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 OPERATIONS MANAGEMENT
20ME41T

Operations Management is the management of an organisation's productive resources or its production

system, which converts inputs into the organisation's products and services.

Operations management is the management of that part of an organization that is responsible for producing
goods and/or services. There are examples of these goods and services all around you. Every book you read,
every video you watch, every e-mail you send, every telephone conversation you have, and every medical
treatment you receive involves the operations function of one or more organizations. So does everything you
wear, eat, travel in, sit on, and access the Internet with.

However, in order to have a clear idea of Operations Management, one must have an idea of ‘Operating
Systems’.An Operating System is defined as a configuration of resources combined for the provision of goods
or services.

Retail organizations, hospitals, bus and taxi services, tailors, hotels and dentists are all examples of operating
systems. Any operating system converts inputs, using physical resources, to create outputs, the function of
which is to satisfy customers wants. The creation of goods or services involves transforming or converting
inputs into outputs. Various inputs such as capital, labour, and information are used to create goods or
services using one or more transformation processes (e.g., storing, transporting, and cutting). To ensure that
the desired output are obtained, an organization takes measurements at various points in the transformation
process (feedback) and then compares with them with previously established standards to determine whether
corrective action is needed (control).

It is important to note that goods and services often occur jointly. For example, having the oil changed in your
car is a service, but the oil that is delivered is a good. Similarly, house painting is a service, but the paint is a
good. The goods-service combination is a continuum. It can range from primarily goods, with little service, to

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primarily service, with few goods. Because there are relatively few pure goods or pure services, companies
usually sell product packages, which are a combination of goods and services. There are elements of both
goods production and service delivery in these product packages. This makes managing operations more
interesting, and also more challenging.

OBJECTIVES OF OPERATIONS MANAGEMENT

Objectives of operations management can be categorised into (i) Customer service and (ii) Resource
utilisation.

(i) Customer service

The first objective is the customer service which means the service for the satisfaction of customer wants.
Customer service is therefore a key objective of operations management.

The Operations Management must provide something to a specification which can satisfy the customer in
terms of cost and timing. Thus, primary objective can be satisfied by providing the ‘right thing at the right
price at the right time’

(ii) Resource Utilization

Another major objective is to utilize resources for the satisfaction of customer wants effectively, i.e., customer
service must be provided with the achievement of effective operations through efficient use of resources.
Inefficient use of resources or inadequate customer service leads to commercial failure of an operating
system.

Operations management is concerned essentially with the utilization of resources, i.e., obtaining maximum
effect from resources or minimizing their loss, under utilization or waste. The extent of the utilization of the
resources’ potential might be expressed in terms of the proportion of available time used or occupied, space
utilization, levels of activity, etc. Each measure indicates the extent to which the potential or capacity of such
resources is utilized. This is referred as the objective of resource utilization.

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SCOPE OF OPERATION MANAGEMENT

Operations Management concerns with the conversion of inputs into outputs, using physical resources, so as
to provide the desired utilities to the customer while meeting the other organizational objectives of
effectiveness, efficiency and adoptability. It distinguishes itself from other functions such as personnel,
marketing, finance, etc. by its primary concern for ‘conversion by using physical resources’. Following are the
activities, which are listed under

Production and Operations Management functions:

1. Location of facilities.

2. Plant layouts and Material Handling.

3. Product Design.

4. Process Design.

5. Production Planning and Control.

6. Quality Control.

7. Materials Management.

8. Maintenance Management.

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PRODUCTIONS MANAGEMENT V/S OPERATIONS MANAGEMET

There are two points of distinction between production management and operations management. First, the
term production management is more used for a system where tangible goods are produced. Whereas,
operations management is more frequently used where various inputs are transformed into intangible services.
Viewed from this perspective, operations management will cover such service organisations as banks, airlines,
utilities, pollution control agencies, super bazaars, educational institutions, libraries, consultancy firms and
police departments, in addition, of course, to manufacturing enterprises. The second distinction relates to the
evolution of the subject. Operations management is the term that is used nowadays. Production management
precedes operations management in the historical growth of the subject.

RECENT TRENDS IN PRODUCTION/OPERATIONS MANAGEMENT

Recent trends in production/operations management relate to global competition and the impact it has on

manufacturing firms. Some of the recent trends are :

1. Global Market Place : Globalisation of business has compelled many manufacturing firms to have
operations in many countries where they have certain economic advantage. This has resulted in a steep
increase in the level of competition among manufacturing firms throughout the world.

2. Production/Operations Strategy : More and more firms are recognising the importance of
production/operations strategy for the overall success of their business and the necessity for relating it to their
overall business strategy.

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3. Total Quality Management (TQM) : TQM approach has been adopted by many firms to achieve
customer satisfaction by a never-ending quest for improving the quality of goods and services.

4. Flexibility : The ability to adapt quickly to changes in volume of demand, in the product mix demanded,
and in product design or in delivery schedules, has become a major competitive strategy and a competitive
advantage to the firms. This is sometimes called as agile manufacturing.

5. Time Reduction : Reduction of manufacturing cycle time and speed to market for a new product provide
competitive edge to a firm over other firms. When companies can provide products at the same price and
quality, quicker delivery (short lead times) provide one firm competitive edge over the other.

6. Technology : Advances in technology have led to a vast array of new products, new processes and new
materials and components. Automation, computerisation, information and communication technologies have
revolutionised the way companies operate. Technological changes in products and processes can have great
impact on competitiveness and quality, if the advanced technology is carefully integrated into the existing
system.

7. Worker Involvement : The recent trend is to assign responsibility for decision making and problem
solving to the lower levels in the organisation. This is known as employee involvement and empowerment.
Examples of worker involvement are quality circles and use of work teams or quality improvement teams.

8. Re-engineering : This involves drastic measures or break-through improvements to improve the

performance of a firm. It involves the concept of clean-slate approach or starting from scratch in redesigning
the business processes.

9. Environmental Issues : Today’s production managers are concerned more and more with pollution
control and waste disposal which are key issues in protection of environment and social responsibility. There
is increasing emphasis on reducing waste, recycling waste, using less-toxic chemicals and using
biodegradable materials for packaging.

10. Corporate Downsizing (or Right Sizing) : Downsizing or right sizing has been forced on firms to shed
their obesity. This has become necessary due to competition, lowering productivity, need for improved profit
and for higher dividend payment to shareholders.

11. Supply-Chain Management : Management of supply-chain, from suppliers to final customers reduces
the cost of transportation, warehousing and distribution throughout the supply chain.

12. Lean Production : Production systems have become lean production systems which use minimal
amounts of resources to produce a high volume of high quality goods with some variety. These systems use

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flexible manufacturing systems and multi-skilled workforce to have advantages of both mass production and
job production (or craft production).

Productivity

Productivity implies development of an attitude of mind and a constant urge to find better, cheaper,
quicker, easier and safe ways of doing a job, which could be either manufacturing an article or
providing a service. Since the beginning of the industrial era, the manufacturers or producers have been
facing the problem of how to use the available resources and factors of production to the best of their ability
and capacity so as to get the maximum output with the minimum cost of production. Industrial revolution,
social, technological and scientific developments, changes in economic systems are the various efforts made
in this direction and the process of development and changes is still on. New and new machines, methods and
technology are being invented and used in the industrial field to minimise the wastage of men, materials and
machines. It is all to increase the productivity.

Productivity is the quality or state of being productive. It is some relationship of outputs to inputs. It is a
concept that guides the management of a production system, and measures its success. It is the quality that
indicates how well labour, capital, materials and energy are utilised. Productivity improvement is sought
everywhere because it supports a higher standard of living, helps control inflation, and contributes towards a
stronger national economy.

Productivity is an indicator reflecting the changes in the performance of the enterprise and having some sort
of input-output comparisons relating to various activities of an organisation. It also facilitates the management
to control and plan the future operations of the enterprise.

A productivity index is a device of expressing the ratio between outputs and the inputs of the resources
numerically. These indices are prepared by comparing the volume of output of goods with the labour
employed on that job or the profits of the firm with the capital employed. If the comparison shows an upward
trend in indices, it is a sign of improved or better productivity and vice-versa.

The productivity is a measure of how much input is required to achieve a given output.

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Symbolically:

P = O/I ,where P = Productivity; O = Output, I = Input.

Measurement of Productivity: The productivity or the performance of various input and output factors can
be measured in many ways. These measures are mainly based on the following two criteria:

(i) Change in output per unit of input: indicates the change in the performance of corresponding input
during the given period, e.g., change in output per worker or per man-hour will signify the change in
performance of labour.

(ii) Change in input per unit of output: during the given period signifies the change in the performance of
the corresponding input factor, e.g., change in man-hour or workers’ per unit of output will also indicate the
change in the performance of the labour input.

Productivity measurement implies the use of standards set for each input factor in terms of output. In
circumstances where standards are not in use, productivity can be measured only when the output is converted
into ‘units or work’ which is defined as the amount of work that can be performed by one unit of input. Thus
productivity can be measured by dividing the output by the performance of each input factor taken together.

Some of the well-known indices of productivity are given below:

(A) Man-hour output: The most widely used index of productivity is to work out the output per
man- hour it can be put as –

Productivity = Units of output / Total man-hours

(B) Productivity Ratio: The rate of return on capital employed is a valuable and widely used guide
to many types of business decisions. This ratio of profit to capital employed is a valuable means of
measuring the performance of divisions, sections, plants, products and other components of a business, and
can be calculated as—

Productivity =Net Profit/Capital employed

(C) Use of Financial Ratios: There are many situations when time standards cannot be set and
therefore, it is very difficult in such cases to measure the productivity by a direct method. In these cases,
financial ratios can be used to measure the productivity by using its sales turn-over. But ‘added value’
is a more useful approach for measuring productivity. ‘Added value’ means output - inputs.

The most common financial ratio of productivity is—

Productivity = Added Value / Labour Costs

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 Productivity = Added Value / Conversion Costs

The first ratio gives the financial productivity of labour force and the second ratio gives the financial
productivity of all the resources of the company put together.

(D) Other Useful Measures: There are many other useful productivity ratios to measure the
productivity of various input factors. These are:

A combined measure of productivity can be taken as

There may be other input factors such as insurance, taxes, advertising etc. and their productivity can be
measured likewise.

Each measure requires different kinds of data and only rarely such information is available for all
commodities in an industry on continuous basis.

Tools of productivity or how to increase productivity:

The productivity of an enterprise can be improved by improving the performance of various inputs and other

factors affecting productivity. For this purpose, use of following tools can be recommended.

1. Human Aspects: Under this, cooperation of workers is sought in the following ways:

(i) More workers’ participation in management or in decision making through joint consultation.

(ii) Improving communication services.

(iii) Improving mutual trust and cooperation through improved job procedures, better training of employees,

more workers incentives by implementing various incentive schemes, and labour welfare programmes.

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(iv) Better planning of work, more effective management, more democracy in administration, improved

human relations and selection and training of personnel at various levels of management are some

human efforts from the side of management in order to improve the productivity.

2. Supply of Inputs:

(i) Improvement in the nature and quality of raw materials and their supplies to the work.

(ii) Proper provision of plant, equipment and their maintenance.

(iii) Introduction of more and more machines and equipment in place of physical work.

(iv) Fuller utilisation of manpower and efficiency or capacity of plant and equipment employed.

3. Technological Aspects:

Certain methodological and technological developments are also necessary to improve the productivity of the

concern. These are;

(i) Work, time and motion studies to determine better ways and means of doing a job.

(ii) Implementing various simplification, specialisation and standardisation programmes.

(iii) Applying control techniques comprising of production and planning control, cost control and quality

control techniques.

(iv) Improving layout of plants, shops and machine tools, and material handling and internal transportation

system.

(v) Improving inspection techniques so as to minimise the wastage and defective work.

Factors affecting industrial productivity:

Productivity is defined to be some ratio between output and input. Thus all factors which affect output and
inputs will also affect the measure of productivity.

The following factors affect the productivity.

1. Technological Development: Technical factors including the degree of mechanisation, technical

know-how, raw materials, layout and the methods and techniques of work determine the level of

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technological development in any industry. The principal factors in technological development affecting
productivity are:

(a) The Size of the Plant: The size of the plant and the capacity utilisation has direct bearing on productivity.
Production below or above the optimum level will be uneconomical and will tend towards lower level of
productivity.

(b) Research and Development: Investment in research and development may yield better method of work
and better design and quality of products.

(c) Plant and Job Layout: The arrangement of machines and positions in the plant and the set-up of the
work-bench of an individual worker will determine, how economically and efficiently production will be
carried out.

(d) Machine and Equipment Design: Whether the design of machinery and equipment is modern and in
keeping with the limitations and capacities of the workers will also determine the production efficiency and
level of productivity.

(e) Production Processes: Advanced production processes involving the use of modern integrated and
automatic machinery and semi-processed materials have been known to help in raising levels of
productivity.

(f) Power, Raw Materials etc. Improved quality of raw materials and increased use of power have a
favourable effect on productivity.

(g) Scientific Management Techniques: Scientific management techniques such as better planning of work,
simplification of methods, time and motion study, emphasis for reduced wastage and spoilage have positive
effects on productivity.

2. Individual Factors: Individual factors such as knowledge, skill and attitude also affect the
productivity of industry. Knowledge is acquired through training, education and interest on the part of
learner. Skill is affected by aptitude (one’s capacity to learn a particular kind of work), personality
(emotional maturity, balance of mind etc.) as also by education, experience, training etc. Increased
knowledge, skill and aptitude certainly increased the productivity and a person deficient in these personal
attributes is less productive than an average man.

The attitude (willingness of employee to work for organisation) of employees towards the work and the
organisation affect their productivity to a great extent. Knowledge and skill without willingness are futile. The
urge to work is a complex phenomenon governed by several factors such as formal and informal organisation,

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leadership, need, satisfaction, influence of trade unions etc. These factors motivate the workers to work better
and with enthusiasm.

3. Organisation Factors: Organsiation factors include various steps taken by the organisation towards
maintaining better industrial relations such as delegation and decentralization of authority, participative
management (workers’ participation in management), organizational efficiency, proper, personnel
policies relating to selection, placement, promotion, wage salary levels, incentives, merit rating, job
evaluation, training and provision for two-way communication, supervision, etc. These factors also influence
motivation. Likewise the existence of groups with higher productivity as their goal is likely to contribute to
the organisational objectives. These facts were brought out by Hawthorne experiments in U.S.A. A properly-
motivated worker will certainly contribute to the industrial productivity.

4. Work Environment: The importance of proper work environment and physical conditions on the job has
been emphasized by industrial psychologists and human engineers. Better work environment ensures the
greatest ease at work through better ventilation and light arrangement, improved safety devices, reduction in
noise, introducing suitable rest-pause etc.

5. Other factors: There are several other factors that affect productivity. These are:

(a) Natural Factors: Physical, geographical and climatic conditions influence the productivity at large.
Abundance of natural resources affects the productivity and similarly climate affects the efficiency of workers
to a great extent.

(b) Managerial Factors: The industrial productivity is influenced very much through managerial ability and
leadership. The managerial ability of utilising the available resources to the maximum, organising capacity,
foresightedness, decision-making ability and entrepreneurship are certain factors that contribute to
productivity.

(c) Government Policy: Government policies towards industry also contribute to industrial
productivity. Taxation policy, financial and administrative policy, tariff policy and protection policy
affect the Productivity to a large extent.

Thus, the above factors are responsible for the increased productivity.

Production and Productivity:

Production and productivity are not synonymous. Production refers to the volume, value or quantity of goods
and services produced during a given period by a worker, plant, firm or economy. It is the sum total of results
achieved by the various factors used together. Productivity, on the other hand, is not concerned with the
volume of production. It is the ratio of output and input factors of an enterprise. It shows the efficiency of

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production or the efficiency level of input factors. In other words, productivity is relative to the resources used
in turning out a certain amount of physical output, while production is used, more or less, in absolute sense.
The distinction between these two terms becomes more clear when we find that increase in production does
not necessarily mean the increase in productivity. If increase in production is attributed to the increase in the
inputs of production in the same proportion, the production will have increased but productivity may have
declined or may remain constant because the ratio of output and inputs has shown a decline or has not shown
any improvement.

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DEMAND FORECASTING

Forecasting

Forecasts are essential for the smooth operations of business organizations. They provide information
that can assist managers in guiding future activities toward organizational goals.

Forecasts are estimates of the occurrence, timing, or magnitude of uncertain future events. Forecasts
are essential for the smooth operations of business organizations. They provide information that can
assist managers in guiding future activities toward organizational goals.

Forecasting means peeping into the future. As future is unknown and is anybody’s guess but the business
leaders in the past have evolved certain systematic and scientific methods to know the future by scientific
analysis based on facts and possible consequences. Thus, this systematic method of probing the future is
called forecasting. In this way forecasting of sales refers to an act of making prediction about future sales
followed by a detailed analysis of facts related to future situations and forces which may affect the business as
a whole.

Foresight is not the whole of management, but at least it is an essential part of management and accordingly,
to foresee in this context means both to assess the future and make provisions for it, that is forecasting is itself
in action already. Forecasting is a kind of future picture wherein proximate events are outlined with some
distinctness, while remote events appear progressively less distinct and it entails the running of the business as
foresee and provide means to run the business over a definite period.

As far as the marketing manager is concerned the sales forecast is an estimate of the amount of unit sales for a
specified future period under the proposed marketing plan or program. It may also be defined as an estimate
of sales in rupees of physical units for a specified future period under a proposed marketing plan or program
and under an assumed set of economic and other force outside the organisation for which the forecast is made.

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When we consider the function of production and operations management, no doubt Production and Operation
departments will produce goods as per the sales program given by the sales department, but it has to prepare
forecast regarding machine capacity required, materials required and time required for production and so on.
This needs the knowledge of what exactly happened in the production shop in previous periods.

Making of a proper forecast requires the assessment of both controllable and uncontrollable factors (both
economic and non economic) inside and outside the organisation.

All business and industrial activities revolve around the sale and its future planning. To know what a business
will do we must know its future sales. So, sales forecasting is the most important activity in the business
because all other activities depend upon the sales of the concern. Sales forecasting is a guiding factor for a
firm because it enables the firm to concentrate its efforts to produce the required quantities, at the right time at
reasonable price and of the right quality. Sales forecasting is the basis of planning the various activities i.e.;
production activities, pricing policies, programme policies and strategies, personnel policies as to recruitment,
transfer, promotion, training, wages etc.

The period of forecasting, that is the time range selected for forecasting depends on the purpose for which the
forecast is made. The period may vary from one week to some years. Depending upon the period, the
forecast can be termed as ‘Short range forecasting’, medium range forecasting’ and ‘Long range
forecasting’. ‘Short range forecasting period may be one week, two weeks or a couple of months.
Medium range forecasting period may vary from 3 to 6 months. Long range forecasting period may
vary from one year to any period. The objective of above said forecast is naturally different.

In general, short term forecasting will be more useful in production planning. The manager who does short
range forecast must see that they are very nearer to the accuracy.

In long range forecast, the normal period used is generally 5 years. In some cases it may extends to 10 to 15
years also.

The purpose of long range forecast is:

(i) To work out expected capital expenditure for future developments or to acquire new facilities,

(ii) To determine expected cash flow from sales,

(iii) To plan for future manpower requirements,

(iv) To plan for material requirement,

(v) To plan for Research and Development. Here much importance is given to long range growth factor.

In case of medium range forecasting the period may extend over to one or two years. The purpose of this
type of forecasting is:

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(i) To determine budgetary control over expenses,

(ii) To determine dividend policy,

(iii) To find and control maintenance expenses,

(iv) To determine schedule of operations,

(v) To plan for capacity adjustments.

In case of short-term forecast, which extends from few weeks to three or six months and the following
purposes are generally served:

(i) To estimate the inventory requirement,

(ii) To provide transport facilities for despatch of finished goods,

(iii) To decide work loads for men and machines,

(iv) To find the working capital needed,

(v) To set-up of production run for the products,

(vi) To fix sales quota,

(vii) To find the required overtime to meet the delivery promises.

Various factors that influence the forecast are:

(i) Environmental changes,

(ii) Changes in the preference of the user,

(iii) Number of competitive products,

(iv) Disposable income of the consumer.

In forecasting the production important factors to be considered are:

(i) Demand from the marketing department,

(ii) Rate of labours absenteeism,

(iii) Availability of materials,

(iv) Available capacity of machines,

(v) Maintenance schedules,

(vi) Delivery date schedules.

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Steps in forecasting

Whatever may be the method used for forecasting, the following steps are followed in forecasting.

(a) Determine the objective of forecast: What for you are making forecast? Is it for predicting the demand?
Is it to know the consumer’s preferences? Is it to study the trend? You have to spell out clearly the use of
forecast.

(b) Select the period over which the forecast will be made? Is it long-term forecast or medium-term
forecast or short-term forecast? What are your information needs over that period?

(c) Select the method you want to use for making the forecast. This method depends on the period
selected for the forecast and the information or data available on hand. It also depends on what you expect
from the information you get from the forecast. Select appropriate method for making forecast.

(d) Gather information to be used in the forecast. The data you use for making forecasting to produce the
result, which is of great use to you. The data may be collected by:

(i) Primary source: This data we will get from the records of the firm itself.

(ii) Secondary source: This is available from outside means, such as published data, magazines,
educational institutions etc.

(e) Make the forecast: Using the data collected in the selected method of forecasting, the forecast is made.

Forecasting Methods:

1. Opinion and Judgmental Methods or Qualitative Methods.

a. Delphi Method
b. Market Research

2. Time Series or Quantitative Forecasting Methods.

1) Moving Average Method

a) Naive Forecast Method
b) Simple Moving Average
c) Weighted Moving Average
2) Exponential Smoothing Forecast

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Criteria of a good forecasting method: It cannot be said which method of sales forecasting is the best
because everyone has merits and demerits of its own. The suitability of a method depends on various factors
such as nature of the product, available time and past records, wealth and energy, degree of accuracy and the
forecaster etc. of an enterprise. However, in general, a good forecasting method must possess the following
qualifications.

(i) Accuracy: Accuracy of the forecasting figures is the life blood of the business because many important
plans and programmes, policies and strategies are prepared and followed on the basis of such estimates. If
sales forecasts are wrong, the businessman suffer a big loss. Hence, the method of forecasting to be applied
must amount to maximum accuracy.

(ii) Simplicity: The method for forecasting should be very simple. If the method is difficult or technical, then
there is every possibility of mistake. Some information are collected from outside and that will remain
unanswered or inaccurate replies will be received, if the method is difficult. Management must also be able to
understand and have confidence in the method.

(iii) Economy: The method to be used should be economical taking into account the importance of the
accuracy of forecast. Costs must be weighted against the importance of the forcast to the operations of the
business.

(iv) Availability: The method should be such for which the relevant information may be available
immediately with reasonable accuracy. Moreover, the technique must give quick results and useful
information to the management.

(v) Stability: The data of forecasting should be such wherein the future changes are expected to be minimum
and are reliable for future planning for sometime.

(vi) Utility: The forecasting technique must be easily understandable and suitable to the management.

Opinion and Judgmental Methods or Qualitative Methods.

1. Delphi Method

 The Delphi method is a process of gaining consensus from a group of experts While maintaining their
anonymity.

 It is forecasting techniques applied to subjective nature demand values.

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 It is useful when there is no historical data from which to develop statistical models and when managers
inside the firm have no experience.

 Several knowledgeable persons are asked to provide estimates of demand or forecasts of possible advances
of technology.

 A coordinator sends questions to each member of the panel of outside experts, and they are
unknown to each other. Anonymity is important when some members of the tend to dominate discussion
or command a high degree of respect in their field. The members tend to respond to the questions and
support their responses freely. The coordinator prepares a statistical summary of the responses along with a
summary of arguments for a particular response. If the variation among the opinions too much the
report is sent to the same group for another round and the participants may choose to modify their
previous responses. This process will be continuing until consensus is obtained. So Delphi method is
a iterative process.

2. Market Research

 It is systematic approach to determine external consumer interest in a service or product by creating and
testing hypothesis through data-gathering surveys.

 It includes all research activities in marketing problem:

o Gathering, recording and analyzing the utility and marketability of the product

o The nature of the demand

o The nature of competition

o The methods of marketing

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 o Other aspects of movements of product from the stage of to the point where they get consumed.

 Market research gathers records and analysis all facts about problems relating to the transfer and sale of
goods and services from producer to consumer.

 It may be used to forecast demand for the short, medium and long-term. Accuracy is excellent for the short
term, good for the medium term and only fair for the long term.

Time Series or Quantitative Forecasting Methods.

1) Moving Average Method

A) Naive Forecast Method

Naive forecast: Demand in current period is used as next period’s forecast

B) Simple moving average

 Uses average demand for a fixed sequence of periods.

 Stable demand with no pronounced behavioral patterns.

n = number of periods taken to evaluate the moving average

Dt or Di = Actual demand in that period

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 C) Weighted Moving Average
While the moving average formula implies an equal weight being placed on each value that is being
averaged, the weighted moving average permits an unequal weighting on prior time periods

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 2. Exponential Smoothing Forecast

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Time series Components

A time series can be split into four separate time series components: (1) the trend-cycle, (2) seasonal
effects, (3) other calendar effects such as trading days and moving holidays, and (4) the irregular
component. Here is an overview of each:

The trend-cycle: This represents the smoothed version of the time series and indicates its general pattern
or direction. The trend-cycle can be interpreted as the long-term movement in the time series, the result of
different factors (or determinants) that condition long-run changes in the data over time. As its name
suggests, the trend-cycle also reflects periodic expansions and contractions in economic activity, such as
those associated with the business cycle.

Seasonal effects: These represent regular movements or patterns in time series data that occur in the same
month or quarter every year. On the basis of past movements of the time series, these regular patterns
repeat themselves from year to year. These seasonal patterns are fairly stable in terms of timing, direction
and magnitude. Often these seasonal effects relate to well-established calendar-based variations in
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 economic activity, such as the increase in retail sales in the lead up to Christmas, or increases in
construction employment in the spring. Seasonal effects identify these regularly occurring patterns in the
data.

Monthly or quarterly time series data are sometimes influenced by seasonal and calendar effects. These
effects can bring about changes in the data that normally occur at the same time, and in about the same
magnitude, every year. For example, monthly retail sales have historically been at their highest level for
the year in December as a result of holiday shopping, and then declined to lower levels in January. This
occurs year after year and affects the extent to which information on trends in retail industries can be
informed by comparing raw sales data for these two months. A seasonally adjusted time series is a
monthly or quarterly time series that has been modified to eliminate the effect of seasonal and calendar
influences. The seasonally adjusted data allow for more meaningful comparisons of economic conditions
from period to period. A raw time series is the equivalent series before seasonal adjustment and is
sometimes referred to as the original or unadjusted time series.

Demand Forecasting Accuracy

In supply chain management it’s important to be able to measure the accuracy of your demand forecasts.
Inaccurate demand forecasting can lead to the accumulation of excess stock or the reverse

What is Forecast Error?

One way to check the quality of your demand forecast is to calculate its forecast error. Forecast error is the
deviation of the actual demand from the forecasted demand. If you can calculate the level of error in your
previous demand forecasts, you can factor this into future ones and make the relevant adjustments to your
planning.

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Forecast Accuracy/Forecast Error Calculations

There are a number of formulas that inventory planners can use to calculate forecast accuracy/forecast
error, from the fairly simple to the quite complex. Two of the most common forecast accuracy/error
calculations include MAPE – the Mean Absolute Percent Error and MAD – the Mean Absolute Deviation.

A fairly simple way to calculate forecast error is to find the Mean Absolute Percent Error (MAPE) of
your forecast. Statistically MAPE is defined as the average of percentage errors.

1. MAPE formula

The MAPE formula consists of two parts: M and APE. The formula for APE is:

Since MAPE is a measure of error, high numbers are bad and low numbers are good.

2. MAD formula

Another common way to work out forecast error is to calculate the Mean Absolute Deviation (MAD).
This shows the deviation of forecasted demand from actual demand in units. It takes the absolute value of
forecast errors and averages them over the forecasted time periods.

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CAPACITY PLANNING

The effective management of capacity is the most important responsibility of production and operations
management. The objective of capacity management i.e., planning and control of capacity, is to match the
level of operations to the level of demand.

Capacity planning is concerned with finding answers to the basic questions regarding capacity such as:

(i) What kind of capacity is needed?

(ii) How much capacity is needed?

(iii) When this capacity is needed?

Capacity planning is to be carried out keeping in mind future growth and expansion plans, market trends, sales
forecasting, etc. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as
volume of output per period of time.

Capacity planning is required for the following:

• Sufficient capacity is required to meet the customers demand in time,

• Capacity affects the cost efficiency of operations,

• Capacity affects the scheduling system,

• Capacity creation requires an investment,

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• Capacity planning is the first step when an organisation decides to produce more or new products.

Capacity is mathematically expressed as:

Capacity = (Maximum production rate/Hour) x (Number of hours worked/Period);

where, Production Rate = Number of units produced/Amount of time

Capacity planning is mainly of two types:

(i) Long-term capacity plans which are concerned with investments in new facilities and equipments. These
plans cover a time horizon of more than two years.

(ii) Short-term capacity plans which takes into account work-force size, overtime budgets, inventories etc.
Capacity refers to the maximum load an operating unit can handle. The operating unit might be a plant, a
department, a machine, a store or a worker. Capacity of a plant is the maximum rate of output (goods or
services) the plant can produce.

The production capacity of a facility or a firm is the maximum rate of production the facility or the firm is
capable of producing. It is usually expressed as volume of output per period of time (i.e., hour, day, week,
month, quarter etc.). Capacity indicates the ability of a firm to meet market demand - both current and future.

Effective Capacity can be determined by giving due consideration to the following factors:

Facilities - design, location, layout and environment.

Product - Product design and product-mix.

Process - Quantity and quality capabilities of the process or to be followed.

Human factors - Job content, Job design, motivation, compensation, training and experience of labour,
learning rates and absenteeism and labour turn over.

Operational factors - Scheduling, materials management, quality assurance, maintenance policies, and
equipment break-downs.

External factors - Product standards, safety regulations, union attitudes, pollution control standards.

Measurement of capacity

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Capacity of a plant is usually expressed as the rate of output, i.e., in terms of units produced per period of time
(i.e., hour, shift, day, week, month etc.). But when firms are producing different types of products, it is
difficult to use volume of output of each product to express the capacity of the firm. In such cases, capacity of
the firm is expressed in terms of monetary value (production value) of the various products produced put
together.

Capacity Requirement Planning : Capacity requirement planning (CRP) is a technique which determines
what equipment and labour/personnel capacities are required to meet the production objectives (i.e., volume
of products) as per the master production schedule and material requirement planning (MRP-I).

Capacity Requirement Planning Strategies:

Two types of capacity planning strategies used are:

(i) “Level capacity” plan and

(ii) “Matching capacity with demand” plan.

“Level capacity” plan is based in “produce-to-stock and sell” approaches wherein the production systems are
operated at uniform production levels and finished goods inventories rise and fall depending upon whether
production level exceeds demand or vice versa from time period to time period (say every quarter).

“Matching capacity with demand” Plan: In this plan, production capacity is matched with the demand in
each period (weekly, monthly or quarterly demand). Usually, material flows and machine capacity are
changed from quarter to quarter to match the demand. The main advantages are low levels of finished goods
inventory resulting in lesser inventory carrying costs. Also, the back-ordering cost is reduced. The
disadvantages are high labour and material costs because of frequent changes in workforce (hiring, training
and lay-off costs, overtime or idle time cost or subcontracting costs).

Forms/Models of capacity planning:

Based on time-horizon

(i) Long-term capacity planning and

(ii) Short-term capacity planning

Based on amount of resources employed

(i) Finite capacity planning and

(ii) Infinite capacity planning

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Aggregate Planning:

Aggregate planning is an intermediate term planning decision. It is the process of planning the quantity and
timing of output over the intermediate time horizon (3 months to one year). Within this range, the physical
facilities are assumed to be fixed for the planning period. Therefore, fluctuations in demand must be met by
varying labour and inventory schedule. Aggregate planning seeks the best combination to minimise costs.

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Production planning in the intermediate range of time is termed as ‘Aggregate Planning’. It is thus called
because the demand on facilities and available capacities is specified in aggregate quantities. For example
aggregate quantities of number of Automobile vehicles, Aggregate number of soaps etc. Here the total
expected demand is specified without regard to the product mix that makes up the specified figure.

While dealing with production problems, the planning process is normally divided in three categories.

(i) Long range Planning which deals with strategic decisions such as purchase of facilities, introduction of
new products, processes etc.

(ii) Short term planning which deals with day-to-day work, scheduling and sometimes inventory problems.

(iii) Intermediate Planning or Aggregate Planning, which is in between long range and short term
planning, which is concerned in generally acceptable planning taking the load on hand and the facilities
available into considerations. In aggregate planning the management formulates a general strategy by which
capacity can be made to satisfy demand in a most economical way during a specific moderate time period, say
for one year. The aggregate planning is made operational through a master schedule that gives the
manufacturing schedule (Products and dates of manufacture). Generally, day-to-day schedules are prepared
from master schedule. Facility planning and scheduling has got very close relationship with aggregate
planning.

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A Master Production Schedule (MPS) is a plan for production, staffing, inventory and resources. It is usually
linked to manufacturing where the plan indicates when and how much of each product will be

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demanded. This plan quantifies significant processes, parts, and other resources in order to optimize
production, to identify bottlenecks, and to anticipate needs and completed goods.

Master Production Scheduler’s schedules every possible aspect of production such as forecast demand,
production costs, inventory costs, lead time, working hours, capacity, inventory levels, available
storage, and parts supply. The MPS is a statement of what the company expects to produce and
purchase(i.e. quantity to be produced, staffing levels, dates, available to promise and projected balance).

The MPS translates the business plan, including forecast demand, into a production plan using planned orders
in a true multi-level optional component scheduling environment. Using MPS helps avoid shortages, costly
expediting, last minute scheduling, and inefficient allocation of resources. Working with MPS allows
businesses to consolidate planned parts, produce master schedules and forecasts for any level of the Bill of
Material (BOM) for any type of part.

Scheduling Types

Companies use backward and forward scheduling to allocate plant and machinery resources, plan
human resources, plan production processes and purchase materials.

Forward scheduling is planning the tasks from the date resources become available to determine the

shipping date or the due date.

Backward scheduling is planning the tasks from the due date or required-by date to determine the start date
and/or any changes in capacity required.

MPS Purpose & Relationship

The Master Schedule’s primary purpose is to translate the strategic initiatives of top management into
workable day to- day actions that result in making and shipping products to customers, providing
service and earning their satisfaction. MPS relationships between three important processes: Master
Planning, Detail Planning and Planning Execution.

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Make or Buy Decision: Factors, Criteria and Analysis
Introduction to Make or Buy Decision:

Make or buy is a valid consideration in any cost reduction or product improvement programme. Advantages
and disadvantages of possible alternatives should be evaluated and the choice that identifies the minimum cost
makes for the final decision.

Make:
It requires appropriate production equipment, suitable personnel, material, adequate space, supervision, design
standards and involves overheads, maintenance, taxes, insurances, management attention and other indirect
and hidden costs.

It provides work for idle equipment and personnel utilise scrap material, shorten delivery period, permits strict
adherence to the raw material specification and quality of final product. It ensures continuity of supply, may
cost less than purchase and keep design and research information secret.

Buy:
Permits lower investment in facilities, smaller labour force, less handling, lower plant cost for building and
upkeep, less overhead or taxes, insurance and supervision and less problems of man-management relations.

Buy permits specialisation, allows manufacture by most efficient equipment, lowers inventories, change of
design without loss of investment in equipment or inventory, obtaining best price of product, and supplying
more varied experience and encourages growth of ancillaries.

Whether to make or buy is sometimes referred as a purchasing function, though the decision whether to make
components in one’s own factory or to buy them from market is a top management policy matter.

Theoretically, a company has choice of three alternatives before starting for a new product:

1. Purchase the product complete from a contracted manufacturer.

2. Purchase some components and materials, and manufacture and assemble the balance in its own plants.

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3. Manufacture the product completely, starting with the extraction of basic raw materials.

In practice, almost no company considers the third alternative. Some companies choose the first alternative
and obtain a new product completely from another company. These companies usually have no manufacturing
units, but sell the product under their trade marks.

But in general, most of the companies make certain components of a product and buy others. The companies
may buy a component from outside in semi-finished or complete state or buy the raw material only.

Factors Considered for Make or Buy Decision:

Factors Considered for Buying:

1. What quantities are involved?

2. Will drawings need modification?

3. Whether jigs, tools, gauges are loaned?

4. Will demand be temporary or permanent?

5. Will demand fluctuate?

6. Are special manufacturing techniques involved?

7. Is there any question of secrecy?

8. Is there a likely market elsewhere?

9. Are frequent design changes likely?

10. Arrangement for inspection, sampling etc.

11. Retention of own production personnel.

12. What notice of termination is required?

Factors Considered for Manufacturing:

1. Are patents or copy rights involved?

2. If so, what are the royalties?

3. Have the best prices been obtained?

4. Are the quantities optimized?

5. Is the previously contracted firm already making something similar which could be added to the new item,
thus reducing production cost?

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6. Techniques of production may be special.

7. Is raw material readily available?

8. If free material to be provided?

9. Will any tax be involved?

Criteria for Make or Buy Decision:

Companies prefer own manufacturing and buying only raw material or semi-finished parts.

Such decision is made in the following cases:

1. Finished product can be made cheaply by the firm than that by the outside suppliers.

2. Finished product only is manufactured by limited number of outside firms, which are unable to meet the
demand.

3. The part has an importance for the firm, and requires extremely close quality control.

4. The part can readily be manufactured with the firm’s existing facilities and the part is similar to other items
in which the company has manufacturing experience.

5. Requires high investment on facilities, which are not available at supplier’s plant.

6. Has a demand that is both stable and relatively large.

Companies will usually buy a finished part from an outside supplier when:

1. They do not have facilities to make it and there are other profitable opportunities for investing company
capital.

2. Existing facilities can be used more economically to make other parts.

3. The skill of personnel employed by company is not readily available to manufacture the part.

4. Patent or other legal barriers prevent the company for making the part.

5. Demand for the part is either temporary or seasonal.

Analysis for Make or Buy Decision:

There are three types of analysis:

1. Simple cost analysis.

2. Economic analysis.

3. Break-Even-Point analysis.

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1. Simple Cost Analysis:

A make or buy cost analysis involves a determination and comparison of the cost to make the part and the cost
to buy it. The final make or buy decision must be based on a careful weighing of the cost considerations and
various quantitative considerations.

The most difficult make-buy factors to assess are those that will significantly be affected by change in
economic conditions, technological advancement, growth of the firm, or changes in the labour management
relations in the future. Studies show that more mistakes are made in making what could be more profitable to
bought than in buying what could more profitable to be made.

Following major elements should be involved in a ‘make or buy’ cost estimate:

To make:

1. Delivered purchased material costs.

2. Direct labour costs.

3. Any follow-on costs.

4. Incremental inventory carrying costs.

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5. Incremental factory overhead costs.

6. Incremental purchasing costs.

7. Incremental managerial costs.

8. Incremental costs of capital.

To buy:

1. Purchase price of the part.

2. Transportation costs.
3. Receiving and inspection costs.
4. Incremental purchasing costs.
5. Any follow-on cost related to quality or service.
To get a clear picture, analyst must carefully evaluate these costs considering the effects of time and capacity
utilisation. Cost figures must include all relevant costs, direct and indirect, and they must reflect the effect of
anticipated cost changes. Since it is difficult to predict future cost levels, estimated average cost figures for the
total time period in question are generally used.

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Example 1:A detailed simple cost analysis is as follows:

On the basis of above cost analysis it is quite clear that the decision must be in favour of buying the part.

Break-Even Point Theory:

The break-even point of any two variable situations is the point or the value at which they become equal as a
result of a common variable.

Break - Even Point – It is a point which neither profit, nor loss is made. At this point company’s earnings are
just sufficient to cover the expenses.

There are following two methods to obtain break-even point:

(a) Mathematical method.

(b) Graphical method.

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Graphical method:

Although the break-even point may be calculated mathematically but it is usually represented graphically
because it enables manager to see more clearly the break-even point and the possibilities for profits and
losses. By using these charts one can predict probable profits at various levels of output.

A break-even chart given in Fig. is used to determine break-even point and amount of profit or loss under
varying conditions of output of costs. Sales or expenditure in rupees is represented on vertical axis, while
output (either in quantity or in percentage capacity) is represented on horizontal axis.

Line A represents the “fixed cost”, Line B represents total cost or total expenses, while line C represents sales
revenue and indicates income at various levels of output. The point where lines B and C intersect each other is
“Break-Even Point”. The space between lines B and C to the right of the “Break-Even Point” potential loss.
The amount of loss or profit can be measured on vertical scale.

Some Important Definitions:

(i) Angle of incidence:

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It is the angle at which income line or sales line cuts the total cost line. If the angle is large, it is an indication
that profits are being made at a high rate, on the other hand, if the angle is a small, it indicates that less profits
are being made and are achieved under less favourable conditions.

(ii) Margin of safety:

It is the output at full capacity minus the output at “Break-Even Point”. It is expressed as percentage of output
at full capacity. If the margin of safety is small, a small drop in production capacity will reduce the profit
greatly.

It can also be expressed as:

(iii) Contribution:
It is the difference between sales and variable cost (marginal cost). It is also called as Marginal Profit or Gross
Margin. The marginal profit provides the contribution towards fixed cost and profit.

Contribution = (Sales – Variable cost) which in turn will be equal to fixed cost + Profit.

Break-Even Point Calculations:

(A) Break Even Point(BEP) in terms of physical units
Fixed Costs
BEP = ---------------------------------------------------
Selling Price – Variable cost per unit

(B) Break Even Point(BEP) in terms of Sales Value

Fixed Costs
BEP = ----------------------------
Contribution Ratio

Selling Value – Variable cost

Contribution Ratio = -------------------------------------
Selling Value

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Example :
The following data from a plant is available:

Fixed cost per year = Rs. 7500

Total sales from three products = Rs. 25,000
It is decided by the management to drop the product A and add product D. To find whether the decision is
profitable or not?
Assume sales for products B, C and D as Rs. 26,000.

Solution:
Total fixed cost per year = Rs. 7500.
Sales for the current year = 25,000
Product A contribution = Rs. (10 – 6) = Rs. 4
... Contribution for 20% sales of product A = 10 – 6/10 × 0.20 = 0.08
Similarly for product B, = 6 – 4/6 × 0.30 = 0.10
and for product C = 20 – 12/20 × 0.5 = 0.20
Thus contribution ratio for product A, B and C
= 0.08 + 0.10 + 0.20 = 0.38
... Total contribution of sales = 0.38 × 25,000 = Rs. 9500
... Profit = Contribution—Fixed costs = 9500 – 7500 = Rs. 2000
Similarly, the profit or contribution for new product line of products D, B, C
D = 16-6/16 × 10% = 0.06
B = 6 – 4/6 × 0.50 = 0.17
C = 20 – 12/20 × 0.40 = 0.16
... Total contribution ratio = 0.06 + 0.17 + 0.16 = 0.39
... Total contribution from sales = 26,000 × 0.39 = Rs. 10,140
... Profit = 10,140 – 7500 – Rs. 2640.
Hence proposed decision is profitable to accept.

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Break-even Analysis:

The decision regarding make or buy can easily be made with the help of break-even-point theory.

How the decisions are made using this theory can be easily understood with the help of following
example:

Example -
A manufacturer of motor cycles buys spark plugs at Rs. 8 each. In case he makes it himself, the fixed and
variable costs would be Rs. 10,000 and Rs. 3 per spark plug respectively. Should the manufacturer make or
buy the spark plugs?

Solution:
Graphical Method:

A break-even chart is drawn for solving the problem as shown in Fig.. Draw horizontal line AB at a distance
to show the fixed cost involved in making a spark plug. Draw the line AC for the variable cost to make the
part. When no spark plug is made there is no variable cost and when 4,000 spark plugs will be made the
variable cost is Rs. 12,000. Thus the line starts from A and end at B, where total cost is equal to Rs. 10000 +
12000 = Rs. 22,000.

Draw line OD for the cost of buying the spark plug, at point A the cost of no spark plug is zero, whereas for
4000 spark plugs the cost is 8 × 4000 = Rs. 32,000.

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We see that break-even-point is P, and OQ is the quantity at BEP. Thus beyond Q (2000 spark plugs) it would
be cheaper to make the spark plugs than buy them. Below Q (2000 spark plugs) it would be cheaper to
purchase the spark plug than to make them.

What causes bottleneck in supply chain?

A few common contributing factors to bottlenecks include: poor storage methods, poorly developed
operating processes, undefined inventory norms, limited resource networks, inefficient manpower, lack
of supply chain transparency, and gaps between demand and supply.

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Man- Machine Chart

A man-machine chart graphically represents the relationship between the manual work performed by
one or more operators and one or more machines involved in a manufacturing process.
Given the different work steps required in a production process to load, operate and unload machines
in conjunction with the process times of the machines themselves the man-machine chart is used to
determine the highest production level that can be achieved given the resources available. This process
usually involves performing as much manual work as possible internal to the machine cycles i.e. when
the machine is running so that when a the machine cycle is complete the production generating
machine cycle can be restarted again with as little downtime as possible.

One Operator and One Machine

TIME OPERATOR MACHINE -1

5 SET UP TIME SET UP TIME

10

15

RUNNING
20 IDLE
TIME

25

30

Utility of Man =( 5/30) *100 =16.66%

Utility of Machine - 1 = (25/30 )*100=83.33%

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 One Operator and Two Machines

TIME OPERATOR MACHINE -1 MACHINE -2

RUNNING
5 SET UP TIME SET UP TIME
TIME

10 SET UP TIME SET UP TIME

15

RUNNING
20
TIME RUNNING
IDLE
25

30

Utility of Man =( 10/30) *100 = 33.33%

Utility of Machine - 1 = (25/30 )*100=83.33%

Utility of Machine - 2 = (25/30 )*100=83.33%

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 One Operator and Three Machines

TIME OPERATOR MACHINE -1 MACHINE -2 MACHINE -3

RUNNING
5 SET UP TIME SET UP TIME
TIME RUNNING
TIME
10 SET UP TIME SET UP TIME

15 SET UP TIME SET UP TIME

RUNNING
20
TIME RUNNING
TIME RUNNING
25 IDLE
TIME

30

Utility of Man =( 15/30) *100 = 50%

Utility of Machine - 1 = (25/30 )*100=83.33%

Utility of Machine - 2 = (25/30 )*100=83.33%

Utility of Machine - 3 = (25/30 )*100=83.33%

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 Inventory Management
 Inventory: It defined as a comprehensive list of movable items which are required for manufacturing the
products and to maintain the plant facilities in working conditions.
 Inventory Control: The systematic location, storage and recording of goods in such a way the desired
degree of service can be made to the operating shops at minimum ultimate cost.
 Objectives of Inventory Control:
1. To support the production departments with materials of the right quality in the right quantity, at the right
time and the right price, and from the right supplier
2. To minimize investments in the materials by ensuring economies of storage and ordering costs
3. To avoid accumulation of work in process
4. To ensure economy of costs by processing economic order quantities
5. To maintain adequate inventories at the required sales outlets to meet the market needs promptly, thus
avoiding both excessive stocks and shortages at any given time
6. To contribute directly to the overall profitability of the enterprise
 Functions of inventory control:
 To develop policies, plans and standards essential to achieve the objectives
 To build up a logical and workable plan of organization for doing the job satisfactory
 To develop procedure and methods that will produce the desired results economically
 To provide the necessary physical facilities
 To maintain overall control by checking results and taking corrective actions.

Types of inventory are:

1. Raw Materials Inventory: Parts and raw materials obtained from suppliers that are used in the production
process

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2. Work-in-process (WIP) Inventory: This constitutes semi-fi nished parts, components, sub-assemblies or
modules that have been inducted into the production process but not yet finished.
3. Finished Goods Inventory: Finished product or end-items.
4. Replacement Parts Inventory: Maintenance Parts meant to replace other parts in machinery or
equipment, either the company’s own or that of its customers.
5. Supplies Inventory: Parts or materials used to support the production process, but not usually a
component of the product.
6. Transportation (pipeline) Inventory: Items that are in the distribution system but are in the process of
being shipped from suppliers or to customers.

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Inventory Costs
1. Ordering Cost (S)
Although it costs money to hold inventory, it also, unfortunately, necessary to replenish inventory. These
costs are called inventory ordering costs.

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2.Holding (or Carrying) Costs (H)
It costs money to hold inventory. Such costs are called inventory holding costs or carrying costs. This broad
category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence,
depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favor low
inventory levels and frequent replenishment. There is a differentiation between fi xed and variable costs of
holding inventory. Some of the costs will not change by increase or decrease in inventory levels, while some
costs are dependent on the levels of inventory held.

3.Shortage or Stock-out Costs

When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or
be canceled. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stock
out. The costs that are incurred as result of running out of stock are known as stock out or shortage costs. As a
result of shortages, production as well as capacity can be lost, sales of goods may be lost, and finally
customers can be lost.

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Inventory Control Systems

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ABC Analysis:
ABC analysis is a technique of controlling inventories based on their value and quantities. It is more
remembered as an analysis for ‘Always Better Control’ of inventory. Here all items of the inventory are
listed in the order of descending values, showing quantity held and their corresponding value.

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Then, the inventory is divided into three categories A, B and C based on their respective values.
A – Refers to high value item
B – Refers to medium value item
C – Refers to low value item
A category comprises of inventory, which is very costly and valuable. Normally 70% of the funds are tied up
in such costly stocks, which would be around 10% of the total volume of stocks. Because the stocks in this
category are very costly, these require strict monitoring on a day-to-day basis.
B category comprises of inventory, which is less costly. Twenty percent of the funds are tied up in such
stocks and these accounts for over 20% of the volume of stocks. These items require monitoring on a weekly
or fortnightly basis
C category consists of such stocks, which are of least cost. Volume wise, they form 70% of the total stocks
but value-wise, they do not cost more than 10% of the investment in the stocks. This category of stocks can be
monitored on a monthly or bi-monthly basis.

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Reorder Point
The reorder point (ROP) is the level of inventory which triggers an action to replenish that particular
inventory stock. Itis a minimum amount of an item which a firm holds in stock,such that, when stock falls
to this amount, the item must be reordered. It is normally calculated as the forecast usage during the
replenishment lead time plus safety stock. In the EOQ (Economic Order Quantity) model, it was assumed
that there is no time lag between ordering and procuring of materials.
Reorder Point = Normal consumption during lead-time +Safety Stock
Safety Stock
Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate
risk of stock outs (shortfall in raw material or packaging) caused by uncertainties in supply and
demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety
stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an
insurance against stock outs.
Lead Time

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A lead time 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 manufacturer might be between 2
weeks and 6 months, depending on various particularities. One business dictionary defines "manufacturing
lead time" as the total time required to manufacture an item, including order preparation time, queue
time, setup time, run time, move time, inspection time, and put-away time. For make- to-order products, it is
the time between release of an order and the production and shipment that fulfill that order. For make-to-
stock products, it is the time taken from the release of an order to production and receipt into finished goods
inventory.

JUST-IN-TIME (JIT)
Objectives of JIT manufacturing : The specific goal of JIT manufacturing is to provide the right quality
level at the right place. Customer demand always determines what is right. JIT tries to build only what
internal and external customers want and when they want it. The more focussed objectives of JIT are:
(i) Produce only the products (goods or services) that customers want.
(ii) Produce products only as quickly as customers want to use them.
(iii) Produce products with perfect quality.
(iv) Produce in the minimum possible lead times.

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(v) Produce products with features that customers want and no others.
(vi) Produce with no waste of labour, materials or equipment, designate a purpose for every movement to
leave zero idle inventory.
(vii) Produce with methods that reinforce the occupational development of workers.

Overview of JIT manufacturing

JIT manufacturing includes many activities :
(i) Inventory reduction : JIT is a system for reducing inventory levels at all stages of production viz. raw
materials, work-in-progress and finished goods.
(ii) Quality improvement : JIT provides a procedure for improving quality both within the firm and outside
the firm.
(iii) Lead time reduction : With JIT, lead time components such as set-up and move times are significantly
reduced.
(iv) Vendor control/Performance improvement : JIT gives the buying organisation greater power in buyer-
supplier relationship. The firm moves from a situation where multiple suppliers are used to a situation where
only one or two suppliers are used for supplying most of the parts. With fewer suppliers, the buying
organisation has more power because it is making larger purchases from each vendor. Also, the buying
organisation can now impose higher requirements on each supplier in terms of delivery and quality.
(v) Continuous Improvement : In the JIT system, existing problems are corrected and new problems
identified in a never-ending approach to operations management.

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(vi) Total Preventive Maintenance : JIT emphasises preventive maintenance to reduce the risk of
equipment break-downs which may cause production hold ups and increase in manufacturing cycle time due
to delays.
(vii) Strategic Gain : JIT provides the firm’s management with a means of developing, implementing
and maintaining a sustainable competitive advantage in the market place.

Seven Wastes (MUDA)

Shiego Shingo, a Japanese JIT authority and engineer at the Toyota Motor Company identifies seven wastes
as being the targets of continuous improvement in production process. By attending to these wastes, the
improvement is achieved.
1. Waste of over production eliminate by reducing set-up times, synchronizing quantities and timing
between processes, layout problems. Make only what is needed now.
2. Waste of waiting eliminate bottlenecks and balance uneven loads by flexible work force and equipment.
3. Waste of transportation establish layouts and locations to make handling and transport unnecessary if
possible. Minimise transportation and handling if not possible to eliminate.
4. Waste of processing itself question regarding the reasons for existence of the product and then why each
process is necessary.
5. Waste of stocks reducing all other wastes reduces stocks.
6. Waste of motion study for economy and consistency. Economy improves productivity and consistency
improves quality. First improve the motions, then mechanise or automate otherwise. There is danger of
automating the waste.
7. Waste of making defective products develop the production process to prevent defects from being
produced, so as to eliminate inspection. At each process, do not accept defects and makes no defects. Make
the process fail-safe. A quantify process always yield quality product.

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KANBAN SYSTEM

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What is Kanban?
Kanban is a Japanese word meaning signboard, sign, or card. A Kanban system primarily uses
visual cues to signal when a particular action should occur. In a manufacturing environment, for
example, a card listing specific information can be sent from the shipping department to the assembly
line requesting a certain number of products. The Kanban card in this example serves as a link between
the two departments and works to trigger the action of moving that material, enabling the work to
occur exactly when it should.

Types of Kanban Systems

 Production Kanban is the first and most basic type of Kanban system that can be implemented.
It focuses on a list of items that need to be completed at specific times to maximize production
flow.

 Withdrawal Kanban focuses on the movement of materials. Once one section of the process is
completed by a team of workers, the part moves to the next stage.

 Supplier Kanban cards enable the suppliers of the current manufacturing process to be
included within their supply chain network. Once a material runs low, the users can send a
request to the suppliers for more, streamlining distribution.

 Emergency Kanban cards are used when something requires immediate attention. This may be
anything from replacing a defective part or suddenly needing more materials due to an increase
in demand.

 Express Kanban cards deal with the shortage of an item and the immediate need for
replacement. These are like emergency Kanban cards, but they don’t deal with defects.

 Through Kanban is a combination of both the product and withdrawal cards used by two
production teams. Rather than having two separate cards, it is condensed to one that lets one
team know that they need to start a task and move the finished material to the next stage.

Kanban Cards

 These cards are the main source of visual communication within the agile project management
system that is Kanban. There are 1-card, and 2-card strategies that companies can use to
maximize workflow productivity.
 The information that Kanban cards may contain include
 The name and part number of the item
 A description of the item
 The quantity needed
 The location of its use
 Supplier information
 Number in series (e.g., card 1 of 4)

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A 2-card system usually has three main locations and two loops rather than a 1-card system that is
usually just used in the manufacturing facility. The 2-card strategy is one where if the shipping
department needs products, it sends its Kanban card to the store. The store provides the products and
sends its Kanban card to the production line. The production line then begins making more products.

A 2-bin system is commonly used in storage areas at many types of workplaces. It can be used in
warehouses, supply rooms at hospitals, places where ingredients are stored in restaurants or bakeries,
and more.

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This system functions by having two bins of a particular item placed one in front of the other, often on
shelves. When the first bin is empty, it is removed, and the second bin is pulled forward. Then one of
two things can happen. Either the empty bin itself will be placed in a designated location for reordering
or a Kanban card placed at the back of the bin that has reordering information is placed in a separate
location with other cards that specify reordering needs. This system is simple, but it helps ensure
supplies never run out.
A 3-bin system connects different departments or different parts of work processes. In some cases, it
even connects a company to its outside suppliers.
As an example, a basic 3-bin system functions by placing one bin at the factory where products are
made, one at the store where parts/materials are held, and one at the supplier. When the factory runs
out of parts, it sends its empty bin to the store to be refilled. The store fills the bin and now sends its
own newly emptied bin to the supplier. The supplier then sends a full bin to the store. The bins serve as
the signal that each downstream part of the process needs more of something. They also give
permission to move those things; in Kanban, nothing moves without permission.

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Supply Chain Management (SCM)

At the most fundamental level, supply chain management (SCM) is management of the flow of goods,
data, and finances related to a product or service, from the procurement of raw materials to the
delivery of the product at its final destination.

Supply chain management is the handling of the entire production flow of a good or service — starting
from the raw components all the way to delivering the final product to the consumer. A company
creates a network of suppliers (“links” in the chain) that move the product along from the suppliers of
raw materials to those organizations that deal directly with users.

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Supply Chain for Service Providers
The ultimate and most important member would be service provider. They serve as the core unit
of service supply chain and service provider plays similar role as the focal company in a traditional
manufacturing supply chain.
Service chain management enables service organisations to improve customer satisfaction and
reduce operational costs through intelligent and optimised forecasting, planning and scheduling of the
service chain, and its associated resources such as people, networks and other assets.

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Value Chain Management

Manufacturing value chain management (VCM) is the process of monitoring and managing all the
components that comprise manufacturing, including procurement, production, quality control and
distribution.
This practice has gained prominence over the past couple of decades. As business in general has gone
increasingly global, the resulting competition has caused many companies to focus on their core
competencies and outsource other business activities.
This core-competency strategy was designed to help streamline operations and make them more
profitable by moving less-efficient and non-core competency tasks and operations outside the
enterprise. One unintended result, however, was the increasing diversity and complexity of
external processes that lengthened the vendor-to-customer chain.
In response, methodologies to help manage, standardize and optimize the value chain end-to-
end were developed and value chain management was born. The concept was originally introduced
by Michael Porter in Competitive Advantage: Creating and Sustaining Superior Performance (1985).
Since then, the concept has continually grown in importance.
Ultimately, the purpose of value chain analysis is to increase efficiency, delivering the most possible
value to consumers at the lowest possible cost. Achieving this optimal value chain results in a
significant competitive advantage.

Examples of Value Chain Management Fundamentals

 Integrated supply chain planning & scheduling

 Comprehensive resource management

 Achieving more responsive cycle cimes

 Supply chain-wide resource optimization

 Vendor/customer information integration

Benefits of value chain management

Proper VCM is key to optimizing business operations and maximizing profit. Companies can optimize
value for themselves, their vendors and their end customers when they effectively manage the flow of
production and sales from inbound logistics to operations, outbound logistics, marketing, and sales and
service.

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Seven Important Benefits of Value Chain Management

1. Improved Bids and Proposals: Effective VCM improves your ability to capture, track and
manage customer and marketing requirements to better estimate design, planning,
procurement, production and service activities for more accurate cost estimates — all with
complete traceability.

2. Better Product Planning, Research, and Development: Good VCM includes developing a
cross-functional team approach to planning, developing, delivering and servicing products
focused on program performance, cost reduction and product quality. This enables you to more
effectively plan and implement simultaneous projects while managing resource allocation, costs,
scheduling and deliverables more efficiently.

3. Standardized Processes: VCM calls for repeatable and measurable business processes to better
manage the product master data to ensure that customer expectations and commitments are
met. Active VCM enables release and change processes to be better managed from concept to
implementation. Standard, reliable and repeatable processes contribute significantly to reducing
overall operational inefficiencies and waste.

4. Improved Vendor Management: Synchronizing design and sourcing teams with vendors
ensures that outsourced components and subsystems are managed to meet performance,
quality, schedule and cost requirements while avoiding design flaws, excess inventory and
waste.

5. Post-Sales Service and Support: Through VCM, you’re able to better manage and track in-
service product configuration changes coordinated among field service, customer support and
engineering resources.

6. Reduced Costs: Optimizing all the value chain components listed above can result in substantial
end-to-end cost savings from streamlined processes, reduced inefficiencies and waste, better
inventory control and improved product quality.

7. Improved Profitability: The ultimate result of a comprehensive and robust VCM program is
enhanced revenues and better profit margins, contributing to greater overall success.

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Vendor
A vendor, also known as a supplier, is an individual or company that sells goods or services to someone
else in the economic production chain.

The vendor management process is a series of strategic and tactical activities that companies use to
manage and collaborate with vendors. This includes setting objectives, establishing vendor selection
criteria, negotiating contracts, strategizing for risk reduction, and controlling for cost and delivery.

7 Things to Consider When Choosing/Selection of a Vendor

 Price.
 Quality of Product or Service.
 Check References.
 Customer Service.
 Ethics and Integrity of The Vendor.
 Professional Employees.
 Recommendations from Others.
 Existing Relationships.

Criteria for Supplier Evaluation in the Construction Sector

 Quality, Cost, and Delivery (QCD)
 Long-Term Relationship.
 Financial Stability.
 Total Quality Performance and Philosophy.
 E Commerce Capabilities

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Vendor Development Process

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Step # 1. Identify critical commodities for development:This is a portfolio analysis which states that not all
organisation required to go for vendor development which are already using sourcing facilities from word-class
vendors or the outsourcing ratio is very small to total cost or total sales so that investment in vendor is neither
strategically nor financially justifiable.So a corporate level executive committee should develop an assessment of
the relative importance of all goods and services purchased by the company to identify where to focus any
development efforts. This is called critical analysis of commodities related to vendor-development.

Step # 2. Identify vendors for critical commodity development:After identifying commodities for
development next step is to identify group of vendors of that particular critical commodity needed to be
developed. A very well-known approach is parcto-analysis of existing Vendor performance. Vendors who are
failing to meet minimum performance objectives related to the quality-areas, delivery, cycle time, late-delivery
time, total cost, service, safety or the climate and environment are targeted for analysis and appropriate
development.

Step # 3. Formation of internal team:Before approaching vendors and asking for improvements, it is important
to develop internal cross-functional team for the initiative. Team members come from different departments like
design, engineering, quality control.

Step # 4. Meeting with top-management of vendor:After identify the suitable vendor for development and
establishing a team, a team should approach the top management of vendor and establish key area decision
related to strategic alignment, measurement and professionalism.Strategic alignment not only means an internal
business and technology alignment, but it should also focus on customer requirement. Vendor measurement
includes a total cost focus, credibility and technical function. Professionalism involves setting a positive
relationship, faster communication, trust development, provide expertise whenever required.

Step # 5. Identify opportunities for development: At meetings with top management of vendor executive
should identify area for improvement. Such areas are formed on the basis of customer’s expectations needs.

Step # 6. Define feasibility and viability:After identifying the key areas for development opportunities should
be evaluated in terms of feasibility and viability and it should include resources and time-requirements for
carrying out the project and potential outcomes of this investment.

Step # 7. Joint agreement of project:Once a potential improvement project is seected, both buyer and vendor
must reach an agreement related to the specific measures that will indicate success. These measures may include
percentage of quality improvement, percentage of cost saving shared, percentage of delivery or cycle time
improvement, technology availability and system implementation stage. Once an agreement is reached, the
project is rolled out hopefully according to schedule.

Step # 8. Monitoring progress of project:Once a vendor development project has been initiated, progress must
be monitored and tracked over time. This can be achieved by creating different monitoring means, process and
standards for objectives, updating progress and in turn creating new or revised objectives based on progress till
date.

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Step # 9. Follow-up and modification:By continuing the step (viii) we have required continuous follow-up and
accordingly it may require modification in the original plan, additional resources, information or priorities
depending upon the current situation at that time.

Vendor negotiation

Vendor negotiation is the strategic process of reaching an agreement that is mutually beneficial for your
business and it's third-parties. It may involve multiple discussions, compromise from both parties and
the involvement of softer skills

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MATERIAL REQUIREMENT PLANNING (MRP)

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 MRP is the scientific way of determining the requirements of raw materials, spares,
components, and all other items required for production within the economic investment
policies of the productive system.
• MRP converts the Master schedule for the final product into a detailed schedule for raw materials and
all other items required for production.
• MRP helps to understand about order time, the delivery time of all the materials necessary for smooth
production function.
• The logic of MRP is based on the principle of dependent demand. i.e. the direct relationship between
the demand of one item and demand of its main assembly (e.g. wheel and bicycle).
• MRP projects not only the demand but also the timing of the inventory demand.
• MRP determines quantity and timing for material planning.
MRP Objectives
MRP has several objectives, such as:
Reduction in Inventory Cost: By providing the right quantity of material at the right time to meet the
master production schedule, MRP tries to avoid the cost of excessive inventory.
Meeting Delivery Schedule: By minimizing the delays in materials procurement, production decision
making, MRP helps avoid delays in production thereby meeting delivery schedules more consistently.

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Improved Performance: By streamlining the production operations and minimizing the unplanned
interruptions, MRP focuses on having all components available at the right place in the right quantity at
the right time.
Functions of Material Requirements Planning:
1. To ensure that material and components are available for production.
2. To ensure that final products are ready for dispatch.
3. To maintain minimum inventory.
4. To ensure the right quantity of material is available at the right time to produce the right quantity of
products.
5. To ensure the planning of all manufacturing processes.
6. To reduce investment in work in process inventories.
Components of MRP system
Inputs to MRP:
1. Supplier lead time: supplier lead time need to be an essential part of how you plan production.
2. On hand inventory: If resource material is available in inventory, then there is no necessity to
purchase new. This saves money. This helps to optimize on the materials already in the inventory.
Keeping promises of customers is also easy.
3. Current forecasting: if there is knowledge about what you have already forecasted, then this can
alert the organization to make changes that need to be made. This helps to line up demand and
inventory.
4. Work and machine center capacity:
• Knowledge person capacity is a must to do MRP.
• Whenever a customer wants material, we should make it available to the customer.
• If capacity at work is known, then the planning of material available for dispatch can be calculated.
• As per such calculation, we can give promises to the customers.
5. Order history and season:
• There should be an idea about seasonal trends.
• This knowledge helps to optimize production rate as per the demands. Also, in addition to the above,
the following are a few more inputs for effective MRP.
6. Price trends of the materials.
7. Import policy of the government.
Input Files of MRP :
Master Production Schedule (MPS): MPS is designed to meet the market demand (both the firm
orders and forecasted demand) in the future in the taken planning horizon. MPS mainly depicts the

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detailed delivery schedule of the end products. However, orders for replacement components can also
be included in it to make it more comprehensive.
Bill of Materials (BOM) File: BOM represents the product structure. It encompasses information about
all sub-components needed, their quantity, and their sequence of buildup in the end product.
Information about the work centers performing buildup operations is also included in it.
Inventory Status File: Inventory status file keeps an up-to-date record of each item in the inventory.
Information such as item identification number, quantity on hand, safety stock level, quantity already
allocated and the procurement lead time of each item is recorded in this file.
Output Of MRP :
Planned Orders Receipts: This is the order quantity of an item that is planned to be ordered so that it is
received at the beginning of the period under consideration to meet the net requirements of that
period. This order has not yet been placed and will be placed in the future.
Planned Order Release: This is the order quantity of an item that is planned to be ordered in the
planned time period for this order that will ensure that the item is received when needed. Planned
order release is determined by offsetting the planned order receipt by the procurement lead time of
that item. Planned Order Release includes inventory forecast, purchase commitment reports, stock-out
incidences, etc.
Order Rescheduling: This highlights the need for any expediting, de-expediting, and cancellation of
open orders, etc. in case of unexpected situations.
MRP Outputs Reports :
The material requirements planning program generates a variety of outputs that can be used in the
planning and management of plant operations.
These outputs include:
1. Order release notice, to place orders that have been planned by the MRP system
2. Reports showing planned orders to be released in future periods
3. Rescheduling notices, indicating changes in due dates for open orders
4. Cancellation notices, indicating cancellation of open orders because of changes in the master
schedule
5. Reports on inventory status
These reports include:
1. Performance reports of various types, indicating costs, item usage, actual versus planned lead times,
and other measures of performance
2. Exception reports, showing deviations from schedule, orders that are overdue, scrap, and so on

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3. Inventory forecasts, indicating projected inventory levels (both aggregate inventory as well as item
inventory) in future periods
Advantages of material resource planning:
1. Minimum levels of inventories are possible.
2. As inventories are minimum, the costs related to them are also less.
3. Material tracking becomes easy.
4. It is ensured that the economic order quantity is achieved for all lot orders.
5. Material planning smoothens capacity utilization.
6. MRP allocates the correct time to products as per the demand forecast.
7. Quicker response to the change in demand.
8. Better machine utilization.
9. No issues of shortages.
10. Better inventory turnover.
Limitations of MRP:
Material planning is highly dependent on the inputs it receives from other systems or departments. If
the input information is not correct than output for material planning will also be incorrect.
The material planning system requires proper training for end-users, as to get maximum out of the
system.
The material resource planning system requires a substantial investment of time and capital.

ENTERPRISES RESOURCE PLANNING (ERP)

An ERP system is a business process management software that integrates daily business
activities. This ranges from providing real-time and accurate information to increasing interdepartmental
communication to allowing leadership to make good decisions. These decisions are based on previous data
the ERP system collects.
Enterprises- is a group of people with a common goal, which has certain resources at its disposal to
achieve that goal
Resource- include money, management, materials and all other things that are required to run the
enterprise
Planning- is done, so that all the functions are performed in the right manner at the right time

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Enterprise Resource Planning (ERP) is the integrated management of main business processes, often
in real time and mediated by software and technology.

Enterprise Resource Planning (ERP) refers to a type of software that organizations use to manage
day-to-day business activities such as accounting, procurement, project management, risk management
and compliance, and supply chain operations.

1. Finance
The finance and accounting module is the most important ERP module because it allows businesses to
understand their current financial state and future outlook. Key features of this module include
tracking accounts payable (AP) and accounts receivable (AR) and managing the general ledger. It also
creates and stores crucial financial documents like balance sheets, payment receipts and tax
statements.

The financial management module can automate tasks related to billing, vendor payments, cash
management and account reconciliation, helping the accounting department close the books in a timely
manner and comply with current revenue recognition standards. It also has the data that financial
planning and analysis employees need to prepare key reports, including profit and loss (P&L)
statements and board reports, and run scenario plans.

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2. Procurement
The procurement module, also known as the purchasing module, helps an organization secure the
materials or products it needs to manufacture and/or sell goods. Companies can keep a list of approved
vendors in this module and tie those suppliers to certain items, helping with supplier relationship
management. The module can automate requests for a quote, then track and analyze the quotes that
come in.

Once a company accepts a quote, the procurement module helps the purchasing department prepare
and send out purchase orders. It can then track that purchase order as the seller turns it into a sales
order and ships the goods, automatically updating inventory levels once the order arrives.

3. Manufacturing
The earliest version of ERP, material requirements planning (MRP) systems, were designed for
manufacturers, and manufacturing remains a key piece of ERP. Today, ERP systems typically have a
production management or manufacturing execution system (MES). The manufacturing module helps
manufacturers plan production and make sure they have everything they need for planned production
runs, like raw materials and machinery capacity. During the manufacturing process, it can update the
status of goods-in-progress and help companies track actual output against forecasted production. It
also provides a real-time picture of the shop floor, capturing information on items in progress and
finished goods. It can calculate the average time to produce an item and then compare supply with
forecasted demand to plan adequate production.

4. Inventory Management
The inventory management module enables inventory control by tracking item quantities and location
down to individual SKUs. This module offers a complete picture of not only current but also incoming
inventory, through an integration with the procurement tool. This piece of software helps businesses
manage inventory costs, making sure they have sufficient stock without tying up too much cash in
inventory. An inventory management application can weigh sales trends against available product to
helps companies make informed decisions that boost margins and increase inventory turn (a measure
of how often inventory is sold over a certain period). It can help prevent stockouts and delays, which
enhances customer service.

Businesses that lack other supply chain management modules may also use the inventory management
application to handle purchase orders, sales orders and shipping. Larger organizations will need a
version of this solution that can track inventory across multiple locations.

5. Order Management
An order management module tracks orders from receipt to delivery. This piece of the ERP feeds all
orders to the warehouse, distribution center or retail store after customers place them and tracks their
status as they’re prepared, fulfilled and shipped to the customer. The order management module
prevents orders from being lost and boosts on-time delivery rates to keep customers happy and cut
unnecessary expenses for expedited shipping.

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More advanced order management applications can help a company determine the most cost-effective
option for fulfilling an order—a store vs. a warehouse vs. a third-party fulfillment partner, for example
—based on available inventory and the buyer’s location.

6. Warehouse Management
A warehouse management module can deliver a rapid return on investment for businesses that operate
their own warehouses. This application can efficiently guide warehouse employees through all
warehouse processes based on the layout of the facility, from putaway when shipments arrive to
picking to packing and shipping. It can also help companies plan labor based on expected order volume.
The warehouse management module can support different picking strategies like batch picking, wave
picking and zone picking depending on which is most efficient for a given business, and some modules
can show employees the most efficient pick path.

When the warehouse management module is integrated with inventory management and order
management applications, employees can quickly find the right products and get shipments out the
door quickly. Faster delivery ultimately increases customer satisfaction.

7. Supply Chain Management

A supply chain management module tracks each step in the movement of supplies and goods
throughout the supply chain, from sub-suppliers to suppliers to manufacturers to distributors to
retailers or consumers. It can also manage any materials or products returned for refund or
replacement.

As noted earlier, supply chain management can include a wide array of modules like procurement,
inventory management, manufacturing, order management and warehouse management. However, it
may have functionality beyond the core capabilities of those modules.

8. Customer Relationship Management (CRM)

The customer relationship management (CRM) module stores all customer and prospect information.
That includes the company’s communication history with a person—the date and time of calls and
emails, for example—and their purchase history. A CRM improves customer service because staffers
can easily access all the information they need when working with a customer.

Many businesses also use CRM to manage sales leads and opportunities. It can track communication
with prospects and suggest which customers should be targeted for certain promotions or cross-sell
opportunities. More robust CRM modules may support customer segmentation (enabling more targeted
marketing) and advanced contact managers and reporting tools.

9. Professional Services Automation (Service Resource Management)

A professional services automation (PSA) module, also called a service resource management module,
allows an organization to plan and manage projects. Services-based businesses often use this module.
The application tracks the status of projects, managing human and capital resources throughout, and

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allows managers to approve expenses and timesheets. It facilitates collaboration between teams by
keeping all related documents in a shared place. Additionally, the PSA module can automatically
prepare and send bills to clients based on rules around the billing cycle.

10. Workforce Management

A workforce management module is similar to a human resource management module but is designed
for companies with more hourly than salaried employees. It can monitor workers’ attendance and
hours and measure things like employee productivity and absenteeism.

Payroll could also fall under the workforce management module. A payroll sub-module automatically
distributes paychecks to employees on a set schedule with the appropriate taxes deducted and handles
expense reimbursement. It can also provide reports on payroll expenses, total overtime hours and
similar KPIs.

11. Human Resources Management

A human resource management (HRM) or human capital management (HCM) module usually
encompasses all the features of a workforce management application and offers additional capabilities.
HRM could be viewed as CRM for employees. This popular module has detailed records on all
employees and stores documents like performance reviews, job descriptions and offer letters. It tracks
not only hours worked but also paid time off (PTO)/sick days and benefits information.

Since the HRM module stores a vast amount of information on every employee across the organization,
it eliminates a lot of duplicate or inaccurate data that many organizations store in various spreadsheets.

12. Ecommerce
Certain ERP vendors offer an ecommerce module for businesses that want to sell online. This module
allows companies to quickly launch a business-to-business (B2B) or business-to-consumer (B2C)
ecommerce website. Leading commerce applications include user-friendly tools that allow employees
to easily add new items, update product content (item descriptions, titles, specs, images, etc.) and
change the look and feel of the website.

When the ecommerce application is integrated with other ERP applications, all payment, order and
inventory information feeds from the ecommerce module into the shared database. That ensures all
transactions are added to the ledger, out-of-stock items are removed from the site and orders ship on
time.

13. Marketing Automation

Like with ecommerce, certain software providers have developed a marketing automation module. A
marketing module manages marketing campaigns across digital channels like email, web, social media
and SMS. It can automate email sends based on campaign rules and has advanced customer
segmentation features, so customers only receive relevant messages.

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Marketing automation software, whether part of the ERP system or a separate solution, can provide
detailed reports on the performance of campaigns to shape future marketing plans and spend. These
applications increase leads, customer loyalty and, over time, sales.

WAREHOUSE MANAGEMENT SYSTEM(WMS)

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HUMAN RESOURCE MANAGEMENT (HRM)
Human resource management is the strategic approach to the effective and efficient management of
people in a company or organization such that they help their business gain a competitive advantage. It
is designed to maximize employee performance in service of an employer's strategic objectives.
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Human: refers to the skilled workforce in an organization.

Resource: refers to limited availability or scarce.

Management: refers how to optimize and make best use of such limited or scarce resource so as to meet
the organization goals and objectives.

An HRMS or Human Resources Management System, is a suite of software applications used to

manage human resources and related processes throughout the employee lifecycle
Major Functions of Human Resource Management

 Recruitment.

 Induction.

 Working Environment.

 Staff Relations.

 Staff Development.

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Quality Means-
- Fitness for the usage at lowest cost
- Degree of excellence of a product /service
- Degree of perfection or conformance to the requirements
- Degree to which it fulfills the requirements of the customer
Customer means One who purchases product or service
QUALITY FROM THE CUSTOMER’S PERSPECTIVE
A business organization produces goods and services to meet its customers’ needs. Customers want
value and quality has become a major factor in the value of products and service. Customers know that
certain companies produce better-quality products than others, and they buy accordingly. That means a
firm must consider how the consumer defines quality. The customer can be a manufacturer purchasing
raw materials or parts, a store owner or retailer purchasing products to sell, or someone who
purchases retail products or services over the Internet. W. Edwards Deming, author and consultant on
quality, says that “The consumer is the most important part of the production line. Quality should be
aimed at the needs of the consumer, present and future.” From this perspective, product and service
quality is determined by what the customer wants and is willing to pay for. Since customers have
different product needs, they will have different quality expectations. This results in a commonly used
definition of quality as a service’s or product’s fitness for its intended use, or fitness for use; how well
does it do what the customer or user thinks it is supposed to do and wants it to do? Products and
services are designed with intentional differences in quality to meet the different wants and needs of
individual consumers. A Mercedes and a Ford truck are equally “fit for use,” in the sense that they both
provide automobile transportation for the consumer, and each may meet the quality standards of its
individual purchaser. However, the two products have obviously been designed differently for different
types of consumers. This is commonly referred to as the quality of design—the degree to which quality
characteristics are designed into the product. Although designed for the same use, the Mercedes and
Ford differ in their performance, features, size, and various other quality characteristics.

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DIMENSIONS OF QUALITY FOR MANUFACTURED PRODUCTS
The dimensions of quality for manufactured products a consumer looks for include the following
1. Performance: The basic operating characteristics of a product; for example, how well a car handles
or its gas mileage.
2. Features: The “extra” items added to the basic features, such as a stereo CD or a leather interior in a
car.
3. Reliability: The probability that a product will operate properly within an expected time frame; that
is, a TV will work without repair for about seven years.
4. Conformance: The degree to which a product meets pre-established standards.
5. Durability: How long the product lasts; its life span before replacement. A pair of L.L. Bean boots,
with care, might be expected to last a lifetime.
6. Serviceability: The ease of getting repairs, the speed of repairs, and the courtesy and competence of
the repair person.
7. Aesthetics: How a product looks, feels, sounds, smells, or tastes.
8. Safety: Assurance that the customer will not suffer injury or harm from a product; an especially
important consideration for automobiles.
9. Other perceptions: Subjective perceptions based on brand name, advertising, and the like.
These quality characteristics are weighed by the customer relative to the cost of the product. In
general, customers will pay for the level of quality they can afford. If they feel they are getting what they
paid for (or more), then they tend to be satisfied with the quality of the product.

DIMENSIONS OF QUALITY FOR SERVICES

The dimensions of quality for a service differ somewhat from those of a manufactured product. Service
quality is more directly related to time, and the interaction between employees and the customer.
Evans and Lindsay identify the following dimensions of service quality.
1. Time and timeliness: How long must a customer wait for service, and is it completed on time? For
example, is an overnight package delivered overnight?
2. Completeness: Is everything the customer asked for provided? For example, is a mail order from a
catalogue company complete when delivered?
3. Courtesy: How are customers treated by employees? For example, are catalogue phone operators at
L.L. Bean nice and are their voices pleasant?

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4. Consistency: Is the same level of service provided to each customer each time? Is your newspaper
delivered on time every morning?
5. Accessibility and convenience: How easy is it to obtain the service? For example, when you call L.L.
Bean does the service representative answer quickly?
6. Accuracy: Is the service performed right every time? Is your bank or credit card statement correct
every month?
7. Responsiveness: How well does the company react to unusual situations, which can happen
frequently in a service company? For example, how well is a telephone operator at L.L. Bean able to
respond to a customer’s questions about a catalogue item not fully described in the catalogue?

QUALITY FROM THE PRODUCER’S PERSPECTIVE

Now we need to look at quality the way a producer or service provider sees it: how value is created. We
already know that product development is a function of the quality characteristics (i.e., the product’s
fitness for use) the customer wants, needs, and can afford. Product or service design results in design
specifications that should achieve the desired quality. However, once the product design has been
determined, the producer perceives quality to be how effectively the production process is able to
conform to the specifications required by the design referred to as the quality of conformance. What
this means is quality during production focuses on making sure that the product meets the
specifications required by the design.
Examples of the quality of conformance: If new tires do not conform to specifications, they wobble. If
a hotel room is not clean when a guest checks in, the hotel is not functioning according to the
specifications of its design; it is a faulty service. From this producer’s perspective, good-quality
products conform to specifications—they are well made; poor-quality products are not made well—
they do not conform to specifications.
Achieving quality of conformance depends on a number of factors, including the design of the
production process (distinct from product design), the performance level of machinery, equipment and
technology, the materials used, the training and supervision of employees, and the degree to which
statistical quality-control techniques are used. When equipment fails or is maladjusted, when
employees make mistakes, when material and parts are defective, and when supervision is lax, design
specifications are generally not met. Key personnel in achieving conformance to specifications include
the engineering staff, supervisors and managers, and, most important, employees.
An important consideration from the customer’s perspective of product quality is product or service
price. From the producer’s perspective, an important consideration is achieving quality of
conformance at an acceptable cost. Product cost is also an important design specification. If products

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or services cannot be produced at a cost that results in a competitive price, then the final product will
not have acceptable value—the price is more than the consumer is willing to pay given the product’s
quality characteristics. Thus, the quality characteristics included in the product design must be
balanced against production costs.

A FINAL PERSPECTIVE ON QUALITY

We approached quality from two perspectives, the customer’s and the producer’s. These two
perspectives are dependent on each other as shown in Figure . Although product design is
customermotivated, it cannot be achieved without the coordination and participation of the production
process. When a product or service is designed without considering how it will be produced, it may be
impossible for the production process to meet design specifications or it may be so costly to do so that
the product or service must be priced prohibitively high.
Figure depicts the meaning of quality from the producer’s and consumer’s perspectives. The final
determination of quality is fitness for use, which is the customer’s view of quality. It is the consumer
who makes the final judgment regarding quality, and so it is the customer’s view that must dominate.

THE COST OF QUALITY

According to legendary quality guru Armand Feigenbaum, “quality costs are the foundation for quality
systems economics.” Quality costs have traditionally served as the basis for evaluating investments in
quality programs. The costs of quality are those incurred to achieve good quality and to satisfy the
customer, as well as costs incurred when quality fails to satisfy the customer. Thus, quality costs fall
into two categories:

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  The cost of achieving good quality, also known as the cost of quality assurance

 The cost associated with poor-quality products, also referred to as the cost of not conforming to
specifications.
THE COST OF ACHIEVING GOOD QUALITY

The costs of a quality management program are prevention costs and appraisal costs.

Prevention costs are the costs of trying to prevent poor-quality products from reaching the
customer. Prevention reflects the quality philosophy of “do it right the first time,” the goal of a quality
management program. Examples of prevention costs include:
-Quality planning costs: The costs of developing and implementing the quality management program.
-Product-design costs: The costs of designing products with quality characteristics.
-Process costs: The costs expended to make sure the productive process conforms to quality
specifications.
-Training costs: The costs of developing and putting on quality training programs for employees and
management.
-Information costs: The costs of acquiring and maintaining (typically on computers) data related to
quality, and the development and analysis of reports on quality performance.

Appraisal costs are the costs of measuring, testing, and analyzing materials, parts, products, and the
productive process to ensure that product-quality specifications are being met. Examples of appraisal
costs include:
-Inspection and testing: The costs of testing and inspecting materials, parts, and the product at
various stages and at the end of the process.
-Test equipment costs: The costs of maintaining equipment used in testing the quality characteristics
of products.
-Operator costs: The costs of the time spent by operators to gather data for testing product quality, to
make equipment adjustments to maintain quality, and to stop work to assess quality.
Appraisal costs tend to be higher in a service organization than in a manufacturing company and
therefore, are a greater proportion of total quality costs. Quality in services is related primarily to the
interaction between an employee and a customer, which makes the cost of appraising quality more
difficult. Quality appraisal in a manufacturing operation can take place almost exclusively in-house;
appraisal of service quality usually requires customer interviews, surveys, questionnaires, and the like.

THE COST OF POOR QUALITY

The cost of poor quality (COPQ) is the difference between what it actually costs to produce a product or
deliver a service and what it would cost if there were no defects. Most companies find that defects,
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rework and other unnecessary activities related to quality problems significantly inflate costs;
estimates range as high as 20 to 30% of total revenues. This is generally the largest quality cost
category in a company, frequently accounting for 70 to 90% of total quality costs. This is also where the
greatest cost improvement is possible.
The cost of poor quality can be categorized as internal failure costs or external failure costs.
Internal failure costs are incurred when poor-quality products are discovered before they are delivered
to the customer. Examples of internal failure costs include:
-Scrap costs: The costs of poor-quality products that must be discarded, including labor, material, and
indirect costs.
-Rework costs: The costs of fixing defective products to conform to quality specifications.
-Process failure costs: The costs of determining why the production process is producing poor quality
products.
-Process downtime costs: The costs of shutting down the productive process to fix the problem.
-Price-downgrading costs: The costs of discounting poor-quality products—that is, selling products as
“seconds.”

External failure costs are incurred after the customer has received a poor-quality product and are
primarily related to customer service. Examples of external failure costs include:
-Customer complaint costs: The costs of investigating and satisfactorily responding to a customer
complaint resulting from a poor-quality product.
-Product return costs: The costs of handling and replacing poor-quality products returned by the
customer. In the United States it is estimated that product returns reduce company profitability by an
average of 4% annually.
-Warranty claims costs: The costs of complying with product warranties.
-Product liability costs: The litigation costs resulting from product liability and customer injury.
-Lost sales costs: The costs incurred because customers are dissatisfied with poor-quality products
and do not make additional purchases.
Internal failure costs tend to be low for a service, whereas external failure costs can be quite high. A
service organization has little opportunity to examine and correct a defective internal process, usually
an employee–customer interaction, before it actually happens. At that point it becomes an external
failure. External failures typically result in an increase in service time or inconvenience for the
customer. Examples of external failures include a customer waiting too long to place a catalogue phone
order; a catalogue order that arrives with the wrong item, requiring the customer to repackage and
send it back; an error in a charge card billing statement, requiring the customer to make phone calls or

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write letters to correct it; sending a customer’s orders or statements to the wrong address; or an
overnight mail package that does not arrive overnight.

THE QUALITY–PRODUCTIVITY RATIO

Another measure of the effect of quality on productivity combines the concepts of quality index
numbers and product yield. Called the quality–productivity ratio (QPR).it is computed as follows:

This is actually a quality index number that includes productivity and quality costs. The QPR increases
if either processing cost or rework costs or both decrease. It increases if more good quality units are
produced relative to total product input (i.e., the number of units that begin the production process).

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TQM AND QMS
What is Total Quality Management (TQM)?
A philosophy that involves everyone in an organisation in a continual effort to improve quality and
achieve customer satisfaction.
Total quality management (TQM) has been the most prominent and visible approach to quality to
evolve from the work of Deming and the early quality gurus. TQM originated in the 1980s as a Japanese-
style management approach to quality improvement, and became very popular during the 1990s, being
adopted by thousands of companies. Although it has taken on many meanings, it was (and still is) a
philosophy for managing an organization centered on quality and customer satisfaction as “the”
strategy for achieving long-term success. It requires the active involvement, participation and
cooperation of everyone in the organization, and encompasses virtually all of its activities and
processes.
To achieve and sustain this pervasive focus on quality requires a significant long-term commitment on
the part of the organization’s leadership. Deming’s 14 points and the philosophies and teachings of the
early quality gurus are clearly embodied in the basic principles of TQM:
1. Quality can and must be managed.
2. The customer defines quality, and customer satisfaction is the top goal; it is a requirement and is not
negotiable.
3. Management must be involved and provide leadership.
4. Continuous quality improvement is “the” strategic goal, which requires planning and organization.
5. Quality improvement is the responsibility of every employee; all employees must be trained and
educated to achieve quality improvement.
6. Quality problems are found in processes, and problems must be prevented, not solved.
7. The quality standard is “no defects.”
8. Quality must be measured; improvement requires the use of quality tools, and especially statistical
process control.
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TQM has been supplanted to a large extent by what is most commonly referred to as a quality
management system (QMS). This approach (or term) has evolved out of the ISO certification process
that many companies around the world have gone through; essentially ISO certifies a company’s
“quality management system,” and much of the ISO’s written materials refer directly to “quality
management systems.” (ISO certification is discussed in greater detail in a separate section later in this
chapter.) A QMS is not as much of a philosophy as TQM; rather, it is a system that complements a
company’s other systems and functions. It is a systematic approach to achieving quality and hence
customer satisfaction, and while it suggests no less commitment to that goal than TQM, it maintains less
of a core strategic focus that TQM. Further, since a QMS is not a “philosophy,” it more naturally is
designed to meet the individual needs and circumstances of a particular company. It outlines the
policies and procedures necessary to improve and control specific (but not all) processes that will lead
to improved business performance. A QMS tends to focus more on individual projects that have a
quantifiable impact (i.e., increased profitability). Some companies ave adopted the Malcolm Baldrige
National Quality Award criteria as its QMS; another well known QMS is Six Sigma (which we will discuss
in greater detail in a later section). Regardless of the term a company uses to identify its approach to
achieving quality improvement, and the possible differences between TQM and a QMS or other
approaches, there are certain common characteristics of company-wide approaches to quality
improvement, such as customer satisfaction and employee involvement.
Basic Concepts in TQM
1. Top management commitment and support.
2. Focus on both internal and external customers.
3. Employee involvement and empowerment.
4. Continuous improvement (KAIZEN)
5. Partnership with suppliers
6. Establishing performance measures for processes.

Essentials of TQM Focus

1. Customer satisfaction
2. Leadership
3. Quality policy
4. Organisation structure
5. Employee involvement
6. Quality costs

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7. Supplier selection and development
8. Recognition and reward.
Underlying Principles in TQM
1. Strive for quality in all things (Total Quality)
2. The customer is the creation of quality
3. Improve the process or systems by which products are produced
4. Quality improvement is continuous, never ending activity (continuous improvement-Kaizen)
5. Worker involvement is essential
6. Ground decisions and actions on knowledge
7. Encourage team work and cooperation.
Scope of TQM
1. An integrated organisational infrastructure
2. A set of management practices
3. A wide variety of tools and techniques.
TQM is Japanese approach to quality. The term TQM refers to a quest-for quality in an organization.
TQM is a process that underlines three philosophies. One is never-ending push to improve, which
is referred to as continuous improvement; the second is the involvement of every employee in the
organization and the third is the goal for customer satisfaction, which means meeting or exceeding
customer expectations. It often focuses on benchmarking world-class standards, product and service
design and purchasing. In addition, TQM involves a number of other elements such as:
• Team approach,
• Employee empowerment
• Decisions based on facts rather than opinions,
• Knowledge of quality tools [flow charts, check sheets, histograms, pareto analysis, scatter diagrams
etc.]
• Quality at the source and
• Inclusion of suppliers as a part of quality improvement programme.
TQM is a process of continuous improvement at every level of the organization-the centre of the entire
process is customer satisfaction. TQM implies that the organization is doing everything it can to achieve
quality at all stages of the process, from customer demands, to product design, to engineering.

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THE FOCUS OF QUALITY MANAGEMENT—CUSTOMERS
The main focus of Deming’s 14 points, TQM and all QMSs is to achieve customer satisfaction. The reason
is simple; customers who are very happy and delighted are less likely to switch to a competitor, which
translates to profits. A high level of satisfaction creates an emotional bond instead of simply a rational
preference. Research by companies has shown that there is a direct link between customer satisfaction
and attrition rates, indicating that delighted customers are less likely to defect than dissatisfied
customers. Below Highlights some of the “facts” that are generally known to exist about customer
satisfaction.
• It costs 5 or 6 times more to attract a new customer as it does to keep an existing one.
• Between 94 and 96 percent of dissatisfied customers don’t complain, they just walk away and about
91 percent of them don’t come back.
• Between 54 and 70 percent of customers who complain will do business with the company again if
their complaints are resolved satisfactorily; and it increases to around 95 percent if the complaint is
resolved quickly.
• A typical dissastisfied customer will tell 8 to 10 people about their problem; one in five will tell 20
(and the Internet now makes it possible to tell thousands). A satisfied complainer will tell an average of
five people about how a problem was resolved to their satisfaction.
• It takes about 12 positive service encounters to make up for a single negative one.
• Only about five percent of customers who cannot buy a product because it’s out of stock return to
make the originally planned purchase.

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• Around 68 percent of customers stop doing business with suppliers because they perceive an
attitude of indifference toward them; only 14 percent leave because they are dissatisfied with a
product, and only 9 percent leave for competitive reasons.
• Between 80 and 90 percent of customers who defect say they are “satisfied;” but “very satisfied”
customers are four to seven times more likely to repeat their purchase within the next 18 months
than those who were merely “satisfied.”
• An increase of as little as five percent in customer retention can result in an 80 to 100 percent
increase in profits.
• Businesses with low quality service average only one percent return on sales and lose market share
at a rate of two percent annually; businesses with a high-quality service average a 12 percent return
on sales and gain market share at the rate of 6 percent annually (and charge significantly higher
prices).

QUALITY MANAGEMENT IN THE SUPPLY CHAIN

Most companies not only have customers they want to satisfy, but they are also customers of other
companies, their suppliers, within a company’s supply chain. Companies know that to satisfy its
customers requires not only their own commitment to quality, but also the support and resources of its
suppliers. This is especially true of companies that outsource many of their activities to suppliers.
Companies and their suppliers joined together in a supply chain must work together to meet the needs
of the company’s customers. A partnership exists between the supplier and its customer wherein the
supplier is expected to manage its own quality effectively so that the company it supplies can count on
the quality of the materials, parts, and services it receives. Many companies reduce their number of
suppliers in order to have more direct influence over their suppliers’ quality and delivery performance,
which was one of Deming’s 14 points. It is based on the notion that if a company has a major portion of
a supplier’s business, then the supplier is more willing to meet the customer’s quality standards. The
company and supplier enter into a business relationship referred to as partnering, in which the supplier
agrees to meet the company’s quality standards, and in return the company enters into a long-term
purchasing agreement with the supplier that includes a stable order and delivery schedule.
In order to ensure that its supplier meets its quality standards, a company will often insist that
the supplier adopt a QMS similar to its own, or a company’s QMS will include its suppliers. Still other
companies require that their suppliers achieve ISO 9000 certification , an international quality standard
that ensures a high industry standard of quality as its QMS; some companies require their suppliers to
follow Baldrige National Quality Award guidelines or even enter the Baldrige Award competition as
their QMS.

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 At the other end of a company’s spectrum from its suppliers is its direct relationship with its
own customers. An important component of any QMS is the company’s ability to measure customer
satisfaction; to “hear” what the customer wants. The company needs to know if its QMS is effective. Is
the company meeting customer expectations? Are its products or services meeting their fitness for use
definition? Is it what the customer wants, does the customer like it, does the customer need it, would
the customer like it changed? A QMS requires that some form of measurement system be in place to
answer these questions and provide data about the customer’s level of satisfaction. It is a well-
established fact of consumer behavior that unhappy customers will tell almost twice as many others
about their quality problems as they will tell others about satisfactory products or services.

THE ROLE OF EMPLOYEES IN QUALITY IMPROVEMENT

Job training and employee development are major features of a successful quality management
program. Increased training in job skills results in improved processes that improve product quality.
Training in quality tools and skills such as statistical process control enable employees to diagnose and
correct day-to-day problems related to their job. This provides employees with greater responsibility
for product quality and greater satisfaction for doing their part to achieve quality. When achievement is
reinforced through rewards and recognition, it further increases employee satisfaction. At Ritz-Carlton,
first-year employees receive over 300 hours of training. Marriott employees are trained to view
breakdowns in service as opportunities for satisfying customers; for example, they may send a gift and
note of apology to customers who have experienced a problem in the hotel. In our previous discussions,
the importance of customer satisfaction as an overriding company objective was stressed. However,
another important aspect of a successful QMS is internal customer (e.g., employee) satisfaction. It is
unlikely that a company will be able to make its customers happy if its employees are not happy. For
that reason, many successful companies conduct employee satisfaction surveys just as they conduct
customer surveys.
When employees are directly involved in the quality management process, it is referred to as
participative problem solving. Employee participation in identifying and solving quality problems has
been shown to be effective in improving quality, increasing employee satisfaction and morale,
improving job skills, reducing job turnover and absenteeism, and increasing productivity.
Participative problem solving is usually within an employee-involvement (EI) program, with a
team approach. We will look at some of these programs for involving employees in quality
management, including kaizen, quality circles, and process improvement teams.

KAIZEN AND CONTINUOUS IMPROVEMENT

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Kaizen is the Japanese term for continuous improvement, not only in the workplace but also in one’s
personal life, home life, and social life. In the workplace, kaizen means involving everyone in a process
of gradual, organized, and continuous improvement. Every employee within an organization should be
involved in working together to make improvements. If an improvement is not part of a continuous,
ongoing process, it is not considered kaizen. Kaizen is most closely associated with lean systems, an
approach to continuous improvement throughout the organization.
Employees are most directly involved in kaizen when they are determining solutions to their own
problems. Employees are the real experts in their immediate workspace. In its most basic form, kaizen
is a system in which employees identify many small improvements on a continual basis and implement
these improvements themselves. This is actually the application of the steps in the Deming Wheel at its
most basic, individual level. Employees identify a problem, come up with a solution, check with their
supervisor, and then implement it. This works to involve all employees in the improvement process and
gives them a feeling that they are really participating in quality improvement, which in turn keeps them
excited about their jobs. Nothing motivates someone more than when they come up with a solution to
their own problem. Small individual changes have a cumulative effect in improving entire processes,
and with this level of participation improvement occurs across the entire organization. No company-
wide quality management program can succeed without this level of total employee involvement in
continuous improvement.
Employees at Dana Corporation’s Spicer Driveshaft Division, North America’s largest independent
manufacturer of driveshafts and a 2000 Malcolm Baldrige National Quality Award winner, participate in
a kaizen-type program. On average, each employee submits three suggestions for improvements per
month and almost 80 percent of these ideas are implemented. The company also makes use of kaizen
“blitzes” in which teams brainstorm, identify, and implement ideas for improvement, sometimes as
often as every three or four weeks. Company-wide, Dana Corporation employees implemented almost 2
million ideas in one year alone.

QUALITY CIRCLES
One of the first team-based approaches to quality improvement was quality circles. Called quality
control circles in Japan when they originated during the 1960s, they were introduced in the United
States in the 1970s. A quality circle is a small, voluntary group of employees and their supervisor(s),
comprising a team of about 8 to 10 members from the same work area or department. The supervisor is
typically the circle moderator, promoting group discussion but not directing the group or making
decisions; decisions result from group consensus. A circle meets about once a week during company
time in a room designated especially for that purpose, where the team works on problems and projects
of their own choice. These problems may not always relate to quality issues; instead, they focus on

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productivity, costs, safety, or other work-related issues in the circle’s area. Quality circles follow an
established procedure for identifying, analyzing, and solving quality-related (or other) problems. Figure
is a graphical representation of the quality circle process.

PROCESS IMPROVEMENT TEAMS

Process improvement teams, also called quality improvement teams (QIT), focuses attention on
business processes rather than separate company functions. It was noted previously that quality circles
are generally composed of employees and supervisors from the same work area or department,
whereas process improvement teams tend to be cross-functional or even cross-business between
suppliers and their customers. A process improvement team would include members from the various
interrelated functions or departments that constitute a process. For example, a process improvement
team for customer service might include members from distribution, packaging, manufacturing, and
human resources. A key objective of a process improvement team is to understand the process the team
is addressing in terms of how all the parts (functions and departments) work together. The process is
then measured and evaluated, with the goal of improving the process to make it more efficient and the
product or service better.
SIX SIGMA - GOAL—3.4 DPMO
Six Sigma is a process for developing and delivering virtually perfect products and services. The word
“sigma” is a familiar statistical term for the standard deviation, a measure of variability around the

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mean of a normal distribution. In Six Sigma it is a measure of how much a given product or process
deviates from perfection, or zero defects. The main idea behind Six Sigma is that if the number of
“defects” in a process can be measured, then it can be systematically determined how to eliminate them
and get as close to zero defects as possible. In Six Sigma “as close to zero defects as possible” translates
into a statistically based numerical goal of 3.4 defects per million opportunities (DPMO), which is the
near elimination of defects from a process, product, or service. This is a goal far beyond the quality level
at which most companies have traditionally operated. Through the reduction of variation in all
processes (i.e., achieving the Six Sigma goal), the overall performance of the company will be improved
and significant overall cost savings will be realized.
THE SIX SIGMA PROCESS
As implemented by Motorola, Six Sigma follows four basic steps—align, mobilize, accelerate, and
govern.
In the first step, “align,” senior executives create a balanced scorecard of strategic goals, metrics and
initiatives to identify the areas of improvement that will have the greatest impact on the company’s
bottom line. Process owners (i.e, the senior executives who supervise the processes) “champion” the
creation of high-impact improvement projects that will achieve the strategic goals.
In the second step, “mobilize,” project teams are formed and empowered to act. The process owners
select “black belts” to lead well-defined improvement projects. The teams follow a step-by-step,
problem-solving approach referred to as DMAIC.
In the third step, “accelerate,” improvement teams made up of black belt and green belt team
members with appropriate expertise use an action-learning approach to build their capability and
execute the project. This approach combines training and education with project work and coaching.
Ongoing reviews with project champions ensure that projects progress according to an aggressive
timeline.
In the final step, “govern,” executive process owners monitor and review the status of improvement
projects to make sure the system is functioning as expected. Leaders share the knowledge gained from
the improvement projects with other parts of the organization to maximize benefit.

SIX SIGMA TOOLS

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THE BREAKTHROUGH STRATEGY: DMAIC
At the heart of Six Sigma is the breakthrough strategy, a five-step process applied to improvement
projects. The five steps in the breakthrough strategy are very similar to Deming’s four-stage PDCA cycle
although more specific and detailed. The breakthrough strategy steps are define, measure, analyze,
improve, and control, (DMAIC).
Define: The problem is defined, including who the customers are and what they want, to determine
what needs to improve. It is important to know which quality attributes are most important to the
customer, what the defects are, and what the improved process can deliver.
Measure: The process is measured, data are collected, and compared to the desired state.
Analyze: The data are analyzed in order to determine the cause of the problem.

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Improve: The team brainstorms to develop solutions to problems; changes are made to the process,
and the results are measured to see if the problems have been eliminated. If not, more changes may be
necessary.
Control: If the process is operating at the desired level of performance, it is monitored to make sure the
improvement is sustained and no unexpected and undesirable changes occur.

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