10 units, fixed lot size is 25, and beginning inventory
and Contral in week 1 is 10 units. See in second week here, 20 units are short of demand and 10
units are needed for SS, So total 30 units are required, lot size is of 25 units. So we are
producing two lots; 25 X 2 = 50, in week 2.
NOTES
For product `B’
1 20 25 (5) 35 30
2 30 35 (5) 35 30
3 30 45 (15) 35 20
4 20 35 (15) 35 20
5 20 25 (5) 35 30
For product B, SS is 20 units, fixed lot size is 35, and beginning inventory in
week 1 is 20 units.
Table 8.13 : Master production Schedule (Number of products A and B)
1 2 3 4 5
A Total Demand 15 40 40 25 25
Beginning Inventory 10 20 30 15 15
Required Production 25 50 25 25 25
Ending Inventory 20 30 15 15 15
B Total Demand 25 35 45 35 25
Beginning Inventory 20 30 30 20 20
Required Production 35 35 35 35 35
Ending Inventory 30 30 20 20 30
Example 7.5 : The firm in example 8.4 now wishes to determine if the MPS that
was developed underloads or overloads the final assembly line that produces both NOTES
Product A and Product B. The final assembly line has a weekly capacity of 80 hours
available. Each product A requires 0.75 hours and each product B requires 1.5 hours of
final assembly capacity. (A) Compute the actual load. (final assembly hours required
to produce the MPS for both products.) (B) Compare the load to the final assembly
capacity available in each week and for the total 5 weeks; (Rough cut capacity planning.)
(C) Does sufficient final assembly capacity exist to produce the MPS? (D) What changes
to the MPS would you recommend?
Solution :- (A) Table 14 gives calculation of load in each week and for the five
weeks, and comparison of load to the final assembly capacity :
Table 8.14 : Load as per MPS of Table 8.13
Week 1 2 3 4 5 6 7 8
8.8 Summary
NOTES
Structure
9.0 Introduction
9.1 Unit Objectives
9.2 What is Quality?
9.3 Cost of Quality
9.4 Famous Quality Guru
9.5 Total Quality Management (TQM)
9.6 Six Sigma
9.7 Statistical Quality Control
9.8 Quality Certification
9.9 Summary
9.10 Key Terms
9.11 Questions and Exercies
9.12 Further Reading and References.
9.0 Introduction
Quality as a competitive criterion has been thrust centre stage since the late 1970s.
The success of Japanese manufacturing firms in the 1970s and 1980s is largely attributed
to a quality revolution sweeping across these firms. Many studies are available comparing
quality of Japanese and American products. Studies were conducted in the field of air-
conditioners and automobile sector particularly. In one of the study conducted by
Massachusetts Institute of Technology (MIT), it was found that Japanese manufacturers
were employing fewer workers, smaller purchasing departments and fewer defects in
final products as compared to American manufacturers.
For most companies today, superior quality is at the core of their business strategy.
For these companies, attaining near- perfect product quality is seen as a major source
of capturing market share in global competition. Achieving superior product quality
within a business requires a long- Term process of changing the fundamental culture of
the organization. This unit is about quality management, which will discuss traditional
thinking on quality management and new approach known as total quality management.
There are some very interesting costs associated with product quality. Three basic
NOTES assumptions are taken to discuss these costs : (1) failures are caused, (2) prevention is
cheaper, and (3) performance can be measured. Four types of costs of quality are as
follows :
(i) Internal failure costs :- When products are found to be defective while in
production, they must be either scrapped or repaired or reworked. The costs
of repair, rework, retesting defective products and all the costs of delays,
paperwork, rescheduling and other handling are internal failure costs.
(ii) External failure costs :- These costs are for defects when a defected product
pass through the system. Customer warranty replacements, loss of customers
or goodwill, handling complaints and product repairs are external failure
costs.
(iii) Detecting Defects (Appraisal Costs) :- This includes the cost of inspection,
testing and other quality contral activities to ensure that the product or process
is acceptable.
(iv) Prevention Cost :- The sum of all the costs to prevent defects, such as the
costs to identify the cause of the defect, to implement corrective action to
eliminate the cause,
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account of similarities
and differences
between thoughts of
various quality gurus.
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Management : 124 )LJ7DJXFKL¶VORVVIXQFWLRQ
source and means that every worker, secretary, engineer must be responsible for Quality Management
performing their work with perfect quality.
Genichi Taguchi :- He focused quality from a different perspective. He aimed to
reduce variations to function satisfactory despite variations on the production line or in NOTES
field. He introduced concept of loss function to measure quality.
Figure 9.4 shows loss function of Taguchi, which establishes a financial measure
of user dissatisfaction with a product's performance as it deviates from a target valus.
√
σ= Σ (x-x)2
___________
η-1
SSPRXWVLGHıOLPLWV
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V
SSERXWVLGHVOLPLWV
V V
LCL = p- - 3 __________
p (100-p)
n
Where p- is Average level and n is number of units in a sample.
Example 1 : In a shift of production 10 samples are taken of 100 items each. In
each sample 4, 3, 3, 6, 1, 9, 5, 12, 4, and 3 items are defective respectively.
4+3+3+6+1+9+5+12+4+3
________________________
Here p = =5
10
Figure 9.8 is p chart for given data. only one point having p value of "12" is above
UCL which is out of acceptance range.
Production & Operations
Management : 128 This is alarming point. If chart gets this point, we need to immediatly stop the
process, look for reasons for bringing Quality Management
12
11.53=ULC
process out of acceptance range, correct
those reasons and then start the process. 9
This chart should not follow any trend. 6
5=AL
It should show randomness while plotting 4 5 4 NOTES
3 3 3
the data. If all points are below AL or 1
0=LCL
above AL, it means process is biased and Check Your Progress
same process has to be improved to Fig. 9.8 4. Describe various steps
restore randomness in the process only. in making X and R
X-and R charts :- These charts are used in controlling variables. The size of the chart
samples, number of samples, frequency of samples, and control limits are four main
issues in constructing X- and R charts.
For a particular variable in a sample, we are taking n observations. Measurement
of this variable is x1, x2, ........xn
x1+x2... + xn
____________
So x = , and R = xmax - xmin in a sample
n
UCL of X- Chart = x=+AR LCL of R Chart = D1R-
LCL of X- Chart = x=+AR UCL of R Chart = D2R-
A, D1and D2are determined on the basis of sample size.
2 1.880 0 3.267
3 1.023 0 2.575
4 0.729 0 2.282
5 0.577 0 2.116
10 0.308 0.223 1.777
Sample No. 1 2 3 4 5 x R
7 10.00 10.12 10.00 9.80 9.90 9.964 0.32 Production & Operations
Management : 129
Quality Management 8 9.75 10.00 10.08 9.90 10.10 9.966 0.35
ULC=10.152 ULC=.643
AL=9.977 AL=.304
LCL=9.80 LCL=0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
X Chart R Chart
Fig. 9.9 X and R chart
Figure 9.9 shows x-and R charts. Here data points are randonly distributed around
mean value. If any point goes out of these limits, we will stop the process to correct the
fault and then we start the process again.
Acceptance Sampling :- In many situations, it is either impossible or uneconomical
to inspect and test each and every product. In some products, we perform destructive
tests where product does not survive after the test. In case of quality check through
destructive tests, such as pressure testing of cylinders, acceptance sampling is the
desired statistical method.
Single or double sampling plans can be made as per requirement. In a single plan,
an acceptance or rejection decision is made after drawing only one sample from the lot.
Following steps are followed in a single sampling plan!
(1) Lot size = N items
(2) Select a random sample of n items.
(3) Decide a pre defined acceptance level 'X'
Production & Operations (4) Test n items on decided quality parameters.
Management : 130
(5) p items out of n are found OK. Quality Management
(6) Decision rule, if p > 'x' accept the lot
if p < x reject the lot
NOTES
9.8 Quality Certification
Quality certification, particularly ISO 9000 has become very much popular in near
past. ISO 9000 is a series of international quality standards that have been developed
by the international organization for standardization. Many Indian manufacturing and
services company are applying and getting ISO certification. Within ISO 9000 group
principal standards are ISO 9001, 9002 and 9003. These all are requirement standards.
Out of these, ISO 9001 is the most comprehensive.
Scope of ISO 9001 is model for quality assurance in design, development,
production, installation and servicing. ISO 9002 and ISO 9003 are derivatives of the
9001. ISO 9002 is a model for quality assurance in production, installation and servicing
while 9003 deals with final inspection and test.
Another important series ISO 14000 deals with environment management. ISO
14000 family provides practical tools for companies and organizations looking to identify
and control their environmental import and constantly improve their environmental
performance. ISO 140001:2004 and ISO 14004:2004 focus on environment management
systems. The other standards in the family focus on specific environment aspects such
as life cycle analysis, communication and auditing.
ISO 22000 is another international standards providing you with a framework
defining the requirements for food safety management.
ISO 28000 is supply chain security management training standards.
9.9 Summary
Sample Number 1 2 3 4 5
1 100 4 6 100 7
2 100 3 7 100 3
3 100 5 8 100 2
4 100 6 9 100 8
5 100 4 10 100 4
10.0 Introduction
Project initiation
Project execution
WBS is a tool for breaking up the project into its component parts and is the
foundation of project planning. The WBS is a task list and helps in understanding the
project. WBS resembles a typicall bill of material in production planning scenario.
We can take a very simple example of constructing our house. Construction of
house requires large number of small and long duration activites a WBS for this project
is given in figure 2.
- General Condition
- Construction
Since individual responsibilities are assigned during the development of the WBS,
it integrates the work and the organizational structure. This process is called the OBS.
OBS identifies an appropriate organizational structure to execute the tasks listed under
each work package. The OBS indicates the organizational relationship. Fiqure 9.3 gives
OBS for a construction company.
Brickwork
Carpentry and joinery Fiqure 10.3 : Partial OBS for a construction company.
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CBS ia a tool to link each element of WBS to a dimension of cost. CBS provides
useful means for budgetary control and review. Cost of a project is an important aspect
in project management. In many examples like construction of hydro power plants,
infrastructure development cost of initial proposal increase many folds giving extra
burden to the government. Therefor, CBS is an integral part of porject management.
Production & Operations
Management : 137
Project Management
10.8 Tools and Techniques for Project Management
Tood and techniques for project management are related to develop a network
NOTES representation of a project, to analyse these networks, to address time and resource
constraints in projects and finally, to handle uncertainities in projects.
To represent a project as a network, we use two commonly used techniques. These
are Critical Path Method (CPM) and the Programme Evaluation and Review Technique
(PERT). Both these techniques are essentially the same in their approach.
PERT addresses uncertainty in various activities of the project and gives estimates
of the probability of meeting specified schedule dates at various stages of the project.
CPM treates the activity performance time in a deterministic manner and its main feature
is to arrive at a project schedule which minimizes the total cost.
10.8.1 Developing a Network Representation of Project
A network is a schematic representation of work to be done in such a way that
relationship between work items are logically defined. The network representation
provides a visual aid to a manager in understanding various activities involved and
their interactions with other activities.
Activity is the work content required to be achieved to accomplish an event.
Activity is a clearly defined project element, a job or a task which requires the
consumption of resources including time. A merge activity is dependent on two or
more preceeding activities while a burst activity is followed by two or more activities.
Dummy activity does not consume time or resource but provides a logical function.
Example 9.1 : Following table gives some important activities in a project with
their predecessor and time to complete. Draw a network to represent the project.
Table 9.1
A - 8
B A 12
C B 4
D B 2
E C,D 8
F D 2
G E 3
H F 2
C(4) E(8)
G(3)
Start A(8) B(12) End
H(2)
D(2) F(2)
A - 6
B - 7
C- 8
D A 20
E A 18
F B 9
G B 8
H D,E 7
I C 2
J G, I 14
K F,H,J 10
Solution :-
The Aon network is presented in figure- 10.7.
D (20)
H (7)
A (6)
E (18)
A 6 0 6 0 6 0
Check Your Progress B 7 0 7 4 11 4
1. Define EST, EFT, LST, C 8 0 8 9 17 9
LFT, Slack and critical
D 20 6 26 6 26 0
path in project
management. E 18 6 24 8 26 2
F 9 7 16 24 33 17
G 8 7 15 11 19 4
H 7 26 33 26 33 0
I 2 8 10 17 19 9
J 14 15 29 19 33 4
K 10 33 43 33 43 0
Production & Operations
Management : 142
Last column of table 10.3 gives calculation of slack, which is the difference of Project Management
either LFT and EFT or LST and EST. Slack for some of the activities is Zero. Path
made of zero slack activities is critical path. All these activities with zero slack are
critical activities. Non- zero slack for an activity indicates the possiblility of shifting an
activity without disturbing the project completion time. The slack information is a key NOTES
managerial information.
Complete information of table 10.3 with respect to a particular activity can be
represented on the network diagram using following convention :
EST EFT
Activity (Activity duration)
LST LFT
Slack
Fig. 10.8 Representing all time estimates on network
Using symbols of figure 10.8, activity E can be shown as follows :
6 24
E (18)
8 26
2
Fig. 10.9 An example of showing all time estimates on network diagram
Now we can make network diagram of figure 10.7 with all time estimates as
follows:
6 26
D (20)
6 0 26 26 33
H (7)
6 24
0 6 26 0 33
E (18)
A (6)
8 2 26
0 0 6 33 43
7 16 K (10) End
F (9) 33 0 43
0 7
B (7) 24 17 33
Start
4 4 11 7 15
G (8)
11 4 19 15 29
0 8
J (14)
C (8)
8 10 19 4 33
9 9 17 I (2)
17 9 19
Fig. 10.10 Network diagram for example 10.2 with all time estimates and slack
calculation
The highlighed path A-D-H-K is the critical path for the given project. Production & Operations
Management : 143
Project Management 10.8.3 Time-Cost-Trade-Offs in Project
We want to complete project in minimum cost with time objectives. Project
completion duration can be squeezed by employing more resources such as manpower
or machinery. This is known as crashing in project management. Crashing involves
NOTES
additional cost to complete an activity.
In a project, if we want to
complete the project in short Direct Cost
duration, additional resources Total Cost
demand higher cost. On the
other hand, if project elongates Cost
because of limited resources, Indirect Cost
cost of site management,
supervision or penalty is
incurred. The fitst type of cost
is direct cost while later is Project duration
indirect one. We have to make Fig. 10.11 Graph between project duration
a balance between two. and various costs.
If NT is normal duration
of the activity,
CT is the shortest possible duration of the activity,
NC is the normal cost of the activity,
CC is the crashed cost of the activity,
IC is the indirect cost for the project per unit time
Maximum possible crashing of the activity = NT-CT
Additional cost of crashing = CC - NC
(CC - NC)
The crash cost per unit time = - 9.1
(NT - CT)
It means that if the project duration is reduced by one day or one time unit, there
will be a reduction in indirect cost by IC and increase in the direct cost as per equation
9.1.
Example 10.3 : Reconsider example 9.2 and suppose additional information is
available to the manager regarding crashing of some activities in the project. Analyse
the time - cost - trade - off involved in crashing the project duration and identify the
optimal crash length for the project.
The indirect cost for the project is estimated to be INR 2000 per day.
Solution : The critical path for the problem does not change.
Therefore, the project duration is 43 days (as shown in solution of example 9.2).
The total indirect cost is 2000 x 43 = 86000 (INR).
Also, from the information available in table 9.4, we can add the normal cost of
all activities to get the direct cost for the project without any crashing. The direct cost
for the project is 89000 (INR). Therefore, the total cost of the project with no crashing
is 175000 (INR).
Cost per day of crashing the activities
From the table 10.4, two activities, A and I, cannot be crashed. Therefore our
focus is only on the remaining activity.
Table 10.5 below gives calculations of cost per day of crashing for all the activities :
Table 10.5
A 0 NA
B 1 1000
C 2 1000
D 2 1500
E 2 2000
F 1 500
G 2 1000
H 2 2000
I 0 NA
J 2 2000
Production & Operations
K 2 1000 Management : 145
Project Management To reduce the duration of the project, we will select an activity in the critical path
and reduce its duration by crashing. We will select a critical activity with least cost of
crashing per day and crash it to maximum possible time before selecting the next one.
In our example A, D, H and K are critical activities with crashing cost per day NA,
NOTES 1500, 2000 and 1000 (INR) respectively. Activity K has the lowest cost of crashing per
day. The revised calculations are performed as follows :
Cost of the project (With no crashing) : Rs. 1,75,000
Number of days crashed : 2 days
Cost of crashing the project by two day : Rs. 2000
Reduction in indirect cost (@Rs 2000 per day) : Rs. 4000
Net cost of the project after crashing activity K
= 1,75,000 + 2000 - 4000
= Rs. 1,73,000
Revised project duration = 41 days.
Revised critical path : A- D- H - K (Unchanged)
We repeat this procedure until no more activities exist for crashing the project.
Table 10.6 has the detailed computation for crashing.
Table 10.6
Now we recompute critical path for this example and see that A- E- H- K and B-
G- J- K are also two new critical paths. Let us consider path A- E- H- K first. In this
path activities, A, H and K are already handled, E can be crashed by two days. The total
cost will not change. It will remain Rs. 1,72,000, but now we will have only A- D- H-
K and B- G- J- K as critical paths. If we consider lowest cost of crasing per day activity
for maximum duration, it will be G. But this crashing will make path. B- G- J- K as non
critical. Therefore, A- D- H- K with crashed time of 37 days and total cost of project
Rs. 1,72,000 is the optimal solution.
10.8.4 Programme Evaluation And Review Technique (PERT)
The PERT network is similar to CPM, but since it deals with activities whose
duration is not exactly known, it relies on three time estimates of activity duration-
pessimistic time, optimistic time and most likely time. A mean time for the activity is
calculated using formula.
t
pessimistic + 4tmost likely + toptimistic
Mean time = - 9.2
Production & Operations
6
Management : 146
Then the network is drawn as in the case of CPM. The critical path is determined Project Management
and the variance on the path is calculated. The probability of completing the project by
a certain date then be determined.
Variance of the activity duration is calculated using formula
NOTES
t
pessimistic - toptimistic 2
σ 2= [ 6
] -9.3
A - 4 8 18
B A 11 12 25 Check Your Progress
C A 3 4 11 3. What is the difference
D B 1 2 3 between CPM and
E B 6 8 22 PERT?
F D 2 2 8
G E,F 2 3 4
H C, G 1 2 3
I E, F 1 2 3
J I, H 1 2 3
Table 8 below gives mean duration and variance of duration for each activity :
Table 10.8
to+4tm + tp tp-to
Activity Mean time t = Variance σ2 = ( )
6 6
A 9 5.44
B 14 5.44
C 5 1.78
D 2 0.11
E 10 7.11
F 3 1.00
G 3 0.11
H 2 0.11
I 2 0.11
J 2 0.11
Now draw the network following the same rules as for the CPM network.
Zp = ( D- Tp
σ-p
) - 9.4
0HDQWLPH =S
)LJ$UHDXQGHUQRUPDOFXUYH
Area = .4484
Now, from the knowledge of normal distribution, we know that 84% represents
mean + 1 standared deviation. Hence we can say with 84% level of confidence that the
project will finish is
40 + 18.32 = 44.28 days.
(b) What are the chances that project will finish in 47 days.
We will calculate `Z` value using formula (9.4).
47 - 40 7
Zp = = = 1.635
18.32 4.28
10.9 Summary
NOTES
(1) Give two examples in following each category, requiring project management
techniques :- Production & Operations
Management : 149
Project Management (i) Manufacturing
(ii) Services
(iii) Infrastructure development
NOTES (2) What’s meant by work breakdown structure? Why do you need this in project
management?
(3) What are the different types of time estimates in PERT. Disuss.
(4) What is critical path in a project network? How do we determine critical path?
(5) For the data given in table 10.9, draw the network. Crash the activities and
determine the optimal cost of the project and the optimal duration.
Table 10.9 : Data for problem (5)
A - 1 3 5
B - 2 3 4
C - 3 4 5
D A 2 9 10
E C 4 5 6
F B, D, E 5 6 13
G A 2 4 6
H C 1 3 6
7) Prepare a WBS, OBS and CBS for a project of your choice, such as organization
of a cultural fest in your college.
11.0 Introduction
Maintenance is a basic function in any organization for the upkeep and running of
the system. Every production manager wants to make sure that the equipments, machines
and systems in the organization are available for use as and when required. Maintenance
management is a systematic approach to the planning of maintenance activities using
decision - making tools to improve the overall efficiency and effectiveness of the
operating system. To ensure better maintenance management, maintenance departments
are developed within organizations.
The degree of technology of the production processes, the amount of investment
in plant and equipment, the age of the buildings and equipment, and other factors will
affect how maintenance departments are organized, the required worker skills, and the
overall mission of maintenance departments.
This unit deals with different maintenance strategies, difference between them,
measuring maintenance performance, asset lifecycle and trends in maintenance.
Each equipment has a definite pattern of lifespan. Equipment failure rate has a
characteristic behaviour and is closely related to the life cycle of the equipment. Failure
rate is the frequency with which a piece of equipment breaks down during the intended
period of its use. Figure 11.1 gives a general plot of lifespan of products with respect to
failure rate. This curve is known as ''bath tub curve''.
Failure
rate
NOTES
(1) Mean Time Between Failures (MTBF) :- It is the average time between two
consecutive failures. If λ is the failure rate of the equipment, MTBF is 1/λ A good
maintenance performance means higher values of MTBF. Check Your Progress
(2) Mean Time to Repair (MTTR) :- It is the mean time for restoring the equipment 2. What is bath tub curve?
back to working condition. If the repair rate is µ, MTTR is 1/µ. The severity of the Make bath tub curuve
breakdown significantly influence the MTTR. A good maintenance performance for Black & White TV
aims to minimize MTTR. in your house.
3. What are different
(3) Availability :- It refers to the fraction of the time for which the equipment is
measures of
available for productive use. Equipment can be considered to go through a series
maintenance
of failure and repairs until its useful life is over. Figure 11.2 shows life over.
performance?
Start of working
MTBF 1428.57
(d) Availability = = = 0.987
MTBF + MTTR 1428.57 + 17.85
Over the years, many new approaches have been suggested as maintenance
strategies that are intended to overcome problems related to equipment breakdown.
Alternatives range from simple routine inspection schedules to equipment replacement.
Production & Operations Some of the possible maintenance strategies are as follows :
Management : 154
(1) Routine Inspection :- This is the simplest form of maintenance. Production workers Maintenance Management
inspect the equipments for routine and simple maintenance tasks such as checking
of lubrication level etc. We also check air pressures in tyres, water level coolant
level, engine oil level etc. in our vehicles before starting for a long drive. Routine
inspection is done at the beginning of every shift before regular production activity. NOTES
Routine inspection helps in timely detection of simple problems, which helps in
retarding wear and tear of the equipment.
(2) Breakdown Maintenance :- This is one of the earliest maintenance strategies. It is
normally implemented in those organizations where a robust maintenance set- up
is not present. It is a reactive maintenance strategy where repair work is performed
only after a piece of equipment has failed. Breakdown maintenance is both
expensive and undesirable. Where capacity and demand are close, breakdowns
may affect production and thus reduce profits.
(3) Preventive Maintenance :- Our car is working well, but we take it to garage on a Check Your Progress
specific date. This is a case of preventive maintenance. Preventive maintenance is 4. Prepare a comparative
a planned decision to perform some maintenance on the equipment even when the chart of various
equipment is in working condition. Frequency or time gap between preventive mainatenance
maintenance activity is a cirtical issue in preventine maintenance strategy. Frequent strategies.
maintenance will incurr extra cost while delayed maintenance increases the chance 5. Identify suitable
of breakdowns. Often, preventive maintenance is scheduled on the basis of historic example for each of the
data. maintenance strategy.
(4) Predictive Maintenance :- Predictive maintenance is a condition - based approach
to maintenance. Therefore, it is also known as condition - monitoring. Condition
of the equipment is regularly monitored and the decision to carry out maintenance
is based on extrapolation of the health data of the equipment. Advancements in
the field of computers and communications have enabled organizations to make
good analytical models, programs, softwares for equipment monitoring and
predictive maintenance.
(5) Proactive Maintenance :- Proactive maintenance concentrates on the monitoring
and correction of root causes to equipment failures. It aims to achieve zero
downtime or zero in - service breakdowns. It is designed to extend the useful age
of the equipment to reach the wear - out stage by adoptation to a high level of
operating precision.
(6) Planned shutdowns : Sometimes a planned shutdown is done for major overhaul.
In a sugar plant, all major overhauls are done during planned shutdonws. In most
process industry, frequent stoppage of the system for maintenance may prove to
be expensive. Planned shutdown once in a year helps in de- bottlenecking and
maintenance.
(7) Equipment Replacement :- As shown in the bathtub curve in figure 11.1, when
the equipment reaches the end of useful life, failure rate begins to increase. At
some stage, both preventive and breakdown maintenance may prove to be
expensive. Now replacement of equipment may be a better option. We need to
compare cost of replacement as it requires heavy expenditure in comparison with
various maintenance strategies. Production & Operations
Management : 155
Maintenance Management Figure 10.3 represents the cost and operational impact of the various alternatives.
Increasing Cost of Maintenance
21
13
6
3
2
1995 98 99 200 01 02 03 04 05 06 07 08 09 10 11 12
11.7 Summary