Ch 01 & 02

Introduction
The production (or manufacturing) management since long has been associated with a factory situation
where goods are produced in physical sense.
Definition of a Factory
Factory is defined as as any premises in which persons are employed for the purpose of making, altering,
repairing, finishing, cleaning, washing, breaking, demolishing or adopting for sale, any article. The above
definition restricts the scope of production function.
Production is the process by which goods and services are produced
The essential feature of a production function is to bring together people, machines and materials to provide
goods and services thereby satisfying the wants of people. Since both manufacturing and service organizations
involve above mentioned features, the term production management is gradually being replaced by Operations
Management.

Operations Concept of Production

The concept of operations instead of production includes both manufacturing as well as service
organizations. All operations add value to the objectives and thereby enhance their usefulness. An operation
may be defined as the process of changing inputs into outputs thereby adding value to some entity. This can
be done in following ways:
Alteration: It refers to the change in form or state of inputs
Transportation: It refers to the movement of the entity from one place to another.
Storage: It refers to the process of keeping an entity in a protected environment for some period of time.
Inspection: It is the verification of entity for its properties.

Production as the Conversion process

Since production is the process of changing inputs into outputs, every organization has the conversion
system which can be shown as follows

Fig: A Conceptual model of a production (operations) System

The inputs in above system are raw materials, parts, consumable, energy, engineering details, production
schedules, information technology, capital or management and outputs are the produced goods, transported
goods, delivered messages, and serviced customers.

Productivity of Conversion Process

Effectiveness of production (or operations) management may be viewed as the efficiency with which inputs
are converted into outputs. This conversion efficiency can be gauged by the ratio of the output to the input and
is known as productivity of the system.
Productivity =

Output

Inputs

Productivity =
Goods and Services
Capital, Manpower, Material, Machines, Land and Building
The higher the productivity of production system, more efficient the production function. Another way
of looking at the concept of productivity is to look at the amount of waste generated in the system.
Productivity of the system can be improved by minimizing/ eliminating the waste occurring in the system.

Objectives of Production (or operations) management

Effectiveness: Producing the right kind of goods and services that satisfy customers needs.
Efficiency: Maximizing output of goods and services with minimum resource inputs.
Quality: Ensuring that good & services produced conform to pre-set quality specifications.
Lead Time: Minimize delays, waiting time and idle time in the conversion process.
Capacity Utilization: Maximum utilization of manpower, machines etc.
Cost: Minimizing cost of producing goods or rendering a service.
The above mentioned six important objectives are to be achieved to increase the productivity &
ultimately the profit for the organization.

Components of production (or operations) function

Production (or operations) management is essentially planning, organizing and controlling of production
function. Management of production (or operations) can be described in terms of fourteen components as
under:

Production/ Operations as a Co-ordination function

Production plays a vital role in coordinating efforts with three other major functions of an organization,
namely Marketing, Finance and Personnel. Sales department prepares a forecast which includes
products and quantities to be sold, price of each product, profit margin etc. Production departments
analyses the forecast in terms of manufacturing capacities, inventory, sub controlling and
subcontracting etc. and then they modify/accept the forecast. Finance department next analyses the
modified or accepted forecast in terms of corporate objectives, profitability, investment etc. Production
department then finalizes the manpower plan with personnel department. Personnel department will
arrange recruitment and Training if required. Proper co-ordination between production and personnel
department thus ensures that adequate skills to meet finalized forecast (sales) are made available.
Production department also discuss investment plans regarding material, machines etc with finance
dept. to meet the required target production. Finance dept. if required will arrange funds from most
economical sources. Production also coordinates with purchase dept. who takes procurement action for
materials required for production.

Manufacturing systems
A typical production system comprises of three main components i.e. inputs, transformation process and
outputs.
1) Inputs are men, materials, machines, instructions, drawings, paper work etc.
2) The transformation process involves operations, mechanical or chemical to change/ convert inputs into
outputs. It also includes activities that assist conversions. They are as follows:
1. Planning and control of factors of production
2. Procurement of materials
3. Receipt, storage and issue of materials
4. Material handling
5. Inspection of in-process and parts
6. Assembly and testing of products
7. Storage of finished goods
8. Authorization, retrieval etc
3) Outputs are goods and services (e.g. Products, parts, paper work, served customer etc.)
The combination of operations and activities stated above, employed to create goods and services is known as
manufacturing system, (or method). A manufacturing system is an independent group of sub-systems, each
sub-system performing a distinct function. These systems are inter- related and require to be unified to achieve
overall objectives of the organization. Manufacturing system needs to interact with both internal and external
environment. The internal environment is the combination of engineering, marketing, personnel and accounts
activities whereas external environment comprises of customers, competitors, suppliers, labour unions etc. The
selection of the manufacturing system is a strategic decision because changes in later stage are very expensive
to make. The system selected should be such that it can give the desired output, required quality and is to be
cost effective.
Factors influencing choice of manufacturing system
There is no best manufacturing system for any product. The manufacturing system which is selected
must meet two basic objectives namely:
1. It must able to meet the specifications of the final product and
2. It must be cost effective
Various factors which determine the choice of the manufacturing system are as follows:
a) Effect of Volume/ variety
When there are many products in one or few numbers to be produced (i.e. high product variety) it requires
highly skilled labour, general purpose machines, detailed and sophisticated production planning and control
systems. On the other hand when one or few products to be produced in large volumes (i.e. low product
variety) it enables the use of low skilled labour, highly automated mass production processes using special
purpose machines and simple production planning and control system.

b) Capacity of the plant

Whether the firm should use intermittent or continuous process will depend upon the projected sales
volume. Fixed costs are high for continuous process and variable costs are high for intermittent process.
Intermittent process will be cheaper to install and operate at low volumes (small capacity) and continuous
process will be economical to use at high volumes. (Large capacity)
c) Flexibility
Flexibility implies the ability of the company to satisfy varied customers requirements. Flexibility and
product variety are inter-related. It requires high inventory, large manufacturing lead times and sophisticated
planning and control.
d) Lead Time
Lead time means delivery lead time expected by the customers. It is major influencing factor in a competitive
market. As a general rule, faster deliveries are expected in a competitive market.
e) Efficiency
Efficiency measures the speed and the cost of the manufacturing system. Depending upon the sales volume,
product variety will have to be considered and the process has to be selected which will give the best
efficiency in terms of machines and manpower utilization.
f) Environment
Environment brings in new technologies and forces for the adoption of new process of manufacturing.
Similarly as market preferences change due to fashions or other reasons, the manufacturing system has to
be changes accordingly.

Classification (Methods) of Manufacturing System

Manufacturing systems can basically be classifies into five groups:
1] Project Production: Here a single assignment of complex nature is undertaken for completion
within the given period and within the estimated expenditure.
2] Jobbing Production: In this one or few units of a product are produced as per the customers
requirement within the given date and price as per the contract.
3] Batch Production: Where limited quantity of each types of product is manufactured at a time.
4] Mass and flow production: In this system a single or number of machines are arranged according to the
sequence of operations and several number of products are manufactured at a time and stock in warehouse
awaiting sales.
5] Process Production: In this production run is conducted for an infinite period

Characteristics of Manufacturing System methods

A] Characteristics of Project Production
a) Definite beginning and definite end
b) Non-uniform requirement of sources
c) Involvement of different agencies
d) Fixed position assembly types of layout
e) Over running of project will affect and increase the cost
f) Personal problems
g) Great importance to scheduling and control
B] Characteristics of Jobbing Production
a) Small production runs
b) Discontinuous flows of materials
c) Disproportionate manufacturing cycle time
d) General purpose machines and process layout
e) Highly skilled labour requirement
f) Highly competent knowledgeable supervision required
g) Large work in progress
h) Limited functions of production planning and control

C] Characteristics of Batch Production

a) Short production runs
b) Skilled labour in specific trades
c) Supervisor to possess knowledge of a specific process
d) Limited span of control
e) General purpose machines and process type of layout
f) Manual materials handling
g) Large work in progress
h) Flexibility of production schedules
i) Need to have production planning and control
D] Characteristics of Mass and Flow Production
a) Continuous flow of materials
b) Special purpose machines and product type layout
c) Mechanized materials handling
d) Low skilled labour
e) Short manufacturing cycle time
f) Easy supervision
g) Limited work in-progress
h) Less flexibility in production schedules
E] Characteristics of Process Production
a) Special purpose machines with built-in-controls
b) Highly mechanized materials handling
c) Virtually zero manufacturing cycle time
d) Low skilled labour
e) Supervisor to be process specialist
f) Negligible work-in-progress
g) Limited production planning and control functions

Introduction of Facilities Location and Layout

Plant location decisions concern both manufacturing and assembly units as well as service organizations. Ideal
plant location is important for business activities both in manufacturing and service category. Plant location
decisions are strategic, long term & non-repetitive. This is because:
a) Poor location of the plant can be constant source of higher cost, difficult marketing and transportation,
dissatisfaction of employees and customers, frequent disturbance in production, substandard quality,
competitive disadvantage etc.
b) The investment in land and buildings is quite large in case of bigger firms and hence economics of the
locations needs to be evaluated carefully for fair returns on such investment. Location decisions of large
projects like fertilizers, cements, sugar, steel, thermal projects etc. involve economists, geographers, town
planners, marketing experts, accountants, politicians, ecologists etc. Location decisions generally arise when:
A new manufacturing (or servicing) unit is to be set up Existing plant operations are difficult to expand
establishment of additional facilities in new territories because of growth of the business Emergence of new
social (chronic labour problem) political (political instability) problems or economic conditions which suggest a
change in the location of the existing plant.
E.g. Tata Nano plant; new plant requirement for new product developed according to new technological
environment. Changes by Government in Industrial policy which will not permit expansion of existing plant
Factors affecting location
Plant location factors in general may be grouped under three heads which are as follows:
i.
Regional factors (General territory selection)
ii. Community factors (Community selection)
iii. Site factors (Site selection)
i] Regional factors
It will decide the overall area (or region) within the country. It includes proximity to markets, proximity to
sources of raw materials, availability of utilities, transport facilities, climatic conditions, industrial and
taxation laws etc.
ii] Community factors
It influences selection of the plant location within the region. Such factors are availability of labour,
industrial and labour attitudes, social structure, service facilities etc.
iii] Site factors
It is favourable specific site within the community. Such factors are, availability and cost of the land,
suitability of the land, waste disposal etc.

Fig: Factors influencing three phases of plant location

Phase of the study
Location factor
1
2
3
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5
6
7
8
9
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Proximity to Markets
Proximity to Raw Materials
Infrastructural Facilities
Transportation Facilities
Labour and Wages
Legislation and taxation
Climatic condition
Ind & Labour attitude
Safety Requirements
Community attitudes
Supporting industries and services
Community attitudes
Waste Disposal
Availability & Cost of the land
Suitability of the land

Territory Community
Selection Selection
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Site
Selection

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Let us discuss these location factors one by one:

1. Proximity to Markets
Every company is in business to market and it can survive only if their product reaches the consumers
on time and at the competitive price. Location the plant nearer to the market is preferred. If the
product is to be exported, location near ports is desirable. It will reduce the transportation cost;
shipment cost etc.
2. Proximity to source of Raw Materials
Since raw materials usually constitute 50 to 60 percent of the total product cost, it is important that the
firm gets its requirements of raw materials at the right time and at the reasonable price for which the plant
must be located nearby to the sources of required raw materials units. If the raw materials come from a
variety of locations, the plant may be situated so as to minimize total transportation costs.
3. Infrastructural facilities
It considers availability of utilities like power, water, disposal of waste etc.
4. Transportation Facilities
Transportation cost to value added is a key determinant of the plant location. It includes average distance and
medium of transport i.e. Rail, Road or sea and air.
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5. Labour and Wages:

Plant location should be such that required labour is easily available in the neighbourhood. Importing
labour from outside is usually costly and it causes a lot of administrative problems. Prevailing wage
pattern, living costs and industrial relations are other factors to be taken into account.
6. Legislation and Taxation
The policies of the State Govt. and Local bodies relating to issue of licenses, building codes, labour laws
etc. are the factors in selecting or rejecting a particular community/ site. In order to balance economic
growth, both central and state Govt. offer a package of incentives for setting up industries in particular
locations.
Exemptions from excise duty, sales tax and octroi, soft loans, subsidy in electricity charges etc. are some of
the incentives offered by Govt. It will affect in minimizing the product cost.
7. Climate conditions
It is an important factor for textile mills which requires high humidity.
8. Industrial and Labour attitudes
Community attitudes towards supporting hostile trade union activities are an important factor. Frequent labor
problems and interruptions are harmful to the plant in the long run. Political situation in the state and attitude
of Govt. towards labour activities also influences selection of the site for the plant.
9. Safety requirements
It is important for certain industries like
1. Nuclear power plants
2. Explosive factories
3. Location near to border areas is undesirable for such industries.
10. Community facilities (Social infrastructure)
It includes accommodation, education, medical, entertainment and transport facilities. It also includes
communication facilities.
11. Community Attitudes
Community attitudes towards work (people are hardworking or not) as well as their attitudes towards the
incoming entrepreneurs (helpful, cooperative or not) can make or break the industry in that particular location.
12. Supporting Industries and Services
Service needed by the firm as well as supporting industries to that firm should be as nearer as possible for
saving the time and cost.
13. Suitability of the land
Site selection should also take into account topography and soil structure of the land.

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14. Availability and cost of the land:

Site/ Plot size must be large enough to accommodate present required facilities, parking and access
facilities and space for further expansion.
15. Waste Disposal
Proper infrastructure is to be created for the disposal of waste otherwise it will create the problems
like pollution of air, water etc.

Facilities (Plant) Layout

Introduction
Plant layout is the disposition of the various facilities and services of the plant within the areas of the site
selected. Plant layout this involves determination of space requirement for the facilities and arranging them in
a manner that ensures steady flow of production with minimum overall cost.
Plant layout is the placing of right equipment, coupled with right method, in the right place to permit the
processing of the product in the most effective manner through the shortest possible distance and through the
shortest possible time.
Plant layout decisions are strategic decisions. A good layout results in comforts, convenience, appearance,
safety, efficiency and profits. A poor layout causes dispersion of material flow, unnecessary material
handling, more scrap and rework, high output time, wasted movements, frustration and inefficiency.

Principles of a Good layout

There are certain criteria which can be used to judge whether layout is good or not. These are as follows:
a) Overall integration of factors
A good layout is one that integrates men, materials, machines, supporting activities and other in a way that the
best compromise is obtained.
b) Minimum Movement
A good layout is one that permits the minimum movement between the operations.
c) Uni-directional flow
A good layout is one that makes the materials to move only in the forward direction, towards stage of
completion, without any backtracking.
d) Effective use of available space
In good layout available space is effectively used either in horizontal or vertical position.
e) Maximum Visibility
Men, machines and materials are readily observable at all time in good layout.
f) Maximum accessibility
A good layout is one that makes all servicing and maintenance points readily accessible.
g) Minimum Handling
A good layout is one that reduces the materials handling activity to its minimum.
h) Inherent Safety
A good layout is always safe for workmen to work in all respect.
i) Safe and improved environments
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Work centre and areas around them always satisfying the workmen.
j) Maximum Flexibility
A good layout is one that can be altered later if required, without much cost.
k) Maximum Security
A good layout safeguards the plant and machinery against fire, theft etc.

Types of layout
Layouts are basically of three types:
a) Process or functional layout
b) Product or line layout
c) Project or fixed position layout

Process or Functional Layout

Process layout also called layout by function is generally associated with batch production. In this factory is
divided into process units (or departmental) and within these process units (or departments) and within these
process units (or departments) all similar facilities are grouped together.
E.g. Presses are kept at one place, milling machines are placed at another place, and drilling machines are
kept at third place, and so on. It is shown in following figure.

This type of layout is suitable when,

1) The products are non-standard and their quantities are small.
2) There is a wide variation in the processing times of individual operations.
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Advantages of Process Layout

1. Lower capital investment since general purpose and less number of machines required
2. Higher utilization of available equipment
3. Greater flexibility of equipments and workers
4. Workers attain greater skills since they have to attend to one type of machine and operations
5. Imbalance of work in one section does not affect the working of the other section
6. Variety of the jobs makes the work interesting to the workmen
Disadvantages
1. For the given volume of production, space requirements are higher in this type of layout
2. Materials handling cannot be mechanized which adds to extra cost
3. Work in process inventory is higher since jobs have to queue up for each operation
4. Routing and scheduling is difficult
5. Inspection required after each operation. This causes delays in production time
6. Setup costs are high because of frequent changes of jobs

Product or Line Layout

Product layout is also called layout by sequence. The layout of plant, shape and size of its buildings, location
of services, stores, material handling equipments etc. are in such a way that materials flows unidirectional and
at the steady rate. Special purpose machinery and equipment with built in-controls to measure output and input
are employed. The equipment, if necessary, is duplicated to avoid backtracking. In these type materials always
flows in the forward direction towards stage of completion.

This type of layout is suitable when:

1. Products are standard and to be produced in large quantity
2. Products have always reasonably stable demand
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3. Processing times of each operation is more or less equal; E.g. Automobiles, T.V sets, food processers,
radios, transformers, cement, steel etc. (i.e. for single products)
Advantages of product Layout
1. Manufacturing cycle is small which reduces work in progress
2. Material handling is minimum (or automatic)
3. Space required is small
4. Work is simplified by breaking into elemental tasks which are mechanized wherever possible.
Hence labour costs are minimized
5. Quality control is easy to exercise and more effective
6. Delivery commitments are reliable
7. Materials requirements can be scheduled easily and more accurately
Disadvantages
1. The changes in the products necessitate the change in the layout of machinery
2. All machines may not be used to their full capacity
3. Manufacturing cost depends upon volume of production
4. Breakdown of any machine will stop the further process till it gets required
5. Expansion of capacity is not possible

Project or Fixed Position Layout

Project type of industries such as manufacturers of airplanes, ships, large turbines, heavy machinery,
pressure vessels etc. has this type of layout. Heavy materials, components, sub-assemblies; under this
layout remain fixed at one place. Men, machines and other tools are brought to the project location to
complete the job.
This type of layout is suitable when,
1] One or few pieces of an identical product are to be manufactured
2] The cost of transportation of heavy machinery and parts is very high

Combination Layout (Mixed Layout)

A mixed layout is the combination of process and product layout. It is generally used when,
1. Product contains lot many components and parts
2. Product requires to be produced in different types and sizes
In this type of layout, the parts are produced on facilities arranged in a process type of layout and then they are
assembled using the product type of layout. Another concept of mixed layout is called cellular layout in which
the facilities are clubbed together into cells to utilize the concepts, principles and approaches of group
technology. In cellular layout, the facilitates are grouped into cells which are able to perform similar type of
operations for a group of components.

Production Planning and control

Production is defined as transforming inputs into outputs in the form of goods and services required by society.
Planning contains a series of activities that are interrelated and co-ordinate such as materials planning; process
planning, scheduling etc. and which are designed to carry out manufacturing efforts systematically. Control is
nothing but the overall control on the manufacturing process right from inputs to outputs.
Definition:
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According to Gordon Production planning & control involves generally the organization & planning of the
manufacturing process. Specifically it consists of planning of routing, scheduling, dispatching & inspection
coordination & control of materials, methods, machines, tooling & operating times. Thus planning is
forward thinking while control is a mechanism for execution. Planning & control are the two important
wheels of the management process.
Objectives of Production Planning & Control
The main objectives of PPC are as follows:
1. To attain maximum utilization of resources
2. To produce quality products
3. To minimize manufacturing cycle time
4. To maintain optimum inventory levels
5. To achieve co-ordination between labour, machine & other supporting departments
6. To maintain flexibility in operations
7. To achieve cost reduction & cost control
8. To prepare & maintain the production schedules
9. To achieve organizational goals at minimum cost
Functions/ Scope of production planning & Control
Production planning & control covers the following activities
1. Procurement of raw materials, components & spare parts in right quantities at right time from right source
at right prices
2. Selecting best methods of processing & finding out the best sequence of operations
3. To determine the nature & magnitude of the output in consultation with marketing department
4. To plan the layout of operations where different operations are to be performed
5. To prepare & maintain time schedule
6. To ensure continuous inspection over products produced
7. To impose controls over costs & to get work done according to the plan

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Importance of Production Planning & Control

Production planning & control is heart of the production/ operations management function because of
several reasons.
a) It coordinates all phases of the production & operating system
b) An efficient system o production planning & control results into better quality, optimum utilization of
resources, lower level of inventories, reduction in production cycle time, faster delivery, more efficient
customer service, lower cost of production, lower capital investment etc.
c) It also results into higher production, economy in production, quality of goods & services, timely delivery
etc.
d) It also results into higher sales, more profits, increase in market share, increase in competitive advantage
etc.
e) Because of systematic planning & control, machinery breakdown are minimized, maintenance is improved,
excess capacity & idle time is minimized.
f) It contributes significantly increasing the Goodwill & image of the organization.
Thus production planning & control are not only complementary to each other but they are so interrelated that
they can be treated as one function. A number of scientific tools are available for planning but in case of huge
projects, the planning of projects is best performed through well- known techniques like program Evaluation &
Review Techniques (PERT) & Critical Path Method (CPM).

Introduction to Six Sigma

Six Sigma as a management standard in product variation (presently even for service variation) can be
treated back to the work during 1920s when Walter Shewhart showed that three sigma from the mean is the
point where a process requires correction.
Definition
Six Sigma is a disciplined data driven approach & methodology for eliminating defects which amounts to
driving towards six standard deviations between the mean & the nearer specifications limit in any process of
products/ services. Six Sigma level indicates that we are 99.99966% confident that the product/ service
delivered by us is defect free. This means that only 0.00034% of the times the product/ service delivered are
defect prone.
When 0.0000034 is multiplied by one million, it comes to 3.4 defect s per million opportunities.
Actual number of defects
Actual sigma level =
x 100
Total no. of opportunities for the organization
to make mistakes from the customer angle
A process is said to be at six sigma level provided that the process is not producing more than 3.4 defects per
million opportunities. The fundamental objective of six sigma methodology is the process improvement &
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reduction of variation through its application.

At its Core, Six Sigma revolves around the following few concepts
1. It is critical to attributes which are most important to the customers
2. It focuses on the process more specifically what it can deliver
3. It aims for stability of the process i.e. improve product quality which is the utmost expectation
of the customer
4. It focuses on the design for six sigma to meet customer needs & process capability

Approaches for Six Sigma

There are two approaches for achieving six sigma which are as follows:
DMAIC & DMADV
DMAIC
DMAIC means Define, Measure, Analyze, Improve and Control. The six sigma DMAIC process is an
improvement system for existing processes falling below specification & looking for incremental improvement.
It is systematic, scientific & fact based.
DMADV
DMADV means Define, Measure, Analyze, Design and Verify. The six sigma DMADV process is an
improvement system used to develop new processes or products at six sigma quality levels. This can be used
even for existing processes if they require more than just incremental improvement.

Steps of Six Sigma DMAIC

Step 1: Define
This step establishes a leadership team which will decide on the project on which it will work. It also
identifies key considerations like cost benefits, customer expectations, product quality enhancement & ability
of the team to have a positive impact on the process.
1. Define all your products by making a list of them along with corresponding end results
2. Identify your customers of each end product

Step 2: Measure
In this step, the team examines all aspects of the project, develops a thorough understanding of it and identifies
the critical requirements & processes. The team defines performance measures for key characteristics &
establishes an effective means of measuring them. Then, the measurements of the process to determine current
performances are done.
Following are the sub-steps:
1. Define your needs in terms of essential inputs for projects/ products selected
2. Setup quality measures
3. Define the method of computing errors/ unit, errors/million & actual sigma level
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4. Measure the current performance of the process

Step 3: Analyze
In this step, the team analyzes the results of this collected data & work for improvement of the process if
required. It includes identification & quantification of the sources & locations of defect causing variables
within the process.
Step-4: Improve
The following steps are performed
1. Identification of process improvements based on the collected data & analysis
2. Designing a plan of action
3. Performing risk assessments on the potential changes
4. Implementing the plan
5. Monitoring the results for the recommended changes
Step-5: Control
In this step, the team reviews the entire process to ensure that the appropriate changes have been made & to
identify the actions that will permanently maintain those changes. Further, steps are taken to control future
process performance.

Steps of Six Sigma DMADV

The first three steps of DMAIC & DMADV are same except last two steps. The steps of
DMADV are as given
Step-1:
Define the project goals & customer (internal & external) deliverables
Step-2:
Measure & determine customer needs & specifications
Step-3:
Analyze the process options to meet the customer needs
Step-4:
Design detailed process to meet the customer needs
Step-5:
Verify the design performance & ability to meet customer needs

Benefits of Six Sigma

1. It ensures enhanced product quality
2. It enables predictable delivery of the products
3. It helps to achieve productivity improvement
4. It helps to have rapid response to changing needs of customers
5. It also facilities the development & introduction of new production in to the marketplace

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LogisticsManagement
The term Logistics is derived from military organization and it was in use in the days of Louis XIV of France.
It was observed that effectiveness of the military organization did not depend on only weapons, fighting skills
and spirit of the soldiers but also affected by the efficiency of transportation and supply of ammunition and food.
Logistics means this support to military. The same term when applied to industrial activity it reflects the similar
kindofapproachtoimproveflowofproductfromsourceoforiginthroughdifferentstagesandfinallytotheend
user.
Definition
LogisticsManagementencompassesallmaterialflowmanagementfromtheinflowofpurchasedmaterialsinto
works,materialsflowthroughmanufacturingprocessesandmaterialflowtocustomers.
LogisticsManagementincludesthedesignandadministrationofsystemstocontroltheflowofmaterialswork
inprogressandfinishedinventorytosupportbusinessunitstrategy.
ObjectivesofLogisticsManagement
Basicobjectivesofagoodlogisticsystemaretogettherightgoodsorservicestotherightplace,attheright
time,intherightconditionandattherightcost.Otherobjectivesareasfollows:
a) Toensurethehighestlevelofcustomerserviceandsatisfaction
b) Tominimizetheoperatingcostsofphysicalmaterialssystem
c) Toreducetimespentfromprocurementtodeliveryofmaterials
d) Addvalueateverystageoflogisticpipeline
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e) Overallcontroloninventory,workinprogressandfinishgoods
f) Tohelptheorganizationforitscompetitivepositioninthemarket
g) Helpinimprovingcommunicationsystembothexternalandinternal
h) TrytoimplementtheprinciplesofJIT
i) Promotecooperationandcoordinationineachsubsystemtoachievethegoodsoftheorganization.
ActivitiesofLogisticsfunction
1)
2)
3)
4)
5)
6)
7)
8)
9)

OrderProcessing
TransportationManagement
InventoryManagement
Warehousing
Materialshandling
Packaging
Acquisition
ProductScheduling
Informationsystem

ImprovingEffectivenessofLogisticsManagement
EffectivenessofLogisticsmanagementcanbeachievedwiththehelpoffollowing:
1. LogisticsNetwork
2. Transport
3. Information
4. Inventoryand
Warehousing,materialshandlingandpackaging
1.LogisticsNetwork
It includes facilities like manufacturing, dealers, retail stores and warehouses. Larger the geographical area more
complex is the logistical network. Superior logistic network is a very big competitive tool. It is based on
systematic analysis and determination of number of factors like type of facilities, geographical location, specific
work allocation etc.
2.Information
Timelyinformationisthekeytothelogisticperformance.Moderninformationtechnology,intheformofboth
hardwareandsoftwarehasremovedthedeficienciesininformation.

20

3. Transport
Cost, speed and reliability are the key determinants of the effectiveness of any business essential for optimum
cost.
4. Inventory
Good inventory management system must be operated to achieve desired customer service with minimum
inventory investment. Inventory management is the profit centre area of each organization.
5. Warehousing, Materials handling and packaging
The choice and location of the warehouse should be with a view to get closer to the core customers. Materials
handling should be planned to ensure safe and speedy receipt, movement, storage and packaging of customers
requirements.
Lean Manufacturing:
Lean Manufacturing is systematic approach to identifying and eliminating waste (non-value added activities)
through continuous improvement by flow of the product only when the customer needs it (called pull) in
pursuit of perfection.
Why do we need LMS?

To meet the challenge of competing in globalised markets.

Continued Market place focus on quality, cost and delivery (QCD)

Pressure of out sourcing by OEM?

Ever increasing customer expectations.

The need to compete effectively in the global economy

Pressure from customers for price reductions

Continued marketplace focus on quality cost and on-time delivery.

The Lean Drivers:

21

People
Customer
Success

Lean Thinking
Employee Involvement

Tools to support people

and process

ProcessTechnology

Flow
Elimination of Waste

Objectives of Lean Manufacturing system :

Basic Objective of LMS is to do more and more with less and less human effort, less equipment, less time and
less space. At the same time coming closer and closer to providing customers what exactly they want. LMS aims
to reduce the time line by reversing the sequence of activities and eliminating non value added operations.

Flow in Lean Manufacturing System

22

Key Principles in LMS:

1. Minimize material handling. Preference should be given to low or no-cost solutions such as gravityfeed slides. Handle product once only.
2. Minimize distances. Avoid walking, carrying, etc. by creating cells, combining operations within a
work centre, better planning, and so on.
3. Minimize strain. Work centres should be ergonomically designed to avoid back and other muscle
strains.
4. Minimize clutter. Everything should have a home, from parts and tools at a workstation, to equipment
and product within designated floor spaces.
5. Minimize storage. If you have the space, it will surely get filled. Thus, continuously minimize your
storage space for raw material, WIP, finished goods and spare parts throughout the supply chain.
6. Maximize utilization. Make optimal use of people, space, and equipment to improve the return on
investment.
7. Maximize flexibility. The key to lean is creating a layout that can adapt quickly to changes in product,
equipment, personnel, or material.
8. Maximize smooth flow. Continuously determine and eliminate the bottlenecks, then rethe line.

balance

9. Maximize visibility. To quickly spot problems, maintain a clear line of vision to anywhere, from
anywhere.
10. Maximize communication. Lean requires constant training on tools available to meet goals and
objectives, and feedback on how well things are going.
Tools of LMS:
a) JIT
b) Total productive maintenance
c) 5 S
d) Process optimization
e) Visual Controls
f) Streamlined layout
g) Standardized work.
h) Batch size reduction
i) Quality at the source
23

j) Point of use storage

k) Quick changeover
l) Pull and Kanban

Just In Time:
Just in Time is an optimal material requirement planning system for a manufacturing process in which
there is little or no manufacturing material inventory on hand at the manufacturing site and little or no
incoming inspection.
Leading Japanese companies attribute their success in reducing waste and speeding production to the
implementation of so called Just in Time (JIT) methods of working. It is also known as stockless
production because the aim is to receive supplies and manufacture components Just in Time for next
operation. In JIT, the ideal inventory is one.
First sell it, and then make it: JIT reverses the conventional approach of first making and then selling.
Ideally nothing is produced unless a customer is identified. In some Japanese factories the cars are
shipped with the customers name already attached. This helps in reducing inventories,
warehousing and other holding costs.
From finish to start: JIT reverses the conventional approach of planning production from start to finish.
Employees responsible for final operation receive the production plan first. The organization is forced to
get the production process right before commencing production.
Implementing Just-In-Time Production Systems
Just-in-Time (JIT) is a philosophy of continuous improvement in which non-value-adding activities (or
wastes) are identified and removed for the purposes of reducing cost, improving quality, performance,
delivery and flexibility and increasing innovativeness. JIT is not about automation. Typically, JIT
eliminates waste by providing the environment to perfect and simplify the processes. After this is done to
the furthest extent possible, the opportunities for applying technology effectively are more obvious
JIT can mean either of two things:
A collection of techniques that is used to improve operations (TQM, set-up time reduction, multi-skilled
employees, team approaches, simultaneous engineering, etc.)
or,
A new production system that is used to produce goods or services (evolving from the Toyota Production
System developed in the early 1950's, and is know by other terms, such as: stockless production, zero
inventories, lean production, etc.).
The American Production and Inventory Control Society's definition of JIT reflects these two views.
Definition of JIT:
A philosophy of manufacturing based on planned elimination of all waste and continuous improvement of
productivity. It encompasses the successful execution of all manufacturing activities required to produce a
final product, from design engineering to delivery and including all stages of conversion from raw
material onward. The primary elements include having only the required inventory when needed; to
improve quality to zero defects; to reduce lead time by reducing setup time, queue lengths and lot sizes;
to incrementally revise the operations themselves; and to accomplish these things at minimum cost.
Almost all companies in repetitive manufacturing industries are implementing JIT principles. Many
companies in non-repetitive manufacturing industries and service industries are also implementing JIT
principles. When the implementation is successful, significant competitive advantages are realized.

24

JIT principles can be applied to all parts of an organization - from order taking, purchasing, operations,
distribution to sales, accounting design, etc. This guideline focuses on the operations part of the
organization, where JIT is traditionally implemented first.
KANBAN:
The Japanese refer to Kanban as a simple parts-movement system that depends on cards boxes/containers
to take parts from one work station to another on a production line. Kanban stands for Kan- card, Bansignal. The essence of the Kanban concept is that a supplier or the warehouse should only deliver
components to the production line as and when they are needed, so that there is no storage in the
production area. Within this system, workstations located along production lines only produce/deliver
desired components when they receive a card and an empty container, indicating that more parts will be
needed in production. In case of line interruptions, each work-station will only produce enough
components to fill the container and then stop. In addition, Kanban limits the amount of inventory in the
process by acting as an authorization to produce more inventories. Since Kanban is a chain process in
which orders flow from one process to another, the production or delivery of components is pulled to the
production line. In contrast to the traditional forecast oriented method where parts are pushed to the line.
Advantages of the Kanab Process
a) A simple and understandable process
b) Provides quick and precise information
c) Low costs associated with the transfer of information
d) Provides quick response to changes
e) Limit of over-capacity in processes
f) Avoids overproduction
g) Minimizes waste
h) Control can be maintained
i) Delegates responsibility to line workers
The practical expression of Toyota's people and customer-oriented philosophy is known as the Toyota
Production System (TPS). This is not a rigid company-imposed procedure but a set of principles that have
been proven in day-to-day practice over many years. Many of these ideas have been adopted and imitated
all over the world.
TPS has three desired outcomes:
To provide the customer with the highest quality vehicles, at lowest possible cost, in a timely
manner with the shortest possible lead times.
To provide members with work satisfaction, job security and fair treatment.
It gives the company flexibility to respond to the market, achieve profit through cost reduction
activities and long-term prosperity.
TPS strives for the absolute elimination of waste, overburden and unevenness in all areas to allow
members to work smoothly and efficiently. The foundations of TPS are built on standardization to ensure
a safe method of operation and a consistent approach to quality. Toyota members seek to continually
improve their standard processes and procedures in order to ensure maximum quality, improve efficiency
and eliminate waste. This is known as kaizen and is applied to every sphere of the company's activities.
25

Kaizen - Continuous Improvement

Kaizen is the heart of the Toyota Production System.
Like all mass-production systems, the Toyota process requires that all tasks, both human and mechanical,
be very precisely defined and standardized to ensure maximum quality, eliminate waste and improve
efficiency. Toyota Members have a responsibility not only to follow closely these standardized work
guidelines but also to seek their continual improvement. This is simply common sense - since it is clear
that inherent inefficiencies or problems in any procedure will always be most apparent to those closest to
the process. The day-to-day improvements that Members and their Team Leaders make to their working
practices and equipment are known as kaizen. But the term also has a wider meeting: it means a continual
striving for improvement in every sphere of the Company's activities - from the most basic manufacturing
process to serving the customer and the wider community beyond.

Just In Time
It is perhaps not widely known that the 'just in time' approach to production that has now gained
almost universal acceptance in world manufacturing was actually pioneered by Toyota. In fact, a Toyota
engineer coined the term itself. This, too, is a simple but inspired application of common sense.
Essentially, 'just in time' manufacturing consists of allowing the entire production process to be regulated
by the natural laws of supply and demand. Customer demand stimulates production of a vehicle. In turn
the production of the vehicle stimulates production and delivery of the necessary parts and so on. The
result is that the right parts and materials are manufactured and provided in the exact amount needed and when and where they are needed. Under 'just in time' the ultimate arbiter is always the customer. This
is because activity in the system only occurs in response to customer orders. Production is 'pulled' by the
customer rather than being 'pushed' by the needs or capabilities of the production system itself. The
linkage between customer demand and production is made by analyzing takt time, a device for measuring
the pace of sales in the market in relation to the capacity of a manufacturing plant. For example, if a plant
operates for 920 minutes per day and daily demand is for 400 vehicles, then takt time will be 2.3 minutes.
If takt times are reduced more resources are allocated. Toyota never tries to accommodate changes in
demand by making substantial changes in individuals' workloads. Assigning more Members to a line
means that each handles a narrower range of work. Assigning fewer means that each handles a broader
range. Hence there is paramount importance of having a well-trained, flexible and multi-skilled
workforce.
Within the plant itself, the mechanism whereby production is regulated in this way is known as the
kanban. A kanban is simply a message. For example, in the assembly shop this message takes the form of
a card attached to every component that is removed and returned when the component is used. The return
of the kanban to its source stimulates the automatic re-ordering of the component in question. Paperwork
is minimized. Efficiency is maximized. And the Members themselves are completely in charge.
Jidoka
In Japanese 'jidoka' simply means automation. At Toyota it means 'automation with a human touch'. In
1902 Sakichi Toyoda invented the world's first automatic loom that would stop automatically if any of the
threads snapped. This principal, jidoka, of designing equipment and processes to stop and call attention to
problems immediately when they sense a problem is a central concept of TPS. The most visible
manifestation of 'automation with a human touch' at the Altona plant is the land on cord situated above
26

the line. The presence of the andon cord permits any Team Member to intervene and bring production to a
halt if abnormalities occur. The Toyota Production System has inherited the principle originated by Henry
Ford of breaking down work into simple steps and distributing those steps amongst employees on the
line. But employees in the Toyota system are in charge of their own jobs. Through their teams, they run
their own worksites. They identify opportunities for making improvements and take the initiative in
implementing those improvements in co-operation with management.
Suppliers & TPS
Just-in-time manufacturing and other elements of the Toyota Production System work best when they
are a common basis for synchronizing activity throughout the production sequence. This is an egalitarian
arrangement in which each process in the production flow becomes the customer for the preceding
process and each process becomes a supermarket to the following process. Independent suppliers
participate on an equal footing with Toyota operations in the production flow, each fulfilling their own
role in that flow. The only participant in the entire sequence who does not answer to anyone is the
customer who selects a vehicle in the marketplace. Suppliers who participate in the Toyota Production
System enjoy the same benefits that Toyota does from the system. Just-in-time manufacturing can
dissolve inventories at parts suppliers just as readily and effectively as it does at Toyota's assembly plants.
Product quality improves, too. That's because the Toyota Production System includes measures for
illuminating defects whenever and wherever they occur. Suppliers who adopt the Toyota Production
System also report improvements in employee-management relations. That is mainly because the system
provides for an expanded role for employees in designing and managing their own work. It brings
together employees and management in the joint pursuit of improvements in productivity, quality, and
working conditions.

Ch 04
Inventory
Inventoryisoneofthelargestitemsofinvestmentofmanufacturingcompaniesandoftenconstitutes4050%of
thetotalinvestmentandaround8090%ofworkingcapital.Hencethestudyofinventoryisveryimportant.
Definition:Inventoriesarematerialsorresourcesofanykindhavingsomeeconomicvalueseitherwaiting
27

forconversionortobeusedinfuture.
Inventoriesarestockofmaterialsofanykindstoredfirfutureuse,mainlyintheproductionprocess.Theother
indirectmaterialslikefuels,maintenance,materialsetc.arealsoconsideredaspartofinventories. Inventory
includesrawmaterials,inprocessmaterials,finishedpackedmaterials,sparesandallothermaterialsrequiredfor
futureafterdemand.Fromthefinancialpointofview,inventoryisdefinedasthesumofthevalueofraw
materials,fuelsandlubricants,spares,maintenancematerials,semiprocessedmaterialsandfinishedgoodsstock
atanygivenoftime.

TypesofInventories
Therearedifferenttypesofinventoriesinmanufacturingprocess.Theycanbeclassifiedasfollows:
1.Rawmaterialsandproductioninventories:
Thisincludesrawmaterialsandothermaterialswhicharerequiredfortheproductionoffinishedproduct.
2.InprocessInventories
Thesearethesemifinished,workinprogressandpartlyfinishedproductsproducedatvariousstagesof
production.
3.MROInventories
Thisincludesmaintenance,repairsandoperatingsuppliersthatareconsumedduringtheprocessofproduction
e.g.oils,lubricants,spares.
4.FinishedgoodsInventories
Thesearefinalproductsreadyforsale.Inventoriescanbealsoclassifiedonthebasisoftheirfunction.
5. MovementortransitInventories
6. LotsizeInventories
Theseareinventoriesofsomematerialswhichareusedinverysmallquantity
7.FluctuationInventories
Materialswhicharekeptforunpredictablefluctuationsindemandfortheproduct.Howeversuchstocks
areuneconomical.
8.AnticipationInventories
Theseinventoriesareheldtomeetthepredictablechangesindemande.g.stockofrawmaterialsbefore
seasonablechange
9. ToolsandAccessories
10. Generalstoresoroperatingstores

28

Thisincludesitemslikecottonwaste,electricbulbs,sandpapersetc.

DifferenttypesofCostAssociatedwithInventories
Inventoriesaccountforabout4050%oftotalinvestmentandaround8090%ifworkingcapital,henceitis
necessarytotakeintoconsiderationthecostfactorbeforetakinganyinventorydecision.
Inventorycostsbasicallyincludes
Orderingcosts
Carryingcosts
Outofstock/shortagecosts
Capacitycosts
Eachofthesemajorcategoriescoversseveralelementswhichareasfollows:
Orderingcosts
A)Costofplacinganorderofmaterials
Preparingapurchaseorder
Processingpayments
Receivingandinspectionmaterials
B)Orderingfromtheplant
Machinesetup
Scrapresultedatthetimeofproduction
CarryingCosts
A)CapitalCosts
Interestonmoneyinvestedininventory
Interestonmoneyinvestedinlandandmachinery

B)Storagespacecosts
Rentonbuildings
TaxesandInsurance
Depreciationonbuilding
29

Depreciationonwarehouse
Costofmaintenanceandrepairs
Utilitychargeslikeheat,light,wateretc
Salariesofpersonnel
C)InventoryServicecosts
TaxesonInventory
Labourcostsinhandlingandmaintainingstocks
Clericalexpenses
D)HandlingEquipmentcosts
TaxesandInsuranceofequipment
Depreciationonequipment
FuelExpenses
Costofmaintenanceandrepairs
E)InventoryRiskcosts
Insuranceoninventory
Physicaldeteriorationofinventory
Losses
Outofstock/Shortagecosts
Backordering
Lostsales
CapacityCosts
Overtimepaymentswhencapacityistoosmall
Layoffsandidletimecostwhencapacityistoolarge

Alltheabovestatedcostsaretobemaintainedatminimumleveltogettheprofitmaximization.

EconomicOrderQuantity(EOQ)

30

EconomicOrderQuantity(EOQ)isanimportanttechniqueofinventorycontrol.Inventorycontrol
mainlydependswithtwobasicissues:
Whentoorder?
Howmuchtoorder?
Theissuewhentoordercanbesolvedbyobtainingthestocklevelofeachoftheitemintheinventory.The
otherissueofHowmuchtoorderorwhatshouldbethesizeofeachorderisdecidedwiththehelpofEOQ
model.
EOQprescribestheordersizeatwhichtheorderingcostandinventorycarryingcostwillbeminimum.The
orderingcostandtheinventorycarryingcostareindependentandmutuallyexclusive. Whenthesizeofthe
individualorderislargeandthenumberofannualorderislessthantheorderingcostislowbutcarryingcostis
higher. Asagainstthis,largenumberofsmallordersresultsintohigherorderingcostbutthecarryingcost
remainslow.UnderthisconditiontheEOQmodelaimsatachievingthebalancebetweentheorderingcostand
thecarryingcost.Itsuggestssuchaquantityofeachorderatwhichthetotalorderingcostandthecarryingcost
wouldbeminimum.
Asthesecostsaremutuallyexclusivethetotalofboththecostsisminimumatapointwheretheorderingcost
isequaltothecarryingcost.Thiscanbeexplainedwiththehelpofgraphasshownonthenextpage:
IndiagramorderquantityisshownonXaxisandannualinventorycarryingcost(AICC)andannualprocurement
cost(APC)isshownonYaxis. AICCandAPCintersectatpointEsothattheOQistheeconomicorder
quantity(EOQ).AtEOQbothAICCandAPCareequalandannualtotalcost(ATC)isminimumasshown.
AssumptionsoftheEOQmodel:
1. Thedemandfortheproductisconstantanduniformthroughouttheperiod
2. Orderingcostsareconstant
3. Theproductcanbeobtainedinthequantitiesasrequiredasthereisnorestrictiononsupply
4. Thereisnodeteriorationorspoilageoftheitems
5. Therearenobackorders

FormulaforEOQ

31

Thefirststepistoestablishafunctionalrelationshipbetweenthevariablesconcerned.In thecontextofcostswemay
havethefollowingequation:

(Refer Class notes)

ClassificationofMaterialsinMaterialManagement
Amanufacturingorganizationhas todealwithalargenumberofitems ofdifferenttypes,havingdifferent
characteristicanduses.Henceforthepurposeofconveniencesomesortofclassificationofmaterialsbecomes
necessary.
Classificationofmaterialsistheprocessofgroupingofvariousitemsintofewcategoriesonthebasisofcertain
commoncharacteristicsuchasnature,useorservice.
ObjectivesofClassification
1. Toprovidenecessaryinformationaboutprinciplematerialsusedbytheorganization
2. To help the storekeeper for providing proper storing, careful handling and safe custody of the
materials
3. Helpinginplanningandcontrollingofmaterialsofdifferenttype
4. Totakedecisionregardingstorageandissueofmaterialsinaclass
5. Todevelopaccountingandevaluationprocedures
6. Foreffectiveidentificationofmaterials
Generallymaterialsareclassifiedonthebasisof
1)Stageofproductionprocess,
2)Natureofmaterialsand
3)Conditionofmaterials.
Classificationofmaterialsonthebasisofstageofproductionprocess
1]Directmaterials
a) Rawmaterials
b) Workinprogress
c) Worksmadeparts
d) Partspurchasedfromoutside
e) Finishedgoods

2]Indirectmaterials(e.g.cottonwaste,sprayoiletc.)
32

ClassificationofmaterialsonthebasisofstageofNatureofmaterials
a) Rawmaterials
b) Perishablematerials(e.g.eggs,milk,curdetc.)
c) Consumablematerials(e.g.coal,stationary)
d) Furniture(e.g.Tables,chairsetc.)
e) Chemicals(Acids,Alcoholetc.)
f) Packagingmaterials
g) Inflammableitems(Petrol,Diesel,Keroseneetc.)
h) Empties(e.g.woodenboxes,barrels,cansetc.)
i) Supplies(e.g.oils,grease,cleaningpowderetc.)
j) Spares
k) MachineryEquipmentTools
l) Scrapmaterials

Classificationaccordingtotheconditionofmaterials
a) Serviceable,unserviceableandobsolete
b) Finishedorsemifinishedstores
c) Deadstockitems
d) Unusedstockmaterials

33

DifferentTechniquesofInventorycontrol
Inventoriesareessentialforkeepingtheproductionwheelsmovingsmoothlywithoutanyinterruption.Atthe
sametime,itisnecessarytohaveaneffectiveinventorycontroltominimizetheidletimecausedbyshortage
andnonavailabilityofmaterials. Generallyselectiveinventorycontrolpolicyhasbeenrecommendedbecause
ittakesintoconsiderationvariousfactorslikevalueoftheinventoryitems,itscriticality,usagefrequencyetc.It
ismoreeffectiveandisdirectedtowardsmoresignificantgroupofitems.Selectiveinventorycontrolmakesuse
ofvarioustypesofclassificationschemes dependinguponthecriteriausedforclassificationwhichisas
follows:

Typesofclassification

Criterionused

ABCAnalysis

Usagevalue(consumptionperperiod*priceper
unit

VEDAnalysis(Vital,Essential,Desirable)

Criticalityoftheitemintheprocessof
production

FSNAnalysis(Fast,slow,Nonmoving)

Issuesfromstores

GOLFAnalysis(Government,ordinary,Local,
Foreign)

SourcesofProcurement

SOSAnalysis(Seasonal,offseasonable)

Seasonality

Letusdiscusstheseclassificationsindetails:
ABCAnalysis
ABCanalysisisbasedontheprinciple,vitalfew,trivialmany.
EventheParetosLawofCauseandEffectwhichstatesthatonly20%oftheactivitycauses
80%ofeffect.Thisisalsoknownas20/80ratio.
ItprovidesaGoldenrulethatkeepaneyeonthis20%andyouwillcoverthe80%ofthe
effect.Thisrulewhenappliedtoinventoryitems,givesrisetoABCanalysis.
ABCanalysisisabasicanalyticalmaterialsmanagementtool.Italwayscontrolsthebestfirs,
thanbetterandlastlythegood.
TheABCmethodtakesintoconsideration:

34

a)DifferentInventorylevels,b)Orderquantities,c)Monetaryvalueofmaterials,d)extent
andclosenessofthecontroldesired.
Bywayoftakingusagevalueasabasis,inventoryitemsareclassifiedasnumberofitemsandvalueofitems.
Thus,

Class
A
B
C

NoofItems
(%)
10
20
70

Valueofitems
(%)
7090
2030
1020

Valueofitems(%)for
graph
90
8
2

GraphicalPresentationofABCmethodofInventoryControl
StepsinABCanalysis
1. Preparethelistofitemsandestimatetheirannualconsumptionintermsofphysicalunits
2. Determinecostorunitpriceofeachitem
3. Multiplyeachannualconsumptionbycost
4. Arrangetheitemsindescendingorderonannualusagefromhighesttolowest
5. Expresscumulativeusageinpercentage
6. Expresscumulativeitemsinpercentage
PlotthegraphandseparatetheitemsintoA,BandCClass
35

Summaryofcontrol
Srno.
1
2
3
4
5
6

Control
ProcessControl
Requirement
Posting
Checkof
Revision
Qualitycontrol
Expediting

A
Tight
Exact
Individual

B
Moderate
Exact
Individual

C
Loose
Estimate
Group

Close
Exact
Regular

Some
Exact
Some

Little
Approximate
No.

VEDAnalysis(Vital,Essential,Desirable)
AccordingtotheVEDmethod,sparepartsareclassifiedasVital,EssentialandDesirableaccordingtotheir
requirements.
ThosesparesclassifiedasVaretobestockedadequatelytoensuresmoothoperationoftheproduction
process.Vitalsparesarethosebecauseofwhichtheproductionprocessmaystoponnonavailabilityofthese
items.
IncaseofEitems,theorganizationmaytakereasonablerisk.Whenrequiredsuchitemshavetobemade
availableatashortnotice.
TheDitemsaresuchthattheydonotcauseanyimmediatelossofproductionandtheirstockoutcostisalso
normal.
VEDanalysisisusefultothecapitalintensiveindustrieswherethemachinery,toolsandequipmentsare
extensivelyusede.g.transportindustry.
FSNAnalysis(Fast,Slow,Nonmoving)
Undermoderndynamicenvironmentcharacterizedbyrapidtechnologicalprogressthreatsaredevelopedto
inventorymanagementaslargenumberofitemsarelikelytobeobsoleteduringstorage.Thechangesin
productmixanddeviationsofactualconsumptionsmayresultinaccumulatinghugeinventory.Thusthe
inventorycanbeclassifiedasFastmovingorSlowmoving.
InFSNtechniqueinventoryofitemsaretobekeptonthebasisofthemovementi.e.howtheitemsaremoving
fast,slow,orNonmoving.Thistechniqueisextensivelyusedforselectiveinventorycontrol.
UsesofFSNanalysis
Itidentifiestheactiveitems

36

Usefultoidentifysurplusitems
Nonmovingitemscanbeidentifiedanddisposed
Investmentforonlyrequireditemscanbedone
GOLFAnalysis(Government,Ordinary,Local,Foreign)
TheGOLFanalysistakesintoconsiderationnatureofsuppliersthataffectsquality,leadtime,termsofpayment,
steadinessofsupplyandadministrativeactivitiesinvolved.

GcategoryitemsarethosethatareprocuredfromgovernmentagenciessuchasStateTradingCorporationor
publicsectorundertakings.Theytakelongleadtime.Ordinaryornongovernmentcategoryincludesthoseitems
obtainedfromordinarysuppliers.Theytakemoderatetimefordeliveryandsupplygoodsevenascredit.
Localcategoryincludesthoseitems,whicharelocallyavailableandlocalsupplierssupplythem.Foreign
categoryincludesimporteditemswhicharerequiredintheproductionprocess.Forsuchitemssearchof
foreignsupplies,obtainingletterofcreditandmakingarrangementforshipmentetc.istobedoneinproper
timetoavoidproductionstoppage.
SOSAnalysis(SeasonalOffSeasonable)
TheSOSanalysisisbasedonseasonableavailabilityoftheitems.Sothereareonlytwocategoriesseasonaland
offseasonalitems.
Seasonalitemsareavailableonlyduringtheseason,whichisaveryshorttime,suchasagriculturalraw
materials.Hencetheyaretobeprocuredinlotsduringseasonsoastouseforthewholeyear.
Nonseasonalitemsarethoseitemswhichareavailableatanytimeduringtheyearandhencetheycanbe
purchasedasandwhenrequired.
Above mentioned are all selective inventory control techniques. These can be used separately or in
combinationwithothers.Anorganizationshouldselectsuitabletechniquesdependinguponthenatureofthe
productandothercircumstances.

37

Ch 03
MaterialsRequirementPlanning(MRP)
Definition
MRPisasystemofplanningandschedulingthetimephasedmaterialsrequirementsforproductionoperations.
MRPisaninventorycontrolprocesscarriedoutwiththeaidofcomputertodeterminetimephasedrequirement
ofcomponentsthatareusedformanufacturingproductonassemblylineprinciples.
MRPaimsatsolvingbasicproblemsofinventorycontrolsuchasthesupplyofrightquantitycomponentsat
righttime,toavoidstockpilingofheavyinventoryandavoidstockouts.MRPisusedfordependeddemand
situations

MRPoutputsare:
1. MasterProductionSchedule(MPS)
2. BillofMaterials(BOM)
3. Inventorystatus
38

ObjectivesofMRP
1) InventoryReduction
2)
3)
4)
5)
6)

ReductioninproductionandDeliveryLeadTimes
RealisticCommitments
Increaseinefficiency
Toreduceinventorycostsbyreducinginventorylevels
Toimproveplantoperatingefficiency

AdvantagesofMRP
1) ReducedLevelsofInventory
2) Betterutilizationofhumanandnonhumanresources
3) Improvedconsumerservice
4) EfficientFinancialPlanning
5) BetterScheduling
6) ImprovedvendorRelations
7) EfficientPlanning
8) PromotingEngineeringEfficiency
9) DynamicNature
10) RationalMaterialsDecisions
MasterProductionSchedule(MPS)
InitiallytheMPSisdevelopedfromthecustomerordersreceivedbythefirmorfromforecastsofdemand
beforetheMRPsystembeginstooperate.TheMPSisdesignedtomeetmarketdemandandhenceitprovides
valuable information for the MRP system. Now with the help of MRP systems the MPS is scheduled to
completethedemandofthemarkets.
BillofMaterials(BOM)
TheBOMidentifieshoweachendproductismanufactured,specifyingallsubcomponent items,theirsequence
ofbuildup,theirquantityineachfinishedunit,andthework centresperformingthebuildupsequence.This
information can be obtained from product design documents, workflow analysis and other standard
manufacturingandindustrial engineeringdocuments.TheMRPreceivesprimaryinformationfromtheBOMis
thatof productstructurewhichshowsvariouscomponentsofaproduct.Eachitemintheproduct structureisgivena
uniqueidentificationnumber.AccuracyinMRPcanbeobtainedwith thehelpofBOMatthetimeofMPS
39

FewCurrentConcepts:
FLEXIBLE MANUFACTURING SYSTEMS
A flexible manufacturing system (FMS) is a group of numerically-controlled machine tools, interconnected
by a central control system. The various machining cells are interconnected, via loading and unloading stations,
by an automated transport system. Operational flexibility is enhanced by the ability to execute all manufacturing
tasks on numerous product designs in small quantities and with faster delivery. It has been described as an
automated job shop and as a miniature automated factory. Simply stated, it is an automated production system
that produces one or more families of parts in a flexible manner. Today, this prospect of automation and
flexibility presents the possibility of producing nonstandard parts to create a competitive advantage.
The concept of flexible manufacturing systems evolved during the 1960s when robots, programmable
controllers, and computerized numerical controls brought a controlled environment to the factory floor in the
form of numerically-controlled and direct-numerically-controlled machines.
For the most part, FMS is limited to firms involved in batch production or job shop environments. Normally,
batch producers have two kinds of equipment from which to choose: dedicated machinery or unautomated,
general-purpose tools. Dedicated machinery results in cost savings but lacks flexibility. General purpose
machines such as lathes, milling machines, or drill presses are all costly, and may not reach full capacity. Flexible
manufacturing systems provide the batch manufacturer with another optionone that can make batch
manufacturing just as efficient and productive as mass production.
OBJECTIVES OF FMS
Stated formally, the general objectives of an FMS are to approach the efficiencies and economies of scale
normally associated with mass production, and to maintain the flexibility required for small- and medium-lot-size
production of a variety of parts. Two kinds of manufacturing systems fall within the FMS spectrum. These are
assembly systems, which assemble components into final products and forming systems, which actually form
components or final products. A generic FMS is said to consist of the following components:
1. A set of work stations containing machine tools that do not require significant set-up time or change-over
between successive jobs. Typically, these machines perform milling, boring, drilling, tapping, reaming,
turning, and grooving operations.
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2. A material-handling system that is automated and flexible in that it permits jobs to move between any pair
of machines so that any job routing can be followed.
3. A network of supervisory computers and microprocessors that perform some or all of the following tasks:
(a) directs the routing of jobs through the system; (b) tracks the status of all jobs in progress so it is
known where each job is to go next; (c) passes the instructions for the processing of each operation to
each station and ensures that the right tools are available for the job; and (d) provides essential monitoring
of the correct performance of operations and signals problems requiring attention.
4. Storage, locally at the work stations, and/or centrally at the system level.
5. The jobs to be processed by the system. In operating an FMS, the worker enters the job to be run at the
supervisory computer, which then downloads the part programs to the cell control or NC controller.
BENEFITS OF FMS
The potential benefits from the implementation and utilization of a flexible manufacturing system have been
detailed by numerous researchers on the subject. A review of the literature reveals many tangible and intangible
benefits that FMS users extol. These benefits include:

less waste

fewer workstations

quicker changes of tools, dies, and stamping machinery

reduced downtime

better control over quality

reduced labour

more efficient use of machinery

work-in-process inventory reduced

increased capacity

increased production flexibility

The savings from these benefits can be sizable. Enough so that Ford has poured $4,400,000 into overhauling its
Torrence Avenue plant in Chicago, giving it flexible manufacturing capability. This will allow the factory to add
new models in as little as two weeks instead of two months or longer. Richard Truett reports, in Automotive
News, that the flexible manufacturing systems used in five of Ford Motor Company's plants will yield a $2.5
billion savings. Truett also reports that, by the year 2010, Ford will have converted 80 percent of its plants to
flexible manufacturing.
LIMITATIONS OF FMS
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Despite these benefits, FMS does have certain limitations. In particular, this type of system can only handle a
relatively-narrow range of part varieties, so it must be used for similar parts (family of parts) that require similar
processing. Due to increased complexity and cost, an FMS also requires a longer planning and development
period than traditional manufacturing equipment.
Equipment utilization for the FMS sometimes is not as high as one would expect. Japanese firms tend to have
a much higher equipment utilization rate than U.S. manufacturers utilizing FMS. This is probably a result of U.S.
users' attempt to utilize FMS for high-volume production of a few parts rather than for a high-variety production
of many parts at a low cost per unit. U.S. firms average ten types of parts per machine, compared to ninety-three
types of parts per machine in Japan.
Other problems can result from a lack of technical literacy, management incompetence, and poor
implementation of the FMS process. If the firm misidentifies its objectives and manufacturing mission, and does
not maintain a manufacturing strategy that is consistent with the firm's overall strategy, problems are inevitable.
It is crucial that a firm's technology acquisition decisions be consistent with its manufacturing strategy.
If a firm chooses to compete on the basis of flexibility rather than cost or quality, it may be a candidate for
flexible manufacturing, especially if it is suited for low- to mid-volume production. This is particularly true if the
firm is in an industry where products change rapidly, and the ability to introduce new products may be more
important than minimizing cost. In this scenario, scale is no longer the main concern and size is no longer a
barrier to entry.
However, an FMS may not be appropriate for some firms. Since new technology is costly and requires several
years to install and become productive, it requires a supportive infrastructure and the allocation of scarce
resources for implementation. Frankly, many firms do not possess the necessary resources. Economically
justifying an FMS is a difficult taskespecially since cost accounting tends to be designed for mass production
of a mature product, with known characteristics, and a stable technology. Therefore, it is difficult to give an
accurate indication of whether flexible manufacturing is justified. The question remains of how to quantify the
benefits of flexibility. In addition, rapidly-changing technology and shortened product life cycles can cause
capital equipment to quickly become obsolete.

For other firms, their products may not require processes at the technological level of an FMS. IBM found
that a redesigned printer was simple enough for high-quality manual assembly and that the manual assembly
could be achieved at a lower cost than automated assembly. Potential FMS users should also consider that some
of the costs traditionally incurred in manufacturing may actually be higher in a flexible automated system than in
conventional manufacturing. Although the system is continually self-monitoring, maintenance costs are expected
to be higher. Energy costs are likely to be higher despite more efficient use of energy. Increased machine
utilization can result in faster deterioration of equipment, providing a shorter than average economic life. Finally,
personnel training costs may prove to be relatively high.
For some firms, worker resistance is a problem. Workers tend to perceive automation as an effort to replace
them with a tireless piece of metal that does not eat, take breaks, or go to the bathroom. To combat this
perception, many firms stress that workers are upgraded as a result of FMS installation, and that no loss of jobs
ensues. Despite any problems, use of flexible manufacturing systems should continue to grow as more firms are
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forced to compete on a flexibility basis and as technology advances. It has shown many advantages in low- to
mid-volume, high-mix production applications. Future systems will probably see lower and lower quantities per
batch. FMS can somewhat shift emphasis in manufacturing from large-scale, repetitive production of standard
products to highly-automated job shops featuring the manufacture of items in small batches for specific
customers. The increased availability of flexible manufacturing technology will also give multi-product firms
more choices of how to design production facilities, how to assign products to facilities, and how to share
capacity among products.

Aggregate planning
Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate
schedule of the overall operations of an organization. The aggregate plan generally contains targeted sales
forecasts, production levels, inventory levels, and customer backlogs. This schedule is intended to satisfy the
demand forecast at a minimum cost. Properly done, aggregate planning should minimize the effects of shortsighted, day-to-day scheduling, in which small amounts of material may be ordered one week, with an
accompanying layoff of workers, followed by ordering larger amounts and rehiring workers the next week. This
longer-term perspective on resource use can help minimize short-term requirements changes with a resulting cost
savings.
In simple terms, aggregate planning is an attempt to balance capacity and demand in such a way that costs are
minimized. The term "aggregate" is used because planning at this level includes all resources "in the aggregate;"
for example, as a product line or family. Aggregate resources could be total number of workers, hours of machine
time, or tons of raw materials. Aggregate units of output could include gallons, feet, pounds of output, as well as
aggregate units appearing in service industries such as hours of service delivered, number of patients seen, etc.
Aggregate planning does not distinguish among sizes, colours, features, and so forth. For example, with
automobile manufacturing, aggregate planning would consider the total number of cars planned for not the
individual models, colours, or options. When units of aggregation are difficult to determine (for example, when
the variation in output is extreme) equivalent units are usually determined. These equivalent units could be based
on value, cost, worker hours, or some similar measure.
Aggregate planning is considered to be intermediate-term (as opposed to long- or short-term) in nature.
Hence, most aggregate plans cover a period of three to 18 months. Aggregate plans serve as a foundation for
future short-range type planning, such as production scheduling, sequencing, and loading. The master production
schedule (MPS) used in material requirements planning (MRP) has been described as the aggregate plan
"disaggregated."
Steps taken to produce an aggregate plan begin with the determination of demand and the determination of
current capacity. Capacity is expressed as total number of units per time period that can be produced (this
requires that an average number of units be computed since the total may include a product mix utilizing
distinctly different production times). Demand is expressed as total number of units needed. If the two are not in
balance (equal), the firm must decide whether to increase or decrease capacity to meet demand or increase or
decrease demand to meet capacity. In order to accomplish this, a number of options are available.
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"Aggregate Planning is concerned with matching supply and demand of output over the medium time range,
up to approximately 12 months into the future. Term aggregate implies that the planning is done for a single
overall measure of output or, at the most, a few aggregated product categories. The aim of aggregate planning is
to set overall output levels in the near to medium future in the face of fluctuating or uncertain demands.
Aggregate planning might seek to influence demand as well as supply."

Aggregate Plan Strategies

Level plans

Use a constant workforce & produce similar quantities each time period

Use inventories and backorders to absorb demand peaks & valleys

Chase plans

Minimize finished goods inventories by trying to keep pace with demand fluctuations

Matches demand by varying either work force level or output rate

Hybrid Strategies

Build-up inventory ahead of rising demand and use backorders to level extreme peaks

Subcontract production or hire temporary workers to cover short-term peaks

Reassign workers to preventive maintenance during lulls

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