Operations Management

Queens’ College
WELCOME TO:
OPERATIONS MANAGEMENT
Credit hours: 3
Chapter 1
The Nature of Operations
1.1.Operations Management Definition
Operations management is defined

as the business function responsible for
the design, operation, and
improvement of the systems that
create and deliver the firm’s primary
products and services.
2
Operations Management is:
• A management functional area
• An organization’s core function
• In every organization whether Service or

Manufacturing, profit or Not for profit
4
Operations Management
– Refers to the management of the production system

that transforms inputs into finished goods and
services.
• Production system: the way a firm acquires inputs then
converts and disposes outputs.
• Operations managers: responsible for the transformation
process from inputs to outputs.
– Operations management seeks to increase the
quality, efficiency, and responsiveness of the firm.
• Seeks to provide a competitive advantage.
1.2. Development of OM as a Field – The Names and Emphasis Change,
but the Elements Remain Basically the Same!
Scientific Manufacturing TQM &

Management Strategy Six Sigma
Moving Assembly JIT/Lean Business Process

Line Manufacturing Reengineering
Hawthorne Manufacturing Electronic

Studies Resources Planning Enterprise
Operations Service Quality Global Supply

Research and Productivity Chain Mgt.
Historical OM’s Emergence

Underpinnings as a Field
13
Operations Activities
• Strategy • Inventory
• Output Planning Management
• Capacity Planning • Materials
• Facility Location Requirements
Planning
• Facility Layout
• Scheduling
• Aggregate Planning
• Quality Control
7
Operations Management - Overview
Process Analysis Process Control Supply Chain Project

and Design and Improvement Management Management
Operations Quality Supply Chain

Strategy Management Strategy
Process Analysis Statistical Just in Time

Process Control
Job Design Planning for Production
Consulting and
Manufacturing Reengineering Capacity Management
Facility Layout Aggregate

Planning
Services Inventory Control
Waiting Line Analysis and Materials Requirement Planning

Simulation
1.3. Importance of Operations
• Improvements in operations can

simultaneously lower costs and improve
customer satisfaction.
• Improving operations often dependent on
advances in technology.
• Can obtain competitive advantage by
improving operations.
• Diversity of operations
9
1.4.Operations Management Concepts
– Quality: goods and services that are reliable and perform
correctly.
• Quality allows customers to receive the performance that
they expect.
• Efficiency - Doing something at the lowest possible cost,
or “doing things right”
• Effectiveness – “Doing the right things” to create the most
value for the organization
• Responsiveness to customers: actions taken to respond to
customer needs.
• Firm can react quickly and correctly to customer needs as
they arise.
Productivity
Outputs
Productivity =
Inputs
• Partial measures
– output/(single input)
• Multi-factor measures
– output/(multiple inputs)
• Total measure
– output/(total inputs)
1.5. Operations Decision Making
Marketplace
Corporate Strategy
Finance Strategy Operations Strategy Marketing Strategy
Operations Management
People Plants Parts Processes

Materials & Products &
Customers Services
Planning and Control
Input Output
The Transformation Process (value adding) 4

Key Decisions of Operations Managers
• What
What resources/what amounts
• When
Needed/scheduled/ordered
• Where
Work to be done
• How
Designed
• Who
To do the work
1-13
Competitive Dimensions
• Cost leadership
• Differentiation
• Quick response
• Quality and Reliability
• Delivery
– Flexibility
– Speed
– Reliability
• Coping with Changes in Demand
• New Product Introduction
– Speed
– Flexibility
Competing on Differentiation
Uniqueness can go beyond both the physical

characteristics and service attributes to
encompass everything that impacts
customer’s perception of value
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Competing on Cost
Provide the maximum value as perceived by
customer
Does not imply low value or low quality
2-
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16
Competing on Response
• Flexibility
• Reliability
• Timeliness
Requires institutionalization within the firm of
the ability to respond
2-
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OM’s Contribution to Strategy
Operations Examples Specific Strategy Competitive
Decisions Used Advantage
Quality FLEXIBILITY
Sony’s constant innovation of new products Design
Product HP’s ability to follow the printer market Volume
Process Southwest Airlines No-frills service LOW COST
Location DELIVERY
Pizza Hut’s five-minute guarantee at lunchtime Speed
Layout Federal Express’s “absolutely, positively on time” Dependability Differentiation
(Better)
Human Resource
QUALITY
Supply Chain Motorola’s automotive products ignition systems Conformance Cost leadership Response
Motorola’s pagers Performance (Cheaper) (Faster)
Inventory
Scheduling IBM’s after-sale service on mainframe computers AFTER-SALE SERVICE
Maintenance Fidelity Security’s broad line of mutual funds BROAD PRODUCT LINE
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1.6. The Production System
19
Systems Perspective
• Inputs
• Transformation System
– Alter
– Transport
– Store
– Inspect
• Outputs
• Environment
20
Inputs
• Inputs include facilities, labor, capital,
equipment, raw materials, and supplies.
• A less obvious input is knowledge of how to
transform the inputs into outputs.
21
Transformation System
• The part of the system that adds value to the
inputs.
• Four major ways
– Alter – physical change
– Transport - relocate
– Store - protect
– Inspect – better understanding
22
Outputs
• Two types of outputs commonly result from a
production system
– Services (abstract or nonphysical)
– Products (physical goods)
23
Examples of Production Systems
System Inputs Conversion Output
(desired)
Hospital Patients Health Care Healthy
MDs, Nurses Individuals
Medical Supplies
Equipment
Restaurant Hungry Customers Prepare Food Satisfied
Food, Chef Serve Food Customers
Servers
Atmosphere
Automobile Sheet Steel Fabrication High Quality
Plant Engine Parts and Assembly Automobiles
Tools, Equipment of Cars
Workers
University High School Grads Transferring Educated
Teachers, Books of Knowledge Individuals
Classroom and Skills
6
1.7. Service or Good?
• “If you drop it on your foot, it won’t hurt

you.” (Good or service?)
• “Services never include goods and

goods never include services.” (True or
false?)
7
Goods vs Service
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
1-26
1.9. Manufacturers vs Service Organizations
• Manufacturers:
• Services:
• Tangible product
• • Intangible
Product product
is inventoried
• Low• customer
Product cannot
contactbe
• Longerinventoried
response time
• • High
Capital customer contact
intensive
• Short response time
• Labor intensive
27
Similarities for Service/Manufacturers
• Both use technology

• Both have quality, productivity, & response issues
• Both must forecast demand
• Both can have capacity, layout, and location issues
• Both have customers, suppliers, scheduling and
staffing issues
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Service vs Manufacturing
• Manufacturing often provides services
• Services often provides tangible goods
• Some organizations are a blend of
service/manufacturing/quasi-manufacturing
Quasi-Manufacturing (QM) organizations
• QM characteristics include
– Low customer contact & Capital Intensive
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1.10. Operations Strategy
Strategy Process Example
Customer Needs More Product
Corporate Strategy/ Increase Org. Size

Business strategy
Operations Strategy Increase Production Capacity
Decisions on Processes
Build New Factory
and Infrastructure
2. Operations Strategy
• What is Strategy?
• Strategic decisions can be classified as those decisions which
make major long term changes to the resource base of the
organization in response to external factors such as markets,
customers and competitors.
• Operations strategy is concerned with both what the operation

has to do in order to meet current and future challenges and also
is concerned with the long-term development of its operations
resources and processes so that they can provide the basis for a
sustainable advantage
31
Levels of Strategy
• Strategy can be seen to exist at three main
levels within the organization.
• At the highest or corporate level the strategy
provides very general long-range guidance for
the whole organization, often expressed as a
statement of its mission
• The second level of strategy is termed a business
strategy and may be for the organization or at
the strategic business unit level in larger
diversified companies
01/07/2023 32
Conti…
The third level of strategy is termed the

operational or functional strategy were the
functions of the business (e.g. operations,
marketing, finance) make long-range plans which
support the business strategy.
Since the operations function is responsible in
large part for the delivery of the product/service
it has a major responsibility for business strategy
formulation and implementation
01/07/2023 33
34
Chapter Two
Operations Decision Making

2.1. The Meaning of Decision Making
 Decision making: is the process of identifying, analyzing and

choosing the best alternative from many analyzed alternatives
and implementing it.
 Decision making situation is a choice situation.
 If there is no alternative, then there is no need to worry about

decision-making.
2.2. Characteristics of Decisions
 Operations decision range from simple judgments to complex

analyses, which also involves judgment.
 Judgment typically incorporates basic knowledge, experience,

and common sense.
 They enable to blend objectives and sub-objective data to arrive

at a choice.
The appropriateness of a given type of analysis
depends on:
o The significant or long lasting decisions,
o The time availability and the cost of analysis, and
o The degree of complexity of the decision.
 The significant or long lasting decisions
deserve more considerations than routine ones.
-Plant investment, which is a long-range decision,
may deserve more thorough analysis.
 The time availability and the cost of analysis also
influence the amount of analysis.
 The degree of complexity of the decision
increases when many variables are involved,
variables are highly independent and the data
describing the variables are uncertain.
• Business decision-makers have always had to
work with incomplete and uncertain data.
• Table below depicts the information environment of
decision.
Decision making techniques
The decisions that can be made on certainty

conditions depend on experience and past
data of the organization.
Under certainty conditions, different types of

mathematical programming techniques can
be used for making decision when the existing
data become difficult to manually compute.
Decision making techniques Cont’d
A technique that assumes certainty in its

solution is referred to as deterministic.
The decisions under uncertainty conditions
are made with the different degree of decision
maker´s optimism.
Decisions under risk conditions are made
with the use of probabilistic techniques with
some possibility that alternative solutions
might exist.
2.3. Framework for Decision-Making
 An analytical and scientific framework for decision
implies the following systematic steps:
i. Defining the problem
ii. Establish the decision criteria
iii. Formulation of a model
iv. Generating alternatives
v. Evaluation of the alternatives
vi. Implementation and monitoring
2.4. Types of Decision-Making
 There are two main types of decision making. These are:
1). Programmed decision
2). Non-programmed decisions
1). Programmed Decisions:
o Programmed decisions are those that are made in predictable
circumstances and have predictable results.
o Results are predictable because similar decisions have often been
made under similar and recurring circumstances.
o When problems are of repetitive and routine nature, alternative
procedures are developed and used to solve these problems each
time when they occur.
o Programmed decisions are based on policy directives, procedures
and rules.
o Lower-level mangers usually make more programmed decisions.
2). Non-Programmed Decisions:
o Non-programmed decisions are those that are made in
unique circumstances and often have unpredictable results.
o While programmed decisions can be anticipated, non-

programmed decisions must be dealt with as they occur.
o Higher level mangers tend to make more non-programmed

decisions.
2.5. Making Effective Decision
 The following are the major guidelines for making effective
decisions:
i). Use Information Effectively:
o Using information effectively is one way to reduce
confusion and improve decisions because the quality of
timely information helps managers to make good decisions.
ii). Enhance Systems for Decision-making
o Recent innovations in management reflect exciting changes
in systems, human forms of organization, and joint
endeavors lead to improve performance.
o Enhancing system for decision making deals with
empowerment of those who must implement decisions.
2.5. Making Effective Decision Cont’d
o Empowerment means not only including employees in decision-

making, but also ensuring that they are given both the resources
necessary to implement decisions and the responsibility for getting the
job done.
o The main benefit of empowerment is to help workers to cooperate and

feel positively to accept and understand organizational decisions.
iii). Communicate Effectively:

o Decisions must be understood by those who carry them out
as well as by those at higher echelons who must evaluate
performance.
o Clear communication is crucial to gaining acceptance.

iv. Delegate Pragmatically

o Leadership and motivation focus on the delegation of
authority.
o Pragmatic delegation suggests that mangers define who is
best suited to make decisions on the basis of several criteria.
o People with experience in solving problems, who have
access to information, and who are in the best position to
implement decisions are the best candidates for decision-
making authority.
2.6. Decision Support System
• Decision support system (DSS) is computer-based systems
designed to aid decision-makers of any stage of the decision
process in the development of alternatives and evaluation of
possible course of action.
• Their purpose is to provide the information and analytical support
that enables managers to better control and guide the decision
process.
• Emphasis is given for giving useful information and appropriate
quantitative models that support the manager’s skills.
• DSS helps the managers to learn better, how to apply data
processing and modeling capabilities of computers to the analysis
of ill-structured and value based decisions.
2.7. Economic Models
• Break-even Analysis is an economic model

describing cost-price-volume relationships.
• It is a complete certainty type of model because costs

and revenues are known quantities.
2.6.1 Break-even Analysis
• One of the techniques to study the total cost, total

revenue and output relationship is known as Break-
even Analysis.
• A Break-even Analysis indicates at what level of
output, cost and revenue are in ‘equilibrium’.
• In other words, it determines the level of operations in
an enterprise where the undertaking neither gains a
profit nor incurs a loss.
Break-even Analysis
 Notations and Terminology Used in Break-even
Analysis:
 Break-even chart (BEC): It is a graph showing the variation in
total costs at different levels of output (cost line) as well as the
variation in the total revenues at various levels of output.
 Break-even point: It is the point of activity (sales volume)
where total revenues and total expenses are equal. It is point of
zero profit, i.e. stage of no profit and no loss. BEP can be used
to study the impact of variations in volume of sales and cost of
production on profits.
 Angle of incidence: It is an angle at which total revenue line
intersects total cost line. The magnitude of this angle indicates
the level of profit.
 Larger the angle of incidence, higher will be the profits per
unit increase in sales and vice versa.
Break-even Analysis
• Margin of safety: It is excess of budgeted or actual sales over
the break-even sales volume.
• Margin of safety = (actual sales minus sales at BEP)/actual
sales.
• A high margin of safety would mean that even with a lean
period, where sales go down, the company would not come in
loss area.
• A small margin of safety means a small reduction in sale
would take company to cross BEP and come in red zone.
Break-even Analysis
Calculation of BEP:
 The analysis is carried out for all elemental costs.
 The total cost function would give total fixed cost and total
variable cost for the company.
 The Break-even Point is that volume where the fixed and
variable costs are covered, but no profit exists.
 Thus at BEP, the total revenues equal to the total costs.
Break-even Analysis
 If F – Fixed Costs, which are independent on quantity
produced,
• a – Variable Cost per unit
• b – Selling Price per unit
• Q – Quantity (Volume of output)
 The total costs are given by:
 Total Cost (TC) = Fixed Cost + Variable Cost
 TC = (F + a⋅ Q)
 Sales Revenue (SR) = Selling price per unit × Quantity
 SR = b x Q
Break-even Analysis
 The point of Intersection of Total Cost line and the sales

revenue is the Break-even Point.
 At Break-even Point, Total Cost (TC) = Sales Revenue (SR)

• F+axQ=bxQ
• F = Q (b – a)
• Q = F/b - a in units ..............................(1)
Break-even Analysis
 Profit volume ratio (PVR): is defined as the ratio between
Contribution Margin and Sales Revenue.
• Profit Volume Ratio (f) = Contribution Margin
Sales Revenue
= Sales Revenue – Total Variable Cost
Sales Revenue
φ = (b Q – a Q) = Q (b-a) …………………….. (2)
bQ bQ
• From Equation 1, F = Q ⋅ (b – a), Hence Equation 2 can be
written as: φ = (b Q – a Q = F/b Q
bQ
Product Screening
 Break-Even Analysis
Break-even Analysis
Exercise:
 The owner of shop is contemplating adding a new product,
which will require additional monthly payment of Br 6,000.
Variable costs would be Br. 2.00 per new product, and its
selling price is planned to be Br 7.00 each.
(a) How many new products must be sold in order to break-
even?
(b) What would the profit (loss) be if 1,000 units were sold in
a month?
(c) How many units must be sold to realize a profit of BR
4,000?
Break-Even Analysis
 Solution:
o Fixed Cost (F) = Br 6,000, Variable Cost (a ) = Br 2 per unit,
Sales Price (b) = Br 7 per unit
a) QBEP = F/b-a = Br 6000/ Br 7 - Br 2 = 1200 Units
b) Profit (loss)/ Z/ = Total sales – Total cost
= bQ–F+aQ
= Q(b-a) -F
= 1000 units (Br 7-2) – Br 6000
= Br 5000 – Br 6000
Loss = Br 1000
Break- even Analysis
c. Z= b Q - F + a Q
= Q (b-a)- F
Q = (Z+F)/b-a
Q = (4000 Br + 6000 Br)/ 7-2
= 10,000 Br/ 5
= 2000 units
2.8. Statistical Models
• Most business decisions are made with only limited or
incomplete information.
• Statistical theory can help to control error associated with the
amount of data used in the decision process.
• Decision makers utilize probabilities, which are the most basic
measures of risks.
• Probabilities attach a quantitative value (between 0 and 1) to
the occurrence of an event.
• Events are called independent if the occurrence of one in no
way affects any other one.
• Mutually exclusive events automatically preclude each
other, such as classifying an item as good or defective.
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Chapter Three
Product Development and Design

3.1. Purpose of a Product Design
 Indeed, designs are ‘creative’ in nature and they
should be so.
 However, in an organizational context, the design
should serve the organizational objectives while
being creative.
 Since an organization has a purpose, the product
design should help to serve that larger purpose.
Purpose of a Product Design Cont’d
 Design starts with conceptualization which has to

have a basis.
 The basis of product design effort comes from:

a) Providing value to the customer,
b) The return on investment to the company,
c) The competitiveness of the company
A product’s design has tremendous impact

on:
 what materials and components would be used,
 which suppliers will be included,
 what machines or what type of processes will be
used to manufacture it,
 where it will be stored, and
 how it will be transported.
 Product development and design is primarily governed by
management decisions with respect to quality and pricing
policy.
 A development program and a market survey can provide
information as to market potentialities as well as functional,
operational, dependability, and durability requirements and
possibilities.
 Selection of the functional scope and application of
standardization, simplification, and specialization principles
are closely related to plant efficiency and to its net profit and
must therefore be an integral part of management policy.
 The economics of a proposed new product or new model have
to be analyzed in order to establish the market size that would
justify production.
Purpose of a Product Design
 Aesthetic considerations come normally at an advanced
stage, but may sometimes be a dominant factor in
design, especially with consumer goods.
 Product development and design must be also carried

out with close liaison with the production
departments, in order to ensure that the right
materials and processes are utilized and that their
implications are considered at a fairly early stage.
3.2. Product Analysis
 Many factors have to be analyzed in connection with

development and design of product. Some of these may be
grouped as follows:
1. Marketing aspect
2. Product characteristics aspect
(i) Functional aspect,
(ii) Operational aspect,
(iii) Durability and dependability aspects, and
(iv) Aesthetic aspect.
3. Economic aspect
(i) The profit consideration,
(ii) The effect of standardization, simplification, and specialization, and
(iii) The break-even analysis.
4. Production aspect
3.2.1. Market/ marketing aspect
 First, it is necessary to establish that the proposed
product will satisfy a demand in the market, that what it
is supposed to do and the services it can offer are both
desirable and acceptable.
 Market analysis consists of evaluating the product
concept with potential customers through interviews,
focus groups and other data collection methods.
 If no positive reaction is envisaged, there is no point
in proceeding with product design.
3.2.2. The Product Characteristics aspect
1. Functional Aspect:
 When the marketing possibilities have been explored, the
functional scope of the product has to be carefully
analyzed and properly defined.
 The definition of the objective itself rarely tells us very
much about the functional scope envisaged.
 For example: A washing machine has a clearly defined objective: to
wash clothing. This does not state, however, how the washing should
be carried out, whether the machine should be capable of heating
the water prior to washing, whether drying, or both, are to be done
by the machine, and if so by what method, and what should the
proportion be between automatic functioning and manual
supervision.
3.2.2. Product Characteristics Cont’d
2. Operational aspect:
 After determining the functional aspect, the operational
aspect has then to be considered.
 Not only must the product function properly, it must be
easy to handle and simple to operate.
 Sometimes it has to be adaptable to various operational
conditions, and very often it is subjected to varying
degrees of skill of potential operators.
3.2.2 Product Characteristics Cont’d
3. Durability and Dependability:

 Quality is not always a simple characteristic to define,
but durability and dependability are two factors that
often determine quality and have to be carefully
considered by the designer.
Durability is defined mainly by the length of the active life,

or endurance, of the product under given working conditions.
Dependability is the capability of the product to function

when called upon to do its job.
 Another aspect of durability is that of maintenance

and repair.
 The amount of repair and preventative maintenance
required for some products is closely related to quality
and design policy.
 This is of particular importance when the equipment is

supposed to operate continuously and when any repair
involves a loss of running time.
4. Aesthetics:
 The aesthetics are mainly concerned with molding the
final shape around the basic skeleton.
 In extreme cases, aesthetics are the governing factor in

design and completely dominate it. This is especially
true for many consumer goods, such as automobiles and
household equipment, or fashion goods.
3.2.3. Economic Analysis
 An economic analysis is the key to management
decision in product design policy.
 The economic analysis can proceed by seeking an
answer to the following questions:
o What capital expenditure is required for manufacturing the
new product?
o What total production costs per piece are envisaged?
o What is the reasonable margin of profit that can be expected?
o Do the price (= total costs + profit) and the features of the
product render it competitive in the market?
o In what numbers is the product expected to be sold?
3.2.4. Production Aspect
“Design for production” has become a motto among designers. The following three
aspects of production engineering have to be weighed:
1. Selection of processes that will be the most suitable and economical for the purpose.
Such a selection will have to consider:
(i) The production quantities involved. Some processes are very expensive to
operate unless used for a suitable production run.
(ii) Utilization of existing equipment. Such considerations may override
acquisition of equipment for an ideally more suitable process.
(iii) Selection of fixtures and other production aids, the use of which
may affect the design of components.
(iv) Sequence of operations and methods for sub-assembling and assembling.
(v) Limitation of skill. The selection of a process must be compatible with
available skill and sometimes may be solely governed by it. Mechanized and
push button equipment is particularly suitable to non-skilled or semiskilled
operators, but it is usually expensive to install and must be justified by long runs.
(vi) Application of new production processes. The designer has to consider not only
conventional techniques but also the latest developments and research into newer
production methods.
3.2.4. Production Aspect
2. Utilization of materials and components with the view

of:
(i) Selection of materials having appropriate specifications.
(ii) Selection of method or design to reduce waste and scrap.
(iii) Using standard components and assemblies.
(iv) Having interchangeability of components and assemblies
with in the product.
3. Selection of appropriate workmanship and tolerances
that satisfy quality requirements, but which are at the
same time compatible with the precision and quality that
can be attained through the available processes.
Product Analysis
3.3. A Framework for Process Design
 Product design: – the process of defining all of the companies

product characteristics
 Product design must support product manufacturability
(the ease with which a product can be made)
 Product design defines a product’s characteristics of:
• tolerances, and
• Performance standards.
• appearance,
• materials,
• dimensions,
 Process Selection: – the development of the process
necessary to produce the designed product.
A Framework for Product &Process Design
Cont’d
 Strategic Importance of Product Design:

 Products and service offerings must support the
company’s business strategy by satisfying the target
customers’ needs & preferences.
 If not, the company will lose its customer base and its
market position will erode.
A Framework for Product &Process Design
Cont’d
 Product Life Cycle:

 Product life cycle
stages
o Introduction
o Growth
o Maturity
o Decline
 Facility & process
investment depends on
life cycle
3.4. Steps in Product Design
 Idea Development:
o A need is identified & a product idea to satisfy it is put
together
 Product Screening:
o Initial ideas are evaluated for difficulty & likelihood of
success
 Preliminary Design & Testing
o Market testing & prototype development
 Final Design
o Product & service characteristics are set
A. Idea Development
Sources
 Existing & target customers
o Customer surveys & focus groups
 Benchmarking
o Studying “best in class” companies from your industry or
others and comparing their practices & performance to your
own.
 Reverse engineering
o Buying a competitor’s product & analyzing its design
characteristics & how it was made.
 Suppliers, employees and technical advances
B. Product Screening
The screening process consists of market
analysis, economic analysis, technical
analysis, and operation,
i. Operations:
oAre production requirements consistent
with existing capacity?
oAre the necessary labor skills & raw
materials available?
Conti…
ii. Market analysis
• Market analysis consists of evaluating the
product concept with potential customers
through interviews, focus groups and other
data collection methods.
iii. Economic Analysis

• Economic Analysis consists of developing
estimates of production and demand costs
and comparing them with estimates of
demand
88
Conti…
iv. Technical Analysis
• Technical analysis consists of determining
whether technical capability to manufacture
the product. This covers such issues as
ensuring materials are available to make the
product to the specification required, and
ensuring the appropriate machinery and skills
are available to work with these materials.
89
C. Preliminary Design & Testing
 General performance characteristics are

translated into technical specifications.
 Prototypes are built & tested (maybe offered for

sale on a small scale).
 Designs may be refined

D. Final Design
Specifications are set & then used to:

o Develop processing and service delivery
instructions
o Guide equipment selection
o Outline jobs to be performed
o Negotiate contracts with suppliers and
distributors
3.5. Designing Factors
Factors to be considered in process of product

design include:
1. Design for Manufacture
2. Product Life Cycle
3. Concurrent Engineering
1. Design for Manufacture (DMF)
• Minimize parts
• Design parts for
multiply applications
• Use modular design
• Simplify operations
1. Design for Manufacture (DFM)
 DFM Benefits:
 Lower costs:
oLower inventories (fewer, standardized
components)
oLess labor required (simpler flows, easier
tasks)
Higher quality:
o Simple, easy-to-make products means
fewer opportunities to make mistakes
2. Product Life Cycle
The product life cycle helps to understand:
o The limited life of products,
o Product sales that pass through distinct stages
and the related challenges to the seller,
o At what stage profits can rise and fall in the
product life cycle,
o The products’ requirement for different
marketing, human resource, finance, production
strategies in each stage of their life cycle.
 A design approach that uses multifunctional

teams to simultaneously design the product &
process.
 Replaces a traditional ‘over-the-wall’ approach

where one group does their part & then hands off
the design to the next group. It is a Sequential
Design
 Sequential Design:
 Concurrent Design:
 Concurrent Engineering Benefits:
 Representatives from the different groups can
better consider trade-offs in cost & design
choices as each decision is being made.
 Development time is reduced due to less rework
(traditionally, groups would argue with earlier
decisions & try to get them changed).
 Emphasis is on problem-solving (not placing
blame on the ‘other group’ for mistakes).
3.6. Process Selection
I. Process selection is based on five considerations
 Type of process; range from intermittent to
continuous
 Degree of vertical integration
 Flexibility of resources
 Mix between capital & human resources
 Degree of customer contact
II. Types of Processes
When considering product design the

issue of the design of the process
that is used to produce that design
should be considered
a. Project process
• A type of Processes that produce

products of high variety and low
volume are termed projects
01/07/2023 Compiled by: Matiwos Ensermu, PhD 102

b. Jobbing process
• Jobbing processes are used to make a
one-off or low volume product to a customer
specification. A feature of a jobbing process is
that the product moves to the location of
transforming resources such as equipment.
Thus resources such as staff and equipment
can be shared between many products

c. Batch process
Processes that produce products of
medium variety and medium
volume are termed batch which
denote that the products are grouped
as they move through the
design process.

d. Line process
• Processes that produce products of high
volume and low variety are termed line or
mass processes

e. Continuous operation
Processes that operate continually to produce a
very high volume of a standard product are
termed continuous.
-The products produced by a continuous operation
are usually a continuous flow such as oil and gas.
-Continuous processes use a large amount of
equipment specialized and dedicated to
producing a single product (such as an oil
refinery for example).

III. Process Technologies
 Automation
 Automated Material Handling:
o Automated guided vehicles (AGV)
o Automated storage & retrieval systems (AS/RS)
 Computer-Aided Design (CAD) software
 Robotics & Numerically-Controlled (NC) equipment
 Flexible Manufacturing Systems (FMS)
 Computer-Integrated Manufacturing (CIM)
3.7. Service Design
 Approaches to Service Design:
1. Differing designs
o Substitute Technology for People
o Get the Customer Involved
o Provide High Level of Customer Attention
Service Design
2. Service Package:
 It can be physical goods
 Should provide sensual benefits and
psychological benefits
Service Design
3. Service Characteristics
o Pure services
o Quasi-Manufacturing
o Mixed services
3.8. Product and Service Strategy
 Type of operation is directly related to product

and service strategy.
 Three basic strategies include:
1. Make-to-stock; in anticipation of demand
2. Assemble-to-order; built from standard
components on order
3. Make-to-order; produce to customer specification
at time of order.
Degrees of Vertical Integration & Make
or Buy
 Vertical integration refers to the degree a firm chooses to do
processes itself- raw material to sales.
o Backward Integration means moving closer to primary
operations
o Forward Integration means moving closer to customers
 A firm’s Make-or-Buy choices should be based on the
following considerations:
o Strategic impact
o Available capacity
o Expertise
o Quality considerations
o Speed
o Cost (fixed cost + variable cost)make = Cost (fixed cost +
Variable cost)buy
3.9. The Distinction between Design for Manufacture
(DFM) & Design for Excellence (DFX)
I. Design for Manufacture (DFM)

 DFM is an effort to modify the existing product’s (and/or
its components’) design or have a new product designed
in such a way that the processes to manufacture the same
are easier, quicker and or less expensive.
 Reducing the manufacturing time is a major

consideration. This has to be achieved without
compromising on quality.
Design for Manufacture (DFM)
 A good product design would facilitate the

manufacturing functions by making manufacturing
related functions to be done in:
o Less time,
o Less effort, and
o With less cost
Design for Manufacture (DFM)
The manufacturing related operation

include:
o Material procurement,
o Material handling,
o Product conversion (e.g. machining processes),
o Changeovers and set-ups, and
o Quality control procedures.
Design for Excellence
 The designer/team should look beyond its own

organization to other associated organizations in
the value chain.
 Design being a strategic activity, the design effort
should not only improve the present efficiencies but
should also keep the future in view while making the
design and other changes.
 Customer service should be the motto that should
drive the product design effort in any organization.
 Product design should be an all-round exercise,
contributing to the overall excellence of the
organization.
6.5. Design for Excellence
 Design for Excellence (DFX) includes the initiatives such

as:
o Design for Assembly,
o Design for Cost,
o Design for Manufacturing,
o Design for Test,
o Design for Logistics,
o Design for Performance, etc.
118
Chapter Four
Total Quality Management and Supply Chain

Management
4.1. concepts of Total Quality Management
 Total quality management (TQM) is a

commitment to excellence that emphasizes
continuous improvement in all aspects of an
organization's operation by sharing responsibility
among all the members of the organization.
 Managing quality supports differentiation, low cost,
and response strategies
 Quality helps firms increase sales and reduce costs
 Building a quality organization is a demanding task
Defining Quality
 The totality of features and characteristics of a
product or service that bears on its ability to satisfy
stated or implied needs.
 For some quality signifies the degree of perfection.

In fact, quality, like beauty, lies in the beholder’s
eyes.
 Quality is often described as getting things done

‘right first time, every time’
Implications of Quality
1. Company reputation
 Perception of new products
 Employment practices
 Supplier relations
2. Product liability
 Reduce risk
3. Global implications
 Improved ability to compete
Key Dimensions of Quality
Dimensions of quality:
 Performance  Durability
 Features  Serviceability
 Reliability  Aesthetics
 Conformance  Perceived quality
 Value
4.2. TQM Approaches
 To achieve TQM objectives, a number of
approaches may be used. These approaches
include:
i. Employee empowerment,
ii. Continuous improvement
iii. improved customer focus.
4.2. TQM Approaches
i. Employee empowerment: Quality problems would

be best solved with an emphasis on employee
involvement.
 Many organizations use quality circles as a means of
achieving employee empowerment.
 Under this approach, teams of up to 10 workers meet
regularly to solve problems related to process, design or
quality.
 The groups often make presentations to management with
their ideas, in order to improve the performance of the
organization.
4.2. TQM Approaches
ii. Continuous improvement /Kaizen: is a

process that involves a constant evaluation of,
and improvement in, the way things are done.
 Kaizen (Japanese for ‘improvement’) emphasizes
continuous improvement in all facets of an
organization, from the way the CEO manages to
the way assembly line workers perform their jobs.
 Although perfection is practically impossible to
achieve, it is the ‘striving’ which is important to
organizational culture.
4.2. TQM Approaches
iii. Improved customer focus: Quality should

be the responsibility of every employee.
 The TQM approach considers one of the most
important question an organization should ask:
‘What does the customer require?’
 All teams need to realize that they are serving a
customer.
This is as true for the employees that deal
directly with external customers.
To improve quality- Deming’s Fourteen
Points
1. Create consistency of purpose
2. Lead to promote change
3. Build quality into the product; stop
depending on inspection
4. Build long-term relationships based on
performance, not price
5. Continuously improve product, quality,
and service
6. Start training
7. Emphasize leadership
128
Deming’s Fourteen Points
8. Drive out fear
9. Break down barriers between
departments
10. Stop haranguing (to criticize or question
somebody )workers
11. Support, help, improve
12. Remove barriers to pride in work
13. Institute a vigorous program of
education and self-improvement
14. Put everybody in the company to work
on the transformation
129
4.3. The Cost of Achieving Good Quality
 The cost of achieving good quality includes:
The cost of designing goods with the quality
control characteristics;
The cost of designing process which conform to
quality specifications
The cost of implementation of staff training
programs
 Prevention costs - reducing the potential for defects
 Appraisal costs - evaluating products, parts, and
services
The Cost of Poor Quality
 The cost of poor quality can be categorized as
internal failure costs and external cost failures.
 Internal failure costs include:
oThe scrap cost of poor quality parts that
must be discarded;
oThe rework cost of fixing defective products;
oThe down time lost due to fixing or
replacing defective product;
The Cost of Poor Quality
 External failure costs: occur after the customer

has received the product and primarily related to
customer service: These include:
o The cost of responding to customer complaints;
o The cost of handling and replacing poor quality
products;
o The litigation cost resulting from product
liability;
o The lost sales incurred because of customer
good will affecting future business
4.4. Quality System
 Quality system is based on:
 Quality management system ISO 9001
 Environmental management system ISO 14001
 ISO 9001 – International Standard for quality management & it is:

 A family of standards and guidelines, that sets the requirements, for
the assurance of quality and management’s involvement in an
organization. To ensure products and services are consistent with
their intended purpose.
 Achieve customer satisfaction
 Continual improvement of performance and
competitiveness
 Continual improvement of processes, products and services
 Comply with regulatory requirements
Origin of ISO
 ISO the world wide federation developed to

harmonize national and international standards.
 Developed by American National Standards

Institute (ANSI) and American Society for Quality
(ASQ) in 1987 after 35 years
ISO 9001 and ISO 14001
• ISO 9001 and ISO 14001 are among ISO's most well
known standards ever.
• They are implemented by more than a million

organizations in some 175 countries.
• ISO 14001 helps organizations to implement

environmental management
• While ISO 9001 helps organizations to implement

quality management
ISO 9001 and ISO 14001
 ISO 14001 is for environmental

management. This means what the
organization does to:
o minimize harmful effects on the environment
caused by its activities,
o to conform to applicable regulatory requirements,
and to
o achieve continual improvement of its
environmental performance.
Quality Management Systems: ISO 9000
 Developed by the International Organization for Standardization, Geneva, in
1987 - the best known symbol of quality in the world
 Initially a quality accreditation process, but evolved into a system for quality
management, ISO 9000:2000, reviewed regularly
 Replaced in Nov 2008 by ISO 9001:2008 – no new requirements but

clarifies the requirements of ISO 9001:2000 and improves consistency with
the environmental management system standard IS14001:2004.
 Based on eight quality management principles:

1. Systems approach to management
2. Leadership
3. People involvement
4. Continuous improvement
5. Customer focus
6. Sound supplier relationships
7. Process approach
8. Decisions based on facts 137
-----------------------------------------
Supply Chain Management

4.5. Supply Chain Management
4.5.1. Over view of Supply Chain Management

 Supply chain is basically a group of independent
organizations connected together through the products
and services that they separately and/or jointly add
value in order to deliver them to the end consumer.
 Supply chain is very much an extended concept of an

organization, which adds value to its products or
services and delivers them to its customers.
Key Characteristics of Supply Chain
 Key Characteristics of supply chain:

 A supply chain is formed and can only be formed if
there are more than one participating companies.
 The participating companies within a supply chain normally do
not belong to the same business ownership, and hence there
is a legal independence among them.
 Those companies are inter-connected on the common
commitment to add value to the steam of material flow that run
through the supply chain.
 The material flow, to each company in supply chain, comes in as
the transformed inputs and goes out as the value added
outputs
 There are two types of values
 Value adding from production promotion
 Value adding from marketing operation

Basic Supply Chain Model
Objective and importance of Supply Chain
Management
 The objective is to build a chain of suppliers that
focuses on maximizing value to the ultimate customer.
 The strategic importance of supply chain management

is:
 The integration of the activities that procure materials and
services, transform them into intermediate goods and final
products, and deliver them through a distribution system
Supply Chain Management Activities
 Important activities include determining:

 Transportation vendors
 Credit and cash transfers
 Accounts payable and receivable
 Suppliers
 Distributors
 Warehousing and inventory
 Order fulfillment
 Sharing customer, forecasting, and production
information
The Four Interrelated Flows in SCM
1. Product & Service Flows:
The value-adding flow, as products & services
progress along the supply chain from point of
origin to point of final use or consumption.
Generally flow downstream the chain
but also upstream (e.g. reprocessing)
2. Information Flows:
The bi-directional flows of information throughout the chain – particularly
on customer demand which “pulls” the supply chain, but also on supply
conditions & eventual disruptions
3. Funds Flows:
The flows of funds, mainly upstream (payments for goods
& services received) but also in some cases downstream
4. Expertise & Technology Flows:

Sharing in areas such as IT systems, SCM expertise, product design,
145
marketing, developing joint SC performance indicators, etc.
4.5.2. Strategic SCM (cont’d)
 Key elements are the elimination of waste - especially inventory - and

continuous improvement
 Strategic SCM integrates supply & demand
 Effective SCM strategies can provide a sustainable competitive

advantage.
 Factors to consider:
Globalization
Outsourcing
Location
Product Life Cycle
Time-based Competition
e-business
Collaborative Planning, Forecasting & Replenishment
Supply Chain Risk Management 146
Strategic SCM (cont’d)
1. Globalization:
Globalization has increased competition and
changed the way organizations do business, making
supply chains longer & more complex
2. Outsourcing:
Outsourcing is obtaining a product previously produced internally from
an external supplier – it is occurring more frequently, especially global
outsourcing
3. Location:
The choice of location becomes even more complex when taken from
the perspective of the supply chain
01/07/2023 147
4. Product Life Cycle:

Product life cycles are becoming shorter as customers demand new
and a larger variety of products, leading to changing requirements and the
introduction of new supply chains
5. Time-based Competition:
Organizations and supply chains compete in
reducing delivery lead-times and increasing the
speed to produce new products
01/07/2023 148
6. E-business:
IT – especially electronic communications and e-business – has strongly stimulated the

development of SCM. Electronic information systems such as ERM, SRM & CRM today
play a crucial role in maintaining the essential links between
demand & supply
7. Collaborative Planning, Forecasting & Replenishment:
A recent development that facilitates information sharing among supply chain

participants in order to:
Improve customer service
Reduce inventories and logistics costs
Increase sales and profits
01/07/2023 149
8. Supply Chain Risk Management (SCRM):
A relatively new concept that has developed due to the risks of supply
globalization, single sourcing, outsourcing, lean systems, distribution, etc.; it
is intended to help identify the risks, protect from the consequences of these
risks and minimize any loss
01/07/2023 150
Types of Supply Chains - Examples
Different types of organizations require different types of supply chains – this

can be shown through a matrix linking uncertainty of demand with
uncertainty of supply
 Efficient Supply Chain (functional products and stable process): e.g. petrol,
diesel, cement, groceries
 Agile Supply Chain (innovative products with uncertain demand and
evolving processes): innovative high-tech products, e.g. “smart” mobile
phones
 Risk-hedging Supply Chain (functional products with high supply
uncertainty due to changing processes): seasonal products
 Responsive Supply Chain (innovative products with high demand
uncertainty but stable supply processes): e.g. fashion goods and music
01/07/2023 151
Supply Chain Leverage on Profit
One of the most widely used business performance measures

– particularly important in SCM - is the Return on Investment
(ROI) or Return on Capital Employed (ROCE), i.e. the benefit
received from assets, which is calculated as follows:
ROI = Profit (or Net Income)

Total Assets (or Capital Employed)
01/07/2023 152
Supply Chain Leverage on Profit (cont’d)
ROI can be broken down into two other important financial

ratios:
ROI = Profit = Profit x Sales

Total Assets Sales Total Assets
Now: Profit Margin = Profit

Sales
And: Asset Turnover = Sales

Total Assets
Therefore: ROI = Profit Margin x Asset Turnover

01/07/2023 153
Supply Chain Leverage on Profit (cont’d)
Profit margin is a measure of the ability to control costs

Asset turnover is a measure of the ability to use assets
(especially current assets, e.g. inventory), a particularly
important ratio in the fast moving consumer goods (FMCG)
industry where it is often reported as the number of
inventory turns per annum
SC leverage on profit can have a major impact on improving

profit by lowering costs: savings go straight to the bottom-line
01/07/2023 154
4.5.3. Greening the Supply Chain:
The Reprocessing Flow
 The Reprocessing Flow is a critical part of

“Greening the Supply Chain”
 The US Environmental Protection Agency (EPA) originally came up with

the concept of the “4Rs of waste management”: Reduce, Reuse,
Reallocate & Recycle
 However, the growth and ongoing development of Remanufacturing

must also be recognized as an important contributor to the greening of
the supply chain
-it includes Reduce, Reuse, Reallocate, Recycle & Remanufacture
01/07/2023 155
Greening the Supply Chain:
The 5 R’s of Reprocessing
REDUCE: The Reduction in use of materials,
e.g. reduce solid waste, reduce packaging, etc.
REUSE: The Re-use of materials,

e.g. returnable boxes, reusable packaging
RE-ALLOCATE: Extending the use of waste,

e.g. by - products used for another purpose
RECYCLE: Collection and separation of material,

e.g. waste paper, plastics, aluminium beverage cans
REMANUFACTURE: Resource regeneration,

e.g. reconditioning single-use cameras, printer cartridges
01/07/2023 156
The Sustainable Supply Chain
 The concept of a sustainable SC, although relatively recent, is becoming
increasingly important
 It involves managing the SC - from raw materials to the final consumer, along
with the reprocessing of any waste materials - with the objective of protecting
the environment while also being socially responsible
 The champions of sustainable SCM are no longer the manufacturers, but

rather the retailers in response to public concerns
01/07/2023 157
4.5.4. Supply Chain Management
 SCM has resulted in a major change in the way that we do

business.
 Effective supply chain management strategies have many

potential benefits:
 Improved customer service

 Lower inventory & higher inventory turnover
 Higher productivity
 Shorter lead-times
 Improved ROI
 Increased market share
01/07/2023 158
Fluctuations in Supply Chain
 The behavior of supply chain that are subjected to
demand fluctuations has been described as Bullwhip
Effect and occurs when there is a lack of
synchronization in supply chain members.
 The factors that increase the variability in the supply
chain include:
o A time lag between ordering materials and getting them
delivered;
o Leading to over-ordering in advance to ensure sufficient stock
are available to meet customer demand;
o Use of order batching
o Price fluctuation such as price cuts and quantity discount
Fluctuations in Supply Chain Cont’d
 There are some commonly agreeable measures

to handle the bullwhip effect:
• Improve information sharing through EDI (electronic
data interchange), POS (point of sale systems), and web-
based IS (information systems);
• Reducing batch ordering;
• Coordinating capacity and production planning;
• Apply appropriate safety stocks to insulate the oscillation;
• Reducing inventory level through JIT (just in time), VMI
(vendor managed inventory), QR (quick response).
Supply Chain Procurement
 Supply chain procurement deals with the activities

such as selecting suppliers, approving orders and
receiving goods from suppliers.
 The increased importance of procurement as
compared to purchasing include:
o Increased use of process technology both in terms of
material and information processing;
o The efficient use of automated system that require a high

quality and reliable sources of materials to be available.
Supply Chain Distribution
 Vertical Integration
Vertical Integration Examples of Vertical Integration

Raw material Iron ore Silicon Farming
(suppliers)
Backward
Steel
integration
Current Integrated
transformation Automobiles circuits Flour milling
Distribution
Forward integration Circuit boards
systems
Finished goods Computers

(customers) Dealers Watches Baked goods
Calculators
Supply Chain Distribution Cont’d
 Vertical Integration:
• Developing the ability to produce goods or service
previously purchased
• Integration may be forward, towards the customer, or
backward, towards suppliers
• Can improve cost, quality, and inventory but requires
capital, managerial skills, and demand
• Risky in industries with rapid technological change
4.5.5 . Materials Handling
 Objective is to obtain efficient operations
through the integration of all material
acquisition, movement, and storage activities.
 Allows competitive advantage to be gained
through reduced costs and improved customer
service.
Materials Handling Cont’d
 Transportation system to be used:
 Trucking
 Moves the vast majority of manufactured goods
 Chief advantage is flexibility
 Railroads
 Capable of carrying large loads
 Little flexibility though containers and piggybacking
have helped with this
 Airfreight
 Fast and flexible for light loads
 May be expensive
 Waterways
 Typically used for bulky, low-value cargo
 Used when shipping cost is more important
than speed.
 Pipelines
 Used for transporting oil, gas, and other
chemical products
4.5. 6. Warehousing
 Part of firms logistics system that stores products at
and between point of origin and point of consumption.
 Warehousing provides time and place utility for raw

materials, industrial goods, and finished products,
allowing firms to use customer service as a dynamic
value-adding competitive tool.
Warehousing Cont’d
 The role of warehouse in the supply chain management include:
-The warehouse is where the supply chain holds or stores goods.
 Functions of warehousing include

 Transportation consolidation
 Product mixing
 Docking
 Service
 Protection against contingencies
Type of Warehouse
• Public Warehousing
• Private Warehousing
• Contract Warehousing
• Multi-client Warehousing
Warehouse Activities
• Receive goods
• Identify the goods

• Dispatch goods to storage
• Hold goods
• Pick goods
• Marshal shipment
• Dispatch shipment
• Operate an information system

4.5.7. Managing the Supply Chain
 There are significant management issues in controlling

a supply chain involving many independent
organizations:
 Mutual agreement on goals
 Trust
 Compatible organizational cultures
174
Chapter Five
JIT and Lean Systems

Just-in-Time: Definitions
…is an operations philosophy based on the elimination of waste that enables
an organization to consistently produce & deliver products according to
customer demand
 Goods & services are produced / provided just when

needed - neither early nor late - at the right place, in the
right quantity and of the right quality
 SCM has led a shift from JIT within an organization to JIT
along the supply chain
 Today terms such as “lean operations” and “lean supply
chains” are preferred
So JIT has become…

…an operations philosophy of continuous improvement aimed at the
elimination of waste along the entire supply chain
The Foundations of JIT
1 The Elimination of waste
The heart of JIT is eliminating waste, which is the best way to reduce
costs and improve ROI: “Inventory is Evil”; and as “Inventory is Waste,
thus all Waste is Evil”
2 Continuous improvement
JIT is a system of enforced problem-solving to eliminate waste using
continuous improvement (kaizen) to achieve its objectives
3 Respect for people

It requires a supportive & progressive work environment, demanding
respect for all staff, suppliers & customers
4 Long-term strategic vision

Organizations adopting JIT must make it the basis for their mission and
for all their goals

1 Elimination of Waste
Waste is any activity that does not add value

(the Japanese term for waste is “muda”)
 The elimination of waste is at the heart of the Toyota

Production System created by their Chief Engineer, Taiichi
Ohno
 He established seven categories of waste: “The Seven
Wastes”
 More “wastes” have since been added, so they are now
ten !

1
U F D
N P U D A E
N R E N U I
E N P
E O X N F L L
C C C E D U
O E E E
W E E E C C R T
V S S S R E
E A E T I
I S S S S U
R I T O
T A S V T N
P R W I I O
R I A E
N Y A N R L
O I O
D G S V Y P U F
T T E Z S
U R E
T R E N M O E N
C A T D
T I O D A
M N O T U S T.
I S R S U
O E I C
P Y O K P
N T I R
O N S P E
R L L
L S
T Y O
A S
U
T C R
I H C
O A E
01/07/2023 Compiled
N by: Matiwos Ensermu, PhD I 179
S
N
2 Continuous Improvement
…is a fundamental principle of JIT as well as one of the 3 key
elements of TQM, and is crucial to the elimination of waste
Continuous improvement techniques:
1. Minimization of inventory
2. Reducing set-up times
3. Small lot sizes
4. Uniform plant loading (level scheduling)
5. Push vs. Pull
6. Quality at source
7. JIT Layout
8. JIT Suppliers
3 Respect for People
 Respect for people is central to JIT because continuous

improvement requires staff participation
 Trust and teamwork are prerequisites for JIT and Lean
systems to work
 Originally this referred only to employees, but today it has
been extended to suppliers and customers – in fact to all
participants along the supply chain

4 JIT Philosophy
Two forms of JIT:

 JIT Philosophy (sometimes called “Big JIT”)
 JIT as an operations technique that typically includes the use of

kanbans (the Japanese word for “signal”) to control the
movements of goods (also known as “Little JIT”)

4 JIT Philosophy (cont’d)
Parameter JIT/Lean Systems Traditional Systems

Low WIP – can be controlled High WIP. High inventory
by kanbans. Inventory is conceals hidden problems
Inventory waste and must be reduced
to expose problems
Capacity Produce only what is required High capacity utilization
JIT, cellular: Workstations Large space requirement
Layout close together, small space
required
Set-ups Many, short set-up times Few, long set-up times
Lot sizes Small Large
Flexible Relatively inflexible
Flexibility Short production runs. Long production runs
Few or single; collaborative Many; competitive
Suppliers Long-term relationships Short-term relationships
Many, frequent small deliveries Fewer, larger deliveries.
Deliveries Deliver to stores
Deliver directly to shop floor
Employees Human Assets Necessity
Forecasts communicated to Independent forecasts
Forecasting all supply chain participants Not communicated to
customers or suppliers
Maintenance Planned Remedial
Maintenance
• To ensure that all company assets meet and
continue to meet the design function of the
asset
• Maintenance management is the science,
art, philosophy of managing all assets
owned by a production organization, based
on maximizing the return on investment in
assets and minimizing its life cycle
costs(inception to disposal)
Maintenance
…encompasses the various measures undertaken on equipment
and systems to ensure that they function according to
specification and meet quality, output and safety requirements
at the lowest possible cost
 Maintenance is the science of caring for things
 It is vital not only to JIT operations but to all lean
operations along a supply chain, where
an unforeseen failure can have a
catastrophic and knock-on effect
throughout the supply chain
 It is equally important in the service sector – e.g. the
maintenance of information
systems, transport fleets, etc.
Maintenance (cont’d)
Maintenance planning:
 Failure Mode and Effect Analysis (FMEA): considers for each

failure the type, the mechanism, the risk, and its effects
 The outcome of failure analysis is maintenance planning
 Failure analysis often incorporates the well-known Bathtub
Curve

Typical Bath-tub Curve
FAILURE RATE showing levels of reliability over time
Burn-in Normal Wear-out

Phase Phase Phase
(infant) (adult) (aged)
01/07/2023 TIME
Compiled by: Matiwos Ensermu, PhD 187
Categories:
1. Breakdown or Repair (Remedial) Maintenance

This is performed after the equipment or system fails – a
most undesirable situation!
2. Planned Maintenance
A generic term encompassing scheduled maintenance,
preventive maintenance and predictive maintenance, in
order to prevent equipment and systems failure

Categories:
3. Preventive Maintenance
Carried out to ensure that production is not interrupted by
equipment failing or malfunctioning; it is performed before the
equipment or systems break down
4. Predictive Maintenance
Used to predict when equipment is likely to fail by constantly
monitoring it to ascertain when maintenance should be
undertaken

Categories:
5. Total Productive Maintenance (TPM)

The application of JIT and TQM principles to maintenance:
 “Zero defects, zero breakdowns, zero accidents”
 Includes planned, preventive & predictive maintenance
 All staff can participate (as in TQM)
 An essential part of lean operations & lean supply chains

Corrective maintenance steps
• Fault detection
• Fault isolation
• Fault elimination
• Verification that the fault has been eliminated

Strategic Importance of
Maintenance and Reliability
 Failure has far reaching effects on a firm’s
 Operation
 Reputation
 Profitability
 Dissatisfied customers
 Idle employees
 Profits becoming losses
 Reduced value of investment in plant and
equipment

Benefits of JIT
 A substantial reduction in all categories of inventory. As a

result, inventory turnover increases markedly and far less
space is required for inventory.
 Improved quality from suppliers and
rapid resolution of any quality problems.
 Improved relationships with suppliers
and lower purchasing costs.
 More frequent on-time deliveries
with reduced lead-times.
 Due to all of the above, decreased costs, enhanced supply
chain competitiveness, increased sales and improved ROI.
JIT & Lean Systems…
 JIT is costly and time-consuming, requiring considerable resources, total
commitment by management & staff, and the full support of key suppliers
 Like TQM, everyone in the organization is involved, requiring extensive training
programmes
 Yet the philosophy of JIT & lean operations can be embraced by organizations
of all sizes & sectors
 Lean systems are essential to SCM: elimination of inventory & waste across
the supply chain
 As the SCM philosophy develops, so too the importance of JIT & Lean
Systems continues to increase

Lean Thinking
• Five lean principles:

1. Specify value from the customer’s point of view.
2. Identify the value stream, the complete set of
activities required to create the output valued by the
customer.
3. Make value flow through the value stream by
eliminating non-value added activities and
streamlining the remaining value added steps.
4. Have the customer pull value through the value
stream.
5. Pursue perfection.
Chapter 11: Just-in-Time Systems 195

History and Philosophy of Lean
• Lean production (also known as

synchronous manufacturing or simply
lean) is the name given to the Toyota
Production System.
• The Toyota system is known for its minimal
use of resources and elimination of all
forms of waste, including time.
• Just-in-time (JIT) is a substantial portion of
the Toyota system.

Japan
• Japan is a small country with minimal
resources and a large population.
• Their work systems tend to be based on
three primary tenets:
– Minimizing waste in all forms.
– Continually improving processes and systems.
– Maintaining respect for all workers.

Traditional Systems Compared with Lean
• Priorities: With lean, the target market is

usually limited and the options are also
limited.
• Product/Service Design: Engineering in the
lean firm designs standard outputs and
incrementally improves each design.
• Capacity: Excess capacities are kept to a
minimum to avoid inherent waste,
particularly the WIP inventories.

continued
• Layout: With lean, equipment is moved as

close together as possible so that parts can
be actually handed from one worker or
machine to the next.
• Workforce: Lean strives for a broadly
skilled, flexible worker who will look for
and solve production problems wherever
they appear.

continued
• Inventories: In Japan, inventory is seen as an

evil in itself. It is a resource sitting idle, wasting
money. Reduce the inventories until inventory
investment is practically gone. The result is a
greatly improved and smoother production
system.

continued
• Suppliers: With lean, the desire is for

frequent, smooth deliveries of small lots
with the supplier considered part of the
team.
• There is no incoming inspection of the
materials to check their quality—all parts
must be of specified quality and guaranteed
by the supplier.

continued
• Planning and Control: In the lean approach,

the focus is on control. Thus, procedures
are kept simple, visual, and made as routine
as possible. Rather than planning and
forecasting for an uncertain future, the firm
attempts to respond to what actually
happens in real time with flexible, quick
operations.

continued
• Quality: The traditional approach to quality is

to inspect the goods at critical points in the
production system to weed out bad items and
correct the system. With lean, the goal is zero
defects and perfect quality.

continued
• Maintenance: In the traditional approach to

production, maintenance has been what is termed
corrective maintenance, although preventive
maintenance is also common. In lean
organizations, the maintenance function assumes
greater responsibility and has greater visibility.
• The lean enterprise relies much more heavily on
the operator for many of the maintenance tasks,
especially simple preventive maintenance.

Pursue Perfection
• At the heart of lean is the concept of value. Another common
definition of value is that it is the opposite of waste.
• Five commonly used tools lean organizations turn to in their

pursuit of perfection: 5S, the visual factory, kaizen, poka yoke,
and total productive maintenance.
 The 5s
– Sort
– Straighten (Set in order)
– Scrub (Shine)
– Systemize
– Standardize (Sustain)

Benefits of Lean
• Five primary types of benefits:

– Cost savings
– Revenue increases
– Investment savings
– Workforce improvements
– Uncovering problems

207
Chapter Six
Capacity Planning, Facility Location and
Layout Decisions
6.1. Capacity Planning
 Capacity planning comprises the resources to

serve customers, process information or make
products and is a mix of the people, systems,
equipment and facilities needed to meet the
services or products involved.
 Capacity planning consists of both estimating

future customer demand and determining current
capacity levels to meet that demand.
 The capacity of the manufacturing unit can be
expressed in number of units of output per period.
 In some situations measuring capacity is more

complicated when they manufacture multiple
products.
 In such situations, the capacity is expressed as
man-hours or machine hours.
 Design Capacity:
 Designed capacity of a facility is the planned or

engineered rate of output of goods or services
under normal or full scale operating conditions.
 For example: the designed capacity of the cement
plant is 100 tones per day. Capacity of the sugar
factory is 150 tones of sugarcane crushing per day.
 The design capacity should reflect management’s
strategy for meeting the demand.
 The best approach is to plan for some in-between
level of capacity.
 System/effective capacity: System capacity is the
maximum output of the specific product or product mix
the system of workers and machines is capable of
producing as an integrated whole.
 System efficiency: The system efficiency is expressed as

ratio of actual measured output to the system capacity.
Design and Systems Capacity Cont’d
 Different measures of capacity are useful in defining
two measures of system effectiveness: efficiency and
utilization.
 Efficiency is the ratio of actual output to effective
capacity.
Actual output
Efficiency = Effective capacity
 Utilization is the ratio of actual output to design

capacity.
Actual output
Utilization = Design capacity
Expected output = Effective capacity x Efficiency

6.2. Process of Capacity Planning
 Capacity planning is concerned with defining the
long-term and the short-term capacity needs of an
organization and determining how those needs will
be satisfied.
 Capacity planning decisions are taken based upon

the consumer demand and this is merged with the
human, material and financial resources of the
organization.
Process of Capacity Planning
 Capacity requirements can be evaluated from two

perspectives—long-term capacity strategies and
short-term capacity strategies.
I. Long-term capacity strategies: Long-term capacity

requirements are more difficult to determine
because the future demand and technology are
uncertain.
 Forecasting for five or ten years into the future is
more risky and difficult.
 Long-range capacity requirements are dependent on

marketing plans, product development and life-cycle
of the product.
 Long-term capacity planning is concerned with
accommodating major changes that affect overall
level of the output in long-term.
 Marketing environmental assessment and
implementing the long-term capacity plans in a
systematic manner are the major responsibilities of
management.
II. Short-term capacity strategies: Managers often use

forecasts of product demand to estimate the short-term
workload which the facility at hand requires.
 Managers looking ahead up to 12 months,
anticipate output requirements for different
products, and services.
 Managers then compare requirements with existing
capacity and then take decisions as to when the
capacity adjustments are needed.
 The short-term capacity strategies are:

1. Inventories: Stock finished goods during slack
periods to meet the demand during peak period.
2. Backlog: During peak periods, the willing customers
are requested to wait and their orders are fulfilled
after a peak demand period.
3. Employment level (hiring or firing): Hire additional
employees during peak demand period and layoff
employees as demand decreases.
4. Employee training: Develop multi skilled employees

through training so that they can be rotated among
different jobs. The multi skilling helps as an
alternative to hiring employees.
5. Subcontracting: During peak periods, hire the capacity
of other firms temporarily to make the component
parts or products.
6. Process design: Change job contents by redesigning the job.
6.3. Facility Location
 The selection of location is a key-decision as large investment
is made in building plant and machinery.
 It is not advisable or not possible to change the location very
often.
 Before a location for a plant is selected, long range forecasts
should be made anticipating future needs of the company.
 The plant location should be based on:
 the company’s expansion plan and policy,
diversification plan for the products, changing market
conditions,
the changing sources of raw materials and many other factors
that influence the choice of the location decision.
 The purpose of the location study is to find an optimum
location one that will result in the greatest advantage to the
organization.
6.3.1. Need for Selecting a Suitable Location Facility
 The need for selecting a suitable location arises because of
three situations.
I. When starting a new organization, i.e., location choice
for the first time.
 Cost economies are always important while selecting
a location for the first time
II. In case of existing organization - In this case a
manufacturing plant has to fit into a multi-plant operations
strategy. That is, additional plant location in the same
premises
III. In case of Global Location - In case of global locations,
there is scope for virtual proximity and virtual factory.
 Virtual Proximity: a market presence in the country of the
customers is quite necessary
 Virtual Factory: use of its business associates’ operations facilities.
6.3.2. Factors Influencing Plant Location/Facility Location
 Facility location is the process of determining a geographic

site for a firm’s operations.
 Managers service and manufacturing organizations must
weigh many factors when assessing the desirability of a
particular site.
 On the basis of the nature of the organization, the factors that
influence the plant location or facility location can be
categorized as:
1. General locational factors: which include controllable
and uncontrollable factors for all type of organizations
2. Specific locational factors: specifically required for
manufacturing and service organizations.
Factors Influencing Plant Location/Facility Location
1. General Locational Factors

 Following are the general factors that influence the
selection for location of plant in case of all types of
organizations.
 Controllable factors:
o Proximity to markets
o Proximity to suppliers and resources
o Transportation facilities
o Infrastructure availability
o Labor and wage
o Capital
Factors Influencing Plant Location/Facility Location
Cont’d
 Uncontrollable Factors
 Government policy
 Climate conditions
 Supporting industries and services
 Community and labor attitudes
 Community Infrastructure.
Factors Influencing Plant Location/Facility
Location Cont’d
2. Specific Locational Factors.
 The dominant specific locational factors include:
o Favorable labor climate
o Quality of life
o Utilities, taxes, and real estate costs
6.3.3. Locational Economics
 An ideal location is one which results in lowest

production cost and least distribution cost per unit.
 These costs are influenced by a number of factors
such as:
 The costs of land, building, equipment, labor,
material,
 Other factors like community attitude,
community facilities and housing facilities
 Economic analysis is carried out to decide as to
which site is best location.
6.4. Plant Layout Design
 Plant layout refers to the physical arrangement of

production facilities.
 It is the configuration of departments, work centers

and equipment in the conversion process.
 It is a floor plan of the physical facilities, which are

used in production.
 Layout design is important because it can have a
significant effect on the cost and efficiency of an
operation and can entail substantial investment in time
and money.
Layout Design
 The primary goal of the plant layout is to maximize the profit by

arrangement of all the plant facilities to the best advantage of
total manufacturing of the product.
 The objectives of plant layout are:
 Streamline the flow of materials through the plant.
 Facilitate the manufacturing process.
 Maintain high turnover of in-process inventory.
 Minimize materials handling and cost.
 Effective utilization of men, equipment and space.
 Make effective utilization of cubic space.
 Flexibility of manufacturing operations and arrangements.
 Provide for employee convenience, safety and comfort.
 Minimize investment in equipment.
 Minimize overall production time.
 Maintain flexibility of arrangement and operation.
 Facilitate the organizational structure.
6.5. Classification of Layout
1. Process layout: Process layout is recommended for batch

production.
 All machines performing similar type of operations are
grouped at one location in the process layout.
 In process layout the arrangement of facilities are grouped
together according to their functions.
e.g., all lathes, milling machines, etc. are grouped in the
shop will be clustered in like groups.
2. Product layout: In this type of layout, machines and auxiliary
services are located according to the processing sequence of
the product.
 If the volume of production of one or more products is
large, the facilities can be arranged to achieve efficient
flow of materials and lower cost per unit.
Classification of Layout Cont’d
3. Combination layout: A combination of process and product

layouts combines the advantages of both types of layouts.
 A combination layout is possible where an item is being made in
different types and sizes.
 Here machinery is arranged in a process layout but the process

grouping is then arranged in a sequence to manufacture various
types and sizes of products.
 It is to be noted that the sequence of operations remains same

with the variety of products and sizes.
4. Fixed position layout: This is also called the project type

of layout.
 In this type of layout, the material, or major components
remain in a fixed location and tools, machinery, men and
other materials are brought to this location.
 This type of layout is suitable when one or a few pieces of

identical heavy products are to be manufactured and when
the assembly consists of large number of heavy parts, the
cost of transportation of these parts is very high.
5. Group layout : Group layout is the analysis and comparisons

of items to group them into families with similar
characteristics.
 Group layout can be used to develop a hybrid between pure

process layout and pure flow line (product) layout.
 This technique is very useful for companies that produce

variety of parts in small batches to enable them to take
advantage and economics of flow line layout
6.6. Service Layout
 The major factors considered for service providers, is

an impact of location on sales and customer
satisfaction.
 Customers usually look about how close a service
facility is, particularly if the process requires
considerable customer contact.
 Hence, service facility layouts should provide for easy
entrance to these facilities from the freeways.
 Well-organized packing areas, easily accessible
facilities, well designed walkways and parking areas
are some of the requirements of service facility layout.
 Service facility layout will be designed based on degree of
customer contact and the service needed by a customer.
6.7. Organization of Physical Facilities
 The following are the most important physical
facilities to be organized:
1. Factory building: is a factor which is the most important
consideration for every industrial enterprise.
 A modem factory building is required to provide protection
for men, machines, materials, products or even the
company’s secrets .
 It has to serve as a part of the production facilities and as a
factor to maximize economy and efficiency in plant
operations.
 It should offer a pleasant and comfortable working
environment and project the management’s image and
prestige.
 Factory building is like skin and bones of a living body for
an organization.
Organization of Physical Facilities Cont’d
2. Lighting: It is estimated that 80 per cent of the information

required in doing job is perceived visually.
 Good visibility of the equipment, the product and the data

involved in the work process is an essential factor in
accelerating production, reducing the number of defective
products, cutting down waste and preventing visual fatigue and
headaches among the workers.
 It may also be added that both inadequate visibility and glare

are frequently causes accidents.
 Excessive contrasts in lighting levels between the worker’s
task and the general surroundings should also be avoided.
 The use of natural light should be encouraged.
3. Climatic conditions: Control of the climatic conditions at

the workplace is paramount importance to the workers health
and comfort and to the maintenance of higher productivity.
 With excess heat or cold, workers may feel very

uncomfortable, and their efficiency drops.
 In addition, it can lead to accidents.
 It is essential to avoid excessive heat or cold, and wherever
possible to keep the climatic conditions optimal so that the
body can maintain a thermal balance.
4. Ventilation: Ventilation is the dynamic parameter that

complements the concept of air space.
 For a given number of workers, the smaller the work

premises, the more should be the ventilation.
 Ventilation replaces contaminated air by fresh air, whereas

as the air-circulation merely moves the air without renewing
it.
 Ventilation disperses the heat generated by machines and
people at work.
 Adequate ventilation should be looked upon as an important
factor in maintaining the worker’s health and productivity.
5. Work-related welfare facilities: Work-related welfare

facilities offered at or through the workplace can be important
factors.
 Some facilities are very basic, but often ignored, such as

drinking-water, sanitary facilities like toilets, and first-aid
medical care at work place in case of accidents or unforeseen
sickness.
239
CHAPTER SEVEN
INVENTERY/ MATERIAL
MANAGEMENT
7.1. Concepts of Materials Management
 It is concerned with planning, organizing and

controlling the flow of materials from their initial
purchase through internal operations to the service
point through distribution.
OR
 Material management is a scientific technique,

concerned with Planning, Organizing &Control of
flow of materials, from their initial purchase to
destination.
Purposes/ Functions of Materials Management
•To gain economy in purchasing
•To satisfy the demand during period of replenishment
•To carry reserve stock to avoid stock out
•To stabilize fluctuations in consumption
•To provide reasonable level of client services
Four basic needs of Material management:
1. To have adequate materials on hand when
needed;
2. To pay the lowest possible prices, consistent with
quality and value requirement for purchases
materials;
3. To minimize the inventory investment;
4. To operate efficiently.
Elements of material management:
1. Demand estimation
2. Identify the needed items
3. Identifying the trends in Consumption
4. Review with resource constraints
Basic principles of material management:

5. Effective management & supervision
2. Sound purchasing methods
3. Skillful & hard poised negotiations
4. Effective purchase system
5. Should be simple
6. Must not increase other costs
7. Simple inventory control program
7.2.Inventory Planning
 It means stocking adequate number and

kind of stores, so that the materials are
available whenever required. Scientific
inventory control results in optimal balance.
Functions of Inventories
• Transit Inventories
• Buffer Inventories (safety stocks)
• Anticipation Inventories
• Decoupling Inventories
• Cycle Inventories
Functions of inventory control

• To provide maximum supply service, consistent with
maximum efficiency & optimum investment.
• To provide cohesion between forecasted & actual
demand for a material.
246
Forms of Inventories
• Raw materials
• Maintenance, repair, and operating supplies
• Work-in-process (WIP)
• Finished goods
247
Inventory-Related Costs
• Ordering or setup costs
• Inventory carrying or holding costs
• Stockout costs
• Opportunity costs
• Cost of goods
248
Ordering Cost:
 Totalordering cost generally includes:

 The cost of processing order like all record
keeping,
 Transportation cost to get order from the supplier,
 The cost of unloading the order and placing it in
inventory,
 Salaries of employees involved in the ordering
process,
 All supplies used ordering, including forms,
postage, telephone, and computer time.
Carrying Cost:
 The carrying cost also called the holding cost is the
cost incurred by the store for carrying the items in
the inventory.
 The total carrying cost generally includes some or all of the following items:
 Direct storage cost ( rent, heat, lights, maintenance, security, handling,
recordkeeping, labor, etc in the warehouse
 Deferred profit on investment ( items in inventory does not produce a profit)
 Interest on the investment in inventory
 Product obsolescence
 Depreciation, taxes, insurance, etc.
Types of Inventory Management Systems
• Reorder point systems

– time between orders varies
– constant order quantity
• Periodic review systems
– time between orders fixed
– order quantity varies
• Material requirements planning (MRP)
– dependent demand items
251
7.3. Inventory Control
 Inventory generally refers to the materials in stock.

 It is also called the idle resource of an enterprise.
 Inventories represent those items which are either
stocked for sale or they are in the process of
manufacturing or they are in the form of materials,
which are yet to be utilized.
 It is necessary to hold inventories of various kinds to
act as a buffer between supply and demand for efficient
operation of the system.
 An effective control on inventory is a must for smooth
and efficient running of the production cycle with least
interruptions.
Meaning of Inventory Control
 Inventory control is a planned approach of

determining what to order, when to order and how
much to order and how much to stock so that costs
associated with buying and storing are optimal without
interrupting production and sales.
Inventory control basically deals with two problems:

(i) When should an order be placed? (Order level/ order
frequency), and
(ii) How much should be ordered? (Order quantity).
Reasons for Keeping Inventories
 To stabilize production
 To take advantage of price discounts
 To meet the demand during the replenishment period
 To prevent loss of orders (sales)
 To keep pace with changing market conditions

Benefits of Inventory Control
 It is an established fact that through the practice of
scientific inventory control, following are the benefits
of inventory control:
i. Improvement in customer’s relationship because of
the timely delivery of goods and service;
ii. Smooth and uninterrupted production and, hence,
no stock out.
iii. Efficient utilization of working capital which helps
in minimizing loss due to deterioration,
obsolescence damage and pilferage;
iv. Economy in purchasing; and
v. Eliminates the possibility of duplicate ordering.
Techniques of Inventory Control
 When the number of items in inventory is large and
then large amount of money is needed to create such
inventory, it becomes the concern of the management to
have a proper control over its ordering, procurement,
maintenance and consumption.
 The control can be for order quality and order
frequency.
 The most widely used method of inventory control is

known as ABC analysis.
 In this technique, the total inventory is categorized
into three sub-heads and then proper exercise is
exercised for each sub-heads.
Techniques of Inventory Control
I. ABC Aanalysis method

(ABC = Always Better Control)
 Thisis based on cost criteria.
 It helps to exercise selective control when confronted with
large number of items and rationalizes the number of orders,
number of items & reduce the inventory.
o About 10 % of materials consume 70 % of resources
‘A’ ITEMS
Small in number, but consume large amount of
resources.
Must have:
• Tight control
• Rigid estimate of requirements
• Strict & closer watch
• Low safety stocks
• Managed by top management
‘C’ ITEMS
Larger in number, but consume lesser amount of
resources
Must have:
• Ordinary control measures
• Purchase based on usage estimates
• High safety stocks
ABC analysis does not stress on items those are
less costly but may be vital .
‘B’ ITEM
Intermediate
Must have:
• Moderate control
• Purchase based on rigid requirements
• Reasonably strict watch & control
• Moderate safety stocks
• Managed by middle level management
II. Economic order of quantity
ECONOMIC ORDER OF
QUANTITY(EOQ)
PURCHASING CARRYING
COST COST
• Re-order level: stock level at which fresh order is
placed.
•Average consumption per day x lead time +

buffer stock
• Lead time: Duration time between placing an

order & receipt of material
•Ideal – 2 to 6 weeks.
EOQ Model Assumptions
 Demand is known & constant - no safety
stock is required
 Lead time is known & constant
 No quantity discounts are available
 Ordering (or setup) costs are constant
 All demand is satisfied (no shortages)
 The order quantity arrives in a single

shipment
EOQ Assumptions
Annual Cost
Total Cost Curve
Holding Cost
Order (Setup) Cost
Order Quantity
EOQ Assumptions
Number of Orders = D / Q
Ordering costs = Oc x (D / Q)
Average inventory
units = Q / 2
$ = (Q / 2) x C
Cost to carry
average inventory = (Q / 2) x I x C
= (Q /2) x Cc
I= Carrying /Holding cost (% of Cost per unit of inventory)
EOQ Assumptions
TC EOQ = (Q/2) x Cc + (D/Q) x Oc

Carrying inv carry cost Ordering cost
Where:
TC = Annual total cost
D = Annual demand
Q = Quantity to be ordered
Oc = Ordering or set up cost per unit per annual
Cc = Annual inventory carrying/holding cost per unit
EOQ Assumptions
 EOQ can be determined as follows:
Total annual carrying cost = Total Annual ordering cost (at EOQ point)
Q/ 2 x (Cc) = D/Q x (Oc)
Q2 /2 x (Cc) = D x (Oc) ( multiplying both sides by Q)
Q2 x (Cc) = 2D x (Oc) (multiplying both sides by 2)
Q2 = 2D (Oc) ( Dividing both sides by Cc)
Cc
Q2 = 2D (Oc)
Cc
2  D  Oc
EOQ 
Cc
When to Order: The Reorder Point
• Without safety stock:

R  dL
where R  reorder point in units
d  daily/weekly demand in units
L  lead time in days/weeks
• With safety stock:

R  dL  SS
where SS  safety stock in units
 Expected number of order (N) = D/Q
 Expected Time between orders (T) = Working days per year/N
 Demand per day (d) = Annual demand (D)/ Working days per year
EOQ Model Example
Kaldis Coffee needs 1000 Kg of coffee per year. The
cost of each Kg of coffee is $78. Ordering cost is $100
per order per year. Carrying cost is 40% of per unit cost
per year. Lead time is 5 days. Kaldis coffee is open
365 days/yr.
a. What is the optimal order quantity?

b. What is the ROP?
c. What is the ROP if Kaldis coffee plans to hold 15 kg
of safety stock ?
d. Calculate the total annual inventory cost
e. Calculate the number of orders and time between
orders
EOQ Model Example
Given: a ).
D = 1000
2  D  Oc
Oc = $100
C = $ 78
EOQ 
I = 40% Cc
Cc = C x I
2 1000  $100
Cc = $31.20
EOQ 
$31.20
EOQ = 80 Kg of coffee
EOQ Model Example
b). ROP = demand over lead time
= daily demand x lead time (days)
=dxl
D = annual demand = 1000
Days / year = 365
Daily demand = 1000 / 365 = 2.74
Lead time = 5 days
ROP = 2.74 x 5 = 13.7 => 14 Kg
c). ROP with SS = D x l + SS

= 2.74x 5 +15Kg = 29Kg
EOQ Model Example
d). Total inventory cost = Total carrying cost + Annual ordering cost
= Q/2 (Cc) + D/Q (Oc)
= 80/2 ($31.20) + 1000/80 ( $100)
= $1248 + $1250
= $2498 per year
e). The number of orders (N) = Annual demand (D)/Q

= 1000kg/ 80kg
= 12.5 ~ 13 orders per year
The time between orders (T) = Working days/ Number of orders per year
= 365 days/13 orders
= 28 days between orders
7.5. Purchasing
 Purchasing is an important function of materials

management.
 Purchasing is a process of buying of equipments,

materials, tools, parts etc. required for industry.
 The basic objective of the purchasing function is to

ensure continuity of supply of raw materials, sub-
contracted items and spare parts and to reduce the
ultimate cost of the finished goods.
7.5.1. Basic Principles of Purchasing (5 R’s)
 The basic principles of purchasing regarded as the provision of the required materials:
i. In the Right Quality: is concerned with determining what is the required and why
it is needed.
ii. In the Right Quantity: implies that the amount of materials required should be
determined.
iii. In the Right Time: implies prior determination of delivery date and delivery
schedule for each type of materials.
iv. At the Right Price: It is the fair and reasonable price determined through
negotiation.
v. From the Right Supplier: is a supplier that can provide uniform quality materials
and that is punctual in delivery time.
7.7.3. Inventory Record Accuracy
 Inaccurate inventory records can cause:
o Lost sales
o Disrupted operations
o Poor customer service
o Lower productivity
o Planning errors and expediting
 Two methods are available for checking record accuracy
• Periodic counting-physical inventory
• Cycle counting-daily counting of pre-specified items
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Queens’ College

Operations management is defined

• A management functional area

• An organization’s core function

• In every organization whether Service or

– Refers to the management of the production system

Scientific Manufacturing TQM &

Moving Assembly JIT/Lean Business Process

Hawthorne Manufacturing Electronic

Operations Service Quality Global Supply

Historical OM’s Emergence

Process Analysis Process Control Supply Chain Project

Operations Quality Supply Chain

Process Analysis Statistical Just in Time

Facility Layout Aggregate

Services Inventory Control

Waiting Line Analysis and Materials Requirement Planning

• Improvements in operations can

Finance Strategy Operations Strategy Marketing Strategy

People Plants Parts Processes

The Transformation Process (value adding) 4

Uniqueness can go beyond both the physical

Does not imply low value or low quality

Process Southwest Airlines No-frills service LOW COST

Scheduling IBM’s after-sale service on mainframe computers AFTER-SALE SERVICE

• “If you drop it on your foot, it won’t hurt

• “Services never include goods and

• Both use technology

Customer Needs More Product

Corporate Strategy/ Increase Org. Size

Operations Strategy Increase Production Capacity

• Operations strategy is concerned with both what the operation

The third level of strategy is termed the

Operations Decision Making

 Decision making: is the process of identifying, analyzing and

 Decision making situation is a choice situation.

 If there is no alternative, then there is no need to worry about

 Operations decision range from simple judgments to complex

 Judgment typically incorporates basic knowledge, experience,

 They enable to blend objectives and sub-objective data to arrive

The decisions that can be made on certainty

Under certainty conditions, different types of

A technique that assumes certainty in its

o While programmed decisions can be anticipated, non-

o Higher level mangers tend to make more non-programmed

o Empowerment means not only including employees in decision-

o The main benefit of empowerment is to help workers to cooperate and

iii). Communicate Effectively:

o Clear communication is crucial to gaining acceptance.

iv. Delegate Pragmatically

• Break-even Analysis is an economic model

• It is a complete certainty type of model because costs

• One of the techniques to study the total cost, total

 The point of Intersection of Total Cost line and the sales

 At Break-even Point, Total Cost (TC) = Sales Revenue (SR)

Product Development and Design

 Design starts with conceptualization which has to

 The basis of product design effort comes from:

A product’s design has tremendous impact