SCM

Certificate in Manufacturing Concepts
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TCS Business Domain Academy
Chapter-1 Introduction to Manufacturing

Introduction Manufacturing is defined as the conversion of raw materials into finished goods using tools. Manufacturing is applicable to different industries such as automobile, aerospace, chemical, and pharmaceutical, computers, and so on. The extent of manufacturing varies from a small scale manufacturer to a large scale one. For example, Honda being the worlds largest motorcycle manufacturer using more number of tools than a company called Electrotherm Limited, which is a small scale manufacturer in India, who builds electric bikes. Learning Objectives After completing this chapter, you will be able to: Understand the definition of manufacturing Understand the different types of manufacturing classifications Know the essence of manufacturing Identify the different processes involved in value chain analysis Identify the business process and its classification
Topics covered 1.1 Manufacturing Definition and Objectives .............................................................. 4 1.1.1 Definition .............................................................................................................. 4 1.1.2 Objectives of Manufacturers ................................................................................. 4 1.2 Types of Goods .......................................................................................................... 5 1.3 Manufacturing Classification ..................................................................................... 5 1.3.1 Based on End Product ...................................................................................... 6 1.3.2 Based On Strategy ........................................................................................... 7 1.3.3 Based on Variety and Volume .......................................................................... 7 1.3 Classification of Manufacturing based on Industry................................................... 8 1.4 Value Chain Analysis.................................................................................................. 9 1.5 Business Processes .................................................................................................. 11 1.6 Changing World Competition.................................................................................. 13 Summary ....................................................................................................................... 16
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1.2 Types of Goods The classification of physical goods is important to a business since it helps in formulating the marketing strategies depending upon the usage of the product. Goods are classified into two types; consumer goods and industrial goods. Consumer Goods: Consumer goods are finished goods which are available at retail stores for personal or household use. Consumer goods are classified into durable goods and perishable goods. Durable goods have long life and can be used more than once, such as a fan, a television and a laptop. Perishable goods have shorter life time and are meant for single use, such as all food items. Based on the buying behavior of the consumer, these goods are again subcategorized into three types: Convenience goods Shopping goods Specialty goods.
Industrial Goods: Industrial goods are used as components for manufacturing finished goods or final products. Unlike consumer goods, these goods can be used either directly or indirectly. Industrial goods can further be classified as capital items and expense items. Capital items are durable industrial goods that are procured for long term use. On the other hand, expense items are those which are generally consumed within a year. Based on their usage, industrial goods are classified into the following five categories: Installation equipment Accessory equipment Raw materials Fabricated parts and materials Industrial supplies.
A few examples of industrial goods are tyres, semiconductors and so on. 1.3 Manufacturing Classification Manufacturing can be classified based on various aspects such as end product produced, strategy used, and variety and volume of the production.
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Figure 1.2 illustrates the classification of manufacturing based on these aspects. Manufacturing Classification
End Product 1. Discrete 2. Process
Variety and Volume 1. 2. 3. 4. Project Job Repetitive / Batch Continuous / Flow
Strategy 1. 2. 3. 4. MTS ATO MTO ETO
Fig 1.2 Manufacturing Classifications

1.3.1 Based on End Product
Based on the end product produced, manufacturing is classified into two types: 1) Discrete Manufacturing: In the industrial terminology, discrete manufacturing is the manufacturing of finished product using dissimilar items that can be counted, touched and seen. It is a reversible process. In discrete manufacturing, it is possible to get back the raw materials by disassembling the finished product, stage by stage, in a reverse order. For instance, by dissembling a finished automobile, most of the raw materials that have gone into the manufacturing of the automobile can be recovered. 2) Process Manufacturing: Process manufacturing produces multiple products in different stages of the process. Process manufacturing involves the movement of materials among operations such as screening, crushing, storing, mixing, milling, blending, cooking, fermenting, evaporating and distilling. Process manufacturing produces multiple products in different stages of the process. It results in irreversible changes to the raw materials that take an entirely new form. For instance, the Oil and Gas industry applies process manufacturing to manufacture petroleum. Process manufacturing is widely applied in the cement, plastic, paper, chemical, steel and brewing industries.
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1.3.2
Based On Strategy
Based on strategy used, manufacturing is classified into four types: 1) Made to Stock: In this type of manufacturing, the products are manufactured against a sales forecast and these products are sold from the stock of finished goods. 2) Assemble to Order: In this type of manufacturing, the basic components or the raw materials that are necessary to assemble the product are procured and stored by the manufacturer. The product is then assembled to suit the specifications of the customer. 3) Made to Order: In this type of manufacturing, the underlying design of the product will be standardized for all products. However, the components will be customized
according to customer specifications and availability of components in the factory or in the market. 4) Engineered to order: This type of manufacturing is undertaken to fulfill a unique order given by specific customers. Engineers start designing the product according to requirements of the customer or when product is ordered by the customer.
1.3.3 Based on Variety and Volume
Based on item variety and volume produced, the manufacturing can be broadly classified into four types. 1) Project: In this type of manufacturing, each product produced is unique. The quantity of the product produced in a project is usually single or at the most in a single digit. For instance: a missile or a bridge. 2) Job: In this type of manufacturing, the number of items produced in terms of quantity and volume are higher when compare to a project, for instance paper and pulp machinery. 3) Repetitive / Batch: This method is used in process manufacturing. Here production is done in small to large batches based on variety and volume, for instance pharmaceutical products. 4) Continuous / Flow:
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This method is used in discrete manufacturing and is used for large scale production, for instance vehicle assembly line. 1.3 Classification of Manufacturing based on Industry The quality and nature of manufacturing that identifies it and gives a distinct identity can be broadly divided into five major categories. These categories establish the most important features of manufacturing. The categories are:
1. Factory It is a place (also called plant) where the workers manufacture goods, i.e. convert the raw material to finished product. The two main resources used in a factory are manpower and capital. Governing a factory has been one of the main concerns of senior management since years. Managing the hierarchy involving unskilled, semi-skilled, skilled labor and managers has always been a cumbersome task. Companies have now started using scientific methods to govern factories. 2. Light industry A light industry uses a moderate amount of resources and capital, and is more consumer-oriented rather than being business oriented. It is consumer oriented in the sense that its end products are used by the consumer, and are not intermediate goods to be used for further production. Clothes, shoes, furniture, household appliances, and so on fall under the light industry category. 3. Heavy industry It is a word used for capital-intensive industries or the tasks requiring greater resources. The work carried out is similar to that of a light industry, except that the scale of work is large. Construction of a large building, chemical plant, production of cranes and bulldozers and so on are examples of heavy industry. 4. Mass production It refers to production of large amounts of some standardized product/good. It is also called as flow production or series production. Mass production is also capital-intensive and may use robots, heavy machines like presses, and so on. Production of soft drinks and medicines are examples of mass production. 5. Production line It is a combination of a series of operations to convert a raw material into a finished good, either for immediate consumption or for further use.
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DID YOU KNOW? The concept of mass production was first popularized by Henry Ford in the early 20th century in his Ford model.
Any product is developed based on the market research and the customer needs. Changes to the product features are made depending upon customer/service feedback and market requirement. 2. Introduction of New Product: Both the prototype and the pilot should be approved before launching the new product into market. 3. Supplier: Raw materials and other components are sourced from suppliers to the organization. 4. Inbound Logistics: It includes all the activities involving the procurement of raw materials, such as bringing the raw materials into a manufacturing unit, storing them and maintaining relationships with the suppliers. 5. Store: It receives and accounts components / raw materials after inspection. It holds them for further processing in factory. 6. Manufacturing: In this, raw materials are converted into finished goods. 7. Warehouse: It is a place were finished goods are stored till the goods reach the customer. 8. Outbound Logistics: It includes all the activities involved in transporting the finished goods from the manufacturing unit to dealers, retailers and finally to the customer. 9. Distributor and Retailers: Goods are received by the distributors, retailers. These are stored and then dispatched them to the customer. 10. Order completion: It is final stage in the process. Customer receives the goods according to the purchase order placed. 11. Marketing and Sales: Marketing advertises the product to boost the demand. Price of the product is based on actual selling activity to till the product is sold. 12. After Sales Services:
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It resolves customer complaints and collects feedback from them to enhance product. It also includes activities to keep the product or service work effectively. 1.5 Business Processes It is defined as any function within an organization that enables the organization to successfully deliver its products and services. Business processes are divided into the following two types: core process and supporting process.
Source: http://www.benchnet.com/datproc.htm
Core Processes They are central to the functioning of a manufacturing organization and are of the following four types: 1. Procure to Pay It is the process of obtaining goods and services by processing requisition through receipt and matching of the vouchers for the payment to suppliers. Briefly it represents the transactions that take place between the suppliers and manufacturer before and after purchase of raw materials, components and sub assemblies. The major procurement functions are supplier selection, price negotiations, processing of purchase order, and receipt of item and supplier payments. 2. Plan to Produce It is the complete process of planning at various time horizons as per sales forecast and sales orders, validating the plan with available capacity to produce items. Plan to produce represents transactions linking demand and supply of product at various levels. The major functions are planning at strategic, tactical and operational levels considering sales forecast and sales orders and validating the plan against the capacity. 3. Manufacturing Execution It is the transformation of raw materials, components and purchased items into a saleable product using assembly, subassemblies and mechanical or chemical processes in different stages. It represents the actual process of transforming the raw materials using components and sub assemblies into a final product. The major functions are processing production orders at given time for give item and quantity, issuing inventory, booking hours and completing order. 4. Order to Cash
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Complete processes of selling of goods and services, involving order entry, dispatch, warehousing, invoicing and receipt of payment. It represents the transactions between the manufacturer and customer. The sequence of activities would be, receiving orders, delivering goods, and collecting payment from the customer. The major function are creating sales order, allocating items, updating inventory, on delivery, generating sales advice and collecting payment from the customer. Support process They enable the smooth flow of the core processes. The following are the eight support processes: 1. Market Planning It is the process of developing and implementing a plan to identify, anticipate and satisfy customer demand; and to establish marketing objectives and decide product mix. It represents transactions between the manufacturer and the customer that take place before designing the product and services. The major functions are market research, product mix, promotion and budgeting. 2. Product Development It is an ongoing process of identifying and articulating market requirements that define the features of a product. It represents the transactions between the marketing and design functions to convert a concept to a product. The major functions are product concept, design, prototype, testing, pilot lot, final design and product enhancement till product obsolescence. 3. Logistics It is the management of the flow of goods, information and other resources, between the point of origin and consumption. It represents transaction between delivery functions for moving materials between supplier, manufacture and customer. The major functions are: inbound logistics, that include the movement of materials between supplier and manufacturer, and outbound logistics, that include the movement of goods from manufacture to retailer, and customer. 4. After Sales-services It is a series of activities undertaken to maintain the promised level of quality of goods and services. These activities are undertaken to guarantee customer satisfaction using online support, warranties and return policies. It represents activities by the service functions to ensure proper product functioning and
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minimal customer dissatisfaction. The major functions involved are receiving customer complaints, assigning technician, resolving and testing and receiving product feedback too. 5. Plant and Equipment Maintenance It covers the activities necessary for retaining or restoring an equipment, machine or plant to specified operable condition to achieve maximum useful life. It represents activities within the maintenance functions to ensure the dissatisfactory functioning of the plant and equipment in use. The major functions are resolving complaints regarding manufacturing plant and machines, and undertaking annual and preventive maintenance. 6. Quality Management This support process is a Collection of policies, plans, practices and supporting infrastructure aimed to reduce and eliminate non-conformance to specification, standards and customer expectations in a cost effective and efficient manner. It represents transactions by quality assurance functions, to ensure that the products being manufactured meet the product design specifications. The major functions are incoming and in process inspection, quality control, calibration and certification. 7. Human Resources It includes activities like recruitment, talent acquisition, orientation & training of current employees, providing benefits and retention. The major functions are managing the employee life cycle from recruitment to retirement, appraisal and career planning. 8. Finance A branch of economics concerned with resource allocation and management, acquisition and investment. It represents transactions between various accounting sections covering all cores and supporting processes. The major functions are monitoring all transactions from supplier, customers, materials, machines and human resources. 1.6 Changing World Competition Todays competition in manufacturing industry has led to invention of new strategies like lean manufacturing. Lean manufacturing reduces wastage from procurement stage to delivery stage. This strategy has the ability to reduce the production cost but puts
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tremendous pressure on employees to improve the responsiveness and efficiency in every stage of lean manufacturing. E-Manufacturing, a new strategy in manufacturing, overcomes this by reducing the total life-cycle cost of the product with a transparent sustainable value. For organizations relying on e-business to reach to a large customer base, E-manufacturing has become a core competency. Today, Internet is a major platform for communication. Traditional
manufacturing was not transparent due to lack of information sharing between the supply chain, plant floor and product development departments. E-manufacturing aims to complete the gaps in the traditional manufacturing systems. By integrating all the business functions including suppliers, supply chain, product development and plant floor, EManufacturing meets the demands of the customers and improves the responsiveness and efficiency of the product. E-Manufacturing helps to: Cut the lead times to meet the demands of the customers, Promote efficient flow of information flow between customers, manufacturer, and product development Achieve predictive, near-zero downtime
Supply Chain
E-Manufacturing
Product Development Fig 1.4 E-Manufacturing Information Flow
Plant Floor
E-Manufacturing integrates Supply Chain Management (SCM), Enterprise Resource Planning (ERP), and Customer Relation Management (CRM) systems to meet the customer demands from different regions of the world. Advantages of E-Manufacturing:
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In E-Manufacturing, information will be updated dynamically. So when a customer places an order, the information regarding this order is passed across the supply chain. At this instant, the production starts. As this process is transparent, customers can get updated information about the order at any time. This process reduces the excess inventory, capacity and avoids uncertainties.
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Summary Manufacturing is defined as the transformation of raw materials, components and purchased items into a sealable product (or) finished product using different processes at different stages like assembly, mechanical and chemical. Fabrication is the process of designing a circuit or manufacturing a device, that act as component parts / fabricated goods that is used for manufacturing the final product. The classification of physical goods is important to business because, depending on the usage of the product, marketing strategies are formulated. Goods are classified into two types; consumer goods and industrial goods. Consumer goods are the finished goods which are available at retail store for personal or household use. Industrials goods are used as components for manufacturing finished goods or final products. Classification of Manufacturing is done on various aspects like end product, strategy, variety and volume. Based on end product, it is classified into two types of manufacturing: discrete manufacturing and process manufacturing. Based on strategy, it is classified into four types: made to stock, assemble to order, made to order, and engineered to order. Based on item variety and volume produced out of process, it can be broadly classified into four types: Project, Job, Repetitive / Batch, Continuous / Flow.
The quality and nature of manufacturing that identifies it and gives a distinct identity can be broadly divided into five major categories. These categories establish the most important features of manufacturing. These are Factory, Heavy industry, Light industry, Mass production, and Production line.
Value chain analysis describes the main activities that take place in an organization to have better competitive strength for the organization. Value chain estimates what each activity adds the value to the overall productivity of the organization.
By integration of all the business functions including suppliers, supply chain, product development and plant floor to meet the demands of the customers and also to improve responsiveness and efficiency of the product.
E-Manufacturing has tightly integrated supply chain management (SCM), enterprise resource planning (ERP), and customer relation management (CRM) systems to meet the customer demand from different regions of the world.
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Chapter -2 Role of Management in Manufacturing Version4.0

For Associates
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Chapter-2 Role of Management in Manufacturing

Introduction During the days of Industrial Revolution, manufacturing was almost an isolated function in many organizations. The main function of manufacturing in an organization was to take the designers blueprint of the product and produce it. It was found that there were always barriers in cooperation, coordination and communication among the manufacturing and the other functions of the company. Manufacturing management has gained advantage in the recent years. Role of management is very important in formulating the corporate mission and strategy. Different facets of manufacturing management are planning, operating and controlling. Learning Objectives After completing this chapter, you will be able to understand: The basic principles of management Importance of mission, vision and strategy for an organization Activities related to planning and operations The role of the management in manufacturing planning
Topics covered 2.1 Manufacturing Management..................................................................................... 4 2.2 Corporate Mission, Objective and Strategy .............................................................. 6 2.2.1 Corporate Mission ................................................................................................ 6 2.2.2 Manufacturing Objective ...................................................................................... 6 2.2.3 Corporate Strategy ............................................................................................... 8 2.2.4 Key Points to Consider Before Formulating Strategy ........................................... 8 2.2.5 Manufacturing Policies ......................................................................................... 8 2.3 Manufacturing Functions........................................................................................... 9 2.3.1 Planning................................................................................................................ 9 2.3.2 Operating ........................................................................................................... 10 2.3.3 Controlling .......................................................................................................... 10 2.4 Role of the Operating Force .................................................................................... 11 2.5 Type of Managerial Decisions .................................................................................. 11 2.6 Business Process Reengineering ............................................................................. 13 2.7 Changing Concept of Manufacturing Management................................................ 14 Summary ....................................................................................................................... 15
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Certificate in Basics of Manufacturing
2.1 Manufacturing Management It is the process of performing and managing different tasks in an organization. It comprises strategies, tactics, philosophies, methods and techniques which enable the management to achieve higher quality, lower unit cost, greater flexibility and innovation. Manufacturing Management builds on the concept of quality and the philosophy of continually striving to achieve the highest possible organization-wide standards. Different processes that fall under the ambit of Manufacturing Management are performed by different divisions in a company, which operate independently. Management plays a vital role in integrating all the activities performed in a company. DID YOU KNOW? Daimler can be considered as the founder of automobile industry. Daimler formed the Daimler Motor Company in the year 1890. Ford Henry created the first assembly line for automobiles.
In the case of manufacturing machine parts, the first stage is prerequisite of material, then procurement of material, vendor selection for purchasing the material, assigning the work to different machine shops, packaging the final product, dispatching the product, invoice management, and finally receiving payment for the parts. These activities have to be in the sequence as shown in figure 2.1. It is important that people performing these activities work coherently; Manufacturing Management plays a vital role in achieving this. Prerequisite of material Work assignment Packaging
Dispatching
Invoice management
Cash management
Fig 2.1 Stages in Manufacturing of Machine Parts
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Manufacturing Management is often misunderstood by the decision-makers in the organization. The purpose of Manufacturing Management is to ensure efficient use of all the resources. It also controls all the aspects of the manufacturing process from product design to product distribution and also minimizes the risk in the process. Consider the scenario given below: Company X produces machine parts which require raw material from their suppliers. As company X keeps very less inventory, it places an urgent order for more raw materials. Since the supplier company is not prepared for the order, it will force its workers to work overtime in order to meet the order. Meanwhile company X is facing the risk of running into loss due to the unavailability of the raw material. The distributor who has placed the order with company X will have to wait for the shipments. In turn, the customers also have to wait for the product. This will result in losses for the company in terms of business, money, and credibility in market. Distributors also lose money due to decrease in customers. The above problem can be sorted out by implementing a five-step approach:
Elimination
Co-ordination
Co-operation
Integration
Communication
Fig 2.2 Activities involved in Manufacturing of Machine Parts
Elimination phase involves analysis of operating cycle or manufacturing cycle, determining what needs to be done to reduce the time of the manufacturing cycle. Once the bottlenecks are found in the manufacturing cycle, next step is coordination of the manufacturing activities between the organization and the suppliers. By doing this, emergency order will become normal, and also can be rectified completely.
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Cooperative attitude of the organization towards the vendor and distributor is essential in ensuring efficient supply chain management. Integration of all the activities carried out in the organization is the most challenging job in any management. There are many software packages available in the market which can help in integrating organizational activities. For example: Enterprise Resource Planning (ERP). Communication of the company with its vendors and distributors should be regular and clear to update them about the level of inventory in the company. This will help them in planning their activities accordingly.
DID YOU KNOW? China is the worlds fourth largest producer of manufacturing products. Of the 500 top companies in world, 400 have either invested or manufactured goods in China.
2.2 Corporate Mission, Objective and Strategy A firms corporate mission and corporate strategy are about ends and means for a firm. The main objectives of developing manufacturing strategy are: The competitive dimensions are typically obtained from the marketing team and are converted into specific performance requirements for operations. Ensure some necessary plans are taken, so as the operations and enterprise capabilities are sufficient to accomplish them. 2.2.1 Corporate Mission Corporate mission outlines a firms corporate values, intended markets and products, broad goals and objectives, core competencies, and strategic capabilities. 2.2.2 Manufacturing Objective An organizations manufacturing objective is to manufacture a quality product, on time and at the lowest possible cost with maximum utilization of resources to achieve customer satisfaction. Manufacturing objective may be classified into:
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Ultimate goals Intermediate goals Functional goals Restrictive goals Integrated goals
Ultimate goals: These are product focused goals associated with manufacturing operations. These goals are defined in terms of quality, cost, and availability of the product. Primary responsibility of the manufacturing manager is to produce a product with preestablished costs, specified characteristics of quality and within the defined time frame. Variable cost per unit, total cost, rejections, number and rate, material yield percentage and so on are some of the measures of ultimate goals. Intermediate goals: These goals can be stated as the utilization targets of manufacturing inputs, including energy, materials, machinery, equipment, facilities, methods, money and manpower. Utilization of machines, operating cost and rates, machine capacity growth, working capital needed for manufacturing activities, productivity per man-hour are some of the measures of intermediate goals. Functional goals: These are related to the effectiveness of the auxiliary and support departments such as production control, inspection, maintenance, methods engineering, wage incentives, work measurement, tool engineering etc. Inventory turnover rate, machine utilization, percentage of stock outs, cost of holding inventories are some of the measures of functional goals. Restrictive goals: These represent manufacturing managers commitments towards other functions in the organizations. Manufacturing organizations normally commit themselves to goals associated with or imposed by sales and marketing, product design, finance, and distribution operations. Few examples of restrictive goals are reducing number of written customer complaints by 30 %, paint and clean up of the processing area for shops within 10 days etc. Integrated goals: These are inherent in all organizations and are increasingly imposed to optimize effort DID YOU KNOW? National manufacturing growth of USA (2001-06) was 16.9 %. It is nearly 2/3rd of USA's total export.
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2.2.3 Corporate Strategy This states how a firm will achieve its goals and objectives. Formulating a corporate strategy is an iterative process that requires the input of all functional areas. Functional strategies must support each other, as well as the corporate strategy. DID YOU KNOW? The mission statement of Ford Motors Ltd. in early 1900's was "Ford will democratize the automobile.
2.2.4 Key Points to Consider Before Formulating Strategy Management should focus on the following aspects before formulating a strategy: 1) The strategy should be customer oriented. 2) Competing on simultaneously cost, quality, flexibility, dependability, time, and service. 3) It should provide for investment in R & D and advanced technology. 4) It should enable integration of the system with the people. 5) It should enable continuous improvement of the firm, its products and its processes. 2.2.5 Manufacturing Policies The manufacturing policies that organizations follow are: 1) Selecting suitable, capable and experienced employees and continuously improving their skills by providing training and advancement opportunities. 2) Carrying out full-time, continuous manufacturing developments in each division and deriving benefits from the latest improvements in equipment techniques and methods. 3) Providing new facilities to each employee. 4) Minimizing the product cost by implementing new technologies. 5) Expecting all employees to comply with the daily output standards . 6) Administering wage payment plans to reward employees fairly for skill, effort and time. 7) Increasing production capacity by balancing various manufacturing operations to minimize bottlenecks and thereby improving the production process. 8) Planning the layout of all plants based on products manufactured, and dividing the facilities into self contained integrated units wherever possible.
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9) Controlling product quality to meet product specifications and to ensure the delivery of a reliable product to the consumers. 10) Planning and controlling material, manpower and facilities. 11) Providing healthy working conditions to employees. 12) Maintaining and safeguarding company assets to maximize the return over the life of the asset. 2.3 Manufacturing Functions The three basic functions of manufacturing are: 1) Planning 2) Operating 3) Controlling 2.3.1 Planning It is one of the major activities performed by the management in manufacturing organizations. Planning includes finalizing plant layout, processes, methods, machines and tools to be used. Planning also includes project management, estimation of costs, aggregate sales and operational planning, plant location decision, capacity requirement planning, Material Requirement Planning (MRP), material management etc. Expansion is a major decision for managers as they have to decide whether to set up a new plant or upgrade the existing facilities. These are high risk decisions, but are critical in gaining competitive advantage.. Manufacturing Planning: This offers the opportunity for large scale innovations, whether that task is about replacing machines, upgrading an old plant or planning a new one. It requires a careful appraisal of what is economically practical and justifiable. Most of all, however, planning requires an attitude that will inspire men to look beyond the traditional ways of doing things, with the knowledge and judgment to blend the traditional with the new. Tremendous gains are possible through intelligent planning. By implementing the planning actively a company can increase its sales up to 200 to 300 percent, and inventory can be reduced to as minimum as 25 percent. Much of this improvement can be attributed to very effective manufacturing planning. Example: For metal cutting operation, many organizations use Computer Numerically Controlled machines (CNC), which save time and reduce chances of errors.
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DID YOU KNOW? Ireland is number one in high technology exports. Over 50% of Irelands manufacturing exports are high end products.
2.3.2 Operating At the fundamental level, operations management is about getting day-to-day activities done quickly, efficiently, without errors and at low cost. The critical tasks of a manufacturing operations manager are training, motivating, and improving the morale of the work force. Operating functions include activities involved in the actual manufacturing of the products such as operational control, production standardization, benchmarking, setting work standards, supervision, plant maintenance etc. All the day-to-day activities are performed by the middle and lower management. Consider the following scenario: The foreman of a section or a plant has been replaced, and within a short duration, the plant has become more productive. This is an indication that the attitude and morale of the employees has improved drastically. These changes occur with little or no change in physical assets. A highly skilled first-line supervisor is the backbone of any manufacturing operation. Thus, it is critical that there technical knowledge is in line with the industry standards. Also decentralization, streamlining and simplification make the job critical for an operations manager. 2.3.3 Controlling The control functions of any manufacturing organization ensure that the product is of consistent quality, and manufactured in time and in an efficient manner. Monitoring the quality standard is a major part of controlling activities. Controlling activities also include industrial engineering, production control, reliability and quality control. In controlling functions, technological advancements inspire and sometimes force more advanced technologies. In production control, data processing and computer equipment are showing new and improved methods. Faster response levels and shorter manufacturing cycles are the requirements of modern manufacturing industry.
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Note: Manufacturing cycle is defined as the time taken by a process or system to take the raw material from the supplier and produce the finished product. Reliability and quality control are also assuming entirely new dimensions. In companies such as those of electric utilities and various process industries like steel, automobile and paper, reliability is no longer merely desirable, but essential. Add to this the increasing complexity of the equipment used, and the need for stringent quality control in manufacturing. DID YOU KNOW? Total quality managements basic concept came from a chapter titled total quality control in the book Quality control: Principles, Practices and Administration by Armand Feigenbaums.
2.4 Role of the Operating Force Operating force is the last and the most important link between the organizations objective and results. Corporate organizations depend on their operating force to implement a manufacturing plan. Operating force is the human resource and may also be the final controller of the physical resources like raw material, machinery etc. Thus, it is important that the organizations objectives are understood and accepted by the operating force. The operating force must be deployed in a way such that it conducts the activities in a feasible and effective manner. Change in technology will require re-deployment and training. Smooth functioning of the operating force requires and effective communication link between the individual and the manager or the concerned executive.. In recent years, operations of the manufacturing sector have become more capital intensive and less labor intensive. Communication between managers and the operating force about resource utilization has become more important. 2.5 Type of Managerial Decisions The management has to take decisions on the following aspects of the manufacturing activity
1) Finance-budgeting and investment: a) Cash flow analysis, long-term capital requirements, dividend policy, and investment portfolio.
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b) Credit policies, credit risk and delinquent account procedures. c)Claim and complaint procedure 2) Purchasing, procurement and exploration: a) Policies for buying, supplying and stabling or varying prices. b) Determination of quantities and timing of purchases. c) Bidding policies d) Strategies for exploration and exploitation of raw material sources e) Replacement policies. 3) Production management a) Physical distribution i) Location and size of the warehouse, distribution centre and retail outlets. ii) Distribution policies.
b) Facilities planning i) Number of location of factories, warehouse and hospitals. ii) Loading and unloading facilities for railroads and trucks determining the transport schedule. c) Manufacturing i) Production scheduling and sequencing.
ii) Stabilization of production and employment training, layoffs and optimum product mix. d) Maintenance and project scheduling
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i)
Maintenance policies and preventive maintenance.
ii) Maintenance of crew sizes iii) Project scheduling and allocation of resources. 4) Marketing a) Product selection, timing and competitive actions. b) Determination of number of salesmen, frequency of calling on accounts per cent, and time spent on prospectus. c) Selection of Advertising media with respect to cost and time. 5) Personnel management a) Selection of suitable personnel on minimum salary. b) Determination of Mix of age and skills. c) Determination of Recruitment policies and assignment of jobs. 6) Research and development a) Determination of the areas for research and development. b) Project selection. c) Determination of time-cost trade off and control of development projects. d) Determination of reliability and alternative design.
2.6 Business Process Reengineering The need to become lean and remain competitive during the global economic recession in the 1990s pushed companies to seek innovations in the process used to run their operations. Business process reengineering is taking a fresh look at what the organization is trying to do in all its business processes, and then eliminating the non-value-add steps and computerizing the remaining ones to achieve the desired outcome.
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DID YOU KNOW? Michael Hammer was the first consultant to advocate eliminating nonvalue-add steps and reengineering processes.
2.7 Changing Concept of Manufacturing Management In earlier days a hard working young machine operator could work up the ladder of manufacturing to become a manufacturing manager. However, in todays organizations, it is less likely unless the possibility seems even more remote in future. The machine operators constantly upgrade their skills to keep pace with the complexity of the constantly upgraded manufacturing machinery. The manufacturing manager of the past tended to be insulated from other functions of the company despite knowledge of shop problems. However, the manufacturing managers of today and tomorrow must, in contrast, know and work along with all the other functions that relate to manufacturing, including engineering, purchasing and marketing. The traditional barriers between functions such as engineering and manufacturing are breaking down, and even disappearing. In controlling product costs, for example, design engineers, manufacturing engineers, and the purchasing executives are working as a team. Personnel from manufacturing or purchasing may contribute design ideas. Example: Purchasing personnel may well be able to suggest the use of less expansive bolts or a substitute material with which the design engineer may not be familiar with. The manufacturing personnel, with their knowledge of machines and work force, often can suggest changes in design that will make the product simpler and easier to manufacture. The net effect of all the changes discussed here is increased professionalism in all areas of manufacturing. The manufacturing manager of the present must be aware of all the new techniques available in the market and possess the necessary interpersonal skills to inspire people constantly to seek better ways of doing things.
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Summary Manufacturing management is defined as performing and managing different tasks in an organization. Different processes that fall under Manufacturing Management are performed by the different divisions in the company. These departments operate independently. Integrating all the activities of the organization is the most challenging job for any management. The three manufacturing functions are planning, operating and controlling Planning includes actions required to assure the use of the best plant layout, processes, methods, machines and tools. Operating functions include all activities involved in the actual manufacturing of the products. Control functions ensure that the product will be of consistent quality and manufactured on time and in the most efficient manner. Corporate mission, objective and strategy are the ends and means of the organization. Manufacturing objective may be classified as: Ultimate goals, Functional goals, Restrictive goals, and integrated goals. Corporate organizations depend on their operating force to implement their manufacturing plan. Operating force (the human resource) is the final controller of the physical resources like raw material, machinery and so on. Business Process Reengineering takes a fresh perspective of the organizations business processes, and eliminates the non-value-add processes and computerizes the remaining to achieve the desired outcome The manufacturing manager of the present must be knowledgeable in all the new techniques that are available in the market. Intermediate goals,
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Chapter-3 Manufacturing Systems

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Chapter-3 Manufacturing Systems

Introduction A broad understanding of presently used manufacturing systems is helpful to the manager interested in improving the excellence of his operations. It helps in solving problems that are new to ones competitors or ones own industry. Manufacturing system is a broad function that includes planning, analysis, selection, assembly, and utilization of the company resources used to convert raw materials into stable products at optimum cost.
Learning objectives After completing this chapter, you will be able to understand: Manufacturing system and its components Types of manufacturing systems prevalent today Optimal utilization of the different manufacturing systems.
Topics covered 3.1 Manufacturing Systems-Purpose .............................................................................. 4 3.2 Manufacturing Systems Classification ...................................................................... 5 3.2.1 Processing ............................................................................................................ 5 3.2.2 Fabrication ........................................................................................................... 6 3.3 Other Manufacturing Systems .................................................................................. 9 3.3.1 Mass Production ................................................................................................... 9 3.3.2 Just In Time ........................................................................................................... 9 3.3.2.1 The Concept of JIT System ............................................................................... 10 3.3.2.1.1 People Involvement....................................................................................... 11 3.3.2.1.2 Total Quality Control..................................................................................... 11 3.3.3 Lean Manufacturing ............................................................................................ 12 3.3.4 Flexible Manufacturing ....................................................................................... 13 3.3.5 Mass Customization ............................................................................................ 14 3.4 Installation of the Manufacturing Process .............................................................. 14 3.5 Design of Manufacturing Systems .......................................................................... 15 3.6 Ordered Fulfillment ................................................................................................. 15 3.6.1 Engineer to Order (ETO) .................................................................................. 16 3.6.2 Make to Order (MTO) .................................................................................. 16 3.6.3 Assemble to Order (ATO) ................................................................................ 16 3.6.4 Make to Stock (MTS) ....................................................................................17 Summary ....................................................................................................................... 18
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3.1 Manufacturing Systems-Purpose Manufacturing systems is a broad function that includes planning, analysis, selection, assembly, and utilization of the company resources to convert raw materials into salable products at optimum cost. The manufacturing system is designed to usually evolve with over a span of time as a key segment of the business system used by the company, and is the cumulative creation of many people under the general guidance of top manufacturing management. It not only embodies past achievements and presents goals, but it also channels the future progress of the company. The manufacturing system extends into and overlaps the boundaries of other business systems, especially those of marketing and engineering. The customer needs and the product design are influenced by the manufacturing system. The system is not readily analyzed in detail because of the systems uniqueness and complexity and it is not readily accepted because of the high investment costs. This issue can be resolved by reviewing the industry classifications and the four key interdependent subsystems that are the essence of any manufacturing system, the subsystems are: Types of production Manufacturing processes Installation of the manufacturing processes Production management
Each subsystem is interdependent on the others, and the selection of each is also influenced by the following major considerations: The design of the products comprising size, shape, material composition and intended function. The product marketing objectives comprising order quantities, order frequencies, delivery responsiveness and product line configuration. The typical systems and subsystems of the industry comprising those typically used new ones which are being generally adopted, experimental developments which are still on trial and exciting new ideas which hold great promise. The present system and subsystem used by the company.
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There is no ranking implied by the order of any of the above. It is obvious that the instantaneous relative importance of each is determined by dynamically changing conditions. 3.2 Manufacturing Systems Classification Manufacturing systems are broadly classified based on the material conversion techniques into two types, they are: 1. Processing 2. Fabrication In processing, the raw materials are chemically and physically changed into new materials with different compositions and forms. These new materials, in turn, serve as raw materials for further processing or for fabrication. The processing classification is further subdivided into heavy processing and light or fine processing. In fabrication, the raw materials are physically reshaped into parts. Usually, these parts are combined with others to make a final product assembly. The fabrication subdivisions are heavy fabrication, light fabrication, and bench operations.
3.2.1 Processing
Processing is an irrevocable activity, where if you once put it together, you cant take it back. For example, a cool drink cannot be converted back to its basic components such as carbonated water, citric acid and other ingredients if it once processed. Processing refers to an act of taking something from a usually identified and established set of activities and converts it from one form to another. It is divided into two types: (a) Heavy processing: Both primary metals industries, such as steel and copper, and the heavy chemicals industries, such as sulfuric acid and heavy alkalies, use heavy processing manufacturing systems. The steel industry is an excellent example and can be used to illustrate the general system design. About 90 percent of the total steel-making capacity is controlled by fully integrated companies which mine the raw materials like iron ore, coal, and limestone; smelt the pig iron; refine the steel; and roll or form the steel into semi finished or finished stock products. The significant cost factors in the heavy process industries are the basic raw materials and the energy for heat and power. Labor is comparatively less costly because of the tremendous batch sizes, the extent of material handling mechanization, and the general
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overall simplicity of the processes. The equipment for heating, shaping, and moving heavy products result in correspondingly large fixed capital investments. Geographically, the heavy process industries are usually located near their customers. In addition, they are frequently located on large rivers or lakes or at ocean harbors where seagoing ships can bring in the necessary raw materials and take away shiploads of finished product. (b) Light processing: Most light processing is done by the industry the fine chemical industry. It produces the more intricate chemical compounds, drugs, analytical chemicals, and metals like boron, lithium, and titanium. These materials are carefully made to specification for special uses at high unit price and in relatively small volume. These materials may be classified as products of the fine chemical industry owing to their relatively high price, even though they are produced in very large volume. The growth in light processing resulted from the concept of the unit process, an individual step involving a single chemical reaction, and the unit operation, an individual step involving a single physical change. Chemical engineers who have studied these unit procedures construct flow sheets which show the coordinated sequence required to manufacture the desired product and by-products. The chemical engineer also supervises the skilled laborers who later operate the manufacturing equipment. After the chemical engineer has first tested his process sequence in the laboratory, he constructs a pilot plant which replicates the planned production system but with the smallest equipment available. The small-scale pilot plant is used to test the process design, detect the corrosion and maintenance problems, and evaluate plant efficiency, and train foremen and other skilled labor.
3.2.2 Fabrication
Fabrication is the process of building structures, machines or equipment for further work. It usually deals with the cutting, welding and assembly aspects of manufacturing.
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Figure3.1 A Steel Fabrication Shop
Fabrication is of two types. They are: (a) Heavy fabrication: The products of the heavy fabrication manufacturing industries are large heavy parts or assemblies, mostly made of iron and steel. The companies tend to specialize either by making roughly formed shapes such as castings, forgings, weldments, and parts from plate stock or by making large machinery or equipment. The facilities and equipment used by each are essentially dissimilar. In many instances, the larger formed steel shapes are made by a division of the primary steel producer, because the primary producer already has the furnaces and metalworking and material handling equipment in addition to the starting material. On the other hand, the assemblies are most often complex power-driven machines of unique size and are custom built as a single order or as part of a fairly standard product line. Examples of such products are railroad locomotives and cars, large farm machinery and construction equipment, electric power generating equipment, and a wide variety of industrial production equipment such as large machine tools and the huge Fourdrinier papermaking machine. The industry is characterized not only by the large, heavy products but also by the correspondingly large plant facilities, production machines, and material handling equipment. The manufacturing system is comparatively simple, because each job order is usually treated as an entity, and little or no manufacturing action is taken until the customers order is received. Heavy machinery and equipment are ordered singly or in small quantities because individual pieces are expensive and because their solid long-lasting construction makes replacement orders infrequent.
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Large parts for heavy machinery and equipment are made from castings, forgings, and weldments whose bulk, weight, and rough irregular form make finishing operation setup difficult and time consuming. The facilities used for the fabrication machine assemblies are more extensive and varied. Emphasis is on general purpose manufacturing equipment like horizontal and vertical boring mills, planers, shapers, radial drills, and large-size lathes and milling machines. (b) Light fabrication: There are significant differences between light and heavy fabrication that are difficult or impractical to express. There is no defined size or weight that classifies a product as being specifically either light or heavy. In seeking such boundaries, it rapidly becomes apparent that the variations present in light fabrication make any general discussion full of exceptions. In brief, there are hundreds of different products for nearly every single material made by a process industry, the work force ranges from the one-man shop to industrial giants with over a quarter of a million employees, and the facilities and equipment numbers correspond in proportion to workforce. The equipment itself ranges from small, simple hand tools to very large, complex, fully automated process systems. A review of light fabrication may only be made if one keeps both the variety and host of exceptions in mind. (c) Bench operations: In bench operations, the product is small and light enough for the manufacturing personnel to stand or sit at a bench or table while working. The essential similarity in all the products is the very high proportion of hand labor, particularly assembly. In most instances, the bench worker stays at the work station. All needed parts and materials are arranged within easy reach. Work functions include both making parts and placing them in the assembly. The kinds of products that are frequently made in this fashion are tools and dies, instruments, electronic assemblies, typewriters, and watches. It is obvious that there is a wide range of worker skills in the various companies using this manufacturing technique so that in many instances bench work is done in a single, small internal company department. The tool-anddie maker will use several machine tools away from his bench, and he is one of the most highly skilled and highly trained industrial workers. In many companies, he designs as well as builds special tools. On the other hand, a worker assembling an electric toaster has a relatively simple repetitive task, uses a few tools, and needs little skill or training.
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3.3 Other Manufacturing Systems

3.3.1 Mass Production
Fig 3.2 A typical mass production system
It is the process of producing large volumes of standardized products on the production line. Generally, mass production is also called as flow production or repetitive production or series production. Mass production uses the concept of moving belts or conveyors to move the semi- finished product to the next stage. Another noticeable thing in mass production is the use of robots and machine presses. One of the major advantages of mass production is considerable reduction in non productive efforts. DID YOU KNOW? Mass production was popularized by Henry Ford in the early 20th century for his Ford model.
3.3.2 Just In Time
The Just-In-Time (JIT) manufacturing system is a planning system that controls the availability of material inventories at the manufacturing site to only what, when & how much is strictly necessary. The JIT system is an integrated set of activities designed to achieve high-volume production using minimal inventories, raw materials, work-in-process, finished goods and other consumable goods. Now-a-days, many firms are successful in implementing the JIT philosophy to improve their productivity by reducing unnecessary inventory and avoiding delays in the execution of operations. According to the JIT system, all components and other inventory items arrive when required (i.e. just before the start of an operation). Items are picked up by the worker and fed directly
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into the production process. Firms produce finished goods only when they are required for sale. The JIT system emphasizes the elimination of inventory of raw materials, work-in-progress, and finished goods. Even though it is sometimes difficult to put into practice, firms target the elimination of waste by the timely scheduling of inventory. Implementation of the JIT system requires the total transformation of the methods of designing products and services, assigning responsibilities to workers and organizing work. Today, several major companies such as Hewlett-Packard, 3M Corporation, General Electric, Harley-Davidson and General Motors use the JIT system and are enjoying its benefits.
DID YOU KNOW? A series of signals called Kanban is used in JIT. This is a Japanese term, and is used to tell production processes when to make the next part.
3.3.2.1 The Concept of JIT System
The concept of Just-In-Time states nothing is produced until it is required. The practice of Just-In-Time aims at assembling finished products just before they are sold, and in the same way the sub-assemblies are made just before products are assembled, and components are fabricated just before the sub-assemblies are made. Thus, the system always keep work-inprocess inventory as low as possible, thereby reducing production lead times. In order to ensure smooth flow of materials in JIT system, firms should achieve and maintain high performance levels in all their operational areas. Organizations should consistently maintain high quality in their products and processes. This is possible only when the organization's various production processes are coordinated well. Firms can achieve such quality and coordination only with the active participation, involvement, and cooperation of all its employees. Just-In-Time manufacturing is based on the concept of continuous improvement, which includes two important and mutually supporting components: People involvement Total quality control
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Certificate in Manufacturing Concepts 3.3.2.1.1 People Involvement
A JIT manufacturing system requires a strong human resources management component for its successful implementation. Firms impart the required skills to their workforce by training them in the JIT philosophy, assigning them appropriate responsibilities, coordinating their goal-directed efforts and motivating them. The JIT system aims at the continuous improvement of the Program flexibility (or underutilization) of human capital. Therefore, the JIT system encourages employees and suppliers to be innovative and make use of their creative talents. Firms look for the following three essential elements for the successful implementation of a JIT program:

Teamwork Discipline Supplier involvement
3.3.2.1.2 Total Quality Control
The quality of product is its ability to serve and satisfy the needs of its customers. To produce high quality products, JIT firms conduct surveys, deploying their marketing workforce to understand their customer needs and requirements. This information is useful for designing the features of products in such a way that they fulfill customer needs. It is not just the quality control department of the firm that is responsible for ensuring product quality. High quality can be attained only through the collective and coordinated effort of all the departments of the firm. For instance, the purchasing department works in coordination with the quality control department and purchases only those supplies that meet the quality requirements. The personnel department trains and motivates its workers to produce products of the required specifications and quality. The concept of the immediate customer followed by JIT firms helps them achieve the required levels of quality. A customer is considered as a person outside the firm who buys the products for consumption. But JIT firms view customers in a different way. They use a concept known as immediate customer in which each worker in the firm considers the next worker (who continues the process of production) as the customer. Therefore it is the responsibility of the worker to ensure the product is processed to meet certain specifications and quality
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requirements before passing it to the next worker, i.e. the immediate customer. In JIT manufacturing systems, each worker is trained in quality principles and testing procedures. Workers are made fully responsible for the work they carry out at their workstation and they are entrusted with the job of inspecting their own work. Only items of acceptable quality are delivered to the immediate customer. JIT firms do not maintain separate departments for correcting defects. The employees have to identify and correct their own mistakes and send the products to their immediate customers. Every worker analyzes the types and sources of errors and then develops methods to prevent them in the future. In case a worker delivers a defective item or an improperly finished item to the worker's immediate customer, the worker who identifies the defect is authorized to stop the process and take necessary actions thereafter.
3.3.3 Lean Manufacturing
The lean manufacturing or lean production system is defined with set of activities comprising using least amount of inventories such as raw materials, work-in-process and finished goods to attain high production volume. This system is also based on the principle nothing is produced until it is needed, so the parts will come to the work station when they are needed i.e. Just-In-Time and move through the process quickly. Production need is created by actual demand for the product. When an item is sold, the retailer pulls a replacement order to replace the item. This generates an order to the factory production line, where a worker then pulls another unit from an upstream station in the flow to replace the unit taken. From this station, they will pull order from the next station and so on back to the release of raw materials. To allow this pull process flow to work smoothly, lean production system demands strong merchant relationships, and a fairly predictable demand for the end product, which finally leads to high levels of quality at each stage of the process. Lean manufacturing was developed in Japan and it is used by the Toyota Production System the benchmark for lean manufacturing. The system was developed to improve quality and productivity and is predicated upon two philosophies that are central to the Japanese culture: elimination of waste and respect for people. The features of lean manufacturing are shown in fig 3.3
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What it is Management philosophy Pull system through the plant
What it does Attacks waste (time, inventory, scrap) Exposes problems and bottlenecks Achieves streamlined production
What it requires Employee participation Industrial engineering / basics Continuous improvement Total quality control Small lot sizes
What it assumes Stable environment
Fig 3.3 Features of lean manufacturing
DID YOU KNOW? The philosophy of Lean manufacturing is derived from Toyota Production System.
3.3.4 Flexible Manufacturing
A Flexible Manufacturing System (FMS) is a group of workstations (such as CNC machines) integrated by automated materials handling equipment and controlled by a central computer. These systems are designed to produce a family of parts and can produce different parts simultaneously and in random order. The benefits of this system are:

improved product quality and consistency increased productivity reduced work-in-progress and finished goods inventories reduced labor costs reduced floor space requirements
Flexible manufacturing systems and other applications of advanced technology are simply islands of automation. Integrating these islands can magnify the strategic benefits advanced technology offers. Firms such as Allen-Bradley are linking their manufacturing systems to each other, with other production activities, and even with other departments.
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There are three types of flexibilities in manufacturing: 1. Basic flexibilities Machine flexibility, material handling flexibility and operation flexibility. 2. System flexibilities Volume flexibility, expansion flexibility, routing flexibility, process flexibility and product flexibility. 3. Aggregate flexibilities Program flexibility, production flexibility and market flexibility.
3.3.5 Mass Customization
Mass customization is the mass production of customized goods and services. It is a fairly new concept that is being recognized as the ultimate way to derive benefit from the flexibility inherent in advanced technologies. Firms pursuing a strategy of mass customization lower the cost of specialized products to a point where conscious purchasers of the commodity product become value conscious purchasers of the differentiated product. For example, the global market for semiconductor chips. However, flexible manufacturing processes are giving a tough competition to the concept of mass customization.
DID YOU KNOW? The Japanese dominate the world market in mass customization with their high-volume production of commodity chips sold in millions.
3.4 Installation of the Manufacturing Process Once the technical manufacturing process is complete and operation decisions are made, the next step is to plan the implementation of these decisions. In the fabrication industries, it is common practice to make the plant layout decisions and treat them as a purely technical specialist task. A creative and imaginative management, however, will recognize the need for careful planning of manufacturing strategy in order to achieve company objectives. Of the management decisions that should be made, two are particularly important to plant layout planning. The first is to define company growth objective: Checking whether the company size is going to increase or decrease or stay the same. The second is the product market plan: Checking whether the mass-production product is at a low price, a premium
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product at a high price, or a product line at different quality and price levels. Although the need for these decisions is evident, it is often erroneously assumed that the plant layout specialist has all this information and has made the necessary provisions in the layout. It is customary in the fabrication industries to designate three types of layout as line production, process, and fixed position, depending on the elemental consideration of how material moves through the plant during product manufacture. 3.5 Design of Manufacturing Systems Design of the manufacturing system must include some means of steering it toward the goal of efficient, low-cost production. The production management system provides this means by cross-linking the manufacturing system components into a useful, effective unit. Organizationally, production management is divided into production planning and production control. Manufacturing management is usually well aware of the utility of production control and normally takes an active part in frequently reviewing production status, production problems, and corrective actions with production personnel. Manufacture for inventory In this system, companies manufacture for inventory and store the products. They are released when there is sudden increase in demand or shortage of raw material. Manufacture for custom order Products is customized in this system. Orders are taken from the customers, and manufacturing is carried out accordingly. 3.6 Ordered Fulfillment Oder fulfillment is the process of how a manufacturing firm services its customers from the sale touch points to final delivery of product. For some business requirements, the order fulfillment process might be complex as well as challenging for the firms to supply the customized products. Depending upon the customers or business requirements, the order fulfillment strategies are formulated. If the order fulfillment process is efficient, the steps to finish the process and the cost to achieve the fulfillment will be less. Alternatively, depending upon some special requirements of the customers, the order fulfillment process might also end up with a high cost. Order fulfillment process is mostly used to describe the logistics and distribution functions. Depending upon the customers specifications, one of the following methods will be implemented by the firm:
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3.6.1
Engineer to Order (ETO) Make to Order (MTO) Assemble to Order (ATO) Make to Stock (MTS)
Engineer to Order (ETO)
Engineer to Order is a unique order given by specific customers and these are mostly business to business orders. In manufacturing, engineers start designing the product according to customers requirements (or) when product is ordered by the customer. The raw materials may be procured and stored, but will not be assembled unless the customers order is placed because the product may require a unique set of item numbers, bill of material, and routings which are complex and takes long lead times. For engineer to order products, customers emphasize their involvement from the start of design till the product is finished. For example, BHEL manufacturers heavy electrical products for companies such as NTPC.
3.6.2 Make to Order (MTO)
Make to order is also called as Bill to Order. In Make to Order, the design will be standardized to all the customers, but the components will be customized according to the customer specifications and availability of components in the factory or in the market. Though it makes the customer wait for the product, it allows the customer to have more customization when compared to the ones available with retailers. This strategy is mostly used when technology is the major constituent in the process of manufacturing. For instance, this strategy is mostly used for high-end motor vehicles and aircrafts.
3.6.3 Assemble to Order (ATO)
In assemble to order, the basic components or raw materials which are necessary to assemble the product are procured and stored by the manufactures. When the customer places the order, based on the order specifications the components are assembled and given to the customer quickly, where the manufacturer specifies a modular product architecture that allows for the final product to be configured in this way. This strategy is used where assembly is a major activity. For instance, this strategy is mostly used for Dell's approach to customizing its computers.
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Certificate in Manufacturing Concepts 3.6.4 Make to Stock (MTS)
In Make to Stock, the products are manufactured against a sales forecast and these products are sold-out from the stocked finished goods. This strategy is based on push-type production, which depends on demand forecasting. Here the demand forecasting should be done accurately to avoid excess inventory and stock outs. For instance, this approach is common in the grocery and retail stores.
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Summary
Manufacturing system is a broad function that includes all the planning, analysis, selection, assembly, and utilization of the company resources used to convert raw materials into saleable products at optimum cost.
Manufacturing systems are broadly classified as either processing or fabrication; Processing is further classified as heavy and light processing respectively, and fabrication into heavy, light and bench operations.
Mass production is the process of production of large volumes of standardized products on the production line. It is also called flow production, repetitive production or series production.
The Just-In-Time (JIT) manufacturing system is a planning system for manufacturing processes that minimizes the availability of material inventories at the manufacturing site to only what, when and how much is strictly necessary. The concept of just-in-time states nothing is produced until it is required.
The lean manufacturing or lean production system are defined with set of activities which use least amount of inventories such as raw materials, work-in-process and finished goods to attain high production volume. This system is also based on the principle nothing is produced until it is needed, so the parts are delivered to work station when they are needed i.e. just in time and move through the process quickly.
A Flexible Manufacturing System (FMS) is a group of workstations (such as CNC machines) integrated by automated materials handling equipment and controlled by a central computer.
Mass customization is the mass production of customized goods and services. It is a fairly new concept that is being recognized as the ultimate way to derive benefit from the flexibility inherent in advanced technologies.
Design of the manufacturing system must include some means of steering it toward the goal of efficient, low-cost production. The production management system provides this means by cross-linking the manufacturing system components into a useful, effective unit.
Oder fulfillment is the process of how a manufacturing firm services its customers from the sale touch points to final delivery of product to the customer.
Engineer to Order is a unique order given by specific customers and these are mostly business to business orders. In manufacturing, engineers start designing the
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product according to customers requirements (or) when product is ordered by the customer.
Make to Order is also called as Bill to Order. In Make to Order the design will be standardized to all the customers, but the components will be customized according to the customer specifications and availability of components in the factory or in the market.
In Assemble to Order, when the customer places the order, based on the order specifications the components are assembled and given to the customer quickly, where the manufacturer specifies a modular product architecture that allows for the final product to be configured in this way.
In Make to Stock the products are manufactured against a sales forecast and these products are sold-out from the stocked finished goods.
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Chapter-4 Product Life Cycle

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Chapter-4 Product Life Cycle

Introduction With the invention of new technologies, it is necessary for organizations to update their product portfolios and improve the quality of their existing products. Product Life Cycle (PLC) covers the different phases in the life of a product. Every new product goes through certain phases, namely introduction, growth, maturity and decline. Learning Objectives
After completing this chapter, you will be able to understand:

The different phases in the life of a product The strategies adopted by management in different phases of PLC The limitations of the PLC
Topics covered 4.1 Product .............................................................................................................4 4.2 Classification of Product .....................................................................................4 4.3 Product Life Cycle (Plc) .......................................................................................4 4.3.1 Introduction Stage ................................................................................................ 6 4.3.1.1 Strategies for The Introduction Stage ................................................................ 7 4.3.2 Growth Stage ....................................................................................................... 7 4.3.2.1 Strategies for the Growth Stage ........................................................................ 8 4.3.3 Maturity Stage ...................................................................................................... 8 4.3.3.1 Strategies for the Maturity Stage ....................................................................... 8 4.3.4 Decline Stage ....................................................................................................... 9 4.3.4.1 Strategies for the Decline Stage ........................................................................ 9 4.4 Common Alternative Patterns of Product Life Cycle ............................................ 10 4.4.1 Growth-Slump-Maturity Pattern ........................................................................ 10 4.4.2 Cycle-Recycle Pattern ........................................................................................ 11 4.4.3 Scalloped Plc ...................................................................................................... 11 4.5 Limitations of Plc ............................................................................................. 12 4.6 Role of Technology in Plc .................................................................................. 13 Summary ............................................................................................................. 14
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4.1 Product A product can be a good, a service, an idea or a combination of all these. It consists of a bundle of tangible and intangible attributes that satisfy consumers and is received in exchange for money.
Source: http://www.udel.edu/alex/chapt11.html
4.2 Classification of Products Products are generally classified on the basis of their characteristics, for example, durability, tangibility and usage. The Figure 4.1 will explain in detailed about the product classification. Classification of Products
Durability and Tangibility (a) Non durable goods (b) Durable Goods (c) Services
Usage
Consumer Goods (a) Convenience goods (b) Shopping goods (c) Specialty goods (d) Unsought goods
Industrial Goods (a) Material and parts (b) Capital items (c) Supplies and business services
Figure 4.1 Classification of products
4.3 Product Life Cycle A new product typically goes through a sequence four stages in its life, which are as follows:
a) Introduction b) Growth c) Maturity d) Decline
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This sequence of four stages is known as the product life cycle, which is linked with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix. Product Life Cycle (PLC) analysis can be a very valuable tool in the hands of manufacturing companies to gain a better understanding of how to better managing their profitable products, while eliminating the unprofitable ones. As shown in the figure 4.2, the product moves from one stage of its life cycle to another, marketers try to evaluate and adjust strategies for promoting, pricing and distributing the product.
Fig. 4.2 Different Phases of Product Life Cycle
Both the manufacturing and R&D units of a company need to be aware of the progress on a project from the day it is initiated. The degree of participation of manufacturing versus R&D at any point in a new product life cycle almost exactly follows the quantity of that item produced, from the inception of the idea to the point at which it is decided to remove the product from the market. Serious problems can arise when the R&D phase of a product finishes before manufacturing begins. This means that there has been little or no coordination between the R&D and manufacturing units in the determination of requirements for personnel, equipment or space. Many a time the manufacturing manager is faced with the need to revise an already established product. This may be due to a marketing desire to revitalize a product approaching obsolescence in its present form, a manufacturing desire to reduce the cost of a product or a marketing desire to vary the product for competitive reasons. This requires
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the manufacturing unit to be closely connected with the R&D so that the changes suggested by the R&D unit do not affect the design objective of the product. The contribution of R&D in such instances can occur at any point during the marketing phase of a given product. Properly coordinated marketing strategy would institute the need for such a change in sufficient time to achieve this goal.
Fig. 4.3 PLC of a Manufacturing Industry Product
Role of Manufacturing Engineers The manufacturing engineer is the one to consult for the techniques and processes used in an organization. This knowledge can be most helpful in guiding R&D personnel towards a design approach. The manufacturing engineer would know the capacities and capabilities of the available equipment. Should new capabilities be required, the manufacturing engineers should be notified in due time so that a thorough investigation of what can be purchased or what needs to be developed can be made. 4.3.1 Introduction Stage In the introduction stage, the product is introduced to the customer. Introduction of a new product is difficult for the following reasons:
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The high advertising and other costs The high risk of new product failure
The company needs to Inform the customer about the product Induce product trial Secure distribution in retail outlets
Advertising is one of the most effective tools at this stage of the PLC because marketers must communicate their products features, uses and advantages to potential customers. 4.3.1.1 Strategies for the Introduction Stage Following are the strategies for the introduction stage: Rapid skimming: In this strategy, the firm launches the new product at a higher price with a higher promotional level to skim the market quickly. By using this strategy firms builds brand preference in the customers minds. This strategy is mostly successful when the potential market is not aware of the product. Slow skimming: In this strategy, the firm launches the new product at a higher price and a low promotional level. This strategy is most successful when the market is aware of the product, the market size is limited, competition is not intense and customers are ready to pay a higher price for the product. Rapid penetration: In this strategy, the firm launches the new product at a lower price and a high promotional level. This strategy is applied when the market size is large, customers are unaware of the product, they are more pricesensitive, there is a strong competition among firms, and the unit manufacturing costs comes down with the companys scale of production. Slow penetration: In this strategy, the firm launches the new product at a lower price and low level of promotion. Marketers resort to this strategy when the market size is large, customers are highly aware of the product, they are pricesensitive, and there exists some potential competition in the market. 4.3.2 Growth Stage The introduction stage is followed by the growth stage. The growth stage is crucial for the products survival in the market because the reactions of the competitors to the products success will affect its longevity. In this stage the firm generally sees a growth in sales, heavy
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demand for the product and a peak in the profits. Seeing these promising opportunities in the market, new firms are attracted to enter the market in the growth stage. They introduce new product features and a wider distribution network. Companies increase their promotional expenditure to meet the competition. The profit of the firm increases initially as The promotional costs are spread over a larger volume, and The unit manufacturing cost is less.
At a later phase in the growth stage, the profits begin to decline as competition increases, forcing the lowering of prices and heavy spending on promotion. 4.3.2.1 Strategies for the Growth Stage Marketers may adopt the following strategies during the growth stage of a product: Re-establishing aggressive pricing, lowering prices to attract price-sensitive customers Highlighting the products benefits in order to create a competitive niche it in the market. Improving / adding features, product quality and models. Other changes to the product may include making it available in different sizes, flavors and so on. Introducing new distribution channels Entering new markets
4.3.3 Maturity Stage This stage is marked by a steady decline in sales and a corresponding one in profits. As the market reaches its saturation, the distribution channels get worn out and the growth rate of sales starts slowing down. Then the sales tend to flatten or stabilize on a per capita basis. Finally the sales start declining and customers start trying out new products and substitutes. There is fierce competition at this stage as several brands try to compete with each other. Weaker competitors and smaller firms are squeezed out of the market. 4.3.3.1 Strategies for the Maturity Stage Marketers may adopt the following strategies during the maturity stage of a product
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Concentrating on products which are profitable and abandoning the ones that are not
Increasing advertising and sales promotion, introducing fresh advertising campaigns, new packaging and even product re-launches.
Investing more in R&D to improve the existing product and extend product line.
4.3.4 Decline Stage Eventually the sales and profits of all products and brands tend to decline, some declining faster than others. The reason for decline in sales could be Technological advances Increase in competition Shift in consumers tastes and preferences etc.
As the sales begin to dwindle, firms start withdrawing their products from the market. The size of the exit barriers influences the capacity of the firms to withdraw to a great extent. Firms tend to leave the industry when the exit barriers are low and vice versa. Firms which have high exit barriers stay on in the market, using it as an opportunity to attract the withdrawing firms customers. Exit barriers: Obstacles or impediments that prevent a company from exiting a market. Typical barriers to exit include highly specialized assets, which may be difficult to sell or relocate, huge exit costs, such as asset write-offs and closure costs, and inter-related businesses, making it infeasible to sell a part of it
Source: http://www.investopedia.com/terms/b/barriers-to-exit.asp#ixzz1lyNvOrNF
4.3.4.1 Strategies for the Decline Stage To tackle the decline stage, most firms indulge in strategies like: Reducing the number of products in a product line, especially those that are not earning any profits Cutting promotional budgets and prices Ultimately withdrawing from the market or from the weaker segments and trade channels A company can adopt any of the following five strategies when its product is facing the decline stage:
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Firms tend to increase the investment to increase its competitive position and lead the market.
Firms tend to maintain constant investment level until the market reaches stability.
Investment is utilized in a correct way by dropping the unprofitable customer groups and strengthening the firms investment in profitable niches.
Harvest the firms investment to recover the cash quickly. Divest the business through disposal assets.
DID YOU KNOW? Maruti 800 is at decline stage of product life cycle.
4.4 Common Alternative Patterns of Product Life Cycle There are three common alternative patterns of product life cycle that exist. These are: Growth-slump-maturity pattern Cycle recycle pattern Scalloped pattern
4.4.1 Growth-Slump-Maturity Pattern In this type of sales pattern, the product sales are high in the introduction stage subsequently declining drastically. The sale of this product is sustained by the late adopters and laggards while the early adopters of the product switch to newer products.
Fig. 4.3 Growth-slump-maturity pattern
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4.4.2 Cycle-Recycle Pattern Generally these sales patterns occur in the pharmaceutical industry. When a new drug is introduced it is promoted aggressively to capture the market. This is called the first cycle. The promotional push that is subsequently required to increase / sustain the sales of the drug is called another cycle.
Fig. 4.4 Cycle recycle pattern
4.4.3 Scalloped PLC In this cycle, whenever the sale of a new product begins declining an innovation to the product is made to recapture the market. When the sale of this product too starts declining an innovation is again introduced to retain market share. This cycle is repetitious in nature.
Fig. 4.5 Scalloped product life cycle
Example 1: The sale of nylon show a scalloped pattern because of the many new uses of itparachutes, hosiery, shirts, carpeting, boat sails, and automobile tires - that continued to be discovered over time.
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Example 2: Bajaj has been synonymous with scooters in India, and scooters with the typical family vehicle for the urban middle class. There was a time when the demand for Bajaj scooters far outstripped the supply, and the brand enjoyed a near monopoly. The policy of liberalization by the government and the changes in the competitive landscape transformed the market for scooters. Further, the economic progress of the country, which improved the income level of the people, and the rising aspiration of the middle class, gradually made Maruti 800 a substitute / replacement for the scooter. In order to buckle the trend in the market for scooters, the company introduced technologically superior products. The four stroke engine and sleeker models introduced by the company helped to slow down the decline in the demand for scooters. The company also introduced an array of motorcycles. This took place at a time when motorcycles were becoming the cool vehicle for the urban Indian youth. The adoption of this approach helped the brand remain contemporary. 4.5 Limitations of PLC The concept of PLC helps in manufacturing decision-making, but it needs to be implemented with care. Manufacturing managers need to be aware of these limitations, so that they are not misled by its prescriptions. Some of the limitations of the PLC are: The sales of some products may rise and decline at the same rate. However some products may continue at the same stage for long. Example: Cadburys Dairy Milk chocolate has survived for decades in the mature stage of the PLC. Increase in marketing activities such as promotion may alter the shape of the PLC sales curve to a considerable extent. Example: Increase in advertising at the maturity or decline stage may increase the duration of these phases. The PLC outlines the phases but does not give any indication of the duration of the stages (introduction, growth, maturity). This limits the use of PLC as a forecasting tool since it is not possible to predict when maturity/decline will begin.
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4.6 Role of Technology in PLC In recent years many software have been developed to manage the product life cycle. For example, Product Life cycle Management Software supports the product development process, integrating people, data, processes and business systems and providing a product information backbone for companies and their extended enterprise. The benefits of PLM software focus around time, cost and quality. So, technology has played a critical role in product life cycle management in many ways.
Source: http://www.product-lifecycle-management.info/what-is-plm/plm-benefits.html
Advantages of Technology in PLC Product life cycle management improves the management of product at each stage of PLC. Product life cycle management allows the business to respond quickly to the customers demand. To sustain oneself in the fierce competition and meet the customers expectations, it is necessary to manage the product portfolio. Product life cycle management helps in the achieving of realistic business benefit. It increases the revenue, and leads to faster product production and enhanced profit margins. Product life cycle management reduces the products risks.
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Summary A product can be a good, a service, an idea or a combination of all these. The stages that a typical product goes through are introduction, growth, maturity and decline. In the introduction stage, the product is introduced into the market. The sale of the product is low at the time of its introduction into the market. Strategies adopted by management in introduction stage are rapid and slow skimming, and high and low penetration. The growth stage is characterized by an increase in sales, a heavy demand for the product and a peak in the profits. In maturity stage, the sales tend to grow at first, then reach a point of stability, and then begin to decline. The sales and profits of all products and brands tend to decline in the decline stage of the PLC. There are three common alternative patterns of product life cycle, namely GrowthSlump-Maturity, Cycle Recycle and Scalloped PLC.
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Chapter-5 Capacity Requirement Planning

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Chapter - 5 Capacity Requirement Planning

Introduction Capacity planning is one of the most important investment decisions. The purpose of capacity planning is to match resource capabilities of the factory with its long-term demand forecast. The factors to be considered while selecting capacity additions for manufacturing are (a) effects of economies of scale (b) impact of changing facility focus (c) balance among production stages (d) degree of flexibility of facilities and the workforce. Learning objectives After completing this session, you would be able to Capacity management in manufacturing sector Capacity planning concepts Determining capacity requirement
Topics covered 5.1 Capacity.........................................................................................................4 5.2 Capacity Planning Concepts.............................................................................4 5.3 Economies and Diseconomies of Scale .............................................................. 4 5.4 Capacity Focus ............................................................................................... 5 5.5 Capacity Flexibility ......................................................................................... 5 5.6 Capacity Planning ...........................................................................................6 5.7 Determining Capacity Requirements ................................................................ 7 5.8 Using Decision Trees to Evaluate Capacity Alternatives ................................... 11 Summary .......................................................................................................... 13
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5.1 Capacity Capacity implies an attainable rate of output. Capacity is a relative term: in manufacturing operations management context, it may be defined as the amount of resource inputs available relative to output requirements over a particular period of time. The objective of capacity planning is to provide an approach for determining the overall capacity level of capital intensive resources like facilities, equipment, and labor force size.
Source: Operations supply chain Management by chase
Example: In manufacturing, capacity can be the number of products that may be produced in a single shift. 5.2 Capacity Planning Concepts The term capacity means, an attainable rate of output. For instance an automobile industry is able to produce 300 cars per day, but the company didnt mention how long that rate can be sustained. Thus, we dont understand whether it is manufacturing 300 cars per day is a one-day or a six month average. So to avoid this ambiguity, Best Operating Level concept is used. This is a process designed for finding the level of capacity and this is the volume of capacity at which average unit cost is minimized. Difficult task is to find this minimum cost because it entails a complex trade-off between the allocation of fixed overhead costs and the cost of overtime, equipment wear, defect rates, and other costs. Capacity utilization rate is an important measure, which discloses how close a firm is to its best operating point. Capacity utilization rate= Capacity used/ Best operating level Normally, capacity utilization rate is disclosed in percentage, so it requires that the numerator and denominator must be measured in the same units and time approach. 5.3 Economies and Diseconomies of Scale The basic idea of this concept is, whenever a plant gets larger, it automatically increases the volume of output and decreases the average cost per unit. It partially happens due to lower operating cost and capital cost, because a piece of equipment which has twice the capacity of another typically does not cost either to purchase or to operate. Whenever plants gets bigger it also gains efficiency to fully utilize the dedicated resources for tasks such as material handling, computer equipment, and administrative support personnel.
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Example: Jaguar is the luxury automobiles producer which recently found that, they had too many plants and therefore employed 8560 workers in three plants that produced 1,26,122 cars, about 14 cars per employee. Alternatively, Volvos plant in Torslanda, Sweden, was twice as productive as Jaguar building 1,58,466 cars with just 5472 workers, rather 29 cars per employee. At the same time, BMW AGs mini unit has produced 1, 74,000 vehicles at a single British plant with just 4500 workers or 39 cars per employee. 5.4 Capacity Focus The capacity focus concept epitomizes the production concept of an organization which focuses on a limited set of production objectives like cost, quality and flexibility etc. instead of excelling in all the aspects. In this concept the organization selects those set of production activities which fulfill most of the objectives. But with increase in technology, there is a need for all aspects of production to do well and give a competitive advantage to the organization. To deal with these contradictions, a firm can justify its selection of objectives and capabilities based on its level of operation. The capacity focus concept can also be operationalized using a plant within plant strategy, where in, each plant may have several sub organizations having their own objectives and policies made under the same roof. This in turn helps to focus on different operating objectives at different level for each department and thereby still carrying the Capacity focus concept in each level. DID YOU KNOW? The XEROX focused factory creates a flexible and efficient work environment where teams of employees are responsible for the end to end manufacturing or specific products. The factory was designed with input from the industrial staff, working in tandem with engineers and management. 5.5 Capacity Flexibility Capacity flexibility has a great advantage over production, it has the ability to either increase or decrease the production levels drastically and it also has the great flexibility to shift the production capacity quickly from one product to another product or service. This type of flexibility is achieved only by following the strategies that use the capacity of other organization.
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Flexible plants A flexible plant has an advantage that it can maintain zero-changeover-time. A plant can quickly adapt to changes by using these methods like movable equipment, knockdown walls, easily accessible and re-routable utilities. For example, in a circus it is easy to install and easy to tear down and move. Flexible processes Flexible process is characterized by flexible manufacturing systems, where it is simple to set up the equipment, and also by using these technological approaches there are advantages like low cost switching from one product line to another, etc. This is sometimes referred to as economies of scope. (By definition, economies of scope exist when multiple products can be produced at a lower cost in combination than they can separately).
Source: Operations supply chain Management by chase
Flexible workers These flexible workers have different skills sets. Where their abilities are, they can work on any type of machinery and also they can easily switch from one kind of job to another. These workers need boarder training than specialized training and for adapting the quick changes these people need managers, supporting staff. 5.6 Capacity Planning While adding capacity to the factories there are many issues to be considered. Three important issues are maintaining system balance, frequency of capacity additions, and the use of external capacity. Maintaining System Balance A perfectly balanced plant should always maintain exact input and output requirements at all the stages. For instance, the output of department 1 should provide the exact input requirements for department 2 and so on. It is not possible to achieve such perfect design in practice because of two reasons; the first reason is that the best operating levels will always differ from department to department. For instance, department 1 may operate at their best over a range of 100 to 120 units per month, whereas the next stage in the process or department 2 might operate at best over a range 80 to 95. The second reason is
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variability in product demand and if the production lines are not automated they might lead to process imbalance. To avoid this process imbalance there are three methods. In the first method, whenever there is a bottleneck in the process add capacities to the process. Few of the measures taken are scheduling overtime, leasing equipment or purchasing additional capacity through subcontracting. In the second method, try to keep bottleneck process always in working stage or zero downtime even by using buffered stock. In final method, by duplicating the process in which there is bottleneck. By using these methods, delay-in subsequent methods can be removed. Frequency of capacity addition While adding capacities to the factory, two types of cost should be considered. The first type of cost is upgrading capacity too frequently, this type of capacities are too expensive because it includes removing and replacing the old equipment with new one and also training the workers on that equipment. Whenever new equipment is purchased additional cost is incurred over selling price of old one. Finally some more costs are incurred like cost of ideal time of the plant during changeover period. The second type of cost is upgrading capacity too infrequently, this type of capacities are also expensive because capacities are purchased in large amounts. This excess capacity must be carried until it is utilized. External source of capacity Sometimes, it is better not to add capacities at all. Instead, use some external source of capacities to manage the demand. Outsourcing and sharing capacity are the two common strategies used by the most of organizations. Airlines are best example for sharing capacities, when there are two routes one is frequently used and the other is not. These airline companies use the two flights in same route sharing the demand for that season. 5.7 Determining Capacity Requirements While determining capacity requirements, it is necessary to identify the demands for individual product lines, individual plant capabilities, and allocation of production through the plant network. Typically this is done according to the following steps: Implement forecasting techniques to forecast sales for individual products within each product line.
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To forecast product depth, approximate measure of the equipments and labor requirements.
Direct and indirect cost should be planned for a period of time.
Sometimes firms decide to maintain capacity cushions between the projected requirements and actual capacity. Capacity cushions can be defined as an amount of capacity in excess of forecasted demand. For instance, if a company has forecasted the demand of the product would be around 10 million per year and they designed the capacity for 12 million per year. This 20 percent of excess capacity is called as capacity cushion. Sometimes firms also decide to maintain a negative capacity cushion. Negative capacity cushions can be defined as produced capacity less than the forecasted demand. For instance, if a company has forecasted the demand of the product would be around 12 million per year and they produced the capacity for 10 million per year. They produced only 16.7 percent of the demand, which is called as negative capacity cushion. Example of determining the capacity requirements A detergent company produces two varieties of detergents: Surf and Surf-Ex. These detergents are available in both bags and single serving pouches. For this factory, management is willing to forecast the equipment and labor requirements for the next five years. Solution Step 1: Implement forecasting techniques to forecast sales for individual products within each product line. For running the promotional campaign for Surf-Ex, the marketing department has provided data for the forecast demand values (in thousands) for the next five years and this campaign is going to continue for the next two years.
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Table 5.1: Forecasted demands for the Surf, Surf-Ex bags and pouches
Year 1 Surf 60 Bags (000s) 100 150 200 250 2 3 4 5
Pouches (000s)
100
200
300
400
500
Surf-Ex 75 bags (000s) Pouches (000s) 200 400 600 650 680 85 95 97 98
Step 2: To forecast product depth, approximate measure of the equipments and labor requirements are made. Presently there are three machines that can package up to 150,000 bags per machine per year and each machine requires two operators to produce both bags of Surf and Surf-Ex. Six bag machine operators are available. There are five machines that can package up to 250,000 pouches per machine per year and each machine requires three operators to produce both pouches of Surf and Surf-Ex. Currently, 20 pouching machine operators are available. From the preceding table, it is easy to calculate the forecast of total product line just by adding the yearly demand of bags and pouches as follows:
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Table 5.2: Forecasted demands for the bags and pouches
Year
Bags
135
185
245
297
348
Pouches
300
600
900
1050
1180
Now it is easy to calculate equipment and labor requirements for the year 1. From the table, the total available capacity for bags is 450,000 per year (3* 150,000 each), we will be using 135/450= 0.3 of the available capacity for the current year, or 0.3*3= 0.9 machine. In the same way, we will need 300/1250= 0.24 of the available capacity for pouches bags for the current year, or 0.24*5= 1.2 machines. The number of operators required to maintain our forecasted demand for the first year will consist of the operators required for the bags and the pouch machines. The operator requirement for year 1s bag operation is 0.9 bag machine* 2 operator= 1.8 operators 1.2 pouch machine* 3 operators= 3.6 operators Step 3: Direct and indirect cost should be planned for a period of time. Repeat the previous calculation for the remaining years.
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Table 5.3: Represents direct and indirect cost occurred Year 1 2 3 4 5
POUCH OPERATIONS Percentage capacity utilized Machine requirement Labor requirement 24 48 72 84 94
1.2
2.4
3.6
4.2
4.7
3.6
7.2
10.8
12.6
14.1
BAG OPERATIONS Percentage capacity utilized Machine requirement Labor requirement 30 41 54 66 77
.9
1.23
1.62
1.98
2.31
1.8
2.46
3.24
3.96
4.62
There is a positive capacity cushion for all five years because the available capacity for both operations is always exceeding the expected demand. The detergent Company can now begin to develop the intermediate- sales and operations plan for the two production lines. 5.8 Using Decision Trees to Evaluate Capacity Alternatives Decision tree is an easy way to solve the capacity planning problem. It helps not only in understanding the problem but also in finding a solution. A decision tree is a sequential
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problem solving method in which each step gives the conditions and the consequences of the problem. To analyze the decision tree, recently many software packages have been developed. Decision trees consist of nodes and branches represented by squares and circles respectively. Generally, there is a flow of information from the branches to the node or visa versa. Circles show the probability of occurrence of an event and squares represent decision point. The process of solving the decision tree problem starts from the last branch and gradually moving towards the start of the tree in reverse order. Expected values are calculated at each step keeping in mind, the time value of money. It is important to consider the time value of money while planning for long term.
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Summary Capacity implies an attainable rate of output. Capacity is a relative term: in manufacturing operations management context, it may be defined as the amount of resource inputs available relative to output requirements over a particular period of time. The term capacity implies an attainable rate of output. The basic notion of economies of scale is that as a plant gets larger and volume increases, the average cost per unit of output drops. The concept of the capacity focused factory holds that a production facility work best when it focuses on a fairly limited set of production objectives. Capacity flexibility means having the ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one product or service to another. Such flexibility is achieved through strategies that use the capacity of other organizations. These strategies are related to flexible plants, flexible processes, and flexible workers. Forecasting seeks to predict what is most likely to happen in future. By predicting the most probable future value of a variable, managers take effective decisions and carry out planning activities. The objective of selecting the right method is to maximize accuracy and minimize biases. Therefore, the suitability of a forecasting method should be verified before it is selected. The factors to be considered are time span, data availability, and cost & accuracy. In determining capacity requirements, we must address the demands for individual product lines, individual plant capabilities, and allocation of production through the plant network.
A convenient way to lay out the steps of a capacity problem through the use of decision trees. The tree helps not only in understanding the problem but also in finding a solution. A decision tree is a schematic model of the sequence of steps in a problem and the conditions and consequences of each step.
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Chapter-6 Product Design and Development

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Chapter - 6 Product Design and Development

Introduction Increased competition in the global business environment is compelling operations managers of from manufacturing industry to streamline their operations, and to develop innovative products and designs. Product design is the description of the specific stages in the production process and the relationships among the stages. Learning objectives After completing this chapter, you will be able to understand the: need for product design and its development different steps taken in the development process concept of prototyping various tools and technologies used for the design process
Topics covered
6.1 Product Design and Development An Overview ....................................................4 6.2 Factors Affecting Product Design Decisions .............................................................4 6.3 The Product Development Process ........................................................................... 5 6.4 Rapid Prototyping .....................................................................................................6 5.5 Automation in Design ................................................................................................ 7 6.5.1 Computer Aided Design ........................................................................................ 7 6.5.2 Computer Aided Manufacturing ...........................................................................8 6.5.3 Flexible Manufacturing System .............................................................................9 6.5.4 Computer Integrated Manufacturing .................................................................. 10 6.6 Industrial Design ...................................................................................................... 11 6.7 Measuring Product Development Performance ..................................................... 11 6.8 Variants of Development Products ......................................................................... 12 Summary ........................................................................................................................ 15
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6.1 Product Design and Development An Overview Product design refers to the description of the specific stages in the production process and the relationship among the stages that enable the production system to produce products or services. The products or services should meet the desired quality standards, and should also be produced at the right time (when the customer wants them) and within the budgeted cost. New product development (NPD) is the process of bringing a new product to the market. NPD is the first phase in product life cycle management. New products can be of the following types: Changes in the existing product Entire revision of the core product Line extension New product line Repositioning Completely new product
6.2 Factors Affecting Product Design Decisions Operation managers take the following factors into consideration before deciding on a product design.
Nature of demand The main objective of any production system is to fulfill customer requirements. Therefore, an organization should schedule its production to meet requirements and estimated future demand levels.
Degree of vertical integration Vertical integration refers to the extent to which the production and the distribution chain (extending from the suppliers of raw materials and components to the delivery of finished products) are brought under the ownership of the organization. The degree of vertical integration determines the extent to which a product and its components are produced internally.
Flexibility A flexible organization responds quickly to changing customer needs and market conditions. Flexibility is essential for organizations to increase and maintain their market shares, both in terms of product as well as in terms of volume.
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Degree of automation If automation is not made a strategic weapon, it will be a limitation for the operations. By automating their operations, organizations can produce products/services of high quality within a short period and can also shift to other products/services easily.
Quality level and degree of customer contact The products competitive position in the market depends on its quality. Decisions taken on the desired quality level of products/services affect the design of the product as well as its production process. The desired level of quality has a direct implication on the degree of automation in the production process.
6.3 The Product Development Process A firm follows the below mentioned activities to conceive, design, and bring a product to the market. The following are the six activities involved in the product development process: 1. Planning This is the initial activity or phase zero which gives approval to launch the actual product development process. This activity starts with formulation of corporate strategy and evaluation of technology developments and market objectives. The output of this phase is the product mission statement that explains the products target market, business goals, limitations and assumptions about the product. 2. Concept development This stage includes identification of the target market, assessment of various product concepts, selection of a product concept for further development and testing. The product concept describes the products form, function, features and specification. This is followed by an analysis of competitive products and the economic justification of the product. 3. System level design This stage defines the architecture of the product and the product is broken down into subsystems and components to define the assembly scheme for the production system. 4. Design detail This phase includes the design specification of the product like geometry, materials, and tolerances of all the unique parts in the product. At this stage suppliers are also identified for purchasing standard raw materials. A process plan is prepared and tooling is also designed for the production system. 5. Testing and refinement This stage involves assessment and construction of a prototype of the original product. This prototype is usually built with the same
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materials and dimensions, but the procedure followed in the production may not be the same. 6. Production ramp up At this stage, the product is made and ready to be produced in-large quantities at the factory. The main purpose of the production ramp up is, when the new product is designed by R&D, they have to train the factory personnel and also resolve the problems faced by them during the actual production. 6.4 Rapid Prototyping A prototype is an original type, or (form instance, early sample, model) built to test a concept/process or to act as a thing to be replicated or learned from or standard for later stages. Rapid prototyping is building a model of the short-listed ideas to enable an understanding of the idea. The process consists of three Rs: Rough, Rapid, and Right. The first two Rs state that the models must be made roughly rapidly since, in the early stages, a model need not be perfect. The third attribute, Right, refers to building a lot of small models until a solution is reached. DID YOU KNOW? When a design consultancy group called IDEO designed a phone, they cut out dozens of pieces of foam and cradled them between their heads and shoulders to find the best shape for a handset.
Rapid prototyping, combined with Design for Manufacturing and Assembly (DFMA) tools, can determine if a product will perform its desired functions. It also tells how well and for how long rapid prototyping will work. Use of DFMA in the early stages of rapid prototyping can reduce the expenses in the later stages (manufacture, assembly, and product use). The speed with which a company can design and develop new products is a critical element in its ability to introduce new products into the marketplace. A three-dimensional prototype can help in identifying the problems, allowing the design, engineering, and production people to provide their input and test the design early in the development cycle. The models developed with three-dimensional prototype, results in higher quality products and lower development costs.
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5.5 Automation in Design The use of computers can improve the speed and simplify the design process of a product. The design process includes analyzing, evaluating and presenting a design for a product). 6.5.1 Computer Aided Design Computer Aided Design (CAD) is a technique used for designing product and process on a computer terminal. Computer systems assist in the creation, modification, analysis and optimization of a design.
Source: Operation Supply Management by Chase
CAD system incorporates computer graphics and computer-aided engineering systems. The physical attributes of the process or products can be illustrated using computer graphics while computer-aided engineering systems can highlight the operational capabilities of the proposed design. The designer working with a CAD system creates the lines and surfaces that form the object (product, part, structure, etc.) and stores this model in the computer database. Once the design procedure is completed, the CAD system generates detailed drawings required to create a product or process. Using a CAD system, a designer can generate various views of an assembly and its components. Several models such as the wire frame model (illustrates the outline of the product structure in 3D space) are used to represent the parts in desirable forms. The use of CAD systems in product design enables production engineers and marketing personnel to view the items and suggest changes in the design before the commencement of production. A few of the topend CAD packages allow testing at the drawing stages thus eliminating the need for costly prototype testing at the initial stages of the product design. By introducing CAD, an organization can improve the quality and functionality of a design. A CAD system provides comprehensive tools for improving design process. Some of the benefits of using CAD include: Increase in productivity Improvement in the quality of product or process design More standardized products and design documentations
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Fig 5.1 A digital multi-CAD view of a crane Source: http://en.wikipedia.org/wiki/CAD
DID YOU KNOW? The first milestone in the history of CAD was in the field of mathematical work on curves developed by Robert Issac Newton in 1940s.
6.5.2 Computer Aided Manufacturing In Computer Aided Manufacturing (CAM), computers are used either directly to control the processing equipment or indirectly to support manufacturing operations. Based on the sequential instructions given by the computer within operational specifications, a variety of operations are performed by automated machines. Computer programs can be stored in a database and can be retrieved, updated, and revised as components are added / redesigned. They can also be transmitted electronically in-house or externally by satellite to other divisions and facilities. The use of computers to indirectly support manufacturing operations is often referred to as indirect CAM. It involves capturing data regarding the flow of items through automatic means such as bar coding, and using this information in planning and scheduling production activities. Operation managers generally apply indirect CAM for activities such as capacity planning, purchasing, inventory control, quality reporting and so on. Direct CAM links computers directly to one or more machines such that the production processes are monitored and controlled by computer signals. For example, Computer Numeric Controlled (CNC) machines store operational instructions on their on-board computers which control their operations.
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Benefits of using CAM are: Reliable information inputs Consistent product quality Reduction in labor costs Better control and management of equipment materials Improvement in production rate
Fig 5.2 An exploded view of CAM generated moulding and tooling box Source: http://en.wikipedia.org/wiki/Image:Ugs-nx5-mold-tooling.jpg
DID YOU KNOW? Dassault Systems and UGS Corporation (now owned by Siemens) are the worlds largest CAM software companies.
6.5.3 Flexible Manufacturing System Early automation systems consisted of a transfer line, which was a fixed-path conveyor with single-purpose equipment installed on either side of it. The conveyor moved the parts to each workstation where the machines performed a predetermined task. This automation was economical only for those organizations, which were involved in the production of large volumes of a single product or similar products. To overcome these inefficiencies, Flexible Manufacturing Systems (FMS) was introduced in production lines. It is a form of flexible automation in which several machine tools are linked to the material-handling system. A central computer controls all the aspects of the system. This system is effective in producing different items that have similar processing requirements. The components that make up a typical FMS are: An automated loading system to load materials
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Two or more machining centers, which are automated to change tools by themselves
A system to move materials in between machining centers An unloading system A central computer to integrates the whole process
In comparison with the traditional automated systems, the FMS offers advantages such as reduced direct labor, shorter response time, consistent quality of products and better control over the manufacturing processes. However, FMS requires huge capital investments in equipment, and planning and control systems. Hence, they are employed only by those production organizations in which all the products produced utilize similar components or different products manufactured are variations of the same basic design. 6.5.4 Computer Integrated Manufacturing Computer integrated manufacturing (CIM) integrates all the functions of CAD/CAM and also includes the business functions (order entry, cost accounting, maintenance of employee, time records and payroll, and customer billing) of a firm. CIM is considered as an upgraded technological progression for an organization. For a normal CIM system, computer technology is applied from customer orders through design and production (CAD/CAM) to product shipment and customer service. All operational and information-processing functions help the company in fulfilling the customer service. In many ways, CIM represents the highest level of integration in manufacturing. Table 5.1 illustrates the components of CIM.
Table 5.1 Components of CIM
Computer Integrated Manufacturing (CIM) Business activities CAD CAM Planning drafting Capacity Control planning, Process controls, control,
Procurement, order Engineering entry, payroll, analysis,
billing and so on.
design review
materials planning, shop-floor computer-aided process planning
computer-aided inspection
Manufacturing activities: Materials handling, fabrication, assembly, inspection
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6.6 Industrial Design Industrial design is an art where the aesthetics and usability of the products being manufactured or to be manufactured can be improved for marketability and production. The role of an industrial engineer is to create and implement the design solutions to the problems of engineering, sales & marketing, and brand development. In the present scenario, the definition of industrial design has been changed. Companies concentrate much on developing their technology in-order to compete in the market. It mostly happens in the field of electronics, with the negligible costs of computer chips, companies are coming up with the more advanced technological features in their product which are not fully operated by customers, who use only a small number of the available features. This is actually deviating from the consumers end benefits. For example: Setting the VCR, working on the car or adjusting a computerized furnace thermostat, most of the customers have complaints regarding the use of the product or service. Note: IDEO is one of the most successful industrial design firms in the world.
DID YOU KNOW? Quality function deployment is an approach for including the opinion of the customer into the design specification of a product.
6.7 Measuring Product Development Performance Many studies reveal that continuous development of new products is important to sustain in the competitive environment. Companies should concentrate on the changing customer needs and activities of their competitors to identify the opportunities and growing needs of the customer and bring the new product and processes quickly into action. With the fast growing competition and varying model life styles , firms need to have much more development projects than previously, with fewer resources. In the US automobile market, the growth of models and market segments over the last 25 years indicates that an auto firm must increase its development projects to 4 times more than their current projects to maintain its market share. But smaller volumes per model and
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shorter design lives mean resource requirements must drop dramatically. Remaining in the competition requires efficient engineering, design, and development activities. Measures of product development success can be categorized into: Speed and Frequency of bringing new products or introducing to the market. Productivity of the actual development process. Quality of the actual product introduced.
To determine the market impact of the product and its profitability, time, quality, and productivity, along other activities like sales, manufacturing, advertising, and customer service are taken into consideration. 6.8 Variants of Development Products There are several variants of product development strategies existing today which have been / can be developed by different techniques. These are: 1. Market pull products The market pulls the development decisions, that is, when there is an opportunity and a need, the firm begins the product development strategies with all the requirements to satisfy the market needs. 2. Technology push products A firm begins with a new proprietary and looks for an appropriate market to apply this technology, i.e., the technology pushes development. Gore-Tex, an expanded Teflon sheet manufactured by W.L. Gore Associates, is an example of technology push. 3. Platform products A product with more additional features to the existing product technology is considered to be a platform product. For example, Instant film used in Polaroid cameras, tape transport mechanism in Sony walkman, and the Apple Macintosh Operating system. 4. Process intensive products These are mostly produced in large quantities because it follows standard production procedure as the production process has an impact on product. Hence the product design cannot be separated from the production process design. Few examples of process intensive products are semiconductors, foods, chemicals, and paper.
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5. Customized products These products are developed to meet customer specific order request and are modified versions of the standard products. Examples: switches, motors, batteries, and containers. 6. High risk products These products are entailed with large risk related to technology and market. Hence, the product development process is planned to face risk. This is possible by addressing the biggest risk in the initial stages of the product development. The risks can be avoided by completing the required design and test activities earlier in the process. For example, building a highly uncertain technical product requires that its key features are tested in the earlier stages of the process to avoid risk in the later stages. This process explores multiple solutions simultaneously and ensures that one of the solutions succeeds. Evaluation of the risk should be done at regular basis without delay. 7. Quick build products In the present scenario, building and testing prototype models has become a rapid process. To further speed up the development process, the products features are disintegrated into high, medium and low priority in the design phase. This is followed by several cycles of design, build, integrate, and test activities, beginning with the highest priority to medium priority features and if time and budgets do not overrun, low priority features are also incorporated into the evolving product. In most cases, the lack of budget or time, do not allow the incorporation of the low priority features in the next generation of the product. For example, electronics and software products of recent times use the design-builttest cycle which can be repeated many times. 8. Complex systems While developing a complex system, a modification in the generic product deals with a number of system level issues. While considering the architecture of the entire system, a number of subsystems architectures may be considered as competing concepts for the overall system. Due to this, the entire system level becomes critical; hence it is divided into subsystems and the subsystems are further divided into components. Each of these components is managed by different teams and special teams are assigned to integrate these components into subsystems. These subsystems are, and then combined into the overall system. As each of these processes is executed in parallel, it is often referred to as concurrent engineering. The interactions across the components and subsystems are managed by system engineering specialists. The testing and
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refinement phase includes not only system integration but extensive testing and validation of the product. For example, all large scale products such as automobiles and airplanes comprise many complex interacting subsystems and components.
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Summary
Product design refers to the description of the specific stages in the production process and the relationship between the stages that enable the system to produce products or services. production
New product development is the process of bringing a new product to the market. The six phases of the generic development process are planning, concept development, system level design, design detail, testing & refinement, and production ramp up.
Rapid prototyping can quickly produce three-dimensional prototypes allowing design, engineering, and production teams to provide input and test the design early in the development cycle.
CAD is a technique used for designing product and process on a computer terminal. Computer systems assist in the creation, modification, analysis and optimization of a design. A CAD system incorporates computer graphics and computer-aided engineering systems.
In Computer Aided Manufacturing (CAM), computers are used either directly to control the processing equipment or indirectly to support manufacturing operations.
Flexible manufacturing system (FMS) is a form of flexible automation in which several machine tools are linked to the material-handling system. A central computer controls all the aspects of the system.
Computer Integrated Manufacturing (CIM) is the next step in the technological progression of an organization. The system incorporates all the engineering functions of CAD/CAM and the business functions of the firm.
Industrial design is an art where the aesthetics and usability of the products being manufactured or to be manufactured can be improved for marketability and production.
Measures of product development success can be categorized into those that relate to the speed and frequency of bringing new products online, to the productivity of the actual development process, and to the quality of the actual produced introduced.
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Chapter-7 Manufacturing Processes

Version 4.0
For Associates
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Confidentiality statement This document should not be carried outside the physical and virtual boundaries of TCS and its client work locations. The sharing of this document with any person other than TCSer would tantamount to violation of confidentiality agreement signed by you while joining TCS.
Introduction The term process structure has a broad perspective and includes issues like the plant capacity, choice of equipment, process technology, production control, work force management, etc. The design of a manufacturing process is an important part of the structure of operations. Hence it becomes mandatory for an operations manager to be aware of various manufacturing processes possible, so that the best fit can be used in his organization. Learning Objectives After completing this session, you would be able to Understand the need of manufacturing processes Types of manufacturing processes existing today Which type is best suitable for what kind of operations Degree of control in the process used Tools used for selecting and designing a process The procedure for selecting the process
Topics Covered 7.1 Manufacturing Process .............................................................................................. 4 7.2 Types of Processes ..................................................................................................... 4 7.2.1 Product-Focused ................................................................................................... 4 7.2.1.1 Discrete Unit Manufacturing .............................................................................. 5 7.2.1.2 Process Manufacturing ...................................................................................... 6 7.2.1.3 Delivery of Services ............................................................................................ 6 7.2.2 Process-Focused ................................................................................................... 6 7.2.3 Group Technology ................................................................................................ 8 7.2.3.1 Cellular Manufacturing ....................................................................................... 9 7.3 Process Planning Aids .............................................................................................. 10 7.3.1 Assembly Charts ................................................................................................. 10 7.3.2 Process Charts .................................................................................................... 11 7.4 Selecting the Type of Process ................................................................................. 11 7.4.1 Variety and Volume ............................................................................................ 11 7.4.2 Investment ......................................................................................................... 13 7.4.3 Economic Analysis .............................................................................................. 13 7.5 Measuring Process Performance ............................................................................. 14 Summary ....................................................................................................................... 16
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7.1 Manufacturing Process A manufacturing process is a set of activities that transform the resources and expertise of an organization into higher value goods and services. This involves a series of discrete tasks or activities performed by an integrated set of people and equipment. It takes input from the market environment and the organizations own technological capabilities and convert them into an economically efficient and productive activity. It is essential for an organization to decide, on the type of process design that should be used to produce each product or service. 7.2 Types of Processes The various types of processes that are generally used can be classified into three broad categories: Product-focused Process-focused Group technology
7.2.1 Product-Focused Product focused is also referred to as Line flow production system; this type of process is used mostly in production departments that are organized according to the type of product or service being produced. In this type of process, products or services tend to flow along linear paths without backtracking or side tracking. Items follow a similar production sequence, which can be anything from a pipeline (for oil) to an assemble line (for televisions or radios). Product-focused systems offer many advantages like low unit costs, high volumes of production and ease of planning. However, they require higher initial investments because of the use of specialized and expensive fixed position processing equipment in the production process. Figure 7.1 illustrates the direct, linear and continuous paths in which raw materials, components, sub assemblies, assemblies and finished products flow in the production of a hypothetical product.
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Raw materials
Components (Made)
Sub assemblies
Assemblies
Finished product
Components (Procured)
Sub assemblies
Sub assemblies (Procured)
Fig 7.1 Schematic layout of a product focused system Many managers prefer this system for the benefits it offer, like Low labor skill requirements Reduced worker training Reduced supervision and ease of control
A product-focused production system is generally designed for three forms of production: discrete unit manufacturing, process manufacturing, and delivery of services. 7.2.1.1 Discrete Unit Manufacturing Discrete manufacturing is reversible process. In industry terminology discrete manufacturing is, Manufacturing of finished product using dissimilar items that can be counted, touched and seen. In discrete manufacturing it is possible to get raw materials, by disassembling the finished product stage by stage in exact reverse order. For instance all the automobiles.
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7.2.1.2 Process Manufacturing Process manufacturing produces multiple products in stages. Process manufacturing involves the movement of materials between operations such as screening, crushing, storing, mixing, milling, blending, cooking, fermenting, evaporating and distilling. It is leads to irreversible changes, for instance, the petroleum industry. It is widely applied in the cement, plastic, paper, chemical, steel and brewing industries.
Fig 7.2 Process Manufacturing 7.2.1.3 Delivery of Services Delivery of services can also use a product-focused process. In such a system, services are administered to customers while they move in a sequence or in a linear route. Services delivered by waiters in restaurants make use of this system. 7.2.2 Process-Focused In a process-focused system, all the operations are grouped according to the type of process. The system is also referred to as an intermittent production system, because products undergo an intermittent process of production. The system is also referred to as job shop, as the products move from department to department in batches (jobs) that are usually determined by customers orders. As the process focused systems produce different items in small quantities on general purpose machines, this is also called as batch production. Personnel are allocated according to their functions for processing the equipment and the products flows through the facilities on irregular paths as these are customized products.
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Figure 7.2 illustrates the zigzag type of routes followed by products in products flow, in this type of production system. This system allows both sidetracking and backtracking in the product flow route. In the figure, Job A and Job B represent two different product designs. As per their design requirements, they are routed through different design departments to undergo different operations in different sequences. Receiving raw materials storage Foundry Welding and soldering Lathe section Quality control Painting and packaging
Job A
Job B
Fig 7.2 Process focused production A schematic layout
The system has its own merits and demerits. Two or more jobs undertaken by a production organization may come to the same department at the same time. If the department cannot work on both the jobs simultaneously, one of them has to be kept waiting. This is a simple case where one job waits for its turn in one department. In large production organizations, several jobs are kept waiting in various departments. This system may lead to loss of time, especially when major portion of production time actually comprises the time in which jobs are waiting to be processed in different departments. Also, processfocused production systems require greater employee skill, more employees training, more supervision and complex production control. On the plus side, process-focused production systems are more flexible because of their ability to produce a wide spectrum of products in small batch sizes. They also require less initial investment since they use general-purpose equipment that is less expensive. Product-focused and process-focused production systems represent two types of traditional approaches for organizing production activities. But, in practice, many
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organizations use blends of these two approaches. For instance, a typical factory producing television sets uses a blend of the above two systems. In the upstream part of the factory, where components and sub-assemblies are prepared, a process-focused approach is used because of the great variety of component designs involved. But in the downstream part of the factory that produces finished products, a product-focused approach is used because of the relatively small variety of designs involved. Such practices have now become very common, as the organizations put in greater efforts to cut production costs. 7.2.3 Group Technology Group technology is most widely used for metal working applications. In this type of process, dissimilar machines are grouped into work centers to work on products similar in shape and processing requirements. A group technology layout is similar to both product layout and process layout because each cell is dedicated to a limited range of products and each cell is designed to perform specific set of processes respectively. It is also referred to as the parts classification and coding system. In group technology, each part manufactured is given a code. This code has several digits, each digit representing a physical characteristic of the part. Organizations draw the following benefits by implementing the coding system: Coding gives a clear picture of the steps that are involved in producing a part. Hence, it is easy to route the parts in production. Coding results in standardization of part designs. A database can be maintained with the design details of old parts. Whenever a new product is to be designed, the codes of existing products can be accessed to identify similar parts present. This simplifies the process of manufacturing new products. Parts with similar characteristics can be grouped into families as similar products are generally produced in similar ways, i.e. similar parts are made on the same machines with similar tooling. Suppose an organization produces mild steel (MS) bolts of varying specifications. If all the bolts to be produced are processed on similar lathe machines, they can be grouped into a part family, thus simplifying the process of production.
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DID YOU KNOW? The concept of group technology was first used for production processes in the late 1940s in the Soviet Union. Later, it was studied and applied in India, Japan, the United States and many European countries. 7.2.3.1 Cellular Manufacturing Cellular manufacturing is a type of group technology in which the total production area is conveniently divided into cells, each cell consisting of a group of similar machines. For instance, a production organization can be divided into different cells such as lathe section, boring section, drilling section, grinding section and so on. These cells can be used to produce those parts that are needed more often in moderate batch sizes. Within each cell, products are similar to one another, and the flow of parts within the cell is more like a product-focused system.
Figure 7.3 illustrate an example of cellular manufacturing layout. Here each product is manufactured in its own cell.
Fig 7.3 A typical cellular manufacturing layout

Source: http://en.wikipedia.org/wiki/Cellular_manufacturing
Cellular manufacturing offers many advantages for organizations. Some of the advantages of cellular manufacturing are:
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As similar parts to a particular cell, the machine changeover times between batches of parts are considerable reduced. This results not only in the increase of production capacity, but also in the reduction of production costs.
As the workers in a particular cell are made to work on a set of similar machinery, their costs of training can be brought down significantly. Moreover, workers gain specialized skills in production, as they are exposed to a smaller variety of machinery. This improves the quality of output.
The route of production through cells is more direct, as compared to that in noncellular group technology. There are many advantages in this, like reduction in material handling costs and simplified production planning and control (PPC). It also permits quicker shipment of products.
Parts spend less time in waiting before they are processed. This results in a significant decrease in in-process inventory levels.
These advantages may lead to group technology and cellular manufacturing being adopted by many organizations in the future. But all job shop production should not be converted to group technology production because this production system is economical only for those parts that possess a degree of standardization and are produced in moderate batch sizes. DID YOU KNOW? Cellular manufacturing is an integral part of lean manufacturing, it being capable of managing the resources quite efficiently, thereby increasing productivity.
7.3 Process Planning Aids Process planning is essential for designing and implementing a work system that will produce the required quantity of goods and services. It is a continuous activity, as production volumes have to be continuously adapted to the changing demand for goods and services. Managers generally use assembly charts and process charts to redesign, update and evaluate their production processes. 7.3.1 Assembly Charts Assembly charts are used to obtain a general understanding of the entire process involved in producing products which involve assembly of a number of parts. They provide an overall macro view of the movement of components and sub-assemblies in the process of
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producing a finished product. They also show the material requirements (i.e. the list of all major components), sub-assembly operations, quality checks and assembly operations that are involved in making a mechanical assembly. In these charts, it is a standard practice to indicate operations by circles and inspections by squares. 7.3.2 Process Charts Process charts are similar to assembly charts, except that they include extra information like description of the various steps involved, their frequency of occurrence, the time for each step, the distance traveled and so on. Non-productive activities like storage, delay, and transport are also included. Process charts are used to compare alternative way of performing operations. Each activity can be reviewed by examining whether it can be improved by eliminating a task, combining tasks, changing the sequence of tasks, or modifying the tasks. Process charts can be used for process planning when new products are being planned or when existing operations have to be improved. Thus, these charts help the manager analyze the efficiency of operations. 7.4 Selecting the Type of Process Operations managers consider several factors before choosing a production process for an organization. Some of these factors are: Variety and volume Investment Economic analysis
7.4.1 Variety and Volume The type of process design that is appropriate for a production system depends greatly on the range of product i.e. variety, and the volume of demand for each product model. Figure 7.4 demonstrates the effect of batch size and the diversity of product designs on an organizations selection of product design.
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P D i v e r s i t
Process focused Job shop system Cellular Manufacturing Q System Product focused Batch system Product focused Dedicated system
Batch size
Fig 7.4 Influence of product diversity and batch size on process design decisions
In the figure, as we move from point P to point S, unit production cost and product flexibility decrease. Point P represents a case in which a variety of products is manufactured. In such a case, similar products are produced in small batches, with sometimes a batch containing just a single unit. Process-focused job shop production systems with very high flexibility are appropriate in such cases. As the product variety decreases and the batch size of products increases to point Q, cellular manufacturing for the production of parts in a job shop system becomes more appropriate. As the product varieties decrease further and the batch size of the product increases at point R, a product-focused batch system can be implemented. This system in relatively inflexible and necessitates special training for employees to shift their production activities between various products. The other extreme, point S, represents a case where there is not much scope for product variety and the batch size is very large. At this point, a product-focused production system that is dedicated to the production of a non-differentiated product is appropriate. This production system helps managers reduce unit production costs to the lowest level. However, it is inflexible and impractical to alter the equipment to make it possible to produce other products.
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Thus, the number of product models that is to be produced and the volume of demand that is expected for each product model has a significant effect on the managers selection of process design. 7.4.2 Investment In general, huge investments are required for setting up a product-focused production system that is dedicated to the production of a particular product. Such a system consists of inflexible equipment that is specialized to the product, and necessitates specific training of employees for producing the product. The capital investment required also influences the decision makers choice of production system for the organization. Many organizations adjust their business strategies to meet their production targets by using the limited funds available. 7.4.3 Economic Analysis Each type of process design requires a different amount of funds for its implementation, because fixed and variable costs tend to differ from one production system to another. The greater the investments in fixed assets, the greater are the fixed costs. Variable costs differ with the volume of products produced in each period, say one month. The product-focused system is associated with high fixed costs. These costs are related to the expensive machinery, automated controls and fixed-position material handling equipment. The variable costs associated with this system are relatively low as compared to the other types of process design. In the case of process-focused job shop system, a comparatively lower initial investment in fixed assets is required, but there is a steep growth in variable costs when the production volume is increased. The fixed and variable costs of cellular manufacturing generally lie between these two process designs. If the availability of funds is not a major constraint, managers can select the process design on the basis of the targeted production volume of the product. Hence, it can be inferred that for the given product, a process-focused job shop design is preferable if the annual production volume is less than roughly two lakhs of units. If the production volume ranges between approximately two lakhs and three lakhs, a cellular
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manufacturing system is preferable. For higher volume, a product-focused production system that is totally dedicated to the product is preferable. Though managers consider factors like the variety and volume of products and the amount of initial investment required while selecting the process design, an important factor that should be considered is the profitability associated with the selected process design. 7.5 Measuring Process Performance There is a lot of variation in the way performance metrics are calculated in practice. These metrics tells not only about the firms progress but also suggest the improvements to be made for the firms progress. Metrics like process performance gives details about the productivity of the process and also tells that the productivity is changing over time. Operations managers need to improve the performance of a process frequently or project the impact of a proposed change. These are different types of metrics used to measure the performance of a process: Utilization It is the ratio of the time that a resource is actually being used relative to the time that it is available for use. Utilization is always measured in reference to some resource for instance, the utilization of machine resource in a factory or the utilization of a direct labor for producing the goods. Productivity It is the ratio of output to input. Total factor productivity is usually measured in monetary units, dollars for instance, by taking the value of the goods and services sold and dividing by the cost of the material, labor, and capital investment for producing the product. On the other hand, partial factor productivity is measured based on an individual input, labor being the most common. Efficiency It is the ratio of the actual output of a process relative to some standard. For instance, a machine is used to package cereal at a rate of 40 boxes per minute. If during a shift the operators actually produce at a rate of 46 boxes per minute, then the efficiency of the machine is 120 percent (46/40). Run time It is the time required to produce a batch of parts. This is calculated by multiplying the time required to produce each unit by the batch size. The setup time is the time required to prepare a machine to make a particular item. Machines that have significant setup time will typically run parts in batches. The
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operation time is the sum of the setup time and run time for a batch of parts that are run on a machine. Consider the cereal-boxing machine which can produce at a rate of 30 boxes per minute. The run time for each box is 2 seconds. To switch the machine from 16ounce boxes to 12-ounce boxes requires a setup time of 30 minutes. The operation time to make a batch of 10000 12-ounce boxes is 21800 seconds (30 minutes * 60 seconds per minute + 2 seconds per box * 10000 boxes) or 363.33 minutes. Cycle time It is the elapsed time between starting and completing a job. Another related term is throughput time. It includes the time that the unit spends actually being worked on together with the time spent waiting in a queue. For instance, consider an assembly line, which has 6 stations and runs with a cycle time of 30 seconds. These stations are placed one right after another and for every 30 seconds parts move from one station to other, and the throughput time is 3 minutes because, according to cycle time (30 seconds * 6 stations 60 seconds per minute). The throughput rate is the output rate that the process is expected to produce over a period of time, throughput rate of the assembly line is 120 units per hour that is (60 minutes per hour * 60 seconds per minute / 30 seconds per unit). In this case, the throughput rate is the mathematical inverse of the cycle time. Process velocity It is also known as throughput ratio. It is the ratio of the total throughput time to the value-added time. Value-added time is the time in which useful work is actually being done on the unit. The process velocity of an assembly line with 10 additional buffer positions, and assuming the positions are used 100 percent of the time, is 2.66 (8 minutes / 3 minutes). Littles Law It states a mathematical relationship between throughput rate, throughput time, and the amount of work-in-process inventory. Littles Law estimates the time that an item will spend in work-in-process inventory, which can be useful for calculating the total throughput time for a process. Using the terminology, Littles Law is defined as follows: Throughput time = Work-in-process / Throughput rate
Operations Management for competitive advantage by chase
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Summary A manufacturing process is a set of activities that transform the resources and expertise of an organization into higher value goods and services The various types of processes that are generally used can be classified into three broad categories: o Product-focused o Process-focused o Group technology In product-focused type of process, products or services tend to flow along linear paths without backtracking or side tracking. Items follow a similar production sequence, which can be anything from a pipeline (for oil) to an assemble line (for televisions or radios). It is of three types viz discrete unit manufacturing, process manufacturing and delivery of services. In a process-focused system, all the operations are grouped according to the type of process. The system is also referred to as job shop as the products move from department to department in batches (jobs) that are usually determined by customers orders. In group technology, dissimilar machines are grouped into work centers to work on products similar in shape and processing requirements. Cellular manufacturing is a type of group technology in which the total production area is conveniently divided into cells, each cell consisting of a group of similar machines. Process planning is essential for designing and implementing a work system that will produce the required quantity of goods and services. Managers generally use assembly charts and process charts to redesign, update and evaluate their production processes. Operations managers consider several factors before choosing a production process for an organization. Some of these factors are: o o o Variety and volume Investment Economic analysis
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Comparing the metrics of one company to another, often referred to as benchmarking, is an important activity. Metrics tell a firm if progress is being made toward improvement.
Various parameters that can be used to measure performance of a process are utilization, productivity, efficiency, run time, cycle time and process velocity. Littles Law gives a mathematical relationship to measure performance.
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Chapter-8 Supply Chain Management Version4.0

For Associates
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Confidentiality Statement This document should not be carried outside the physical and virtual boundaries of TCS and its client work locations. Sharing of this document with any person other than a TCSer will tantamount to violation of confidentiality agreement signed by you while joining TCS.
Chapter-8 Supply Chain Management

Introduction
Supply Chain Management (SCM) is gaining importance in todays business scenario. SCM applies a systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer. The term supply chain is derived from a picture that depicts how different functions in an organization are linked together.
Learning objectives After completing this chapter, you would be able to understand: purpose of supply chain strategies used in SCM problems faced while implementing SCM forces that shape a supply chain concept of Electronic Supply Chain
Topics covered 8.1 Supply Chain Management An Overview............................................................... 4 8.2 Functions Involved in SCM ........................................................................................ 4 8.3 The Value of Supply Chain Management .................................................................. 5 8.4 Business Drivers and their Respective Performance Metrics in SCM ....................... 5 8.4.1 Facilities ............................................................................................................ 6 8.4.2 Inventory .......................................................................................................... 7 8.4.3 Transportation .................................................................................................. 8 8.4.4 Information ....................................................................................................... 9 8.4.5 Sourcing............................................................................................................ 9 8.4.6 Pricing ............................................................................................................. 10 8.5 Principles of Supply Chain Management ........................................................... 11 8.6 Forces Shaping Supply Chain Management ........................................................... 13 8.7 Supply Chain Strategies .......................................................................................... 13 8.8 Supply Chain Management Framework ................................................................. 14 8.8.1 Supply Chain Management Components ........................................................... 15 8.8.2 Supply Chain Management Enablers .................................................................. 16 8.9 Electronic Supply Chain Management .....................................................................17 8.9.1 ESCM Advantages .............................................................................................. 17 8.9.2 ESCM Implementation ....................................................................................... 18 8.9.3 Issues Relating To ESCM..................................................................................... 18 8.10 Broad Trends and Misconceptions ........................................................................ 19 Summary ....................................................................................................................... 21
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8.1 Supply Chain Management An Overview Supply Chain is a network, which describes various stages involved in providing value added goods or services to customers. It includes not only suppliers and manufacturers, but also transporters, warehouses, distributors, retailers, and so on. The number of stages in the supply chain depends on customers needs, and the role each stage plays in fulfilling those needs.
SCM integrates procurement, operations and logistics to provide value added products or services to customers. Effective management of the supply chain help organizations meet customer requirements in time, with the desired quality specifications, in a cost-effective manner, through the coordination of different activities which transform raw materials into final products and services.
SCM can provide both tangible and intangible benefits to an organization. Tangible benefits include revenue growth, improved facility utilization, and optimized inventory management and so on. Intangible benefits include improvement in quality, customer satisfaction and customer and supplier relationships. 8.2 Functions Involved in SCM Supply chain is a network of activities in which raw materials are purchased, manufactured into goods and finally delivered to customers. It involves different stake holders in the network from suppliers, factories, warehouses to retailers who have their own share in the network. The three supply chain management functions are strategic, tactical, and operational. These three decision making functions are spread across the supply chain. Strategic Level: Includes activities like finalizing suppliers, warehouses, manufacturing facilities, production levels and transportation routes in the supply chain network. Tactical Level: Deals with planning and scheduling the supply chain activities to meet the actual demand. Operational Level: Executes plans of the previous levels. SCM should consider these three decision making functions before rescheduling or planning the activities in the supply chain. Coordination is important between these three decision
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making functions for optimizing the performance of the supply chain.
The efficient
management of tactical and operational levels of the supply chain is essential to achieve timely dissemination of information and accurate coordination of decisions, which, in turn, determines the efficient, coordinated achievement of enterprise goals. New software applications have emerged in recent years, for administrating the supply chain at the tactical levels and operational levels. It views the supply chain as a set of intelligent (software) agents, each responsible for one or more activities in the supply chain and each interacting with other agents in planning and executing their responsibilities. 8.3 The Value of Supply Chain Management The concept Value of Supply Chain Management has been developed to meet the needs of the customer at a low cost and within a short delivery time. Value of Supply Chain Management involves shorter time to market (for new product), obsolescence and cash commitments, lower stock and lower unit costs of purchasing and manufacturing. Value = (shorter times to market for new products or lower stock or obsolescence / cash commitments to lower unit costs of purchasing or manufacturing) There is immense pressure on the manufacturing industries to deliver a large variety of products through large distribution channels in quick responsiveness to market and at a low cost. This wish list is universal to all manufacturing industries; only the prominence varies according to the marketplace they operate in. The value of SCM helps in providing indicators to tackle the above mentioned contradictory goals. 8.4 Business Drivers and their Respective Performance Metrics in SCM Most organizations focus on supply chain management to reduce costs and improve efficiency of the production process. To attract customers, organizations are concentrating on cost efficiency and responsiveness. These activities pertaining to supply chain strategy provide competitive advantage to the organization. So, to develop supply chain performance in terms of cost efficiency and responsiveness, organizations must pay attention to logistical and cross functional drivers of supply chain performance. The six key drivers that measure performance of the supply chain performance are: facilities, inventory, transportation, information, sourcing and pricing. These drivers interact with each other to evaluate supply chain performance in terms of responsiveness and cost
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effectiveness. Mangers are forced to choose between responsiveness and cost efficiency by considering these drivers within the supply chain.
C om petitive Strategy Supply C hain Strategy E fficiency Supply chain structure Logistical D rivers F acilities Inventory Transportation R esponsiveness
Inform ation
Sourcing C ross Functional D rivers
Pricing
Fig 5.1 Supply chain decision-making framework

Source:http://www.umflint.edu/~weli/courses/mgt581/project/driver.pdf
8.4.1 Facilities Facilities are the places where raw material or products are stored, assembled, or fabricated in the supply chain. The two types of facilities are: 1. Product sites 2. Storage sites Facility decisions like location, flexibility, role and capacity have an important role in the performance of the supply chain. For example, a distributor who is known for his responsiveness has to maintain many warehousing facilities located within customer vicinity even though this practice increases the cost of the product. Similarly, a distributor who is well known for his cost efficiency would have fewer warehouses to reduce the cost of the product even if it reduces his responsiveness.
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Certificate in Manufacturing Concepts Performance Metrics:
Following are few metrics used by most of the organizations for measuring the effectiveness of their Supply Chain. Production cost per unit measures the ratio of total cost of production to the number of items produced / manufactured. The unit of measurement varies depending on the type of the product. Ex: per unit/ case/ pound. Actual average flow / cycle time computes the average time taken to produce all units over a period such as a month or a year. The actual flow /cycle time includes the theoretical time and delays if any. This metric must be used while they are setting due dates for orders. Flow time efficiency measures the ratio of the hypothetical flow time to actual average flow time. Low values for flow time efficiency indicate that a large fraction of time is spent waiting. Average production batch size quantifies the average amount produced in each production batch. Large batch sizes reduce production cost but raises inventories in the supply chain. 8.4.2 Inventory Inventory is generally classified as raw materials, work in progress, and finished goods within a supply chain. A series of inventory policies can significantly change the cost efficiency and responsiveness of a supply chain. For instance, a shopkeeper can be more responsive by holding large amounts of inventory. A large inventory, however, increases the cost, making it less cost efficient. Performance Metrics: Following are few metrics used by most of the organizations for measuring the effectiveness of their Supply Chain. Average Inventory measures the average amount of holding inventory. Average inventory should be calculated in units, financial value and days of demand. Inventory Turns measures the number of times the order is placed (inventory turns) over in a year. It is the ratio of average inventory to either the cost of goods sold or sales. Average Replenishment Batch Size measures the average amount in each replenishment order. The batch size should be calculated by Stock Keeping Unit
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(SKU) in terms of both units and days of demand. It can be predicted by averaging over time the between the maximum and minimum inventory (measures in each replenishment cycle) on hand. Average Safety Inventory measures the average amount of inventory on hand when a replenishment order arrives. Average safety inventory should be calculated by SKU in both days of demand and units. It can be predicted by averaging over time the smallest inventory on hand in each replenishment cycle. 8.4.3 Transportation Transportation incorporates moving raw materials, and finished goods (inventory) from one point to other point in the supply chain. It may involve different combinations of modes (road, rail, air and sea) and routes, each with its own performance characteristics. Transportation preferences have a great impact on supply chain cost efficiency and responsiveness. For instance, Dell has planned its supply chain to meet customer orders with less lead time. They are able to satisfy customers with high level of responsiveness at high cost. Performance Metrics Following are few metrics used by most of the organizations for measuring the effectiveness of their Supply Chain. Average Inbound Transportation Cost normally determines the cost of transporting the product into a facility as a percentage of sales or Cost of the Goods Sold (COGS). Theoretically, this cost should be calculated per unit brought in a facility, but this can be difficult. The inbound transportation cost is usually included in COGS. It is helpful to separate this cost by supplier. Average Inbound Transportation Cost per Shipment measures the average transportation cost of each lot received. Along with the shipment size (lot) received, this metric classifies the opportunities for better economies of scale in inbound transportation. Average Outbound Transportation Cost measures the cost of transporting product out of a facility to customer. Normally, this cost should be calculated per unit shipped, but it is frequently calculated as a percentage of the sales. It is useful to separate this metric by customer.
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Average Outbound Transportation Cost per Shipment determines the average transportation cost of outgoing lot. Along with the outgoing lot or shipment size, this metric classifies opportunities for better economies of scale in outbound transportations. 8.4.4 Information Information includes all data and analysis related to facilities, inventory, transportation, costs and customers across the supply chain. It is one of the important drivers in total supply chain because it directly affects the performance of other drivers. Accurate information allows management to make supply chain more responsive and cost efficient. For instance, a retailer will forecast the demand of the stock based on previous forecasts information, and will stock the inventory to meet the demand. This is possible only when the information for previous months or years is available. Performance Metrics Following are few metrics used by most of the organizations for measuring the effectiveness of their Supply Chain. Frequency of Update recognizes how frequently each forecast is updated. The forecast must be updated more frequently than a decision re-examined, so that large changes can be identified and corrective action be taken. Forecast error determines the variation between the forecasted and actual demand. The forecast error assists in measuring the uncertainty related to safety inventory or excess capacity. Variance from Plan recognizes the variation between the planned inventories /production and the actual values. These variances are used to identify shortages and surpluses. 8.4.5 Sourcing Sourcing is a means of designating the right roles and responsibilities to the right person(s)/department(s). This also specifies the activities that are to be performed by the firm and the activities that are to be outsourced.
Supply chain activities involve decisions related to production, storage, transportation, or the management of information. These decisions are made at the strategic level, which decides what functions to be performed by the firm and what functions should be
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outsourced. Sourcing decisions are considered very important as they affect both the responsiveness and efficiency of the supply chain. For instance, Nokia outsourced much of its production to contract manufactures in China, which improved its efficiency but its responsiveness suffered because of the long distance.
Performance Metrics Following are few metrics used by most of the organizations for measuring the effectiveness of their Supply Chain. Range of Purchase Price determines the variation in purchase during a specific period. The objective is to find out if the price is correlated to the quality purchased. Average Purchase Quantity determines the average quantity purchased per order. The objective is to find out whether a sufficient level of aggregation is happening across locations when buying an order. Supply Lead Time determines the average time elapsed between placing a stock order with the supplier and receiving it.
8.4.6 Pricing
Pricing is the process of fixing a price for products or services. Pricing affects the behavior of the buyer, and consequently affects the performance of the supply chain. For instance, a logistic company maintains different sets of prices for different customer requirements.
Performance Metrics Following are few metrics used by most of the organizations for measuring the effectiveness of their Supply Chain. Days Sales Outstanding determines the average time elapsed between selling the product and receiving the cash for it. Average Sale Price determines the average price at which a supply chain activity is completed in a given period. The average price is calculated by weighting the price with the quantity sold at that price. Average Order Size determines the average quantity per order. The average sale price, order size, incremental fixed cost per order, and incremental variable cost per unit help estimate the contribution from performing the supply chain activity.
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Supply Chain Management should focuses on both logistics and cross-functional drivers in order to increase the supply chain surplus. In recent years, cross functional drivers have become important in raising the supply chain surplus; however, logistics continues to be the major contributor. Supply Chain Management focuses on the three cross functional drivers to increase the supply chain surplus.
For more details about performance metrics and driver of SCM refer to Supply chain management by sunil chopra, peter meindl and D.V kalra.
DID YOU KNOW? The earliest work in the history of supply chains was done by Geoffrion and Graves in 1974, when they introduced a multi commodity logistics design model for optimizing annual finished product flows.
8.5 Principles of Supply Chain Management Managers focus on improving the effectiveness of the supply chain in order to service the needs of customers, fulfill their expectations and meet the organizations growth and profitability objectives. If an organization follows the principles of Supply Chain
Management, it can attain a balance between customers expectations and its growth and profitability objectives. An organizations supply chain is based on the following principles: 1. Segment customers based on service needs Most organizations segment customers based on the industry, product or trade channel without differentiating their specific requirements. In order to serve customers properly, organizations should segment markets based on the specific needs of customers. Once the market is segmented, organizations can develop a supply chain plan that takes into account the specific requirements of the different segments. Based on the segments, merchandising, distribution and other supply chain plans are developed and implemented. 2. Customize the Supply Chain Management network Companies usually design their logistics system either to meet the average service requirements of all customers or to satisfy the toughest requirements of a single customer. However, both these approaches lead to poor resource utilization. For instance, an organization may need to follow two different logistics networks to service two different types of customers, whose lead times are significantly different. In
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order to meet specific requirements, organizations have to customize their logistics network so that they can supply items to customers based on their specific requirements. 3. Monitor Demand Forecasts carefully and land Accordingly Traditionally, each department in an organization makes demand forecasts for the same set of products independently. But the assumptions and measures made by each department differ significantly from those of other departments. Therefore, their forecasts also vary widely. Such forecasts make the supply chain inefficient. Therefore, a process which can recognize the needs and demands of different functional groups is required. The organization should ensure that every link in the supply chain is involved in collaborative forecasting and should provide the required capacity for all operations. The process should foresee surges and slumps in demand, if any, from ordering patterns. 4. Differentiate product closer to the customer Organizations traditionally set their production goals on the basis of demand forecasts. They also kept a cushion of extra inventories of finished products to offset forecast errors. They assumed that the lead time to convert raw materials into finished goods was constant. They could also cut costs by reducing their set up time, and by using just-in-time techniques, and so on. Today, many manufacturers are recognizing the greater potential of using non-traditional strategies like mass customization. They are questioning the validity of assuming fixed lead-time for production. Manufacturers can gain competitive advantage if they reduce the lead-time along the supply chain and the conversion time (from raw material to finished product) and tailor their products to the requirements of specific customers. 5. Strategically manage the sources of supply Organizations can derive significant cost advantages if they maintain strong and long-term relationships with their suppliers, but they should not forget that their suppliers also play a significant role in reducing cost. On the basis of market positions and industry structure, manufacturers can decide how to approach suppliers invite competitive biddings, enter into long-term contracts, make strategic alliances, outsource, and so on. 6. Develop a technology strategy across the supply chain Information is very important to any organization. Organizations should maintain information technology system. With the help of IT systems, organizations can predict
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demand and satisfy the customers in time. Generally information systems are classified into three types: short term, mid-term and long term. These information systems create opportunities to change the supply chain, from slashing transaction costs through electronic handling of orders, invoices, and payments. Further they can also minimize inventories through vendor-managed inventory programs. 7. Adopt channel-spanning performance measures Instead of just having inward-looking performance measures, organizations should develop a comprehensive system to overhaul performance of the supply chain system. By establishing common measures, organizations can assure that all the supply chain entities are working towards common goals and objectives. As all the activities in the supply chain are interdependent and interrelated, nonperformance of one entity of the supply chain is reflected in the entire supply chain. 8.6 Forces Shaping Supply Chain Management Various business and economic forces influence the effectiveness of a supply chain. They include: Consumer demand Globalization Competition Information and communication Government regulation Environment
8.7 Supply Chain Strategies The four broad types of supply chain strategies that exist today are: Efficient supply chain This supply chain strategy is aimed at creating highest cost efficiency. Strategies like optimization techniques are used for production, non-value added activities and economies of scale are achieved for increasing supply chain surplus. Also, information linkages are established to ensure the most efficient, accurate, and cost-effective transmission of information across the supply chain to bring cost efficiency. Risk hedging supply chain this supply chain strategy is aimed at collecting and distributing resources in a supply chain so that the risks in supply disruption
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can be shared. A single entity in a supply chain can be easily exposed to supply disruptions, but if there is more than one supply source or if substitute supply resources are available, then the risk of disruption is reduced. A company may, for example, increase the safety stock of its key components to hedge against the risk of supply disruption, and by sharing the safety stock with other companies who also need this key component, so that the cost of maintaining this safety stock can be shared. This strategy is common in retailing, where different retail stores or dealerships share inventory. Information technology is important for the success of these strategies since real-time information on inventory and demand allows for the most cost-effective management and trans-shipment of goods between partners sharing the inventory.
Responsive supply chain This supply chain strategy is intended at being responsive and flexible to the altering and varied needs of the customers. Companies use build-to-order and mass customization processes as a means to meet the specific requirements of the customers.
Agile supply chains This supply chain strategy is intended at being responsive and flexible to buyer needs, while the risks of supply scarcity or disruptions are hedged by gathering inventory and other capacity resources. These supply chains basically have strategies in place that join the strengths of hedged and responsive supply chains. They are agile because they have the ability to be responsive to the changing, diverse, and unpredictable demands of the customers on the front-end, while minimizing the back-end risks of supply disruptions.
DID YOU KNOW? The most commonly used supply strategy is Hub and spoke t in which materials are brought to one central location and then sorted for delivery to respective destinations.
8.8 Supply Chain Management Framework The supply chain network is a well integrated system which helps an organization in performing basic operational functions. Its framework involves several components and enablers which define key functions, processes and best practices. The Supply Chain Management framework is mainly dependent on:
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Certificate in Manufacturing Concepts SCM components SCM enablers
SCM components and enablers helps in defining the overall supply chain performance. 8.8.1 Supply Chain Management Components SCM is mainly divided into seven components which represent business processes and practices. They incorporate all the activities that are necessary for maintaining and developing relationships with suppliers, keeping the organizations marketing and financial objectives in focus. The seven SCM components are:
SCM leadership SCM leadership component provides SCM system direction, and designs and assists in deployment and improvement of the SCM system.
SCM strategy A firms SCM strategy component focuses on how different entities of the supply chain perform as a group. The firms resources are allocated to different supply chain operations and these resources are aligned with the firms strategies.
Operational planning This component describes about the operational requirements for sustaining a supply chain. These requirements are specified in terms of tasks, resource requirements and measurements.
Business relationship management Organizations are dependent on the supply chain partners as much as these partners are dependent on them. Thus, it is important to have an environment conducive for communication and negotiation between the organization and its supply chain partners. The nature of the communication varies depending on the organizations relationship with its key suppliers. Organizations normally share operational, financial and marketing information with their supply chain partners. In this way, trust develops between them.
Order-to-delivery process The order-to-delivery process defines how effectively an organization can direct the flow of products from suppliers to the company. It includes certain processes such as order releases, receiving, inspection of incoming material, accounts payable, and materials handling.
Quality and performance management The quality and performance component is concerned with the initiatives that organizations and suppliers take towards improving, and maintaining the quality standards.
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Human resources management The human resources component deals with the training of personnel in order to improve their skills, knowledge and attitudes that help enhance the performance of supply chain. Employees should understand the diverse supply chain activities and should be able to perform the activities competently.
8.8.2 Supply Chain Management Enablers The supply chain management enablers are responsible for the overall performance of the SCM. These enablers are a group of well defined actions and techniques that encourages and supports firms commitment for high performance of SCM practices. The six SCM enablers are as follows: Alignment Alignment refers to the matching of corporate and business unit goals. It also includes consistency in processes, actions, and decisions across the business units to support the supply chain management processes. It is a key organizational behavior within the supply chain management system. As the organizations function, with the help of the coordinated efforts of different processes, it is of critical importance to have well-coordinated cross-functional and inter-company activities. This ensures that stakeholders and business processes work towards consciously determined and mutually recognized goals and objectives. Customer-supplier focus The basic objective of the customer-supplier focus is to prepare an organizations processes in such a way that they are able to understand and react quickly to customer requirements. For organizations like Boeing, which largely depends on the suppliers for their requirements, the health and well-being of the suppliers is critical to provide value to the customers. Design For products, processes, systems and services, design is the important thing that ensures their successfulness. Design is the comprehensive process that, after considering feedback from customers and suppliers, defines the overall requirements both external and internal to the organization. Designs help organizations develop products, services and business processes that satisfy the requirements of both customers and suppliers. Measurement Measurement refers to the quantification of information about inputs, outputs, and performance dimensions of products, process and services.
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Measurement is the tool used by organizations to evaluate the performance of different processes and supplier activities. Participation involvement Stakeholders must be involved in the decisionmaking process in order to ensure the success of products, processes, systems, and services. Utilization of available resources in terms of the talents and energies of employees and external stakeholders improve organizational efficiency and performance. Periodic review Evaluation of the performance of the processes, programs and systems, on a periodic basis, supports continuous improvement. 8.9 Electronic Supply Chain Management In an organization, the SCMs core focus is to integrate its suppliers, the manufacturing process and its customers. As with most other aspects of business, information technology has become a part of SCM. Internet has provided organizations the capability to integrate the entire supply chain, from raw material sourcing to delivery of the product to the customers. Electronic Supply Chain Management (ESCM) is business-to-business integration through the internet. DID YOU KNOW? Major SCM vendors today are SAP, Oracle, JDA and Manhattan Associates.
8.9.1 ESCM Advantages The advantages of ESCM include timely order-processing, improved inventory tracking and management, improved accuracy in order fulfillment, support for JIT manufacturing, and so on. Other advantages are:
Cost saving By integrating different supply chain levels, organizations can realize huge cost reductions. As the ESCM integrates supply chain partners with the help of the Internet, the cost and time involved in communicating with them is reduced significantly.
Reduction in inventory levels ESCM consequences in an extended organization that summarizes the activities of the suppliers. The extended organization structure provides instant information about the status of inventory levels to the suppliers. As a result, inventory levels are replenished as
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and when required. In todays business arena, suppliers are electronically connected and get real time information about the inventory level ll. Therefore, there is no need to carry high inventory.
Reduction in procurement costs An organization can reduce its procurement costs significantly by providing its suppliers instant access to information. With this the supplier can access the information regarding inventory and procurement automatically. The purchasing department can reduce its involvement in minor transactions and focus on higher value activities like vendor selection, sourcing, and managing relationships with vendors/suppliers.
Reduction in cycle time ESCM ensures that the organizations get timely and accurate forecasts with regard to product or service demand. This allows proper production planning based on actual requirements, resulting in reduced cycle time for production activities and reduction in stock-out costs.
8.9.2 ESCM Implementation In order to improve the implementation of ESCM, the following activities should be undertaken: Understand and evaluate the level of integration within the organization. Determine the number of suppliers who have direct influence over the products or services that are delivered to the customers, across the entire supply chain. Divide suppliers into different categories, namely, first tier, second tier, and so on. Define the customer base in term of sales, profitability, size, and so on. Improve the information infrastructure within the organization to accommodate ESCM requirements. Constitute a team with representation from various functions within the organization and with representatives from suppliers and customers to plan and carry out the implementation. Identify leaders who are capable of guiding the implementation process competently. 8.9.3 Issues Relating To ESCM The purpose of ESCM is to allow effective sharing of information like forecasts and orders among the supply chain partners. Utilization of data relating to customers and suppliers
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through internet technologies results in a virtual corporation that facilitates real time information flow between various supply chain partners. Although ESCM has many benefits, there are issues that must be addressed to improve its efficiency. These issues include: Security issues Security is the most sensitive issue when information is shared or exchanged over the Internet. An organization has to ensure that only the rightful recipient views the information. One way of doing this is to encrypt the data as this ensures that the data is secure and members of supply chain can view only that information which is relevant to them. Changes to existing business processes An electronic supply chain transforms a business process significantly. Changes arise in the way companies deal with each other. All channel partners should be willing to exchange information such as inventory levels, production schedules, forecasts, promotion plans, and so on. Sometimes, partners may be apprehensive of sharing too much information. In order to tide over such apprehensions, a culture of openness and trust should be developed between all the channel partners.
8.10 Broad Trends and Misconceptions of SCM When developing a demand chain, channel partners must be aware of broad demand trends in consumer markets, which are based on demographics, lifestyle and other social factors. For instance, due to the fall in the birth rate in industrialized nations, the size of the average family has shrunk, thus bringing down the number of new consumers. Further, due to increase in automation, the size of the workforce has also shrunk. As a result, organizations in industrialized countries are looking for new markets and segments. In new markets, organizations have to perform efficiently with few resources (time, money, human resources, and so on.). Therefore, supply chain partners need to change their operations and strategies. These changes influence the way in which consumers purchase goods. Failure to acknowledge these changes lead to two common misconceptions about the working of the demand chain. The first misconception is that customers will always buy from retailers. This may be true in most cases, but the trend is changing. Now consumers are actively looking for new sources to obtain products and services. In their endeavor to get value for money, they are prepared to buy products and services from any channel
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member who can provide them with quality products, timely delivery and a reasonable price. Therefore, through their buying habits, consumers are now determining which supply chain entity would succeed and which would fail. All members of the supply chain must work in unison to improve the profitability and performance of all members. Consumers investments in terms of time, attention, and money on a particular business indicate which business will succeed in the future. Channel partners should realize that if consumers select a particular retail outlet for fulfilling their needs and wants, they are affecting the whole supply chain. The second misconception about demand chains is that business-to-business companies need to monitor only their customers. In other words, since they are not dealing directly with end-users, they do not need to be concerned about them. In industrial or business-tobusiness organizations, solving your customers problems sometimes means solving your customers customers problems. All customer/industrial demand for products or services across the supply chain is derived from end-user demand. Business-to-business customers will not order more parts if consumers are not buying their end products.
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Summary The supply chain is a network, covering the various stages in the provision of products or services to customers. It includes not only manufacturers and suppliers, but also transporters, warehouses, distributors, retailers, and so on. The supply chain is a network of suppliers, factories, warehouses, distribution centers, and retailers through which raw materials are purchased, transformed, and delivered to customers. The three supply-chain management functions are strategic, tactical, and operational. Strategic Level: It deals with the selection of suppliers, transportation routes, manufacturing facilities, production levels, and warehouses in the supply chain network. Tactical Level: In the supply chain, tactical level plans and programs are scheduled to meet actual demand. Operational Level: The operational level executes the plans of the strategic and tactical levels. The major goal of supply chain strategy is to have balance between responsiveness and cost efficiency that meets with the competitive strategy. So to improve the performance of the supply chain in terms of cost efficiency and responsiveness, organizations must give attention to logistical and cross functional drivers of supply chain performance. They are six key drivers which measures the supply chain performance are facilities, inventory,
transportation, information, sourcing and pricing. The principles on which an organizations supply chain is based are: segment customers based on service needs customize the logistics network a) plan based on market demand b) enhance ability to meet customer requirements c) improve relationships with the suppliers d) devise a complete supply chain performance measure Various business and economic forces influence the effectiveness of a supply chain. They include consumer demand, globalization, competition, information and communication, government regulation, and environment. The four broad types of supply chain strategies that exist today are: efficient supply chains, risk-hedging supply chains, responsive supply chains and agile supply chains.
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The SCM components represent business processes and practices. They incorporate all the activities that are necessary for maintaining and developing relationships with suppliers, keeping the organizations marketing and financial objectives in focus. The seven SCM components are SCM leadership, SCM strategy, operational planning, business relationship management, order-todelivery process, quality and performance management, and human resources management.
Enablers are responsible for the overall performance of the SCM. The SCM enablers are a group of carefully conceived and defined behaviors and approaches that allow, encourage and reinforce a firms commitment to high performance SCM practices. The six SCM enablers are alignment, customersupplier focus, design, measurement, participation/involvement, and periodic review.
Electronic Supply Chain Management (ESCM) is business-to-business integration through the Internet.
The advantages of ESCM are many, and include timely order-processing, improved inventory tracking and management, improved accuracy in order fulfillment, support for JIT manufacturing, etc.
Although ESCM has many benefits, issues related to security and changes to existing business processes must be addressed to improve the efficiency of ESCM.
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Chapter-9 Logistics Management Version4.0

For Associates
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Chapter-9 Logistics Management

Introduction Logistics management is of pivotal importance in business today. It plays a key role in planning, implementing and controlling the effective flow, storage of goods and related information from point of origin (Seller) to destination (Buyer) requirements. Logistics management deals with different functions such as warehousing, transportation that are linked together in-order to gain profit in business. Learning objectives After completing this chapter, you will be able to understand: The purpose of Logistics management The various warehouse functions The warehouse technologies The concept of inventory The methodology to control inventory Different modes of transportation
Topics covered 9.1 Logistics ..................................................................................................................... 4 9.2 The Logistic Goals...................................................................................................... 4 9.3 Logistics Framework ................................................................................................. 4 9.4 Warehouse ................................................................................................................. 5 9.4.1 Needs of Warehouses ........................................................................................... 6 9.4.2 Warehouse Functions ........................................................................................... 7 9.4.3 Factors Impacting Site Selection of a Warehouse ................................................. 9 9.4.4 Warehouse Operations......................................................................................... 9 9.4.5 Warehouse Technology Enablement .................................................................. 10 9.4.5 Advantages of Warehouse:................................................................................. 12 9.5 Inventory.................................................................................................................. 12 9.5.1 Inventory Management ...................................................................................... 12 9.5.2 Inventory Management Objectives .................................................................... 13 9.5.3 Inventory System................................................................................................ 14 9.5.4 Controlling Inventory.......................................................................................... 14 9.6 Transportation......................................................................................................... 16 9.7 Reverse Logistics ......................................................................................................17 Summary ....................................................................................................................... 18
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9.1 Logistics - Definition Council of Logistics Management (1991) defined Logistics as: part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers requirements. The process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimizing the goods- or service-producing network to fulfill customer requests; and utilizing the network to fulfill customer requests in a timely way (Tilanus, 1997).
Source: http://www.siam.org/journals/plagiary/1657.pdf
9.2 Logistic Goals The goals of logistics are as follows: To complete the activities of logistics in an economical manner To place and receive orders easily, accurately and satisfactorily To minimize the time between placing orders and receiving merchandise To coordinate shipments from various suppliers To hold enough merchandise to satisfy the customer demand and to avoid stockout situations To arrange merchandise on the sales floor efficiently To process customer orders efficiently To communicate and collaborate with other supply chain members To handle returns effectively and minimize damaged products To monitor logistics performance To arrange for backup plans in case of breakdown in the system
9.3 Logistics Framework Logistics is the process of planning, implementing and controlling the flow and storage of goods and related information from point of origin (Seller) to destination (Buyer) to conform to customer requirements. Logistics is the business planning framework for management of material, service, information and capital flow. The framework includes inbound, outbound, external and
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internal movement and return of materials. Logistics is a tool to bridge the gap between supply and demand where the origin and destination may be separated by long distance and deliver the right goods at right time, right place and in a manner the consumer/buyer wants it.
Figure No: 9.1 Logistics Framework The term Logistics Management encompasses the total flow of materials starting from raw materials procurement to the delivery of finished products to consumer. The efficiency of Logistics depends on the following three concepts: Warehouse Management Inventory Management Transportation
9.4 Warehouse Management A warehouse is required to: stock products, ensure inventory availability enable consolidated bulk buying make distribution efficient and cost effective
Earlier, warehouse was just a storage location to stock and distribute products. Its functions were limited to being a buffer between the production and actual demand; which ultimately led to a lot of inventory stocking at the warehouse, making it a huge cost centre. As the methods of transportation began to evolve, organizations started viewing warehousing as a means of optimizing their businesses. Today the speed of reaching a customer has become
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a competitive advantage and hence, the functions of distribution and storage are being used to improve customer service.
Figure No: 9.2 Warehouse Blueprint 9.4.1 Need for Warehouses Warehouses are used for storing of goods until a customer places an order. The need for a warehouse arises because, production and consumption of products do not happen simultaneously. Warehousing is essential for the following reasons: Seasonal Demand
Some products have demand only in some seasons, for example: air conditioners in summer, woolen wear in winter or raincoats in the rainy season. To meet the seasonal demand of the product, an organization has to produce goods throughout the year and these goods are stored in warehouses. Price Stabilization
Scarcity of raw materials or components may create price variations in the market. In order to maintain price stability, organizations store sufficient quantities of goods and raw materials in warehouses.
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Large-scale Production
Manufacturers produce products in large scale to be cost-effective, these products are stored in a warehouse. Quick Supply
Any product that is produced should be stocked in a warehouse, which is near to the place of consumption, so that it is easy to the supply to consumers at the time of their need. Continuous Production
To enable continuous production, raw materials are procured beforehand and are stored in a warehouse. 9.4.2 Warehouse Functions The various functions involved in warehousing are as follows: Managing the in-flow of Goods
The activities involved are checking, recording of receipts, allotting storage space and depending on the type of the goods, performing quality control checks, unpacking and repacking. Reserve Storage
Reserve storage is back-up storage in a warehouse, which occupies large space in most of the warehouses. When goods are delivered, they are moved into reserve storage and the location of the storage place is entered into warehouse information system. Replenishment
The process of movement of goods from reserve storage to order picking location in a warehouse for achieving high levels of order fill and avoid stock outs in warehouse is replenishment of a warehouse. Order Picking
When customers place orders, the goods are selected from the order picking stock according to their required quantities and time. Order picking is a time consuming process as it involves splitting of large quantity into custom sizes to meet customers order requirements. For effective customer service, it is important to design and establish a mechanism of picking systems. In addition to this, a systematic operation of work force has a major role in achieving higher warehouse performance in a cost effective way.
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Figure No: 9.3 Warehouse Layouts Secondary Sortation
When there are many small orders under a good or pallet category, the small orders are considered to be one order and are divided into individual orders before dispatch. This secondary sorting is done to achieve better lead time. Sortation
Information Technology (IT) has a prominent role in warehousing. It helps in keeping record of information such as stored goods, ordered goods and goods yet to be received. Recent developments in IT help in sorting the goods according to specific customers orders, immediately on arrival. To meet the customers order in time, sometimes by using highspeed sortation conveyors, goods directly go to order collation. For example, this type of approach is used for grocery produce by major supermarkets. Collate
After completing the picking process, goods are brought together and are combined as Completed Order (ready for dispatch to customers). Collate activities include packing the goods into dispatch outer case/cartons, and labeling them. Dispatch
After completing the collate process, goods are loaded into outbound vehicles for onward dispatch to the distribution centre. Finally, these are transported to customer.
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9.4.3 Factors Impacting Site Selection of a Warehouse The following factors are considered while selecting a site for a warehouse: 1 Dependency on imports: If the imports constitute a major chunk of the items stocked in the warehouse and are likely to grow in near future, it is better to have a warehouse near a port along the coastline, depending upon the origin of goods and preferred route of shipping goods for majority of importers. Infrastructure availability in terms of highways and rail. Available labor pool in the area. Investments made by port authorities to improve the port infrastructure (available terminals, berths and so on) to cater to future demand. Expenses associated with transportation costs for transporting goods between ports, terminals, DCs and so on. Note: A Distribution Center (DC) is a warehouse where the products from various supply points are received and (value added) processes like consolidation, break pack and repalletization and cross-docking are carried out to reduce the distribution costs and increase supply chain efficiency. In simple terms, its main function is distribution rather than storage. Political environment in the area.
Models such as Factor Rating model, Load-distance model, Transportation model and so on are available to carry out location analysis. 9.4.4 Warehouse Operations The presence of a warehouse in supply chain depends on forecasting at the store/ DC level, purchase order placement and generation of replenishment plan. The warehouse personnel thereafter plan scheduling and once the goods are received, the unloading and unpacking operations are triggered. These goods are then put away in stocking area. Goods received can be classified into two types; those which are to be stored and those which are to be cross-docked immediately. The goods to be stored are then sent to the storage area where they are stored depending on factors such as shelf life, dimensions and so on. Order picking is the method of recovering items from storage locations as a reply to the customer order. It forms a part of outbound operations of the warehouse and involves a lot of manual labor and hence is considered an important activity. Warehouses use different types of order
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picking systems based on their requirements. There could also be goods which are cross docked and kept in storing area before being shipped.
Figure No: 9.4 Warehouse Operations The supply chain has altered into a network connecting various channels due to factors such as customer awareness, mounting demands, shorter product life cycles and increased quality requirements. This has lead to the retailer moving from bulk ordering to small orderings and as a result the emphasis on DC has increased. 9.4.5 Warehouse Technology Enablement Today, technology is not only being used to eliminate the paper work wherever possible, but is also being used to improve the information and goods flow. This in turn helps in improving service level, productivity, flexibility and accuracy. This section discusses the effect of technology enablement on warehouses. 9.4.5.1 Warehouse Management System Initially, Material Requirements Planning (MRP) was used for controlling and planning the raw material. Later, MRP was replaced with Manufacturing Resource Planning (MRP-II) incorporating all the crucial aspects. MRP II systems added new functions such as
scheduling and capacity planning. Soon after, MRP-II was replaced with Enterprise Resource Planning (ERP), which comprised all the basics of MRP-II and added new functionalities such as full-fledged financials, customer and vendor management. Today, ERP is spread in all the functions of management. Earlier, a system was used to supervise warehouse operations and functions such as storage and movement of materials. Later, this
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role was performed by Warehouse Management System (WMS) in all light manufacturing, transportation management, order management, and complete accounting systems. Various components of WMS cater to all the activities within a warehouse, from appointment to scheduling, receiving, put-away and slotting, to picking, Value Added Services (VAS), packing and labeling and so on. The WMS is flexible to handle full case, split case or any other kind of shipment. 9.4.5.2 Radio Frequency Identification Device Radio Frequency Identification Device (RFID) uses radio signals to transmit data between a tag or transponder and a device (which is commonly called either reader or writer). RFID tags are of two types: Active tags Passive tags
Active Tags: These tags consist of chips, antennas and battery with some protective shields, attached to the item that is to be identified. It can transmit data and also receive data with help of battery; hence, they are called active tags. It is used for Real-Time Location Systems (RTLS). RTLS are a type of local positioning system that allows tracking and identifying the location of objects in real time. Passive Tags: A passive tag consists of an encoded label within the label material, with printed text and bar code to support legacy operations. It is smaller in size and is less expensive than active tags. These tags are preferred for most supply chain applications. RFID tags are used in warehouses and distribution centers depending on the importance of items and operations. For example, Smart labels or passive tags are attached to cases and pallets of items, which convey information about the items in the warehouse. However, items such as industrial solvents and other expensive machinery use active tags (with chips and antenna) to provide information of permanent asset and location identification. 9.4.5.3 Barcode or Universal Product Codes Barcode is a machine readable code. This code consists of information about the item to which it is attached. They are represented by numbers, alphabet and linear parallel lines. They are scanned by special optical scanners called barcode readers and with the help of interpretive software, desktop and smart phones. Since barcodes are universally same for a
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product, these are called Universal Product Codes. These barcodes were initially used to label railroad cars but today, they are used for retail outlets. Retailers use barcodes not only for product identification and cost management, but also for inventory control in warehouses. Hence, barcode came into use in warehouses. It is easy to control the inflow and outflow of goods in warehouses and to identify types of goods present through barcodes. 9.4.6 Advantages of Warehouse Warehousing offers the following advantages: Protection and Preservation of goods Regular flow of goods Continuity in production Convenient location Easy handling Facilitates sale of goods Availability of finance Reduces risk of loss
9.5 Inventory Management Inventory is the stock of any item or physical resource (raw materials, finished products, component parts, supplies, and work-in-process) with the intent of selling it or transforming it into a finished product. The purpose of inventory is to meet customer demand by avoiding stock-out of materials which may cause stoppage of production. The real challenge is to get right goods, at right time, at right quantity and right place. 9.5.1 Inventory Management Inventory Management is a group of concepts, policies, practices and procedures for determining what items to order, how much to order, when the items are needed, when to order them and how to store them. The activities of Inventory Management are directed at getting right product in the right quantity and the right condition, at the right place, at the right time, for the right customer at the right cost. Inventories may consist of finished goods ready for sale, parts or intermediate items, work-in-process or raw materials. The Inventory system updates the database and captures the transactions whenever it happens, for
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reporting and audit purposes. Daily, weekly and monthly reports are generated based on the transaction activity.
Figure No: 9.5 Inventory Management 9.5.2 Inventory Management Objectives
Maximizing Customer Service By increasing the percentage of orders shipped on schedule By increasing the percentage of line items shipped on schedule By reducing the idle time due to material and component shortages
Increasing Production Efficiency Maintaining buffer stock for smooth production flow Maintain a level work force for smooth production flow Allow longer production runs and quantity discounts
Minimize Inventory Related Investments Marinating good inventory turnover Weeks (or days) of supply
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9.5.3 Inventory System Inventory System is the set of policies and controls that monitor the levels of inventory and determine what levels should be maintained, when the stock should be replenished, and how large the orders should be. Inventory system is used to: provide inventory reports to support shop floor, financial and managerial needs provide material tracking capabilities process engine assembly build-up and charge-off activity process components and sub-assembly build up develop interfaces with other systems to provide synchronization of files
9.5.4 Controlling Inventory Controlling inventory is the primary objective of todays competitive retailing because inventory involves the majority of the finances of the organization. With proper planning and forecasting, inventory can be controlled to increase the profit of the organization. The following five step process has been designed to help businesses use the resources optimally: 1. Plan Inventory
Inventory includes raw materials, goods in transit or goods stored in the plant that are to be sold. The best way to plan inventory is to find out the Economic Order Quantity and Reorder Point for a product so that the next lot arrives only after the last item has been used or sold. Economic Order Quantity helps in availing discounts from the manufacturer, and to reduce the amount of time goods spend in shipment. 2. Establish Order Cycles
Demand can be predicted when the ordering of quantities can be accurately forecasted by deciding on regular ordering levels to avoid stock-outs and to minimize total costs. By applying the principle of Economic Order Quantity, aggregate shipping costs, cost of preparing an order and so on can be reduced. A customized system should be designed for different businesses to include items critical to the organization. On the other hand, if the business has seasonal demand, it is critical to identify these cycles to avoid running out of products in the middle of a busy season. Such situations might result
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in extreme costs for both the supplier and the customers. Hence suppliers offer attractive deals to induce forward buying. This leads to a shift of carrying costs and leads to substantial savings for the supplier. Therefore, it is important that establishing these order cycles have seasonable implications that must be built into the planning process in order to support an effective inventory management system. 3. Balance Inventory Levels
Balancing the inventory levels is one of the major factors which determine a healthy profit and efficient management of a business. The inventory should be maintained such that products are available to customers when needed to stop customers from switching to competitors. The ideal quantity of inventory meets the demand requirements which results in profitable sales and justifies the investment. 4. Review Stocks
Shelf space is very valuable and hence obsolete inventory or inventory which is not in demand should be avoided. This can be done by mark down of the merchandise. Even though the margins are reduced, selling these goods will save shelf space by avoiding storing of obsolete inventory. Usually, a novel product is marked up to generate more profits. However, as the product turns into a common product, the sellers mark down their merchandise drastically to avoid losses. In order to avoid inventory piling up, the retailer must pay constant attention to the market trends. Inventory levels of seasonal goods or fad merchandise must be maintained in a planned manner such that excess is not left stuck with the retailer. Obsolete merchandise should in general be removed from inventory at any cost. It is the stock turnover that gives profit to a business as it is an estimate of the sales on regular basis. Inventory turnover ratio or stock turnover ratio is the rate at which the inventory is replaced or turned over, throughout a pre-defined standard operating period. Turnover ratios act as an effective benchmark to compare with the business in question. If the inventory turnover is too irregular, it indicates that the stock needs to be changed as it is not catching the attention of the target customers whereas too frequent inventory turns indicate overwork with a limited capital. Stock turns or inventory turnover can be calculated using the following equation: Stock Turn = (Cost of Goods Sold /Average Inventory at Cost)
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5.
Follow-up and Control
Inventory reviews must be done on a regular basis to detect the obsolete and slow moving stock and to keep up with the latest market trends. Stock should be properly measured and maintained to prevent stock outs and to avoid stock piling. Carefully planned inventory will serve the dual purpose of higher inventory turnover and lower investment, thus adding to the organizations profits. 9.6 Transportation Management Transportation is one of the important sub functions of logistics. It is the backbone of the entire supply chain that ensures the right product in the right quantity and the right condition; reaches the right customer at the right place, at the right time, and at a right cost. A well operated transportation system will provide benefits such as increased logistics efficiency, reduced operation cost and improved service quality. There are different modes of transportation such as road, rail, water and air. Road: The road transportation is mostly done by trucks. Trucking is little expensive than rail but it offers door to door delivery service with shorter delivery time. Trucking industry is mainly divided into two types: Truck Load (TL) and Less than a Truck Load (LTL). The truck load is appropriate for large shipment (full truck) with low cost. Whereas less than a truck load is appropriate for small lots, which are too big to parcel. Sometimes it may end up with equal cost of TL. Rail: This mode of transportation is ideal for heavy shipment, high-density products. Transportation time by rail is long but cost effective for goods like coal. This mode should further be supported by other transport modes to get the goods to destination. Water: Water transportation is appropriate for carrying very large loads at low cost. However it is the slowest of all the modes and needs further support from other transport modes to get the goods to destination. Air: This transportation mode offers a fast delivery of goods but is expensive. This type of transportation is best suited for small goods with high-value and emergency shipments which have to travel a long distance.
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9.7 Reverse Logistics Reverse Logistics can be defined as the process of planning, implementing and controlling the efficient and cost effective flow of raw materials, in process inventory, finished goods, packaging and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. Categories of Reverse Logistics Reverse Logistics can be classified into the following two categories: Activities involved in bringing back Returnable Packaging material Activities involved when there is wastage and returns
There could be returns from the store to the warehouse for reasons such as excess stock and damages. In each of these cases, the items need to be segregated and stored in a separate area before they can be sent back to the warehouse. Depending on the Reverse Logistics Strategy of the retailer, all the returned material could either be moved to a separate Return DC or to the same DC from which the store was supplied.
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Summary Logistics is part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers requirements. The process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimizing the goods- or service-producing network to fulfill customer requests; and utilizing the network to fulfill customer requests in a timely way Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of goods and related information from point of origin (Seller) to destination (Buyer) to conform to customer requirements. Warehouse is a storage location to stock and distribute products. Traditionally, its function was limited to just being a buffer between the production and actual demand. The need for a warehouse arises because, production and consumption of products do not happen simultaneously. The various factors that make warehousing a vital activity are: Seasonal Production, Seasonal Demand, Price Stabilization, Large-scale Production, Quick Supply and Continuous Production. The functions of warehouses include managing inflow goods, reserve storage, replenishment, order picking, secondary sortation, sortation, collate and dispatch. The role of a warehouse in supply chain starts with forecasting at the store/ DC level, purchase order placement and generation of replenishment plan. The warehouse thereafter plans scheduling and once the goods are received, the unloading and unpacking operations are triggered. Various components of a WMS should cater to all the activities within a warehouse, right from appointment scheduling, receiving, put-away and slotting, to picking, VASs, packing and labeling and so on. The WMS should be flexible to handle full case, split case or any other kind of shipment. Radio Frequency Identification Device (RFID) uses radio signals to transmit data between a tag or transponder and a device (which commonly called either reader or writer). Generally RFIDS are two types: Active tags and Passive tags.
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A barcode is a machine readable code. This code consists of information about the item to which it is attached to. They are represented by numbers, alphabet and linear parallel lines.
Inventory is stock of any item or physical resource (Raw Materials, Finished Products, Component parts, Supplies, and Work-in-process) with intent of selling it or transforming it into a finished product.
Inventory management is group of concepts, policies, practices and procedures for determining what items to order, how much to order, when the items are needed, when to order them and how to store them.
The set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.
With proper planning and forecasting, inventory can be controlled to increase the organizations profit. The steps to control inventory are Plan Inventory, Establish Order Cycles, Balance Inventory Levels, Review Stocks and Follow-up and Control.
Transportation is the backbone of the entire supply chain that ensures the delivery of the right product in the right quantity and the right condition, at the right place, at the right time, for the right customer at the right cost. The different modes of transportation are road, rail, water and air.
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Chapter-10 Aggregate sales and Operational planning Version4.0

For Associates
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Chapter-10 Aggregate Sales and Operational Planning

Introduction Demand and supply out of balance, dissatisfied customers, late shipments, finger pointing cash flow problems, demand and supply out of balance, missing the business plan, high inventories, etc has been the norms in many companies for years. To avoid these problems, many companies are using a business process called sales and operations planning(S&OP). The objective is to minimize the cost of resources required to meet the demand over that period. Learning objectives After completing this chapter, you will understand: Sales and operations planning and its activities Aggregate Operations Plan Production Planning Strategies Implementing Aggregate Plans and Master Schedules Yield Management and Forecasting
Topics Covered 9.1 What Is Sales and Operations Planning............................................................. 4 9.2 Overview of Sales and Operations Planning Activities ........................................ 4 9.3 The Aggregate Operations Plan ....................................................................... 6 9.4 Production Planning Strategies ....................................................................... 7 9.5 Level Scheduling ............................................................................................8 9.6 Relevant Costs ............................................................................................... 9 9.7 Implementing Aggregate Plans and Master Schedules ..................................... 10 9.8 Yield Management ....................................................................................... 11 9.9 Forecasting .................................................................................................. 13 Summary .......................................................................................................... 16
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9.1 What is Sales and Operations Planning Sales and operation planning is a process of building on collaboration among sales, operations, finance, and product development departments. The process is designed to get balance between supply and demand and also to maintain them in balance over the time. This balance is important for running a business well. The goals of sales and operations planning is to provide a better customer service, lower inventory, shorten customer lead times, and stabilize production rate. This process consists of a series of meetings with various departments to make intermediate-term decisions. The idea behind these meetings is not only to achieve optimal balance between supply and demand but also to bring operational plan in line with the business plan. Organizations need to get this balance not only at aggregate level but also at detailed individual product level. For calculating the demand for a product, it is important to monitor the sales of the product from 3 to 18 months. By aggregating at the level of major groups of products, organization can find out the demand and ensures, to maintain enough capacity in-order to supply. If the organization is planning for long terms, it is difficult to find out the demand of the product because of uncertainties. But organization should be able to know how to sell a larger group of similar products (aggregate refers to this group of products) in the long term. 9.2 Overview of Sales and Operations Planning Activities The term sales and operations planning have been created by organizations to refer to the process that keeps demand and supply in balance. In manufacturing management this process is usually called as Aggregate Planning. This entails general management, sales, operations, finance, and product development. Aggregation should be done on both supply and demand sides. On the supply side it is done by product families and on the demand side it is done by groups of customers. The individual product, production schemes and matching customer orders can be handled more readily as a result of the sales and operations planning process. Figure 10.1 explains about sales and operations planning, which relates to other major operations planning activities.
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Process planning Long range
Strategic capacity planning
Forecasting and demand management
Sales and operations (aggregate) planning Sales plan Aggregate operations plan
Medium range Master scheduling
Material requirements planning Weekly workforce and customer scheduling
Order scheduling Short range
Daily workforce and customer scheduling
Fig 10.1 Overview of major operations planning activities
In the figure, the time dimension is shown as long, intermediate, and short range. Long Range Planning: This is usually done annually, focusing on duration of greater than one year. Intermediate Range Planning: This is calculated on the periodic basis generally from 3 to 18 months, with time increments that are weekly, monthly, or sometimes quarterly.
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Short Range Planning: This is calculated on the periodic basis generally from one day or less than six months, with the time increment daily or weekly. The aggregate production plan should be updated at least every quarter (13 weeks). Many companies now update them every four weeks. In manufacturing, the planning process can be summarized as follows: The Master production schedule (MPS) will take production control groups forecast orders as input and generate output as specific items required for each order, order quantity and time. Basing on MPS output, Rough-cut capacity planning will start verifying production, warehouse, facilities, and equipment and also check whether the vendors have allocated sufficient capacity to provide material on time. By considering end product requirement from the MPS, Material Requirement Planning (MRP) splits them into component parts and sub-assemblies to create materials plan. This material plan specifies, when to place production order and purchase order for each part which is required for sub-assembly to complete the production order on the schedule time. Most MRP systems also allocate production capacity to each other. This is called Capacity Requirements Planning (CRP). The final planning activity is daily or weekly order scheduling of jobs to specific machines, production lines, or work centers. 9.3 The Aggregate Operations Plan The purpose of aggregate operations plan is to find out the production rate, by finding the mean of product group or other broad categories. The aggregate plan is generally calculated for an intermediate term of 3 to 18 months and provides optimal combinations of production rate, workforce level, and inventory on hand. Production rate: This is calculated on the basis of number of units completed per unit of time (such as per hour or per day). Workforce level: This is calculated on the basis of number of workers needed for production (production = production rate * workforce level). Inventory on hand: This is calculated on the basis of unused inventory carried over from the previous period. The aggregate plans differ from company to company. Large companies, formulate their plan based on company's objectives and goals and marketing strategies. Whereas smaller companies, decide by making simple calculation of the workforce needs.
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9.4 Production Planning Strategies The production planning strategies are tradeoffs between workforce size, work hours, inventory and back logs. These strategies are chosen based on the firms requirement and order time. The three production planning strategies are: Chase strategy This strategy mainly depends on production rate and order rate. When the order rate is high the organization will hire more people to fulfill the order. Whereas, if the order rate is low they may lay-off the employees. This strategy will be successful only if they have a pool of trained employees to hire from to fulfill an order. This strategy also makes the employees to slow down the work, out of the fear of being laid off as soon as existing order completes. Stable workforce-variable work hours In this strategy, order rate is managed by changing the number of working hours and reducing the down time of the machine through flexible work schedules or overtime. This strategy also avoids hiring and firing of employees and provides work force continuity. Level strategy In this strategy, organization maintains constant output rate so that they can maintain stable work force and also constant working hours. This strategy manages the shortages and surpluses of production by fluctuating inventory levels, order backlogs, and lost sales. By avoiding overtime there is an advantage, the quality of the product increases. The disadvantage of this strategy is the possibility of the products becoming obsolete and increase in the inventory cost. Basing upon the usage, these three strategies are divided into two types; Pure Strategy: When just one of these strategies is used to absorb demand fluctuations then its named as pure strategy. Mixed Strategy: When two or more of these strategies are used to absorb demand fluctuations. Then it is called as mixed strategy, this strategy is most widely applied in industry. Subcontracting Subcontracting is also a widely used strategy of production planning. In subcontracting some portion of the production is outsourced when the demand is more. This is similar to chase strategy, but hiring and firing is transferred to the outsourced party. This is a high-risk
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strategy, if the relationship with the outsourced party is not strong, manufacturer can lose control over schedule and quality. This is major disadvantage which should be considered before subcontracting the production and this is high-risk strategy. DID YOU KNOW? Outsourcing became an integral part of business during the 1980s.
9.5 Level Scheduling Level scheduling is a combination of production planning strategies. It holds constant production for a period of the time. For every period, it maintains constant workforce, low inventory and it also depends on the demand of the products. Advantages of Level Scheduling: The entire system can be planned to minimize inventory and work-in-process. The system is planned to get minimum work-in-process and inventory. The low amount of work-in-process keeps up-to date product modifications. The production system has easy process flow. Production line receives the items or materials directly from the vendors.
Due to these advantages level scheduling is often know as backbone for JIT productions. Example: Toyota Motor Corporation develops a yearly production plan that consists of total number of cars to be made and sold. To produce this total number with a level schedule, system requirements are important which are generated by aggregate production plan. Production smoothing is the one of the secret of success for the Japanese level scheduling. This plan is converted into monthly and daily, which helps to schedule the sequence of products through the production system. The essentially procedure is: Two months in advance, the car types and quantities needed are established. This is converted to a detailed plan one month ahead. These quantities are given to subcontractors and vendors so that they can plan on meeting Toyotas needs. The monthly needs of various car types are then translated into daily schedules. To use level scheduling technique: Production system should be repetitive. The system must contain excess capacity.
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Output of the system must be fixed for a period of time (preferably a month). They should maintain a good relationship among purchasing, marketing, and production.
The cost of carrying inventory must be high. Equipment costs must be low. The workforce must be multi skilled.
9.6 Relevant Costs Relevant costs are related to the production cost itself as well as the cost to hold inventory and to have unfulfilled orders. For aggregate production plan, there are four relevant costs: Basic production costs-: The cost incurred while producing a given type of product in a given time period. These costs include fixed, variable, direct and indirect labor costs and also regular as well as overtime compensation. Costs associated with changes in the production rate These costs are incurred in hiring, training, and laying-off personnel. Inventory holding costs This cost incurred in storing, insurance, taxes, spoilage, and obsolescence of inventory which means capital is tied up in inventory. Backordering costs These costs are usually very hard to measure like cost of expediting, loss of customer goodwill, and loss of sales revenue. Budgets Operational managers have to submit annual budget reports, even sometimes quarterly budget reports for receiving funding from the finance department. For preparing these budget plans, aggregate plans help out in minimizing the total production-related costs over the planning horizon by determining the optimum contribution of workforce levels and inventory levels. Operational managers use aggregate plan as a key to successfully complete the budgeting process. Thus, the aggregate plan provides the control for the requested budget amount. Accurate medium range planning increases the likelihood of: (a) Receiving the requested budget (b) Operating within the limits of the budget.
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9.7 Implementing Aggregate Plans and Master Schedules The process and technique for implementing an aggregate plan depends on the conditions prevalent. Due to this reason, the implementation procedure can be segregated into two ways. These are: Unplanned events Behavioral considerations
9.7.1 Unplanned Events Aggregate plans are continuously updated to accommodate the effects of unplanned events. Forecasted demand and actual demand for a product may differ significantly due to unexpected events. Not achieving planned outputs for the month or the workforce not being able to produce at its average capacity are unexpected events that may also disrupt the plans. These unexpected events must be taken into account while developing aggregate plan. But in this case, the difference will be that the actual demand is taken as input rather than the forecasted demand. As the aggregate plans are updated, the master production schedule is also altered to incorporate these changes. But, sometimes the aggregate plan remains fixed, while the master production schedule undergoes changes because of changes in demand for individual products, the production process, and performance rates. The MPS transactions, records and reports are updated and reviewed continuously to accommodate these changes. This process of reviewing and updating, called rolling through time, shows the dynamic nature of planning and scheduling activities in operations management. 9.7.2 Behavioral Considerations Behavioral considerations are important in planning and implementing the aggregate plans. Deciding the time horizon is the biggest issue in aggregate planning, as the complexities in planning are dependent on the time horizon. If the plan is short-term and based on judgment and experience, it might turn out to be costly. But long-term planning is a difficult task. Therefore, the optimal time period for aggregate planning should be selected. When an aggregate plan is implemented, it has an impact on almost all the functions and departments of an organization. For example, the purchasing department has to make arrangements to procure materials and hire subcontractors. The implementation of the
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aggregate plan initiates actions in various functions. It also affects organizational environment. If the plan specifies reduced output, people may have to be removed from their jobs. This may affect the level of motivation and job satisfaction of the workforce. 9.8 Yield Management Yield management can be defined as the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield.
Source: Operation management for competitive advantage by chase
It is a powerful approach to predict the demand, which is important for preparing aggregate planning. Example: Airlines, rental car agencies, cruise lines and hotels are the best examples of yield management usage. From an operational perspective, yield management is more effective when Demand can be segmented by customer Fixed costs are high and variable costs are low Inventory is perishable Product can be sold in advance Demand is highly variable
Examples: applying yield management to:
Barber shop The first step is to determine the peak and off-peak times. A barber shop, can offer lower prices during off-peak times such as days of the week, or times of the day when demand is low. The second step is to offer a discount on an appointment for people who walk-in, during off-peak time. Thus, transferring demand to an off-peak time from peak time. Soft drink vending machine It is assumed that the lack of capacity would not be a problem for a vending machine, so reallocating peak demand should not be an issue. However, trying to increase consumption during non-peak times is difficult because most vending machine can charge only one price. But new technology can allow the prices to be changed based on time of day, or even the day of the week. Therefore, during off-peak times, a lower price could be charged to stimulate sales.
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DID YOU KNOW? The first widespread scientific application of yield management began when American Airlines computerized reservation system (SABRE), was introduced in the mid 1980s.
9.8.1 Operating Yield Management Systems 1. The following concerns can come up in managing yield: Ensure that pricing structures appear logical to the customer and the different prices are justified. Such justifications, commonly called rate fences, may have either a physical basis (such as a room with a view) or a nonphysical basis (like unrestricted access to the internet). Pricing should also relate to addressing specific capacity problems. If capacity is sufficient for peak demand, price reductions stimulating off-peak demand should be the focus. If capacity is insufficient, offering deals to customers who arrive during non-peak periods (or creating alternative service locations) may enhance revenue generation. 2. Handle variability in arrival or starting times, duration, and time between customers effectively. This entails employing accurate forecasting methods (the greater the accuracy in forecasting demand, the more likely yield management will succeed); coordinated policies on overbooking, deposits, and no-show cancellation penalties; and well-designed service processes that are reliable and consistent. 3. Manage the service process properly. Some strategies include scheduling additional personnel to meet peak demand, increasing customer co-production(here customers is also part production like in designing and so on), creating adjustable capacity, utilizing idle capacity for complementary services, and cross-training employees to create reserves for peak periods. 4. The fourth issue is the critical and important issue related to training workers and managers to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer. Companies have to develop creative ways for peace-making the overbooked customers. Example: Any airlines company gives overbooked passengers free tickets for other flights. A golf course company once offered $ 100 putters to players who had been overbooked at a particular tee time.
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9.9 Forecasting Forecasting seeks to predict what is most likely to happen in future. By predicting the most probable future value of a variable, managers take effective decisions and carry out planning activities. Organizations need to forecast the demand for their products and services so that all relevant plans can be developed accordingly. Demand is the quantity of a product or a service that buyers are able and willing to purchase during a particular time period, in a specific market environment. The market environment is influenced by following conditions: Price of a product Price of its substitute Complementary products The incomes of customers Their expectations regarding price changes Their tastes & preferences The number of customers Their travel costs to the point of purchase (PoP). 9.9.1 Forecasting In Operations Forecasting involves making calculated predictions that can be used in the planning and decision-making process. While forecasting cannot predict the future with absolute accuracy, it can provide vital information for strategic, tactical and operational planning. The main purpose of forecasting is to predict future customer demand for a product or service. In includes both long-term estimates of overall demand and short-term estimates of demand for each product or service. Forecasting is used in process design, capacity and facilities planning, aggregate planning, scheduling, inventory management, etc. Good forecasting is the foundation of good operations management. Operations managers often try to forecast a wide spectrum of future events that could influence the performance of their organizations. Short-term demand estimates for individual products are generally very detailed, and are used to plan and schedule the production operations. But long-term, aggregate product-demand forecasts, are used for making location, layout and capacity decisions. Thus, forecasting time horizons (the future point in time to which forecasting is
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directed) provide different types of information, to help the managers make long-term or short-term decisions. On the basis of aggregate demand forecast (that is obtained in terms of sales volume) individual forecasts are made for labor/or material requirements. These resource forecasts are used to plan and control the operation subsystems. Forecasting is thus necessary for planning, scheduling, and controlling the production system in order to deliver goods and services effectively and efficiently. 9.9.2 Selecting a Forecasting Method The objective of selecting the right method is to maximize accuracy and minimize biases. Therefore, the suitability of a forecasting method should be verified before it is selected. Operations managers should select a method on the basis of data available, the amount and nature of available data, the amount of variation expected and the forecast accuracy required. The costs and technical expertise involved in forecasting also affects the situation of a method. Generally, the selection of a forecasting system depends on the following factors: time period for which the forecast is needed, the amount and nature of data available and the cost and accuracy of the method. Time span The time period for which the forecast is needed is one of the key issues in the selection of a forecasting method. For short-range decisions like purchasing, job scheduling, project assignment and machine scheduling, time series techniques such as moving averages (SMA or WMA) and exponential smoothing are preferred. For decisions like capital and cash budgeting, medium range forecasting method like regression analysis is used. Forecasting for long range decisions like product planning, facility location and expansion, capital planning is done through the use of regression analysis, the Delphi technique, market research, etc. Data availability The selection of a forecasting method also depends on the amount and nature of data available, if no data is available or it is too expensive to collect data, qualitative forecasting methods such as the Delphi method or the nominal group technique is used. If comprehensive historical data is available, then time series analysis such as moving
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averages and exponential smoothing methods is employed. If a relationship exists between the different variables under review, causal methods (such as regression analysis) are used. Cost and accuracy No forecasting method can be hundred percent accurate. Generally, operations managers make a tradeoff between cost and accuracy. Some low accuracy methods use less data which is readily available. For these methods, the cost of forecasting is low. Due to inaccuracies in the forecasts provided by these methods, organizations may end up with high inventory holding costs and operating costs.
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Summary Sales and operations planning is a process to help give better customer services, lower inventory, shorten customer lead times, stabilize production rates, and give top management a handle on the business. Typically sales and operations planning involve general management, sales, operations, finance, and product development. The aggregate operations plan is concerned with setting production rates by product group or other broad categories for the intermediate term (3 to 18 months). The aggregate plan aims to specify the optimal combination of production rate, workforce level, and inventory on hand. Chase strategy Match the production rate to the order rate by hiring and laying-off employees as the order rate varies. Stable workforce-variable work hours Vary the output by varying the number of hours worked through flexible work schedules or overtime. Level strategy Maintain a stable workforce, working at a constant output rate. Shortages and surpluses are absorbed by fluctuating inventory levels, order backlogs, and lost sales. A level schedule holds production constant over a period of time. It is a combination of the strategies mentioned above. For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through. Four costs are relevant to the aggregate production plan. These relate to the production cost itself as well as the cost to hold inventory and to have unfulfilled orders. The process and technique for implementing an aggregate plan depends on the conditions prevalent. Due to this reason, the implementation procedure can be segregated into two ways: unplanned events and behavioral considerations. Yield management can be defined as the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield. Forecasting seeks to predict what is most likely to happen in future. By predicting the most probable future value of a variable, managers take effective decisions and carry out planning activities.
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The main purpose of forecasting in operations is to predict future customer demand for a product or service. In includes both long-term estimates of overall demand and short-term estimates of demand for each product or service. Forecasting is used in process design, capacity and facilities planning, aggregate planning, scheduling, inventory management, etc.
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Certificate in Manufacturing Concepts

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Chapter-1 Introduction to Manufacturing

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End Product 1. Discrete 2. Process

Variety and Volume 1. 2. 3. 4. Project Job Repetitive / Batch Continuous / Flow

Strategy 1. 2. 3. 4. MTS ATO MTO ETO

Fig 1.2 Manufacturing Classifications

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Product Development Fig 1.4 E-Manufacturing Information Flow

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Chapter -2 Role of Management in Manufacturing Version4.0

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Chapter-2 Role of Management in Manufacturing

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Fig 2.1 Stages in Manufacturing of Machine Parts

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Fig 2.2 Activities involved in Manufacturing of Machine Parts

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Certificate in Basics of Manufacturing

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Certificate in Basics of Manufacturing

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Certificate in Basics of Manufacturing

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Certificate in Basics of Manufacturing

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Certificate in Basics of Manufacturing

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Certificate in Basics of Manufacturing

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Maintenance policies and preventive maintenance.

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Chapter-3 Manufacturing Systems