Operations Management TfoAQD5ZZS

OPERATIONS MANAGEMENT
COURSE DESIGN COMMITTEE

TOC Reviewer
Content Reviewer
Mr. R Vijayan
Visiting Faculty, NMIMS Global Access School for Continuing Education.
Specialization: Operations, Supply Chain
Management
Mr. R Vijayan
Visiting Faculty, NMIMS Global Access School for Continuing Education.
Specialization: Operations, Supply Chain
Management
Author : R P Mohanty & Parag Diwan

Reviewed By : Mr. R Vijayan
Copyright:
2014 Publisher
ISBN:
978-81-8323-123-7
Address:
A-45, Naraina, Phase-I, New Delhi 110 028
Only for
NMIMS Global Access School for Continuing Education School Address
V. L. Mehta Road, Vile Parle (W), Mumbai 400 056, India.
NMIMS Global Access School for Continuing Education
iii
CHAPTER NO.
CHAPTER NAME
PAGE NO.
Basics of Operations Management
Operations Management in Manufacturing

and Service Sector
35
Location Decision
77
Plant Layout
117
Productivity and Production
177
Manufacturing Economics
211
Inventory Management
243
Inventory Models
283
Total Quality Management
317
10
Theory of Constraints
389
11
Case Studies
413
iv
C U R R I C U L U M
Basics of Operations Management: Value Driven Approach, Importance of Customers

in Operation Management, Distinction between Consumers and Customers,
Automation, The Operations Managers Role, Operations Functions and Interfaces
with other Functions
Operations Management in Manufacturing and Service Sector: Typology of

Products, Product Development Process, Product Design and Architecture, Product
Development in Services, Product Development Strategies, Types of Production
System
Location Decision: Need for a Facility Location Planning, Nature of Location Decisions,
Factors Affecting Location Decisions, Selection of Site for the Plant, Procedures for
Location Decisions, Techniques of Location Analysis, Location Decision using the
Transportation Method
Plant Layout: Facility Layout, Types of Layout, Process Layout, Product or Line
Layout, Fixed Layout, Cellular or Group Layout, New Approaches to Layout Design,
Other Service Layouts, Plant Maintenance, Maintenance Strategies, Total Productive
Maintenance
Productivity and Production: Organization and Productivity, Competitiveness

Strategy and Productivity, Computing Productivity, Production Planning and Control
(Job Scheduling), Steps of Production Planning and Control
Manufacturing Economics: Legal and Environmental Issues, Lifecycles, Economic

Valuation
Inventory Management: What is Inventory? Functions of Inventory, Bill of Materials,

Identification of Inventory Items, Inventory Records, Data Integrity, Dependency
Relationships, Inventory Costs, Inventory Control
Inventory Models: Inventory Models, Economic Batch Quantity (EBQ) or Economic

Production Quantity Model, Sensitivity Analysis, Economic Order Quantity Model
with Shortages, Fixed-time Period Models
Total Quality Management: What is Quality?, Definition of Quality, Cost of Quality,

Process Approach Total Quality Management (TQM), The Quality Management
Function, Service Quality Measurement, Eight Building Blocks of TQM, Different
Pillars of TQM, The Lean Concept, Kaizen, Six Sigma and TQM, ISO (International
Organisation for Standardisation), 5 S Methodology, Safety, Security
Theory Of Constraints: TOC Process, Five Focusing Steps, Determining the

Bottlenecks, Simplified Approach
BASICS OF OPERATIONS MANAGEMENT
CONTENTS

1.1
Introduction
1.2
Transformation Approach
1.3
Value Driven Approach
1.3.1
Determine Customer Needs
1.3.2
Develop Product Strategy
1.3.3
Secure Processes and Materials to Satisfy Demand
1.3.4
Manage Strategic Planning Processes
1.4
Importance of Customers in Operations Management
1.5 Distinction between Consumers and Customers
1.5.1 Performance
1.5.2 Quality
1.5.3 Flexibility

1.6
Automation
1.6.1
Advantages of Automation
1.6.2
Disadvantages of Automation
1.7
The Operations Managers Role
1.7.1
Structural Decisions
1.7.2
Infrastructural Decisions
1.7.3
Organisational Decisions
1.8 Operations Functions and Interfaces with other Functions
1.8.1 Operations Management Marketing Interface
1.8.2
Operations Management Finance Interface
1.8.3
Operations Management Design Interface
1.8.4 Operations Management Human Resource Interface
1.8.5 Operations Management Information Systems
1.9
Summary
1.10
Descriptive Questions
1.11
Answers and Hints
1.12
Suggested Readings for Reference
2 OPERATIONS MANAGEMENT
INTRODUCTORY CASELET
OPERATIONS IN TOYOTA
In Toyota, although JIT (Just in Time) systems control production
quantities, defects would stop the flow of parts to subsequent
operations. Such a situation is avoided by a concept called an
Autonomation System. This is a Toyota coined word that means
autonomous defects control. It is a worker controlled quality
program. There are two versions of this. In mechanical equipment,
this system is called Bakayoke by Toyota. Machines in their
factories are equipped with automatic stopping devices that detect
defective parts. As soon as a defective part is detected, the machine
comes to a stop so as to prevent flow of defective parts to the next
operation. In manual systems, such as assembly operations, the
system is called Andon. It is implemented through the worker, who
is required to press a stop button that interrupts the line, when
defective parts are detected. This prevents defective items from
being produced in any quantity. The line is restarted when the
problem has been resolved.
In addition, the Yo--don system is used to extend the concept of
teamwork on the shop floor and ensure that work at the various
work stations is balanced. The system involves teamwork between
adjacent operations. As workers at each station complete their
work, they press a button. At the end of the cycle time, a red light
lights up at the work stations where the work is not completed.
The entire line stops and normally others nearby pitch in to help
workers having difficulty. The line starts again when all the red
lights are off again.
BASICS OF OPERATIONS MANAGEMENT 3
After studying this chapter, you should be able to:

Define different approaches of operations management

Know the functions and responsibilities of operational
manager

Know the relating production management with other
management functions
Make difference between services and manufacturing
1.1 INTRODUCTION
Operations may be defined as a conversion (transformation) process
that yields an intangible output (services), a deed, a performance, an
effort. For example, Consider Tata Consultancy Services Ltd. Bombay
which provides technical, financial and other business services such
as computer software feasibility reports etc.
Manufacturing or Service Operation is an integrated extension of
corporate policy to the extent that the total enterprise exists and
is organised as a system of transformation (value adding) activities
to satisfy pluralistic needs and expectations of stakeholders. The
objective of the operation system, then, is the means to a strategic end.
If one can acknowledge this viewpoint, then the entire organisation
must be operation-oriented, because it is the engine of development.
(Mohanty, 1995)
Production is the process of transforming a variety of resources
into goods or services. Transformation is not merely conversion of
inputs into outputs, but it is conversion through a significant value
addition to inputs by a process to create utilities to the end users.
Resources include materials, machines, human time, energy and so
on. The output of the production process may be manufactured goods
such as automobiles and computers, or services such as healthcare
and financial transactions. The term operation describes the whole
set of activities associated with the production of goods and services.
Operation may involve manufacturing, in which goods are physically
created from material inputs; supply, in which the ownership or
possession of goods is changed; or service, in which the principal
characteristic is the treatment or accommodation of something for
someone.
For the purpose of understanding, the value chain of a Cement
Manufacturing Unit is presented in Figure 1.1.
Figure 1.1: The Value Chain of a Cement Manufacturing Unit

Characteristics of Production/Operations Function: The types of
activities involved in production/operations include organizing work,
selecting processes, arranging layouts, locating facilities, designing
jobs, measuring performance, controlling quality, scheduling work,
managing inventory and planning production. Operations managers
deal with the people, technology, and deadlines. These managers
need good technical, conceptual, and behavioural skills.
Production as a function: As shown in Figure 1.2 the three

primary functions of a firm are: (a) Marketing (b) Finance
(c) Production. Other areas, such as personnel, engineering,
accounting and purchasing support the three main functions.
PRODUCTION
MARKETING
FINANCE
Figure 1.2: Production as a basic Function

In simplified form, marketing establishes the demand for goods

or services, finance provides the capital, and equipment and
production actually makes the goods or provide services. Thus
production is viewed as a function.
Production as the Technical Core: Figure 1.3 views production

from other perspective, as the technical core of an organization.
In this scenario, production is the central function of an
organization.
The organization exists to provide goods and services. All other

functions exist to support the operations function. Operations
interact with marketing to receive estimates of customer demand

and customer feedback on problems. Finance for capital investments,
budgets and purchasing to order needed materials for production.
PURCHASING
PRODUCTION
MARKETING
LABOUR FORCE
FINANCE
PERSONNEL
SUPPLIERS
CAPITAL MARKET
CUSTOMERS
Figure 1.3: Production as the Technical Core
1.2 TRANSFORMATION APPROACH

The traditional definition considers Operations Management to be a
transformation system. According to this view:
Operations management is the business function that manages that
part of a business that transforms raw materials and human inputs
into goods and services of higher value.
According to this definition, Operations Management transforms
inputs into outputs of goods or services. For example, a manufacturing
plant takes raw materials in the form of parts, components, and
subassemblies and transforms them into a manufactured product
such as an automobile, by the use of resources such as labour, capital,
and energy.
The basic characteristics of the transformation approach are described
as follows:
Mass production based on scale economics rather characteristic

of industrial activities and societies
Standardised products (goods or services) with minimum

changes in design or product over time - Attention mostly focused
on improvements of processes and technologies
Big organisations
Inflexible technologies and production

machines
Plants programmed from the summit
Inflexible production programs with only volume adjustments
with single purpose
Search for productivity in man-machine relations
Strict separation between direct and indirect labour product and

production design must come first
Quality control at the end of the chain
Price based competition
Primordially of physical and tangible capital (hardware)
Equipments of electromechanical type
High temperature production
Energy consuming productions
Direct contact with materials and components, mechanical

transfer handling and the management of stocks as a main
function
Dense geographical concentration of functions and production

units
Centrality of power relations between capital and labour

Material Flow
Outputs
Inputs
Process
Tangible
Intangible
Goods
Information Flow
Services
Quality Assessment
Figure 1.4: Operations Management as a

Transformation Process
Operations Management, seen in this way, is the science of optimising
transformation processes, during which sets of inputs are converted
efficiently and economically into outputs, with the objective of
improving profitability of the organisation as seen in Figure 1.4. We
will discuss the components of Operations Management in the value
driven approach. As the value driven approach is broader based, this
traditional view becomes a subset of the larger landscape.
Explain the important issues with transformation. Select at least

two organisations they are familiar with. One of these organisations
should be involved in providing a tangible product and the other
an intangible product. They should draw out the transformation
process to the inputs and show what the outputs are, and what is
involved in the transformation process. How is value added?
Choose the appropriate answer:

1.
According

to transformational
management i s the process of
approach
(a) Transferring inputs into outputs
(b) Managing inputs and outputs
(c) Management of all the operational activities
(d) None of the above
operational
2. Which of the following are the primary function of a firm?

(a) Finance
(b) Marketing
(c) Production
(d) All the above
The management of operations includes primary functions such as

planning, executing and controlling of the production process and
the coordination with the interfaces with supporting functions in
the organisation.
1.3 VALUE DRIVEN APPROACH

The second approach is a value driven approach to operations
management. The value driven approach starts by recognising that
a business is a set of processes, each of which has inputs, outputs,
and structure. Each process has a job to do and each process should
be measured on how effective it is in achieving the desired outcomes.
The basic features of value driven approach are described as follows:
Flexible outputs based on variety and economics of range typical

of a permanently new economy
Attention to quality, and customers-complex customised and

tailor-made, multi-optional products or services - continuous
search for variations, variety and innovations in shape and
content
Small and medium-sized organisations - redevelopment of large

enterprises in small and medium enterprises
Multipurpose equipments and reprogrammable machines or

flexible workshops equipped with a full range of machinery
Programming customer-supplier transactions between workers

by means of kanban techniques
Qualitative flexibility in production schedules planned for batch

production
Search for global productivity of the system through information

technologies and networking
Better integration between intellectual and manual labour and

between functions by form of market or customer-supplier
relations within and outside the plant
On-line and total quality control
Competition based on quality and variety
Predominance of human capital (soft-and orgware)
Micro and mecano-electronic equipments and cybernetic

mechanisms
Low temperature production, as in microchemistry and

microbiology, for example
Economic use of energy and growing use of weak current
Remote operation and control-automated transmission, production

with zero stock, just in time and without delivery delays through
the management of information and product flows
Specially dispensed units and plants thanks to dense networks
Total customer responsiveness
The Core Process Model as shown in Table 1.1 is a simple model,

based on the four core business processes describing the functioning
of a business organisation. There can be many more core processes
depending upon the business and how it is structured.
TABLE 1.1: CORE PROCESS MODEL

SUPPORTING BUSINESS PROCESSES
Determine Monitor
Market
Measure
Customer Competitive Products &
Customer
Needs
Environment Provide After- Satisfaction
Sales Service
CORE PROCESSES
Understand
Customers,
Market
Segments
& the
Competitive
Environment
Build
Develop New
and Test
Products
Prototypes or Product
Improvements
Develop
Product
Strategy
Evaluate
Product
Concept
Secure
Processes
&
Materials
to Satisfy
Demand
Manage
Strategic
Planning
Processes
Operations
Planning
& Control
Processes
Create New
Products
Design or
Product
Improvements
Manage
Manage
Product
Business
Transformation Logistics
Processes
Manage
Human
Resources
Manage
Information
Systems
Manage
Financial
Resources
Manage the
Supply Chain
Process
Enterprise
Management
& Business
Support
Activities
The four core business processes in this model are described below:
1.3.1 DETERMINE CUSTOMER NEEDS
It is critical for the organisation to know the customers needs in order
to support the firms demand, its forecasting needs and its product
design and development activities. In order to do this it is necessary
to monitor the competitive environment. The supporting business
processes are involved in marketing products and providing aftersales service. There has to be a measure of customer satisfaction. There
is also a requirement to understand the specific needs of different
market segments and the nature of the competitive environment. For
fast-pace firms, Customer Relations Management (CRM) has become
important. Many software firms in India are developing applications
that are designed to keep them in a position to understand what their
customers want and in some cases, how it can enhance the marketing
capabilities of its sales force.
1.3.2 DEVELOP PRODUCT STRATEGY
This involves marketing, operations and engineering activities in
order to create products that customers desire. This requires an
ability to evaluate product concepts so that there is support to design
new products or introduce product improvements. The slower the
pace the more is the focus on customers for finding better ways
to incrementally improve products that already exist. But as the
pace of business increases, the greater is the need to be aware of
the competitive challenges that new technologies and competitors
introduce into the marketplace.
The organisation has to develop the ability to understand the potential
customer and the pleasing/displeasing consequences associated with
changes. An aggressive competitive market exploits the limitations
of an organisation for it has to possess the ability to design, build and
test prototypes, and develop new products or product improvements
before competition. The risk is that if the firm does not replace its
existing products in time, some other firm will.
1.3.3 SECURE PROCESSES AND MATERIALS TO SATISFY
DEMAND
Management activities involve selection of raw materials from
vendors and the ultimate delivering and servicing of the product for
the customer. These activities include operations planning and control
processes and managing the product transformation processes. In
addition, the business logistics and the supply chain process play a
critical part and have to be managed effectively. In todays world,
supply chain players are widely distributed and will seldom lie within
the firms boundaries hence making the need to manage the flow of
materials effectively more challenging.
1.3.4 MANAGE STRATEGIC PLANNING PROCESSES

Strategic planning and decision making is broad in scope and
involves corporate policies and resource-acquisition decisions, such
as choosing product lines, and distribution and marketing channels;
determining required resources; locating and sizing new plants and
warehouses; designing manufacturing processes; and so on. Strategic
planning involves a long time horizon such as 35 years, and a high
degree of uncertainty and risk.
Support business processes are essential to all organisations.
The strategic planning process defines the firms as well as its own
Operations Management function. It also specifies what it must do
to achieve its corporate goals. The human resource management
function creates an organisation design that is suited to the
competitive environment and provides and/or enhances the human
capital needed by other functions to effectively carry out their tasks.
The Management Information Systems groups provide timely
information that is needed to assess the competitive environment
and the performance of its business functions. The accounting and
finance groups monitor the use of financial assets and take steps to
assure that the financial base of the organisation is both adequate and
efficiently utilised. There has to be an adequate interface between all
these functions.
Operations Management activities are mostly involved in the second
and third core processes. Operations Management, as a value creating
activity, contributes to the customer satisfaction process by assisting
to design and develop products that possess the capability to satisfy
the customers functional need with the desired level of design, quality
and cost. Operations Management is defined as the following:
Operations Management constitutes all of the activities that an
organisation conducts in order to deliver value to its customers. Its
the set of processes that transforms either materials or information
into a product or service.
The operations function contributes to the value delivery to
customers by significant improvements in the cost, quality, timeliness,
and availability of products and services. Organisations can use
effective Operations Management either to show improvements in
performance and quality, coupled with lower prices in real value, or
to help raise their bottom-line.
The idea ofroleis important. As individuals we all play roles in our
everyday life. Sometimes we arecolleaguesof other people on our
course. At other times we arefriendsof the people we grew up with.
At other times thechildrenof our parents. Each is a different role.
The important point is that we behave differently depending on which
role we are in at any time. It is the same for the operations function.
Depending on its role, it will behave differently. The chapter identifies
three roles for operations management. They are not exclusive in the
sense that an operation has to be one of them, but they all contribute
to making up the way an operation behaves. The three roles are:
The implementer of business strategy.
The supporter of business strategy.
The driver of business strategy.
Two things are important in understanding these roles. First, they are
stated in order of difficulty and in order of importance. Implementing
business strategy is a very basic responsibility for operations,
supporting business strategy is what most operations should aspire
to, but driving business strategy is only possible if the operation really
does have unique capabilities. Second, they are cumulative in the
sense that an operation cannot be a supporter of business strategy
unless it has skills as an implementer, and cannot drive business
strategy unless it has the skills to support the business strategy.

3. Which is not a part of the process of value chain approach?

(a) Determine customer needs
(b) Determine customer values
(c) Develop product strategies
(d) Both (a) and (b)
Fill in the blanks:

4. ........................ is the application of scientific methods to improve
the effectiveness of operations, decisions and management, by
means, such as analysing data, creating mathematical models
and proposing innovative approaches.
5.
........................ constitutes all of the activities that an organisation

conducts in order to deliver value to its customers. Its the set
of processes that transforms either materials or information
into a product or service.
The role of the operations function means something beyond

its obvious responsibilities and tasks it means the underlying
rationale of the function, the very reason that the function exists.
Take a hospital, say Apollo Hospital, and explain the conversions

taking place. What are the hospitals overall objectives of the
operations systems and how does the hospital achieve it?
1.4
IMPORTANCE OF CUSTOMERS IN
Customers are the requestors/receivers/payers of the service/

output of the process. Customers can include clients, their families
and friends, referral sources, providers, payers, community, and other
staff. Customers can be internal (staff, programs) to the organization
or external (clients, their families, contractors, etc.) and both are key
to the success of organizational change/improvement. Generally,
organizational staff are viewed as providers/suppliers and clients as
customers but both can be either at different steps in a process.
The idea of a hierarchy of operations processes within an organisation
is introduced in the text and has had a significant effect on management
thinking over the last few years. It has highlighted the issue of how
different processes or micro-operations relate to each other within
an organisation. This is sometimes called the internal customer
concept. It has also helped to underpin the idea of business process
reengineering which became fashionable in many businesses during
the 1990s. One can consider the internal customer concept and business
process reengineering as being alternative approaches to solving the
same problem. This problem is that within any organisation different
sections or departments find it difficult to interface with each other.
This may be because they are too busy with their own tasks to worry
about other parts of the organisation, or it may be that they have (or
regard themselves as having) different interests and objectives.
The internal customer conceptadvocates that each micro-operation
should identify its internal customers and internal suppliers and
formally talk to them about what they need and what they can offer.
In other words, to treat internal suppliers and customers as if they
were independent external organisations.
Business process reengineeringis more radical and advocates that all
the resources and activities necessary to do everything required for an
end-to-end business process should be put within the same unit or
department. In other words, the organisation should be reconfigured
around these key processes.
Fill in the blanks:

6.
Customers can be ............................... like staff, programs to

the organization or ........................ like clients, their families,
contractors, etc.
7.
One can consider the internal customer concept and business

process ......................... as being alternative approaches to
solving the same problem.
Visit any service-based industry and find out its internal and
external customers. Discuss the importance of those customers
with the Manager in the company and prepare a short report.
1.5
DISTINCTION BETWEEN CONSUMERS

AND CUSTOMERS
While many people use the terms customer and consumer

interchangeably, distinct differences do exist in the meaning
of the two words. Understanding the distinction is crucial for
businesses as it affects how they both purchase goods they use in
their day-to-day activities and market the products that they sell.
This distinction between consumers and customers is important
for operations managers. The concept of internal customer has
profoundly changed Operations Management thinking. It helps
employees understand how they fit into the system and how their work
contributes to the final product, and it enables managers to view the
organisation as a system. The needs of each group are quite different
and lead to different operations capabilities that must be met.
The following distinction should help:
A customer purchases and pays for a product
or service. The customer is an organization or
person that purchases a product but is not the
end user of the goods. For example, assume
a customer is the purchasing department
of an organization. Each department of the
organization places an order for goods or
services that it needs, such as paper for the
administrative department. The purchasing
department finds a manufacturer that sells the product and orders
the product. The purchasing department is the customer but the
administrative department is the consumer.
A consumer is the ultimate user of the product or service; the
consumer may not have paid for the product or service. The consumer
is the end user of a product and actually uses the product. An example
of a consumer is the patron of a grocery store. The patron buys
groceries from the store to eat the food. The grocery store bought
those food items from farmers, manufacturers and other vendors, so
that it could sell these items to consumers. The grocery store is the
customer of the farmers, and the patrons are the consumers of the
grocery store.
Consider the following example:
A food manufacturing business makes own-label, Italian ready meals
for the major supermarkets. So far as the business is concerned, the
customer is the supermarket to whom it supplies meals. The consumer
is the individual who eats the meal. In reality we need to understand

the needs and wants of both the customer and the consumer.
We need to develop a strong understanding of the needs of the
supermarkets in terms of their requirements for ready meals (e.g.
packaging, recipes, price & delivery). We also need to understand
(perhaps with the help of the supermarkets) the needs and wants of
the consumer. How are tastes changing? Are consumers happy with
the standard/taste of the product?
The customer is an organization or person that purchases a product

but is not the end user of the goods.
The consumer is the end user of a product and actually uses the
product.
We also need to understand the terms Performance, Quality and
Flexibility.
1.5.1 PERFORMANCE
Performance is defined by the cumulative benefits that will result if
the product is purchased and used as intended.
When a product or service is purchased; the buyer has an intended
use for it. Functionality is a measure of the extent the product, when
properly used, is able to accomplish the intended feat.
1.5.2 QUALITY
Quality is broadly defined as the extent to which a product or service
is delivered in consistence with what the customer has been lead to
expect.
An organisations speed is often measured in two dimensions:
How long a customer must wait for the product once it is

requested, and
How long its takes to design, develop, and introduce new

products.
Timeliness is the ability of a firm to get the right product to targeted

customers at the most desirable time.
1.5.3 FLEXIBILITY
Flexibility is the input to the value equation relating to the ability

of the Operations Management system to give the customer the
desired product.
Operations managers evaluate cost, measured in money terms, for its

contributions in two important roles:
Enhancing value, and
Serving as a performance metric for evaluating business

processes.
The element in the value equation that is of primary importance is

often called the order winner. Order winners are attributes that reflect
a customers preference and dominate the other elements of value.
Excellent food offered by a restaurant may be an order winner. Over
time, order winners often evolve into order qualifiers, as the value
provided by competition improves.
For example, Sonys Trinitron picture tube that was an order winner
became an order qualifier as the quality of competition improved.
Having a high quality picture tube was no longer enough for Sony to
win the customer.
Sometimes a value equation component has a trait that can make the
consumer decide in not purchasing the product. Such traits are called
order losers. Human rights activists dissuade people from buying
products made through child labour. In this case products identified
as being produced by children became order losers.
Fill in the blanks:

8.
The value of a .................... is the ratio of performance divided

by cost.
9. .................... is defined by the cumulative benefits that will

result if the product is purchased and used as intended.
10. .................... is the ability of a firm to get the right product to
targeted customers at the most desirable time.
11. .................... is defined as the extent to which a product or
service is delivered in consistence with what the customer has
been lead to expect.
12. .................... is the input to the value equation relating to the
ability of the Operations Management system to give the
customer the desired product.
13. A .................... is the ultimate user of the product or service; the
consumer may not have paid for the product or service.
Visit any consumer product company like Hindustan Levers and

evaluate the value model of that company. Determine whether they
give more importance to customers or consumers?
1.6 AUTOMATION
Automation is the self-controlling operation of machinery that

reduces or dispenses with human communication or control when
used in normal conditions. In other words, it is the act or process
of converting the controlling of a machine or device to a more
automatic system, such as computer or electronic controls.
Automation is utilized in many processes of todays manufacturing
sector. Many factories that are creating components and parts for
a variety of industries have some type of the process automated.
Robots are often used in more hazardous applications or in extremely
repetitive actions that can be ergonomically problematic for human
workers.
While automation has become a resource for remaining competitive
in the manufacturing industry, there are definitely some factors to
be considered in order to be competitive and to get a return on the
investment. Depending on the operations, automation may or may not
be a good fit. If it is a small operation with low production quantities,
the initial investment of purchasing an automated machine would not
be economical. On the other hand, if the operation has a larger facility
with many employees on the shop floor two fabricate medium to large
runs, automated machines would be better suited.
In the past 20 years, technology has changed the nature of
manufacturing. In the old days, manufacturing and fabrication were
all done by hand by people. Now that computers and technology have
penetrated the industry, automation has become the competitive
advantage in todays manufacturing world. Although automation
is constantly setting the standards for the industry and has many
advantages, there are also some negative aspects about automation.
1.6.1 ADVANTAGES OF AUTOMATION
Automation has the following advantages:
Reduction in production time: Having a machine that is

automated definitely speeds up the production time since no
thinking is needed by the machine; there is better repeatability,
and less human error. Many automated systems can work long
hours, into the night and on weekends, which provides an overall
increase in productivity. This increase in productivity, although
beneficial, may be slowed by other non-automated factors,
such as product finishing, final packaging, and shipping. A cost
comparison of skilled workers versus an automated system with
all the factors from start to finish is the best analysis to determine
if increased productivity can offset any human staff-related costs.
Consistency, reliability, and accuracy: Automated equipment

and robotics can manufacture and continually repeat consistent
final product results. The addition of automation eliminates the

common issue of human error that may detract from the overall
quality of production. Manufacturing processes can be carefully
regulated and manipulated in order to maintain overall quality.
This is a key advantage of automated equipmentthe human
error element is greatly reduced providing assurance that parts
and components will be of consistent high quality.
Less human error: No one is perfect, and we are all prone to
making mistakes. A machine that performs repeated tasks is less
likely to make mistakes than an employee.
Less employee costs: By adding automated machines to an
operation, means less employees are needed to get the job done.
With having fewer employees, there are numerous costs that
are diminished or reduced such as payroll, benefits, sick days,
etc. When a manufacturing company adds some element of
automation into its production or fabrication of products, the
competitive advantage is increased for the company. Through
automation, the company will be able to reduce costs through
elimination of staff and an increase in productivity (many
robots can run 24/7). However, it is important to note that many
automated systems and equipment are expensive, so these
additional costs will have to be compared to the overall reduction
of cost in the long run.
Increased safety: Having automated machines means having
fewer employees who perform tasks that can be dangerous and
prone to injury, which can make the work environment safer. The
use of robotics and automated equipment is an effective way to
prevent worker injuries. Many of todays automated production
devices keep workers a safe distance from the more hazardous
areas of work. Human staff is still needed to operate and program
the equipment, but the actual hands-on work is left to the
machine, protecting the health and safety of staff. In addition,
robots are able to work in extreme environments such as very
hot or cold areas of a manufacturing plant. This allows workers
to be free of additional harm from elements harmful to humans.
High volume production: Automation is a valuable resource
when a manufacturer is producing high volumes of components
or parts. However, it isnt very useful for lower volume production,
as the expense for tooling and operating the machines can often
outweigh the overall cost of the finished product.
1.6.2 DISADVANTAGES OF AUTOMATION

Automation has the following disadvantages:
Less versatility: By having a machine that can perform a certain
task limits to the flexibility and variety of tasks that an employee
could do.
More pollution: Different types of machines operate using motor
which may require gases or chemicals in order to operate. This
can cause an increase in pollution in the workplace.
Large initial investment: Automation involves higher capital

outlay, and the consequential problems of the cost of capital,
depreciation power consumption, etc. Automation is therefore,
a luxury for small firms. Automated machines can be one of
the most costly operating costs for a company. With automated
machines running anywhere between thousands and millions of
dollars depending on the type and degree of automation.
Increase in unemployment: By increasing the amount of
automation, there are less employees required causing high
unemployment rates. In spite of assurances to the contrary,
automation does not result in worker replacement, and often
in management replacement as well. Workers in unions oppose
the move for automation. The LIC installed five computers
successfully. The Trade Unions installed one of the computers
in the Bombay office. The Trade Unions also saw to it that no
LIC employee was retrenched because of the automation. They
are still unhappy due to the installment of the Computer in the
Bombay office, due to which, future employee opportunities have
been closed in that office.
Benefit of employee suggestion lost: Labor being displaced,
the benefit of suggestions from employees is lost. This is an
irreparable loss to the management.
Unpredictable costs: There can be several unpredictable costs
that may exceed the actual cost saved by the automation itself.
Some of these costs could include research and development costs
of automating a process, preventative maintenance costs, and
the cost of training employees to operate automated machines.
Slack Season would be disastrous: Automation results in
increased production if increased production does not find a
ready market, the prices will fall and the result will be disastrous.
The management should, therefore, be sensitive to the demands.
Automation based on a hopeful market expansion is a direct road
to bankruptcy.
Fill in the blank:

14. ....................... is the act or process of converting the controlling
of a machine or device to a more automatic system, such as
computer or electronic controls.

15. Which of the following is not the advantage of Automation?

(a) Reduction in production time
(b) Consistency, Reliability and Accuracy
(c) Increased safety
(d) Large initial investment
Automation has allowed for companies to mass produce products

at outstanding speeds and with great repeatability and quality.
Automation has become a determining factor in whether or not a
company will remain competitive within the manufacturing industry.
Visit the manufacturing unit of Siemens. Study the automation

process being used there. Discuss its advantages and disadvantages
with the floor manager over there. Prepare a short report on that.
1.7 THE OPERATIONS MANAGERS ROLE

Appropriate technology and worker skills are the essential
components in the effective operation of a production system. However,
in this regard, a strong argument can be made that, it is the operations
managers who have the greatest influence on productivity and
quality. Workers are different, but operations management standards
are the same. Managers of operations perform various activities.
A plant manager, for example, may oversee several departments, such
as production control, industrial engineering and quality control.
The problems a plant manager faces may include reducing production
bottlenecks, controlling costs, and eliminating lost time accidents.
As another example, a hospital administrator also needs to manage
many departments, such as Operation Theatre (OT), X-ray and
outpatient treatment. Such an administrator faces problems of
maintaining an adequate staff and ensuring high-quality services. In
both the cases, the manager is concerned with planning, organising,
directing, and controlling productive operations in order to meet the
objectives of the organisation. These are accomplished by managing
work (the technical side of P/OM) and by managing people (the
behavioural side of P/OM). Both are equally important.
The four basic functions of management, i.e. planning, organising,
directing and controlling are performed by managers at all levels of
an organisation. Planning provides the basis for all future managerial
activities by establishing the guidelines and actions that must be
taken in order to meet the stated objectives, as well as setting timing
of these actions. Organising is the process of bringing together the
resources personnel, materials, equipment, and capital necessary
to perform planned activities. Directing is the process of turning
plans into realities by assigning specific tasks and responsibilities to
employees, motivating them, and coordinating their efforts. However,
since planning, organising and directing are not absolutely effective,
controlling is necessary. Controlling includes the evaluation of
performance and the application of corrective measures, as necessary.
Table 1.2 shows the relative emphasis of planning, organising,
directing, and controlling at three major levels of management: top,
middle and supervisory.
TABLE 1.2: INVOLVEMENT IN MANAGEMENT

ACTIVITIES
Level of
Management
Activity
Top
Planning
High
Organising Directing Controlling

Low
Low
Moderate
Middle
Moderate
High
Moderate Moderate
Supervisory
Low
Low
High
High
Top management is responsible for setting the goals of an organisation,

such as achieving profit, growth, competitive position or good public
relations. Top management makes decisions that affect the longterm future of the organisation. The outcome of such decisions
might be the introduction of a new product line or the construction
of a new manufacturing facility. The timing and implementation of
these decisions are important for the achievement of organisational
objectives. Thus, effective planning becomes critical at this level of
management. Relatively, a little organising and directing occur at this
level, although a moderate level of control is necessary in order to
ensure that plans are carried out.
The decisions and plans made by top management specify the
goals that middle managers, such as the production manager, must
accomplish, as well as the constraints within which they must operate.
For instance, in introducing a new product, production managers must
acquire the materials and machines to produce the product. Plans
at the middle management level involve a shorter time frame, and
more direction is required because a larger number of subordinates
frequently report to middle managers.
All good managers perform the basic functions of management
process, applied to production/operations functions. These can be
summed up as follows:
Planning: The operations manager defines the objectives for

the operations subsystems of the organization, and the policies,
programmes and procedures for achieving the objectives. It
involves product planning, facilities designing, and using the
conversion process. Planning includes activities which establish
a course of action and guide future decision making.
Organising: It includes activities that establish a structure of tasks

and authority. Operations managers establish a structure of roles
and the flow of information within the operations subsystems.
They determine the activities required to achieve the operations
subsystems goals and assign authority and responsibility for
carrying them out.
Staffing: Managers determine labour requirements and the

best way to recruit, train, retain, and terminate the personnel
necessary for achieving objectives.
Leading: Managers lead, supervise, and motivate personnel to

achieve objectives.
Controlling: Managers develop the standards and communication

networks necessary to ensure that the organization, staffing,
and direction are pursuing appropriate plans and achieving
objectives.
The departments mission can be segregated into three different

decision areas. These are as follows:
Structural decisions,
Infrastructural decisions, and
Organisational decisions.
1.7.1 STRUCTURAL DECISIONS

Structural decisions refer to the hardware of organisations; they are
long-term decisions that require substantial capital investment and
are difficult to reverse once they are in place. Examples of structural
decisions are the number and size of facilities and the type of
processing equipment. It also involves stategical planning. Strategic
planning and decision making is broad in scope and involves corporate
policies and resource-acquisition decisions, such as choosing product
lines, and distribution and marketing channels; determining required
resources; locating and sizing new plants and warehouses; designing
manufacturing processes; and so on. Strategic planning involves a
long time horizon such as 35 years, and a high degree of uncertainty
and risk.
1.7.2 INFRASTRUCTURAL DECISIONS
Infrastructural decisions are the software of operations. These are
typically tactical in nature and facilitate the management of day-today issues. An example is machine loading and the changing of dies
in a forging unit. Table 1.3 given below describes the decision areas
in detail.
TABLE 1.3: DECISION AREAS OF OPERATIONS

MANAGERS
Category
Structure
Decision
Area
Products
(What?)
Typical
Questions
Do we produce
standard or
custom products
and services?
Contemporary
Challenges
How do we design
products and
services that are
easy to make?
Do we make to
order or make to
stock?
How can we
coordinate design
teams that are
scattered across
the world?
Contd...
Processes
What kind of
How do we
equipment should exploit new IT
(How?)
we use?
developments
such as the
How much of the
internet for rapid
process should be
and flexible
automated?
response to
How should
customer needs?
processes be
configured?
Capacity
How much is
How do we use
needed?
flexible capacity
(How much?)
options (such
What type?
as temporary
When should
workers) and
capacity be
economies
increased or
of scope for
decreased?
competitive
advantage?
Facilities
Where are they
How do we
located?
manage and
(Where?)
exploit global
What products
opportunities for
should be
locating facilities?
produced in
each?
Infrastructure Quality
How do we
Management prevent defects
and errors?
(How to
improve?)
How do we
improve products
and processes?
Schedule
Should
Management scheduling be
centralised or
(When?)
decentralised?
How do we
prioritise work
and/or customer
orders?
How can we
better learn from
customers?
How can we
improve quality
to world-class
standards?
How do we use
available cost
and financial
information in
scheduling?
How do we
integrate
enterprise
resource planning
systems into
operations?
Contd...
People and
organisation
Inventory
What products
and Supply should we
Chain
outsource?
Management
How many
(How to
suppliers should
acquire and we use?
deliver?)
Workforce
What skill level
and
and training
Productivity should employees
have?
(Who?)
What types of
compensation
and reward
systems are best?
Organisation Is a hierarchical
or team-based
(What
work structure
structure?)
better?
Should we train
in-house or
outsource?
How do we
manage the
supply chain for
increased value to
the customer?
What effect does
the internet have?
How can
we develop
truly highperformance
work systems?
How can we
better align work
systems with
long-range plans
and objectives?
What structures
are best suited
for operations
in different
countries?
Should we
flatten the
organisation?
How to respond How can we
to customers
develop a learning
special needs?
organisation
in a globalised
What information
environment?
do we need
to effectively
How can we
manage growth? best look at the
organisation
across functional
boundaries?
Strategy
(How to
manage
growth?)
1.7.3 ORGANISATIONAL DECISIONS

The departmental mission will to a large extent depend on the nature
of the product whether the organisation is dealing with goods, services
or contracts. Whatever the product, the departments mission is
judged on three major components:
Cost minimisation,
Delivery reliability, and
Product quality.
Equally if not more important, is the ability to manage humans in a way

that is mutually satisfying to the subordinates, peers, and superiors and
this involves getting the necessary things done. Effective operations
managers must show commitment commitment both to their
employees and to the organisations objectives. It also involves Tactical
planning. Tactical planning and decision making is narrower in scope
and involves resource allocation and utilisation. In manufacturing
organisations, tactical planning normally occurs at the plant-level,
involves a medium-term time horizon, and a moderate degree of
uncertainty and risk. Examples of tactical planning involve the use
of capital-intensive equipment to improve production throughput,
evaluating resource capacity and demand changes, making 6-month
or 1-year production plans, and determining workforce levels.
Workers expect good managers to be fair and impartial. In an era of
downsizing and disintermediation, workers would like to feel that
their manager is an effective advocate when it comes to advancing or
protecting their jobs.
New United Motor Manufacturing (NUMMI)
Established in 1984 as a joint venture between General Motors Corp.
and Toyota, New United Motor Manufacturing (NUMMI) took over
the former General Motors plant. The plant, on 211 acres east of
Interstate 880 and south of Fremont Boulevard, occupies about 5.3
million square feet. This was a 5050 joint venture that produced
Toyota Corollas and Chevrolet Novas.
Toyotas secrets arent secret. Its production system, which stresses
eliminating all wasted material and labour, has been written about in
excruciating detail. NUMMI is a proof of this. The plant, which had
operated from 1963 to 1981, had been closed down as it was plagued
by labour disputes. Toyota turned the plant around extra quick. They
hired the best of the former workers and created teams of multi-skilled
workers. Absenteeism dropped to less than 2 percent compared to
20 percent under the old management. Productivity at the plant rose
to twice the average level at other GM plants. The Toyota managers
achieved this improvement by focusing on five areas:
New products were designed for easy assembly and easy

modification.
Production layout was organised by product needs.
Production flow was managed with little or no inventory.
Workers shared responsibility for quality.
Employees were encouraged to participate in nearly all decisions.
The system improvements did not come from technology investment;

it was transformed by how the managers were able to integrate the
different elements into a coherent operations strategy. Even without
much automation, each worker was producing 63 cars a year by 1989,
more than any other US plant and 40 percent above the average at
that time.
Ten years later in 2004, the company sells 2.1 million vehicles in
North America. Today, NUMMI continues to flourish as a company
of 5,000 team members. With Toyotas engineering content, Toyotas
managers transformed an antiquated NUMMI assembly plant into
GMs most efficient factory using what is described as the Toyota
Way a corporate philosophy that empowers employees.
This advocacy role is often in conflict with another real corporate
need the need to have team players that understand and are
committed to the corporate mission. Resolving this conflict to
everyones satisfaction is often an art. Operations Management is also
the art of getting work done through people.
The operations manager is also the supply chain manager/coordinator.
In a manufacturing organisation, for example, the manager must
view the entire flow of goods and information within the supply chain,
whether this falls within the corporations legal boundaries or within
that of suppliers and customers outside the organisation.
The operations manager also has duties that involve cross-functional
participation with the business processes in the other three core
processes. The most important non-supply chain business process
is the product innovation process. But activities involving human
resource management, accounting, marketing, and R&D processes
also are critical contributors to the operations managers effectiveness.
In fast paced business settings, since operations managers are amongst
those closest to the customer, they can provide quick feedback to
the strategic planning process regarding the changes in the market.
Good operations managers are expected to manage existing business
processes while helping get the firm ready for the future.
1.8
PERATIONS FUNCTIONS AND

O
INTERFACES WITH OTHER FUNCTIONS
Well-designed manufacturing and service operations exploit a

companys distinctive competencies the strengths unique to that
company to meet these needs. Such strengths might be a particularly
skilled or creative workforce, strong distribution networks, or
the ability to rapidly develop new products or quickly change
production-output rates. A good operations manager will interface
with other functions in order to exploit the competencies of the
organisation.
We can analyse the interface requirements from another angle
also from the point of view of Operations Managements processes.
Generally, processes involve combinations of people, machines, tools,
techniques, and materials in a systematic series of steps or actions.
The overall value chain extends from suppliers to customers. Inputs

consist of the sources related to materials like capital, equipment,
personnel, information, and energy used to produce the desired
outputs. Inputs typically are selected by the operations function
in association with other functions. Outputs are the final product
whether of tangible goods or intangible services.
1.8.1 OPERATIONS MANAGEMENT MARKETING
INTERFACE
There is a need to integrate the marketing and operational aspects
of services and to address the interactions between these two areas.
This need has largely been overlooked in articulating strategies and
tactics for improving services. The customisation of products is a
dimension that is intimately related to both product and processoriented criteria (e.g., Maister and Lovelock, 1982; Lovelock 1983;
Schmenner, 1986; Haywood-Farmer, 1988). Customisation is essentially
the extent to which a product offering will work to satisfy the customers
needs/wants. This criterion has implications for the integration of the
marketing and operations-oriented aspects of services. Not only does
one have to consider the implications on product design and its effects
on marketing, but it should also have significant implications for the
design of the service system. This illustrates the need to address the
interactions between the marketing and operations functions and to
integrate these functions for the betterment of the firm.
Marketing is responsible for understanding customer needs,
generating and maintaining demand for the firms products,
ensuring customer satisfaction, and developing new markets and
product potential. The firms strategic positioning and its market
segmentation decisions to a large extent determine the manufacturing
and operations strategy. Typical benefits include reduced product
development time, fewer engineering (design) changes, reduced
time to market, improvement in quality, improved white-collar
productivity, and a higher return on assets (Evans and Lindsay,
1996). Managerial practice should be directed toward the effective
integration of marketing and operations to ensure that services of
only the highest quality are delivered to customers.
1.8.2 OPERATIONS MANAGEMENT FINANCE INTERFACE
Capital equipment, cost-control policies, price-volume decisions and
inventories constitute the interface with financial decision making.
As acquisition and management of assets is an important part of
decision making, finance and operations need to work together
to understand the nature of technology used in operations and the
practice-performance gap in their organisation.
Tracking
common,
provides
evaluate
performance requires that the organisation develops

objective platforms for performance evaluation. Finance
data on product and service costs that help managers
operational performance. Operations managers should
have knowledge of financial procedures, limits, and capabilities. The

effectiveness of operational planning and budgeting is often driven by
the level of cooperation between these two areas.
1.8.3 OPERATIONS MANAGEMENT DESIGN INTERFACE
Shrinking product lifecycles have been adding to the demands on the
product development process. This is especially true for industries
that have a high clock-speed. Launching more new products faster
requires tight integration between the design and Operations
Management functions. Initiatives such as simultaneous engineering
and early supplier involvement in the product design process not only
add to the role of operations but also improve the perception of value
provided in the product and service concept design process.
In addition, process development and engineering is responsible for
production methods necessary to make the products. This function
has a great impact on operations. Therefore, co-operation between
these three functions, i.e., process engineering, design and operations,
leads to improved organisational performance.
1.8.4 OPERATIONS MANAGEMENT HUMAN RESOURCE
INTERFACE
No plant manager anywhere would ignore the role of good people
management in running an efficient operation. The human resource
function includes operations approaches such as continuous
improvement and total quality that rely mainly on human inputs.
Decisions about people and the organisation of the operations
function interact significantly with both structural and infrastructural
decisions. Such issues are not unique to the operations function,
however; they impact other functions and are dealt with more
effectively through the human resource management function.
In services, the human resource focus is vital, as customers
perceptions of an organisation are generally formed by their
interaction with customer contact personnel, such as customer service
representatives. As organisations increasingly opt for flextime, the
operations function has to develop unique process configurations
to accommodate employees with minimum disruption in the flow of
work. Operations Management and Human Resource departments
have to cooperate for recruiting and training employees, enhancing
employee well-being and development, and fostering motivation that
are vital to the success of management policies in practice.
1.8.5 OPERATIONS MANAGEMENT INFORMATION
SYSTEMS
Information systems provide, analyse, and coordinate the information
needs of operations. The distributed processing environment and the
growth and evolution of Enterprise Resource Planning (ERP) systems
for the organisation have a direct impact on operations. It allows
organisations to generate relevant information and make appropriate

information available when needed. The operational plans become
the driver of all business planning including recruiting, cash flows,
and marketing promotions. With Computer Integrated Manufacturing
(CIM) systems IT plays a very important role.
In many organisations, similar activities are performed at different
locations or at the same location by different people. Examples would
be a manufacturer with plants spread out all over the world. However,
knowledge is rarely, if ever, shared among employees performing
similar jobs. Information technology provides an option for managing
and sharing knowledge. It dramatically improves the task of managing
knowledge. Advances in process automation allow firms to redefine
their core processes and design better systems to accommodate the
needs of product and service variety. Ecommerce creates new demands
for managing processes while also providing new opportunities for
reconfiguring them. Much progress in information technologies is
wasted if the operations function does not respond to the challenges
created by the increased availability of information and knowledge.
This approach emphasises cross-functional thinking and relates
it to the context of overall activities of the organisation. Operations
Management measures the effectiveness of people, processes, and
technology so that an enterprise can perform better, faster, and with
greater productivity. It provides customers with products and services;
and supports corporate strategies by working with marketing, finance
and human resource areas.

16. Any departments mission is judged on the basis of
(a) Cost minimisation
(b) Delivery reliability
(c) Product quality
(d) All the above
17. The different decisions areas of structure management are
(a) Products
(b) Process
(c) Capacity
(d) Facilities
(e) All the above
Contd...
18. What is the self-controlling operation of machinery that

reduces or dispenses with human communication or control
when used in normal conditions?
(a) Cost Minimisation
(b) Automation
(c) Transformation
(d) Flexibility
19. Organisations typically require a wide range of reports,
e.g. financial reports, status reports, project reports, etc, to
_________whats being done, by when and how.
(a) Administer
(b) Archive
(c) Mandate
(d) Monitor
20. Operations Management measures the ..................... of people,
processes, and technology so that an enterprise can perform
better, faster, and with greater productivity.
Visit any organisation of your choice. Define its operations processes

and explain its key components. What challenges do operations
managers face in managing processes over there? Prepare a short
report.
1.9 SUMMARY
Operations may be defined as a conversion (transformation)

process that yields an intangible output (services), a deed, a
performance, an effort. For example, Consider Tata Consultancy
Services Ltd. Bombay which provides technical, financial and
other business services such as computer software feasibility
reports etc Where Operations Management was once viewed
primarily as a manufacturing function, service firms are now
recognising its tremendous competitive potential.
Production is the process of transforming a variety of resources

into goods or services. Transformation is not merely conversion
of inputs into outputs, but it is conversion through a significant
value addition to inputs by a process to create utilities to the end
users. Resources include materials, machines, human time, and
energy and so on.
The traditional definition considers Operations Management to

be a transformation system. According to this view: Operations
management is the business function that manages that part of
a business that transforms raw materials and human inputs into

goods and services of higher value.
The value driven approach starts by recognising that a business

is a set of processes, each of which has inputs, outputs, and
structure. Each process has a job to do and each process should
be measured on how effective it is in achieving the desired
outcomes.
The value driven approach focuses on the value provided to

the customer. Customers are those who purchase final goods
and services. Those who ultimately use the products are called
consumers.
The role of the operations function means something beyond

its obvious responsibilities and tasks it means the underlying
rationale of the function, the very reason that the function exists.
Customers are the requestors/receivers/payers of the service/

output of the process. Customers can include clients, their families
and friends, referral sources, providers, payers, community, and
other staff. Customers can be internal (staff, programs) to the
organization or external (clients, their families, contractors,
etc.) and both are key to the success of organizational change/
improvement.

for operations managers. The concept of internal customer has
profoundly changed Operations Management thinking. It helps
employees understand how they fit into the system and how their
work contributes to the final product, and it enables managers to
view the organisation as a system. The needs of each group are
quite different and lead to different operations capabilities that
must be met.

when used in normal conditions. In other words, it is the act or
process of converting the controlling of a machine or device to a
more automatic system, such as computer or electronic controls.
Instead of a focus on cost, the focus now encompasses reliability

as well as delivery times. Operations Management is now a major
contributor to the design and management of the supply chain
needed to create, deliver, and service the products sold.
The four basic functions of management, i.e. planning, organising,

directing and controlling are performed by managers at all levels
of an organisation. Planning provides the basis for all future
managerial activities by establishing the guidelines and actions
that must be taken in order to meet the stated objectives, as
well as setting timing of these actions. Organising is the process
of bringing together the resources personnel, materials,
equipment, and capital necessary to perform planned activities.
Directing is the process of turning plans into realities by assigning

specific tasks and responsibilities to employees, motivating them,
and coordinating their efforts.
Well-designed manufacturing and service operations exploit

a companys distinctive competencies the strengths unique
to that company to meet these needs. A good operations
manager will interface with other functions in order to exploit
the competencies of the organisation.
There is a need to integrate the marketing and operational

aspects of services and to address the interactions between these
two areas. This need has largely been overlooked in articulating
strategies and tactics for improving services. The customisation
of products is a dimension that is intimately related to both
product and process-oriented criteria.
Contracts: These constitute business exchanges in which

neither services nor goods are transferred; instead, there
is an implicit understanding between the customer and the
provider that goods and services will be provided on an as
needed basis.
Goods: These are tangible items that are usually produced
in one location and purchased in another. They can be
transferred from one place to another and stored for purchase
by a consumer at a later time.
Operations Management: Operations Management, often
described as Production and Operations Management (POM),
relates to the management of such systems that convert or
transform resource inputs into useful goods and services as
outputs.
Services: Services are intangible products that are consumed
as they are created. Direct Customer contact is a key
characteristic of services.
Strategic Planning Process: Strategic planning process
defines the firm as well as its own operations management
function.
Transformation Approach: According to transformation
approach, operations management transforms inputs into
outputs of goods or services.
Value Driven Approach: The value driven approach starts by
recognising that a business is a set of processes, each of which
has inputs, outputs, and structure. Each process has a job to
do and each process should be measured on how effective it is
in achieving the desired outcomes.
Value Model: People part with their money to buy a product
when it delivers more value than the value they attribute to
the money exchange.
1.10 DESCRIPTIVE QUESTIONS

1. What do you understand by the concept of operations
management?
2.
Define the transformations approach to operations management.
3.
Discuss the value driven approach to operations management.
4. Analyse the four core business processes in the operations

management.
5. Why is it important for operations manager to know the
distinction between consumers and customers? Explain the
difference between them too.
6.
Write short notes on performance, flexibility and Quality.
7. What is automation? Explain the advantages and disadvantages

of Automation.
8. A good operations manager will interface with other functions
in order to exploit the competencies of the organisation. Discuss
the statement with the view of marketing, finance, design, human
resource and information system interfaces.
1.11 ANSWERS AND HINTS

ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic
Q. No. Answers
Transformation Approach
1.
(a) T
ransferring inputs into
outputs
2.
(d) All the above
3.
(b) Determine customer

values
4.
Operations research
5.
Operations Management
Value Driven Approach
Importance of Customers
6.
in Operations Management
7.
Distinction between
8.
Consumers and Customers
Automation
internal, external
reengineering
product
9.
Performance
10.
Timeliness
11.
Quality
12.
Flexibility
13.
Consumer
14.
Automation
15.
(d) Large initial investment

Contd...
Operations Functions
and Interfaces with other
Functions
16.
(d) All the above
17.
(e) All the above
18.
(b) Automation
19.
(d) Monitor
20.
effectiveness
HINTS FOR DESCRIPTIVE QUESTIONS

1.
Section 1.1
Operations may be defined as a conversion (transformation)

process that yields an intangible output (services), a deed, a
performance, an effort. For example, Consider Tata Consultancy
Services Ltd. Bombay which provides technical, financial and
other business services such as computer software feasibility
reports etc.
2.
Section 1.2
The traditional definition considers Operations Management to

be a transformation system. According to this view, Operations
management is the business function that manages that part of
a business that transforms raw materials and human inputs into
goods and services of higher value.
3.
Section 1.3
The value driven approach starts by recognising that a business

is a set of processes, each of which has inputs, outputs, and
structure. Each process has a job to do and each process should
be measured on how effective it is in achieving the desired
outcomes.
4.
Section 1.3
The four core business processes are Determine Customer

Needs, Develop Product Strategy, Secure Processes & Materials
to Satisfy Demand and Manage Strategic Planning Processes.
5.
Section 1.4 and 1.5
While many people use the terms customer and consumer

interchangeably, distinct differences do exist in the meaning
of the two words. Understanding the distinction is crucial for
businesses as it affects how they both purchase goods they use in
their day-to-day activities and market the products that they sell.
for operations managers.
6.
Section 1.5
Performance is defined by the cumulative benefits that will

result if the product is purchased and used as intended. Quality
is broadly defined as the extent to which a product or service is
delivered in consistence with what the customer has been lead
to expect. Flexibility is the input to the value equation relating

to the ability of the Operations Management system to give the
customer the desired product.
7.
Section 1.6

when used in normal conditions. In other words, it is the act or
process of converting the controlling of a machine or device to a
more automatic system, such as computer or electronic controls.
8.
Section 1.8
A good operations manager will interface with other functions

in order to exploit the competencies of the organisation.
Generally, processes involve combinations of people, machines,
tools, techniques, and materials in a systematic series of steps
or actions. The overall value chain extends from suppliers to
customers. Inputs consist of the sources related to materials like
capital, equipment, personnel, information, and energy used to
produce the desired outputs. Inputs typically are selected by the
operations function in association with other functions.
1.12 SUGGESTED READINGS FOR REFERENCE

SUGGESTED READINGS
Adam and Ebert, Production and Operations Management

Concepts, Models and Behavior, Prentice Hall of India, 1992
Bradley Gale, Managing Customer Value: Creating Quality and

Service that Customers can see, Free Press, NY, 1994
Buffa and Sarin, Modern Production/Operations Management,

John Wiley & Sons, 1994
Clayton Christensen, The Innovators Dilemma: When New

Technologies Cause Great Firms to Fail, HBS Press, 1997
Chase, Jacobs, Aquilano, Operations Management for Competitive

Advantage, Tata McGraw Hill, Delhi, 2004
Krajewski and Ritzman, Operations Management, Strategy and

Analysis, Pearson Education, 2002
Vonderembse, Mark, White, Gregory, Operations Management,

Concepts, Methods and Strategies, John Wiley & Sons, 2004
E-REFERENCES
http://www.referenceforbusiness.com/small/Op-Qu/Operations-
Management.html
h t t p : / / a u t o m a t i o n p r i m e r. c o m / 2 0 1 4 / 0 2 / 1 6 / a d v a n t a g e s - a n d -
disadvantages-of-automation/
h t t p : / / w p s . p e a r s o n e d . c o . u k / e m a _ u k _ h e _ s l a c k _
opsman_4/17/4471/1144821.cw/
OPERATIONS MANAGEMENT IN MANUFACTURING

AND SERVICE SECTOR
CONTENTS

2.1
Introduction
2.2
Typology of Products
2.2.1
2.3
Effective Operations Management
Product Development Process
2.3.1
Clarification of the Task
2.3.2
Concept Generation
2.3.3
Embodiment Design
2.3.4
Detailed Engineering Design
2.3.5
Physical Evaluation
2.3.6
Speed of Product Development
2.4
Product Design and Architecture
2.4.1
Product Architecture
2.4.2
Engineering Economy
2.4.3
Measuring Costs and Identifying Waste
2.4.4
Design for Manufacturability (DFM)
2.4.5
DFX Design for X
2.4.6
End Product and Parts Standardisation
2.4.7
Modular Designs
2.5
Product Development in Services
2.6
Product Development Strategies
2.6.1
Internal Development
2.6.2
Reverse Engineering
2.6.3 Collaborative Development and Contracted Out R&D
2.6.4
Joint Ventures
2.6.5 Producer-customer
Contd...
2.6.6
2.7
Manufacturing Sub-contracting
Types of Production System
2.7.1
Job Shop Production
2.7.2
Batch Production
2.7.3
Mass Production
2.7.4
Continuous Production
2.8
Summary
2.9
2.10
Answers and Hints
2.11
OPERATIONS MANAGEMENT IN MANUFACTURING AND SERVICE SECTOR 37
OPERATIONS MANAGEMENT IN ERNST AND YOUNG
Ernst and Young are leading the connected Manufacturing
Enterprise Project, which includes input from experts in the
industry and academia. The group offers these key conclusions
about how information will change manufacturing.
By 2008 assets such as relationships with suppliers customers and
employees will be more important sources of value than traditional
hard assets such as buildings and equipment. This focus on
connected assets will change the face of manufacturing in
future years. Managing these connected assets will be the critical
capability for manufacturing organisations.
Innovation will accelerate. Manufacturers will outsource more
production to networks of suppliers. Customers, suppliers and
employees will use information technology to collaborate in realtime.
When levels of trust in these new kinds of relationships are resolved
we will see new incentive structures cross-investing third-party
mediation and many new types of contracts.
Source: Adapted from Special Report: Manufacturing in the 21st Century, Upshot Issue 2.8
September 1998, pp. 12.

Define the topology of products
Know about the operation management in manufacturing
and service sector
Define design in the context of operations management
Identify the objectives of the design activity
Know about the types of production system
Explain the importance of product design and architecture
Learn about the product development strategies
2.1 INTRODUCTION
Product decisions often make or break companies. Studies indicate
that nearly two out of three new products fail after launch. In addition,
companies in many sectors are under continual pressure to speed up
the pace of product development even to adapt products that are still
in the pipeline to the demands of a constantly changing marketplace.
A product is a bundle of utilities consisting of various product features
and accompanying services expected to yield satisfaction or benefits
to the buyer. A product is a complex of tangible attributes, including
packaging, colour, price, manufacturing organizations prestige,
service, retailers prestige and service which the buyer may expect as
offering satisfaction of wants or needs.
A product or service is defined in terms of its functions. What it is to
do? Product or services are as diverse as manufactured GE toaster,
and appendectomy, a MacDonalds chicken nugget dish, or a bank
account.
This chapter will discuss product design and process selection, which
are crucial areas in operations management.
2.2 TYPOLOGY OF PRODUCTS

Operations Management is fundamental to an organisations
achievement of its mission and competitive goals. It is involved in
creating value in the products. Products can be tangible or intangible.
Tangible products are called goods, while intangible products
include services and contracts. These are collectively referred to as
products.
Goods are tangible items that are usually produced in one location
and purchased in another. They can be transferred from one place
to another and stored for purchase by a consumer at a later time.
Examples of goods are products such as cars, washing machines,

televisions, and packaged foods, etc. Tangible products are classified
into two major categories:
Consumer Goods: These are the goods destined for use by the
ultimate consumer or household in such form that they can be
used without commercial processing. Soaps, sweet and shoes
etc., are the examples of consumer goods.
Industrial Goods: These goods are meant for use in producing

other goods or rendering services as contrasted with goods
destined to be sold primarily to the ultimate consumers.
Services are intangible products that are consumed as they are

created. Services now dominate the economies of most industrialised
nations. Service organisations include hotels, hospitals, law offices,
educational institutions, and public utilities. They provide such
services as a restful and satisfying vacation, responsive health care,
legal defence, knowledge enrichment, and safe drinking water.
Services also include back-office support for internal customers of an
organisation, such as IT support, training, and legal services. Services
take place in direct contact between a customer and representatives
of the service function.
Customer contact is a key characteristic of services. A high quality
of customer contact is characteristic of a good service organisation.
This is vital to retain current customers as well as for attracting new
ones. Most service organisations though they seldom carry finished
inventory do have supporting inventory. Hospitals keep drugs,
surgical supplies, emergency supplies and equipment spares; Banks
have forms, cheque books, and other supplies; etc.
Contracts are business exchanges in which neither services nor goods
are transferred; instead, there is an implicit understanding between
the customer and the provider that goods and services will be provided
on an as needed basis. With a contract, the customer pays a fee and
then is entitled to a manufactured goods or services. Many goods and
services are now evolving into contracts.
Today, increasingly organisations are trying to grow their presence in
the market and earn a competitive edge over competition by mixing
goods, services and contracts. This brings in a number of permutations
and combination, significantly changing the landscape of operations.
Table 2.1 summarises some key differences and operational
consequences among goods, services, and contracts across several
factors that shape operational decisions in organisations.
TABLE 2.1: COMPARISON AMONG GOODS, SERVICES

AND CONTRACTS
Operations
Factors
Value
Goods
Services
Contracts
Value is
provided
by physical
processing
during
manufacturing.
Value is
provided by
availability of
the service,
leading to
sensory or
psychological
satisfaction.
Tangibility
Goods are
tangible;
specifications
are easily
defined; and
goods can be
inspected for
quality.
Services are
intangible;
operational
characteristics
are difficult to
specify; and
services cannot
be inspected for
quality prior to
consumption.
Value is
provided by
the promise
(guarantee) of
availability of
a product or
service when
the contract is
exercised.
Intangibility
is often
accompanied
by an absence
of customer
presence for
long periods of
time.
Process
design
Manufacturing
can be isolated
from the
customer and
designed for
efficiency.
The service
process must
be designed
to occur in the
presence of the
customer.
the presence of
the customer.
Inventory
Products can be Services are

stored for later consumed
consumption.
as they are
created.

Capacity
Manufacturing
capacity can
be designed
for average
demand.
Capacity must
be designed
for maximum
demand.
The process
must be
designed to
accommodate
batches and
surges in
demand.
Many
operations can
be conducted
off-line,
or not in the
presence of the
customer.
Capacity must
be flexible to
accommodate
periods of
low and high
demand.
Contd...
Quality
Manufacturing
processes
can achieve a
high level of
precision and
repeatability.
Consistency
of human
performance is
more difficult
to maintain;
customer
perceptions are
subjective.
Location
Facilities can
be located
to minimise
operations and
transportation
costs.
Service facilities
must be located
near the
customer.
Quality is
perceived
only when
the option
is exercised,
and may be
influenced
by time and
availability.
Centralisation
and economies
of scale are
more likely.
2.2.1 EFFECTIVE OPERATIONS MANAGEMENT

Effective Operations Management is critical for organisations that
provide goods as well as to organisations that provide services and
contracts. A firms success or failure can depend on how it manages
operations on a daily basis.
The primary purpose of operations management is to contribute to
the ability of the organisation to satisfy customers and to achieve
competitive advantage through lowering costs, improving quality,
shorter time, and increased responsiveness.
Many recent thinkers have suggested that most manufacturing firms
are better off thinking of their output in terms of the service bundle
they provide to the customer. For example, Mercedes has announced
that it is developing a system that will connect the cars software via
the Internet to a customer assistance centre. This system will be able
to detect, diagnose and repair the problem.
Another example is Xerox. It has redefined its product as facilitating
communications rather than just selling copy machines. In its
strategy to be the Document Company, Xerox now offers products
that can copy handwritten documents, convert them to electronic
form, and e-mail them. Such products have allowed Xerox to increase
the services related to document management in its output bundle.
This type of transition creates significant challenges for Operations
Management.
Goods are tangible items that are usually produced in one location
and purchased in another.
Services are intangible products that are consumed as they are
created.
Fill in the blanks:

1. ...................... are tangible items that are usually produced in
one location and purchased in another.
2. ........................ has redefined its product as facilitating
communications rather than just selling copy machines.
Today, increasingly organisations are trying to grow their presence

in the market and earn a competitive edge over competition by
mixing goods, services and contracts. Visit any organisation of your
choice, study its strategy for operations management and relate it
with the above mentioned statement.
Service and contracts require more attention and better planning

than manufacturing. A manufacturing defect can always be
reworked before dispatch. Service, however, occurs in the presence
of the service provider, making it difficult to manage capacity and
control quality since inventory cannot be stored and inspected
prior to the service encounter. Contractual transactions can be even
more complicated. The complication arises because it is difficult
to enhance capacity overnight and all customers may choose to
exercise their options at the same time.
2.3 PRODUCT DEVELOPMENT PROCESS

Without products, there would be no customers. Without customers,
there would be no revenue. Developing a new product is a major
activity. Thomas Alva Edison, with as many as 1,300 inventions and
1,100 patents to his credit, said about the product development process,
Genius is 1 per cent inspiration and 99 per cent perspiration. Product
development requires more of perspiration and less of genius to be
successful. Leaders today still use four key components of Edisons
product development model:
Lofty Goals: For example, the ability of the bulb to stay lit for
long periods of time.
Right to Left Process: Start with customers and move backward

through operations to design.
Structure: Have clear targets instead of daydreaming and

aimless experimentation.
Fluidity: Be driven by talent, not hierarchy.
Many designers do not understand these issues and, as a result, often

propose products that cannot be produced or service designs that
cannot be delivered because of inadequate technology or operational
capabilities. The approach to product development has to start with
an evaluation of the capabilities and resources of the organization.
The new product strategy of the organization is decided on the basis
of organizational capabilities and resources. Organizations should
develop explicit product-development strategies to co-ordinate all of
the major business processes that contribute to product innovation.
The need to be fast when competing in high clock-speed industries
makes this an absolute necessity. The product-development
process and its identifiable stages are shown in Figure 2.1. Product
development includes a number of processes. The steps that follow
are given below:
Figure 2.1: New Product Development Process
2.3.1 CLARIFICATION OF THE TASK

The search for ideas starts based on the new product strategy. The
ideas that fit in with the strategy have to be identified. The customer
needs need to be determined. This should provide pointers towards
the functional requirements of the product.
Simultaneously, the organisation should be evaluating its resources
and time schedules to identify and specify constraints.
Based on this exercise the general specifications of the product or
service are drawn up.
The product idea must demonstrate that it fulfils some consumer
need, and that existing products do not already fulfil.
2.3.2 CONCEPT GENERATION
The specifications are the basis for concept generation. At the concept
level, the organisation should identify essential problems and propose
the function structure of the product or service. This should generate
proposals and solution principles that are combined and refined into
concept variants.
The concept should be evaluated against technical and economic
data. If the results are found satisfactory, the concept has reached the
stage for screening.
Screening is a management process. Each idea is analysed and its
risks and potential are scrutinised, both technically and business wise.
Those having potential are identified. Most of the ideas are killed or
die at the screening level.
The business analysis includes preliminary market analysis,
creating alternative concepts for the product, clarifying operational
requirements, establishing design criteria and their priorities, and
estimating logistic requirements for producing, distributing and
maintaining the product in the market.
2.3.3 EMBODIMENT DESIGN
The ideas, after they have cleared screening, are developed in their
preliminary configuration and an introductory analysis is conducted.
The best preliminary design(s) are:
Selected and refined.
Evaluated against technical and economic criteria.
The preliminary design(s) are refined and the configuration

completed.
Detailed analysis is conducted of refined design(s). The design is

reviewed for errors, manufacturability and cost. The preliminary
design and alternate designs are evaluated according to critical
parameters to determine the design support that will be required

including analytical testing, experimentation, and physical modelling.
Based on the results and trade-offs, the conceptual design is firmed
up. This is followed by:
Preparation of preliminary parts list and
Fabrication design for the basic elements of the conceptual

design.
This completes the stage of firming up the definitive design of the new
product or service.
2.3.4 DETAILED ENGINEERING DESIGN
This stage is a series of engineering activities to develop a detailed
definition of the product, including its subsystems and components,
materials, sizes, shapes, and so on. The engineering process typically
involves analysis, experimentation, and data collection to find
designs that meet several design objectives: (1) design for function
so the product will perform as intended, (2) design for reliability so
the product will perform consistently, (3) design for maintainability
so the product can be economically maintained, (4) design for safety
so the product will perform with minimal hazard to the user and the
environment, (5) Design For Manufacturing (DFM) so the product
can be manufactured at the intended cost and volumes. Computer
analysis, simulations, and physical prototypes allow for testing various
design alternatives, and validate that the final design meets the design
objectives. Since objectives can conflict with each other, tradeoffs are
inevitable in the optimal design. Typically, the final design includes
drawings and other documentation as well as a working prototype of
the product.
2.3.5 PHYSICAL EVALUATION
Concurrently with the development of detailed engineering design,
physical evaluation is carried out. This includes:
Fabricating a working prototype of the product.
Testing and evaluation to confirm that it represents the solution.
Very often, the duration of this stage can be reduced if certain tasks
done simultaneously by the organisation fully utilising the benefits of
cross-functional thinking.
Computer simulations often precede physical evaluation. In currently
available CAD systems, the designer can view the part in any
orientation, any scale or any cross section. The parts and the product
can be seen in three dimensions, rotated, moved, and the response
to different stress patterns seen visually on the computer screen,
without building a physical prototype.
2.3.6 SPEED OF PRODUCT DEVELOPMENT

With a new regime of patents and legal protection against copying
ideas, designs, or products there have been changes in the approach
to new product development. Organisations are more concerned
about being the first to develop an idea or design a product so that the
can protect their markets.
Being able to design, develop, and introduce a new product quickly
is a major competitive advantage and it gives a firm fast to market
capabilities.
There are two types of fast to market activities.
Fast to customisation: The first activity is being able to develop

products to meet the specific needs of a customer. This is
called fast to customisation. Producing such a product with the
participation of the customer, may give a firm a competitive
advantage.
Fast to design: The second type relates to developing products to

meet the needs of a cluster of customers. Fast to design product
innovation can be used in MTS (Make to Stock), ATO (Assemble
to Order), and MTO (Make to Order) market orientations. For
example, Nokia introduced cell phones that incorporate cameras.
Seeing that there was a cluster of customers for this product all
manufacturers now offer this product. Nokia has a first movers
lead in this market.
In other situations, being fast to market may not be less important. It

depends on how quickly a products design becomes stale. MercedesBenz traditionally had customers that valued good design more than
a model year.
For some products, being fast to market may not be in your firms best
interest. A creative advertising executive always makes his clients wait
a week or two, even though he thought of the copy for the ad in a day.
Likewise, if a gourmet restaurant that serves your meal five minutes
after you order, you know that they must be using a microwave oven.
If they make you wait for 30 minutes, then the same judgment cannot
be made.
Another important type of product innovation involves refining or
rejuvenating products within the existing product line. For some
companies, this is an annual event, such as is the case with the
automotive industry.
Major redesigns in the automobile industry can take years and costs
billions. This becomes a catch-22 situation as it costs so much to
develop new models, auto companies often try to sell as many copies
of the new product as possible, even if it takes four or five years. But
the older a cars design gets, the greater the chance that it will lose
market share to competitors with fresher models. And worse yet, if
it takes five years to develop a new model and a company wants to

sell that model for another five years, then it must project what the
customers preferences are likely to be ten years from now. This is a
challenge.
Choose the correct option:

3. New products are introduced in which stage of product
lifecycle

(a) Introduction stage
(b) Growth stage
(c) Maturity stage
(d) Extinction
4. Which of the following is the part of Edisons product

development model?

(a) Lofty goals
(b) Right to left process
(c) Structure
(d) Fluidity
(e) All the above
5.
The best preliminary design(s) are:
(a) Selected and refined.
(b) Evaluated against technical and economic criteria.
(c) The preliminary design(s) are refined and the

configuration completed.
(d) All of the above
6.
Conceptual design is firmed up and followed by:
(a) Preparation of preliminary parts list and
(b) Fabrication design for the basic elements of the

conceptual design.
(c) Both (a) and (b)
7. Which of the following is true about product design?

(a) It is not analysed
(b) It is not experimented upon
(c) Data is collected to determine if the design meets the

design objectives

Contd...
8. Concurrently with the development of detailed engineering

design, physical evaluation is carried out which includes:

(a) Fabricating a working prototype of the product.
(b) Testing and evaluation to confirm that it represents the

solution.
(c) Trade off in optimal design.
(d) Both (a) and (b) are correct
We will offer a small passenger car priced at ` 1 lac to our customers

by the end of this decade says Mr. Ratan Tata. Relate this statement
to the product development strategy of Maruti Udyog Ltd. and
explain your recommendations.
Product development process is a major busiess process. Being

able to design, develop, and introduce a new product is based on
the capabilities and resources of the organisation and results in
product innovation.
2.4 PRODUCT DESIGN AND ARCHITECTURE

Product design is the structuring of component parts or activities so
that as a unit they can provide a specified value. It usually begins with
the development of a set of detailed specifications.
2.4.1 PRODUCT ARCHITECTURE
Product architecture is typically an engineering function-detailed
drawings or specifications are prepared which give dimensions,
weights, colours, and so on. In service industries, the product
specification often consists of an environmental requirement to be
maintained or a procedure to be followed. For example, a health care
environment may be the product of a nursing home or an accessible
and quiet reading area, the service offered by a library. Design
personnel should be familiar with the production technology and
work with operations personnel to be sure that their design makes
the best use of the organisations capabilities. In this way the good
or service will emerge with the most desirable material and service
aspects.
Firms that are constantly evolving new design such as General Motors
and Boeing, make extensive use of Computer-Assisted Design (CAD)
techniques during this phase. These approaches enable designers to
develop and test a multitude of good or service configurations that
could not otherwise be explored.
Good product architecture can help designers develop products

capable of providing the firm with a competitive advantage. If being
cost competitive is the strategy, engineering economy should be a
major consideration. If being fast to market or fast to product is a
strategic goal, then the ability to achieve these ends starts with good
product architecture.
Product architecture establishes the functional capabilities of the

product, its features, and post sales servicing needs, the capabilities
of the product delivery system and post sale support that the
customer expects and determine the ability of the organisation to
provide for these, and the roles and risks each player within the
supply chain will assume.
2.4.2 ENGINEERING ECONOMY
Engineering economy is the discipline concerned with the economic

aspects of engineering. It involves the systematic evaluation of the
costs and benefits of proposed technical projects. In reality, any
engineering project must be not only physically realizable but also
economically feasible.
For example, Maruti Udyog had decided that the weight of the Maruti
800 was a critical requirement of the design. How do you choose
between plastic composite and steel sheet stock for the auto body
panel?
The choice of material will dictate the manufacturing process for
the body panel as well as manufacturing costs. Some may argue that
because the composite body panels will be stronger and lighter, it is a
better choice. However, there was not much of a market for expensive
cars. Maruti was looking for a car that would be low cost so that it
could tap the higher end of the two-wheeler users.
It also had to take to account that:
The customer may not believe that plastics will provide a

stronger body option than steel panels, and may not be willing
to pay more, and
A maintenance man may not believe that it is easy to repair

composites, and therefore repair and maintenance will cost more.
One might suggest that the above arguments are ridiculously

simplistic and that common sense would dictate choosing steel sheets
for the framing material. Although the scenario is an exaggeration, it
reinforces the idea that the economic factors of a design weigh heavily
in the design process, and that engineering economy is an integral
part of that process, regardless of the engineering discipline.
The focus on economic cost and engineering costs of new product

development has great importance. Each different technical solution
to a problem constitutes an alternative. Each alternative requires
different level of resources to build and causes different levels of
resource to be expended. Thus trade-offs must be made during the
design of engineered systems. Engineering economy selects the best
alternative based on design for the theme.
Why do this at all?
Why do this now?
Why do it this way?
An engineering cost analysis, in its simplest form, may be no more

than a spreadsheet listing the phases found in the product concept
through product realisation cycles on one axis and identifying the
many functional areas, costs, or even software tools on the other.
In its second-generation form, engineering cost analysis software

will approximate the costs associated with each phase of the
product developmentrealisation cycle.
In its ultimate form, the engineering cost analysis will include

and improve upon all of systems engineerings current discrete
event optimisation functions; but, more importantly, it will extend
forward in time to include accurate estimates for various design,
material, and process selection options. In some instances, it may
also include the determination of the optimum product concept
to satisfy the intended customers needs and cost constraints.
Figure 2.2 provides a glimpse into the various inter-connections

within the operations function that need to taken into account in a
properly designed engineering cost analysis.
Equipment
Information
Tooling
Raw Materials
Labor
Manufacturing System
Finished Goods
Purchased
Components
Energy
Suppliers Services
Waste
Figure 2.2: Second Generation Engineering Cost Analysis

As a rule of thumb, 70 percent of the cost of the product or service is
firmed up by the time the conceptual design has been completed. By
the time the system definition is completed 80 percent of the cost is
finalised and 90 percent of the cost is firmed up before production.
For example, the geometrical shape of a part or assembly determines

the subsequent manufacturing processes by which it may be
manufactured. This, in turn, limits the materials to just those few that
are suitable for those processes.
Source: Adapted from: M Lilienthal, Defence Modelling and Simulation Office, Observations
on the use of Modelling and Simulation, 2003.
Figure 2.3: Locking of Product Costs and Design

The impact of the design process on costs is shown in Figure 2.3. It
shows how costs are firmed up and it will be seen that the majority of
cost reduction opportunities are lost prior to the actual production.
These decisions are difficult because there is no guarantee for
success. Two out of three new products fail after launch. Therefore,
the key observations on product development recommended by the
expert committee on Bridging Design and Manufacturing setup by
the national research Council, U.S.A., after a series of hearings from
industry, in February 2003, should be of great interest:
Continue the early collaborative exploration of the largest

possible space across the lifecycle, including manufacturing,
logistics, time-phased requirements, and technology insertion.
Perform assessments based on modelling and simulation early in

the development cycle alternative system designs built, tested
and operated in the computer before critical decisions are locked
in and manufacturing begins.
Wait to develop designs until requirements are understood.
Requirements are the key. Balance them early.
Once the design is drawn, the cost and weight are set.
No amount of analysis can help a bad design get stronger or

cheaper.
Remember that 80 percent of a products cost is determined

by the number of parts, assembly technique, manufacturing
processes, tooling approach, materials, and tolerances.
2.4.3 MEASURING COSTS AND IDENTIFYING WASTE

Operations Management is interested in enhancing value. Cost
reductions often translate directly into increases in value if they
outweigh changes in performance. Like the other inputs to the value
equation, the costs are composed of a variety of different elements.
For example, the costs relevant to the purchase decision could include
one or more of several categories:
Acquisition cost: The purchase price of a car, for instance
Repair costs: The cost of replacing a broken part
Maintenance costs: The cost of oil changes and tune-ups
Operating costs: The cost of gas and tires
Salvage/resale costs: The cost recovered upon selling a car
Disposal costs: The cost of disposing of a wrecked car
Furthermore, managers can break down costs to express them

quantitatively or qualitatively.
A major problem in many corporate accounting systems has been
that overhead costs are precisely applied to the products that they
support. Effective performance measurement requires each product
to bear its fair share of all costs incurred to create, make, sell, and
service. Direct costs pose no major problem; managers simply record
all of the labour, materials, and other resources used by a product.
However, assigning overhead costs becomes more difficult. Unlike
direct costs, these costs seldom vary with changes in output.
Marketers know well that people like to buy things cheaply, but they
do not like cheap things. This statement describes both the major
attraction and the problem of emphasising cost as the firms major
source of value.
Customers want at least the same performance for a lower cost, not
simply less for less. A cost driven approach to value treats performance
as a given and focuses on reducing cost. For example, this approach
has been successful in Bajaj Auto. It has been successful in inculcating
a concept in its workforce of lower costs means better quality.
The firm should be able to measure customer satisfaction, to evaluate
customer service costs. It is cheaper to keep a good customer happy
than to win one of your competitors good customers. Customer
satisfaction can be measured by the use of the concept of Lifetime
Value of a Customer, which is an estimate of the stream of income a
firm can expect to receive from a satisfied good customer. This is a
useful concept in that, like value, it forces all within a system to focus
on keeping customers satisfied and coming back.
Operations management system must examine both the product it is

selling and the processes it uses to deliver and service the product,
to achieve this objective. It should identify product features that
customers do not value highly or processes or parts of processes that
contribute unnecessarily to cost. Activities that do not add value are
waste, if they are not support activities. Unnecessary product features
that dont add value are waste this need to be eliminated.
Using a waste reduction approach helps reduce the excessive
emphasis on cost reduction. Cost reduction programs that ignore the
negative effects on lead-time, flexibility and quality will not enhance
a firms competitiveness in the long run. For example, a firm that uses
cheaper material that reduces quality to lower cost may save money
in the short term. However, over the long haul they reduce the ability
of the firm to deliver a product consumers value. They may buy the
product once, but not thereafter.
Design-to-cost: Factor costs, scale effects, and productivity
differentials should not be the only criteria for design decisions.
Perhaps the greatest of all scope for improvement lies in design-tocost. This means cost is taken as a basis for the final design decision.
This technique requires the organisation to have experience in
systems optimisation and good knowledge of the manufacturing
processes involved. Often the supplier has this knowledge. For
example, the amount of costly platinum needed for an automotive
catalytic converter used by BMW was considerably reduced when
a suppliers experience in flow optimisation was applied at an early
stage of development.
Exchanges of experience between manufacturer and supplier often
bring to light unexpected opportunities for making improvements.
One German manufacturer sent a standard part to Japan for redesign
and a comparative quotation, and initially had its expectations
confirmed: the Japanese supplier could deliver around 30 percent
cheaper.
The German manufacturer was surprised at the second attempt, when
it sent a much more complex part for development. The Japanese
supplier was some 18 percent more expensive than the company
itself, despite the redesign. A closer look at the Japanese suppliers
redesign explained the results. On its own, the complex part offered
hardly any optimisation opportunities, being interconnected with too
many other components.
By optimising the total system redesign and fresh development of all
the components, the Japanese supplier revealed the full potential for
cost reduction. Once the costs of the optimisation had been properly
allocated to the total system, the Japanese alternative proved to be
more cost-effective in the long term than in-house development had
been.
2.4.4 DESIGN FOR MANUFACTURABILITY (DFM)

The design of a system or product involves the principal task of
evolving a form that can support the functions required by the
system or product. The design must be optimised with regard to cost,
technical requirements and value considerations of the customer. The
challenge is to use resources wisely.
This has given rise to a number of techniques and created a number
of tools that are being practiced in industry, focused to provide the
greatest value of the product to the consumer and optimise the
production process and capacity. Amongst the best known amongst
these is the Design for Manufacturability (DFM) technique and Design
for X (DFX), which is a special case of DFM.
Proposed Design
Estimate the
Manufacturing Costs
Reduce the Costs of

Assembly
Reduce the Costs of

Components
Reduce the Costs of

Supporting Production
Consider the Impact of DFM

Decisions on Other Factors
Recompute the
Manufacturing Costs
Good
enough
?
Y
Acceptable Design
Figure 2.4: The DFM Process

DFM is the process of designing a product for efficient production
maintaining the highest level of quality. It is intended to avoid
more complex and expensive product designs to simplify assembly
operations. The flowchart for the DFM process is given in Figure 2.4.
Some guidelines to determine whether the design is good enough are
given below:
Minimise the number of parts
Develop a modular design
Design parts for multi-use
Avoid separate fasteners
Eliminate adjustments
Design for top-down assembly
Design for minimum handling
Avoid tools
Minimise sub-assemblies
Use standard parts when possible
Simplify operations
Design for efficient and adequate testing
Use repeatable and understood processes
Analyse failures
Rigorously assess value
DFM is a team-based approach that involves everyone associated

with the development process. For example, the US Navys modelling
and simulation processes for the Virginia-class submarine reduced
the standard parts list from 95,000 items for the earlier Seawolf-class
submarine to 16,000 items.
2.4.5 DFX DESIGN FOR X
DFX is a special case of DFM, where a certain area, say X is selected
for attention. Improvements in X are proposed after detailed analysis
of the process by a team of cross-functional experts. The performance
measures are established and items are identified that will simplify
the process and at the same time provide value to the customer.
An example is of Escorts Ltd., a company that was making heating
elements for electrical kettles. The holder that screwed on the
element to the kettle was made as a casting. The casting had to be premachined, sized, cut and turned before it was ready for threading.
The technical requirements were not critical, as the function of the
part was to protect the consumer from contact with the electrical
contacts and guide the external socket to the corresponding part
of the heating element. Standard tubes were found that met the
dimensional requirements for the component. This greatly simplified
the process, avoided a number of operations, reduced the number of
parts, and also reduced costs.
2.4.6 END PRODUCT AND PARTS STANDARDISATION
Eli Whitneys use of standard parts enabled his firm to gain a
competitive advantage in its bid for an army rifle contract. Henry
Fords assembly lines were made possible by improved manufacturing
processes that allowed unskilled workers to quickly attach standard
parts to standard cars.
Standard end products enable manufacturers to use make to stock
market orientations, thereby decoupling manufacturing decisions
from market transactions.
Product standardization offers benefits to consumers and producers

alike. Customers can count on simplicity and convenience in
purchasing standardised products like household doors, screws
and other fasteners, spark plugs, and so on. Similarly, uniform
(standardised) pricing code label has meant greater efficiency for
the retailer. In designing new products, standardisation can bolster
productivity by (1) avoiding unnecessary engineering design when a
suitable component already exists; (2) simplifying materials planning
and control during production because fewer components are in
the system; (3) reducing components production (if the components
are produced in-house) or reducing purchasing requirements and
limiting the number of vendors (if components are purchased). The
risky side of standardisation is that your competitor may upstage
you with a new product feature that you cannot match because your
design capabilities have become stagnant.
2.4.7 MODULAR DESIGNS
Modular design is the creation of products from some combination

of basic preexisting subsystems.
In selecting a personal computer system, for example, you may have
your choice of three video monitors, two keyboards, two computers, and
three printers, all of which are compatible. All possible combinations
make a total of 36 (3223) different computer systems from which
to choose. The modular design concept gives consumers a range of
product options and, at the same time, offers considerable advantages
in manufacturing and product design. Stabilising the designs of the
modules makes them easier to build.
Problems are easier to diagnose, and the modules are easier to service.
Production proficiency increases as personnel make refinements
to and gain experience with the manufacturing processes for
standardised sets of modules.
Similarly, materials planning and inventory control can be simplified,
especially in finished goods inventories. Now, rather than storing
inventories of all 36 finished computer systems, only some of which
will be needed, we instead store just the subsystems or modules.
Then, when a particular computer system is demanded, the producer
can focus on quickly retrieving and assembling the appropriate
modules into, the desired configurations and avoid the high costs of
idle finished goods inventories.
Work out the design of any simple object of your choice using the
principles of DFM.
Standard end products enable manufacturers to use make to stock

market orientations, thereby decoupling manufacturing decisions
from market transactions.

9.
The fast to design product innovation can be used in
(a) MTO
(b) ATO
10. DFM stands for

(a) Development for manufacturability
(b) Design for manufacturability
(c) Decisions for manufacturability
Fill in the blanks:

11. ...................... should specify the functional capabilities of the
product, its features, and post-sale servicing needs.
12. ...................... involves the systematic evaluation of the costs
and benefits of proposed technical projects.
13. Cost of replacing a broken part is an example of ......................
costs.
2.5 PRODUCT DEVELOPMENT IN SERVICES

Manufactured goods differ from services in three ways:
The first is that a good can be inventoried, thereby giving system

designers additional degrees of freedom.
The second difference relates to risk. More so than for services, the
design of manufactured products and their supporting delivery
systems requires substantial up-front financial commitments.
The third difference is that the product innovation process for

goods are often supply chain-wide dependent. For example, for
Intel to develop next-generation micro-processor chips it requires
to coordinate its efforts with software players, application
developers and the makers of chip manufacturing equipment.
Services can be classified on the basis of the degree of contact with

the customer. The extent of customer contact can be defined as the
percentage of time the customer must be in the system relative to the

time it takes to perform the customer service.
Low Degree of Customer Contact
Services, with a low degree of customer contact, involve the same
stages as the design of manufactured products. The service system
product development process is comparable to manufacturing.
However, services often do not require a physical component, such
as prototype building etc. and the process technology sometimes
involves different issues and considerations because the conversion
process takes place before the client or customer.
High Degree of Customer Contact
Services with a high degree of customer contact are difficult to control
as the customer can affect the time of demand, the exact nature of the
service, and the quality or the perceived quality of the service. These
types of services often require a high degree of personalisation and
speed of delivery.
Services normally require a much higher levels of capacity relative to
demand and also require greater flexibility. There can be tremendous
diversity of customer influence and hence greater system variability.
Fill in the blanks:

14. Manufactured goods differ from services in a way that product
innovation process for goods are often supply chain-wide
.......................
15. ...................... normally require a much higher levels of capacity
relative to demand and also require greater flexibility.
Work out the product development process in hospitality sector.
2.6 PRODUCT DEVELOPMENT STRATEGIES

Product Development Strategy requires a capability of the
organisation to correctly evaluate product concepts so that there is
support to design new products or to introduce product improvements
in keeping with the market requirements. There are a number of
different strategies used for product development, depending on the
organisational capabilities.
2.6.1 INTERNAL DEVELOPMENT
Internal development involves developing the necessary skills among
existing staff and acquiring the necessary production capacity. Though
this may seem the most logical move and provide the advantage to
maximizing the value addition, this option is more suited to technology
driven organizations. The risks are lower than for other methods. The
main disadvantage is that this takes time, during which competitors
may move fasteror opportunities may be lost in other ways.
Internal development means that the organizations strategic
managers decide to grow the business by adding the needed assets
(people, buildings, machinery, or whatever) from inside rather than
outside sources. The Internal Development Strategy requires a strong
research and development group within the company that creates
the technology that the company uses. This manner of internal
development has significant advantages:
The firm knows the product from a hands-on perspective.
It understands the technologies used in the product.
When the product fails or when related activities are discovered

in the market, the firm can react quickly.
The products tend to be unique, as the firm has created the

technology and the product. This also gives it a basis for
competitive advantage.
When a competitor develops an improved version of the product,

the firm is better able to understand the technology behind it and
create an even better one.
In addition, internal R&D has the advantage, that in many

countries, it attracts tax deductions and other incentives from
the government.
Internal technology acquisition has three major disadvantages:
Failure to develop the necessary technology is a risk that is always

there. The more difficult the project, the greater is the risk.
Developing technology normally takes longer than buying out

the technology. Not only may it take longer; the length of time is
also unknown.
In-house development is often more expensive than acquiring

technology externally.
2.6.2 REVERSE ENGINEERING

One of the most common methods of internal development, in
developing countries, is through reverse engineering. Reverse
engineering is determining the technology embedded in a product
through rigorous study of its attributes. It entails the acquisition of a
product containing a technology that the company thinks is an asset,
disassembling it, and subjecting its components to a series of tests and
engineering analysis to ascertain how it works and the engineering
design criteria used in the products creation. The tests used depend
on the technologies involved.
Reverse engineering requires a very good understanding of the
application of the product being studied so that the tests used to
determine the design criteria are appropriate. It also requires strong
engineering capability. It is less risky, less costly, and takes less time
to market compared to internal R & D.
2.6.3 COLLABORATIVE DEVELOPMENT AND CONTRACTED
OUT R&D
Collaborative Development: The internal R&D work with an external
agency to jointly develop a technology. This enhances the ability of
the firm to enter into technology areas, where it might not be able
to do so singly. Collaborative development has the same advantages
and disadvantages as internal R&D. The basic difference is that the
results are jointly owned, and an effective mechanism to co-ordinate
the efforts of the teams are necessary. This approach actually improves
the companys external acquisition capabilities. This often uncovers
technology options that might not be considered by the firm from its
internal R&D.
Contracted Out R&D: Companies choose to contract out R&D for a
variety of reasons. It is an ideal option for those who do not have the
necessary facilities and expertise to carry out the work and yet would
like to maintain control and own the results exclusively. It allows
short-term access to world-class personnel and facilities that would
normally be beyond the companys means. With the selection of the
right team for the work required, it should be able to assemble a more
capable team than it could assemble internally.
Contracting R&D reduces the companys hands-on experience
with the technology. This can be quite risky if the application of the
technology is in areas with no in-house expertise. The risk of breach
of confidentiality may be high in some cases. The ownership of the
technology and what constitutes the technology needs to be carefully
defined in the documentation.
Consulting Engineering Firms are often a source of technology.
Obtaining technology from consulting engineering firms is another
form of contracted out R&D. This is generally used in the case of
process design, and seldom for product design. It has the problems
associated with contracted out R&D as well as its advantages.
2.6.4 JOINT VENTURES
In a joint venture, two or more organisations form a separate legal
undertaking, which is an independent organisation for strategic
purposes. The partnership is usually focused on a specific market
objective. They may last from a few months to a few years, and often
involve a cross-border relationship. One organisation may purchase a
percentage of the stock in the other partner, but not a controlling share.
Entering into a joint venture agreement with a technology provider is

another form of external acquisition that can be very effective.
This form is extremely advantageous when it is contracted between
a company with technology and a company with market access. It
normally takes the form of a new company with each of the partners
owning shares in the company. For example, General Motors came
into India in a joint venture with Hindustan Motors and setup it
manufacturing facilities at Halol, in Gujarat.
The risk in such ventures is low. It has other advantages of licensing
agreement. The disadvantage of technology absorption is largely
removed. Due to the ongoing relationship between the companies, the
opportunity to learn on both sides exists. However, the disadvantage
is that neither partner can make decisions on their own.
BOX 2.1: JOINT VENTURE: BERTELSMANN AND
BARNESANDNOBLE.COM
German media giant Bertelsmann AG agreed to pay $200 million
for a 50 per cent stake in Barnes and Noble Inc.s online retail unit,
a move which raises the stakes in the online book retailing business.
Both companies will contribute $100 million to the capital of the
joint venture. Bertelsmann also said it will contribute certain U.S.
resources to barnesandnoble.com from its previously announced
Books Online service.
The two organizations formed this joint venture to combat the
market power of Amazon.com, the premier Internet bookseller.
After gaining a leadership position in the chain bookstore market,
Barnes and Noble felt the heat from Amazon.com. The organization
responded with barnesandnoble.com, but the web site lost money
in its early days. Bertelsmanns Books Online service also struggled
against Amazon.com. Through this joint venture, Bertelsmann and
Barnes and Noble hope to penetrate the online book market more
deeply.
Source: http://cnnfn.com/hotstories/companies/9810/06/barnesnoble/
Joint ventures have been a major source of technology acquisition

in developing countries. For example, Escorts Limited had a joint
venture with JCB of the UK to manufacture small excavators. Escorts
again, entered into a joint venture with Hughes Communications of
USA for manufacture of communication equipment.
2.6.5 PRODUCER-CUSTOMER
This is normally done in the form of buying a piece of production
machinery with embedded technology. This is perhaps the quickest
form of technology transfer because the technology is already
packaged and ready to use. It is low risk because the equipment
has been proven to work technically and evidence can be acquired
from other users to back-up the producers claims. In addition, the
producer normally would be glad to provide implementation support
in the form of setting up the machine and in the training of personnel.
2.6.6 MANUFACTURING SUB-CONTRACTING

Most firms do not manufacture all the systems that are required for
the product. There are specialised firms that have the technology and
designing capability to supply the system to the firms specifications.
In some cases, sub-contracting is used as a cost reduction option, as
the costs of technology and development by sub-contracting firms
may be lower than that of the firm. In such cases, the ownership of
the technology is not with the firm.
A comparison of the different product development strategies has
been tabulated in Table 2.2. As the various sources for acquisition of
technologies present different advantages and disadvantages, benefits
and risks, and cost to the firm, these factors have been compared.
TABLE 2.2: COMPARISON OF DIFFERENT

STRATEGIES FOR PRODUCT DEVELOPMENT
Technology
Option
Internal
Development
Advantages
and Benefits
Develop
knowledge
in company,
stronger
company
Exclusivity,
competitive
advantage
Tax and other
Government
incentives
Collaborative
or R&D with
Networking
Develop
knowledge
in company,
stronger
company
Exclusivity,
competitive
advantage
Tax and other
Government
incentives
Disadvantages
and Risks
Long time to
market
Generally more
Expensive
than external
acquisition
Cost Factors
R&D Staff
Equipment
Office,
Laboratory and
Shop space
Risk of failure,
loss of investment
and time
May not have
R&D expertise,
equipment, etc.
Long time
to market
(shortened
somewhat)
R&D Staff,
equipment, and
space
Attending
Networking costs trade shows,
added, overall
conferences
costs down
Reading
Risk of failure
relevant
reduced (better
journals,
knowledge base) magazines
Inventiveness can
Staff exposed to be curtailed
other sources of
ideas
Contd...
R&D Contract/ No investment

Consulting
in facilities
Engineers
Low investment
on staff
Licensing
Joint Venture
Do not have
hands-on
knowledge
in-house
Harder to keep
Own
confidential
technology,
unique product Same time, cost
and risk issues as
in Internal R&D
Reduced risks Risk in applying
due to known
technology to new
technology
application
Contractor fees
may be lower
than R&D
Searching,
networking
Some internal
Reduced time to Very little support technical staff
market
available
Adaptation/
Develops
adoption costs
internal
capability
Immediately
Market risks
Up-front
implementable
investment in
Do not have
new business
Proven
control, have
technology, low to agree with
Ongoing
risk
partner
operational
costs
Probably,
Does not develop
exclusivity in
technical strength Training costs
the region
Learn from
provider
Manufacturing Quickest, ready Competitive
Sub-contract/ to use
advantage issues
ProducerLowest
Possible
customer
risk, proven
implementation
technology
problems
Acquisition
of a Company
with
Technology
Staff to
understand
technology,
manage
contracts
Up-front
payment
Training costs
Should be less
than developing
Implementation Builds little
because
support
technical strength development
costs shared by
Non-exclusive
many
Short time
May have to
Depends on
to market,
adapt technology purchase price
perhaps already to needs
of company
in market
May acquire
Should be
Low risk
negative baggage proportional to
technological
Could buy good May have merger
assets
image
problems
Contd...
Reverse
Engineering
Less costly, less

risky, less time
compared to
internal
R&D
Opportunity
to improve
product to gain
competitive
advantage
Me-too-product
Risk of not fully
understanding
original design
Some legal risks
Strong
Engineering
capability
Some office,
laboratory, shop
space
Possible legal
costs
Fill in the blanks:

16. .......................... entails the acquisition of a product containing a
technology that the company thinks is an asset, disassembling
it, and subjecting its components to a series of tests and
engineering analysis to ascertain how it works and the
engineering design criteria used in the products creation.
17. Which of the following are the advantages of internal
development?
(a) When the product fails or when related activities are
discovered in the market, the firm can react quickly.
(b) Failure to develop the necessary technology is a risk that
is always there. The more difficult the project, the greater
is the risk.
(c) Developing technology normally takes longer than buying
out the technology. Not only may it take longer; the length
of time is also unknown.
(d) In-house development is often more expensive than
acquiring technology externally.
Provide a description of the different possible types of strategic

alliancefrom joint ventures to network organisations to informal
agreements in the automobile industry. Providing some context
to the growing number of alliances in many industries would be
helpful.
2.7 TYPES OF PRODUCTION SYSTEM

Production systems can be classified as Job Shop, Batch, Mass and
Continuous Production systems.
2.7.1 JOB SHOP PRODUCTION

Job shop: A production system consisting of different general
purpose facilities used to handle a variety of tasks each with its
unique processing requirements. Each job is being different from the
previous one.
Characteristics: The main characteristics are as follows:
In the job shop both the nature and demand of job is unpredictable.
Each order or job is unique, requiring its own make up of

operations and times for processing through a number of
machines or facilities in a factory.
A job shop typically consists of general purpose machines clubbed

into different departments. Each job, governed by its unique
technological requirements, demands processing on machines
in a certain order.
Because of variety of jobs, and tasks, the job shop becomes

a complex queueing system; a job leaves one machine and
proceeds on its route to another for the next operation, only to
find other jobs already waiting for the machine to complete its
current task, so that a queue of jobs in front of that machine is
formed, alternatively, a machine may finish its task and be ready
to take the next job, but no jobs are available, so that the machine
becomes idle.
Planning for the job shop essentially involves deciding the order
or priority for jobs waiting to be proceeded at each machine to
achieve the desired objectives.
Examples: Scooter repair shop, Car garrage, Workshop, Computer

centres and Banks.
Problems and Prospects of Job Shop Production
Most of the problems in job production arise from the variety of jobs
arriving and demanding individual processing sequences on the
scarce facilities in the job shop owing to these factors, the job shop is
characterised by the following typical problems:
Complicated and unsystematic material flow pattern
Large in-process inventories
Large waiting time for jobs
Large completion time for jobs
Unpredictable problems owing to the large variety of tasks
The future prospects of job shop production will revolve around two
kinds of research.
Job Shop Scheduling: There has been attempt at developing

new procedures for scheduling with a variety of objectives. Most
of the procedures so far have been developed for the static job or
flow shop. Clearly a lot more could be done in this direction. The
major difficulty in large job shops is the combinatorial increase
in the computational facilities.
Dispatching and Simulation: The second kind of scheduling

research has been to test the efficiency of different priority
dispatching rules using simulation. The advantage of this
approach is that dynamic features can be incorporated and
evaluated. There are possibly two extremes for scheduling the
new jobs in a dynamic environment, to produce a new schedule
each time a new job arrives, or to completely finish the existing
schedule before producing a new schedule for the jobs that had
arrived in the mean time or a situation between the two extremes
could be considered. Ignoring computational considerations,
one could have an on line computer system whereby every time
an operation finishes on a machine, this information is fed into
the computer. The programme then considers the actual status
of the shop at that time and all the relevant data and applies
some criterion to select the next operation for that machine.
This approach may be computationally very demanding and
economically not feasible. Hence less frequent rescheduling
be done. What is the right frequency of scheduling with its
implication on cost and effectiveness is an important question
for researchers.
2.7.2 BATCH PRODUCTION
A production situation where production takes place in lots or

batches. Batch production implies that general purpose machines
are utilised for the production of different products. Material flow
tends to be more complex in such systems than in mass production
systems.
Characteristics of Batch Production: Unlike mass production which
tend to be organised as product layouts with machines or equipment
arranged according to the product flow, batch production normally is
done employing a process layout. Here similar machines or equipment
are grouped in departments and different jobs will follow their own
route depending on requirements. Apart from the greater flexibility
afforded by process layouts as compared to product layout some of
the advantages and disadvantages of batch production are as follows:
Advantages:
Better utilization of machines is possible, consequently fewer

machines are required.
A high degree of flexibility exists vis a vis equipment or manpower

utilisation/allocation for specific tasks.
Comparatively low investment in machines is needed.
There is generally greater job satisfaction for the operator owing

to the diversity of jobs handled.
Specialised supervision is possible.
Disadvantages:
Since longer and irregular flow lines result, materials handling

is more expensive.
Production planning and control system are more involved.
Total production time is usually larger.
Comparatively large amounts of in-process inventory results.
Space and capital are tied up by work in process.
Because of diversity of jobs in specialised departments, higher

grades of skill are required.
2.7.3 MASS PRODUCTION

Mass Production may be defined as a manufacturing system based on
interchangeable parts and the concept of division of labour to produce
generally large quantity of a product through successive operations/
assemblies carried out at a sequence of workstations in an assembly
line. Typical examples are: car assembly, electrical appliances, T.V.
sets, Computer assemblies, etc.
Features of a Mass Production System: A mass production system
operating as a continuous flow line exhibits certain desirable and
undesirable features. These are as follows:
Advantages:
A smooth flow of material from one workstation to next in a

logical order. Although straight line flow is common, other
patterns of flow include L flow, U flow, Circular or 0 flow or
serpentine or S flow.
Since the work from one process is fed directly into the next,
small in-process inventories result.
Total production per unit is short.
Since the workstations are located so as to minimise

distances between consecutive operations, materials
handling is reduced.
Little skill is usually required by operators at the production

line, hence training is simple, short and inexpensive.
Simple production planning and control system are possible.
Less space is occupied by work in transit, and for temporary

storage.
Disadvantages:
A breakdown of one machine may lead to complete stoppage

of the line that follows the machine. Hence maintenance and
repair is a challenging job.
Since the product dictates the layout, changes in product

design may require major changes in the layout. This is
often expressed by saying that assembly lines are inflexible.
The pace of production is determined by the slower or

bottleneck machine. Line balancing proves to be a major
problem with mass manufacturer on assembly lines.
Supervision is generally not specialised, as the supervisor of

a line is looking after diverse machines on a line.
Generally high investments are required owing to the

specialised nature of the machines and their possible
duplication in the line.
2.7.4 CONTINUOUS PRODUCTION

Continuous production system involves a continuous or almost
continuous physical flow of material. It makes use of special purpose
machines and produces standardised items in large quantities.
Examples: Petrochemical industries, cement industries, steel, sugar,
cigarette and fertilizers industries, etc.
Design of Continuous Production System: In this system the items are
produced for the stocks and not for specific orders. Before planning,
manufacturing to stock, a sales forecast is made to estimate likely
demand of the product and a master schedule is prepared to adjust the
sales forecast according to past orders and level of inventory. Here the
inputs are standardised and a standard set of processes and sequence
of processes can be adopted. Due to this, routing and scheduling for
the whole process can be standardised.
After setting of master production schedule, a detailed planning is
carried on. Basic production information and bills of materials are
recorded. Information for machine load charts, equipment and
personnel and materials needs is tabulated. In continuous production
each production run manufactures in large lot sizes and the
production process is carried out in a definite sequence of operation
in a predetermined order. In-process storage is not necessary, which
in turn reduces materials handling and transportation facilities. First
in first out rules is followed in the system.
Characteristics of Continuous Production System: These are as
follows:
Standard products are manufactured, which have large demand

through-out the year.
Standardised inputs and standardised sequence of operations,

machine tools and equipments are used.
Division of labour is made more efficiently.
Minimum materials handling.
Balanced flow of work.
Small work in progress.
Less supervision.
Use of productivity techniques is feasible.
Minimum cost of production per unit.
Rigid quality control.
More maintenance.
Types of Continuous Production: There are two types of continuous

production.
Mass Production: Here only one type of product or maximum

2 or 3 types are manufactured in large quantities and much
emphasis is not given to consumers orders. Standardisation of
products, process, materials, machines and uninterrupted flow
of materials are the main characteristics of this system.
Process Production: This system is used for manufacture of

those items whose demand is continuous and high. Here single
raw material can be transformed into different kind of products
at different stages of the production processes e.g., in processing
of crude oil in refinery one gets kerosene, gasoline etc. at different
stage of production.
Advantages of Continuous Production System
Reduced labour cost.
High accuracy.
Reduced materials handling.
Better quality and increased production.
Minimum wastages.
Simple control process.
Better materials control/Inventory control.
Better return on investments.
Limitations/Disadvantages
Heavy losses during slack demand period.
Rigid maintenance and upkeep.
Customer tastes can not be met as only one standard product is

manufactured.
It is difficult to adjust to new situations and specifications.
Special purpose machine tools are required.

Visit any manufacturer firm of electronic items. Check and report

for which items batch production was done and for which ones mass
production was done. State the differences between the volume,
variety and amount of machinery and labour required by them.
Fill in the blanks:

18. Major advantage of ...................... is the reduction in time to
market the product, relative to forms of technology acquisition
that require development.
19. In a joint venture, two or more organisations form a separate
legal undertaking, which is an ...................... organisation for
strategic purposes.
20. .................... production are characterised by manufacturing of
one or few quantity of products designed and produced as per
the specification of customers within prefixed time and cost.
21. ...................... production is defined by (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.
22. Manufacture of discrete parts or assemblies using a continuous
process are called ..................... .
23. Continuous production is used when Material handling is
fully ...................... .
2.8 SUMMARY
Products can be tangible or intangible. Tangible products are

called goods, while intangible products include services and
contracts. These are collectively referred to as products.
Product development includes a number of processes in

identifiable stages. These are Clarification of the Task, Concept
Generation, Embodiment Design, Detailed Engineering Design,
and Physical Evaluation.
Product design provides the operations team the basis for

preparing plans for: (a) Materials acquisitions, and (b) Production.
Once the product is introduced, the organisation needs to
monitor customer satisfaction and detect product weaknesses so
as provide feedback to the design team.
Concurrent engineering approach is to speed up the product

development process. With an integration team ensuring the
exchange of information between the teams working on different
aspects, it is possible to considerably reduce development times
and create high quality product designs that meet customer

expectations.
As a rule of thumb, 70 percent of the cost of the product or

service is firmed up by the time the conceptual design has
been completed. By the time the system definition is completed
80 percent of the cost is finalised and 90 percent of the cost is
firmed up before production.
Product architecture, therefore, is extremely important as it

establishes the functional capabilities of the product, its features,
and post-sale servicing needs, the capabilities of the product
delivery system and post-sale support that the customer expects
and determine the ability of the organisation to provide for these,
and the roles and risks each player within the supply chain will
assume.
Some concepts related to good product design and architecture

are Design-to-cost, Design for Manufacturability, Design for X,
End Product and Parts Standardisation, and Modular Designs.
Services, with a low degree of customer contact, involve the

same stages as the design of manufactured products. However,
services with a high degree of customer contact normally require
a much higher levels of capacity relative to demand and also
require greater flexibility.
Different strategies are employed in product development.

These are Internal Development, Collaborative or R&D with
Networking, R&D Contract/Consulting Engineers, Licensing,
Joint Venture, Manufacturing Sub-contract/Producer-customer,
Acquisition of a Company with Technology and Reverse
Engineering.
Joint Venture: A Joint Venture is when two or more organisations

form a separate legal undertaking, which is an independent
organisation for strategic purposes. The partnership is usually
focused on a specific market objective, with a given timeframe
and often involves a cross-border relationship.
Contracts: Contracts are business exchanges in which neither

services nor goods are transferred; instead, there is an implicit
understanding between the customer and the provider that
goods and services will be provided on an as needed basis.
Design for Manufacturability (DFM): Design for

Manufacturability (DFM) is the process of designing a product
for efficient production maintaining the highest level of quality.
Fast to Market Capability: Fast to Market Capability is the

ability to design, develop, and introduce a new product quickly.
Contd...
Fixed Costs: Fixed Costs are those costs that remain constant
irrespective of changes in the volume of output.
Goods: Goods are tangible items that are usually produced in

Innovation Capability: Innovation Capability reflects the

skills and activities spanning invention to innovation that are
involved in technological changes that range from radical new
departures to incremental improvements in existing technology.
Internal Development: Internal Development involves

developing the necessary skills among existing staff and
acquiring the necessary production capacity.
Products: Products are artefacts that provide value to the

customer. They can be tangible or intangible.
Quality Function Deployment: Quality Function Deployment

is an approach to understanding the customers requirements
and incorporating it in the design specifications of the product.
Reverse Engineering: Reverse Engineering is determining

the technology embedded in a product through rigorous
study of its attributes. It entails the acquisition of a product
containing a technology that the company thinks is an asset,
disassembling it, and subjecting its components to a series of
tests and engineering analysis to ascertain how it works and
the engineering design criteria used in the products creation.
Services: Services are intangible products that are consumed

as they are created.

1. Discuss the comparison between goods, services and contracts.
2. What are the steps and stages of product development? Is it
possible to reduce the time and the number of stages and come
out with a new product and service? Give details of procedures
and techniques.
3.
Why is the area of product development so important to the future

of the company? Can you categorise industries on the basis of the
pressures they feel due to product development? Explain.
4. Explain the following in relation to product design and

architecture:
(a) Product architecture
(b) Engineering economy
(c) Speed to Market
(d) Value Engineering
(e) Modular Design
5. What are the different types of costs incurred in product

development?
6.
How does Design for Manufacturability (DFM) work? How are

DFM and Value Engineering different? Explain with examples.
7.
Explain what DFX is with the help of examples.
8. What do you understand by standardisation of products and

manufacturing inputs for a firm?
9. What are the product development strategies for an organisation?
Explain with examples.
10. Differentiate between Job shop production, batch production
and mass production with the help of examples.

Topic
Typology of Products
Product Development
Process
Product Design and

Architecture
Q. No.
1.
2.
3.
Answers
Goods
Xerox
(b) Growth stage
4.
5.
6.
7.
(e) All the above

(c) Data is collected to
determine if the design
meets the design objectives
(d) Both (a) and (b) are correct
8.
9.
10.
Product Development in
Services
Product Development
Strategies
11.
12.
13.
14.
(b) Design for

manufacturability
Product Architecture
Engineering economy
Repair
dependent
15.
16.
Services
Reverse engineering
Contd...
17.
Types of Production System 18.

19.
20.
21.
22.
23.
(a) When the product fails or

when related activities are
discovered in the market,
the firm can react quickly
Licensing
independent
Job shop
Batch
mass production
automated

1.
Section 2.2
Goods are tangible items that are usually produced in one

location and purchased in another.
Services are intangible products that are consumed as they

are created. Services now dominate the economies of most
industrialised nations.
Contracts are business exchanges in which neither services nor

goods are transferred; instead, there is an implicit understanding
between the customer and the provider that goods and services
will be provided on an as needed basis.
2.
Section 2.3
The new product strategy of the organization is decided on the

basis of organizational capabilities and resources. Organizations
should develop explicit product-development strategies to
co-ordinate all of the major business processes that contribute to
product innovation. The need to be fast when competing in high
clock-speed industries makes this an absolute necessity.
3. Section 2.3

Being able to design, develop, and introduce a new product

quickly is a major competitive advantage and it gives a firm fast
to market capabilities.
There are two types of fast to market activities: Fast to

customisation and Fast to design.
4. Section 2.3 and 2.4

Engineering economy is the discipline concerned with the

economic aspects of engineering. It involves the systematic
evaluation of the costs and benefits of proposed technical projects.
In reality, any engineering project must be not only physically
realizable but also economically feasible.
Modular design is the creation of products from some combination

of basic preexisting subsystems.
5. Section 2.4.3
(a) Acquisition cost: The purchase price of a car, for instance
(b) Repair costs: The cost of replacing a broken part
(c) Maintenance costs: The cost of oil changes and tune-ups
(d) Operating costs: The cost of gas and tires
(e) Salvage/resale costs: The cost recovered upon selling a car
(f) Disposal costs: The cost of disposing of a wrecked car
6. Section 2.4.4

The design of a system or product involves the principal task of

evolving a form that can support the functions required by the
system or product. The design must be optimised with regard
to cost, technical requirements and value considerations of the
customer.
DFM is the process of designing a product for efficient

production maintaining the highest level of quality. It is intended
to avoid more complex and expensive product designs to simplify
assembly operations.
7. Section 2.4.5

DFX is a special case of DFM, where a certain area, say X is

selected for attention. Improvements in X are proposed after
detailed analysis of the process by a team of cross-functional
experts. The performance measures are established and items
are identified that will simplify the process and at the same time
provide value to the customer.
8. Section 2.4.6

Product standardization offers benefits to consumers and

producers alike. Customers can count on simplicity and
convenience in purchasing standardised products like household
doors, screws and other fasteners, spark plugs, and so on.
Similarly, uniform (standardised) pricing code label has meant
greater efficiency for the retailer.
9. Section 2.6

Product Development Strategy requires a capability of the

organisation to correctly evaluate product concepts so that
there is support to design new products or to introduce product
improvements in keeping with the market requirements. There
are a number of different strategies used for product development,
depending on the organisational capabilities.
10. Section 2.7

Job Shop: A production system consisting of different general

purpose facilities used to handle a variety of tasks each with its
unique processing requirements. Each job is being different from

the previous one.

Batch Production: A production situation where production

takes place in lots or batches. Batch production implies that
general purpose machines are utilised for the production of
different products. Material flow tends to be more complex in
such systems than in mass production systems.
Mass Production may be defined as a manufacturing system

based on interchangeable parts and the concept of division of
labour to produce generally large quantity of a product through
successive operations/assemblies carried out at a sequence of
workstations in an assembly line.

SUGGESTED READINGS
Adam & Ebert, Production and Operations Management





Kachru, Upendra, Strategic Management Concepts and Cases,

Excel Books, 2005

Melnyk, S. and D. Denzler, Operations Management: A Value

Driven Approach, McGraw Hill, 1996
Rummler, Geary A. and Alan P. Brache, Improving Performance:

How to Manage the White Spaces of the Organisational Chart,
Second Edition, Jossy-Bass, San Francisco, 1995

E-REFERENCES
http://www.investopedia.com/terms/m/mass-production.asp
http://ocw.mit.edu/courses/mechanical-engineering/2-875mechanical-assembly-and-its-role-in-product-developmentfall-2004/lecture-notes/cls15_prod_arch4.pdf
http://user.engineering.uiowa.edu/~eeconomy/documents/eitorginal.pdf
LOCATION DECISION
CONTENTS

3.1
3.2 Need for Facility Location Planning
3.3
Introduction
Nature of Location Decisions
3.3.1
Types of Facilities
3.4 Factors Affecting Location Decisions
3.4.1
Factors Affecting Manufactured Products
3.4.2
Factors Affecting Service Products
3.5
Selection of Site for the Plant
3.5.1 Country
3.5.2 State/District

3.5.3
3.6
Plant Location
Procedures for Location Decisions
3.6.1
Facility Master Plan
3.6.2
Impact Planning
3.6.3
Site Evaluation
3.7
Techniques of Location Analysis
3.7.1
Factor Rating Method
3.7.2
Load Distance Model
3.7.3
Least Cost Method
3.8 Location Decision Using the Transportation Method
3.9
Summary
3.10
3.11
Answers and Hints
3.12
MATS-INDIA LTD.
Mats-India in collaboration with an NRI group has reached an
understanding to set up an electronics plant in India. The product
range they have in mind is in the area of entertainment electronics
(VCR, CD playes and CTV, etc.). They are discussing about the
most appropriate place of location for this industry. Options they
have in mind are Calcutta, Srinagar, Bangalore, Jaipur and Patna.
Major plant and machinery for this project need to be airlifted and
70% of the products are to be exported.
The NRI group raised another issue. We would like to buy almost
60% of the components and subsystems from the local market but
we are not sure of the quality and reliability of materials and the
vendors. We cannot afford to have more than 3% rejections at any
stage right from incoming materials to finished goods. There are
five probable vendors in the list prepared.
Yet another matter that is of concern to them is the organisational
structure required for this enterprise, not knowing the details of
hierarchical system and lines of control etc. that are prevalent in
India.
LOCATION DECISION 79

Discuss the need for facility location planning
Describe various factors affecting location decisions
Explain how to select the site for a plant
Discuss procedures for location decisions like facility master
plan, impact planning, site evaluation, etc.
Describe location decisions using transportation method
Explain the constraints of a transportation problem
Elaborate upon the more common techniques, which can be
used in location decisions
3.1 INTRODUCTION
One of the most important long-term cost and revenue decisions a
company makes is where to locate its operation. Location is a critical
element in determining fixed and variable costs for both industrial
and service firms. Depending on the product and type of production
or service taking place, transportation costs alone can total as much
as 25% of the selling price. That is one fourth of the total revenue of a
firm may be needed just to cover freight expenses of the raw materials
coming in and the finished product going out. Other costs that may be
influenced by location include taxes, wages, and raw material costs.
The choice of locations can alter total production and distribution
costs by as much as 10%. Lowering costs by 10% of total production
costs through optimum location selection may be the easiest 10%
savings management ever makes.
Once an operations manager has committed an organisation to a
specific location, many costs are firmly in place and difficult to reduce.
For instance, if a new factory location is in a region with high energy
costs, even good management with an outstanding energy strategy is
starting at a disadvantage. The same is true of a good human resource
strategy if labour in the selected location is expensive, ill-trained,
or has a poor work ethic. Consequently, hard work to determine an
optimal facility location is a good investment.
3.2
EED FOR FACILITY LOCATION

N
PLANNING
Facilities location may be defined as selection of suitable location or

site or place where the factory or plant or facilities to be installed,
where plant will start functioning.
The development of a location strategy depends upon the type of

firm being considered. Industrial location analysis decisions focus
on minimising costs; retail and professional service organisations
typically have a focus of maximising revenue. Warehouse location,
on the other hand, may be determined by a combination of cost and
speed of delivery. The objective of location strategy is to maximise the
benefit of location to the firm.
Facility planning has developed, in the past decade, into a major
thriving business sector and discipline. One of the major reasons for
new facilities is the global economic boom that has been accompanied
by an enhancement of capacity worldwide.
In addition to the global economic boom, there are several other
reasons for changing or adding locations:
The cost or availability of labour, raw materials, and supporting

resources often change. These changes in resources may spur
the decision.
As product markets change, the geographical region of demand

may shift. For example, many international companies find it
desirable to change facility location to provide better service to
customers.
Companies may split, merge, or be acquired by new owners,

making facilities redundant.
New products may be introduced, changing the requirement and

availability of resources.
Political, economic and legal requirements may make it more

attractive to change location. Many companies are moving
facilities to regions where environment or labour laws are more
favourable.
Well-planned facilities enable an organisation to function at its most

efficient and effective level, offering real added value improvements
to the organisations core business.
Location and co-ordination have become the critical strategic

issues for corporations facing the challenges of globalisation.
Outline and assess the factors affecting the decisions corporations
might take about the location and management of key activities,
such as research and development, manufacturing, sales and
marketing, in the light of the statement above for any organisation
of your choice.
The development of a location strategy depends upon the type of

firm being considered. Industrial location analysis decisions focus
on minimising costs; retail and professional service organisations
typically have a focus of maximising revenue.

1.
Different levels of facility planning are

(a) Global level
(b) Macro level
(c) Micro level
(d) Sub-micro
(e) All the above
2. Who developed the use of standardisation in large-scale mass

production using a moving assembly line?
(a) Frederick Winslow Taylor
(b) Frank Gilbreth
(c) Adam Smith
(d) Henry Ford
3. Which of the following reasons are correct for changing or
adding locations for a facility?
(a) The cost or availability of labour, raw materials, and
supporting resources often change.
(b) Companies may split, merge, or be acquired by new
owners, making facilities redundant.
(c) New products may be introduced, changing the
requirement and availability of resources.
(d) As product markets change, the geographical region of
demand may shift.
(e) All the above
Fill in the blank:
4.
.......................... may be defined as selection of suitable location

or site or place where the factory or plant or facilities to be
installed, where plant will start functioning.
3.3 NATURE OF LOCATION DECISIONS

One of the most important long-term cost and revenue decisions
company makes is where to locate its operation. Location is a critical
element in determining fixed and variable costs for both industrial
and service firms. Depending on the product and type of production

or service taking place, transportation costs alone can total as much
as 25% of the selling price. That is one-fourth of the total revenue of a
firm may be needed just to over freight expenses of the raw materials
coming in and the finished product going out. Other costs that may
be influenced by location include taxes, wages and raw material costs.
The choice of locations can alter total production and distribution
costs by as much 10%. Lowering costs by 10% of total production costs
through optimum location selection may be the easiest 10% savings
management ever makes.
Once an operations manager has committed an organisation to a
specific location, many costs are firmly in place and difficult to reduce.
For instance, if a new factory location is in a region with high energy
costs, even good management with an outstanding energy strategy is
starting at a disadvantage. The same is true of a good human resource
strategy if labour in the selected location is expensive, ill-trained,
or has a poor work ethic. Consequently, hard work to determine an
optimal facility location is a good investment.
3.3.1 TYPES OF FACILITIES
The various types of facilities are briefly described below:
Heavy Manufacturing
Heavy manufacturing facilities are primarily plants that are

relatively large and require a lot of space and as a result, are
expensive to construct.
Example: Automobile plants, steel mills and oil refineries.
Important factors in the location decision for plants include
construction costs, modes of transportation for shipping heavy
manufactured items and receiving bulk shipments of raw materials,
proximity to raw materials, utilities, means of waste disposal and
labour availability. Sites for manufacturing plants are normally
selected where construction and land costs can be kept at a minimum
and raw material sources are nearby in order to reduce transportation
costs. Access to rail-roads is frequently a major factor in locating a
plant. Environmental issues have increasingly become a major factor
in plant location decisions. Plants can create various forms of pool
pollution and traffic pollution. These plants must be located where
the harm to the environment is minimised. Although proximity to
customers is an important factor for some facility types, it is less so
for manufacturing plants.
Light Industry
Light industry facilities are typically perceived as smaller, cleaner

plants that produce electronic equipment and components, parts
used in assemblies, or assembled products.
Example: Making stereos, TVs, or computers, tool and die shop,
breweries, or pharmaceutical firms.
Several factors are important for light industry. Land and construction
costs are not generally as crucial, because the plants tend to be smaller
and require less engineering. It is not as important to be near raw
materials, since they are not received in large bulk quantities, nor is
storage capacity required to as great a degree. As a result, transportation
costs are somewhat less important. Many parts and material suppliers
fall into this category and as such, proximity to customers can be an
important factor. Alternatively, many light industries ship directly
to regional warehouses or distributors, making it less important
to be near customers. Environmental issues are less important in
light industry, since burning raw materials is not normally part of
their production processes, not are there large quantities of waste.
Important factors include the labour pool, especially the availability
of skilled workers, the community environment, access to commercial
air travel, government regulation and land use requirements.
Warehouses and Distribution Centres
Warehouses are a category of their own. Products are not manufactured
or assembled within their confines, nor are they sold from them.
They represent an intermediate point in the logistical inventory
system where products are held in storage. Normally a warehouse
is simply a building that is used to receive, handle and then ship
products. They generally require only moderate environmental
conditions and security and little labour, although some specialised
warehouses require a more controlled environment, such as
refrigeration or security for precious metals or drugs. Because of their
role as intermediate points in the movement of products from the
manufacturer to the customer, transportation and shipping costs are
the most important factors in the location decision for warehouses.
The proximity to customers can also be an important consideration,
depending on the delivery requirements, including frequency of
delivery required by the customer. Construction and land costs tend
to be of less importance as does labour availability. Since warehouses
require no raw materials, have no production processes and create no
waste, factors such as proximity to raw materials, utilities and waste
disposal are of almost no importance.
Retail and Service
Retail and service operations generally require the smallest and
least costly facilities. Examples include such service facilities as
restaurants, banks, hotels, cleaners, clinics and law offices and retail
facilities such as groceries and department stores, among many
others. The single most important factor for locating a service or
retail facility is proximity to customers. It is usually critical that a
service facility be near the customers who buy from it. Construction
costs are generally less important (especially when compared with a
manufacturing plant); however, land or leasing costs can be important.
For retail operations, for which the saying location is everything is
very meaningful, site costs can be very high. Other location factors
that are important for heavy and light manufacturing facilities, such
as proximity to raw materials, zoning, utilities, transportation and
labour, are less important or not important at all for service and retail
facilities.
Though factory layout is the focal point of facility design in most cases
and it dominates the thinking of most managers, yet factory layout is
only one of several detail levels. It is useful to think of facility planning
at four levels, these are:
Global (Site Location)
Macro (Site Planning)
Micro (Facility and Building Layout)
Sub-micro (Workstation Design)
Ideally, the design progresses from global to sub-micro in distinct,

sequential phases. At the end of each phase, the design is frozen by
consensus. Moving in a sequential manner helps management in the
following manner:
Settling the more global issues first.
It allows smooth progress without continually revisiting

unresolved issues.
It prevents detail from overwhelming the project.
Based on strategic importance, the macro layout is accepted to be the

most critical and strategically important aspect of facility planning.
However, all the stages have their own importance and significance.
TABLE 3.1: FACILITY PLANNING MATRIX

Level
Activity
Global
Site Location
& Selection
Site Planning Site
Features, and
Departments
Macro Layout
Space
Planning
Unit
Sites
Environment
World or Country
Site and Building
Concept
Contd...
Micro Layout
Sub-micro
Layout
Facility,
Building
and Factory
Layout
Workstation
& Cell
Design
Buildings,
Workstations
Features
Plant or
Departments
Tool &
Fixture
Locations
Workstation &
Cells
Visit any service operator firm. What are the special problems
faced by service operators, like Sahara Pariwar, in locating new
facilities?
Fill in the blanks:

5
.......................... is a critical element in determining fixed and

variable costs for both industrial and service firms.
6. .......................... manufacturing facilities are primarily plants

that are relatively large and require a lot of space and as a
result, are expensive to construct.
7. Which of the following is not associated with the work of
Taylor?
(a) A one best way of doing things
(b) The hierarchal need of labour
(c) The scientific method
(d) Clear distinctions between the responsibilities of labour
and management
8. Which of the following is not the type of facilities?
(a) Heavy manufacturing
(b) Warehouse and distribution centres
(c) Retail and service industry
(d) All are types of facilities
3.4
ACTORS AFFECTING LOCATION

F
DECISIONS
The location of a business is considered when it starts-up or when its

present location is unsatisfactory. The businesss objectives as well as
the conditions of the environment change, so the business may need
to look for a new location once in a while. There are many factors that
affect the location of businesses, and these factors are different for each
business sector. Some of the factors are shown below in the figure 3.1
Amenities
Raw
Materials
Cheap
land
Employees
Factors
influencing
location
Infrastructure
Customers
Good
Transport
Figure 3.1: Factors affecting Location Decisions

3.4.1 FACTORS AFFECTING MANUFACTURED PRODUCTS
Manufactured products differ from many service products as
production may take place at a location, and then the goods are
distributed to the customer. Often the source of raw materials is an
important factor in deciding locations. Very often, you want to locate
your operation close to that source of raw material.
In the previous section we identified some of the factors that impact
on the location decision for a new facility. These factors included some
that tend to be critical regardless of the type of facility or location,
such as labour, transportation, access to customers and markets, and
community environments. In this section we discuss these factors and
others in more detail.
Labour
The Labour climate is one of the most important overall factors in the
location decision, particularly for manufacturing operations and even
to a certain extent for service operations. Labour climate includes the
cost of labour, embodied in wage rates and salaries, the availability
of labour, the work ethic of the labour population, the possibility of
labour conflict and problems with organised labour. and the general
skill level of the labour pool.
Wage rates have traditionally been lower in the Central and Southern
regions in India than in other geographic regions, especially the
North and West. This has contributed to the relocation of many
manufacturing companies to the Central region. However, the eastern
region has become less inviting due to labour strife.
Individual communities will often reflect different work ethics in
terms of absenteeism, commitment and productivity. This sometimes
results from the fact that a new plant in a town where few plants are
located often offers a welcome desirable work experience with higherpaying jobs.
Labour conflict is anathema to many companies and they will
avoid union contamination of their work force at almost any cost.
Alternatively many local unions are able to assist in attracting new

plants or keep plants from relocating by their willingness to work
with management and make attractive labour compromises and
concessions.
Transportation and Logistics
The proximity of suppliers and markets are both important
considerations in the location decision. For many heavymanufacturing companies it is essential to be close to raw material
sources. such as forestry and wood products companies, mining
operations, and food-processing plants. Although it is not necessary
for some companies to be in close proximity to their source of raw
materials, it is important that they be near one of the five primary
modes of transportation, railroads, highways/trucking, waterways or
pipelines that is adequate to meet their, shipping and receiving needs.
Distribution and supply routes and modes of transportation are also
important for many service-related businesses. Fast-food operations,
retail stores, groceries, and service stations are examples of businesses
that use materials or products that must be transported to them from
a warehouse or distributor.
The costs associated with transporting materials and finished products
can be significant for businesses, especially when frequent deliveries
over long distances are required or the items being distributed are
large. The magnitude of these costs is often the primary reason that
a business will locate near its customers, its suppliers, or both. The
closeness of suppliers can also determine the amount of inventory a
firm will be required to keep in stock. If a supplier is very near a plant
or business then items can be received quickly, negating the necessity
to keep large stocks of materials, supplies, or parts on hand, thus
reducing inventory costs. As the distance from suppliers increases,
the variability of the timing of deliveries increases. This fact magnifies
the uncertainties inherent in a companys usage rate, which requires
even larger stocks or inventory to guard against any stockouts and
work stoppages resulting from late deliveries. The same problems can
occur in reverse if a company is far from its customers. Uncertainty
in delivery schedules caused by long distances can cause customers
to maintain larger-than-desired inventory stocks. This situation
generally decreases the level of customer service that can be provided.
Customers and Markets
Many businesses simply look for a high volume of customer traffic
as the main determinant of location, regardless of the potential
competition. An national highway exit onto a major thoroughfare will
almost always include a number of competing service stations and
fast-food restaurants. Shopping centres are an example of a location in
which a critical mass of customer traffic is sought to support a variety
of similar and dissimilar businesses. For example, a shopping centre
typically has numerous restaurants, several large department stores,
and a variety of smaller speciality stores that sell similar products. In
fact, a large department store in a shopping centre will stock almost
every product (not brand) that virtually everyone of the smaller stores
around it also stocks. Instead of seeking a location away from large
competitors these smaller retail stores cluster together to feed off the
customer traffic created by the larger anchor stores. Alternatively,
businesses that rely on a steady customer clientele, such as doctors,
dentists, lawyers, barber shops and hair salons, and health clubs often
tend to seek locations with limited competition, which minimises
customer turnover.
Although it is important to be located where suppliers are, in order
to make sales, it is also important to be near enough to customers to
provide a high level of customer service. This is especially true given
the current emphasis and expectations regarding quality service.
As a result, it has become increasingly important for manufacturing
firms to be near their customers, especially if they are suppliers of
parts or materials used to produce finished goods. As we have already
mentioned on several occasions, there is pressure on suppliers to locate
near their customers in order to reduce the uncertainty of delivery
schedules and provide better customer service. As international
markets have opened up, a number of major manufacturing companies
have located plants overseas for similar reasons-that is, to minimise
transportation costs and be closer to their customers.
State/District Environment
A number of specific factors associated with the local state/district
where a business might locate can be important to the location
decision.
TABLE: 3.2 FACTOR AFFECTING LOCATION DECISION

Climate
Crime rates
Available housing in different

price ranges
Medical, fire, and police services
Taxes
Local population and available

labour pool
Financial Health and

institutions
Distance to convenient air

service
Universities and research labs
Local road system and traffic
System of local government
Shopping
Cultural and entertainment

activities
Environmental, noise, pollution

regulations
Land use regulations and

ordinances
Local attitudes toward business
Educational system
States/districts will often aggressively seek out new businesses to locate
in their area by enhancing many of these factors including providing
tax breaks and low interest loans; easing construction, easing land use
and environmental regulation and ordinances; improving and building

roads; and issuing bonds to support site preparation and construction
of the facility. Alternatively, states/districts will occasionally work to
keep out undesirable businesses that might foul the environment
or increase the demand on community services without providing
acceptable long-term benefits.
Site Characteristics
When locating at a new site, a business can either purchase or lease
an existing building or select a parcel of land and construct a new
facility. Service-related businesses often rent or purchase existing
facilities, for example, in shopping malls or office buildings. It is
usually more difficult for manufacturing operations to find a building
that is suitable for their specific needs, and so construction is usually
required.
If a new facility is built, a range of factors must be considered,
many of which are the same as for a person building a house. These
include the size of the space, potential for expansion, soil stability and
content, neighbourhood, drainage, direct access to roads, sewer and
water connections, utilities, and cost. When evaluating a site for lease
or purchase, other considerations (that would be built into a new
facility) include structural integrity of the facility, the ability to make
alterations to the structure, existing parking and the potential for
additional parking, neighbourhood, loading-dock facilities, storage,
maintenance and utility expenses, the lease rate (or purchase cost),
and, if leasing, the length of the lease.
A recent trend in site locations has been a proliferation of industrial
and office estates, in which many of the special use needs of
businesses have been planned for. Industrial estates usually have a
combination of available parcels of land and existing structures that
cater to service operations or vendors with storage requirements and
light manufacturing. Office estates typically have a number of existing
buildings and office suites that are attractive to white-collar service
operations such as insurance companies, lawyers, doctors, real estate,
and financial institutions.
3.4.2 FACTORS AFFECTING SERVICE PRODUCTS
In service, the capacity to deliver the service to the customer must
first be determined; only then can the service be produced. What
geographic area can you realistically service?
Example: A hotel room must be available where the customer is when
that customer needs it a room available in another city is not much
use to the customer.
The primary parameters on which the geographical location decisions
are based for service products have been enumerated below:
Purchasing power of customer drawing area.
Service and image compatibility with demographics of the

customer drawing area.
Competition in the area.
Quality of the competition.
Uniqueness of the firms and competitors locations.
Physical qualities of facilities and neighbouring businesses.
Operating policies of the firm.
Quality of management.
Example: Karim, a specialty restaurant in Delhi, had opened outlets

in the major upcoming markets in Delhi, Noida and Gurgaon. In the
malls that are coming up in and around Delhi, you see well known
names like Marks and Spencer, McDonalds, Tissot, Canon Nike, etc.
These are all decisions related to capacity.

9. Why locating plants and facilities near the market for a
particular product or service is of primary importance?
(a) Product may be fragile.
(b) Decrease deliveries.
(c) It susceptible to spoilage.
(d) Add to transportation costs.
(e) All of the above.
10. The location of materials is likely to be important if:
(a) Transportation of materials and parts represent the
minor portion of unit costs.
(b) Material is available in all the regions.
(c) Material is very light in the raw state.
(d) Material bulk can be reduced in various products and by
products during processing.
Fill in the blanks:
11. The bulk of all freight shipments are made by ........................
since it offers low costs, flexibility and speed.
12. One of the primary parameters on which the geographical
location decisions are based for service products is ....................
of the firms and competitors locations.
Discuss all the factors affecting the decision for locating a new steel
plant by TATA. Where should TATA set up its new steel plant in
India?
Assembly-type industries, in which raw materials are gathered

together from various diverse locations and are assembled into
a single unit, often tend to be located near the intended market.
This becomes especially important in the case of a custom-made
product, where close customer contact is essential.
3.5 SELECTION OF SITE FOR THE PLANT

When we see on the television news or read in the newspaper that a
company has selected a site for a new plant, the decision can appear
to be almost trivial.
Usually it is reported that a particular site was selected from among
two or three alternatives, and a few reasons are provided such as good
community or available land. However, such media reports conceal the
long, detailed process for selecting a site for a major manufacturing
facility. When General Motors selected Spring Hill, Tennessee, as the
location for their new Saturn Plant in 1985, it culminated a selection
process that required several years and the evaluation of hundreds of
potential sites.
When the site selection process is initiated, the pool of potential
locations for a manufacturing facility is, literally, global. Since
proximity to customers is not normally an important location factor
for a manufacturing plant, countries around the world become
potential sites. As such, the site selection process is one of gradually
and methodically narrowing down the pool of alternatives until the
final location is determined. In the following discussion we identify
some of the more important factors that companies consider when
determining the district, region, state, and site at which to locate a
facility.
3.5.1 COUNTRY
Until recent years companies almost exclusively tended to locate
within their national borders. This has changed somewhat in recent
years as U.S. companies began to locate outside the continental United
States to take advantage of lower labour costs. This was largely an
initial reaction to the competitive edge gained by overseas firms,
especially Far Eastern countries, in the 1970 and 1980. U.S. companies
too quickly perceived that foreign competitors were gaining a
competitive edge primarily because of lower labour costs. They
failed to recognise that the real reason was often a new managerial
philosophy based on quality and the reduction of all production
related costs. High transportation costs for overseas shipping, the lack
of skilled labour, unfavourable foreign exchange rates, and changes in
an unstable government have often combined to negate any potential
savings in labour costs gained by locating overseas. Ironically, some
German companies, such as Mercedes-Benz, are now locating plants
in the United States because of lower labour costs. An overseas

location is also attractive to some companies who need to be closer to
their customers, especially many suppliers.
Location factors that are often considered for an overseas site include
the following:
TABLE 3.3: LOCATION FACTORS FOR

AN OVERSEAS SITE
Government stability
Government regulations
Political and economic systems
Economic stability
Exchange rates
Culture
Climate
Export and import regulations,
duties and fees
Raw material availability

Number and proximity of
suppliers
Transportation system
Labour pool and cost
Available technology
Commercial travel
Technical expertise
3.5.2 STATE/DISTRICT
The next stage in the site selection process is to determine the part of
the country or the state in which to locate the facility.
In India the Western and Central regions are generally most preferable,
and the Eastern region is least preferable for manufacturing facilities.
This reflects a general migration of industry from the Eastern to the
Western and Central regions during the last two decades primarily
due to labour relations. The factors that influence in what part of the
country to locate are more focused and area-specific than the general
location factors for determining a country.
Factors that are considered when selecting the part of the country for
a facility include the following:
TABLE 3.4: FACTORS FOR LOCATION DECISION

IN THE COUNTRY
Labour (availability, cost and unions)
Proximity of customers
Number of customers
Construction/Leasing costs
Land cost
Modes and quality of transportation
Transportation costs
Government regulations
Environmental regulations
Raw material availability
Commercial travel
Climate
Utilities
3.5.3 PLANT LOCATION

The site selection process further narrows the pool of potential
locations for the facility down to several communities or localities.
Many of the same location factors that are considered in selecting the
country or region in which to locate are also considered at this level of
the process. Location factors include the following:
TABLE 3.5: PLANT LOCATION FACTORS

State/District government
Concentration of Customers
Local business, regulations
Taxes
Environmental regulations
Construction/Leasing costs
Government services
Land cost
(Chamber of Commerce, etc.)
Availability of sites
Business climate
Financial services
State amenities
Labour pool
Transportation system
State inducements
Proximity of customers
Proximity of suppliers
Site
The site selection process eventually narrows down to the
determination of the best location within a community. In many cases
a community may have only one or a few acceptable sites, so that
once the community is selected the site selection is an easy decision.
Alternatively, if many potential sites exist, a thorough evaluation is
required of sites that are potentially very similar. For service and
retail operations, customer concentrations become a very important
consideration in selecting a site within a community, as does cost.
These and other factors in the selection of a site are included among
the following:
TABLE 3.6: SITE SELECTION FACTORS

Customer base
Land use restrictions
Construction/Leasing cost
Traffic
Land cost
Safety/Security
Site size
Competition
Transportation
Area business climate
Utilities
Income level

13. Which of the following is not associated with the work of
Taylor?
(a) A one best way of doing things
(b) The hierarchal need of labour
(c) The scientific method
(d) Clear distinctions between the responsibilities of labour
and management
14. Which of the following is not an OM tactical issue?
(a) How many workers do we need?
(b) Where do we locate the facility or facilities?
(c) When should we have material delivered?
(d) Should we work overtime or put on a second shift?
15. Which of the following is not an example of the shift of power
from producers to consumers?
(a) Increasingly higher power of product
(b) A focus on shorter delivery times
(c) Less emphasis on reducing labour and material costs
(d) Better utilisation of facilities
Visit any retail store of garments of your choice. Ask them about
the location of their plant in India and why have they chosen that
location? Study all the factors affecting their decision of choosing
that location.
3.6 PROCEDURES FOR LOCATION DECISIONS

At macro level, the plans of the site are developed. These plans should
include number, size and location of buildings. It should also include
infrastructure such as roads, rail, water and energy. Planning of
this stage has the greatest strategic impact on the facility planning
decision. This is the time to look ahead and consider the different
impacts and site and plant expansions leading to the eventual site
saturation. Planning at the macro level stage should include the
following:
Development of a facility master plan to guide facility investments

over a multi-year period
Impact planning
Evaluation
Facility layout, space allocation and capacity
Development of space standards.
3.6.1 FACILITY MASTER PLAN

The facility master plan helps plan:
Right services: The right services consistent with

organisations mission, strategic initiatives, and market;
the
Of the right size, based on projected demand, staffing, and

equipment/technology;
At the right location based on access, operational efficiency, and

building suitability;
With the right financial structure.
Facility master planning strategy involves examining the existing

facilities; the sizing of future facilities and site amenities; the
integration of these facilities into the site; traffic flow and circulation;
and the analysis of any impact that this development will have on the
site with respect to environmental issues.
The areas it covers include:
Land-use Planning
Site Evaluation
Zoning Analysis
Traffic Impact Analysis
Site Engineering Analysis
Architectural Programming
Needs Assessment Survey
Interior Space Planning
Adaptive Reuse Study
Building Design
Site Design
Landscape Design
The master planning teams work is broadly divided into two phases:
Phase I deals with information gathering and analysis. Phase II
addresses the synthesis of gathered information into the development
of a master plan.
Steps Involved in Phase I
A review of the development history of the business;
Evaluation in the local and regional context;
Planned current and projected conditions;

It starts with collecting baseline data on market dynamics,

workload trends, current space allocation, and perceived facility,
operational, and technology issues.
Steps Involved in Phase II

Phase II synthesises and integrates numerous strands of information
gathered into an organised plan.
Orderly approach to master planning and the growth during a

specified planning period.
The master planners, at this stage, formulate approaches to such

big picture issues as image, identity, character, and visions of
the future of the organisation within a broader, societal context.
The current market strategies and business plans, potential

operations restructuring initiatives, and planned investments
in new equipment, information technology, and other capital
requirements (e.g., infrastructure upgrading) are reviewed.
The facility master plan provides a detailed phasing/

implementation plan, which also serves as a road map to guide
facility investments over a multi-year period.
It identifies immediate, short-term, and long-range projects

with corresponding capital requirements and its sequencing.
This is compared with current industry practice.
3.6.2 IMPACT PLANNING

New locations require that organisations establish relationships
with new environments and employees, and adding or deleting
facilities requires adjustments in the overall management system.
The organisation structure and modes of making operating decisions
must be modified to accommodate the change. These hidden system
costs are usually excluded from quantitative models, and yet they
are very real aspects of the location decision.
Cultural Differences
The decision to locate a new facility usually means that employees
will be hired from within the new locale. It also means that the
organisation must establish appropriate community relations to fit
into the locale as a good neighbour and citizen. The organisation
must recognise the differences in the way people in various ethnic,
urban, suburban, and rural communities react to new businesses.
Managerial style and organisational structure must adapt to the norms
and customs of local subcultures. Employees acceptance of authority
may vary with subcultures, as do their life goals, beliefs about the role
of work, career aspirations, and perceptions of opportunity. These
cultural variations in attitude impact on-the-job behaviour and talent.
At the international level are even greater cultural differences.
Compare, for example, the Japanese work tradition with that of
Western industrial society. Japanese workers are often guaranteed

lifetime employment. Management decisions usually are group rather
than individual decisions. Employee compensation is determined by
length of service, number of dependents, and numerous factors apart
from the employees productivity. Obviously operations managers in
Japan face a very different set of managerial problems from their U.S
counterparts. Wage determination, employee turnover, hiring, and
promotion practices are not at all the same.
The European social system, as another example, has resulted in
a more managerial elite in their organisations than in the U.S.
Because of education, training, and socialisation, including a lifelong
exposure to a relatively rigid class system, lower subordinates are not
prepared to accept participative managerial styles. This has resulted
in more authoritarian/centralised organisations than participative/
decentralised.
Locating a new facility in a new culture is not simply a matter
of duplicating a highly refined manufacturing process. Merely
transferring tools and equipment is not adequate. Managerial
techniques and skills, in a proper mix, must be borrowed from the
culture, and so must the cultural assumptions that are needed to make
them work. Clearly, the economic, political, and cultural makeup of
a society has far-reaching effects on the technological and economic
success of multinational location decisions.
Job Satisfaction
In recent years managers have been very concerned about employee
job satisfaction because it affects how well the organisation operates.
Although no consistent overall relationship between job satisfaction
and productivity seems to exist, other consistent relationships have
been found. As compared with employees with low job satisfaction,
those expressing high job satisfaction exhibit the following
characteristics:
Fewer labour turnovers
Less absenteeism
Less tardiness
Fewer grievances
These four factors can substantially affect both costs and disruptions
of operations. But how is job satisfaction related to facility location?
There is some evidence that satisfaction is related to community
characteristics such as community prosperity small town versus large
metropolitan locations and the degree of unionisation. Accordingly, a
company with facilities in multiple locations can expect variations in
employee satisfaction due to variation in attitudes and value systems
across locations.
Consumer Considerations
For many organisations, location planning must emphasise consumer
behaviour and proximity to customers. If primary product is a
service to the public, the customer convenience may be the prime
consideration. Theatres, banks, supermarkets and restaurants heavily
emphasise customer convenience when choosing a location. In fact,
location convenience itself is often considered to be the service. For
these reasons the location decision may be regarded as a responsibility
of marketing staff instead of production! operations staff especially as
it affects revenues rather than costs.
3.6.3 SITE EVALUATION
In the previous sections we have identified the important factors that
companies often consider when determining where to locate a facility.
In the site selection process these factors and others are evaluated by a
search team or individual from the company. Sometimes a consulting
firm is hired that specialises in site selection for different types of
facilities. For example, there are consulting firms that specialise solely
in selecting sites for bookstores in university communities. Similarly,
there are site location firms that travel around the world evaluating
locations for plants for large companies. However, whoever conducts
the search, the evaluation process requires large amounts of data and
information relative to the different location factors. The cost data
alone for different factors such as construction, land, labour, and
transportation can be voluminous. National, state, and community
governments generally have departments or offices that specialise
in attracting businesses and have data and information useful in the
site selection process. Government agencies also publish numerous
documents with data and information about potential business sites
in their jurisdiction. These offices will also usually provide assistance
in gathering relevant data from publications, brochures, reports, or
a computerised information system. They will also help to gather
information that is not readily available. Chambers of commerce for
different cities are excellent sources of information about communities
and potential facility sites.
Size of site: The plot of land must be large enough to hold the
proposed plant along with its utilities, waste and water treatment
facilities, parking and access facilities and support services. The
size of the plot must also be large enough to provide sufficient
space for further expansion.
Utilities: The continuity of operations and the ability for

uninterrupted production depends on the adequacy of utilities.
The ability to overcome recurring problems associated with
the supply of utilities needs to be evaluated and accountability
assigned:
Possible restrictions on power availability.
Cost differentials at peak periods.
Availability of water supply during a hot summer.
Quality of water-hard or soft, etc.
Connection cost of services from main supply lines to the

intended plant.
Costs associated with the volume and reliability of power, water

and fuel supplies must be evaluated carefully. These costs are
considerable and have to be borne over the life of the assets.
Transportation facilities: Rail and road networks should be close

to the proposed plant to minimise the cost of creating private
sidings to the rail lines and access roads. Some indication can be
gained by looking at the present road and rail network serving
the local community. The plant should also be easily accessible
by car and public transport.
Intangible factors to consider include the reliability and network

of the available carriers, the frequency of service, and freight and
terminal facilities, and distance from the nearest airport. These
can reflect on the cost and time required to transport the finished
product to market and raw materials to the plant. They may also
impact on the time required to contact or service a customer.
These are important issues that must also be considered.
Land costs: These are non-recurring costs and of little importance

in the determination of the facility location. In general, the plant
site will be one of the following locations: city location; industrial
areas or estates; or interior areas.
Locating an establishment can be in a (a) city, (b) industrial estate

or industrial area, or (c) at a greenfield location. Each option has
advantages and disadvantages. The criteria for choosing each of
these locations are given below:
City Location:
99
Availability of high proportion of highly skilled

employees.
99
Fast transportation or quick contact with customers

and suppliers.
99
Size of plant often a limitation, small plant sites or

multi-floor operations.
99
Transportation of large variety of materials and supplies

possible, but usually in relatively small quantities.
99
Urban facilities and utilities available at reasonable

rates.
99
Possible to start production with a minimum investment

in land, buildings, etc., as these can usually be rented.
Industrial Estates/Industrial Areas:

99 Limitations in locating close to employees homes.
99 Often provided exemptions from high taxes.
99 Freedom from strict city building and zoning
restrictions.
99 Infrastructure often not a major concern.
99 Environmental concerns can be met at minimum cost
outlay.
99 The site should be close to transportation and
population.
Interior Greenfield Location:

99 Large land requirement.
99 Suitable to production processes/product which are
dangerous or objectionable.
99 Requirement for large volumes of relatively pure water.
99 Often provided exemptions from high taxes.
99 Limited availability of highly skilled employees.
99 Need to invest in infrastructure and housing.
Plant location analysis is a periodic task. Management

should recognise that successful businesses are dynamic.
A location may not remain optimal forever.
3.7 TECHNIQUES OF LOCATION ANALYSIS

Location analysis is an important decision and should not be taken
lightly. The physical location of business functions is an important
part in the supply chain strategy of any company. Location should
be defined by strategy, not only in foreign but also in domestic
locations. According to studies conducted, poor location is among the
chief causes of all business failures. Simply finding the cheapest site
is typically a recipe for disaster. We discuss here three mostly used
techniques of location analysis.
3.7.1 FACTOR RATING METHOD
The decision where to locate is basically subjective, based on a
variety of different types of information and inputs. There is no single
model or technique that will select the best location from a group.
However, there are techniques available that help to organise location
information and that can be used as a basis for comparing different
locations according to specific criteria.
One of the more popular methods for evaluating and comparing
different locations is the location factor rating system. In this
procedure the factors that are important in the location decision
are identified. Each factor is assigned a weight from 0 to 1.00 that
prioritises the factor and reflects its importance. A score is assigned
(usually between 0 and 100) to each factor based on its attractiveness
compared to other locations, and the weighted scores are summed.
Example: The Indian Seamless Tube Company Ltd. which has

distribution plants in Gujarat and Andhra is considering adding a third
assembly and distribution plant either in Ahmedabad, Bangalore or
Cochin.
The company has collected the following economic and other relevant
data:
Factors
Transportation cost/week
Labour cost/week
Selected criteria scores (Based
on a scale of 0-100 points)
Finishing material supplied
Maintenance facilities
Community attitude
Cochin Ahmedabad Bangalore

` 780
` 640
` 560
` 1200 ` 1020
` 1180
35
60
50
85
25
85
70
30
70
Company Management has pre-established weights for various factors

ranging from 0-10. They include a standard of 1.00 for each ` 10 pet
week of economic advantage. Other weights that are applicable are
1.5 on finishing material supply, 0.8 on maintenance facilities and 2.0
on community attitude. Maintenance also has a minimum acceptable
score of 30. Develop a quantitative factor comparison for the three
locations.
Solution:
1.
The relevant factors are

(a) Relative economic advantage
(b) Finishing material supply
(c) Maintenance facility
(d) Community attitude
2.
Evaluation scales are all 0-100 points.
3.
Factor weights for (a), (b), (c) and (d) per ` 10 weekly advantage
are 1.0, 1.5, 0.8 and 2 respectively.
4.
Weighted scores = E (score) (weight)
First we must determine the relative economic advantage score:

Cochin
Ahmedabad
Bangalore
1980
1660
1740
(highest cost/week)
0
Economic advantages
320
240
score in ` 10 units
32
24
Cost/week
(transportation +
labour)
Relative economic
advantage
Factors
Cochin
Ahmedabad
Bangalore
Economic
0 1.0 = 0
32 1.0 = 32.0
24 l.0 = 24
Material supply 35 l.5 = 52.5
85 1.5 = 127.5 70 1.5 = 105
Maintenance
60 0.8 = 48.0
25 0.8 = 20.0
Community
50 2.0 = 100.0 65 2.0 = 130.0 70 2.0 = 140
30 0.8 = 24
The Bangalore and Ahmedabad sites do not meet the maintenance

minimum criteria of 30. Though Cochin has the least total points and
would be recommended on the basis of this limited analysis (even
though Bangalore and Ahmedabad have a lower cost structure). If
maintenance criterion is lowered to 20 points than Ahmedabad is
perhaps the best choice.
It is often better to use this model along with a quantitative model
and compare the results before taking a facility location decision.
A number of other models are available and commonly used that
quantify both the benefits and costs of a specific location compared
to others.
3.7.2 LOAD DISTANCE MODEL
The Load-distance Model is a simple mathematical model that
captures costs to identify attractive candidate locations on the basis of
quantitative factors. The objective of this model is to select a location
that minimises the total weighted loads moving into and out of the
facility.
Center-of-Gravity Technique
In general, transportation costs are a function of distance, weight,
and time. The center-of-gravity, or weight center, technique is a
quantitative method for locating a facility such as a warehouse at
the center of movement in a geographic area based on weight and
distance. This method identifies a set of coordinates designating a
central location on a map that minimises the weighted average of the
weight transported to all other locations. As such, it implicitly assumes
that by minimising the weight shipped, costs are also minimised.
The starting point for this method is a grid map set up on a Cartesian
plane, as shown in Figure 3.2. Note that there are locations identified
as 1, 2, and 3, each at a set of coordinates (Xi, Yi) identifying its location
in the grid. The value Wi is the annual weight shipped from that
location. The objective is to determine a central location for a new
facility that minimises the distance these weights are shipped.
The coordinates for the location of the new facility are computed
using the following formulas:
n
x w
y w
i i
=i 1=i 1
n
n
=
x
=
y
w
i
=i 1=i 1
y
y2
y1
2(x2 y2) w2
1(x1 y1) w1
3(x3 y3) w3
y3
x1
x2
x3
Figure 3.2: Grid-Map Co-ordinates for Centre of Gravity Method

Where
x,y
= coordinates of the new facility at center of gravity
xi, yi
= coordinates of existing facility i
wi
= annual weight shipped from facility i
Load Distance Technique

A variation of the center-of-gravity method for determining the
coordinates of a facility location is the load-distance technique. In this
method, a single set of location coordinates is not identified. Instead,
various locations are evaluated using a load-distance value that is
a measure of weight and distance. For a single potential location, a
load-distance value is computed as follows:
LD =
I d
i =1
Where
LD
= the load-distance value
Ii
= the load expressed as a weight, number of trips, or units

being shipped from the proposed site and location
di
= the distance between the proposed site and location i
The distance d in this formula can be the travel distance, if that value
is known or can be determined from a map. It can also be computed
using the following formula for the straight line distance between two
points, which is also the hypotenuse of a right triangle.
di =
(xi x)2 + (y i y )2
Where
(x, y) = coordinates of proposed site
(xi, y) = coordinates of existing facility
The load-distance technique is applied by computing a load distance
value for each potential facility location. The implication is that
the location with the lowest value would result in the minimum
transportation cost and thus would be preferable.
3.7.3 LEAST COST METHOD
Least cost method suggests that the agriculture and industries should
locate their activities as close to the market as possible, in order to get
benefit of least cost of transportation of goods they produce.
According to this method, a site is chosen for industrial development
where total costs are theoretically at their lowest, as opposed to
location at the point of maximum revenue.
A model of industrial location proposed by A. Weber, assumes that
industrialists choose a least-cost location for the development of
new industry. The theory is based on a number of assumptions,
among them that markets are fixed at certain specific points, that
transport costs are proportional to the weight of the goods and the
distance covered by a raw material or a finished product, that perfect
competition exists, and that decisions are made by economic man.
Weber argued that raw materials and markets would exert a pull
on the location of an industry through transport costs. Industries
with a high material index would be pulled towards the raw material.
Industries with a low material index would be pulled towards the
market.
Once a least-cost location has been established, Weber goes on to
consider the deflecting effect of labour costs.
Locational Break-even Analysis
Locational break-even analysis is based on cost-volume analysis to
make an economic comparison of location alternatives. By identifying
fixed and variable cost and graphing them for each location, we can
determine which one provides the lowest cost. Locational break-even
analysis can be done mathematically or graphically. The graphic
approach has the advantage of providing the range of volume over
which each location is preferable.
The three steps to locational break-even analysis are:
Determine the fixed and variable cost for each location.
Plot the costs for each location, with costs on the vertical axis of
the graph and annual volume on the horizontal axis.
Select the location that has the lowest total cost for the expected
production volume.
Visit any thermal power plant and evaluate the site based on
size of the land, the provision of infrastructure and utilities, the
transportation facilities, land cost and site location, etc.
National, state, and community governments generally have

departments or offices that specialise in attracting businesses and
have data and information useful in the site selection process.
Government agencies also publish numerous documents with
data and information about potential business sites in their
jurisdiction. These offices will also usually provide assistance in
gathering relevant data from publications, brochures, reports, or a
computerised information system.

16. Higher productivity derived from efficient operations leads to
(a) More expensive goods and services
(b) Lower quality goods and services
(c) Higher discretionary incomes from consumers
(d) Increased dependence on expensive labour
17. Which of the following is consistent with contemporary
operations management?
(a) Limitation of expensive aluminium recycling efforts
(b) Raw waste disposal into waterways in acceptable
quantities
(c) Restricting air pollutant production to areas where
pollution is normal
(d) Replanting of forest land to reduce erosion
18. Which of the following best describes the concept of the value
chain?
(a) Adding financial value to an organisation through the
acquisition of other firms
(b) The step-wise increases in product prices as raw materials
are turned into goods/services
(c) The steps in manufacturing that add value to finished
products
(d) All steps in the transformation process that add value
even if they dont come from manufacturing
Contd...
Fill in the blanks:

19. The master planning teams work is broadly divided into two
phases: Phase I deals with ......................... and analysis. Phase
II addresses the ......................... of gathered information into
the development of a master plan.
20. Any facility will create an impact on the environment. This is
also called an ..........................
21. City location is chosen for a site because of availability of high
proportion of ......................... employees.
22. The ..................... Model is a simple mathematical model that
captures costs to identify attractive candidate locations on the
basis of quantitative factors.
23. ..................... method suggests that the agriculture and
industries should locate their activities as close to the market
as possible, in order to get benefit of least cost of transportation
of goods they produce.
3.8
LOCATION DECISION USING THE

TRANSPORTATION METHOD
Special algorithms, called the transportation method, have been

developed, and successfully used for solving such physical distribution
problems. In transportation problems we minimise the cost of
transportation from factory to warehouse. These methods have also
been applied for solving other problems which are similar in structure
to the transportation problems, such as factory or warehouse location,
production scheduling, media scheduling, salesperson routing,
workforce scheduling, and so forth.
The transportation method for solving the physical distribution or
transportation problem is an iterative procedure, like the simple
method. The initial allocation is made and then the second allocation
is made. If the second allocation does not result in any cost savings or
turns out to be higher cost allocation, the initiate allocation is optimal.
If, on the other hand, the second allocation turns out to be more cost
effective, third allocation is made. If the third allocation does not show
any cost saving, second allocation is the optimum.
This process is shown in Figure 3.3. In handling such problems, as
many transportation tables are set up as there are location choices,
treating them as separate transportation problems. When the final
solution of the problems is arrived at, the one with the least cost points
to the optimum location.
Start
START
Make the Initial

Allocation
Make another
Allocation
No
Is this more Cost

Effective?
Yes
Stop. You have

Optimal Solution
Figure 3.3: Iterative Procedure of Transportation Method

However, location problems are handled slightly differently than
simple transportation problems. Transportation tables are set up
for each of the location options. Each choice is treated as a separate
transportation problem. The final solution of each of the problems is
compared and the problem that provides the least cost solution is the
optimum location.
We will explain the method using an example. Musgrave Inc. has three
factories in Boston, Detroit and Los Angeles. It is a manufacturer of
washing machines, and its current production is 200 units per day at
Boston, 250 units at Detroit and 400 units at Los Angeles. It is planning
to increase its production capacity to 400 units at Detroit, 600 units at
Los Angeles, and 300 units at Boston.
The company has, at present, two warehouses. The warehouse in
Chicago has a demand of 500 machines, and the one in Birmingham
takes 350 machines. With the expansion program for production,
the company is planning to set up a new warehouse. The choice is
between Dallas and Pittsburgh. The costs per unit are given in Table
3.7.
TABLE 3.7: TRANSPORTATION COSTS ($ PER UNIT)

Boston
Detroit
Los Angeles
Chicago
10
8
9
Birmingham
8
9
8
Dallas
11
11
10
Pittsburgh
9
8
11
Assuming that the demand is estimated at 450 units at Dallas as well

as Pittsburgh, and that the transportation costs is the only factor
in decision-making, where should the company locate the new
warehouse?
Make the Initial Allocation for the first option, i.e. setting up the
warehouse at Dallas. In making the initial allocation we follow the
north-west Corner Rule. Start with the top left-hand (north-west)
corner cell. In our illustration it is cell AD. We make maximum

allocation to AD such that either the total supply in the opposite
extreme right-hand side of the cell is completely exhausted, or the
demand for that warehouse, shown in the bottom extreme left-hand
side cell, is completely filled.
We then move to the top cell in the first row and the second column
(AE). If any supply is left unallocated, exhaust it, until either the
supply is finished or the demand is completely filled in. If any supply
is still left, allocate it to the last cell in the first row and third column.
Following the procedure, we construct the transportation table shown
as Table 3.8.
TABLE 3.8: TRANSPORTATION TABLE WITH

WAREHOUSE AT DALLAS
Chicago
(D)
Birmingham
(E)
Dallas
(F)
Boston (A)
AD 10
AE 8
AF 11
0
BE 9
0
BF 11
300
Detroit (B)
300
BD 8
200
CD 9
200
CE 8
0
CF 10
400
0
500
150
350
450
450
600
1300
Los Angeles
(C)
Demand
Supply
We check this table for degeneracy. It is easily seen that there is no

degeneracy. Therefore, we check the table for optimisation.
TABLE 3.9: NET EFFECT ON COST PATTERN BY

MOVING UNITS FOR MUSGRAVE INC
Empty
cell
name
Cells to which an
additional unit is
given/taken from
Effect on cost
Net effect
AE
+ AE, AD, BE , + BD
+ 8 10 + 8 9
AF
+ AF, AD, CF, + BD
11 10 10 + 8
BF
+ BF, BE, + CE, CF
11 9 + 8 10
CD
+ CD, CE, + BE, BD
98+98
We now select the empty cell with the largest negative figure which
has the greatest cost saving potential i.e. cell AE, and move 200 units
from cell AD. We then balance the table so that all total of all rows and
columns remain unchanged. The new transportation table is shown
as Table 3.10.

WAREHOUSE AT DALLAS, 2ND ALLOCATION
Birmingham
(E)
AE 8
Dallas
(F)
AF 11
Supply
Boston (A)
Chicago
(D)
AD 10
200
BE 9
0
BF 11
300
Detroit (B)
100
BD 8
400
Los Angeles CD 9
(C)
0
Demand
500
0
CE 8
0
CF 10
400
150
350
450
450
600
1300
This is the optimal solution i.e. if the new warehouse is located in

Dallas, the optimum allocation and the combined cost of transportation
will be:
Cost of Transportation = 10 (100) + 8 (200) + 8 (400) + 8 (150) + 10 (450)
= $11,500
We now take the second option of locating the warehouse at Pittsburgh,
and draw up its transportation table. This table is shown as Table 3.11.

WAREHOUSE AT PITTSBURGH
Birmingham Dallas
(E)
(F)
AE 8
AF 9
Supply
Boston (A)
Chicago
(D)
AD 10
0
BE 9
0
BF 8
300
Detroit (B)
300
BD 8
200
Los Angeles CD 9
(C)
0
Demand
500
200
CE 8
0
CF 11
400
150
350
450
450
600
1300
On the second allocation, we obtain the optimal configuration for this

option. This is shown as Table 3.12.

WAREHOUSE AT PITTSBURGH, 2ND ALLOCATION
Boston (A)
Detroit (B)
Chicago
(D)
Birmingham
(E)
Dallas
(F)
Supply
AD 10
0
BD 8
250
AE 8
0
BE 9
0
AF 11
300
BF 11
150
300
400
Contd...
Los Angeles CD 9
(C)
250
Demand
500
CE 8
350
350
CF 10
0
450
600
1300
If the new warehouse is located in Pittsburgh, the combined cost of

transportation will be:
Cost of Transportation = 9 (300) + 8 (250) + 8 (150) + 9 (250) + 8 (350)
= $ 10,950
By comparing the answers of the two problems that we set up, we
come to the conclusion that the optimum allocation with the new
warehouse in Pittsburgh is more economical than the one at Dallas.
The new warehouse should, therefore, be located in Pittsburgh.
Fill in the blanks:

24. In transportation problems we .............................. the cost of
transportation from factory to warehouse.
25. The transportation method for solving the physical distribution
or transportation problem is an ....................... procedure, like
the simple method.
Assume that an auto ancillary is planning to set up a factory to

supply parts to Honda. There are three location options identified
by the company. The first is at Nagpur, where the promoters are
based; the second location is at Gujarat where the company already
has land; and the third is in Gurgaon, close to the principals factory.
How does the company choose the location using a Factor Rating
Analysis?
3.9 SUMMARY
In this Chapter we presented the definition, significance and

objectives of facilities location/plant location. Types of facilities
viz. heavy manufacturing, light industry, warehouse and
distribution centres, retail and services are incorporated.
Facilities location may be defined as selection of suitable location

or site or place where the factory or plant or facilities to be
installed, where plant will start functioning.
Location is a critical element in determining fixed and variable

costs for both industrial and service firms. Depending on
the product and type of production or service taking place,
transportation costs alone can total as much as 25% of the selling
price.
Manufactured products differ from many service products as

production may take place at a location, and then the goods are
distributed to the customer. Often the source of raw materials is
an important factor in deciding locations.
The typical factors that require consideration are Location of

markets, Location of materials, Transportation facilities, Labour
supply, Location of other plants and warehouses, Climate and
Governmental controls and regulations.
When the site selection process is initiated, the pool of potential

locations for a manufacturing facility is, literally, global. Since
proximity to customers is not normally an important location
factor for a manufacturing plant, countries around the world
become potential sites.
We have identify some of the more important factors that

companies consider when determining the district, region, state
and site at which to locate a facility.
At macro level, the plans of the site are developed. These plans
should include number, size and location of buildings. It should
also include infrastructure such as roads, rail, water and energy.
Planning of this stage has the greatest strategic impact on the
facility planning decision.
Any facility will create an impact on the environment. This is

also called an ecological footprint. Theoretically, the size of
the ecological footprint should be minimised. Impact planning
is the integration of commercial and practical environmental
objectives to produce the optimum benefit for business and the
environment.
Site evaluation should be the step after the facility impact

assessment bears out the suitability of the site. The next steps are
to look at the size of the land, the provision of infrastructure and
utilities, the transportation facilities, land cost and site location,
etc.

basis of quantitative factors. The objective of this model is to
select a location that minimises the total weighted loads moving
into and out of the facility.
Least cost method suggests that the agriculture and industries

should locate their activities as close to the market as possible, in
order to get benefit of least cost of transportation of goods they
produce.
The transportation method for solving the physical distribution

or transportation problem is an iterative procedure, like the
simple method. The initial allocation is made and then the second
allocation is made. If the second allocation does not result in any
cost savings or turns out to be higher cost allocation, the initiate

allocation is optimal.
Ecological Footprints: Impact of the facility on the

environment.
Facility Location: Selection of suitable location or site or place

where plant or facilities to be installed.
Facility Master Plan: Helps plan the right services consistent

with firms mission.
Facility Planning: Providing physical capability to add value

to the organisation.
Factor Rating Method: Very simple method to relate factors

and their salience to facility location decisions.
Heavy Industries: Plants that are relatively large and require

a lot of space.
Impact Planning: Integration of commercial and practical

environmental objectives to produce optimum benefits for
business and environment.
Least Cost Location: A site is chosen for industrial development

where total costs are theoretically at their lowest.
Light Industries: Perceived as smaller, cleaner plants that

produce electronic equipment and parts used in assemblies,
or assembled products.

1. What are the reasons for changing or adding locations in any
type of industry?
2. The development of a location strategy depends upon the type
of firm being considered. Discuss.
3. Discuss the factors affecting manufactured products.
4. The proximity of suppliers and markets are both important
considerations in the location decision. Substantiate.
5. Suppose you are a businessman producing garments, looking
to start your business operations in some other country. What
factors will you keep in mind while setting up your business
abroad?
6. Manpower is the most costly input in most production systems.
Analyse this statement.
7. What do you mean by the right services in facility master plan?
8. Discuss the behavioral impact on the location decision.
9. Why is it important to evaluate a site beforehand? Discuss the

basis for site evaluation.
10. What is facility master planning strategy and facility master
plan? Explain in detail.
11. What is Load Distance Model? Explain with the help of an
example.
12. Who gave the Least cost Method. Explain its concept.
13. Explain the process of making decision regarding Location of a
facility using the transportation method.

Topic
Q. No.
Need for a Facility Location 1.
Planning
2.
3.
4.
Nature of Location
5.
Decisions
6.
7.
Factors Affecting Location

Decisions
8.
9.
10.
11.
12.
Selection of the Site for the 13.
Plant
14.
15.
Techniques of Location
Analysis
16.
Answers
(e) All the above
(d) Henry Ford
(e) All the above
Facilities location
Location
Heavy
(b) The hierarchal need of
labour
(d) All are types of facilities
(e) All of the above
(d) Material bulk can be
reduced in various
products and by products
during processing
rail
Uniqueness
(b) The hierarchal need of
labour
(b) Where do we locate the
facility or facilities?
(c) Less emphasis on reducing
labour and material costs
(b) Lower quality goods and
services
Contd...
17.
20.
21.
22.
23.
24.
(d) Replanting of forest land

to reduce erosion
(d) All steps in the
transformation process
that add value even if
they dont come from
manufacturing
information gathering,
synthesis
ecological footprint
highly skilled
Load-distance
Least cost
minimise
25.
iterative
18.
19.
Location Decision Using

the Transportation Method

1.
Section 3.2
In addition to the global economic boom, there are several other

reasons for changing or adding locations. The cost or availability
of labour, raw materials, and supporting resources often change.
These changes in resources may spur the decision.
2. Section 3.3

The development of a location strategy depends upon the type

of firm being considered. Industrial location analysis decisions
focus on minimising costs; retail and professional service
organisations typically have a focus of maximising revenue.
Warehouse location, on the other hand, may be determined by
a combination of cost and speed of delivery. The objective of
location strategy is to maximise the benefit of location to the firm.
3. Section 3.4

These factors included some that tend to be critical regardless

of the type of facility or location, such as labour, transportation,
access to customers and markets, and community environments.
4. Section 3.4

For many heavy-manufacturing companies it is essential to be

close to raw material sources. such as forestry and wood products
companies, mining operations, and food-processing plants.
Although it is not necessary for some companies to be in close
proximity to their source of raw materials, it is important that
they be near one of the five primary modes of transportation,
railroads, highways/trucking, waterways or pipelines that is
adequate to meet their, shipping and receiving needs.
5.
Section 3.5
Location factors that are often considered for an overseas site

include the following: Government stability, Raw material
availability, Government regulations , Number and proximity of
suppliers, Political and economic systems.
6. Section 3.4.1

The Labour climate is one of the most important overall factors in

the location decision, particularly for manufacturing operations
and even to a certain extent for service operations. Labour
climate includes the cost of labour, embodied in wage rates and
salaries, the availability of labour, the work ethic of the labour
population, the possibility of labour conflict and problems with
organised labour. and the general skill level of the labour pool.
7. Section 3.6.1

The right services consistent with the organisations mission,

strategic initiatives, and market.
8. Section 3.6.2

New locations require that organisations establish relationships

with new environments and employees, and adding or deleting
facilities requires adjustments in the overall management system.
The organisation structure and modes of making -operating
decisions must be modified to accommodate the change. These
hidden system costs are usually excluded from quantitative
models, and yet they are very real aspects of the location decision.
9. Section 3.6.3

In the site selection process these factors and others are evaluated
by a search team or individual from the company. Sometimes
a consulting firm is hired that specialises in site selection for
different types of facilities. Sites are evaluated on the following
basis, Size of site: The plot of land must be large enough to
hold the proposed plant along with its utilities, waste and water
treatment facilities, parking and access facilities and support
services.
10. Section 3.6.1

Facility master planning strategy involves examining the

existing facilities; the sizing of future facilities and site amenities;
the integration of these facilities into the site; traffic flow and
circulation; and the analysis of any impact that this development
will have on the site with respect to environmental issues.
11. Section 3.7


basis of quantitative factors. The objective of this model is to
select a location that minimises the total weighted loads moving

into and out of the facility.
12. Section 3.7.2

Least cost method suggests that the agriculture and industries

should locate their activities as close to the market as possible, in
order to get benefit of least cost of transportation of goods they
produce. According to this method, a site is chosen for industrial
development where total costs are theoretically at their lowest,
as opposed to location at the point of maximum revenue.
13. Section 3.8

The transportation method for solving the physical distribution

or transportation problem is an iterative procedure, like the
simple method. The initial allocation is made and then the second
allocation is made. If the second allocation does not result in any
cost savings or turns out to be higher cost allocation, the initiate
allocation is optimal. If, on the other hand, the second allocation
turns out to be more cost effective, third allocation is made. If the
third allocation does not show any cost saving, second allocation
is the optimum.

SUGGESTED READINGS
Upendra Kachru, Production and Operations Management, Excel

Books, New Delhi
Canary, Patrick H., International Transportation Factors in Site

Selection, (October 1988): 1217-1219
Chan, Yupo, Location theory and Decision Analysis with Facility

Location and Land-use Models, Cincinnati, OH: South-Western
College Publishing, 2001
Hurter, Arthur, P., Jr., and Joseph S. Martinich, Facility Location

and the Theory of Production, Boston: Kluwer Academic
Publishers, 1989
Schniederjans, Marc J., International Facility Acquisition and

Location Analysis, Westport, CT: Quorum, 1999
E-REFERENCES
h t t p : / / w w w. s c i e n c e d i r e c t . c o m / s c i e n c e / a r t i c l e / p i i /
S0377221798001866
http://www.managementstudyguide.com/facility-location.htm
h t t p : / / w w w. s c i e n c e d i r e c t . c o m / s c i e n c e / a r t i c l e /
pii/0377221785902462
PLANT LAYOUT
CONTENTS

4.1
Introduction
4.2
Facility Layout
4.3
Types of Layout
4.4
Process Layout
4.4.1
Process Layout and Material Handling Costs
4.4.2
Process Layout in Nokia
4.4.3 Advantages and Disadvantages of Process Layout
4.5
Product or Line Layout
4.5.1
Assembly Line
4.5.2
Defining the Layout Problem
4.5.3
Assembly Line Balancing
4.5.4
Graphic and Schematic Analysis
4.5.5
Limitations of Product Layout
4.6
Fixed Layout
4.7
Cellular or Group Layout
4.7.1
U-shaped Assembly Line
4.7.2
Advantages and Disadvantages of Cellular Layouts
4.7.3
Comparison of Layouts
4.8
New Approaches to Layout Design
4.8.1 Flexibility

4.8.2
Mixed Model Line
4.9
Other Service Layouts
4.10
Plant Maintenance
4.11
Maintenance Strategies
4.11.1
Corrective or Breakdown Maintenance
4.11.2
Preventive Maintenance
4.11.3
Predictive Maintenance
Contd...
4.11.4
Proactive Maintenance
4.11.5
Root Cause Failure Analysis
4.12
Total Productive Maintenance
4.13 Summary

4.14
4.15
Answers and Hints
4.16
PLANT LAYOUT 119
LAYOUT AT HEAVY JOB MECHANICAL WORKS

Heavy-job Mechanical Works undertakes machining work on
sub-contract from nearby manufacturers. Most of the jobs handled
by the workshop involve operations like turning, thread cutting,
drilling and facing.
The workshop possesses a few general-purpose lathes, grinding
machines, sawing machines, two heavy-duty horizontal turret
lathes, and two gang drills.
Of the several machines mentioned above, the turret lathes and
the gang drills can be considered the most important. These
machines can undertake sophisticated, heavy jobs; and, most of the
contribution earned by the workshop is from the jobs processed on
them.
The turret lathes and gang drills were acquired second-hand,
one year back, and were immediately commissioned. In the
initial stages, the machines caused a great deal of anxiety to
the management by failing quite frequently and unexpectedly,
especially while processing important jobs. The reasons for
breakdowns were many: development of high temperature in
the bearings, formation of sludges and corrosive compounds on
the machine parts, breakage and slips of gear and belt drives,
misalignment of shafts and pulleys, overheating of motors, failure
of insulation in electrical circuits, etc.
The breakdown of the machines resulted in a great loss of
productive time and also led to several problems such as not being
able to meet due dates, and low morale of workers.
In order to combat these problems, the proprietor of the workshop
advertised for maintenance specialists for the turret lathes and
gang drills. As he wanted technicians with experience on the specific
machines he had, the proprietor had considerable difficulty in
finding the maintenance specialists. After a long search, he selected
four technicians for employment. The technicians accepted the
job under the condition that if ever they are required to work in
the second shift on a day, they are to be paid overtime. The four
workers were divided into two crews, each crew consisting of two
workers. Maintenance work on a machine requires both workers
of a crew. The maintenance crews can do breakdown maintenance
(that is, repair work in case of a machine breakdown) as well as
preventive maintenance for all the four machines. The machine
operators can only operate the machine when they are in working
condition, and cannot attend to any repairs or maintenance.
Preventive maintenance of a machine consists of dismantling the
machine and checking all its important parts like motors, bearings,
Contd...
gears, clutches, brake pipes, lubrication system and cooling

system, and making the necessary adjustments and replacements.
Such maintenance is expected to reduce the frequency of machine
breakdowns.
The proprietor is not able to make up his mind about how frequently
the preventive maintenance is to be scheduled. Although he is
convinced that preventive maintenance leads to fewer breakdowns,
with related savings and customer benefits, he has realised that too
much preventive maintenance can also cause problems; when a
machine is shut down for preventive maintenance, its productive
time is lost during the shutdown and the crew allotted for the
maintenance are not available for repairs on other machines
during that period.
The proprietor prefers to work with a planning horizon of ten days.
At the beginning of each planning horizon, he reviews, the status of
the workshop, and decides which orders are to be accepted among
the orders received during the previous ten day period. Along with
each order, a due date and revenue to be paid on completion in
time are also specified. In case the job is completed late, a certain
amount of penalty is incurred. Once a job is accepted, the proprietor
does not normally like to abandon the job; otherwise, it results in
poor customer relations.
Safety and maintenance are both bottomline issues, but rarely do
managers discuss them in the same context. In the early days of
industry, maintenance and safety functions were largely ignored.
For example, the maintenance function contained, primarily, two
kinds of jobs-sanitation, and emergency repairs. Whilehe sanitation
work was often scheduled with some degree of regularity, repairs
of equipment and facilities were performed only when breakdowns
occurred. Similarly, the majority of the safety improvements
occurred in the 1970s and later. On-the-job deaths declined from a
rate of 428 per million workers in 1930, to per million rates of 214 in
1960, 134 in 1980 and 38 in 1999. A drop of 72 per cent was observed
in the period 1980-99. Non-fatal manufacturing injuries decreased
from 230 injuries per 1,000 in 1926 to a rate of 80 per 1,000 in 1999,
working out to an average of 153 per thousand employees in 1973,
and further declining to 80 in 1999.
What were company managements priorities then? It wasnt
employee safety and health, but rather increased productivity. Most
managers say their worst problems are associated with quality and
productivity. Very often, those problems come about because of
poor management decisions related to machine maintenance and
employee training. Without the proper maintenance procedures,
safety cant exist. Efficient plant maintenance is vital to a companys
ability to optimise and harmonise its production processes.
PLANT LAYOUT 121

Describe the basic types of layout fixed position layout,
process layout, cell layout and product layout
Know the effect of volume and variety on layout type
Use some of the more common techniques, which can be
used in layout decisions
Know about the new approaches to layout design
4.1 INTRODUCTION
A typical manufacturing plant has a number of diverse activities
interacting with each other. Raw materials arrive at a shipping dock,
they are unpacked and checked in a quality control area, they may
then be processed through several processing areas, and finally the
finished product again passes through the shipping dock. In addition to
areas specifically related to production, there must be dressing rooms,
lunch rooms, and restrooms for employees; offices for supervision,
design, and production control; and space for inventory and aisles.
In fact, a plant may be viewed as a number of finite geometric areas
arranged on the floor space of the building. The problem of arranging
these areas in an effective manner is the facility layout problem.
Clearly, the layout problem has relevance in many areas of facility
and equipment design. This chapter tries to disseminate knowledge
on the design and planning of service and production facilities. It
discusses the different types of layouts, blending organisational
expectations with effective use of space to create a work environment
that is efficient.
4.2 FACILITY LAYOUT
Plant Layout may be defined as physical arrangement of industrial

facilities. This arrangement includes the spaces needed for material
movement, storage, indirect laborers and all other supporting
activities or services as well as operating equipment and personnel.
Plant layout is,
Placing
the right equipment;
Coupled
In
with the right method;
the right place;
To
permit the processing of a product unit in the most effective

manner;
Through
In
the shortest possible distance; and
the shortest possible time.

Objectives of Plant Layout

These objectives of good plant layout lead to:
Material handling and transportation is

minimized and efficiently controlled.
Maximum utilization of floor space.
A good layout permits material to move

through the plant at the desired speed
with the lowest cost.
There is increased productivity and

better product quality with reduced
capital cost.
To reduce internal transport from one operation to the next as

much as possible.
Minimization of the worker movement.
Work stations are designed suitably and properly.
Better utilization of machine, manpower and service.
Better facilities for maintenance and inspection etc.
Less work in process.
Less supervision and indirect labor.
Less congestion and better house keeping.
Flexible and easy adjustments to changed conditions.
Less floor space.
Improved safety conditions.
Avoidance of production delays.
Improved worker morale.
Space for future expansion.
Fewer accidents.
Lighting and ventilating of areas.
Proper production control.
To estimate waste effort and speed of production.
The operations function in both manufacturing and service

organisations can be divided into two basic types, intermittent and
continuous, according to the volume and standardising of the product
or service.
Different types of operations have different layout requirements.
By their nature, layouts of the facility are one of the most important
strategic elements of a business enterprise. Many symptoms of
inappropriate business architecture appear as layout or material
PLANT LAYOUT 123
handling issues. For example, in warehouses, materials flows and the

cost of picking stocks are dominant considerations; in retail outlets
customer convenience and sales may dominate; whereas in an office,
communication effectiveness and team building may be crucial.
Equipment Availability
Production Goals
Building Design
INPUTS
OUTPUTS
Materials
Handling
Forecasts
Drawings
Specifications
Operation sheets
Route sheets
Job descriptions
Plant location
Capacity
Internal
External
Layout
Process
Product
Fixed-position
Cellular
Equipment
Type
Quantity
Location
Workplace
Design
Support
Services
Human Factors
Capital Availability
Figure 4.1: Facility Planning Model
Fill in the blanks:

1. Plant ................... may be defined as physical arrangement of
industrial facilities.
2. Material handling and transportation is ................... and
efficiently controlled.
Visit any organisation of your choice, study its plant layout and
prepare a short report.
The functional layout for each building, structure or other sub-unit

of the site whether in terms of space allocation or capacity from
the Operations Departments point of view is perhaps the most
important level of planning.
4.3 TYPES OF LAYOUT

The Facility Layout plan institutionalizes the fundamental
organizational structure. Every layout has four fundamental elements:
Space Planning Units (SPUs),
Affinities,
Space, and
Constraints.
Keeping these in mind, several fundamental choices are available

to managers. There are three basic types of layouts: (1) Process,
(2) Product and (3) Fixed-position. Besides, there are three hybrid
layouts: (1) cellular layouts, (2) flexible manufacturing systems and
(3) Mixed-model assembly lines.
These basic types of layout should concentrate on the following
principles:
The emphasis should on gross material flow, personal space and

communication.
Socio-technical considerations should play an important in

determining the layout.
The layout should facilitate arrangement of physical facilities,

which allows most efficient use of man, machine and material
necessary for the operation to meet the requirements of capacity
and quality.
The layout should be based on a premise that a properly designed

facility is an important source of
competitive advantage.
It is very difficult to enumerate all the

properties of most efficient use of man,
machine and material; however the
layout should try to:
Operate at low cost
Effectively use space
Provide for easy supervision
Provide fast delivery
Minimum cost of material handling
Accommodate frequent new products
Produce many varied products
Produce high or low volume products
Produce at the highest quality level
Workers convenience and safety
Provide unique services or features
Though, it is not possible to simultaneously optimise all these factors in

the design but a balance should be maintained. The Functional Layout
for each building, structure or other sub-unit of the site whether in
terms of space allocation or capacity, from the Operations Departments
point of view is perhaps the most important level of planning.
PLANT LAYOUT 125
Fill in the blanks:

3. Good micro level planning can affect an organisation and
determine how well it meets its competitive priorities by
...................... convenience of customers and thereby sales at a
retail store.
4. Location can significantly affect ....................... .
5. Which of the following is/are the fundamental element(s) of a
layout?
(a) Space Planning Units (SPUs),
(b) Affinities,
(c) Space, and
(d) Constraints.
6. Which of the following is/are the basic type(s) of layouts?
(a) Process layout
(b) Product layout
(c) Group layout
7. An ideal facility layout should try to do which of the following
things?
(a) Effectively use space
(b) Maximum cost of material handling
(c) Produce only low volume products
(d) Provide for difficult supervision
Find out the inputs and outputs of a facility planning model for any
glass making industry.
4.4 PROCESS LAYOUT

Also known as functional layouts, group similar machines together in
departments or work centers according to the process or function they
perform. For example, all drills would be located in one work center,
lathes in another work center, and milling machines in still another
work center. All painting operations, of course, would be performed
in the department. A department store is organised in a way where
womens clothes, mens clothes, childrens clothes, cosmetics, and
shoes are kept in separate section. A process layout is characteristic
of intermittent operations, job shops, or batch production, in which a

variety of customers are served with different needs. The volume of
each customers order is relatively low, and the sequence of operations
required to complete a customers order can vary considerably. The
equipment in a process layout is general purpose, and the workers are
skilled at operating the equipment in their particular department. The
main advantage of this layout is its flexibility. The main disadvantage
is its inefficiency. Jobs do not flow through the system in an orderly
manner, backtracking is common, movement from department to
department can take a considerable amount of time, and queues
tend to develop. In addition each new job arrival to a work center
may require that the machine be set up differently for its particular
processing requirements. Although workers can operate a number
of machines in a single department, their workload often fluctuates from queues of jobs waiting to be processed to idle time between jobs.
Process layout is also known as functional layout. Similar machines

or similar operations are located at one place as per the functions.
Figure 4.2 shows a schematic diagram of a process layout with sample
job routings.
Lathe Department
L
Milling
Drilling
G
P
G
P
Receiving and
Shipping
Assembly
Figure 4.2: Schematic Diagram of a Process Layout with

Sample Job Routings
PLANT LAYOUT 127
4.4.1 PROCESS LAYOUT AND MATERIAL HANDLING COSTS

In process layouts, one of the principles of paramount importance is
that centres between which frequent trips or interactions are required
should be placed close to one another.
This has implications in all manner of organisations; in a manufacturing
plant, it minimises materials handling costs; in a warehouse, stock
picking costs can be reduced by storing items typically needed for the
same order next one another; in a retail store, minimising customer
search and travel time improves customer convenience; in an office
where people or departments must interact frequently are located near
one another, both communication and cooperation often improves
and coordination between departments can be less challenging.
There are both quantitative and semi-quantitative methods available
for optimising process layouts. We have studied the Load-distance
Model previously, which is a simple mathematical model that captures
costs to identify a location that minimises the total weighted loads
moving into and out of the facility.
4.4.2 PROCESS LAYOUT IN NOKIA
Under this layout, skilled workers are required to operate general
purpose machines doing variety of jobs. Recruiting such candidate
is not so easy in short time and also at the same time wage rate will
usually be high.
Figure 4.3: Layout of a Mobile Manufacturing Company (Nokia)
Raw Material Supply from Suppliers

Most electronic components, from resisters and capacitors to highly
integrated circuits, are delivered by suppliers on reels of tape,
protected in circular plastic cases.
The Foundation: A Printed Circuit Board (Soldering Process):

At the heart of every Nokia phone is a slender strip of plastic
covered with a latticework of basic circuits and settings for
the installation of chips and other 1 2 3 4 5 6 7 8 9 10 electronic
components. Here, printed circuit boards enter the paste printing
machine, which lays down a patterned layer of solder paste, made
from a tin copper-silver alloy. The paste is later melted in an oven
to bind electronic components to the board.
Providing the Parts (Loading Process): Reels of components

are loaded onto spindles. From there, they feed into automated
pick-and-place machines that grab individual parts off the tape
and lay them precisely onto the printed circuit boards. Nokia uses
mostly surface mount components that lie flat on the board.
Laying Down the Basics (Laying Process): Circuit boards travel

down a belt from one pick-and-place machine to the next, and by
the time they reach the end of the line, all the basic components
have been installed. After the parts are in place, the boards go to
an oven for seven minutes, where the solder paste is melted and
the parts become firmly attached.
Quality Testing: The first quality test takes place after the basic
components have been installed.
Configuring (Software Installation Process): The boards are

advanced automatically on tracks into the flash and alignment
stage, where basic software is first installed into programmable
components.
Assembly and Configuring Process: A robotic arm lifts the board

off the track and puts it into a bay. There, the chips on the board
are configured with low-level settings, such as what power level
the phone will operate on.
Testing Process: Then, a series of electronic tests are administered

to ensure that the circuit board is perfect, all the parts work, and
that they have been correctly installed.
Fixing Camera and LCD Displays: At this stage, the hand work
begins. Here, a worker plucks digital camera modules from a reel
and installs them with tweezers onto assembled, tested, printed
circuit boards. The expensive and fragile liquid-crystal display
screens are also added by hand.
Protection Covers Fixing: A nearby worker performs another

essential task by hand: sandwiching the completed printed
circuit board between front and back structural frames, later
adding the outside covers.
PLANT LAYOUT 129
Adding Functionality: The last step in the production turns a

generic phone into one customised to the exacting specifications
of mobile-phone users around the world.
Unique Serial Numbering Process: Each handset is put into a

cradle, where it is given a unique serial number, known as its
IMEI code. Then, depending on who the customer is, a unique
batch of software code is pumped into the phone.
Diagnostic Test: Finally, the phone and installed software

undergo a battery of diagnostic tests. From this point forward, the
IMEI code links each individual phone to its intended customer.
Final Inspection Test (by Human Eye): It seems quaint after all
the high-tech assembly and testing, but before every Nokia phone
goes into a box, its inspected one last time by an unmatched
resource: the human eye. Only a tiny fraction of phones fail this
final test. Then, before being packed, the phone is de-ionised to
remove dust and electrical charge from the surface.
Packing: Phones are packed into retail boxes by hand, with

appropriate documentation and accessories, and then logged
into a tracking system using a bar-code reader.
Finished Goods Storage

Phones packed into retail boxes are grouped territory wise and order
wise in ware house. From there it is dispatched to specific places
based on the orders.
4.4.3 ADVANTAGES AND DISADVANTAGES OF PROCESS
LAYOUT
Advantages of Layout by Process:
This type of layout adjusts itself easily to any changes in the

volume of products, in the raw materials used, in the method of
production or the rate of production necessitated due to addition
of equipment. There is greater flexibility. Changes in operations
or sequence of operations do not affect the layout.
Succession of operations are not held up due to any breakdown

or failure of a machine. The Job can be transferred to another
machine in the same class. If the job is rush and all machines
are busy a slight change in the scheduling is made.
Maximum utilisation of equipment results in increase in

production and reduction in investment in equipment. The
overhead costs are spread over a larger number of units bringing
down the unit cost of production. Manufacturing costs can be
kept down. Under peak loads labour costs are high per unit, but
under low production labour costs are lower. Unit overhead costs
are lower under medium production. When plant is not near
peak capacity the total costs can be lower.
New workers have easy training facilities on the job, better

opportunities for the utilisation of the skill of the workers and
use of the specialised abilities of the supervising staff, workers
know how to run various machines in the group and are able to
set up work, perform special operations and gauge the work and
quality as mechanics.
Adaptable to special condition arising out of the use of particular

type of equipment.
Due to less duplication, there is lower investment in machines,

only necessary number of machines of each type are obtained for
handling normal maximum load instead of one in each product
line.
Machines, being the required number of each kind for normal

production, are kept busy most of the time.
Foremen and supervisors become specialised in the execution of

the jobs and know all about the equipment and its operation.
Disadvantages of Process Layout
Work does not flow over any definite mechanical channels.

Routing and scheduling is more difficult.
It is essential to plan and supervise the work of every department

and of every worker and machine in every department. This
entails greater difficulties in production control and addition to
the cost of the finished product.
Excessive back-hauling and handling of materials during

operations due to defects and bringing back the material for
removal of defects. More hand labour is involved. Higher cost
of the material handling due to the separation of operations
and longer distances for the raw materials travel. There are no
cheaper and automatic devices for internal transport.
Comparatively more time is required to produce the same

products due to transportation and advance moving of the
materials into a department so that the machines are not idle
due to non-availability of the necessary raw material.
Comparatively excessive work in process inventory, more

complicated system of production control and no visual control,
all parts and all operations to be checked minutely, more work
orders, time tickets, inspection order to be followed and put
on records, comparatively much more accounts-keeping and
clerical work.
More space is required for the same volume of products as

automatic material handling is not easy and due to greater spacing
between machines. There is more space for aisles, elevators etc.
Thus more floor is required for each unit product.
PLANT LAYOUT 131
Inspection of work after each operation is essential as the

material passes to the next department. The inspection is after
each operation and not at the end of the each group of operation.
This results in more inspections.
There are hold-ups of work for inspection after processing,

materials pile up near machines in advance of processing.
Movement may not be ready immediately after the work in
process has been inspected for next department.
More training will be necessary to prepare the workers for the

particular jobs: sometimes specialised knowledge is required for
which higher wages have to be paid, which adds to the total cost
of the product.
Fill in the blanks:

8. Process layout is also called as ..................... layout.
9. There are both quantitative and semi-quantitative methods
available for ..................... process layouts.
10. Which of the following is/are the advantage(s) of process
layout?
(a) Initial investment in process layout is low.
(b) There is high degree of material handling. Parts may have
to backtrack in the same department.
(c) Large work in-process inventory is common. This may
lead to more storage area.
11. Which of the following is/are the disadvantage(s) of process
layout?
(a) The overhead cost is low.
(b) Total cycle time is high. This is due to waiting in different
departments and longer material flow.
(c) There is greater flexibility and scope of expansion.
In process layouts, one of the principles of paramount importance

is that centers between which frequent trips or interactions
are required should be placed close to one another. This has
implications in all manner of organizations; in a manufacturing
plant, it minimizes materials handling costs; in a warehouse, stock
picking costs can be reduced by storing items typically needed
for the same order next one another; in a retail store, minimizing
customer search and travel time improves customer convenience.
Visit the Samsung production unit. Discuss the functional process

layout for Samsung Mobile phones, laptops and other electronic
items available there. Make a comparison report.
4.5 PRODUCT OR LINE LAYOUT
A product layout is also called a line layout. In this type of

arrangement, the various facilities, such as machine, equipment,
work force, etc., are located based on the sequence of operation on
parts. Where the facility is needed again after few other operations,
the facility is duplicated as required by the sequence of operations.
Primarily known as assembly lines, arrange machines in a line
according to the sequence of operations that need to be performed to
assemble a particular product. Thus, each product bas its own line
specifically designed to meet its requirements. The flow of work is
very orderly and efficient, moving from one workstation to another
down the assembly line until a finished product comes of the end of the
line. Since the line is set up for one type of product, special machines
can be purchased that match the specific processing requirements
of the product. Product layouts are suitable for mass production or
repetitive operations in which demand is stable and volume is high.
The product is a standard one made for a general market not for a
particular customer.
Because of the high level of demand, product layouts are typically
more automated than process layouts, and the role of the worker is
different. Workers perform narrowly defined fabrication or assembly
tasks that do not demand as high a wage rate as those of the more
versatile workers in a process layout.
The main advantage of the product layout is its efficiency and ease of
use. The main disadvantage is its inflexibility. Significant changes in
product design may require that a new assembly line be built and new
equipment be purchased. This is what happened to U.S. automakers
in the 1970s when demand shifted to smaller cars. The factories that
could efficiently produce four-cylinder engines could not be adated
to produce six-cylinder engines. A similar inflexibility occurs when
demand volume slows. The fixed costs of a product layout (mostly for
equipment) allocated over fewer units can send the price of a product
soaring. Figure 4.4 shows a schematic diagram of a product layout
and the flow of the products through the system.
Difference between Product and Process Layout
In addition to the flow of work and arrangement of machines, product
and process layouts look very different in other ways. In-process
PLANT LAYOUT 133
inventory for a process layout is high because material moves from

work center to work center in batches waiting to be processed.
Finished goods inventory, on the other hand, is low because the goods
are being made for a particular customer and are shipped out to that
customer upon completion. The opposite is true of a product layout.
In-process inventory is consumed in the assembly of the product as
it moves down the assembly line, but finished goods inventory may
stack up or require a separate warehouse for storage before the
goods are shipped to dealers or stores to be sold. Storage space in
the process layout is large to accommodate the large amount of inprocess inventory. Some of these factories look like warehouses, with
work centers strewn between storage aisles. In contrast, the storage
space along an assembly line is usually quite small.
Material handling methods are also different for the two layouts.
Process layouts need flexible material handling equipment that can
follow multiple paths, move in any direction, and carry large loads
of in-process goods. A forklift fits that description and is typically
used to move pallets of material from work center to work center in
a process layout. A product layout envsages that material moved in
one direction along the assembly line and always in the same pattern.
Conveyors are the most common material handling equipment for
product layouts. Conveyors can be paced (automatically set to control
the speed of work) or unpaced (stopped and started by the workers
according to their pace). Assembly work can be performed on line
(i.e., on the conveyor) or off-line (at a workstation serviced by the
conveyor).
In
Out
Figure 4.4: A Schematic Diagram of a Product Layout

The aisles in a process layout need to be wide to accommodate the
two way movement of forklifts. The aisles in a product layout can be
narrow because its an integral part of the assembly process, usually
with workstations on either side. Scheduling of the conveyors, once

they are installed, is simple-the only variable is how fast it should
operate. Scheduling of forklifts is typically controlled by radio
dispatch and varies from day to day and, hour to hour. Routes have
to be determined and priorities given to different loads competing for
pickup.
The major problem, in terms of layout, for a process layout is where
to locate the machine centers (i.e. groupings of similar machines) in
relation to each other. Although each job potentially has a different
route through the shop, there will be some paths between machines
that are more common than others. Past information on customer
orders and projections of customers orders is used to develop typical
patterns of flow through the shop. For a product layout, the major layout
problem is balancing the assembly line so that no one workstation
becomes a bottleneck and holds up the flow of work through the line.
Summarises the differences we have discussed between the product
and process layouts.
4.5.1 ASSEMBLY LINE
In continuous operations, the part variety is less, production volume
is high and part demand is relatively stable. A breakthrough in
continuous operations was the assembly line. Though Ransom E.
Olds created the first assembly line in 1901, Henry Ford is recognised
for revolutionising industry by mass-producing automobiles.
Ford improved upon Olds assembly line idea by installing conveyor
belts and converting Olds idea into a moving assembly line. According
to Ford, he developed the idea by watching the sequence of operations
in a meat factory. By using a moving assembly line, Ford was able to
cut the time of manufacturing a Model T from a day and a half to a
mere ninety minutes. The assembly line concept has remained more
or less similar since 1913.
The assembly line concept is applicable on products that can be
produced with identical parts. Since each part is identical and can
be replaced with an identical part, the entire production sequence
can be predetermined in careful detail. This permits each task to be
minutely studied by engineers and managers to find ways to make the
sequence quicker and cheaper.
Using better work methods, specialised equipment and tools, and
extensive employee training the speed of producing the product can
be increased and the cost decreased. This is the basic concept of the
assembly line.
The problem of layout continuous inflow (product layout) and job
shop (process layout) are different in nature. The primary problem in
product layout is of line balancing. In process layout the objective is to
find out the most economic arrangement of various departments (or
machine centres) in a manufacturing organisation.
PLANT LAYOUT 135
4.5.2 DEFINING THE LAYOUT PROBLEM

The layout-planning problem for assembly lines, is to determine
the minimum number of stations (workers) and assign tasks to each
station, so that a desired level of output is achieved. The design must
consider the following aspects:
Plan the whole and then the details: Begin with the layout of
the site or plant as a whole, and then work out the details. First,
determine the general requirements in relation to the volume
of production anticipated. Establish the relationship of these
areas to each other considering only the movement of material
for a simple basic pattern of flow. From this develop a general
overall layout. Only after approval of the overall layout proceed
with the detailed arrangement with each area. This is the actual
positioning of the men, materials, machines, and supporting
activities which becomes the detailed layout plan.
Plan the ideal and from it the practical: The initial concept of
the layout should represent a theoretically ideal plan, without
regard for existing conditions irrespective of cost. Later, make
adjustments to incorporate the practical limitations of building
and other factors.
Follow the cycles of layout development, and make the phases

overlap: The cycles of layout development follow a sequence of
four phases. The first phase is to determine where the layout shall
be, where the facilities to be laid out are to be located. The second
phase is to plan an overall layout for the new production area.
Then comes the detailed layout plan, and finally the installation.
Since the overall layout may influence the choice of location, the
layout engineer should not decide definitely on his location until
he has reached a decision on a theoretical arrangement of the
area. Likewise, he should not definitely consider his overall plan
as firm until he has checked at least roughly into the next phasethe detailed layout of each department. This means there should
be an overlapping from one phase to the next.
Plan the process and machinery around the material

requirements: The material factor is basic. The product design
and manufacturing specifications largely determine what
processes to use. And we must know the quantities, or rates of
production, of the various products of parts in order to calculate
what processes we need. The process and machinery must be
built around the material requirements.
Plan the layout around the process and machinery: After the
proper production processes are selected, the layout planning
begins. We shall have to consider the demands of the equipment
itself-weight, size, shape, movement to and for and the like. The
space and location of the production processes or machinery
(including tools and equipment) are the heart of the layout plan.
Plan the building around the layout(s): Where machinery,

service equipment, and layout are to be more permanent than
the building, the building should be set, around the most efficient
layout. Make no more concessions to the building factor than
necessary. Where the layout is less permanent than the building,
still follow this guiding fundamental but after it to read layout.
Since we know there will be changes, we build a general-purpose
plant, planning the building around several prospective layouts
that may successively occupy the building.
When the layout must go into an existing building, certain major

features of the structure will be fixed. We should identify these
fixed limitations as we begin to adjust from the ideal to the
practical. Other features, such as walls, windows, floor levels,
ceiling or roofs, and the like can all be changed or moved. For the
layout in an existing building, this guiding fundamental becomes:
plan the building modifications around the layout.
Plan with the aid of clear visualisation: The experienced layout

specialist knows that aids to clear visualisation are a key to his
work. They help him gather his facts, and they help him analyse.
In addition, clear visualisation is essential when, he wants to
discuss his plans with foremen and service personnel, when he
presents his proposals to management for approval or when he
shows the workers how the layout will operate.
Plan with the help of others: Layout is a cooperative affair, the

best layout will not be obtained unless the cooperation of all
persons concerned is built into it. We most solicit their ideas;
we must draw them into the project. They already have detailed
knowledge about the job. They are the ones who will make the
layout operate. Moreover, if we give them the chance to take part
in planning the layout, they will tend to accept it more readily.
Check the layout: When we have developed one phase of our

project, we must get it approved before we go too far in planning
the next. This will save later headaches and ensure an integration
of each area with the overall plans. We must check each phase of
our layout before we present it for approval. This check assures
us that the layout is sound or reveals further improvements we
can make.
Sell the layout plan: Sometimes the hardest of layout work is

getting others to buy it. It may be good. But, we must remember,
it is still a compromise, it means changing people around; it will
require an outlay of funds. Therefore, keep enthusiastically
plugging the benefits of the layout being planned; take additional
time to bring the operating people into the project; get everyone
to participate; take time making ready to present the layout to
the prospects who will in the end put up the money for it.
PLANT LAYOUT 137
4.5.3 ASSEMBLY LINE BALANCING
Assembly line balancing is a technique that assigns tasks to different

workstations, in such a way, that the total processing time at each
workstation is balanced in order to minimize idle time.
Given a capacity or production rate requirement, we can meet that
requirement with a single line with a cycle time c, or with two parallel
lines with a cycle time 2c, and so forth. Line balancing programs have
been developed that enable the most efficient use of the assembly line.
In multiple parallel lines, as the number of parallel lines increases,
so does the scope of job. We can also increase output by horizontal
job enlargement, as has been demonstrated in the example of ABC
Electricals. The point is that alternatives do exist.
How can the cost of idle time of man and machine be reduced? Perhaps
the ten tasks (A to M in Table 4.1 exclude tasks either at station 1 or
station 2) can be reassigned so that more available employee time is
used.
TABLE 4.1: ASSEMBLY LINE FOR CONTACT BREAKER

Work
Preceding Task
Station Work
Assigned
Station
1
Predecessor Task
Task
Time/
Unit
(Hours)
None
0.010
A:
Contact
Breaker
Assembly;
Take Molding
Half and
clean burrs
etc.
B:
A
Install
B
contacts
A,C
C:
Install
Springs
0.020
Operators
per
station
1
0.020
0.040
D:
Install plastic
levers etc. on
Molding Half.
Contd...
E:
Install
contacts
F:
Install
Springs
2, 3
0.020
0.020
A,C
0.040
G:
Install plastic
levers etc., on
Molding Half.
H:
G
Close
with other
Molding Half
I:
H
Assemble
4 of the above
units
J:
I
Insert Rivets
K:
J
Rivet the
sandwich
units
L:
E
Switching
Test under
load
M:
F
Pack Contact
Breaker unit
Total
0.050
0.008
0.040
0.098
0.050
0.020
0. 354
An ideal assembly line would be one where tasks are assigned to

different workstations in such a way that the total processing times at
each workstation is equal. If every station used up an equal amount of
task time, no time would be idle time. Though this is seldom true, an
approximation of this condition can be achieved by effective assembly
line balancing. The problem of equalising stations is solved using six
steps:
Define tasks.
Identify precedence requirements.
Calculate the minimum number of work stations required to

produce desired output.
Apply an assignment heuristic to assign tasks to each station.
Evaluate effectiveness and efficiency.
Seek further improvement.
PLANT LAYOUT 139
For the example of the contact breaker facility, we have already taken
the first step, defining tasks, shown in Table 4.1. The second step
requires identifying a specific sequence. These sequence requirements
are also listed in Table 4.1 in column 4.
Once the desired output is specified, we can calculate the theoretical
minimum number of stations required. This is done by contrasting
the time required to produce one unit with the time we can allow,
given the daily output requirements. We have already calculated the
time required, as the sum of the task times in Table 4.1 and we have
calculated the time allowable, as the maximum allowable cycle time.
Since just 0.098 hours are allowed to produce one unit, 5.56 stations
must operate simultaneously, each contributing 0.098 hours, so that
the required 0.356 hours are made available.
Theoretical minimum Number of stations = Time required/(Unit time
allowed/Unit)
To produce 1 unit = 0.356 hours/(0.098 hours/unit) = 3.63 stations
Since only whole stations are possible, at least four stations are
needed. The actual layout may use more than the minimum number
of stations, depending on the precedence requirements. The initial
layout in Table 4.1 uses nine stations.
The fourth step assigns tasks to each station. The designer must assign
ten tasks to six or more stations. Several assignment combinations are
possible. In the example given earlier, TAMS designed a system that
provided a rectangular platen system manned by only five operators.
All assembly was completed on the platen with the sub-assemblies
being transferred to a central position on the platen for riveting.
For larger problems with thousands of tasks and hundreds of stations,
we often use heuristics. We will apply a Longest Operation Time
(LOT) heuristic to find a balance for the 0.098 hours/unit cycle time.
The LOT steps are:
Heuristic Step 1: Longest operation time gives the top priority of
assignment to the task requiring the longest operation time. Assign
first the task that takes the most time to the first station. However, the
precedence requirements have to be maintained. In our example, task
K requires the longest operation time of 5 minutes (the bottleneck
operation); therefore, this task has the highest priority of assignment
at the first workstation. Table 4.1 shows that task K has precedence
requirement of other tasks, i.e., there is a need for other tasks to be
competed for the execution of task K. Therefore, task K cannot be
assigned to the first workstation. We have to assign task A as the first
task.
Heuristic Step 2: In the first rule, task A is the eligible task for the
first workstation and is assigned to it. As the task time of A is 0.010
hours, and the bottleneck task is 0.098 hours, additional tasks can be
assigned to the station. Therefore tasks B, C, and D which require
a total time of 0.080 hours can also be assigned to this station. The
time available on station 1 after completing these tasks is 0.008 hours.
As there is no other task that has this timing, no more tasks can be
assigned to this station.
Heuristic Step 3: For workstation 3, we see that task H requires the
longest task time of 0.050 hours. From Table 4.1, notice that tasks I
and J require 0.008 and 0.040 hours respectively. In keeping with the
precedence requirement, tasks H, I and J can be assigned to workstation
3 as the total of the time required to complete these tasks is 0.098 hours.
Heuristic Step 4: Workstation 4 is the bottleneck station. The task K
cannot be split into parts, this task has to be assigned to a workstation
and the cycle time cannot be less than the duration of this task. No
other task can be accommodated at this workstation
Heuristic Steps 5-7: Repeat the above-explained process to get Table
4.2. Note that we have used five workstations for the assignment of
all the tasks. It could have been more; for example if task I required
more time, we would have ended up with 6 workstations. This explains
why this is called the theoretical minimum workstations.
This entire process, carried to completion, is summarised in Table 4.2,
showing a five-station assembly line comprising 10 tasks.
TABLE 4.2: LINE BALANCING PROBLEM

Work Preceding Task
Station Work
Assigned
Station
1
A:
Contact
Breaker
Assembly;
Take
Molding Half
and clean
burrs etc.
Predecessor Task
Task
Time /
Unit
(Hours)
None
0.010
Operators
per
station
1
A
B
0.020
A,C
0.020
0.040
B:
Install
contacts
C:
Install
Springs
D:
Install
plastic
levers etc.
on Molding
Half.
Contd...
PLANT LAYOUT 141
Total
H: Close G
with other
Molding Half
H
I:
Assemble 4 I
of the above
units
J: Insert
Rivets
K: Rivet J
the sandwich
units
L:
E
Switching
Test under
load
M: Pack F
Contact
Breaker unit
0.050
0.008
0.040
0.098
0.050
0.020
0. 354
This layout is effective if it yields the desired capacity. It is efficient

if it minimises idle time. Though the new assembly line design does
increase the efficiency, as the idle time is significantly reduced, it still
does not yield the desired capacity. To be able to meet the demand
ABC Electricals, in the example we have been following, we need to
reduce the cycle time to 0.064 hours.
There are occasions when effectiveness and efficiency can be
increased by deviating from procedures. For example we can look at
task sharing i.e. when more than one workstation is manned by one
worker. This can reduce idleness as we are eliminating workers, and
letting the others take turns at workstation: other improvements are
possible if more than one worker can be assigned to a single station, as
was done by ABC Electrical earlier and shown in Table 4.1. Finally, if
the desired output does not exceed the required capacity, bottlenecks
may be re-examined.
In the example of ABC Electricals, TAMS looked at the bottleneck
operation and see how it could be improved. Initially riveting (the
bottleneck operation) took place using a 5 tonne press, which
completed the riveting in two passes. It had a rotating fixture
that permitted riveting of two rivets simultaneously. The rotating
fixture was removed and a die was designed so that riveting
required just one pass. Testing took place immediately following
riveting. Consecutive test failures were flagged up immediately
allowing corrections to be made without a backlog of test failures.
All acceptable products were then immediately laser marked with the
company logo and specification. Finally the product was unloaded to
a multilane conveyor to packing.
With the change in the bottleneck, the assembly line was redesigned
using the LOT technique. As you can see, the newly designed assembly
line had seven stations with 7 operators. This meant that there was an
increase in the number of stations and workers. It was less efficient
than the layout suggested earlier.
However, though less efficient, the new system was able to reduce the
cycle time 0.060 hours i.e. the output had increased from 1960 units
per month to 3200 units per month. This gave, ABC Electricals, the
number of assembled Contact Breakers units they required. It also
pruned the excessive costs so that ABC Electricals would eventually
be more competitive.
Very often, it gives better results when the organisation is effective
rather than when it is efficient. Being more effective it reduced
the costs of the product and ABC Electricals, the additional and
unnecessary costs were not passed on to the customers. The form of
the final assembly line is shown in Table 4.3.
TABLE 4.3: FINAL ASSEMBLY LINE DESIGN

Work
Preceding Task
Station Work
Assigned
Station
1
Predecessor Task
Task
Time /
Unit
(Hours)
None
0.010
A:
Contact
A
Breaker
Assembly;
B
Take
Molding
A,C
Half and
clean burrs
etc.
Operators
per
station
1
0.020
0.020
B:
Install
contacts
C:
Install
Springs
D:
A
Install
plastic
levers etc.
on Molding
Half.
0.040
Contd...
PLANT LAYOUT 143
Total
H:
G
Close
with other
Molding
Half
I:
H
Assemble
4 of the
above units I
J:
Insert
Rivets
K:
J
Rivet the
sandwich
units
L:
E
Switching
Test under
load
M:
Pack F
Contact
Breaker
unit
0.050
0.008
0.040
0.060
0.050
0.020
0. 354
Many other heuristics may be used instead of the Longest-Operation

Time (LOT) approach. Several computerised heuristics are available,
and since different heuristics can lead to different layouts, it may be
worthwhile to want to try more than one approach. Mathematical
and computer-based Heuristic models can identify and evaluate
alternative layouts far more rapidly than manual or intuitive methods.
Though these models use observation and experimentation as they do
theory, they have their limitations.
4.5.4 GRAPHIC AND SCHEMATIC ANALYSIS
Aschematic, orschematic diagram, is a representation of the elements
of asystemusing abstract, graphicsymbols rather than realistic
pictures. A schematic usually omits all details that are not relevant
to the information the schematic is intended to convey, and may add
unrealistic elements that aid comprehension. For example, a subway
map intended for riders may represent a subway station with a dot;
the dot doesnt resemble the actual station at all but gives the viewer
information without unnecessary visual clutter.
A schematic diagram of a chemical process uses symbols to represent
the vessels, piping, valves, pumps, and other equipment of the system,
emphasizing their interconnection paths and suppressing physical
details. In an electroniccircuit diagram, the layout of the symbols

may not resemble the layout in the physical circuit.
In the schematic diagram, the symbolic elements are arranged to be
more easily interpreted by the viewer. For example, Transit map, a
schematic map (i.e. not drawn to scale, stations are equidistant, lines
are drawn at 45 and 90-degree angles)
Historically, assembly line layouts have used manual trial-and-error
techniques and templates, drawings, and graphical procedures. For
large facilities with many tasks and work centres, mathematical
procedures are extremely complex and there is no guarantee that will
ensure finding the best possible design. The quality of the design very
often depends upon the experience and judgment of the designers
and the industrial engineers.
4.5.5 LIMITATIONS OF PRODUCT LAYOUT
Though research has tried to find optimal solutions to product layout
system, some of the basic limitations of the system are identified
below:
All machines may not be utilised to their maximum capacity. The

quantity of work allotted to each mechanic may not be enough
to keep the machine busy all the time, causing considerable
machine idleness. A machine may be required to perform only
a certain operation in a given sequence and after this has been
completed, the machine may remain idle. At a certain stage the
plant may have several machines that may not be working to the
maximum capacity.
In the event of one of the machines in the line breaking down,

all the other machines will remain idle till the machine is again
in working order. Unless there are several machines of a kind
or reserve of replacement equipment or immediate emergency
repairs executed to keep work flowing the machines are bound
to remain idle.
There is much greater difficulty in providing the proper

supervision specialisation facilities at particular operations.
Supervisors attending to a series of different machines do not
acquire the skill in the work of anyone particular type of machine,
so the supervision is not very efficient.
There is less flexibility in getting work done. In case of a change

in the product to be manufactured the entire layout may have to
be rearranged as jobs lots cannot be handled with ease nor they
can be assigned to other similar machines.
For expansion purposes it is not possible to add a few machines.

The production rate depends on the speed of the slowest
operation in the line. To increase the production capacity of the
plant it is essential either to revise the complete line or to set up
a duplicate line of machines, which means high investment.
PLANT LAYOUT 145
Machine or workstation is usually automatic equipment fed by

operator. Each worker learns job at a particular machine, so he is
not skilled for other machines or operations.
Considerable flexibility can be achieved within the capacities

of the lines, if the workers are taken off or added and conveyor
speeds are accordingly adjusted to suit the decreased or increased
number of workers.
High factory overhead on production lines may result higher

manufacturing costs in spite of labour costs per unit being lower.
The manufacturing cost will be still higher when the machines
are idle or are not having enough work to be busy all the time.
Fill in the blanks:

12. A product layout is also called a ....................... layout.
13. Though ....................... created the first assembly line in 1901,
......................... is recognised for revolutionising industry by
mass-producing automobiles.
14. The assembly line concept is applicable on products that can
be produced with ....................... parts.
15. The ..................... problem for assembly lines is to determine
the minimum number of stations (workers) and assign tasks to
each station, so that a desired level of output is achieved.
16. An ideal assembly line would be one where tasks are assigned
to different workstations in such a way that the total processing
times at each workstation is ....................... .
17. Which of the following is/are the limitation(s) of the product
layout?
(a) Product variety is very much limited.
(b) Breakdown of a particular machine in a production line
halts the production output of the entire line.
(c) There is limited flexibility to increase the production
capacities.
(d) Layouts are relatively fixed and changes in product
design are difficult to accommodate.
(e) All of the above.
Visit a television manufacturing firm. Observe the layout for

manufacturing televisions. Describe and prepare the report on
product layout of the firm.
Product layout is used for continuous operations, where the part

variety is less, production volume is high and part demand is
relatively stable. Though Ransom E. Olds created the first assembly
line in 1901, Henry Ford is recognized for revolutionizing industry
by mass-producing automobiles.
4.6 FIXED LAYOUT

The third basic type of layout is the fixed-position layout. Fixedposition layouts are typical of projects in which the product produced
is too fragile, bulky, or heavy to move. Ships, houses, and aircraft are
examples. As the name implies, in this layout, the product remains
stationary for the entire manufacturing cycle. Equipment, workers,
materials, and other resources are brought to the production site.
Equipment utilisation is low because it is often less costly to leave
equipment idle at a location where it will be needed again in a few days,
than to move it back and forth. Frequently, the equipment is leased
or subcontracted, because if one were to look at the cost breakdown
for fixed-position layouts, the fixed cost would be relatively low
(equipment may not be owned by the company), whereas the variable
cost would be high (due to high labour rates and the cost of leasing
and moving equipment). Some of the examples are production of
aircraft, ships, dams, bridges, and housing industry.
R
E
S
O
U
R
C
E
Final Product
(SHIP)
Ship building yard
Figure 4.5: Fixed Layout

The fixed position, process, and product layouts can be compared on
the basis of cost in a break-even analysis format. Figure 4.6 is a graph
of the three layouts, with representative values of fixed and variable
costs. Examining the y-intercepts of the three layouts, the product
layout has the highest fixed cost, followed by the process layout and
then fixed position layout. From the slope of the lines, we can see that
the fixed-position layout has the highest variable costs, followed by
the process layout and then product layout. A major determinant
of the appropriate layout is demand volume. At volume v1, a
low-demand volume, the fixed-position layout would have the lowest
total cost. But at volume v2, a medium volume, the process layout
would be preferred, and at volume v3, a high demand volume, the
product layout would be best.
PLANT LAYOUT 147
Because the fixed-position layout is quite specialised, we concentrate

on the product and process layouts and their variations for the
remainder of this chapter.In the sections that follow, we examine
some quantitative approaches for designing product and process
layouts.
Fixed Position
Money
Process
Product
V1
V2
V3
Volume
Figure 4.6: Schematic Diagram of a Fixed Position Layout

The advantages of this layout are as follows:
This layout is flexible w.r.t. change in design, operation sequence,

labour availability, etc.
It is essential in large project jobs, such as construction and

shipbuilding etc., where large capacity mobile equipment is
required.
Very cost effective when similar type products are being

processed, each at a different stage of progress.
The limitations of fixed position layout are as follows:
Capital investment may be for a one-off product, which can make

it expensive.
Due to long duration to complete a product, average utilisation of

capital equipment is limited.
Space requirements for storage of material and equipment are

generally large.
Products essentially require high class planning and focused attention

on critical activities to maximise margins.
Fill in the blanks:

18. ....................... layouts are typical of projects in which the
product produced is too fragile, bulky, or heavy to move.
19. Space requirements for storage of material and equipment are
generally ....................... in fixed layout.
Study about Boeing Aircraft manufacturing plant layout. Describe

and prepare the report on Fixed Position layout of the firm.
Fixed Position Layout is essential when the products are difficult

to move. Need for such type of layouts arises in case of extremely
large and heavy products. Some of the examples are production of
aircraft, ships, dams, bridges, and housing industry.
4.7 CELLULAR OR GROUP LAYOUT

When TI Cycles reorganised its manufacturing plant it used Group
or Cellular layout to improve the efficiency of production. Sundaram
Fastners boasts of a Cellular Layout with world-class control on
manufacturing costs. What then is cellular layout? Conventional
layouts, product and process layouts, are two extremes of the spectrum.
The specific approach used to reach a group layout may also result in
one of the above two extremes, if the situation so demands.
Cellular layout is based on group technology principles. It is a

combination of both process and product layout and incorporates
the strong points of both of these.
This layout is suitable when a large variety of products are needed in
small volumes (or batches). The group technology principle suggests
that parts, which are similar in design or manufacturing operations,
are grouped into one family, called part-family. For each part-family a
dedicated cluster of machines (called machine cells) are identified.
Generally, all the processing requirements of a particular part-family
are completed in its corresponding machine cell, eliminating intercell transfers of the part.
Figure 4.7: Transition from a Functional to Cellular Layout

PLANT LAYOUT 149
The above diagrams show clearly the transition from a functional to

cellular layout.
In the before example the products moved from one process to
the next available process. In the after example specific product
families are flowing through a series of operations to reduce waste
and improve quality.
Cell layouts can be in several configurations. It really depends upon
your needs as to which type of cellular layout you will use.
The optimum shape for any cellular layout is a U. This allows one way
in and out of the cell, the products to flow and its easier to balance the
workload between the operators. Also, in a U shaped cell its easier
to adjust the number of people (up or down) when demand changes.
Group technology and cellular layouts can be combined and used
to produce families of parts more economically than can traditional
process or product layouts. Data is gathered to identify parts with
similar characteristics, which are also manufactured similarly.
Groups of items can be formed either according to similarities in their
design (external features such as size, shape, use, etc.) or according to
similarities in their manufacturing process. This is a time-consuming
and tedious task, which can be accomplished by the following methods:
Visual inspection method (for grouping items according to

design similarities), which is very simple in application but not
very accurate.
Examination of design and production data (for grouping items

according to design similarities), which is more complex to
implement than visual inspection but much more accurate.
Analysis of the production flow of items (for grouping items

according to manufacturing process similarities).
This identification and coding is the chart of group technology. The

equipment to make these is grouped together and designated for
these parts. To some extent, a process layout, characteristic of job
shops, is changed to a small well-defined product layout. This group
of equipment is called a cell, and the arrangement of cells is called a
cellular layout.
Figure 4.8 illustrates the difference between the two alternative
layouts. Two parts require different tooling;
One part could be made in a job shop moving from machine A to

C to D to E.
The second part can be made moving from machine A to C to D

to B.
In the Process Layout, the machines are grouped together and the
product moves to the machines. In the Cellular Layout, the machines
are grouped in a line flow.
In order for a cell to be economical and practical in the long term, the
machines must be closely grouped, and the cell must be flexible in its
mix of capacity and must be big enough so any on absent employee
does not shut it down, yet small enough for employees to identify with
the cell and understand the products and equipment.
Process Layout
Cellular Layout
Figure 4.8: Process versus Cellular Layouts

Cell manufacturing is also the building block of Flexible Manufacturing
Systems (FMS). It is, in essence, FMS with some manual operations.
The Cellular Layout principles are adopted in FMS because the
concepts make it easier to process large volume of information because
of the decomposed manufacturing system; it is easier to manage the
operational facilities compared to functional manufacturing due to
limitation on cell size, and the technological compulsions often require
grouping some operations like forging machines and heat treatment
unit.
Although cellular layout is catchy new term, the phenomenon is not
new. For decades, large job shops have grouped equipment for highvolume parts or special customers. Similarly, assembly lines may
group machines by type to make or modify a variety of parts that feed
into the main assembly line.
Example: Telco, Jamshedpur, has different machine shops and
die shops whose output is finally fed into the assembly line. When
considering a new technique such as cellular layout, managers
need to thoroughly look at past practices as a guide to changing the
manufacturing environment.
PLANT LAYOUT 151
4.7.1 U-SHAPED ASSEMBLY LINE

At any airport it is common to see baggage in the arrival area being
distributed using U-shaped conveyor belts. There has been a move
to move from traditional longitudinal assembly lines to U-shaped
assembly lines, especially in cellular layouts. Not only is it useful
particularly when there is a single worker in the line taking care of all
the workstations, but it also consumes less space. The U-shape of the
line reduces the walking distance of the worker almost by half.
Assembly line balances frequently result in unequal workstation
times. Flexible line layouts, such as the U-shaped line with work
sharing, could help resolve the imbalance and are a common way of
dealing with this problem. The closeness of the workstations, is used
by the Japanese, to allow workers to help a fellow worker catch up,
increase teamwork among workers. U-shaped assembly lines are
being successfully used by Matsushita Electric Co. of Japan by using
a single worker in the line. In addition, the U-shaped line reduces
material handling as the entry and exit points of the material on the
line are nearby. A trolley which brings the raw material for the line
may take back the finished goods in a single round.
Toyotas lean production system is a part of the generic system of
Cellular Manufacturing. The Toyota Production System called lean
production by some, has been heralded by many commentators as
the future for competitive manufacturing. It is a team concept and
incorporates a philosophy of constantly reducing production costs
through the progressive elimination of waste. This waste is seen
everywhere in the manufacturing operation, and includes excessive
work or over-production. This has given rise to the Just-in-time
system (JIT).
JIT is a simple principle that includes produce and deliver finished
goods just-in-time to be sold, sub-assemblies just-in-time to be
assembled into finished goods, and purchased materials just-in-time
to be transformed into finished parts.
4.7.2 ADVANTAGES AND DISADVANTAGES OF CELLULAR
LAYOUTS
Some of the advantages of cellular layouts are that overall
performance often increases by lowering costs and improving ontime delivery. Quality should increase as well, though that might take
other interventions beyond the layout change. Other advantages are
given below:
Lower work-in-process inventories,
A reduction in materials handling costs,
Shorter flow times in production,
Simplified scheduling of materials and labour,
Quicker set-ups and fewer tooling changes, and
Improved functional and visual control.
Disadvantages include the following:
Reduced manufacturing flexibility.
Unless the forecasting system in place is extremely accurate,

it also has the potential to increase machine downtime (since
machines are dedicated to cells and may not be used all the time).
There is also the risk that the Cells that may become out-of-date
as products and processes change, and the disruption and cost of
changing to cells can be significant.
There is increased operator responsibility, and therefore

behavioural aspects of management become crucial.
4.7.3 COMPARISON OF LAYOUTS

We have seen that both product and process layouts have their
advantages and disadvantages. Product layout is desirable by most
organisations, be the low volume and the variety of their products
does not warrant it. Therefore, they have no choice but to go in for
goods old batch processing on process layout.
TABLE 4.4: COMPARISON OF COMMON

CHARACTERISTICS OF DIFFERENT LAYOUTS
Aspect of the
Conversion
Process
Product
Work Flow
Human Skills
Layout Type
ProductProcessFixed Position
oriented
oriented
Standardised
Diversified
Made to order,
Product, large products
low volume
volume, stable using common
rate of output
operations,
varying
volumes,
varying rate of
output
Straight line
Variable flow,
Little or
of product,
each order
no flow,
same
(product) may
equipment
sequence of
require unique and human
operations for sequence of
resources
each unit
operations
brought to site
as needed.
Able to
Primarily
Great flexibility
perform
skilled
required,
routine,
craftsman, able work and be
repetitive
to perform
moderately
tasks at fixed
without close
assignments
place highly
supervision
and locations
specialised
adaptable
vary
Contd...
PLANT LAYOUT 153
Support Staff
Large,
schedule
materials
and people,
monitor and
maintain work
Material
Handling
Predictable,
flow,
systematized
and often
automated
Inventory
High
turnover of
raw material
and work
in process
inventories
Space
Utilisation
Efficient
utilisation,
large output
per unit space
Capital
Requirements
Large
investment
in specialized
equipment
and processes
Relatively
high, fixed
costs
Product cost
Perform tasks
of scheduling,
materials
handling and
production
and inventory
control
Flow variable,
handling often
duplicated
Low turnover
of raw material
and work
in process
inventories,
high raw
materials
inventories
Small output
per unit space,
large work
in process
requirements
General
purpose,
flexible
equipment and
processes
Relatively low
fixed cost
Schedule and
coordinate
skillfully
Flow variable,
often low may
require heavy
duty, general
purpose
handling
equipment
Variable
inventories
and frequent
tie ups because
production
cycle is long
Small output
per unit space
if conversion is
on site
General
purpose,
mobile
equipment
processes
Relatively low
fixed costs
Visit any automobile manufacturer firm. Observe whether it has

cellular layout, process layout or a product layout. Prepare a short
report.
Product layout and process layout represent the two extremes of

layout techniques. Cellular layout had evolved to aid manufacturers
with intermittent manufacturing of a high variety of products with
the advantages of a product layout.
Fill in the blanks:

20. ....................... position Layout is essential when the products
are difficult to move.
21. ....................... is a combination of both process and product
layout and incorporates the strong points of both of these.
22. Which of the following is the advantage of fixed layout?
(a) Very cost effective when similar type products are being
processed, each at a different stage of progress.
(b) Capital investment may be for a one-off product, which
can make it expensive.
(c) Space requirements for storage of material and equipment
are generally large.
(d) Due to long duration to complete a product, average
utilisation of capital equipment is limited.
4.8 NEW APPROACHES TO LAYOUT DESIGN

It may not be in the realm of impossibility that we may find for many
companies in the future, the ideal location to be a floating factory ship
that will go from port to port, from country to country wherever cost
per unit is lowest. Already, Telemarketing and Internet Industries
require neither face-to-face contact with customers (or employees)
nor movement of material and present a whole new perspective on
the location problem.
However, going back to the present, the Japanese have used
Cell manufacturing as an important element in the successful
implementation of Justin-time (JIT) for parts having long queues
at various work centres. According to their concept, this is used to
reduce production related wastes, such as: inventory (WIP, finished
goods or raw materials), and production setup times. It also simplifies
job scheduling.
Japan has been in the forefront in bringing to the industrial world
a rethink on work simplification and continuous improvement. In
Japanese management practice, the team concept is mainly associated
with kaizen or continuous improvement, the constant drive to remove
waste from the production process. Central to this are suggestion
schemes which capture the creative thinking or inventive ideas, from
workers, either as individuals or through the team-based activities
of quality circles. The Japanese have developed it to a fine art.
Process layout is one application where the Japanese change both the
physical layout and the managerial system. A Japanese innovation
is the U-shaped assembly line, which is used to encourage employee
involvement.
PLANT LAYOUT 155
4.8.1 FLEXIBILITY
Flexibility has become a very important requirement in todays
marketplace. It is expected that with increasing competition, the
importance of flexibility will go up rather than down.
Advantages of a flexible layout are:
A flexible layout allows a firm to adapt quickly to changing

customer needs and preferences and is best for many situations.
Layout flexibility means either that the facility remains desirable

after significant changes occur or that it can be easily and
inexpensively adapted in response to changes.
This is a way to minimise the cost of layout changes.
These changes are taking place around us all the time. We see these
in the mix of customers served by a store, goods made a plant, space
management in a warehouse, or organisational structure in an office.
For example, many offices now use modular furniture and partitions,
rather then permanent load-bearing walls. This is one way to minimise
the cost of office layout changes.
Manufacturers are adopting wide bays, heavy-duly floors, and extra
electrical connections in a plant. In the centre aisle of the Sahara Mall,
retailers use kiosks that display a variety of novelties and specialty
items. The ever-changing array of merchandise transforms onceutilitarian passageways into retailing hot spots. They are right where
the customers have to walk and create a stream of impulses purchase.
4.8.2 MIXED MODEL LINE
With increasing pressure on manufacturing flexibility to meet
customer needs, there has been a move towards new forms of assembly
lines, e.g. mixed model lines. A mixed-model line produces several
times belonging to the same family, such as the different models of
cars manufactured by Maruti Udyog Ltd. In contrast, a single-model
line produces one model with no variations; mixed-model production
enables a plant to achieve both high-volume production and product
variety.
This approach is also used by JIT manufacturers such as Toyota;
its objective is to meet the demand for a variety of products and to
avoid building high inventories. Mixed-model balancing is carried out
by Toyota Motor Corporation by averaging the production per day
in the monthly production schedule classified by specifications, and
dividing by the number of working days. The production sequence
during each day, the cycle time of each different specification vehicle
is calculated. To have all specification vehicles appear at their own
cycle time, different specification vehicles are ordered to follow each
other.
This does complicate scheduling and increase the need for good
communication about the specific parts to be produced at each station.
Care must be taken to alternate models so as not to overload some

stations for too long. Despite these difficulties, the mixed-model line
may be the only reasonable choice when product plants call for many
customers options, as volumes may not be high enough to justify a
separate line for each model.
Fill in the blanks:

23. A ....................... layout allows a firm to adapt quickly to
changing customer needs and preferences and is best for
many situations.
24. ....................... production enables a plant to achieve both highvolume production and product variety.
Visit Maruti manufacturing unit. Study its Mixed model line of

manufacturing cars. Prepare a short report stating its advantages
and disadvantages.
4.9 OTHER SERVICE LAYOUTS

Warehouse or Storage Layout: Warehousing was supposed to
disappear with Lean Manufacturing. This has rarely occurred but the
nature of warehousing often does change from storage-dominance to
transaction dominance.
In addition, the trend to overseas sourcing has increased the need for
warehousing and its importance in the supply chain.
Warehousing buffers inbound shipments from suppliers and outbound
orders to customers. Customers usually order in patterns that are
not compatible with the capabilities of the warehouse suppliers. The
amount of storage depends on the disparity between incoming and
outbound shipment patterns.
One key to effective design is the relative dominance of picking or
storage activity. These two warehouse functions have opposing
requirements.
Techniques that maximise space utilisation tend to complicate picking
and render it inefficient while large storage areas increase distance
and also reduce picking efficiency. Ideal picking requires small stocks
in dedicated, close locations. This works against storage efficiency.
Automation of picking, storage, handling and information can
compensate for these opposing requirements to a degree. However,
automation is expensive to install and operate.
Retail Layouts: A well-planned retail store layout allows a retailer to
maximise the sales for each square foot of the allocated selling space
within the store.
PLANT LAYOUT 157
Store layouts generally show the size and location of each department,
any permanent structures, fixture locations and customer traffic
patterns.
Each floor plan and store layout will depend on the type of products
sold, the building location and how much the business can afford to
put into the overall store design.
Some of the famous retail layouts are: straight floor plan, diagonal
floor plan, angular floor plan, geometric floor plan and mixed floor
plan.
Office Layouts: Office productivity is influenced by a number of
factors, one of which is office layout. Because office layout influences
the entire white-collar-employee segment of the organisation,
its importance to organisational productivity should never be
underestimated. Office layout is based on the interrelationships
among three primary factors: employees, flow of work through the
various work units, and equipment.
Efficient office layout results in a number of benefits to the
organisation, including the following:
It affects how much satisfaction employees derive from their jobs.
It affects the impression individuals get of the organisations

work areas.
It provides effective allocation and use of the buildings floor

space.
It provides employees with efficient, productive work areas.
It facilitates the expansion and/or rearrangement of work areas

when the need arises.
It facilitates employee supervision.
Fill in the blanks:

25. ........................ buffers inbound shipments from suppliers and
outbound orders to customers.
26. Efficient ...................... results in effective allocation and use of
the buildings floor space.
4.10 PLANT MAINTENANCE

Maintenance is a bottom line issue, but rarely do managers discuss
it in the same context. In the early days of industry, maintenance
functions were largely ignored. For example, the maintenance
function contained, primarily, two kinds of jobs sanitation and
emergency repairs. While the sanitation work was often scheduled
with some degree of regularity, repairs of equipment and facilities
were performed only when breakdowns occurred.
What were company managements priorities then? It is increased

productivity. Most managers say their worst problems are associated
with quality and productivity. Very often, those problems come
about because of poor management decisions related to Machine
maintenance and employee training. Without the proper maintenance
Procedures, safety cant exist. Efficient plant maintenance is vital to a
companys ability to optimise and harmonise its production processes.
When poor maintenance procedures result in an unsafe environment,
whether related to unnecessary breakdown/ improper shutdowns, or
even nitty-gritty issues like excess noise or dirty work areas, lost work
days further erode the bottom line, as do costs related to overtime,
temporary replacements and workers compensation. In addition,
bad decision-making is one of the leading causes of accidents.
4.11 MAINTENANCE STRATEGIES

The modern view of maintenance is that it is all about preserving the
functions of physical assets. In other words, carrying out tasks that
serve the central purpose of ensuring that our machines are capable
of doing what the users want them to do, when they want them to do
it i.e., making them available. The possible maintenance policies can
be classified as:
Corrective: Wait until a failure occurs and then remedy the

situation (restoring the asset to productive capability) as quickly
as possible.
Preventive: Believe that a regular maintenance attention will

keep an otherwise troublesome failure mode at bay.
Predictive: Rather than looking at a calendar and assessing what

attention the equipment needs, we should examine the vital
signs and infer what the equipment is trying to tell us. The term
Condition Monitoring is to mean using a piece of technology
(most often a vibration analyser) to assess the health of our plant
and equipment.
Detective: It applies to the types of devices that only need to

work when required and do not tell us when they are in the failed
state e.g. a fire alarm or smoke detector. They generally require a
periodic functional check to ascertain that they are still working.
Apart from detective maintenance, the central problem that companies

have struggled with is how to make the choice between the other
three. This has led to the increasing interest within industry in two
strategies, which offer a path to long-term continuous improvement
rather than the promise of a quick fix. These are Reliability Centred
Maintenance (RCM) and Total Productive Maintenance (TPM). The
two strategies, although having similar names, actually have very
different strengths.
PLANT LAYOUT 159
4.11.1 CORRECTIVE OR BREAKDOWN MAINTENANCE

Breakdown maintenance practice allows a machine or any other
facility to run without much of routine attention till it actually breaks
down to be then put back into commission. Type: gravity, place and
time of break-down are of a random nature. This practice, therefore,
leads to disruption of production plans. It also makes it impossible to
plan the work load and distribution of maintenance workforce for a
balanced attention of all equipment. It increases overtime payment
and involves prolonged down time due to non-availability of requisite
manpower and spares. This practice, consequently, accepts a lower
level of organizational efficiency, and cannot be recommended as
general practice for all types of equipment.
It is, however, an economical way of maintaining certain non-critical
items whose repair and down time costs are less this way than with
any other system of maintenance.
Restoring a failed system usually involves replacing or repairing the
component that is responsible for the failure of the overall system.
Corrective maintenance is performed at unpredictable intervals
because a components failure time is not known a priori. Corrective
maintenance is typically carried out in three steps:
Diagnosis of the problem: The maintenance technician must

take time to locate the failed parts or otherwise satisfactorily
assess the cause of the system failure.
Repair and/or replacement of faulty component(s): Once the

cause of system failure has been determined, action must be
taken to address the cause, usually by replacing or repairing the
components that caused the system to fail.
Verification of the repair action: Once the components in

question have been repaired or replaced, the maintenance
technician must verify that the system is again successfully
operating.
However, a properly designed fault reporting system must be instituted

and similarly the rectification of the fault should be processed in the
same manner as for planned maintenance work schedules.
Corrective maintenance in a broader perspective may also include
activities related to correcting potential causes for failure or
malfunction that might not have been adequately considered when
the equipment was designed. In such cases, proper feedback to the
design department may lead to alterations in design that will reduce
or eliminate failures. For example, if careful observations of repeated
failures of an equipment or system suggest that the remedy lies in
correcting the system, thereby eliminating or at least minimising the
failures, maintenance engineers should be allowed to consider the
possibility.
Where capacity and demand are close, breakdowns may affect

production and thus reduce profits in such a situation the practice
of attending to machines only after they have broken-down may
be uneconomical, and the adoption of other maintenance practices
may reduce interruptions to production. Even where capacity is not
a constraint, and where production interruptions may be negligible,
the breakdown maintenance practice may be costlier than other
maintenance strategies.
4.11.2 PREVENTIVE MAINTENANCE
Preventive maintenance is the performance of inspection and/

or servicing tasks that have been preplanned (i.e., scheduled) for
accomplishment at specific points in time to retain the functional
capabilities of operating equipment or systems.
Preventive Maintenance refers to only a part of a good maintenance
programme. It consists of routine actions taken in a planned manner
to prevent breakdown and to ensure operational accuracy to the
extent it is economically and practically possible to do so. Lubrication
and inspection are the two constituents of preventive maintenance.
Lubrication insures long life and safe working of the equipment
without mishaps. Inspection tries to detect faults in a equipment and
facility so that repairs and replacements may be undertaken before
the faults assume the proportion and shape of a break down.
Preventive maintenance is under taken to prevent anticipated
breakdowns of equipment in the near future, thus minimising the total
interruption of production. It anticipates and forestalls breakdowns,
and has an active system and not a reactive approach. Thus under
this equipment maintenance strategy, replacing, overhauling or
remanufacturing an items is done at a fixed intervals regardless of its
condition at the time.
Preventive maintenance may be defined as a set of systematic
inspection procedures and maintenance activities carried out to
keep equipment in the optimum operating state, minimise faults and
prevent breakdowns. The preventive maintenance management is
designed with the following goals and objectives:
To produce and supply products at an optimal minimum cost

which assures reliability.
To improve productivity and provide greater plant safety.
To develop well chalked out and systematic inspection procedures

and maintenance activities for all equipments in the plant to
minimise downtime.
Preventive maintenance is often scheduled on the basis of historic

data, which reveals causes and timing of breakdowns.
PLANT LAYOUT 161
The program should be designed to effectively to reduce premature

wear and tear, provide regular and prescribed inspection and service
schedules; and cater for identification of incipient faults. It should
treat these problems before they actually result in breakdowns. Often
manufacturers will supply good preventive maintenance information
about their equipment. One of the big advantages of well designed
preventive maintenance programs is that they permit maintenance
work to be scheduled so that production is disrupted as little as
possible.
Though preventive maintenance is carried out to prevent equipment
failures this is not a complete viewpoint. Unfortunately, we are not
yet smart enough to prevent all equipment failures. In fact, there are
three additional and important options to consider. First, while we
may not know how to prevent a failure, frequently we do know how
to detect the onset of failure. And our knowledge of how to do this is
increasing every day, and is creating a whole new discipline called
predictive maintenance. Second, even though we may not be able
to prevent or detect the onset of failure, we often can check to see
if a failure has occurred before equipment is called into service and
may be able to discover a hidden failure. We may adopt a of Run-tofailure (RTF) option due to economics and/or technical limitations,
i.e. do nothing, because of valid limitations. Preventive maintenance
is economical when:
Equipment must be kept running during the production cycle
Predictive maintenance cannot be applied
The economics/effects of breakdown maintenance cannot be

tolerated.
The preventive maintenance strategy can be very expensive at times,

especially during the useful period of the equipment life where
typically 95 percent of the time, breakdown is random. Although in
India, a large number of companies practice corrective maintenance
rather than preventive maintenance, many also periodically (annual
or half-yearly) overhaul major equipment, particularly machines that
are critical to production. Sometimes, preventive maintenance is
required by law, such as for boilers, etc.
4.11.3 PREDICTIVE MAINTENANCE
Historically predictive maintenance has been targeted at rotating
machinery-utilising techniques such as vibration monitoring and oil
analysis etc. Higher vibration levels, which can be induced by flow
or caused by factors such as misalignment, incorrect installation,
rotor imbalance or pump cavitation, can lead to much reduced life
expectancy. Oil analysis and tribology assesses the condition of
components by analysing samples of oil taken from process equipment
and measuring the concentrations of different elements present in
wear debris. These techniques have been very successful for motors,
bearings, gearboxes, etc. The unqualified success of these techniques

has encouraged the use of predictive maintenance on other assets.
Predictive maintenance depends on the ability to measure asset

health and extrapolate this information in order to predict the
moment that the asset will fail to fulfil its function.
Predictive maintenance is a condition-based approach to

maintenance.
Modern process plant consists of many types of assets that have

the potential to fail. New techniques, in addition to vibration
analysis, etc. like infrared thermographs, ultrasonic detection,
etc. are utilised to determine the condition of equipment, and to
decide on any necessary repairs.
Testing devices used in predictive maintenance include vibration

analysers, amplitude meters, audio gauges, and conventional
pressure, temperature, and resistance measuring devices.
The relevant tests and measurements can be made either

periodically or whenever justified, or can be on a continuous
basis.
To understand how failures can be predicted, the mortality of

machinery and the finding of parameters need to be understood. The
measurement of a physical parameter in itself is not enough to detect
the destructive effects on a machine or process. A major part of the
predictive maintenance program involves the ongoing analysis of
every machine in the plant, to ensure that wear levels are accurately
monitored and action taken to prevent breakdowns. It is important
to establish a limit or rate of change in the parameter that may be
excessive or damaging. Many engineered limits have already been
established for equipment by manufacturers, professional societies
and industrial groups. These make the task easier.
These methods combine predictive technologies with statistical
process control techniques. Limits are established by equipment
performance monitoring. Very often human senses are also adapted
to monitor the equipment condition. This follows the logic that
the worker manning the machine is sensitive to the changes in the
different characteristics of the equipment he or she is using.
One of the barriers to the expansion of predictive maintenance has
been the difficulty in gathering consistent, accurate information on
equipment condition and its health. Todays predictive maintenance
programs rely largely on intelligence delivered to analytical software
by advanced monitoring technologies. Typically, these technologies
also raise alarms if the components they are watching suddenly
develop symptoms of impending failure, so immediate corrective
action can be taken.
Predictive maintenance has limited scope for many applications,
nevertheless, wherever such scope exists, it is usually more economical
PLANT LAYOUT 163
to follow the predictive maintenance practice then to rely solely on

conventional preventive maintenance programs.
The conditions under which predictive maintenance is successful are:
The equipment in question is of the type that will give advance

warnings of a failure or malfunction that can be measured or
detected, or
The occurrence of one type of failure predicts the occurrence of

other types such that we have some means for preventing their
occurrence.
Process industries by their very nature are highly mechanised and

capital intensive operations and consequently, maintenance costs are
a high percentage of their overall production costs. In recent years
significant cost reductions have been achieved by re-evaluating the
traditional maintenance techniques and adopting more advanced
predictive strategies.
With the rapid development of computer technology especially in the
area of artificial intelligent and expert systems, computer simulations
and modelling may provide more universal and better predictive
tools of the future. This would be a big leap forward as predictive
maintenance is a more economical and feasible strategy compared to
preventive maintenance and corrective maintenance because labour,
materials and production schedules are used much more efficiently.
4.11.4 PROACTIVE MAINTENANCE
Unlike the three types of maintenance strategies, which have been
discussed earlier, proactive maintenance can be considered as a
new approach to maintenance strategy. Dissimilar to preventive
maintenance that is based on time intervals or predictive maintenance
that based on condition monitoring, proactive maintenance
concentrates on the monitoring and correction of root causes to
equipment failures. The proactive maintenance strategy is also
designed to extend the useful age of the equipment to reach the wearout stage by adaptation a high level of operating precision.
Fundamental among the differences between the strategies discussed
earlier and proactive maintenance are:
Focus is now not only concentrated on availability but also

reliability,
There is a push towards zero downtime or zero in-service

breakdowns, and
Use of improved maintenance tools such as Reliability Centered

Maintenance (RCM), Root Cause Failure Analysis (RCFA), and
others are applied to achieve maintenance objectives.
This means that reliability and availability have become key issues.
Manufacturing Reliability can here be defined as a manufacturing
systems capability to operate when it is expected to operate and when

it is operating it is manufacturing quality product at the speed required.
Using the above definition the formula most commonly used to
measure Manufacturing Reliability (MR) is:
MR = %T %Q %S.
Where:
Time performance = T
Quality performance = Q
Speed performance = S
Figure 4.9: Manufacturing Reliability Model

There are many ways to measure reliability.
You measure Mean Time between Production Loss (MTBPL);

Production Losses include all losses due to Time, Quality and
Speed.
Then you divide this with Mean Production Loss (MPL).
This reliability index expresses that you want to run without

production losses as long as possible, but when they occur you must
fix the problem as fast as possible. This index should continuously
improve. Whatever way you measure, you measure how much quality
product volume you manufacture divided by the quality product
volume you could have made.
What is good reliability performance? As a general rule in
industrial processes one can say that the more complex the
equipment is and the more complex raw material the lower is the
reliability. For example, a NC Lathe machine can be very good at
90 percent while a less complex automat lathe must be at +98 percent
to be classified as very good. Within a processing industry like the
paper industry, a tissue machine can be considered very good at +94
percent reliability while a liquid packaging machine is good at around
+80 percent reliability. The difference is complexity of the equipment
and process.
4.11.5 ROOT CAUSE FAILURE ANALYSIS
The Root Cause Failure Analysis (RCFA) method brings a team of
3 to 6 knowledgeable people together to investigate the failure using
PLANT LAYOUT 165
evidence left behind from the fault. The team brainstorms to find
as many causes of the fault as possible. By using what evidence
remains after the fault and through discussions with people involved
in the incident, all the non-contributing causes are removed and the
contributing causes retained.
A fault tree is constructed starting with the final failure and
progressively tracing each cause that led to the previous cause. Once
the fault tree is completed and checked for logical flow the team then
determines what changes to make to prevent the sequence of causes
and consequences from again occurring.
The purpose of Reliability Centered Maintenance (RCM) is
to determine the maintenance requirements of any physical assets
in its operating context. This is accomplished by answering seven
questions about the equipment in order to determine what type of
maintenance strategy to employ for the asset. RCM provides a flow
diagram that tells you what type of maintenance to use based on the
answers to the questions. By answering the seven questions all of the
potential modes of failure are uncovered and a predictive maintenance
strategy is devised to mitigate the consequences of the failure based
on the criticality of the failure mode.
The comparison between the RCFA and RCM is striking RCM is
driven by preventive maintenance strategies while RCFA is driven
by maintenance prevention strategies. When implemented together
they compliment each other and provide the greatest overall benefit
to the facility.
Total Productive Maintenance (TPM) and Failure Modes and Effects
Analysis (FMEA) are other maintenance tools that are used for
proactive maintenance. Proactive maintenance is a high-leverage
initiative as it impacts upon many different aspects of a business,
through production, quality, hygiene, engineering, customer service,
planning and organisational leadership. It has particular relevance to
high-volume production environments and can improve a companys
maintenance system and help increase the overall productivity of
most processes. Probably the most important benefit is building a
corporate expert system.
Fill in the blanks:

27. .......................... maintenance may be defined as the repairs
carried out to restore equipment, which has broken-down or
developed a fault, to a specified operating state.
28. .................. maintenance is the performance of inspection and/
or servicing tasks that have been preplanned (i.e., scheduled)
for accomplishment at specific points in time to retain the
functional capabilities of operating equipment or systems.
How will you determine the effectiveness of the maintenance

strategy in a steel manufacturing plant. Visit any steel manufacturing
plant and prepare a presentation.
Corrective maintenance strategy has no routine maintenance

task and therefore is also described as no scheduled maintenance
strategy. It is also called, breakdown maintenance, and as the
name suggests, the repair work is performed only after a piece of
equipment has failed.
4.12 TOTAL PRODUCTIVE MAINTENANCE

TPM is a manufacturing led initiative that emphasises the importance
of people, a can do and a continuous improvement philosophy; and
the importance of production and maintenance staff working together.
It is presented as a key part of an overall manufacturing philosophy.
In essence, TPM seeks to reshape the organisation to liberate its
own potential. The modern business world is a rapidly changing
environment, so the last thing a company needs if it is to compete in
the global marketplace, is to get in its own way, because the way in
which it approaches the business of looking after its income, generates
physical assets.
TPM aims to establish good maintenance practice through the pursuit
of the five goals:
Improve equipment effectiveness: Examine the effectiveness of

facilities by identifying and examining all losses which occur
downtime losses, speed losses and defect losses.
Achieve autonomous maintenance: Allows the people who

operate equipment to take responsibility for, at least for some of
the maintenance tasks. This can be at:
The repair level (where staff carry out instructions as a

response to a problem)
The prevention level (where staff take proactive action to

prevent foreseen problems)
Improvement level (where staff not only takes corrective

action but also propose improvements to prevent recurrence)
Plan maintenance: Have a systematic approach to all

maintenance activities. This involves the identification of the
nature and level of preventive maintenance required for each
piece of equipment, the creation of standards for conditionbased maintenance, and the setting of respective responsibilities
for operating and maintenance staff. The respective roles of
PLANT LAYOUT 167
operating and maintenance staff are seen as being distinct.

Maintenance staff are seen as developing preventive actions and
general breakdown services, whereas operating staff take on the
ownership of the facilities and their general care. Maintenance
staff typically moves to a more facilitating and supporting role
where they are responsible for the training of operators, problem
diagnosis, and devising and assessing maintenance practice.
Train all staff in relevant maintenance skills: The defined

responsibilities of operating and maintenance staff require that
each has all the necessary skills to carry out these roles. TPM
places a heavy emphasis on appropriate and continuous training.
Achieve early equipment management: The aim is to move

towards zero maintenance through Maintenance Prevention
(MP). MP involves consideration of the causes of failure and
the maintainability of equipment during its design stage,
manufacturing, installation, and commissioning. As part of the
overall process, TPM attempts to track all potential maintenance
problems back to their root cause so that they can be eliminated
at the earliest point in the overall design, manufacture and
deployment process.
Objectives of the TPM

The following are the objectives of TPM:
To maximise Overall Equipment Effectiveness (OEE) through

total employee involvement
To improve the equipment reliability and maintainability which

will improve quality and productivity
To ensure maximum economy in equipment and management

for the entire life of the equipment
To cultivate the equipment-related expertise among operators

and skills among operators
To create an enthusiastic work environment
The following box presents a real life example of cost savings through
TPM implementation.
BOX 4.1: TPM IMPLEMENTATION SAVES COST
The company ABC Ltd. is a leading cement manufacturer in India
having an annual turnover of ` 5,000 crores. The company has 8
plants spread across the country. The following is a snapshot of one
of the projects implemented under TPM.
Project Definition: Modification in the water pumps at Plant No. II
and replacement of electric motor of water pump in the filter plant.
Date of Implementation: April 2001
Description of Existing System: It was proposed to modify the
vertical water pumps by reducing the shaft length and increasing
Contd...
the impeller diameter which would help in fulfilling the water

requirement of the plant by running only one pump. The pump
after modification would need a motor of 60KW.
At the filter plant, it was then suggested to replace the water
pump motor of 60KW with 45KW. This would reduce the electricity
consumption by 15 units. So, net electricity savings would be of 45
units per hour.
Project Implementation Details: The above modification was
carried out with the help of available resources.
Total Cost: Nil (As all the modification were completed with
available resources)
Benefits: Per day savings in electricity units: @ 45 units per hr
= 45 24 = 1080 units (Kwh), the electricity charges are:
` 3 per unit.
Hence the savings = 1080 3 = ` 3240 per day
Total Annual savings @ 300 working days = 3240 3 00 = ` 9,72,000
or approximately ` 10 Lacs.

29. Which of the following determines the capacity of a production
line?
(a) The takt time
(b) The throughput time
(c) The theoretical minimum number of work stations
(d) The efficiency
30. Which of the following is not an element of a servicescape?
(a) Lighting
(b) Symbols
(c) Special layouts
(d) Prices
Corrective maintenance may be defined as the repairs carried

out to restore equipment, which has broken-down or developed
a fault, to a specified operating state. It consists of the action(s)
taken to restore a failed system to operational status. The goals and
objectives of corrective maintenance management are,
(a) To restore the faulty equipment to the healthy operating state
as promptly as possible, and
(b) To do this in a cost effective manner.
PLANT LAYOUT 169
Visit any electronics manufacturing firm. Discuss with them how

implementation of TPM can save their cost. Prepare a short report
on it.
4.13 SUMMARY
This chapter establishes that design of an operations layout is a

strategic issue. It provides an integrated approach by analysing
the basic production systems and moves on to explain the
different kinds of layouts.
A study into the factors influencing plant layout and the guiding
fundamentals to a successful layout is also dealt with layout
Engineering as separate topic lends an overview into the
technicalities of their area. Also, the increasing role of computers
and the enhanced information access as a mode of layout planning
have also been provided.
The layout is basically an expression of the various relationships

between different operations or work areas, e.g., the two
departments having close relationship with each other may
be required to keep adjacent to each other, e.g., for each of
supervision, minimum distance need for common lighting, etc.
Process layout is also called functional layout. Similar machines

or similar operations are located at one place as per the functions.
Very often the operations are intermittent.
Process layout is best suited for non-standardised products; where

there is a low volume, high variety manufacturing environment;
where the market requires frequent change in product design; in
job-shop manufacturing; and for setups where very expensive or
specialised machines.

work force, etc., are located based on the sequence of operation
on parts. Where the facility is needed again after few other
operations, the facility is duplicated as required by the sequence
of operations.
In continuous operations, the part variety is less, production

volume is high and part demand is relatively stable. A
breakthrough in continuous operations was the assembly line.
An ideal assembly line would be one where tasks are assigned

to different workstations in such a way that the total processing
times at each workstation is equal. If every station used up an
equal amount of task time, no time would be idle time.
The combination method of layout is feasible when a number

of products require about the same sequence of functional
operations but none enjoys sufficient volume to justify individual

production line. The principle of this method lies in the
arrangement of functional departments across the building at
right angle to the flow of product and in the required sequence
of operations.
Cellular layout is a layout based on group technology principles.

It is a combination of both process and product layout and
incorporates the strong points of both of these. Conventional
layouts, product and process layouts, are two extremes of the
spectrum. The specific approach used to reach a group layout
may also result in one of the above two extremes, if the situation
so demands.
The equipment to make these is grouped together and designated

for these parts. To some extent, a process layout, characteristic of
job shops, is changed to a small well-defined product layout. This
group of equipment is called a cell, and the arrangement of cells
is called a cellular layout.
The Japanese have used Cell manufacturing as an important

element in the successful implementation of Justin-time (JIT)
for parts having long queues at various work centres. According
to their concept, this is used to reduce production related wastes,
such as: inventory (WIP, finished goods or raw materials), and
production setup times. It also simplifies job scheduling.
Over the years, many new approaches have been advocated as

maintenance strategies, which are intended to overcome the
problems, which are related to equipment breakdown. Some
of the common approaches to maintenance are Breakdown
maintenance, Preventive maintenance, Predictive maintenance,
Proactive maintenance.
Total Productive Maintenance (TPM) is a maintenance program

which involves a newly defined concept for maintaining plants
and equipment. The goal of the TPM program is to markedly
increase production while, at the same time, increasing employee
morale and job satisfaction.
Continuous Production System: A production system that

involves a continuous physical flow of material.
Intermittent Production System: A production system where

the goods are manufactured specifically to fulfil orders by
customers rather than producing against stock.
Job Production System: A production system where

production of a single complete unit is carried out by one
operator or a group of operators.
Contd...
PLANT LAYOUT 171
Line Layout: A type of layout where all the equipment required

for one part or product is grouped together in one department
in the sequence of the operations performed.
Mass Production System: A production system where only

one type of product or maximum two or three types of products
are manufactured in large quantities.
Process Layout: A type of layout where the department is

made up of machines, equipments or process that fall into one
category according to the functions performed.

1.
What are the objectives of a plant layout?
2.
What is process layout? Explain the process layout of Nokia.
3.
Discuss the advantages and disadvantages of process layout.
4.
What is product layout? How will you define the layout problem?
5.
Differentiate between Product and process layout.
6.
What are the limitations of a product layout?
7. Explain the fixed layout. Throw some light on its advantages and
disadvantages also.
8. What is a Cellular layout? Explain its advantages and
disadvantages.
9. Make a comparison between product, process and fixed layout
on the basis of various factors like Arrangement of facilities, Cost
of layout, Inventory, Material handling, etc.
10. What are various plant maintenance strategies, which are
intended to overcome the problems, which are related to
equipment breakdown?

Topic
Q. No.
Answers
Facility Layout
1.
Layout
2.
minimised
3.
increasing
4.
productivity
5.
6.
7.
(a) Effectively use space
Types of Layout
Contd...
Process Layout
Product or Line Layout
Fixed Layout
Cellular or Group Layout
8.
functional
9.
optimising
10.
(a) Initial investment in

process layout is low
11.
(b) Total cycle time is high.

This is due to waiting in
different departments
and longer material flow
12.
line
13.
Ransom E. Olds, Henry Ford
14.
identical
15.
layout-planning
16.
equal
17.
18.
Fixed-position
19.
large
20.
Fixed
21.
Cellular layout
22.
(a) Very cost effective when

similar type products are
being processed, each
at a different stage of
progress
New Approaches to Layout 23.

Design
Other Service Layouts
Maintenance Strategies
Total Productive
Maintenance
flexible
24.
mixed-model
25.
Warehousing
26.
office layout
27.
Corrective
28.
Preventive
29.
(a) The takt time
30.
(d) Prices

1.
Section 4.2
These objectives of good plant layout lead to:

(a) Material handling and transportation is minimized and
efficiently controlled.
PLANT LAYOUT 173
(b) Maximum utilization of floor space.

(c) A good layout permits material to move through the plant at
the desired speed with the lowest cost.
2. Section 4.4

A process layout is characteristic of intermittent operations,

job shops, or batch production, in which a variety of customers
are served with different needs. The volume of each customers
order is relatively low, and the sequence of operations required
to complete a customers order can vary considerably.
3. Section 4.4.3

This type of layout adjusts itself easily to any changes in the

volume of products, in the raw materials used, in the method of
production or the rate of production necessitated due to addition
of equipment. There is greater flexibility. Changes in operations
or sequence of operations do not affect the layout.
Work does not flow over any definite mechanical channels.

Routing and scheduling is more difficult. It is essential to plan
and supervise the work of every department and of every worker
and machine in every department. This entails greater difficulties
in production control and addition to the cost of the finished
product.
4.
Section 4.5

work force, etc., are located based on the sequence of operation
on parts. Where the facility is needed again after few other
operations, the facility is duplicated as required by the sequence
of operations.
5. Section 4.5

In addition to the flow of work and arrangement of machines,

product and process layouts look very different in other ways.
In-process inventory for a process layout is high because material
moves from work center to work center in batches waiting to be
processed. Finished goods inventory, on the other hand, is low
because the goods are being made for a particular customer and
are shipped out to that customer upon completion. The opposite
is true of a product layout.
6. Section 4.5.5

All machines may not be utilised to their maximum capacity. The

quantity of work allotted to each mechanic may not be enough
to keep the machine busy all the time, causing considerable
machine idleness. A machine may be required to perform only
a certain operation in a given sequence and after this has been
completed, the machine may remain idle. At a certain stage the
plant may have several machines that may not be working to the
maximum capacity.
7.
Section 4.6
Fixed-position layouts are typical of projects in which the product

produced is too fragile, bulky, or heavy to move. Ships, houses,
and aircraft are examples. As the name implies, in this layout, the
product remains stationary for the entire manufacturing cycle.
The advantages of this layout are as follows:
(a) This layout is flexible w.r.t. change in design, operation
sequence, labour availability, etc.
(b) It is essential in large project jobs, such as construction and
shipbuilding etc., where large capacity mobile equipment is
required.
The limitations of fixed position layout are as follows:

(a) Capital investment may be for a one-off product, which can
make it expensive.
(b) Due to long duration to complete a product, average
utilisation of capital equipment is limited.
8. Section 4.7

Cellular layout is based on group technology principles. It is a

combination of both process and product layout and incorporates
the strong points of both of these. This layout is suitable when
a large variety of products are needed in small volumes (or
batches).
9. Section 4.7.3

We have seen that both product and process layouts have their
advantages and disadvantages. Product layout is desirable by
most organisations, be the low volume and the variety of their
products does not warrant it. Therefore, they have no choice but
to go in for goods old batch processing on process layout.
(See table no. 4.4)
10. Section 4.11

The possible maintenance Strategies can be classified as:

(a) Corrective: Wait until a failure occurs and then remedy the
situation (restoring the asset to productive capability) as
quickly as possible.
(b) Preventive: Believe that a regular maintenance attention
will keep an otherwise troublesome failure mode at bay.
(c) Predictive: Rather than looking at a calendar and assessing
what attention the equipment needs, we should examine the
vital signs and infer what the equipment is trying to tell us.
The term Condition Monitoring is to mean using a piece
PLANT LAYOUT 175
of technology (most often a vibration analyser) to assess the

health of our plant and equipment.
(d) Detective: It applies to the types of devices that only need
to work when required and do not tell us when they are
in the failed state e.g. a fire alarm or smoke detector. They
generally require a periodic functional check to ascertain
that they are still working.

SUGGESTED READINGS
Meller, Russell D., and Kai Yin Gau, The Facility Layout Problem:
Recent and Emerging Trends and Perspectives, Journal of
Manufacturing Systems, 15, no. 5 (1996): 351-366


Service that Customers can See, Free Press, NY, 1994






E-REFERENCES
http://www.leanproduction.com/tpm.html
http://www.plant-maintenance.com/articles/tpm_intro.shtml
http://www.slideshare.net/centenvir/presentation-on-totalproductive-maintenance
PRODUCTIVITY AND PRODUCTION
CONTENTS

5.1
Introduction
5.2
Organisation and Productivity
5.2.1
Labour Productivity
5.2.2
Multiple Factor Productivity
5.2.3
Total Factor Productivity
5.3 Competitiveness Strategy and Productivity
5.3.1
Enhancing Productivity to Gain Competitiveness
5.3.2
Productivity in Manufacturing versus Service Firms
5.4
Computing Productivity
5.4.1
Productivity Indices
5.4.2 Wastivity

5.4.3
5.5
Productivity Enhancement Techniques
Production Planning and Control
5.5.1
Benefits to Small Entrepreneur
5.6 Steps of Production Planning and Control
5.7
Summary
5.8
5.9
Answers and Hints
5.10
PRODUCTIVITY EFFORTS BY NPC

Understanding economic competitiveness requires continual
assessment of economic data and trends from around the world.
The competitive position of an organisation depends on
benchmarking efforts that identify key weaknesses and strengths
in the company. This was recognised by the Government of India
in 1958 when it established the National Productivity Council
(NPC), as a national level organisation to promote productivity
culture in India. NPC implements productivity promotion plans
and programs.
Every companys most important asset is the people who walk in
its doors every morning. Talented people, creating new ideas and
innovative technologies, keep the companies strong and growing
stronger. Productivity consciousness has acquired worldwide
momentum. Higher productivity is necessary for the survival of any
organisation. It stands for proper utilisation of available resources
to achieve the best results with minimum cost. Improvement in
productivity is the only answer to the problems in the industrial
sphere and it is the only path to national prosperity. In India, it
assumes special significance owing to the resource gap.
In order to overcome the hurdle of shortfall in resources, stepping
up of productivity is a must. This is the challenge of NPC which
has its headquarters at New Delhi. It also has twelve Regional
Directorates, two Regional Offices and two Training Institutes. It
provides training, consultancy, research and information in the
areas of productivity, industrial engineering, pollution prevention
and control, human resource development and various other
related fields. A maintenance-cum-training centre has been built
at Gandhi Nagar with the assistance of the Government of Gujarat.
In all, NPC have 14 offices in India and 207 full time professional
consultants.
The activities of the Council are chiefly guided by its basic mission
objectives:
To increase productivity in all spheres of industries and to

pave the way for launching productivity drive in all spheres of
economic activities of the country;
To stimulate and promote productivity consciousness by

disseminating information regarding productivity techniques
and processes;
To stimulate and facilitate establishment of regional/local and

industry-wise productivity organisations; and
To undertake
productivity.
scientific
research
activities
related
to
Contd...
PRODUCTIVITY AND PRODUCTION 179
As the premier institution for promotion of productivity in

India, the professional services are aimed at achieving greater
competitiveness, improvement in working conditions and the
quality of work life. It is trying to make productivity a mass
movement. The ability to succeed in the marketplace remains a
cornerstone of competitiveness.
The threats to economic competitiveness that existed two decades
ago have been replaced by new challengeschallenges relating
to innovation, capacity and competitiveness. The concept of
productivity encompasses not only a more efficient use of resources,
but also of quality, environmental protection and integrated
economic and social development.
Mr. Umesh Panjiar, the Director General of NPC, in a meeting
with his senior officers was concerned with the changes taking
place. Though the directions of the changes were clear, how could
one tackle the challenges they posed? He asked Dr. A.K. Saxena,
a senior Director in the organisation, to suggest ways and
recommend changes within the organisation that would enable it
to meet the new challenges.

Know what is productivity and what is its role in the
organisation
Define the difference between productivity and production
Know how we can enhance productivity
Know the differences between productivity in manufacturing
and service organisations
Explain the design of production system and manufacturing
process

List out the factors influencing the choice of production
process
Discuss the benefits, which a small entrepreneur can reap by
having properly designed production planning, and control
system
5.1 INTRODUCTION
Stories concerning outsourcing and replacement of jobs in foreign
companies by OECD nations have been commonplace since the
1980s. India has been a beneficiary. This change has come about by
the ability of offshore companies to manufacture products of higher
quality at lower costs than would have been possible locally.
This is why during the last 40 years every nation has set up a
productivity organization, to help and direct productivity
improvements. Though India is competing on the basis of being a lowwage economy, in the long run this advantage cannot be sustained
without continuous improvements in productivity. India has had a
productivity growth of around 8 per cent since late 1992. Considering
the low productivity even till date, productivity needs to be focused
on.
Productivity measurement has emerged as a distinct and separate
branch of study in management. A number of studies employing
highly sophisticated mathematical and statistical techniques and
tools of analysis have been conducted to measure productivity. The
importance given to productivity and its measurements is because,
in a larger sense, productivity impacts the organization in all areas,
and that is what Production and Operations Management is all about.
However, two basic components (a) Work Measurement and (b) Job
design are crucial to improvement of productivity.
In this chapter we will study productivity and production. These areas
are the basic components that make organizations competitive. We
need to understand the concepts involved. We will discuss the concepts
related to productivity. We will also discuss the most commonly
employed productivity enhancement techniques. We will demonstrate
how to compute productivity and learn about productivity indices and

wastivity. In addition, we will also discuss the production planning
and control i.e. job scheduling.
5.2 ORGANISATION AND PRODUCTIVITY

Productivity Defined: Productivity may be defined as the ratio or
outputs of goods or services of the production, system to the input
resources such as Land, Labour, Capital, Material, Energy, etc.,
employed to the production system.
Mathematically productivity can be expressed:
Productivity=
Outputs of the production system

Inputs employed in the system
Technically, productivity signifies the ratio between the input and

output with respect to given resources, i.e. the ratio of the outputs
achieved from an activity to the inputs consumed to make those
outputs. It does not have any unit. It is a management tool which
highlights how efficient the resources in the system are used.
When productivity is stagnating, so, generally, is the profit.
Organisations, of all sizes and types, irrespective of how long they have
existed, have potential for productivity improvement. No organisation
is an exception.
This definition, while accurate, does not convey the central role that
productivity and productivity improvements have in determining the
competitiveness of the organisation. Productivity is a multi-faceted
concept; no single definition can fully describe it. When more is
produced with the same expenditure of resources it may be termed as
effectiveness; when the same amount is produced at less cost it may
be termed as efficiency.
The word productivity is broad enough to cover both. It denotes the
efficiency with which the various inputs are converted into goods and
services and the effectiveness with which resources are used.
To calculate productivity, it is essential to define and measure the
inputs and the outputs for the process or activity. In simple cases e.g.
a manufacturing operation making a single product on an automatic
machine, calculating the productivity of that machine is simple.
Example: Rewa Engineering manufactures 20,000 components per
month by employing 100 workers in one 8 hour shift. What is the
productivity of the labour?
Present production = 20,000 Components
Productivity
= Output/Input = Production/Total man-hours
Assuming 25 working days per month

= 20,000/100 8 25
Therefore, productivity is 1.0 components/man-hour

Productivity and Production distinguished: The difference between

production and productivity is highlighted in the following Table 5.1.
Relationship between production and productivity: There does not
exist any relationship between production and productivity. Increased
output may or may not improve productivity, sometimes it may reduce
productivity, depending up on how inputs are used. If the increased
output is the result of proportionally lesser inputs it is certainly an
improvement in productivity.
TABLE 5.1: DIFFERENCE BETWEEN PRODUCTION

AND PRODUCTIVITY
Description
Production
Productivity
Definition
It deals with
conversion process
of input resources
into output of the
production system.
It is a ratio of the
outputs of the system
and inputs employed in
the system.
Unit
It is expressed in No.,
Kgs, Meters, Tonnes,
Kilolitres etc.
It is a ratio; it does not

have any unit.
Utility
It satisfies the human

needs and wants.
It is a management
technique used to
improve the efficiency
and effectiveness of the
production system.
Profitability and Productivity Distinguished: Productivity indicates

the efficiency of inputs used in the production system, while
profitability is the ratio of outputs to inputs to the production systems.
Productivity Level: Productivity can be viewed at two extremes. We
can look at the level of an entire nation or at the level of an individual
employee. In between these two extremes are industry, organisation
(firm), division (business unit) and work group levels.
Productivity Trends: During past decade the contribution of capital
as partial factor of productivity has not contributed positively, overall,
to productivity growth in the U.S. economy, while in under developed
and developed economy there is scarce capital. The contribution of
labour is declining all over the world due to skill transformation from
labour to machine. The trends are to measure from organizational
productivity to infrastructural productivity. From integratedproductivity of the networking of productivity to the nation.
Productivity
Productivity is a simple concept. It is the amount of output produced
per unit of input. It is the value of outputs (i.e. goods and services)
produced divided by the values of output resources (i.e. wages and

cost of equipment, etc.) used. It is a measure of efficiency.
Productivity can be mathematically expressed as:
Productivity = Output/Input
Productivity Calculations: Compare the productivity of two teams of
workers in a machine shop. If the team in A shift produces 400 units
in the shift while the team in B shift produces 360 units; then:
Productivity of A Team = 400/8 = 50 units/hour
Productivity of B Team = 360/8 = 45 units/hour
Productivity measures have been used as tools for business
improvement. The success of a business generally depends on its
ability to deliver more real value for consumers without using more
labour, capital or other inputs.
There are several concepts of productivity. In addition to the single
factor measure of productivity there are also multifactor productivity
measures (relating a measure of output to a bundle of inputs).
Another distinction, of particular relevance at the industry or firm
level is between productivity measures that relate some measure of
gross output to one or several inputs and those which use a valueadded concept to capture measurements of output. The input/output
relationships of the main productivity measures are shown in Table
5.2.
TABLE 5.2: OVERVIEW OF MAIN PRODUCTIVITY

MEASURES
Type of
Output
measure
Gross
output
Value
added
Type of input measure

Labour
Capital
Labour
Capital
productivity productivity
(based
(based
on gross
on gross
output)
output)
Labour
Capital
productivity productivity
(based
(based on
on value
value added)
added)
Single factor productivity
measures
Capital and
Labour
Capital labour MFP

(based on
gross output)
Capital labour MFP
(based on
value added)
Capital,
labour and
intermediate
inputs
(energy,
materials,
services)
KLEMS
multifactor
productivity
Multifactor Productivity
(MFP) measures
In improving the standard of living of a nation, productivity is

more important than money because productivity determines the
output while money just measures the value of the output. However,
the measures that are of relevance here from the point of view of
the operations manager are labour productivity, multiple factor
productivity and total factor productivity.
5.2.1 LABOUR PRODUCTIVITY
Labor productivity is the quantity of output produced by one unit

of production input in a unit of time.
Average economic productivity is computed by dividing output value
and (time/physical) units of input. If the production process uses
only one factor (e.g. labour) this procedure gives the productivity of
that factor, in this case labour productivity. This was explored in the
example we attempted earlier.
5.2.2 MULTIPLE FACTOR PRODUCTIVITY
Labor productivity is a single factor productivity measure (relating
a measure of output to a single measure of input). It is only based on
observations of volume product outputs and inputs for labour. While
the example illustrates the method for calculating productivity, it did
not consider that most operations have more than one input and more
than one output. In an economic sense, the inputs are:
Labor as managers, workers, and externally purchased services,
Capital for land, facilities, and equipment, and
Materials, including energy requirements.
The importance of these factors may vary widely for companies

producing different products. Multiple factor productivity
accommodates more than one input factor and more than one output
factor when calculating overall productivity. With multiple factor
productivity, the outputs can be measured either in money terms or
the number of units produced, provided the units can be measured in
the same units.
Multiple Factor Productivity = Output (units or value of units)/
[Labor + capital + materials + energy + other]
When more than one input is used, for each factor it is called partial.
For example, the Partial Productivity Index of labour is measured by
dividing the market value of goods and services produced during the
year in the economy as a whole or a particular industry or a firm and
dividing it by the number of man-hours taken to produce the goods
and services.
Outputs are sometimes difficult to define and measure. For example,
the productivity of a fast-food restaurant could be measured in terms
of customers served per hour or by the number of items sold. Both

the measures can be misleading because customers may order more
than one item and restaurants sell various items (such as drinks,
sandwiches, and ice cream) that have different values.
Another issue is that even within the firm, customers of many processes
are internal customers, making it difficult to assign a rupee value to
the value of process output. This raises three important issues that
can complicate how productivity is measured.
How can you assign rupee values to different outputs within and
external to the firm?
How can multiple inputs with different economic values be

included in the measurements?
How can multiple outputs with different economic values be

included in the measurements?
Total Factor productivity is the year-by-year change in the output

where a number of factors are taken into consideration. It is the
attempt to construct a productivity measure for an aggregation of
factors. Such an aggregation requires additional hypotheses to make
it meaningful. These other factors consist not only of investment
for education, training, research and development, but also of non
quantifiable factors such as the labour relations climate and worker
and management attitudes towards productive efficiency and
competitiveness.
5.2.3 TOTAL FACTOR PRODUCTIVITY
Total factor productivity is a more accurate indicator of the economic
efficiency of a firm, industry or nation than labour productivity.
There are some other limitations to the definition of Total factor
productivity.
Example: It might be the investment made in human beings to raise
the quality of labour or that made to improve productive knowledge
through research and development, or by the introduction of
organisational, managerial and social innovations.
Economic productivity will depend also on pricing and demand. If
consumers require fewer products than can be produced, plants will
not work at full productive capacity. Thus economic productivity can
well fall, as with decreasing demand and prices.
Another limitation of this definition is that productivity defined
in this manner does not identify whether the change is due to new
machinery or more skilled labour force. Both technological and
market elements interacts to determine economic productivity.
However, mainly because of the difficulties involved in quantifying
various intangible inputs to total factor productivity, labour
productivity is far more widely used. It is important to bear in mind
that labour productivity, is affected not only by capital input, but also
by other factors, which affect the efficient use of both capital and
hours of work.
Productivity is linked to the competitive strategy of the organisation.
Corporate strategy and objectives have a major impact in determining
the different operational parameters at the corporate level. There are
many other factors and the list may differ from one organisation to the
next and between different time periods for an organisation as well.
The principle impact on these parameters comes from competitive
strategies.
Fill in the blanks:

1.
........................... is defined as the amount of output per unit of

input.
2. Productivity is said to be .................... when more output is

derived from the same input, or the same output is obtained
from a less input.
3. .................... productivity is the quantity of output produced by
one unit of production input in a unit of time.
4. Total .................... productivity is a more accurate indicator
of the economic efficiency of a firm, industry or nation than
labour productivity.
Visit the eating joint like Mc-Donalds. How will you calculate the
productivity of Mc-Donalds? Prepare a short report.
Productivity is also used at the national level. Productivity typically

is measured as the rupee value of output per unit of labour. This
measure depends on the quality of the products and services
generated in a nation and on the efficiency with which they are
produced. Productivity data is available from different sources
for national productivity, sector wise as well as industry wise
performance.
5.3
COMPETITIVENESS STRATEGY AND

PRODUCTIVITY
Corporate strategies and competitive strategies form a hierarchy

of strategies. Corporate strategies are concerned with the type of
business the organisation is in, its overall competitive position and how
the resources of the organisation have to be deployed. The business
strategies are basically competitive strategies. The objectives of these
strategies are about how to compete successfully in particular markets,

and how can the business units acquire competitive advantage.
Improving quality is one important way to maintain a competitive
position in todays markets. Quality can be promoted to customers
and employees. Consumers want quality product and services and
employees at all levels in the organisation like to be associated with
winner. Most people associate high quality with a winning competitive
position.
From economic perspective, when quality is emphasized and
subsequently improved waste is decreased or eliminated. Hours
are not wasted in reworking products. Material is not thrown away.
Operations costs are reduce. At the same time, the customer receives
products and services that are fit for use. Moreover prices can be
lowered to share this productivity gain with customers, thereby
stimulating an increase in the firms market share, or, alternatively,
the higher quality product can command a premium price and
temporarily secure a market niche. To employees, these results mean
increased job security. Stock holders can benefit through higher
overall profits and improved asset utilisation. In short, quality can
make every one a winner.
Sun-Tzu, a Chinese strategist and general, made an observation
in Art of War: The more opportunities that I seize, the more
opportunities that multiply before me. This phenomenon is at the
heart of strategy. Organizations compete successfully by seizing
opportunities. Organizations achieve competitive advantage by
providing their customers with what they want, or need, better or
more effectively than competitors and in ways the competitors find
difficult to imitate. The strategy for each organization is unique
reflecting the particular circumstances it faces. There are two schools
of thought on developing competitive strategies. On the one hand, the
concept of Generic Strategies is promoted by strategic thinkers like
Michael Porter. On the other hand, Prahalad and Hamel promote the
Resource based Approach. However, we will lay greater emphasis
on Generic Strategies as these are industry focused and reflect more
closely the requirements of the OM Strategy. In order to succeed in
this, organisations have found many offensive and defensive actions
to defend their position in the industry and cope with competitive
forces.
There are two basic types of competitive advantage a firm can
possess: low cost or differentiation. The two basic types of competitive
advantage combined with the scope of activities for which a firm
seeks to achieve them, lead to three internally consistent generic
competitive strategies. These strategies are:
Cost Leadership: A firm pursuing a cost-leadership strategy

attempts to gain a competitive advantage primarily by reducing
its economic costs below that of its competitors. This policy,
once achieved, provides high margins and a superior return on

investments.
Differentiation: In a differentiation strategy, a firm seeks to be

unique in its industry along some dimensions that are widely
valued by buyers. It selects one or more attributes that many
buyers in an industry perceive as important, and uniquely
positions itself to meet those needs. Differentiation will cause
buyers to prefer the companys product/service over brands
of rivals. An organisation pursuing such a strategy can expect
higher revenues/margins and enhanced economic performance.
Focus Strategies: The generic strategy of focus rests on the

choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry,
or buyer groups, or a geographical market and tailors its strategy
to serving them to the exclusion of others. The attention of the
organisation is concentrated on a narrow section of the total
market with an objective of catering to service buyers in the
target niche market. The idea is that they will do a better job than
the rivals, who service the entire market. Each functional policy
of the organisation is built with this in mind.
5.3.1 ENHANCING PRODUCTIVITY TO GAIN

COMPETITIVENESS
Although labour and multifactor productivity measures can be
informative, they also can be deceptive when applied to a firm at
process levels.
Example: If a firm decides to transfer some of its work to outside
suppliers and lay off some of its own workforce, the labour productivity
will increase. This is because the value of the firms total sales
(the numerator) remains unchanged while the number of employees
(the denominator) drops.
What is measured and the way in which the processes are managed
play a key role in determining productivity improvements. We have to
increase the value of output relative to the cost of input. If processes
can generate more output of better quality using the same amount of
input, productivity increases. If they can maintain the same level of
output while reducing the use of resources, productivity also increases.
Some of the objectives of improvements in productivity are:
Efficiency
Maximum output
Economy
Quality
Elimination of waste
Satisfaction of human beings through increased employment,

income and better standard of living.
From a broader perspective, an increase of productivity is due to

a squeeze in waste of resources. The resources may be productive
resources, governance, markets or social needs. The real issue is how
to achieve them.
Some issues can be simple improvements in the working conditions.
Example: Attention to the details of the production process, like
placement of the work piece at the work centre such that it simplifies
the job loading of the machine.
This adjustment can be an important contribution in reducing
movements and eliminating physical stress, therefore leading to
greater output. This type of improvement s important, however, it
does not provide the whole picture. The larger picture includes:
Issues related to the structure of operations, such as the number

size, location and capacity of the facilities providing the service
or producing the products.
The equipment and methods used in the activities.
The detailed analysis of the individual jobs and activities.
The structure of operations is not as simple as saying that fewer,

bigger facilities will result in higher productivity and lower costs.
According to conventional economic theory, this tends to be true up to
a certain limit. Economies of scale allow firms to increase productivity
by making operations larger. Service and manufacturing operations
can take advantage of this to improve productivity and lower costs.
Figure 5.1: Productivity Tree
Consolidation in the many industries is being driven by the need

to spread Fixed Costs, such as information systems, infrastructure,
and management, over a broader base of operations. But this
action assumes that demand is infinite. Therefore, matching the
characteristics of the market to the needs of the customer is crucial.
Very often, adding facilities is not the right answer.
Example: When Indian Airlines purchased Boeing aircraft, it arranged
for the maintenance of the aircraft to be undertaken by Air India,
which already had an established infrastructure. In this way, Indian
Airlines avoided duplicating expensive equipment, highly trained
staff, and administrative overhead. Similarly, many hospitals are
forming alliances with super speciality services to avoid duplication
of expensive facilities.
In both these cases, the cost of the service declines and the quality
improves.
However, it must be remembered that developments in technology
often drive productivity improvements. As organisations invest in
technology, they can optimise time, expand options, and reduce costs.
The productivity tree is shown in three parts, the roots (inputs), the
trunk (the conversion process) and the fruit (the outputs). As will be
recognised in the figure, long-term productivity improvements can be
achieved by the human factor through skills, systems, management
and positive and innovative attitudes. In this sense, productivity is an
attitude of mind which is intolerant of waste of every kind and in any
form. It not only refers to work systems but also to the development
of right attitudes and a strong concern for efficiency. Waste can be
eliminated through:
Technology, Innovation and Automation: Technology, Innovation

and automation brings new ideas, methods, and/or equipment to
the process of making a product. Technology determines both
the maximal physical quantity of output that can be reached
as well as the number and the quality of inputs required. This
presents an opportunity to cut costs and to do more value-added
work. The technology that is adopted is an economic choice,
taken upon both economic and technological reasons. However,
reversibility of the choice is often low because of high switching
costs. Business process redesign is another aspect of technology.
Technology to improve physical productivity focuses on
understanding the diffusion of technology in use and redesigning
of processes that exist within and between companies. The rate
of technological change varies between industries and the need
increases as the clock-speed of the industry increases. Innovative
changes in business processes that allow the customer to obtain
better value, increases productivity of the organisation. Using
numerically controlled machine tools can increase productivity
and reduce manpower. Similar technologies have been available
for decades, but are constantly finding new applications. These
reflect exercises in automation as the focus is to substitute capital
for labour. It is different from technological innovation because

existing automation is merely applied to a new situation.
Learning and Experience: The learning and experience curve

concepts have been discussed earlier in detail. This was first
observed in the aircraft industry and was found to enhance
productivity and reduce costs substantially. The productivity is
greatly improved by a distinct form of specialisation. As workers
learn, they get better trained in the techniques required to do the
job. Learning and experience enable firms to achieve productivity
improvements because the workforce gains knowledge about the
product and work processes. From this knowledge workers find
better ways to organise work.
Job Design, Work Analysis and Motivation: All these techniques

enable firms to examine work at the level of the individual
worker, the interface between a worker and a machine, or the
interface between a worker and the firm. The job design and
work analysis approach investigates and improves individual
movement to improve productivity. It makes possible productivity
improvements through scientific redesign of the work content.
Job design and work measurements also provide benchmarks
that can be powerful motivators. Motivation is a powerful tool
that can be used to increase productivity in any job that is labour
intensive.
Firms can also provide incentives to increase workers productivity

through a stimulating environment and the removal of obstacles to
their effective work. The classical Hawthorne Studies by Elton Mayo
showed that if labour is motivated to do more work, productivity
can increase without additional investments or cost increases. For
example, when the lighting levels in the Hawthorne works were
improved, there was increased productivity with no additional costs.
5.3.2 PRODUCTIVITY IN MANUFACTURING VERSUS
SERVICE FIRMS
Productivity applies equally to the blue-collar workforce as to people
doing intellectual work. In many developed countries, blue-collar
workers represent a small and declining portion of the workforce
and the dominant workforce is represented by intellectual work in
service organisations. This change is explained by a change from
a manufacturing to service-based economy in these countries. The
problem presented by this shift is that productivity gains in the service
sector have lagged behind gains in the manufacturing sector.
Nobel Prize-winning economist Robert Solow has said that we
see computers everywhere except in the productivity statistics.
That productivity measures do not seem to show any impact from
new computer and information technologies has been labelled the
productivity paradox. Several explanations have been advanced
to explain this lag, including ineffective measures for services sector
productivity and macroeconomic factors, such as the low savings rate
while on the other hand fear of job loss by manufacturing workers,

which motivates them to work harder and smarter.
However, there are many examples from leading-edge service
companies that have achieved dramatic improvements in productivity
while other firms within the same industry have lagged. In many
cases, these competing companies use the same basic technology,
pay the same wage rates, and operate under the same basic labour
agreement. This contradiction is often explained by lack of intelligent
focus in the use of new technologies.
The animating force for productivity and wage growth in the new
economy will be the pervasive use of digital electronic technologies.
This is expected to increase efficiency and productivity, particularly
in the low-technology service sector.
It is forecasted that with increased learning, the digitisation of the
economy in the 21st century will bring in the kind of economic benefits
that mechanisation brought in the 20th. And this will be spurred
by the network effect the more we use these technologies (e.g.,
Internet, smart cards, broadband and telecommunications), the more
applications will be developed, and the more value they will provide
for users. Once this occurs, the productivity paradox could very likely
give way to a productivity and wage boom.
Visit any Five star Resort in your area. Examine various processes
like making of food, quality serving, maintenance of rooms,
maintenance of other activities like swimming pool, spa, restaurants
and bars, etc. Suggest the ways of improving productivity in each
area and prepare a presentation.
Technology is in many cases revolutionising business and

Operations Management by changing everything from the way
products are designed to how inventory is managed and controlled.
It is helping in decision making by gathering, organising, analysing,
and presenting data to managers faster and cheaper each day.
This has an impact not only on how effectively and efficiently the
equipment is used but also on designing activities that help enhance
productivity.
Fill in the blanks:

5. A firm pursuing a .................... strategy attempts to gain a
competitive advantage primarily by reducing its economic
costs below that of its competitors.
Contd...
6. In a ............... strategy, a firm seeks to be unique in its industry

along some dimensions that are widely valued by buyers.
7. Economies of scale allow firms to .................... productivity by
making operations larger.
8. Relative productivity increases only if
(a) Your process outputs go up
(b) Your process inputs go down
(c) Your process outputs go up faster than your process
inputs
(d) Your productivity goes up faster than your competitions
9. Which of the following is not a classic process performance
measure as discussed in the book?
(a) Profitability
(b) Productivity
(c) Quality
(d) Flexibility
10. Which of the following is the method of eliminating waste?
(a) Technology, Innovation and Automation
(b) Learning and Experience
(c) Job Design, Work Analysis and Motivation
5.4 COMPUTING PRODUCTIVITY

Productivity can be measured by two ways:
Total factor basis: Total factor productivity is the ratio of outputs

of the production system to all inputs employed to the production
system.
Productivity=
Outputs of goods or services of the production system

Inputs (Land+Labour+Capital+Material, Energy, etc.)
employed in the system
Partial factor basis: Partial productivity is the ratio of all outputs of

the production system to one or two or three of these inputs: Land,
Labour, Capital, Material or Energy employed to the systems.
Productivity=
Outputs of the production system

Labour
Labour productivity (outputs per labour hour) is perhaps the most

common partial measure of productivity.
5.4.1 PRODUCTIVITY INDICES
When both output and input are expressed in the same unit,
productivity reduces to a mere number. Quite often it is expressed as
a % of output to input. It is also expressed as:
OMS: Output per Man-shift

Example: A coalminer produces coal @ 2 tonnes per day, we say that
his OMS is 2t/day.
Production per month
For better understanding in an industry, e.g., in a steel plant, it is

expressed as 10,000 tonnes (of steel produced) per month.
GNP (Gross National Product): National productivity is given as

per capita income.
In agriculture sector: Output per hectare, etc.
For industries having incentive Schemes:

Productivity = SMH/AMH

= Standard Man-hours Earned/Actual Man-hours
Worked
5.4.2 WASTIVITY
Wastivity = 1/Productivity
Another way of looking at the concept of productivity is to look at the
amount of wastage generated in the system. The wastage could be an
unnecessary input, a defective output, idling of the resources, etc. If
we could measure these wastages and have a measure of the wastage,
then it becomes a tool for measuring the efficiency of the inputs called
Wastivity.
Example: The typical examples of wastes are:
Idling of resources, e.g., materials waiting in the form of inventory

in the stores, machines waiting to be loaded, job orders waiting
to be processed, patients waiting for service at a doctors clinic
customers waiting for reserving a berth/seat at a reservation
counter.
Production of defective goods and services, e.g., components/

parts not conforming to specifications, higher conversion costs
resulting from inefficient/poor methods of working or process
not set correctly, poor quality of materials used, excessive
maintenance delays, etc.
For an effective and efficient production system, wastage of all kinds

must be eliminated or at least minimised.Checklist for above can be
prepared through the parameters responsible for wastage generation
and fixing standards from time to time.
Reduction of scrap or rejections, or percentage increase in yield, just
by one (1) % can save an organisation tremendously as compared to
an increase in production and sales efforts by at least 10-15 %.
Surplus from Scrap and Waste

Surpluses from production processing are inevitable. Many raw
materials undergo various transformations in the production process
while they are being converted into finished goods. As a result, not
all the materials a firm purchases are wholly consumed; residue
is left. One company stamps disks from copper strip or its main
product. From this operation, at least 15 per cent of copper left cannot
be used elsewhere in the firms production operations. The excess
copper, therefore, must be disposed as surplus. It is impossible for
management to eliminate this type of surplus, which is called scrap.
Rather, managements objective is to minimize legitimate scrap by
means of intelligent planning and effective production controls.
Surpluses also result from the inefficient use of production
machinery, from carelessness, and from poor purchasing. This type
of surplus is called waste Effective management does everything
possible to keep waste at a minimum. Cooperation with production
and engineering to prevent waste should be one of the purchasing
departments major value analysis objectives. The least costly method
of controlling surplus is its elimination at the source. For example, the
buyer of raw materials must be constantly alert to the need for buying
the most efficient size and shapes of metals his firm uses. The authors
recently noticed a plant which was buying 1-foot-square metal sheets
from which 6-inch disks were being stamped. This kind of waste is
clearly avoidable.
Precious metals are a fertile and growing source of available profits
from the proper recovery and disposal of scrap. These metals are
especially important today because they are being used at prodigiously
increasing rates by many industries. Among the largest industry
users are electronics, precision instruments, hospital, photography,
and industrial chemistry.
Profitable Disposal of Surplus or Waste
When material has been declared surplus/waste to the need of a
firm, the purchasing department or the salvage and reclamation
department should be informed. From that point, disposal can take
five routes:
Circulation within the company
Return to the vendor
Direct sale to another firm
Sale to a dealer or broker
Sale to employees.
Example: In a manufacturing unit, the standard time allowed for the

production of a unit is 5 hrs. If in a particular month 126 units are
produced by employing 4 persons and the allowable delays are found
to be 44 man-hours, find the productivity and wastivity of the concern.
Solution:
ESH = Earned Standard Hours
STD Time/Unit = 5 hrs
Production = 126 units
Earned standard man-hours = 5 126
= 630 hrs
AMH = Available Man-hours
Manpower Employed= 4 P
Monthly working hrs = 4 25 8 = 800 hrs
Allowed delays = 44 hrs
Therefore, AMH = Actual Man-hours available for production

= (800 44) hrs
= 756 hrs.
Therefore, Productivity = (ESH/AMH) 100

= (630/756) 100
= 83.33% Ans.
Wastivity = 100 83.33

= 16.67%
5.4.3 PRODUCTIVITY ENHANCEMENT TECHNIQUES

Organisations focus their attention on enhancing productivity. The
first step in enhancing productivity ratio is to understand the factors
that influence the relationship between output and input. Several
factors influence productivity.
Human element is the next important factor which affects
productivity. A company may own the best of machines, but if the
people do not work with dedication, productivity cannot increase.
Productivity can be enhanced through other ways. The method of
enhancing productivity is practically the same as those of scientific
management. Specifically, production planning, production control,
inventory control, operations research, cost control, budgetary control
marketing research, preventive maintenance and the like.
Some of the tools and techniques used for enhancing productivity are:
Improving volume of production.
Reducing the rejection rate.
Minimising rework rate.
Maintaining delivery schedules.
Controlling resources such as men and machine.
Updating the processes and procedures.
Maintaining accuracy and timeliness of MIS.
Controlling overtime.
Good house keeping.
Eliminating accidents.
Efficient training and team building.
Minimising inventory and achieving better yields.
Enhancing customer satisfaction.
Total Quality Management (TQM).
Business process reengineering.
The following measures should be taken to increase productivity.
Improved raw materials: Raw materials of right quality should

be procured by every industrial unit. This will reduce wastage
and increase the productivity of workers and machines.
Improved working conditions: There should be proper

arrangements of lighting, ventilation, cleanliness, cooling
and heating of work place. If arrangements are not proper,
productivity is likely to be low.
Improved machines: Latest machines and equipment should be

procured by the industrial units as they are more efficient and
economical.
Scientific selection of workers: In order to fill various positions

in the organisation, right types of employees should be appointed.
They should also be provided adequate training in the use of raw
materials, machines, etc.
Provision of incentives: Workers should be offered incentives

to increase their productivity. Workers with good record of
productivity should be recognized and suitably rewarded.
Productivity linked bonus plan may be introduced to get good
response from the workers.
Harmonious relations: There should be industrial peace in the

organisation. Cordial relations between the workers and the
management are key to higher productivity. Higher production
targets can be achieved if conflicts between the workers and the
management are at their lowest possible level.
Quality and cost consciousness: Both the workers and the

management should be conscious about cost and quality. This
will reduce unnecessary wastages in the production process.
Industrial research: The government should encourage

industrial research by the industrial units. New methods and
techniques of production will increase industrial productivity in

the country.
Productivity can be increased by any of the following three ways:
By increase of output, keeping input constant.
By decreasing inputs for producing the same output.
By increasing outputs proportionately higher than increases

affected in inputs.
Various factors contributing to increase of productivity can be

summarized as below:
Better utilisation of resources like men, machines and materials.
Using efficient and effective methods of working.
Through good and systematic plan-layouts using guidelines and

principles of motion-economy.
Reducing material handling through better layouts and using

appropriate material handling equipments/facilities.
Selection of appropriate technology suiting the product(s) and

the production process selected.
Selection of proper maintenance policy, keeping in mind

the service level, preventive maintenance and breakdown
maintenance.
Provision of healthy and safe working conditions to workmen.
Through modern HRM methods; management by MBO rather

than management by crisis, counselling rather than threatening
workmen through participation of workmen in management
including quality circles etc. This shall ensure better working
environment and keep the workforce motivated.
Provision of fair wages and proper compensation through

incentive schemes.
Through better quality by use of SQC techniques sampling plans

in purchase and statistical process control in production.
Fill in the blanks:

11. .................. of production management is measured by the
efficiency through which the inputs are converted into outputs.
12. A coalminer produces coal @ 10 tonnes per day, we say that
his OMS is .................. .
Contd...

13. Productivity can be increased by any of the following ways:
(a) By increase of output, keeping input constant.
(b) By increasing inputs for producing the same output.
(c) By decreasing outputs proportionately higher than
increases affected in inputs.
14. What are the various factors contributing to increase of
productivity?
(a) Better utilisation of resources like men, machines and
materials.
(b) Using efficient and effective methods of working.
(c) Through good and systematic plan-layouts
guidelines and principles of motion-economy.
using
(d) Reducing material handling through better layouts

and using appropriate material handling equipments/
facilities.
15. Which of the following are the tools and techniques used for
enhancing productivity?
(a) Reducing volume of production
(b) Maximising rework rate.
(c) Efficient training and team building
(d) By not eliminating accidents
(e) Enhancing customer dissatisfaction.
Visit any factory located in your area. Prepare a checklist for the
parameters responsible for wastage generation and fixing standards
from time to time in that factory.
5.5 PRODUCTION PLANNING AND CONTROL

Once the entrepreneur has taken the decisions regarding the product
design and production processes and system, his next task is to take
steps for production planning and control, as this function is essentially
required for efficient and economical production. One of the major
problems of small scale enterprises is that of low productivity small
scale industries can utilise natural resources, which are otherwise
lying. Small scale sector can play an important role, similar to the one
played by small scale industries in other developed countries.
Planned production is an important feature of the small industry. The

small entrepreneur possessing the ability to look ahead, organise and
coordinate and having plenty of driving force and capacity to lead and
ability to supervise and coordinate work and simulates his associates
by means of a programme of human relation and organisation of
employees, he would be able to get the best out of his small industrial
unit. Gorden and Carson observe production; planning and control
involve generally the organisation and planning of manufacturing
process. Especially it consists of the planning of routing, scheduling,
dispatching inspection, and coordination, control of materials,
methods machines, tools and operating times. The ultimate objective
is the organisation of the supply and movement of materials and
labour, machines utilisation and related activities, in order to bring
about the desired manufacturing results in terms of quality, quantity,
time and place.
Production planning without production control is like a bank
without a bank manager, planning initiates action while control is
an adjusting process, providing corrective measures for planned
development. Production control regulates and stimulates the orderly
how of materials in the manufacturing process from the beginning to
the end.
5.5.1 BENEFITS TO SMALL ENTREPRENEUR
Production planning and control can facilitate the small entrepreneur
in the following ways:
Optimum utilisation of capacity: With the help of Production

Planning and Control (PPC) the entrepreneur can schedule his
tasks and production runs and thereby ensure that his productive
capacity does not remain idle and there is no undue queuing up
of tasks via proper allocation of tasks to the production facilities.
No order goes unattended and no machine remains idle.
Inventory control: Proper PPC will help the entrepreneur to

resort to just-in-time systems and thereby reduce the overall
inventory. It will enable him to ensure that the right supplies are
available at the right time.
Economy in production time: PPC will help the entrepreneur

to reduce the cycle time and increase the turnover via proper
scheduling.
Ensure quality: A good PPC will provide for adherence to the

quality standards so that quality of output is ensured. To sum up
we may say that PPC is of immense value to the entrepreneur
in capacity utilisation and inventory control. More importantly
it improves his response time and quality. As such effective
PPC contributes to time, quality and cost parameters of
entrepreneurial success.
Consider the balance sheet of a company for two successive years.

Analyse it from the productivity point of view, using this as basis,
show the advantages and limitations of the productivity measures.

16. What are the ways by which production planning and control
can facilitate the small entrepreneur?
(a) Worst utilisation of capacity
(b) Inventory control
(c) Economy in marketing time
(d) Ensure inferiority
5.6
TEPS OF PRODUCTION PLANNING AND

S
CONTROL
Production Planning and Control (PPC) is a process that comprises

the performance of some critical; functions on either side, viz.,
planning as well as control.
Definition of Production planning: Production planning may be
defined as the technique of foreseeing every step in a long series of
separate operations, each step to be taken at the right time and in the
right place and each operation to be performed in maximum efficiency.
It helps entrepreneur to work out the quantity of material manpower,
machine and money requires for producing predetermined level of
output in given period of time.
Routing: Under this, the operations, their path and sequence are
established. To perform these operations the proper class of machines
and personnel required are also worked out. The main aim of routing
is to determine the best and cheapest sequence of operations and to
ensure that this sequence is strictly followed. In small enterprises,
this job is usually done by entrepreneur himself in a rather adhoc
manner. Routing procedure involves following different activities:
An analysis of the article to determine what to make and what to

buy.
To determine the quality and type of material.
Determining the manufacturing operations and their sequence.
A determination of lot sizes.
Determination of scrap factors.
An analysis of cost of the article.
Organisation of production control forms.

Scheduling: It means working out of time that should be required to

perform each operation and also the time necessary to perform the
entire series as routed, making allowances for all factors concerned.
It mainly concerns with time element and priorities of a job. The
pattern of scheduling differs from one job to another which is
explained as below:
Production Schedule: The main aim is to schedule that amount of
work which can easily be handled by plant and equipment without
interference. Its not independent decision as it takes into account
following factors.
Physical plant facilities of the type required to process the

material being scheduled.
Personnel who possess the desired skills and experience to

operate the equipment and perform the type of work involved.
Necessary materials and purchased parts.
Master Schedule: Scheduling usually starts with preparation of

master schedule which is weekly or monthly break-down of the
production requirement for each product for a definite time period,
by having this as a running record of total production requirements
the entrepreneur is in better position to shift the production from one
product to another as per the changed production requirements. This
forms a base for all subsequent scheduling acclivities.
Manufacturing Schedule: It is prepared on the basis of type of
manufacturing process involved. It is very useful where single or few
products are manufactured repeatedly at regular intervals. Thus it
would show the required quality of each product and sequence in
which the same to be operated.
Scheduling of Job order manufacturing: Scheduling acquires greater
importance in job order manufacturing. This will enable the speedy
execution of job at each centre point.
As far as small scale industry is concerned scheduling is of utmost
importance as it brings out efficiency in the operations and s reduces
cost price. The small entrepreneur should maintain four types of
schedules to have a close scrutiny of all stages namely an enquiry
schedule, a production schedule, a shop schedule and an arrears
schedule out of above four, a shop schedule is the most important most
suited to the needs of small scale industry as it enables a foreman to
see at a glance.
The total load on any section
The operational sequence
The stage, which any job has reached.
Loading: The next step is the execution of the schedule plan as per
the route chalked out it includes the assignment of the work to the
operators at their machines or work places. So loading determines
who will do the work as routing determines where and scheduling

determines when it shall be done. Gantt Charts are most commonly
used in small industries in order to determine the existing load and
also to foresee how fast a job can be done. The usefulness of their
technique lies in the fact that they compare what has been done and
what ought to have been done.
Most of a small scale enterprise fail due to non-adherence to delivery
schedules therefore they can be successful if they have ability to meet
delivery order in time which no doubt depends upon production
of quality goods in right time. It makes all the more important for
entrepreneur to judge ahead of time what should be done, where and
when thus to leave nothing to chance once the work has begun.
Production Control: Production control is the process of planning
production in advance of operations, establishing the extract route of
each individual item part or assembly, setting, starting and finishing
for each important item, assembly or the finishing production and
releasing the necessary orders as well as initiating the necessary
follow-up to have the smooth function of the enterprise. The
production control is of complicated nature in small industries. The
production planning and control department can function at its
best in small scale unit only when the work manager, the purchase
manager, the personnel manager and the financial controller assist
in planning production activities. The production controller directly
reports to the works manager but in small scale unit, all the three
functions namely material control, planning and control are often
performed by the entrepreneur himself production control starts with
dispatching and ends up with corrective actions.
Dispatching: Dispatching involves issue of production orders for
starting the operations. Necessary authority and conformation is
given for:
Movement of materials to different workstations.
Movement of tools and fixtures necessary for each operation.
Beginning of work on each operation.
Recording of time and cost involved in each operation.
Movement of work from one operation to another in accordance

with the route sheet.
Inspecting or supervision of work.
Dispatching is an important step as it translates production plans into

production.
Follow Up: Every production programme involves determination of
the progress of work, removing bottlenecks in the flow of work and
ensuring that the productive operations are taking place in accordance
with the plans. It spots delays or deviations from the production plans.
It helps to reveal detects in routing and scheduling, misunderstanding
of orders and instruction, under loading or overloading of work etc.

All problems or deviations are investigated and remedial measurer
are undertaken to ensure the completion of work by the planned date.
Inspection: This is mainly to ensure the quality of goods. It can
be required as effective agency of production control. Corrective
measures: Corrective action may involve any of those activities of
adjusting the route, rescheduling of work changing the workloads,
repairs and maintenance of machinery or equipment, control over
inventories of the cause of deviation is the poor performance of
the employees. Certain personnel decisions like training, transfer,
demotion etc. may have to be taken. Alternate methods may be
suggested to handle peak loads.
Fill in the blanks:

17. Under ........................., the operations, their path and sequence
are established.
18. Routing procedure involves determining the ...................... and
type of material.
19. .................... means working out of time that should be required
to perform each operation and also the time necessary to
perform the entire series as routed, making allowances for all
factors concerned.
20. The main aim of a ......................... schedule is to schedule that
amount of work which can easily be handled by plant and
equipment without interference.
21. A master schedule is followed by ................... schedule which
fixes total time required to do a piece of work with a given
machine or which shows the time required to do each detailed
operation of a given job with a given machine or process.
22. ....................... are most commonly used in small industries in
order to determine the existing load and also to foresee how
fast a job can be done.
Visit a FMCG company like Britania. Study its Production

Schedule, Master Schedule, Manufacturing Schedule. Also discuss
their production control process and prepare a short report.
A master schedule is followed by operator schedule which fixes

total time required to do a piece of work with a given machine or
which shows the time required to do each detailed operation of a
given job with a given machine or process.
5.7 SUMMARY
Productivity relates output to the quantity of resources or

inputs used to produce them. It is basically concerned with how
efficiently a certain output of goods and services is produced,
and the value created by the production process.
In addition to the single factor measure of productivity there are

also multifactor productivity measures. Productivity is also used
at the national level. Productivity is linked to the competitive
strategy of the organisation. Corporate strategy and objectives
have a major impact in determining the different operational
parameters at the corporate level.
Small-scale industries have a challenge to manufacture products

at economical prices. They need to embrace management
principles surrounding production processes, which are effective
for the products manufactured by them.
Corporate strategies and competitive strategies form a hierarchy

of strategies. Corporate strategies are concerned with the type
of business the organisation is in, its overall competitive position
and how the resources of the organisation have to be deployed.
The business strategies are basically competitive strategies.
There are two basic types of competitive advantage a firm

can possess: low cost or differentiation. The two basic types of
competitive advantage combined with the scope of activities
for which a firm seeks to achieve them, lead to three internally
consistent generic competitive strategies.
Effectiveness of production management is measured by the

efficiency through which the inputs are converted into outputs,
i.e., effectiveness of outputs and inputs. This efficiency is called
productivity of the system. The higher the productivity, the more
efficient is the production system.
When both output and input are expressed in the same unit,
productivity reduces to a mere number. Quite often it is expressed
as a % of output to input. It is also expressed as: OMS: Output per
Man-shift
An upfront planning and study of the critical factors of the

manufacturing processes will not only help the small scale
entrepreneurs to understand the steps they need to take in
selecting the most appropriate manufacturing process but
also help them identify areas of risk so that necessary control
procedures are put in place. This will eventually help the
small entrepreneur to eliminate the wastages and increase the
production, productivity and profits.
Production planning and control can facilitate the small

entrepreneur in the following ways Optimum utilisation of
capacity, Inventory control, Economy in production time, Ensure
quality.
Production planning may be defined as the technique of

foreseeing every step in a long series of separate operations, each
step to be taken at the right time and in the right place and each
operation to be performed in maximum efficiency.
The main aim of routing is to determine the best and cheapest

sequence of operations and to ensure that this sequence is
strictly followed. In small enterprises, this job is usually done by
entrepreneur himself in a rather adhoc manner.
Scheduling means working out of time that should be required to

perform each operation and also the time necessary to perform
the entire series as routed, making allowances for all factors
concerned.
A master schedule is followed by operator schedule which fixes

total time required to do a piece of work with a given machine or
which shows the time required to do each detailed operation of a
given job with a given machine or process.
Production control is the process of planning production in

advance of operations, establishing the extract route of each
individual item part or assembly, setting, starting and finishing
for each important item, assembly or the finishing production and
releasing the necessary orders as well as initiating the necessary
follow-up to have the smooth function of the enterprise.
Lead Time: Time lag between placing an order and getting

deliveries
Personnel: Team of persons who work for organisation
Production: Conversion of inputs men, machines, materials,

money, methods and management (6 Ms) into output through
a transformation process
Productivity: The ratio of the quantity and quality of units

produced to the labour per unit of time.
Services: Intangible products that are consumed as they are

created
Total Factor Productivity: Year-by-year change in the output

where a number of factors are taken into consideration
Wastivity: Ratio of waste to input.

1. Productivity is linked to the competitive strategy of the
organisation. Discuss.
2.
What are various productivity measures?
3.
How can organisations calculation based on labour productivity

be deceptive? What other method do you suggest?
4.
The structure of operations is not as simple as saying that fewer,

bigger facilities will result in higher productivity and lower
costs. Elucidate.
5.
Explain the concept of productivity tree.
6.
What are the various methods of eliminating waste in a firm?
7. How do you compute productivity? What are productivity

indices?
8. Discuss some of the productivity enhancement tools and
techniques.
9.
What do you understand by production planning and control?

Discuss its elements and steps in brief.
10. What benefits can small scale enterprises can derive by installing
an effective system of production planning and control?

Topic
Q. No. Answers
Organisation and
Productivity
1.
Productivity
2.
high
3.
Labor
4.
factor
5.
cost-leadership
6.
differentiation
7.
increase
8.
(d) Your productivity goes

up faster than your
competitions
9.
(a) Profitability
10.
11.
Effectiveness
12.
10t/day
13.
(a) By increase of output,

keeping input constant
14.
15.
(c) Efficient training and

team building
Competitiveness Strategy
and Productivity
Computing Productivity
Contd...
Production Planning and

Control
16.
(b)Inventory control
Steps of Production
Planning and Control
17.
routing
18.
quality
19.
Scheduling
20.
production
21.
operator
22.
Gantt Charts

1. Section 5.2

Productivity the amount of output per unit of input is a basic

yardstick of an organisations health. Productivity is said to be
high when more output is derived from the same input, or the
same output is obtained from a less input. When productivity is
growing, profits tend to rise. When productivity is stagnating,
so, generally, is the profit. Organisations, of all sizes and types,
irrespective of how long they have existed, have potential for
productivity improvement. No organisation is an exception.
2. Section 5.2

Labor productivity is the quantity of output produced by one

unit of production input in a unit of time. With multiple factor
productivity, the outputs can be measured either in money terms
or the number of units produced, provided the units can be
measured in the same units.
Multiple Factor Productivity = Output (units or value of units)/

[Labor + capital + materials + energy + other]
3. Section 5.2

Labor productivity is a single factor productivity measure

(relating a measure of output to a single measure of input). It
is only based on observations of volume product outputs and
inputs for labour. While the example illustrates the method for
calculating productivity, it did not consider that most operations
have more than one input and more than one output.
4. Section 5.3

What is measured and the way in which the processes are managed
play a key role in determining productivity improvements.
We have to increase the value of output relative to the cost of
input. If processes can generate more output of better quality
using the same amount of input, productivity increases. If they
can maintain the same level of output while reducing the use of
resources, productivity also increases.
5. Section 5.3

The productivity tree is shown in three parts, the roots (inputs),

the trunk (the conversion process) and the fruit (the outputs).
As will be recognised in the figure, long-term productivity
improvements can be achieved by the human factor through
skills, systems, management and positive and innovative
attitudes. In this sense, productivity is an attitude of mind which
is intolerant of waste of every kind and in any form.
6. Section 5.3.1

When material has been declared surplus to the need of a firm,

the purchasing department or the salvage and reclamation
department should be informed. From that point, disposal can
take five routes:
(a) Circulation within the company
(b) Return to the vendor
(c) Direct sale to another firm
(d) Sale to a dealer or broker
(e) Sale to employees.
7. Section 5.4

Conceptually, productivity is defined as an attitude of mind and

prevention of all kinds of waste. Mathematically,
Productivity = Output/Input = Goods or Services Produced/All

Factors of Production
8. Section 5.4.3

Some of the tools and techniques used for enhancing productivity

are:
(a) Improving volume of production
(b) Reducing the rejection rate.
(c) Minimising rework rate.
(d) Maintaining delivery schedules.
9.
Section 5.5 and 5.6
Production planning may be defined as the technique of

foreseeing every step in a long series of separate operations,
each step to be taken at the right time and in the right place and
each operation to be performed in maximum efficiency. It helps
entrepreneur to work out the quantity of material manpower,
machine and money requires for producing predetermined level
of output in given period of time.
10. Section 5.5.1

Production planning and control can facilitate the small

entrepreneur in the following ways: Optimum utilisation of
capacity: With the help of Production Planning and Control
[PPC] the entrepreneur can schedule his tasks and production
runs and thereby ensure that his productive capacity does not
remain idle and there is no undue queuing up of tasks via proper
allocation of tasks to the production facilities. No order goes
unattended and no machine remains idle.

SUGGESTED READINGS
Chase, Richard B., and Eric L. Prentis, Operations Management:

A Field Rediscovered, Journal of Management, 13, no. 2 (October
1987): 351: 366
Hayes, Robert H., Towards a New Architecture for ROM,

Production and Operations Management, 9, no. 2 (Summer 2000)
105-110
Schonberger, Richard J., World Class Manufacturing: The Next

Decade, New York: The Free Press, 1996


E-REFERENCES
http://www.emeraldinsight.com/journals.htm?
http://stat.mq.edu.au/Stats_docs/stat379/.pdf
http://www.slideshare.net/centenvir/presentation-on-totalproductive-maintenance
MANUFACTURING ECONOMICS
CONTENTS

6.1
Introduction
6.2
Legal and Environmental Issues
6.2.1
Major Legal Issues
6.2.2
Main Environmental Issues
6.3
Lifecycles
6.3.1
Product Lifecycles
6.3.2
Technology Lifecycle
6.3.3
Product Lifecycle and Technology Lifecycle
6.4
Economic Valuation
6.4.1
Break-even Analysis (BEA)
6.4.2
Other Costing Methods
6.5
Summary
6.6
6.7
Answers and Hints
6.8
LIFECYCLE OF 3M
3M is a 100-year-old company that has discovered its own fountain
of youth. Yet it is no secret what it does to constantly renew itself.
3M is fast and successful in spinning out new products that offer
innovative and practical solutions to customers problems. This
doesnt happen by chance. It is an ongoing priority of top managers.
For example, 3Ms chief set an objective that 30 per cent of sales
should come from products that didnt exist four years earlier. You
can see the emphasis on innovation in even the quickest visit to
3Ms website (3m.com). Current 3M innovations include respirators
(for Dept. of Homeland Security first respondents) radiant light
film (for uses ranging from brighter cell phone displays to glittery
signage), elastomers (which seal in aggressive chemicals in high
temperature settings), and Filtrate electrostatic fibbers (which
filter dust out of heating vents). Everywhere you look, there are
past 3M innovations that are still being improved, including brands
like Post-it-Notes, Thinsulate outdoor wear, and Scotch-Pop-Up
Tape Strips.
3M motivates innovation by staying close to customers, rewarding
new-product champions, and sharing ideas among divisions. Teams
from marketing, operations, and R&D screen new-product concepts
for the ones with the highest profit potential. Then everyone works
to bring the best ones to market fast. 3Ms Scotch-Brite Never Rust
Wool Soap Pads show how this approach can succeed. Consumers
told 3M marketing researchers that they wanted an improved soap
pad. Ordinary steel wool pads leave rust stains on sinks and tiny
metal splinters in dishpan hands. 3M screens new products for
their environmental impact, so the R&D people developed a pad
using plastic fibbers from recycled plastic bottles. Experts from
3Ms abrasives division figured out how to coat the fibbers with
fine abrasives biodegradable soap. Further marketing research
refined the shape of the pads, and test markets evaluated details of
the marketing plan. For example, tests confirmed that consumers
liked the colourful package made from recycled paper and would
pay more for Never Rust pads than they did for Brillo.
The managers varied the marketing plan for different countries.
In mature markets, such as U.S. and Brazil, where steel wool pads
already had a large consumer base, the objective was to capture
share. In Japan, where steel wool is not commonly used, the
objective was to pioneer the market and attract new customers. In
a firm renowned for innovation, the launch of Never Rust pads was
one of 3Ms most profitable ever.
3M is also serious about how its innovations affect consumer
welfare. When managers learnt that traces of chemicals in 3Ms
Contd...
MANUFACTURING ECONOMICS 213
Scotchgard fabric protector might persist in the environment, they

didnt wait for scientists to do more tests. They voluntarily pulled
the popular product off the market before they even knew if R&D
could find a substitute chemical.
Source: www.mhhe.com/fourps

Know the concept of product lifecycle and technology
lifecycle in the development of new products
Know what are engineering costs? How to measure these
costsfixed costs, variable costs and breakeven point
Know the concepts involved in Design for Manufacturability
(DFM) and value analysis/value engineering
Discuss legal and environmental issues
Define ABC costing
6.1 INTRODUCTION
Product decisions often make or break companies. Studies indicate
that nearly two out of three new products fail after launch. In addition,
companies in many sectors are under continual pressure to speed up
the pace of product development even to adapt products that are still
in the pipeline to the demands of a constantly changing marketplace.
Manufacturing economics lies at the cross Refer between your market
knowledge and our production knowledge. Together we will optimise
production getting the right tools doing the right things. By utilising
your production resources better you will lower your fixed costs, so
you can invest in your existing production and ultimately, allowing
you to be competitive, both in mature and emerging markets. And
by doing things right from the start optimising manufacturing
processes in new machines youll get faster return on investment
and higher profitability down the line. Many times, optimisation of
existing processes or in an investment phase, can give you 10 to 15
percent lower costs or higher efficiency in your production a good
starting point for bridging the gap.
6.2 LEGAL AND ENVIRONMENTAL ISSUES

This section discusses about the legal and environmental aspects of
production. We shall also discuss about the environmental act.
6.2.1 MAJOR LEGAL ISSUES
Patents: A patent is a grant of property rights by the government

to an inventor. Patents are exclusive property rights that can be
sold, transferred, willed, licensed or used as collateral, much like
other valuable assets. In fact, most independent inventors do
not commercialise their inventions or create new products from
their ideas. Instead, they sell or license their patents to others
who have the resources to develop products and commercial
markets. Patent law stipulate broad categories of what can and
cannot be patented and in the words of the statute, any person
who invents or discovers any new and useful process, machine,
manufacture, composition or matter or any new and useful

improvement thereof, may obtain a patent.
Trademarks: It includes any word, name, symbol, distinguishing

device or any combination thereof adopted and used by a
manufacturer or merchant to identify his goods as distinguishing
them from those manufactured or sold by others.
Copyrights: A copyright extends protection to authors,

composers, artists and it relates to the form of expression rather
than the subject matter. This distinguishing feature is important
because most intellectual property has proprietary information in
terms of subject matter and if that property cannot be patented,
the copyright only prevents duplicating and using the original
matter. The probation does not prevent another person from
using the subject matter or rewriting the material.
Product Liability: It refers to the responsibility of a manufacturer

or vendor of goods to compensate for injury caused by defective
merchandise that it has provided for sale.
When individuals are harmed by an unsafe product, they may

have a Cause of Action against the persons who designed,
manufactured, sold, or furnished that product.
In the United States, some consumers have hailed the rapid growth
of product liability litigation as an effective tool for Consumer
Protection. The law has changed from caveat emptor (let the buyer
beware) to Strict Liability for manufacturing defects that make a
product unreasonably dangerous. Manufacturers and others who
distribute and sell goods argue that product liability verdicts have
enriched plaintiffs attorneys and added to the cost of goods sold.
Businesses have sought TORT reform from state legislatures and
Congress in hopes of reducing damage awards that sometimes
reach millions of dollars.
Uniform Commercial Code: Created in 1952, the Uniform

Commercial Code (UCC) consists of uniform acts coordinating
the sale of goods and other commercial transactions throughout
the 50 United States. The Uniform Commercial Code also seeks
to make commercial paper transactions, such as the processing
of checks, less complex. It distinguishes between merchants, who
know their business well, and consumers, who do not. Overall,
the codes objective is to eliminate the need for lawyers in the
aspects of commercial trade it governs.
Interview some consumers or business people and identify two

products or companies who are committed to maintain environment.
6.2.2 MAIN ENVIRONMENTAL ISSUES

Manufacturing industries are one of the contributing factors toward
environmental damage and are the focus here. However, the real
contributing factors are population growth and the human desire for
more and better goods to increase quality of life.
The societal need for more and better goods give rise to the design
and development of better and complex materials and manufacturing
processes. The manufacture of these products require industrial
activities which, when done without analyzing the implications, can
impact the environment. Consumers use and disposal of manufactured
goods also have an impact on the environment. Interactions between
human needs and wants, industrial activities, and the environment
must be well-understood to assess and manage the risks.
Example: It is easy to see the tyre manufacture process as a chain
of events resulting in a high-quality product made from tested raw
materials and components. Nokian Tyres is known as the industrys
pioneer in environmental issues. Environmental issues are taken into
consideration in the long term, with regard to the tyres entire life cycle.
As for production, this means such measures as using only purified
oils and utilising raw materials as efficiently as possible. Furthermore,
the production noise does not harm the surrounding areas, and no
toxic chemicals are used in the manufacture processes. Respect for
the environment is part of their product development philosophy.
They aim to pay increasing attention to environmental issues in the
design of new products, starting from ethical raw material acquisition
all the way to a well-functioning recycling system. Nokian Tyres is the
worlds first tyre manufacturer to have fully eliminated high-aromatic
(HA) oils in its production in 2005.
Environment Protection Act
Environment Protection Act has been enacted to provide for the
protection and improvement of environment and for matters
connected therewith.
Whereas the decisions were taken at the United Nations Conference
on the Human Environment held at Stockholm in June, 1972, in which
India participated, to take appropriate steps for the protection and
improvement of human environment; And Whereas it is considered
necessary further to implement the decisions aforesaid in so far as
they relate to the protection and improvement of environment and
the prevention of hazards to human beings, other living creatures,
plants and property. Subject to the provisions of this Act, the Central
Government shall have the power to take all such measures as it deems
necessary or expedient for the purpose of protecting and improving
the quality of the environment and preventing controlling and abating
environmental pollution. Where any offence under this Act has been
committed by a company, every person who, at the time the offence
was committed, was directly in charge of, and was responsible to, the
company for the conduct of the business of the company, as well as
the company, shall be deemed to be guilty of the offence and shall be

liable to be proceeded against and punished accordingly.
Provided that nothing contained in this sub-section shall render any
such person liable to any punishment provided in this Act, if he proves
that the offence was committed without his knowledge or that he
exercised all due diligence to prevent the commission of such offence.
Fill in the blanks:

1. A ..................... is a grant of property rights by the government
to an inventor.
2. Patents are exclusive ..................... rights that can be sold,
transferred, willed, licensed or used as collateral, much like
other valuable assets.
3. ..................... includes any word, name, symbol, distinguishing
device or any combination thereof adopted and used
by a manufacturer or merchant to identify his goods as
distinguishing them from those manufactured or sold by
others.
4. A ..................... extends protection to authors, composers,
artists and it relates to the form of expression rather than the
subject matter.
5. ..................... refers to the responsibility of a manufacturer or
vendor of goods to compensate for injury caused by defective
State whether the following statements are true or false:
6. The Uniform Commercial Code also seeks to make commercial
paper transactions, such as the processing of checks, less
complex.
7. Environment Protection Act has been enacted to provide for
the protection and improvement of Technology and for matters
connected therewith.
8. When individuals are harmed by an unsafe product, they may
have a Cause of Action against the persons who designed,
manufactured, sold, or furnished that product.
Visit any chemical factory in your area. Find out if they are producing
their products in accordance with Environmental Protection Act or
not. Prepare a short report.
6.3 LIFECYCLES
There is general agreement that products have life cycle much the
same way as living organisms do. This concept of life cycle applies to
product category, sub-category, and brands in the sub-category.
Example: Computer represents a product category; desktop, and

laptop represent product sub-category, and Apple PowerBook, and
Sony Vaio are brands in the sub-category.
A product is introduced among consumers, and if consumers perceive
it as meeting their needs and want, it experiences a period of growth.
Subsequently, it reaches the stage of maturity and when it loses
its appeal, its decline starts and eventually is may be taken off the
market (demise). The classical product life cycle curves are depicted
as S shaped and generally divided in four stages: Introduction,
growth, maturity, and decline. Some authors distinguish more than
four stages. For instance, Chester W. Wasson views an additional stage
of competitive turbulence or shake-out at the end of growth period
and just before the start of maturity phase. During this competitive
turbulence, the growth rate starts declining and leads to strong price
competition. This may force some companies to exit the industry or
sell out.
6.3.1 PRODUCT LIFECYCLES
Products follow certain kinds of life cycle patterns. Whether the
pattern is like that of an S-shaped curve or modifications as we have
shown in previous pages, we need to understand the relevance of the
product life cycle concept in the context of making strategic decisions
and making marketing forecasts. Many products generally have a
characteristic known as perishable distinctiveness. This means that
a product which is distinct when new, degenerates over the years
into a common commodity. The process by which the distinctiveness
gradually disappears as the product merges with other competitive
products is termed as the cycle of competitive degeneration. Common
product life cycle shapes are shown in Figure 6.1.
The cycle begins with the invention of a new product, often followed
by patent protection and further development to make it saleable.
This is usually followed by a rapid expansion in its sales as the
product gains market acceptance. Then competitors enter the field
with imitation and rival products and the distinctiveness of the new
product starts diminishing. This speed of degeneration differs from
product to product. While some products fail immediately on birth
or a little later, others may live long enough. BPL television launched
Picture in Picture (PIP) television, which was eliminated at the
introduction stage itself. Pagers had a grand launch in the market
but got eliminated as the next better product of communication in the
form of mobile phones entered the market. The innovation of a new
product and its degeneration into a common product is termed as the
life cycle of a product. This often helps competitors to benchmark
against the available technology and develops better products
compared to the current one so as to take away the market share from
the market leader. There are four distinct stages in the life cycle of a
product as shown below:
N
Sales
Sales
Sales
Time
(a) Growth-Decline Plateau
Time
Time
(b) Cycle-Recycle Pattern
(c) Innovative Maturity or

Scalloped Pattern
Sales
Profits
Loss
Introduction
Growth
Time
Maturity
Decline
(d) Classical Life Cycle Pattern
Figure 6.1: Common Product Life Curves

Stage 1: Product Introduction Stage
After successful test marketing of a new product, the company
introduces the product in the market with full-scale marketing
programme. The introductory stage is viewed as fairly risky and quite
expensive because large amounts of money is spent on advertising
and other tools of marketing communications to create consumer
awareness in sufficiently large numbers, and encourage trial. For
truly new products, any direct competition may be very little or nonexistent and the companys primary objective is demand stimulation
for the category rather than its brand. Profits are mostly negative in
this stage, or in some exceptional cases they may be very little. The
competition will be in the form of imperfect substitutes available
in the market and by the availability of existing products. In many
instances two firms working on a similar technological platform may
also launch competing products at the same time.
Stage 2: Growth Stage
The growth stage of life cycle is characterized by a sharp rise in sales.
Only a small percentage of new products introduced survive to reach
the growth stage. Important improvements in the product continue,
but at reduced rate. Increased brand differentiation is attempted
primarily by adding new features. Product line expands to attract
new customer segments. The intensity of competition increases, and

competitors offer increased choices to consumers in terms of features,
packaging and price. During the later part of growth stage, market
share leader particularly endeavours to lengthen the period of growth
stage by improving product quality, adding new features, lowering
costs, adding new segments, and trying to increase product usage
rate. Due to the combined total efforts of all competing companies,
market expands and more customers start buying the product. Seeing
the trends of increasing demand, more resellers are willing to carry
the product and generally prices are reduced.
Near the end of this stage, there is a drop in the overall growth rate
and typically the prices are significantly reduced. Generally, weaker
companies start exiting the market and strong competitors capture
more market share. This results in major changes in the industrys
competitive structure. Strong companies evaluate their product lines
and eliminate their weaker items, start promotional pricing, and
strengthen their reseller relationships. What happens to a company
during this period depends much on how well the product has been
positioned with respect to target customers, the state of distribution
system, and relative costs per unit.
Stage 3: Maturity Stage
Most products after surviving competitive battles, winning customer
confidence and successful through growth phase enter their maturity
stage. The sales plateau, and this flattening of sales usually lasts for
some time because most products in the category have reached their
maturity stage, and there is stability in terms of demand, technology,
and competition. Sales slow down, competition is intense; price and
promotional wars erupt, and profits decline. The demand for the
category is at its highest during maturity. Strong market leaders
manage to gain high profits and large positive cash flows because they
have the advantage of lower-cost and have no need to expand their
facilities. In general, if the maturity stage is protracted, a company
cannot ignore the possibility of changes in the marketplace, the
product, the distribution, production processes, and the nature and
structure of competition.
Stage 4: Decline Stage
Decline stage sets in when customer preferences change due to the
availability of technologically superior products and consumers shift
in values, beliefs, and tastes to products offering more value. The
number of competitors dwindles and generally few product versions
are available. Those who stay, may cut their promotional budgets and
further reduce their prices. The onset of decline stage may be gradual
or fast. There may still be a small residual segment that remain loyal
to the product.
Sales take a nosedive, costs increase, and profits are almost
non-existent. All these factors create overcapacity. If the industry has
low-exit barriers, many companies leave the market. This may increase
the sales volume of remaining companies to the extent that their exit
may be delayed, and for a short time strong contenders may even
prosper.
6.3.2 TECHNOLOGY LIFECYCLE
Statistical regularities show that the product lifecycle can be used
to forecast the way the product attributes, demand, production and
competition will change as the product matures. A related and more
useful concept is the technological lifecycle. This links market growth
and technology.
B
A
A
MARKET
VOLUME
B B
Product
Process
TIME
Technology
Development
Application
Launch
Application
Growth
Mature
Technology
Technology
Substitution
Figure 6.2: Technology Lifecycle

It has been seen that technological change generally follows the course
described by the technology lifecycle graph. By plotting the market
volume over time for any industry, one can identify the changes in
the industry. This is called technological aging of the industry. This
exercise can be carried out both for the product as well as the process
and has been depicted in Figure 6.2. When a new industry based on
new technology is begun, there will come a point in time that one can
mark as the inception point of the technology.
Let us discuss the various phases of technological aging/lifecycle by
taking up the example of the automobile industry. In 1887, Gottlieb
Daimler manufactured the first gasoline-powered automobile.
Phase I Technology Development
Then the first technological phase begins with the rapid

development of the new technology. This phase is called the
Technology Development phase. In the case of the automobile, it
would be from 1887 to 1902, as experiments with steam, electric
and gasoline powered vehicles were conducted.
This is an exciting time, because product improvements continue

and improved processes for producing cheaper, better products
are innovated.
This is the time of eliminating weak competitors. For example, in

1909 there were 69 auto-manufacturing firms in USA. Only half
the firms survived by 1916.
Phase II Applications Launch

This phase is the creative period of product experimentation. This
lasts till the time a standard design has been worked out and rapid
growth of the market begins. This occurred with Fords Model T design.
During this phase, failure rate of firms in the industry continues to be
high, but successful firms grow. Corporate R & D becomes important
to maintain incremental model improvements. For example, by 1923
only eight major American firms had remained in the automobile
industry, capturing 99 percent of the market.
Phase III Applications Growth
During this phase there is a rapid growth in the penetration of

technology into markets.
After some time, however, the innovation rate slows down and
the market peaks; no new markets are created.
Phase IV Mature Technology
In this phase, process innovations are dominant.
Very few firms survive, of the original lot.
Competition is primarily on price and segmented market lines.
Production is specialised and efficient.
Economies of scale and marketing dominance continue to

whittle down competitors, to the final few. For example, by 1965,
only General Motors, Ford, Chrysler, and American Motors had
survived in the American automobile industry.
A mature industry can continue indefinitely. Competitors with more

abundant resources, cheaper labour or subsidised capital can obtain
a competitive advantage. When market saturation is taking place, it is
important to continue technological innovation to extend the product
life and delay market saturation. Innovation succeeds in:
Creating succeeding generation products with significantly

improved performance,
Creating multiple applications,
Lowering of price to facilitate ownership of multiple copies of the

product for convenience.
Phase V Technology Substitution

Finally, competing or substituting technologies overrun the mature
technology and the last phase is reached. At this stage, the industry
has run out of significant innovation. Changes in demography,
replacement and foreign markets now primarily determine the

market size.
Check up advertisements and market and identify the stage of the

product lifecycle of the following products:
1. Cellular phone
2. Notebook PCs
3. Wristwatch with Camera
6.3.3 PRODUCT LIFECYCLE AND TECHNOLOGY LIFECYCLE
The length and pattern of the Product Lifecycle can vary significantly.
There is no reason to believe that all products inevitably pass through
all four stages, e.g., fad items, consumer resistance, and introduction
of superior new product. Though the Product Lifecycle diagram
has been designed for product categories, it has limited use to
management, as it may not reflect the life of their Product Form, or
Brand.
The reliability and the interpretation of the Product Lifecycle for
analysis of product brands is a serious limitation of this instrument.
However, it can be used for product forms quite successfully.
The Product Lifecycle concept is extremely useful. It shows how
customers tend to be much more knowledgeable about the product
class as the lifecycle progresses; product performance typically
improves over the cycle and the relative differences in brands
competing for the same segment decline as successful ideas are
copied. This leads to increased competition based on price, image,
service, durability, reliability, etc., which results in increased value to
the consumer.
Simultaneously, with the technological changes in the lifecycle of the
product, changes also take place in the process. The changes are slow
at first during the period that the product volumes increase, but are
maximised during the phase that the product reaches the maturity
stage. In other words, the growth stage of the process technology
normally coincides with the maturity stage of the product.
The growth stage of the technological process is between the lines AA
and BB in Figure 6.2, which coincides with the maturity stage of the
product technology. Technology improvements take place until such
time that the process becomes so efficient that any marginal increase in
the parameters of the process would not provide the required returns.
As improvements continue, the investment in small improvements
becomes so large that they are not economically justified. This reflects
the downturn in the process technology curve.
The fact that the rates of technological innovation affect the
competitive conditions of an industry means that management
should plan different strategies for different phases of the technology

lifecycle.
A general strategy of phasing new products in and phasing old
products out sustains the existing process capacity.
Fill in the blank:

9. The ........................... model is a simple representation of the
cumulative impact of changes in the business environment on
the life of a manufactured product.
10. During Growth Stage, the product is new to the market and
the consumers have to be motivated to try and accept the
product.
11. New competitive products are introduced and there is a
significant change in the product features due to continuous
improvements in the growth stage.
12. The Decline stage sees the product as an established product
and the demand and quality of the product does not undergo
much change.
13. In Maturity stage, new product categories are introduced
into the market that provide better value to the consumer for
that particular need or there is a change in the needs of the
consumer.
14. Phase 1 of technological lifecycle is an exciting time, because
product improvements continue and improved processes for
producing cheaper, better products are innovated.
15. During Phase IV Mature Technology, there is a rapid growth
in the penetration of technology into markets.
16. Factors that impact the introduction stage of consumer
products positively are:
(a) Complexity
(b) Compatibility (values and experience of adopters)
(c) Perceived Risk
(d) Disadvantages
Study all the products offered by LG and identify in which stage of

Technological cycle they are in. Prepare a report giving reasons for
the same.
6.4 ECONOMIC VALUATION

Businesses are economic entities. To preserve and maintain the
wealth-producing assets of the business, its return on equity must be
competitive with other investment options available to stockholders
and investors.
The expected rate of return is based on the investors perceived risk
associated with the investment opportunity. The space for emotional
or indirect financial incentives is seldom present. The acceptability
of a strategy will depend on the return on equity from the different
options, the perceived risk by the organisation, and the acceptability
of the option by the stakeholders.
Any criteria must provide, at least, a means of distinguishing between
acceptable and unacceptable investments in plant and equipment. It
must also solve the problem of choosing techniques. If there are two
acceptable ways of doing something, it must choose between them. If
possible, it should also provide a ranking of processes in order of their
desirability.
In reaching decisions, any suitable criteria must respect the following
two fundamental principles:
The bigger the better principle: Other things being equal, bigger
benefits are preferable to smaller ones, and
The bird in hand principle: Other things being equal, early

benefits are preferable to later benefits.
If the investments being considered are similar in terms of size and

life, the time-shape of the earnings stream should be the deciding
factor in the selection of the project. Finally, the criteria must have
the capability to be applicable to any conceivable investment.
There are some simple tools that are often used to evaluate projects
and measure the return of the different options. These are the
opportunity costs, payback period analysis, discounted cash flow, and
the cost-benefit analysis.
6.4.1 BREAK-EVEN ANALYSIS (BEA)
The break-even analysis is conducted by organizations to identify
the level of operations at which the entity has covered all costs but
has not earned any profits. The concept presents and studies the
interrelationship between costs, volume and profits. The level of sales
at which the costs and revenue are equal is known as the break-even
point. The break-even point is that volume of activity at which total
revenue equals the sum of total costs.
The determination of break-even point is important for management
as it helps them to identify a minimum acceptable level of operations.
The basic objective of break-even analysis is to find out the number of
units of product that must be sold if a company is to operate without
loss. In other words the no-profit-no-loss point is the break-even point.

Sales below the break-even point mean a loss, while sales above the
break-even point, shows that profits begin.
The break-even point can be computed both algebraically and
graphically and is expressed in either units of output or sales rupees.
Charts can also be used to illustrate the break-even point and to show
how changes in volume will impact profits.
A standard approach to choosing among alternative processes or
equipment is cost-volume-profit analysis. Cost-volume-profit analysis
is typically based on the following assumptions:
Cost can be divided into two broad categories: fixed costs and
variable costs.
Unit selling price is constant. This means that total revenues

vary linearly with the volume of sales.
Inventory changes are nil. This means that the quantity sold in a
given period is the same as the quantity produced in that period.
The company either manufacturing a single product or more of

them maintains a constant product (mix where multiple products
are manufactured).
Figure 6.3: Description of Different Components of Cost

A cost-volume-profit analysis calculates alternative profits and losses
due to the number of units produced or sold. The choice obviously
depends on anticipated demand. The point where the total costs equal
the total revenues is called the breakeven point.
As cost is an important component in selecting processes and plant
and equipment, let us discuss some of the basics of costs. The total
cost of a product or service has two components:
Manufacturing costs: Traditionally, costs are classified as

manufacturing costs that include direct materials, direct labour
and manufacturing overhead.
Non-production costs: In addition, there are non-manufacturing

costs that constitute overhead, marketing, and administrative
costs. Typically, costs are divided into two categories: fixed costs
and variable costs. These are described below:
Fixed Costs: These are costs that remain constant

irrespective of changes in the volume of output. They may
represent depreciation charges, taxes, insurance, and rent
which arise because the firm hires its factory premises; they
also include the interest burden on long-term debt. Fixed
costs arise as a result of capacity creation and are invariant
with respect to variations of activity (capacity utilisation).
They are a function essentially of time.
The upper two diagrams in Figure 6.3 illustrate the nature of

fixed costs. The behaviour of total fixed costs with respect to
output is shown in upper left quadrant and the behaviour of
unit fixed costs with respect to output is shown in the upper
right quadrant.
Variable Costs: Several important components of cost vary

directly with output. For example, the total material cost
varies linearly with output. Likewise, the cost of power and
other utilities, and direct labour may vary directly with
output. All such costs which vary directly (proportionately)
with output are referred to as variable costs.
The behaviour of total fixed costs per unit of production is shown

in the lower left quadrant of Figure 6.3, whereas the behaviour of
unit variable costs in relation to output is shown in the lower right
quadrant of the figure.
Mathematically, variable costs are defined as:
TVC = VQ
Where:

TVC = Total Variable Costs
= Unit Variable Costs, and
= Output Quantity.
Two characteristics of costs that are of special interest are:
Total fixed costs remain fixed whereas unit fixed cost declines as
the output increases;
Total variable costs vary linearly with output, whereas unit

variable costs remains fixed irrespective of the output level.
Cost Volume Profit Analysis

Algebraically, the relationship between cost, volume, and profit can
be represented by the equation:

=QPQVF
Where:
F is Fixed Cost
P is the Selling Price
V is the Unit Variable Cost
Q is the Quantity of Product Sold, and
is the Profit Cost-volume-profit relationship may be used to find the:
break-even quantity;
profit for a given quantity level;
quantity required for attaining a given level of profit; and/or
break-even sales in rupees.

Profit
Total costs (F + VQ)

Slope = V
Cost `
Slope = P
loss
BEP: F + VQ = PQ
Fixed Cost
Total revenue (PQ)
Production (and sales) volume (Q) units
Figure 6.4: Cost-volume-profit Analysis and Break-even Point

A graphical representation of cost-volume-profit analysis is shown in
Figure 6.4.
Break-even Quantity is value of quantity of product sold for which
the profit is zero. Setting profit equal to 0 in the cost-volume-profit
equation, we get:
At the break-even point:
F + VQ = PQ
QBEQ = F/(P V)
TC = TR
TC = F+VQ
TR = PQ
Where:
TC is Total Cost
TR is Total Revenue
The quantity (P V) represents the difference between the unit selling

price and unit variable cost, and is called the contribution margin.
Variations in Unit Selling Price, Unit Variable Cost and Fixed
Costs
Using cost-volume-profit equation, the relationship between the
different constituents can be studied. Given below are important
relationships between cost, volume, and profit.
Increase in P Q, V and F remaining unchanged: Decreases the

break-even quantity and increases the slope of the profit line;
decrease in P Q, V, and F remaining unchanged increases the
break-even quantity and decreases the slope of the profit line.
Increase in V Q, S, and remaining unchanged: Increases the

break-even point and decreases the slope of the profit line;
decrease in V Q, S, and F remaining unchanged decreases the
break-even point and increases the slope of the profit line.
Increase in F Q, S, and V remaining unchanged: Increases

the break-even quantity, leaving the slope of the profit line
unchanged.
Example:
A Pharmaceutical company produces formulations having a shelf life
of one year. The company has an opening stock of 30,000 boxes on
1st January 2005 and expected to produce 1,30,000 boxes as it did in
the just ended year of 2004. Expected sale would be 1,50,000 boxes.
Costing department has worked out escalation in cost by 25% on
variable cost and 10% on fixed cost. Fixed cost for the year 2004 is `40
per unit. New price announced for 2005 is ` 100 per box. Variable cost
on opening stock is ` 40 per box. You are required to compute breakeven volume for the year 2005.
Solution:
Shelf life is one year hence opening stock of 30,000 boxes is to be sold
first.
Contribution on these boxes is 30,000 (100 40) = ` 18,00,000
In the question production of 2004 is same as in 2005. Hence, fixed
cost for the year 2004 is ` 52,00,000 (1,30,00 40).
Therefore, fixed cost for the year 2005 is ` 57,20,000 (52,00,000 + 10%
of 52,00,000).
Variable Cost for the year 2005 (` 40 + 25% of ` 40) = ` 50 per unit
Hence Contribution per unit during 2005 is ` 50
Break even volume is the volume to meet the fixed cost, i.e., fixed cost
equals to contribution.
Therefore, remaining fixed cost of ` 39,20,000 (57,20,000 18,00,000) to

be recovered from production during 2005.
Production in 2005 to reach BEP = 39,20,000/50 = 78,400 units
Therefore BEP for the year 2005 is 1,08,400 boxes.
Example:
An automobile company is wondering whether it should make or buy
a certain component. The part is required in 1,000 numbers. The cost
of manufacturing is given as follows:
Total cost for
000 units
Direct Material
` 45,000
Direct Labour
` 15,000
Variable Manufacturing Overhead ` 25,000
Fixed Manufacturing Overhead
` 40,000
TOTAL
` 125,000
Cost per
unit
` 45.00
` 15.00
` 25.00
` 40.00
` 125.00
The fixed manufacturing overhead charge of ` 40,000 consists of

` 10,000 which results from the decision to manufacture the part.
Alternatively, they can buy the component at ` 100 per unit. Should
the company make or buy this component?
Solution:
Given the above information, the following analysis may be made:
Total incremental cost for 1,000 units if the item is manufactured
Direct Material ` 45,000
Direct Labour ` 15,000
Variable Manufacturing Overhead
` 25,000
Separable Fixed Manufacturing Overhead
` 10,000
` 95,000
Total incremental cost for 1,000 units if the item is purchased
` 1, 00,000.00
Since the total incremental cost to manufacture the part is less that of
buying the part, it is advisable to manufacture the part.
Crossover Charts
Break-even analysis aids process selection by identifying the processes
with the lowest total cost for the volume expected. Such a point
will also indicate the largest profit corridor. We are also to address
two issues: the low-cost process and the absolute amount of profit.
Only by directly addressing both issues, can the process decision be
successful.
The crossover chart, shown in Figure 6.5, addresses both the issues.
You first determine fixed and variable costs for each option. Then plot
the total cost for each alternative and select the option with lowest
total cost for expected production volume which must be above breakeven.
Total process B costs

Total process A costs
Total process C costs
Volume
Figure 6.5: Crossover Charts
Study the financial records of any manufacturing firm. Identify the

fixed and variable costs over there. Also find out the break-even
point for the last quarter of their sales.
6.4.2 OTHER COSTING METHODS
There are many other variations in how material, labour, and overhead
costs are computed and combined. These are summarised below:
Activity-based Costing (ABC)

Focuses on accurate allocation of overhead costs to individual products
based on activities. It has its origins in the accounting profession. Value
analysis was originally an accounting method used to analyse complex
manufacturing systems. It was designed to find out and examine how
to bring in cost improvements or improve value creation in the system.
Accountants, instead of using conventional costing for expenses for
a specific function broke them into the activities of the function.
The concept of activity-based costing was evolved on the following set
of assumptions:
The cost has to be assigned to the individual activity: How the

cost can be assigned to the individual activity? The cost of any
activity is determined on the basis of the volume of consumption
of resources. The identification or determination of the volume
of resources consumed is only for the determination of the cost of
an activity, which is known as resource-driver.
In ABC, the cost is assigned to activity but in the traditional

cost system cost is classified and apportioned on the basis of
functions of the enterprise viz Factory, Administrative, Selling &
Distribution and so on.
The second important assumption is the assignment of cost to

cost objects: How can the cost be assigned to cost object? Before
understanding the methodology of the cost assignment, every
one should know about the meaning of the terminology of cost
object. It is defined as an item for which the cost measurement is
required for the product, job and customer.
The assignment of cost to cost object only on the basis of activity

drivers clearly determines the real consumption of the activity.
The activity cost of any object is subject to the number of activities
involved. The activity cost of mounting the circuit board of the small
transistor involves placing the circuit board appropriately, fitting the
screws, checking the quality of mounting and finally checking the
process of working.
The above-enlisted activity requires labourers to carry out process

of mounting, which are normally denominated in terms of labour
hours. The speciality of ABC is the number of hours consumed by the
labourers and the cost involvement of every activity at every level, but
the traditional costing system gives only in the form of direct labour
hours without any information.
The ABC not only enlists the number of activities but also classifies
them into two categories viz primary activity and secondary activity.
Primary activity is an activity which directly charges to cost object,
which could be classified into two different categories, in accordance
with the nature of business viz Product and Service.
Important Factors of Selecting the Cost Drivers
The following are the important factors:
Degree of correlation: The degree of correlation between the

consumption of activity and consumption of cost drivers shows
the trend of the cost assignment in the context of cost drivers.
If the firm requires regular inspection of the quality standard of

the products during the production for every batch, the number
of inspections per hour and per shift will be subject to the
previously mentioned norms. If the number of inspection is more
and more in line with the volume of production, it means the firm
has a positive high correlation between the cost of the activity
and cost object.
Trade off in between cost and accuracy: Undoubtedly, ABC is

the only system able to extend the business intelligence for the
firms survival over the other combatants with the help of more
amount of accurate costs for every level of activities, but they
are very expensive in the process of implementation as well as in
maintenance.
Effects in the behaviour of ABC analysts: It not only influences

the decisions of the firm which are taken by the ABC analysts but
also their behaviour.
The third most important assumption is information about the

activities. It only helps to determine the quality customers who
generate greater profitability to the firm.
Now the entire structure of assumptions of ABC are over. ABC is
considered to be predominant tool of analysis in the manufacturing
firm. Why ? The following are reasons:
Dominance of overheads: Nowadays, due to cutthroat

competition, every firm is expected to meet the needs and
demands through value addition at cheaper cost. These objectives
are mutually contradictory. Normally, the process of value
addition warrants more and more research and development
cost requiring the firm to charge higher price for the absorption
of overheads. But the cost cutting is aimed at bringing down the
cost on one side as well as to supply the products/ services at
lower price to attract the buyers through the pricing strategy.
This is the only reason for greater volume of overheads over the
direct costs.
Different kinds of product range: Due to acute competition,

every firm is required to meet the varied needs and demands
of the ultimate consumer. To supply the car to the tune of the
consumer preference, the car has to be painted accordingly.
It involves some more activities than the routine supply of a car.
It requires the firm to price the value addition appropriately
through an appropriate pricing which neither overcharges the
customer nor undercharges the firm.
Varied overhead rate for divergent products: Different products

use different overheads wherever they incur according to various
needs and demands of the market.
Consumption of overheads driven by an activity not by volume:

The consumption of overheads is not driven by the volume of
output but by the number of activities which are involved in the
process.
Objectives of ABC
To establish the linkage between the amount of cost and the cost
drivers, which are nothing but resource and activity drivers.
To determine the cost of every activity and finally to find out the
cost of the product or service.
To apportion the overheads in accordance with the activities

involved in the process only in order to ascertain the accurate
cost.
To evade the bottlenecks of the traditional cost system through

the destruction of charging the overheads on the functional basis.
Sequential process flow models attempt to emulate the actual

manufacturing process by modelling each step in sequence and are
particularly useful when testing, reworking, and scrapping occurs at
one or more places in the process.
Resource-based cost modelling assesses the resources of materials,
energy, capital, time and information associated with the manufacture
of a product and aims to enable optimum process selection.
Technical cost modelling carries cost modelling one step further by
introducing physical models associated with particular processes into
the cost models of the actual production activities. Technical cost
modelling also incorporates production rate information.
As one might expect, there are pros and cons associated with all the
approaches outlined above. Also, nearly all of the basic manufacturing
cost models are supplemented by yield models, learning curve models,
and test/rework economic models.
Although the evaluation of decisions on process and plant and

equipment may be assisted by the use of one or more of these
financial techniques, it is important to recognise some of the implicit
assumptions which inevitably limit their use as comprehensive
techniques of strategy evaluation.
The analyst should use more than one method to evaluate the decision
and should evaluate the investment both as a stand-alone investment
and also combine it with the operations of the firm to come to a
conclusion.
Fill in the blanks:

17. Other things being equal, bigger benefits are preferable to
smaller ones is called ................................... principle.
18. Other things being equal, early benefits are preferable to later
benefits is called ................................... principle.
19. Which of the following is not a legal issue?
(a) Patent
(b) Trademark
(c) Copyright
(d) Environment protection
20. Integration of all aspects of manufacturing through computers
is known as
(a) Using machine centre
(b) Computer integrated manufacturing
(c) A flexible manufacturing system
(d) Computer aided design and manufacturing
21. Break-even is the point where
(a) Company has no profit no loss
(b) Company is in profit
(c) Company is having losses
22. In activity-based costing, cost is based on the:
(a) Activity of individual product
(b) Activity of particular group
(c) Activity of the whole production system
(d) All the above
Contd...
23. Operations management divides decisions into three broad

categories. They are:
(a) Strategic, operational and financial
(b) Personnel, financial and operational
(c) Strategic, tactical and operational planning and control
(d) Planning, tactical and control
24. With respect to the Customers Activity Cycle (CAC), a firms
position in the marketplace is strongest if it is involved in:
(a) The pre-purchase activities
(b) The purchase activities
(c) The post purchase activity
(d) All the above
Visit a trading company located in your area. Conduct ABC analysis

for its expenses and prepare a short report.
6.5 SUMMARY
Manufacturing economics lies at the cross section between your

market knowledge and our production knowledge. Together
we will optimise production getting the right tools doing the
right things. By utilising your production resources better you
will lower your fixed costs, so you can invest in your existing
production and ultimately, allowing you to be competitive, both
in mature and emerging markets.
A patent is a grant of property rights by the government to an

inventor. Patents are exclusive property rights that can be sold,
transferred, willed, licensed or used as collateral, much like other
valuable assets.
Trademarks includes any word, name, symbol, distinguishing

device or any combination thereof adopted and used by a
manufacturer or merchant to identify his goods as distinguishing
them from those manufactured or sold by others.
A copyright extends protection to authors, composers, artists and

it relates to the form of expression rather than the subject matter.
This distinguishing feature is important because most intellectual
property has proprietary information in terms of subject matter
and if that property cannot be patented, the copyright only
prevents duplicating and using the original matter.
Product liability refers to the responsibility of a manufacturer

or vendor of goods to compensate for injury caused by defective
Whereas the decisions were taken at the United Nations

Conference on the Human Environment held at Stockholm in
June, 1972, in which India participated, to take appropriate steps
for the protection and improvement of human environment.
The product lifecycle model is a simple representation of the

cumulative impact of changes in the business environment on the
life of a manufactured product. It is an important management
tool to understand the product and its finite lifespan and develop
the understanding of the situation so that strategies for survival
and growth can be effectively advanced.
Statistical regularities show that the product lifecycle can be used

to forecast the way the product attributes, demand, production
and competition will change as the product matures. A related
and more useful concept is the technological lifecycle. This links
market growth and technology.
The expected rate of return is based on the investors perceived

risk associated with the investment opportunity. The space for
emotional or indirect financial incentives is seldom present. The
acceptability of a strategy will depend on the return on equity
from the different options, the perceived risk by the organisation,
and the acceptability of the option by the stakeholders.
A standard approach to choosing among alternative processes

or equipment is cost-volume-profit analysis. A cost-volumeprofit analysis calculates alternative profits and losses due to the
number of units produced or sold. The choice obviously depends
on anticipated demand. The point where the total costs equal the
total revenues is called the breakeven point.
Break-even analysis aids process selection by identifying the

processes with the lowest total cost for the volume expected.
Such a point will also indicate the largest profit corridor. We are
also to address two issues: the low-cost process and the absolute
amount of profit.
ABC costing focuses on accurate allocation of overhead costs

to individual products based on activities. It has its origins in
the accounting profession. Value analysis was originally an
accounting method used to analyse complex manufacturing
systems. It was designed to find out and examine how to bring in
cost improvements or improve value creation in the system.
Fixed Costs: Fixed costs are those costs that remain constant
irrespective of changes in the volume of output.
Goods: Goods are tangible items that are usually produced in

Contd...
Innovation Capability: Innovation Capability reflects the

skills and activities spanning invention to innovation that are
involved in technological changes that range from radical
new departures to incremental improvements in existing
technology.
Product Lifecycle Model: Product Lifecycle Model is a

simplistic representation of the cumulative impact of changes
in the business environment on the life of a manufactured
product.
Technological Capability: Technological capability is a

detailed rendering of the different technological skills of the
organisation.
Technological Life Cycle: Technological Life Cycle is a

representation of the cumulative impact of changes in market
growth and technology.
Variable Costs: Variable costs are all the costs, which vary
directly (proportionately) with output. The point where the
total costs equal the total revenues is called the Break-even
Point.

1.
Discuss various legal issues pertaining to manufacturing firms.
2. Discuss the Environmental

environmental issues.
protection
act
and
some
3. Explain the concept of product lifecycle. Which is better from

operations point of view product lifecycle or technology cycle?
Why?
4.
Does the concept of product lifecycle always hold well? Discuss

the situations where it is not valid.
5. Discuss technological lifecycle with the help of examples and

diagram.
6.
Write a note on economic valuation using Break-even analysis.
7.
What is the difference between fixed costs and variable costs?

Explain with the help of examples.
8. How will you perform cost volume profit analysis of a

manufacturing firm? Also give examples where you can find out
the break even point.
9.
Discuss Crossover charts with the help of diagrams.
10. Write a note on ABC costing.

Topic
Legal and Environmental
Issues
Lifecycles
Economic Valuation
Q. No.
1.
Answers
Patent
2.
3.
4.
5.
6.
Property
Trademarks
Product
Product liability
True
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
False
True
Product lifecycle
False
True
False
False
True
False
(b) Compatibility (values and
experience of adopters)
The bigger the better
The bird in hand
(d) Environment protection
(b) Computer integrated
manufacturing
(a) Company has no profit no
loss
(a) Activity of individual
product
(c) Strategic, tactical and
operational planning and
control
(d) All the above
17.
18.
19.
20.
21.
22.
23.
24.

1. Section 6.2.1

Major legal issues pertaining to manufacturing firms are

described as follows: Patents, Trademarks, Copyrights, Uniform
Commercial Code.
2. Section 6.2.2

Environment Protection Act has been enacted to provide for the

protection and improvement of environment and for matters
connected therewith. Whereas the decisions were taken at the
United Nations Conference on the Human Environment held
at Stockholm in June, 1972, in which India participated, to take
appropriate steps for the protection and improvement of human
environment.
3. Section 6.3

Products follow certain kinds of life cycle patterns. Whether

the pattern is like that of an S-shaped curve or modifications
as we have shown in previous pages, we need to understand
the relevance of the product life cycle concept in the context of
making strategic decisions and making marketing forecasts. Many
products generally have a characteristic known as perishable
distinctiveness. This means that a product which is distinct when
new, degenerates over the years into a common commodity. The
process by which the distinctiveness gradually disappears as the
product merges with other competitive products is termed as
the cycle of competitive degeneration.
4. Section 6.3

Product Lifecycle diagram has been designed for product

categories, it has limited use to management, as it may not reflect
the life of their Product Form, or Brand.
The reliability and the interpretation of the Product Lifecycle

for analysis of product brands is a serious limitation of this
instrument. However, it can be used for product forms quite
successfully.
5. Section 6.3.2

It has been seen that technological change generally follows the

course described by the technology lifecycle graph. By plotting
the market volume over time for any industry, one can identify
the changes in the industry. This is called technological aging of
the industry. This exercise can be carried out both for the product
as well as the process. (Refer Figure 6.2).
6. Section 6.4

A cost-volume-profit analysis calculates alternative profits and

losses due to the number of units produced or sold. The choice
obviously depends on anticipated demand. The point where the
total costs equal the total revenues is called the breakeven point.
As cost is an important component in selecting processes and
plant and equipment, let us discuss some of the basics of costs.
7. Section 6.4

Fixed costs arise as a result of capacity creation and are invariant

with respect to variations of activity (capacity utilisation). They
are a function essentially of time.
Several important components of cost vary directly with output.

For example, the total material cost varies linearly with output.
Likewise, the cost of power and other utilities, and direct labour
may vary directly with output. All such costs which vary directly
(proportionately) with output are referred to as variable costs.
8. Section 6.4

Algebraically, the relationship between cost, volume, and profit

can be represented by the equation:
p=QPQVF
p is the Profit Cost-volume-profit relationship may be used to

find the;
(a) The break-even quantity;
(b) The profit for a given quantity level;
(c) The quantity required for attaining a given level of profit;
and/or
(d) The break-even sales in rupees.
9. Section 6.4.1

Break-even analysis aids process selection by identifying the

processes with the lowest total cost for the volume expected.
Such a point will also indicate the largest profit corridor. We are
also to address two issues: the low-cost process and the absolute
amount of profit. Only by directly addressing both issues, can the
process decision be successful.
10. Section 6.4.2

ABC costing focuses on accurate allocation of overhead costs

to individual products based on activities. It has its origins in
the accounting profession. Value analysis was originally an
accounting method used to analyse complex manufacturing
systems.

SUGGESTED READINGS
Chase, Richard B., and Eric L. Prentis, Operations Management:

A Field Rediscovered, Journal of Management, 13, no. 2 (October
1987): 351: 366
Hayes, Robert H., Towards a New Architecture for ROM,

Production and Operations Management, 9, no. 2 (Summer 2000)
105-110
Schonberger, Richard J., World Class Manufacturing: The Next

Decade, New York: The Free Press, 1996
Upendra Kachru, Production and Operations Management, Excel

Books, New Delhi
Schniederjans, Marc J., International Facility Acquisition and

Location Analysis, Westport, CT: Quorum, 1999
E-REFERENCES
http://www.referenceforbusiness.com/small/OperationsManagement.html
http://www.managementstudyguide.com/.htm
http://www.wiley.com/college/sc/reid/
INVENTORY MANAGEMENT
CONTENTS

7.1
Introduction
7.2
What is Inventory?
7.3
Functions of Inventory
7.3.1 Manufacturing
7.3.2 Wholesale

7.4
Bill of Materials
7.5
Identification of Inventory Items
7.6
Inventory Records
7.7
Data Integrity
7.8
Dependency Relationships
7.9
Inventory Costs
7.9.1
Holding (or Carrying) Costs
7.9.2
Cost of Ordering
7.9.3
Shortage or Stock-out Costs
7.9.4
Setup (or Production Change) Costs
7.10
Inventory Control
7.10.1
ABC Analysis
7.10.2
VED Analysis
7.10.3
Fast Moving, Slow Moving and Non-moving Items
7.11
Summary
7.12
7.13
Answers and Hints
7.14
DELL IS IT MANAGING INVENTORY?
From its origins in Michael Dells dorm room at the University
of Texas, Dell Computer sold personal computers directly to end
users, in contrast to most other leading manufacturers, who sold
through distributors, resellers, and retailers. By differentiating
from other computer makers selling direct, first over the
telephone, and later via the Internet Dell enabled customers,
especially corporate customers, to specify exactly the features they
wanted. Dell then quickly assembled computers to meet these
specifications and shipped them directly to its customers.
What was it that about Dells concept that customers found so
attractive? First, they could specify precisely what they wanted
hard drive size, memory, modem or network card, and so on.
Second, Dells price/value offering was unbeatable customers
got more computers for their money. And, because Dell shipped
quickly and offered strong service and support, albeit without local
face-to-face handholding, these two major benefits get what you
want, for less money came without any significant drawbacks to
the key target market: corporations.
Not only did Dells direct business model offer tangible benefits to
its target customers, it also brought Dell important advantages that
gave it a real and so far sustainable edge over its competitors.
Dell worked closely with its suppliers to arrange just-in-time
delivery of parts for its custom-assembled PCs, communicating
replenishment needs to key vendors on an hourly basis. By
carrying, in 1996, for example, only 15 days inventory on average,
instead of 65 days for competitor Compaq, Dell not only saved
carrying cost for its inventory, but it bought parts later, thereby
benefiting from the fact that prices of components used to make
PCs typically declined 25 to 20 per cent per year. Additional savings
from eliminating intermediaries in its distribution channel made
Dells cost advantage over its competitors a substantial one.
Given its lower cost structure than its competitors, Dells custombuilt, low-cost positioning in the market place allowed it to make
an attractive strategic choice. Should it choose to reap higher
margins than others in its industry, or should it keep prices low
to gain market share? For much of its history, Dell made the latter
choice, gaining share at the expense of its rivals.
INVENTORY MANAGEMENT 245

Know what is inventory
Understand the different functions of inventory
Know about how to prepare bills of materials
Learn about the identification of inventory items
Know how to keep inventory records
Learn about dependency relationships
Interpret the concept of inventory costs
7.1 INTRODUCTION
Inventory decisions are high-risk and high-impact operations.
Inventory planning is critical to manufacturing. Raw material
shortages can shut down a manufacturing line or modify a production
schedule, which, in turn, introduces added expense and potential for
finished goods shortages. In simple words, inventory means stock
items. However, the two words inventories and stores should not be
confused. Where as stores means all those articles (materials, supplies
and products) which are kept in a store. Inventory comprises stores as
well as materials in transit, materials in process (i.e., semi-finished and
finished parts), finished products, stock and stock lying at companys
showrooms and distribution centres which have not been sold out.
In spite of these differences it may not be surprising to discover that
the terms inventory and stores are being used interchangeably.
In this chapter, we will discuss the concept of inventory to understand
its functionality, the identification, classification, and some of the
simple models for arriving at basic inventory decision rules and finally
we will discuss inventory control.
7.2 WHAT IS INVENTORY?
The term inventory means any stock of direct or indirect material

(raw materials or finished items or both) stocked in order to meet
the expected and unexpected demand in the future.
Inventory is the physical stock of items that a business or production
organisation keeps in hand for efficient running of affairs of its
production. Inventories consist of raw materials. Component parts
supplies and finished assemblies which an organisation purchases
from an outside source and parts, assemblies and finished products
which the company manufactures itself. In simple words inventory
means stock items or items in stock. The concept of inventory and
its relation with performance of any system can be very well explained
by the following statements:
Inventories serve as cushions to absorb shocks. An organisation

has to deal with several customers and vendors who are not
necessarily close to their works. But due to their unpredictable
behaviour there are always fluctuations in demand or supply
of the items which disturbs the schedule of an organisation.
Inventories absorb these fluctuations and help in maintaining
undisturbed production and stable employment rates i.e., we
decouple the manufacturing operation from the customer and
the vendor successfully by cushions of stocks.
Inventory for any organisation is a necessary evil: Inventories

require valuable space and consume taxation and insurance
charges. This leads to considerable investment and causes
considerable opportunity loss.
This capital invested in inventories remains idle till items present

in stocks are not used. On the other hand, no organization can
work without maintaining some inventory, i.e., it is a necessity.
It is observed that costs of not having inventories are usually
greater than the costs of having them. Thus inventories are
necessary evil.
Inventories are the result of many interrelated decisions and

policies within an organisation: The behaviour of inventories
is the direct result of diverse policies and decisions within
a company. Marketing, production, finance and purchasing
decisions directly influence the level of inventory.
Inventory provides production economies; Stocks bring economy

in purchase of various inputs due to discounts on bulk purchase.
This also minimises ordering, transportation and other costs.
They also reduce the number or setups.
Types of Inventories
The various types of inventories for a manufacturing organisation are
classified as under:
Raw Materials and Supplies Inventories: These consist of raw

materials, parts, sub-assemblies and supplies which the company
purchases from outside sources, namely suppliers-dealers or
manufacturers. These items are to be purchased and kept in
stock before and during production of goods.
Production Inventories: Raw materials, parts and components

which become part of the product during the production process
are called production inventories. These may consist of:
Raw materials or other items purchased from outside.
Non-standard purchased items or supplies.
Special items manufactured in the factory itself.
M.R.O. Inventories: Maintenance, repair and operation supplies

or in short M.R.O. inventories. Which are assumed in the
production process but do not become part of the product, for
example, oil, spare parts, etc.
In Process Inventories: These are processed or semi-finished

products, manufactured at various stages during the production
cycle (process). In bicycle factory frames, pedals, rims, axles, etc.
These are also called in-process inventories or work-in-progress
inventories.
Finished Product Inventories: Finished goods or stocks are

completed products ready to be sent away to the market or
customers. These products have been fabricated or manufactured
or assembled from production and in-process inventories, i.e., a
complete bicycle in case of a cycle manufacturing factory or a car
in case of a car manufacturing factory.
Material in Transit Inventories: These are raw material and

supplies inventories which are in transit and have already been
paid for. These have not so far been received at the factory.
Dealers Stock: In case a company owns a showroom or

distribution centre, inventories of finished goods or products
kept there have also to be considered.
Total Inventories: Total inventories of an organisation should

consist of all the above categories of inventories as capital is
locked up in these.
Fill in the blanks:

1.
Raw materials, parts and components which become part

of the product during the production process are called
......................... inventories.
2. The term ...................... means any stock of direct or indirect

material (raw materials or finished items or both) stocked in
order to meet the expected and unexpected demand in the
future.
Visit any manufacturing firm of your choice and classify the

inventory kept there according to different types of inventories as
you have studied still now.
A basic purpose of inventory management is to control inventory

by managing the flows of materials. It sets policies and controls
to monitor levels of inventory and determine what levels should
be maintained, when stock should be replenished, and how large
orders should be.
7.3 FUNCTIONS OF INVENTORY

Inventories are essential for keeping the production wheels moving.
Inventories keep the market going and distribution system intact.
They serve as lubrication and spring for production-distribution
system.
The following are the important functions of inventories:
Inventories gear up production.
Inventories force consumption to adopt itself to the necessities

of production.
Inventories activise the market.
Inventories provide a cushion to prevent stock outs.
Inventories help in stabilising employment in the enterprise.
Inventories help in utilising the existing skilled labour and help

in making a utilization plan for future.
Inventories strike a balance between the objectives of the stores

department and those of the enterprise as a whole.
Inventories help in avoiding unnecessary wastage and blocking

up of valuable working capital.
Inventories act as an insurance against errors in demand forecasts.
A well planned inventory scheme helps in efficient, smooth and

effective service to customers at a lesser cost with the help of
lower investment through planned but reduced inventories.
7.3.1 MANUFACTURING
Manufacturing inventory is typically classified into raw materials,
finished products, component parts, supplies, and work-in-process.
Independence of workstations is desirable in intermittent processes
and on assembly lines a well. As the time that it takes to do identical
operations varies from one unit to the next, inventory allows
management to reduce the number of setups. This results in better
performance.
In the case of seasonal items, any fluctuation in demand can be met if
possible, by either changing the rate of production or with inventories.
However, if the fluctuation in demand is met by changing the rate of
production, one has to take into account the different costs. The cost
of increasing production and employment level involves employment
and training; additional staff and service activities; added shifts; and
overtime costs. On the other hand, the cost of decreasing production
and employment level involves unemployment compensation costs;
other employee costs; staff, clerical and services activities; and idle
time costs. By maintaining inventories the average output can be
fairly stable. The use of seasonal inventories can often give a better
balance of these costs.
For the manufacturer, inventory risk has a long-term dimension.

Although retailers or wholesalers as will be shown have a wider
product line than the manufacturer, the manufacturers inventory
commitment is relatively deep and of long duration.
7.3.2 WHOLESALE
The wholesaler purchases large quantities from manufacturers
and sells small quantities to retailers. He provides the capability to
provide retail customers with assorted merchandise from different
manufacturers in smaller quantities. Expansion of product lines has
increased the width and inventory risk. Where products are seasonal,
the wholesaler has to take an inventory position far in advance of
selling.
Wholesaler risk exposure is narrower but deeper and of longer
duration than that of retailers.
Retail for a retailer, inventory management is fundamentally a matter
buying and selling. The retailer purchases a wide variety of products
and markets them. The prime emphasis in retailing is on inventory
turnover and direct product profitability. Turnover measures
inventory velocity and is calculated as the ratio of annual sales divided
by average inventory.
Although retailers assume a position of risk on a variety of products,
the position on anyone product is not deep. This does not mean that
their risk is lesser; due to the variety of merchandise the risk is wider.
For example, a typical supermarket carries more than 10,000 SKUs.
This variety of merchandise reflects the risk of the retailer.
Only when considered in light of all quality, customer service and
economic factors from the viewpoints of purchasing, manufacturing,
sales and finance does the whole picture of inventory become clear.
No matter the viewpoint, effective inventory management is essential
to organisational competitiveness.
Advantages of Inventory
In a large manufacturing concern it is always advantageous to order
some type of raw-materials and purchase parts in advance and hold
them in stock to be used when required to meet the customers orders.
The main advantages of purchasing materials well in advance are the
following:
Sometimes in competition with other manufacturers, delivery

requirements (dates) are very tight and if orders for raw-materials
or parts are placed after receiving customers order it may not be
possible to meet the demand and the required delivery date. It is,
therefore, advantageous to hold inventories.
Buying and producing material in large quantities is profitable

as discounts and concessions are available on large quantity
purchases. There is reduced cost per item of selling up machines
and plant. There is also reduced clerical work and cost for placing
orders less frequently.
A good industry keeps a ready stock of its product for immediate

sale. Inventory of raw materials and parts helps to replace these
products faster once they are sold and disposed of.
There can be difficulties in procurement of raw materials and

parts due to unexpected strikes, shortages, power breakdowns
or periods of high demands in relation to supply. In this case,
inventories may come to rescue.
Building up a big inventory will be profitable as later on there

may be a rise in prices of various items due to various reasons.
More products can be manufactured rapidly when raw material

or parts are held in stock.
Inventories reduce the risk of closing down the plant or keeping

workers and machines idle.
Disadvantages of Large Inventories
Working capital is tied up with excess inventories. Interest has

to be paid on capital. This increases the cost of production. At
the same time there is less available cash for income producing
investment.
They occupy valuable space and may require added storage

space for which rent has to be paid.
Bigger the inventories more the insurance charges to be paid for

their security.
There will be an increased cost of handling stores and maintaining

their record.
Inventories or goods in stock are subject to damage, deterioration

and spoilage with passage of time. With change in design or
availability of better type of material, long lying inventories may
be considerable.
There is also more possibility of pilferage and misplacement of

materials parts.
There is greater risk of loss due to devaluation through changes

in price of manufacturing cost. Therefore, it is important that
strict control be exercised over the inventory so that costs of
purchasing and storing are lowest possible, while at the same
time material is available as and when required.
Visit a wholesaler and a retailer of household products. Compare

the amount of inventory stocks they maintain in a year and prepare
a short report.
In addition, the firm also has to have in-services inventory. This

generally refers to finished goods, the tangible goods that must often
be transferred to warehouses in close proximity to wholesalers and
retailers to be sold, and the supplies necessary to administer the
service.
Fill in the blanks:

3. Inventories strike a balance between the ............... of the stores
department and those of the enterprise as a whole.
4. Items that are in the distribution system but are in the process
of being shipped from suppliers or to customers are called
......................... inventory.
5. ..................... inventory is typically classified into raw materials,
finished products, component parts, supplies, and work-inprocess.
7.4 BILL OF MATERIALS

Information on inventory is conveyed through the bill of materials. It
serves as the interface to order entry. While good business practice
indicates that companies should aim for a unified set of information,
including having just one version of every bill of materials at a time,
but many different views of bills are feasible. Where good practice has
not been fully adopted, multiple concurrent bills of materials may be
encountered.
The bill of material structure is the arrangement of inventory item
data within the bill of materials file. Information in the bill of materials
includes:
Item identities: Assignment of item identity eliminates ambiguity
and identifies levels of manufacture. It cross-references the item
master data. An item may be able to be listed as a component more
than once in a bill.
Sequence number: This can be used to present the bill in a particular
way, grouping all component items of a given type together, or
presenting a picking sequence. Also known as a find number or
balloon number.
Component quantity: The amount of the component item to be used
in manufacturing the parent, normally stated as quantity per unit of
the parent but expressed per batch in some formula-based systems.
Also known as quantity per.
Unit of measure: This may be provided automatically by an MRP II
or ERP or other system or specified by the user if unit conversions are
available.
Relationship: This indicates whether the component is used in the

quantity stated per unit or batch of the parent or in some other way,
such as per order or as required.
Type of component: It shows whether the item is a normal component
or a special type. Types of component in addition to standard include
phantoms, sometimes called pseudo, options, reference items and
others.
There are different types of bills of materials. These are described
below:
Engineering bill of materials: The engineering bill of materials is the
master product definition that contains as-designed information on
the inventory item.
TABLE 7.1: A TYPICAL ENGINEERING BILL OF

MATERIALS
Level Part #
Revision Quantity Unit Description Make/

Buy
..1
1684423003 B
Parent
Ea
Adapter
Make
..2
1547662009 J
Ea
Control Unit Buy
..2
1676387001 C
Ea
Moisture
Tester
Make
....3
1870119302 B
Ea
Enclosure
Buy
....2
1870119302 B
Ea
Enclosure
Buy
....3
1200014273 D
Ea
Machine
Screw
Buy
....3
0900016001 F
Ea
Cover
Buy
....2
1464438389 AA
Ea
Precipitator Make
Assy.
....3
5201048007 E
Ea
Element
Buy
....3
5700255100 E
Ea
Housing
Buy
....3
9800266600 D
Ea
Machine
Screw
Buy
....3
1200014267 G
Ea
Precipitator Buy
Table 7.1 shows a typical engineering bill of materials. Each

engineering bill of materials has a parent. The parent is the item
(product, assembly, subassembly, intermediate, etc.), which is to be
made. All the controls on the bill of materials relate to the parent. In
other words, it has context and instruction that allows manufacturing
engineers to derive the manufacturing bill of materials.
The first column provides the relationships between the inventory
items or the product structure. The end item is conventionally
represented by level 0 and subassemblies etc. by level 1 onwards.
These product levels are further discussed in dependency

relationships. In our example, the parent is signified by level 1, the
subassemblies by level 2 and the components by level 3.
You will also notice that part no. 18701-19302 appears twice in the bill
of materials. The parent part requires 4 units of enclosures, the first
3 enclosures are used for the subassemblies and the fourth is used at
the final-assembly stage. In a situation like this, to avoid the possibility
of placing separate orders for the same part, the part always assigned
the lowest level (highest level number) at which it appears. Thus, the
enclosures should always appear as a level 3 item. This is called lowlevel coding. Such coding also facilitates computer processing.
Column 4 provides information on the quantity required for
each parent item. Column 5 provides information on the unit of
measurement. The metrics adopted are very important and should
be consistent. Column 6 gives the description of the inventory item.
This may or may not be unique. The last column provides information
on the sourcing of the inventory item.
The manufacturing bill of material is developed by re-sequencing the
engineering bill of materials in the context of the assembly process,
and then deriving from it the process information that will allow the
new part to be ready for production.
In addition to the manufacturing bill of materials and the engineering
bill of materials other possible and common bills of material include:
Planning or modular bill of materials: This is used in Master
Production Scheduling. This is an artificial grouping of items in bill of
materials format that expresses the relationship of multiple product
features, variants and options. Inventory items are arranged in terms
of product modules i.e. sets of component items each of which can be
planned as a group.
The process of modularising consists of breaking down the bills of
highest-level item and rearranging them into modules. There are two
somewhat different objectives, in modularisation:
To disentangle combination of optimal product features.
To segregate common from unique, or peculiar parts.
The first is required to facilitate forecasting and the second is aimed

at minimising inventories in components that are common to option
alternatives i.e., are used in either optional choice. Sometimes there are
options within options (like four wheel or two wheel drive for a jeep).
A traditional approach to optional product features was providing
stock over the forecast provisions. The lack of modularisation in
product design made it difficult to disentangle options and options
within options, thereby entailing additional safety stock and making
inventory management more difficult.
A multitude of model designation implies that all the models then
to get into the processor of forecasting and master scheduling. It is
difficult to forecast demand for any single option, but to forecast,

with a degree of dependability, and with what other options it will
be combined is very difficult. The number of models within each
product family should be reduced (at least for internal purposes).
This is primarily for procurement, fabrication and subassembly
of components. For purposes of final assembly scheduling, specific
combinations of options must be specified for each unit to be built.
Thus the concept of modular bills of material is very useful in
multi-model product situations.
With the emergence of cost effective data processing and MRP II
(Manufacturing Resource Planning) and ERP (Enterprise Resource
Planning) systems, it is possible to display the bill of materials in
many ways. Commonly encountered reporting formats include:
Single-level bill: A parent and its direct components.
Single-level where-used: An item and all the parents in which it is
a direct component.
Indented bill (multi-level bill): A parent, its direct components,
their components and so on down to the starting materials. This
shows which components form part of which parents at all levels.
Indented where-used: An item, all the parents in which it is a direct
component, their parents and so on up to the end products. This
also shows structures.
Next level-end level where-used: An item, all the parents in which
it is a direct component, and the top-level parents (products) of
which they form part.
Summarised bill: A list of all components (at all levels) in a
parent with total quantities, but not displaying any structure
information.
Phantom bill of materials: A technique called phantom bill can
be used to handle transient assemblies. In this technique the
transient subassembly is treated as follows:
Lead time is specified as zero.
Lot sizing is lot for lot.
The bill of material carries a special code so that the system can
recognise that it is a phantom and applies special treatment to it.
Pseudo bill of materials: When the bill of material is broken down in
the process of modularisation, various subassemblies are promoted
and become end products i.e. highest-level items. This tends to create
a large number of end items. In order to reduce the forecasting burden
the technique of creating pseudo bill of materials is used. The newly
created end items are grouped by option so that there is no obstacle
to taking any such group and creating a pseudo bill (assigning an
artificial parent with a number) to cover it. The pseudo bill number
represents the optional product features in the MPS and MRP system
will explode the requirements from this point on.
The bill of material should reflect, through its level structure, the
way material flows in and out of stock. Thus it is expected to specify
not only the composition of a product but also the process stages in
the products manufacture. The product structure must be defined
in terms of levels of manufacture. Subassemblies which never see a
stock room because they are immediately consumed in the assembly
of their parents are called transient subassemblies.
Costing bill of materials: Occasionally encountered is a version of
the bill of materials, which expresses cost information separately
from the manufacturing bill.
Inventory control is based on the information that is provided by the
bill of materials. The bill of materials is not simply a materials list but
is a materials list that provides information useful to reconstruct the
manufacturing, wholesaling and retailing processes.
Fill in the blanks:

6. Information on inventory is conveyed through the ..................
of materials.
7. The bill of material structure is the arrangement of .................
item data within the bill of materials file.
8. The engineering bill of materials is the master product
definition that contains ............................. information on the
inventory item.
9. Planning or ............................ bill of materials is an artificial
grouping of items in bill of materials format that expresses the
relationship of multiple product features, variants and options.
10. When the bill of material is broken down in the process of
modularisation, various subassemblies are promoted and
become end products i.e. highest-level items, it is called
.............................. .
The product structure must be defined in terms of levels of

manufacture. Subassemblies, which never see a stock room
because they are immediately consumed in the assembly of their
parents, called transient subassemblies, should also be accounted
for. A technique called phantom bill can be used to handle these.
Visit a retail store in your locality. Check out its various household
items and prepare a bill of materials for its inventory.
7.5 IDENTIFICATION OF INVENTORY ITEMS

Each inventory item must be uniquely identified. The identifying
number must define the contents of the item unambiguously. The bill
of material should reflect, through its level structure, the way material
flows in and out of stock. Thus it is expected to specify not only the
composition of a product but also the process stages in the products
manufacture.
The inventory item number is shown in column 2 of Table 7.1, the
engineering bill of materials. In this case, it is a 10-digit number.
Depending upon the complexity of the production system, the part
number could be an alphanumerical number also. Alphanumeric
numbering systems provide a larger number of permutations and
combinations of the part numbering system.
The inventory includes stock of raw materials, semi finished goods,
finished goods and components, etc., of several description. In
order to facilitate prompt recording, locating and dealing, each
item of inventory should be assigned a particular code for proper
identification and then must be divided or sub-divided in groups on
any basis (location, nature of item, plant, etc.) feasible. Specific efforts
should be made to establish an effective control of high value items.
ABC analysis is very much helpful in this regard.
Standardisation and simplification of inventories: For proper
inventory control standardisation of materials and products as well
as simplification of the production line is necessary.
Standardisation refers to limiting of a production line to definite

types, sizes and characteristics which are considered to be standard
by which a comparison on evaluation can be made.
Specification for components should also be fixed. It will ensure
the quality of products manufactured. Simplification of inventories
refers to the elimination of excess types and sizes of items. It leads to
reduction in inventories and carrying cost.

11. The bill of material should reflect, through its level structure,
the way material flows in and out of stock.
12. Standardization refers to limiting of a production line to
definite types, sizes and characteristics which are considered
to be standard by which a comparison on evaluation can be
made.
13. The bill of materials should not provide the basis for product
costing.
Visit any automobile parts shop. How will you identify the inventory
items of an automobile parts bill?
7.6 INVENTORY RECORDS

An efficient inventory control necessitates maintenance of proper
inventory records because various inventory records contain
information to meet the needs of purchasing, production, sales and
financial staff. Any typical information regarding any particular item
of inventory may be had at hand from such records. Such information
may be about quantity in hand or in transit or on plants, location,
unit cost, EOW, re-ordering points, safety level, etc., for each item
of inventory. Statements, forms, reports, etc., should be designed in
such a way that the clerical cost of maintaining these records must be
kept at a minimum.
A manufacturing inventory is defined as consisting of the following:
Raw materials in stock
Semi finished component parts in stock
Finished component parts in stock
Subassemblies in stock
Component parts in process
Subassemblies in process
TABLE 7.2: MRP RECORD OF RUBBER HOSE

Item: X123
Lot Size: 100 units
Description: Rubber Hose

Week
1
2
Gross Requirements
150
Scheduled Receipts
200
Projected on-hand
150
Inventory
Planned Receipts
Planned Order Releases
Lead Time: 2 Weeks

6
7
8
120
150
4
5
100
50
200
80
200
A MRP record for an inventory item is shown in Table 7.2. The

inventory record divides the future into time periods called time
buckets. Generally firms use weekly time buckets, although other
time periods could as easily be used. The inventory record shows an
items lot-size policy, lead time, and various time-phased data. The
purpose of inventory record is to keep track of inventory levels and
component replenishment needs.
The time-phased information contained in the inventory record

consists of:
Gross requirements,
Scheduled receipts,
Projected on-hand inventory,
Planned receipts, and
Planned order releases.
In order for MRP to work, accurate inventory records must be kept

meticulously. For most companies, the accuracy requires continually
updating inventory records as items are with drawn or added. For
example, Bharat Petroleum Corp. Ltd., at their Wadilub plant, often
found container suppliers directly dispatch containers to the third
party blenders without making Goods Receipt (GR) and Goods Issue
(GI). However, the system would not physically receive the dispatches
if it did not have any issues for such materials. For inventory records
to register, the system would require the necessary documentation at
both ends of a transaction.
In the case of materials that come in continuous form (rolls of sheet
metal etc.) the standard planning procedures are modified and the
system that can handle such inventory items properly is adopted.
The assumption of process independence means that any given
inventory item can be started and completed on its own and not
be contingent on the existence or progress, of some other order for
completing the process. Thus, mating part relationships and setup
dependencies in a manufacturing order are not acceptable in the
inventory records. The requirement of independence is basic to the
development of the MRP system and has to be incorporated in the
inventory items in the records.
Fill in the blank:

14. The inventory record divides the future into time periods
called .......................... .
Prepare a MRP record for a Truck Tire manufacturing company.
7.7 DATA INTEGRITY

Data integrity is an important prerequisite for the inventory system.
This is especially true when using a MRP system. To reconcile inventory
records and correct errors, many companies using MRP also employ
what is called cycle counting. Using this method, a physical count of
each part is made at least once during its replenishment cycle, which
is the period between orders to replenish inventory. This system of
cross checking is also called, cycle counting.
The bill of materials should be reviewed to ascertain its data integrity
for purposes of MRP. The following checklist will help in spotting its
structural deficiencies. The bill of materials should:
Forecast optional product features.
Permit the MPS to be stated in the fewest possible number of end

items.
Lend it to planning of subassembly priorities.
Permit easy order entry via bill of material numbers.
Be usable for purposes of final assembly scheduling.
Provide the basis for product costing.
Be geared to efficient computer file storage and file maintenance.
Data integrity also means that the assumptions regarding inventories

are met in all respects, i.e.
Lead times for all inventory items are known;
All receipts and issues are reportable;
Components and materials are discretely disbursed and used;
The process is independent;
The database must be tested for integrity to ensure that this is

true for all inventory items;
File data must be accurate, complete and up to date, if the MRP

system is to prove successful or even useful.
Fill in the blank:

15. To reconcile inventory records and correct errors, many
companies using MRP also employ what is called ................... .
State whether the following statement is true or false:
16. Data integrity also means that the assumptions regarding
inventories are met in all respects, i.e. the process is dependent.
Prepare a MRP record for a shoe manufacturing company.
7.8 DEPENDENCY RELATIONSHIPS

Product structures determine the dependency relationships between
end products and inventory items. These vary widely. For example,
in the steel industry, pig iron is manufactured from sintered, pelletised

or lump iron ores using coke and limestone in a blast furnace. It is
then fed to a basic oxygen converter in molten form along with scrap
metal, fluxes, alloys, and high-purity oxygen to manufacture steel.
This type of product shows a dependency structure is linear There
is no assembly involved as raw material inventories are directly
converted to products.
COATED, ORDINARY, AND SPECIAL STEEL
Blast furnace
Hot rolling mill
Hot metal
pretreatment
Vacuum degenerating
vessel
Convertor
Continuous slab-casting line
Heating
furnace
Roughing mill
Finishing mill
Continuous
picking line
Figure 7.1: Steel Manufacturing Process

Figure 7.1 shows the flow diagram of a steel plant making flat products.
Similar dependency relationships can be found in the case of paper,
process industries, and petroleum industry such as BPCL. In this
type of system it is imperative that the master schedule of the finished
product requires the supply of raw materials at the right time and in
the needed quantities.
Many manufacturers buy components and parts and assemble them,
with little or no fabrication operations. For example, locally assembled
computers still account for over 50 percent of the total computer
market in India. This is also true of many electronic products and
some small appliances. In such situations, the product structure is
horizontal rather than vertical as with process industries.
In this type of system it is imperative that the master schedule of the
finished product requires the supply of all the raw materials, parts
and components at the right time and in the needed quantities. The
focus is on supply lead items from vendors in planning and executing
the schedule, though the operations of subassemblies may also be
important.
Some producers fabricate parts and assemble finished products
that may have intervening subassemblies. The master schedule of
end products again requires the supply of all parts, components,
and subassemblies. Manufacturing relies on multiple, technically
complex systems working well together within and between shops,
to accomplish its functions. In addition, it must take into account
of supply lead times that involve not only vendors but also in-plant
fabrication operations.
The concept of product level was discussed earlier. It is related to the
way the product is structured i.e. manufactured. Each principal stage
in the manufacturing process of converting material into product
is equivalent to a level of product structures. Product depth is an
important factor in the scope and duration of MRP data processing

job. For example, the average new car has some 14,000 to 15,000 parts
and accessories, which is a very complex system with integrated
fabrication and assembly operations.
Level 1
Level 2
Level 3
Figure 7.2: Typical Manufacturing/Assembly Process

Figure 7.2 represents the product structure of either assembly
and manufacturing processes or both. The bill of materials lists
components of each assembly and subassembly linking of individual
item bills which form the product, resulting in a hierarchical, and
pyramid like structure with different levels. The items on the highest
level in a product structure file are termed end items. By convention;
levels are numbered from top to bottom, beginning with level 0 for the
end item.
In determining net requirements for a low-level inventory item, the
quantity that exists under its own identity, as well as any quantities
existing as (consumed) components of parent items must be accounted
for. The net requirements are developed by allocating and reallocating
quantities in inventory to the quantities of gross requirements, in a
level-by-level process. The downward progression form one product
level to another is called an explosion. The bill of material file guides
the explosion process.
Examples of these hierarchical product structures abound in industry,
including automobiles, appliances, machine tools, and so on.
Fill in the blank:

17. Product structures determine the dependency relationships
between ......................... and inventory items.
Visit any paper manufacturing industry. Study the dependency

relationship between raw materials and manufactured products.
Depict the same in form of a flowchart.
The focus in hierarchical product structure has to be internal

as well as external. Supply lead items from vendors in planning
and executing the schedule is important and so is the progress of
different manufacturing processes within the enterprise.
7.9 INVENTORY COSTS

As inventory is a necessary but idle resource, inventory costs in
manufacturing need to be minimised. The heart of inventory decisions
lies in the identification of inventory costs and optimising the costs
relative to the operations of the organisation. Therefore, an analysis
of inventory is useful to determine the level of stocks. The resultant
stock keeping decision specifies:
When items should be ordered.
How large the order should be.
When and how much to deliver.
It must be remembered that inventory is costly and large amounts

are generally undesirable. Inventory can have a significant impact on
both a companys productivity and its delivery time. Large holdings
of inventory also cause long cycle times which may not be desirable
as well. What are the costs identified with inventory? The following
costs are generally associated with inventories:
7.9.1 HOLDING (OR CARRYING) COSTS
It costs money to hold inventory. Such costs are called inventory
holding costs or carrying costs. This broad category includes the
costs for storage facilities, handling, insurance, pilferage, breakage,
obsolescence, depreciation, taxes, and the opportunity cost of capital.
Obviously, high holding costs tend to favour low inventory levels and
frequent replenishment.
There is a differentiation between fixed and variable costs of holding
inventory. Some of the costs will not change by increase or decrease
in inventory levels, while some costs are dependent on the levels of
inventory held. The general break down for inventory holding costs
has been shown in Table 7.3.
TABLE 7.3: FIXED AND VARIABLE HOLDING COSTS

Fixed costs
Variable costs
Capital costs of warehouse or store

Cost of operating the warehouse or
store
Cost of capital in inventory

Insurance on inventory
value
Contd...
Personnel costs
Losses due to obsolescence,

theft, spoilage
Cost of renting warehouse
or storage space
Thus cost is measured as a percentage of the unit cost of the item.

This measure gives a basis for estimating what it actually costs a firm
to carry stock. This cost includes:
Interest on capital.
Insurance and Tax charges.
Storage costsany labour excluding handling or receipts of new

ordersthe costs of provision of storage area and facilities like
bins, racks etc.
Allowance for deterioration or spoilage.
Salaries of stores staff, and
Obsolescence.
The inventory carrying cost varies and in a typical Indian industry is

about 30 per cent. A major portion of this is accounted for by the interest
on capital which depends on the fiscal policies of the government. A
few firms differentiate the costs as fixed and variable. In the analysis
of and use of mathematical formula, only the variable cost of ordering
should be considered as the fixed costs will be constant irrespective of
the number of orders placed or the inventory carried.
7.9.2 COST OF ORDERING
Ordering costs or procurement costs are those costs which are

incurred on procurement (buying) process.
Ordering costs include all the annual expenditure of the purchase
section or department. Small items should be ordered in significantly
large quantities to avoid unreasonable expense in preparing
large numbers of small orders. Ordering costs cover the following
expenditure:
Costs of calling quotation.
Costs of processing tenders.
Costs of placing the purchase order.
Costs of inspecting the shipment.
Rent for the office accommodation of inspecting staff.
Salary and wages of the purchasing department staff.
Stationery used.
Postage.
Telephone and telegram expenses.

Travelling expenses.
Entertainment and refreshment expenses.
Legal expenses in case of purchase disputes.
Ordering costs are usually expressed as cost per order which is

obtained by dividing the total of the costs mentioned above by the
number of orders placed during a given period. This works out to
be roughly between ` 10/- and ` 50/- per order depending upon the
purchase procedure adopted by a company. Ordering costs naturally
depend upon the number of orders placed during a given time, say,
a year. More the number of orders to be placed, more will be the
expenditure on the above factors particularly salaries, stationery and
travelling expenses. The ordering cost may vary dependent upon the
type of items: raw material, like steel against production components
like casting.
If the level of purchasing increases, the extra load will be tackled
by paying overtime to existing staff or by recruiting new personnel.
This additional cost can be viewed as the marginal cost of orders. The
ordering cost in a typical Indian firm is around ` 100/- per order. Best
experience shows that this cost varies considerably depending upon
the purchasing department.
It is good to be able to clearly differentiate between those ordering
costs that do not change much and those that are incurred each time
an order is placed. The general breakdown between fixed and variable
ordering costs is a follows:
TABLE 7.4: FIXED AND VARIABLE ORDERING COSTS

Fixed costs
Staffing costs (payroll, benefits,
etc)
Fixed costs on IT systems
Office rental and equipment costs
Fixed costs of vendor
development
Variable costs
Shipping costs
Cost of placing and order
(phone, postage, order forms)
Running costs of IT systems
Receiving and inspection
costs
Variable costs of vendor
development
7.9.3 SHORTAGE OR STOCK-OUT COSTS

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

between dependent and independent demand that we discussed
in the last chapter. In manufacturing, inventory requirements are
primarily derived from dependent demand, however, in retailing the
requirements are basically dependent on independent demand.
This cost is the cost incurred when an item is out of stock. It indicates
the cost of lost production during the period of stockout and the extra
cost per unit which might have to be paid for an emergency purchase.
Example:
(a) How will you calculate ordering cost and inventory carrying
costs. What is their significance?
(b) Following details are known of a company:

Purchase Department Expenses
` 2,00,000/-
Stores Personnel Expenses
` 2,00,000/-
Obsolescence
` 60,000/-
Hire Charges of Warehouse
` 1,40,000/-
Collection Cost
` 40,000/-
Receiving Cost
` 35,000/-
Inspection Cost
` 50,000/-
Material Handling in the Stores
` 1,60,000/-
Bill Payment Expenses
` 75,000/-
Interest Charges 14.5%
Insurance Charges 2%
Calculate Costs of Ordering and of Carrying Inventory.

The Company places 5000 orders per year and has an average total of
` 100 lakh.
Solution:

Ordering Costs
Purchase Department Expenses
` 2,00,000/-
Collection Cost
` 40,000/-
Receiving Cost
` 35,000/-
Inspection Cost
` 50,000/-
Bill Payment Expenses
` 75,000/-
Total
` 4,00,000/-
No. of orders/year = 5,000
Cost/order =
4, 00, 000
5000
= 80/ -
Inventory Carrying Costs
Stores Personnel Expenses
` 2,00,000/-
Obsolescence
` 60,000/-
Hire Charges to Warehouses
` 1,40,000/-
Material Handling in the Stores
` 1,60,000/-
` 5,60,000/-
Insurance
` 2,00,000/-
` 14,50,000/-
Interest charge @ 14.5% of ` 100 lakhs
Total
Inventory carry charge=
=

` 22,10,000/-
Total Inventory Cost

100
Averages inventory
22,10, 000 100

1, 00, 00, 000
= 22.1%
7.9.4 SETUP (OR PRODUCTION CHANGE) COSTS

In the case of subassemblies, or finished products that may be
produced in-house, ordering cost is actually represented by the costs
associated with changing over equipment from producing one item to
producing another. This is usually referred to as setup costs.
Set-up costs reflect the costs involved in obtaining the necessary
materials, arranging specific equipment setups, filling out the required
papers, appropriately charging time and materials, and moving out
the previous stock of materials, in making each different product. If
there were no costs or loss of time associated in changing form one
product to another, many small lots would be produced, permitting
reduction in inventory levels and the resultant savings in costs.
Overstocking cost is the inventory carrying cost (which is calculated

per year) for a specific period of time. The time varies in different
contexts it could be the lead time of procurement or the entire life
time of a machine. In the case of one time purchases, overstocking
cost would be: Purchase price Scrap price.
Visit any LED manufacturing firm. Identify the fixed and variable
operating and holding cost for the inventory stored there.
Fill in the blanks:

18. The downward progression form one product level to another
is called an .............................. .
19. ........................... costs includes the costs for storage facilities,
handling, insurance, pilferage, breakage, obsolescence,
depreciation, taxes, and the opportunity cost of capital.
20. Costs that refer to the managerial and clerical costs entailed in
preparing the purchase of production order are known as:
(a) Ordering cost
(b) Header cost
(c) Line cost
(d) Setup cost
21. The time between the issuance of a replenishment order and
the receipt of stock is:
(a) Stock time
(b) Lead time
(c) Work content time
(d) In-process time
7.10 INVENTORY CONTROL

Inventory control is a system which ensures the provision of the
required quantity of inventories of required quality at the required
time with the minimum amount of capital investment. Thus the
function of inventory control is to obtain the maximum inventory
turnover with sufficient stock to meet all requirements.
In the words of John L. Burbidge, Inventory control is concerned

with the control of the quantities and/or monetary values of these
items at predetermined level or within safe limits.
Scope of Inventory Control
The inventory control management includes the following aspects:
Size of inventory-determining maximum and minimum levels,

establishing time schedules, procedures and lot of sizes for new
orders, ascertaining minimum safety levels, coordinating sales,
production and inventory policies.
Providing proper storage facilities arranging the receipts,

disbursements and procurement of materials, developing the
forms of recording these transactions.
Assigning responsibilities for carrying out inventory control

functions.
Providing for the reports necessary for supervising the over-all

activity.
Factors Affecting Inventory Control Policy

The inventory policy of an organisation has an impact on the whole
system. There are a number of factors which can affect the inventory
decisions. These can be broadly divided in the following categories:
Characteristics of the Manufacturing System: The nature of

the production process, the product design, production planning
and plant layout have significant effect on inventory policy. Some
of these factors are:
Degree of Specialisation and Differentiation of the Product

at Various Stages: The degree of change in the nature of
the product from raw material to final product at various
stages of transformation viz. final assembly and packaging
determines the nature of inventory control operation, e.g.,
if nature of product remains more or less same at various
stages of production then economies can be achieved by
keeping the right balance of stocks of semi-finished product.
Process Capability and Flexibility: Process capability is

characterised by processing time of various operations, e.g.,
the replenishment lead time (length of delay in execution
after issuance of replenishment order) directly influences
the size of inventory.
Similarly how rapidly and economically a system can

adjust its production rate, shift product facilities from
one operation to another determines the magnitude of
flexibility. Inventory policy should aim towards balancing
the production flexibility, capability, inventory levels and
customer service needs.
Production Capacity and Storage Facility: The capacity of

production system as well as the nature of storage facilities
considerably affects the inventory policy of an organisation,
e.g., capacity for heating oil production in an oil refinery is
governed in part by its through-put capacity and in part by
its distribution system. Similarly if for any product the cost
of storage facility is high then it sets a limit on the storage
capacity.
Quality requirements, shelf-life and obsolescence risks.
Nature of the Production System: It is characterised by the

number of manufacturing stages and the interrelationship
between various production operations, e.g., in Product-line
system inventory control is simpler than in Job-type system.
Similarly when there are many operational stages then the
inventory control system must provide smooth adjustment
of early operating stages and inventories to fluctuations in
finished stock.
Amount of Protection against Shortages: There is always

variation in demand and supply of the product. The protection
against such unpredictable variations can be done by means of
buffer stocks. The factors responsible for such variations are:
Changes in Size and Frequency of Orders: The amount of

product sold in a large number of orders of small size can be
operated with less inventory.
Unpredictability of Sales: If there are too much fluctuations

in demand of a product then these can be handled only by
flexible and large capacity of inventory operations.
Physical and Economic Structure of Distribution Pattern:

Longer the channel of distribution the more is the inventory
requirement. Field inventories basically improve service to
retailers by removing some of the burden of keeping stocks.
Costs Associated with Failure to Meet Demand: When there

is heavy penalty on any delay in fulfilment of any order then
inventory should be large.
Accuracy, Frequency and Detail of Demand Forecasts:

Fluctuations in stock exist when forecasts are not exact. The
responsibility of forecast errors for inventory needs should
be clearly recognised.
Protection against breakdown or other interruptions in

production.
Organisational Factors: There are certain factors which are

related to the policies, traditions and environment of any
enterprise. Some of these are:
Labour relations policies of the organisation.
Amount of capital available for stock.
Rate of return on capital available if invested elsewhere.
Other Factors: These are related to the overall business

environment of the region viz.,
Inflation.
Strike situation in communication facilities.
Wars or some other natural calamities like famines, floods,

etc.
Difference between input and output.
Limitations of Inventory Control
Efficient inventory control methods can reduce but cannot

eliminate business risk.
The objectives of better sales through improved service to

customer; reduction in inventories to reduce size of investment
and reducing cost of production by smoother production
operations are conflicting with each other.
The control of inventories is complex because of the many

functions it performs. It should be viewed as a shared
responsibility.
7.10.1 ABC ANALYSIS

Where there are a large number of items in the inventory it becomes
essential to have an efficient control over all items of stores. However,
comparatively greater care should be given to items of higher value.
The movements of certain manufacturing concerns may consist of
a small number of items representing a major portion of inventory
value and a large number of items may represent a major portion
of inventory value. In such cases, a selective approach for inventory
control should be followed.
The most modern technique for controlling the inventory is a value
item analysis popularly known as ABC analysis which attempts to
relate how the inventory value is concentrated among the individual
items.
Under this analysis, all items of stores are divided into three main
categoriesA, B and C. Category A includes the most important
items which represent about 60 to 70 per cent of the value of stores
but constitute only 10 to 15 per cent items. These items are recognised
for special attention. Category B includes lesser important items
representing an investment value of 20 to 25 per cent and constitute a
similar percentage of items of stores. Category C consists of the least
important items of stores and constitute 60 to 70 per cent of stores
items representing only a capital investment between 10 and 15 per
cent. Close attention is paid to items falling in Category A and the
best items of Category C. This classification of items into A, B and
C categories is based upon value, usage rate and criticality of items
and these variables are given due weightage in categorising the items.
The term ABC implies Always Better Control.
Steps in ABC Analysis
Though no definite procedure can be laid down for classifying the
inventories into A, B and C categories as this will depend upon a
number of factors such as nature and varieties of items, specific

requirements of the business, place of items in the production etc.
These factors vary from business to business and item to item.
However, the following procedure may be recommended:
Firstly, the quality of each material expected to be used in a given

period should be estimated.
Secondly, the money value of the items of materials so chosen

should be calculated by multiplying the quantity of each item
with the price.
Thirdly, the items should be re-arranged in the descending order

of their values irrespective of their quantities.
Fourthly, a running total of all the values and items will be

taken and then the figure so obtained should be converted into
percentages of the gross total.
Fifthly and lastly, it will be found that a small number of a first

few items may amount to a large percentage of the total value of
the items. The management, then, will have to take a decision as
to the percentage of the total value or the total number of items
which have to be covered by A, B and C categories.
ABC Analysis on Graph
Percentage of Annual Consumption Value
The two percentages, so calculated (percentage of items and

percentage of values) may be plotted on graph paper by taking the
percentage of total items on X-axis and the corresponding usage
values on Y-axis. Points then shall be marked where the curve sharply
changes its shape. This will give three segments as A, B and C. ABC
graph can be drawn as follows:
100
90
80
70
60
50
40
30
A B C
20
10
10 20 30 40 50 60 70 80 90 100
Percentage Number of Inventory Items
Figure 7.3: Graphical Representation of ABC Analysis
Advantages of ABC Analysis

The advantages of ABC analysis are as follows:
It ensures closer control on costly items in which a large amount

of capital is invested.
It helps in developing a scientific method of controlling

inventories. Clerical costs are reduced and stock is maintained
at optimum level.
It helps in achieving the main objectives of inventory control at

minimum cost. The stock turnover rate can be maintained at
comparatively higher level through scientific control of inventories.
The technique of ABC Analysis is based on the principle of management

by exception and can be used in areas other than the inventory control.
7.10.2 VED ANALYSIS
V-E-D stands for vital, essential and desirable. This type of classification
is applicable mostly in the case of spare parts. This peculiarity about
spare parts is that it does not follow a predictable demand pattern as in
the case of raw materials, for example. The result is that if we follow the
usual methods outlined earlier, we might get into difficulties when the
demand suddenly changes. For example, the older the machine gets,
the greater may be the maintenance spares required. As such, past
trends cannot throw much light on stocking policies. To get over this
difficulty, V-E-D classification is used. Here, the categories are made
in terms of the importance or criticality of the part to the operation
of the plant. If it is very vital, it is given a V classification. If it is not
so important, it is given a D classification. How such a classification is
done will purely depend upon the machinery or equipment involved
and ones own experience, ease of availability of the items etc. For
example, if the item was available off the shelf from the suppliers
showroom, there would be no purpose in categorising it as V. But, on
the other hand, a minor imported item might automatically get a V
classification. In other words, the classification is not purely in terms
of the criticality of the item for proper working of the machine but it is
a combination of several factors including price, availability etc.
For V items a reasonably large quantum of stocks might be necessary,
while for D items, no stocks need perhaps be kept. Especially if that
item also happens to be in the A or B classification, close control should
be kept on stock levels, but if it is a C item, then large quantities may
be stored. See Table below:
TABLE 7.5: VED ANALYSIS

Classes
V items
E items
D items
A items
Constant control and

regular follow-up
Moderate stocks
Nil stocks
Contd...
B items
Moderate stocks
Moderate stocks
Very low
stocks
C items
High stocks
Moderate stocks
Low stocks
7.10.3 FAST MOVING, SLOW MOVING AND NON-MOVING

ITEMS
The basis of classification in FSND (Fast moving, Slow moving,
Non-moving, Dead items) is Consumption pattern of the component.
It is mainly used to control obsolescence. This classification takes
into account the pattern of issues from stores. The three letters stand
for fast moving, slow moving and non-moving. This classification
comes in very handy when we desire to control obsolescence. Items
classified as S and N require very great attention, especially N items.
There may be several reasons why an item has got into the N category.
There might have been a change in technology or change in the
specification of a particular spare part or the item might no longer be
in use. When an FSN classification is made all such information stand
out prominently enabling managers to act on the information in the
best interests of the organisation.
Other similar types of classifications are the XYZ Classification, VED
Classification, and the HML classification of inventory. The basic
difference between the ABC Classification and the XYZ Classification
is that it is based on the inventory in stock rather than usage. Various
other classifications and their comparisons are mentioned below in
the Table 7.6.

CLASSIFICATION SYSTEMS
S.
No.
Title
Basis
Main Uses
1.
ABC (Level of
Usage)
Value of
consumption
2.
HML (High,
Medium, Low
Usage)
FSND (Fast
moving, Slow
moving, Nonmoving, Dead
items)
SDE (Scarce,
Difficult, Easy to
obtain items)
Unit price of
the material
To control raw material

components and workin-progress inventories
in the normal course of
business.
Mainly to control
purchase.
3.
4.
Consumption To control obsolescence.

pattern of the
component
Problems
faced in
procurement
Lead time analysis and

purchasing strategies.
Contd...
5.
6.
7.
8.
Golf
(Government,
Ordinary, Local,
Foreign Sources)
VED (Vital,
Essential,
Desirable)
SOS (Seasonal,
Off-seasonal)
Source of the
material
Procurement strategies.
Criticality
of the
component
Nature of
suppliers
XYZ (Value of
Stock)
Value of
items in
storage
To determine the
stocking levels of spare
parts.
Procurement/ holding
strategies for seasonal
items like agriculture
products.
To review the
inventories and their
use scheduled intervals.
Example: What are the appropriate ABC groups of inventory items?

ABC Analysis
Stock Number
Annual $ Volume
Percent of Annual $ Volume
J24
12,500
46.2
R26
9,000
33.3
L02
3,200
11.8
M12
1,550
5.8
P33
620
2.3
T72
65
0.2
S67
53
0.2
Q47
32
0.1
V20
30
0.1
= 100.0
Solution:
ABC Groups
Class
Items
Annual
Volume
Percent of $
Volume
J24, R26
21,500
79.5
L02, M12
4,750
17.6
P33, T72, S67, Q47, V20
800
2.9
= 100.0
Example: A firm has 1,000 A items (which it counts every week, i.e.,
5 days), 4,000 B items (counted every 40 days), and 8,000 C items
(counted every 100 days). How many items should be counted per
day?
Solution:
Item
Class
Quantity
Policy
Number of Items to
Count Per Day
1,000
Every 5
days
1000/5 = 200/day
4,000
Every 40
days
4000/40=100/day
8,000
Every 100
days
8000/100=80/day
Total items to count: 380/day
Fill in the blanks:

22. The ......................... classification is based on focusing efforts
where the payoff is highest, i.e., high-value; high-usage items
must be tracked carefully and continuously.
23. The basis of ......................... classification is Unit price of the
material.
24. The basis of ......................... classification is Criticality of the
component.
ABC analysis is based on Paretos Law. Paretos Law states that a

fewer items having high usage value having high investment value
should be paid more attention than a bulk of items having low
usage value and having a low investment in capital.
Visit any manufacturer of wooden tables and chair. Construct ABC

analysis of the inventory of tables and chairs.
7.11 SUMMARY
Inventory systems are predicated on whether demand is

derived from an end item or is related to the item itself. Because
independent demand is uncertain extra inventory needs to be
carried to reduce the risk of stocking out.

(raw materials or finished items or both) stocked in order to
meet the expected and unexpected demand in the future. A basic
purpose of inventory management is to control inventory by
managing the flows of materials.
Formulating inventory policy requires understanding the

inventorys role in the firm. Though inventory is an idle resource
and adds to the risk of the firm, it is almost essential to keep some
inventory in order to promote smooth and efficient running of
business.
Manufacturing inventory is typically classified into raw

materials, finished products, component parts, supplies, and
work-in-process. Independence of workstations is desirable in
intermittent processes and on assembly lines a well.
The wholesaler purchases large quantities from manufacturers

and sells small quantities to retailers. He provides the capability
to provide retail customers with assorted merchandise from
different manufacturers in smaller quantities. Expansion of
product lines has increased the width and inventory risk. Where
products are seasonal, the wholesaler has to take an inventory
position far in advance of selling.
Information on inventory is conveyed through the bill of materials.

It serves as the interface to order entry. While good business
practice indicates that companies should aim for a unified set
of information, including having just one version of every bill of
materials at a time, but many different views of bills are feasible.
Engineering drawings very often undergo changes and there

are often a multitude of model designations. The changes can be
initiated by a number of reasons including design issues, cost,
subsequent processing, etc.
The inventory record divides the future into time periods called
time buckets. Generally firms use weekly time buckets, although
other time periods could as easily be used. The inventory record
shows an items lot-size policy, lead time, and various timephased data.
Data integrity is an important prerequisite for the inventory

system. This is especially true when using a MRP system. To
reconcile inventory records and correct errors, many companies
using MRP also employ what is called cycle counting.
Although it costs money to hold inventory, but unfortunately

to replenish it. These costs are called inventory ordering costs.
Ordering costs have two components: (a) One component that is
relatively fixed, and (b) Another component that will vary.
The ABC classification is based on focusing efforts where the

payoff is highest, i.e., high-value, high-usage items must be
tracked carefully and continuously. As these items constitute only
20 per cent, the ABC analysis makes the task relatively easier.
ABC Classification: A classification based on Rupee usage

of the inventory. The high value items, i.e., the first 20% are
classified as A, the next 30% are classified as B and the last
50% are classified as C. Items of different classifications are
treated differently for control purposes.
Days of Inventory: This measure is an indication of

approximately how many days of sales can be supplied solely
from inventory.
Inventory Holding (or Carrying) Costs: It costs money to

hold inventory. Such costs are called inventory holding costs
or carrying costs. This broad category includes the costs for
storage facilities, handling, insurance, pilferage, breakage,
obsolescence, depreciation, taxes and the opportunity cost of
capital.
Inventory Holding Costs: Costs involved in holding inventory,

e.g., storage, handling, interest, breakage, pilferage, etc., are
called inventory holding (or carrying) costs.
Inventory: Inventory is any idle resource of an enterprise. The

term inventory means any stock of direct or indirect material
(raw materials or finished items or both) stocked in order to
meet an unexpected demand in the future.
Inventory Ordering Costs: Costs involved in replenishing

inventory, e.g., staffing, order placing, vendor development,
receiving and inspection, etc., are called inventory ordering
costs.
Inventory System: Inventory System is the set of policies

and controls that monitor levels of inventory and determine
what levels should be maintained, when stock should be
replenished, and how large orders should be.
Inventory Turnover Ratio: Inventory Turnover Ratio is a

measure of the ratio of companys sales to its average inventory
investment.
Set-up Costs: Set-up Costs reflect the costs involved in

obtaining the necessary materials, arranging specific equipment
set-ups, filling out the required papers, appropriately charging
time and materials, and moving out the previous stock of
materials, in making each different product.
Stock-out Costs: The costs that are incurred as the result of

running out of stock are known as stock out or shortage costs.

1.
What is inventory? Why is inventory management required in

organisations?
2.
What are commonly identified types of inventory?
3.
Describe various functions of inventory.
4. What is Bill of material? What information is included in bill of

material?
5.
What are planning or modular bill of material?
6.
What are inventory records? Explain with the help of example.
7. What are the relevant costs that management should try to

balance in deciding on the size of purchase orders? How do they
vary with order size?
8. What are ordering and carrying costs? What are their
constituents? Explain the relationship between ordering and
carrying costs.
9.
Describe ABC analysis used for inventory control.
10. Make a comparison for different classifications used for inventory

control.

Topic
Q. No.
Answers
What is Inventory?
1.
production
2.
inventory
3.
objectives
4.
Transportation (pipeline)
5.
Manufacturing
6.
bill
7.
inventory
8.
as-designed
9.
modular
10.
Pseudo bill of materials
11.
True
12.
True
13.
False
Inventory Records
14.
time buckets
Data Integrity
15.
cycle counting
16.
False
Functions of Inventory
Bill of Materials
Identification of
Inventory Items
Contd...
Dependency
Relationships
17.
end products
Inventory Costs
18.
explosion
19.
Holding (or Carrying)
20.
(d) Setup cost
21.
(b) Lead time
22.
ABC
23.
HML
24.
VED
Inventory Control

1. Section 7.2


(raw materials or finished items or both) stocked in order to meet
the expected and unexpected demand in the future.
2. Section 7.2

The various types of inventories for a manufacturing organisation

are classified as under:
(a) Raw Materials and Supplies Inventories: These consist
of raw materials, parts, sub-assemblies and supplies which
the company purchases from outside sources, namely
suppliers-dealers or manufacturers. These items are to be
purchased and kept in stock before and during production
of goods.
(b) Production Inventories: Raw materials, parts and
components which become part of the product during the
production process are called production inventories.
3. Section 7.3

The following are the important functions of inventories:

(a) Inventories gear up production.
(b) Inventories force consumption to adopt itself to the
necessities of production.
(c) Inventories activise the market.
4. Section 7.4

The bill of material structure is the arrangement of inventory

item data within the bill of materials file. Information in the bill
of materials includes:
(a) Item identities: Assignment of item identity eliminates
ambiguity and identifies levels of manufacture. It cross-
references the item master data. An item may be able to be

listed as a component more than once in a bill.
5. Section 7.4

This is used in Master Production Scheduling. This is an artificial

grouping of items in bill of materials format that expresses the
relationship of multiple product features, variants and options.
Inventory items are arranged in terms of product modules i.e.
sets of component items each of which can be planned as a group.
6. Section 7.6

An efficient inventory control necessitates maintenance of

proper inventory records because various inventory records
contain information to meet the needs of purchasing, production,
sales and financial staff. Any typical information regarding any
particular item of inventory may be had at hand from such
records.
7. Section 7.9

Large holdings of inventory also cause long cycle times which

may not be desirable as well. What are the costs identified with
inventory? The following costs are generally associated with
inventories. Holding (or carrying) costs, cost of ordering, set up
costs, shortage or stock out costs.
8. Section 7.9

Ordering costs or procurement costs are those costs which

are incurred on procurement (buying) process. Ordering costs
include all the annual expenditure of the purchase section or
department. Small items should be ordered in significantly large
quantities to avoid unreasonable expense in preparing large
numbers of small orders.
9. Section 7.10

The most modern technique for controlling the inventory is

a value item analysis popularly known as ABC analysis which
attempts to relate how the inventory value is concentrated among
the individual items. Under this analysis, all items of stores
are divided into three main categoriesA, B and C. Category A
includes the most important items which represent about 60 to
70 per cent of the value of stores but constitute only 10 to 15 per
cent items. These items are recognised for special attention.
10. Section 7.10

The basic difference between the ABC Classification and the

XYZ Classification is that it is based on the inventory in stock
rather than usage. (Refer Table 7.6).

SUGGESTED READINGS

Buffa and Sarin, Modern Production/Operations Management;



Kachru, Upendra, Strategic Management Concepts and Cases,

Excel Books, 2005

E-REFERENCES
http://www.referenceforbusiness.com/encyclopedia/Int-Jun/
Inventory-Control-Systems.html
http://www.investopedia.com/terms/i/inventory-management.
asp
http://www.apics-redwood.org/articles/art0302BCW.htm
INVENTORY MODELS
CONTENTS

8.1
Introduction
8.2
Inventory Models
8.2.1
Single Period Models
8.2.2
Multiple Period Inventory Models
8.2.3
Fixed-order Quantity Model
8.2.4 Economic Batch Quantity (EBQ) or Economic

Production Quantity Model
8.3
8.4 Economic Order Quantity Model with Shortages
8.5
Sensitivity Analysis
Fixed Time Period Models
8.5.1
Fixed Time Period Model with Safety Stock
8.6
Summary
8.7
8.8
Answers and Hints
8.9
IMPLEMENTING INVENTORY MODELS AT KEVINCARE

Started as a single product company, KevinCare*, today offers
quality hair care, skin care and personal care products, born out
of a keen understanding of consumer needs. They built in India a
consciousness to use branded cosmetics made from natural herbs.
Products like Rachna, FairSkin and Stile are already established
brands in the Indian cosmetic market. Kevincare popularized the
concept of shampoo sachets, which restructured the packaging
traits, in 1983 with its Lokshaakti brand of shampoos.
Technologically, the company has managed to tally with the
international standards relying on the key focus area supply
chain management, which is necessary in a FMCG company for
smooth management. KevinCare has its offices in Gwalior, Patna,
New Delhi, Mumbai and Kolkata.
KevinCare has touched a turnover of over 5000 million INR in
2006-2007. The company has a supply chain network of 3 factories
with Bonded Stock Rooms (BSR) attached for despatch to the
depots and 35 depots for servicing distributors. Goods move from
the factory to the BSR. BSR despatches stocks to mother CFAs
(depot). Other depots receive stocks from the mother depot and
sell them to distributors.
However, the companys profits were dipping. The company was
carrying large inventories at the BSR and depots. They had no
track of damaged stocks across the chain and losing money due
to this. The inventory accuracy at stocking points including both
BSRs and depots was doubtful. These problems, put together, were
seriously impacting the bottom line and were a significant burden
to the company.
In a competitive atmosphere it has become imperative to have
the latest technology to manage our network, said Mr. Vishnu
Sharma, Vice President, IT Systems at KevinCare, It is a challenge
to change the entire system, which was based on traditional
infrastructure, but we have to do it.
The inventory-related issues at BSRs and depots included the high
levels of inventory holding as a proportion of sales and poor practices
employed for track goods in the warehouse. The proportion of
fast and slow moving stocks to the total inventory was unhealthy.
There were just rudimentary linkages of factory dispatches to
BSR, therefore they found it difficult to align with patterns of BSR
dispatches to depots. Furthermore, management doubted the
accuracy of inventory records especially of fast selling lines.
Names have been changed due to confidentiality requirements.
Contd...
INVENTORY MODELS 285
We looked at the problem and came to the conclusion that

inventory levels were very high across the distribution chain
on account of mismatch between sales and despatch forecasts,
which were not in line with actual primary/secondary sales, said
Mr. Sharma, Stocking across all points in the distribution chain
was driven by a push-oriented system that did not have provisions
to use scientific inventory models. Actual safety stocks maintained
at depots were significantly higher than necessary.
It also became apparent that the organization did not have a
clear policy on periodic reconciliation of physical stock with book
records. Inaccuracies grew over time, compounded with process
failure on accounting for dead stocks. Dead stocks were allowed to
accumulate in the system mainly because there was an absence of
visibility into inventory details across stocking points.
The solutions were simple. Bin card system was implemented
for each rack at the CFAs and the delivery staff was trained in
relevant bind card maintenance practices. A process to regularly
reconcile physical and book stocks using the cycle-count process
was mandated. A solution was identified and implemented for
calculating safety stock levels periodic and dynamic based on
updated sales data, and facilitating communication of closing
stock data on a weekly basis from BSR and depots to the logistics
department.
The results were dramatic. The organization achieved an inventory
record accuracy (book stocks correctly reflecting physical stocks)
of 95 percent within 2 months. Stock levels were reduced from
8.2 weeks to 5.5 weeks at the BSR; and from 6.5 weeks to 4 weeks at
the depots. Better management of damaged and un-saleable stocks
raised the sales realization on salvage and sale of damaged stocks
by nearly 80 percent.

Learn about various inventory models like single period
models, multiple period models, fixed-order quantity models
and economic batch quantity models
Understand the concept of sensitivity analysis
Learn about economic order quantity model with shortages

Discuss fixed time period models and fixed time period
model with safety stock
8.1 INTRODUCTION
In this chapter, we will study about different inventory models which
include single period models, multiple period inventory models, fixed
order quantity model and economic batch quantity model. Also we
will study about sensitivity analysis in detail. We will discuss about
economic order quantity model with shortages along with some
numerical examples on the same. Also, at the end of the chapter we
will study about fixed time period models and its safety stock.
An inventory policy will answer the questions of interest and specify
the order quantity and its timing in order to minimise cost. The policy
will differ depending on
Whether shortages are allowed (and so customers will wait till

the next order arrives a so-called backorder model)
Whether all demand is satisfied immediately.
8.2 INVENTORY MODELS

Inventory models seek to optimise the costs associated with investing
in an idle resource. There are single period and multiple period
inventory models. We will begin with single period inventory models.
Single-period inventory models are useful for a wide variety of service
and manufacturing applications. Multiple Period Inventory Models
(systems) are designed to ensure that an item will be available on an
ongoing basis throughout the year.
In a simple inventory model we assume:
Supply: The ordered items arrive instantaneously
We do not allow any shortages, i.e. we do not take any backorders,

and the sale is lost
Demand: Constant and known
There is a constant cost for each item we obtain from the supplier
The quantity we order is always going to be the same. In this

model noted that orders only need to be placed when inventory
falls to zero. That is, the reorder level is 0; we only need to

calculate the quantity we need to order.
8.2.1 SINGLE PERIOD MODELS
This is a special case of periodic inventory system, as opposed to a
perpetual inventory system. Consider the problem that a florist
stationed outside a 5-Star hotel has. Every morning the wholesalers
truck comes to him and he has to decide how many flowers to buy. If
he does not have enough flowers in the stand, some customers will
not be able to purchase flowers and the florist will lose the profit
associated with these sales. On the other hand, if he stocks too many
flowers he will not be able to sell them tomorrow as they will spoil. He
will have paid for flowers, lowering profit for the day.
Actually, this is a very common type of problem for all products that
are perishable or have very low shelf lives. This includes both goods
as well as services. A simple way to think about this is to consider how
much risk we are willing to take for running out of inventory.
The classical case illustrated in most texts is the newspaper sellers
dilemma. Lets take the example where the newspaper vendor has
collected data over a few months that show each Sunday, on an average,
100 papers were sold with a standard deviation of 10 papers. With this
data it is possible for our newspaper vendor to state a service rate
that he feels is acceptable to him. For example, the newspaper vendor
might want to be 90 percent sure of not running out of newspapers
each Sunday.
If we assume that the distribution is normal and the newspaper vendor
stocked exactly 100 papers each Sunday morning, the risk of stock
running out would be 50 percent. The demand would be expected
to be less than 100 newspapers 50 percent of the time, and greater
than 100 the other 50 percent. To be 90 percent sure of not stocking
out, he needs to carry a few more papers. From the standard normal
distribution, we know that we need to have additional papers to
cover 1.282 standard deviations, in order to ensure that the newspaper
vendor is 90 percent sure of not stocking out.
A quick way to find the exact number of standard deviations needed
for a given probability of stocking out is provided by Microsoft Excel.
Press the insert and you will find functions. Click on function and
select the category statistical. You can then use the NORMSINV
(probability) function to get the answer. NORMSINV returns the
inverse of the standard normal cumulative distribution. In this
case, (NORMSINV (.90) = 1.281552. This means that the number
extra newspapers required by the vendor would be 1.281552 10 =
12.81552, or 13 papers. This result is more accurate than what we can
get from the tables and is sometimes very useful.
If we know the potential profit and loss associated with stocking
either too many or too few papers on the stand, we can calculate the
optimal stocking level using marginal analysis. The optimal stocking

level occurs at the point where the expected benefits derived form
carrying the next unit are less than the expected costs for that unit.
This can mathematically be expressed as is given below:
If Co = Cost per unit of demand overestimated, and Cu = Cost per unit
of demand overestimated and the probability that the unit will be sold
is P; the expected marginal cost equation can be represented as:
P (Co) < (1 P)Cu
Here (1 P) is the probability of the newspaper not being sold. Solving
for P, we obtain
P < [Cu/(Co + Cu)]
This equation states that we should continue to increase the size of
the order so long as the probability of selling what we order is equal
to or less than the Ratio Cu/(Co + Cu).
Single-period inventory models are useful for a wide variety of service
and manufacturing applications. This mode is very useful and is used
for many service sector problems, such as in yield analysis.
8.2.2 MULTIPLE PERIOD INVENTORY MODELS
Multi-period inventory systems are designed to ensure that an item
will be available on an ongoing basis throughout the year. There
are two general types of systems and these inventory systems can
be distinguished on the basis of the ordering criteria. The models of
these two systems are:
Fixed-order Quantity Models (also called the Economic Order

Quantity models), and
Fixed-time Period Models (also referred to as the Periodic System

or P-models).
The basic difference between the two systems is that the fixedorder quantity models are event triggered and fixed time period
models are time triggered. In other words, at an identified level
of the stock the fixed-order quantity model initiates an order. This
event may take place at any time, depending on the demand for the
items considered. In contrast, the fixed time period models review the
stocks at time intervals that are fixed and orders are placed at the end
of predetermined time periods. In these models, only the passage of
time triggers action.
Table 8.1 makes a comparison of the two systems and brings out the
significant differences.
The models that emanate from this system are for perpetual
systems that require continual monitoring of inventory. Every time
a withdrawal from inventory or an addition to inventory is made,
records must be updated.
Generally, the Fixed-order Quantity models are favoured when:
Items are more expensive items because average inventory is

lower.
Items are critical e.g. repair parts, because there is closer

monitoring and therefore quicker response to potential stock out.
TABLE 8.1: FIXED-ORDER QUANTITY AND FIXEDTIME PERIOD DIFFERENCES

Feature
Fixed-order Quantity
Model
Order quantity The same amount
ordered each time
Fixed-time Period
Model
Quantity varies each
time order is placed
When to place
order
Reorder when the

review period arrives
Record
keeping
Size of
inventory
Time to
maintain
Type of items
Reorder point when

inventory position dips to
a predetermined level
Each time a withdrawal
or addition is made
Counted only at review

period.
Less than fixed-time

Larger than fixedperiod model
order quantity model
Higher due to perpetual
record keeping
Higher-priced, critical, or
important items.
The models that emanate from this are similar to batch processing
systems, counting takes place only at the review period. The Fixedtime Period models require a larger average inventory because it
must also protect against stock out during the review period; while
the fixed-order quantity mode has no review period.
These differences and the nature of operations tend to influence the
choice of the inventory system that is more appropriate.
Visit any manufacturing firm in your area. Observe whether it has

single period model or multiple period inventory models. Prepare
a short report on it.
8.2.3 FIXED-ORDER QUANTITY MODEL
In this section we will consider Fixed-order Quantity i.e. inventory
models in which demand is assumed to be fixed and completely
predetermined. The heart of inventory analysis resides in the
identification of relevant costs. The basic approach to determining
fixed order sizes are the Economic Order Quantity (EOQ) models.
The basic EOQ model is concerned primarily with the cost of ordering
and the cost of holding inventory.
A Fixed-order Quantity system is shown in Figure 8.1. The notations

that are used in the models for this system are given below:
D Annual demand
v Unit purchase cost or unit cost of production (`/unit)
A Ordering or Set-up cost (`/year)
r Holding cost per ` per year (`/`/year) (Inventory carrying charges
Factor)
b Shortage cost per ` short per unit time (`/`/year)
Q Order quantity (to be determined)
Waiting for demand
Demand occurs, units withdrawn

from inventory from inventory or
backorder
No
Is position Reorder
point?
Yes
Issue an order for
exactly Q units
Figure 8.1: Fixed Order Quantity System

The basic assumptions in the model are as follows:
The rate of demand for the item is deterministic and is a constant

D units per annum independent of time.
Production rate is infinite, i.e. production is instantaneous.
Shortages are not allowed.
Lead time is zero or constant and it is independent of both

demand as well as the quantity ordered.
The entire quantity is delivered as a single package (or produced

in a single run).
The objective of the model is to minimise the average annual variable

costs. And it provides a solution to the problem of determining when
an order should be placed and how much should be ordered. The
schematic representation of the EOQ Model is given in figure. It
shows the inventory level vs. time relationship.
Inventory Level Q
Time
Figure 8.2: Schematic Representation of the EOQ Model

In developing the EOQ model, we will attempt to minimise total
annual costs by varying the order quantity, or lot size. From the figure
it is obvious that since the inventory is consumed at uniform rate and
since maximum inventory level is Q, the average inventory will be
Q/2.
Hence, average Investment in Inventory will be = Q v/2
And the Average Inventory Holding Cost will be = (Q v r)/2
Hence the total annual variable cost (TC) = Ordering cost + Inventory
Holding Cost.
Therefore,
TC = (A D)/Q + (Q v r)/2
If QEOQ is the order quantity at which the total cost is minimum, then
mathematically the relationship can be expressed as:
Q = QEOQ = (2 A D/r v),
This equation is known as the EOQ formula. From this formula, the
optimal time between orders can be derived.
TEOQ = D/Q = (1/D) (2 A D/r v)
The minimum Total Annual Cost (TC) of holding inventory is given
by the formula:
TC = 2 A D r v
Ordering cost and holding cost can be imagined as two children on a
see saw. When one goes up, the other goes down, and vice versa. This
way out of this dilemma is to combine the two costs as total annual
variable costs and worry only about minimising that cost.
Figure 8.3 shows the relationship between order quantity and
(a) Annual Ordering Cost; (b) Inventory Holding Cost; and (c) Total
Annual Cost. You can see that there is just one point at which total
costs are minimised.
C)
C+O
t (IC
l cos
Tota
Total cost/year
ICC
Ordering co
st
Q
EOQ
Order Quantity
Note: Total material cost is same for all order quantities
Figure 8.3: Total Annual Variable Costs

EOQ Model with Lead Time
In the above discussion we considered that lead time is zero. However,
if lead time is constant the above results can be used without any
modification.
Inventory
Level
Q
Reorder
Level, Ro
T
Time
Figure 8.4: EOQ with a Fixed Lead Time Reorder Level

If lead time is say constant and equal to L (in weeks). Then during
lead time, the consumption is L D units. This means order will have
to be released for quantity QEOQ, the new order will arrive exactly
after time period L at which time inventory level will be zero and the
system will repeat it self.
The inventory level at which the order is released is known as reorder
level is shown in Figure 8.4. It can be mathematically expressed by
the equation:
Reorder Level = Ro = L D
Let us work out an example to understand the EOQ Model and all that
has been said earlier in this section on fixed order quantity policies.
Example: A company, for one of its class A items, placed 8 orders each
for a lot of 150 numbers, in a year. Given that the ordering cost is `
5,400.00, the inventory holding cost is 40 percent, and the cost per unit
is ` 40.00. Find out if the company is making a loss in not using the
EOQ Model for order quantity policies.
What are your recommendations for ordering the item in the future?
And what should be the reorder level, if the lead time to deliver the
item is 6 months?
D = Annual demand = 8 150 = 1200 units
v = Unit purchase cost = ` 40.00
A = Ordering Cost = ` 5400.00
r = Holding Cost = 40%
Using the Economic Order Equation:
QEOQ = (2 A D/rv) =
(2 5400 1200)/(0.40 40) = 900 units.
Minimum Total Annual Cost (TC) = 2ADrv
= 2540012000.4040
= ` 14,400.00
The Total annual Cost under the present system
= ` (1200 5400/150 + 0.40 40 150/2)
= ` (43,800 + 1200) = ` 45,000.00
The loss to the company = ` 45,000 ` 14,400 = ` 30,600.00
Reorder Level = Ro = L D = (6/12) 1200 = 600 units
The company should place orders for economic lot sizes of 900 units
in each order. It should have a reorder level at 600 units.
The given below are the basic assumptions of EOQ model:
Knowing the ordering cost and the cost of holding inventory
Instant replenishment of inventory (entire shipment comes in at

one time)
The item is not allowed to experience shortages (at least in the

simple EOQ relationship)
Expressions for the ordering cost and the holding cost as a

function of the order quantity are required
The average inventory level with constant demand and

instantaneous replenishment will be one-half the order quantity
The holding cost is assumed to be directly proportional to the

average inventory level
The ordering cost is assumed to be constant for each order
The demand rate is level and constant from one time period to
the next
The number of orders per year will be the annual demand divided
by the order quantity.
EOQ Model with Non-instantaneous Replenishment Scenario

The basic EOQ model assumes instantaneous delivery; however, many
times an organisation produces items to be used in the assembly of
products. In this case the organisation is both a producer and user.
Orders for items may be replenished (non-instantaneously) over time
rather than instantaneously.
Example: Consider the situation where a toy manufacturer makes
dump trucks.
The manufacturer also produces (production rate) the rubber

wheels that are used in the assembly of the dump trucks. Lets
consider 500 per day for example.
In this case the ordering costs associated with an order for rubber
wheels would be the cost associated with the setup and delivery
of the rubber wheels to the dump truck assembly area.
The manufacturer makes the dump trucks at constant rate per

day (production rate).
Figure 8.5
As you see in this figure, the inventory depends on the production
rate and the usage rate.
How much to order depends on setup costs and carrying costs. The
Economic Order Quantity (EOQ) is the order size that minimises
the total cost of inventory. Sometimes this is referred to as the
Economic Run Quantity because it is dependent on the cumulative

manufacturing production quantity.
Total cost = Carrying costs + Setup costs.
A schematic of the non-instantaneous considerations is shown below.
Figure 8.6
Formula for the Economic Run Quantity
Economic Run Quantity = Q0 =

where
2DS
p
H
p- u
p = production rate
u = usage rate
S = ordering cost
H = carrying cost and
D = annual demand
Maximum Inventory = Imax =
Average Inventory =
Q0
(p u)
p
I max
2
Minimum Total Cost = TCmin = Carrying cost + Setup cost

=
Cycle Time =
Run Time =
I max
D
(H) +
(S)
2
Q0
Q0
u
Q0
p
Example: A toy manufacturer uses 48,000 rubber wheels per year for
its popular dump truck series. The firm makes its own wheels, which
it can produce at a rate of 800 per day. The toy trucks are assembled
uniformly over the entire year. Carrying cost is $1 per wheel per year.
Setup cost for a production run of wheels is $45. The firm operates
240 days per year. Determine the optimal run size.
Non-instantaneous Example
p = production or delivery rate = 800 wheels per day
D = annual demand = 48,000 wheels
u = usage rate =
48,000
= 200 wheels per day
240
S = ordering cost = $45

H = carrying cost = $1 per wheel per year
Economic Run Quantity = Q0 =

2(48,000)45)
800
1
800 - 200
= 2,400 wheels
Practical Considerations in the Application of EOQ

Order Quantity
To enable quick calculation of EOQ, ready made reference tables are
available where the EOQ for various consumption value procurement
costs and inventory carrying costs have been worked out.
Some of the usual objections that one hears about EOQ are as follows:
Often the inventory holding cost and the ordering cost cannot be
identified accurately and sometimes cannot be even identified
properly.
The EOQ calculated is often an inconvenient number.
The use of EOQ usually leads to orders at random points in time,

so that suppliers receive an irregular stream of orders.
EOQ applied without due regard to possibility of failing demand

can lead to a high value obsolecent inventory.
EOQ may not be applicable when the requirements are irregular,

or where there is an impending price rise.
This is where the human judgement comes in. Techniques in

management do not always give results which are 100% correct.
Every decision will depend upon the environmental conditions, i.e.,
those relating technology, imports and exports, consumer tastes and
myriads of other items, all of which play a very vital role in taking
decision. As such, every decision is to be taken on the merits of the
problems and the EOQ formula should not be treated as gospel.
Limitations of EOQ
Ordering to the nearest trade quantities or packing. Say instead

of ordering 11 dozens, the order may be for one gross.
Modifying an order quantity to get a better freight may more

than compensate the extra inventory carrying cost.
Simplification of routine. Instead of ordering 14 times a year, one

may order once a month.
In the case of perishable, or bulky items with diminishing

consumption or for items whose market prices are likely to
decline, it may be better to order less than the theoretically
worked out order quantities.
Seasonal supply factors, market conditions, availability of transport

facilities etc., may indicate larger or smaller purchase quantities.
In these situations, judgement should be given more weight.
Liberal discounts or concessional freight rates may suggest

larger quantities. The pros and cons of such purchase should
be weighed carefully before a decision is taken.
EOQ and Quantity Discounts

At EOQ both ordering cost and inventory carrying cost are at optimum.
However we get discounts if we buy more quantities than EOQ. One
would ask the question as to whether to go in for the discounts and
buy more than EOQ or do not accept the discounts.
Let us look at the case in detail.
There are two important costs while we buy:
Cost of Materials: Cost of materials go down when we get

discounts. This will result in saving.
Cost of Ordering: They are:
Ordering cost: While we get discounts we buy more

quantities, i.e., quantity/order is more and subsequently
number of orders/year are less. If number of orders are less
then we get a saving in ordering cost.
Inventory cost: Contrary to it when number of orders are less

and quantity ordered is more average inventory is more.
Subsequently inventory carrying cost increases so we have
the following phenomenon while taking discounts.
Saving in discounts + Saving in ordering cost Loss in Inventory

carrying cost
8.2.4 ECONOMIC BATCH QUANTITY (EBQ) OR ECONOMIC
PRODUCTION QUANTITY MODEL
The Economic Batch Quantity model, or production lot-size model,
is similar to the EOQ model in that we are attempting to calculate an
optimum for the batch quantity we have to produce. Economic Batch

Quantity model is an extension of the Economic Order Quantity model.
The EPQ model was developed by E.W. Taft in 1918. The difference
being that the EPQ model assumes orders are received incrementally
during the production process. The function of this model is to balance
the inventory holding cost and the average fixed ordering cost. In
some literature Economic Manufacturing Quantity (EMQ) model is
used for Economic Production Quantity (EPQ) model. Similar to the
EOQ model, EPQ is a single product lot scheduling method. A multi
product extension to these models is called Product Cycling Problem.
In working with this EBQ model, we also make use of a number of
assumptions.
These principal assumptions are:
The demand is known and constant within a certain period of

time
The unit cost of the inventory item is constant
The annual holding-cost per unit is constant
The setup-cost per batch is constant
The production time is known and constant
We are dealing with one kind of product
There is no interaction with other products
The aspect of time does not play a role, just the setup time does
The setup cost is constant and does not act upon the batch
quantity
The formula used for EPQ is given below:

EPQ =
2KD
P
F
P- D
Variables:
K = setup cost
D = demand rate
F = holding cost
T = cycle length
P = production rate
x=
D
P
The formula for holding cost per unit time is:

1
FD (1 x) T
2
Fill in the blanks:

1. Inventory models seek to ........................ the costs associated
with investing in an idle resource.
2. ...................... inventory models are useful for a wide variety of
service and manufacturing applications.
3. ................... Inventory Models (systems) are designed to ensure
that an item will be available on an ongoing basis throughout
the year.
4. The models of multiple period inventory systems are ................
Quantity Models and ...................... Period Models.
5. The objective of the Fixed order quantity model is to
...................... the average annual variable costs.
6. The Economic Order Quantity (EOQ) is the order size that
minimises the total ...................... of inventory.
7. The Economic Batch Quantity model was developed by
...................... in 1918.
8. Which of the following are basic assumptions of fixed order
quantity system?
(a) The rate of demand for the item is deterministic and is a
constant D units per annum independent of time.
(b) Production rate is infinite, i.e. production is instantaneous.
(c) Shortages are not allowed.
(d) Lead time is zero or constant and it is independent of
both demand as well as the quantity ordered.
9. Most inventory models are made based on:
(b) Profit maximisation
(c) Minimising setup time
(d) Minimising lead time
Study the Economic Batch Quantity (EBQ) or Economic Production

Quantity Model of any manufacturing firm located in your area.
Prepare a short presentation on it.
8.3 SENSITIVITY ANALYSIS

In the models that we have discussed in this section, we have assumed
as if the various parameters are used such as annual demand D,
inventory carrying charges factor H ordering or set-up cost S,

are known. In real life situations, the value that is used is often an
estimate which may be different than real value due to a number of
causes. Due to practical reasons, it is important to test the results of
the EOQ model and find how sensitive the results are to the changes
in various parameters.
The sensitivity can be explored in various ways. Let us assume that
the estimated values of parameters differ from true values by some
factor X. The average inventory will be XQ*Q/2. The estimated
holding cost is XH *H and the estimated ordering cost is XS*HQ/2.
The estimated purchasing cost is XP*DP. Then the Q Sensitivity of D,
S, & H can be given as follows:
Q* = (2DS/H)
Q* = (2DS XDXS )/ HXH = Q* (XDXS/ XH)
(Q Q*)/ Q* = {Q* [ (XDXS/ XH) ] - Q*} / Q*
= [ (XDXS/ XH)] 1 = Order Quantity Error Fraction
Similarly, the sensitivity of the total variable costs can be determined.
TVC(Q) sensitivity OF D, S, and H is given by:
[(TVC(Q) TVC(Q*)/ TVC(Q*)] =
[ (XDXSXH) ] 1 = TVC Error Fraction
And TVC(Q) sensitivity of Q is given by:
[(TVC(Q) TVC(Q*))/ TVC(Q*)] = (XQ 1)2 / 2 XQ
TVC(Q)/ TVC(Q*) = [Q*/ Q + Q/ Q*]
EOQ model is not so sensitive to the errors on the higher or lower side
of demand estimation. To examine the sensitivity of the costs to the
errors in estimation of parameters let us consider an example where
the estimates of S, H and P are correct, i.e. they all correspond
to the true value. This means, XQ = XH = XS = 1. However, the
estimate of demand turns out to be 50 percent higher than the true
demand, i.e. XD = 1.5.
Now putting these values into the equation, we can find the ratio of
actual cost to true cost for this case.
(TVC(Q) TVC(Q*)/ TVC(Q*) = ( 1.5*1*1) 1 = 1.22 1 = 0.22
If the same example is considered, but we assume that demand is 50
percent on the lower side of true demand then, XD = 0.5. We already
know that XQ = XH = XS = 1 as before. Therefore, we get,
(TVC(Q) TVC(Q*)/ TVC(Q*) = ( 0.5*1*1) 1 = 0.71 1 = 0.29
The results show that if the estimate of demand is 50% on the high
side of the true value of demand, the increase in cost over the true
optimal cost is only 22.0 percent; and if estimated demand is 50 percent
on the lower side, then the increase in cost over true optimal cost
will be 29.00 percent.
Source: Adapted from Adam and Ebert, Production and Operations Management, Tata McGraw
Hill, 2006
Figure 8.7: Inventory Sensitivity

Since XD, XS and XH appear in ratio in Q*, any error in the numerator
or denominator of the same magnitude and direction will cancel each
other out, whereas errors in the opposite direction will be magnified.
Therefore, it will be advantageous to overestimate XH, if XD and
XS are likely to be overestimated and underestimate XH if XD and
XS are likely to be underestimated.
We can see from the mathematical derivations of the EOQ equations
that:
For similar magnitudes, overestimation is preferable to

underestimation of parameters.
If XD and XS are likely to be overestimated, then it is better to

overestimate XS since errors cancel out when they are in same
direction.
In general, the total cost is not very sensitive to errors in

estimation of parameters.

10. In real life situations, the value that is used is often an estimate
which may be different than real value due to a number of
causes. Due to practical reasons, it is important to test the
results of the EOQ model and find how sensitive the results
are to the changes in various parameters.
11. We can see from the mathematical derivations of the EOQ
equations that for similar magnitudes, overestimation is
preferable to underestimation of parameters.
How is the model of inventory used by a manufacturer different

from a retailer?.
CONOMIC ORDER QUANTITY MODEL

E
WITH SHORTAGES
8.4
This model considers the situation when back orders are allowed, i.e.
stock-out is allowed for some period in the system. In case of shortage,
demand is assumed to reflect as a back-order and is not lost. The
model assumes three costs, unlike the earlier model that assumed
only the first two costs shown below:
Ordering or set-up cost,
Inventory holding cost, and
Shortage or stock-out cost.
The shortage cost is denoted by b rupees per ` short per unit time
i.e. `/`/Year.
The total average annual cost (TC) can be written as,
TC = Ordering cost + Inventory holding cost + Cost of back orders
Assuming order quantity to be Q, then the number of orders per
annum equals D/Q And hence ordering cost equals A (D/Q).
Total Annual Cost (with backorders permitted)
= [(Q S)2 v r/2Q] + A (D/Q) + S x2 b/2 QEOQ
T1
T1
T2
Time
T1
T
T2
T2
Figure 8.8: EOQ Model with Shortages

The average inventory and stock out can be derived using Figure 8.7.
The average inventory during period T1 will be I (as consumption
is at uniform rate) and the inventory level during T2 us negative and
hence in practice on hand inventory will be zero.
Thus average inventory through period T will be
Average Inventory = (Q S)2/2Q
Average Inventory Holding Cost = [(Q S)2/2Q] v r
And,
QEOQ = (2 A D/r v) ((r v + b)/b)
If shortages are not allowed, then b =

The above equation will be reduced to: Q = QEOQ = 2 A D/r v
This is the same equation that we had derived earlier, i.e. optimal
order quantity for the EOQ model.
Example: Let us try another exercise to demonstrate the EOQ model.
The demand for an item is equal to 600 units per year. The per unit cost
of the item is ` 50 and the cost of placing an order is ` 5. The inventory
carrying cost is 20% of inventory per annum and the cost of shortage
is ` 1 per unit per month. Find the optimum ordering quantity if stock
outs are permitted. If stock outs are not permitted what would be the
loss to the company?
D = Annual demand = 600 units
v = Unit purchase cost = ` 50.00
A = Ordering Cost = ` 5.00 per order
r = Holding Cost = 20% per annum
b = Shortage Cost = ` 12 per annum
QEOQ = (2 A D/ r v) ((r v + b)/ b)
= (2 5 600/0.20 50) ((0.20 50 + 12)/12)
= 600 1.833 = 33.16 units = say 33 units
Max. Number of backorders = S = QEOQ (r v/(r v + b)

= 33 (0.20 50/((0.20 50) +12)
= 15 units
Total Annual Cost (with backorders permitted)
= [(Q S)2 v r /2Q] + A (D/Q) + Sx2 b/2 QEOQ
= [(33 15)2 (0.20 50)/(2 33)] + (600 5)/33 + 15 15 12/(2
33)
= ` 181
If stock outs and backorders are not permitted, the economic order
quantity is:
Q = QEOQ = 2 A D/r v
= 2 600 5/(0.20 50) = 24.5 units
TC = Ordering Cost + Ave. Holding Cost

= [D A/QEOQ] + QEOQ r v/2
= [600 5/ 24.5)] + 24.5 0.20 50/2 = ` 254.00
Therefore, additional cost when backordering is not allowed

= 254.00 181.00 = ` 73.00
Example:
(a) For a given item there is a constant demand rate. Yearly demand
is 6,000 units. The price of the item is ` 60/- per unit. The ordering
cost is ` 150/- and inventory carrying cost is 20%. What is the
optimal ordering policy?
(b) The manufacturer of the item offers a 1% discount if 1200 units
are ordered. Should the discounts be taken?
Solution:
Optimal ordering =

Where
2AU
CI
A = 6000 units
C = ` 60/-
U = ` 150/-
I = 20%
EOQ =
2 6000 150
60 0.2
= 387.29
= 388
6000
= 15.46 = 16
388
As we have seen while we buy at quantities of 1200 units more than
EOQ quantity, i.e., units we have following situation.
No. of orders =
(a) No. of orders are less, ordering costs are less.

(b) Average Inventory is more, so inventory carrying costs are more.
(c) Saving in special discounts.
Saving in ordering cost + Saving in discount Loss in inventory
carrying cost.
(a) Saving in ordering costs
6000 6000
=
150
388 1200

= (15.46 5) 150
= 1569
(b) Saving in discount

6000 60 1
=
= 3600
100
(c) Loss in inventory carrying costs

20
1200 388
=
60
2
100
2

= (600 194) 60
= 4872
20
100
i.e.,
Saving in order cost + saving in discount Loss in I.C.C.
1569 + 3600 4872
Since we are gaining ` 297 it is better to take discounts and buy in
quantities of 1200 units instead of 388 units.

12. The Economic order quantity model with shortages assumes
three costs, which are:
(a) Ordering or set-up cost
(b) Inventory holding cost
(c) Shortage or stock-out cost
Hindustan Lever is a manufacturer of the Surf detergent powder.

A 100-g pack of its detergent powder is priced at ` 30 for its
suppliers. One of its suppliers purchases 16,000 packs per annum.
The supplier incurs an ordering cost of ` 350.00 per order and has
a carrying cost of 12% of the inventory value. Hindustan Lever
offers discounts for the following ranges of bulk purchases to its
suppliers: 0.5% for 3,0006,999 units, 0.75% for 70009,999 units and
1% for 10,000 and more units. Which discount option should the
supplier choose? What is the EOQ in this case?
8.5 FIXED TIME PERIOD MODELS

In many retail merchandising systems, a fixed-time period system is
used. Sales people make routine visits to customers and take orders
for their complete line of products. Inventory, therefore, is counted
only at particular times, such as every week or every month or when
the suppliers visit is due. Sometimes, this is also resorted to in order
to combine orders to save transportation costs.
Fixed-time period models generate order quantities that vary from
period to period, depending on the usage rates. A Fixed-period
Quantity system is shown in Figure 8.8. These generally require a

higher level of safety stock than fixed-order quantity systems, which
require continual tracking of inventory on hand and replenishing
stock when the reorder point is reached. In contrast, the standard
fixed-time period models assume that inventory is counted only at the
time specified for review.
The risk associated with this system is that it is possible that some
large demand will draw the stock down to zero right after an order
is placed. There is no remedy for such a situation and the condition
could go unnoticed until the next review period. Even after placement
of new orders, the item may still take time to arrive.
This highlights the high probability of being out of stock throughout
the entire review period and order lead time. Safety stock, therefore,
is an extremely important requirement for these systems and is used
to effectively protect against the high probability of stock outs.
8.5.1 FIXED TIME PERIOD MODEL WITH SAFETY STOCK
Continuing our discussions on Fixed-time period models, it is essential
that safety stock is a consideration in model building. We will discuss
below a fixed-time period system with safety stock.
Figure 8.9: Fixed-time Period Quantity System

The notations that will be used in the model are given below:
q
= Quantity to be ordered
= Number of days between reviews
=
Lead time in days (time between placing an order and
receiving it)
= Forecast average daily demand
z =
Number of standard deviations for a specified service
probability
sT + L = Standard deviation of demand over the review and lead time
I
= Current inventory level (includes items on order)
Reorders are placed at the time of review T, and the safety stock
has to be a function of the level of service desired and lead time.
Accordingly, the quantity that must be reordered is:
Safety Stock = z sT + L
Figure 8.9 shows a fixed-time period system with a review cycle of
T and constant lead time of L. Demand is assumed to be normally
distributed and randomly distributed about a mean d and the
quantity to order q, is given by the relationship:
Order Quantity = Average demand over the vulnerable period +
safety stock Inventory currently on hand
Or
q = d (T + L) + z sT + L I
Place
order
Inventory
on hand
(units)
Safety
stock
Place
order
Stock out
Figure 8.10: Fixed-time Period Model with Safety Stock

In this model, demand (d) can be forecast and revised each review
period if desired or the yearly average may be used if appropriate.
The value of z is dependent on the probability of stocking out and can
be found using the Excel NORMSINV function discussed earlier.
A comparison between the two systems;
(a) Fixed-order Quantity System and
(b) Fixed-time Quantity System
These are shown in Table 8.2.

INVENTORY ORDERING SYSTEMS
S.
No.
Fixed Order Quantity

System
Fixed Time Quantity

System
1.
The order quantity is fixed.
The re-order data is fixed.
2.
The order is placed when the

inventory drops tore-order
level.
The re-order quantity varies

according to inventory on
hand.
3.
It is most suitable when

carrying cost is measurable
and significant.
It is suitable when the

carrying cost is meaningless
and insignificant.
4.
It is preferred when the

supplier places a minimum
order quantity restriction.
It is preferred when the

supplier will only ship at
fixed date.
5.
It is suitable for A class items

having a high unit cost.
It is suitable for B and C

class items.
Example: Novelty Ltd. carries a wide assortment of items for its

customers. One item, Gaylook, is very popular. Desirous of keeping its
inventory under control, a decision is taken to order only the optimal
economic quantity, for this item, each time. You have the following
information. Make your recommendations:
Annual demand : 1,60,000 units
Price per unit : ` 20
Carrying cost : ` 1 per unit or 5 percent per rupee of inventory value
Cost per order : ` 50
Determine the optimal economic quantity by developing the following
table
Size of order
No. of orders
Average inventory
Carrying costs
Order costs
Total costs
10
20
40
Solution:
Let us attack the problem using a tabular approach.
80
100
We know the requirement, carrying cost and ordering cost. These

have been appropriated in the table below:
Order
Per
Year
Lot
Size
Average
Carrying
Inventory Cost (`1)
1
10
40
80
100
1,60,000
16,000
8,000
4,000
2,000
1,600
80,000
8,000
4,000
2,000
2,000
800
80,000
8,000
4,000
2,000
1,000
800
Ordering
Cost
(`50 Per
Order)
50
500
1,000
2,000
4,000
5,000
Total Cost
Per Year
80,000
8,500
5,000
4,000
5,000
5,800
The optimum economic quantity (lot size) for this item is 4,000
numbers.
Example: A manufacturer has to supply his customers 600 units of
his product per year. Shortages are not allowed and the inventory
carrying cost amount to ` 0.60 per unit year. The setup cost per run is
` 0.80. Find:
(i) The Economic order quantity.
(ii) The minimum average yearly cost.
(iii) The optimum number of orders per year.
(iv) The optimum period of supply per optimum order.
(v) The increase in the total cost associated with ordering 20 percent
more than EOQ.
Solution:
We are given:
D = Total number of unit supplied per unit time period = 600 units
A = Set-up cost per run = ` 80
r = Inventory carrying cost per unit per year = ` 0.60.
(i) Economic order quantity is given by:
QEOQ = (2DA / r)
= [(2 600 80)/0.60] = 400 units
(ii) Minimum average yearly cost is given by:
TEOQ = (D A)/QEOQ + (QEOQ r)/2

= (600 80)/400 + (400 0.60)/2
= ` 240.
(iii) The optimum number of orders per year is:
NEOQ = D/ QEOQ = 600/400 = 3/2
(iv) The optimum period of supply per optimum order is

TEOQ = 1/NEOQ = 1/(3/2)

= 2/3
(v) Ordering 20% higher than EOQ:

Ordering quantity = (120 400)/100 = 480 units
With
QEOQ = 400 and Q = 480,

The ratio k = Q/QEOQ = 480/400 = 1.2
We have
TQ/TEOQ = [(1/k + k)/2]

= (1/1.2 + 1.2)/2
= 61/60
Thus the cost would increase by 1/60th
Or 240 1/60 = ` 4
For simple inventory models, we assumed that future demand is

known with certainty. Generally, demand may vary from day to day as
well from period to period. However, complex models are beyond the
scope of this book.
Fill in the blanks:

13. ................... period models generate order quantities that vary
from period to period, depending on the usage rates.
14. In Fixed Order Quantity System, the order quantity is
................... .
15. In Fixed Time Quantity System, The re-order quantity varies
according to ................... on hand.
16. Within the production system, partially completed units are
called
(a) Work-in-progress
(b) Buffer-stock
(c) Unit in order
17. Which of the following inventory systems would be most
appropriate in controlling many items ordered from the same
vendor?
(a) Fixed-order Quantity System
Contd...
(b) Fixed-time Period System

(c) Materials Requirements Planning System
(d) One Period Inventory Model using Marginal Analysis
18. Which of the following systems would be most appropriate in
controlling components used in a complex assembly?
(a) Fixed-order Quantity System
(c) Dependent Demand System
(d) Single Period Inventory Model
Nuvyug Industries Ltd. has an annual requirement of 5,000 pieces

of brake cylinders for its popular brand of golf carts. Each brake
cylinder has a carrying cost of ` 25 per unit per year. The Ordering
Cost per order is ` 800. Calculate the total inventory cost for the
following values of number of orders: 5, 10, 20 and 25. Plot the
various costs with respect to these orders on a graph and use it to
find the EOQ.
8.6 SUMMARY
Inventory models seek to optimise the costs associated with

investing in an idle resource. There are single period and
multiple period inventory models.
Single-period inventory models are useful for a wide variety

of service and manufacturing applications. Multiple Period
Inventory Models (systems) are designed to ensure that an item
will be available on an ongoing basis throughout the year.
There are two general types of systems and these inventory

systems can be distinguished on the basis of the ordering criteria.
The models of these two systems are (a) Fixed-order Quantity
Models (also called the Economic Order Quantity models), and
(b) Fixed-time Period Models (also referred to as the Periodic
System or P-models).
The heart of inventory analysis resides in the identification of

relevant costs. The basic approach to determining fixed order
sizes are the Economic Order Quantity (EOQ) models. The basic
EOQ model is concerned primarily with the cost of ordering and
the cost of holding inventory.
The objective of the model is to minimise the average annual

variable costs. And it provides a solution to the problem of
determining when an order should be placed and how much
should be ordered.
The basic EOQ model assumes instantaneous delivery; however,

many times an organisation produces items to be used in the
assembly of products. In this case the organisation is both
a producer and user. Orders for items may be replenished
(non-instantaneously) over time rather than instantaneously.
Economic Batch Quantity model is an extension of the Economic

Order Quantity model. The EPQ model was developed by E.W.
Taft in 1918. The difference being that the EPQ model assumes
orders are received incrementally during the production process.
The function of this model is to balance the inventory holding cost

and the average fixed ordering cost. In some literature Economic
Manufacturing Quantity (EMQ) model is used for Economic
Production Quantity (EPQ) model.
Fixed-time period models generate order quantities that vary

from period to period, depending on the usage rates. These
generally require a higher level of safety stock than fixed-order
quantity systems, which require continual tracking of inventory
on hand and replenishing stock when the reorder point is
reached.
Economic Order Quantity (EOQ) Models: The basic approach

to determining fixed order sizesare the Economic Order
Quantity (EOQ) models. The basic EOQ model is concerned
primarily with the cost of ordering and the cost of holding
inventory.
Fixed Order Quantity Systems: These are multiple period

inventory models that are event triggered, at an identified
level of the stock the fixed-order quantity model initiates an
order.
Fixed Time Quantity Systems: These systems are time

triggered, at an identified fixed time the fixed-time quantity
model initiates an order to replenish the stock.
Price-Break Models: When item cost varies with volume

ordered, the result is a modified simple lot size situation called
the quantity volume case or price break model.
Re-order Level: The inventory level at which the order is

released is known as the reorder level.
Single-Period Inventory Models: Single-Period Inventory

Models are a special case of periodic inventory systems based
on how much risk we are willing to take for running out of
inventory. These models are useful for a wide variety of service
and manufacturing applications.

1. What are inventory models? Discuss single and multiple period
inventory models with examples.
2. Make a comparison between fixed order quantity and fixed-time
period models.
3. What are the basic assumptions of Fixed Order Quantity System?
Also explain the model with the help of diagram.
4. What is Economic Order Quantity (EOQ)? Explain the EOQ
model of inventory with its simplifying assumptions.
5.
Explain Economic Batch Quantity (EBQ) or Economic Production

Quantity Model. What are its principle assumptions?
6. Discuss EOQ model with shortages with the help of diagram.

7.
What are fixed time period models with safety stocks. Discuss
with the help of examples.

Topic
Q. No. Answers
Inventory Models
1.
Optimise
2.
Single-period
3.
Multiple Periods
4.
Fixed-order, Fixed-time
5.
Minimise
6.
Cost
7.
E.W. Taft
8.
9.
10.
True
11.
True
Economic Order Quantity

Model with Shortages
12.
Fixed Time Period Models
13.
Fixed-time
14.
fixed
15.
inventory
16.
(a) Work-in-progress
17.
18.
(c) Dependent Demand

System
Sensitivity Analysis

1.
Section 8.2
Inventory models seek to optimise the costs associated with

investing in an idle resource. There are single period and
multiple period inventory models. We will begin with single
period inventory models. Single-period inventory models
are useful for a wide variety of service and manufacturing
applications. Multiple Period Inventory Models (systems) are
designed to ensure that an item will be available on an ongoing
basis throughout the year.
2. Section 8.2.2

Table 8.1 makes a comparison of the two systems and brings out
the significant differences.
3. Section 8.2.3

The basic assumptions in the model are as follows:

(a) The rate of demand for the item is deterministic and is a
constant D units per annum independent of time.
(b) Production rate is infinite, i.e. production is instantaneous.
(c) Shortages are not allowed.
4. Section 8.2.3

The objective of the model is to minimise the average annual

variable costs. And it provides a solution to the problem of
determining when an order should be placed and how much
should be ordered. The schematic representation of the EOQ
Model is given in figure. It shows the inventory level vs. time
relationship.
In developing the EOQ model, we will attempt to minimise total

annual costs by varying the order quantity, or lot size. From
the figure it is obvious that since the inventory is consumed at
uniform rate and since maximum inventory level is Q, the average
inventory will be Q/2.
5.
Section 8.2.4
The Economic Batch Quantity model, or production lot-size

model, is similar to the EOQ model in that we are attempting to
calculate an optimum for the batch quantity we have to produce.
Economic Batch Quantity model is an extension of the Economic
Order Quantity model. The EPQ model was developed by E.W.
Taft in 1918. The difference being that the EPQ model assumes
orders are received incrementally during the production process.
6. Section 8.4

This model considers the situation when back orders are allowed,
i.e. stock-out is allowed for some period in the system. In case of
shortage, demand is assumed to reflect as a back-order and is

not lost. The model assumes three costs, unlike the earlier model
that assumed only the first two costs shown below:
(a) Ordering or set-up cost,
(b) Inventory holding cost, and
(c) Shortage or stock-out cost.
7. Section 8.5

Fixed-time period models generate order quantities that vary

from period to period, depending on the usage rates. A Fixedperiod Quantity system is shown in Figure 8.8. These generally
require a higher level of safety stock than fixed-order quantity
systems, which require continual tracking of inventory on hand
and replenishing stock when the reorder point is reached. In
contrast, the standard fixed-time period models assume that
inventory is counted only at the time specified for review.

SUGGESTED READINGS






E-REFERENCES
http://scm.ncsu.edu/scm-articles/article/economic- orderquantity-eoq-model-inventory-management-models-a-tutorial
http://stat.mq.edu.au/Stats_docs/stat379/Inventory_2pp.pdf
http://home.ubalt.edu/ntsbarsh/business-stat/otherapplets/
inventory.htm
TOTAL QUALITY MANAGEMENT
CONTENTS

9.1
Introduction
9.2
What is Quality?
9.2.1
Attribute of Quality
9.3
Definition of Quality
9.4
Cost of Quality
9.5 Process Approach Total Quality Management (TQM)
9.6
The Quality Management Function
9.6.1
Where to Inspect?
9.6.2
How much to Inspect?
9.6.3
Control of Inspection Costs
9.6.4
TQM Approach
9.7
Service Quality Measurement
9.8
Eight Building Blocks of TQM
9.9
Different Pillars of TQM
9.10
The Lean Concept
9.10.1
Seven wastages: The 7Ws Taiichi Ohnos Categories

of Waste
9.11 Kaizen

9.12
Six Sigma and TQM
9.13 ISO (International Organisation for Standardisation)
9.14
5-S Methodology
9.14.1
Seiri (Sort)
9.14.2
Seiton (Set in Order or Straighten)
9.14.3
Seiso (Shine)
9.14.4
Seiketsu ( Discipline)
9.14.5
Shitsuke (Sustain)
Contd...
S
9.15
Safety
9.15.1
Man Power Safety
9.15.2
Material Safety
9.15.3
Building Safety
9.15.4
Infrastructure Safety
9.16
Security
9.16.1
Building Security
9.16.2
Material Security
9.17
Summary
9.18
9.19
Answers and Hints
9.20
TOTAL QUALITY MANAGEMENT 319
TOTAL QUALITY MANAGEMENT IN THE HOSPITALITY
INDUSTRY
Visualize the lobby of a hotel that is renowned for its quality
service. The general manager is discretely observing the activity
in the foyer.
Nearby is the front desk and guests are being checked in, and from
his vantage point the manager can hear what is being said.
The front desk clerk is confirming the arrangements of the booking
with the guest and the following discussion occurs:
Sir, you will be charging your accommodation to the company and
paying your other expenses.
No, all expenses will be paid by the company.
I am sorry sir, but according to this we have only authorized
charge of the accommodation.
Last time I stayed here I had the same problem and last week
I personally rang to sort this out. All expenses are to be charged.
The clerk goes to get authorization on the account and the now
disgruntled guest turns to his companion and says in exasperation:
. . . you see its exactly as I said it would happen. I stay here every
month and yet every time I have this same problem.
The general manager considers the exchange with concern. That
guest had not received the quality of service the hotel was aiming
to provide and if the guest continually had this experience it would
simply be a matter of time before he decided to try one of the
competitors. Not only could that one guests customer be lost, but
he could be the manager of a company who frequently stay at the
hotel and hold functions there.
The difficulty for the hotel manager is to determine how to react to
this situation. Is it a problem that only this particular guest faces
or is it a common problem experienced by many? Whose fault is it
that the problem arises in the first place? What is the appropriate
action to be taken?

Know what is quality
Learn about the cost of quality

Know about the different approaches to Total Quality
Management (TQM)
Describe the Quality Management Function
Know about various methods of Service Quality Measurement
for service control in service firms
Explain the different building blocks and pillars of TQM
Define Six Sigma approach
9.1 INTRODUCTION
Quality has become a key economic factor in terms of staying
competitive on a global basis. It has become necessary for promoting
business growth. This is because quality leadership is linked to
customer focus. If a company cares deeply for the needs of its
customers it is bound to be successful. This is what the Toyota Motor
Company has done so well year after year. That is what Jet Airways
is trying to do.
By the term quality control, we mean the process of control where
the management tries to conform the quality of the product in
accordance with the pre-determined standards and specifications. It
is a systematic control of those variables that affect the excellence of
the ultimate product. Thus quality control as a technique of scientific
management has the object of improving industrial efficiency by
concentration on better standards of quality arid on controls to
ensure that standards are always maintained. In this way, for quality
control its first standards and specifications are established and then
see whether the product conforms to those standards.
In this chapter, we will explore this area further. The quality message,
learnt in Japan, came late to western business. It was only late in life
that W. Edward Deming, who was a pioneer in quality management,
was recognised as a prophet in his own land. Quality has become
as much a way of thinking as an application of analytical methods.
Clearly, where relevant, and we shall examine the two.
9.2 WHAT IS QUALITY?

Quality, may be defined as the sum total of all characteristics
and attributes of a certain product or an object which go to make it
acceptable to the people for whom it is meant, and it is this sum total
of these characteristics and attributes that determine the demand or
utility or price of a product or an object.
For Professors Westing, Fine and Zenz, Quality is an expression

of the measured properties, conditions or characteristics of a
product or process, usually stated in terms of grades, classes or
specifications and determined by the application that is involved.
Quality of a product, object or process refers to its (i) characteristics, (ii)
attributes, (iii) properties, and (iv) conditions which are stated either
in terms of certain specifications or gradation and is determined by
the user by its application who ultimately determines the (a) demand,
(b) utility, and (c) price of the product, object or process in terms of the
quality which he receives for his use.
The following definition is being reproduced hereunder to make the
term quality control understandable:
Quality control may be defined as that industrial management

technique or group of techniques by means of which products of
uniform acceptable quality are manufactured.
Alford and Beatty
9.2.1 ATTRIBUTE OF QUALITY
In effect, you are citing attributes of quality, i.e., the traits associated
with quality that can be identified and, more importantly, measured.
Some attributes used to help define quality are:
Freshness: Some products are perishable, i.e. the quality

declines over time. Vegetables fall into this category. Fashion
items also are subject to obsolescence. At the other extreme, the
value associated with some products increases with age, as is the
case with antiques and red wine.
Reliability: The quality associated with a product often increases

with the dependability of the product customer experience.
Patients expect that hospitals to have competent staff. Customers
expect telephones to work. Ni-Cd Batteries manufactured by
ECIL should be as reliable as other internationally manufactured
batteries.
Durability: The quality attribute that implies product

performance under adverse conditions. Evereadys Red
commercials are designed to convey the durability of its batteries.
Safety: This is an attribute of quality that measures the likelihood

of harm from goods or service. What is safe can be a controversial
issue. For instance is a gun with a safety clip safe? Is the packaging
of a product tamper proof?
Environmental Friendly: As is the case with safety, this quality

attribute has both societal aspects and is individual specific. The
requirements for being considered an environmentally friendly
product are becoming more stringent. For example, firms must
now also focus on how a product is disposed of after its useful life.
Serviceability: This attribute relates to the ease and cost

associated with servicing a product after the sale has been made.
Products are now being increasingly designed so that they do not
need service, such as car batteries. But many others do require
service and this capability must be both designed into the product
and the post-sale service system. This is especially important for
consumer durables. ECIL, perhaps, has not been able to convey
that it has an adequate service organisation for the televisions it
manufactures.
Aesthetics: A products appearance, feel, sound, taste, or smell

reflects its aesthetics. Aesthetics are hard to define; it is customer
specific and sometimes situation specific. What is aesthetically
pleasing to one individual may be considered ugly to another.
Attribute Consistency: The attributes associated with a product

should be internally consistent. It would make little sense to
build a Maruti 800 with airfoils, or a biodegradable cigarette
filter. Products with inconsistent combinations of features arent
likely to match the needs of their buyers.
Attributes, however, are not the same as quality. Identifying every

attribute of quality for a product would not describe that products
quality level.
To a certain degree the functionality and the quality overlap. Products
with excellent designs will excel in attributes that matter. These in
turn increase the functionality of the product.
Fill in the blanks:

1. .......................... relates to the ease and cost associated with
servicing a product after the sale has been made.
2. A products appearance, feel, sound, taste, or smell reflects
its .......................... .
3. Which of the following is not the attribute of Quality?
(a) Freshness
(b) Reliability
(c) Attribute consistency
(d) Non-durability
With reference to a service organisation, illustrate with a real life

case how the attributes of quality are being implemented over there.
Quality control refers to the systematic control of those variables

encountered in a manufacturing process which affect the excellence
of the end product. Such variables result from the application of
materials, men, machines and manufacturing conditions.
9.3 DEFINITION OF QUALITY

Perception of quality is different for different people. It changes with
situation as well as with time. Hence quality is not absolute. It has
no common yardstick; it has varied characteristics, many of which
cannot be measured. It also has no boundaries and hence can not
be precisely defined. But a goal without definition is vague hence
difficult to achieve. Thus the first task must be to agree on a broad
definition of quality and thereafter to communicate the same within
the institute.
Various definitions of quality have been proposed in the TQM
literature. However, most of them are with respect to manufacturing
activity. The various definitions can be categorised as either philosophic
or operational. The former group comprises definitions built around
the word excellence/exception/transcendence/transformation.
Definitions
Garvin (1988): A mark of uncompromising standards and high
achievement.
Harvey & Green (1993): A qualitative change for enhancing and
empowering the participants.
Definitions falling in the second category (operational) are more
pragmatic. Some examples of pragmatic definition are introduced by:
Crosby (1979): Conformance to requirements.
Juran (1988): Fitness to use.
Deming (1986): A predictable degree of uniformity and dependability at
low cost and suited to market.
Feigenbaum(1983):The total composite product or service
characteristics through which the product or service in use will meet the
expectation of the customer.
ISO 9000 (1986): The totality of features and characteristics of a product
or service that bears on its ability to satisfy stated or implied needs.
Objectives of Quality Control

The following are the main objectives of quality control programme:
To assess the quality of the raw materials, semi-finished goods

and finished products at various stages of production process.
To see whether the product conforms to the predetermined

standards and specifications and whether it satisfies the needs
of the customers.
If the quality of the products deviates from the specifications,

able to locate the reason for deviations and to take necessary
remedial steps so that the deviation should not recur.
To suggest suitable improvements in the quality or standard of

goods produced without much increase or no increase in the cost
of production. New techniques in machines and methods may be
applied for this purpose.
To develop quality consciousness in the various sections of the

manufacturing unit.
To assess the various techniques of quality control, methods and

processes of production and suggest improvement in them to be
more effective.
To reduce the wastage of raw materials, men and machine during

the process of production.
Fill in the blanks:

4. The definition, a qualitative change for enhancing and
empowering the participants is given by .......................... .
5. One of the objectives of quality control is to develop quality
................... in the various sections of the manufacturing unit.
With reference to a product manufacturing organisation, illustrate

with a real life case how the objectives of quality control are being
fulfilled in various departments.
9.4 COST OF QUALITY

Cost of Quality (COQ) is defined as the sum of everything that would
not have been necessary if everything else was done right the first time.
According to quality guru A.V. Feigenbaum, cost of quality is defined

as Those costs associated with the creation and control of quality
as well as the evaluation and feedback of conformance of quality,
reliability and safety requirements, and those costs associated with
the consequences of failure to meet the requirements both within
the factory and in the hands of the customer.
The cost of quality isnt the price of creating a quality product or
service. Its the cost of NOT creating a quality product or service.
Components of Cost of quality are being shown in the Figure 9.1.
Every time work is redone, the cost of quality increases. Obvious
examples include:
The reworking of a manufactured item.
The retesting of an assembly.
The rebuilding of a tool.
The correction of a bank statement.
The reworking of a service, such as the reprocessing of a loan

operation or the replacement of a food order in a restaurant.
Quality costs are the total of the cost incurred by:
Investing in the prevention of nonconformance to requirements.
Appraising a product or service for conformance to requirements.
Failing to meet requirements.
The cost of poor quality dropped from $22 million to less than $4
million annually, making the loss making plant profitable. All this did
not cost much. Quality improvement was achieved through marginal
investments but primarily by innovative employee relations and
workplace reorganization.
Though customers consider quality a trade-off, the companies who
offer low prices with high quality, do not see the trade-off. This is
because they do not attribute cost to quality. The consensus is that
quality increases profits and reduces costs.
The typical activities of quality assurance that cost the organization
are shown in Figure 9.1. Costs of poor quality are generally classified
into four broad categories. The costs include:
Internal Failure Costs;
External Failure Costs;
Appraisal Costs;
Prevention Costs.
Cost of Quality
Conformance
Prevention
Non-conformance
Appraisal
Internal
Failure
External
Failure
Figure 9.1: Costs of QualityComponents

Prevention Costs
Prevention costs are the costs of all activities specifically designed

to prevent poor quality in products or services.
Prevention costs are associated with design, implementation,
maintenance, and planning prior to actual operation in order to avoid
defects from happening.
The emphasis is on the prevention of defects in order to reduce the
probability of producing defective products. Prevention activities lead
to reduction of appraisal costs and both type of failures (internal and
external). The motto is Prevention rather than appraisal.
Prevention costs are the costs of:
New product review
Quality planning
Supplier capability surveys
Process capability evaluations
Quality improvement team meetings
Quality improvement projects
Quality education and training
Market research
Contract review
Design review
Field trials
Supplier evaluation
Process plan review
Design and manufacture of jigs and fixtures
Preventive maintenance
Appraisal Costs
These are the costs associated with measuring, evaluating or

auditing products or services to assure conformance to quality
standards and performance requirements.
Appraisal costs are spent to detect defects to assure conformance to
quality standards. Appraisal cost activities sums up to the cost of
checking if things are correct. The appraisal costs are focused on the
discovery of defects rather than prevention of defects.
These include the costs of:
Incoming and source inspection/test of purchased material
In-process and final inspection/test
Product, process or service audits
Calibration of measuring and test equipment
Associated supplies and materials testing
Proto type testing
Vendor surveillance
Final inspection
Laboratory testing/measurement
Depreciation cost for measuring instruments
Quality audits.
Failure Costs
These are failure costs are the costs resulting from products or services
not conforming to requirements or customer/user needs. Failure costs
are divided into internal and external failure categories.
Internal Failure Costs
Internal failure costs are failure costs occurring prior to delivery

or shipment of the product, or the furnishing of a service, to the
customer.
Internal failure costs occurs when results of work fail to reach
designated quality standards, and are detected before transfer to the
customer takes place.
The internal failure costs are the costs of:
Scrap
Rework
Re-inspection
Re-testing
Material review
Downgrading
Design changes/corrective action
Scrap due to design changes
Excess inventory
Rectification/reject disposition of purchased material
Downtime of plant and machinery
Trouble-shooting and investigation of defects
External Failure Costs
Failure costs occurring after delivery or shipment of the product

and during or after furnishing of a service to the customer are
known as external failure costs.
External failure costs occur when the product or service from a process
fails to reach designated quality standards, and is not detected until
after transfer to the customer.
External failure costs are the costs of:
Processing customer complaints
Customer returns
Warranty claims
Product recalls
Processing/investigation of customer complaint
Repair/replacement of sold goods
Product liability and litigation costs
Interest charges on delayed payment due to quality problems
Loss of customer goodwill and sales.
Total Quality Costs

Total cost of quality is the sum of the above costs. This represents the
difference between the actual cost of a product or service and what
the reduced cost would be if there were no possibility of substandard
service, failure of products or defects in their manufacture. A glimpse
of all the costs and their descriptions and examples are presented in
Table 9.1 below.
TABLE 9.1: COMPONENTS OF COSTS OF QUALITY

COQ
Category
Typical Descriptions (may

vary between different
organizations)
Internal
Costs associated with
failure costs internal losses (ie. within
the process being analyzed)
Preventive
External
Appraisal
Examples
Off-cuts, equipment
breakdowns,
spills, scrap, yield,
productivity
Costs associated with the
Planning, mistakeprevention of future losses: proofing, scheduled
(eg. unplanned or undesired maintenance, quality
problems, losses, lost
assurance
opportunities, breakdowns,
work stoppages, waste, etc.)
Costs external to the
customer complaints,
process being analyzed
latent defects found by
(ie. occur outside, not
the customer, warranty
within). These costs are
usually discovered by,
or affect third parties
(eg. customers). Some
external costs may have
originated from within,
or been caused, created
by, or made worse by the
process being analyzed.
They are defined as
external because of where
they were discovered, or
who is primarily or initially
affected.
Costs associated with
KPIs, inspection,
measurement and
quality check, dock
assessment of the process.
audits, third party
audits, measuring
devices, reporting
systems, data collection
systems, forms
Fill in the blanks:

6. ........................ are the costs of all activities specifically designed
to prevent poor quality in products or services.
7. .................... is the costs associated with measuring, evaluating
or auditing products or services to assure conformance to
quality standards and performance requirements.
Visit a manufacturing plant. Visit the corporate office of the

organisation. Collect and document their different types of costs
which are being incurred for quality assurance. Prepare a short
report.
9.5
ROCESS APPROACH TOTAL QUALITY

P
MANAGEMENT (TQM)
Total Quality Management focuses its attention and efforts not only
on the Quality of products and services but also on the quality of
business as whole. The entire gamut of operations of a company
market research, assessing the new needs of customer, the peculiar
usage, habits of the target market, optimal use of raw materials and
other inputs, product design, manufacturing processes, sales, aftersales service etc. are some of the issues which come under the purview
of TQM.
Total Quality Management is an integrated approach to Quality

Management comprising three basic areas viz. product quality,
process quality and human quality.
Quality Management should not be regarded as just one of the several
organisational functions but it has to permeate in all work aspects
of the company with the ultimate objective of fostering customer
perceived quality as early as possible. Total Quality strategy requires
a market oriented managerial discipline and methodology which
begins by recognising that quality is quality leadership, enabling
actions in detail throughout the entire organisation together with its
suppliers and vendors.
Various TQM principles such as Leadership, Continuous
improvement, Customer Focus, and Teamwork are closely related to
one another. Continuous improvement is required to achieve higher
customer satisfaction, and it is most effective when driven by customer
needs. The continuous improvement transcends hierarchical,
functional and organisational boundaries, therefore, teamwork is
essential. Thus, TQM is a set of mutually reinforcing principles, which
are ultimately based on fulfilling customers needs.
TQM provides new forms of organisation relevant in todays context.
Customer focus is expressed by the organisations attempt to design
and deliver products and services that fulfil customers stated and
implied needs. The rationale being that customer satisfaction results
in long-term organisational success. Quality comes in two flavours:
Potential Quality and Actual Quality.
Potential quality is the known maximum possible value added

per unit of input.
Actual quality is the current value added per unit of input.
The difference between potential and actual quality is waste.
TQM focuses on improving quality (i.e., reduce waste) by helping

organisations produce products and services better, faster and
cheaper by involving all stakeholders.
In summary, the TQM philosophy is built around three basic ideas: to

become customer-driven instead of being self-focused, to concentrate
on the process rather than being preoccupied with results, and to use
workers thinking ability. Total Quality is defined as the organisation
wide approach which results in Performance Leadership in meeting
customers requirements, by doing the right things right the first time
and every time. Total quality is being recognised and employed as a
strategic weapon to energise the entire workforce of an organisation
to achieve excellence.
BOX 9.1: WHAT TQM INVOLVES
Vision
Philosophy
Value
Symbol
Goal
Benchmark
Metric
Tool
Methodology
BOX 9.2: JACK WELCHS VISION 2000
Quality . . . is the next opportunity for our Company to set itself

apart from its competitors . . .
. . . Dramatically improved Quality will increase employee and
customer satisfaction, will improve share and profitability, and will
enhance our reputation
. . . This Quality drive will require the passionate commitment of all
of you to make it happen . . . A Six Sigma 2000 target will require
a significant commitment of resources and your strong, highly
personal commitment to the objective.
Although no two business use TQM in exactly the same way, its
theory rests on two basic tenets. The first and most important is that
customers are vital to the operation of the organisation. Without
customers, there is no business, and without business, there is no
organisation. Consequently, it should be the primary aim of any group
to keep customers satisfied by providing them with quality products
(Deming, 1986).
These ideas are not foreign to most organisations; what makes TQM
unique is its call for a restructuring of management methods to create
that quality. TQM proponents urge organisations to turn nearsighted,
top-down management on its head by involving both customers and
employees in decisions. This second tenet, that management needs
to listen to non-traditional sources of information in order to institute
quality, it based on the belief that people want to do quality work and
that they would do it if managers would listen to them and create
workplace based on their ideas (Deming, 1986).
Managers, in the TQM view, need to become leaders who not only
work in the system but also on the system (Rocheleau, 1991). A
Company will see continuous improvement in products only when
managers realise all systems consist of interdependent parts and
work to aim all those parts toward a vision to quality, proponents
argue. This type of leadership is needed to ensure that product quality
improves constantly and forever and truly satisfies the customers
(Deming, 1986).
TQM is more than just a philosophy. In addition to proposing new
theories about the workplace, it advocates specific changes that
managers need to make if they want to improve the system.
TQM may be defined as a contributions quest for excellence by
creating the right skills and attitudes in people to make prevention of
defects possible and satisfy customers/users totally at all times. TQM
is an organisation-wide activity that has to reach every individual
within an organisation. Oakland has defined TQM as follows:
Total quality management (TQM) is an approach to improving the
effectiveness and flexibility of business as a whole. It is essentially
a way of organising and involving the whole organisation; every
department, every activity, every single person at every level.
TQM is regarded as an integration of various processes characterising
the behavioural dynamics of an organisation. For this, an organisation
is referred to as a total system (socio-technical), where all the
activities carried out are geared towards meeting the requirements
of customers with efficiency and effectiveness. Zaire and Simintiras,
1991, have propounded this viewpoint by stating:
Total quality management is the combination of the socio-technical
process towards doing the right things (externally), everything right
(internal) first time and all the time, with economic viability considered
at each stage of each process.
TQM has been based on the quest for progress and continual
improvement in the areas of cost, reliability, quality, innovative
efficiency and business effectiveness. Pfau, 1989 states that TQM is an
approach for continuously improving the quality of goods and services
delivered through the participation of all levels and functions of the
organisation. Tobin, (1990) views TQM as the totally integrated effort
for gaining competitive advantage by continuously improving every
facet of organisational culture. Deming, 1982 provides an operational

definition of TQM which gives a motivational meaning to the concept.
Sink states that TQM can be successful only if the operational definition
is translated into strategies by the leadership of the organisation and
which are crystallised into action and communicated to all the people
with conviction and clarity.
However, TQM may also be viewed functionally as an integration of
two basic functions, i.e. total quality control and quality management.
Quality has been defined in a variety of ways, such as fitness
for use; conformance to requirements; the amounts of unpriced
attributes contained in each unit of priced attributes; among many
others. Total Quality Control is a long-term success strategy for
organisations. Customer satisfaction, employee satisfaction, product
quality assurance in all its stages, and continuous improvement
and innovation, are the main ingredients of total quality control;
whereas quality management is a way of planning, organising and
directing that will facilitate and integrate the capabilities of all
employees of continuous improvement of anything and everything in
an organisation to attain excellence. Thus, TQM in an organisation
brings all the people together to ensure and improve product-process
quality, the work environment and working culture.
TABLE 9.2: TQM AS A VALUE

Issue
Classical
TQM
Focus
Product
Process
Aim
Company
Customer
Behaviour
Reactive
Pro-active
Goal Setting
Realistic Perception
Reach-out-andStretch
Management
Cost & Time
Quality & Time
Problems
Fixing
Preventing
Problem Solving
Expert-based
System-based
Approach
Symptomatic
Problematic
Out-Look
Short-term
Long-term
Chain-of-command Hierarchy
Empowered Teams
Control
Centralised
Localised
Process
Adjustments
Tweaking
SPC Charts
Oakland depicts TQM as a pyramid representing five distinct

components management commitment, customer-supplier chain,
quality systems, Statistical Process Control (SPC) tools and teamwork.
The customer-supplier chain forms the top of the Oakland pyramid.
It reflects process ownership, process management and process
improvement, propelled throughout the customer supplier chain.
Zaire, 1991 has mentioned that TQM can be formulated in terms of

the three important aspects of continuous improvement, value-added
management and employee involvement (Refer Table 9.2).
Price and Gaskill, 1990 have identified three dimensions of TQM as:
The product and service dimension: The degree to which the

customer is satisfied with the product or service supplied.
The people dimension: The degree to which the customer is

satisfied with the relationship with the people in the supplying
organisations.
The process dimension: The degree to which the supplier is

satisfied with the internal work processes, which are used to
develop the products and services supplied to the customers.
According to Feigenbaum (1990), in an increasingly competitive

world quality is no longer an optional extra; it is an essential business
strategy for survival. According to (Mohanty and Lakhe, 1998), TQM
is a pragmatic long term systems approach initiated and driven by
the top management to bring about a total cultural change and interlink and integrate everyone, every function, every process and every
activity of an organisation through cross functional involvement and
participation of people to meet the dynamic needs of the customer
and to create a loyal but at the same time a diversified customer base.
The process of TQM has been shown in the Figure 9.2.
Figure 9.2: Process of TQM
Sohal A. S. (1989) have explained that the continuous improvement

in quality has to come from an integrated approach of controlling
quality via action plans in different operations of the business
cycle. They have identified five elements such as customer focus,
management commitment, total participation, statistical quality
control and systematic problem solving.
Fill in the blanks:

8. .................. Management can be defined as managing the entire
organisation so that it excels in all dimensions of products and
services that are important to the customer.
9. TQM approach is also used in ISO .................. standards.
10. Total Quality Management is an integrated approach to Quality
Management comprising of three basic areas viz. ..................
quality, process quality and human quality.
What do you understand by leadership through quality? Examine

the case of Jet Airways and explain how they were able to attain a
pre-eminent place in the Indian Aviation Industry.
9.6 THE QUALITY MANAGEMENT FUNCTION

Usually quality control is a staff function independent of production. It
is given the responsibility to ensure that the product meets the design
specifications. Though quality has many dimensions, two terms
are commonly used in this context. Design quality is the inherent
quality of the product or service in the marketplace. Conformance
quality refers to the degree to which the product or service design
specifications are met.
The function of quality control is to minimise the difference between
the Design quality and the Conformance quality, i.e. the product
or service meets the requirements of the customers. The quality
management process is judged by the degree to which the product
or service design specifications are met. The departments ability to
adhere to quality standards is based on two methods:
Sampling inspection and
Statistical quality control charts.
We will discuss inspections here.

In the case of inspection, decisions have to be taken:
Where to Inspect?
How much to Inspect?
How to control inspection costs?
9.6.1 WHERE TO INSPECT?

Essential types of inspection include the following:
Incoming Inspection: Incoming raw material and components

are normally inspected at the manufacturers premise on arrival.
This inspection not only weeds out material with defects but also
determines vendor quality levels.
Problems often occur due to procuring from less expensive

sources. Though high-quality materials are easier to work with
than low-quality materials, and they often result in a labour
savings, this is often overlooked.
Incoming inspection is important to all organisations, but

is especially important to organisations that procure a high
percentage of their components or parts from outside the firm or
consume natural raw materials. There is a trend today for buyers
to require vendor certification. This reduces the burden on
incoming inspection. In essence, certification makes the vendor
into a part of the company team as a link in the supply chain.
In-process Inspection: The inspection of work in-process

prevents the continuing production of excessive amounts of
defective products. Traditional in-process inspection consists of
spot checking product quality during processing and 100 percent
inspection of lots at critical points. It also involves inspection of
the first few pieces of a product run for a given machine.
The key factor in production quality is the degree of variation

or a piece-to-piece consistency within a material lot and in
subsequent lots. This needs to be controlled and this is done by
using the inspection information for statistical quality control.
Final Inspection: The final inspection normally takes place in

special areas equipped with all essential inspection instruments.
The objective of this inspection is that the product that leaves the
premises must meet the quality objectives of the firm.
Equipment and Tooling Inspection: Inspection of equipment

and tooling is extremely important to ensure that processes
operate properly. Facilities, processes, and equipment also affect
quality. For example, tools wear out and break, equipment needs
to be in good repair and properly calibrated from time to time. All
these factors affect quality. Tools, jigs, fixtures, gauges, forms and
other machine accessories are normally inspected 100 percent in
the tool crib. Processing and handling equipment is inspected on

the shop floor.
The objective of this inspection is to prevent machine breakdown and
production loss.
9.6.2 HOW MUCH TO INSPECT?
There are two types of decisions that are possible:
Inspection can be 100 percent or
Inspection can be done on a sampling basis.
Though 100 percent inspection is practiced by many firms at critical

process junctions or final inspection, there is an increasing tendency
in well run organisation to go in for sampling inspection. This involves
selecting representative random samples from given lots.
Besides cost considerations, 100% inspection sometimes is impossible
when inspection involves destructive testing.
9.6.3 CONTROL OF INSPECTION COSTS
Inspection constitutes a post mortem judgment of the goodness or
defectiveness of a product. The proper amount of inspection, therefore,
is the least amount that is necessary. Deming points out, Inspection
(as the sole means) to improve quality is too late! Lasting quality comes
not from inspection, but from improvements in the system. For example,
documenting deficiencies in record-keeping does not, by itself, generate
ideas that would make the task of record-keeping less error-prone.
A quality-driven approach might, instead, encourage development of
clear and simple record-keeping forms that minimise or eliminate the
likelihood of mistakes.
Quality control should constantly monitor performance for compliance
with the original design standards. As inspection and monitoring
constitute a post mortem judgment, the effectiveness of Quality control
is based on identifying where performance falls short of the standard,
and put into action plans to deal quickly with the problem. Procedures
and records that are essential should be readily accessible by the people
who need them and those that add no value should be abandoned.
All efforts have to be made to put the system back into a state of
control, i.e., the way it was designed to operate, with the least number
of defects possible.
In service organisations controlling costs becomes more difficult due
to nature of the product. Additional measures have to be taken often to
ensure that quality is under control. For example, Jet Airways, not only
benchmarks its services, but in order to be able to control its quality
control program it has incorporated the following features into it:
Quality awareness programs for all staff,
Outstation audits (in-flight and airport),
Quarterly customer feedback workshop,

Review of standards (minimum/competitive world-class),
External measurement of quality.
There are a number of methods to reduce inspection costs.
Inspection costs can be reduced by using statistical sampling

inspection.
Another option is to increase mechanisation and automation of

the processes and especially of the inspection procedures.
Electronic controls are often used to stop a machine and reset

it when it gets out of adjustment. This often makes inspection
redundant.
The objective should be that solutions reflect a systems approach and

provides effective quality control.
9.6.4 TQM APPROACH
Zaire (1991) outlines the evolution of quality concepts and points out
that they have evolved from two extremes:
From control driven to culturally driven
From controlling in to managing in quality
Hansen, 1990, has identified two notable milestones in the evolution:
The transition from one-off manufacture to mass production or

the differential piece-rate system (Taylorism)
The transition to the communication-oriented industrial society

(electronic data processing)
The evolution of TQM is the outcome of four major eras of

development, as outlined by Garvin, 1988. He illustrates the
evolutionary process where quality has moved from an initial stage of
inspecting, sorting and correcting standards to an era of developing
quality manuals and controlling process performance. The third
stage was to develop systems for third-party certification, more
comprehensive manuals including areas of organisation other than
production, and to use standard techniques such as SPC. The present
and fourth era of TQM is primarily strategic in nature and is based on
continuous improvement as the driving force.
Sink, 1991, identifies the primary factors behind the need for TQM as:
the global economy; complex and dynamic technology; complex and
dynamic resources; customer orientation and expectations; complex
and dynamic task environment; and a shrinking feasible solution
space for many critical problems, issues and opportunities.
Foster and Whittle, 1989 have found that TQM is a fundamental shift
away from traditional thinking. The systematic analysis, preplanning
and blueprinting of operations remain essential, but the focus switches
from a process driven by external controls through procedurecompliance and embasement to a process of habitual improvement,
where control is embedded in and driven through the culture of the
organisation.
According to Sink, 1991, TQM has evolved out of these five checkpoints:
Selection and management of upstream streams
Incoming quality assurance
Process quality management and assurance
Outgoing quality assurance
The proactive assurance that the organisational system is meeting

or exceeding customers needs, specifications, requirements,
worth desires and expectations
He further states that if an organisational system successfully manages

each of these five checkpoints, it will manage quality totally.
The TQM approach differs from conventional management in the
following ways:
TQM focuses on customers absolutely. The firm customer focus

brings competitive edge to the organisation
Products conquer markets is the basic edifice of TQM
TQM takes the view that profits follow quality, not the other way
around
TQM views total quality as having multi-dimensional attributes
TQM creates goal-directed connections between customers,

managers and workers. Everyone is motivated to contribute
towards quality. TQM empowers each and every employee,
regardless of level, to find better ways to work. Traditional
management, in contrast, is monolithic: workers work and
managers manage the workers
TQM is process-oriented, as against the traditional resultoriented approach
TQM fervours a long span of control, with authority pushed down

almost to the lowest level, as against short spans of control and
many layers of authority in traditional management cultures.
Accountability for quality is embedded at every level
TQM requires a multi-skilled workforce with job rotation, in

contrast to division of labour
In essence, all people in the organisational collectively own TQM and

it is everybodys concern to improve perpetually.
BOX 9.3: QUALITY IS A PERMEATING ETHIC
The primary ethical question is not what is predictable, nor is what
is possible, nor is it what will enable the human species merely to
survive; it is rather, what will conduce to the common good. Human
life is intrinsically relational. It is lived in a set of context:
A Biosphere
A Sociosphere
A Psychosphere
The common good is that texture of relationship in which the life of all
is enhanced by the actions and dispositions of each one. Its common
name is quality. The common good is not an abstract number. It is the
quality that provides the deepest impulse to eliminate sufferings and
miseries of human systems.
TQM in Japan
Throughout the 1950s, Made in Japan was synonymous with poorlymade products. Today the phrase means the exact opposite. Japanese
quality, technology and ingenuity are much sought after by consumers
throughout the world. The primary source of their success is the
implementation of total quality management in every walk of life.
Efforts to study quality control in Japan started in 1949, when a
special group was organised in the Union of Japanese Scientists and
Engineers, with the purpose of providing educational programs to
promote quality control in Japanese firms. Dr. W. E. Deming from the
United States was invited in 1950 to deliver a lecture on Statistical
Quality Control (SQC). The years 1946 to 1950 were declared to the
SQC period in Japan. Although this resulted in establishing statistical
control techniques and quality control education programs, top
management remained aloof from quality control activities. All
this changed in 1954, after Dr J.M. Jurans lecture on Planning and
Practice in Quality Control. The period between 1955 and 1960 was
designated the Years of TQC. During this period, quality control
activities were backed by top management and programs of company
wide quality control were launched. Some of the more important
considerations in implementing successful company wide quality
control programs in Japanese companies, as outlined by (Ishikawal,
1985), are top management involvement, emphasis on training and
education, a formal organisation of quality, the use of informal quality
control circles, giving awards and, above all, lots of patience.
Fill in the blanks:

11. .................... quality is the inherent quality of the product or
service in the marketplace.
12. .................... should constantly monitor performance for
compliance with the original design standards.
13. The function of quality control is to .................... the difference
between the Design quality and the Conformance quality,
i.e. the product or service meets the requirements of the
customers.
14. .................... , 1991, identifies the primary factors behind the
need for TQM as: the global economy; complex and dynamic
technology; complex and dynamic resources.
Contd...
15. ....................... System takes corrective actions that result

from non-conformances, receiving inspections, customer
complaints, audits and more can all be tracked through
resolution and final verification.
16. TQM is .................... , as against the traditional result-oriented
approach.
Visit any food chain outlet of your area which is running into
losses. How will you use TQM approach to improve its services and
products?
Nessa LAbbe, (1991) emphasises integrity, methodology and

humanity as the essential evolutionary features of TQM. According
to him, integrity relates to a management philosophy that focuses
on quality with emphasis on both vertical and horizontal integrity.
Methodology requires the universal application of scientific
methods for the processing of data; and humanity implies that
all people are made creative participants through teamwork and
quality control circles.
9.7 SERVICE QUALITY MEASUREMENT

Services have been defined in several ways.
According to Stanton, services are those separately identifiable,

essentially intangible activities that provide want-satisfaction
and that are not necessarily tied to the sale of product or another
service. However, when such use is required, there is no transfer of
the title to those tangible goods.
Kotler defines service as any act or performance that one party can
offer to another which is essentially intangible and does not result in
the ownership of anything. Its production may or may not be tied to a
physical product.
Examples of Service Industries:
Health Care
Professional Service
Hospital, medical practice, dentistry, eye care

Accounting, legal, architectural
Financial Services
Banking, investment advising, insurance
Hospitality
Travel
Restaurant, hotel/model, bed & breakfast ski resort, rafting

Airlines, travel agencies, theme park
Others:
Hair styling, pest control, plumbing, lawn maintenance,

counseling services, health club
Services have many unique characteristics that make them different

from products. Some important features of services are:
A service cannot be touched
Precise standardization is not possible
There is no ownership
Production and consumption are inseparable
There is no inventories of services
The consumer is a part of the production process
Service Quality: Service quality includes quality of both core services

and supporting services, which may add value to the core services.
Quality in services offered by an organization is very important as
organization may lose customers it fails to satisfy them. It is also very
important to note that cost of acquiring new customers is much higher
than cost of retaining existing customers. Service quality attributes
are different from product quality attributes. Some the important
service quality attributes are listed below.
Time: How long must a customer wait for the service and for
completion of the service?
Timeliness: Will the services be delivered within the promised

time?
Completeness: Are all the required services offered to the

customer?
Courtesy: Do frontline employees greet the customer and are

they polite to the customer?
Consistency: Are services delivered in the same fashion each

time for each customer?
Acceptability and convenience: Is the service easy to obtain?
Accuracy: Is the service performed accurately the first time?
Responsiveness: Can the service personnel react quickly to

unexpected problems?
Measuring Service Quality

The quality of services is more difficult to measure than quality of
manufactured products. Generally, customers may have a few service
features in their mind and if any of these features is missing they may
not be satisfied and may look for other service providers. Customer
perception of a service quality may depend on comparison of expected
experience of a service and actual service experience.
There are five important dimensions of service quality namely,
reliability, responsiveness, assurance, empathy and tangibles. These
dimensions represent how customers organize information about the
service quality in their minds. These measures are very widely used
to determine service quality in many sectors like banking, insurance,
financial services, telecom services, transport services, health care,
automobile repair etc.
These dimensions are explained below:
Reliability: It is the most important dimension of service and

hence it occupies the first position among the five service
quality dimensions. Reliability is defined as the ability to
perform the promised service dependently and accurately. A
reliable organization delivers the services as per the promises
like timely delivery, service provision, problem resolution, cost,
etc. Organizations must be capable of understanding customer
perceptions about each of these expectations about reliability
and ensure that these expectations are met.
Responsiveness: It is the quality attribute of service which

refers to willingness to help. Responsiveness is willingness to
help customers and to provide prompt service. It defines the
attentiveness of the organization and its promptness in dealing
with customers requests, complaints, problems etc. Company
must handle the service from customers point of view rather
than from the organizations point of view.
Assurance: Assurance is defined as employees knowledge and

courtesy and the ability of the firm and its employees to inspire
trust and confidence. This dimension is very important for such
services about which customers perceives high risk or regarding
which they feel certain about their ability to evaluate outcomes.
Trust and confidence are very important in many services like
financial services, health care, insurance, etc.
Empathy: Empathy refers to ability of a service provider to

treat the customers as human beings. Empathy refers to caring,
individualized attention, of the firm and thinking from the
customers viewpoint. It helps in providing customized service.
Simple things like remembering the customers name, attending
their each problem with interest, having personal knowledge
about the customers needs etc., defines the components of
empathy. Highly customized services are very important for
enhancing customer satisfaction.
Tangibles: Tangibles refer to representing the service physically.

Tangibles define appearance of physical facilities, equipment,
personnel and communication. They create an image of the
service to the customers. For example, hospitality provided to

customers in restaurants, the ambiance etc., refers to tangibles
of the service quality.
Fill in the blanks:

17. Kotler defines service as any act or performance that one party
can offer to another which is essentially .............. and does not
result in the ownership of anything.
18. .............. quality includes quality of both core services and
supporting services, which may add value to the core services.
Visit any Travel agency in your area. Measure the service quality
being offered there according to TQM principles.
9.8 EIGHT BUILDING BLOCKS OF TQM

Total Quality is a description of the culture, attitude and organisation
of a company that strives to provide customers with products and
services that satisfy their needs. The culture requires quality in all
aspects of the companys operations, with processes being done right
the first time and defects and waste eradicated from operations.
The eight key elements are as follows:
Ethics
Integrity
Trust
Training
Teamwork
Leadership
Recognition
Communication
TQM has been coined to describe a philosophy that makes quality the
driving force behind leadership, design, planning and improvement
initiatives. For this, TQM requires the help of those eight key elements.
These elements can be divided into four groups according to their
function. The groups are:
Foundation Ethics, Integrity and Trust.
Building Bricks Training, Teamwork and Leadership.
Binding Mortar Communication.
Roof Recognition.
The explanation is as follows:

Foundation
TQM is built on a foundation of ethics, integrity and trust. It fosters
openness, fairness and sincerity and allows involvement by everyone.
This is the key to unlocking the ultimate potential of TQM. These three
elements move together, however, each element offers something
different to the TQM concept.
Ethics: Ethics is the discipline concerned with good and bad

in any situation. It is a two-faceted subject represented by
organisational and individual ethics. Organisational ethics
establish a business code of ethics that outlines guidelines that
all employees are to adhere to in the performance of their work.
Individual ethics include personal rights or wrongs.
Integrity: Integrity implies honesty, morals, values, fairness, and

adherence to the facts and sincerity. The characteristic is what
customers (internal or external) expect and deserve to receive.
People see the opposite of integrity as duplicity. TQM will not
work in an atmosphere of duplicity.
Trust: Trust is a by-product of integrity and ethical conduct.

Without trust, the framework of TQM cannot be built. Trust
fosters full participation of all members. It allows empowerment
that encourages pride ownership and it encourages commitment.
It allows decision making at appropriate levels in the organisation,
fosters individual risk-taking for continuous improvement and
helps to ensure that measurements focus on improvement of
process and are not used to contend people. Trust is essential
to ensure customer satisfaction. So, trust builds the cooperative
environment essential for TQM.
Building Bricks
Basing on the strong foundation of trust, ethics and integrity, bricks
are placed to reach the roof of recognition. It includes:
Training: Training is very important for employees to be highly

productive. Supervisors are solely responsible for implementing
TQM within their departments, and teaching their employees
the philosophies of TQM. Training that employees require are
interpersonal skills, the ability to function within teams, problem
solving, decision making, job management performance analysis
and improvement, business economics and technical skills.
During the creation and formation of TQM, employees are trained
so that they can become effective employees for the company.
Teamwork: To become successful in business, teamwork is

also a key element of TQM. With the use of teams, the business
will receive quicker and better solutions to problems. Teams
also provide more permanent improvements in processes and
operations. In teams, people feel more comfortable bringing up

problems that may occur, and can get help from other workers to
find a solution and put into place. There are mainly three types
of teams that TQM organisations adopt:
Quality Improvement Teams or Excellence Teams (QITS):

These are temporary teams with the purpose of dealing with
specific problems that often re-occur. These teams are set
up for period of three to twelve months.
Problem Solving Teams (PSTs): These are temporary teams

to solve certain problems and also to identify and overcome
causes of problems. They generally last from one week to
three months.
Natural Work Teams (NWTs): These teams consist of

small groups of skilled workers who share tasks and
responsibilities. These teams use concepts such as employee
involvement teams, self-managing teams and quality circles.
These teams generally work for one to two hours a week.
Leadership: It is possibly the most important element in TQM. It

appears everywhere in organisation. Leadership in TQM requires
the manager to provide an inspiring vision, make strategic
directions that are understood by all and to instil values that
guide subordinates. For TQM to be successful in the business,
the supervisor must be committed in leading his employees.
A supervisor must understand TQM, believe in it and then
demonstrate their belief and commitment through their daily
practices of TQM. The supervisor makes sure that strategies,
philosophies, values and goals are transmitted down through out
the organisation to provide focus, clarity and direction.
Binding Mortar
Communication: It binds everything together. Starting from
foundation to roof of the TQM house, everything is bound by strong
mortar of communication. It acts as a vital link between all elements
of TQM. Communication means a common understanding of ideas
between the sender and the receiver. The success of TQM demands
communication with and among all the organisation members,
suppliers and customers. Supervisors must keep open airways where
employees can send and receive information about the TQM process.
Communication coupled with the sharing of correct information is
vital. For communication to be credible the message must be clear
and receiver must interpret in the way the sender intended.
There are different ways of communication such as:
Downward communication: This is the dominant form of

communication in an organisation. Presentations and discussions
basically do it. By this the supervisors are able to make the
employees clear about TQM.
Upward communication: By this the lower level of employees

are able to provide suggestions to upper management of the
affects of TQM. As employees provide insight and constructive
criticism, supervisors must listen effectively to correct the
situation that comes about through the use of TQM. This forms
a level of trust between supervisors and employees. This is also
similar to empowering communication, where supervisors keep
open ears and listen to others.
Sideways communication: This type of communication is

important because it breaks down barriers between departments.
It also allows dealing with customers and suppliers in a more
professional manner.
Roof
Recognition: Recognition is the last and final element in the entire
system. It should be provided for both suggestions and achievements
for teams as well as individuals. Employees strive to receive recognition
for themselves and their teams. Detecting and recognising contributors
is the most important job of a supervisor. As people are recognised,
there can be huge changes in self-esteem, productivity, quality and
the amount of effort exhorted to the task at hand. Recognition comes
in its best form when it is immediately following an action that an
employee has performed. Recognition comes in different ways, places
and time such as:
Ways: It can be by way of personal letter from top management.

Also by award banquets, plaques, trophies etc.
Places: Good performers can be recognised in front of

departments, on performance boards and also in front of top
management.
Time: Recognition can be given at any time like in staff meeting,

annual award banquets, etc.

19. Which of the following is not the building block of TQM?
(a) Ethics
(b) Integrity
(c) Mistrust
(d) Training
20. The elements of TQM can be divided into four groups according
to their function. The groups are:
(a) Foundation Ethics, Integrity and Trust.
(b) Building Bricks Training, Teamwork and Leadership
Contd...
(c) Binding Mortar Communication

(d) Roof Recognition
21. There are different ways of communication such as:
(a) Downward communication
(b) Upward communication
(c) Sideways communication
Fill in the blank:
22. ........................ implies honesty, morals, values, fairness, and
adherence to the facts and sincerity.
Visit any Hospital in your area. Measure the service quality being
offered there according to TQM principles.
A key point is that TQM has to be introduced and led by top

management. Commitment and personal involvement is required
from top management in creating and deploying clear quality
values and goals consistent with the objectives of the company
and in creating and deploying well defined systems, methods and
performance measures for achieving those goals.
9.9 DIFFERENT PILLARS OF TQM

The concept of TQM is applicable to academics. Many educators
believe that the Demings concept of TQM provides guiding principles
for needed educational reform. In his article, The Quality Revolution
in Education, John Jay Bonstingl outlines the TQM principles he
believes are most salient to education reform. He calls them the Four
Pillars of Total Quality Management.
The four pillars are given below:
Pillar 1: Synergistic Relationships
According to this principle, an organization must focus, first and
foremost, on its suppliers and customers. In a TQM organization,
everyone is both a customer and supplier; this confusing concept
emphasizes the systematic nature of the work in which all are
involved. In other words, teamwork and collaboration are essential.
Traditionally, education has been prone to individual and departmental
isolation. However, according to Bonstingl, this outdated practice no
longer serves us: When I close the classroom door, those kids are
mine! is a notion too narrow to survive in a world in which teamwork

and collaboration result in high-quality benefits for the greatest
number of people. The very application of the first pillar of TQM
to education emphasizes the synergistic relationship between the
suppliers and customers. The concept of synergy suggests that
performance and production is enhanced by pooling the talent and
experience of individuals.
In a classroom, teacher-student teams are the equivalent of industrys
front-line workers. The product of their successful work together
is the development of the students capabilities, interests, and
character. In one sense, the student is the teachers customer, as the
recipient of educational services provided for the students growth
and improvement. Viewed in this way, the teacher and the school
are suppliers of effective learning tools, environments, and systems
to the student, who is the schools primary customer. The school is
responsible for providing for the long-term educational welfare of
students by teaching them how to learn and communicate in highquality ways, how to access quality in their own work and in that of
others, and how to invest in their own lifelong and life-wide learning
processes by maximizing opportunities for growth in every aspect of
daily life. In another sense, the student is also a worker, whose product
is essentially his or her own continuous improvement and personal
growth.
Pillar 2: Continuous Improvement and Self-evaluation
The second pillar of TQM applied to education is the total dedication
to continuous improvement, personally and collectively. Within a
Total Quality school setting, administrators work collaboratively
with their customers: teachers. Gone are the vestiges of Scientific
management... whose watchwords were compliance, control and
command. The foundations for this system were fear, intimidation,
and an adversarial approach to problem-solving. Today it is in our best
interest to encourage everyones potential by dedicating ourselves
to the continual improvement of our own abilities and those of the
people with whom we work and live. Total Quality is, essentially, a
win-win approach which works to everyones ultimate advantage.
According to Deming, no human being should ever evaluate another
human being. Therefore, TQM emphasizes self-evaluation as part of
a continuous improvement process. In addition, this principle also
laminates to the focusing on students strengths, individual learning
styles, and different types of intelligences.
Pillar 3: A System of Ongoing Process
The third pillar of TQM as applied in academics is the recognition of
the organization as a system and the work done within the organization
must be seen as an ongoing process. The primary implication of this
principle is that individual students and teachers are less to blame for
failure than the system in which they work. Quality speaks to working
on the system, which must be examined to identify and eliminate the

flawed processes that allow its participants to fail. Since systems are
made up of processes, the improvements made in the quality of those
processes largely determine the quality of the resulting product. In
the new paradigm of learning, continual improvement of learning
processes based on learning outcomes replaces the outdated teach
and test mode.
Pillar 4: Leadership
The fourth TQM principle applied to education is that the success of
TQM is the responsibility of top management. The school teachers
must establish the context in which students can best achieve their
potential through the continuous improvement that results from
teachers and students working together. Teachers who emphasize
content area literacy and principle-centered teaching provide
the leadership, framework, and tools necessary for continuous
improvement in the learning process.
According to the practical evidences, the TQM principles help the
schools in following clauses:
Redefine the role, purpose and responsibilities of schools.
Improve schools as a way of life.
Plan comprehensive leadership training for educators at all

levels.
Create staff development that addresses the attitudes and beliefs

of school staff.
Use research and practice-based information to guide both policy

and practice.
Design comprehensive child-development initiatives that cut

across a variety of agencies and institutions.
In order to achieve the above as opportunities to the academic

scenario, in addition to patience, participatory management among
well-trained and educated partners is crucial to the success of TQM
in education; everyone involved must understand and believe in
principles. Some personnel who are committed to the principles can
facilitate success with TQM. Their vision and skills in leadership,
management, interpersonal communication, problem solving
and creative cooperation are important qualities for successful
implementation of TQM.
TQM is mainly concerned with continuous improvement in all work,
from high level strategic planning and decision-making, to detailed
execution of work elements on the shop floor. A central principle
of TQM is that mistakes may be made by people, but most of them
are caused, or at least permitted, by faulty systems and processes.
This means that the root cause of such mistakes can be identified
and eliminated, and repetition can be prevented by changing the
processes.
Fill in the blanks:

23. ................. is mainly concerned with continuous improvement
in all work, from high level strategic planning and decisionmaking, to detailed execution of work elements on the shop
floor.
Visit any two companies where traditional approach to quality

and TQM is being implemented. Prepare a short report on the
differences of working and quality dimension of the two companies.
Continuous improvement must deal not only with improving

results, but more importantly with improving capabilities to
produce better results in the future. The five major areas of
focus for capability improvement are demand generation, supply
generation, technology, operations and people capability.
9.10 THE LEAN CONCEPT

Until thirty years ago monopolies existed and large companies took
their existing costs and added a profit to set the product price. If
consumers wanted the product they had to pay this price. These
companies are rare now. Todays market is characterised by intense
competition and sophisticated consumers. Consumers demand
products with more features, better quality, higher availability,
competitive prices and infallible after sales service. These customer
demands are order qualifying and not order winning requirements.
There are multiple numbers of companies producing each type of
product who are willing to meet customer demands to qualify their
products. These market developments provide the rationale for Lean
Systems.
All manufacturing processes are either value-added or non-valueadded. The value stream includes all activities required to bring a
product from the vendors raw material into the hands of the customer.
Value-added processes mold, transform or otherwise change raw
materials into a finished product.
Non-value-added activities are often necessary, consume time and
resources but add little or no value to the product. Such activities
include transporting material, storing material, conducting
inspections, etc.
To provide what the customer is asking for, you need to improve
production efficiency. In the past, increasing production efficiency
required employees to work harder or longer and machines to run

faster. Such methods work in the short run but ultimately cause
problems. Accident rates increase, workers and equipment are
overworked and the overtaxed equipment and workmen revolt. So,
how do you increase efficiency without working harder or longer?
The answer lies in Lean Manufacturing.
The Lean Concept refers to a collection of tools used to promote

long-term profitability and growth by doing more with less.
This seemingly impossible task is achievable by identifying and
eliminating non-value-added processes and with proper training any
company can implement Lean successfully.
The worldwide movement to transition from Mass Production to
Lean Manufacturing is credited to Toyota, the Japanese automobile
manufacturer. Since the 1960s Toyota has been more productive
than its competitors. In 2001, Toyota continued to maintain industry
leadership. Consumer Reports rated Toyota models first in four of the
ten product categories. This is true even today. Toyota has consistently
outperformed competitors.
The essential elements of Lean Manufacturing do not substantially
differ from the techniques developed by Ohno. Lean Manufacturing
is aimed at the elimination of waste in every area of production
including customer relations, product design, supplier networks and
factory management. Its goal is to incorporate less human effort, less
inventory, less time to develop products and less space, to become
highly responsive to customer demand while producing top quality
products in the most efficient and economical manner possible.
This philosophy is reflected in the business model or strategy, the
organisational structure as well as the operational capability of the
organisation.
Conventional mass production models are relatively inflexible bodies
that focus on exploiting economies of scale and pushing products into
the market. They have rigid organisational hierarchies. A relatively
untrained workforce follows orders strictly and is expected to do the
same tasks, hour after hour, day-in and day-out. Tools to improve
productivity assume an extreme division of labour.
A Lean Manufacturing enterprise does this by encouraging problem
identification, hypothesis generation, and experimentation at all
levels in the organisation. It also integrates its suppliers and thinks
more about its customers than it does about running big machines
fast to absorb labour costs and overhead.
Unlike conventional Mass Production principles, Lean Manufacturing
systems involve a relentless pursuit of process improvement which
results in reduction of product lot sizes. Reduction in product lot sizes
triggers a chain of events involving improved motivation, improved
quality control and a reduction in wastes. The ultimate objective is

to eliminate wastes. The comparison of the two systems is shown in
Table 9.3.
TABLE 9.3: DIFFERENCES BETWEEN LEAN

MANUFACTURING AND MASS MANUFACTURING
Areas Affected
Business
Strategy
Organisational
Structure
Operational
Capability
Mass Production
Product-out strategy,
focused on exploiting
economies of scale of
stable product designs
and non-unique
technologies.
Hierarchical structures
that encourage
following orders and
discourage the flow
of vital information
that highlights
defects, operator
errors, equipment
abnormalities and
organisational
deficiencies.
Dumb tools that
assume an extreme
division of labour, the
following of orders and
no problem solving
skills.
Lean Enterprise
Customer-focused
strategy focused
on identifying
and exploiting
shifting competitive
advantage.
Flat structures
that encourage
initiative and
encourage the flow
of vital information
that highlights
defects, operator
errors, equipment
abnormalities and
organisational
deficiencies.
Smart tools that
assume standardised
work, strength in
problem identification,
hypothesis generation
and experimentation.
9.10.1 SEVEN WASTAGES: THE 7WS TAIICHI OHNOS

CATEGORIES OF WASTE
Taiichi Ohno is a production engineer whose formative years were
spent in the textiles division of the Toyota Corporation, and later
moved to the automotive business in 1943. Ohno is usually referred to
as the Father of the Toyota Production System (TPS), which is itself
the basis for what is considered in the West as lean manufacturing.
In fact, the TPS was first launched in the West as Just in Time, or JIT.
It was learnt by them during the initial visits from the US and Europe
to see how Japanese industry had stolen such a march resulting in
people returning with stories of factories which made only what was
required, when required. No wonder that Japanese people were
capturing all others markets when they carried no stock and didnt
need complex computer systems to plan production. All they had was
little yellow cards which sat on the side of tins, stillages or baskets and
instructed machine shops to provide components for their colleagues

(or customers) in assembly.
Lean manufacturing, in basic terms, means the elimination of waste
(or Muda, in Toyota-speak). Ohno identified seven wastes to be
addressed by the Toyota system, and they have become known as the
7Ws. They are described as follows:
Defects: The simplest form of waste is components or products

that do not meet the specification. It is very well known that
Japanese were scaring others with their target of single-figure
reject rates it was realised that they measured in parts per
million and that 1% defects gave a figure of 10,000. Of course, the
key point of Japanese quality achievement came with the switch
from Quality Control to Quality Assurance efforts devoted to
getting the process right, rather than inspecting the results.
Over-Production: A key element of JIT was making only the

quantity required of any component or product. This challenged
the Western premise of the Economic Order Quantity (EOQ)
which was built on acceptance of fixed ordering costs, built
around set-up times, and thus the need to spread these fixed costs
over large batches. Another Japanese guru who contributed to
this change is Shigeo Shingo who led Toyotas move from long
set-ups to Single Minute Exchange of Die (or SMED).
Waiting: Ohno says that Time not being used effectively is a

waste we are incurring the cost of wages and all the fixed costs of
rent, rates, lighting and heating so we should use every minute of
every day productively. Ohno looked at the reasons for machines
or operators being under-utilised and set about addressing them
all. Thus, we have learnt about preventive maintenance and the
creation of flow through our factories with the emphasis on the
time, the rate at which a component or product moves to the next
stage. The objective is to reduce waiting time.
Transporting: Items being moved incur a cost, if it is only the

energy needed to initiate the movement such as the electricity
absorbed by a fork lift truck. Of course, movement brings another
cost, which is less visible but of far greater impact. This is the
time required to move and possible damages during handling.
Managing a factory with operations carried out great distances
apart is much more difficult than when the subsequent stages are
adjacent to one another. This can be seen as the primary driver
behind cellular manufacturing (though some would point out
that Group Technology is very similar and came from Sweden,
rather than from the Orient).
Movement: On a related note, people spending time moving

around the plant is equally wasteful. The time a machine operator
or fitter wastes walking to the toolroom or the stores for a fixture
or a component could be far better utilised if our plant layout
and housekeeping were geared around having everything that is
required close to hand.
Inappropriate Processing: The most obvious example of

inappropriate processing from my own experience relates to
surface finishes that required components to be moved to grinders
for completion, when in fact, such finishes served no purpose. A
basic principle of the TPS is doing only what is appropriate.
Inventory: The element that Western industry immediately

focused upon when confronted with JIT was the cost reduction
available from holding less inventory. The fact that the initial
fact-finding trips to Japan took place when interest rates were at
breathtakingly high levels (mortgage rate was at 15%) perhaps
contributed to failure to see the other costs that Ohno had
considered in his own interpretation. We now know that stock
hides problems and those problems are pearls in that finding a
problem is a good thing now we can solve it, which we couldnt
until it came to light.
Fill in the blanks:

24. The ............................... Concept refers to a collection of tools
used to promote long-term profitability and growth by doing
more with less.
25. .................. is considered to be any part of the process that takes
time and resources but adds little or no value to the product.
26. ..................... mass production models are relatively inflexible
bodies that focus on exploiting economies of scale and pushing
products into the market.
Take an organisation implementing JIT. Write on how suppliers

were involved in implementing JIT. What is the Vendor rating
system they have developed and how?
A Lean Manufacturing enterprise has a flat, team-based structure

with a high degree of work autonomy that encourages initiative and
innovation. It breaks down organisational barriers and develops
highly-trained, motivated employees who investigate problems and
find solutions as a part of their job.
9.11 KAIZEN
Kaizen means continuous improvement. Moreover, it means
continuing improvement in personal life, home life, social life, and
working life. When applied to the workplace Kaizen means continuing
improvement involving everyone from top management to
managers and workers.
The Kaizen strategy is the single most important concept in Japanese

management. It is the key to Japanese competitive success. Because
of Japans success, the Kaizen philosophy has been implemented
in organizations around the world as a way to improve production
values while also improving employee morale and safety.
Kaizen The Definition
Kaizen (Ky'zen) is a Japanese term that means continuous
improvement, taken from words Kai, which means continuous and
zen which means improvement. Some translate Kai to mean change
and zen to mean good, or for the better.
Kaizen is one of the most commonly used words in Japan. Japanese
society is bombarded daily with statements regarding the Kaizen
of almost anything. In business, the concept of Kaizen is so deeply
ingrained in the minds of both managers and workers that they often
do not even realize that they are thinking Kaizen. After World War
II, Japanese managers were constantly looking for ways to improve
in-house systems and procedures and this resulted Kaizen activities
in all most all the fields like labour management relations, marketing
practices, supplier relations, wastage reduction, productivity
improvement, new product development etc. See the Kaizen umbrella
shown below in Figure 9.3, which gives the list of activities of coming
under Kaizen.
The key difference between how change is understood in Japan and
how it is viewed in the West lies in the Kaizen concept. This concept is
so natural and obvious to many Japanese managers that they often do
not even realize that they possess it. This explains why companies are
constantly changing in Japan. After WWII, most Japanese companies
had to start from the ground up. Every day brought new challenges to
managers and workers alike, and every day meant progress. Simply
staying in business required unending progress, and Kaizen has
become a way of life.
Customer
Orientation
Kanban
Quality Improvement
Just-In-Time
Zero Defects
Small Group Activities
Cooperative Labour
Management Relations
TQC
Robotics
QC Circles
Suggestion Systems
Automation
Discipline in the
work place
Productivity
improvement
TPM
New Product
Development
Figure 9.3: Kaizen Umbrella

Constant Improvement
In any business, an employees work is based on existing standards
imposed by management. Improvement refers to improving those
standards. The Japanese perception of management boils down to
one precept: to maintain and improve standards.
Improving standards means establishing higher standards. Once this
is done, it becomes the managements maintenance job to see that the
new standards are observed. Lasting improvement is achieved only
when people work to higher standards. Maintenance and improvement
have thus become inseparable for most Japanese managers.
The higher up the manager is, the more he is concerned with
improvement. At the bottom level, an unskilled worker working at
a machine may spend all his time following instructions. However,
as he becomes more proficient at his work, he begins to think about
improvement. He begins to contribute to improvements in the way
his work is done, either through individual suggestions or through
group suggestions.
Nobody can dispute the value of improvement. Whenever and
wherever improvements are made in business, these improvements
are eventually going to lead to improvements in such areas as quality
and productivity. The starting point for improvement is to recognize
need, and this comes from recognition of a problem. Kaizen emphasizes
problem-awareness and provides clues for identifying problems.
Problem-Solving
Kaizen starts with a problem or, more precisely, with the recognition
that a problem exists. Where there are no problems, there is no
potential for improvement. A problem in business is anything that
inconveniences people downstream, either people in the next process
or ultimate customers.
The issue is that the people who create the problem are not directly
inconvenienced by it, and therefore are not sensitive to the problem. In
day-to-day management situations, the first instinct, when confronted
with a problem, is to hide it or ignore it rather than to face it squarely.
This happens because a problem is a problem, and because nobody
wants to be accused of having created the problem. By resorting to
positive thinking, however, we can turn each problem into a valuable
opportunity for improvement.
Standardization
There can be no improvement where there are no standards. The
starting point in any improvement is to know exactly where one
stands. There must be a precise standard of measurement for every
worker, every machine, and every process. Similarly, there must be a
precise standard of measurement for every manager.
Kaizen strategy calls for never-ending efforts for improvement. In

other words, the Kaizen strategy is a continuing challenge to prevailing
standards. For Kaizen, standards exist only to be superseded by better
standards. Kaizen is really based on constant upgrading and revision.
Only crucial elements need to be measurable and standardized.
Sometimes, Japanese factories employ one-point standardization.
Each worker should have one of his many operations standardized.
Much of blue-collar work does not need to be standardized, so one
point is often enough. This one-point standard is often displayed at
the workplace so that the worker is always mindful of it, and after it
becomes second nature to follow this standard, another standard can
be added.
Standardization is a way of spreading the benefits of improvement
throughout the organizations. Everyone must be mindful of the
standard even management. This is called discipline.
The Suggestion System
Kaizen covers the total spectrum of business, starting with the
way the worker works in the shop, moving on to improvements in
the machinery and facilities, and finally effecting improvements in
systems and procedures. Many top Japanese executives believe
that Kaizen is 50 per cent of managements job, and really, Kaizen is
everybodys job!
It is essential that management properly understand the workers
role in Kaizen and use It is essential that management properly
understand the workers role in Kaizen and use every opportunity to
support it. One of the main vehicles of achieving Kaizen and involving
all employees is through the suggestion system. This system does not
always ask for immediate economic payback on each suggestion. Its
looked at as a morale booster. Morale is improved through Kaizen
activities as everybody masters the art of solving immediate problems.
In many Japanese companies, the number of suggestions made by
each worker is regarded as an important criterion in reviewing the
performance of the supervisors. The manager of the supervisor is, in
turn, expected to assist them so that they can help workers generate
more suggestions.
Management is willing to give recognition to employees efforts for
improvements and makes its concern visible wherever possible.
Often, the number of suggestions is posted individually on the wall
of the workplace in order to encourage competition among workers
and among groups. A typical Japanese plant has a space reserved in
the corner of every workshop for publicizing activities going on in
the workplace, such as the current level of suggestions and recent
achievements by small groups. Sometimes, tools that have been
improved as a result of workers suggestions are displayed so that
workers in other work areas can adopt the same improvement ideas.
Process-oriented Thinking
Kaizen generates process-oriented thinking, since processes must
be improved before we get improved results. Kaizen is also peopleoriented and is directed at peoples efforts. This contrasts sharply
with the result-oriented thinking of most Western managers. In Japan,
the process is considered just as important as the obviously intended
result. In the US, generally speaking, no matter how hard a person
works, lack of results will result in a poor personal rating and lower
income or status. The individuals contribution is valued only for its
concrete results.
Kaizen vs. Innovation
Kaizen vs. innovation could be referred to as the gradualist-approach
vs. the great-leap-forward approach. Japanese companies generally
favour the gradualist approach and Western companies favour the
great-leap approach, which is an approach epitomized by the term
innovation.
Innovation is characterized by major changes in the wake of
technological breakthroughs, or the introduction of the latest
management concepts or production techniques. Kaizen, on the
other hand, is un-dramatic and subtle, and its results are seldom
immediately visible. Kaizen is continuous while innovation is a
one-shot phenomenon. Further, innovation is technology and moneyoriented whereas Kaizen is people-oriented.
Kaizen does not call for a large investment to implement it, but it
does call for a great deal of continuous effort and commitment. To
implement Kaizen, you need only simple, conventional techniques.
Often, common sense is all that is needed. On the other hand,
innovation usually requires highly sophisticated technology, as well
as a huge investment.
Time
Kaizen
Innovation
Improvement
Figure 9.4: Kaizen vs. Innovation
If we look at a diagram in Figure 9.4 of Kaizen vs. Innovation, Kaizen

is a constant slope, while innovation is a staircase. Often, innovation
does not bring the staircase effect, however, because it lacks the Kaizen
strategy to go along with it. Once a new system has been installed as
a result of new innovation, it is subject to steady deterioration unless
continuing efforts are made to first maintain it and then improve on
it. Difference between Kaizen and Innovation has been summarized
in Table 9.4.
TABLE 9.4: DIFFERENCE BETWEEN KAIZEN AND

INNOVATION
Sl. No.
1
2
3
4
5
6
7
8
Factor
Effect
Kaizen
Long-term and long
lasting but change is
un-dramatic
Pace
Small steps
Timeframe
Continuous and
incremental
Change
Gradual and constant
Involvement Everybody
Approach
Group and systems
approach
Requirement Little investment but
great efforts
Effort
People
orientation
Innovation
Short-term but
dramatic change
Big steps
Abrupt and volatile
Abrupt and volatile
Few champions
Individualism
Large investment
but little efforts
Technology
9.12 SIX SIGMA AND TQM

According to James Harrington, Six Sigma was simply a TQM
process that uses process capability as a way of measuring progress.
According to Pande, Newman and Cavanaugh, Six Sigma is

a comprehensive and flexible system for achieving, sustaining and
maximising business success. Six Sigma is uniquely driven by close
understanding of customer needs, disciplined use of facts, data and
statistical analysis, and diligent attention to managing, improving
and reinventing business processes.
The Six Sigma of today speaks the language of management: bottomline results. It institutionalizes a rigorous, disciplined, fact-based
way to deliver more money to the bottom-line through process
improvement and process design projects-selected by the top
leadership and led by high potentials trained as Black Belts or
Master Black Belts in Six Sigma-that aim to create near-perfect
processes, products, and services all aligned to delivering what the
customer wants. In successful implementations, the majority of Six

Sigma projects are selected for measurable bottom-line or customer
impact that is completed within two to six months. The projects are
delivered through the application of a well-defined set of statistical
tools and process improvement techniques by well-trained people
in an organization that has made it clear that Six Sigma is a career
accelerator.
Traditional quality programs focus on detecting and correcting
defects. However, Six Sigma programs seek to reduce the variation
in the processes that lead to these defects. One of the most important
measures of variation is the standard deviation.
The standard deviation (s) of a population, (of size N) is given by
N
s=
(x
i =1
x) 2
Where: xi is ith variable and x is arithmetic mean

The philosophy underlying six sigma production is to reduce the
variation in the quality variable of the output product to the extent
that there is probability of getting 3.4 detective products maximum
from one million products produced. The performance of a process
in terms of its variability is compared with different processes using
a common metric.
This metric is Defects per Million Opportunities (DPMO). This
calculation requires three pieces of data:
Unit: The item produced or being serviced.
Defect: Any item or event that does not meet the customers
requirements.
Opportunity: A chance for a defect to occur.
A calculation is made by using the following formula.

DPMO = (Number of defects 1,000,000)/Number of opportunities
for error per unit Number of units
For a Six Sigma process with only one specification limit (upper or
lower), there are six process standard deviations between the mean of
the process and the customers specification limit. This is the origin
of the name Six Sigma. For a process with two specification limits
(upper and lower), this translates to slightly more than six process
standard deviations between the mean and each specification limit
such that the total defect rate corresponds to equivalent of six process
standard deviations. This relationship is shown graphically in
Figure 9.5.
A process that is in Six Sigma control will produce no more than two
defects out of every billion units. Often, this is stated as four defects per
million units which is true if the process is only running somewhere

within one sigma of the target specification.
The overall performance of a process, as the customer views it,
might be 3.4 DPMO. However, a process could indeed be capable of
producing a near perfect output. As the process sigma value increases
from zero to six, the variation of the process around the mean value
decreases. With a high enough value of process sigma, the process
approaches zero variation and is known as zero defects.
LSL
USL
Target
Shifted 6 Sigma
Process: 3.4 Total
Defects of One
Million Opportunities
Below The LSL
3 Sigma Process
Centered Around
The Target: 66,738
Total Defects of One
Million Opportunities
Outside the Lower and
Upper Specification
Limits
Figure 9.5: Six Sigma A Statistical Representation

Key Elements of Six Sigma
The following could be encapsulated as the key elements of Six Sigma:
Process Orientation
Customer Focus
Y = f(X)
Data and Measurement Driven
Focus on Variation Reduction
Statistical Rigour
Project Orientation
The DMAIC Process Improvement/Problem Solving Process
Dedicated Personnel
Bottom Line Results Focussed
Data-driven culture (In God we trust, all others bring data).
A preliminary step in TQM implementation is to assess the

organisations current reality: relevant preconditions have to do
with the organisations history, its current needs, precipitating
events leading to TQM, and the existing employee quality of working
life. Visit a company and explain the relevance of this statement.
Six Sigma can be described as a business improvement approach

that seeks to find and eliminate causes of defects and errors in
manufacturing and service processes by focusing on outputs that are
critical to customers and a clear financial return for the organization.
Fill in the blanks:

27. ......................... means continuous improvement.
28. The central philosophy of kaizen was probably best expressed
by an earlier head of Toyota, ....................... , who said that no
process could ever be declared perfect and that therefore there
was always room for improvement.
29. ....................... refers to a disciplined, data-driven approach and
methodology for eliminating defects in any process from
manufacturing to transactional and from product to service.
30. A ....................... is a component that does not fall within the
customers specification limits.
31. With a high enough value of process sigma, the process
approaches zero variation and is known as ....................... .
9.13
ISO (INTERNATIONAL ORGANISATION

FOR STANDARDISATION)
The International Organisation for Standardization (ISO) was founded

in 1946 in Geneva, Switzerland. The objective of this organisation is
to promote the development of international standards to facilitate
free exchange of goods and services across the globe. Organisations
competing in international business, which would like to expand
their business to all parts of world, are finding that it is necessary to
adopt and adhere to these standards. The ISO technical committee
developed a series of international standards, which were published
in 1987. These standards consisting of ISO 9000, 9001, 9004 were
intended to provide guidelines and were developed for use in twoparty contractual situations and internal auditing. However, with
adoption by the European Community and other communities and
many countries insisting ISO as the basic requirement for import of
goods and services, ISO standards became very popular and they are
universally acceptable standards. All most all countries have adopted
ISO standards and organisations all over the world have obtained
registration of ISO standards.
ISO is generic quality management system which can be adopted by
any organisation in any part of the world, which can be into any type
of business. It is an internationally accepted standard of quality for all
business to business to dealings.
In 2000, the ISO 9000 standards were revised with significant changes
from the earlier standards (Standards of 1994) in order to enhance their
effectiveness. ISO 9000 defines quality system standards, based on the
premise that certain generic characteristics of management practices
can be standardized, and that a well designed, well implemented,
and carefully managed quality system provides confidence that the
outputs will meet customer expectations and requirements. The ISO
9000 standards are created to meet the following objectives.
Achieve, maintain, and seek to continuously improve product

quality and after sales services in relationship to requirements.
Improve the quality of operations to continuously meet customers

stake holders stated and implied needs.
Provide confidence to internal management and other

employees that quality requirements are being fulfilled and that
improvement is taking place.
Provide confidence to customers and other stakeholders that

quality requirements are being achieved in the delivered products.
Provide confidence that quality system requirements are fulfilled.
The standards prescribe documentation for all processes affecting

quality and ensure compliance through auditing, which will also lead
to continuous improvement.
Fill in the blanks:

32. The objective of ....................... is to promote the development
of international standards to facilitate free exchange of goods
and services across the globe.
33. ISO ....................... is applicable to all types of organisations,
including manufacturers of different types of products,
software developers, service providers like banks, insurance,
transport services, hospital, hotels etc.
ISO 9000 is applicable to all types of organisations, including

manufacturers of different types of products, software developers,
service providers like banks, insurance, transport services, hospital,
hotels, etc.
9.14 5-S METHODOLOGY

5-S is a methodology for organising, cleaning, developing and
sustaining a productive work environment. Based on Japanese words
that begins with S, shown in Table 9.5, the 5-S Philosophy focuses on
effective work place organisation and standardized work procedures.
It simplifies the work environment, reduces waste and non-value
activity while improving quality, efficiency and safety.
Housekeeping is a vital element of Lean. 5-S has universal application
and is more a way of thinking than an actual tool. The actions relating
to the organisation and housekeeping of the work area are Separate,
Sanitize, Segregate, Standardize, and Sustain. In addition, Safety is
always included as a sixth S.
TABLE 9.5: THE 5S SYSTEM

Seiri
SORT what is not needed. Use the red tag system

of tagging items considered not needed, then give
everyone a chance to indicate if the items really
are needed. Any red tagged item for which no one
identifies a need is eliminated (sell to employee, sell
to scrap dealer, give away, put into trash).
Seiton
STRAIGHTEN what must be kept. Make things

visible. Put tools on peg board and outline the tool so
its location can be readily identified. Apply the saying
a place for everything and everything in its place.
Seiso
SCRUB everything that remains. Clean and paint to

provide a pleasing appearance.
Seiketsu
SPREAD the clean/check routine. When others see

the improvements in the Kaizen area, give them the
training and the time to improve their work area.
Shitsuke
STANDARDISATION and self-discipline. Establish

a cleaning schedule. Use downtime to clean and
straighten area.
9.14.1 SEIRI (SORT)

The first S focuses on eliminating unnecessary items from the
workplace. An effective visual method to identify these unneeded
items is called red tagging. A red tag is placed on all items not required
for the job. These items are moved to a central holding area where
their need is evaluated. Occasionally used items are moved to a more
organised storage location outside of the work area while unneeded

items are discarded. Sorting is an excellent way to free up valuable
floor space and eliminate such things as broken tools, obsolete jigs
and fixtures, scrap and excess raw material.
9.14.2 SEITON (SET IN ORDER OR STRAIGHTEN)
The second S of the 5-Ss focuses on efficient and effective storage
methods. You must ask yourself these questions:
What do I need to do my job?
Where should I locate this item?
How many of this item do I really need?
Some strategies that incorporate the concept of Seiton are a part

of the visual management and control concepts discussed earlier.
These are painting floors, outlining work areas and locations, shadow
boards, etc. In addition, modular shelving and cabinets are provided
for needed items such as trash cans, brooms, mops and buckets. Each
object on the shop floor has a specific location where all employees
can find it. The concept is described by a place for everything and
everything in its place.
9.14.3 SEISO (SHINE)
The third S of the 5-Ss focuses on a thoroughly clean work area.
Workers should take pride in a clean and clutter-free work area.
This is achieved by the Shine step. It helps create ownership in
the equipment and facility. Workers also begin to notice changes in
equipment and facility location such as air, oil and coolant leaks,
repeat contamination and vibration, broken, fatigue, breakage, and
misalignment. Identifying these changes early, leads to reduced
equipment failure and loss of production adding to the companys
bottom line.
9.14.4 SEIKETSU (DISCIPLINE)
Once the first three of the 5-Ss have been implemented, you should
concentrate on standardising best practice in your work area. Allow
your employees to participate in the development of such standards.
They are a valuable but often overlooked source of information
regarding their work.
9.14.5 SHITSUKE (SUSTAIN)
This is by far the most difficult S to implement and achieve. Human
nature resists change and the tendency is to return to the status quo.
Sustain focuses on defining a new status quo and standard of work
place organisation.
Once fully implemented the 5-S process can increase morale, create
positive impressions on customers and increase efficiency and
organisation. Not only will employees feel better about where they
work but also the effect on continuous improvement can lead to less
waste, better quality and faster lead times, any of which will make the
organisation more profitable and competitive in the marketplace.
Safety is an issue that must always be considered in all operations.
Lean concepts strive to provide the safest available work environment
for employees, management and the community at large. Lean
also supports maintaining an environmentally sound and friendly
workplace, which is included in the Lean concepts 5-S and Just in
Time, also. Maintaining an orderly workplace and a minimum amount
of inventory naturally enhances employees safety and environmental
awareness. These all lead to improved efficiency, work organisation,
quality, safety and housekeeping and protect investment at the same
time.
Fill in the blanks:

34. The first S, ....................... focuses on eliminating unnecessary
items from the workplace.
35. ....................... focuses on a thoroughly clean work area.
Visit a small business firm in your area. Apply the approach of

5-S methodology to make an effective work place organisation
and standardised work procedures. Observe the production and
revenues for six months. Then prepare a short report how it has
helped in the improvement of revenues and profit for that firm.
9.15 SAFETY
The number of people, if any, engaged full time in promoting safety
varies with the size of the company and the nature of its activities. But
it has been found that the companies which employ full-time safety
men have accident records much better than those that do not. The
number of employees is not always a comparable basis for judging the
number of potential hazards. For example, an assembling plant doing
only light assembly work has less risk of personal injury though it may
employ a very large workforce.
The safety department is usually located within the personnel
department. But, the safety man should preferably report to someone
senior in the organisation so as to be respected. It may be ideal for the
safety man to report to the works or production manager. This can
help in proper implementation of major safety programs as operations
and production are areas more prone to accidents.
The safety specialist should have the authority to stop any process he
considers unsafe until adequate measures have been taken to remove
the hazard apparent to him. The education and experience of the

safety specialist can vary widely.
A safety specialist should possess the following:
Have certain specific knowledge about emergency procedures

and how to implement and enforce such procedure;
Have the ability to investigate into accidents or direct such

investigations;
Possess a certificate in first aid;
He should also be familiar with safety principles and techniques,

and if working in industry a good knowledge of the plant and
equipment.
In addition, he must have certain personal characteristics:
Ability to get along with people. This is a very important trait,

as he must achieve his objective more by persuasion than by
command.
Enthusiasm, drive and perseverance.
Readiness for new ideas and approaches.
Risk Assessment
Risk assessment is an essential part of safe operations of plant and
equipment. All processes and equipment need to be assessed from
the point of view of compatibility, storage, fire protection, toxicity,
hazard index rating, fire and explosion hazards. There should be
an ongoing program of reliability assessment of process equipment,
incorporating safety trips and interlocks, scrubbing system, etc.
Evaluation of electrical safety, areas and equipment using high voltage
and hazardous area classification should be carried out, protection
provided against these hazards, with warning and caution signs being
highly visible.
Periodical assessment of safety procedures and practices is essential.
Performance of safety systems and gadgets along with follow-up
measures need to be identified. There should also be a comprehensive
risk analysis plan indicating the impact of consequences and specific
written down and practiced emergency procedures. Safety induction
and periodical refresher training for the regular employees and
contract workmen were not carried out. Thorough identification and
analysis of all risks and insurance planning should also be done so
that interruption risks and public liability risks could also be managed
effectively.
9.15.1 MAN POWER SAFETY
Industrial accidents present a serious problem, and can possibly have
a crippling effect on the operations of the organisation in addition to
heavy losses by way of workmens compensation, lost production and
possible morale of the workforce. Though the cost to individuals is a

major concern, production losses and property damage attributable
to work accidents are much higher. This need not be the case as it is
both possible and practicable to control industrial accidents. This is
shown very clearly by the statistics, which have been provided at the
beginning of this chapter.
The Indian Factories Act, 1948 has its objectives:
To protect human beings from being subjected to unduly long

hours of bodily strains of manual labour, and
Employees should work in healthy and sanitary conditions so far

as the manufacturing process will allow and precautions should
be taken for their safety and prevention of accidents.
The terms accidents and injuries are often used interchangeably.

Actually, the meanings are somewhat different. An industrial
accident may be defined as an unintended occurrence arising out
of employment that either causes personal injury or causes property
damage or interference with production or other business activity
under such circumstances that personal injury might have resulted.
For example, when a cable on a crane carrying a pallet breaks and
the falling pallet breaks a mans skull, there has clearly been both
an accident and a personal injury. However, if the pallet falls in
such a way that no one is hurt, no property is damaged, and there
is no appreciable interference with production, then it would not be
counted as an accidentthough it was a hazardous occurrence. But,
if the pallet falls to the floor damaging a standing trolley, though no
one was hurt in the incident it counts as an accident.
Accidents involve injuries, deaths and even evacuation of large
numbers of people. The largest industrial accident in recent history
that resulted in over 2,800 deaths, was the Bhopal Gas Accident in
1984, in the Union Carbide Plant. It is tragic that accidents do take
place. Some accidents that occurred in the 1990s are shown in
Table 9.6.
TABLE 9.6: SOME ACCIDENTS IN THE 1990S

Number of
Origin of
accident
Year
Date Location
Products
involved
Bulk cargo
handling
terminal
1997
00.01 Mumbai
Sulphur
Explosion
1992
(warehouse)
29.04 New Delhi
Chemicals
Fire at a
chemical
store
1994
13.11 New Delhi
Toxic cloud
(chemicals)
Fire in
refinery
1988
09.11 Bombay
Oil
35
16
Leakage
1990
05.11 Nagothane
Ethane and
propane
32
22
Deaths
Injured
43
20
Evacuated
500
..
Contd...
S
Leakage
(transport
accident)
1997
21.01 Bhopal
Ammonia
400
Leakage
from a
pipeline
1991
00.12 Calcutta
Chlorine
200
Leakage
in an Ice
Factory
1990
00.07 Lucknow
Ammonia
gas
200
Refinery
fire
1997
14.09 Vishakhapatnam
34
31
Transport
accident
1994
00.01 Thane District
Chlorine gas
298
Transport
accident
1991
00.01 New Bombay
Ammonia gas 1
150
Transport
accident
1995
12.03 Madras
Fuel
23
Transport
accident
1995
00.12 Maharashtra
Ammonia gas
2 000
Transport
accident
(leakage)
1991
00.11 Medran
Inflammable
93
liquid
25
~100
150000
Accidents do not just happen; they are caused. High public

awareness, stricter statutory regulations and a responsive judiciary
make it necessary for industries to upgrade their safety management
capabilities, which include identifying, assessing, communicating and
controlling industrial risks. The prime purpose of accident prevention
is to prevent personal injuries and deaths. Apart from this, there are
intangible gains to be made from accident prevention like morale and
public relations.
9.15.2 MATERIAL SAFETY
A workshop where there are many accidents is one in which
production processes are not adequately under control. It has been
found that highest efficiencies are generally found in conjunction
with the best accident records. Therefore, safety reduces production
or operating costs and has an important place along with work
simplification, good materials handling, production control and other
techniques of management.
Material safety involves three key areasoperation, maintenance and
specifications. These may reflect in unsafe physical conditions and
unsafe personal acts or both. Any effective safety program must first
isolate the causes that produce accidents. Practically every accident is
caused by more than one factor attributable to either of these or both.
Unsafe Physical Conditions: Unsafe physical conditions are those
factors which are present due to defects in condition, errors in design,
faulty planning or omission of essential safety requirements. These
may be grouped into seven categories:
Inadequate mechanical guards on moving equipment.
Operating poorly maintained or defective equipment.
Unsafe design or construction.
Hazardous processes or operations.
Inadequate or incorrect illumination in work place.
Inadequate or incorrect ventilation in work place.
Improper or inappropriate safety apparel or accessories.
For example, the chemical industry is a point in case. Many prominent

chemical industries like caustic soda, soda ash, carbon black, phenol,
acetic acid, methanol and azo dyes, use large quantities of flammable,
explosive, toxic or corrosive materials. The lifecycle impact of many of
these chemicals should be considered when assessing its dangers and
benefits. Safety is an attempt to prevent all hazardous occurrences
and eliminate unsafe conditions.
Unsafe Personal Acts: Personal injuries can be divided into three
classes as lost-time, doctors and first-aid cases. The American
Standards Association prefers the expressions disabling injuries
and medical treatment injuries. Whatever be the terminology, unsafe
personal acts, i.e., behaviours which lead to accidents, need to be
avoided. Seven categories of unsafe behaviour are identified below:
Working unsafely and using equipment unsafely (e.g., working

under suspended loads, etc.).
Removing safety devices or altering their operation.
Operating equipment or plant at unsafe speeds.
Use of unsafe or improper equipment.
Improper interpersonal behaviour, e.g., horse-play, teasing, etc.
Failure to use safety attire or personal protective devices like

gloves/goggles.
Performing operations for which supervisory permission has not

been obtained.
For example, in steel plants a simple requirement and precaution is to

use dark coloured glasses when looking at hot liquid metal. Failure to
do so can affect the workers eyesight. Though the affect is long-term,
it should be the responsibility of management and supervisors to
enforce compliance of safety requirements. The supervisors should be
aware of the risks involved and strictly discourage acts of commission
or omission that can turn out to be a potential hazard.
9.15.3 BUILDING SAFETY
Statistically, one accident might give rise to one, none, or several
injuries. Safe physical conditions are to a large extent determined by
the state of the plant and equipment. Five important maintenance
practices that can help keep Building and material in good running
condition and ensure they are safe to operate are given below:
Obtain and Use Manufacturers Maintenance Manuals: This

is fundamental and deserves to be at the top of the list. The
manufacturer knows the problems of the plant and equipment
better than others. The manufacturers maintenance manuals

are therefore essential for proper maintenance at right intervals,
Establish a Preventive Maintenance Program: Preventive

maintenance helps keep the plant and equipment operating
properly with minimum downtime and expense. More importantly,
regular preventive maintenance will help you detect and correct
small problems before they cause big failures. All inspections
should be conducted in accordance with the manufacturers
recommended procedures and performed at least as frequently
as the manufacturers recommended intervals.
Use Qualified Maintenance Personnel: Maintenance people

should be qualified to do their assigned jobs. Asking someone to
perform work for which he or she is not qualified may place the
person performing the work as well as others at risk of injury or
death.
Perform Required Testing: Even the best-maintained

components wear with time, hence periodic testing serves as
a double check to maintenance. It confirms that components
and machinery are fit for service. Written records of all tests
including dates, equipment serial numbers, names of personnel
conducting the tests and all data, such as pressures, times, flow
rates, weights, etc., should be maintained.
Establish Replacement Points: At some point, all plant and

equipment needs to be replaced. This point depends on the
usage, condition and amount of maintenance expected in the
future. Replacement points should be established to ensure that
they provide adequate levels of safety.
Proper maintenance is an important part of safety. Maintenance is

a function of inspector qualifications, inspection levels, frequency
of inspections, out-of-service criteria, test forms and records.
Implementing the points outlined above will help keep plant and
equipment running safely.
Guidelines for Safety of Material in Industry
Material handling: The handling of objects is responsible for
approximately one-fourth of the occupational disabling injuries.
Proper training must be given to the workers in lifting and lowering
objects and in the use of manually operated vehicles injuries. Proper
training must be given to the workers in lifting and lowering objects
and in the use of manually operated vehicles.
In the case of powered trucks, only trained operators must be allowed
to operate them; in-plant routes must be barricaded where they pass
along side or over work-areas.
Conveyors, although safe, demand the use of precautions because of
certain inherent factors. The conveyor must be barricaded where it
pass alongside or over work-areas.
Material storage: The location must be such that it offers no hazards

to personnel. Bulk storage of flammables are special problems and
call for the attention of an expert.
Hand tools: In spite of their disarmingly harmless appearance, these
are responsible for a significant number of injuries. A good axiom to
follow is choose the right tool for the right job.
9.15.4 INFRASTRUCTURE SAFETY
Guidelines for Safety of Infrastructure in Industry
Plant Layout and Design: Some considerations that should be kept
in mind while approving the design are:
Adequate aisle and storage space to minimise materials handling

hazards.
Location of fuses and switches on the operating side of machines.
Provision of permanently installed ladders for operating valves

and other controls at a height of more than 8 feet.
Proper insulation of hot surfaces in excess of 200 F within reach

of personnel.
Adequate guarding of belting and line shafting.
Segregation of noisy or dusty operations (if possible).
Other built-in safety equipments.
Apart from these, other factors like providing non-skid floors, hand
rails for stairs, correct light intensity, ventilation, etc., must be looked
into.
Machinery, Boilers, and Guards: In some respects, machines are
monsters created by man which serve as long as he keeps his wits and
attention concentrated. If he loses concentration, it can cause swift
and painful injury.
The more common sources of mechanical hazards are unguarded
shafting; belt drives; gear trains; projections on rotating parts; any
exposed component parts of machines or power driven equipment
which rotate rapidly or have considerable power and may catch the
worker. The elimination of hazard from such sources is generally
achieved by substantially enclosing, screening, barricading or
otherwise protecting so that persons cannot inadvertently come in
contact with the danger point.
Boilers and other pressure vessels must be provided with safety
valves, pressure gauges and other similar instruments.
Electrical Equipment and Installation: As little as 0.05 ampere may
cause a fatal shock. A number of methods may be used to protect
personnel against accidentally contacting live electrical elements;
All electrical equipment operating at 50 volt or above should be

guarded.
All inside wiring must be enclosed in a conduit.
Grounding should be provided on all exposed metallic noncurrent carrying parts of electrical equipment.
Costs Associated with Accidents

It is becoming increasingly important for any department in an
organisation to show to the higher levels of management the value of its
services from time-to-time. The safety section is in a peculiar position
in this respect. A minimum level of safety of operation is absolutely
essential. But once that is achieved, it is a matter of judgment as to
how serious an effort must be made to accomplish a good or perhaps,
an excellent accident record.
Even a simple or minor accident can be expensive. The great
majority of cost statements focus only on the costs to the company
itself (some comprising reconstruction costs, and some including the
costs of business interruption); however, other organisations become
involved following a major accident and each incurs additional costs
as a consequence. An example is the Bhopal Gas Accident.
Very often, there is commercial sensitivity associated with the costs
of accidents. Companies may prefer not to acknowledge huge losses
from an accident as such because:
The information could depress the companys valuation on the

stock market,
Disclose damaging information to competitors, and
Create consumer concern about the possible impact on product

costs.
However, some of the costs associated with accidents can be quickly

identified such as medical treatment, lost wages and decreased
productivity. These easily-identified expenses are often known as the
direct costs associated with accidents. There are two major classes of
costs resulting from accidents the insurance (or insured) cost and
the uninsured costs (some prefer to call these the direct and indirect
costs).
The insurance cost is the payment made under workmens
compensation laws and medical expenses of the type usually covered
by insurance. This cost is easily estimated. The uninsured cost may
consist of a combination of the following elements:
Cost of wages paid for working time lost by workers who were
not injured.
Property damageto tools, materials and equipment.
Cost of wages paid for working time lost by injured workers other
than workmens compensation payments.
Extra cost due to overtime work necessitated by an accident.
The expense and time of finding a temporary replacement for

the injured worker.
Time used by supervision to investigate the mishap, preparation

of accident reports and adjustments made to work schedules.
Time used by other employees to assist the injured worker.
Wage cost due to decreased output of injured worker after

returning to work.
Delays in accomplishment of work task by a group.
Cost of learning period of new worker.
Uninsured medical cost borne by the company.
Cost of time spent by higher supervision and clerical workers on

investigations.
Miscellaneous unusual costs.
Less evident expenses associated with accidents are known as indirect

or hidden costs and can be several times greater than the value of
the direct costs. Indirect costs vary greatly from case-to-case, and are
often difficult to quantify. The main point is that accidents are much
more costly than just the basic or direct costs.
Responsibility for Accident Prevention
Accident prevention is a major task of management. It is up to the
owners or the board of directors to establish or at least to review and
approve the long run objectives. They should know that until accidents
have been reduced to a very low level, they are not maximising their
profits because prevention is cheaper than the costs resulting from
accidents.
Emergency Procedures
Specialised staff should be trained and equipped to respond to

and investigate accidents and hazards, including fires, crimes
and medical emergencies. If there is an emergency, they should
be contacted.
Supervisors and workers should know where to report an

emergency.
Staff officers should be trained to respond to the location and

render appropriate aid that may include notification of the police
or fire departments.
Buildings should be equipped with fire alarm systems that utilise

horns or sirens to alert building occupants. In the event of a fire
alarm, occupants should evacuate at once via the nearest exit.
Accident Investigation
Accidents and illnesses on the job result in a no win situation.

Employees suffer from injury and the organisation suffers
from having employees off the job. It is for this reason that an
important goal of the management should be to prevent accidents
whenever possible.
However, when an accident occurs it should always be promptly

reported and accidents requiring in-depth investigation (such as
a fatal injury, two or more persons admitted to the hospital or
excessive property damage) should be investigated by an outside
agency.
An accident does not have to be of a serious nature to be reported.

Any action or activity that has caused an injury to an employee
should be reported, even if little or no immediate aid is needed.
This will help protect the employee by having an objective source
check their condition.
Employees should also report near miss injuries or accidents,

either to their supervisor or to safety. A near miss could be
stumbling, slipping, or perhaps a falling object that causes no
immediate harm. These reports help identify potential hazards or
conditions that can be addressed to avoid an injury in the future.
A written report about the accident should be filed, which should

include an investigation into the cause of the accident, the
findings of which should be reviewed by the Safety Committee,
who would discuss the accident, and work towards implementing
changes to prevent such incidents in future.
Use, Care and Maintenance of Machinery, Tools, Material and

Equipment
Safe use and care should be practiced of all tools, machinery,

equipment or material used by employees on the companys
property, regardless of ownership.
All supervisors should be responsible for monitoring that such

items are used properly by the employee(s) and are maintained
and remain in good working condition.
Employees must know how to properly operate, clean, maintain

and recognise when equipment or machinery is no longer safe to
use.
All tools, machinery, or equipment should be used and

maintained according to the manufacturers recommendations.
If such instructions are not available, the manufacturer should
be contacted to obtain a new copy.
If a new copy cannot be obtained, then qualified persons within

the department should be assigned to develop a written set of
guidelines for the safe use and maintenance of that item.
Instruction manuals should be kept with each piece of equipment,

or at a central location known to all persons using that equipment.
After laying down adequate safety as one of their requirements,

the owners should assign safety responsibility to their chief
executives. The chief executive should, in turn, directly charge
the different functional departments with specific safety
responsibilities. For example, Process Engineering for the
clearance of process, of machines, of jigs and fixtures that are
complete and ready for use so that the operation will be safe to the
worker directly involved and will not constitute a hazard to other
employees. The head of the Maintenance department should
be particularly charged with the responsibility for seeing that
the work of his department is carried out in such a way that no
temporary hazards are allowed to exist. Also, the major objective
should be to keep the plant safe for work. General housekeeping
is an immediate clue as to the safety rating of a company.
In addition, special focus needs to be given to Personnel or

Industrial Relations, as the safety specialist is usually attached
to this department. The Safety Specialist should be charged
with organising, stimulating and guiding the safety program as
well as keeping up on safety subjects. It is up to this department
to support the specialist or the foreman in the relatively few
instances where an employee refuses to cooperate in safety
regulations.
The foreman of the shop or department is the key man in safety

programs particularly with regard to unsafe acts. Accident
prevention is one aspect of production comparable to waste
redaction. The foreman must be taught to get the production
while simultaneously adhering to safety regulations.
The Union should be made to support the management in

enforcement of safety regulations. There is usually very little
difficulty in this.
First Aid
To provide immediate assistance to injured employees, all Safety

Officers, maintenance supervisors and laboratory supervisors
need to maintain current certification in first aid.
Each department that has first aid certified employees is

responsible for arranging initial and subsequent training for
them.
Fill in the blank:

36. Material safety involves three key areasoperation, ..................
and specifications.
Visit a building of an office which is having at least 10 floors. Compile

a report of all the building safety measures being used there.
Safety should also ensure that proper maintenance of plant and

equipment is carried out on schedule. If there is a delay, the reasons
for the delay should be investigated, and if found necessary, use
of the equipment should be forbidden till further notice, pending
rectification.
9.16 SECURITY
Security is a comprehensive area, including Risk Management
Information Security Policies Guidelines, Baselines, Procedures
and Standards Security organisation and education, etc. The aim of
security is to protect the company/entity and its assets. We shall study
about two types of security i.e. material security and building security
which we will study in detail.
9.16.1 BUILDING SECURITY
Here are seven steps that you can take to make your building more
secure physically. While all of these suggestions wont apply to every
building, if we start at the top of the list and work your way down,
we will find practical steps that us can take to protect our people and
assets.
Install Deadbolt Locks: The deadbolt lock is a foundation

block of building security. It is one of the strongest, and most
common, locking devices which are used on exterior doors.
Home improvement stores can have several choices of deadbolts,
so we need to understand the differences in order to make the
best selection.
Establish a Key Control Policy: If we dont know who is holding

keys to our doors, or if key holders can make duplicate keys
without our permission, then we have a serious gap in our security
plan. Once we have physically secured our doors, the next step is
to keep them secure by establishing a key control policy.
Install an Alarm System: Building security measures such as

deadbolt locks are designed to keep out intruders. If they get in,
however, we must know about it. A monitored alarm system serves
two basic purposes: First, it alerts law enforcement professionals
who can respond to our break-in; Second, it can trip a siren that
will scare an intruder away.
Assign a Floor Marshall: A Floor Marshall is a volunteer in the

organisation whose job is to approach unrecognised visitors and
make sure that they have a fixed purpose to be on your premises.
A Floor Marshall also gives other employees a go-to person for
reporting suspicious individuals.
Install an Electronic Access Control System: Mechanical locks

do not tell any tales. We must upgrade our door locks with an
Electronic Access Control System, we will gain a record of who
opened, or attempted to open, every door. This information will
be extremely helpful if we need to investigate a security breach.
In addition, an EAC system lets you instantly add or delete
electronic keys. This eliminates our exposure due to lost or stolen
keys, and also allows us to assign customised access privileges
based on time, date, and authority level.
Use Video Surveillance: A camera system improves our ability

to monitor our premises, and it can also provide useful evidence
and information if we need to investigate an accident, attack, or
theft. We must remember to keep employeeprivacyin mind as
we implement our surveillance system.
Learn about CPTED: Crime Prevention through Environmental

Design (CPTED) is a set of design principles used to discourage
crime. Buildings and properties are designed to prevent damage
from the force of the elements and natural disasters; they should
also be designed to prevent crime. We can use these principles to
improve home offices as well as high-rise buildings.
9.16.2 MATERIAL SECURITY

Materials security concerns with ensuring a supply of those materials
which are critical to the economy. Security of supply encompasses
physical availability as well as economic and political access export
quotas and tariffs which also determine a resources availability.
Resource efficiency has put importance on dematerialisation to reduce
the amount of material used although it will not be sufficient in many
cases to meet the demands of increasing population and expectations
for higher standards of living. Managing demand through behavioural
change is not considered to be a realistic short-term option, given the
growing economies in many parts of the world.
By reusing and recycling the resources, we can circulate it in the
economy for longer, which in turn reduces demand. Being more
efficient in use and reuse helps in reducing reliance on imports
and extraction, and hence, increases security of supply. Innovative
transitions to a service offerings and targeting resources that are
currently under pressure by material substitution, often require
innovation can also reduce demand.
Fill in the blank:

37. A ....................... is a volunteer in the organisation whose job
is to approach unrecognised visitors and make sure that they
have a fixed purpose to be on your premises.
Visit a building of your locality. Compile a report of all the building

security measures being used there.
9.17 SUMMARY
Companies offering a powerful combination of low prices and

high quality are capturing the hearts and wallets of consumers.
Today as value driven companies are growing in number, they
are moving from competing on price to providing quality, service
and convenience.
Quality is a state in which value entitlement is realised for

the customer and provider in every aspect of the business
relationship.
Value represents economic worth, practical utility and

availability for both the customer and the company that creates
the product or service. This definition accepts the fact that the
quality of products or services rarely consist of a single element.
Juran has stipulated a model for optimum quality costs. Juran

defines three quality zones relative to the point of minimum total
quality costs. The zone of improvement projects lies below
the optimum quality level, while the zone of perfectionism lies
above it.
TQM is a process approach and it is a management strategy. This

approach is also used in ISO 9000 standards. When managers
use a process approach, it means that they manage the processes
that make up their organisation, the interaction between these
processes, and the inputs and outputs that join these processes
together.
Improved efficiency and service can result from focusing not only
on achieving present performance targets, but more importantly,
by breaking through existing performance levels to new, higher
levels. A close cooperation between those who provide services
and those who consume services is essential.
The function of quality control is to minimise the difference

between the Design quality and the Conformance quality, i.e. the
product or service meets the requirements of the customers. The
quality management process is judged by the degree to which
the product or service design specifications are met.
Total Quality Management focuses on the needs of the customer,

rather than on internal requirements. Implementing a Quality
Management System and becoming certified is only important to
the extent it can improve customer satisfaction and loyalty.
TQM is built on a foundation of ethics, integrity and trust. It

fosters openness, fairness and sincerity and allows involvement
by everyone. This is the key to unlocking the ultimate potential
of TQM. These three elements move together, however, each
element offers something different to the TQM concept.
Many educators believe that the Demings concept of TQM

provides guiding principles for needed educational reform.
In his article, The Quality Revolution in Education, John Jay
Bonstingl outlines the TQM principles he believes are most
salient to education reform. He calls them the Four Pillars of
Total Quality Management.
The four pillars are Pillar 1: Synergistic Relationships, Pillar 2:

Continuous Improvement and Self Evaluation, Pillar 3: A System
of Ongoing Process, Pillar 4: Leadership.

eliminating non-value-added processes and with proper training
any company can implement Lean successfully.
Kaizen translated from Japanese means continuous

improvement, taken from the word Kai which means continuous
and zen which means improvement. It is a management
philosophy and forms the basis of the Toyota Production System
(TPS) as well as Lean Manufacturing.
Six Sigma refers to a disciplined, data-driven approach and

methodology for eliminating defects in any process from
manufacturing to transactional and from product to service. A
defect is a component that does not fall within the customers
specification limits.
The International Organisation for Standardization (ISO) was

founded in 1946 in Geneva, Switzerland. The objective of this
organisation is to promote the development of international
standards to facilitate free exchange of goods and services across
the globe.

sustaining a productive work environment. Based on Japanese
words that begin with S.
The 5-S Philosophy focuses on effective work place organisation

and standardised work procedures. It simplifies the work
environment, reduces waste and non-value activity while
improving quality, efficiency and safety.

department. But, the safety man should preferably report to
someone senior in the organisation so as to be respected. It may
be ideal for the safety man to report to the works or production
manager.

department. But, the safety man should preferably report to
someone senior in the organisation so as to be respected. It may
be ideal for the safety man to report to the works or production
manager.
Benchmarking: Benchmarking is a continuous systematic

process for evaluating the products, services and work
of organisations that are recognised as representing best
practices for the purpose of organisational improvement.
Conformance Quality: Conformance quality refers to the

degree to which the product or service design specifications
are met.
Design Quality: Design quality is the inherent quality of the

product or service in the marketplace.
External Customers: External customers are the customers

that buy the final product, which pays the organisations bills.
Freedom from Deficiencies: Freedom from deficiencies refers
to the quality of conformance.
Hard Attributes: Hard attributes are those attributes that

must be met by the delivered product or service if it is to be
considered satisfactory.
Internal Customers: Internal customers are the receivers of

output transactions that take place within the organisation.
Quality: Quality is a state in which value entitlement is realised

for the customer and provider in every aspect of the business
relationship.
Soft Attributes: Soft attributes are those attributes that are

desirable and have no hard measures.
Total Quality Management: Total quality management can be

defined as managing the entire organisation so that it excels
in all dimensions of products and services that are important
to the customer.

1.
What is quality? What are the attributes of quality? Discuss.
2. Describe various costs of quality assurance.
3.
Describe TQM. Describe the TQM process with diagram.
4.
Describe TQM as Oakland as defined it.
5.
Identify different types of inspection and discuss their roles in the

quality assurance and control process. What is the relationship
between inspection and acceptance sampling?
6.
What are the significant differences between quality control in

manufacturing and service organisation? Explain why these
differences exist.
7. What are the eight building blocks of TQM? Explain the

foundation of TQM based on them.
8.
What are the different pillars of TQM?
9. Explain the lean concept and concept of seven wastages given by

Ohno.
10. Differentiate between
manufacturing.
Lean
manufacturing
and
Mass
11. Explain the concept of Kaizen with the help of diagram and
example.
12. What is six sigma and its relation to TQM?
13. What is ISO 9000? What are the certification requirements and
why do manufacturers get certified? Does it control quality? If
so, how?
14. Discuss 5-S methodology in detail.
15. Write down all the guideline for safety of material and
infrastructure in industry for safety.

Topic
Q. No. Answers
What is Quality
1.
Serviceability
2.
Aesthetics
3.
(d) Non-durability
4.
Harvey & Green
5.
Consciousness
6.
Prevention Costs
7.
Appraisal costs
Definition of Quality
Cost of Quality
Process Approach Total

8.
Quality Management (TQM)
Total Quality
Contd...
9.
9000
10.
product
11.
Design
12.
Quality control
13.
Minimise
14.
Sink
15.
Corrective Action
16.
process-oriented
17.
intangible
18.
Service
19.
(c) Mistrust
20.
21.
22.
Integrity
Different Pillars of TQM
23.
TQM
The Lean Concept
24.
Lean
25.
Waste
26.
Conventional
27.
Kaizen
28.
Toyota Sakichi
29.
Six Sigma
30.
Defect
31.
Zero defects
32.
ISO
33.
9000
34.
Seiri (Sort)
35.
Seiso (Shine)
Safety
36.
Maintenance
Security
37.
Floor Marshall
The Quality Management

Function
Service Quality
Measurement
Eight Bulding Blocks of
TQM
Six Sigma and TQM
ISO (International
Organisational for
Standardisation)
5 S methodology

1. Section 9.2

Quality, may be defined as the sum total of all characteristics

and attributes of a certain product or an object which go to make
it acceptable to the people for whom it is meant, and it is this
sum total of these characteristics and attributes that determine
the demand or utility or price of a product or an object.
2. Section 9.4

According to quality guru A.V. Feigenbaum, cost of quality

is defined as Those costs associated with the creation and
control of quality as well as the evaluation and feedback of
conformance of quality, reliability and safety requirements, and
those costs associated with the consequences of failure to meet
the requirements both within the factory and in the hands of the
customer. Components of Cost of quality components are being
shown in the Figure 9.1.
3. Section 9.5

Total Quality Management is an integrated approach to Quality

Management comprising of three basic areas viz. product quality,
process quality and human quality. Quality Management should
not be regarded as just one of the several organisational functions
but it has to permeate in all work aspects of the company with
the ultimate objective of fostering customer perceived quality as
early as possible.
4. Section 9.5

Oakland has defined TQM as follows:
Total quality management (TQM) is an approach to improving the

effectiveness and flexibility of business as a whole. It is essentially
a way of organising and involving the whole organisation; every
department, every activity, every single person at every level.
5. Section 9.6

Essential types of inspection include the following:

(a) Incoming Inspection: Incoming raw material and
components are normally inspected at the manufacturers
premise on arrival. This inspection not only weeds out
material with defects but also determines vendor quality
levels.
(b) In-process inspection: The inspection of work in-process
prevents the continuing production of excessive amounts of
defective products.
6. Section 9.6 and 9.7

Service quality includes quality of both core services and

supporting services, which may add value to the core services.
Quality in services offered by an organization is very important

as organization may lose customers it fails to satisfy them. It is
also very important to note that cost of acquiring new customers
is much higher than cost of retaining existing customers. Service
quality attributes are different from product quality attributes.
7. Section 9.8

Total Quality is a description of the culture, attitude and

organisation of a company that strives to provide customers
with products and services that satisfy their needs. The culture
requires quality in all aspects of the companys operations, with
processes being done right the first time and defects and waste
eradicated from operations.
The eight key elements are as follows: Ethics, Integrity,

Trust, Training, Teamwork, Leadership, Recognition and
Communication
8. Section 9.9

Four Pillars of Total Quality Management are as follows:

(a) Satisfying customers
(b) System/process approach
(c) Improvement tools
(d) People
9. Section 9.10


eliminating non-value-added processes and with proper training
any company can implement Lean successfully. Ohno identified
seven wastes to be addressed by the Toyota system, and they
have become known as the 7Ws.
10. Section 9.10

Lean Manufacturing is aimed at the elimination of waste in every

area of production including customer relations, product design,
supplier networks and factory management.
Conventional mass production models are relatively inflexible

bodies that focus on exploiting economies of scale and pushing
products into the market. They have rigid organisational
hierarchies. The comparison of the two systems is shown in Table
9.5.
11. Section 9.11

Kaizen means improvement. Moreover, it means continuing

improvement in personal life, home life, social life, and working
life. When applied to the workplace Kaizen means continuing
improvement involving everyone from top management to

managers and workers.
12. Section 9.12

According to Pande, Newman and Cavanaugh Six Sigma is

A comprehensive and flexible system for achieving, sustaining
and maximising business success. Six Sigma is uniquely driven by
close understanding of customer needs, disciplined use of facts,
data and statistical analysis, and diligent attention to managing,
improving and reinventing business processes.
13. Section 9.13

The International Organisation for Standardization (ISO) was

founded in 1946 in Geneva, Switzerland. The objective of this
organisation is to promote the development of international
standards to facilitate free exchange of goods and services across
the globe. ISO 9000 is generic quality management system which
can be adopted by any organisation in any part of the world, which
can be into any type of business. It is an internationally accepted
standard of quality for all business to business to dealings.
14. Section 9.14


sustaining a productive work environment. Based on Japanese
words that begins with S, shown in Table 9.7, the 5-S Philosophy
focuses on effective work place organisation and standardized
work procedures. It simplifies the work environment, reduces
waste and non-value activity while improving quality, efficiency
and safety.
15. Section 9.15

Material safety involves three key areasoperation, maintenance

and specifications. These may reflect in unsafe physical conditions
and unsafe personal acts or both. Any effective safety program
must first isolate the causes that produce accidents. Practically
every accident is caused by more than one factor attributable to
either of these or both. The more common sources of mechanical
hazards are unguarded shafting; belt drives; gear trains;
projections on rotating parts; any exposed component parts of
machines or power driven equipment which rotate rapidly or
have considerable power and may catch the worker.

SUGGESTED READINGS







E-REFERENCES
http://asq.org/learn-about-quality/total-quality-management/
overview/overview.html
h t t p : / / w w w. i s i x s i g m a . c o m / m e t h o d o l o g y / t o t a l - q u a l i t y management-tqm/
http://www.wiley.com/college/sc/reid/chap5.pdf
10
THEORY OF CONSTRAINTS
CONTENTS
10.1 Introduction

10.2
TOC Process
10.3
Five Focusing Steps
10.4
Determining the Bottleneck
10.4.1
10.5
Rounding Out System Capacity
Simplified Approach
10.5.1
Finite Capacity Scheduling (FCS)
10.5.2
Capacity Requirements Planning (CRP)
10.5.3
Optimised Production Technique (OPT)
10.6
Summary
10.7
10.8
Answers and Hints
10.9
BEST THEORY FOR BPCL
The Indian oil industry was brought under government control
after the oil crisis in the 1970s. On January 24, 1976, the Burmah
Shell Group of Companies was taken over by the Government of
India to form Bharat Refineries Limited. On August 1, 1977, it was
renamed Bharat Petroleum Corporation Limited (BPCL).
After liberalisation, under the economic reform process, the private
sector entered several areas within the industry and emergence
of additional capacities in the region in refining and marketing.
Added competition, due to the opening up of the Indian economy,
brought in other challenges. Provoked by the phased dismantling
of the Administered Pricing Mechanism (APM), and anticipating
radical changes in the business environment after deregulation,
BPCL undertook a massive exercise for preparing itself to face
these challenges. BPCLs change initiative started towards the
end of 1996 with the help of Arthur D Little, Inc. (ADL). ADLs
methodology involved a cross-section of the organisation in
co-creating a vision for the company, determining its current reality,
conceptualising the gaps between vision and current reality, and
finally evolving a change plan to bridge these gaps.
BPCL has always enjoyed the image of a progressive organisation.
It is, in fact, the only Indian company to have won the CIO
Global 100 award for its use of technology and forward looking
Human Resource (HR) policies. Also, it was the only public sector
organisation to figure in the top ten best employers in India in the
Business Today survey in 2001.
In tangible terms, the change plan resulted in restructuring and
radical delayering of the organisation. The function-based structure
was carefully dismantled and replaced with a process-based one,
to make the company more responsive to its customer needs. The
entire change plan necessitated effective integration and was
premised on a massive increase in the information intensity of
the organisation. It involved change process that would transform
BPCL into a learning organisation (Senge, 1990) and IT would
contribute significantly in this. Thus began the project for evolving
an information system for the organisation.
A small team of nine people set out to map the existing business
systems (legacy systems) vis--vis the future needs characterised by
customer focus, resource-optimisation, integration, and flexibility.
The challenge was to ensure that all the integrated elements (of the
complex multi-modular integrated solutions that impact the entire
workflow of the organisation) work seamlessly across the length
and breadth of the country, including the remote locations. The
team concluded that it was imperative to replace the existing batchprocess-oriented legacy systems with a state-of-the-art ERP system.
Contd...
THEORY OF CONSTRAINTS 391
A detailed technical selection process was undertaken to find the

best fit ERP package for current and future needs of BPCL. SAP
R/3 software was selected for implementation. The top management
decided to name the project for implementation of SAP R/3 as
project for implementation of SAP R/3 as project ENTRAINS, a
short form for Enterprise Transformation. The name signified the
top managements vision of a totally transformed organisation
a new BPCL. The unique thing about BPCLs ERP implementation
is that right from its conception it has been a business initiative.
We just performed the necessary catalytic role paradoxically,
this expression of pride came from the Head of IT in BPCL.
The SAP modules implemented during the pilot implementation
were Financial Accounting/Asset Management, Materials
Management at Refinery and Marketing Locations, Sales and
Distribution, Quality Management, Plant Maintenance and Service
at Refinery and Marketing Locations, Production Planning at Two
Lube Plants, and the Indian version for Excise, MODVAT, TDS,
Sales Tax, Octroi, etc.
However, implementing the program was not easy. For example,
at Wadilub, the staff thought many simple tasks had now become
tedious involving many steps and demanding longer working
hours than before. The system would not allow them to take short
cuts that they were used to. For instance, container suppliers used
to directly despatch containers to the third party blenders without
making Goods Receipt (GR) and Goods Issue (GI). The system
would not physically receive if it did not have any issues for such
materials. It would require the necessary documentation at both
ends of a transaction to register. In addition, many configuration
problems were also encountered, causing agitation among the staff.
Notwithstanding these difficulties, Mr. Vairamohan, the Plant
Manager, recounted the benefits from the pilot implementation
saying, SAP system imposed strict discipline among the staff
to follow a certain sequence of operation. As a result, there is no
suspense issue at Wadilub today. We are able to get many logistics
information such as material inventory, product despatches,
and pending indents. Bharat Petroleum found that by having
information available, its capabilities along the entire value chain
were enhanced. It is reaping the benefits of the integrated system
in many areas of its operations. The early gains of implementation
were in the areas of tracking customer-receivables, monitoring
credit-management, inventory management, besides easing
the operations in a large number of areas. It also enabled the
management to take better strategic and business decisions, thus
ensuring value-added services, better customer satisfaction and
enhanced shareholder value.

Define the meaning of theory of constraints
Describe the different steps of TOC
Define bottleneck
Know the difference between simplified and conventional
approach
10.1 INTRODUCTION
The Theory of Constraints (TOC), unlike a scheduling algorithm

(which attempts to manage constraints), has a process orientation.
The operational philosophy behind TOC is that capacity of shop does
not reflect the cumulative capacity of the different workstations.
The capacity of the different workstations can be optimised by
unravelling bottlenecks in a manner that will increase the effective
capacity utilisation of the shop. TOC does this by devising a scheduling
system wherein the bottleneck pulls its requirements from other
stations.
Today, more than ever, change is essential to satisfying expectations.
Customers expect higher product and service quality than the price
theyre willing to pay to acquire those products and services. More
than ever, employees expect security in their jobs. Shareholders
expect that todays investments will yield a higher rate of return
over a shorter timeframe. Yet, to make ends meet, management is
constantly pressured to keep costs under control.
In light of todays competitive pressures and a rapidly changing
environment, to not change is to give way to ones competitors. Hence,
we should understand that to improve means to change. We know
that to improve means we must:
Provide products and services that solve customers problems
Release products and services consistent with market demand
Reduce variability in our processes
Have measurements that indicate success relative to achieving

our goal
Reward people for their contribution to change
Rather than reacting to external change, or being subjected to random

internal change, many organizations have concluded that a process of
on-going improvement is an absolute necessity. For an organization
to have a process of on-going improvement, certain basic questions
need to be answered faster and more effectively. Those fundamental

questions are:
What To Change?
What To Change To?
How To Cause The Change?
Goldratt considers inventory to be all the money the system invests

in things it intends to sell, including facilities and equipment. And he
defines operating expense as all the money the system spends to turn
inventory into throughput.
A change in any of these dimensions will automatically result in a
proportional change in at least one, maybe both, of the other two. For
example, if actions are taken to reduce inventory, a commensurate
reduction in carrying costs (operating expense) can be expected, and
so on.
With this three-dimensional framework, Goldratt maintains that
ongoing improvement requires efforts to increase throughput,
decrease inventory, and decrease operating expense. Operating
expense and inventory have a theoretical lower limit of zero, but in
practice, they are seldom zero. Therefore, maximising throughput
with simultaneous minimisation of both inventory and operating
expense is the objective in constraint management.
The throughput of a system will naturally increase until it is limited by
some constraint or bottleneck. A constraint can be a resource, either
manufacturing and non-manufacturing, which causes a reduction
in the flow of material through the process, e.g., a machine, person,
facility, procedure or a policy. Developing schedules that identify
constraints and then focusing on (bottlenecks) these constraints and
managing them effectively results in improvement of the process in
term leading to making more money for business.
10.2 TOC PROCESS

Goldratt has introduced a rigorous five-stage logical thinking process,
which zeroes in on what to change, what to change to, and how to
effect the change with a minimum of errors and false starts. These
processes shown in Figures 10.1, 10.2 and 10.3 include the concepts
of current reality tree, the evaporating cloud, the future reality tree,
the prerequisite tree, and the transition tree.
The TOC processes used to improve the health of an organization
(or solve any problem) are almost identical; however, the terminology
is changed to better suit the language of problem-solving in
organizations. In TOC, the process is described via the use of three
questions: What to Change? What to Change To? and How to Cause
the Change?
What to Change? From a list of observable symptoms, causeand effect is used to identify the underlying common cause, the
core problem, for all of the symptoms. In organizations, however,

the core problem is inevitably an unresolved conflict that
keeps the organization trapped and/or distracted in a constant
tug-of-war (management versus market, shortterm versus longterm, centralize versus decentralize, process versus results). This
conflict is called a Core Conflict. Due to the devastating effects
caused by Core Conflicts, its common for organizations to create
policies, measurements, and behaviors in attempts to treat
those negative effects (often referred to as band-aid fixes) that,
when treating the Core Conflict, must be removed, modified, or
replaced.
Source: http://www.goldratt.com/pdfs/toctpwp.pdf
Figure 10.1: What to Change
What to Change To? By challenging the logical assumptions

behind the Core Conflict, a solution to the Core Conflict is
identified. This is only the starting point for the development of
a complete solution a strategy for resolving all of the initial
symptoms, and many others, once and for all. As in the Design of a
Treatment Plan above, the strategy must also include the changes
that must be made alongside the solution to the Core Conflict
to ensure that the solution works and that the organization is
restored to its best possible health. Respectively, these are
often the changes to the policies, measurements, and behaviors
identified in what to Change? As well as the organizations strategic
objectives. Lastly, the strategy is not complete until all potential
negative side-effects of the strategy have been identified, and the
means for preventing or mitigating them become key elements
of the strategy. Trimming these negatives side-effects allows an
organization to intentionally and systematically create strategies
that are a win for all those affected.
Figure 10.2: What to Change to
How to Cause the Change? Taking into consideration the unique

culture which exists in every organization, a plan is developed to
transition an organization from where it is today to realizing the
strategy. In other words, a plan for successfully implementing
the strategy is created, including what actions must be taken,
by whom and when. Because resistance to change can block
even the most perfectly laid strategies and plans, building active
consensus and collaboration, or buy-in is crucial.
TOC has developed a process based on the psychology of change that

acknowledges and systematically addresses the questions people
intuitively ask when evaluating a change.
Is the right problem being addressed - mine?
Is the general direction that the solution is heading a good one?
Will the solution really work to solve the problems and whats in
it for me?
What could go wrong? Who might get hurt?
How the heck are we going to implement this thing?
Are we really up to this? Do we have the leadership and the

commitment to pull this change off successfully?
If these questions arent answered frankly and effectively with both

the people who must implement the change and those who will be
affected by it, the proposed change will not have the buy-in and
support to succeed. Like most changes, no matter how great the idea
or tremendous the value, the strategy and tactics are doomed from
the outset.
Figure 10.3: How to Cause the Change

As a result of applying TOCs Thinking Processes to countless
organizations over three decades, generic TOC solutions have
emerged that have applicability across all organizations, both forprofit and not-for-profit. To this day these applications continue to
evolve, resulting in more and more significant and sustainable overall
and bottom line performance improvements where implemented.
The process a clinician applies to treating a patient is an excellent

analogy for explaining how TOC recommends going about solving
a systems problem. Describe the overall process used by a clinician
treating a patient.
Fill in the blanks:

1. The Theory of Constraints (TOC), unlike a scheduling has a
........................ orientation.
2. The ...................... philosophy behind TOC is that capacity of
shop does not reflect the cumulative capacity of the different
workstations.
3. ........................ has introduced a rigorous five-stage logical
thinking process, which zeroes in on what to change, what to
change to, and how to effect the change with a minimum of
errors and false starts.
4. Which of the following is not a mark of a good layout in
manufacturing?
(a) Straight line flow patter (or adaption)
(b) Predictable production line
(c) Bottleneck operations
(d) Work stations close together
5. The TOC is concerned with:
(a) Increase throughput
(b) Decrease inventory
(c) Decrease expenses
(d) All the above
6. What is the meaning of throughput in TOC?
(a) Total output
(b) Rate at which the system generates money through sales
(c) Gross output
The three questions, What to Change?, What to Change To?, and

How to Cause the Change?, provide the framework for whats
called the TOC Thinking Processes. The Thinking Processes are a
set of tools and processes that allows an individual or group to solve
a problem and/or develop an integrated strategy using the rigor
and logic of cause-and-effect, beginning with the symptoms and
ending with a detailed action plan that coordinates the activities of
all those involved in implementing the solution.
10.3 FIVE FOCUSING STEPS

There is a five-step process to track the constraint and move towards
system level improvement. These five steps provide a reliable method
to effective improvement. The performance of any value-chain is
dictated by its constraints. Recognising this, the resulting steps to
maximising the performance of a value-chain are:
Identify the System Constraint: The part of a system that

constitutes its weakest link can be either physical or a policy.
Decide How to Exploit the Constraint: Goldratt instructs the

change agent to obtain as much capability as possible from a
constraining component, without undergoing expensive changes
or upgrades.
An example is to reduce or eliminate the downtime of bottleneck

operations.
Subordinate Everything Else: The non-constraint components

of the system must be adjusted to a setting that will enable the
constraint to operate at maximum effectiveness. Once this has
been done, the overall system is evaluated to determine if the
constraint has shifted to another component. If the constraint
has been eliminated, the change agent jumps to step five.
Elevate the Constraint: Elevating the constraint refers to

taking whatever action is necessary to eliminate the constraint.
This step is only considered if steps two and three have not been
successful. Major changes to the existing system are considered
at this step.
Return to Step One, But Beware of Inertia
Figure 10.4: Five Focusing Steps
Although the 5 Steps of TOC can be applied to every process at

every level in an organisation, which is how TOC is frequently often
implemented, the true power and results comes from:
Understanding the interdependencies between and across

processes that contribute to delivering a product or service,
Understanding the impact that those interdependencies and

normal variability have on their combined, overall performance,
and
Appropriately buffering for interdependencies and normal

variability so that performance can be predictably and
consistently high.
TOC likens each system to a chain, where the weakest link limits its
performance. This weakest link is the systems constraint. Improving
the performance (throughput) of the chain requires strengthening
that weakest link, improving any other link will cost money (increase
operating expense) but will not increase the strength of the chain.
The process is also shown in Figure 10.4.
However, as soon as that weakest link is strengthened to the degree
that it is no longer the weakest link, (i.e., the constraint is broken), the
next weakest link becomes the constraint which again limits overall
system performance. One can methodically explore the system till
such time the system is optimised.
These logical thinking processes provide a contextual basis from
which to apply more commonly known quality tools, such as statistical
process control, design of experiments, quality function deployment,
and other structured problem solving methods.
Many large corporations have successfully applied the principles of
the theory of constraints. Some of these corporations include 3M,
Bethlehem Steel, Boeing, Dell Computers, Asia Pacific Delta Airlines,
Dresser Industries, Allied-Signal and United Airlines.
Fill in the blanks:

7. The performance of any value-chain is dictated by its
........................ .
8. The primary benefit of the TOC approach is its orientation
toward the ........................ of the entire system, rather than a
compartmentalised look at specific components of the system.
The primary benefit of the TOC approach is its orientation toward

the output of the entire system, rather than a compartmentalised
look at specific components of the system. With this kind of system
evil focus, the systems constraint can be located. If the constraint is
internal, it can be located and efforts to de-bottleneck the constraint
can then be initiated without delay.
Study the aviation sector and find out which company have applied
the TOC Thinking Processes and How?
10.4 DETERMINING THE BOTTLENECK

Without knowledge of the existing limits on capacity, meaningful
capacity planning cannot take place.
Capacity
Capacity is not a fixed number below which organisations are

forced to operate.
Capacity is often a function of management ingenuity.
It can be influenced by planning, operating procedures,

maintenance, and other management decisions.
The role of Operations Management is to investigate the possible

methods to increase capacity before investing substantial capital
in new facilities.
Operations are a combination of different machines/equipment

and processes that make finished products. To plan effectively,
management must know the capacity of the entire system, not just the
individual parts. The management must also know how departments
are related. With this knowledge, it is possible to increase throughput
depending on how the bottlenecks are scheduled.
10.4.1 ROUNDING OUT SYSTEM CAPACITY
Applying resources to the bottleneck department can increase
the system capacity. This approach is called rounding out capacity
because resources are applied to the bottleneck so as to bring it into
balance with other parts (departments) in the system. Rounding out
capacity has a limit. As soon as a bottleneck is removed from one
sub-system, the bottleneck simply jumps to another department. This
issue is important and needs careful analysis as the ultimate objective
is to determine how far the systems capacity can be increased before
the next bottleneck appears.
There are two basic arrangements of production systems product

layout and process layout. Determining system capacity in a processoriented layout is more complex than doing so in a product-oriented
layout. It is also important to know which department, machine, or
step in the process restricts the systems capacity. The determination
of system capacity is not merely a search for the minimum department
capacity because there is no dominant flow. The capacity of the system
is a function of the jobs presented.
For example, take a machine shop. If all the jobs in the machine shop
type A jobs (those needing turning and threading operations), the
capacity of the system will be 250 parts per day. If all the jobs are of
type B only (those needing turning operations only), then the capacity
will be 500 parts per week. For jobs of types C and D (type C is milling
and turning and type D is shaping and milling), the system capacities
are 300 and 400 parts per day, respectively. Table 10.1 shows the
various capacities. The systems capacity is a function of the job types
presented.
TABLE 10.1: MACHINE SHOP CAPACITIES

Mix
100% A
100% B
100% C
100% D
Systems capacity
450 ppd
500 ppd
350 ppd
300 ppd
Operations
Turning & Threading
Turning
Milling & Turning
Shaping & Milling
Bottleneck
Threading
Turning
Milling
Shaping
If the machine shop only processed one type of part, the system
capacity could be easily and accurately estimated, what would the
system capacity be if the machine shop processed all four types during
the same week?
To simplify the logic, let us assume that all the jobs have the same
quantum of work on each machine. Looking at Table 10.1, type B jobs
where turning is the only operation, the capacity is 500 parts per day.
Therefore, the turning capacity is 500 ppd.
On type B jobs, 500 pieces could be turned, but as the system capacity
is 450, it is obvious that the threading capacity is limited to 450 parts
per day.
Type C jobs require milling and turning. Turning capacity is 500 ppd,
but the system capacity is only 350. The number of parts that can be
milled per day is 350.
Type D parts require shaping and milling, so we can come to the
conclusion that shaping capacity is limited to 300 pieces per day.
The system capacity per day for this machine shop is 500 turning jobs,
450 threading jobs, 350 milling jobs and 300 shaping jobs. In reality,
the machine shop will not get jobs as has shown above.
The assumption that we have made that all jobs for a particular machine
are the same, is seldom true. How can the Operations Management
give an accurate estimate of system capacity and determine which
machine is the bottleneck? An often-used technique for estimating
capacity in a process layout is simulation.
Visit any organisation of your choice. Construct a Future Reality

Tree that lays out the complete solution/strategy that Ensures
alignment with the Strategic Objectives (SO) of the bigger system
that the subject is a part.
Fill in the blanks:

9. The role of Operations Management is to ...................... the
possible methods to increase capacity before investing
substantial capital in new facilities.
10. When resources are applied to the bottleneck so as to bring it
into balance with other parts (departments) in the system, it is
called ...................... .
11. There are two basic arrangements of production systems
...................... layout and ...................... layout.
10.5 SIMPLIFIED APPROACH

A simplified and practical approach to using TOC for capacity planning
and scheduling which works for most manufacturing businesses is
shown below.
Create a spreadsheet, starting with the bottlenecks, describing

the capacity consumed on the bottleneck resource by each
product. This is called a product load profile.
Across the spreadsheet maintain the required customer

quantities.
TABLE 10.2: LOAD PROFILE

ProductLoad Profile Period Period Period Period Period 2 Period
on
1
2
3 etc. 1
Load
3
bottleneck
Load
Load
etc.
A
Hrs/product Qty
Qty
Qty
Hours Hours Hours
B
Hrs/product Qty
Qty
Qty
Hours Hours Hours
etc.
Hrs/product Qty
Qty
Qty
Hours Hours Hours
A
Hrs/product Qty
Qty
Qty
Hours Hours Hours
Contd...
B
Hrs/product
etc.
Hrs/product
Total load
Demonstrated
Capacity
Under/overload
Qty
Qty
Total
Qty
Qty
Qty
Total
Qty
Qty
Qty
Total
Qty
Hours
Hours
Total
Hours
Hours
Hours
Total
Hours
Hours
Hours
Total
Hours
Qty
Qty
Qty
Hours Hours
Hours
Calculate load hours by multiplying the hours per product by the

quantity in the period to create hours per period columns. This
is shown in Table 10.2.
Use this spreadsheet to calculate the load for each product in

each period and total.
Compare this to demonstrated capacity and highlight the

differences. Demonstrated capacity is simply, previously achieved
output, where it is expected that this can be repeated, or (only if
in a step change situation) the planned output.
This model may be refined for multiple constraints by creating

a spreadsheet that contains a multidimensional-constraint, load
profile. A new sheet is then created for each period as follows:
TABLE 10.3: LOAD PROFILE WITH MULTIPLE

CONSTRAINTS
Product
Resource Resource Resource 3 Resource Resource

1
2
Etc.
1 Load
2 etc.
Load
A
Hrs/
Hrs/
Hrs/product Hours
Hours
product
product
B
Hrs/
Hrs/
Hrs/product Hours
Hours
product
product
etc.
Hrs/
Hrs/
Hrs/product Hours
Hours
product
product
Product
Resource Resource Resource 3 Resource Resource
1
2
Etc.
1
2
Load
etc. Load
Total load
Total
Total
Demonstrated Capacity
Hours
Hours
Under/overload
Hours
Hours
In this case a product load profile is maintained for each product for
up to six resources.
Each resource load is calculated by period by multiplying the hours
per product by the quantity required to give the load per resource per
period.
TOC brings out some basic principles of synchronising shop floor

manufacturing practices. Though the solution has to be custom built
for each shop, there are a set of broad principles that need to be
adhered to. The broad principles are:
There is a clear distinction between the capacity of the shop and

that of the workstation. The shop capacity takes precedence over
the workstation capacity.
It is extremely important that the control strategy of the shop

should focus on maximising throughput rather than minimising
inventory.
The throughput increases when flows are balanced and not

capacity.
Focus on the bottleneck station/resource and lighten the load

at the bottleneck and prioritise jobs that are required at the
bottleneck (finite capacity forward scheduling) such that the
bottlenecks requirements are fully met.
Balance waiting for resource with waiting for parts.
Using Pareto analysis, increase batch sizes of the low volume

value C items, and decrease the batch sizes of the fast movers.
Take advantage of any excess capacity to reduce set up times,

process times and waiting times and also try to reduce batch size.
This simplified approach when reinforced with these principles will

work as well as expensive MRP II systems in most circumstances.
Where manufacturing has very precise and tightly defined process
times for each alternative work centre, and is complex, with a high
product mix (hundreds of products), a number of alternate methods
(work centres) of processing are available, but if each work centre has
different processing times, an MRP II system works better.
However, MRP II systems require that the bills of material and
routings are locked and subject to strict change control and process
reliability and quality are excellent, in order to show superior results.
Let us look at these alternatives from a historical perspective.
10.5.1 FINITE CAPACITY SCHEDULING (FCS)
This system in the 1980s made the scheduling problem a mathematical
sequencing problem.
It tried to optimise allocation of the same capacity resources.
The result involved multiple orders, multiple sequential and

often interdependent manufacturing operations, and multiple
production and business constraints.
FCS emphasised maximising production resources.
Over-capacity at a work-centre was not acceptable. If capacity

exceeded 100 percent for a predetermined time, the system could
automatically extend some production dates or reprioritise the

production order based on priorities associated with the customer
or customer order. Or, the planning logic could evaluate the
factors leading to a constraint or the confluence of constraints,
generating a set of recommendations to rebalance those factors
toward an optimised schedule. We have studied some of these
models in this chapter.
Visit any automobile parts manufacturing firm. Do planning and

scheduling for the same using simplified and practical approach to
TOC.
10.5.2 CAPACITY REQUIREMENTS PLANNING (CRP)
It was developed as a new tool that tried to correct this situation

by at least identifying under-utilisation and overload conditions
at a machine or work cell.
CRP was a useful reporting tool, but it didnt provide the ability
to fully model production and all its constraints.
Goldratt, around the same time, introduced a new paradigm in

managing operations. He moved away from managing constraints
that create operational problems to removing constraints and
consequently the associated problems. This is the Theory of
Constraints (TOC).
Shop floor synchronisation emerged as an effective way of planning
and controlling operations. Its advantage stemmed from the fact that
it attempted to coordinate activities, resources and requirements
on a shop floor. What is the storage capacity of your computer?
The computer software suppliers will tell you it is finite. Is it? In
what circumstances is it finite? What does finite mean? How can it
be influenced to improve it? What are the current influences that
adversely affect it? What happens as your demand approaches your
capacity? What is the best way of balancing load and capacity?
10.5.3 OPTIMISED PRODUCTION TECHNIQUE (OPT)
It was developed by Eli Goldratt and others using TOC as the

basis.
It introduced the concept of constraints as bottlenecks on the

factory floor.
It attempted to identify only production bottlenecks, and then

eliminate them through proper scheduling.
This simple idea could lead to the better utilisation of

manufacturing resources, resulting in greater productivity and
lower costs.
However, in the early 1990s, a separate planning system, generically

called Fast MRP, became available. It was basically a type of simulation
tool. Fast MRP enabled users to run several material requirements
and production scenarios in a very short period of time. Scheduling
changes resulting from the best scenario would then be uploaded and
integrated into the MRP II database.
Changing business requirements and markets eventually led back to
rules-based logic to capture business and production strategies and
priorities as algorithms. These rules coupled with a true model of the
factory floor and a finite capacity view of production was developed as
Advanced Planning and Scheduling Systems (APS).
Regardless of the manufacturing environment, APS requires lots of
data: constraints, behaviour rules for when a given constraint may be
altered, priorities, and strategic corporate objectives. Both static and
dynamic data are required. All of these data then run through one of
five categories of constraint-based planning engines:
Heuristic engines rely on forward and backward scheduling to

balance demands against resources.
Theory of Constraints engines identify resource bottlenecks and

then prioritise activities to minimise the bottlenecks or impacts
of bottlenecks.
Simulation engines model the shop floor, process local heuristic

scheduling rules, and then generate a statistical output about the
flow of work through the various work centres on the shop floor.
Knowledge-based engines use explicit rules about customer

demand, work flow, resources, and constraints to balance
incoming customer orders against desired delivery dates.
Optimiser engines use mathematical programming and

branching techniques to minimise scheduling and resource
conflicts in meeting individual customer orders.
In operation, APS systems can perform both backward and forward

scheduling. This improves upstream and downstream resources as
changes in demand, availability, and capacity are synchronised by
the APS to the available resources. For example, BPCL is effectively
using the systems design of its ERP system for the operational facet
of the planning process.
The SAP/R3 implemented by BPCL includes a demand-planning
module. This module represents a new approach to demand
forecasting. Rather than projecting future demand based on
historical data, BPCL was able to rely on current information from
across the enterprise. Product lifecycle data, promotion plans, sales
data, competitor promotion plans, custom buying plans, supply
chain capacity, and to some extent inputs from across the sales,
marketing, manufacturing, finance, and distribution departments are
all used to generate a reliable forecast.
Though newer and more effective systems will be developed, it is

because of forward scheduling and the issue of prioritising resources
against the backdrop of demand and business strategy, that the need
for a rules-based approach to scheduling will dominate in future
developments.
There has been a consistent requirement to constantly update

the traditional MRP system to loop back to reconsider different
options and multiple constraints. This has given birth to a number
of alternatives to the MRP.

12. Capacity is defined as:
(a) A fixed number
(b) It can be influenced by planning
(c) Can be influenced by other decisions
(d) Both (b) and (c)
13. The best operating level is:
(a) The maximum point of the cost curve
(b) The level of capacity for which average unit cost is
minimised
(c) Maximum capacity
(d) The level of capacity for which total cost is minimised
14. Long-range capacity planning should be the responsibility of:
(a) Analysis
(b) Middle management
(c) Top management
(d) Marketing management
Fill in the blanks:
15. ........................ in the 1980s made the scheduling problem a
mathematical sequencing problem.
16. Finite Capacity Scheduling (FCS) tried to ................. allocation
of the same capacity resources.
17. FCS emphasised ................. production resources.
18. CRP was a useful reporting tool, but it didnt provide the ability
to fully model production and all its ................. .
19. Optimised Production Technique (OPT) was developed by
................. and others using TOC as the basis.
Contd...
20. Optimised Production Technique (OPT) attempted to identify

only production ................. , and then eliminate them through
proper scheduling.
Apply Optimised Production Technique (OPT) on the processes of

any semiconductor manufacturing firm.
10.6 SUMMARY

The operational philosophy behind TOC is that capacity of
workstations.
The capacity of the different workstations can be optimised

by unravelling bottlenecks in a manner that will increase the
effective capacity utilisation of the shop. TOC does this by
devising a scheduling system wherein the bottleneck pulls its
requirements from other stations.
Goldratt considers inventory to be all the money the system

invests in things it intends to sell, including facilities and
equipment. And he defines operating expense as all the money
the system spends to turn inventory into throughput.
Goldratt has introduced a rigorous five-stage logical thinking

process, which zeroes in on what to change, what to change to,
and how to effect the change with a minimum of errors and false
starts.
The thinking processes are a set of tools and processes that

allows an individual or group to solve a problem and/or develop
an integrated strategy using the rigor and logic of cause-andeffect, beginning with the symptoms and ending with a detailed
action plan that coordinates the activities of all those involved in
implementing the solution.
There is a five-step process to track the constraint and move

towards system level improvement. These five steps provide a
reliable method to effective improvement. The performance of
any value-chain is dictated by its constraints.
TOC likens each system to a chain, where the weakest link limits
its performance. This weakest link is the systems constraint.
Improving the performance (throughput) of the chain requires
strengthening that weakest link, improving any other link will
cost money (increase operating expense) but will not increase
the strength of the chain.
The approach is called rounding out capacity because resources

are applied to the bottleneck so as to bring it into balance
with other parts (departments) in the system. Rounding out
capacity has a limit. As soon as a bottleneck is removed from one
sub-system, the bottleneck simply jumps to another department.
This issue is important and needs careful analysis as the ultimate
objective is to determine how far the systems capacity can be
increased before the next bottleneck appears.
Finite Capacity Scheduling (FCS) system in the 1980s made the

scheduling problem a mathematical sequencing problem. It tried
to optimise allocation of the same capacity resources.
In operation, APS systems can perform both backward and

forward scheduling. This improves upstream and downstream
resources as changes in demand, availability, and capacity are
synchronised by the APS to the available resources. For example,
BPCL is effectively using the systems design of its ERP system
for the operational facet of the planning process.
Inventory: Inventory is all the money the system invests in

things it intends to sell, including facilities and equipment.
Operating Expense: Operating expense is all the money the

system spends to turn inventory into throughput.
Theory of Constraints (TOC): Theory of Constraints (TOC)

is a concept that maintains that ongoing improvements in
a process require efforts to increase throughput, decrease
inventory, and decrease operating expense. TOC also includes
the concepts of current reality tree, the evaporating cloud, the
future reality tree, the prerequisite tree, and the transition
tree.
Throughput: Throughput is defined in the Theory of

Constraints (TOC) as the rate at which the system generates
money through sales.

1. Theory of Constraints (TOC) brings out some basic principles of
synchronising shop floor manufacturing practices. Discuss.
2.
Define Theory of constraints.
3.
What are the different steps used in TOC? Explain each of them
and the relationship between them.
4. Discuss a simplified and practical approach to using TOC

for capacity planning and scheduling which works for most
manufacturing businesses.
5. What do you understand by rounding out system capacity

approach?
6. Explain the concept of Finite Capacity Scheduling (FCS).
7. What do you understand by Capacity Requirements Planning
(CRP)?
8. Discuss Optimised Production Technique (OPT).

Topic
TOC Process
Five Focusing Steps
Determining the
Bottleneck
Simplified Approach
Q. No.
1.
2.
Answers
Process
Operational
3.
Goldratt
4.
(c) Bottleneck operations
5.
(d) All the above
6.
(b) Rate at which the

system generates money
through sales
7.
Constraints
8.
Output
9.
Investigate
10.
Rounding out capacity
11.
Product, process
12.
(d) Both (b) and (c)
13.
(b) The level of capacity for

which average unit cost
is minimised
14.
(c) Top management
15.
Finite Capacity Scheduling
16.
Optimise
17.
Maximising
18.
Constraints
19.
Eli Goldratt
20.
Bottlenecks

1. Section 10.5

TOC brings out some basic principles of synchronising shop floor

manufacturing practices. Though the solution has to be custom
built for each shop, there are a set of broad principles that need
to be adhered to. The broad principles are:
(a) There is a clear distinction between the capacity of the
shop and that of the workstation. The shop capacity takes
precedence over the workstation capacity.
2. Section 10.1


The operational philosophy behind TOC is that capacity of
workstations
3. Section 10.3

For an organization to have a process of on-going improvement,

certain basic questions need to be answered faster and more
effectively. Those fundamental questions are:
(a) What To Change?
(b) What To Change To?
(c) How To Cause The Change?
4. Section 10.5

Create a spreadsheet, starting with the bottlenecks, describing the

capacity consumed on the bottleneck resource by each product.
This is called a product load profile. Across the spreadsheet
maintain the required customer quantities.
5. Section 10.4

Applying resources to the bottleneck department can increase

the system capacity. This approach is called rounding out capacity
because resources are applied to the bottleneck so as to bring
it into balance with other parts (departments) in the system.
Rounding out capacity has a limit. As soon as a bottleneck is
removed from one sub-system, the bottleneck simply jumps to
another department.
6. Section 10.5.1

It tried to optimise allocation of the same capacity resources.

The result involved multiple orders, multiple sequential and
often interdependent manufacturing operations, and multiple
production and business constraints. FCS emphasised
maximising production resources.
7. Section 10.5.2

It was developed as a new tool that tried to correct this situation

by at least identifying under-utilisation and overload conditions
at a machine or work cell. CRP was a useful reporting tool, but
it didnt provide the ability to fully model production and all its
constraints.
8. Section 10.5.3

It was developed by Eli Goldratt and others using TOC as the basis.
It introduced the concept of constraints as bottlenecks on the
factory floor. It attempted to identify only production bottlenecks,
and then eliminate them through proper scheduling. This
simple idea could lead to the better utilisation of manufacturing
resources, resulting in greater productivity and lower costs.

SUGGESTED READINGS






E-REFERENCES
http://www.lean.org/common/display/?o=223
http://www.tocico.org/?page=toc
http://www.emeraldinsight.com/journals.htm?articleid=849107
&show=abstract
http://www.goldratt.com/pdfs/toctpwp.pdf
11
CASE STUDIES
CONTENTS
Case Study 1: Chapter 1
Production Management Objectives for ABC Ltd.
Nestl: Sustainability and Water

Enterprise Rent a Car: Locating a Business to

Enhance the Customer Experience
Mahindra Vehicles
The Henry Ford Production Model
Case Study 6: Chapter 6 Gunny Bags Inventory at Western India Cement

Company
Acme Tyre
Restaurant Machines Manufacturing Company

Portakabin The Importance of Quality in

Creating Competitive Advantage
Case Study 10: Chapter 10 RTA Furniture Factory Case Study

Case Study 11: Chapter 10 Lean Production at Portakabin
Case Study 12: Chapter 10 Strategy Formulation for Electra Limited
CASE STUDY 1: CHAPTER 1
PRODUCTION MANAGEMENT OBJECTIVES FOR ABC LTD.

ABC Ltd. is one of the multinationals, employing about 240,000
employees and the turnover (sales) over the past 5 years has
exceeded $20 billion. This makes hundreds of different products
at 10 different plants situated in South America, Europe, Asia
and Africa. The products are mainly mechanical and electrical
equipment for industrial customers and defence organisations.
The company is hierarchically organised into several functional
and staff departments. Production department is organised in a
particular plant in a particular product category. Each department
functions in a semi-autonomous manner and considered as a
profit centre. The head office is at Rotterdam and branch offices at
Bombay, Singapore, Lima, Bahrain, Frankfurt, Nairobi, London,
New York, and Cincinnati.
Over the past several years, ABC Ltd. has formulated the following
broad objectives:
To diversify continuously the operating activities in

Mechanical, electrical, electronics products manufacturing.
To continuously modernise the plants and machinery by

brining new technology through R&D.
To produce such products to achieve favourable acceptance of

customers and profitable results.
To build public confidence and continuing friendly feelings

for products and services though various activities.
To provide interesting jobs, working conditions, and

opportunities for advancement to local nationals.
To manage the company for progress, growth, profit and

public rvice through systematic planning & procedures with
reference to each nations legal and regulatory framework.
To cooperate with suppliers, distributors, contractors and

other connected people for maintaining continuity in business
& profitable progress.
1. In your view, what should be the vision and mission for
ABC Ltd.?
2.
Suppose that you are the General Manager (Operations) for

one of the plants, what specific objectives can you identify
for your operations? How will you go about implementing
the same?
CASE STUDIES 415
NESTL: SUSTAINABILITY AND WATER

Introduction
Intelligent businesses in the 21st century operate with an
awareness of their responsibilities to all of their stakeholders,
not just responsibilities to directors and shareholders, but also to
customers and, perhaps most importantly, the environment. For
Nestl, this is nothing new. From its founding in 1867 by Henri
Nestl who developed the first cereal-milk food for infants
Nestl has built its business on the basis of sound principles.
The business is committed to creating value for all stakeholders
and recognizes that different stakeholders see different values as
important.
The major stakeholders in Nestl are:
shareholders, who want a dividend from profits
employees, who want job security and the necessary training

and development to allow them to further their careers with
Nestl
consumers, who want products that better meet their needs,

that are available in the right places and at the right price
business partners, who want long-term and trusted

relationships
local and national economies within which Nestl operates.
This Case Study examines Nestls policies on eco-efficiency

and sustainability, and, in particular, how it has developed a
responsible policy towards the use of water. This is covered in its
first water review Nestl and Water: Sustainability, Protection,
Stewardship published in 2003.
Background
Nestl is the worlds largest food and Beverage Company and
employs over a quarter of a million workers. It is in the secondary
sector at the centre of the supply chain that starts with producers
of agricultural products in the primary sector and ends with
distribution and retailing in the tertiary sector.
Ownership
Nestl SA acts as a holding company. SA is the Swiss equivalent
of a UK Public Limited Company (PLC). Like all companies
it has a duty to provide returns to its shareholders in the form
of dividends. Nestl balances this against the need for growth
whilst continuously improving and being true to its principles
of sustainability. Nestl UK is a Private Limited Company (Ltd),
wholly owned by Nestl SA. However, Nestl UK has its own
directors and can make many of its own decisions; this is because
Contd...
Nestl strives to be as decentralized as possible - local decisions are

made locally.
Nestl produces over 100 brands, including many household
names such as Nescafe, Kit Kat and Nesquik. Other brands are
also well known, but you might not have realised that they were
Nestl products - such as Golden Grahams, Buitoni, Friskies and
Perrier. In 2002 Nestl had a sales turnover of over 38.3 billion on
which it made a net profit of over 3.2 billion. The majority of this
profit (63%) was re-invested in the business whilst the remainder
was paid out to shareholders in dividends. Its attitude to growth is
that it, too, should be sustainable, and this usually means organic
growth. However, its water business - known as Nestl Waters
since 2002 - has grown both organically and by acquisition. Nestl
acquired Vittel in 1969, Perrier in 1992 and San Pellegrino in 1998.
Today, Nestl Waters is established in 130 countries and is the
worlds leading bottled water business.
Acting Responsibly
Nestl feels that it has a real role to show a lead in acting responsibly
with its business partners, suppliers and customers around the
world. Responsible business practices dont just make moral
sense; they make good business sense. The company has therefore
developed policies and principles to help it meet its general aims
of fairness, honesty and concern for people. Its Corporate Business
Principles includes all nine principles of the United Nations Global
Compact referring to labour standards, human rights, and the
environment which are applied throughout the company.
Some of the basic Nestl values and principles are to:
prefer long term development over short term profit
develop long term commitments and relationships with

suppliers and customers
show respect for diverse cultures and ensure operations

integrate with them
recognise that consumers deserve information about the

products they buy and the company behind the brand
encourage all employees, led by senior management, to follow

these principles by integrating them into Nestls business
processes.
Nestl and Sustainable Development

Nestl defines sustainable development as the process of increasing
the worlds access to higher quality food, while contributing to
long-term social and economic development, and preserving the
environment for future generations. Nestl tries to be a genuine
partner in sustainable development. The rise in the worlds
population means there is an increased demand for food. This in
Contd...
CASE STUDIES 417
turn places pressure on water and raw materials produced by the

primary sector. If Nestl wants its business to continue growing it
must encourage more production of better quality raw materials
from its suppliers. Recognising that others face this issue, Nestl
created the Sustainable Agricultural Initiative with other food
manufacturers. The group defines sustainable agriculture as a
productive, competitive and efficient way to produce agricultural
raw materials, while at the same time protecting and improving
the natural environment and social/economic conditions of local
communities. They recognise that this will take time, but by cooperating these competitors are better placed to make an impact
on a global scale.
Basic Economic Problem
Economists distinguish between wants and needs; needs are those
things which people require to survive. These comprise food,
water and protection from the elements in the form of shelter and
clothing. Nestl products fall into two of these categories (food and
water). However they can only be described as wants because it is
possible to survive without consuming any Nestl products at all.
All resources are considered scarce because the wants for them
(the demand) outstrip the various uses for them (the supply). This
means that they have to be shared out (distributed) by a mechanism
such as price. There are numerous ways in which a resource may
be used, an opportunity cost is therefore created whenever one use
is preferred over another. If water is used for industrial production,
it is not available for agriculture or domestic consumption. Water is
a classic example of the distribution problem of scarce resources.
There is actually enough water in the world for everyones needs,
and it is not a resource that is ever used up in the way that other
resources can be consumed. The amount of water in the earths
water cycle evaporating from the sea, then falling as precipitation
over land is constant, the problem is one of distribution - it is not
always located where it is needed.
Factors of Production
The factors of production are:
land - natural resources including water and the proportion of

the planet given over to agriculture producing raw materials
labour - the human effort involved in production
capital - the money invested in business including equipment

purchases
enterprise - the process of bringing the above factors together

to make a profit.
Any production process involves the use of all factors of production.

The efficient and sustainable use of factors of production has long
Contd...
been tackled by Nestl working with its agricultural suppliers.

Nestl helps suppliers in developing countries to increase their
output. For example, in Pakistan sales of milk per farmer have
doubled in the last three years as a result of the support from Nestl
Agricultural Services provided to more than 115,000 farmers.
Despite consuming only a tiny proportion of water, Nestl still seeks
to minimise water use. 70% of water usage is by agriculture, and
agricultural raw materials provide the basis of Nestls finished
products. It is important that the environment in which raw
materials are grown is safeguarded and protected in a sustainable
manner. Nestl does not own farms but encourages sustainable
agricultural practices amongst its suppliers. The company invests
over 45 million per year in environmental protection, amounting
to 3% of total capital expenditure on top of regular capitalinvestment projects that incorporate environmental components
and factory environmental operating costs. Also, in certain parts
of the world, Nestl has invested in water education programmes
and community initiatives to develop sustainable and safe
water supplies. It partners EcoLink - a non-profit-making, nongovernment environmental education trust - in a water tank project
to provide a reliable source of clean water to many South African
communities. For example, in the Nkomazi and Nsikazi areas 20
water tanks have been provided at various womens groups and
schools reaching over 10,600 people. For more information see
www.nestle.co.uk/studentissues and follow the links to Nestl in
the Community and the Ecolink page.
Nestl uses water in manufacturing (for example to wash raw
materials). It limits the use of water in its various operations and,
where this is not possible, re-uses or re-cycles waste water.
Limiting Water Usage/Wastage
Between 1997 and 2001 Nestls volume of production increased
by 32% but the amount of water used in production was actually
reduced. For example, Nestls Harrismith plant in South Africa
achieved savings of around 40% through recovery of water
generated by evaporation and tight controls on the municipal
water supply.
Nestl achieved a 12% reduction in wastewater production in
the period 1997-2001. From 1993-1999 the company built 38 new
wastewater treatment plants and 120 plants were upgraded.
Costs and Benefits
The examples above involve large amounts of investment in
capital equipment. Nestl invests over 43 million per year for
the protection of the environment in its factories, with 30% of this
applied in the water area. Nestl takes a long-term perspective on
gaining a return on this investment, for sustainable growth and
Contd...
CASE STUDIES 419
improvement in efficiencies. Another cost which shows Nestls

commitment to improvement is the team of over 200 auditors
employed to check that the business is complying with its own
Corporate Business Principles. Nestls internal communication
system includes an intranet, on which the Principles are published.
There is also a cost attached to the external communication of
spreading the message e.g. the report referred to above. One
benefit is that employees see Nestl as a good business to work for.
The annual employee turnover rate is just 5%. In 2001 a European
survey of recent business school graduates ranked Nestl as 13th
most desirable company to work for.
Nestl also benefits in dealings with partners, suppliers and also
from consumers - who are more likely to deal with or purchase from
a business that they recognise as being responsible. Nestl grows by
acquisition - buying other companies as well as by organic means
i.e. selling more of an enlarged portfolio of products. The growth
potential of the business is also enhanced if companies it wants to
buy see Nestl as a responsible purchaser of other businesses.
Conclusion
Nestl is not complacent about its position, it still means to go
forward, developing new policies and initiatives on eco-efficiency,
responsible business practice and sustainability. Nestl will
also work with national and international bodies to improve
sustainability. For example, the 2002 World Summit on Sustainable
Development set a target to decrease by half the number of people
without access to safe drinking water by 2015: Nestl will share its
knowledge with others to help reach this goal. Nestl will continue
to protect water, increase the efficient and responsible use of water
and encourage its partners and stakeholders to use water in a
responsible way.
1.
Discuss the effective operations managemnet in nestle.
2. Analyze the product development process at Nestle.

3. Analyse the product development strategies being used at
Nestle.

ENTERPRISE RENT A CAR: LOCATING A BUSINESS TO
ENHANCE THE CUSTOMER EXPERIENCE
Introduction
One of the most important decisions a business has to make is where
to locate. The location of the business can have a significant effect
on how it performs. Businesses will aim to operate from locations
that provide the maximum competitive advantage. These decisions
need to be reviewed regularly. By selecting the best location, a
business could get more customers, improve its efficiency and
generate greater profits. For example, choosing an out-of-town
shopping park instead of a high street may allow a retail business
to have greater shop space, better overheads and attract more
customers because parking is easier. Multinational businesses need
to make many decisions about the location of their operations. At
an international level, they might need to choose which countries
or territories to operate within to maximise opportunities. Within
each country, they would need to locate the head office. At a more
local level, they may need to choose whether to locate within or
around major cities.
Enterprise Rent-A-Car is an internationally recognised brand,
operating within the United States, Canada, the UK, Ireland and
Germany. It is the UKs largest car rental company. As the company
has developed, it has sought to retain the personal feel of a smaller
business. The company encourages its branch managers to take
responsibility for local operations. This approach helps to create
a dynamic service driven by the individual branches. This means
that each branch is free to focus on the needs of its local customers,
while delivering Enterprises values and high standards of customer
service. Car rental is an extremely competitive market. There
are many car rental companies operating in the UK. Enterprise
aims to outperform its competitors through a focus on customer
service. Service is a core element of Enterprises ethos and as such,
employees seek to provide the highest standards of customer care.
This is the driving force and key differentiator of the business.
As part of this strategy, Enterprise attempts to locate its branches
as close as possible to its customers. It has an extensive branch
network. Within the UK, the company operates from 350 locations.
Most people (over 75% of the countrys population) live within five
miles of an Enterprise branch.
This case study focuses on how Enterprise Rent-A-Car decides
where to locate its new or relocated branches.
Factors Affecting the Location of a Business
There are several reasons why an organisation might decide to open
new branches or relocate its existing operations. It might want to
expand the business, so it will open branches in cities where the
Contd...
CASE STUDIES 421
organisation did not previously have a presence. A business might

also want to restructure or modernise its operations. It might do this
by bringing together some existing departments into new purpose
built premises. It might decide to shut its less profitable operations
and open branches in locations that offer more business potential.
A business will have to consider many factors when determining
where to locate a new branch or operation. Usually, it will have to
balance several factors in making a decision. Sometimes one factor
may sway the decision:
It may choose a site with the cheapest land or buildings.
It might decide on a location that is convenient for key

employees. A business needs to be able to recruit staff with
the right skills base.
It might choose a site that has easy access to raw materials. For
example, many frozen food factories are located near fishing
ports to reduce transport time taken and to keep fish fresh.
The key factor could be the transport and service infrastructure.

Many businesses require easy access to good road and railway
links and modern telecommunication services. These ensure
that they can meet service or delivery deadlines.
Enterprise Rent-A-Car is a service business. Its customers include:
businesses, who may require regular car rentals for their staff
or visitors
individual customers, who may want to hire a car when they

are on holiday or if their own vehicle has been involved in an
accident.
Enterprise makes it as easy as possible for customers to use

its services. For example, business customers may need a car
delivered to their doorstep. Alternatively, retail customers can use
Enterprises unique pick-up service, where the customer will be
collected from their location and taken back to the branch to collect
the car. Customers can also pick up cars direct from branches, so
all Enterprise sites need to have good transportation links and easy
access. They also need to be close to their customers. This helps to
ensure Enterprise can keep its promise to customers on the speed
and efficiency of its service.
Enterprise has branches in two types of locations:
First, there are home/city branches. These are located in

areas close to long-term business partners, as well as to a
large market for personal customers. These branches meet
the demand for car rental from businesses and individuals
wanting a car for accident cover or for leisure purposes and
represent 95% of all Enterprises locations.
Contd...
Second, there are branches at airport locations. These provide

a service for people flying into or out of a region. By locating
branches in busy areas and near to its customers, Enterprise
can also increase awareness of its services by using its premises
to project a strong visual brand. The signs and fittings at each
branch premises display the Enterprise corporate logo and
reflect the companys colours and branding. Enterprise also
needs to be open to changing customer demand.
For example, a major new housing development may generate

a new source of customers in an area. The growth of residential
housing could also encourage new businesses, such as shops and
offices, to open nearby to provide services and goods to this new
market. Enterprise needs to be in a position to adapt its locations
to meet any changes in its market efficiently.
Return on Investment
When an organisation makes an investment, it is taking a business
risk. When a company spends money on opening or moving to a
new location, it will hope to see a return on this investment through
increased profits. For example, by opening a new branch close to a
buoyant or developing market, the business would hope to increase
its sales. This in turn should lead to higher profits. Setting up a
new Enterprise branch generates costs. These relate to:
set-up costs, such as for obtaining planning permission,

decorating and fitting out the buildings and installing fire
alarms and security
fixed costs, including rent and other overheads such as

heating and lighting
variable costs, which will depend on the volume of business.

These include staff salaries as the business grows, a company
will hire more staff and, for Enterprise, the cost of owning
and maintaining vehicles.
There are several ways in which Enterprise assesses whether

a new branch or relocation will generate sufficient return on
the required investment. The starting point for any method of
investment appraisal is to forecast how much additional revenue
the new operation will generate. However, this also needs to be
considered against how much that business may take away from
other Enterprise locations nearby. This revenue forecast can then
be used to obtain a profit forecast. Projected revenues and profits
can be linked back to costs in several ways:
Payback measures the length of time it will take to generate

sufficient profit to cover the costs of the initial investment.
When assessing different project options, companies
sometimes choose the project that has the shortest payback
period.
Contd...
CASE STUDIES 423
Return on capital employed expresses the amount of profit

generated in a given period (usually a year) as a percentage
of the costs of the project. Investors would usually only back
projects where this percentage is greater than prevailing bank
interest rates. It would make little sense to back a business
project if investors could get a greater return by simply
keeping their money in a bank account.
Break-even analysis is a way of assessing how long it will take

(or how many customers are required) for a new business
venture to generate a profit. This analysis relates sales
revenue to total costs. The break-even point is achieved when
the revenue equals the costs incurred to date.
A large multi-national company like Enterprise may sometimes

take a location because it offers a strategic advantage. For example,
it may stop a competitor obtaining the location or may be situated
in a developing area where the longer term projections are very
good. Identifying a new location Before selecting a new location for
a branch, Enterprise undertakes a detailed analysis. Initially, local
managers identify the potential of possible new locations. This is
done through a detailed process of forecasting based on existing
information, such as how many customers currently use each
branch. This process enables the business to spot where existing
branches are at maximum capacity and where there might be
opportunities for new branches to win business from competitors.
At this early stage, managers look at the population in the catchment
area of the proposed new branch. They assess how many cars have
been rented by customers in this catchment area from surrounding
branches. They aim to understand the amount of business in the
area, as well as what level of business is currently being missed
because Enterprise does not have a presence in that local market.
Enterprise sets a boundary for a new location aiming to be within
a six-minute drive time for its customers. It also needs to be close
to referral sources, such as vehicle repair centres, mechanics and
dealerships. These are some of the places where Enterprise may
acquire new customers, such as people who urgently need a rental
car because their own car has broken down or been involved in
an accident. Once it has been decided to establish a branch in a
particular location, Enterprise managers consider the suitability
of potential sites. Enterprise needs its branch sites to have good
access and parking space.
They should be easy to get to at all times. If the area around
the site experiences frequent traffic jams, this might
inconvenience customers and create negative perceptions of
Enterprises service.
Enterprise managers undertake an initial property analysis to see
if a site is worth further investigation. They use a comprehensive
checklist to evaluate each location. This includes looking at other
Contd...
planning applications being made in the area, estimating the cost

of setting up the branch and considering the impacts promotional
signs will have at and around the site.
Enterprise sets high standards so that every new branch will provide
a better service for customers. For example, the new Enterprise
Rent-A-Car branch at Heathrow airport has a convenient and
accessible position between the airport junctions on both the M4
and the M25 motorways. This means customers coming from
different directions can find it easily. It also has prominent signage
to make it easier for customers to see where they should leave
rental vehicles that are being returned. The new branch also has
operational advantages for Enterprise. It is a bigger site and allows
more efficient operations. Its location means that shuttle times to
the airport terminals have reduced. It now takes 10 minutes less
to transfer customers from the Enterprise offices to the terminal
buildings. The new branch also offers Wi-Fi and has a rest area
for customers. The improved facilities not only mean customers
generally feel more comfortable, but also that business people can
keep using email and internet whilst waiting.
Qualitative Influences
There are also other factors that influence Enterprise in its choice
of location for a new site. It is important that safety requirements
are met, for example, making sure the road conditions are suitable.
Ideally, there should be the space to expand operations in the
future, so managers assess if the local facilities and infrastructure
will allow this.
Managers also take into account environmental considerations.
Enterprise aims to make new branches as environmentally-friendly
as possible:
Long-life bulbs are used within Enterprise signage. These

last five times longer than standard bulbs. This reduces
environmental waste and cuts the labour hours spent replacing
bulbs.
Photocells are used to switch on outside lights and signs only

when they are needed. This reduces electricity consumption.
Regulators are placed on car wash and jet wash machines to

reduce the amount of shampoo used.
Printing is kept to a minimum and documents are only printed

on recycled paper.
A last person out switch turns off all non-essential electrical

devices at the end of the day.
Special window blinds reduce heat gain, which reduces energy

costs.
Contd...
CASE STUDIES 425
Offices use efficient lighting that generates less heat, so that

cooling systems are not required.
Furniture is recycled by donating replaced items to charities.
As there are 7,700 Enterprise Rent-A-Car branches worldwide,

even small environmental improvements at branch level produce
a big difference globally.
Conclusion
Setting up new branch locations gives Enterprise the opportunity
to expand the business and improve on the quality of its customer
service. The key factor that often differentiates a service business
from its competitors is the quality of the care and attention given
to customers. When looking for new sites, Enterprise aims to locate
the business as close to customers as possible. This means that it
can respond more quickly to their requirements. It also makes it
more easy and convenient for customers to access the services of
Enterprise. In evaluating potential new locations, Enterprise also
aims to address environmental concerns. During refurbishments
and the setting up of new branches, Enterprise puts in place
measures to reduce the carbon footprint of the business. This not
only improves the customer experience, it also helps Enterprise to
reduce its costs and grow as a business.
1.
Using an example of a service that you know, describe what

is meant by customer service.
2. Explain why Enterprise Rent-A-Car tries to locate branches

close to its customers.
3. Analyse the various factors that influence Enterprises
decisions about where to locate a new branch.
4. Assess how organisations might evaluate any investment
that they may make.

MAHINDRA VEHICLES
A World Leader in Vehicle Manufacturing Rises in South Asia
Mahindra Group (Mahindra) is among the biggest and most
powerful publicly listed companies in the world. It operates in the
key industries that drive economic growth, enjoying a leadership
position in tractors, utility vehicles, Information Technology (IT)
and vacation ownership. Mahindra focuses on enabling people
to Rise, a call to action to unite the many companies within the
Mahindra Group to a common purpose. More specifically, Mahindra
employees are encouraged to rise, to succeed and to create a better
future for themselves, their families and their communities. In the
spirit of Rise, a new Mahindra manufacturing facility recently
rose in the Chakan corridor near Pune, India.
Mahindra Groups Automotive Sector manufactures and markets
light commercial and utility vehicles, including auto rickshaws
(three-wheelers). The sector has been the leader in Indias utility
vehicles market since its inception, and currently accounts for
about half of Indias utility vehicle market. The company exports
its products to Europe, Africa, South America, South Asia and the
Middle East.
Mahindra decided to expand its lineup to include a new range of
medium and heavy commercial vehicles, including SUVs, trucks
and buses. This expansion required a new plant, so Mahindra
decided to establish a new manufacturing facility in Chakan.
Mahindras challenge was how to assess, design and build the
facility, plus get it running and producing vehicles according to the
aggressive schedule that management had defined.
As of 2012, 1,500,000 cars are produced annually in the Chakan
corridor by Mahindra, Volkswagen, General Motors, Mercedes
Benz and other automotive manufacturers. Mahindra is one of the
largest manufacturers in this area, producing light commercial
vehicles (LCV), pick-up trucks, SUVs and the Mahindra Navistar
heavy duty trucks.
Revisiting Engineering Processes to Establish State-of-theart Plant
Mahindra is a long-time customer of Siemens PLM Software.
Designers, data administrators and some of its product assembly
suppliers useTeamcenter software for Product Lifecycle
Management (PLM). The company also usesNXsoftware for some
of the powertrain product design, and a few years ago Mahindra
started usingTecnomatixsoftware fordigital manufacturing.
In 2007, we selected and introduced the Tecnomatix solution,
because it offers a full range of digital manufacturing tools that
serve our needs, integrates smoothly with our existing product
Contd...
CASE STUDIES 427
data management systems and clearly stands out in meeting the

criteria we had defined, says Nagesh Nidamaluri, senior general
manager, Assembly Systems, MES and Digital Manufacturing,
Chakan plant, Mahindra Vehicles.
Mahindra uses the Manufacturing Process Planner solution in
the Teamcenter portfolio for the planning of various production
processes; as well as Plant Simulation, FactoryCAD software
and FactoryFLOW software, all in the Tecnomatix portfolio,
for plant design and optimization; Process DesignerandProcess
SimulateandJacksoftware, also all in the Tecnomatix portfolio,
for assembly planning and validation.
The establishment of a new plant was a good opportunity to revisit
Mahindras current engineering processes. We have realized that
in order to shorten a vehicle manufacturing project, we need to
deploy concurrent engineering methods, Nidamaluri says. This
means that manufacturing engineering needs to work concurrently
with product design. Digital manufacturing tools provided by
Siemens PLM Software facilitate this approach. This is a dramatic
change to our current engineering processes.
We have a gate system, and one of the gates is the virtual validation
gate. In the past, mostly the product design group was actually
doing validations for this gate; but now, with the help of Tecnomatix
digital manufacturing tools, the manufacturing engineering group
is very active in preparations for this gate.
Mahindra decided to execute the digital manufacturing journey
at the Chakan plant in a series of steps, deploying point solutions
to address specific needs, followed by the Manufacturing Bill of
Materials (MBOM) and finally the bill of process (BOP). Mahindra
plans to clone proven methodologies developed in the Chakan
plant at other plants.
Laying out the New Chakan Plant in 3D
While constructing the new plant in Chakan, Mahindra decided
to significantly upgrade the way it creates and manages plant
layout data. There were a number of issues to deal with, including
the fact that there was no uniform plant layout method across
the enterprise. Each site was managing plant layout separately.
Plant layout drawings were not maintained in a central repository,
which made it very time-consuming to locate them when they
were needed. There was no revision management system and only
one engineer at a time could work on any given layout. Drawings
provided by suppliers were maintained in different layers in the
same file, resulting in duplication of data and unnecessarily large
files, which degrade visualization performance.
To resolve these issues, FactoryCAD was used to create 3D plant
layouts for all of the Chakan plant production lines, including body
Contd...
and trim, chassis and final (TCF). Providing the essentials needed
to create detailed and intelligent factory models, FactoryCAD
allowed our planners to use smart objects to represent their
factory resources, says Anupam Patil, senior manager, IT and
PLM, Chakan plant, Mahindra Vehicles.
This was especially advantageous because the objects provided
the ability to snap a layout model together, instead of wasting time
drawing the individual equipment. Using FactoryCAD, we were
able to resolve many issues before erecting and commissioning of
the factory, such as interferences of process and utility equipment
with the civil structure, for example, as well as a monorail system
that caused interference with the supporting beams at a specific
area and a robot that caused interference with the building column
in another area.
A Planned Production Line, Virtually Simulated
Before building the production line, Mahindra completed a number
of simulation projects that helped to make important decisions in
configuring the production line. One of the projects addressed the
inter-connections of the body-in-white (BIW) welding shop, paint
line and the TCF assembly line, where all the parts are assembled
to form a completed vehicle.
The goal of the simulation project was to find out the optimal
buffer storage capacity in between these production lines.
The challenge arose because there were three BIW planned
production lines (for the Maxximo, Genio and XUV vehicles) going
into a single paint line, which then goes into three separate TCF
assembly lines. Tecnomatix Plant Simulation was used to conduct
a what-if simulation to determine the best scenarios for the plants
inter-shop conveyor system. Several scenarios of mixed-model
production volumes were simulated and the optimal size of central
painted body buffer storage and individual BIW shop storage was
determined. This simulation project substantially reduces the lead
time in designing the storage.
Another project was to determine the optimal routing method of
painted vehicle bodies from the single paint line to the three TCF
assembly lines. The simulation helped to identify bottlenecks, and
verify the robustness of the selected option, says Amit Jahagirdar,
digital manufacturing manager, Chakan plant, Mahindra Vehicles.
One simulated option was a clockwise flow of bodies with no
cross-over. The simulation showed that in the event that one of
the three TCF lines is shut-down, the respective bodies in the
main line would create blockage in moving bodies to the other
TCF lines. The second option was a counter-clockwise flow, with a
cross-over for the empty skids to flow back to the paint shop. This
is a more robust option because each TCF feeder line is practically
Contd...
CASE STUDIES 429
independent of others. So, there is little or no impact on the overall

performance of the line shutdowns.
Using Plant Simulation, Mahindra gained critical insight regarding
its factory layout and installation processes across vehicle lines.
Accurate and fast validation of processes enabled the company to
achieve its goal of getting the implementation right the first time.
Detailed throughput examination notably reduced bottlenecks, and
what-if analysis capabilities substantially decreased unnecessary
capital investment in machines and conveyors.
MBOM Creation Means No Part is Forgotten in the Production
The Engineering Bill of Materials (EBOM) is created and managed
using Teamcenter. Then manufacturing engineers create the
MBOM using Manufacturing Process Planner by consuming parts
from the EBOM. The MBOM is then sent from Manufacturing
Process Planner to SAP software, the enterprise resource
planning (ERP) system Mahindra uses.
In the previous method, planners used Microsoft Excel to define
and maintain the MBOM, Patil says. While the tool is intuitive, it
was clear to us that this is not sustainable for handling large BOMs
and sharing engineering data. So, we decided to use dedicated
tools for this task, and developed a robust MBOM creation and
update methodology using Manufacturing Process Planner. Using
this methodology, planners adjust the EBOM and add relevant
production information such as a make or buy definition for each
item and the point of consumption along the production line, which
is later used by the shop floor logistics management system.
The MBOM will include the car parts in their form through the
entire production process. For example, in the paint line, the
chassis will be represented by a bare chassis, cathodic electrocoat
deposition body and painted body. These forms, which we call
semi-finished parts, appear as a single assembly in the EBOM, but
as different assemblies in the MBOM. Another example of MBOMspecific information is the addition of scrap weight to the stamped
parts, as this information is used downstream in the recycling
process.
Handling the MBOM changes throughout the development
lifecycle is crucial for us. Therefore, the engineering notifications
are transferred along with the EBOM from Teamcenter. The
notifications are put into a common pull, and from there they
are assigned to the relevant MBOM planner. In addition, once an
initial MBOM is created, all subsequent changes in the MBOM are
done in a controlled configuration, using the incremental change
mechanism, which enables us to analyze very clearly the impact of
any EBOM change on the MBOM. Within the incremental change,
we use the workflow mechanism of Teamcenter which helps
Contd...
ensure that every change goes through a pre-defined sequence of

events and an authorized approval. These capabilities are unique,
and provide us the ability to put a lot of structure into the MBOM
creation process.
Due to the importance of maintaining an accurate MBOM, starting
from the engineering team and down to the shop floor, Mahindra
uses Teamcenter to execute a daily update to synchronize any
incremental changes to the EBOM. In a similar manner, Teamcenter
integration for SAP synchronizes the MBOM daily with SAP
based on make or buy attributes. For example, any assembly node
with children, which was identified in the MBOM as a purchased
assembly, will be automatically exported and will appear in SAP as
a single node.
Dynamic 3D Simulation Supports Analysis of Complex Assembly
Scenarios for the New Maxximo
The painted body of the Maxximo mini-truck is transported inside
the new assembly shop for operations. The car body is moved along
using a hanger system in the underbody areas and on transfer
lines. The system was initially designed to carry the car body with
the doors closed. After analyzing the conceptual flow of assembly,
other possible assembly operations were analyzed. It was found
that in order to reduce production time, some assembly operations
could be executed when the car body is on the hanger, as long as
the doors could be opened to a certain extent, which will enable
operators to work inside the cabin area.
Manufacturing engineers used Process Simulate to validate
hanger design that could support sufficient door opening. The
limit to which the doors can be opened was calculated based on the
virtual 3D simulation, instead of waiting for actual parts to arrive
at plant. This resulted in cost and time savings and reduced the
number of iterations of the hanger design, says Jahagirdar.
The assembly process for the Maxximo was planned so that the
engine assembly from the engine production unit is transferred to
the final assembly shop from a logistic area. It moves on a predefined
track and gets synchronized with the conveyor carrying the
Maxximo car bodies on hangers. Because this is a complex scenario,
which involves many parameters, manufacturing engineers also
performed a dynamic 3D simulation of this scenario. The main
objective of this simulation was to validate the planned process
and its duration estimation. The ergonomics of operators was also
evaluated based on Mahindra standards, Jahagirdar says.
Tools Management Lowers Cost by Enabling Re-use
Mahindra plans to use the resource classification capability of
Teamcenter to manage its many production tools. According to
Jahagirdar, The objective of this initiative is to lower costs, reduce
Contd...
CASE STUDIES 431
lead time and improve quality by helping the manufacturing

engineer/planner select the proper resource, increasing the
re-use of manufacturing tools, reducing tool inventory, maximizing
resource utilization and delivering digital models for verification
and simulation.
We have defined simple categories for any tool we have in our
production plants, including a tool suitable to a specific part, such
as fixtures or specific gauges. There are also more generic tools,
such as robots and torque wrenches. Based on this, we are defining
a workflow using Teamcenter to classify our existing and new tools
by part number, so that eventually we will have a structured library
of tools across the Mahindra automotive sector.
The next step is the development of the BOP using Manufacturing
Process Planner. Assembly operations and their duration are
defined, and then linked to the parts that should be handled and to
the specific tools required to carry out the work. This methodology
enables Mahindra manufacturing engineers to re-use best practices
and captured knowledge in planning or modifying a production line.
The digital manufacturing tools play a key role in the first steps of
a car project, says Nidamaluri. These tools are already used in the
requirements definition phase of a new or modified production line.
This enables us to provide more mature engineering information
upfront to our system suppliers, and will therefore reduce lead
time and the overall duration of a car project. I also expect that
our production facilities and tools suppliers will interact with the
system, and introduce their inputs.
Mahindra Vehicles Receives Top Award
Mahindra Vehicles received the top honor in Siemens PLM
Softwares Asia Pacific Innovation Awards 2012, which places a
spotlight on how PLM technology enables companies to make
smarter decisions that lead to the creation of better products. The
top award is presented to the company that uses PLM technology in
a way that enables it to be a hallmark of success in the manufacturing
industry, maximizing the value derived from its products throughout
the entire lifecycle to streamline its productivity and performance.
Implementing Tecnomatix portfolio enabled Mahindra Vehicles to
come closer than ever before to real-time digital manufacturing.
Other benefits included a 25 percent reduction in the green field
plant set-up time, a 28 percent improvement in effective working
time by validating and reducing non-value added activities and an
overall increase in flexibility, which produced more product model
mixes and reduced time-to-market.
First time right will Lead to a Brighter Future
The benefits of the Tecnomatix digital manufacturing tools for
Mahindra are already invaluable, Nidamaluri says. This toolset
Contd...
deployment strengthens the first time right mindset we have in

Mahindra, as it enables us to conduct different what-if analyses of
production scenarios. Still, we are looking forward to make more
progress in the digital manufacturing journey. For example, we
have more than 100 robots in our Chakan plant. Currently, even
the slightest change in a robot program requires us to contact the
line builder and ask for modifications. I believe we can develop
skills by using the Tecnomatix robotics off-line programming tools
to conduct some of this work ourselves. This will bring multiple
benefits, including higher flexibility due to greater engineering
capability, shortening the modifications lead time and reducing
cost.
1.
Analyze and discuss the new plant layout of Mahindra.
2.
How has tools management lowered the cost for Mahindra?
3.
Discuss the advantages of assembly line of Mahindra group.
CASE STUDIES 433
THE HENRY FORD PRODUCTION MODEL

Process: The Early Days of Ford Motor Company and the Model T
When Henry Ford incorporated the Ford Motor Company in 1903,
automobiles were expensive, custom-made machines purchased as
a luxury item by the wealthy. Workers at the Ford factory in Detroit
produced just a few cars a day. Henry Fords ambition was to make a
motor car for the great multitude. He wanted to build a high-quality
automobile that would be affordable to everyday people. He believed
the way to do this was to manufacture one model in huge quantities.
Ford and his companys engineers designed a car named the Model
T. First offered for sale in 1908, the Model T was produced like other
carsone vehicle at a time. But the Model T was more sturdy and
powerful than other cars. Considered relatively simple to operate
and maintain, the auto offered no factory options, not even a choice
of color. The Model T was also less expensive than most other cars.
At an initial price of $950, 10,000 autos were sold the first year
more than any other model.
Vanadium Steel. Henry Ford searched the world for the best
materials he could find at the cheapest cost. During a car race in
Florida , he examined the wreckage of a French car and noticed
that many of its parts were made of a metal that was lighter but
stronger than what was being used in American cars. No one in
the U.S. knew how to make this French steela vanadium alloy. As
part of the preproduction process for the Model T, Ford imported
an expert who helped him build a steel mill. As a result, the only
cars in the world to utilize vanadium steel in the next five years
would be French luxury cars and the Model T.
The Moving Assembly Line
Like parts for other cars of the
time, parts for the Model T were
initially purchased made-to-order
from other businesses. Teams of
two or three skilled mechanics
in the factory would gather these
parts and put them together at a
workstation, using everyday tools.
When parts did not fit together as
needed, workers used files and hammers to make them fit.
Henry Ford realized that a more efficient production process was
needed to lower the price and meet increasing consumer demand
for his popular new car. He needed to improve productivitythe
amount of goods and services produced from a given amount of
productive resources. Economists refer to goods and services as
output. Henry Fords output was the Model T. The productive
resources used in productionnatural resources, capital resources
Contd...
and human capitalare inputs. Fords inputs were the steel,

workers, and other resources required to manufacture the car.
Ford looked at other industries and found strategies that he could
apply to making the Model T. Take a look atInterchangeable
Partsand theAssembly Lineto learn more about two of the first
strategies he adapted.
Using interchangeable parts required making the individual
pieces of the car the same every time. All pieces would fit with all
others. Any valve would fit any engine and any engine would fit
any frame. The standardization of parts made it possible to break
down assembly of the Model T into distinct steps. Each worker was
trained to do just one step or a very few steps. Economists refer to
this practice asspecializationor the division of labor.
Ransom Oldsis the first manufacturer to have used interchangeable
parts and the assembly line in the U.S. auto industry. He used these
ideas in the production of the 1901 Curved Dash Oldsmobile also
referred to as the runabout.
In 1913, the Ford Motor Company established the first moving
assembly line ever used for large-scale manufacturing. On a trip to
Chicago, Henry Ford observed meat packers removing cuts of beef
from a carcass, as it was passed along by a trolley, until nothing was
left. He was inspired to reverse the process for the production of
his automobile.
Parts were attached to a moving Model T chassis in order, from
axles at the beginning to bodies at the end of the line. As vehicles
moved past the workers on the line, each worker would do one
task. Some components took longer to put together and attach
than others. Subassemblies were established for these. For
example, each radiator with all its hose fittings was put together on
a separate line feeding into the main assembly line. The interval
between delivery of the car and its components was carefully timed
to maintain a continuous flow. View a video clip which shows the
moving assembly line in action. Click on Ford Assembly Line,
1920s at the bottom.
The home for this new production system was the Highland Park
Plant near Detroit, Michigan, which Ford opened in 1910. Assembly
wound downward in the factory starting on the fourth floor where
body panels were hammered out. On the third floor workers placed
tires on wheels and painted auto bodies. After the assembly was
completed on the second floor, the autos moved down a ramp past
the first-floor offices. Test your comprehension of this lesson in the
following activity.
Conclusion
Critical to the success of the Model T was Henry Ford s ability
to increase productivityoutput per unit of input. Specialization
Contd...
CASE STUDIES 435
and division of labor helped Henry Ford and his company increase
Model T productivity. Assembly line production was more efficient
than having individual workers making complete products.
Interchangeable parts made this new way to organize production
feasible.
1.
Discuss the assembly line for Henry Ford.
2. Draw the steps in the process for manufacturing a product

which Henry Ford used. Label the various stages in the
production process.
3. What plan was developed by Henry Ford to improve task
productivity?

GUNNY BAGS INVENTORY AT WESTERN INDIA CEMENT
COMPANY
The Western India Cement Company (WICC), a reputed and large
Cement Manufacturer operates an one million Tonne Cement plant
at Cement Nagar in Western India. The plant has access to high
quality limestone in close proximity of the plant. Due to this, WICC
has a Competitive edge in terms of cost of production and quality of
Cement. However, WICC is not so fortunate in respect of some of
the other materials it consumes, particularly coal and Gunny bags.
WICC has to put up with low quality (High Ash content) of coal and
also irregular supply. In addition there is long haulage for Coal.
WICC manages its Coal requirements though adequate stock of
Coal along with occasional purchase from open market and road
transport.
The situation in respect of Gunny bags is somewhat different.
The availability of Gunny bags is not a serious issue but the cost
incurred on maintaining the Gunny bags inventory is of concern to
the management of WICC.
Almost the entire quantity of Cement produced in the Country is
despatched through 50 Kg bags. The bulk transport of Cement, as
in developed Countries, is yet to be accepted widely in India.
There are some choices in respect of the Bags for transportation
of Cement: in the form of paper, polythene, Gunny Bags - with
or without polythene lining, etc. The Government of India has
been consistantly advocating and continuously supporting the
use of Gunny bags for Cement transportation partly to keep
the Jute Industry viable and also for energy and environmental
considerations. WICC has been as a policy using Gunny bags for
the entire transportation requirements of Cement.
The total requirement of Gunny bags for a 1.0 million Tonne plant
comes to 20.4 million bags per year, considering burstage and other
losses of about 2%. The annual expenditures on procurement of
Gunny Bags come to ` 20.4 crores at an average cost of ` 10.00
per bag. This being a high consumption value item it becomes
essential to monitor its supplies on a regular basis, so that there
is no abnormal increase in the inventories as also the plant is
adequately catered against stockouts. The monthwise receipts
and consumption pattern of Gunny bags for the years 1989, 1990,
and 1991 have been presented in Appendix - 1, Appendix - 2 and
Appendix - 3 respectively.
Calcutta is the major source of Gunny bags in the Country. Almost
entire quantity of Gunny bags requirement of WICC is obtained
from Calcutta. There is no major bottleneck in the availability
of Gunny bags. However, there is variation in the transportation
time of Gunny bags from Calcutta to the works of WICC.
Contd...
CASE STUDIES 437
The bags are despatched from Calcutta by goods train to Delhi.

Once the wagons arrive in Delhi, the bags are unloaded within 5
hours and loaded on to trucks for transportation to the works site.
Past records of railway receipts received from Calcutta and the
date on which the bags were received at the factory indicates that
on an average 12 days (Appendix - 4) are required from the day the
materials are despatched from Calcutta till it reaches the factory.
Normally monthly orders are placed by the Purchase Division. The
despatches from Calcutta are regulated through despatch advice
communicated periodically through telex/fax.
The expected monthly requirement of bags for the year 1992
have been furnished in Appendix - 6. It is desired to finalise the
procurement and inventory policy in respect of Gunny bags for the
year 1992 in order to minimise the total cost related to Gunny bags.
The Purchase Division has indicated an ordering Cost of ` 740/
order (Appendix - 5). The cost of each Gunny bag can be taken to
be ` 10.00 per bag.
1.
Comment on the Compensation of Ordering Cost. Suggest

an alternate (better) method if any. Also indicate how the
inventory carrying cost (which has been estimated to be
21%) needs to be computed.
2. Suggest a procurement and inventory policy for Gunny

Bags for the year 1992, with cost and consumption and
other data provided in the case.
Appendix 1
Statement showing month-wise receipt and consumption of
gunny bags for 1989
Month
Receipt
Consumption
January
Opening
Stock
1624628
1770000
803189
Closing
Stock
2591439
February
2591439
80000
688372
1983067
March
1983067
850059
1133008
April
1133008
450000
621129
961879
May
961879
948500
735840
1174539
June
1174539
1437625
653332
1958832
July
1958832
573000
861061
1670771
August
1670771
476125
722555
1424341
September
1424341
287500
829322
882519
October
882519
867752
926057
824214
November
824214
1034209
904917
953506
December
953506
1354250
920334
1387422
9278961
9516167
16945537
Total
- Average monthly closing stock = 16945537/12 = 1412128

- Average monthly receipt = 9278961/12 = 773246
- Average monthly consumption = 9516167/12 = 793014
Contd...
CASE STUDIES 439
Appendix 2
Month
Receipt
Consumption Closing Stock
January
Opening
Stock
1387422
904472
855671
1436223
February
1436223
356832
560734
1232321
March
1232321
1099879
587368
1744832
April
1744832
392577
778870
1358539
May
1358539
508736
976932
890343
June
890343
1035135
789330
1136148
July
1136148
732383
815240
1053291
August
1053291
798005
950996
900300
September 900300
969893
746705
1123488
October
1123488
500530
675513
948505
November
948505
573571
755735
766441
December
766441
781330
1046812
500959
8653443
9539906
13091390
Total
Notes:
1. In consumption figures of May, 99983 bags are included which

were destroyed due to fire.
2. 25,000 bags sent for repairing in the month of October.
3. 9850 bags sent for repairing in the month of November.
- Average monthly closing stock is = 13091390/12 = 1090949
- Average monthly receipts = 8653443/12 = 721120
Contd...
Appendix 3
Statement Showing Month-wise Receipt and Consumption
of Gunny Bags for the year - 1991
Month
Opening Receipt Consumption Closing
Stock
Stock
January
500959
909450
751815
658594
February
658594
475830
452478
681946
March
681946
1091125
630922
1142149
April
1142149
1030000
730675
1441474
May
1441474
263250
825397
879327
June
879327
391500
774885
495942
July
495942
1363900
818618
1041124
August
1041124
587400
594647
1033877
September
1033877
727640
467580
1292927
October
1293937
480840
571630
1203147
November
1203147
419700
663255
959592
December
959592
415600
790628
584564
Total
8156235 8072530
11415673
- Average monthly closing stock = 11415673/12 = 951306
- Average monthly receipts = 8156235/12 = 679686
Contd...
CASE STUDIES 441
Appendix 4
Receipt Frequency of Gunny Bags in 1991
(No. of days in transit taken from date of R/R till the date of
receipt at works)
Instances of No. of days in transit
Months
13
14
days days
15
days
January
No.of
10
11
12
Trucks
days days days
Received
42
2
2
35
February
26
16
March
57
47
April
52
40
May
20
12
June
24
16
July
61
46
August
33
26
September
37
25
October
26
13
November
22
13
December
23
1
2
17
3
Total
423
13
46
306
42
8
8
Average No. of days in transit = (13*10*11+306*12+42*13+8*1
4+8*15) / 423
= (130+506+3672+546+112+120) /423
= 5086/423 = 12.02 Say 12 days.
Contd...
Appendix 5
Computation of Ordering Cost
Purchase Department, New Delhi, has furnished the following
information in connection with the Purchase orders released both
from Delhi and Plant Office as also the establishment charges for
both the places:
(A) No. of Orders Released a) From New Delhi
1320 Nos.
b) From PLANT
806 Nos.
Total
2126 Nos.
(B) In addition to the above, one order per month is released for
Coal and two orders per month for Diesel.
(C) Total no. orders released would be (a) No. of orders from Delhi & PLANT
2126 Nos.
(b) No. of orders for Coal
12 Nos.
(c) No.of orders for Diesel
24 Nos.
Total
2162 Nos.
(D) Establishment Costs of Purchase Department at Head Ofice &

PLANT Office

(Based on the information furnished by Manager (Accounts)),

New Delhi = ` 16 lakhs
(E) Ordering Cost `16 lakhs / 2162

= `740 per order.
Contd...
CASE STUDIES 443
Appendix 6
Requirement of Gunny Bags for 1992
(One tonne =20 gunny bags, 2% extra bags required due to
burstage) (Quantity in Tonnes & Nos.)
Month
OPC
Cement
Despatch
(in
Tonnes)
PPC
Cement
Despatch
(in
Tonnes)
Total
OPC
PPC
Total
Cement
Desptach (Requirement (Requirement (Requirement
in Nos.)
(in Tonnes) of bags in Nos.) in Nos.)
January
12350
18500
30850
251940
377400
629340
February
15500
23250
38750
316200
474300
790500
March
18500
27700
46200
377400
565080
942480
April
17300
25900
43200
352920
528360
881280
May
17300
25900
43200
352920
528360
881280
June
15600
23400
39000
318240
477360
795600
July
17600
26300
43900
359040
536520
895560
August
18800
28200
47000
383520
575280
958800
September 18200
27200
45400
371280
554880
926160
October
17600
26300
43900
359040
536520
895560
November
17900
26900
44800
365160
548760
913920
December
19200
28800
48000
391680
587520
979200
Total
205850
308350
514200
4199340
6290340
1048960
-Average Requirement of OPC bags/month = 4199340/12 =

349945, say 350000
-Average Requirement of PPC bags/month = 6290340/12 =
524195, say 525000
-
Average Requirement of bags/month = 10489680/12 = 873390,
say 875000
ACME TYRE
Acme Tyre (ATC) carries a diverse group of automobile and truck
tires and tubes. Its gross sales volume of ` 100 Crore annually is
composed of sales to retail customers as well as to local service
stations, auto dealers, and car rental agencies. It has four plants
located in Pune, Calcutta, Chhenai and Faribabad. ATC has a chain
of 500 distributors all over the country. The head office is located in
Mumbai. The corporate head office has identified four major areas
in which an information system might be an improvement over its
old, manual system.
Inventory Control (IC)
The inventory is difficult to monitor and control manually. Counting
items is heavy, dirty labour and requires considerable workspace
to do correctly. At the other extreme, counting tiny automotive
parts and accessories is very tedious. If an annual physical
inventory is taken, it should be possible to maintain accurate
inventory balances using a computerised based inventory system.
IC application would also allow use of EOQ and Reorder points to
keep inventory investments as low as possible while keeping stock
outs to minimum.
Billing
When customer orders are received, sales representatives complete
an order form or sales slip, including customer name and address,
quantity of each item orders, item description, and unit price. They
extend price times quantity for each item with a calculator, locate
any appropriate sales and/or excise tax in a table, add these to the
previous total, and give the completed invoice to the customer.
The process is time consuming and error prone. Furthermore, since
retail customers may walk in at any moment and request service,
this work can not be batched and done at a more convenient time,
as with wholesale mail or telephone orders. The billing process is
complicated by the fact that there is a five-level pricing structure.
Thus for the same item, a retail consumer would pay more than
a service station, which in turn would pay more than a car rental
agency. For each customer, the correct price class and credit limit
must be verified before the order can be written and delivered.
Payroll
Sale representatives are paid on the basis of salary plus commission.
Accurate billing is essential to the correct calculation of commission
earnings. Each invoice total must be multiplied by a commission
percentage factor and the result included in the salespersons
gross earnings for the pay period. With an average of 1000 invoices
Contd...
CASE STUDIES 445
monthly, these calculations are burdensome, time consuming, and

often incorrect.
Accounts Receivable
Seventy-five percent of ATCs customers having in house charge
accounts are sent a monthly statement showing current charges and
payments as well as past-due balances. ATC mails 500 statements a
month to its charge customers. Customers sometimes deliberately or
inadvertently attempt to order merchandise in excess of their credit
limit, but the credit manager has no convenient way to summarise the
payment history of the customer and decide whether or not to grant
an increase in the credit limit. There is no easy way to determine the
age of past-due balances. Each customer has a ledger card on which
all charges and payments are posted, but active customer may have
accumulated several ledger cards worth of information.
The Decision to Computerise
After attending a seminar at the School of Management, the president
of ATC made a unilateral decision to purchase a computer system.
He also purchased a software package to handle billing, receivable,
inventory, payroll and sale analysis. The total expenditure of `
8000,000 including the cost of training, documentation and supplies
seemed modest enough to be worth the risk, given problems with
the manual system that needed to be solved. The first step in
conversion to the new system was the assignment of code numbers
to inventory items, customer accounts, and employees. Inventory
items were given block codes based on vendor source, type of
merchandise, and size. Customers and employees were assigned
quasi-alphabetic codes. The switchboard operator was asked to
make these code assignments in her free time. She was given as
alphabetised roster of customers, told to assign the first customers
the number 00050, the next customer 0100 and so forth, so that the
numeric sequence would parallel the distribution of the customers
last name. She applied a similar system with three-digit numbers
to the current employee list for payroll purposes.
Inventory Control Problems
A code book listing merchandise in alphabetical order was prepared
so that sales representatives could took up the code number of each
item and record it, along with the quantity sold, on the sales slip.
In preparation for the automated perpetual inventory system,
ATCs staff took a physical inventory of all tyres, tubes, and
accessories. These current stock levels were keyed into inventory
master records to be maintained on the hard disk.
From that point inventory balances were increased by the amount
of shipments received from suppliers or merchandise returned
Contd...
by customers, and balances were documented by each days

sales. After several weeks, the warehouse pickers began to notice
that some items the computer had flagged for reorder were,
in fact, in ample supply, while other supposedly plentiful items
were out of stock.
A random sample of sales slips showed that the sales representatives
had often failed to record the inventory item numbers on the slips,
since they were accustomed to scribbling a brief item description
as before the automated system went into effect. The DP clerk
who input sales slip data to prepare customer invoices was forced
to guess which stock number was appropriate. The guesses were
frequently wrong, resulting in inaccurate customer billing and
incorrect stock balances.
The president of ATC called a meeting of the sales force in which he
explained the importance of placing accurate stock code numbers
on the sales slip. The sales representatives countered with the
complaint that it took too much time away from sales efforts to look
up the stock numbers in the code book. The president warned that
the sales representatives would receive commissions only on sales
slips that contained all needed stock numbers. Another physical
inventory was taken at considerable expense and inconvenience;
new stock balance was entered into the inventory master file, and
the system began again from scratch.
After several weeks of operation, it was again apparent that the
stock balances shown by the computer, and the true state of the
inventory was very different. Another random sample of sales slips
revealed that all contained stock codes but often the code bore
no resemblance to the correct one for the item described by the
customer after a telephone call to verify the order. When challenged
by the president, the sales representatives apologised and claimed
they must have made errors in looking up the codes. The truth was
they usually didnt look up the codes at all, they simply recorded
some commonly used, plausible code number.
Billing Problem
The computer system that ATC has purchased did not support
multitasking. It sat idle for much of the time during normal business
hours, awaiting the possible arrival of a customer for whom an
invoice must be prepared. Billing of mail and telephone customers,
accounts receivable, payroll, sales analysis, and inventory updates
were relegated for the second shift. Besides the cost of hiring an
operator for the second shift, the president was displeased with
the potential lack of security in having a lot of employees in the
premises operating the computer after the regular hours. A check
with the hardware manufacturer indicated that it was impossible
to upgrade the computer system to support multitasking.
Contd...
CASE STUDIES 447
Receivable Problem
Management was eager to replace the tedious manual preparation
of customer statements with the automated receivable system. The
president did not want to incur the time and expense of parallel
conversion runs in which the manual system would operate
concurrently with the automated systems to isolate and remedy
possible bugs. At the end of May, the last manual statements were
prepared and sent to customers, and the first automated statements
followed the last week of June. The day after the automated
statements were mailed, the switchboard was deluged with calls
from incensed customers who claimed their statements were
wrong. Eventually, a pattern of errors merged. The switchboard
operator had assigned the same account number to all customers
who shared the same last name. The computer posted charges and
credits to the records of the first such customer with a common last
name and ignored the rest. It was necessary to re-post the entire
months transactions after examining and modifying the customer
account number list.
Credit Evaluation Problems
ATCs credit manager recently worked for a computerised head
unsuccessfully. Partly as a result of that experience, she strongly
opposed the acquisition of a computer system and urged instead
that more clerks be hired. She secretly feared that automated
receivable might displace her strong discretionary power over
customer credit.
Because of her previous unpleasant experience, the credit
manager did not trust the new computerised accounting systems.
She insisted that the computer records and retains each and every
purchase and payment by a customer along with an indication of
whether the payment was on time or late and if late, how late.
The manual ledger card system was set up in this fashion, so that
when a customer asked for an increase in his or her credit limit,
the credit manager could have access to all possible information
germane to the decision. Since most retail customers purchase
tires infrequently, ledger card may keep records dated back 10
years or more. As the automated billing system accumulated more
purchases, the credit manager demanded that each purchase be
posted on the ledger cards as well as on the computer for credit
evaluation purposes.
The president understood the credit managers concerns but
resisted the duplication of effort. He asked the software about the
feasibility of retaining purchase and payment records individually
and indefinitely on the computer. He was told it was prohibitively
expensive to keep such records on machine-readable media other
than magnetic tape. ATCs system had no provision for this.
Contd...
Payroll Problems
Because of the errors in inventory and billing, sales commissions
could not be calculated correctly. Sales representatives began to use
office copier to duplicate sales slips for their own records to contest
lost commissions. At every pay period, there was a confrontation
between the sales representatives and the payroll clerks. Copier
cost became astronomical as well.
1. What are the problems in existing Payroll, accounts and

Materials system?
2.
Draw a logical diagram through a flow chart showing the

working of current accounts payable process.
3.
Reengineering is the only solution for ATC. Comment on

this statement.
CASE STUDIES 449
RESTAURANT MACHINES MANUFACTURING COMPANY

The Company has fallen on bad times. Eagle, a maker of specially
restaurant equipment, has sales totalling ` 72 million, but sales are
declining while costs continue to increase. If things continue in this
direction, Eagle soon may have to close its doors.
At a special management meeting, the president lays it on the line.
He demands that the firm break even in the remaining quarter of
the year. For next year, he calls for profits of 5 percent, a 20 percent
increase in sales, and deeper cuts in labour, material and overhead.
Later in the day, the President calls Mr. Manoharan, V. P. Finance
& Accounts, in for a discussion.
Manoharan, I want your Finance & Accounts to carry the ball at
the start of this game. We cant get sales moving for six months.
But you can improve your housekeeping and Eagles profits right
away. Just think what you can do to that chart! Every penny you
save is profit! So take a close look at what we buy & what we sell.
I dont care how you make your savings by negotiations, inventories,
imports, anything. But put at the screws tight right away!
Start with inventories, theyre sky-high. So get together with
manufacturing on a 10 percent cut. Weve got ` 12 million worth of
materials stashed away around here, and a 10 percent cut would
save at least ` 300,000 a year in carrying charges. At the same time,
get your payroll and operating expenses down 10 percent. Thats in
line with our company wide cutback. I know this hurts, Manoharan,
because we have got some mighty fine people here in purchasing,
but we cant be sentimental these days. Our overhead has got to
come down or were dead!
Im having an executive committee meeting in one week. Have
your plans ready by that time! Were betting on you, Manoharan.
Youve got to get us out of the hole. I know you can do it. Please
interact and develop a harmonious proposal.
Mr. Manoharan starts a review along with other deptts. The
purchase total only ` 43.2 million per year. Eagles buy a wide
variety of materials, ranging from a few kgs of rare metals to
sizable quantities of sheet metal. A big part of the Rupee volume
is in nonferrous castings, forgings, stampings, fasteners, and
subassemblies.
The purchasing department consists of one Sr. Manager, three
buyers, and four clerks. Salaries, fringes, and expenses sum to
` 370,000 a year. The purchasing department is responsible only
for buying and expediting; the manufacturing manager handles
production, inventory control, receiving, and traffic. Manoharan
reports to the president, as do other department heads. Manoharan
learns from inventory control that raw stock inventory is ` 12.2
million. The marketing manager controls finished goods stocks.
Contd...
Manoharan wonders how he can deliver the cost reduction

program.
Rule 1: Only make products which you can quickly despatch and
invoice to customers.
Rule 2: Only produce in one period those components (ingredients)
you need for assembly (blending) in the next period.
Rule 3: Minimise the material throughput time, i.e. compress all
lead times.
Rule 4: Use the shortest planning period i.e., the smallest run
quantity which can be managed efficiently.
Rule 5: Only take deliveries from suppliers in small batches when
needed for processing or assembly.
Rule 6: Eliminate all process uncertainties.
Rule 7: Understand, document, and simplify the whole supply
chain.
Rule 8: Remove or absorb echelons as necessary.
Rule 9: Ensure all information is up-to-date and undistorted.
Rule 10: Ensure all relevant operations information is visible at all
points within the total supply chain.
Rule 11: Use only proven Decision Support Systems (DSS) based
on an appropriate feedback and feedforward logic.
1.
What actions should Manoharan take to reduce inventories

by 10 percent?
2.
What dangers, if any, are there in reducing inventories?
3.
In what ways could the cost of goods purchased be reduced?
4.
What position should Manoharan take on the Presidents

plan to reduce the purchasing payroll by 10 percent?
CASE STUDIES 451
PORTAKABIN THE IMPORTANCE OF QUALITY IN

CREATING COMPETITIVE ADVANTAGE
Introduction
Most businesses operate in competitive markets: they have to take
on and see off rivals. Each organisation must decide for itself how
best to try to do this. Not all firms come up with the same answer
and for good reason. Firstly, there are several different ways of
gaining competitive advantage. Secondly, businesses need to play
to their strengths and not all businesses have the same strengths.
Thirdly, many markets are segmented and what is important to
one set of customers may be less important to another set. So
businesses need to decide which segments of the market they are
targeting. Ways of seeking to gain competitive advantage include:
offering lower prices
offering clearly superior products at above average prices
delivering products more quickly
offering superior customer service, including after sales

service.
This Case Study focuses on how Portakabin has set about gaining
a competitive advantage in the hire and sale of interim (temporary)
or permanent accommodation by concentrating on quality.
The Portakabin Group is a private company, owned by the
Shepherd family. Clients want modular buildings for a variety of
reasons. For example:
Portakabin operates in a highly competitive market and competes
with tough competitors. Despite this, Portakabin has 17% of the
overall UK market (its nearest competitor has 14%). In competing
for business, the company decided early on to establish a reputation
for quality.
It has attracted key customers who recognise that their own
reputations depend, at least in part, on the quality of accommodation
and facilities they offer their own customers. The chart shows the
broad nature of Portakabins high profile customer base.
Portakabin has positioned its products at the top end of the market:
it looks to provide high levels of quality at premium prices.
Quality is associated with consistency. A customer who is happy
with the first buying experience needs and wants to be equally
happy on each further occasion.
Portakabins motto is: Quality - this time - next time - every time.
The company believes that clients who really care about quality
are willing to pay that bit more to obtain it and see the extras as
worth the additional expense. Today the company operates in a
Contd...
range of European countries as well as the UK. Portakabins brand

vision is:
To provide peace of mind for our customers across Europe through
quality buildings and services.
What is quality?
Quality relates to appropriate use: how well a product does what
it is intended to do.
Portakabins Ultima building illustrates quality well. The Ultima
specification includes:
modern design
high quality materials
layout and fitting of the building to clients requirements
allied to :
rapid construction
provide:
a smart modern working environment
an image that reflects the status of the client.
The appropriate use quality comes from two sources. One is

internal to the company. Portakabin has developed its range
of buildings around its own market research, which discovers
customers precise needs. The company knows how important it
is to offer optional extras, such as high quality carpeting, fitted
furnishings and climate control systems to provide a quality
working environment. Simultaneously being able to offer not only
the building but also the forementioned accessories, gives the
customer a quality one-stop-shop service.
The other source of quality control is external e.g. national building
requirements and standards. Portakabins products, whether
interim or permanent, comply fully with all appropriate building
regulations. They also meet the demands of ISO 9001: Quality
Management Systems. This is an internationally recognised
standard which acts as a form of guarantee that everything the
company does is managed to the highest quality standards.
The groups Quality Systems Manager (QSM) is responsible for
ensuring that Portakabin has in place systems that guarantee
quality throughout the Group. To manage quality, the QSM has
created an electronic system that all PCs throughout the whole
company can access. One of the systems key features is the 1-page
Quality Manual that defines the requirements of the Quality
Management System. This is easy to communicate both within the
organisation and also to customers.
Contd...
CASE STUDIES 453
Quality Products
The term product covers not only goods but the services that
support them. Portakabin offers a range of tangible products e.g.
Lilliput (a modular nursery building) and Titan (a modular building
for office applications). The company also offers key services e.g.
Total Solutions, a planning and project management service for
customers wanting to hire modular buildings. Portakabin also offers
a wide range of support services to clients for whom a modular
building is part of a larger plan. If requested, Portakabin will take on
the customers project from start to finish. This includes managing
planning applications, project management and providing health
and safety advice, as well as providing access for the disabled.
Product quality also relates to how well a product meets changing
demands. In modular buildings, technologies are increasing the
range of what is possible. At the same time, customers are becoming
more particular about their own requirements. For example, they
want building solutions that are safe and clean, which minimise
disruption, save time and guarantee quality. Quality involves
keeping pace with these demands.
Modular construction involves manufacturing a building off-site in
a controlled factory environment. For example, the steel modules
used to construct Ultima buildings are fully fitted out with all
electrics, plumbing, heating, doors, windows and internal finishes
before they leave a Portakabin production centre. This enhances
their quality and also reduces programme times.
Being registered as meeting the requirements of ISO 9001 is
very important to Portakabin. This is because many customers
will deal only with organisations that can demonstrate they meet
this rigorous standard. All of Portakabins products meet with
modern standards and requirements, and this enhances consumer
confidence. To reinforce this quality system, Portakabin has a zero
tolerance quality checking system (see section 4) in place, so that
no building may leave the production site until it has been checked
against, and complies with, demanding customer standards.
Furthermore, because of their high quality standards, Portakabin
are the only modular building company to offer quality guarantees
in the form of 5 and 20 year warranties.
The standards required are wide ranging. For example, the
recently ratified Kyoto Protocol requires industrialised nations to
limit their production of gases that are harmful to the environment.
Portakabin takes this requirement very seriously. As a result, all
of its buildings are thermally efficient to minimise energy use.
Following Kyoto there are a range of new building requirements
and these are particularly important for Portakabins public sector
customers such as hospitals and schools.
Contd...
Quality Processes
Any form of production activity involves sets of interlinking
processes.
Portakabins factory-based production process combines
standardisation with customisation. The modules to be assembled
come in standardised sizes and shapes. However, the way they
are put together and their interior design depends on clients
individual specifications. For example, modules that are assembled
for Sainsburys to train new checkout staff are different from those
designed for an easyJet office.
To ensure that all customers get what they want, Portakabin deploys
the Quality Systems approach referred to earlier. A Corporate
Quality Team (comprising senior managers) is responsible for
ensuring that individual teams understand quality processes.
Communication takes place by means of process charts. These are
clear illustrations that set out the processes involved e.g. in creating
a new set of school classrooms or laboratories.
The essentials of the Quality System are:
Say what you do
By studying the Quality Manual, teams working on a particular

process know what the job requires. If in doubt, they can
ask team leaders. This process enables everyone involved to
understand and state the process and their role within it.
Do what you say
Once they understand the process, team members are able to

implement it e.g. by constructing a new building for a specific
client.
Record what you have done
Construction teams record all actions taken, so that all those

involved know the current position, what has gone on before
and what still needs to be done.
Review what you have done
Records are regularly reviewed both to ensure delivery targets

can be met and to identify any problem areas.
Take remedial action where necessary
If problems or potential problem areas are identified, steps

are taken to eliminate or reduce these.
Then start the process again
This procedure is followed for each stage in each process to

ensure that everyone benefits from solutions to problems,
which have already been devised.
Contd...
CASE STUDIES 455
These essential steps can be illustrated in the form of a hierarchy

of quality processes:
An essential part of improving quality is to identify problems as
and when they occur. These can then be addressed and resolved
immediately. This is what Portakabin mean by zero tolerance. To
address any issues, Portakabin deploys a commando team as part
of its Quality Team. This team scrutinises products and processes
from the customers viewpoint. On one occasion the team found
blistering on the walls of a particular building, a quick alert to
the manufacturing team led to the fault being eliminated before
it became a problem for the customer. Teams complete quality
reports with the purpose of:
fixing the immediate problem
identifying its cause
making changes to prevent the problem reoccurring.
Quality Service
The company believes that providing exceptional levels of customer
service is as important as the quality of the products it makes. To
support this commitment, it has developed a number of initiatives
aimed at continuously improving service. Portakabin:
guarantees to complete projects on time and on budget
operates a Customer Charter that sets out minimum standards

that customers of its Hire Division can expect to receive. This
charter includes the pledge where Portakabin will recompense
the customer if it fails to deliver a building on time
offers a complete plan, design and build service, whereby a

client can choose simply to accept the keys and open the doors
on completion
runs a comprehensive customer satisfaction survey every

month.
Conclusion
In a competitive market, businesses stay ahead by offering
products that are different and/or superior in ways that matter to
customers. Portakabin has positioned itself at the top end of the
modular buildings market in terms of quality, whilst at the same
time providing value-for-money products that fully meet key
standards set out in IS0 9001. The most recent external audit of
Portakabins practices showed that the company is meeting the
required standards in all aspects of quality. This outcome is the
result of a great deal of thought, careful planning and ongoing
education and training of a skilled and dedicated workforce.
Contd...
1. What are the essential features of quality system of

Portakabin?
2.
How has Portakabin positioned itself at the top end of the

modular buildings market in terms of quality?
3. How has Portakabin gained competitive advantage by

ensuring quality?
CASE STUDIES 457
RTA FURNITURE FACTORY CASE STUDY

Preface A Bitter/Sweet Theory of Constraints Case Study
This was our first implementation meaning, back in the late
1980s. (Yes, Theory of Constraints has been around that long and
yes, weve been implementing it for that long.) And it was long
before we provided the scope of consulting services we provide
today we were primarily educators, and only incidentally were
we management consultants.
Starting Point: Small Business Success
The problems facing this small manufacturer when we first
encountered them were of the type that many small manufacturers
only dream about; demand for their growing line of ready-toassemble furniture was almost beyond their ability to produce,
even with two full shifts in operation. Certainly the order backlog
on the plant was steadily increasing. This growing demand was
gratifying for the owners. The company had been formed only
3 years earlier, in an unlikely location; a converted fruit-packing
plant in an agricultural town a long way from the nearest major
cities. The owners had worked hard to prove that their venture was
no 12-month wonder.
Our success at that point was no accident we were doing a lot of
things right, stated the GM. We had well-designed and well-built
products, our prices were competitive, and we offered good service
to our dealers.
In an unusual move for such a small company, they had ensured
that their distance from major consumer populations presented no
obstacles to their dealers, opening distribution centers in Eastern
Canada and the US Midwest. The GM stresses the importance of
the service offered; The dealers really appreciated our efforts to
guarantee good service we could usually get product to them from
our warehouses more quickly even than their local suppliers.
But Success Brings Its Own Problems
However, management were not slow to recognize the warning
signs of impending troubles. The GM recalls, As we became
busier, our manufacturing lead time stretched to more than three
weeks, which meant that we had to hold even higher inventories
in our distribution warehouse because we couldnt replenish them
very quickly. Along with this, whenever we did try to deal with
an urgent customer demand, it caused us lots of grief. We always
made it, one way or another, but we always paid the price in terms
of disruptions other orders would become even further behind
schedule, constant changes lead to mistakes and quality problems,
and the people on the shop floor questioned whether we knew
what we were doing, constantly shuffling priorities on them when
they were already so busy.
Contd...
Lengthy set-ups were a matter for concern on some equipment,

and wherever possible components were manufactured in sizeable
batches, not only to keep costs-per-piece down but also to avoid
wasting productive capacity. One consequence of this was the
ballooning work-in-process inventory which led to the increased
lead times and also caused the company to seriously consider a
relatively expensive plant expansion.
Quality, always a point of pride in this business, was also becoming
more of an issue as the pressure grew. Notes the GM, Occasionally,
and usually at the worst possible time of course, we would find a
whole batch of parts which either needed re-work or even had to
be scrapped. Recovery gave us all the same problems as urgent
customer orders shuffling priorities, disrupting schedules, and
hurting morale.
Conventional Wisdom Solutions were Not Appealing
The GM had some formal training in Operations Management
and recognized that the companys planning and control systems
would not be adequate as the growth continued. He investigated
the Manufacturing Resource Planning systems that are now key
components in todays ERP systems, and also the Just-In-Time/
Kanban approach that today forms a vital component of Lean
manufacturing. Implementing a computer system seemed to be
the most popular step for companies in our position, commented
the GM, but I was uneasy about it. I could see how we could tie up
a lot of our time and energy in making the system work, rather than
in making the business work better. Plus, the dollar investment
would have been substantial. The Just-In-Time approach was
interesting, but represented a radical departure from their current
methods one that management hesitated to commit to, given
that any problems in implementation during peak demand would
translate into lost sales.
Theory of Constraints andthe Goal
Then, through a series of coincidences, the GM was introduced
to the Theory of Constraints when he met Steve Jackson of
Synchronix Technologies, and first read Eli Goldratts best-selling
bookThe Goal.
The Goal was a real eye-opener, the GM recalled. Although we
were in no danger of being shut down (unlike the fictitious plant
featured inThe Goal), it was almost as if the book had been written
about us. Lead times too long, orders behind schedule, and so on.
It was hard to put the book down.
Over lunch with Jackson the following week, he pursued many of
the issues raised in the book. Unable to attend himself, he decided
then and there to send his Production manager and systems
specialist to a 2-day TOC workshop being sponsored at that time
Contd...
CASE STUDIES 459
by the University of British Columbia, where Jackson was to

introduce the technology to a small group of managers.
The production manager recalls Our GM had given us the book to
read before we went, but we still werent sure what we were in for.
By the close of the first days session, they knew they were on to
something different and valuable. Even before the workshop had
concluded, the duo were looking at how they could implement the
concepts theyd learned. The toughest part was acknowledging
just how many of our methods and procedures had been developed
around controlling costs and keeping spending under control and
not around doing those things that made money, commented the
Production manager. Time after time throughout the workshop, it
became clear that our cost-based actions not only didnt help us to
get where we wanted to be, they were actually stopping us.
From Concept to Action
On their drive back to town following the workshop, the two
debated how to apply the ideas. One problem was, the basic
concepts seemed almost too simple. The pre-fabricated furniture
they manufactured principally stereo cabinets, speaker stands,
television stands at that time presented the problem of many
different combinations of finished products in terms of sizes
and finish, although many of the processes were similar for each
product type. Although we were dealing with a lot of different
components that had to come together in different combinations
for our product lines, with several different processes involved, the
power of the TOC was that it showed us how we need concentrate
on only a very few things, in order to guarantee results.
As they had learned in the workshop, for this manufacturer (as
for all) the first step was to identify which of their several busy
resources was the Drum, the resource which most limited their
rate of production. Although there was some debate, the Grooving
line became the strongest candidate. We really didnt waste a lot of
time capturing lots of data and measuring everything, explained
the Production manager. Once wed learned the kind of thing
to look for, it wasnt difficult. There were some real concerns,
however; the Grooving line fed the packaging area which some also
considered a limiting factor it always appeared to be overloaded.
If they tied the packaging flow to the Grooving line, perhaps the
packaging would suffer and damage total plant throughput?
They held their breath and tried it.
Synchronizing All the Production Policy Constraints Emerge!
Essentially, the implementation involved all the management and
shop workers in making sure that the Grooving line was being
used effectively, then synchronizing all other production activity
to keep material flowing smoothly to the line, and from it (through
packaging) to shipping. Simple in principle, and apparently just
Contd...
common sense; however, the detailed mechanisms developed by

users of the TOC often contradict more traditional methods, which
tend to be based on producing the lowest cost-per-unit produced,
and maintaining high efficiencies in every work center.
In fact, by making sure that material from stores was only introduced
into the front-end of the production process exactly in-sync with the
production capability of the Grooving line, the company made it
impossible for any resource except the Grooving line to be even close
to 100% efficient. On these non-constraint resources, frequent setup changes were no longer considered to add cost and therefore
no longer discouraged; no one was looking to combine batches of
parts in order to save a set-up, or reduce the cost per piece. Small
quantities of components were passed onto the next workstation as
soon as they were completed, instead of waiting for the completion
of a whole batch. It was not immediately smooth sailing. After years
of driving everyone to be as efficient as possible, to always keep busy,
it was relatively easy to change our procedures and measurements,
but not easy to change peoples behavior patterns, noted the GM.
However, the beauty of the TOC is that occasional stumbles
during the learning period dont hurt. All sorts of little things might
go wrong along the way to and from the Grooving line, but as long as
we kept the constraint busy working on the right parts, the plant as
a whole was always on track.
Major Improvements Blossom
Results were quick to appear. Within days, there was a noticeable
decline in the volume of work-in-process in the plant, causing
inevitable tremors of anxiety that some of the resources might run
out of work and cause the plant to fall further behind schedule.
Yet as the WIP dropped, the Drum-Buffer-Rope system made
sure that the constraint was rarely threatened with a stoppage, so
production rates actually climbed and the backlog of orders was
quickly consumed.
One unexpected side-benefit of the smoother flow through the
plant and the reduced WIP was the early detection of quality
problems often, in time to make a correction to the faulty process
while it was still running. The company was rarely caught any more
with a whole batch of off-quality components. As quality improved
noticeably, the elimination of a lot of re-work eliminated much of
the schedule-shuffling on the floor.
Lead time shrank from more than 3 weeks to level out at 5 or 6
days, on average. This gave management a choice of opportunities;
they could shrink the inventories in their distribution centers, since
they had the capability to replenish stocks in far less time than
before, or they could hold many more models at the DCs without
any overall increase in inventories. To take advantage of servicebased sales opportunities, they chose the latter route.
Contd...
CASE STUDIES 461
Another unexpected benefit was the amount of floor-space made

available. Any thoughts of expansion were quickly shelved; there
was plenty of room in the existing plant, now the material flow was
being better managed and a much higher output was being gained
from the same resources.
The short lead time also made handling of urgent customer
demands almost routine. Looking back, the GM commented,
Before the TOC, a request for an urgent job meant an almostimpossible seven day turnaround, and caused major problems.
When Drum-Buffer-Rope was in place, many urgent requests
could be dealt with routinely although we may not always have
let our customers know that we hadnt killed ourselves for their
sake!
Their fast turnaround ability made their entry into a new market
segment, catalog sales, very easy; once a catalog appears, demand is
instant and largely unpredictable, yet superb shipping performance
is demanded by consumers and the catalog companies. Their new
found flexibility made the market entry glitch-free.
The Power of Focus A Strength of the Theory of Constraints
The GM and production manager were quick to point out, We
never subscribed fully to some of the big company ways of doing
things, so by applying common sense we were doing a lot of things
right even before the TOC came along. What the TOC has done is
allowed us to make the most of what we had going for us and we
are still trying to find out what that most is. We havent hit the
limit yet.
They agree on another point. There is no limit today on the
number of things that a company could choose to improve, and
it seems like theres no limit on the number of improvement tools
we could be using Total Quality, Statistical Process Control, MRP,
empowerment, team concepts, and so on.
Yet by simply knowing where to focus, and how to focus, we
achieved what we did in less than three months, mainly as a result
of changing some policies, procedures, and measurements.
There was no need to change plant lay-out significantly, or
extensively train teams in teamwork concepts, or reduce setups throughout the plant, form committees, buy new computer
systems, collect accurate data real-time, or ask why five times.
Down the road, I suppose we may turn to any or all of these tools to
help us improve even more, but unless an organization knows how
to focus on the very few constraints they truly have, all these tools
simply become what I like to call VPAI Very Powerful Alternatives
to Improvement. Genuine, bottom-line improvement, that is.
Contd...
3 Years On A New Constraint Emerges

Now we move almost 3 years ahead: Well, the first thing to
recognize is that the past two or three years have been among
the worst in memory for our industry, warns the GM. A number
of our competitors, even those ideally located near consumer
demand points, have gone under. Some others have had to swallow
substantial losses while waiting for the economy to turn-around.
And this company? They managed the Grooving line until it was
no longer a constraint, then re-focused production around the next
constraint, gaining even more output from the same resources.
However, there were times when the real constraint appeared to be
a lack of business, especially as the company moved into the early
stages of the recession. In the summer we asked Steve (Jackson)
for an in-house workshop for all our management team, after we
had made it through our first cycle of improvements, stated the
GM. It quickly became clear to all of us that there was much more
to the Theory of Constraints than just its application to the shop
floor. It gave us a very different perspective on the markets we
could be in, and on issues such as pricing and bidding, even which
new products to consider.
Best Ever Revenue, Profit Performance
The workshop set the company up for its best-ever Fall, and bestever year to that point, in terms of revenues, units shipped, and
profits. The product line was deliberately expanded, to include
student desks, shoe racks, and storage towers for videotapes or
CDs. Creative marketing strategies, generally conforming to TOCbased segmentation and pricing ideas, helped keep the plant busy
and profitable while competitors were shutting their doors. The
company encountered a couple of business stumbles along the way.
Profit growth showed a hiccup when first an attempted purchase
of another company fell through at the last minute after some
substantial, related expenditures; then a major customer fell victim
to the recession, closing their doors while owing our client a great
deal of money. Operationally, however, results remained good.
More Challenges, More Improvement!
As the economy then recovered management was ideally placed
to capitalize on their improved performance. By that Fall it was
clear that demand from their much-expanded markets was outstripping the output of their then-constraint, which had already
undergone some set-up reduction as a natural part of exploiting
the resource to its fullest.
A short telephone conversation was all it took for me to give them
an avenue in which to find more capacity through set-up reduction,
and this paid-off in spades. Steve simply suggested that we treat
the change-over on the constraints like an Indy-car pit crew treats
Contd...
CASE STUDIES 463
their car on a pit-stop. Our own pit crew responded beautifully,

people even coming into the plant in their own time to help with
preventive maintenance on the constraints! By October, the
constraint had been managed to the point where it had ceased to be
the limiting factor, and yet another capacity constraint appeared
one which could be elevated relatively easily, simply by the addition
of manpower.
60% More Revenue Than Our Best-Ever!
Were a privately owned company, and we dont release many
figures, explained the GM, but I can tell you that during the Fall,
with relatively little increase in head-count and using exactly the
same equipment we were able to record 60% more revenue than
in our previous best-ever Fall which at the time we had thought
was close to the plants maximum production! In fact, since we first
started with the TOC we have more than doubled our sales without
a single additional piece of equipment, and only a small increase in
headcount. And profits? Very satisfactory!
We were recently part of a Federal Government survey which
compared the performance of furniture manufacturers across the
country, added the GM. We were not too surprised to learn that we
came out first among composite wood manufacturers highest sales
per employee, and highest productivity. In fact, we have also been
nominated for a National Excellence in Small Business award.
The production manager pointed out another less-obvious benefit
of their operation, the kind of thing that could not be measured
in surveys or captured in statistics; the impact on the people on
the shop floor. No one is constantly leaning over their shoulder
to make sure theyre busy all the time. Even when we were really
humming, through the Fall, there was far less pressure than when
we did half the volume a couple of years ago.
Introducing the Mafia Offer
These days, long before the sales downturn hit we would expect
to be working with our client to develop a Mafia Offer. A Mafia
Offer is a sales offering that capitalizes on a level of Operations
performance that could ONLY come from the Theory of Constraints
implementation, and one that solves a customers major problem
a problem they didnt believe would ever be solved. What this
offer does for the Theory of Constraints user is to change their
customers perception of the value that our clients products and
services bring to the table.A solid Mafia Offer means that the TOC
user can often charge MORE than the competition, and increase
sales while theyre doing it even in a market where the sales
people are convinced its all about price.
Today, with a very few exceptions we consider lowering prices to be
the 1001st option out of 1000. If we were to work with this company
Contd...
today, wed treat the sales constraint very differently. In fact wed
do a LOT differently.
Seeing the Bigger Picture (Downstream Supply Chain)
Up-front, wed spend time to thoroughly understand the
downstream supply chain. It astonishes us how many companies
we encounter that are involved in improvement projects which
miss the boat on this. For example, well see Lean implementations
aimed at reducing lead time (among other things) which Lean
can certainly accomplish. Its taken as a given that this is a good
thing to do.
But if the end result is a greatly-reduced lead time for a product
that, when received by the customer, simply goes into make-tostock products that sit on warehouse shelves for weeks the
reduction in lead time might be virtually worthless.
Sure it looks good, and sounds good, but will the customer pay
more for the product because of it? Probably not. Will a prospective
customer in this situation dump a trusted supplier with a longer
lead time, in order to do business with you based on this? Almost
certainly not.
BecauseIt Doesnt Solve A Problem!
It doesnt offer a DEFINITIVE or DISTINCT competitive edge.
When you offer it to an existing customer their response will be
Great; I now expect that level of performance routinely, and of
course we still expect the 5% per year price cut from you. And a
new potential customer will tell you Well keep you in mind.
But what if the circumstances were different; what if halving the
lead time enabled their customer to win an order, or an account,
or a market that they hadnt been able to win before? And what if
none of their competitors could match that performance?
Now that lead time reduction hasreal value value sufficient to
exclude you from price cuts or even permit price increases (heres
the end of the dreaded margin squeeze!); value sufficient to cause
a prospect to dump their existing supplier and give you their
business (subject to the usual performance issues of quality, etc).
Up-front Education and Training
These guys took the ideas from the workshop and applied them
internally before they conducted any formal education or training
in-house. They got away with it, but people are almost inevitably
placed in a conflict when a change is implemented that calls for
behaviors to change significantly. So we want to first get to the
level of policies and procedures and measurements that drive
the old behaviors, and changethembefore we aim for behavior
changes. And while we can see the flawed policies, procedures etc
within minutes of walking into a plant, the current management
Contd...
CASE STUDIES 465
team cannot they still view the plant through the same old lenses.
So its crucial that they understand these issues in depth so its
crucial that they receive some solid education. This extends to
EVERYONE understanding what the new way of working will be,
and why, and what their role should be. And because there are so
many policy constraints, deeply embedded, the way weve always
done it, its also important that people understand VERY clearly
that initially the new way of workingwillcreate conflicts with the
way they are used to working, and they need to understand how
to identify these conflicts, and articulate them, and exactly how
to deal with them. For the first few weeks a lot of silt rises to
the surface when this way of working is implemented. It has to be
recognized quickly and skimmed-off.
The Moving Bottleneck
Also, did you notice how the constraint moved around? In their
case, this was over a period of a few years, so wed probably not be
concerned its natural, and many things can change dramatically
in that length of time. But today wed have anticipated the
changes in demand (and perhaps product mix) stemming from
the Mafia Offer, then worked with them tochoosea strategic
constraint to synchronize around after which theyd aim to
deliberately keep the constraint there. This is extremely powerful.
To go one step further if we definitely had a Mafia Offer and
management commitment to aggressive growth wed want to create
an environment where there was no internal constraint for a long
time, if ever. These are the types of advanced topics we mention in
our workshops.
In some companies theres a performance characteristic we call
moving bottleneck syndrome. This morning the bottleneck
seems to be at the Punch Press, this afternoon it popped-up in
welding, tomorrow who knows.
The Change in Ownership
In 19 years of consulting in the theory of constraints, the only times i
have known a toc implementation to be halted mid-implementation,
or to revert following a complete implementation, is when:
There is a change in ownership or a change in senior

management
The new owner or senior manager is determined to make his

or her mark, to do things their way
And their way isnotthe TOC way. They go with what they
know best.
We have heard from colleagues of showcase implementations

with impressive profit growth and positive cash swings of tens of
millions of dollars being suspended because of this reason.
Contd...
We have had a client, probably the best in the world at what they
did, bought by a competitor who moved our clients equipment into
their own facility, fired the people, shut the plant down and refused
to adopt any of their working practices. Within 2 years they had
lost almost every single customer from the business theyd bought,
AND some of their original customers, because their service level,
never great, plummeted while the customers of our client had
grown accustomed to 98% and better service levels for several
years.
1. Discuss how will you determine the bottleneck for the

company.
2.
How did synchronizing all the production brought policy

constraints?
3. How did the company find out that it was the time to
strengthen the theory of constraints?
CASE STUDIES 467
LEAN PRODUCTION AT PORTAKABIN

Introduction
Portakabin is an international company. It produces some of the
most advanced building systems available. The company is part of
the 700 million turnover Shepherd Group.
The Shepherd Group is one of the largest family-owned companies
in the European building industry and employs 3,500 people. It
focuses on three main areas:
Manufacturing
Construction
Property.
The name Portakabin is a registered trade mark. This instantly

recognisable sign means that no other company can use the
Portakabin name on its products. Donald Shepherd, the founder
of Portakabin, came up with the idea of stand-alone re-locatable
buildings in the 1960s. Since that day, only buildings produced by
Portakabin can be called Portakabin buildings. Portakabin uses
modular buildings. This means they are made up of one or more
modules that are constructed in a factory environment. These are
then linked together to form multi-purpose buildings.
Typical examples of Portakabin buildings include:
Portakabin buildings can be erected almost anywhere in the world.

Portakabin is able to deliver the same high quality buildings across
the globe because it closely monitors processes and standards
during production at the Portakabin site. Portakabin is able to
deliver value to customers by manufacturing products that exactly
meet customer requirements.
Lean production is an approach to production that seeks to
minimise waste and inefficiency. In short, it means doing more
with less. A lean company will make the very most of its resources.
Lean production is based on the principle that any use of resources
that does not create value for the consumer is waste.
Contd...
This case study focuses on how Portakabin uses lean production

methods to ensure it produces a quality product that gives value to
the customer.
What is lean production?
The aim of lean production is to reduce the quantity of resources
used. Lean production should mean less use of labour, materials,
space and time. Portakabin uses three main production methods.
Portakabin is working towards eliminating waste in each of the

three areas. Lean production makes it possible to eliminate waste
by reducing defects so that products are right first time and are of
a quality that meets customer requirements.
Quality is a top level objective for the company therefore Portakabin
uses a Quality Management System. The purpose of this is to
make sure that every aspect of what the company does is designed
to give customers what they want, for example, a safer learning
environment or a more inspiring office. High quality is supported
through a process known as Kaizen. Kaizen is a Japanese term
which means continuous improvement. Kaizen is typically
achieved through small, regular steps rather than the occasional
large change. It enables everyone at all levels in the organisation to
contribute to improvements. Everyone who works for Portakabin
is encouraged to suggest ways of improving production. New
ideas bubble up from employees at every stage. For example, an
employee in stores may have a good idea about how to manage
stock more effectively. Everyone is therefore working to improve
quality and give better value to customers.
Portakabin is approved to meet the International Standards ISO
9001 and ISO 14001.
In order to gain these awards, companies must prove their
achievements to International Standards Organisations. Being
accredited to International Standards tells customers that an
organisation meets the tough guidelines set by awarding bodies.
Meeting ISO 9001 shows that Portakabin has a Quality Management
System which among other things ensures that:
It has a documented set of procedures for all key processes

in the business and that these processes are checked for
efficiency
Outputs are checked for defects and put right where necessary.
Contd...
CASE STUDIES 469
Meeting ISO 14001 shows that Portakabin also has a well organised
environmental management system. An environmental
management system helps an organisation to reduce its impact on
the environment and minimise pollution.
The emphasis on quality can be illustrated by the Portakabin

Lilliput products. Lilliput Childrens Centres are designed to be
child-focused. They meet the tough safety and care standards that
have been created to protect children:
The Childrens Centres provide a resource for the whole

community.
They can be built in half the time it takes to build using

traditional methods.
Multi-functional rooms can be used as kitchens, crche

facilities, and training rooms as well as nurseries.
This contrasts with the much slower process of traditional building

with bricks and mortar. These buildings take far longer to construct
and building work may be delayed, for example, by poor weather.
Just-in-time production
Just-in-time is perhaps the best known method utilised within a
lean production environment. It is a process which aims to reduce
the costs of holding stocks. Finished goods, work in progress and
raw materials are kept to a minimum level by ensuring that stocks
are only produced when they are needed.
Holding stock adds to business costs in a number of ways:
Firms have to pay for the storage space where stocks are held.
Cash is tied up in stored stocks rather than allowing working

capital to be used more efficiently.
Regulations or customer requirements may change which

could render current stocks unusable.
Any defects in large quantities of stock may cause costs of

rework.
With just-in-time, the demand for new buildings pulls supplies

through the system. This is a very important business principle.
When demand increases Portakabin orders and builds new
component supplies, rather than having these in stock just in case.
For example, the Portakabin Ultima range consists of high quality
workplaces for up to 1,000 people. In order to meet the demand from
businesses for these buildings Portakabin only holds the stocks it
needs for orders in process. This reduces costs and ensures that
the components ordered specifically meet the requirements of the
individual businesses.
Contd...
Detailed information technology systems are used to manage

the flow of production. These record supplies at every stage of
production to ensure components are available exactly when
required. Good relationships with suppliers are also necessary
as any delay in delivery of raw materials can hold up the entire
production process. JIT also helps the internal Portakabin
production process by providing components only when needed
by the next stage of production.
Reducing Waste
The Portakabin lean production process encourages waste
reduction. Building in a modular way is a lean process. The off-site
construction and installation of completed and fitted out modules
means that fewer workers are required on site and there is less
transport needed. Portakabin has been able to reduce the volume
of waste sent to landfill by 60% over the last three years. This has
been achieved by:
1. Cutting out waste from the manufacturing system.
Portakabin has thought carefully about how it can improve
design to reduce waste in manufacturing. Examples of how
this has been achieved include:
2.
Clever design of the modules. This maximises the use of

standard width materials and minimizes cutting to fit
Re-use of materials, for example, door and window

shapes cut out from insulated wall panels are re-used for
floor insulation
Changes in materials used. For example, a new type of

insulating foam has reduced material use by 10%
Steel beams are supplied to the factory already cut to the

precise length required
The boards used for floors in Portakabin modules are

pre-sized. No trimming is required. As a result no wood
particles or dust is created.
Recycling waste
The Portakabin Group recycles 65% of waste generated in

off-site manufacturing:
Staff is trained always to think about recycling. For

example they learn to use colour coded bins for different
types of waste. Recycling in a Portakabin factory is much
easier to manage than it would be on a building site.
Portakabin has set up waste management teams.

These are made up of a production manager and waste
contractor. A permanent trainer works for the company
Contd...
CASE STUDIES 471
and employees are regularly given refresher courses to

update them on new ideas.
Pallets used for transporting Portakabin products are

recycled at every stage of the supply chain.
Benefits of Lean Production

Lean production can be seen as providing a win/win/win situation.
Financial Benefits
The Portakabin production methods reduce the cost of constructing
high quality building projects.
The lead time between a customer placing an order and the end
product being ready is much shorter through the use of the latest
technologies under controlled conditions.
The main financial benefits include:
Predictable construction. The construction is factory based

so it is not disrupted by weather conditions or site related
problems. 99.6% of Portakabin projects are delivered on time
and on budget. This compares with a traditional construction
industry average of 63% on time and 49% on budget
Speed of construction. Build times are up to 50% faster than

those in traditional building projects
Quality control. The Portakabin Quality Management Systems

and use of lean manufacturing techniques guarantee high
quality at every stage of production.
Environmental Benefits
There are a number of important environmental benefits, including:
Better thermal performance. Tests carried out on the Ultima

buildings show that they exceed air permeability requirements
by 70% meaning that the buildings have minimal air leakage
and are therefore thermally efficient
Ozone-friendly materials. The insulation materials used in

the walls, roof and floors have an Ozone Depleting Potential
(ODP) of zero meaning that their manufacturing process does
not harm the ozone layer
Reduced noise and pollution. Fewer vehicle movements to

construction sites minimize traffic pollution
Contd...
Recycling of materials. The buildings are constructed in

sections. Later they can be taken apart in simple steps.
The steel is 100% recyclable so 96% of the total building is
recyclable.
Social Benefits
There are also benefits to the wider community. For example:
Improved health and safety. Factory-based construction is

much safer than a traditional construction site
There is far less noise, lorry movements and other nuisance

factors to local communities.
There are some potential drawbacks of lean production. For

example, everyone involved in supplying the new buildings is
dependent on the previous stage of production. Delays in deliveries
of stock when using a Just-in-Time system can affect the next stage.
Adhering to quality standards can take extra time and people
which all add costs to businesses. However, if managed carefully,
the benefits of adopting a lean approach to production far outweigh
the drawbacks.
Conclusion
Portakabin provides solutions to help other organisations to
manage their changing accommodation requirements. Its modular
buildings are put together using lean production methods.
Lean processes provide an environmentally-friendly approach in a
world of scarce resources.
Materials are used more effectively. Time is used more efficiently.
Less waste is generated at every stage of lean production. Portakabin
modular buildings can be put up very quickly. Problems associated
with conventional new buildings such as delay or overspending are
eliminated. The net effect is a win/win/win situation for Portakabin,
its customers and the environment. Portakabin, Ultima, Lilliput
and Lilliput Childrens Centres are registered trade marks.
1. What is meant by lean production? Describe two ways

in which lean production at Portakabin leads to a more
efficient use of resources.
2. Explain how just-in-time production would operate in
delivering and assembling a new Lilliput Childrens Centre.
3.
Analyse how the waste reduction methods at Portakabin

could be applied to another organisation with which you
are familiar.
4.
Evaluate the impacts on Portakabin of using lean production.
CASE STUDIES 473
STRATEGY FORMULATION FOR ELECTRA LIMITED

Electra Limited is a leading manufacturer of electrical and
electronic equipment. It has annual sales of over ` 5000 Crores
and employs of 2,000 people. EL is an ISO 9000 company. The
boundaries of operations strategy are wider ranging in this firm
than in most others. Operations strategy is defined to encompass
a strategy for the total product delivery process; product design
and development, manufacturing, procurement, order entry,
installation, and service. In contrast, the marketing strategy
determines which products are to be delivered. Together the two
strategies form the business strategy. The process of developing
operations strategy is illustrated in Figure below.
Industry Analysis and

Environmental Analysis through
SWOT
Operations
Committee
Marketing
Strategy
Overall Business Strategy
Operations Effectiveness
Evaluation
Formulates
Operations
Philosophy
Operations
Strategy
Formulates
Executive
Management
Figure 1: Operations Strategy for Electra Limited

The Operations Committee (OC), which consists of the directors
of operations and/or general managers from all operating groups
and divisions as well as all the operations directors at the corporate
level, is responsible for developing the operations philosophy and
strategy. The OC uses the marketing strategy and an environmental
analysis as input to the strategy development process. SWOT
(Strengths, Weaknesses, Opportunities, and Threats) analysis
is used in analysing this. This process is highly structured and
consists of five steps.
The process begins with an evaluation of the effectiveness of
operations. Here not only the strengths and weaknesses of the
categories as proposed by Hayes and Wheelwright are analysed
but also the organisational control systems, human resource
management, organisational structure, capital investment
decisions, and corporate culture are included. The second step is
Contd...
an industry/market analysis, which seeks to describe what would

have to be included in the strategy for a firm to be successful in
the industry. The third stage is the development of an operations
philosophy, which consists of the firms basic assumptions and
beliefs that would precondition a successful operations strategy.
The fourth step is the actual development of the operations strategy,
which consists of the formulation of a specific strategic objective,
which would serve as a framework for planning throughout
the organisation. The strategy is accompanied by operations
methodology, which consists of a series of steps designed to execute
the strategy and make the product delivery process more effective.
The strategy is then encapsulated in a short document, which is
passed on to senior executives for additional input. The president
ultimately approves the revised strategy.
Responsibility for strategy implementation also resides with
the OC, and specifically with the directors of operations in the
operating units. Inherent problems with the strategy are identified
by using a strategy-culture compatibility grid, which seeks to
identify discrepancies between the behaviours and performance
measures required for strategy implementation and those that
seem to be currently practiced within the firm. The OC continually
reassesses the operations strategy and monitors the status of its
implementation with quarterly meetings. Although the strategy
is broad enough that it needs be revised only every three to five
years, or as business conditions dictate, the three-years, operating
plan is revised annually. The operating plan also contains financial
projections that once approved in the first year of the operating
plan automatically becomes the operating budget for the next year.
In addition, each business unit also develops a strategic plan from
the operations strategy.
1.
How has SWOT analysis helped Electra Limited in strategy

formulation?
2. Discuss the operations strategy for Electra Limited.

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OPERATIONS MANAGEMENT

COURSE DESIGN COMMITTEE

Author : R P Mohanty & Parag Diwan

NMIMS Global Access School for Continuing Education

Basics of Operations Management

Operations Management in Manufacturing

Productivity and Production

Total Quality Management

NMIMS Global Access School for Continuing Education

Basics of Operations Management: Value Driven Approach, Importance of Customers

Operations Management in Manufacturing and Service Sector: Typology of

Productivity and Production: Organization and Productivity, Competitiveness

Manufacturing Economics: Legal and Environmental Issues, Lifecycles, Economic

Inventory Management: What is Inventory? Functions of Inventory, Bill of Materials,

NMIMS Global Access School for Continuing Education

Inventory Models: Inventory Models, Economic Batch Quantity (EBQ) or Economic

Total Quality Management: What is Quality?, Definition of Quality, Cost of Quality,

Theory Of Constraints: TOC Process, Five Focusing Steps, Determining the

NMIMS Global Access School for Continuing Education

BASICS OF OPERATIONS MANAGEMENT

Value Driven Approach

Determine Customer Needs

Develop Product Strategy

Secure Processes and Materials to Satisfy Demand

Manage Strategic Planning Processes

Importance of Customers in Operations Management

1.5 Distinction between Consumers and Customers

The Operations Managers Role

1.8 Operations Functions and Interfaces with other Functions

1.8.1 Operations Management Marketing Interface

Operations Management Finance Interface

Operations Management Design Interface

1.8.4 Operations Management Human Resource Interface

1.8.5 Operations Management Information Systems

Answers and Hints

Suggested Readings for Reference

NMIMS Global Access School for Continuing Education

NMIMS Global Access School for Continuing Education

BASICS OF OPERATIONS MANAGEMENT 3

After studying this chapter, you should be able to:

NMIMS Global Access School for Continuing Education

Figure 1.1: The Value Chain of a Cement Manufacturing Unit

Production as a function: As shown in Figure 1.2 the three

Figure 1.2: Production as a basic Function

In simplified form, marketing establishes the demand for goods

Production as the Technical Core: Figure 1.3 views production

The organization exists to provide goods and services. All other

BASICS OF OPERATIONS MANAGEMENT 5

interact with marketing to receive estimates of customer demand

Figure 1.3: Production as the Technical Core

1.2 TRANSFORMATION APPROACH

Mass production based on scale economics rather characteristic

Standardised products (goods or services) with minimum

Inflexible technologies and production

Plants programmed from the summit

Inflexible production programs with only volume adjustments

with single purpose

NMIMS Global Access School for Continuing Education

Search for productivity in man-machine relations

Strict separation between direct and indirect labour product and

Quality control at the end of the chain

Price based competition

Primordially of physical and tangible capital (hardware)

Equipments of electromechanical type

1.5 Distinction between Consumers and Customers

1.8 Operations Functions and Interfaces with other Functions

1.8.1 Operations Management Marketing Interface

1.8.4 Operations Management Human Resource Interface

1.8.5 Operations Management Information Systems

2. Which of the following are the primary function of a firm?

DISTINCTION BETWEEN CONSUMERS