Operations Guide Book

2013 - 2014

Prepared by
ADITYA MVR
ANIRUDH VATS
ANKUR CHATURVEDI
APOORV KULKARNI
AMAR JYOTHI
RAVI TEJA P
VARSHAA DHUWALIA
Contents
1. OPERATIONS MANAGEMENT I .......................................................................................................... 4
Introduction to Operations Management: ............................................................................................... 4
Components of Operational Strategy: .................................................................................................. 4
Competitive Priorities ........................................................................................................................... 4
Product design and development: ............................................................................................................ 4
Product life cycle: .................................................................................................................................. 5
Product development process: ............................................................................................................. 6
Product Design: ..................................................................................................................................... 6
Process Management: .............................................................................................................................. 8
Facility Location: ..................................................................................................................................... 10
Techniques: ......................................................................................................................................... 10
Facility Layout ......................................................................................................................................... 12
Capacity Management ............................................................................................................................ 23
Demand Management and Forecasting ................................................................................................. 29
Project Management .............................................................................................................................. 41
2. OPERATIONS MANAGEMENT II ........................................................................................................... 50
Aggregate planning ............................................................................................................................... 50
Strategies for meeting uneven demand ........................................................................................... 50
Techniques for aggregate planning.................................................................................................. 51
Scheduling .............................................................................................................................................. 51
Scheduling Techniques ..................................................................................................................... 51
Inventory Management......................................................................................................................... 52
Models related to Inventory Management ...................................................................................... 52
Supply Chain Management ................................................................................................................... 56
Objective of SCM: ............................................................................................................................... 57
Types of supply chains ...................................................................................................................... 58
Bull Whip effect ................................................................................................................................. 59
Material Requirements Planning ......................................................................................................... 59
Just in Time Manufacturing .................................................................................................................. 62
JIT Objectives: .................................................................................................................................... 63
The seven wastes ............................................................................................................................... 63
Kanban Production............................................................................................................................ 63

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 Quality Management ............................................................................................................................. 64
Process capability .............................................................................................................................. 64
Six Sigma ............................................................................................................................................ 64
Statistical Process Control (SPC) ...................................................................................................... 64
3. LOGISTICS AND SUPPLY CHAIN ........................................................................................................... 66
Role of logistics ...................................................................................................................................... 66
Logistics support operations ................................................................................................................ 66
SUPPLY CHAINS..................................................................................................................................... 67
Networks and webs ............................................................................................................................... 69
Activities of logistics.............................................................................................................................. 70
4. SERVICE OPERATIONS MANAGEMENT .............................................................................................. 73
Service Industry Basics ............................................................................................................................. 73
Service Process Matrix .......................................................................................................................... 74
Service Centre Cost Structure............................................................................................................... 75
Costing model in ITES-BPO............................................................................................................... 75
Basics of Forecasting ................................................................................................................................. 76
Forecasting Techniques ........................................................................................................................ 77
Demand Requirement Planning ........................................................................................................... 78
Service Quality ........................................................................................................................................... 79
Process in a Service industry ................................................................................................................ 80
Service Quality measurement .............................................................................................................. 81
Key Terms: ......................................................................................................................................... 82
Voice of customer .................................................................................................................................. 83
Tools used for analysis of surveys ....................................................................................................... 84
1. Pareto Chart ............................................................................................................................... 84
2. Scatter Plot ................................................................................................................................. 85
3. Cause effect diagram ................................................................................................................. 86
4. Control Impact Matrix ............................................................................................................... 88
5. Bond Factor and VSF ................................................................................................................. 88
6. Box Plot ...................................................................................................................................... 89
7. Histogram................................................................................................................................... 90
8. Run Chart ................................................................................................................................... 90
9. Control Chart ............................................................................................................................. 92

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 Cost of Quality........................................................................................................................................ 94
Sampling..................................................................................................................................................... 95
Six Sigma concept .................................................................................................................................. 96
New Service design ................................................................................................................................... 97
5. STATISTICS ............................................................................................................................................ 99
Basic Concepts ....................................................................................................................................... 99
Discrete Probability Distribution ....................................................................................................... 100
Normal Distribution ............................................................................................................................ 100
Standard Normal Distribution........................................................................................................ 102
Hypothesis Testing .............................................................................................................................. 102
Type I & Type II Error ..................................................................................................................... 103
One Tailed and Two Tailed Tests ................................................................................................... 104
P-Value ............................................................................................................................................. 104
Which test to use for Hypothesis Testing? .................................................................................... 106
6. QUESTIONS ON OPERATIONS ............................................................................................................ 108
7. GLOSSARY ............................................................................................................................................ 111

3
 1. OPERATIONS MANAGEMENT I
Introduction to Operations Management:

Product System Services system

Raw material & output is tangible Intangible

Price differentiation is more difficult Price differentiation is easier
Less customization More customization
Product can be stored Cannot be stored
Production and consumption happen at Production and consumption happen
different points of time simultaneously
Dependency on material No dependency
Economies of scale easier to achieve More difficult

Components of Operational Strategy:

Design of products or services
Capacity management
Process oriented technology vs. Product oriented technology
Automated vs. Manual
Facility Layout (Process layout Vs. Product Layout)
Facility Location
HR policy
Operational policy (JIT, TQM, six sigma, lean mfg.)
Supplier strategy
Information Strategy (what info to be exchanged and with whom? Etc.)
Environment Strategy

Competitive Priorities
o Cost(Ex: Wal-Mart, IKEA,NANO)
o Quality(consistent quality , exclusive quality)
o Time
o After sale service
o Flexibility(Volume flexibility, customization)

Product design and development:

Differentiation(quality, features)
Affects the operation(what is the design & process to produce it)
Affects cost
Lead times(simple design leads to less lead time)

4
 Flexibility

Product life cycle:

Introduction:

Frequent design changes

Product innovation rate is very high
Responsiveness/flexibility
Production volume is low
Production cost is high

Growth:

Forecasting is critical
Process innovation dominates
Price competition
Enhance distribution
May need to enhance capacity

Maturity:

Product design is relatively stable

Process innovation is still important
Capacity utilisation is optimum
Growth becomes flat

Decline Stage:

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 No differentiation
Cost is the only important thing
Production as well as process innovation is minimal
Capacity overload

Product development process:

1. Idea generation
a. By user needs
b. Technological development
c. Creating need
2. Screening
a. Use weighted score model
3. Design & development
a. Detailed design is made
b. Functional requirement
c. Technical requirement
4. Prototype/Testing
a. Actual working units used under actual working conditions
b. Modify if required
5. Final design

Product Design:
1. Maintainability
a. Low maintenance cost
b. How frequently maintenance is required
2. Durability
3. Ease of use
4. Reliability
a. In terms of percentage i.e., 90% of the times it works correctly
b. Mean time between failure(MTBF)

Probability that product fails =

Probability that product will fail for MTBF hours is = = = 36.4%

6
In series:

0.9 0.8
Input Output
A B

System will work only if A and B work together

P (A B) = P (A) * P (B) = 0.9 * 0.8 = 0.72

Here the probability that system will work i.e., 72% is less than the least component probability (i.e., 0.8
of B) of system.

A 0.9

B 0.8

P (A U B) = P (A) + P (B) P (A B) = 0.9 + 0.8 0.9 * 0.8 = 0.98

Here the probability that system will work i.e., 98% is more than the highest component probability (i.e.,
0.9 of A) of system.

Concurrent engineering:

Normal design process is sequential in nature. Here parallelization of activities is facilitated. Cross
functional teams are formed for this. This process reduces product delivery time.

Value engineering:

This implies adding value to the product.

Value =

7
Process Management:
Steps involved:

1. Make or buy decision

2. Choosing a technology
3. Choosing a manufacturing approach(producing volumes vs. variety)

Manufacturing approaches:

1. Project:
a. Specific start and end
b. Temporary activity
c. Focussed/specific
d. Budget & resources allocated
e. Volumes are very small
f. Customization is very high
g. Complex
2. Job:
a. Highly customized
b. Volume is higher than project
c. Complexity lesser than project
3. Batch:
a. Intermediate volumes
b. Medium variety
4. Line:
a. High volumes
b. Small variety
5. Continuous:
a. High volumes
b. Small variety

8
Process improvement tools:

1. Flow chart(Breaking into sub processes)

2. Process chart

Breaking into parts to check for improvement

Process Type of process Time

1 Operations

2 Transportation

3 Inspection

4 Storage

5 Delay

3. Business process reengineering (to start entirely different process, clean state approach)

Make to order: Produce only when customer orders (ex. Luxury cars)

Make to stock: Forecast & prepare beforehand (ex. Maruthi)

Hybrid: Partly prepare and assemble when you get the order

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Throughput time:

The period required for a material, part, or subassembly to pass through the manufacturing process.

30sec 45sec 30 sec

Here throughput time is = 30 + 45 + 30 = 105 sec

Throughput rate: This is the rate at which the product is produced. It depends upon the process taking
larger time in the cycle.

Here throughput rate is = one piece per 45 sec = 1/45 part/sec = 4 parts / 3 mins

Facility Location:
Criteria:

1. Availability of Raw material

2. Govt. regulation
3. Law & order
4. Political stability
5. Availability of land
6. Availability of labour
7. Environment issues
8. Exchange rate

Techniques:
1. Factor rating method(weighted score model)

2. Load distance method(Minimisation of transportation cost)

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 Transportation cost distance

Transportation cost load

Therefore, Transportation cost distance * load

3. Centre of gravity method

Where:

xi = x-coordinate of location i.

yi = y-coordinate of location i.

li = quantity (load) of goods moved to/from location i.

4. Location break even analysis

Step 1: For each location, determine the fixed and variable costs

Step 2: Plot the total costs for each location on one graph

Step 3: Identify ranges of output for which each location has the lowest total cost

Step 4: Solve algebraically for the break-even points over the identified ranges

Total cost = F + cQ where F is fixed cost, c variable cost per unit & Q is no. of units

Total revenue = pQ where p is price per unit and Q is no. of units

Break-even is where Total Revenue = Total Cost

5. Transportation method

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Facility Layout

a) Strategic Importance of Layout Decisions - The objective of layout strategy is to develop a cost-
effective layout that will meet a firms competitive needs

b) Layout Design Considerations

- Higher utilization of space, equipment, and people
- Improved flow of information, materials, or people
- Improved employee morale and safer working conditions
- Improved customer/client interaction
- Flexibility

c) Types of Layout
1. Office layout - Positions workers, their equipment, and spaces/offices to provide for movement of
information
2. Retail layout - Allocates shelf space and responds to customer behavior
3. Warehouse layout - Addresses trade-offs between space and material handling
4. Fixed-position layout - Addresses the layout requirements of large, bulky projects such as ships
and buildings
5. Process-oriented layout - Deals with low-volume, high-variety production (also called job shop or
intermittent production)
6. Work-cell layout - Arranges machinery and equipment to focus on production of a single product
or group of related products
7. Product-oriented layout - Seeks the best personnel and machine utilizations in repetitive or
continuous production

d) Good Layouts Consider

- Material handling equipment
- Capacity and space requirements
- Environment and aesthetics
- Flows of information
- Cost of moving between various work areas

e) Layout Strategies
Office Retail Warehouse (storage)

Examples

Allstate Insurance Krogers Supermarket Federal-Moguls warehouse

Microsoft Corp. Walgreens Bloomingdales The Gaps distribution center

Problems/Issues

12
Locate workers requiring Expose customer to high-margin items Balance low-cost storage with low-cost
frequent contact close to material handling
one another

Project (fixed position) Job Shop (process oriented)

Examples

Ingall Ship Building Corp. Trump Plaza Arnold Palmer Hospital Hard Rock Caf
Pittsburgh Airport Olive Garden

Problems/Issues

Move material to the limited storage areas around the Manage varied material flow for each product
site

Work Cells (product families) Repetitive/ Continuous (product oriented)

Examples

Hallmark Cards Wheeled Coach Standard Aero Sonys TV assembly line Toyota Scion

Problems/Issues

Identify a product family, build teams, cross train team Equalize the task time at each workstation
members

f) Office Layout
- Grouping of workers, their equipment, and spaces to provide comfort, safety, and movement of
information
- Movement of information is main distinction
- Typically in state of flux due to frequent technological changes
- Relationship Chart

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g) Process Layout: Systematic Layout Planning
- Numerical flow of items between workcentres
a. Can be impractical to obtain
b. Does not account for the qualitative factors that may be crucial to the placement
decision
- Systematic Layout Planning
a) Accounts for the importance of having each department located next to every other
department
b) Is also guided by trial and error
i. Switching work centres then checking the results of the closeness score
- Muthers Systematic Layout Planning

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15
Example of Systematic Layout Planning:
- Relating Reasons and Importance

Relationship Chart or REL Chart

- Reasons for Closeness

- Importance of Closeness

16
 - Initial Relationship Diagram

1) Note, Depts. (1) and (2) are linked together, and Depts. (2) and (5) are linked together by multiple
lines or required transactions.
2) The number of lines here represents paths required to be taken in transactions between the
departments. The more lines, the more the interaction between departments

- Initial and Final Layouts

Final Layout - Adjusted by square footage and

building size

20 ft

Initial Layout - Ignoring space and

building constraints 50 ft

Note in the Final Layout that Depts. (1) and (5) are not both placed directly next to Dept. (2).

h) Computerised Layout Planning

- Construction Programmes
- Computerised Relationship Layout Planning (CORELAP)
- Automated Layout Design Programme (ALDEP)
- Plant Layout Analysis and Evaluation Technique (PLANET)
- Improvement Programmes
- Computerised Relative Allocation of Facilities Technique (CRAFT)

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 - Computerised Facilities Design (CFD)
i) Cellular Manufacturing Layouts
- Operations required to produce a particular family (group) of parts are arranged in the sequence
required to make that family
- Used when the operations system must handle a moderate variety of products in moderate
volumes
- Reorganizes people and machines into groups to focus on single products or product groups
- Group technology identifies products that have similar characteristics for particular cells
- Volume must justify cells
- Cells can be reconfigured as designs or volume changes

j) Characteristics of Cellular Manufacturing

- Relative to Process Layouts
- Equipment can be less general-purpose
- Material handling costs are reduced
- Training periods for operators are shortened
- In-process inventory is lower
- Parts can be made faster and shipped more quickly
- Relative to Product Layouts
- Equipment can be less special-purpose
- Changeovers are simplified
- Production is easier to automate

k) Manufacturing Cell: Benefits & Advantages

- Better human relations
- Improved operator expertise
- Faster production setup
- Reduced work-in-process inventory
- Less floor space required
- Reduced raw material and finished goods inventory
- Reduced direct labor
- Heightened sense of employee participation
- Increased use of equipment and machinery
- Reduced investment in machinery and equipment

l) Manufacturing Cell: Transition from Process Layout

- Grouping parts into families that follow a common sequence of steps
- Identifying dominant flow patterns of parts families as a basis for location or relocation of
processes
- Physically grouping machines and processes into cells
-
m) Requirements of Work Cells
- Identification of families of products
- A high level of training, flexibility and empowerment of employees

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 - Being self-contained, with its own equipment and resources
- Test (poka-yoke) at each station in the cell
- Fundamental Requirements for Parts to be Made in Cells
- Demand for the parts must be high enough and stable enough that moderate batch sizes of
the parts can be produced periodically.
- Parts must be capable of being grouped into parts families

- More-Complex Issues to be Resolved

- If all the parts cannot be cleanly divided between cells, how will we decide which are to be
the exceptional parts?
- If inadequate capacity is available to produce all the parts in cells, which parts should be
made outside the cells?

n) Cell Formation Procedure

- Form the Parts-Machines Matrix.
- Rearrange the Rows - Place the machines that produce the same parts in adjacent rows.
- Rearrange the Columns - Place the parts requiring the same machines in adjacent columns.
- Use the rearranged parts-machines matrix to identify cells, the machines for that cell and the
parts that will be produced in that cell.

o) Product-Oriented Layouts
- Fabrication line
- Builds components on a series of machines
- Machine-paced
- Require mechanical or engineering changes to balance
- Assembly line
- Puts fabricated parts together at a series of workstations
- Paced by work tasks
- Balanced by moving tasks
Both types of lines must be balanced so that the time to perform the work at each station is the same

p) Product-Oriented Layouts Advantages

- Low variable cost per unit
- Low material handling costs
- Reduced work-in-process inventories
- Easier training and supervision
- Rapid throughput

q) Product-Oriented Layouts Disadvantages

- High volume is required
- Work stoppage at any point ties up the whole operation
- Lack of flexibility in product or production rates

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 McDonalds Assembly Line

r) Assembly-Line Balancing
- Objective is to minimize the imbalance between machines or personnel while meeting required
output
- Starts with the precedence relationships
- Determine cycle time
- Calculate theoretical minimum number of workstations
- Balance the line by assigning specific tasks to workstations

s) Assembly Line Balancing Example: Wing Component Example

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 Precedence Diagram

Line-Balancing Heuristics We are using the second for this problem

1. Longest task time Choose the available task with the longest task time

2. Most following tasks Choose the available task with the largest number of following tasks

3. Ranked positional weight Choose the available task for which the sum of following task times is the longest

4. Shortest task time Choose the available task with the shortest task time

5. Least number of following tasks Choose the available task with the least number of following tasks

21
 Balanced Line

Task times
Efficiency =
(Actual number of workstations) x (Largest cycle time)

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Capacity Management

a) Capacity - The maximum available amount of output of the transformation process over some
specified duration
Or
Capacity is related to Intensiveness of use of resources, e.g. number of shifts in a day, number of
hours in a week, etc.
Or
In some situations, capacity is qualified by mentioning how it was established e.g. licensed, installed,
rated etc.

b) Definitions of Capacity
- In general, production capacity is the maximum production rate of an organization.
- Capacity can be difficult to quantify due to
- Day-to-day uncertainties such as employee absences, equipment breakdowns, and material-
delivery delays
- Products and services differ in production rates (so product mix is a factor)
- Different interpretations of maximum capacity
c) Measurements of Capacity
- Output Rate Capacity
- For a facility having a single product or a few homogeneous products, the unit of
measure is straightforward (barrels of beer per month)
- For a facility having a diverse mix of products, an aggregate unit of capacity must be
established using a common unit of output
- Input Rate Capacity
- Commonly used for service operations where output measures are particularly difficult
Hospitals use available beds per month
Airlines use available seat-miles per month
Movie theatres use available seats per month
- Capacity Utilization Percentage
- Relates actual output to output capacity
Example: Actual automobiles produced in a quarter divided by the quarterly
automobile production capacity
- Relates actual input used to input capacity
Example: Actual accountant hours used in a month divided by the monthly
account-hours available
- Capacity Cushion
- an additional amount of capacity added onto the expected demand to allow for:
- greater than expected demand
- demand during peak demand seasons

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 - lower production costs
- product and volume flexibility
- improved quality of products and services

d) Strategic Capacity Planning

- Capacity can be defined as the ability to hold, receive, store, or accommodate.
- Strategic capacity planning is an approach for determining the overall capacity level of capital
intensive resources, including facilities, equipment, and overall labor force size.

e) Capacity Utilization

Capacity used
Capacity utilization rate
Where, Best operating level
- Capacity used - Rate of output actually achieved
- Best operating level - Capacity for which the process was designed
Best Operating Level

Example: Engineers design engines and assembly lines to operate at an ideal or best operating level to
maximize output and minimize ware

- Example of Capacity Utilization - During one week of production, a plant produced 83 units of a
product. Its historic highest or best utilization recorded was 120 units per week. What is this plants
capacity utilization rate?

- Answer:

Capacity utilization rate = Capacity used

Best operating level

= 83/120
=0.69 or 69%
f) Economies & Diseconomies of Scale - Economies of Scale and the Learning Curve working
- Best operating level - least average unit cost

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- Economies of scale - average cost per unit decreases as the volume increases toward the best
operating level
- Diseconomies of scale - average cost per unit increases as the volume increases beyond the best
operating level

- Economies of Scope
- The ability to produce many product models in one flexible facility more cheaply than in
separate facilities
- Highly flexible and programmable automation allows quick, inexpensive product-to-product
changes
- Economies are created by spreading the automation cost over many products

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The Learning Curve - As plants produce more products, they gain experience in the best production
methods and reduce their costs per unit

g) Capacity Focus - The concept of the focused factory holds that production facilities work best when
they focus on a fairly limited set of production objectives
Plants Within Plants (PWP) - Extend focus concept to operating level

h) Forecasting Capacity Demand

1. Consider the life of the input (e.g. facility is 10-30 yr)
2. Understand product life cycle as it impacts capacity
3. Anticipate technological developments
4. Anticipate competitors actions
5. Forecast the firms demand
6. Other Considerations
- Resource availability
- Accuracy of the long-range forecast
- Capacity cushion
- Changes in competitive environment

i) Process for Capacity Planning

1. Assess the company situation and environment to predict future demands, including the possible
impact of technology, competition and other events.
2. Determine the available capacity.
3. Translate predictions into physical capacity requirements.
4. Develop alternate capacity plans for matching required and available capacity.
5. Analyze the economic effects of alternate capacity plans.
6. Analyze the risks and other strategic consequences of alternate plans.
7. Recommend a course of action.
8. Implement the course of action.

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j) Expansion of Long-Term Capacity
- Subcontract with other companies
- Acquire other companies, facilities, or resources
- Develop sites, construct buildings, buy equipment
- Expand, update, or modify existing facilities
- Reactivate standby facilities

k) Reduction of Long-Term Capacity

- Sell off existing resources, lay off employees
- Mothball facilities, transfer employees
- Develop and phase in new products/services

l) Two General Approaches to Expanding Long-Range Capacity

- All at Once build the ultimate facility now and grow into it
- Little risk of having to turn down business due to inadequate capacity
- Less interruption of production
- One large construction project costs less than several smaller projects
- Due to inflation, construction costs will be higher in the future
- Most appropriate for mature products with stable demand

- Incrementally build incrementally as capacity demand grows

- Less risky if forecast needs do not materialize
- Funds that could be used for other types of investments will not be tied up in excess
capacity
- More appropriate for new products

m) Subcontractor Networks - A viable alternative to larger-capacity facilities is to develop subcontractor

and supplier networks.
- Farming out or outsourcing your capacity needs to your suppliers
- Developing long-range relationships with suppliers of parts, components, and subassemblies
- Relying less on backward vertical integration
- Requiring less capital for production facilities
- More easily varying capacity during slack or peak demand periods

n) Outsourcing Service Functions

- Building maintenance
- Data processing
- Delivery
- Payroll
- Bookkeeping
- Customer service

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- Mailroom
- Benefits administration

o) Capacity Focus - Should manufacturers attempt to excel on all production objectives?

- Plants within plants (Skinner)
- Extend focus concept to operating level

p) Capacity Flexibility
- Flexible plants
- Flexible processes
- Flexible workers

Capacity Planning - Balance

q) Risk Analysis of Alternate Capacity Plans - In each of the following cases, one may plan for
overcapacity rather than under capacity if:
- There are minimum economic capacity sizes
- Cost involved in establishing capacity is low
- Sub-contracting is very difficult or impossible.
- Lead time required to establish new capacity is very long
- The demand growth is more likely to be nearer the optimistic prediction than the pessimistic one.
- Lost sales are perceived as very negative and may amount to more than proportionate drop in market
share.

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Demand Management and Forecasting
a) Introduction
- Demand estimates for products and services are the starting point for all the other planning in
operations management.
- Management teams develop sales forecasts based in part on demand estimates.
- The sales forecasts become inputs to both business strategy and production resource forecasts.
- Some Reasons Why Forecasting is Essential in OM
- New Facility Planning It can take 5 years to design and build a new factory or design and
implement a new production process.
- Production Planning Demand for products vary from month to month and it can take
several months to change the capacities of production processes.
- Workforce Scheduling Demand for services (and the necessary staffing) can vary from hour
to hour and employees weekly work schedules must be developed in advance.
- Examples of Production Resource Forecasts

b) Demand Management

29
c) Independent Demand: What a firm can do to manage it?
- Can take an active role to influence demand
- Can take a passive role and simply respond to demand

d) Types of Forecasts / Forecasting Methods

- Qualitative / Judgmental Methods
- Quantitative
- Time Series Analysis / Extrapolative or Time Series Methods
- Causal Relationships / Causal or Explanatory Methods
- Simulation

e) Components of Demand
- Average demand for a period of time
- Trend
- Seasonal element
- Cyclical elements
- Random variation
- Autocorrelation

f) Finding Components of Demand

g) Qualitative Methods
- Usually based on judgments about causal factors that underlie the demand of particular products
or services
- Do not require a demand history for the product or service, therefore are useful for new
products/services
- Approaches vary in sophistication from scientifically conducted surveys to intuitive hunches
about future events

30
- The approach/method that is appropriate depends on a products life cycle stage
- Generally useful for long range forecasts
- Qualitative Methods - Intuitive hunches
- Educated guess
- Executive committee consensus
- Delphi method
- Survey of sales force
- Survey of customers
- Historical analogy
- Market research Scientifically conducted surveys

h) Delphi Method
1. Choose the experts to participate representing a variety of knowledgeable people in different
areas
2. Through a questionnaire (or E-mail), obtain forecasts (and any premises or qualifications for the
forecasts) from all participants
3. Summarize the results and redistribute them to the participants along with appropriate new
questions
4. Summarize again, refining forecasts and conditions, and again develop new questions
5. Repeat Step 4 as necessary and distribute the final results to all participants

i) Time Series Analysis - Time series forecasting models try to predict the future based on past data.
- Based on the assumption that the forces that generated the past demand will generate
the future demand, i.e., history will tend to repeat itself
- Analysis of the past demand pattern provides a good basis for forecasting future
demand
- Requires large amount of past data
- You can pick models based on:
- Time horizon to forecast
- Data availability
- Accuracy required
- Size of forecasting budget
- Availability of qualified personnel
- A time series is a set of numbers where the order or sequence of the numbers is
important, e.g., historical demand
- Analysis of the time series identifies patterns
- Once the patterns are identified, they can be used to develop a forecast
- Generally useful for short range forecasts
- Components of a Time Series
- Trends are noted by an upward or downward sloping line.
- Cycle is a data pattern that may cover several years before it repeats itself.
- Seasonality is a data pattern that repeats itself over the period of one year or less.

31
 - Random fluctuation (noise) results from random variation or unexplained causes.
- Time Series Methods
- Simple Moving Average
- Weighted Moving Average
- Exponential Smoothing (exponentially weighted moving average)
- Exponential Smoothing with Trend
- Exponential Smoothing with Seasonality
- Exponential Smoothing with Trend and Seasonality

j) Simple Moving Average Formula - The simple moving average model assumes an average is a
good estimator of future behavior. The formula for the simple moving average is:
A t -1 + A t -2 + A t -3 + ... + A t -n
Ft =
n
Where: Ft = Forecast for the coming period
N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for up to n periods

- Question: What are the 3-week and 6-week moving average forecasts for demand?
Week Demand
1 650
2 678
3 720
4 785
A t -1 + At -2 + At -3 + ... + A t -n
5 859 Ft =
6 920 n
7 850
8 758
9 892
10 920
11 789
12 844

Assume you only have 3 weeks and 6 weeks of actual demand data for the respective forecasts
Calculating the moving averages gives us:

F =(650+678+720)/3 =682.67
4
Week Demand 3-Week 6-Week
1 650 F =(650+678+720+785+859+920)/6 =768.67
2 678 7

3 720
4 785 682.67

32
 5 859 727.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83

Demand 3-Week 6-Week

1000
900
Demand

800
700
600
500
1 2 3 4 5 6 7 8 9 10 11 12
Week

Note that 3-Week is smoother than the Demand, and 6-Week is even smoother

k) Weighted Moving Average Formula - While the moving average formula implies an equal weight
being placed on each value that is being averaged, the weighted moving average permits an
unequal weighting on prior time periods. The formula for the moving average is:

Ft = w1 A t -1 + w2A t -2 + w3A t -3 + ... + w n A t -n

Where: wt = weight given to time period t occurrence (weights must add to one)
Ft = Forecast for the coming period
N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for up to n periods
And
n

wi=1
i =1

- Weighted Moving Average Problem (1) Data - Question: Given the weekly demand and weights,
what is the forecast for the 4th period or Week 4?
Week Demand
1 650 Weights:
2 678 t-1 .5
t-2 .3
t-3 .2
33
 3 720
4
Note that the weights place more emphasis on the most recent data, that is time period t-1
Weighted Moving Average Problem (1) Solution

Week Demand Forecast

1 650
2 678
3 720
4 693.4

F = 0.5(720)+0.3(678)+0.2(650)=693.4
4

l) Exponential Smoothing Model - The weights used to compute the forecast (moving average) are
exponentially distributed. The forecast is the sum of the old forecast and a portion ( ) of the
forecast error (At-1 - Ft-1).

Ft = Ft-1 + (At-1 - Ft-1)

Where :
Ft Forcast value for the coming t time period
Ft - 1 Forecast value in 1 past time period
At - 1 Actual occurance in the past t time period
Alpha smoothing constant
- The smoothing constant, a, must be between 0.0 and 1.0.
- A large a provides a high impulse response forecast.
- A small provides a low impulse response forecast.

Premise: The most recent observations might have the highest predictive value
Therefore, we should give more weight to the more recent time periods when forecasting

- Exponential Smoothing Problem (1) Data - Question: Given the weekly demand data, what are the
exponential smoothing forecasts for periods 2-10 using a=0.10 and a=0.60?
Week Demand
1 820
2 775
3 680
4 655
5 750
6 802
7 798
8 689

34
 9 775
10

Assume F1=D1
Solution: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future.

Week Demand 0.1 0.6 0.5

1 820 820.00 820.00 820.00 F =820+(0.5)(820-820)=820
1
2 775 820.00 820.00 820.00
3 680 815.50 793.00 797.50
4 655 801.95 725.20 738.75
F =820+(0.5)(775-820)=797.75
5 750 787.26 683.08 696.88 3
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28

Exponential Smoothing Problem (1) Plotting

Demand 0.1 0.6

850
800
Demand

750
700
650
600
550
500
1 2 3 4 5 6 7 8 9 10

Week

Note how that the smaller alpha results in a smoother line in this example

m) The MAD Statistic to Determine Forecasting Error

n

A
t =1
t - Ft
MAD =
n
1 MAD 0.8 standard deviation
1 standard deviation 1.25 MAD
- The ideal MAD is zero which would mean there is no forecasting error

35
 - The larger the MAD, the less the accurate the resulting model

- MAD Problem Data - Question: What is the MAD value given the forecast values in the table
below?

MAD Problem Solution -

A t - Ft
40
MAD = t =1
= = 10
n 4

Note that by itself, the MAD only lets us know the mean error in a set of forecasts

n) Tracking Signal Formula - The TS measures the cumulative forecast error over n periods in terms
of MAD. The Tracking Signal or TS is a measure that indicates whether the forecast average is
keeping pace with any genuine upward or downward changes in demand. Depending on the
number of MADs selected, the TS can be used like a quality control chart indicating when the
model is generating too much error in its forecasts. The TS formula is:

RSFE Running sum of forecast errors

TS = =
MAD Mean absolute deviation
n

Actual Demand t Forecast Demandt

TS t 1
MAD

36
 - If the forecasting model is performing well, the TS should be around zero
- The TS indicates the direction of the forecasting error; if the TS is positive - increase the
forecasts, if the TS is negative -- decrease the forecasts.
- The value of the TS can be used to automatically trigger new parameter values of a
model, thereby correcting model performance.
- If the limits are set too narrow, the parameter values will be changed too often.
- If the limits are set too wide, the parameter values will not be changed often enough and
accuracy will suffer.

o) Causal Methods
- Demand of the product or service is assumed to be caused by other explanatory variables
- Some of the explanatory variables can be leading or lagging indicators
- If the demand can be estimated as a function of the causal or explanatory variables, it can be
forecast if the future values of these variables are known
- Generally useful for medium range forecasts
- Causal Methods - Regression simple or multiple
- Simultaneous Equations models
- Simulation

p) Simple Linear Regression Model

Yt = a + bx

Yt - the regressed forecast value or dependent variable in the model

a - the intercept value of the regression line
b - is similar to the slope of the regression line. However, since it is calculated with the variability
of the data in mind, its formulation is not as straight forward as our usual notion of slope.
- Simple Linear Regression Formulas for Calculating a and b
a = y - bx

b=
xy - n(y )(x )
x - n(x )
2 2

q) Web-Based Forecasting: CPFR

37
- Collaborative Planning, Forecasting, and Replenishment (CPFR) a Web-based tool used to
coordinate demand forecasting, production and purchase planning, and inventory replenishment
between supply chain trading partners.
- Used to integrate the multi-tier or n-Tier supply chain, including manufacturers, distributors and
retailers.
- CPFRs objective is to exchange selected internal information to provide for a reliable, longer
term future views of demand in the supply chain.
- CPFR uses a cyclic and iterative approach to derive consensus forecasts.

r) Web-Based Forecasting: Steps in CPFR

1. Creation of a front-end partnership agreement.
2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment

s) Evaluating Forecast-Model Performance

- Short-range forecasting models are evaluated on the basis of four characteristics:
- Impulse response
- Noise-dampening ability
- Accuracy
- Precision

t) Impulse Response and Noise-Dampening Ability

- If forecasts have little period-to-period fluctuation, they are said to be noise dampening.
- Forecasts that respond quickly to changes in data are said to have a high impulse response.
- A forecast system that responds quickly to data changes necessarily picks up a great deal of
random fluctuation (noise).
- Hence, there is a trade-off between high impulse response and high noise dampening.

u) Accuracy and Precision

- Accuracy and precision are the typical criteria for judging the performance of a forecasting model
- Accuracy measures the performance of the forecasting model on an average
- Precision measures how well the forecasted values match the actual values

v) Forecast Errors
et = Forecast error in period t
= (Actual Demand in period t Forecast for period t)
= Dt Ft

w) Monitoring Accuracy or Bias - Accuracy can be measured by one of the following:

38
 1 n
Average Error (AE) et
n t 1

Running Sum of Forecast Errors (RSFE)

et
t 1

x) Monitoring Precision
- Precision of a forecasting model needs to be monitored to assess the confidence you can have in
its forecasts and changes in the market may require reevaluation of the approach
- Precision can be measured in several ways
- Mean absolute deviation (MAD)
Sum of absolute deviation for n periods
MAD =
n n
Actual Demand t Forecast Demandt
MAD t 1
n
1 n
et
n t 1
1 n 2
-
et
Mean squared error (MSE)
n t 1

1 n et
- Mean Absolute Percentage Error (MAPE) 100
n t 1 Dt
A small value for MAD, MSE or MAPE means actual demand figures are tightly grouped
around the forecast figures and error range is small.

y) Criteria for Selecting a Forecasting Method

- Cost
- Accuracy and Precision
- Data available
- Time span
- Nature of products and services
- Impulse response and noise dampening

39
- Cost, Accuracy and Precision
- There is a trade-off between cost and precision; generally, more forecast precision can be
obtained at a cost.
- High-precision approaches have disadvantages:
- Use more data
- Data are ordinarily more difficult to obtain
- The models are more costly to design, implement, and operate
- Take longer to use
- Cost and Precision
- Low/Moderate-Cost Approaches statistical models, historical analogies, executive-
committee consensus
- High-Cost Approaches complex econometric models, Delphi, and market research
- Data Available
- Is the necessary data available or can it be economically obtained?
- If the need is to forecast sales of a new product, then a customer survey may not be
practical; instead, historical analogy or market research may have to be used.
- Time Span
- What operations resource is being forecast and for what purpose?
- Short-term staffing needs might best be forecast with moving average or exponential
smoothing models.
- Long-term factory capacity needs might best be predicted with regression or executive-
committee consensus methods.
- Nature of Products and Services
- Is the product/service high cost or high volume?
- Where is the product/service in its life cycle?
- Does the product/service have seasonal demand fluctuations?
- Impulse Response and Noise Dampening
- An appropriate balance must be achieved between:
- How responsive we want the forecasting model to be to changes in the actual demand data
- Our desire to suppress undesirable chance variation or noise in the demand data
z) Computer Software for Forecasting
- Primarily for forecasting
- Forecast Pro
- Autobox
- Have Forecasting modules
- SmartForecasts for Windows
- SAS
- SPSS
- SAP
- POM Software Library

40
Project Management

a) What is a Project?

A PROJECT is a sequence of unique, complex, and connected activities having one goal or purpose
and that must be completed by a specific time, within budget and according to specification.

PMI Definition:

- A project is temporary in that it has a defined beginning and end in time, and therefore defined
scope and resources.
- A project is unique in that it is not a routine operation, but a specific set of operations designed to
accomplish a singular goal. So a project team often includes people who dont usually work
together sometimes from different organizations and across multiple geographies.

Examples of Project(s): Development of software for an improved business process, Construction of a

building or bridge, Relief effort after a natural disaster, Expansion of sales into a new geographic
market etc.

And all must be expertly managed to deliver the on-time, on-budget results, learning and integration
that organizations need.

Project Characteristics
- Consists of temporary activities that have predetermined start & end dates
- Uses restricted Resources
- Has a single goal or a set of goals
- All events are to be realized to develop a single & new output
- Usually has a budget
- Usually a project manager is responsible for coordinating all activities

Hence, following are characteristics of a Project:

1. Unique One time activity
2. Non Repetitive
3. High Customization
4. Fixed/Predetermined Budgets & Timelines
5. Very Small Order Size
6. Many related activities

b) What is Project Management?

41
 Project management, is the application of knowledge, skills and techniques to execute projects
effectively and efficiently. Its a strategic competency for organizations, enabling them to tie
project results to business goals and thus, better compete in their markets.

Project management processes fall into five groups:

1) Initiating
2) Planning
3) Executing
4) Monitoring and Controlling
5) Closing/ Termination

Project management knowledge draws on ten areas:

1. Integration 2. Scope 3. Time

4. Cost 5. Quality 6. Procurement
7. Human resources 8. Communications 9. Risk management
10. Stakeholder management

c) Projects Management Activities

- Planning - goal setting, defining the project, team organization. It involves:
- Define project objective(s)
- Identify activities
- Establish precedence relationships
- Make time estimates
- Determine project completion time
- Compare project schedule objectives
- Determine resource requirements to meet objective
- Scheduling - relates people, money, and supplies to specific activities and activities to each other.
It includes the following:
- Often temporary structure
- Uses specialists from entire company
- Headed by project manager
- Coordinates activities
- Monitors schedule and costs
- Permanent structure called matrix organization
- Controlling - monitors resources, costs, quality, and budgets; revises plans and shifts resources to
meet time and cost demands. It comprises of:
- Monitoring
- Comparing
- Revising
- Taking Appropriate Action
-
d) Where Do Schedules Come From?
- Project schedules grow out of the basic document(s) that initiate a project:
- Project charter includes start and end dates and budget information

42
 - Scope statement and WBS (Work Breakdown Structure) help define what will be done
- Activity definition involves developing a more detailed WBS and supporting explanations to
understand all the work to be done
e) Work Breakdown Structure It represents the breakup/decomposition of project into smaller
activities & sub activities

f) THE SCOPE TRIANGLE

COST TIME
SCOPE
&
QUALITY

RESOURCES
g) STANDARD S-CURVE It depicts the mode in which a normal project progresses. Initially, the
project proceeds at an increasing rate with time. In the middle portion, the relation is almost
normal. Towards the end, the rate tapers & the project progresses at a slowing pace.

43
h) AGRESSIVE S-CURVE

i) THE S-CURVE TO AVOID

44
 j) Activity Sequencing
- Involves reviewing activities and determining dependencies
- Mandatory dependencies: inherent in the nature of the work; hard logic
- Discretionary dependencies: defined by the project team; soft logic
- External dependencies: involve relationships between project and non-project activities
- You must determine dependencies in order to use critical path analysis

k) Project Scheduling It primarily involves

- Identifying precedence relationships
- Sequencing activities
- Determining activity times & costs
- Estimating material & worker requirements
- Determining critical activities

l) Purposes of Project Scheduling

- Shows the relationship of each activity to others and to the whole project
- Identifies the precedence relationships among activities
- Encourages the setting of realistic time and cost estimates for each activity
- Helps make better use of people, money, and material resources by identifying critical
bottlenecks in the project

m) Scheduling Techniques
- Ensure that all activities are planned for
- Their order of performance is accounted for
- The activity time estimates are recorded
- The overall project time is developed

n) Project Management Techniques

- Gantt chart
- Critical Path Method (CPM)
- Program Evaluation and Review Technique (PERT)
Of these, the last two are Project Network Diagrams
- Project network diagrams are the preferred technique for showing activity sequencing
- A project network diagram is a schematic display of the logical relationships among, or
sequencing of, project activities

o) Gantt Chart - It is one of the most popular and useful ways of showing activities (tasks or events)
displayed against time. On the left of the chart is a list of the activities and along the top is a
suitable time scale. Each activity is represented by a bar; the position and length of the bar
reflects the start date, duration and end date of the activity. This allows you to see at a glance:
- What the various activities are
- When each activity begins and ends
- How long each activity is scheduled to last
- Where activities overlap with other activities, and by how much
- The start and end date of the whole project

45
 p) Project Control Reports These serve the following purposes:

- Detailed cost breakdowns for each task

- Total program labor curves
- Cost distribution tables
- Functional cost and hour summaries
- Raw materials and expenditure forecasts
- Variance reports
- Time analysis reports
- Work status reports

q) Network Oriented Methods

- Critical Path Method (CPM)
- DuPont & Remington-Rand (1956) A
- Deterministic task times
- Activity-on-node network construction
- Project Eval. & Review Technique (PERT)
- US Navy, Booz, Allen & Hamilton A
- Multiple task time estimates
- Activity-on-arrow network construction

r) Network Construction
- In AON, nodes represent activities & arrows show precedence relationships
- In AOA, arrows represent activities & nodes are events for points in time
- An event is the completion or beginning of an activity (consumes no time)
- A dummy shows precedence for two activities with same start & end nodes
-
s) Illustration CPM - NEW PRODUCT LAUNCH PROJECT
- List down all Activities in Order

Activity Activity Description Imm. Predecessor Estimated Duration

Code Activity (Weeks)
A Finalize package design -- 2

46
 B Set up packaging eqpt. and A 8
procure raw materials
C Produce the first batch -- 12
D Package the first batch B,C 4
E Set up the sales office -- 4
F Recruit salesmen E 4
G Train salesmen F 6
H Select retailers E 8
I Sell to retailers G,H 3
J Despatch to retailers D,I 5
K Select advt. agency E 4
L Plan advt. Campaign K 9
M Release pre-launch advts. L 1
N Conduct advt. campaign J,M 4

- Draw Precedence Diagram

A, 2 B, 8

D, 4

Start C, 12

J, 5

F, 4 G, 6

E, 4
I, 3
H, 8 N, 4 End

K, 4 L, 9 M, 1

- Prepare Activity Duration Chart

47
 Activity Duration ES EF LS LF Total Slack
A 2 0 2 3 5 3
B 8 2 10 5 13 3
C 12 0 12 1 13 1
D 4 12 16 13 17 1
E 4 0 4 0 4 0
F 4 4 8 4 8 0
G 6 8 14 8 14 0
H 8 4 12 6 14 2
I 3 14 17 14 17 0
J 5 17 22 17 22 0
K 4 4 8 8 12 4
L 9 8 17 12 21 4
M 1 17 18 21 22 4
N 4 22 26 22 26 0

Forward Pass: Early Start: ESi = Max {EFf, EFg, EFh, .}

Early Finish: EFi = ESi + ti

where f, g, h, .. are imm. predecessors of i

Backward Pass: Late Finish: LFi = Min {LSj, LSk, LSl, .}

Late Start: LSi = LFi - ti

where j, k, l, .. are imm. successors of i

and
[Total Slack]i = LSi ESi = LFi EFi

- Connect All the Activities for which Slack = 0 to Get the CRITICAL Path,which has the following
characteristics:
- Longest Path
- Shortest Time i.e. any (critical activity) activity delayed along this path will delay the
whole project.

t) Network Analysis Summary

- Draw the Project network
- A graphic view of the relationships among the required activities
- Analyze the paths through the network
- Determine the length of each path (the time required to complete each path)
- Starting at the beginning of the network and working toward the end (from left to right),
determine the ES and the EF for each activity.
- Path analysis (continued)
- Identify the critical path(s) (the longest path[s] through the network)

48
 - The critical path(s) determines how long the project will take
- Determine the slack for each activity
- Working from the end of the project network (from right to left), find the LF and the LS
for each activity
- Compute the activitys slack
Slack = LS - ES = LF - EF
- Slack is the maximum amount of time that this activity can be delay in its completion
before it becomes a critical activity, i.e., delays completion of the project

u) Difference in the Nature of Activities between

Enterprise Operation Management of Project
- Repetitive - One-time
- Comparatively low resource use rate - High resource use rate
- Process becomes familiar - Each project has different
- Statistical data available and useful problems
- Work teams well established
- Statistical data of limited use
- New people for each project
Note: For CPM, the durations given are deterministic while for PERT these are probabilistic & hence
is beyond the scope of this text.

49
 2. OPERATIONS MANAGEMENT II
Aggregate planning
The aggregate planning is concerned with setting production rates by product groups or
other broad categories for a medium term (3 to 18 months). The main purpose of aggregate
plan is to specify an optimal combination of production level, workforce level and inventory
on hand.
For example, suppose there is an organization which is into manufacturing of steel sheets of
different thickness and steel angles of various sizes. While making an aggregate plan they will
only plan for what quantity of steel in form of sheets and angles is to be produced. They wont
go into planning of how much steel sheets of a particular thickness or how much steel angles
of a particular size have to be made.

Master Production Schedule: MPS is the time phased plan specifying how many and when
the firm plans to produce each type of item. MPS is made by disaggregation of aggregate plan
into smaller periods and individual products/services.

Strategies for meeting uneven demand

1. Level workforce strategy: Under this strategy you have a constant size of
workforce while your demand may vary.
Significant aspects of this strategy are:
a. You have a stable workforce hence the employee morale remains high.
b. Varying demand is managed by:
i. Overtime
ii. Maintaining Inventory
iii. Undertime/shift cuts/ Low machine utilizations
iv. Temporary labor/contractual labor
v. Subcontracting/ outsourcing

2. Level output strategy: In this strategy we maintain a constant size of workforce

and keep on producing at a constant production rate.
Significant aspects of this strategy are:
a. constant workforce along with constant production rate
b. High inventory carrying cost
c. Varying demand is managed by:
i. Building inventories
ii. Sub contracting
iii. Back ordering/order postponement

3. Chase Strategy: In this strategy we vary our production along with the varying
demand in an attempt to catch up with it.
Significant aspects of this strategy are:
a. Production chases the demand
b. Hire people when demand increases and lay them off when demand
decreases. However, this is not good for employee morale

50
 c. Inventory carrying cost is less as you dont build excess inventory for
fulfilling orders

Techniques for aggregate planning

Techniques used for aggregate planning include:

1. Linear programming method
2. Transportation method

Both these methods are used to create an aggregate plan by minimizing the overall
production cost. In doing so various costs are taken into consideration like:
Regular time production cost
Overtime production cost
Inventory holding cost
Back ordering cost
Sub contracting cost
Hiring/laying off cost ( in case of linear programming method)

Scheduling
Scheduling lies at the heart of any manufacturing process. A schedule is a timetable for
performing activities, utilizing resources, and allocating facilities.

Scheduling Techniques

Shortest run out time first: In this sequencing method you take up the
production of those item first whose inventory is going to run out the first.
Project task scheduling: For scheduling various tasks in a project we use the
critical path method. Under this method, we first draw a network diagram based
on the dependence of activities on each other. Based on this network diagram
we do a forward pass and a backward pass to find out early start, early finish,
late start and late finish. Now slack for each activity is calculated using formula:
Slack= EF-ES or Slack= LF-LS
The series of tasks from start to end for which slack is zero is called the critical
path. The activities on the critical path have to start at ES and finish at EF in so
that the project can finish on time. All the other activities having slacks can be
postponed to some extent depending on the slack available to have optimum
schedule.
Heuristics based scheduling:
Shortest Processing time: We schedule the jobs based on their processing
times, starting with the job having minimum processing time. It helps to
minimize the flow time and WIP. However, it increases the maximum
tardiness value for the system. To overcome this truncated SPT is used
wherein after sometime; the task at the bottom of the scheduling list is put
on top and done first. This scheduling I based on a static rule.

51
 Earliest Due Date: In this method we arrange the jobs based on their due
dates. This method reduces the average tardiness but does not do so well on
mean flow time. This method is also based on a static rule.

Critical Ratio: Here we arrange the jobs in the ascending order of their
critical ratio values. The critical ratio is calculated as :
Critical ratio = Time remaining for due date
total processing time remaining
This method is based on a dynamic rule.
Slack per Remaining Operation: Here we arrange the jobs in the ascending
order of the slack. It is calculated as:
Slack= (Time for due date Remaining processing time)
No of operations remaining
This method is also based on a dynamic rule.
First come first served: In this method the orders are processed in the same
order as they are recived.

Inventory Management

Inventory management is primarily about specifying the size and placement of stocked goods.
Inventory management is required at different locations within a facility or within multiple
locations of a supply network to protect the regular and planned course of production against
the random disturbance of running out of materials or goods. The scope of inventory
management also concerns the fine lines between replenishment lead time, carrying costs of
inventory, asset management, inventory forecasting, inventory valuation, inventory visibility,
future inventory price forecasting, physical inventory, available physical space for inventory,
quality management, replenishment, returns and defective goods and demand forecasting
and also by replenishment

Models related to Inventory Management

Reorder Point Model

This model is also called the Q model of inventory management. In this
model the order of goods is triggered by the falling of stocks to a
predetermined level. The reorder point is maintained at a level such that you
are able to meet the demand during the lead time and also have some safety
stock in hand for servicing the customers in case of delay in delivery over
and above the stipulated lead time.

Reorder point = Demand during lead time + Safety Stock

The Reorder Point Model is generally used for high cost/high usage value
items of the inventory. The following graph depicts the reorder point model.

52
 Periodic Review Model
This model is also called the P model of inventory management. IN this
model the inventory is replenished only after a fixed period of time. Hence
while ordering the stock you need to decide upon how much to order so that
you dont run out of stock until the date of receipt of next order. That is you
have to have the stock which is enough to cover the period up to the next
ordering date and the lead time thereafter. This model is generally used for
the low cost items of the inventory.
The graph below shows the periodic review system model. Where
L - Lead Time
T Reorder Interval
SS - Safety Stock

53
 Single period Inventory Model

A single period inventory model is a business scenario faced by companies

that order seasonal or one-time items. There is only one chance to get the
quantity right when ordering, as the product has no value after the time it is
needed. There are costs to both ordering too much or too little, and the
company must try to get the order right the first time to minimize the
chances of a loss. The single period inventory model is often explained in
terms of the "newsboy problem." A newsboy who stands on the corner and
sells papers to passers-by must order the papers the day before. He only has
one chance to order because the papers only have any value on the day they
are published; the next day they are worth nothing. If he orders too many
he'll have to absorb the loss of the unsold papers, and if he orders too few he
will have lost profits and annoyed customers. Getting the order quantity
correct is how the newsboy makes the most profit. Based on the cost of
under stocking and the cost of over stocking, you keep in increasing your
inventory as long as the expected profit is greater than expected loss.

Analysis to categorize inventories (ABC, VED, FSN Analysis)

54
 ABC Analysis
ABC analysis is an inventory categorization method which consists in dividing
items into three categories, A, B and C: A being the most valuable items, C being the
least valuable ones. This method aims to draw managers attention on the critical
few (A-items) and not on the trivial many (C-items).

Inventory optimization is critical in order to keep costs under control within the
supply chain. Yet, in order to get the most from management efforts, it is efficient to
focus on items that cost most to the business.

The ABC approach states that, when reviewing inventory, a company should rate
items from A to C, basing its ratings on the following rules:

A-items are goods which annual consumption value is the highest. The top 70-
80% of the annual consumption value of the company typically accounts for
only 10-20% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The
lower 5% of the annual consumption value typically accounts for 50% of total
inventory items.
B-items are the interclass items, with a medium consumption value. Those 15-
25% of annual consumption value typically accounts for 30% of total inventory
items.

The annual consumption value is calculated with the formula:

(Annual demand) x (item cost per unit).

55
 Through this categorization, the supply manager can identify inventory hot spots,
and separate them from the rest of the items, especially those that are numerous
but not that profitable.

Policies based on ABC analysis:

A ITEMS: very tight control and accurate records.

B ITEMS: less tightly controlled and good records.
C ITEMS: simplest controls possible and minimal records.

For items classified under A category we may go in for reorder point inventory
management while for those under category C we may go in for a periodic review
system.

VED Analysis
In VED analysis the material is classified based on its criticality for the
production/service process. VED analysis classifies the parts as Vital, essential and
desirable. VED rankings may be given based on the shortage costs of the material which
may be quantified or qualitatively expressed. Hence the inventory of material classified
as vital needs to be closely monitored as any shortage of vital material may cause the
process to stop completely. The degree of monitoring required goes down as we move
to essential and desirable items.

FSN Analysis
This analysis is to help control obsolescence and is based on the consumption pattern
of the items. The items are analyzed to be classified as Fast-moving (F), Slow-moving
(S) and Non-moving (N) items. The Non-moving items (usually not consumed over a
period of two years) are of great importance. Scrutiny of non-moving items is to be
made to determine whether they could be used or be disposed off. The fast and slow-
moving classifications help in arrangement of stock in stores and their distribution and
handling methods.

Supply Chain Management

What is a Supply Chain?

Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors,
and customers) are linked together.
A basic supply chain consists of a company, an immediate supplier, and an immediate
customer directly linked by one or more of the upstream and down stream flows of products,
services, finances, and information.

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 An extended supply chain includes suppliers of the immediate supplier and customers of
the immediate customer, all linked by one or more of the upstream and down stream flows
of products, services, finances, and information.
An ultimate supply chain includes all the companies involved in all the upstream and
downstream flows of products, services, finances, and information from the initial supplier
to the ultimate customer.

Information Flow in a supply chain:

Supply Chain Management:

A set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and

stores, so that merchandise is produced and distributed at the right quantities, to the right
locations, and at the right time, in order to minimize system wide costs while satisfying service level
requirements.

Objective of SCM:

The primary objective is to create superior mutual value for the customer in terms of the product
and service delivered in response to customer needs and demand.

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Secondary objectives to create the value are:

Profitability
Reliability
Flexibility/Agility
Responsiveness
Turnover Rate
Communication and coordination

Supply chain process cycles:

aa

Customer Retailer Distributor Manufacturer Supplier

Customer Order Replenishment Manufacturing Procurement

Cycle Cycle Cycle Cycle

Types of supply chains

Efficient Supply Chains: They utilize strategies at creating highest cost efficiency. Elimination
of non-value added activities, scale economies, optimization techniques, capacity utilization
in production and distribution, efficient information linkages, accurate, cost effective flow of
information are certain characteristics.

Risk Hedging Supply chains: Utilize strategies aimed at pooling and sharing resources in a
supply chain so that risk in supply disruption can be shared.
Ex: A company may increase safety stock of its key component to hedge against risk of
supply disruption, and by sharing the safety stock with other companies who also need this
key component, the cost of maintaining safety stock can be shared.

Responsive Supply Chains: Utilize strategies aimed at being responsible and flexible to
changing and diverse needs of customers. Build- to order and mass customization process
are a means to meet specific needs of customers.

Agile Supply Chains: Utilize strategies aimed at being responsible and flexible to customer
needs, while risks of supply shortages or disruptions are hedged by pooling inventory and
other capacity resources. Combines strengths of responsive and hedged supply chains.

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Service supply chain:
Service supply chain and manufacturing supply chain differ in regard to role of customer and
direction of flow of delivery process. Service supply chain focus on interaction between customer
and provider while manufacturing supplychains focus on the creation and delivery of a physical
good.

Bull Whip effect

Demand variability increases as one moves up the supply chain away from the retail customer, and
small changes in customer demand can result in large variations in orders placed upstream.
Eventually, the network can oscillate in very large swings and each organization in the supply chain
seeks to solve the problem in its own perspective. This phenomenon is known as bullwhip effect,
observed across most industries result in increased cost and poorer service.

Material Requirements Planning

Computer based system

Dependent demand drives MRP

Explodes Master Schedule (MPS) into required amounts of raw materials, parts,
components and subassemblies to support MPS

Nets against current orders and inventories to develop production and purchased
material ordering schedules

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Dependent demand is caused by demand for a high level item ( say a car). A car requires 5 parts of X
and 4 parts of Y demand for X and Y are dependent demand and MRP is based on dependent
demand.

The demand for high level item ( car in our case ) is rather uncertain and is called independent
demand.

Input for MRP:

Master Production Schedule

Bill of material file
Inventory record file
Output for MRP
Order releases
Planned order releases
Changes to planned order releases

MPS:

Shows time phased requirement for all independent demand items.

Schedule often for 1 week planning periods (time buckets)

MPS may include both firm booked orders and orders for stock (based on forecasted future sales)

BOM: A listing of all of the raw materials, parts, subassemblies, and assemblies needed to produce
one unit of a product

Product structure tree: Visual depiction of the requirements in a bill of materials, where all
components are listed by levels Represented in tree form or indented form

Usual implementation: parent-child relationships, where a pointer links a parent item only to the
items it is assembled from

Low-level codes (LLC): Unique level code representing the lowest level at which the item appears in
any product structure tree

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MRP Reports:

Order release notices to execute the planned orders

Planned orders to be released at a future time

Changes in open orders

Due dates of open orders due to rescheduling

Cancellations or suspensions of open orders due to cancellation or suspension of orders on the

master production schedule

Capacity Requirement Planning: Tests MPS for feasibility

Utilizes routings to determine WorkCentre loads

If schedule feasible, recommends freezing

If schedule overloads resources, points out processes that are overscheduled

MRP I simply exploded demand (MPS) into requirement materials. Whereas MRP II has emphasis
placed on integrating Financial Planning, Marketing, Engineering, Purchasing & Manufacturing.

Overview of inputs to an MRP and reports generated by the program

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Just in Time Manufacturing
JIT: A philosophy of manufacturing based on planned elimination of waste and continuous
improvement of productivity.

The primary elements of Just-in-Time are:

to have only the required inventory when needed;

to improve quality to zero defects;

to reduce lead times by reducing setup times, queue lengths, and lot sizes;

to incrementally revise the operations themselves;

and to accomplish these things at minimum cost.

Production Systems that signal delivery from downstream stations are known as pull-production
systems.

Production Systems which push materials on downstream stations are known as push-production
systems.

JIT follows demand pull logic which has following advantages:

Low unit cost

High external quality

Good customer service

Flexibility

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JIT Objectives:
The main objective of JIT manufacturing is to reduce manufacturing lead times.

This is primarily achieved by drastic reductions in work-in-process (WIP).

100% capacity utilization is NOT the predominant objective.

The result is a smooth, uninterrupted flow of small lots of products throughout production.

The seven wastes

(1) Waste from overproduction

(2) Waste of waiting time

(3) Transportation waste

(4) Inventory waste

(5) Processing waste

(6) Waste of motion

(7) Waste from product defects

Uniform plant loading (to minimize wastes)

Maintaining stable mix of products and firm monthly schedules.

Produce some quantity of every product every day

Adjust resources to produce precisely the quantity that is needed no more, no less

Objective is to dampen the reaction waves that normally occur in response to schedule
variations

Kanban Production
At the core of JIT manufacturing at Toyota is Kanban, an amazingly simple system of
planning and controlling production.

Kan, in Japanese, means card and ban means signal.

Kanban is the means of signaling to the upstream workstation that the downstream
workstation is ready for the upstream workstation to produce another batch of parts.

http://www.processexcellencenetwork.com/lean/articles/what-is-kanban/

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Quality Management
Process capability
Process Capability Ratio Cp (USL LSL) 6

Specification limits (USL and LSL) are the characteristics of the product to be produced and the
standard deviation is the characteristic of the process being used.

Six Sigma
Six Sigma is a set of strategies, techniques, and tools for process improvement. Developed by
Motorola, it seeks to improve the quality of process outputs by identifying and removing the causes
of defects (errors) and minimizing variability in manufacturing and business processes. Processes
that operate with "six sigma quality" over the short term are assumed to produce long-term defect levels
below 3.4 Defects Per Million Opportunities (DPMO)

http://www.businessballs.com/sixsigma.htm

Statistical Process Control (SPC)

Statistical Process Control, or SPC is a method for achieving quality control in manufacturing
processes. The technique hinges on the observation that any manufacturing process is subject to
seemingly random variations, which are said to have common causes, and non-random variations,
which are said to have special causes. SPC relies on measuring variation in manufacturing output
and setting control limits based on observations of variations arising solely from common causes. A
process that is "in control" is expected to generate output that is within the control limits. If the
process produces an "out of control" point, one would not necessarily assume the process had
moved to an "out of control" state but would try to locate the special cause(s) for this condition.

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https://www.moresteam.com/toolbox/statistical-process-control-spc.cfm

***

65
 3. LOGISTICS AND SUPPLY CHAIN
Role of logistics

Every organisation has to move materials. Manufacturers have factories that collect raw
materials from suppliers and deliver finished goods to customers; retail shops have
deliveries from wholesalers; a television news service collects reports from around the
world and delivers them to viewers. Most of us live in towns and cities and eat food
brought in from the country. When you order books from a website, a courier delivers them
to your door, and when you buy a mobile phone it has probably travelled around the world
to reach you. Every time you buy, rent, lease, hire or borrow anything at all, someone has to
collect it and deliver it to. Logistics your door. Logistics is the function responsible for this
movement.

Logistics is the function responsible for all aspects of the movement and storage of
materials on their journey from original suppliers through to final customers.

Logistics support operations

Logistics manages the flow of inputs from suppliers, the movement of materials through
different operations within the organisation, and the flow of materials out to customers
Inbound or inward logistics move materials into an organisation from suppliers.

Outbound or outward logistics move materials from an organisation out to Customers

Moving materials into the organisation from suppliers is called inbound or inward logistics;
moving materials out to customers is outbound or outward logistics.

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A product is the mixture of goods and services that an organisation passes to its customers.

Materials are all the things needed to make a product, and these can be both tangible (such
as raw materials) and intangible (such as information).

Logistics is responsible for moving and storing all the materials.

SUPPLY CHAINS

A supply chain consists of the series of activities and organisations that materials move through on
their journey from initial suppliers to final customers.

Basic structure
Supply chain consists of the series of activities and organisations that materials move through on

Every product has its own unique supply chain, and this can be both long and complicated. A supply
chain in Cadbury starts with cocoa beans growing on farms and ends when hungry customers buy
bars of chocolate. A supply chain for Levi jeans starts with someone growing a field of cotton and
ends when you buy them in a shop. The supply chain describes the total journey of materials as
they move from dirt to dirt.4 Along this journey, materials may move through farmers, miners,
processors, raw materials suppliers, agents, component makers, manufacturers, assemblers,
finishers, packers, logistics centres, warehouses, thirdparty operators, transport companies,
wholesalers, retailers, and a whole range of other operations.

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Upstream in front of an organisation and moving materials inwards from original suppliers
Downstream after an organisation and moving materials outwards to final customers

The simplest view of a supply chain has a single product moving through a series of organisations,
each of which somehow adds value to the product. Taking one organisations point of view,
activities in front of it (moving materials inwards) are called upstream; those after the organisation
(moving materials outwards) are called downstream.

The upstream activities are divided into tiers of suppliers. A supplier that sends materials directly
to the operations is a first-tier supplier; one that send materials to a first-tier supplier is a second-
tier supplier; one that sends materials to second-tier supplier is a third-tier supplier, and so on back
to the original sources. Customers are also divided into tiers. One that gets a product directly from
the operations is a first-tier customer; one that gets a product from a first-tier customer is a second-
tier customer; one that gets a product from a second-tier customer is a third-tier customer, and so
on to the final customers.

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Networks and webs

Supply chains is getting more complicated, with various mergers and divisions along their
length. The reality is even more complex, as each chain can have more complex
movements, such as loops where materials are returned.

Most importantly, each organisation works with many often thousands of different
products, each of which has its own supply chain. For instance, the

French company Carrefour is Europes largest retailer and comes at the end of tens
of thousands of supply chains; Mittals steel is used by countless other companies,
Dells computers are used for huge amounts of information transfer. This leads to Pecks7
view of a rather nebulous flow of materials, goods and information (including money), that
pass within and between organisations, linked by a range of tangible and intangible
facilitators, including relationships, processes, activities, and integrated information
systems.

Because of the complexity, some people argue that the term supply chain
gives too simple a view and they prefer to talk about a supply network or supply
web. In reality, these terms still describe the same structure and functions, and differences
are largely a matter of definition. In this book we stick to the usual name of supply chain,
and recognise that it refers to a complex pattern of movements and relationships.

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Activities of logistics

Logistics is a broad function which consists of a series of related activities. You can imagine
these by following some materials on their way through an organisation, when you would
typically see the following:

Procurement or purchasing. The flow of materials into an organisation is usually initiated

by a purchase order sent to a supplier. To prepare this a purchasing, or procurement,
department finds suitable suppliers, negotiates terms and conditions, organises delivery,
arranges insurance and payment, and does everything needed to get materials into the
organisation. In the past, this was a clerical job that processed the transactions of orders,
but this is now largely automated and procurement focuses on its role as the main link with
upstream activities.
Inward transport or traffic moves materials from suppliers to an organisations
receiving area. For this, managers have to choose the type of transport (road, rail, air, etc.),
find the best transport operator, design a route, make sure that all safety and legal
requirements are met, ensure deliveries on time, keep costs low, and so on.

Receiving makes sure that materials delivered match an order, acknowledges

receipt, unloads delivery vehicles, inspects materials for damage, and sorts them.

Warehousing or stores moves materials from the receiving area into storage and makes
sure that they are available when needed. Warehousing also looks after stored materials,
giving the right conditions, treatment and packaging to keep them in good condition. This is
particularly important with, say, frozen food, drugs, alcohol in bond, chemicals, animals,
and dangerous goods

Stock control sets the policies for inventory. It considers the materials to store, overall
investment, customer service, stock levels, order sizes, order timing, and so on.

Material handling is the general term for moving materials within an organisation.
Every time that materials are moved around operations, it uses materials handling, whose
aim is to give efficient movements, with short journeys, using appropriate equipment, with
little damage, and using special packaging and handling where needed.

Order picking finds and removes materials from stores. Typically, materials needed for a
customer order are located, identified, checked, removed from racks, consolidated into a
single load and moved to a departure area for loading onto delivery vehicles.

Packaging wraps materials to make sure that they are properly protected during
movements so that damage is kept to a minimum.

Outward transport takes materials from the departure area and delivers them
to customers (with concerns that are similar to inward transport).

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Physical distribution a general term for the activities that deliver finished goods to
customers

Physical distribution is a general term for the activities that deliver finished goods to
customers, including outward transport. It is often aligned with marketing and forms an
important link with downstream activities.

Recycling, returns and waste disposal. Even when products have been delivered to
customers, the work of logistics may not be finished. Sometimes there are problems with
delivered materials and they have to be collected and brought back (perhaps because they
were faulty, or too many were delivered, or they were the wrong type). Sometimes
associated materials such as pallets, delivery boxes, cable reels and containers are returned
to suppliers for reuse. Sometimes materials are brought back for recycling, such as metals,
glass, paper, plastics and oils. Other materials cannot be recycled but are returned for safe
disposal, such as dangerous chemicals. Activities that return materials back to an
organisation are called reverse logistics (compared with forward logistics that made the
original deliveries).

Location. Logistics activities are usually spread over many locations. For instance, stocks
of finished goods can be held at the end of production, moved to nearby warehouses, sent
to regional depots, put into stores near to customers, passed on to third parties, or a range
of alternatives. Managers have to find the best locations for each activity, and consider
related questions about the size and number of facilities.

Communication. Alongside the physical flow of materials is the associated flow of

information. This links all parts of the supply chain, passing information about products,
customer demand, materials, movements, schedules, stocklevels, availability, problems,
costs, service levels, and so on. Coordinating the flow of information is always difficult, and
logistics managers often describe themselves as processing information rather than
moving goods.

Effects on financial performance

As an expensive function, logistics has a clear impact on an organisations financial

performance. In this light, the Institute of Supply Management estimate that every 1%
saved in materials delivery cost gives the same benefit as a 5% increase in sales.24
You can see the financial importance of logistics from a companys return on
assets (ROA), which is defined as the pre-tax profit divided by the value of assets employed.
Return on assets = profits earned assets employed
This gives a measure of how well an organisations resources are used, and higher
values usually suggest better performance.

Assets are described as either current (cash, accounts receivable, stocks, etc.) or
fixed (property, plant, equipment, etc.). Both of these depend on logistics. For
instance, improving the flow of materials reduces the amount of stock held, and
this lowers the value of current assets. Similarly, improving the utilisation of facilities
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and equipment reduces the amount needed, thereby reducing fixed assets.
ROA = (units sold selling price profit margin)/(current assets + fixed assets)

1. Current assets. More efficient logistics reduces the current assets, primarily through
lower stock levels. Then lower investment in stock can free up cash for more productive
purposes and reduce the need for borrowing.
2. Fixed assets. Its warehouses, transport fleets, materials handling equipment and other
facilities, mean that logistics is a heavy user of fixed assets. Using these more efficiently can
bring considerable savings.
3. Sales. By supplying a more attractive product, or delivering them efficiently to improve
customer service, logistics can increase sales and give higher market share.
4. Profit margin. More efficient logistics reduce operating costs and directly increase profit
margins.
5. Price. Logistics can improve the perceived value of products perhaps making them
more readily available, enabling faster delivery, or shortening lead times. This increased
value can allow premium prices.

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 4. SERVICE OPERATIONS MANAGEMENT

Service Industry Basics

Service provisioning: An economic activity that does not leads to ownership, and this is what it
differentiates from providing physical goods.

Product Service Bundle:

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Service Process Matrix

It is based on degree of interaction/customization and labour intensity.

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Service Centre Cost Structure

The costs are primarily divided into three broad categories:

1. Labour Cost
a. Direct Labour Cost(Wages, benefits, incentives)
b. Indirect Labour Cost
c. Hiring & Training Cost
2. Equipment Cost
a. Hardware Cost
b. Software Cost
c. Connectivity Cost
d. Equipment maintenance Cost
3. Other Cost
a. Rent, sales & marketing cost
b. Office maintenance
c. Depreciation and Interest on Capital Expenditure and other Financial Cost

Costing model in ITES-BPO

1. Cost per FTE(Full time equivalent)

2. Cost per minute
3. Cost per call
4. Cost per resolution
5. Cost per customer
6. Cost per satisfied customer

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Basics of Forecasting

What do we need to forecast?

The arrival pattern of the orders

The transaction volumes

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 Handle Time
Shrinkages (ie.. Unplanned absenteeism, Attrition, reduction in available workforce)

How to develop a forecasting model?

Forecasting Techniques

1. Time Series Forecasting (Based on past values)

a. Simple Moving average: Simply takes a certain number of past periods and add
them together; then divide by the number of periods

MA(t+1) = [Dt + Dt-1 + ... +Dt-n+1] / n

b. Weighted Moving average:
Weighted MA(3) = w1.Dt + w2.Dt-1 + w3.Dt-2
where the weights are any positive numbers such that:
w1 + w2 + w3 = 1
c. Moving average with a trend

2. Causal (Based on past values and other variables)

We follow a regression analysis for calculating the output of the forecast

3. Smoothening Methods
a. Exponential Smoothing:
Only when there is Level
Ft+1 = Dt + (1 - ) Ft
b. Holt's Method (Double Exponential):
Non-seasonal, but has Level and Trend

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 Finds Level component and Trend component separately, then adds
c. Holt-Winters' Forecasting:
Multiple Seasonality with Trend
Finds Level, Trend and Seasonality components separately, then combines.

Demand Requirement Planning

In order to schedule the resources hired we would need to forecast the demand for those resources.
Hence, the next step in capacity planning is to forecast the Service level or the shrinkages of the
resources at hand.
Example 1

You are supposed to get some work from a client / business unit. The service provided is customer
service for payment related calls that need to be serviced from your centre.
Demand Side: Average weekly volume = 47464 calls
10% of these are cold transferred back to the client
Average Talk + Hold Time (ATT) = 185 sec
After-Call Wrap Time (ACW) = 20 sec
Supply Side: 7.5 hours a day, 5 days, 80% resource efficiency
Thus the number FTE required on the shop floor would be
(47464 * (1 - 0.1) * (185 + 20)) / (7.5 * 3600 * 5 * 0.8) = 81
Now while recruiting these people:
4 weeks training, attrition of 2% every week.
30% people offered a job do not take it.
50% of people interviewed do not make it to offer stage
Thus the total number of people to be interviewed is
81 / [(0.98)4 * (1 0.3) * (1 0.5)] = 251
Thus, a total of 251 people have to be interviewed for recruiting 81 FTEs.

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Service Quality

The 5Ps of operation management:

People
Process
Plant
Parts
Planning & Control

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Process in a Service industry
A process is a systematic series of actions directed towards the achievement of a goal Juran
A Process is a series of definable, repeatable, and measurable tasks leading to a useful result.

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Service Quality measurement

What type of measure is it?

Effectiveness Measures:
How well a process meets the requirements?
Did I give the correct answer to an incoming call?
Was the customers query resolved?
CSAT, FCR, On-time, Turn-around time, Responsiveness
Efficiency Measures:
How well resources are allocated to execute the process
Cost per transaction
Time per transaction

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 Utilization, Productivity, Attrition, Absenteeism, ESAT

Parameters to be measured:
Speed and Revenue
Inbound metrics: ASA, Service Level, Abandon Rate (ABA)
Outbound metrics: Contact Rate, Dialer Effectiveness

Quality
Customer satisfaction (CSAT) and dissatisfaction
Critical and non-critical accuracy, Number of defects, Monitoring score
FCR (Resolution), Conversion Rate

Cost
Cost per unit, cost per transaction
Attrition, Absenteeism (unplanned)

Yield / Productivity
AHT, APT, Units per hour
Utilization, Occupancy

Key Terms:

Handle Time: Talk + Hold + Wrap

Talk: Talking to customer
Hold: Customer on Hold / Advisor on Research
Wrap: Updating records after call, notes etc.

Idle Time: Waiting for a call. Also called Available time

AUX Time: Break, Coaching, Training, Meetings

Some AUX time can be productive e.g. Making Outbound contact / callback to customers
In these cases, Outbound time can be included in the value added time

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Voice of customer

83
Surveys are used as measure of VOC. In order to measure the customer satisfaction we use the top
two boxes approach and for measuring customer dissatisfaction we go for %x bottom boxes
approach (Measurement is done on a 5 point scale).

Tools used for analysis of surveys

1. Pareto Chart

A Pareto chart, named after Vilfredo Pareto, is a type of chart that contains both bars and a line
graph, where individual values are represented in descending order by bars, and the cumulative
total is represented by the line.

84
Simple example of a Pareto chart using hypothetical data showing the relative frequency of reasons
for arriving late at work
The left vertical axis is the frequency of occurrence, but it can alternatively represent cost or
another important unit of measure. The right vertical axis is the cumulative percentage of the total
number of occurrences, total cost, or total of the particular unit of measure. Because the reasons are
in decreasing order, the cumulative function is a concave function. To take the example above, in
order to lower the amount of late arriving by 78%, it is sufficient to solve the first three issues.
The purpose of the Pareto chart is to highlight the most important among a (typically large) set of
factors. In quality control, it often represents the most common sources of defects, the highest
occurring type of defect, or the most frequent reasons for customer complaints, and so on.
Wilkinson (2006) devised an algorithm for producing statistically based acceptance limits (similar
to confidence intervals) for each bar in the Pareto chart.
These charts can be generated by simple spreadsheet programs, such as OpenOffice.org Calc and
Microsoft Excel and specialized statistical software tools as well as online quality charts generators.

2. Scatter Plot

A scatter plot, scatterplot, or scatter graph is a type of mathematical diagram using Cartesian
coordinates to display values for two variables for a set of data. The data is displayed as a collection
of points, each having the value of one variable determining the position on the horizontal axis and
the value of the other variable determining the position on the vertical axis.
A scatter plot is used when a variable exists that is below the control of the experimenter. If a
parameter exists that is systematically incremented and/or decremented by the other, it is called
the control parameter or independent variable and is customarily plotted along the horizontal axis.
The measured or dependent variable is customarily plotted along the vertical axis. If no dependent
variable exists, either type of variable can be plotted on either axis and a scatter plot will illustrate
only the degree of correlation (not causation) between two variables.

85
A scatter plot can suggest various kinds of correlations between variables with a certain confidence
interval. For example, weight and height, weight would be on x axis and height would be on the y
axis. Correlations may be positive (rising), negative (falling), or null (uncorrelated). If the pattern of
dots slopes from lower left to upper right, it suggests a positive correlation between the variables
being studied. If the pattern of dots slopes from upper left to lower right, it suggests a negative
correlation. A line of best fit (alternatively called 'trend line') can be drawn in order to study the
correlation between the variables. An equation for the correlation between the variables can be
determined by established best-fit procedures. For a linear correlation, the best-fit procedure is
known as linear regression and is guaranteed to generate a correct solution in a finite time. No
universal best-fit procedure is guaranteed to generate a correct solution for arbitrary relationships.
A scatter plot is also very useful when we wish to see how two comparable data sets agree with
each other. In this case, an identity line, i.e., a y=x line, or an 1:1 line, is often drawn as a reference.
The more the two data sets agree, the more the scatters tend to concentrate in the vicinity of the
identity line; if the two data sets are numerically identical, the scatters fall on the identity line
exactly.
One of the most powerful aspects of a scatter plot, however, is its ability to show nonlinear
relationships between variables. Furthermore, if the data is represented by a mixture model of
simple relationships, these relationships will be visually evident as superimposed patterns.

3. Cause effect diagram

Ishikawa diagrams (also called fishbone diagrams, herringbone diagrams, cause-and-effect

diagrams, or Fishikawa) are causal diagrams created by Kaoru Ishikawa (1968) that show the
causes of a specific event. Common uses of the Ishikawa diagram are product design and quality
defect prevention, to identify potential factors causing an overall effect. Each cause or reason for
imperfection is a source of variation. Causes are usually grouped into major categories to identify
these sources of variation. The categories typically include:
People: Anyone involved with the process
Methods: How the process is performed and the specific requirements for doing it, such as policies,
procedures, rules, regulations and laws

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Machines: Any equipment, computers, tools, etc. required to accomplish the job
Materials: Raw materials, parts, pens, paper, etc. used to produce the final product
Measurements: Data generated from the process that are used to evaluate its quality
Environment: The conditions, such as location, time, temperature, and culture in which the
process operates
Causes can be derived from brainstorming sessions. These groups can then be labelled as categories
of the fishbone. They will typically be one of the traditional categories mentioned above but may be
something unique to the application in a specific case. Causes can be traced back to root causes.

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 4. Control Impact Matrix

5. Bond Factor and VSF

It is found that the best approach to measuring variation is to start simple and then add complexity
as management becomes more experienced with measuring and managing variation
A Very Simple Measure of Variation
Range / Average
Too much variation when > 0.70
We call this the Bond Factor

A More Complex Measure of Variation

Standard Deviation / (Average / 6)

Too much variation when > 1.0
This is the Variance Significance Factor or VSF

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 6. Box Plot
Box-plots provide a wonderful tool for viewing the behaviour of a data set or comparing two or
more sets. They are especially useful for small data sets when a histogram could be misleading. The
box plot is a graphic presentation that divides quantitative data into quarters.
It is robust to outliers or extreme observations.
Also helps identify outliers.
Works well for skewed data.

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 7. Histogram
A histogram is a graphical representation of the distribution of data. It is an estimate of the
probability distribution of a continuous variable and was first introduced by Karl Pearson. A
histogram is a representation of tabulated frequencies, shown as adjacent rectangles, erected over
discrete intervals (bins), with an area equal to the frequency of the observations in the interval. The
height of a rectangle is also equal to the frequency density of the interval, i.e., the frequency divided
by the width of the interval. The total area of the histogram is equal to the number of data. A
histogram may also be normalized displaying relative frequencies. It then shows the proportion of
cases that fall into each of several categories, with the total area equalling 1. The categories are
usually specified as consecutive, non-overlapping intervals of a variable. The categories (intervals)
must be adjacent, and often are chosen to be of the same size. The rectangles of a histogram are
drawn so that they touch each other to indicate that the original variable is continuous.
Histograms are used to plot the density of data, and often for density estimation: estimating the
probability density function of the underlying variable. The total area of a histogram used for
probability density is always normalized to 1. If the length of the intervals on the x-axis is 1, then a
histogram is identical to a relative frequency plot.

8. Run Chart
A run chart, also known as a run-sequence plot is a graph that displays observed data in a time
sequence. Often, the data displayed represent some aspect of the output or performance of a
manufacturing or other business process.
Run sequence plots are an easy way to graphically summarize a univariate data set. A common
assumption of univariate data sets is that they behave like:

90
 random drawings;
from a fixed distribution;
with a common location; and
with a common scale.

With run sequence plots, shifts in location and scale are typically quite evident. Also, outliers can
easily be detected.
A run is a series of point on the same side as the median. A run can be any length from one point to
many points. Too few or too many runs are important signals of special causes they indicate
something in the process has changed.
Typical special causes identified:

Clusters
Oscillations
Mixtures
Trends

Run about the median: Number of consecutive points on the same side of the median.
Runs up or down: Number of consecutive points moving in the same direction.

Run Chart Decision Table:

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 9. Control Chart

A control chart plots time ordered data (Just like run charts) with statistically determined control
limits are drawn on the plot. The centre line calculation uses the mean not the median.
Why use Control Charts?
Statistical control limits establish process capability
Statistical control limits are another way to separate common cause and special cause variation
Can be used for almost any type of data over time
Provides a common language for discussing process performance
Track performance over time and gives early warning indicators
Evaluate progress after process changes/improvements
Focus attention on detecting and monitoring process variation over time

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A control limit defines the bounds of common cause variation in the process. A control limit is the
tool we use to help us take the right actions. Represents what a process is actually capable of doing.
It can be considered for an early warning signal.

93
Cost of Quality
Cost of quality is essentially the cost of a defect.

Cost area Description Examples

Quality planning
Statistical process control
Investment in quality-
related information
systems
Prevention Arise from efforts to keep defects from
costs occurring at all Quality training and
workforce development
Product-design
verification
Systems development
and management
Costs of control (Costs of
Test and inspection of
conformance)
purchased materials
Acceptance testing
Inspection
Testing
Appraisal Arise from detecting defects via inspection, Checking labor
costs test, audit Setup for test or
inspection
Test and inspection
equipment
Quality audits
Field testing

Scrap
Arise from defects caught internally and
Internal Rework
dealt with by discarding or repairing the
failure costs Material procurement
defective items
costs

Costs of failure of control

Complaints in warranty
(Costs of non-conformance) Complaints out of
warranty
External Arise from defects that actually reach Product service
failure costs customers
Product liability
Product recall
Loss of reputation

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Sampling

Sampling is done to study a representative portion of population

Types of sampling include:
CENSUS. Sometimes a population will be sufficiently small enough that every member can be
sampled.
When the population is too large, you want to choose a representative sample. There are
probability and nonprobability methods for sampling. The aim is to minimize the introduction of
bias, so that the sample closely matches the population.
SIMPLE RANDOM SAMPLING allows every member of a population to have an equal chance of
being included in the sample (a probability sampling method). They can be chosen by computerized
random number generators, tables of random numbers, or you can simply draw names/numbers
out of a hat.
STRATIFIED RANDOM SAMPLING divides the population into groups or strata, based on
knowledge of the populatione.g., types of patients, gender, race, etc. The proportion of cases
randomly drawn within each strata should be the same as in the larger population and drawn using
a random method (probability sampling).
SYSTEMATIC SAMPLING, also called the Nth name selection technique, draws every Nth record
from a population. As long as the list does not contain a hidden order, this technique is as good as
random sampling.
JUDGMENT or RATIONAL SAMPLING is used more frequently in quality improvement studies,
relying on the knowledge of those with process knowledge. In this mode, data is looked at over time
in a control or Shewhart chart (called analytical studies). Data are selected in a non-random method
(nonprobability sampling), taking small repeated samples from a process over time. This could be
daily or monthly, for example, drawing a small number of cases (4-7 recommended) each time, for a
minimum of 25 data points (Raymond Carey, Improving Healthcare with Control Charts, 2003). The
problem with this method is that the sampling error is unknown.
COVENIENCE SAMPLING is just thatyou look at easy-to-view cases to allow you to get a feel for
your population, inexpensively. It is often used in the exploratory stage of a study, just to get some
gross estimates.

Calculating the sample size:

S = ( z / e )2

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Where
S = the sample size
z = a number relating to the degree of confidence you wish to have in the result.

95% confidence - most frequently used and accepted.

z = 2.58 for 99% confidence,
z = 1.96 for 95% confidence,
z = 1.64 for 90% confidence and
z = 1.28 for 80% confidence.
e = the error you are prepared to accept, measured as a proportion of the standard
deviation (accuracy) i.e. The Confidence Interval

Six Sigma concept

96
New Service design

The generic and heuristic approaches to service design stem from the following areas that a service
manager tries to address

97
98
 5. STATISTICS

Why Statistics in Operations?

Statistics forms an integral part of Operations Management especially in the Quality domain. For
example, Six Sigma is based on statistics, identifying problems and verifying solutions by employing
statistical methods.
The following text attempts to summarize important concepts of statistics which are applicable in
domains of finance, operations as well as marketing research.

Basic Concepts

Random Variable: (Also called stochastic variable)

i. It is a variable whose value is subject to variation due to chance or randomness.
ii. It could be either discrete (can be counted) or continuous.
iii. It has a set of possible values that it can assume, each of which has a probability
associated with it. This is called Probability Distribution of the random variable.
Discrete Variables: Can take on only certain values along an interval
i. the number of sales made in a week
ii. the volume of milk bought at a store
iii. the number of defective parts
Continuous Variables: Can take on any value at any point along an interval
i. the depth at which a drilling team strikes oil
ii. the volume of milk produced by a cow
iii. the proportion of defective parts

Probability Distribution: Based on whether the random variable is discrete of continuous, the
following two types of probability distributions are possible.
i. Probability Mass Function is the probability distribution for a discrete random variable.
ii. Probability Density Function is the probability distribution for a continuous random
variable.

Types of Probability Distribution:

i. Discrete:
n
Binomial Distribution: P(x) p x (1 p)n x
x
Negative Binomial Distribution
Geometric Distribution
Hyper geometric Distribution

e x
Poisson Distribution: P(x)
x!

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 ii. Continuous:
Uniform Distribution
Exponential Distribution
Normal Distribution

Discrete Probability Distribution

There are the distributions in which outcomes are not continuous. When we deal with discrete
variables, there is a probability value assigned to each event. These values must be between 0 and
1, and they must sum to 1.
These distributions follow the three rules required of all probability distributions:
1. the events are mutually exclusive and collectively exhaustive
2. the individual probability values are between 0 and 1 inclusive
3. the total of the probability values sum to 1
Expected Value of the Discrete Probability Distribution:
The expected value, a measure of central tendency, as a weighted average of the values of the
variable

Variance:
The variance is a number that reveals the overall spread or dispersion of the distribution:

Normal Distribution

It is a very important continuous distribution, since several random variables in real life scenarios
can be easily approximated to the Normal Distribution. If a variable is approximately normally
distributed we can make inferences about values of that variable. The normal distribution and its
properties are well known, and if our variable of interest is normally distributed, we can apply what

100
we know about the normal distribution to our situation, and find the probabilities associated with
particular outcomes.

Definition: It is the distribution that approximates the probability of a continuous random variable
in some context to lie between two real numbers. It is also called the Gaussian Distribution or the
Bell curve.

Mathematical Formula:
It is denoted by X ~ N(, 2); where:
o X : Continuous Random Variable
o N(): Normal Distribution
o : Mean of the Distribution
o 2: Variance of the Distribution

Properties:
Forms a symmetric bell-shaped curve
Area under the curve is 1
Curve is asymptotic to the x axis
Mean, median, and mode are located at the midpoint of the x axis

Usage:
Since we know the shape of the curve, we can calculate the area under the curve. The percentage of
that area can be used to determine the probability that a given value could be pulled from a given
distribution and obtain the p-value.
Central Limit Theorem:
A statistical theory that states that given a sufficiently large sample size from a population with a finite level
of variance, the mean of all samples from the same population will be approximately equal to the mean of the
population. Furthermore, all of the samples will follow an approximate normal distribution pattern, with all
variances being approximately equal to the variance of the population divided by each sample's size.

101
This is useful especially in Hypothesis testing, and also reiterates how important Normal Distribution really
is.

Standard Normal Distribution

The Normal distribution in a standardized form is called a standard normal distribution denoted
by Z. It is a probability distribution that can tackle any unit of measurement. It is given by:

x
Z ~ N(0, 1) or z

Please note that z is a pure number independent of the unit of measurement. The random
variable z follows a normal distribution with mean=0 and standard deviation =1. This enables one
to compare apples and oranges, since theyre standardized and made comparable.
Usage:
First convert the original variable in a given problem into z. It is only a transformation of scale. The
probability table for z is available for computing the necessary probabilities for a given situation.

Hypothesis Testing
A statistical hypothesis is a statement about a population parameter which may or may not be
correct.
How to carry out Hypothesis testing?

102
 A null hypothesis, denoted by H0, is an assertion about one or more population parameters.
This is the assertion we hold to be true until we have sufficient statistical evidence to
conclude otherwise.
Ex: H0: = 100
The alternative hypothesis, denoted by H1, is the assertion of all situations not covered by
the null hypothesis.
Ex: H1: not equal to 100
NOTE: H0 and H1 are:
o Mutually exclusive
Only one can be true.
o Exhaustive
Together they cover all possibilities, so one or the other must be true.

Type I & Type II Error

The errors are summarized in the following table

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 The probability of making a Type I error is called the level of significance of the test. It is
designated by the Greek letter alpha . If you set = 0.05 and happen to reject the null
hypothesis at this level, there is a 5% probability that you have rejected the null hypothesis
when in fact it is true!
(1-) is the confidence level that says that you are right in your assessment (1-)% of the
times.
The probability of making a Type II error is symbolized by the Greek letter .
1- is called the power of the test. The power of the test is the probability of rejecting the
null hypothesis when in fact it is false.
NOTE: A decrease in will lead to an increase in , and an in increase in will lead to a
decrease in .

One Tailed and Two Tailed Tests

A directional hypothesis is one in which the population parameter is structured to be

greater than or equal to or less than or equal to a specified value. This is known as a one-
tailed test.
A non-directional hypothesis is one in which the population parameter is structured to be
equal to a specified value. This is known as a two-tailed test.

P-Value
The p-value is the probability of obtaining a value of the test statistic as extreme as, or more
extreme than, the actual value obtained, when the null hypothesis is true.
The p-value is the smallest level of significance, a, at which the null hypothesis may be
rejected using the obtained value of the test statistic.
NOTE: When the p-value is less than alpha , reject H0

Thumb Rules:

When the p-value is smaller than 0.01, the result is called very significant.
When the p-value is between 0.01 and 0.05, the result is called significant.
When the p-value is between 0.05 and 0.10, the result is considered by some as
marginally significant (and by most as not significant).
When the p-value is greater than 0.10, the result is considered not significant.
P-Value for two-tailed tests:
In a two-tailed test, we find the p-value by doubling the area in the tail of the distribution beyond
the value of the test statistic.

104
 The further away in the tail of the distribution the test statistic falls, the smaller is the p-
value and, hence, the more convinced we are that the null hypothesis is false and should be
rejected.
In a right-tailed test, the p-value is the area to the right of the test statistic if the test statistic
is positive.
In a left-tailed test, the p-value is the area to the left of the test statistic if the test statistic is
negative.
In a two-tailed test, the p-value is twice the area to the right of a positive test statistic or to
the left of a negative test statistic.
For a given level of significance, Alpha:
Reject the null hypothesis if and only if Alpha> p-value

105
Which test to use for Hypothesis Testing?
1. Univariate: (A single Population)

2. Bivariate: (Two different populations)

106
 For a small sample,

p1 p 2
Difference Between population proportions: Z =
1 1
p(1 p)
n1 n2

107
 6. QUESTIONS ON OPERATIONS
Questions Answers

Aggregate Planning estimate of workforce,

inventory based on customer
reqt and capacity lim.

How you will solve an assignment problem with 4 jobs and 3 workers Dummy worker
Different types of layouts
A company has a lot of WIP inventory lying
around and people seem to be working
but still productivity isn't up. As a consultant
how would you go about analysing this?

Push & Pull Strategy

Prinicples on which JIT works Pull, one-piece flow, removing
waste, ensuring quality at
source.
Diff between services and manufacturing
Define Services
Characteristics of Linear Programming Deterministic, additivity,
proportionality, linearity.
Smoothing Constant (alpha) should be high or low? Low
Application of OR in Finance Valuation, funding decisions
Apply a model of OR in Marketing? Transportation
Formula for total cost of Inventory? Qc/2 + dc/q + dm.
EOQ? (2ds/h)^0.5
What type of problem is this( linear / nonlinear) why?
How do you get EOQ? ( what are various cost involved)
Why does Cost/unit of inventory not affect EOQ (give matematical Cost/unit is constant so
reason) differentiation makes it zero
MIS and DSS (difference)? MIS- Routine, DSS-Advanced
Simplex problem graphical representation cases, bounded,unbounded
some distribution with respect to Queing <dont rem> Poisson
what is Linear programing and What benefit it gives
which optimization process will we use for allocating 5 projects if
intrested students are 6
Explain assignment model hungarian method
how many iterations before reaching an optimal solution in simplex
problem?
EOQ formula and assumptions
What are corner points?
Inventory models
What is Push-pull system?

108
Why do manufacturers keep inventory when they know that it is an
overhead for them?
What is Unbounded region in LP
What is JIT and name a tool for it Kanban, andon is for jidoka.
Define Quality Dont give own definitions/
explainations.
He wanted:
Fitness for Use; Conformance
to specifications

I have some random numerical data. How will I forecast the data for Different Forecasting models
next period?
Difference between y=a+bx & y=a+bt? both same..for regression; 1st
is causal and next is time series
regression

2 types of Forecasting models? Causal and Time series

What is MRP?
MRP, MRP 2 Difference and interlinking between them
bullwhip effect, 2 types of suppy chain, basic principle of simplex efficient and responsive
method, assignment problem
Under what conditions can the simplex have solution in finite number
of iterations, Aggregate Resource Planning, Difference between MRP
and MRP II, What is MPS
SCM and its benefits
what are 2 key principles of JIT zero inv, zero defect
card system of kanban
wat is CPM?
which type of layout is used during car manufacturing & why?
What are the necessary steps in JIT & what does it reduces? (with
respect to the cycle time)
Push and Pull system
EOQ, What other Order policy you know
Do every Primal has a Dual solution, special cases if any
BOM, Aggregare Planning
What are cellular layouts
What are diff types of layouts, use of them
What is lot size the size of batch ordered
map service industry into a supply chain system how does it differ Inventory is info. Which flows
from clients, analysts,
developers.
give the input-transformation- output model in a telecom industry
ops tool/technique that can be used to manage crowd at counters Queueing theory, simulation
efficeintly in banks
ops tool/technique that can be used to make decisions on where to AHP, Facilities location,
locate retail store outlets in the city. warehouse mgmt..
What is Bullwhip Effect?

109
Why is it called Bullwhip ?
Discussion on the risks involved in the supply chain of a global firm
What is JIT ?
Discussion on Toyota's implementation of JIT
Bullwhip effect, its causes and methods to reduce them
Quality circles
Drivers of supply chain?
Apply an OR concept in SCM.
What is transportation problem in SCM, what are the different
variations to it?
What are the different types of networking methods in SCM?
Tell the difference betweem Milk run and Hub-spoke.
Formulate the Minimum cost and maximum profit models of
Transportation in SCM? What are the differences in their constraints?
What is MRP, MPS, BOM?
what is six sigma
what is offcentering? what is lean?
explain muda,muri,mura. what is product and process layout?
What is the significance of a dual in linear programming?
What are shadow prices?
Why is null hypothesis called null?
Is the null hypothesis made for the population or sample?
Differentiate between population, sample and statistic

110
 7. GLOSSARY
This glossary includes terms pertinent to operations management. It was compiled to assist
operations management students in courses at the University of Michigan Business School.
Source: The website of the business school.
ABC: See Activity Based Costing.

ABSENTEE POLICY: The policy that covers allowed absence from the workplace and the
penalties that accrue for excessive absence. This policy is typically part of the employee
handbook.

ACCOUNTS PAYABLE: Liabilities that result from a purchase of goods or services on an open
account. Amounts owed to suppliers of goods or services.

ACCOUNTS RECEIVABLE: Amounts owed to a company by customers as a result of delivering

goods or services and extending credit in the ordinary course of business.

ACQUISITION: Typically the purchase of a company or a significant business asset. In the

defense industry, acquisition means the purchase of products and systems.

ACTIVITY: Generally the processing at a work station or equipment location

ACTIVITY BASED COSTING (ABC): An ABC system identifies and then classifies the major
activities of a facility's production process into one of the following four categories:unit-
level, batch-level, product-level, and facility-level activities. Costs in the first three categories of
activities are assigned to products using bases (i.e. cost drivers) that capture the underlying
behavior of the costs that are being assigned. The costs offacility-level activities, however, are
treated as period costs or allocated to products in some arbitrary manner.

AD&D: Disability insurance as part of an employee benefit package

ADD: American Disabilities Act

AGGREGATION: The concept indicating that pooling of demand or other random variables
reduces the variance of the resulting aggregated variable.

ALLOCATION: The assignment of costs incurred in one area or function of a plant or company
to another because of the service to the charged unit.
AMORTIZATION: The systematic reduction of an asset, specifically when referring to along-
lived intangible asset such as goodwill or intellectual property. It usually means the allocation
of costs of intangible assets to the periods that benefit from these assets. See also depreciation.

ANDON: The visible light or sign that denotes the state of an operation (i.e., on, trouble or off.)
The process can be stopped or investigated for quality issues or defects as a result of the status
of the lights. In addition, everyone in the immediate area can see that the problem is being
addressed.

A/P: See Accounts Payable

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A/R: See Accounts Receivable

ASSETS: The tangible and intangible goods, intellectual property, and goodwill that are listed
under the asset column in the balance sheet for a company. Any beneficial item owned by a
company.

ATTRIBUTE: A critical property of an activity or operation

AVAILABILITY: That time or percentage of time that a resource unit or activity center is ready
to process or be activated.

BACKLOG: The amount of actual demand, orders or contracts that are in the pipeline for future
sales. Can be expressed in units of production time or dollars; e.g. six weeks of firm orders for a
plant that can produce $2 million dollars per week would be a $12 million backlog.

BACKROOM COSTS: Indirect costs that do not add direct value to a product and may or may
not be necessary to support its production. Examples are matching supplier material receipts
to their invoices to make sure that they are being paid accurately; sending invoices to
customers; matching computer inventory records to actual inventory; accounting for product
costs at each station on a production routing; keeping track of hazardous materials receipt,
control, and proper disposal; tracking customer warranty issues; operation of the computer
systems that control the production process, etc.

BATCH: The number of production units in an aggregation of units that can be produced by an
activity that produces in batches. A multiple of units in a plant designated for any purpose such
as packaging, outside services, etc.

BENCHMARKING: Benchmarking is defined as a process of continuous comparison of a

companys performance on predetermined measure against that of the best in an industry or a
class, considered the standard or the reference. Benchmarking is one of the most popular
business management tools for establishing competitive advantage and initiating performance
improvements. The Benchmarking process supports the adoption of best practices with
enhanced organization performance. The goal is to attain low-cost producer status. BENEFITS:

BEST PRACTICE: Denotes that practice considered the most effective for an industry. Best
practices continually evolve. Best practices are often assessed across industries to set new
"best practice" standards.

BILL OF MATERIAL (BoM): A bill of material is an ordered listing of all the parts in a finished
product. The listing usually includes the part number, how many of each part is required, and a
brief word description of the part. It is best practice to use only words that appear in a parts
dictionary. Bills of material are usually organized by indenting subsystems.

BLOCKAGE: Prevention of a processing unit to produce more units because of inadequate

storage space or lack of authorization to produce

BLUE SKY: Goodwill associated with an acquisition of a company or asset.

BORROWINGS: Debt

112
BUFFERS: Inventory between processing or activity units.

BUILDING TO CUSTOMER ORDER versus BUILDING TO FORECAST: Building to customer

order means that at least the final assembly, packaging, and shipping awaits a firm order for
the product. Building to forecast means that the product is manufactured to a forecasted
demand. Building to customer order means that the product is pulled by customer order rather
than pushed by a forecast.

BURDEN: Also known as overhead and sometimes as indirect costs. It is the support system
cost with respect to the direct costs for manufacturing a product. Burden rates vary widely
among operations depending on the equipment investment and other factors. Burden rates
include all indirect costs and are usually referenced to direct labor cost excluding fringes
required for the direct product manufacture.

CAD: Computer aided design is a process of generating and manipulating product designs
through computer software. The software allows all information of a part to be generated and
stored electronically at a computer terminal and transferred to other sites or machines.

CAM: Computer aided manufacturing (often used synonymously with CAD) is a similar process
of generating manufacturing processes electronically.

CAPACITY: For a process or activity, the maximum THROUGHPUT that can be sustained.

CAPITAL EXPENDITURES (CAPEX. CAPITAL): The cash cost of acquiring capital equipment or
goods. Capital expenditures result in depreciation that is the cost that appears on the P&L
statement.

CASH FLOW: The beginning and ending net cash as a result of cash that has flowed through an
operation over a given period of time.

CENTRALIZATION: Combining of disparate inventories at a central location implying that the

total inventory and logistics cost needed to meet anticipated demand can be lower. Availability
may be a problem at regional locations.

CIM: Computer-integrated-manufacturing. Popular in the 1980s, it implied fully computer-

controlled manufacturing processes. It has been supplanted by lean manufacturing concepts in
the main.

CLASSIFICATION: The designation of the job function that an employee is proficient in and
assigned to, e.g. machinist, welder, and assembler.

CNC: Computer numerical control generally refers to equipment that is operated through the
use of digital information rather than human input. For instance, a CNC milling machine will
automatically produce the desired net shape of a part as specified by the controlling program.

COEFFICIENTS OF VARIATION: The ratio of the standard deviation to the mean for statistical
demands & processes. See P-K Formula

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CONTRIBUTION MARGIN: Sales minus the variable coststhe contribution of a sale to the
fixed costs of an operation

CONTROL CHARTS: Statistical charting process that is used to identify sporadic and chronic
faults in a process. Mean and variance measurements of a product are charted and acceptable
limits are set on these values. An out of control process can be identified and adjustments made
to remedy the situation through the use of control charts.

CORRELATED DEMANDS: Implies that aggregated demand would have less variability than
separate demands because of correlation among demands.

COST OF GOODS SOLD (COGS): The term appearing on the income statement of a company or
plant representing the manufacturing cost of the goods sold. The COGS does not include sales
and marketing, engineering, and corporate administration.

COST OF SALES (COS): This abbreviation denotes the "cost of sales". It denotes all the costs in
a plant. It is the sum of materials cost and value added. The COS can also be referred to as "cost
of goods sold".
CRITICAL PATH: That path through a process or activity system that has the longest
theoretical flow time (see flow time).

CURRENT: Meaning in the present period. Current assets mean cash, AR, inventories, and all
accrued benefits on a balance sheet for the current time period.

CUSTOMER SATISFACTION: A term in Total Quality Management that implies the degree to
which customers are pleased with a product or service.

DAYS (DAYS OUTSTANDING): Usually an adjective implying the amount of an asset or liability
measured in days of sales, e.g. AP days is the average days that a company or plant delays
payments of invoices to its suppliers.

DCF: Discounted cash flow. The process by which a stream of cash is related to its value at
present by discounting future cash flows by an interest rate.

DEBT: Monies owed by a company or plant

DEMAND: Customer requirements measured in production or sales per unit time

DEPRECIATION: the systematic allocation and reduction of the acquisition cost of long-livedor
fixed assets to the expense accounts over particular period to functions that benefit from the
use of the assets. Also see amortization.

DFM: Design for manufacturing. The process by which designs are completed mindful of the
cost of manufacturing.

DIES: Those special forms that are used in general purpose equipment to make specific parts.
See tooling also.

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DIRECT: Usually associated with functions that are directly associated with the production of a
part.

DIRECT LABOR: Denotes that portion of the workforce directly assigned to manufacture the
product. Direct labor also refers to the standard direct hours that are needed to manufacture a
component or system, e.g., there are 1.25 hours DL in a Honda seat set. See also indirect labor.

DIRECT MATERIALS PURCHASING: is purchasing from suppliers on a contractual basis

for a fixed period of time or amount of product. For job shops, the purchasing contract can
be for only one job. For repetitive manufacturing, the materials are usually purchased on
contracts that last for a model run or at least a year. The contract specifies the price, the
delivery requirements, the tooling agreements, the quality standards, the release
communications and data receipt requirements, and a host of other terms and conditions.
The purchase contract does not specify the releases. That is done by the receiving plant as
their forecasts or orders require. There can be confusion between purchasing and
releasing. Purchasing usually does not release nor do operations purchase.

DISABILITY: That limitation of capacity that is covered by the American Disabilities Act or that
limits a function in a plant or company.

DISCOUNTED CASH FLOW (DCF): See DCF.

DISPUTE RESOLUTION: The process of arbitration, mediation, or other means to settle

disputes without going to court.

DISTRIBUTION: This term denotes the process and/or entities that take manufactured
products and make them available to the ultimate customer. In the automotive and appliance
industries, it is the automobile and appliance dealers. Distribution can be quite complicated. In
the beverage industry, there may be bottlers who have their own distribution so that there are
two levels of distribution. There may be several parallel distribution paths to consumers.
Original equipment manufacturers (OEMs) may distribute to other OEMs.

DIVIDENDS: Distribution of monies to shareholders from company cash flow

DECOUPLING: Implies that through buffers and inventory, processes in a product line can
operate relatively independently of the each other.

EBIT: Earnings before interest and taxes.

EBITDA: Earnings before interest, taxes, amortization, and depreciation. The single most used
measure in valuing companies. It represents free cash flow quite accurately.

ECONOMIES OF SCALE: The unit cost reduction that accrues from larger volume production or
distribution of similar products or products produced in similar operations.

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ECONOMIC ORDER QUANTITY (EOQ): The optimal batch size for an order that minimizes the
total period cost, including cost of ordering (setup cost), inventory holding cost, and cost of
materials procured. For setup cost S, holding cost H, and throughput R, the optimal batch size
Q* is given by Q* = square root (2 x S x R/H)

EEOC--Equal Employment Opportunity Commission is the administrative agency that

administers Title VII of the Civil Rights Act. It is headed by five commissioners appointed by the
President. Title VII prohibits discrimination in employment based on race, color, religion, sex,
or national origin.

EFFECTIVE: Adjective denoting real capacity of a processing unit is fully utilized when it was
available.

EFFICIENCY: Measure of total processing cost of an activity or process.

EPS: Earnings per share of common stock for a company

EQUIPMENT: Those assets that are used to produce product in a manufacturing or operating
environment

EQUITY: The assets minus the liabilities of a company. Stockholders equity implies joint
ownership of the value of this equity in proportion to the stock held.

ER&D: Engineering, Research, and Development--usually appearing on the income statement

of a company implying development costs for new products.

ERP: Enterprise Resource Planning--the latest designation of company-wide computer

integrated information system. The term implies that disparate computers, information
databases, and communications networks are integrated.
ERROR PROOFING (POKA YOKA): Error proofing seems to be a simple concept, but there are
many variations on the primary theme. The basic concept is that a product is prohibited from
being taken out of its fixture if it has a quality defect as a result of the machine or operator
action. The defect must be corrected prior to release of the product from the fixture.

EVA: Economic Value Added--the amount the profits of a company or entity differs from its cost
of capital times its net assets. EVA is increasingly used as a performance measure replacing
return on equity and return on investment.

EXPECTED VALUE: In probability theory the mean value expected at any time or over a
specified set of random variables.

FASB: The Financial Accounting Standards Board is a private-sector body that determines
generally accepted accounting standards in the United States.

FILE FOLDER (PARTS): There are many names for a parts file folder. The concept is simple,
however. A parts file folder contains all the required information about a part including cost,
lead times for production, approved suppliers, tooling requirements and cost, drawings of the

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part, its tooling, and fixturing, computer data if it has been programmed for production on
a computer-controlled machine, quality specifications, key characteristics, etc.

FILL RATE: Fraction of total demand satisfied by inventory on hand.

FINISHED GOODS: Finished goods inventory consists of goods that have been completed and
are awaiting sale. Finished goods are valued at the cost of sales.
FIVE S's: Toyota defines the fives S (for keeping an operation clean):
1. Seison: Maintaining a clean plant
Ordered placement & identification of all parts & work
2. Seiton: items
Identifying & separating necessary from unnecessary
3. Sheiri: items
4. Seiketsu: Maintaining Seiri, Seiton, & Seison
5. Shitsuke: Instilling Seiri, Seiton, Seison, & Seiketsu in workforce
FIVE WHYs: The process of repeatedly asking why until the root cause of the problem is found.
The purpose is to keep asking why until the root cause of the problem is known and the
solution found. Toyota has found that asking "why" five times usually leads one to the root
cause.

FIXED COST: That set of costs in an operation that does not vary with production volume.

FIXTURES: Fixtures are what secure tools and components to general-purpose machines. The
location and fixture type make a significant difference in the speed with which tools can be
changed and in the quality or the part produced. It is best practice to fix a tool at just the right
point so that the key characteristics are produced with the most accuracy given the machine
and tools being used to make the part.

FLOW SHOP: An operation that produces products at volume in a continuous flow or by awell-
defined, connected sequence of activities or processes.
FLOW TIME: The average (actual) time for a unit of production to flow through a process unit
or activity including input and output inventories. Theoretical Flow Time is the flow time
without inventories.
FLOW TIME EFFICIENCY: The ratio of theoretical flow time to the actual flow time through a
process.

FMEA: Failure mode and effects analysis--the process by which failures are hypothesized,
valued, and corrected.

FOREWARD BUYING: Buying of materials in advance of need.

FORECAST: Usually the prediction of customer sales and the subsequent manufacturing
schedule.

FORKLIFT: A general-purpose small truck for lifting and transporting materials and containers
in a plant; not conducive to lean operations

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FRINGES (FRINGE BENEFITS): Employee non-cash compensation such as medical coverage,
insurance, etc.

GOODWILL: The excess of the cost of an acquired company over the book value. Intangible
values on a company balance sheet.

GRIEVANCE: A formal complaint filed by a union member against a company. The resolution of
grievances is a formal process also defined by contract.

GROSS MARGIN: The ratio in percent with the numerator the difference between sales and
cost of sales and the denominator sales. Gross margin for a plant is revenue minus COS divided
by revenue.

HAZMAT: Hazardous material handling process defined by environmental laws and legal
precedents. A process has been defined by regulations that impose stiff fines for a plant if the
regulations are ignored.

HEIJUNKA: The Deployment of matched goals throughout the organization

INDIRECT COSTS: All costs that are not direct costs. Usually associated with the functions in an
operation that may be necessary to support direct production.

INDIRECT LABOR: Denotes the production workers that support the direct labor function.
Indirect labor functions can include maintenance, material handling, setup, product testing, and
inspection. Best practice limits indirect functions and indirect people by, for example, assigning
direct responsibility for all functions at routing stations to teams that would include direct
operations, maintenance, material movement, and scheduling.

INPUTS: The material or products that are presented or flow into an activity.

INTERNAL RATE OF RETURN: See IRR.

IRR: Internal rate of return--that period interest rate that makes the present value of the
discounted cash flows zero. Given a stream of cash flows, iteration is required to find that
interest rate that makes the net present value zero.
ISO 9000: International Standards Organization quality standard. The "9000" designation is a
general one. Levels of quality achievement encompassing wider functions in a firm from
manufacture to complete product design, customer service, and manufacture progress from
"9003" to "9001". This quality standard is administered by approved consulting firms and
denotes a company's commitment to follow standard processes in its business practice.

ISO CERTIFICATION: Denotes that a firm or plant has received an ISO quality standard. Also, it
is the process by which a firm achieves such certification.

INVENTORY: Goods and products held by a company in the product value stream that are
eventually intended for sale to customers on their own or as part of a product system.
Inventory includes the material cost of the goods and the value added by the operation to reach

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its state of manufacture. Raw materials, work in process, and finished goods are three
categories of inventory.

JIDOKA: The principle of stopping work (or the line) when there is a quality problem--
theprocess for correcting that problem

JIT: Just-in-time manufacturing system. In a full JIT system, the only parts that enter a plant or
move from process to process in a plant are those identified uniquely with a final product, no
more or no less. Thus, every part being supplied and every part in the plant can be related
directly to a bill of material of a product that is either in production or will shortly to be in
production.

JOB SHOP: Job shops refer to those operations where each order is more or less unique and
where the volumes are small or only one order. The clearest example of a job shop is a
construction firm that constructs unique buildings. The book manufacturing industry is
another example of a job shop if the production runs are small as is the case for a textbook. The
automotive, appliance, towel, petroleum refining, and computer industries are examples of
repetitive manufacturing. See also repetitive manufacturing.

Several industries have characteristics of both repetitive manufacturing and job shops in their
operations. Even in job shops, standardized materials, machines, and tooling and fixtures are
desirable. Standard sizes, capacities, and performance are characteristic of the construction
industry. Also, either industry may incur high tooling costs. Even in the construction industry,
repetitive manufacturing is gaining as modular assemblies are replacing craftwork in many of
the subassemblies.

KAIZEN: The process whereby teams attack a manufacturing operation to make a series of
quick, small steps to improve the process. It is also the process by which such small
improvements are continued. Standardized work is the result of Kaizens

KANBAN: A card that signals the replenishment requirements in a production process.

Associated with delivering just the amount of inventory needed at the right time. The heart of a
pull system where the process need for inventory is signaled by the placement of a demand
card with the supply process.

LAYOFF: The process by which employees that are not needed for some extended period of
time are given notice that their services are not needed. Layoffs are usually associated with
unionized operations although not always so. Layoffs do not necessarily imply that the
employee will be called back, but in union contracts, laid-off employees have callback rights.
Eligibility for unemployment benefits also depends on the layoff process. Seniority generally
rules for layoffs, although voluntary layoffs where employees volunteer to a layoff are effective
ways to allow flexibility in the layoff process. Benefits may or may not continue in a layoff.

LABOR: The workforce in a plant, the people activity that produces value in a product stream.

LEAD TIME: Time that is required to fill an order or meet customer demand.

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LEAN: A term used to indicate that an operation adheres to the Toyota Production System and
has achieved the level of quality, productivity, and customer satisfaction associated with
application of that system

LEVELED PRODUCTION: The distribution of production of different kinds of items evenly

through the day and week to allocate work evenly and thereby use resources optimally; also
Heijunka.

LIABILITIES: Economic obligations of the organization to outsiders or claims against the assets
by outsiders. Debt, accounts payable, taxes owed, and wages to be paid are examples of
liabilities.

LIFE CYCLE COSTING: Using the full cost of a component or system over its useful life in a
financial decision process instead of just original purchase price. For example, life cycle costs
brought to present value may justify a higher initial purchase price.

LINE BALANCING: In a production or process operation line with several processes, machines,
or operations in sequence, the discipline of balancing the throughput of each operation in the
sequence such that production of any one unit in the sequence is equivalent or "balanced" with
each of the other units in the sequence.

LITTLES LAW: The equation relating Throughput, Inventory, and Flow

Time for a process. It is: THROUGHPUT = INVENTORY divided by FLOW TIME

LOGISTICS: The process of managing materials for operations to meet certain objectives such
as delivery speed, low inventories, and high accuracy. A new business opportunity has arisen
for firms that specialize in logistics management to supply OEMs with JIT components and
systems. Integrated Logistics handle a variety of unrelated components required by a customer
or customers.

MAINTENANCE: That classification of employees and process by which machines and

equipment are maintained for sustained production.

MAKE-TO-ORDER: Operations that make products or deliver services only to customer order--
no finished goods inventory.

MAKE-TO-STOCK: Operations that make products to inventory in anticipation of customer

demand--requires demand forecasts.

MANUFACTURING ENGINEERING: The discipline that plans and implements production

processes in an operational setting.

MARGINAL ANALYSIS: Analysis of the effect of an action or activity at the limits or at a point in
the operation rather than on the average. The marginal cost of an additional unit of production
may be lower or higher than the average cost.

MASTER PRODUCTION SCHEDULE (MPS): The schedule of finished goods that are to be
manufactured based on actual or forecasted customer demand. Work centers are scheduled to
manufacture the products to meet the MPS.

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MATERIAL CONTROL: That process whereby materials are ordered, received, and distributed
throughout an operation to satisfy the master production schedule.

MATERIAL FLOW: That process that defines the flow of materials in an operation.

MATERIAL RELEASE: Release means the process and data by which a supplier is notified that
material is to be shipped. Releases imply that the supplier already has a purchase contract for
the goods to be supplied. The supplier may choose either to manufacture the product in
anticipation of the release (forecasting) or wait until receiving the release and manufacture the
product between the time that the release is received and the time that the supplier must ship
the product to reach the customer plant on time. Release information usually specifies the part
number and quantity required and the time it is to be received at the customer plant dock.

MATERIALS: Those components that are part of the production bill of material that are
process by an operation.

MIX: The breakdown of the total demand or production that identifies the different products in
an aggregate demand or production run.

MRO: Those components and parts not associated with the direct material for a product. Tools,
gloves, lubricants, machine maintenance parts are part of MRO.

MRP: Material requirements planning. MRP systems are used in almost all plants. They
coordinate the bill of materials, forecasted demand, long lead-time parts, and the inventory in
the plant. The reasons MRP systems are generally required relate to the fact that all parts
cannot be supplied JIT and that schedules are not predictable. There are still suppliers that give
price discounts for larger orders. Further, material receipt, inventory tracking, and engineering
changes introduce complexity in plants unless the bills of material are few and simple. A plant
that uses JIT exclusively is very rare. Forecasted demand is common for many supplied parts.
Further, parts get lost, stolen, and damaged. Parts that do not meet quality standards must be
reworked or resupplied. For all these reasons and more, an MRP system is required. MRP
systems are quite complex and computer-based. The software incorporating MRP systems can
be expensive and difficult to install because it requires and evaluation and possible change of
all business practices.

MRP II: Material Resource Planning--an advanced version of MRP that integrates the whole
value chain in planning material orders, production, scheduling, and shipments.

MOLDS: Molds are the same as tools but for plastic or chemical processing part production. A
mold is the term used for the tools that shape plastic or other "soft" material parts in injection
molding machines, that shape foam pads for furniture and automotive seating, and that shape
baked goods. Thus, a baking pan is a mold for bread.

MUDA: Waste. Reducing waste throughout the enterprise is one of the fundamentals tenets of
the Toyota Production System.

MULTIPLE SOURCING: Sourcing more than one supplier for the same part or system.

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NET INCOME: The income remaining after all expenses have been deducted from revenues
including taxes and extraordinary.

NEWSVENDOR: Name of traditional problem and solution in operations management dealing

with single order quantity optimization such as newspaper and other spoilable goods.

NLRB: National Labor Relations Board is an independent administrative agency responsible

directly to the President who administers most of the provisions of the National Labor
Relations Act. It is the federal agency responsible for administering union matters and issues.

NORMAL DISTRIBUTION: Denotes the Gaussian probability function defined by the exponent
of the weighted squared probability variable

NPD: New product development

OSHA: Occupational Safety and Health Administration. The federal agency that administers The
Occupational Safety and Health Act was formed by an Act of Congress in 1970. Ever since,
OSHAs mission has been clear and unwavering: "to assure so far as possible every working
man and women in the nation safe and healthy working conditions." Coverage of the Act
extends to all employers and their employees in the 50 states, the District of Columbia, Puerto
Rico, and all other territories under Federal Government jurisdiction.

OEM: Original Equipment Manufacturer. The term OEM denotes a company or sector that
manufacturers equipment ready for purchase by the end-use customer. The large automotive
companies are referred to as OEMs. Suppliers to such companies supply to the OEMs, they are
not OEMs themselves. There is an implication of a distribution entity between an OEM and the
ultimate customer.

OPERATING INCOME: Gross profit less administrative (SG&A) and development (ER&G)
expenses.

OPERATIONS: Any activity that transforms and adds value to an input stream. The input
stream can be a physical entities, services, or flows. The valued added transformation produces
products or services that are designed to meet a customer demand. Operations range from
processing loan applications to production of computers, to designing buildings.

OVERHEAD: In general denotes an allocated cost to a direct operation. It includes all

manufacturing costs, other than direct material and direct labor. In addition to indirect
material and indirect labor, overhead cost includes utilities, maintenance, depreciation and
taxes.

OVERTIME: Work beyond the federally mandated work period usually a day or a week.
Overtime pay regulations are quite specific.

PARTS FILE FOLDER: See File Folder.

PACING PROCESS: That process in a product production line that is used to signal all the other
processes in the line for the production Takt time. It is generally the final process but does not

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have to be. The production rate of each process is then tied to the production rate of the pacing
process.

PAYROLL: The employees on a payroll for a company; also the process by which employees are
paid including deductions and additions for taxes, savings, benefits, payroll deductions,
overtime, etc. Payroll systems can be quite complex and must be updated continually as tax and
benefit policies and procedures change.

PICK AND PLACE: Equipment that picks up parts from one station on an assembly line and
places them on the next. It is usually a pick and place robot.

P-K FORMULA: An approximate formula for buffer inventory as a function of activity

utilization, number of activity servers, and statistical coefficients of variation for the demand
and the process. Given utilization , c servers, and input and demand coefficients of variation,
the buffer inventory is:

(C i2 +C p2 ) 2(c+1)
I=
2 1

PLANT RATE: Plant rate is the total value added by a plant divided by the total direct labor
hours in a yearly budget. It is the shop rate plus all other plant costs divided by the direct labor
hours in a yearly budget.
POKA YOKA: See Error Proofing.

POOLING: That action that combines in parallel previously independent processes to reduce
the total variance compared to the variances that would occur when the processes were
independent. Generally reduces the variance of the combined processes by the square root of
the sum of the squares of the independent processes.

POSTPONEMENT: That action that delays complexity to later stages in an operation so that
product differentiation occurs later in the production cycle. Examples: 1. are different model
cars using the same drive trains, suspensions, and mechanical components; differentiation
coming with plastic and sheet metal ornamentation, 2. Chinese food that takes a few basic
ingredients and develops a complex menu that can be prepared quickly.

PP&E: The property, plant and equipment or fixed assets of a company.

PRODUCT LIABILITY: That legal liability for product malfunction in the hands of a consumer
or customer. It is also the process by which liability is established.

PRODUCT MIX: The proportion of different products in the total production of an operation or
plant.

PRODUCTIVITY: Measure of labor efficiency. Amount of goods produced per unit of labor cost
or hours. It can be applied more generally to the efficiency of machines and systems.

PULL SYSTEM FOR MATERIAL CONTROL: Equivalent to JIT but most often internal to
operations. The pull system means that the "release" for moving material within the plant or

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from suppliers is signaled by the next process in line that needs the material. The material is
moved by the demand from the succeeding process in the production chain or routings not by a
central schedule or general release. See also Kanban and push system.

The idea is to produce what the customer requires. The main challenge in implementing this
system comes in when looking at the supply side of raw materials as well as the efficiency of
the plants. A company that produces JIT, need to have suppliers that can supply raw materials
in a short notice and are therefore located close by in order to receive raw materials in a timely
fashion for production. At the same time, manufacturing JIT requires more than just good
plants. See the seven zeros. The implementation of this system took Toyota over 30 years to be
perfected. However the trend seems to be going towards this system in the United States. The
biggest advantage of this system is the reduction in cost of the goods as well as the flexibility in
production that help companies be more dynamic and competitive in the industry.

PURCHASING: That function that defines the conditions that govern purchases within a
company as well as the actual purchase of the goods and services.

PUSH SYSTEM FOR MATERIAL CONTROL: The push system denotes a system whereby material is
released for production and movement by a central or local scheduling algorithm and based on
forecasted or anticipated needs for that material. See also pull system.

Traditionally, the Push system had been used in plants for production scheduling. The push
system is simply when the demand for a product is forecasted and a production schedule is
made up according to the forecast of demand through a centralized system. However, the main
problem with this system is the variations between the forecasted and the actual demand that
may cause excess inventory of finished goods or a backorder in production. In order to avoid
problems that are caused due to forecasting errors, companies that use a push system may
either:

i.Keep finished goods on inventory (safety stock)

ii.Have an excess lead-time on delivery to give enough time to produce enough

The main disadvantage of the system comes in when the plants have to keep excess inventory
or have long lead times for the customers. Inventory costs money and long lead times cause
dissatisfied customers. At the same time, companies have spent millions of dollars in the past
just to get good MRP software that would be able to help planners plan the production
effectively.

QFD--Quality Function Deployment: The formal process whereby products and services are
designed that meet all customer expectations cognizant of costs, competitors, manufacturing,
and flexibility.

QS 9000: The automotive industry version of the ISO 9000 requirements.

QUALITY COST: The sum of the preventive, measuring, internal failure, and external failure
costs for a plant, division, or company. Implied in quality cost is that the least expensive way to
lower quality costs is to invest in prevention rather than pay for external failures. These costs
are not part of the general accounting systems and can be quite difficult to accrue.

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QUEUING: Formation of a line. Queuing theory is the study of the formation and variation of
queues. It is applied to operations where capacity constraints or variations produce lines or
queues.
REENGINEERING: The process of redesigning processes or activities to reduce flow times,
inventories, and increase throughput. Its primary objective is to reduce costs and increase
customer response. It is generally applied to service or support activities in contrast to physical
operations. Redesigning or reconfiguring physical processes is usually referred to as lean
transformation. The two terms generally refer to the same process of

RELEASE (MATERIAL): See Material Release.

RELEASING OFF BILL OF MATERIAL: Releasing off a bill of material means that the only
information a supplier receives is a time sequence of finished product part or model numbers.
The suppliers must then know which parts in the bill of materials are theirs. This sequence of
final products can be the only information shipped out to all suppliers that do not use the
"vending machine" approach. This greatly simplifies material control and release. Instead of
each part number for each supplier part being separately communicated to the right supplier,
all suppliers receive only the sequence of final product or model numbers. In the case of a
vehicle or a refrigerator, the suppliers would only receive the model number of the product
being produced in the production sequence along with the options code. It would then be the
suppliers' responsibility to ship the right parts for that model in sequence to the customer
plant JIT.

REORDER POINT: That inventory level where new is ordered.

REPETITIVE MANUFACTURING: Repetitive manufacturing refers to those operations where

each product is produced more or less continuously at significant volumes usually on an
assembly line. It is assumed that the products are completely engineering so that minimal
design or craftwork is done on the manufacturing line. See also job shops.

Several industries have characteristics of both repetitive manufacturing and job shops in their
operations. Even in job shops, standardized materials, machines, and tooling and fixtures are
desirable. Standard sizes, capacities, and performance are characteristic of the construction
industry. Also, either industry may incur high tooling costs. Even in the construction industry,
repetitive manufacturing is gaining as modular assemblies are replacing craftwork in many of
the subassemblies.

REWORK: That activity that reprocesses defective parts to make them satisfactory for reuse in
the production process.

ROE: Return on equity--net income divided by average equity over a period.

ROI: Return on investment--average yearly income divided by the average investment--usually

applicable for a project. See IRR and RONA.

RONA: Return on average assets--this measure is usually applied to plant or divisional

operations to compare returns without considering debt.

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ROS: Ratio of net profits to sales expressed in percent

ROUTINGS: Routings are the sequence of steps that a product follows through a manufacturing
plant as it moves from machine to machine. There may be several subsystems in a product that
follow different routes finally converging at one or more machines or assembly lines that
complete the final product.

SALARIED STAFF: That staff in a plant or operation that supports the value-added activities in
the operation and are paid salaries rather than an hourly rate.

SCHEDULE: Ordering of production to meet forecasted or actual customer demand.

SCRAP: Components or goods to be discarded usually because of poor quality or no demand.

SELLING AND ADMINISTRATIVE COST (SG&A): Those costs that are associated with the
marketing, sales, and administrative functions for a plant or company.

SERVICE LEVEL: Probability that customer demand will not exceed inventory for an order
cycle.

SERVICE OPERATION: Operations in a service industry or business. Such businesses are

generally characterized by direct service to consumers rather than in the supply of
manufactured products. As traditional manufacturing businesses have become more customer
oriented and service businesses more product focused, such differentiation has blurred.
Examples of service businesses are restaurants, banks, health care, and education.

SETUP: Denotes the process of changing or fitting tools on general-purpose equipment to

produce a particular product. Best practice reduces setup times and effort by designing the
tools and their clamping and fixing devices for rapid attachment and detachment, by having all
the required hand and special tools located conveniently near the equipment, and by training
the operational teams to make quick, safe tool changes.

SETUP TIME EFFICIENCY: The ratio of the setup time to the process flow time.

SEVEN ZEROS: The seven even zeros are an essential part of the TPS They are:

Zero Defects: To avoid delays due to defects (Quality at the source)

Zero (Excess) Lot Size: To avoid "waiting inventory" delays
Zero Setups: To minimize setup delay and facilitate small lot sizes
Zero Breakdowns: To avoid stopping tightly coupled line
Zero (Excess) handling: To promote flaw of parts
Zero Lead-Time: To ensure rapid replenishment of parts
Zero Surging: Necessary in system without work in progress buffers

SHOP COMMITTEE: That committee that represents the union in its relations and negotiations
with a company or plant.

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SHOP RATE: Shop rate is the direct labor cost plus the manufacturing overhead divided by the
total direct labor hours in the yearly budget for the plant. It can range from $20-100 per hour.
It is used to estimate the cost for bidding for new business.

SHRINKAGE: The amount inventory is less than what is on the "books". Shrinkage can occur
from unrecorded scrapped parts, short shipments by supplier, pilferage, unrecorded over
shipments, and damaged parts that are discarded without relieving inventory. Shrinkage
reduces pretax profits directly.

SINGLE PIECE PRODUCTION: That capability to produce a single unit of a product at the same
throughput and cost as volume production. This generally requires that setup times be very
small, that there is a production line, and that inventory is stored line side. It is an element of
the Toyota Production System and related to JIT.

SINGLE SOURCING: Sourcing all the requirements for a particular part to one supplier is called
single sourcing.

It has been a purchasing truism forever that sourcing to more than one supplier is required to
obtain competitive pricing, quality, and delivery. The Japanese automotive industry developed
a system, however, that made a form of single sourcing work more effectively than the multiple
sourcing practiced by the U.S. automotive industry. This modified single sourcing system has
begun to be adopted by all automotive companies and by other industries as well.

The system sources to a single supplier all the requirements for a product line early enough in
the design cycle so that the supplier has significant design responsibilities. The volumes can be
quite attractive. In the seating industry, the average contract in the early 1980s before this
system was adopted was in the range of one to three million dollars per year for one year. After
the new system was adopted the contracts were for fifty to one hundred million dollars per
year for five years or more.

The supplier works to a target cost for the product that is set independently and prior to the
design process. The responsibility of the supplier is then to design the product to the cost
specified by the customer and make a profit, to deliver the product to the customer on time,
and to meet the customer quality specifications. The supplier must develop significant
expertise in such subsystems to win and keep business in this sourcing strategy.

In this system, a mutual dependency develops whereby the supplier has the business for a
model run of four to six years. Since the supplier wants the business for the next model as well
as the current model, the supplier is motivated to keep costs down, quality up, and delivery on
time. At the next model design, more than one supplier has the opportunity to bid for the yet to
be designed product. In this way, the full history of the current supplier is known during the
bidding for the next design. However, new ideas and concepts can be brought to the customer
by competitors. The system works well when there are at least two capable suppliers that can
bid on such large contracts. The seating industry has evolved to this status from more than two
dozen small firms in the early 1980s to a very few, very large firms in the late 1990s. In 1981,
Hoover Universal seating (which JCI acquired) had less than one hundred fifty million-
dollar sales per year and Lear had less. In 1998, both Lear and JCI are above nine billion dollars
in sales.

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SOURCING: The process by which supply contracts are let by purchasing.

SPARE PARTS (SERVICE PARTS): Parts for products already produced that can be shipped to
customer order or stored for future orders.

SPC: Statistical process control involves the implementation of statistical tools (including
control charts) that monitor processes in order to identify improvement opportunities. Process
faults are identified, a root cause of the fault is isolated, and corrective actions are taken to
improve the process.

STANDARD COST: A measure of how much one unit of product or services should cost to
produce or deliver. Standard cost may be established using careful analysis of the product or
service and the materials and processes used to create it. If established in this manner,
standard costs may be thought of as ideal costs, and actual costs may differ from these costs
because of actual price differences, errors or mistakes, or changed conditions from the ideal.

SUPERMARKET: That process where material for the next process in an operation is arranged
as in a supermarket where visual control of the production is assured. The following process
takes from the "supermarket" area what it requires for production in that stage and the
preceding process produces exactly what has been taken. Also know as a visual Kanban.

SUPPLY CHAIN: The supply chain denotes the process by which components are moved and
produced from raw material to the ultimate consumer. It also includes the details of that
process such as cost, time, transportation, packaging, etc. It may involve two or three levels of
suppliers, one or more OEM plants, a distribution system, spare parts replacement parts flow,
and the disposal and recycling process.

TAKT TIME: The pace at which consumers demand a product--production scheduling at that
pace. The line speed in an auto assembly plant (around 1 vehicle per minute) is the Takt time
for that plant.
TARGET COST: A system for utilized in product development where part of the specifications
of the product is the cost. The system was developed by the Japanese auto manufactures and
has become a concept and system in wide use in business.

T&E: Travel and entertainment costs

TIER ONE: Tier one designated those group of suppliers who have becomes directly
responsible for not only product supply but product development. The tier one suppliers in the
automotive industry, for example, supply complete seats, braking systems, drive trains, and
other complete systems that have been developed in cooperation with the OEMs.

TERMINAL VALUE: The value of an operation or entity at the end of the time period
considered. For discounted cash flow, it is the net value of the entity considering all future cash
flows at a terminal time in the future.
THROUGHPUT: The production rate of a process or activity measured in units or flow per unit
time. Throughput divided by Capacity is Utilization

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TOOLING: Tooling and dies refer to hardware (or software) that is developed specifically for a
part so that a when that tool or die is inserted into a general-purpose machine, that machine
will produce or shape that part uniquely. Tool and die makers design and make tooling and
dies. The two terms are almost synonyms. Engineers or tool designers design tools and dies.
Examples of tools and dies are:
Molds that are used in plastic injection molding machines to make everything from plastic
cups to complex plastic parts for industrial or commercial use
Tool steel dies designed for hydraulic and mechanical presses so that a flat piece of steel or
other metal can be formed into such products as fenders, CRT enclosures, or cooking ware
Templates used for printing, painting, and lithography
A set of patterns for cutting cloth or leather
Digital data that guide a general purpose machine in its cutting of materials
Cookie and bread molds for cooking
A metal stamp that embosses the figures on a coin blank
Camera-ready copy of a manuscript to be published

TOYOTA PRODUCTION SYSTEM: Toyota Motor Company developed a comprehensive

business system that produced the remarkable results in quality, productivity, and continuous
improvement marked by Toyota's products and services. This system led to the "lean"
manufacturing and "lean" enterprise concepts in the U. S. and Europe. It has also spawned
innumerable other "production systems" for firms that have tried to emulate Toyota's record of
success. Toyota bases the system on continuous reduction of waste, respect for their
employees, and customer satisfaction.

TQC: Total quality control--a process by which a firm deploys it quality program throughout all
functions of the company.

TQM: Total quality management--see TQC.

TURNS: Commonly thought of as inventory turns or turnover ratio, turns are defined as the
ratio of throughput to average inventory. A high number of turns imply that less inventory is
kept on hand and/or materials are received in smaller lots and processed quickly.
UNION CONTRACT: A formal contract between a union representing employees in a plant or
firm and the company for whom the employees work. The contract covers all aspects of pay,
working conditions, and strike options. Contracts usually run from 2-6 years.

UNION FREE: A designation that notes that an operation does not have a union.

UNION SHOP: A facility in which all hourly employees are unionized, or more formally a clause
in a collective bargaining agreement under which membership in the union is required as a
condition of employment.

UTILITIES: Services provided by utility companies--electricity, water, heating fuel, materials

disposal, and communications.

UTILIZATION: The average fraction of the capacity of a process or activity that is utilized
during an operation

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VALUE ADDED: Denotes the "value" added to the materials received by a plant in the plants
operations. Usually a percentage of COS. Value added can be a combination of true value and
the non-value added work done in manufacturing a product. Best practice requires a plant to
continually assess which of its activities is true value added and eliminate or reduce the non-
value added activities. This assessment can be complex, however. There is a gray area in
determining what the direct materials are. There is no confusion on direct materials that are
part of the bill of materials. The uncertainty is in the indirect materials some of which could be
included in the bill of material. For example, adhesives and lubricants are generally bought in
bulk and used as needed with the amounts not accurately specified in the bills. For most plants,
these items are small compared with other costs.

VARIABILITY: The variations in any portion of an operationdemand, processes, activities,

supplier performance, quality, etc.--See coefficients of variation.

VARIANCE: That deviation from the standard cost for a product or process in production.
Positive variances denote performance better than standard.

VARIABLE MANUFACTURING COST: Those operational costs that vary with the production
volume in contrast to fixed costs that are independent of production volume.

VENDING MACHINE MATERIAL CONTROL: Soft drink and snack suppliers to a plant replenish
the previous day's employee purchases each day. They do not forecast demand in any formal
way; they stock their delivery trucks with products that have been selling plus maybe some
new, more inticing snacks. Plants can use this philosophy to have many types of production
material stocked. Suppliers come to the plant daily and replenish bins from which material has
been used the previous day. They do not forecast nor know except from recent historical data
what the usage will be. Such parts are usually standard ones such as fasteners.

VISUAL MANAGEMENT: That system of deployment of visual graphs, charts, inventory

arrangements, tool & fixture storage, and order that aids in implementing and maintaining lean
manufacturing and order within a plant. It is based on the concept that people are apt to
understand and relate to visual cues and data better than to other communication means.

VOLUNTARY LAYOFF: Layoffs where the employees are given the option of taking a non- paid
leave from their work for a short, specified period of time.

WARRANTY: A guarantee of the quality of a product or service that lasts for some period of
time and has some specific product or service coverage.

WELDING: The process by which two metals or materials or joined by heat or pressure most
often resulting in melting of the materials

WELLNESS: The process of fostering healthy practices and lifestyles for people to improve
foster health and wellbeing.
WORKFORCE: The employees of a plant or company

WORK TEAMS: Teams of employees formed to shepherd a particular work area or function.

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WORK IN PROCESS (WIP): Inventory consisting of products that are in a semi finished state.
Work in process is valued at the cost of the purchased material plus the cost of manufacturing
up to the stage of completion at the time that the inventory is valued.

WORKING CAPITAL: In a manufacturing operation, working capital generally refers to

inventory plus accounts receivable minus accounts payable. These are the dominant
requirements for cash in a plant in addition to payroll and property, plant, and equipment.
For a company, the accounting definition of working capital is current assets minus the current
liabilities. This definition refers to the working capital that the company has. From a
manufacturing perspective, the working capital requirement to run the operations is what is
important. This allows a forecast of the cash required to produce a new order, to negotiate with
suppliers and customer on payment terms, and to communicate with corporate treasury
functions on the cash needed so that it can be lined up from banks or investors. For this
purpose, working capital is current assets minus cash minus current liabilities plus the current
portion of debt due.

WORKMAN'S COMPENSATION: This is a state-administered program whereby employees are

guaranteed medical coverage in case they are injured on the job and companies are limited as
to their liability for such job-related injuries.

***

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