Operations Management

Operations Management
MBA
(Annual Pattern)
First Year
Paper No. 1.9
For SDE Candidates admitted during 2011-12 and onwards
School of Distance Education

Bharathiar University, Coimbatore - 641 046
CONTENTS
Page No.
UNIT I
Lesson 1 Introduction to Operation Management 7
Lesson 2 Types of Production Systems 35
UNIT II
Lesson 3 Product and Product Design 45
Lesson 4 Operations Technology and Facility Location 72
Lesson 5 Plant Layout 107
UNIT III
Lesson 6 Production Planning and Control 143
Lesson 7 ERP and MRP-II Overview 173
UNIT IV
Lesson 8 Introduction to Materials Management 189
Lesson 9 Inventory Control 210
UNIT V
Lesson 10 Total Quality Management 257
Lesson 11 ISO Quality Certification Concepts 282
OPERATIONS MANAGEMENT
SYLLABUS
UNIT I
Operations Management Meaning Importance Historical contributions System
view of OM Operations strategy and competitiveness Functions of OM Types of
production systems
UNIT II
Production design and process selection Evaluation and selection of appropriate
Production and Operations Technology Product design and process selection.
Types of layout Analysis and selection of layout Product and/or Process layout
Cellular Lean and Agile manufacturing systems Computer Integrated Manufacturing
Systems Assembly line balancing.
UNIT III
Production planning and control Meaning Functions Aggregate Planning Master
Production Schedule (MPS) Material Requirement Planning (MRP) BOM Capacity
Requirement Planning (CRP) An Introduction to MRP II and ERP Business Process
Re-engineering Total Productive Maintenance (TPM)
UNIT IV
Materials Management Functions Material Planning and Budgeting Value
Analysis Purchase functions and Procedure Inventory Control Types of
Inventory Safety stock Order Point Service level Inventory Control Systems
Perpetual Periodic JIT KANBAN
UNIT V
Total Quality Management Concept Statistical Quality Control for acceptance sampling
and process control Concepts of OC Curve Use of the OC curve Concept of
Type I and Type II error Quality Movement Quality Circles ISO Quality Certifications
and Type Quality Assurance Six sigma concept

5
Introduction to
Operation Management
UNIT I

6

7
LESSON Introduction to
1
INTRODUCTION TO OPERATION MANAGEMENT
CONTENTS
1.0 Aims and Objectives
1.1 Introduction
1.2 Meaning of Operation Management
1.3 Importance of OM
1.4 Historical Contributions
1.4.1 Scientific Management Time and Motion Studies
1.4.2 World War II to the 1960s Operations Research
1.4.3 The 1970s and 1980s Japanese Challenge
1.4.4 The 1990s and After
1.5 Systems View of Operations Management
1.5.1 Transformation Approach
1.5.2 Value Driven Approach
1.5.3 Operations Management Basics
1.6 Operation Strategy and Competitiveness
1.7 Functions of Operations Manager
1.7.1 Interface with other Functions
1.7.2 Operations Managements Future Challenges
1.8 Efficiency and Effectiveness
1.9 Let us Sum up
1.10 Lesson End Activities
1.11 Keywords
1.12 Questions for Discussion
1.13 Suggested Readings
1.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:
Describe the meanings and importance of Operations Management as a discipline
a historical perspective

8 Discuss the roles of operations and operations managers within the firm and the
interactions with engineering, marketing, finance, accounting, and human resource
management
Analyse the concept of value and the value equation, including definitions of
performance and costs
Learn about future challenges that operations managers are likely to face.
1.1 INTRODUCTION
A number of forces are impacting most businesses today. These are the forces of
change. They are impacting businesses through international trade, transactional
finance, and global production; challenging traditional beliefs and practices
challenging the way businesses compete with each other.
This is good news and bad. The bad news is that never before in the history of
mankind has the rate of change, the challenges, and the cost of failure, been so high.
And the good news is, never before has humankind had so much knowledge to meet
the challenges.
The winds of change have brought in new industries, new products and services into
the marketplace with increased competition from national and multinational
corporations. The winds of change are impacting all industries, while some seemingly
change gradually, and others change so rapidly that some businesses can not respond
quickly enough to these changes. This makes managing change complex and difficult.
No management system works well for firms competing at the different extremes of
this pace spectrum.
People and processes produce the organizations products, be it a service (e.g. booking
an airline ticket) or a product (e.g. a bar of soap). All these products have one thing
that is common a conversion process. As a discipline that manages the conversion
processes, Operations Management is expected to provide solutions to many of these
challenges.
The first step, to meet these challenges, is to find some means to classify firms and
industries on the basis of their requirement to change. Charles Fine of MIT tackled
this problem. He coined the term clock-speed to describe the pace of change
existing within an industry and by the rate at which customers demand or are able to
get new goods or services.
While it is difficult to define one attribute to measure a firms clock-speed, Fine cites
a list of industries to illustrate the concept.
Table 1.1: Industry Classification by Clock-speed
Fast Clock-speed Moderate Clock-speed Slow Clock-speed
Personal computers Bicycles Commercial aircraft
Software Automobiles Tobacco
Toys and games Computer operating systems Steel
Athletic footwear Agriculture Military aircraft
Semiconductors Fast food Shipbuilding
Clock-speed also indicates how fast a firm or parts of a firm must respond to
competitive threats, and to other organizational challenges. It provides a framework
for organizations to decide whether they should act reactively, actively or proactively.
Slow and steady improvement is appropriate in some situations, while in others,
attempts at dramatic breakthroughs are appropriate. Different improvement strategies

require different resources, management styles, and support structures. They not only 9
Introduction to
require different organizational capabilities but also require creating new ones. Operation Management
In fast-paced organizations most competitive advantages are quite temporary. The
challenge for such organizations is to be able to anticipate and adapt to change fast
enough to avoid decline and possibly extinction.
In slow clock-speed industries, change comes, but at a more gradual pace. These
changes are often predictable because they have their roots in the driving forces and
you have the time to prepare for them.
Competitive advantage flows from the ability to make the conversion process more
efficient, eliminate wastes, lower costs, increase the outputs from limited resources
and provide more value to the consumer. All organizations whether manufacturing a
product or offering a service, whether fast clock-speed or slow clock-speed, must
manage processes and people effectively to achieve this state.
1.2 MEANING OF OPERATION MANAGEMENT

Operations Management concentrates on the core businesses, squeezes out the waste,
and focuses on differentiating between competitors in meaningful ways. The
importance of Operations Management lies in examining the processes by which
goods and services are created and to use the available knowledge and techniques to
resolve problems. It has to think and rethink, whether the practices adopted are still
appropriate today. And, if not, what new techniques and methodologies should replace
them?
In fast clock speed industries, the focus of operations management is on the structural
components of the discipline, i.e. product design, process, capacity and location.
In slow clock-speed industries the focus of the discipline is on the infrastructural
components, i.e., quality, manufacture, outsourcing, planning and other components of
the transformation process.
1.3 IMPORTANCE OF OM
The importance of Operations Management can be measured by its ability in creating
world class companies. For example, in moderate clock-speed industries, Bajaj Auto
has focused on Operations Management to emerge as lowest cost manufacturer of
two-wheelers in the world. Reliance Industries leads worldwide in project
management. In slow clock-speed industries, Tata Steel is the lowest cost steel
producer, internationally. Infosys, Tata Consultancy Services and Wipro have
established their superiority over their international rivals in fast clock-speed products
like software. These and many such Indian stories and case studies will be elaborated
in the rest of the book.
1.4 HISTORICAL CONTRIBUTIONS

A leisurely cruise through the history of any subject offers the reader a historical
perspective and an opportunity at reflection. Tracking the changing concepts of the
subject, and what it has been at different points in time, also helps in identifying
patterns in the development of ideas. Most important, I hope, an understanding of
history should foster the ability to sort through the barrage of ideas some good and
some not so good about the subject.
Operations Management has been variously known as Industrial Management,
Management Science/Operations Research, Production Management, and Production
and Operations Management.

10 The concepts associated with Operations Management, perhaps, have their roots
embedded in the development of early organizations. The class of problems
represented by Operations Management came into high relief in the era after the
Industrial Revolution. This was a period of radical changes. People got replaced by
machines, and water and mule power replaced human muscular effort. These
developments changed the nature of production. As production moved from the
cottage to the factory, the seeds of operations management spouted on fertile ground.
1.4.1 Scientific Management Time and Motion Studies

In 1769, James Watt applied for the patent of the steam engine. By 1785, the steam
engine was being manufactured and used. In 1799, Eli Whitney began mass
production and introduced the concept of standard interchangeable parts. By the late
1700s, this had resulted in the development of the machine tool industry metal tools
and machines that built the parts of other machines or goods became available. Many
organizations evolved into large, vertically integrated businesses. Managers of
organizations faced coordination problems of unprecedented scope.
Treatises on organizing, measuring, and managing production in these challenging
settings were published. Frederick Winslow Taylor enunciated his theory of "scientific
management" in the late 19th and early 20th centuries. The basis of "scientific
management" was a focus on machines and the system of their utilization. It was
based on Taylor's postulations:
The stress here is focused on the population of the inputs, techniques, and outputs
needed to create a new design method that responds to the paradigm shift in an
industry. Drawing on information presented for the execution of each step, the
TIES method may be presented. The techniques utilized to execute each step of
the method were chosen based on robustness and generality and should allow for a
substantial reduction in design cycle time and provide quantitative justification for
design decisions. Scientific laws govern work, so scientific methods can be used
to analyze work.
Workers are different, so match workers to their job and then train them
thoroughly.
Use employee self-interest to motivate.
Separate the responsibilities of workers and managers.
The concept of Scientific Management led to the development of 'time and motion
study'. The first contribution in this direction was made by Taylor in the 1880s. Early
in the 20th century, Frank and Lillian Gilbreth developed a more systematic and
sophisticated method of 'time and motion study', taking into account the limits of
human physical and mental capacity and the importance of a good physical
environment.
Time and motion study is an analysis of the operations required to manufacture an
article in a factory, with the aim of increasing efficiency. Each operation is studied
minutely and analyzed in order to eliminate unnecessary motions and thus reduce
production time and raise output, which increases productivity.
In the early 1900s, Alfred P. Sloan of General Motors introduced the concept of
'organizational management' and Henry Ford introduced 'assembly-line
manufacturing'. The Hawthorne Studies by Elton Mayo, in 1927, resulted in the
Human Resources Movement. These developments changed the way operations were
managed in many businesses, during this period.

1.4.2 World War II to the 1960s Operations Research 11

Introduction to
Before World War II the focus of scientific management was based on the Operation Management
micro-environment in the manufacturing sector. During the War, the focus moved
from the micro-environment to the macro-environment.
A new multi-disciplinary approach to problem solving, called Operations Research,
was developed. This was a quantitative approach basically concerned with the
efficient allocation and control of resources. Multi-disciplinary operations research
groups, largely initiated and founded by government and quasi-governmental
organizations, were formed.
These groups focused on developing algorithms and methodologies to solve
optimization problems that arose in a broad range of functional areas. They
successfully developed models on linear programming, network flow problems,
inventory theory, dynamic programming, machine maintenance, queuing and game
theory, etc., to identify how operations could be improved.
For example, while Dantzig applied linear programming to the travelling salesman
problem; Clark, Scarf, etc., developed models on inventory theory and so on. The
Ford Harris Economic Order Quantity model, however, dates as far back as 1915.
These early successes resulted in the birth of operations research groups at many
business organizations which were formed with the objective of finding ways of
improving performance.
During the late 1960s, business schools began to take interest in the more scientific
and rigorous approaches advocated by operations research groups for decision making
and incorporated this discipline in business curricula.
Box 1.1: Mathematical Models in Operations Management
At the centre of operations research, practice and theory is a diverse set of mathematical models that
are used to capture and explore a wide range of real-world settings. An operations research model is a
mathematical abstraction or simplification of reality. The degree of simplification is a function of data
availability, time and resources, and the situational issues and decisions that the model is designed to
address. Mathematics is, therefore, useful as an aid in calculating and giving insight to real world
situations. There are two types of models that are used:
Optimization Models: Production problems offer great opportunities for cost savings using
optimization models. Such models reflect complex systems involving large numbers of decision
variables and constraints and are broadly labeled mathematical programming models. Some of the
most complex constrained optimization models involve tens of thousands of constraints and hundreds
of thousands of decision variables. Operation researchers not only model these complex systems but
also have developed algorithms that can efficiently search for optimal or near optimal solutions.
Another class of deterministic models involves networks: routing through the network or optimal
location on a network. Decisions involving multiple objectives can be addressed with a general class
of models called Multi-Criteria Decision Analysis (MCDA).
Heuristic Models: For a great many problems, no solution technique is known at all. For these
problems, heuristic solution techniques are the alternative. These are mathematical models to predict
the behaviour of systems that attempt to provide service for randomly arising demands. Heuristic
problem solving involves finding a set of rules or a procedure, that provides satisfactory solutions to a
specific problem. These models are sometimes called "good enough, fast enough'' solution
techniques. There are many valuable applications of heuristic models, including traffic flow (vehicles,
aircraft, people, communications), scheduling (patients in hospitals, jobs on machines, programs on a
computer), and facility design (banks, post offices, amusement parks, fast -food restaurants), etc.
Mathematical models are created in a world of make-believe, and not in the real world. However,
with a mathematical model in hand, the operations researcher can work with managers and decision
makers to evaluate decision alternatives or system redesign. The purpose of computing is insight, but
it should not replace thought.

12 1.4.3 The 1970s and 1980s Japanese Challenge

Operations research faced a new challenge in this period. Japan, without the extensive
knowledge of operations research and the new models and methodologies, was able to
deliver vehicles to the European market at lower costs than the Europeans themselves.
This made no sense at all to the west and the industry attention moved to Japan. Since
the Japanese systems produced results, this created an interest in the use of these
systems.
One of the major focus areas was the Toyota production system. The Toyota
production system was developed by Taiichi Ohno and is now being implemented in
many western companies, usually under the names of Lean production or World Class
Manufacturing program. Ohno identified seven categories of Muda (Waste), which
form the basis for process improvements:
Defects, including rework
Overproduction of goods not needed/wanted by customers
Inventories of goods awaiting further processing
Unnecessary processing
Unnecessary movement of people
Unnecessary transportation of goods
Waiting by employees for upstream activity.
This resulted in important changes in the field of Operations Management. Holistic
systems of physical and human processes that extended its reach into the whole firm
in a cross-disciplinary manner were introduced. Some of these that had a significant
impact on business practice and performance were Material Requirements Planning
(MRP) systems, then later concepts such as Just-In-Time (JIT), and Total Quality
Management (TQM), etc. By the end of the 1980s, researchers and practitioners were
using a broader set of paradigms in their quest to improve operations. Researchers
were beginning to examine higher-level issues in manufacturing strategy using an
empirical approach.
Box 1.2: Toyota Production System-Autonomation
Although JIT systems control production quantities, defects would stop the flow of parts to
subsequent operations. Such a situation is avoided by a concept called an Autonomation System. This
is a Toyota coined word that means 'autonomous defects control'. It is a worker controlled quality
program.
There are two versions of this. In mechanical equipment, this system is called Bakayoke by Toyota.
Machines in their factories are equipped with automatic stopping devices that detect defective parts.
As soon as a defective part is detected, the machine comes to a stop so as to prevent flow of defective
parts to the next operation. In manual systems, such as assembly operations, the system is called
Andon. It is implemented through the worker, who is required to press a stop button that interrupts
the line, when defective parts are detected. This prevents defective items from being produced in any
quantity. The line is restarted when the problem has been solved.
In addition, the Yo--don system is used to extend the concept of teamwork on the shop floor and
ensure that work at the various work stations is balanced. The system involves teamwork between
adjacent operations. As workers at each station complete their work, they press a button. At the end of
the cycle time, a red light lights up at the work stations where the work is not completed. The entire
line stops and normally others nearby pitch in to help workers having difficulty. The line starts again
when all the red lights are off again.

1.4.4 The 1990s and After 13

Introduction to
The changes and challenges of the 1970s and 1980s generated a sense of identity crisis Operation Management
in Operations Management. The disillusionment with Operations Management,
however, was short lived. There was a refocusing of research questions. This was a
crucial driver of growth of the field in the 1990s. Particularly, the research focus
became more managerial (e.g., focusing on system design, information, and
incentives) and less on tactical execution.
Another more important reason for the re-emerging importance of Operations
Management was developments in the field of computers and communications
technology. By the end of the 1980s, as the computational capacity increased
dramatically, computers found use in design and production; and newer models were
developed for solving operations problems. These models were application based and
did not require extensive knowledge of mathematics.
Table 1.2: Historical Milestones in Operations Management
Date Initiator Event
1875 James Watt The Steam Engine was commercially manufactured
1899 Eli Whitney Introduced mass production and the concept of standard
interchangeable parts
1900 Frederick W. Taylor Scientific Management
1900 Frank & Lillian Gilbreth Time & Motion Studies
1901 Henry H. Gantt Scheduling
1905 Henry Ford Assembly Line
1905 Alfred P. Sloan Organizational Management
1927 Elton Mayo Human Resources Movement
1931 Walter A. Shewart; Quality Control Charts
1935 H.F. Dodge & H.G. Romig Statistical Sampling applied to quality control
1940 P.M.S. Blacket et al Operations Research Applications
1947 George B. Dantzig et al Linear Programming
1950 A. Charnes, W.W. Cooper & Non-linear and Stochastic Processes Programming
H. Raiffa
1970 J. Orlicky & O. Wright Computer applications to Manufacturing Material
Requirement Planning (MRP)
1980 W.E. Deming, Philip Crosby Quality and productivity applications from Japan;
& J. Juran Computer aided Design and Manufacturing (CAD
General Motors & IBM /CAM); Robotics,
1990 Netscape, US Department of Internet, Electronic Enterprise
Defense Business Process Reengineering
Michael Hammer, James
Champy
2000 Amazon, eBay, Yahoo, E-commerce,
America Online
Dr. Daniel Whitney and Agile Manufacturing, High performance Work systems
Professor Charles Fine, MIT
The combination of computer and communication advances affected the way business
was conducted and it particularly impacted many service industries. The development
of the better and faster microprocessors, communication technology, miniaturization,
and digitization created a new lease of life and added vigour to the development of
new techniques in Operations Management.

14
Figure 1.1: Chronology of Operations Management Themes

Some important developments during this period were to move towards an
interdisciplinary research. There was also an explicit recognition of businesses as
decentralized entities of control that provided local incentives to its employees. This
relationship altered the criteria for analysis. There was re-emergence of economic
equilibrium and the sole-owner optimality became the focal criteria in the new
approach.
Operations Management underwent three key shifts in emphasis:
1. From cost and efficiency to value creation.
2. From mass production to agility and customization.
3. From functional specialization to a systems approach to achieving high
performance.
Figure 1.1 shows the way Operations Management themes have been changing over
the last four decades.
Check Your Progress 1
State whether the following statements are true or false:
1. Productivity = Input over output.
2. Output per man is a fixed unit that remains constant across industries.
3. Productivity is a function of actual man hours worked.
4. Reduction in wastesity should be promoted but it does not bring about an
increase in production effort.
5. Man, machines and money are the primary inputs of production.

15
1.5 SYSTEMS VIEW OF OPERATIONS MANAGEMENT Introduction to
Productive systems are those that convert or transform resource inputs into useful
goods and services as outputs. Such productive systems are generally referred to as
Operations systems. Operations Management, often described as Production and
Operations Management (POM), relates to the management of such systems. Of the
many developments taking place in the discipline in the recent past, the most radical is
perhaps the concept of what the discipline represents. Up to the 1970s, Operations
Management was considered as a centre system with its basic focus on cost
reduction. Since the 1990s, it has been increasingly recognized as a basis for value
creation within the organization.
Both these views on Operations Management co-exist today. In smaller organizations
where the competition is price sensitive, markets are small and the customer needs are
well defined, the focus is on the cost reduction aspect of Operations Management.
However, as organizations grow, the parameters of competition increase, market
logistics become more complex and customers become more demanding, the focus of
Operations Management as a value creation function, provides greater rewards.
There are, therefore, two ways traditional and modern in which Operations
Management is viewed:
1. The traditional view perceives Operations Management as a system that is
involved with the manufacture and production of goods and services.
2. The more modern view perceives Operations Management as a system designed
to deliver value.
Let us discuss these two perspectives in greater detail.
1.5.1 Transformation Approach

The traditional definition considers Operations Management to be a transformation
system. According to this view:
Operations Management is the business function that manages that part of a business
that transforms raw materials and human inputs into goods and services of higher
value.
According to this definition, Operations Management transforms inputs into outputs of
goods or services. For example, a manufacturing plant takes raw materials in the form
of parts, components, and sub-assemblies and transforms them into a manufactured
product such as an automobile, by the use of resources such as labour, capital, and
energy.
It is the task of Operations Management to set-up and run the system that can produce
or provide the required outputs. The specifications of the outputs are the starting point.
For getting the desired output, the specifications and quality of the inputs is first
determined. The responsibility of Operations Management is to transform these inputs
into outputs in such a way that the outputs have greater value than the costs of inputs
plus the costs related to investments in the process.
The primary system of analysis and control of the effectiveness of the Operations
Management system is the breakeven analysis. This is because, in a system based on
the input-output concept, controls can be basically exercised on variable costs. The
variable costs are made up of the input costs and the process costs. Once a process has
been selected, it is difficult to alter the processes; therefore, process costs are
relatively stable. The input costs reflect that part of variable costs that can basically be
16 controlled. Control of input costs, therefore, becomes the basis for the measurement of
performance of the system.
Inputs Transformation Output
Inputs Process Output
Performance
Measurement
Figure 1.2: Operations Management as a Transformation Process

Operations Management has a number of functions to carry out the transformation
process effectively. The functions incorporate different roles that are interdependent
but which can be grouped under five main headings:
1. Product: The role of Operations Management is to ensure that the product is
manufactured as per specifications and the plan.
2. Plant: In order to make the product, plant and equipment is required; Operations
Management has to consider that the plant meets specifications and is in keeping
with the requirements.
3. Process: There are many ways of producing the product, and Operations
Management has the responsibility of choosing the best way.
4. Program: The production programme ensures that the schedules of production are
met.
5. People: Production depends on people and their skills and motivation. Operations
Management has to ensure that skilled and motivated workers are available.
Operations Management, seen in this way, is the science of optimizing transformation
processes, during which sets of inputs are converted efficiently and economically
into outputs, with the objective of improving profitability of the organization. We will
discuss the components of Operations Management in the value driven approach.
As the value driven approach is broader based, this traditional view becomes a subset
of the larger landscape.
1.5.2 Value Driven Approach

The second approach is a value driven approach to operations management. The value
driven approach starts by recognizing that a business is a set of processes, each of
which has inputs, outputs, and structure. Each process has a job to do and each process
should be measured on how effective it is in achieving the desired outcomes.
The Core Process Model as shown in Table 1.3 is a simple model, based on the four
core business processes describing the functioning of a business organization. There
can be many more core processes depending upon the business and how it is
structured.

Table 1.3: Core Process Model 17

Introduction to
SUPPORTING BUSINESS PROCESSES Operation Management
Determine Monitor Market Products Measure Understand

Customer Competitive & Provide After- Customer Customers, Market
Needs Environment Sales Service Satisfaction Segments & the
Competitive
Environment
Develop Evaluate Create New Build and Test Develop New
CORE PROCESSES
Product Product Products Design Prototypes Products or Product

Strategy Concept or Product Improvements
Improvements
Secure Operations Manage Product Manage Manage the Supply
Processes Planning & Transformation Business Chain Process
& Control Processes Logistics
Materials Processes
to Satisfy
Demand
Manage Manage Manage Manage Enterprise
Strategic Human Information Financial Management &
Planning Resources Systems Resources Business Support
Processes Activities
The four core business processes in this model are described below:
1. Determine Customer Needs: It is critical for the organization to know the
customers needs in order to support the firm's demand, its forecasting needs and
its product design and development activities. In order to do this it is necessary to
monitor the competitive environment. The supporting business processes are
involved in marketing products and providing after-sales service. There has to be
a measure of customer satisfaction. There is also a requirement to understand the
specific needs of different market segments and the nature of the competitive
environment. For fast-pace firms, Customer Relations Management (CRM) has
become important. Many software firms in India are developing applications that
are designed to keep them in a position to understand what their customers want
and in some cases, how it can enhance the marketing capabilities of its sales force.
2. Develop Product Strategy: This involves marketing, operations, and engineering
activities in order to create products that customers desire. This requires an ability
to evaluate product concepts so that there is support to design new products or
introduce product improvements. The slower the pace, the more is the focus on
delighting customers by finding better ways to incrementally improve products
that already exist. But as the pace of business increases, the greater is the need to
be aware of the competitive challenges that new technologies and competitors
introduce into the marketplace.
The organization has to develop the ability to understand the potential customer
and the pleasing/displeasing consequences associated with changes. An aggressive
competitive market exploits the limitations of an organization; as such, it has to
possess the ability to design, build and test prototypes, and develop new products
or product improvements before the competition. The risk is that if the firm does
not replace, upgrade its existing products in time, some other firm will.
3. Secure Processes and Materials to Satisfy Demand: Management activities
involve selection of raw materials from vendors and the ultimate delivering and
servicing of the product for the customer. These activities include operations
planning and control processes and managing the product transformation
processes. In addition, the business logistics and the supply chain process play a
critical part and have to be managed effectively. In today's world, supply chain

18 players are widely distributed and will seldom lie within the firm's boundaries,
hence making the need to manage the flow of materials effectively more
challenging.
4. Manage Strategic Planning Processes: Support business processes are essential
to all organizations. The strategic planning process defines the firm's as well as its
own Operations Management function. It also specifies what it must do to achieve
its corporate goals. The human resource management function creates an
organization design that is suited to the competitive environment and provides
and/or enhances the human capital needed by other functions to effectively carry
out their tasks. The Management Information Systems groups provide timely
information that is needed to assess the competitive environment and the
performance of its business functions. The accounting and finance groups monitor
the use of financial assets and take steps to ensure that the financial base of the
organization is both adequate and efficiently utilized. There has to be an adequate
interface between all these functions.
Operations Management activities are mostly involved in the second and third core
processes. Operations Management, as a value creating activity, contributes to the
customer satisfaction process by assisting to design and develop products that possess
the capability to satisfy the customers functional need with the desired level of
design, quality and cost. Operations Management is defined as the following:
Operations Management constitutes all of the activities that an organization conducts
in order to deliver value to its customers. It is the set of processes that transforms
either materials or information into a product or service.
The operations function contributes to the value delivery to customers by significant
improvements in the cost, quality, timeliness, and availability of products and
services. Organizations can use effective Operations Management either to show
improvements in performance and quality, coupled with lower prices in real value, or
to help raise their bottom-line.
Consider the Consumer Durable Sector in India: During the last twelve months, the
market leaders have given a lead by lowering prices by 25-40 per cent on almost their
entire product range. The decline in prices is attributed to substantial value
engineering and technology improvement. This in turn has resulted in a 16-18 per cent
increase in consumer demand for the industry. Such dramatic changes are also seen in
other technology products.
On the other hand, during the same period in the FMCG segment, most leading
companies have reported appreciable growth in profits despite the reductions in sale
and sagging top-lines. They have managed to effectively protect prices by squeezing
costs through better sourcing, better supply chain and by reducing overhead costs. The
average profit growth has been in the region of 10 per cent while average sales have
reduced by 5 per cent.
Value Chain Model

In the overall execution of the core processes, Operations Management plays an
exceedingly important role. Operations Management processes are designed to deliver
value and contribute to the customer satisfaction process in two significant ways:
Operations Management assists in the organization's product innovation process to
design and develop products that can satisfy the customer's functional need with the
desired level of design quality and cost. Product Design determines product
specifications to meet customer needs; Process Development subscribes the
production methods necessary to make the products.

These two functions have to work together, for innovation and systematization go 19
Introduction to
hand in hand. It is only possible with tight integration between these two functions Operation Management
that more new products can be launched faster. Shrinking product lifecycles makes
this an important requirement, especially for fast clock-speed industries. Initiatives
such as simultaneous engineering and early supplier involvement in the product design
process elevate the role of operations in the product and service concept design
process.
Operations Management designs and manages the value chain for manufacturing
goods and delivering services, i.e., the process and supply chain needed to create,
deliver, and service the products sold. It is in addition, involved in designing and
managing processes that support the value chainsuch as purchasing and materials
management, storage and transportation, customer support, and work systems.
Its performance metrics in delivering value in controlling and improving the value
chain and support processes to achieve and sustain high levels of business and
organizational performance can be judged on its capability to:
Deliver a product that measures up to design specifications
Be flexible enough to offer products to customers depending on how, when, and
where they want it.
Do the above at an acceptable cost.
Operations Management is no longer merely something that has to "get done" in order
to proceed with business as usual. It successfully helps organizations to squeeze out
the waste, and to focus on how to differentiate from competitors in meaningful ways.
Where Operations Management was once viewed primarily as a manufacturing
function, service firms are now recognizing its tremendous competitive potential.
Instead of a focus on cost, the focus now encompasses reliability as well as delivery
times. Operations Management is now a major contributor to the design and
management of the supply chain needed to create, deliver, and service the products
sold.
1.5.3 Operations Management Basics

The value driven approach focuses on the value provided to the customer. Customers
are those who purchase final goods and services. Those who ultimately use the
products are called consumers.
The consumer and the customer may not be the same person. For example, it is known
that wives generally buy their husband's wardrobe. Here, the consumer is the man
while the customer is the woman. Similarly, the recipients of goods and services from
external suppliers are called external customers, while the recipients of goods and
services from internal suppliers are called internal customers.
For example, in Escorts Ltd. the engine plant of the Tractor Division in Plant I
purchases engine castings from Menon & Menon in Kohlapur, the engine plant is an
external customer of the casting company. In turn, the engine plant supplies the
machined engine block to the Tractor Assembly in Plant III. Plant III' is an internal
customer to Plant I.
This distinction between consumers and customers (internal and external) is important
for operations managers. The concept of internal customer has profoundly changed
Operations Management thinking. It helps employees understand how they fit into the
system and how their work contributes to the final product, and it enables managers to
view the organization as a system. The needs of each group are quite different and
lead to different operations capabilities that must be met.

20 For example, a consumer product company like Hindustan Lever must pay attention to
consumers needs for product quality and performance, as well as to external
customers (an independent retail outlet like Morning Stores in Delhi) needs to supply
the right products at the right time.
Figure 1.3: The Value Seesaw

The value concept is represented by the value seesaw, shown in Figure 1.3.
The right-hand box represents the product-life cost associated with acquiring,
operating, and disposing of the product. For a simple product, such as a bar of
Cadbury's chocolate, there is the price of the chocolate and perhaps some tooth decay,
too. Note that the customer perhaps your mother worries about tooth decay, but you as
a consumer are less concerned with this long-term consequence. For other products,
such as a nuclear power plant, calculating the lifecycle costs of the product is more
difficult since its economic life and end-of-life disposal costs are hard to estimate.
The left-hand box represents the sum of the benefits that will occur if the product is
purchased and consumed. No matter how cheap a chocolate is, consumers won't want
it if it doesn't satisfy a need. What we need is some means to measure these benefits.
The value of a product is the ratio of performance divided by cost as is shown in the
equation below:
Value = Performance/Cost
Where:
Performance = f (functionality, quality, speed, timeliness, flexibility).
If a company's product is compared with that of a competitor's product, the product
with the highest ratio will be the most valued by the customer. This is the value
equation.
Performance is defined by the cumulative benefits that will result if the product is
purchased and used as intended.
When a product or service is purchased; the buyer has an intended use for it.
Functionality is a measure of the extent the product, when properly used, is able to
accomplish the intended feat.
Quality is broadly defined as the extent to which a product or service is delivered in
consistence with what the customer has been led to expect.
An organization's speed is often measured in two dimensions:
1. How long a customer must wait for the product once it is requested? and
2. How long it takes to design, develop, and introduce new products?

Timeliness is the ability of a firm to get the right product to targeted customers at the 21
Introduction to
most desirable time. Operation Management
Flexibility is the input to the value equation relating to the ability of the Operations
Management system to give the customer the desired product.
Operations managers evaluate cost, measured in money terms, for its contributions in
two important roles:
1. Enhancing value, and
2. Serving as a performance metric for evaluating business processes.
The element in the value equation that is of primary importance is often called the
order winner. Order winners are attributes that reflect a customer's preference and
dominate the other elements of value. Excellent food offered by a restaurant may be
an order winner. Over time, order winners often evolve into order qualifiers, as the
value provided by competition improves.
For example, Sonys Trinitron picture tube that was an order winner became an order
qualifier as the quality of competition improved. Having a high-quality picture tube
was no longer enough for Sony to win the customer.
Sometimes, a value equation component has a trait that can make the consumer decide
in not purchasing the product. Such traits are called order losers. Human rights
activists dissuade people from buying products made through child labour. In this
case, products identified as being produced by children become order losers.
1.6 OPERATION STRATEGY AND COMPETITIVENESS

Role of Operation Strategy
The role of operations strategy is to provide a plan for the operations function so that
it can make the best use of its resources. Operations strategy specifies the policies and
plans for using the organizations resources to support its long-term competitive
strategy. Figure 1.4 shows this relationship.
Figure 1.4: Relationship between the Business Strategy and the Functional Strategies

22 Remember that the operations function is responsible for managing the resources
needed to produce the companys goods and services. Operations strategy is the plan
that specifies the design and use of resources to support the business strategy. This
includes the location, size, and type of facilities available; worker skills and talents
required; use of technology, special processes needed, special equipment; and quality
control methods. The operations strategy must be aligned with the companys business
strategy and enable the company to achieve its long-term plan. For example, the
business strategy of FedEx, the worlds largest provider of expedited delivery
services, is to compete on time and dependability of deliveries. The operations
strategy of FedEx developed a plan for resources to support its business strategy. To
provide speed of delivery, FedEx acquired its own fleet of airplanes. To provide
dependability of deliveries, FedEx invested in a sophisticated bar code technology to
track all packages.
Importance of Operations Strategy

Operations strategy did not come to the forefront until the 1970s. Up to that time U.S.
companies emphasized mass production of standard product designs. There were no
serious international competitors, and U.S. companies could pretty much sell anything
they produced. However, that changed in the 1970s and 1980s. Japanese companies
began offering products of superior quality at lower cost, and U.S. companies lost
market share to their Japanese counterparts. In an attempt to survive, many U.S.
companies copied Japanese approaches. Unfortunately, merely copying these
approaches often proved unsuccessful; it took time to really understand Japanese
approaches. It became clear that Japanese companies were more competitive because
of their operations strategy; that is, all their resources were specifically designed to
directly support the companys overall strategic plan.
Harvard Business School professor Michael Porter says that companies often do not
understand the differences between operational efficiency and strategy. Operational
efficiency is performing operations tasks well, even better than competitors. Strategy,
on the other hand, is a plan for competing in the marketplace. An analogy might be
that of running a race efficiently, but it may be the wrong race. Strategy is defining in
what race you will win. Operational efficiency and strategy must be aligned; otherwise
you may be very efficiently performing the wrong task. The role of operations strategy
is to make sure that all the tasks performed by the operations function are the right
tasks. Consider a software company that recently invested millions of dollars in
developing software with features not provided by competitors, only to discover that
these were features customers did not particularly want.
Now that we know the meaning of business strategy and operations strategy and their
importance, lets look at how a company would go about developing a business
strategy. Then we will see how an operations strategy would be developed to support
the companys business strategy.
1.7 FUNCTIONS OF OPERATIONS MANAGER

A modern operations manager performs many functions. Figure 1.5 reflects the
relationships between the various process components of the business environment.
As will be seen from the figure, unlike the transformation approach, the organizational
relationship starts with the external environment that includes suppliers and
customers. There is a continuous feedback into the system which makes the
environment dynamic.

23
Feedback Introduction to
INPUTS:
Materials Processes OUTPUTS:
Capital Goods
Suppliers Equipment (Tangible) Customers
People Services
Information (Intangible)
Energy
Operations
Management
Figure 1.5: Value Driven Concept of Operations Management

In this dynamic environment, the operations manager must understand his roles. These
keep modifying and the focus keeps changing in the context of the forces of change
that operate and impact the functioning of the organization. The roles of the operations
manager have to be suitably moderated depending on the changed circumstances. The
primary role of the operations manager is to accomplish the department's mission as
best as possible.
The departments mission can be segregated into three different decision areas. These
are as follows:
1. Structural decisions,
2. Infrastructural decisions, and
3. Organizational decisions.
Structural decisions refer to the 'hardware' of organizations; they are long-term
decisions that require substantial capital investment and are difficult to reverse once
they are in place. Examples of structural decisions are the number and size of facilities
and the type of processing equipment.
Infrastructural decisions are the software of operations. These are typically tactical
in nature and facilitate the management of day-to-day issues. An example is machine
loading and the changing of dies in a forging unit. Table 1.4 given below describes
the decision areas in detail; however, the Human Resource decisions will be discussed
later.
Table 1.4: Decision Areas of Operations Manager
Category Decision Area Typical Questions Contemporary Challenges
Structure Products Do we produce standard or How do we design products
(What?) custom products and services? and services that are easy to
Do we make to order or make make?
to stock? How can we coordinate
design teams that are
scattered across the world?
Processes What kind of equipment How do we exploit new IT
(How?) should we use? developments such as the
How much of the process Internet for rapid and
should be automated? flexible response to customer
needs?
How should processes be
configured?
Contd

24 Capacity How much is needed? How do we use flexible

Operations Management capacity options (such as
(How much?) What type?
temporary workers) and
When should capacity be economies of scope for
increased or decreased? competitive advantage?
Facilities Where are they located? How do we manage and
(Where?) What products should be exploit global opportunities
produced in each? for locating facilities?
Infrastructure Quality How do we prevent defects How can we better learn

Management and errors? from customers?
(How to How do we improve products How can we improve quality
improve?) and processes? to world-class standards?
Schedule Should scheduling be How do we use available
Management centralized or decentralized? cost and financial
(When?) How do we prioritize work information in scheduling?
and/or customer orders? How do we integrate
enterprise resource planning
systems into operations?
Inventory and What products should we How do we manage the
Supply Chain outsource? supply chain for increased
Management How many suppliers should value to the customer?
(How to acquire we use? What effect does the Internet
and deliver?) have?
People and Workforce and What skill level and training How can we develop truly
organization Productivity should employees have? high-performance work
(Who?) What types of compensation systems?
and reward systems are best? How can we better align
work systems with long-
range plans and objectives?
Organization Is a hierarchical or team- What structures are best
(What based work structure better? suited for operations in
structure?) Should we train in-house or different countries?
outsource? Should we flatten the
organization?
Lean Manufacturing
Strategy How to respond to customers How can we develop a
(How to manage special needs? learning organization in a
growth?) What information do we need globalized environment?
to effectively manage growth? How can we best look at the
organization across
functional boundaries?
The departmental mission will to a large extent depend on the nature of the product
whether the organization is dealing with goods, services or contracts. Whatever the
product, the departments mission is judged on three major components:
1. Cost minimization,
2. Delivery reliability, and
3. Product quality
Equally if not more important, is the ability to manage humans in a way that is
mutually satisfying to the subordinates, peers, and superiors and this involves getting
the necessary things done. Effective operations managers must show commitment
both to their employees and to the organization's objectives.

Workers expect good managers to be fair and impartial. In an era of downsizing and 25
Introduction to
disintermediation, workers would like to feel that their manager is an effective Operation Management
advocate when it comes to advancing or protecting their jobs.
Box 1.3: New United Motor Manufacturing (NUMMI)
Established in 1984 as a joint venture between General Motors Corp. and Toyota, New United Motor
Manufacturing (NUMMI) took over the former General Motors plant. The plant, on 211 acres east of
Interstate 880 and south of Fremont Boulevard, occupies about 5.3 million square feet. This was a
50-50 joint venture that produced Toyota Corollas and Chevrolet Novas.
Toyota's secrets aren't secret. Its production system, which stresses eliminating all wasted material
and labour, has been written about in excruciating detail. NUMMI is proof of this. The plant, which
had operated from 1963 to 1981, had been closed down as it was plagued by labour disputes. Toyota
turned the plant around extra quick. They hired the best of the former workers and created teams of
multi-skilled workers. Absenteeism dropped to less than 2 per cent compared to 20 per cent under the
old management. Productivity at the plant rose to twice the average level at other GM plants. The
Toyota managers achieved this improvement by focusing on five areas:
1. New products were designed for easy assembly and easy modification.
2. Production layout was organized by product needs.
3. Production flow was managed with little or no inventory.
4. Workers shared responsibility for quality.
5. Employees were encouraged to participate in nearly all decisions.
The system improvements did not come from technology investment; it was transformed by how the
managers were able to integrate the different elements into a coherent operations strategy. Even
without much automation, each worker was producing 63 cars a year by 1989, more than any other
US plant and 40 per cent above the average at that time.
Twenty years later in 2004, the company sells 2.1 million vehicles in North America. Today,
NUMMI continues to flourish as a company of 5,000 team members. With Toyota's engineering
content, Toyotas managers transformed an antiquated NUMMI assembly plant into GMs most
efficient factory using what is described as the Toyota Way a corporate philosophy that
empowers employees.
This advocacy role is often in conflict with another real corporate need the need to
have team players that understand and are committed to the corporate mission.
Resolving this conflict to everyones satisfaction is often an art. Operations
Management is also the art of getting work done through people. Box 1.3 is a case
where dramatic changes were obtained by the effective use of software of
operations.
The operations manager is also the supply chain manager/coordinator. In a
manufacturing organization, for example, the manager must view the entire flow of
goods and information within the supply chain, whether this falls within the
corporation's legal boundaries or within that of suppliers and customers outside the
organization.
The operations manager also has duties that involve cross-functional participation
with the business processes in the other three core processes. The most important
non-supply chain business process is the product innovation process. But activities
involving human resource management, accounting, marketing, and R&D processes
also are critical contributors to the operations managers effectiveness.
In fast paced business settings, since operations managers are amongst those closest to
the customer, they can provide quick feedback to the strategic planning process
regarding the changes in the market. Good operations managers are expected to
manage existing business processes while helping get the firm ready for the future.

26 1.7.1 Interface with Other Functions

Well-designed manufacturing and service operations exploit a companys distinctive
competencies the strengths unique to that company to meet these needs. Such
strengths might be a particularly skilled or creative workforce, strong distribution
networks, or the ability to rapidly develop new products or quickly change production-
output rates. A good operations manager will interface with other functions in order to
exploit the competencies of the organization.
We can analyze the interface requirements from another angle also from the point of
view of Operations Managements processes. Generally, processes involve
combinations of people, machines, tools, techniques, and materials in a systematic
series of steps or actions.
The overall value chain extends from suppliers to customers. Inputs consist of the
sources related to materials like capital, equipment, personnel, information, and
energy used to produce the desired outputs. Inputs typically are selected by the
operations function in association with other functions. Outputs are the final product
whether of tangible goods or intangible services.
Some of the interfaces with other functional areas in the organization are described
below:
Operations Management Marketing Interface: Marketing is responsible for
understanding customer needs, generating and maintaining demand for the firm's
products, ensuring customer satisfaction, and developing new markets and product
potential. The firm's strategic positioning and its market segmentation decisions to
a large extent determine the manufacturing and operations strategy.
In addition, marketing is the key information gatekeeper between operations and
the product markets. Marketing determines the kind of product customer's value.
This starts prior to product development, positioning, pricing, forecasting and
promotions both before and after product launch. Interdisciplinary co-operation
involving operations and marketing decisions go back over many decades.
Conflicts between operations and marketing in most organizations result from the
lack of broad agreement on critical organizational decisions such as the width of
the product line, the amount of time taken to deliver the product, and service or
quality levels. The interface between these two functions offers wide leverage in
most organizations increased understanding and trust between operations and
marketing propels many organizations to higher levels of effectiveness.
Operations Management Finance Interface: Capital equipment, cost-control
policies, price-volume decisions and inventories constitute the interface with
financial decision making. As acquisition and management of assets is an
important part of decision making, finance and operations need to work together
to understand the nature of technology used in operations and the
practice-performance gap in their organization.
Tracking performance requires that the organization develops common, objective
platforms for performance evaluation. Finance provides data on product and
service costs that help managers evaluate operational performance. Operations
managers should have knowledge of financial procedures, limits, and capabilities.
The effectiveness of operational planning and budgeting is often driven by the
level of co-operation between these two areas.
Operations Management Design Interface: Shrinking product lifecycles have
been adding to the demands on the product development process. This is
especially true for industries that have a high clock-speed. Launching more new

products faster requires tight integration between the design and Operations 27
Introduction to
Management functions. Initiatives such as simultaneous engineering and early Operation Management
supplier involvement in the product design process not only add to the role of
operations but also improve the perception of value provided in the product and
service concept design process.
In addition, process development and engineering is responsible for production
methods necessary to make the products. This function has a great impact on
operations. Therefore, co-operation between these three functions, i.e., process
engineering, design and operations, leads to improved organizational
performance.
Operations Management Human Resource Interface: No plant manager
anywhere would ignore the role of good people management in running an
efficient operation. The human resource function includes operation's approaches
such as continuous improvement and total quality that rely mainly on human
inputs. Decisions about people and the organization of the operations function
interact significantly with both structural and infrastructural decisions. Such issues
are not unique to the operations function, however; they impact other functions
and are dealt with more effectively through the human resource management
function.
In services, the human resource focus is vital, as customer's perceptions of an
organization are generally formed by their interaction with customer contact
personnel, such as customer service representatives. As organizations increasingly
opt for 'flextime', the operations function has to develop unique process
configurations to accommodate employees with minimum disruption in the flow
of work. Operations Management and Human Resource departments have to
co-operate for recruiting and training employees, enhancing employee well-being
and development, and fostering motivation that are vital to the success of
management policies in practice.
Operations Management Information Systems: Information systems provide,
analyze, and co-ordinate the information needs of operations. The distributed
processing environment and the growth and evolution of Enterprise Resource
Planning (ERP) systems for the organization have a direct impact on operations.
It allows organizations to generate relevant information and make appropriate
information available when needed. The operational plans become the driver of all
business planning including recruiting, cash flows, and marketing promotions.
With Computer Integrated Manufacturing (CIM) systems IT plays a very
important role.
In many organizations, similar activities are performed at different locations or at the
same location by different people. Examples would be a manufacturer with plants
spread out all over the world. However, knowledge is rarely, if ever, shared among
employees performing similar jobs. Information technology provides an option for
managing and sharing knowledge. It dramatically improves the task of managing
knowledge. Advances in process automation allow firms to redefine their core
processes and design better systems to accommodate the needs of product and service
variety. E-commerce creates new demands for managing processes while also
providing new opportunities for reconfiguring them. Much progress in information
technologies is wasted if the operations function does not respond to the challenges
created by the increased availability of information and knowledge.
This approach emphasizes cross-functional thinking and relates it to the context of
overall activities of the organization. Operations Management measures the
effectiveness of people, processes, and technology so that an enterprise can perform

28 better, faster, and with greater productivity. It provides customers with products and
services; and supports corporate strategies by working with marketing, finance and
human resource areas.
1.7.2 Operations Managements Future Challenges

We know that change comes, but not when and how. December 26, 2004, saw the
greatest natural catastrophe of the last few hundred years. It drove this lesson home in
a most tragic way. Over 200,000 persons perished in the Tsunami. Tsunami, a word
that was not known before in many parts of the world, became a household word with
an awe inspiring meaning.
It is not necessary to suffer a corporate tragedy in order to drive home the point that
one should be familiar with the challenges that one could face in the future. The
following represent a brief projected perspective on what operations managers should
look at when they think of the future. Some of these are the possible future challenges
that Operations Management may have to face.
Marketplace Challenges
1. Market Fragmentation: Competitive advantage was historically based on
mass-marketing and mass-manufacturing processes. However, this is now
changing. Domestic customers increasingly want their goods and services their
way. The challenge is even greater in marketing goods and services on a global
scale. Organizations will need an increased ability to customize product for local
markets.
2. Vocal Customers: Some customers become increasingly vocal-especially those
with single-issue agendas. Environmental concerns will be voiced loudly.
Recently a single memo from Greenpeace to Gerbers Swiss parent led this
baby-food firm to switch to organic inputs for its product. Similarly, new issues
are cropping up like endangered rain forests, child labour, non-biodegradable
polymers, etc. Privacy concerns will become commonplace as society more fully
understands the extent to which they know all about you.
3. Customer-Supplier Relationship: The customer is increasingly becoming a
partner-often unwillingly. This trend is particularly visible in the service industry.
For example, restaurants will give you a beeper to tell you when you should come
up to serve yourself. This is extending to manufacturing too. This trend is driven
by competition; with new low-cost technologies enabling organizations to provide
added value, and customers demanding value.
4. Disruptive Technologies: Customers, employees, and supply chain players will
become increasingly wired-often via wireless technology. There are numerous
possibilities; global positioning technology will spread quickly, which in turn will
create some interesting employee control/privacy issues; three dimensional bar
coding will greatly enhance the amount of information that can be stored on a
product or workstation; digital image technology will create new norms of
supervision and control; and wireless access to databases will become common.
These are just a few of the possibilities.
Factors of Production Challenges

1. Process Design and Improvements: Many quality programs have process
improvement as their core theme, and the key tactic is managing the innovation
processes. Where do new ideas come from? How are they encouraged, nurtured,
screened, and implemented? Process design poses similar challenges, but with
fewer constraints on the eventual outcome. As there is a critical relationship

between operations and organizations, new process designs will emerge merging 29
Introduction to
the physical flow system, social system, and information system into a Operation Management
self-consistent whole.
2. Employee Diversity: The job of managing an increasingly diverse workforce will
become an even greater challenge. The Operations Management function will
have to figure how to manage an increasingly diverse workforce.
3. Human Resource Scarcity: Businesses will find it increasingly difficult to hire
and keep quality workers. While the number of skilled workers tends to increase,
in an expanding economy, the increase will be insufficient. A shortage of hirable
unskilled workers will continue to plague the service industry. The time has come
to begin viewing employees as a renewable resource, and to keep them as long as
one can.
4. Global Workforce: The location of work and workers will be dramatically
impacted by communication technologies. The output of many service activities
can be done by competent persons residing in lower cost areas of the world.
General Electric moved many of its back office jobs to India, while Boeing is
hiring Russian engineers to design products at its Moscow Engineering Centre.
The Chairman of Hyundai Motors has gone on record that the Korean major in
seriously working towards developing India as a global hub for their auto
components.
5. Declining Raw Material Prices: In the late 1990s, the prices of certain electronic
parts were declining at a rate of 1.5% a month. If this trend continues, deflation
may be a real possibility. It will be a buyer's market that could drastically impact
some supply chain management concepts.
Technological Challenges
1. Technological Change: The challenge of investing in and mastering the right
technologies is a major one. No firm has either the financial or the managerial
resources to engage every new technology. Short product/process life spans mean
that investing firms must recover investments even faster.
2. Bio-genetic: Synthetic and/or animal substitutes will become commonplace in the
form of replacement body parts, foodstuffs, and drugs. On the plus side, advances
in medical health may alleviate some of the more troublesome behavioural
problems in the workplace.
3. Miniaturization: The size of products and processes will continue to become
smaller. Nano-technology is creating a revolution; self-healing garments,
tiny mechanical roto-rooters clean out our bodies, etc. More functions and
remote-control capabilities will be added to the gadgets at home and office.
Societal Challenges
1. Environment: Technologies, to make products more earth friendly, will be
developed. It is already being done to some degree in the product packaging area.
Firms need to realize that there is no way that most businesses will ever satisfy
certain sectors of the environmental movement. Nor do most of their customers
want to forego the conveniences of the products they require. The challenge to
deal effectively with environmental enthusiasts will have to be tackled.
2. Intellectual Property: Protection will lie more with the delivery process rather
than the product. Firms will rely more on industry alliances than governments to
protect intellectual property.

30 3. Financial Reporting: There will be fuller disclosure rules. This will require that a
firm's financial control system should have better and more timely inputs from
operations possibly to stabilize short-term earnings. If that is not possible,
operations managers will need to be able to alert top management whenever there
are significant deviations from the announced financial projections.
Geopolitical Challenges
1. China: Ever since Marco Polo, Western entrepreneurs have dreamt of selling
millions of products to the worlds most populous nation. With a few minor
exceptions, these dreams have remained unfulfilled. Initial sales often are quickly
replaced with Chinese goods since the Chinese have proved themselves to be
particularly adept in adopting new technologies. China's rising industrial base will
result in major economic changes as it will not be willing to remain solely as the
source of low-cost, labour-intensive products.
2. Japan: Even though Japan's economic problems seem intractable, it remains a
formidable manufacturing threat. Toyota continues to extend its manufacturing
advantage as it hones its ability to make vehicles desired by Americansat the
expense of Detroits Big Twos market share. This will extend into other areas of
business too.
3. India: With a GDP growth approximating 7 per cent, India is emerging as a
potential economic power. The growth today is based on the availability of skilled
labour. The country is progressing into higher value added products in areas such
as software development, biotechnology and pharmaceuticals. However, in the
long run, as a source of semi-skilled and unskilled labour, India will provide a
competitive advantage in the global marketplace.
New research by the McKinsey Global Institute indicates that the introduction of
foreign competition in IT, business-process outsourcing, and the automotive industry
has forced Indian companies to revamp their operations and boost productivity, and
some have become formidable global competitors. Thousands of new jobs have been
created in these industries. Consumers benefit from lower prices, better quality, and
from availability of a wider selection of products and services.
India has demonstrated to the world that the country is a credible off-shoring
destination. There are legions of trained local workers, and the skills of Indian
companies are established. Indian outsourcing firms now control over half of the
intensely competitive global IT and back-office outsourcing market.
Now that China has been admitted to the WTO, India is losing low-cost jobs.
However, with its bio-diversity, the country will be one of best sources of biological
materials. Unfortunately, the country has not advanced sufficiently in its economic
infrastructure which is the new area of focus of the Government. India can take full
advantage of its competitive advantage, by greatly expanding its investment in human
resources. If it continues to integrate itself into the global economy, India should
provide intense competition in many areas to world class companies from the
developed economies.

Check Your Progress 2 31

Introduction to
State whether the following statements are true or false: Operation Management
1. Marketing is responsible for understanding customer needs, generating

and maintaining demand for the firms products.
2. Marketing is the key operation gatekeeper between operations and the
products markets.
3. Information systems do not provide, analyze and co-ordinate the
information needs of operations.
4. India has demonstrated to the world that the country is a credible off-
shoring destination.
1.8 EFFICIENCY AND EFFECTIVENESS

Performance measurement can be defined as the process of quantifying the efficiency
and effectiveness of action.
A performance measure can be defined as a metric used to quantify the efficiency
and/or effectiveness of an action.
A performance measurement system can be defined as the set of metrics used to
quantify both the efficiency and effectiveness of actions.
These definitions highlight the fact that a performance measurement system can be
analyzed both at the level of the system, and at the level of the individual performance
measures which together constitute the system.
Efficiency or Performance Measurement System

Traditionally, businesses have used financially orientated performance measurement
systems, relying on derivatives of measures, such as Return on Investment (ROI). By
the time Johnson and Kaplans Relevance lost was published (1987) there was
widespread dissatisfaction with these traditional, cost accounting based performance
measurement systems, not least because they were seen to encourage short-termism
and lacked strategic focus. Additionally they failed to provide data on quality,
responsiveness or flexibility, encouraged local optimization, for example,
manufacturing inventory to keep people and machines busy, encouraged managers to
minimize the variances from standard rather than continually seek to improve, and
failed to provide information on what customers wanted and what the competition was
doing.
Many organizations are now actively involved in the process of reviewing their
performance measurement systems, not simply to get a better means of monitoring
performance, but also to enable them to: (1) assess health; (2) stimulate learning; and
(3) improve communication.
1. Assessing Health: One of the primary roles of senior management in any
organization is to keep track of whether the organizations resources are being
used in a way that will help it survive and prosper. Traditionally, financial
measures of performance have been the tools used to do this, but increasingly
senior managers are looking for a more rounded picture of the health of their
businesses. As a result they are turning to measurement systems which combine
the financial and non-financial dimension of performance. This trend is
encapsulated by Kaplan and Nortons (1992, 1994) balanced scorecard which is

32 based on the assumption that an organizations measurement system should enable

its managers to answer each of the following questions:
How do we look to our shareholders (financial perspective)?
What must we excel at (internal business perspective)?
How do our customers see us (customer perspective)?
How can we continue to improve and create value (innovation and learning
perspective)?
2. Stimulate Learning: Initially benchmarking was primarily seen as a means of
determining an organizations competitive standing. More recently, however, the
emphasis has shifted to benchmarking practices rather than performance. In large,
multinational corporations, this concept has important implications, because
within such organizations, there is scope to transfer knowledge or learning from
one part of the business to another. Having comparable measures of performance
in different parts of the business simplifies the process of identifying which
knowledge could valuably be transferred.
3. Improve Communication: It has long been recognized that the effect of
measurement is to stimulate action. The final way in which businesses are now
seeking to use performance measures is as a means of communicating what they
care about, thereby stimulating appropriate behaviours.
Individual Performance Measures

Information is needed to specify a performance measure. This can be incorporated in a
ten-step procedure.
1.9 LET US SUM UP

This lesson discusses the historical background, definition and the basic concepts of
Operations Management. We will also examine the responsibilities of the Operation
Manager and Operations Managements interface with other functions. In the last
section, we will identify the future challenges that will impact this discipline.
Todays consumers have high expectations, and these are on the rise everyday.
Consumers demand an increasing variety of products with new and improved features
that meet their changing needs; products that are defect-free, have high performance,
are reliable and durable, and are easy to repair. They demand rapid and excellent
service for the products they buy.
A focus on the issues central to operations management will soon carry us beyond
existing technologies and provide the catalyst for developing new ones. The set of
challenging problems is boundless, as is the upside potential in this new era.
Although ultimately it is the problems facing managers that will define objectives and
techniques, there are already visible broad outlines of potentially new and exciting
developments. These include agile production and mass customisation which will
enable firms to make products better, cheaper, and faster than their competitors and
facilitate innovation and increased product variety. Nonetheless, transforming
operations from stable, rigid systems to operations that support agility will continue to
be a difficult challenge.

33
1.10 LESSON END ACTIVITIES Introduction to
1. Students should select at least two organizations they are familiar with. One of
these organizations should be involved in providing a tangible product and the
other an intangible product. They should draw out the transformation process to
the inputs and show what the outputs are, and what is involved in the
transformation process. How is value added?
2. Explain the important issues with transformation. Take a hospital, say Apollo
Hospital, and explain the conversions taking place. What are the hospitals overall
objectives of the operations systems and how does the hospital achieve it?
1.11 KEYWORDS
Clock-speed: It is an important attribute for it defines how fast a firm, or parts of a
firm, must respond to change, to competitive threats, and other organizational
challenges.
Scientific Management: It was a set of principles postulated by Frederick Winslow
Taylor. The principles of scientific management were: scientific laws govern work, so
scientific methods can be used to analyze work; workers are different, so match
workers to their job and then train them thoroughly; use employee self-interest to
motivate and separate the responsibilities of workers and managers.
Time and Motion Study: It is an analysis of the operations required to produce a
manufactured article in a factory, with the aim of increasing efficiency. Each
operation is studied minutely and analyzed in order to eliminate unnecessary motions
and thus reduce production time and raise output, which increases productivity.
Operations Research (OR): Operations research is the application of scientific
methods to improve the effectiveness of operations, decisions and management, by
means, such as analyzing data, creating mathematical models and proposing
innovative approaches.
Operations Management constitutes all activities that an organization conducts in
order to deliver value to its customers. Its the set of processes that transforms either
materials or information into a product or service.
Goods: These are tangible items that are usually produced in one location and
purchased in another. They can be transferred from one place to another and stored for
purchase by a consumer at a later time.
Services: Services are intangible products that are consumed as they are created.
Direct customer contact is a key characteristic of services.
1.12 QUESTIONS FOR DISCUSSION

1. Why do you need to accept that Operations Management should be viewed as a
system? What is the systems view of Operations Management? What are the
subsystems within the operations function and what is their salience?
2. Define operations processes and explain its key components. What challenges do
operations managers face in managing processes?
3. Operations management has been analysed by three schools of thought. Outline
the basic differences in their perspectives.

34 Check Your Progress: Model Answers

CYP 1
1. False
2. False
3. True
4. False
5. False
CYP 2
1. True
2. True
3. False
4. True
1.13 SUGGESTED READINGS

Upendra Kachru, Productions and Operations Management, Excel Books, New Delhi.
Everest E Adam & Albert, Productions and Operations Management, PHI
Publications, IVth Ed.
Joseph G. Monks, Operations Management (Theory & Problems), McGraw Hill Intl.
S.N. Chary, Productions and Operations Management, TMH Publications.
Chunawala and Patil, Productions and Operations Management, Himalaya.
Adam & Ebert, Production and Operations Management Concepts, Models and
Behavior, Prentice Hall of India, 1992
Bradley Gale, Managing Customer Value: Creating Quality and Service that
Customers can see, Free Press, NY, 1994
Buffa and Sarin, Modern Production/Operations Management, John Wiley & Sons,
1994
Clayton Christensen, The Innovators Dilemma: When New Technologies Cause
Great Firms to Fail, HBS Press, 1997
Chase, Jacobs, Aquilano, Operations Management for Competitive Advantage,
Tata McGraw Hill, Delhi, 2004
Krajewski and Ritzman, Operations Management, Strategy and Analysis,
Pearson Education, 2002
Melnyk, S. and D. Denzler, Operations Management: A Value Driven Approach;
McGraw Hill, 1996
Vonderembse, Mark, White, Gregory, Operations Management, Concepts, Methods
and Strategies, John Wiley & Sons, 2004

35
LESSON Types of Production Systems
2
TYPES OF PRODUCTION SYSTEMS
CONTENTS
2.1 Introduction
2.2 Production Systems
2.3 Types of Production Systems
2.3.1 Project
2.3.2 Job Shop
2.3.3 Batch Production (Disconnected Line)
2.3.4 Assembly Line
2.3.5 Continuous Flow
2.3.6 Cell Manufacturing (Group Technology)
2.3.7 Flexible Manufacturing Systems (FMS)
2.4 Production System and its Environment
2.5 Let us Sum up
2.6 Lesson End Activity
2.7 Keywords

Explain different types of production systems
Know about manufacturing strategies and the contingency framework that links
production system to manufacturing strategies.
2.1 INTRODUCTION
The study here suggests a set of potential profiles for different types of production
systems and manufacturing strategies and deals with the contingency framework that
links production systems to manufacturing strategies. Specifically, an explicit
conceptual link is drawn between generic manufacturing strategy that uses two
dimensions of strategy (cost efficiency and differentiation) and the complementary
production system typology in manufacturing that uses technical complexity and
technical flexibility. Proposed production systems are intermittent production

36 system, continuous production system, concurrent production system, and

degenerate production system. The study have also expands the area of interest to
focus on the development of methods and measures of each technology dimension that
can be validated in some way.
Thus, this lesson provides an integrated framework, clarifies and combines the terms
and concepts related to manufacturing strategies based on the results of business
strategy research and new manufacturing technology.
2.2 PRODUCTION SYSTEMS

Production systems play a very important role in achieving organizational excellence.
But lack of proper planning, co-ordination and control often affects the capabilities of
these systems because of which these systems are not utilized fully and effectively
leading to many undesirable situations forcing many organizations to become less
competitive. A number of organizations worldwide have achieved and sustained
excellence by effective production management.
What is Effective Production Management?

Effective production management involves understanding of the characteristics of
various types of production systems, identification of the dynamics of the different
phases of the management process, realizing the potential of different analytical tools,
learning the nuances of the implementation of these tools, visualizing the impact of
various uncertain situations and developing the ability to react under various scenarios
to achieve consistently excellent business results. There are evidences to show how a
number of organizations achieved world-class status by effective management of their
production systems. These organizations achieved superior quality, higher
productivity, perfect delivery performance, overall customer satisfaction and
enterprise excellence all with lower cost.
The important issues arise here are related to What, Why and How of Production
Management. Also, to identify the basic problems in industries involved in production
of goods, understand various approaches available to analyze these problems, learn
various solution procedures for these problems handle real life situations with
confidence and adjust to future changes in production systems. It should be
endeavored to enhance their confidence through practice sessions comprising of
exercises and cases of different success stories, addressing issues related to how to
reduce cost, improve quality, enhance delivery reliability and improve all round
productivity performance effectively.
1. Effective production management involves the understanding of the
characteristics of various types of production systems.
2. There are evidences to show that how a number of organizations achieved
world status by effective management of their production system.
3. A production system refers to how an organisation organizes material
flow using different process technologies.
4. Production system does not play an effective role in achieving the
organizational excellence.

37
2.3 TYPES OF PRODUCTION SYSTEMS Types of Production Systems
A production system refers to how an organization organizes material flow using

different process technologies. There are five major types of production systems that
have been generally identified. Though these will be discussed in greater detail later,
they are described below:
2.3.1 Project
These are generally one-off projects. It is based on extensive customisation that is
suited to the customer's need. Many construction projects, project management
contracts, shipbuilding and civil engineering projects fall in this category.
For example, Larson and Toubros main business is executing projects. Much of the
work is carried out at site rather than in a factory. All equipment, tools, materials,
labour, etc., are placed at the site itself. Infosys sends its teams to the customer's
facilities to install, test, and customize its software.
2.3.2 Job Shop

Job shop production is characterized by processing of small batches of a large number
of different products, most of which require a different set or sequence of processing
steps. Production equipment is mostly general purpose to meet specific customer
orders. Highly skilled labour is needed to handle the processes, as the variety and
product range are generally very high.
Commercial printing firms, machine shops, and die, jigs and fixture making, etc., are
examples of this type of structure. Thomson Press operates on the basis of specific
customer orders; Tools and Equipment makes jigs and fixtures as per the design and
requirements of its clientele. Tata Consultancy Services (TCS) produce different types
of software, based and customized to each clients requirements.
2.3.3 Batch Production (Disconnected Line)

Production is in discrete parts that are repeated at regular intervals. Essentially, it is
somewhat like a standardized job shop. Such a structure is generally employed for
relatively stable line of products, each of which is produced in medium volume, either
to customer order or for inventory. The process has the ability to switch over from one
product to another with relative ease. Though mostly general-purpose machine are
used, they are supported with specially designed jigs and fixtures. The skill level of
labour is high but not critical.
Examples include equipment like X-ray machines, earth moving and material
handling equipment, electronic devices, etc. Wipro GE manufactures medical
equipment and ECIL manufactures mainframe computers using batch production. This
is also applicable to many small-scale enterprises or many chemical processes, etc.,
e.g., Oracle or People Soft produce CDs with standard software in batch productions
depending on the demand.
2.3.4 Assembly Line

An assembly line is a mass production process. On assembly line, production follows
in a predetermined sequence of steps, which are continuous rather than discrete. The
product moves from workstation to workstation at a controlled rate, following the
sequence needed to build the product. The product variety is low and special purpose
tools and equipment is normally employed. When other processes are employed in a
line fashion along with assembly, it is commonly referred to as a production line.

38 Examples include automobiles, appliances like washing machines, televisions, etc.

Maruti makes cars on an assembly production line; ECIL makes electronic
components and McDonalds its burgers using the same concept.
2.3.5 Continuous Flow

Continuous production is common in the food processing industry, and in industries
involving undifferentiated materials such as petroleum and chemicals. Most bulk
products are manufactured using continuous flow production. Generally, on-line
control and continuous system monitoring is needed. Such processes are usually
highly automated and, in effect, constitute one integrated machine. Shutdowns and
start-ups are very expensive in this production mode, and need to be avoided.
The Reliance Petrochemical complex at Patalganga and the Thermal Power Plants
operated by NTPC are examples of this type.
2.3.6 Cell Manufacturing (Group Technology)

A cell is a self-sufficient unit, in which all operations required to make components or
complete products can be carried out. It is like a mini-factory within the factory,
which is managed by a cell team. TI Cycles reorganized its manufacturing into cells to
serve other operations. Thus cell manufacturing creates a client-server relationship
between the different components of the production system.
Cell layouts can be U-shaped or a segment of a line (a product or sub-assembly stage)
allowing a self-organizing, multi-skilled group of fewer people to manage the
operation. Shorter processing times, better team attention to quality problems,
reduction of work in progress, lower handling costs and simpler scheduling can be
achieved. Built in spare plant capacity (redundancy) or providing additional machines
to a cell can accommodate small changes or fluctuations in demand and bring benefits.
2.3.7 Flexible Manufacturing Systems (FMS)

A flexible manufacturing system generally consists of a number of CNC machine
tools and a materials handling system that is controlled by one or more dedicated
computers. A typical flexible manufacturing system can completely process the
members of one or more part families on a continuing basis without human
intervention. FMS brings flexibility to manufacturing so that a part can be produced
when the market requires it. The system is flexible enough to suit changing market
conditions and product type without buying other equipment.
Computer-aided manufacture and control enables to set up time on machines or
minimize changeover procedures. Computers control machines so that they can
respond to pre-programmed instructions. Parts or components are designed using
Computer Aided Design software (CAD) and the data from design specification
provides the input to generate instructions to computer-controlled machines. Due to
this, the production of frequent, small batches is possible and machine availability can
be better scheduled in response to customer orders and unit production costs can be
kept low.
A production line assembling cars, e.g., Maruti, can switch from producing large
batches of one model of car to another model with a different shape and arrangement
of sub-assemblies within minutes and multi-skilled workers can re-configure their
work stations with required materials.


Types of Production Systems
1. Cycle time is the average time between start and completing a job.
2. Lead time is the interval between the start and end of an activity or series
of activities.
3. A good plant layout looks nice and attractive but cannot bring about
increase in productivity.
4. Corporate policies related to quality of production are an external factor
since quality is an industry specific matter.
5. The process of conversion of materials into finished product comprises
two inspections.
2.4 PRODUCTION SYSTEM AND ITS ENVIRONMENT

The production system is one of the major components of an organization. Production
is affected by and has an impact on other divisions of the organization. As said
above, the production is the heart of an organization and it coordinates all other
divisions of the organization. The diagram given below shows that production
coordinates finance, marketing, materials management and human resource divisions.
The figure 2.1 also shows that the various divisions have interaction with outside
agencies such as: finance has interaction with capital management, material
management has interaction with vendors, HRM with labour force and marketing with
customers.
Figure 2.1: Customer Orientation in Production and Operations

Internal factors affecting production:
1. Engineering: Product Quality
2. Research and Development: Product Development
3. Quality: Quality Control and Quality Assurance

40 External factors affecting production:

1. Government
2. Competition
3. Technology
4. Economic Conditions
2.5 LET US SUM UP

The world's markets and industry structures are in flux because the global forces at
work are lowering the barriers to interaction. As interaction costs fall around the
world, new economies of specialization, scale, and scope are being created
innovative companies have an abundance of opportunities to earn high rewards for the
risks taken. Factories of the future are already in the making. FMS, CAD and CAM
are cornerstones of the factory of the future.
2.6 LESSON END ACTIVITY

Students are expected to demonstrate an understanding of the principles involved in
outsourcing processes. Based on this understanding, on why outsourcing has become
so important today, he should try to explain the statement.
2.7 KEYWORDS
Flexible Manufacturing System: It is a manufacturing system that consists of a
number of CNC machine tools and a materials handling system that is controlled by
one or more dedicated computers.
Manufacturing Flexibility: It is the ability of a manufacturing system to respond, at a
reasonable cost and at an appropriate speed, to planned and unanticipated changes in
external and internal environments.
Mix Flexibility: The ability of a system to present a wide range of products or variants
with fast set ups.
Changeover Flexibility: The ability of an OM system to introduce a large variety of
major design change quickly within existing facilities.
Modification Flexibility: The ability of the transformation process to implement
minor product design changes, quite possibly after the product has been delivered.
Volume Flexibility: The ability of the transformation process to profitably
accommodate variations in production quantities. Systems with high fixed costs beget
inflexibility since the firm will always be striving to maintain high utilization rates.

1. Describe the basic features of the five major process types and give an example of
each type in (a) food business, (b) health care, and (c) manufacturing.
2. Draw out the process diagrams of any two of the above.
3. Companies are focusing on the things they do best and outsourcing all other
functions to trusted partners. Explain this statement with examples from Indian
Industry.

4. What is the difference between high-contact and low-contact systems? Provide 41

Types of Production Systems
some examples. Would a hotel such as Holiday Inn be classified as a high-contact
operation if a customer on a business trip spends 8 of the 16 hours on the trip
sleeping in the hotel?
5. How does customer contact affect the operations strategy of a service
organization?
6. What implications do high-contact and low-contact systems have for efficiency,
quality, flexibility, and dependability? Use the example of HMOs pressuring
hospitals to reduce the average length of stay in order to reduce the cost of
operations.
Check Your Progress: Model Answers

CYP 1
1. True
2. True
3. True
4. False
CYP 2
1. True
2. True
3. False
4. False
5. True

Upendra Kachru, Productions and Operations Management, Excel Books, New Delhi.
Everest E Adam & Albert, Productions and Operations Management, PHI
Publications, IVth Ed.
Joseph G. Monks, Operations Management (Theory & Problems), McGraw Hill Intl.
S.N. Chary, Productions and Operations Management, TMH Publications.
Chunawala and Patil, Productions and Operations Management, Himalaya.
1994

42 Krajewski and Ritzman, Operations Management, Strategy and Analysis,

Pearson Education, 2002
McGraw Hill, 1996

43
Product and Product Design
UNIT II

44

45
LESSON Product and Product Design
3
PRODUCT AND PRODUCT DESIGN
CONTENTS
3.1 Introduction
3.2 Typology of Products
3.3 Product Development Process
3.3.1 Clarification of the Task
3.3.2 Concept Generation
3.3.3 Embodiment Design
3.3.4 Detailed Engineering Design
3.3.5 Physical Evaluation
3.3.6 Speed of Product Development
3.4 Product Design and Architecture
3.4.1 Product Architecture
3.4.2 Engineering Economy
3.4.3 Measuring Costs and Identifying Waste
3.4.4 Design for Manufacturability (DFM)
3.4.5 DFX Design for X
3.4.6 End Product and Parts Standardization
3.4.7 Modular Designs
3.5 Product Development in Services
3.6 Product Development Strategies
3.6.1 Internal Development
3.6.2 Reverse Engineering
3.6.3 Collaborative Development and Contracted Out R&D
3.6.4 Joint Ventures
3.6.5 Producer-customer
3.6.6 Manufacturing Sub-contracting
3.7 Types of Production System
3.7.1 Job Shop Production
3.7.2 Batch Production
Contd

46 3.7.3 Mass Production

3.7.4 Continuous Production
3.8 Let us Sum up
3.10 Keywords

Describe the topology of products
Know the operation management in manufacturing and service sector
Explain the design in the context of operations management
Identify the objectives of the design activity
Know the types of production system
Analyse the importance of product design and architecture
Learn about the product development strategies.
3.1 INTRODUCTION
Product decisions often make or break companies. Studies indicate that nearly two out
of three new products fail after launch. In addition, companies in many sectors are
under continual pressure to speed up the pace of product development even to adapt
products that are still in the pipeline to the demands of a constantly changing
marketplace. This lesson will discuss product design and process selection, which are
crucial areas in operations management.
3.2 TYPOLOGY OF PRODUCTS

Operations Management is fundamental to an organizations achievement of its
mission and competitive goals. It is involved in creating value in the products.
Products can be tangible or intangible. Tangible products are called goods, while
intangible products include services and contracts. These are collectively referred
to as products.
Effective Operations Management

Effective Operations Management is critical for organizations that provide goods as
well as to organizations that provide services and contracts. A firms success or failure
can depend on how it manages operations on a daily basis.
Goods are tangible items that are usually produced in one location and purchased in
another. They can be transferred from one place to another and stored for purchase by
a consumer at a later time. Examples of goods are products such as cars, washing
machines, televisions, and packaged foods, etc.
Services are intangible products that are consumed as they are created. Services now
dominate the economies of most industrialized nations. Service organizations include

hotels, hospitals, law offices, educational institutions, and public utilities. They 47
provide such services as a restful and satisfying vacation, responsive healthcare, legal
defense, knowledge enrichment, and safe drinking water.
Services also include back-office support for internal customers of an organization,
such as IT support, training, and legal services. Services take place in direct contact
between a customer and representatives of the service function.
Customer contact is a key characteristic of services. A high quality of customer
contact is characteristic of a good service organization. This is vital to retain current
customers as well as for attracting new ones. Most service organizations though they
seldom carry finished inventory do have supporting inventory. Hospitals keep drugs,
surgical supplies, emergency supplies and equipment spares; Banks have forms,
cheque books, and other supplies.
Contracts are business exchanges in which neither services nor goods are transferred;
instead, there is an implicit understanding between the customer and the provider that
goods and services will be provided on an as needed basis. With a contract, the
customer pays a fee and then is entitled to a manufactured goods or services. Many
goods and services are now evolving into contracts.
Historically, manufacturing organizations have operated tertiary and often secondary
activities on contracts. Today, increasingly, many businesses are moving to contract
based transactions. For example, Internet and Applications Service Providers (ASPs);
security organizations; maintenance, healthcare and many other businesses design
their operations based on contracts.
Service and contracts require more attention and better planning than manufacturing.
A manufacturing defect can always be reworked before dispatch. Service, however,
occurs in the presence of the service provider, making it difficult to manage capacity
and control quality since inventory cannot be stored and inspected prior to the service
encounter. Contractual transactions can be even more complicated. The complication
arises because it is difficult to enhance capacity overnight and all customers may
choose to exercise their options at the same time.
Many recent thinkers have suggested that most manufacturing firms are better off
thinking of their output in terms of the service bundle they provide to the customer.
For example, Mercedes has announced that it is developing a system that will connect
the cars software via the Internet to a customer assistance center. This system will be
able to detect, diagnose and repair the problem.
Another example is Xerox. It has redefined its product as facilitating
communications rather than just selling copy machines. In its strategy to be the
Document Company, Xerox now offers products that can copy handwritten
documents, convert them to electronic form, and e-mail them. Such products have
allowed Xerox to increase the services related to document management in its output
bundle. This type of transition creates significant challenges for Operations
Management.
Today, increasingly organizations are trying to grow their presence in the market and
earn a competitive edge over competition by mixing goods, services and contracts.
This brings in a number of permutations and combination, significantly changing the
landscape of operations.

48 Table 3.1: Comparison among Goods, Services and Contracts

Operations Goods Services Contracts
Factors
Value Value is provided by Value is provided by Value is provided by the

physical processing availability of the promise (guarantee) of
during manufacturing. service, leading to availability of a product or
sensory or service when the contract
psychological is exercised.
satisfaction.
Tangibility Goods are tangible; Services are intangible; Intangibility is often

specifications are operational accompanied by an
easily defined; and characteristics are absence of customer
goods can be difficult to specify; and presence for long periods
inspected for quality. services cannot be of time.
inspected for quality
prior to consumption.
Process Manufacturing can be The service process The process must be

design isolated from the must be designed to designed to accommodate
customer and occur in the presence of batches and surges in
designed for the customer. demand.
efficiency.
Inventory Products can be stored Services are consumed Many operations can be
for later consumption. as they are created. conducted off-line, or
not in the presence of the
customer.
Capacity Manufacturing Capacity must be Capacity must be flexible

capacity can be designed for maximum to accommodate periods of
designed for average demand. low and high demand.
demand.
Quality Manufacturing Consistency of human Quality is perceived only

processes can achieve performance is more when the option is
a high level of difficult to maintain; exercised, and may be
precision and customer perceptions influenced by time and
repeatability. are subjective. availability.
Location Facilities can be Service facilities must Centralization and

located to minimize be located near the economies of scale are
operations and customer. more likely.
transportation costs.
Table 3.1 summarizes some key differences and operational consequences among
goods, services, and contracts across several factors that shape operational decisions in
organizations.

49
3.3 PRODUCT DEVELOPMENT PROCESS Product and Product Design
Figure 3.1: New Product Development Process

Product development includes a number of processes in identifiable stages. These are
shown in Figure 3.1. The steps are as follows:
3.3.1 Clarification of the Task

The search for ideas starts based on the new product strategy. The ideas that fit in
with the strategy have to be identified. The customer needs need to be determined.
This should provide pointers towards the functional requirements of the product.
Simultaneously, the organization should be evaluating its resources and time
schedules to identify and specify constraints.

50 Based on this exercise the general specifications of the product or service are
drawn up.
The product idea must demonstrate that it fulfills some consumer need, and that
existing products do not already fulfill.
3.3.2 Concept Generation

The specifications are the basis for concept generation. At the concept level, the
organization should identify essential problems and propose the function structure of
the product or service. This should generate proposals and solution principles that are
combined and refined into concept variants.
The concept should be evaluated against technical and economic data. If the results
are found satisfactory, the concept has reached the stage for screening.
Screening is a management process. Each idea is analyzed and its risks and potential
are scrutinized, both technically and business wise. Those having potential are
identified. Most of the ideas are killed or die at the screening level.
The business analysis includes preliminary market analysis, creating alternative
concepts for the product, clarifying operational requirements, establishing design
criteria and their priorities, and estimating logistic requirements for producing,
distributing and maintaining the product in the market.
3.3.3 Embodiment Design

The ideas, after they have cleared screening, are developed in their preliminary
configuration and an introductory analysis is conducted.
The best preliminary design(s) are:
(a) Selected and refined.
(b) Evaluated against technical and economic criteria.
(c) The preliminary design(s) are refined and the configuration completed.
Detailed analysis is conducted of refined design(s). The design is reviewed for errors,
manufacturability and cost. The preliminary design and alternate designs are evaluated
according to critical parameters to determine the design support that will be required
including analytical testing, experimentation, and physical modeling. Based on the
results and trade-offs, the conceptual design is firmed up.
This is followed by:
(a) Preparation of preliminary parts list, and
(b) Fabrication design for the basic elements of the conceptual design.
This completes the stage of firming up the definitive design of the new product or
service.
3.3.4 Detailed Engineering Design

This stage involves engineering a detailed definition of the product, including its
components, materials, sizes, shapes, etc. The product design is:
(a) Analyzed,
(b) Experimented upon, and
(c) Data collected to determine if the design meets the design objectives.
Trade-offs is inevitable in the optimal design, since objectives often conflict with each
other.

The final design, whether computer generated or compiled manually, includes 51

drawings, specifications and other documentations necessary to form the basis of
product and process development.
Since the 1960s, when GM and IBM began work to develop a system of Computer
Aided Design (CAD); it has become a commonly used tool. Originally, CAD was
envisaged as a sophisticated drafting system. Today, final analysis and verification is
conducted through computer analysis and simulations. Complete detail drawings and
production documents are then generated.
Prototypes are used to establish the detailed engineering design before the details are
finalized. In some cases, especially in defense related products or products whose unit
value is extremely high, prototypes are often virtual prototypes.
In 1986, I was a member of a team from India that was invited to Brazil to witness the
demonstration of an armored vehicle. When we arrived in Sao Palo, we expected to
see the physical testing on the vehicle to demonstrate its capabilities. Instead, we were
taken to the main computer center of the firm and the entire sequence of attack and
defense, and its consequences were played out on the computer. Sitting in the
laboratory we were able to assess the damage to the vehicle, the parts that had failed
and the impact on the body armor.
Figure 3.2: Product Design Cycle
3.3.5 Physical Evaluation

Concurrently with the development of detailed engineering design, physical
evaluation is carried out. This includes:
(a) Fabricating a working prototype of the product.
(b) Testing and evaluation to confirm that it represents the solution.
Very often, the duration of this stage can be reduced if certain tasks done
simultaneously by the organization fully utilizing the benefits of cross-functional
thinking.
Computer simulations often precede physical evaluation. In currently available CAD
systems, the designer can view the part in any orientation, any scale or any cross
section. The parts and the product can be seen in three dimensions, rotated, moved,

52 and the response to different stress patterns seen visually on the computer screen,
without building a physical prototype.
3.3.6 Speed of Product Development

With a new regime of patents and legal protection against copying ideas, designs, or
products there have been changes in the approach to new product development.
Organizations are more concerned about being the first to develop an idea or design a
product so that the can protect their markets.
Being able to design, develop, and introduce a new product quickly is a major
competitive advantage and it gives a firm fast to market capabilities.
There are two types of fast to market activities:
1. Fast to customization: The first activity is being able to develop products to meet
the specific needs of a customer. This is called fast to customization. Producing
such a product with the participation of the customer, may give a firm a
competitive advantage.
2. Fast to design: The second type relates to developing products to meet the needs
of a cluster of customers. Fast to design product innovation can be used in MTS,
ATO, and MTO market orientations. For example, Nokia introduced cell phones
that incorporate cameras. Seeing that there was a cluster of customers for this
product all manufacturers now offer this product. Nokia has a first movers lead in
this market.
In other situations, being fast to market may not be less important. It depends on how
quickly a products design becomes stale. Mercedes-Benz traditionally had customers
that valued good design more than a model year.
For some products, being fast to market may not be in your firms best interest.
A creative advertising executive always makes his clients wait a week or two, even
though he thought of the copy for the ad in a day. Likewise, if a gourmet restaurant
that serves your meal five minutes after you order, you know that they must be using a
microwave oven. If they make you wait for 30 minutes, then the same judgment
cannot be made.
Another important type of product innovation involves refining or rejuvenating
products within the existing product line. For some companies, this is an annual event,
such as is the case with the automotive industry.
Major redesigns in the automobile industry can take years and costs billions. This
becomes a catch-22 situation as it costs so much to develop new models, auto
companies often try to sell as many copies of the new product as possible, even if it
takes four or five years. But the older a cars design gets, the greater the chance that it
will lose market share to competitors with fresher models. And worse yet, if it takes
five years to develop a new model and a company wants to sell that model for another
five years, then it must project what the customers preferences are likely to be ten
years from now. This is a challenge.
Fill in the blanks:
1. is a key characteristic of services.
2. Service and contracts require more attention and better planning than

3. Screening is a process.

53
3.4 PRODUCT DESIGN AND ARCHITECTURE Product and Product Design
The first step in developing a new product strategy is that the organizations should
decide their target customers, what they value, and the likely size of the market of
their interest. These are key inputs to make product architecture decisions.
3.4.1 Product Architecture

It should establish three things:
1. Specify the functional capabilities of the product, its features, and post-sale
servicing needs.
2. Specify the capabilities of the product delivery system and post-sale support that
the customer expects and determine the ability of the organization to provide for
these, and
3. Specify the roles and risks each player within the supply chain will assume.
For businesses that make to stock or assemble to order, the business process that
develops a products architecture must deal with a number of design issues, such as:
Can a make to stock product meet the core needs of target customers?
Can a make to stock product with a flexible set of optional functional modules
satisfy the mix variety demanded by the buyers who want assemble to order
products?
How can product designers divide the functions of the product among separate
modules effectively and how should the modules interface with each other?
How much technical risk can the design take?
What should be in-house development and what should be contracted out?
These are product design decisions that fall beyond what was called a line of visibility
in the service area and products customer. But within the firm, they have important
effects, not only on product quality, but also on the resources needed to effectively
perform the development process.
Good product architecture can help designers develop products capable of providing
the firm with a competitive advantage. If being cost competitive is the strategy,
engineering economy should be a major consideration. If being fast to market or fast
to product is a strategic goal, then the ability to achieve these ends starts with good
product architecture.
3.4.2 Engineering Economy

Engineering economy is the discipline concerned with the economic aspects of
engineering. It involves the systematic evaluation of the costs and benefits of proposed
technical projects. In reality, any engineering project must be not only physically
realizable but also economically feasible.
For example, Maruti Udyog had decided that the weight of the Maruti 800 was a
critical requirement of the design. How do you choose between plastic composite and
steel sheet stock for the auto body panel?
The choice of material will dictate the manufacturing process for the body panel as
well as manufacturing costs. Some may argue that because the composite body panels
will be stronger and lighter, it is a better choice. However, there was not much of a
market for expensive cars. Maruti was looking for a car that would be low cost so that
it could tap the higher end of the two-wheeler users.

54 It also had to take to account that:

(a) The customer may not believe that plastics will provide a stronger body option
than steel panels, and may not be willing to pay more, and
(b) A maintenance man may not believe that it is easy to repair composites, and
therefore repair and maintenance will cost more.
One might suggest that the above arguments are ridiculously simplistic and that
common sense would dictate choosing steel sheets for the framing material. Although
the scenario is an exaggeration, it reinforces the idea that the economic factors of a
design weigh heavily in the design process, and that engineering economy is an
integral part of that process, regardless of the engineering discipline.
The focus on economic cost and engineering costs of new product development has
great importance. Each different technical solution to a problem constitutes an
alternative. Each alternative requires different level of resources to build and causes
different levels of resource to be expended. Thus trade-offs must be made during the
design of engineered systems. Engineering economy selects the best alternative based
on design for the theme.
Why do this at all?
Why do this now?
Why do it this way?
An engineering cost analysis, in its simplest form, may be no more than a spreadsheet
listing the phases found in the product concept through product realization cycles on
one axis and identifying the many functional areas, costs, or even software tools on
the other.
In its second-generation form, engineering cost analysis software will approximate the
costs associated with each phase of the product developmentrealization cycle.
In its ultimate form, the engineering cost analysis will include and improve upon all of
systems engineering's current discrete event optimization functions; but, more
importantly, it will extend forward in time to include accurate estimates for various
design, material, and process selection options. In some instances, it may also include
the determination of the optimum product concept to satisfy the intended customers'
needs and cost constraints.
Figure 3.3 provides a glimpse into the various inter-connections within the operations
function that need to taken into account in a properly designed engineering cost
analysis.
Equipment Information Tooling
Raw Materials
Labor
Manufacturing System Finished Goods
Purchased
Components
Energy Suppliers Services Waste
Figure 3.3: Second Generation Engineering Cost Analysis

As a rule of thumb, 70 percent of the cost of the product or service is firmed up by the 55
time the conceptual design has been completed. By the time the system definition is
completed 80 percent of the cost is finalized and 90 percent of the cost is firmed up
before production. For example, the geometrical shape of a part or assembly
determines the subsequent manufacturing processes by which it may be manufactured.
This, in turn, limits the materials to just those few that are suitable for those processes.
Source: M Lilienthal, Defence Modelling and Simulation Office, Observations on the use of Modelling and
Simulation, 2003.
Figure 3.4: Locking of Product Costs and Design

The impact of the design process on costs is shown in Figure 3.4. It shows how costs
are firmed up and it will be seen that the majority of cost reduction opportunities are
lost prior to the actual production.
These decisions are difficult because there is no guarantee for success. Two out of
three new products fail after launch. Therefore, the key observations on product
development recommended by the expert committee on Bridging Design and
Manufacturing setup by the national research Council, U.S.A., after a series of
hearings from industry, in February 2003, should be of great interest:
Continue the early collaborative exploration of the largest possible space across
the lifecycle, including manufacturing, logistics, time-phased requirements, and
technology insertion.
Perform assessments based on modeling and simulation early in the development
cycle alternative system designs built, tested and operated in the computer
before critical decisions are locked in and manufacturing begins.
Wait to develop designs until requirements are understood.
Requirements are the key. Balance them early.
Once the design is drawn, the cost and weight are set.
No amount of analysis can help a bad design get stronger or cheaper.

56 Remember that 80 percent of a product's cost is determined by the number of parts,

assembly technique, manufacturing processes, tooling approach, materials, and
tolerances.
3.4.3 Measuring Costs and Identifying Waste

Operations Management is interested in enhancing value. Cost reductions often
translate directly into increases in value if they outweigh changes in performance.
Like the other inputs to the value equation, the costs are composed of a variety of
different elements. For example, the costs relevant to the purchase decision could
include one or more of several categories:
Acquisition cost: The purchase price of a car, for instance
Repair costs: The cost of replacing a broken part
Maintenance costs: The cost of oil changes and tune-ups
Operating costs: The cost of gas and tires
Salvage/resale costs: The cost recovered upon selling a car
Disposal costs: The cost of disposing of a wrecked car
Furthermore, managers can break down costs to express them quantitatively or
qualitatively.
A major problem in many corporate accounting systems has been that overhead costs
are precisely applied to the products that they support. Effective performance
measurement requires each product to bear its fair share of all costs incurred to create,
make, sell, and service. Direct costs pose no major problem; managers simply record
all of the labor, materials, and other resources used by a product. However, assigning
overhead costs becomes more difficult. Unlike direct costs, these costs seldom vary
with changes in output.
Marketers know well that people like to buy things cheaply, but they do not like
cheap things. This statement describes both the major attraction and the problem of
emphasizing cost as the firm's major source of value.
Customers want at least the same performance for a lower cost, not simply less for
less. A cost driven approach to value treats performance as a given and focuses on
reducing cost. For example, this approach has been successful in Bajaj Auto. It has
been successful in inculcating a concept in its workforce of lower costs means better
quality.
The firm should be able to measure customer satisfaction, to evaluate customer service
costs. It is cheaper to keep a good customer happy than to win one of your
competitors good customers. Customer satisfaction can be measured by the use of the
concept of Lifetime Value of a Customer, which is an estimate of the stream of
income a firm can expect to receive from a satisfied good customer. This is a useful
concept in that, like value, it forces all within a system to focus on keeping customers
satisfied and coming back.
Operations management system must examine both the product it is selling and the
processes it uses to deliver and service the product, to achieve this objective. It should
identify product features that customers do not value highly or processes or parts of
processes that contribute unnecessarily to cost. Activities that do not add value are
waste, if they are not support activities. Unnecessary product features that dont add
value are waste these need to be eliminated.
Using a waste reduction approach helps reduce the excessive emphasis on cost
reduction. Cost reduction programs that ignore the negative effects on lead-time,

flexibility and quality will not enhance a firms competitiveness in the long run. For 57
example, a firm that uses cheaper material that reduces quality to lower cost may save
money in the short term. However, over the long haul they reduce the ability of the
firm to deliver a product consumers value. They may buy the product once, but not
thereafter.
Design-to-cost: Factor costs, scale effects, and productivity differentials should not be
the only criteria for design decisions. Perhaps the greatest of all scope for
improvement lies in design-to-cost. This means cost is taken as a basis for the final
design decision.
This technique requires the organization to have experience in systems optimization
and good knowledge of the manufacturing processes involved. Often the supplier has
this knowledge. For example, the amount of costly platinum needed for an automotive
catalytic converter used by BMW was considerably reduced when a suppliers
experience in flow optimization was applied at an early stage of development.
Exchanges of experience between manufacturer and supplier often bring to light
unexpected opportunities for making improvements. One German manufacturer sent a
standard part to Japan for redesign and a comparative quotation, and initially had its
expectations confirmed: the Japanese supplier could deliver around 30 percent
cheaper.
The German manufacturer was surprised at the second attempt, when it sent a much
more complex part for development. The Japanese supplier was some 18 percent more
expensive than the company itself, despite the redesign. A closer look at the Japanese
suppliers redesign explained the results. On its own, the complex part offered hardly
any optimization opportunities, being interconnected with too many other
components.
By optimizing the total system redesign and fresh development of all the
components, the Japanese supplier revealed the full potential for cost reduction. Once
the costs of the optimization had been properly allocated to the total system, the
Japanese alternative proved to be more cost-effective in the long term than in-house
development had been.
3.4.4 Design for Manufacturability (DFM)

The design of a system or product involves the principal task of evolving a form that
can support the functions required by the system or product. The design must be
optimized with regard to cost, technical requirements and value considerations of the
customer. The challenge is to use resources wisely.
This has given rise to a number of techniques and created a number of tools that are
being practiced in industry, focused to provide the greatest value of the product to the
consumer and optimize the production process and capacity. Amongst the best known
amongst these is the Design for Manufacturability (DFM) technique and Design for
X (DFX), which is a special case of DFM.
DFM is the process of designing a product for efficient production maintaining the
highest level of quality. It is intended to avoid more complex and expensive product
designs to simplify assembly operations.
The flowchart for the DFM process is given in Figure 3.5. Some guidelines to
determine whether the design is good enough are given below:
1. Minimize the number of parts
2. Develop a modular design
3. Design parts for multi-use
58 4. Avoid separate fasteners
5. Eliminate adjustments
6. Design for top-down assembly
7. Design for minimum handling
8. Avoid tools
9. Minimize sub-assemblies
10. Use standard parts when possible
11. Simplify operations
12. Design for efficient and adequate testing
13. Use repeatable and understood processes
14. Analyze failures
15. Rigorously assess value
Proposed Design
Estimate the
Manufacturing Costs
Reduce the Costs of Reduce the Costs Reduce the Costs of

Components of Assembly Supporting Production
Consider the Impact of DFM

Decisions on Other Factors
Recompute the
Manufacturing Costs
N Good
enough?
Acceptable Design
Figure 3.5: DFM Process

DFM is a team-based approach that involves everyone associated with the
development process. For example, the US Navy's modeling and simulation processes
for the Virginia-class submarine reduced the standard parts list from 95,000 items for
the earlier Seawolf-class submarine to 16,000 items.
3.4.5 DFX Design for X

DFX is a special case of DFM, where a certain area, say X is selected for attention.
Improvements in X are proposed after detailed analysis of the process by a team of

cross-functional experts. The performance measures are established and items are 59
identified that will simplify the process and at the same time provide value to the
customer.
An example is of Escorts Ltd., a company that was making heating elements for
electrical kettles. The holder that screwed on the element to the kettle was made as a
casting. The casting had to be pre-machined, sized, cut and turned before it was ready
for threading.
The technical requirements were not critical, as the function of the part was to protect
the consumer from contact with the electrical contacts and guide the external socket to
the corresponding part of the heating element. Standard tubes were found that met the
dimensional requirements for the component. This greatly simplified the process,
avoided a number of operations, reduced the number of parts, and also reduced costs.
3.4.6 End Product and Parts Standardization

Eli Whitneys use of standard parts enabled his firm to gain a competitive advantage
in its bid for an army rifle contract. Henry Fords assembly lines were made possible
by improved manufacturing processes that allowed unskilled workers to quickly attach
standard parts to standard cars.
Standard end products enable manufacturers to use make to stock market
orientations, thereby decoupling manufacturing decisions from market transactions.
Standardization of products and manufacturing inputs can also help a firm achieve:
1. Lower Product Costs: Economies of scale occur when product design costs are
spread over a large volume. Very often a standard component in a product
provides the same functionality without paying for new engineering work and
customization.
Standardized products often justify investments in more efficient production
processes. Higher volume production systems often allow the process to use less
skilled employees. However, this often reflects in reduced flexibility.
2. Quicker Product Design: Standardized Product Interfaces often reduce product
design periods as has been demonstrated in personal computer designs.
Manufacturers have benefited by industry standards that define the protocol that
must exist between each module.
3. Enhanced Product Flexibility Capabilities: Standardized features that use
standard interfaces permit designers to enhance its offerings without risking
incompatibility as long as they stay within the specified parameters.
4. Delivery: Standard products may create economies of scale in transportation.
Inventories of standard products can also be placed at sites near customers to
facilitate a rapid response to any order, often providing a competitive advantage
with time-conscious customers.
5. Simplified Value Comparisons: Standardized goods help consumers to shop for
the best price or product performance. People can easily compare the cost of a
60-watt Philips bulb with a Laxman & Sylvania bulb. It also provides consumer
protection as the performance standards are often regulated.
60
Operations Management Manufacturing Cost
Components Assembly Overhead
Equipment Indirect
Standard Custom Labor Support
and Tooling Allocation
Raw Material Processing Tooling
Figure 3.6: Breakup of Manufacturing Costs

Though the points mentioned below are applicable to all designs, they are especially
important in designing the product using standard parts. As will be observed from
Figure 3.6, standard components require little or no tooling and processing. However,
in such products it is essential to ensure and take extra care so that the product:
(a) Functions so as to perform as intended;
(b) Reliability is ensured so that the product will perform consistently;
(c) Is maintainable so that maintenance is economical;
(d) Is safe so that it will perform with minimal hazard to the user and the
environment; and
(e) The production process is simple so the product can be produced at the intended
costs and volumes.
3.4.7 Modular Designs

Another way to bring customized products quickly is to use modular designs. In the
fashion world, this is called mix-and-match clothing. In manufacturing, assemble to
order systems allow the customer to specify a need and then either the customer or the
vendor selects pre-engineered sub-assemblies to meet a customers need. The product
then is either assembled or shipped as a kit to the customer. This is the system that
Dell uses. A wider variety of end product options is possible but within certain limits.
The product architecture Maruti Udyog Limited used in launching the Maruti 800,
Omni and Gypsy in 1984-85 from a single platform, was based on a modular design
concept. Basic modules were integrated to create three different products, with a high
degree of commonality of parts. Writing on the product architecture, the General
Manager of MUL in his note referred to earlier wrote,
It is possible for us to find a product which can, with necessary engineering inputs,
with a high degree of parts commonality, cater to the demands of the three demand
segments identified earlier. This vehicle, I am defining as a Universal Vehiclee logic
of this type of conversion of a sedan to the Universal Vehicle is the use of mass
production technology in the manufacture of aggregates, so as to minimize the cost of
built-up products.
If the objectives for 198788, is laid down to capture 50 percent of the car, jeep and
light commercial vehicle market and defense requirements, the domestic sales will be
of the order of 70,500 units, including spare parts requirements. With a focus on this
type of volume, the project becomes economically viable.

The key to successful product development is to know what features or parts of the 61
end product need to be customized to meet the expectations of the target customers.
1. Engineering economy is the discipline concerned with the economic
aspects of engineering.
2. Economies of scale occur when product design costs are spread over a
large volume.
3.5 PRODUCT DEVELOPMENT IN SERVICES

Manufactured goods differ from services in three ways.
The first is that a good can be inventoried, thereby giving system designers additional
degrees of freedom.
The second difference relates to risk. More so than for services, the design of
manufactured products and their supporting delivery systems requires substantial
up-front financial commitments.
The third difference is that the product innovation process for goods are often supply
chain-wide dependent. For example, for Intel to develop next-generation micro-
processor chips it requires to coordinate its efforts with software players, application
developers and the makers of chip manufacturing equipment.
Services can be classified on the basis of the degree of contact with the customer. The
extent of customer contact can be defined as the percentage of time the customer must
be in the system relative to the time it takes to perform the customer service.
Low Degree of Customer Contact

Services, with a low degree of customer contact, involve the same stages as the design
of manufactured products. The service system product development process is
comparable to manufacturing.
However, services often do not require a physical component, such as prototype
building etc. and the process technology sometimes involves different issues and
considerations because the conversion process takes place before the client or
customer.
High Degree of Customer Contact

Services with a high degree of customer contact are difficult to control as the customer
can affect the time of demand, the exact nature of the service, and the quality or the
perceived quality of the service. These types of services often require a high degree of
personalization and speed of delivery.
Services normally require a much higher levels of capacity relative to demand and
also require greater flexibility. There can be tremendous diversity of customer
influence and hence greater system variability.
3.6 PRODUCT DEVELOPMENT STRATEGIES

Without products, there would be no customers. Without customers, there would be no
revenue. Developing a new product is a major activity. Thomas Alva Edison, with as
many as 1,300 inventions and 1,100 patents to his credit, said about the product
development process, Genius is 1 percent inspiration and 99 percent perspiration.

62 Product development requires more of perspiration and less of genius to be successful.

Leaders today still use four key components of Edisons product development model:
1. Lofty Goals: For example, the ability of the bulb to stay lit for long periods of
time.
2. Right to Left Process: Start with customers and move backward through
operations to design.
3. Structure: Have clear targets instead of daydreaming and aimless
experimentation.
4. Fluidity: Be driven by talent, not hierarchy.
Many designers do not understand these issues and, as a result, often propose products
that cannot be produced or service designs that cannot be delivered because of
inadequate technology or operational capabilities. The approach to product
development has to start with an evaluation of the capabilities and resources of the
organization. Organizations should develop explicit product-development strategies to
coordinate all of the major business processes that contribute to product innovation.
Product Development Strategy requires a capability of the organization to correctly
evaluate product concepts so that there is support to design new products or to
introduce product improvements in keeping with the market requirements. There are a
number of different strategies used for product development, depending on the
organizational capabilities.
3.6.1 Internal Development

Internal development has been discussed in detail in the preceding sections. This
manner of internal development has significant advantages:
The firm knows the product from a hands-on perspective.
It understands the technologies used in the product.
When the product fails or when related activities are discovered in the market, the
firm can react quickly.
The products tend to be unique, as the firm has created the technology and the
product.
This also gives it a basis for competitive advantage.
When a competitor develops an improved version of the product, the firm is better
able to understand the technology behind it and create an even better one.
In addition, internal R & D has the advantage, that in many countries, it attracts
tax deductions and other incentives from the government.
Internal technology acquisition has three major disadvantages:
Failure to develop the necessary technology is a risk that is always there. The
more difficult the project, the greater is the risk.
Developing technology normally takes longer than buying out the technology. Not
only may it take longer; the length of time is also unknown.
In-house development is often more expensive than acquiring technology
externally.

3.6.2 Reverse Engineering 63

One of the most common methods of internal development, in developing countries, is
through reverse engineering. Reverse engineering is determining the technology
embedded in a product through rigorous study of its attributes. It entails the
acquisition of a product containing a technology that the company thinks is an asset,
disassembling it, and subjecting its components to a series of tests and engineering
analysis to ascertain how it works and the engineering design criteria used in the
products creation. The tests used depend on the technologies involved.
Reverse engineering requires a very good understanding of the application of the
product being studied so that the tests used to determine the design criteria are
appropriate. It also requires strong engineering capability. It is less risky, less costly,
and takes less time to market compared to internal R & D.
3.6.3 Collaborative Development and Contracted Out R&D

The internal and contracted out R & D is an ideal option for those who do not have the
necessary facilities and expertise to carry out the work and yet would like to maintain
control and own the results exclusively. It allows short-term access to world-class
personnel and facilities that would normally be beyond the companys means. With
the selection of the right team for the work required, it should be able to assemble a
more capable team than it could assemble internally. It also enhances the ability of the
firm to enter into technology areas, where it might not be able to do so singly.
Licensing is a form of contractual arrangement. Licensing existing technology is a
popular and effective form of technology acquisition. It enables the firm to move
directly into the implementation of the project. Its major advantage is the reduction in
time to market the product, relative to forms of technology acquisition that require
development. If the payment is in the form of royalty, the provider of the technology
shares the risks of financial performance. It has the appearance of being low risk or
almost risk free. This is true if the companys application is identical to the one for
which the technology was developed.
This route has been used by a number of corporations to establish their products or
brands in India. Daimler Benz had a licensing agreement with Telco, GE and Siemens
had a number of licensing agreements with BHEL. There are many such examples.
This can allow quick growth by avoiding the need to build manufacturing or
distribution capability. Licensing is probably most frequent in high technology
businesses particularly in foreign countries or specialized markets where volumes of
business may be too low to justify a permanent presence. Such contracts normally
have a defined duration. Difficulties with this mode include conflicts of interest when
the same agent acts for competing principles, develops competitive products or is
simply inert.
Consulting Engineering Firms are often a source of technology. Obtaining technology
from consulting engineering firms is another form of contracted out R & D. This is
generally used in the case of process design, and seldom for product design.
3.6.4 Joint Ventures

In a joint venture, two or more organizations form a separate legal undertaking, which
is an independent organization for strategic purposes. The partnership is usually
focused on a specific market objective. They may last from a few months to a few
years, and often involve a cross-border relationship. One organization may purchase a
percentage of the stock in the other partner, but not a controlling share. Entering into a

64 joint venture agreement with a technology provider is another form of external

acquisition that can be very effective.
This form is extremely advantageous when it is contracted between a company with
technology and a company with market access. It normally takes the form of a new
company with each of the partners owning shares in the company. For example,
General Motors came into India in a joint venture with Hindustan Motors and setup it
manufacturing facilities at Halol, in Gujarat.
Box 3.1: The Changing Face of Manufacturing
Ernst and Young are leading the connected Manufacturing Enterprise Project, which includes input
from experts in industry and academia. The group offers these key conclusions about how
information will change manufacturing.
By 2008 assets such as relationships with suppliers customers and employees will be more important
sources of value than traditional "hard assets" such as buildings and equipment. This focus on
"connected assets" will change the face of manufacturing in future years. Managing these connected
assets will be the critical capability for manufacturing organizations.
Innovation will accelerate. Manufacturers will outsource more production to networks of suppliers.
Customers, suppliers and employees will use information technology to collaborate in real-time.
When levels of trust in these new kinds of relationships are resolved we will see new incentive
structures cross-investing third-party mediation and many new types of contracts.
Source: Special Report: Manufacturing in the 21st Century, Upshot Issue 2.8 September 1998, pp. 12.
The risk in such ventures is low. It has other advantages of licensing agreement. The
disadvantage of technology absorption is largely removed. Due to the ongoing
relationship between the companies, the opportunity to learn on both sides exists.
However, the disadvantage is that neither partner can make decisions on their own.
Joint ventures have been a major source of technology acquisition in developing
countries. For example, Escorts Limited had a joint venture with JCB of the UK to
manufacture small excavators. Escorts again, entered into a joint venture with Hughes
Communications of USA for manufacture of communication equipment.
3.6.5 Producer-customer
This is normally done in the form of buying a piece of production machinery with
embedded technology. This is perhaps the quickest form of technology transfer
because the technology is already packaged and ready to use. It is low risk because the
equipment has been proven to work technically and evidence can be acquired from
other users to back-up the producers claims. In addition, the producer normally would
be glad to provide implementation support in the form of setting up the machine and
in the training of personnel.
3.6.6 Manufacturing Sub-contracting

Most firms do not manufacture all the systems that are required for the product. There
are specialized firms that have the technology and designing capability to supply the
system to the firms specifications.
In some cases, sub-contracting is used as a cost reduction option, as the costs of
technology and development by sub-contracting firms may be lower than that of the
firm. In such cases, the ownership of the technology is not with the firm.
A comparison of the different product development strategies has been tabulated in
Table 3.2. As the various sources for acquisition of technologies present different
advantages and disadvantages, benefits and risks, and cost to the firm, these factors
have been compared.

Table 3.2: Comparison of Different Strategies for Product Development 65

Technology
Advantages and Benefits Disadvantages and Risks Cost Factors
Option
Internal Develop knowledge in Long time to market R & D Staff
Development company, stronger Generally more Expensive Equipment
company than external acquisition Office, Laboratory
Exclusivity, competitive Risk of failure, loss of and Shop space
advantage investment and time
Tax and other May not have R & D
Government incentives expertise, equipment etc.
Collaborative Develop knowledge in Long time to market R & D Staff,
or R&D with company, stronger (shortened somewhat) equipment, and space
Networking company Networking costs added, Attending trade
Exclusivity, competitive overall costs down shows, conferences
advantage Risk of failure reduced Reading relevant
Tax and other (better knowledge base) journals, magazines
Government incentives Inventiveness can be
Staff exposed to other curtailed
sources of ideas
R&D Contract/ No investment in facilities Do not have hands-on Staff to understand
Consulting Low investment on staff knowledge in-house technology, manage
Engineers Harder to keep confidential contracts
Own technology, unique
product Same time, cost and risk Contractor fees may
issues as in Internal R & D be lower than R & D
Licensing Reduced risks due to Risk in applying Searching,

known technology technology to new networking
Reduced time to market application Some internal
Develops internal Very little support available technical staff
capability Adaptation/adoption
costs
Joint Venture Immediately Market risks Up-front investment
implementable Do not have control, have in new business
Proven technology, low to agree with partner Ongoing operational
risk Does not develop technical costs
Probably, exclusivity in strength Training costs
the region
Learn from provider
Manufacturing Quickest, ready to use Competitive advantage Up-front payment
Sub-contract/ Lowest risk, proven issues Training costs
Producer- technology Possible implementation
customer Should be lass than
Implementation support problems developing because
Non-exclusive Builds little technical development costs
strength shared by many
Acquisition of Short time to market, May have to adapt Depends on purchase
a Company perhaps already in market technology to needs price of company
with Low risk May acquire negative Should be
Technology baggage proportional to
Could buy good image
May have merger problems technological assets
Reverse Less costly, less risky, Me-too-product Strong Engineering

Engineering less time compared to Risk of not fully capability
internal understanding original Some office,
R&D design laboratory, shop
Opportunity to improve Some legal risks space
product to gain Possible legal costs
competitive advantage

66
Operations Management 3.7 TYPES OF PRODUCTION SYSTEM
Production systems can be classified as Job Shop, Batch, Mass and Continuous
Production systems.
3.7.1 Job Shop Production

Job shop production are characterized by manufacturing of one or few quantity of
products designed and produced as per the specification of customers within prefixed
time and cost. The distinguishing feature of this is low volume and high variety of
products.
A job shop comprises of general purpose machines arranged into different
departments.
Each job demands unique technological requirements, demands processing on
machines in a certain sequence.
Characteristics
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of
uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
3.7.2 Batch Production

Batch production is defined by American Production and Inventory Control Society
(APICS) as a form of manufacturing in which the job passes through the functional
departments in lots or batches and each lot may have a different routing. It is
characterized by the manufacture of limited number of products produced at regular
intervals and stocked awaiting sales.
Characteristics
Batch production system is used under the following circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of item in a batch and
change of set up is required for processing the next batch.
4. When manufacturing lead time and cost are lower as compared to job order
production.
3.7.3 Mass Production

Manufacture of discrete parts or assemblies using a continuous process are called
mass production.
This production system is justified by very large volume of production. The machines
are arranged in a line or product layout. Product and process standardisation exists and
all outputs follow the same path.

Characteristics 67
Mass production is used under the following circumstances:
1. Standardization of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and
output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back
tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Fill in the blanks:
1. is a form of contractual arrangement.
2. Consulting Engineering Firms are often a source of ..
3. .. have been a major source of technology acquisition in
developing countries.
3.7.4 Continuous Production

Production facilities are arranged as per the sequence of production operations from
the first operations to the finished product. The items are made to flow through the
sequence of operations through material handling devices such as conveyors, transfer
devices, etc.
Characteristics
Continuous production is used under the following circumstances:
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
3.8 LET US SUM UP

Products can be tangible or intangible. Tangible products are called goods, while
intangible products include services and contracts. These are collectively referred
to as products.
Product development includes a number of processes in identifiable stages. These are
Clarification of the Task, Concept Generation, Embodiment Design, Detailed
Engineering Design, and Physical Evaluation.

68 Product design provides the operations team the basis for preparing plans for:
(a) Materials acquisitions, and (b) Production.
Once the product is introduced, the organization needs to monitor customer
satisfaction and detect product weaknesses so as provide feedback to the design team.
Concurrent engineering approach is to speed up the product development process.
With an integration team ensuring the exchange of information between the teams
working on different aspects, it is possible to considerably reduce development times
and create high quality product designs that meet customer expectations.
As a rule of thumb, 70 percent of the cost of the product or service is firmed up by the
time the conceptual design has been completed. By the time the system definition is
completed 80 percent of the cost is finalized and 90 percent of the cost is firmed up
before production.
Product architecture, therefore, is extremely important as it establishes the functional
capabilities of the product, its features, and post-sale servicing needs, the capabilities
of the product delivery system and post-sale support that the customer expects and
determine the ability of the organization to provide for these, and the roles and risks
each player within the supply chain will assume.
Some concepts related to good product design and architecture are Design-to-cost,
Design for Manufacturability, Design for X, End Product and Parts Standardization,
and Modular Designs.
Services, with a low degree of customer contact, involve the same stages as the design
of manufactured products. However, services with a high degree of customer contact,
normally require a much higher levels of capacity relative to demand and also require
greater flexibility.
Different strategies are employed in product development. These are Internal
Development, Collaborative or R&D with Networking, R&D Contract/Consulting
Engineers, Licensing, Joint Venture, Manufacturing Sub-contract/Producer-customer,
Acquisition of a Company with Technology and Reverse Engineering.

What are the tradeoffs involved in outsourcing? What is good outsourcing? These
arguments should be discussed with examples of Indian industry.
3.10 KEYWORDS
Products are artifacts that provide value to the customer. They can be tangible or
intangible.
Goods are tangible items that are usually produced in one location and purchased in
another.
Services are intangible products that are consumed as they are created.
Contracts are business exchanges in which neither services nor goods are transferred;
instead, there is an implicit understanding between the customer and the provider that
goods and services will be provided on an as needed basis.
The Product Lifecycle model is a simplistic representation of the cumulative impact
of changes in the business environment on the life of a manufactured product.
Technological Life Cycle is a representation of the cumulative impact of changes in
market growth and technology.

Technological Capability is a detailed rendering of the different technological skills 69

of the organization.
Innovation Capability reflects the skills and activities spanning invention to
innovation that are involved in technological changes that range from radical new
departures to incremental improvements in existing technology.
Fast to Market Capability is the ability to design, develop, and introduce a new
product quickly.
Concurrent Engineering approach involves the parallel completion of project phases
to speed up the product development process.
Quality Function Deployment is an approach to understanding the customers
requirements and incorporating it in the design specifications of the product.
Fixed Costs are those costs that remain constant irrespective of changes in the volume
of output.
Variable Costs are all the costs, which vary directly (proportionately) with output.
Design for Manufacturability (DFM) is the process of designing a product for
efficient production maintaining the highest level of quality.
Internal Development involves developing the necessary skills among existing staff
and acquiring the necessary production capacity.
Reverse Engineering is determining the technology embedded in a product through
rigorous study of its attributes. It entails the acquisition of a product containing a
technology that the company thinks is an asset, disassembling it, and subjecting its
components to a series of tests and engineering analysis to ascertain how it works and
the engineering design criteria used in the products creation.
A Joint Venture is when two or more organizations form a separate legal undertaking,
which is an independent organization for strategic purposes. The partnership is usually
focused on a specific market objective, with a given timeframe and often involves a
cross-border relationship.
Licensing is an arrangement between two or more organizations that enter a legal
contract for a specific business purpose. It is generally a technology transfer
transaction and the intellectual property rights for the invention are retained by the
licensee. Such contracts normally have a defined duration.
Worldwide Sourcing is a system used by multinational companies of integrating the
supply chain by operating suppliers plants abroad and integrating those plants to
manufacture components as subdivisions of a globally organized production process.

1. We will offer a small passenger car priced at 1 lac to our customers by the end
of this decade says Mr. Ratan Tata. Relate this statement to the product
development strategy of Maruti Udyog Ltd. and explain your recommendations.
2. How do you classify products? What are the factors that provide value to the
product? Explain.
3. Why is the area of product development so important to the future of the
company? Can you categorize industries on the basis of the pressures they feel
due to product development? Explain.

70 4. What are the steps and stages of product development? Is it possible to reduce the
time and the number of stages and come out with a new product and service? Give
details of procedures and techniques.
5. Differentiate between fixed costs and variable costs and explain how they help in
determining the breakeven point.
6. Explain the following in relation to new product development:
(a) Standardization
(b) Simplification
(c) Speed to Market
(d) Activity based Costing
(e) Value Engineering
(f) Modular Design
7. How does Design for Manufacturability (DFM) work? How are DFM and Value
Engineering different? Explain with examples.
8. Work out the design of any simple object of your choice using the Principles of
DFM?
9. How do product development strategies relate to the other organizational
strategies (i.e. competitive and functional)? What is the difference between single
and multi-business organizations? Provide examples.

CYP 1
1. Customer contact
2. manufacturing
3. management
CYP 2
1. True
2. True
CYP 3
1. Licensing
2. technology
3. Joint ventures

1994

Clayton Christensen, The Innovators Dilemma: When New Technologies Cause 71

Krajewski and Ritzman, Operations Management, Strategy and Analysis, Pearson
Education, 2002
Melnyk, S. and D. Denzler, Operations Management: A Value Driven Approach,
McGraw Hill, 1996
and Strategies; John Wiley & Sons, 2004

72
LESSON
4
OPERATIONS TECHNOLOGY AND
FACILITY LOCATION
CONTENTS
4.1 Introduction
4.2 Growing Importance of Evaluation and Selection of P&O Technology
4.3 Selection of Technology
4.3.1 Technology Compatibility
4.3.2 System Impact of Technologies
4.3.3 Technology Readiness
4.3.4 Technology Development and Uncertainty
4.3.5 Technology Forecasting
4.3.6 Bounding Technological Uncertainty
4.3.7 Uncertainty in Forecasting a Technology
4.3.8 Technology Evaluation
4.3.9 Deterministic Evaluation
4.3.10 Technology Sensitivities
4.3.11 Probabilistic Evaluation
4.3.12 Technology Frontiers
4.3.13 How will the Technology Frontier Change for Different Levels of
Confidence?
4.3.14 Resource Allocation
4.4 Technology Identification, Evaluation and Selection Method
4.5 Need for a Facility Location Planning
4.6 Nature of Location Decisions
4.7 Factors affecting Location Decisions
4.7.1 Factors affecting Manufactured Products
4.7.2 Factors affecting Service Products
4.8 Selection of Site for the Plant
4.8.1 Country
4.8.2 State/District
4.8.3 Plant Location
Contd...

4.9 Procedures for Location Decisions 73

Operations Technology and
4.9.1 Facility Master Plan Facility Location
4.9.2 Impact Planning

4.9.3 Site Evaluation
4.10 Techniques of Location Analysis
4.10.1 Factor Rating Method
4.10.2 Load Distance Model
4.10.3 Least Cost Method
4.11 Location Decision using the Transportation Method
4.12 Let us Sum up
4.14 Keywords

Explain technology selection
Describe the location decisions using transportation method
Inequalities in the constraints of a transportation problem
Use some of the more common techniques, which can be used in location
decisions.
4.1 INTRODUCTION
The management is often faced with the problem of selecting a new site for locating a
new production facility or a new warehouse. Very often the cost of transportation of
inputs and outputs to the processing units or the marketplace are critical parameters.
In such cases, the transportation method can be used in finding out the lowest cost
location insofar as the location factors can be quantified.
Every industry has become dynamic, growth-oriented, and a major contributor to the
strength of the economy in the evolving global competitive environment.
Characterized by firms of various sizes working in a competitive and quickly
changing environment, each particular industry offers fertile ground for investigating
changes that are currently taking place in small business management. One important
domain of management is the selection and evaluation of suppliers. This lesson
explores the techniques currently used to select and evaluate production and operation
technology in a sample of small and large firms in any industry.
4.2 GROWING IMPORTANCE OF EVALUATION AND

SELECTION OF P&O TECHNOLOGY
There are a number of reasons why the selection and evaluation of suppliers are more
important today than they were in the recent past. With the current emphasis on supply
base reduction and long-term supplier relationships, supplier selection and evaluation

74 have become even more critical (Abegglen and Stalk, Jr. 1985). The increasing
adoption of just-in-time (JIT) manufacturing practices has placed a new emphasis on
supply base reduction, making the processes of the selection and evaluation of
suppliers increasingly critical. Even many firms without a formal implementation of
JIT manufacturing are in the process of supply base reduction (Emshwiller 1991).
Supply base reduction involves a longer time commitment to suppliers on the part of
buyers. This commitment usually brings greater interaction between the buyer and
supplier which may lead to a sharing of resources. Resource sharing may involve
training and development in an effort to improve quality, reduce costs, and emphasize
continuous improvement in all areas of interaction (Watts and Hahn 1993). The
strategy of involving suppliers early in the product design, has become more important
in the era of global competition.
4.3 SELECTION OF TECHNOLOGY

There exist two avenues by which technologies may be selected and infused into the
system. One is to look forward and the other is to look back. If the decision maker
deems that the system is not feasible today in comparison to the targets set for the
future, the following questions may be posed.
What will it take me to do today to get where I want to be in the future? Or, with the
specific technologies that I have today, where will I be in the future?
The first avenue is a method that has been developed and applied to various vehicle
concepts and is called Technology Impact Forecasting (TIF). The latter method is the
focus of this research and is the TIES method.
Technology
Impact
Forecasting
Technology
Identification
Evaluation
Selection
To overcome the show-stopper metrics or to improve the current system, specific
breakthrough technologies must be infused. This is the heart and soul of the TIES
method. To accomplish this end, applicable technologies or programs must be
identified from the Morphological Matrix of the alternative concept space defined in
Step 2. The selection of the technologies should be guided by the troubled metrics
identified in Step 5 and also any other potentially enabling technologies that may
indirectly improve the system. Once the set of technologies is identified, the following
must be addressed.
Are the technologies physically compatible?
What is the impact to the system from each technology?
What is the readiness, or maturity, of each technology?
4.3.1 Technology Compatibility

Once the appropriate technologies have been identified, physical compatibility rules
between technologies are established and formalized in a Technology Compatibility
Matrix (TCM). This matrix is best prepared by a group of technologists or disciplinary
experts familiar with each of the selected technologies. The purpose of this matrix is

to eliminate combinations that are not physically realizable and, as a by-product, 75

results in a downsizing of the evaluation problem. Incompatibilities arise when Facility Location
technologies are competing for the same application or one technology severely
degrades the intended function or integrity of another.
4.3.2 System Impact of Technologies

Unfortunately, advanced technologies are difficult to assess within a conceptual M&S
environment such as a sizing and synthesis tool. A formulation of a technology in
terms of elementary variables does not lend itself to an M&S environment. Sizing and
synthesis tools are typically based on regressed historical data that limits or removes
their applicability to exotic or revolutionary technologies, and, if the technology is in
its infancy stages of development, a closed-form mathematical model probably does
not exist. However, introducing technology impact factors (k factors) can
quantitatively assess the impact of a technology as was described previously. These
k factors modify disciplinary technical metrics, such as specific fuel consumption,
cruise drag, and/or component weights that result from a sizing tool. In effect, the k
factors simulate the discontinuity in benefits and/or penalties associated with the
addition of a new technology within the M&S environment so that rapid assessments
can be performed.
The impact that each technology has on the system may originate from three sources:
expert team questionnaires, physics-based modeling, or literature reviews. Each
source of impact estimation has an associated uncertainty. In some cases, this
uncertainty is not quantifiable. For example, if one was to ask an aerodynamics expert
how much drag reduction would result from the addition of a laminar flow technology
to a vehicle, the answer would be subjective and based on the experience and
knowledge of that expert. Furthermore, the experts estimate may be based on a
disciplinarians point of view without knowledge of other discipline limits unless
iterative schemes of information flow between experts exists. This iterative scheme is
costly and time consuming, and decisions and information are usually lost. Next,
uncertainty is also associated with estimates stemming from physics-based modeling.
This arises from the fidelity of the analysis tool utilized (panel code versus Navier-
Stokes code), geometry modeling (flat plate versus full three-dimensional), and the
assumptions around the analysis (point mass flight simulator versus six degree of
freedom model). Finally, if a literature review is the only means of quantifying the
impact of a technology, the issue of applicability across classes of vehicles is posed.
If a technology has matured on one system, can one apply the same impact to another,
different type of system? Furthermore, if the literature review is of an immature
technology, the two previous issues apply. A primary, underlying theme associated
with each source of impact uncertainty is the maturation level (or readiness) of the
technology. This aspect of the TIES method is subsequently addressed.
4.3.3 Technology Readiness

In general, the impact of a technology is probabilistic in nature. The probabilistic
nature arises from various contributing factors, especially if the technology has not
fully matured, i.e. widespread commercial or military application. Hence, an
understanding is needed on the unique aspects of an immature technology, in
particular:
The milestones encountered during a generic technology development program,
The sources of uncertainty during that development,
The potential methods for bounding and forecasting the uncertainty to quantify the
impact.

76 4.3.4 Technology Development and Uncertainty

The innovative process by which a technology is developed can be qualitatively
described through a monitoring of the major milestones achieved from concept
formulation to widespread application. A successful program is one that can achieve
all goals within the allowed budget and schedule. Consideration is not given to
disruptive events that may alter the progression such as schedule, budget, market
demand, political or socio-economic policy, or physical limitations. The Typical
Technology Readiness Levels (TRLs) simply describe the maturation and
development process of a technology and provide a basis by which different
technologies can be compared as they progress through the gates of maturation.
Martino points out similar milestones for generic development programs but includes
commercial introduction or operational use, widespread adoption, and diffusion to
other industries past the TRL=9 level. For program monitoring, TRLs are appropriate,
but should be mapped to a quantitative scale for the purpose of decision making. To
do so, one must understand how a generic technology develops and matures.
There are general concepts of how technologies develop, however, and these can be a
useful guide. One of the prominent concepts is through the method of analogy to other
well-known physical or biological systems such as growth patterns of yeast cell
populations. Historical data for various technology concepts, including aircraft speed,
steam engines, and fluorescent lamps, has revealed an ordered pattern of development
that resembles this biological growth curve, also known as a Sigmoid curve or an
S-curve. The method of analogy assumes that a technology development program will
follow this S-curve pattern if a successful program is achieved.
The solid S-curve is the expected or ideal progression of a technology as a function of
program effort, where program effort is dependent on monetary resources, manpower,
and computational and physical testing. Porter observed that the program advances
slowly as many impediments must be initially overcome, advances rapidly for a
period and then slows as the easy improvements are achieved. The uncertainty
bounds associated with the expected maturation curve are due to variations in
knowledge, schedule, budget, available resources, and integration difficulties, in
addition to assumptions made and models used to analyze and design the technology.
As would be expected, the uncertainty diminishes as the program advances and
knowledge and experience increases. The upper limit of this curve is typically viewed
as a physical limitation of the functional capability of the technology and in most
instances, a point of diminishing returns and technology obsolescence. In a successful
program, the upper limit is analogous to the impacts estimated in the TIM.
Based on the concept of the technology progress curve and the TRL definitions, a
quantitative scale for measuring technology maturity is desired. Yet, one issue arises
immediately.
At a TRL, the component is integrated to the system and the milestones continue from
there. Typically, a technology is developed for a given component, e.g. a new
combustor, new materials for the wing, or new control systems. The technology
development and shrinking uncertainty curves could be based on a component level
abstraction. Yet, the decision-maker desires the knowledge of the uncertainty
associated with the entire system, or aircraft. To apply the method of analogy of the
reducing uncertainty as the technology progresses, one must consider the uncertainty
of the technology at the component level concurrently with the uncertainty of the
entire system, and thus, the impact of the technology to the entire system.
From this level of abstraction, the method of analogy applies and the entire system
uncertainty reduces as the program progresses and is the result of all contributing
component uncertainties.

4.3.5 Technology Forecasting 77

The next step is to identify forecasting techniques to bound, quantify, and estimate the Facility Location
technological uncertainty at the system level. The primary purpose of forecasting, in
any context, is to provide the decision-maker with adequate information on which
future decisions, company strategies, and business cases may be based. Two broad
categories of forecasting exist: exploratory and normative. Exploratory forecasting
techniques consider historical trends and extrapolate into the future to predict what
may happen. The feasibility of this process depends upon an assumption that
progress is evolutionary and does follow a regular pattern. The normative method
begins with future goals and works backward to identify the levels of performance
needed to obtain the desired goals, if at all achievable with the resources available.
This approach is equivalent to the Technology Impact Forecasting (TIF) environment
that establishes how much improvement is needed from the various disciplines to
achieve future customer requirements, as discussed with the avenues for infusing new
technologies. Thus, TIF may be classified as a normative forecasting technique and
TIES as an exploratory forecasting technique.
Either normative or exploratory utilizes one, or combinations, of four traditional
forecasting techniques: S-curves, trend extrapolation, Delphi method, or scenario
development.
The first two techniques assume a functional form of a previous or existing
technological growth pattern and extrapolate to a future time. Again, sufficient
information must exist for the forecast to be accurate and of value to the decision-
maker.
If insufficient information exists, the Delphi method is a structured means of
incorporating expert opinions (usually subjective) through questionnaires and
controlled feedback to estimate a technology impact and the confidence of achieving
that impact. Based on numerous development programs identified by Martino and
Porter, the uncertainty should diminish if the program is successful in achieving the
desired goals. Finally, the scenario development assumes some future status of the
world (economic, political, etc.) and its influence on the technology progress to shape
the development curve and usually disrupts the technology progress at a pre-specified
time.
If sufficient program monitoring and evaluation is performed in the early phases of a
development, a technology impact trend may be established and the first two
techniques utilized. This trend may then be forecasted to a future time (or a TRL) and
the impact quantified as a function of time, or program schedule. Yet, if a technology
is in the infancy stages and little information is available as to the detailed progress,
insufficient information exists to forecast the technology or estimate the uncertainty
and the Delphi method must be used.
The irony exists that a considerable quantity of data is required to sufficiently forecast,
but the need for forecasting is more prominent when insufficient information exists, as
in the conceptual phases of aircraft design.
4.3.6 Bounding Technological Uncertainty

If a technology is in the infancy stage of development (low TRL), the shape of the
development curve is not easy to predict, due to lack of substantial data to establish a
trend. Hence, the forecast must rely on expert, subjective opinions through the Delphi
method with an assumed growth pattern. Subsequently, the forecast should focus on
the evaluation of the potential commercial benefits (and penalties) that might be
achieved IF the (program) is successful and can be matured to the point of full-scale

78 application (i.e., TRL=9). As more information and data becomes available, the
forecast should be updated and re-evaluated.
Based on this rationale, the uncertainty, or confidence limits, may be bound based on a
logical reasoning and with the method of analogy to what should happen as a
technology program progresses without any unforeseen problems. For example, one
may assume that a successful technology program develops along a linear trend. Point
A represents a technology in the infancy stage of development, TRL=2. The desired
capability of the performance improvement is Point D and is assumed to be the
expert defined impact when a TRL of 9 is reached.
4.3.7 Uncertainty in Forecasting a Technology

To place bounds on the uncertainty of the technology, one must realize the two
additive sources of uncertainty. First, the inherent uncertainty associated with the
technology development as described previously. Second, there is uncertainty
associated with forecasting the trend. Specifically, the confidence limits of achieving a
desired value broaden as the time frame of the forecast increases, reflecting the
growing level of uncertainty in knowledge. A tangible analogy of this type of
uncertainty is forecasting the price of fuel. One could forecast (or estimate) what the
fuel price would be tomorrow with a very high confidence, say $1.39 per gallon
$0.01 where fuel is $1.39 per gallon today. However, the confidence of what the price
will be in fifty years is very low and uncertainty is very high, say $2.97 per gallon
$?. If one applies this analogy to forecast an immature technology to a future time
(i.e. TRL), the confidence limits should spread. Consider Point A, since the time
frame of the forecast to the desired impact value is large, the distribution is very wide
as shown by distribution a. Yet, for a high TRL value, the confidence of achieving
the desired technology improvement increases since the forecast is for a shorter time
frame and more information is available regarding the technology as shown by
distribution c.
4.3.8 Technology Evaluation

In this step, the technologies identified are applied to the vehicle concept and
evaluated. The evaluation provides data and information to the decision-maker
whereby selection of the proper mix of technologies is performed. Yet, generating the
data needed to conduct the search is dominated by the curse of dimensionality.
Depending upon the number of technologies (n) considered, the combinatorial
problem could be enormous. If all combinations are physically compatible and
assuming only an on or off condition, then 2n combinations would exist. In
addition, the technology k factor vector that influences a vehicle is probabilistic and
a CDF must be generated for each combination, hence, the curse of uncertainty. If the
computational expense of the analysis is acceptable, a full-factorial investigation could
ensue. Yet, if the computational expense is too high (e.g., a finite element analysis), an
alternate evaluation method is needed. One potential method is a genetic algorithm
formulation. Gen defines genetic algorithms as a class of general-purpose search
methodswhich can make a remarkable balance between exploration and exploitation
of the search [of the design or technology] space to find the best family of
alternatives.
The evaluation of the technologies considered for infusion can be performed from two
perspectives, depending on the level of knowledge, information desired, stage of the
design, and at what level of abstraction is desired. The two perspectives are either
deterministic or probabilistic.

4.3.9 Deterministic Evaluation 79

The motivation for a deterministic evaluation is two-fold. In many cases, a plethora of Facility Location
technologies need to be considered and the decision-maker wishes to downsize the
problem with a rapid assessment. Second, the decision-maker has very little
knowledge of the technology due to a high immaturity and a quick assessment is
desired. The results from the latter point are the best and worst case scenarios
since the inclusion of uncertainty will only degrade the impact. In essence, the
technology impact thresholds are established.
4.3.10 Technology Sensitivities

The decision-maker may desire insight to the sensitivity of the metrics to the
technologies. This can be accomplished with a full-factorial evaluation of the
technologies. The decision-maker can readily identify the technologies that most
significantly impacted the system metrics. The profiler provides a rapid, visual
environment that the decision-maker may perform trade-offs. Caution should be
exercised since the compatibility rules are not inherent in the sensitivities, and care
should be taken prior to arbitrarily turning on a mix of technologies.
4.3.11 Probabilistic Evaluation

The motivation for a probabilistic evaluation is to provide a more realistic assessment
of the uncertainty and risk associated with the impact of immature technologies.
Probabilistically evaluating a single technology or a combination of technologies is
similar to the deterministic evaluation, except that the k factors are distributions
rather than single point values. To quantify the impact on a system metric, a Monte
Carlo Simulation (MCS) is performed with user defined frequency distributions for
each k factor element and a CDF obtained for each system metric. If one assumes
that the technologies are additive, then a combination of two or more technologies
remains a simple MCS on the RSE. Now, instead of the response, R, being a function
of only one k vector (i.e., technology), it is a function of the sum of the combination
of vectors (i.e., sum of technologies). For example, if one wants to determine a system
metric value due to a combination of T1 and T2, distributions are assigned to each
element of both technology k vectors. Subsequently, a random number generator
selects a value for the first element of the T1 vector and the first element from the
T2 vector, based on the user-defined frequency distributions. Then, the two values are
added to obtain a new first element that is inserted into RSE and the system metric
value calculated. This is done for each element and each time a new combination of
technologies is desired. This process is automated with the software package Crystal
Ball , which is a Microsoft EXCEL add-in function.
The procedure to probabilistically evaluate technology combinations is:
Define distributions associated with technologys TRL
Run a random number generator for each element of the technology vector
Add elements of the technology vectors that are on
Insert values of the new vector element into the RSE and recalculate
Repeat for as many MCS runs desired
Extract metric data (CDF or PDF)
Repeat steps 1-6 for each technology combination.
There are two limitations to TOPSIS and MADM techniques in general. First,
TOPSIS requires deterministic values when ranking the alternatives, yet, the

80 technology impacts on the system are probabilistic. Thus, information regarding the
different metric CDFs may be lost in the down select process and include the
variability that is associated with a given mix of technologies. As a simplified solution
the limitations, one could select the top alternatives for different confidence levels and
weighting scenarios. Once the top alternatives are determined, the results may be
compared to conclude if any combinations consistently rank in the top ten or so,
regardless of confidence level. Although this is a simple approach, visualizing the
impact of uncertainty of the top alternatives is not necessarily intuitive. One should
note that the results of the top alternatives for different confidence levels might not be
identical due to the fact that the distribution variance for each technology alternative
changes. The variance is driven by the uncertainty associated with an immature
technology (low TRL) and increases when more technologies are added. Finally, the
numerical values obtained from the ranking of alternatives are not intuitive to the
decision-maker, especially for visual representations. Thus, additional selection
techniques are suggested to aid in the decision-making process.
4.3.12 Technology Frontiers

The inefficiencies of the MADM techniques, deterministic, and non-intuitive
numerical results may be improved with the use of Technology Frontiers. Technology
Frontiers are defined as the limiting threshold of an effectiveness parameter,
whereby uncertainty is captured and more tangible results presented. The technology
frontier takes a similar approach as TOPSIS. An Effectiveness Parameter (EP) is a
user-defined function for which maximization is desired. As in the case of TOPSIS,
preference of the different criteria is introduced through weighting factors. Two
intuitive parameters may be defined as Performance Effectiveness (PE) and
Economics Effectiveness (EE). Once the EPs are determined for each alternative, the
technology space may be compared to any parameter of interest. One parameter of
particular importance would be the investment costs associated with developing a
technology combination to maturity.
This approach is similar to the notion of system cost effectiveness proposed by
Mavris, which is the ratio of the benefit to the system relative to the cost of achieving
those benefits. A similar approach to TOPSIS can be used to define the ideal solution
for the technology space. A best compromise solution may be established based on
the technology alternative that is closest to the ideal solution. The best compromise
solution is similar to a Pareto optimal solution which implies that one metric cannot be
improved any further without degrading another metric.
Finally, the Technology Frontier is established by placing a threshold curve around all
of the technology alternatives and is analogous to a Pareto front. The frontier implies
that no alternative falls outside of the established boundary.
4.3.13 How will the Technology Frontier Change for Different Levels of
Confidence?
Technology Evaluation, assessing a technology combination without uncertainty
yields the theoretical limit of the technology impact. Similarly, different frontiers may
be established for different confidence levels.
To identify the technology alternatives that may satisfy the customer requirements, or
criteria, effectiveness thresholds should be established. An effectiveness threshold
defines how much improvement is needed from each criterion to create a feasible
space.
The technology alternatives that fall within this region are easily identified and may be
investigated in further detail. If no alternatives fall within this region, then no

technology combinations can meet the imposed customer requirements. Yet, the 81
combinations that come closest to the feasible region may be readily identified. The Facility Location
decision maker may re-evaluate the development schedule of the three technologies to
determine if costs savings can be achieved. The technology frontiers provide a rapid
and visual means of selecting a family of feasible alternatives while including
technological uncertainty via multiple frontiers.
4.3.14 Resource Allocation

MADM and technology frontier techniques to select the best technology combinations
that satisfy a set of customer requirements are not the only means by which
alternatives may be selected. The final approach is a quantitative resource allocation
investigation. From the first two approaches, a family of alternatives are identified that
may satisfy the customer requirements with an associated confidence. In general, the
more technologies added, the better the performance of the system. Yet, it is highly
unlikely that a company has the expendable Research and Development (R&D)
budget and resources to develop more than a few technologies at a time. Thus, a
decision-maker desires guidance as to which technology programs should be pursued
so that scarce resources may be allocated in an optimal fashion. Unlike the traditional
methods of resource allocation mentioned previously, the approach taken here is more
rigorous and quantitative, such that investment decisions made regarding a particular
technology development may be justified and tracked.
Froham summarizes that traditional R&D projects allocate resources based on past
activity in the specific research area rather than the potential bottom line contributions
and a justified business case. In addition, far-term thinking and planning is not
generally the trend. Short-term funding tends to be the driver for allocating resources
which leads to projects and endeavors that are not broader-range or do not have long-
term or high payoffs for the particular company. The approach herein attempts to deal
with these shortcomings. The key aspect of this approach is that the big hitter
technologies are rapidly and efficiently identified and provide quantitative justification
of technology investment program decisions.
The execution of this approach is nothing more than a manipulation of data that was
generated in previous steps.
Fill in the blanks:
1. JIT stands for
2. TIF stands for .
3. MCS stands for
4.4 TECHNOLOGY IDENTIFICATION, EVALUATION AND

SELECTION METHOD
The stress here is focused on the population of the inputs, techniques, and outputs
needed to create a new design method that responds to the paradigm shift in an
industry. Drawing on information presented for the execution of each step, the TIES
method may be presented. The techniques utilized to execute each step of the method
were chosen based on robustness and generality and should allow for a substantial
reduction in design cycle time and provide quantitative justification for design
decisions.

82 The potential applications of the TIES method are numerous. The steps required for
implementation are generic such that any complex system could be analyzed.
However, the basic requirements for application of TIES include the ability to identify
a set of customer requirements for which the system may be judged as successful or
not. Further, a Modeling and Simulation (M&S) environment in some capacity must
exist whereby the customer requirements can be quantitatively assessed. Finally, the
technologies to be infused to the system must be quantifiable in the M&S
environment. The remaining steps are not specific to any class of systems or vehicles
and the TIES method could be applied to a wide-range of complex systems including
missiles, torpedoes, ships, power generators, automobiles, telecommunication
systems, and the list could go on indefinitely although a few procedures described
may have to be modified for the problem of interest.
One final comment should be made regarding a validation of the TIES method. The
likelihood of entire method being validated is minute. To validate the entire method,
one would have to obtain the data and information regarding the decisions,
configurations, and technology options throughout an existing system. Unfortunately,
most companies do not retain the detailed information regarding previous designs and
how the development process evolved from concept formulation to product launch.
4.5 NEED FOR A FACILITY LOCATION PLANNING

Facilities location may be defined as selection of suitable location or site or place
where the factory or plant or facilities to be installed, where plant will start
functioning.
The development of a location strategy depends upon the type of firm being
considered. Industrial location analysis decisions focus on minimizing costs; retail and
professional service organisations typically have a focus of maximizing revenue.
Warehouse location, on the other hand, may be determined by a combination of cost
and speed of delivery. The objective of location strategy is to maximise the benefit of
location to the firm.
Facility planning has developed, in the past decade, into a major thriving business
sector and discipline. One of the major reasons for new facilities is the global
economic boom that has been accompanied by an enhancement of capacity
worldwide.
In addition to the global economic boom, there are several other reasons for changing
or adding locations:
The cost or availability of labour, raw materials, and supporting resources often
change. These changes in resources may spur the decision.
As product markets change, the geographical region of demand may shift. For
example, many international companies find it desirable to change facility
location to provide better service to customers.
Companies may split, merge, or be acquired by new owners, making facilities
redundant.
New products may be introduced, changing the requirement and availability of
resources.
Political, economic and legal requirements may make it more attractive to change
location. Many companies are moving facilities to regions where environment or
labour laws are more favourable.

Well-planned facilities enable an organization to function at its most efficient and 83

effective level, offering real added value improvements to the organization's core Facility Location
business.
4.6 NATURE OF LOCATION DECISIONS

One of the most important long-term cost and revenue decisions company makes is
where to locate its operation. Location is a critical element in determining fixed and
variable costs for both industrial and service firms. Depending on the product and type
of production or service taking place, transportation costs alone can total as much as
25% of the selling price. That is one-fourth of the total revenue of a firm may be
needed just to over freight expenses of the raw materials coming in and the finished
product going out. Other costs that may be influenced by location include taxes, wages
and raw material costs. The choice of locations can alter total production and
distribution costs by as much 10%. Lowering costs by 10% of total production costs
through optimum location selection may be the easiest 10% savings management ever
makes.
Once an operations manager has committed an organisation to a specific location,
many costs are firmly in place and difficult to reduce. For instance, if a new factory
location is in a region with high energy costs, even good management with an
outstanding energy strategy is starting at a disadvantage. The same is true of a good
human resource strategy if labour in the selected location is expensive, ill-trained, or
has a poor work ethic. Consequently, hard work to determine an optimal facility
location is a good investment.
Types of Facilities
The various types of facilities are briefly described below:
Heavy Manufacturing
Heavy manufacturing facilities are primarily plants that are relatively large and require
a lot of space and as a result, are expensive to construct.
Example: Automobile plants, steel mills and oil refineries.
Important factors in the location decision for plants include construction costs, modes
of transportation for shipping heavy manufactured items and receiving bulk shipments
of raw materials, proximity to raw materials, utilities, means of waste disposal and
labour availability. Sites for manufacturing plants are normally selected where
construction and land costs can be kept at a minimum and raw material sources are
nearby in order to reduce transportation costs. Access to rail-roads is frequently a
major factor in locating a plant. Environmental issues have increasingly become a
major factor in plant location decisions. Plants can create various forms of pool
pollution and traffic pollution. These plants must be located where the harm to the
environment is minimised. Although proximity to customers is an important factor for
some facility types, it is less so for manufacturing plants.
Light Industry
Light industry facilities are typically perceived as smaller, cleaner plants that produce
electronic equipment and components, parts used in assemblies, or assembled
products.
Example: Making stereos, TVs, or computers, tool and die shop, breweries, or
pharmaceutical firms.

84 Several factors are important for light industry. Land and construction costs are not
generally as crucial, because the plants tend to be smaller and require less engineering.
It is not as important to be near raw materials, since they are not received in large bulk
quantities, nor is storage capacity required to as great a degree. As a result,
transportation costs are somewhat less important. Many parts and material suppliers
fall into this category and as such, proximity to customers can be an important factor.
Alternatively, many light industries ship directly to regional warehouses or
distributors, making it less important to be near customers. Environmental issues are
less important in light industry, since burning raw materials is not normally part of
their production processes, not are there large quantities of waste. Important factors
include the labour pool, especially the availability of skilled workers, the community
environment, access to commercial air travel, government regulation and land use
requirements.
Warehouses and Distribution Centers

Warehouses are a category of their own. Products are not manufactured or assembled
within their confines, nor are they sold from them. They represent an intermediate
point in the logistical inventory system where products are held in storage. Normally,
a warehouse is simply a building that is used to receive, handle and then ship products.
They generally require only moderate environmental conditions and security and little
labour, although some specialised warehouses require a more controlled environment,
such as refrigeration or security for precious metals or drugs. Because of their role as
intermediate points in the movement of products from the manufacturer to the
customer, transportation and shipping costs are the most important factors in the
location decision for warehouses. The proximity to customers can also be an important
consideration, depending on the delivery requirements, including frequency of
delivery required by the customer. Construction and land costs tend to be of less
importance as does labour availability. Since warehouses require no raw materials,
have no production processes and create no waste, factors such as proximity to raw
materials, utilities and waste disposal are of almost no importance.
Retail and Service

Retail and service operations generally require the smallest and least costly facilities.
Examples include such service facilities as restaurants, banks, hotels, cleaners, clinics
and law offices and retail facilities such as groceries and department stores, among
many others. The single most important factor for locating a service or retail facility is
proximity to customers. It is usually critical that a service facility be near the
customers who buy from it. Construction costs are generally less important (especially
when compared with a manufacturing plant); however, land or leasing costs can be
important. For retail operations, for which the saying "location is everything" is very
meaningful, site costs can be very high. Other location factors that are important for
heavy and light manufacturing facilities, such as proximity to raw materials, zoning,
utilities, transportation and labour, are less important or not important at all for service
and retail facilities.
Though factory layout is the focal point of facility design in most cases and it
dominates the thinking of most managers, yet factory layout is only one of several
detail levels. It is useful to think of facility planning at four levels, these are:
Global (Site Location)
Macro (Site Planning)
Micro (Facility and Building Layout)
Sub-micro (Workstation Design)

Ideally, the design progresses from global to sub-micro in distinct, sequential phases. 85
At the end of each phase, the design is 'frozen' by consensus. Moving in a sequential Facility Location
manner helps management in the following manner:
Settling the more global issues first.
It allows smooth progress without continually revisiting unresolved issues.
It prevents detail from overwhelming the project.
Based on strategic importance, the macro layout is accepted to be the most critical and
strategically important aspect of facility planning. However, all the stages have their
own importance and significance.
Table 4.1: Facility Planning Matrix
Level Activity Space Planning Unit Environment
Global Site Location & Sites World or Country
Selection
Macro Site Planning Site Features, and Site and Building Concept
Layout Departments
Micro Layout Facility, Building Buildings, Workstations Plant or Departments
and Factory Layout Features
Sub Micro Workstation & Cell Tool & Fixture Locations Workstation & Cells
Layout Design
4.7 FACTORS AFFECTING LOCATION DECISIONS

4.7.1 Factors affecting Manufactured Products
Manufactured products differ from many service products as production may take
place at a location, and then the goods are distributed to the customer. Often the
source of raw materials is an important factor in deciding locations. Very often, you
want to locate your operation close to that source of raw material.
Example: In aquaculture, the incubation of salmon eggs and the first stage lifecycle of
the fish are done in fresh water. Therefore, it is advantageous to locate hatcheries
where there is an abundance of fresh water.
The typical factors that require consideration are:
Location of Markets: Locating plants and facilities near the market for a
particular product or service may be of primary importance for many products in
the sense that location may impact the economics of the manufacturing process.
This may be because of:
Increased bulk or weight of the product.
Product may be fragile.
It susceptible to spoilage.
Add to transportation costs.
Increase transit time.
Decrease deliveries.
Affect the promptness of service.
Affect the selling price of the product the transportation cost often makes
the product expensive.

86 Assembly-type industries, in which raw materials are gathered together from

various diverse locations and are assembled into a single unit, often tend to be
located near the intended market. This becomes especially important in the case of
a custom-made product, where close customer contact is essential.
Location of Materials: Access to suppliers of raw materials, parts, supplies, tools,
equipment, etc., are very often considered to be of paramount importance. The
main issue here is the promptness and regularity of supply from suppliers and the
level of freight costs incurred. In general, the location of materials is likely to be
important if:
Transportation of materials and parts represent the major portion of unit costs.
Material is available only in a particular region.
Material is bulky in the raw state.
Material bulk can be reduced in various products and by products during
processing.
Material is perishable and processing increases the shelf life.
Keeping in mind those materials may come from a variety of locations; the plant
would then be located such as to minimize the total transportation costs.
Transportation costs are not simply a function of distance they can vary
depending on the specific routes as well as the specific product classifications.
Transportation Facilities: Adequate transportation facilities are essential for the
economic operation of a production system. These can include road, rail,
waterways, airports. The bulk of all freight shipments are made by rail since it
offers low costs, flexibility and speed.
For companies that produce or buy heavy and bulky low-value-per-ton
commodities as are generally involved in import and export activities, shipping
and location of ports may be a factor of prime importance in the plant location
decision. Truck transport for intercity transport is increasing as is airfreight and
executive travel.
Traveling expenses of management and sales personnel should also be considered
in the equation.
Labour Supply: Manpower is the most costly input in most production systems.
An ample supply of labour is essential to any enterprise. The following rule of
thumb is generally applied:
The area should contain four times as many permanent job applicants than the
organization will require.
There should be a diversification between industry and commerce-roughly
50/50.
Organizations often take advantage of a location with an abundant supply of
workers. Labour costs and/or skills are often a very important consideration for
locating a facility. The type and level of skill possessed by the workforce must
also be considered. If a particular required skill is not available, then training costs
may be prohibitive and the resulting level of productivity inadequate.
In the call center business, the need of English speaking workers becomes a factor
in deciding the location of your business capacity. India has come on the map
for software development because it has a large number of skilled software
personnel. Microsoft, Texas Instruments, Cisco Systems, Oracle, etc., some of the
best-known names in software applications, have located facilities in India.

Many countries, like China and India, are turning out to be attractive locations for 87
industries that require large contingents of unskilled labour. Facility Location
Though, this is often very appealing, you need to bear in mind that conditions can
change in time. For example, while labour costs may be low in a certain
geographic location now, this will change if the demand for labour grows
significantly.
In considering the labour supply, the following points should be considered:
Skills available size of the labour force productivity levels.
Unionization prevailing labour management attitudes.
History of local labour relations turnover rates absenteeism, etc.
Some organizations have relocated from a high skill/high cost area to a low
skill/low cost area without any decrease in productivity. Sometimes it has been
due to skill availability and labour-management relations but often it has been the
result of higher investment in mechanization.
Location of other Plants and Warehouses: Organizations need to look at their
plant locations for the complete system point of view:
Distribution and supply requirements require the support of sister-plants and
warehouses that complement the system.
The system should be designed to minimize total system costs.
The locations of competitor's plant and warehouses must also be considered
(what do they know, that you don't) the object being to obtain an advantage in
both freight costs and the level of customer service.
Climate: The recent typhoons in the Gulf of Mexico have indicated the need to
look at climatic conditions as a parameter for making location decisions.
Example: Petrochemical plants near Houston were seriously threatened by
Hurricane Katrina.
Japan has seismic regions that could be extremely risky for large fixed
investments in products that are hazardous or dangerous or uses raw materials or
produces by products that may have similar impacts.
Governmental Controls and Regulations: Table 4.2 shows the composite ranking
of the business environment in 20 countries, based upon factors including
government controls, regulations and incentives and labour conditions. Labour
conditions include skills, availability, unionization and history of labour relations.
Table 4.2: Ranking of the Business Environment in 20 Countries, 1997 -2001
1 Netherlands 11 Finland
2 Britain 12 Belgium
3 Canada 13 New Zealand
4 Singapore 14 Hong Kong
5 U.S. 15 Austria
6 Denmark 16 Australia
7 Germany 17 Norway
8 France 18 Ireland
9 Switzerland 19 Italy
10 Sweden 20 Chile

88 In another ranking, this time by the World Bank in their 'Doing Business in 2006'
ratings, India was ranked 116 out of the 155 countries in the listing. New Zealand was
number one, closely followed by Singapore. According to this report, starting a
business in India requires 11 procedures and around 72 days, the highest in the Asian
region. Business in India requires 20 procedures. In 'rigidity of employment' that
relates to hiring and firing people, India ranks 62 on an index of 100. Around
40 procedures and 425 days are required for a contract. Also, taxes must be paid 59
times during the year.
Tax regulations, environmental regulations or various other kinds of government
policies and regulations can be important factors in the location decision. There may
be a more favourable investment climate in a particular geographical or political
region that may attract industry to invest in that region.
4.7.2 Factors affecting Service Products

In service, the capacity to deliver the service to the customer must first be determined;
only then can the service be produced. What geographic area can you realistically
service?
Example: A hotel room must be available where the customer is when that customer
needs it a room available in another city is not much use to the customer.
The primary parameters on which the geographical location decisions are based for
service products have been enumerated below:
Purchasing power of customer drawing area.
Service and image compatibility with demographics of the customer drawing area.
Competition in the area.
Quality of the competition.
Uniqueness of the firm's and competitor's locations.
Physical qualities of facilities and neighboring businesses.
Operating policies of the firm.
Quality of management.
Example: Karim, a specialty restaurant in Delhi, had opened outlets in the major
upcoming markets in Delhi, Noida and Gurgaon. In the malls that are coming up in
and around Delhi, you see well known names like Marks and Spencer, McDonald's,
Tissot, Canon Nike, etc. These are all decisions related to capacity.
1. Define facility location
.
.
2. List some heavy manufacturing units.
.
.

89
4.8 SELECTION OF SITE FOR THE PLANT Operations Technology and
Facility Location
When we see on the television news or read in the newspaper that a company has
selected a site for a new plant, the decision can appear to be almost trivial. Usually, it
is reported that a particular site was selected from among two or three alternatives and
a few reasons are provided such as good community or available land. However, such
media reports conceal the long, detailed process for selecting a site for a major
manufacturing facility.
Example: When General Motors selected Spring Hill, Tennessee, as the location for
their new Saturn Plant in 1985, it culminated a selection process that required several
years and the evaluation of hundreds of potential sites.
When the site selection process is initiated, the pool of potential locations for a
manufacturing facility is, literally, global. Since proximity to customers is not
normally an important location factor for a manufacturing plant, countries around the
world become potential sites. As such, the site selection process is one of gradually
and methodically narrowing down the pool of alternatives until the final location is
determined. In the following discussion we identify some of the more important
factors that companies consider when determining the district, region, state and site at
which to locate a facility.
4.8.1 Country
Until recent years companies almost exclusively tended to locate within their national
borders. This has changed somewhat in recent years as US companies began to locate
outside the continental United States to take advantage of lower labour costs. This was
largely an initial reaction to the competitive edge gained by overseas firms, especially
Far Eastern countries, in the 1970 and 1980. US companies too quickly perceived that
foreign competitors were gaining a competitive edge primarily because of lower
labour costs. They failed to recognise that the real reason was often a new managerial
philosophy based on quality and the reduction of all production related costs. High
transportation costs for overseas shipping, the lack of skilled labour, unfavourable
foreign exchange rates and changes in an unstable government have often combined to
negate any potential savings in labour costs gained by locating overseas. Ironically,
some German companies, such as Mercedes-Benz, are now locating plants in the
United States because of lower labour costs. An overseas location is also attractive to
some companies who need to be closer to their customers, especially many suppliers.
The next stage in the site selection process is to determine the part of the country or
the state in which to locate the facility.
In India the Western and Central regions are generally most preferable and the Eastern
region is least preferable for manufacturing facilities. This reflects a general migration
of industry from the Eastern to the Western and Central regions during the last two
decades primarily due to labour relations. The factors that influence in what part of the
country to locate are more focused and area-specific than the general location factors
for determining a country.
4.8.2 State/District
The site selection process further narrows the pool of potential locations for the
facility down to several communities or localities. Many of the same location factors
that are considered in selecting the country or region in which to locate are also
considered at this level of the process.

90 State/District specific factors are:

State/District government
Local business regulations
Environmental regulations
Government services (Chamber of Commerce, etc.)
Availability of sites
Financial services
Labour pool
State inducements
Proximity of suppliers
Concentration of customers
Taxes
Construction/Leasing costs
Land cost
Business climate
State amenities
Transportation system
Proximity of customers
4.8.3 Plant Location

The site selection process eventually narrows down to the determination of the best
location within a community. In many cases a community may have only one or a few
acceptable sites, so that once the community is selected the site selection is an easy
decision. Alternatively, if many potential sites exist, a thorough evaluation is required
of sites that are potentially very similar. For service and retail operations, customer
concentrations become a very important consideration in selecting a site within a
community, as does cost.
Plant specific factors are:
Customer base
Construction/Leasing cost
Land cost
Site size
Transportation
Utilities
Land use restrictions
Traffic
Safety/Security
Competition
Area business climate
Income level

91
4.9 PROCEDURES FOR LOCATION DECISIONS Operations Technology and
Facility Location
At macro level, the plans of the site are developed. These plans should include
number, size and location of buildings. It should also include infrastructure such as
roads, rail, water and energy. Planning of this stage has the greatest strategic impact
on the facility planning decision. This is the time to look ahead and consider the
different impacts and site and plant expansions leading to the eventual site saturation.
Planning at the macro level stage should include the following:
Development of a facility master plan to guide facility investments over a
multi-year period
Impact planning
Evaluation
Facility layout, space allocation and capacity
Development of space standards.
4.9.1 Facility Master Plan

The facility master plan helps:
Right services: The right services consistent with the organization's mission,
strategic initiatives, and market;
Of the right size, based on projected demand, staffing, and equipment/technology;
At the right location based on access, operational efficiency, and building
suitability;
With the right financial structure.
Facility master planning strategy involves examining the existing facilities; the sizing
of future facilities and site amenities; the integration of these facilities into the site;
traffic flow and circulation; and the analysis of any impact that this development will
have on the site with respect to environmental issues.
The areas it covers include:
Land-use Planning
Site Evaluation
Zoning Analysis
Traffic Impact Analysis
Site Engineering Analysis
Architectural Programming
Needs Assessment Survey
Interior Space Planning
Adaptive Reuse Study
Building Design
Site Design
Landscape Design

92 The master planning team's work is broadly divided into two phases: Phase I deals
with information gathering and analysis. Phase II addresses the synthesis of gathered
information into the development of a master plan.
Steps involved in Phase I

A review of the development history of the business;
Evaluation in the local and regional context;
Planned current and projected conditions;
It starts with collecting baseline data on market dynamics, workload trends,
current space allocation, and perceived facility, operational, and technology
issues.
Steps involved in Phase II

Phase II synthesizes and integrates numerous strands of information gathered into
an organized plan.
Orderly approach to master planning and the growth during a specified planning
period.
The master planners, at this stage, formulate approaches to such 'big picture'
issues as image, identity, character, and visions of the future of the organization
within a broader, societal context.
The current market strategies and business plans, potential operations
restructuring initiatives, and planned investments in new equipment, information
technology, and other capital requirements (e.g., infrastructure upgrading) are
reviewed.
The facility master plan provides a detailed phasing/implementation plan, which
also serves as a 'road map' to guide facility investments over a multi-year period.
It identifies immediate, short-term, and long-range "projects" with corresponding
capital requirements and its sequencing. This is compared with current industry
practice.
4.9.2 Impact Planning

Any facility will create an impact on the environment. This is also called an ecological
footprint. Theoretically, the size of the ecological footprint should be minimized.
Impact planning is the integration of commercial and practical environmental
objectives to produce the optimum benefit for business and the environment.
The following features need to be protected and the impact on these also needs to be
considered:
Vegetation/Tree cover
Wetlands, Swamps, Mangroves
Protected Areas
Lakes
Rivers and creeks
Sea coast
The impacts on these specific elements should be within the parameters of the
environmental laws that protect environs of the site.

In addition, the topography, soil mixture and drainage must be suited to the type of 93
building required. The soil must be capable of providing it with a proper foundation. Facility Location
It should not be a low-lying area. Ingress of excess water during monsoons should not
disturb operations. Land improvements or piling and concrete rafting to provide
protection and the required strength to the foundations always prove expensive. Even
when the price of land is low, it may not prove to be economical to build on such sites.
In India we have laws to protect the air, water, and ground. Both air and water are
impacted by the wastes that are produced and the manner in which wastes are
disposed of. Will the plant be situated in a smoke-free zone? Can water and oil be
discharged directly or must it be transported from the plant? What local agencies are
available to provide solutions?
Recently there were news reports that oil seepage from an oil storage depot of Indian
Oil Corporation in Bihar, had found its way into the water table. Water supply in the
area has become unfit for human consumption. This raises questions of various threats
to the environment from factory operations.
The legal requirements of the Government of India and the types of impacts that need
to be controlled to meet environmental and local laws include the following:
Air pollution
Water pollution
Waste treatment
Solid waste disposal
Hazardous chemicals
Disposal of sludge
Noise
Dust
Radiation
Toxic chemicals
Industrial accidents
Chemical or fuel spills
Box 4.1: Infrastructure for Environmental Requirements
Questionnaire
This identifies a number of services and features that may be linked to infrastructural requirements of
the unit. Who provides or is responsible for the following services, tools or actions?
1. Industrial Estate Authority
2. Operational Units
3. Government Authority
4. Private Sector
5. Others
1 2 3 4 5
Energy
Centralized energy supply o o o o o
Individual energy supply o o o o o
Supply and recovery of waste heat (cogeneration) o o o o o
Contd

94 District heating system o o o o o

Energy from waste facility o o o o o
Energy from renewable resources facility o o o o o
Water
Municipal service o o o o o
Tube wells o o o o o
Treatment facilities o o o o o
Waste water disposal o o o o o
Liquid waste disposal o o o o o
Waste water recycling o o o o o
Rain water harvesting o o o o o
Sewage disposal o o o o o
Solid Waste
Solid waste disposal o o o o o
Composting of biological waste o o o o o
Industrial liquid waste disposal o o o o o
Hazardous waste disposal o o o o o
Waste exchange clearing house o o o o o
Multi-material resource recovery o o o o o
Transport
Traffic and transport management plan o o o o o
Management
Environmental monitoring o o o o o
Effluent monitoring o o o o o
Air emission monitoring o o o o o
Environmental auditing o o o o o
Environmental impact assessment o o o o o
Environmental risk assessment o o o o o
Environmental technology assessment o o o o o
ISO 14001 certification o o o o o
Environmental training and education o o o o o
Emergency preparedness and response capability o o o o o
Self-regulation and operational standards o o o o o
Insurance services o o o o o
Miscellaneous
Restoring natural features of the site o o o o o
Landscaping and gardening o o o o o
Analytical and laboratory services o o o o o
Protection and security system o o o o o
Safety, Fire and other hazards o o o o o

For example, considering the example of the Sahara Mall, KT Ravindran, an 95

urban-planning expert at Delhi's School of Planning and Architecture, says that the Facility Location
daily exodus of shoppers from Delhi to Gurgaon's malls is already creating
excruciating delays on the roads. But that's only the start of the trouble; because the
electricity supply is unreliable in Gurgaon, malls will have to run their own diesel-
powered generators, which cause significant pollution. And because the water supply
is also limited, many of the malls have to dig wells and suck up groundwater, thus
lowering the water level in the region.
In the Sahara Mall, the main source of power is the grid of HSEB. As Gurgaon is a
power-cut prone area, an Auto Voltage Regulator (AVR) has been installed to ensure
automatic regulation of voltage and 100 percent standby power generated through four
in-house continuous rating generators. The DG sets are installed in specially designed
rooms to control noise.
Water requirements are supplemented by the use of two bore wells. The raw water is
stored in soft water tank after curing through softening plant. Water is filtered and
chlorinated and stored in domestic tank for drinking purpose. Limited roof-top
rainwater harvesting is used to recharge the ground water.
Solid waste disposal is another issue. A garbage room is maintained in the upper
basement of the Mall where all occupants place their garbage in closed PVC bags.
Garbage is cleared from common areas dust and ashbins and stored in the garbage
room. Garbage room is cleared at night on a daily basis. Low temperature has to be
maintained in the garbage room for reducing decomposition and thereby foul smell.
4.9.3 Site Evaluation

Site evaluation should be the step after the facility impact assessment bears out the
suitability of the site. The next steps are to look at the size of the land, the provision of
infrastructure and utilities, the transportation facilities, land cost and site location, etc.
Some of these considerations are discussed here under:
1. Size of Site: The plot of land must be large enough to hold the proposed plant
along with its utilities, waste and water treatment facilities, parking and access
facilities and support services. The size of the plot must also be large enough to
provide sufficient space for further expansion.
2. Utilities: The continuity of operations and the ability for uninterrupted production
depends on the adequacy of utilities. The ability to overcome recurring problems
associated with the supply of utilities needs to be evaluated and accountability
assigned:
Possible restrictions on power availability.
Cost differentials at peak periods.
Availability of water supply during a 'hot' summer.
Quality of water-hard or soft, etc.
Connection cost of services from main supply lines to the intended plant.
Costs associated with the volume and reliability of power, water and fuel supplies
must be evaluated carefully. These costs are considerable and have to be borne
over the life of the assets.
3. Transportation Facilities: Rail and road networks should be close to the proposed
plant to minimize the cost of creating private sidings to the rail lines and access
roads. Some indication can be gained by looking at the present road and rail

96 network serving the local community. The plant should also be easily accessible
by car and public transport.
Intangible factors to consider include the reliability and network of the available
carriers, the frequency of service, and freight and terminal facilities, and distance
from the nearest airport. These can reflect on the cost and time required to
transport the finished product to market and raw materials to the plant. They may
also impact on the time required to contact or service a customer. These are
important issues that must also be considered.
4. Land Costs: These are non-recurring costs and of little importance in the
determination of the facility location. In general, the plant site will be one of the
following locations: city location; industrial areas or estates; or interior areas.
Locating an establishment can be in a (a) city, (b) industrial estate or industrial
area, or (c) at a greenfield location. Each option has advantages and
disadvantages. The criteria for choosing each of these locations are given above:
City Location:
Availability of high proportion of highly skilled employees.
Fast transportation or quick contact with customers and suppliers.
Size of plant often a limitation, small plant sites or multi-floor operations.
Transportation of large variety of materials and supplies possible, but
usually in relatively small quantities.
Urban facilities and utilities available at reasonable rates.
Possible to start production with a minimum investment in land,
buildings, etc., as these can usually be rented.
Industrial Estates/Industrial Areas:
Limitations in locating close to employee's homes.
Often provided exemptions from high taxes.
Freedom from strict city building and zoning restrictions.
Infrastructure often not a major concern.
Environmental concerns can be met at minimum cost outlay.
The site should be close to transportation and population.
Interior Greenfield Location:
Large land requirement.
Suitable to production processes/product which are dangerous or
objectionable.
Requirement for large volumes of relatively pure water.
Often provided exemptions from high taxes.
Limited availability of highly skilled employees.
Need to invest in infrastructure and housing.
Plant location analysis is a periodic task. Management should recognize that
successful businesses are dynamic. A location may not remain optimal forever.
1. List some plant specific factors. Facility Location
.
.
2. Facility master planning strategy involves:
.
.
4.10 TECHNIQUES OF LOCATION ANALYSIS

4.10.1 Factor Rating Method
Assume that an auto ancillary is planning to set up a factory to supply parts to Maruti.
There are three location options identified by the company. The first is at Jammu,
where the promoters are based; the second location is at Chandigarh where the
company already has land; and the third is in Gurgaon, close to the principal's factory.
How does the company choose the location using a Factor Rating Analysis?
In this type of analysis, the company chooses the factors that it considers most
important in making the correct decision. The identified factors are rated on a scale of
1 to 5. A rating of 5 is given to the most important factor and 1 to the least important
one. The factors that have been identified are given scores raging from 1 to 10
dependent on the advantages the site offers. Ten (10) is the highest score. This is
called the location score.
Table 4.3 shows the factor ratings and the location scores that were considered in this
particular case.
Table 4.3: Factor Rating Analysis
Factor Factor Rating Location Scores
Jammu Chandigarh Gurgaon
Required Amenities 4 3 7 9
Government Regulations 2 10 7 5
Ability to Expand Capacity 3 10 10 6
Easy Availability of required 1 7 10 4
Land
Availability of Skilled Labor 4 2 6 9
Impact Analysis 4 10 8 6
Ease of Funding 5 5 5 10
Proximity to Market 3 2 5 10
Proximity to Suppliers 5 2 6 9
Jammu gets very high scores in government regulations, ability to expand, and impact
analysis. Government offers incentives relating to exemption of sales tax and lower
income taxes in Jammu. As the promoters are based in Jammu, their ability to acquire
assets to expand is going to be easier in Jammu. As the level of industrialization in
Jammu is low, the level of the investment in clean technologies is expected to be low
as the base levels of pollution are low.
Chandigarh gets very high scores both on ability to expand and availability of required
land. This is because the company already owns sufficient land at Chandigarh.

98 Gurgaon gets very high scores at ease of funding, because Maruti has a policy of
investing in its ancillaries around Gurgaon as a joint venture partner. This would not
only ease the fund requirements of the owners, but would also make availability of
additional funds easier. It would be located adjacent to its market, Maruti Udyog Ltd.,
and most of the suppliers of inputs would be relatively close.
Table 4.4: Composite Location Scores
Factor Composite Location Scores

Factor
Rating Jammu Chandigarh Gurgaon
Required Amenities 4 12 28 36
Government Regulations 2 20 14 10
Ability to Expand Capacity 3 30 30 18
Easy Availability of required Land 1 7 10 4
Availability of Skilled Labor 4 8 24 36
Impact Analysis 4 40 32 24
Ease of Funding 5 25 25 50
Proximity to Market 3 6 15 30
Proximity to Suppliers 5 10 30 45
158 208 253
We can now convert the factor rating and location score into a composite score. This
is done easily by multiplying the factor rating with the location scores. The product is
the composite score for the location. The totals of all the factors are added and
compared. The location with the highest composite location score is the preferred
location. This has been worked out in Table 4.4.
Based on the Factor Rating Analysis, Gurgaon is the best site for locating the new
plant. It is a significantly better location than Chandigarh or Jammu based on the
factors that were identified and the salience that was given to these factors.
There is an implicit assumption in this model that either the cost differences between
the locations are not significant or that the benefits also reflect the cost advantages of
the location decision. This assumption may or may not be true. In the example we
have discussed above, the cost of land in Gurgaon could be extremely high, while the
historical cost of the Chandigarh land may be insignificant. The cost of pollution
control devices required at Gurgaon may be significantly higher than that required in
Jammu.
It is often better to use this model along with a quantitative model and compare the
results before taking a facility location decision. A number of other models are
available and commonly used that quantify both the benefits and costs of a specific
location compared to others.
4.10.2 Load Distance Model

The Load-distance Model is a simple mathematical model that captures costs to
identify attractive candidate locations on the basis of quantitative factors. The
objective of this model is to select a location that minimizes the total weighted loads
moving into and out of the facility.
Distance Measures: The model requires a rough calculation of the distance. Either
Euclidean or rectilinear measures can be used. Euclidean distance is the straight-line
distance, the shortest distance between the points. To calculate the distance, we use
the formula of a right-angled triangle. The distance is the hypotenuse:
DAB = (xo xi)2 + (yo xi)2

Where, Do is the distance between the locations (the hypotenuse), 99

xi yi are the coordinates of the existing location 'i', and Facility Location
xo yo are the coordinates of location optimal location 'o'

Rectilinear distance measures all movements in the east-west or north-south
directions: (the distance between the points is measured in 900 turns). Diagonal moves
are not considered. Essentially, the distance between two points is the sum of two
points based on the sum of the base and perpendicular of a triangle. This can be
expressed by the formula:
DAB = |(xA xB)| + |(yA xB)|
Notice we calculate the absolute value of difference, because distance is always
positive.
Suppose we take an example. Imperial Carpets sells hand-made carpets, primarily, in
the Delhi market. It procures, on an average, 60 truckloads of rough carpets directly
from weavers in Agra and 60 truckloads of rough carpets from weavers in Jaipur, each
month.
Presently, Imperial Carpets subcontract the finishing to local parties in Agra and
Jaipur. Finishing involves trimming the pile, washing, chemical treatment and finished
sizing of the carpets. After finishing, the final product reduces in volume and weight
from 60 to 50 truckloads. The cost of moving the product is based on a straight
measure of distance. Each truckload costs 80 per kilometer travelled.
Due to increase in subcontracting costs and also for strategic reasons, Imperial Carpets
wants to set up its own new plant to finish carpets. The decision that the management
has to take is, 'where to locate the finishing unit'? They have to decide between Delhi,
Agra and Jaipur. The three given locations are shown in Figure 4.1. The model
expresses distances by assigning co-ordinates on a rectangular grid to the different
locations.
Agra Jaipur
50, 200 350, 210
South
Kms.
Delhi
200, 50
Kms.
West
Figure 4.1: Load-distance Model

Where should we locate the new plant to minimize annual transportation costs for this
network of facilities?
The Euclidean distance between Agra and Delhi is 212 kms, the distance between
Delhi and Jaipur is 220 kms; and the distance between Jaipur and Agra is 300 kms. All
figures have been converted to integers. The rectilinear distance between Agra and
Delhi is 300 kms, the distance between Delhi and Jaipur is 310 kms and the distance
between Jaipur and Agra is 310 kms.

100 Using the rectilinear model, which is more popular, we are framing below a general
procedure for such problems. Assume the coordinate location of each existing facility
is (xi, yi).
Since all loads must be on rectangular paths, distance between each existing facility
and the new plant will be measured by the difference in the x-coordinates and the
difference in the y-coordinates.
If we let (xo, yo) be the co-ordinates of a proposed new plant, then
Di = |(xo xi)| + |(yo xi)|
Our goal is to find an optimal solution for xo and yo (new plant) that results in
minimum transportation costs. We follow three steps:
1. Identify the median value of the loads L i moved.
2. Find the x and y-coordinates to the existing facility that sends (or receives) the
median load.
3. Find the y-coordinate value of the existing facility that sends (or receives) the
median load.
The x and y-coordinates found in steps 2 and 3 define the new plant's best location.
Table 4.5: Location of Manufacturing Facility
Location- Loads Distance Unit Load-Distance
Median
new travel
Euclidean Rectilinear Loads Euclidean Rectilinear
Facility between
Delhi 212 300 100 21200 30000
Agra (A)
Jaipur 300 310 60 18000 29200 18600 38600
Delhi 220 310 100 22000 31000
Jaipur (B)
Agra 300 310 60 18000 30000 18600 39600
Agra 212 300 60 12720 18000
Delhi (C)
Jaipur 220 310 60 13200 25920 18600 36600
Table 4.5 shows the number of loads to be shipped monthly between the different
locations. It also shows the Euclidean and rectilinear distances between the locations,
and calculates the load-distance factor for the different location options. In this case,
as the total transit cost depends on distance only and the transported units are similar,
the total transportation cost is a constant and does not affect the final results.
If the cost to move one unit of load Ci and the number of loads are Li, the general
formula for transportation costs is:
n
Total Transportation Cost = Ci L i D i
i 1
The model does not consider road availability, physical terrain, or many other
important location considerations. This provides a rule of thumb method to determine
location. More rigorous quantitative models are often used. Two such quantitative
models are Linear Programming (LP) and Transportation models.
4.10.3 Least Cost Method

Least cost method suggests that the agriculture and industries should locate their
activities as close to the market as possible, in order to get benefit of least cost of
transportation of goods they produce.

According to this method, a site is chosen for industrial development where total costs 101
are theoretically at their lowest, as opposed to location at the point of maximum Facility Location
revenue.
A model of industrial location proposed by A. Weber, assumes that industrialists
choose a least-cost location for the development of new industry. The theory is based
on a number of assumptions, among them that markets are fixed at certain specific
points, that transport costs are proportional to the weight of the goods and the distance
covered by a raw material or a finished product, that perfect competition exists, and
that decisions are made by economic man.
Weber argued that raw materials and markets would exert a 'pull' on the location of an
industry through transport costs. Industries with a high material index would be pulled
towards the raw material. Industries with a low material index would be pulled
towards the market.
Once a least-cost location has been established, Weber goes on to consider the
deflecting effect of labour costs.
4.11 LOCATION DECISION USING

THE TRANSPORTATION METHOD
Special algorithms, called the transportation method, have been developed, and
successfully used for solving such physical distribution problems. In transportation
problems we minimize the cost of transportation from factory to warehouse. These
methods have also been applied for solving other problems which are similar in
structure to the transportation problems, such as factory or warehouse location,
production scheduling, media scheduling, salesperson routing, workforce scheduling,
and so forth.
The transportation method for solving the physical distribution or transportation
problem is an iterative procedure, like the simple method. The initial allocation is
made and then the second allocation is made. If the second allocation does not result
in any cost savings or turns out to be higher cost allocation, the initiate allocation is
optimal. If, on the other hand, the second allocation turns out to be more cost
effective, third allocation is made. If the third allocation does not show any cost
saving, second allocation is the optimum.
START
Make the Initial

Allocation
Make another
Allocation
No Yes Stop. You have

Is this more Cost
Effective? Optimal Solution
Figure 4.2: Iterative Procedure of Transportation Method

102 This process is shown in Figure 4.2. In handling such problems, as many
transportation tables are set up as there are location choices, treating them as separate
transportation problems. When the final solution of the problems is arrived at, the one
with the least cost points to the optimum location.
However, location problems are handled slightly differently than simple transportation
problems. Transportation tables are set up for each of the location options. Each
choice is treated as a separate transportation problem. The final solution of each of the
problems is compared and the problem that provides the least cost solution is the
optimum location.
We will explain the method using an example. Musgrave Inc. has three factories in
Boston, Detroit and Los Angeles. It is a manufacturer of washing machines, and its
current production is 200 units per day at Boston, 250 units at Detroit and 400 units at
Los Angeles. It is planning to increase its production capacity to 400 units at Detroit,
600 units at Los Angeles, and 300 units at Boston.
The company has, at present, two warehouses. The warehouse in Chicago has a
demand of 500 machines, and the one in Birmingham takes 350 machines. With the
expansion program for production, the company is planning to set up a new
warehouse. The choice is between Dallas and Pittsburgh. The costs per unit are given
in Table 4.6.
Table 4.6: Transportation Costs
($ per unit)
Chicago Birmingham Dallas Pittsburg
Boston 10 8 11 9
Detroit 8 9 11 8
Los Angeles 9 8 10 11
Assuming that the demand is estimated at 450 units at Dallas as well as Pittsburgh,
and that the transportation costs is the only factor in decision-making, where should
the company locate the new warehouse?
Make the Initial Allocation for the first option, i.e. setting up the warehouse at Dallas.
In making the initial allocation we follow the north-west Corner Rule. Start with the
top left-hand (north-west) corner cell. In our illustration it is cell AD. We make
maximum allocation to AD such that either the total supply in the opposite extreme
right-hand side of the cell is completely exhausted, or the demand for that warehouse,
shown in the bottom extreme left-hand side cell, is completely filled.
Table 4.7: Transportation Table with Warehouse at Dallas
Chicago Birmingham Dallas Supply
(D) (E) (F)
Boston (A) AD 10 AE 8 AF 11
300 0 0 300
Detroit (B) BD 8 BE 9 BF 11
200 200 0 400
Los Angeles (C) CD 9 CE 8 CF 10
0 150 450 600
Demand 500 350 450 1300
We then move to the top cell in the first row and the second column (AE). If any
supply is left unallocated, exhaust it, until either the supply is finished or the demand
is completely filled in. If any supply is still left, allocate it to the last cell in the first

row and third column. Following the procedure, we construct the transportation table 103
shown as Table 4.7. Facility Location
We check this table for degeneracy. It is easily seen that there is no degeneracy.
Therefore, we check the table for optimization.
Table 4.8: Net Effect on Cost Pattern by Moving Units for Musgrave Inc .
Empty cell Cells to which an additional Effect on cost Net effect
name unit is given/taken from
AE + AE, AD, BE , + BD + 8 10 + 8 9 3
AF + AF, AD, CF, + BD 11 10 10 + 8 1
BF + BF, BE, + CE, CF 11 9 + 8 10 0
CD + CD, CE, + BE, BD 98+98 2
We now select the empty cell with the largest negative figure which has the greatest
cost saving potential i.e. cell AE, and move 200 units from cell AD. We then balance
the table so that all total of all rows and columns remain unchanged. The new
transportation table is shown as Table 4.9.
Table 4.9: Transportation Table with Warehouse at Dallas, 2nd Allocation
(D) (E) (F)
100 200 0 300
400 0 0 400
0 150 450 600
Demand 500 350 450 1300
This is the optimal solution i.e. if the new warehouse is located in Dallas, the optimum
allocation and the combined cost of transportation will be:
Cost of Transportation = 10(100) + 8(200) + 8(400) + 8(150) + 10(450) = $11,500
We now take the second option of locating the warehouse at Pittsburgh, and draw up
its transportation table. This table is shown as Table 4.10.
Table 4.10: Transportation Table with Warehouse at Pittsburgh
(D) (E) (F)
300 0 0 300
200 200 0 400
0 150 450 600
Demand 500 350 450 1300
On the second allocation, we obtain the optimal configuration for this option. This is
shown as Table 4.11.

104 Table 4.11: Transportation Table with Warehouse at Pittsburgh, 2nd Allocation
(D) (E) (F)
0 0 300 300
250 0 150 400
250 350 0 600
Demand 500 350 450 1300
If the new warehouse is located in Pittsburgh, the combined cost of transportation will
be:
Cost of Transportation = 9 (300) + 8 (250) + 8 (150) + 9 (250) + 8 (350) = $ 10,950
By comparing the answers of the two problems that we set up, we come to the
conclusion that the optimum allocation with the new warehouse in Pittsburgh is more
economical than the one at Dallas. The new warehouse should, therefore, be located in
Pittsburgh.
These types of questions can also be solved using Vogels Approximation Method.
The solved example below has used VAM to arrive at the solution.
4.12 LET US SUM UP

In this lesson we presented the definition, significance and objectives of facilities
location/plant location. Types of facilities viz. heavy manufacturing, light industry,
warehouse and distribution centres, retail and services are incorporated. The site
evaluation processes and critical factors in location analysis are included. Location
analysis techniques, Locational break-even analysis and Behavioural impacts in
facility location are highlighted.

Prepare a study note on TIES method.
4.14 KEYWORDS
Capacity: Capacity is defined as the maximum load that can be handled by a facility
during a given period. The load can be expressed in terms of the inputs or outputs.
Layout: Layout of a facility is the physical location of various departments/units of
the facility in the premises of the facility.
Effective Capacity: Effective capacity is the maximum rate of output that can be
practically achieved under the constraints of time consumed it set-ups, oiling and
cleaning, defective items, etc.
Cycle Time: Cycle time is a time period after which completed units come off the
assembly line.

1. What do you mean by warehouses and distribution centers?
2. Describe various factors affecting manufactured decisions.

3. Explain location decision procedure in detail. 105

4. "The development of a location strategy depends upon the type of firm being Facility Location
considered". Discuss.
5. "Well-planned facilities offer real added value improvements to the organization's
core business." Explain the statement.
6. "Location is a critical element in determining fixed and variable costs for both
industrial and service firms." Substantiate.
7. Suppose you are a businessman producing garments, looking to start your
business operations in some other country. What factors will you keep in mind
while setting up your business abroad?
8. "Manpower is the most costly input in most production systems." Analyse this
statement.
9. What do you mean by the 'right services' in facility master plan?
10. "Any facility will create an impact on the environment." Elucidate.
11. Why is it important to evaluate a site beforehand? Discuss the least cost and centre
of gravity method and their relevance.
12. Write short notes on:
(a) Land cost
(b) Site evaluation
(c) Facility master plan

CYP 1
1. Just-In-Time
2. Technology Impact Forecasting
3. Monte Carlo Simulation
CYP 2
1. Facilities location may be defined as selection of suitable location.
2. Some heavy manufacturing units are: Automobile plants, steel mills and
oil refineries.
CYP 3
1. Some plant specific factors are:
(a) Customer base
(b) Construction/Leasing cost
(c) Land cost
(d) Site size
(e) Transportation
(f) Utilities
Contd

106 (g) Land use restrictions

(h) Traffic
2. Facility master planning strategy involves examining the existing
facilities; the sizing of future facilities and site amenities; the integration
of these facilities into the site; traffic flow and circulation; and the
analysis of any impact that this development will have on the site with
respect to environmental issues.

1994
Education, 2002
McGraw Hill, 1996

107
LESSON Plant Layout
5
PLANT LAYOUT
CONTENTS
5.1 Introduction
5.2 Facility Layout
5.3 Types of Layout
5.4 Process Layout
5.4.1 Process Layout and Material Handling Costs
5.4.2 Process Layout in Nokia
5.4.3 Advantages and Disadvantages of Process Layout
5.5 Product or Line Layout
5.5.1 Assembly Line
5.5.2 Defining the Layout Problem
5.5.3 Assembly Line Balancing
5.5.4 Graphic and Schematic Analysis
5.5.5 Limitations of Product Layout
5.6 Fixed Layout
5.7 Cellular or Group Layout
5.7.1 The U-shaped Assembly Line
5.7.2 Advantages and Disadvantages of Cellular Layouts
5.7.3 Comparison of Layouts
5.8 New Approaches to Layout Design
5.8.1 Flexibility
5.8.2 Mixed Model Line
5.9 Lean Manufacturing System
5.10 Agile Manufacturing System
5.11 Computer-integrated Manufacturing System
5.12 Assembly Line Balancing
5.13 Let us Sum up
5.15 Keywords

108
Operations Management 5.0 AIMS AND OBJECTIVES
Describe the basic layout types of fixed position layout, process layout, cell layout
and product layout
Know the effect of volume and variety on layout type
Use some of the more common techniques, which can be used in layout decisions
Know about the new approaches to layout design.
5.1 INTRODUCTION
A typical manufacturing plant has a number of diverse activities interacting with each
other. Raw materials arrive at a shipping dock, they are unpacked and checked in a
quality control area, they may then be processed through several processing areas, and
finally the finished product again passes through the shipping dock. In addition to
areas specifically related to production, there must be dressing rooms, lunch rooms,
and restrooms for employees; offices for supervision, design, and production control;
and space for inventory and aisles. In fact, a plant may be viewed as a number of finite
geometric areas arranged on the floor space of the building. The problem of arranging
these areas in an effective manner is the facility layout problem.
Clearly, the layout problem has relevance in many areas of facility and equipment
design. This lesson tries to disseminate knowledge on the design and planning of
service and production facilities. It discusses the different types of layouts, blending
organizational expectations with effective use of space to create a work environment
that is efficient.
5.2 FACILITY LAYOUT

Good micro level planning can affect an organization and determine how well it meets
its competitive priorities by:
Facilitating the easy flow of materials and information,
Increasing the efficiency in the utilization of labor and equipment,
Increasing convenience of customers and thereby sales at a retail store,
Improving working conditions and decreasing hazards to workers,
Improving employee morale, and
Improving communication.
Facility planning at the micro level involves decisions about the functional layout and
physical arrangement of economic activity centers. Economic activity centers are
work related places that consume space:
It could be a teller window in a bank or the space for customers to wait for their
turns;
It could be a machine, a workbench or work-station;
It could be a stairway or an aisle, and
It could be a cafeteria or storage space. These have many practical and strategic
implications.

The goal of functional layout is to allow workers and equipment to operate as 109
Plant Layout
effectively as possible. In order to do so, the following questions need to be addressed:
What should the layout include for each economic activity center? The
economic activity center should reflect decisions that maximize productivity. For
example, a central tool room is often efficient for most processes, but keeping
tools at individual workstations makes more sense for other processes.
How much space and capacity does each economic activity center need? Space
is a cost but inadequate space can reduce productivity and even create safety and
health hazards.
How should each economic activity centers space be configured? The space, its
shape, and the elements need to be interrelated. For example, in a store the
placement of the show windows, spaces planned so that products are visible and
providing a pleasing atmosphere are necessary parts of the layout configuration
decisions.
The location of an economic activity center has two dimensions that affect a centers
performance.
Relative location, or the placement of a center relative to other centers, and
Absolute location or the particular space that the center occupies within the
facility.
Where should each economic activity center be located? Location can significantly
affect productivity. Employees who must frequently interact with one another should
be placed close together so that interaction becomes easier; sections or departments
should be planned to reduce time lost in moving material or traveling of personnel
back and forth.
Equipment Availability Production Goals
Building Design
INPUTS OUTPUTS
Materials
Forecasts Handling Capacity
Drawings Workplace Internal
Specifications Design External
Operation sheets Layout
Route sheets Support Process
Job descriptions Services Product
Plant location Fixed-position
Cellular
Equipment
Type
Quantity
Location
Human Factors Capital Availability
Figure 5.1: Facility Planning Model

The operations function in both manufacturing and service organizations can be
divided into two basic types, intermittent and continuous, according to the volume and
standardizing of the product or service.
Different types of operations have different layout requirements. By their nature,
layouts of the facility are one of the most important strategic elements of a business
enterprise. Many symptoms of inappropriate business architecture appear as layout or
material handling issues. For example, in warehouses, materials flows and the cost of
picking stocks are dominant considerations; in retail outlets customer convenience and

110 sales may dominate; whereas in an office, communication effectiveness and team
building may be crucial.
5.3 TYPES OF LAYOUT

The Facility Layout plan institutionalizes the fundamental organizational structure.
Every layout has four fundamental elements:
Space Planning Units (SPUs),
Affinities,
Space, and
Constraints.
Keeping these in mind, several fundamental choices are available to managers. These
choices are incorporated in the four basic types of layouts:
Process layout
Product layout
Fixed layout
Group layout
These basic types of layout should keep in mind the following principles:
1. The emphasis should on gross material flow, personal space and communication.
2. Socio-technical considerations should play an important in determining the layout.
3. The layout should facilitate arrangement of physical facilities, which allows most
efficient use of man, machine and material necessary for the operation to meet the
requirements of capacity and quality.
4. The layout should be based on a premise that a properly designed facility is an
important source of competitive advantage.
It is very difficult to enumerate all the properties of most efficient use of man,
machine and material; however the layout should try to:
Operate at low cost
Effectively use space
Provide for easy supervision
Provide fast delivery
Minimum cost of material handling
Accommodate frequent new products
Produce many varied products
Produce high or low volume products
Produce at the highest quality level
Workers convenience and safety
Provide unique services or features
Though, it is not possible to simultaneously optimize all these factors in the design but
a balance should be maintained. The Functional Layout for each building, structure or
other sub-unit of the site whether in terms of space allocation or capacity, from the

Operations Departments point of view is perhaps the most important level of 111
Plant Layout
planning.
5.4 PROCESS LAYOUT

Process layout is also called as functional layout. Similar machines or similar
operations are located at one place as per the functions. Very often the operations are
intermittent. For example, as will be apparent from Figure 5.2, all milling operations
are carried out at one place while all lathes are kept at a separate location. Grinding,
milling or finishing operations are carried out in separate locations. This functional
grouping of facilities is useful for job production and non-repetitive manufacturing
environment.
Intermittent operations are characterized by the work piece moving from one group of
machines to another. It finds application in made-to-order products, low product
volume, general-purpose equipment, labor-intense operations, interrupted product
flow, frequent schedule changes, and large product mix. An example is a machine
shop.
Receipt Lathes-A Grinding-E Assembly-F
Stores
Inspection Stock
Shaping-B Drilling-C Milling-D
Figure 5.2: Functional Process Layout
5.4.1 Process Layout and Material Handling Costs

In process layouts, one of the principles of paramount importance is that centers
between which frequent trips or interactions are required should be placed close to one
another.
This has implications in all manner of organizations; in a manufacturing plant, it
minimizes materials handling costs; in a warehouse, stock picking costs can be
reduced by storing items typically needed for the same order next one another; in a
retail store, minimizing customer search and travel time improves customer
convenience; in an office where people or departments must interact frequently are
located near one another, both communication and cooperation often improves and
coordination between departments can be less challenging.
There are both quantitative and semi-quantitative methods available for optimizing
process layouts. We have studied the Load-distance Model previously, which is a
simple mathematical model that captures costs to identify a location that minimizes
the total weighted loads moving into and out of the facility. A detailed discussion of
this technique has already been given earlier.

112 5.4.2 Process Layout in Nokia

Under this layout, skilled workers are required to operate general purpose machines
doing variety of jobs. Recruiting such candidate is not so easy in short time and also at
the same time wage rate will usually be high.
Figure 5.3: Layout of a Mobile Manufacturing Company (Nokia)
Raw Material Supply from Suppliers

Most electronic components, from resisters and capacitors to highly integrated
circuits, are delivered by suppliers on reels of tape, protected in circular plastic cases.
The Foundation: A Printed Circuit Board (Soldering Process): At the heart of
every Nokia phone is a slender strip of plastic covered with a latticework of basic
circuits and settings for the installation of chips and other 1 2 3 4 5 6 7 8 9 10
electronic components. Here, printed circuit boards enter the paste printing
machine, which lays down a patterned layer of solder paste, made from a tin
copper-silver alloy. The paste is later melted in an oven to bind electronic
components to the board.
Providing the Parts (Loading Process): Reels of components are loaded onto
spindles. From there, they feed into automated "pick-and-place machines" that
grab individual parts off the tape and lay them precisely onto the printed circuit
boards. Nokia uses mostly "surface mount" components that lie flat on the board.
Laying Down the Basics (Laying Process): Circuit boards travel down a belt
from one pick-and-place machine to the next, and by the time they reach the end
of the line, all the basic components have been installed. After the parts are in
place, the boards go to an oven for seven minutes, where the solder paste is melted
and the parts become firmly attached.
Quality Testing: The first quality test takes place after the basic components have
been installed.

Configuring (Software Installation Process): The boards are advanced 113

Plant Layout
automatically on tracks into the "flash and alignment" stage, where basic software
is first installed into programmable components.
Assembly and Configuring Process: A robotic arm lifts the board off the track
and puts it into a bay. There, the chips on the board are configured with low-level
settings, such as what power level the phone will operate on.
Testing Process: Then, a series of electronic tests are administered to ensure that
the circuit board is perfect, all the parts work, and that they have been correctly
installed.
Fixing Camera and LCD Displays: At this stage, the hand work begins. Here, a
worker plucks digital camera modules from a reel and installs them with tweezers
onto assembled, tested, printed circuit boards. The expensive and fragile liquid-
crystal display screens are also added by hand.
Protection covers Fixing: A nearby worker performs another essential task by
hand: sandwiching the completed printed circuit board between front and back
structural frames, later adding the outside covers.
Adding Functionality: The last step in the production turns a generic phone into
one customized to the exacting specifications of mobile-phone users around the
world.
Unique Serial Numbering Process: Each handset is put into a cradle, where it is
given a unique serial number, known as its IMEI code. Then, depending on who
the customer is, a unique batch of software code is pumped into the phone.
Diagnostic Test: Finally, the phone and installed software undergo a battery of
diagnostic tests. From this point forward, the IMEI code links each individual
phone to its intended customer.
Final Inspection Test (by Human Eye): It seems quaint after all the high-tech
assembly and testing, but before every Nokia phone goes into a box, it's inspected
one last time by an unmatched resource: the human eye. Only a tiny fraction of
phones fail this final test. Then, before being packed, the phone is de-ionized to
remove dust and electrical charge from the surface.
Packing: Phones are packed into retail boxes by hand, with appropriate
documentation and accessories, and then logged into a tracking system using a
bar-code reader.
Finished Goods Storage

Phones packed into retail boxes are grouped territory wise and order wise in ware
house. From there it is dispatched to specific places based on the orders.
5.4.3 Advantages and Disadvantages of Process Layout

Process layout is best suited for non-standardized products; where there is a low
volume, high variety manufacturing environment; where the market requires frequent
change in product design; in job-shop manufacturing; and for setups where very
expensive or specialized machines like CNC milling, coordinate measuring machine,
etc. are required to be used. Its advantages are:
Initial investment in process layout is low.
Varied degree of machine utilization may be achieved in process layout, as
machines are not dedicated to any single product.
There is greater flexibility and scope of expansion.

114 High product variety can be easily handled, therefore, different product designs
and varying production volumes can be easily adopted.
The overhead cost is low.
Breakdown of one machine does not result in total stoppage of production.
Maintenance of machines is relatively easy as it can be scheduled without greatly
impacting production.
Easy, effective and specialized supervision of each function area is easy to
achieve. With different departments for different processes, better teamwork can
be achieved.
There is low setup and maintenance cost compared to other layouts.
Though the advantages outweigh the disadvantages in job shops and batch production,
there are some disadvantages of process layout:
There is high degree of material handling. Parts may have to backtrack in the
same department.
Large work in-process inventory is common. This may lead to more storage area.
Workers are more skilled. This is because of variety in products and difference in
design, therefore, labor cost is higher.
Total cycle time is high. This is due to waiting in different departments and longer
material flow.
Inspection is more frequent which result in higher supervision cost.
It is difficult to fix responsibility for a defect or quality problem. The work moves
in different departments in which the machine preference is not fixed. Therefore,
which machine or which operator was faulty during a quality lapse may be
difficult to trace in some cases.
The production planning and control is relatively difficult.
5.5 PRODUCT OR LINE LAYOUT

A product layout is also called a line layout. In this type of arrangement, the various
facilities, such as machine, equipment, work force, etc., are located based on the
sequence of operation on parts. Where the facility is needed again after few other
operations, the facility is duplicated as required by the sequence of operations.
In product layout all products go through one sequence of operations.
Assembly line production is a good example.
1 2 3 Product
One or group of
operations
Figure 5.4: Assembly Line

Standardized products of high product volume characterize continuous operations.
Special purpose equipment and capital-intense operations with continuous product
flow characterizes these layouts. There is a small product mix and products are made

to store as inventory i.e. they are available off the shelf. The layout of continuous flow 115
Plant Layout
is shown in Figure 5.5.
Figure 5.5: Layout for Continuous Operations
5.5.1 Assembly Line

In continuous operations, the part variety is less, production volume is high and part
demand is relatively stable. A breakthrough in continuous operations was the
assembly line. Though Ransom E. Olds created the first assembly line in 1901, Henry
Ford is recognized for revolutionizing industry by mass-producing automobiles.
Ford improved upon Olds assembly line idea by installing conveyor belts and
converting Olds idea into a moving assembly line. According to Ford, he developed
the idea by watching the sequence of operations in a meat factory. By using a moving
assembly line, Ford was able to cut the time of manufacturing a Model T from a day
and a half to a mere ninety minutes. The assembly line concept has remained more or
less similar since 1913.
The assembly line concept is applicable on products that can be produced with
identical parts. Since each part is identical and can be replaced with an identical part,
the entire production sequence can be predetermined in careful detail. This permits
each task to be minutely studied by engineers and managers to find ways to make the
sequence quicker and cheaper.
Using better work methods, specialized equipment and tools, and extensive employee
training the speed of producing the product can be increased and the cost decreased.
This is the basic concept of the assembly line.
The problem of layout continuous inflow (product layout) and job shop (process
layout) are different in nature. The primary problem in product layout is of line
balancing. In process layout the objective is to find out the most economic
arrangement of various departments (or machine centers) in a manufacturing
organization.
5.5.2 Defining the Layout Problem

The layout-planning problem for assembly lines, is to determine the minimum number
of stations (workers) and assign tasks to each station, so that a desired level of output
is achieved. The design must consider the following aspects:
It should focus on achieving a desired level of output capacity.
The tasks assigned to stations and the sequence in which tasks must be carried out.
The output should be attained efficiently, without using minimum input resources.

116 How this is achieved can be best understood with an example. ABC Electricals is a
medium sized firm in Delhi. It has an established design of a contact breaker
assembly, used industry-wide to protect all electrical circuits. The company has
established an assembly line to manufacture the product.
The operator starts the assembly process with a molding half. Into this molding he
puts the contacts, springs, plastic levers, etc. The assembly is closed off with a similar
molding half. The final assembly, comprised up to four of these units, is secured with
four rivets passing through the sandwich. The assembly is then tested. Testing is a
critical operation, as the contact breaker assembly carries up to 415 volts. If the unit is
found acceptable, it is labeled and packed for dispatch.
The method of assembly was on a series of benches with the sub-assemblies being
placed to boxes for transfer to the riveting press. The rivet operation involved the
manual placing of four long tubular rivets, placing to a 5 tonne press and secured. The
product was again boxed for transfer to testing.
The demand for this was 3000 units per month. However, due to the high rate of
rejection and the highly labor intensive process, they were unable to meet the demand.
Table 5.1 gives the assembly line details for the product.
Table 5.1: Assembly Line for Contact Breaker
Work Preceding Task Assigned Predecessor Task Operators
Station Work Task Time/ per station
Station Unit
(Hours)
1 - A: Contact Breaker None 0.010 1
Assembly; Take Molding
Half and clean burrs etc.
2 1 B: Install contacts A 0.020 2
C: Install Springs B 0.020
D: Install plastic levers A,C 0.040
etc. on Molding Half.
3 1 E: Install contacts A 0.020 2
F: Install Springs B 0.020
G: Install plastic levers A,C 0.040
4 2,3 H: Close with other G 0.050 2
Molding Half
5 4 I: Assemble 4 of the above H 0.008 1

units
6 5 J: Insert Rivets I 0.040 1

7 6 K: Rivet the sandwich J 0.098 1
units
8 7 L: Switching Test under E 0.050 1
load
9 8 M: Pack Contact Breaker F 0.020 1
unit
Total 0. 354
Is capacity adequate? The number of units this layout permits the company to
produce each day depends on the station whose tasks take the longest time to perform.
From Table 5.1 we know that:
The task assigned to station 1 require 0.010 hours,

Station 2 and station 3 are parallel paths and the tasks assigned take 0.080 hours, 117
Plant Layout
Station 4 requires 0.50 hours,
The longest time is needed at station 6 that is 0.098 hours, and so on.
Since every unit passes through all stations, station 3 is the bottleneck operation. This
station restricts the rate of flow of the line. With this layout, a finished contact breaker
will flow of the end of the line every 0.098 hours. This time is called the cycle time of
the line.
The cycle time is, in fact, also the time after which the conveyor moves in a moving
assembly line. Cycle time is defined as the time period after which completed units
come off the assembly line. Completed units are available after each movement of the
conveyor, as the basic structure worked upon at the last workstation will become a
completed unit in that time.
With a cycle time of 0.098 hours, how many contact breakers are produced daily?
If the operation runs for on 8-hour shift each day, the available productive time each
day is 8 hours. Therefore, maximum daily output can be as follows:
Maximum daily output = Available time/(Cycle time/unit)
= 8.0/0.098 = 81.63 units
Since this assembly line can generate 81 units daily, and the requirement is 3000 units
per month, capacity is inadequate.
An alternative method for determining whether capacity is adequate is to calculate the
maximum allowable cycle time give a desired capacity 3000 units/month.
Maximum allowable cycle time = Time Available/Desired number of units
= (8 24)/3000 = 0.064 hours/unit
This calculation shows that a layout whose cycle time is 0.064 hours or less will yield
the desired capacity.
Is the sequence of tasks feasible? For now, we will assume that the proposed
sequence of tasks is feasible. By examining the product, we can see the sequence
restrictions that must be observed in its assembly. For example, the moldings have to
be assembled prior to subsequent assembly steps to ensure that the four moldings can
be connected together. Finally, the contact breaker cannot be assembled until the
moldings have been riveted together.
This sequence must be observed because the contact breaker cannot be assembled
correctly in any other way. One the other hand, it makes no difference whether the
contacts are placed before the plastic lever or after the springs are assembled in the
molding. Similarly, the order of the riveting is irrelevant.
In general, the assembly tasks, listed in the table, are broken down into the smallest
whole activity. For each task, we note in column 4 of Table 5.1, the task or tasks that
must immediately precede it. However, job simplification is possible even within the
requirement of precedence.
Is the line efficient? The revised layout had six stations manned by 14 operators. All
workers are paid for 8 hours daily. How much of their time was spent productively?
This assignment was given to Technology & Management Systems (TAMS).
ABC Electricals, due to the traditional approach, believed that the assembly was very
labor intensive. Even with parallel processing they were utilizing up to fourteen
operators as is shown in column 6 of Table 5.1. TAMS decided to balance the
assembly line.

118 5.5.3 Assembly Line Balancing

Given a capacity or production rate requirement, we can meet that requirement with a
single line with a cycle time c, or with two parallel lines with a cycle time 2c, and
so forth. Line balancing programs have been developed that enable the most efficient
use of the assembly line.
In multiple parallel lines, as the number of parallel lines increases, so does the scope
of job. We can also increase output by horizontal job enlargement, as has been
demonstrated in the example of ABC Electricals. The point is that alternatives do
exist.
How can the cost of idle time of man and machine be reduced? Perhaps the ten tasks
(A to M in Table 5.1 exclude tasks either at station 1 or station 2) can be reassigned
so that more available employee time is used.
An ideal assembly line would be one where tasks are assigned to different
workstations in such a way that the total processing times at each workstation is equal.
If every station used up an equal amount of task time, no time would be idle time.
Though this is seldom true, an approximation of this condition can be achieved by
effective assembly line balancing. The problem of equalizing stations is solved using
six steps:
1. Define tasks.
2. Identify precedence requirements.
3. Calculate the minimum number of work stations required to produce desired
output.
4. Apply an assignment heuristic to assign tasks to each station.
5. Evaluate effectiveness and efficiency.
6. Seek further improvement.
For the example of the contact breaker facility, we have already taken the first step,
defining tasks, shown in Table 5.1. The second step requires identifying a specific
sequence. These sequence requirements are also listed in Table 5.1 in column 4.
Once the desired output is specified, we can calculate the theoretical minimum
number of stations required. This is done by contrasting the time required to produce
one unit with the time we can allow, given the daily output requirements. We have
already calculated the time required, as the sum of the task times in Table 5.1 and we
have calculated the time allowable, as the maximum allowable cycle time.
Since just 0.098 hours are allowed to produce one unit, 5.56 stations must operate
simultaneously, each contributing 0.098 hours, so that the required 0.356 hours are
made available.
Theoretical minimum Number of stations = Time required/(Unit time allowed/Unit)
To produce 1 unit = 0.356 hours/(0.098 hours/unit) = 3.63 stations
Since only whole stations are possible, at least four stations are needed. The actual
layout may use more than the minimum number of stations, depending on the
precedence requirements. The initial layout in Table 5.1 uses nine stations.
The fourth step assigns tasks to each station. The designer must assign ten tasks to six
or more stations. Several assignment combinations are possible. In the example given
earlier, TAMS designed a system that provided a rectangular platen system manned by
only five operators. All assembly was completed on the platen with the sub-assemblies
being transferred to a central position on the platen for riveting.

For larger problems with thousands of tasks and hundreds of stations, we often use 119
Plant Layout
heuristics. We will apply a Longest Operation Time (LOT) heuristic to find a balance
for the 0.098 hours/unit cycle time. The LOT steps are:
Heuristic Step 1: Longest operation time gives the top priority of assignment to the
task requiring the longest operation time. Assign first the task that takes the most time
to the first station. However, the precedence requirements have to be maintained.
In our example, task K requires the longest operation time of 5 minutes (the
bottleneck operation); therefore, this task has the highest priority of assignment at the
first workstation. Table 5.1 shows that task K has precedence requirement of other
tasks, i.e., there is a need for other tasks to be competed for the execution of task K.
Therefore, task K cannot be assigned to the first workstation. We have to assign task
A as the first task.
Heuristic Step 2: In the first rule, task A is the eligible task for the first workstation
and is assigned to it. As the task time of A is 0.010 hours, and the bottleneck task is
0.098 hours, additional tasks can be assigned to the station. Therefore, tasks B, C,
and D which require a total time of 0.080 hours can also be assigned to this station.
The time available on station 1 after completing these tasks is 0.008 hours. As there is
no other task that has this timing, no more tasks can be assigned to this station.
Heuristic Step 3: For workstation 3, we see that task H requires the longest task time
of 0.050 hours. From Table 5.1, notice that tasks I and J require 0.008 and 0.040
hours respectively. In keeping with the precedence requirement, tasks H, I and J can
be assigned to workstation 3 as the total of the time required to complete these tasks is
0.098 hours.
Heuristic Step 4: Workstation 4 is the bottleneck station. The task K cannot be split
into parts, this task has to be assigned to a workstation and the cycle time cannot be
less than the duration of this task. No other task can be accommodated at this
workstation.
Heuristic Steps 5-7: Repeat the above-explained process to get Table 5.2. Note that
we have used five workstations for the assignment of all the tasks. It could have
been more; for example if task I required more time, we would have ended up with
6 workstations. This explains why this is called the theoretical minimum workstations.
This entire process, carried to completion, is summarized in Table 5.2, showing a
five-station assembly line comprising 10 tasks.
Table 5.2: Line Balancing Problem
Work Preceding Task Assigned Predecessor Task Operators
Station Work Task Time per station
Station /Unit
(Hours)
1 - A: Contact Breaker None
Assembly; Take A 0.010 1
Molding Half and clean
burrs etc.
B: Install contacts B 0.020
C: Install Springs A,C 0.020
D: Install plastic A 0.040
levers etc. on Molding
Half.
Contd

120 2 1 H: Close with other G 0.050 1

Operations Management Molding Half
I: Assemble 4 of the H 0.008
above units
0.040
J: Insert Rivets I
units
4 3 L: Switching Test E 0.050 1
under load
5 4 M: Pack Contact F 0.020 1
Breaker unit
Total 0. 354
This layout is effective if it yields the desired capacity. It is efficient if it minimizes

idle time. Though the new assembly line design does increase the efficiency, as the
idle time is significantly reduced, it still does not yield the desired capacity. To be able
to meet the demand ABC Electricals, in the example we have been following, we need
to reduce the cycle time to 0.064 hours.
There are occasions when effectiveness and efficiency can be increased by deviating
from procedures. For example we can look at task sharing i.e. when more than one
workstation is manned by one worker. This can reduce idleness as we are eliminating
workers, and letting the others take turns at workstation: other improvements are
possible if more than one worker can be assigned to a single station, as was done by
ABC Electrical earlier and shown in Table 5.1. Finally, if the desired output does not
exceed the required capacity, bottlenecks may be re-examined.
In the example of ABC Electricals, TAMS looked at the bottleneck operation and see
how it could be improved. Initially riveting (the bottleneck operation) took place using
a 5 tonne press, which completed the riveting in two passes. It had a rotating fixture
that permitted riveting of two rivets simultaneously. The rotating fixture was removed
and a die was designed so that riveting required just one pass. Testing took place
immediately following riveting. Consecutive test failures were flagged up
immediately allowing corrections to be made without a backlog of test failures.
All acceptable products were then immediately laser marked with the company logo
and specification. Finally the product was unloaded to a multilane conveyor to
packing.
With the change in the bottleneck, the assembly line was redesigned using the LOT
technique. As you can see, the newly designed assembly line had seven stations with
7 operators. This meant that there was an increase in the number of stations and
workers. It was less efficient than the layout suggested earlier.
However, though less efficient, the new system was able to reduce the cycle time
0.060 hours i.e. the output had increased from 1960 units per month to 3200 units per
month.
This gave, ABC Electricals, the number of assembled Contact Breakers units they
required. It also pruned the excessive costs so that ABC Electricals would eventually
be more competitive.
Very often, it gives better results when the organization is effective rather than when it
is efficient. Being more effective it reduced the costs of the product and ABC
Electricals, the additional and unnecessary costs were not passed on to the customers.
The form of the final assembly line is shown in Table 5.3.

Table 5.3: Final Assembly Line Design 121

Plant Layout
Work Preceding Task Assigned Predecessor Task Time Operators
Station Work Task /Unit per station
Station (Hours)
1 - A: Contact Breaker None 1
Assembly; Take Molding A 0.010
Half and clean burrs etc.
B: Install contacts B 0.020
C: Install Springs A,C 0.020
2 1 D: Install plastic levers A 0.040 1
3 2 H: Close with other G 0.050 1
Molding Half
4 3 I: Assemble 4 of the H 0.008 1

above units
J: Insert Rivets I 0.040
units
6 5 L: Switching Test under E 0.050 1
load
7 6 M: Pack Contact F 0.020 1
Breaker unit
Total 0. 354
Many other heuristics may be used instead of the Longest-Operation Time (LOT)
approach. Several computerized heuristics are available, and since different heuristics
can lead to different layouts, it may be worthwhile to want to try more than one
approach. Mathematical and computer-based Heuristic models can identify and
evaluate alternative layouts far more rapidly than manual or intuitive methods.
Though these models use observation and experimentation as they do theory, they
have their limitations.
5.5.4 Graphic and Schematic Analysis

Historically, assembly line layouts have used manual trial-and-error techniques and
templates, drawings, and graphical procedures. For large facilities with many tasks
and work centers, mathematical procedures are extremely complex and there is no
guarantee that will ensure finding the best possible design. The quality of the design
very often depends upon the experience and judgment of the designers and the
industrial engineers.
1. Define facility planning at micro-level.
.
.
2. List basic types of layouts.
.
.

122 5.5.5 Limitations of Product Layout

The widespread use of assembly-line methods both in manufacturing and in the
service industry has dramatically increased output rates. Historically, the focus has
almost always been on full utilization of human labor, i.e. to design assembly lines
minimizing human idle time. However, there have been questions raised if this is the
best approach. The example of ABC Electricals, demonstrates this.
Though research has tried to find optimal solutions to product layout system, some of
the basic limitations of the system are identified below:
Layouts are relatively fixed and changes in product design are difficult to
accommodate.
Product variety is very much limited.
Breakdown of a particular machine in a production line halts the production
output of the entire line.
Capital investment in machines is often higher as compared to process layout and
duplication of machines in the line is part of this cost.
There is limited flexibility to increase the production capacities.
5.6 FIXED LAYOUT

In this type, the material remains at a fixed position and tools, machinery and men are
brought to the location of the material. Fixed Position Layout is essential when the
products are difficult to move. Need for such type of layouts arises in case of
extremely large and heavy products. Some of the examples are production of aircraft,
ships, dams, bridges, and housing industry.
R
E
S Final Product
O (SHIP)
U
R
C
E Ship building yard
Figure 5.6: Fixed Layout

The advantages of this layout are:
This layout is flexible w.r.t. change in design, operation sequence, labor
availability, etc.
It is essential in large project jobs, such as construction and shipbuilding, etc.,
where large capacity mobile equipment is required.
Very cost effective when similar type products are being processed, each at a
different stage of progress.
The limitations of fixed position layout are as follows:
Capital investment may be for a one-off product, which can make it expensive.
Due to long duration to complete a product, average utilization of capital
equipment is limited.

Space requirements for storage of material and equipment are generally large. 123
Plant Layout
Products essentially require high class planning and focused attention on critical
activities to maximize margins.
5.7 CELLULAR OR GROUP LAYOUT

When TI Cycles reorganized its manufacturing plant it used Group or Cellular layout
to improve the efficiency of production. Sundaram Fastners boasts of a Cellular
Layout with world-class control on manufacturing costs. What then is cellular layout?
It is a layout based on group technology principles. It is a combination of both process
and product layout and incorporates the strong points of both of these. Conventional
layouts, product and process layouts, are two extremes of the spectrum. The specific
approach used to reach a group layout may also result in one of the above two
extremes, if the situation so demands.
This layout is suitable when a large variety of products are needed in small volumes
(or batches). The group technology principle suggests that parts, which are similar in
design or manufacturing operations, are grouped into one family, called part-family.
For each part-family a dedicated cluster of machines (called machine cells) are
identified. Generally, all the processing requirements of a particular part-family are
completed in its corresponding machine cell, eliminating inter-cell transfers of the
part.
Figure 5.7: Cellular Layout

The above diagrams show clearly the transition from a functional to cellular layout.
In the "before" example the products moved from one process to the next available
process. In the "after" example specific product families are flowing through a series
of operations to reduce waste and improve quality.
Cell layouts can be in several configurations. It really depends upon your needs as to
which type of cellular layout you will use.
The optimum shape for any cellular layout is a 'U". This allows one way in and out of
the cell, the products to flow and its easier to balance the workload between the
operators. Also, in a "U" shaped cell its easier to adjust the number of people (up or
down) when demand changes.
Group technology and cellular layouts can be combined and used to produce families
of parts more economically than can traditional process or product layouts. Data is
gathered to identify parts with similar characteristics, which are also manufactured
similarly. Groups of items can be formed either according to similarities in their
design (external features such as size, shape, use, etc.) or according to similarities in

124 their manufacturing process. This is a time-consuming and tedious task, which can be
accomplished by the following methods:
Visual inspection method (for grouping items according to design similarities),
which is very simple in application but not very accurate.
Examination of design and production data (for grouping items according to
design similarities), which is more complex to implement than visual inspection
but much more accurate.
Analysis of the production flow of items (for grouping items according to
manufacturing process similarities).
This identification and coding is the chart of group technology. The equipment to
make these is grouped together and designated for these parts. To some extent, a
process layout, characteristic of job shops, is changed to a small well-defined product
layout. This group of equipment is called a cell, and the arrangement of cells is called
a cellular layout.
Figure 5.8 illustrates the difference between the two alternative layouts. Two parts
require different tooling;
One part could be made in a job shop moving from machine A to C to D to E.
The second part can be made moving from machine A to C to D to B.
In the Process Layout, the machines are grouped together and the product moves to
the machines. In the Cellular Layout, the machines are grouped in a line flow.
A A C C
A B D D
A B D E
Process Layout
A A
Cellular Layout C C
D D
E B
Figure 5.8: Process versus Cellular Layouts

In order for a cell to be economical and practical in the long term, the machines must 125
Plant Layout
be closely grouped, and the cell must be flexible in its mix of capacity and must be big
enough so any on absent employee does not shut it down, yet small enough for
employees to identify with the cell and understand the products and equipment.
Cell manufacturing is also the building block of Flexible Manufacturing Systems
(FMS). It is, in essence, FMS with some manual operations. The Cellular Layout
principles are adopted in FMS because the concepts make it easier to process large
volume of information because of the decomposed manufacturing system; it is easier
to manage the operational facilities compared to functional manufacturing due to
limitation on cell size, and the technological compulsions often require grouping some
operations like forging machines and heat treatment unit.
Although cellular layout is catchy new term, the phenomenon is not new. For decades,
large job shops have grouped equipment for high-volume parts or special customers.
Similarly, assembly lines may group machines by type to make or modify a variety of
parts that feed into the main assembly line.
For example, Telco, Jamshedpur, has different machine shops and die shops whose
output is finally fed into the assembly line. When considering a new technique such
as cellular layout, managers need to thoroughly look at past practices as a guide to
changing the manufacturing environment.
5.7.1 The U-shaped Assembly Line

At any airport it is common to see baggage in the arrival area being distributed using
U-shaped conveyor belts. There has been a move to move from traditional
longitudinal assembly lines to U-shaped assembly lines, especially in cellular layouts.
Not only is it useful particularly when there is a single worker in the line taking care
of all the workstations, but it also consumes less space. The U-shape of the line
reduces the walking distance of the worker almost by half.
Assembly line balances frequently result in unequal workstation times. Flexible line
layouts, such as the U-shaped line with work sharing, could help resolve the
imbalance and are a common way of dealing with this problem. The closeness of the
workstations, is used by the Japanese, to allow workers to help a fellow worker catch
up, increase teamwork among workers. U-shaped assembly lines are being
successfully used by Matsushita Electric Co. of Japan by using a single worker in the
line. In addition, the U-shaped line reduces material handling as the entry and exit
points of the material on the line are nearby. A trolley which brings the raw material
for the line may take back the finished goods in a single round.
Toyotas lean production system is a part of the generic system of Cellular
Manufacturing. The Toyota Production System called as lean production by some,
has been heralded by many commentators as the future for competitive manufacturing.
It is a team concept and incorporates a philosophy of constantly reducing production
costs through the progressive elimination of waste. This waste is seen everywhere in
the manufacturing operation, and includes excessive work or over-production. This
has given rise to the Just-in-time system (JIT).
JIT is a simple principle that includes produce and deliver finished goods just-in-time
to be sold, sub-assemblies just-in-time to be assembled into finished goods, and
purchased materials just-in-time to be transformed into finished parts.
5.7.2 Advantages and Disadvantages of Cellular Layouts

Some of the advantages of cellular layouts are that overall performance often
increases by lowering costs and improving on-time delivery. Quality should increase

126 as well, though that might take other interventions beyond the layout change. Other
advantages are given below:
Lower work-in-process inventories,
A reduction in materials handling costs,
Shorter flow times in production,
Simplified scheduling of materials and labor,
Quicker set-ups and fewer tooling changes, and
Improved functional and visual control.
Disadvantages include the following:
Reduced manufacturing flexibility.
Unless the forecasting system in place is extremely accurate, it also has the
potential to increase machine downtime (since machines are dedicated to cells and
may not be used all the time).
There is also the risk that the cells that may become out-of-date as products and
processes change, and the disruption and cost of changing to cells can be
significant.
There is increased operator responsibility, and therefore behavioral aspects of
management become crucial.
5.7.3 Comparison of Layouts

We have seen that both product and process layouts have their advantages and
disadvantages. Product layout is desirable by most organizations, be the low volume
and the variety of their products does not warrant it. Therefore, they have no choice
but to go in for goods old batch processing on process layout.
Product layout and process layout represent the two extremes of layout techniques.
Cellular layout had evolved to aid manufacturers with intermittent manufacturing of a
high variety of products with the advantages of a product layout.
Table 5.4: Comparison of Common Characteristics of Different Layouts
Factors Fixed position Product (Line) Process Cellular (GT)
(Functional)
Product Made to Order, Standardized Diversified Diversified
Low Volume Product, Large Products using Products, Varying
Volume, Stable common volumes
Rate of Output operations,
Varying
volumes,
Varying Rate of
Output
Process Ship building, Continuous, and Job or small Small to medium
large scale repetitive batch batch
project,
construction or
industrial project
Contd

Arrangement of Facilities move Placed along the Grouped by Similar parts are 127
facilities where the fixed line of product specialty and by grouped in part- Plant Layout
product/ project flow in a function family one
is being specialized machines cells is
implemented sequence of tasks formed which
for each unit contains all
facilities needed by
corresponding part-
family
Cost of layout General purpose Large investment General purpose Moderate to low
equipment. in specialized equipment and
Moderate to low equipment and processes.
processes. Moderate to
high
Inventory Variable High turnover of Low turnover of High turnover of
inventories and raw material and raw material raw material and
frequent tie-ups work in process and work in lower work in
because process, High process
production cycle raw material
is generally long. inventory
Material Flow variable, Predictable, flow Flow variable, Flow variable, can
handling often low. May systemized and handling often be reasonably high
require heavy often automated duplicated
duty handling
equipment
Material travel Variable path Fixed path Often high Fixed path
Utilization of Moderate Very high General purpose High
facilities
Operating General purpose Special purpose Skilled Special purpose
facilities
Employee skill Unskilled/skilled Unskilled Skilled Multi-skilled as one
operator may
handle more than
one operation
Quality/Product Normally 1, as Large (Q/P) Moderate (Q/P) Small (Q/P)
Variety Ratio single product
production
Product Cost Relatively low Relatively high Relatively low Reasonable level of
fixed costs; high fixed costs; low fixed costs; high fixed costs;
unit labor and unit costs for unit costs for relatively low unit
material costs direct labor and labor, material costs for direct
materials handling and labor and materials
material
5.8 NEW APPROACHES TO LAYOUT DESIGN

It may not be in the realm of impossibility that we may find for many companies in
the future, the ideal location to be a floating factory ship that will go from port to port,
from country to country wherever cost per unit is lowest. Already, Telemarketing
and Internet Industries require neither face-to-face contact with customers (or
employees) nor movement of material and present a whole new perspective on the
location problem.
However, going back to the present, the Japanese have used Cell manufacturing as an
important element in the successful implementation of Justin-Time (JIT) for parts
having long queues at various work centers. According to their concept, this is used to
reduce production related wastes, such as: inventory (WIP, finished goods or raw
materials), and production setup times. It also simplifies job scheduling.

128 Japan has been in the forefront in bringing to the industrial world a rethink on work
simplification and continuous improvement. In Japanese management practice, the
team concept is mainly associated with kaizen or continuous improvement, the
constant drive to remove waste from the production process. Central to this are
suggestion schemes which capture the creative thinking or inventive ideas, from
workers, either as individuals or through the team-based activities of quality circles.
The Japanese have developed it to a fine art. Process layout is one application where
the Japanese change both the physical layout and the managerial system. A Japanese
innovation is the U-shaped assembly line, which is used to encourage employee
involvement.
5.8.1 Flexibility
Flexibility has become a very important requirement in todays marketplace. It is
expected that with increasing competition, the importance of flexibility will go up
rather than down.
Advantages of a flexible layout are:
A flexible layout allows a firm to adapt quickly to changing customer needs and
preferences and is best for many situations.
Layout flexibility means either that the facility remains desirable after significant
changes occur or that it can be easily and inexpensively adapted in response to
changes.
This is a way to minimize the cost of layout changes.
These changes are taking place around us all the time. We see these in the mix of
customers served by a store, goods made a plant, space management in a warehouse,
or organizational structure in an office. For example, many offices now use modular
furniture and partitions, rather then permanent load-bearing walls. This is one way to
minimize the cost of office layout changes.
Manufacturers are adopting wide bays, heavy-duly floors, and extra electrical
connections in a plant. In the center aisle of the Sahara Mall, retailers use kiosks that
display a variety of novelties and specialty items. The ever-changing array of
merchandise transforms once-utilitarian passageways into retailing hot spots. They are
right where the customers have to walk and create a stream of impulses purchase.
5.8.2 Mixed Model Line

With increasing pressure on manufacturing flexibility to meet customer needs, there
has been a move towards new forms of assembly lines, e.g. mixed model lines.
A mixed-model line produces several times belonging to the same family, such as the
different models of cars manufactured by Maruti Udyog Ltd. In contrast, a single-
model line produces one model with no variations; mixed-model production enables a
plant to achieve both high-volume production and product variety.
This approach is also used by JIT manufacturers such as Toyota; its objective is to
meet the demand for a variety of products and to avoid building high inventories.
Mixed-model balancing is carried out by Toyota Motor Corporation by averaging the
production per day in the monthly production schedule classified by specifications,
and dividing by the number of working days. The production sequence during each
day, the cycle time of each different specification vehicle is calculated. To have all
specification vehicles appear at their own cycle time, different specification vehicles
are ordered to follow each other.
This does complicate scheduling and increase the need for good communication about
the specific parts to be produced at each station. Care must be taken to alternate

models so as not to overload some stations for too long. Despite these difficulties, the 129
Plant Layout
mixed-model line may be the only reasonable choice when product plants call for
many customers options, as volumes may not be high enough to justify a separate line
for each model.
State whether the following statements are true or false.
1. Group layout is suitable when a large variety of products are needed in
small volumes.
2. Cell layouts cant be in several configurations.
3. Cell manufacturing is also the building block of Flexible Manufacturing
Systems (FMS).
5.9 LEAN MANUFACTURING SYSTEM

Lean Manufacturing is a system that integrates the routine work of producing and
delivering products, services, and information with problem identification and process
improvement to eliminate wastes and reduce production lot sizes.
Until thirty years ago, monopolies existed and large companies took their existing
costs, added a profit to set the product price. If consumers wanted the product, they
had to pay this price. These companies are rare now.
Todays market is characterized by intense competition and sophisticated consumers;
consumers who demand products with more features, better quality, higher
availability, and competitive prices and infallible after sale service. These customer
demands are order qualifying and not order winning requirements. There are multiple
numbers of companies producing each type of product who are willing to meet
customer demands to qualify their products. These market developments provide the
rationale for Lean systems.
All manufacturing processes are either value-added or non-value-added. The value
stream includes all activities required to bring a product from the vendors raw
material into the hand of the customer. Value-added processes mold, transform, or
otherwise change raw materials into a finished product.
Non-value-added activities are often necessary, consume time and resources, but add
little or no value to the product. Such activities include transporting material, storing
material, conducting inspections, etc.
To provide what the customer is asking for, you need to improve production
efficiency. In the past, increasing production efficiency required employees to work
harder or longer, and machines to run faster. Such methods work in the short run, but
ultimately cause problems. Accident rates increase, workers and equipment are
overworked and the overtaxed equipment and workmen revolt. So, how do you
increase efficiency without working harder or longer? The answer lies in lean
manufacturing.
The Lean Concept refers to a collection of tools used to promote long-term
profitability, and growth, by doing more with less. This seemingly impossible task is
achievable by identifying and eliminating non-value-added processes. And with
proper training, any company can implement Lean successfully.
The worldwide movement to transition from mass production to Lean Manufacturing
is credited to Toyota, the Japanese automobile manufacturer. Since the 1960s, Toyota

130 has been more productive than its competitors. In 2001, Toyota continued to maintain
industry leadership. Consumer Reports rated Toyota models first in four of ten product
categories. This is true even today. Toyota has consistently outperformed competitors.
Two engineers, Taiichi Ohno and Shigeo Shingo devised the basis of what we call
Lean Manufacturing philosophy. They called it the Toyota Production System (TPS).
TPS uses waste elimination to increase profitability, quality and productivity. Waste is
considered to be any part of the process that takes time and resources but adds little or
no value to the product. Ohno identified the following seven types of waste as the
most prominent ones:
Waste from overproduction
Waste of waiting time
Transportation waste
Processing waste
Inventory waste
Waste of motion
Waste from product defect
The essential elements of Lean Manufacturing do not substantially differ from the
techniques developed by Ohno. Lean Manufacturing is aimed at the elimination of
waste in every area of production including customer relations, product design,
supplier networks and factory management. Its goal is to incorporate less human
effort, less inventory, less time to develop products, and less space to become highly
responsive to customer demand while producing top quality products in the most
efficient and economical manner possible.
The philosophy is reflected in the business model or strategy, the organizational
structure as well as the operational capability of the organization. Conventional mass
production models are relatively inflexible bodies that focus on exploiting economies
of scale, and pushing products into the market. They have rigid organizational
hierarchies: a relatively untrained workforce follows orders strictly and are expected
to do the same tasks, hour after hour, day-in and day-out. Tools to improve
productivity assume an extreme division of labor.
A lean manufacturing enterprise has a flat, team-based structure, with a high degree of
work autonomy that encourages initiative and innovation. It breaks down
organizational barriers and develops highly-trained, motivated employees who
investigate problems and find solutions as part of their job.
A lean manufacturing enterprise does this by encouraging problem identification,
hypothesis generation, and experimentation at all levels in the organization. It also
integrates its suppliers, and thinks more about its customers than it does about running
big machines fast to absorb labor costs and overhead.
Unlike conventional mass production principles, lean manufacturing systems involve
a relentless pursuit of process improvement which results in reduction in production
lot sizes. Reduction in product lot sizes triggers a chain of events involving improved
motivation, improved quality control, and a reduction in wastes. The ultimate
objective is to eliminate wastes. The comparison of the two systems is shown in
Table 5.5.

Table 5.5: Differences between Lean Manufacturing and Mass Manufacturing 131
Plant Layout
Areas Affected Mass Production Lean Enterprise
Business strategy Product-out strategy focused on Customer focused strategy
exploiting economies of scale of stable focused on identifying and
product designs and non-unique exploiting shifting competitive
technologies. advantage
Organizational Hierarchical structures that encourage Flat structures that encourage
structure following orders and discourage the initiative and encourage the flow
flow of vital information that highlights of vital information that highlights
defects, operator errors, equipment defects, operator errors,
abnormalities, and organizational equipment abnormalities, and
deficiencies. organizational deficiencies.
Operational Dumb tools that assume an extreme Smart tools that assume
capability division of labor, the following of standardized work, strength in
orders, and no problem solving skills. problem identification, hypothesis
generation, and experimentation.
5.10 AGILE MANUFACTURING SYSTEM

Manufacturing industry is on the verge of a major paradigm shift. This shift will take
us away from mass production, way beyond lean manufacturing, into a world of Agile
Manufacturing.
We spent most of our time during the 1980s and early 1990s copying the Japanese.
Now we may be about to teach the Japanese something. For a change, US
manufacturing industry is realising that it has very little to gain, in the long term, by
copying what other people are doing. There is now a growing realisation that global
preeminence in manufacturing can only be achieved through innovation. We can learn
from others, but in a highly competitive world, we can only become world leaders if
we develop new ideas that take us beyond the state-of-the-art.
Since the 1950s our manufacturing industries have been dominated by the paradigm of
mass production, which has led to enormous wealth creation and supported an ever
increasing standard of living. But there has been a price to pay for this prosperity. As
our factories became geared up to producing large volumes of low variety and low
cost products, they became inflexible and lost the capability to respond to rapid shifts
in market conditions. This was not a problem, as long as everyone was playing the
same mass production game, but it is now clear that our Japanese competitors were
not playing this game. Over an extended period, the Japanese, in effect, developed
their own manufacturing paradigm, what today we call lean manufacturing. This is so
called, because it is concerned with manufacturing products with less of everything -
less time to design, less inventory, less defects, etc.
Lean manufacturing was not developed overnight. The Japanese gradually worked
away at the development of their manufacturing paradigm, with companies like
Toyota acting as pioneers, in much the same way that Ford pioneered mass
production. By the late 1970s many Japanese enterprises were starting to outperform
our own. Today, in the 1990s, there are some industrial sectors where several of our
enterprises have become wholly or partly owned by the Japanese. The fact of the
matter is, that both in the US and in Europe, there has been a gradual loss of
competitiveness. As the lean manufacturing paradigm became established in Japan,
generating competitive edge for those Japanese companies who were using it, the
mass production paradigm, dominant in US and European industry, was contributing
to this loss of competitiveness, which has now become a major economic problem.

132 We should ask ourselves what we are going to do to restore our competitiveness.
Should we adopt lean manufacturing in our own enterprises? Should we mimic the
Japanese? Or should we do something different and something better?
Without doubt there are now a significant number of people who believe that we have
to adopt lean manufacturing. But in adopting this approach we run the risk of forever
chasing after a moving target, for the Japanese are not going to standstill and wait to
be outperformed by US and European enterprises. The Japanese will keep innovating
and perfecting their methods. Thus, adopting lean manufacturing can only be a short
term measure aimed doing something to close the competitive gap. In the longer term,
if we want to catch up with and overtake the Japanese, lean manufacturing is not the
answer. What we need to do, is something which the Japanese cannot do.
Enter Agile Manufacturing. This is not another program of the month. Nor is it
another term for computer integrated manufacturing (CIM), or any number of other
fashionable buzzwords. Agile Manufacturing is primarily a business concept. Its aim
is quite simple - to put our enterprises way out in front of our primary competitors. In
Agile Manufacturing, our aim is to combine our organisation, people and technology
into an integrated and coordinated whole. We will then use the agility that arises from
this integrated and coordinated whole for competitive advantage, by being able to
rapidly respond to changes occurring in the market environment and through our
ability to use and exploit a fundamental resource - knowledge.
Fundamental to the exploitation of this resource is the idea of using technologies to
lever the skills and knowledge of our people. Our people must also be brought
together, in dynamic teams formed around clearly identified market opportunities, so
that it becomes possible to lever one another's knowledge. Through these processes we
seek to achieve the transformation of knowledge and ideas into new products and
services, as well as improvements to our existing products and services.
The concept of Agile Manufacturing is built around the synthesis of a number of
enterprises that each have some core skills or competencies which they bring to a joint
venturing operation, which is based on using each partners facilities and resources.
For this reason, these joint venture enterprises are called virtual corporations, because
they do not own significant capital resources of their own. This helps to make them
Agile, as they can be formed and changed very rapidly.
Central to the ability to form these joint ventures is the deployment of advanced
information technologies and the development of highly nimble organisational
structures to support highly skilled, knowledgeable and empowered people. Agile
Manufacturing builds on what is good in lean manufacturing and uses what can be
adapted to western cultures, but it also adds the power of the individual and the
opportunities afforded by new technologies.
Agile Manufacturing enterprises will be capable of rapidly responding to changes in
customer demand. They will be able to take advantage of the windows of
opportunities that, from time to time, appear in the market place. With Agile
Manufacturing we will be able to develop new ways of interacting with our customers
and suppliers. Our customers will not only be able to gain access to our products and
services, but will also be able to easily assess and exploit our competencies, so
enabling them to use these competencies to achieve the things that they are seeking.
The key to agility however, lies in several places. An agile enterprise needs highly
skilled and knowledgeable people who are flexible, motivated and responsive to
change. An agile enterprise also needs new forms of organisational structures which
engender non-hierarchical management styles and which stimulate and support
individuals as well as cooperation and team working. Agile manufacturing enterprises
also need advanced computer based technologies.

To achieve Agile Manufacturing, enterprises will have to bring together a wide range 133
Plant Layout
of knowledge in the design of a manufacturing system that encompass suppliers and
customers, and which addresses all dimensions of the system, including organisation,
people, technology, management accounting practices, etc. Most importantly, the
inter-related nature of all these areas needs to be recognised, and an interdisciplinary
manufacturing systems design method adopted as standard practice. This means going
beyond the multidisciplinary approaches that are currently being adopted, and looking
at areas between professions.
There is however, a fundamental problem, a barrier which hinders progress in this area
of interdisciplinary design. For the past two hundred years or more, the industrialised
world has organised knowledge into well defined boxes which have been represented
by professional groups often working in separate departments. Anything that did not
fit into these well defined areas of knowledge has been ignored or allowed to fall
through the cracks that we have created between professions. This has resulted in such
countermeasures as design for manufacture, where we are attempting to overcome the
problems that arise from our fundamental operating philosophies.
In manufacturing we have tended to treat organisation, people and technology issues
independently, and for the most part this division of knowledge has worked well in the
past. However, this approach does not work very well today, because over the last ten
years or so the world has changed enormously and has become a much more complex
place. Technologies have become more sophisticated, markets have become more
global and dynamic, and people have started to become more demanding, both as
customers and as employees. The traditional paradigms which fostered the growth of
manufacturing industry have started to shown signs of breaking down. We are now
entering upon a new era, and as manufacturing begins to move from the old industrial
era to the new knowledge intensive age, new paradigms are being forged. Agile
Manufacturing is a new paradigm. It is highly likely that it will form the basis of
21st century manufacturing strategy.
Interdisciplinary design will form the basis of designing Agile Manufacturing systems
in the new knowledge intensive era. Interdisciplinary design however, means more
than just applying knowledge from other domains, such as psychology and
organisational science, to the design of Agile Manufacturing systems. It also implies
looking into the unexplored areas between these disciplines and the areas where they
overlap, to find new insights, new knowledge and new and original solutions. This is
one of the most important challenges that managers and system designers and
integrators will face in the years ahead, for interdisciplinary design leads us to new
approaches and new ways of working and of thinking. However, to successfully adopt
an interdisciplinary design method, we also need to:
Challenge our accepted design strategies and develop new and better approaches;
Question our established and cherished beliefs and theories, and develop new ones
to replace those that no longer have any validity;
Consider how we address organisation, people and technology, and other issues in
the design of manufacturing systems, so that we can achieve systems that are
better for performance, for the environment and for the people who form a part of
these systems;
Go beyond the automation paradigm of the industrial era, to use technology in a way
that makes human skill, knowledge, and intelligence more effective and productive,
and that allows us to tap into the creativity and talent of all our people.
The challenges that we face with respect to all these issues are enormous. If we look at
the world of manufacturing we will see that it is very complex. There are a massive

134 number of interconnections between the various components and elements.

A manufacturing enterprise is so complex that, in the past, it has been impossible to
cope with it as a whole, and it has been necessary to reduce it into manageable areas
which have tended to be examined separately.
In this respect we have copied the scientific method, but the end result has been that
our knowledge of manufacturing is divided into well defined boxes such as industrial
engineering, mechanical engineering, software engineering, industrial psychology, etc.
There is however, no natural law which states that knowledge of manufacturing
should be divided in this way. These subjects are man-made, and the divisions
between them are more a matter of convenience rather than anything else.
More correctly, it should be said that the division of knowledge into these boxes was a
matter of convenience. This is no longer the case. In fact it is now a handicap, a
barrier to progress in the field of Agile Manufacturing.
In the past we have managed reasonably well with this way of organising knowledge.
It has resulted in some problems, but on the whole the benefits seem to have
outweighed the costs. In the past however, we did not have to deal with some of the
complex technological systems that have been designed and built over the past few
decades, or with the complexities of rapidly changing market conditions, and with the
several other factors which makes the world of manufacturing very complex.
Increasing technical sophistication, of course, has been vitally important to the
development of all aspects of civilisation, including manufacturing industry. It could
be said that technology is the axis, the pivot, the springboard of development. For
without technology there would be no progress. No books to stir the imagination. No
cars, no planes, no houses, no radios, no televisions, nothing. That is the power of
technology. Without knowledge and access to technology, civilisation cannot develop.
If a society has no access to technology it becomes trapped in a time warp, that of
primitive existence.
Without technology there would be no manufacturing. But manufacturing is more than
technology. Manufacturing is also about people and it is about how people and
technical resources are organised. Manufacturing is about organisation, people,
technology, management accounting, business strategy, etc. It is also about the
connections between all these dimensions. In the past we have tended to ignore not
only the connections, but also some of the dimensions themselves. We have placed too
much faith in our technology, and used technology to compensate for inadequacies
elsewhere, and tried to solve all problems as though they were technical problems.
All the relevant dimensions of Agile Manufacturing, such as organisation, people,
technology, management accounting, etc. are however, all written in different books
and taught by different people. When we pass through the educational system we learn
limited and discrete lumps of knowledge. Even if people are educated in a broad range
of disciplines, which sadly is still uncommon, there is rarely any indication given how
these different areas of knowledge relate to one another. These relationships however,
lead us to a new vision of manufacturing.
The paradigm which we call Agile Manufacturing, if it is to be successful, will
involve us making a break with the things that are wrong with the way we do things
today. We aim to show how better and more effective manufacturing systems and
technologies can be designed based on the insights derived from the relationships
between different areas of knowledge. However, to make the transition to Agile
Manufacturing we need to:
Examine and define the underlying conceptual framework on which Agile
Manufacturing enterprises will be built.

Explore and understand the nature of the mass production paradigm and the nature 135
Plant Layout
of the cultural and methodological difficulties involved in the transition to Agile
Manufacturing.
Define a methodology for designing a 21st century manufacturing enterprise.
5.11 COMPUTER-INTEGRATED MANUFACTURING

SYSTEM
Computer-based manufacturing information systems use several major techniques to
support Computer-integrated Manufacturing (CIM). CIM is an overall concept that
stresses that the goals of computer use in factory automation must be to:
Simplify: (re-engineer) production processes, product designs, and factory
organization as a vital foundation to automation and integration.
Automate: Production processes and the business functions that support them with
computers, machines, and robots.
Integrate: All production and support processes using computers,
telecommunications networks, and other information technologies.
Overall goal of CIM: Is to create flexible, agile, manufacturing processes that
efficiently produce products of the highest quality. Thus, CIM supports the concepts
of:
Flexible manufacturing systems
Agile manufacturing
Total quality management
Results of CIM: Implementing such manufacturing concepts enables a company to
quickly respond to and fulfill customer requirements with high-quality products and
services.
Uses of computers in manufacturing include:
Computer-aided Engineering (CAE)
Computer-aided Design (CAD)
Computer-aided Process Planning (CAPP)
Material Requirements Planning (MRP)
Manufacturing Resource Planning (MRP-II)
Computer-aided Manufacturing (CAM)
Computer-aided Manufacturing: (CAM) systems are those that automate the
production process.
Example, this could be accomplished by monitoring and controlling the production
process in a factory (manufacturing execution systems) or by directly controlling a
physical process (process control), a machine tool (machine control), or machines with
some humanlike work capabilities (robots).
Manufacturing Execution Systems: (MES) are performance monitoring information
systems for factory floor operations. They monitor, track, and control the five essential
components involved in a production process:
Materials
Equipment

136 Personnel
Instructions and specifications
Production facilities.
MES includes:
Shop floor scheduling and control systems
Machine control systems
Robotics control systems
Process control systems
Some of the benefits of CIM are:
Increased efficiency through:
Work simplification and automation,
Better production schedule planning
Better balancing of production workloads in production capacity
Improved utilization of facilities, higher productivity, better quality control
through:
Continuous monitoring
Feedback and control of factory operations, equipment and robots.
Reduced investments in production inventories and facilities
Work simplification
Just-in-time inventory policies
Better planning and control of production
Better planning and control of finished goods requirements
Improved customer service
Reducing out-of-stock situations
Producing high-quality products that better meet customer requirements.
Fill in the blanks:
1. .. refers to a collection of tools used to promote
long-term profitability, and growth, by doing more with less.
2. .. Manufacturing enterprises will be capable of rapidly
responding to changes in customer demand.
3. . is about organisation, people, technology,
management accounting, business strategy, etc.
5.12 ASSEMBLY LINE BALANCING

Line Balancing and Work Cell Balancing is an effective tool to increase the output of
the Assembly line and Work Cell line to reduce manpower and cost. Assembly Line
Balancing is nothing but the Simple Line Balancing is the calculation of assigning

works to workstation alongside an Assembly Line and that operation will be optima in 137
Plant Layout
sense. Henry Ford who introduced the Assembly Line Balancing and in early times it
was simple Line Balancing (LB) which has optimized the industrial importance, the
effective difference between the optimal and sub-optimal operation can afford savings
which will be million dollars every year.
LB: It is a Classical Operation Research (OR) which optimizes the problem, and it has
been handled by OR for many decades. Most of the algorithms have been proposed to
this problem and it contempt the usual importance of the issue and the OR use to
handle this. Its commercial software which is available to optimize the industry and
their lines.
Assembly Line Balancing is dependent on 3 models and it is described that these 3
kinds of models is related to Assembly Line Balancing and they are Single-Model
Assembly lines, mixed models, and multi-model Assembly lines.
Singe-model Assembly Line: In early times assembly lines were used in high level
production of a single product. But now the products will attract customers without
any difference and allows the profitable utilization of Assembly Lines. An advanced
technology of production which enables the automated setup of operations and it is
negotiated time and money. Once the product is assembled in the same line and it
wont variant the setup or significant setup and its time that is used, this assembly
system is called as Single Model Line.
Mixed Model Assembly Line: In this model the setup time between the models would
be decreased sufficiently and enough to be ignored. So this internal mixed model
determines the assembled on the same line. And the type of assembly line in which
workers work in different models of a product in the same assembly line is called
Mixed Assembly Line.
Multi-model Assembly Line: In this model the uniformity of the assembled products
and the production system is not that much sufficient to accept the enabling of the
product and the production levels. To reduce the time and money this assembly is
arranged in batches, and this allows the short term lot-sizing issues which made in
groups of the models to batches and the result will be on the assembly levels.
5.13 LET US SUM UP

This lesson establishes that design of an operations layout is a strategic issue.
It provides an integrated approach by analyzing the basic production systems and
moves on to explain the different kinds of layouts. A study into the factors influencing
plant layout and the guiding fundamentals to a successful layout is also dealt with
layout Engineering as separate topic lends an overview into the technicalities of their
area. Also, the increasing role of computers and the enhanced information access as a
mode of layout planning have also been provided.
The layout is basically an expression of the various relationships between different
operations or work areas, e.g., the two departments having close relationship with
each other may be required to keep adjacent to each other, e.g., for each of
supervision, minimum distance need for common lighting, etc. Similarly, the two
departments may not be required to keep adjacent to each other as in the case of
surgical and gynaecology departments.

Distinguish between single model assembly line and multi model assembly line with
the help of example.

138
Operations Management 5.15 KEYWORDS
Fixed Position Layout: Material remains fixed and tools, machinery and men are
brought to the location of the material.
Flexible Manufacturing: Ability of a manufacturing system to respond at a
reasonable cost and at an appropriate speed.
Group Layout: Combination of both process and product layout and incorporates the
strong points of both of these.
Mixed Layout: Produces several items belonging to the same family.
Process Layout: Similar machines or similar operations are located at one place as per
the functions
Product Layout: Facilities are located based on the sequence of operation on parts.

1. What do you mean by facility layout?
2. Describe various types of layout in details.
3. What are the advantages and disadvantages of process layout?
4. Explain assembly line balancing.
5. Write short note on U-shaped assembly line.

CYP 1
1. Facility planning at the micro level involves decisions about the
functional layout and physical arrangement of economic activity centers.
2. The basic types of layouts are:
(a) Process layout
(b) Product layout
(c) Fixed layout
(d) Group layout
CYP 2
1. True
2. False
3. True
CYP 3
1. Lean Concept
2. Agile
3. Manufacturing

139
5.17 SUGGESTED READINGS Plant Layout
1994
Education, 2002
McGraw Hill, 1996
30
Micro-Finance:
Perspectives and Operations

141
Production Planning and Control
UNIT III

142

143
LESSON Production Planning and Control
6
PRODUCTION PLANNING AND CONTROL
CONTENTS
6.1 Introduction
6.2 Meaning of Production Planning
6.3 Functions of Production Planning and Control
6.4 Aggregate Planning
6.4.1 Various Steps involved in the Aggregate Planning
6.4.2 Objectives of Aggregate Planning
6.4.3 Various Strategies involved in Aggregate Planning
6.4.4 Varying Workforce Level to Meet Demand
6.5 Master Production Schedule
6.6 Material Requirement Planning (MRP)
6.6.1 Assumptions and Pre-requisites
6.6.2 Material Planning
6.6.3 MRP Process
6.6.4 MRP System
6.6.5 Benefits of MRP System
6.6.6 Outputs The Materials Requirement Plan
6.6.7 Priority Planning
6.7 Bill of Materials (BOM)
6.7.1 Costing Bill of Materials
6.7.2 Planning or Modular Bill of Materials
6.7.3 Phantom Bill of Materials
6.7.4 Engineering Bill of Materials
6.7.5 Pseudo Bill of Materials
6.7.6 Features of Bill of Materials
6.8 Capacity Requirement Planning
6.9 Techniques of CRP
6.10 Problems in MRP and CRP
6.10.1 Material Requirements Planning (MRP) Problems
6.10.2 CRP Problems
Contd

144 6.11 Maintenance Management Concepts

6.12 Business Process Re-engineering
6.13 Total Productive Maintenance
6.14 Let us Sum up
6.16 Keywords

Define production planning and control and its functions
Explain production planning problems in job shop and continuous production
systems
Define plant capacity and apply capacity planning to real business situations
Know MPS and BOM
6.1 INTRODUCTION
The conversion of a customers order to a finished product needs generally the
organization and planning of the manufacturing process. The overall objective of any
organization is to improve its profitability through productivity i.e. by employing
various inputs (Men, Machines, Materials, Money & Management) effectively so as to
bring about the desired manufacturing results in terms of quality, time and place.
6.2 MEANING OF PRODUCTION PLANNING

Production Planning: It is concerned with the planning of various inputs (Men,
Machines, Materials, etc.) for a given period of time so that the customer could get the
right quality of products at right place, price and in time. Production Planning may be
done as:
Long-term Planning: Strategic Planning normally more than an years time.
Medium-term Planning: Aggregate Planning up to an years time.
Short-term Planning: Routine Planning monthly/weekly.
Production Planning alone is not sufficient to achieve the objective of any
organisation.
Production Control: It measures the actual performance of the production units and
taking remedial action called for to see that the production actually achieved is not
less than the target or standard set in advance.
Thus Production Planning and Control is to set the realisation targets in terms of
Standard Output, measure the actual production performance against the target set in
advance and take remedial action as and when necessary.

145
6.3 FUNCTIONS OF PRODUCTION PLANNING AND Production Planning and Control
CONTROL
Following are the main functions performed by a PPC department:
Order Preparation
Once an order, through the sales department, is received for execution, activities like
preparation of the work-order, converting the same into shop-order and then releasing
the same to various departments for planning action at their end for their concerned
activities get started.
Materials Planning
Material Requirement Planning (MRP) is based on the orders on hand, the inventory
position of the finished goods & raw materials; the expected demand from
marketing/sales department, the capacity of various production shops and bills of
materials, the lead time and constantly following up of the status with purchase and
stores departments against specific shop orders is done.
Routing (or Process Planning)

Process Planning means fixing the process of manufacturing/sequence of operations,
the tools, and fixtures required and also the measuring instrument and gauges for
inspection/quality control so as to produce the right quality of products at the most
economical cost and for delivering the product timely to a buyer.
A well equipped PPC department also works out for their periodical replenishment of
worn-out tools, etc.
Scheduling
Scheduling of manufacturing order takes care of the following:
Preparation of machine loads.
Fixation of calendar dates of various operations/sequence of operations to be
performed on the jobs & follow-up the same.
Coordination with sales to confirm delivery dates of new items and keeping them
informed about the periodical dispatch schedules.
Dispatching
Dispatching concerns preparation and distribution of show orders and manufacturing
instructions to the concerned departments. The instruments and show orders received
by various departments is an authority for them to perform the work according to that
schedule.
Progressing
Progressing means control, i.e., collection of data from various manufacturing shops,
recording the progress of work and comparing progress against the plan.
Expediting
Expediting means chasing intensively the bottle neck areas causing delays/
interruptions in carrying out smooth production and taking appropriate actions from
time to time and keeping the concerned authorities well informed about the progress
of planned targets. Also to communicate the sales department promptly about the
failure in delivering commitments, if any.

146 Miscellaneous Functions

In addition to above usual functions of PPC, they are also helping in cost estimation,
fixation of standards through Industrial Engg, capacity planning, make or buy
decisions, projection of companies product market on long terms basis.
6.4 AGGREGATE PLANNING

Aggregate Planning may be defined as Intermediate Planning which is normally
done for a period of up to one years time. The word Aggregate symbolises that the
planning is done at the broadest level. The details of the individual product
requirements and the detailed scheduling of various resources (men/machines) and
other facilities is normally not done and left to the individual at lower level to carry
out the same.
6.4.1 Various Steps involved in the Aggregate Planning

The first step involved is the forecast of resource for a reasonable period
(normally up to a years time).
The state of the system at the end of last period.
Once these two factors are decided, the decision for the upcoming period about
the size of the workforce and production rate can be known.
Also, the decision made may call for having or laying of personnel thereby
expanding or contracting the effective capacity of the productive system.
Special techniques available for Aggregate Planning are:
Graphical Method
Linear Decision Rule (LDR)
6.4.2 Objectives of Aggregate Planning

The various objectives of aggregate planning are:
To make use of the available facilities and resources to ensure their optimum use.
Aggregate Planning increases the range of alterations for capacity use through
various techniques viz., hiring of additive manpower or laying out of personnel
thereby fixing the size of the workforce and the production rate.
Inventories for work-in-progress and finished goods is made during the loan
demand so as to use the same to meet the peak demand.
More time is devoted to produce more from the same machinery capacity through
properly employing the sequencing and scheduling techniques.
The following variables are studied under the Aggregate Planning:
Production Rate
Labour Employment
Inventories
Sub-contracting (if permissible)
If the production rate and labour employment are fixed, the Inventories &
Sub-Contracting can be derived there from. However, Aggregate Planning is not
long-term planning.

Conversion of an Aggregate Plan into a Master Schedule 147

Month Apr. May Jun. Jul. Aug. Sept.
Units Reqd. 4000 3000 5000 5000 6000 3000
Month Oct. Nov. Dec. Jan. Feb. Mar.
Units Reqd. 3000 4000 5000 6000 5000 4000
Master Schedule
Month Rating Apr. May Jun. Jul. Aug. Sept.
6A 2000 2000 3000 3000 4000 2000
16A 1200 500 1000 1000 1000 -
20A - 200 - 500 - -
25A - - 500 - 500 500
32A 500 - 500 200 200 200
40A 200 - 500 100 100 100
63A 100 - 500 100 100 100
4000 2700 5500 5000 6000 3000
Month Rating Apr. May Jun. Jul. Aug. Sept.

6A 2000 3000 4000 4000 3000 3000
16A 500 500 - 500 500 500
20A 500 - 500 500 500 -
25A - 500 500 500 500 500
32A - - - 200 200 -
40A - - - 200 200 -
63A - - - 100 100 -
3000 4000 5000 6000 5000 4000
6.4.3 Various Strategies involved in Aggregate Planning

The objective of the various strategies of Aggregate Planning is to smooth out the
peaks and voltages of the demand during the Planning horizon. This is achieved
through actions briefed below:
Without changing production output rate.
Varying production output rate.
Appropriate Inventory Level.
Sub-contracting.
Capacity Utilisation.
Without Changing Production Level

During periods of low demand, the increase of sales of goods can be done through
special discount schemes/cutting prices etc.
During periods of high demand, the method of back logging orders can be adopted
but depends upon the willingness of the customer if he could wait for that much
time. However, backlogging of orders is not without danger of loosing goodwill.

148 Change in Production Level

The change in production level is done to the extent possible to contain the fluctuation
in demand. This is achieved as follows:
When demand is on the increasing side, the output rate can be changed by hiring
workers temporarily. Wherever, it is possible to increase production through
change in workforce or by keeping workers on over-time (OT) or through some
special Incentive Schemes by altering the capacity through increase of a few
equipments/machinery or sometimes by changing the planned plant shut downs.
When demand is decreasing, changing the output rate by logging off
Casual/Temporary Workers/by paying full salary to employees but reducing
output rate for a short period Without demoralising/demotivating the workforce
or by reducing capacity by switching off part machinery whenever possible.
By Appropriate Inventory Level

Inventory of furnished goods is increased during periods of low demand and the same
can be used to meet high demand/seasonal demand in other periods. Manufacturing
firms can use this strategy very well.
Sub-contracting
Sub-contracting means meeting demand through acquiring part of goods from other
manufacturers/producers rather than making in-house. House benefits must be
weighed against cost and quantity.
Capacity Utilisation
Capacity utilisation is very common to service industries, organisations or companies
which cannot store products or services. They must arrange to meet peak load through
sharing capacity utilizations. Example: Telephone Companies, Electric Power
Companies & Computer Time Sharing Companies.
Examples on Aggregate Planning

Problem 1: The forecasted demand of an item, influenced by seasonal factors is given
below:
April 200 Oct 260
May 81 Nov 176
June 210 Dec 84
July 560 Jan 108
Aug 805 Feb 190
Sept 100 March 450
The Number of working days in the financial year is given below:
April 20 Oct 20
May 27 Nov 22
June 27 Dec 28
July 28 Jan 27
Aug 23 Feb 19
Sept 25 March 25

Show the daily requirement and cumulative demand graphically and determine the 149
production rate to meet the average demand.
Solution: The production requirements are tabulated hereunder:
Month Forecasted No. of Production Demand Cumulative Cumulative
Demand Days Available per day Production Demand
(2/3) Days (units)
1 2 3 4 5 6
April 200 20 10 20 200
May 81 27 3 47 281
June 210 27 10 74 551
July 560 28 20 102 1111
August 805 23 35 125 1916
Sept 100 25 4 150 2016
Oct 260 20 13 170 2276
Nov 176 22 8 192 2452
Dec 84 28 3 220 2536
Jan 108 27 4 247 2644
Feb 190 19 10 266 2834
March 450 25 18 291 3224
3224 291
Total Demand 3224

Average Demand = =
Total Production Days 291
= 11.28 = 11 units (day)
6.4.4 Varying Workforce Level to Meet Demand

Problem 2: A company employs 20 persons at an average salary of 2000 per month.
Each unit of production requires 4 standard hours to produce. Hiring cost are
estimated at 1500 per month man, layoff cost are estimated at 1000 per man per
month. Given below, the forecasted demand, find the total cost.
Month Demand (Units) Working Days
April 1000 25
May 2340 26
June 864 24
July 1674 27
Aug 1408 22
Sept. 1512 18
Solution:
MONTH April May June July Aug Sept.
1. MEN REQD 1000 4 2340 4 864 4 1674 4 1408 4 1512 4

25 8 26 8 24 8 27 8 22 8 18 8
= 20 = 45 = 18 = 31 = 32 = 42
2. REGULAR 200020 200045 200018 200031 200032 200042

LABOUR
SALARY ( ) =40,000 =90,000 =36,000 =62,000 =64,000 =84,000
150
3. HIRING NIL 251500 111500 121500 221500
COST (`)
=37,500 =16,500 =18,000 =33,000
4. LAY-OFF 21000
(`) REQD =2000
TOTAL (`) 40,000 1,27,500 38,000 78,500 82,000 1,17,000
Total Cost (`) = 4,83,000
Keeping Workforce Fixed

Problem 3: If in the above example, the number of men employed is 30, the inventory
carrying cost is ` 6/unit/month and the shortage cost is ` 100/unit/month. Then find
the total cost under this plan. Compare the two plans, which plan would you
recommend and why?
Solution:
MONTH April May June July Aug. Sept.
1. MEN REQD 30 30 30 30 30 30
2. REGULAR 200030 200030 200030 200030 200030 200030

LABOUR
SALARY (`) =60,000 =60,000 =60,000 =60,000 =60,000 =60,000
3. INVENTORY 1500 500 -280 296 242 154

(Units)
1000 +1560 +1440 +1620 +1320 1080
2340 864 1674 1408 1512
= 500 = 280 = 296 = 242 = 154 = 278
4. INVENTORY 5006 2966 2426 1546

CARRYING
COST (`) =3000 =1576 =1452 =924
5. SHORTAGE 280100 278 100

COST (`)
= 28,000 = 27,800
TOTAL (`) 63,000 88,000 61,576 61,452 60,924 87,800
Total Cost = ` 4,22,752
Comparison of Strategy I vs. Strategy II

The second strategy is more economical. Moreover, it is very advantageous
particularly from the following angles:
1. Manpower is fixed and no hiring and firing.
2. This keeps manpower motivated, consequently there is no demoralising effect.
3. Extra inventory in most of the months is good to meet extra demand.
4. However, shortage to the extent possible should be avoided even if men have to
be kept on Incentive/O.T./more men on extra duty have to be engaged.


Arrange the following steps of aggregate planning process in the correct order
as presented to you earlier:
1. Analyze the system at the end of the last period
2. Special techniques for aggregate planning are used
3. Decide the production rate
4. Expand or contract workforce strength
5. Forecast for the upcoming year
6.5 MASTER PRODUCTION SCHEDULE

The master production schedule (also commonly referred to as the MPS) is effectively
the plan that the company has developed for production, staffing, inventory, etc.
The master production schedule provides details about the quantities ad delivery
timings of a product, but not the production plan. For example, if according to the
master production schedule, 1,200 cars of a particular model are to be delivered to the
customer in week 1 and 1,000 cars of the model are already in the inventory, then only
200 units have to be produced in this week. On the other hand, if there are 1,500 units
of this model of the car in the inventory, there may be no requirement of any
production in this week.
Figure 6.1: Master Production Schedule

The MPS gives details about the quantities and timings of the planned production of a
product. It is derived from the master schedule by taking into account the inventory
status of the product in a given period.
Anticipated build schedule for manufacturing end products (or product options)
A statement of production, not a statement of market demand
MPS takes into account capacity limitations, as well as desires to utilize capacity
fully
Stated in product specifications in part numbers for which bill of material exist

152 Since it is a build schedule, it must be stated in terms used to determine

component part needs and other requirements; not in monetary or other global unit
of measure
Specific products may be groups of items such as models instead of end items
The exact product mix may be determined with Final Assembly Schedule
(FAS), which is not ascertained until the latest possible moment
If the MPS is to be stated in terms of product groups, we must create a special
bill of material (planning bill) for these groups
Task Performed by a Master Production Scheduler
Construct and update the MPS

Involves processing MPS transactions, maintaining MPS records and reports,
having a periodic review and update cycle (rolling through time), processing and
responding to exception conditions, and measuring MPS effectiveness on a
routine basis
On a day-to-day basis, marketing and production are coordinated through the MPS
in terms of Order Promising
Order promising is the activity by which customer order requests receive shipment
dates.
An effective MPS provides

Basis for making customer delivery promises
Utilising plant capacity effectively
Attaining the firms strategic objectives as reflected in the production plan
Resolving trade-off between manufacturing and marketing
Since MPS is the basis for manufacturing budgets, the financial budgets
should be integrated with production planning/MPS activities
When MPS is extended over a time horizon, is a better basis for capital
budgeting
Based on the production output specified in the MPS the day-to-day cash flow
can be forecasted
The MPS should be realizable and not overstated
When scheduled production exceeds capacity, usually some or all of the following
occur:
Invalid priority
Poor customer service (missed deliveries)
Excess in-process inventories
High expediting costs
Lack of accountability

153
6.6 MATERIAL REQUIREMENT PLANNING (MRP) Production Planning and Control
The business environment today is complex with uncertainties, competition and

change. To be competitive, an enterprise should have good processes and systems,
which should be able to adjust to the changes in the business environment. The change
can be of technological innovations, government policies, interest rates, competition,
changing customer perception and many other fluctuating forces.
To achieve competitive advantage companies differentiate themselves from other
players in the market. There are various ways by which a company can do so.
The products that are going to be produced should conform to the requirements of
the market and the design should be such that it should forecast and accommodate
customers future needs.
The marketing department, which keeps an eye on the trends and needs of the
market, should give relevant information to the production department so that they
would make periodic and relevant changes to the products.
The demand-supply factor in the market should be analyzed for proper production
planning and there should be some system that can assist management to take
strategic decisions.
Competitive advantage starts from sourcing the right raw material at the right
time. For this, the organization should have a good system of managing its
vendors, which includes parameters of quality, price and delivery schedules.
Manufacturing inventory system should be optimum, which is essential in
achieving the first stage of the cost reduction process.
The function of a manufacturing inventory system is to translate the Master
Production Schedule into detailed component material requirements and orders, based
on inventory. The system determines item-by-item, what is to be processed and when,
as well as what is to be manufactured and when. This is based on order priorities and
available capacities. As the purpose of manufacturing inventory is to satisfy
production requirements, the production plan is the source of demand and thus the
demand is deterministic.
From the point of view of quantity and timing of related production planning systems,
four categories of systems are possible to manage and control inventories.
Statistical Order Point: The system provides optimal solutions by means of
standard solutions to standard situations using statistical information to calculate
optimal item parameters, e.g., automatic recalculation of lead times, economic
order quantities and reorder points.
Lot Requirement Planning: An order method that is driven by forecast periods.
Order quantities are made to match demand in each specific forecast period.
Time Phased Order Point: Time-phased replenishment relies on actual demand
not established stock levels to drive the ordering and quantities of inventory for
manufacture or distribution.
Material Requirements Planning: A Material Requirements Planning system,
narrowly defined, consists of a set of logically related procedures, decision rules
and records, designed to translate a Master Production Schedule into net
requirements and the planned coverage of such requirements, for each component
inventory item needed to implement this schedule.
MRP is probably the most comprehensive approach to manufacturing inventory and
other dependents which demand an efficient inventory management system.

154 In the process of planning, MRP system allocates existing inventories on hand to the
items to be manufactured. And based on the gross requirements, it reevaluates the
validity of the timing of any outstanding orders. The system establishes a schedule of
planned orders for each item, including orders, if any, to be released immediately plus
orders scheduled for release at specific future dates. Planned order quantities are
computed using any of several lot sizing rules.
6.6.1 Assumptions and Pre-requisites

There are a number of assumptions that are fundamental to all MRP models.
In addition, there are also prerequisites that ensure that the assumptions provide the
necessary optimum outputs. These are discussed below with some principles that are
employed by MRP systems:
Assumptions
The MRP system makes certain assumptions regarding inventories. The models
assume that:
Lead times for all inventory items are known and can be supplied to the system, at
least as estimates.
Every inventory item under item control goes into and out of stock, i.e., there will
be reportable receipts, following which the item will be in an 'on-hand' state and
will eventually be disbursed to support an order for an item into which it is
merged.
All components of an assembly must be available at the time an order for that
assembly is to be released to the factory.
Components and materials are discretely disbursed and used. In the case of
materials that come in continuous form (e.g., rolls of sheet metal), the standard
planning procedures are modified and the system adapted to handle such
inventory items properly.
The process is independent, i.e., a manufacturing order for any given inventory
item can be started and completed on its own and not be contingent on the
existence or progress of some other order for completing the process. Thus,
mating part relationships and set up dependencies do not fit the scheme of MRP.
Prerequisites
In order to develop a MRP model there are some prerequisites. The principle
prerequisites for a standard MRP system are as follows.
A Master Production Schedule exists and can be stated in bill of materials form;
All inventory items are uniquely identified;
A bill of material exists at the time of planning;
Inventory records contain data on the status of every item; and
There is integrity of file data.
In addition, other prerequisites in building MRP models are:
Individual item lead times are known;
Every inventory item goes into and out of stock;
All of the components of an assembly are needed at the time of release of
assembly orders;

There is discrete disbursement and usage of component materials; and 155

Process independence of manufactured items is ensured.
6.6.2 Material Planning

Material Planning is a technique of determining the requirements of raw materials,
components, spares, etc., required for the manufacturing of the product. If the delivery
date of the finished product is known in advance, then the ordering time and quantity
of other work-in-progress can be planned accurately with the help of mathematical
calculations. This planning of work-in-progress of the finished goods is known as
Material Requirement Planning (or MRP).
While doing Material Requirement Planning one has to look for the following things:
All the components, sub-assemblies and assemblies are known so that they all can
participate for the planning of required materials.
The lead-time of all the assemblies and sub-assemblies should be known.
The inventory already in hand should be considered for the present Material
Requirement Planning.
6.6.3 MRP Process

The MRP can be understood with the help of following figure:
Figure 6.2: Material Requirement Planning (MRP)

The MRP process is initiated once the customer orders for the finished goods from the
supplier. Then the forecasting is done for the finished goods. A master plan is
prepared for the production process. This master plan contains all the constituents of
the production process that would finally lead to the resultant product. The master
plan for production initiates the process of Material Requirement Planning. For MRP
two other inputs are inventory which is already in hand and product design and
development. Then we have to see whether the capacity is adequate for the production
of requisite number of finished goods demanded by the customer. If the answer is
negative, then again we have to reschedule our production plan. But if the answer is
affirmative i.e., there is adequate capacity then we can go for the final master plan that
would ultimately lead us to the Material Requirement Planning.

156 Check Your Progress 2

1. Define production planning and control.
.
.
2. Define expediting.
.
.
6.6.4 MRP System

The MRP is applicable to any manufacturing system that involves discrete, engineered
products involving assembling and part fabrication is dependent on the demand
situation. Since MPS is essentially an input to the system, MRP could be regarded
primarily as a component requirement planning system.
The basis for MRP design is based on a concept of dependent demand and a time
phasing approach. The approach combines three principles:
The inventory system deals with dependent demand.
Component demand can be precisely determined from the master schedule.
The optimum levels of inventory can be determined by time phasing, i.e.,
segmenting inventory status data by time.
Time phasing means adding the dimension of time to inventory data. The status is
established by recording and storing information on either specific dates or planning
periods with which the inventory are associated. The main aim of time phasing is to
provide answers to questions related to manufacturing inventory management.
It answers all questions related to when the material is required.
6.6.5 Benefits of MRP System

As shown in Figure 6.2, it is clear that the MRP system is very much commendable to
computerisation. Hence for very large number of products e.g., for many assembled
products, perhaps with sub-assemblies, the number of parts involved can easily be in
thousands. Requirement generation, inventory control, time phased orders and
capacity requirements, all have to be coordinated. All this can be done in a relatively
straight forward manner. Thus, practically all advantages of computerised planning
can be thought of with MRP system e.g., change in production schedule due to change
in market demand, cancellation of orders, change in procurement policy, delays in
receipt of incoming materials and also the change in capacity planning etc., all this
may reduce idle time at various stages and hence may increase productivity by men,
machine & materials.
6.6.6 Outputs The Materials Requirement Plan

The common objective of all MRP systems is to determine (gross and net)
requirements, i.e., discrete period demands for each item of inventory, so as to be able
to generate information needed for correct action in ordering inventory, i.e., relating to
procurement and production. The action is either new action (release of an order) or a
revision of previous action. The essential data elements that are required for any
action to be taken are:
Item Identity (part number)

Order Quantity 157

Date of Order Release
Date of Order Completion (due date)
Once the order has been placed, the types of order action that are required when
revising an action taken previously, are limited to the following:
Increase in Order Quantity.
Decrease in Order Quantity.
Order cancellation.
Advancement of Order Due Date.
Deferment of Order Due Date.
Order suspension (indefinite deferment).
MRP systems meet their objective by computing net requirement for each inventory
item. The term component in MRP covers all inventory items other than products or
end items. Requirements for end items are stated in the MPS. The latter are derived
from forecasts, customer orders, field warehouse requirements, interplant orders, etc.
Requirements for all component items (including raw material) and their timings are
derived from the MPS by the system.
After determining the net requirements, these are time phased to ensure their proper
coverage. Therefore, MRP converts the gross requirements into net requirements. The
net requirements are always related to time, i.e., to some date or period. These are
covered by planned orders. Their quantities and timing are determined by any of the
lot sizing techniques. MRP signals, if necessary, the need to reschedule any of these
orders forward or backward in time, so that the net requirements are directly related
and are correctly timed with shop orders and purchase orders. Capacity considerations
are taken into account in determining MPS; this is not the role determined by MRP.
All the inputs received above enable determination of correct inventory status of each
item under the control of MRP. The MPS expresses the overall production plan and
the span of time covered by it. This is termed the planning horizon. Item lead time,
safety stock (if any), scrap allowances, lot-sizing algorithms, etc., are available from
the inventory record file. This is used to determine the size and timing of the planned
orders. The product structure file contains information on relationships of components
and assemblies. The MRP system uses these inputs to provide a number of important
outputs. These outputs can be classified as primary and secondary outputs. The
primary outputs of an MRP system are:
Order-release notices: These determine the orders that need to be placed and the
system makes the call for placement of planned order.
Rescheduling notices: Based on the feedback from manufacturing, it firms up
requirements on open order due dates.
Cancellation notices: Wherever necessary, it calls for cancellation or suspension
of open orders.
Item status analysis: It provides back-up data on the item. The output of the MRP
includes the following information: (a) Requirements, (b) Coverage of
requirements, and (c) Product structure.
Planned orders: It identifies factors considered for planning and on that basis
schedules for releases of notices in the future.

158 The system is also capable of providing to provide a number of secondary outputs.
Apart from the primary outputs an MRP System can be used for:
Inventory order action,
Re-planning order quantities,
Safeguarding priority integrity,
Performance control, and
Reporting errors, incongruities and out-of-bounds situations in the system.
Some of the secondary outputs that can be provided by the MRP system are:
Exception notices reporting errors, incongruities, and out-of-bound situations.
Inventory level projections.
Purchase commitment reports.
Tracing demand sources.
Performance reports.
An MRP system that is properly designed, implemented and used will also contain
valid and timely information that can assist in the functioning of the organization on
three separate levels:
Planning and control of inventories.
Planning of open order priorities.
Inputs to the capacity requirements planning system.
6.6.7 Priority Planning

The validity and integrity of shop scheduling, loading, despatching and job
assignments are based on operational priorities. The priorities in a MRP system are
derived from the MPS. Each shop order entails a number of operations that must be
performed to complete the order. In order to complete these operations, there are
priorities in two areas:
1. Order priority.
2. Operation priority.
Where there are valid open-orders, priority planning and priority control are the basis
for decisions on due dates, re-planning of order quantities and releases of schedules in
the future. But to be valid, they must derive from valid order priorities, i.e., valid order
due date. An MRP system has the capability to establish valid order priorities at the
time of order release and maintain them up-to-date and valid.
In priority assignment and updating, the concept of dependent priority is very useful.
The 'dependent priority' concept recognizes that the real priority of an order depends
on the time of order completion and the availability of all inventory items that are
required not only for the operation but also for previous operations. This can be
thought of as vertical priority dependence. Due date-oriented priority ratios have been
developed and are being used successfully in many MRP systems.

Dynamic updating of operation priority is based on the critical ratio and not due dates 159
and established relative priorities. The dependent priority procedure computes the
value of the critical ratio for the next operation to be performed on every open shop
order, as follows:
Ratio A = Quantity On-hand/Order Point
Ratio B = Lead time for Balance Work/Total Lead time
Critical Ratio = A/ B
Ratio A is a measure of need and represents the degree of stock depletion. Ratio B
is a measure of the response and reflects the degree of work completion. A critical
ratio of 1 signifies that work on the order has kept pace with the rate of stock
depletionthe order is on Schedule. A value, lower than 1, indicates an order
ahead of schedule. The priority of the job becomes higher as the value of critical
ratio falls or becomes lower.
In the case of assembly products, horizontal dependence exists. In such a situation, the
MRP system must re-plan requirements and dates of need for the component orders in
question, in case of change or rescheduling in parent product requirements. However,
in independent demand situations, ratio A is meaningless.
6.7 BILL OF MATERIALS (BOM)

A bill of materials (sometimes bill of material or BOM) is a list of the raw materials,
sub-assemblies, intermediate assemblies, sub-components, components, parts and the
quantities of each needed to manufacture an end product.
A BOM can define products as they are designed (engineering bill of materials), as
they are ordered (sales bill of materials), as they are built (manufacturing bill of
materials), or as they are maintained (service bill of materials). The different types of
BOMs depend on the business need and use for which they are intended. In process
industries, the BOM is also known as the formula, recipe, or ingredients list. In
electronics, the BOM represents the list of components used on the printed wiring
board or printed circuit board. Once the design of the circuit is completed, the BOM
list is passed on to the PCB layout engineer as well as component engineer who will
procure the components required for the design.
The bill of materials is not simply a materials list but is a materials list that provides
information useful to reconstruct the manufacturing process. It serves as the interface
to order entry. The manufacturing bill of material is developed by re-sequencing the
engineering bill of materials in the context of the assembly process, and then deriving
from it the process information that will allow the new part to be ready for production.
While good business practice indicates that companies should aim for a unified set of
information, including having just one version of every bill of materials at a time, but
many different views of bills are feasible. Where good practice has not been fully
adopted, multiple concurrent bills of materials may be encountered. In addition to the
Manufacturing bill of materials and the engineering bill of materials, other possible
and common bills of material include:
6.7.1 Costing Bill of Materials

Occasionally encountered is a version of the bill of materials, which expresses cost
information separately from the manufacturing bill.

160 6.7.2 Planning or Modular Bill of Materials

This is used in Master Production Scheduling. This is an artificial grouping of items in
bill of materials format that expresses the relationship of multiple product features,
variants and options. Inventory items are arranged in terms of product modules, i.e.,
sets of component items each of which can be planned as a group. The process of
modularizing consists of breaking down the bills of highest-level item and rearranging
them into modules. There are two somewhat different objectives, in modularization:
1. To disentangle combination of optimal product features.
2. To segregate common from unique, or peculiar parts.
The first is required to facilitate forecasting and the second is aimed at minimizing
inventories in components that are common to option alternatives, i.e., are used in
either optional choice. Sometimes there are options within options (like four-wheel or
two-wheel drive for a jeep. A traditional approach to optional product features was
providing stock over the forecast provisions. The lack of modularization in product
design made it difficult to disentangle options and options within options, thereby
entailing additional safety stock and making inventory management more difficult.
A multitude of model designation implies that all the models, then get into the
processor of forecasting and master scheduling. It is difficult to forecast demand for
any single option, but to forecast, with a degree of dependability, and with what other
options it will be combined is very difficult. The number of models within each
product family should be reduced (at least for internal purposes). This is primarily for
procurement, fabrication and subassembly of components. For purposes of final
assembly scheduling, specific combinations of options must be specified for each unit
to be built. Thus the concept of modular bills of material is very useful in multi-model
product situations.
6.7.3 Phantom Bill of Materials

A technique called phantom bill can be used to handle transient assemblies. In this
technique the transient subassembly is treated as follows:
1. Lead time is specified as zero.
2. Lot sizing is lot for lot.
The bill of material carries a special code so that the system can recognize that it is a
phantom and applies special treatment to it.
6.7.4 Engineering Bill of Materials

The engineering bill of materials is the master product definition that contains
as-designed information on the inventory item.
Table 6.1: A Typical Engineering Bill of Materials
Level Part # Revision Quantity Unit Description Make/buy
1 1684423003 B Parent Ea Adapter Make
..2 1547662009 J 1 Ea Control Unit Buy
..2 1676387001 C 1 Ea Moisture Tester Make
....3 1870119302 B 3 Ea Enclosure Buy
..2 1870119302 B 1 Ea Enclosure Buy
....3 1200014273 D 4 Ea Machine Screw Buy
....3 0900016001 F 1 Ea Cover Buy
Contd..

..2 1464438389 AA 2 Ea Precipitator Assy. Make 161

....3 5201048007 E 2 Ea Element Buy
....3 5700255100 E 2 Ea Housing Buy
....3 9800266600 D 8 Ea Machine Screw Buy
....3 1200014267 G 2 Ea Precipitator Buy
Table 6.1 shows a typical engineering bill of materials. Each engineering bill of
materials has a parent. The parent is the item (product, assembly, subassembly,
intermediate, etc), which is to be made. All the controls on the bill of materials relate
to the parent. In other words, it has context and instruction that allows manufacturing
engineers to derive the manufacturing bill of materials.
The product structure must be defined in terms of levels of manufacture.
Subassemblies, which never see a stock room because they are immediately consumed
in the assembly of their parents, called transient subassemblies, should also be
accounted for. A technique called phantom bill can be used to handle these.
You will also come across certain apparent discrepancies; let us take a hypothetical
case where part no. 18701-19302 appears twice in the bill of materials. The parent part
requires 4 units of enclosures, the first 3 enclosures are used for the sub-assemblies
and the fourth is used at the final-assembly stage. In a situation like this, to avoid the
possibility of placing separate orders for the same part, the part is always assigned the
lowest level (highest level number) at which it appears. Thus, the enclosures should
always appear as a level 3 item. This is called low-level coding. Such coding also
facilitates computer processing.
Column 4 provides information on the quantity required for each parent item.
Column 5 provides information on the unit of measurement. The metrics adopted are
very important and should be consistent. Column 6 gives the description of the
inventory item. This may or may not be unique. The last column provides information
on the sourcing of the inventory item.
6.7.5 Pseudo Bill of Materials

When the bill of material is broken down in the process of modularization, various
sub-assemblies are promoted and become end products, i.e., highest-level items. This
tends to create a large number of end items. In order to reduce the forecasting burden
the technique of creating pseudo bill of materials is used. The newly created end items
are grouped by option so that there is no obstacle to taking any such group and
creating a pseudo bill (assigning an artificial parent with a number) to cover it. The
pseudo bill number represents the optional product features in the MPS and MRP
system will explode the requirements from this point on.
With the emergence of cost effective data processing and MRP II and ERP systems, it
is possible to display the bill of materials in many ways. Commonly encountered
reporting formats include:
Single-level bill: A parent and its direct components.
Single-level where-used: An item and all the parents in which it is a direct
component.
Indented bill (multi-level bill): A parent, its direct components, their components
and so on down to the starting materials. This shows which components form part
of which parents at all levels.
Indented where-used: An item, all the parents in which it is a direct component,
their parents and so on up to the end products. This also shows structures.

162 Next level end level where-used: An item, all the parents in which it is a direct
component, and the top-level parents (products) of which they form part.
Summarized bill: A list of all components (at all levels) in a parent with total
quantities, but not displaying any structure information.
The bill of material structure is the arrangement of inventory item data within the bill
of materials file. Information in the bill of materials includes:
Item identities: Assignment of item identity eliminates ambiguity and identifies
levels of manufacture. It cross-references the item master data. An item may be
able to be listed as a component more than once in a bill.
Sequence Number: Can be used to present the bill in a particular way, grouping
all component items of a given type together, or presenting a picking sequence.
Also known as a find number or balloon number.
Component Quantity: The amount of the component item to be used in
manufacturing the parent, normally stated as quantity per unit of the parent but
expressed per batch in some formula-based systems. Also known as quantity
per.
Unit of Measure: May be provided automatically by an MRP II or ERP or other
system or specified by the user if unit conversions are available.
Relationship: Indicates whether the component is used in the quantity stated per
unit or batch of the parent or in some other way, such as per order or as required.
Type of Component: shows whether the item is a normal component or a special
type. Types of component in addition to standard include phantoms, sometimes
called pseudo, options, reference items and others.
The bill of material should reflect, through its level structure, the way material flows
in and out of stock. Thus it is expected to specify not only the composition of a
product but also the process stages in the products manufacture. The product structure
must be defined in terms of levels of manufacture. Sub-assemblies which never see a
stock room because they are immediately consumed in the assembly of their parents
are called transient subassemblies.
6.7.6 Features of Bill of Materials

Insight into current and future availability with Available to Promise and
Component Availability
Visual drill-down into existing bills of material
Use stock or non-stock components
Attach media objects for videos or pictures of assemblies
Global replacement of components
User-defined cost groupings
Optional routing definition
Tracking of engineering change history
Various user-defined fields for each assembly
Copy from functionality to ease setup of new bills
Engineer name, revision numbers, drawing numbers, effective dates
Engineering change order (ECO) tracking

163
6.8 CAPACITY REQUIREMENT PLANNING Production Planning and Control
As the master schedule is developed, rough-cut capacity planning is used to check

capacity requirements against capacity availability. But rough-cut capacity planning
does not take into account lead time off setting, or the amount ahead of time
component parts must be made to meet the master schedule for the end items. MRP
forms the basis for detailed capacity calculations.
The output of the MRP system indicates what component items will have to be
produced and when, and this output can therefore be converted into the capacities
required to produce these items. The explosion of the MPS results in details on
machine load, or workload projections. The MRP then compares this with available
departmental and work center capacities to answer such question as relating to
overtime work, inter-departmental transfer of work/people, sub-contracting of work,
starting new shifts, hiring more manpower, etc.
This exercise by using the routing sheet, which indicates the sequence of machines or
work centers a part must go through during processing and the labour standards,
makes it possible to determine capacity requirements at each operation.
The total capacity requirements placed on a work centre during a given time period
are called the load. The output of Capacity Requirements Planning (CRP) is usually in
the form of load report, or load profile, which is a graphical representation of the load
on each work centre by time period. This report provides visibility into future and is
based on valid order priorities. Hence, it facilitates capacity requirement planning by
providing essential inputs for the capacity requirement planning system to function
effectively.
6.9 TECHNIQUES OF CRP

Capacity Requirements Planning, also known as CRP, in MRP parlance, is the
technique that allows business to plan ahead to determine how large their future
inventory capacity needs to be in order to meet demand. CRP also helps companies
determine how much space they will need to hold these materials. It verifies that you
have the sufficient capacity available to meet the capacity requirement for the MRP
plans. It thus helps the planners to make the right decisions on scheduling before the
problem develops.
The key elements of the Capacity Requirements Planning process are of establishing,
measuring, and adjusting the limits or levels of the production capacity based on the
process of determining the amount of labor and machine resources required to
accomplish the tasks of production. Inputs of the CRP process are the Order Entry
modules in a MRP system which facilitates translating the orders into hours of work
by the work center by time period via the use of parts routings and time standards.
Capacity planning actually occurs at two times in the assembly environments. First, it
is the Rough-Cut Capacity Planning (RCCP) that is done during the preparation of the
Master Production Schedule. Purpose of RCCP is to make a rough check on the
feasibility of the MPS (against the availability of operating shifts and labor hours,
existing availability of equipments) before making any materials planning and final
scheduling decisions. It identifies potential bottleneck operations that may disrupt
your master schedule. If the master schedule is not feasible at this stage, it should be
adjusted. Any serious capacity problems should be relayed back to the aggregate
production plan. Once a feasible master schedule is confirmed, we continue with the
short-range scheduling of production.

164 The master schedule is exploded through the MRP using bills-of-material, producing a
set of recommended planned orders, for in-house production, as well as orders to
suppliers for any bought-out material items, and indicate, based on the master
schedule and the associated material buy plan, which items should be replenished first
and the due dates. It can also include rescheduling of the open orders.
In a job shop situation, using the saved routings of the various items, these planned-
orders are converted to requirements (for example, in machine and labor hours) at the
various work centers. In this way the required capacity for each work center in each
time period is determined. As MRP assumes infinite capacity, and in the general
approach of infinite loading, capacity constraints are ignored in developing the
capacity profile. In finite loading, the master schedule is developed within the capacity
constraints at all work centers.
6.10 PROBLEMS IN MRP AND CRP

6.10.1 Material Requirements Planning (MRP) Problems
The major problem with MRP systems is the integrity of the data. If there are any
errors in the inventory data, the [bill of materials] (commonly referred to as 'BOM')
data, or the master production schedule, then the output data will also be incorrect
(colloquially, "GIGO": Garbage In, Garbage Out). Data integrity is also affected by
inaccurate cycle count adjustments, mistakes in receiving input and shipping output,
scrap not reported, waste, damage, box count errors, supplier container count errors,
production reporting errors, and system issues. Many of these type of errors can be
minimized by implementing pull systems and using bar code scanning. Most vendors
in this type of system recommend at least 99% data integrity for the system to give
useful results.
Another major problem with MRP systems is the requirement that the user specify
how long it will take for a factory to make a product from its component parts
(assuming they are all available). Additionally, the system design also assumes that
this "lead time" in manufacturing will be the same each time the item is made, without
regard to quantity being made, or other items being made simultaneously in the
factory.
A manufacturer may have factories in different cities or even countries. It is not good
for an MRP system to say that we do not need to order some material, because we
have plenty thousands of miles away. The overall ERP system needs to be able to
organize inventory and needs by individual factory, and inter-communicate the needs
in order to enable each factory to redistribute components, so as to serve the overall
enterprise.
This means that other systems in the enterprise need to work properly, both before
implementing an MRP system and in the future. For example systems like variety
reduction and engineering which makes sure that product comes out right first time
(without defects) must be in place.
Production may be in progress for some part, whose design gets changed, with
customer orders in the system for both the old design, and the new one, concurrently.
The overall ERP system needs to have a system of coding parts such that the MRP
will correctly calculate needs and tracking for both versions. Parts must be booked
into and out of stores more regularly than the MRP calculations take place. Note, these
other systems can well be manual systems, but must interface to the MRP. For
example, a 'walk around' stock intake done just prior to the MRP calculations can be a
practical solution for a small inventory (especially if it is an "open store").

The other major drawback of MRP is that takes no account of capacity in its 165
calculations. This means it will give results that are impossible to implement due to
manpower or machine or supplier capacity constraints. However this is largely dealt
with by MRP II.
6.10.2 CRP Problems

The key elements of the Capacity Requirements Planning process are of establishing,
measuring, and adjusting the limits or levels of the production capacity based on the
process of determining the amount of labor and machine resources required to
accomplish the tasks of production. Inputs of the CRP process are the Order Entry
modules in a MRP system which facilitates translating the orders into hours of work
by the work center by time period via the use of parts routings and time standards.
Organizations operate below their maximum available capacity, either because there is
insufficient demand to fill the capacity, or it is deliberately done so that the operation
cans response quickly to every unplanned increase in demand. Often, though,
organizations find some parts of their production operating below capacity while other
component parts have production at their capacity ceiling. It is the parts of production
that are operating at maximum capacity which constitute the capacity constraint for
the whole production operation. Alternative long-term capacity strategies would be to
add in new production equipments, adding new work shifts, continuous process
improvement to reduce cycle times, subcontract out some production volume, or to
improve on forecast accuracy with better forecasting methods if actual demand has
shown to consistently lag behind forecast.
6.11 MAINTENANCE MANAGEMENT CONCEPTS

Although there are many definitions of maintenance, maintenance must be defined
and managed as a 'process', in order to achieve optimum pay back from expenditure.
Hence, there is a need to identify a maintenance management system as an integral
part of the asset life cycle management model.
Optimal performance is only achieved by organizations that embrace a holistic
approach. This encourages a close working link between the production and
maintenance areas that are jointly responsible for achieving business plan
requirements. There are three critical factors needed to realize optimal performance.
Assets must be maintained with a focus on the asset's function. The asset function
defines what is needed to achieve operating performance targets. Thus, effective
maintenance is about preservation of asset function to deliver the required
operating performance, rather than just preservation of the asset itself.
Processes need to establish the concept of maintenance as an important process in
achieving business profitability. In order to efficiently manage maintenance
activity, evaluation of performance against targets, and processes reflecting a
cycle of continuous improvement and the 'asset lifecycle management model' are
adopted to gain acceptance and management commitment.
People need to be effectively engaged to understand their role, responsibility and
goals in terms of the maintenance management processes. People are the means of
achieving performance and dependability targets that assure the achievement of
business goals. This is an integral part of asset and maintenance management.
166 Programmed maintenance management increases the efficiency and lifespan of
equipment, therefore increasing profitability. These ideas are addressed all in three
factors mentioned above. When this happens, it delivers synergetic asset management
where:
z Business goals drive decisions for the use and care of assets.
z Production and maintenance work together as manufacturing teams to develop
mutual targets.
z Performance and dependability targets become drivers for business profitability.
z All resources are optimized, not just maintenance resources.
Asset management needs to be considered as a holistic management system. This will
ensure that good decisions for the use and care of equipment are consistently made
and implemented-decisions, which constitute the best business value, which manage
assets for their entire lifecycle.
Operations and Maintenance Contracts

Contracting out maintenance jobs is a fairly common practice in the United States.
In India, many companies now offer contracts for Operations and Maintenance
(O&M). This is very common in the aviation and power industries. In addition,
specific assets like computing systems, electrical, mechanical equipment, etc., a large
number of organizations contact out maintenance. A third category is the increasing
interest in asset management firms to offer such services. This has become quite
popular in construction and buildings and in the software areas.
By outsourcing O&M, it increases the level of maintenance productivity. Associating
with professional maintenance people gives a company the advantage to address
issues with those experts who face and meet these challenges on a daily basis.
In addition, outsourcing also enables a company to gain greater control over
maintenance results. However, it is important to note that the following key elements
have to be highlighted to achieve the optimum benefit from outsourcing activities:
z Performance measurements are developed and clearly communicated,
z Planned maintenance is established as the focus of the operation,
z Maintenance becomes a competitive advantage,
z Both manufacturer and maintenance contractor desire a mutually beneficial
relationship,
z Maintenance best practices are established and tracked.
The Company saves on the need for highly trained maintenance men whose average
utilization over the year may be low. It also benefits from the contractor's
specialization, who being more familiar with the jobs, are likely to do a better and a
quick job. In the maintenance partnership scenario, performance guarantees and
continuous improvement goals provide greater control over maintenance results and
assures production goals are being achieved.
6.12 BUSINESS PROCESS RE-ENGINEERING

Business process re-engineering is one approach for redesigning the way work is done
to better support the organizations mission and reduce costs. Re-engineering starts
with a high-level assessment of the organizations mission, strategic goals, and
customer needs. Basic questions are asked, such as Does our mission need to be
redefined? Are our strategic goals aligned with our mission? Who are our
customers? An organization may find that it is operating on questionable 167
assumptions, particularly in terms of the wants and needs of its customers. Only after
the organization rethinks what it should be doing, does it go on to decide how best to
do it.
In this lesson we shall discuss the concept of BPR and its advantages and challenges.
A business process or business method is a collection of related, structured activities
or tasks that produce a specific service or product (serve a particular goal) for a
particular customer or customers. It often can be visualized with a flowchart as a
sequence of activities.
Information Resource Goal
<<supply>> <<supply>>
<<goal>>
<<Process>>
Event Output
Business Process
A business process:
1. Has a Goal;
2. Has specific input;
3. Has specific output;
4. Uses resources;
5. Has a number of activities that are performed
in some order;
6. May affect more than one organizational unit.
Horizontal organizational impact;
7. Creates value of some kind for the customer.
The customer may be internal or external
Figure 6.3: Business Process

A business process:
z has a Goal
z has specific inputs
z has specific outputs
z uses resources
z has a number of activities that are performed in some order
z may affect more than one organizational unit. Horizontal organizational impact
z creates value of some kind for the customer. The customer may be internal or
external.
Process Models
Business Process
A business process is a collection of activities designed to produce a specific output
for a particular customer or market. It implies a strong emphasis on how the work is
done within and organization, in contrast to a products focus on what. A process is

168 thus a specific ordering of work activities across time and place, with a beginning, an
end, and clearly defined inputs and outputs: a structure for action.
Connections
Supply link from object Information. A supply link indicates that the information or
object linked to the process is not used up in the processing phase. For example, order
templates may be used over and over to provide new orders of a certain style - the
templates are not altered or exhausted as part of this activity.
Supply link from object Resource. An input link indicates that the attached object or
resource is consumed in the processing procedure. As an example, as customer orders
are processed they are completed and signed off, and typically are used only once per
unique resource (order).
Goal link to object goal indicates the attached object to the business process describes
the goal of the process. A goal is the business justification for performing the activity.
Stateflow Link to Object Output

Stateflow link from event indicates some object is passed into a business process. It
captures the passing of control to another entity or process, with the implied passing of
state or information from activity to activity.
Object
Object
Figure 6.4: Workflow
Goal
A business process has some well defined goal. This is the reason the organization
does this work, and should be defined in terms of the benefits this process has for the
organization as a whole and in satisfying the business needs.
Goal link from activity Business Process indicates the attached object to the business
process describes the goal of the process. A goal is the business justification for
performing the activity.
Information
Business processes use information to tailor or complete their activities. Information,
unlike resources, is not consumed in the process - rather it is used as part of the
transformation process. In formation may come from external sources, from
customers, from internal organizational units and may even be the product of other
processes.
Supply link to activity Business Process indicates that the information or object linked
to the process is not used up in the processing phase. For example, order templates
may be used over and over to provide new orders of a certain style - the templates are
not altered or exhausted as part of this activity.

Output 169
A business process will typically produce one or more outputs of value to the
business, either for internal use of to satisfy external requirements. An output may be
a physical object (such as a report or invoice), a transformation of raw resources into a
new arrangement (a daily schedule or roster) or an overall business result such as
completing a customer order.
An output of one business process may feed into another process, either as a requested
item or a trigger to initiate new activities.
Resource
A resource is an input to a business process, and, unlike information, is typically
consumed during the processing. For example, as each daily train service is run and
actual recorded, the service resource is used up as far as the process of recording
actual train times is concerned.
Supply link to activity Business Process. An input link indicates that the attached
object or resource is consumed in the processing procedure. As an example, as
customer orders are processed they are completed and signed off, and typically are
used only once per unique resource (order).
6.13 TOTAL PRODUCTIVE MAINTENANCE

Total Productive Maintenance (TPM) is a Lean concept based on three simple ideas:
Preventive maintenance schedules must be developed and adhered to.
Extensive maintenance history exists in a database, and equipment failures may
be predicted within reasonable timeframes.
Simpler maintenance tasks may be delegated to those who know the equipment
the best.
Establishing a preventive maintenance schedule and a Predictive maintenance system
are the basic requirements of lean manufacturing. In addition, the operators should be
responsible and have ownership for all maintenance of the equipment they operate.
As operators know their machines the best, they would be the first to detect variations
in operation: unusual sounds, vibrations, smell, etc. Only complex and specialized
maintenance functions are assigned to the maintenance department.
A series of methods, originally pioneered by Nippondenso (a member of the Toyota
group), to ensure every machine in a production process is always able to perform its
required tasks so production is never interrupted.
Total Productive Maintenance is a new way of looking at maintenance, or conversely,
a reversion to old ways but on a mass scale. In TPM the machine operator performs
much, and sometimes all, of the routine maintenance tasks themselves. This auto-
maintenance ensures appropriate and effective efforts are expended since the machine
is wholly the domain of one person or team. TPM is a critical adjunct to lean
manufacturing. If machine uptime is not predictable and if process capability is not
sustained, the process must keep extra stocks to buffer against this uncertainty and
flow through the process will be interrupted.. One way to think of TPM is
"deterioration prevention" and "maintenance reduction", not fixing machines. For this
reason many people refer to TPM as "Total Productive Manufacturing" or "Total
Process Management". TPM is a proactive approach that essentially aims to prevent
any kind of slack before occurrence. Its motto is "zero error, zero work-related
accident, and zero loss."

170 TPM is a Japanese idea that can be traced back to 1951 when preventive maintenance
was introduced into Japan from the USA. Nippondenso, part of Toyota, was the first
company in Japan to introduce plant wide preventive maintenance in 1960. In
preventive maintenance operators produced goods using machines and the
maintenance group was dedicated to the work of maintaining those machines.
However with the high level of automation of Nippondenso maintenance became a
problem as so many more maintenance personnel were now required. So the
management decided that the routine maintenance of equipment would now be carried
out by the operators themselves (This is Autonomous maintenance, one of the features
of TPM). The maintenance group then focused only on 'maintenance' works for
upgrades.
The maintenance group performed equipment modification that would improve its
reliability. These modifications were then made or incorporated into new equipment.
The work of the maintenance group is then to make changes that lead to maintenance
prevention. Thus preventive maintenance along with Maintenance prevention and
Maintainability Improvement were grouped as Productive maintenance. The aim of
productive maintenance was to maximize plant and equipment effectiveness to
achieve the optimum life cycle cost of production equipment.
Nippondenso already had quality circles which involved the employees in changes.
Therefore, now, all employees took part in implementing Productive maintenance.
Based on these developments Nippondenso was awarded the distinguished plant prize
for developing and implementing TPM, by the Japanese Institute of Plant Engineers
(JIPE). This Nippondenso of the Toyota group became the first company to obtain the
TPM certifications.
Implementation
TPM has five goals:
1. Maximize equipment effectiveness.
2. Develop a system of productive maintenance for the life of the equipment.
3. Involve all departments that plan, design, use, or maintain equipment in
implementing TPM.
4. Actively involve all employees.
5. Promote TPM through motivational management.
TPM identifies the 16 types of waste (Muda) and then works systematically to
eliminate them by making improvements (Kaizen). TPM has 8 pillars of activity, each
being set to achieve a zero target. These pillars are:
1. Focused improvement (Kobetsu-Kaizen): for eliminating waste.
2. Autonomous maintenance (Jishu-Hozen): in autonomous maintenance, the
operator is the key player. It involves daily maintenance activities carried out by
the operators themselves that prevent the deterioration of the equipment.
3. Planned maintenance: for achieving zero breakdowns.
4. Education and training: for increasing productivity.
5. Early equipment/product management: to reduce waste occurring during the
implementation of a new machine or the production of a new product.
6. Quality maintenance (Hinshitsu-Hozen): This is actually maintenance for
quality. It includes the most effective quality tool of TPM: poka-yoke, which
aims to achieve zero loss by taking necessary measures to prevent loss.

7. Safety, hygiene, and environment: for achieving zero work-related accidents and 171
for protecting the environment.
8. Office TPM: for involvement of all parties to TPM since office processes can be
improved in a similar manner as well.
9. TPM Success Measurement: A set of performance metrics, which is considered
to fit well in a Lean/TPM environment, is Overall Equipment Effectiveness, or
OEE.
1. Process planning begins during the engineering design of the product.
2. Contracting out maintenance jobs is a fairly common practice in India.
3. The MRP process is initiated once the customer orders for the finished
goods from the supplier.
6.14 LET US SUM UP

In any manufacturing enterprise production is the driving force to which most other
functions react. This is particularly true with inventories; they exist because of the
needs of production. In this lesson the relationship of production planning and control
to work-in-process inventories is stressed. The ultimate objective of production
planning and control, like that of all other manufacturing controls, is to contribute to
the profits of the enterprise. As with inventory management and control, this is
accomplished by keeping the customers satisfied through the meeting of delivery
schedules. Specific objectives of production planning and control are to establish
routes and schedules for work that will ensure the optimum utilization of materials,
workers, and machines and to provide the means for ensuring the operation of the
plant in accordance with these plans.

Describe briefly the various strategies involved in an Aggregate Planning.
6.16 KEYWORDS
Material Requirement Planning: MRP is a system for planning the future
requirements of dependent demand items.
Master Production Schedule: MPS is an extension of the aggregate production plan.
It tells us the number of units of different models of a product to be manufactured on a
weekly or monthly basis.
Process Planning: Process Planning means fixing the process of manufacturing/
sequence of operations.
Dispatching: Dispatching concerns preparation and distribution of show orders and
manufacturing instructions to the concerned departments.

1. What are the functions of production planning and control?
2. Explain master production schedule.

172 3. Write short notes on:

(a) Material planning
(b) MRP process
(c) MRP systems
4. Describe capacity requirement planning.

CYP 1
5, 1, 3, 4, 2
CYP 2
1. Production Planning and Control is to set the realisation targets in terms
of Standard Output, measure the actual production performance against
the target set in advance and take remedial action as and when necessary.
2. Expediting means chasing intensively the bottle neck areas causing
delays/interruptions in carrying out smooth production and taking
appropriate actions from time to time and keeping the concerned
authorities well informed about the progress of planned targets.
CYP 3
1. True
2. False
3. True

1994
Education, 2002
McGraw Hill, 1996

173
LESSON ERP and MRP-II Overview
7
ERP AND MRP-II OVERVIEW
CONTENTS
7.1 Introduction
7.2 Introduction to ERP
7.3 Overview of ERP
7.4 What is ERP?
7.4.1 The Ideal ERP System
7.4.2 Implementation of an ERP System
7.5 Evolution of ERP
7.6 Reasons for Growth of ERP
7.7 Benefits of ERP
7.8 Failure of ERP Implementation
7.9 Integrated Data Model
7.10 Manufacturing Resource Planning (MRP II)
7.11 Let us Sum up
7.13 Keywords

Define ERP
Describe history of ERP
Explain growth reasons of ERP
Understand MRP-II
7.1 INTRODUCTION
ERP systems are now ubiquitous in large businesses and the current move by vendors
is to repackage them for Small to Medium Enterprises (SMEs). This migration has
many consequences that have to be addressed through understanding the history and
evolution of ERP systems and their current architectures. The advantages and
disadvantages of the ERP systems will impact their penetration in this new market.

174 The market position and general strategy of the major systems providers in
preparation for this push are described. The lesson concludes that the growth and
success of ERP adoption and development in the new millennium will depend on the
legacy ERP systems capability of extending to Customer Relationship Management
(CRM), Supply Chain Management (SCM) and other extended modules, and
integration with the Internet-enabled applications.
7.2 INTRODUCTION TO ERP

Today, Enterprise Resource Planning (ERP) systems have come to signify a
never-before opportunity for organisations to gain a clear edge over their competitors.
In order to compete and grow, many organisations in India either have already
implemented or are at the threshold of acquiring ERP systems.
ERP is a high-end sophisticated software solution that reduces the pressure and
workload of the managers and provides accurate, timely information for taking
appropriate business decisions.
Enterprise Resource Planning is the latest high end solution that information
technology has lent to business application.
Information technology has transformed the way we live in and the way we do
business. Since the last decade, IT has made a drastic change in our life. As compared
to earlier stage, when computer was used just as a typewriter, nowadays users have
become more intelligent and IT literate. Now the user knows that a PC can do many
more things rather then just typing a letter in a word processing software or making
balance sheets in Excel. They expect more things out of their PC. During this phase of
industry, every one of us must have heard the word ERP in one or the other form. It
may be in the title of any IT magazine or may be a point of discussion in any IT
Seminar or may be in an advertisement of big IT Company. Thus in any form, we all
have been through this word. In fact, ERP software consists of multiple software
modules that integrate activities across functional departments - from production
planning, parts purchasing, inventory control and product distribution to order
tracking. Most ERP software systems include application modules to support common
business activities like finance, accounting and human resources.
Figure 7.1: Planning for ERP

175
7.3 OVERVIEW OF ERP ERP and MRP-II Overview
ERP is much more than just a computer software. An ERP System includes ERP
Software, Business Processes, Users and Hardware that run the ERP software.
An ERP system is more than the sum of its parts or components. Those components
interact together to achieve a common goal - streamline and improve organizations
business processes. Most important factor for ERP system is the users. Successful
implementation of any ERP System depends more on intelligent users who are going
to use them, because any standard ERP Software would consist hundreds of input
information for any particular business activity. Thus good knowledge of each entity
of system by the users is the most important factor in ERP Software.
Figure 7.2: Functional Departments of ERP

Enterprise Resource Planning (ERP) is the evolution of Manufacturing Requirements
Planning (MRP) II in 1980s, which was mainly related to Manufacturing Industry and
was designed to control manufacturing process and planning the required production
with efficient output. MRP is the evolution of Inventory Management & Control
conceived in 1960s, which was mainly designed for management of Stocks in any
particular industry. ERP has expanded from coordination of manufacturing processes
to the integration of enterprise-wide backened processes like production planning and
scheduling of delivery. In terms of technology, ERP has evolved from legacy
implementation to more flexible tiered client-server architecture.
7.4 WHAT IS ERP?

It serves as a Cross-functional Enterprise Backbone that Integrates and Automates
many Internal Business Process and Information Systems covering all functional
areas.
The term ERP originally implied systems designed to plan the use of enterprise-wide
resources. Although the initialism ERP originated in the manufacturing environment,
todays use of the term ERP systems has a much broader scope. ERP systems typically
attempt to cover all basic functions of an organization, regardless of the organizations
business or charter. Businesses, non-profit organizations, non-governmental
organizations, governments, and other large entities utilize ERP systems.
To be considered an ERP system, a software package must provide the function of at
least two systems.
Example, A software package that provides both payroll and accounting functions
could technically be considered an ERP software package.

176
Figure 7.3: ERP

However, the term is typically reserved for larger, more broadly based applications.
The introduction of an ERP system to replace two or more independent applications
eliminates the need for external interfaces previously required between systems, and
provides additional benefits that range from standardization and lower maintenance
(one system instead of two or more) to easier and/or greater reporting capabilities
(as all data is typically kept in one database).
Figure 7.4: ERP Planning Process

Enterprise Resource Planning is a term originally derived from manufacturing
resource planning (MRP II) that followed material requirements planning (MRP).
MRP evolved into ERP when routings became a major part of the software
architecture and a companys capacity planning activity also became a part of the
standard software activity. ERP systems typically handle the manufacturing, logistics,
distribution, inventory, shipping, invoicing, and accounting for a company. Enterprise
Resource Planning or ERP software can aid in the control of many business activities,
like sales, marketing, delivery, billing, production, inventory management, quality
management, and human resource management.

177
ERP and MRP-II Overview
Figure 7.5: Current Business Scenario

ERP systems saw a large boost in sales in the 1990s as companies faced the Y2K
problem in their legacy systems. Many companies took this opportunity to replace
their legacy information systems with ERP systems. This rapid growth in sales was
followed by a slump in 1999, at which time most companies had already implemented
their Y2K solution.
7.4.1 The Ideal ERP System

An ideal ERP system is when a single database is utilized and contains all data for
various software modules. These software modules can include:
Manufacturing: Some of the functions include; engineering, capacity, workflow
management, quality control, bills of material, manufacturing process, etc.
Financials: Accounts payable, accounts receivable, fixed assets, general ledger and
cash management, etc.
Human Resources: Benefits, training, payroll, time and attendance, etc.
Supply Chain Management: Inventory, supply chain planning, supplier scheduling,
claim processing, order entry, purchasing, etc.
Projects: Costing, billing, activity management, time and expense, etc.
Customer Relationship Management: Sales and marketing, service, commissions,
customer contact, calls center support, etc.
Data Warehouse: Usually this is a module that can be accessed by an organizations
customers, suppliers and employees.
7.4.2 Implementation of an ERP System

Implementing an ERP system is not an easy task to achieve, in fact it takes lots of
planning, consulting and in most cases 3 months to 1 year +. ERP systems are
extraordinary wide in scope and for many larger organizations can be extremely
complex. Implementing an ERP system will ultimately require significant changes on
staff and work practices. While it may seem reasonable for an in house IT staff to head
the project, it is widely advised that ERP implementation consultants be used, due to

178 the fact that consultants are usually more cost effective and are specifically trained in
implementing these types of systems.
One of the most important traits that an organization should have when implementing
an ERP system is ownership of the project. Because so many changes take place and
its broad effect on almost every individual in the organization, it is important to make
sure that everyone is on board and will help make the project and using the new ERP
system a success.
Usually organizations use ERP vendors or consulting companies to implement their
customized ERP system. There are three types of professional services that are
provided when implementing an ERP system, they are Consulting, Customization and
Support.
Consulting Services: Usually consulting services are responsible for the initial stages
of ERP implementation, they help an organization go live with their new system, with
product training, workflow, improve ERP's use in the specific organization, etc.
Customization Services: Customization services work by extending the use of the new
ERP system or changing its use by creating customized interfaces and/or underlying
application code. While ERP systems are made for many core routines, there are still
some needs that need to be built or customized for an organization.
Support Services: Support services include both support and maintenance of ERP
systems. For instance, trouble shooting and assistance with ERP issues.
Fill in the blanks:
1. MRP-I stands for ..
2. ERP stands for ..
3. MRP-II stands for ..
7.5 EVOLUTION OF ERP

The evolution of ERP systems closely followed the spectacular developments in the
field of computer hardware and software systems. During the 1960s most
organizations designed, developed and implemented centralized computing systems,
mostly automating their inventory control systems using inventory control packages
(IC). These were legacy systems based on programming languages such as COBOL,
ALGOL and FORTRAN. Material Requirements Planning (MRP) systems were
developed in the 1970s which involved mainly planning the product or parts
requirements according to the master production schedule. Following this route new
software systems called manufacturing resources planning (MRP II) were introduced
in the 1980s with an emphasis on optimizing manufacturing processes by
synchronizing the materials with production requirements. MRP II included areas such
as shop floor and distribution management, project management, finance, human
resource and engineering. ERP systems first appeared in the late 1980s and the
beginning of the 1990s with the power of enterprise-wide inter-functional
coordination and integration. Based on the technological foundations of MRP and
MRP II, ERP systems integrate business processes including manufacturing,
distribution, accounting, financial, human resource management, project management,
inventory management, service and maintenance, and transportation, providing
accessibility, visibility and consistency across the enterprise.
During the 1990s ERP vendors added more modules and functions as add-ons to the
core modules giving birth to the extended ERPs. These ERP extensions include

Advanced Planning and Scheduling (APS), e-business solutions such as customer 179
relationship management (CRM) and supply chain management (SCM). Figure 7.6
summarizes the historical events related with ERP.
Figure 7.6: ERP Evolution
7.6 REASONS FOR GROWTH OF ERP

There are some reasons for the explosive growth of ERP market and ERP vendors.
Following are some tangible benefits of ERP which have participated in its rapid
growth.
1. Reduction of lead time
2. Cycle time cut
3. On time shipment
4. Increase of inventory
5. Doubled business
6. Eliminates limitations in legacy system (Century dating, inflexibility to change,
etc).
Apart from the above tangible benefits there are some intangible benefits that cause
the growth of ERP systems. They are:
1. Customer satisfaction
2. Increase flexibility
3. Better analysis and planning capabilities (decision making).
4. Reduce quality cost by implementing latest technology
5. Proper utility of resources
6. Improved information accuracy.
The latest technologies like client server architecture, open system technology
provides integration capabilities to entire enterprise system. It brings supplier and
customers together by ensuring smoother flow of information at all levels and parts of
organization. ERP helps to make the decision at the right time and by the right person
as entire organization shows the same information and views. This provides powerful
support to the decision making.
This provides powerful support to the decision making. The Customer is the ultimate
winner as he could get better product and quality along with better service at
affordable prices.

180
Operations Management 7.7 BENEFITS OF ERP
The ERP packages promise the seamless integration of all information flowing
through an organization; they are becoming the fastest growing softwares in the world.
The ERP vendors like SAP, Oracle, Baan, QAD, J.D. Edwards, Peoplesoft are in
demand for their packages. The main task of the ERP system is to deliver products to
the companies to manage their internal and external functions efficiently. There are
several other advantages of adopting the ERP system, few of them are as follows:
1. Improved Efficiency: This is achieved by reduction of cycle time, inventory
reduction, order fulfillment, improving support to supply chain, management, etc.
2. Business Integration: ERP packages are integrated. i.e. Exchange of data among
related business components is possible. In the large companies timing of system
constructions, directive differs for each product and department function.
3. Better Decision-making: The decision making procedure become easier because
of highly structured programmed process. These processes governs days to day
operations and produces reports in structured form, which are further used by top
management of organization to meet with its basic goals and objectives and to
monitor the whole organization.
4. Quick Response Time to Customers: The system is easy to operate so, that not
much computer skills are required to handle the operations. Because of its
comprehensive nature the system avoids unnecessary duplication and redundancy
in data gathering and storage. Thus the response time to customer is reduced.
5. Business Integration: ERP creates the common database across the organization
which is used by various departments within the organization. The ERP supports
the flow of information within department automatically. This business integration
capabilities makes it easy to group business details in real time and carry out
various types of management decision in time. The support systems like DSS can
use this common database. Thus information and the data are on the fingertip of
top level management.
6. Analysis and Planning Capabilities: Though different types of decisions support
systems and simulation function, ERP makes the analysis of data easier. The DSS
also supports the middle and top management for tactical and strategic planning.
7. Technology Support: Utilization of latest development in Information technology
is quickly adapted by the ERP packages. Distributed system, open system, client
server technology, internet, intranet, E-commerce, CALS (Computer aided
Acquisition and Logistic Support) are some examples of flexible environment
adopted by ERP. The ERP packages itself design in a way that they can
incorporate with latest technology even during the customization, maintenance
and expansion phases.
7.8 FAILURE OF ERP IMPLEMENTATION

When firms fail to allot sufficient investment for the Enterprise Resource Planning
software that they use, the approach can affect the functionalities and efficiency of
departments. In this regard, it is important that corporations create a policy that will
protect the files stored in the system to prevent experiencing the common problems
associated with ERP.
One of the disadvantages of Enterprise Resource Planning is that the use of software
that will manage the activities of a firm can affect the workflow, competitive
advantage, and employee morale. In addition, the implementation of this approach is

very expensive and very risky. Since the files, activities, and corporate reports are 181
centralized, there is a high possibility that some important and confidential files could
be lost.
While advantages usually outweigh disadvantages for most organizations
implementing an ERP system, here are some of the most common obstacles
experienced:
Usually many obstacles can be prevented if adequate investment is made and adequate
training is involved, however, success does depend on skills and the experience of the
workforce to quickly adapt to the new system.
Customization in many situations is limited
The need to reengineer business processes
ERP systems can be cost prohibitive to install and run
Technical support can be shoddy
ERP's may be too rigid for specific organizations that are either new or want to
move in a new direction in the near future.
7.9 INTEGRATED DATA MODEL

Enterprise Resource Planning (ERP) software helps integrate management, staff, and
equipment, combining all aspects of the business into one system in order to facilitate
every element of the manufacturing process. ERP groups traditional company and
management functions (such as accounting, Human Resources [HR], manufacturing
management, and Customer Relationship Management [CRM]) into a coherent whole.
Manufacturing management also includes inventory, purchasing, and quality and sales
management.
This is very common in the retail sector, where even a mid-sized retailer will have a
discrete Point-of-Sale (POS) product and financials application, then a series of
specialized applications to handle business requirements such as warehouse
management, staff rostering, merchandising and logistics.
Ideally, ERP delivers a single database that contains all data for the software modules,
which would include:
Manufacturing: Engineering, Bills of Material, Scheduling, Capacity, Workflow
Management, Quality Control, Cost Management, Manufacturing Process,
Manufacturing Projects, Manufacturing Flow.
Supply Chain Management: Order to cash, Inventory, Order Entry, Purchasing,
Product Configuration, Supply Chain Planning, Supplier Scheduling, Inspection
of goods, Claim Processing, Commission Calculation.
Financial: General Ledger, Cash Management, Accounts Payable, Accounts
Receivable, Fixed Assets.
Projects: Costing, Billing, Time and Expense, Activity Management.
Human Resources: Human Resources, Payroll, Training, Time & Attendance,
Rostering, Benefits.
Customer Relationship Management: Sales and Marketing, Commissions,
Service, Customer Contact and Call Center support.
Data Warehouse: Various Self-Service interfaces for Customers, Suppliers, and
Employees.

182 Access Control: User privilege as per authority levels for process execution.
Customization: To meet the extension, addition, change in process flow.
To implement ERP systems, companies often seek the help of an ERP vendor or of
third-party consulting companies. These firms typically provide three areas of
professional services: consulting, customization and support. The client organisation
may also employ independent program management, business analysis, change
management and UAT specialists to ensure their business requirements remain a
priority during implementation.
Data migration is one of the most important activities in determining the success of an
ERP implementation. Since many decisions must be made before migration, a
significant amount of planning must occur. Unfortunately, data migration is the last
activity before the production phase of an ERP implementation, and therefore receives
minimal attention due to time constraints. The following are the steps of a data
migration strategy that can help with the success of an ERP implementation:
Identifying the data to be migrated
Determining the timing of data migration
Generating the data templates
Freezing the tools for data migration
Deciding on migration related setups
Deciding on data archiving
Making the Right Choice

Single-instance ERP is not for everybody. Here are the key characteristics of
companies that tend to choose global ERP and of those that use regional systems.
Global ERP
Multinationals seeking to centralise financial reporting and close their monthly or
quarterly financials faster.
Companies looking to minimise the variety of financial controls in place to
simplify regulatory compliance activities.
Corporations that stand to gain operational efficiencies by centralising
management and control of operational procedures, such as order management,
materials handling and inventory control.
Organisations seeking to maintain common business processes across various
divisions and geographies.
Corporations that are highly distributed or operate as collections of regional
businesses.
Companies that need customised systems to meet unique business requirements in
particular markets.
Multinationals subject to various local rules and regulations that require reporting
of financials or operational data in formats different from those used by the rest of
the company.
Far-flung companies whose regional units may be subject to infrastructure
instability, making it difficult to maintain consistent high-speed connections to a
host system located across the world.

183
Figure 7.7: Procurement Cycle

Companies that consolidate to a single global ERP system face many human and
technical challenges, including these:
Managing change, including standardising business processes
Communicating project goals to constituents from different cultures
Gaining business unit buy-in
Achieving data integrity
Retiring dozens or even hundreds of discrete systems
Meeting regional legal and regulatory requirements
Achieving high system availability through high-bandwidth connections
Maintaining business as usual during the transition
Providing consistent global technical support.
7.10 MANUFACTURING RESOURCE PLANNING (MRP II)

Manufacturing Resource Planning (MRP II) is defined by APICS as a method for the
effective planning of all resources of a manufacturing company. Ideally, it addresses
operational planning in units, financial planning in dollars, and has a simulation
capability to answer "what-if" questions and extension of closed-loop MRP.
Manufacturing Resource Planning (or MRP 2) - Around 1980, over-frequent changes
in sales forecasts, entailing continual readjustments in production, as well as the
unsuitability of the parameters fixed by the system, led MRP (Material Requirement
Planning) to evolve into a new concept : Manufacturing Resource Planning
(e.g. MRP 2)
MRP II is not a proprietary software system and can thus take many forms. It is almost
impossible to visualize an MRP II system that does not use a computer, but an MRP II
system can be based on either purchasedlicensed or in-house software.

184 Almost every MRP II system is modular in construction. Characteristic basic modules
in an MRP II system are:
Master Production Schedule (MPS)
Item Master Data (Technical Data)
Bill of materials (BOM) (Technical Data)
Production Resources Data (Manufacturing Technical Data)
Inventories and Orders (Inventory Control)
Purchasing Management
Material Requirements Planning (MRP)
Shop Floor Control (SFC)
Capacity planning or Capacity Requirements Planning (CRP)
Standard Costing (Cost Control)
Cost Reporting/Management (Cost Control)
Benefits of MRP II
MRP II systems can provide:
Better control of inventories
Improved scheduling
Productive relationships with suppliers
For Design/Engineering:
Improved design control
Better quality and quality control
For Financial and Costing:
Reduced working capital for inventory
Improved cash flow through quicker deliveries
Accurate inventory records
Timely and valid cost and profitability information.
MRP II systems have been implemented in most manufacturing industries. Some
industries need specialised functions e.g. lot traceability in regulated manufacturing
such as pharmaceuticals or food. Other industries can afford to disregard facilities
required by others e.g. the tableware industry has few starting materials mainly
clay and does not need complex materials planning. Capacity planning is the key to
success in this as in many industries, and it is in those that MRP II is less appropriate.
Fill in the blanks:
1. creates the common database across the organization
which is used by various departments within the organization.
2. Data migration is one of the most important activities in determining the
success of an .

185
7.11 LET US SUM UP ERP and MRP-II Overview
ERP is the abbreviation of Enterprise Resource Planning and means, the techniques
and concepts for integrated management of businesses as a whole from the viewpoint
of the effective use of management resources to improve the efficiency of enterprise
management. ERP provides the backbone for an enterprise-wide information system.
At the core of this enterprise software is a central database which draws data from and
feeds data into modular applications that operate on a common computing platform,
thus standardizing business processes and data definitions into a unified environment.
With an ERP system, data needs to be entered only once. The system provides
consistency and visibility or transparency across the entire enterprise. A primary
benefit of ERP is easier access to reliable, integrated information. A related benefit is
the elimination of redundant data and the rationalization of processes, which result in
substantial cost savings.

Discuss the effect of ERP in Supply chain management and Customer relationship
management.
7.13 KEYWORDS
Enterprise Resource Planning: Enterprise applications used to manage information
about organizational resources such as raw materials, products, staff and customers as
part of delivery of a product or service.
Customer Relationship Management (CRM): An approach to building and sustaining
long-term business with customers.
Information System: A collection of hardware, software, data, and people designed to
collect, process, and distribute data throughout an organization.

1. What are the advantages of ERP?
2. How business integration achieved by ERP system?
3. Discuss the evolution of ERP.
4. Describe the reasons of growth of ERP market.
5. Explain the importance of ERP in Modern Business Organization.
6. State the significance of Integrated Management Systems.
7. Describe the reasons for the growth of ERP.
8. What are the obstacles of applying IT, ERP Market?
9. ERP originally implied systems designed to plan the use of enterprise-wide
resources. Explain.
10. Describe business modeling process in detail.

186 Check Your Progress: Model Answers

CYP 1
1. Material Requirement Planning
2. Enterprise Resource Planning
3. Manufacturing Resource Planning
CYP 2
1. ERP
2. ERP implementation

Pankaj Sharma, Enterprise Resource Planning, APH Publishing Corporation,
New Delhi, 2004.
Hanson, J.J., "Successful ERP Implementations Go Far Beyond Software.", San Diego
Business Journal (5 July 2004).
Olinger, Charles, "The Issues Behind ERP Acceptance and Implementation." APICS:
The Performance Advantage
Millman, Gregory J., "What Did You Get from ERP and What Can You Get?",
Financial Executive (May 2004).
Ellen Monk, Bret Wagner, Concepts in Enterprise Resource Planning, Course
Technology, Second Edition, 2005
Daniel E. OLeary ERP Systems: Systems, Life Cycle, E-commerce, and Risk,
Cambridge University Press, 2000.
Murrell G. Shields, E-Business and ERP: Rapid Implementation and Project
Planning, Wiley, 2001.
Alexis Leon, ERP Demystified 2/E, Tata McGraw-Hill, New Delhi
Bhatnagar, S.C. and K.V. Ramani, Computers and Information Management, Prentice
Hall of India Private Ltd, New Delhi, 1991.

187
Introduction to
Materials Management
UNIT IV

188

189
LESSON Introduction to
8
INTRODUCTION TO MATERIALS MANAGEMENT
CONTENTS
8.1 Introduction
8.2 Materials Management
8.3 Role of Materials Management in a Business
8.4 Objectives of Materials Management
8.5 Functions of Materials Management
8.5.1 Material Requirement Planning
8.5.2 Buying or Purchasing
8.5.3 Logistics Transportation and Warehousing
8.6 Evolution of Materials Management
8.7 Importance of Materials Management
8.7.1 Expenditure on Materials Management
8.7.2 Profit Impact of Materials Management
8.8 Integrated Materials Management
8.9 Material Planning
8.9.1 Factors affecting Material Planning
8.9.2 Material Planning Process
8.10 Budgeting
8.10.1 Strategy, Planning and Budgeting
8.10.2 The Budget Period
8.10.3 Programme Budget and Responsibility Budget
8.10.4 Organization for Budgeting
8.10.5 The Budget Base
8.10.6 Production Budget
8.10.7 Materials and Purchases Budgets
8.11 Introduction to Value Analysis
8.11.1 The Value Analysis Method
8.11.2 Value Analysis Process
8.12 Purchase Functions and Procedures
8.13 Let us Sum up
Contd

190 8.15 Keywords


Define materials management
Describe roles of materials management in a business
Explain objectives and functions of materials management
Describe importance of materials management.
8.1 INTRODUCTION
Materials management is an essential business function. It is concerned with planning,
acquisition and flow of materials within the supply chain. Material is one of the four
basic resources (labour, material, equipment and capital) of any industrial or business
activity. For a long time, it was regarded as a routine function with less importance.
But over the years, with accelerating economic, technological, societal and
environmental changes, this function has become more important, more complex, and
more professional.
Materials management creates a competitive edge by delivering quality product(s) or
service on time and offering lower cost by cutting its own cost as well as cutting
purchased item costs, which account for over fifty per cent of the sales revenue, thus
imparting superior value.
However, it is complex as it confronts various issues including outsourcing, global
sourcing, size of supply base, shorter Lead time, smaller lot size, price determination,
mode/carrier selection, maintaining long-term relationship with suppliers, choosing
the right type of information technology, legal issues, etc.
It has evolved out of common sense or rule of thumb approach. It has organized
principles and a wealth of knowledge in the form of tools, techniques, models,
heuristics, systems and procedures, methodology and a huge database and is being
studied and the undergraduate, postgraduate and doctoral level in colleges/universities
and is practiced extensively in industry. Today, it finds an important place in an
organizations hierarchy and is manned by highly qualified professionals.
8.2 MATERIALS MANAGEMENT

The inbound system in the logistics function has been traditionally named as Materials
Management. When viewed as a business function, it is the management of materials
and their flow to, within, and from the firm. The Association for Operations
Management (APICS) dictionary defines Materials Management as:
The grouping of management functions supporting the complete cycle of material
flow, from the purchase and internal control of production materials to the planning
and control of work in process to the warehousing, shipping, and distribution of the
finished product.

For our purposes, the materials function is an integrated approach to planning, 191
Introduction to
acquisition, conversion, flow, and distribution of materials. The paramount objective, Materials Management
of this function, is to reduce materials costs - more precisely, to reduce the total costs
associated with the acquisition and management of materials.
The materials function is a functional area composed of a number of sub-functions.
The sub-functions associated with it include:
Procurement: Total cost of ownership, the right time, in the right place;
Make or Buy: What to buy from who;
Material Planning: Product Line Specific Planning, Facility Location, Network
Design;
Inventory Management: How much to stock where, Trigger points,
Replenishment;
Stores and Warehousing: Storage layout, Order Processing, Receiving, Break
bulk, Pick Pack and Ship, What to stock and where; and
Materials Handling: How to move product, Packaging, Containerization.
8.3 ROLE OF MATERIALS MANAGEMENT IN A

BUSINESS
The different roles of materials management can be viewed from three perspectives as
discussed below:
As a basic function of the firm: Materials management is one of the following six
functions performed by any firm:
Design: Converts concept into specification
Finance: Acquires and controls capital
Personnel: Manages human resources
Materials: Planning, acquisition and logistics of materials, service and
equipment
Production: Converts materials into goods and services
Marketing: Distributes goods and services to buyers
The contents, supervision and importance of materials management differ from
industry to industry.
As a manager of outside manufacturing: The parts that go into making of end
products can come from two sources: in-house production or purchase from
outside. Earlier, firms themselves produced most parts that they needed for
assembly of end products. Gradually firms started identifying, cultivating and
exploiting their core competencies doing the things they knew how to do the
best and outsourcing the rest. This marked a significant increase in the
percentage of purchased parts.
Materials manager is answerable for purchase of items manufactured outside just
as production manager is answerable for parts produced in-house. Hence,
materials manager is rightly called manager of outside manufacturing.
As a controller of cost: Major costs related with material include Ordering or
set-up costs, carrying costs, logistics costs (transportation and warehousing) and
shortages or surpluses costs, besides the cost of purchased items. Historically

192 these costs were not accounted separately and were generally included in
overheads. As such, their impact was not felt. But now their combined
contribution is measured, which is quite significant and provides good scope for
cutting cost.
8.4 OBJECTIVES OF MATERIALS MANAGEMENT

The broad objectives of materials management can be stated as:
Maintaining continuity of supply: Earlier this was achieved through multiple
sourcing and keeping high levels of stock. Now it is achieved through a better
understanding of the environment, greater insight of the purchase portfolio and a
smaller number of carefully selected and nurtured suppliers.
Contribution to cost reduction: This is important on two counts firstly,
purchase share is large and secondly, its impact on the bottom line is direct. Life
cycle costing (quality, reliability and service elements), value engineering,
purchasing tools, Inventory control models etc. help to achieve this objective.
Innovation in product/process: This can be achieved by involving purchase at the
research/design stage and associating supplier in the team.
8.5 FUNCTIONS OF MATERIALS MANAGEMENT

Broadly speaking, there are three functions of materials management. Each of them is
discussed below.
Material requirement planning
Buying or Purchasing
Logistics Transportation and Warehousing
8.5.1 Material Requirement Planning

Based on the production schedule of end items, materials requirement planning
determines how much of sub-assemblies, parts and raw materials are needed and how
to buy them. To do so, a large number of Inventory models are available which try to
minimize the total cost comprising all Relevant Costs and associated Uncertainty.
Depending upon organizations need/situation, a suitable model can be selected.
8.5.2 Buying or Purchasing

Purchasing is done to facilitate resale (trading) and consumption or conversion.
Buyers of materials for consumption or conversion (also referred to as industrial
buyers) include buyers for manufacturing firms, service business, institutions (schools,
hospitals), government agencies, etc.
Industrial buying differs from buying for trading in many ways; Material requirement
planning, procurement process and logistics (warehousing and transportation) are far
more complex, dynamic and challenging in case of industrial buying. This book is
primarily concerned with industrial buying.
Purchasing can broadly be classified into two categories Cash purchase and
purchase by tender. In case of Cash purchase, a designated team visits local suppliers,
picks up whatever is required and pays for it either in cash or by cheque. Such kind of
purchase is usually resorted to in case of low value, emergency and non-standard
items.

In case of purchase by tenders, tenders or bids are invited from prospective suppliers. 193
Introduction to
Bids are opened and analyzed and the lowest or otherwise best bid is selected and Materials Management
purchase order is placed. In some cases, buyers go for Negotiation with short-listed
suppliers.
Purchasing process has several phases including:
Purchase requisition
Selection of suppliers
Ordering: pricing, terms and conditions and placement of purchase order
Follow-up
Receipt and inspection
Maintain records
Supplier Management supplier relations, evaluation and development
8.5.3 Logistics Transportation and Warehousing

Logistics is concerned with the management of warehousing (receiving, storing and
issue of materials) and flow (transportation) of materials, service and information in a
supply chain with a view to enhance the products value.
There are primarily five modes of transportation including motor, rail, air, water and
pipelines. Besides these, we have inter-modal combinations and third party logistics.
There are a large number of carriers associated with each of the modes. The selection
of mode/carrier is a complex decision problem. It is faced with multiple and
conflicting objectives, information non-availability, presence of a large number of
alternatives, etc.
Warehousing includes receipt of materials, physical identification of materials,
physical control of stored materials, physical verification of Inventory, Valuation of
Stock, and issue.
Since costs associated with logistics are significant, its management has become
important.
8.6 EVOLUTION OF MATERIALS MANAGEMENT

The evolution of materials management can be grouped in three separate periods:
early part of the twentieth century, major part of the twentieth century and towards the
end of twentieth century.
During the early part of the twentieth century, the function of materials management
was largely reactive and clerical. Its contribution to Profit was not perceived as
significant and management did not attach much importance to it.
In the second period, two important developments took place. After the Second World
War, demand for consumer goods increased greatly. This created a shortage of raw
materials. Leading to innovative concepts like substitution of materials and value
engineering. Then the oil crisis of the 1970s occurred. Petroleum products and their
derivatives became scarce. There was sharp rise in the cost of raw material and this
led to the increase in cost of Inventory.
Purchase managers were forced to adopt innovative and proactive measures such as
looking for new sources of supply, finding substitute products, applying value analysis
in purchased products, specification change that allowed use of less costly and scarce
materials, use of scientific methods of Inventory control policies, partnerships,

194 involving carefully chosen suppliers at an early stage in design and development, and
increasing integration of information system.
All of the above actions allowed purchasing to fulfill its role as an expense controller
for the organization and helped to increase regard for the purchasing department as a
contributor to Profit.
Towards the end of the twentieth century firms believed in purchasing fewer items.
Generally, they were purchasing raw materials and converting these into end products.
Even functions like education, hospitals, and townships were managed in-house. Then
the concept of core competency and a number of competent suppliers emerged.
Consequently, the concept of outsourcing emerged and firms tried to outsource items
which did not fall under their core competency.
Responsibility of outsourcing fell on the purchasing manager. This responsibility is on
the rise, making materials managers role a very important one. Table 8.1 presents the
evolution of materials management in brief.
Table 8.1: Evolution of Materials Management
Period Nature of Purchase Management Perception

Early part of Clerical A function
twentieth century
Reactive
Most part of Expense control Increased regard for
twentieth century Purchase
Reduce price
New source of supply
Finding substitutes of products
Specification change resulting in
less costly material
Regulating ordering/delivery to
have low inventory
Proactive
Towards end of Manager of outside manufacturing Greater importance
twentieth century
Paradigm shift in coping with
uncertainties in place of information
technology is used
Supply chain
8.7 IMPORTANCE OF MATERIALS MANAGEMENT

Today, materials management is viewed as an important function in any organization.
This realization has come from the increasing expenditure on materials management
and its impact on Profit.

8.7.1 Expenditure on Materials Management 195

Introduction to
Figure 8.1: Percentage distribution of the sales dollar for the average
US manufacturing concern in 1991
Over half of the income received from sales of manufactured products is spent on
the purchase of materials, services and equipment needed to produce these goods.
Figure 8.1, which shows the percentage distribution of sales revenue for the average
US manufacturing firms, supports this. This fact also highlights that materials
management function is a key area for cost reduction and innovation resulting in
increased Profit.
8.7.2 Profit Impact of Materials Management

Savings from materials management affect the bottom line directly. Each rupee saved
adds an extra rupee to corporate Profit. On the other hand, a sales person has to sell
goods worth x, which is equal to 1/Profit margin, to get a Profit of 1. The factor, x
is termed as purchase multiplier. In another words, purchase multiplier gives the
equivalent sales volume for every rupee saved in purchasing and is measured as:
1
Purchase multiplier =
Profit Margin
Fill in the blanks:
1. . is done to facilitate resale (trading) and consumption
or conversion.
2. The is a functional area composed of a number of
sub-functions.

196
Operations Management 8.8 INTEGRATED MATERIALS MANAGEMENT
For running any industry or business, we need a number of resources. These resources
are popularly known as 5 M's of any Industrial activity i.e.
Men
Machines
Materials
Money
Management.
All these resources which are basic inputs, are important but their relative importance
depends upon the particular type of industry and also other environmental factors.
Earlier, when many modern machines were not even known, whole activity was
around men.
But now the importance has shifted from men to machines and in the present
environment materials are the life blood of any industry or business and for their
proper running, materials should be available at proper time in proper quantity at
proper place.
Traditionally, various activities related to managing materials were looked after by
various departments. While purchases were generally arranged by top management
with the assistance of a Purchase Agent or Purchase Officer, store keeping and stock
control was the responsibility of the production head with the assistance of a store
keeper or Stores Officer. Apart from these two main activities, distribution of
materials (mostly finished goods) was the responsibility of marketing.
After realizing the profitability potential of Materials Management function, when
attempts were made to exploit this potential, it was realized that there were many
problems in achieving the objectives due to inherent conflicts amongst various
departmental objectives. When a purchasing personnel wants to purchase in bulk to
get price discounts, inventory of the stores personnel becomes high. Similarly desire
of marketing personnel to have adequate stocks of finished goods in order not to loose
any opportunity of sale resorts in high inventory.
In the traditional set up one person could not be held responsible for all the functions
of materials management to achieve overall economy. Therefore necessity of placing
all the functions related to materials management e.g. purchasing, stocking, inventory
control and distribution under one department headed by an executive of status at par
with other departmental heads, was felt.
Thus evolved the concept of integrated materials management which can be defined as
the function which is responsible for the coordination of planning, selecting sources,
purchasing, moving, storing and controlling materials in an optimum manner so as to
provide a pre-decided service to the customer at a minimum cost.
8.9 MATERIAL PLANNING

Material planning is a scientific technique of determining in advance the requirements
of raw materials, ancillary parts and components, spares, etc. as dictated by the
production programme. As a matter of fact, overall management planning and control
system is a broad perspective within which materials planning functions, and materials
functioning, control and execution.

The basis of materials planning is generally production-plan based on demand 197

Introduction to
forecasts for finished goods. Requirements of various items of materials are arrived at Materials Management
by exploding a master production schedule for a planning period through time
horizon. Explosion chart is documented through Bills of Materials in a matrix form
and grouped together for various materials. This becomes the basis of the materials
plan for firm requirements. Materials budget becomes the tool of control, and within
its framework money is made available for purchase and procurement of materials.
Generally, quarter of an year may be taken for planning period, but as the time horizon
extends, forecast reliability becomes increasingly less accurate owing to the fact that
the material planner will always find some materials in short supply, or in over supply
and he will rectify and adjust accordingly. Ordering is done on this basis with the
suppliers on firm commitments and delivery schedules are arranged on a time need
basis.
But the general constraints are import policy of the government, foreign exchange
components of the production requirements, credit availability, etc., on which
non-programmed decisions have to be taken. Working out delivery schedules, making
money available in time, etc. are programmed decisions which call for strict adherence
to plans. But no materials planner can afford to feel complacent about his job and
ignore these constraints within which he has to operate. Therefore, some flexibility
will always be necessary for effective and reliable materials planning. The following
points may have to be taken into consideration:
In working out the materials plan, anticipated longest lead-times must be taken
into account.
Operating environment within which the organization works must be very
carefully analyzed to allowed for errors or fluctuations in demand forecasts and/or
effect of seasonal variations in the trend of demand.
When planning horizon extends beyond one year, materials planning becomes
unrealistic because of many uncontrollable variations which may enter into the
planning process.
Without a computerized planning and information system, working out new or
revised materials estimates, scheduling of delivery owing to sudden change or
fluctuations in demand and consequent change in the production plan, becomes all
the more difficult.
For many engineering industries it is possible to project sales forecasts accurately
which bear close relationship to actual sales. For them, production programmes are
planned to match sales forecasts. Therefore, large quantities of materials and
components are ordered in advance months before the actual production. When
purchases involve longer lead-times for short-run seasonal products, marketable sales
volume is controlled by materials and components availability. In this way,
forecasting of sales and scheduling of deliveries meet production needs. This
minimizes inventory carrying costs. The factors that are to be critically judged are
projection of sales forecasts accurately, and scheduling of deliveries in a very tight
fashion. The relationship between materials planning, and sales forecasts and actual
sales and production programmes is given in Figure 8.2. This technique is also
applicable in many fabrication, job-shop and special order manufacturing industries.
However, be it a job-shop or mass-production line, the fixing of manufacturing run
lengths and purchase quantities and delivery schedules are studied at length with the
objective of keeping inventory carrying cost at the minimum.

198
Figure 8.2: Relationship of Materials Planning, Production Programmes and Sales

In any integrated Materials Management environment, planning for getting the
materials is the starting point for the whole MM function. Materials planning sets the
procurement function and the subsequent material functions rolling.
Material planning is a scientific way of determining the requirements starting with raw
materials, consumables, spare parts and all other materials that are required to meet
the given production plan for a certain period. Material planning is derived from the
over all organisational planning and hence it is always a sub-plan of the broad
organisational plan. What it does is forecasting and initiating for procurement of
materials.
8.9.1 Factors affecting Material Planning

Macro Factors: Global factors such as price trends, business cycles,
government's import and export policies etc are called the macro factors. Credit
policy of the government is a critical factor as banks follow these guidelines only
while extending financial support to a business entity.
Micro Factors: These are essentially the factors existing within the organisation
such as corporate policy on inventory holding, production plan, investments, etc.
For any organisation, factors such as Lead time of procurement, acceptable
inventory levels, working capital, seasonality, delegation of power are micro
factors.
8.9.2 Material Planning Process

The manufacturing industry has seen tremendous growth in the last few years across
the globe and will be growing at an astonishing rate in future too. The industry which
was once "supplier driven" has now become "customer driven". The lead times have
shrunk. The lot sizes have been reduced. The competition has grown tremendously.
Now, the customer has more "options" to buy a given product. This means more
pressure on "new product development and introduction" to the market.
How does a manufacturer compete in today's world? It is not just survival, but it is
growth-oriented planning and execution systems that are essential for any enterprise to
excel in the current business scenario. When you look at a product which has more
than 60% of the total cost as a material component, if we can control the material cost,
we can make a BIG difference to the bottom line of the organization.

Let us look at how, traditionally, material planning has been carried out. Materials 199
Introduction to
department (Inventory) and Purchase department are the two functions which had the Materials Management
onus on controlling cost. Material department maintains the inventory, receipts, issues
and plans for any new requirement based on "Re-Order Point", "Min-Max" and
various other methods.
In most of these methods, the experience of the individual is given a higher
importance. The quantity was decided by "average consumption" during a given
period. So the key requirement of this department is to keep as much as possible "low
stock/inventory". The Purchase department on the other hand has to procure the
material at the lowest price to reduce the material cost. Unit cost is low when volumes
increase. The tendency is to order for higher volumes to reduce cost. If we observe
carefully, this objective contradicts the Materials department objective. In the process,
there is no real gain in the material cost reduction program. Generally this tendency
leads to excess unwanted material and shortage of the most needed material.
8.10 BUDGETING
A budget is a quantitative expression of plans. It is commonly used by business firms,
governmental agencies, non-profit institutions, and even households. While there is
considerable variation in the scope, degree of formality, and level of sophistication
applied to budgeting, most of the well-managed business firms use a budget which is a
comprehensive and coordinated plan for the operations and resources of the firm. Such
a budget is developed by a formal and intricate process.
How are budgets useful? Budgets provide several benefits in that they:
induce managements to think systematically about the future
serve as a device for coordinating the complex operations of the business
provide a medium for communicating the plans of the firm
motivate managers at all levels to perform well
serve as a standard against which the actual performance may be judged
8.10.1 Strategy, Planning and Budgeting

The exercise of periodic budgeting is based on the framework of corporate strategy
and long-range plan. The corporate strategy of the firm reflects its basic objectives and
the fundamental policies for realising these objectives. The long-range plan of the
firm founded on its corporate strategy delineates its major programmes in
various areas (production, marketing, finance, research and development, personnel,
etc.), expected revenues and expenses, and projected financial condition over the next
few years.
When the corporate strategy and long-range plan are not explicitly articulated, the top
management may specify certain broad guidelines at the time of budget preparation.
Such guidelines would reflect the corporate strategy and long-range plan followed
implicitly by the top management. A simple guideline may be: "Assume that volume
would increase by 5 per cent and prices and costs would increase by 10 per cent next
year." A more elaborate set of guidelines may cover a variety of things: projected
general economic conditions, expected scale of operations and product mix, likely
price and cost levels, anticipated productivity improvements and manpower levels,
planned capital expenditures, allowable levels of discretionary expenditures, expected
tax burden, proposed dividend disbursement, proposed financing arrangements, and
other such elements.

200 8.10.2 The Budget Period

In order to be operationally meaningful, the budget must be drawn up for a specific
time period. Usually, the budget is drawn up for a year. The yearly budget may be
divided into quarterly budgets or even monthly budgets. Generally, the budget period
is divided into two parts with differing levels of detail applying to them. For example,
the budget for the first quarter or first six months may be drawn up on a monthly basis
and for the remaining period on a quarterly basis. As the period for which the budget
is drawn up on a quarterly basis approaches, the quarterly budgets may then be cast in
terms of monthly budgets.
Some firms employ a rolling budget. Under this system, at the end of each quarter or
each half year, the budget is extended by adding another quarter or another half year.
Hence the firm always has the budget for a year ahead of it. To illustrate, the budget
system for a hypothetical company may be described: Exotica Limited finalises by
December 15, 1990, the budget for the year 1991 drawn up on a quarterly basis. Come
March 15, 1991, it drops the first quarter of 1991 (the quarter about to be completed)
and includes the first quarter of 1992 in its budget. At that time, of course, the budget
estimates of the remaining three quarter of 1991 are revised and updated.
8.10.3 Programme Budget and Responsibility Budget

The operating budget of the firm may be constructed in terns of programmes
(programme budget) or responsibility areas (responsibility budget).
The programme budget is developed in terms of products that are regarded as the
principal programmes of the business. Such a budget shows the expected revenues and
costs of various products. Of course, the budgets for various products are
supplemented by budgets for inventory levels, purchases of materials, manpower
levels, and several other things. The programme budget shows the relative profitability
of various product lines, suggests areas where efforts may be required to enhance
revenues and reduce costs. It also points toward certain imbalances and inadequacies
in the programmes of the firm that require corrective action.
The responsibility budget shows the plan in terms of persons responsible for achieving
them. To illustrate, the factory may be divided into several departments (responsibility
centres) and a budget is drawn up for each department showing what costs are
amenable to control by the departmental supervisor (who is the head of the
responsibility centre). This is different from the way the programme budget (which
shows the budgeted cost for each product, including direct and allocated costs) is
drawn up. Of course, the total factor costs derived from these two types of budget
would be the same.
8.10.4 Organization for Budgeting

Though there seems to be no standardised organisation for budget preparation, in most
of the large firms which develop formal budgets, a basic pattern exists. There is a
budget committee and a budget director which guide and monitor the process of
budgeting. In this, understandably, the line executives have a significant involvement.
Consisting of several top management executives, the budget committee (i) sets broad
guidelines for budgeting, (ii) coordinates the separate budgets prepared by different
departments, (iii) reconciles inconsistencies among various departmental budgets,
(iv) compiles the budget in its final form, and (v) sends the budget for the approval of
the chief executive and the board of directors.
The budget director, working in liaison with the budget committee, heads a staff unit
which helps the line organization in preparing the budget. Usually, he issues

instructions on how the budgets have to be prepared, provides past data useful for 201
Introduction to
estimation purposes, offers aid in computing various budget figures, persuades people Materials Management
to submit their budgets on time, and assembles the budgets prepared by the line
organization. It should be emphasised that the budget director is responsible mainly
for the mechanics of budget preparation, not the substance of budgets themselves. The
line organization provides, by its decisions and judgements, this content. Commenting
on this, Robert Anthony says: "The budget organization is like a telephone company,
operating an important communication system; it is responsible for the speed,
accuracy, and clarity with which messages flow through the system, but not the
content of the messages themselves".
8.10.5 The Budget Base

What is the base or starting point for preparing the budget? A commonly used base is
the level of operations in the current year. Using this, the expected and planned
changes in the forthcoming year are identified for purposes of developing the budget
for that year. Under this approach, referred to as the incremental approach to
budgeting, the focus of budgeting is on the increments in operations during the budget
period. This approach can be quite appropriate in some cases. The sales budget for a
product sold exclusively to the government or the salary budget of the corporate head
office can be developed in this manner. The incremental approach to budgeting,
however, suffers from one major limitation: it tends to perpetuate past follies and
inefficiencies. A sales budget developed according to the incremental approach might
overlook opportunities to penetrate different market areas; an expense budget prepared
in this way could tend to gloss over wasteful elements.
To overcome the shortcomings of the incremental approach, an alternative has been
proposed known as the zero-base approach to budgeting. It was pioneered by the
Texas Instruments Company in the USA.
The basic feature of a zero-base budget is that while preparing their budgets, the
departments should not take anything for granted and start, as it were, on a clean slate.
The budget making for the ensuing year should be started from ground zero instead of
treating the current budget as the base or the starting point. The concept of zero-base
budgeting implies that all activities of the organization should be viewed afresh.
Priorities among competing claims for allocation of funds are to be settled on the basis
of some evaluation technique such as cost-benefit analysis. The zero-base sales
budget, for example, would be developed by examining all possible markets for the
product rather than considering incremental changes over current sales operations.
Similarly, a zero-base budget for manufacturing costs would be based on a careful
assessment of operational requirements and not determined by using a "present cost
plus something" formula.
The steps involved in zero-base budgeting are:
Identification of decision units
Describing each decision unit in terms of decision packages
Evaluating and ranking all decision packages by using the analytical technique of
cost-benefit analysis
Developing the budget requests by ranking decision packages on the basis of their
relative projected performance. Resources are allocated to activities or decision
packages by utilising hierarchical funding cut-off levels.
The zero-base approach obviously requires more effort and time. Further, it is likely to
be opposed by heads of responsibility centres. They may not favour the searching
scrutiny of every item in the budget every year. In view of these problems associated

202 with this approach, a compromise solution may be worked out. The zero-base review
can be done once every four (or five) years and the incremental approach applied in
the intervening years.
8.10.6 Production Budget

In a manufacturing organization, the budget of production is one of the important parts
of the operating budget. A well-balanced production plan is required to ensure
economical manufacturing. The factors that influence the plan of production are:
(i) the volume and timing of sales budget, (ii) inventory policy, and (iii) productive
capacity.
The production plan is geared to meet the requirements of sales. Goods flow from the
production line largely in conformity with the needs of sales. There may, however, be
significant divergence between the pattern of sales and the pattern of production. This
happens under two conditions: (i) there is a pronounced seasonal variation in sales
whereas production is planned in a stable manner; (ii) production necessarily has to be
carried out during a certain period of the year, whereas sales occur round the year
though there may be some seasonal variation.
The steps involved in preparing the production budget are broadly as follows:
Assess the productive capacity of the firm.
Specify the finished goods inventory policy of the firm.
Estimate the total quantity of each product to be manufactured during the budget
period on the basis of sales forecast and finished goods inventory policy.
Schedule the production during the budget period, taking into account the pattern of
sales, the finished goods inventory policy, and the productive capacity.
8.10.7 Materials and Purchases Budgets

Once the production budget defines the quantities to be produced, the next logical step
is to estimate the material requirements and determine the purchase programme.
In this context, the following principal budgets are developed.
Materials Budget
Materials used in a manufacturing unit are traditionally classified as direct and
indirect. Direct materials are materials which are directly identified with the product
and are visibly incorporated in it. Indirect materials cannot be traced directly to the
product. The materials budget generally is concerned only with direct materials.
Indirect materials and supplies are covered by the manufacturing overhead budget.
The materials budget shows the quantities, and often the prices, of materials planned
to be purchased.
Purchase Budget
This budget shows: (i) the quantities of each type of raw material to be purchased,
(ii) the schedule of purchases, and (iii) the estimated cost of purchases.
In developing the purchase budget, one has to take into account the following:
(i) the quantities specified in the materials budget,
(ii) the planned changes in material inventories,
(iii) re-order levels of various inventory items, and
(iv) economic order quantities of various inventory items.

203
8.11 INTRODUCTION TO VALUE ANALYSIS Introduction to
Lawrence Miles conceived of Value Analysis (VA) in the 1945 based on the
application of function analysis to the component parts of a product. Component cost
reduction was an effective and popular way to improve "value" when direct labor and
material cost determined the success of a product. The value analysis technique
supported cost reduction activities by relating the cost of components to their function
contributions.
Value analysis defines a "basic function" as anything that makes the product work or
sell. A function that is defined as "basic" cannot change. Secondary functions, also
called "supporting functions", described the manner in which the basic function were
implemented. Secondary functions could be modified or eliminated to reduce product
cost.
As VA progressed to larger and more complex products and systems, emphasis shifted
to "upstream" product development activities where VA can be more effectively
applied to a product before it reaches the production phase. However, as products have
become more complex and sophisticated, the technique needed to be adapted to the
"systems" approach that is involved in many products today.
The first VALUE ANALYSIS (VA) program was established in the General Electric,
USA by about 1947, since then the programme has received considerable attention
and many successful applications have been reported. Though the technique started
with analysis of purchased items it has been extended to manufactured items as well.
The idea behind Value Analysis is not new. The approach to the problem essentially
differs from that of the other Cost Reduction techniques. A customer when buying a
product weighs its functional and other features (appearance, attractiveness, get up)
against its price and judges the VALUE of the product. Manufacturer in turn, in order
to enhance the VALUE of his products must ensure that he offers all the necessary
functional features at the lowest possible price. This functional approach is the basic
criteria of VALUE ANALYSIS. It tries to obtain a FUNCTION and NOT the
PART, at a lesser COST.
This has the fundamental base, as the USER is not at all interested as to how the part
looks like, or what it is made of, as long as the DESIRED FUNCTION is performed to
HIS satisfaction along with the required level of Quality & Reliability.
8.11.1 The Value Analysis Method

In all problem solving techniques, we are trying to change a condition by means of a
solution that is unique and relevant. If we describe in detail what we are trying to
accomplish, we tend to describe a solution and miss the opportunity to engage in
divergent thinking about other alternatives. When trying to describe problems that
affect us, we become locked in to a course of action without realizing it, because of
our own bias. Conversely, the more abstractly we can define the function of what we
are trying to accomplish, the more opportunities we will have for divergent thinking.
This high level of abstraction can be achieved by describing what is to be
accomplished with a verb and a noun. In this discipline, the verb answers the question,
"What is to be done?" or, "What is it to do?" The verb defines the required action. The
noun answers the question, "What is it being done to?" The noun tells what is acted
upon. Identifying the function by a verb-noun is not as simple a matter as it appears.
Identifying the function in the broadest possible terms provides the greatest potential
for divergent thinking because it gives the greatest freedom for creatively developing
alternatives. A function should be identified as to what is to be accomplished by a

204 solution and not how it is to be accomplished. How the function is identified
determines the scope, or range of solutions that can be considered.
That functions designated as "basic" represent the operative function of the item or
product and must be maintained and protected. Determining the basic function of
single components can be relatively simple. By definition then, functions designated
as "basic" will not change, but the way those functions are implemented is open to
innovative speculation.
As important as the basic function is to the success of any product, the cost to perform
that function is inversely proportional to its importance. This is not an absolute rule,
but rather an observation of the consumer products market. Few people purchase
consumer products based on performance or the lowest cost of basic functions alone.
When purchasing a product it is assumed that the basic function is operative. The
customer's attention is then directed to those visible secondary support functions, or
product features, which determine the worth of the product. From a product design
point of view, products that are perceived to have high value first address the basic
function's performance and stress the achievement of all of the performance attributes.
Once the basic functions are satisfied, the designer's then address the secondary
functions necessary to attract customers. Secondary functions are incorporated in the
product as features to support and enhance the basic function and help sell the product.
The elimination of secondary functions that are not very important to the customer
will reduce product cost and increase value without detracting from the worth of the
product.
The cost contribution of the basic function does not, by itself, establish the value of
the product. Few products are sold on the basis of their basic function alone. If this
were so, the market for "no name" brands would be more popular than it is today.
Although the cost contribution of the basic function is relatively small, its loss will
cause the loss of the market value of the product.
One objective of value analysis or function analysis, to improve value by reducing the
cost-function relationship of a product, is achieved by eliminating or combining as
many secondary functions as possible.
8.11.2 Value Analysis Process

The first step in the value analysis process is to define the problem and its scope. Once
this is done, the functions of the product and its items are derived. These functions are
classified into "basic" and "secondary" functions. A Cost Function Matrix or Value
Analysis Matrix is prepared to identify the cost of providing each function by
associating the function with a mechanism or component part of a product. Product
functions with a high cost-function ratio are identified as opportunities for further
investigation and improvement. Improvement opportunities are then brainstormed,
analyzed, and selected.
The objective of the Function Cost Matrix approach is to draw the attention of the
analysts away from the cost of components and focus their attention on the cost
contribution of the functions. The Function Cost Matrix displays the components of
the product, and the cost of those components, along the left vertical side of the graph.
The top horizontal legend contains the functions performed by those components.
Each component is then examined to determine how many functions that component
performs, and the cost contributions of those functions.
Detailed cost estimates become more important following function analysis, when
evaluating value improvement proposals. The total cost and percent contribution of
the functions of the item under study will guide the team, or analyst, in selecting
which functions to select for value improvement analysis.

A variation of the Function-Cost Matrix is the Value Analysis Matrix. This matrix was 205
Introduction to
derived from the Quality Function Deployment (QFD) methodology. It is more Materials Management
powerful in two ways. First, it associates functions back to customer needs or
requirements. In doing this, it carries forward an importance rating to associate with
these functions based on the original customer needs or requirements. Functions are
then related to mechanisms, the same as with the Function-Cost Matrix. Mechanisms
are related to functions as either strongly, moderately or weakly supporting the given
function. This relationship is noted with the standard QFD relationship symbols. The
associated weighting factor is multiplied by customer or function importance and each
columns value is added.
These totals are normalized to calculate each mechanism's relative weight in satisfying
the designated functions. This is where the second difference with the Function-Cost
Matrix arises. This mechanism weight can then be used as the basis to allocate the
overall item or product cost. The mechanism target costs can be compared with the
actual or estimated costs to see where costs are out of line with the value of that
mechanism as derived from customer requirements and function analysis.
8.12 PURCHASE FUNCTIONS AND PROCEDURES

Fundamental Principles of Public Buying
Every authority delegated with the financial powers of procuring goods in public
interest shall have the responsibility and accountability to bring efficiency, economy,
transparency in matters relating to public procurement and for fair and equitable
treatment of suppliers and promotion of competition in public procurement.
The procedure to be followed in making public procurement must conform to the
following yardsticks:
The specifications in terms of quality, type, etc., as also quantity of goods to be
procured, should be clearly spelt out keeping in view the specific needs of the
procuring organizations. The specifications so worked out should meet the basic
needs of the organization without including superfluous and non-essential
features, which may result in unwarranted expenditure. Care should also be taken
to avoid purchasing quantities in excess of requirement to avoid inventory
carrying costs.
Offers should be invited following a fair, transparent and reasonable procedure.
The procuring authority should be satisfied that the selected offer adequately
meets the requirement in all respects.
The procuring authority should satisfy itself that the price of the selected offer is
reasonable and consistent with the quality required.
At each stage of procurement the concerned procuring authority must place on
record, in precise terms, the considerations which weighed with it while taking the
procurement decision.
Authorities Competent to Purchase Goods and their Purchase Powers

An authority which is competent to incur contingent expenditure may sanction
the purchase of goods required for use in public service in accordance with
Schedule V of the Delegation of Financial Rules, 1978, following the general
procedure contained in this Manual.

206 A demand should not be split into small quantities for the sole purpose of avoiding
the necessity of taking approval of the higher authority required for sanctioning
the purchase of the original demand.
Purchase through a Central Purchase Organization

In case a Ministry/Department does not have the required expertise or manpower, it
may send its indent to the Central Purchase Organization (e.g., DGS&D) with the
approval of its Secretary. The indent form to be utilized for this purpose will be as per
the standard form evolved by the Central Purchase Organization.
Depending on the nature of the required goods, the quantity & value involved and the
period of supply, the purchase organization is to decide the appropriate mode of
purchase. The various modes of purchase to be adopted for this purpose are indicated
in the subsequent paragraphs.
Approval of the Competent Authority to the Purchase

Demand for Goods should not be divided into smaller quantities for making piece
meal purchases for the sole purpose of avoiding the necessity of obtaining the sanction
of higher authority required with reference to the estimated value of the total demand.
Purchase of Goods without Quotation

Purchase of goods up to a value of 15,000/- ( Fifteen Thousand only) on each
occasion may be made without inviting quotations/bids by the competent authority on
the basis of a certificate to be recorded by him in the following format:
"I, am personally satisfied that these goods purchased are of the
requisite quality and specification and have been purchased from a reliable supplier
at a reasonable price."
Purchase of Goods by Purchase Committee

Purchase of goods costing above 15,000/- ( Fifteen Thousand only) and up to
1,00,000/- ( One lakh only) on each occasion may be made on the
recommendations of a duly constituted Local Purchase Committee consisting of three
members of an appropriate level as decided by the Head of Department. The
committee will survey the market to ascertain the reasonableness of rate, quality and
specifications and identify the appropriate supplier. Before recommending placement
of the purchase order the members of the committee will jointly record a certificate as
under:
"Certified that we .., members of the purchase committee are
jointly and individually satisfied that the goods recommended for purchase are of the
requisite specification and quality, priced at the prevailing market rate and the
supplier recommended is reliable and competent to supply the goods in question."
Purchase of Rate Contracted Goods

The Central Purchase Organization (e.g. DGS&D) will conclude rate contracts with
the registered suppliers, for goods and items of standards types which are identified as
common user items and are needed on recurring basis by various Ministries/
Departments. The Central Purchase Organization (e.g. DGS&D) is to post the
specifications, prices and other salient details of different rate contracted items,
appropriately updated, on its website for use by the procuring Ministries/
Departments. The Ministries/Departments are to operate those rate contracts to the
maximum extent possible. In case a Ministry/Department directly procures Central
Purchase Organizations (e.g. DGS&Ds) rate contracted goods from suppliers, the

prices to be paid for such goods shall not exceed those stipulated in the rate contract 207
Introduction to
and the other salient terms and conditions of the purchase should be in line with those Materials Management
specified in the rate contract. The Ministry/Department shall make its own
arrangement for inspection and testing of such goods where required.
E-Procurement
Purchase of goods through electronic mode of interface with tenderers and IT enabled
management of the entire procurement process (notice inviting tenders, supply of
tender documents, receipt of bids, evaluation of bids, award of contract, and execution
of contract through systematic enforcement of its various clauses and tracking of
claims, counter-claims and payments) is gradually gaining popularity. In order to cut
down transaction costs and improve efficiency and transparency, the Government
aims to make it mandatory for all the Ministries/Departments including the Central
Public Sector Undertakings under their administrative control to conduct all
their procurements electronically beyond 31st December, 2006. The Ministries/
Departments have been advised to fix appropriate cut-off points in terms of the size of
procurement to switch over to e-procurement. The Director General (Supplies &
Disposal) has made significant progress in this direction and the National Informatics
Centre is engaged in pilot projects to design a secure IT solution addressing concerns
like encryption/decryption of bids, digital signatures, secure payment gateways,
date/time stamp for activities, access control, etc. The Ministries/Departments have
already been directed to publicize all their tenders on their websites as the first step
towards full-fledged e-procurement. The Ministries/Departments are advised to
proactively engage themselves in articulating user needs in the development of IT
systems for e-procurement. The system should be secure, capable of maintaining
complete confidentiality at appropriate stages of the bidding process, so that the
tenderers feel confidence in electronically transmitting their queries and bids.
However, as all the tendering firms may not have the facility of transmitting their
quotations through e-mail, the Ministry/Departments should allow the receipt of
quotations through hard copies as well as by e-mail. The closing date & time for
receipt of tenders should be identical for both types of tenders.
Fill in the blanks:
1. Production manager is answerable for parts
2. Logistics is concerned with the management of warehousing (receiving,
storing and issue of materials) and ..
8.13 LET US SUM UP

Materials management is an essential business function. It can make similar
contribution as other major business functions.
Purchased material consumes over half of the sales revenue. Consequently, saving
potential of purchase activity is enormous.
Over the years, the materials management function has become more complex, more
professional, more encompassing and more strategic.
Potential importance of the materials management function is great. However, its full
potential is yet to be realized.

208
Operations Management 8.14 LESSON END ACTIVITY
Do you think today materials budgets are relevant in an ever changing business
scenario? Give reasons in support of your answer.
8.15 KEYWORDS
Materials Management: It is concerned with planning, acquisition and flow of
material in the supply chain.
Material Productivity: The output achieved from an activity divided by the material
inputs.
Materials: The physical items that are necessary to produce the goods and services we
consume.

1. What do you mean by materials management? Also describe the various roles of
materials management in business.
2. Explain various functions of materials management.
3. Describe materials management evolution.
4. What are the objectives of materials management?

CYP 1
1. Purchasing
2. materials function
CYP 2
1. produced in-house
2. flow of materials

Chopra and Meindl, Supply Chain Management Strategy, Planning, and Operation,
Prentice-Hall of India, 2006.
Gattorna, J., Gower, Handbook of Supply Chain Management, 2003.
Mentzer (ed.), Supply Chain Management, Response Books, 2001.
Wisner, Leong and Tan, Principles of Supply Chain Management A Balanced
Approach, Thomson South-Western, 2005.
Lee, Heu L., and Corey Billington, Managing Supply Chain Inventory, Sloan
Management Review (Spring 1992), pp. 65-73.
Solver, Edword A., David Pyke, and Rein Peterson, Inventory Management and
Production Planning and Scheduling, Wiley, New York, 1998.
Prime source of this section is the book, Production and Supply Chain Management
(6th Edition) by Dobler, DW and Burt, DN, Published by Tata McGraw-Hill, 1996.

Prahlad, CK, Core Competency Revisited, Enterprise, October 1993, p.20. Also quoted 209
Introduction to
in Dobler, DW, and Burt DN, Production and Supply Chain Management Materials Management
(6th Edition), Tata McGraw-Hill, p.23. 1996.
Syson, Russell, Improving Purchase Performance, Pitman Publishing, 1992.
Prime source of this section is the book, Purchasing, Principle and Application
(8th Edition) by Farrel, Paul K, Giunipero, Larry C and Kolchin, Michael G,
Published by Prentice Hall, 1991.
Dobler, DW and Burt, DN, Production and Supply Chain Management (6th Edition),
Tata McGraw-Hill, Figure 2-3, Page 28, 1996.

210
LESSON
9
INVENTORY CONTROL
CONTENTS
9.1 Introduction
9.2 Inventory Management
9.3 Types of Inventory
9.3.1 Manufacturing Inventory
9.3.2 Types of Inventory by Function
9.4 Safety Stock
9.5 Importance of Inventory
9.5.1 Manufacturing of Inventory
9.5.2 Functions of Inventory
9.6 Inventory Costs
9.6.1 Holding (or Carrying) Costs
9.6.2 Cost of Ordering
9.6.3 Setup (or Production Change) Costs
9.6.4 Shortage or Stock-out Costs
9.7 Inventory Classification
9.7.1 ABC Classification
9.7.2 Other Models
9.8 Fundamental Approaches to Manage Inventory
9.9 Fixed-order Quantity Approach
9.9.1 Fixed-order Quantity Modeling
9.9.2 Inventory Model with Uncertainty
9.9.3 Fixed-order Interval Approach
9.10 Inventory Control
9.10.1 Reasons for Maintaining Inventory
9.10.2 The Eyeball System
9.10.3 Reserve Stock (or Brown Bag) System
9.10.4 Perpetual Inventory Systems
9.10.5 Stock Control
9.10.6 Inventory Control Records
Contd...

9.11 Controlling Inventory 211

Inventory Control
9.12 Just-in-Time
9.13 Kanban
9.13.1 The Two-card System
9.13.2 Attributes of JIT
9.14 Let us Sum up
9.16 Keywords

Define inventory
Know the importance of coordinated flow of inventory through the supply chain
Describe associated costs of inventory
Some EOQ models for fixed-order quantity approach (under conditions of
certainty and uncertainty)
Explain fixed-order interval approach to inventory management.
9.1 INTRODUCTION
The term inventory means any stock of direct or indirect material (raw materials or
finished items or both) stocked in order to meet the expected and unexpected demand
in the future. A basic purpose of inventory management is to control inventory by
managing the flows of materials. It sets policies and controls to monitor levels of
inventory and determine what levels should be maintained, when stock should be
replenished, and how large orders should be.
9.2 INVENTORY MANAGEMENT

Inventories are materials and supplies carried on hand either for sale or to provide
material or supplies to the production process. They provide a buffer against the
differences in demand rates and production rates.
Inventory Management involves the control of current assets being procured or
produced in the normal course of the company's operations i.e. or "how many" parts,
pieces, components, raw material and finished goods the firm should hold and when
should it replenish the stock. What should be the trigger points for action?
The purpose of holding inventories is to allow the firm to separate the processes of
purchasing, manufacturing, and marketing of its primary products. In other words, the
inventory forms a buffer that ensures the flow of the goods and services of the firm is
maintained on a continuing basis, based on the customers requirements.
Inventories not only separate processes, but also reduce risk of production shortages.
For example, manufacturing firms frequently produce goods with hundreds or even
thousands of components. If any of these components are not available on time, the

212 entire production operation can be halted. This would mean a heavy loss to the firm.
To avoid starting a production run and then discovering the shortage of a vital raw
material or other component, firms maintain inventories.
The goal of effective inventory management is to minimize the total costs - direct and
indirect - that are associated with holding these assets. However, the importance of
inventory management to the company depends upon the extent of investment in
inventory. As the value of the inventory goes up, the criticality of the function in
Inventory Management enables an organization to meet or exceed customers'
expectations of product availability while maximizing net profits or minimizing costs.
What is Inventory?
in the future. A basic purpose of inventory management is to control inventory by
managing the flows of materials. It sets policies and controls to monitor levels of
inventory and determine what levels should be maintained, when stock should be
replenished, and how large orders should be.
9.3 TYPES OF INVENTORY

There are two basic types: merchandising and manufacturing. Manufacturing is further
divided into three more components: raw material, work in process and finished
goods.
1. Merchandise inventory: If you buy items from other artists and crafters to sell in
your own gallery or shop, you'll have a merchandise inventory. Remember
though - any items in your shop on consignment are not part of your inventory.
2. Manufacturing inventory: If you make your own arts and crafts, you'll have a
manufacturing inventory. The term 'manufacturing' might not seem to fit a hand
crafted type of business, but a quick review of the classifications within the term,
will make the relationship clearer.
9.3.1 Manufacturing Inventory

A manufacturing inventory consists of three different parts: raw materials, work in
process and finished goods. Using a leather crafting business as my sample craft
company, here are definitions and examples of the three:
1. Raw materials: Everything the crafter buys to make the product is classified as
raw materials. That includes leather, dyes, snaps and grommets. The raw material
inventory only includes items that have not yet been put into the production
process.
2. Work in process: This includes all the leather raw materials that are in various
stages of development. For the leather crafting business, it would include leather
pieces cut and in the process of being sewn together and the leather belts and
purse etc. that are partially constructed.
In addition to the raw materials, the work in process inventory includes the cost of
the labor directly doing the work and manufacturing overhead. Manufacturing
overhead is a catchall phrase for any other expenses the leather crafting business
has that indirectly relate to making the products. A good example is depreciation
of leather making fixed assets.

3. Finished goods: When the leather items are completely ready to sell at craft 213
Inventory Control
shows or other venues, they are finished goods. The finished goods inventory also
consists of the cost of raw materials, labor and manufacturing overhead, now for
the entire product.
9.3.2 Types of Inventory by Function

Input Process Output
Raw Materials Work In Process Finished Goods
Consumables required for Semi Finished Production in various Finished Goods at
processing. E.g. : Fuel, stages, lying with various Distribution Centers through
Stationary, Bolts & Nuts departments like Production, WIP out Supply Chain
etc. required in Stores, QC, Final Assembly, Paint
manufacturing Shop, Packing, Outbound Store, etc.
Maintenance Production Waste and Scrap Finished Goods in transit
Items/Consumables
Packing Materials Rejections and Defectives Finished Goods with
Stockiest and Dealers
Local purchased Items Spare Parts Stocks & Bought
required for production Out items
Defectives, Rejects and Sales
Returns
Repaired Stock and Parts
Sales Promotion & Sample
Stocks
9.4 SAFETY STOCK

It is the amount of inventory carried in addition to the average demand to take care of
fluctuations in demand.
The basic issue associated with P and Q systems of inventory is to determine safety
stock, which is influenced by the criteria we choose, the method of calculation and the
nature of demand distribution. Silver, et al. has suggested four criteria to determine
safety stock, which are summarized below:
Safety stock established through the use of a simple minded approach, "supplies
for a fixed-time period and equal safety factor for all items."
Safety stock based on minimization of cost (cost per unit short, cost per stock out,
etc).
Safety stock based on customer service (specified probability of no stock out per
replenishment cycle, specified fraction of demand to be met, etc).
Safety stock based on aggregate consideration "allocation of total safety stocks for
items to minimize the expected total cost of stock out per year, etc."
Regarding calculation of safety stock, we have two approaches approximate method
and optimal method. Approximate method independently calculates the safety stock.
It is less involved computationally and offers a near optimal solution. Optimal method
is computationally more complex and faced with the problem of data availability.
In a large number of situations, demand follows normal distribution. However, when
level of demand is low, discrete distribution, such as Poisson, is more appropriate.

214 Here, we shall present the calculation of safety stock of P and Q systems using
approximate method and considering the criteria as given below:
Specified probability of no stock out
Specified Fraction of demand fulfillment.
9.5 IMPORTANCE OF INVENTORY

Inventory is a stock of materials used to satisfy customer demand or support the
production of goods or services. By convention, inventory generally refers to items
that contributes to or becomes part of an enterprises output. There are different types
of inventory, however the most commonly identified types of inventory are:
Raw Materials Inventory: Parts and raw materials obtained from suppliers that
are used in the production process.
Work-in-process (WIP) Inventory: This constitutes partly-finished parts,
components, sub-assemblies or modules that have been started into the production
process but not yet finished.
Finished Goods Inventory: Finished product or end-items.
Replacement Parts Inventory: Maintenance Parts meant to replace other parts in
machinery or equipment, either the companys own or that of its customers.
Supplies Inventory: Parts or materials used to support the production process, but
not usually a component of the product.
Transportation (Pipeline) Inventory: Items that are in the distribution system but
are in the process of being shipped from suppliers or to customers.
Though the description above focuses on manufacturing inventory, wholesalers and
retailers have corresponding inventory types. The different types of inventories are
given below and each type has different risks depending upon the firms position in
the distribution channel.
9.5.1 Manufacturing of Inventory

Manufacturing inventory is typically classified into raw materials, finished products,
component parts, supplies, and work-in-process. Independence of workstations is
desirable in intermittent processes and on assembly lines a well. As the time that it
takes to do identical operations varies from one unit to the next, inventory allows
management to reduce the number of setups. This results in better performance.
In the case of seasonal items, any fluctuation in demand can be met if possible, by
either changing the rate of production or with inventories. However, if the fluctuation
in demand is met by changing the rate of production, one has to take into account the
different costs. The cost of increasing production and employment level involves
employment and training; additional staff and service activities; added shifts; and
overtime costs. On the other hand, the cost of decreasing production and employment
level involves unemployment compensation costs; other employee costs; staff, clerical
and services activities; and idle time costs. By maintaining inventories the average
output can be fairly stable. The use of seasonal inventories can often give a better
balance of these costs.
In addition, the firm also has to have in-services inventory. This generally refers to
finished goods, the tangible goods that must often be transferred to warehouses in
close proximity to wholesalers and retailers to be sold, and the supplies necessary to
administer the service.

Wholesale: The wholesaler purchases large quantities from manufacturers and sells 215
Inventory Control
small quantities to retailers. He provides the capability to provide retail customers
with assorted merchandise from different manufacturers in smaller quantities.
Expansion of product lines has increased the width and inventory risk. Where products
are seasonal, the wholesaler has to take an inventory position far in advance of selling.
Retail: For a retailer, inventory management is fundamentally a matter buying and
selling. The retailer purchases a wide variety of products and markets them. The prime
emphasis in retailing is on inventory turnover and direct product profitability.
Turnover measures inventory velocity and is calculated as the ratio of annual sales
divided by average inventory.
Not all types of inventories are held by all businesses. Table 9.1 summarizes the
inventory types held by different kinds of business organizations. Retail service
organizations hold only supplies. Retail sales organizations, wholesalers and
distributors hold both supplies and finished products. Projects and intermittent
processes in manufacturing hold supplies, raw materials and in-process inventory.
However, most continuous manufacturing organizations hold all the different types of
inventory.
Table 9.1: Organizational Inventories
Type of Inventory
Type of Organization Raw In-Process Finished
Supplies
Materials Inventory Goods
A. Retail systems
1. Sale of services *
2. Sale of goods * *
B. Wholesale/Distribution * *
C. Manufacturing systems
1. Projects * * *
2. Intermittent process * * *
3. Continuous process * * * *
9.5.2 Functions of Inventory

To maintain independence of operations, a supply of materials at a work center allows
that center flexibility in operations. Consider the case - an enterprise that does not
have any inventory. Clearly, as soon as the enterprise receives a sales order, it will
have to order for raw materials to complete the order. This will keep the customers
waiting. It is quite possible that sales may be lost. Also the enterprise may have to pay
high price for some other reasons. If the demand for the product is known precisely, it
may be possible (though not necessarily economical) to produce the product to exactly
meet the demand. However, in the real world this does not happen and inventories
become essential. It is almost essential to keep some inventory in order to promote
smooth and efficient running of business.
Inventory comprises physical stock of goods that is kept by an enterprise for future
purposes. Functional inventory categories are:
Working Stock: Also known as work-in-progress, is the inventory associated
with manufacturing/production. Significant amounts of inventory can be
accumulated between processes or at the assembly line.
Safety Stock: It is the stock that is always kept in store to protect against
uncertainties. It is a buffer.

216 Anticipation Stock: Stock kept at hand to meet seasonal fluctuations in demand or
to meet the shortfall caused by erratic production. Also called build stock or
seasonal stock.
Pipeline Stock: This is stock that is on the books of the firm but is not physically
available, e.g., stock in transit.
Decoupling Stock: A buffer stock used between productions processes to make
one process independent of the other.
Psychic Stock: Used in retail, it is retail display inventory used for stimulating
demand.
Figure 9.1: Functions of Inventory

Broadly speaking, the functions of inventory have been shown in Figure 9.1. Raw
materials flow in from the supplier and finally are sold to the customer. During the
process of providing goods to the customer, the inventory is required for use,
transformation and for distribution. A part of the inventory is in transit connecting the
different transformation and distribution activities.
The build-up of inventory takes place at different points during this flow from the
supplier to the final customer. It is desirable to maintain inventories in order to
provide time utility, guard against discontinuity and uncertainty, enhance stability of
production, protect employment levels and to provide economic advantage to the
organization.
Broadly speaking some of the functions of inventories are:
1. To protect against unpredictable variations (fluctuations) in demand and supply;
2. To take the advantage of price discounts by bulk purchases;
3. To take the advantage of batches and longer production run;
4. To provide flexibility to allow changes in production plans in view of changes in
demands, etc; and
5. To facilitate intermittent production.
Formulating inventory policy requires understanding the inventorys role in the firm.
Inventories permit production planning for smoother flow and lower cost operation
through larger lot-size production. They allow a buffer when delays occur. These
delays can be for a variety of reasons: a normal variation in shipping time, a shortage
of material at the vendors plant, an unexpected strike in any part of the supply chain,
a lost order, a climatic catastrophe like a hurricane or floods, or perhaps a shipment of
incorrect or defective materials.

In simple terms, inventory is an idle resource of an enterprise comprising physical 217

Inventory Control
stock of goods that is kept by an enterprise for future purposes. You do not want to
hold it, but cannot do without it.
The inventory decision gets complicated due to the different relationships between
inventory and the objectives of different functional departments. These conflicting
objectives are reflected in the contradictory viewpoints of different parts of the
organization.
Table 9.2: Conflicting Organizational Objectives
Area Typical Response
Marketing/Sales I can't sell from an empty wagon. I can't keep our customers if we
continue to stock out and there is not sufficient product variety
Production If I can produce larger lot sizes, I can reduce per unit cost and function
efficiency.
Purchasing I can reduce the per unit cost if I buy large quantities in bulk.
Warehousing I am out of space. I can't fit anything else in the building.
Finance Where am I going to get the funds to pay for the inventory? The levels
should be lower.
These comments in Table 9.2 place the focus on the functional significance of
inventory for different departments in the organization.
Marketing would like to have a large inventory so that customer service can be
improved and sales can increase.
Production would like to minimize set-up costs and increase worker productivity by
having large production runs adding on to the in-process inventory (work-in-progress
and finished goods).
Purchasing can bring down prices by buying in bulk and obtaining quantity discounts.
Stores or warehousing has storage constraints in storing and moving large quantities
of stock.
But the bottom line is equally important. All these requirements can be met at a cost.
Larger inventories mean more capital investment, lower cash flows, idle inventory,
and lower profitability. This is reflected in the comments made by Finance.
All this is clearly seen below in Table 9.3 the whole picture of inventory becomes
clear when seen in the context of the different functional objectives of departments
within the organization.
Table 9.3: Functional Significance of Inventory
Functional Functional Inventory
Inventory Goal
Area Responsibility Inclination
Maximize customer
Marketing Sell the Product High
service
Production Make the Product Efficient lot sizes High
Purchasing Buy required materials Low cost per unit High
Finance Provide working capital Efficient use of capital Low
Engineering Design the product Avoid obsolescence Low
As will be apparent from Table 9.3, some functional areas find inventory desirable,
while others do not. What is important to note is that both the inclination to hold
inventory and the inventory goals of the different functions are significantly different.
For example, inventory can be used to promote sales by reducing customers waiting
time, improve work performance by reducing the number of setups, or protect

218 employment levels by minimizing the cost of changing the rate of production.
Therefore, it is desirable to maintain inventories in order to enhance stability of
production and employment levels.
The functionality of inventory becomes clear only when it is considered in light of all
quality, customer service and economic factors - from the viewpoints of purchasing,
manufacturing, sales and finance. Inventory build-up is important as it is meant to
permit them to meet their functional objectives.
The major issue in inventory decisions is how to reconcile the differences between the
different functional requirements of the different parts of the organization and the
goals of the organization as a whole. No matter what the viewpoint of each department
is or what each function desires, in the ultimate analysis; effective inventory
management has to provide an economic advantage that is essential to organizational
competitiveness.
A significant percentage of assets of many firms are tied up in inventories. This could
range from fifteen per cent to nearly fifty percent of the capital utilized in a typical
firm. Holding of inventory, therefore, reflects a type of risk to the firm, these are risks
related to the capital investment and the potential for obsolescence of the inventory.
For the manufacturer, inventory risk has a long-term dimension. Although retailers or
wholesalers have a wider product line than the manufacturer, the manufacturer's
inventory commitment is relatively deep and of long duration. Wholesaler risk
exposure is narrower but deeper and of longer duration than that of retailers. Although
retailers assume a position of risk on a variety of products, the position on anyone
product is not deep. This does not mean that their risk is lesser; due to the variety of
merchandise the risk is wider. For example, a typical supermarket carries more than
10,000 SKUs. This variety of merchandise reflects the risk of the retailer. If an
individual enterprise plans to operate at more than one level of the distribution
channel, it must be prepared to assume additional inventory risk.
Only when considered in light of all quality, customer service and economic factors
from the viewpoints of purchasing, manufacturing, sales and financedoes the whole
picture of inventory functionality become clear. No matter the viewpoint, effective
inventory management is essential to organizational competitiveness as excessive
inventory is a drain to the profitability of the organization. This is discussed in the
next section.
Broadly speaking, some other functions of inventories are:
1. To protect against unpredictable variations in demand and supply
2. To take the advantage of price discounts by bulk purchases
3. To take the advantage of batches and longer production run
4. To provide slack to allow changes in marketing plans, etc; and
5. To facilitate intermittent production.
Which of these statements are true?

219
9.6 INVENTORY COSTS Inventory Control
The heart of inventory decisions lies in the identification of inventory costs and
optimizing the costs relative to the operations of the organization. Therefore, an
analysis of inventory is useful to determine the level of stocks. The resultant stock
keeping decision specifies:
1. When items should be ordered,
2. How large the order should be?
3. When and how many to deliver?
It must be remembered that inventory is costly and large amounts are generally
undesirable. Inventory can have a significant impact on both a companys productivity
and its delivery time. Large holdings of inventory also cause long cycle times which
may not be desirable as well. What are the costs identified with inventory?
The costs generally associated with inventories are shown in Figure 9.2. The different
components of cost are discussed below:
Figure 9.2: Total Inventory Costs
9.6.1 Holding (or Carrying) Costs

It costs money to hold inventory. Such costs are called inventory holding costs or
carrying costs. This broad category includes the costs for storage facilities, handling,
insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity
cost of capital. Obviously, high holding costs tend to favor low inventory levels and
frequent replenishment.
There is a differentiation between fixed and variable costs of holding inventory. Some
of the costs will not change by increase or decrease in inventory levels, while some
costs are dependent on the levels of inventory held. The general break down for
inventory holding costs has been shown in Table 9.4.

220 Table 9.4: Fixed and Variable Holding Costs

Fixed costs Variable cost
Capital costs of warehouse or store Cost of capital in inventory
Cost of operating the warehouse or store Insurance on inventory value
Personnel costs Losses due to obsolescence, theft, spoilage
Cost of renting warehouse or storage space
9.6.2 Cost of Ordering

Although it costs money to hold inventory, it also, unfortunately, to replenish
inventory. These costs are called inventory ordering costs. Ordering costs have two
components:
1. One component that is relatively fixed, and
2. Another component that will vary.
It is good to be able to clearly differentiate between those ordering costs that do not
change much and those that are incurred each time an order is placed. The general
breakdown between fixed and variable ordering costs is a follows:
Table 9.5: Fixed and Variable Ordering Costs
Fixed costs Variable costs
Staffing costs (payroll, benefits, etc.) Shipping costs
Fixed Costs on IT systems Cost of placing and order (phone, postage,
order forms)
Office Rental and equipment costs Running costs of IT systems
Fixed Costs of Vendor Development Receiving and inspection costs
Variable Costs of Vendor Development
One major component of cost associated with inventory is the cost of replenishing it.
If a part or raw material is ordered form outside suppliers, and places orders for a
given part with its supplier three times per year instead of six times per year, the costs
to the organization that would change are the variable costs, and which would
probably not are the fixed costs.
There are costs incurred in maintaining and updating the information system,
developing vendors, evaluating capabilities of vendors. Ordering costs also include all
the details, such as counting items and calculating order quantities. The costs
associated with maintaining the system needed to track orders are also included in
ordering costs. This includes phone calls, typing, postage, and so on.
Though Vendor development is an ongoing process, it is also a very expensive
process. With a good vendor base, it is possible to enter into longer-term relationships
to supply needs for perhaps the entire year. This changes the when to how many to
order and brings about a reduction both in the complexity and costs of ordering.
9.6.3 Setup (or Production Change) Costs

In the case of subassemblies, or finished products that may be produced in-house,
ordering cost is actually represented by the costs associated with changing over
equipment from producing one item to producing another. This is usually referred to
as setup costs.
Set-up costs reflect the costs involved in obtaining the necessary materials, arranging
specific equipment setups, filling out the required papers, appropriately charging time
and materials, and moving out the previous stock of materials, in making each

different product. If there were no costs or loss of time associated in changing form 221
Inventory Control
one product to another, many small lots would be produced, permitting reduction in
inventory levels and the resultant savings in costs.
9.6.4 Shortage or Stock-out Costs

When the stock of an item is depleted, an order for that item must either wait until the
stock is replenished or be canceled. There is a trade-off between carrying stock to
satisfy demand and the costs resulting from stock out. The costs that are incurred as
result of running out of stock are known as stock out or shortage costs. As a result of
shortages, production as well as capacity can be lost, sales of goods may be lost, and
finally customers can be lost.
In manufacturing, inventory requirements are primarily derived from dependent
demand, however, in retailing the requirements are basically dependent on
independent demand. Inventory systems are predicated on whether demand is derived
from an end item or is related to the item itself. Because independent demand is
uncertain extra inventory needs to be carried to reduce the risk of stocking out. To
determine the quantities of independent item that must be produced, firms usually use
a variety of techniques, including customer surveys, and forecasting. However, a
balance is sometimes difficult to obtain, because it may not be possible to estimate lost
profits, the effects of lost customers, or lateness penalties.
If the unfulfilled demand for the items can be satisfied at a later date (back order case),
in this case cost of back orders are assumed to vary directly with the shortage quantity
(in rupee value) and the cost involved in the additional time required to fulfill the
backorder ( / /year). However, if the unfulfilled demand is lost, the cost of shortages
is assumed to vary directly with the shortage quantity ( /unit shortage). Frequently,
the assumed shortage cost is little more than a guess, although it is usually possible to
specify a range of such costs.
9.7 INVENTORY CLASSIFICATION

It is useful to visualize the inventory of a medium sized business organization. The
inventory would comprise thousands of items, each item with different usage, price,
lead time and specifications. This makes planning and co-ordination extremely
difficult, if not impossible. There could be different procurement and technical
problems associated with different items and many a time the firm has to deal with the
inability of the entire chain of suppliers to respond promptly.
As the number of departments and users increase different types of issues arise. For
example, an electric company had as many as 118 names for a simple screw with a
width of 3/8 inches and length of 6 inches, depending upon the type of usage and the
department using the screw. This type of issue would finally result in confusion and
tend to duplicate ordering or result in overstocking.
In order to escape this quagmire many selective inventory management techniques are
used based on thorough analysis of the items that constitute the inventory. It is often
prudent to classify inventory so as to improve response time and bring the relevant
issues within the capability of the supply chain partners.
The use of class systems make the effort to manage inventory more effective and
efficient than if the organization managed each individual item independently. Some
of the classifications that facilitate this process of improving the management of
inventory are described above.

222 9.7.1 ABC Classification

ABC classification, or the alphabetical approach, is based on the annual consumption
value. Typically only 20 percent of all the items account for 70 to 80 percent of the
total rupee usage, while the remaining 80 percent of the items typically account for
remaining 20 to 30 percent of the rupee value. The ABC classification is based on
focusing efforts where the payoff is highest; i.e. high-value, high-usage items must be
tracked carefully and continuously. As these items constitute only 20 percent, the
ABC analysis makes the task relatively easier.
After calculating the rupee usage for each inventory item, the items are ranked by
rupee usage, from highest to lowest. The first 20 percent of the items are assigned to
class A. These are the items that warrant closest control and monitoring through a
perpetual inventory system.
One of the major costs of inventory is annual carrying costs, and your money is
invested largely in class A. Tight control, sound operating doctrine, and attention to
security on these items would allow you to control a large rupee volume with a
reasonable amount of time and effort.
The next 30 percent of the items are classified as B items. These deserve less
attention than A items. Finally, the last 50 percent of items are C items. These have
the lowest rupee usage and can be monitored loosely, with larger safety stocks
maintained to avoid stock outs. They should have carefully established but routine
controls.
Figure 9.3: ABC Analysis

This classification is commonly used by companies, as very often they need not keep
extremely accurate track of all inventory items. Through performing 80/20 analysis,
many companies are optimizing their investment in inventory, and production,
procurement and distribution assets. These companies are able to analyze their
inventory network as well as policies and able to add inventory where there are
opportunities for winning additional market share and reduce inventory where they are
not needed. They do not trim inventories across the board to reduce cost.
Through this approach, organizations are able to increase their overall customer
service levels while simultaneously reducing their total inventory carrying costs. Thus
these companies are able to improve other key metrics like customer retention, gross
margin and inventory turns.
The importance of each item is determined while procuring and storing it to improve
the purchase efficiency. The fundamental idea behind selective control techniques is
to put the efforts where the results are worth it. Even if an organization uses millions
of items, only a few items become important - from the finance view, availability
considerations, seasonality, criticality of performance, etc. The materials are classified

according to their importance and increased attention is paid to the items that are more 223
Inventory Control
important. For instance, high-value, high-usage items must be tracked carefully and
continuously but certain parts with a relatively low value or infrequent use can be
monitored loosely.
The ABC Analysis is also a guide to physical count of items of inventory. Counts are
conducted depending on the importance of inventory items. A items are counted
frequently, B items less frequently and C items are counted the least frequently.
Accuracy of the count also depends on the classification. APICS recommends 0.2
percent for A items, 1 percent for B items and 5 percent for C items.
However, ABC analysis should be used prudently. It cannot always be applied across
the board. Some categories of items where the application of ABC analysis is fraught
with high risk are identified below:
Difficult Procurement Items
Short Shelf Life
Large Storage Space Requirements
Items Operational Criticality
Likelihood of Theft
Difficult Forecast Items
9.7.2 Other Models

The ABC classification has limitations when applied to items that are scarce, where
lead time analysis is difficult and purchasing strategies can be critical. Purchase
strategies can also be critical for a number of items that may have to be imported and
in addition to normal transportation times, time required for clearance through
customs may not be highly predictable. In such cases, there is a tendency to hold too
little inventory for items with lumpy demand and too much for items with steady
demand.
However, organizations deal with a large number of items with varying degrees of
characteristics in terms of size, shape, physical characteristics, sources of supply,
modes of handing, user departments, etc. Inventory can also be classified using any of
differences between the items.
Items may belong to more than one class depending upon the criteria used. Any of
these criteria could be the basis of classification. The criterion could be the nature of
the materials, e.g. raw materials, machinery and equipment, consumable items,
chemicals, packaging materials, inflammable items, fuel stock, furniture and fixtures,
scrap, general materials, etc. Another could be, on the basis of usability of the material
e.g. finished, semi-finished items, dead stock items, unused items, serviceable,
unserviceable, and dead stock items, etc. Still another criterion could be the critically
of the component, e.g. vital, essential, desirable, etc.
There are, therefore, a number of classification systems besides the ABC classification
that are used in industry. Most of these systems operate in a similar manner to the
ABC Classification. A brief description and comparison of these classifications are
given in Table 9.6.

224 Table 9.6: Comparison of Different Classification Systems

S. No. Title Basis Main Uses
1. ABC (Level of Usage) Value of To control raw material components
consumption and work-in progress inventories in
the normal course of business
2. HML (High, medium, Unit price of the Mainly to control purchase.
low usage) material
3. FSND (Fast moving, Consumption To control obsolescence.
Slow moving, Non- pattern of the
moving, dead items) component
4. SDE (Scarce, difficult, Problems faced in Lead time analysis and purchasing
easy to obtain items) procurement strategies
5. Golf (Government, Source of the Procurement strategies
Ordinary, Local, Foreign material
Sources)
6. VED (Vital, Essential, Criticality of the To determine the stocking levels of
Desirable) component spare parts.
7. SOS (Seasonal, Off- Nature of suppliers Procurement/ holding strategies for
seasonal) seasonal items like agriculture
products
8. XYZ ( Value of Stock) Value of items in To review the inventories and their
storage use scheduled intervals.
Other similar types of classifications are the XYZ Classification, VED Classification,
and the HML classification of inventory. The basic difference between the ABC
Classification and the XYZ Classification is that it is based on the inventory in stock
rather than usage.
The VED Classification is based on the criticality of the inventory item. In normal
practice, items in the V category are often monitored manually; in addition to the
computer monitoring that may be in place. The HML reflects a classification based on
the unit price of the item. Obviously, the H category items require additional
attention, especially if the lead times are long, as it may often be in imported
components. The time triggered reorder system has some advantages in production
cycling, in such high value items.
All these techniques are used to focus management attention in deciding on the degree
of control necessary for different items in the inventory. However, it should be kept in
mind that changes in the business environment, e.g. customer demand patterns or
material costs, can cause material item classifications to change. This in turn can
affect key planning & scheduling decisions.
9.8 FUNDAMENTAL APPROACHES TO MANAGE

INVENTORY
Managing inventory involves four fundamental questions: how much to order, when
to reorder, where inventory should be held, and what specific line items should be
available at specific locations. The first two questions can be answered by performing
a few simple calculations. However, questions regarding the other two still challenge
the creativity and analytical capabilities of inventory decision makers.
Managing inventory in today's business environment usually involves selecting an
overall strategy from a range of alternatives and to structure logistics systems to
manage inventories more effectively and to lower cost and improve service as well.
Selecting an acceptable approach depends on the circumstances under which the
company operates and the simplifying assumptions that can be made.

Inventory decisions are made on issues relating to cost and to customer service 225
Inventory Control
requirements. Increasing investments in inventory generally result in higher levels of
customer service, but can options be identified that will result in higher levels of
customer service along with reduced investments in inventories. That is the challenge.
However, several factors make this an achievable objective:
1. More responsive order-processing and order-management systems;
2. Enhanced ability to strategically manage logistics information;
3. More capable and reliable transportation resources; and
4. Improvements in the ability to position inventories so that they will be available
when and where they are needed.
Key Differences among Approaches to Managing Inventory

Given the various approaches to managing inventory that are available and used today,
it is important to know the key ways in which they differ. These differences include
dependent versus independent demand, pull versus push, and system wide versus
single-facility solutions to inventory management issues.
Dependent Demand: The risk of carrying additional inventory depends on the nature
of the demand. Each type of demand carries with it a different type of risk. And this
adds to the cost and the quantum of inventory held by the organization.
For example, marketing experts hold the Edsel designed by Ford Motor Co. as a
supreme example of corporate Americas failure to understand the nature of consumer
demand. The Edsel was created as an automobile that would meet consumer demands
for a new generation of Americans. It was the hot new car that everybody was talking
about. It turned out to be a major failure. The company suffered greatly because it did
not consider the risks associated with getting the figures wrong.
Inventory items can be divided into two main types: Independent demand, and
dependent demand items. In inventory management it is important to distinguish
between dependent and independent demand.
An item has independent demand when we cant control it or tie it directly to another
items demand. The Ford example was an example of independent demand. Though
Ford tried to manipulate demand through pricing incentives and other marketing
efforts, the Edsel failed. As the results of the Edsel show, the firm can try to predict or
influence independent demand, but independent demand for the product is ultimately
determined by the marketplace.
In order to predict independent demand firms use different types of forecasting
methods. Forecasting looks at the market place to determine how much of the product
the consumers want.
In forecasting, both accuracy of data as well as the method, are important. It is not
only important to know where the data comes from but also if it is useful. There are
many different applications to consider when deciding which method is best. Not only
is the input important but also the quality of output is very important. Feedback on the
output creates the ability to go back and correct any errors that may have been made
during the initial input of data. The first item to look at is different methods used in
different situations. We will be looking at this issue in greater detail the next unit on
forecasting.
Manufacturing requirements are primarily derived from dependent demand, while
retailing requirements basically depend on independent demand. Dependent demand is
by far the most common type of demand. An item has dependent demand when the
demand for an item is controlled directly, or tied to the production of something else.

226 Continuing with the Edsel example, Suppose, Ford decided to manufacture 15,000
units of the automobile for the first year based on a forecast of the independent
demand. Based on this, Ford knew exactly how many steering wheels are needed and
when. This is because the demand for these items is dependent on the production
schedule of 15,000 automobiles for the year. The steering wheels are dependent
demand items because:
1. The firm controls their demand through the production schedule, and
2. Their demand is tied to the production of automobiles.
Dependent demand, in a manufacturing unit, is based on the sub-assemblies or
components or raw materials that are part of the BOM for the end items. The demand
for these items is indirect or comes from the finished products demand when we
explode the BOM (Bill of Material).
Material Planning: Materials Planning has been automated, to a large extent, in many
organizations through the use of MRP I and MRP II. MRP I, is also called
Materials Requirement Planning, and MRP II is called Manufacturing Resource
Planning. These are software solutions that integrate many areas of the manufacturing
enterprise into a single entity for planning and control purposes in order to minimize
inventory when the demand is dependent. It uses the basic principal that external
demand is generally independent and internal demand is generally dependent. This
genre of planning starts with aggregate planning and includes MRP I and MRP II.
Dependent Demand Dependent Demand
Figure 9.4: Independent and Dependent Demand in MRP Models

As shown in Figure 9.4, Material Planning, MRP I and MRP II get the independent
demand and calculate the total demand by working downwards at the highest level of
the Bill of Materials after deducting on hand quantities. Once this is done for high
level items, the bills of material are exploded to calculate the components required.
This process is repeated further down the levels till the raw material requirements are
arrived at.
Managing Independent Demand: It must be remembered that inventory is costly and
large amounts are generally undesirable. As inventory can have a significant impact
on both a companys productivity and its delivery time, different methods have to be
found to reduce inventory. One approach is through demand management. Another
is to reduce the risks associated with inventory. If risks are reduced, inventory levels
can be are also reduced.
Push-Pull Concept: It has been found that the risks due to independent demand can
be reduced through process design. Process design can minimize the risk if we reduce
demand uncertainty of independent demand by positioning the process from the push-
pull point of view. What is the push-pull view?

The push/pull relationship is that between a product or piece of information and who 227
Inventory Control
is moving it. Customers "pull" things towards themselves, while a producer "pushes"
things toward customers.
Another way of looking at the transformation operations of any product is whether
they are executed in response to a customer order or in anticipation of customer
orders. Pull processes are initiated by a customer order whereas push process are
initiated and performed in anticipation of customer orders. Engineered-to-Order
(ETO) and Made-to-Order (MTO) are based on pull processes, whereas Made-to-
Stock (MTS) is based on a push process. Assembled-to-Order (ATO) is a combination
of pull and push processes.
For example, Tata Steel collects orders that are similar enough to enable it to
consolidate demand and produce specific products in large quantities. In this case, the
manufacturing cycle is reacting to customer demand (referred to as a pull process).
The other example is Hindustan Lever Ltd, a consumer products firm, which must
produce in anticipation of demand. In this case the manufacturing cycle is anticipating
customer demand (referred to as a push process).
A push/pull view of the transformation processes is very useful when considering
strategic decisions relating to planning for material requirements. This view forces a
more global consideration of operations as they relate to fulfilling the customers
order.
Push is a planning based approach and is more appropriate for dependent demand,
scale economies, supply uncertainties, source capacity limitations, or seasonal build-
ups. In general, push systems are more prevalent in organizations having greater
logistics sophistication.
Customer
Order PULL
Cycle PROCESS Customer Order Cycle Customer
Retailer
Customer Replenishment and
Order Manufacturing Cycle
Arrives
Manufacturer
Procurement PUSH
Procurement Cycle
Manufacturing, PROCESS Supplier
Replenishment Cycle
Figure 9.5: Push/Pull Processes for a Retail Network

Figure 9.5 shows graphically the push/pull system in a retail network. It can be clearly
seen from the figure that in the pull processes, customer demand is known with
certainty at the time of execution i.e. it is executed after the customer order arrives.
Whereas for a push process demand is not known and must be forecast as the
customer order is yet to arrive.
Therefore, pull processes may also be referred to as reactive processes because they
react to customer demand. Push processes may also be referred to as speculative
processes because they respond to forecasted rather than actual demand. The push/pull
boundary separates push processes from pull processes.

228 A process or market orientation that has more pull processes has a significant impact
on reducing the requirement of inventory in the system. Just like in the case of
collaborative forecasting, more pull processes can help eliminate excess inventory as
it minimizes the inventory carried to cover uncertainty due to independent demand.
Just-in-Time (JIT) is, in a sense, a pull system. The firm places an order for an item
only when the amount on hand reaches a certain level, thus pulling inventory through
the system as needed. There is a time phased approach to inventory scheduling and
inventory receipt. The Economic Order Quantity (EOQ) approach, which we will
study in this lesson, on the other hand is generally pull based, but is quite often a
hybrid system.
System wide versus Single Facility Solution

A major inventory management issue is whether to take a system wide approach to
inventory management or to provide solutions on a facility wise basis. Generally, JIT,
EOQ-based approaches are applicable to single facility decision making. The MRP or
DRP solutions are more suited to system wide applications.
The single facility approach is simpler and less expensive. The MRP or DRP approach
is expensive and it takes time, effort and systemic change of the mental framework to
make it successful. The choice is a trade-off.
Identify which of these statements are true:
1. An item has independent demand when we cant control it or tie it directly
to another items demand.
2. Manufacturing requirements are primarily derived from dependent
demand.
3. As the lead time reduces, it reflects an increase in inventory requirements.
4. Push processes are initiated by a customer order whereas pull process are
initiated and performed in anticipation of customer orders.
5. A market orientation that has more pull processes reduces the requirement
of inventory in the system.
9.9 FIXED-ORDER QUANTITY APPROACH

Multi-period inventory systems are designed to ensure that an item will be available
on an ongoing basis throughout the year. Fixed-order quantity models are event
triggered. In other words, at an identified level of the stock the fixed-order quantity
model initiates an order. This event may take place at any time, depending on the
demand for the items considered. Generally, the Fixed-order Quantity models are
favored when:
1. Items are more expensive items because average inventory is lower.
2. Items are critical, e.g. repair parts, because there is closer monitoring and
therefore quicker response to potential stock out.
The models that emanate from this are similar to batch processing systems, counting
takes place only at the review period. The Fixed-Time Period models are time
triggered i.e. the model initiates an order after a fixed-time. These models require a
larger average inventory because they must also protect against stock out during the
review period; while the fixed-order quantity mode has no review period.

These differences and the nature of operations tend to influence the choice of the 229
Inventory Control
inventory system that is more appropriate.
9.9.1 Fixed-order Quantity Modeling

In this lesson we will consider Fixed-Order Quantity i.e. inventory models in which
demand is assumed to be fixed and completely predetermined. The heart of inventory
analysis resides in the identification of relevant costs. The basic approach to
determining fixed-order sizes are the Economic Order Quantity (EOQ) models. The
basic EOQ model is concerned primarily with the cost of ordering and the cost of
holding inventory.
Waiting for demand
Demand occurs, units

withdrawn from
inventory or backorder
No Is position
< Recorder point?
Yes
Issue an order for

exactly 'Q' units
Figure 9.6: Fixed-order Quantity System

A Fixed-Order Quantity system is shown in Figure 9.6. The notations that are used in
the models for this system are given below:
D Annual demand
v Unit purchase cost or unit cost of production ( /unit)
A Ordering or Set-up cost ( /year)
r Holding cost per per year ( / /year) (Inventory carrying charges factor)
b Shortage cost per short per unit time ( / /year)
Q Order quantity (to be determined)
The basic assumptions in the model are as follows:
1. The rate of demand for the item is deterministic and is a constant D units per
annum independent of time.
2. Production rate is infinite, i.e. production is instantaneous.
3. Shortages are not allowed.

230 4. Lead time is zero or constant and it is independent of both demand as well as the
quantity ordered.
5. The entire quantity is delivered as a single package (or produced in a single run).
The objective of the model is to minimize the average annual variable costs. And it
provides a solution to the problem of determining when an order should be placed and
how much should be ordered. The schematic representation of the EOQ Model is
given in Figure 9.7. It shows the inventory level vs. time relationship.
Inventory Level Q
Time T T
Figure 9.7: Schematic Representation of the EOQ Model

In developing the EOQ model, we will attempt to minimize total annual costs by
varying the order quantity, or lot size. From the figure it is obvious that since the
inventory is consumed at uniform rate and since maximum inventory level is Q, the
average inventory will be Q / 2.
Hence, average Investment in Inventory will be = Q v / 2
And the Average Inventory Holding Cost will be = (Q v r) / 2
Hence the total annual variable cost (TC) = Ordering cost + Inventory Holding Cost.
Therefore,
TC = (A D) / Q + (Q v r) / 2
If QEOQ is the order quantity at which the total cost is minimum, then mathematically
the relationship can be expressed as:
Q = QEOQ = (2 A D /r v),
This equation is known as the EOQ formula. From this formula, the optimal time
between orders can be derived.
TEOQ = D/Q = (1/D) (2 A D/ r v)
The Minimum Total Annual Cost (TC) of holding inventory is given by the formula:
TC = 2 A D r v
Ordering cost and holding cost can be imagined as two children on a see saw. When
one goes up, the other goes down, and vice versa. This way out of this dilemma is to
combine the two costs as total annual variable costs and worry only about minimizing
that cost.

1. EOQ Model with Lead Time: In the above discussion we considered that lead 231
Inventory Control
time is zero. However, if lead time is constant the above results can be used
without any modification.
Inventory Level
Reorder Level, R0
L L L
Time
T T T
Figure 9.8: EOQ with a Fixed Lead Time Reorder Level

If lead time is say constant and equal to L (in weeks). Then during lead time, the
consumption is L D units. This means order will have to be released for quantity
QEOQ, the new order will arrive exactly after time period L at which time inventory
level will be zero and the system will repeat it self.
The inventory level at which the order is released is known as reorder level is shown
in Figure 9.8. It can be mathematically expressed by the equation:
Reorder Level = Ro = L D
Let us work out an example to understand the EOQ Model and all that has been said
earlier in this section on fixed-order quantity policies:
A company, for one of its class A items, placed 8 orders each for a lot of 150
numbers, in a year. Given that the ordering cost is 5,400.00, the inventory holding
cost is 40 percent, and the cost per unit is 40.00. Find out if the company is making a
loss in not using the EOQ Model for order quantity policies.
What are your recommendations for ordering the item in the future? And what should
be the reorder level, if the lead time to deliver the item is 6 months?
D = Annual demand = 8 150 = 1200 units
v = Unit purchase cost = 40.00
A = Ordering Cost = 5400.00
r = Holding Cost = 40%
Using the Economic Order Equation:
QEOQ = (2 A D /r v)
= (2 5400 1200)/(0.40 40) = 900 units.

232 Minimum Total Annual Cost (TC) = 2 A D r v

= 2 5400 1200 0.40 40
= 14,400.00
The Total annual Cost under the present system
= (1200 5400/150 + 0.40 40 150/2)
= (43,800 + 1200) = 45,000.00
The loss to the company = 45,000 14,400 = 30,600.00
Reorder Level = Ro = L D = (6/12) 1200 = 600 units
The company should place orders for economic lot sizes of 900 units in each order. It
should have a reorder level at 600 units.
Economic Order Quantity Model with Shortages

This model considers the situation when back orders are allowed, i.e. stock-out is
allowed for some period in the system. In case of shortage, demand is assumed to
reflect as a back-order and is not lost. The model assumes three costs, unlike the
earlier model that assumed only the first two costs shown below:
(a) Ordering or set-up cost,
(b) Inventory holding cost, and
(c) Shortage or stock-out cost.
The shortage cost is denoted by b rupees per short per unit time i.e. / /Year.
The total average annual cost (TC) can be written as,
TC = Ordering cost +Inventory holding cost + Cost of back orders
Assuming order quantity to be Q, then the number of orders per annum equals D/Q
And hence ordering cost equals A* (D/Q).
Total Annual Cost (with backorders permitted) = [(Q-S) 2 *v*r /2Q] + A* (D/Q) +
S*2 *b/2* QEOQ
The average inventory and stock out can be derived using Figure 9.9. The average
inventory during period T1 will be I (as consumption is at uniform rate) and the
inventory level during T 2 us negative and hence in practice on hand inventory will be
zero.
Thus, average inventory through period T will be
Average Inventory = (Q S)2 / 2Q
Average Inventory Holding Cost = [(Q-S)2 /2Q] *v*r
And,
QEOQ = (2*A*D/ r*v)*((r*v + b)/ b)
If shortages are not allowed, then b =
The above equation will be reduced to: Q = QEOQ = 2*A*D/r*v
233
Inventory Control
T1 T1 T1 Time
T2 T2 T2
T T T
Figure 9.9: EOQ Model with Shortages

This is the same equation that we had derived earlier, i.e. optimal order quantity for
the EOQ model.
Let us try another exercise to demonstrate the EOQ model. The demand for an item is
equal to 600 units per year. The per unit cost of the item is ` 50 and the cost of placing
an order is ` 5. The inventory carrying cost is 20% of inventory per annum and the
cost of shortage is ` 1 per unit per month. Find the optimum ordering quantity if stock
outs are permitted. If stock outs are not permitted what would be the loss to the
company?
D = Annual demand = 600 units
v = Unit purchase cost = ` 50.00
A = Ordering Cost = ` 5.00 per order
r = Holding Cost = 20% per annum
b = Shortage Cost = ` 12 per annum
EOQ
Q = (2AD/ rv)((rv + b)/ b)
= (25600/0.2050)((0.2050 +12)/12)
= 600*1.833 = 33.16 units = say 33 units
Max. Number of backorders = (S*) = QEOQ (rv/(rv) + b)
= 33(0.2050/((0.2050) +12) = 15 units
Total Annual Cost (with backorders permitted)
= [(Q-S)2 v r /2Q ] + A (D/Q) + S 2 b/2 QEOQ
= [(33 -15) 2 (0.20 50) / (2 33)] + (600 5)/33 + 15 15 12/ (2 33)
= ` 181
If stock outs and backorders are not permitted, the economic order quantity is:
Q = QEOQ = 2 A D/r v
= 2 600 5/ (0.20 50) = 24.5 units
TC = Ordering Cost + Ave. Holding Cost = [D A/ QEOQ] + QEOQ r v/2
= [600 (5/ 24.5)] + 24.5 0.20 50/2 = ` 254.00

234 Therefore, additional cost when backordering is not allowed

= 254.00 181.00 = 64.00.
9.9.2 Inventory Model with Uncertainty

Inventory models with uncertainty have been developed that can be used to determine
how much inventory should be kept on stock, what service levels should be met, and
how to design inventory layout. Such models consider that risks have geometrically-
distributed probabilities and demand to be either deterministic or normally distributed.
Figure 9.10: Working Stock and Safety Stock

Figure 9.10 shows the relationship between working stock and safety stock, where the
demand is uncertain. In the Figure Ss represents the safety stock. B is the reorder point
and the working stock is shown as the difference between the total stock and safety
stock.
In re-order point models with risk, the probability distribution of demand during the
lead-time is an important characteristic in inventory management. We can, generally,
assume the lead time demand as a normal distribution as shown in Figure 9.11. The
Y axis shows the frequency of occurrence i.e. the probability, and the X axis shows
the demand during the lead time.
The different relationships shown in Figure 9.10 are reflected in Figure 9.11 also. The
reason that we can represent the inventory model shown in Figure 9.10 with the
distribution shown in Figure 9.11 is because of the central limit theorem. Suppose we
repeat an experiment many times, where the lead time demand is M, and Mi is the
result of the ith experiment. In general, we won't know what the distribution of M i is,
and it may be discrete or continuous. The central limit theorem says that the
distribution of the average of the Mi's is normal.
Figure 9.11: Realistic Lead Time Demand

Using these concepts, we can tackle problems with constant lead time and variable 235
Inventory Control
demand. Data has been provided in Table 9.7 to illustrate such a problem. In the
problem, it is assumed that the weekly demand is variable and the lead time is
constant at 2 weeks.
Table 9.7: Calculation of Lead Time Demand
Demand Probability Demand Probability Lead time Probability
first week p(D) second week p(D) demand (col. 2)(col. 4)
(D) (D) (col. 1)(col. p(M)
3) (M)
1. 0.60 1 0.60 2 0.36
3 0.30 4 0.18
4 0.10 5 0.06
2. 0.30 1 0.60 4 0.18
3 0.30 6 0.09
4 0.10 7 0.03
3. 0.10 1 0.60 5 0.06
3 0.30 7 0.03
4 0.10 8 0.01
The basic data in Table 9.7, in columns 1 to 3 are used to calculate the lead time
demand and the probability of lead time demand, which are given in columns 5 and 6.
The lead time demand obtained and the probability of lead time demand obtained in
Table 9.7 have been rearranged in Table 9.8 to obtain the distribution.
Table 9.8: Lead Time Demand and Probability
Lead time demand (M) Probability P(M)
0 0
1 0
2 0.36
3 0
4 0.36
5 0.12
6 0.09
7 0.06
8 0.01
Total 1.00
We have worked out the example of constant lead time and variable demand above.
A reasonable approximation method for determining model parameters is to use the
EOQ model to solve for the order size. The time between orders is then simply the
order quantity divided by annual demand. The standard deviation of demand during
the order interval is found by determining the daily standard deviation of demand and
multiplying by the square root of the length of the order interval. Different
relationships emerge when there is:
1. Variable demand and constant lead time,
2. Constant demand with variable lead time, and
3. Variable demand with variable lead time.

236 Each of these relationships is shown below. The notations that are used are as follows:
B= Reorder point in units.
M = Lead time demand in units (a random variable).
f (M) = Probability density function of lead time demand.
p (M)= Probability of a lead time demand of M units.
L = Expected lead time
Lm = Maximum lead time
= Standard deviation of lead time demand
Q = Lot size
S = Set-up cost or Ordering Cost ( /year)
SS = Safety Stock
D = Annual Demand
P = Unit Price ( /unit)
H = Holding or Carrying cost per Unit ( /Unit)
F = Inventory Carrying Charges Factor
Q* = Economic Order Quantity (to be determined)
Figure 9.12: Inventory Risk: Variable Demand and Constant Lead Time
The relationships that emerge when Demand is variable and Lead Time is constant are
shown in Figure 9.12. The figure shows the relationships that are given below:
B SS = Expected lead time demand
B - J = Minimum lead time demand
B + W = Maximum lead time demand
p(M>B) = Probability of a stock out
Figure 9.13: Inventory Risk: Variable Demand and Variable Lead Time

The relationships when there is constant demand with variable lead time are shown in 237
Inventory Control
Figure 9.13. The relationships that emerge from this configuration are given below:
p (M > B) = Probability of a stock out
B S = Expected lead time demand
B + W = Maximum lead time demand
The lot order size is given by the expression:
Q* = 2DS / H (1)
And the reorder point is given by:
B = M + SS (2)
When both demand and lead times are probabilistic, the basic procedure for finding
operating doctrines is a convergence procedure. This is a directed trial an error
method. For the quantity/reorder point model, the order quantity is computed
assuming constant demand. Then the reorder point is calculated using the computed
order quantity. This value is then used to recalculate the order quantity and recalculate
the reorder point. Eventually, the order quantity the reorder point coverage to their
optimal values. The example of ABC Ltd. illustrates the method.
ABC Ltd. for one of its class A items, has an ordering cost is 5,400.00, the
inventory holding cost is 40 percent, and the cost per unit is 40.00.
D = Annual demand = 8 150 = 1200 units
P = Unit purchase cost = 40.00
S = Ordering Cost = 5400.00
F = Holding Cost = 40%
The lead time to deliver the item is 10 days. The Lead time demand is given in the
table below.
Lead time demand Probability P(M) Lead time demand Probability P(M)
(M) (M)
0 0 1 0
2 0.36 3 0
4 0.36 5 0.12
6 0.09 7 0.06
8 0.01 Total 1.00
What is the lowest cost reorder point if the stock out cost is 5 per unit?
Using the Economic Order Equation:
Q* = (2DS/H) = (2DS/FP) = EOQ
= (2 5400 1200)/(0.40 40) = 900 units.
Reorder Level: (RB) = L D = (10/365) 1200 33 units

238 Let us now determine the lowest cost reorder point.

M max 8
B = 34 E(M > B) = (M B) p(M ) or ( M 33) p ( M )
M B 1 1 1
= (34 33) 0.36 + (34 33) 0.00 + (34 33) 0.36 + (34 33) 0.12 +
(34 33) 0.09 + (34 33) 0.06 + (34 33) 0.01
= 1 unit
TCS = Holding Cost + Stock out Cost
= (B M) H + SCS E (M>B)/ Q
TCS = (34 - 33) 1 + 5400 2 1/ 900
= 1 + 12 = 13.00
8
B = 35 E (M > B) = ( M 33) p ( M )
2 1
= (35 33) 0.36 + (35 33) 0.12 +

(35 33) 0.09 + (35 33) 0.06 + (35 33) 0.01
= 1.28 units
TCS = (35 33) 1 + 5400 2 1.28/ 900
= 2 + 15.36 = 17.36
8
B = 36 E (M > B) = ( M 33) p ( M )
4 1
= (36 33) 0.12 + (36 33) 0.09 + (36 33) 0.06 + (36 33) 0.01
= 1.12 units
TCS = (36 33) 1 + 5400 2 1.12/ 900
= 4 + 13.44 = 17.44
8
B = 37 E (M > B) = ( M 33) p ( M )
5 1
= (37 33) 0.09 + (37 33) 0.06 + (37 33) 0.01

= 0.80 units
TCS = (37 33) 1 + 5400 2 0.80/ 900
= 5 + 9.60 = 14.60
8
B = 38 E (M > B) = ( M 33) p ( M )
6 1
= (38 33) 0.06 + (38 33) 0.01

= 0.42 units
TCS = (38 33) 1 + 5400 2 0.42/ 900
= 6 + 5.04 = 11.04
8
B = 39 E (M > B) = ( M 33) p ( M )
7 1

= (39 33) 0.01 239

Inventory Control
= 0.07 units
TCS = (39 33) 1 + 5400 2 0.07/ 900
= 7 + 0.84 = 7.84
Therefore, the lowest cost of reorder point is 39 units with an expected annual cost of
safety stock of 7.84.
In the example that we worked out above and in this section, we have considered the
single period inventory problem when there is a fixed-order or setup cost including the
point at which the marginal revenue of an additional unit of initial inventory just
equals the marginal cost of a unit of inventory.
9.9.3 Fixed-order Interval Approach

Another approach is called the fixed period or fixed review period approach.
In essence, this technique involves ordering inventory at fixed or regular intervals; and
generally the amount ordered depends on how much is in stock and available at the
time of review. Firms customarily count inventory near the interval's end and base
orders on the amount on hand at the time.
The basic difference between the two systems, the fixed order and the fixed period
is that the fixed-order quantity models are event triggered and fixed-time period
models are time triggered. In other words, at an identified level of the stock the
fixed-order quantity model initiates an order. This event may take place at any time,
depending on the demand for the items considered. In contrast, the fixed-time period
models review the stocks at time intervals that are fixed and orders are placed at the
end of predetermined time periods. In these models, only the passage of time triggers
action.
Table 9.9 makes a comparison of the two systems and brings out the significant
differences.
Table 9.9: Fixed-order Quantity and Fixed-Time Period Differences
Feature Fixed-Order Quantity Model Fixed-Time Period Model
Order quantity The same amount ordered each time Quantity varies each time order is
placed
When to place Reorder point when inventory Reorder when the review period
order position dips to a predetermined level arrives
Record keeping Each time a withdrawal or addition is Counted only at review period.
made
Size of inventory Less than fixed-time period model Larger than fixed-order quantity
model
Time to maintain Higher due to perpetual record
keeping
Type of items Higher-priced, critical, or important
items.
The models that emanate from fixed-order system are for perpetual systems that
require continual monitoring of inventory. Every time a withdrawal from inventory or
an addition to inventory is made, records must be updated.
In comparison with the basic EOQ approach: the fixed interval model does not require
close surveillance of inventory levels; thus, monitoring is less expensive. The fixed-
time models are similar to batch processing systems, counting takes place only at the
review period. The firm can order low-valued items infrequently and in large

240 quantities, checking only infrequently to determine exactly how much is on hand at
any particular time.
In many retail merchandising systems, a fixed-time period system is used. Sales
people make routine visits to customers and take orders for their complete line of
products. Inventory, therefore, is counted only at particular times, such as every week
or every month or when the suppliers visit is due. Sometimes, this is also resorted to
in order to combine orders to save transportation costs.
Figure 9.14: Fixed-Time Period Model System

The way in which a Fixed-Period Quantity system works, is shown in Figure 9.14.
Fixed-time period models generate order quantities that vary from period to period,
depending on the usage rates. They generally require a higher level of safety stock
than fixed-order quantity systems. They also require continual tracking of inventory
on hand and replenishing stock when the reorder point is reached, while the fixed-
order quantity mode has no review period.
Like the fixed-order quantity approach to inventory management, the fixed-order
interval approach typically combines elements of both the pull and push philosophy.
These differences and the nature of operations tend to influence the choice of the
inventory system that is more appropriate.
The inventory models analyzed represents a small subset of the inventory models.
Other models including infinite horizon models continuous review and periodic
review models are outside the scope of this book.
9.10 INVENTORY CONTROL

Control of inventory, which typically represents 45% to 90% of all expenses for
business, is needed to ensure that the business has the right goods on hand to avoid
stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting.
Many businesses have too much of their limited resource, capital, tied up in their
major asset, inventory. Worse, they may have their capital tied up in the wrong kind of
inventory. Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or
colors, or there may be an imbalance among different product lines that reduces the
customer appeal of the total operation.

Inventory control involves the procurement, care and disposition of materials. There 241
Inventory Control
are three kinds of inventory that are of concern to managers:
1. Raw materials,
2. In-process or semi-finished goods, and
3. Finished goods.
If a manager effectively controls these three types of inventory, capital can be released
that may be tied up in unnecessary inventory, production control can be improved and
can protect against obsolescence, deterioration and/or theft.
9.10.1 Reasons for Maintaining Inventory

The various reasons of maintaining inventory are:
1. Anticipation Inventory or Seasonal Inventory: Inventory are often built in
anticipation of future demand, planned promotional programs, seasonal demand
fluctuations, plant shutdowns, vacations, etc.
2. Fluctuation Inventory or Safety Stock: Inventory is sometimes carried to protect
against unpredictable or unexpected variations in demand.
3. Lot-Size Inventory or Cycle Stock: Inventory is frequently bought or produced in
excess of what is immediately needed in order to take advantage of lower unit
costs or quantity discounts.
4. Transportation or Pipeline Inventory: Inventory is used to fill the pipeline as
products are in transit in the distribution network.
5. Speculative or Hedge Inventory: Inventory can be carried to protect against some
future event, such as a scarcity in supply, price increase, disruption in supply,
strike, etc.
6. Maintenance, Repair, and Operating (MRO) Inventory: Inventories of some
items (such as maintenance supplies, spare parts, lubricants, cleaning compounds,
and office supplies) are used to support general operations and maintenance.
Three major approaches can be used for inventory control in any type and size of
operation. The actual system selected will depend upon the type of operation, the
amount of goods.
9.10.2 The Eyeball System

This is the standard inventory control system for the vast majority of small retail and
many small manufacturing operations and is very simple in application. The key
manager stands in the middle of the store or manufacturing area and looks around.
If he or she happens to notice that some items are out of stock, they are reordered.
In retailing, the difficulty with the eyeball system is that a particularly good item may
be out of stock for sometime before anyone notices. Throughout the time it is out of
stock, sales are being lost on it. Similarly, in a small manufacturing operation, low
stocks of some particularly critical item may not be noticed until there are none left.
Then production suffers until the supply of that part can be replenished. Such
unsystematic but simple retailers and manufacturers to their inherent disadvantage.
9.10.3 Reserve Stock (or Brown Bag) System

This approach is much more systematic than the eyeball system. It involves keeping a
reserve stock of items aside, often literally in a brown bag placed at the rear of the
stock bin or storage area. When the last unit of open inventory is used, the brown bag
of reserve stock is opened and the new supplies it contains are placed in the bin as

242 open stock. At this time, a reorder is immediately placed. If the reserve stock quantity
has been calculated properly, the new shipment should arrive just as the last of the
reserve stock is being used.
In order to calculate the proper reserve stock quantity, it is necessary to know the rate
of product usage and the order cycle delivery time. Thus, if the rate of product units
sold is 100 units per week and the order cycle delivery time is two weeks, the
appropriate reserve stock would consist of 200 units (100u x 2w). This is fine as long
as the two-week cycle holds. If the order cycle is extended, the reserve stock
quantities must be increased. When the new order arrives, the reserve stock amount is
packaged again and placed at the rear of the storage area.
This is a very simple system to operate and one that is highly effective for virtually
any type of organization. The variations on the reserve stock system merely involve
the management of the reserve stock itself. Larger items may remain in inventory but
be cordoned off in some way to indicate that it is the reserve stock and should trigger a
reorder.
9.10.4 Perpetual Inventory Systems

Various types of perpetual inventory systems include manual, card-oriented, and
computer-operated systems. In computer-operated systems, a programmed instruction
referred to commonly as a trigger, automatically transmits an order to the appropriate
vendor once supplies fall below a prescribed level. The purpose of each of the three
types of perpetual inventory approaches is to tally either the unit use or the dollar use
(or both) of different items and product lines. This information will serve to help avoid
stock-outs and to maintain a constant evaluation of the sales of different product lines
to see where the emphasis should be placed for both selling and buying.
9.10.5 Stock Control

A stock control system should keep you aware of the quantity of each kind of
merchandise on hand. An effective system will provide you with a guide for what,
when, and how much to buy of each style, color, size, price and brand. It will reduce
the number of lost sales resulting from being out of stock of merchandise in popular
demand. The system will also locate slow selling articles and help indicate changes in
customer preferences. The size of your establishment and the number of people
employed are determining factors in devising an effective stock control plan. Can you
keep control by observation? Should you use on-hand/on-order/sold records?
Detachable ticket stubs? Checklists? And/or physical inventory? If so, how often?
With the observation method (the eyeball system), unless the people using it have an
unusually sharp sense of quantity and sales patterns, it is difficult to keep a
satisfactory check on merchandise depletion. It means that you record shortages of
goods or reorders as the need for them occurs to you. Without a better checking
system, orders may only be placed at the time of the salesman's regular visit,
regardless of when they are actually needed. Although it may be the simplest system,
it also can often result in lost sales or production delays. Detachable stubs or tickets
placed on merchandise provide a good means of control. The stubs, containing
information identifying the articles, are removed at the time the items are sold. The
accumulated stubs are then posted regularly to the perpetual inventory system by hand
or through the use of an optical scanner.
A checklist, often provided by wholesalers, is another counting tool. The checklist
provides space to record the items carried, the selling price, cost price, and minimum
quantities to be ordered of each. It also contains a column in which to note whether the
stock on hand is sufficient and when to reorder. This is another very simple device

that provides the level of information required to make knowledgeable decisions about 243
Inventory Control
effective inventory management.
Most smaller operations today, except for the very smallest, are using some form of a
perpetual online system to record the movement of inventories into and out of their
facilities. In a retail operation, the clerk at the register merely scans the ticket with a
reader, and the system shows the current price and removes the item from the
inventory control system. A similar process occurs in a manufacturing operation,
except that the "sale" is actually a transfer of the inventory from control to production.
This is a particularly critical system in a large operation such as a grocery store where
they regularly maintain 12,000 plus items. Often a vendor will provide on-site or
computerized assistance needed to help their smaller customers maintain a good
understanding of their own inventory levels and so keep them in balance.
9.10.6 Inventory Control Records

Inventory control records are essential to making buy-and-sell decisions. Some
companies control their stock by taking physical inventories at regular intervals,
monthly or quarterly. Others use a dollar inventory record that gives a rough idea of
what the inventory may be from day to day in terms of dollars. If your stock is made
up of thousands of items, as it is for a convenience type store, dollar control may be
more practical than physical control. However, even with this method, an inventory
count must be taken periodically to verify the levels of inventory by item.
Perpetual inventory control records are most practical for big-ticket items. With such
items it is quite suitable to hand count the starting inventory, maintain a card for each
item or group of items, and reduce the item count each time a unit is sold or
transferred out of inventory.
Periodic physical counts are taken to verify the accuracy of the inventory card.
Out-of-stock sheets, sometimes called want sheets, notify the buyer that it is time to
reorder an item. Experience with the rate of turnover of an item will help indicate the
level of inventory at which the unit should be reordered to make sure that the new
merchandise arrives before the stock is totally exhausted.
Open-to-buy records help to prevent ordering more than is needed to meet demand or
to stay within a budget. These records adjust your order rate to the sales rate. They
provide a running account of the dollar amount that may be bought without departing
significantly from the pre-established inventory levels. An open-to-buy record is
related to the inventory budget. It is the difference between what has been budgeted
and what has been spent. Each time a sale is made, open-to-buy is increased
(inventory is reduced). Each time merchandise is purchased; open-to-buy is reduced
(inventory is increased). The net effect is to help maintain a balance among product
lies within the business, and to keep the business from getting overloaded in one
particular area.
Purchase order files keep track of what has been ordered and the status or expected
receipt date of materials. It is convenient to maintain these files by using a copy of
each purchase order that is written. Notations can be added or merchandise needs
updated directly on the copy of the purchase order with respect to changes in price or
delivery dates.
Supplier files are valuable references on suppliers and can be very helpful in
negotiating price, delivery and terms. Extra copies of purchase orders can be used to
create these files, organized alphabetically by supplier, and can provide a fast way to
determine how much business is done with each vendor. Purchase order copies also

244 serve to document ordering habits and procedures and so may be used to help reveal
and/or resolve future potential problems.
Returned goods files provide a continuous record of merchandise that has been
returned to suppliers. They should indicate amounts, dates and reasons for the returns.
This information is useful in controlling debits, credits and quality Issues.
Price books, maintained in alphabetical order according to supplier, provide a record
of purchase prices, selling prices, markdowns, and markups. It is important to keep
this record completely up to date in order to be able to access the latest price and profit
information on materials purchased for resale.
9.11 CONTROLLING INVENTORY

Controlling inventory does not have to be an onerous or complex proposition. It is a
process and thoughtful inventory management. There are no hard and fast rules to
abide by, but some extremely useful guidelines to help your thinking about the
subject. A five step process has been designed that will help any business bring this
potential problem under control to think systematically thorough the process and allow
the business to make the most efficient use possible of the resources represented. The
final decisions, of course, must be the result of good judgment, and not the product of
a mechanical set of formulas.
Step 1: Inventory Planning

Inventory control requires inventory planning. Inventory refers to more than the goods
on hand in the retail operation, service business, or manufacturing facility. It also
represents goods that must be in transit for arrival after the goods in the store or plant
are sold or used. An ideal inventory control system would arrange for the arrival of
new goods at the same moment the last item has been sold or used. The economic
order quantity, or base orders, depends upon the amount of cash (or credit) available
to invest in inventories, the number of units that qualify for a quantity discount from
the manufacturer, and the amount of time goods spend in shipment.
Step 2: Establish Order Cycles

If demand can be predicted for the product or if demand can be measured on a regular
basis, regular ordering quantities can be setup that take into consideration the most
economic relationships among the costs of preparing an order, the aggregate shipping
costs, and the economic order cost. When demand is regular, it is possible to program
regular ordering levels so that stock-outs will be avoided and costs will be minimized.
If it is known that every so many weeks or months a certain quantity of goods will be
sold at a steady pace, then replacements should be scheduled to arrive with equal
regularity. Time should be spent developing a system tailored to the needs of each
business. It is useful to focus on items whose costs justify such control, recognizing
that in some cases control efforts may cost more the items worth. At the same time, it
is also necessary to include low return items that are critical to the overall sales effort.
If the business experiences seasonal cycles, it is important to recognize the demands
that will be placed on suppliers as well as other sellers.
A given firm must recognize that if it begins to run out of product in the middle of a
busy season, other sellers are also beginning to run out and are looking for more
goods. The problem is compounded in that the producer may have already switched
over to next seasons production and so is not interested in (or probably even capable
of) filling any further orders for the current selling season. Production resources are
likely to already be allocated to filling orders for the next selling season. Changes in
this momentum would be extremely costly for both the supplier and the customer.

On the other hand, because suppliers have problems with inventory control, just as 245
Inventory Control
sellers do, they may be interested in making deals to induce customers to purchase
inventories off-season, usually at substantial savings. They want to shift the carrying
costs of purchase and storage from the seller to the buyer. Thus, there are seasonal
implications to inventory control as well, both positive and negative. The point is that
these seasonable implications must be built into the planning process in order to
support an effective inventory management system.
Step 3: Balance Inventory Levels

Efficient or inefficient management of merchandise inventory by a firm is a major
factor between healthy profits and operating at a loss. There are both market-related
and budget-related issues that must be dealt with in terms of coming up with an ideal
inventory balance:
Is the inventory correct for the market being served?
Does the inventory have the proper turnover?
What is the ideal inventory for a typical retailer or wholesaler in this business?
To answer the last question first, the ideal inventory is the inventory that does not lose
profitable sales and can still justify the investment in each part of its whole.
An inventory that is not compatible with the firms market will lose profitable sales.
Customers who cannot find the items they desire in one store or from one supplier are
forced to go to a competitor. Customer will be especially irritated if the item out of
stock is one they would normally expect to find from such a supplier. Repeated
experiences of this type will motivate customers to become regular customers of
competitors.
Step 4: Review Stocks

Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping
inventory up to date and devoid of obsolete merchandise is another critical aspect of
good inventory control. This is particularly important with style merchandise, but it is
important with any merchandise that is turning at a lower rate than the average stock
turns for that particular business. One of the important principles newer sellers
frequently find difficult is the need to mark down merchandise that is not moving
well.
Markups are usually highest when a new style first comes out. As the style fades,
efficient sellers gradually begin to mark it down to avoid being stuck with large
inventories, thus keeping inventory capital working. They will begin to mark down
their inventory, take less gross margin, and return the funds to working capital rather
than have their investment stand on the shelves as obsolete merchandise. Markdowns
are an important part of the working capital cycle. Even though the margins on
markdown sales are lower, turning these items into cash allows you to purchase other,
more current goods, where you can make the margin you desire.
Keeping an inventory fresh and up to date requires constant attention by any
organization, large or small. Style merchandise should be disposed of before the style
fades. Fad merchandise must have its inventory levels kept in line with the passing
fancy. Obsolete merchandise usually must be sold at less than normal markup or even
as loss leaders where it is priced more competitively. Loss leader pricing strategies
can also serve to attract more' consumer traffic for the business thus creating
opportunities to sell other merchandise as well as well as the obsolete items.
Technologically obsolete merchandise should normally be removed from inventory at
any cost.

246 Stock turnover is really the way businesses make money. It is not so much the profit
per unit of sale that makes money for the business, but sales on a regular basis over
time that eventually results in profitability. The stock turnover rate is the rate at which
the average inventory is replaced or turned over, throughout a pre-defined standard
operating period, typically one year. It is generally seen as the multiple that sales
represent of the average inventory for a given period of time.
Turnover averages are available for virtually any industry or business maintaining
inventories and having sales. These figures act as an efficient and effective benchmark
with which to compare the business in question, in order to determine its effectiveness
relative to its capital investment. Too frequent inventory turns can be as great a
potential problem as too few. Too frequent inventory turns may indicate the business
is trying to overwork a limited capital base, and may carry with it the attendant costs
of stock-outs and unhappy and lost customers.
Stock turns or turnover, is the number of times the "average" inventory of a given
product is sold annually. It is an important concept because it helps to determine what
the inventory level should be to achieve or support the sales levels predicted or
desired. Inventory turnover is computed by dividing the volume of goods sold by the
average inventory. Stock turns or inventory turnover can be calculated by the
following equations:
Cost of Goods Sold
Stock Turn =
Average Inventory at Cost
Or
Sales
=
Average Inventory at Sales Value
If the inventory is recorded at cost, stock turn equals cost of goods sold divided by the
average inventory. If the inventory is recorded at sales value, stock turn is equal to
sales divided by average inventory. Stock turns four times a year on the average for
many businesses. Jewelry stores are slow, with two turns a year, and grocery stores
may go up to 45 turns a year.
If the dollar value of a particular inventory compares favorably with the industry
average, but the turnover of the inventory is less than the industry average, a further
analysis of that inventory is needed. Is it too heavy in some areas? Are there reasons
that suggest more inventories are needed in certain categories? Are there conditions
peculiar to that particular firm? The point is that all markets are not uniform and
circumstances may be found that will justify a variation from average figures.
In the accumulation of comparative data for any particular type of firm, a wide
variation will be found for most significant statistical comparisons. Averages are just
that, and often most firms in the group are somewhat different from that result.
Nevertheless, they serve as very useful guides for the adequacy of industry turnover,
and for other ratios as well. The important thing for each firm is to know how the firm
compares with the averages and to determine whether deviations from the averages
are to its benefit or disadvantage.
Step 5: Follow-up and Control

Periodic reviews of the inventory to detect slow-moving or obsolete stock and to
identify fast sellers are essential for proper inventory management. Taking regular and
periodic inventories must be more than just totaling the costs. Any clerk can do the
work of recording an inventory. However, it is the responsibility of key management
to study the figures and review the items themselves in order to make correct

decisions about the disposal, replacement, or discontinuance of different segments of 247

Inventory Control
the inventory base.
Just as an airline cannot make money with its airplanes on the ground, a firm cannot
earn a profit in the absence of sales of goods. Keeping the inventory attractive to
customers is a prime prerequisite for healthy sales. Again, the seller's inventory is
usually his largest investment. It will earn profits in direct proportion to the effort and
skill applied in its management.
Inventory quantities must be organized and measured carefully. Minimum stocks must
be assured to prevent stock-outs or the lack of product. At the same time, they must be
balanced against excessive inventory because of carrying costs. In larger retail
organizations and in many manufacturing operations, purchasing has evolved as a
distinct new and separate phase of management to achieve the dual objective of higher
turnover and lower investment. If this type of strategy is to be utilized, however,
extremely careful attention and constant review must be built into the management
system in order to avoid getting caught short by unexpected changes in the larger
business environment.
9.12 JUST-IN-TIME
Just-in-Time (JIT) is a term that has often been used interchangeably with Lean
Manufacturing. Some say it is a predecessor to Lean Manufacturing, but in any case, it
is an essential part of lean manufacturing.
JIT is a management philosophy that strives to eliminate sources of manufacturing
waste by producing the right part in the right place at the right time. Waste results
from any activity that adds cost without adding value such as moving and storage. JIT
improves profits and return on investment by reducing inventory levels, reducing
variability, improving product quality and reducing production and delivery lead
times. In a JIT system, underutilized (excess) capacity is used instead of buffer
inventories to hedge against problems that may arise.
Just-in-time is a movement and idea that has gained wide acceptance over the past
decade. As companies became more and more competitive and the pressures from
Japan's continuous improvement culture mounted, other firms were forced to find
innovative ways to cut costs and compete. The notion of pushing materials in large
quantities no longer made sense. Both the financial costs and the required resources of
doing so are counter productive in the long run. It is wiser to deliver materials only
just before they are needed and only in the quantity required.
A firm cannot implement a JIT system by itself; it must have the complete cooperation
of its entire Supply Chain. A large amount of information is needed for a JIT system
to operate well. It demands partnerships to be formed and nurtured, almost to the point
at which an entire supply chain operates as one firm. Examples of these kinds of
partnerships are everywhere in todays business world.
9.13 KANBAN
Kanban is a Japanese word meaning flag or signal and is a visual aid to convey the
message that action is required. The Kanban inventory control system was an integral
part of TPS and some aspects of the Kanban have been discussed in the 'pull concept'.
JIT uses a Kanban system. It works on the basis that each process on a production line
pulls just the number and type of components the process requires, at just the right
time. Kanban is usually a physical card but other devices can be used. A Kanban is a
card that is attached to a storage and transport container. It identifies the part number

248 and container capacity along with other information. There are two common types of
Kanban systems used; the one-card system and the two-card system.
9.13.1 The Two-card System

The two-card system is the more popularly used Kanban system. It uses two kinds of
Kanban cards:
1. Conveyance Kanban (C-Kanban), signals the need to deliver more parts to the
next work center. It specifies the kind and quantity of product which a
manufacturing process should withdraw from a preceding process. The C-Kanban
in Figure 9.15 shows that the preceding process which makes this part is forging,
and the person carrying this Kanban from the subsequent process must go to
position B-2 of the forging department to withdraw drive pinions. Each box of
drive pinions contains 20 units and the shape of the box is B. This Kanban is the
4th of 8 issued. The item back number is an abbreviation of the item.
2. Production Kanban (P-Kanban), signals the need to produce more parts.
It specifies the kind and quantity of product which the preceding process must
produce. The P-Kanban on the right in Figure 9.15 shows that the machining
process SB-8 must produce the crankshaft for the car type SX50BC-150. The
crankshaft produced should be placed at store F26-18. The production-ordering
Kanban is often called an in-process Kanban or simply a production Kanban.
Figure 9.15: C-Kanban and P-Kanban

Each process (area, cell) on the production line has two Kanban post-boxes, one for
C-Kanbans and one for P-Kanbans. At regular intervals a worker takes C-Kanbans
that have accumulated in his process post-box, and any empty pallets, to the location
where finished parts (components, assemblies) from the preceding process are stored.
Each full pallet has attached to it one or more P-Kanbans which he removes and puts
in the appropriate post-box belonging to the process that produced the parts. The
worker now attaches a P-Kanban to the pallet and takes it back to his own process
area. When this new pallet begins being used its C-Kanban is put back into the
post-box. At each process on the line P-Kanbans are periodically removed from their
post-box and used to define what parts and quantities to produce next. There are three
rules that must be followed:
1. No parts to be made unless P-Kanban authorizes production
2. Exactly one P-Kanban and one C-Kanban for each container
3. Only standard containers are used and they are always filled with the prescribed
quantity.
The number of kanban card sets required in a particular location can be calculated as:
K = (Expected demand during lead time + Safety stock)/(Size of the container)
If rounding is necessary, K must be rounded up to the next highest integer.

Lean Manufacturing strives to maximize long-term profitability and growth. Kanbans 249
Inventory Control
help simplify planning and to fine-tune production to meet changing customer demand
of up to 10%. The system requires planned monthly and weekly production
schedules. Kanbans simplify day-to-day flexibility, hence changes to the production
schedule only need to be given to the final assembly process and then automatically
work their way back up the line.
Kanban systems can be tightened by removing cards or by reducing the number of
parts on a pallet. The effect will be to speed the flow through the process and hence
reduce lead times. However, it also makes the system more vulnerable to breakdowns
and other causes of dislocation. By identifying the areas within the line that are
causing disruption, efforts can be made to improve them. Thus, the overall efficiency
of the line is raised by tackling the key points.
A Kanban system is a pull system, in which the Kanban is used to pull parts to the
next production stage when they are needed; an MRP system (or any schedule based
system) is a push system, in which a detailed production schedule for each part is used
to push parts to the next production stage when scheduled. The weakness of a push
system (MRP) is that customer demand must be forecast and production lead times
must be estimated accurately. The weakness of a pull system (Kanban) is that
following the Lean Manufacturing philosophy is essential, especially concerning the
elements of short setup times and small lot sizes.
Single Card Kanban Systems: In a single-card Kanban system, parts are produced and
bought according to a daily schedule and deliveries to the user are controlled by a
C-Kanban. In effect, the single-card system is a push system for production coupled
with a pull system for delivery to the point of use.
Single-card Kanban controls deliveries very tightly so that the using work center never
has more than a container or two of parts and the stock points serving the work center
are eliminated. Single-card systems work well in companies in which it is relatively
easy to associate the required quantity and timing of component parts with the
schedule of end products. These are usually companies with a relatively small range of
end products or products which are not subject to rapid, unexpected changes in
demand levels.
9.13.2 Attributes of JIT

Just-in-time has been discussed as a way to control flows of material through
sequential processes, with particular emphasis on the pacing by downstream processes
of the production and delivery work done by upstream processes. While this and
associated issues of inventory control are important aspects of JIT as used in practice,
this emphasis misses attributes of JIT that contribute to problem solving, process
improvement and the operations-based sustainable competitive advantage often
associated with Toyota and its affiliates. These attributes are explained through a real
life example.
The Aisin JIT System is shown in Figure 9.16 Aisin is a first-tier, auto-parts supplier
to Toyota. It also manufactures consumer products such as mattresses, sewing
machines and computerized bathroom scales.

250
Figure 9.16: Aisin JIT System

Customer orders (item 1) determine production mix, volume and delivery timing for
the plant. Production control creates printed manifests establishing the production
mix, volume, and sequence with one manifest for every mattress and sends the
individual manifest to the start of the quilting line (item 2). It also sends one that
corresponds to the same mattress to the start of the framing line (item 3).
For every mattress for which a manifest-set was sent to the start of quilting and
framing, a separate signal was sent to the end of the assembly line (item 4), indicating
that the next mattress was to be taken to shipping.
This signal continued through the system and established for each worker when to
produce and deliver one more unit and thereby determined each person's correct
production pace.
Stores, which separated process-stages in the plant, were located between quilting and
assembly (item 5) and framing and assembly (item 6). These stores were the only way
to transfer units between the feeder and the assembly lines. They operated on a
first-in, first-out basis. Therefore, the stores protected the unambiguous production
mix and sequence established at the start of quilting and framing. Stores also protected
the production rate across process-stages because of their capacity limitations.
As materials were depleted, individual 'Kanban' cards were sent to the person who
ordered material thereby automatically authorizing delivery of small batches of
replacement supplies. Kanban cards were the only way of reordering certain materials
and were used every time a specific customer had to reorder material of a particular
type. They went to a specific supplier and established the criteria for a good response
(i.e., the card for fabric-1 was different than that for fabric-2 and indicated a
pre-agreed quantity, such as 20 meters worth of cloth). The person who received the
individual Kanban cards reordered materials by sending a shipment worth of Kanban
cards to the external supplier, on an established schedule. By extending the rate and
sequence with which customer orders were filled from within the Aisin plant to
external suppliers as well, the entire system was linked to the mass customization
effort.
The plant transitioned from mass production to mass customization in 1986. The
impact of using JIT in spite of continued increases in volume and variety is shown in

Table 9.10. One can see the increases in productivity and simultaneous reductions in 251
Inventory Control
lead-time and inventory.
Table 9.10: Aisin Mattress Production: Historical Mix, Volume and Inventory
This transition was achieved despite challenges characteristic of making complex

items more general such as multiple process stages, imbalanced and variable process
times, product variety and fluctuations in the mix, volume, and timing of demand.
Thus, rather than facing static trade-offs along a fixed 'production possibilities frontier'
the plant repeatedly improved its manufacturing process and continued to achieve
much better frontiers.
Manifests traveled with mattresses at each step. The information on each manifest
established fully the criteria of what each worker had to do to achieve a good
outcome. Linking individual, customer orders to the end of production initiated a pull
that extended upstream to external suppliers. Each batch of Kanban cards also had an
unambiguous meaning. A batch of cards was the only way to specify the mix and
volume of the next shipment and was sent for every order.
The example shows the JIT system at work. The process established the production
rhythm for the entire plant by structuring information unambiguously between
external customers and the plant, within the assembly line, between assembly and its
feeder process-stages and between the feeder processes and their external suppliers.
The basic difference between the two inventory ordering systems is:
1. The fixed-order quantity models are time triggered, and
2. Fixed-time period models are event triggered.
Which of these statements are false?
9.14 LET US SUM UP

in the future. Formulating inventory policy requires understanding the inventorys role
in the firm. Though inventory is an idle resource and adds to the risk of the firm, it is
almost essential to keep some inventory in order to promote smooth and efficient
running of business.
The different types of inventories have different risks depending upon the firms
position in the distribution channel. If an individual enterprise plans to operate at more
than one level of the distribution channel, it must be prepared to assume additional
inventory risk. In light of all quality, customer service and economic factorsfrom
the viewpoints of purchasing, manufacturing, sales and financeeffective inventory
management is essential to organizational competitiveness.
The heart of inventory decisions lies in the identification of inventory costs and
optimizing the costs relative to the operations of the organization: When items should

252 be ordered, how large the order should be, and when and how many to deliver.
The following costs are generally associated with inventories: Holding (or carrying)
costs, Cost of ordering, Setup (or production change) costs, and Shortage or Stock-out
Costs.
Many selective inventory management techniques are used. The most common is the
ABC Classification. The ABC classification is based on focusing efforts where the
payoff is highest; i.e. high-value, high-usage items are tracked carefully and
continuously, while the level of control for other items tapers off. Other similar types
of classifications are the XYZ Classification, VED Classification, and the HML
classification of inventory. All these techniques are used to focus management
attention in deciding on the degree of control necessary for different items in the
inventory.

Shortages are undesirable, but some organizations create shortages intentionally.
How is this justified from an economic point of view? Derive an expression for total
cost in the inventory model for intentional shortages.
9.16 KEYWORDS
ABC Classification, or the alphabetical approach, is based on the annual consumption
value based on the 80:20 principle, efforts are focused where the payoff is highest.
Anticipation Stock: Stock kept at hand to meet seasonal fluctuations in demand or to
meet the shortfall caused by erratic production. Also called build stock or seasonal
stock.
Cost of Ordering: The cost to replenish inventory.
Decoupling Stock: A buffer stock used between productions processes to make one
process independent of the other.
Economic Order Quantity (EOQ): Models determine order size by minimizing the
cost of ordering and the cost of holding inventory.
Fixed-order Quantity Models: At an identified level of the stock the fixed-order
quantity model initiates an order; they are event triggered.
Fixed-time Period Models are time triggered i.e. the model initiates an order after a
fixed-time.
Holding (or Carrying) Costs: The cost to hold inventory. This category includes the
costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence,
depreciation, taxes, and the opportunity cost of capital.

1. What is economic order quantity (EOQ)? Explain the EOQ model of inventory
with its simplifying assumptions. How is the model of inventory used by a
manufacturer different from a retailer?
2. Inventory control system may need to be modified as demand, costs, and
competitive pressures changes. What are the parameters that should be reviewed
for the fixed reorder quantity and periodic reorder systems?
3. What is the cost of uncertainty in demand during lead time?
4. Nuvyug Industries Ltd. has an annual requirement of 5,000 pieces of brake 253
Inventory Control
cylinders for its popular brand of golf carts. Each brake cylinder has a carrying
cost of `25 per unit per year. The Ordering Cost per order is ` 800. Calculate the
total inventory cost for the following values of number of orders: 5, 10, 20, and
25. Plot the various costs with respect to these orders on a graph and use it to find
the EOQ.

CYP 1
1. True
2. True
CYP 2
1. True
2. True
3. True
4. True
CYP 3
1. False
2. False

Chopra and Meindl, Supply Chain Management Strategy, Planning, and Operation,
Prentice, Hall of India, 2006.
Gattorna, J., Gower, Handbook of Supply Chain Management, 2003.
Mentzer (ed.), Supply Chain Management, Response Books, 2001.
Wisner, Leong and Tan, Principles of Supply Chain Management A Balanced
Approach, Thomson South-Western, 2005.
Lee, Heu L., and Corey Billington, Managing Supply Chain Inventory, Sloan
Management Review (Spring 1992), pp. 65-73.
Solver, Edword A., David Pyke, and Rein Peterson, Inventory Management and
Production Planning and Scheduling, Wiley, New York, 1998.
30
Micro-Finance:

255
Total Quality Management
UNIT V

256

257
LESSON Total Quality Management
10
TOTAL QUALITY MANAGEMENT
CONTENTS
10.1 Introduction
10.2 Definition
10.3 Why Quality Management?
10.4 Statistical Process Control (SPC)
10.5 Statistical Quality Control (SQC)
10.6 Company Wide Quality Control (CWQC)
10.7 Acceptance Sampling
10.8 Acceptance Sampling Plan
10.8.1 Sampling Plans
10.8.2 Characteristics of a Good Sampling Plan
10.8.3 Points to remember while using Acceptance Sampling
10.9 OC Curve
10.9.1 The Shape of the OC Curve
10.9.2 Some Specific Points on the OC Curve
10.9.3 A Stream of Lots and the Binomial Distribution
10.9.4 The Isolated Lot and the Hypergeometric Distribution
10.9.5 Single and Double Sample Plans
10.10 Use of OC Curve
10.11 Concept of Type I and Type II Error
10.11.1 Type I Error
10.11.2 Type II Error
10.11.3 Type I and Type II Errors and their Applications
10.12 Quality Movement
10.13 Quality Circles
10.14 Let us Sum up
10.16 Keywords

258
Operations Management 10.0 AIMS AND OBJECTIVES
Describe TQM concept
Attempt an analysis of the improvement process
Understand the principles of the total quality management
Know about the implementation and measurement of TQM
10.1 INTRODUCTION
Total Quality Management (TQM), a buzzword phrase of the 1980's, has been killed
and resurrected on a number of occasions. The concept and principles, though simple
seem to be creeping back into existence by "bits and pieces" through the evolution of
the ISO 9001 Management Quality System standard.
"Total Quality Control" was the key concept of Armand Feigenbaum's 1951 book,
Quality Control: Principles, Practice, and Administration, in a chapter titled "Total
Quality Control" Feigenbaum grabs on to an idea that sparked many scholars interest
in the following decades, that would later be catapulted from Total Quality Control to
Total Quality Management. W. Edwards Deming, Joseph Juran, Philip B. Crosby, and
Kaoru Ishikawa, known as the big four, also contributed to the body of knowledge
now known as Total Quality Management.
The American Society for Quality says that the term Total Quality Management was
used by the U.S. Naval Air Systems Command "to describe its Japanese-style
management approach to quality improvement." This is consistent with the story that
the United States Navy Personnel Research and Development Center began
researching the use of Statistical Process Control (SPC); the work of Juran, Crosby,
and Ishikawa; and the philosophy of W. Edwards Deming to make performance
improvements in 1984. This approach was first tested at the North Island Naval
Aviation Depot.
Companies who have implemented TQM include Ford Motor Company, Phillips
Semiconductor, SGL Carbon, Motorola and Toyota Motor Company.
The latest changes coming up for the ISO 9001:2000 standards "Process Model"
seem to complete the embodiment. TQM is the concept that quality can be managed
and that it is a process.
Total Quality Management (TQM) is a management strategy aimed at embedding
awareness of quality in all organizational processes. TQM has been widely used in
manufacturing, education, government, and service industries, as well as NASA space
and science programs.
Total Quality Management (TQM)

Total = Quality involves everyone and all activities in the company.
Quality = Conformance to Requirements (Meeting Customer Requirements).
Management = Quality can and must be managed.
TQM = A process for managing quality; it must be a continuous way of life;
a philosophy of perpetual improvement in everything we do.

259
10.2 DEFINITION Total Quality Management
TQM is composed of three paradigms

1. Total: Involving the entire organization, supply chain, and/or product life cycle
2. Quality: With its usual Definitions, with all its complexities (External Definition)
3. Management: The system of managing with steps like Plan, Organize, Control,
Lead, Staff, provisioning and the likes.
As Defined by the International Organization for Standardization (ISO)
TQM is a management approach for an organization, centered on quality, based on
the participation of all its members and aiming at long-term success through customer
satisfaction, and benefits to all members of the organization and to society.
One major aim is to reduce variation from every process so that greater consistency of
effort is obtained.
A Comprehensive Definition
TQM Total Quality Management is the organization wide management of quality. We
know that management consists of planning, organizing, directing, control, and
assurance. Then, one has to define "total quality". Total quality is called total because
it consists of 3 qualities: Quality of return to satisfy the needs of the shareholders.
10.3 WHY QUALITY MANAGEMENT?
Figure 10.1: Evolution of Quality Management Concept

Total Quality Management (TQM) in its various forms appears to dominate business
life nowadays. In the earlier days before the emergence of the Industrial Revolution,
quality did not pose any problem as the emphasis was on individual craftsmanship,
workmanship and skills. The era of mass production initiated the industrial revolution
and quality started getting attention. From then on, quality has been a problem
addressed for a long time and has progressed from stages of playing a purely reactive
role (inspection) to its present prominence in shaping the competitive strategy of
business. Figure 10.1 depicts this evolution. The development of quality management
through phases involved the work of pioneers such as Juran, Feingenbaum, Deming,

260 Crosby, Ishikawa and many others. We will learn more about the work of these
quality Gurus in the next unit as we go along. The quality movement has thus
progressed until the present day when quality has taken a central place in determining
the organisational objectives and competitive positives.
It seems that, besides the Japanese, the rest of the world has suddenly woken up from
a long sleep with eagerness and a sense of urgency to be updated on all the potential
benefits of quality which is being adopted as a way of conducting business. Let us
now look briefly at some of the important factors, which caused this realization. They
are:
Question of survival in an intense competitive environment: The industrial
development in any society/country takes place in phase. In the initial phase,
subsequent to identifying a need, one or few suppliers emerge to provide the
product/service to satisfy the need of customers. This near-monopoly situation
dominated by the supplier creates a seller's market enabling the suppliers to
provide a product/service of the quality they are capable of providing without
bothering whether their products satisfy the need or not. However, soon in the
later phase, more and more suppliers looking for business opportunities emerge on
the scene creating a buyer's market enabling the customers to choose a supplier.
As you must have observed, over the last 10 years or so, phenomenal changes
have taken place in the economic scenario all over the world. By now, we are
sure, you are familiar with the terms "globalisation and "liberalisation".
Economic barriers, which existed in many world economies, have broken down
and the whole world, economy-wise, has shrunk as one big market allowing
almost free exchange of goods and services. Suppliers now not only face
competition from domestic suppliers but also from the international ones. All the
suppliers try their best to retain and possibly increase their market share. We are
in the era of intense competition, and for suppliers all over the world it has
become a question of survival. Just conforming to specifications and satisfying the
needs of the customer is no more enough. The emphasis now is on delighting and
winning over customers. The earlier concepts of quality management have been
found inadequate to meet this objective, giving rise to the present concept of total
quality management.
Increasing Customer Consciousness: Customers all over the world are becoming
increasingly conscious about getting more than just value for the money paid for
products and services they buy. Backed by government laws and regulations, a
number of agencies (governmental and non-governmental) have emerged which
are working for protection of consumer's interests. The needs of the customers
also keep on changing fast. Unless the suppliers are fast enough and are capable of
satisfying the changed needs, they just lose the customers, ultimately resulting in a
reduction in their market share.
Need for earning profit instead of making profit: All business organisations have
to be profit-oriented as profits are essential for the very survival of the
organisation-and are also needed for its growth. In the earlier economic situation
of seller's market, organisations used to make profit through the age-old equation
of cost price (CP) + Profit (P) = Sales price (SP). The selling price used to be
fixed in such a way that it automatically ensured making of as much profit as
desired by the supplier organisation. In the present prevailing competitive buyer-
dominated situation, this equation is no more valid as the market forces now
determine the selling price. Therefore, if the supplier organisation has to achieve
the profit objective, it has now to earn profit by controlling the cost price. As you
are aware, some of the major components which make up cost price are costs of
material, energy and human resources. You are also aware how all the three costs

keep on rising and the supplier organisation has no control on the cost of these 261
inputs. So, for controlling the cost price, the only major way in the hands of the
supplier is to reduce what is known as 'quality cost' i.e. cost incurred by an
organisation for making non-conforming products. The cost of repair,
reprocessing, regarding and/or scrapping non-conforming products form a big
chunk of the total sales turnover - as much as 20 to 30% as revealed by way of
case studies. You will learn more about quality cost as you go along. To reduce
the Quality Cost, the objective of the supplier should, therefore, be to make things
right first time and every time a TQM approach.
Organisational issues pointing to the need to focus on TQM:
That Leadership plays a very crucial le in the total business performance of
the organisation has now been realized. The quality of ah organisation is
largely influenced by the quality of its leader. And, therefore, it has to be a
major ingredient of quality management.
Human resource management is one issue that is receiving increasing
attention in organisations all, over the world. In fact, it has been a major factor
for many Japanese organisations to become world leaders. Though not
considered important enough earlier, it now forms another major component
of quality management.
The advent of revolution in information technology.
It intensifies the need for everyone in the organisation to be computer literate.
The distribution of power relating to technical, problems solving, and
decision-making abilities in the organisation through computer networks.
The speed, directness and immediacy of information exchange, both within
the organisation at all levels and between organizations and key external
stakeholders (suppliers and customers), is redefining business relationship and
responsibilities.
If you appreciate the factors listed above, you will realize the inadequacy of the earlier
static approach to quality management and the need for some dynamic approach. This
is provided by what has come to be known as Total Quality Management approach
(TQM). As per definition provided by the International Organisation for
Standardisation (ISO), TQM is a "management approach of an organisation, centered
on quality, based on the participation of all its members and aiming at long-term
success through customer satisfaction, and benefits to all members of the organisation
and to society".
10.4 STATISTICAL PROCESS CONTROL (SPC)

The application of statistical techniques to control a process; often used
interchangeably with the term statistical quality control.
Statistical Process Control (SPC) involves using statistical techniques to measure and
analyze the variation in processes. Most often used for manufacturing processes, the
intent of SPC is to monitor product quality and maintain processes to fixed targets.
Statistical quality control refers to using statistical techniques for measuring and
improving the quality of processes and includes SPC in addition to other techniques,
such as sampling plans, experimental design, variation reduction, process capability
analysis, and process improvement plans.

262 SPC is used to monitor the consistency of processes used to manufacture a product as
designed. It aims to get and keep processes under control. No matter how good or bad
the design, SPC can ensure that the product is being manufactured as designed and
intended. Thus, SPC will not improve a poorly designed product's reliability, but can
be used to maintain the consistency of how the product is made and, therefore, of the
manufactured product itself and its as-designed reliability.
A primary tool used for SPC is the control chart, a graphical representation of certain
descriptive statistics for specific quantitative measurements of the manufacturing
process. These descriptive statistics are displayed in the control chart in comparison to
their "in-control" sampling distributions. The comparison detects any unusual
variation in the manufacturing process, which could indicate a problem with the
process. Several different descriptive statistics can be used in control charts and there
are several different types of control charts that can test for different causes, such as
how quickly major vs. minor shifts in process means are detected. Control charts are
also used with product measurements to analyze process capability and for continuous
process improvement efforts.
Benefits
Provides surveillance and feedback for keeping processes in control
Signals when a problem with the process has occurred
Detects assignable causes of variation
Accomplishes process characterization
Reduces need for inspection
Monitors process quality
Provides mechanism to make process changes and track effects of those changes
Once a process is stable (assignable causes of variation have been eliminated),
provides process capability analysis with comparison to the product tolerance.
10.5 STATISTICAL QUALITY CONTROL (SQC)
Figure 10.2: Statistical Quality Control

The application of statistical techniques to control quality. Often used interchangeably 263
with the term statistical process control, although statistical quality control includes
acceptance sampling, which statistical process control does not. It provides the
methods and tools for the manufacturing manager to improve quality, increase
productivity, and enhance the competitive position of the manufacturing line.
Proposes potentially controversial methods of performance appraisals, operation
certification, line qualification, vendor certification, and just-in-time manufacturing.
Statistical quality control provides the statistical techniques necessary to assure and
improve the quality of products. Most of the statistical quality techniques used now
have been developed during the last century. Basic steps in statistical quality control
methodology are represented in Figure 10.2, which also lists the output of each step.
Advantage of Statistical Quality Control

When the quality of a product is tested by destructive testing, then 100% testing
will spoil all the products. Under statistical quality control very few products will
be destructed in testing.
It ensures control, maintenance and improvement in the quality standards.
It provides better quality assurance at lower inspection cost.
It reduces the wastage of time and material to the minimum. It reduces the
inspection and manufacturing cost and enhances profits.
10.6 COMPANY WIDE QUALITY CONTROL (CWQC)

CWQC is a system of activities to assure that quality products and services required
by customers are economically designed, produced and supplied while respecting the
principle of customer-orientation and the overall public well-being. These quality
assurance activities involve market research, research and development, design,
purchasing, production, inspection and sales, as well as other related activities inside
and outside the company. Through everyone in the company understanding both the
statistical concepts and methods, through their application to all the aspects of quality
assurance and through the repeating cycle of rational planning, implementation,
evaluation and action, CWQC aims to accomplish business objectives.
This definition will come as a surprise to people who consider that the Deming Prize
is just based on the application of statistical techniques to manufacturing processes.
Whereas the Baldrige Award and European Quality Award take a much deeper look at
customer satisfaction and service quality as excellence criteria, there is no doubt that
some of these principles are embedded in the Deming framework. The most recent
(1994) version of the framework has significant change of language away from
quality control to total quality management. It also introduces some of the features
of the Baldrige and EFQM frameworks, such as corporate social responsibility.
It is true, however, that the main strengths of the Deming Prize criteria are the focus
they have on top management leadership, process control, Kaizen improvement
activities and on future planning to ensure that the gains will be sustained. Kaizen is a
philosophy of continuous improvement of all the organizations employees, so that
they can make an incremental contribution to continuous improvement each day.
The framework looks specifically at the role and effectiveness of the senior
management team. The term control in Japanese implies management, and hence
Japanese quality control really means quality management. In the Western world we
have a different perception of the term quality control.

264 The purpose of the award, as first defined by JUSE, is:

To award prizes to those companies that are recognized us having successfully
applied Company-wide Quality Control based on statistical control and are likely to
keep it up in the future.
Consequently, criteria such as company policy and planning, results and future plans
are primarily concerned with quality assurance activities and quality results, especially
the elimination of defects.
10.7 ACCEPTANCE SAMPLING

Acceptance sampling is a quality assurance technique used for inspecting incoming
material and outgoing (finished) products. It is a technique where decisions to accept
or reject products or services are taken on the basis of sampling inspection. It provides
only an indirect means for quality improvement.
Acceptance sampling is an important field of statistical quality control that was
popularized by Dodge and Roming and originally applied by the U.S. military to the
testing of bullets during World War II. If every bullet were tested in advance, no
bullets would be left to ship. If, on the other hand, none were tested, malfunctions
might occur in the filed of battle, with potentially disastrous results.
Dodge reasoned that a sample should be picked at random from the lot, and on the
basis of information that was yielded by the sample, a decision should be made
regarding the disposition of the lot. In general, the decision is either to accept or reject
the lot. This process is called Lot Acceptance Sampling or just Acceptance Sampling.
It is used to minimize the Average Total Inspection (ATI) per lot product for a given
process average.
Acceptance sampling involves a system of principles and methods to define decision
rules to accept or reject product based on sample data. It depends on:
the quality requirements of the product in the marketable place;
the capability of the process; and
the cost and logistics of sample taken.
Acceptance sampling is the middle of the road approach between no inspection and
100% inspection. There are two major classifications of acceptance plans: by
attributes and by variables. The attributes case is the most common for acceptance
sampling, and will be assumed for the rest of this section.
Acceptance sampling plans can be applied for inspection of:
End items,
Components,
Raw materials,
Operations,
Materials in process,
Supplies in storage,
Maintenance operations, and
Data or record and administrative procedures.

Acceptance sampling plans are commonly used in manufacturing to decide whether to 265
accept or to reject lots of product. However, they can also be used during validation to
accept or to reject the process.
Acceptance sampling will require the selection of a sampling plan. Sampling plans are
used to make product disposition decisions. A sampling plan will determine the size of
a sample and the number of defectives permitted in the sample top determine the
acceptance or rejection of the population.
The two parameters of sampling plans are:
N = Sample size (number of units in the sample)
C = Acceptance number (maximum number of defective units allowed in a sample to
decide the acceptance or rejection of the population)
Types of acceptance sampling plans: This categorization depends on when the
inspection takes place. Outgoing inspection happens when the batches are inspected
before the product is shipped to the consumer. If the inspection is done by the
consumer, after they were received from the supplier, it is called incoming inspection.
Rectifying vs. outgoing inspections: This determines what is done with non-
conforming items that were found during the inspection. The cost of replacing faulty
items with new ones, or reworking them is accounted for, the sampling plan is
rectifying.
Sampling by attributes vs. sampling by variables: Sampling by attributes occurs when
the inspection of an item is done for an attribute and leads to binary result or the
numbers of non-conformities in an item are counted. When inspection is done to a
continuous measurement, then we are sampling by variables.
Single, double, and multiple plans: The sampling procedure may consist of drawing a
single sample, or it may be done in two or more steps. A double sampling procedure
means that if the sample taken from the batch is not informative enough, another
sample is taken. In multiple sampling, additional samples can be drawn after the
second sample.
Following the acceptance by a sampling plan, one can make confidence statement
such as: With 95% confidence, the defect rate is below 1% defective. A point to
remember is that the main purpose of acceptance sampling is to decide whether or not
the lot is likely to be acceptable, not to estimate the quality of the lot.
For selecting statistically valid sampling plans, one must clearly define the objective
of the inspection and one must demonstrate that the sampling plan allows this
objective to be met.
The selection of a sampling plan must be guided by:
Cost of the inspection that will be incurred
Protection provided to the producer and customer by the high efficiency of the
sampling.
Ideally, a sampling plan should reject all bad lots while accepting all good lots.
However, because the sampling plan bases it decisions on a sample of the lot and not
the entire lot, these is always a chance of making an incorrect decision.

266 A well-designed sampling plan would help to achieve

Higher productivity
Avoiding production losses
Reducing inspection cost
Maintaining smooth business relations and
Healthy growth of business
The behavior of a sampling of a sampling plan is described by the sampling plans
Operating Characteristic (OC) curve. Acceptance sampling makes use of standard
table such as the Dodge-Rowing Sampling Tables of Military Standards 105D (MIL
STD-105D).
10.8 ACCEPTANCE SAMPLING PLAN

Acceptance control charts are acceptance-sampling plans that are converted into chart
form for implementation. They control he producers point and the consumers point
of the Operating Curve (OC-curve).
Harold Dodge pointed in 1969 that Acceptance Quality Control is not the same as
Acceptance Sampling. The latter depends on specific sampling plans, which when
implemented indicate the conditions for acceptance or rejection of the immediate lot
that is being inspected. The former may be implemented in the form of an Acceptance
Control Chart.
The control limits for the Acceptance Control Chart are computed using the
specification limits and the standard deviation of what is being monitored. Acceptance
charts provide a valid visible means for making acceptance-sampling decisions. They
can be in the case of variable (actual Measurements) data.
10.8.1 Sampling Plans

Sampling plans are used to make product disposition decisions. They decide which
lots of product to accept and release and which lots to reject and either rework or
discard. Ideally, a sampling plan should reject all bad lots while accepting all
good lots.
However, because the sampling plan bases it decision on a sample of the lot and not
the entire lot, there is always a chance of making an incorrect decision. The behavior
of a sampling plan is described by the sampling plans Operating Characteristic (OC)
curve.
On the other side of the OC curve, the customer wishes to be protected from accepting
poor quality from the producer. So the consumer establishes a criterion, the lot
tolerance percent defective or LTPD. Here the idea is to only accept poor quality
product with a very low probability. MILSTD Plans has been used for over 50 years to
achieve these goals. Sampling risks are affected by lot size, sample size and the
acceptance number.
10.8.2 Characteristics of a Good Sampling Plan 267
z The index AQL, used to define quality should reflect the needs of the consumer
and producer and not be chosen primarily for statistical convenience.
z The sampling risks should be quantified (OC Curve). The producer should have
adequate protection against rejection of good lots and the consumer should be
protected against acceptance of bad lots.
z Plan should minimize the total cost of inspection.
z The plan should make use of other knowledge of process capability, vendor
details, etc.
z The plan should have a built in flexibility to change in lot size, etc.
z The measurement required by the plans should prove to be useful in estimating
individual lot quantity and long-term requirements.
z The plan should be simple to explain and administer.
10.8.3 Points to Remember while using Acceptance Sampling

z The protection level provided by a sampling plan is described by what it accepts
its AQL - and what it rejects its LTPD.
z Selecting a statistically valid sampling plan requires stating the objective of the
inspection, selecting the appropriate AQL and LTPD, and then choosing a
sampling plan that provides the desired protection.
z Companies must know the AQL and LTPD are substantially equivalent
procedures, so costs can sometimes be reduced by using equivalent double,
multiple, or variables sampling plans as alternative to single sampling plans.
z SPC cannot serve as a replacement for an acceptance sampling. The two
techniques should be combined by using the same data to control the process and
to make product disposition decisions.
SPC does not eliminate the need for acceptance sampling. In Statistical Process
Control Charts are used to make process control and process improvement
decisions, and actions are taken on the process to ensure that future products are
good. In contrast, sampling plans are used to make product disposition decisions,
and actions are taken on previously produced lots to ensure the quality of released
product.
In an ideal situation with SPC in place no defectives will ever be made and
Acceptance sampling will become unnecessary. However, in practice all processes
have some risk of failure, and thus quality of released product.
10.9 OC CURVE
The Operating Characteristic (OC) curve describes the probability of accepting a lot as
a function of the lots quality. Figure 10.3 shows a typical OC Curve.

268
Figure 10.3: Typical Operating Characteristic (OC) Curve
10.9.1 The Shape of the OC Curve

The first thing to notice about the OC curve in Figure 10.3 is the shape; the curve is
not a straight line. Notice the roughly S shape. As the lot percent non-conforming
increases, the probability of acceptance decreases, just as you would expect.
Historically, acceptance sampling is part of the process between a parts producer and
consumer. To help determine the quality of a process (or lot) the producer or
consumer can take a sample instead of inspecting the full lot. Sampling reduces costs,
because one needs to inspect or test fewer items than looking at the whole lot.
Sampling is based on the idea that the lots come from a process that has a certain non-
conformance rate (but there is another view described below). The concept is that the
consumer will accept all the producers lots as long as the process percent non-
conforming is below a prescribed level. This produces the, so called, ideal OC curve
shown in Figure 10.4.
When the process percent non-conforming is below the prescribed level, 4.0% in this
example, the probability of acceptance is 100%. For quality worse than this level,
higher than 4%, the probability of acceptance immediately drops to 0%. The dividing
line between 100% and 0% acceptance is called the Acceptable Quality Level (AQL).
Figure 10.4: Ideal OC Curve

The only way to realize the ideal OC curve is 100% inspection. With sampling, we 269
can come close. In general, as the sample size increases, keeping the acceptance
number proportional, the OC curve approaches the ideal, as shown in Figure 10.5.
Figure 10.5: As n Increases the OC Curve Approaches the Ideal

Similarly, as the acceptance number, c, gets larger for a given sample size, n, the OC
curve approaches the ideal. Figure 10.6 illustrates the relationship.
Figure 10.6: As c Increases, for Fixed n, the OC Curve Approaches the Ideal
10.9.2 Some Specific Points on the OC Curve

Because sampling doesnt allow the ideal OC curve, we need to consider certain risks.
The first risk is that the consumer will reject a lot that satisfies the established
conditions, i.e., the process quality is acceptable, but, by the luck of the draw, there
are too many non-conforming items in the sample. This is called the producers risk,
and is denoted by the Greek letter .
The second risk is that the consumer will accept a lot that doesnt meet the conditions,
i.e., by the luck of the draw there are not many non-conforming items in the sample,
so the lot is accepted. This is the consumers risk and is denoted by the Greek letter .
In a variety of typical values for and , but common values are 5% and 10%. When
we locate these values on the OC curve, expressed in terms of probability of
acceptance, we actually locate 1 .

270
Figure 10.7: Specific Points on the OC Curve

These points correspond to specific values of lot quality and they have a variety of
names. The point associated with 1 is often called the Acceptable Quality Limit or
AQL. This is not necessarily the same AQL used to describe the ideal OC curve. For a
of 5% this means a process operating at the AQL will have 95% of its lots accepted
by the sampling plan.
Similarly, the point associated with is often called, in contrast, the Rejectable
Quality Limit or RQL. A process operating at the RQL will have 5% of its lots
accepted by the sampling plan.
Lastly, some authors consider the process quality where the lots have a 50%
probability of acceptance. This is called the Indifference Quality Limit or IQL.
Figure 10.7 illustrates these points.
10.9.3 A Stream of Lots and the Binomial Distribution

We described the OC curve in terms of a process that produces a series of lots. This
leads us to recognize that the underlying distribution is the binomial. In the binomial
distribution, there are two possible outcomes. The items in the sample are either
conforming or non-conforming. In addition, the probably of selecting a non-
conforming item doesnt change as a result of the sample. Since we are sampling from
a process, the potentially infinite number of items is not impacted by taking the
sample.
When the producer presents lots for acceptance, they often come from a process that is
operating at some quality level, i.e., the process produces a certain percentage of non-
conforming items. The probability of obtaining a specified number of non-conforming
items, Pr(x), from a sample of n items with percent non-conforming, denoted p, is
given by the binomial distribution.
In a single sample plan we accept the lot if the number of non-conforming items is c
or less. This means we are interesting in the probability of 0, 1, , c items. We write
this as

271
The probability of accepting the lot is the probability that there are c or fewer non-
conforming items in the sample. This is the equation above, and is what we plot as the
OC curve.
10.9.4 The Isolated Lot and the Hypergeometric Distribution

The binomial distribution applies when we consider lots coming from an ongoing
production process. Sometimes we consider isolated lots, or we are interested in a
specific lot. In these cases, we need to realize that taking the sample, because we
sample without replacement, changes the probability of the next item in the sample.
In these cases, we need the hypergeometric distribution.
Here, N is the lot size, n is the sample size, and d is the number of non-conforming
items in the lot.
If we are interested in determining the probability of c or fewer non-conforming items
in the sample then we write:
We can use this equation to draw the OC curve for the isolated lot.
Often, the risk is applied to each lot, instead of the stream of lots. In these cases, the
quality level corresponding to a probability of acceptance equal to is called the Lot
Tolerance Percent Defective (LTPD).
10.9.5 Single and Double Sample Plans

The material above discusses sampling plans in which we draw one sample from the
lot. This is called a single sample plan. We describe the plan by a set of parameters:
n is the sample size,
c is the maximum number of non-conforming items allowed for acceptance, and
r is the minimum number of non-conforming items allowed for rejection.
In a single sample plan r and c differ by 1.
In contrast, there are double sampling plans in which we take the first sample and
make one of three decisions: accept, reject, or take a second sample. If we take the
second sample, we then make an accept/reject decision.
As described above the set of parameters used to describe a double sample plan are:
ni is the ith sample size,

272 ci is the maximum number of non-conforming items allowed for acceptance on the ith
sample, and
ri is the minimum number of non-conforming items allowed for rejection on the ith
sample.
For example, a single sample plan may be:
n = 20, c = 2, r = 3.
A double sample plan may be:
n1 = 20, c1 = 1, r1 = 4
n2 = 20, c2 = 4, r2 = 5
In this example, if we had 2 non-conforming items on the first sample, we would draw
the second sample. In total, we would have sampled 40 items.
We can calculate the probability of acceptance, the information we need to define the
OC curve, by the following equation.
The probabilities are, as described above, calculated using either the binomial or
hypergeometric distributions.
The c=0 Sampling Plans

Many practitioners are concerned that traditional lot acceptance sampling plans allow
non-conforming items in the sample. For example, the single sample plan n=20, c=2,
r=3 allows as many as two non-conforming items in the sample.
One solution is the use of plans that dont allow any non-conforming items. One
example of plan is n=20, c=0, r=1. The consumer would reject the lot if any non-
conforming items appeared in the sample.
Sampling plans with c=0 dont have the same kind of OC curve discussed above.
Instead of the classic S shape, that starts to approximate the ideal curve, c=0 OC
curves drop off sharply without the bend. Figure 10.8 shows the OC curves for these
two plans.
Figure 10.8: OC Curve comparison Showing c=0 Effect

Notice how quickly the c=0 plan drops off. The figure also has dashed horizontal lines 273
at 5% and 95% probability of acceptance. The AQL and RQL for these plans are listed
below.
C=0 C=2
AQL 0.26% 4.21%
RQL 13.9% 28.3%
It is easy to see that c=0 plan will accept many fewer lots than the corresponding c=2
plan. If your process cannot tolerate even a few non-conforming units, c=0 plans may
be a good approach. However, recognize that lot rejection incurs a transaction cost,
that may be high. The selection is a c=0 plan is certainly an economic decision.
10.10 USE OF OC CURVE

The OC curve quantifies the and risks of an attribute sampling plan. Below is an
ideal OC curve (the bold line) for a situation in which we might want to accept all lots
that are, say, 1% defective and reject all lots that are > 1% defective:
With this ideal (no risks) curve, all batches with 1% defective incoming quality level
would have a probability of acceptance (Pa) of 1.0. And, all lots with > 1% defective
would have a Pa of 0. The Pa is the probability that the sampling plan will accept the
lot. It is the long-run % of submitted lots that would be accepted when many lots of a
stated quality level are submitted for inspection. It is the probability of accepting lots
from a steady stream of product having a fraction defective P.
10.11 CONCEPT OF TYPE I AND TYPE II ERROR

10.11.1 Type I Error
A type I error occurs when one rejects the null hypothesis when it is true. The
probability of a type I error is the level of significance of the test of hypothesis, and is
denoted by *alpha*. Usually, a one-tailed test of hypothesis is used when one talks
about type I error.

274 Example: If the cholesterol level of healthy men is normally distributed with a mean
of 180 and a standard deviation of 20, and men with cholesterol levels over 225 are
diagnosed as not healthy, what is the probability of a type one error?
z = (225-180)/20=2.25; the corresponding tail area is .0122, which is the probability of
a type I error.
If the cholesterol level of healthy men is normally distributed with a mean of 180 and
a standard deviation of 20, at what level (in excess of 180) should men be diagnosed
as not healthy if you want the probability of a type one error to be 2%?
2% in the tail corresponds to a z-score of 2.05; 2.05 20 = 41; 180 + 41 = 221.
10.11.2 Type II Error

A type II error occurs when one rejects the alternative hypothesis (fails to reject the
null hypothesis) when the alternative hypothesis is true. The probability of a type II
error is denoted by *beta*. One cannot evaluate the probability of a type II error when
the alternative hypothesis is of the form > 180, but often the alternative hypothesis is
a competing hypothesis of the form: the mean of the alternative population is 300 with
a standard deviation of 30, in which case one can calculate the probability of a type II
error.
Example: If men predisposed to heart disease have a mean cholesterol level of 300
with a standard deviation of 30, but only men with a cholesterol level over 225 are
diagnosed as predisposed to heart disease, what is the probability of a type II error (the
null hypothesis is that a person is not predisposed to heart disease).
z = (225-300)/30=-2.5 which corresponds to a tail area of .0062, which is the
probability of a type II error (*beta*).
If men predisposed to heart disease have a mean cholesterol level of 300 with a
standard deviation of 30, above what cholesterol level should you diagnose men as
predisposed to heart disease if you want the probability of a type II error to be 1%?
(The null hypothesis is that a person is not predisposed to heart disease.)
1% in the tail corresponds to a z-score of 2.33 (or 2.33); 2.33 30 = 70;
300 70 = 230.
10.11.3 Type I and Type II Errors and their Applications

Type I and Type II errors are two well-known concepts in quality engineering, which
are related to hypothesis testing. Often engineers are confused by these two concepts
simply because they have many different names. We list a few of them here.
Type I errors are also called:
Producers risk
False alarm
False negative
error
Type II errors are also called:
Consumers risk
Misdetection
False positive
error

Type I and Type II errors can be defined in terms of hypothesis testing. 275
A Type I error ( ) is the probability of rejecting a true null hypothesis.
A Type II error ( ) is the probability of failing to reject a false null hypothesis.
State whether the following statements are true of false:
1. TQM helps to improve product quality using a long-term approach at
improving production and customer satisfaction while decreasing wastes.
2. Variety of organizational mechanisms have not been used to promote
continuous improvement, such as work teams, quality circles, and
suggestion systems.
10.12 QUALITY MOVEMENT

The Quality Movement was established in North America in the 1940's and has grown
and expanded since then; evolving through many milestones such as quality circles,
kaizen blitzes, employee involvement, suggestion systems and total quality
management. Today, organizations such as the National Quality Institute (NQI) and
the American Society for Quality (ASQ) continue to advance individual,
organizational and community excellence through quality improvements, learning and
knowledge exchange. According to Gregory Watson, 2001 President of ASQ,
"Today's quality movement is better off because of what we've learned as each of
these initiatives have been implemented. The next focus for quality is to emphasize
performance excellence and business results.
History of Japan's Quality Movement

The quality movement in Japan began in 1946 with the U.S. Occupation Force's
mission to revive and restructure Japan's communications equipment industry. General
Douglas MacArthur was committed to public education through radio. Homer
Sarasohn was recruited to spearhead the effort by repairing and installing equipment,
making materials and parts available, restarting factories, establishing the Equipment
Test Laboratory (ETL), and setting rigid quality standards for products (Tsurumi
1990). Sarasohn recommended individuals for company presidencies, like Koji
Kobayashi of NEC, and he established education for Japan's top executives in the
management of quality. Furthermore, upon Sarasohn's return to the United States, he
recommended W. Edwards Deming to provide a seminar in Japan on Statistical
Quality Control (SQC).
Deming's 1950 lecture notes provided the basis for a 30-day seminar sponsored by the
Union of Japanese Scientists and Engineers (JUSE) and provided the criteria for
Japan's famed Deming Prize. The first Deming Prize was given to Koji Kobayashi in
1952. Within a decade, JUSE had trained nearly 20,000 engineers in SQC methods.
Today Japan gives high rating to companies that win the Deming prize; they number
about ten large companies per year. Deming's work has impacted industries such as
those for radios and parts, transistors, cameras, binoculars, and sewing machines. In
1960, Deming was recognized for his contribution to Japan's reindustrialization when
the Prime Minister awarded him the Second Order of the Sacred Treasure.
In 1954, Dr. Joseph M. Juran of the United States raised the level of quality
management from the factory to the total organization. He stressed the importance of
systems thinking that begins with product designs, prototype testing, proper

276 equipment operations, and accurate process feedback. Juran's seminar also became a
part of JUSE's educational programs. Juran provided the move from SQC to TQC
(total quality control) in Japan. This included company-wide activities and education
in quality control (QC), QC circles and audits, and promotion of quality management
principles. By 1968, Kaoru Ishikawa, one of the fathers of TQC in Japan, had outlined
the elements of TQC management:
Quality comes first, not short-term profits
The customer comes first, not the producer
Customers are the next process with no organizational barriers
Decisions are based on facts and data
Management is participatory and respectful of all employees
Management is driven by cross-functional committees covering product planning,
product design, production planning, purchasing, manufacturing, sales, and
distribution (Ishikawa 1985).
By 1991, JUSE had registered over 331,000 quality circles with over 2.5 million
participants in its activities. Today, JUSE continues to provide over 200 courses per
year, including five executive management courses, ten management courses, and a
full range of technical training programs.
One of the innovative TQC methodologies developed in Japan is referred to as the
"Ishikawa" or "cause-and-effect" diagram. After collecting statistical data, Ishikawa
found that dispersion came from four common causes, as shown in Figure 10.9.
Materials Processes
Quality
Equipment Measurement
CAUSES EFFECT
Figure 10.9: Cause-and-effect Diagram

Materials often differ when sources of supply or size requirements vary. Equipment or
machines also function differently depending on variations in their own parts, and they
operate optimally for only part of the time. Processes or work methods have even
greater variations. Finally, measurement also varies. All of these variations affect a
product's quality. Ishikawa's diagram has lead Japanese firms to focus quality control
attention on the improvement of materials, equipment, and processes.
JTEC panelists observed Statistical Process Control (SPC) charts, often with goal lines
extending into 1995, in a few of the factories they visited in 1993. For example, at
Ibiden, process control was apparent in its laminated process board manufacture,
where there was extensive use of drawings and descriptions of the processes necessary
to do the job. Companies that were competing for the Deming Prize made extensive

use of such charts, and companies that had received ISO 9000 certification also posted 277
the process information required for each machine. However, the panel was surprised
at the relatively limited use of SPC charts within the factories visited. The Japanese
believe that the greatest benefit occurs when defect detection is implemented within
the manufacturing sequence, thus minimizing the time required for detection,
maximizing return on investment, and indirectly improving product reliability.
10.13 QUALITY CIRCLES

Quality Circle is a participative philosophy woven around Quality Control and
Problem solving at the grass root level. Employer normally takes the initiative for the
same by setting aside a room for the sole use of the circle, equipped with notice-
boards, flip charts, audio-visual equipment, and so on.
Quality circles consistent of around 4-12 people from the same work area, who hold
1-2 hour meetings voluntarily on a regular basis to solve their work-related problems.
Meetings are held in paid time and the circle leader is often the supervisor of the work
group involved.
Teamwork among the human resources is a critical factor in performance
effectiveness of any Organization. Quality circles were the first step to develop teams
as permanent parts of organizations. Dr. Shigeo credited quality circle activities for
the quality improvement in Japan.
The quality circles started with the objectives of improving quality of services, good
working conditions and job satisfaction to all employees, reducing stress, strain and
cost reduction. It recognizes the Fact that the workers know their job best. They can
better contribute in finding solutions to the routine work-related problems.
The main aim was to reduce human errors, enhance quality, inspire an effective
teamwork, increase employee motivation, leadership quality, communication building
and finally top develop greater safety awareness.
Key Elements of Quality Circles

The key elements of Quality Circles are:
A people-Building Philosophy: In quality circles people know each other and
there is a feeling of togetherness. It inculcates group or teamwork.
Voluntary in Nature: As the membership is voluntary it is left to the members to
take advantage of it or not. It is the workers own initiative which makes him join
the group. It is a way of life, and a continuous process.
Participative nature: Everyone in the group Participates.
Encourages creativity: Quality circle infuses among its members' confidence, a
Problem preventing and problem solving attitude. Hence people are able to
present their ideas freely.
Training is a must: Members need to be trained for using problem solving
techniques like Pareto diagram, cause and effect analysis, check sheets, etc.
Management Support: Quality circles require support from top management in
the form of advice and commitment.
Problems related to work: Problems have to be related to members own
department or work area.

278 Quality Circle has a progressive and systematic approach towards soling a problem
based on Identify, Select, Analyze and Solve using the following techniques.
Brain storming
Data collection
Pareto analysis
Cause and effect or Ishikawa Diagram.
Benefits of Quality Circles

Changes in attitude at all levels.
Spreads of problem-solving ethic throughout the whole organization.
Develops supervisory performance especially in the areas of man-management
and communication.
Optimum utilization of human resources.
Reduction of absenteeism and grievances.
Development of quality consciousness.
Encourages leadership quality and personal development.
Promote issues like cost-reduction, safety of workers and other day-to-day work-
related problems.
Impediments to the Effective Working of Quality Circles

Lack of management support
Lack of enthusiasm from employees and their rigid attitudes
Caliber of members and leaders of quality circle
Apathetic attitude of trade unions
Structural defects and operational impediments
Lack of training to members as well as top management
Lack of planning and co-ordination when starting new projects
Running out of ideas to work on.
Quality Circles and the Trade Unions

Quality circles do not threaten unions as their membership is voluntary and they
discuss only work related problems within a specific area. They can in a way bring
unity among workers due to better understanding and thus pave way for better
relationship with the union as well as between union and management.
Quality Circles in India

Professional bodies like the Quality Circle Forum of India and Indian Association for
quality and Reliability had been formed to create an awareness of quality circle
movement in India as early as in 1970s. The first National Convention on Quality
Circle was held in India in 1987.
Bharat Heavy Electricals Ltd., at Ramachandrapuram, Hyderabad Unit, introduced the
first quality circle in India in January 1981. There are over 500 organizations that have
set up quality circles all over the country.

Areas of Success due to Quality Circle Activities in BHEL 279

Increased productivity and production
Improved quality
Reduction in the percentage of absenteeism
Increased motivation and support from employees
Reduction in organizational hierarchies and red-tapism.
Fill in the blanks:
1. .. infuses among its members confidence, a Problem
preventing and problem solving attitude.
2. Bharat Heavy Electricals Ltd., at Ramachandrapuram, Hyderabad Unit
introduced the first quality circle in India in
10.14 LET US SUM UP

TQM based framework is designed for IQ improvement projects. Six TQM concepts
are integrated into an organized process that translates IQ customer needs into IQ
metrics and ensures their fulfillment. Metrics and measurement of information quality
are at the heart of the process. These metrics are manipulated through a set of
operations like selection, prioritization and presentation. Three tools that facilitate
these operations are integrated into the TQM framework, creating the InfoQual
methodology.
The methodology represents an explicit and manageable approach to the improvement
of information quality. It suggests that the stakeholders should invest meaningful
effort in explicitly defining and tracking IQ needs and metrics, using a formal and
structured process. More research is required in order to test its usefulness. The
following questions arise: what is the cost of implementation? How can effort be
minimized, in order to make it acceptable to all stakeholders? What are the direct
effects on information quality? What are the side effects and benefits? In what
information domains is the methodology more practical?
Many quality approaches are added on top of the regular business processes without
eliminating or replacing any existing activity. The pre-quality way hangs around with
some extra work in the form of the new way. Such redundancy must be avoided.
Therefore, the InfoQual methodology is designed to be integrated into common and
existing operational approaches to information systems specifications. The next phase
of this research will test the practicality of InfoQual in real-life implementations.

Take an example of any ISO 9000 company and study its manufacturing processes.
You may use the internet for this activity.

280
Total Quality Management (TQM) is a management approach aimed at satisfying all
customer requirements, needs and expectations using a Continuous Improvement
approach.
Metrics translate the customer needs into technical characteristics of the desired
information solution.
Quality: Defined as that aspect of things under which they are considered in thinking
or speaking of their nature, condition, or properties.
Statistical Process Control (SPC): A process to control the variability of output using
control charts.
Statistical Quality Control (SQC): Use of statistical methods to improve or enhance
quality for customer satisfaction. It involves monitoring a process to identify the
unique causes of variation for signaling appropriate corrective actions.

1. Explain the TQM framework to quality improvement.
2. Determine the steps in TQM process.
3. Define the TQM and explain its principles.
4. Why we need quality management? Explain
5. What do you mean by statistical process control?
6. Describe the advantages of statistical quality control.

CYP 1
1. True
2. False
CYP 2
1. Quality circle
2. January 1981

Bailey, J. E., Pearson, S. W., Development of a Tool for Measuring and Analyzing
Computer user Satisfaction, Management Science.
Delen, G.P.A.J. and Rijsenbrij, D.B. B., A specification, Engineering and
Measurement of Information Systems Quality.

Drucker, P.E., The Information Executives Truly Need, Harvard Business Review. 281
Fox, C., Levitin, A. and Redman, T., The Notion of Data and its Quality
Dimensions, Information Processing & Management.
Greene, R.T., Global Quality A Synthesis of the World Best Management Methods,
1993, New York, ASQC Quality Press.
Hari, A. (editor), The Quality Terms Lexicon, 1995, Israel, Quality and Excellence
Center, Prime Minister Office (Hebrew Text).
Rolph, P. and Bartram, P., The Information Agenda: Harnessing Relevant
Information in a Changing Business Environment, 1994, London, Management
Books.

282
LESSON
11
ISO QUALITY CERTIFICATION CONCEPTS
CONTENTS
11.1 Introduction
11.2 Essence of International Standards
11.3 Overview of ISO Standards
11.4 ISO 9000 Quality Standard
11.5 ISO 9000 Quality System Certification
11.6 ISO 9000 Family
11.7 ISO 14000
11.8 QS 9000
11.9 Documentation of Quality System
11.9.1 Quality Manual
11.9.2 Quality Procedures
11.9.3 Quality Records
11.9.4 Controlled Documents
11.10 Implementing ISO 9001: 2000
11.11 Quality Assurance
11.12 Quality Assurance Review
11.13 Objectives of Quality Assurance Review
11.13.1 Business Review
11.13.2 Technical Review
11.13.3 Management Review
11.13.4 Roles and Responsibilities
11.14 Six Sigma Concepts
11.15 Six Sigma Roles and Responsibilities
11.16 Six Sigma Methodology
11.16.1 The Differences of DMAIC and DMADV
11.16.2 When to use DMAIC
11.16.3 When to use DMADV
11.17 Let us Sum up
Contd

11.19 Keywords 283

ISO Quality Certification Concepts

Describe the various ISO-standards
Explain advantages of implementation of various standards
Learn about the documentation procedure of various ISO-certificates
11.1 INTRODUCTION
Introduction to ISO 9000 is a family of standards for quality management systems.
ISO 9000 is maintained by ISO, the International Organization for Standardization
and is administered by accreditation and certification bodies. Some of the
requirements in ISO 9001 (which is one of the standards in the ISO 9000 family)
include:
a set of procedures that cover all key processes in the business;
monitoring processes to ensure they are effective;
keeping adequate records;
checking output for defects, with appropriate and corrective action where
necessary;
regularly reviewing individual processes and the quality system itself for
effectiveness; and
facilitating continual improvement.
A company or organization that has been independently audited and certified to be in
conformance with ISO 9001 may publicly state that it is "ISO 9001 certified" or "ISO
9001 registered." Certification to an ISO 9000 standard does not guarantee the
compliance (and therefore the quality) of end products and services; rather, it certifies
that consistent business processes are being applied.
Although the standards originated in manufacturing, they are now employed across a
wide range of other types of organizations. A "product", in ISO vocabulary, can mean
a physical object, or services, or software. In fact, according to ISO in 2004, "service
sectors now account by far for the highest number of ISO 9001:2000 certificates -
about 31% of the total."
ISO 9001 certification does not guarantee that the company delivers products of
superior (or even decent) quality. It just certifies that the company engages internally
in paperwork prescribed by the standard. Indeed, some companies enter the ISO 9001
certification as a marketing tool.
Standards are documented agreements containing technical specifications or other
precise criteria to be used consistently as rules, guidelines, or definitions of
characteristics, to ensure that materials, products, processes and services are fit for
their purpose.
For example, the format of the credit cards, phone cards, and smart cards that have
become commonplace is derived from an ISO International Standard. Adhering to the

284 standard, which defines such features as an optimal thickness (0.76 mm), means that
the cards can be used worldwide.
International Standards thus contribute to making life simpler, and to increasing the
reliability and effectiveness of the goods and services we use.
Similarity, there are several existing international standards for software development
organization and more are added from time to time depending on the requirement.
11.2 ESSENCE OF INTERNATIONAL STANDARDS

International standardization is well-established for many technologies in such diverse
field as information processing and communications, textiles, packaging, distribution
of goods. Energy production and utilization, shipbuilding, banking and financial
services. It will continue to grow in importance for all sectors of industrial activity for
the foreseeable future.
The main reasons are:
Worldwide Progress in Trade Liberalization

Todays free market economies increasingly encourage diverse sources of supply
and provide opportunities for expanding markets.
On the technology side, fair competition needs to be based on identifiable, clearly
defined common reference that are recognized from one country to the next, and
from one region to other.
An industry wide standard, internationally recognized, developed by consensus
among trading partners, serves as the language of trade.
Interpenetration of Sectors
No industry in todays world can truly claim to be completely independent of
components, products, rules of application, etc., that have been developed in other
sectors.
Bolts are used in aviation and for agricultural machinery, welding plays a role in
mechanical and nuclear engineering, and electronic data processing has penetrated
all industries.
Environmentally friendly products and processes, and recyclable or biodegradable
packaging are pervasive concerns.
Worldwide Communications Systems

The computer industry offers a good example of technology that needs quickly
and progressively to be standardized at a global levels.
Full compatibility among open system fosters healthy competition among
producers, and offers real options to users since it is a powerful catalyst for
innovation improved productivity and cost cutting.
Global Standards for Emerging Technologies

Standardization programmes in completely new fields are now being developed.
Such fields include advanced materials, the environment, life sciences,
urbanization and construction.
In the very early stage of new technology development, applications can be
imagined but functional prototypes do not exist.

Here, the need for standardization is in defining terminology and accumulating 285
databases of quantitative information.
Developing Countries
Development agencies are increasingly recognizing that a standardization
infrastructure is a basic condition for the success of economic policies aimed at
achieving sustainable development.
Creating such an infrastructure in developing countries is essential for improving
productivity, market competitiveness, and export capability.
Industry wide standardization is a condition existing within a particular industrial
sector when the large majority of products or services confirm to the same standards.
It results from consensus agreements reached between all economic players in that
industrial sector suppliers, users, and often governments. They agree on specifications
and criteria to be applied consistently in the choice and classification of materials, the
manufacture of products, and the provision of services.
The aim is to facilitate trade, exchange and technology transfer through:
Enhanced product quality and reliability at a reasonable price.
Improved health, safety and environmental protection, and reduction of waste.
Greater compatibility and interoperability of goods and services.
Simplification for improved usability.
Reduction in the number of models, and thus reduction in costs.
Increased distribution efficiency, and ease of maintenance.
Users have more confidence in products and services that confirm to International
Standards. Assurance of conformity can be provided by manufacturers declaration or
by audits carried out by independent bodies.
11.3 OVERVIEW OF ISO STANDARDS

The International Organization for Standardization based in Geneva, Switzerland is
commonly known as ISO. Migration from equal to standard and the choice of ISO is
easy to follow, with the additional advantage that the name requires no transaction in
the International Organization for Standardizations three official languages English,
French and Russian.
ISO is an international, non-governmental organization that promotes the development
and implementation of voluntary international standards. This is done through a
cooperative, consensus building process that results in the creation of product and
process management standards. ISO consists of 120 member countries each
represented by a national organization. The American National Standards Institute
(ANSI) represents the United States at ISO.
Quality and its Essence

The dictionary defines quality as a degree of excellence. This may explain why some
people say quality is really in the eye of the beholder.
Others try to be more precise and say quality is conformance to requirements.
A measure of quality may be how well a product exceeds expectations and pleases the
customer.
Quality can be viewed as the degree to which products and services meet requirements
and satisfy customers in an affordable and timely manner.

286 Satisfied customers may buy again. Poor quality offerings cause companies to waste
time, money and materials. The result may be the loss of customers, or worse yet, the
risk of going out of business.
Quality should be a key business strategy. That is why companies are learning the
language of quality as spoken by the ISO 9000 international standard.
ISO Standards
ISO standards are written specification and guidance documents that establish
internationally harmonized conventions for the operation, design, performance, or
management of products (technical standards) and processes (management standards).
ISO standards are developed within ISO Technical Committees, commonly referred to
as TSc. TCs are made up of individual experts from industry, government, public
interest groups and academia from any member countries that wish to participate. TCs
prepare draft versions of the standards which are sent for formal support and
comments to each of the participating ISO member countries. Through iterations,
using a consensus building process, feedback is incorporated with the goal of realizing
an agreed upon international standard. ISO standards are adopted as final when
approved by at least 75% of the member bodies casting a vote. This process usually
takes 7 to 8 years. Most ISO standards are technical standards. The ISO 9000 Series
and the ISO 14000 Series are management standards.
11.4 ISO 9000 QUALITY STANDARD

ISO 9000 is a series of standards dealing with quality management systems. The
standards are published by the International Organization. All industrialized countries
are members and participate in writing the standards.
Most countries have adopted and published ISO 9000 as their own national standard.
In the United States, it has been issued as Q9000 with virtually the same text as the
original standard.
Conformance and Guidance Standards

ISO 9000 consists conformance standards and guidance standards. The conformance
standards are ISO 9001, ISO 9002, and ISO 9003, and state the requirements for an
effective quality system. The guidance standards recommend how to use the series,
develop quality systems, and apply the requirements in various industries.
ISO 9001 contains requirements for quality assurance in the design, development,
production, installation, and serving activities. ISO 9002 is the same as ISO 9001, but
without the design and development requirements. ISO 9003 only applies to
companies that are limited to the final inspection and testing of products and services.
ISO Standard Series and Some Other Standards

The ISO Standard Series includes the following Systems Standards indicating their
specific purposes:
ISO 9000: Quality Management and Quality Assurance Standards Guidelines for
Selection and Use.
ISO 9001: Model for Quality Assurance in Design/Development, Production
Installation, and Servicing.
ISO 9002: Model for Quality Assurance in Production and Installation.
ISO 9003: Model for Quality Assurance in Final Inspection and Test.

ISO 9004: Generic Guidelines for Quality Management and Systems. 287
ISO 9004-2: Guidelines for Services
ISO 14001: Environmental Management System Guidelines for Principles, Systems,
and Supporting Techniques.
Some other System Standards include:
QS 9000: Encompasses ISO 9000 and the Big Three Auto Makers specific
requirements.
TS 9000: Based on ISO 9001 establishes quality systems requirements for the
worldwide telecommunications network.
FDA-CGMP: Medical Device, Current Good Manufacturing Practices (includes all of
ISO 9001).
Fill in the blanks:
1. The International Organization for Standardization based in
..
2. ISO consists of .. member countries each represented by
a national organization.
3. .. is a series of standards dealing with quality
management systems.
11.5 ISO 9000 QUALITY SYSTEM CERTIFICATION

Initially ISO 9000 was used as the basis for specifying quality requirements in
contractual arrangements between a purchaser and supplier. Customers would perform
on-site assessments of their suppliers to ensure compliance.
Third-party registrars are now being used to perform independent ISO 9000
assessments. These certifying bodies are officially authorized by a national
accreditation group to carry out the audits and issue certificates. Registrars certify to
customers that a supplier is complying with all the applicable requirements of the
standard.
Reasons for Certification

Why are so many firms ISO 9000 certification? The primary reason is customer
demand. It is fast becoming a requirement for doing business. An ISO 9000 certificate
is also the passport for access to worldwide markets.
Some companies are pursuing ISO 9000 registration to achieve a competitive
advantage. The certificate itself may be necessary to bid on certain contracts.
In addition, the lower costs and higher quality associated with ISO 9000 systems give
registered companies a competitive edge.
In many cases, companies are simply interested in ISO 9000 as a proven framework
for quality improvement. They want to benefit from the quality system structure, its
consistence operation, and the focus on preventing costly problems.

288 Benefits of ISO 9000 Certification

Some basic benefits of ISO 9000 Certification are summarized below:
Improved customer satisfaction
Greater quality awareness
Higher real and perceived quality
Positive cultural change
Competitive edge
Increased market share
Increased productivity
Reduced costs
Limitation of ISO 9000 Certification

Though ISO 9000 has proved to be very effective for software development
organizations, however, it also suffers from several limitations.
ISO 9000 does not automatically lead to total quality management (TQM) i.e.
continuous improvement.
ISO 9000 does not provide any guideline for defining an appropriate process.
ISO 9000 certification process is not foolproof and thus variations in the
certification norms may exist.
11.6 ISO 9000 FAMILY

ISO 9000 includes the following standards:
ISO 9000:2000, Quality Management SystemsFundamentals and Vocabulary:
Covers the basics of what quality management systems are and also contains the
core language of the ISO 9000 series of standards. A guidance document, not used
for certification purposes.
ISO 9001:2000 Quality Management SystemsRequirements is intended for use
in any organization which designs, develops, manufactures, installs and/or
services any product or provides any form of service. It provides a number of
requirements which an organization needs to fulfill if it is to achieve customer
satisfaction through consistent products and services which meet customer
expectations. It includes a requirement for the continual (i.e. planned)
improvement of the Quality Management System, for which ISO 9004:2000
provides many hints.
This is the only implementation for which third-party auditors may grant
certification. It should be noted that certification is not described as any of the
'needs' of an organization as a driver for using ISO 9001 (see ISO 9001:2000
section 1 'Scope') but does recognise that it may be used for such a purpose
(see ISO 9001:2000 section 0.1 'Introduction').
ISO 9004:2000 Quality Management Systems-Guidelines for Performance
Improvements covers continual improvement. This gives you advice on what you
could do to enhance a mature system. This standard very specifically states that it
is not intended as a guide to implementation.
There are many more standards in the ISO 9001 family, one of many may be Leicester
University which also found out the electronic fingerprinting, but for other standard

see ("List of ISO 9000 standards" from ISO), many of them not even carrying "ISO 289
900x" numbers. For example, some standards in the 10,000 range are considered part
of the 9000 family: ISO 10007:1995 discusses Configuration management, which for
most organizations is just one element of a complete management system. ISO notes:
"The emphasis on certification tends to overshadow the fact that there is an entire
family of ISO 9000 standards ... Organizations stand to obtain the greatest value when
the standards in the new core series are used in an integrated manner, both with each
other and with the other standards making up the ISO 9000 family as a whole".
Note that the previous members of the ISO 9000 family, 9001, 9002 and 9003, have
all been integrated into 9001. In most cases, an organization claiming to be "ISO 9000
registered" is referring to ISO 9001.
11.7 ISO 14000

Environmental management standards exist to help organizations minimize how their
operations negatively affect the environment (cause adverse changes to air, water, or
land), comply with applicable laws and regulations).
ISO 14001 is the international specification for an Environmental Management
System (EMS). It specifies requirements for establishing an environmental policy,
determining environmental aspects and impacts of products/activities/services,
planning environmental objectives and measurable targets, implementation and
operation of programs to meet objectives and targets, checking and corrective action,
and management review.
ISO 14000 is similar to ISO 9000 quality management in that both pertain to the
process (the comprehensive outcome of how a product is produced) rather than to the
product itself. The overall idea is to establish an organized approach to systematically
reduce the impact of the environmental aspects which an organization can control.
Effective tools for the analysis of environmental aspects of an organization and for the
generation of options for improvement are provided by the concept of Cleaner
Production.
As with ISO 9000, certification is performed by third-party organizations rather than
being awarded by ISO directly. The ISO 19011 audit standard applies when auditing
for both 9000 and 14000 compliance at once.
Standards
The material included in this family of specifications is very broad. The major parts of
ISO 14000 are:
ISO 14001 is the standard against which organizations are assessed. ISO 14001 is
generic and flexible enough to apply to any organization producing and/or
manufacturing any product, or even providing a service anywhere in the world.
ISO 14004 is a guidance document that explains the 14001 requirements in more
detail. These present a structured approach to setting environmental objectives and
targets and to establishing and monitoring operational controls.
These are further expanded upon by the following:
ISO 14020 series (14020 to 14025), Environmental Labeling, covers labels and
declarations.
ISO 14030 discusses post-production environmental assessment.
ISO 14031 Evaluation of Environmental Performance.

290 ISO 14040 series (14040 to 14044), Life Cycle Assessment, LCA, discusses
pre-production planning and environment goal setting.
ISO 14050 terms and definitions.
ISO 14062 discusses making improvements to environmental impact goals.
ISO 14063 is an addendum to 14020, discussing further communications on
environmental impact.
ISO 14064-1:2006 is Greenhouse gases Part 1: Specification with guidance at
the organization level for the description, quantification and reporting of
greenhouse gas emissions and removals.
ISO 14064-2:2006 is Greenhouse gases Part 2: Specification with guidance at
the project level for the description, quantification, monitoring and reporting of
greenhouse gas emission reductions and removal enhancements.
ISO 14064-3:2006 is Greenhouse gases Part 3: Specification with guidance for
the validation and verification of greenhouse gas assertion.
ISO 19011 which specifies one audit protocol for both 14000 and 9000 series
standards together. This replaces ISO 14011 meta-evaluationhow to tell if your
intended regulatory tools worked. 19011 is now the only recommended way to
determine this.
11.8 QS 9000
QS 9000 is the name given to the Quality System Requirements of the automotive
industry which were developed by Chrysler, Ford, General Motors and major truck
manufacturers and issued in late 1994. QS-9000 replaces such quality system
requirements as Ford Q-101, Chrysler's Supplier Quality Assurance Manual, GM's
NAO Targets for Excellence and the Truck Manufacturer's quality system manuals.
The influence of QS-9000 is being seen throughout the automotive industry as it has
virtually eliminated varying demands and waste associated with redundant systems.
Proof of conformance to QS-9000 is certification/registration by an accredited third
party such as Underwriter's Laboratories (UL) or the American Bureau of Shipping
(ABS). Companies that become registered under QS-9000 will be considered to have
higher standards and better quality products.
QS-9000 will help companies to stay ahead of their competition. It will do this by
filling gaps in the business and quality systems that can cause problems. QS-9000
eliminates redundant and unnecessary work practices. QS-9000 tells current and
potential customers that the product has consistent quality and is manufactured under
controlled conditions. This system is globally accepted as proof of quality in the
automotive industry and is also a major customer requirement.
11.9 DOCUMENTATION OF QUALITY SYSTEM

The first step in setting up a quality management system within a company is to
generate a quality manual. This should be done even before any quality procedures or
specifications are written.
Effective documentation and records produces development. The quality manual is the
companys quality bible or constitution. It is a document that states in a concise and
brief format the high-level policies and objectives of the company required to achieve
its desired level of quality. This is enhanced by a management system operating with
the concept.

Once the quality system plan of the company has been completed, the quality system 291
must undergo full documentation that comprehends:
The complexity of the production process.
The manpower skills required for production, and
The training requirements to achieve these manpower skills.
Some of the main objectives of an organizations documentation are:
As a tool for information transmission and communication
Evidence of conformity to confirm what was planned, has actually been done
Knowledge sharing by disseminating and preserving the organizations
experiences.
Documentation requirements documents may be in any form or type of medium like:
Paper
Magnetic
Electronic or optical Computer Disc
Photograph
Master Sample, etc.
The extent of the QMS documentation may differ from one organization to another
due to:
The size of organization and type of activities;
The complexity of processes and their interactions, and
The competence of personnel.
At the minimum, quality system documentation should include the companys quality
manual and specifications showing the company processes, work instructions in
support of these processes, and production/quality records required by these work
instructions.
Processes exist within the organization and the initial approach should be limited to
identifying and managing them in the most appropriate way. In determining which
processes should be documented the organization may wish to consider factors such
as:
Effect of quality
Risk of customer dissatisfaction
Statutory and/or regulatory requirements
Economic risk
Effectiveness and efficiency
Competence of personnel
Complexity of processes
Where it is found necessary to document processes, a number of different methods can
be used, such as graphical representations, written instructions, checklists, flow charts,
visual media, or electronic methods.

292 Documentation is the heart of the QMS system. It shall include:

Statement of quality policy and quality objectives,
A quality manual
Required documented procedures,
Documents like Work Instructions needed to ensure:
Effective planning,
Operation, and
Control of processes, and
Required records.
Quality policy refers to the statements from Top management regarding their
commitment relative to quality products and services. They are basically the purpose
and vision of the organization. This must be expanded in the quality objectives.
It is essential that the Top management is able to define the quality policy and quality
objectives with clarity that all the employees are able to understand and strive for it.
These are displayed prominently in the work area to act as motivators for all.
Requirements for the quality policy and quality objectives and defined in clauses 5.3
and 5.4.1 of ISO 9001:2000 respectively. These documented quality objectives and
quality policy are subject to document control requirements of clauses 4.2.3.
The next four types of documentation are usually referred as the four levels of ISO
9000 documentation
Level 1: Quality manual
Level 2: Quality Procedures
Level 3: Quality documents
Level 4: Quality Records
11.9.1 Quality Manual

Quality manual states the organizations philosophy and vision. The quality manual
represents the strategic plan for an organizations quality system and contains its
mission statement.
Clause 4.2.2 of ISO 9001:2000 specifies the minimum content fort a quality manual.
The format and structure of the manual is a decision for each organization, and will
depend on the organizations size, culture and complexity. The quality manual is a
document that has to be controlled in accordance with requirements clauses 4.2.3.
11.9.2 Quality Procedures

This documentation describes the actions that have to take place. It also spells out the
actual steps must be followed. The level of detail should be sufficient for a new person
to read the document and understand what has to be done. It also states who is
responsible for each ISO 9000 section. They outline the workflow between
departments, suppliers, and the customer.
ISO 9001:2000 specially requires the organization to have documented procedures
for the following activities:
4.2.3.Control of Documents:
4.2.4.Control of records

8.2.2.Internal audit 293

8.3 Control of nonconforming product
8.5.2. Corrective action
8.5.3.Preventive action
There are also to be controlled in accordance with the requirements of clauses 4.2.3.
Quality Documents: In order for an organization to demonstrate the effective
implementation of its QMS, it may be necessary to develop documents other than
documented procedures even though the only documents specially mentioned in ISO:
2000 are:
Quality policy (clause 4.2.1.a)
Quality objectives (clause 4.2.1.a)
Quality manual (clause 4.2.1.b)
Quality documents the process. These documents represent how tasks are executed
such as design specifications, operating instructions and assembly instructions. They
involve the details of how individual or group is to perform specific task or job. This
is very important to maintain uniformity. It also ensures that the job can still be done
even if key employee is unavailable.
Examples of these documents are:
Organization charts
Specifications
Drawings
Blueprints
Process maps, process flow charts and /or process descriptions
Work and/or test instructions
Documents containing internal communications
Production schedules
Approved supplier lists
Test and inspection plans
Test procedures
Quality plans
Operation sheets
Inspection instructions.
Quality documents tell what to do For example, work instructions would be a
quality document. They can also be the specifications for a new product design, which
list engineering requirements for the design and govern the product development
cycle.
Documents are a unique type of data and are important as:
They can be unpredictable, created on an as-needed basis in virtually any form.
Theyre dynamic. They can be changed, modified and enhanced within very short
time periods, or over long life cycles.

294 Theyre complex. Documents can be structured on a logical basis, a temporal axis
or almost any configuration.
They may contain other documents. They can include vital and volatile source
information from CAD, spreadsheets or MRP that needs to be updated regularly.
They may contain technical drawing and images.
They can be developed using pencil and paper, a CAD system, a spreadsheet or a
word processor.
They are the circulatory system of an organization. And they must be managed to
be effective.
11.9.3 Quality Records

They document the results of actions specified in level 3. A Quality record is evidence
that the organization has fulfilled the actions described in quality documents.
Records required by ISO 9001:2000 are:
Inspection reports
Test data
Qualification reports
Defect checklist
Validation reports
Audit reports
Calibration data
Audit reports
Factory log
These records shall be legible, readily identifiable, and retrievable. Using the example
of product testing, the quality record would describe who did the test and would
include the data, location, time which product, test result and then the actions taken.
A documented procedure shall be established to define the controls needed for the
identification, storage, protect6ion, retrieval, retention time, and disposition of
records. can be used to document tractability and to provide evidence of verification,
preventive action, and corrective action.
Documentation is thus the heart of the ISO 9000 standards. It may be in any form or
type of medium. Many companies fail because important process information does not
reside in documents, but rather in management.
The quality manual drives the ISO 9000 quality system implementation. Policies and
procedures describe the quality practiceswhat each department must do. Quality
documents describe the processhow procedures are to be done, at an individual level.
Quality records report the outcome of processes and support the results.
Managers know what to do. They just do it. Why should we keep records for
everything we do? The answer is that the ISO 9000 standards require you to create
and maintain quality records. Thee quality documents and quality records represent
the work instructions and records that instructions have been followed in your
organization.

These are the vital elements of any ISO 9000 project. Because these documents are 295
dynamic, the document control is critical to ensure that the right version of these
documents are used and maintained.
11.9.4 Controlled Documents

Documents required by the QMS shall be controlled. ISO stipulates a documented
procedure to define the control needed to:
approve documents prior to use,
review, update, and re approve as necessary,
identify the current revision status,
ensure that current versions are available at the point of use,
ensure that documents are legible and readily identified,
identify and distribute documents of external origin, and
provide for the prompt removal of obsolete documents and identify suitably what
may be retained.
Documented procedure means that the QMS shall be controlled. ISO stipulates a
documented procedure to define the control needed to:
approve documents prior to use,
review, update, and re approve as necessary,
identify the current revision status,
ensure that current versions are available at the point of use,
ensure that documents are legible and readily identified,
identify and distribute documents of external origin, and
provide for the prompt removal of obsolete documents and identify suitably what
may be retained.
Documented procedure means that procedure is established, documented,
implemented, and maintained. It also makes it mandatory to document the revisions
with its unique system of versions.
A controlled document is a document that, if changed, affects some part of the process
or product. These can be procedures, process documents, product or part drawings
(prints) or other similar documents. Forms a typically controlled document.
Typically there will be one or more list(s) of master documents.
If a controlled document is changed, a record of the change has to be made. This
means these must be a History of All Changes.
If a document is changed, people who use it must know about the change. This
means thee has to be a distribution list or other effective way to let everyone who
uses it know the document has changed (read Communicate the changes).
Every employee must know how to check to see if documentation they are using
is the most current version.

296 Check Your Progress 2

Fill in the blanks:
1. Third-party registrars are now being used to perform independent
.. assessments.
2. . exist to help organizations minimize how their
operations negatively affect the environment.
11.10 IMPLEMENTING ISO 9001: 2000

Quality management system involves the following preparations:
1. Identify the goals the organization wants to achieve. Typical goals may be:
Be more efficient and profitable
Produce products and services that consistently meet customer requirements
Achieve customer satisfaction
Increase market share
Maintain market share
Improve communications and morale in the organization
Reduce costs and liabilities
Increase confidence in the production system
2. Identify what others expect of the organization. These are the expectations of
interested parties (stakeholders) such as:
Customer and end users
Employees
Suppliers
Shareholders
Society
3. Obtain information about the ISO 9000 family.
4. Decide the type of certification of the quality management system required like:
Using ISO 9001:2000 as the basis for certification
Using ISO 9004:2000 in conjunction with the national quality award criteria
to prepare for a national quality award.
5. Obtain guidance on specific topics within the quality management system. These
topic-specific standards are:
ISO 10006 for project management
ISO 10007 for configuration management
ISO 10012 for measurement systems
ISO10013 for quality documentation
ISO/TR 10014 for managing the economics of quality
ISO 10015 for training

ISO/TS 16949 for automotive suppliers 297

ISO 19011 for auditing
6. Establish the current status and determine the gaps between the current quality
management system and the requirements of ISO 9001: 2000 by
Self-assessment
Assessment by an external organization
7. Determine the process that is needed to supply products to your customers.
Review the requirements of the ISO 9001: 2000 section on Product Realization to
determine how they apply or do not apply to your quality management system
including;
Customer related processes
Design and/or development
Purchasing
Production and service operations
Control of measuring and monitoring devices.
8. Develop a plan to close the gaps in step 6 and to develop the processes in step 7.
Identify actions needed to close the gaps, allocate resources to perform these
actions, assign responsibilities and establish a schedule to complete the needed
actions. ISO 9001:2000 Paragraphs 4.1 and 7.1 provide the information needed to
consider when developing the plan.
9. Carry out the plan: Proceed to implement the identified actions and track progress
to your schedule.
10. Undergo periodic internal assessment. Use ISO 19011 for guidance in auditing,
auditor qualification and managing audit programmes.
11. Is there a need to demonstrate conformance?
If yes, go to step 12
If no, go to step 13
The need or wish to show conformance (certification/registration) can be for
various purposes, like:
Contractual requirements
Market reasons or customer preference
Regulatory requirements
Risk management
To set clear goal for the internal quality development (motivation)
12. Undergo independent audit. Engage an accredited registration/certification body
to perform an audit and certify that your quality management system complies
with the requirements of ISO 9001:2000.
13. Continue to improve the business. Review the effectiveness and suitability of the
quality management system. ISO 9004:2000 provides a methodology for
improvement.

298 The processes involved in the implementation are given below:

1. The Management Commitment: For a successful implementation the top
management must support it and must be committed to it.
2. Appointment the Management Representative (MR): A management
representative is to be appointed. MR can be a senior manager. He will
co-ordinate the implementation activities.
3. Awareness: The implementation of the quality system should involve everyone in
the organization. Hence everyone should understand the quality system. They
should know how it would affect day-to-day operations. They also must know
about the potential benefits.
4. Assembling of an implementation Team: Since it is teamwork, and
implementation team has to be assembled. It must contain people from all
departments and from all levels. The team should identify the QMS processes and
their sequence and interaction.
5. Training: Members of the implementation team, supervisors, and internal audit
team should be trained. The training can be done in house for all.
6. Time schedule: A time schedule must be developed for the implementation and
registration of the system. This schedule must be further divided for the various
tasks within the same.
7. Select Element Owners: Selection of owners for each of the system element is the
next step. These owners would make up teams to assist them.
8. Review the Present System: Review the current system is done by the element
owners.
9. Write the Documents: Prepare the Quality Policy, Quality manual, Work
instructions etc. The documentation must be simple and easily understandable.
10. Install the New System: Install the new system. Train all the people in the use of
the various procedures, etc.
11. Internal Audit: Conduct an internal audit of the quality system. Make the
necessary corrections as they occur. The audit people must be different from those
who have made it.
12. Management Review: The management review is done to judge the effectiveness
for the system in achieving the stated quality. Revise of needed.
13. Pre assessment: This step may not be necessary. But it serves as a rehearsal.
14. Registration: This is the final step towards certification. The Policy and procedure
manuals are reviewed by the certifying agency. They then conduct the system
audit.
15. The audit would start with an opening meeting where the auditors would explain
the process of auditing. This will be followed by the audit itself. In the closing
meeting the auditors would discuss the findings of the audit.
16. Any minor non-conformity would be corrected. Once the auditors are satisfied,
they would issue the certification.
Some pitfalls to successful implementation are:
Over documentation of documentation that is too complex.
Using external consultants without internal ownership and involvement.

Lack of top managements involvement. 299

Developing a system that odes not represent the actual system.
1.11 QUALITY ASSURANCE

Quality assurance comprises variety of tasks associated with the following seven
major activities:
Application of technical methods
Conduct of formal technical reviews
Software testing
Enforcement of standards
Control of change
Measurement
Record keeping and reporting
Application of Technical Methods

Quality is designed into the software but not added afterwards. Implies must have set
of technical methods and tools to help analyst generated high quality specifications
and designs.
Formal Technical Reviews

A formal technical review is a stylised meeting conducted by technical staff to
uncover quality performs.
Reviews can be as effective as testing in uncovering defects in software.
Software Testing
Appropriate strategies for software testing should be applied. Note that testing cannot
uncover all errors.
Enforcement of Standards
There are several quality standards such as ISO 9000, SEI CMMs, etc. meant for
ensuring software quality. If these standards are used, can be applied by developers as
part of a formal review. These can be independently verified by SQA group
conducting an audit.
Control of Change
Changes can introduce errors. Change control includes:
Formalized requests for change
Evaluates the nature of the change
Controls the impact of the change
Measurement
Software metrics are needed to track quality and assess impact of methodological and
procedural changes.

300 Record Keeping and Reporting

Collection and dissemination of software quality assurance information is required.
Results of audits, reviews, change control, testing and other SQA activities are part of
the historical record of the project.
11.12 QUALITY ASSURANCE REVIEW

Reviews, inspections and walkthroughs are claimed to improve productivity and
reduce errors in software during development as well as resulting in higher quality
software at the end of development process.
The inclusion of reviews, inspections and walkthrough in a development process
should:
Increase project productivity be detecting defects early, thus reducing rework time
and possibly decreasing time which needs to be spent on testing.
Improve the quality of the system.
Inform (educate) other members of the tem about developments. This improves
productivity by reducing the errors caused by ignorance and makes the team more
able to cope with the problems caused by loss of staff.
Mark the completion of a stage in the development if the software.
Produce more maintainable software. The chain of reasoning is that for software
to be reviewed the reviewers must be able to understand it. it must therefore be
well documented. The review thus forces the developer to produce documentation,
which might not otherwise have been produced until the end of project, at which
resource constraints might have reduced its quality. In addition the review process
will increase the understanding of the software being developed.
A review consists of activities conducted by a team of people to identify problem. The
purpose of software quality assurance reviews is to assure the quality of a deliverable
(a product that has to be delivered to a customer) before the development process is
allowed to continue. Once a deliverable has been reviewed, revised as necessary, and
approved, it can safely be used as the basis for further development.
11.13 OBJECTIVES OF QUALITY ASSURANCE REVIEW

The objectives of the quality assurance review are:
Identify required improvement in a product.
Assure that the deliverable is complete.
Assure that the deliverable is technically correct (e.g., all the data flow diagram
are correct).
Measure the progress of the project.
Identify and defects early, thus resulting in cost and timesaving.
11.13.1 Business Review

The business review ensure that the following objectives are met:
The deliverable is complete.
The deliverable provides the information required for the next phase (i.e., can the
system design be developed from the requirements document?)

The deliverable is correct. 301

There is adherence to the procedures and policies.
11.13.2 Technical Review

The technical review ensure that the software confirms to your companys standards
of development. These standards may include, but are not limited to, any standards for
GUO, windows, user interface, naming conventions, repository completeness, and so
forth. The technical review process also ensure that any changes to the software are
implemented according to pre-defined procedures and standards.
Project managers need an evaluation of the technical output from the development
team. A technical review is a form of testing of a software configuration item and is
classified according to the project being reviewed. It is a formal team evaluation of a
software elements which tries to identify any discrepancies from the specification of
the software element.
The review leader is responsible for selecting the review team, planning and
scheduling the review, ensuring that entire documentation is distributed, conducted the
review and issuing the report. The reviewers might be chosen from the following
groups:
User
Maintainer
Quality engineer
Specialists with knowledge of the application
Specialists with knowledge of the design methodology.
The review must take place as soon as possible after the work to be reviewed has been
completed. The input to review process includes a statement of objectives for the
review, item being reviewed, specification of item being reviewed and any plans,
standards or guidelines against which the team is being examined. Each of the
reviewers is given sufficient time to prepare. Then the meeting is called after some
time. The review leader should monitor individual reviewers responses that reviewers
make during the meeting. Each of the reviewers must be given sample opportunity to
comment on the item being reviewed. However, the structure of the meeting must be
conducted in strict accordance with the agenda. If errors are found during the review,
it must be decided whether the item should be reviewed again after correction of the
item. If no errors are found, then the item can be accepted. The recorders main task is
to provide information for the accurate report of the review. The information is about
such things as defects, inconsistencies, omissions, ambiguities, decisions and
recommendations. At the end of the meeting, the recorder summarizes the notes and
the conclusions, which will form the basis of the report. The review have been
addressed and the report has been issued. Issues relating to style should not be raised,
the evaluation is concerned with technical accuracy. The copy of the report should be
kept with project documentation.
11.13.3 Management Review

The intent of the management reviews is to:
Validate from a management perspective that the project is making progress
according to the project plan.
Ensure a deliverable is ready for management approval.
Resolve issues that require managements attention.

302 Identify if the project needs a change of direction.

Control the project through adequate allocation of resources.
Generally, these reviews are not planned and they may occur on an as needed basis.
The management review team consists of the representatives of all the areas affected
by the development effort.
The project manager is responsible for formally reporting the status of the project,
ensuring that all supporting documents of the review are available for distribution to
the appropriate managers and distributing the minutes. Each member of the
management review team us responsible for reviewing the documents and making
notes for issue before attending the review meeting.
During the review, the team:
Examine the project status.
Determine if the project fulfills user requirements and performance criteria.
Ensure that properly trained resources are allocated to the project.
Generates a list of issues, associated risks, recommendations, and resource of
actions to be taken to resolve the issues.
Examine the project cost.
Reviews the initial project plan; notes variations to the cost and identities the
possible occurrences causing the variations; identifies strategic activities and time
frame to address the variations.
Recommends authorization for additional management reviews if necessary.
The output from the management review process is the management review report
which lists action items, ownership and status, issues and recommendation identified
by the management review team that are addressed for the project to meet its
milestone, and recommendations for the improvement of the process to avoid the same
defects from occurring in the future.
11.13.4 Roles and Responsibilities

Whenever a group problem solving session is held, there is a well defined set of roles
that are played by the participants. This is true whether you are talking about a review,
inspection, or any other type of problem solving. One way in which these roles can be
defined is as follows:
Facilitator
The facilitator is the individual who thoroughly understand the subject matter under
review and can present the background information and assign roles to other members.
The facilitator also encourages participation for all the attendees and ensures all
problems are adequately reviewed. The facilitator understands the issues and keeps the
meeting focused and moving. In addition, he or she makes a general agreement on
problem and makes sure that everyone has a chance to express view or receive
clarification on any misunderstanding. The facilitator is required to perform the duties
of a reviewer and records issues if the recorder is not present.
Author (Producer)
The author ensures that the subject material is ready for the review and distributes it.
During the meeting, the author paraphrases the document a section at a time. The
author is responsible for scheduling the review; selecting the review participants,
determining if entry criteria for the review are met; providing information about the

product during all stages; clarifying any unclear issues and correcting any problems 303
identified and providing dates for reworks and resolution.
Recorder
The recorder collects and records each defect uncovered during the review meeting.
Then, the recorder develops and issues list and identifies whose responsibility it is to
resolve each issue. In addition, he or she records meeting decisions on the issues,
prepares the minutes, and publishes the minutes.
Reviewer
Each member of the review team spends time prior to the meeting reviewing the
information, makes notes of defects and becomes familiar with the product to be
reviewed and identifies strengths of the product.
Observer
The observer is a new member to the project team who learns the product and
observes the review techniques.
11.14 SIX SIGMA CONCEPTS

Six Sigma is a business management strategy originally developed by Motorola, USA
in 1981. As of 2010, it enjoys widespread application in many sectors of industry,
although its application is not without controversy.
Six Sigma refers to a disciplined, data-driven approach and methodology for
eliminating defects in any processfrom manufacturing to transactional and from
product to service. A defect is a component that does not fall within the customers
specification limits. For example, in administrative processes, Six Sigma may mean
optimizing response time to inquiries, maximizing the speed and accuracy with which
inventory and materials are supplied, and fool proofing such support processes from
errors, inaccuracies and inefficiency.
Traditional quality programs focus on detecting and correcting defects. However, Six
Sigma programs seek to reduce the variation in the processes that lead to these defects.
One of the most important measures of variation is the standard deviation. The
standard deviation () of a set of sample scores is a measure of variation of scores
about the mean, and is defined by the following formula:
Where,
x is the value of the attribute
x is the mean value, and
n is the number of readings
The philosophy underlying Six Sigma is to reduce process output variation. The
performance of a process in terms of its variability is compared with different
processes using a common metric. This metric is defects per million opportunities
(DPMO). This calculation requires three pieces of data:
Unit. The item produced or being serviced.
Defect. Any item or event that does not meet the customers requirements.
Opportunity. A chance for a defect to occur.

304 A calculation is made using the following formula.

DPMO = (Number of defects 1,000,000) / Number of opportunities for error per unit
Number of units
As we have already studied, the control limit of acceptable error of any stream of
numbers is 3 ( being the standard deviation). A product is considered
acceptable if the variation is 3 on the normal specification. This limits in
specifications permit 66,738 defects per million. In Six Sigma, on a long-term basis,
no more than 3.4 defect parts per million or 3.4 defects per million opportunities
(DPMO) are permitted.
For a Six Sigma process with only one specification limit (upper or lower), there are
six process standard deviations between the mean of the process and the customer's
specification limit. This is the origin of the name Six Sigma. For a process with two
specification limits (upper and lower), this translates to slightly more than six process
standard deviations between the mean and each specification limit such that the total
defect rate corresponds to equivalent of six process standard deviations. This
relationship is shown graphically in Figure 11.1.
LSL Target USL
Shifted 6 Sigma Process: 3 Sigma Process Centered

3.4 total Defects of One Around The Target: 66.738
Million Opportunities Total Defects of One Million
Below The LSL Opportunities Outside the
Lower and Upper
Specification Limits
Figure 11.1: Six Sigma A Statistical Representation

A process that is in Six Sigma control will produce no more than two defects out of
every billion units. Often, this is stated as four defects per million units which is true if
the process is only running somewhere within one sigma of the target specification.
The overall performance of a process, as the customer views it, might be 3.4 DPMO.
However, a process could indeed be capable of producing a near perfect output. As the
process sigma value increases from zero to six, the variation of the process around the
mean value decreases. With a high enough value of process sigma, the process
approaches zero variation and is known as 'zero defects.'
There are two aspects to Six Sigma programs: the people side and the methodology
side. We will take this up in order.
11.15 SIX SIGMA ROLES AND RESPONSIBILITIES

Successful implementation of Six Sigma is based on using sound personnel practices
as well as technical methodologies. The roles and responsibilities of different people
in a Six Sigma organization are shown in Exhibit 11.1.

Exhibit 11.1: Roles and Responsibilities in a Six Sigma Organization 305

To convey the need to vigorously attack problems, professionals are given martial arts titles reflecting
their skills and roles:
Quality Leader/Manager (QL/QM) The quality leader represents the needs of the customer. The
Quality function is independent from the manufacturing or transactional proce ssing functions to
maintain impartiality. The quality leader is generally on the CEO's staff, and has equal authority to all
other direct reports.
Master Black Belt (MBB) Master Black Belts are typically assigned to a specific area or function
such as marketing or machine shop, die shop, etc. MBBs work very closely and share information
with the owners of the process to ensure that quality objectives and targets are set, plans are
determined, progress is tracked, and training is provided.
Process Owner (PO) Process owners are responsible for specific processes. For instance, in the
marketing department there is usually one person in charge of marketingthe chief of marketing is
the process owner for marketing. Depending on the size of the business and core activities, there may
be process owners at lower levels of the organizational structure. For example, in the marketing
department there may be a head of marketing services: that's the process owner.
Black Belt (BB) Black Belts are at the heart of the Six Sigma quality initiative. Their main purpose
is to lead quality projects and work full time until they are complete. Black Belts can typically
complete four to six projects per year. They also coach Green Belts on their projects.
Green Belt (GB) Green Belts are employees trained in Six Sigma who spend a portion of their time
completing projects, but maintain their regular work role and responsibilities.
Source: Adapted from 2000-2005 iSixSigma LLC

306 Six sigma needs leaders and champions, truly committed to it, to promote it
throughout the organization. Corporate wide training in Six Sigma concepts and tools
is essential. Professionals in the organization need to be qualified in Six Sigma
techniques. MBBs receive in-depth training on statistical tools and process
improvement techniques. They must identify appropriate metrics early in the project.
They must make certain that the improvement effort focuses on business results that
are to be improved. They are the trainers of trainers.
11.16 SIX SIGMA METHODOLOGY

While Six Sigmas methods include many of the statistical tools that are employed in
other quality movements, DMAIC and DMADV are both special tools developed for
Six Sigma applications:
Six Sigma methodologies used to drive defects to less than 3.4 per million
opportunities.
Data intensive solution approaches.
Implemented by Green Belts, Black Belts and Master Black Belts.
Ways to help meet the business/financial bottom-line numbers.
Implemented with the support of a champion and process owner.
11.16.1 The Differences of DMAIC and DMADV

DMAIC and DMADV sound very similar, but operate differently. The two
methodologies are compared in Table 11.1.
Table 11.1: Differences between DMAIC and DMADV
DMAIC Define Identify customers and their priorities
Measure
Define the project goals and customer (internal and external)
Analyze
deliverables. Identify CTQs (critical-to-quality characteristics) that
Improve
the customer considers to have the most impact on quality.
Control
Measure the process to determine current performance
Identify the key internal processes that influence CTQs and
measure the defects currently generated relative to those processes.
Analyze and determine the root cause(s) of the defects
Improve the process by eliminating defects
Control future process performance
DMADV Define Identify customers and their priorities
Measure
Define the project goals and customer (internal and external)
Analyze
deliverables. Identify CTQs.
Design
Verify Measure and determine customer needs and specifications
Identify the key internal processes that influence CTQs and
measure the defects currently generated relative to those processes.
Analyze the process options to meet the customer needs
Design (detailed) the process to meet the customer needs
Verify the design performance and ability to meet customer needs
11.16.2 When to Use DMAIC

The DMAIC cycle is a more detailed version of the Deming PCDA cycle, which
consists of four stepsplan, do, check, and actthat underlie continuous
improvement. The DMAIC methodology, instead of the DMADV methodology,

should be used when a product or process is in existence at your company but is not 307
meeting customer specification or is not performing adequately. The objective here is
to modify the process to stay within acceptable range. Determine the control
parameters and how to maintain the improvements. Put tools in place to ensure that
the key variables remain within the maximum acceptance ranges under the modified
process.
11.16.3 When to Use DMADV

The DMADV methodology, instead of the DMAIC methodology, should be used
when:
A product or process is not in existence and the company one needs to be
developed
The existing product or process exists and has been optimized (using either
DMAIC or not) and still doesn't meet the level of customer specification or Six
Sigma level.
The objectives of the DMADV methodology finds application in product and process
design, or reengineering that have been discussed in earlier chapters. The design
parameters are determined and tools put in place to ensure that the key variables
remain within the maximum acceptance ranges under the new or reengineered
process.
Fill in the blanks:
1. .. is similar to ISO 9000 quality management in that both
pertain to the process rather than to the product itself.
2. QS-9000 will help companies to stay ahead of their ..
3. A .. is a component that does not fall within the
customers specification limits.
11.17 LET US SUM UP

There are many more standards in the ISO 9001 family, one of many may be Leicester
University which also found out the electronic fingerprinting, but for other standard
see ("List of ISO 9000 standards" from ISO), many of them not even carrying "ISO
900x" numbers. For example, some standards in the 10,000 range are considered part
of the 9000 family: ISO 10007:1995 discusses Configuration management, which for
most organizations is just one element of a complete management system. ISO notes:
"The emphasis on certification tends to overshadow the fact that there is an entire
family of ISO 9000 standards ... Organizations stand to obtain the greatest value when
the standards in the new core series are used in an integrated manner, both with each
other and with the other standards making up the ISO 9000 family as a whole".

Write a note on ISO 9000 and the way to get a license.

308
ISO 9000: It is a family of standards for quality management systems.
ISO 14000: The environmental management standards exist to help organizations
minimize how their operations negatively affect the environment (cause adverse
changes to air, water, or land), comply with applicable laws and regulations).
Standard: A practice or procedure that is imposed and enforced throughout the
organization.
Vendor: A person or organization that sells part or all of a product, usually for
inclusion in a large product being developed by a producer.

1. Explain the concept of Business Process Reengineering System.
2. Describe about the ISO standards and what are its advantages.
3. Explain the procedure for documentation of quality system.
4. Discuss the elements of ISO 9000 standard.

CYP 1
1. Geneva, Switzerland
2. 120
3. ISO 9000
CYP 2
1. ISO 9000
2. Environmental management standards
CYP 3
1. ISO 14000
2. Competition
3. defect

Bailey, J. E., Pearson, S. W., Development of a Tool for Measuring and Analyzing
Computer user Satisfaction, Management Science.
Delen, G.P.A.J. and Rijsenbrij, D.B. B., A specification, Engineering and
Measurement of Information Systems Quality.
Drucker, P.E., The Information Executives Truly Need, Harvard Business Review.
Fox, C., Levitin, A. and Redman, T., The Notion of Data and its Quality
Dimensions, Information Processing & Management.

Greene, R.T., Global Quality A Synthesis of the World Best Management Methods, 309
1993, New York, ASQC Quality Press.
Hari, A. (editor), The Quality Terms Lexicon, 1995, Israel, Quality and Excellence
Center, Prime minister Office (Hebrew text).
Rolph, P. and Bartram, P., The Information Agenda: Harnessing Relevant
Information in a Changing Business Environment, 1994, London, Management
Books.
30
Micro-Finance:
Model Question Paper
MODEL QUESTION PAPER

MBA
Sub: Operations Management

Time: 3 hours Total Marks: 100
Direction: There are total eight questions, each carrying 20 marks. You have to
attempt any five questions.
1. Describe historical contribution of operation management. Also describe various

functions of operation management.
2. Explain production system and its environment in detail.
3. How do product development strategies relate to the other organizational
strategies (i.e. competitive and functional)? What is the difference between single
and multi-business organizations? Provide examples.
4. Describe various techniques used in location analysis.
5. Explain various functions of production planning and control.
6. ERP originally implied systems designed to plan the use of enterprise-wide
resources. Explain
7. What do you mean by material management? Also describe the various roles of
material management in business.
8. Explain the TQM framework to quality improvement.
309
30
Micro-Finance:

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Operations Management

Paper No. 1.9

For SDE Candidates admitted during 2011-12 and onwards

School of Distance Education

1.0 AIMS AND OBJECTIVES

1.2 MEANING OF OPERATION MANAGEMENT

1.4 HISTORICAL CONTRIBUTIONS

1.4.1 Scientific Management Time and Motion Studies

1.4.2 World War II to the 1960s Operations Research 11

12 1.4.3 The 1970s and 1980s Japanese Challenge

1.4.4 The 1990s and After 13

Figure 1.1: Chronology of Operations Management Themes

1.5.1 Transformation Approach

Inputs Transformation Output

Inputs Process Output

Figure 1.2: Operations Management as a Transformation Process

1.5.2 Value Driven Approach

Table 1.3: Core Process Model 17

Determine Monitor Market Products Measure Understand

Product Product Products Design Prototypes Products or Product

Value Chain Model

1.5.3 Operations Management Basics

Figure 1.3: The Value Seesaw

1.6 OPERATION STRATEGY AND COMPETITIVENESS

Importance of Operations Strategy

1.7 FUNCTIONS OF OPERATIONS MANAGER

Figure 1.5: Value Driven Concept of Operations Management

24 Capacity How much is needed? How do we use flexible

Infrastructure Quality How do we prevent defects How can we better learn

26 1.7.1 Interface with Other Functions

1.7.2 Operations Managements Future Challenges

Factors of Production Challenges

Check Your Progress 2 31

1. Marketing is responsible for understanding customer needs, generating

1.8 EFFICIENCY AND EFFECTIVENESS

Efficiency or Performance Measurement System

32 based on the assumption that an organizations measurement system should enable

Individual Performance Measures

1.9 LET US SUM UP

1.12 QUESTIONS FOR DISCUSSION

34 Check Your Progress: Model Answers

1.13 SUGGESTED READINGS

2.0 AIMS AND OBJECTIVES

36 system, continuous production system, concurrent production system, and

2.2 PRODUCTION SYSTEMS

What is Effective Production Management?

A production system refers to how an organization organizes material flow using

2.3.2 Job Shop

2.3.3 Batch Production (Disconnected Line)

2.3.4 Assembly Line

38 Examples include automobiles, appliances like washing machines, televisions, etc.

2.3.5 Continuous Flow

2.3.6 Cell Manufacturing (Group Technology)

2.3.7 Flexible Manufacturing Systems (FMS)

Check Your Progress 2 39

2.4 PRODUCTION SYSTEM AND ITS ENVIRONMENT

Figure 2.1: Customer Orientation in Production and Operations

40 External factors affecting production:

2.5 LET US SUM UP

2.6 LESSON END ACTIVITY

2.8 QUESTIONS FOR DISCUSSION

4. What is the difference between high-contact and low-contact systems? Provide 41

Check Your Progress: Model Answers

2.9 SUGGESTED READINGS