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M.B.A IInd Semester Course - 206

Operation Management

LESSONS 1 TO 12

INTERNATIONAL CENTRE FOR DISTANCE EDUCATION

AND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY,

GYAN PATH, SUMMERHILL, SHIMLA-171005

Contents

Sr. No. Topic Page No,

Syllabus 1

Chapter-1 Operations Management 2

Chapter-2 Production System 18

Chapter-3 Inventory Management 30

Chapter-4 Demand Forecasting 44

Chapter-5 Purchasing Management Functions 56

Chapter-6 Source Selection, Vendor rating and Value analysis 59

Chapter-7 Production Planning and Control 81

Chapter-8 Project Management 100

Chapter-9 Quantity and Acceptance Sampling 114

Chapter-10 Statistical Process Control 128

Chapter-11 Work Measurement & Method Study 147

Chapter-12 Facilities Location and Layout 167

1

Syllabus

Master of Business Administration (M.B.A.) 2nd Semester

206: Operation Management

Objective

The Course is oriented towards the exposition to the various operational problems in the area ofproduction.

The Stress in the Course is on various techniques available for discharging the responsibilities asoperations manager.

Course Contents:

UNIT-I

The Operations Managements System, Responsibilities of operations personnel, Basic ManufacturingProcess-Continuous Intermittent and repetitive flaws of processing.

UNIT-II

Methods of forecasting Demand-Opinion Method. Time Series Analysis, Economic Indicators.Inventory Control-Costs associated with inventory control systems, Economic Order Quantity.

UNIT-III

The Production Control System for intermittent and continuous for processes. Project SchedulingPERT/CPM Method-Network analysis, earliest and latest time analysis. Gantt Charts.

UNIT-IV

Acceptance Sampling by Attributes-Single Sample, double sample and multiple sample plans withsales risk. Control Charts for variables-averages and ranges. Control charts for defectives- fraction defectiveand numbers defective.

UNIT-V

Work Study, Methods study and motivation study. Plant Layout concepts. Developing the processlayout and the product layout. Facility location planning.

REFERENCES:

1. M.K. Star Production Management System & Synthesis.

2. B.S. Butta Modern Production Management.

3. Mayer Production and Operations Management.

4. Lamar Le & D.W. Dobler Purchasing and Materials Management.

*****

2

Chapter-1Operations Management

Structure:

1.0 Learning Objectives

1.1 Introduction

1.2 Meaning and Concept of Operations Management

1.3 Historical Events in Operations Management

1.4 Just-In-Time (JIT) Production: the emerging trends

1.4.1 Some Key elements of JIT

1.5 Need and Importance of studying Operations Management

1.6 Major Decisions of Production and operations Management

1.7 Scope of Operations Management

1.8 Operations Strategies

1.8.1 Operation Strategy Decisions

1.8.1 (A) Strategic Decisions (Long-range)

1.8.1 (B) Tactical Decisions (Medium-range)

1.8.1 (C) Operational Planning and Control (Short-range)

1.9 Implication of Product and Process Life Cycles for Positioning Strategy

1.10 Contributions of Operations Management to the society

1.11 Self-Assessment Questions

1.12 Summary

1.13 Glossary

1.14 Answers to Self-Assessment Questions

1.15 Terminal Questions

1.16 Suggested Readings

1.0 Learning objectives

After studying the lesson, you will be able to understand:-

• Operations Management concept

• Operations/ Production System Defined

• Historical Events in Operations Management

• Current Issues in Operations Management

• Strategies in Operations Management

• Contribution Operations management to the society

3

1.1. Introduction:

Operation is a function or system that transforms inputs into outputs of greater value. Throughthis process raw material is converted into semi finished products and thereby adds to the value ofutility of products, which can be measured as the difference between the value of inputs and value ofoutputs.

Operation management function encompasses the activities of procurement, allocation andutilization of resources. The main objective of operation management function is to produce the goodsand services demanded by the customers in the most efficient and economical way. Therefore efficientmanagement of the production function is of utmost importance in order to achieve this objective.

Transformation process is a series of activities along a value chain extending from supplier tocustomer. Those activities that do not add value are superfluous and should be eliminated

1.2 Meaning and Concept of Operations Management

Operations Management is management of the conversion process which transforms inputssuch as raw material and labor into outputs in the form of finished goods and services. Operationmanagement involves design, operation, and improvement of productive systems. Operationmanagement is also defined as the management of an organization’s productive resources of itsproduction system, which converts into the organization’s products and services.

All organizations need to perform three basic functions namely, marketing, production/operations and finance.

Marketing: which generates demand or at least takes the order for a product or service

Production/operations: which creates the product. Production is the creation of goods and services.Production/operation system is any system which transforms input into output and in the meantime creates value. In some organizations the product is a physical good (refrigerators, bread, etc.)and the activities creating such tangible product is usually referred to as Production. In others theproduct is a service (insurance, health care for elderly, etc.). The production that takes place toproduce a service is called Operations.

Finance/ Accounting: which tracks how well the organization is doing, pays bills, and collect themoney

Figure: The three basic functions of business organizations

Production/operations

Marketing Finance

Organization

MarketingProduction/operations

Finance

4

Operations management (OM) is defined as the design, operation, and improvement of thesystems that create and deliver the firm’s primary products and services.

Like marketing and finance, OM is a field of business with clear management responsibilities.This point is important because operations management is frequently confused with operations researchand management science. The essential difference is that OM is a field of management whereas OR/MSis application of quantitative methods to decision making in all fields. Operations managers use thedecision making tools of OR/MS (such as Critical path scheduling).

Transformation Process

(components)

Inputs

(customers

Figure 1.1. Transformation of inputs to outputs

Figure 1.2. Transformation of inputs to outputs by adding value

With either the broad or narrow view, managing operations is crucial to each area of anorganization because only through successful management of people, capital, information, and materialscan it meet its goals. While undertaking operations management functions, two principals must beconsidered;

i. Each part of an organization, not just the operation functions, must design and operateprocesses and deal with quality, technology, and staffing issues. Thus there has to be a synergybetween different departments.

ii. Each part of an organization has its own identity and yet is connected with operations, i.e.there has to be coordination between departments and interdependence of differentfunctions.

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Figure 1.3. The transformation process – from inputs to outputs

Table 1.1. Examples of transformation processes.

Value is added by the interaction with markets where the product or service is

needed

Land, Capital, Information,

Machines, Labour Raw materials

The conversion

process of all the inputs

Goods and/or

services

Control and feedback from the markets regarding outputs produced

INPUTS OUTPUTS TRANSFORMATION

OPE-RATION

INPUTS

TRANSFORMATION PROCESS

OUTPUTS

Hospital

Doctors Nurses Patients

Beds Medicines Operations

Test results Healthy patients Research

Canned goods

Fresh foodstuff Machines Other equipment Labour

Prepare the food Can and cook the food

Canned goods

Police

Officers Crime information Public Computers

Prevent crime Solve crime Arrest criminals

Lawful society Public feel safe

Food store

Foodstuffs for sale Staff Cash registers Customers

Display of goods Advise given Selling of goods

The goods and customers are brought together

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Table 1.2 Differences between the manufacturing and service industries

Examples of manufacturing and service industries:

Manufacturing: Motor vehicles, bottling of beverages, canning of foodstuffs, manufacturing ofhousehold appliances and other electrical appliances.

Service: The following can be included: National, provincial and local government, financialservices, cellular telephones and the servicing of motor vehicles.

Services can be further classified into two types; Core services and value added services. Thecore Services customers want the products that are made correctly, customized to their needs, deliveredon time, and priced competitively.

Explicit services: Essential or intrinsic features of the service. Examples: smooth-running ofmotorbike after a tune-up; response time of a fire department

Implicit services: Psychological benefits of the service. Examples: certificate of a graduate degreefrom a well-known school, privacy of a loan office

1.3 Historical Events in Operations Management

Table 1.3 shows the historical events of Operations management.

The focus of this section is to highlight on major operations related concepts that have beenpopular since the beginning of industrial revolution. There were large number of developments aslisted in the table including, the post civil war period, scientific management, human relations andbehavioralism, operations research, the service revolution and the computer/ internet revolution.

MANUFACTURING SERVICE A physical (tangible) product which is durable. The product may be used for many years.

An intangible product. This type of product is usually perishable. Can be used once only.

Goods produced can be stored in a warehouse or at home.

The final product cannot be stored.

No direct contact between consumer and producer.

By the nature of the service industry there must be direct contact.

Output is usually produced in large plants or factories.

Facilities for the service industry is usually much smaller.

Large capital outlays are required. Very labour intensive operations. Easy to determine and measure quality. Much harder to determine and measure quality. Not essential to be on the consumers doorstep. Goods can be transported.

Essential to be close to the consumer of the service rendered.

Output produced can be resold numerous times.

Cannot be resold to a third party.

Before consumption of the output can take place, it must be produced first.

Provision and consumption take place simultaneously.

The product produced can be patented. It is difficult to patent the output. Due to the low variability, production tends to be efficient and smooth.

The activities tend to be slow and awkward. Output is variable.

Productivity measurements tend to be straightforward.

Productivity measurements tend to be much more difficult.

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Trends affecting the production and operations management are

Outsourcing, increasing the importance of supply chain.

Globalisation, internationalisation.

Increasing automatisation at developed countries, moving towards a service economy

IT and ERP-system evolution (which really is automatisation, too).

Flexible supply chains for mass customization of products and services

Global supplier, production, and distribution networks

Commoditization of suppliers – “plug compatibility”

Enhancing value-added services

Maximizing use of internet to share information, coordinate production

Time Line for Operations Strategies

Table 1.3. Historical events of operations management

Era Events/Concepts Dates Originator

Industrial

Revolution

Steam engine 1769 James Watt

Division of labor 1776 Adam Smith

Interchangeable parts 1790 Eli Whitney

Scientific Management

Principles of scientific

management 1911 Frederick W. Taylor

Time and motion studies 1911 Frank and Lillian Gilbreth

Activity scheduling chart 1912 Henry Gantt

Moving assembly line 1913 Henry Ford

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Human Relations

Hawthorne studies 1930 Elton Mayo

Motivation theories 1940s Abraham Maslow

1950s Frederick Herzberg

1960s Douglas McGregor

Operations Research

Linear programming 1947 George Dantzig

Digital computer 1951 Remington Rand

Simulation, waiting

line theory, decision

theory, PERT/CPM

1950s Operations research groups

MRP, EDI, EFT, CIM 1960s,

1970s

Joseph Orlicky, IBM

and others

Quality

Revolution

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)

TQM (total quality

management)

1980s W. Edwards Deming,

Joseph Juran

Strategy and

operations

1990s Wickham Skinner,

Robert Hayes

Business process

reengineering

1990s Michael Hammer,

James Champy

Globalization WTO, European Union, and

other trade agreements

1990s

2000s

Numerous countries

and companies

Internet Revolution

Internet, WWW, ERP,

supply chain management

1990s ARPANET, Tim

Berners-Lee SAP,

i2 Technologies,

ORACLE,

PeopleSoft

E-commerce 2000s Amazon, Yahoo,

9

1.4. Just-In-Time (JIT) Production: The emerging trends

Just-in-time (JIT) is defined in the APICS dictionary as “a philosophy of manufacturing based onplanned elimination of all waste and on continuous improvement of productivity”. It also has beendescribed as an approach with the objective of producing the right part in the right place at the righttime (in other words, “just in time”). Waste results from any activity that adds cost without addingvalue, such as the unnecessary moving of materials, the accumulation of excess inventory, or the use offaulty production methods that create products requiring subsequent rework. JIT (also known as leanproduction or stockless production) should improve profits and return on investment by reducinginventory levels (increasing the inventory turnover rate), reducing variability, improving product quality,reducing production and delivery lead times, and reducing other costs (such as those associated withmachine setup and equipment breakdown). In a JIT system, underutilized (excess) capacity is usedinstead of buffer inventories to hedge against problems that may arise.

JIT applies primarily to repetitive manufacturing processes in which the same products andcomponents are produced over and over again. The general idea is to establish flow processes (evenwhen the facility uses a jobbing or batch process layout) by linking work centers so that there is an even,balanced flow of materials throughout the entire production process, similar to that found in an assemblyline. To accomplish this, an attempt is made to reach the goals of driving all inventory buffers towardzero and achieving the ideal lot size of one unit.

The basic elements of JIT were developed by Toyota in the 1950’s, and became known as theToyota Production System (TPS). JIT was well-established in many Japanese factories by the early1970’s. JIT began to be adopted in the U.S. in the 1980’s (General Electric was an early adopter), and theJIT/lean concepts are now widely accepted and used.

1.4.1. Some Key Elements of JIT

1. Stabilize and level the MPS with uniform plant loading (heijunka in Japanese): create a uniformload on all work centers through constant daily production (establish freeze windows to preventchanges in the production plan for some period of time) and mixed model assembly (produceroughly the same mix of products each day, using a repeating sequence if several products areproduced on the same line). Meet demand fluctuations through end item inventory rather thanthrough fluctuations in production level. Use of a stable production schedule also permits theuse of backflushing to manage inventory: an end item’s bill of materials is periodically explodedto calculate the usage quantities of the various components that were used to make the item,eliminating the need to collect detailed usage information on the shop floor.

2. Reduce or eliminate setup times: aim for single digit setup times (less than 10 minutes) or “onetouch” setup this can be done through better planning, process redesign, and product redesign. A good example of the potential for improved setup times can be found in auto racing, where aNASCAR pit crew can change all four tires and put gas in the tank in under 20 seconds. (How longwould it take you to change just one tire on your car?) The pit crew’s efficiency is the result of ateam effort using specialized equipment and a coordinated, well-rehearsed process.

3. Reduce lot sizes (manufacturing and purchase): reducing setup times allows economical productionof smaller lots; close cooperation with suppliers is necessary to achieve reductions in order lotsizes for purchased items, since this will require more frequent deliveries.

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4. Reduce lead times (production and delivery): production lead times can be reduced by movingwork stations closer together, applying group technology and cellular manufacturing concepts,reducing queue length (reducing the number of jobs waiting to be processed at a given machine),and improving the coordination and cooperation between successive processes; delivery leadtimes can be reduced through close cooperation with suppliers, possibly by inducing suppliers tolocate closer to the factory.

5. Preventive maintenance: use machine and worker idle time to maintain equipment and preventbreakdowns.

6. Flexible work force: workers should be trained to operate several machines, to performmaintenance tasks, and to perform quality inspections. In general, JIT requires teams ofcompetent, empowered employees who have more responsibility for their own work. The ToyotaProduction System concept of “respect for people” contributes to a good relationship betweenworkers and management.

7. Require supplier quality assurance and implement a zero defects quality program: errors leadingto defective items must be eliminated, since there are no buffers of excess parts. A quality at thesource (jidoka) program must be implemented to give workers the personal responsibility forthe quality of the work they do, and the authority to stop production when something goeswrong. Techniques such as “JIT lights” (to indicate line slowdowns or stoppages) and “tally boards”(to record and analyze causes of production stoppages and slowdowns to facilitate correctingthem later) may be used.

8. Small lot (single unit) conveyance: use a control system such as a kanban (card) system (or othersignaling system) to convey parts between work stations in small quantities (ideally, one unit ata time). In its largest sense, JIT is not the same thing as a kanban system, and a kanban system isnot required to implement JIT (some companies have instituted a JIT program along with a MRPsystem), although JIT is required to implement a kanban system and the two concepts arefrequently equated with one another.

1.5. Need and importance of studying Operations Management

Marketing gets people to buy our product

Finance makes sure we have the money to operate

Accounting keeps track of what we spend

Management keeps people on task

I/S makes sure systems work to support everyone else

Operations actually makes the thing we sell. Without operations, you can’t have a company.Satisfying Customers depends on Operations managemnt

Objectives of production and operations management are how to efficiently provide the customer with

• the right amount of

• the right products & services at

• the right time.

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Table 1.4. Major Decisions of Production & Operations Management

Production control (monitoring) Materials planning

Chasing, expediting, fire fighting Materials requirements planning (MRP)

Production planning Manufacturing resources planning (MRP II)

Production management Enterprise resources planning (ERP)

Operations/Supply Chain management Advanced Planning & Scheduling (APS).

1.7 Scope of Operations Management

Figure 1.5. Scope of Operations Management

Business Education

Systematic Approach to Org. Processes

Career Opportunities

Cross-Functional Applications

Operations Management

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Figure 1.6. A production System model

1.8. Operations Strategies

Management Decisions are classified into three types

Strategic Decisions (long term)

Tactical Decisions (medium-range)

Operational Planning and Control (short term)

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A corporate mission is a set of long-range goals and including statements about:

the kind of business the company wants to be in

who its customers are

its basic beliefs about business

its goals of survival, growth, and profitability

Business strategy is a long-range game plan of an organization and provides a road map of how toachieve the corporate mission. Inputs to the business strategy are

Assessment of global business conditions - social, economic, political, technological, competitive

Distinctive competencies or weaknesses - workers, sales force, R&D, technology, management

Operations strategy is a long-range game plan for the production of a company’s products/services,and provides a road map for the production function in helping to achieve the business strategy.

Low production costs - unit cost (labor, material, and overhead) for each product/service

Delivery performance - fast, on-time delivery

High quality products/services - customers’ perception of degree of excellence of product/service

Customer service and flexibility - responsiveness to customer needs and ability to quickly changeproduction/service volumes, configurations, etc.

Key Elements in Operations Strategy include decisions about whether organization wants to be

Innovator or imitator

Product development and product life cycle decisions

Product variety/ choices to be offered

Outsourcing or vertical integration

Location and logistics management

Types of processes: whether continuous, batch or intermittent

Adapted production technologies

Price, quality, and delivery issues associated with production

Small/large batch production decisions

Workforce management including training and compensations

1.8 Operations Strategy Decisions

(a) Strategic (long-range); Needs of customers, (capacity planning). These decisions are of strategicimportance and have long-term significance for the organization. Examples include deciding: the design for anew product’s production process, where to locate a new factory, whether to launch a new-product developmentplan.

(b) Tactical (medium-range); Efficient scheduling of resources. These decisions are necessary ifthe ongoing production of goods and services is to satisfy market demands and provide profits. Examplesinclude deciding: how much finished-goods inventory to carry, the amount of overtime to use next week, thedetails for purchasing raw material next month

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(c) Operational planning and control (short-range); Immediate tasks and activities. These decisionsconcern the day-to-day activities of workers, quality of products and services, production and overheadcosts, and machine maintenance. Examples include deciding: labor cost standards for a new product, frequencyof preventive maintenance, new quality control acceptance criteria

1.9 The Implications of Product and Process Life Cycles for Positioning Strategy

The characteristics of production systems tend to evolve as products move through their productlife cycles. This linkage ensures that production takes on a proactive role and then can be used as acompetitive weapon in the struggle to capture market share.

Sa

les

Vo

lum

e

Start-up Rapid growth MaturationStability

or decline

Time

Figure: The Product Life Cycle Curve

15

The product life cycle stages and related strategies include:

Start-up: Great variety, Low volume, Low competition, Compete on product characteristics

Growth: Increasing standardization, Increasing volume, Competition build up, Compete productquality and availability

Maturation: emergence of dominant design, high volume, few large competitors, compete on priceand dependability

Stability or decline: high standardization, high volume and compete on price

Process: Job shop Batch Flow Continuous Flow

1.10 Contributions of Operations management to the Society

Operations management has contributed tremendously to the society in many ways;

1. Higher Standard of Living

a. Ability to increase productivity

b. Lower cost of goods and services

2. Better Quality Goods and Services

a. Competition increases quality

3. Concern for the Environment

a. Recycling and concern for air and water quality

4. Improved Working Conditions

a. Better job design and employee participation

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Figure:Characteristics of the Process Life Cycle

16

1.11 SELF-ASSESSMENT QUESTIONS:

1. Explain the meaning of Operations Management.

2. Briefly explain Just-In-Time Production.

3. What are the Operations Strategy Decisions?

1.12 SUMMARY:

Operations Management is management of the conversion process which transforms inputssuch as raw material and labor into outputs in the form of finished goods and services. OperationsManagement involves design, operation and improvement of productive systems. It is also defined asthe management of an organization’s productive resources of its productive system, which convertsinto the organization’s products and services.Operations Management dates back to the industrialrevolution. There was large number of developments in the post-civil war period, scientific management,human relations and behaviouralism, operations research, the service revolution and the computer/internet revolution. Just-in-time is defined as “a philosophy of manufacturing based on plannedelimination of all waste and on continuous improvement of productivity”.

Operations management is important in various aspects such as marketing gets people to buyour product, finance makes sure we have the money to operate, accounting keeps track of what wespend, etc. The objectives of production and operations management are how to efficiently providethe customer with the right amount of products and services at the right time. Operations strategydecisions are classifies into three types i.e. strategic, tactical and operational planning and controldecisions.Operations management has contributed tremendously to the society in many ways such ashigher standard of living, better quality of goods and services, concern for the environment and improvedworking conditions.

1.13 GLOSSARY:

Just-In-T ime (JIT): It is a methodology aimed primarily at reducing times withinthe production system as well as response times from suppliers and to customers.

Lead Time: It is the latency between the initiation and completion of a process. For example,the lead time between the placement of an order and delivery of new cars by a given manufacturermight be between 2 weeks and 6 months, depending on various particularities.

Outsourcing: It refers to shift tasks, operations, jobs, or processes to an external workforce, bycontracting with a third party for a significant period of time.

Production System: It is a computer program typically used to provide some form of artificialintelligence, which consists primarily of a set of rules about behaviour but it also includes the mechanismnecessary to follow those rules as the system responds to states of the world.

1.14 ANSWERS TO SELF-ASSESSMENT QUESTIONS:

1. Refer to section (1.2)


3. Refer to section (1.6.1)

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1. Define Operations Management and explain the need and scope of Operations Managementin the decision making process.

2. What is Operations Management? Explain the nature and features of Operations Management.

3. Discuss the meaning and objectives of Operations Management. How it is to be used forDecision Making?

4. What is operation management’s contribution to the society?

5. What are the most important factors affecting operations management today?

6. Discuss the historical events in operations management.

1.16. Suggested Readings

1. Chase, R. and Aquilano, N. (1995). Production and Operations Management. (7th Edition).Richard D. Irwin.

2. Dilworth, J.B. (1992). Operations Management: Design and Control for Manufacturing andServices. McGraw-Hill.

3. Meredith, J.R. (1992). The Management of Operations. (4th Edition). Wiley.

4. Pycraft, M. ; Singh, H. ; Phihlela, K. ; Slack, N. ; Chamers, S. ; Harland, C. ; Harrison, A. andJohnston, R. (1997). Operations Management. (1st Edition). Pitman Publishing.

5. Russel, R.S. and Taylor, B.W. III. (1995) Operations Management-Focusing on Quality andcompetitiveness. International Edition. (2nd Edition). Prentice-Hall.

*****

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Chapter-2Production System

Structure:


2.1 Introduction

2.2 Meaning of Production System

2.3 Types of Production Systems

2.3.1 Continuous Production

2.3.2 Job or Unit Production

2.3.3 Intermittent Production

2.4 Basic Manufacturing Processes

2.5 Factors Affecting the Choice of Manufacturing Process

2.5 (a) Effect of volume/ variety

2.5 (b) Capacity of the plant

2.5 (c) Lead time

2.5 (d) Flexibility and Efficiency

2.6 Productivity Improvement

2.7 Techniques for Improvement of Productivity


2.9 Summary

2.10 Glossary




2.0 Learning Objectives:

After studying the lesson, you will be able to understand:

Production systems

Types of production systems

Manufacturing process

Types of manufacturing process

Factors affecting the choice of manufacturing process

Productivity Improvement

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2.1. Introduction

Production is simply the conversion of inputs into outputs. It is an economic process that usesresources to create a commodity that is suitable for exchange. This can include manufacturing, storing,shipping, and packaging. Some economists define production broadly as all economic activity otherthan consumption. They see every commercial activity other than the final purchase as some form ofproduction.

Production is a process, and as such it occurs through time and space. Because it is a flowconcept, production is measured as a “rate of output per period of time”. There are three aspects toproduction process:

1. the quantity of the commodity produced,

2. the form of the good produced,

3. the temporal and spatial distribution of the commodity produced.

A production process can be defined as any activity that increases the similarity between thepattern of demand for goods, and the quantity, form, and distribution of these goods available to themarket place.

2.2 Meaning of Production System

Production system is a system whose function is to convert a set of inputs into a set of desiredoutputs. Production system can be depicted under with help of a diagram

Control

Subsystem

The inputs or resources used in the production process are called factors by economists. Themyriad of possible inputs are usually grouped into four categories. These factors are:

Raw materials (natural capital)

Labour services (human capital)

Capital goods

Land

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20

Sometimes a fifth category is added, entrepreneurial and management skills, a subcategory oflabour services. Capital goods are those goods that have previously undergone a production process.They are previously produced means of production. Some textbooks use “technology” as a factor ofproduction.

In the “long run” all of these factors of production can be adjusted by management. The “shortrun” however, is defined as a period in which at least one of the factors of production is fixed. A fixedfactor of production is one whose quantity cannot readily be changed. Examples include major piecesof equipment, suitable factory space, and key managerial personnel. A variable factor of production isone whose usage rate can be changed easily. Examples include electrical power consumption,transportation services, and most raw material inputs. In the short run, a firm’s “scale of operations”determines the maximum number of outputs that can be produced. In the long run, there are no scalelimitations.

The classical theory, further developed, remains useful to the present day as a basis ofmicroeconomics. Some more means that deal with factors of production are as follows:

Entrepreneurs are people who organize other productive resources to make goods and services.The economists regard entrepreneurs as a specialist form of labor input. The success and/orfailure of a business often depends on the quality of entrepreneurship.

Capital has many meanings including the finance raised to operate a business. Normallythough, capital means investment in goods that can produce other goods in the future. It canalso be referred to as machines, roads, factories, schools, and office buildings in which humanswork in order to produce other goods and services. Investment is important if the economy isto achieve economic growth in the future.

Human Capital is the quality of labor resources which can be improved through investments,education, and training.

Fixed Capital this includes machinery, work plants, equipment, new technology, factories,buildings, and goods that are designed to increase the productive potential of the economyfor future years.

Working Capital this includes the stocks of finished and semi-finished goods that will beeconomically consumed in the near future or will be made into a finished consumer good inthe near future. It includes also the liquid assets needed for immediate expenses linked tothe production process (salaries, invoices, taxes, interests...).

2.3. Types of production systems

Product design is a strategic decision as the image and profit earning capacity of a firm dependslargely on product design. Once the product to be produced is decided by the company the next step isto prepare its design. Product design consists of form and function. The form designing includes decisionsregarding its shape, size, color and appearance of the product. The functional design involves theworking conditions of the product. Once a product is designed, it prevails for a long time thereforevarious factors are to be considered before designing it. These factors are listed below: -

(a) Standardization

(b) Reliability

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(c) Maintainability

(d) Servicing

(e) Reproducibility

(f) Sustainability

(g) Product simplification

(h) Quality Commensuration with cost

(i) Product value

(j) Consumer quality

(k) Needs and tastes of consumers.

Above all, the product design should be dictated by the market demand. It is an importantdecision and therefore the entrepreneur should pay due effort, time, energy and attention in order toget the best results.

Production system is the framework within which the production activities of an enterprisetake place. Manufacturing process is the conversion process through which inputs are converted intooutputs. An appropriate designing of production system ensures the coordination of various productionoperations. There is no single pattern of production system which is universally applicable to all typesof production system varies from one enterprise to another.

Broadly there are three types of production systems which are mentioned here under: -

(a) Continuous production

(b) Job or unit production

(c) Intermittent production

In another classification there are three common types of basic production systems: the batchsystem, the continuous system, and the project system.

2.3.1 Continuous production:

It refers to the production of standardized products with a standard set of process and operationsequence in anticipation of demand. It is also known as mass flow production or assembly line production.This system ensures less work in process inventory and high product quality but involves large investmentin machinery and equipment. The system is suitable in plants involving large volume and small varietyof output e.g. oil refineries cement manufacturing etc. In the continuous system, items to be processedflow through a series of steps, or operations, that are common to most other products being processed.Since large volumes of throughput are expected, specially designed equipment and methods are oftenused so that lower production costs can be achieved. Frequently the tasks handled by workers aredivided into relatively small segments that can be quickly mastered and efficiently performed. Examplesinclude systems for assembling automobile engines and automobiles themselves, as well as otherconsumer products such as televisions, washing machines, and personal computers. Continuousproduction systems are often referred to as assembly systems or assembly line systems and, are commonin mass production operations.

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2.3.2. Job or Unit production:It involves production as per customer’s specification each batch or order consists of a

small lot of identical products and is different from other batches. The system requires comparativelysmaller investment in machines and equipment. It is flexible and can be adapted to changes inproduct design and order size without much inconvenience. This system is most suitable whereheterogeneous products are produced against specific orders.

The two types of systems mentioned thus far are often found in combination. In the productionof integrated circuits for electronic equipment, for example, thousands of circuits are processed as abatch on several large slices of silicon crystal through dozens, or even hundreds, of processing steps.The tiny circuits, each only a few millimetres on a side, are then separated and individually assembledwith other circuit elements on a continuous line to produce the final product.

2.3.3 Intermittent Production:

Under this system the goods are produced partly for inventory and partly for customer’s orders.E.g. components are made for inventory but they are combined differently for different customers. .Automobile plants, printing presses, electrical goods plant are examples of this type of manufacturing.

In the batch system, general-purpose equipment and methods are used to produce smallquantities of output (goods or services) with specifications that vary greatly from one batch to the next.A given quantity of a product is moved as a batch through one or more steps, and the total volumeemerges simultaneously at the end of the production cycle. Examples include systems for producingspecialized machine tools or heavy-duty construction equipment, specialty chemicals, and processedfood products, or, in the service sector, the system for processing claims in a large insurance company.Batch production systems are often referred to as job shops.

The third type of production system is the project, or “one-shot” system. For a single, one-of-a-kind product, for example, a building, a ship, or the prototype of a product such as an airplane or a largecomputer, resources are brought together only once. Because of the singular nature of project systems,special methods of management have been developed to contain the costs of production withinreasonable levels.

2.4 Basic Manufacturing Processes

The nature of the process of production required by these three different types of productionsystem are distinct and require different conditions for their working. Selection of manufacturing processis also a strategic decision as changes in the same are costly. Therefore the manufacturing process isselected at the stage of planning a business venture. It should meet the basic two objectives i.e. tomeet the specification of the final product and to be cost effective.

Types of Manufacturing Process

The manufacturing process is classified into four types.

(i) Jobbing/ Project production

(ii) Batch production

(iii) Mass or flow production

(iv) Process/ Continuous Production

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Figure 1.1. Types of manufacturing processes

(i) Jobbing/ Project Production: - Herein one or few units of the products are produced as perthe requirement and specification of the customer. Production is to meet the deliveryschedule and costs are fixed prior to the contract.

(ii) Batch Production: - In this, limited quantities of each of the different types of products aremanufactured on same set of machines. Different products are produced separately oneafter the other.

(iii) Mass or flow production: Under this, the production run is conducted on a set of machinesarranged according to the sequence of operations. A huge quantity of same product ismanufactured at a time and is stocked for sale. Different product will require differentmanufacturing lines. Since one line can produce only one type of product, this process isalso called as line flow.

(iv) Process/ Continuous Production: Under this, the production run is conducted for an indefiniteperiod.

2.5. Factors Affecting the Choice of Manufacturing Process

Following factors need to be considered before making a choice of manufacturing process.

a) Effect of volume/variety: This is one of the major considerations in selection of manufacturingprocess. When the volume is low and variety is high, intermittent process is most suitable andwith increase in volume and reduction in variety continuous process become suitable. Thefollowing figure indicates the choice of process as a function of repetitiveness. Degree ofrepetitiveness is determined by dividing volume of goods by variety.

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Figure1.2. Improved standardization with higher volume of production

b) Capacity of the plant: Projected sales volume is the key factor to make a choice between batchand line process. In case of line process, fixed costs are substantially higher than variable costs.The reverse is true for batch process thus at low volume it would be cheaper to install andmaintain a batch process and line process becomes economical at higher volumes.

c) Lead time: - The continuous process normally yields faster deliveries as compared to batchprocess. Therefore lead-time and level of competition certainly influence the choice ofproduction process.

d) Flexibility and Efficiency: - The manufacturing process needs to be flexible enough to adaptcontemplated changes and volume of production should be large enough to lower costs.

Hence it is very important for any organization to consider all above mentioned factors beforetaking a decision regarding the type of manufacturing process to be adopted.

2.6 Productivity improvement.

As competitiveness becomes more important every day so does the increase of productivity.Low productivity in a company usually leads to that company becoming less competitive. Theuncompetitiveness will lead directly to an increase in the cost of manufacturing for that firm. It will costthis firm more and take them longer to manufacture one completed product compared to theircompetition. Productivity can be defined as the measurement of the output in direct relation to theinput needed to produce the desired number of end items. The following formula can be used toexpress productivity:

Productivity = Output

Input

Project Construction of the aircraft carrier is a huge project that takes almost 10 years to complete.

Batch Production Bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried.

Mass Production Here in a clean room a worker performs quality checks on a computer assembly line.

Continuous Production A paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels.

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Outputs can be seen as the product/service produced or rendered. Inputs may vary from companyto company. The most important inputs are labour, materials and energy. The outputs that is measuredduring the production process will to a large extend depend on the type of job performed. Examples ofproductivity measurements follow:

M2 of bricks laid per day = M2 of bricks laid

Hours worked

Number of cars serviced in a day = Number of cars serviced

Number of weeks

Jobs done by a machine = Number of jobs

Hours worked

The above formulae only measure a small part of the overall productivity. There are numerousother fractional ways to measure productivity. The main determinant as to which formula to use willdepend upon what has to be measured. Thus, determining what is to be measured and the reason formeasuring that specific entity will help in selecting the measuring unit. the objective that has to beobtained by that measurement is to be considered.

Example:

Given the information below,

1. 6 bricklayers laid 900 M2 of bricks in one 8-hour shift.

2. The total production run for a machine in a 12 hour shift is 16 000 items. Out of the totalproduction run only 12 650 items can be used.

Determining the productivity in each of the following cases will involve:

A.Productivity =

M2 of brick laid

Hours worked

= 900

6x8

= 900

48

= 19 m2 of brick laid per hour per bricklayer

2.Productivity = Number of good items

Production time

= 12650

12

= 1054 items per hour worked

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2.7 Techniques for Improvement of productivity.

Most companies do productivity analysis to determine what their real productivity performanceis. Once that has been determined, their next objective is to improve on the current state of productivity.The productivity performance of a company will directly influence their competitiveness in comparisonto their direct competitions. The lower their productivity is compared to their competitors, the lessthey will be able to compete. If they want to remain competitive the following steps can be taken:

It is important that throughout the company for every operation a productivity measurementmust be in place. Without such measurements in place it will be difficult to determine howwell the company measures up to productivity standards. Management and control of theoperations will become very difficult.

Determine which of the operations are the most critical. Critical operations are thoseoperations that will influence the whole process negatively. Bottleneck is a sure sign of criticaloperations. The determination of critical operations must be done for the whole process. Ifthis is not done some critical operations may be overlooked with dire consequences to thecompany.

Better methods must be employed that will enable a company to achieve better productivityresults. Involve the employees when setting the productivity measures. Ask them to comeforward with new ideas how productivity can be improved. This will make them feel involvedand work harder to attain the set standards. Better methods can be put in place by usingbenchmarking. Study the methods the competition employs to achieve their high productivity.Employ the best methods in the company.

Ensure that the objective that is set to better the productivity is obtainable and fair. There isnothing that demotivate people more easily than not reaching goals. This is counterproductive.

Employees must see that management is part of this drive to attain a higher standard ofproductivity. Management must encourage and support in full the productivity program.

The improvements must be measured and the results published on a regular basis. It isimportant for the moral of the employees to be informed how they are doing. If this is notdone they will lose interest in the program. Then the program is doomed to failure.

A clear distinction between productivity and efficiency must be spelled out. Efficiency is themaximisation of all available resources. Productivity is the maximisation and effective use ofall the resources of a company.

To further enhance the productivity in a company there is certain factors that must be taken intoaccount. In some instance management will be able to influence these factors but in other instancesthey will not be able to influence these factors. There are two main categories of factors that influenceproductivity. Firstly there is the outside or external factors that will influence productivity. These factorswork in on the company from the outside and management can do nothing to change or influence them.Management has to work within the framework of these factors. One such an external factors could belabour legislation, Industrial policy of government, social and political factors etc. Management canonly endeavour to minimise the impact that all the external factors will have on the productivity of thecompany. Secondly there are two sets of internal factors that will influence productivity. Managementmay experience difficulty in changing or influencing the second set of factors. Examples of such factors

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are the manner in which the company is organised, human resource policies and the work ethics of theemployees. To attempt to change this set of factors, the essence of the company will have to be changed.Management will have to realise that they will have to manage productivity within this framework. Thesecond set of factors that will influence productivity internally is within management’s power to changeand influence. For example, installing newer and better machines to enhance productivity. The resultwill be less breakdowns and better quality. Installing and continuously maintaining better processesand work methods can also improve productivity. Lastly management can help to achieve higherproductivity by installing proper productivity measurement criteria.

Productivity has a far greater impact on a company than most people realise. The prosperity ofa nation can be directly linked to the productivity of that nation. The lower the productivity is of thatnation the fewer new job opportunities becomes available. A country where low productivity is rifebecomes less competitive than their counterpart where productivity is high. The result is that thecountry with low productivity will price them out of the marketplace. The reason being that it will costthat country more to produce their products than it will cost the country with high productivity index.Employees should realise that when salary increases the productivity should increase roughly by thesame percentage. In this instance the costs will keep on increasing but the output remain the same. Thefollowing example illustrates what will happen if productivity does not increase in direct proportionwith salary increase.

Productivity measurement before increase.

A company produces 2000 items per day. Labour costs is R250, 00, cost of material is R100, 00 andthe overheads is R170, 00.

Productivity = Quantity produced Labour costs+material costs+overheads

= 2000250 + 100 + 170

= 2000520

= 3,8 rounded off 4

4 items can be manufactured for every rand expended.

Productivity measurement after increase.

Assume that the labour costs have increase from R250,00 to R350, 00 and all the other figuresremained the same.

Productivity = Quantity produced

Labour costs+material costs+overheads

= 2000

350 + 100 + 170

= 2000620

= 3,2 rounded off 3

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In this case 3 items can be manufactured for every rupee spent. As a result of the productivity that didnot increase, a decrease in the number of items produced resulted. Conversely it can be argued that itcosts more to produce less. Wealth cannot and will not be created in this manner. For the creation ofwealth and new job opportunities a high productivity index is required. It is therefore company’sresponsibility to ensure that the highest standard of productivity is maintained so that shareholders areadequately rewarded.


1. Explain the meaning of Production System.

2. What are the different types of Production Systems?

3. Explain the factors affecting the choice of manufacturing process.

2.9 Summary

Companies face a challenge to manufacture products at economical prices. They need to embracemanagement principles surrounding production processes, which are effective for the productsmanufactured by them. An upfront planning and study of the critical factors of the manufacturingprocesses will not only help the organization to understand the steps they need to take in selecting themost appropriate manufacturing process but also help them identify areas of risk so that necessarycontrol procedures are put in place. This will eventually help the company to eliminate the wastagesand increase the production, productivity and profits.

2.10 GLOSSARY:

Human Capital: It refers to the the skills, knowledge, and experience possessed by an individualor population, viewed in terms of their value or cost to an organization or country.

Working Capital: It is the capital of a business which is used in its day-to-day trading operations,calculated as the current assets minus the current liabilities.

Intermittent: occurring at irregular intervals; not continuous or steady.

Productivity: It is defined as the efficient use of resources, labour, capital, land, materials,energy, information, in the production of various goods and services.





2.12. Terminal Assessment

1. Discuss with examples various manufacturing processes.

2. What factors affect the choice of manufacturing process? Elaborate.

3. What are your recommendations for improving the productivity?

4. Explain the concept of productivity with suitable illustrations.

5. Discuss the different means to improve productivity.

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2.13. Suggested Reading

1. Steudel, H.J. and Desruelle, P. (1992). Manufacturing in the Nineties, Van Nostrand Reinhold,New York.

2. Stevenson, W.J. (1996). Production and Operations Management. (5th Edition) Irwin.

3. Ulrich, K.T. and Eppinger, S.D. (1995). Product Design and Development. McGraw-Hill.

4. Vollmann, T.E. ; Berry, W.L. ; Whybark, D.C. (1997). Manufacturing Planning and Control Systems.(4th Edition). Irwin/McGraw-Hill.



7. Adam, Everette E. Jr., and Ronald J. Ebert (2003). Production and Operations Management -Concepts Models and Behaviour. Pearson Education, New Delhi.

8. Buffa, E.S., Modern Production Management, New Delhi: Wily, 1988

9. Charantimath, Poornima (2003), Total Quality Management. Pearson Education, New Delhi.

10. Desai, Vasant Dr. (2004) Management of Small Scale Enterprises New Delhi: Himalaya PublishingHouse.

*****

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Chapter-3Inventory Management

Structure:


3.1 Introduction

3.2 Types of Inventory

3.3 Purposes of Inventory

3.4 Inventory Costs

3.4 (i) Carrying Cost or Holding cost

(ii) Ordering Cost

(iii) Shortage Cost

(iv) Setup Cost

3.5 Inventory Control Systems

3.6 Economic Order Quantity

3.7 ABC Classification

3.8 Just-in-Time Inventory Management

3.9 Controlling Inventory

3.9.1 Process of Controlling Inventory


3.11 Summary3.12 Glossary3.13 Answers to Self-Assessment Questions3.14 Terminal Questions3.15 Suggested Readings

3.0 Learning Objectives:After Studying the lesson, you will be able to know:

What is inventory? Types of inventory Purpose of inventory mnagement Inventory Costs Inventory Systems Economic Order Quantity Models ABC classification Just in time

Controlling Inventory

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3.1. Introduction:

Inventory is stock of items kept to meet future demand for internal customers and externalcustomers. Inventory system is the set of policies and controls that monitors levels of inventory anddetermine what level should be maintained, when stock should be replenished and how large theorders should be. Purpose of inventory management includes the decision about how many units toorder and when to order.

There are two forms of demand i.e. dependent demand and independent demand. Dependentdemand is demand for items used to produce final products, for example tyres stored at a Tyremanufacturing plant. Independent demand is demand for items used by external customers, forexample, cars, appliances, computers, and houses are examples of independent demand inventory.

3.2. Types of Inventory

When dealing with the planning and control of inventories, it is important to distinguish betweentwo types of demand. The demand types are dependent and independent demand. The dependentdemand is that demand for the subassemblies or components that is used to manufacture the finalproduct. This type of demand usually originates from within the company. It can be seen as an internaldemand. The independent demand is the demand placed by a customer for the finished productmanufactured by the company. This type of demand as a rule usually originates from outside the company.Therefore it stand to reason that each of these demand types will influence the demand for the productin a different manner. Ensuring that the production process runs smoothly the following types ofinventories are held:

Finished goods inventory. This is the final product of the company. It is kept in a warehouseawaiting a customer order. The products can also be in the warehouse waiting to be shippedto the customer after receipt of an order.

Components or finished good that are in transit between the manufacturer and the customer.The items are not on the manufacturer’s premises, since it have not yet been received by thecustomer. Because no payment and delivery has taken place it will show as stock held.

Office supplies machine tools as well as the parts that are required to repair broken-downmachines.

Raw materials required for the manufacturing of goods as well as the purchased parts used inthe manufacturing process.

Half completed goods in the manufacturing process. This type of inventory is known as work-in-process (WIP).

Examples of the different types of inventory that can be held

BUSINESS/SERVICE TYPE OF INVENTORY HELDDoctor Syringes, needles and dressingsRetailer Goods for sale (Groceries)Motor spares shop All types of motor sparesManufacturing Raw materials, WIP, finished goodsFilling station Fuel and lubricantsFast food outlet Ingredients for the food

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From the above table it can be deduced why it is important to hold inventory in most of thecases. For example, if a customer walks into a fast food outlet ordering a burger a and the establishmentdoes not have buns, cheese or the potatoes available to fill that order the customer will leave. This willresult in a loss of sale and goodwill of the customer. No customer will support an establishment that cannot satisfy his or her demand.

3.3. Purposes of Inventory

All firms keep a supply of inventory for the following reasons

Smooth operation of the manufacturing process. In this type of inventory raw materials andwork-in-process will be included. This type of inventory will ensure continuos production.

Buffer stock. In this instance stock of half finished goods are kept at the machine to ensurethat the machine will not be idle waiting for a job.

For the prevention of stock-outs. Products are manufactured in excess of the existing demands.When a surge in the demand do occur, there will be enough stock in the warehouse to satisfythe unforeseen demands. This will lead to customer satisfaction.

Seasonality. Firms whose demand is influenced by certain seasons use this type of inventory.During the off-season enough products are manufactured and stored to ensure that all thedemands can be met during the high season. An example of this is a knitwear company thatwill produce enough jerseys during the summer, thus ensuring that enough garments will beavailable during winter.

Order cycles. This will ensure the most advantageous buying of raw materials and othermaterials. Buying in cycles ensure that goods are purchased at the best economic orderquantities. A result of this will be that the cost of reordering will be minimised.

Take advantage of price discounts

To provide a safeguard for variation in raw material delivery time.

Inventory provides independence between stages and avoids work stop-pages

Increase in prices. If there is a price increase in the pipeline, buy in larger quantities to offsetor beat the imminent price increase. In this manner costs can be minimised.

Although inventories are indispensable to the efficient and effective operation of productionsystems but inventory is costly and large amounts are generally undesirable.

3.4. Inventory Costs

i. Carrying cost or Holding cost; Includes cost of holding an item in inventory. Include costs forstorage, facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxesand the opportunity cost of capital. Higher the inventory levels, higher the carrying costs.There are two basic ways of expressing holding costs. It can be expressed as a percentage ofthe selling price. E.g. holding cost per item is 10% of Rs. 5000. Thus the holding cost per itemwill be Rs. 500. Alternatively it can be expressed as a rupee value per item. E.g. holding costper item is Rs. 150.

33

ii. Ordering cost; Includes cost of replenishing inventory. These costs refer to managerial andclerical costs to prepare the purchase order. Costs will be incurred each time that inventoryhas to be replenished. The first part of the cost will be incurred when an order is placed. Thesecond part of the costs will be incurred when the goods ordered are received into stock. Theordering costs are usually expressed as a fixed amount per order. E.g. Rs. 1,00,00 per orderplaced. The larger the lot sizes, the more inventories we hold, but we order fewer timesduring the year and annual ordering costs are less.

iii. Shortage cost; Includes temporary or permanent loss of sales when demand cannot be met.When the stock of an item is depleted, an order for that item must be either wait until thestock is replenished or can be cancelled. There is a trade off between carrying stock to satisfydemand and the costs resulting from stockout. The costs that are included on a regular basis isloss of goodwill of the customer, charges for the late delivery of goods, loss of sale and a hostof other subjective costs.

iv. Setup Cost; the cost involved in changing over a machine to produce a different component oritem is the setup cost. It includes labor and time to make changeover, cleaning, and new toolsor fixtures. If there were no setup costs or loss of time for product changeover, many smalllots would be produced. This would reduce inventory levels, with a resulting saving in cost.

3.5 Inventory Control Systems

An inventory system provides the organizational structure and the operating policies formaintaining and controlling goods to be stocked. The system is responsible for ordering and receipt ofgoods; timing the order placement and keeping track of what has been ordered, how much, and fromwhom. Mainly two types of system are followed for ordering the inventories; they are continuoussystems and periodic systems.

i. Continuous system (fixed-order-quantity); In fixed order quantity systems a constant amountordered when inventory declines to predetermined level. However, when the order is placed isallowed to vary. When inventory falls to a critical inventory level, the reorder point, triggers anorder. Fixed order quantity model attempt to determine the specific point, R, the reorder level, atwhich an order will be placed and the size of that order, Q.

Assumptions of the Model

Demand is known with certainty and is constant over time

No shortages are allowed

Price per unit of product is constant

Lead time (time from ordering to receipt) for the receipt of orders is constant

Order quantity is received all at once

The setup cost is constant

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Figure 3.1 Basic Fixed order quantity ModelTotal cost = Annual purchase cost + Annual ordering cost + Annual holding cost, which corresponds to:

HQ

OQ

DDCTC

2

Q * = optimal order quantity

TC = Total annual cost

D = Annual demand

C = cost per unit

R = Reorder point

O = Ordering cost or cost of placing an order

L = Lead time, in days

H = Annual holding and storage cost per unit of average inventory (often holding cost is taken asa percentage of the cost of the item, such as H=iC, where I is the percentage carrying cost)

Taking the derivative of both sides of the equation and setting equal to zero, one obtains

. 02

02

H

Q

DO

dQ

dTC

H

DOQ

2*

The superscript asterisk (*) indicates the optimal order quantity or economic order quantity(EOQ).

DDeemmaanndd rraattee

TTiimmee LLeeaadd ttiimmee

LLeeaadd ttiimmee

OOrrddeerr ppllaacceedd

OOrrddeerr ppllaacceedd

OOrrddeerr rreecceeiipptt

OOrrddeerr rreecceeiipptt

IInnvveennttoorryy LLeevveell

RReeoorrddeerr ppooiinntt,, RR

OOrrddeerr qquuaannttiittyy,, QQ

00

35

Because this simple model assumes constant demand and lead time, no safety stock is necessary,and the reorder point, R is simply

LdR

Where, d is average daily demand.

3.6. Economic Order Quantity

The Economic Order Quantity (EOQ) is the number of units that a company should add toinventory with each order to minimize the total costs of inventory—such as holding costs, order costs,and shortage costs. The EOQ is used as part of a continuous review inventory system, in which the levelof inventory is monitored at all times, and a fixed quantity is ordered each time the inventory levelreaches a specific reorder point. The EOQ provides a model for calculating the appropriate reorderpoint and the optimal reorder quantity to ensure the instantaneous replenishment of inventory withno shortages. It can be a valuable tool for small business owners who need to make decisions abouthow much inventory to keep on hand, how many items to order each time, and how often to reorder toincur the lowest possible costs.

The EOQ model assumes that demand is constant, and that inventory is depleted at a fixed rateuntil it reaches zero. At that point, a specific number of items arrive to return the inventory to itsbeginning level. Since the model assumes instantaneous replenishment, there are no inventoryshortages or associated costs. Therefore, the cost of inventory under the EOQ model involves a tradeoffbetween inventory holding costs (the cost of storage, as well as the cost of tying up capital in inventoryrather than investing it or using it for other purposes) and order costs (any fees associated with placingorders, such as delivery charges). Ordering a large amount at one time will increase a small business’sholding costs, while making more frequent orders of fewer items will reduce holding costs but increaseorder costs. The EOQ model finds the quantity that minimizes the sum of these costs.

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Safety Stock

Safety Stocks is the buffer added to on hand inventory during lead time. It can also be definedas the amount of inventory carried in addition to the expected demand. Safety stock can be determinedbased on many different criteria. A common approach is for a company to simply state that a certainnumber of weeks of supply be kept in safety stock.

ii. Periodic system (fixed-time-period); order placed for variable amount after fixed passage oftime. Counting inventory and placing orders periodically is desirable in situations such as whenvendors make routine visits to customers and take orders for their complete line of products, orwhen buyers want to combine orders to save transportation costs.

Fixed time period models generate order quantities that vary from period to period, dependingon the usage rates. These generally require a higher level of safety stock than a fixed orderquantity system. The fixed order quantity system assumes continual tracking of inventory onhand, with an order immediately placed when the reorder point is reached. In contrast the fixedtime period models assume that inventory is counted only at the time specified for review.

3.7 ABC Classification

As a result of the high costs involved when holding stock, it becomes critically important tomanage that stock properly. A general rule that can be used is that the higher the monetary value of anitem, the higher the degree of attention given to that item. The lower the monetary value is the lessattention is given to that item. This is only a general rule of thumb. Because of the high investment ininventory a more scientific method had to be found to do the analysis to determine how to manageinventory properly. The technique that came into being is popularly known as the A-B-C classificationsystem. Other names used for this technique is the Pareto principle or the 80/20 principle. Inventory isclassified into three main classes or categories. This is achieved by taking the monetary value of eachitem into account. Category A items contains all the high monetary value items. A small number ofitems, around 20%, are responsible for the largest slice of the costs. These items are usually responsiblefor 80% of the costs. That is why it is known as the 80/20 principle. 80% of the costs is caused by 20% ofthe items in stockholding. These items should be controlled strictly. Category B items is moderatelyimportant. The category C items are the least important. An item that is included in this category isusually of low monetary value. E.g. nuts, bolts and washers. They need the least attention.

Figure 3.3. ABC classification system

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Management will concentrate their effort on controlling category A items. These types of itemsare usually of high value and can thus be sold outside the company at a profit. When discrepancies arefound during stock taking it is usually in this category. Pilferage usually takes place of these items ifemployees see that control is lax.

Class A; 5 – 15 % of units and 70 – 80 % of value

Class B; 30 % of units and 15 % of value

Class C; 50 – 60 % of units and 5 – 10 % of value

3.8. Just-in-Time (JIT) Inventory Management.

A system that has the purpose to fulfill any demand placed on the system without delay. It willdo so with the minimum of waste and only with high quality products. In simpler language it means toproduce the product only when it is required. The required product will thus not be delivered earlier orlater than the date specified by the customer. The following advantages can be derived fromimplementing a Just-in-Time system:

1. Costs will decrease.

2. Less defective products will be manufactured which will result in higher customer satisfaction.This is one of the reasons that costs will decrease.

3. Flexibility of the production system will increase.

4. New and more improved products can be made available to the consumers much faster.

Once a Just-in-Time system has been installed it should not be seen as the begin all and end allof the production system. The system must be managed properly and most importantly continuousimprovements must be made to the system. Fine-tune the system continuously. The main purpose of aJust-in-Time system is to eliminate waste in the production process. Waste for this purpose can bedefined as anything that does not add value to a product or service. Examples of waste is the following:

An operator standing or sitting watching a machine while the manufacturing process is inprogress. He being there does not add value to the product. The operator is there just in casethe machine breaks down.

The rework of sub standard quality products. No value is added when products have to bereworked because quality is low or non existent.

The moving around of completed or half-completed products over long distances. No value isadded as valuable time is wasted.

Operators looking for lost or misplaced tools.

Machines or work centers waiting for raw materials or parts to continue the manufacturingprocess. No value is added as both the machine and the operator is idle.

Holding of inventory. The space is required for the holding of inventory could be put to betteruse.

The breakdown of machinery. Better maintenance plans should be put into operation toeliminate this kind of waste.

Continuous counting and recounting of existing stock. This is one of the biggest sources ofwaste in any business. Nothing constructive is produced. For this very reason no inventoryexist in the Just-in-Time system.

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The overproduction of products. Many companies do this to prevent the non-availability oftheir products. This is one of the cases where “fat” is built in just in case of stock-outs.

It is therefore the goal of the Just-in-Time system to eliminate this waste and ensure a smoothproduction process. For a successful Just-in-Time system the following goals must be met:

Waste must be eliminated. If waste is not eliminated resource that could have been used inproduction is kept busy with unproductive work.

The system must be flexible. The system must be developed in such a manner that any mix ofproducts can be handled without much of a problem. The balance and rate of throughputmust be maintained at a steady rate.

Prevent disruptions. Disruptions have a negative influence on the production process. It willinterrupt the smooth flow of products through the production process. Once this happensone of the cornerstones of the Just-in-Time system is absent. Factors such as poor quality,continuous changes in the production schedule, the late receipt of materials and thebreakdown of machines will cause disruptions to the smooth flow of products through theproduction process.

Delivery times of raw materials and the set-up times of machines must be reduced. Thelonger these times are, the less value is added to the final product. This will also impactnegatively on the flexibility of the production process.

Keep the minimum inventory. Ideally, there should be no inventory in a Just-in-Time system.The more inventory that is held, the more space is required. This will push up the cost of thefinal product.

Good supplier network. To eliminate the holding of stock a reliable supplier network must bebuild up. The smaller the number of suppliers the more reliable the deliveries become. Thesuppliers must constantly be kept informed of when and what quantities of goods are required.It will be a great help if the suppliers are situated close to the factory.

Source quality. Quality is a prerequisite for a successful Just-in-Time system. Ensure that onlyhigh quality parts and raw materials are received from the suppliers. In this manner themanufacturing of zero defect products become more viable.

Many benefits can be derived from a properly installed Just-in-Time system. The following is themain benefits of Just-in-Time:

All levels of inventory (work-in-process, bought in goods and finished goods) will be reduced.If properly installed Just-in-Time will trim inventory down to only the materials needed forthat day’s production.

Quality of the goods produced will improve. Rework and scrap will be reduced and eventuallyeliminated.

All the costs involved will be reduced. This include the cost of rework, scrap, inventory holdingcosts as well as the cost of constantly setting up the machines.

The time taken to manufacture a finished product will be reduced.

The productivity of both the man and the machine will improve because of better utilization.

There will be more flexibility in the production process.

39

Better relationships with the suppliers will be the result of a successful implementation of aJust-in-Time system.

The scheduling and controlling of jobs will be simplified.

Due to fewer interruptions in the manufacturing process capacity will be increased. This willcome to pass because of better quality, better training of employees and less machinebreakdowns.

Use employees more productive. Employees can now become actively involved in the solvingof production problems. The people working in the process is usually more aware whereproblems is likely to occur and how to solve them. Listen to their input.

Indirect labour (progress chasers, storemen and planners) can be reduced.

More types of products can be produced.

To become more competitive and stay competitive, more and more companies are consideringconversion to a Just-in-Time system. Those that choose not to convert, risk becoming irrelevant in themanufacturing environment. Their cost will be high, capital will be tied up in unproductive stock holingand their quality will be almost non existent. It is for these reasons that the Japanese and other Asiancountries dominated the world markets in the late 1970’s through the 1980’s and early 1990’s. It is onlylately that the Western countries have started competing on an equal footing with the Asian countries.These countries have learned their lessons well. If Indian firms want to compete in the global marketthey to will have to learn these lessons. If they do not, India will always remain a manufacturingbackwater.

3.9. Controlling Inventory

Controlling inventory does not have to be an onerous or complex proposition. It is a process andthoughtful inventory management. There are no hard and fast rules to abide by, but there are someextremely useful guidelines. A five step process can help any business bring this potential problemunder control to think systematically thorough the process and allow the business to make the mostefficient use possible of the resources represented. The final decisions, of course, must be the result ofgood judgment, and not the product of a mechanical set of formulas.

STEP 1: Inventory Planning

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

STEP 2: Establish order cycles

If demand can be predicted for the product or if demand can be measured on a regular basis,regular ordering quantities can be setup that take into consideration the most economic relationshipsamong the costs of preparing an order, the aggregate shipping costs, and the economic order cost.When demand is regular, it is possible to program regular ordering levels so that stock-outs will be

40

avoided and costs will be minimized. If it is known that every so many weeks or months a certainquantity of goods will be sold at a steady pace, then replacements should be scheduled to arrive withequal regularity. Time should be spent developing a system tailored to the needs of each business. It isuseful to focus on items whose costs justify such control, recognizing that in some cases control effortsmay cost more the items worth. At the same time, it is also necessary to include low return items thatare critical to the overall sales effort.

If the business experiences seasonal cycles, it is important to recognize the demands that willbe placed on suppliers as well as other sellers.

A given firm must recognize that if it begins to run out of product in the middle of a busy season,other sellers are also beginning to run out and are looking for more goods. The problem is compoundedin that the producer may have already switched over to next season’s production and so is not interestedin (or probably even capable of) filling any further orders for the current selling season. Productionresources are likely to already be allocated to filling orders for the next selling season. Changes in thismomentum would be extremely costly for both the supplier and the customer.

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

STEP 3: Balance Inventory Levels

Efficient or inefficient management of merchandise inventory by a firm is a major factor betweenhealthy profits and operating at a loss. There are both market-related and budget-related issues thatmust be dealt with in terms of coming up with an ideal inventory balance:

• Is the inventory correct for the market being served?

• Does the inventory have the proper turnover?

• What is the ideal inventory for a typical retailer or wholesaler in this business?

The ideal inventory is the inventory that does not lose profitable sales and can still justify theinvestment in each part of its whole.

An inventory that is not compatible with the firm’s market will lose profitable sales. Customerswho cannot find the items they desire in one store or from one supplier are forced to go to a competitor.Customer will be especially irritated if the item out of stock is one they would normally expect to findfrom such a supplier. Repeated experiences of this type will motivate customers to become regularcustomers of competitors.

STEP 4: Review Stocks

Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping inventory upto date and devoid of obsolete merchandise is another critical aspect of good inventory control. This isparticularly important with style merchandise, but it is important with any merchandise that is turningat a lower rate than the average stock turns for that particular business. One of the important principlesnewer sellers frequently find difficult is the need to mark down merchandise that is not moving well.

41

Markups are usually highest when a new style first comes out. As the style fades, efficientsellers gradually begin to mark it down to avoid being stuck with large inventories, thus keeping inventorycapital working. They will begin to mark down their inventory, take less gross margin, and return thefunds to working capital rather than have their investment stand on the shelves as obsolete merchandise.Markdowns are an important part of the working capital cycle. Even though the margins on markdownsales are lower, turning these items into cash allows you to purchase other, more current goods, whereyou can make the margin you desire.

Keeping an inventory fresh and up to date requires constant attention by any organization,large or small. Style merchandise should be disposed of before the style fades. Fad merchandise musthave its inventory levels kept in line with the passing fancy. Obsolete merchandise usually must be soldat less than normal markup or even as loss leaders where it is priced more competitively. Loss leaderpricing strategies can also serve to attract more’ consumer traffic for the business thus creatingopportunities to sell other merchandise as well as well as the obsolete items. Technologically obsoletemerchandise should normally be removed from inventory at any cost.

Stock turnover is really the way businesses make money. It is not so much the profit per unit ofsale that makes money for the business, but sales on a regular basis over time that eventually results inprofitability. The stock turnover rate is the rate at which the average inventory is replaced or turnedover, throughout a pre-defined standard operating period, typically one year. It is generally seen as themultiple that sales represent of the average inventory for a given period of time.

Turnover averages are available for virtually any industry or business maintaining inventoriesand having sales. These figures act as an efficient and effective benchmark with which to compare thebusiness in question, in order to determine its effectiveness relative to its capital investment. Toofrequent inventory turns can be as great a potential problem as too few. Too frequent inventory turnsmay indicate the business is trying to overwork a limited capital base, and may carry with it the attendantcosts of stock-outs and unhappy and lost customers.

Stock turns or turnover, is the number of times the “average” inventory of a given product issold annually. It is an important concept because it helps to determine what the inventory level shouldbe to achieve or support the sales levels predicted or desired. Inventory turnover is computed bydividing the volume of goods sold by the average inventory.

STEP 5: Follow-up and Control

Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fastsellers are essential for proper inventory management. Taking regular and periodic inventories must bemore than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is theresponsibility of key management to study the figures and review the items themselves in order tomake correct decisions about the disposal, replacement, or discontinuance of different segments ofthe inventory base.

Just as an airline cannot make money with its airplanes on the ground, a firm cannot earn aprofit in the absence of sales of goods. Keeping the inventory attractive to customers is a primeprerequisite for healthy sales. Again, the seller’s inventory is usually his largest investment. It will earnprofits in direct proportion to the effort and skill applied in its management.

42

Inventory quantities must be organized and measured carefully. Minimum stocks must be assuredto prevent stock-outs or the lack of product. At the same time, they must be balanced against excessiveinventory because of carrying costs. In larger retail organizations and in many manufacturing operations,purchasing has evolved as a distinct new and separate phase of management to achieve the dualobjective of higher turnover and lower investment. If this type of strategy is to be utilized, however,extremely careful attention and constant review must be built into the management system in order toavoid getting caught short by unexpected changes in the larger business environment.

Caution and periodic review of reorder points and quantities are a must. Individual market sizeof some products can change suddenly and corrections should be made.


1. What are the types of inventory?

2. What are the different inventory costs?

3. Explain the process of controlling inventory.

3.11. Summary

Inventory serves a useful purpose in the supply chain. Firms can help minimize the need forinventory by carefully managing those factors that drive inventory levels up.

Inventory items can be divided into two main types: Independent demand and dependentdemand items. The systems for managing these two types if inventory differ significantly.

The two classic systems for managing independent demand inventory are Fixed order and fixedtime period systems.

The economic order quantity (EOQ) is the order quantity that minimizes total holding andordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us agood indication of whether or not current order quantities are reasonable.

The reorder point formula allows us to determine the safety stock (SS) needed to achieve acertain cycle service level. In general, the longer the lead times are, and the greater thevariability of demand and lead times, the more SS we will need.

3.12 GLOSSARY:

Buffer Stock: A buffer stock is a system which buys and stores socks at times of good harveststo prevent prices falling below a target range and releases stocks during bad harvests to preventprices rising above a target range.

Stock-outs: A stock-out is an event that causes inventory to be exhausted.

Economic Order Quantity: It is the number of units that a company should add to inventorywith each order to minimize the total costs of inventory.

Just-in-time Inventory: It is a strategy to increase efficiency and decrease waste by receivinggoods only as they are needed in the production process, thereby reducing inventory costs.

Order Cycles: It is the number of days required for a seller to use up a vendor's supply to meetthe supplier's target order requirement. It also tells the seller how much stock is used andneeded before placing a replenishment request.

43





3.14 TERMINAL QUESTIONS: in book

3.15 SUGGESTED READINGS: in book

3.14. Terminal Questions

1. Define and discuss the term inventory and the major reasons for having inventory.

2. List the main requirements for effective inventory management.

3. What is Economic order quantity? Explain.

4. Discuss the A-B-C method of inventory control.

5. List the different types of inventory that can be held by a company.

6. Discuss the reasons for holding stock.

7. List the costs associated with holding stock.

3.15. Suggested Reading




4. Pycraft, M. ; Singh, H. ; Phihlela, K. ; Slack, N. ; Chamers, S. ; Harland, C. ; Harrison, A. andJohnston, R. (1997). Operations Management. (1st Edition). Pitman Publishing.

5. Russel, R.S. and Taylor, B.W. III. (1995) Operations Management-Focusing on Quality andcompetitiveness. International Edition. (2nd Edition). Prentice-Hall.

*****

44

Chapter-4Demand Forecasting

Structure:


4.1 Introduction

4.2 Applications for forecasting

4.3 Demand Behavior

4.4 Types of Forecasting Methods

4.4.1 Forecasting Process

4.4.2 Qualitative Methods

4.4.2 (a) Delphi Method

4.4.2 (b) Genius Forecasting

4.4.3 Quantitative Methods

4.4.3 (a) Regression Methods

4.4.3 (b) Multiple equation Methods

4.4.3 (c) Time series Methods

4.4.3 (d) Moving Average Method

4.4.3 (e) Single Exponential Smoothing

4.4.3 (f) Decision Tree

4.5 Evaluating Forecast Accuracy

4.6 Factors Affecting Choice of a forecasting system

4.7 Reasons for Ineffective Forecasting

4.8 How to Monitor and Control a Forecasting Model


4.10 Summary

4.11 Glossary





After studying the leason, you will be able to know:

What is Forecasting?

Applications of forecasting

Demand behavior

45

Methods of forecasting

Qualitative methods of forecasting

Quantitative methods of forecasting

4.1. Introduction :

Forecasting is the estimation of the value of a variable (or set of variables) at some future pointin time. A forecasting exercise is usually carried out in order to provide an aid to decision-making and inplanning the future. Typically all such exercises work on the premise that if we can predict what thefuture will be like we can modify our behavior now to be in a better position, than we otherwise wouldhave been, when the future arrives.

There are several assumptions about forecasting:

1. There is no way to state what the future will be with complete certainty. Regardless of themethods that we use there will always be an element of uncertainty until the forecast horizonhas come to pass.

2. There will always be blind spots in forecasts. We cannot, for example, forecast completely newtechnologies for which there are no existing paradigms.

3. Providing forecasts to policy-makers will help them formulate social policy. The new social policy,in turn, will affect the future, thus changing the accuracy of the forecast.

4.2. Applications for forecasting include:

Inventory control/production planning - forecasting the demand for a product enables us tocontrol the stock of raw materials and finished goods, plan the production schedule, etc

Investment policy - forecasting financial information such as interest rates, exchange rates,share prices, the price of gold, etc. This is an area in which no one has yet developed a reliable(consistently accurate) forecasting technique (or at least if they have they haven’t told anybody!)

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46

Economic policy - forecasting economic information such as the growth in the economy,unemployment, the inflation rate, etc is vital both to government and business in planning forthe future.

Accurate forecasting customer demand is a key to providing good quality service Continuous replenishment and Just in Time complement Total quality management

eliminates the need for buffer inventory, which, in turn, reduces both waste and inventorycosts, a primary goal of TQM

smoothes process flow with no defective items meets expectations about on-time delivery, which is perceived as good-quality service

4.3. Demand BehaviorFour type of demand pattern existsi. Trend; a gradual, long-term up or down movement of demand.ii. Random variations; movements in demand that do not follow a pattern.iii. Cycle; an up-and-down repetitive movement in demand.iv. Seasonal pattern; an up-and-down repetitive movement in demand occurring periodically.

Figure 4.1. Different demand behaviors

4.4. Types of forecasting problems/methods

One way of classifying forecasting problems is to consider the timescale involved in the forecast i.e.how far forward into the future we are trying to forecast. Short, medium and long-term are the usualcategories but the actual meaning of each will vary according to the situation that is being studied, e.g.in forecasting energy demand in order to construct power stations 5-10 years would be short-term and50 years would be long-term, whilst in forecasting consumer demand in many business situations up to6 months would be short-term and over a couple of years long-term. The table below shows thetimescale associated with business decisions.

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47

Figure 4.2. Forecasting Time Horizons

The basic reason for the above classification is that different forecasting methods apply in eachsituation, e.g. a forecasting method that is appropriate for forecasting sales next month (a short-term forecast)would probably be an inappropriate method for forecasting sales in five years time (a long-term forecast). Inparticular note here that the use of numbers (data) to which quantitative techniques are applied typicallyvaries from very high for short-term forecasting to very low for long-term forecasting when we are dealingwith business situations.

Forecasting methods can be classified into several different categories:

qualitative methods - where there is no formal mathematical model, often because the dataavailable is not thought to be representative of the future (long-term forecasting)

Timescale Type of Decision Examples

Short term

Upto 3-6 months

Operating Inventory control, production

planning, distribution

Medium term

3-6 months – 2 years

Tactical Leasing of plant and

equipment

Employment changes

Long-term

Above 2 years

Strategic Research and development

Acquisitions and mergers

Product changes

48

regression methods - an extension of linear regression where a variable is thought to be linearlyrelated to a number of other independent variables

multiple equation methods - where there are a number of dependent variables that interact witheach other through a series of equations (as in economic models)

time series methods - where we have a single variable that changes with time and whose futurevalues are related in some way to its past values.

4.4.1 Forcasting Process

Figure 4.3. Forecasting Process

4.4.2. Qualitative methods

Methods of this type are primarily used in situations where there is judged to be no relevant pastdata (numbers) on which a forecast can be based and typically concern long-term forecasting. One approachof this kind is the Delphi technique

a. Delphi Method

The Delphi method is a systematic interactive forecasting method based on independent inputs ofselected experts.

The name “Delphi” derives from the Oracle of Delphi. The authors of the method were not happywith this name, because it implies “something oracular, something smacking a little of the occult”, whereas inreality precisely the opposite is involved. The Delphi method recognizes the value of expert opinion, experienceand intuition and allows using the limited information available in these forms, when full scientific knowledgeis lacking.

6. Check forecast accuracy with one or more measures

4. Select a forecast model that seems appropriate for data

5. Develop/compute forecast for per iod of historical data

8a. Forecast over planning horizon

9. Ad just forecast based on add itional qualitative information and insight

10. Monitor results and measure forecast accuracy

8b. Select new forecast model or adjust parameters of existing model

7. Is accuracy of

forecast acceptable?

1. Identi fy the purpose of forecast

3. Plot data and identify patterns

2 . Collect historical data

No

Yes

49

Nowadays the Delphi technique has a different meaning. It involves asking a body of experts toarrive at a consensus opinion as to what the future holds. Underlying the idea of using experts is the beliefthat their view of the future will be better than that of non-experts (such as people chosen at random in thestreet). Consider - what types of experts would you choose if you were trying to forecast what the world willbe like in 50 years time?

The Delphi technique is a method for obtaining forecasts from a panel of independent experts overtwo or more rounds. Experts are asked to predict quantities. After each round, an administrator provides ananonymous summary of the experts’ forecasts and their reasons for them. When experts’ forecasts havechanged little between rounds, the process is stopped and the final round forecasts are combined by averaging.Delphi is based on well-researched principles and provides forecasts that are more accurate than those fromunstructured groups. In a Delphi study the experts are all consulted separately to avoid some of the bias thatmight result were they all brought together, e.g. domination by a strong willed individual, divergent (but valid)views not being expressed for fear of humiliation.

The following key characteristics of the Delphi method help the participants to focus on the issues athand and separate Delphi from other methodologies:

1. Structuring of information flow

2. Regular feedback

3. Anonymity of the participants

Applications of Delphi Methods

First applications of the Delphi method were in the field of science and technology forecasting. Theobjective of the method was to combine expert opinions on likelihood and expected development time, of theparticular technology, in a single indicator. One of the first such reports, prepared in 1964 by Gordon andHelmer, assessed the direction of long-term trends in science and technology development, covering suchtopics as scientific breakthroughs, population control, automation, space progress, war prevention and weaponsystems.

Later the Delphi method was applied in other areas, especially those related to public policy issues,such as economic trends, health and education. It was also applied successfully and with high accuracy inbusiness forecasting. For example, in one case reported by Basu and Schroeder (1977), the Delphi methodpredicted the sales of a new product during the first two years with inaccuracy of 3–4% compared withactual sales. Quantitative methods produced errors of 10–15%, and traditional unstructured forecast methodshad errors of about 20%.

b. Genius forecasting -

This method is based on a combination of intuition, insight, and luck. Psychics and crystal ball readersare the most extreme case of genius forecasting. Their forecasts are based exclusively on intuition. Sciencefiction writers have sometimes described new technologies with uncanny accuracy.

There are many examples where men and women have been remarkable successful at predictingthe future. There are also many examples of wrong forecasts. The weakness in genius forecasting is that itsimpossible to recognize a good forecast until the forecast has come to pass.

Some psychic individuals are capable of producing consistently accurate forecasts. Mainstreamscience generally ignores this fact because the implications are simply to difficult to accept. Our currentunderstanding of reality is not adequate to explain this phenomena.

50

4.4.3 Quantitative Methods

a. Regression methods

Linear regression where a straight line of the form Y = a + bX is fitted to data. It is possible to extendthe method to deal with more than one independent variable X. Suppose we have k independentvariables X

1, X

2, ..., X

k then we can fit the regression line

Y = a + b1X

1 + b

2X

2 + ... + b

kX

k

This extension to the basic linear regression technique is known as multiple regression. Plainly knowingthe regression line enables us to forecast Y given values for the X

i i = 1,2,...,k.

b. Multiple equation methods

Methods of this type are frequently used in economic modelling (econometrics) where there are manydependent variables that interact with each other via a series of equations, the form of which is givenby economic theory. This is an important point. Economic theory gives us some insight into the basicstructural relationships between variables. The precise numeric relationship between variables mustoften be deduced by examining data.

As an example consider the following simple model, let:

X = personal income

Y = personal spending

I = personal investment

r = interest rate

From economic theory suppose that we have

Y = a1 + b

1(X-a

1) (spending a linear function of disposable income)

I = a2 + b

2r (investment linearly related to the interest rate)

and the balancing equation

X = Y + I (income = spending + investment)

where a1,a

2,b

1,b

2 are constants.

Here we have 3 equations in 4 variables (X,Y,I,r) and so to solve these equations one of the variablesmust be given a value. The variable so chosen is known as an exogenous variable because its value isdetermined outside the system of equations whilst the remaining variables are called endogenous variablesas their values are determined within the system of equations, e.g. in our model we might regard the interestrate r as the exogenous variable and be interested in how X, Y and I change as we alter r.

c. Time series methods/analysis

Methods of this type are concerned with a variable that changes with time and which can be said todepend only upon the current time and the previous values that it took (i.e. not dependent on any othervariables or external factors). If Y

t is the value of the variable at time t then the equation for Y

t is

Yt = f(Y

t-1, Y

t-2, ..., Y

0, t)

i.e. the value of the variable at time t is purely some function of its previous values and time, no othervariables/factors are of relevance. The purpose of time series analysis is to discover the nature of thefunction f and hence allow us to forecast values for Y

t.

51

Time series methods are especially good for short-term forecasting where, within reason, the pastbehaviour of a particular variable is a good indicator of its future behaviour, at least in the short-term. Thetypical example here is short-term demand forecasting. The difference between demand and sales - demandis what customers want - sales is what we sell, and the two may be different.

d. Moving average

One, very simple, method for time series forecasting is to take a moving average (also known asweighted moving average).

The moving average (mt) over the last L periods ending in period t is calculated by taking the average

of the values for the periods t-L+1, t-L+2, t-L+3, ..., t-1, t so that

mt = [Y

t-L+1 + Y

t-L+2 + Y

t-L+3 + ... + Y

t-1 + Y

t]/L

To forecast using the moving average we say that the forecast for all periods beyond t is just mt

(although we usually only forecast for one period ahead, updating the moving average as the actual observationfor that period becomes available).

e. Single exponential smoothing

One disadvantage of using moving averages for forecasting is that in calculating the average all theobservations are given equal weight (namely 1/L), whereas we would expect the more recent observations tobe a better indicator of the future (and accordingly ought to be given greater weight). Also in moving averageswe only use recent observations, perhaps we should take into account all previous observations.

One technique known as exponential smoothing (or, more accurately, single exponential smoothing)gives greater weight to more recent observations and takes into account all previous observations.

Define a constant µ where 0 <= µ <= 1 then the (single) exponentially smoothed moving average forperiod t (M

t say) is given by

Mt = µY

t + µ(1- µ)Y

t-1 + µ(1- µ)²Y

t-2 + µ(1- µ)³Y

t-3 + ...

115500 –

112255 –

110000 –

7755 –

5500 –

2255 –

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MMoonntthh

33--mmoonntthh

55-- mmoonntthh

52

So you can see here that the exponentially smoothed moving average takes into account all of theprevious observations, compare the moving average above where only a few of the previous observationswere taken into account.

The above equation is difficult to use numerically but note that:

Mt = µY

t + (1- µ)[µY

t-1 + µ(1- µ)Y

t-2 + µ(1- µ)²Y

t-3 + ...]

i.e. Mt = µY

t + (1- µ)M

t-1

Hence the exponentially smoothed moving average for period t is a linear combination of the currentvalue (Y

t) and the previous exponentially smoothed moving average (M

t-1).

The constant µ is called the smoothing constant and the value of µ reflects the weight given to thecurrent observation (Y

t) in calculating the exponentially smoothed moving average M

t for period t (which is

the forecast for period t+1). For example if µ = 0.2 then this indicates that 20% of the weight in generatingforecasts is assigned to the most recent observation and the remaining 80% to previous observations.

f. Decision trees

Decision trees originally evolved as graphical devices to help illustrate the structural relationshipsbetween alternative choices. These trees were originally presented as a series of yes/no (dichotomous)choices. As our understanding of feedback loops improved, decision trees became more complex. Theirstructure became the foundation of computer flow charts.

Computer technology has made it possible create very complex decision trees consisting of manysubsystems and feedback loops. Decisions are no longer limited to dichotomies; they now involve assigningprobabilities to the likelihood of any particular path.

Decision theory is based on the concept that an expected value of a discrete variable can becalculated as the average value for that variable. The expected value is especially useful for decision makersbecause it represents the most likely value based on the probabilities of the distribution function. The applicationof Bayes’ theorem enables the modification of initial probability estimates, so the decision tree becomesrefined as new evidence is introduced.

Utility theory is often used in conjunction with decision theory to improve the decision making process.It recognizes that dollar amounts are not the only consideration in the decision process. Other factors, such asrisk, are also considered.

4.5 Evaluating Forecast Accuracy

Accuracy is how well the forecasted values match the actual values

Measuring the accuracy of Forecasts when making a choice between various forecasting alternatives

Accuracy of a forecasting approach needs to be monitored to assess the confidence you can have inits forecasts and changes in the market may require reevaluation of the approach

Accuracy can be measured in several ways

a.Mean absolute deviation (MAD)

b.Mean squared error (MSE)

n

periodsn for deviation absolute of Sum=MAD

53

MSE penalizes large errors more than small errors. When the forecast errors are normallydistributed

MSE = 1.25(MAD)

4.6 Factors affecting Choice of a forecasting system

Selecting a Forecasting Method depends upon the following factors

i. Accuracy of forecast: In choosing a forecast method, a trade off may result between cost andaccuracy, in other words, more forecast accuracy can be obtained at a cost. High accuracyapproaches use more data, the data are ordinarily more difficult to obtain, and models aremore costly to design, implement and operate.

ii. Data available: The data that are available and relevant for forecast is an important factor inchoosing a forecast method. For example, if the attitude and intentions of customers are arelevant factor in forecasts and if the data can be economically obtained from customersabout their attitudes and intentions, then a survey of customers may be an appropriate methodfor developing demand estimates. On the other hand, if the requirement is to forecast salesof a new product, then the survey of customers may not be a practical way to develop forecast;historical analogy, market research, executive committee consensus, or some other methodmay have to be used.

iii. Time span: The choice of an appropriate forecasting method is affected by the nature of theproduction resource that is to be forecasted. Workers, cash, inventories, and machine schedulesare short range in nature and can be forecasted with moving average or exponential smoothingmethods. Long range production resource needs such as factory capacities and capital fundsand can be estimated by regression, executive committee consensus, market research, orother methods that are appropriate for long range forecasts.

iv. Nature of products and services; Managers are advised to use different forecasting methodsfor different products. Such factors as whether a product is high volume and high cost, whetherthe product is a manufactured good or a service, whether product demand demonstratesseasonal fluctuations or growth or decline, and where the product is in its life cycle all affectthe choice of forecasting method.

n

demandForecast -demand Actual=MAD

n

1=i i

n

Z-Z =MAD = MAE

tt

MSE = RMSE

n

)Z -(Z = MSE

n

1

2tt

54

v. Impulse response and noise dampening; Each forecasting model differs in its impulse responseand noise dampening abilities, and the model selected must fit the forecasting situation.Once managers have selected the forecasting model to use, the performance of the modelmust be tracked.

4.7 Reasons for Ineffective Forecasting

Following are the reasons for ineffective forecasts;

Not involving a broad cross section of people

Not recognizing that forecasting is integral to business planning

Not recognizing that forecasts will always be wrong

Not forecasting the right things

Not selecting an appropriate forecasting method

Not tracking the accuracy of the forecasting models

4.8 How to Monitor and Control a Forecasting Model

It is very important to monitor and control the forecasting model. Controlling the forecast isimportant to ensure the performance of a given forecasting method in use is adequate

A forecast is generally considered to perform adequately when the errors exhibit only randomvariations. In other words, if the method is unbiased forecast errors should fluctuate randomlyabove and below zero.

Forecasts can be monitored using control charts. The control chart approach involves settingupper and lower limits for forecast errors. If the forecast is “in control”, individual errors shouldfall within the limits. Points that fall outside these limits should be regarded as evidence thatcorrective action is needed


1. Define forecasting. Discuss the assumptions about forecasting.

2. Explain different types of demand behavior.

3. What are the factors affecting choice of a forecasting system?

4.10 SUMMARY:

Forecasting is the estimation of the value of a variable at some future point in time. A forecastingexercise is usually carried out in order to provide an aid to decision-making and in planning the future.It is applicable in various areas like inventory control, investment policy, economic policy, etc.

Forecasting methods are mainly divided into two categories i.e. Qualitative and Quantitativemethods. Qualitative methods are Delphi method and Genius forecasting. Quantitative methods areregression methods, multiple equation method, time series method, moving average, single exponentialsmoothing and decision tree. There are various factors which affect the choice of a forecasting methodor system such as accuracy of forecast, data available, time span, nature of products and services andimpulse response and noise dampening.

4.11 GLOSSARY:

Forecasting: It is the process of making predictions of the future based on past and present dataand most commonly by analysis of trends.

55

Delphi Method: It is a forecasting process framework based on the results of multiple rounds ofquestionnaires sent to a panel of experts. Several rounds of questionnaires are sent out to the group ofexperts, and the anonymous responses are aggregated and shared with the group after each round.

Regression: It is a statistical method used in finance, investing, and other disciplines that attemptsto determine the strength and character of the relationship between one dependent variable (usuallydenoted by Y) and a series of other variables (known as independent variables).

Time series: It is a series of data points indexed (or listed or graphed) in time order. Mostcommonly, a time series is a sequence taken at successive equally spaced points in time.

Moving Average: It is a technique often used in technical analysis that smooths price historiesby averaging daily prices over some period of time. Simple moving averages (SMA) takes the arithmeticmean of a given set of prices over the past number of days, for example over the previous 15, 30, 100, or200 days.4.12 ANSWERS TO SELF-ASSESSMENT QUESTIONS:

1. Refer to section (4.1)2. Refer to section (4.3)3. Refer to section (4.6)4.13 TERMINAL QUESTIONS: in book4.14SUGGESTED READINGS: in book

4.13 Terminal Questions1. Define forecasting. Discuss its application.2. Discuss the various methods for demand forecasting.3. What is Delphi technique? Discuss in details.4. Discuss the quantitative models for demand forecasting with their merits and demerits.5. Discuss the forecasting process in an organization.6. How can you evaluate forecasting accuracy?7. Discuss the various ways to have a successful forecasting system.8. What are the various reasons for an ineffective forecast? Discuss.9. Discuss the ways in which you can monitor and control forecasting model.

4.14 Suggested Reading




4. Buffa, E.S., Modern Production Management, New Delhi: Wily, 19885. Charantimath, Poornima (2003), Total Quality Management. Pearson Education, New Delhi.6. Desai, Vasant Dr. (2004) Management of Small Scale Enterprises New Delhi: Himalaya Publishing

House.

*****

56

Chapter-5Purchasing Management Functions

Structure:


5.1 Introduction

5.2 Types of Purchasing System

5.3 The Purchasing Process

5.4 Purchasing Methods

5.4 (i) Tendering

5.4 (ii) Selective Purchase

5.4 (iii) Emergency Purchasing

5.4 (iv) Bulk Purchasing

5.4 (v) Period Contracts

5.4 (vi) Intent Purchasing

5.5 Preparation and Processing of Tenders

5.5.1 Telephone Quotations

5.5.2 Written Tenders

5.5.2 (i) Conditions of Tender

5.5.2 (ii) Specifications

5.5.2 (iii) Conditions of Contract

5.6 Ordering and Delivery

5.6.1 Purchase Orders

5.6.2 Follow-up

5.6.3 Delivery and its terms

5.6.4 Payment


5.8 Summary

5.9 Glossary





The purchasing management function

Types of purchasing system

57

The Purchasing Process

Purchasing Methods

Tendering

Ordering and Delivery Systems

5.1. Introduction:

Purchasing manager typically handles the creating, printing and follow up of purchase orders.The purchase orders may apply to inventoried or non-inventoried materials. Also maintained is vendor-related data, such as name, address, contact, and items purchased.

Company develop purchasing plans for each major product or service consistent with operationsstrategies as it helps to ensure:

Low production costs Fast and on-time deliveries High quality products and services Flexibility in purchasing and production

Specialized ExpertiseThe purchasing philosophy of every organization should be to obtain the most suitable goods

and services at the best possible price, delivered where and when required. Different types oforganizations will use different means to meet these aims in accordance with their individualmanagement styles and operational requirements.

The Head of each department is responsible for establishing internal purchasing policies whichare consistent with overall purchasing policies, and for determining who in the department will beresponsible for the purchasing function. The following factors should be considered:

the complexities of the purchasing function and the proportion of the organization’s totalbudget spent on goods and services;

the degree of purchasing expertise required. For example, does the organization purchasemainly low value, consumable goods or are there a considerable number of high valuecapital purchases and expensive consultancies?

the development of a purchasing profile. Does the PARETO principle (80% high volume/lowvalue, 20% low volume/high value) apply? If so, purchasing resources can be concentratedon the low volume/high value purchasing;

purchasing economies. Can worthwhile savings be made by investing in high qualitypurchasing resources?

Consideration of the above factors can assist the departmental heads in determining theimportance of the purchasing function to the organization and assigning responsibility for it to a personwith the appropriate expertise.5.2. Types of Purchasing System

Within the public sector, purchasing has normally been the responsibility of either Operations orFinance sections/divisions. No matter which division within the organization now has responsibility forpurchasing, close co-operation with the operational and financial sections is essential to ensure thatthe following requirements are met:

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Operational

that the goods and services purchased meet user requirements and are delivered to the rightplace at the right time;

Financial

that the cost of the goods and/or services purchased is within budget and is correctly accountedfor;

that capital purchases are included in the asset register; stock is taken onto inventory; inputsare correctly charged to outputs;

that the finance department has sufficient information for correct cash forecasting and fundingfor payments.

The person who is given the responsibility for the purchasing function must then consider whichpurchasing system is best suited to the organization. The options are:

Centralised

Decentralised

A combination of the above

Under a centralised system, a single department or officer is responsible for arranging purchasesfor the entire organization.

A centralised system allows:

concentration of purchasing expertise;

development of cost-effective purchasing methods such as bulk-buying;

standardisation of goods and services throughout the organization;

easier co-ordination with the finance section.

However, such a system suffers with following drawbacks:

may be inflexible, making it difficult for individual offices to obtain the goods they need atthe time they need them;

removes responsibility from managers of local offices.

Under a decentralised system, staff in different branches have various levels of responsibility fortheir own purchasing needs.

A decentralised system allows:

local managers to be responsible, and therefore accountable, for purchasing decisions

close liaison with end-users.

However, such a system has its own limitations:

can be expensive, since many individuals may need to develop purchasing expertise;

does not encourage standardisation and purchasing economies.

By combining the best features of the centralised and decentralised methods, it should be possibleto achieve an efficient and effective purchasing system.

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Delegation of Purchasing Authority

Once the purchasing manager has established a purchasing policy and decided the best systemfor the organization, a formal delegation of authority can be made. The delegation should cover factorssuch as whether the authority to purchase is to be vested in a single officer or section, a number ofofficers or a Tenders Committee. It may be prudent to set various levels of authority with definedfinancial limits. The delegation of authority should also make clear and explicit the degree ofresponsibility given for financial decisions, as distinct from purchasing decisions.

5.3. The Purchasing Process

Requisition Accounting System

Financial Approval Payment

Market Assessment Receipting and Accounting

for Goods/Services Received

Purchase Decision Delivery

Ordering

MMaatteerriiaall RReeqquuiissiittiioonn

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BBaasseedd oonn qquuaalliittyy,, pprriiccee,, lleeaadd ttiimmee,, ddeeppeennddaabbiilliittyy

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FFrroomm ssuupppplliieerr,, ttoo rreecceeiivviinngg,, qquuaalliittyy ccoonnttrrooll,, wwaarreehhoouussee

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(i) Requisitioning

Every organization needs a system by which a member of staff can notify the purchasing officer ofa need for goods or services. A simple, but clear, requisition form is all that should be necessary. Thereis a tendency to oversimplify or overlook the requisition stage, but it provides a mechanism by whichthe purchasing officer can gain an accurate description of the goods or service required. An end-usermay know what is needed but may not have the technical expertise to describe it correctly.Accuratelydetailed requisitions ensure the supply of correct requirements and avoid the waste of money.

(ii) Financial Approval

Financial approval must be given before the purchasing commitment is made, and the purchasingsystem should be designed to ensure that this is done. A simple technique is to include a space forrecording financial approval on the requisitioning form.

(iii) Market Assessment

Once the purchasing officer receives an approved requisition, a check should be made to ensurethat the item is not already in stock. A market assessment should then be made, considering thefollowing questions:

Is there a competitive market for the item?

Is the volume/value of goods required sufficient to warrant calling for quotations and tenders,and if so, should prices and other details be obtained by telephone or in writing?

If there is no competitive market, should the sole supplier be given an immediate order, orcan a lower price be negotiated?

Is it appropriate to call for “Registration of Interest”, prior to inviting formal tenders?

Are suitable period contracts available?

Is there a list of “approved suppliers” for the item, or is the establishment of an “approvedsuppliers” list warranted?

Could there be scope for a bulk purchase?

(iv) Purchase Decision

Having completed the market assessment and determined the method of purchase, the purchasingofficer then decides on the supplier or suppliers.

This decision must be well documented, not only for audit purposes but also to provide clearreasons justifying the choice of supplier in case there is a subsequent complaint.

(v) Ordering

Every organization needs a good system of order tracking and follow up. This will ensure that thecosts associated with stock-outs or excess purchases are reduced. Most companies now have on-linetracking system through internet.

(vi) Delivery

The method, terms and time of delivery need to be clearly established when ordering. It shouldbe remembered that freight can form a substantial part of the purchase cost, but the very competitivetransport market means that wise freighting decisions can achieve considerable cost savings.

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(vii) Receipting and Accounting for Goods and Services Received

Clear procedures needs to be established so that the costs are well documented and accountedfor different budget heads may have to be created to monitor and reduce costs, besides preventingthefts and under supplies.

(viii) Payment

The satisfactory conclusion of a purchasing transaction depends upon both parties (buyer andseller) fulfilling their part of the bargain. To maintain good supplier relations it is important that paymentsare made on the dates they are due. Terms of payment are to be drafted in a transparent manner.

(ix) Accounting System

All purchases of goods and services are inputs to the organization’s business and need to becorrectly charged to the output or outputs to which they contribute. This requires close co-operationbetween the organization’s purchasing and accounting sections to ensure that the inputs are correctlycosted and charged.

5.4. Purchasing Methods

The main reason for acquiring skilled purchasing expertise is so that informed decisions can bemade on the methods of purchasing and suitable supply contracts can be negotiated. There are manyways of making a purchase and the principal ones are discussed in the following paragraphs.

(i) Tendering

Many organizations spend huge money of the shareholders and lenders and therefore have aresponsibility to be accountable for their expenditure and to ensure that their purchasing is fair andequitable. Issuing an open, competitive tender is the recommended method for purchasing, since itoffers all suppliers a fair and equitable opportunity. The preparation and processing of tenders isdiscussed in the next section.

(ii) Selective Purchase

There are circumstances when competitive tendering is not practicable and it is sensible to makea selective purchase. There are many reasons why a selective purchase may be justified. For example,the item may be:

of minor value;

spare parts and accessories for existing equipment;

a repeat purchase in a short time frame;

Specialist equipment available from only one source.

There are other, more general, reasons for selective purchasing, such as:

standardization;

compatibility with existing equipment;

prototype or development work;

consultants’ knowledge of the organization from previous assignments.

In the final analysis, selective purchasing is a question of judgement. It is important to have highquality purchasing advice, and if a decision for selective purchasing is taken, it should be welldocumented, and the reasons for it should be clearly stated in order to meet accountability requirements.

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(iii) Emergency Purchasing

There are genuine emergencies when selective purchasing is obviously appropriate. However,care should be taken to ensure that claims of emergency are not just a cover up for poor planning.

(iv) Bulk Purchasing

Purchasing in bulk offers the advantages of economies of scale. When considering a bulk purchase,it is necessary to take into account the costs of:

warehousing, including possible deterioration, and obsolescence;

Capital investment (“opportunity cost” issues-could the money involved be of more valueused elsewhere?).

Clearly, if the above costs outweigh the potential savings, a bulk purchase is not warranted.

There may be other reasons for considering bulk purchases, such as having an item manufacturedto a special design requirements of the company.

(v) Period Contracts

A period contract is a contract to supply goods or services over a specified period of time, whichcan be short (six months or less) or relatively long. When there is a steady demand for an item or acommodity group (for example, stationery, hardware, timber) the best option may be to purchase byperiod contract. The time period is normally decided by such factors as:

the cost of establishment (setting up a contract for the first time can be very time-consuming); the volume and time-frame of usage; the value of the contract (it should be sufficient to encourage competition among suppliers); the risk of obsolescence (for example, model changes); Price volatility (the contract should include clauses covering normal price rises/falls).

A period contract has many advantages. For example: it can be established initially by competitive tender, with a competitive price and agreed

terms and conditions of supply; purchases covered by the contract can be made as and when required-with immediate or

agreed delivery time and no warehousing or stockholding costs; ordering is simplified-anyone can write an order, since price and terms have already been

established; It assists the organization to standardize where this is desirable, (which can reduce training

and maintenance costs).(vi) Indent Purchasing

Purchasing directly from overseas (indent) can offer significant financial advantages. However,consideration needs to be given to:

The complexities of indent purchasing. Expertise is required in freight forwarding, importand export regulations, Customs clearance procedures, etc;

the fact that by-passing agents or importers could have an impact on future servicing andsupply of spares and accessories;

The possibility of local manufacture.

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5.5. Preparation and Processing of Tenders

Inviting tenders (or requesting proposals) allows the organization to explore the market andestablish the most competitive price and terms available. It also provides all suppliers with theopportunity to do business with the public sector, thus meeting the requirement for fairness andequitability.

5.5.1 Telephone Quotations

The simplest form of tender is to telephone prospective suppliers to determine the availability,price and terms of supply for an item or service. Although telephoning is a very quick and convenientway of exploring the market, it has the disadvantage in a case of dispute that there is no formal recordof the discussions between purchaser and suppliers. When quotations are invited by telephone, arecord of the responses should be kept, both to meet accountability requirements and to aid indeveloping an under-standing of the market.

5.5.2 Written Tenders

A written invitation to tender should contain the following information:

Conditions of tender;

Specifications of the goods and/or services required;

Conditions of contract.

(i) Conditions of Tender

These should cover:

when and where tenders close (the date, time and place);

details of any deposit required-either to obtain tender documents or when submitting atender response-and whether or not such deposits are refundable;

where and to whom enquiries should be addressed;

Any requirements regarding the form in which tender responses should be presented. Forexample, to a specified format or on a supplied tender form;

if appropriate, a clause advising that the lowest (or any) tender may not necessarily beaccepted;

Information about how both successful and unsuccessful tenderers will be notified.

(ii) Specifications

The type of specification will depend upon the particular requirement. The question of whetherthe specification is functional or technical should be given careful consideration. A functionalspecification (that is, one which describes the function of the item or service) encourages the explorationof alternative means of fulfilling the requirement and provides potential tenderers with the flexibilityto offer new approaches or ideas. On the other hand, a technical specification (which includes detaileddesigns or defines specific technical parameters) is used where such flexibility would be inappropriate.

(iii) Conditions of Contract

The scope and complexity of the conditions of contract will depend upon the scale of thepurchase.

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It is possible to omit the conditions of contract and invite tenderers to offer a proposal whichincludes their own conditions. For the following reasons, this practice is not normally followed:

Competing tenders need a common basis for comparison. This comparison is made morecomplex if the terms and conditions of supply differ;

Purchasers start from a position of strength if contract negotiations are around their termsand conditions rather than those of suppliers.

Evaluation Criteria

It is recommended that the invitations to tender include the criteria by which responses will beevaluated. This is particularly important for complex tenders such as those for computer systems.Evaluation criteria provide prospective tenderers with an insight into the requirements that the purchaserconsiders to be most important. The tenderer can then construct a response which concentrates onthese aspects.

Even if evaluation criteria are not included in the invitations to tender, they should be establishedbefore tenders close, and certainly before any of the tender responses are read. Otherwise, it is possiblefor elements of bias to be introduced.

Registration of Interest

It can be useful to call for a Registration of Interest prior to a formal invitation to tender. Thisprocedure can help in:

drawing up a short list of prospective tenderers while meeting the requirement to be fair andequitable;

exploring an unknown market and finding out who is interested;

providing preliminary advice to the market of a forthcoming tender enabling the tenderperiod to be shortened;

Eliciting a range of possible solutions to a problem where the user requirement is vague ornot fully specified.

Opening and Registering Tenders

Tenders should be time and date stamped when opened and those responsible for opening themshould initial the date stamp. The tenders should be numbered and entered on to a register whichshould also be initialled, so that a subsequent tender cannot be added without explanation. Suchinternal control procedures ensure that the organization is able to demonstrate that it has acted in a fairand equitable manner.

Acceptance of Tenders

The procedures for accepting tenders need to be clearly established. For example, will theorganization accept offers from tenderers over the telephone and, if so, is confirmation in writingrequired?

Late Tenders

There needs to be a clearly defined policy for the handling of “late tenders”. This needs to cover:

how to determine whether a tender is late. For example, is a tender post-marked before theclosing time treated as late; is a courier’s receipt marked before the closing time acceptable?

65

how to decide whether or not late tenders should be accepted for consideration.

The policy can be either stringent (no late tenders can be accepted) or more flexible (late tendersmay be admitted, subject to certain conditions). Whichever policy is adopted, it is important that it isrigorously observed and no exceptions made; otherwise the integrity of system is placed in question.

Tender Evaluations

The procedure for evaluating each tender requires some prior planning which should includedecisions regarding:

who is going to evaluate the tenders. It is important that tender evaluators have the appropriatetechnical and commercial skills and can make a well balanced judgement. Care should betaken to ensure that any claims of bias can be repudiated;

the evaluation criteria. Ideally these should be established when the tender is issued andincluded in the tender document;

who will receive the evaluation team’s recommendations, and who will make the finaldecision;

whether the evaluation will be made in stages, with the first phase being a short list. If so, willthe unsuccessful tenderers be advised at that stage?

whether tenderers will be invited to make a presentation and, if so, how the presentationswill be conducted;

the need to visit tenderers’ premises or users’ sites and the programme for such visits;

the procedures for writing up the evaluation and recommendations. It must be rememberedthat the organization is accountable for its decision and may be required to provide informationabout the decision to different shareholders and auditors.

Post-Tender Negotiations

There are often real advantages to be gained from post-tender negotiations. However, thesemust be conducted in a professional manner and with due regard to fairness and equitability. If theorganization earns a reputation for such dealings, it is likely to affect the way in which prospectivetenderers will respond to future tenders.

Post-tender negotiations present an opportunity for the prospective purchaser and seller toexplore potential mutual benefits and cost reductions in such areas as:

terms and conditions of supply;

delivery;

terms of payment;

warranties;

on-going maintenance.

The negotiations should be well documented and terms agreed between the two parties. Theproceedings should be reviewed to ensure that all tenderers have been given the same opportunitiesand that the requirements of fairness and equitability have not been compromised.

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Awarding of Contracts

Many transactions will be completed by issuing an official order, but contract documentation willbe required for some purchases. The procedures in these cases can be quite time-consuming, and itmay be appropriate to send the chosen supplier a “letter of intent”. Such a letter states that the tenderhas been successful, but that a confirmed order may depend on such factors as the negotiation of asatisfactory contract. The advantage of a letter of intent is that it allows the supplier to be sufficientlysure of securing the business to begin substantive work on the contract.

Legal advice should be sought on the wording of “letters of intent” to ensure that they do notmake a binding commitment which could prejudice negotiation of the final contract.

Approved Suppliers

Organizations which purchase items specifically designed and manufactured to meet theirrequirements can prepared a list of “approved suppliers”. This process involves potential suppliersbeing evaluated under appropriate criteria; for example, their financial stability, their ability to producerequired items to appropriate quality standards at competitive prices, and whether they can meetrequired delivery schedules.

Building up an “approved supplier” network can be expensive, but there can be long-term benefitsin consolidating effective relationships with reliable suppliers.

5.6. Ordering and Delivery

5.6.1 Purchase Orders

To streamline the ordering process, an order form can be designed to fulfil several functions. Forexample, it can be:

an official, numbered document which details the department’s requirements and authorisesthe supplier to charge the goods or services to the organization;

a requisition to the purchasing section;

a record of the financial approval of the purchase and commitment to pay;

a record of the financial coding against which a commitment is being made, that is, whetherthe item is to be direct charged to a job, added to inventory or posted to an Asset Register;

a record of the purchase for the requisitioner;

a permanent record in the department’s purchasing file;

preliminary advice of the purchasing commitment to the Accounts Payable section;

an acknowledgement of receipt of the purchased goods and an authorization for payment ofthe supplier’s invoice;

a data input document for the financial system;

a post-payment advice that the transaction has been completed;

a document from which operating expenses or capital expenditure are accrued;

a voucher to support payment.

5.6.2 Follow-up

It is important to have in place an order-tracking system which will ensure that all orders arefollowed up. Such a system should incorporate:

67

checking with suppliers that delivery dates are still able to be met. If timing is critical, frequentpre-delivery checks may be necessary;

documentation which acknowledges part-delivery of orders and allows follow-up on deliveryof the remainder;

a procedure which ensures that suppliers are paid in accordance with contracted terms.

5.6.3 Delivery and its terms:

The most important part of the purchasing process is the eventual delivery of the goods. Deliverycan be a significant element of the purchase cost, and as such should be achieved in the most economicalway-the transport industry is very competitive and worthwhile savings can be achieved.

The purchaser may stipulate delivery requirements or leave them to the discretion of the supplier.The supplier will not have the same incentives as the purchaser to reduce delivery costs, so it is in thepurchaser’s interest to state delivery requirements.

All orders contain the terms of delivery. If the delivery terms and costs are the supplier’sresponsibility, the order is known as on “freight paid” basis. Alternatively, if the purchaser is responsiblefor delivery terms and costs on an FOR/FOB or ex works basis, it is in the purchaser’s responsibility tostipulate the delivery method.

The requirements for Customs clearance and insurance need to be taken into account whenpurchasing from overseas. Careful selection and appointment of Customs clearance and insurancebrokers can result in significant savings.

Procedures should be in place to enable the quality and quantity of delivered goods to be checkedagainst the relevant purchase order.

5.6.4 Payments

Terms of payment and the extension of credit are important factors to be considered by purchasemanagers. The terms of payment offered by prospective suppliers should be taken into account intender evaluations and other purchase decisions. Some potential areas for purchaser/suppliernegotiation are discounts, progress payments and postponement of payment during warranty periodor until satisfactory performance is demonstrated.


1. What are the types of purchasing system?

2. Explain the Purchasing Process.

3. Explain the terms Telephone Quotations and Written Tenders.

5.8 SUMMARY:

Purchasing manager typically handles the creating, printing and follow-up of purchase orders.The purchase orders may apply to inventoried or non-inventoried materials. The purchasing policy ofevery organization should be to obtain the most suitable goods and services at the best possible price,delivered where and when required. Purchasing has normally been the responsibility of eitheroperations or finance divisions. Basically there are two types of purchasing systems i.e. centralized anddecentralized purchasing systems.

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Purchasing is done as per the specified process which includes step: Requisition, Financeapproval, market assessment, purchase decision, ordering, delivery, receipting and accounting of goodsand services received, payment and accounting system. There are mainly six purchasing methods whichare tendering, selective purchase, emergency purchasing, bulk purchasing, period contracts and intendpurchasing.

5.9 GLOSSARY:

`Centralized:Centralisation is the process by which the activities of an organisation, particularlythose regarding planning and decision-making, framing strategy and policies becomeconcentrated within a particular geographical location group..

Decentralized:Decentralization is the process by which the activities of an organization,particularly those regarding planning and decision making, are distributed or delegated awayfrom a central, authoritative location or group.

Delegation:Delegation is the assignment of any authority to another person (normally from amanager to a subordinate) to carry out specific activities.

Requisition: Requisition is an official order claiming or demanding property or materials ordemanding the performance of a duty.





5.11 Terminal Questions:

1. Discuss the meaning and objectives of Purchasing Management.

2. What are the various purchasing systems? Discuss with examples.

3. Discuss the purchasing process in detail.

4. Define tendering. Discuss the steps in tendering.

5. Discuss the various purchasing methods in detail.





4. Buffa, E.S., Modern Production Management, New Delhi: Wily, 1988.

5. Ross, Alexender C., Industrial Marketing.

*****

69

Chapter-6Source Selection, Vendor rating and Value analysis

Structure:6.0 Learning Objectives6.1 Introduction6.2 Source Selection

6.2.1 Meaning of Source Selection6.2.2 Objectives of Source Selection6.2.3 Types of Suppliers6.2.4 Characteristics of Potential Suppliers6.2.5 Selection Criteria

6.3 Vendor Rating6.3.1 Meaning of Vendor Rating6.3.2 Need for Vendor Rating6.3.3 Vendor Rating Criteria6.3.4 Vendor Rating Definitions6.3.5 Benefits of Vendor Rating Statement

6.4 Value Analysis6.4.1 What is Value?6.4.2 Maximum Value6.4.3 Normal degree of Value6.4.4 Importance of Value6.4.5 What is Value Analysis?6.4.6 Four Approaches to Value Analysis6.4.7 Considerations for improving value

6.5 Self-Assessment Questions6.6 Summary6.7 Glossary6.8 Answers to Self-Assessment Questions6.9 Terminal Questions6.10 Suggested Readings

6.0 Learning Objectives:After studying the lesson you are able to understand: Source Selection Vendor Rating Value Analysis

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6.1 Introduction:

Suppliers play a very important role in the organisation. Many materials are purchased by theorganisation from outside suppliers. So, it is very important to select the optimum supplier. The selectionof suppliers is the responsibility of the Purchasing Officer which co-ordinate with other departmentsand then selects the supplier. The performance of current suppliers is also rated through vendor ratingcriteria.

6.2 Source Selection

6.2.1 Meaning of Source Selection:

The selection of suppliers is the responsibility of the Purchasing Officer and requires theconsideration of several factors. In making the selection, Purchasing Officers coordinate closely withother departments to obtain adequate and reasonable specifications. Whenever possible, identificationof brand names, or sufficient detail, is obtained to ensure that the order can be correctly filled. Objectivesof supplier selection are;

6.2.2 Objectives of Source Selection:

1. Reduce number of suppliers

2. Evaluate supplier suitability

3. Avoid expensive tendering

4. Buyers can focus on “most suitable”

5. Manage expectations

6. Get the “best” not just those who “pass”

6.2.3 Type of Suppliers:

Purchasing Officers should endeavour to place orders with regard to the dependability andservice record of the supplier, the nature of the guaranty and warranty of the product, its price, andquality. Companies prefer following types of suppliers, provided this involves no sacrifice in quality,service or price:

A. suppliers who are developing new and improved products or equipment, or designing anddeveloping a special product for the company’s use;

B. suppliers located near the company and its affiliates;

C. suppliers with adequate financial strength who also have a reputation for adhering tospecifications and delivery schedules.

6.2.4 Charactristics of Potential Suppliers:

Purchasing officer is committed to reducing the total costs, while simultaneously acting as aresponsible employee and providing excellent service to the customers. To achieve these threeobjectives, following characteristics from potential suppliers are looked into.

Strategy — Services or products with clear strategic value to the company, our customers and/orour team members.

Resources — Developing and deploying human resources, information systems and raw materialsnecessary to maximize performance. Nothing happens without highly skilled professionals usingeffective technical tools and quality materials.

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Processes — Creating strategic plans based upon total cost management and insourcing/outsourcing analysis and applying a systematic approach to better utilizing the supply base.

Optimization — Aligning the supply base with our supply chain goals and continually seeking toimprove the supply chain methods and composition.

Globalization — Viewing supply opportunities on a global basis.

Sustainability — Improving our business practices so that they are more sustainable fromenvironmental, economic and social perspectives.

6.2.5 Selection Criteria:

A company never likes to compromise on high standards for service and quality from suppliers.Main objective of purchasing is to acquire quality products and services delivered on time and atcompetitive prices, resulting in the lowest total cost of ownership. Selection of suppliers is based ontheir ability to meet the stringent requirements of the company and the capability to serve as a supplychain improvement partner.

Key suppliers are selected based on the company’s core process requirements and standardizedselection criteria. Supplier selection is based upon criteria that are vital to a particular process andindicative of future success of a company. The criteria are weighted and some attributes may be moreimportant for one process team than another. For example, technical support may be more importantfor electronic product buyer than field a bicycle buyer and will be weighted accordingly. Criterion has tobe developed with detailed descriptions that define the requirements that are important to a company.

Some fundamental selection criteria include:

Health, Safety and Environment (strong safety processes and culture)

Economics (financially sound, competitive pricing, internal cost systems, term, etc.)

Alliance Qualities (alliance experience, team skills, facilitation capabilities or skills, etc.)

Technical Support Capabilities

Field Service and Support Capabilities

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Customer References

Performance (continuous improvement)

Quality (ISO 9002; consistent and improving quality)

Electronic Commerce Capabilities

6.3. Vendor Rating

6.3.1. Meaning of Wendor Rating:

Vendor Rating is a system used to rate the performance of a current supplier against establishedcriteria. Vendor Rating is NOT concerned with evaluating or appraising potential suppliers. VendorRating is quick and simple, so as to find outif a supplier is underperforming or performing well at aglance. Vendor Rating is a flexible system which can be adapted and implemented in any supply situation.The criteria used can be updated and changed to suit the needs of any organization.

6.3.2 Need for Vendor Rating

A vendor’s performance in meeting the requirements and standards set by the buyer should beassessed in a systematic manner. Such a system would also guide the buyer to select appropriatesupplier depending upon the prevailing buying conditions.

In addition, Vendor Rating can be used for:

Supplier rationalisation – it can be used as evidence for removing poorly performing suppliersfrom your supplier base.

Providing evidence to work with supplier to improve their performance

Identifying and supporting good suppliers

6.3.3 Vendor Rating Criteria:

The operations manager have to give appropriate weightage to some points before arriving ata decision on a vendor. Subjectiveness of the evaluator can reflect into the system under suchcircumstances. When rating suppliers companies use the criteria which important to its preference; thismay vary according to goods or services purchased.

The criteria used to rate suppliers include:

Price: Pricing considerations include basic components of competitiveness and fairness. Priceshas to be fair, with clear terms and conditions. A vendor’s established pricing practices anddiscounting policies also have to be considered. Low prices do a customer little good if thevendor’s pricing strategies are endangering the vendor’s long-term financial health. Withoutsufficient profit margins on products and services, customers may go to a vendor for supportto find out that the vendor is no longer there or that its ability to support its products hasdeteriorated to the point of uselessness.

Quality: Did the goods arrive in good condition? Are they faulty? Are they as specified?

Quantity: Were the goods delivered in the quantities requested? Does the supplier deliverpart orders which can generate more work ie more delivery notes to be checked, more invoicesto be paid?

Accuracy of Documentation: Are the delivery notes and invoices correct? Does the deliverynote give a delivery date for undelivered items?

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Product/Service: Factors looked into are the major product lines and how the vendor delivers,supports and markets its major products. Vendors may provide products (for example,hardware, software and networking) and services (for example, implementation, consultingand integration).

Products

Vendor ratings consider various factors regarding vendor products. Some are as simple aswhether the product fits into a vendor’s overall strategy, and whether it is “complete”in allrespects and requires purchase of ancillaries . Service support is also an important issue.

Services

If the vendor offering is a service, ratings will consider whether the vendor is recognized fordelivering high-quality services and whether the vendor is clearly positioned in the servicesmarket. Other considerations are whether the vendor has demonstrated the ability to provideconsistently high level of performance.

Does the vendor have a track record of delivering services on time and on budget?

A successful vendor generally invests in and manages its services with specific objectives forperformance, business outcome and quality. To evaluate how well a vendor measures theseobjectives, vendor ratings consider what benefits are provided by vendors.

After Sales Service: How quickly does the supplier respond to a reported fault? Does thecompany receives a replacement in good time?

Delivery: Is the packaging suitable for the product being delivered? Does the supplier deliveryat a time that is suitable for the company? Does the supplier deliver in a suitable vehicle(refrigerated vehicle for certain types of products)? Is the pack/food, medicine size acceptable?

Sales/Distribution: Good vendors will have sales channels that are specifically focusedcustomers needs, with partnerships that are strong enough to sustain profitable relationships.The sales strategy will minimize channel conflict while providing enough diversity throughoriginal equipment manufacturer agreements, value-added resellers, and direct and onlinesales. When a vendor’s offerings are tailored specifically toward enterprises of a specific sizeor vertical market, or when the vendor is providing standardized product, it benefits thebuyer.

Support Services: Vendors must have the ability to support their legacy products and newproducts. Vendors must also be sufficiently familiar with their partners’ products to havethem step in when necessary. Enterprises should pay particular attention to links betweenproduct support and development, and whether a vendor has the depth of skills to support anew product line. Another important consideration with regard to support is whether a vendoruses services to grow its business as opposed to using services to support its business. Forexample, does the vendor have service customers who are not customers of its productdivisions?

Technology

Technology considerations are based on whether a vendor is being proactive or reactive withregard to technology in its products.

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o Is the vendor offering new technology solutions or is it just reacting to marketingcompetition?

o Is the vendor’s technology architecture contemporary?

o Is the vendor’s technology truly innovative?

o Is the vendor leveraging R&D toward its products’ growth?

o Is the vendor’s product is unique or similar to offering of other suppliers?

o Is the vendor tied to specific applications or technologies, and does it allow its customersto build their own solutions using different technologies?

o Is the technology extendible and flexible to be able to adapt to changing environments?

Organization: If a vendor’s organizational structure isn’t appropriate to its corporate strategy,its chances of success are slim. A successful vendor needs strong senior management, and keydivisions must be committed to the vendor’s long-term goals. The vendor’s organizationalstructure must allow for future growth, and its workforce must have the necessary skills tofulfill the buyer’s requirements.

Strategy of the vendor

When evaluating strategic soundness, mainly three factors are considered:Soundness: A corporate or product line strategy must be reasonable and sound in today’sbusiness environment. A solid strategy should have defined endurance, and it must be relevantin the present as well as forward-looking.Clarity: Goals must be clear and shared at every level of the enterprise. All of the vendor’semployees must understand what it does and, perhaps more importantly, does not need todo to achieve those goals. For example, a vendor must know which customers and markets topursue and which ones not to pursue.Commitment: Employees at every level must be committed to the enterprise’s overall strategy.Failure to commit wholeheartedly will result in duplication of effort, turf wars and otherforms of wasted energy. Corporate strategy has to be well-defined and congruent withcustomer needs and market trends. For example: Is the vendor’s strategy well-articulated to its current/potential customers? How well is the strategy demonstrated throughout the company? How willing or able is the vendor to distinguish between the businesses and customers it

should pursue from businesses and customers it should not pursue? Financial position

Evaluation of a vendor’s overall financial position based on official financial filings, is important.A key criterion for evaluation is a measure of profitability. Is this vendor profitable or at leastdemonstrating growth that tracks toward profitability? Other possible considerations includeconsistent revenue growth, cash position and R&D investment. How well does the vendor’s revenue stream (from products, services and subscriptions)

match or support its strategy? Is the vendor reporting stable, growing or declining revenue? What is the vendor’s cash position?

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6.3.4 Vendor Rating Definitions

Vendor ratings represent company’s overall view of a vendor and its initiatives. It is importantto rate a vendor’s strengths and challenges, thereby giving buyer a clearer sense of a vendor’s overallcapabilities.

Vendor ratings are used to rate vendors on different aspects, such as its strategy, organization,products, technology, marketing, financials or support. Vendors with a clear focus, solid products and anadvantageous market position may be rated highly. Vendors or product lines that lack these qualitiesmay be rated average. Vendors that have potential, but which need to be very carefully evaluated, canbe rated “promising.”

Vendor’s ratings have to be periodically revised to reflect our change in judgment when asignificant internal or external event directly affects the vendor. Companies continuously track market,technological and organizational changes that may have an impact on a vendor. An illustrative exampleon vendor analysis could be:

6.3.5 Benefits of Vendor Rating Statement

The operations manager would compile the vendor rating statement based on the details of thesuppliers, material supplied, Purchase Order, date of receipt, ordered quantity, accepted quantity andrating points. This statement is helpfulfor the following purposes:

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i) To eliminate vendors who repeatedly fail to meet the standards;ii) For selecting the right supplier when two or more supplier quote the same price and other

terms;iii) For allocating share of business to various suppliers;iv) To warn a supplier if its rating is low and to suggest ways and means of improvement;v) To reject the quotations/bids from vendors with low rating;

6.4 Value analysis6.4.1 What Is Value?

A product or service is generally considered to have good value if that product or service hasappropriate performance and cost. Or, by reverse definition, a product is considered not to have goodvalue if it lacks either appropriate performance or cost. It can almost truthfully be said that, by thisdefinition, value can be increased by either increasing the performance or decreasing the cost. Moreprecisely:

1. Value is always increased by decreasing costs (while, of course, maintaining performance).2. Value is increased by increasing performance if the customer needs, wants, and is willing to

pay for more performance.6.4.2 Maximum Value

Maximum value is probably never achieved. The degree of value in any product depends on theeffectiveness with which every usable idea, process, material, and approach to the problem have beenidentified, studied, and utilized. The purpose of the special techniques and special knowledge of valueanalysis is to bring, with less expenditure of time and money, more of the better value combinationsinto focus.6.4.3 Normal Degree of Value

In normal usage, value is considered good if the product contains somewhat better combinationsof ideas, processes, materials, and functions, costwise, than competition; it is considered bad if, becausethe opposite is true, lost sales volume results. This method of determining the degree of value oftencomes too late and has serious limitations. Selected typical products have been given a concentratedand over normal amount of attention in order to determine more nearly the amount of unnecessarycost they contain when compared, not with competition, but with the optimum combination of availableideas, processes, materials, and design concepts. Studies have shown that unnecessary cost which canbe so identified varies between 25 and 75 per cent of the product cost.6.4.4 Importance of Value

In a free enterprise system, with competition at full play, success in business over the long termhinges on continually offering the customer the best value for the price asked. Competition, in otherwords, determines in what direction one must go in setting the value content in order for a product ora service to be competitive.

This best value is determined by two considerations: performance and cost. It has been generallyrecognized that an acceptable product must serve the customer’s needs and wishes to the degree thathe expects; that is to say, the product must have performance capability. Cost of producing must be suchthat the customer can buy the product at competitive prices while leaving adequate difference betweencustomer’s cost (selling price) and production cost to assure a continuing healthy business.

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6.4.5 What is Value Analysis?It is an orderly and creative method to increase the value of an item. This “ item” can be a

product, a system, a process, a procedure, a plan, a machine, equipment, tool , a service or a method ofworking. Value Analysis, also called Functional Analysis was created by L.D. Miles. The value of an itemis how well the item does its function divided by the cost of the item:

Value of an item = Performance of its function / costAn item that does its function better than another, has more value. Between two items that

perform their function equally well, the one that costs less, is more valuable.The performance of its function could include that it is beautiful (where needed).Value analysis or engineering is a complete system for identifying and dealing with the factors

that cause uncontributing cost or effort in products, processes, or services. This system uses all existingtechnologies, knowledge, and skills to efficiently identify costs or efforts that do not contribute to thecustomer’s needs and wants. Its effect is to help the organization increase its profitability. The valueanalysis problem-solving system contains four distinct steps. These are:

1. Information and assumption searching2. Analysis3. Creative thinking4. Judgment thinking (minimizing disadvantages and maximizing advantages

Synonymous with the terms value management and value analysis, value engineering is aprofessionally applied, function-oriented, systematic team approach used to analyze and improvevalue in a product, facility design, system or service-a powerful methodology for solving problems and/or reducing costs while improving performance/quality requirements. By enhancing value characteristics,Value Engineering increases customer satisfaction and adds value to company’s investment. ValueEngineering can be applied to any business or economic sector, including industry, government,construction and service. Using Value Engineering is considered a successful long-term business strategy.

Value analysis is a problem-solving system implemented by the use of a specific set of techniques,a body of knowledge, and a group of learned skills. It is an organized creative approach that has for itspurpose the efficient identification of unnecessary cost, i.e., cost that provides neither quality nor usenor life nor appearance nor customer features.

When applied to products, this approach assists in the orderly utilization of better approaches,alternative materials, newer processes, and abilities of specialized suppliers. It focuses engineering,manufacturing, and purchasing attention on one objective-equivalent performance for lower cost.Having this focus, it provides step-by-step procedures for accomplishing its objectives efficiently andwith assurance.

When applied to services, this approach assists in the more precise determination of problems,a thorough collection and penetrating analysis of information and assumptions surrounding the service,viable alternatives from the creative mental processes, with skillful sorting and development of betterapproaches to problem solving system. Value analysis approaches may assist all branches of an enterpriseengineering, manufacturing, procurement, marketing, and management by securing better answers totheir specific problems in supplying what the customer wants at lower production costs. It has beenestimated that, 15 to 25 per cent manufacturing costs can be made unnecessary without any reductionin customer values by the use of this problem-solving system in the significant decision areas.

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The value analysis approach requires clear answers be developed for the following five questions:

1. What is the item or service?

2. What does it cost?

3. What does it do?

4. What else would do the job?

5. What would that alternative cost?

6.4.6 Four approaches to value analysis

Value analysis include four separate approaches towards a common objective, and followed bya development and refinement activity

1. Exhaustive accumulation of information and identification and improvement of assumptions.

2. Penetrating analysis. To understand the pros and cons of such assumptions.? What specificproblems will be and their costs and benefits?

3. Creative mental activity, in which all judgments are evaluated for their technical, managerialand human relations impact.

4. Judgment-type mental activity, in which the results of creative thought are searched forstrategies in order to minimize disadvantages and maximize advantages sufficiently to meetthe need for cost and/or operation improvement.

6.4.7 Considerations for Improving Value

In order to satisfy the customer’s needs and wants and of doing so in an effective and efficientmanner, value analysis should be undertaken from the research and development stage to the maturitystage. A number of factors are responsible for continued inclusion of unnecessary cost in the product.Some of these include:

(i) Effect of Time Shortage: In a highly competitive and uncertain market environment, companiesmay not be able to accurately determine customer’s requirements. Thus, lot of guess work andcomplex statistical analysis may be required, which is difficult many a times. The same situationexists in purchasing, in manufacturing, and in all other areas of the business. Thus a shortage oftime, by the very nature of the problem, is the cause of inclusion of unnecessary costs.

(ii) Lack of Measurement in Value Work; Decision making in performance-oriented work can usuallybe based upon tests and measurements. In contrast, the effectiveness of value oriented work ateach stage of the product design and manufacturing cycle cannot be accurately measured.

(iii) Human Factors Lack of sufficient communication, misunderstandings, and normal frictionsbetween human beings become increasingly responsible for unnecessary costs in the morecomplicated products and systems. Employees can accomplish their job more effectively if theyare supplied with vastly improved tools and information, besides involving employees in thedecision making process. This forms the basic philosophy of the value analysis

(iv) Impact of New Processes, Products, and Materials The constant and accelerating flow of newideas, new processes, new products, and new materials can aid in establishing the desired customervalues at a lower cost. When a product is designed and tooled and is in the market, continuouscustomer feedback is needed to understand consumer behaviour.

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6.5 Self-Assessment Questions:

1. Explain the meaning of source selection.

2. Explain the criteria of source selection.

3. What are the considerations for improving value?

6.6 Summary:

The selection of suppliers is the responsibility of the Purchasing Officer and requires theconsideration of several factors. In making the selection, Purchasing Officers co-ordinate closely withother departments to obtain adequate and reasonable specifications. Purchasing officer is committedto reducing the total costs while simultaneously acting as a responsible employee and providing excellentservice to the customers.

Vendor rating is a system to rate the performance of a current supplier against establishedcriteria. Vendor rating can be used for supplier rationalization, providing evidence to work with suppliersto improve their performance and identifying and supporting good suppliers.

Value Analysis is an orderly and creative method to increase the value of an item. This item canbe a product, a system, a process, a procedure, a plan, a machine, equipment, tool, a service or amethod of working.

6.7 Glossary:

Source Selection:Source Selection generally refers to the process of evaluating a competitivebid or proposal to enter into a Government procurement contract.

Optimization:It isan act, process, or methodology of making something (such as a design, system,or decision) as fully perfect, functional, or effective as possible.

Sustainability:Sustainability means meeting our own needs without compromising the abilityof future generations to meet their own needs.

Strategy:A method or plan chosen to bring about a desired future, such as achievement of a goalor solution to a problem.

Value Analysis:It is the systematic and critical assessment by an organization of every feature ofa product to ensure that its cost is no greater than is necessary to carry out its functions.

6.8 Answers to Self-Assessment Questions:





1. What is meant by supplier selection? What are its objectives?

2. What is meant by vendor rating? Explain.

3. What is the difference between supplier appraisal and vendor rating?

4. What are the advantages and disadvantages of using a vendor rating system?

5. Why is it important to give suppliers feedback on their performance?

6. What are the various vendor rating definitions? Explain.

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7. What is meant by value analysis? Explain different approaches to value analysis.

8. What is meant by value, normal value and maximum value? What are the various valueconsiderations?



2. Ettlie, J. and Stoll, H. (1990). Managing the Design-Manufacturing Process. McGraw-Hill.

3. Gaither, N. (1994). Production and Operations Management. Dryden Press.

4. Goldratt, E. and Cox, J. (1984). The Goal. North River Press, Croton-on-Hudson. New York.

5. Harmon, R.L. (1992). Reinventing the Factory: II. Free Press, New York.


7. Steudel, H.J. and Desruelle, P. (1992). Manufacturing in the Nineties, Van Nostrand Reinhold,New York.

8. Stevenson, W.J. (1996). Production and Operations Management. (5th Edition) Irwin.

9. Ulrich, K.T. and Eppinger, S.D. (1995). Product Design and Development. McGraw-Hill.

*****

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Chapter-7Production Planning and Control

Structure:


7.1 Introduction

7.2 Main Functions of Production Planning and Control

7.3 Aggregate Planning

7.3.1 Objectives and approaches of Aggregate Planning

7.3.2 Goals of Aggregate Planning

7.3.3 Aggregate Production Planning

7.3.4 Aggregate Capacity Planning

7.3.5 Approaches to Aggregate Planning

7.3.6 Aggregate Planning for Service Organizations

7.4 Material Resource Planning (MRP)

7.4.1 Master Production Schedule (MPS)

7.4.2 Bills of Material (BOM)

7.4.3 Inventory Status File

7.4.4 The MRP Processing Logic

7.4.5 Limitations and Advantages of MRP

7.5 Capacity Requirement Planning

7.5.1 Objectives of Capacity Planning

7.5.2 Effective Capacity

7.5.3 Functions of Capacity Requirement Planning

7.6 Steps of Production Planning and Control

7.7 Steps of Production Planning and Control


7.9 Summary

7.10 Glossary





After studying the lesson, you will be able to know:

Introduction to Production Planning

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Main Functions of PPC

Aggregate Planning

Capacity Planning

Material Requirement Planning

Steps in Production Planning

7.1. Introduction to Production Planning

Production or operations management is a process, which combines and transforms variousresources used in production/ operations sub system of the organization in to value added products /services in a controlled manner as per the company’s policies. Production planning may be defined asthe technique of foreseeing every step in a long series of separate operations, each step to be taken atthe right time and in the right place and each operation to be performed in maximum efficiency. It helpsentrepreneur to work out the quantity of material manpower, machine and money required for producingpredetermined level of output in given period of time.

Production System

Production/ Operation planning and scheduling system concern the volume and timing of theoutputs, utilizations of the operations capacity, and the balancing outputs with capacity at desiredlevels for competitive effectiveness.

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Figure 7.1. Production Planning Horizon

Purpose of Production Planning and Control:

Production planning and control help in reducing:

Waste of over production

Waiting time and idle time of machines/ individuals

Waste of transportation

Waste of processing itself

Waste of stocks

Waste of motion

Avoiding making defective products

Production Planning and Control helps in effectively utilizing limited resources in the productionof goods so as to satisfy customer demands and create a profit for investors.

Resources include the production facilities, labor and materials.

Constraints include the availability of resources, delivery times for the products, andmanagement policies.

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It helps to ensure that the desired outputs are obtained (e.g. it is acceptable in terms of quantity,cost and quality), measurements are taken at various points in the transformation process (feedback)and then compared to previously established standards to determine if corrective action is needed(control)

Figure 7.2. Hierarchical Nature of Production Planning

Production planning and control entails the acquisition and allocation of limited resources toproduction activities so as to satisfy customer demand over a specified time horizon. As such, planningand control problems are inherently optimization problems, where the objective is to develop a planthat meets demand at minimum cost or that fills the demand that maximizes profit. The underlyingoptimization problem will vary due to differences in the manufacturing and market context. This chapterprovides a framework for discrete-parts manufacturing planning and control and provides an overviewof applicable model formulations.

The production control activity is a chain of interrelated events that functions as a system. Thedecisions are made for different horizons in time and with different degrees of accuracy. Yet they mustall occur if the ultimate objective is to be met: that is, to use limited resources effectively to producegoods that satisfy customer demands and create a profit for investors.

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Capacity requirements

plan

Input/ output control

Aggregate production

plan

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Figure 7.3. Figure show how can planning and control increase profitability

High Profitability

Low Costs

Low Unit Costs

High Throughput

Less Variability

High Utilization

Low Inventory

Quality Product

High Sales

Many products

Fast Response

More Variability

High Inventory

Low Utilization

Short Cycle Times

High Customer Service

Once the entrepreneur has taken the decisions regarding the product design and productionprocesses and system, his next task is to take steps for production planning and control, as this functionis essentially required for efficient and economical production.

Production Planning and Control involve generally the organization and planning ofmanufacturing process. Especially it consists of the planning of routing, scheduling, dispatchinginspection, and coordination, control of materials, methods machines, tools and operating times. Theultimate objective is the organization of the supply and movement of materials and labour, machinesutilization and related activities, in order to bring about the desired manufacturing results in terms ofquality, quantity, time and place.

Production planning without production control is like a bank without a bank manager, planninginitiates action while control is an adjusting process, providing corrective measures for planneddevelopment. Production control regulates and stimulates the orderly flow of materials in themanufacturing process from the beginning to the end.

7.2. Main Functions of Production Planning and Control

Production planning and control undertakes following functions;

a. Forecasting to predict customer demand on various products over a given horizon.

b. Aggregate Planning to determine overall resources needed.

c. Materials Requirement Planning to determine all required components and timing.

d. Capacity Requirement Planning to determine plant capacity viz a viz demand.

e. Inventory Management to decide production or purchase quantities and timing.

f. Scheduling to determine shop-floor schedule of various components.

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Figure 7.4. The Production Planning and control System

7.3 Aggregate Planning

Specify the combination of production rate, workforce level, and inventory on-hand that satisfiesthe forecasted demand at the lowest cost. Generate a long-term production plan that establishes arough product mix, anticipates bottlenecks, and is consistent with capacity and workforce plans.

It is important because it provides for;

Production rate: quantity of product produced per unit of time (autos/day).

Workforce level: number of workers required to meet a specific level of output.

Inventory on hand: unsold units carried over from one period to the next.

Fully loaded facilities and minimizes overloading and under-loading, thus reducing productioncosts.

Getting the most output for the amount of resources available, which is important in times ofscarce production resources.

The aggregate plan is useful because it focuses on a general course of action, consistent withthe company’s strategic goals and objectives, without getting bogged down in detail.

Demand forecasting

Sales and order entry Customer

Produc tion

Inventory Vendors

Aggregate planning

Inventory management

Shipping and

receiving

Materials requirement

planning

Shop-floor scheduling and control

The Production Control System

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7.3.1 Objectives and Approved of Aggregate Planning

Figure 7.5. Aggregate Planning: Objectives and Approaches

7.3.2. Goals for aggregate planning

There are number of goals to be satisfied

• It has to provide the overall levels of output, inventory and backlogs dictated by the businessplan

• Proper utilization of the plant capacity. It should not be under utilized because it is waste ofresources.. It is better to operate at a near full capacity.

• The aggregate plan should be consistent with the company’s goals and policies regarding itsemployees.. A firm may like to have employee stability or hire and layoff strategy. Otherfirms change employees freely as the output level is varied throughout the aggregate planninghorizon.

7.3.3 Aggregate Production Planning:

This plan is the production portion of the business plan and addresses the demand side of thefirm’s activities by showing the outputs it will produce, expressed in numbers of units of its productgroups or families. Since various product groups may be produced at diverse plants, facilities, or divisions,each of them needs its own production plan. The division’s aggregate output plan covers the coming 6to 18 months on a weekly or monthly basis. Planning at this level ignores such details as how many ofeach individual product, style, color option, or model to produce. The plan recognizes the division’sexisting fixed capacity and the - company’s overall policies for maintaining inventories and backlogs,employment stability, and subcontracting.

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7.3.4 Aggregate Capacity Planning:A statement of desired output is useful only if it is feasible. This is the role of aggregate capacity

planning-to keep capacity Utilization at desired levels and to test the feasibility of planned outputagainst existing capacity.

Thus it addresses the supply side of the firm’s ability to meet the demand. As for aggregateoutput plans, each plant, facility, or division requires its own aggregate capacity plan. Capacity andoutput must be in balance. A capacity plan translates an output plan into input terms, approximatinghow much of the division’s capacity will be consumed. A product group, for example, usually consumespredictable amounts of capacity such as labor hours of assembly or machine hours for fabrication.Although these basic capacities are fixed, management can manipulate the short-term capacities bythe ways they deploy their work force, by subcontracting, or by using multiple work shifts to adjust thetiming of overall outputs. As a result, the aggregate planning process balances output levels, capacityconstraints, and temporary capacity adjustments to meet demand and utilize capacity at desired levelsduring the coming months. The resulting plan sets limits on the master production schedule.7.3.5 Approaches to Aggregate Planning

(i) Reactive approach: Allow volume forecasts based on Marketing plan to drive production planning(ii) Proactive approach: Coordinate Marketing & Production plans to level demand using advertising

& price incentives(iii) Chase strategy: Match the production rate to meet the demand rate by adjusting the workforce

level (hiring/firing) as the demand rate changes. Minimize finished good inventories by matchingdemand fluctuations.Finished goods inventories in make-to-stock companies can be used as a cushion againstfluctuating demand. A fixed number of employees, selected so that little or no overtime or idletime is incurred, can be maintained throughout the planning horizon. Producing at a constantrate, output will exceed demand during slack demand periods, and finished goods inventorieswill accumulate. During peak periods, when demand is greater than capacity, the demand canbe supplied from inventory. This planning strategy results in fluctuating inventory levelsthroughout the planning horizon.The comparative advantages of this strategy are obvious: stable employment, no idle time, andno overtime. Disadvantages are, first, inventories of finished goods (and other supportinginventories) are not cost-free. Inventories tie up working capital that could otherwise be earninga return on investment. Materials handling costs, storage space requirements, risk of damageand obsolescence, clerical efforts, and taxes all increase with larger inventories. Backorderscan also be costly. Customers may not be willing to tolerate backordering, particularly ifalternative sources of supply are available; sales may be lost, and changing customer taste maydecrease future sales as well. In short, there are costs for carrying too much or too little inventory.

(iv) Level strategy: Use a stable workforce working at a constant production rate. Use inventoriesand backorders to absorb demand peaks and valleys.A big advantage of this strategy is that it avoids the hiring and layoff costs associated. But othercosts are incurred instead. Overtime, for example, can be very expensive, commonly at least 50percent higher than regular-time wages. Furthermore, there are both legal and behaviorallimits on overtime. When employees work a lot of overtime, they tend to become inefficient,and job-related accidents happen more often.

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Idle time also has some subtle drawbacks. During slack periods, employee morale can diminish,especially if the idle time is perceived to be a precursor of layoffs. Opportunity costs also resultfrom idle time. When employees are forced to be idle, the company foregoes the opportunityof additional output. While wages are still paid, some potential output has been lost forever.

Figure 7.6. Figure showing different types of Aggregate planning strategies

v) Hybrid strategies: Combine elements of the chase/level strategies with other options:Advantages include, Stable workforce but variable work rate (overtime/undertime) andSubcontract production or hire part-time or temporary workers to cover short-term peaks.

7.3.6 Aggregate Planning for Service Organizations

Service organizations can also use aggregate planning. The typical service operation, however,is make – to – order than make-to-stock. Consequently, finished goods are not available for respondingto demand fluctuations. Instead, backlogs of customer requests can be increased or decreased to utilizecapacity at desired levels.

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Some service systems that supply customized services to customers experience the samedifficulty as job shops in specifying the nature and extent of services to be performed for each customer.Examples to these systems are hospitals, computer services, and automobile body repair shops. Anothercomplicating factor with many of thses customized service systems is that, unlike in job shops, thecustomer may be an integral part of the production system, and scaling production capacity up or downmay directly alter the perceived quality of the delivered services. Examples of these services are smallprivate colleges and universities, exclusive dinner clubs, private country clubs and private health clinics.

7.4 Material Resources Planning

Material requirements planning (MRP): A system of planning and scheduling the time-phased materials requirement for production operations. Material requirements planning (MRP)has become a centerpiece for all manufacturing systems. The key to successful production andoperations management in a manufacturing company is the balancing of requirements andcapacities. It’s that simple and yet very challenging.

MRP provides the following:

1. Inventory reduction: MRP determines how many of a component are needed and when, inorder to meet the master schedule.

2. Reduction in production and delivery lead times: MRP identifies materials and componentsquantities, timings, availabilities, and procurement and production actions required to meetdelivery dealings.

3. Realistic commitments: Realistic delivery promises can enhance customer satisfaction. Byusing MRP, production can give marketing timely information about likely delivery times toprospective customers.

4. Increased efficiency: MRP provides close coordination among various work centers as productsprogress through them.

Figure 7.7. Inputs and outputs from Material requirement Planning

Master Production Schedule

Material Requirements Planning - MRP

Time Phased Order Point

Exception messages

Bills of Material

General Item Data

Inventory Records

Input to Capacity Planning

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MRP is a system of planning and scheduling the time-phased materials requirements forproduction operations. As such, it is geared toward meeting the end-item outputs prescribed in themaster production schedule.

Master Production Schedule (MPS)

The purpose of master production scheduling is to meet the demand for individual products inthe product group. This more detailed level of planning disaggregates the product groups into individualproducts and indicates when they will be produced. The MPS is an important link between marketingand production. It shows when incoming sales orders can be scheduled into production, and when eachshipment can be scheduled for delivery. It also fakes into account current backlogs so that productionand delivery schedules are realistic.

The MPS is initially developed from firm customer orders or from forecasts of demand beforethe MRP system begins to operate. The MPS is an input to the MRP system. Designed to meet marketdemand, the MPS identifies the quantity of each and product (end item) and when it needs to beproduced during each future period in the production-planning horizon.

Master Production Schedule states, for an individual end item in a e.g. weekly level

What product (or option) will be produced

How many should be completed

When these products are completed

Master Production Schedule (MPS) is

MPS is an anticipated (planned) build schedule, not a forecast.

MPS is stated in items (end item, end item groups, options) in order to figure out thematerials and capacity needs.

Used as a vehicle for communication with sales – sales can make accurate order promisingagainst MPS.

MPS is updated as time goes on, i.e. “rolling through time”.

7.4.2 Bill of Materials (BOM)

The BOM identifies how each end product is manufactured, specifying all subcomponents items,their sequence of buildup, their quantity in each finished unit, and the work centers performing thebuildup sequence. BOM file or product structure file identifies all components required to make one ofany end-item. It must be structured to reflect the sequence of steps necessary to produce the product.It helps in determining all the lower-level components needed to make a parent- item is called explodingthe requirements by the bill of the materials.

Modified BOM: When the bill of material is turned on its side and lead times for each componentare added, we have a modified BOM or time-phased product structure.

7.4.3 Inventory Status File

The MRP system must retain an up-to-date file of the inventory status of each item in theproduct structure. This file provides accurate information about the availability of every item controlledby the MRP system which can then maintain an accurate accounting of all inventory transaction, bothactual and planned.

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Inventory Status file contains two major types of data

inventory on hand, projected receipts of each item, and customer orders for the item whichdetermine end-of-period inventory balances for each period in the planning horizon

production (or purchasing) lead time, lot sizes, safety stock level for each item

7.4.4 The MRP Processing Logic

The MRP processing logic accepts the master schedule and determines the componentsschedules for successively lower-level items of the product structures. It calculates for each item ineach product structure and for each time period (typically one week) in the planning horizon how manyof that item are needed (gross requirements), how many units from inventory are already available,the net quantity that must be planned on receiving in new shipments (planned order receipts), andwhen orders for the new shipments must be placed (planned order releases) so that all materials arrivejust when needed.

Figure 7.8. Master production Schedule

7.4.5 Limitations and Advantages of MRP

The limitations of MRP stem from the conditions that must be met before it can be used. Acomputer is necessary; the product structure must be assembly-oriented; bill of materials and inventorystatus information must be assembled and computerized; and a valid master schedule must be prepared.Another limitation has to do with data integrity. Unreliable inventory and transactions data from theshop floor can ruin a well-planned MRP system. Training personnel to keep accurate records is not aneasy task, but it is critical to successful MRP implementation. In general, the system must be believable,accurate, and directly useful or else it will become an expensive ornament that is bypassed in favor ofinformal, ad hoc methods.

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The dynamic nature of the MRP system is a vital advantage. It reacts well to changing conditions;in fact, it thrives on change. Changing conditions from the master schedule for several periods into thefuture can affect not only the end item but also hundreds, even thousands, of components. Because theproduction-inventory data system is computerized, management can make a new MRP computer run torevise production and procurement plans that react quickly to changes in customer demands as reflectedin the master schedule.

7.5. Capacity requirement planning

Detailed Capacity Planning Detailed capacity planning, also called capacity requirementsplanning, is a companion process used with MRP to identify in detail the capacity required to executethe MRP. At this level, more accurate comparisons of available and needed capacity for scheduled workloads are possible.

Capacity can be defined as the maximum use of all the limited resources available to produce aset quantity of goods in a given time frame that is fixed if all the condition for production were ideal. Thecapacity available can be seen as the upper limit of the amount of work that a productive unit will beable to perform.

The objectives of capacity planning.

The balance that is struck between capacity and demand will influence the cost structure.

The balance struck between capacity and demand will influence revenues.

If finished goods are manufactured for stock (inventory); working capital will be tied up.

Large fluctuations in the demand may cause quality problems.

Enhancement of the speed with which a customer’s order can be filled.

The closer the demands are to the available capacity the more dependable the supply ofgoods will be.

7.5.2 Effective capacity can be defined as the maximum rate at which a process can produce for extendedperiods when the production conditions are normal, taking the maintenance requirements, the restperiods, the production mix to be manufactured, how well employees are trained in their jobs, theirwork schedules and the methods used to schedule that work into account.

Factors that will influence the availability of capacity in a factory:

1. Design of the process.

2. Design of the product.

3. Variety of the product.

4. Quality of the product.

5. Scheduling of production.

6. Management of materials.

7. Maintenance of the equipment.

8. Management of people.

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Table 7.1 Examples of how capacity can be measured

BUSINESS INPUTS OUTPUTS

Filling Station Number of pumps Quantity fuel pumped

Airline Number of seats Number of passengers

Technikon/ University Number of students Students graduating

Hospital Beds available Patients treated

Movie Theatre Number of seats Number of patrons

Repair Facility Number of jobs received Number of jobs completed

1.) Design capacity: If everything is ideal during the manufacturing process, it is the maximum outputthat can possibly be attained by that manufacturing process.

2.) Effective capacity: If all the constraints such as the number of products to be manufactured,breakdown of machines, scheduling and quality is taken into account, it will be the capacitynecessary to attain the maximum possible output from that process.

3.) Actual output: That is what was actually achieved by that process.

Efficiency = Actual Output

Effective capacity

Utilisation = Actual Output

Design CapacityFunctions of Capacity Requirement Planning Tests Master production Schedule (MPS) for its feasibility Takes the planned order releases off the MRP Utilizes routings to determine labor/machine loads If schedule feasible, recommends freezing If schedule overloads resources, points out processes that are overscheduled Managers may increase capacity (by overtime, subcontracting, etc. ) if this is possible and

economical, change the routing or assignment of orders to work centers or else revise theMPS and repeat the process

Compares actual labor and machine hours against available hours Offsets schedules between successive stages of production by lead times Provides feasible MPS and economically loaded work centers Promotes system operating efficiency and lowers costs.

7.6. Steps of Production Planning and ControlProduction Planning and Control (PPC) is a process that comprises the performance of somecritical; functions on either side, viz., planning as well as control.

(i) Production planning: Production planning may be defined as the technique of foreseeing every stepin a long series of separate operations, each step to be taken at the right time and in the right place andeach operation to be performed in maximum efficiency. It helps entrepreneur to work out the quantityof material manpower, machine and money requires for producing predetermined level of output ingiven period of time.

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Figure 7.9. Steps of Production Planning and Control

(ii) Routing: Under this, the operations, their path and sequence are established. To perform theseoperations the proper class of machines and personnel required are also worked out. The main aim ofrouting is to determine the best and cheapest sequence of operations and to ensure that this sequenceis strictly followed. In small enterprises, this job is usually done by entrepreneur himself in a ratheradhoc manner. Routing procedure involves following different activities.

(1) An analysis of the article to determine what to make and what to buy.

(2) To determine the quality and type of material

(3) Determining the manufacturing operations and their sequence.

(4) A determination of lot sizes

(5) Determination of scrap factors

(6) An analysis of cost of the article

(7) Organization of production control forms.

(iii) Scheduling: It means working out the time that should be required to perform each operation andalso the time necessary to perform the entire series as routed, making allowances for all factorsconcerned. It mainly concerns with time element and priorities of a job. The pattern of schedulingdiffers from one job to another which is explained as below:

Production schedule: The main aim is to schedule that amount of work which can easily behandled by plant and equipment without interference. Its not independent decision as it takes intoaccount following factors.

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(1) Physical plant facilities of the type required to process the material being scheduled.

(2) Personnel who possess the desired skills and experience to operate the equipment and performthe type of work involved.

(3) Necessary materials and purchased parts.

(iv) Master Schedule: Scheduling usually starts with preparation of master schedule which is weekly ormonthly break-down of the production requirement for each product for a definite time period, byhaving this as a running record of total production requirements the entrepreneur is in better positionto shift the production from one product to another as per the changed production requirements. Thisforms a base for all subsequent scheduling acclivities. A master schedule is followed by operator schedulewhich fixes total time required to do a piece of work with a given machine or which shows the timerequired to do each detailed operation of a given job with a given machine or process.

Manufacturing schedule: It is prepared on the basis of type of manufacturing process involved. It is veryuseful where single or few products are manufactured repeatedly at regular intervals. Thus it wouldshow the required quality of each product and sequence in which the same to be operated

(v) Scheduling of Job order manufacturing: Scheduling acquires greater importance in job ordermanufacturing. This will enable the speedy execution of job at each center point. As far as small scaleindustry is concerned scheduling is of utmost importance as it brings out efficiency in the operationsand s reduces cost price. The small entrepreneur should maintain four types of schedules to have aclose scrutiny of all stages namely an enquiry schedule, a production schedule, a shop schedule and anarrears schedule out of above four,.

1. The total load on any section

2. The operational sequence

3. The stage, which any job has reached.

(vi) Loading: The next step is the execution of the schedule plan as per the route chalked out it includesthe assignment of the work to the operators at their machines or work places. So loading determineswho will do the work as routing determines where and scheduling determines when it shall be done.Gantt Charts are most commonly used in in order to determine the existing load and also to foreseehow fast a job can be done. The usefulness of their technique lies in the fact that they compare what hasbeen done and what ought to have been done.

Most of a the enterprise fail due to non-adherence to delivery schedules therefore they can be successfulif they have ability to meet delivery order in time which no doubt depends upon production of qualitygoods in right time. It makes all the more important for company to judge ahead of time what should bedone, where and when thus to leave nothing to chance once the work has begun.

(vii) Production control: Production control is the process of planning production in advance ofoperations, establishing the extract route of each individual item part or assembly, setting, starting andfinishing for each important item, assembly or the finishing production and releasing the necessaryorders as well as initiating the necessary follow-up to have the smooth function of the enterprise. Theproduction control is of complicated nature in. The production planning and control department canfunction at its best in only when the work manager, the purchase manager, the personnel manager andthe financial controller assist in planning production activities. The production controller directly reportsto the works manager but in small scale unit, all the three functions namely material control, planningand control are often performed by the entrepreneur himself. Production control starts with dispatchingand ends up with corrective actions.

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(viii) Dispatching: Dispatching involves issue of production orders for starting the operations. Necessaryauthority and conformation is given for:

1. Movement of materials to different workstations.

2. Movement of tools and fixtures necessary for each operation.

3. Beginning of work on each operation.

4. Recording of time and cost involved in each operation.

5. Movement of work from one operation to another in accordance with the route sheet.

6. Inspecting or supervision of work

Dispatching is an important step as it translates production plans into production.

(ix) Follow up: Every production programme involves determination of the progress of work, removingbottlenecks in the flow of work and ensuring that the productive operations are taking place in accordancewith the plans. It spots delays or deviations from the production plans. It helps to reveal detects inrouting and scheduling, misunderstanding of orders and instruction, under loading or overloading ofwork etc. All problems or deviations are investigated and remedial measurer are undertaken to ensurethe completion of work by the planned date. Inspection: This is mainly to ensure the quality of goods.It can be required as effective agency of production control. Corrective measures: Corrective actionmay involve any of those activities of adjusting the route, rescheduling of work changing the workloads,repairs and maintenance of machinery or equipment, control over inventories of the cause of deviationis the poor performance of the employees. Certain personnel decisions like training, transfer, demotionetc. may have to be taken. Alternate methods may be suggested to handle peak loads.

7.7. Benefits of Production Planning and Control

Production planning and control can facilitate in following ways

(1) Optimum Utilization of Capacity: With the help of Production Planning and Control [PPC] thecompany can schedule its tasks and production runs and thereby ensure that its productivecapacity does not remain idle and there is no undue queuing up of tasks via proper allocation oftasks to the production facilities. No order goes unattended and no machine remains idle.

(2) Inventory control: Proper PPC will help the company to resort to just- in- time systems andthereby reduce the overall inventory. It will enable the company to ensure that the right suppliesare available at the right time.

(3) Economy in production time: PPC will help the company to reduce the cycle time and increasethe turnover via proper scheduling.

(4) Ensure quality: A good PPC will provide for adherence to the quality standards so that quality ofoutput is ensured.

To sum up we may say that PPC is of immense value to the company in capacity utilization andinventory control. More importantly it improves his response time and quality. As such effective PPCcontributes to time, quality and cost parameters of organizational success.


1. Explain the terms Master Production Schedule (MPS) and Bill of Materials (BOM)

2. Discuss the functions of Capacity Requirement Planning.

3. What are the benefits of Production Planning and Control?

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7.9 Summary:

Production planning may be defined as the technique of foreseeing every step in a long seriesof separate operations, each step to be taken at the right time and in the right place and each operationto be performed in maximum efficiency. Production planning and control entails the acquisition andallocation of limited resources to production activities so as to satisfy customer demand over a specifiedtime horizon.

The main function of Production planning and control are forecasting, aggregate planning,materials requirement planning, capacity requirement planning, inventory management and scheduling.Aggregate plan is useful because it focuses on a general course of action, consistent with the company'sstrategic goals and objectives, without getting bogged down in detail. Material Resource Planning is asystem of planning and scheduling the time-phased materials requirement for production operations.Capacity Requirement planning is a companion process used with MRP to identify in detail the capacityrequired to execute MRP.

7.10 Glossary:

Capacity:It is the maximum that can be produced on a machine or in a facility or group.

Inventory: Inventory is the array of finished goods or goods used in production held by acompany. Inventory is classified as a current asset on a company's balance sheet, and it servesas a buffer between manufacturing and order fulfilment.

Scheduling: It is the process of arranging, controlling and optimizing work and workloads in aproduction process or manufacturing process.

Material:It refers to a physical object, as opposed to something spiritual or mental, or somethingthat is essential and relevant.

Effective capacity:Effective capacity is the maximum amount of work that an organization iscapable of completing in a given period due to constraints such as quality problems, delays,material handling, etc.

Routing: It is the process of selecting a path for traffic in a network or between or acrossmultiple networks.


1. Refer to section (7.4.1 & 7.4.2)



7.12 Terminal Evaluation

1. List and discuss the objectives of capacity planning.

2. Discuss the different types of capacity measurements available with examples.

3. Define the term Aggregate Planning. Explain the strategies for Aggregate Planning.

4. Explain Materials Requirement Planning and discuss the nature and development of MaterialsRequirement Planning.

5. Briefly explain the principles of Materials Requirement Planning. Suggest ways for successfulimplementation of Materials Requirement Planning.

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6. Differentiate between Aggregate Production Planning and Aggregate Capacity Planning.

7. Write the steps involved in Production planning and control.





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Chapter-8Project Management

Structure:


8.1 Introduction

8.2 Project Life Cycle

8.2.1 Planning

8.2.2 Build-up

8.2.3 Implementation

8.2.4 Phase-out

8.3 Project Scheduling Models

8.3.1 Gantt Charts

8.3.2 Performance Evaluation and Review Technique (PERT)

8.3.3 Critical Path Method (CPM)


8.5 Summary

8.6 Glossary





After studying the lesson you will be able to understand:

Productin Management

Project Life cycle

Project Scheduling Models

Gantt Charts

PERT

CPM

8.1. Introduction

Project management is the overseeing of a project from start to finish. For your project to be asuccess, you need to transform what begins as a vague concept in management’s mind into a measurableand accountable system that not only applies a broad range of knowledge, skills, and resources, but thatalso meets organizational requirements—and finish it within budget and on time.

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Project management is the allocation, tracking, and utilization of resources to meet therequirements of a particular project within a specified period of time. It requires a firm grasp of staffing,quality, budgeting, and communication issues. Proper project management can ensure:

Quick development “pipelines”

Efficient and effective use of resources

Relevant definitions and measures of success

8.2. Project Life Cycle

A project is a set of interrelated activities, usually involving a group of people working togethertoward a common goal or objective over a period of time. For example: Designing a new car is a projectthat requires a group of people to collaborate on design, building, testing, and modification. Once thenew car goes into production, the project is ended, and responsibility for the car’s production is givento an ongoing department or business unit.

Figure 8.1. Project life cycle

The life cycle of a typical project is comprised of four phases:

8.2.1 Planning: Define Project Objectives and Parameters

8.2.2 Build-Up: Assemble team and assigning tasks and Develop project schedule

8.2.3 Implementation: Control changes, Monitor and report progress and Review and approvecomplete work

8.2.4 Phase-Out: Evaluate performance and Close project.

The major tasks and activities in each phase have a certain amount of overlap. For example, youoften begin the planning phase with a your budget and an estimated completion date for the project.Once you’re in the build-up phase and are filling in the details of the project plan, you’ll want thesebudget and schedule estimates to be much more specific. So you might revisit some of the activities ofthe planning phase, asking the questions in greater detail. Similar overlaps will occur in later phases ofthe project.

Planning Objectives Resources Work break-

down schedule

Organization

Scheduling Project

activities Start & end

times

Controlling Monitor, compare,

revise, action

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8.2.1 Planning

Even when the project is assigned with very explicit responsibilities and expectations, a managerhas to make sure he is preparing to solve the right problem or identified the underlying need. Althoughsenior management may have clearly communicated their assumptions and expectations, these maystill not address the heart of the issue. Here are some questions that can help to uncover the real issuesat the core of the project:

What is the perceived need or purpose of the project?

What caused people to see this as a problem that needed solving?

Who has a stake in the solution or outcome?

How do the various stakeholders’ goals for the project differ?

What criteria are people going to use to judge this project a success?

A stakeholder is anyone who has a vested interest in the outcome of your project: contributors,customers, managers, and financial staff are all stakeholders; they are the people who will judge thesuccess or failure of the project. To identify all the stakeholders in a project, consider

what functions or people might be affected by the project’s activities or outcomes.

who contributes resources—people, space, time, tools, and money—to the project.

Once the stakeholders are identified, they should be asked to spell out exactly what success onthe project means for them. Because stakeholders’ interests vary, their definitions are likely to differ.One of the critical tasks in this phase is to meld stakeholders’ expectations into a coherent and manageableset of project objectives.

This is the point where the project need to be defined. The success of the project will bedefined by how well the objectives have been met. The more explicitly are objectives are stated at theoutset, the less disagreement there will be at the end a. In the planning phase, however, much is still influx. One should be prepared to revise the objectives as information is gathered about what need to beachieved. When defining an objective, think SMART. In other words, an objective should be

Specific

Measurable

Action-oriented

Realistic

Time-limited

When planning a project and defining the objectives, there are several different aspects toconsider:

Quality—identifying quality standards relevant to the project, determining how to measurethem, and how to satisfy them.

Organization—identifying project roles, assignments, and relationships as well as getting theright people assigned to the project.

Communication—determining the information needs of stakeholders and how they will get it.

Risk—determining the risks likely to affect the project, and evaluating possible responses.

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Time, cost, and quality are the three related variables that most often determine what is possiblefor you to achieve—change any one of these and you change your outcome. As you define an achievableobjective, first consider these variables: ask yourself how the time and funds you have allocated willaffect or limit the quality of the result. Deciding whether and how to make tradeoffs between time,cost, and quality—this is the stuff of project management. It is crucial that you keep all stakeholdersinformed of any changes in your project’s objectives—and what the consequences of those changeswill be in terms of time, cost, and quality. Whenever you’re making a tradeoff that reduces quality,make sure you’ve got your stakeholders on board. To do otherwise is heading for failure. Many projectsfail because a significant part of the work has been overlooked, or because the time and money requiredto complete it has been grossly underestimated. If you are building and installing a new databasemanagement system and forget to include time and cost of training people on the new system, you areunlikely to meet all your objectives. Here’s where careful scrutiny can save the day. Try to break eachobjective down into its component tasks, and include reasonable estimates for the time and resourcesnecessary to accomplish each task.

Once the project has been defined and the project process organized, the team must formulatea plan that identifies the specific tasks to be accomplished and a schedule for their completion. Planningprojects involves five steps:

1. defining the work breakdown structure

2. diagramming the network

3. developing the schedule

4. analyzing cost-time trade-offs, and

5. assessing risks.

The Work Breakdown Structure (WBS) is a tool that can help you develop estimates, assignpersonnel, track progress, and show the scope of project work. Through this tool complex activity issubdivided into several smaller tasks. This can be continued until the activity can no longer be subdivided.The work breakdown structure (WBS) is a statement of all work that has to be completed. The projectmanager must work closely with the team to identify all work tasks. An activity is the smallest unit ofwok effort consuming both time and resources that the project manager can schedule and control.

8.2.2 Build-Up

The build-up phase begins with an assessment of the skills needed for the project. Thisassessment flows directly from your work on the Work Breakdown Structure (WBS) during the planningphase, in which you developed your best estimate for the necessary tasks and activities. Depending onthis assessment, you may find that your current team may not have certain requisite skills, and so youmay need to recruit people who have them. Be prepared to bring in people—either temporary workersor employees from within the organization—who have the additional skills the project needs.

On other occasions a team will be assigned to you, making your task one of assessing teammembers’ skills. You will make assignments according to the best matches between skill and task andthen provide training for those people who need to acquire additional skills for the project. Don’tforget to budget time and money for any training you or your team may need to cover these skill gaps.

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Project scheduling

In contrast to project planning, project scheduling is more specific. Scheduling establishes timesand sequences of the various phases of the project. In project scheduling, the manager considers themany activities of an overall project and the tasks that must be accomplished and relates them coherentlyto one another and to the calendar.

The scheduling process starts with the decomposition of the project into smaller activities thatcan be clearly defined, along with their respective deliverables.

Create a list of activities and combine it with the WBS that will allow project teams to identifyall project deliverables. This provides the basis for creating a project schedule with realisticmilestones and due dates.

Establish control and communication systems for updating and revising the schedule.

Understand what factors modify the schedule and create a system to alert the properstakeholders of these changes.

Keep everyone involved informed of progress and modifications.

8.3. Project Scheduling Models

Two generally accepted methods of scheduling projects—Gantt Charts and flow charts—aredesigned to follow either the Critical Path Method (CPM) or Performance Evaluation and ReviewTechnique (PERT).

8.3.1 Gantt Charts

Gantt Charts are the basic bar charts. They provide an easy graphical representation of whenactivities might take place.

Advantages and limitations

Gantt charts are simple to construct, easy to read, an effective way to communicate with teammembers what they need to do in a given time frame.

They are difficult to assess the impact of a change in one area on the rest of the project.

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A Gantt chart is a popular type of bar chart that illustrates a project schedule. Gantt chartsillustrate the start and finish dates of the terminal elements and summary elements of a project.Terminal elements and summary elements comprise the work breakdown structure of the project.Some Gantt charts also show the dependency (i.e., precedence network) relationships betweenactivities.

Gantt charts have become a common technique for representing the phases and activities of aproject work breakdown structure (WBS), so they can be understood by a wide audience.

A common error made by those who equate Gantt chart design with project design is that theyattempt to define the project work breakdown structure at the same time that they define scheduleactivities. This practice makes it very difficult to follow the 100% Rule. Instead the WBS should be fullydefined to follow the 100% Rule, then the project schedule can be designed.

Although a Gantt chart is easily comprehended for small projects that fit on a single sheet orscreen, they can become quite unwieldy for projects with more than about 30 activities. Larger Ganttcharts may not be suitable for most computer displays. A related criticism is that Gantt charts communicaterelatively little information per unit area of display. That is, projects are often considerably more complexthan can be communicated effectively with a Gantt chart.

Gantt charts only represent part of the triple constraints of projects, because they focus primarilyon schedule management. Moreover, Gantt charts do not represent the size of a project or the relativesize of work elements, therefore the magnitude of a behind-schedule condition is easilymiscommunicated. If two projects are the same number of days behind schedule, the larger project hasa larger impact on resource utilization, yet the Gantt does not represent this difference.

Because the horizontal bars of a Gantt chart have a fixed height, they can misrepresent thetime-phased workload (resource requirements) of a project. In the example shown in this article,Activities E and G appear to be the same size, but in reality they may be orders of magnitude different.

Flow charts: While Gantt Charts illustrate the duration and chronological order of phases, flowcharts show when every project task within a phase should begin, exactly how much time is scheduledfor each task, when a task outcome should be complete, all tasks in progress at any given time, and allthe dependencies between outcomes, tasks, and events.

Pros: Allows much greater knowledge of all parts and interdependencies of a project.

Cons: Complex and not quickly mastered

8.3.2 Performance Evaluation and Review Technique (PERT)

PERT is basically a method to analyze the tasks involved in completing a given project, especiallythe time needed to complete each task, and identifying the minimum time needed to complete thetotal project.

PERT was developed in the 1950’s, primarily to simplify the planning and scheduling of large andcomplex projects. It was able to incorporate uncertainty by making it possible to schedule a project notknowing precisely the details and durations of all the activities. It is more of an event-oriented techniquerather than start- and completion-oriented, and is used more in R&D-type projects where not cost buttime is a major factor.

106

The most famous part of PERT is the “PERT Networks”, charts of timelines that interconnect.PERT is intended for very large-scale, one-time, complex, non-routine projects.

Conventions

A PERT chart is a tool that facilitates decision making; The first draft of a PERT chart will numberits events sequentially in 10s (10, 20, 30, etc.) to allow the later insertion of additional events.

Two consecutive events in a PERT chart are linked by activities, which are conventionallyrepresented as arrows in the diagram above.

The events are presented in a logical sequence and no activity can commence until itsimmediately preceding event is completed.

The planner decides which milestones should be PERT events and also decides their “proper” sequence

Terminology

A PERT event: is a point that marks the start or completion of one (or more) tasks. It consumesno time, and uses no resources. It marks the completion of one (or more) tasks, and is not“reached” until all of the activities leading to that event have been completed.

A predecessor event: an event (or events) that immediately precedes some other event withoutany other events intervening. It may be the consequence of more than one activity.

A successor event: an event (or events) that immediately follows some other event withoutany other events intervening. It may be the consequence of more than one activity.

A PERT activity: is the actual performance of a task. It consumes time, it requires resources(such as labour, materials, space, machinery), and it can be understood as representing thetime, effort, and resources required to move from one event to another. A PERT activity cannotbe completed until the event preceding it has occurred. A Dummy Activity is a fictitious activityconsuming no time; It is necessary to preserve the unique identification of activities.

Optimistic time (to): the minimum possible time required to accomplish a task, assumingeverything proceeds better than is normally expected

Pessimistic time (tP): the maximum possible time required to accomplish a task, assumingeverything goes wrong (but excluding major catastrophes).

Most likely time (tM): the best estimate of the time required to accomplish a task, assumingeverything proceeds as normal.

Expected time (te): the best estimate of the time required to accomplish a task, assumingeverything proceeds as normal (the implication being that the expected time is the averagetime the task would require if the task were repeated on a number of occasions over anextended period of time).

TE = (O + 4M + P) ÷ 6

Critical Path: the longest possible continuous pathway taken from the initial event to theterminal event. It determines the total calendar time required for the project; and, therefore,any time delays along the critical path will delay the reaching of the terminal event by at leastthe same amount.

Lead time: the time by which a predecessor event must be completed in order to allow sufficienttime for the activities that must elapse before a specific PERT event is reached to be completed.

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Lag time: the earliest time by which a successor event can follow a specific PERT event.

Slack: the slack of an event is a measure of the excess time and resources available in achievingthis event. Positive slack(+) would indicate ahead of schedule; negative slack would indicatebehind schedule; and zero slack would indicate on schedule.

The first step to scheduling the project is to determine the tasks that the project requires andthe order in which they must be completed. The order may be easy to record for some tasks (i.e. Whenbuilding a house, the land must be graded before the foundation can be laid) while difficult for others(There are two areas that need to be graded, but there are only enough bulldozers to do one). Additionally,the time estimates usually reflect the normal, non-rushed time. Many times, the time required toexecute the task can be reduced for an additional cost or a reduction in the quality.

PERT works by following these steps:

1. Clearly identify all activities in the project.

2. Identify the precedence requirements of the activities.

3. Diagram the precedence requirements as a sequence of activities.

4. Estimate the time each activity will take.

5. Calculate the critical path and other project performance criteria, creating the schedule andplan for subsequent control.

6. Reevaluate and revise as experience dictates.

In the following example there are seven tasks, labeled a through g. Some tasks can be doneconcurrently (a & b) while others cannot be done until their predecessor task is complete (c cannotbegin until a is complete). Additionally, each task has three time estimates: the optimistic time estimate(to), the most likely or normal time estimate (tm), and the pessimistic time estimate (tp).

The expected time (te) is computed using the formula

6

4 pmoe

tttt

2

2

6

op tt

Activity Preceded by to tm tp te 2

A - 2 6 7 5.50 0.694

B - 5 7 9 7.00 0.444

C A 3 5 6 4.83 0.250

D A 10 10 10 10.0 0.000

E B,C 3 4 5 4.0 0.111

F D 8 12 13 11.5 0.694

G E 2 4 8 4.33 1.000

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Expected Completion Time and Variance of Path A-D-FExpected completion time = 5.5 + 10 + 11.5=27Path Variance = 0.694 + 0 + 0.913 = 1.607Path Expected time Variance Standard DeviationA-D-F 27 1.607 1.27A-C-E-F 14.66 2.055 1.43B-E-G 15.33 1.555 1.25

Probabilities of Completion

V

mempletiontiExpectedCoepletiontimDesiredComz

Probability of Project Being Completed on or Before Time 25Only path A-D-F has reasonable chance of taking 25 or more:

57.127.1

2725

z

From standard normal table, there is a 5.82% chance of completing project on or before time 25.Probability of Path A-D-F being completed on or Before Time 25

1

2

3

4

5

6

[5.5, 0.694]

[7.0, 0.444]

[4.83, 0.250]

[10, 0.0]

[4.0, 0.111]

[4.33, 1.0]

[11.5, 0.913] A

B

C

D

E

F

G

5.82%

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Conditions in which PERT applies

First the project must be one whose activities clearly are distinct and separable. Second, theproject and activities must all have clear starting and ending dates. Third, the project must not- becomplicated by too many interrelated tasks. Fourth, the project must be one whose activities affordalternative sequencing and timing.

8.3.3 Critical Path Method

The Critical Path Method, abbreviated CPM, or Critical path analysis, is a mathematically basedalgorithm for scheduling a set of project activities. It is a very important tool for effective projectmanagement. It was developed in the 1950’s in a joint venture between DuPont Corporation andRemington Rand Corporation for managing plant maintenance projects. Today, it is commonly usedwith all forms of projects, including construction, software development, research projects, productdevelopment, engineering, and plant maintenance, among others. Any project with interdependentactivities can apply this method of scheduling.

The essential technique for using CPM is to construct a model of the project that includes the following:

A list of all activities required to complete the project (also known as Work breakdownstructure),

The time (duration) that each activity will take to completion, and

The dependencies between the activities.

Using these values, CPM calculates the starting and ending times for each activity, determineswhich activities are critical to the completion of a project (called the critical path), and reveals thoseactivities with “float time” (are less critical). In project management, a critical path is the sequence ofproject network activities with the longest overall duration, determining the shortest time possible tocomplete the project. Any delay of an activity on the critical path directly impacts the planned projectcompletion date (i.e. there is no float on the critical path). A project can have several, parallel nearcritical paths. An additional parallel path through the network with the total durations shorter than thecritical path is called a sub-critical or non-critical path.

• ES = Earliest start time [largest of the earliest times of all finish times of allpredecessors]

• EF = earliest finish time

• T = activity time

• LS = latest start time

• LF = latest finish time [smallest of the latest start time of all following activities]

• EF = ES + t

• LS = LF - t

• Slack = length of time an activity can be delayed without increasing the projectcompletion time. Slack = LS-ES=LF-EF

If an activity has zero slack, that activity can not be delayed without increasing the project’scompletion time

Activity with zero slack is part of the critical path.

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Lets solve the following example by Critical path method.

Activity Description Immediate Predecessors

A Build internal components -

B Modify roof and floor -

C Construct collection stack A

D Pour concrete and install frame A, B

E Build high-temperature burner C

F Install pollution control system C

G Install air pollution device D, E

H Inspect and test F, G

Start

A

B

C

D

F

F

G

H

1

3

2 4

5

6 7 H

Inspect/Test

G Install pollution control device D

Pour concrete/ Install frame

B Modify

roof/floor

C Construct

stack F

Install controls E

Build burn

er

A Build

internal compone

nts

Dummy Activity

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These results allow managers to prioritize activities for the effective management of projectcompletion. Originally, the critical path method considered only logical dependencies between terminalelements. Since then, it has been expanded to allow for the inclusion of resources related to eachactivity. This capability allows for the exploration of a related concept called the critical chain, whichdetermines the project duration from both time and resource dependencies.

Since project schedules change on a regular basis, CPM allows continuous monitoring of theschedule, allows the project manager to track the critical activities, and ensures that non-critical activitiesdo not interfere with the critical ones. In addition, the method can easily incorporate the concepts ofstochastic predictions, using the Program Evaluation and Review Technique (PERT).

Currently, there are several software solutions available in industry that use the CPM methodof scheduling. However, the method was developed and used still predominantly without the aid ofcomputers.

There are drawbacks of this technique, as estimations are used to calculate times: if one mistakeis made, the whole analysis could be flawed, causing major upset in the organization of a project.


1. What do you mean by Project Management?

2. Explain the acronym SMART.

3. Write a short note on critical path method.

8.5 Summary:

Project management is the overseeing of a project from start to finish. For your project to besuccess, you need to transform what begins as a vague concept in management's mind into a measurableand accountable system that not only applies a broad range of knowledge, skills and resources but thatalso meets organizational requirements and finish it within budget and on time.

The project life cycle is comprised or four phases- planning, build-up, implementation andphase-out. There are generally two methods of scheduling project which are Gantt Charts and flowCharts- are designed to follow either Critical Path Method (CPM) or Performance Evaluation and ReviewTechnique (PERT).

Start

A

B

C

D

F

F

G

H H

13 13

2

15 15

H G

8 8

5

13 13

H F

4 10

3

7 13

H C

2 2

2

4 4

H E

4 4

4

8 8

H D

3 4

4

7 8

H B

0 1

3

3 4

H A

0 0

2

2 2

H

0 0

0

0 0

Sla ck=0 Slack=0

S lack=0

S lack=0

Slack =6

Slack=1 Slack=1

Start

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8.6 Glossary:

Realistic:It means having or showing a sensible and practical idea of what can be achieved orexpected.

Work Breakdown Structure:A Work Breakdown Structure (WBS) is a deliverable-orientedhierarchical decomposition of the work to be executed by the project team to accomplish theproject objectives and create the required deliverables. A WBS is the cornerstone of effectiveproject planning, execution, controlling, monitoring, and reporting. All the work containedwithin the WBS is to be identified, estimated, scheduled, and budgeted.

Scheduling:Scheduling is the process of arranging, controlling and optimizing work andworkloads in a production process or manufacturing process.

Lead Time:A lead time is the latency between the initiation and completion of a process.

Lag Time:Lag time is a delay between tasks that have a dependency. For example, if you needa two-day delay between the finish of one task and the start of another, you can establish afinish-to-start dependency and specify two days of lag time.






1. What is meant by project scheduling? Give various steps in project scheduling.

2. In the interest of better serving the public, Metro Apollo Hospital has decided to relocatefrom Saritabihar to Badarpur, a large suburb that has no primary medical facility. The move toBadarpur will involve constructing a new hospital and making it operational. The work breakdown structure of it consists of 11 major project activities. The immediate predecessors foreach activity are identified and shown in the following table. Draw the network diagram andidentify the critical path.

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3. Irfan Bearings (P) Ltd is considering the replacement of the old machines in their factory bynew advanced machines. The production manager has identified the activities given in thefollowing table for this project. Draw the network diagram of the project and find the criticalpath with its duration.

4. Systems Software (P) Ltd is planning to develop a new software. It has identified the activitiesfor the project as listed in the following table. The three estimates for all activities are alsoestimated and listed in the table. Find the expected time required for all the activities .

5. What are Gantt charts? Give advantages and disadvantages of Gantt charts.

6. Explain the various stages of a project life cycle.





*****

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Chapter-9Quantity and Acceptance Sampling

Structure:


9.1 Introduction

9.2 Meaning of Quality

9.2.1 Quality Characteristics

9.2.2 Variables and Attributes

9.2.3 Defect

9.2.4 Standard or Specification

9.3 Three Aspects of Quality

9.3.1 Quality of Design

9.3.2 Quality of Conformance

9.3.3 Quality of Performance

9.4 Quality Control

9.4.1 Quality Assurance

9.4.2 Quality Circles

9.4.3 Benefits of Quality Control

9.4.4 Quality and Reliability

9.4.5 Quality Improvement

9.5 Management of Quality

9.6 Acceptance Sampling

9.6.1 Types of acceptance sampling plans

9.7 Types of Sampling Plans

9.7.1 Single Sampling

9.7.2 Double Sampling

9.7.3 Multiple Sampling Plans

9.7.4 Sequential Sampling Plans

9.7.5 Acceptable Quality Level

9.7.6 Lot Tolerance percent Defective (LTPD)

9.8 Operating Characteristic (OC) Curve


9.10 Summary

9.11 Glossary

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9 .0 Learning Objectives

After studying the lesson, you will be able to understand :

Definition of quality

Three aspects of quality

Quality Control

Benefits of Quality Control

Acceptance Sampling

Type of Sampling Plans

Operating Curves

9.1 Introduction:

Products and services provided to the customers must be of good quality. Quality is conformanceto requirements or specifications. In order to check the quality acceptance sampling is used. Acceptancesampling is a form of inspection that is used to determine whether or not goods are coherent with a setstandard of quality.

9.2 Meaning of Quality

Quality is conformance to requirements or specifications, (Crosby 1979).

Quality is fitness for use. (Juran 1974)

The quality of a product or service is the fitness of that product or service for meeting itsintended used as required by the customers.

9.2.1 Quality Characteristics

Quality Characteristic may be one or more elements which define the intended quality level of aproduct or service. Several grouping of these characteristics can be formed in;

Structural characteristics include such elements as the length of a part, the weight of a can, thestrength of a beam, the viscosity of a fluid, and so on.

Sensory’ characteristics include the taste of good food, the smell of a sweet fragrance, and thebeauty of a model, among others.

Time-oriented characteristics include such measures as a warranty, reliability, andmaintainability.

Ethical characteristics include honesty, courtesy, friendliness, and so on. Variables and Attributes

9.2.2 Variables and Attributes:

Variables - characteristics that are measurable and are expressed on a numerical scale.

Nonconformity - is a quality characteristic that does not meet its stipulated specificationsrequirement.

Nonconforming - unit is one that has one or more nonconformities such that the unit is unableto meet the intended standards and is unable to function as required.

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Attribute a quality characteristics if it can be classified as either conforming or nonconformingto a stipulated specifications requirement.

9.2.3 DefectA defect is a departure of a quality characteristic from its intended level or star that occurs with

a severity sufficient to cause an associated product or service no to satisfy intended normal or reasonablyforeseeable usage requirements. ( ANSI/ASQC Standard A3 1987)9.2.4 Standard or Specification

1. Specification: a set of conditions and requirements of specific and limited application, thatprovide a detailed description of the procedure, process, material, product, or service for useprimarily in procurement and manufacturing. Standards may be referenced or included in aspecification.

2. Standard: a prescribed set of conditions and requirements, of general or broad application,established by authority or agreement, to be satisfied by a material, product, process,procedure, convention, test method; and/or the physical, functional, performance, orconformance characteristics thereof. A physical embodiment of a unit of measurement’(forexample, an object such as the standard kilogram or an apparatus such as the weighingmachines).

9.3 Three Aspects of Quality9.3.1 Quality of Design

Quality of design deals with the stringent conditions that the product or service must minimallypossess in order to satisfy the requirements of the customer. It implies that the product or serviceoffered must be able to meet at least minimally the needs of the consumer.9.3.2 Quality of Conformance

Quality of conformance implies that the manufactured product or the service rendered mustmeet the standards selected in the design phase.9.3.3 Quality of Performance

Quality of performance is concerned with the operation of the product when actually put to useor the service when performed and measures the degree to which it satisfies the consumer.Figure 1. The Three Aspects of Quality

Quality

Quality of

Conformance

Quality of Quality of

Design Performance

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9.4 Quality Control

Quality control may generally be defined as a system that is used to maintain a desired level of qualityin a product or service. This task may be achieved through different measured such as:

Planning

Design

Use of proper equipment and procedures

Inspection

Taking corrective action in a case a deviation is observed between the product, service, orprocess output and a specified standard.

This general area may be divided into two main sub-areas:

Statistical Process Control involves the comparison of the output of a process or a service witha standard and the taking of remedial actions in case of a discrepancy between the two. Itinvolves the determination of the ability of a process to produce a product that meets desiredspecifications or requirements.

SPC is used to monitor the consistency of processes used to manufacture a product as designed.It aims to get and keep processes under control. No matter how good or bad the design, SPC canensure that the product is being manufactured as designed and intended. Thus, SPC will notimprove a poorly designed product’s reliability, but can be used to maintain the consistency ofhow the product is made and, therefore, of the manufactured product itself and its as- designedreliability.

Acceptance Sampling Plan is a plan that determines the number of items to sample and theacceptance criteria stipulated conditions such as the risk of rejecting a good lot or accepting abad lot. Acceptance Sampling is a form of inspection that is used to determine whether or notgoods are coherent with a set standard of quality. It is used to randomly inspect a batch of goodsto determine acceptance/rejectibn.

9.4.1 Quality Assurance

Quality assurance means all those planned or systematic actions necessary to provide confidencethat a product or service will satisfy given needs The objective of the quality assurance function is tohave a formal system that will continually survey A u.- V the effectiveness of the quality philosophy ofthe company.

9.4.2 Quality Circles

Quality circle is typically an informal group of people, which may consist of operators,supervisors, managers, and so on, who get together to seek improved ways of making the product ordelivering the service. A quality circle tries to overcome barriers that may exist within the prevailingorganizational structure so as to foster an open exchange of ideas. The group members feel a sense ofinvolvement in the decision making process and develop a positive attitude toward creating a better 3product or service.

9.4.3 Benefits of Quality Control

The advantages of a quality control system, however, become obvious in the long run.

First, the improvement in the quality of products and services.

118

Second, the system is continually evaluated and modified to meet the changing needs of thecustomer.

Third, a quality control system improves productivity, which is one of the goals of all organizations.

Fourth, such a system reduces costs in the long run.

Fifth, with improved productivity, the lead time on the production of parts and subassembliesis reduced, which may result in an improvement in meeting customer due dates.

Keeping the customers satisfied is a fundamental goal.

A company that adopts this philosophy and uses a quality control system to help in meeting thisobjective is one that will be competitive for a long time.

9.4.4 Quality and Reliability

Reliability refers to the ability of a product to function effectively over a certain period of timewhen in use by the consumer. Achievement of desirable standards of reliability is obtained by carefulanalysis in the product design phase. The product is typically over designed to more than meet theperformance requirements over a specified time frame.

9.5 Quality Improvement

Quality improvement is a never-ending process, and efforts to reduce the variability of a processand reduce the production of nonconforming items should continue forever. Whereas process controldeals with identification and elimination of special causes that force a system to go out of control, inorder to bring the process lo a state of statistical control, quality improvement relates to the detectionand elimination of common causes.

9.5. Management of Quality

Management of quality is important at every stage of decision making process.

Management functions

Plan

Organize

Staff

Direct

Product phase

Proposal phase

D e s i g n / P l an n i n gPhase

P r e - p r o d u c t i o nphase

Production Phase

Action to be taken

Develop quality policy

Plan for quality

Set up guidelines for systemadministration

Consider product liability/user safety

Develop an organization

Design assurance

Design change control

Develop Production quality planning

Select employee

Train employee

Motivate employee

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9.6 Acceptance Sampling

Acceptance Sampling is a form of inspection that is used to determine whether or not goods arccoherent with a set standard of quality.

Acceptance sampling is a procedure used for sentencing incoming batches. The most widelyused plans are given by the Military Standard tables, which were developed during World War II.

Acceptance Sampling is a branch of SQC refers to the process of randomly inspecting a certainnumber of items from a lot or batch in Order to decide whether to accept or reject the entire batch. It isdifferent from SPC because acceptance sampling is performed either before or after the process ratherthan during. Sampling before typically is done to supplier material and Sampling after involves samplingfinished items before shipment or finished components prior to assembly.

Acceptance sampling is used where inspection is expensive, volume is high, or inspection isdestructive

9.6.1 Types of acceptance sampling plans

Sampling plans can be categorized across several dimensions:

Sampling by attributes vs. sampling by variables: When the item inspection leads to a binaryresult (either the item is conforming or nonconforming) or the number of nonconformities inan item are counted, then we are dealing with sampling by attributes. If the item inspectionleads to a continuous measurement, then we are sampling by variables.

Incoming vs. outgoing inspection: If the batches are inspected before the product is shipped tothe consumer, it is called outgoing inspection. If the inspection is done by the consumer, afterthey were received from the supplier,, it is called incoming inspection.

Rectifying vs. non-rectifying sampling plans: Determines what is done with nonconforming itemsthat were found during the inspection. When the cost , of replacing faulty items with new ones,or reworking them is accounted for, the sampling plan is rectifying.

Single, double, and multiple sampling plans’. The sampling procedure may consist of drawing asingle sample, or it may be done in two or more steps.

A double sampling procedure means that if the sample taken from the batch is not informativeenough, another sample is taken. In multiple sampling, additional samples can be drawn after thesecond sample.

Monitor purchase materials quality

Direct final inspectin

Direct handling/inspection

Obtain quality information

Get data on field performance

Take corrective action

Conduct statistical quality control

Manage quality cost

Control Production and postproduction phase

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9.7 Types of Sampling Plans

Complete inspection is often impractical, uneconomical, or impossible for a number of reasons.The test itself may destroy the item being tested (for example, when light bulbs are tested for lifeduration, the test consists of letting the bulb burn until it burns out), the inspection costs may be toohigh, there may not be enough trained inspectors, inspection may be too time consuming, and so on.Unless the identification of every single defective item is considered essential, a sample may bepreferable to complete inspection.

Necessity of Sampling

In most cases 100% inspection is too costly.

In some cases 100% inspection may be impossible.

If only the defective items are returned, repair or replacement may be cheaper than improvingquality. But, if the entire lot is returned on the basis of sample quality, then the producer has amuch greater motivation to improve quality.

A “lot,” or batch, of items can be inspected in several ways, including the use of single, double,or sequential sampling.

9.7.1 Single sampling

One sample of items is selected at random from a lot and the disposition of the lot is determinedfrom the resulting information. These plans are usually denoted as (n.c) plans for a sample size n,where the lot is rejected if there are more than c defectives. These are the most common (and easiest)plans to use although not the most efficient in terms of average number of samples needed.

Two numbers specify a single sampling plan: They are the number of items Jo be sampled (n)and a pre-specified acceptable number of defects (c). If there are fewer or equal defects in the lot thanthe acceptance number, c, then the whole batch will be accepted. If there are more than c defects, thewhole lot will be rejected or subjected to 100% screening.

9.7.2 Double sampling

After the first sample is tested, there are three possibilities:

1. Accept the lot

2. Reject the lot

3. No decision

If the outcome is (3), and a second sample is taken, the procedure is to combine the results ofboth samples and make a final decision based on that information.

Often a lot of items is so good or so bad that we can reach a conclusion about its quality by takinga smaller sample than would have been used in a single sampling plan. If the number of defects in thissmaller sample (of size n1 ) is less than or equal to some lower limit (c1). the lot can be accepted. If thenumber of defects exceeds an upper limit (c 2 ), the whole lot can be rejected. But if the number ofdefects in the n 1 sample is between c 1 and c 2 , a second sample (of size n 2 ) is drawn. The cumulativeresults determine whether to accept or reject the lot. The concept is called double sampling.

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9.7.3 Multiple sampling plans:

This is an extension of the double sampling plans where more than two samples are needed toreach a conclusion. The advantage of multiple sampling is smaller sample sizes.

9.7.4 Sequential sampling

This is the ultimate extension of multiple sampling where items are selected from a lot one ata time and after inspection of each item a decision is made to accept or reject the lot or select anotherunit.

Multiple sampling is an extension of double sampling, with smaller samples used sequentiallyuntil a clear decision can be made. When units are randomly selected from a lot and tested one by one,with the cumulative number of inspected pieces and defects recorded, the process is called sequentialsampling.

If the cumulative number of defects exceeds an upper limit specified for that sample, thewhole lot will be rejected. Or if the cumulative number of rejects is less than or equal to the lower limit,the lot will be accepted. But if the number of defects falls within these two boundaries, we continue tosample units from the lot. It is possible in some sequential plans for the whole lot to be tested, unit byunit, before a conclusion is reached.

Selection of the best sampling approach—single, double, or sequential—depends on the typesof products being inspected and their expected quality level. A very low- quality batch of goods, forexample, can be identified quickly and more cheaply with sequential sampling. This means that theinspection, which may be costly and/or destructive, can end sooner. On the other hand, in many casesa single sampling plan is easier and simpler for workers to conduct even though the number sampledmay be greater than under other plans.

9.7.5 Acceptable Quality Level (AQL)

The AQL is a percent defective that is the base line requirement for the quality of the producer’sproduct. The producer would like to design a sampling plan such that there is a high probability ofaccepting a lot that has a defect level less than or equal to the AQL.

9.7.6 Lot Tolerance Percent Defective (LTPD)

The LTPD is a designated high-defect level that would be unacceptable to the consumer. Theconsumer would like the sampling plan to have a low probability of accepting a lot with a defect level ashigh as the LTPD.

When a decision about the lot is based on a sample, certain risks are undertaken. A lot containinga small number of defective items may be rejected because too many of these defectives happened toshow up in the sample, or a lot containing a large number of defectives may be accepted because toofew defectives happened to show up in the sample. These risks are inherent in the sampling procedureitself and cannot be entirely eliminated.

When a lot is accepted, the items become part of the buyer’s stocks and remain in inventoryuntil they are sold, assembled, processed or otherwise disposed of.

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9.8 Operating Characteristic (OC) Curve

This curve plots the probability of accepting the lot (Y-axis) versus the lot fraction or percentdefectives (X-axis). The OC curve is the primary tool for displaying and investigating the properties of aLASP (Lot Acceptance Sampling Plan).

OC curve is a graph showing what any particular sampling plan can be expected to do in terms ofaccepting and rejecting batches. An understanding of the implications of an OC curve helps understandthe risks to the manufacturer, consumer, and in deciding inspection levels and batch sizes. Each possibleplan has its own OC curve. Horizontal scale shows the percentage defective items. Vertical scale showsthe percentage of batches that may be expected to be accepted if batches are produced with thatpercentage of defects.

OC curves are graphs which show the probability of accepting a lot given various proportions ofdefects in the lot. X-axis shows % of items that are defective in a lot- “lot quality” and the Y-axis showsthe probability or chance of accepting a lot. As proportion of defects increases, the chance of acceptinglot decreases. Example: 90% chance of accepting a lot with 5% defectives; 10% chance of accepting a lotwith 24% defectives.

Figure 1. OC-Curve. (Operating Characteristic)

Developing OC Curves

OC curves graphically depict the discriminating power of a sampling plan.

Cumulative binomial tables like partial table below are used to obtain probabilities of acceptinga lot given varying levels of lot defectives.

Top of the table shows value of p (proportion of defective items in lot). Left hand column showsvalues of n (sample size) and x represents the cumulative number of defects found.

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Example: Lets develop an OC curve for a sampling plan in which a sample of 5 items is drawnfrom lots of N=T000 items. The accept /reject criteria are set up in such a way that we accept a lot if nomore that one defect (c=l) is found. Using the above table and the row corresponding to n=5 and x=l,Note that we have a 99.74% chance of accepting a lot with 5% defects and a 73.73% chance with 20%defects.

Partial Cumulative Binomial Probability Table Proportion of Items Defective (p) .05 .10 ..15 .20 .25 .30 .35 .40 .45 .50

n X

5 0 .7738 .5905 .4437 .3277 .2373 .1681 .1160 .0778 .0503 .0313

Pac 1 .9974 .9185 .8352 .7373 .6328 .5282 .4284 .3370 .2562 .1875 A0Q .0499 .0919 1253 .1475 .1582 .1585 .1499 ,1348 .1153 .0938

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Average Outgoing Quality (AOQ)

A common procedure, when sampling and testing is non-destructive, is to 100%- inspect rejectedlots and replace all defectives with good units. In this case, all rejected lots are made perfect and theonly defects left are those in lots that were accepted. AOQ’s refer to the long term defect level for thiscombined LASP and 100% inspection of rejected lots process. If all lots come in with a defect level ofexactly p, and the OC curve for the chosen (n,c) LASP indicates a probability pa of accepting such a lot,over the long run the AOQ can easily be shown to be:.

PcP (N-n)AOQ

N

where N is the lot size.

If a lot is accepted, it may contain some defective items. Many of the items (N-n items in a singlesampling plan) not inspected may be defective.

The items which are inspected and found defective, may be

Case 1: returned to the producer or

Case 2: repaired or replaced by the producer.

We assume Case (2).

If a lot is rejected, it may be subjected to a 100% inspection. Such action is referred to asscreening inspection, or detailing. This is sometimes described as an acceptance/rectification scheme.

Again, There may be two assumptions regarding the defective items. The defective items may be

Case 1: returned to the producer or

Case 2: repaired or replaced by the producer.

We assume Case 2. So. if a lot is rejected, it will contain no defective item at all. The consumerwill get N good items.

Thus, if there is an average of 2% defective items, the accepted lots will contain little less than2% defective items and rejected lots will not contain any defective item at all. On average, the consumerwill receive less than 2% defective items.

Given a proportion of defective, p the Average Outgoing Quality (AOQ) is the proportion ofdefectives items in the outgoing lots.

Average Outgoing Quality Level (AOQL)

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A plot of the AOQ (Y-axis) versus the incoming lot p (X-axis) will start at 0 for p= 0, and return to0 for p = 1 (where every lot is 100% inspected and rectified). In between, it will rise to a maximum. Thismaximum, which is the worst possible long term AGQ, is called the AOQL.

Average Total Inspection (ATI)

When rejected lots are 100% inspected, it is easy to calculate the ATI if lots come consistentlywith a defect level of p. For a LASP (n.c) with a probability pa of accepting a lot with defect level p, wehave ATI — n + (1 –pa) (N-n)

where N is the lot size.

Average Sample Number (ASN)

For a single sampling LASP (n.c) we know each and every lot has a sample of size n taken andinspected or tested. For double, multiple and sequential LASP’s, the amount of sampling variesdepending on the number of defects observed. For any given double, multiple or sequential plan, along term ASN can be calculated assuming all lots come in with a defect level of p. A plot of the ASN,versus the incoming defect level p, describes the sampling efficiency of a given LASP scheme. When alot is rejected, however, its fate depends on whatever agreements were made with the seller. Forexample, the lot may be returned to the seller, who then inspects or tests some or all of the items andreplaces any defective items found; the partially or totally corrected lot is then returned to the buyer,who may inspect the new lot completely or form a decision on the basis of the results from anothersample taken from the lot. Alternatively, the buyer may inspect all items left in the lot that were notpart of the sample, and return to the seller for replacement all defectives found in the original sampleand in the rest of the lot. Numerous other possibilities exist.

Type I Error (Producer’s Risk)

This is the probability, for a given (n,c) sampling plan, of rejecting a lot that has a defectlevel equal to the AQL. The producer suffers when this occurs, because a lot with acceptable qualitywas rejected. The symbol is commonly used for the type 1 error and typical values for range from0.2 to 0.01.

Type II Error (Consumer’s Risk)

This is the probability, for a given (n.c) sampling plan, of accepting a lot with a defect level equalto the I.TPD. The consumer suffers when this occurs, because a lot with unacceptable quality wasaccepted. The symbol â is commonly used for the Type II error and typical values range from 0.2 to0.01.

Producer’s Point

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The producer’s point controls the acceptance of lots that are at an acceptable quality level. Thegoal is to prevent good lots from being rejected.

Consumer’s Point

The consumer’s point controls the rejection of lots that are at a reject able quality level. Thegoal is to prevent bad lots from being accepted.

The figure below shows how the OC curve changes with the change in the Population size i.e. N,change in the sample size i.e. n and change in number of defectives i.e. c.


1. Define the terms Quality Assurance and Quality Circles.

2. What are the three aspects of Quality?

3. Define acceptance sampling. What are the types of acceptance sampling?

9.10 Summary:

Quality of a product or service is the fitness of that product or service for meeting its intendedused as required by the customers. There are three aspects of Quality- Quality of Design, Quality ofConformance and Quality of Performance. Quality control is defined as a system that is used to maintaina desired level of quality in a product or service. Acceptance sampling is a form of inspection that is usedto determine whether or not goods are coherent with a set standard of quality.

9.11 Glossary:

Quality:It the standard of something as measured against other things of a similar kind; thedegree of excellence of something.

Defect:A defect is a physical, functional, or aesthetic attribute of a product or service that exhibitsthat the product or service failed to meet one of the desired specifications.

Attributes: An attribute is defined as a quality or characteristic of a person, place, or thing. Reallife individuals and fictional characters possess various attributes.

Conformance:Conformance is how well something, such as a product, service or a system, meetsa specified standard and may refer more specifically to: Conformance testing, testing to determinewhether a product or system meets some specified standard.

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Sampling:Sampling is a process used in statistical analysis in which a predetermined number ofobservations are taken from a larger population. The methodology used to sample from a largerpopulation depends on the type of analysis being performed, but it may include simplerandom sampling or systematic sampling.


1. Refer to section (9.4.1 & 9.4.2)




1. Why is quality control important in manufacturing and service industries?

2. What do you mean by acceptance sampling? Discuss various sampling plans.

3. What are operating characteristic curves? Discuss their importance.

4. Differentiate between Type I and Type II error.


1. Doty, Leonard A. Statistical Process Control. New York, NY: Industrial Press INC, 1996.

2. Grant, Eugene L. and Richard S. Leavenworth. Statistical Quality Control. New York, NY: TheMcGraw-Hill Companies INC, 1996.

3. Griffith, Gary K. The Quality Technician’s Handbook. Engle Cliffs, NJ: Prentice Hall, 1996.

4. Summers, Donna C. S. Quality. Upper Saddle River, NJ: Prentice Hall, 1997.

5. Vaughn, Richard C. Quality Control. Ames, IA: The Iowa State University, 1974.

*****

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Chapter-10Statistical Process Control

Structure:


10.1 Introduction

10.2 Meaning of Statistical Process Control

10.3 Benefits of Statistical Process Control

10.4 Tools of Statistical Process Control

10.4.1 Flow Charts

10.4.2 Run Charts

10.4.3 Pareto Charts

10.4.4 Cause and Effect Diagram

10.4.5 Frequency Histograms

10.4.6 Control Charts

10.4.6.1 Types of Control Charts


10.6 Summary

10.7 Glossary




10.0 Learning Objective:

After studying the lesson you will be able to understand:

Statistical process control (SPC)

Tools of SPC

Flow chart

Run Chart

Pareto Charts and analysis

Cause and effect diagrams

Frequency histograms

Control charts

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10.1 Introduction

Statistical process control (SPC) involves using statistical techniques to measure and analyzethe variation in processes. Most often used for manufacturing processes, the intent of SPC is to monitorproduct quality and maintain processes to fixed targets. Statistical quality control refers to using statisticaltechniques for measuring and improving the quality of processes and includes SPC in addition to othertechniques, such as sampling plans, experimental design, variation reduction, process capability analysis,and process improvement plans.

SPC is used to monitor the consistency of processes used to manufacture a product as designed.It aims to get and keep processes under control. No matter how good or bad the design, SPC can ensurethat the product is being manufactured as designed and intended. Thus, SPC will not improve a poorlydesigned product’s reliability, but can be used to maintain the consistency of how the product is madeand, therefore, of the manufactured product itself and its as-designed reliability.

10.2 Meaning of Statistical Process control:

Statistical process control (SPC) is a method of visually monitoring manufacturing processes.With the use of control charts and collecting few but frequent samples, this method can effectivelydetect changes in the process that may affect its quality. Under the assumption that a manufacturedproduct has variation and this variation is affected by several process parameters, when SPC is appliedto “control” each parameter the final result trend to be a more controlled product. SPC can be very costefficient, as it usually requires collection and charting data already available, while “product control”requires accepting, rejecting, reworking and scrapping products that already went through the wholeprocess.

Statistical process control was pioneered by Walter A. Shewhart and taken up by W. EdwardsDeming with significant effect by the Americans during World War II to improve industrial production.Deming was also instrumental in introducing - SPC methods to Japanese industry after that war. Shewhartcreated the basis for the control chart and the concept of a state of statistical control by carefullydesigned experiments. While Dr. Shewhart drew from pure mathematical statistical theories, heunderstood data from physical processes never produce a “normal distribution curve” (a Gaussiandistribution, also commonly referred to as a “bell curve”). He discovered that observed variation inmanufacturing data did not always behave the same way as data in nature (Brownian motion of particles).Dr. Shewhart concluded that while every process displays variation, some processes display controlledvariation that is natural to the process, while others display uncontrolled Variation that is not present inthe process causal system at all times.

Classical quality control was achieved by inspecting 100% of the finished product and acceptingor rejecting each item based on how well the item met specifications’. In contrast, statistical processcontrol uses statistical tools to observe the performance of the production line to predict significantdeviations that may result in rejected products.

The underlying assumption is that there is variability in any production process: The processproduces products whose properties vary slightly from their designed values, even when the productionline is running normally, and these variances can be analyzed statistically to control the process. Forexample, a breakfast cereal packaging line may be designed to fill each cereal box with 500 grams ofproduct, but some boxes will have slightly more than 500 grams, and some will have slightly less, in

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accordance with a distribution of net weights. If the production process, its inputs, or its environmentchanges (for example, the machines doing the manufacture begin to wear) this distribution can change.For example, as its cams and pulleys wear out, the cereal filling machine may start putting more cerealinto each box than specified. If this change is allowed to continue unchecked, more and more productwill be produced that fall outside the tolerances of the manufacturer or consumer, resulting in waste.While in this case, the waste is in the form of “free” product for the consumer, typically waste consistsof rework or scrap.

By observing at the right time what happened in the process that led to a change, the qualityengineer or any member of the team responsible for the production line can troubleshoot the rootcause of the variation that has crept in to the process and correct the problem.

SPC indicates when an action should be taken in a process, but it also indicates when NO actionshould be taken. An example is a person who would like to maintain a constant body weight and takesweight measurements weekly. A person who does not understand SPC concepts might start dietingevery time his or her weight increased, or eat more every time his or her weight decreased. This type ofaction could be harmful and possibly generate even more variation in body weight. SPC would accountfor normal weight variation and better indicate when the person is in fact gaining or losing weight.

SPC is an optimization philosophy concerned with continuous process improvements, using acollection of (statistical) tools for data and process analysis, making inferences about process behaviourand decision making. SPC is a key component of Total Quality initiatives.

Ultimately, SPC seeks to maximize profit by

o Improving product quality

o Improving productivity

o Streamlining process

o Reducing wastage

o Reducing emissions

o Improving customer service, etc.

Commonly used tools in SPC include

Flow charts

Run charts

Pareto charts and analysis

Cause-and-effect diagrams

Frequency histograms

Control charts

10.3 Benefits of Statistical Process Control:

Provides surveillance and feedback for keeping processes in control

Signals when a problem with the process has occurred

Detects assignable causes of variation

Accomplishes process characterization

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Reduces need for inspection

Monitors process quality

Provides mechanism to make process changes and track effects of those changes

Once a process is stable (assignable causes of variation have been eliminated), provides processcapability analysis with comparison to the product tojerance

10.4 Tools of statistical process control (SPC)

10.4.1 Flow charts

Flow charts have no statistical basis and are excellent visualization tools. Flow charts show theprogress of work and the flow of material or information through a sequence of operations. Flow chartsare useful in an initial process analysis. Flow charts should be complemented by process flow sheets orprocess flow diagrams (more detailed) if available. Everyone involved in the project should draw a flowchart of the process being studied so as to reveal the different perceptions of how the process operates.

Figure 1. A typical flow chart of a procedure to ensure data quality

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10.4.2 Run Chart

Run churls arc simply plots of process characteristics against time or in chronological sequence. They donot have statistical basis, but are useful in revealing the trends and the relationships between variables.

Figure 2. Example of Run Chart with two responses

Run charts can be used to study relationships between variables. For example, in the abovechart, the relationship between the 2 variables is difficult to discern. To facilitate this, appropriatescalings for the plots should be chosen. If each plotted variable has its own y-axis scale, the above runchart then becomes.

Figure 3. Run Chart for two variables with independent – Y-axis scales

Now, the relationship between the two becomes much clearer. Obviously this method will failwhen there are more than two variables. However, if the variables are standardized before plotting,only a single common axis is necessary, and the results are just as clear as the previous.

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10.4.3 Pareto Charts

Vilfredo Pareto (1848-1923) discovered that:

80% of the wealth in Italy was held by 20% of the population;

20% of customers accounted for 80% of sales;

20% of parts accounted for 80% of cost, etc.

These observations were confirmed by Juran (1960) and resulted in what is known as the ParetoPrinciple. The Pareto Principle states that: “Not all of the causes of a particular phenomenon occur withthe same frequency or with the same impact”. Such characteristics can be highlighted using ParetoCharts. Pareto charts show the most frequently occurring factors and analysis of Pareto charts help tomake best use of limited resources by targeting the most important problems to tackle. For example.Products may suffer from different defects, but the defects occur at different frequency and only a fewaccount for most of the defects present. Also different defects incur different costs.

So a product line may experience a range of defects (A, B, C ... J). Plotting the percentagecontribution of each type to total number of faults, gives the bar-plots in the following diagram. Next if,each of these contributions are sequentially summed, a cumulative line plot is obtained. These twoplots together make up the Pareto Chart.

Fig.5 Example of Pareto Chart

Fig. 4 Run Chart for two standardized variables

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From the information on the chart, the manufacturer could for example, concentrate on reducingdefects A, B and C since they make up 75% of all defects and focus on eliminating defect E, if defect Ecauses 40% of monetary loss.

10.4.4 Cause and Effect Diagram

Cause-and-effect diagrams are also called Ishikawa diagrams named after Dr. Kaoru Ishikawa,1943 and they are also called fishbone diagrams. Cause-and - effect diagrams do not have a statisticalbasis, but are excellent aids for problem solving and trouble-shooting. Cause-and-effect diagrams canreveal important relationships among various variables and possible causes and provide additionalinsight into process behavior.

Figure 6. Example of a Cause-and-effect diagram

10.4.5 Frequency Histograms

The frequency histogram is a very effective graphical and easily interpreted method forsummarizing data. The frequency histogram is a fundamental statistical tool of SPC. It providesinformation about:

o the average (mean) of the data

o the variation present in the data

o the pattern of variation

o whether the process is within specifications

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Example frequency histogram

Drawing Frequency Histograms

In drawing frequency histograms, bear in mind the following rules:

Intervals should be equally spaced

Select intervals to have convenient values

Number of intervals is usually between 6 to 20

Small amounts of data require fewer intervals

10 intervals is sufficient for 50 to 200 readings

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10.4.6 Control Charts

A primary tool used for SPC is the control chart, a graphical representation of certain descriptivestatistics for specific quantitative measurements of the manufacturing process. These descriptivestatistics are displayed in the control chart in comparison to their “in-control” sampling distributions.The comparison detects any unusual variation in the manufacturing process, which could indicate aproblem with the process. Several different descriptive statistics can be used in control charts andthere are several different types of control charts that can test for different causes, such as how quicklymajor vs. minor shifts in process means are detected. Control charts are also used with productmeasurements to analyze process capability and for continuous process improvement efforts.

Control charts were developed as a monitoring tool for SPC by Dr. Shewhart; they are among themost important tools in the analysis of production process variations. .The purpose of using controlcharts is to help prevent the process from going out of control.

The control charts help detect the assignable causes of variation on time so that appropriateactions can be taken to bring the process back in control. They are used to keep from making adjustmentswhen they are not needed.

Most production processes allow operators a certain level of leeway to make adjustments, onthe machines that they are using when it is necessary. Yet over adjusting machines can have negativeimpacts on the output. Control charts can indicate when the adjustments are necessary and when theyare not. They are used to determine the natural range (control limits) of a process and to compare it toits specified limits.

If the range of the control limits is wider than the one of the specified limits, the productionprocess will need to be adjusted. Thus they help to inform about the process capabilities and stability.The process capability refers to its ability to constantly deliver products that are within the specifiedlimits and the stability refers to the quality auditor’s ability to predict the process trends based on pastexperience. A long term analysis of the control charts can help monitor the machine long termcapabilities. Machine wear out will reflect on the production output, thus they to fulfill the need of aconstant process monitoring Control charts make assumptions about the plotted statistic, namely.

it is independent, i.e. a value is not influenced by its past value and will not affect future values

it is normally distributed, i.e. the data has a normal probability density function.

Normal Probability Density Function

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The assumptions of normality and independence enable predictions to be made about thedata.

Control charts provide a graphical means for testing hypotheses about the data being monitored.Consider the commonly used Shewhart Chart as an example.

How to build a control chart

The control charts we are addressing are created for a production process in progress. Samplesare taken from the production lines at given time intervals and tested to determine whether they are inconformance with the specifications and their level of conformance are plotted on the charts andmonitored.

Let’s consider Y, a sample statistic that measures a Critical-To-Quality characteristic of a product(length, color, or thickness...), with a mean µ y and a standard deviation y . The Upper Control Limit(UCL), the Center Line (CL) and the Lower Control Limit (LCL) for the control chart will be given as follow:

UCL = µ y — ky

CL = µ y

LCL = µ y — ky

Where k is the distance between the center line and the control limits.

Example: Consider the length as being the critical characteristic of manufactured bolts. Themean length of the bolts is 17 inches with a known standard deviation of 0.01. A sample of 5 bolts istaken every half an hour for testing and the mean of the sample is computed and plotted on the chart.That control chart will be called control chart because it plots the means of the samples.

Based on the Central Limit theorem, we can determine the sample standard deviation and the mean.

= n 5

The mean will still be the same as the population’s mean, 17.

For three sigma control limits, we will have:

UCL = 17 + 3(0.0045) =17.013

CL = 17

LCL = 17 -3(0.0045) = 16.99

Control limits on a control chart should be readjusted every time a significant shift in the processoccurs.

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A typical control chart is -made up of at least four lines: a vertical line that measures the levelsof the samples’ means, the two outmost horizontal lines represent the UCL and the LCL and the CenterLine represents the mean. If all the points plot in between the UCL and the LCL in a random manner, theprocess is considered to be in control.

What is meant by in control process is not a total absence of variation but instead, when thevariations are present, they exhibit a random pattern, they are not outside the control limits and basedon past experience, they can be predicted and are strictly due to common causes. The control charts arean effective tool for detecting the special causes of variation.

The following chart depicts a process in control and within the specified limits. The Normalcurve on the left side shows the specified (desired) limits of the production process while the rightchart is the control chart. The specification limits determine whether the products meet the customers’expectations while the control limits determine whether the process is under statistical control. Thesetwo charts are completely separate entities. There is no statistical relationship between the specificationlimits and the control limits.

If some points are outside the control limits, this will indicate that the process is out of controland corrective actions need to be taken.

Let’s note that a process with all the points in between the control limits is not necessarilysynonymous with acceptable process. A process can be in control with a high variability or too many ofthe plotted points are too close to one control limit and away from the target.

The following chart is a good example of an out of control process with all the points plottedwithin the control limits.

In this example, points A, B, C, D, E and F are all well within the limits but they do not behaverandomly, they exhibit a run up pattern, in other words they follow a steady (increasing) trend. Thecauses of this run up pattern need to be investigated because it might be the result of a problem withthe process.

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The interpretation of the control charts patterns is not easy and requires experience and know-how.

The Western Electric (WECO) Rules for making Control Charts

Western Electric put out a handbook in 1956 to determine the rules for interpreting the processpatterns. These rules are based on the probability for the points to plot at specified areas of the controlcharts.

A process is said to be out of control if the following occur:

A single point falls outside the 3 Sigma limit.

Two out of three successive points fall beyond 2 sigma limit.

Four out of Five successive points fall within 1 sigma or beyond from the mean.

Eight successive points fall on one side of the center line.

The WECO rules are very good guidelines for interpreting the charts but they need to be usedwith caution because they add sensitivity to the trends of the mean. When the process is out of control,production is stopped and corrective actions taken.

10.4.6.1 Types of control charts

Control chart are classified according to whether they monitor attribute data, variable data ormultivariate data.

(i) Attribute control charts

Attribute characteristics resemble binary data they can only take one of two given forms. Inquality control, the most common attribute characteristics used are “conforming” or “not conforming”,“good” or “bad”. Attribute data need to be transformed into discrete data to be meaningful.

The types of charts used for attribute data are:

The p –chart

The np –chart

The C-chart

The U –chart

(ii) P-chart

The P chart is very similar to the X-bar chart except that the statistic being plotted is the sampleproportion rather than the sample mean. Since the proportion deals with the percentage of successes,clearly the appropriate data for P charts needs to be attribute data where the outcomes for each trialcan be classified as either a success or a failure (conform or non-conform, yes or no, etc.). The subgroupsize must be equal so the proportion can be determined by dividing the outcome by the subgroup size.

1. The “p” comes from use of the proportion of nonconforming items.

2. Need a good definition of nonconforming items — usually a categorical definition.

3. Can of equal or unequal subgroups.

4. Normally need large subgroups - can even be to total for the period.

The p -chart is used when dealing with ratios, proportions or percentages of conforming or nonconforming parts in a given sample. A good example for a p - chart is the inspection of products on aproduction line. They are either conforming or nonconforming. The probability distribution used in this

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context is the Binomial distribution with p representing the non-conforming proportion and q (which isequal to 1 —p ) representing the proportion of conforming items. Since the products are only inspectedonce, the experiments are independent from one another.

The first step when creating a p -chart is to calculate the proportion of nonconformity for each sample.

pm

b

Where m represents the number of nonconforming items, b is the number of items in thesample and p is the proportion of nonconformity.

p = p1 + p2 + ..... + p3

k

Where is the mean proportion, k is the number of samples audited and Pk is the kth proportionobtained.

The control limits of a p -chart are:

And represents the center line.

(ii) np -chart

The np chart is one of the easiest to build. While the p -chart tracks the proportion of non-conformities per sample, the np chart plots the number of non-conforming items per sample.

The audit process of the samples follows a binomial distribution, in other words, the expectedoutcome is “good” or “bad”, and therefore the mean number of success is np.

The control limits for an np chart are as follow:

CL = np

(iii) The c -chart’

The c -chart monitors the process variations due to the fluctuations of defects per item or groupof items. The c -chart is useful for the process engineer to know not just how many items are notconforming but how many defects there are per item. Knowing how many defects there are on a givenpart produced on a line might in some cases be as important as knowing how many parts are defective.Here, non-conformance must be distinguished from defective items since there can be several non-conformances oil a single defective item.

LCL = 𝑃 - 3 𝑃(1−𝑃)

𝑛

UCL = 𝑃 + 3 𝑃(1−𝑃)

𝑛

UCL = n �� + 3 𝑛 �� ( 1 − ��)

LCL = n �� - 3 𝑛 �� ( 1 − ��)

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The probability for a nonconformance to be found on an item, in this case follows a Poissondistribution.

If the sample size does not change and the defects on the items are fairly easy to count, the c -chart becomes an effective tool to monitor the quality of the production process.

If C is the average nonconformity, the UCL and the LCL limits will be given as follow for a k -sigmacontrol chart:

Where c is the center line and k is the sigma level intended. The most commonly used sigmalevel is 3.

(iv) u- chart

One of the premises for a c -chart was that the sample sizes had to be the same. The samplesizes can vary when the u -chart is being used to monitor the quality of the production process and theu -chart does not require any limit to the number of potential defects. Furthermore, for a p -chart or annp -chart the number of non--conformances cannot exceed the number of items on a sample but for au -chart, it is conceivable since what is being addressed is not the number of defective items but thenumber of defects on the sample.

The first step in creating a u -chart is to calculate the number of defects per unit for each sample.

Where u represents the average defect per sample, c is the total number of defects and n is thesample size.

Once all the averages are determined, a distribution of the means is created and the next stepwill be to find the mean of the distribution, in other word, the grand mean.

Where k is the number of samples

The control limits are determined based on u and the mean of the samples n.

UCL = c - k √ 𝑐

CL = c

LCL = c - k √ 𝑐

u = 𝑐

𝑛

𝑢 = ( 𝑢1 + 𝑢2 +⋯ + 𝑢3)

𝑘

UCL = 𝑢 + 3 𝑢

𝑛

LCL = 𝑢 - 3 𝑢

𝑛

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(B) Variable Control Charts

Control charts monitor not only the means of the samples for Critical-To-Quality characteristicsbut also the variability of those characteristics. When the characteristics are measured as variable data,the , the S and R charts are used. These control charts are used more often and they are more efficientin providing feedback about the process performance.

The principle underlying the building of the control charts for variables is the same as the one ofthe attribute control charts. The whole idea is to determine the mean, the standard deviation and thedistance between the mean and the control limits based on the standard deviation.

But since we do not know what the process population mean and standard deviation are, wecannot just plug numbers to these formulas to obtain a control chart. The standard deviation and themean must be determined from sample statistics. The first chart we will use will be the S chart todetermine whether the process is stable or not.

(i) and S control Charts

The S chart is used to determine if there is a significant level of variability in the process, so itplots the standard deviations of the samples taken at regular intervals. A strong variation in the dataplots will indicate that the process is very unstable. Since 2 the population’s variance is unknown, itneeds to be estimated using the S2.

S

S2 = x2 - x

n-1

n-1

Therefore

S

1S2 = x2

- x S =n-1

n-1

k

for a number of k samples.

But using S as an estimator for would lead to a biased result. Instead c2 is used, where c2 is aconstant that depends only on the sample size n. If

S = c2

UCL = 𝑢 – 3 𝜎

√𝑛

CL = u

UCL = 𝑢 – 3 𝜎

√𝑛

S

n - 1

s

143

The mean expected of the standard deviation (which is also the Center Line) will be E1S1 = c3and the standard deviation of S is

So the control limits will be as follow:

UCL = c2

CL = c2

LCL = c2

These equations can be simplified using and B5 and B5.

B5 = c4 + 3

B5 = c4 - 3

Therefore,

UCL = B5

CL = c4

LCL = B5

Similarly

CL = S

These equations can be simplified

Therefore

UCL = B4 S

CL = S

LCL = B3 S

Sc

2

1 c24

1 c24

1 c24

1 c24

1 c24

UCL = S Sc

4

1 c24

UCL = S Sc

4

1 c24

B3 = 13c

4

1 c24

B4 = 13c

4

1 c24

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(ii) X and R charts

The building of X chart follows the same principle as for the one of attribute control charts withthe difference that quantitative measurements are considered for the Critical-To-Quality characteristicsinstead of qualitative attributes. Samples are taken and measurements of the means | X | for eachsample derived and plotted on the chart.

The center line (CL) is determined by averaging the | X |s.

Where n represents the number of samples.

The next step will be to determine the Upper Control Limit (UCL = x + k) and the lower ControlLimit ( LCL = x + k ). We have determined k to be equal to 3, the only remaining variable’ of this equationis <7 which can be determined in several ways. One way to do it would be through the use of the

standard error estimate and another one would be the use of the mean range.

There is a special relationship between the mean range and the standard deviationfor normallydistributed data.

Where the constant d2 is function of n.

(iii) Standard error based X chart

The standard error based chart is straight forward. Based on the Central Limit theorem, thestandard deviation used for the Control Limits is nothing but the standard deviation of the processdivided by the square root of the number of samples and we obtain:

UCL = x 3

CL = x

LCL = x 3

Since the process standard deviation is not known, in theory these formulas make sense but inactuality impractical. The alternative to that is the use of the mean range.

(iv) Mean Range based X control charts

When the sample sizes are relatively small |n d” 10 |the variations within sample are likely tobe small so the range (the difference between the highest and the lowest observe values) can be useden lieu et place of the standard deviation when constructing a control chart.

or R = d2 where R is called the relative range.

CL = X x

1 + x

2 + ..... x

n

n

c

4

R

d2

n

n

R

d2

145

The mean range is

Where R2 is the range of the kth sample.

Therefore the estimator of is and the estimator of so

UCL = x + R

CL = x

LCL x R

The formulas for the control limits become

UCL = x + A2 R

CL = x

LCL = x - A2 R

(v) R Chart

For an R chart, the center line will be R and the estimator of sigma is given as

Since , we can replace a with its value and therefore obtain

Therefore the control limits becomes:

UCL = D1 R

CL = R

LCL = D3 R


1. Define Statistical Process Control.

2. What are the benefits of Statistical Process Control?

3. Explain the tools Flow charts and control charts of Statistical Process Control

R1 - R

2 - ...... R

3

kR

R

d2

n

R

d2 n

=

3

d2 n

A2 =

3

d2 n

3

d2 n

R

Rd3

R

d2

d3 R

d2

R

andd3

d2

D3 = 1 ( d3

d2

D1 = 1 (

146

10.6 Summary:

Statistical Process Control (SPC) is a method of visually monitoring manufacturing processes. Itinvolves using statistical techniques to measure and analyze the variation in processes. There arevarious tools of Statistical Process Control- Flow charts, run charts, pareto charts, cause and effectdiagram, frequency histograms and control charts.

10.7 Glossary:

Statistical Process Control:Statistical process control (SPC) is a method of quality control whichemploys statistical methods to monitor and control a process. This helps to ensure thatthe process operates efficiently, producing more specification-conforming products with less waste(rework or scrap).

Flow charts:A flowchart is a visual representation of the sequence of steps and decisions neededto perform a process. Each step in the sequence is noted within a diagram shape. Steps are linked byconnecting lines and directional arrows.

Frequency:Frequency is the number of occurrences of a repeating event per unit of time. It isalso referred to as temporal frequency, which emphasizes the contrast to spatial frequency andangular frequency. The period is the duration of time of one cycle in a repeating event, so the period isthe reciprocal of the frequency.10.8 Answers to Self-Assessment Questions:

1. Refer to section (10.2)2. Refer to section (10.3)3. Refer to section (10.4)

10.9 Terminal Questions1. What is meant by Statistical Process control (SPC)?2. Name various tools for SPC.3. What are control charts? Give their applications in SPC.4. What is the difference between attribute control charts and variable control charts?5. Give various steps in preparing Control charts.6. How do you decide using a control chart that the process is out of control? Discuss.

10.10 Suggested Reading1. Pitt. H. (1994). SPC for the Rest of Us. Addison-Wesley.2. Wetherill, G.B and Brown, D. W. (1991). Statistical Process Control theory and practice. Chapman

and Hall.3. Wheeler. D.J. and Chambers. D.S. (1990). Understanding Statistical-Process Control. Addison-

Wesley.4. Grant, E.I. (1964), Statistical Quality Control. 3rd Edition. McGraw-Hill.5. Keats, J.B. and Monogomery, D.C. [eds.] (1991). Statistical Process Controls in Manufacturing.

Marcel Dekker.6. Kotz, S. and Johnson, N.L. (1993). Process Capability Indices. Champman and Hall.

*****

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Chapter-11Work Measurement & Method Study

Structure:


11.1 Introduction

11.2 Work Measurement

11.2.1 Need of Work Measurement

11.2.2 Work Measurement System

11.2.3 Work Measurement System Plan

11.2.4 Techniques of Work Measurement

11.2.5 Choosing a Measurement Technique

11.3 Labor Standard Types

11.4 Estimate of Efficient Operation Cost

11.5 Time Study

11.5.1 Leveled Time

11.5.2 Techniques of Leveled Time

11.5.3 PF&D Allowance (Personal, fatigue and delay allowance)

11.6 Measuring and Projecting Operation Efficiency

11.7 KAIZEN

11.8 Method Study

11.8.1 Purpose

11.8.2 The Method Study Procedure

11.9 Pre-determined Motion Time Systems

11.10 Total Productive Maintenance


11.12 Summary

11.13 Glossary






Definition and need of work measurement

Time study

KAIZEN

148

Method Study

Predetermined Motion Time Systems

Total Productive Maintenance

11.1 Introduction:

Work measurement is the process of establishing the time that a given task would take whenperformed by a qualified worker working at a defined level of performance. Method study is theprocess of subjecting work to systematic, critical scrutiny in order to make it more effective and moreefficient.

11.2 Work Measurement.

Work Measurement involves the use of labor standards to measure and control the time requiredto perform a particular task or group of tasks. Most often labor standards are developed and applied inmanufacturing operations; however labor standards can be used in estimating and managing the cost ofa vast variety of activities including engineering drafting, clerical administration, and janitorial services.

Work measurement is the process of establishing the time that a given task would take whenperformed by a qualified worker working at a defined level of performance.

11.2.1 Need of Work Measurement

The fundamental purpose of work measurement is to set time standards for a job. Such standardsarc necessary for four reasons:

To schedule work and allocate capacity. All scheduling approaches require some estimate ofhow much time it takes to do the work being scheduled.

To motivate the workforce and measuring workers’ performance. Measured standards areparticularly critical where output based incentive plans are employed.

To evaluate existing performance and bid for new contracts. Question such as “Can we do it?”and “how are we doing?” presume the existence of standards.

To use for benchmarking. Benchmarking teams regularly compare work standards in theircompany with those of similar jobs in other organizations.

Work measurement and its resulting work standards have been controversial since Taylor’stime. Much of this criticism has come from unions, which argue that management often sets standardsthat cannot be regularly achieved. There is also the argument that workers who find a better way ofdoing the job get penalized by having a revised rate set. Despite criticisms, work measurement andstandards have proved effective.

There are various ways in which work may be measured and a variety of techniques have beenestablished. The basic procedure, irrespective of the particular measurement technique being used,consists of three stages;

an analysis phase in which the job is divided into convenient, discrete components, commonlyknown as elements;

a measurement phase in which the specific measurement technique is used, to establish thetime required (by a qualified worker working at a defined level of performance) to completeeach element of work;

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a synthesis phase in which the various elemental times are added, together with appropriateallowances (see below), to construct the standard time for the complete job.

11.2.2 Work Measurement System: A Work Measurement System is a management system designed to:

Analyze the touch labor content of an operation;

Establish labor standards for that operation;

Measure and analyze variances from those standards; and

Continuously improve both the operation and the labor standards used in that operation.

11.2.3 Work Measurement System Plan. A Work Measurement System Plan is the firm’s program forimplementing, operating, and maintaining work measurement in its operations. It is the key to aneffective Work Measurement System with a defined system clear responsibility assignments. As aminimum, the Plan should provide guidance on:

Establishing and maintaining standard accuracy;

Conducting engineering analyses to improve operations;

Revising standards and related system data; and

Using labor standards as an input to budgeting, estimating, production planning, and performanceevaluation.

11.2.4 Techniques of Work Measurement

The techniques used to measure work can be classified into those that rely on direct observationof the work, and those that do not. For example, some techniques, such as predetermined motion-timesystems and the use of synthetic or standard data can provide times from simulation or even visualizationof the work. However, the data on which such techniques are based were almost certainly based onearlier observation of actual work.

(a) Direct observation techniques (such as time study and analytical estimating) include a process forconverting observed times to times for the “qualified worker working at a defined level of performance.”The commonest of these processes is known as rating.

This involves the observer (after appropriate training) making an assessment of the worker’srate of working relative to the observer’s concept of the rate corresponding to standard rating. Thisassessment is based on the factors involved in the work - such as effort, dexterity, speed of movement,and consistency. The assessment is made on a rating scale, of which there are three or four in commonusage. Thus on the 0-100 scale, the observer makes a judgment of the worker’s rate of working as apercentage of the standard rate of working (100).

The rating is then used (in a process known as “extension” in time study) to convert the observedtime to the basic time using the simple formula:

Basic time = observed time x observed rating/standard rating

Rating is regarded by many as a controversial area of measurement since it is a subjectiveassessment. Where different observers rate differently the resulting basic times are not comparable.However, practiced rating practitioners are remarkably consistent.

When carrying out work over a complete shift or working day, workers obviously suffer from thefatigue imposed both by the work undertaken and the conditions under which they are working. The

150

normal practice is to make an addition to the basic time (commonly referred to as an “allowance”) toallow the worker to recover from this fatigue and to attend to personal needs. The amount of theallowance depends on the nature of the work and the working environment, and is often assessedusing ah agreed set of guidelines and scales.

It is usual to allow some of the recovery period inherent in these allowances to be taken awayfrom the workplace (and it is essential in adverse working conditions). Thus, work design should includethe design of an effective work-rest regime. The addition of allowances should never be used tocompensate for an unsafe or unhealthy working environment.

In many jobs there are small amounts of work that may occur irregularly and inconsistently. It isoften not economic to measure such infrequent work and an additional allowance is added to coversuch work and similar irregular delays. This allowance is known as a contingency allowance and isassessed either by observation, by analysis of historical records (for such items as tool sharpening orreplacement), or by experience. The end result is a standard time which includes the time the work“should” take (when carried out by a qualified worker) plus additional allocations in the form ofallowances, where appropriate, to cover relaxation time, contingency time and, perhaps, unoccupiedtime which increases the overall work cycle ( such as waiting for a machine to finish a processing cycle).

11.2.5 Choosing a measurement technique

The choice of a suitable measurement technique depends on a number of factors including:

the purpose of the measurement;

the level of detail required;

the time available for the measurement;

the existence of available predetermined data;

and the cost of measurement.

To some extent there is a tradeoff between some of these factors.’ For example, techniqueswhich derive times quickly may provide less detail and be less suitable for some purposes, such as theestablishment of individual performance levels on short-cycle work.

The advantage of structured and systematic work measurement is that it gives a commoncurrency for the evaluation and comparison of all types of work. The results obtained from workmeasurement are commonly used as the basis of the planning and scheduling of work, manpowerplanning, work balancing in team working, costing, labour performance measurement, and financialincentives. They are less commonly used as the basis of product design, methods comparison, worksequencing, and workplace design.

11.3 Labor Standard Types

A labor standard is a measure of the time it should take for a qualified worker to perform aparticular operation. Labor standards are commonly grouped into two types:

Engineered standards are developed using recognized principles of industrial engineering andwork measurement. The standards developed define the time necessary for a qualified worker,working at a pace ordinarily used, under capable supervision, and experiencing normal fatigueand delays, to do a defined amount of work of specified quality when following the prescribedmethod. As a result, you can use engineered standards to examine contractor operations toestimate the number of labor hours that should be required to efficiently and effectively producea particular product and to identify any projected contractor variances from that estimate.

151

Non-engineered standards are developed using the best information available withoutperforming the detailed analysis required to develop engineered standards. Historical costsare commonly used standards that typically measure the hours that have been required tocomplete a task rather than the hours that should be required.

11.4 Estimate of Efficient Operation Cost

Standards provide information on what it should cost to complete an operation or series ofoperations in product production. Instead of applying pressure to improve in all areas, managers canuse this information to identify areas requiring particular management emphasis. The Acquisition Teamcan use that same information to identify inefficient operations for close scrutiny during contractnegotiations.

The log-log graph below presents a line-of-best-fit developed using actual labor- hour history.Note that this line follows the form of the improvement curve. Without labor standards, thefirm and the Government would likely project the improvement curve to estimate the laborhours required to produce future units.

Labor standards provide additional information that can be used in estimate development andanalysis. The vertical distance between the labor-hour history and the labor standard represents thevariance from the standard. Some of that variance may be related to inefficiencies that cannot beresolved. However, all elements should be targeted for identification and analysis. Key elementsinclude:

o Technical factors (e g., manufacturing coordination, engineering design changes, fitproblems, design errors, operation sheet errors, tooling errors, work sequence errors, andengineering liaison problems),

o Logistics (e.g., incorrect hardware and parts shortages),

o Miscellaneous factors (e.g.,’ unusual working’ conditions, excessive overtime, and excessivefatigue).

o Worker learning (e.g., familiarity with processes and methods).

• Variance analysis should identify, categorize, and develop plans to control all variances fromstandard. Plans will typically concentrate on the operations with the largest variances from standard,because these operations present the greatest opportunity for cost reduction.

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11.5 Time Study

Time study is a structured process of directly observing and measuring (using a timing device)human work in order to establish the time required for completion of the work by a qualified workerwhen working at a defined level of performance.

In performing a time study, industrial engineers (or other labor analysts) time the effort requiredto perform a defined task. While it may sound .simple, this is a complex process that requires specialtraining and experience. To perform a time study, the analyst must:

Clearly define and document the work design, including the best design of the work place,tools, tasks, and subtasks,

Select a person to be timed. The person selected should be receptive to being timed, experiencedin the work methods being used, and familiar with the tasks and subtasks of the work design.

Observe and record the time that the selected worker requires to perform each of the subtasksin the work design. Several observations are required to average out random variations andassure that, all elements of the work have been considered. The number of observations requiredwill increase as the confidence level desired by the analyst increases and as the variabilitybetween observed times increases.

Assign a pace rating based on an evaluation of how the ability and effort of the worker beingtimed compares with those of an average worker. Using the pace ratings, the analyst convertsobserved times into a leveled time for the subtask, o Total subtask times to develop a leveledtime for the entire task.

153

The observer first undertakes preliminary observation of the work (a pilot study) to identifysuitable elements which can be clearly recognized on subsequent occasions and are convenient, interms of their length, for measurement.

Subsequent studies are taken during which the observer times each occurrence of each element(using a stopwatch or other timing device) while at the same time making an assessment of the worker’srate of working on an agreed rating scale. (One of the prime reasons for measuring elements of work,rather than the work as a whole is to facilitate the process of rating. The rate at which a worker workswill vary over time; if elements are carefully selected, the rate of working should be consistent for therelatively short duration of the element. This assessment of rating is used to convert the observed timefor the element into a basic time - a process referred to as “extension”. It is essential that a time studyobserver has been properly trained in the technique and especially in rating.

Time study, when properly undertaken, involves the use of specific control mechanisms toensure that timing errors are within acceptable limits. Increasingly, timing is by electronic devicesrather than by mechanical stopwatch; some of these devices also assist in subsequent stages of thestudy by carrying out the process of “extending” or converting observed times into basic times.

The number of cycles that should be observed depends on the variability in the work and thelevel of accuracy required. Since time study is essentially a sampling technique in which the value ofthe time required for the job is based on the observed times for a sample of observations, it is possibleusing statistical techniques to estimate the number of observations required under specific conditions.This total number of observations should be taken over a range of conditions (where these are variable)and, where possible, on a range of workers.

Once a basic time for each element has been determined, allowances are added (for example,to allow the worker to recover from the physical and mental effects of carrying out the work) to derivea standard time.

Time study is a very flexible technique, suitable for a wide range of work performed under awide range of conditions, although it is difficult to time jobs with very short cycle times (of a fewseconds). Because if is a direct observation technique, it takes account of specific and special conditionsbut it does rely on the use of the subjective process of rating. However, if properly carried out itproduces consistent results and it is widely used. Additionally, the use of electronic data capture devicesand personal computers for analysis makes it much more cost effective than previously.

11.5.1 Leveled Time:

Leveled time is the time that a worker of average skill, making an average effort, under averageconditions, would take to complete the required task. There are a variety of techniques used in leveledtime development, but the four used most commonly are:

11.5.2 Techniques of leveled Times :

(i) Predetermined Leveled Times. Instead of using time study to develop a leveled time, theanalyst can use predetermined leveled times (also called predetermined standards or basic motionstandard data). Predetermined leveled times are established for basic body motions, such as reach,move, turn, grasp, position, release, disengage, and apply pressure. The analyst may obtain them frompublished standards in tabular or electronic forms, or the firm may develop its own. To use predeterminedleveled times, the analyst must:

154

o Clearly define and document the work design, including the best design of the work place,tools, tasks, and subtasks,

o Select and document the source of the predetermined leveled times,

o Identify and document the basic body motions involved in performing each subtask. Motionsfor each hand must be specifically identified. The need for precise measurement of complexbody motions for each job element may make this method of leveled time developmentinappropriate for complex tasks with long performance cycle times.

o Assign times to the body motions required to complete each subtask and total assigned timesto develop a leveled time for the subtask. Documentation should demonstrate that the accuracyof the original data base has not been compromised in application or standard development,

o Total subtask times to develop a leveled time for the entire task.

(ii) Standard Time Data: Standard time data (or elemental standard data) are developed forgroups of motions that are commonly performed together, such as drilling a hole or painting a squarefoot of surface area. Standard time data can be developed using time studies or predetermined leveledtimes. After development, the analyst can use the standard time data instead of developing an estimatefor the group of motions each time they occur.

o Typically, the use of standard time data improves accuracy because the standard deviations forgroups of motions tend to be smaller than those for individual basic motions. In addition, theiruse speeds standard development by reducing the number of calculations required,

o Estimate development using standard time data is much like using predetermined leveledtimes except that groups of motions are estimated as a single element instead of individualbody motions.

(iii) Work Sampling. Work sampling is commonly used to develop non-engineered standards. Itcannot be used alone to develop engineered standards. However, it can be used to supplement orcheck standard development by more the definitive techniques described above. For example, it canbe used to determine job content and assess productive vs. nonproductive time.

o In work sampling, analysis is based on a large number of random, rather than continuousobservations. Estimates are based the proportion of time spent by one or more persons on agiven activity. This is useful for jobs with irregular components that vary in the amount of timeper unit of output,

o To use work sampling in standard development, the analyst must:

o Identify and define activities involved in the work (through discussions with the workers andpreliminary observations),

o Develop the method(s) for observing and recording activities,

o Determine the sampling strategy (e.g., stratified) and number of observations (by time andplace).

o Record observed activities during each period,

o Consolidate and analyze the data.

o Use the data collected to develop non-engineered standards or to supplement development ofengineered standards.

155

11.5.3 PF&D Allowance

After the leveled time is developed, estimators must consider a personal, fatigue, and delay(PF&D) allowance.

Personal Allowance. A personal allowance considers time for a worker to take care of personalneeds, such as trips to the rest room and drinking fountain.

Fatigue Allowance. A fatigue allowance considers the time required to recuperate from fatigue.

Delay Allowance. A delay allowance covers unavoidable, predictable and unpredictable delaysfor such activities as replenishing materials, rejecting nonstandard parts, making minorequipment repairs, and receiving instructions. The allowance:

o Should consider delays inherent in the job, as well as the relationship between each job andadjacent jobs. The table below outlines some of the factors that - should be considered.

o Should not consider delays that can be prevented by the employee or for rework/repair ofsubstandard parts.

Special Allowances. Any proposed special allowance must be supported by detailed engineeringanalysis. An appropriate study should be conducted in each shop or functional area to ascertain anyrequirement for a separate delay allowance. The analyst should assure that there is no duplicationbetween cycle time elements and allowance elements and that the Special Allowance does not becomea dumping ground for operation activity that is not an integral part of shop work load.

Work elements such as cleaning chips from equipment, tool care, or tool replacement, thoughoccurring irregularly, should be measured and the time required prorated directly to the machineoperating portion of the work cycle rather than as an allowance.

Certain other irregularly occurring elements having a direct relationship to the job such asobtaining parts and materials arid periodic inspection should be added to the cycle time on aprorated basis or as a separate work element rather than added as an allowance.

When a special allowance is appropriate, the time required is first calculated in minutes andthen converted to a percentage. The base for calculating and applying the allowance percentage isnormally the sum of the leveled time and the PF&D allowance. Appropriate special allowances typicallyfall into two categories:

Those that consider elements that occur on an unforeseeable basis:

o Power failures of non-reportable duration,

o Minor repairs to defective parts,

o Waiting for a job assignment.

o Obtaining job information from a supervisor, inspector, or production control specialist.

o Unsuccessful hunt for parts or materials,

o Machine breakdown of non-reportable duration.

Those that consider elements that occur periodically (daily, weekly, hourly) such as:

o Cleaning and lubricating equipment,

o Work area clean-up.

156

Applying an Allowance to Leveled Time

Allowances are normally expressed as a percentage of standard time spent unproductively(e.g., a 15 percent PF&D Allowance indicates that 15 percent of the worker’s standard time is spentunproductively). To apply an allowance, the analyst must determine how much the leveled time mustbe increased to allow for the unproductive time. This is accomplished by dividing the leveled time bythe percentage of time spent productively.

Where:

Ts = Standard time

TL = Leveled time

APF&D = PF&D allowance in decimal form

For example: The leveled time for a particular task is 170 minutes, the PF&D Allowance is 15percent, and there is no special allowance. The standard time would be calculated as:

= 200 minutes

Note: The leveled time is 85 percent of the standard time (85% of 200 is 170). The remaining 15percent of the standard time (15% of 200 minutes is 30 minutes) is the allowance for personal, fatigue,and delay factors.

11.6 Measuring and Projecting Operation Efficiency

(i) Comparing Labor Standard with the Actual Time

Standards represent goals for efficient operation. Tasks are rarely completed in the allowedstandard time. Work Measurement Systems commonly use realization or efficiency factors, to evaluatehow the actual time required to complete a task compares with the-standard time for that task.. Analystscan then use these measures to identify tasks that require special analysis to identify and correctinefficient operations.

Since estimators strive to estimate realistic contract costs, they use realization or efficiencyfactors with labor standards to estimate future labor hours required to complete the task.

(ii) Calculating a Realization Factor

A realization factor is generally a measure of overall performance (e.g., shop, product line, orplant). It will normally be calculated from historical data as:

Ts =

TL

1.00 APD&D

Ts =

TL

1.00 APD&D

=170

1.00 15

=170

.85

157

Where:

FR = Realization factor

TA = Actual time to perform the work

Ts = Standard hours for the task

R = Repetitions of the task included in the work

For example: A task has a standard time of 1.5 hours. Actual time to perform the task 100 times is 300hours. The realization factor would be calculated as follows:

= 2.00

In the above example, actual experience shows that the work takes twice as many hours as thestandard time indicates.

(iii) Developing an Estimate Using a Realization Factor

The estimator can use the standard time and realization factor to develop a realistic labor-hour-estimate.

For example. An estimate of the actual time to complete the task above for 50 units would becalculated as:

Y = TS x R x FR

= 1.5 x 50 x 2.00

= 150 labor hours

Where:

Y = Estimated hours

All other symbols are as defined above

(iv) Calculating an Efficiency Factor.

An efficiency factor is calculated to demonstrate efficiency against the standard (e.g., a taskwith an efficiency factor of .60 is being performed at 60 percent efficiency). The factor is normallycalculated:

Fs =

TA

TS x R

FR =

TL

TS x R

=300

1.5 x 100

=300

150

FE =

Ts x R

TA

158

Where:

FE = Efficiency factor

All other symbols are as defined above

For example. A task has a standard of 1.8 hours. Actual time to perform the task 100 times is 400hours. The efficiency factor would be calculated as follows:

= .45 or 45 percent efficiency

(v) Developing an Estimate Using an Efficiency Factor. The estimator can use the standard time andefficiency factor to develop a realistic labor-hour estimate.

For example. An estimate of the time to complete the task above for 50 units would be calculatedas:

= 200 labor hours

(vi) Analyzing Realization and Efficiency Factors:

Analysis of labor estimates developed using labor standards requires extensive knowledge andexperience. Even skilled industrial engineers typically require special training in work measurementanalysis.

For each standard, offerors should be required to provide information on internal analyses ofthe variance between the actual time required to complete the work and the standard time to determinethe causes for the variance and identify ways of managing performance improvement.

Offeror’s should demonstrate continued improvement in realization and efficiency factors.The figure below depicts some of the reasons for that improvement.

At Unit # 1, total labor-hours include substantial inefficiencies related to technical, logistics,learning, and other factors.

As production increases, there should be reductions in all areas of inefficiency. In most cases,there should also be an improvement in the labor standard itself, as better production methodsare identified and implemented.

By Unit # 1000 the contractor should be operating efficiently, with only minor inefficienciesrelated to such factors as unavoidable parts shortages.

FE =

TS

x R

TA

=1.8 x 100

400

=180

400

Y =T

S x R

FE

=1.8 x 50

.45

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Typical Variances from Standard during a Production Program

However, improvement will not automatically follow this pattern. Effective analysis andmanagement effort are required. Even when these are present, improvement may be hampered byfactors such as repeated changes in design or production methods. Still, the goal of both the contractorand the Government should be continuous improvement. Even when operations are being performedat or close to standard, the contractor should be searching for methods improvements that will reducecosts and improve overall efficiency.

(vii) Projecting Realization and Efficiency Factors. Be cautious of any estimate for continuous productionthat does not consider variance reduction following the improvement curve. Continuous improvementis one of the reasons for using labor standards, because standards provide detailed information on theareas that offer the greatest opportunity for improvement.

Improvement curves and moving averages are commonly used to project variation from laborstandards. Either technique can be acceptable depending on the situation. Technical assistance can bevery valuable in evaluating offeror forecasts.

(a) Improvement Curves. Using an improvement curve to track and project variance from a labor standardassumes that the variance is related to the number of units produced. As more units are produced, thevariance is expected to decline following improvement curve theory.

(b) Moving Averages: Firm’s often use moving averages to track and project variance from a laborstandard when the variance is not expected to follow an improvement curve. This assumption is oftenvalid when product production is not continuous or there are frequent changes in design or productionmethods.

While moving averages are an acceptable way to track and project variances, do not forget thata firm could be using a moving average to hide 3 downward trend in the data. That is particularlytrue in cases where the firm proposes a single moving average calculated over a large numberof periods.

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Government technical personnel can provide invaluable assistance in assuring that averagesare not masking a trend in the data and that data from one or two periods are not undulyaffecting the average.

11.7 KAIZEN

KAIZEN is a Japanese word meaning gradual and orderly, continuous improvement. AdoptingKAIZEN involves the creation of a culture of sustained continuous improvement focusing on eliminatingwaste in all systems and processes of an organization. There are two essential elements that make upKAIZEN:

improvement/change for the better; and

ongoing/continuity.

A system/culture that lacks either of these is not true KAIZEN. Thus, maintaining existing waysof working (good though they may be) lacks the essential ‘improvement’ element, though it ensurescontinuity. Similarly, ‘breakthrough’ improvement, not backed up by effective ongoing improvement,lacks the element of continuity. KAIZEN should contain both elements.

KAIZEN achieves its effects by working through people. All are expected to be involved. Managers, forexample, are expected to spend about half their time on improving what they - and those for whomthey are responsible - do.

Traditionally, a Japanese Samurai carried seven tools into battle. After World War II the Japaneseadopted ‘quality’ as a philosophy for economic recovery and, in line with this traditional approach,sought seven tools to accomplish the economic rejuvenation. The seven tools chosen were:

Histograms

Cause and Effect Diagrams

Check Sheets

Pareto Diagrams

Graphs

Control Charts

Scatter Diagrams

These tools were largely developed as aids within the process of statistical quality control. Allpersonnel are trained to use them - and the resulting charts and diagrams are displayed prominently.

KAIZEN recognizes that improvements can be small or large. Many small improvements canmake a big change - so KAIZEN works at a detailed level.

The principles/approach behind KAIZEN are:

1. Discard conventional fixed ideas.

2. Think of how to do it, not why it cannot be done.

3. Do not make excuses. Start by questioning current practices.

4. Do not seek perfection. Do it right away even if it will only achieve 50% of target.

5. If you make a mistake, correct it right away.

6. Throw wisdom at a problem, not money.

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7. Ask ’WHY?” five times and seek root causes.8. Seek the wisdom of ten people rather than the knowledge of one.9. Don’t ask workers to leave their brains at the factory gate.

KAIZEN is thus a (relatively) low cost, simple, team-based approach. Team are trained in thetechniques and tools of KAIZEN. They then brainstorm improvement ideas and vote on them for priorityaction. They then create an action/implementation plan which is submitted to management for approval.Assuming it is approved, the team then, sets about implementation (with professional help ifappropriate). The team then meets weekly to review progress, identify/overcome barriers, celebratesuccesses, and document the resulting changed processes.11.8 Method Study

Method study is the process of subjecting work to systematic, critical scrutiny in order to makeit more effective and/or more efficient. It was originally designed for the analysis and improvement ofrepetitive, manual work, but it can be used for all types of activity at all levels of an organization.

According to the British Standards Institute BS3138, 1992, Glossary of terms used in ManagementServices, Term 11007, method study is “The systematic recording and critical examination of ways ofdoing things in order to make improvements.” Its “Method Study Sequence” diagram is a usefulillustration of the procedures.11.8.1 Purpose

The aim of method study is to analyze a situation, examine the objectives of the situation andthen to synthesize an improved, more efficient and effective method or system.11.8.2 The Method Study procedure

The basic procedure was first developed and articulated by Russell Currie at Imperial ChemicalIndustries (ICI) and consists of six steps (SREDIM):

1. SELECT the work or area to be studied.2. RECORD all appropriate and relevant data about the current situation.3. EXAMINE critically, the recorded data.4. DEVELOP alternative approaches to making improvements and choose the most appropriate.5. INSTALL the new method, to make the required changes to the situation.6. MAINTAIN that new situation.

The problem with expressing the procedure in such a simple manner is that undertaking amethod study appears to be a simple, linear and mechanistic process. This description in six steps doeshowever serve to show the underlying simplicity of the concept of method study. In practice, theprocedure consists of a cyclical or iterative process in which each step may be revisited according to thefindings of subsequent steps. For example, collecting data about a current situation often enables us todiscover the reality behind our first perceptions and thus to refine our selection of what we areaddressing. Similarly, when we start to examine data, we sometimes become aware that data aremissing or incomplete and we need to go back and collect (record) additional data. This cyclic processoften begins with a rough first pass, in which preliminary data are collected and examined, and progressesto a more detailed and thorough pass which results in the collection of more detailed and more completedata which is the subject of a more rigorous scrutiny. The method study procedure is thus a convenientrepresentation of what may be a complex process.

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The cyclic process often starts with a quick, rough pass in which preliminary data are collectedand examined, before subsequent passes provide and handle more comprehensive and more detaileddata to obtain and analyze a more complete picture.

In the Select stage, work is selected for method study on the basis of it being an identifiedproblem area of an identified opportunity (resulting from a Systematic review of available data, normalmonitoring or control processes, high levels of dissatisfaction and complaint or as part of a management-derived change in policy, practice, technology or location), and usually because it meets certain conditionsof urgency and/or priority.

Before any method study investigation is begun, it is necessary to establish clear terms ofreference which define the aims, scale, scope and constraints of the investigation. This should alsoinclude an identification of who “owns” the problem or situation and ways in which such “ownership” isshared. This may lead to a debate on the aims of the project, on reporting mechanisms and frequencies,and on the measures of success. This process is sometimes introduced as a separate and distinct phaseof method study, as the “define” stage. It leads to a plan for the investigation which identifies appropriatetechniques, personnel, and timescale.

The Record stage of method study is to provide sufficient data (in terms of both quality andquantity) to act as the basis of evaluation and examination. A wide range of techniques are available forrecording; the choice depends on the nature of the investigation and the work being studied, and onthe level of detail required. Many of the techniques are simple charts and diagrams, but these may besupplemented by photographic and video recording, and by computer based techniques.

Especially with “hard” (clearly defined) problems, method study often involves the constructionand analysis of models, from simple charts and diagrams used to record and represent the situation tofull, computerized simulations. Manipulation of and experimentation on the models leads to ideas fordevelopment.

The recorded data are subjected to examination and analysis; formalized versions of this processare critical examination and systems analysis. The aim is to identify, often through a structured,questioning process, those points of the overall system of work that require improvements or offeropportunity for beneficial change.

The Examine stage merges into the Develop stage of the investigation as more thorough analysisleads automatically to identified areas of change. The aim here is to identify possible actions forimprovement and to subject these to evaluation in order to develop a preferred solution.

Sometimes it is necessary to identify short-term and long-term solutions so that improvementscan be made “(relatively) immediately, while longer-term changes are implemented and come tofruition.

The success of any method study project is realized when actual change is made ‘on the ground’- change that meets the originally specified terms of reference for the project. Thus, the Install phase isvery important. Making theoretical change is easy; making real change demands careful planning - andhandling of the people involved in the situation under review. They may need reassuring, retrainingand supporting through the acquisition of new skills. Install, in some cases .will require a parallelrunning of old and new systems, in others, it may need the build-up of buffer stocks, and in others whatmatters is that the introduction of new working methods is successful. There is often only one chanceto make change!

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Sometime after the introduction of new working methods, it is necessary to check that the newmethod is working, that it is being adhered to, and that it has brought about the desired results. This isthe Maintain phase. Method drift is common - when people start to either revert to old ways of working,or introduce new changes. Some of these may be helpful (and should formally be incorporated); othersmay be inefficient or unsafe. A methods audit can be used to formally compare practice with thedefined method and identify such ‘irregularities’.

11.9 Predetermined Motion Time Systems

Predetermined motion time systems (PMTS) are work measurement systems based on theanalysis of work into basic human movements, classified according to the nature of each moyementand the conditions under which it is made. Tables of data provide a time, at a defined rate of working,for each classification of each movement.

The first PMTS (since designated as “first-level” systems) were designed to provide times fordetailed manual work and thus consisted of fundamental movements (reach, grasp, move, etc) andassociated times.

Large amounts of research, data collection, analysis, synthesis, and validation are required toproduce PMTS data and the number of such systems is very low. “Higher level” systems have since beendevised, most commonly by combining these fundamental movements into common, simple manualtasks. Such higher level systems are designed for faster standard setting of longer cycle activity.

Criticisms of PMTS relate to their inability to provide data for movements made under “unnatural”conditions (such as working in cramped conditions or with an unnatural body posture) or for mentalprocesses and their difficulty in coping with work which is subject to interruptions. However, varioussystems have been derived for “office work,” which include tasks with a simple and predictable mentalcontent.

Conversely, one of the significant advantages of PMTS is that they require a detailed descriptionof the working method - and are thus useful for studying how work is done (and how it can be improved)as well as measuring the time it should take.

Many PMTS are proprietary systems and users must either attend a designated and approvedtraining course and/or pay a royalty for use of the data.

One of the major PMTS systems is MTM (Methods-Times Measurement) which is actually a‘family’ of systems operating at different levels and applicable to different types of work. MTM1 - the‘highest-level’ or most detailed member of the family - was developed in the 1940s by analyzing largenumbers of repetitive cycles of manual work on film. MTM gives values for such basic hand/arm motionsas: Reach Move, Turn, Grasp, Position, Disengage, and Release, together with a small set of full bodymotions. The time taken to Reach to an object is then given by a table based on the kind of Reach (e.g.whether the object is in a fixed location - such as a tool in a tool holder - or is a single object located ona bench, or jumbled together with other objects, etc.) and the distance to be Reached. Similar tablesgive times for each of the other basic movements categorized and measured similarly. MTM is suitablefor measuring short cycle, highly-repetitive work. Other members of the MTM family use lower levelmotions (so that in MTM2, for example, the MTM1 motions of Reach and Grasp are combined into acomposite motion, GET). MTM2 is thus quicker to apply, but more suited to longer-cycle work where thefine level of discrimination of MTM 1 is unnecessary in terms of meeting accuracy requirements.

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11.10 Total Productive Maintenance

Total productive maintenance (TPM) is the systematic execution of maintenance by all employeesthrough small group activities.

The dual goals of TPM are zero breakdowns and zero defects; this obviously improves equipmentefficiency rates and reduces costs. It also minimizes inventory costs associated with spare parts.

It is claimed that most companies can realize a 15-25 percent increase in equipment operationrates within three years of adopting TPM. Labor productivity also generally increases by a significantmargin, sometimes as high as 40-50 percent.

The Japanese imported preventive maintenance (PM) from the United States in the 1950s and itremained well established until the 1970s. This consisted mainly of time-based maintenance featuringperiodic servicing and overhaul. During the 1980s PM was steadily replaced by predictive maintenance,or condition-based maintenance. TPM is often defined as productive maintenance involving totalparticipation - a kind of marriage between PM and TQM. Many organizations misconstrue this to implythat only shop floor staffneed be involved. However, TPM should be implemented on a company-widebasis.

TPM aims to establish good maintenance practice through the pursuit of “the five goals of TPM”:

(1) Improve equipment effectiveness: examine the effectiveness of facilities by identifying andexamining all losses which occur - downtime losses, speed losses and defect losses.

(2) Achieve autonomous maintenance: allow the people who operate equipment to takeresponsibility for, at least some, of the maintenance tasks. This can be at:

• The repair level (where staff carry out instructions as a response to a problem);.

o The prevention level (where staff take pro-active action to prevent foreseen problems); andthe.

o Improvement level (where staff not only takes corrective action but also propose improvementsto prevent recurrence).

(3) Plan maintenance: have a systematic approach to all maintenance activities. This involves theidentification of the nature and level of preventive maintenance required for each piece ofequipment, the creation of standards for condition-based maintenance, and the setting of’respective responsibilities for operating and maintenance staff. The respective roles of“operating” and “maintenance” staff are seen as being distinct. Maintenance staff are seen asdeveloping preventive actions and general breakdown services, whereas operating staff takeon the “ownership” of the facilities and their general care. Maintenance staff typically moveto a more facilitating and supporting role where they are responsible for the training ofoperators, problem diagnosis, and devising and assessing maintenance practice.

4. Train all staff in relevant maintenance skills: the defined responsibilities of operating andmaintenance staff require that each has all the necessary skills to carry out these roles. TPMplaces a heavy emphasis on appropriate and continuous training.

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5. Achieve early equipment management: the aim is to move towards zero maintenance through“maintenance prevention” (MP). MP involves considering failure causes and the maintainabilityof equipment during its design stage, its manufacture, its installation, and its commissioning.As part of the overall process, TPM attempts to track all potential maintenance problems backto their root cause so that they can be eliminated at the earliest point in the overall design,manufacture and deployment process.

TPM works to eliminate losses:

Downtime from breakdown and changeover times

Speed losses (when equipment fails to operate at its optimum speed)

Idling and minor stoppages due to the abnormal operation of sensors, blockage of work onchutes, etc.

Process defects due to scrap and quality defects to be repaired

Reduced yield in the period from machine start-up to stable production.


1. What is the need of Work Measurement?

2. Explain the terms time study and method study.

3. Write a short note on KAIZEN.

11.12 Summary:

Work measurement involves the use of labor standards to measure and control the time requiredto perform a particular task or group of tasks. It is the process of establishing the time that a given taskwould take when performed by a qualified worker at a defined level of performance. The fundamentalpurpose of work measurement is to set time standards for a job. The mainly used technique to measurework is direct observation techniques.

Time study is a structured process of directly observing and measuring human work in order toestablish the time required for completion of the work by a qualified worker when working at a definedlevel of performance. Method study is the process of subjecting work to systematic, critical scrutiny inorder to make it more effective and more efficient.

11.13 Glossary:

Work measurement: Work measurement is the process of establishing the time that a giventask would take when performed by a qualified worker working at a defined level ofperformance.

Operation Cost: Operating costs are expenses associated with the maintenance andadministration of a business on a day-to-day basis. The total operating cost for a company includesthe cost of goods sold, operating expenses as well as overhead expenses.

Labor Standard: A labor standard is the amount of labor time that is expected for the completionof a task. It is sometimes referred to as the standard labor rate. The labor standard concept isused when planning how many employees to assign to a task, which is part of the budgeting andplanning processes.

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KAIZEN: Kaizen is a concept referring to business activities that continuously improve allfunctions and involve all employees from the CEO to the assembly line workers.

Time Study: Time study is a structured process of directly observing and measuring humanwork using a timing device to establish the time required for completion of the work by aqualified worker when working at a defined level of performance.

Method Study: Method study is a systematic method of analyzing the method of doing a jobincluding human movements involved in it. So it is the process of analyzing the methods involvedin work flow to increase productivity. It deals with doing the work in a better way, with less timeand effort.



2. Refer to section (11.5 & 11.8)



1. Discuss the role of time study, work sampling and other techniques in designing jobs.

2. Name three uses of work sampling.

3. Define work measurement. What is the universal unit of measure in work measurement?

4. What is KAIZEN? How is it important?

5. What do you mean by Total Productivity Maintenance? What are the five goals of TPM?

6. What are Predetermined Motion Time Systems?

7. What are the various phases of work measurement? Discuss.

8. What is meant by time study? Give various steps in time study.


1. Nakajima, S. (1988). Introduction to Total Productive Maintenance. Cambridge, MA: ProductivityPress.




*****

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Chapter-12Facilities Location and Layout

Structure:


12.1 Introduction

12.2 Facility Location

12.2.1 Factors Affecting Location Decisions

12.2.1.1 Dominant Factors in manufacturing

12.2.1.2 Dominant Factors in Servicing

12.2.2 Decisions regarding site selection

12.2.3 Comparing several sites

12.2.4 Methods for Location Site Selection

12.3 Plant Layout

12.3.1 Objectives of Layout Decisions

12.3.2 Layout Types


12.5 Summary

12.6 Glossary




12.0 Learning Objective


Facility Location

Factors Affecting Location Decisions

Plant Layout

Types of layout

a. Process layout

b. Product layout

c. Fixed position layout

d. Hybrid layout

e. Models for Plant layout

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12.1 Introduction:

Plant location or facilities location problem is an important strategic level decision making foran organization. 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 materialsand many other factors that influence the choice of the location decision. Facility layout is an arrangementof different aspects of manufacturing in an appropriate manner as to achieve desired production results.

12.2 Facility Location

Facilities are defined as collection of static resources required for the operation. Facility locationproblems are applicable in two basic situations

entirely new business

case of existing business

In case of existing business facility locations are sought either

To expand the capacity

To replace the existing facilities

The general facility location problem is: given a set of facility locations and a set of customers who areserved from the facilities then:

which facilities should be used

which customers should be served from which facilities so as to minimize the total cost ofserving all the customers.

Typically here facilities are regarded as “open” (used to serve at least one customer) or “closed”and there is a fixed cost which is incurred if a facility is open. Which facilities to have open and whichclosed is our decision.

Below we show a graphical representation of the problem.

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Replacement of existing facilities may be taken due to one or more of the following reasons;

The movement of markets, i.e. changes in the location of demand.

Changes in the cost or availability of local labor.

Demolition or compulsory purchase of premises.

Changes in the availability and effectiveness of transport.

Relocation of associated industry or plant.

• National legislation (legislation relating to the investment allowances, depreciation, etc. may influencecompany financial policy enough to affect the scale or the nature of the undertaking or legislationrelating to labor may necessitate a change in nature or extent of facilities.

Or changes in interest rates may affect the cost of holding stocks, which in turn causes a change in stockholding policy, which in turn effects the space requirements)

12.2.1 Factors Affecting Location Decisions

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

Location factors can be divided into two categories: -

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Dominant factors, and Secondary factors

Dominant factors are those derived from competitive priorities (cost, quality, time, andflexibility) and have a particularly strong impact on sales or costs. Secondary factors also are important,but management may downplay or even ignore some of them if other factors are more important.

Eleven location conditions can be distinguished:

Transportation facilities

Materials

Markets

Labor

External Economies

Energy

Community Infrastructure

Capital, Land

Environment and Government policy

(i) Materials, markets and transportation

Factories which produce products for different markets usually are threatened by transportationcosts. These costs include procurement costs, i.e. the costs considered for bringing raw materials orsemi products to the company. On the other hand the finished products needs to be distributed to themarkets, which incurs distribution costs. Therefore locations near inputs lower procurement costs andlocations near markets lower distribution costs. Transportation costs comprise direct freight charges,while transfer costs refer to both direct costs and indirect costs such as insurance costs and lossesresulting from damage in transit. Basically transportation costs are determined by physical characteristicslike value of product and quantity of goods on the one hand and are determined also by freight rates onthe other hand. Consequently, average transport costs decline significantly with .distance.

(ii) Labor

Labor costs comprise wages and non-wage benefits, like contributions to medical plans, vacationtime and pay, and pension schemes. Labor costs vary by industry, country, region, unionized and non-unionized sectors. Tremendous differences in labor costs can be seen between countries with highwages like developed countries on the on hand, and low developed countries like China, India and soon, ,on the other hand. But even among high developed countries labor costs can vary.

(iii) External economies of scale

External economies of scale can be described as urbanization and vocational economies ofscale. It refers to advantages of a company by setting up operations in a large city while the second onerefers to the “settling down” among other companies of related Industries. In the case of urbanizationeconomies, firms derive from locating in larger cities rather than in smaller ones in a search of havingaccess to a large pool of labor, transport facilities, and as well to increase their markets for selling theirproducts and have access to a much wider range of business services.

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Location economies of scale in the manufacturing sector have evolved over time and havemainly increased competition due to production facilities and lower production costs as a result oflower transportation and logistical costs. This led to manufacturing districts where many companies ofrelated industries are located more or less in the same area.

(iv) Energy

Energy sources were a significant factor of location before the Industrial Revolutions. Companiesneeded access to water energy, electricity for. their operations. Now electricity and other energy sourceslike oil can be transformed and shipped very easily and cheaply and therefore Energy as being a mainfactor of location has decreased in its meaning.

All of us are a part of the community and society in general. Thus, the factors given below alsoassume grave significance.

(v) Community infrastructure and amenity

All manufacturing activities require access to a community infrastructure, most notably economicoverhead capital, such as roads, railways, port facilities, power lines and service facilities and socialoverhead capital like schools, universities and hospitals.

These factors are also needed to be considered by location decisions as infrastructure isenormously expensive to build and for most manufacturing activities the existing stock of infrastructureprovides physical restrictions on location possibilities. But on the other hand it is worth to mentioningthat existing infrastructure does not cause” industry to occur.

(vi) Capital

By looking at capital as a location condition, it is important to distinguish the physiology of fixedcapital in buildings and equipment from financial capital. Fixed capital costs as building and constructioncosts vary from region to region. But on the other hand buildings can also be rented and existing plantscan be expanded. Financial capital is highly mobile and does not very much influence decisions. Forexample, large Multinational Corporations such as Coca-Cola operate in many different countries andcan raise capital where interest rates are lowest and conditions are most suitable. Capital becomes amain factor when it comes to venture capital. In that case young, fast growing (or not) high tech firmsare concerned which usually have not many fixed assets. These firms particularly need access to financialcapital and also skilled educated employees (i.e. Silicon Valley).

12.2.1 Dominant factors in manufacturing

Factors dominating location decisions for new manufacturing plants can be broadly classified insix groups. They are listed in the order of their importance as follows.

1. Favor able labor climate

2. Proximity to markets

3. Quality of life

4. Proximity to suppliers and resources

5. Proximity to the parent company’s facilities

6. Utilities, axes, and real e state costs

Let us consider each of these factors one by one.

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Factors affecting Manufacturing

Resources Local conditions

Labor skills and productivity Community receptivity to business

Land availability and cost Construction costs

Raw materials Organized industrial complexes

Subcontractors Quality of life: climate housing, recreation,schools etc.

Transportation facilities (highways, rail, Taxes

air and water)

Proximity to market

Utility availability and rates

Proximity to parent company’s facilities

(i) Favorable labor climate

A favorable labor climate may be the most important factor in location decisions for labour-intensive firms in industries such as textiles, furniture, and consumer electronics. Labour climate includeswage rates, training requirements, attitudes toward work, worker productivity, and union strength.Many executives consider weak unions oral low probability of union organizing efforts as a distinctadvantage.

(ii) Proximity to markets

After determining where the demand for goods and services is greatest, management mustselect a location for the facility that will supply that demand. Locating near markets is particularlyimportant when the final goods are bulky or heavy and outbound transportation rates are high. Forexample, manufacturers of products such as plastic pipe and heavy metals all emphasize proximity totheir markets.

(iii) Quality of life

Good schools, recreational facilities, cultural events, and an attractive lifestyle contribute toquality of life. This factor is relatively unimportant on its own, but it can make the difference in locationdecisions.

(iv) Proximity to suppliers and resources

In many companies, plants supply parts to other facilities or rely on other facilities formanagement and staff support. These require frequent coordination and communication, which canbecome more difficult as distance increases.

(v) Utilities, taxes, and real estate costs

Other important factors that may emerge include utility costs (telephone, energy, and water),local and state taxes, financing incentives offered by local or state governments, relocation costs, andland costs.

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(vi) Other factors

There are some other factors needed to be considered, including room for expansion,construction costs, accessibility to multiple modes of transportation, the cost of shuffling people andmaterials between plants, competition from other firms for the workforce, community attitudes, andmany others. For global operations, firms are emphasizing local employee skills and education and thelocal infrastructure.

12.2.2 Dominant factors in services

Proximity to customers

Transportation costs and proximity to markets

Location of competitors

Site specific factors include (retail activity, residential density, traffic flow, and site visibility)

The factors considered for manufacturers are also applied to service providers, with oneimportant addition - the impact of location on sales and customer satisfaction. Customers usually lookabout how close a service facility is, particularly if the process requires considerable customer contact.

(i) Proximity to customers

Location is a key factor in determining how conveniently customers can carry on business witha firm. For example, few people would like to go to remotely located dry cleaner or supermarket ifanother is more convenient. Thus the influence of location on revenues tends to be the dominantfactor.

(ii) Transportation costs and proximity to markets

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

(iii) Location of competitors

One complication in estimating the sales potential at different location is the impact ofcompetitors. Management must not only consider the current location of competitors but also try toanticipate their reaction to the firm’s new location. Avoiding areas where competitors are already wellestablished often pays. However, in some industries, such as new-car sales showrooms and fast-foodchains, locating near competitors is actually advantageous. The strategy is to create a critical mass,whereby several competing firms clustered in one location attract more customers than the total numberwho would shop at the same stores at scattered locations. Recognizing this effect, some firms use afollow the leader strategy when selecting new sites.

(iv) Site-specific factors

Retailers also must consider the level of retail activity, residential density, traffic flow, and sitevisibility. Retail activity in the area is important, as shoppers often decide on impulse to go shopping orto eat in a restaurant. Traffic flows and visibility are important because businesses’ customers arrive incars. Visibility involves distance from the street and size of nearby buildings and signs. High residentialdensity ensures nighttime and weekend business when the population in the area fits the firm’scompetitive priorities and target market segment.

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Factors affecting locational choice

Political stability

Relevant legislation e.g. industrial relations

Unionization of labor

Feasibility of joint operations

Capital restrictions

Transfer of earnings restrictions

Taxation of foreign firms

Currency restrictions

GNP trends

Foreign investment trends

Restrictions on foreign labor/ staff

Climate

Language

Management preference

Location of company’s existing facilities

Availability of suitable area

Cost of living

Standard of Living

Location of markets

Location of suppliers

Proximity to, related industries

Labor availability and skills

Unemployment, turnover ad absenteeism

Pay levels and scales

Planning and development restrictions

Tax structures and incentives

Environmental controls

Communications (international, national and local)

Transport (air, rail, road, other)

Availability of suitable communities

Land availability and cost

Availability of premises

Cost of land

Cost of buildings

Rents of premises

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Cost of services

Zoning and planning restrictions

Availability of utilities

Availability of amenities

Availability of education and training

Community attitude and culture

Energy availability

Energy costs

Impact of environment

Development plans

Availability of subcontractors

Availability of suitable sites

Site characteristics

Availability of adjacent spaces

Transport access Parking space

Local transport provisions

Facilities for waste disposal

12.2.2 Decisions regarding site selection

Management must first decide whether to expand on site, build another facility, or relocate toanother site. The advantages of building a new plant or moving to a new retail or office space are thatthe firm does not have to rely on production from a single plant, can hire new and possibly moreproductive labour, can modernize with new technology, and can reduce transportation costs.

Before selecting a site, several issues must be examined from different angles and their relativemerits and de-merits should be properly examined.

12.2.3 Comparing several sites

The process of selecting a new facility location involves a series of steps.

1. Identify the important location factors and categorize them as dominant or secondary.

2. Consider alternative regions: then narrow the choices to alternative communities and finallyto specific sites.

3. Collect data on the alternatives, from location consultants, state development agencies, cityplanning departments, chambers of commerce, land developers, electric power companies,banks, and on-site visits.

4. Analyze the data collected, beginning with the quantitative factors- factors that can bemeasured in rupees, such as annual transportation costs or taxes. These rupees values may bebroken into separate cost categories (e.g., inbound and outbound transportation, labour,construction, and utilities) and separate revenue sources (e.g., sales, stock or bond issues,and interest income). These financial factors can then be converted to a single measure offinancial merit and used to compare two or more sites.

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5. Consider qualitative factors pertaining to each site into the evaluation. A qualitative factor isone that cannot be evaluated in rupees terms, such as quality of life or community attitudes.To merge quantitative and qualitative factors, some managers review the expectedperformance of each factor while others assign each factor a weight of relative importanceand calculate a weighted score for each site, using a preference matrix. What is important inone situation may be unimportant or less important in another. The site with the a-C highestweighted score is best.

12.2.4 Models for Location site selection

1. Load-distance method

The load-distance method is a mathematical model used to evaluate locations based on proximityfactors. The objective is to select a location that minimizes the total weighted loads moving into and outof the facility. The distance between two points is expressed by assigning the points to grid coordinateson a map. An alternative approach is to use time rather than distance.

Where dAB = distance between points A and B

xA = x - coordinate of point A

xB = y - coordinate of point A

xB = y - coordinate of point B

yB = y - coordinate of point B

Calculating a load-distance score

Suppose that a firm planning a new location wants to select a site that minimizes the distancesthat loads, particularly the larger ones, must travel to and from the site. Depending on the industry, aload may be shipments from suppliers, between plants, or to customers, or it may be customers oremployees traveling to or from the facility. The firm seeks to minimize its load-distance, generally bychoosing a location so that large loads go short distances.

To calculate a load-distance for any potential location, we use either of the distance measuresand simply multiply the loads flowing to and from the facility by the distances traveled. These loadsmay be expressed as tones or number of trips per week.

2. Center of gravity

Center of gravity is based primarily on cost considerations. This method can be used to assistmanagers in balancing cost and service objectives. The center of gravity method takes into account thelocations of plants and markets, the volume of goods moved, and transportation costs in arriving at thebest location for a single intermediate warehouse.

The center of gravity is defined to be the location that minimizes the weighted distance betweenthe warehouse and its supply and distribution points, where the distance is weighted by the number oftones supplied or consumed. The first step in this procedure is to place the locations on a coordinatesystem. The origin of the coordinate system and scale used are arbitrary, just as long as the relativedistances are correctly represented. This can be easily done by placing a grid over an ordinary map. Thecenter of gravity is determined by formulae

dAH (x

A x

H)2 + (y

A y

H)2

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Where

Cx = x - coordinate of the center of gravity

Cy = y - coordinate of the center of gravity

Dix = x - coordinate of location

Diy = y - coordinate of location

12.3 Plant Layout

Layout planning involves decisions about the physical arrangement of economic activity centerswithin a facility. An economic activity center can be anything that consumes space: a person or group ofpeople, a teller window, a machine, a workstation, a department, a cafeteria or storage room, and soon. The goal of layout planning is to allow workers and equipment to operate most effectively. Ingeneral, the inputs to the layout decision are as follows:

1. Specification of the objectives and corresponding criteria to be used to evaluate the design.The amount of space required, and the distance that must be traveled between elements inthat layout, are common basic criteria.

2. Estimates of product or service demand on the system.

3. Processing requirements in terms of number of operations and amount of flow between theelements in that layout.

4. Space requirements for the elements in that layout.

5. Space availability within the facility itself, or if this is a new facility, possible buildingconfigurations.

12.3.4 Objectives of Layout Decision

Following are the objectives of the layout decisions:

1. Minimize material handling costs

2. Utilize space efficiently

3. Utilize labor efficiently

4. Eliminate bottlenecks

5. Facilitate communication and interaction between workers, between workers and theirsupervisors, or between workers and customers.

6. Reduce manufacturing cycle time and customer service time

7. Eliminate wasted or redundant movements

8. Incorporate safety and security measures

Cx =1

Wi

1

dtxWi

Cy =1

Wi

1

dtyWi

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9. Promote product and service quality

10. Encourage proper maintenance activities

11. Provide a visual control of activities

12. Provide flexibility to adapt to changing conditions.

12.3.2 Layout types

The choice of layout type depends largely on process choice. There are four basic types oflayout: process, product, hybrid, and fixed position.

a. Process layout

Process layout consists of functional groupings of machines or activities that do similar work.For example, in the metal-working job shop shown in-Figure below, all drills are located in one area ofthe machine shop and all milling machines are located in another.

The process layout is most common when the same operation must intermittently producemany different products or serve many different customers. Process arrangement is typical of a jobshop in that it provides high flexibility in the type of products that can be made. In addition, thediversity of jobs offers more satisfaction to workers. However, handling and transportation’ costs arehigh, since the products must be moved frequently between departments. There is often high in-process inventory, and scheduling of both production and movement is more difficult.

Many service organizations use a process arrangement. Libraries have such items as referencematerials, serials, and microfilms grouped in separate areas. Insurance companies have office layoutsin which claims, underwriting, filing, and so on are grouped as individual departments-. Nearly all officelayouts are process layouts.

Group similar activities together according to the process they perform.

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Features of Process Layout

a. Most common when same operations must intermittently produce many different productsor serve many different customers.

b. Demand levels are too, and sequence of operations required to complete a customer’s ordercan vary considerably.

c. Equipments used are general purpose, workers are skilled at operating the equipment in theirparticular department.

d. It is characteristic of intermittent operations, service shops, job shops, or batch production,which serve different customers with different needs.

Advantages:

1. Resources are relatively general purpose and less capital intensive

2. It is vulnerable to changes in product mix and new marketing strategies i.e. flexible.

3. Equipment utilization is higher

4. Employee supervision can be more specialized (imp. When job requires a good deal of technicalknowledge)

Disadvantage

1. Processing rates tend to be slower

2. Productive time is lost in changing from one product to another

3. More capital and space is tied up in inventory

4. Material handling tends to be costly

5. Process layout in services requires large aisles from customers to move back and forth andample display space to accommodate different customer preferences.

6. Diversity in routing and jumbled flow necessitates the use of variable path devices.

b. Product Layout (Assembly Line Layout)

Continuous-flow, mass-production, and batch-processing arrangements are usually organizedby product layout. Equipment arrangement is based on the sequence of operations performed inproduction, and products move in a continuous path from one department to the next. An example ofa product layout is winemaking, which uses a layout of the type shown in Figure 7.2. Product arrangementsallow for continuity of production and the use of specialized, handling equipment, -since all productsmove in the same directions.

This type of layout arranges activities in a line according to the sequence of operations for aparticular product or service. Each product has its own line specifically designed to meet its requirements.

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Although product layouts often follow a straight line, a straight line is not always best, andlayouts may take an L, O, S, or U shape. A product layout often is called a production line or an assemblyline. The difference between the two is that an assembly line is limited to assembly processes, whereasa production line can be used to perform other processes such as machining.Features of Product layout

1. Work is orderly and efficient2. Suitable for mass production or repetitive operations in which demand is stable and volume is

high.3. Product or service is standard for a general market, not for a particular customer.4. More automated than process layout

Advantages1. Efficiency and ease of use2. Lower inventories3. Less productive time lost to changeovers and material handling

Disadvantages1. Inflexible2. Major concern is balancing the assembly line so that no one workstation becomes a bottleneck

and holds up the flow of work through a line3. Low resource utilization for low volume product or services.4. Greater risk of layout redesign for products or services with short or uncertain lives.

Difference between Product and Process layout

Description

Type of process

Product

Demand

Volume

Equipment

Workers

Inventory

Storage space

Material handling

Aisles

Scheduling

Layout Decision

Goal

Advantage

Product Layout

Sequential arrangement of activities

Continuous, mass production,mainly assembly

Standardized, made to stock

Stable

High

Special purpose

Limited skills

Low in-process, high finished goods

Small

Fixed path (ex. Conveyor)

Narrow

Part of balancing

Line balancing

Equalize work at each station

Efficiency

Process Layout

Functional group of activities

Intermittent, job shop, batchproduction, mainly fabrication

Varied, made to order

Fluctuating

Low

General purpose

Varied skills

High-in progress, low finishedgoods

Large

Variable path

Wide

Dynamic

Machine location

Minimize material handling cost

Flexibility

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c. Fixed Position Layout

This type of layout is used for projects in which product is bulky, heavy to move or too fragile.The construction of large items, such as heavy machine tools, airplanes, locomotives, and so on, isusually accomplished in one place. Rather than move the item from one work center to another, toolsand components are brought to one f>lace for assembly. Many project processes have this arrangement.A fixed-position layout minimizes the number of times that the product must be moved and often is theonly feasible solution.

Features

1. Product remains stationary for entire manufacturing cycle.

2. Equipment, workers, material and other resources are brought to the production site.

3. Equipment utilization is low

4. Frequently, the equipment is leased or subcontracted, because it is used for limited period oftime.

5. Skilled labor is called to the site.

d. Hybrid Layout

Layout combining both Product and Process layout i.e. portion of facilities are arranged in aprocess layout and others are arranged in a product layout, (facilities combining both fabrication andassembly operations).

In hybrid layout some portions of the facility are arranged in a process layout and others arearranged in a product layout. Hybrid layouts are used in facilities having both fabrication and assemblyoperations. Fabrication operations — in which components are made from raw materials - have ajumbled flow, whereas assembly operations in which components are assembled into finished products-have a line flow.

A retail store is an example of a hybrid layout in a non-manufacturing setting. The manager maygroup similar merchandise, enabling customers to find desired items easily (a process layout). At thesame time, the layout often leads customers along predetermined paths, such as up and down aisles (aproduct layout). The intent is to maximize exposure to the full array of goods, thereby stimulating sales.

c. Models for Process Layout

1. Load Distance Model

Min C = Lij Dij

i, j varies from 1 to N

N = The number of Work centers

Ljj = The number of Loads or movements of work between work centres i and j

Djj = The distance between work centers i and j

Limitations

1. Sizes of all the departments are not same

2. Special restrictions may be imposed by aisle requirements, limited access to, work areas,different types of material handling methods, and electrical and plumbing requirements.

182

3. Special requirements

4. Lengthy computations, especially when large no. of departments is involved.

2. Block Diagram

Steps Involved:

i. Draw a Load Summary Chart (gives average number of unit loads transported between thedepartments over a given period of time)

Unit Load can be a single unit, a pallet of material, a bin of material or a crate of material.

ii. Calculate the composite movements between departments and rank them from mostmovement to least movement.

iii. Place the trial layout on a grid that graphically represents the relative distances betweendepartments in the form of uniform blocks.

The objective is to assign each department to a block on the grid so that no’h adjacent loads aireminimized.


1. Explain the meaning of Facility Location.

2. What are the objectives of Layout Decisions?

3. Explain Process Layout and Product Layout.

12.5 Summary:

Facilities are defined as a collection of static resources required for the operation. Facilitylocation problems are applicable in two basic situations- entirely new business and in case of existingbusiness. There are various dominant and secondary factors that affect the location decisions.Layoutplanning involves decisions about the physical arrangement of economic activity centers within a facility.The layout types are- process layout, product layout, fixed position layout and hybrid layout.

12.6 Glossary:

Facility: Facilities are buildings, pieces of equipment, or services that are provided for aparticular purpose.

Facility Location: Facility Location is the right location for the manufacturing facility, it will havesufficient access to the customers, workers, transportation, etc.

Economies of Scale: Economies of scale are cost reductions that occur when companies increaseproduction. The fixed costs, like administration, are spread over more units of production. Sometimesthe company can negotiate to lower its variable costs as well.

Plant Layout: Plant layout is the most effective physical arrangement, either existing or inplans of industrial facilities i.e. arrangement of machines, processing equipment and service departmentsto achieve greatest co-ordination and efficiency of 4 M’s (Men, Materials, Machines and Methods) ina plant.





183


1. What are the various factors Affecting Location Decisions?

2. What are the objectives of location decisions? Explain with illustrations.

3. Discus various models for facility location.

4. What are the objectives of layout decisions?

5. Differentiate between process layout and product layout.

6. Discuss various models for plant layout.

12.9 Suggested Readings:

1. Dilworth, JB. (1992). Operations Management: Design and Control for Manufacturing andServices. McGraw-Hill

2. Gaither, N. (1994). Production and Operations Management. Dryden Press

3. Chase, R. and Aquilano, N. (1995). Production and Operations Management (7th Edition). RichardD. Irwin.

*****

M.B.A IInd Semester Course - 206

Operation Management

LESSONS 1 TO 12

By.

INTERNATIONAL CENTRE FOR DISTANCE EDUCATIONAND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY,

GYAN PATH, SUMMERHILL, SHIMLA-171005

ContentsSr. No. Topic Page No,Syllabus 1

Chapter-1 Operations Management 2

Chapter-2 Production System 18

Chapter-3 Inventory Management 30

Chapter-4 Demand Forecasting 44

Chapter-5 Purchasing Management Functions 56

Chapter-6 Source Selection, Vendor rating and Value analysis 59

Chapter-7 Production Planning and Control 81

Chapter-8 Project Management 100

Chapter-9 Quantity and Acceptance Sampling 114

Chapter-10 Statistical Process Control 128

Chapter-11 Work Measurement & Method Study 147

Chapter-12 Facilities Location and Layout 167

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