BASIC CONCEPTS

OF OPERATIONS

PREP TEAM

List of Interns
Amazon
Aditya Navali
Tanuj Madan

Flipkart
Ravi Teja Palla
Phani Kiran

Global E-Procure
(GEP)
Rohit Mennon

Tata Steel
Sayantan Das

Bosch
Abhishek Katiyar

ABG
Tejas Kulkarni

BASIC CONCEPTS

OPERATIONS MANAGEMENT

PROCESS ANALYSIS

SUPPLY CHAIN MANAGEMENT

INVENTORY MANAGEMENT

THEORY OF CONSTRAINTS

Operations Management

Business function responsible for

planning, coordinating and controlling
the resources needed to produce
products and services for a company.
Services

Manufacturers

Intangible Product

Tangible product

No inventory

Inventory costs

High customer contact

Low customer contact

Short response time

Longer response time

Labor intensive

Capital intensive

Difficulty in measuring
output

Quantifiable output

Operations and supply

strategy

Setting broad policies and plan for using resources of a firm

to best support its long term competitive strategy.
Competition dimensions could be:

Cost or Price
Make the product or deliver the service cheap

Quality
Make a great product or deliver a great service
Delivery Speed
Make the product or deliver the service quickly
Delivery Reliability
Deliver it when promised
Coping with changes in demand
Change its volume
Flexibility & new product introduction speed
Change it

Order Qualifiers & Winners

Order qualifiers are the basic criteria

that permit the firms product to be
considered as candidates for purchase
by customers

Order Winners are the criteria that

differentiates the products & services of
one from another

Process Analysis Basic Definitions

Bottleneck: Governs the output rate of the process

Setup Time: Time required to prepare a machine to make an
item
Operation Time: Sum of the setup time and run time for a
batch of parts
Waiting Time: Time spent waiting to be taken up for
operation
Throughput Time: It is the average time for a unit to move
through the system. Sum of operation time and waiting time.
Cycle Time: Time between completion of 2 units of output
Capacity: Maximum a system can produce in a given time
period
Capacity Utilization: Actual output/Capacity
Output Rate: Total time/Cycle Time

Process Classification

Make to Order process is activated only in

response to an actual order (Job Shop)

Make to Stock process produces standard

products that can be delivered quickly
(Assembly Line)

Hybrid process combines the above two such

that a generic product is made and stocked and
then finished based on actual orders

Process Shop Floor

Job Shop: Marked by low volume of high

variety of goods & services. Work includes
small jobs, each with somewhat different
processing requirements
Assembly Line: Used when higher
volumes of standardized goods or services
are needed. Repetitive processing
Project: Marked by a number of activities
to be performed in a defined sequence.
End of all activities mark the end of the
project. Project is typically a one shot

Lean Six Sigma

Reducing Variation

Classifications of Operations Planning

Long Range Planning : 5-10 years

Medium Range Planning : 1 year
Short Range Planning : less than 1 year (SKU
Level)
The medium range planning (critical) is termed
as Aggregate Production Planning (APP). In
such cases the demand is assumed to be
dynamic.
The goal of aggregate planning is to achieve
a production plan that will effectively utilize
the organizations resources to satisfy
expected demand.

Production Planning Framework

Demand
Forecasti
ng

APP
Aggregat
e
Productio
n
Planning

MPS
Master
Productio
n
Schedulin
g

MRP
Material
Requirem
ent
Planning

Day to
Day
Schedulin
g

Porters 5 Forces
Value chain

Framework to analyze
competition
To know attractiveness
of Industry

Porters

Chain of activities in a firm

Strive for Competitive advantage
a) Cost & b) Differentiation
advantage

Supply Chain Management

Supply Chain (SC): the sequence of

business processes and information
that provides a product or service from
suppliers through manufacturing and
distribution to the ultimate customer.
Supply Chain Management (SCM):
is a set of approaches utilized to
efficiently integrate suppliers,
manufactures, warehouses, and stores,
so that merchandise is produced and
distributed at right quantities, to the
right locations, and at the right time, in
order to minimize system wide costs
while satisfying service level
requirements

Evolution of Supply Chain Philosophy

SCM PHILOSOPHY
The entire supply
chain is a single,
integrated entity
The cost, quality &
delivery requirements
are central
Supply tuned to
demand

Issues in SCM
Decisions in SCM
A. Operational level : day to day decisions
B. Tactical level
: Every quarter & year
C. Strategic level
: Long lasting effect
outsourcing

Ex : Scheduling, loading
Ex : Purchasing, inventory
Ex : Productdesign,

Few Issues in SCM

Distribution network configuration

o. Inventory Control
o. Supply Contracts
o. Supply Chain Integration and Strategic Partnering
o. Outsourcing and Off sourcing
o. Information Technology and Decision- support systems
o. Supply side and Demand side risks
o.

New Concepts & Trends in

SCM

ERP (MRP) Systems, Supplier Scorecards

Just In Time (JIT)
Offshore outsourcing
Vendor Managed Inventory
ISO certified suppliers
RFID ( Radio Frequency Identification)

Inventory Management : Why?

Economics involved in producing or

purchasing in batches
Uncertainty in both demand and supply
Seasonality in demand pattern
Availability of different transportation
and distribution models

Inventory Management : Types & Key Terms

Inventory in Supply Chain :

a) Raw Material Inventory
b) Work In Process (WIP) Inventory
c) Finished Product

Key Terms :
Service level
Safety stock
Cost of over stocking
Cost of under stocking

Effective Inventory Policy- Factors

Customer Demand Forecasting,

Variability
Replenishment lead time certain or
uncertain?
Number of different Products/SKUs
Service level requirements
The length of the planning horizon
Costs a) Order cost large order ,
smaller price
b) Inventory Holding Cost Ex :

Inventory Control Policies

Inventory control answers the following

questions

What should be the order quantity (Q)?

When should an order be placed, called
reorder point (ROP)?
How much safety stock (SS) should be
maintained?

Inventory Control
Policy

Continuous
Review

Periodic Review

Time between
orders

Variable

Constant

When to Order?

When inventory

At the end of T

Two categories of Inventory control

Order
Quantity
Constant
Variable
policies

Economic Order Quantity

(Q)

Order quantity of inventory that minimizes total

cost of inventory management
Balances two costs - inventory carrying costs and
ordering costs
Total inventory cost = Ordering cost + Carrying
cost
Drives low ordering costs due to high batch sizes
May lead to high inventory levels that increase:

Rework costs
Lost or broken items
Obsolescence

Assumptions ?? Different Models ??

ABC Analysis

Classification of all consumption items, based on

the Consumption Value
Consumption Value = D X C

D= annual demand in units C= cost per unit in Rs.

Based on CV, inventory of a number of items can

be separated into A, B and C classes
A items: Top 10% items account for 70% of CV
B items: Next 20% items account for 20% of CV
C items: Bottom 70% items account for 10% of
CV

Pareto Rule (80/20)

Named after the Italian economist, Vilfredo Pareto
He observed that 80% of the income in Italy, was received by
20% of the Italian population.
This became the famous 80/20 rule
20% of clients are responsible for 80% of sales volume
80% of stock movements are for 20% of our products
The assumption is that most of the results in any situation are
determined by a small number of causes.
Are most of our problems (process variation) caused by a
limited number of things (variables)?
Pareto analysis can help see if this is true
Note: Dont think that the percentages will always be 80/20
Youre just looking for something that stands out

THEORY OF
CONSTRAINTS

Short-term Capacity Optimization

26

Theory of Constraints
27

Significance of bottlenecks

Maximum speed of the process is the speed

of the slowest operation
Any improvements will be wasted unless
the bottleneck is relieved
Bottlenecks

must be identified and improved if

the process is to be improved

Theory of Constraints
28

Purpose is to identify bottlenecks or other

constraints and exploit them to the extent
possible

Identification of constraints allows management to

take action to alleviate the constraint in the future
Reduce

cycle time

Time from receipt of customer order to shipment

Improve

manufacturing cycle efficiency (MCE)

Processing time / total cycle time

Assumes current constraints cannot be changed in

the short-run

What should be produced now, with current

resources, to maximize profits?

Theory of Constraints
29

Theory of Constraints
30

Constraining resource must be maximized

All other operations must be geared toward this goal

May

Upstream operations must provide only what the constraint

can handle
Downstream operations will only receive what the constraint
can put out

Constraint must be kept operating at its full capacity

If

require sub-optimization in other areas

not, the entire process slows further

Focus is on maximizing throughput

Sales totally variable costs

All other costs treated as fixed operational expenses
Cannot

vary much in the short-run

Theory of Constraints
31

Based on the concepts of drum, buffer and ropes

Drum
Output

of the constraint is the drumbeat

Sets the tempo for other operations

Tells upstream operations what to produce

Tells downstream operations what to expect

Buffer
Stockpile

of work in process in front of constraint

Precaution to keep constraint running if upstream operations are

interrupted

Rope
Sequence

of processes prior to and including the constraint

Want to pull the rope at the maximum speed

Speed of the constraint

Theory of Constraints
32

Steps in the TOC Process

1. Identify the system constraints

Internal

Process constraints
Machine

time, etc.

External

Policy constraints
No

Material
constraints
Insufficient

overtime, etc.

materials

Market constraints
Insufficient

demand

How is a constraint identified?

33

Steps in the TOC Process

34

2. Decide how to exploit the constraint

Produce the most profitable product mix

Want it working at 100%
How

much of a buffer?

Holding costs
Including risk, quality costs
Stock-out costs

3. Subordinate everything else to the preceding

decision

Plan production to keep constraint working at 100%

May need to change performance measures to
conform upstream activities to the rope speed

Steps in the TOC Process

35

Demand per month

Price per unit
Material cost per unit

Product 1
1,000
$
900
$
400

Product 2
600
$
1,500
$
800

Hours required per unit

Test components
Assemble components
Install electronics
Final inspection and test
Package and ship

0.25
1.00
0.50
1.25
0.10

0.40
1.50
0.50
1.00
0.10

Identify the constraint

Test components
Assemble components
Install electronics
Final inspection and test
Package and ship

Product 1
250
1000
500
1250
100

Product 2
240
900
300
600
60

Total
490
1900
800
1850
160

Hours
available
per month
640
2240
800
1760
160

Slack
hours
150
340
0
(90)
0

Steps in the TOC Process

36

Identify the best use of the constraint

Price per unit
Material cost per unit
Throughput per unit
Constaint time per unit
Throughput per hour

$900
$400
$500
1.25
$400

$1,500
$800
$700
1.00
$700

Identify the most profitable product mix

Total demand
Units produced in best mix
Unmet demand

Throughput generated
Units produced
Throughput per unit
Total throughput

$
$

1,000
928
72

600
600
-

928
500
464,000

600
700
420,000

$
$

884,000

Steps in the TOC Process

37

4. Alleviate the constraint

Determine how to increase its capacity

5. Repeat the process

Always a new constraint

Evaluation of TOC
38

Advantages

Improves capacity decisions in the shortrun

Avoids build up of inventory
Aids in process understanding
Avoids local optimization
Improves communication between
departments

Evaluation of TOC
39

Disadvantages

Negative impact on non-constrained areas

Diverts

attention from other areas that may be

the next constraint
Temptation to reduce capacity

Ignores long-run considerations

Introduction

of new products
Continuous improvement in non-constrained
areas

May lead organization away from strategy