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OM - IIFT

Prof. Manimay Ghosh, Ph.D.

Renfro India
ROAD MAP
Topics to be covered in OM I
▪ Introduction to OM
▪ Project Management
▪ Product Design
▪ Process design and analysis
▪ Facilities Layout
▪ Inventory Management
▪ Statistical Quality Control
▪ Capacity planning
Evaluation Components

▪ Two Quizzes: 30 marks


▪ Case/Class participation: 10 marks
▪ Group Project: 20 marks
▪ End-Term: 40 marks

Total: 100 marks


INTRODUCTION
THE SUPPLY CHAIN / SUPPLY WEB / SUPPLY NETWORK
Why Study OM?

▪ One of the three major functions of any


organization (operations, marketing, finance)

▪ We want to know how goods are produced

▪ We want to study what operation managers


do

▪ It is a costly part of an organization


What is Operations?

▪ Operations at the most general level is about


converting certain inputs (labour, equipment,
raw materials, processed components,
facilities, time, knowledge etc.) into outputs
(products/ services)

▪ Management is about planning, organizing,


coordinating, and controlling resources
What is Operations
Management?
▪ Operations management designs, operates,
and improves production systems to deliver
good quality products and services.
Definition of Manufacturing as a
Technological Process
Process View of OM
Three Basic Functions of a
Business Organization
Organization

Finance Operations Marketing


Primary Functions Within
Organizations
Types of Manufacturing
▪ Project – Building a bridge, dam, house, special m/c

▪ Job shop – Make custom products in low volume

 Example: special machines, jewelry


Requirement small quantity (1-100 units/year)

▪ Batch manufacturing – Similar standard items made in small


batches – Examples: Bakery / meals, clothing
 Medium quantity (100 - 10,000 units/year)

▪ High volume (discrete) – Cars, TVs, refrigerators, light bulbs ,


fasteners, aluminum cans

 Large Quantity (10,000 – millions of units per year). Often called


mass production

▪ High volume (non-discrete) – Chemicals, refining oil, paper mill, flour


mill
Types of Manufacturing

Increasing Volume

Increasing customization

Batch Process Assembly Continuous


Project Job Shop
Line Flow
Types of Facilities for
Different Levels of Production
Quantity and Variety
Operations Management
(Decision Making)
▪ Strategic (long-term) decisions
 Plant capacity, location, process design, technology,
Supply chain
▪ Tactical (intermediate-term) decisions
 Output levels, employment (FT/PT), # shifts,
subcontracting, overtime, inventory levels
▪ Operational planning and control (short-term)
decisions
 Scheduling people, machinery, materials, assembly
plans
Competitive Advantage Through
Operations (Competitive Dimensions)
▪ Competing on
 Price
 Quality
 Speed / Delivery promise
 Flexibility
 Volume flexibility
 Variety flexibility
 Innovation
 Mass customization
Marketing Dimensions

▪ Order qualifiers
 minimum characteristics of a product or service
required to compete in the marketplace.

▪ Order winners
 Product or service characteristics better than
competitors in the marketplace.
Order Winners
and Order Qualifiers

Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan
Betts, Operations and Process Management, Prentice Hall, 2006, p. 47 1-
20
Productivity
▪ Productivity
 An index that measures the effective use of organizational
resources, usually expressed as the ratio of output to input.
 Higher the productivity, the lower the cost of output
 Can be calculated for single operation, a department, an
organization, or an entire country

▪ Productivity ratios are used for


 Planning workforce requirements
 Scheduling equipment
 Incentives to workers
 Training
Measures of Productivity

Partial Output Output Output Output


measures Labor Machine Capital Energy

Multifactor Output Output


measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced


measure All inputs used to produce them
Examples of Partial Productivity Measures

Labor Units of output per labor hour


Units of output per shift
Productivity
Machine Units of output per machine hour

Productivity
Capital Units of output per rupee input
Rupee value of output per rupee input
Productivity
Energy Units of output per kilowatt-hour
Rupee value of output per kilowatt-hour
Productivity
Productivity
(partial)
▪ Determine productivity where 4 workers
installed 720 sq. yards of carpeting in 8 hours
 Productivity: Yards of carpet / labour hrs worked
 720/(4 workers × 8 hours/worker)
 720 yards/32 hours = 22.5 yards/hour
Productivity
(partial)
▪ A machine produced 68 usable pieces in two
hours
 Productivity: usable pieces / production time
 68 pieces / 2 hours
 34 pieces /hour
Productivity
(Multi-factor)
▪ Given: output: 7,040 units
▪ Input
 Labour: Rs 1,000
 Materials: Rs 520
 Overhead: Rs 2,000
▪ Multi-factor productivity
 Output / (Labour + Materials + Overhead)
 7,040 / (Rs 1000 + Rs 520 + Rs 2,000)
 2 units /Rupee
Factors Affecting Productivity

▪ Technology increases productivity


▪ Standard processes increase productivity
▪ Use of internet increases productivity
▪ Incentives can increase productivity
▪ Computer virus decreases productivity
▪ Scrap rates decreases productivity
▪ Layoffs decreases productivity
▪ Labor turnover decreases productivity
Productivity Problem 1

▪ Compute the multifactor productivity


measure for an eight-hour day in which the
usable output was 300 units, produced by
three workers who used 600 lbs of materials.
Workers have an hourly wage of $20, and
material cost is $1 per pound. Overhead is 1.5
times labor cost.
Productivity Problem 2
▪ ABC industry is compiling the monthly
productivity report for its board of directors. From
the following data, calculate labor productivity,
machine productivity, multifactor productivity per
dollar spent on labor, machines, materials, and
energy. Labor rate is $15/hr and machine rate is
$10/hr
Units produced 100,000
Labour hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000
What is Service?
 “A service is not something that is built in a factory, put on a shelf, and
then taken home by a customer. A service is a dynamic, living process. A
service is performed. A service is rendered. The raw materials of a service
are time and motion; not plastic or steel. A service cannot be stored or
shipped; only the means for creating it. In short, a service is not a thing”
Lynn Shostack

 Services are deeds, processes and performances


Zeithaml and Bitner

 Services sector includes all economic activities whose output is not a


physical product, is generally consumed at the time it is produced, and
provides added value in forms (such as convenience, amusement,
timeliness, comfort or health) that are essentially intangible concerns for
its purchasers.

Quinn et al.
Distinction Between a
Product and a Service
▪ Distinction is hard to make because the purchase of a
product is accompanied by some facilitating service
(e.g., installation of carpets, buying and installing an
air-conditioner) and the purchase of a service often
includes facilitating goods (food and drinks in a
restaurant)
Comparison of Goods and
Services
Goods Services

100% 75% 50% 25% 0% 25% 50% 75% 100%

Self-service groceries
Automobile
Installed carpeting
Fast-food restaurant
Gourmet restaurant
Auto maintenance
Haircut
Consulting services
Distinctive Characteristics
of Services
1. Intangibility
2. Variability (arrival, capability, request, effort,
subjective preference)
3. Inseparability (simultaneous production and
consumption)
A. In other words, services are “consumed”
the instant they are produced
4. Perishability
5. Customer participation in the process
Manufacturing vs. Services

Manufacturing Services
1. Production precedes 1. Production and consumption
consumption takes place simultaneously

2. Output – Tangible 2. Output – Intangible


3. Output – Stored in 3. Output can’t be stored in
inventory inventory, perishable
4. Quality – Ensured before 4. Quality – Quality tests
delivery to customer
difficult to perform before
consumption
5. Low degree of customer
5. High degree of customer
contact
contact
PROJECT MANAGEMENT
Why Study Project Management?
▪ Rapidly changing technology
▪ Shortened product life cycles
▪ Reducing production costs
▪ Improving quality
▪ Increasing competition due to
 More market players in every segment
 Newer and better products
 Reducing wait times in the system
▪ Inadequate capacity
▪ Societal needs (for example, municipal projects)
▪ Environmental concerns
What is a Project?

▪ Project Management Institute (PMBOK,


2021) has defined a project as “A temporary
endeavour undertaken to create a unique
product, service, or result”
Characteristics of a
Project
1. Have a specific objective to be completed within
certain specifications (ex: constructing a 60-story
building within 2 years at a cost of 30 crores)

2. Are temporary activities to create a unique product or


service (one-time occurrence)
a. Something that has not been done before

3. Have defined start and end dates (finite duration)

4. Have funding limits (if applicable)


Characteristics of a Project

5.Consume human and nonhuman resources (i.e.,


money, people, equipment)

6. Multifunctional (cut across several functional


lines)

7. Involves unfamiliarity and risks

8. Project have life cycle (several distinct phases)


Green Field or Brown Field
Greenfield:
Project is on a fresh area where there has been nothing earlier
and a totally fresh approach is being taken to set up the
project of any size on fresh location (Padma bridge,
Bangladesh, June 2022)

Brown field:
Project is of expanding on the existing set up with additional
equipment and installation that is to be set up with all the
intricacies / complexities involved in getting work progress
without affecting running operations of the existing plant
(plant capacity expansion in the same premises, or adding a
new wing in an existing hospital)
Few Examples of Projects

▪ Complex technological projects


 Industry 4.0, AI projects
▪ Industrial Projects
 Power (non-renewable: coal, oil, gas, renewable: wind,
solar, hydro) chemical, fertilizer, e-vehicles, autonomous
vehicles, Industry 4.0
▪ Civil construction projects
 Building dams, bridges, water treatment plants, railway
metro tunnel under Ganges, city flyovers, Padma bridge
▪ Humanitarian projects
 Saving human lives from man-made or natural disasters
(Tsunami, earthquakes, floods, cyclones), pandemics
Few Examples of Projects
▪ Software development projects
 Developing software programs for clients (for
example, self-check-in at airports during Covid-19)
▪ Educational projects
 Launching a new program, new university or a
school, new curriculum for B-schools (Purdue
University, USA)
▪ Individual projects
 Composing a song, writing a novel, making
sculpture, writing a term paper for a course
What is not a Project?

▪ The more familiar and routine the undertaking,


the more stable the environment, the less unique
and more standardized the end-item, and the
lower the stake in the result, the work is usually
not considered a project, and less is the need for
project management.
 Example: production of standardized
industrial and agricultural outputs
What is Project Management?

▪ PMBOK (Project Management Body of


Knowledge) defines project management as
“… application of knowledge, skills, tools and
techniques to project activities to meet
project requirements. Project Management
is accomplished through the application and
integration of project management processes
of initiating, planning, executing, monitoring,
controlling, and closing”
Program vs. Project
▪ A program is a group of related projects designed to accomplish a
common goal over an extended period ( 5 or more years). In
essence, large scale endeavour comprising several projects with a
common goal

 For example, a pharmaceutical company may have program for


curing cancer. The cancer program includes all cancer related
projects

 Eradication of COVID-19
 Vaccine development
 Production of masks, PPEs, sanitisers
 Set-up of COVID hospitals nation-wide
 Set-up oxygen plant in each hospital
 Training of healthcare givers

▪ The time scale for projects tends to be shorter than programs


Project Goals or Triple
Constraint or Iron Triangle
▪ Virtually every project has three overriding
goals:
 Cost (budget)
 Time (schedule)
 Scope (technical specs, quality)

▪ The three goals are interrelated and must be


addressed simultaneously
Project Management: The Person,
the Team, the System
▪ Project Manager
 Accountable for the project and totally dedicated to
achieving its goals
 Coordinates efforts across various functional disciplines,
controls costs, schedules and work tasks
 Manages suppliers, top management, regulatory agencies,
villagers, political leaders, local goons, terrorist outfits etc.
 Manages conflicts within the team

▪ Project Team
 Project work is accomplished by a group of people
often from different functional areas who participate
wherever and whenever they are needed
 People work full-time or part-time on one or more
projects
Project Management: The Person,
the Team, the System
▪ Project Management System
 Provides the means for
 Identification of tasks
 Making time estimates
 Identification of resource and costs
 Establishing priorities
 Preparing budgets
 Planning and updating schedules
 Measuring project performance
 Project closure
When to use Project Management?
General Criteria
▪ Project Management can be applied to any ad
hoc undertaking
▪ There are two conditions suggesting when
project management should be applied
1. More unfamiliar or unique the undertaking, the
greater the need for PM to ensure that nothing gets
overlooked

2. More numerous, interdisciplinary, and


interdependent the activities in the undertaking to
ensure everything is coordinated, integrated, and
completed in a timely manner
Project Life Cycle
▪ Defining
 Preliminary scope, budget, schedule prepared
 Approvals from various authorities obtained
 Top Mgt., government regulatory bodies
▪ Planning
 Detailed work planning, budget, time, quality, risk
▪ Executing
 Monitor and control quality, technical specs, time,
cost
▪ Closing
 All deliverables match the specs, technical
manual handed, training provided etc.
The Project Life Cycle
Time Distribution of Project
Effort
Project Management – A Socio-
Technical Approach
▪ Two dimensions of projects
 Technical Dimension (“Science” of PM)
 Scope, WBS, Schedules, Resource allocation,
baseline budgets, status reports

 Sociocultural (“Art of PM”)


 Leadership, problem solving, teamwork, conflict
management, negotiations, politics, customer
expectations
Good project managers pay equal attention to
both dimensions
Alignment of Projects with
Strategy
▪ Projects should support the overall strategic
plan of the organization to ensure effective
use of organization resources

▪ Thus, every project should have a clear link to


overall competitive strategy of the firm
DEFINING PROJECT
PROJECT SCOPE
▪ Project Scope is the END RESULT of a project – a product or
service for the client. In other words, scope is the magnitude
or size of the project

 Example: Design, develop, install, and commission a 500


MW thermal power plant in 3 years at a cost of 2000 crores

 Example: Expand the plant capacity of a diesel engine


manufacturing plant from 22,000 diesel engines to 32,000
diesel engines per year in 2 years at a cost of 24 crores.

 Build an engineering college campus in 2 years at a cost of


100 crores
Scope Creep

▪ Tendency of the project to expand over time –


usually by changing requirements, specifications,
and priorities.

▪ Too broad a scope statement can lead to scope


creep.

▪ Scope creep leads to cost overruns and delays


Project Scope Check List

To ensure project scope definition is complete:


1. Project objective – answers what to produce, when
(time), and how much cost
2. Deliverables – expected measurable outputs
3. Milestones – significant event in the project
4. Technical Requirements – Performance
specifications
5. Limits and exclusions – what is included and what is
not included
6. Review with customer – understanding and
agreement of expectations
Power Plant Project (Example)

▪ Objective: to build a Thermal Power plant of


500 MW capacity in 3 years at a cost of 3000
crores
▪ Deliverables: Boiler plant, turbine plant,
generator, chimney, coal handling plant,
ESP…
▪ Milestones: land acquisition, obtaining
approvals from regulators such as Pollution
Control Boards, construction of each plant….
Power Plant Project (Example)

▪ Performance specs:
 Boiler : 1500 tons of steam per hour at a pressure of
170 kg/cm sq and temp ….
 Turbine: Steam at 1500 tons/hr at 170 kg/sq cm….

▪ Limits and exclusions: Parking lots for client,


canteens, landscaping etc.
Work Breakdown Structure (WBS)

▪ After identifying the scope and


deliverables, the work of the project can
be successively subdivided into smaller
and smaller work elements. The outcome
of this hierarchical process is called the
WBS
WBS Hierarchical Levels

Level Element Description


1 Overall Project
2 Deliverables (major components)
3 Sub-deliverables
4 Sub-sub deliverables
Work package (individual project
activities)
WBS
▪ WBS is the main tool for managing a project scope as
described by PMBOK
▪ Defines all the elements of the project in a hierarchical
framework and establishes their relationship to the
project end-items

▪ Facilitates evaluation of cost, time, and technical


performance at all levels in the organization over the life
of a project

▪ Provides management with information appropriate at


all levels
WBS
▪ Thus,

WBS defines all the elements of the project into


a hierarchical framework and establishes their
relationship to the project end item(s). Project
is a large work package broken down into
smaller work packages; the total project is the
summation of all the work packages. This
hierarchical structure facilitates evaluation of
cost, time, and technical performance at all
levels in the organization over the life of the
project. It also provides management with
information appropriate to each level.
Work Package

▪ Dividing the project into work packages


makes it possible to project schedules and
cost estimates and to assign task
responsibility. This helps in planning,
scheduling, and budgeting the project
WBS – Another Example
Integrating WBS with
Organization
▪ Organization Breakdown Structure (OBS)
 Depicts how the firm has organized to discharge
work responsibility
 The OBS assigns the lowest organizational unit
the responsibility for work packages within a cost
account
 The intersection of the work package and the
organizational unit creates a project cost account
that integrates work and responsibility
The Intersection of WBS and OBS
Cost Account Rollup Using OBS
DEVELOPING A PROJECT PLAN
Developing the Project Network

▪ Project network is a visual flow diagram of all


the activities, their interrelationships, and
sequence that must be completed to
complete the project

▪ The tool is used for planning, scheduling, and


monitoring project progress
Benefits of Project Network

1. Provides estimated duration of the project

2. Provides the basis for labour and equipment


usage

3. Enhances communication so that everyone


focus on meeting the time, cost, and
performance objectives of the project
Benefits of Project Network
5. It identifies which activities are critical

6. Identifies which activities need to be


compressed for meeting deadlines

7. It provides the basis for cash flow of the project

8. Provides a mechanism so that corrective actions


can be taken to prevent slippages
From Work Package to Project
Network
▪ Work packages from the WBS are used to build
activities in the project network

▪ An activity can include one or more work packages

▪ Activities are placed in sequence for orderly


completion of the project

▪ Integration of WBS and project network is crucial to


effective project management
How are WBS and Project Network
Linked?
▪ The network uses the time estimates found in the
work packages of the WBS to develop the network.
The time estimates, budgets, and resources
required for a work package in the WBS are set in
time frames, but without dates. The dates are
computed after the network is developed.
From Work Package to Network

▪ Work packages are independent of other


work packages, has start and end times,
requires specific resource, includes technical
specs and has cost estimates

INTEGRATION OF THE WBS AND PROJECT


NETWORK IS CRUCIAL TO EFFECTIVE
PROJECT MANAGEMENT
Work Package to Project Network
Work Package to Network
Project Network Terminology

▪ Activity: Element of a project that consumes


time
 Represents one or more tasks from a work
package

▪ Merge Activity: Activity that has more than


one activity immediately preceding it. Merge
activities can be located by doing a forward
pass through the network
Project Network Terminology
▪ Path: A sequence of connected, dependent activities

▪ Burst Activity: The activity has more than one activity


immediately following it. Burst activity can be located
by doing a backward pass through the network

▪ Critical Path: Path(s) with the longest duration


through the network; if an activity on the path is
delayed, the project is delayed the same amount of
time
Burst Activity and Merge
Activity
Basic Rules to Follow in
Developing Project Networks
1. Networks typically flow from left to right.
2. An activity cannot begin until all preceding connected
activities are complete.
3. Arrows indicate precedence and flow and can cross over each
other.
4. Each activity must have a unique identify number that is
greater than any of its predecessor activities.
5. Looping (attempt by planner to return to an earlier activity) is
not allowed. In other words, recycling through a set of
previous activities not permissible.
6. Conditional statements are not allowed (this type of
statement should not appear: If successful, do this, else do
that)
7. Use common start and stop nodes.
Constructing Project Network
Critical Path Method (CPM)
▪ Two Approaches
 Activity-on-Node (AON)
 Uses a node to depict an activity.

 Activity-on-Arrow (AOA)
 Uses an arrow to depict an activity.

AON IS THE DOMINANT APPROACH IN MOST


PROJECT NETWORK PLANS. POPULAR
Network Computation Process
▪ Forward Pass—Earliest Times
 How soon can the activity start? (early start—ES)
 How soon can the activity finish? (early finish—EF)
 EF = ES + Duration
▪ Backward Pass—Latest Times
 How late can the activity start? (late start—LS)
 How late can the activity finish? (late finish—LF)
 LS = LF - Duration
 Which activities represent the critical path? Longest path in
the network, which when delayed, will delay the project
 How long can activity be delayed? (slack or float—SL)
Forward Pass Computation
▪ Add activity times along each path in the
network (ES + Duration = EF).
▪ Carry the early finish (EF) to the next activity
where it becomes its early start (ES) unless…
▪ The next succeeding activity is a merge activity,
in which case the largest EF of all preceding
activities is selected.
Backward Pass Computation
▪ Subtract activity times along each path in the
network (LF - Duration = LS).
▪ Carry the late start (LS) to the next activity
where it becomes its late finish (LF) unless
▪ The next succeeding activity is a burst activity,
in which case the smallest LF of all preceding
activities is selected.
Critical Path
▪ In the language of PM, a project’s finish date is
determined by its critical path.
▪ A chain of linked tasks that directly affect the
project finish date. If any task on the critical path is
late, the whole project is late.
▪ When evaluating the duration of a project, one
should focus on the tasks on the critical path, called
critical tasks.
▪ The word “critical” has nothing to do with how
important the tasks are to the overall project. It
says how their scheduling affects the project’s
finish date.
Slack (or Float)

▪ Total slack is the amount of time an activity can


be delayed without delaying the project

In other words, total slack is the amount of time an activity can


exceed its early finish date without affecting the project end date

▪ Float = LS-ES (or, Float = LF – EF)

Note: The total slack time is the maximum allowable time


that can occur for non-critical activities. Once this slack is
used up, noncritical activities become critical and further
delays will extend the project completion date
Can a Project have more than
one critical path?
▪ Yes
▪ However, if the project duration needs to be
shortened , it would be necessary to shorten
both critical paths.
PERT – Program Evaluation Review
Technique
CPM with Three Time Estimates:
PERT
▪ If a single estimate of the time to complete
an activity is not reliable, the best procedure
is to use three-time estimates

▪ The estimated activity time is calculated


using a weighted average of the minimum,
maximum, and most likely time estimate
PERT
Probabilistic Estimates

0
to tm te tp

Activity Optimistic Most likely Pessimistic


start time time (mode) time
Probability of Completing a
Project using Standard Normal
Distribution

This sum includes only activities on the critical paths(s) or path being
reviewed
Reducing Project Duration
Rationale for Reducing Project
Duration
 Rationale
 Time-to-market pressures
 Delayed project
 Incentive contracts (bonuses for early
completion)
 Imposed deadlines
 Pressure to move resources to other projects
 Exceed customer expectations
Options for Accelerating
Project Completion
▪ Options when resources are not constrained
 Adding resources
 Outsourcing project work
 Scheduling overtime without adding people
 Establish core project team – undivided attention
 Do it twice – Fast and correctly
 Pontoon bridges in combat as solution to damaged
bridge
 Releasing unfinished software solutions. Subsequent
versions correct bugs and add intended functionality
 Additional cost of doing twice are often compensated for by
the benefits of satisfying deadline
PONTOON BRIDGE
Options for Accelerating
Project Completion
▪ Options when resources are constrained
 Fast-Tracking
 Finish to start TO Start-to-Start relationships
 Activities are done in parallel (concurrently) rather than sequentially.
For example, converting finish-to-start relationship to start-to-start
relationship.

 Scope Reduction
 Reducing or scale back project scope for meeting unattainable
deadlines

 Compromise quality
 Rarely acceptable

NOTE: In practice, the most commonly used methods to crash


projects are scheduling OT, outsourcing, or adding resources
Explanation of Project Costs

▪ Project Direct Costs


 Normal costs that can be assigned directly to a
specific work package or project activity.
 Labor, materials, equipment, other expenses,
subcontractors etc. directly attributable to a
particular project
 Direct cost are also likely to be variable costs
 Direct costs for an activity represent normal costs,
which typically mean low-cost, efficient methods
for a normal time
 Crashing activities increases direct costs.
Explanation of Project Costs
▪ Project Indirect Costs (overhead costs or
overheads)
 Costs that cannot be associated with any work package
or project activity.
 Supervision, administration, consultants’ fee, training,
welfare services, interest etc.
 Except in case of a firm set up specially to fulfill only one
project, these general costs can’t usually be allocated
directly to one project.

 Indirect costs vary (increase/decrease) directly with


time.
 Reducing project time directly reduces indirect costs.
Reducing Project Duration
to Reduce Project Cost
Identifying direct costs to reduce project time

Gather information about direct and indirect costs of


specific project durations.

Search critical activities for lowest direct-cost


activities to shorten project duration.

Compute total costs for specific durations and compare


to benefits of reducing project time.

The cost-time crashing method relies on choosing the cheapest m


reducing the duration of the project
Constructing a Project Cost–Duration
Graph
▪ Find total direct costs for
selected project durations.
▪ Find total indirect costs for
selected project durations.
▪ Sum direct and indirect costs for
these selected project
durations.
▪ Compare additional cost
alternatives for benefits.
Time-Cost Trade Off

▪ Because activity direct costs and project


indirect costs are opposing costs dependent
on time, the scheduling problem is essentially
one of finding the project duration that
minimizes their sum, or, in other words,
finding the optimum point in time-cost trade-
off
Crashing

▪ An activity duration can be shortened by putting


in more effort. Perhaps 2 people could be used
instead of one for a particular task. It is possible
to get materials faster, but at more expense, by
changing suppliers or by using express freight.
Additional equipment might be hired t speed a
task. All these actions are collectively known to
planners as “CRASHING”
▪ To achieve maximum effect at minimum cost,
only critical activities should be considered for
crashing.
Some Terminologies
▪ Crashing: Shortening of an activity that can realistically
be completed

▪ Crash Time: The shortest time one can realistically


complete an activity

▪ Normal Time: Low-cost, realistic, efficient methods for


completing the activity under normal conditions

▪ Crash point: maximum time an activity can be


compressed

▪ Crash Cost: The direct cost for completing an activity in


its crash time is called crash cost
Activity Graph

Slope

Crash time

Normal Time
Cost Slope

Crash Cost – Normal Cost


Cost Slope = -------------------------------------
Normal Time – Crash Time

$800 - $400 $400


Cost Slope = ----------------- = ------------ = 80
10 – 5 5

The slope of the cost line is $80 for each time unit the activity is redu
Constructing a Project Cost–
Duration Graph
▪ Determining Activities to Shorten
 Shorten the critical activities with the smallest
increase in cost per unit of time.
 Assumptions:
 The cost relationship is linear.
 Normal time assumes low-cost, efficient
methods to complete the activity.
 Crash time represents a limit — the greatest time
reduction possible under realistic conditions.
 Slope represents a constant cost per unit of time.
 All accelerations must occur within the normal
and crash times.
What if Cost, Not Time Is the
Issue?
▪ Commonly Used Options for Cutting Costs
 Reducing project scope
 Having owner take on more responsibility

 Outsourcing project activities or even the entire


project
 Brainstorming cost savings options
PROCESS DESIGN AND ANALYSIS
Operations Management

▪ Operations management is designing,


managing and improving activities to create
products and services.
▪ The activities, resources, people, and
procedures that dictate how work is organized
is called the operating system
▪ The basic building block of an operating system
is the operating process. Most operating
system comprises multiple processes
Process Analysis

▪ Detailed understanding of how work


is currently performed and how it can
be redesigned for improvement
Process
▪ Process is the basic building block of any
operating system
▪ Process: A group of related activities that takes inputs (labor,
capital, knowledge, raw materials, purchased components,
and energy) and transforms them into outputs that are of
great value to the customers and to the organization itself.
 Complete Process
 Making bread from start to finish
 Segment of a process
 Packaging of breads
▪ Process Analysis
 Documentation and detailed understanding of how work is
performed and how it can be redesigned for improvement
Process Analysis

▪ How to start?
 1st step in analyzing a process is to describe it. We
need to have a good understanding of the current
process
 Activities
 Activity times
 Sequence of activities, i.e. flow

 Draw process flow chart


Describing a Process –
Flow Chart
▪ Process flowcharting is the use of a diagram to
present the major elements of a process

▪ It is an ideal methodology by which to begin


analyzing a process

▪ There are various conventions for mapping


processes
Process Chart Symbols
Emergency Room Admission
Types of Processes

▪ Single Stage
 One machine

▪ Multiple stages
 Multiple machines connected in sequence
Process Analysis Terminology
▪ Average Throughput time (or Flow time or
Manufacturing Lead Time)
 Total time for a unit to move through the system, from
beginning to end (Proc Time + Transport Time + Wait time)

1 2 3

4 minutes 4 minutes 4 minutes

FLOW TIME : 4 + 4 + 4 = 12 minutes


Throughput rate = 60 / 4 = 15 units per hour
Throughput Time: Important determinant of the speed of the process, how long
a customer will have to wait after placing an order
Process Analysis Terminology

▪ Rush Order throughput time


 Example: Orders that need to be executed
immediately (without delays)
Process Analysis
Terminologies
▪ Capacity: The maximum rate of output of a
process to meet demand. It is measured in units
of output per unit of time, capacity = 1 / CT

▪ Efficiency: Actual output / Standard output

▪ Utilization: Time activated / Time available


Lead-Times

▪ Order to delivery lead time (Speed): Time that


passes from the instant the customer placed an
order until the instant the customer receives the
product.
 Product Design Lead Time
 Procurement lead time
 Production lead time
 Delivery lead time
Process Analysis Terminology –
Batch Process
▪ Routing: Sequence of workstations passed
through by a part

▪ Run Time: Time required to produce a batch of


products. Product of time per unit and # units
per batch

▪ Set-up: Time required to make a particular


machine ready for a particular item

▪ Operation time: Set up time + Run time


Process Analysis Terminology

▪ Cycle Time: Average time between completion of


two successive units of product.

 Cycle time (CT) = 1 / Capacity


Process Analysis Terminology

▪ Buffering: Storage area in between stages where


the output of a stage is placed prior to being
used by the downstream station

▪ Blocking: Activities in upstream workstation


stopped as the downstream workstation is
unable to accept the part completed due to
limited capacity

▪ Starving: Downstream workstation waiting for


materials (stop due to no work)
Bottleneck Operation

Operation that limits the output of a production process is called the


bottleneck operation
Bottleneck Pipe
Capacity Bottleneck

Customers
Inputs

200 / hr 50 / hr 200 / hr

Bottleneck operation
Four step process – Blocking and
Starving

Task A Task B Task C Task D


2min/unit 4 min/unit 5 min/unit 3 min/unit

Task C is the bottleneck, it limits the output of the process. Task A and B could
produce greater output, but that would result in WIP inventory building up in fron
of task C indefinitely, with no increase in process output. When the physical
space for holding WIP in front of task C is full, we say Workstations A and B
are BLOCKED. Task D has to wait for Task C’s five minute cycle to do its
work. We say Task D is a STARVED task.
Capacity Calculation
Four step process
(Sequential Process)
Four step process with bottleneck
Task A Task B Task C Task D
2min/unit 4 min/unit 5 min/unit 3 min/unit

Capacity = 12 units / hour


Four step process (Parallel
Process

Four step process with bottleneck


Task A Task B Task C Task D
2min/unit 4 min/unit 5 min/unit 3 min/unit

Task C,
5 min/unit

Capacity = 15 units/hour

Doubling the resources at a work station effectively cuts the time at that
station in half. If “n” parallel operations are added, the time of the combined
workstation operation will equal 1/n times the original time
Parallel Processing
Parallel process: Tasks that can be performed at the same time. Outputs from
parallel process are typically integrated into one product at some point in the
process flow.

Bottleneck activity Output = 120 units / hour

30 seconds/unit C

20 seconds / unit

10 seconds/unit

Utilization: UA = 30/30 = 100%, UB = 10/30 = 33.3%, UC = 20/30 = 66.7%


Four-step process

Capacity = 20 units/hour
Parallel Process - Chair Making

Output = 4 chairs per day (assuming single shift, 8 hours per shift)

Can we further improve the output?


Measuring Process
Performance
▪ Assessing efficiency
 Labour utilization
 Useful time spent by the workers as a % of the total
time for which they are available
 Machine utilization (U)
 % of time that a machine is running and productive
 U = (t*AP)/h
where t = machining time for one component
AP = actual production per shift
h = number of hours per shift
Note: While calculating machine utilization we should consider set up time as well
As time the machine is actively producing output
Labour Utilization
Four step process with bottleneck

Task A Task B Task C Task D


2min/unit 4 min/unit 5 min/unit 3 min/unit

Hourly capacity = 12 units / hour


Worker A worked: 12*2 = 24 mins
Worker B worked: 4*12 = 48 mins
Worker C worked: 5*12 = 60 mins
Worker D worked: 3*12 = 36 mins
Labour utilization for entire process = (24+48+60+36)/ (4*60) = 70 %

OR
Labor content per cycle = (2+4+5+3) / (5)(4) = 70%
Labour utilization for Task A: (2/5)*100 = 40%; Task B=80%; Task C=100%,
Task D=60%
Labour Utilization Formula

Total direct labour content


▪ Direct Labour Util = ----------------------------------
(Process Cycle Time) (# of workers)
Process Analysis Terminology

Lot Size (also called Batch Size): # units of a


particular product type produced before
beginning production of another type
Process Analysis Terminology

▪ Process Velocity (also known as Throughput


ratio): Throughput time / Value added time

 Minimizing the time it takes to process something


through the system
 The lower the ratio, the better
Little’s Law

Average Inventory
▪ Average Flow time = ----------------------------------------
Flow Rate (or Average demand)

The average amount of inventory in a system is equal to the


product of average demand and the average time a unit
is in the system
Process Analysis Terminology

▪ Make-to-order (MTO)– Against specific


customer order

▪ Make-to stock (MTS) – Produced as finished


good stocks, delivered later against order

▪ Assemble to order (ATO) – Assemble against


specific customer order
Blue Print for Process
Analysis

“CHANGE IS CONSTANT “ Kamal Bali, CEO, Volvo India


Champagne MBA Large PC
Industry Program manufacturer
(XIMB)
Flow unit Bottle of MBA Computer
Champagne student
Flow rate 260 lacs 360 5000
or Bottle/year students/yr units/day
throughput
Flow time Avg time in 2 years 10 days
cellar: 3.5
years
Inventory 900 lacs 720 50,000
bottle students computers
Case Analysis

▪ Paediatric Orthopaedic Clinic at the


children’s hospital of western Ontario, Ivey
Case, 908D01
Paediatric Orthopaedic Clinic at the
Children’s Hospital of Western Ontario
(POCCHWO)

Questions

1. What is the activity utilisation at each step in


the process of providing care?
2. Which is the bottleneck activity?
3. What is the overall throughput time?
4. Calculate proportion of wait time in each
activity?
5. Calculate average number of patients in the
system?
Paediatric Orthopaedic Clinic at the
Children’s Hospital of Western Ontario

6. How is the variability affecting capacity at the clinic?

7. What are options for improvement?


Articles for Reading

▪ Process Analysis by Roy, D. Shapiro


Harvard Business School, September 12, 2013

▪ Designing, Managing, and Improving


Operations by Roy D Shapiro, Harvard
Business School, September 12, 2013

▪ Process Fundamentals by Gray and Leonard,


Harvard Business School, September 8, 2009
PRODUCT DESIGN
Why Study Product and
Service Design?
▪ The essence of any business organization are
structured around its product and services
▪ These products help achieve organizational goals
▪ Product design determine cost, quality, time to
market, customer satisfaction
▪ Touches every part of the organization (operation,
finance, marketing, accounting)
▪ In essence, firms must innovate rapidly to remain
competitive in the changing environment
What is Product Design

▪ Product design defines the appearance of the


product, sets standards for performance,
specifies which materials are to be used, and
determines dimensions and tolerances
Concurrent Design
Product Design Criteria
▪ Design for the customer
 Design for environment
 Cradle-to-Grave Assessment
 End-of-Life program
 The Three Rs: Reduce, Reuse, and Recycle
 Green sourcing (use environment friendly parts,
recyclable materials)
 Green manufacture (use of solar and wind
power)
Design for Environment and
Extended Producer Responsibility
▪ Design for environment
➢ designing a product from material that can be
recycled
➢ design for ease of repair
➢ minimize packaging
➢ minimize material and energy used during
manufacture, consumption, and disposal

▪ Extended producer responsibility


 holds companies responsible for their product even
after its useful life 4-7
Design for Environment

Copyright 2011 John Wiley & Sons, Inc. 4-8


Product Design Criteria
▪ Value analysis / value engineering
 Maximum functionality at minimum cost
▪ Design products for manufacture (DFM) and design
for assembly (DFA)
▪ Design for robustness
▪ Degree of Standardization
▪ Designing for mass customization
▪ Reliability
▪ Quality Function Deployment
▪ Legal and Ethical Considerations
▪ Cultural Factors
Value Analysis (VA)

▪ Eliminate unnecessary features and functions


▪ Used by multifunctional design teams
▪ Define essential functions of an item
▪ Determine the value of the functions
▪ Determine the cost of providing the functions
▪ Compute Value/Cost ratio
▪ Design team works to increase the ratio

4-
11
QFD
▪ QFD is a structured process to define the needs of
the customers and transforming them into
specific product designs and process plans to
produce products.

▪ Essentially, listening to the voice of the customer


(VOC) and align efforts.

▪ Important requirement to remain competitive in


this highly competitive business world
A 4-Step Process

▪ QFD has four components


Process
Product Product Process
Quality
Definition Development Development
Control

• Collect VOC • Identify • Design


• Identify critical processes
• Translate to parts process
Specs • Create control &
• Produce Specs flow charts Testing
House of Quality

Importance
Co-relationships

3
Product Attributes

1 4 2

Customer Relationship Competitive


requirements matrix assessment

6 Technical Attributes
A Series of Connected QFD
Houses
Product
characteristics
requirement
Customer

Part
A-1 characteristics

characteristics
s

Process
House A-2
Product

characteristics
of

characteristic
quality
Parts A-3 Operations
deployment

Part

characteristic
s
Process A-4

Process
planning

s
Operating
requirements
Benefits of QFD

▪ Promotes better understanding of


customer demands and allocate
resources
▪ Great cross-functional buy-ins and
alignment
▪ Reduced wastage of resource
Case

▪ Ikea – Design and Pricing


INVENTORY MANAGEMENT
Inventory
▪ Inventory: material that is being transferred,
stored, consumed, produced, packaged or
sold during a firm’s normal course of business
Goals in Operations w.r.t
Inventory
▪ Carrying the right amount of inventory and ensuring
that neither overstocking nor shortages occur is the
goal of inventory management

▪ Keep the level of inventory in the supply chain as low


as possible

▪ Moving the inventory, in its continually changing


form, as fast as possible through the supply chain for
delivery to the final client
What is Inventory
Management?
▪ Inventory management encompasses
processes that ensures product availability
while reducing investment costs
Forms of Manufacturing
Inventories
▪ Manufacturing Inventory: Items that contribute to or
become part of a firm’s product.

 Raw material
 Physical inputs at the start of the
 production process.

 Work-in-process (Partially completed)


 Inventory between the start and end points of a
product routine (yet to become finished products)
Types of Manufacturing
Inventory
(Work-in-process)
Manufacturing Inventory

 Finished goods
 End item ready to be sold
at the end of routine
 Maintenance / Repair /
Operating Supplies (MRO)
 Oil, lubricants, cotton
waste, wood dust
 Pens, papers, files,
envelopes
 Pipeline or Transit Stock
 Inventory ordered but
not yet received by
warehouses, distributors,
or customers
Service Inventory

▪ Inventory: Tangible goods to be sold and the


supplies necessary to administer the services in
various types of service organizations (hospitals,
banks)

 Hospitals: (medicines, syringes, blood, sutures,


glucose bottles, bandages etc.)

 Banks: brochures, pamphlets, currency notes,


coins
Levels of Inventory

▪ High Levels
 Tying more financial capital
 High interest charges

▪ Low Levels
 Stock outs
 Lost sales
Goal of Materials Manager

▪ Optimal Level of Inventory

▪ Key Questions
 What should be the size of order to the supplier?

 When should the order be placed?


Measures of Inventory
Management
▪ Inventory turnover
Costs of goods sold
--------------------------------------------------------
Average aggregate inventory value

 Cost of goods sold is finished goods valued at cost, not


the final sale price

 Average aggregate inventory value is the total value at


cost of all items (RM, WIP, Finished goods) being held in
inventory
Problem – Inventory Turnover

▪ Suppose a firm has an annual cost of goods sold of


$500M and its average inventory level during the
year is $80M. Then,
▪ Inventory Turnover = $500/$80 = 6.25 turns
▪ It can expressed as turning its inventory 365/6.25 =
58.4 days
▪ A low inventory turnover implies excess inventory and
weak sales. Inventory turnover measures the speed at
which a company converts inventory to sales
Measures of Inventory
Management
▪ Days (or weeks) of inventory in hand

average aggregate value of inventory


= --------------------------------------------
(cost of goods sold) / 365 days
Other INVENTORY MEASURES

▪ Inventory Accuracy – Detailed measure of inventory


accuracy and availability to maximize manufacturing
efficiency and financial results

 Inventory Accuracy: 1- (Variance Value / Closing Stock)

 Example: A warehouse is storing inventory of 10,000


units as per computer stock. On physical count of
material after a period (say, 2 months), 9995 units were
found. Then,
 Inventory Accuracy is: 1 – (5/10000) = 99.95%
Selective Control of
Inventory
▪ FSN Classification
 Based on movement of inventory
 F: fast moving, S: slow moving, N: non-moving

▪ VED Classification
 Based on criticality of items
 V: Vital, E: essential, D: desirable

▪ ABC Classification
 Based on cost of items consumed
ABC Classification System

▪ ABC classification method divides inventory items into


three groups
 A items (high rupee volume)

 B items (moderate rupee volume)

 C items (low rupee volume)

Note: Rupee volume is a measure of importance; an item low in cost


but high in volume can be more important than a high-cost item
with low volume.
ABC Inventory Planning

▪ A items
 10 to 20% of # of items
 60 to 70% of annual rupee value of total inventory costs
 Tight inventory control

▪ B items
 Represent 30% of # items and 15% of total inventory value costs

▪ C items
 50 to 60% of # of items
 10 to 15% of annual rupee value of inventory cost
 Less stringent inventory control
ABC Inventory Planning
Item No Annual Rupee Usage ( #units * price) % of Total Value
22 95000 40.69
68 75000 32.13
27 25000 10.71
3 15000 6.43
82 13000 5.57
54 7500 3.21
36 1500 0.64
19 800 0.34
23 425 0.18
41 225 0.1

233,450 100%
ABC Inventory Planning

Classification Item No. Annual Rupee Usage % of Total

A 22, 68 Rs 170,000 72.90%

B 27, 03, 82 53,000 22.7

C 54, 36, 19, 23, 41 10,450 4.4


A Typical ABC Breakdown
Key Use of ABC Concepts

▪ Use in customer service


 Focus on essential aspects

▪ Guide to cycle counting


 Physical counting of items in inventory to
avoid discrepancy indicated by inventory
records and actual quantities
Inventory Costs

▪ Types of costs
 Ordering costs (costs associated with placing an order and receiving
inventory, independent of order size). Assigned to entire batch
 Identification of sources of supply
 Price negotiation, purchase order generation
 Follow-up and receipt of materials
 Inspecting goods upon arrival for quality and quantity
 Stationery, postage, telephone and electricity bills
 Transportation costs

 Set-up Costs
 When a firm produces its own inventory, the cost of machine set-up
such as arranging tools, drawings, cleaning the machine, adjusting
the machine are all parts of set-up costs
Inventory Costs

 Holding or Carrying costs (in warehouse)


 Cost of storage facilities (rent, if rented)
 Electricity
 Cost of capital tied up in inventory
 Material handling
 Interest charges
 Insurance and taxes
 Pilferage, scrap, & obsolescence
 Cost of personnel
 Software for maintaining inventory status
Inventory Costs

▪ Shortage Costs (or stock out costs)


 Loss of profits
 Loss of goodwill
 Late charges
Basic Inventory Control
Systems
▪ Two types
 Fixed order quantity model
(Q – Model)
 Also known as Perpetual system
or Continuous Review System
 Event or quantity triggered

 Fixed time period model (P-


model)
 Also known as Periodic Review
System
 Time Triggered
Economic Order Quantity
(EOQ) Model
▪ Assumptions
 Annual demand for item is constant and uniform
throughout
 Lead time is constant
 Price per unit of product constant
 Inventory holding cost is based on avg. inventory
 Ordering or set-up costs are constant
 Instantaneous replenishment
 There are no quantity discounts
 Inventory incurred no cost in transit
Q-Model

▪ Lead Time: Time between placing an order and its receipt

▪ Reorder Point: The inventory level at which a new order


should be placed.
Q-Model

Inventory on hand
Q Demand Rate

Avg. Inventory
(Q/2)
R
Reorder Pt.

L
Time L = Lead Time Time
Order Placed
Order Receipt R = Reorder Point
Average Inventory Levels and
Number of Orders
Total Cost Curve
Minimum Total Cost

The total cost curve reaches its minimum


where the carrying and ordering costs are
equal.

Q = DS
H
2 Q
Q Model

2DS
▪ Q opt= H

Q answers the “how much” question directly

The square root formula is the EOQ, also referred as economic lot size
Q-Model

▪ Optimal number of orders = D / Q

▪ Time between orders = Q / D


Reorder Point in EOQ
When to Reorder with EOQ

▪ If demand and lead time are both


constant, the reorder point is
ROP = d X LT
where d = Demand rate (units per
day or week)
LT = Lead time in days or
weeks
Fixed Order Quantity Model
(Q-model)
Total Annual Cost = Annual Purchase Cost + Annual
Ordering Cost + Annual Holding Cost

TC = PD + (D/Q)×S + (Q/2)×H
Where, TC = Total annual cost
D = Demand
P = Unit cost
Q = Quantity to be ordered
S = Ordering cost or set-up cost
R = reorder point
L = Lead Time
H = Annual holding or storing cost per unit of
Q Model

▪ Item cost (P×D) is not a function of the order


quantity – there are no quantity discounts– so
the amount PD is constant. Therefore, the value
of Q that minimizes the equation is the value
that minimizes the sum of the ordering costs and
holding costs, called the total inventory cost or
total stock cost. This quantity is called Economic
Order Quantity (EOQ).
EOQ with Purchasing Cost

Adding purchasing cost does not change EOQ


Total Cost Curve Near EOQ

The Total Cost Curve is flat near EOQ


Little’s Law

Average Inventory
▪ Average Flow time = ----------------------------------------
Flow Rate (or Average demand)

The average amount of inventory in a system is equal to the product


of average demand and the average time a unit is in the system
Observation

▪ If demand increases by a factor k, the optimal lot


size increases by factor √k. The number of orders
placed per year should also increase by a factor
√k. Flow time attributed to cycle inventory
should decrease by a factor of √k.
Stock out Occurrence
Excessive Consumption During
Lead Time
Undue Stretching of Lead
Time by Supplier
When to Reorder with EOQ

▪ When variability is present in demand or lead


time, it creates the possibility that actual
demand will exceed expected demand

▪ Therefore, it is necessary to carry safety stock to


avoid stock out
Safety Stock

▪ EOQ model assumed deterministic demand


▪ Demand in practice varies from day-to-day
 Probability of stock out during lead time
 Need to keep safety stock in addition to expected
demand
 To hedge against the possibility of stock out
▪ Amount of safety stock depends on
 Service Level
 Probability that inventory on hand during lead time in
sufficient to meet expected demand, i.e., the
probability that stock out will not occur.
Safety Stock Avoids Stock
Out Caused by Excessive
Consumption
Safety Stock Avoids Stock Out by
Undue Stretching of LT by Suppliers
Service Level

▪ Probability that the demand will not exceed supply


during lead time. It is the coverage of the protection
interval (LT)

Example: Service level of 95% implies a probability of 95%


that demand will not exceed supply during lead time,
and probability of stockout or backorder is 5%

▪ Service Level = 100% - Stock out risk


Normal Distribution Curve
During Lead Time
Reorder Point (ROP)

▪ If expected demand during lead time and its standard


deviation are available, then
▪ ROP = d×L + safety stock
▪ ROP = Expected demand during lead time + ZσdLT

Where, z = # standard deviations


σdLT = The standard deviation of demand
during lead time
ZσdLT = Safety Stock
Note: Smaller the risk manager is willing to accept, the greater the value of Z
Other Three Probabilistic
Models
1. Demand is variable, and LT constant
2. Lead time is variable, demand constant
3. Both lead time and demand are variable
Managing Inventory (Key
Learning)
▪ Inventory costs money, inventory hides problems
▪ Reduce inventory
 Reducing lot sizes (EOQ)
 Lowering order costs through E-bidding
 Reducing receiving costs
 Automated payment of invoices
 Examine holding cost. If understated, larger H will
reduce EOQ
 Reducing set-up costs
 Automation and process improvements
Managing Inventory (Key
Learning)
 Reduce safety stock
 Better forecasting models to reduce the unpredictability of
demand
 Collaborating Planning Forecasting and Replenishment (CPFR)
 Reduce variability in demand by working with customers
 Reduce lead time
 Bringing suppliers close to the buyer, reduce throughput time
of suppliers
 Reliable method of transportation
 Faster method of transportation
Fixed Time Period Model
(P-Model) or Periodic Review
System
▪ Inventory checked only at fixed intervals of time,
rather than on a continuous basis
▪ Time between orders is constant
▪ On-hand inventory is counted
▪ Only the amount necessary to bring the total
inventory up to a pre-specified target is ordered
(order size varies depending on on-hand
inventory)
Fixed Time Period Model
(P-Model) or Periodic Review
System
Order Qty = Avg. demand + Safety Stock - Inventory on hand
P-Model
P Model

▪ Advantages
 Practical approach if the inventory withdrawals can’t be closely
monitored
 Inventory counted only before the next review period
 Convenient administratively
 More appropriate for C-items
▪ Disadvantages
 No tally of inventory during review period
 Possibility of stock out
 Large amount of safety stock because need to protect against
shortages during order interval and lead time
Differences (Q vs. P Models)
▪ Q model ▪ P model
 Order Qty: Q fixed  Order Qty: variable
 When order: ROP triggered
(varies each time order
is placed due to demand
 Record keep: Each time variability)
material withdrawn
 When order: Review
 Time to maintain: High period (time triggered)
 If Higher than normal  Record keep: Counted
demand – Shorter time only at review period
between orders  Administration: Easy
 Type of items: High priced,
 Type of items: Retail,
critical, important items drugs
 A items  Appropriate when large
number of items ordered from
same supplier resulting in
consolidation and lower
freight rates
Choosing Between Q and P

▪ Not an easy decision


 Part science and part human judgment
 It depends on variety of factors
 Total SKUs monitored
 Computerized or manual system
 ABC profile
 Strategic focus
 Cost minimization or customer service
Choosing Between Q and P
▪ P system
 The P system should be used when orders may be placed at specified
intervals
 Weekly order and delivery of FMCG products to a grocery store
 The P system is ideal when items are ordered from same supplier, and
delivered in same shipment
 Shipments can be consolidated resulting in lower freight rates
 Ordering for multiple products at the same time
 Provides scheduled replenishment and less record keeping
 Often used for inexpensive items

▪ Q system
 Often used for expensive items
Inventory Records and
Accuracy
▪ Inventory records differ from physical count
▪ Inventory accuracy refers to how closely they match
▪ How to keep up-to-date inventory records
 Keep storeroom locked
 Educating employees
 Putting fence up to ceiling around storage area to
prevent unauthorised access to pull items
clandestinely
 Cycle counting at regular intervals
Strategic Capacity Planning
Why Capacity Decisions
Important?
▪ Entails huge investment
▪ Can’t be altered in the short-term (last a long time),
especially factories
▪ Enduring impact on a firm’s performance
▪ Expensive to change
▪ To meet market requirements managers should be
 Able to change production volume to respond to customer
demand
 Produce different variety of products to respond to changing
customer needs (flexible plants)
 Alter process technology to remain competitive
▪ Goal of Capacity Planning: Matching supply capabilities with
demand
Capacity Measurement

Capacity: Amount of output that a system is


capable of delivering over a specific period of
time (max rate of output per unit of time)
▪ Capacity in Manufacturing Industry
 Automobile Plants: # of cars produced per shift or per year
 Steel Plants: MTPA
 Sugar Mills: # of tons of sugar produced per day
 Electric Utility: megawatts of electricity / hour
 Refinery: barrels/day
 Bearings: 25 million pieces per year
 Winery: barrels of wine produced per month
Capacity Measurement

▪ Capacity in Service Industry


 Restaurant: # of customers handled per hour or
number of tables available to seat customers
 Theater: Number of seats
 Retailer: Annual sales generated per sq ft.
 Airlines: Available seats per flight
 Hospital : Number of beds
 Tennis club: Number of courts
 Classroom: Number of students
 IT sector: Lines of codes per hour
Measuring Capacity
Examples
▪ There is no one best way to measure capacity
▪ Output measures like kegs per day are easier to understand
▪ With multiple products, inputs measures work better

Input Measures of Output Measures


Type of Business
Capacity of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Floor space in
Retail store Revenue per foot
square feet
Estimating Capacity
Requirements
▪ Capacity requirements can be expressed in
two ways
 Using output measures
 Appropriate for high volume processes with low
product variety
 Using input measures
 Appropriate for high product variety
 High process divergence
 Example, a neighborhood bakery might measure the
number of baking hours or machine hours available, or
simple kilos of raw material (white flour)
Estimating Capacity

▪ Capacity/period =
max production rate/hr × hrs worked/period

# units produced
▪ Production rate = ----------------------
Amount of time
Example of Capacity

▪ Given
 3 assembly lines
 Output 800 units per line per shift
 Maximum two shifts, 8 hours per shift

Capacity = (800 units per line per shift)×(number of


lines)×(number of shifts)
Min capacity: 800 units/day (1 line, 1 shift)
Max capacity: 4,800 units/day (3 lines, 2 shifts)
Example - Capacity

▪ Max production rate: 240 units/hr


▪ # hours (2 shifts): 80 hours/week
▪ Overtime = 10 hours/week
▪ Preventive maintenance = 0 (3rd shift)
▪ Equipment failure = 5% of planned hours
▪ Capacity/week =
(240 units/hr)×(80+10-0 hours/week) × (1-0.05) = 20,520 units/wk
Capacity Planning Framework
Changing Capacity (A Variable)
▪ Capacity can be changed by
 Increasing or decreasing human resource
 By purchasing or selling process equipment
 Hard to change in short time frame as they have
longer lives and involve large investments
 By expanding existing facilities or by creating new
facilities
 Managing suppliers or subcontractors
 Quality improvement by reducing waste and
rework
 Adding shift or providing innovation
Changing Capacity (A Variable)
▪ Improved process design
▪ Improved product design
▪ Reduced product variety
▪ Better product scheduling
▪ Better material management
▪ Reduced m/c breakdown through proper
maintenance
▪ Personnel management
 Motivation
▪ Increasing product yield
 Yield = Quantity of output / Qty of input
Reasons for Capacity
Planning
▪ Four primary reasons
 Increasing demand
 Maruti, Volkswagen, Toyota, Honda, Mercedes Benz,
Tata Steel
 Dropping demand
 Ex: Jaguar Land Rover, Ashok Leyland, Shalimar
Paints, Hindustan Motors,
 Changing technology and environment
 Ex: Mobile banking, Online ordering, Industry 4.0
 Spotting opportunities
 Electric vehicles, driverless vehicles
Capacity Expansion – Car
Industry
Capacity Planning Time
Horizons
▪ Long Range ( > 1 Year)
 Address demand through
 Brick and mortar changes
 Major changes to existing facility (expansion/modernization)
 Constructing new facility
▪ Intermediate Range ( 6 – 18 months)
 Address demand through
 Hiring
 Layoffs (Example: Jet Airways retrenched 900 airhostesses,
Tata Motors retrenched non-permanent staff)
 Subcontracting
Capacity Planning Time
Horizons
▪ Short Range (< 1 month)
 Address demand through
 Overtime, addition or deletion of shifts, workforce
changes
 Example: Greaves winch gear box delivery to Tata
Motors
Types of Capacity
▪ Design capacity or Theoretical capacity or Peak Capacity
 Maximum rate of output that can be achieved under ideal conditions
(without interruptions or downtime) over a given period of time such as
day, week, or year
Example: # tons of steel per week, or per month, or per year

A bakery can make 30 custom cakes per day when pushed at holiday time

▪ Effective capacity or Planned Capacity (< Design capacity)


 Maximum rate of output that the company can economically sustain
under normal conditions for an extended period
considering the product mix, maintenance, scheduling methods, lunch
breaks, employee training, quality standards etc.

On the average this bakery can make 20 custom cakes per day
Difference between Peak and
Effective Capacity
▪ FedEx averages volume of packages
delivered throughout the year is 6 million per
day. However, during Christmas holiday
season of 2007, FedEx projected that
December 17, 2007 would be the busiest
single day ever , with more than 11.3 million
packages moving through the system. Thus
peak capacity is 60% higher than effective
capacity
Types of Capacity

▪ Actual capacity (< Effective capacity)


 Maximum output achieved under constraints of
unexpected machine breakdowns, absenteeism,
defective materials, material shortages, quality
problems.
An example

▪ Problem: A small machine shop is designed to operate 1


shift per day for 5 days per week and can produce 500
units per shift with its current equipment, product mix,
and workforce
▪ Design cap = (500 units/shift)*(1 shift/day)*(5 days/wk)
= 2500 units/week
This calculation makes some assumptions:
1. No loss of time for product changeovers
2. No loss of capacity due to machine breakdowns,
preventive maintenance, worker problems, scrap etc.
Effective Capacity

▪ Operations Managers base their decisions on effective


capacity due to following reasons:
 Any excess capacity can accommodate unexpected
demand
 No shop-floor scheduler expects to receive all orders
with normal lead times. Important customers often
submit rush orders that require rapid response
 Allows preventive maintenance, which reduces
chances for unplanned breakdowns
 Does not strain equipment and people thus reducing
anxiety
Utilization and Efficiency

▪ Utilization: How intensely a resource is being


used. Mathematically,
Utilization = Actual Hrs used / Scheduled Hrs available
 Scheduled Hours – Available hours
▪ Efficiency: How well something is performing
relative to expectations. Mathematically,
Efficiency = Actual Units produced / Standard production Rate

Note: Utilization is always < 1; Efficiency can exceed 1


Effective Capacity

▪ Effective Cap = design cap × utilization ×


efficiency
If utilization = 75%, Efficiency = 95%
Effective cap = (2500)(0.75)(0.95) = 1781.25
Utilization

▪ Utilization = (Actual Output/ Cap)×100%

▪ Utilization rates vary by industry


 Continuous flow processes = Utilization near 100%
 Assembly line processes = around 80%
 Medical emergency , police, fire = Fairly low
utilization
Capacity Cushion
(or Safety Capacity)
▪ Amount of reserve capacity that a process needs to have to handle
sudden increases in demand or temporary losses of production
capacity due to machine breakdowns

Capacity Cushion (%)= 100% - Utilization Rate (%)

Greater the degree of demand uncertainty, greater the amount


of cushion

Capacity cushion often called safety capacity

Appropriate cushion varies by industry


 Capital intensive industry (Paper, oil refinery): <10%
 Hotel industry: 30% - 40%
Calculating Processing
Requirements
Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400


5,800

Q: How many machines are needed? A machine operates


10 hours per day and 250 days a year.
One machine has total processing time per year:
10 X 250 = 2500.
Number of machines needed is 5800/2500 = 2. 35
THREE machines!
Calculating Processing
Requirements cont.
Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400


5,800

Q: How many machines are needed? Average utilization of


a machine is 50%.
One machine has total effective processing time per year:
10 X 250 X 50% = 1250.
Number of machines needed is 5800/1250 = 4. 7
FIVE machines!
Input Measure: One product or
service
▪ For one service or product processed at one
operation with a one year time period, the
capacity requirement, M, is
Capacity Processing hours required for year’s demand
requirement = Hours available from a single capacity unit
(such as an employee or machine) per year,
after deducting desired cushion
D×p
M=
N[1 – (C/100)]
where
D = demand forecast for the year (number of customers serviced or
units of product)
p = processing time (in hours per customer served or unit produced)
N = total number of hours per year during which the process operates
C = desired capacity cushion (expressed as a percent)
▪ Setup times may be required if
multiple products are produced

Processing and setup hours required for


year’s demand, summed over all services
Capacity or products
requirement = Hours available from a single capacity unit
per year, after deducting desired cushion

[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 2 + …


+ [Dp + (D/Q)s]product n
M=
N[1 – (C/100)]
where
Q = number of units in each lot
s = setup time (in hours) per lot
N =total number of hours per year during which the
process operates
C =desired capacity cushion (expressed as a percent)
Problems

▪ Class Exercise (Problems)


Quality Management and SPC

Renfro India
Quality Message

▪ The market is becoming more and more competitive and


quality focused. Quality is no longer a differentiator. It has
become a basic requirement.

Guenter Butschek, CEO and MD, Tata Motors,


2016
History of Quality
Management
▪ Rooted in Post-World war II Japan
▪ Japanese in an effort to build their nation adopted the US
manufacturing practices
 Embraced and suppported the work of two American
researchers: Joseph Juran (1904-2008) and W Edwards
Deming (1900-1993)
 Juran blamed the culture of the firm and management for
poor quality
 Deming developed SPC for industries
 Japanese industry leaders embraced the idea that efforts to
improve quality can actually reduce costs
History of Quality
Management
▪ By 1970s and 1980s, US market was invaded by Japanese
electronic and automobile products
▪ Toyota was already using advanced quality management
system, and TPS became the international superstar of
manufacturing practice
 In late 1980s, Motorola developed the Six Sigma (SS)
approach, others (GE, Seagate, AlliedSignal) adopted
SS
▪ TQM, another well-known method adopted by industry
What is Quality?

 Degree to which performance of a product or service


meets or exceeds customer expectations
 Performance - Expectations>0, performance has
exceeded customer expectations
 Performance = Expectations, expectations have
been met
 Performance – Expectations <0, expectations have
not been met
What is Quality Management?

▪Set of activities that an organization performs to


maintain and improve the quality of its products
and services
Performance and Conformance
Quality
▪ Different kinds of quality
 Performance quality
 Refers to the ability of the product to excel along one
or more performance dimensions (“attributes”)
 Conformance quality
 Because of inherent variability in production
processes, nothing is produced exactly according to
specifications. The degree of match between
specifications and the actual product or service is what
we call as conformance quality
Quality Article

▪ “Competing on eight dimensions of quality”


(Harvard Business Review, Nov-Dec 1987) by
David Garvin
Dimensions of Quality:
Manufactured Products
Product quality is often judged on eight dimensions:

 Performance – primary product characteristics


 Features – secondary characteristics that supplements the
primary characteristics
 Reliability – How often does the product fail? Consistency of
performance
 Conformance to standards – meeting design specifications
 Durability – How long the product lasts; its life span before
replacement
 Serviceability – ease of repair, speed of repair
 Aesthetics – sensory characteristics (sound, feel, look)
 Perceived Quality – past performance, reputation, recognition
Article – Key Points

▪ Eight dimensions of quality


▪ Companies need not pursue all eight dimensions
 If pursued, products become costly
▪ Companies need to find what dimensions customers care
for and work on those dimensions
 Proper market research is key
Quality Gurus

▪ Walter Shewart
▪ W. Edward Deming
▪ Joseph Juran
▪ Armand V. Feigenbaum
▪ Philip Crosby
▪ Kaoru Ishikawa
▪ Taguchi
Key Contributors to Quality
Management
Shewart Control Charts
Deming 14 points, special vs. common cause
variation

Juran Quality is fitness-for-use


Feigenbaum Customer defines quality
Crosby Quality is free, zero defects
Ishikawa Cause-and-effect diagrams
Taguchi Taguchi loss function
Ohno and Shingo Continuous improvement
Modern Definition of Quality

▪ Quality is inversely proportional to variability


Reduction of variability is the fundamental idea in quality
control.
Describing Variability

▪ Measures of variability (or spread out)


 Range
 Variance and the standard deviation
 Stem-and-leaf plot
 Histogram
 Box Plot
 Coefficient of variation
Quality Improvement

▪ Quality improvement is the reduction of variability in


processes and products
Describing Variability

▪ Stem-and-leaf display (Graphical display about a data set)


 Shape
 Spread
 Central tendency
▪ Box Plot (Graphical Display)
 Central tendency
 Spread or variability
 Departure from symmetry
 Identification of outliers
▪ Histogram
 Same as above
Coefficient of Variation

▪ Coefficient of Variation, c = σ / µ
 Where σ = standard deviation
µ = mean

▪ If c<0.75 , low variability


▪ If 0.75 <= c <=1.33, moderate variability
▪ If c >= 1.33, High variability
Where in the Process to
Inspect?
▪ Raw materials and purchased parts
▪ Finished products
▪ Before a costly operation or where significant
value is added to the product
▪ Before an irreversible process
▪ Before a covering process

Note: Inspection is an appraisal activity that compares goods and services to a


standard
How Much to Inspect and How
Often?
▪ The amount of inspection can range from no inspection
whatsoever to inspection of each item.
▪ Low –cost, high volume items require less inspection
▪ High-cost, low volume items require intensive inspection
▪ Majority of the quality control applications lie somewhere
between the two
 Most require some inspection, but it is neither possible nor economically
feasible to examine every part of a product or every aspect of a service for
control purposes

As a rule, operations with high proportion of human involvement necessitate


more inspection than mechanical operations
Costs of Quality

▪ Prevention Costs (costs associated with tasks


intended to prevent defects from occurring)
 Quality Planning (developing & implementing quality management
program)
 Process monitoring
 Training
 Purchasing better equipment that produces less variation
 Working with vendors to increase the quality of input materials
 Process redesign to reduce errors
 Quality data acquisition and analysis
 Quality improvement projects
Costs of Quality

▪ Appraisal Costs (assessing the condition of


materials and processes at various points in
process)
 Inspection and testing of incoming materials
 Product inspection and test at various stages
 Maintaining accuracy of test equipment (calibration)
 Laboratory testing

Costs of quality estimated to be between 15%-20% of sales at most companies

Crosby
Cost of Quality
▪ Internal failure costs (defects discovered before
shipment)
 Scrap
 Rework
 Process downtime
 Retest
 Failure analysis
 Disposition
▪ External failure costs (defects discovered after
shipment)
 Customer complaint
 Warranty charges
 Liability costs
 Returned product/material
External and internal failure costs together accounted for 50%-80% of COQ
Juran
The Costs of Quality
Cost of Quality
Quality Cost Trend Prediction
as a Function of Time
Cost of Quality

It is estimated that the cost to fix a problem at the customer end is about 5 times the
cost to fix a problem at the design stage
Cost of Quality

Ce + Ci + Ca + Cp
▪ Cost of Quality= --------------------------------------
Cb + Ce + Ci + Ca + Cp
Ce = External failure cost
Ci = Internal failure cost
Ca = appraisal cost
Cp = prevention cost
Cb = measured base production cost ( no costs for quality)
Consequences of Poor Quality

▪ Loss of business
▪ Liability
▪ Productivity
▪ Costs
Process Control

▪ Starts with measuring an important variable. This can be


a
 Product attribute
 Diameter of a metal component, weight of a bag of
potato chip
 Process Attribute
 Temperature in a restaurant’s oven, length of
waiting time in a ticket booth, pressure applied in a
molding process
Statistical Process Control
(SPC)
▪ A statistical process control involves testing a random sample
of output from a process to determine whether the process is
producing items within a pre-selected range

▪ SPC uses statistical tools to observe the performance of the


production process in order to detect significant variations
before they result in the production of a sub-standard article.

▪ SPC is about monitoring consistency and repeatability of a


process
Major Objectives of SPC

▪ Quickly detect the occurrence of assignable


causes of process so that investigation of the
process and corrective action may be undertaken
before non-conforming units are manufactured

▪ Reducing variability in the process


Why Quality Problems?

▪ Variation in output is due to two reasons:

 Common Cause or random variation

 Assignable or Special cause or


controllable variation
Statistical Process Control
Tools (SPC)
▪ Variation in output is due to:
 Common causes (also known as natural variation)
 Inherent variation present in every process
 Causes may difficult to distinguish or wholly
unidentifiable
 Resulting degree of variation is minor
 Assignable causes (known as special variation)
 Variations due to specific causes
▪ A process subject to assignable variation is out of control
Statistical Process Control
Tools (SPC)
▪ Control (or in control or stable)
 A process that exhibits only common cause
variation is said to be in control or stable
▪ A process is said to be out of control when it
exhibits assignable variation
 Examples: less experienced worker has replaced
an experienced worker, machine malfunctioning,
change of machine settings
Control Charts
▪ A control chart is a time ordered plot of sample statistics
▪ Sometimes called “the voice of the process”
▪ Graphical display of a quality characteristics (for example, level of
beer in each bottle in a bottling plant)
▪ Distinguish between random and non-random variability
▪ Chart contains a center line and two limits
 Upper control limit
 Lower control limit
▪ If the process is in control, all sample points will fall between them
▪ As long as points fall within control limits – the process is in
statistical control
▪ However, any point outside limits – investigate the assignable
causes
Control Charts

▪ If all the points plot inside the limits, but behave


in a nonrandom manner – indication that process
is out of control and needs investigation
A Control Chart
Quality Control Chart
Quality Control Chart
In Statistical Control

▪ A process that is operating with only chance


cause of variation present is said to be in
statistical control
▪ If the process is in control, all the plotted
points should have an essentially random
pattern
Reasons for Popularity of
Control Charts
▪ Proven technique for improving productivity
▪ Effective in defect prevention
▪ Prevents unnecessary process adjustment
▪ Provides diagnostic information
▪ Provides information about process capability
Statistical Process Control
Tools
▪ Control Charts for variables (Characteristics that are expressed on a numerical
scale: density, weight, diameter, resistance, length, time, volume)
 X-bar Chart and R-Chart
 X-bar chart for process average
 R-chart for process variability

▪ Control Charts for attributes (characteristic that can’t be measured on a


numerical scale: smell of cologne acceptable or not acceptable, color of a
fabric acceptable or not)
 p-chart and c-chart
 p-charts for percent defective in a sample
 c-charts for counts (e.g. # of defects)
SPC Tools

▪ Control Charts for variables (X-chart, R-Chart)


 Variables data are measured on continuous scale
 Length
 Width
 Weight
 Voltage
 Viscosity
 Amount of time needed to complete a task
R-Chart Control Limits

D3, D4 = constants that provide 3 standard deviations (3σ) limits


for a given sample size
X-bar Chart Limits

A2 = constant to provide three sigma limits for the sample mean


Steps in developing X-bar
and R-chart
▪ Collect data on the variable measured (time, weight,
diameter). Collect at least 20-25 samples randomly.
Sample size should be of 4 to 5 units.
▪ Compute range for each sample, and average R-bar
▪ Calculate the UCL and LCL
▪ Plot the sample ranges. If all are in control, process is in
statistical control
▪ Calculate UCL and LCL for x-bar chart
▪ Plot the sample means. If all are in control, process is in
statistical control.
Zones for Identification of
Nonrandom Pattern
Control Chart Patterns
Control Chart Patterns
Pattern Recognition in
Control Charts
▪ Recognizing non-random patterns on the control
chart
 One point plots outside 3σ limits
 Two or three consecutive points plot beyond 2σ
limits
 Four out of 5 consecutive points plot at a distance
of 1σ or beyond from the centre line
 Eight consecutive points on one side of centre line
p-chart

▪ Control charts for attributes (quality characteristics that are counted rather
than measured)
 p-chart measures % defective items or proportion
defective items in a sample

Total # defects from all samples


 p-bar = ----------------------------------------
# samples × Sample size
 Appropriate when data consists of two categories
of items
 Good or bad, pass or fail
 Examples: # bad light bulbs and good light bulbs in a given lot
P-chart Limits
c-chart

▪ Appropriate when number of defects are counted


because not possible to compute proportion defective
▪ Examples
 Number of accidents per day
 Number of crimes committed in a month
 Blemishes on a desk
 Complaints in a day
 Typo errors in a chapter of the text book
 # customer invoice errors
C-chart Limits

C-bar = average no. of defects per unit = Total number of defects


No of samples
Control charts – Two issues

▪ ISSUE ONE: SAMPLE SIZE


 For attribute control chart, samples should be fairly
large, frequently in the range of 50-300 observations.
As a general rule, the sample must be at least large
enough to allow for the detection of one defective
unit.
 Control chart for variables require much smaller
sample size, usually in the range of 3 to 10 items
Control charts – Two issues

▪ ISSUE 2: HOW FREQUENTLY TO SAMPLE


 A high volume production process should be
sampled frequently since a large number of
defective units could be produced between
samples, provided the cost of sampling is not too
high
Control chart is Services

▪ In service sector control charts are used to control the time


or the percentage of defects from various processes – for
example, the time it takes to answer a phone, the time it
takes to serve a customer, or time it takes to collect
accounts receivables.

▪ Control charts are also used to monitor and control the


percentage of dissatisfied customers or the percentage of
late payments
Process Capability

▪ Specifications: A range of values imposed by designers of


the product or service based on customer requirements
▪ Control limits and based on production process, and they
reflect process variability
▪ Process variability: Natural or inherent variability in a
process due to randomness
▪ Process capability: The inherent variability of process
output relative to the variation allowed by the design
specifications
Measures of Process
Capability

▪ Measures of Process Capability


 Process Capability Ratio
 Process Capability Index
Process Capability Ratio

▪ Cp = (Upper Spec – Lower Spec) / 6σ

▪ If Cp < 1, process range > tolerance range


 Process not capable of producing within design
specifications
▪ If Cp = 1, Tolerance range and process range are same
▪ If Cp > 1, Tolerance range > process range
 A desirable situation
 Ideally Cp > 1.33
Process Capability
Process Capability
Process Capability

▪ Cp does not take into account where the


process mean is located relative to the
specifications

▪ Cp simply measures the spread of the


specifications relative to the six sigma spread
in the process
Process Capability Index

Generally, if Cp = Cpk, the process is centered at the midpoint of the specifications

When Cpk < Cp, the process is off center


Process Capability
(Sequential Steps)
1. Calculate Cpk to check centrality
2. Calculate Cp to check whether the process
variation are within design specifications
SBI, Fortune Towers, BBSR
Process Standards
▪ Process standards
 Encashment of cheque: 5 minutes (after reaching
counter)
 Receipt of cash: 3 minutes
 Issue of Demand Draft: 10 minutes
 Issue cheque book: max 7 days
 Opening of bank account: 10 minutes
 Issue of duplicate card/PIN – 7 working days
 Issue of welcome kit: 8 days

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