MENG 7037- PRODUCTION AND

OPERATIONS MANAGEMENT Dr.K.BALASUNDARAM

Assistant Professor
School of Mechanical & Industrial
Engineering
Dire Dawa Institute of Technology
Dire Dawa University
 Chapter -I
INTRODUCTION

Production facility Location decisions: multi-criteria approach,

mathematical models for facility location and layout, use of ISO cost

lines
 Introduction-POM
 The set of interrelated management
activities, which are involved in
manufacturing certain products, is called
as production management.

 If the same concept is extended to

services management, then the
corresponding set of management
activities is called as operations
management.
Production and Operation Management
 DEFINITION Means planning, organizing, directing and controlling of
production activities.

 Deals with converting raw materials into finished goods/products.

 Brings together 6Ms (men, money, machines, materials, methods and

markets) to satisfy the wants of people

 Main objective= produce goods at right quality, quantity, time and at

minimum cost
Definition-Production & Operation Management

Production and operation management is defined as the design,

operation, and improvement of transformation process, which converts
the various inputs into the desired outputs of products and services.

Definition: According to E.S.Buffa “Production management deals with

decision making related to production process so that result the
goods or services are produced according to specifications in the
amounts and by the scheduled demanded and at minimum cost.’’
 Case of Production & Operation Management
Organization Input Resources Transformation Output

Auto mobile Steel sheets, Tools Fabrication High quality

Plant engine parts Workers and auto mobile
Assembling
Taxi Customers Driver, taxi, Driving Destination
services petrol
Hospital Pharmacy Doctors Health care Healthy
In patient Nurses individual
Out patient
 History of POM
 The traditional view of manufacturing management began in
eighteenth century when Adam Smith recognized the economic
benefits of specialization of labor.

 He recommended breaking of jobs down into subtasks and recognizes

workers to specialized tasks in which they would become highly skilled
and efficient.

 In the early twentieth century, F.W. Taylor implemented Smith’s

theories and developed scientific management
 Meaning of Production System
 The term “Production 'refers to the transformation of raw materials into
finished goods and/or creation of services in order to satisfy the
customer needs (Fig. 1.1).

 The process of creating goods and/or services through a combination

of material, work, and capital is called production.

 Production can be anything from production of consumer goods, service

production in a consultancy company, music or energy production.
Production System
 Production System
The production system has the following characteristics:

1. Production is an organized activity, so every production system has

an objective.

2. The system transforms the various inputs to useful outputs.

3. It does not operate in isolation from the other organization system.

4. There exists a feedback about the activities, which is essential to

control and improve system performance
Concept of Production
 CONCEPT OF PRODUCTION
 Production function is that part of an organization, which is concerned with
the transformation of a range of inputs into the required outputs (products)
having the requisite quality level.

 Production is defined as “the step-by-step conversion of one form of

material into another form through chemical or mechanical process to
create or enhance the utility of the product to the user.” Thus production is a
value addition process.

 Edwood Buffa defines production as ‘a process by which goods and services

are created’.
 CONCEPT OF PRODUCTION
Some examples of production are:

Manufacturing custom-made products like, boilers with a specific

capacity,

Constructing flats, some structural fabrication works for selected

customers, etc.

Manufacturing standardized products like, car, bus, motor cycle,

radio, television, etc.
CONCEPT OF PRODUCTION- Examples of Production

Boiler

structural fabrication
Classification of Production System
Classification of Production System
Classification of Production System
 PRODUCTION MANAGEMENT
 Production management is a
process of planning, organizing,
directing and controlling the
activities of the production
function.
 It combines and transforms
various resources used in the
production subsystem of the
organization into value added
product in a controlled manner
as per the policies of the
organization.
Objectives of Production Management
Objectives of Production Management-RIGHT QUALITY

 The quality of product is established based

upon the customers needs.

 The right quality is not necessarily best

quality. It is determined by the cost of the

product and the technical characteristics as

suited to the specific requirements.

Objectives of Production Management-RIGHT QUANTITY

 The manufacturing organization should

produce the products in right number.

 If they are produced in excess of demand

the capital will block up in the form of

inventory and if the quantity is produced

in short of demand, leads to shortage of

products.
Objectives of Production Management-RIGHT TIME

 Timeliness of delivery is one of the

important parameter to judge the

effectiveness of production department.

 So, the production department has to

make the optimal utilization of input

resources to achieve its objective.

Objectives of Production Management-RIGHT
MANUFACTURING COST

 Manufacturing costs are established before

the product is actually manufactured.

 Hence, all attempts should be made to

produce the products at pre-established cost,

so as to reduce the variation between actual

and the standard (pre-established) cost.

 Operation Management
The term Operation Management is an extension of production management.
Operation Management is systematic direction and control of the processes
and application.
Operation Management deals with all the processes and activities involved
with designing, producing and delivering a product and / or service.
Broadly speaking, Operations Management deals with all the processes and
activities involved with designing, producing and delivering a product and/ or
service .
 Operation Management
 Operations management helps to achieve the objectives of the company.

 Operation management improves the productivity of employees.

 Operation management improves goodwill and presence of the organization.

 The manager will become more able to utilize resources.

 Operations management helps to improve the motivation of employees.

 Operation Management
Operations Management Examples

Suppose A company wants to manufacture Mobile in Ethiopia . The

company needs to take some operations decisions. For example:
Purchasing of Raw material from China(assumed).
To hire skilled and qualified employees.
To set Manufacturing units.
To make sure the supply chain of mobile phones.
To set services center across the country.
 PRODUCTION & OPERATIONS MANAGEMENT
FUNCTIONS

 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 and planning control 6. Quality control

7. Materials management 8. Maintenance management

 SCOPE OF PRODUCTION AND OPERATIONS
MANAGEMENT
Production planning and control
Scheduling, dispatching and rooting
Job shop or flow shop scheduling
Planning for mass production
Designing plant layout
Plant location and the factors influencing location
Program Evolution Review Techniques
Total Quality Management
Time study
Inventory control
SCOPE OF PRODUCTION AND OPERATIONS
MANAGEMENT
FACILITY
LOCATION
 Facility Location – Introduction
 A Business system utilize facilities like, Plant, Warehouse ,
machineries etc., while performing the task of production products.
 A proper planning of this facilities would definitely reduce their cost of
operation and maintenance .
 Plant location decisions are very important because they have direct
bearing on factors like, financial employment and distribution
patterns.
 To staring any new industry, one should generate several alternate
sites for locating the plant.
 Location of warehouse and other facilities are also having direct
bearing on the operational performance or organizations.
 Facility Location- Introduction
 It is branch of Manufacturing Planning & Control

 Focuses on optimal placement of facilities to reduce costs associated with

transportation, distribution and production

 Facility location refers to the location of service organizations

 It’s also known as factory location in production organization

 The success of organization is dependent on decision of facility location

 Facility Location- Introduction
Facility location is the process of determining a geographic site for a firm’s
operations, or it is the process of identifying the best geographic location for
a service or production facility.

Facility location is the right location for the manufacturing facility, it will have
sufficient access to the customers, workers transportation,

The facility location decision is very important for big business house wrong
location of facility may lead to failure of he complete project

Overall objective of an organization is to satisfy and delight customers with

its product and services.
 Need of Facility Location
Facility location is important for both new and existing organizations

Existing company may need facility location for:

o Change in available resources

o Shift of demand

o To expand new target market

o Development of new technology

o Socio-political-Legal changes
 Need of Facility Location
 Facility location planning is more important to new organizations

 It involves 3 strategic decisions:

1. To select proper geographical region

2. To select specific site within this region

3. To find the actual site

 Factors influencing Facility location
 The factors which influence plant location can be classified are:
Factors

General Factors Specific Factors

1. Availability of land for present and

future needs.
1. The economic stability of the
2. Availability of inputs such as labor,
country
raw materials etc.,
2. Analysis must be based on the
3. Availability of necessary modes of
factors like wage rate, policy, duties
transportation like rod, rail, airport and
3. The company can set up joint
water ways.
ventures with any leading company,
4. Availability of infrastructures power,
will solve many operational
water, bank , closeness to market
problems.
place.
5. Disposal of waste and effluent
 General Locational Factors

Controllable factors Uncontrollable factors

1. Proximity to markets 1. Government policy

2. Supply of materials 2. Climate conditions

3. Transportation facilities 3. Supporting industries and services

4. Infrastructure availability 4. Community and labour attitudes

5. Labour and wages

6. Capital
 Selection of Facility Location
 Facility location is strategic decision regarding selecting a best plant
location

 It is long term commitment of an organization

 A best selection of facility is hub for success of organization besides

that wrong decision may negatively affects the every step of an
organization
 Selection of Facility Location
Selection of
Location

Urban Rural Semi-Urban

Advantages :
Advantages :
- Cheap Land and Labor.
- Good transportation, Advantages :
- Lesser Taxes,.
communication services. - Cheap Land compared
- Sufficient Land
- Banking, Credit to Urban areas.
available.
-Availability of skilled, - Availability of Adequate
Disadvantages :
-Educational, Medical Land.
- Lack of Transportation.
facilities. - Lesser cost of
- High Distribution Costs.
Disadvantages : Distribution as compared
- Shortage of Skilled
High Land Cost., Labor to Rural areas.
Labor.
Cost and Tax
- Banking,
 Facility Location Decision -Models
 There are various quantitative and qualitative analysis to find out the
best alternatives.

 The quantitative models are used for analyzing those factors which
can be measured in terms of money.

 It is basically mathematical models which can be multiple use.

 Facility Location Decision -Models
Various models are available which help to identify the ideal location.
Some of the popular models are:

1. Factor rating method

2. Weighted factor rating method

3. Load-distance method

4. Centre of gravity method

5. Break even analysis

 Factor Rating Method
The process of selecting a new facility location involves a series of
following steps:

1. Identify the important location factors.

2. Rate each factor according to its relative importance, i.e., higher the ratings is
indicative of prominent factor.

3. Assign each location according to the merits of the location for each factor.

4. Calculate the rating for each location by multiplying factor assigned to each
location with basic factors considered.

5. Find the sum of product calculated for each factor and select best location
having highest total score
 Factor Rating Method-Problem
Example1:
Let us assume that a new medical facility, Health-care, is to be located
in Addis . The location factors, factor rating and scores for two
potential sites are shown in the following table. Which is the best
location based on factor rating method?
 Factor Rating Method-Problem

The total score for location 2 is higher than that of location 1. Hence
location 2, is the best choice.
 Weighted Factor Rating Method

 In this method to merge quantitative and qualitative factors, factors

are assigned weights based on relative importance and weight age

score for each site using a preference matrix is calculated.

 The site with the highest weighted score is selected as the best

choice.
 Weighted Factor Rating Method-Problems
Example 2: Let us assume that a new medical facility, Health-care, is to be
located in Addis. The location factors, weights, and scores (1 = poor, 5 =
excellent) for two potential sites are shown in the following table. What is the
weighted score for these sites? Which is the best location?
Weighted Factor Rating Method-Problems
 Load-distance Method
 The load-distance method is a mathematical model used to evaluate
locations based on proximity factors.

 The objective is to select a location that minimizes the total weighted

loads moving into and out of the facility.

 The distance between two points is expressed by assigning the points

to grid coordinates on a map. An alternative approach is to use time
rather than distance
 Load-distance Method
 load-distance method, a rough calculation that is either Euclidean or
rectilinear distance measure may be used. Euclidean distance is the
straight-line distance, or shortest possible path, between two points.
The point A on the grid represents
the supplier’s location in Ghaziabad,
and the point B represents the
possible warehouse location at
Gurgaon. The distance between
points A and B is the length of the
hypotenuse of a right triangle, or
Load-distance Method
 Load-distance Method-Problem

 Example 3: The new Health-care facility is targeted to serve seven census

tracts in Addis. The table given below shows the coordinates for the center
of each census tract, along with the projected populations, measured in
thousands. Customers will travel from the seven census tract centres to the
new facility when they need health-care. Two locations being considered for
the new facility are at (5.5, 4.5) and (7, 2), which are the centres of census
tracts C and F. Details of seven census tract centres, co-ordinate distances
along with the population for each centre are given below. If we use the
population as the loads and use rectilinear distance, which location is better
in terms of its total load distance score?
Load-distance Method-Problem
Load-distance Method-Problem
 Centre of Gravity
 Centre of gravity is based primarily on cost considerations.

 This method can be used to assist managers in balancing cost and

service objectives.

 The objective of the gravity location problem is to locate the single

new facility such that the total material handling cost is minimized .
 Centre of Gravity
 The above process will yield the following results.

Where:
wi = weight associated with the
existing facility
ai = x-coordinate of the ith existing
facility
bi = y-coordinate of the ith existing
facility
m = total number of existing facility

The coordinates x *and y * are the optimal coordinates for the new
facility. Also, it is interpreted as weight averages of the x- and y-
coordinates of the existing facility. Hence this type of location is
called as gravity location problem. The solution is called as the
 Centre of Gravity-Problem
 Example4: There are five existing facilities which are to be served by a
single new facility. The details of the existing facilities are shown in
the following table.
Existing Facility 1 2 3 4 5

Coordinates (5, 10) (20, 5) (15, 20) (30 ,25) (25, 50)

No. of trips of load 100 300 200 300 100

/year

Find the optimum location of the new facility based on gravity location
concept.
Centre of Gravity-Problem
 Break Even Analysis
 The objective of any location problem is to maximize profit. In
comparing serval potential locations on an economic basic, only
revenues and cost need to be considered. These will vary from on e
location to another .

 An economic analysis can be done by using break-even analysis. This

uses fixed cost and variable cost. The concept is demonstrate using
an example.
 Break Even Analysis
 A generalized methodology for location break-even analysis is given below.

1.Determine all relevant coast for each of the locations

2.Classify the cost for each locations into annual fixed cost (FC) and variable
cost per unit (VC)

3.Plot the total cost associated with each location on a single chart of annual
cost versus annual volume.

4.Select the location with the lowest total annual cost (TC) at the expected
production volume.
 Break Even Analysis-Problems
 Example5: Potential locations A, B and C have the cost structures
shown below for manufacturing a product which is expected to sell for
Birr 7000 per unit. Find the most economic location for an expected
volume of 2000units per year.

Site Fixed cost /Year Variable Cost/Unit

(Birr) (Birr)

A 6,000,000 1500

B 7,000,000 500

C 5,000,000 4000
 Break Even Analysis-Problems
 Solution
For each plant find the total cost using the following formula.
Total cost (TC) = Fixed cost (FC) + Variable cost (VC)/unit)* Volume
TC = FC + VC * V
The calculation are summarized in the following table.
Location Total Cost (TC)

A 6,000,000+1500*2000 = 9,000,000

B 7,000,000+500*2000 = 8,000,000

C 5,000,000+4000*2000 = 13,000,000

Form the above table, it is clear that the cost for the location B is the
minimum. Hence, it is to be selected for locating the plant .
 Single Facility Location

 If we are given a set of existing with their coordinates on X-Y plane

and the movement of materials form a new facility to all these existing

facilities, the objective is to determine the optimal location for the new

facility.
 ISO cost Line
 The isocost line is an important component when analysing
producer's behavior.

 The isocost line illustrates all the possible combinations of two

factors that can be used at given costs and for a given producer's
budget.

 In simple words, an isocost line represents a combination of inputs

which all cost the same amount
 ISO cost Line

Definitions:

“The Iso-product curves show the different combinations of two

resources with which a firm can produce equal amount of product.”

 “Iso-product curve shows the different input combinations that will

produce a given output.”
 ISO cost Line
Assumptions:

The main assumptions of ISO Cost line curves are as follows:

1. Two Factors of Production : Only two factors are used to produce a
commodity.

2. Divisible Factor : Factors of production can be divided into

small parts.

3. Constant Technique : Technique of production is constant or is

known before hand.

4. Possibility of Technical Substitution: The substitution between the two factors is
technically possible

5. Efficient Combinations : Under the given technique, factors of

production can be used with maximum
efficiency.
 ISO-Product Schedule:
 Let us suppose that there are two factor inputs—labour and capital.
An Iso-product schedule shows the different combination of these two
inputs that yield the same level of output as shown in table 1.
 ISO-Product Schedule
 (a) 1 units of labour and 15 units of
capital
 (b) 2 units of labour and 11 units of
capital
 (c) 3 units of labour and 8 units of
capital
 (d) 4 units of labour and 6 units of
capital
 (e) 5 units of labour and 5 units of
capital
 Isocost line
 The significance of factors of productive resources is that, any two
factors are substitutable e.g. labor is substitutable for capital and vice
versa.

 No two factors are perfect substitutes.

 This indicates that one factor can be used a little more and other
factor a little less, without changing the level of output.