Operation Management Notes 130126072649 Phpapp02

8/20/2019 Operation Management Notes 130126072649 Phpapp02

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Operation Management

Unit-I

Production is the process by which raw materials and other inputs are converted intofinished products . Production management refers to the application of management principles to the

production function in a factory. In other words, production management involvesapplication of planning, organising, directing and controlling to the production process.Operations management is the process in which resorurces/inputs are converted into moreuseful productsProduction management and operations management are differentiated based ontangibilities of finished goods/servicesProduction system model comprises:

Operation managers are required to make a series of decisions in the production function.

he decisions made by operation managers about the activities of production systemstend to fall into three general categories, vi!.,

". #trategic decisions$. Operating decisions%. &ontrol decisions

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Student HandNotes R. Sendamiztchelvan


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Importance of Production Function

Production function can offer competitive advantage to a firm in the following areas:

• #horter new'product'lead time• (ore inventory turns• #horter manufacturing lead time• )igher quality• *reater fle+ibility• etter customer service• -educed wastage

Characteristics of Modern Production and Operations Function

". (anufacturing as &ompetitive dvantage$. #ervices Orientation%. isappearance of #mokestacks0. #mall has ecome eautiful

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Recent Trends in Production/Operations management

". *lobal (arket Place$. Production/Operations #trategy%. otal 1uality (anagement 2 1(30. 4le+ibility5. ime -eduction6. echnology7. 8orker Involvement9. -e'engineering

. ;nvironmental Issues"


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Operations strategy comprises si+ components :() Positioning the production system*- It involves selecting the product design, the production

system and the inventory policy for the finished goods for each product line+&) Product Focused- *enerally employed in mass production organi!ations, where there aregroups of machine, tools and workers arranged according to their respective tasks in order to puttogether a product. 3.Process Focused- It is designed to support production departments that perform a single task like painting or packing. hese system are highly fle+ible and can easily be modified to supportother product design.

,) Focus of factories and service faci$ities*) Product/Service design and deve$opment)

.) Techno$ogy se$ection and process deve$opment ,' horough analysis and planning of the production processes and facilities. ;very step in the process of production is planned in

detail. he technology to be used in the production process is selected from range of options) +$$ocation of resources to strategic a$ternatives- Production companies have to

continuously deal with the problem of scarce resources like capital, machine and materialsand so on. s these resource inputs are vital to production activities, their shortages caninfluence production performance significantly. )ence the operation manger have to plan theoptimal use of resources, both in terms of minimi!ing wastage, and in terms of their allocation to the best strategic use.

0) Faci$ity p$anning)• he location of the production facilities is one of the key decisions an operation manager

has to make since it is critical to the competitiveness of the organi!ation.• #etting up production facilities with adequate capacity involves massive initial

investment.• #trategically right options should be carefully weighted against all available alternatives.

hese decisions also influence the future decisions on probable capacity e+pansions plans.

• Operation managers also make decisions, i.e. decision on internal arrangement of workersand department within the facility

Operations Competitive Priorities

() Product and service design,) &ost

) =ocation.) 1uality

) 1uick response 0) 4le+ibility1) Inventory management

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iv. 4inancial planningMedium or 7ong-Range O"6ectives5

i. =ong'range planning for production capacityii. =abour requirements 2;mployment levels3

iii. -estructuring the capital structure

Steps in the Forecasting Processhe seven basic stepsi. etermine the purpose 2ob?ectives3 of the forecast

ii. #elect the items for which forecasts are needediii. etermine the time hori!on for the forecastiv. #elect the forecasting model 2method or technique3v. *ather and analyse the data needed for the forecast

vi. Prepare the forecastvii. (onitor the forecastForecasting Approaches : he two general approaches to forecasting are :(i) 8ua$itative methods consist mainly of sub?ective inputs, often of non'numerical

description.• !ury of e9ecutive opinion method involves taking opinion of a small group of high'levelmanagers and results in a group estimate of demand.

• Sa$esforce composite method is based on estimate of e+pected sales by sales persons.• Mar:et research method or consumer survey method determines consumer interest in

a product or service by means of a consumer survey.• 4e$phi method is a ?udgemental method which uses a group process that allows e+perts

to make forecasts.2ii3 8uantitative methods involve either pro?ection of historical data or the development of association models which attempt to use causal variables to arrive at the forecasts.

() Time series mode$s use a series of past data to make a forecast for the future. ime series is atime'ordered sequence of observations taken at regular intervals over a period of time.

Yc C T. S . C . R multiplicative modelYc C T D S D C D R additive model

where T is rend, S is #easonal, C is &yclical, and R is -andom components of a series.Trend is a gradual long'term directional movement in the data 2growth or decline3.Seasona$ effects are similar variations occurring during corresponding periods, e.g., ecember retail sales. #easonal can be quarterly, monthly, weekly, daily, or even hourly inde+es.Cyc$ica$ factors are the long'term swings about the trend line. hey are often associated with

business cycles and may e+tend out to several years in length.Random component are sporadic 2unpredictable3 effects due to chance and unusualoccurrences. hey are the residual after the trend, cyclical, and seasonal variations are removed.

Trend : hree methods for describing trend are: 2"3 (oving average, 2$3 )and fitting, and2%3 =east squares.

() MO;I


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Aumber of Period+ %eighted moving average #M+%& allows some values to be emphasi!ed by varying theweights assigned to each component of the average. 8eights can be either percentages or a realnumber.

E 2Wt 3 X ( wt =E Wt

,) >+


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2a3 Simple regression e+presses the relationship between a dependent variable Y and aindependent variable X in terms of the slope and intercept of the line of best fit relating the twovariables.2b3 Simple correlation e+presses the degree or closeness of the relationship between twovariables in terms of a correlation coefficient that provides an indirect measure of the variability

of points from the line of best fit. Aeither regression nor correlation gives proof of a cause'effectrelationship.

Capacitymount of output a system is capable of achieving over a specific period of time.

ctual output;fficiency C

;ffective capacity

ctual output

Mtilisation C esign capacityCapacity p$anning&apacity planning is central to the long'term success of an organisation. &apacity plans are madeat two levels:(i) 7ong-term capacity p$ans which deal with investments in new facilities and equipmentscovering the requirements for at least two years into the future.(ii) Short-term capacity p$ans which focus on work'force si!e, overtime budgets, inventoriesetc.7ong-Range Capacity P$anning

long term strategic decision that establishes a firmNs overall level resources.hree ma?or capacity decisions are:

i. )ow much capacity to be installed,ii. 8hen to increase capacity and

iii. )ow much to increase.Types of Capacity

@ Production capacity5 (a+imum rate of production or output of an organisation.@ 4esign capacity5 he ma+imum output that can possibly be attained.@ 'ffective capacity5 he ma+imum output given a product mi+, scheduling difficulties,

machine maintenance, quality factors, absenteeism etc.@ Ma9imum capacity5 he ma+imum output that a facility can achieve under ideal

conditions. lso known as peak capacity.4eve$oping Capacity +$ternatives

o enhance capacity management, the following approaches to capacity alternatives could bedeveloped:

i. esigning fle+ibility into the systemii. ifferentiating between new and mature products or services

iii. aking a Gbig'pictureH approach to capacity changesiv. Preparing to deal with GchunksH of capacityv. ttempting to smooth out capacity requirements

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+ggregate P$anning@ ggregate planning involves planning the best quality to produce in the intermediate'

range hori!on 2% months to one year3@ ggregate production planning is the process of determining output levels of product

groups over the ne+t 6 to "9 months period.

@ Ob?ectives of ggregate Planningi. he overall ob?ective is to balance conflicting ob?ectives involving customer service, work force stability, cost and profit.

ii. o establish company'wide strategic plan for allocating resources.iii. o develop an economic strategy to meet customer demand.

Inputs to and Outputs from +ggregate Production P$anning

+ggregate P$anning or +ggregate Capacity P$anning Aeed for ggregate &apacity Planning

". It facilitates fully loaded facilities and minimi!es overloading and underloadingand keeps production costs low.

$. dequate production capacity is provided to meet e+pected aggregate demand.%. Orderly and systematic transition of production capacity to meet the peaks and

valleys of e+pected customer demand is facilitated.Steps in +ggregate Capacity P$anning

". etermine the demand 2 i.e.! sales forecast3 for each product for each time period2i.e.! weeks or months or quarters3 over the planning hori!on 26 to "$ months3.

$. etermine the aggregate demand by summing up the demand for individual products.

%. ransform the aggregate demand for each time period into workers, materials,machines required to satisfy aggregate demand.

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0. Identify company policies that are pertinent 2 e. .! policy regarding safety stock maintenance, maintaining stable workforce etc.3.

5. etermine unit costs for regular time, overtime, subcontracting, holdinginventories, back orders, layoffs etc.

6. evelop alternative resource plans for providing necessary production capacity to

support the cumulative aggregate demand and compute the cost of eachalternative plan.7. #elect the resource plan from among the alternatives considered that satisfies

aggregate demand and best meets the ob?ectives of the firm.+pproaches to +ggregate P$anning

". op down approach$. bottom'up approach or subplan consolidation approach

-ough'cut &apacity Planninghis is done in con?unction with the tentative master production schedule to test its

feasibility in terms of capacity before the master production schedule 2(P#3 is finalised.Capacity P$anning and Capacity Re@uirement P$anning #CRP&

Production capacity is defined as the ma+imum production rate of a facility or a plant.@ ypes of &apacity". 4i+ed capacity$. d?ustable capacity%. esign capacity0. #ystem capacity5. Potential capacity6. Immediate capacity7. ;ffective capacity9. Aormal capacity or rated capacity

. ctual or utilised capacity

Capacity P$anning@ &apacity planning involves activities such as:". ssessing e+isting capacity$. 4orecasting future capacity needs%. Identifying alternative ways to modify capacity0. ;valuating financial, economical and technological capacity alternatives

#electing a capacity alternative most suited to achieve the strategic mission of the firm. &apacity planning involves capacity decisions that must merge consumer demands with human, materialand financial resources of the organi!ation0 ypes of &apacity Planning are:

@ =ong term &apacity Planning

@ #hort'term &apacity Planing@ 4inite &apacity Planning@ Infinite &apacity Planning.

@ wo catagories of factors affecting capacity planning are:@ &ontrollable 4actors@ =ess &ontrollable 4actors.

@ &apacity -equirement Planning 2&-P3: technique to determine the labour andequipment capacities needed to meet the ob?ectives.

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Capacity Re@uirement P$anning #CRP& Process

Master Production Schedu$ing@ Ob?ectives of (aster Production #cheduling

". o schedule end items to be completed promptly and when promised tocustomers.

$. o avoid overloading or underloading the production facility so that productioncapacity is efficiently utili!ed and low production costs result.

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Functions of MPS5@ ranslating aggregate plans@ ;valuating alternative master schedules@ *enerating material and capacity requirements@ 4acilitating information processing

@ (aintaining priorities@ Mtili!ing the capacity effectively.Master Production Schedu$e - F$o% Chart

=uide$ines for Master Schedu$ing". 8ork from an aggregate production plan$. #chedule common modules when possible%. =oad facilities realistically0. -elease orders on a timely basis5. (onitor inventory levels closely

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6. -eschedule as requiredMPS in Produce-to-stoc: and Produce-to-order Firms

he elements of the (P# that are affected by the type of production system are:a. emand management

b. =ot'si!ing

c. Aumber of products to be scheduled 2product'mi+3.Materia$s Re@uirements p$anning #MRP-( or mrp&5 &omputer based information system for ordering and scheduling of dependent demand inventories.O"6ectives of MRP". o improve customer service by meeting delivery schedules promised and shortening deliverylead times.$. o reduce inventory costs by reducing inventory levels.%. o improve plant operating efficiency by better use of productive resources.

hree main purposes of a basic (-P system are to:@ &ontrol inventory levels@ ssign operating priorities

@ ssign capacity to load production systems.

MRP System InputsMaster Production Schedu$e5 One of the three primary inputs in (-P, specifies what end

products are to be produced, in what quantities and when.i$$ of Materia$s fi$e5 Provides the information regarding all the materials, parts and sub

assemblies that go into the end product.Inventory Status fi$e5 *ives complete and up'to'date information on the on'hand inventories,gross requirements, scheduled receipts and planned order releases for the item.MRP System OutputsPrimary outputs of (-P #ystems:

@ Planned order schedule@ &hanges in planned orders.#econdary inputs of (-P system:

@ ;+ception reports@ Performance reports@ Planning reports

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Manufacturing Resource P$anning #MRP II & : road'based resource co'ordination systeminvolving other areas of a firm in the planning process, such as marketing, finance and the humanresource.

(anufacturing -esource Planning 2(-P II3 addresses the planning and control of activities related to materials, capacity, finance, engineering, sales and marketing.

&losed'loop (-P: system built around material requirement planning 2(-P'I3 and also includingadditional planning functions such as master production scheduling and capacity requirement

planning'nterprise Resource P$anning

'nterprise Resource P$anning #'RP&5 software package developed for optimum useof resources of an enterprise in a planned manner. It integrates the entire enterprisestarting form the supplier to the customer, covering, logistics, financial and humanresources.

4eatures of ;-P". ccommodating variety

$. Integrated (anagement Information%. #eamless integration0. #upply chain management5. -esource management6. Integrated data model#cope of ;-P

a. 4inancials b. =ogisticsc. )uman resourcesd. 8ork flow

pplication of ;-P

;-P is gaining popularity in India at a rapid pace. his is mainly due to the need for reducingcosts especially when the sales are sluggish in the sub'merging markets.

Unit-Product 4esign5 &oncerned with form and function of a product. It refers to the arrangement of elements or parts that collectively form a product.Process 4esign5 &oncerned with the overall sequence of operations required to achieve thedesign specification of the product.Production 4esign5 &oncept of designing products from the point of view of producibility.O"6ectives of Product 4esign2i3 he overall ob?ective is profit generation in the long run.

2ii3 o achieve the desired product quality.2iii3 o reduce the development time and cost to the minimum.2iv3 o reduce the cost of the product.2v3 o ensure producibility or manufacturability 2design for manufacturing and assembly3.Factors Inf$uencing Product 4esign

i. &ustomer requirementsii. &onvenience of the operator or user

iii. rade off between function and form

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iv. ypes of materials usedv. 8ork methods and equipments

vi. &ost/Price ratiovii. Product quality

viii. Process capability

i+. ;ffect on e+isting products+. Packaging+pproaches to Product 4esign

i. esigning for the customer @ Industrial design@ oice of the customer@ 1uality function deployment 214 3

ii. esigning for (anufacture and ssembly 2 4( 3@ GOver'the'wall approachH@ &oncurrent engineering@ esign for (anufacturing 2 4(3 esign for ssembly 2 4 3

iii. esigning for ease of production 2or for producibility or manufacturability3@ #pecification@ #tandardisation@ #implification

iv. esigning for 1ualitya. esigning for robustness 2or robust design3

b. esigning for productioni. (odular design

ii. esigning for automationc. esigning for reliability

v. esigning for ;rgonomicsvi. esigning for environmental protection

vii. esigning for recyclingviii. esigning of disassembly 2 4 3

i+. esigning for mass customisationelayed differentiation and modular designs are two tactics used to make mass

customisation possible.+. Other issues in product design are 2a3 &omputer aided design 2& 3, 2b3 alue

engineering or value analysis which@ &omputer aided design: Mse of computer graphics for designing the product helps

to generate a number of alternative designs and identify the best alternative whichmeets the designerNs criteria.

@ alue engineering/ alue analysis: &oncerned with the improvement of design andspecifications at various stages of product planning and development.

7ega$ +spect of Product 4esign(i) he imposition of rules and acts passed by #tate and &entral *ovt.(ii) he standards related to code of practice for design, fabrication and testing of products

prepared by standards organi!ation.(iii) he imposition of punitive damages by the courts in product liability cases.

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(iv) he resistance of consumer protection forums to badly designed and manufacturing products.

(v) he resistance of public to damage of their environment.(vi) he most important law to consider while dealing with the product liability is the

&onsumer Protection ct of " 96.

(vii) he sales of *oods ct of " 56.'nvironmenta$ IssuesProduct Po$$ution

esigner should anticipate environmental trends and design products that are clean enough for future environmental standards.Process Po$$ution

Product designer must avoid the process that causing pollution from solvents, combustible products, wastes etc. or he may change the processes at the early stages.'ase of recyc$ing product

;veryone has a moral obligation about the happens to the product after itNs useful life is over&an it be recycled into new even be able to profit in some manner from recycling of itNs product.

Process P$anning and Process 4esignfter the final design of the product has been approved and released for production, the

production planning and control department takes the responsibility of process plannin and process desi n for converting the product design into a tangible product.

Ahat is a ProcessB process is a sequence of activities that is intended to achieve some result, for e+ample, tocreate added value for the customersProcess p$anning5 &oncerned with planning the conversion processes needed to convert the rawmaterial into finished products.Process design5 &oncerned with the overall sequences of operations required to achieve the

product specificationsOperations design5 &oncerned with the design of the individual manufacturing operation.

Process Se$ectionProcess selection refers to the %ay production of goods or services is organised.

hree primary questions to be addressed before deciding on process selection are:2i3 )ow much variety of products or services will the system need to handle2ii3 8hat degree of equipment fle+ibility will be needed2iii3 8hat is the e+pected volume of output

Process Strategy n organisationNs approach to selection of the process for the conversion of resource inputs into

outputs.Qey aspects in process strategy include:i. (ake or buy decisions

ii. &apital intensity andiii. Process fle+ibility

Process Se$ected Must Fit %ith ;o$ume and ;ariety

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S'R;IC' OP'R+TIO


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wo types of quasi'manufacturing operations are:@ Product'focussed operations@ Process focussed operations.

@ Personnel #cheduling in #erviceshree difficulties faced in scheduled personnel in services are:

@ emand variability@ #ervice time variability@ vailability of person when they are needed.

Schedu$ing Customer-+s-ParticipantD Service OperationsG&ustomer'as'participantH service operations:

@ &ustomer actually participates in service operations for eg. retailing, tourism etc.@ )as huge invovement of customer in service operations.

Schedu$ing Customer-+s-ProductD Service OperationsG&ustomer'as'productH service operations:

@ #ervice is actually performed on the customer. for e+ample, hair dressing,, medicaltreatment, surgery etc.

@ #cheduling (ultiple -esources

wo ma?or characteristics of service operations are:@ #ervices are produced and delivered by people@ he pattern of demand for services is not uniform

#cheduling of service system involve scheduling@ &ustomers@ 8ork force@ ;quipment

Schedu$ing Strategies for Serviceswo common strategies for scheduling services are:

@ #chedule for peak demand@ &hase emand. Other Possible #trategies

Other possible strategies for services are:@ -eservation strategy@ &ustomer participation@ d?ustable capacity@ &ross' raining@ #haring capacity.

Schedu$ing Mu$tip$e ResourcesIn some service organi!ation it is necessary to coordinate the uses of more than one resource.

he comple+ity of scheduling the resources increases with multiple resources used by the service

systems.Cyc$ica$ Schedu$e or Rotating Schedu$e&yclical or rotating schedule rotates employees through a series of workdays or working hours.

Aor: Study-Method Study and Aor: Measurement@ (ethods engineering includes work simplification, ?ob design, value analysis and the

like.@ 8ork study method was developed to improve performance of a given work.

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@ 8ork study is the body of knowledge concerned with analysis of the work methods, andthe standard of proposed work methods.

@ Ob?ective of work study is to improve operational efficiency.@ he purpose of work study is to determine the best or most effective method of

accomplishing a necessary operation.

Re$ationship of Time and Motion Study to Aor: Study@ ime study and motion study are results of practices developed by 4.8. aylor, 4rank and=illian *ilbreth.

@ ime study: ;+ercising control over the output in respect of a ?ob by setting standards for performance.

@ ime study may be used to compare the effectiveness of alternative work methods.

Steps Invo$ved in Aor: Study

Method Study or Methods +na$ysis@ (ethod study is also known as methods improvement.@ Prime ob?ectives of method study are to eliminate wasteful and inefficient motions.

Steps in method study

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". Se$ect ' select the work to be studied.$. Record 'record all the relevant facts of the present method of direct observation.%. '9amine 'e+amine the facts critically in sequence, using special critical e+amination sheet.0. 4eve$op 'develop the best method 2i.e3 the most practical, economic and effective method,

under prevailing circumstances.

5. Insta$$ 'install that method as standard practice6. Maintain ' maintain the standard practice by regular routine check.Motion StudyMotion study is the science of eliminating wastefulness resulting from using unnecessaryR ill'directed and inefficient motion. he aim of motion study is to find and perpetuate the scheme of least waste methods of labour.

Micro motion study provides a valuable technique for making minute analysis of thoseoperations that are short in cycle, contain rapid movements and involve high production over along period of time.(icro'motions are also known as S herbligsN.'9amp$es of Ther"$igs

". #earch 2#r3$. #elect 2#t3%. *rasp 2*30. ransport empty 2 ;35. ransport loaded 2 =36. )old 2)37. -elease load 2-=39. Position 2P3

. Pre'position 2PP3

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%. ;stablish elemental time values by e+tending observed time into normal time for eachelement by applying a rating factor.

0. ssess rela+ation allowance for personal needs and physical and mental fatigue involvedin carrying out each element.

5. dd the rela+ation allowance time to the normal time for each element to arrive at the

work content.6. etermine the frequency of occurrences of each element in the ?ob, multiply the work content of each element by its frequency 2 i.e.! number of time the element occurs in the

?ob3 and add up the times to arrive at the work content for the ?ob.7. dd contingency allowance if any to arrive at the standard time to do the ?ob.

Productivity and 'mp$oyees@ Production refers to the total output.@ Productivity: he amount of goods and services produced with resources used.@ Partial productivity: Output in a given period divided by labors hours used in the period.

Output in a given periodotal productivity C=abour D &apital D (aterials D ;nergy used in the same period

Unit-.Ahy Materia$s ManagementB

(aterials is one of the five (Ns2(en, (aterial, (oney, (achine and (ethods3 of anindustrial organi!ation.(aterials offer considerable scope for improving profit.(aterials form an important form of current assets in any organi!ation.

alue addition is the margin between the raw material value and finished goods value.#uppliers and materials management account for more than 5< percent of total value.1uality of the finished product depends on quality of materials used.&onservation of materials and their availability for posterity is one of the planks of socialresponsibility of business.;+ploring new sources of supply is a challenge for material management e+ecutives.

Materia$s Management(aterial management involves organi!ing and coordinating all management functions thatare responsible for every aspect of materials, storage, and transformation.

uying, storage, and movement of material are the three basic ob?ectives of materialsmanagement.Optimum investment in inventory is the prime ob?ective of materials management )

evelopment of personnel is very important for long'term growth of a firm.;ngineering groups are primarily responsible for standards of specifications.

Importance of Materia$s Management". =ower prices for materials and

equipment$. 4aster inventory turnover %. &ontinuity of supply

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0. -educed lead time5. -educed transportation costs6. =ess duplication of efforts7. ;limination of buck'passing9. -educed materials obsolescence

. Improved supplier relationships and better records, and information

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It is a subsystem in the overall planning activity. here are many factors, which influence theactivity of material planning. hese factors can be classified as macro and micro systems.". Macro %actors : #ome of the micro factors which affect material planning, are price trends,

business cycles *ovt. import policy etc.$. Micro %actors: #ome of the micro factors that affect material planning are plant capacity

utili!ation, re?ection rates, lead times, inventory levels, working capital, delegation of powersand communication.Materia$s udgetingThe Process of Preparing Materia$ udgets

Materia$s udgeting5 Process of preparing materials budget or purchase budget in terms of quantity and money value of materials to be procured for a given period of time.(aterial udgeting is an estimate of e+penses to be incurred in the procurement of material andits helps in effective e+ecution and control of material plans.Materia$ Contro$4unction of maintaining constantly availability of all kinds of materials required for themanufacture of products.Purchasing

he term SpurchasingN refer to buying of a material or an item from a company or division thatsupplies materials. #ince a manufacturing firm is involved in the conversion of raw material intofinished goods, it should ensure that right type of material are purchased in the right time. one

percent saving in cost is equivalent to "< percent increase in turnover.O"6ectives of Purchasing

he basic ob?ective of the purchasing function is to ensure continuity of supply of raw materials,sub'contracted items and spare parts and to reduce the ultimate cost of the finished goods. Inother words, the ob?ective is not only to procure the raw materials at the lowest price but toreduce the cost of the final product.

he ob?ectives of the purchasing department can be outlined as under:23



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U To avai$ the materia$s* supp$iers and e@uipments at the minimum possi"$e costs5 heseare the inputs in the manufacturing operations. he minimi!ation of the input cost increases the

productivity and resultantly the profitability of the operations.U To ensure the continuous f$o% of production through continuous supply of raw materials,components, tools etc. with repair and maintenance service.

U To increase the asset turnover5 he investment in the inventories should be kept minimum inrelation to the volume of sales. his will increase the turnover of the assets and thus the profitability of the company.U To deve$op an a$ternative source of supp$y5 ;+ploration of alternative sources of supply of materials increases the bargaining ability of the buyer, minimisation of cost of materials andincreases the ability to meet the emergencies.U To esta"$ish and maintain the good re$ations %ith the supp$iers5 (aintenance of goodrelations with the supplier helps in evolving a favourable image in the business circles. #uchrelations are beneficial to the buyer in terms of changing the reasonable price, preferentialallocation of material in case of material shortages, etc.To achieve ma9imum integration %ith other department of the company5 he purchase

function is related with production department for specifications and flow of material,engineering department for the purchase of tools, equipments and machines, mar:etingdepartment for the forecasts of sales and its impact on procurement of materials, financia$department for the purpose of maintaining levels of materials and estimating the workingcapital required, personne$ department for the purpose of manning and developing the

personnel of purchase department and maintaining good vendor relationship.U To train and deve$op the personne$5 Purchasing department is manned with varied types of

personnel. he company should try to build the imaginative employee force through training anddevelopment.U 'fficient record :eeping and management reporting5 Paper processing is inherent in the

purchase function. #uch paper processing should be standardised so that record keeping can befacilitated. Periodic reporting to the management about the purchase activities ?ustifies theindependent e+istence of the department.

Purchase Cyc$e

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Purchasing cycle comprising of eight steps.". -ecognition of Aeed : Identifying an item that is officially brought to the attention of

purchasing department.$. escription of -equirement: Purchase requisition should give accurate information for

ordering recognised product.%. #election of #ource: -egistered suppliers who are approved by the company. uyingfrom single supplier helps develop long'term relationship and reduces the risk andinterruption in the supply. uying from multiple suppliers may not help in maintainingquality and helps get material at competitive prices.

0. etermination of Price and vailability5. Placing the Order 6. Order cknowledgement7. 4ollow Mp and ;+pediting9. &hecking he Invoice and pproval

Purchase Functions". Obtaining prices$. #electing vendors%. warding purchase orders0. 4ollow up on delivery promise5. d?usting and settling complaints6. #electing and training of purchase personnel7. endor relations

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Purchasing Po$icies@ +nci$$ary 4eve$opment5 he firms sub'contracts, i.e., decides to buy the parts from outside

suppliers. (ostly the fabricated parts, components are brought from outside suppliers by thefirms.

@ Ma:e or "uy5 nother purchasing policy is whether to buy the parts or components from

outside supplier or manufacture within the firm. he decisions lie depending in variousfactors.@ Specu$ative "uying5 #peculative buying is conducted with the hope of making profit out of

price changes. )ere the profit is made by buying at low price and selling at higher price.

;endor rating5 he evaluation of supplier or vendor rating provides valuable information whichhelp in improving the quality of the decision. In the vendor rating three basic aspects areconsidered namely quality, service and price

he evelopment Pro?ect &ommittee of the Aational ssociation of Purchasing gents 2M.#. .3has suggested following methods for evalu ating the performance of past suppliers.() The categorica$ p$an5 Mnder this method the members of the buying staff related with the

supplier like receiving section, quality control department, manufacturing department etc., arerequired to assess the performance of each supplier. he rating sheets are provided with therecord of the supplier, their product and the list of factors for the evaluation purposes. hemembers of the buying staff are required to assign the plus or minus notations against eachfactor .,) The %eighted-point method5 he weighted'point method provides the quantitative data for each factor of evaluation. he weights are assigned to each factor of evaluation according to theneed of the organi!ation, e. ., a company decides the three factors to be consideredVquality,

price and timely delivery. It assigns the relative weight to each of these factors as under:1uality WWW 5< pointsPrice WWW %< points

imely delivery WWW $< points) Critica$ incidents method5 -ecord of events related to buyer vendor relationships ismaintained in each vendorNs file. hey reflect positive and negative aspect of actual performance.

his kind of documentation useful in discussing ways and means of improving performance,acknowledging the e+istence of good relationships, determining the competence of a vendor, andif necessary considering termination.) The cost-ratio p$an5 Mnder this method, the vendor rating is done on the basis of various costsincurred for procuring the materials from various suppliers. he cost'ratios are ascertaineddelivery etc. he cost'ratios are ascertained for the different rating variables such as quality,

price, timely delivery etc. he cost'ratio is calculated in percentage on the basis of totalindividual cost and total value of purchases.

) Chec:$ist system5 simple checklist is used to evaluate the vendors. &heck list may be something like -eliability, technical capability, after sales service, availability, buyingconvenience etc

VALUE ANALYSISalue engineering or value analysis had its birth during the 8orld 8ar II =awrence . (iles was

responsible for developing the technique and naming it. alue analysis is defined as Gan

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organi!ed creative approach which has its ob?ective, the efficient identification of unnecessarycost'cost which provides neither quality nor use nor life nor appearance nor customer features.H

alue analysis focuses engineering, manufacturing and purchasing attention to one ob?ective'equivalent performance at a lower cost.

4unction . alue C

&ostSteps in Value AnalysisIn order to answer the above questions, three "asic steps are necessary:". Identifying the function5 ny useful product has some primary function which must beidentifiedVa bulb to give light, a refrigerator to preserve food, etc. In addition it may havesecondary functions such as withstanding shock, etc. hese two must be identified.$. 'va$uation of the function "y comparison5 alue being a relative term, the comparisonapproach must be used to evaluate functions. he basic question is, S oes the functionaccomplish reliability at the best costN and can be answered only comparison.%. 4eve$op a$ternatives5 -ealistic situations must be faced, ob?ections should overcome andeffective engineering manufacturing and other alternatives must be developed.

STORES MANAGEMENT#tores play a vital role in the operations of company. It is in direct touch with the user departments in its day'to'day activities. he most important purpose served by the stores is to

provide uninterrupted service to the manufacturing divisions. 4urther, stores are often equateddirectly with money, as money is locked up in the stores .


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5. o reveal e+cessive variety and promote standardi!ation and variety reduction.6. o establish a common language for the identification of an item.7. o fi+ essential parameters for specifying an item.9. o specify item as per national and international standards.

. o enable data processing and analysis.

Inventory physical resource that a firm holds in stock with the intent of selling it or transforming it into amore valuable state.

• -aw (aterials• 8orks'in'Process• 4inished *oods• (aintenance, -epair and Operating 2(-O3

O !ecti"es o# In"ento$y Cont$ol". o ensure adequate supply of products to customer and avoid shortages as far as possible.$. o make sure that the financial investment in inventories is minimum 2 i.e.! to see that theworking capital is blocked to the minimum possible e+tent3.%. ;fficient purchasing, storing, consumption and accounting for materials is an importantob?ective.0. o maintain timely record of inventories of all the items and to maintain the stock within thedesired limits5. o ensure timely action for replenishment.6. o provide a reserve stock for variations in lead times of delivery of materials.7. o provide a scientific base for both short'term and long'term planning of materials.Inventory CostsInventory costs includes ordering cost plus carrying costs.". Ordering &osts$. &arrying &osts@ &apital &osts

&apital cost is the loss of interest on money invested in inventory building andinventory control equipment.#torage #pace &osts@ Inventory #ervice &osts@ )andling'equipment &osts@ Inventory -isk &osts%. Out'of'stock &osts0. &apacity &ostsInventory Contro$ Techni@ues". +$%ays "etter contro$ #+ C& c$assification) In this analysis, the classification of

e+isting inventory is based on annual consumption and the annual value of the items. )encewe obtain the quantity of inventory item consumed during the year and multiply it by unitcost to obtain annual usage cost. he items are then arranged in the descending order of suchannual usage cost.

2a3 A-Item: ery tight control, the items being of high value. he control need be e+ercised athigher level of authority.

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2b3 B-Item: (oderate control, the items being of moderate value. he control need be e+ercisedat middle level of authority.2c3 C-Item: he items being of low value, the control can be e+ercised at gross root level ofauthority, i.e., by respective user department managers.,)>igh* medium and $o% #>M7& c$assification) In this analysis, the classification of

e+isting inventory is based on unit price of the items. hey are classified as high price, medium price and low cost items.);ita$* essentia$ and desira"$e #;'4& c$assification) In this analysis, the classification of

e+isting inventory is based on criticality of the items. hey are classified as vital, essential anddesirable items. It is mainly used in spare parts inventory..)Scarce* difficu$t and easy to o"tain #S4'&) In this analysis, the classification of e+istinginventory is based on the items.

)=O7F ana$ysis5 In this analysis, the classification of e+isting inventory is based sources of theitems. hey are classified as *overnment supply, ordinarily available, local availability andforeign source of supply items.0)SOS ana$ysis5 In this analysis, the classification of e+isting inventory is based nature of supply

of items. hey are classified as seasonal and off'seasonal items .1)Fast moving* s$o% moving and non-moving #FS

Documents

Operation Management Notes 130126072649 Phpapp02