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OPERATIONS MANAGEMENT
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Introduction………………………………………………….
Operations Management
• Operations Management deals with Management of transforming inputs to outputs.
• Operation management is management of Direct Resources i.e.
• MEN MATERIAL MACHINE• OM deals with
– Design of Products & Processes– Acquisition of Resources– Transformation of Resources into Output– Distribution of Goods & Services
Operations Management
• Traditional view perceives Operations Management as a system that is involved with the manufacture and production of goods and services
• Modern view perceives OM as a system designed to deliver Value
Operations Management
Importance of Operations Management - • Organizations need to offer superior quality
product /services at competitive price & still survive.
• This calls for efficiently managed operations• Upto 1970, basic focus of OM was Cost
Reduction• Since 1990 focus is shifted to Value Creation
Operations ManagementTypical Operations Management Decisions • Capacity Decisions – Type, Quantum and
Flexibility• Facility decision – Location and its size• Workflow and Technology decisions – Type of
production processes and layout of facilities• Materials and Inventory decisions• Quality Decisions – Level and how to achieve it
Production Systems• Production function is concerned with transformation
of various inputs into required output• Production System is the way in which this production
function is carried out• Selection of production nsystem is based on criteri like
– What will each alternative cost in short term and long term– What will it provide in terms of cost, quality,time and
availability of output– What will require in terms raw material, energy,
infrastructure, managerial talent and other inputs
Continuous Production
Classification of Production Systems
Prod./Opera. volume
Output/Product Variety
Mass Production
Batch production
Job-shop Production
Mass production
Batch production
Job-shop Production
OM in Organization ChartPresident or CEO
Marketing
Operations
V.P. of OperationsManages:
People,Equipment, Technology,
materials and informationTo Produce:
Goods and/or Services
Finance
OM in Organization Chart• In Manufacturing Firm Operations would
include– Prod. Control, Scheduling and Materials control– Purchasing– Manufacturing– Quality Assurance– Engineering Support – Warehouse Management
• In Service industry it may differ according to the type of service offered
Product and ServiceManufactured Goods Services
These are physical Intangible
Can be stored, transported Can not be stored
Customers do not have
contact with production
system
Customers actively participate
Response time is longer Response time is very short
Requires large facilities, more
capital
Little facilities, lesser capital
Quality is measurable Quality is not measurable
Operations as Service• Emerging model is every organization is in
service business• In manufacturing such services can be divided
– As Core Service • Manufacturing and delivering customized product
correctly at required time at competitive price
– As Value-added Service• Information• Problem-solving• Sales Support• Field Support
HISTORICAL EVOLUTION
• Adam Smith -- Division of Labor• Assigning workers to tasks based on their SKILLS
• Production Management was re-titled as
OPERATIONS MANAGEMENT (70’s) to enlarge the Field
HISTORICAL EVOLUTION
• Taylor’s Scientific Management– Task to workers based on skills– Output time should be used for Plan & Schedules– Standardized & written specifications, Job-Instructions– Training of Supervisors & Workers– Monetary Incentive for Motivation– Working for Maximum Output, rather than Restricted
output– Developing all workers to the fullest extent possible
HISTORICAL EVOLUTION
• Moving Assembly Line• Applying Taylor’s Principle in Automobile production
line in Ford Motors, Assembly time was reduced drastically.
• This increased popularity of Scientific Management
• Hawthorne Studies -- by Elton Mayo• Introduced Human Dimensions• Illumination Studies implied the effect of group and
work environment on productivity of workers
HISTORICAL EVOLUTION• Operations Research -- Started with World War II
Mathematical Technique to Deploy Limited Resources.
• Computers– 50’s – Salary & Accounting Statements– 60’s – L.P. to analyze operational problems – 70’s -- Mnfrg. Information System
• Material Requirement Planning (MRP)– 80’s -- CAD CAM FMS AS/RS– 90’s – Robots for Repetitive & Hazardous tasks
HISTORICAL EVOLUTION
• 1980 - Manufacturing StrategyJust In Time (JIT) TQCService Quality and Productivity
• 1990 - TQM and Quality CertificationBusiness Process Reengineering
(BPR)Supply Chain Management (SCM)E - Commerce
Shift in Emphasis
• Operations Management underwent three key shifts in emphasis– From Cost and Efficiency to Value Creation– From Mass Production to Agility and
Customization– From Functional Specialization to a Systems
approach to achieve high performance
Current Issues in OM• Coordinating the relationship between
mutually supportive but separate organizations• Optimizing Global SCM• Increased co-production of goods and services• Operational Challenges
– Process Design and Improvements– Employee diversity– Human Resource scarcity– Global workforce
Current Issues in OM• Challenges at Marketplace
– Market fragmentation– Vocal Customers– Customer-Supplier relationship
• Technological Challenges– Technological changes– Bio-genetic– Miniaturization
• Societal Challenges– The Environment– Intellectual Property
Operations Strategy & Competitiveness
………………………………………
OPERATIONS STRATEGY
• STRATEGY is a Plan consistent with the Objectives to eliminate external threats or to take advantage of Opportunities.
• Levels of Strategy– Corporate Strategy– Business Strategy– Functional Strategy Operations Strategy
• Operations Strategy is influenced by Product / Services Market served
Corporate Strategy Design Process• Firm should develop comprehensive strategy
that integrates Finance, Marketing and Operations
• Financial Perspective : two basic strategies– Growth
• Build the Franchise – Develop new sources of revenue• Increase customer value
– Productivity• Improve cost structure• Improve asset utilization
Corporate Strategy Design Process• Customer Perspective – Find ways to
differentiate itself in the marketplace– Product Leadership– Customer intimacy– Operational excellence
• Internal Perspective– Defines business process– Specifies desired outcomes and the process to
achieve them
Corporate Strategy Design Process
• Learning and Growth Perspective – Defines intangible assets needed– Strategic Competencies– Strategic Technologies– Climate for action
Strategy
• Organizations should have Resources and capabilities to execute and support the strategy
• The extent to which organization is matching its resources and capabilities with the opportunities in external environment is Strategic Fit
• Strategy is delivered through a set of tailored activities
Operations Strategy
• Operations Strategy specifies how operations can help implement firm’s corporate strategy.
• Operations Strategy involves linking design decisions and operating decisions
• Cross-functional interaction must occur for implementing any functional strategy.
• Operation Strategy must be linked vertically to the customer and horizontally to other parts of enterprise
Operations Competitive DimensionsCompetitive priorities – Four Groups 1. COST
Low cost operations, Commodity type products
2. QUALITYHigh performance design, Consistent Quality.
3. TIMEFast delivery time, On time DeliveryDevelopment Speed
4. FLEXIBILITYVolume flexibility, Customisation,Varieties of product Special services to augment the sale
ELEMENTS OF OPERATION STRATEGY
• Designing the Production System• Product / Service Design & Development• Technology Selection & Process Development• Allocation of Resources to Strategic
alternatives• Facility Planning
DEVELOPING AN OPERATIONS STRATEGY
• Should be in line with Organization StrategyAnd Organization Strategy should be in line with Corporate vision
• Aim is to achieve Long Term goals of Business strategy
• Operations Strategy should be Flexible to support product through its Lifecycle.
• Operations Strategy should be consistent with strategies of other functional areas.
Long Term Operation Strategy Decisions
concerned with• Developing New Product• Determining appropriate production capacity• Establishing new production facilities• Adopting new technologies• Locations of Plant & Warehouses
Operations Strategy as Weapon in Competition
• Identify distinct Competencies• Expertise in
Product (ITC) / Process / Marketing (P&G) / Supply (HLL) expertise
• Shorter Product Cycle – Fast entry & Growth (CD Mnfrg)• Production Flexibility (Garment manufacturing lines)• Low Cost Process (Labor Intensive Jobs)• Convenience & Location ( HLL vis a vis Sara Lee)• Product variety & Facility Size • Quality
Productivity• The productivity is the measure of efficiency.• Productivity is a ratio of Output to Input.• Higher the ratio, higher the efficiencyTwo basic types of ProductivityTotal Productivity – Considers all the Inputs &
Ratio is Total Output / Total InputGives very little indication about Input areas needing improvement. It requires all variables to be expressed in same unit.
Partial Productivity – Considers only Specific Input (like Labor, R.M.) and Ratio is total Output / Partial Input
• Partial Productivity ratio is more preferred.
Productivity• Productivity ratios are used to measure efficiency of operation and
comparison of same with reference to Time, Industry.• Here it gains importance as control measure.To improve productivity we look at factors affecting productivity• Time spent on unproductive activity• Social or legal obligations• Unrest in employees• Learning new skillsIt is easy to measure the productivity of quantifiable tasks.But for Knowledge workers where tasks are• Not quantifiable• Intangible• Dependent on many other factors• Such that results are not directly attributable to tasks and
results come up after a long period
Example of Productivity Measures• Input & Output DataOutput1. Fin. Units Rs. 100002. WIP 25003. Dividends 1000
Total 13500Input4. Human Rs. 30005. Material 1536. Capital 100007. Energy 5408. Other expenses 1500
Total 15193
• Total Measure
• Multifactor Measures
• Partial Measures
89.015193
13500
Input Total
Output Total
28.43153
13500
MaterialHuman
tTotalOutpu
17.33153
10000
MaterialHuman
UnitsFinished
5.2540
13500
Energy
Output Total
52.18540
10000
Energy
UnitsFinished
Learning Curve
• Learning Curve is a line displaying relationship between unit production time and cumulative units produced
• Learning Curve Theory is based on three assumptions– The amount of time required to complete a given
task will be less each time the task is undertaken– Unit time will decrease at a decreasing rate– The reduction in time will follow a predictable pattern
Limited Passenger
Service
Frequent Reliable
Departures
Lean and highly
productive ground
and gate crews
No meals
No seat assignment
No baggage transfer
Process Analysis
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Process Analysis
• Process is any part of the organization that takes inputs and transforms them into output expected to be of greater value
• By analyzing process we can understand– Handling capacity– Serving time– Changes required to increase capacity– How much does the process cost
• We must clearly define the purpose of analyzing the process
Process Analysis• Process Analysis generally involves following tasks
– Decide process boundaries that mark the entry point of the process inputs and exit points of the process outputs
– Construct process flow diagram showing various process activities and their interrelationships
– Determine capacity of each step in the process– Identify the bottlenecks– Evaluate further limitations in order to quantify the
impact of the bottlenecks– Use the analysis to make operating decisions and
improve the process
Process Flowcharting• Process Flow-charting is a tool that categorizes each
activity & provides operational details to understand the process
• Good way to start analyzing a process is with diagram showing the basic elements of process– Tasks– Flows– Storage– Decision points
• Some times diagram is separated into different horizontal or vertical bands to allow separation of tasks
Types of Processes
• Single –stage process• Multi-stage process
– May be buffered internally– Buffering refers to storage area between stages– Buffering allows stages to operate independently– If no buffering, it is possible that Blocking or Starving
may happen• Processes by Market Orientation
– Make to stock - generally standard products– Make to order – generally customize products– Hybrid – combination of both above
Types of Processes
• Processes by Production Systems– Project– Job-Shop– Batch Production– Assembly Line– Continuous Flow– Cell Manufacturing– Flexible Manufacturing System– Pacing – refers to the fixed timings of movement of
the items through the process
Multistage Process
Multistage Process with Buffer
Alternate Paths
Measuring Process Performance• Utilization =Actual utilized time / Available time• Efficiency = Actual output of the process /
standard• Run-time – time required to produce a batch of
parts• Set-up time – time required to prepare a machine
to make a particular item• Operation time – sum of set-up and run-time for
a batch• Cycle time – time elapsed between starting and
completing a job
Measuring Process Performance
• Throughput time – time that a unit spends actually being worked on together with time spent waiting in a queue
• Throughput rate – Output rate that a process is expected to produce
• Process Velocity – Ratio of total throughput time to the value-added time
• Value-added time – time in which useful work is actually being done on the unit
Throughput Time Reduction
• Perform activities in parallel• Reduce back and forth movements• Change the sequence of activities• Reduce interruptions• Eliminate redundant activities• Combine activities wherever possible
Product Design
/\/\/\/\/\/\/\/\/\/\/\/\/\/\
• Starts with conceptualization with objectives of– Providing value to the customer– Return on Investment to the company– Competitiveness in the market
• Product design has impact on– Materials & components used– Processes used for manufacturing– Machines used for processing– Methods of storage– Ways of transportation– Production / Operations Strategies– Marketing Strategies
Product Design
Product Design• Design for Customer
– Achievement of purpose for which it is required, expressed or implied– Features– Ease of operation– User-friendly – Reliability– Consistency– Conformance to specification– Competitive price– Serviceability– Safety– Aesthetic– Environmental friendly– Disposal value– Durability
Quality Function Deployment• Quality Function Deployment is an approach to
understand the customers requirements and incorporating it in product design– Uses inter-functional teams– Shortens design time– Process begins with listening to customers to determine
characteristics of a superior product– Product needs and preferences are defined– These are broken down into categories called customer
requirements– Requirements are given weights according to its importance to
customers– Customer is asked to compare and rate company’s product with
that of a competitor
Value Engineering• It is “Engineering the Value”• The prime concern of VE is to enhance the function to
improve value • VE seeks out best functional balance between Cost, Reliability
and Performance• VE looks at saving money while providing better value• Value engineering always improves and / or maintains the
quality, reliability and maintainability of a product• It promotes progressive change by Identifying and removing
unnecessary cost• VE shows insights into the basics of Unnecessary cost without
compromising on Quality, Reliability or Maintainability• Application of Value Engineering is better way to fight
inflation
Value Engineering• VE is
– Systems Oriented formal job plan to identify and remove unnecessary cost
– Multidisciplinary team approach– Lifecycle oriented – examines the total cost of owning and
operating a facility– Functional Oriented – relates functions required to the
value received• But VE is not
– Design Review– A cheapening Process– A requirement done on all designs– Quality Control
Value Programs• Value Engineering
– Describes a value study on a project or product that is being developed
– It analyses the cost of project or product while it is being designed
• Value Analysis– Describes a value study of a project or product that is
already built or designed– It analyses product to see if it can be improved
• Value management– Identifies methodology and techniques used in Value work
• Concurrent Engineering is necessary to speed up product development
• Form Cross-functional teams for product development
• Design for Manufacture (DFM) – A good product design would be such that it would make manufacturing related functions – In less time– With less effort– At less cost
Design for Manufacturing and Assembly
• Activities involved in product development– Concept development– Market assessment– Feasibility Studies– Prototype Design– Prototype Testing– Interaction with suppliers and production departments– Initial Design of Production Model– Economic Evaluation– Market Testing– Final Design of Production Model
Product Development
Manufacturing Process Selection & Design
~~~~~~~~~ ~~~~~ ~~~~~~~~~
• Nature of Demand– Capacity to meet Estimated future demands
• Influence of SeasonalityTrend & other factorsPrice level
• Degree of Vertical Integration – Determines extent to which product & its
components are produced internally– Integration
• Backward or Forward
Major Factors Affecting Process Design Decisions
• Flexibility– Ability to respond quickly to changes
• In customer needs• Market changes
• Product Flexibility– Change from one product to other
• Results in Small batches• Calls for
– General purpose machines– Multi-skilled employees– Employee Training
• Volume Flexibility– Ability to change prod. Volume rapidly– Required for products where demand fluctuates and high
inventories are uneconomical
Factors Affecting Process Design
• Degree of Automation– It is a Strategic weapon– Essential for remaining Competitive– Can achieve flexibility (label manufacture)
• Quality Level & Degree of customer Contact– Quality decides degree of Automation– Customer contacts influence process like banking
Factors Affecting Process Design
Types of Processes
• Single –stage process• Multi-stage process
– May be buffered internally– Buffering refers to storage area between stages– Buffering allows stages to operate independently– If no buffering, it is possible that Blocking or Starving
may happen• Processes by Market Orientation
– Make to stock - generally standard products– Make to order – generally customize products– Hybrid – combination of both above
Types of Processes
• Processes by Production Systems– Project– Job-Shop– Batch Production– Assembly Line– Continuous Flow– Cell Manufacturing– Flexible Manufacturing System– Pacing – refers to the fixed timings of movement of
the items through the process
Process Flow Structure
• Process Flow Structure refers to how a factory organizes material flow
• Four major process flow structures are– Job shop – small batches of varieties of products– Batch shop – somewhat standardized job shop– Assembly line– Continuous flow
• Product Focused
• Process Focused
• Group Technology
TYPES OF PROCESS DESIGN
• Also known as Line Flow Production System
Used for High VolumeUse Specialised machinesProduct or Services flow in linear path without
backtracking
• Designed for three forms of production
Discreet Unit Manufacturing – Distinct product like RadioProcess Manufacturing – involves movement of material between operations ; like cement / paper plantDelivery of services – services are administered while Customers move in a queue
Product Focused
• Advantages – Low unit cost, Ease of Planning
Low labor skill requiredReduced trainingReduced SupervisionEase of Control
• Disadvantages - High Initial Investment
Product Focused
• Also called as Intermittent Production System.Or Job Shop ( Products move in batches)
• Used for Low Volume• Use relatively General purpose machine• Operations are grouped according to Process• Product flows in Irregular path•
Process Focused
• Advantages – Flexibility is goodLess initial Investment
• Disadvantages – Jobs are waiting for their turn for processing
Require greater employee skillMore Employee trainingMore Supervision Complex control
• In practice blend of both the systems is used.
Process Focused
• Dissimilar machines are grouped together into work centers to process the products which are similar in shape & have similar processing requirement.
• Each cell is dedicated to a limited range of products
• Each cell is designed to perform specific sets of processes
• Also known as Parts Classification and Coding System (because each part manufactured is given a Code).
Group Technology
• Selection depends upon– Product variety & volume
• Product Flexibility and small batch size - Process focused
• Reduction in flexibility & increase in batch size – Cellular
• Variety decreases, batch size increased – Product focused
• Investment• Economic Analysis – by way of Fixed & Variable Cost
SELECTION OF TYPE OF PROCESS DESIGN
Product Structure
Process Structure
Low volumeLow Standardization
Multiple productsLow volume
Few major productsHigher volume
High volumeHigh Standardization
Effectiveness Measure
1IJob shop
Commercial Printer
None (Not feasible
Flexibility –HighUnit Cost - high
IIBatch
Heavy Equipment
IIIAssembly line
Automobile Assembly
IVContinuous
None (Not feasible
Sugar Refinery
Flexibility – LowUnit Cost - Low
SERVICE PROCESS SELECTION AND DESIGN
.
Service Operations
• Service Operations exists in two broad organizational contexts– Service Business – Primary business is providing
services• Facilities-based service – customer goes to service
facility• Field-based service – service is provided in customer’s
environment
– Internal Services – Required to support activities of an organization
Characteristics of Services• Intangibility
– services can not be counted, measured or felt– This results in each customer having different experience
about the same service
• Customer-centered• Heterogeneity
– Similar type of services have a different effect depending on person who renders and person who uses it
• Inseparability– The production and consumption of service can not be
separated from the source that provides it• Perishability
– Services are required to be utilized as soon as they are produced; they are perishable
• Quality of work is not the quality of service
Classification of Service Organization• Service organizations can be classified on six
dimensions– Equipment focus / People focus– Product focus / Process focus (how the purchase is made)
– Level of customization– Back office focus / Front office focus (direct interaction
with customer)
– Duration of customer contact– Level of discretion
Categories of Service Organizations
Schmenner’s Service Classification Matrix
Degree of VariationCustomization for and Interaction with customers
Low High
Relative
throughput time
Low
Service FactoryFast FoodCall for Standard Operating Procedures
Service ShopTraditional RestaurantFocus should be on reducing the variations and standardization of services
High
Mass ServiceSchoolFocus should be on lowering throughput time
Professional ServiceGourmet RestaurantEmployees are highly skilled Personal Control
Designing Service Organization• In service we must meet demand as it arises• So capacity is dominant issue• Too much capacity generates excessive cost and
insufficient capacity leads to lost customers• Strive to reduce duration and variability of waiting
period• Designing service organization involves
– Identification of target market– Service concept(how we differentiate our service in the
market)– Service strategy– Service delivery system
Buffered Core (none) Permeable system (some) Reactive system (much)
High
Low High
Low
Sales opportunity
Production efficiency
Mail contact
Internet and on site Technology
Phone contact
Face to face tight
specs
Face to face loose
specs
Face to face total
cusomization
Degree of customer/server contact
Worker requirement
Clerical Skills Helping skills Verbal skills Procedural skills
Trade skills Diagnostic skills
Focus of operation
Paper handling
Demand management
Scripting calls Flow control Capacity management
Client mix
Technological Innovation
Office Automation
Routine methods
Computer database
Electronic aids Self-serve Client/worker teams
Service System Design• Depending on High-Contact or Low-Contact System, service
design can differ on– Facility location– Facility Layout– Product Design– Process Design– Scheduling– Production Planning– Worker Skills– Quality Control– Time Standards– Wage Payment– Capacity Planning
Service Encounter
• Service encounters are simply said as interactions between service provider and service seeker
• Service encounters are important for perception of service
• Three aspects of encounter are – The flow of the service experience (what is
happening)– The flow of time (how long it seems to take)– Judging encounter performance (what you think
about it later)
Behavioral Science & Service Encounter
• Front-end and back-end are not created equal– Company is likely to be better off with a relatively
weak start and upswing at the end• Segment the pleasure and combine the pain• Let the customer control the process• Pay attention to the norms and rituals
– Particularly true for professional services• People are easier to blame than systems• Let the punishment fit the crime in service recovery
Service Blueprinting and Fail-safing• Each activity that makes up a typical service encounter is
mapped into the flowchart• Distinction is made between the high customer contact
aspects of the services and those activities that customer does not see by drawing a line of visibility
• Designing Service Blueprint will involve– Identification of all activities– Identification of activities prone to problems– Decide on time required to deliver service process– Delivery of service– Listing of interactions between service provider and customer
• Fail-safing can be done through Poka-yoke (procedure that blocks inevitable mistakes)
Facility Location
/\/\/\/\/\/\/\/\/\/\/\/\/\/\
• Selection of Facility Location is needed When business is newly startedWhen expansion in existing plant is not
possibleWhen a new branch is to be establishedWhen a place has to be vacatedfor Social or Economic reasons like inadequate power, Govt. regulations etc.
• Earlier these decisions were dependent on individual preferences.
FACILITY LOCATION & LAYOUT
• Location fixes the production technology and cost structure
• Size and nature of Business• Ability to serve customer quickly and
conveniently• After facility location, Internal structure is
decided that is LAYOUT
Importance of Location
• Define the Location objectives and associated constraints
• Identify the relevant decision criteria• Relate objectives to criteria by appropriate model• Conduct field research• Select the location that best satisfies the criteria• Manufacturing location decisions focus on
minimization of cost• Service facility location decision focuses on
maximization of profit potential
Steps for Location selection
• Cost – Profit – Volume or Break even analysis between alternatives for the estimated volume. Lower total cost is the choice.
• Point Rating Method – – Decide factors important for location decision– Assign weightage to each factor – Give rating to each factor in the form of points– Take sum of weighted rating of all the factors– Highest rating location can be chosen
• Transportation Method of L.P.
MODELS
TRANSPORTATION PROBLEM• Methods for initial feasible solutions are
– North-West Corner Method– Least Cost Method– Vogel’s approximation Method
• Problem
• Distances between factory and its warehouse and Demand at each warehouse are given in the table below
• Factory /Warehouse W 1 W 2 W 3 Supply• F 1 16 22 14 200• F 2 18 14 18 150• F 3 8 14 16 100• Demand 175 125 150
• Find out the solution for transporting the goods at a minimum cost.
• Center of Gravity Method - used for optimal location for distribution center to minimize transportation costs– The center of gravity can be found by taking weighted
average of X and Y co-ordinates of different destinations
MODELS
i
iic V
VXX
i
iic V
VYY
Locating Service Facility
• Services have multiple sites to maintain close customer contacts
• Location decision is closely linked to market selection decisions
• Market need affect affects number, size and characteristics of site
• Service locations many times aim at maximizing profit potential rather than minimizing cost
Transportation Methods
~~~~~~~~~~~~~~~~~~~~~~~~
Transportation• This is a special case of L.P.• Applicable in situations involving physical distribution of goods from
plants to warehouses and further• Can also be applied to Production Scheduling & inventory Control• This model reduces computational efforts involved in simplex
method.• Transportation problem can be
Balanced or Unbalanced• In Balanced problem Qty of Goods Produced is equal to Total
Requirement• In Unbalanced problem it is not.• Unbalanced problem is made Balanced by adding Dummy• If Production Capacity is higher, then Dummy Warehouse is added
&• If Production Capacity is lesser, then Dummy Origin is added.
Formulation of Transportation Problem• X i j represents the number of units shipped from origin i to
destination j• C i j represents the cost of shipping a unit from origin i to
destination j• S i represents the supply available at i th origin• D j represents the quantity demanded at j th destination• Then, Objective Function is
– Minimize Z = ∑ C i j X i j• Subject to supply constraint
• = S i i = 1,2,….m
• Subject to demand constraint
• = D j j = 1,2,….n
n
jijX
1
m
1iijX
Steps to solve Transportation Problem• Define Objective function to be minimized• Develop Transportation table with Rows representing Origins &
Columns representing Destinations• Determine the Initial Feasible Solution• Examine whether Initial Solution is Feasible.
– A solution is feasible, if the numbers of occupied cells in the solution are (m + n – 1) where
– ‘m’ is the number of origins &– ‘n’ is the number of destinations.
• Test the solution for optimality by computing the opportunity cost associated with unoccupied cells
• If the solution is not optimum, modify the allocation such that transportation cost can be reduced further.
• Methods for initial feasible solutions are – North-West Corner Method– Least Cost Method– Vogel’s approximation Method
Problem• Distances between factory and its warehouse and Demand at
each warehouse are given in the table below.Find out the solution for transporting the goods at a minimum cost.
Factory
/Warehouse
W 1 W 2 W 3 Supply
F 1 16 22 14 200
F 2 18 14 18 150
F 3 8 14 16 100
Demand 175 125 150
North-West Corner Method
• The allocation of products starts at• North-West (top left) corner of Transportation table• Assign max. possible qty. to Top Left corner cell of
table• adjust supply and Demand numbers• If supply is exhausted move to next Supply
downwards & if Demand is satisfied move to next warehouse horizontally.
• Continue till entire requirements are met.• Check the Feasibility of the Solution
W1 W2 W3 Supply
F1 17516
2522 14
200
F2
18100
1450
18150
F3
8 14100
16100
Demand 175 125 150
North-West Corner Method
• The number of occupied cells is 5 that is equal to m + n – 1 cells; so solution is feasible.
• The cost associated with this solution is Rs. 7250
Least Cost Method• Allocations are made on the basis of unit transport cost• Allocate as many units as possible to the cell with least cost• Select a cell with the next higher cost and allocate as many
units as possible and continue the process till all requirements are met
• Number of occupied cells are 5 = m + n -1; hence the solution is feasible.
• The cost associated with this solution is Rs. 5900
W1 W2 W3 Supply
F1 5016 22
15014
200
F2 2518
12514 18
150
F3 1008 14 16
100
Demand 175 125 150
Vogel’s Approximation Method (VAM)• This is the most preferred method as it usually results in Optimal or
near optimal solution.• Calculate penalty
i.e. the difference between the least cost and next least cost of that row/ column, for each row and column of T.T.
• Identify row or column with the largest penalty value; and assign the possible qty. of product to that cell having the least unit cost in that row or column.
• Adjust the supply and requirement values after the allocation is made.
• Delete that row or column where the supply or requirement is zero• Calculate the values of penalty to all rows and columns for the
reduced transportation problem and repeat the procedure till entire requirements are met.
W1 W2 W3 Supply Penalty
F1 5016 22
15014
200 ; 50 2 ;2 ;2
F2 2518
12514 18
150 25 4 ;4 ;0
F3 1008 14 16
100 ;0 6
Demand 175 75 125 ;0 150 ; 0
Penalty 8 ;2 ;2 0 ;8 2 ;4 ;4
Vogel’s Approximation Method (VAM)
• Number of occupied cells are 5 = m + n -1; hence the solution is feasible.
• The cost associated with this solution is Rs. 5900 Number of occupied cells are 5 = m + n -1; hence the solution is feasible.
• The cost associated with this solution is Rs. 5900
Modified Distribution Method /
MODI Method/ U-V Method • For allocated cells form equation
ui +vj = Cij, and solve for ui , vj
• With these values of ui , vj ,find Δij = Cij - ui - vj for all unallocated cells
• If all Δij are ≥ 0, then it is the optimum solution• If any Δiiij ≤ 0, select most negative cell and form loop• Starting point of the loop is positive and alternatively they are
assigned +ve and –ve signs• Examine the quantities allocated at negative places; select
minimum and add it to positive places and subtract from negative places
• Form new table and check again for Optimality
Example on moving towards Optimization
Variations in Transportation Problem
• Unbalanced supply and demand – Add dummy with zero transportation cost
• Degeneracy – Allocate small quantity (€) to unoccupied cell which has lowest transportation cost
• Alternate Optimal solution – It exists if the Net Cost Change for an Unoccupied cell is zero
• Prohibited Transport Route – Assign very large cost to that route
• For Maximization Transport problem, reverse the process
Facility Layout
^#^#^#^#^#^#^
FACILITY LAYOUT• Physical disposition of the facilities of a plant.• Involves planning & arrangement of manufacturing
machinery, equipment & services for first time & improvement thereafter.
• Aim is to allow quick flow of men & material with minimum cost & least handling process from the stage of material receipt to shipment of finished goods.
• No set patterns; Requires Expertise
FACILITY LAYOUT
• Revisions are required when changes occur in• Product Design• Production Method• Plant size• Layout decisions have long term effect
OBJECTIVES of FACILITY LAYOUT
• To provide smooth flow of work & material• Providing sufficient production capacity• reducing material handling cost• Reducing accidents & hazards• Reducing congestion & utilizing the space
efficiently and effectively• Efficient utilization of labour• Easy supervision• Easy maintenance & high machine utilization• Improving productivity
CRITERIA FOR GOOD LAYOUT• Maximum Flexibility• Max. Co-ordination in different Dept.• Max. visibility• Max. accessibility• Minimum distances / movements• Min. handling• Min. discomfort• Inherent safety• Efficient process flow / Unidirectional flow – no
crossing• Identification – Provide a space for each worker; it
raises morale
PROCESS LAYOUT (Work-centers) • Also known as Functional layout or Job-shop layout • Grouping of similar equipment in one area• Use general purpose machines• Workers must be highly skilled• Require intensive job instructions•• Advantages – Greater flexibility
Better & more efficient supervision thr’specializationBreak-down can be handled easilyBetter utilization is possible
• Disadvantages – More production timeMore floor space is requiredAccumulation of work at different process centres
DEVELOPING PROCESS LAYOUT • Graphic & Schematic analysis using templates• Computer Models – CRAFT (Computerised Relative
Allocation of Facilities Technique) is a program available
Works on criteria similar to Load – distance Model.
Initial layout is fed with cost of transporting loads and the loads moved.
• Load – distance Model – Used to minimize the material flow
PRODUCT LAYOUT (Assembly Line) • Also known as Flow shop / Straight Line Layout• Arrangement of machines according to
progressive steps.• Preferred in the plant manufacturing standard
products• Advantages – Material handling cost is reduced
considerablyLess floor space requiredBetter production control
• Disadvantages – Expansion of production line is difficult
Break-down of equipment may disrupt entire line
DEVELOPING PRODUCT LAYOUT • This is partly established when Product design
is made and the different steps to make it are determined.
• Line balancing is used to group tasks to be performed at each work-station
• Line balancing ensures that each work-station gets equal amount of time approximately
Assembly Line Balancing• Assembly Line Balancing problem is one of assigning all tasks to a
series of workstations so that workstation is engaged for maximum amount of time out of Required Workstation Cycle Time (T)
• Steps in Balancing assembly Line– Draw Precedence Diagram– Determine Required Workstation Cycle Time ( C) C = Production time per day/ Reqd. output per day– Determine theoretical minimum number of workstations (N) required
to satisfy WCT N = Sum of Task Time (T) / Cycle Time (C)
– Assign task that has max following tasks to first workstation untill the sum of the task times is equal to WCT or no other tasks are feasible because of time or sequence restrictions
– Repeat till all tasks are completed– Efficiency = Sum of task times / WCT * No. of Work stations
Grouping Technology Layout
• These help in simplifying machine changeovers.
• Developing A Cellular Manufacturing Layout– Parts with common sequence are grouped– Dominant flow pattern is identified as a basis for
location– Machines are physically grouped into cells
OTHER LAYOUTS • FIXED POSITION LAYOUT (Project Layout)
– Movement of machines & men to product which is stationery
– Less investment in Layout– Avoids transporting bulky material
• HYBRID LAYOUT – Combination • JAPANESE APPROACH
– Because of space constraint, layouts are COMPACT– Designed for flexibility and adaptability to different
product models• SERVICE FACILITY LAYOUT
– Include features for customer contact & conveniences– Layout in Banks is built totally around customer receiving
service– Layout in Hospital is more of process oriented than
customer
Retail Service Layout
• Objective may be to maximize net profit per sq. ft. of floor space
• Aim is to maximize product exposure to customers• Some rules for this layout
– Locate high-draw items around the periphery of the store
– Use prominent locations for high margin items– Remove cross-over aisles– Distribute “Power items” to both sides of aisles– Also consider ambient conditions
Office Layout
• Basic design of the entire office and workspace
• Should include everything that is required in the particular office for people to work smoothly and efficiently
• Relationship diagrams are considered for placing different departments adjacent to each other
Measuring Flow - Qualitatively• Can be measured by using Closeness relationship
values• Value Closeness
A Absolutely necessaryE Especially importantI ImportantO ordinary closeness okayU UnimportantX Undesirable
• It is reasonable to expect– 5% of the pair-wise combinations to have A activity
Department / Person
Closeness Relationship Value
Reason in code
Relationship Chart
Graph based Method
Relationship ChartRelationship Diagram
1
2
3
4
5
98
100
1213
720
02
1
3
2
4
58
9
12
10
13
20
7
2
0
0
Graph based Method
3 4 Total
1 8 10 18
2 12 13 25
5 0 2 2
2
3 4
12 13
20
Faces Total
1-2-3 7
1-2-4 9
1-3-4 2
2-3-4 9
2 3 4
1 9 8 10 27
5 7 0 9 16
Step 2
1
Step 3
2
3 4
1
5
2
31 5
4
Waiting Line Management
<<<<<<<<<<<<<<<<<<<<<<<<
• Capacity decisions in Service system are often made on the basis of impact on customer
• In service system, waiting time is important operational measure
• Waiting line models analyze impact of alternative capacity choices on operational measures
Waiting Line Models
Queuing Models• Can be applied to operational situations when there is
imperfect matching between customers and service facilities • Imperfect matching occurs because of inability to predict
accurately arrival and service times of customers.• Queuing Models are used to determine the level of service
(either service rate or the number of service facilities) that balances the two conflicting costs– Cost of offering the service– Cost incurred due to delay in offering service
• The optimum service level is the one which minimizes sum of these two costs
Cost
Service Capacity
Cost of Service Capacity
Cost of Customer Waiting
Total Cost
Elements of Queuing Models
• Customer – entities that arrive and require some service
• Server – entities that provide the service required by the customer
• Queue discipline – refers to the behavior of the customer in the waiting line and the design of waiting line
• Service Discipline – refers to the manner in which customers are served
• Structure of Queuing System– Calling Population – It places demand and uses
capacity deployed– Arrival Parameters – The rate at which customers
arrive and the pattern of the same– Queue Parameters – Indicate how waiting jobs are
handled and how arriving customer behaves– System Structure – Refers to manner in which
resources are organized in operating system
Waiting Line Models
Structure of Queuing System•Service Parameter – determines how resources are likely to be consumed i.e. it specifies service time•Performance Metrics
Average no. of customers in the system = Ls
Average no. of customers in the waiting line = Lq
Average time a customer spends in the system = Ws
Average time a customer spends in waiting line = Wq Generalized relationship known as Little’s formulaλ = Arrival rate & µ = Service rate
s
s
LW
q
q
LW
qs LL
Infinite
Finite
Rate
Pattern
ServersStagesRoutingCapacity
Calling population
Arrival parameters
Queue Parameters
Markovian, Gen dist, Deterministic
Single, Bulk, Spl Group
FCFS, LCFS, Random, Balk, Renege, Jog
Performance Metrics
Queue Length, Waiting Time, Utilization, Cost Based
Basic Elements of Waiting Line Models
Single, MultipleSingle, Multiple
single, Serial,NetworkFinite, Infinite
System Structure & parameters
Service Parameters Markovian, Gen dist, Deterministic
QUEUING MODELS• To study varieties of Queuing problems following classification
scheme is adapted • (x / y / z) : (u / v / w)
where• x = Arrival (or inter-arrival) distribution• y = The departure (service time) distribution• z = Number of parallel service channels• u = The service discipline• v = Maximum number of customers allowed in the
system• w = The size of population
Codes used for Symbols• M = Exponential inter-arrival or service time distribution (equivalent to
Poisson arrival or departure distribution)• GI = General independent distribution of arrival• G = General distribution of departure• D = Deterministic inter-arrival or service time • Symbol z, v and w are replaced by appropriate numerical designations• Symbol u is replaced by codes like• FCFS = First come, first served• LCFS = Last come, first served• SIRO = Service in random order• SPT = Shortest processing time• GD = General service discipline• Superscript is attached to the first symbol if bulk arrival exists and to the
second symbol if bulk service is used
Notations in Queuing Systemn = Number of customers in the system
Pn = Probability of ‘n’ customers in the system
= Average (expected) customer arrival rate
= Average (expected) service rate
timearrival-inter Average
timecompletion service Average
= Traffi c intensity
c = Number of service channels
N = maximum number of customers allowed in the system
L = average number of customers in the system
Lq = average number of customers in the queue
Lb = average length of non-empty queue
W = average waiting time in the system
Wq = average waiting time in the queue
Pw = Probability that an arriving customer has to wait
Operating CharacteristicsRelationship among Performance measures
1.
N
0nnnPL &
N
snnq P)cn(L
2. ̂
LL q
3. 1
WW q
4. Average no. of customers served per busy period
bL
5. U = Server Utilisation = (L – Lq) / c
6. W = L / ̂ and Wq = Lq / ̂
Model I – {(M/M/1):(FCFS/Infinity)} Single server, exponential service – unlimited queue
110P
1n
nP
Pw = Prob. of arriving cust. has to wait = 1 - P0 =
;
sL )(
2
qL
)(
LW
1ssL
W
1
)(;)(
kk
knPknP
Expected length of non-empty queue
=
bL
Example on Model ICustomers arrive at one window drive-in bank according to Poisson
distribution with mean 10 per hour. Service time per customer is exponentially distributed with mean 5 minutes. The space in front of the window including that for the serviced car can accommodate a maximum of 3 cars. Others can wait outside this space.
i) What is the probability that an arriving customer can drive directly to the space in front of the window?
ii) What is the probability that an arriving customer will have to wait outside the indicated space?
iii) How long is an arriving customer expected to wait before starting service?
Strategic Capacity Management
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• What is Capacity– Capacity denotes maximum amount of output of
products or services one can achieve• Capacity can be expressed in terms of hours
available of a resource or output in some units of measure
• Capacity has significant impact on cost of operations
Capacity
• Measures of Capacity– Low volume – high variety firms generally indicate
capacity by quantum of input that it can process in unit time
– High volume – low variety use output as measure of capacity
• Capacity Utilization is one of the important parameter in determining capacity required
• Capacity Utilization = Capacity put to use /Total capacity available
• Rated capacity = Capacity X Utilization X Efficiency
Measures
CAPACITY PLANNING • 100 % capacity utilization is not possible• Capacity requirement should not be under or over
estimated• Economies of Scale – As the size of operation increases, per
unit cost of operation decreases– Because of decrease in the fixed cost per unit of output
& adoption of efficient processes and technologies– But beyond a certain point this cost per unit starts
increasing because of increase in storage and distribution cost and complexities of operations
• Consider the concept of capacity focus• In response to changing market scenario capacity decision
should be addressed from time to time • Capacity can not be added in incremental terms at frequent
intervals• Firms undergo a cycle of over, appropriate and under
capacity
Factors Affecting Capacity Planning
• Type of Product and Services that are offered• Process• Resource availability• External factors
• Capacity Planning is systematic approach to – Identification & Evaluation of Long-term & Short-term
capacity Requirements – Ascertain available capacity & additional capacity
requirement– Identify Action to bridge gaps
– Evaluation of alternative methods for augmenting the capacity
– Select the action plan– Devising various methods to use existing capacity
effectively
Capacity Planning
• Capacity Planning should be focused on each stage of production or Service Delivery System
• Time horizon– Long term i.e. 2 – 5 years– Medium term i.e. 1 year– Short term i.e. 1 week – 3 months
Capacity Planning
• Adding additional resources may not be always attractive• There can be alternatives to this
– Waste Elimination– Multi-skilling of work-force– Over time working– Sub-contracting / Outsourcing
• Considerations are– Lack of capacity– Technological Intensity and criticality of item– Cost of Manufacturing vs. Outsourcing
• Advantages are– Flexibility in handling demand fluctuations– Reduction in response time– Reduction in risk in investment for new equipment
Capacity Augmentation
• Services has typical characteristics– Cannot be stored– Must be located near customer– Volatility of demand
• Capacity decisions in Service system are often made on the basis of impact on customer
• In service system, waiting time is important operational measure• Waiting line models analyze impact of alternative capacity
choices on operational measures• Enough capacity is required to be built for meeting maximum
demand• Demand management principles can be utilized to utilize
capacity and regulate waiting time
Service Capacity
Aggregate Sales & Operations Planning
-------------------------------------
Aggregate Sales & Operations Planning• Traditionally this is known as Aggregate Planning• Aggregate plan links strategic goals and objectives with plan for
individual products, services and their various components• Aggregate Sales & Operations Planning is a process to help
– Give better customer service– Lower inventory– Shorter customer lead times– Stabilize production rates– Keep business in control
• Process is built on teamwork between sales, operation, finance and product development
• Process is designed to help company get demand and supply in balance• The balance must occur at aggregate level and also at detailed
individual product level
AGGREGATE PLANNING
• Aggregate Planning reflects operational decisions to ensure that resources required are available
• To satisfy demand, essential to have Resource planning.
• Easy for Single product; but difficult for multiple product company.
• For multiple products, take group of products.• Decision can be taken on this basis.• Measure output in common terms – AGGREGATE
OUTPUT• Planning on this basis is AGGREGATE PLANNING
AGGREGATE PLANNING• AGGREGATE PLANNING reflects decisions on
– Output rates– Workforce Requirement– Inventory levels– Equipment allocation– Backorders– Sub-contracting / Outsourcing– Overtime etc.
• Aggregate plans are disaggregated into smaller tasks to give master schedule for individual products.
• Aggregate plan gives stages for future course of action
• MASTER PRODUCTION SCHEDULE (MPS) gives quantity to be produced & time frame for deliveries.
AGGREGATE PLANNING PROCESS
• Objective is To minimize production cost / Improve profitImprove customer serviceMinimize inventory investmentUtilization of resourcesMake changes in Production Rates &
Workforce levels• Concept of aggregation – Identify a measure of
output.
AGGREGATE PLANNING
• Aggregate Planning Goals – # Specify required output# Specify Inventory levels# Utilize facility’s capacity in an efficient way w.r.t. organization's strategy# Should be in line with company’s policy & objectives regarding its
employees.
Variables in Development ofAggregate Planning
• Developed on considering the variables like• Operations - Current machine Capacities
Plan for future capacitiesWorkforce CapacityCurrent staffing levels
• Materials - Supplier capabilitiesStorage capacityMaterials availability
• Engineering - New Products
VARIABLES
• Distribution & Marketing – Customer needsDemand ForecastCompetition
• Accounting & finance – Cost dataFinancial condition of a firm
• Human resources – Labour market conditionTraining Capacity
• Use different combinations of variables To satisfy demand efficiently & economically
Strategies for Managing Supply• Chase Strategy – Capacity is adjusted to match the
demand as close as possible• Level Strategy – Maintains constant capacity over
a period of time, irrespective of fluctuations in demand– This strategy is used when skill level, training required
and cost of hiring or terminating people is high• Mixed Strategy – Trying to keep workforce
constant– Adjustments by o/t, sub-contracting, inventory levels,
hiring or lay-offs
Pure Planning strategy• Pure Planning strategy – When only one strategy is adapted,
then it is a pure strategy. Normally a combination is used.• Different pure Strategies used
– Varying Workforce • Disadvantages – Hiring & lay-off costs
Training Cost Morale of workforce Non-availability of skilled workforce
– Varying the utilization of workforce – • Disadvantages - Idleness or overtime
Inefficiency in employeesLoss of interest in employeeProne to job related accidentsMorale down
Pure Planning strategy
• Varying the size of Inventory – Disadvantages - Increased inventory cost
Increased material handling costAdditional storage space requiredRisk of damage, loss, obsolescence
• Back-orders• Sub-contracting• Adjusting Plant Capacity
Aggregate Planning Techniques
Graphical method – – Cum days on X-axis & cum. Output on Y-axis– Select planning Strategy & plot output for the period– Compare demand and output– Estimate the cost
• Optimal Models– – Linear programming for minimizing the cost– Useful when cost & variable relationship is linear
Aggregate Planning Techniques
– Linear Decision Rules – Set of equations for calculating optimal solution
• Overcomes limitations of L.P. by taking into account non-linear cost relationship
• Drawback is that for any changes in equation, extensive mathematical analysis is required
• Must be tailored to suit specific requirement
Aggregate Planning Techniques
• Heuristic Approach – based on historical data– Management Co-efficient Model – uses
Regression Method; objective is to find regression equation that fits best for past data & then use that equation for future.
• Computer Search method – When large amount of information on different variables is available, Computer Programme Simulation of all conditions to find best solution
• Computer Simulation in capacity Evaluation – Used to evaluate performance of plans.
INVENTORY MANAGEMENT
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Inventory
• What is Inventory?• It is Stock of Goods, Commodities or other
Economic Resources held for future production requirements.
• Two Categories - Direct – Used directly in productionIndirect – Goods necessary for
production process
Types of Inventories • Types of Inventories & Reasons for holding –• Raw Materials – Delay in delivery, Qty. discount,
Reduction in freight charges because of large shipments
• Semi-finished Goods – Flexibility in planning, Unequal production rates of processing stations, Reduction in handling & prod. Cost due to large batch size.
• Finished Goods – To meet Customer demand in time, Production in batches, High level of production to take advantage of economies of scale, to show product to customer.
• Replacement Parts & Consumables Inventory
Independent versus Dependent Demand• Inventory items are divided into two types
– Independent Demand & Dependent Demand• Independent Demand
– Not controlled directly by the company– Generally includes finished products– Demand is generally independent of company’s own production
plans• Dependent Demand
– Usually generated by company’s own production plan– It is related to the demand for another inventory item or product– Vertical dependency (Assymbly – Sub-assymbly – component– Horizontal dependency (Attachments, manual with product)
• To manage dependent demand Materials Requirement Planning is used
Inventory Management• Inventory Management –
To minimize Inventory cost , without affecting Customer service.
• Objective is To Order Right Quantity, at Right Time Without affecting Production
• Purpose for Inventory– Smooth Production– Better services to the customers – Protection against business uncertainties– Take advantage of quantity discounts
Inventory Costs • Purchase Cost – Cost per unit of item• Carrying Cost (or Holding Cost) – Cost incurred due
to storing of inventories. Include – Opportunity cost of investment, – Cost of Storage (Rent, Electricity), – Staffing – Equipment & Maintenance– Insurance, Interest, Taxes, Security, – Loss due to Pilferage. Spoilage, Breakage, Obsolescence– Generally expressed as percentage of material cost(20-
25 %).
Inventory Costs • Ordering Cost
– Incurred for process of purchasing i. e. preparing order, communication, record-keeping & accounting, material receiving
– Incurred every time the order is placed– Fixed cost does not change even if order quantity is
changed.• Stock-out Cost – Include
– Loss of Sale– Customer shift to competitor’s product– Additional cost associated with urgent purchase– Loss of Customer good-will
INVENTORY SYSTEMS
There are • Single period Models (Perishable products) or• Multiple period Models (for items required on
on-going basis)• In multiple period models there are two
general type of systems– Fixed Order Quantity (EOQ) Model or Q-System– Fixed Time Period Model or P-System
Fixed Order Quantity System ( Q – system)
• Check stock level continuously• Place new order, when level reaches certain
point (Reorder point)• Order Quantity is constant• Quantity of order is determined by demand &
cost consideration• Objective is to determine order quqntity soas
to minimize total cost
Annual Total Cost
Order Quantity
Carrying Cost
Shortage Cost
Total Cost
Economic Order Quantity Model• Order quantity is such that the Total cost ( Ordering cost +
carrying cost ) is minimized.• Assumptions
– Price of item is independent of order quantity– Cost of ordering is fixed & independent of qty.– Carrying cost is proportional to inventory level– Usage rate of product is constant– Lead time is known & is fairly constant– Reorder Point – assumes that inventory reaches zero at the
end of each reordering cycle• Reorder Point = Demand X Lead Time
D X LT
Economic Order Quantity Model • Optimal Order Quantity
– Shortages are not allowed i.e. no Shortage Cost– So, total cost is having three components
Ordering costHolding CostVariable Cost
• Ordering cost / unit time = C o x D / QD – Demand per unit timeQ – Order quantity
• Holding Cost / unit time = C h x Q / 2• Total Cost - TC = C o x D / Q + C h x Q / 2 + C p x D• Total Cost is minimum when
C o x D / Q = C h x Q / 2
EOQ =h
o
C
D2C
Examples• A company purchases 9000 parts of a machine
for its annual requirements, ordering one month’s usage at a time. Each part costs Rs. 20. The ordering cost per order is Rs. 15 and the carrying charges are 15% of the average inventory per year. Suggest a more economical purchase policy for the company
Fixed Order Period System ( P - System)
• Order period is fixed • Order quantity varies according to inventory
level & future requirements• No continuous check on Inventory is required• But safety stocks are high• Safety stock can be = zSL *S.D.
Inventory Classifications• ABC Classification System
– Principle of Selective Control• Items with high Usage value are paid more attention.• Usage value = Unit cost X Qty. consumed in a year• ‘A’ - represents material of high usage value (60-70
%)• ‘B’ - represents material of Moderate usage value
(10-30 %)• ‘C’ - represents material of low usage value (5-15 %)• ABC - ALWAYS BETTER CONTROL
Inventory ClassificationsVED Classification – Based on importanceof a particular item in production process• V – Vital• E – Essential• D – Desirable• Item categorized as V, need maximum control and
investmentFSND Classification – Based on the turnover of the
goods• F – Fast-moving S – Slow-moving• N – Non-moving D - Dead
Other Inventory Systems• Optional replenishment System
– Like P-system review is taken at regular interval but order is placed only when stock reaches re-order level
– Order is placed for a quantity as calculated in P-system
• Two Bin System– Involves use of two containers for inventory– When first bin is empty, it is time for re-order– The second bin contains stock sufficient to satisfy
demand during lead time and safety stock
Materials Requirement Planning
MRP
Dependent Demand & MRP• Dependent Demand – Demand for an Item that can be
linked to the demand for another item.• To manage dependent demand Materials Requirement
Planning (MRP) is used• MRP –
– combines Inventory Control with Production Planning– finds Net requirement & Generates Schedules
through Computers– Backward scheduling process considering
Date of Requirement of End ProductLead Time for Components & inventories
MRP• Dis-assembles End Products into Product Hierarchy i.e.
Sub-Assemblies ComponentsRaw material Std. Bought-out Parts
• Schedules the activities in Time Period of Planning• Co-ordinates orders from Internal and External sources• Aims at replenishing stock when required• Examines production Schedule regularly to adjust material flow to reduce
Inventory• Helps taking Capacity Planning Decisions
• Useful in Complex products Involving many components and sub-
assembliesProducts with shorter delivery scheduleJob shop, Assemble to order processAlso for continuous process to adjust production disruption
MRP• OBJECTIVES of MRP
Improved Customer ServiceReduced Investment in InventoryImproved Operating efficiencyFaster Response to market change
• COMPONENTS of MRPInput Processing & Output
• To process it requiresOrder positionDemand forecastCapacity InformationStock position of Dependent demand items (W.I.P. & R.M.) Expected receipts & consumptions of itemsDesign changes expected
• This information is converted into a form acceptable to MRP system
MRP - INPUT• Master production Schedule (MPS)• Bill of material (BOM)• Inventory Record file• MPS – MRP system assumes that Production
Capacity is sufficient for production as per MPS
• From MPS, Replenishment plan is generated for items used
• Time horizon is divided into time Bucket like Days, Weeks
MRP - INPUT• BOM – also known as Product Structure file
Shows production Phase LevelsLists all the sub-assy. & components which
make end product• Inventory Record file –
Complete Record of each material held likeOpening stockExpected Receipts & consumptionLead time for the itemRate of purchaseSupplier’s information
INFORMATION PROCESSING – • Develops Production & Purchase Schedules• Explosion – End product is dis-assembled into
components • Generates the Sequence followed to produce the End
Product• Netting –Development of Material requirement
Plan for each item in BOM, for each time Bucket• Offsetting – Planned Order release• Consolidation – of Material Requirement in
Master Material Requirement Plan
OUTPUT • Reports - Planning Information
Schedules Customised Reports
• Primary Reports – Main Reports likeOrdersChanges in due dateCancellation
• Used in Inventory & Production Control
• Secondary Report – To assess the Performance likePlanning ReportPerformance ReportException Report
MRP System
• Advantages of MRP System – Reduction in per unit cost of production Low Inventory levelsBetter market responseBetter Customer serviceOptimised production schedulingImproved Capacity allocation & Planning
MRP System • Disadvantages –
High CostTechnical ComplexitiesLonger implementation timeLarge amount of Inputs are requiredAssumed data may be misleading
• Problems in Implementation – Inadequate Employee Training & involvementUse of inaccurate & obsolete dataInappropriate product environment
MANUFACTURING RESOURCE PLANNIG (MRP II )
• Integrating other functional areas like engineering, production, Finance, marketing, Purchasing with MRP is Manufacturing Resource planning (MRP II)
MASTER PRODUCTION SCHEDULE(MPS)
• Gives details of Type and Quantity of each product to be produced.
• Detail plan includes scheduling of different stages in production &
• Reflects most economic use of labor & equipment capacities.
Functions of MPS • Translates aggregate plan to
Break-up of total production into Groups of product or lots
• Gives specific number of individual products to be produced with workstations and time-frame.
• Evaluate alternative schedule• Identify material requirement• Generate Capacity Requirement• Effectively utilize capacity – assign load for labor &
equipment
MASTER PRODUCTION SCHEDULING • Planning of activities to achieve production objectives.• MRP & CRP are part of this activity.• Steps in scheduling –
Determine the Gross Requirement of materialsObtain Net Requirement considering inventoriesCorrection in MPS if required
Convert Net Requirement into Planned Release OrdersDeveloping Load – Report containing information on amount of work assigned to individual worker, m/c & work-stationsIf mismatch between available & required capacity, modify MPS or add capacity.
MPS• MPS is generally based on Demand forecast.• Demand forecast is not always accurate.• Actual demand is not equal to schedule• Schedule is not equal to Actual Output • So, MPS needs modifications. • These are done by –
Modifying the size or composition of productAllow changes in inventory levelDivert resources at the cost of some other
functionSub-contract the requirementsAlter the price to influence the demand level
MASTER SCHEDULE FORMATION
• Made from aggregate Plan.• Influenced by Market Environment & Resource availability.• Main inputs which influence MPS are forecast & orders.• For Make-to-stock items
Input is Demand forecastInventories are replenished at plant or distributor.Finished goods inventories are maintained
constantly.• For Make-to-Order items
Detail scheduling is essentialNo finished goods inventory.Production begins after order is received
SUPPLY CHAIN STRATEGY
====
What is SCM
• Supply Chain covers various stages in provision of product to customers• SCM is involved with integration of three flows between different stages
– Flow of information– Flow of product / material– Flow of Funds
• A typical Supply Chain may involve variety of stages like– Customers– Retailers– Wholesalers/Distributors– Manufacturers– Component/Raw material suppliers
• Supply Chain Management is integration of activities at these stages for competitive advantage of the organization
• Supply Chain management should be EFFICIENT & RESPONSIVE.
Key Drivers of SCM• Inventory – R.M., WIP. & F.G.
– Required because of mismatch between Demand & supplyLead Time & to increase Responsiveness
– Objective of SCM is to reduce Inventory cost without compromising on the Responsiveness
• Transportation – Decision on – Mode, Route & Network– Whether company should own Transport – There is always trade-off between Efficiency & Responsiveness
• Facilities – Locations where – R. M. & F.G. are stored– WIP is assembled – Finished Goods are distributed– Facility’s location & capacity has effect on SCM
4. Information – SC is made up of various entities;Proper co-ordination of them is key to efficiency.Flow of Information improves the co-ordination
Supply Chain Strategy
• Supply Chain strategy should support Business strategy
• Look at your – Core competencies– Focus– Means of differentiation
• Assess the extended supply chain
Performance Measures for Overall Supply Chain
• Delivery Performance - % orders delivered as per schedule
• Fill rate by line item – Customer would prefer to get all the items they order at the time they ordered them
• Order fulfillment lead time• Perfect order fulfillment• Supply Chain Response time – This measures how
long it will take for the effect to be felt in the supply chain given a change
• Upside production flexibility – Assesses response time required by the manufacturing facility to meet increase in demand
Performance Measures for Overall Supply Chain
• Supply Chain Management cost• Warranty Cost as % of revenue – Affects in two ways:
one is warranty cost and other is loss of goodwill or even customer
• Value added per employee• Inventory days of supply – It quantifies how long
enterprise can continue to run if all sources of supply are cut off.
• Cash-to-cash cycle Time • Asset Turns – How many times the same asset can be
used to generate revenue and profit (Inventory turnover ratio)
.
• Push strategy pushes a product through the trade channel– Creates inventory of F.G.
• Pull Strategy – Customer initiates demand– Focus is required for reduction in WIP– Inventory of common raw material required. can be increased
to reduce lead time• Push/Pull strategy – • Bullwhip Effect distorts demand information within the
supply chain– when complete information is not shared between stages due
to conflicting objectives, the information gets distorted as it moves within the supply chain and it creates bullwhip effect
– Results in loss of SC co-ordination, trust in the members– Also results in damage to performance metrics
Outsourcing• Outsourcing refers to the process of contracting to the third
party• Considerations are
– Lack of capacity– Technological Intensity and criticality of item– Cost of Manufacturing vs. Outsourcing
• Advantages are– Flexibility in handling demand fluctuations– Reduction in response time– Reduction in risk in investment for new equipment
• Disadvantage – Product differentiation may be lost– If it is because of cost consideration, efficient competitor may
overtake you
Global Sourcing• Aims to exploit global efficiencies in the delivery of product or
services• These efficiencies include low cost of labour/ raw material and
other economic factors• Advantages
– Learning how to do business in new potential market– Tapping into skills or resources so far unavailable– Developing alternate sources– Increasing total capacity
• Disadvantages– Hidden costs associated with different culture, time zone– Exposure to financial and political risks– Increased risk of loss of intellectual property– Increased monitoring cost, lead time– Difficulties in monitoring quality
Mass Customization• Aim is increase in variety and customization of product or
service without corresponding increase in cost• It is mass production of individually customized goods or
services• Four types of Mass Customization
– Collaborative Customization – On getting information from customer, make a product that suits the specific customer
– Adaptive Customization – Firm produces standard product but product is customizable in the hands of the end user
– Transparent customization – provide customized product without telling customer about it
– Cosmetic Customization – produce standardized product but market it to different customers in a unique ways
Total Quality Management
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CONCEPT OF TQM
• W.E. Deming – Father of TQM• It is a Philosophy for improvement through
Involvement of everyone• Earlier, quality was referred only to Product and
Production; now it is referred to entire Organization• TQM refers to meeting the customers Requirement
consistently by continuous improvement in the quality of Work
• TQM is a process approach• Process approach is also used in ISO 9000
Objectives and essentials of TQM• Meeting Customers Requirement Consistently• Continuous Improvement to meet ever-changing Requirements
– It may be better quality– different size– Price reduction– Comparison with Competitors Product– Advancement in Technology
• Involvement of all Employees– It should be a concern of all Managers & Workers– Improvement in Quality of work of employees through Training
& Development– Employees should be conscious about need for Improvement.
• A positive attitude towards Customer and Constant enhancement of Quality must be the attitude of all Employees.
• In TQM each dept. treats other dept. as their customer
What is Quality? • Quality means ability of the Product to meet stated or implied
needs.– Quality of Design– Quality of Conformance– Quality of Performance
• Availability• Reliability• Maintainability
• Quality was viewed as defensive function. • Quality control was used to reduce number of customer
complaints. • It was concerned with inspection after the defect is produced.
Quality Functions• Eight different Quality Function
– Performance– Features– Reliability– Conformance– Durability– Serviceability– Aesthetics– Safety– User-friendliness– Customizability– Environmental friendliness – Perceived quality
• Role of Inspection in Quality Control
Cost of Quality Assurance• Cost of Inspection includes
Man power cost Equipment costMaterial costTraining costSample cost
• Cost of quality or undetected faults includes Customer complaints Loss of goodwillProduct replacement & recallReturned products Liability suits
Cost of Quality• Cost of quality or undetected faults categorized into
– Cost of Prevention –which includes • Investment in machinery, technology• training to reduce number of defect• Cost of quality programs, data collection and analysis• This brings high returns
– Cost of detection/appraisal• associated with quality evaluation
– Cost of failure • Internal failure cost – include
Scrap, repair, retesting, downtime• External failure cost – include
Cost of returned material, warranty charges, legal suits, loss of customer goodwill
Six Sigma
• Six Sigma is a technique to manage process variation that causes defect
• It aims to achieve world-class performance, reliability and value for customers
• Traditionally Quality programmes focus on detecting and correcting defects whereas Six sigma focus on variations in process which lead to defect creation
• The performance of a process is measured in terms of Defects Per Million Opportunities (DPMO)
• In Six Sigma , on a long term basis, no more than 3.4 DPMO are permitted
• Successful implementation of six sigma is based on sound personnel practices as well as technical methodologies
• To convey the need to vigorously attack the problems, professionals are given martial arts titles
Six Sigma Methodology• DMAIC and DMADV are the methodologies to
implement six sigma• DMAIC DMADV
– D – Define D - Define– M – Measure M – Measure– A – Analyze A - Analyse– I – Improve D - Design– C- Control V – Veify
• DMADV methodology is used when – Product or process is not in existence– Existing product or process does not meet the
customer specification or Six Sigma level
Shingo System• Two aspects of Shingo System
– Hoe to obtaindrastic cuts in equipment set-up time by Single Minute Exchange of Die (SMED)
– Use of source inspection or Poka-Yokesystem to achieve zero defect
• According to Shingo SQC does not prevent defects, it is inadequate to improve quality
• Shingo’s approach– Defects occur because people make error– Defects can be prevented if feedback leading to
corrective action takes place immediately after error is made
Shingo System
• Such feedback requires 100 % inspection• Inspection can be
– Successive checks – Performed by next person in the process
– Self-check – Done by individual worker– Source Inspection – Done by individual worker; in
this case worker checks for error that causes defect
• All these inspection depend on fail-safe procedure
Fail-safe
• Fail-safe are the methods to prevent human errors from becoming defects in the end product
• Concepts are particularly appropriate when full scale automation is too costly or it is otherwise impractical
• Fail-safe does not require that a specific value be put on process parameters
• It requires only ability to discriminategood from bad• Poka-Yoke is automatic device or method used in fail-
safing
ISO 9000• ISO 9000
– It is a series of standards agreed by International Organization for Standards
– Adapted by more than 100 countries in 1987– It says “Document what you do & then do as you
documented”.– Relates Quality Management System– Provides standardized requirement for Quality
Management System
ISO 14000• ISO 14000
– It is Environmental Management Standard– This is significant international initiative for
Sustainable Development– Objective is to promote most effective and
efficient Environmental Management System• ISO 19011
– It isaudit standard applies when auditing for both ISO 9000 & ISO 14000 compliance at once
Kaizen (Continuous Improvement)
• No process can ever be declared as perfect and so there is always a scope for improvement
• Kaizen is about continually aiming for small improvement across the whole company
• Kaizen is based on principles that– Process creates result – Without improving the process,
results do not improve• Look for improvement in five inputs to the process – persons,
machines, methods, materials and environment
– Total systems are more important than each of the parts– Be non-blaming and non-judgemental – find what is
wrong and not who is wrong
