UNIT I : Introduction to production and operations management

The History of Operation & Production Management

Operation and production management is not a new concept, in fact its history dates back to the late 18th century.
Beginning just prior to the industrial revolution and continuing into the 21st century, operation and production
management has continually developed, allowing for greater and greater production efficiency. Management students
and practitioners will benefit from understanding these developments.

18th Century

The earliest account of operations and production management is given by Adam Smith in his book, "An Inquiry into
the Nature and Causes of the Wealth of Nations," published in 1776. In this work, Smith explains how the division of
labor allows for more efficient production. According to Smith, people are more efficient producers if each person
works on a single component, rather than building the product from start to finish.

19th Century

In the 19th century, technological advancements gave rise to the use of interchangeable parts. These are components
to a product that are standardized according to precise specifications. Previously, each component had to be custom
fit to the specific product. Industrialists such as Eli Whitney and Marc Isambard Brunel used interchangeable parts to
develop highly efficient production systems in which workers could simply build components that would be
assembled at the end of the process.

Early 20th Century

In the early 20th century, Henry Ford took the division of labor and the use of interchangeable parts one step further,
creating the assembly line method of manufacturing. This method revolutionized operation and production
management, allowing Ford to produce a high volume of cars at affordable prices. This method of production has
been adopted by many other producers, allowing for the mass production of cheap consumer goods.

Contemporary Period

In the latter half of the 20th century, several operation and production management systems have been developed.
The focus of most of these systems is on creating even greater efficiency in the production process. Some of the more
popular systems have included Six Sigma, which was developed by Motorola; lean manufacturing, which was
developed by Toyota; and ISO 9000, which was developed by the International Organization for Standardization.

Production Management: it’s Meaning, Definition, Function and Scope

Meaning of Production Management:

Production Management refers to the application of management principles to the production function in a factory.
In other words, production management involves application of planning, organizing, directing and controlling the
production process.

The application of management to the field of production has been the result of at least three developments:
(i) First is the development of factory system of production. Until the emergence of the concept of manufacturing,
there was no such thing as management as we know it. It is true that people operated business of one type or
another, but for the most part, these people were owners of business and did not regard themselves as managers as
well,

(ii) Essentially stems from the first, namely, the development of the large corporation with many owners and the
necessity to hire people to operate the business,

(iii) Stems from the work of many of the pioneers of scientific management who were able to demonstrate the
value, from a performance and profit point of view, of some of the techniques they were developing.

Definition of Production Management:

It is observed that one cannot demarcate the beginning and end points of Production Management in an
establishment. The reason is that it is interrelated with many other functional areas of business, viz., marketing,
finance, industrial relation policies etc.

Alternately, Production Management is not independent of marketing, financial and personnel management due to
which it is very difficult to formulate some single appropriate definition of Production Management.

The following definitions try to explain main characteristics of production management:

(i) In the words of Mr, E.L. Brech:

“Production Management is the process of effective planning and regulating the operations of that section of an
enterprise which is responsible for the actual transformation of materials into finished products.” This definition
limits the scope of production management to those activities of an enterprise which are associated with the
transformation process of inputs into outputs. & the definition does not include the human factors involved in a
production process. It lays stress on materialistic features only.

(ii) Production Management deals with decision-making related to production process. So that the resulting goods
and services are produced in accordance with the quantitative specifications and demand schedule with minimum
cost.

According to this definition design and control of the production system are two main functions of production
management.

(iii) Production Management is a set of general principles for production economies, facility design, job design,
schedule design, quality control, inventory control, work study and cost and budgetary control. This definition
explains the main areas of an enterprise where the principles of production management can be applied. This
definition clearly points out that production management is not a set of techniques.
 In short, the main activities of production management can be listed as:
(i) Specification and procurement of input resources namely management, material, and land, labour, equipment
and capital.

(ii) Product design and development to determine the production process for transforming the input factors into
output of goods and services.

(iii) Supervision and control of transformation process for efficient production of goods and services.

Functions of Production Management:

The definitions discussed above clearly shows that the concept of production management is related mainly to the
organizations engaged in production of goods and services. Earlier these organizations were mostly in the form of one man
shops having insignificant problems of managing the productions.

But with development and expansion of production organizations in the shape of factories more complicated
problems like location and lay out, inventory control, quality control, routing and scheduling of the production
process etc. came into existence which required more detailed analysis and study of the whole phenomenon.

This resulted in the development of production management in the area of factory management. In the beginning
the main function of production management was to control labour costs which at that time constituted the major
proportion of costs associated with production.

But with development of factory system towards mechanization and automation the indirect labour costs increased
tremendously in comparison to direct labour costs, e.g., designing and packing of the products, production and
inventory control, plant layout and location, transportation of raw materials and finished products etc. The planning
and control of all these activities required more expertise and special techniques.

In modern times production management has to perform a variety of functions, namely:

(i) Design and development of production process.
(ii) Production planning and control.
(iii) Implementation of the plan and related activities to produce the desired output.
(iv) Administration and co-ordination of the activities of various components and departments responsible for
producing the necessary goods and services.
However, the responsibility of determining the output characteristics and the distribution strategy followed by an
organization including pricing and selling policies are normally outside the scope of Production Management.
 Scope of Production Management:
The scope of production management is indeed vast. Commencing with the selection of location, production
management covers such activities as acquisition of land, constructing building, procuring and installing
machinery, purchasing and storing raw materials and converting them into saleable products. Added to the above
are other related topics such as quality management, maintenance management, production planning and control,
methods improvement and work simplification and other related areas.

Objective of Production Management
Production management is ‘a process of planning, organizing, directing and controlling the activities of the
production function. It combines and transforms various resources used in the production subsystem of the
organization into value added product in a controlled manner as per the policies of the organization’.

E.S. Buffa defines production management as follows:

‘Production management deals with decision-making related to production processes so that the resulting goods or
services are produced according to specifications, in the amount and by the schedule demanded and out of
minimum cost’.

The objective of the production management is ‘to produce goods services of right quality and quantity at

the right time and right manufacturing cost’.

1. RIGHT QUALITY

The quality of product is established based upon the customer’s needs. The right quality is not necessarily best
quality. It is determined by the cost of the product and the technical characteristics as suited to the specific
requirements.

2. RIGHT QUANTITY

The manufacturing organization should produce the products in right number. If they are produced in excess of
demand the capital will block up in the form of inventory and if the quantity is produced in short of demand, leads
to shortage of products.

3. RIGHT TIME

Timeliness of delivery is one of the important parameter to judge the effectiveness of production department. So,
the production department has to make the optimal utilization of input resources to achieve its objective.

4. RIGHT MANUFACTURING COST

Manufacturing costs are established before the product is actually manufactured. Hence, all attempts should be
made to produce the products at pre-established cost, so as to reduce the variation between actual and the standard
(pre-established) cost.

Concept of Operations Mangement :

Defining Operations Management
Every business is managed through multiple business functions each responsible for managing certain aspects of the
business. Figure 1-1 illustrates this by showing that the vice president of each of these functions reports directly to
the president or CEO of the company. Marketing is responsible for sales, generating customer demand, and
understanding customer wants and needs. Finance is responsible for managing cash flow, current assets, and capital
investments. MIS is responsible for managing flows of information. Most of us have some idea of what finance and
marketing are about, but what does operations management do?

Figure 1-1 Organizational chart

Operations management (OM) is the business function responsible for managing the process of creation of goods and
services. It involves planning, organizing, coordinating, and controlling all the resources needed to produce a
company’s goods and services. Because operations management is a management function, it involves managing
people, equipment, technology, information, and all the other resources needed in the production of goods and
services. Operations management is the central core function of every company. This is true regardless of the size of
the company, the industry it is in, whether it is manufacturing or service, or is for-profit or not-for-profit.

Consider a pharmaceutical company such as Merck. The marketing function of Merck is responsible for promoting
new pharmaceuticals to target customers and bringing customer feedback to the organization. Marketing is
essentially the window to customers. The finance function of Merck makes sure that they have needed capital for
different processes including R&D. However, it is the operations function that plans and coordinates all the resources
needed to design, produce, and deliver the various pharmaceuticals to hospitals, pharmacies, and other locations
where needed. Without operations, there would be no products to sell to customers.

The Transformation Role of Operations Management

We say that operations management performs a transformation role in the process of converting inputs such as raw
materials into finished goods and services. These inputs include human resources, such as workers, staff, and
managers; facilities and processes, such as buildings and equipment; they also include materials, technology, and
information. In the traditional transformation model outputs are the goods and services a company produces. This is
shown in Figure 1-2.

Figure 1-2 The transformation role of operations management

At a manufacturing plant the transformation is the physical change of raw materials into products, such as
transforming steel into automobiles, cloth into jackets, or plastic into toys. This is equally true of service
organizations. At a university OM is involved in organizing resources, such as faculty, curriculum, and facilities, to
transform high school students into college graduates. At an airline it involves transporting passengers and their
luggage from one location to another.

The transformation role of OM makes this function the “engine room” of the organization. As a result it is directly
responsible for many decisions and activities that give rise to product design and delivery problems. The design and
management of operations strongly influence how much material resources are consumed to manufacture goods or
deliver a service, making sure that there is enough inventory to produce the quantities that need to be delivered to the
customer, and ensuring that what is made is in fact what the customer wants. Many of these decisions can be costly.
It is for this reason that OM is a function companies go to in order to improve performance and the financial bottom
line.

Internal and External Factors affecting production and operations managment

Internal influences on operational objectives

Corporate objectives

As with all the functional areas, corporate objectives are the most important internal influence. An operations
objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs)

Finance

Operations decisions often involve significant investment and cost The financial position of the business
(profitability, cash flow, liquidity) directly affects the choices available

Human resources

For a services business in particular, the quality and capacity of the workforce is a key factor in affecting
operational objectives. Targets for productivity, for example, will be affected by the investment in training and the
effectiveness of workforce planning

Marketing issues

The nature of the product determines the operational set-up. Regular changes to the marketing mix – particularly
product – may place strains on operations, particularly if production is relatively inflexible

External influences on operational objectives

Economic environment

Crucial for operations. Sudden or short-term changes in demand impact on capacity utilisation, productivity etc.
Changes in interest rates impact on the cost of financing capital investment in operations

Competitor efficiency flexibility

Quicker, more efficient or better quality competitors will place pressure on operations to deliver at least
comparable performance

Technological change

Also very significant – especially in markets where product life cycles are short, innovation is rife and production
processes are costly.
Legal & environmental change
Greater regulation and legislation of the environment places new challenges for operations objectives.

Importance of Production Function and Production Management

Successful organizations have well defined and efficient line function and support function. Production comes
under the category of line function which directly affects customer experience and there by future of organization
itself.

Aim of production function is to add value to product or service which will create a strong and long lasting
customer relationship or association. And this can be achieved by healthy and productive association between
Marketing and Production people. Marketing function people are frontline representative of the company and
provide insights to real product needs of customers.

An effective planning and control on production parameters to achieve or create value for customers is called
production management.

Operations Management

As to deliver value for customers in products and services, it is essential for the company to do the following:

1. Identify the customer needs and convert that into a specific product or service (numbers of products
required for specific period of time)
2. Based on product requirement do back-ward working to identify raw material requirements
3. Engage internal and external vendors to create supply chain for raw material and finished goods between
vendor → production facility → customers.

Operations management captures above identified 3 points.

Production Management v/s Operations Management

A high level comparison which distinct production and operations management can be done on following
characteristics:

 Output: Production management deals with manufacturing of products like (computer, car, etc) while
operations management cover both products and services.
 Usage of Output: Products like computer/car are utilized over a period of time whereas services need to
be consumed immediately
 Classification of work: To produce products like computer/car more of capital equipment and less labour
are required while services require more labour and lesser capital equipment.
 Customer Contact: There is no participation of customer during production whereas for services a
constant contact with customer is required.

Production management and operations management both are very essential in meeting objective of an
organization.

CURRENT CHALLENGES FOR OPERATIONS MANAGEMENT

 Four Current Challenges for Operations Management

There are multiple challenges that operations managers face on a pretty frequent basis, and below you can see
listed the four current challenges for operations management. 

 Globalization - Globalization pertains to the process of interaction and integration among people,
companies, and governments among various nations. This is being driven by the reduction of trade barriers,
advancements in information/transportation technology, and more. Operations managers have found themselves
facing competition not only from competitors within their country, but from other countries as well. This is why is
is so important for operations management to keep up with the trends and softwares that are available to increase
their production and ultimately enable them to maintain their competitive advantage.
 Sustainability - Sustainability is a frequent issue discussed among various news outlets - with
manufacturing being one of the largest factors contributing to conversation. There is much debate over whether or
not we will have the appropriate amount of resources needed in order to have a sustainable future. When
discussing the concept of sustainability, the three pillars of sustainable usually come into play, which include
social, environmental, and economic. Operations managers need to be aware of the outcomes of each of these
pillars, including how their production facility or work will affect these factors. Effective operations management
will implement practices that will address these concerns pertaining to sustainability.
 Effective Communication - Consistency and effectiveness of communication is extremely difficult within
organizations. The challenge for operations managers is to be able to communicate effectively with all internal and
external stakeholders. This will ultimately allow for more thorough transparency within your production facility,
which will aid your factory floor immensely. Having everyone on the same page can boost efficiency within your
manufacturing operation with ease and operations management needs to look into softwares that can make this
much simpler for them. Effective communication is a must for manufacturing facilities that are seeking to boost
operational efficiency in areas such as demand planning, demand forecasting, using the plan/forecast, and
ultimately implementing this into a proper production plan.
 Ethical Conduct - Ethics is defined as a subset of business ethics that is meant to ensure that production
functions or activities are not damaging to people or society. Understanding the ethics of business will ensure that
you will not fall out of line in terms of keeping the people and environment of your business safe. Unethical
behavior has contributed to the demise of various companies around the globe - which is why understanding them
is so important. Being ethical across all functions of your business will ensure that your operation runs smoothly
and that you will not turn into one of the companies that have failed due to this.

Criteria of performance for the operations management System

Three objectives or criteria of performance of the production and operations management system are

1. Customer satisfaction
2. Effectiveness
3. Efficiency

The case for ‘efficiency’ or ‘productive’ utilization of resources is clear. Whether, the organization is
in the private sector or in the public sector, is a ‘manufacturing’ or a ‘service’ organization, or a
‘profit making’ or a ‘non-profit’ organization, the productive or optimal utilization of resource inputs
is always a desired objective. However, effectiveness has more dimensions to it. It involves optimality in the
fulfillment of multiple objectives, with a possible prioritization within the objectives. This is not difficult to
imagine because modern production and operations management has to serve the so-called target customers, the
people working within, as also the region, country or society at large. In order to survive the production/operations
management system, has not only to be ‘profitable’ and/or ‘efficient’, but, must necessarily satisfy
many more ‘customers’. This effectiveness has to be again viewed in terms of the short and long time
horizons (depending upon the operations system’s need to remain active for short or long time horizons) –
because , what may seem now like an ‘effective’ solution may not be ‘all that effective in the future. In
fact, the effectiveness of the operations systems may depend not only upon a multi-objectives satisfaction but also
on its flexibility or adaptability to change situations in the future so that it continues to fulfill the desirable
objectives set while maintaining optimal efficiency.
Typically, what are the different decisions taken in production and operations management? As a discipline of
‘management’ which involves basically planning, implementation, monitoring, and control, some of the
jobs/decisions are involved in the production and operations management.

The production and operations management function can be broadly divided into the following four areas:

1. Technology selection and management

2. Capacity management
3. Scheduling /Timing,Time allocation
4. System maintenance

This is primarily an aspect pertaining to the long term decision with some spillover into the intermediate region.
Although it is not immediately connected with the day-to-day short term decisions handled in the plant, it is an
important problem to be addressed in an age of spectacular technological advances, so that an appropriate choice is
made by a particular organization to suit its objectives, organizational preparedness and its micro economic
perspectives. It is a decision that will have a significant bearing on the management of manpower, machinery, and
materials capacity of the operations system and also on the type of disturbances it can create within and outside the
system by generating (i) undesirable effects of deterioration, (ii) potentially harmful waste by-products, and (iii)
potential risk, to the users and non-users alike, due to a variety of reasons. A technology decision is closely linked
with the capacity and system maintenance areas.

The capacity management aspect once framed in a long term perspective revolves around matching of available
capacity to demand or making certain capacity available to meet the demand variation. This is done on both the
intermediate and short time horizons. Capacity management is very important for achieving the organizational
objectives of efficiency, customer service and overall effectiveness. While lower than needed capacity results in
non-fulfillment of some of the customer services and other objectives of the production/operations system, a higher
than necessary capacity results in lowered utilization of the resources or, in other words, lower efficiency of the
conversion operations. There could be a ‘flexibility’ built into the capacity availability, but this depends
upon the ‘technology’ decision to some extent and also on the nature of the production/operations system.
While some operations systems can ‘flex’ significantly, some have to use inventories as the flexible joint
between the rigidities of a system. The degree of flexibility required depends upon the customers demand
fluctuations and thus the demand characteristics of the operations system.

As the product variety increases, the systems of production/operations change. In a system characterized by large
volume low variety, one have capacities of machinery and men which are inflexible while taking advantage of the
repetitive nature of activities involved in the system; whereas in a high variety (and low volume) demand situation,
the need is for a flexible manufacturing system even at some cost to the efficiency. It may be noted that the
relationship between the flexibility, capacity and the desired system-type holds good even for the ‘service’
industry.

Scheduling is another decision area of operations management which deals with the timing of various activities
– time phasing of the filling of the demands or rather, the time phasing of the capacities to meet the demand as it
keeps fluctuating.

System Maintenance: The fourth area of operation management is regarding safeguards – that only desired
outputs will be produced in the ‘normal’ condition of the physical resources, and that the condition will be
maintained normal. This is an important area whereby ‘vigilance’ is maintained so that all the good work of
capacity creation, scheduling, etc is not negated.

THE MAJOR PRINCIPLES OF OPERATIONS MANAGEMENT

OPERATIONS MANAGEMENT DECISIONS

In this section we look at some of the specific decisions that operations managers have to make. The best way to do
this is to think about decisions we would need to make if we started our own company—say, a company called
 Gourmet Wafers that produces praline–pecan cookies from an old family recipe. Think about the decisions that
would have to be made to go from the initial idea to actual production of the product: that is operations
management

Some of the fundamentals of the everyday work in operations management worth expanding a little more. Below
you will find two major approaches that are important to understand the driving forces behind the decisions about
planning, designing and organizing processes.
They are both embracing the idea of focusing on the delivery: supporting the organization to deliver better results,
by an optimized input of materials, equipment, technology, and human resources.

Randall Schaeffer is an experienced manufacturing and operations management professional, an industrial

philosopher, and regular speaker at conferences organized by APICS, the leading US association of supply chain
and operations management. He presented his list of 10 principles of operations management at an APICS
conference in 2007, saying the violation of these principles had caused the struggle US manufacturing companies
were experiencing.

 Reality. Operations management should focus on the problem, instead of the techniques, because no tool
in itself would present a universal solution.
 Organization. Processes in manufacturing are interconnected. All elements have to be predictable and
consistent, in order to achieve a similar outcome in profits.
 Fundamentals. The Pareto rule is also applicable to operations: 80% of success comes from a strict
adherence to precisely maintaining records and disciplines, and only 20% comes from applying new techniques to
the processes.
 Accountability. Managers are expected to set the rules and the metrics, and define responsibilities of their
subordinates, as well as regularly check if the goals are met. Only this way would the workers put in the necessary
efforts.
 Variance. Variance of processes has to be encouraged, because if managed well, they can be sources of
creativity.
 Causality. Problems are symptoms: effects of underlying causes. Unless the causes are attacked, the same
problems will appear again.
 Managed passion. The passion of employees can be a major driver of company growth, and it can be
instilled by the managers if not coming naturally.
 Humility. Instead of a costly trial and error process, managers should acknowledge their limitations, “get
help, and move on.”
 Success. What is considered success will change over time, but always consider the interest of the
customer. In order to keep them, all the other principles have to be revised occasionally.
 Change. There will always be new theories and solutions, so you should not stick to one or the other, but
embrace the change, and manage for stability in the long term.

10 Critical Decisions of Operations Management

In 2008, Ford Motor Company reorganized using what’s known as the 10 strategic operations areas. It was part of
the company’s turnaround and enabled the organization be more flexible and survive the financial crisis without
taking government bailouts. Toyota, Google and Jet Blue are also known for using the 10 area system in all of their
business activities. It is used across industries as a guide to operations management.
 The areas are:

1. Goods and services: This includes looking for ways to implement consistency in costs, quality, and
resources across all business divisions.

2. Quality Management: Be clear on the customer’s demands and then meet those expectations. Use market
research to determine customer needs and batch quality assurance testing on products and services in production.

3. Process and Capacity Design: Design strategies which support all production goals including technology
and resources. A value stream map can help determine what processes are necessary and how to keep them running
efficiently.

4. Location: In developing a location strategy consider supply chain and how the location will receive
supplies, the movement of goods and services internally and to customers, and the role of marketing and public
relations in the location choice.

5. Layout Design and Strategy: Consider the placement of desks, workstations, and how materials are
delivered and used.

6. Human Resources and Job Design: Implement continuous improvement programs with regular reviews,
provide continuous training for employees, and institute employee satisfaction programs to achieve success in this
area.

7. Supply Chain Management: Determine the best strategies to streamline, be cost effective, and to develop
trusted partners.

8. Inventory: Different markets mean different challenges when it comes to inventory but all need to
strategize and plan their inventory control. Weather, supply shortages, and labor all influence how an organization
maintains its inventory.

9. Scheduling: Consider both production and people. Ask questions such as how much product is required to
be produced for the customer in the required time? How many people and how many machines are required to do
the job effectively and efficiently? This differs among industries and business departments. For example,
emergency rooms need to maintain different schedules than a hospital’s corporate office.

10. Maintenance: This includes maintaining people and machines, as well as, process. What do you need to
do to maintain quality and keep resources reliable and stable?
These 10 areas can be applied to any size business, not just global giants such as Ford and Jet Blue. Use them as a
guide to analyze your operations. Measure your current productivity and then implement strategies to
operationalize these 10 areas into your decision making process and watch your productivity become more
efficient.

Operational descions: The most common type of repeatable decision is the operational decision. These involve
the daily business decisions that are done in high-volume by every business. When a customer contacts your
business, places an order, or does any form of interaction, it involves operational decisions.
This type of decision is essential to every organization, no matter what size, because of how often they are made.
When taken individually, their value isn’t as high as the other decisions because it usually involves a single
transaction or customer. But when gathered, this data becomes extremely valuable. When you consider a decision
that’s been made thousands of times a year, its value increases and often exceeds that of the other types of
decisions.
It’s in the nature of operational decisions to be easily repeatable, because one of its primary characteristc is being
consistent at following defined rules or guidelines.  Another characteristic is that these decisions should often be
made as quickly as possible and sometimes they are made while clients are waiting. While these decisions are
often made about customers, they can also involve suppliers, employees and products. Thanks to the Internet of
Things, more and more physical objects are wired to the Internet, expanding both the amount of data and the
number of operational decisions that can be managed and improved to increase business value.
Facility Location - Factors Influencing the Location
Facility Location is the right location for the manufacturing facility, it will have sufficient access to the customers,
workers, transportation, etc. For commercial success, and competitive advantage following are the critical factors:

Overall objective of an organization is to satisfy and delight customers with its product and services. Therefore, for
an organization it becomes important to have strategy formulated around its manufacturing unit. A manufacturing
unit is the place where all inputs such as raw material, equipment, skilled labors, etc. come together and
manufacture products for customers. One of the most critical factors determining the success of the manufacturing
unit is the location.

Facility location determination is a business critical strategic decision. There are several factors, which
determine the location of facility among them competition, cost and corresponding associated effects.
Facility location is a scientific process utilizing various techniques.

Location Selection Factors

For a company which operates in a global environment; cost, available infrastructure, labor skill, government
policies and environment are very important factors. A right location provides adequate access to customers,
skilled labors, transportation, etc. A right location ensures success of the organization in current global competitive
environment.

Industrialization

A geographic area becomes a focal point for various facility locations based on many factors, parameters and
issues. These factors are can be divided into primary factors and secondary factors. A primary factor which leads to
industrialization of a particular area for particular manufacturing of products is material, labor and presence of
similar manufacturing facilities. Secondary factors are available of credit finance, communication infrastructure
and insurance.

Errors in Location Selection

Facility location is critical for business continuity and success of the organization. So it is important to avoid
mistakes while making selection for a location. Errors in selection can be divided into two broad categories
behavioral and non-behavioral. Behavioral errors are decision made by executives of the company where personal
factors are considered before success of location, for example, movement of personal establishment from
hometown to new location facility. Non-behavioral errors include lack of proper investigative practice and
analysis, ignoring critical factors and characteristics of the industry.

Location Strategy

The goal of an organization is customer delight for that it needs access to the customers at minimum possible cost.
This is achieved by developing location strategy. Location strategy helps the company in determining product
offering, market, demand forecast in different markets, best location to access customers and best manufacturing
and service location.
 Factors Influencing Facility Location

If the organization can configure the right location for the manufacturing facility, it will have sufficient access to
the customers, workers, transportation, etc. For commercial success, and competitive advantage following are the
critical factors:

Customer Proximity: Facility locations are selected closer to the customer as to reduce transportation cost and
decrease time in reaching the customer.

Business Area: Presence of other similar manufacturing units around makes business area conducive for facility
establishment.

Availability of Skill Labor: Education, experience and skill of available labor are another important, which
determines facility location.

Free Trade Zone/Agreement: Free-trade zones promote the establishment of manufacturing facility by providing
incentives in custom duties and levies. On another hand free trade agreement is among countries providing an
incentive to establish business, in particular, country.

Suppliers: Continuous and quality supply of the raw materials is another critical factor in determining the location
of manufacturing facility.

Environmental Policy: In current globalized world pollution, control is very important, therefore understanding of
environmental policy for the facility location is another critical factor.

What is Layout Optimization?

 
Facility Layout Optimization is the evaluation of multiple layout scenarios to design the optimum layout that
reduces material handling costs, improves throughput, minimizes space requirements, and lowers energy bills.
Our layout optimization services are provided by industrial engineering consultants who are also experts in related
productivity improvement methods such as lean & six sigma, simulation, ergonomics, and work measurement.
As a result, PMC clients benefit from our overall productivity and quality improvement mindset when they engage
PMC's layout optimization services.

Merits and Demerits of Product and Process Layouts

Product Layout: Possible Advantages:

(1) Low total flow time of the product from the input stage to the output stage (i.e. higher rates of output) due to:
(a) Continuous flow without intermediate stoppages and storages;
(b) Repetitive, small, fragmented jobs learnt to perfection by the concerned workers; and
(c) Minimum set-up times of machines.

(2) Production planning and control is simple; less paper work

(3) Inspection required is less
(4) Lower degrees of skills in the manpower may suffice
(5) Raw materials and other inputs can be planned better, even to the extent of ‘Just in Time’, resulting in lower
inventories.
(6) Lower work-in-process inventories needed.
(7) Lower material handling costs
(8) By ‘balancing’ the line, labor utilization can be high.

Product Layout: Possible Disadvantages:

(1) None or very little variety possible.
(2) Less flexibility to changes, particularly to other than minor changes.
(3) Entire line or significant portions of the line may come to a grinding halt if any equipment in the line breaks
down, resulting in high stoppage costs.
(4) Larger maintenance crew needed.
(5) Very low job variety and therefore lower job satisfaction and higher boredom for the workers.
(6) More coordination required by supervisors.
(7) Duplication of machines and equipments may be necessary resulting in higher capital investment.
(8) More space may be required.

Process Layout: Possible Advantages:

(1) Very high degree of variety in products is possible.

(2) Flexibility and adaptability to changes is high.
(3) Machine breakdowns do not cause crippling production stoppages.
(4) Requires small maintenance crew.
(5) Good level of variety, skills requirement and therefore higher job satisfaction.
(6) Coordination and supervision is simpler as the processes are similar and the staff is skilled.

Process Layout: Possible Disadvantages:

(1) Higher flow times of products due to:

(a) Intermittent flows of the material; and (b) More numerous machine set-ups.
(2) Production planning and control is more complex; much paper work is necessary.
(3) Worker skills need to be high in order to complete all components of the job.
(4) Higher inventories of basic raw materials may be necessary due to much uncertainty of demand.
(5) Higher work-in-process inventories due to necessary intermediate storages, if the machine and labor utilization
is to be at a satisfactory level and if the flow times of the products are to be at acceptable levels.
(6) More handling of materials.

Optimization in a Product/Line Layout:

The product or line layout is relatively easy to plan as the layout is according to the flow of the product as it takes
shape from the raw material state to the finished goods state. The equipment and the work areas are laid out
according to the sequence of the operations involved in converting the raw material to the finished product. The
problem in the Line layout may not be that of how to sequence or relatively position the work areas, but rather to
group the work elements in such a way that there is very little idle time at any of the grouped work centers. The
problem in Line layout is therefore one of balancing the flow line of work (and also of the material) in such a way
as to minimize the idle time at the different work centers (alternatively called ‘work stations’). This is technically
termed as Assembly Line Balancing. This procedure automatically minimizes the relevant costs associated with
Line layout.

Optimization in a Process Layout:

The problem in Process layout is one of arranging the different work areas in such a way that the inter-area
material movement costs are kept to a minimum. Of course, one has to take into account, simultaneously, the total
plant area available and any constraints on the individual area requirements or position requirements of the work
centers. A mathematical treatment for this problem is available; but one ought to note that the mathematical
optimizing models take into consideration only the cost of material handling. It is assumed, at best, that the other
relevant costs of layout will also be reduced on account of this optimizing procedure. The material handling costs
between two work areas (departments) is the product of the distance between the two work areas and the number
of loads that are handled between the two departments during a unit period of time. The sum of these products, for
all the combinations of departments, should be minimum for an optimal plant layout.

The starting point in such a mathematical optimization procedure for the Process layout is therefore, the gathering
of the data on the number of loads per unit time moved between different combinations of the work areas. This
data is called ‘load summary’ and is presented in matrix fashion.
 CLASSIFICATION OF LAYOUT - PRODUCTION AND OPERATIONS
MANAGEMENT
Classification and Advantages of Plant Layout

Layouts can be classified into the following five categories:

1. Process layout.
2. Product layout
3. Combination layout
4. Fixed position layout
5. Group layout
Process Layout
Process layout is recommended for batch production. All machines performing similar type of operations are
grouped at one location in the process layout e.g., all lathes, milling machines, etc. are grouped in the shop will be
clustered in like groups.
Thus, in process layout the arrangement of facilities are grouped together according to their functions. A typical
process layout is shown in the following figure. The flow paths of material through the facilities from one
functional area to another vary from product to product. Usually the paths are long and there will be possibility of
backtracking.
Process layout is normally used when the production volume is not sufficient to justify a product layout. Typically,
job shops employ process layouts due to the variety of products manufactured and their low production volumes.
Process layout

Advantages
1. In process layout machines are better utilized and fewer machines are required.
2. Flexibility of equipment and personnel is possible in process layout.
3. Lower investment on account of comparatively less number of machines and lower cost of general
purpose machines.
4. Higher utilization of production facilities.
5. A high degree of flexibility with regards to work distribution to machineries and workers.
6. The diversity of tasks and variety of job makes the job challenging and interesting.
7. Supervisors will become highly knowledgeable about the functions under their department.
Limitations
1. Backtracking and long movements may occur in the handling of materials thus, reducing material
handling efficiency.
2. Material handling cannot be mechanized which adds to cost.
3. Process time is prolonged which reduce the inventory turnover and increases the in- process inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the process) time is longer.
6. Space and capital are tied up by work-in-process.
Product Layout
In this type of layout, machines and auxiliary services are located according to the processing sequence of the
product. If the volume of production of one or more products is large, the facilities can be arranged to achieve
efficient flow of materials and lower cost per unit. Special purpose machines are used which perform the required
function quickly and reliably.
 The product layout is selected when the volume of production of a product is high such that a separate production
line to manufacture it can be justified. In a strict product layout, machines are not shared by different products.
Therefore, the production volume must be sufficient to achieve satisfactory utilization of the equipment. A typical
product layout is shown in the following figure.

Product layout

Advantages
1. The flow of product will be smooth and logical in flow lines.
2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are possible.
6. Less space is occupied by work transit and for temporary storage.
7. Reduced material handling cost due to mechanized handling systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle capacity.
9. Manufacturing cycle is short due to uninterrupted flow of materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
Limitations
1. A breakdown of one machine in a product line may cause stoppages of machines in the downstream of
the line.
2. A change in product design may require major alterations in the layout.
3. The line output is decided by the bottleneck machine.
4. Comparatively high investment in equipments is required.
5. Lack of flexibility. A change in product may require the facility modification.

Combination Layout Advantages and Disadvantages

Combination Layout
A combination of process and product layouts combines the advantages of both types of layouts. A combination
layout is possible where an item is being made in different types and sizes. Here machinery is arranged in a process
layout but the process grouping is then arranged in a sequence to manufacture various types and sizes of products.
It is to be noted that the sequence of operations remains same with the variety of products and sizes. The following
figure shows a combination type of layout for manufacturing different sized gears.
Combination layout for making different types and sizes of gears
 Fixed Position Layout
This is also called the project type of layout. In this type of layout, the material, or major components remain in a
fixed location and tools, machinery, men and other materials are brought to this location. This type of layout is
suitable when one or a few pieces of identical heavy products are to be manufactured and when the assembly
consists of large number of heavy parts, the cost of transportation of these parts is very high.
Fixed position layout

Advantages
The major advantages of this type of layout are:
1. Helps in job enlargement and upgrades the skills of the operators.
2. The workers identify themselves with a product in which they take interest and pride in doing the job.
3. Greater flexibility with this type of layout.
4. Layout capital investment is lower.
Group Layout (or Cellular Layout)
There is a trend now to bring an element of flexibility into manufacturing system as regards to variation in batch
sizes and sequence of operations. A grouping of equipment for performing a sequence of operations on family of
similar components or products has become all the important.

Group technology layout in Operation Management

Group technology (GT) is the analysis and comparisons of items to group them into families with similar
characteristics. GT can be used to develop a hybrid between pure process layout and pure flow line (product)
layout. This technique is very useful for companies that produce variety of parts in small batches to enable them to
take advantage and economics of flow line layout.
 The application of group technology involves two basic steps; first step is to determine component families or
groups. The second step in applying group technology is to arrange the plants equipment used to process a
particular family of components. This represents small plants within the plants. The group technology reduces
production planning time for jobs. It reduces the set-up time.

Thus group layout is a combination of the product layout and process layout. It combines the advantages of both
layout systems. If there are m-machines and n-components, in a group layout (Group-Technology Layout), the M -
machines and n -components will be divided into number of machine-component cells (group) such that all the
components assigned to a cell are almost processed within that cell itself. Here, the objective is to minimize the
intercell movements.
The basic aim of a group technology layout is to identify families of components that require similar of satisfying
all the requirements of the machines are grouped into cells. Each cell is capable of satisfying all the requirements
of the component family assigned to it.

The layout design process considers mostly a single objective while designing layouts. In process layout, the
objective is to minimize the total cost of materials handling. Because of the nature of the layout, the cost of
equipments will be the minimum in this type of layout. In product layout, the cost of materials handling will be at
the absolute minimum. But the cost of equipments would not be at the minimum if the equipments are not fully
utilized.

In-group technology layout, the objective is to minimize the sum of the cost of transportation and the cost of
equipments. So, this is called as multi-objective layout. A typical process layout is shown .

Group layout or Cellular layout

Advantages of Group Technology Layout

Group Technology layout can increase
1. Component standardization and rationalization.
2. Reliability of estimates.
3. Effective machine operation and productivity.
4. Customer service.
 It can decrease the
1. Paper work and overall production time.
2. Work-in-progress and work movement.
3. Overall cost.
Limitations of Group Technology Layout
This type of layout may not be feasible for all situations. If the product mix is completely dissimilar, then we may
not have meaningful cell formation.

FACTORS INFLUENCING PLANT LOCATION IN OPERATION

MANAGEMENT - PRODUCTION AND OPERATIONS MANAGEMENT

Factors affecting Facility location decision in Operations Management

Facility location is the process of determining a geographic site for a firm’s operations. Managers of both service
and manufacturing organizations must weigh many factors when assessing the desirability of a particular site,
including proximity to customers and suppliers, labor costs, and transportation costs.

Location conditions are complex and each comprises a different Characteristic of a tangible (i.e. Freight rates,
production costs) and non-tangible (i.e. reliability, frequency security, quality) nature.

Location conditions are hard to measure. Tangible cost based factors such as wages and products costs can be
quantified precisely into what makes locations better to compare. On the other hand non-tangible features, which
refer to such characteristics as reliability, availability and security, can only be measured along an ordinal or even
nominal scale. Other non-tangible features like the percentage of employees that are unionized can be measured
as well. To sum this up non-tangible features are very important for business location decisions.

It is appropriate to divide the factors, which influence the plant location or facility location on the basis of the
nature of the organization as

1. General locational factors, which include controllable and uncontrollable factors for all type of
organizations.
2. Specific locational factors  specifically required for manufacturing and service organizations.
Location factors can be further divided into two categories: Dominant factors are those derived from competitive
priorities (cost, quality, time, and flexibility) and have a particularly strong impact on sales or costs. Secondary
factors also are important, but management may downplay or even ignore some of them if other factors are more
important.

General Locational Factors

Following are the general factors required for location of plant in case of all types of organisations.
CONTROLLABLE FACTORS
1. Proximity to markets.
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labour and wages
 Factors influencing plant location

6. External economies
7. Capital
UNCONTROLLABLE FACTORS
8. Government policy
9. Climate conditions
10. Supporting industries and services
11. Community and labor attitudes
12. Community Infrastructure
CONTROLLABLE FACTORS
1. Proximity to markets:
Every company is expected to serve its customers by providing goods and services at the time needed and at
reasonable price organizations may choose to locate facilities close to the market or away from the market
depending upon the product. When the buyers for the product are concentrated, it is advisable to locate the
facilities close to the market. Locating nearer to the market is preferred if

 The products are delicate and susceptible to spoilage.

 After sales services are promptly required very often.
 Transportation cost is high and increase the cost significantly.
 Shelf life of the product is low.
Nearness to the market ensures a consistent supply of goods to customers and reduces the cost of transportation.

2. Supply of raw material:

It is essential for the organization to get raw material in right qualities and time in order to have an
uninterrupted production. This factor becomes very important if the materials are perishable and cost of
transportation is very high.
General guidelines suggested by Yaseen regarding effects of raw materials on plant location are:

 When a single raw material is used without loss of weight, locate the plant at the raw material
source, at the market or at any point in between.
 When weight loosing raw material is demanded, locate the plant at the raw material source.
 When raw material is universally available, locate close to the market area.
 If the raw materials are processed from variety of locations, the plant may be situated so as to
minimize total transportation costs.
 Nearness to raw material is important in case of industries such as sugar, cement, jute and cotton textiles.

3. Transportation facilities:
Speedy transport facilities ensure timely supply of raw materials to the company and finished goods to the
customers. The transport facility is a prerequisite for the location of the plant. There are five basic modes of
physical transportation, air, road, rail, water and pipeline. Goods that are mainly intended for exports demand a
location near to the port or large airport. The choice of transport method and hence the location will depend on
relative costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria for
plant location.
4. Infrastructure availability:
The basic infrastructure facilities like power, water and waste disposal, etc., become the prominent factors in
deciding the location. Certain types of industries are power hungry e.g., aluminum and steel and they should be
located close to the power station or location where uninterrupted power supply is assured throughout the year.
The non-availability of power may become a survival problem for such industries. Process industries like paper,
chemical, cement, etc., require continuous. Supply of water in large amount and good quality, and mineral
content of water becomes an important factor. A waste disposal facility for process industries is an important
factor, which influences the plant location.
5. Labor and wages:
The problem of securing adequate number of labor and with skills specific is a factor to be considered both at
territorial as well as at community level during plant location. Importing labor is usually costly and involve
administrative problem. The history of labor relations in a prospective community is to be studied. Prospective
community is to be studied. Productivity of labor is also an important factor to be considered. Prevailing wage
pattern, cost of living and industrial relation and bargaining power of the unions’ forms in important
considerations.
6. External economies of scale:
External economies of scale can be described as urbanization and locational economies of scale. It refers to
advantages of a company by setting up operations in a large city while the second one refers to the “settling
down” among other companies of related Industries. In the case of urbanization economies, firms derive from
locating in larger cities rather than in smaller ones in a search of having access to a large pool of labor, transport
facilities, and as well to increase their markets for selling their products and have access to a much wider range
of business services.
Location economies of scale in the manufacturing sector have evolved over time and have mainly increased
competition due to production facilities and lower production costs as a result of lower transportation and logistical
costs. This led to manufacturing districts where many companies of related industries are located more or less in
the same area. As large corporations have realized that inventories and warehouses have become a major cost
factor, they have tried reducing inventory costs by launching “Just in Time” production system (the so called
Kanban System). This high efficient production system was one main factor in the Japanese car industry for being
so successful. Just in time ensures to get spare parts from suppliers within just a few hours after ordering. To fulfill
these criteria corporations have to be located in the same area increasing their market and service for large
corporations.
7. Capital:
By looking at capital as a location condition, it is important to distinguish the physiology of fixed capital in
buildings and equipment from financial capital. Fixed capital costs as building and construction costs vary from
region to region. But on the other hand buildings can also be rented and existing plants can be expanded.
Financial capital is highly mobile and does not very much influence decisions. For example, large Multinational
Corporations such as Coca- Cola operate in many different countries and can raise capital where interest rates
are lowest and conditions are most suitable
8. .
Capital becomes a main factor when it comes to venture capital. In that case young, fast growing (or not) high tech
firms are concerned which usually have not many fixed assets. These firms particularly need access to financial
capital and also skilled educated employees.
 UNCONTROLLABLE FACTORS
8. Government policy:
The policies of the state governments and local bodies concerning labor laws, building codes, safety, etc., are
the factors that demand attention. In order to have a balanced regional growth of industries, both central and
state governments in our country offer the package of incentives to entrepreneurs in particular locations. The
incentive package may be in the form of exemption from a safes tax and excise duties for a specific period, soft
loan from financial institutions, subsidy in electricity charges and investment subsidy. Some of these incentives
may tempt to locate the plant to avail these facilities offered.

9. Climatic conditions:
The geology of the area needs to be considered together with climatic conditions (humidity, temperature).
Climates greatly influence human efficiency and behavior. Some industries require specific climatic conditions
e.g., textile mill will require humidity.

10. Supporting industries and services:

Now a day the manufacturing organization will not make all the components and parts by itself and it
subcontracts the work to vendors. So, the source of supply of component parts will be the one of the factors that
influences the location.
The various services like communications, banking services professional consultancy services and other civil
amenities services will play a vital role in selection of a location.
11. community and labor attitudes:
Community attitude towards their work and towards the prospective industries can make or mar the industry.
Community attitudes towards supporting trade union activities are important criteria. Facility location in
specific location is not desirable even though all factors are favoring because of labor attitude towards
management, which brings very often the strikes and lockouts.

12. Community infrastructure and amenity:

All manufacturing activities require access to a community infrastructure, most notably economic overhead
capital, such as roads, railways, port facilities, power lines and service facilities and social overhead capital like
schools, universities and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is enormously expensive to
build and for most manufacturing activities the existing stock of infrastructure provides physical restrictions on
location possibilities.

Specific Locational Factors for Manufacturing Organization

DOMINANT FACTORS
Factors dominating location decisions for new manufacturing plants can be broadly classified in six groups. They
are listed in the order of their importance as follows.
1. Favorable labor climate
2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs
1. Favorable labor climate:
A favorable labor climate may be the most important factor in location decisions for labour-intensive firms in
industries such as textiles, furniture, and consumer electronics. Labor climate includes wage rates, training
requirements, attitudes toward work, worker productivity, and union strength. Many executives consider weak
unions or al low probability of union organizing efforts as a distinct advantage.
2. Proximity to markets:
After determining where the demand for goods and services is greatest, management must select a location for
the facility that will supply that demand. Locating near markets is particularly important when the final goods
are bulky or heavy and outbound transportation rates are high. For example, manufacturers of products such as
plastic pipe and heavy metals all emphasize proximity to their markets.
3. Quality of life:
Good schools, recreational facilities, cultural events, and an attractive lifestyle contribute to quality of life. This
factor is relatively unimportant on its own, but it can make the difference in location decisions.
4. Proximity to suppliers and resources:
In many companies, plants supply parts to other facilities or rely on other facilities for management and staff
support. These require frequent coordination and communication, which can become more difficult as distance
increases.
5. Utilities, taxes, and real estate costs:
Other important factors that may emerge include utility costs (telephone, energy, and water), local and state
taxes, financing incentives offered by local or state governments, relocation costs, and land costs.
SECONDARY FACTORS
There are some other factors needed to be considered, including room for expansion, construction costs,
accessibility to multiple modes of transportation, the cost of shuffling people and materials between plants,
competition from other firms for the workforce, community attitudes, and many others. For global operations,
firms are emphasizing local employee skills and education and the local infrastructure.
Specific Locational Factors for Service Organization
DOMINANT FACTORS
The factors considered for manufacturers are also applied to service providers, with one important addition the
impact of location on sales and customer satisfaction. Customers usually look about how close a service facility is,
particularly if the process requires considerable customer contact.
PROXIMITY TO CUSTOMERS
Location is a key factor in determining how conveniently customers can carry on business with a firm. For
example, few people would like to go to remotely located dry cleaner or supermarket if another is more
convenient. Thus the influence of location on revenues tends to be the dominant factor.

TRANSPORTATION COSTS AND PROXIMITY TO MARKETS

For warehousing and distribution operations, transportation costs and proximity to markets are extremely
important. With a warehouse nearby, many firms can hold inventory closer to the customer, thus reducing delivery
time and promoting sales.

LOCATION OF COMPETITORS
One complication in estimating the sales potential at different location is the impact of competitors. Management
must not only consider the current location of competitors but also try to anticipate their reaction to the firm’s new
location. Avoiding areas where competitors are already well established often pays. However, in some industries,
such as new-car sales showrooms and fast- food chains, locating near competitors is actually advantageous. The
strategy is to create a critical mass, whereby several competing firms clustered in one location attract more
customers than the total number who would shop at the same stores at scattered locations. Recognizing this effect,
some firms use a follow –the leader strategy when selecting new sites.
SECONDARY FACTORS
Retailers also must consider the level of retail activity, residential density, traffic flow, and site visibility. Retail
activity in the area is important, as shoppers often decide on impulse to go shopping or to eat in a restaurant.
Traffic flows and visibility are important because businesses’ customers arrive in cars. Visibility involves distance
from the street and size of nearby buildings and signs. High residential density ensures nighttime and weekend
business when the population in the area fits the firm’s competitive priorities and target market segment.