OPERATIONS MANAGEMENT

RECENT TRENDS IN OPERATIONS MANAGEMENT

Operation as an open system
Over time operations has had the need to interact with the external environment and as the
environment is dynamic, operation needs to change and adapt to these changes. Some of the
new dynamics to operations include:I. Market Focus
Awareness that market controls production
Old view
A market exists to get rid of products produced
Products are commodities
New view
Products are produced to meet market needs
Products should be differentiated and targeted at distinct niches to capture maximum value
from products
II. Globalization
Reduction in trade barriers
Globalization of major companies
Global sourcing
Improved transportation capabilities
Increased interest in products from around the world - new opportunities for variety
Changing business models example Retailers Are Becoming Global and their Scope is
increasing
Companies are expanding in both directions
Vertically to control supply chains and also horizontally to extend business capabilities or the
ability to meet customer needs
III. Lean production
Many aspects introduced by the U.S. after the war
Three Principles:
1. Quality comes first.
2. Continual Improvement of product and process.
3. Elimination of waste.
- Just-In-Time
IV. Quality Management Systems
Importance of quality management has finally been recognized. Companies have introduced
Internal and external quality systems. The concept of TQM (Total Quality Management) is
widely adopted by many companies
ISO Certifications
Government regulations
V. Business Process Analysis, Improvement or Reengineering
Business processes can be optimized by ignoring the way things were done in the past
Focus on what has to be done. This has also been used to disguise downsizing

VI. Supply Chain Management

There is an importance of considering the entire supply chains rather than single firms.
Therefore there is a need to create closer relationships with suppliers and ensuring that
coordination and decision making is spread through the chain.
Electronic Data Exchange - EDI
Efficient Consumer Response - ECR
VII. Service Operations Management
- Rise in service employment since 1960's.
- Service jobs outnumber manufacturing jobs.
- measuring performance is much more difficult
- Productivity increases much more difficult to achieve.
- By 2005 only 20% of the population will be involved in industrial production
VIII. Environmental, Social and ethical
- Consumer awareness social issues
- Impact on global organizations
- Cultural differences
- Environmental concern
- Government regulation
- ISO
- Outsourcing production to 3rd world plants
- Minimizing the environmental impact of products - EU has regulations that force
product design to include consideration of the ultimate disposal of the product.
IX. New Technologies
- Robotics
- Computer controlled manufacturing
- Biotechnology
- Global positioning systems
CURRENT ISSUES IN OPERATION MANAGEMENT
1) Coordinating the relationships between mutually supportive but separate organizations
2) Optimizing global supplier, production and distribution network
3) Increased co-production of goods and services
4) Managing customer touch points
SERVICE OPERATIONS
Service operations has been defined as the transformation process in which there is a high
degree of interaction between the customer and the organization and which the output may be
primarily or partly tangible.
Service can be divided into the following:1) Public services this includes the government and non-profit making organizations
2) Social services they range from health industry to catering industry
3) Business services these are knowledge based-services offered to business
organizations or persons that include finance, banking, consultations
4) Trade services these will include services offered in relation to a physical object like
installation, distribution, repair and maintenance
5) Infrastructural services these mostly deal with communications and infrastructure

TRANSFORMATION PROCESS
INPUT/OUTPUT MODEL
This model is also referred to as the Production function. A transformation process uses
resources to convert input into desired outputs. There are various categories of transformation
as explained below.

INPUT

TRANSFORMATION
PROCESS

OUTPUT

FEEDBACK

CATEGORIES OF TRANSFORMATION PROCESSES

1) Physical This is found in manufacturing industries e.g. Oranges to orange juices,
Sugarcane to sugar
2) Locational This occurs in transportation and it involves shifting from one location to
another
3) Exchange This is in retailing business where products change hands in exchange for
money of any other product
4) Storage in warehousing
5) Physiological This is found mostly in service based businesses like health care systems
6) Informational telecommunications
Operations managers must make decisions on three levels:1. Strategic
2. Tactical
3. Operating
STRATEGIC DECISIONS:
These are longer term decisions usually made at the senior management level e.g.
Product and service strategy
Competitive priorities
Positioning strategy
Location, capacity
Long term partnerships
Quality system and overall approach to quality
TACTICAL DECISIONS
They are medium term decisions, tactical in nature made by middle and senior managers e.g.
Process design
Technology management
Job design and workforce management
Capacity management
Facility location
Facility layout

OPERATING DECISIONS
Shorter term decisions made at middle and lower management levels e.g.
Forecasting
Materials management
Inventory management
Aggregate planning
Master production scheduling
Production control
Scheduling

OPERATIONS STRATEGY
STRATEGY
This can be defined as a plan of how the organization will achieve its future goals and
objectives. Basically a strategy will: Define how the mission of a company is accomplished
Provide direction for achieving a mission
Unite the organization
Provide consistency in decisions and,
Keep organization moving in the right direction
GOALS OF STRATEGY
1) To satisfy and if possible to delight customers This is where the organization focuses
on the market requirements in order to best understand the customers needs in order
to develop products and services that will best satisfy the customers.
2) Optimization of resources through strategy a firm will conduct an internal analysis of
its capabilities and limitations with regards to their resources so that it can better
formulate strategies that will best exploit their resource capabilities
3) Development of competitive advantage Another aim of strategy is to come up with
superior capabilities that the competition cannot copy. Something that the company
does best compared to other firms in the same industry.
LEVELS OF STRATEGY
1) Corporate Strategy
This defines the direction of the organization in terms of defining the vision, mission, and
corporate values. It identifies the business the organization will be in or is already in. Global
objectives are identified here. This strategy provides a framework for business style and
influences the business strategy. E.g. outsourcing, diversification
2) Business strategy
This strategy deals with SBUs strategic business units. This strategy must have an identifiable
and definable product range, market segment and competitor set. Business strategies may be
classified as cost leadership or product differentiation strategies
3) Functional / operational strategy
This is concerned with the implementation of the above 2 strategies through efficient resource
utilization. Operation decisions are made in the context of the firm as a whole. The market
place which is the firms customers for its products and services shapes the firms corporate
strategy. This strategy is based in the corporate mission and it reflects how the firm plans to use
all its resources and functions in order to gain competitive advantage.

As such the operation strategy specifies how the firm will employ its production capabilities to
support its corporate strategy.
STRATEGY FORMULATION PROCESS
1) External environmental analysis
This will involve a look into the changes that are happening outside the organization in terms of
the environment and the industry. The environmental analysis may use PEST analysis model
that will look into changes in the Political, Economic, Social and Technological environment.
The industry analysis may be done using the Porters five forces model which looks at the
bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threats of
substitutes and rivalry among the existing competitors.
2) Internal analysis
This basically involves the assessment of the organizations internal strengths and weaknesses
and comparing them with the external opportunities and threats (SWOT analysis).
3) Developing strategic alternatives
This is where the organization will develop a number of strategies based on aligning the firms
capabilities with the opportunities identified.
4) Selecting the best strategic alternative
After the identification of a number of alternative strategy alternatives, comes the moment of
deciding which the best alternative to adopt is. The alternative that will be chosen is one that
will match the internal capabilities to better exploit the opportunities presented by the
environment and also fight the threats posed by the same environment. Basically this is what is
referred to as strategic fit
TYPES OF STRATEGIES
Firms can pursue either of the following two strategies: Resource based strategies or Market
led strategies
1) MARKET LED STRATEGIES
This strategy was advanced and popularized by Michael Porter whereby he proposes that firms
should seek opportunities in new and existing markets, or market niches and then align the firm
with these opportunities. Thus an emphasis will be on evaluating which markets are attractive
and which markets the firm should exit.
This strategy was used when the opportunities identified were attractive to the firm and thus
the in house capabilities would be formulated to exploit such opportunities. The danger with
this strategy is that the firm may end up competing in markets in which it may not have
sufficient capabilities to do so effectively.
2) RESOURCE BASED STRATEGIES
This will occur where a firm chooses to compete on its capabilities or strengths. This strategy
gained prominence in the early 1990s with an emphasis on core competencies. This was argued
that the main means of sustaining a competitive advantage for a firm comes from developing
and protecting the firms core competencies and capabilities.
This means that the firm out to have done a through internal audit in order for them to best
understand their capabilities. The challenges with this strategy are that the firm may involve
themselves in making products that the customers do not want.

STRATEGIC RESONANCE
This is defined as an ongoing, dynamic, strategic process whereby customer requirements and
organizational capabilities are in harmony and resonate. This strategy ensures harmonization
between
The market and the firms operations capabilities
The firms strategy and its operational capabilities
All functions and levels within the firm.
Strategic resonance ensures there is no conflict between market led and resource based
strategies.
SERVICE OPERATIONS STRATEGIES
1) Customer-oriented focus
This strategy focuses on providing a wide range of services to a limited range of customers
using a customer-centered database and developing new offerings to existing customers
2) Service-oriented focus
Firms pursuing this strategy will seek to provide a focused, limited menu of services to a wide
range of customers usually through specialization in a narrow range of services
3) Customer and service oriented focus
This is done through providing a limited range of services to a highly targeted set of customers
MITIGATING SERVICE FAILURES
At times service failures occur whereby maybe the service is unavailable, very slow or even it
doesnt meet the organizational or customer standards. There are ways in which a firm can
mitigate this through:1) Service guarantees
This is whereby a firm will offer guarantees as a way of ensuring customer satisfaction. This is
mostly offered to the customers before any failures have occurred.
2) Service recovery
This is to mitigate problems that may arise with the service. This may be through allowing the
customer to become a partner to the service delivery system. E.g. self-service cafes, ATMs in
bank
OPERATION RESOURCES
They are the 5 Ps of OM which includes:1) People direct and indirect workforce
2) Plants factories or service branches where production is carried out
3) Parts materials and or supplies that go through the system
4) Processes steps by which the production takes place
5) Planning and control systems these are the procedures and information management
used to operate the system
Developing an Operations Strategy
1. Segment the markets by product groups
2. Identify product requirements, demand patterns and profit margins for each
group
3. Determine market qualifying and order winning attributes for each product
group
4. Convert these attributes into specific performance characteristics - most focus
will be on order winning.

COMPETITIVE PRIORITIES
These are also known as competitive advantage, distinctive competencies or performance
objectives. They are the elements in which operations must excel in order to support corporate
strategy.
A company cannot excel on all dimensions and must select the ones most important to its
operations and organizational strategy. (Market qualifying vs. order winning)
A) QUALITY
This can be defined as the consistent conformance to the customers expectations or doing
things right. This is also minimizing defect rates or conforming to design specifications. At
times quality is the most visible part of what operation does since it is something that the
customer finds relatively easy to judge about operation.
What does quality mean in a hospital or a bank?
Benefits of Quality
1) Reduces cost in the sense that the fewer the mistakes made by each process in the
operation the lesser time will be needed to correct the mistakes and the less confusion
and irritation will be there whether for internal customers or external customers. E.g.
dispatch of wrong goods to a companys branch
2) Increases dependability
B) SPEED
This simply means the elapsed time between customers requesting for a product or service and
the receipt of them. I.e. short lead time or fast delivery ("speed"). The operation should have
the ability to meet requested and promised delivery schedules, ensure on-time delivery
("reliability") and speed in developing and introducing new products or services
Speed in a hospital
Time between requiring treatment and received is kept to a minimum
Time for test results, x-rays to be returned kept to a minimum
What does speed mean in a supermarket or a bank?
Benefits of speed
1) Speed reduces risks forecasting of tomorrows events is far less risky than forecasting
next year events. Therefore the further ahead companies forecast the more likely they
are to get it wrong. Thus the faster the throughput time of a process the later
forecasting can be left
C) DEPENDABILITY
This means doing things on time for customers to receive their goods and services exactly when
they are needed or at least when they were promised. Dependability can only be judged after
the goods or services have been delivered. This can be achieved through producing a product
which meets (or exceeds) customer expectations for quality and providing consistent quality
("dependability")
What dependability means in a hospital: Test results returned as promised
Keeping to appointment times
Proportion of appointments which are cancelled kept to a minimum
What dependability means in a Supermarket: Predictability of opening hours
Keeping to reasonable opening hours

 Constant availability of parking

D) FLEXIBILITY
This is being able to change the operation is some way. This can be defined as the ability to
respond to rapid changes in customer demand and requirements for existing products or
services. This may be the ability to adjust to changes in product mix, production volume, or
design. This may mean changing what the operation does, how it is doing it or when it is doing
it. Customers will need the operation to change in order for it to provide 4 types of flexibility
requirements:i) Product and service flexibility this is the ability to introduce new or modified products
and services
ii) Mix flexibility is the ability to produce a wide range or mix of products and services
iii) Volume flexibility is ability to change the levels of output/activity to produce different
quantities or volumes of products and service over time
iv) Delivery flexibility ability to change the timing of the delivery of products and services
What flexibility is in a hospital: Introduction of new types of treatment
A wide range of available treatments
Ability to adjust the number of patients treated
Ability to reschedule appointments
Benefits of flexibility
1) Flexibility speeds up response fast services often depends on the operation being
flexible e.g. in a hospital that is receiving patients from a road accident. A flexible
hospital will be able to transfer skilled personnel to the emergency department and be
able to offer a fast service the patients need
2) Flexibility saves time The operation must ensure that staff are well equipped with
knowledge and skills to offer a variety of services and the availability of equipment
where necessary in order to save on time when changing over from one task to another.
3) Flexibility maintains dependability Internal flexibility helps to keep the operational
schedule when unexpected events disrupt the operations plans. E.g . Hospitals can
reserve theatres to be used when there is a sudden influx of road accident victims in
order not to inconvenience patients who had been scheduled for surgery earlier.
E) COST
For companies that compete directly on price, cost will be their major operation objective. The
lower the costs are, the lower the prices to their customers. Thus the major aim will be on the
production and distribution of a product or service with a minimum of expenses or wasted
resources leading to low cost production and distribution and ultimately low price product or
service
Waste elimination
Relentlessly pursuing the removal of all waste
Examination of cost structure
Looking at the entire cost structure for reduction potential
Lean production
Providing low costs through disciplined operations
The operation spends its money on: Staff, Materials and Facilities, equipment & technology.

Keeping Operation costs down

Productivity ratios
This is the measure most frequently used to indicate how successful an operation is in reducing
costs in productivity. This is the ratio of the output from an operation to the inputs of the same
operation. i.e. what is produced by an operation to what is required to produce it.
Productivity = output from the operation
Input into the operation
At times partial measures of an input factor are used so that comparisons can be made. This is
known as Single Factor Measure of Productivity. This will allow different operations to be
compared on one unit of input excluding the effects of other inputs
Single factor Productivity =

output from the operation

One Input into the operation
Multi/Total Factor Productivity is where all inputs factors are used when measuring the
productivity of an operation
Multi/total factor Productivity =

output from the operation

All Inputs into the operation

Example
A supermarket has 50 employees and processes 2000 customers per week. Each employee
works 40 hours per week. The supermarkets weekly total wage bill is Kes 400,000 and its total
overhead expenses are Kes 200,000 per week.
Required:
a) Calculate the supermarkets single factor labour productivity
i) Labour = 50, customers = 2000
= 2000/50
= 40 customers/employee
ii) Labour hours = (50 x 40)= 200, customers = 2000
= 2000/200
= 10 customers/labour hour
b) Calculate the supermarkets multifactor productivity
Customers = 2000, total cost = (400000+200000) = 600000
= 2000/600000
= 0.0033 customers/kes
Ways of improving productivity
1) Reducing the cost of input while maintaining the level of outputs involves reducing the
costs of some or all of its transformed and transforming resource inputs. E.g. A bank can
relocate its call centre to a place where rent is minimum, an IT firm can relocate its
entire operations to India or China where labour costs are low
2) By making better use of inputs to the operation this is through reduction of waste
whether waste of staff time, material or waste through underutilization of facilities

Market Qualifying/Order Winning Priorities

Market qualifying priorities
These are the characteristics a product must have to be in the market
Order winning priorities
They are the characteristics that make a product different and cause customers to buy

PRODUCT DESIGN, PRODUCT DEVELOPMENT AND SERVICE DESIGN

PRODUCT LIFECYCLE
Introduction
This is when a product has been introduced into the market. Proper research and forecasting
must be done to ensure that the product/service is adequate and for a specific time. Most
buyers will be the ones trying to purchase the new innovation.
Growth
The sales volumes increase as more customers are attracted to the product. Quality and price
become more important here.
Maturity
The sales volumes get to their peak and thus stable. This product at this stage may take much
time because it must repay all the investments that went into its development and also fund
the next generation of product development
Decline
The sales volumes decrease.
PRODUCT DESIGN
This refers to those activities involved in creating the styling, look and feel of the product,
deciding on the product's mechanical architecture, selecting materials and processes, and
engineering the various components necessary to make the product work. Basically a product
design: Defines appearance of product
Sets standards for performance
Specifies which materials are to be used
Determines dimensions and tolerances

PRODUCT DEVELOPMENT
This refers collectively to the entire process of identifying a market opportunity, creating a
product to appeal to the identified market, and finally, testing, modifying and refining the
product until it is ready for production.
The impetus for a new product normally comes from a perceived market opportunity or from
the development of a new technology. Consequently, new products are broadly categorized as
either market-pull products or technology-push products.
Market-pull
With a market-pull product, the marketing center of the company first determines that sales
could be increased if a new product were designed to appeal to a particular segment of its
customers. Engineering is then asked to determine the technical feasibility of the new product
idea. This interaction is reversed with a technology-push product. When a technical
breakthrough opens the way for a new product, marketing attempts to determine the idea's
prospects in the market place.
Technology-push
In many cases, the technology itself may not actually point to a particular product, but instead,
to new capabilities and benefits that could be packaged in a variety of ways to create a number
of different products. Marketing would have the responsibility of determining how the
technology should be packaged to have the greatest appeal to its customers. With either
scenario, manufacturing is responsible for estimating the cost of building the prospective new
product, and their estimations are used to project a selling price and estimate the potential
profit for the company.
Advantages of an effective Design Process
1. matches product or service characteristics with customer requirements
2. ensures that customer requirements are met in the simplest and least costly manner
3. reduces time required to design a new product or service
4. minimizes revisions necessary to make a design workable
STAGES OF NEW PRODUCT DEVELOPMENT
Initial concept
This involves idea generation and idea screening and there are a number of sources that
include:a) suggestions from customer
b) Research and development departments
c) Consumer research into what customers want by means of buying patterns analyses,
focus groups and consumer surveys
d) Reverse engineering or stripping down competitors products to discover design
improvements that can be adopted for your product
e) Government regulations that create a demand for new products
Lots of ideas are generated about the new product. Out of these ideas many are implemented.
The ideas are generated in many forms. Many reasons are responsible for generation of an
idea.
Idea Generation or Brainstorming of new product, service, or store concepts - idea generation
techniques can begin when you have done your OPPORTUNITY ANALYSIS to support your ideas
in the Idea Screening Phase (shown in the next development step).

The objective of idea screening is to eliminate unsound concepts prior to devoting resources to
them.
The screeners should ask several questions:
1. Will the customer in the target market benefit from the product?
2. What is the size and growth forecasts of the market segment / target market?
3. What is the current or expected competitive pressure for the product idea?
4. What are the industry sales and market trends the product idea is based on?
5. Is it technically feasible to manufacture the product?
6. Will the product be profitable when manufactured and delivered to the customer at the
target price?
Feasibility study
Feasibility studies will be conducted on the demand of the product, production methods,
associated costs and return on investments. Estimate likely selling price based upon
competition and customer feedback. Estimate sales volume based upon size of market and
estimate profitability and break-even point
Preliminary product design
The design team will include representatives from most of the organizations departments.
Develop the marketing and engineering details; Investigate intellectual property issues and
search patent databases. Seek to answer the following questions:1. Who is the target market and who is the decision maker in the purchasing process?
2. What product features must the product incorporate?
3. What benefits will the product provide?
4. How will consumers react to the product?
5. How will the product be produced most cost effectively?
6. Prove feasibility through virtual computer aided rendering and rapid prototyping
7. What will it cost to produce it?
Testing the Concept by asking a number of prospective customers what they think of the idea usually via Choice Modeling.
Prototype testing
Produce a physical prototype or mock-up. Prototypes may include life-size models or computer
visualizations such as computer animations and virtual reality. Test the product (and its
packaging) in typical usage situations
Conduct focus group customer interviews or introduce at trade show. Make adjustments where
necessary. Produce an initial run of the product and sell it in a test market area to determine
customer acceptance
Finalized product and production design
At this stage the design team will be concerned with ensuring that the product meets the
customers requirements. It involves decisions relating to how the product is to be made,
including details of processes, quality specifications, materials to be used, and the supply chain
e.t.c. Others will include: New program initiation
Finalize quality management system
Resource estimation
Requirement publication
Publish technical communications such as data sheets
Engineering operations planning

 Department scheduling
Supplier collaboration
Logistics plan
Resource plan publication
Program review and monitoring
Contingencies - what-if planning
Piloting product and production
These will involve marketing and production. The product will be tried out on a sample of the
customers. Production will ensure that the product moves smoothly through the various stages
of manufacture. Feedback will be obtained about the ability of the product to satisfy the
customers expectations.
Release for commercial manufacture
This is the stage at which the product is commercially produced for the market. Here the firm
launches the product; produce and place advertisements and other promotions and fills the
distribution pipeline with product
Dreyfuss (1967) lists five critical goals that industrial designers bring to a team when developing
new products:
Utility: The product's human interfaces should be safe, easy to use, and intuitive. Each
feature should be shaped so that it communicates its function to the user.
Appearance: Form, line, proportion, and color are used to integrate the product into a
pleasing whole.
Ease of Maintenance: Products must also be designed to communicate how they are to
be maintained and repaired.
Low Costs: Form and features have a large impact on tooling and production costs, so
they must be considered jointly by the team.
Communication: Product designs should communicate the corporate design philosophy
and mission through the visual qualities of the products.

SERVICE DESIGN
Services
These are acts, deeds, or performances
Characteristics of Services
Services are inseparable from delivery
Services tend to be decentralized and dispersed
Services are consumed more often than products
Services can be easily emulated
Services are intangible
Service output is variable
Services have higher customer contact
Services are perishable

Service Design Process

MANUFACTURING PROCESS/SYSTEM CHOICES

TYPE OF PRODUCTION METHODS
1) Job Production
It involves the production of a single product at a time. A single product is produced from start
to finish as a result of an individual customer order. Can suit both small scale production e.g. a
tailor made suit, and large scale production e.g. a cruise liner tends to be a labour-intensive
production process
Job shop production are characterized by manufacturing of one or few quantity of products
designed and produced as per the specification of customers within prefixed time and cost. The
distinguishing feature of this is low volume and high variety of products. A job shop comprises
of general purpose machines arranged into different departments. Each job demands unique
technological requirements, demands processing on machines in a certain sequence.
Job production occurs when a firm produces a one-off product for a specific customer. The
production of kitchens by country kitchens could be considered as job production since each
kitchen is designed to suit the specific needs of individual customers.

Characteristics
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of uniqueness.
4. Large inventory of materials, tools, parts.
a) Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
Advantages
1. Each piece is made to the customers exact requirements
2. Job satisfaction is high for the worker
3. Quality of the goods is very high
4. The design is flexible and can be changed
5. Able to produce unique orders to meet customers individual needs
6. More likely to motivate workers (see end results)
7. Fairly simple way of production (one a time)
8. The main advantage of job production is that it allows the firm to make customized
products for individual consumers.
9. Because the product or service is customized to meet the specific requirements of a
customer the firm is able to charge a higher price.
10. Job production also allows for greater flexibility which means that plans can be changed
or adapted at the buyers request even after production has begun.
11. Because each job is unique, worker motivation should be high.
12. Because of general purpose machines and facilities variety of products can be produced.
13. Operators will become more skilled and competent, as each job gives them learning
opportunities.
14. Full potential of operators can be utilized.
15. Opportunity exists for creative methods and innovative ideas.
Disadvantages
1. The products are very expensive
2. The work is very time consuming
3. The advantages of economies of scale are lost
4. Labor intensiveness and high costs
5. High selling costs
6. Not fit for mass production and large demand
7. Job production increases the average cost of production since it requires the use of
specialist labor.
8. Job production can also be very time consuming.
9. In job production there are very few opportunities to automate the production process
10. Higher cost due to frequent set up changes.
11. Higher level of inventory at all levels and hence higher inventory cost.
12. Production planning is complicated.
13. Larger space requirements.

2) Batch Production
Batch production is defined by American Production and Inventory Control Society (APICS) as a
form of manufacturing in which the job passes through the functional departments in lots or
batches and each lot may have a different routing. It is characterized by the manufacture of
limited number of products produced at regular intervals and stocked awaiting sales.
This involves dividing the work into a number of different operations, or a method that involves
completing one operation at a time on all units before performing the next.
It is used to produce a number of similar products - a batch. When an order has been
completed another batch is produced. Most manufacturing occurs through batch production.
For example clothes manufacturers use batch production to produce a given item, such as a
blazer, in batches of different sizes or colours.
All of the items in the batch are the same, so production is speeded up. This reduces the cost
of labour and results in the final product being less expensive for the customer
Batch production occurs whenever a number of identical (or in some cases similar) products are
produced in a batch. In batch production the products are not necessarily produced for a
particular customer but are made at regular intervals and then sold to a number of customers.
Batch production is often used in bakeries where a batch of one product for example brown
bread is made before moving on to the production of some other good for example white
bread.
Characteristics
Batch production system is used under the following circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of item in a batch and
change of set up is required for processing the next batch.
4. When manufacturing lead time and cost are lower as compared to job order production.
Advantages
1. Suitable for a wide range of similar products
2. Reducing the need for skilled workers
3. More standardized products and less machinery needed
4. Workers may specialise to some degree
5. Labour costs reduced so final price is lower
6. Machinery may be used
7. Production is faster
8. Begins to take advantage of economies of scale
9. The main advantage of batch production as opposed to job production is that it reduces
costs since there is less need for a skilled and flexible workforce.
10. Batch production also allows the firm to buy material in bulk and therefore avail of
economies of scale.
11. Batch production allows workers to specialize and use specialist machinery which
improves productivity.
Disadvantages
1. Higher unit costs for small batch
2. Less motivated workers for repetitive one operation
3. Careful planning needed to reduce idle machines or worker waiting
4. The work is less interesting and very repetitive

5.
6.
7.
8.

More space is required for working and storage

Larger stocks of raw materials must be kept
Machines have to be re-set between batches, losing time
The main problem with batch production is that all equipment must be stopped cleaned
and reset in between jobs. This down time increases the cost of production.
9. Batch production means that goods cannot be customized to meet the specific needs of
individual consumers.
10. Batch production also means that goods have to be stored which can be costly.
11. Because batch production leads to greater specialization it can led to de-motivation as
workers get bored doing the same job all day every day.
12. Material handling is complex because of irregular and longer flows.
13. Production planning and control is complex.
14. Work in process inventory is higher compared to continuous production.
15. Higher set up costs due to frequent changes in set up.
3) Mass Production
Manufacture of discrete parts or assemblies using a continuous process are called mass
production. This production system is justified by very large volume of production. The
machines are arranged in a line or product layout. Product and process standardization exists
and all outputs follow the same path.
Characteristics of mass production
Mass production is used under the following circumstances:
1. Standardization of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and output
rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Advantages
Following are the advantages of mass production:
a. Higher rate of production with reduced cycle time.
b. Higher capacity utilization due to line balancing.
c. Less skilled operators are required.
d. Low process inventory.
e. Manufacturing cost per unit is low.
Limitations
Following are the limitations of mass production:
a. Breakdown of one machine will stop an entire production line.
b. Line layout needs major change with the changes in the product design.
c. High investment in production facilities.
d. The cycle time is determined by the slowest operation.

4) Continuous Production
Production facilities are arranged as per the sequence of production operations from the first
operations to the finished product. The items are made to flow through the sequence of
operations through material handling devices such as conveyors, transfer devices, etc.
Characteristics
Continuous production is used under the following circumstances:
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
Advantages
Following are the advantages of continuous production:
a. Standardization of product and process sequence.
b. Higher rate of production with reduced cycle time.
c. Higher capacity utilization due to line balancing.
d. Manpower is not required for material handling as it is completely automatic.
e. Person with limited skills can be used on the production line.
f. Unit cost is lower due to high volume of production.
Limitations
Following are the limitations of continuous production:
a. Flexibility to accommodate and process number of products does not exist.
b. Very high investment for setting flow lines.
c. Product differentiation is limited
ENTERPRISE RESOURCE PLANNING (ERP)
Its a business management system that integrates all the departments or function of an
enterprise
Advantages
1) Leads to faster inventory turnovers
2) Improved customer service 5 R of marketing
3) Higher quality work
4) Timely revenue collection and improved cash flows
5) Better inventory accuracy and fewer audits
Disadvantages
1) Difficult to implement because it involves a change from functional to process approach
of business
2) Expensive systems because of customization of standard modules to accommodate
different processes is involved
3) Cost of training employees is high
JUST-IN-TIME PRODUCTION
The following comprehensive definition of JIT is provided by the American Production and
Inventory Control Society:
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 when needed; to improve to zero defects; to reduce lead time by reducing set-up
times, queue lengths and lot sizes; to incrementally revise the operations themselves; and to
accomplish these things at minimum cost.
From the above definitions, it can be seen that JIT is more than delivering an item where and
when required and at the right time. JIT is both a production scheduling and inventory control
technique and an aspect of total quality management (TQM). As a production control
technique, it is concerned with adding value and eliminating waste by ensuring that any
resources needed for production operation whether raw material, finished product or
anything in between are produced and available precisely when needed. This emphasis on
waste elimination means that JIT is an essential element in lean production. As a philosophy
that aims at zero defects or never allowing defective units from preceding process to flow into
and disrupt a subsequent process, it is an aspect of TQM.
A useful distinction may be made between its two forms:

BIG-JIT or lean production focusing on all sources of waste, as outlined in the first of the
above definitions

Little-JIT focusing more narrowly on scheduling goods, inventories and providing
resources where needed.
The background of JIT
JIT is generally agreed to have been developed by Talichi Ohno, a vice-president of the Japanese
Toyota motor company in the 1960s. It should be noted, however, that Henry Ford practiced
mass production with a JIT approach in 1921. By 1924, the production cycle of the Model T
from processing the core material to the final product was only for days.
JIT Objectives
These have been concisely summarized as:

Zero defects all products will more than meet the quality expectations of the customer

Zero set-up time no set-up time results in shorter production time, shorter production
cycles and smaller inventories

Zero inventories, inventories, including work-in-progress, finished goods and subassemblies, will be reduced to zero this is the opposite of the traditional
manufacturing philosophy of maintaining buffer stocks as precaution against unreliable
suppliers or fluctuating demand

Zero handling the elimination, so far as possible, of all non-value-adding activities

Zero lead time in some markets, this is impossible, but the aim is to increase flexibility
by using small batches of components of assemblies

Lot size of one this makes it possible to adapt quickly when demand is changing so if, for
example, the lot size is 200 and demand is changing, either the supplier or customer
ends up with a quantity of inventory that will either never or only very slowly reduce
KEY ELEMENTS OF JUST-IN-TIME SYSTEMS
1. material flow system
2. Lot sizes are small
3. There is short setup times
4. uniform Master Production Schedule
5. standardization of components and work methods
6. consistent, high quality

close supplier ties

flexible work force
product focus
preventative maintenance
continuous improvement
BENEFITS OF JIT
The potential benefits of JIT to an organization and its purchasing function in particular, have
been summarized by Schonberger and Ansari as follows:

Part costs - low scrap costs, low inventory carrying costs

Quality - fast detection and correction of unsatisfactory quality and, ultimately, higher
quality of purchased parts

Design - fast response to engineering change requirements

Administrative efficiency - fewer suppliers, minimal expediting and order release work,
simplified communications and receiving activities

Productivity - reduced rework, reduced inspection, reduced parts-related delays

Capital requirements - reduced inventories of purchased parts, raw materials, work-inprogress and finished goods
Other benefits of JIT
1. Reduced inventory
2. Improved quality
3. Lower costs
4. Reduced space requirements
5. Shorter lead time
6. Increased productivity
7. Greater flexibility
8. Better relations with suppliers
9. Simplified scheduling and control activities
10. Increased capacity
11. Better use of human resources
12. More product variety
POSSIBLE DISADVANTAGES OF JIT
Some organizations have experienced problems with JIT for the following reasons:

Faulty forecasting of demand and inability of suppliers to move quickly to changes in
demand

JIT requires the provision of the necessary systems and methods of communication
between purchasers and suppliers, ranging from vehicle telephones to EDI, so problems
will arise if there is inadequate communication both internally from production to
purchasing and externally from purchasing to suppliers and vice versa

Organizations with, ideally, no safety stocks are highly vulnerable to supply failures

Purely stockless buying is a fallacy lack of low-cost C class items can halt a production
line as easily as a failure in the delivery of high-priced A class items

The advantages of buying in bulk at lower prices may outweigh the savings negotiated
for JIT contracts as suppliers may increase their prices to cover costs of delivery,
paperwork and storage required for JIT
7.
8.
9.
10.
11.

JIT is not suitable for flow than batch production and may require a change from batch
to flow methods, with consequent changes in the systems required to support the new
methods.
Even for manufacturers that mass-produce items, a substantial percentage of
components are made by number, if not value, in batches, as well as a small number of
high-value components, on dedicated flow lines

PROJECT MANAGEMENT
PROJECT
A project is a unique endeavor to produce a set of deliverables within clearly specified time,
cost and quality constraints.
CHARACTERISTICS OF A PROJECT
1) Projects are unique in nature mostly they dont involve repetitive processes
2) Have a defined time scale clearly stated start and finish dates
3) Have approved budgets a level of financial expenditure is allocated to a project
4) Have limited resources
5) They involve an element of risk this is because of many uncertainties involved
6) Leads to achievement of beneficial change
Other characteristics
1) Are goal oriented
2) Lead to a specific accomplishment
3) Involves resource utilization
4) Targets a market place
PROJECT MANAGEMENT
It is the application of knowledge, skills, tools and techniques to project objectives to meet
stakeholders needs and expectation.
PROJECT SUCCESS FACTORS
1) Stakeholders involvement communication is key
2) Executive management support top management should sponsor the project
3) Clear statement of vision and objectives
4) Proper planning
5) Realistic expectations should be set
6) Smaller project milestones
7) Competent, hardworking and focused staff
PROJECT MANAGEMENT PROCESS
A) PROJECT INITIATION
Involves identifying a problem and developing a proposal that entails the objective, scope and
structure of the project
i)
Proposal development this includes a detailed definition of the problem,
analysis of the potential options, recommended solution to the problem and the
time and financial requirements
ii)
Feasibility study this is done through pilot tests and is done to assess the
possibility of a particular option achieving the benefits stated in the proposal,
whether the estimated costs are reasonable and whether the suggested risks
and issues management are good enough

iii)

Establishment of terms of reference this defines the vision, objectives, scope

and outputs of the project. It also defines the roles and responsibilities of each
person, summarizes activities, costs, risks and issues of the project
iv)
Appointment of a project team detailed job description for each role is
prepared
v)
Phase review this is a checkpoint to ensure that the project has achieved its
stated objectives
B) PROJECT PLANNING
This stage involves creating a plan for all activities, time resources, finance and risk and basically
involves
Project
Resource
Financial
Quality
Risk
Communication
Procurement planning
C) PROJECT EXECUTION
This stage involves implementation of each activity specified in the project planning. It
involves:a)
Construct outputs this is the generation of outputs that are acceptable to all
the stakeholders
b)
Monitor and control this involves
i)
Time management record time spent by staff in project activities is
recorded against the project
ii)
Cost management identifying costs and recording approval and
payment of such costs
iii)
Quality management involves assurance and control of project outputs
iv)
Change management changes to the project scope, output and
timelines are evaluated and approved
v)
Risk management identification, quantification and management of
project risks
vi)
Procurement management sourcing of products from external suppliers
vii)
Communication management formal communication messages are
identified, created, reviewed and communicated.
D) PROJECT CLOSURE
This involves releasing the final output to the stakeholders, handing over project documents,
terminating supplier contracts, releasing project resources and communicating project closure
to all stakeholders.
Work Breakdown Structure
Breaks a project into components, subcomponents, activities, and tasks

PROJECT SCHEDULING
Steps followed when carrying scheduling
1. Define activities
2. Sequence activities
3. Estimate time
4. Develop schedule
Techniques used
1. Graphical methods e.g. Gantt chart
2. Network methods e.g. CPM/PERT
A) GRAPHICAL METHOD
Use bar charts, time lines, or other pictorial methods to illustrate activity durations, activity
start and finish times, precedence relationships, milestone events, etc.
Examples
Bar charts, time lines, Gantt charts
GANTT CHART
This may involve the use of a graph or bar chart. The bars represent the time for each task and
may also indicate status of tasks. Its advantage is that it provides a visual display of project
schedule
Slack
Amount of time an activity can be delayed without delaying the project
Example of Gantt chart

B) NETWORK METHODS
Network representation of projects: treat the project as a set of related activities that can be
displayed visually in a network diagram consisting of nodes (circles) and arcs (arrows) that
depict the relationships between activities

Examples
PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method) which have
been combined into one method CPM/PERT
Activity-on-node (AON)
Nodes represent activities
Arrows show precedence relationships
Activity-on-arrow (AOA)
Arrows represent activities
Nodes are events for points in time
Event
Completion or beginning of an activity in a project
CRITICAL PATH
This is the longest path through a network
Minimum project completion time

A:
B:
C:
D:

1-2-4-7
1-2-5-6-7
1-3-4-7
1-3-5-6-7

3 + 2 + 3 + 1 = 9 months
3 + 2 + 1 + 1 + 1 = 8 months
3 + 1 + 3 + 1 = 8 months
3 + 1 + 1 + 1 + 1 = 7 months

PROJECT CRASHING
COST AND RESOURCE CONSIDERATIONS IN PROJECT PLANNING
"crashing an activity" ("crashing the network"): reducing the time required to complete an
activity (in hopes that this will reduce the completion time of the entire project) by assigning
additional resources to that activity but reducing the duration time of the activities on the
critical path may change the critical path
normal time (NT): the expected time to complete an activity
normal cost (NC): the cost to complete the activity in its normal time
crash time (CT): the shortest possible time in which the activity can be completed

crash cost (CC): the cost to complete the activity in the shortest possible time (i.e. the
cost to complete the activity in its crash time)
crash cost per time period = (CC - NC) / (NT - CT)
APPROACHES TO CRASHING A PROJECT NETWORK
A) "minimum-time schedule" method:
1. use the normal times for each activity to determine the critical path
2. crash every activity from its normal time to its crash time (minimum duration time) - this
gives the minimum-time schedule
If you must make the minimum time but you want to reduce the cost you can uncrash activities
that aren't critical, beginning with those that are most expensive.
B) "Minimum-cost schedule" method:
1. use the normal times for each activity to determine the critical path
2. crash the activity on the critical path that has the lowest cost to crash per unit time,
until: the activity duration time cannot be reduced any further; or another path
becomes critical; or the additional costs of crashing outweigh savings from crashing
3. repeat step 2 until the cost of continuing to crash the project is greater than the savings
from crashing
4. when there is more than one critical path, it may be necessary to simultaneously crash
an activity on each path if so, select the activities that give the lowest total cost per unit
time
Example 3
Activity Predecessors Normal Time Crash Time Normal Cost Crash Cost Crash Cost/Week
A

11,000

11,700

700

7,000

9,000

1000

5,000

5,600

600

14,000

16,000

2,000

B, C

2,000

2,000

8,700

10,000

1,300

E, F

23,000

28,000

2,500

10,000

11,200

1,200

80,700

93,500

Total

Time-Cost Relationship
Crashing costs increase as project duration decreases
Indirect costs increase as project duration increases
Reduce project length as long as crashing costs are less than indirect costs
Time-Cost Tradeoff

OPERATION PLANNING
INTRODUCTION AND MEANING
Operations planning and scheduling systems concern with the volume and timing of outputs,
the utilization of operations capacity at desired levels for competitive effectiveness. These
systems must fit together activities at various levels, from top to bottom, in support of one
another, as shown in Fig. 5.3. Note that the time orientation ranges from long to short as we
progress from top to bottom in the hierarchy. Also, the level of detail in the planning process
ranges from broad at the top to detail at the bottom.
COMPONENTS OF OPERATIONS PLANNING AND SCHEDULING SYSTEM
1. The Business Plan
The business plan is a statement of the organizations overall level of business activity for the
coming six to eighteen months, usually expressed in terms of outputs (in volume of sales) for its
various product groups, a set of individual products that share or consume common blocks of
capacity in the manufacturing process. It also specifies the overall inventory and backlog levels
that will be maintained during the planning period.
The business plan is an agreement between all functional areasfinance, production,
marketing, engineering, R & Dabout the level of activity and the products they are committed
to support.
The business plan is not concerned with all the details and specific timing of the actions for
executing the plan. Instead, it determines a feasible general posture for competing to achieve
its major goals. The resulting plan guides the lower-level, more details decisions.
2. Aggregate Production (Output) Planning
The process of determining output levels of product groups over the coming six to eighteen
months on a weekly or monthly basis. It identifies the overall level of outputs in support of the
business plan. The plan recognizes the divisions existing fixed capacity and the companys
overall policies for maintaining inventories and backlogs, employment stability and
subcontracting.
3. Aggregate Capacity Planning
It is the process of testing the feasibility of aggregate output plans and evaluating overall
capacity utilization. A statement of desired output is useful only if it is feasible. Thus, it

addresses the supply side of the firms ability to meet the demand. As for aggregate output
plans, each plant, facility, or division requires its own aggregate capacity plan.
Capacity and output must be in balance, as indicated by the arrow between them in Fig. 1.5. A
capacity plan translates an output plan into input terms, approximating how much of the
divisions capacity will be consumed. Although these basic capacities are fixed, management
can manipulate the short-term capacities by the ways they deploy their work force, by
subcontracting, or by using multiple work shifts to adjust the timing of overall outputs. As a
result, the aggregate planning process balances output levels, capacity constraints, and
temporary capacity adjustments to meet demand and utilize capacity at desired levels during
the coming months. The resulting plan sets limits on the master production schedule.
4. Master Production Scheduling (Mps)
MPS is a schedule showing week by week how many of each product must be produced
according to customer orders and demand forecasts. Its purpose is to meet the demand for
individual products in the product group. This more detailed level of planning disaggregates the
product groups into individual products and indicates when they will be produced.
The MPS is an important link between marketing and production. It shows when incoming sales
orders can be scheduled into production, and when each shipment can be scheduled for
delivery. It also takes into account current backlogs so that production and delivery schedules
are realistic.
5. Resource Requirement Planning
Resource requirement planning (rough-cut capacity planning) is the process of testing the
Feasibility of master production schedule in terms of capacity. This step ensures that a
proposed MPS does not inadvertently overload any key department, work centre, or machine,
making the MPS unworkable.
6. Material Requirement Planning
Material requirement planning (MRP) is a system of planning and scheduling the time phased
material requirements for releasing materials and receiving materials that enable the master
production schedule to be implemented. Thus, the master production schedule is the driving
force for material requirements planning. MRP provides information such as due dates for
components that are subsequently used for shop floor control. Once this information is
available, it enables managers to estimate the detailed requirements for each work centres.
7. Capacity Requirement Planning
Capacity requirement planning (CRP) is an iterative process of modifying the MPS or planned
resources to make capacity consistent with the production schedule. CRP is a companion
process used with MRP to identify in detail the capacity required to execute the material
requirement planning. At this level, more accurate comparisons of available and needed
capacity for scheduled workloads are possible.
8. Shop Floor Control
Shop floor control involves the activities that execute and control shop operations namely
loading, sequencing, and detailed scheduling and expediting jobs in production. It coordinates
the weekly and daily activities that get jobs done. Individual jobs are assigned to machines and
work centres (loading), the sequence of processing the jobs for priority control is determined,
start times and job assignments for each stage of processing are decided (detailed scheduling )
and materials and work flows from station to station are monitored and adjusted (expediting).
9. Loading

Each job (customer order) may have its unique product specification and, hence, it is unique
through various work centres in the facility. As new job orders are released, they are assigned
or allocated among the work centres, thus establishing how much of a load each work centre
must carry during the coming planning period. This assignment is known as loading (sometimes
called shop loading as machine loading).
10. Sequencing
This stage establishes the priorities for jobs in the queues (waiting lines) at the work centres.
Priority sequencing specifies the order in which the waiting jobs are processed; it requires the
adoption of a priority sequencing rule.
11. Detailed Scheduling
Detailed scheduling determines start times, finish times and work assignments for all jobs at
each work centre. Calendar times are specified when job orders, employees, and materials
(inputs), as well as job completion (outputs), should occur at each work centre. By estimating
how long each job will take to complete and when it is due, schedulers can establish start and
finish dates and develop the detailed schedule.
12. Expediting
Expediting is a process of tracking a jobs progress and taking special actions to move it through
the facility. In tracking a jobs progress, special action may be needed to keep the job moving
through the facility on time. Manufacturing or service operations disruptions-equipments
breakdowns, unavailable materials, last-minute priority changes, require managers to deviate
from plans and schedules and expedite an important job on a special handling basis.
13. Input/ Output Control
Input/output control related to the activities to monitor actual versus planned utilization of a
Work centres capacity. Output plans and schedules call for certain levels of capacity at a work
centre, but actual utilization may differ from what was planned. Actual versus planned
utilization of the work centres capacity can be monitored by using input-output reports and,
when discrepancies exist, adjustments can be made. The important components of operations
planning and scheduling system has been explained in detail in the following paragraphs.
AGGREGATE PLANNING
Aggregate planning is an intermediate term planning decision. It is the process of planning the
quantity and timing of output over the intermediate time horizon (3 months to one year).
Within this range, the physical facilities are assumed to 10 be fixed for the planning period.
Therefore, fluctuations in demand must be met by varying labour and inventory schedule.
Aggregate planning seeks the best combination to minimize costs.
Aggregate Planning Strategies
The variables of the production system are labour, materials and capital. More labour effort is
required to generate higher volume of output. Hence, the employment and use of overtime
(OT) are the two relevant variables. Materials help to regulate output. The alternatives
available to the company are inventories, back ordering or subcontracting of items. These
controllable variables constitute pure strategies by which fluctuations in demand and
uncertainties in production activities can be accommodated by using the following steps:
1. Vary the size or the workforce: Output is controlled by hiring or laying off workers in
proportion to changes in demand.
2. Vary the hours worked: Maintain the stable workforce, but permit idle time when there
is a slack and permit overtime (OT) when demand is peak.

3. Vary inventory levels: Demand fluctuations can be met by large amount of inventory.
4. Subcontract: Upward shift in demand from low level. Constant production rates can be
met by using subcontractors to provide extra capacity.
Aggregate Planning Guidelines
The following are the guidelines for aggregate planning:
1. Determine corporate policy regarding controllable variables.
2. Use a good forecast as a basis for planning.
3. Plan in proper units of capacity.
4. Maintain the stable workforce.
5. Maintain needed control over inventories.
6. Maintain flexibility to change.
7. Respond to demand in a controlled manner.
8. Evaluate planning on a regular base.
MASTER PRODUCTION SCHEDULE (MPS)
Master scheduling follows aggregate planning. It expresses the overall plans in terms of specific
end items or models that can be assigned priorities. It is useful to plan for the material and
capacity requirements.
Time interval used in master scheduling depends upon the type, volume, and component lead
times of the products being produced. Normally weekly time intervals are used. The time
horizon covered by the master schedule also depends upon product characteristics and lead
times. Some master schedules cover a period as short as few weeks and for some products it is
more than a year.
Functions of MPS
Master Production Schedule (MPS) gives formal details of the production plan and converts this
plan into specific material and capacity requirements. The requirements with respect to labour,
material and equipment are then assessed.
The main functions of MPS are:
1. To translate aggregate plans into specific end items: Aggregate plan determines level of
operations that tentatively balances the market demands with the material, labour and
equipment capabilities of the company. A master schedule translates this plan into
specific number of end items to be produced in specific time period.
2. Evaluate alternative schedules: Master schedule is prepared by trial and error. Many
computer simulation models are available to evaluate the alternate schedules.
3. Generate material requirement: It forms the basic input for material requirement
planning (MRP).
4. Generate capacity requirements: Capacity requirements are directly derived from MPS.
Master scheduling is thus a prerequisite for capacity planning.
5. Facilitate information processing: By controlling the load on the plant. Master schedule
determines when the delivery should be made. It coordinates with other management
information systems such as, marketing, finance and personnel.
6. Effective utilization of capacity: By specifying end item requirements schedule
establishes the load and utilization requirements for machines and equipment.

MATERIAL REQUIREMENT PLANNING (MRP)

MATERIAL REQUIREMENTS PLANNING MRP
An MRP system entails a computer-based system used to synchronize the supply of material,
components and sub-assemblies with production planning and scheduling so that inventory
may be limited to the absolute minimum.
Definition:
An MRP system is a computerized information system that integrates the scheduling
and control of materials through logically related records, procedures and decision rules
with the master production schedule (MPS) into time phased net requirements for
each inventory item.
MRP refers to the basic calculations used to determine components required from end
item requirements. It also refers to a broader information system that uses the
dependence relationship to plan and control manufacturing operations.
Materials Requirement Planning (MRP) is a technique for determining the quantity and
timing for the acquisition of dependent demand items needed to satisfy master
production schedule requirements.
The MRP system uses planned production to determine what and how much should be
ordered, when to order and on what date delivery should take place. The basic function of MRP
system includes inventory control, bill of material processing and elementary scheduling. MRP
helps organizations to maintain low inventory levels. It is used to plan manufacturing,
purchasing and delivering activities.
This is invariably an IT-based system that helps determine when items are required for a
production line and in what quantities. It can operate manually but this is very rare and would
really only work for finished goods that contain few components.
MRP is based on a master production schedule (MPS). This is derived from the companys sales
forecast, updated with the latest actual sales information. This provides an estimate of orders
that will need to be satisfied during the time period under consideration. "Manufacturing
organizations, whatever their products, face the same daily practical problem - that customers
want products to be available in a shorter time than it takes to make them. This means that
some level of planning is required."
Companies need to control the types and quantities of materials they purchase, plan which
products are to be produced and in what quantities and ensure that they are able to meet
current and future customer demand, all at the lowest possible cost. Making a bad decision in
any of these areas will make the company lose money. A few examples are given below:
If a company purchases insufficient quantity of an item used in manufacturing (or the
wrong item) it may be unable to meet contract obligations to supply products on time.
If a company purchases excessive quantities of an item, money is wasted - the excess
quantity ties up cash while it remains as stock and may never even be used at all.
Beginning production of an order at the wrong time can cause customer deadlines to be
missed.
MRP is a tool to deal with these problems. It provides answers for several questions:
What items are required?
How many are required?
When are they required?

MRP can be applied both to items that are purchased from outside suppliers and to subassemblies produced internally, that are components of more complex items.
Once the MPS has been produced, the next stage is to explode it. This means that the
computer software calculates how many of each component is required in order to
manufacture the finished products specified in the MPS. The document that results from this
process is known as of materials (BOM).
We can illustrate this by reference to our fictional forklift manufacturer, suppose the MPS
shows that 200 1,000kg capacity trucks are to be produced. The BOM will show that 800 wheels
are required (four per truck), meaning 4,000 wheel nuts (five per wheel) and so on. The BOM
will follow this process for every component and subassembly the entire truck. This is
illustrated in Figure 7.2

The inventory status file: this tells us which of the required items we already have in
stock and in what quantities
The delivery lead times for all of the items required
All of these pieces of information should tell us what we need to order, in what
quantities and when we need to place the orders. This should then ensure that the right
quantities of the right items are delivered to us not too long before being required by
the production line. This is not quite just in time but it s moving in that direction.
With items being used regularly, it is not uncommon to place them on call-off orders or
to use consignment stocking. This is particularly true of items with short lead times and
which are readily available.
Obtain updated sales forecast updated with latest actual sales information.
Use sales forecast, customer orders and production policy to form master production
schedule. (MPS)
Use MRP software to compute material requirements by exploding end product
requirements into successively lower levels in the product structure. This gives the gross
requirement for each material and component.
Use the inventory status file to determine materials and components already in stock.
Deduct this from the gross requirement to arrive at the net requirement for each
material and component (i.e. the quantities we need to order from suppliers).
Assess the net requirement in the light of supplier lead times in order to determine the
schedule for ordering materials and components.

Place orders with suppliers via the purchasing function

Receive goods and issue them to the production line.

The data that must be considered include:

The end item (or items) being created. This is sometimes called Independent Demand or
Level 0 on BOM (Bill of materials).
How much is required at a time.
When the quantities are required to meet demand.
Shelf life of stored materials.
Inventory status records. Records of net materials available for use already in stock (on
hand) and materials on order from suppliers.
Bills of materials. Details of the materials, components and sub-assemblies required to
make each product.
Planning Data. This includes all the restraints and directions to produce the end items.
This includes such items as: Routings, Labor and Machine Standards, Quality and Testing
Standards, Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size,
Lot-For-Lot, and Economic Order Quantity), Scrap Percentages, and other inputs.
Inputs
The following inputs are essential for the successful implementation of materials requirements:
- A master production schedule (MPS):- this specifies the firms requirements for final
products by time period.
- A bill of material (BOM): - This is for each final product in the MPS, which defines the
components that the final assembly process needs to complete that product.
- Inventory status file: - This provides information on the status of all scheduled incoming
components.
- The planned lead-time of every process required. These represents the total time
needed to produce a product.
Outputs
There are two outputs and a variety of messages/reports:

Output 1 is the "Recommended Production Schedule" which lays out a detailed

schedule of the required minimum start and completion dates, with quantities, for each
step of the Routing and Bill of Material required satisfying the demand from the Master
Production Schedule (MPS).
Output 2 is the "Recommended Purchasing Schedule". This lays out both the dates that
the purchased items should be received into the facility AND the dates that the
Purchase orders, or Blanket Order Release should occur to match the production
schedules.
Messages and Reports:
Purchase orders. An order to a supplier to provide materials.
Reschedule notices. These recommend cancelling, increasing, delaying or speeding up
existing orders.
Characteristics of MRP System
It uses electronic data-processing equipment to calculate in advance the inventory
requirements for a particular period.
- Inventory holding is reduced to a bare minimum by synchronizing materials flow and
production scheduling.
- The MPRS is the guiding tool for MRP system.
- The demand for materials can be calculated by means of MRP system, which is more
reliable than forecasting.
- The MRP system eminently suited to the supply of production materials in
manufacturing enterprises.
- There must be a master production schedule exploded into a bill of materials
- All inventory items must be identified.
- The bill of materials must exist at planning stage.
- The inventory status of all items is needed
- File data must have integrity.
- Lead times for each material and component must be known and update on an ongoing
basis.
- All of the quantity relationships to end products must be known
- There must be reliable, flexible suppliers who are committed to supplying against MRP
schedules and who will make the system work,
Objectives of MRP
1. Inventory reduction: MRP determines how many components are required when they
are required in order to meet the master schedule. It helps to procure the materials/
components as and when needed and thus avoid excessive build up of inventory.
2. Reduction in the manufacturing and delivery lead times: MRP identifies materials and
component quantities, timings when they are needed, availabilities and procurements
and actions required to meet delivery deadlines. MRP helps to avoid delays in
production and priorities production activities by putting due dates on customer job
order.
3. Realistic delivery commitments: By using MRP, production can give marketing timely
information about likely delivery times to prospective customers.
4. Increased efficiency: MRP provides a close coordination among various work centres
and hence help to achieve uninterrupted flow of materials through the production line.
This increases the efficiency of production system.

Advantages of MRP System

- Forges closer linkages with suppliers and user departments
- Decrease in inventories of purchased parts.
- Fewer outstanding orders.
- Elimination of expediting.
- Improvement of accuracy of record and control information.
- Improved accuracy fro purchasing planning and scheduling.
- It reduces inventory.
- It is sensitive to change. Data can be updated as frequently as is necessary. It provides a
look into the future by forecasting what products are to be produced and what
materials will be needed to produce them.
- Inventory control is action-oriented rather than clerically-oriented.
- Order quantities are related to requirements. This is one of the main reasons why MRP
reduces inventory.
- MRP reduces routine time in the purchasing job. This is particularly true if
requirements are known for a relatively long period of time and remain steady during
that time.
- It integrates the thinking and action of personnel in purchasing, production and
marketing. This is because it requires information from all three departments as we
have seen above.
Possible Disadvantages/Difficulties
- Because lead times have to be short and very reliable, suppliers and placed under
pressure which may damage supplier relations.
- Low inventory levels place greater pressure on the purchasing function.
- Purchasing quantities are largely inflexible since the quantities are determined by the
system.
- Too much reliance on purchasing information on the availability and lead times, which
influences the success of MRP system.
- It only applies to dependent demand items.
- Its payback on own-value items (Category C items: see Pareto analysis in Chapter 4) may
be doubtful. This is because it might be advantageous just to keep fairly large quantities
of these items in stock. This would mean that the items would be available when
required without costing too much to hold in stock. This would mean that they would
also only need to be ordered infrequently, so that the cost of ordering would be low.
- It depends on an accurate forecast which is not always possible.
- It does not apply to many jobbing manufacturers who must keep raw materials on
hand to meet what amounts to emergency production orders.
MANUFACTURING RESOURCE PLANNING (MRP II)
MRP II has been defined as a system built around materials requirement planning and also
including the additional planning functions of production planning, master production
scheduling and capacity requirements planning.
MRP II has wider implications than MRP I. MRP II is concerned with virtually any resource
entering into production, including manpower, machines and money in addition to materials.
The development of the MRP system into MRP II system has produced a useful aid for the
entire management of business.

Material requirements planning (MRP) is a production planning and inventory control system
used to manage manufacturing processes. Most MRP systems are software-based, while it is
possible to conduct MRP by hand as well.
This is not exclusively a software function, but a marriage of people skills, dedication to
database accuracy, and computer resources. It is a total company management concept for
using human resources more productively
An MRP II system is intended to simultaneously meet three objectives:
- Ensure materials are available for production and products are available for delivery to
customers.
- Maintain the lowest possible material and product levels in store
- Plan manufacturing activities, delivery schedules and purchasing activities.
MRP is concerned primarily with manufacturing materials while MRPII is concerned with the
coordination of the entire manufacturing production, including materials, finance, and human
relations. The goal of MRP II is to provide consistent data to all players in the manufacturing
process as the product moves through the production line.
Paper-based information systems and non-integrated computer systems that provide paper or
disk outputs result in many information errors, including missing data, redundant data,
numerical errors that result from being incorrectly keyed into the system, incorrect calculations
based on numerical errors, and bad decisions based on incorrect or old data.
While MRP allows for the co-ordination of raw materials purchasing, MRP II facilitates the
development of a detailed production schedule that accounts for machine and labour capacity,
scheduling the production runs according to the arrival of materials. An MRP II output is a final
labour and machine schedule. Data about the cost of production, including machine time,
labour time and materials used, as well as final production numbers, is provided from the MRPII
system to accounting and finance
Advantages of MRP II
1. Better control of inventories
2. Improved scheduling
3. Productive relationships with suppliers
4. Improved design control
5. Better quality and quality control
6. Reduced working capital for inventory
7. Improved cash flow through quicker deliveries
8. Accurate inventory records
Disadvantages
1. MRP II implementation requires information to be accurate. If poor quantity information
is used in either the inventory area or the bill of material module, errors in automated
planning processes will result. The planning modules use averages for length of time to
purchase or manufacture (lead times) and for quantities usually purchased on a purchase
order or manufactured on a work order (lot sizes). If there is variability in the actual lot
sizes purchased or produced and the lead times then planning software will not produce
plans that match what actually happens.
2. Poor information and lack of understanding of the impact of average lot sizes and lead
times can cause implementation failure and costly reimplementation.

SCHEDULING
Scheduling can be defined as prescribing of when and where each operation necessary to
manufacture the product is to be performed.
It is also defined as establishing of times at which to begin and complete each event or
operation comprising a procedure. The principle aim of scheduling is to plan the sequence of
work so that production can be systematically arranged towards the end of completion of all
products by due date.
PRINCIPLES OF SCHEDULING
1. The principle of optimum task size: Scheduling tends to achieve maximum efficiency
when the task sizes are small, and all tasks of same order of magnitude.
2. Principle of optimum production plan: The planning should be such that it imposes an
equal load on all plants.
3. Principle of optimum sequence: Scheduling tends to achieve the maximum efficiency
when the work is planned so that work hours are normally used in the same sequence.
Inputs to Scheduling
1. Performance standards: The information regarding the performance standards
(standard times for operations) helps to know the capacity in order to assign required
machine hours to the facility.
2. Units in which loading and scheduling is to be expressed.
3. Effective capacity of the work centre.
4. Demand pattern and extent of flexibility to be provided for rush orders.
5. Overlapping of operations.
6. Individual job schedules.
SCHEDULING STRATEGIES
Scheduling strategies vary widely among firms and range from no scheduling to very
sophisticated approaches.
These strategies are grouped into four classes:
1. Detailed scheduling: Detailed scheduling for specific jobs that are arrived from
customers is impracticable in actual manufacturing situation. Changes in orders,
equipment breakdown, and unforeseen events deviate the plans.
2. Cumulative scheduling: Cumulative scheduling of total work load is useful especially for
long range planning of capacity needs. This may load the current period excessively and
under load future periods. It has some means to control the jobs.
3. Cumulative detailed: Cumulative detailed combination is both feasible and practical
approach. Faster schedule has fixed and flexible portions.
4. Priority decision rules: Priority decision rules are scheduling guides that are used
independently and in conjunction with one of the above strategies, i.e., first come first
serve. These are useful in reducing Work-In-Process (WIP) inventory.
TYPES OF SCHEDULING
Types of scheduling can be categorized as forward scheduling and backward scheduling.
1. Forward scheduling is commonly used in job shops where customers place their orders
on needed as soon as possible basis. Forward scheduling determines start and finish
times of next priority job by assigning it the earliest available time slot and from that
time, determines when the job will be finished in that work centre. Since the job and its
components start as early as possible, they will typically be completed before they are
due at the subsequent work centres in the routing. The forward method generates in

the process inventory that are needed at subsequent work centres and higher inventory
cost. Forward scheduling is simple to use and it gets jobs done in shorter lead times,
compared to backward scheduling.
2. Backward scheduling is often used in assembly type industries and commit in advance
to specific delivery dates. Backward scheduling determines the start and finish times for
waiting jobs by assigning them to the latest available time slot that will enable each job
to be completed just when it is due, but done before. By assigning jobs as late as
possible, backward scheduling minimizes inventories since a job is not completed until it
must go directly to the next work centre on its routing. Forward and backward
scheduling methods are shown in Fig. 6
SCHEDULING METHODOLOGY
The scheduling methodology depends upon the type of industry, organization, product, and
level of sophistication required. They are:
1. Charts and boards,
2. Priority decision rules, and
3. Mathematical programming methods.
1. Gantt Charts and Boards
Gantt charts and associated scheduling boards have been extensively used scheduling devices
in the past, although many of the charts are now drawn by computer. Gantt charts are
extremely easy to understand and can quickly reveal the current or planned situation to all
concerned. They are used in several forms, namely,
(a) Scheduling or progress charts, which depicts the sequential schedule;
(b) Load charts, which show the work assigned to a group of workers or machines;
and
(c) Record a chart, which are used to record the actual operating times and delays
of workers and machines.
2. Priority Decision Rules
Priority decision rules are simplified guidelines for determining the sequence in which jobs will
be done. In some firms these rules take the place of priority planning systems such as MRP
systems. Following are some of the priority rules followed.
Symbol
Symbol Priority rule
FCFS
First come, first served
EDO
Earliest due date
LS
Least slack (that is, time due less processing time
SPT
Shortest processing time
LPT
Longest processing time
PCO
Preferred customer order
RS
Random selection
3. Mathematical Programming Methods
Scheduling is a complex resource allocation problem. Firms process capacity, labour skills,
materials and they seek to allocate their use so as to maximize a profit or service objective, or
perhaps meet a demand while minimizing costs.
The following are some of the models used in scheduling and production control.
(a) Linear programming model: Here all the constraints and objective functions are
formulated as a linear equation and then problem is solved for optimality. Simplex
method, transportation methods and assignment method are major methods used here.

(b) PERT/CPM network model: PERT/CPM network is the network showing the sequence of
operations for a project and the precedence relation between the activities to be
completed.
Note: Scheduling is done in all the activities of an organization i.e., production, maintenance
etc. Therefore, all the methods and techniques of scheduling is used for maintenance
management

PLANT LOCATION AND LAYOUT

INTRODUCTION AND MEANING
Plant location or the facilities location problem is an important strategic level decision making
for an organization. One of the key features of a conversion process (manufacturing system) is
the efficiency with which the products (services) are transferred to the customers. This fact will
include the determination of where to place the plant or facility.
The selection of location is a key-decision as large investment is made in building plant and
machinery. It is not advisable or not possible to change the location very often. So an improper
location of plant may lead to waste of all the investments made in building and machinery,
equipment.
Before a location for a plant is selected, long range forecasts should be made anticipating
future needs of the company. The plant location should be based on the companys expansion
plan and policy, diversification plan for the products, changing market conditions, the changing
sources of raw materials and many other factors that influence the choice of the location
decision. The purpose of the location study is to find an optimum location one that will result in
the greatest advantage to the organization.
NEED FOR SELECTING A SUITABLE LOCATION
The need for selecting a suitable location arises because of three situations
1) When starting a new organization, i.e., location choice for the first time.
2) In case of existing organization.
3) In case of Global Location.
A) NEW ORGANIZATION
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organisational objectives. The following are the
factors to be considered while selecting the location for the new organisations:
1) Identification of region: The organisational objectives along with the various long-term
considerations about marketing, technology, internal organisational strengths and
weaknesses, region specific resources and business environment, legal-governmental
environment, social environment and geographical environment suggest a suitable region
for locating the operations facility.
2) Choice of a site within a region: Once the suitable region is identified, the next step is
choosing the best site from an available set. Choice of a site is less dependent on the
organizations long-term strategies. Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem. The problem of location of a site
within the region can be approached with the following cost oriented non-interactive
model, i.e., dimensional analysis.
3) Dimensional analysis: If all the costs were tangible and quantifiable, the comparison and
selection of a site is easy. The location with the least cost is selected. In most of the cases
intangible costs which are expressed in relative terms than in absolute terms. Their

relative merits and demerits of sites can also be compared easily. Since both tangible and
intangible costs need to be considered for a selection of a site, dimensional analysis is
used. Dimensional analysis consists in computing the relative merits (cost ratio) for each
of the cost items for two alternative sites.
When starting a new factory, plant location decisions are very important because they have
direct bearing on factors like, financial, employment and distribution patterns. In the long run,
relocation of plant may even benefit the organization. But, the relocation of the plant involves
stoppage of production, and also cost for shifting the facilities to a new location. In addition to
these things, it will introduce some inconvenience in the normal functioning of the business.
Hence, at the time of starting any industry, one should generate several alternate sites for
locating the plant. After a critical analysis, the best site is to be selected for commissioning the
plant. Location of warehouses and other facilities are also having direct bearing on the
operational performance of organizations.
The existing firms will seek new locations in order to expand the capacity or to place the
existing facilities. When the demand for product increases, it will give rise to following
decisions:
Whether to expand the existing capacity and facilities.
Whether to look for new locations for additional facilities.
Whether to close down existing facilities to take advantage of some new locations.
B) EXISTING ORGANIZATION
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:
The different operations strategies under the above circumstances could be:
1) Plants manufacturing distinct products: Each plant services the entire market area for
the organization. This strategy is necessary where the needs of technological and
resource inputs are specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with
other product-line requiring little emphasis on precision. It may not be proper to have
too many contradictions such as sophisticated and old equipment, highly skilled and
semi-skilled personnel, delicates processes and those that could permit rough handlings,
all under one roof and one set of managers. Such a setting leads to much confusion
regarding the required emphasis and the management policies. Product specialization
may be necessary in a highly competitive market. It may be necessary to exploit the
special resources of a particular geographical area. The more decentralized these pairs
are in terms of the management and in terms of their physical location, the better
would be the planning and control and the utilization of the resources.
2) Manufacturing plants supplying to a specific market area: Here, each plant
manufactures almost all of the companys products. This type of strategy is useful where
market proximity consideration dominates the resources and technology
considerations. This strategy requires great deal of coordination from the corporate
office. An extreme example of this strategy is that of soft drinks bottling plants.
3) Plants divided on the basis of the process or stages in manufacturing: Each production
process or stage of manufacturing may require distinctively different equipment
capabilities, labour skills, technologies, and managerial policies and emphasis. Since the
products of one plant feed into the other plant, this strategy requires much centralized

coordination of the manufacturing activities from the corporate office that are expected
to understand the various technological aspects of all the plants.
4) Plants emphasizing flexibility: This requires much coordination between plants to meet
the changing needs and at the same time ensure efficient use of the facilities and
resources. Frequent changes in the long-term strategy in order to improve be efficiently
temporarily, are not healthy for the organization. In any facility location problem the
central question is: Is this a location at which the company can remain competitive for a
long time? For an established organization in order to add on to the capacity, following
are the ways:
a. Expansion of the facilities at the existing site: This is acceptable when it does not
violate the basic business and managerial outlines, i.e., philosophies, purposes,
strategies and capabilities. For example, expansion should not compromise
quality, delivery, or customer service.
b. (b) Relocation of the facilities (closing down the existing ones): This is a drastic
step which can be called as Uprooting and Transplanting. Unless there are very
compelling reasons, relocation is not done. The reasons will be either bringing
radical changes in technology, resource availability or other destabilization.
All these factors are applicable to service organizations, whose objectives, priorities and
strategies may differ from those of hardcore manufacturing organizations.
C) GLOBAL LOCATION
Because of globalization, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.
1) Virtual proximity: With the advance in telecommunications technology, a firm can be in
virtual proximity to its customers. For a software services firm much of its logistics is
through the information/ communication pathway. Many firms use the communications
highway for conducting a large portion of their business transactions. Logistics is
certainly an important factor in deciding on a locationwhether in the home country or
abroad. Markets have to be reached. Customers have to be contacted. Hence, a market
presence in the country of the customers is quite necessary.
2) Virtual factory: Many firms based in USA and UK in the service sector and in the
manufacturing sector often out sources part of their business processes to foreign
locations such as India. Thus, instead of ones own operations, a firm could use its
business associates operations facilities. The Indian BPO firm is a foreign-based
companys virtual service factory. So a location could be ones own or ones business
associates. The location decision need not always necessarily pertain to own operations.
REASONS FOR A GLOBAL/FOREIGN LOCATION
A) Tangible Reasons
The tangible reasons for setting up an operations facility abroad could be as follows:
Reaching the customer is one obvious reason for locating a facility abroad is that of capturing a
share of the market expanding worldwide. The phenomenal growth of the GDP of India is a big
reason for the multinationals to have their operations facilities in our country. An important
reason is that of providing service to the customer promptly and economically which is logisticsdependent. Therefore, cost and case of logistics is a reason for setting up manufacturing
facilities abroad.

By logistics set of activities closes the gap between production of goods/services and reaching
of these intended goods/services to the customer to his satisfaction. Reaching the customer is
thus the main objective. The tangible and intangible gains and costs depend upon the company
defining for it as to what that reaching means. The tangible costs could be the logistics related
costs; the intangible costs may be the risk of operating is a foreign country. The gains are the
immediate gains; the intangible gains are an outcome of what the company defines the
concepts of reaching and customer for it.
The other tangible reasons could be as follows:
(a) The host country may offer substantial tax advantages compared to the home country.
(b) The costs of manufacturing and running operations may be substantially less in that
foreign country. This may be due to lower labour costs, lower raw material cost, better
availability of the inputs like materials, energy, water, ores, metals, key personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing plant in a
foreign country rather than exporting the items to that country.
B) Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be as
follows:
1. Customer-related Reasons
(a) With an operations facility in the foreign country, the firms customers may feel secure
that the firm is more accessible. Accessibility is an important service quality
determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.
2. Organizational Learning-related Reasons
(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an technologically more advanced
country. The firm can learn from advanced research laboratories/universities in that
country. Such learning may help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) It can also learn from its competitors operating in that country. For this reason, it may
have to be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant
there, it will have intensive interaction with the suppliers in that country from whom
there may be much to learn in terms of modern and appropriate technology, modern
management methods, and new trends in business worldwide.
3. Other Strategic Reasons
(a) The firm by being physically present in the host country may gain some local boy kind
of psychological advantage. The firm is no more a foreign company just sending its
products across international borders. This may help the firm in lobbying with the
government of that country and with the business associations in that country.
(b) The firm may avoid political risk by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.

(d) The firm could hunt for human capital in different countries by having operations in
those countries. Thus, the firm can gather the best of people from across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market risks for
the firm. If one market goes slow the other may be doing well, thus lowering the overall
risk.
FACTORS INFLUENCING PLANT LOCATION/FACILITY LOCATION
Facility location is the process of determining a geographic site for a firms operations.
Managers of both service and manufacturing organizations must weigh many factors when
assessing the desirability of a particular site, including proximity to customers and suppliers,
labour costs, and transportation costs.
Location conditions are complex and each comprises a different Characteristic of a tangible (i.e.
Freight rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality)
nature
Location conditions are hard to measure. Tangible cost based factors such as wages and
products costs can be quantified precisely into what makes locations better to compare. On the
other hand non-tangible features, which refer to such characteristics as reliability, availability
and security, can only be measured along an ordinal or even nominal scale. Other non-tangible
features like the percentage of employees that are unionized can be measured as well. To sum
this up non-tangible features are very important for business location decisions.
It is appropriate to divide the factors, which influence the plant location or facility location on
the basis of the nature of the organization as:
1. General locational factors, which include controllable and uncontrollable factors for all
type of organisations.
2. Specific locational factors specifically required for manufacturing and service
organizations.
Location factors can be further divided into two categories:
1. Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs.
2. Secondary factors also are important, but management may downplay or even ignore
some of them if other factors are more important.
A) GENERAL LOCATIONAL FACTORS
Following are the general factors required for location of plant in case of all types of
organisations.
a) Controllable Factors
b) Uncontrollable Factors
Controllable Factors
1. Proximity to markets: Every company is expected to serve its customers by providing goods
and services at the time needed and at reasonable price organizations may choose to locate
facilities close to the market or away from the market depending upon the product. When the
buyers for the product are concentrated, it is advisable to locate the facilities close to the
market.
Locating nearer to the market is preferred if
The products are delicate and susceptible to spoilage.
After sales services are promptly required very often.
Transportation cost is high and increase the cost significantly.
Shelf life of the product is low.

Nearness to the market ensures a consistent supply of goods to customers and reduces the cost
of transportation.
2. Supply of raw material: It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted production. This factor becomes very
important if the materials are perishable and cost of transportation is very high.
General guidelines suggested by Yaseen regarding effects of raw materials on plant location
are:
When a single raw material is used without loss of weight, locate the plant at the raw
material source, at the market or at any point in between.
When weight loosing raw material is demanded, locate the plant at the raw material
source.
When raw material is universally available, locate close to the market area.
If the raw materials are processed from variety of locations, the plant may be situated
so as to minimize total transportation costs.
Nearness to raw material is important in case of industries such as sugar, cement, jute and
cotton textiles.
3. Transportation facilities: Speedy transport facilities ensure timely supply of raw materials to
the company and finished goods to the customers. The transport facility is a prerequisite for the
location of the plant. There are five basic modes of physical transportation, air, road, rail, water
and pipeline. Goods that are mainly intended for exports demand a location near to the port or
large airport. The choice of transport method and hence the location will depend on relative
costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria
for plant location.
4. Infrastructure availability: The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location. Certain types of
industries are power hungry e.g., aluminum and steel and they should be located close to the
power station or location where uninterrupted power supply is assured throughout the year.
The non-availability of power may become a survival problem for such industries. Process
industries like paper, chemical, cement, etc., require continuous. Supply of water in large
amount and good quality, and mineral content of water becomes an important factor. A waste
disposal facility for process industries is an important factor, which influences the plant
location.
5. Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during plant
location. Importing labour is usually costly and involve administrative problem. The history of
labor relations in a prospective community is to be studied. Prospective community is to be
studied. Productivity of labour is also an important factor to be considered. Prevailing wage
patterns, cost of living and industrial relation and bargaining power of the unions forms in
important considerations
6. External economies of scale: External economies of scale can be described as urbanization
and location economies of scale. It refers to advantages of a company by setting up operations
in a large city while the second one refers to the settling down among other companies of
related Industries. In the case of urbanization economies, firms derive from locating in larger
cities rather than in smaller ones in a search of having access to a large pool of labour, transport
facilities, and as well to increase their markets for selling their products and have access to a
much wider range of business services.

Location economies of scale in the manufacturing sector have evolved over time and have
mainly increased competition due to production facilities and lower production costs as a result
of lower transportation and logistical costs. This led to manufacturing districts where many
companies of related industries are located more or less in the same area. As large corporations
have realized that inventories and warehouses have become a major cost factor, they have
tried reducing inventory costs by launching Just in Time production system (the so called
Kanban System).
This high efficient production system was one main factor in the Japanese car industry for being
so successful. Just in time ensures to get spare parts from suppliers within just a few hours after
ordering. To fulfill these criteria corporations have to be located in the same area increasing
their market and service for large corporations.
7. Capital: By looking at capital as a location condition, it is important to distinguish the
physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs
as building and construction costs vary from region to region. But on the other hand buildings
can also be rented and existing plants can be expanded. Financial capital is highly mobile and
does not very much influence decisions. For example, large Multinational Corporations such as
Coca-Cola operate in many different countries and can raise capital where interest rates are
lowest and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast
growing (or not) high tech firms are concerned which usually have not many fixed assets. These
firms particularly need access to financial capital and also skilled educated employees.
Uncontrollable Factors
1. Government policy: The policies of the state governments and local bodies concerning
labour laws, building codes, safety, etc., are the factors that demand attention.
In order to have a balanced regional growth of industries, both central and state governments
in our country offer the package of incentives to entrepreneurs in particular locations. The
incentive package may be in the form of exemption from a safes tax and excise duties for a
specific period, soft loan from financial institutions, subsidy in electricity charges and
investment subsidy. Some of these incentives may tempt to locate the plant to avail these
facilities offered.
2. Climatic conditions: The geology of the area needs to be considered together with climatic
conditions (humidity, temperature). Climates greatly influence human efficiency and behavior.
Some industries require specific climatic conditions e.g., textile mill will require humidity.
3. Supporting industries and services: Now a day the manufacturing organization will not make
all the components and parts by itself and it subcontracts the work to vendors.
So, the source of supply of component parts will be the one of the factors that influences the
location. The various services like communications, banking services professional consultancy
services and other civil amenities services will play a vital role in selection of a location.
4. Community and labour attitudes: Community attitude towards their work and towards the
prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria. Facility location in specific location is not desirable
even though all factors are favoring because of labour attitude towards management, which
brings very often the strikes and lockouts.
5. Community infrastructure and amenity: All manufacturing activities require access to a
community infrastructure, most notably economic overhead capital, such as roads, railways,
port facilities, power lines and service facilities and social overhead capital like schools,

universities and hospitals. These factors are also needed to be considered by location decisions
as infrastructure is enormously expensive to build and for most manufacturing activities the
existing stock of infrastructure provides physical restrictions on location possibilities.
B) SPECIFIC LOCATIONAL FACTORS FOR MANUFACTURING ORGANIZATIONS
Dominant Factors
Factors dominating location decisions for new manufacturing plants can be broadly classified in
five groups.
1. Favorable labour climate: A favorable labour climate may be the most important factor
in location decisions for labour-intensive firms in industries such as textiles, furniture,
and consumer electronics. Labour climate includes wage rates, training requirements,
and attitudes toward work, worker productivity, and union strength. Many executives
consider weak unions oral low probability of union organizing efforts as a distinct
advantage.
2. Proximity to markets: After determining where the demand for goods and services is
greatest, management must select a location for the facility that will supply that
demand. Locating near markets is particularly important when the final goods are bulky
or heavy and outbound transportation rates are high. For example, manufacturers of
products such as plastic pipe and heavy metals all emphasize proximity to their markets.
3. Quality of life: Good schools, recreational facilities, cultural events, and an attractive
lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but
it can make the difference in location decisions.
4. Proximity to suppliers and resources: In many companies, plants supply parts to other
facilities or rely on other facilities for management and staff support. These require
frequent coordination and communication, which can become more difficult as distance
increases.
5. Utilities, taxes, and real estate costs: Other important factors that may emerge include
utility costs (telephone, energy, and water), local and state taxes, financing incentives
offered by local or state governments, relocation costs, and land costs.
Secondary Factors
There are some other factors needed to be considered, including
1. Room for expansion,
2. Construction costs,
3. Accessibility to multiple modes of transportation,
4. The cost of shuffling people and materials between plants,
5. Competition from other firms for the workforce,
6. Community attitudes
For global operations, firms are emphasizing local employee skills and education and the local
infrastructure.
SPECIFIC LOCATIONAL FACTORS FOR SERVICE ORGANISATION
Dominant Factors
The factors considered for manufacturers are also applied to service providers, with one
important addition the impact of location on sales and customer satisfaction. Customers
usually look about how close a service facility is, particularly if the process requires considerable
customer contact.
1. Proximity to Customers; Location is a key factor in determining how conveniently
customers can carry on business with a firm. For example, few people would like to go

to remotely located dry cleaner or supermarket if another is more convenient. Thus the
influence of location on revenues tends to be the dominant factor.
2. Transportation Costs and Proximity To Markets; For warehousing and distribution
operations, transportation costs and proximity to markets are extremely important.
With a warehouse nearby, many firms can hold inventory closer to the customer, thus
reducing delivery time and promoting sales.
3. Location of Competitors; One complication in estimating the sales potential at different
location is the impact of competitors. Management must not only consider the current
location of competitors but also try to anticipate their reaction to the firms new
location. Avoiding areas where competitors are already well established often pays.
However, in some industries, such as new-car sales showrooms and fast food chains,
locating near competitors is actually advantageous. The strategy is to create a critical
mass, whereby several competing firms clustered in one location attract more
customers than the total number who would shop at the same stores at scattered
locations. Recognizing this effect, some firms use a follow the leader strategy when
selecting new sites.
Secondary Factors
Retailers also must consider the
1. level of retail activity,
2. residential density,
3. traffic flow, and
4. Site visibility.
Retail activity in the area is important, as shoppers often decide on impulse to go shopping or
to eat in a restaurant. Traffic flows and visibility are important because businesses customers
arrive in cars. Visibility involves distance from the street and size of nearby buildings and signs.
High residential density ensures nighttime and weekend business when the population in the
area fits the firms competitive priorities and target market segment.
LOCATION THEORIES
ALFRED WEBERS THEORY OF THE LOCATION OF INDUSTRIES
Alfred Weber (18681958), with the publication of Theory of the Location of Industries in 1909,
put forth the first developed general theory of industrial location. His model took into account
several spatial factors for finding the optimal location and minimal cost for manufacturing
plants.
The point for locating an industry that minimizes costs of transportation and labour requires
analysis of three factors:
1. The point of optimal transportation based on the costs of distance to the material
indexthe ratio of weight to intermediate products (raw materials) to finished product.
2. The labour distortion, in which more favorable sources of lower cost of labour may
justify greater transport distances.
3. Agglomeration and degglomerating.
Agglomeration or concentration of firms in a locale occurs when there is sufficient demand for
support services for the company and labour force, including new investments in schools and
hospitals. Also supporting companies, such as facilities that build and service machines and
financial services, prefer closer contact with their customers

Degglommeration occurs when companies and services leave because of over concentration of
industries or of the wrong types of industries, or shortages of labour, capital, affordable land,
etc. Weber also examined factors leading to the diversification of an industry in the horizontal
relations between processes within the plant.
The issue of industry location is increasingly relevant to todays global markets and
transnational corporations. Focusing only on the mechanics of the Weberian model could
justify greater transport distances for cheap labour and unexploited raw materials. When
resources are exhausted or workers revolt industries move to different countries.
LOCATION MODELS
Various models are available which help to identify the ideal location. Some of the popular
models are:
A)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.
B) Weighted Factor Rating Method
In this method to merge quantitative and qualitative factors, factors are assigned weights based
on relative importance and weightage score for each site using a preference matrix is
calculated. The site with the highest weighted score is selected as the best choice.
C) 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.
Distance measures
Suppose that a new warehouse is to be located to serve Delhi. It will receive inbound shipments
from several suppliers, including one in Ghaziabad. If the new warehouse were located at
Gurgaon, what would be the distance between the two facilities? If shipments travel by truck,
the distance depends on the highway system and the specific route taken. Computer software
is available for calculating the actual mileage between any two locations in the same county.
However, for 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 suppliers 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 Rectilinear distance measures distance
between two points with a series of 90 turns as city blocks. Essentially, this distance is the sum
of the two dashed lines representing the base and side of the triangle in figure. The distance

travelled in the x-direction is the absolute value of the difference in x-coordinates. Adding this
result to the absolute value of the difference in the coordinates gives
Calculating load-distance score
Suppose that a firm planning a new location wants to select a site that minimizes the distances
that loads, particularly the larger ones, must travel to and from the site. Depending on the
industry, a load may be shipments from suppliers, between plants, or to customers, or it may
be customers or employees travelling to or from the facility. The firm seeks to minimize its load
distance, generally by choosing a location so that large loads go short distances.
To calculate a load-distance for any potential location, we use either of the distance measures
and simply multiply the loads flowing to and from the facility by the distances travelled. These
loads may be expressed as tones or number of trips per week.
D) 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 centre of gravity method takes into
account the locations of plants and markets, the volume of goods moved, and transportation
costs in arriving at the best location for a single intermediate warehouse.
The centre of gravity is defined to be the location that minimizes the weighted distance
between the warehouse and its supply and distribution points, where the distance is weighted
by the number of tones supplied or consumed. The first step in this procedure is to place the
locations on a coordinate system. The origin of the coordinate system and scale used are
arbitrary, just as long as the relative distances are correctly represented. This can be easily done
by placing a grid over an ordinary map. The centre of gravity is determined by the formula.
Break Even Analysis
Break even analysis implies that at some point in the operations, total revenue equals total
cost. Break even analysis is concerned with finding the point at which revenues and costs agree
exactly. It is called Break-even Point. The Fig. 9.3 portrays the Break Even Chart:
Breakeven point is the volume of output at which neither a profit is made nor a loss is incurred.
The Break Even Point (BEP) in units can be calculated by using the relation:
Plotting the break even chart for each location can make economic comparisons of locations.
This will be helpful in identifying the range of production volume over which location can be
selected.
LOCATIONAL ECONOMICS
An ideal location is one which results in lowest production cost and least distribution cost per
unit. These costs are influenced by a number of factors as discussed earlier. The various costs
which decide locational economy are those of land, building, equipment, labour, material, etc.
Other factors like community attitude, community facilities and housing facilities will also
influence the selection of best location. Economic analysis is carried out to decide as to which
locate best location.
OBJECTIVES OF PLANT LAYOUT
Howard J and Mark E. G (2007) defined facility layout as the physical arrangement of everything
needed for the product or service, including machines, personnel, raw materials, and finished
goods. It is an important component of a business's overall operations, both in terms of
maximizing the effectiveness of production processes and meeting employee needs and/or
desires.

The primary goal of the plant layout is to maximize the profit by arrangement of all the plant
facilities to the best advantage of total manufacturing of the product.
The objectives of plant layout are:
1. Streamline the flow of materials through the plant.
2. Facilitate the manufacturing process.
3. Maintain high turnover of in-process inventory.
4. Minimize materials handling and cost.
5. Effective utilization of men, equipment and space.
6. Make effective utilization of cubic space.
7. Flexibility of manufacturing operations and arrangements.
8. Provide for employee convenience, safety and comfort.
9. Minimize investment in equipment.
10. Minimize overall production time.
11. Maintain flexibility of arrangement and operation.
12. Facilitate the organizational structure.
PRINCIPLES OF PLANT LAYOUT
1. Principle of integration: A good layout is one that integrates men, materials, machines
and supporting services and others in order to get the optimum utilization of resources
and maximum effectiveness.
2. Principle of minimum distance: This principle is concerned with the minimum travel (or
movement) of man and materials. The facilities should be arranged such that, the total
distance travelled by the men and materials should be minimum and as far as possible
straight line movement should be preferred.
3. Principle of cubic space utilization: The good layout is one that utilizes both horizontal
and vertical space. It is not only enough if only the floor space is utilized optimally but
the third dimension, i.e., the height is also to be utilized effectively.
4. Principle of flow: A good layout is one that makes the materials to move in forward
direction towards the completion stage, i.e., there should not be any backtracking.
5. Principle of maximum flexibility: The good layout is one that can be altered without
much cost and time, i.e., future requirements should be taken into account while
designing the present layout.
6. Principle of safety, security and satisfaction: A good layout is one that gives due
consideration to workers safety and satisfaction and safeguards the plant and
machinery against fire, theft, etc.
7. Principle of minimum handling: A good layout is one that reduces the material handling
to the minimum.
FACTORS AFFECTING FACILITY LAYOUT
The final solution for a Plant Layout has to take into account a balance among the
characteristics and considerations of all factors affecting plant layout, in order to get the
maximum advantages. The factors affecting plant layout can be grouped into 8 categories:
1) Materials
The layout of the productive equipment will depend on the characteristics of the
product to be managed at the facility, as well as the different parts and materials to
work on.

2)

3)

4)

5)

6)

7)

8)

Main factors to be considered: size, shape, volume, weight, and the physical-chemical
characteristics, since they influence the manufacturing methods and storage and
material handling processes.
The sequence and order of the operations will affect plant layout as well, taking into
account the variety and quantity to produce.
Machinery
Having information about the processes, machinery, tools and necessary equipment, as
well as their use and requirements is essential to design a correct layout.
The methods and time studies to improve the processes are closely linked to the plant
layout.
Regarding machinery, we have to consider the type, total available for each type, as well
as type and quantity of tools and equipment.
Its essential as well to know about space required, shape, height, weight, quantity and
type of workers required, risks for the personnel, requirements of auxiliary services, etc.
Labor
Labor has to be organized in the production process (direct labor, supervision and
auxiliary services).
Environment considerations: employees safety, light conditions, ventilation,
temperature, noise, etc.
Process considerations: personnel qualifications, flexibility, number of workers required
at a given time as well as the type of work to be performed by them.
Material Handling
Material handling does not add value to the product; its just waste.
Objective: Minimize material handling as well as combining with other operations when
possible, eliminating unnecessary and costly movements.
Waiting time Stock
Objective: Continuous Material Flow through the facility, avoiding the cost of waiting
time and demurrages that happen when the flow stops.
On the other hand, the material waiting to flow through the facility not always
represents a cost to avoid. Stock sometimes offers benefits like production continuity,
improving customer service, allowing more economic batches, etc.
Auxiliary Services
Support the main production activities at the plant:
Related to labor: Accessibility paths, fire protection installations, supervision, safety, etc.
Related to material: quality control.
Related to machinery: maintenance and electrical and water lines.
The auxiliary services represent around 30% of the space at a facility.
The space dedicated to auxiliary services is usually considered as waste.
Its important to have efficient services to insure that their indirect costs have been
minimized.
The building
If it has been already selected, its characteristics will be a constraint at the moment of
designing the layout, which is different if the building has to be built.
Future changes
One of the main objectives of plant layout is flexibility.

Its important to forecast the future changes to avoid having an inefficient plant layout
in a short term.
Flexibility can be reached keeping the original layout as free as possible regarding fixed
characteristics, allowing the adjustment to emergencies and variations of the normal
process activities.
Possible future extensions of the facility must be taken into account, as well as the
feasibility of production during re-layout.
CLASSIFICATION OF LAYOUT
Layouts can be classified into the following five categories:
1. Process layout
2. Product layout
3. Combination layout
4. Fixed position layout
5. Group layout
1) Process Layout
Process layout is recommended for batch production. All machines performing similar type of
operations are grouped at one location in the process layout e.g., all lathes, milling machines,
etc. are grouped in the shop will be clustered in like groups.
Thus, in process layout the arrangement of facilities are grouped together according to their
functions. A typical process layout is shown in Fig. 9.5. The flow paths of material through the
facilities from one functional area to another vary from product to product. Usually the paths
are long and there will be possibility of backtracking.
Process layout is normally used when the production volume is not sufficient to justify a
product layout. Typically, job shops employ process layouts due to the variety of products
manufactured and their low production volumes.
Advantages
1. In process layout machines are better utilized and fewer machines are required.
2. Flexibility of equipment and personnel is possible in process layout.
3. Lower investment on account of comparatively less number of machines and lower cost
of general purpose machines.
4. Higher utilization of production facilities.
5. A high degree of flexibility with regards to work distribution to machineries and
workers.
6. The diversity of tasks and variety of job makes the job challenging and interesting.
7. Supervisors will become highly knowledgeable about the functions under their
department.
Limitations
1. Backtracking and long movements may occur in the handling of materials thus, reducing
material handling efficiency.
2. Material handling cannot be mechanized which adds to cost.
3. Process time is prolonged which reduce the inventory turnover and increases the inprocess inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the process) time is longer.
6. Space and capital are tied up by work-in-process.

2) Product Layout
In this type of layout, machines and auxiliary services are located according to the processing
sequence of the product. If the volume of production of one or more products is large, the
facilities can be arranged to achieve efficient flow of materials and lower cost per unit. Special
purpose machines are used which perform the required function quickly and reliably.
The product layout is selected when the volume of production of a product is high such that a
separate production line to manufacture it can be justified. In a strict product layout, machines
are not shared by different products. Therefore, the production volume must be sufficient to
achieve satisfactory utilization of the equipment.
A typical product layout is shown in Fig. 9.6.
Advantages
1. The flow of product will be smooth and logical in flow lines.
2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are possible.
6. Less space is occupied by work transit and for temporary storage.
7. Reduced material handling cost due to mechanized handling systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle capacity.
9. Manufacturing cycle is short due to uninterrupted flow of materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
Limitations
1. A breakdown of one machine in a product line may cause stoppages of machines in the
downstream of the line.
2. A change in product design may require major alterations in the layout.
3. The line output is decided by the bottleneck machine.
4. Comparatively high investment in equipments is required.
5. Lack of flexibility. A change in product may require the facility modification.
3) Fixed-position layouts
Layout in which the product or project remains stationary, and workers, materials and
equipment are moved as needed e.g. Building projects, disabled patients at hospitals
Used when the product is too large to move and remains in one place.
Features of this layout include;
a) Used when product is large.
b) Product is difficult or impossible to move, i.e. very large or fixed
c) All resources must be brought to the site.
d) Scheduling of crews and resources is a challenge.
4) Hybrid Layouts
Combines elements of both product & process layouts
Maintain some of the efficiencies of product layouts
Maintain some of the flexibility of process layouts
Example: A hospital is normally arranged on process layout (xray, theatres etc) yet within each
process different layouts are used for instance surgical theatres use fixed position layout.

OTHER
1) Office layout
Positions workers, their equipment, and spaces/offices to provide for movement of information
Design positions people, equipment, & offices for maximum information flow.
Arranged by process or product
Example: Payroll dept. is by process.
Relationship chart used.
Examples includes an Insurance company or Software company
2) Retail/service layout
Allocates shelf space and responds to customer behavior
Design maximizes product exposure to customers
Decision variables e.g. Store flow pattern and Allocation of (shelf) space to products.
3) Warehouse layout
Addresses trade-offs between space and material handling
Design balances space (cube) utilization & handling cost.
Similar to process layout i.e. Items moved between dock & various storage areas.
Optimum layout depends on variety of items stored and Number of items picked.

CAPACITY PLANNING
Design of the production system involves planning for the inputs, conversion process and
outputs of production operation. The effective management of capacity is the most important
responsibility of production management. The objective of capacity management (i.e., planning
and control of capacity) is to match the level of operations to the level of demand.
Capacity planning is to be carried out keeping in mind future growth and expansion plans,
market trends, sales forecasting, etc. It is a simple task to plan the capacity in case of stable
demand. But in practice the demand will be seldom stable. The fluctuation of demand creates
problems regarding the procurement of resources to meet the customer demand. Capacity
decisions are strategic in nature. Capacity is the rate of productive capability of a facility.
Capacity is usually expressed as volume of output per period of time.
Production managers are more concerned about the capacity for the following reasons:
Sufficient capacity is required to meet the customers demand in time.
Capacity affects the cost efficiency of operations.
Capacity affects the scheduling system.
Capacity creation requires an investment.
Capacity planning is the first step when an organization decides to produce more or new
products. An Operations Manager is supposed to identify tactics and formulate a strategy in
order to answer the basic questions with respect to capacity handling. These questions are:
1. What kind of capacity is needed?
2. How much is needed?
3. When is it needed?
Importance of Capacity Decisions
Capacity decisions impacts ability to meet future demands, affects operating costs. These
decisions often act as a major determinant of initial costs, as they involve long-term
commitment. These decisions affect competitiveness and gives ease of management. Capacity
Decisions focus on globalization as it is more complex and impacts long range planning.

1. Ability to meet future demands; Capacity essentially limits the rate of possible output.
Having capacity to satisfy demand can allow a company of taking advantage of
tremendous opportunities. An international automobile manufacturer of good repute
increased its production by working on its capacity decision after its quality product
received a lot more demand than it was originally anticipated.
2. Affects operating costs; We already know that estimated or forecasted demand differs
from actual demand, so the ideal concept of capacity matching demand is untrue.
Organizations should be willing to take a critical decision to balance the cost of over and
under capacity. Overcapacity reflects overkill of resources and under capacity shows a
weak management philosophy to make best use of an available market.
3. Acts as a major determinant of initial costs; It is typical to see that greater the capacity
of a productive unit, greater would be the cost. This does not mean I am advocating a
one to one relationship for higher capacity for production to costs; in fact larger units
tend to cost proportionately less than smaller units. E.g. Pakistan Steel Mill at Karachi is
one good example, where higher costs are misunderstood as the mills capacity is not
being fully utilized
4. Involves long-term commitment; Once long term commitment of resources has been
taken, the difficulty of reversing would cost more. Indicating a capacity increase or
decrease for an organization set up would mean additional costs.
5. Affects competitiveness; This is very critical, if a firm has an excessive capacity or can
quickly add capacity, which fact may serve as a barrier against entry by other firms.
6. Affects ease of management; Capacity increase or decrease decisions involves
management to answer the question of operating the organization as well as an
increase or decrease in the plant capacity
7. Globalization adds complexity; Capacity decision often involves making a decision in a
foreign country which requires the management to know about the political, economic
and cultural issues.
8. Impacts long range planning; Capacity decisions extend beyond 18 months and thus get
classified as long term in nature.
MEASUREMENT OF CAPACITY PLANNING
The capacity of the manufacturing unit can be expressed in number of units of output per
period. In some situations measuring capacity is more complicated when they manufacture
multiple products. In such situations, the capacity is expressed as man-hours or machine hours.
The relationship between capacity and output is shown in Fig. 5.6.
Design capacity: Designed capacity of a facility is the planned or engineered rate of output of
goods or services under normal or full scale operating conditions.
For example, the designed capacity of the cement plant is 100 TPD (Tonnes per day).
Capacity of the sugar factory is 150 tonnes of sugarcane crushing per day.
System capacity: System capacity is the maximum output of the specific product or product mix
the system of workers and machines is capable of producing as an integrated whole. System
capacity is less than design capacity or at the most equal, because of the limitation of product
mix, quality specification, breakdowns. The actual is even less because of many factors affecting
the output such as actual demand, downtime due to machine/equipment failure, unauthorized
absenteeism.
The system capacity is less than design capacity because of long range uncontrollable factors.

The actual output is still reduced because of short-term effects such as, breakdown of
equipment, inefficiency of labor. The system efficiency is expressed as ratio of actual measured
output to the system capacity.
Licensed capacity: Capacity licensed by the various regulatory agencies or government
authorities. This is the limitation on the output exercised by the government.
Installed capacity: The capacity provided at the time of installation of the plant is called
installed capacity.
Rated capacity: Capacity based on the highest production rate established by actual trials is
referred to as rated capacity.
PROCESS OF CAPACITY PLANNING
Capacity planning is concerned with defining the long-term and the short-term capacity needs
of an organization and determining how those needs will be satisfied. Capacity planning
decisions are taken based upon the consumer demand and this is merged with the human,
material and financial resources of the organization. Capacity requirements can be evaluated
from two perspectiveslong-term capacity strategies and short-term capacity strategies.
1) LONG-TERM CAPACITY STRATEGIES
Long-term capacity requirements are more difficult to determine because the future demand
and technology are uncertain. Forecasting for five or ten years into the future is more risky and
difficult. Even sometimes companys todays products may not be existing in the future. Long
range capacity requirements are dependent on marketing plans, product development and
lifecycle of the product. Long-term capacity planning is concerned with accommodating major
changes that affect overall level of the output in long-term. Marketing environmental
assessment and implementing the long-term capacity plans in a systematic manner are the
major responsibilities of management. Following parameters will affect long range capacity
decisions.
1. Multiple products: Companys produce more than one product using the same facilities
in order to increase the profit. The manufacturing of multiple products will reduce the
risk of failure. Having more than one product helps the capacity planners to do a better
job. Because products are in different stages of their life-cycles, it is easy to schedule
them to get maximum capacity utilization.
2. Phasing in capacity: In high technology industries, and in industries where technology
developments are very fast, the rate of obsolescence is high. The products should be
brought into the market quickly. The time to construct the facilities will be long and
there is no much time as the products should be introduced into the market quickly.
Here the solution is phase in capacity on modular basis. Some commitment is made for
building funds and men towards facilities over a period of 35 years. This is an effective
way of capitalizing on technological breakthrough.
3. Phasing out capacity: The outdated manufacturing facilities cause excessive plant
closures and down time. The impact of closures is not limited to only fixed costs of plant
and machinery. Thus, the phasing out here is done with humanistic way without
affecting the community. The phasing out options makes alternative arrangements for
men like shifting them to other jobs or to other locations, compensating the employees,
etc.

2) SHORT-TERM CAPACITY STRATEGIES

Managers often use forecasts of product demand to estimate the short-term workload the
facility must handle. Managers looking ahead up to 12 months, anticipate output requirements
for different products, and services. Managers then compare requirements with existing
capacity and then take decisions as to when the capacity adjustments are needed.
For short-term periods of up to one year, fundamental capacity is fixed. Major facilities will not
be changed. Many short-term adjustments for increasing or decreasing capacity are possible.
The adjustments to be required depend upon the conversion process like whether it is capital
intensive or labour intensive or whether product can be stored as inventory.
Capital intensive processes depend on physical facilities, plant and equipment. Short-term
capacity can be modified by operating these facilities more or less intensively than normal. In
labour intensive processes short-term capacity can be changed by laying off or hiring people or
by giving overtime to workers. The strategies for changing capacity also depend upon how long
the product can be stored as inventory.
The short-term capacity strategies are:
1. Inventories: Stock of finished goods during slack periods to meet the demand during
peak period.
2. Backlog: During peak periods, the willing customers are requested to wait and their
orders are fulfilled after a peak demand period.
3. Employment level (hiring or firing): Hire additional employees during peak demand
period and lay-off employees as demand decreases.
4. Employee training: Develop multi-skilled employees through training so that they can
be rotated among different jobs. The multi-skilling helps as an alternative to hiring
employees.
5. Subcontracting: During peak periods, hire the capacity of other firms temporarily to
make the component parts or products.
6. Process design: Change job contents by redesigning the job.
Strategy Formulation With respect to Capacity Planning
1. Capacity strategy for long-term demand which focus on demand patterns and takes into
account growth rate and variability
2. Facilities that focus on cost of building and operating
3. Technological changes relate to rate and direction of technology changes
4. Behavior of competitors
5. Availability of capital and other inputs
Key Decisions of Capacity Planning
It is important to identify the key decisions in order to carry out a correct capacity planning
decision. Some of the common key decisions are
1. Amount of capacity needed
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
Steps for Capacity Planning Strategy
It is important to understand how to formulate a capacity planning strategy
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives

4.
5.
6.
7.
8.

Conduct financial analysis

Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results

FORECASTING
Forecasting is an attempt to predict the future by using qualitative and quantitative methods. It
is a process of analyzing current and historical data to determine future trends
STEPS IN FORECASTING
1. Data collection: where correct and appropriate methods for instance questionnaires,
surveys e.t.c.
2. Data reduction: The next stage is data screening to rid it of unwanted information and
reducing it to the required size.
3. Model building and evaluation: A forecast model is used to process the data. A simple
or complex method or both can be used. The result should reflect a minimized error
process. This process involves fitting of the collected data into a forecasting model that
is appropriate, in that, it minimizes the forecasting error.
4. Model extrapolation: The next stage is model extrapolation when the actual forecasting
using a selected method is undertaken.
5. Forecast evaluation: The final stage is the forecast evaluation i.e. comparing forecast
values with actual historical values.
Forecasting methods:
1. Qualitative methods
2. Quantitative methods
- Causal methods
- Time series methods
QUALITATIVE FORECASTING METHODS
These are techniques which are used when data is scarce, e.g. the first introduction of a
product. The technique uses human judgments and experience to turn qualitative information
into quantitative estimates. Qualitative forecasting methods are based on educated opinions of
appropriate persons
Delphi method: This is a technique mainly used for longer term forecasting, designed to obtain
expert consensus for a particular forecast, without the problem of submitting undue pressure
to conform to a majority view. The procedure is that a panel of experts answers a sequence of
questionnaires in which the responses in one questionnaire are used to produce answers to the
next questionnaire. Thus the information available to some experts and not others is passed on
to all so that their subsequent judgments are refined as more information and expertise
become available. This is a technique mainly used for longer term forecasting, designed to
obtain expert consensus for a particular forecast, without the problem of submitting undue
pressure to conform to a majority view. The procedure is that a panel of experts answers a
sequence of questionnaires in which the responses in one questionnaire are used to produce
answers to the next questionnaire. Thus the information available to some experts and not
others is passed on to all so that their subsequent judgments are refined as more information
and expertise become available.

Market research: Market research uses opinion surveys, analysis of market data,
questionnaires and other investigation to gauge the reaction of the market to a particular
product, design, price, etc. market research is usually very accurate for the relatively short
term, but longer term forecasts based on surveys are likely to be inaccurate because peoples
opinions, attitudes and intentions tend to change. E.g. panels, questionnaires, test markets,
surveys, etc.
Product life-cycle analogy: forecasts based on life-cycles of similar products, services, or
processes
Expert judgment by management, sales force, or other knowledgeable persons
QUANTITATIVE FORECASTING METHODS
These are techniques of varying levels of statistical complexity which are based on analyzing
past data of the item to be forecasted, e.g. sales figures, stores issues, costs incurred.
TIME SERIES FORECASTING METHODS
Time series forecasting methods are based on analysis of historical data (time series: a set of
observations measured at successive times or over successive periods). They make the
assumption that past patterns in data can be used to forecast future data points.
1. Moving averages (simple moving average, weighted moving average): forecast is based on
arithmetic average of a given number of past data points
2. Exponential smoothing (single exponential smoothing, double exponential smoothing): a
type of weighted moving average that allows inclusion of trends, etc.
3. Mathematical models (trend lines, log-linear models, Fourier series, etc.): linear or nonlinear models fitted to time-series data, usually by regression methods
4. Box-Jenkins methods: autocorrelation methods used to identify underlying time series
and to fit the "best" model
COMPONENTS OF TIME SERIES DEMAND
1. Average: the mean of the observations over time
2. Trend: a gradual increase or decrease in the average over time
3. Seasonal influence: predictable short-term cycling behavior due to time of day, week,
month, season, year, etc.
4. Cyclical movement: unpredictable long-term cycling behavior due to business cycle or
product/service life cycle
5. Random error: remaining variation that cannot be explained by the other four
components

BENCHMARKING
The European Code of conduct defines benchmarking as simply about making comparisons
with other organizations and then learning the lessons that those comparisons throw up. It
can also be said to be the measure of best in class achievement.
Organizations will improve their organizational capabilities by learning from others who are
best in class.
CHARACTERISTICS OF BENCHMARKING
1) Evaluation of internal processes within an organization
2) Learning This is through getting ideas and using or applying such ideas
3) Sharing of information

4) Comparisons An organization will analyse the best in class processes and compare to
theirs, then find the gaps that exists between the two.
5) Adoption of the best in class

CLASSIFICATION OF BENCHMARKING
A) Internal benchmarking
This is the comparing of the performance in key areas in one part of the organization with the
performance in one or more parts of the same organization.
B) Competitive benchmarking
This is the comparison of the firms performance in key areas with the performance of the
firms most successful competitors.
C) Process/Activity benchmarking
This involves identifying and making comparisons of processes, activities, products and services
of other organizations in a different industry.
D) Reverse
E) Strategic
CONDITIONS NECESSARY FOR BENCHMARKING
1) Well planned and structured program
2) Collaborative approach
3) Openness and honesty Its not a spying process
4) Planning, implementation and monitoring to be done by qualified personnel
5) It should be done based on similar product processes
6) Availability of resources
7) Environmental analysis
8) Good business relationship
9) Periodically undertaken
BENEFITS OF BENCHMARKING
1) Brings about quantum leaps in business performance after carrying out a successful
benchmarking , an organization will adapt their process to be as the best in class and
thus achieve a higher level of performance within a short period
2) It acts as an effective wakeup call Through benchmarking an organization will quickly
realize what they have been doing wrong or on effectively and will act as a check for
them to improve on their processes
3) It is a practical way in which performance gaps can be bridged by learning from others
4) It encourages a culture of seeking new and fresh approaches in the way of doing things
and being receptive to new ideas
5) It provides an opportunity for the staff to learn new skills and be involved in
transformation process from the outset
6) It is a tool to make a strong case for change
7) It provides an organization to devolve and gain a competitive edge over its competitors
8) It lead to increased productivity
9) It leads to improved profitability for a firm
10) It leads to increased quality of products and service

FACTORS TO BE CONSIDERED WHEN DOING BENCHMARKING

1) The objectives that are to be achieved
2) The aspects to be reviewed
3) Time timing of the benchmarking
4) Availability of resources
5) The level of experience in benchmarking within the organization
6) Identification of the likely sources of best practices
7) Processes or steps that will be involved
BENCHMARKING PROCESS
1) Organizational analysis
This basically involves the organization evaluating its performance in terms of every
department and or processes and ranks these departments in terms of performance using the
Key performance Indicators. Then the least performing department is ranked as number 1 and
so on.
2) Planning, data collection, data analysis and making recommendations
This step involves an identification of an organization in the same industry that has been ranked
as the best performing in the firms least performing department or process. Then a study is
undertaken on this best performing department or process and involves data collection. The
data collected will then be analyzed in order for the studying firm to make recommendations
which can be implemented.
3) Implementation of recommendations/practices
From the analysis of the data collected, the firm will implement those practices that the best
ranked firm adopts.
4) Monitor and review implemented practices
The implemented practices will be monitored and reviewed periodically which leads to
continuous improvement and consequently the firm becomes a world class in such a
department or process.