Operations and Material Management

Operations and
Material Management
Operations and Material Management
Unit-1
Introduction to Operations
Management
Learning Objectives
After completing this unit, students will be able to:
• Discuss operation management
• Explain the objectives of operation management
• Describe the scope of operations management
• Discuss the importance of operation

management in different functions of the
organization
• Analyze the responsibilities of operation

manager
• Explain differences in manufacturing and

services
Overview like manpower, material and machine, for producing goods.
Operations Management can be defined as the combination of
Operations Management is the function of an organization that tools and techniques to maximize operational efficiency and
creates a product or offers a service. This function uses resources effectiveness through optimum utilization of resources.
Goods and Services
• Goods are tangible physical items that can be touched, • Services are activities that are experience based
seen and experienced. and provide various combinations of time, place,
characteristics or psychological value.
• They include raw materials, work in progress material,
assemblies, sub-assemblies. • They include psychological value and experience.
For example, Central Processing Unit (CPU) that gets For example, these are achieved from whatever we do, eat,
assembled into computers and final products such as cell travel, rest, and wear.
phones and automobiles.
The optimum situation for any organization is to match supply demand side, there are sales and marketing.
and demand of goods or services. Having excess supply or excess
Production is the use of raw material and other resources for
capacity results in wastage and high costs, whereas, having too
producing goods, which may involve several stages of processes.
less means losing the battle in the marketplace and possible
opportunity that results in customer dissatisfaction. In both the A service does not produce anything tangible but only provides
situations, the organization loses the market. The key functions a feel or experience to the user. Customer must be physically
on the supply side are, operations and supply chains and on the present most of the times and be a part of service delivery. It is
completely experience based and the customer will remember Objectives of Operations Management
the experience after using that service. The operations in services
are different than in the manufacturing sector. The objectives of operations management include performance
objectives and cost objectives:
1. Visible Cost or Direct Cost
• Raw material
• Rework
• Labour cost
• Maintenance cost
Cost
Objectives
2. Invisible Cost or Indirect Cost
• Inventory
• Non-availability of goods
• Late delivery
• Material handling cost
• Appraisal cost
• Machine stoppage time
The operations must work to achieve the above-mentioned functions. Management is a science of decision making hence,
objectives. Operations mainly affect management and its decision making is a basic process of operations management.
These decisions are affected by operations and can be categorized into:
Periodic / Strategic Continual / Operational
The decisions that are taken occasionally The decisions that can be structured are
and cannot be reversed easily are called routine and can be reversed are called
periodic/strategic decisions. continual or operational decisions.
Generally, strategic decisions are taken by top management like

location planning, layout decision and capacity decisions. The
routine decisions are taken by functional managers like inventory
levels and production plans.
The Scope of Operations Management
Different organizations have a different scope for operations

management. Personnel engaged in Operations management
handle a vast array of tasks, which may sometimes overlap
also, such as quality control, inventory management, employee
motivation, forecasting and planning, geographical location Let’s take an example of a travel-based company running its own
management and many more. The scope of operations buses. Following activities come under the purview of a travel
management can be better understood with an example. company:
Locating
01 Forecasting
Facilities
08
Motivating and
02 Capacity Planning
Training
07
Facilities Assuring
03 and Layout 06
Quality
Managing
04 Scheduling
Inventories
05
1. Forecasting: It is about various important factors such as other essentials.
weather conditions, a seasonal spike in demand for tickets 6. Assuring Quality: Delivering high quality service every time
and growth prospects for road travel. and in every aspect is essential for smooth operations over
2. Capacity Planning: It is imperative for a travel company to an extended period. Attention to quality should be paid in
have a smooth cash flow and decent profit margins because those areas where the emphasis is on quality, such as the
having too many idle buses or selection of less busy routes behavior of Drivers and Conductor, dealing with customers,
will ultimately have a bearing on profits telephone and online reservations in flying and maintenance
3. Facilities and Layout: It is essential to ensure effective operations.
utilization of personnel and equipment. 7. Motivating and Training: All employees shall be properly
4. Scheduling: Various schedules need to be managed trained and highly motivated in various aspects of operations
properly to ensure optimum efficiency of operations. management.
Routine maintenance; roster of drivers and co-drivers and

scheduling of maintenance staff, office staff and counter
staff.
5. Managing Inventories: It is essential to ensure optimal

inventory levels for food and beverage, newspapers and
magazines, pillows and blankets, first aid equipment and
8. Locating Facilities: It involves taking decisions by managers Among the service jobs that are closely related to operations
on the cities to serve, location for maintenance facilities and are financial services (e.g., stock market analyst, broker and
major and minor hubs. investment banker), marketing services (e.g., market analyst,
marketing researcher, advertising manager and product
Importance of Operations Management manager), accounting services (e.g. corporate accountant, public
accountant, and budget analyst) and information services.
Operations Operations function is the backbone of every manufacturing and

services based business and is an intrinsic part of organizational
culture.
Finance Marketing
Figure 1.1: Overlapping Functions of an Organization
Finance, Marketing and Operations are three major functions of any

business organization, which overlap each other. All other functions
viz. Public Relation, Legal, Information Technology, Purchasing and
Human Resource and so on support the main functions.
Why managers shall study operations management?
• Operations are the backbone of the organization, which others are all interrelated with operations management.
converts customers’ requirement into deliveries.
• The activities under operations are repetitive and non-
• The activities in all other areas of business organizations repetitive. The main part is the flawless execution of the
such as finance, accounting, human resource, marketing and activities.
Responsibilities of an Operations Manager

Operations as a Value-Added Process or transformation process. A process has an input, an output and
Transformation Process a conversion system, which converts the input into output. All
processes consume resources. It is important that processes add
Operations can be understood as a value-adding process or
value. The formula has been transformed from input to output.
Consumes Resources • Manufacturing
• Services
The difference between manufacturing and services has been

Input Conversion System Output
classified below:
Figure 1.2: Process of Conversion System

Production Services
Characteristics
The processes must ensure the value addition, i.e. value of inputs
should be lower than the value of output. Output Tangible Intangible
Inventory Can be stored Immediate

Manufacturing and Services Industries
Work More equipment More labor
Operations can be broadly divided into two categories: Customer contact Low High
Participation of Low High

customer
Performance Complicated Simple

measurement
Ease of Location of
Location
manufacturing users
Summary
Operations Management is an important aspect of management which

involves optimum designing and management of production processes
and restructuring business functioning related to the production of goods
and services. It influences a vast array of sectors like banking, hospitality,
travel, hospitals, etc. Operations Management is an essential function of
every organization as it involves management of long-term as well as the
daily production of goods and services.
Review Questions
1. Differentiate between manufacturing and services.
2. Discuss various objectives of operations management.
3. Describe the process of management.
4. What are the performance criteria for operations manager?
5. Explain the different areas in which an operation manager has to be

involved in decision making.
Unit-2
Decision Making
Learning Objectives
• Appreciate various decision environments
• Understand various decision-making

techniques
• Practice rational decision making

Overview As a key decision maker and planner in an organization, the
Operations Manager has a significant role to play in ensuring
Decision-making is an integral part of modern management. the achievement of company goals and objectives. Most of the
Decisions play important roles as they determine both decisions involve selection of the optimum solution from many
organizational and managerial activities. Decisions are made to options that may have an impact on costs, profits and output. But
sustain the activities of all business activities and organizational it must be made sure that decisions are made post due diligence.
functioning.
The types of decisions that are taken by operations managers are
Operations Management and Decision as below:
Making What What quantities of which resources are required?
When When to replenish inventory? When to schedule

work? When to take corrective actions? When are
specific resources required?
Where Where is the work to be done (place)?
How How to do the work? How to design products and

services? How to allocate resources?
Who Who will complete the work?

Steps in Decision-making Process
The process of decision making involves following steps:
Decision Environments
The environments in which managers make the decision are as under:
Certainty Risk Uncertainty

A condition in which certainty of A condition in which probability A condition in which the
outcomes of all alternatives is of all possible outcomes is probability of outcomes is not
known. known. known.
Decision-making under Certainty Decision-making under Risk
A condition is certain when the outcomes of all alternatives are A condition where the probability of various outcomes of all
certain in nature. alternatives is known. Consider the example below for decision
making under certainty when the outcomes of three alternatives
are not known.
Following is the example of a payoff table. The values in brackets

Example 2.1 indicate the probability of a future condition to happen.
Alternative /
Payoff
market
High (0.4) Moderate (0.1) Low (0.5)

1 50 40 10
2 20 60 20
3 30 40 5
Expected payoff = ∑ px the highest Regrets is selected.
Where p is probability and x is a payoff • The Principle of Insufficient Reason – Equal probability is
So expected payoff for alternative 1 = 0.4 × 50 + 0.1 × 40 + 0.5 × 10 = 29 allocated to all conditions and the alternative with maximum
expected value is selected.
Alternative 2 = 0.4 × 20 + 0.1 × 60 + 0.5 × 20 = 24
Alternative 3 = 0.4 × 30 + 0.1 × 40 + 0.5 × 5 = 18.5
So, decision is in favor of alternative 1, which gives the highest

payoff that is expected.
Decision-making under Uncertainty
• Maximin – The substitute with the best out of the worst payoffs
is selected.
• Maximax – The substitute with the maximum out of highest

pay-offs is selected.
• Laplace – The substitute with the best average payoff out of

any of the Alternatives is selected.
• Minimax Regret – The substitute that has the smallest out of

Example 2.2 Check the payoff table below:
Alternative /
Payoff
market
High Moderate Low

1 50 40 10
2 20 60 20
3 30 40 5
Maximin Identify the minimum payoff for each alternative:
Alternative / Minimum
Payoff
market payoff
High Moderate Low

1 50 40 10 10
2 20 60 20 20
3 30 40 5 5
Identify the maximum out of minimum payoff, which is 20 for
alternative 2. So on the basis of maximin principle, alternative 2
is preferable.
Maximax Identify the maximum payoff for each alternative:
Alternative / Minimum
Payoff
market payoff
High Moderate Low

1 50 40 10 50
2 20 60 20 60
3 30 40 5 40
Maximum out of maximum payoff is 60 for alternative 2. So, on

the basis of Maximax principle, alternative 2 is preferable.
Laplace Calculate average expected payoff for each alternative.
Alternative / Average
Payoff
market payoff
High Moderate Low

1 50 40 10 33.3
2 20 60 20 33.3
3 30 40 5 25
Identify the maximum of average payoff which is 33.3 for The Principle of Insufficient Reason
alternative 1 and 2. So, based on Laplace principle, alternative 1
Allot equal probability to each future state of nature and calculate
and 2 are equally preferable.
an expected value for each alternative. Since there are 3 possible
states of nature, so a probability of 1/3 is allotted to each.
Alternative / Expected
Payoff
market value
High 1/3 Moderate 1 / 3 Low 1 / 3

1 50 40 10 33.3
2 20 60 20 33.3
3 30 40 5 25
Expected value for alternative 1 = 1 / 3 × 50 + 1 / 3 × 40 + 1 / 3 × alternative 1 and 2 are equally preferable.

10 = 33.3
Minimax Regret
Expected value for alternative 2 = 1 / 3 × 20 + 1 / 3 × 60 + 1 / 3 ×
20 = 33.3 In this method, the regret for each alternative for each future
state of nature is determined. Regret for each pair is equal to the
Expected value for alternative 3 = 1 / 3 × 30 + 1 / 3 × 40 + 1 / 3 ×
difference of payoff of that combination and the combination
5 = 25
with the highest payoff or that state of nature.
Identify the maximum of expected value which is 33.3 for
alternative 1 and 2. So, based on principle of Insufficient Reason
Alternative /
Payoff
market
High Moderate Low

1 50 40 10
2 20 60 20
3 30 40 5
The regret for alternative 1 will be: 20 – 20 = 10 for low market
50 – 50 = 0 for high market

The regret for alternative 3 will be:
60 – 40 = 20 for moderate market
20 – 10 = 10 for low market
60 – 40 = 20 for moderate market
The regret for alternative 2 will be: 20 – 5 = 15 for low market

The regret table is then created, and maximum regret for each
60 – 60 = 0 for moderate market alter native is identified.
Alternative / Maximum
Regret
market Regret
High 1/3 Moderate 1 / 3 Low 1 / 3

1 0 20 10 20
2 30 0 10 30
3 20 20 15 20
The decision is made based on a minimum of maximum regret. So, alternatives 1 and 3 are equally
preferable as they have the lowest regret of 20.
Summary
Decision-making is the process of identifying and choosing alternatives based on the
values, preferences and beliefs of the decision-maker. It is required in all phases of life and
in all fields. Every single action that we make is the result of a decision. Moreover, decision-
making plays an important role in various fields of management. It is a significant tool for all
businesses as it helps make efficient decisions during planning thereby reducing risks.
Review Questions a. Maximin
1. Consider the following payoff table: b. Maximax
c. Minimax Regret
Alternatives Profit if future demand is
2. Consider the following payoff table:
Low Medium High
Alternatives Future Conditions
X 10 50 70
Low Moderate High Very high
Y –10 44 120
A 100 100 100 100
Z 0 20 140
B 90 130 150 140
Which alternative would you choose based on:
C (-100) 150 300 160
Unit-3
Productivity
Learning Objectives
• Appreciate the importance of productivity
• Calculate partial and multifactor productivity
• Identify scope of productivity improvement
• Understand the concept of competitiveness
• Describe the various aspects of operations

strategy
Overview hours shift. The resources consumed are as under:
Productivity can be described as the degree of efficient utilization No. of Labour 10
of resources and is normally described as an output to input ratio. Machines 5

It measures output per unit of input in monetary terms. All the
Raw material 100 kg
processes consume resources. The resources could be manpower,
Energy 500 KW
material, machine, energy, money or any other resources, which
are consumed for producing output.
Productivity collectively measures the trends in labour growth,

technology improvement and how effectively the resources are
utilized.
Productivity = output / input

Example 3.1
Consider the following data:
A manufacturing company produces 100 units of a product in 10

Now, the productivity with respect to labour = output / labour The productivity with respect to material = output / raw material
hours × labour hours = 10 × 10 = 100 (no. of labour × no. of hours So, productivity = 100 / 100 = 1 unit per kg of material
in a shift) So, productivity = 100 / 100 = 1 unit per labour hour The productivity with respect to energy = output / energy So,
productivity = 100 / 500 = 0.2 unit per KW
The productivity with respect to machine = output / machine hours
Machine hours = 5 × 10 = 50 You can see that only one input has been considered at a time
for calculating productivity. These are called partial measures of
So, productivity = 100 / 50 = 2 unit per machine hour
productivity. So partial measures of productivity are as under:
Multifactor Measures For example,
If more than one input is used for calculation of productivity, it is

called multifactor productivity.
However, since the inputs have different units, so they have to be Machine hours = 5 × 10 = 50
converted into monetary value for calculating productivity. It is
So, operating cost = 50 × 50 = 2500
explained below with an example.
Material cost = 100 × 20 = 2000
Example 3.2
Energy cost = 500 × 20 = 10000
A manufacturing company produces 100 units of a product in 10 Total cost = 1000 + 2500 + 2000 + 10000 = 15500
hours shift. The resources consumed are as under:
Multifactor productivity = 100 / 15500 units per Rupee spent
Labour 10
Rs. 10 per labour hour Machines 5
Operating cost Rs. 50 per machine hour
Raw material 100 kg @Rs. 20 per kg
Energy [email protected] KW
Labour hours = 10 × 10 =100
Labour cost = 100 × 10 = 1000

The Scope of Improvement in Productivity
There are the many areas, on the identification of which results in the improvement of productivity. Few of the examples are:
The main objective of any organization is to sell competitive Competitiveness is affected by marketing in various ways such
products in the market. Competitiveness has an important role as pricing, promotion, advertising and identification of customer
in determining whether an organization would grow, barely get- wants.
by or would fail. Different business organizations compete on the
basis of a combination of key factors such as price, delivery time, 1. Identification of Consumer Wants or Needs: It plays a vital role
quality, differentiation points. in establishing competitiveness of business and plays a vital
role in the decision-making process. Every company strives
to achieve the perfect balance between customer needs and products and develop a special place in their minds.
company offerings.
Operations of a company are influenced by a host of co-related
2. Price and Quality: This is essential to comprehend the trade- parameters such as cost, quality, inventory, supply chain, product/
off decisions made by the consumers amongst quality and service, post-sales service, location and various others.
price as it plays a crucial role in the final purchase decision.
1. Product and Service Design: This is a key factor that
3. Promotions and Advertising: These are used by companies consumers consider while making a purchase decision is
to inform consumers about the features and benefits of their unique features and characteristics of a product or service. In
order to ensure the presence of such unique characteristics,
it is essential that the various departments of the firm work
together and establishes harmony between consumer wants,
financial capabilities, operations capability and supply chain
capacities. Innovation and time-to-market are two other
critical factors affecting consumer decision making.
2. Cost: It is significant and so the efforts to reduce the cost

of products and services is an ongoing process in every
organization as it has a direct bearing on pricing policies and
profit margins. Firms who possess higher productivity rates
have a distinct competitive advantage over its competitors.
To reduce costs and boost output, companies adopt the
outsourcing strategy for some of its operations.
3. Location: It plays a vital role and so having a strategically

important location is half the battle won for firms as it
provides numerous benefits, for instance, location near raw
material helps reduce transportation costs and delivery lead
times. Location is also important as it is directly associated
with customer convenience as well as establish competitive
superiority in terms of cost, visibility and distribution costs. It
assumes even greater importance in retail sectors. 5. Quick Response: It is the parameter that has very serious
implications for a company and if handled correctly can
4. Quality: It has a very important role to play in a consumer
establish competitive superiority. Companies should try and
purchase decision as consumers analyze any product or
introduce new products in the market quickly and also try to
service they buy based on the perception if it satisfies their
deliver the products and services to customers as quickly
requirement. If a product or service is able to establish
as possible. Another important aspect is to quickly redress
superior quality competitiveness in the mind of the customers,
customer grievances.
customers are willing to pay more for that.
6. Flexibility: Highly flexible companies enjoy a competitive
advantage in a dynamic environment as they are able to
incorporate changes in their products and services quickly
and establish a unique place in the customers mind.
7. Inventory Management: It is a company’s ablity to ensure a

steady supply of goods without enhancing its dead stocks,
so that it has a distinct competitive advantage over its
competitors.
8. Supply Chain Management: It is efficient management of the

of information, etc.
supply chain ensures timely and cost-effective distribution
and delivery services in coordination with buyers and 10. Service Quality: It is a highly critical key differentiator, it
suppliers. ensures that businesses which are more careful towards
extending superior service quality to the customer are
9. After-sale Service: These are value addition activities that
ensured more profits and faster growth as compared to
enhance the user experience such as delivery, warranty,
others who lack in it.
repair and replacement and technical support. It also is
effective during the sales process which helps grab the 11. Most importantly the human resources that are managers,
customer attention such as attention to detail, regular flow workers and labors: They are highly skilled and knowledgeable
manpower greatly enhances the company products and
provides a unique advantage over competitors with their skills.
Strategies and Tactics
Strategies and tactics lay the roadmap for an organization

to achieve its goals through highly efficient decision making.
Organizational strategies encompass most of the activities of
an organization but vary from business to business, e.g. For a
company like Tata, its organizational strategies could be divided

on the basis of its business verticals such as Auto, Software,
IT, Power, etc. These organizational strategies are themselves
developed from functional strategies that cover every possible
functional area of the organization. In a nutshell, functional
strategies should complement the organizational strategies
and organizational strategies should support over-all goals and
missions of the company.
Tactics can be defined as “the actions and techniques used for increase sales, how to ensure customer satisfaction. In case of
successful implementation and execution of strategies. They operations, tactics include the actual doing part of the process.”
are more specific than strategies, and they provide guidance and
direction for carrying out actual operations, which need the most Strategies and Fundamental capabilities need to be in sync to
specific and de- tailed plans and decision making in an organization. ensure effective implementation. Table 3.1 enlists various instances
For a process, the tactics would include “how to” such as how to where organizations have successfully deployed strategic tactics.
Table 3.1: Organizations and Applied Strategies
Types of Strategies Operations Strategy Organizational Examples

Low price Low cost U.S. first-class postage
Wal-Mart
Southwest Airlines
Responsiveness Short processing time McDonald’s restaurants
Express Mail, UPS, FedEx
One-hour photo
On-time delivery Domino’s Pizza
FedEx
Differentiation Performance High-performance Design Sony TV
Differentiation: High-Quality Processing Lexus
High quality Disneyland
Five-star restaurants or hotels
Consistent quality Coca-Cola, PepsiCo
Wegmans
Electrical power
Differentiation: Innovation 3M, Apple
Newness Google
Differentiation: Flexibility Burger King (“Have it your way”)
Variety Volume Hospital emergency room
McDonald’s (“Buses welcome”)
Toyota
Supermarkets (additional checkouts)
Differentiation: Service Superior customer service Disneyland
Amazon
IBM
Nordstrom
Supermarkets, dry cleaners
Mall stores
Service stations
Banks, ATMs
Operations Strategy are addressed to. Likewise, Operations Strategy should be in

sync with the functional units of the organization as well as
Organizational strategy has a broad scope and encompasses the with the organizational strategy. It is required on the part of
whole organization and provides the overall direction whereas senior managers to work in co-ordination with the functional
Operations Strategy is narrower in scope as it deals with the
operational aspects of the organization. It deals with key issues such
as quality, costs, processes, products, resources, lead times and
scheduling, etc. But in order to ensure the effectiveness of Operations
Strategy, it is imperative to link it to organizational strategies as they
both go hand in hand and complement each other.
While formulating organizational strategy, competitor’s strengths

and weaknesses should be taken into account to ensure that
organization’s strengths are capitalized and weaknesses
units to ensure that each individual strategy complements the Table 3.2 provides a comparison of an organization’s mission,
organizational strategy. This will foster a feeling of co-operation its overall strategy and its operations strategy, tactics and
amongst the various functional units of an organization to ensure operations.
the benefits of synergy and co-operation.
Table 3.2 Comparison of an Organization’s Mission
Management Level Time Horizon Scope Level of Detail Relates to
The overall Mission Top Long Broad Low Survival, profitability

organization Strategy
Senior Long Broad Low Growth rate, market share
Operations Strategic Senior Moderate to Broad Low Product design, choice of location,
long choice of technology, new facilities
Tactical Middle Moderate Moderate Moderate Employment levels, output levels,

equipment, selection, facility layout
Operational Low Short Narrow High Scheduling personnel, adjusting

output, rates, inventory management,
purchasing
Summary
Productivity encompasses the various parameters to measure the efficiency of an organization and plays a vital role in enhancing
production performance of the company as well as the nation. An increase in the national productivity ensures improvement in
the standard of living of the people and improves their purchasing power to afford important products and services including better
housing, good education, nutritious food and leisure, etc. Growth inproductivity assists business in enhancing their profitability.
Review Questions consumes 500 kg steel, determine:
1. Define productivity. a) Labour productivity
2. Differentiate between partial and multifactor measures of b) Material productivity

productivity. 7. Differentiate between organizational strategies and
3. What are the various factors affecting productivity? operations strategies.
4. Explain measures of improving productivity. 8. Why is mission statement important and what is its
contribution to the growth of any organization?
5. Explain various competition strategies.
9. List ten operational strategies that a bank requires to
6. If a plant produces 350 units in 700 man hours and
attract customers.
Unit-4
Forecasting: Techniques
and Errors
Learning Objectives
• Discuss the importance of forecasting in

operations management
• Select a suitable forecasting technique
• Apply forecasting technique
• Monitor and control various types of

forecasting techniques
Overview Forecasts form a major component of every decision-making
process under operations management and their importance is
The success of an organization depends on its capability paramount as they offer vital inputs regarding future demands.
to anticipate the future conditions and align the operations The anticipation of demand is necessary for every organization
accordingly. Hence, forecasting of future markets and demand to plan accordingly to fulfill that demand and this is where
becomes important to the effectiveness of an organization. Forecasting comes in handy as it helps determine the future
requirements. For instance, Operation Department needs the
forecasts about the expected demand to formulate budgets,
purchase additional equipment, recruit necessary personnel,
prepare purchase requirements and share them with the vendors
and help supply chain partners with the planning process.
Forecast encompasses two important aspects that are “expected

demand and relative degree of accuracy that could be assigned
to the forecast (potential size of forecast error). Estimated
demand levels can be a function of some structural variations,
such as seasonal variation and Forecast Accuracy is a function
of forecasters which enables them to correctly model various
parameters such as demand, chance variations in demand and
unexpected situations that might impact demand.”
Forecasting plays a critical role in the planning process as they

enable the managers to predict future trends and plan accordingly.
Forecasts are regularly used while handling various essential

functions of an organization such as sales, production, budgeting,
inventory, purchase and capacity planning. The unique aspect
about forecasts is that they are made according to time horizons,
i.e.:
Short-term forecasts relate to ongoing operations whereas long-

term forecasts are essential tools for strategic planning. Long-
term forecasts are useful in the development of new products,
equipment, facilities and services which will take a long time to
develop and implement.
Types of Forecasting
Forecasting could be categorized on various criteria as under:
Economic has economic relevance like demand
Noneconomic has no economic relevance, e.g., political and weather
Macro industry or economy level forecasting
Micro firm level forecasting
Active forecast for planned actions

Passive extrapolation of previous year’s data
Conditional impact of the change in independent variable upon dependent variable.

The change in an independent variable may bring changes in the dependent variable.
Non conditional estimation of change in independent variable
Long run strategic
Short run operational

Forecasting in Operations
Steps in Demand Forecasting • Analyzing the factors affecting demand
• Selecting the forecasting technique

The steps involved in forecasting are as under:
• Verifying the accuracy of forecasting
• Identifying the nature of the product
Components of Demand
• Deciding the nature of the forecast
There are 5 components of demand.
• Enlisting the factors affecting demand
1. Average: the average of all past demands It is necessary to understand the types of demand because the
2. Trend: a continuous increase or decrease in demand over demands of certain products are dependent on the demand for
time its complementary product. Consider an example of razors and

blades. Both are complementary products to each other. So, to be
3. Seasonal influence: an increase or decrease in demand
able to predict the demand for razors it has become imperative to
during different identifiable phases of time
predict the requirements for blades.
4. Cyclical movements: change in demand pattern over a long
span of time Types of Demands for Forecasting are:
5. Random error: chance variations in demand

Techniques of Forecasting • Associative forecast
The techniques of forecasting can be broadly divided into three

Techniques Based on the Judgment
categories:
1. Executive Opinion
• Based on judgments
A group of senior-level managers meets and develop a forecast.
• Based on time series It is used for long-term planning and new product development.
2. Direct Consumer Contact Composites Drawback
Forecasting based on views of direct sales staff or customer • Failure to differentiate amid what consumers want to do and
service staff. what they would actually do
• Influenced by recent experience Drawbacks
• Salesmen have an advantage in providing low sales estimates • It is a time taking process.
3. Consumer Surveys • Evidence of high degree of accuracy does not exist.
Advantages • The poorly designed questionnaire may result in false

conclusions.
• Direct information
5. Nominal group
• Drawback
• Expensive and time-consuming • It involves sharing of ideas by the experts. The ideas are ranked
by the experts and rankings are subject to mathematical
• Low response rate
derivations.
4. Delphi
Techniques Based on Time Series
Delphi involves forecasting based on questionnaires to a group
of managers and experts. The questionnaires are modified, and 1. Naïve Forecast
responses sought till the consensus arrives.
The actual demand for any period is considered as a forecast of
succeeding period.
all given periods.”
Example 4.1
sum of demands for all time periods
Consider the following data, which is available for the past 6 SA =
Number of periods
periods for a manufacturing firm
Period Actual Demand D The major benefit that simple average extends is in the form of a
1 55 reduction in chances of being swayed by gross fluctuation which
2 37 may take place in a fixed period. The disadvantage is that in case,
3 62 the defined pattern changes over time, the simple average method
4 31 will not be able to find out this change.
5 33
Example 4.2
6 48
The forecast for period 7 on the basis of the naïve forecast would Period Actual Demand D
be 48 as it is the actual demand for the last period. 1 100
2 120
2. Simple Average 3 80
4 90
“A simple average is the average of demands/prices incurring in
5 110 Period Actual Demand D
6 70 1 50
2 60
The forecast for period 7 based on simple average will be 3 40
100 + 120 + 80 + 90 + 110 + 70 / 6 = 570 / 6 = 95 4 45
5 55
3. Simple Moving Average 6 50
A simple moving average is a basic type of moving average. It is

The forecast for period 7 based on 5 period simple moving
derived by considering a series of prices or demands, then adding
averages will be
these prices or demands and then dividing the total by the total
data points 60 + 40 + 45 + 55 + 50 / 5 = 250 / 5 = 50
sum of demands for periods The forecast for period 7 based on 3 periods simple moving
MA = average will be
the chosen number of periods
45 + 55 + 50 / 3
Example 4.3
= 150 / 3 = 50
4. Weighted Moving Average 0.3 × 70 + 0.2 × 110 + 0.5 × 90
A moving average forecast makes use of a set of most current = 21 + 22 + 45 = 88

and real data figures for generation of a forecast while the recent
forecasts are allotted the weights. 5. Exponential Smoothing
Exponential smoothing uses a part of past period demand and a

Example 4.4
part of the past period forecast to predict demand for succeeding
period. Next forecast = previous forecast + α (actual demand –
Period Actual Demand D previous forecast)
1 100
Ft = F t-1 + α (Dt-1 − Ft-1)
2 120
3 80 Or Ft = α Dt-1 + (1− α) Ft-1
4 90
α = smoothing constant that represents a percentage of forecast
5 110
error
6 70
0<α<1
Calculate the 3-period weighted moving average if weights are
0.3, and 0.5 (0.3 being the weight of most recent period). Weighted Example 4.5
moving average will be:

Period Actual Demand D Forecast
1 100 120
2 120 100
3 80 95
4 90 100
5 110 135
6 70 80
Calculate demand for period 7 if smoothing coefficient = 0.2.
Forecast for period 7
= α Dt-1 + (1 − α) Ft-1
= 0.2 × 70 + 0.8 × 80 8. Incorporating Trend
= 14 + 64 = 78 The trend is the effect of long-term factors in the series.
7. Selecting the Value of Smoothing Coefficient Trend Equation
Smoothing coefficient is: “Y = a + bt”

“t = specified number of periods As we can see the demand is an increasing trend, trend equation
Y = forecast for period t a = value of Y at t =0 will be used to forecast for period 6.
b = slope of line” Period t Demand D ty T2

n ∑ ty − ∑ t ∑ y 1 5 5 1
b= 2 8 16 4
n ∑ t2 – (∑ t)2
3 9 27 9
y–b∑t 4 12 48 16
a=
n 5 16 80 25
Example 4.6 ∑ t = 15
∑ y = 50
Consider the following data:
∑ ty = 176
Period t Actual Demand D
1 5 ∑ t2 = 55
2 8
N=5
3 9
n ∑ ty − ∑ t ∑ y
4 12 b=
5 16 n ∑ t2 – (∑ t)2
6 70
= 880 – 750 / 275 – 225 forecasted demand – actual demand
=
= 130 / 50 = 2.6 n
∑y – b ∑ t
a= forecast error
n BIAS =
n
= 50 – 39 / 5 = 11 / 5
(forecasted demand – actual demand)
= 2.2 =
n
So, D = a + bt D = 2.2 + 2.6 t
(actual demand – forecast)2
For t = 6, MSE =
n
D = 2.2 + 2.6 × 6
Sources of Forecast Errors
= 2.2 + 15.6 = 17.8
= 18 (approx.) • The omission of an important variable
• Irregular variations due to unpredictable circumstances

Forecasting Error
• Incorrect use of forecasting technique
forecast error • Misinterpretation of results

MAD =
n
Tracking Signal (TS) Period Forecast Actual demand
1 170 155
Tracking signals are used to monitor forecast accuracy. 2 140 160
(actual demand – forecast) 3 165 130
TS = 4 170 185
MAD
5 180 170
When the specified characteristics of demand vary from the 6 155 125
original one but the forecasting model doesn’t do the tracking,
the signal goes out of control.
Normally tracking signal should be within ± 4
If the forecasting model is working accurately, the tracking signal

will be close to zero.
Example 4.7
Following is the data of actual and forecasted demand:

Comment on the suitability of the forecasting technique being used.
Period Actual Forecast A−F RSFE ∑ Bias ∑ IA− FI MAD IA−FI TS RSFE /
Demand (A−F) (A−F) / n /n MAD
1 170 155 15 15 15 15 15 1
2 140 160 −20 −5 −5 / 2 = 20 10 −2

2.5
3 165 130 35 30 10 35 11.7 2.56
4 170 185 −15 15 3.75 15 3.75 4
5 180 170 10 25 5 10 2 12.5
6 155 125 30 55 9.1 30 5 11
Since the value of TS exceeds 4 in period 5 and 6, the forecasting technique is no more suitable.
Summary Review Questions
Forecasting is the technique of giving estimates regarding the future 1. What are the mutual features shared by all types of forecasts?
based on analysis of past and present data along with analyzing
2. What is the relevance of forecasting in operations management?
various trends. With markets becoming highly competitive Forecasting
has found a wide range of applications in multiple fields which are 3. Differentiate between Delphi and nominal group.
highly competitive. Forecasting comes handy in various situations
4. What is forecasting error? What are the measures of forecasting
where analysis of future data is essential:
error?
• Product Forecasting • Economic Forecasting 5. Explain the use of tracking signal in forecasting.
• Political Forecasting • Outcome Forecasting and 6. Forecast demand for April was recorded as 350 units, but actual
demand happened to be only 290. If the firm is using a single
• Credit Score Forecasting • Supply Chain Management
exponential smoothing technique, with α = 0.3, what would be the
• Weather Forecasting forecast for the month of May?
7. Given the following:

But it should be remembered that not everything can be forecasted
Σ X =80 Σ Y = 1200 n = 20
reliably if the factors that relate to what is being forecast are known
and well understood. There is a significant amount of data that can be Σ X = 340 Σ Y = 74800 Σ XY = 5000
used and a very reliable forecasts can often be obtained. Calculate the value of Y, for X equal to 50, using linear regression.
Unit-5
Case Study: Why does
Productivity Matter?
It is important to emphasize the significance of productivity for
an economy. There are declared as well as reported figures of
every nation in terms of GDP, income and Balance of Payments.
They may give a different opinion; sometimes good, sometimes
negative, but they cannot be always taken into consideration. Do
these key economic indicators affect anyone?
High levels of productivity and high living standard go parallel

together.
As is the case with a few of the developed nations, some of the

high-productivity manufacturing sector jobs are replaced by
lower-productivity service sector jobs, due to the economy of
the said countries becoming more service oriented. Due to this Advanced levels of productivity allow the companies the flexibility
shift, it becomes difficult to support higher living standards as to realize higher profits by charging the market price and also
consistently high productivity levels are essential for the industrial challenge the competitors pricing strategy to increase their own
sector. In most of the sectors in an economy higher productivity market share. High levels of comparative productivity put the
gives them a distinct competitive advantage in the market. industry in a strong position where it becomes difficult for any
MNC to displace it.
Review Questions
1. Explain the importance of high productivity for a nation?
2. Comment on the general notion that manufacturing jobs have

higher productivity and service jobs have lower productivity.
3. By having higher productivity than competitors how can an

organization gain a competitive advantage?
Unit-6
Location Selection
Learning Objectives
• Explain strategic importance of location

decision
• Discuss the factors affecting the location
• Explain various sites for understanding

location selection models
Overview • Change in the geography of demand
Location planning is one of the strategic decisions, which an Factors Affecting Location
operations manager makes. Deciding location is important
because this decision is very difficult to reverse. The main factors Following is a list of factors that affect decisions related to territory
that affect location decisions are geographic factors, regional and site selection. The territory is the broad geographical area
factors, different group considerations and site-related factors. whereas site is a specific piece of land in a given geographical
Group factors are related to the community that consists of area.
quality of life, services and perceptions, various types of taxes,
environmental regulations and development support system.
Location decisions are taken under following circumstances:
• Establishment of new facility
• Growing volume of business
• Expansion of existing facility
• Dispersal of industry
• Economic, political, legal or social change

Selection Decision Based on Subjective Factors
Some decisions are based on subjective factors. These factors are discussed below:
Factor Point Rating • Factor points are allocated to each site for each factor.
• The factors affecting location are identified. • The total points are determined.
• A common scale is established for comparison. • Site with the highest total is selected.
Example 6.1
Poor Fair Adequate Good Excellent
F1 Supply of water −15 −12 0 6 10
F2 Facility provided to community −3 −1 0 1 2
F3 Attitude of a community −6 −3 0 3 6
S1 S2 S3 S4
F1 Adequate 0 Fair −12 Good 6 Adequate 0
F2 Adequate 0 Poor −3 Excellent 3 Fair 1
F3 Adequate 0 Adequate 0 Adequate 0 Adequate 0
Rating of sites 0 −15 9 −1
Site S 3 is selected as it has the maximum total rating. Variable Weight Method
• Each factor is allocated a weight as per its importance.

Equal Weight Method
• The scale is established as per weight.
• All factors affecting location are evaluated as being equally
• Total of weights are calculated.
important.
Example 6.3
Example 6.2
Maximum points S1 S2 S3 S4
S1 S2 S3 S4
F1 300 200 250 250 50
F1 2 5 9 2
F2 100 50 70 80 100
F2 3 3 8 3
F3 150 5 50 10 40
F3 6 2 7 3
Rating of
Rating of sites 11 10 24 8 255 370 340 190
sites
Hence, Site S 3 is selected as it has the maximum total rating.

Hence, Site S 2 is selected as it has the maximum total rating.
Weight cum Rating Method Selection Decision Based on Cost
• Weight is allocated as per importance of factors.
Cost Volume Profit (breakeven) Analysis
• A common scale is established for comparison.
F = fixed cost
• Weighted total is calculated for factor point ratings.
V = variable cost per piece
Example 6.4
R = revenue per piece
Total cost = fixed cost + variable cost

Weights S1 S2 S3 S4
= F + VQ
F1 5 2 5 9 2
Where Q = quantity produced
F2 3 3 3 8 3
Total revenue = RQ
F3 2 6 2 7 3
Break-even is the point where total cost equals total revenue.
Site rating 31 38 83 25
RQ = F + VQ
Hence, Site S 3 is selected as it has the maximum total rating. Or

F
Q=
R−V
Example 6.5
The fixed and variable costs for various plants of a manufacturing company are shown below:
Site Fixed Cost per Year Variable Cost per Unit
Karnataka 1, 25,000 6
Andhra Pradesh 75,000 5
Tamil Nadu 1, 00,000 4
Kerala 50,000 12
Sale price 20
For Karnataka, For Tamil Nadu, 100000 / 16 = 6250

BEQ = 125000 / 20 – 6 For Kerala, 50000 / 8 = 6250
= 125000 / 14 = 8928
So, Andhra Pradesh is a preferable location as it has the lowest
For Andhra Pradesh, 75000 / 15 = 5000
break-even quantity of 5000.
Summary
Whether it be the government or businesses, site selection involves carrying out of new location facilities and is in extensive use
now-a-days. Post completion of internal site selection procedures, the Indian government needs development of new facilities.
Though the practice is not widespread, most of the state governments and their agencies have published their personalized site
selection guides. Services of independent advisors or in-house staff can be employed for the purpose by the businesses as well
as the government. Most of the big corporations take services of internal site selection teams for ongoing new facility needs.
Review Questions
1. Explain the importance of location in operations management.
2. Explain multiple factors that have a bearing on location decisions?
3. What important parameters are considered before selecting a site?
4. Which method, according to you, is the best method facilitating decision making for location in a business?
Unit-7
Layout Planning
Learning Objectives
• Understand the meaning of layout planning
• Discuss the objectives of layout planning
• Explain the different types of layouts
• Understand how to select a suitable process

layout
• Compare between process and product layout
• Recognize the importance of layout decisions
• Know the criteria for a good layout
• Understand the Reliability (REL) charts

Overview • Delay is minimized
• Low manufacturing time

Layout refers to the arrangement of equipment, departments
• Minimum material handling the cost
and work centers to ensure smooth movement of customers and
materials within the system. • Effective space utilization
• Fewer inventories in process

It describes the main types of layout selections and the models
• Effective supervision and control
used to evaluate selection alternatives. Plant layout is the
selection of a production or service facility, which includes an • Worker convenience and satisfaction
arrangement of various machines, storage space, etc. However, • Safety
only knowing the concept of layout planning is not sufficient. You
• Minimum waste
also need to know the objectives of layout planning. The primary
objectives of layout planning are discussed further. The layout can be of different types depending on various factors.
Some of these types are discussed below.

Objectives of Layout Planning
The primary objectives of layout planning are listed below:

Types of Layout
• Highest equipment utilization The different types of layout are product layout, process layout,
hybrid layout, cellular layouts and fixed position layout. Indeed, all
types of process layout are important for an organization. • Work centers in sequence of operations
• High production volume

Product Layout
• Standardization
• One type of product in one area
• Stable product demand
Figure 7.1 Product Layout
Figure 7.1 shows raw material delivered to Station 1 for storage, which is then delivered to Station 2 for storage. It is further delivered to
Station 3 for storage and then, finally to Station 4 where the finished product is produced.
Process Layout
Non-standardized products are which the organization produces without standard specifications.
Selecting Process Layout is acquired, and layout is formed. The following information is
required for process layout.
The process layout selection is a process in which the information
Comparison between Product and Process Layout
The comparison between product and process layout can be understood with the help of the flowchart given below:
Figure 7.2 Comparison between Product and Process Layout
Hybrid Layout Cellular Layouts
• Combination of product and process layouts • Facilities clubbed together in cells

• High flexibility Importance of Layout Decisions
• Each cell performs similar types of functions for a group
of products
Fixed Position Layout
• Project like systems
• Major components kept fixed
The need for layout planning arises both in the process of

selecting the new facilities and in reselectioning the existing
facilities. Following are some of the major causes of reselection
of layouts:
• Operational Inefficiency
• Introduction of New Products and Services

• Modification of Output Volumes
Maximum coordination
• Changes in Methods and Equipment Maximum accessibility
• Environmental and Legal Changes Maximum flexibility
• Accidental Hazards Minimum distance
• Changes in Product and Service Selection Minimum handling
However, only taking the right decisions for the formation of a lay- Minimum discomfort
out does not make it a good one. There are many other factors, Maximum visibility
which affect a layout. The other criteria that make a good layout Inherent safety
are discussed below.
Efficient process flow
Criteria for a Good Layout

The REL chart or the Reliability chart is an important tool in the
process of layout planning.
The list below provides the various criteria that make a good
layout. It is important for you to consider each factor as an
REL Chart
important requisite while forming a layout.
The REL indicates the relation between pairs of departments

in terms of closeness depending upon the activities of the
department as:
REL CHART
Figure 7.3 REL Chart

Summary
Layout planning is planning on the most efficient physical arrangement of resources consuming
space in a facility. Layout planning is a critical part of overall organizational planning as it
helps enhance the effectiveness of production process and meeting the employee needs. The
importance of a layout would be better appreciated if one understands the influence of an
efficient layout on the manufacturing function as it makes it smooth and efficient.
Review Questions
1. What are the objectives of plant layout?
2. Explain the layout that will be suitable for an FMCG product (Chips) manufacturing plant.
3. Differentiate between product layout and process layout.
4. Explain the importance of process selection in system selection.
5. Explain the types of layout suitable for offices.

Unit-8
Capacity Planning
Learning Objectives
• Know about efficiency and utilization
• Learn the concept of utilization capacity
• Determine utilization capacity
• Understand the factors affecting capacity

planning
• Classify capacity planning
• Know the steps in capacity planning
• Learn the strategies for capacity planning

Overview
The quantity that a plant can produce at a specified time is called its capacity. The two most important functions of capacity planning are
selection capacity and effective capacity.
These two functions of capacity can be used to find the efficiency Example of Selection
and utilization. The formulae for calculating these are given
below: With the following information, calculate the efficiency and
Actual Output utilization of vehicle maintenance department:
Efficiency = × 100%
Effective Capacity
Actual Output
Utilization = × 100%
Design Capacity
In the above example, the actual output of 36 units per day • Using redundant equipment
looks efficient in comparison with the effective capacity of 40
units per day. But when actual output of 36 units is compared It is necessary to understand what factors are constraining
with the selection capacity of 50 units per day, it might look less effective capacity to improve the effective capacity as
impressive but is more meaningful. maximization of utilization depends on it.
The real key to improve capacity utilization, with effective capacity The purpose of studying about capacity is fruitful, only when the
acting as a ceiling on actual output, is through: capacity of utilization is clear to you. So, first, let us know what
capacity utilization is.
• Maintaining equipment in good condition
• Training eEmployees
Capacity Utilization (CU)
• Correction of quality problems As the name suggests, capacity utilization is the degree to which
resources are being used. The formula used to find the capacity
utilization is given below: Factors Affecting Capacity Planning
Average Output Rate Decision
Capacity Utilization = × 100%
Maximum Capacity
The factors that affect capacity planning decisions are as follows:
Capacity Planning
1. Product/service market demand
As an Operations Manager, itIt is important for you to know that 2. Capital to be invested
an operation may have different levels of capacity. However, when 3. Desired levels of automation
an operation has the lowest capacity, it’s worth analyzing. When
4. Level of integration (i.e., vertical integration)
an operation has the lowest capacity, it is called a bottleneck
operation. An operation that has the lowest capacity of any 5. Type of technology selected
sequence of operations or the operation that takes the maximum 6. Dynamic nature of all factors affecting the
time in a facility and limits the system’s output is called bottleneck determination of plant capacity, such as changes in
operation. To consider that an operation has the highest and the product selection, process technology, market
conditions and product life cycle, etc.
efficient capacity, it is important to fulfill the necessary steps in
the process of capacity planning. Let us quickly study the steps
in capacity planning. Capacity Planning Classification
Based on the timeline, capacity planning can be categorized into

three major divisions: Medium Term Capacity
Long-Term Capacity Sstrategic capacity planning with a time frame of two to three
years is covered under medium-term capacity planning.
Production capacity, sustainable capacity, and effective capacity
determine the long-term capacity of an organization: Short-Term Capacity
• Selection Capacity: It defines the maximum possible Strategic capacity planning with a short time frame such as hours,
output under ideal working conditions as described by the days or weeks falls under the purview of short-term capacity planning.
manufacturer of the equipment.
Steps in Capacity Planning
• Production Capacity: It defines the maximum possible output
output from the equipment in a day under normal working The steps in capacity planning are listed below:
conditions.
1. Selection of a suitable process owner for capacity planning:
• Sustainable Capacity: It ddefines the maximum possible
Selection of an adequately suitable individual is the initial
output achievable in realistic work conditions after making
step towards the development
provision for normal hiccups.
of a strong capacity planning
• Effective Capacity: It defines the optimal output levels under process. This person would
pre-defined work-schedules and making provisions for act as the process and owner
machinery breakdown, maintenance schedules, etc. and would be responsible for
3. Measure the utilization or performance of the resources:
Performance of resources which have been previously
selection, implementation, and maintenance of the process. identified would now be measured. Two important bits of
His powers also include carrying out negotiations with information are derived from this information:
developers and relevant support groups.
2. Identify the key resources to be measured: After the selection,

the process owner’s primary task is the identification of
infrastructural resources whose performance needs to
be measured. This decision is based on the knowledge of
which resources are most critical for meeting future capacity
requirements.
4. Compare utilizations to maximum capacities: This step is

used to determine the available excess capacity for selected
components. The performance of every component has to
be compared with the maximum practical capacity of that
component. It should be remembered that maximum usable
capacity is always going to be less than maximum possible.
5. Collect workload forecasts from developers and users:
This is one of the most critical steps in the entire capacity
planning process, and it is the one over which you have the
least control.
6. Update forecasts and utilization: Capacity planning is

an on-going process, and in order to derive its maximum
benefits there is always a need to update, at least once a
year, continuously to keep it up to date.
The Complexity
The complexity of market forces and technology, makes

capacity planning a difficult task as it involves both short-term vary significantly as such it would be not wise to put time on
and long-term deliberations. Long-term deliberations affect intervals.
the whole capacity levels of the organization, such as facility

Strategies for Capacity Planning
size; Short-term deliberations relate to possible disparities in
capacity requirements caused by seasonal, irregular or random Capacity planning can be classified into the following major
fluctuations in demand. Due to the difference in nature of various categories:
industries, time interval covered by these considerations can
Summary related to development of infrastructure.
Capacity planning involves planning for the To conclude, capacity planning must ensure that:
optimum quantity at optimal time as per business
requirements for lower is the capacity, poorer • All functions can be perfectly performed
would be the response time and severe would be by infrastructure components and can be
issues with performance. On the other hand, higher accommodated.
is the capacity, higher is the cost of production and

• Growth forecast is neither exaggerated nor
wastage of resources. Therefore, optimal capacity
uneconomical.
is quintessential for optimum usage of resources.
Capacity planning is an integral part of planning • Efficient functioning of components.
Review Questions
1. Define capacity. How can you measure the capacity? Give formula also.
2. Why is capacity planning important for any organization?
3. Differentiate between selection capacity and effective capacity.
4. What are various steps involved in capacity planning?
5. What are different strategies involved in capacity planning?

Unit-9
Process Selection
Learning Objectives
• Understand the concept of process selection
• Know the factors affecting process selection
• Be aware of considerations in process

selection
• Recognize the different types of processes
• Know about the different characteristics of

different types of processes
• Understand the tools used in process analysis

Overview
Process Selection is a method through which goods and

services that have been produced are delivered affecting various
organizational aspects such as capacity planning, facilities
layout, equipment selection, work system selection and capacity
layout. Process selection is used for planning of new products
or services that is related to technological advancements and
competition. Process selection is dependent on the strategies in Figure 9.1 Process Selection and Capacity Planning
process, which has two main components viz. capital intensity
and process flexibility. Figure 9.1 shows the process of capacity planning and
process selection as interrelated to each other. The inputs of
an organization that affect them are forecasting, product and
service selection and technological changes. The outputs of an
organization that affect them are facilities and equipment, layout
and work selection.
However, there are certain factors that affect the process of

selection.
Factors Affecting Process Selection
Considerations in Process Selection customer needs or for own use.
• Resource Flexibility: It considers how flexible the process of

The considerations in process selections are as follows: selection of resources is.
• Capital Intensity: The amount of capital required for

• Volume and Variety: It involves considering the volume of
successfully accomplishing the selection process is also
stock available in hand and the volume of stock required.
considered.
• Produce to Stock or Produce to Order: It is important to
Process selection is further classified into different types. They
consider whether goods are to be produced for fulfilling
are listed below.
Types of Processes
Figure 9.2 Product or Service Flexibility Variety and Equipment Flexibility
Characteristics of Different Types of Processes
The characteristics of different types of processes are mentioned below on the basis of different parameters. Consider the chart given
below:
Table 9.1 Characteristics of Different Types of Processes
Project Job shop Batch Assembly line Continuous
Size Variable Small Moderate Large Large
Process flow No pattern Several Few Rigid Rigid
Speed Variable Slow Moderate Fast Fast
Run length Short Short Moderate Long Long
Rate of change Slow Slow Moderate High High
Labor High High Variable Low Low
Skill High High Mixed Low Variable
While studying the process of selection, having an idea about the terms process re-engineering and process
improvement is quite important.
Process Re-engineering and Process Improvement
Tools of Process Analysis
The tools used for process analysis are as follows:

There are few symbols used in making a flow chart. These
symbolsare shown below:
Summary the work facility.
Operations management can be described as tactical Process selection encompasses tactical choice of work
overlooking of production methods and human resources processes to be included in the production process.
to ensure maximization of output, minimization of errors Process selection and facility layout form a critical part
and continuous enhancement in product quality. of operations management.
Facility layout covers the aspects as to how organizations A thorough understanding of each of them, as well as
work equipment such as machinery, workstations, their inter-relation, helps ensure improved efficiency of
machinery, etc. and human resources are positioned at production processes.
Review Questions
1. What do you mean by process selection?
2. What are the factors affecting process selection?
3. Differentiate between job shop and batch process.
4. Explain the relationship between capacity planning and process selection.
5. What is the difference between process re-engineering and process improvement?
6. What are the tools of process analysis?

Unit-10
Case Studies
The restaurant business is a kind of business where the inventory where it will not perish? One option is that some dishes are partially
and capacity have its own role. They are able to cater to different cooked and kept ready for use. The other option is to get frozen
varieties of customers with varied demands. Do these restaurants food from other suppliers and serve the dishes according to the
have big stocking area to store perishable goods and keep them requirements. The big giants like Oberoi, Taj and KFC food chains
fresh and hygienic? The business needs prompt service with are some of the followers. They need to take care of the ordering,
minimum preparation time. Are the chefs quick enough to do it? handling and other cost and maintain equilibrium in pricing.
Do they prepare these stuff beforehand and store it in a condition
Review Questions
1. What advantages of outsourcing in a restaurant?
2. List out major limitations of outsourcing for a restaurant.
3. Can outsourcing in a restaurant deemed unethical? Explain.
4. Elaborate the importance of capacity for any restaurant

business.
Unit-11
Product and Service
Design
Learning Objectives
• Elaborate on the meaning of service and

product design
• Discuss the reason for product and service

design
• Describe product lifecycle
• Explain product reliability
• Discuss how to measure product reliability
• Discuss standardization and mass

customization
• Explain product design and development
• Elaborate the difference between product and

service
Overview utilized by organizations to create product and service designs
to have a competitive advantage in the market. They may opt to
Product and Service designs are the beginning points of follow strategies like standardization, mass customization, robust
customer satisfaction process. The product or service produced or modular design, delayed differentiation, etc. The selection of
in the market should have added value for the consumer from a strategy and method plays a very crucial role in target market
market point of view. Product and service selection is a long-term because opting the right method results in higher productivity
decision that decides strategic formulation and implementation and efficient ways of operations.
in any organization. Every functional area of an organization is
involved in it, but marketing and operations play a significant Service Design
role in product and service design development. It is pertinent Service design is an effort of organizing or planning of people,
to understand the meaning of product design and service design material, and their communication to serve the customer with
while if a deeper understanding is required. better service quality. It involves the interaction of service
provider, customer, and the customers’ experience. The
Meaning of Product and Service Design service design is greatly affected by the degree of variations
in requirements and customer contacts, which determines the
Product Design
extent of standardization of the service. The selling opportunity
Analytical processes are used to create effective product designs remains high until the degree of customer contact is also high.
to be sold to a customer. Various techniques and methods are
Reason for Product and Service Design • Political or legal factors: It includes the factors like new
regulations, government changes, safety issues, etc.
Implementation of strategies involves a significant role of service • Competitive factors: It includes the factors like new products
and product design because there are direct consequences for or services, a new advertisement, new promotion methods,
progress and success of a company. etc.
• Cost factors: It includes the factors like availability of raw

The product and service designing decisions are not only
materials, components or labour, etc.
fundamental but also create an impact on the future activities.
Market Opportunities and threats are the chief forces that initiate • Technological factor: It includes the factors like availability of
a designing process. better technology for manufacturing, product’s components
processing, etc.
The following are the factors that give rise to market opportunities
Each of these factors seem to be obvious and has strategic
and threats:
implications for the success of products and services during
• Economic factor: It includes the factors like low demand, their different stages of life cycle. Since the demand does not
excessive warranty claims, reduction in cost, etc. remain the same in all the stages of a product’s lifecycle, different
strategies should be taken into consideration to attain optimum
• Social and Demographic factor: It includes the factors like
performance of products and services during their useful life.
change in preferences, population shift, etc.
Product Lifecycle
A product lifecycle encompasses various stages in a product or service’s life. It explains various stages that a product goes through from
the initial introduction in the market till it completely disappears from the market. Understanding the stage of a product in its life cycle is
vital for a manager to make rational decisions, as each stage requires a unique and specific strategy.
Figure 11.1 Product Life Cycle
The product life cycle comprises of four stages that are discussed below:
1. Product Introduction/Development Stage 3. Product Maturity and Saturation Stage
It is the first stage of the product lifecycle. It includes idea At this stage, the product attains full market potential, and
generation, new product designing, re-engineering and the entire the business becomes highly profitable. It is observed that
manufacturing process. In this stage, the product is given a growth slows down in the middle phases of this stage and new
name and a complete brand identity that differentiates it from competitors enter to control the market. Many businesses focus
competitors. on marketing activities and lose huge amounts of money in this
stage since they lose loyal customers to their competitors.
2. Product Growth Stage
4. Product Decline Stage
In this stage, rapid growth in sales and revenue is observed.
Growth is attained when number of consumers appreciate the The product decline stage is the last stage of the product lifecycle.
worth and advantages offered by a product. It takes several years This phase occurs when companies do not take necessary
to attain growth. Sometimes, the product might even vanish from preventive measures in the late-maturity stage. Once this phase
the market without a rise in its demand. Therefore, it becomes is reached, the product would never recover again or grow and
essential to establish demand at the introductory stages with would slowly be obsolete. Sometimes, the decline of a product
good marketing plans. is inevitable, especially in consumer technology goods. In such
industries, the companies need to be very responsive and prompt
in foreseeing changes or shifts. Staying relevant, launching
innovative products and being at the forefront of change is more
important for the leaders than smaller players as they have made reliability through immediate failure rates vs. time from inception
much bigger investments. CD player makers have continued to till the end, which shall be observed if waiting period is long and
launch innovative products like Blue Ray players and UHD players a record for given a set of items.
to stay relevant, but more and more people watch movies on their
phones and tablets. TV industry is in the maturity stage and
innovations like curved TV do not see huge adoption.
Product Reliability
Product Reliability can be defined as the chances of a product

performing the desired functions during its useful life as
described by the manufacturers. In case of repairable product it
can be quantified as Mean Time Between Failures (MTBF) and
if the products are non-repairable, then it can be quantified as
Figure 11.2 The Famous Bathtub Curve
Mean Time To Failure (MTTF).
Initial Failure
How to Measure Product Reliability
This is the first period, which is depicted by flatting out of the
Figure 11.2 uses ‘The Bathtub Curve’ to demonstrate the product
slope of the curve on the left side. It marks decreasing failure rate
in the first period. It shows that during early stages of in a product like standardization, mass customization, robust or modular
or service’s life it is more likely to fail against well-established design, delayed differentiation, etc., while keeping in mind the
products and services. characteristics discussed in the curve.
Useful Life Standardization
The second period of the graph is used to depict the ‘useful life’ of Standardization is one of the important strategies for an
a product through the flat bottom curve which shows the random organization, which helps in creating products. It is so because
occurrence of products and services over a period. Here, it is a the manufacturers are not available with many options to make
little hard to predict which failure mode will occur, though the them unique and lowering the price. Standardization offers many
chances of failure remain predictable. significant advantages along with a few disadvantages.
Wearout Failure
The third period, ‘wearout’ is depicted by the rising slope of the

curve which is a result of product or service becoming outdated
and chances of failure are high. So, these are the different periods
that help in understanding the failure rate of a product and
service. The organization may opt to follow any of the strategies
Mass Customization replacement or interchangeability, components are grouped
into modular designs, which is another form of standardization.
Mass customization is a strategy widely used by companies to Product or services are customized to individual preferences and
establish a harmony between standardization and customization, may not have long lives. The life of a non-customized service may
which helps in cost reduction and at the same time adding to the be very small. Alternatively, a customized product may last for
variety. Mass customization is realized through differentiation and longer time. Thus, the different phases of product development
modular designing. In case customer preferences are ambiguous also play a very important role in the designing of a product and
and unknown, the company can opt for delayed differentiation in service.
order to finish off the product later on. In order to enable convenient
Product Design and Development • Feasibility Analysis: It warrants co-operation between
various organizational functions such as marketing, finance,
Product design and development generally follows a series of phases: operations, accounting, etc. It includes demand analysis, cost
analysis, and technical analysis. It is also imperative to have
knowledge of company’s missions and requirements.
• Product specifications: It specifies in-depth analysis to find out

about customer expectations from a product and it warrants
collaboration between various organizational departments.
• Process specifications: After setting up product specifications,

it is entirely up to the operations managers to suggest the
processes which will be required for the production of the
product. All possible alternatives should be listed and analyzed
in terms of cost, resource availability, quality and profitability.
Close interaction between operations and accounting
departments is required.
• Prototype development: In order to find out any flaws in the

product a few units are prepared as samples so that any
Figure 11.3 Stages in Product Design and Development shortcomings may be addressed.
• Design review: At this stage any required changes are Differences between Service Design and
incorporated into the product, or if that is not possible, then Product Design
the product is abandoned entirely. This decision is taken in
consultation with marketing, finance, operations, engineering Though a product and service perform the same function of
and design. satisfaction of consumer needs, there are multiple differences
• Market test: A market test is used to gauge customer between them. So, it becomes quite essential for operations
preferences and get the required feedback. Once the feedback managers to understand the differences between them and then
is received, the product is resent to design review phase where deal with the issues related to products and services separately.
another session of brainstorming starts. Following are the certain differences between a product and a
service:
• Product introduction: Marketing department introduces the
product into the market and conducts necessary promotion
1. Services are intangible and focus on factors such as
activities.
ambiance and experience whereas products are tangible
• Follow-up evaluation: On the basis of feedback received from and focus on factor such as packaging and appearance of
customers, necessary changes are made and forecasts are the product.
adjusted.
2. Services are generally created and delivered simultaneously
for, e.g., a car wash, a haircut, etc. Whereas in case of
products prior planning and inventory management are
required to ensure timely delivery to the consumers. those with little or no customer contact to those that have a
3. It is not possible to prepare an inventory of services. As a very high degree of customer contact e.g., Insulated technical
result, the flexibility and capacity are restricted whereas in core, Little customer contact (software development),
case of products a proper inventory can be easily managed. Personalized service (haircut, medical service), Consumer
participation (diet programs, dance classes), self-service
4. Services should be developed with a consideration that they
(supermarkets). If there is no customer contact than service
are highly visible to the customers, which adds an additional
design is almost similar to product design.
dimension to the design process, which is generally not the
case with the product design. 8. Variability in demand can lead to extreme situations, either
waiting for lines or idle resources. If variability in demand
5. As services have low entry and exit barriers which required
is a critical factor, process designers can take either of the
innovation and cost-effectiveness for the service design to
following approaches:
retain competitive advantage.
• Cost and Efficiency (it is basically a product design
6. Choice of location is highly relevant to service design
approach)
and Service design and Location are intricately related to
ensuring convenience for the customers. • Customer Service (it is basically a service design
approach)
7. Product designs do not have significant customer contact
whereas in case of service design there is little to the very Designers try to limit customer participation during process
high degree of customer contact. Service systems range from designing as it can lead to unpredictability in demand process.
Summary Costs Review Questions
Product and service design are the most • Development of Samples 1. What are the various
important factors to be considered phases of the life cycle of a
• Formulation of Product Specification
during the introduction of a new product?
product or service. It is imperative to As the designing process has a
2. Explain the necessity of R&D
satisfy basic principles to accomplish a critical impact on an organization
(research and development).
successful design, which includes: it is necessary that it is in line with
List its components.
organizational strategy and goals
• Identification of Needs and Wants of
(long term and short term). There are 3. Explain the term product
Customers
multiple levels in the designing process reliability through an
• Refining existing Products and illustration.
including:
Services
• Motivation 4. Differentiate between
• Development of new Products and
standardization and
Services • Improvement Scope
customization.
• Establish Quality Parameters • Organizational Capabilities
5. What is mass
• Manage Production and Delivery • Forecasting customization?
Unit-12
Aggregate Planning
Learning Objectives
• Understand the aggregate planning and its

types
• Analyze the dimensions of aggregate planning
• Discuss the objectives and significance of

aggregate planning
• Appreciate the strategies involved in aggregate

planning
• Know about the cost involved in aggregate

planning
• Recognize the factors affecting aggregate

planning
Overview workers.
Capacity decisions of an organization are made on three levels:

Aggregate Planning
Aggregate planning can be defined as the process of developing,

• Long Term: These decisions are closely associated with
analyzing and maintaining the desired levels of organizational
product and service selection and include determination
operations. It involves minimization of costs and balancing of
of product and service offering, Location and Layout of the
capacity. As the name suggests, it involves all the resources of
facility and Equipment decisions. They determine the capacity
an organization such as raw material, personnel, machine hours,
constraints within which intermediate planning functions.
etc. It is essentially a medium-term planning process ranging
• Intermediate Term: These decisions are related to medium from a period of three months to twelve months.
term objectives such employment levels, Output levels and
Inventory levels. These decisions layout the boundaries within Dimensions of Planning
which short-term planning is to be done.
Planning is the process of deciding and organizing organizational
• Short Term: These decisions are done within the constraints activities to achieve the desired results. Certain dimensions are
specified by intermediate and long-term decisions and are to be taken into consideration while planning, such as:
concerned with the best method to achieve desired results
through job scheduling, arranging for requisite equipment and
Objectives of Aggregate Planning • It helps in the maximization of the available production facility.
The goals of aggregate planning involve the production in line with

Strategies for Aggregate Planning
business plan, optimum utilization of capacity and consistency
• Vary the number of employees: The employees are hired and
with company’s policy regarding employees. These goals are
laid off as per requirement in this strategy.
made on an aggregate level and the planning of aggregate is
done by summing up all the above-mentioned dimensions. • Vary workforce utilization: The utilization of regular work-
force is done on overtime in this strategy.
The Significance of Aggregate Planning
• Vary the size of inventory: A constant production rate is
• It helps in the minimization of production cost. It results in adopted so that inventory is accumulated when demand is
better and maximized customer service experience. less and is consumed when demand is high.
• It helps in accomplishing financial objectives by diminishing

variable cost.
The Cost involved in Aggregate Planning • Overtime Cost: The additional cost of utilizing regular
employees on overtime.
• Regular Time Cost: The cost of wages to regular workers on
• Hiring and Layoff Cost: The cost of hiring and laying off
rolls.
workers as per requirement.
• Inventory Holding Cost: The cost involved in storing and

maintenance of products in warehouses.
• Backorder and Stockout Cost: The cost incurred when an

organization is unable to fill an order and not being able to
meet an internal or external demand from the current inventory.
Types of Aggregate Planning
Level Output: A stable rate of output is sought throughout the

planning period which means ensuring stability in output rate
while handling variations in demand.
Figure 12.1 Level of Output Planning
The figure 12.1 shows the relationship between the cumulative Chase Plan: Under this plan monthly demand is expected to be
demand and cumulative days. It shows the level output planning met by the management of monthly output. In order to match
changes with respect to change in cumulative demand and the capacity with demand, the planned output is set at expected
cumulative days. demand levels for a specific period.
Figure 12.2 Level of chase planning
The figure 12.2 shows the relationship between cumulative changing output rates only as and when required, instead of
demand and cumulative days for chase planning. changing the output rate every month.
Intermediate Plan: This type of aggregate planning focuses Business Plan: A business plan involves analyzing data related to
the profit of a business. It considers forecast sale, product costs in the long run.
and labor costs. A business plan helps a business to be profitable
Factors Affecting Aggregate Planning with short-term production success and as such is a crucial
operational activity for an organization.
Aggregate planning aims to balance long-term strategic planning
Aggregate planning ensures that organizational goals and
objectives can be fulfilled with the management of workforce
levels, production rates and inventory levels.
Summary
Aggregate planning is a medium-term planning process for production capacity and spans over a maximum
period of twelve months with an objective to keep the costs of operations low. Organizations do aggregate
planning to make decisions on their capacity because the demands for seasonal variations are difficult to
forecast precisely. The primary objective of the organizations is to complete utilization of available resources to
meet the expected demand. This objective can be accomplished by considering the factors such as employment
levels, inventory levels, decisions on output rates, overtime, back orders and subcontracting work.
Review Questions
1. What is aggregate planning? Discuss with the help of an exam ple.
2. Explain the production planning hierarchy.
3. What is aggregation?
4. What are the costs involved in aggregate planning?
5. Differentiate between level outputs and chase plan.

Unit-13
Operations in Service
Sectors
Learning Objectives
• Analyze the role of operations in service

sectors
• Understand the meaning of service with the

help of examples
• Learn the characteristics of services
• Appreciate the different types of services
• Know more about service dimensions
• Realize the importance of service quality
• Discuss the useful models in the Service

sector: GAP analysis and the augmented
service offering model
Operations Management for Services doctor, etc.
Operation Management under services perform the essential Characteristics of a Service

duty of developing the services for an organization and thereafter
• Intangibility: It is the key characteristic of a service that
delivering them to the customers directly. It handles those
differentiates it from a product. As services do not have a
decisions which an operation manager needs in order to ensure
physical existence, they cannot be held, touched or smelled.
side-by-side production and consumption of the service. These
decisions are affected by the people, information, process and • Heterogeneity/Variability: Unlike products, it is not possible
systems responsible for production and delivery of a service. It is to mass produce homogenized services because services are
specifically differentiated from general operations management unique and cannot be reproduced even by the same provider.
due to the fact that processes under a service organization are • Perishability: Once a service is delivered to a customer, it is
vastly different from those under manufacturing organization. completely consumed and cannot be delivered to any other
customer. As a result, it is not possible to store, save or resell
What is Service? services post-consumption. e.g., a patient cannot ask a doctor
to refund the fees if his ailment has not been treated.
A service can be defined as an intangible economic activity
that cannot be stored or measured and its ownership can’t be • Inseparability/Simultaneity of Production and Consumption:
established as it is produced right at the time of consumption. A service cannot be generated earlier and stored, it must be
Some examples of services include postal service, beauty salon, produced right at the time of consumption. For instance, a
barber delivering a haircut and a consumer getting one, all is satisfaction and continuous improvement in the services
done at the same time. provided. Service quality is important because the chance of a
In order to complete the service process, it is necessary to customer being dissatisfied is more with services compared to
consider and accomplish some requirements which will establish production. The criteria on the basis of which customer evaluate
the provision of a service to a consumer. Based on the client’s service quality are the reliability of the service, credibility,
expectations and specifications, an assessment is done to competence, assured guarantee and safe to use. Services can
deliver service in a desired manner defining the quality of service. broadly be classified into different types.
It involves quick identification of business problems, customer
Types of Services
As the Operations Manager of an organization in the service their core promises regarding the service attributes and their
sector, one would often have to measure the measures of quality out-comes.
of services. • Responsiveness: This dimension of a service quality
emphasizes on promptness and attentiveness while dealing
Service quality has five dimensions: tangibility, reliability,
with requests, complaints, questions or problems specified by
responsiveness, assurance and empathy.
the customer. Customers judge responsiveness on the basis
of time taken to answer questions or resolution of problems.
Service Dimensions
• Assurance: It is defined as the ability of the service provider or
• Tangibility: As services are intangible, in order to measure the their employees to infuse confidence and trust in the consumer
service quality, consumers compare the quality of the tangibles through prompt service, knowledge of the work and courtesy.
associated with them. Such as appearance of the personnel, This parameter comes in handy especially when the service
equipment used for the service and communication material involved is expensive or carries high risk.
shared. • Empathy: It involves providing personalized attention to the
• Reliability: Reliability implies that the service provider can customer because it infuses trust and confidence in consumer
deliver on the promises they make, whether it be about the time and helps foster loyalty. In many countries, it is considered
or quality or cost, it is necessary to walk the talk. Customers necessary to show individual attention to a customer to show
want to avail services of only such providers who can keep that they hold extreme value to the customers.
Importance of Service Quality customers. In the service industry, quality of service is established
by how well the customer expectations are met with the delivery of
In order to deliver superior service quality, it is necessary for the service.
service provider to first understand what does quality mean to their
One of the major challenges faced by hospitality industry is an organization is perceived by the customers and determines its
delivery of high quality services as it is a vital necessity for success chances of success in the highly competitive industries.
in highly competitive international hospitality markets. Quality is
a dynamic state associated with services, products, people and Service quality in terms of customers can be explained as the
environment which meets or exceeds expectations. It is very difference between what the customer expected and what was
essential to achieve customer satisfaction. Quality defines how delivered to them. The only way to ensure good service quality
is exceeding the customer expectations. When, where and how Gap Analysis Model
the service is delivered also has a bearing on the service quality
perceived by the customer. Gap analysis model attempts to identify the aspects of service
quality and the areas where service quality can be hampered. The
There are two models that make the process of operations in gap analysis model presents 5 gaps that affect and reduce the
the service sector possible thereby giving great results. These perceived quality of service.
models are termed as ‘GAP Analysis’ and ‘The Augmented Service
Gap 1: Between the customer’s expectation and management’s
Offering model.’
perception.
GAP analysis is based on the evaluation of real performance with Gap 2: Between management’s perception and service quality
anticipated performance. A company will fall behind its potential specifications.
in case it fails to make optimum use of resources or overlooks Gap 3: Between the specified quality of service and deliverable
investment in capital or technology. This concept is very similar services.
to the situation where an economy’s level of productivity is under Gap 4: Between delivery of service and external communication
the possible production levels. to customers.
Gap 5: Between estimated service based on expectations and
Therefore, while studying the importance of operations in the
service. based on various perceptions.
service sector, it is essential to appreciate the concept of GAP
Analysis.
1. Accessibility
The accessibility of a service depends on the following factors:
• Quality of service staff
• Quantity of service staff
• Opening and closing hours, schedules and efficiency of

performance
• Tangible aspects of service outlets and premises
• Equipment and stationary documents
2. Interaction with the Service Organization
This includes communication between the customer and service

Figure 13.1 Gap Analysis Model
provider, contact between the service environment and customers
and physical resources, interactions between the customer and
The Augmented Service Offering Model
the systems involved in proving the service and interactions
The concept of an augmented service offering integrates three between customers. These interactions may take place before,
elements of the service process. during or after the service process.
3. Customer Participation
Summary
Customer participation takes into account the
customer as a factor that contributes service Operations managers in the service sector make many decisions that are similar to
process in a qualitative manner and out-come those made by manufacturers. They decide which services to offer, how to provide
and thus, the perception of customers towards these services, where to locate their businesses, what their facilities will look like
the quality of the service. and what the demand will be for their services.
Service providers that produce goods can adopt either a make-to-order approach
Just like benchmarking, a GAP analysis can
(in which products are made to customer satisfaction) or make-to-stock approach
be used to compare processes performed at
other places. For the analysis, each process is (in which products are made for inventory) for manufacturing them.
compared step by step and the differences are

noted down, then each deviation is analyzed Review Questions
carefully to determine, if any change of process 1. Explain the term Services.
is required. The result can lead to three possible
conclusions: 2. What are the characteristics of services?
3. Enlist various types of services

• Continuance of the current process
4. Explain the service dimensions.
• Completely changing to another process
5. Explain the service gap analysis model.
• Fusion of best aspects of each process
Unit-14
Inventory Control
Learning Objectives
• Understand the concept of inventory control
• Demonstrate the knowledge of characteristics

of inventory
• Appreciate the benefits of holding inventory
• Learn about the risks of holding inventories
• Analyze the objectives of inventory

management
• Discuss the factors that affect the process of

inventory control
• Explain the application of Economic Order

Quantity in inventory control
Overview organization. The quantity of raw material required depends
on two factors that are the rate of consumption and time for
Inventory serves a link to fill the gap between production and replenishment.
distribution process and as such ensures smooth functioning • Work in Progress: Work in process is that stage of production
of organizational activities. There is a time lag involved in the wherein the raw materials have been consumed in the process of
realization of want, and its accomplishment, the greater is this production but have not yet taken the shape of finished goods.
time lag, higher is the need for inventory. It is very crucial to
• Consumables: These are supplementary material or catalysts,
have control over the level of inventories as a large part of an
which are not required in the production as a raw material, but
organization’s working capital is invested in inventories. The
they are essential for smoothening of the production process.
main purpose of inventory control is to ensure enough stocks to
meet periodic fluctuations in demand and if required clear out • Finished Goods: When the production process is completed,
the inventory levels. Generally, Inventory implies stock of finished finished goods are obtained. It is necessary for companies to
products only, but in certain cases, it may also include raw have adequate stock of finished goods to cater to the market
materials, work in process and store materials. requirements smoothly.
• Spares: Spares are also an important part of inventory and

Characteristics of Inventory ensure smooth functioning of machines and equipment
necessary for production. Stocking policies for spares vary
• Raw Material: Raw material is essential to carry out the
between industries.
production activities and constitute a major input for the
There are certain benefits of holding inventories. Let us discuss these benefits in detail.
Purpose/Benefits of Holding Inventors
There are three chief objectives of holding inventories, namely:
Risk and Costs of Holding Inventors • Capital Costs: To maintain adequate inventory levels, it is
necessary for the firm to invest a significant portion of their
The holding of inventories involves blocking of a firm’s funds and financial resources. This can lead to cash crunch for daily
incurrence of capital and other costs and exposure to certain operations, and the firm must resort to arrange for additional
risks. Different costs and risks involved in holding inventories funds, either from own sources or from external sources.
have been mentioned below: • Cost of Ordering: Every time an order is placed with the
suppliers, a certain cost is involved, it could be in the form
of paper-work or communication with the supplier. It is a periods can result in deterioration in the quality of inventories.
necessary cost of maintaining inventory levels. Total annual
cost of ordering can be obtained by cost per order multiplied Objectives of Inventory Management
with a number of orders placed.
Following are the major objectives of inventory management:
• Cost of Stock-outs: Stock-out is a situation which occurs
when the firm does not have enough inventory for a product, • Ensure smooth flow of goods into the market, so that customer
but there is a demand for it from the customers. There is a requirements are met and there is no loss of sales.
significant cost of stock-outs because it results in loss of
• Control of inventory levels and short-term and long-term
orders or loss of customers.
planning.
• Risk of Price Decline: In uncertain market situations there
• Perpetual inventory control to ensure that material is reflected
is an inherent risk of reduction in prices of inventories. This
in the stock registers tally with the actual material present in
reduction may be due to market conditions, stiff competition
the stores.
or increased supplies in the market.
• Avoid overstocking and stock-out costs.
• Risk of Obsolescence: There are certain risks involved in case
of technology related items such as obsolescence due to • Minimize losses through wastage, pilferage and damages.
technological changes, changes in consumer tastes, etc. • Ensure optimum investment in inventories as per sales and
• Risk of deterioration in Quality: Storing materials for longer operational activities
• To keep control material cost so that overall reduction in costs
of production can be achieved.
• Make sure that optimum quality goods at optimum prices.
When inventory processes are being managed a wide variety of

factors are to be considered including both internal as well as
external factors. It is very important to keep control of these factors
as they can have a huge impact on inventory management. Let’s
have a look at the major factors that affect inventory processes:
have been placed. Lead time varies according to industries as
Factors Affecting Inventory well as nature of the product. Any changes in lead times require
immediate changes in inventory management.
Financial Factors: These are factors such as the cost of borrowing
money or cost of maintaining inventories that have a significant Product Type: Due consideration must be given to types of
impact on inventory management. products that are required for production. Some products have
a short shelf life and should be ordered in limited quantities only.
Suppliers: Trustworthy suppliers are required for planning to
spend on materials and managing inventories efficiently. Economic order quantity holds a lot of importance in inventory
management as it defines that quantity at which holding and
Lead Time: It is the time taken for material to arrive after orders ordering costs are minimized.
Economic Order Quantity
In order to get better control of inventory, a model has been

developed to find out the desired or optimum quantity or levels
of materials to be maintained and purchased at the time of every
purchase. The model determines the required working stock level
to be maintained. Every time an order is placed, the company
incurs several costs. In order to minimize the costs of purchasing
or ordering cost, the company can buy in bulk quantity to meet
the complete need for the due course year at one time, resulting
into only the cost of one order.
Number of orders D/Q Total Cost = SD / Q + IC Q / 2

Q+0 Where SD = set up cost * Demand IC =carrying cost
Average inventory
2
d TC / D Q = –SD / Q 2 + IC / 2 Annual total demand = 10,000 units
TC is minimum when d TC / d Q = 0 Ordering cost = 500 per order

2 Holding cost = 10%
–SD / Q + IC / 2 = 0 Unit cost = 200
OR Q* = 2DS / IC R = 0
Lead time = 3 days
If lead time is L Working days in a year = 250
R = buffer stock + lead time demand
EOQ = √2SD/iC
= 0 + Dl
= L dl = √2 × 500 × 10000 / 0.1 × 200
= 707
Hence, EOQ can be considered as an important tool for Daily demand = 10000 / 250 = 40 ROP = L dl = 3 × 40 = 120
management to minimize the cost of inventory and the amount
of cash tied up in the inventory balance.
Example 14.1
Calculate Economic Order Quantity (EOQ) and Reorder

point for the following data
Summary Review Questions a. Calculate EOQ.
Inventory control is an 1. Define inventory. What are the objectives of b. If the EOQ has to be reduced to 200, how
important aspect of the growth inventory? much the ordering cost per order has to be
of the company as it ensures reduced?
2. What are the characteristics of inventory?
smooth functioning of company
8. An online boutique store sells 1,000 branded
3. Inventory is a necessary evil. Comment.
operations. Inventory control is
kurtas and pants per month and maintains the
necessary to ensure that the 4. What are the pros and cons of holding
inventory turnover rate at 15 per year. Once a
stocks of all the products are inventory?
customer places an order, the shopped Kurta/
maintained at optimum levels.
5. What are the few factors that affect the process Pants will be shipped directly from a warehouse
In operations management, to customer. Each warehouse worker can ship
of inventory control?
logistics and supply chain 2 Kurtas/Pants per hour and works 8 hours /
6. What is economic order quantity?
management, software day, 250days / year.
programmes are necessary 7. Following is data for an inventory item.
a) What is the average time a Kurta / Pants
for inventory management.
Monthly demand: 1,000 units
spends at the warehouse?
Inventory control also helps Ordering cost: Rs. 4,000 per order
in reduction of overall costs Cost of unit: Rs. 500 b) How many workers are required for
without hurting sales. Holding cost: 20% shipping?
Unit-15
Case Studies
1. Azibuck is a manufacturing firm that uses approximately
4,500 pounds of the colouring material in a year. Presently,
the firm purchases 250 pounds per order and pays $2 per
pound. The supplier has just announced that orders of 1,200
pounds or more will be filled at a price of $2 per pound.
The manufacturing firm incurs a cost of $100 each time it
submits an order and assigns an annual holding cost of 17
percent of the purchase price per pound.
a. Determine the order size that will minimize the total

cost.
b. If the supplier had offered the discount at 1,500

pounds instead of 1,200 pounds, what order size would
minimize the total cost?
2. A lab orders a variety of chemicals from the same supplier

Daily usage of the chemical is approximately normal with
in every 60 days. Lead time is six days. The manager of the
a mean of 15.2 ml per day and a standard deviation of 1.8
lab must determine how much of these chemicals to order.
ml per day. The desired service level for this chemical is 95
A check of stock revealed that twelve 25 ml jars are on hand.
percent.
a. How many jars of the chemicals should be ordered? C categories according to dollar usage. After reviewing your
classification scheme, suppose the manager decides to
b. What is the average amount of safety stock of the
place item P05 into the A category. What are some possible
chemical?
explanations for this decision?
3. The manager of an automobile repair shop hopes to achieve

Item Usage Unit
a better allocation of inventory control efforts by adopting
an A-B-C approach to inventory control. Given the monthly K34 90 $1,400
usages in the following table, classify the items in A, B, and K35 500 12
K36 30 700
M10 100 20
M20 10 1,020
Z45 80 140
F14 1,500 10
F95 300 20
F65 4,800 5
Unit-16
Supply Chain Management
Learning Objectives
• Understand the concept of supply chain

management
• Identify the objectives of supply chain

management
• Explain the concept of purchasing cycle
• Understand the role of logistics in supply chain

management
• Evaluate the performance of a supply chain

management
• Identify the challenges in supply chain

management
Overview has forced businesses to invest in supply chain management. This
investment from businesses, when combined with upgradation
Supply Chains have been brought to attention because of stiff of communication and transportation technologies, has led to
competition in the global markets, the introduction of products a continuous evolution of supply chain and techniques for its
with short life cycles and increased customer expectation. This efficient management.
Interactions going on at various levels of the supply chain must be Definition

taken into account while formulating supply chain management
strategies to help with reduction of costs and improvement of “A supply chain consists of all parties involved, directly or indirectly,
service levels. in fulfilling the customer request. The supply chain includes not
only the manufacturer and suppliers, but also transporters, ware- development, marketing, operations, distribution, finance, and
houses, retailers, and even customers themselves. Within each customer service.” Chopra and Meindl (2012).
organization, such as a manufacturer, the supply chain includes
all functions involved in receiving and filling a customer request. Refer to Figure16.1, a mini case that describes the role of supply
These functions include, but are not limited to, new product chain in the business.
Figure 16.1 Role of Supply Chain

Objectives of Supply Chain Management Elements of Supply Chain
It is the primary objective of supply chain management to control The elements of a supply chain are a supplier, manufacturer,
the total cost of the supply chain to meet given demands. This distributor, retailer and customer. The flow of goods in a
total cost may be comprised of a number of terms including: supply chain occurs when a manufacturer sells his goods to
the distributors who further sell the goods to the retailers and
• Raw material and other acquisition costs customers. The distributor distributes the goods to various
• In-bound transportation costs retailers. Retailers directly connect with customers and provide
the goods to them for a cost. The flow of information and the flow
• Facility investment costs
of funds occur inversely from the customer to the supplier.
• Direct and indirect manufacturing costs
• Direct and indirect distribution center costs
• Inventory holding costs
• Inter-facility transportation costs
• Outbound transportation costs
These objectives can be attained only when a supply chain constitutes

the major elements in it. There are five elements in a supply chain.
Figure 16.2 Elements of Supply Chain
In the process of the supply chain, the purchasing cycle plays an The Purchasing Cycle
important role. It involves the purchase of raw materials for an
organization. The purchasing cycle starts with a request from within the
organization to purchase material, machines, equipment,
suppliers or other items from outside the organization and the
cycle ends when the purchasing department is notified that a shipment has been received in satisfactory condition.
Figure 16.3 explains the purchasing cycle steps.
Figure 16.3 The Purchasing Cycle
1. Receiving the requisition: The requisition includes the goods at minimum costs. In case no existing supplier meets
following: the criteria, it is advisable to look out for new ones. Vendor
• A description of the item or material required ratings may be referred with respect to selecting vendors or
perhaps rating information can be relayed to the vendor for
• The quantity and quality needed
upgrading future performance.
• The desired delivery schedules
3. Placing the order: If the order value is high, like in case of
• The team/department(name) requesting the purchase capital equipment, vendors may be asked to join a bidding
2. Selecting a supplier: It is the duty of purchase department process in which personnel from operations and designs
to shortlist those suppliers who can supply the required will also join in for the negotiation process.
• Large Volume items which are required on a continuous guidelines to suppliers to give them enough time to manage
basis shall be procured through blanket purchase their schedules.
orders, which involves annual negotiations of prices and 5. Receiving orders: Team responsible for receipt of orders
deliveries scheduled throughout the year periodically. should thoroughly check incoming shipments regarding
• Moderate Volume items can either be covered through quality and quantity. If the goods received are in order,
blanket purchase orders or small orders on an individual proper notification should be sent to purchase, accounts
basis, as suitable to the enterprise. and operations department. In case the goods are not as
• Small Volume items are handled directly between the per specifications they shall be returned to the suppliers.
unit requiring it and the supplier. But there should be However, the elements in a supply chain and the purchase cycle
some controlling mechanism in place to avoid any are all possible due to a common aspect of managing them
unnecessary purchases. smoothly. Logistics is such an aspect of the supply chain that
4. Monitoring orders: It is necessary to ensure regular follow- manages the flow of materials in a production area and layout.
up of orders especially in case of orders requiring longer

lead times so that planning could be done for potential
Logistics in Supply Chain Management
delays and information can be passed on to operating units
Logistics is the aspect of managing the flow of materials within
in time. It is necessary for purchase department to relay the
a production area and layout including monitoring, facilitating,
messages regarding any changes in quantities or delivery
tracking and managing all aspects of movement of incoming and
outgoing consignments of various goods, raw material and other • Incoming and outgoing shipments traffic management:
things. It refers to supervising the shipments and inspecting and
managing the inflow and outflow of various goods.
• Movement within a facility:
The traffic management handles:
This kind of movement it carried out in various ways viz.:
- schedules
- from incoming vehicles to receiving.
- shipping methods
- from the last operation to the final storage.
- shipping times
- from storage to the point of use.
- from shipping to outgoing vehicles. Factors Affecting the Choice of Shipping

Methods
- from one work center to the next, or to temporary storage.
- from receiving to storage. • Costs of various alternatives
- from storage to packaging/shipping. • Government regulations
Coordination of movement of materials must take place to • The need of organization relative to the quantity to be
arrive at the appropriate destinations in desired or required shipped and time to market targets
times. Care must be taken to ensure that the items are not • Potential shipping delays/disruptions
lost, stolen or damaged during transportation.
Evaluating Shipping Alternatives • Use in manufacturing
1. Tracking the progress of jobs as they move through the

This decision compares the cost saving by using the slower production process
alternatives for movement with the cost incurred as a result of
2. Providing processing instructions to operators
slow alternatives.
3. Updating inventory records
Incremental holding cost = H (demand/D) Where,
H = Annual holding cost for a product 4. Monitoring quality losses
D = Time in days 5. Monitoring productivity
6. Enabling automatic sorting and packing

Bar Coding
Electronic Data Exchange
Bar Codes are the patterns of alternating wide and narrow black
lines and white spaces, and numbers and symbols that provide
Electronic data exchange is a computer-based system for sharing
specific information about the product carrying the Bar Code.
of data within various functions of the firm automatically on the
• Use in distribution basis of pre-decided data flow and data processing.
1. To track items in warehouses and enroute to customers

The benefits of such systems include:
2. To determine the location of any item in the system
• Increased productivity
and its status
• Elimination of paperwork • Unexpected disruption in transportation
• Reduced lead-time through profit

Evaluation of Supply Chain Performance
• Facilitation of just in time systems
• Electronic transfer of funds done by departments • Storage Space Utilization: It refers to the average amount
of storage capacity used over a period of time. It helps the
• Improved control of operations
managers with an assessment of the fact, if there is any
• Reduced non-skilled labour need to change the layout of the storage area and identify
• Increased accuracy obsolete products that should be junked.
• Order Fill Rate: Describes the orders that can be filled on the
Problems in Just in Time Deliveries basis of inventory at hand in terms of percentage. It helps
in determining the balance of the inventory and forecasting
Just in time or JIT is a methodology aimed primarily at reducing
the sales figures that could be achieved with the present
flow times within production system as well as response times
inventory.
from suppliers and to customers.
• On Time Delivery/Shipments: On time delivery and on time
• Frequent deliveries of small shipments shipments are very important for every business as they
• Increased traffic ensure that the material is being received on time and are
being delivered as per schedule.
• Increase in transportation cost
• Perfect order metric: It is a higher-level performance Customer Preferences
measure that is formed by a combination of performance
By now we already know that global supply chains are very complex.
markers and is essential to this list.
This includes product characteristics that are rapidly changing,
Challenges in Supply Chain Management where the challenge is even more. As soon as a new product is
announced, customers start pressing the companies to up the
The challenges in supply chain management are as follows: ante and come up with the next big thing. This is where innovation
comes into the picture as it helps the companies retain competitive
Globalization advantage. But it also poses a serious challenge because, in order
One of the greatest difficulties in the supply chain is the manner to improve upon a product, companies need to redesign their supply
by which to limit the cost of inventory network. To fulfill the network and fulfill market demand in a customer friendly way.
expectations of customers, firms have restored their assembling
to minimal effort countries over the globe in order to diminish the
Market Growth
immediate and backhanded expenses and to cut duties. However, The ever-going pursuit to acquire new customers poses a serious
having worldwide providers contributes altogether to the many- challenge to the supply chain. It is important to keep the cost of
sided quality that originates from extended delivery lead times. development of a product low, so the companies look to expand
Customers not only want low priced goods, but they also want that into new markets to grow their market share and expand their
those goods are delivered on time. revenue. Nowadays, companies all around the world are expected
to expand their network in the home as well as overseas market.
Summary
Importance of product design has assumed great importance in present times due to globalization and
ease of access to alternative products. As a result, the markets are limited, but the expansion plans of
companies are on the rise. In such a situation pricing decisions takes a back seat and product design
plays the role of a differentiator by adding attractive features to push the demand further.
Review Questions
1. Explain the term ‘Supply Chain Management.’
2. What is logistics?
3. What are the factors affecting the choice of shipping methods?
4. What is bar-coding? What is its application in distribution and manufacturing?
5. What are the factors for evaluation of supply chain performance?

Unit-17
Inspection
Learning Objectives
• Comprehend the concept of sample inspection
• Understand the aspects of sampling inspection
• Analyze the process of sample inspection
• Evaluate the importance of sampling

inspection
• Know the ample size and frequency of

inspection
• Discuss the advantages of sampling inspection
• Explain the concept of acceptance sampling

and sample plan
Overview In Industrial usage, a random sample is drawn from a big lot of
finished goods or work in process. If the defects in the sample are
Sampling inspection is a tool to analyze if a part of the sample above the specified limit, then the entire lot is rejected.
size (Lot) should be accepted or rejected depending on the number
of defective parts found in a sample drawn from that lot. In case Inspection establishes the level to which the product meets
the defective part is below the specified limit, the lot is accepted quality specifications. The method of sampling involves certain
otherwise rejected. aspects which make the process of inspecting easy and effective.
Process of Sample Inspection 1. Raw material
2. In process
In a production process, products are inspected at three stages:
3. Finished product
The purpose of inspecting raw materials before production is
to make sure that inputs are of acceptable quality. The reason
for inspection during production is to check if the process of
converting inputs to outputs conforms to the estimations made
earlier. The purpose of inspecting conformance of finished
product is to make a final verification of product quality before
delivering products to customers.
As an Operations Manager, it is very important to know the

importance of inspecting samples. Sample inspection plays an
important role in the production process. • Economical in terms of time and cost.
Importance of Sample Inspection • As all units of a lot are to be checked before dispatch, the
quality inspectors can be fatigued by the repetitive work
The importance of sample inspection can be understood by the and might end up passing some defective pieces, but with
following points. sample selection, those errors could be identified as there is a
thorough inspection.
• It involves inspection of lesser quantity to derive at a decision
• As only a few samples are checked, there is no harm caused
about the quality of a product.
to rest of the units of the lot.
• In a few cases, checking the quality of the product involves 1. Raw materials
destroying the product during tests or in case of certain 2. In the processing of products
products chemical analysis is required, it is not possible to
3. Finished products
employ 100% inspection.
4. Spares and consumables
Sample Size and Frequency of Inspection
Self-inspection and a Quality Function
It depends on the inspection cost and the cost of any flaws
processed further. The sample size is an important feature of The following factors come under Self-inspection:
any empirical study in which the goal is to make inferences about Decisions are faster
a population from a sample. In practice, the sample size used in a
• Workers are responsible for producing a quality product
study is determined based on the expense of data collection and
the need to have sufficient statistical power. • Lower cost
These are the factors responsible for Quality function:

Stages of Inspection
• Separate specialized function
In manufacturing, inspection is usually carried out at the following • More systematic inspection
stages: • Better quality and fewer defects
• Incurs additional costs

Advantages of Sampling Inspection decision if a lot is to accepted or rejected on the basis of a sample
drawn from the lot. The purpose of this technique is to evaluate
There are several advantages of sampling inspection. They are the quality compliance of the entire lot. Lots that meet quality
mentioned as: standards are passed or accepted and those that do not meet the
quality standards are rejected.
• Sampling is the inspection of a relatively smaller quantity that
requires less effort to ensure quality for a required degree of Acceptance sampling becomes necessary when:
certainty.
• Large volumes of products need to be inspected.
• This method is relatively less expensive and consumes less
time. • The cost of inspection is high.
• Since only a sample is being inspected, all the remaining units • Destructive testing is involved.
of the lot are untouched and are not affected in any way.
While studying acceptance sampling, it is also important to study
• Rejection of a complete lot based on a sample creates positive about sampling plan.
pressure for betterment in quality and control processes.
Sampling Plan
Acceptance Sampling
A sampling plan is the basis of sampling inspection. Sampling
Acceptance sampling is a form of inspection which involves the
plans specify the lot size (N), the sample size (n), and the
acceptance/rejection criteria. e.g., If there are 1 lakh customers, it is
not possible to conduct an interview with 1 lakh customers. Instead, Summary
it will be required to take a sample population of 1000 customers i.e. An inspection is, most generally, an organized examination or
1% of your total population. This sample gives primary data and this formal evaluation exercise. It is applicable in various fields,
is assumed to suit 99% of the customers. Naturally, the 1% of the such as the process of manufacturing, business, government
people interviewed need to be important to the company. Hence, the administration, road vehicles, engineering and mechanics,
need for a sampling plan arises. medical sciences, military, railroad, real estate, software
engineering and so on.
Acceptable Quality Level (AQL)
Review Questions
AQL defines the difference between a good and a bad lot. An AQL of 2%
1. Explain the stages in production where inspection is required.
means that the probability of a lot, with more than 2% defectives is being
accepted and a lot with up to 2% defectives getting rejected is very low. 2. Explain the process of sample inspection?
3. What are the various advantages of sampling inspection?

Lot Tolerance Percent Defective (LTPD)
4. What is the importance of sample inspection?
LTPD is the highest limit of the defective percentage that the consumer
5. What do you understand by sampling plan?
is willing to accept. Although customers want a quality equal to AQL
but are willing to accept up to LTPD sometimes. 6. Explain the concept of OC Curve.
Unit-18
Statistical Quality Control
Learning Objectives
• Understand the concept of statistical control
• Identify the steps in the control process
• Comprehend the tools of statistical quality

control
• Recognize the objectives of the statistical

quality control
• Know the applications of statistical quality

control
• Analyze the use of statistics in process control
• Apply variable and attribute control charts

Overview
Statistical Quality Control (SQC) is used for analysis of quality
related problems and their solution through a set of statistical
tools by professionals for monitoring and maintaining the quality
of products and services. Quality control is checking the product at
any stage to decide its conformance to acceptable standards and
segregating the good from bad. Quality assurance is ensuring that

defectives are not produced by controlling the process. It involves
process control in place of quality control.
Steps in the Control Process
The steps in the control process are as follows:

Tools of Statistical Process Control Objective of Statistical Quality Control
All SQC tools are really helpful in evaluating the service quality and Quality Control is a significant tool for every company, comprising
it uses diverse tools for analysis of the quality problem. of the following parameters:
1. Descriptive Statistics: These are used to explain quality • Service Quality

characteristics and relationships and includes statistics • Employee Participation
such as the mean, standard deviation, range, etc.
• Management leadership,
2. Statistical Process Control (SPC): It answers the question if
• Continuous improvement
a process is functioning properly or not. It involves checking
a random sample of output and decide if the process is • Prompt response
producing products with all the required specifications that • Fact-based actions
fall within a specified range.
• Management Commitment and
3. Acceptance Sampling: This process involves random
• Quality driven culture.
inspection of a small lot of goods and taking a decision if
the lot is acceptable or not based on the results. The primary objectives of the quality control module are to control:
• Receiving Materials
• Rejecting Materials
• Customers either directly or indirectly, to buyer requirements and gratification,
• Claims as well as to the management.
• Providers Application of Statistical Process Control

• Evaluations (SPC)
The development and use of performance pointers are associated
There are three main phases of activity for the application of SPC:
Control Charts two groups, Variables, and Attributes. Control chart for variables
monitors measurable characteristics with a continuum of values
Statistical Process Control commonly makes use of control charts, such as weight, height or volume, etc.
to measure any characteristic of a product such as weigh of a
packet of chips, number of cigarettes in a pack. The characteristics A control chart is a graphical technique that records process variation
that can be measured using control charts can be divided into and gives a signal when the variation exceeds natural limits.
The General Layout of a Control Chart Control Chart for Attributes
The following are the types of control charts for attributes:
P-chart
P-charts help with measurement of defective proportion from a

sample. The calculation of center line along with the upper and
lower control limits is like computation in other types of control
charts. Centre line is obtained by taking random observation
There are certain attributes and variables for which control charts samples and computing the value of p across all samples and it
are prepared: reflects the average defective proportion of the population.
• Variables: A product property that can be measured and C-chart

possesses a continuum of values. e.g., area, volume, density,
C-charts are employed for calculating a number of defects per unit
etc.
such as meals returned in a restaurant, bacteria per ml of water,
• Attributes: A product characteristic with a distinct value and etc.
non-countable. e.g., color, weight.
Summary
Using statistical methods for monitoring and controlling a process, Statistical Process Control (SPC) is an efficient method for
quality control. It lowers wastage percentage by ensuring efficient operation of a process and more specification compliant
products being manufactured. SPC can be applied to any process where specification compliant products can be measured. SPC
makes use of certain tools such as control charts, run charts, focus on improvement and design of experiments.
Review Questions
1. Differentiate between quality control and quality assurance.
2. What is a control chart? What are the types of control charts?
3. Differentiate between random variation and assignable variation.
4. Explain the characteristics of the normal distribution.
5. Explain the method of determining control limits for p-chart and c-chart.
Unit-19
Maintenance
Learning Objectives
• Understand the importance of maintenance
• Identify the results of breakdowns
• Understand the types and importance of

maintenance
• Explain the approaches used to deal with

breakdowns
Overview • Implementing effective maintenance into production is an
investment, not a limiting constraint.
Maintenance is the set of those activities that keep facilities and
equipment in normal order of working and making necessary Results of Breakdowns
repairs when breakdowns occur so that the process can run
The breakdowns in the production process lead to the following:
without any hindrance or disruptions.
• Reduced production and delayed deliveries

Importance of Maintenance
• The increased cost of production
Let us now look at the importance of maintenance.
• There are quality issues; product may be defective
• Effective maintenance can improve profits and decrease cost. • Adverse impact on product quality
• Efficient maintenance adds value through better utilization of • Safety threats for workers
resources.
Types of Maintenance
• Maintenance should be considered as an organizational
function that functions in parallel with production. The different types of maintenance are as follows:
• Maintenance significantly affects multiple aspects of
production costs. • Breakdown Maintenance
It is the repair of equipment in the event of a failure while in It is the periodic check of the equipment as per a predetermined
operation. schedule. The preventive maintenance reduces the chances of
failures of equipment in the plant.
• Preventive Maintenance
• Predictive Maintenance Approaches Used to Deal with Breakdowns

Predictive maintenance identifies the need for machine repair on
• Spare equipment to ensure continued production in the event
the basis of signals before the damage gets bigger. It uses historical
of equipment failure
information and technical data analysis to predict when equipment
or part is about to fail. If failures are estimated in a predictive model, • Inventories of spare parts
there will be more effective preventive maintenance. • Operators skilled in minor repairs of the equipment
Some organizations have workers perform preventive maintenance This approach is consistent with Just in Time (JIT) systems and
on the machines they work on, rather than use separate lean operations, where employees are given greater responsibility
maintenance personnel for that task. This is called total productive for quality, productivity and the general functioning of the system.
maintenance. JIT is a concept that believes the work to be done just before the
due time to avoid any undue gap between tasks. There are a variety
of derived concepts like JIT purchasing, JIT assembling and
execution are associated to remove the gaps between a variety of
tasks within one function and between various functions.
The risk of a breakdown can be reduced by an effective preventive

maintenance program. But sometimes breakdowns still occur.
Organizations with good preventive practices have a lesser need
for breakdown programs. However, organizations that rely less on
preventive maintenance have a greater need for effective ways of
dealing with breakdowns.
In preventive maintenance, management cannot schedule break-

downs but must deal with them on an irregular basis, whenever
they occur.
The main approaches used to deal with breakdowns are the could be equipment that is the focal point of a system e.g., printing
following: presses for a newspaper, or vital operating parts of a car, such as
brakes, steering, transmission, ignition, and engine. At the other
• Standby or backup equipment that can be quickly pressed extreme, it could be equipment that is seldom used, because it
into service. does not perform an important function in the system and also
• Inventories of spare parts that can be installed as needed, equipment for which substitutes are readily available.
thereby avoiding lead times involved in ordering parts and
buffer inventories, so that other equipment will be less likely
to be affected by short-term downtime of a particular piece of
equipment.
• Operators who are able to perform at least minor repairs on

their equipment.
• Repair people who are well trained and readily available to

diagnose and correct problems with equipment.
The degree to which an organization pursues any or all of these

approaches depends on how important a particular piece of
equipment is to the overall operations system. At one extreme, it
Summary
Maintenance is a system of maintaining and improving the integrity of production and quality systems through
the machines, equipment, processes and employees that add business value to an organization. It focuses on
keeping all equipment in top working condition to avoid breakdowns and delays in manufacturing processes.
It is an important factor that is required in several fields, such as maintenance of an organism, aircraft
maintenance, car maintenance, railroad track maintenance, software maintenance and property maintenance.
Review Questions
1. What is maintenance? What are the reasons for maintenance?
2. What are the adverse impacts of machine breakdowns?
3. Differentiate between predictive and preventive maintenance.
4. What are the different strategies to deal with breakdowns?
5. What are the considerations in deciding preventive maintenance schedule?

Unit-20
Case Study
William E. Mitchell, President and CEO of Arrow Electronics offered find out the scope for improvement.
10 guidelines regarding the reduction of product quality issues
5. Sourcing should only be done from companies willing to
and associated risks in an offshore supply chain. Although the
provide a written guarantee for their products.
guidelines were aimed at electronics suppliers, they did offer a
great beginning point for a lot of companies striving for reduction 6. To avoid the risk of counterfeit products caution should
of risk and probable quality problems. be exercised while buying from companies not having
1. Electronics should be sourced from companies with a well-

established reputation and having robust internal controls.
2. Before getting into business with any potential supply chain

partners, carry out a comprehensive background check
including trade references and business history.
3. In order to check quality control systems installed by supply

chain partners, site inspections should be conducted.
4. Communications with the supply chain partners shall be

continually engaged with along with ongoing performance
reviews, to check performance against pre-set goals and
franchised relationships.
Review Questions
7. Unusually low prices are a red flag.
1. What are the challenges before Mr. Mitchell for maintaining
8. Always seek supply chain partners with ISO or other globally
the qualitative parameters?
recognized quality certifications.
2. What would be your suggestion to Mr. Mitchell?
9. Relationships shall be established with third-party
organizations.
10. Convert quality into measurable and well-defined targets.

Communicate them clearly with the supply chain partners
as well as with company employees. As the Supply Chain
Digest notes “to do this right will involve greater costs,
reducing the relative price advantage of offshore strategies
to a degree, and certainly requiring companies to build a
substantial infrastructure to develop and maintain these
monitoring programs.”
Case Study 2 defects also have weight as an important parameter.
Alpha Chemicals is in the business of manufacturing welding Mr. Rohit Pant, the quality manager, was assigned the task of
accessories since 1992. The company is quite cautious about the meeting the customer and resolving the issue. During the meeting,
quality of its products and views any quality problem very seriously. the client’s management informed Mr. Rohit of the high variation
in the weight of units. This variation was causing a lot of trouble in
In August 2015, a major client of alpha chemicals called the production at the client’s plant. Mr. Rohit assured to look into the
representative of the company for discussing a serious quality matter and get back soon with the solution. As a first step, the data
issue. The client was a major client for welding electrodes of weights of products for the last 15 days i.e., from 1st July to 15th
manufactured by the company. The electrodes apart from physical July, was compiled as follows:
Date Weight
1 2 3 4 5
1 2.4 2.2 2.2 2.1 2.2
2 2.3 2.1 2.1 2.2 2.1
3 2.1 2.3 2.1 2.3 2.4
4 2.3 2.2 2.1 2.4 2.4
5 2.4 2.5 2.3 2.2 2.4
6 2.2 2.2 2.1 2.2 2.5
7 2.3 2.1 2.4 2.5 2.2
8 2.4 2.3 2.4 2.3 2.3
9 2.4 2.4 2.2 2.1 2.5
10 2.1 2.2 2.5 2.3 2.3
11 2.5 2.4 2.1 2.2 2.1
12 2.2 2.2 2.2 2.4 2.2
13 2.1 2.1 2.3 2.4 2.4
14 2.3 2.3 2.5 2.3 2.5
15 2.3 2.4 2.2 2.2 2.1
Review Questions
1. What is your analysis of the weight problem?
2. Construct a suitable control chart.
3. What procedures would you recommend to maintain proper

quality control?
Unit-21
Materials Management
Learning Objectives
• Understand the concept of materials

management
• Explain the materials management cycle
• Analyze the objectives of materials

management
• Comprehend the tasks of materials

management
• Discuss the concept of outsourcing
• Appreciate the vendor rating and evaluation
• Know the concept of vendor management

Overview planning, sourcing, purchasing, moving, storing and controlling
materials in an optimum manner to efficiently provide a service
The material can be defined as a tangible object that goes into to the consumers at lowest possible cost.
the making of a physical object.
Materials management process involves short-range decisions about
Materials management is responsible for the coordination of supplies, inventories production levels, schedules and distribution.
Materials Management Cycle Acquisition of Raw Materials: This involves acquiring or buying
raw materials to be used for the manufacturing of finished
The materials management cycle involves purchasing raw mate- products. e.g., A cloth manufacturer would acquire raw materials
rials, storing them for future, converting them finished goods and such as fabric, threads, dye, etc.
then distributing the finished goods to the end users.
• Storage: Once the raw materials are purchased, they need
Let us have a look at the materials management cycle in Figure to be stored in a manner that it does not get damaged until
21.1. the time of production. Example, an ice-cream manufacturer
would buy fruits in advance. So, it will be important for him to
store and refrigerate them such that they do not get destroyed.
• Conversion: This involves the actual process of production

wherein goods are transformed from raw materials to finished
products.
• Storage: Once the finished goods are manufactured, it is

important that the manufacturer stores and packs them
properly until they are delivered to the end user.
Figure 21.1 Material Management Cycle • Distributor: The manufacturer is ought to find distributors
who would deliver the goods to the retailers who in turn would
deliver the finished goods to end users or customers. Tasks of Materials Management
Objectives of Materials Management The various tasks in materials management are listed below:
The main objectives of material management are:
1. Minimizing material costs
2. Reducing the cost of purchasing, receiving, logistics and

storage of materials in an efficient way
3. Using simplification, standardization, value analysis, import

substitution and related aspects to cut down the costs
4. Maintaining continuous supply at reasonable and durable

rates by identifying new sources of supply and establishing
an amicable relation with the suppliers
5. Developing and maintaining high inventory turnover ratios

Outsourcing
by reducing more investments into inventories
Outsourcing refers to acquiring the products or services from
external sources rather than producing in-house.
Importance of Outsourcing Vendor Rating and Evaluation
• External suppliers provide materials better, cheaper and more It is necessary that supplies are obtained from the vendor after
efficiently because of their expertise and economy of scale. deep evaluation and recognizing their overall capabilities. There
are two different scenarios in front of a buyer.
• Expertise and knowledge of vendor becomes available to the
Organization.
1. The performance of the vendor has to be evaluated before
• Production of the part may be restricted by a patent. the delivery. This concept is known as vendor evaluation.
• Outsourcing offers added flexibility. 2. The performance should be evaluated after the delivery of
the products. This is known as vendor rating.
• The organization can focus on the core activity.
Risks in Outsourcing
• The control on production and quality is lost.
• Greater dependency on suppliers may lead to production plan

Disruptions.
Factors for Vendor Evaluation
Vendor Development • Communication of engineering changes
• Developing methods for detecting deviations from standard

Vendor development is one of the popular techniques of strategic
promptly
sourcing, which improves the value we receive from suppliers.
Vendor Development can be defined as any activity that a Buying • Helping the vendors in resolving quality problems
Firm undertakes to improve a Supplier’s performance and • Rendering necessary technical assistance
capabilities to meet the Buying Firms’ supply needs.
• Providing quality data in lieu of incoming inspection
The main features of vendor management are mentioned below: • Reviewing vendor’s performance periodically and providing
feedback
• Communication of essential and helpful information like
design, specifications, standards, practices, etc.
Summary
Materials management involves planning and designing for delivery, distribution, storage, collection and
removal of materials and services. It is usually an additional service that is offered as part of a campus
planning process or a building design project. It is highly useful for educational, healthcare and corporate
environments. Materials management takes care of the planning and designing considerations required
to support effective delivery and movement of goods and services that support occupant activity.
Review Questions
1. Explain materials management cycle with the help of an example.
2. What are the tasks of materials management?
3. Explain acquisition process.
4. What is outsourcing? What are the reasons for outsourcing?
5. What are the factors affecting supplier selection?

Unit-22
Management of Projects
Learning Objectives
• Understand the importance of projects in an

organization
• Know about the characteristics of projects of

an organization
• Analyze the project life cycle concept in various

organizations
• Review the network analysis and Critical Path

Method
• Comprehend the program Evaluation and

Review Technique
• Discuss various intricacies related to project

management
Overview • A new machine is procured and installed.
Consider the following activities: Do you see anything common in all these activities? Do you see
anything common in first set and second set of activities?
• An underpass is constructed in a city.
You can observe that although these activities are entirely different
• Metro rail is built in Hyderabad.
from each other, they are temporary in nature, that is, they have
• A plane is built for Airforce. a start and a finished timeline, unlike the mass manufacturing
• A new hospital is being constructed. operations, which are perpetual.
Do you see anything common in all these activities? All the activities described above fall in the category of projects.
Now consider some more activities: A project can be defined as a temporary endeavor to achieve a
specific well-defined objective.
• A company launches a new product development program.
Projects in Contemporary Organizations
• A manufacturing organization launches a survey for assessing
customer satisfaction with its products.
Initially, the projects were considered different to the conventional
• A manufacturing organization constructs a new warehouse. manufacturing systems. The word project was associated with
large projects like infrastructure, shipbuilding, construction, etc. would result in higher efficiency for the organization.
But in due course of time, it was realized that if conventional
manufacturing systems could adopt project methodology, it So, the project method comprises of three major entities:
Figure 22.1 Projects in Contemporary Organizations
The parent organization selects the team leader and the team Characteristics of Projects
members from its different divisions as per requirement of skills
and qualifications for the project. The project team is responsible The projects differ from traditional forms of production and are
for interacting with customer and ensure that the outcome must characterized by some unique features as follows:
meet the requirements of the customer for that project.
The projects have a purpose: Each project has a well-defined
Note that the customer for the product may be the parent purpose or objective e.g., the project of new product development
organization itself e.g., development of IT system for a company’s may have the objective of achieving a competitive edge. The
operations or construction of a new warehouse or installation of construction of a flyover on the road may have a purpose of
new technology. reducing traffic congestion. The purpose of constructing an
underpass on the road may be to provide a safe road for the Project Life Cycle
pedestrians to cross.
One of the characteristics of projects are temporary endeavors
• Projects have a life cycle: The projects are temporary and characterized by a life cycle. Although the projects differ in
endeavors. While the projects are in progress, they pass size, nature, product and requirements, the life cycle of all projects
through some well-defined stages of life cycle. is typically similar. The phases in the life cycle of projects are
• Each project produces a unique product: The projects are not shown in the form of a graph below. The X-axis of the graph
repetitive manufacturing activities. The product of a project indicates the time and the Y-axis indicates the level of effort
is unique. The same specifications of a product will never be required during various stages.
created by future projects.
• Interdependence: Each project is comprised of a number of

tasks. All the tasks involved in a project are independent,
unique entities but they depend on each other for their
performance e.g., a specific task might not start unless some
of the preceding tasks have been completed.
priorities, organizational needs and importance of the project
to achieve organizational goals.
• Selection: The scarcity of resources may prohibit the

management to launch all screened projects simultaneously.
The projects to be undertaken are then selected by the
management on various criteria like management priorities,
competitive necessity, the significance of the project e.g.,
the management may consider a project for new product
development more significant than the construction of a
new warehouse. A number of numeric and non-numeric
Figure 22.3 Stages in the Life Cycle of a Project
techniques are used by the management for the purpose of
project selection. The numeric techniques include the financial
• Conception: During this stage, the management of the
assessment of projects and also the comparative scoring.
parent organization comes across various ideas of projects,
each project having its own necessity and significance. The
• Planning: The selection phase is followed by planning for
project ideas are generally the outcome of brainstorming or
the project. During this phase, various aspects relating to
other means of idea generation. The ideas so generated are
the project are planned, which include scope definition,
subjected to the screening on the basis of management’s
resource requirement planning, skills required for the project,
manpower requirement, procurement requirement, financial is essential to ensure that the various activities are completed
planning and specification definition. The outcome of this in scheduled time and within decided budget. Exceeding time
process is a project plan, which is a roadmap to the project. or cost will lead to schedule overrun or cost overrun. Since
The project plan is also used as a tool for project control. the projects are also characterized by scarcity of resources
Another important aspect of this phase is identifying the risks and the simultaneous demand for resources by different
involved during the project life and planning to counter these tasks and work packages, it becomes essential to apply
risks in the event of them becoming a reality. techniques for rational and optimum utilization and allocation
of the resources in such a manner that the impact on project
• Scheduling: The project time schedules are developed objectives is minimum. The process of comparing the project
during this phase. The project is broken into smaller tasks progress with plans refers to monitoring. Control refers to
and work packages and time required for the individual task identifying deviations and acting to minimize the impact of
is assessed. The breaking of the project into smaller tasks deviations.
and work packages is called work breakdown structure
(WBS). The interdependence of the tasks is also established • Evaluation: Evaluation refers to analyzing the project
during this phase. The time required to complete the project performance and making sure that the objectives are fulfilled
is then assessed using the compiled information of tasks for the project. Evaluation involves schedule performance,
interdependence and task time requirements. cost performance, specifications achievement, actions
taken to respond to risks, resource use and allocation and
• Monitoring and Control: Once the project is in the process, it management of outsourcing and contracting. The evaluation
is carried out after completion of the project and during the termination is due to successful completion of the project,
different stages of project progress. the product is handed over to the customer.
The during project progress evaluation provides the basis It is also important to understand the life cycle of the project with
for taking corrective actions if needed and the end of project reference to the speed of the project. Typically, the projects have
evaluation is carried out to learn from the completed project so a slow beginning followed by quick momentum and finally a slow
as to perform the future projects in a more efficient and effective finish. It can be explained by the graph given in the Figure 22.4.
manner. The technique generally used for evaluation is called
project audit.
• Termination: The project comes to the finishing part at this

stage. This phase identifies the need of terminating a project.
Please note that termination does not always mean successful
completion of the project. Termination of the project may be
a result of project failure or changed management priorities
or lack of funds and resources. A final accounting of project
is carried out in this phase and project is closed. The project
assets are distributed among different divisions, and the
Figure 22.4 Project Life Cycle
project team members are returned to their parent divisions. If
Project Management: A Managerial may require careful analysis and inspection of each part before
Approach it is integrated. This phase may also require minor changes to

the parts of the project outcomes.
• Slow Beginning: The projects typically begin slowly. The
specifications are under development and negotiations and Project Objectives
changes are being incorporated at this time. The project is
A project will be called successful if it is able to achieve the project
a new one, the requirement of resources is being assessed.
objectives. There are three criteria for defining and evaluating the
Since the team members are drawn from different divisions
success of a project.
of the organization, there is a lot of confusion and conflict
regarding the authority and reporting hierarchy.
The planned measures of the following three criteria make the
target for the project.
• Quick Momentum: As the aspects related to project become
clear, and direction is established and the project gains speed.
• Performance: The product of project must perform what it
This is the phase of quick momentum. The speed increases
was intended for. The specifications of project output must
fast and reaches a peak. This is the phase when monitoring
meet the planned and agreed specifications. Performance is
and control of the project are in existence.
generally one of the aspects leading to conflict between client
and project team leader. It is essential to clearly define the
• Slow Finish: As the project approaches the finish, the various
project objectives in the planning phase leaving no scope
parts of project output now need integration. The integration
of the dispute. Performance is the essential criteria for the as successful, it is essential that the project is completed
successful completion of a project. within defined budget. The reasons causing cost overrun need
to be identified at the planning stage and controls need to be
applied to avoid such circumstances to arise.
• Time: Finishing in scheduled time is an important aspect of

projects. Schedule overruns not only cause intangible losses
like loss of reputation and trust and customer dissatisfaction
but also leads to cost overrun. Many times the schedule over
runs lead to financial compensations to the customer apart
from additional expense in resources. A project for being
termed as successful needs to be completed in scheduled
time.
Figure 22.5 Project Success Criteria

So, a project is successful if it is able to achieve its performance
objectives within scheduled time and allotted budget or cost.
• Cost: No project can be provided with unlimited resources.
Each project is associated with a budget in totality and a
Let us now have a look at the network analysis which also plays
budget for each part of the project. For a project to be termed
an important role in project management.
Network Analysis finished and the project is completed.
Network analysis is the most widely used technique for project Let us understand the use of circle and arrow for drawing the
scheduling. The technique involves identifying the precedence network of the project.
relation between various activities of the project and drawing

We need to follow some basic rules for developing the network.
a network of the activities in accordance with their precedence
relationship. An Activity A is the predecessor to another Activity • The network typically flows from left to right.
B if Activity B cannot be started unless A is complete.
• An activity cannot begin unless all immediately preceding
Two notations are used for drawing of the network: activities are completed.
• It’s not allowed to loop in.
• Conditional activities are not allowed.
• An activity is represented by a single arrow.

An event is a specific moment in time when something has been
• A pair of events cannot be connected by more than one activity.
accomplished. Completion of each activity leads to an event.
The project network starts with an event denoting that nothing • There must be a single start and single end to the project
has been accomplished so far. The network ends with a single network.
event denoting that all activities involved in the project have been
The length of the arrow is NOT proportional to activity time.
Example 22.1
Following is the information related to a software development

project.
Develop a network for the project.
S.No. Task Task code Predecessors
Specification
1 A - Solution
development
2 Process mapping B -
Developing software for
3 C A, B
process components
4 Testing of software D C
Developing hardware
5 E B Example 22.2
specifications
Procurement of Following is the information related to a construction project.
6 F E
hardware
Integration of software S.No. Task Task code Predecessors
7 G C
components 1 Design development A -
Installation of software 2 Design approval B A
8 H F, G
on hardware 3 Vendor identification C A
9 Pilot test I H Procurement of
4 D B, C
10 Training of users J I construction material
various activities involved in the project is established. The
5 Laying foundation E D
next process is establishing a time for the activities. The time
6 Raising pillars F E
estimation has already been discussed in previous sections.
Structure
7 G F The establishment of time taken by activities becomes the basis
development
of the further analysis, which involves determination time for
8 Finishing H G
competing for project and lack of activities.
9 Electrical work I G
10 Inspection J I Critical path method is the technique of analyzing and determining
the project work and its completion time.
Develop a network for the project.
CPM involves the following steps:
1. Making a drawing of the project network.
2. Identifying the paths leading from the first stage to finish.
3. Calculating the total time elapsed along each path.
• The path with maximum total took time is called as the

Critical Path Method (CPM) critical path.
After the development of the network, the interrelation of the • The activities those are done during this path are known
as critical activities.
Example 22.3
Apply CPM to identify the project completion time for the following
data:
Activity Predecessor Activity time

Let us try to identify all paths on the network for reaching the finish
A – 3 from the start. The direction of arrows should be taken care of.
B – 5
C – 7 We can identify four paths along this network.
D C 3
A–E–F–H
E A, B 7 B–E–F–H
F E, D 3 C–D–G–H
G D 2 C–D–F–H
H F, G 2
Calculate the time taken by each path by adding the time taken
by an activity.
Let us see a network development in a project:
A–E–F–H 15 The technique involves identifying 4 values for each activity:
B–E–F–H 17
C–D–G–H 14 • Early Start: The earliest time to start an activity. It depends
C–D–F–H 15 upon earliest accomplishment time of all predecessor
activities.
The critical path is the longest path in the network. • Early Finish: The earliest time for finishing the activity is
obtained by adding the activity time to the earliest start. e.g., if
BEFH with a time requirement of 17 days is the critical path as it
the earliest start of activity is 32 and time required by activity
has taken the maximum time. The time required by critical
is 4, the early finish will be 32+4=36.
path is called as project completion time and is equal to 17 days
for this project. • Late Start: The latest time by which an activity must start to
complete the project in time. To calculate it, the activity time
However, the method requires physically identifying all paths is subtracted from the late finish time of the activity.
and calculating the time required by each path. If the number of • Late Finish: The latest time by which an activity must finish.
activities is more, the network gets complicated and it becomes It depends on the late start of all succeeding activities. Each
almost impractical to identify each path by observation. So, a activity must finish latest by the time of late start of the
more scientific technique is required to identify a critical path on succeeding activities to ensure that project is completed in
the network. time.
Let us try to determine Early Start (ES), Early Finish (EF), Late Activity E can start after both activities A and B are completed.
Start (LS) and Late Finish (LF) for the activities in above network. So, E can start earliest at 5 and its activity time being 7, its EF is
5+7=12.
Activities A, B and C have no predecessor, so they can start at
F can start after completion of D and E, so it starts at 12 (ES) an
time zero. The activity time is 3, 5 and 7 respectively, so early
finishes at 12+3=15.
finish for these activities is 3, 5 and 7.
G can start after completion of D, so it’s ES is 10 and EF is 12.
D can start after C is completed, so D cannot start before 7, that is The last activity H can start after F and G that is at 15 (ES) and
ES of D is 7 and its activity time being 3, its EF is 7+3=10. finishes at 17.
Activity ES EF LS LF As the time of last activity for the early finish is 17, the project
A 0 3 cannot be completed in less than 17 time periods. Hence, 17 is
B 0 5 the project completion time.
C 0 7
D 7 10 Let us now find out the LS and LF for all activities.
E 5 12
Since we would like to finish the project at the earliest, the LF of
F 12 15
G 10 12 last activity is equal to its EF. So, LF for H is 17. Since H has to
H 15 17 finish at 17, it must start at 17–2=15 (LS).

F and G must be completed before H starts, so both F and G must Now consider Activity D. the start of Activity F and G depends on
finish at 15. LS of succeeding activity is equal to LF of all earlier completion of Activity D. LS of F and G is 12 and 13, respectively.
activities. The LS of F and G is therefore 12 and 13 respectively. To allow both F and G to start at their LS, D must finish by 12 and
so must start by 9.
The LF of E is equal to LS of F that is 12, therefore its LS is 12–7=5.
The LF of Activities A and B are equal to LS of E that is 5. So, their
Activity ES EF LS LF LS are 2 and 0 respectively. Similarly, LF of C is 9 (LF of D), and its
A 0 3 2 5 LS is 9–7=2.
B 0 5 0 5
Observe the ES and LS of all activities. The Activities B, E, F, and G
C 0 7 2 9 have equal LS and ES. They are critical activities, so BEFH is the
D 7 10 9 12 critical path. LS and ES of Activities A, C, D, and G are not equal,

so they are non-critical activities. The non-critical activities can
E 5 12 5 12
be deferred to some extent so that they should not affect the
F 12 15 12 15 accomplishment time of the project but the delay in any critical
G 10 12 13 15 activities leads to project delay.
H 15 17 15 17
Example 22.4
The time required for completion of activities is as under.

S. No. Task Task code Predecessors Time (in days)
1 Specification development A - 20
2 Process mapping B - 15
3 Developing software for process components C A, B 90
4 Testing of software D C 5
5 Developing hardware specifications E B 5
6 Procurement of hardware F E 25
7 Integration of software components G C 30
8 Installation of software on hardware H F, G 10
9 Pilot test I H 10
10 Training of users J I 30
Determine the project completion time.
Solution
Let us start with developing the project network.

Let us now determine ES, EF, LS and LF for all activities. Project Evaluation and Review Technique
(PERT)
S. No. Task code ES EF LS LF
1 A 0 20 0 20 The estimate of time used in CPM is deterministic. However, in
2 B 0 15 5 20 real time projects, deterministic time for all activities is least

expected. There are various factors which affect the time taken
3 C 20 110 20 110
by each activity. The time of activities is dependent on several
4 D 110 115 165 170 uncertainties, which cannot be ascertained precisely e.g., a
5 E 15 20 110 115 construction project may have uncertainties related to weather,
6 F 20 45 115 140
7 G 110 140 110 140
8 H 140 150 140 150
9 I 150 160 150 160
10 J 160 170 160 170
So, the critical path is ACGHIJ and project completion time is 170
days.
transport time, manpower availability, etc. A software development The probable time and standard deviation of the events are
project may need redesigning because of unacceptable test calculated, which is then used to derive the completion time,
results, leading to increasing in time. On the contrary, if the which is expected of the project and standard deviation of the
situations governing the activity time are highly favorable, the project. This information helps in anticipating probability of the
activity may even take less time than expected. project being completed in a specific time.
So, the time estimates of various activities in a project are in (PT + 4 MLT + OT)
Expected time =
general probabilistic rather than deterministic. The technique 6
used for network analysis when activity time is probabilistic is
(PT – OT)
called PERT. Standard Deviation =
6
Three different time estimates are determined for each activity of (PT – OT) 2
the project viz. Pessimistic Time (PT), Optimistic Time (OT) and Variance =
2
Most Likely Time (MLT).
Example 22.5
• PT: The time activity will take under adverse conditions.
The time estimates and precedence requirements of activities
• OT: The time activity will take if conditions are favorable.
involved in a project are as under.
• MLT: The time activity will take with the highest probability.
Time estimate (days)
S. No. Task code Immediate predecessors
Optimistic time Most likely time Pessimistic time
1 A - 1 3 5
2 B - 1 3 11
3 C A, B 2 5 8
4 D C 3 4 11
5 E C 4 7 16
6 F D 1 2 3
7 G E 4 6 14
8 H F, G 1 1 1
Determine the expected completion time, standard deviation and variance for all activities.
Standard
Time estimate (days) ET Variance
Deviation
S.No. Task code
Most likely (PT + 4 MLT + OT) (PT – OT) (PT – OT) 2
Optimistic time Pessimistic time
time 6 6 2
1 A 1 3 5 3 4/6=1/3 1/9
2 B 1 3 11 4 10 / 6 = 5 / 3 25 / 9
3 C 2 5 8 5 6/6=1 1
4 D 3 4 11 5 8/6=4/3 16 / 9
5 E 4 7 16 8 12 / 6 = 2 4
6 F 1 2 3 2 2 / 6 =1 / 3 1/9
7 G 4 6 14 7 10 / 6 = 5 / 3 25 / 9
8 H 1 1 1 1 0/6=0 0
The expected time estimates can now be used to estimate the project. The standard deviation of the project completion will
expected completion time of the project on the same lines as depend upon the standard deviation of critical activities.
in case of CPM. With the above-mentioned data, the standard
deviation can also be calculated for the completion time of the To estimate project completion standard deviation:
• Draw a network for the project. • Calculate the standard deviation of the completion time of the
Project.
• Identify critical activities.
• Calculate variance for all the critical activities. Example 22.6
• Calculate the summation of it. Determine the approximate time for project completion and
standard deviation for example 22.5
Solution:
ET Standard Deviation Variance

Immediate
S.No. Task code
Predecessors (PT + 4 MLT + OT) (PT – OT) (PT – OT) 2
6 6 2
1 A - 3 4/6=1/3 1/9
2 B - 4 10 / 6 = 5 / 3 25 / 9
3 C A, B 5 6/6=1 1
4 D C 5 8/6=4/3 16 / 9
5 E C 8 12 / 6 = 2 4
6 F D 2 2 / 6 =1 / 3 1/9
7 G E 7 10 / 6 = 5/3 25 / 9
8 H F, G 1 0/6=0 0
Let us draw the network for the project. The time indicated for each activity is the Expected time for the activity.
The paths from start to finish in the network and the time required • B–C–E–G–H (4+5+8+2+1=20)
on each path can be identified as
BCEGH being the longest path, becomes the critical path for the
above network and activities are critical activities for this path.
• A–C–D–F–H (3+5+5+2+1=16)
The project completion time is equal to the time required by
• A–C–E–G–H (3+5+8+2+1=19) longest path that is 20 days.
• B–C–D–F–H (4+5+5+2+1=17)
Sum of variances of the critical activities is expected to follow a normal distribution. For determining the
probability of project completion in a specific time T, normal
= 25/9+1+4+25/9+0 variant Z needs to be calculated:
= 95/9=10.56
T – Te
Z=
Standard deviation is equal to square root of the variance of σ
project completion time

Where T is the time period.
Standard deviation =√10.56 = 3.25

This the approximate completion time of the project.
The project completion time determined in the above example is

σ is the SD (Standard Deviation) of completion time of the project.
Expected Time and Actual Time taken by the project may vary. The
extent of variation will be determined after finding the standard To find out the relevant area under the curve for the probable
deviation. If the standard deviation is high for the project time, completion time of a project.
the variation can be high as well in the actual project completion
time. The area indicates the probability of project completion in a
specific time period.
Now, let’s look at the calculation of probability for the project
completion time. The variation in the project completion time
Example 22.7
Standard deviation = 3.25 days
What is the probability of completing the project in 17 days T – Te

considering the information is given in Example 22.5? Z=
σ
Solution: 17 – 20
Z= = 0.92
3.25
The value of the area under the curve for Z = 0.92 (from normal
distribution table) is 0.3212. This is the area between Te and T.
The area on the left side of Te is 0.5. The normal curve being the
symmetrical and total area under the curve is 1.0.
So, the total shaded area = 0.5–0.3907=0.1093
The probability of the project being completed in 24 days is thus

0.1093.
Example 22.8
Calculate the probability of completion of the project in 19 days

to 22 days considering the information is given in Example 22.5? Te= 20 days
T1 = 19 days
Solution:
T2 = 22 days
Standard deviation = 3.25 days
T – Te
Z=
σ
22 – 20 The value of area under the curve for Z = 0.62 (from normal
Z1= = 0.62
3.25 distribution table) is 0.2324 and for Z = 0.31, the value is 0.1217.
So, area between 20 and 22 is 0.2324 and area between 19 and
19 – 20
Z2= = 0.31 20 is 0.1217. The total shaded area is 0.2324+0.1217=0.3541
3.25
The probability of project being completed in 19 days to 22 days
is thus 0.3541.
The value of area under the curve for Z = 0.62 (from normal
distribution table) is 0.2324 and for Z = 0.31, the value is 0.1217.
So, area between 20 and 22 is 0.2324 and area between 19 and
20 is 0.1217. The total shaded area is 0.2324+0.1217=0.3541
The probability of project being completed in 19 days to 22 days

is thus 0.3541.
Summary
Project management involves planning and organization of a company’s resources to move a specific task, event
or duty toward completion. It typically involves a one-time project rather than an ongoing activity and resources
managed include personnel, finances, technology and intellectual property. A project manager helps to define the
goals and objectives of the project and determines when the various project components are to be completed
and by whom. He also creates quality control checks to ensure completed components meet a certain standard.
Review Questions
1. Define a project. How is a project different from conventional forms of manufacturing?
2. “The project approach leads to higher efficiency and effectiveness.” Comment
3. “The tasks involved in a project are independent entities but interdependent.” Elaborate.
4. Explain the stages involved in a project’s lifecycle with the help of a diagram.
5. What are the criteria for assessing the success of a project?

Unit-23
Stores Management
Learning Objectives
• Understand the concept of stores management
• Comprehend the objectives of store

management
• Analyze the functions of store management
• Realize the different types of stores
• Explore the layout and design of stores
• Know more about the storage systems
• Discuss the stores accounting systems

Overview
The store is a crucial component for management of materials

as it is the place where materials are maintained safely, properly
inventoried and readily available for usage. Storage forms a crucial
part of the economic cycle. Being a specialized function, store
management lends a high degree of efficiency and effectiveness
to material functions.
Objectives of Store Management

• Reduce storage costs to a minimum level
Effective store management has the following key objectives:
• Maintain proper control over materials
• Ensure a smooth supply of required materials to various • Effective utilization of space available
organizational users on time
• Enhance efficiency of store personnel
• Prevent instances of overstocking and understocking
• Handle materials safely and save them from damage Functions of a Store
• Save material against theft, fire or pilferage Store personnel is responsible for carrying out the following
functions:
• Receiving inward material
• Supervise unloading of material and tally with the list
• Preparing reports for any damaged goods or short receipts
• Preparing ‘goods rejection memo’
• Distribution of received supplies to the respective units
• Dispatching relevant documents to the respective departments
• Ensuring cleanliness and orderliness in the storage space
• Making sure all inward and outward documentation is

done properly
• Safe and suitable management of supplies to save from

damage
• Proper record keeping and accurate accounting of materials

Types of Stores
Let us now have a look at the methods by which we can keep records for controlling stores.
Records for Controlling Store
Two types of records are generally maintained for all materials

received, issued or transferred.
• Bin Card
Bin Card is attached to the individual bin and it keeps track of the
quantity of material coming in the bin and going out of the bin. It
also keeps indicating the balance available. It also sometimes
specifies the desired inventory levels. One card is attached to each • Stores Ledger
bin on the shelf containing the material and record remains with the
storekeeper for reference. The following is a format of a bin card: Store ledger along with the quantities incoming and outgoing also
records the financial value of the parts. While bin card is one for
each bin, the ledger contains information about many items. The
following is a format of a stores ledger:
• Main lanes should usually be 1.5–3 meters wide, depending
upon the type of material and the amount of traffic involved.
• Clear markings should be made at storage space to facilitate

location and identification.
• The fast-moving items should be stored near the dispensing

window.
• The layout should permit the use of modern material handling

equipment.
• Stores layout should encourage FIFO.

Layout and Design of Stores
• Due space should be left for expansion purposes.
While planning the layout and design of stores, the following factors
should be considered: • A pleasing and hygienic environment must be provided within
storeroom.
• The space for receipt and inspection should be provided • Adequate lighting arrangement should be provided.
adjacent to the main stores.
• Adequate safety arrangement should be provided.
• Different storage facilities should be situated in clearly defined
lanes so that items are quickly stored and located.
Summary
A professionally managed store has a clearly defined process and space, for receiving incoming materials i.e.
‘Receiving Bay’, storing them safely until they are required i.e. ‘Custody’ and send them out to relevant departments
as and when required i.e. ‘Issue’ . In case of a manufacturing unit, this is a continuous process and forms a cycle
which is essential for smooth functioning of daily operations. The elementary task of the stores is to act as overseer
and supervisory manager for parts, supplies and materials to assist the departments with their requirements.
Review Questions
1. What are the functions of stores?
2. Differentiate between closed and open stores system.
3. Explain random access stores system.
4. Explain different stores accounting systems.
5. What factors should be considered for design and layout of stores?

Unit-24
Sustaining and Improving
Operations
Learning Objectives
• Explain the objectives of process improvement
• Discuss the importance of:
o PDCA Cycle
o Fishbone Diagram
o Value Analysis
o Kaizen
o Business Process Reengineering (BPR)

Improvement
Improvement is an effort towards making the processes better in

terms of performance. An improvement process involves studying
the current process, measuring its performance and analyzing
improvement opportunities.
The objective of improving the various operational activities can be achieved by several methods, which are discussed as follows.
PDCA Cycle There are four steps in the cycle:
PDCA implies ‘Plan Do Check Act’. It is one of the most straightforward 1. Plan: Identify need for improvement and establish the
and unassuming techniques for process control and ongoing improvement plan specifying objectives.
improvement. It helps in improving the process and performance of 2. Do: Carry out the improvement plan. Collect data to analyze
operational activities in a staged and steady manner. It is primarily the extent of improvement.
used in manufacturing and service industries for development of
3. Check: Carry out an evaluation of data and verify that the
latest products and is used in software development lifecycle.
improvement results are as per the plan.
4. Act: If results are not achieved, analyze the plan and make
the necessary changes.
Fishbone Diagram or the Cause and Effect

Diagram
A ‘cause and effect’ diagram offers a pictorial technique of

identifying the root cause of a problem. Because of its shape, it is
also called fishbone diagram. It was developed by Ishikawa, so it is
Figure 24.1 PDCA Cycle also called as Ishikawa diagram. It systematically categorizes the
reasons of problems and investigates deeper into all reasons that Value Analysis
cause the problem, till it reaches the root cause.
Value analysis refers to the critical investigation of the function of
Figure 24.2 shows the Fishbone diagram with all the possible
components and materials of a product with an objective to reduce
reasons marked on different branches, collectively proceeding
the cost and enhance the performance of the product.
towards the root cause. The diagram investigates the causes of the
reason for material, method, machine, manpower, measurement
Steps for Value Analysis
and environment.
1. Identify a product whose cost is high and needs to be
reduced.
Figure 24.2 Fishbone Diagram

2. Identify all parts and components of the product. Kaizen
3. The question each part and component. Kaizen is a philosophy of continuous improvement.
o Does the component add value or can it be eliminated?
It is reiterates the fact that “Improvement is always possible and
o Can the component be replaced by some other cheaper
work can always be done in a better manner tomorrow than it is
alternative?
being done today.” It involves all personnel of the organization
o Can the part be manufactured instead of purchasing the to strive for small changes in the process without going for large
same? investments and make the process better and more efficient with
o Can specifications be changed to save cost or time? present resources.
o Is a combination of two parts possible?

‘If it is not broken, do not fix it’ changes to ‘Just because it is nit
o Seek suggestions from employees to reduce cost. broken does not mean it cannot be fixed.’ The 5 S of Kaizen are as
4. Analyse the answers to the above questions and plan for
improvement change.
follows: and radical redesign of business processes is termed as BPR. BPR
1. SEIRI: It means Sort Out. It is the sorting out and discarding is based on innovative thinking and creation rather than small
of unnecessary items in the workplace. improvement.
2. SEITION: This means to organize. After sorting, they should A process subjected to re-engineering should be a core business
organize. process of the firm. Re-engineering focuses on the complete
3. SEISO: This word means to shine the workplace. Keep your process in totality rather than focusing on the part of the process.
belongings neat and clean.
Some aspects of BPR are as under:
4. SEIKETSU-SEIKETSU: It refers to Standardization. There
should be standard rules and regulations related to the • Cross-functional Teams: BPR is a team work, which requires
usage of the things. personnel from various cross-functional departments.
5. SHITSUKE or Self Discipline: It is the most crucial factor • Critical Processes: The focus should be on improving the
to achieve success. Individual self-discipline can create core and critical processes in totality.
wonders.
• Information Technology: Use of IT plays a vital role in BPR
Business Process Re-engineering (BPR) efforts.
• Strong Leadership: Strong leadership and motivation are

Dramatic improvement in performance by fundamental rethinking
necessary for BPR effort.
Six Sigma It includes the following points:
Six Sigma is a business process that aims to improve quality, • Designing the processes and strategies related to it.
reduce costs and enhance customer satisfaction. Statistically, six • Measuring the parameters that are important for quality.
sigma means reducing the number of defects during any process,
• Analyzing and developing substitute of superior quality.
product or service per million opportunities to less 3.4 .
• Designing the processes and its complete detailing.
Conceptually, the term is much broader; it aims to reduce the • Verifying the process and implementing the same.
instances of defects so that lower costing is achieved and customer
• Controlling the process at the same time so that they should
satisfaction is improved, through a well-developed program
not surpass the limitations.
based on usage of specific tools and techniques, to accomplish
key business objectives with specific projects. In the business
world, six-sigma programmes have become a key way to improve
quality, save time, cut costs, and improve customer satisfaction.
Six-sigma programmes can be employed in design, production,

service, inventory management and delivery. It is important for six-
sigma projects to be aligned with organizational strategy.
Summary
The success of the business will become more efficient if they can improve their operations management. If any organization
wants to achieve success in modern day highly competitive environment, it has to pursue Operational Improvement. In addition,
it plays an enormous role in driving growth and profitability. The organization always tends to decrease waste, reduce costs,
and set up maintainable programs for achievement of reliable results. For this, Overall Equipment Effectiveness (OEE) is used by
organizations as it is a key performance indicator, for analyzing operational efficiency.
Review Questions of Six Sigma?
1. What is productivity? 5. Write a short note on:
2. What is the significance of measuring productivity? o PDCA Cycle

o BPR
3. What are the various objectives of process improvement?
o Value Analysis
4. Explain the term “kaizen.” What are the important aspects
Unit-25
Case Study: Initiatives in an
Industry and Sustainability
Case 1
There is a retail company that has released their international

responsibility report. The report continues to evolve from major
sustainability efforts to aggressive, full-blown Corporate Social
Responsibility under current leadership.
For example, here is a phrase from the chief whose opening

letter says: “What was once largely about our own operations
has expanded and shifted into helping rewire whole social and
environmental systems.” Wow.
Many of the company’s initiatives involve working with sales

persons to make sustainability and other improvements. A
summary of some of those by product category from the report is
provided below, as the Supply Chain Graphic of the Week.
That is a lot of activity but hardly tells the whole story. From a
more overall perspective, e.g., in early months of 2017, ‘Project
which are covered in the index, company achieved the goal of
buying 70% of goods sourced from US from suppliers participating
in the index.
Last year, 60% growth was registered in the number of suppliers

who completed the data survey with around 2,000 suppliers
completing 5,300 surveys. It also says that more than 300 of its
clients now have the scorecards for their suppliers.
The bottom line is that if you are part of its supply chain, you will
be part of its Social Responsibility efforts big time.
Gigaton’ was declared by the company wherein it would work with

its vendors to reduce 1 Gigaton of emission between 2015-2030.
Review Questions
Initially, announced in 2009, the Sustainability Index for Suppliers
has witnessed significant progress. 1. What is your take away from the case?
2. Do you think any area that the company has left for
The company also cites progress with its Sustainability Index for
achieving sustainability?
suppliers, first announced in 2009. In FY-2017, the categories
Case 2
New Delhi Laboratories Private limited [NDL] is a company

engaged in filtration of transformers oil, transformer
troubleshooting and testing of transformer oil for different
performance characteristics. The company is based in Delhi with
its laboratory at Bahadurgarh. The laboratory of the company
is accredited for its quality management system by National
Accreditation Board for Laboratories. NDL was founded in the
year 1988 and since then has come to known as one point service Mr. Anil Kohli, Managing Director of the company recently came
center for all transformer related requirements. to know about a new sensor developed by electronic research
and development association [ERDA], Vadodara. The new sensor
Recently, managing director of the company, Mr. Anil Kohli has was able to detect a fault in the transformer at its origin and as
been in a dilemma, not sure whether to continue with a new such was able to save high transformer repair costs later on. Mr.
product in which already a lot of money has been invested or not. Kohli saw a bright business prospect in the sensor. But the actual
The product has not found acceptance in the market to the level, conditions were much different than anticipated.
anticipated by Mr. Kohli in the beginning. Mr. Kohli has to decide
urgently, whether to renew the contract or not. When Mr. Kohli first came to know about the fault sensor developed
by ERDA, Vadodara, the concept immediately fascinated him.
His company NDL, which was already in the field of transformer with ERDA personal were held and a technology transfer fee of
service, enjoyed a reputation of one point service center for Rs. 1, 50,000 was decided, along with Rs. 3,000 per piece sold, like
transformer troubleshooting in the industry. He had realized how royalty. He also realized that ERDA only had a laboratory prototype,
the minor problems in the transformers could become giant and which will have to be converted into commercial product.
lead to high costs of repair, apart from disrupting the production
operation in the industry. The new sensor was supposed to Mr. Anil Kohli had further discussions with his technical personnel
detect faults at the initiation of the problem and thereby offered a and assessment was done for the preliminary expenses
preventive measure rather than costly corrective measures. which included technology transfer fee, product development,
infrastructure, and consultancy, etc. The total preliminary
He returned to ERDA with his technical manager and a lot of expenses were anticipated as Rs. 10,53,000.
technical discussions followed. A number of meetings with ERDA
and with own staff followed. A month later, it was decided to In August 2012, the technology transfer deal was finalized. Although
proceed ahead with the project. But Mr. Kohli decided to carry the agreement was for a period of 2 years, Anil Kohli expected to
out some market survey before initiating the project. A vigorous renew it at least for the 3 more years later on. NDL which was in
market study followed and sale projections were made for the the service sector, entered into product manufacturing. The trade
next 5 years. name of the product was proudly decided as Sensofast.
The market survey indicated an encouraging response from the The commercialization of Sensofast began soon and product
market and Mr. Kohli decided to launch the project. Discussions development was initiated to make it suitable for industries. Side
by side, vigorous marketing also was initiated. It took 3 months daily. However, as the time passed, he realized that the potential
to convert the laboratory prototype into product prototype. The was not as high as he had anticipated. During the years 2014 and
sales personnel were very enthusiastic about the response from 2015, against an anticipated sale of 100 pieces, he was able to
industry. mature sales of 10 pieces only. Although a lot of enquires were
flowing in, they did not seem to materialize into sales.
The financial estimates were made with respect to annual fixed
expenses and variable expenses per product, which were Rs. The sales force started getting frustrated because even after their
5,75,000 and Rs. 1,11,000 respectively. best efforts, they were not able to generate sales. Anil Kohli also
started reviewing his decision. While he was still in a dilemma, a
The final commercial prototype was ready in December 2013. letter was received from ERDA, extending the contract for another
Anil Kohli decided to launch the product in a seminar. A seminar 3 years as initially requested by NDL.
was organized, and invitations were sent to senior personnel of
the industry. The attendance at the seminar was encouraging.
The technical experts from ERDA explained the fundamentals of
Sensofast and a practical demonstration was also arranged. The Review Questions
product was priced at Rs. 1,35,000. 1. Was NDL right in venturing into Sensofast?
2. What decision should the managing director of the company

The marketing team started enthusiastically on the new product,
take now?
with Managing Director leading and monitoring the programme

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Operations and

After completing this unit, students will be able to:

• Discuss operation management

• Explain the objectives of operation management

• Describe the scope of operations management

• Discuss the importance of operation

• Analyze the responsibilities of operation

• Explain differences in manufacturing and

Periodic / Strategic Continual / Operational

Generally, strategic decisions are taken by top management like

The Scope of Operations Management

Different organizations have a different scope for operations

3. Facilities and Layout: It is essential to ensure effective operations.

properly to ensure optimum efficiency of operations. management.

Routine maintenance; roster of drivers and co-drivers and

5. Managing Inventories: It is essential to ensure optimal

Operations Operations function is the backbone of every manufacturing and

Figure 1.1: Overlapping Functions of an Organization

Finance, Marketing and Operations are three major functions of any

Responsibilities of an Operations Manager

The difference between manufacturing and services has been

Figure 1.2: Process of Conversion System

Inventory Can be stored Immediate

Participation of Low High

Performance Complicated Simple

Operations Management is an important aspect of management which

1. Differentiate between manufacturing and services.

2. Discuss various objectives of operations management.

3. Describe the process of management.

4. What are the performance criteria for operations manager?

5. Explain the different areas in which an operation manager has to be

After completing this unit, students will be able to:

• Appreciate various decision environments

• Understand various decision-making

• Practice rational decision making

Operations Management and Decision as below:

Making What What quantities of which resources are required?

When When to replenish inventory? When to schedule

Where Where is the work to be done (place)?

How How to do the work? How to design products and

Who Who will complete the work?

The process of decision making involves following steps:

The environments in which managers make the decision are as under:

Certainty Risk Uncertainty

Following is the example of a payoff table. The values in brackets

High (0.4) Moderate (0.1) Low (0.5)

Alternative 3 = 0.4 × 30 + 0.1 × 40 + 0.5 × 5 = 18.5

So, decision is in favor of alternative 1, which gives the highest

Decision-making under Uncertainty

• Maximax – The substitute with the maximum out of highest

• Laplace – The substitute with the best average payoff out of

• Minimax Regret – The substitute that has the smallest out of

High Moderate Low

Maximin Identify the minimum payoff for each alternative:

High Moderate Low

Maximax Identify the maximum payoff for each alternative:

High Moderate Low

Maximum out of maximum payoff is 60 for alternative 2. So, on

High Moderate Low

High 1/3 Moderate 1 / 3 Low 1 / 3