Course Pack - Operations Management
Course Pack - Operations Management
Unit-I
Production is the process by which raw materials and other inputs are converted
into finished products.
Production management refers to the application of management principles to the
production function in a factory. In other words, production management involves
application of planning, organising, directing and controlling to the production process.
Operations management is the process in which resorurces/inputs are converted into more
useful products
Production management and operations management are differentiated based on
tangibilities of finished goods/services
Production system model comprises:
Operation managers are required to make a series of decisions in the production function.
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Importance of Production Function
Production function can offer competitive advantage to a firm in the following areas:
• Shorter new-product-lead time
• Higher quality
• Greater flexibility
• Reduced wastage
Job-Shop Production
Job-shop production are characterised by manufacturing one or few quantity of products
designed and produced as per the specification of customers within prefixed time and cost. The
distinguishing feature of this is low volume and high variety of products.
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Batch Production
American Production and Inventory Control Society (APICS) defines Batch Production as
a form of manufacturing in which the job pass through the functional departments in lots
or batches and each lot may have a different routing.
Mass Production
Manufacture of discrete parts or assemblies using a continuous process are called Mass
Production. This production system is justified by very large volume of production. The
machines are arranged in a line or product layout. Product and process standardisation exists and
all outputs follow the same path.
Continuous Production
Production facilities are arranged as per the sequence of production operations from the
first operations to the finished product. The items are made to flow through the sequence
of operations through material handling devices such as conveyors, transfer devices, etc.
6. Facility planning.
The location of the production facilities is one of the key decisions an operation manager
has to make since it is critical to the competitiveness of the organization.
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Setting up production facilities with adequate capacity involves massive initial
investment.
Strategically right options should be carefully weighted against all available alternatives.
These decisions also influence the future decisions on probable capacity expansions
plans.
Operation managers also make decisions, i.e. decision on internal arrangement of workers
and department within the facility
Operations Competitive Priorities
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Unit-2
Forecasting Defined : Forecasting is the first step in planning. It is defined as estimating the
future demand for products and services and the resources necessary to produce these outputs.
1. MOVING AVERAGE
A centered moving average (MA) is obtained by summing and averaging the values from a given
number of periods repetitively, each time deleting the oldest value and adding a new value.
∑x
MA =
Number of Period
A weighted moving average (MAw) allows some values to be emphasized by varying
the weights assigned to each component of the average. Weights can be either percentages or a
real number.
∑ (Wt)X
MAwt =
∑Wt
2. HAND FITTING
A hand fit or freehand curve is simply a plot of a representative line that (subjectively) seems to
best fit the data points. For linear data, the forecasting equation will be of the form:
Yc = a + b (X) (signature)
where Yc is the trend value, a is the intercept (where line crosses the vertical axis), b is the slope
(the rise, y, divided by the run, x), and X is the time value (years, quarters, etc.). The
“signature” identifies the point in time when X = 0, as well as the X and Y units.
3. LEAST SQUARES
Least squares are a mathematical technique of fitting a trend to data points. The resulting line of
best fit has the following properties: (1) the summation of all vertical deviations about it is zero,
(2) the summation of all vertical deviations squared is a minimum, and (3) the line goes through
the means X and Y. For linear equations, the line of best fit is found by the simultaneous solution
for a and b of the following two normal equations:
∑Y = na b∑X
∑XY = a∑Xb∑X2
EXPONENTIAL SMOOTHING
Exponential smoothening is a moving-average forecasting technique that weights past data in an
Exponential manner so that most recent data carry more weight in the moving average.
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With simple Exponential smoothening, the forecast Ft is made up of the last period forecast Ft–1
plus a portion, α, of the difference between the last periods actual demand At–1 and last period
forecast Ft–1.
Ft = Ft–1 + (At–1– Ft–1).
A low βgives more smoothing of the trend and may be useful if the trend is not well-
established. A high βwill emphasize the latest trend and be more responsive to recent changes
in trend. The initial trend adjustment Tt–1 is sometimes assumed to be zero.
REGRESSION AND CORRELATION METHODS
Regression and correlation techniques quantify the statistical association between two or more
variables.
(a) Simple regression expresses the relationship between a dependent variable Y and a
independent variable X in terms of the slope and intercept of the line of best fit relating the two
variables.
(b) Simple correlation expresses the degree or closeness of the relationship between two
variables in terms of a correlation coefficient that provides an indirect measure of the variability
of points from the line of best fit. Neither regression nor correlation gives proof of a cause-effect
relationship.
Capacity
Amount of output a system is capable of achieving over a specific period of time.
Actual output
Efficiency =
Effective capacity
Actual output
Utilisation =
Design capacity
Capacity planning
Capacity planning is central to the long-term success of an organisation. Capacity plans are made
at two levels:
(i) Long-term capacity plans which deal with investments in new facilities and
equipments covering the requirements for at least two years into the future.
(ii) Short-term capacity plans which focus on work-force size, overtime budgets, inventories
etc.
Long-Range Capacity Planning
A long term strategic decision that establishes a firm’s overall level resources.
Three major capacity decisions are:
i. How much capacity to be installed,
ii. When to increase capacity and
iii. How much to increase.
Types of Capacity
• Production capacity: Maximum rate of production or output of an organisation.
• Design capacity: The maximum output that can possibly be attained.
• Effective capacity: The maximum output given a product mix, scheduling difficulties,
machine maintenance, quality factors, absenteeism etc.
• Maximum capacity: The maximum output that a facility can achieve under ideal
conditions. Also known as peak capacity.
Developing Capacity Alternatives
To enhance capacity management, the following approaches to capacity alternatives could
be developed:
i. Designing flexibility into the system
ii. Differentiating between new and mature products or services
iii. Taking a “big-picture” approach to capacity changes
iv. Preparing to deal with “chunks” of capacity
v. Attempting to smooth out capacity requirements
Aggregate Planning
• Aggregate planning involves planning the best quality to produce in the
intermediate- range horizon (3 months to one year)
• Aggregate production planning is the process of determining output levels of
product groups over the next 6 to 18 months period.
• Objectives of Aggregate Planning
i. The overall objective is to balance conflicting objectives involving customer
service, work force stability, cost and profit.
ii. To establish company-wide strategic plan for allocating resources.
iii. To develop an economic strategy to meet customer demand.
Inputs to and Outputs from Aggregate Production Planning
Aggregate Planning or Aggregate Capacity Planning
Need for Aggregate Capacity Planning
1. It facilitates fully loaded facilities and minimizes overloading and underloading
and keeps production costs low.
2. Adequate production capacity is provided to meet expected aggregate demand.
3. Orderly and systematic transition of production capacity to meet the peaks
and valleys of expected customer demand is facilitated.
Steps in Aggregate Capacity Planning
1. Determine the demand (i.e., sales forecast) for each product for each time period
(i.e., weeks or months or quarters) over the planning horizon (6 to 12 months).
2. Determine the aggregate demand by summing up the demand for individual
products.
3. Transform the aggregate demand for each time period into workers,
materials, machines required to satisfy aggregate demand.
4. Identify company policies that are pertinent (e.g., policy regarding safety
stock maintenance, maintaining stable workforce etc.).
5. Determine unit costs for regular time, overtime, subcontracting, holding
inventories, back orders, layoffs etc.
6. Develop alternative resource plans for providing necessary production capacity to
support the cumulative aggregate demand and compute the cost of
each alternative plan.
7. Select the resource plan from among the alternatives considered that
satisfies aggregate demand and best meets the objectives of the firm.
Approaches to Aggregate Planning
1. Top down approach
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2. A bottom-up approach or subplan consolidation approach
Rough-cut Capacity Planning
This is done in conjunction with the tentative master production schedule to test
its feasibility in terms of capacity before the master production schedule (MPS) is finalised.
Capacity Planning and Capacity Requirement Planning (CRP)
Production capacity is defined as the maximum production rate of a facility or a plant.
• Types of Capacity
1. Fixed capacity
2. Adjustable capacity
3. Design capacity
4. System capacity
5. Potential capacity
6. Immediate capacity
7. Effective capacity
8. Normal capacity or rated capacity
9. Actual or utilised capacity
Capacity Planning
• Capacity planning involves activities such as:
1. Assessing existing capacity
2. Forecasting future capacity needs
3. Identifying alternative ways to modify capacity
4. Evaluating financial, economical and technological capacity alternatives
Selecting a capacity alternative most suited to achieve the strategic mission of the firm. Capacity
planning involves capacity decisions that must merge consumer demands with human, material
and financial resources of the organization
4 Types of Capacity Planning are:
• Long term Capacity Planning
• Short-term Capacity Planing
• Finite Capacity Planning
• Infinite Capacity Planning.
• Two catagories of factors affecting capacity planning are:
• Controllable Factors
• Less Controllable Factors.
• Capacity Requirement Planning (CRP): A technique to determine the labour
and equipment capacities needed to meet the objectives.
Capacity Requirement Planning (CRP) Process
Master Production Scheduling
• Objectives of Master Production Scheduling
1. To schedule end items to be completed promptly and when promised
to customers.
2. To avoid overloading or underloading the production facility so that production
capacity is efficiently utilized and low production costs result.
Functions of MPS:
• Translating aggregate plans
• Evaluating alternative master schedules
• Generating material and capacity requirements
• Facilitating information processing
• Maintaining priorities
• Utilizing the capacity effectively.
Master Production Schedule - Flow Chart
Process Selection
Process selection refers to the way production of goods or services is organised.
Three primary questions to be addressed before deciding on process selection are:
(i) How much variety of products or services will the system need to handle?
(ii) What degree of equipment flexibility will be needed?
(iii) What is the expected volume of output?
Process Strategy
An organisation’s approach to selection of the process for the conversion of resource inputs into
outputs.
Key aspects in process strategy include:
i. Make or buy decisions
ii. Capital intensity and
iii. Process flexibility
Process Selected Must Fit with Volume and Variety
SERVICE OPERATIONS
Planning and Scheduling service systems is different from planning and scheduling
manufacturing systems.
Competitive priorities for service firm:
• Low service product costs.
• Fast and on time delivery
• High quality services
• Customer service
• Flexibility.
Three types of service operations are:
Quasi manufacturing: In quasi manufacturing physical goods are more dominant then
service associated with the product. Here the stress is on cost of production, technology,
products, product quality and prompt delivery. It may be either a standardized or
customized product.
Customer-as-participants: Here there is a high involvement of customer the
physical goods may not be that must sufficient. Services can be either customized or
standardized.
Customer- as-product: Here the service is performed on customer. Service here is
customized physical goods may or may not significant.
Scheduling Quasi-Manufacturing Operations
Two types of quasi-manufacturing operations are:
• Product-focussed operations
• Process focussed operations.
• Personnel Scheduling in Services
Three difficulties faced in scheduled personnel in services are:
• Demand variability
• Service time variability
• Availability of person when they are needed.
Scheduling “Customer-As-Participant” Service Operations
“Customer-as-participant” service operations:
• Customer actually participates in service operations for eg. retailing, tourism etc.
• Has huge invovement of customer in service operations.
Scheduling “Customer-As-Product” Service Operations
“Customer-as-product” service operations:
• Service is actually performed on the customer. for example, hair dressing,, medical
treatment, surgery etc.
• Scheduling Multiple Resources
Purchase Functions
1. Obtaining prices
2. Selecting vendors
3. Awarding purchase orders
4. Follow up on delivery promise
5. Adjusting and settling complaints
6. Selecting and training of purchase personnel
7. Vendor relations
Purchasing Policies
• Ancillary Development: The firms sub-contracts, i.e., decides to buy the parts from outside
suppliers. Mostly the fabricated parts, components are brought from outside suppliers by the
firms.
• Make or buy: Another purchasing policy is whether to buy the parts or components from
outside supplier or manufacture within the firm. The decisions lie depending in
various factors.
• Speculative buying: Speculative buying is conducted with the hope of making profit out of
price changes. Here the profit is made by buying at low price and selling at higher price.
Vendor rating: The evaluation of supplier or vendor rating provides valuable information which
help in improving the quality of the decision. In the vendor rating three basic aspects are
considered namely quality, service and price
The Development Project Committee of the National Association of Purchasing Agents (U.S.A.)
has suggested following methods for evaluating the performance of past suppliers.
1. The categorical plan: Under this method the members of the buying staff related with the
supplier like receiving section, quality control department, manufacturing department etc.,
are required to assess the performance of each supplier. The rating sheets are provided
with the record of the supplier, their product and the list of factors for the evaluation
purposes. The members of the buying staff are required to assign the plus or minus
notations against each factor.
2. The weighted-point method: The weighted-point method provides the quantitative data for
each factor of evaluation. The weights are assigned to each factor of evaluation according to the
need of the organization, e.g., a company decides the three factors to be considered—
quality, price and timely delivery. It assigns the relative weight to each of these factors as under:
Quality ……… 50 points
Price ……… 30 points
Timely delivery ……… 20 points
3. Critical incidents method: Record of events related to buyer vendor relationships is
maintained in each vendor’s file. They reflect positive and negative aspect of
actual performance. This kind of documentation useful in discussing ways and means of
improving performance, acknowledging the existence of good relationships, determining the
competence of a vendor, and if necessary considering termination
4. The cost-ratio plan: Under this method, the vendor rating is done on the basis of
various costs incurred for procuring the materials from various suppliers. The cost-ratios are
ascertained delivery etc. The cost-ratios are ascertained for the different rating variables
such as quality, price, timely delivery etc. The cost-ratio is calculated in percentage on
the basis of total individual cost and total value of purchases.
5. Checklist system: A simple checklist is used to evaluate the vendors. Check list may
be something like Reliability, technical capability, after sales service, availability, buying
convenience etc
VALUE
ANALYSIS
Value engineering or value analysis had its birth during the World War II Lawrence D. Miles
was responsible for developing the technique and naming it. Value analysis is defined as “an
organised creative approach which has its objective, the efficient identification of unnecessary
cost-cost which provides neither quality nor use nor life nor appearance nor customer features.”
Value analysis focuses engineering, manufacturing and purchasing attention to one objective-
equivalent performance at a lower cost.
Function .
Value =
Cost
Steps in Value
Analysis
In order to answer the above questions, three basic steps are necessary:
1. Identifying the function: Any useful product has some primary function which must
be identified—a bulb to give light, a refrigerator to preserve food, etc. In addition it may
have secondary functions such as withstanding shock, etc. These two must be identified.
2. Evaluation of the function by comparison: Value being a relative term, the
comparison approach must be used to evaluate functions. The basic question is, ‘Does the
function accomplish reliability at the best cost’ and can be answered only comparison.
3. Develop alternatives: Realistic situations must be faced, objections should overcome
and effective engineering manufacturing and other alternatives must be developed.
STORES
MANAGEMENT
Stores play a vital role in the operations of company. It is in direct touch with the user
departments in its day-to-day activities. The most important purpose served by the stores is to
provide uninterrupted service to the manufacturing divisions. Further, stores are often equated
directly with money, as money is locked up in the stores.
Nature of Stores
Store as building where inventories are kept.
Storage is the function of receiving, storing, and issuing materials.
Stores ensure ready accessibility of major materials there-by efficient service to users.
Minimisation of stores cost, and continuous supply is the prime function of stores.
Stores layout is a fundamental factor in determining the efficient performance of stores
department.
A satisfactory storage system compromises between the use of space and the use of time.
Random location means that items can be stored in any storage position which is
available.
Keeping stock on one side of the aisle in which case the layout is called comb type .
Stores manual is a written statement of policies, and procedures.
Codificatio
n
It is one of the functions of stores management. Codification is a process of representing each
item by a number, the digit of which indicates the group, the sub-group, the type and the
dimension of the item.
OBJECTIVES OF CODIFICATION
The objectives of a rationalized material coding system are:
1. Bringing all items together.
2. To enable putting up of any future item in its proper place.
3. To classify an item according to its characteristics.
4. To give an unique code number to each item to avoid duplication and ambiguity.
5. To reveal excessive variety and promote standardization and variety reduction.
6. To establish a common language for the identification of an item.
7. To fix essential parameters for specifying an item.
8. To specify item as per national and international standards.
9. To enable data processing and analysis.
Inventory
A physical resource that a firm holds in stock with the intent of selling it or transforming it into a
more valuable state.
Raw Materials
Works-in-Process
Finished Goods
Maintenance, Repair and Operating (MRO)
Objectives of Inventory Control
1. To ensure adequate supply of products to customer and avoid shortages as far as possible.
2. To make sure that the financial investment in inventories is minimum (i.e., to see that the
working capital is blocked to the minimum possible extent).
3. Efficient purchasing, storing, consumption and accounting for materials is an important
objective.
4. To maintain timely record of inventories of all the items and to maintain the stock within the
desired limits
5. To ensure timely action for replenishment.
6. To provide a reserve stock for variations in lead times of delivery of materials.
7. To provide a scientific base for both short-term and long-term planning of materials.
Inventory Costs
Inventory costs includes ordering cost plus carrying costs.
1. Ordering Costs
2. Carrying Costs
• Capital Costs
Capital cost is the loss of interest on money invested in inventory building
and inventory control equipment.
Storage Space Costs
• Inventory Service Costs
• Handling-equipment Costs
• Inventory Risk Costs
3. Out-of-stock Costs
4. Capacity Costs
Inventory Control Techniques
1. Always better control (ABC) classification. In this analysis, the classification of
existing inventory is based on annual consumption and the annual value of the items. Hence
we obtain the quantity of inventory item consumed during the year and multiply it by unit
cost to obtain annual usage cost. The items are then arranged in the descending order of such
annual usage cost.
(a) A-Item: Very tight control, the items being of high value. The control need be exercised at
higher level of authority.
(b) B-Item: Moderate control, the items being of moderate value. The control need be exercised
at middle level of authority.
(c) C-Item: The items being of low value, the control can be exercised at gross root level of
authority, i.e., by respective user department managers.
2.High, medium and low (HML) classification. In this analysis, the classification of
existing inventory is based on unit price of the items. They are classified as high price, medium
price and low cost items.
3.Vital, essential and desirable (VED) classification. In this analysis, the classification of
existing inventory is based on criticality of the items. They are classified as vital, essential and
desirable items. It is mainly used in spare parts inventory.
4.Scarce, difficult and easy to obtain (SDE). In this analysis, the classification of existing
inventory is based on the items.
5.GOLF analysis: In this analysis, the classification of existing inventory is based sources of the
items. They are classified as Government supply, ordinarily available, local availability and
foreign source of supply items.
6.SOS analysis: In this analysis, the classification of existing inventory is based nature of supply
of items. They are classified as seasonal and off-seasonal items.
7.Fast moving, slow moving and non-moving (FSN).
8.Economic order quantity (EOQ). Inventory models deal with idle resources like men,
machines, money and materials. These models are concerned with two decisions: how much to
order (purchase or produce) and when to order so as to minimize the total cost.
9.Max-Minimum system.
10.Two bin system
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