12mba32 Om Notes

OPERATIONS MANAGEMENT 12MBA32
Subject Name: OPERATIONS MANAGEMENT

Sub Code: 12MBA32 IA Marks : 50
No.of Lecture Hrs/week : 04 Exam Hrs. : 03 Hours
Total No. of Lecture Hrs. : 56 Exam Marks : 100
SYLLABUS
Module I: Introduction to Operations Management
What is operations management? Production system concept ,Transformation process, difference

between products and services, OM in the organizational chart, operations as service, Historical
development of OM, Current issues in operations management, Operations strategy, competitive
dimensions, operations strategy in manufacturing, developing manufacturing strategy, operations
strategy in services
Module II: Introduction and Break even analysis
Break even analysis - Break even analysis in terms of physical units, sales value, and percentage
of full capacity. Break even for Multi Product situations, Capacity expansion decisions, Make or
Buy decisions, Equipment Selection decisions, Production process selection decisions,
Managerial uses of break-even analysis, Limitations of Breakeven analysis.
Module III: Forecasting
Forecasting as a planning tool, forecasting time horizon, short and long-range forecasting,
sources of data, types of forecasting, qualitative forecasting techniques, quantitative forecasting
models - Linear regression, Moving average, weighted moving average, Exponential smoothing,
Exponential smoothing with trends, Measurement of errors, Monitoring and controlling
forecasting models.
Module IV: Facility Planning
Facilities location decisions, factors affecting facility location decisions and their relative
importance for different types of facilities, Facility location models. Facility layout planning.
Layout and its objectives for manufacturing operations, warehouse operations, service
operations, and office operations., principles, types of plant layouts – product layout, process
layout, fixed position layout, cellular manufacturing layouts, hybrid layouts, Factors influencing
layout changes.
DEPT. OF MBA / SJBIT Page 1

Module V: Employee Productivity
Productivity and work study Productivity and the standard of living, Productivity and the
organization, productivity, variables affecting labour productivity, work content and time, Work
Study and related working conditions and human factors.
Method Study
Introduction to Method Study, Data collection, recording, examining, and improving work,
Material flow and material handling study, Worker flow study, Worker area study,
Work Measurement
Introduction to Work Measurement, Work sampling study, Time study and setting standards
Module VI: Capacity Planning
Introduction to capacity planning – CRP, MRP, MRP 2. MPS. Managerial importance of

aggregate plans, alternatives for managing demand and supply, capacity augmentation strategies.
Matching demand and capacity, demand chase aggregate planning, level production aggregate
planning.
Module VII: Materials Management
Role of Materials Management- materials and profitability, Purchase functions, Procurement

procedures including bid systems, Vendor selection and development, Vendor rating, ethics in
purchasing. Roles and responsibilities of purchase professionals. Concepts of lead time, purchase
requisition, purchase order, amendments, forms used and records maintained. Inventory
Management: Concepts of inventory, types, Classification, selective inventory management,
ABC VED, and FSN analysis. Inventory costs, Inventory models – EOQ, safety stocks, Re order
point, Quantity discounts.
Stores- types, functions, roles responsibilities, Inventory records,
Module VIII: Designing Service Delivery systems
Introduction, distinctive characteristics of service operations, Service/product mix, intangible

nature of services, simultaneous provision and consumption of services, time dependent capacity,
customer management, multi-site management, factors involved in delivering services,
categories of services, service delivery systems, design, IT based and other service delivery
systems design, Issues to considered in delivery system design service profiling management

INDEX
Module Chapter name Page no.
1 Introduction to Operations Management 4 - 12
2 Introduction and Break even analysis 13 - 15
3 Forecasting 16 - 24
4 Facility planning 25 - 30
5 Employee productivity 31 - 35
6 Capacity planning 36 - 48
7 Materials management 49 - 61
8 Designing service delivery system 62 - 68

Module -1
Introduction to Operations Management
Introduction
The term Operations refers to a function or system that transforms Inputs into outputs of a
greater value. Operations are often defined as a Transformation or conversion process wherein
Inputs such as Materials, Machines, Labor and capital are transformed into outputs.
What is operations management?

Operations management is defined as the design, operation and improvement of the systems that
create and deliver the firm‟s primary products and services.
The term operations refer to a function or system that transforms inputs into outputs of greater
value. Operations are often defined as a transformation or conversion process wherein inputs
such as materials, labour and capital are transformed into outputs.

This view is also known as systems concept of production. A system is defined as the collection
of interrelated entities. The systems approach views any organisation or entity as an arrangement
of interrelated parts that interact in ways that can be specified and to certain extent predicted.
Production is viewed as a system which converts a set of inputs into a set of desired outputs. A
production system has the following elements or parts: i) inputs ii) conversion process iii)
outputs iv)Transportation subsystem v) communication sub system vi) control or decision
making subsystem
Transformation process:
A transformation process uses resources to convert inputs into some desired output. Inputs may
be raw material, a customer, or a finished product from another system.
Transformation processes can be categorized as follows:
 Physical ( as in manufacturing)
 Location ( as in transportation)
 Exchange ( as in retailing)
 Storage ( as in warehousing)
 Physiological ( as in health care)
 Informational ( as in telecommunications)


Difference between product and services:
Product Services
It is tangible It is intangible
It is produced, stored and consumed Produced and consumed simultaneously
Products may or may not be unique Services are often unique
Products have low customer interaction Services has high customer interaction
Long lead times Short lead time
Capital intensive Labour intensive
Quality can be determined easily Quality cannot be determined easily
Products are easy to automate Services cannot be automated
Location of facility is important for cost Location of facility is not important
OM in organisation chart:
Manufacturing companies typically groups operations activities to produce its products in one
department. Service firms scatter operations activities throughout the organisation.
Operations as service:
The emerging model in industry is that every organisation is in the service business. This is true
whether the organisation makes big planes or big macs. In manufacturing, services can be
divided into core services and value added services that are provided to internal and external
customers of the factory.

The core services customers‟ wants are the products that are made correctly, customized to their
needs, delivered on time and priced competitively.
Value added services simply make the external customer‟s life easier. Value added services can
be classified into four categories: information, problem-solving, sales support and field support.
Information: is the ability to furnish critical data on product performance, process parameters,
and cost to internal groups and to external customers, who then use the data to improve their own
operations or products.
Problem solving: is the ability to help internal and external groups solve problems, especially in
quality.
Sales support: is the ability to enhance sales and marketing efforts by demonstrating the
technology, equipment or production systems the company is trying to sell.
Field support: is the ability to replace defective parts quickly or to replenish stocks quickly to
avoid downtime or stock outs.
Historical development of OM:

Historical development of OM can be classified into following phases.
 JIT and TQC

 Manufacturing strategy paradigm
 Service quality and productivity
 TQM and quality certification
 Business process reengineering
 Supply chain management
 Electronic commerce

Current issues in operations management:

1. Global Market Place: Globalization of business has compelled many manufacturing firms to
have operations in many countries where they have certain economic advantage
2. Production/Operations Strategy: More and more firms are recognizing the importance of
production/operations strategy for the overall success of their business and necessity for relating
it to their overall business strategy.
3. Total Quality Management (TQM): TQM approach has been adopted by many firms to
achieve customer satisfaction by a never-ending quest for improving the quality of goods and
services.
4. Flexibility: The ability to adapt quickly to changes in volume of demand, in the product mix
demanded, and in product design or in delivery schedules, has become a major competitive
strategy and a competitive advantage to the firms.
5. Time Reduction: Reduction of manufacturing cycle time and speed to market for a new
product provides competitive edge to a firm over other firms.
6. Technology: Automation, computerization, information and communication technologies

have revolutionized the companies operate.
7. Worker Involvement: The recent trend is to assign responsibility for decision making and
problem solving to the lower levels in the organisation. This is known as employee involvement
and empowerment. Examples of worker involvement are quality circles and use of work teams or
quality improvement teams.
8. Re-engineering: It involves the concept of clean-slate approach or starting from scratch in
redesigning the business processes
9. Environmental Issues: There is increasing emphasis on reducing waste, recycling waste,

using less-toxic chemicals and using biodegradable materials for packaging.
10. Corporate Downsizing (or Right Sizing): Downsizing or right sizing has been forced on
firms to shed their obesity. This has become necessary due to competition, lowering productivity,
need for improved profit and for higher dividend payment to shareholders.
11. Supply-Chain Management: Proper SCM reduces the cost of transportation, warehousing
and distribution throughout the Supply chain
12. Lean Production: This system uses minimal amounts of resources to produce a high volume
of high quality goods with some variety. This system uses FMS and multi-skilled workforce to
have advantage of both mass production and Job production (craft production)
Operations strategy:
Operations strategy is concerned with setting broad policies and plans for using the resources of
a firm to best support its long- term competitive strategy. A firm‟s operations strategy is
comprehensive through its integration with corporate strategy. The strategy involves a long-term
process that must foster inevitable change. An operations strategy involves decisions that relate
to the design of a process and the infrastructure needed to support the process.
Process design includes the selection of appropriate technology, sizing the process overtime, the
role of inventory in the process and locating the process. The infrastructure decisions involve the
logic associated with planning and control systems, quality assurance and control approaches,
work payment structures and organisation of operations functions.
Operations strategy can be viewed as part of a planning process that coordinates operational
goals with those of a larger organisation. Since the goals of a larger organisation change over
time, the operations strategy must be designed to anticipate future needs.

Competitive dimensions:
The major competitive dimensions that form the competitive position of a firm include the
following:
1. Cost or Price: make the product or deliver the service cheap: in every industry, there is
usually a segment of the market that buys solely on the basis of low cost. To successfully
compete in this niche, a firm must be the low-cost producer, but even this does not guarantee
profitability and success.
2. Quality: make a great product or deliver a great service: there are two characteristics of a
product or service that define quality: design quality and process quality. Design quality relates
to the set of features the product or service contains. Process quality relates directly to the
reliability of the product or service. The goal of process quality is to produce defect free products
and services.
3. Delivery speed: make the product or deliver the service quickly: the firm‟s ability to deliver
more quickly than its competitors is critical
4. Delivery reliability: deliver it when promised: this dimension relates to the firm‟s ability to
supply the product or service on or before a promised delivery due date.
5. Coping with changes in demand: change its volume: in many markets, a company‟s ability
to respond to the increases and decreases in demand is important to its ability to compete. The
ability to effectively deal with dynamic market demand over the long term is an essential
element of operations strategy.
6. Flexibility and new-product introduction speed: change it: flexibility, from a strategic
perspective, refers to the ability of a company to offer a wide variety of products to its
customers. An important element of this ability to offer different products is the time required for
a company to develop a new product and to convert its processes to offer the new product.
7. Other product specific criteria: support it: the other dimensions that relate to specific
products or situations are technical liaison and support, meeting a launch date and supplier after-
sale support
Operations strategy in Manufacturing:

Operations strategy cannot be designed in a vacuum. It must be linked vertically to the customer
and horizontally to other parts of the enterprise. The linkages among customer needs, their
performance priorities and requirements for manufacturing operations, and the related enterprise
resource capabilities to satisfy those needs.
The choice of a target market can be difficult, but it must be made.
Core capabilities are the skills that differentiate the service or manufacturing firm from its
competitors

What companies need in this world of intense global competition is not more techniques but a
way to structure a whole new product realization system differently and better than any
competitor.
Developing a manufacturing strategy:

The main objectives of manufacturing strategy development are
i) To translate required competitive dimensions into specific performance requirements

operations
ii) To make the plans necessary to ensure that operations capabilities are sufficient to accomplish
them.
The steps for prioritizing these dimensions are as follows:
 Segment the market according to the product group

 Identify the product requirements, demand patterns, and profit margins of each group
 Determine the order winners and order qualifiers for each group
 Convert order winners into specific performance requirements
Operations strategy in services:

Operations strategy in service firms is generally inseparable from the corporate strategy. Service
strategy begins by selecting the operating focus – the performance priorities – by which the
service firm will compete. These include:
 Treatment of the customer in terms of friendliness and helpfulness

 Speed and convenience of service delivery
 Price of the service
 Variety of services
 Quality of the tangible goods that are central to or accompany the service
 Unique skills that constitute the service offering such as hair styling, brain surgery or
piano lessons

Module -2
Introduction and Break even analysis
Introduction to break –even analysis:
The term ‗Operations ‗refers to a function or system that transforms Inputs into outputs of a
greater value. Operations are often defined as a Transformation or conversion process wherein
Inputs such as Materials, Machines, Labour and capital are transformed into outputs.
Operations management: - It is defined as the design, operation, and Improvement of the

systems that create and deliver the firm„s primary products and services.
FACTORS AFFECTING PRODUCTION AND OPERATIONS:
a) Reality of Global competition.

b) Quality, Customer service and cost challenges.
c) Rapid Expansion of advanced production Technology.
d) Continued growth of service sector.
e) Scarcity of production resources.
f) Social responsibility Issues
PRODUCTIVITY:
The term productivity describes how well a production manager achieves productivity use of the
resources of the firm. Productivity is an index or measure of the effective use of resource.
Productivity measures includes
a) Labour productivity
b) Machine Productivity
c) Capital Productivity.
d) Energy Productivity.
Competitiveness:
Competitiveness is a crucial factor in determining the survival and growth of a firm.

Competitiveness is how effectively an organization meets the needs of customers relative to
other firm which offer similar goods or services. The dimensions of competitiveness that
Measure the effectiveness of the production function are –
a) Cost or price.
b) Quantity.
c) Product / service differentiation
d) Dependability as a supplier.
e) Flexibility.

f) Time to perform certain activities.
Break-Even analysis:
Break-even- analysis, also called profit analysis or cost-volume-profit (CVP) analysis is used to
determine the number of units of a product (volume) to sell or produce that will equate total sales
revenue with total production cost.
The three components of a break-even-analysis are volume, cost and profit.
Application of Break- Even analysis
a) Evaluating products or Services
Break –Even analysis can be used to evaluate the profit potential of a new or existing product or
service. This technique provides answers to following Questions:-
a) Is the projected sales volume of the product service sufficient to break-even?

b) How low the variable cost must be per unit to break-even?
c) How low must the fixed cost is to break-even?
d) How do price levels affect the Break-even volume?
Evaluating alternative Processes
(Make –or – buy)
Operations managers are faced with problem of choosing between two or more processes or between
an Internal Process (Make) and buying products / components from outside vendors (buy) this is
usually referred as Make –or-buy decision.
The assumption is that either decision does not affect revenues. The operation manager must
study all the costs and advantage of each approach and find quantity at which total Costs equal to
Total revenues.
Break-Even analysis for Multi product cases
Most Manufacturers or sellers have a variety of offerings (goods or services). Each offering may
have different selling price and variable cost. B.E analysis can be used to reflect the proportion of
sales for each product.
The formula uses the Weighting „factor indicating each products contribution by its proportion of
sales
F = Fixed cost
Vi = Variable cost / unit
P i= Unit selling price
Wi = Percentage of sales of 1th product of Total Sales.

Major Process Decisions:
1. Process Choice- Determines whether resources are organized around products or processes in
order to implement the flow strategy. It depends on the volumes and degree of customization to
be provided.
2. Vertical Integration: - Is the degree to which a firm‟s own production system handles the
entire supply chain starting from procurement of raw materials to distribution of finished goods.
3. Resource Flexibility: - Is the case with which equipment and workers can handle a wide
variety of products, levels of output, duties and functions.
4. Customers involvement: Refers to the ways in which customers become part of production
process and the extent of their participation.
5. Capital Intensity: Is the mix of equipment and Human Skills in a production process. Capital
Intensity will be high if the relative cost of equipment is high when compared to the cost of
Human Labour.
MANAGERIAL USES OF BREAK-EVEN ANALYSIS
1. It helps in arriving at the Fair value of the profits of the production firm.
2. It helps in understanding the relationship between costs, volume and profits.
3. It suggests the volume of sales required to earn the desired level of profit.
4. It helps in formulating the pricing policies for the firm.
5. It evaluates performance for the purpose of control.
6. It helps in understanding the effect of changes in sales mix on the profits.
7. It assists the management in taking strategic decisions such as make or buy, product add or
Drop, proper sales Mix, acceptance or rejection of an offer etc.
LIMITATIONS OF BREAK-EVEN ANALYSIS
1. The analysis assumes a linear revenue function and a linear cost function.
2. The analysis assumes that whatever is produced will be sold.
3. The analysis assumes that fixed and variables cost can be accurately Identified.
4. For multiple product analysis, the sales mix is assumed to be known and constant.
5. The selling price and costs are assumed to be known with certainty.

Module -3
Forecasting
Forecasting as a planning tool, forecasting time horizon, short and long range forecasting,
sources of data, types of forecasting, qualitative forecasting techniques, quantitative forecasting
models – Linear regression, Moving average, Weighted moving average, Exponential smoothing,
Exponential smoothing with trends, Measurement of errors, Monitoring and Controlling
forecasting models.
A Forecast is an Estimate about the future.”
Forecasting: - It is defined as “estimating the future demand for products and services and the
resources necessary to produce and services and the resources necessary to produce these
outputs. Forecasting is the art and science of predicting future Events. It is not a mere guess or
prediction about the future without any rational basis. It involves Data processing and Data
mining Techniques to come out with conclusions which are more accurate and reliable.
Forecasting as a planning Tool:-

Managerial Decision making is often complicated due to an element of uncertainty in variables
affecting the Decision-making process. It is very important to device a Mechanism which
enables the planning process to happen more comprehensive by suitable Techniques.
Forecasting is that branch of operations Management which addresses such issues provides the
Manager with a set of Tools and Techniques for the Estimation Process.
Forecasts are Estimates of Timing and Magnitude of the occurrence of future events.
Key functions of Forecasting:-
 It is an Estimation Tool.
 A way of addressing the complex and uncertain environment surrounding business

decision-making.
 A Tool for predicting events related to operations planning and control.
 A vital prerequisite for the planning process in organization

Forecast Time Horizon
The forecast Time Horizon can be classified into three sections
a. Short-term
b. Medium-Term
c. Long-term
Parameters Short-term Medium-term Long-term
Duration 1 – 3 Months 12-18 Months 5-10 Years
nature of Decision Purely tactical Tactical as well as Purely strategic

strategic
Considerations Random (short-term effect) Seasonal & cyclical Long-term trends &
effects business cycles
Research Methods Extrapolation of Trends, Collective opinion , Time Technological

Judgment, Exponential series ,Regression Economic,
smoothing Judgment Demographic
Marketing studies
Judgment
nature of Data Mostly Quantitative Subjective and Largely subjective

Quantitative
Degree of Low Significant High

Uncertainty
Examples Revising qtly production Annual production plan, New product

plan, rescheduling supplies capacity augmentation, Introduction,
of Raw Material New Business Facilities Location
Development Decisions

Sources of Data:
Forecasting is often only as good as the quantity and quality of Data available.
1. Sales force Estimates: - The sales force constitutes sales representative and other field
operations staff. The information includes -
Actual consumption
Changing patterns in consumption
Performance of competitor brands.
Over all patterns in the Market share and Market growth.
Organizations can make end-use analysis. This data is very useful in short term forecasting and
mid- course corrections in production and sales planning.
2. Point of sales (POS) Data Systems:-
This system captures data at the point of sale using POS system. With this Technology, as a
customer buys a unit of an organization‟s product at a retail counter. The information is captured
and instantaneously transferred to a common data base. The organization shall periodically
analyses these data base for better Inventory management and sales planning.
E.g., Wal-Mart.
3. Forecast from supply chain patterns:-

Distributors and Retailers form supply chain pattern obtaining POS data is often not easy.
Therefore it is necessary to rely on supply chain patterns to obtain actual data on actual sales
within a period. These estimates are crucial for accurate forecasting pf future Demand.
4. Trade Industry Association Journals:-

These are handy in case of Long-term forecasting. They provide syndicated and
researched data pertaining to the sector in which the organization is operating. Several Market
Research firms such as ORG- MARG and Management consultancy firms also provide classified
Information.
5. B2B portals / Market places:-

B2B (Business 2 Business) portals provide necessary information about company‟s
profile, product range, Market share, latest developments in R & D and other vital inputs about
Market. Internet is the best source of B2B inputs.
6. Economic surveys and Indicators:-
Macro-Economic Trends indicate the emerging Trends in consumption patterns of several
classes of goods and services.
E.g., HDTV (High Definition TVs)

Demand for HDTV are influenced by

Income level distribution in the population.
Prevailing taxation policies.
Disposable Income.
Literary levels.
Rate of urbanization.
For Economic surveys.
a) Central statistical organization (CSO)
b) Centre for Monitoring Indian Economy (CMIE)
TYPES OF FORECASTING:-
a) Technological Forecasts.
b) Economic Forecasts.
c) Demand Forecasts.
a) Technological Forecasts: - are concerned with rates of Technological Progress.

Technological changes will provide many companies with new products and materials to offer
for sale. Even if the products can be developed with a new or improved technology using
machinery and equipment.
b) Economic forecasts: - are statements of expected future business conditions published by

government agencies. These forecasts address the business cycle by predicting Inflation rates,
Money supplies, Housing Statistics and other Economic Indicators such as Tax revenues, level of
employment, GNP. These forecasts give ideas about long range, intermediate range business
growth to business organizations.
c) Demand Forecasts: - are projections of Demand for a company‟s product or services. These
forecasts are also called a sales forecast which gives the expected level of Demand for a
company‟s goods or services throughout some future period and usually provide the basis for
company‟s planning and control decisions.

Forecasting Approaches
1. Qualitative Approach
2. Quantitative Approach.
Forecasting Approach
Qualitative Approach Quantitative approach
Jury of Executive opinion Time series Model Casual

Methods
Sales force composite Method Naïve approach Trend projection
Market Research Method Moving averages linear regression

Delphi Technique Exponential smoothing Correlation
Method
Jury of Executive Opinion: - It is a forecasting Technique in which the opinions of a small

group of high-level executives (Managers) are taken. Based on which a group estimate of
demand is obtained as the forecast.
Advantages:-
1. Uses experience and knowledge of experts.
2. Can be used for Technological forecasting.
3. Can be used for forecasting demand for new product.
4. Can be used to modify existing forecast to account for unusual
circumstances.

Disadvantages:-
1. It is costly process.
2. It sometimes gets out of control or gets delayed.
3. Difficult to obtain consensus opinion of several experts.
Sales Composite Method: - This is also known as “pooled sales force estimate”. Each sales
person estimates what sales will be in his / her territory. These estimates are then reviewed to
ensure that they are realistic.
Advantages:-
- This is more practical, realistic and updated information.
- It helps in Inventory Management, distribution and sales force staffing.
Disadvantages:-
- It may affect the sales forecast.
- Sales people may be unable to distinguish between what customers would like
to do and what they actually will do.
- Sales people may be overly influenced by their recent experiences.
Market Research Methods (Consumer Survey Method)

This is a systematic approach to determine consumer interest in a product or service by
conducting a consumer survey and sample consumer opinions. This method may be used to
forecast Demand for the short, Medium and long term.
Advantages:-
This is better compared to sales force composite method as the customers directly gives their
opinion.
This information is more primary in nature and cannot be obtained in other methods.
Disadvantages:-
1. It is time consuming.
2. It is very costly affair / Expensive.
3. The response rate for Mailed Questionnaire is very poor.
4. The survey result may not reflect the opinions of the market.

Delphi Method: - In this method opinions are solicited from a number of other managers and
staff personnel. The decision makers consist of group of 5 to 10 experts who will be making
actual forecast. The staff personnel assist decision makers by preparing, distributing, collecting
and summarizing a series of questionnaires and survey results.
The managers whose judgments are valid are the respondents. This group provides input to the
decision makers before forecast is made. Response of each respondent are kept anonymous
which tends to encourage honest responses. Each new questionnaire developed using the
information extracted from the previous ones. Thus enlarging the scope of information on which
participants can base their judgment. The goal is to achieve consensus forecast.
Advantages:-
- This method can be used for long-range forecast product demand.
- A panel of experts may be used as participants.
Disadvantages:-
- Process can take a long time.
- Responses may be less Meaningful.

- High accuracy may not be possible.
- Poorly designed Questionnaire will result in ambiguous or false conclusions.
Quantitative Approach:-
Naïve Approach: - The simplest way to forecast is to assume that forecast of Demand in the
next period is equal to the actual Demand in the most recent period.
E.g. If the demand for a product in Jan 2009 is 160. Then demand for the product in Feb-2009
is also 160.
Moving averages Method:

(i) Simple Moving average.
(ii) Weighted Moving average.
∑ Demand in previous n periods

Moving average =

ii) Exponential smoothing Method
It is a sophisticated weighted moving average method that is still relatively easy to understand
and use. It requires three items of data
i) This period‟s forecast.
ii) Actual Demand for the period.
iii) Smoothing constant.
Ft = F t-1 + (A t-1 + F t-1)

Ft= Forecast for the period “t”
Ft-1= Forecast for the previous period (t-1)
α = Smoothing constant (0.05 – 0.5)
At-1 = Actual Demand for the previous period.
Exponential smoothing with trend Adjustment:
F I T (t) = Ft + Tt
F I T = Forecast Including trend.
Ft = exponentially smoothed forecast.
Tt = exponentially smoothed trend.
Forecast Error (FE)

FE= Actual Demand – Forecast Demand.
Mean Absolute Deviation (MAD)

MAD = ∑ I forecast error I
N
Mean square error (MSE)

MSE = ∑ (forecast error )2

MONITORING AND CONTROLLING FORCASTS

Once a forecast has been completed, its need to be monitored and corrected periodically by
determining why actual demand differed significantly from that projected. This can be done by
setting upper and lower limits on how much the performance characteristic of a forecasting
model can determine before we change the parameters of the model
TRACKING SIGNAL
A measurement of how well the forecast is predicting actual values.

Running sum of forecast errors
Tracking signal= Mean absolute deviation

Module-4
Facility planning
FACTORS AFFECTING LOCATION DECISIONS
DECIDING ON DOMESTIC / INTERNATIONAL LOCATION
-Political stability
-Export or Import quotas
-Exchange rates
-Cultural and economic considerations
-availability of natural resources
-cost of labour.
REGIONAL LOCATION DECISION:
- Availability of raw materials.

- Nearness to source of raw materials
- Nearness to market
- Proximity to suppliers
- Availability of power
- Transport facilities
- Suitability of climate
- Govt. Policy
- Competition between states
SELECTION OF COMMUNITY
- Availability of labour
- Civic amenities for employees
- Existence of complementary, ancillary and competing industries.
- Finance & Research facilities.
- Availability of water
- Availability of firefighting services
- Local Taxes & Restrictions.
SELECTION OF EXACT SITE
- Area of land available

- Topography
- Cost of land

- Disposal of waste
- Community attitude.
Facility Location Models:-
1. Factor Raging Method.

2. Point Rating Method.
3. Break-even analysis
4. Qualitative Factor analysis.
a) Factor Rating Method:-

Factor Rating Method Involves giving rating to each factors based on its important factor ratings
are used to evaluate alternative locations.
Advantages:-
- It facilitates communication about why one location / site is better than another.
- Enables bringing diverse locational considerations into the evaluation process.
- Foster consistency of Judgment about location alternatives.
Point Rating Method:-
In this method, the relative weight a company assigns to each objective or to each of points a
perfect site would receive in each category. Each potential site is then evaluated with respect to
every factor a company is looking for and points are assigned for each factor. The site with the
highest total No. of points is considered superior to other sites.
The drawback of this method is that high score in any factor can overcome a low score is any
other factor.
Break-Even analysis:-
Locational Break- Even analysis is the use of cost-profit-analysis to make an economic

comparison of location alternatives. By identifying fixed and variable costs and drawing the
graphs of quantity Vs. Total costs for each location; we can determine the location which has the
lowest cost over a range of volume produced. Locational Break-even-analysis can be done
mathematically or graphically.
Qualitative Factor Method:-
If economic criteria (cost, revenue or profits) alone are not sufficiently influential to determine
the location alternative, a system of assigning weights to qualitative factors separately and
combining them to arrive at a total score is useful in making the location decision. This approach
in known as qualitative factor analysis method.

Facility Layout Planning:-
Facilities Layout refers to the configuration of Departments, work centers and equipment and
Machinery with focus on the flow of Materials or work through the production system.
Facility layout- Means planning for location of all machines, equipment, utilities, works to
customer service areas, Material storage areas, tool serving areas etc., and also planning for the
patterns of flow of Materials and people around into and within the buildings.
Objectives of a Good plant layout:-
1. Higher utilization of space, equipment and people.

2. Improved flow of Materials, Information and place
3. Improved employee morale and safe working condition.
4. Higher flexibility.
5. Improved production capacity.
6. Reducing material handling costs.
7. Reduced congestion or reduced bottleneck centers.
8. Reduced Health Hazard and accidents.
9. To provide ease of supervision.
10. To improve productivity.
11. To allow ease of maintenance.
12. To facilitate better supervision.
13. To utilize available space efficiency and effects.
Factors Influencing Layout changes:-
Primarily the layout of a plant is influenced by the relationship among materials, machinery and
men. Other factors as follows:-
1. Materials: - Plant layout includes provision for storage and handling of raw materials,
supplies and components used in production.
2. Product: - The type of product whether product is light or Heavy, big or small, solid or liquid
Eg. Ship building, Aircraft assembly, Locomotive assembly etc.,
3. Workers: - The Gender of employees (Men/ Women) the position of employees while
working (standing / sitting) employee facilities etc.,
Machinery and Equipments: - Type of product, volume of production, Type of processes

determines type of Machines and equipments to be installed e.g., CNC Machines, lathe
Machines, Automation Techniques, Robotics etc.,
5. Type of Industry: - Industries can be classified as - Synthetic Industry
- Analytical industry
- Conditioning Industry.
- Extraction Industries.
6. Location: - The size and terrain of the site selected for the plant influences the type of
buildings which in turn influences the layout design.

7. Managerial policies: - Regarding volume of production, provision for future expansion,

extent of automation, Make-or-buy decisions. Speed of delivery of goods to customers,
purchasing and Inventory policies and personnel policies influence plant layout design.
Types of plant layout:-
1. Process layout.
2. Product layout.
3. Fixed position layout.
4. Cellular manufacturing layout.
5. Hybrid Layout.
1. Process layout:
- It is also called as job shop or Functional Layout. The Machines and equipment of similar type
are grouped together and placed in one location in the process layout.
All metal cutting equipment like back saw, circular sewing machines, Lathe & turning machines,
Milling Machines, gas cutting Machines, welding Machines will be clustered in group and
housed in separate Location. These are usually called Turning shop, milling shop Gear shop and
Lubrication shop. Etc., sequencing of shops is generally as per a typical product.
The product is given secondary consideration and the process is more important. This
configuration is good for job orders.
Example: - Hospitals.
Advantages:-
Break down of Machines does not stop the entire production.
The existing machines can be fully utilized production flexibility is possible without any changes
in Machines.
Special skills can be developed in workers job insensitive schemes can be developed.
Disadvantages:-
- Large Inventories and consequent cost increase line balancing is not possible.
- Processing time Increases due to ling travels.
- Production planning and control is difficult.
- It is difficult incentive schemes.
Product layout:-
A product layout or straight line layout is a single product oriented layout appropriate for a
standardized product and for large volume production the facilities are laid out such that each
equipment gives a specialized service of sequence of task. In this system the product passes
through all the Machines in a sequence.
Example: - Pharma tab letting, bottling of beverages, car Manufacture, scooter / bike
Manufacture, car washers, cafeterias etc.,
Advantages:-
- Less material handling due to straight Line movement of Materials.
- Idleness and Idle capacity is removed by Maximum space utilization.
- Easy to control production volumes and quality.
- Does not require frequent Machine set up.
- Scheduling, routing and managing in process Inventories are simple.

Disadvantages:-
- Breakdown of one machine in Line stops entire process.
- Benefits of skills of good supervisor cannot be used.
- Change of product or volume change brings problems of utilization of large resources.
- The system is Inflexible.
Fixed position layout:-
As the term itself implies, the fixed position layout involves the movement of men, and machines
to the product which remains stationary. In this type of layout, the material or major component
remains in a fixed location and tools, machinery and men as well as other pieces of material are
brought to this location. It is also called as static layout; this type is normally used in the
manufacture of bulky and heavy products.
Ex: locomotives, ships, aircraft, submarines, space crafts, boilers etc.
Advantages
- Men and machines can be used for a wide variety of operations.

- In investment on layout is very small.
- Cost of Transporting bulky items can be avoided.
4) Cellular manufacturing layout (CM)
In cellular manufacturing (CM) machines are grouped into cells, and the cells function somewhat
like a product layout within a larger shop or process layout. Each cell in CM layout is formed to
produce a single parts family- a few parts, all with common characteristics, which usually means
that they require same machines and have similar
Machines settings.
Ex: - Gear shop, watch outer casing shop.
Advantages:
- Lower work-in progress Inventory

- Reduced material handling cost
Shorter flow times in production
- Simplified production planning
- Improved visual control
- Quality tends to improve
Disadvantages
- Reduced manufacturing flexibility

- Potentially increased machine down time

- Duplicate pieces of equipment may be needed so that parts need not be transported between
cells.
5) Hybrid layout
Generally manufacturing layouts are a combination of process and product layout these are
called Hybrid Layout. The Departments are arranged as per processes but the product flow
through on a product layout. In a mixed layout a good compromise is made of a process and a
product layout to get benefits of both type as applied to a specific product.
Product layout may be separated to some extent. Product line due to process heat, fumes bad
smell etc. which need special treatment maximum use of capacity of machines and space
available. This is done by diversification of product layout for main product and process layout
for joint or by products space constraints and production at different locations brings is hybrid
layouts to avoid large in process inventories.

MODULE-5
Employee productivity
Productivity: - Productivity is the relationship between the output of an organization and inputs
required to produce these outputs. Productivity is expressed as the ratio of output to some or all
of the resources used to produce the output.
Productivity = Output / input
Labour productivity = Units produced / Hours worked
Capital productivity = output/capital input
Material productivity = output/material input
Machines productivity = output/machine hours input
Total productivity = output/labour+material+energy+capital.
Factors affecting productivity
1. Technology
2. Capital investment
3. Quality of products and services
4. Process or methods
5. Management.
6. Standardization of process
7. Quality differences
8. Employee attitude
9. Union activity
10. Power shortage
11. Labour turnover
12. Govt. policies and regulations
13. Work place design.
14. Plant layout and process.
15. Plant maintenance.
Productivity improvement Techniques
1) Employee based technique: which includes financial incentives. Fringe benefits, promotion,
policies, job enrichment, employee participation in management employee training and
education.

2) Material based techniques: such as inventory planning and control. Material requirement
planning material handling system, quality control etc.
3) Task based Techniques: such as engineering, work measurement, job design, job evaluation
and human factor engineering.
4) Products based techniques: such as product standardization, simplification and diversification,

product reliability, advertising and promotion, value analysis, research and development.
5) Technology based Techniques: (based on computer engineering) such as Robotics, CAD,

CAM, electronic data processing, group technology. Flexible manufacturing, total product
maintenance, machine reconditioning etc.
Work Study
Work study is defined as that body of knowledge concerned with the analysis of the work
methods and the equipment used in performing a job. The design of an optimum work method
and the standardization of proposed work methods.
Objectives of Work study:
1) To improve productivity of current jobs and maximize productivity.

2) To reduce waste through standardization of work elements of job.
3) To increase industrial productivity through job satisfaction.
4) To improve labour efficiency
5) To enable optimal utilization of plant
6) To ensure most effective utilization of human effort.
7) To determine efficient work methods
8) To evaluate human effort
9) To establish standards of performance for employers.
Work study procedure
1) Select the work to be measured.

2) Record all the relevant facts about the job or process.
3) Examine critically all recorded facts, questioning the purpose, place to eliminate ineffective
time.
4) Develop a new method for job/process
5) Measure the work content and establish the standard time using an appropriate work
measurement technique.
6) Define the new method for the job.
7) Maintain the new method for job/process/operation.

Benefits Of work study
- Increased productivity and operational efficiency

- Reduced manufacturing costs
- Improved work place layout
- Fair wages to employees
- Improved work flow
- Reduced material handling cost
- Better man power planning
- Better working conditions to employees.
Method study
Method study is a scientific technique of observing, recording and critically examining the
present method of performing a task or job or operation with the aim of improving the present
method and developing a new and cheaper method.
Objectives of Method study
- To study the existing proposed method of doing any job operation or activity
- To develop on improved method.
- To improve utilization of resources.
- To eliminate wasteful and inefficient motions.
- To standardize work network / processes.
Advantages of Method Study:-
Work simplification.
Improved Working Method.
Better Product quality.
Improved workplace layout.
Improved equipment design.
Improved work flow.
Higher safety to workmen.
Shorter Production cycle time.
Reduced material consumption & wastages
Reduced manufacturing costs.
Method study procedure:
1. Select: - The work or job to be studied and define the objectives to be achieved by the
method study. The job selected to have max economic advantage.
2. Record:- all the relevant facts or information pertaining to the existing methods
using recording Techniques such as

a. Process charts: - Outline process chart.

Operation process Chart.
Man-Machine Chart.
Multiple-activity chart.
Motion chart.
SIMO chart.
Two handed process chart.
b. Diagrams: - Flow diagram.
String diagram.
Cycle graph.
Chronocyclical graph.
3. Examine: - the recorded facts critically challenging everything being done and seeking
alternatives, questioning the purpose, the means, sequence, place and the person.
4. Develop: - the improved method by generating several alternatives and selecting the best
method. The factors to be considered are:
Cost of implementation.
Expected savings.
Feasibility.
Productivity.
5. Install: - The improved method in three phases- planning, arranging and implementing
phases.
6. Maintain: - New method by ensuring that the installed method is functioning well. This is
done by periodic checks and verification at regular intervals. Proper control procedures are used
to ensure that the new method is preached to achieve the benefit.
Work Measurement:-
Work measurement is defined as application of Techniques designated to establish the work

content of a specified task by determining the time required for carrying out the task at a defined
standard of performance by a qualified worker.
Objectives of work measurement
Improved planning and control of activities

More efficient manning of plant
Reliable indices for labour performance
Reliable basis for labour cost control
Basis for sound incentive schemes.

Steps in work measurement
Break the job into elements.

Record the observed time for each element by time study
Establish elemental values by extending observed time into normal time.
Assess relaxation allowance for personal needs and physical and mental fatigue.
Add the relaxation allowance time to normal time.
Determine the frequency of occurrence of each element in the job.
Time study
Time study is a work measurement technique for re cording the times and rates of working for
the elements of a specified job carried out under specified conditions and for analyzing the data
so as to obtain the time necessary for carrying out the job at a defined level of performance.
Objectives of Time Study
- To furnish a basis of comparison for determining operating effectiveness

- To set labour standard for satisfactory performance.
- To determine standard costs.
- To compare alternative methods in method study
- To determine basic/normal times.
- To determine the no. of machines.
- To balance the work of operators. .
- To provide a basis for setting piece rate/incentive wages.

MODULE 6
Capacity planning
Capacity Planning:
Capacity refers to the maximum load an operating unit can handle. The operating unit might be a
plant, a department, a machine, a store or a worker.
Production capacity:
The production facility of a facility or a firm is the maximum rate of production the facility or
the firm is capable of producing. It is usually expressed as volume of output per period of time.
Types of capacity
(i) Fixed capacity: This refers to the capital assets (buildings and equipment) a firm possesses at
a particular time. It cannot be easily changed in a short period of time.
(ii) Variable capacity: This refers to the size of the work force. The no. of hrs. Per day or per
week the equipment and labour work and the extent of overtime and subcontracting of work.
(iii) Immediate capacity: is that which can be made available within the current budgeted period.
(iv) Potential capacity: is that which can be available within the decision Horizon of the
management.
(v) Design capacity: It is the planned rate of output of goods or services under normal working
conditions. It sets the upper limit to capacity assuming that there is no capacity loss due to
absenteeism, poor planning & Non-availability of materials etc.
(vi) Operating capacity: It is the capacity which can be utilized after taking into account the
capacity losses due to ineffectiveness, bad planning, rejections and sc rap rate etc.

(vii) System capacity: is the maximum output of a specific product or product mix, a production
system can produce. It is less than design or installed capacity because of limitation on the
system due to
(i) Changes in product mix (ii) Quality specifications (iii) Balance of equipment and labour.
(viii) Normal or Rated capacity: It is the estimated quantity of output or production that should
be normally achieved taking into consideration the overall efficiency of equipment and labour.
The actual capacity which is available for utilization is less than the rated capacity and is
expressed as a percentage of rated capacity.
ix) Utilized capacity: This is the actual output achieved during a particular time period.
Utilization = Actual output
Design capacity
Actual output
System efficiency= System capacity
X) Peak capacity: It is the maximum output that a process or facility can achieve under ideal
conditions, peak capacity can be reached by using excessive overtime, extra shifts, over staffing
and subcontracting.
Xi) Surplus capacity: It is the excess or unutilized capacit6y which is available as surplus to be
utilized for any new customers order or any increased in forecasted demand for a Future time
period.
xii) Bottle neck capacity: Most facilities have multiple operations and often their effective
capacities are not identical. A bottle neck is an operation which has the lowest effective capacity
of any operation in the facility and thus limits the system‟s capacity and output.

Factors affecting determination of plant capacity:
i) Market demand for the product

ii) Capital Investment required
iii) Level of automation desired.
iv) Type of Technology selected
v) Changes in product design, process design, market conditions and product life cycle.
vi) Product obsolescence and Technology obsolescence.
vii) Flexibility for capacity additions.
Capacity planning decisions:
Capacity planning involves activities such as

a) Assessing the capacity of existing facilities
b) Forecasting the long range future capacity needs.
c) Identifying and Analyzing sources of capacity for future needs
d) Evaluating the alternative sources of capacity based on financial, Technological and
Economic considerations.
e) Selecting a capacity alternative most suited to achieve strategic mission of the firm.
Types of capacity planning
A) On the basis of time horizon,

a) Long range (term) capacity planning
b) Short range (term) capacity planning
B) Based on the amount of resources employed,
a) Finite capacity planning
b) Infinite capacity planning
(i) Long term capacity planning: long term capacity planning is done to include major changes
that affect the overall level of output in the long run .the major change could be decisions to

develop new product lines, expanding existing facilities and construct new or phase out existing
production plants.
(ii) Short term capacity planning: is concerned with meeting the relatively intermediate variation
in demand due to seasonal or economic factors. Short term capacity planning involves adjusting
the capacity to match the varying demand in short run by
a) Use of overtime or idle time
b) Increasing the No. of shifts
c) Subcontracting to other firms.
Finite capacity planning: when the customer doesn‟t specify the delivery schedule or where the
products are produced to stock and sell. It is simpler to use forward scheduling based on finite
capacity. (The surplus capacity available to accommodate the new customer order) to arrive at
the delivery or completion schedule.
Infinite capacity planning: If the delivery schedule is fixed by the customer, then the backward
scheduling is done to accommodate this delivery schedule by planning for infinite capacity
(capacity required to execute the customer order in the shortest period possible)
Factors affecting capacity planning:
a) Controllable factors
b) Less controllable factors.
Controllable factors include amount of labour employed, facilities installed. Machines, tooling
shifts of work per day, days worked per week, overtime work, subcontracting, preventive
maintenance, and no. of production set ups.
Less controllable factors include absenteeism. Labour performance, machine break-downs,
material shortages, scrap and reworks, strike, lock-out fire accidents etc.

Developing capacity alternatives: To enhance capacity Management, the following approaches

to capacity alternatives could be developed.
i) Designing flexibility into the system:
Designing flexible production systems can offer potential benefits in long range capacity
planning because of the risks inherent in long term forecasts.
Ex: It would be less expensive to provide for future expansion in the originated design of a
structure rather than remodeling an existing structure to accommodate higher production
capacity.
ii) Differentiating between new and mature product and services:

Capacity requirements of mature products can be predicted more precisely and mature products
may have limited life spans. The possible limited life span of matured products or service may
necessitate finding an alternative use for the resulting excess capacity at the end of life span. On
the other hand, new products tend to carry higher risk because the quantity demanded and
duration of the demand cannot be predicted accurately.
iii) Taking a big- picture approach to capacity changes:

When developing capacity alternatives a firm must consider how different parts of the system
interrelate. Ex., when the management of a five star Hotel makes a decision to Increase the No
of rooms, it must also consider probable increased demand for parking lots restaurant seating
capacity, bigger dining hall and kitchen capacity.
iv) Preparing to deal with “Chunks of capacity: - Usually, capacity increases are often acquired
in the form of fairly large chunks of capacity rather than small increments is capacity.
Ex.: in a steel plant, the existing capacity of a furnace may not be enough to meet the Demand,
but installing an additional furnace would result in having less capacity because additional
furnaces cannot be installed in small capacity chunks.

v) Attempting to smooth out capacity requirements:

Having unevenness in capacity requirement may be problematic. For e.g. during seasons of bad
or extreme weathers, more and more people may tend to use public transport vehicles for their
travel rather than using their own vehicles. Consequently the public transportation system may
tend to alternate between underutilization and over utilization.
vi) Identifying the optimal operating level:-

The optimal operating level is the Ideal level of operation at which the cost per unit is the lowest
for the production unit. Larger or smaller volumes of output would result in higher unit cost.
Aggregate production planning:-
It is the process of determining output levels (units) of product groups over the next 6 to 18
months period on a weekly or monthly basis. The plan indicates the overall level of outputs
supporting the business plan. The aggregate plan is a statement of a firm‟s production rates,
work-force levels and Inventory holding based on estimates of customer requirements and
capacity Limitations.
Objectives of Aggregate planning:-
1. The overall objective is to balance conflicting objectives involving customer service, work
force stability, cost and profit.
2. To establish company-wide strategic plan for allocating resources.
3. To develop an economic strategy to meet customer demand.

Importance of Aggregate planning:-
1. Engineering: - New products, product design changes and machine standards.

2. Materials: - Supplier capabilities, storage capacity and materials availability.
3. Operations: - Current Machine capacities, plans for future capacities, workforce
capacities and current staff levels.
4. Marketing & Distributions: - Customer needs demand forecasts, competition behavior.
5. Accounting & Finance: - Cost data and financial condition of the firm.
6. Human Resources: - labour market conditions and training capacity.
Aggregate Capacity Planning:-
It is the process of devising a plan for providing a production capacity scheme to support the
intermediate range sales forecast.
As forecasted demand becomes known in the form of customer orders, aggregate capacity plans
may have be to revised upward and downward to avoid either over loaded or under loaded
facilities.
Need for aggregate capacity planning:-
1. It facilitates fully loaded facilities and minimizes overloading and under loading and
keeps the production costs low.
2. Adequate production capacity is provided to meet expected aggregate demand.
3. Orderly and systematic transition of production capacity to meet the peaks and valleys of
expected customer demand is facilitated.
4. In times of scarce production resources, get the maximum output for the amount of
resources enhanced.
5. To manage change in production / operations management by planning for production
resources that adapt to the changes is customer demand.

Steps in Aggregate Capacity planning:-
 Prepare the sales forecast for each product that indicates the quantities to be sold in each
time period over the planning horizon.
 Sum up the individual product or service forecast into one aggregate demand for the
factory.
 Transform the aggregate demand for each time period into labour, materials, machines
and other elements of production capacity required to satisfy aggregate demand.
 Develop alternative resource schemes for supplying the necessary production capacity to
support the cumulative aggregate demand.
 Select the capacity plan from among the alternatives considered that satisfies aggregate
demand and best meets the objectives of the organization.
Approaches to Aggregate planning:-
1. Top Down approach: -

Involves development of the entire plan by working only at the highest level of consolidation of
products. It consolidates the products into an average product and then develops one overall
plan. This plan is disintegrated to allocate capacity to product families and individual products.
2. Bottom-up Approach: -
Involves development of plans for major products or product families at some lower level within
product line. These sub plans are then consolidated to arrive at the aggregate plan which gives
the overall output and the capacity required to produce it.
3. Capacity Requirement Planning:-

Capacity requirement planning is a technique for determining what labour / personnel and
equipment capacities are needed to meet the production objectives symbolized in the Master
Production schedule (MPS) and the Material requirement planning (MRP-I)

Aggregate capacity planning strategies:-

Aggregate capacity planning involves the best quantity to produce during time periods in the
Intermediate-range Horizon and planning the lowest –cost Method of providing the adjustable
capacity to accommodate production requirements.
Two types of aggregate plans that are commonly used are-
a. Level capacity plan.

b. Matching capacity with aggregate Demand plan.
a) Level capacity plan: Level capacity plans have uniform capacities per day from time period to
time period. The underlying principle of “Level Capacity Plan” is produce to stock and sell
firms is “operate production systems at uniform production levels and let finished goods
inventories rise and fall as they will to buffer the differences between aggregate demand and
production levels from time period to time period”.
Advantages: cost of hiring and laying off workers and using overtime is practically eliminated.
The cost of locating and developing new sources of material supplies is minimized.
ii) Labour and material cost/unit of output is low.
iii) Simplified supervision and low scrap rates since workers are experienced in their jobs.
iv) Low operating cost
v) Dependable production rates.
Disadvantages:
a) Results in higher finished goods.
b) Higher Inventory levels
c) Increased Inventory carrying costs.

B) Matching capacity with Aggregate demand plan:

In this plan, the production capacity is matched with the aggregate demand in each time period.
The work force is fluctuated to support the aggregate plan. Material flows and machinery
capacity would be allowed to change from quarter to quarter to match the aggregate demand.
The main advantage of this plan is the lower levels of finished goods. Inventory resulting in
lesser carrying costs when compared to level capacity plan. However labour and materials cost
tend to be higher because of frequent changes in work force, material supplies and increasing or
decreasing machine capacities.
Strategies for aggregate capacity planning:
1) Active strategies: The objective is to smooth out the peaks and valleys of demand during the
planning horizon to obtain a smoother load on production facilities. During periods of low
demand, increased sales can be encouraged through price cuts. During periods of high demand,
management can choose not to meet the entire demand requirement but this approach ignores
opportunities of increased revenue.
2) Passive strategies: The objective is not to change demand but to absorb somehow the
fluctuations in demand. The alternatives include varying any one of the work force size,
production rate, and inventory, sub-contracting and capacity utilization.
Resource Requirement planning:
Resource requirement planning is directed at determination of the amount and timing of

production resources such as personnel, materials, cash and production capacity needed to
produce the finished products or end Items as per the master production schedule.
It is an aggregate planning tool that is used to sum up and evaluates the work load that a
production plan (MPS) imposes either on all work centers or on only selected key work center
where resources are limited, expensive or difficult to obtain from outside sources. Rough cut
capacity planning is usually applied to the critical work centers which are most likely to be
bottlenecks.

Resource Requirement Planning System (Diagram)
Functional Inputs Resource requirement Outputs

planning
Marketing short range Marketing end item
demand forecast production schedule
Finance cash availability Finance/accounting –
inventory norms. Inventory level schedule
Production capacity Production -MPS, load
constraints, development Master production profile capacity utilization
of MPS, CRP and MRP. schedule (MPS) data,
Engineering change in
product design and Planned materials order,
product structure. shop floor plans.
Personal – employee
availability Engineering new design
Purchasing – material Material requirement incorporation data.
supply availability planning(MRP)
MIS. Data base system – Personnel – employee
Bill of material file. requirement schedule
Purchasing planned order

Capacity requirement and order releases
planning(CRP)
MIS. Data base system
updated inventory status file.
Material Requirement planning: Material requirement planning is computer based system in

which the given MPS is exploded into the required amounts of raw materials, parts and sub-
assemblies, needed to produce the end items in each time period of the planning horizon. The

gross requirement of these materials is reduced to net requirements by taking into account that
material that are in inventory or on order.
Objectives of MRP
1) to improve customer service by meeting delivery schedules promised and shortening delivery
schedules promised and shortening delivery lead times.
2) To reduce inventory costs by reducing inventory levels,
3) To improve plant operating efficiency by better use of productive resources.
Benefits of MRP:
a) Inventory: the info provided by the MRP system is useful to better coordinate orders for
components with production plans for parent items. This results in reduced levels of average
inventory for dependent demand items.
b) Production: Info from MRP facilitates between utilization of human and capital resources.
c) Sales: MRP helps to check in advance whether the desired delivery dates are achievable. It
improves the company‟s ability to react to changes in customer orders.
d) Engineering: MRP helps in planning the time of design releases and design changes.
e) Planning: MRP can simulate changes in the MPS for purpose of evaluation of alternative
MPS. It facilitates projection of equipment and facility requirement.
f) Purchasing: MRP helps purchase dept. by making known the real priorities and recommending
changes in due dates for orders so that the purchase staff may expedite or delay the orders placed
on vendors.
g) Scheduling: better scheduling can result from MRP through better knowledge of priorities.

h) Finance: MRP can help better planning of cash flow requirements. It can identify time
capacity constraints or bottleneck work centers thereby helping operations managers to make
better capital investment decisions.
Elements of MRP
a) Master production schedule (MPS)

The MPS specifies what end products are to be produced and when? The planning Horizon
should be long enough to cover the cumulative lead times of all components that must be
purchased or manufactured to meet the end product requirements.
b) Bill of Materials (BOM) file:

This file provides there info regarding all the materials parts and sub-assemblies that go into the
end product. The bill of materials can be viewed as having a series of levels, each of which h
represents a stage in the manufacture of the end product. The highest level of BOM represents
the final assembly or end product. The BOM file identifies each component by a unique part
number and facilitates processing by exploding the end product requirements into component
requirements.
c) Inventory status file:

The inventory status file gives complete and up to date info on hand quantities. Gross
requirements scheduled receipts and planned order releases for the item. It also includes other
into such as lot sizes, lead times, safety stock levels and SC rap allowances. The gross
requirements are total needs from all resources whereas the net requirements are „net‟ after
allowing for available inventory and scheduled receipt.
Scheduled receipts are the quantities already on order from a vendor or in house shop. Planned
receipts are quantities that will be ordered on a vendor or in house shop. Planned order release
indicates the quantity and date to initiate the purchase or manufacture of materials that will be
received on schedule after the lead time offset.

MODULE –VII
MATERIALS MANAGEMENT
Materials are any commodities used directly or indirectly in producing a product or service as
raw materials, component parts, assembles and supplies. In the manufacturing organizations.
The important inputs are referred to as 5 Ms, Men, Machines, Money, and Materials & Methods.
According to Bailey and Farmer, a material Management is the “Management of the flow
of Materials into an organization to the point, where those materials are converted into firm‟s end
products.”
According to Lee and Dobler, Materials Management is the “process by which an organization is
supplied with goods and services that it needs when the Material is either consumed or
incorporated into some product. The executives who engage in Materials management, are
concerned with their basic activities, viz., buying, storage of Materials and movement.”
Importance of Materials management:-

 The amount of Money spent on materials is higher than other inputs put together.
(Machinery, labour, energy etc.,)
 Materials offer considerable scope for reducing costs and improving profits.
 Since material is treated as a major part of current assets, improving return on investment
depends on effective utilization of materials.
 Materials add value to the product.
 Quality of finished product depends on the quality of materials used to produce them.
 Materials management encompasses areas such as purchasing, storing, Inventory control,
Transportation and shipping.
 Materials are life blood of development of Humanity.
Objectives of Materials Management:-

1. Lower prices for materials and equipment purchased.
2. Higher inventory turnover ratio.
3. Continuity of supply of materials.

4. Reduced procurement lead time.

5. Reduced Transportation cost.
6. Less duplication of efforts.
7. Reduced obsolescence of Materials.
8. Improved vendor relationship.
9. Better inter-departmental co-operation.
10. Improvement of overall productivity of firm.
Functions of materials Management:-

1. Materials planning and budgeting.
2. Procurement of Materials.
3. Storage of Materials.
4. Issue of Materials.
5. Inventory control
6. Vendor development.
7. Vendor evaluation and vendor rating.
8. Material accounting.
9. Materials handling and transportation.
10. Disposal of scrap.
11. Traffic management.
Purchasing:-
It refers to the function of procuring of materials, supplies, Machines, equipments, tools, spare
parts and services required for meeting the needs of production department and maintenance
department.
Functions of purchasing:-
1. Materials requirement review.
2. Specifications development for materials.
3. Make-or-buy analysis.
4. Materials standardization.

5. Determination of Inventory levels.

6. Determination of quality requirements.
7. Negotiation of price & terms of supply.
8. Supplier selection.
9. Joint problem solving with suppliers
10. Productivity / cost improvement.
11. Vendor analysis / rating.
12. Market analysis.
13. Price forecasting.
14. Value analysis.
15. Determination of purchasing policy.
Purchasing policies:-
It defines the basic decisions of Top management as they relate to buying actions. In most
companies, the following areas covered by policy statements.
 A definition of Authority and responsibility for purchasing.
 Relationship with vendors / suppliers.
 Treatment of sales representatives of vendor.
 Proper handling of competitive bidding.
 Reciprocity.
 Employee purchases.
 Ethical practices in purchases.
Purchasing Manuals: - Purchasing manuals are designed to avoid conflicts between

departments, to classify responsibility, and to provide consistent instructions covering the regular
activities of the purchasing department. There are two types of purchasing manuals.
a. Policy manual.
b. Procedures manual.

a. Policy manual: - is a written statement of company‟s general purchasing policies for use
by all concerned. Both inside and outside the company. copies of the purchasing policy
manuals may be made available to the vendors.
b. Procedure Manuals: - is a detailed precise statement of the intra-company procedural
responsibilities. This helps to ensure that all repetitive actions carried out in the
purchasing department will be performed in a consistently efficient manner.
Ethics in purchasing:-
a. Should not compromise on company‟s interest.
b. Should not exploit the buyer/ supplier.
c. Should not entertain gifts or prizes
d. Should not bribe middlemen / intermediaries
e. Should not exert undue pressure on supplier
f. Should not give misleading information
g. Should not inflate prices / offers.
Purchasing Methods:-
a. Purchasing by requirements:-
This means that no purchase is made until a need arises and then the quantity
bought covers only the current need. This method applies to emergency requirements or
too infrequently used goods which could not be stocked.
b. Purchasing for a specified future period:

This is a standard practice for goods regularly used, but not in large quantities and
for which price variations are negligible. Most suppliers are bought by this method.
C. Purchasing According to Market:-

This method is designed to take advantage of price fluctuation. The quantities purchased
conform to the production schedule and its possible changes or to the demands of the plant or
business. In cases where the firms have definite manufacturing or consumption programs. The

purchase department studies the Market statistics and factors that affect prices and forecast the
trend of market prices and buy to best advantages.
D. Speculative purchasing:
This refers to buying when market is low (low price), more than can possibly be used in
manufacturing, with the idea of reselling much of the material at a higher price to users who may
come to the market when the price is high.
e. Forward Buying:-
It is nothing but committing an organization into the future (usually one year). The buyer
commits to buy a future date a contracted quantity at contracted price, whatever may be the
ruling market price in the contracted period. The future commitment is decided depending upon
the availability of the item, financial policies, EOQ, Qty Discounts and staggered delivery.
f. Hedging:-
It is different from forward buying. In this the buyer tries to protect himself in the future
by entering into two transactions. A purchase contract and a sales contract in two different
markets, whose prices move up and down together. The profit or loss sustained in the buying
transaction is compensated by the loss / profit in selling transaction.
g. Contract purchasing:-
Contract purchasing offers advantages comparable to those of speculative purchasing.
By a contract calling for deferred delivery over a period, advantages can be had of low prices in
effect on materials at the time of placing the contract, while spreading delivery of materials over
a schedule consistent with estimated future requirements.
h. Group purchasing:-
A no. of small items can be purchased as group which offers the possibility of large savings.
When the items are small and of trivial value, the cost of placing an order often exceeds the
value of items purchased. Hence such items are better bought under the method of group
purchasing.
i. Blanket order:-
These are purchase orders placed and accepted for large quantities of Materials to be
delivered as later specified. By the agreement, the vendor agrees to supply and the buyer the

vendor agrees to supply and the buyer agrees to accept a stated no. of units, normally within a
given period.
j. Tender Buying:-
This method (also known as tender system) is adopted to procure materials at the most
competitive rates and to eliminate chances of undue favor to any supplier. The prime objective
is to avoid negotiation and give equal opportunity for all vendors. It is usually adopted by Govt.
Departments and public sector undertaking to choose the best supplier without any bias.
There are three kinds of tenders used are:-

a. Open Tender.
b. Limited Tender.
c. Single Tender
a. Open Tender: - Tenders are invited by advertising in at least three or four English
Newspaper and in Indian Trade Journal. The suppliers will usually have to quote in the
Tender forms along with earnest Money deposit. Once the quotations are received, the
tenders are opened publicity and a comparative statement is made and the tender is
awarded to the lowest tender meeting the technical specifications.
b. Limited Tender: - To avoid the quotation of an irresponsible bidder (Who quotes a very
low price in order to get the order, but will not be able to execute the orders) Limited
Tender system is used. In this, quotations are solicited by sending tender forms to get
quotations from a few selected suppliers who are competent to executive the order.
c. Single Tender: - For proprietary items or single source items, single tender system is
adopted.
Vendor Development & Selection: - Usually a combination of price, quantity, quality,

delivery time and service is used to rate the vendors, giving relevant weight ages to each of these
factors.
a. Reliability:-
- Is supplier reputed, stable and financially strong?
- Are the supplier‟s Integrity and ability beyond doubt

- Is the supplier going along with product development?

- Is the supplier‟s competitive strength as to price, quality etc. proved by past
experience?
b. Technical Capabilities:-
- Can supplier provide assistance as to application engineering?
- Can the supplier provide assistance as to analytical engineering?
- Can the supplier provide design assistance?
- Can the supplier handle special needs?
C. Convenience:-
- Can the supplier help reducing acquisition cost?
- Can he / she offer other related products?
- is he / she qualified to help in solving difficult problems?
- Does the supplier pack his product conveniently?
d. Availability:-
- Does the supplier help reducing acquisition cost?
- Does the supplier assure delivery in time?
- Are his / her stocks locally available and / or at short notice?
- can he / she plan his supply to Minimize inventory?
- Can he / she be depended on for a steady supply of materials?
e. After –Sales service:-
- does the supplier have a service organization?
- is an emergency service available?
- Are parts available when needed?
Sales assistance:-
-Can the supplier help building mutual markets?
- will he / she recommend our products?
- Does the use of supplier‟s product enhance the appearance of our products?

Stores management:-
Receiving and storing are important flow control activities in the Materials Management
chain. In industries, Materials have to be stocked to meet the consumption requirements during
lead time or extension of lead time due to delay by suppliers or due to unexpected increase in the
consumption rate. Ware housing is not the simple act of storing materials, but rather a package
of services which enables the smooth flow of materials through the production departments
without causing stoppage of production due to shortage of materials.
Types of Stores:-
a. Raw Material Store.
b. Component store.
c. Consumable Materials Stores.
d. Semi-finished goods stores.
e. Finished goods stores.
f. Inward goods stores / transit stores.
g. Holding stores.
h. Spare parts stores.
i. Inflammable materials stores.
j. Tools stores.
k. Stationery stores.
l. Maintenance Materials stores.
m. Rejected materials stores.
n. Scarp / disposal stores.
o. Stationary items stores.
p. Packing materials stores.
Functions of Stores Keeping:-

1. To receive raw materials, components, tools, equipment and other items and account for
them.
2. To provide adequate and proper storage and preservation of various kinds of materials.

3. To meet the demands of user departments by proper issues and keeping accounts of items
used by user department.
4. To minimize obsolescence, surplus and scrap through proper codification, preservation
and handling.
5. To highlight accumulation of stocks, discrepancies and abnormal consumption and
implement proper control measures.
6. To ensure good house-keeping to facilitate proper material handling, material
preservation receipt, stocking and issue of materials.
7. To assist material accounts department in stock verification and provide supporting
information for effective purchasing.
8. To co-ordinate store keeping with related production functions.
Roles & Responsibilities of Stores management:-
1. Facilitate a balanced and smooth flow of raw materials, components, tools and any other
items necessary to meet production requirements.
2. To maintain optimum stock of materials to compensate for irregular supplies by
suppliers.
3. To achieve efficient utilization of storage space.
4. To reduce usage of materials handling equipment.
5. To provide codification of stored items for easy recognition.
6. To enable flexibility in production schedules.
7. To facilitate quantity purchases at discount prices.
8. To keep the account of all goods kept in stores.
9. To prevent theft, damage, wastage and deterioration of stored materials.
10. To maintain record of all incoming materials and issue of materials to user department.
Inventory management:-
The term Inventory refers to any resource that has a certain value, which can be used at a
future occasion when the demand arises. Alternatively inventory may be defined as “Stock of
items kept on hand by an organization to be used to meet customer demand.”

Types of Inventory:-
I. Based on Nature of Materials:-
1. Production Inventories: - Raw materials, parts and component which become

part of the firm‟s finished product in the production process.
2. MRO Inventories: Maintenance, repair and operating supplies which are

consumed in the production process, but which does not become part of finished
product.
E.g., Lubricants, grease, cotton waste, spare parts.
3. In-process Inventories: - Also known as work-in-progress or semi-finished goods.

Inventories-these are parts or sub-assemblies found at various stages in the production
process.
4. Finished Goods Inventories: - Completed products kept in stores ready for

Shipment.
II Classified by how it is created:

1. Cycle Inventory: The position of total Inventory which varies directly with Lot size
(quantity ordered) e.g., If Q is the order quantity or the Lot size and the exactly lot,
and the supply is received exactly when the stock is NIL, maximum inventory is Q
and the average cycle inventory is half of quantity ordered.
2. Safety Stock Inventory: - Safety Inventories are held to avoid stock out conditions
which cause production stoppages and to protect against uncertainties in demand, lead
time, supply and consumption rates.
3. Anticipation Inventory: - Inventory of materials purchased in Bulk quantities in
anticipation of price rise and products having seasonal demands produced in

quantities more than the demand during off-seasons and held in inventory to meet
higher demand rate during seasons of High demand.
4. Pipe-Line Inventory: - Inventory moving from point to point in the materials flow
system. Materials move from supplier to a plant, from one operation to the next in the
plant and from the plant to the customer. Pipeline inventories also include materials
that have been ordered but not received.
5. Fluctuation inventory: - Inventory held as reserve stock to meet the unexpected
fluctuating demand over a period which cannot be predicted accurately.
Functions of Inventory:-
1. To meet anticipated Demand,
2. To smooth production requirements.
3. To decouple components of the production, distribution system.
4. To protect against stock outs.
5. To take advantage of order cycles.
6. To take advantage of quantity discounts.
7. To hedge against price increases.
Inventory costs:-
There are two types of costs associated with Inventory namely-
a. Costs associated with the purchase of Inventory items (cost of materials purchased)
b. Costs on materials consisting of three basic costs
- Ordering cost.
- Carrying cost.
- Shortage Cost.
EOQ: - (Economic Order Quantity)
D= Annual demand
Co= Ordering cost.

P= Unit price.
C1= Carrying cost in percentage.
Selective Inventory control
1. A-B-C-analysis:-
This is also referred to as “Always better control” or Pareto analysis. A-B-C analysis is a basic
inventory control Technique which is often the starting point. It can be applied to almost all
aspects of Materials management such as purchasing, receiving, inspection, store keeping and
issue of materials from stores, verification of bills. Inventory control, value analysis etc,
2. XYZ analysis:-
This classification is based on the value of inventory of materials actually held in stores at a
given time (usually during stock checking annually or half- yearly. XYZ analysis helps to control
average inventory value by focusing efforts to reduce the inventory of X items which are usually
10% of the no. of items stored, but counting for 70% of the total inventory value. Similarly Y
items are 20% of the no. of items stored and account for 20% of the inventory value the
remaining 70% of the items accounting for 10% of the total inventory value are „Z‟ items
3. VED Analysis:-
V-vital, E-Essential and D-Desirable. This classification is usually applied for spare parts to be
stocked for maintenance of machines and equipment based on the criticality of spare parts. The
stocking policy is based on the criticality of the items. The vital spare parts are those which can
cause stoppage of the plant if not available. Usually such spare parts are known as capital or
insurance spares. The inventory policy is to keep at least one number of the vital spare
irrespective of its value.
4. FSN Analysis:-
It stands for fast moving, slow-moving and non-moving items. The classification is based on
past consumption pattern. Items which are usually drawn from stores frequently are classified as
Fast moving items; items which are drawn once or twice a year are classified as slow- moving

items and items not drawn at all for past two years are classified as non-moving items FSN
analysis is useful to control obsolescence of raw materials, components, tools and spare parts.
5. HML Analysis:-
This stands for high value, medium value and low value items based on unit price of the item.
6. SDE analysis:-
This stands for scarce, items, difficult to procure items and easy to procure items. A scare item
is one which is not easily available in the market and reliable source may have to develop. Eg,
imported items may have to be stocked because it is difficult to procure and takes long lead time.
7. SOS analysis:-
S- Stands for seasonal items and OS stands for off-seasonal items. It may be advantageous to
buy seasonal items at low prices and keep inventory or buy at high price during off seasons.
8. G O L F Analysis:
This stands for Government, open market, local / foreign source of supply. For many items,
imports can canalize through Government agencies such as “state Trading Corporations, mineral
and metals Trading Corporation. Indian Drugs and pharmaceutical etc.
For such items the buying firms cannot apply any inventory control techniques and have to
accept the quota allotted by the government. Open market is those who form bulk of suppliers
and procurement is rather easy. L category includes those local suppliers from whom items can
be purchased. Off-the-shelf on cash purchase basis. F category indicates foreign suppliers.
Since an elaborate import procedure is involved. It is better to buy imported items in bigger lots
usually to buy imported items in bigger lots usually covering the annual requirements.

Module -8
Designing Service Delivery Systems
Introduction:
The essence of a service business is to provide and sell services. Therefore, how a company
delivers the services it offers will impact customer experience and directly influence repeat
purchase decisions .Consequently, how services are provided is central to both sales revenue
and profit growth. Two dimensions of a service that will affect the design of an appropriate
delivery system are the complexity of the offering itself and the characteristics of the market in
which the service is sold:
Service complexity – the complexity of a service will directly impact the number of steps it
takes to complete it. In many organizations the provision of a service is completed as a single
step (for example borrowing books from a library or paying in a cheque at a local bank), whereas
the processes involved to meet the needs of different patients in a hospital will comprise several
steps and several combinations of steps. The design of the service delivery system will,
therefore, reflect this complexity factor.
The market – a delivery system needs to provide the following dimensions:
– The technical dimension – concerns what the service comprises. For example, bread is baked
and cheques are processed. To complete these tasks requires appropriate technology (in the form
of skills and equipment) within the delivery system, in this instance a baker and ovens and
skilled staff and cheque processing equipment.
– The business dimension – how operations decide to provide a service will reflect the volumes
involved and the market drivers (order-winners and qualifiers) to be supported.
Distinctive characteristics of service operations:
1. Service/product mix
Customers receive impressions about an organization through their experience of the way a
service is delivered. These impressions will be created both by the product (how well the design
specification itself and delivery to this specification meets a customer‟s expectations) and the
service experience which a customer undergoes and which is uniquely linked to the service
delivery system.

2. Intangible nature of services
While products are tangible (a customer is able to see, feel, inspect and even test a product
before purchase), services are not. This presents a problem for both providers and customers.
While the latter rely on a firm‟s reputation, recommendations or „pot luck‟, the provider needs to
develop a service delivery system that provides the service dimension of the package such that
existing customers purchase again and new customers are attracted by factors such as reputation
and recommendation. In this way the delivery system creates the intangible customer experience
that constitutes the service element of the purchase, and so becomes a critical element of the sale.
3. Simultaneous provision and consumption of services
The simultaneous provision and consumption of most services precludes the use of inventory as
one way to help absorb fluctuations in demand. Whereas manufacturing companies may use
inventory as a way of transferring capacity from one time period to be sold in a later time period,
most service companies cannot. In a manufacturing firm, inventory serves as a convenient
boundary line, allowing the overall system to separate the management of the internal process
from the external environment of the market. The result is that inventory can be used to cushion
the process at both ends: it decouples the system from suppliers by holding materials and parts at
the beginning and from fluctuations in customer demand by holding finished products at the end.
The manufacturing process can thus operate as a closed system and, as a consequence, at a level
of output that is deemed most efficient for the overall business. Services, on the other hand,
operate as open systems and are thus exposed to the full impact of market demand variations.
The simultaneous provision and consumption of services also reduces (and often eliminates) the
opportunities for controlling the quality of the service provision in terms of meeting the
service/product specification. Unlike manufacturing where a product can be checked before
delivery, services must build other ways into the system to ensure that the specification is met as
it is delivered
4. Time-dependent capacity
The usefulness of capacity in a service firm is time dependent. If a hotel room, passenger airline
seat, space on a container ship, goods train or truck is not used at the time, the capacity is lost
forever. Similarly, if a restaurant cannot seat you for dinner, the sale is lost forever. Therefore, a
service firm has to find ways to handle the fact that unused capacity is perishable while
insufficient capacity will lose sales.
5. Customers as participants in the service delivery system
In most service firms the customer forms part of the delivery system and is often actively
engaged in the system itself. The popularity of supermarkets, self-service stores, internet
purchasing and online banking are illustrations of this phenomenon.

For the firm, the customer provides capacity within the system that helps lower costs and also
facilitates some aspects of operations management. For example, where customers undertake
part of the role of a server, staff costs and the need to plan staff capacity in this phase of the
delivery system are both reduced
6. Customer management
The design of the delivery system is such that customers and staff are linked. Customers are not
just onlookers; their presence creates a dynamic that needs to be managed.
7. People skills
In service organizations, some staff deals directly with customers. The customer/server interface
that takes place can often combine the business dimensions of both provision and sale. One
consequence is that the range of people skills that staff needs to develop as part of the delivery
system will have a significant effect on the perceived value of the service by the customer
8. Effective services are reproducible
One of the reasons for the emergence of large service companies in sectors that used to be
regarded as local lies in the improved method of reproducing service delivery systems. Franchise
companies, for example fast-food chains, are classic examples of this.
Here, control over key elements of the offering and delivery system such as the physical layout,
internal and external decor, range of offerings, purchasing of inputs (for example food
ingredients),service delivery system design, training and equipment is held and routinely
checked by the originating company. This approach allows companies to expand beyond their
initial geographical area using the same model and tried and tested approach
9. Site selection: proximity to the customer and multi-site management
In many companies the service provider and customer must physically meet for a service to be
performed. As a consequence, many service organizations are made up of small units of capacity
sited close to prospective customers. Either the customer comes to the facility (as in a restaurant,
retail store, hair dresser or hospital) or the service provider goes to the customer (as in a mobile
library or ambulance service). Of course, there are exceptions (for example distance learning)
and even more so with the growing use of IT systems (for example telephone and internet
banking, online shopping and passenger airline, holiday and theatre ticket sales).
Travel time and costs are thus reflected in the economics underpinning site selection, with many
small units of capacity bringing the added task of multi-site management. The resulting
challenges for an organization include the fact that services are performed in the field, so to
speak, and not in a controlled factory environment. To achieve and maintain consistency across

multiple locations requires a combination of standardization within the service delivery system,
extensive training, licensing and third-party or peer reviews.
10. No patents on services
The intangible portion of the service element of the package is more difficult to protect using
these legal formats. Although some protection of a service may be afforded by copyright and
trademarks, most service firms need to recognize and highlight the service delivery system‟s role
in protecting the service concept. Capturing and retaining market share by designing robust
delivery systems that meet the needs of customers and respond and proactively lead change and
development are essential dimensions of many successful service organizations.
Factors involved in delivering services
1. The technology/people mix
Predominant base Level of automation and Examples

people skills
Automated Cash dispensing
Photocopying
Vending machines
Car wash
Technology Monitored by unskilled/semi- Photocopying

skilled people Dry-cleaning
Gardening
Tree surgery
Taxis
Operated by skilled people Airlines

Computer time-sharing
Word processing
Cleaning services
Unskilled Security guards
Catering
People
Vehicle maintenance
Skilled Appliance repairs
Lawyers
Professional Management
professional consultants
Accountants

2. The nature of the services to be delivered
Understanding how services differ is, therefore, an important prerequisite when designing the
delivery systems to be used. Organizations typically design and develop a number of delivery
systems to meet what they sell.
Categories of services
1. Professional services
• Management consultants
• Law firms
• Architects
• Interior designers
2. Service shops
• Hospitals
• Internal decorating
• Electronic equipment repairs
• Dentists
3. Mass services
• Retail banking
• Supermarkets
• Financial services: cheque and voucher processing
Service delivery systems
1. The market
The market provides the external context in which the service delivery system needs to be set
and where the process of design and development starts. Identifying volumes, the relevant order-
winners and qualifiers to retain and grow share in chosen markets, together with the service mix
and design specifications, become the specification for the design of the system.

2. The service encounter and experience
The service encounter (where and what is delivered) and the service experience (the reality of
the service delivered) are the essence of the delivery system. The service encounter needs to
ascertain customers‟ expectations of what the service offering will provide, which need to be set
against the operations standards that the organization has set. Similarly, the reality of the service
delivered (the service experience) needs to check customers‟ perceptions with operations
performance. In this way, customer needs and the reality of provision (what the company sets out
to do and how well it does it) provide the essential inputs into the continuous development of the
services on offer.
3. Retention
One aim of the service delivery system is to help retain and grow market share. The delivery
system design, therefore, needs to monitor its level of success while determining what to do to
recover failure situations. On the other hand, getting it wrong and leaving customers dissatisfied
with the outcome or being too slow or too involved spells trouble
IT-based and other service delivery system designs
Information technology
 automated banking
 teleworking
 e-commerce
 travel booking
 call centers
 grocery shopping
Alternate approaches
 Manual
 semi-automated
 Robotics
Issues considered in delivery system design
1. Enhancing services: making the intangible tangible
Companies basing their approach on service differentiation employ several strategies to enhance
the service provided. One way is to bring the intangible facets of a service to the attention of a
customer by making them tangible. By doing this, parts of a service package that may go
unnoticed by the customer now become a visible part of the provision.

2. Determining the level of customer participation in the delivery system
When designing the delivery system organizations need to decide the extent to which customers
will or will not participate in the creation of the service. The degree of customer involvement in
the system affects many factors including the provision and management of capacity, service
levels, staff training requirements and costs. Higher levels of customer participation in the
delivery system make capacity management easier and reduce the cost of its provision, while
lower levels decrease the degree of customer contact and the opportunities to personalize the
service and encourage customer loyalty.
3. Maximizing the use of skilled staff
Businesses that offer a wide range of services will also typically employ a wide range of skilled
staff. As higher skilled people are more difficult to find and command higher salaries, ensuring
that there is a match between the level of difficulty and the level of staff skill needed to deliver
the task is an important factor in delivery system design
4. Determining the level of server discretion within the delivery system
The system–customer interface allows for servers to exercise discretion. It is important,

therefore, for organizations to establish the appropriate level of discretion to be exercised within
each service category and delivery system (that is, the extent to which it is desired or appropriate
that a server is allowed to interpret what should constitute the service specification actually
provided)
Service profiling
Markets are changing faster and are increasingly different rather than increasingly similar. For
operations to align its capabilities to the needs of the company‟s markets today and tomorrow, it
needs a way of assessing the level of current alignment and being alerted to future changes that
may reduce this essential support. Similarly, in its market-driving role it needs to agree with a
business, ahead of time, those order-winners and qualifiers it must improve to maintain or grow
share in current markets or enable it to successfully enter new markets.
The concept for undertaking this check is called service profiling. It offers an organization the
opportunity to test the current or anticipated degree of fit between the characteristics of its
market(s) and the characteristics of its existing or proposed process and infrastructure
investments. The principal purpose of this assessment is to provide a method to evaluate and,
where necessary, improve the degree of fit between the way in which a company qualifies and
wins orders in its markets and operations ability to support these criteria

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OPERATIONS MANAGEMENT 12MBA32

Subject Name: OPERATIONS MANAGEMENT

Module I: Introduction to Operations Management

What is operations management? Production system concept ,Transformation process, difference

Module II: Introduction and Break even analysis

Module III: Forecasting

Module IV: Facility Planning

DEPT. OF MBA / SJBIT Page 1

Module V: Employee Productivity

Module VI: Capacity Planning

Introduction to capacity planning – CRP, MRP, MRP 2. MPS. Managerial importance of

Module VII: Materials Management

Role of Materials Management- materials and profitability, Purchase functions, Procurement

Stores- types, functions, roles responsibilities, Inventory records,

Module VIII: Designing Service Delivery systems

Introduction, distinctive characteristics of service operations, Service/product mix, intangible

DEPT. OF MBA / SJBIT Page 2

Module Chapter name Page no.

1 Introduction to Operations Management 4 - 12

2 Introduction and Break even analysis 13 - 15

8 Designing service delivery system 62 - 68

DEPT. OF MBA / SJBIT Page 3

Introduction to Operations Management

What is operations management?

DEPT. OF MBA / SJBIT Page 4

DEPT. OF MBA / SJBIT Page 5

DEPT. OF MBA / SJBIT Page 6

Difference between product and services:

DEPT. OF MBA / SJBIT Page 7

Historical development of OM:

 JIT and TQC

DEPT. OF MBA / SJBIT Page 8

Current issues in operations management:

6. Technology: Automation, computerization, information and communication technologies

9. Environmental Issues: There is increasing emphasis on reducing waste, recycling waste,

DEPT. OF MBA / SJBIT Page 10

Operations strategy in Manufacturing:

DEPT. OF MBA / SJBIT Page 11

Developing a manufacturing strategy:

i) To translate required competitive dimensions into specific performance requirements

 Segment the market according to the product group

Operations strategy in services:

 Treatment of the customer in terms of friendliness and helpfulness

DEPT. OF MBA / SJBIT Page 12

Introduction and Break even analysis

Introduction to break –even analysis:

Operations management: - It is defined as the design, operation, and Improvement of the

FACTORS AFFECTING PRODUCTION AND OPERATIONS:

a) Reality of Global competition.

Productivity measures includes

Competitiveness is a crucial factor in determining the survival and growth of a firm.

DEPT. OF MBA / SJBIT Page 13

f) Time to perform certain activities.

Application of Break- Even analysis

a) Evaluating products or Services

a) Is the projected sales volume of the product service sufficient to break-even?

Evaluating alternative Processes

(Make –or – buy)

Break-Even analysis for Multi product cases

Vi = Variable cost / unit

P i= Unit selling price

Wi = Percentage of sales of 1th product of Total Sales.

DEPT. OF MBA / SJBIT Page 14

Major Process Decisions: