I.K. Gujral Punjab Technical University Jalandhar

Self Learning Material

Production and Operation Management

(BBA-406)

Course: Bachelors in Business Administration

Semester-IV

Distance Education Programme

I.K. Gujral Punjab Technical University

Jalandhar

Syllabus

Max Marks: 100

External Assessment: 60

Internal Assessment: 40

Objectives: This course will help the students to understand the importance of understand the

whole process of manufacturing a product or a service, focusing on the concept of optimum

utilization of resources and minimization of costs.

Unit I Production and operations management; its functions and relationship with other functional

areas.

Facility location decision, layout decision, product and process layout. Capacity planning.

Unit II Production planning and control: Planning, scheduling, routing etc. Assembly line balancing.

Work Study: Method study and time study, Work simplification. Productivity linked

incentives.

.

Unit III Inventory Management – Concepts, Classification: Objectives: Factors Affecting Inventory

Control Policy: Inventory costs: Basic EOQ Model: Re-order Level: ABC Analysis. Supply

chain management, brief introduction to JIT

Unit IV Quality Management: What is Quality, Quality as a corporate strategy, statistical methods,

SPC

control charts, acceptance sampling, Total Quality Management (TQM). Quality circles cost

of Quality, Taguchi philosophy.

Suggested Readings:

1. Chary S.N. Production & Operations Management, Latest ed. Tata McGrew Hill

Publishing

2. Buffa, Modern Production Management, Wiley Eastern Pvt. Ltd.

3. Adam, Production & Operations Management, Prentice Hall.

4. Jhamb L.C. Production & Operations Management, Everest Publishing House,

5. K.Aswathappa & Bhat, Production & Operations Management Himalayaya Publishing.

Table of Contents

Chapter

No.

Title Author Page No.

1 OPERATIONS MANAGEMENT Ms. Deepali Soni, I. K. Gujral Punjab

Technical University, Kapurthala

1

2 FACILITY LOCATION Ms. Deepali Soni, I. K. Gujral Punjab


22

3 FACILITY LAYOUT Ms. Deepali Soni, I. K. Gujral Punjab


41

4 CAPACITY PLANNING Ms. Deepali Soni, I. K. Gujral Punjab


63

5 PRODUCT PLANNING AND

CONTROL

Ms. Deepali Soni, I. K. Gujral Punjab


84

6 INVENTORY MANAGEMENT

Dr. Suman Tandon, Assistant Prof.,

Deptt. of Commerce, MLU DAV

College, Phagwara

106

7 JIT AND LEAN PRODUCTION

SYSTEM STRUCTURE OUTLINE

Dr. Suman Tandon, Assistant Prof.,

Deptt. of Commerce, MLU DAV

College, Phagwara

122

8 QUALITY MANAGEMENT

Ms. Kajal Kiran, Assistant Prof., Deptt.

of Commerce, MLU DAV College,

Phagwara

136

Reviewed by:

Dr. Purva Kansal,

Assistant Professor, UBS, Panjab University, Chandigarh

© IK Gujral Punjab Technical University Jalandhar

All rights reserved with IK Gujral Punjab Technical University Jalandhar

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Chapter 1

Operations Management

1.0 Learning objectives

1.1 Introduction to Operation Management

1.2. Concept of operation management

1.3 Functions of Operation Management

1.4 Transformation process model

1.4.1 Input

1.4.1.1Transformed resources

1.4.1.2. Transforming resources

1.4.2 Transformation processes

1.4.2.1 Types of transformation

1.4.3 Output

1.5 Classification of operations

1.5.1 .Based on Demand Pattern

1.5.2. Based on Type of Conversion Process

1.6Responsibilities of operations manager

1.6.1 Understand the operation‘s strategic objectives

1.6.2 Developing an operation‘s strategy for the organization

1.6.3 Designing the operation‘s products, services and processes

1.6.4 Planning and controlling the operation

1.6.5 Improving the performance of the operation.

1.7 Contribution of henry ford to operation management

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1.8 Contribution of deming to operation management

1.9 Contribution of Crosby

1.10 Contribution of Taguchi

1.11 Summary

1.12 Answer to check your progress

1.13 Glossary

1.14 Terminal questions

1.15 Reference

1.0 Learning objectives

After learning this lesson you will be able to:

Describe Operations Management in detail.

The role of operation management and activities of operation manager.

Explain transformation model

Classification of Operations

Responsibilities of operations manager

Contribution of henry ford deming, cross by and taguchi.

1.1 Introduction to Operation Management

This lesson introduces to students, basic concepts of operation management and its functions.

Among various functions performed in an organization, production and operation function is an

important one. An organization composed of four functional subsystems i.e. production ,

marketing, finance and human resource management. The marketing function in an organization

is for promotion of its product sell to customers which help it to increase its sales. This sale

volume is then communicated to the production subsystem to tell them about production

volume which is concerned with the management of all resources for production of an item or

services. This ensures that the available facilities should be so managed that it can able to meet

the current market requirements and it requires resources (raw material, equipment, labour and

working capacity). The finance management function is authorized to provides fund to all other

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subsystems and keep control on it to utilize money more effectively. The human resource

management plans about manpower needed in other subsystems of an organization and fulfil

that demand through recruitment process and training and development workshop. It also

evaluates the performance of the employees .Therefore it is clear that integration among all

subsystem is must for functioning of the organization. The major concern of any organization

now a day is to create more valuable products. Operation management offers way to search for

action and implement action for reducing waste, how to create value and how the organization

can make difference in operations to combat with its competitors .Hence we can say operation

management the science including techniques ,process and systems that ensures production of

goods of the right quality, in the right volume and on right time with the minimum expense

within shortest time span. The essential characteristics of production and operation function is to

bring together 3 M; men, machines and materials to satisfy and fulfil consumer needs.

1.2. Concept of operation management

An operation management is a function that serves the organization, employ techniques and

involves human resources. Operations in the organization is classified as manufacturing

operations and service operations. Operation in a manufacturing concern includes conversion

process that makes tangible output like goods whereas, conversion process that provide output

an intangible output is called services organization.

Following points of difference are considered for differentiating manufacturing operations from

service operations:

1. Intangible or Tangible output.

2. Output consumption

3. Nature of job

4. Extent of customer contact

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5. Customer involvement in conversion process

6. Performance measurement.

Manufacturing operation are the operation by which tangible output i.e. goods are made and

those output are consumed by customers with the passage of time, jobs are like that uses less

number of labour but more equipment. Customer contact is very little, customer participation is

negligible in the transformation process and sophisticated methods are available for measuring

production activities performance.

Service operation are the operation by which intangible output i.e. services and those output

consumed by customers instantly , jobs are like that uses more number of labour. Customer

contact is very vast and direct, customer participation is frequent in the conversion process and

rudimentary methods are available for measuring service provider performance.

But there are few services where equipments are used just like railroad services, telephone

service provider and some are totally human based namely consultancy services, hair styling

salon.

According to Slack ― Operation Management is the set of activities that create goods and

services through the transformation of inputs into outputs.”

As definition given by Joseph G .Monks ―Operations Management is the process whereby

resources, flowing within a defined system, are combined and transformed by a controlled

manner to add value in accordance with policies communicated by management‖.

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Operation Management is heart of every organization. Operations are the tasks that create

value. The operations management is responsible for conversion of input to output. One who is

responsible for this called as operation manager. He/she has the main responsibility for

converting inputs into outputs by getting together resources, capacity and availability of

knowledge in the production facility under production plan and this requires that system work

should be planned and controlled production goods and/or services as per requirement. Control

must be put over such parameters like costs, quality and inventory levels

1.3 Functions of Operation Management

Operations management includes "overseeing, designing, controlling the process of

production and redesigning business operations in the production of goods and/or

services."

In a manufacturing concern such as a factory, it includes planning an efficient processes

to produce products, timely getting hold of raw materials, ensuring adequate numbers of

well trained workers and maintenance and repair work for equipment properly.

In a service concern focus is only on ensuring that workforce are well trained, customer

service locations have enough equipments and are safe for its employees and also for the

public, services are reviewed timely after taking in to consideration feedback given by

customer and other competitive forces.

1.4 Transformation process model

All operations that produce goods as well as services by converting inputs into outputs uses the

‗input-transformation-output' process. In simple words, operations are the kind of process that

take input resources which is convert in to and completely transform into something, or are

transformed themselves, into more useful products as output and services. The objective behind

combining all resources under exact conditions is to transform inputs into goods and services as

output which have higher worth and value than the original form of inputs.

The transformation of input to output is functional with the use of technology . (See exhibit1.0)

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For example, a hospital takes input in the form of ill patients, treat them by providing medical

aids and transform them into healthy person as output.

Transformation processes include:

Changes in the physical characteristics.

Changes in the location of materials, information or customers.

Changes in the rights of materials or information

Storage of materials, information or customers

Changes in the purpose of information

Changes in the physiological or psychological state of customers.

(Exhibit 1.0)

1.4.1 Input

Two categories of inputs are exists in any operation process:

Transformed resources

Transforming resources

1.4.1.1 Transformed resources – the resources that are converted in the process. The

transformed resources are generally a combination of materials, information and customers.

Materials involves converting either physically ( manufacturing), by location (

transportation), by ownership (retail) or by storage ( warehousing).

The Transformation

Process

Output

Goods

Services

Inputs

Human Resources

Facilities &

Processes

Technologies

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Information: This can be transformed by property (accountants), by possession (market

research), by storage ( libraries), or by location (telecommunications).

Customers: They can be transformed either physically (hairdressers), by storage (

hotels), by location ( airlines), by physiological state ( hospitals), or by psychological

state ( entertainment).

1.4.1.2 Transforming resources are the resources that act upon the transformed resources

to add value e.g. Facilities and staff.

Facilities which include plant, building, equipment, and process technology etc. and

Staff includes all those who involves in operation, maintenance, planning and managing.

1.4.2 Transformation processes

It includes:

Changes in the physical nature of materials.

Changes in the location of materials, information or customers.

Changes in the ownership/ possession of materials or information

Storage of materials, information or customers

Changes in the form of information

Changes in the physiological or psychological state of customers.

1.4.2.1 Types of transformation

Manufacture – It includes creation of physical products (example cars, motor bike etc.)

Transport – It includes the movement of material or customer ( example a taxi service)

Supply – It includes changing possession of goods (example whole-selling, retailing)

Service – It includes treating customers or the storing of materials (example hospital room,

warehouses).

1.4.3 Output

Output can be goods or services.

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Goods: It is a product which is physical in nature which you can watch, touch, or possibly

consume. Examples are fish, oranges, flowers, soap, televisions, airplanes, coal, timber,

computers, furniture, paper, and machines.

Service: Service is any activity that cannot be directly produce a product which physical in

nature. Examples are telecommunication service, banking services etc.

Comparisons between Goods and Services

1. Both goods and services deliver value and satisfaction to the customers.

2. Both can be customized or standardized to individual will.

3. Creation of both includes the same process i.e. Operation Management .

4. Goods are tangible but services are intangible.

5. Customers contribute in many service processes, activities, and transactions but not in case of

goods.

6. Prediction of demand for services is more harder than in case of goods.

7. Services cannot be stored in warehouses as physical inventory but this is possible in case of

goods.

8. Skills are of prime concern in service industry to be successful.

9. Service facilities require to be positioned close to the customer.

10. Patents cannot protect services but goods can be protected by patents.

Activity A

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Identify the input ,type of transformation process and output in following operation:

Steel refinery

Car assemblage

Cars dealers

Car repairing

Making design of cars

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1.5 Classification of operations

1.5.1 .Based on Demand Pattern:

a) Make-to-Order: These are made from earlier designs, but are finished only after

receipt of an order .Products in make to order are used when the standardized product is

costly to keep in stock, have uncertainty in demand , or will get worse if stocked. (e.g.

Airplane / Film Developing/……).

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Assembly-to-Order: This involves assemblage of standardized products items that in

stock subassemblies. This lets customers enjoy a wide range of options. (e.g. Car/ Fast

food/……)

b) Make-to-Stock: Usually goods are standard in nature and mature in in this operation

of product. As a common rule of make to stock; products are stocked on the basis of cost

structure and availability for item. Example of such products can be most retail items.

(e.g. Clothes/ Toys/……)

Assembly-to-Stock: In this classification of operation product item is assembled without

having sell in demand and is stocked in the warehouse as an inventory item for sale or

consumption as a subassembly later (e.g. Electronic Products/ TV Sets/……)

1.5.2. Based on Type of Conversion Process:

a) Project Shop: Generally this process result in only one output. Examples are constructing

a mall or catering to a party. Features of project shop are as follows:

Product mostly standard but sometimes can be customized.

Both general and specialized equipment is used

Large size operation

Single item production runs

Fixed production schedule and definite-planning in advance

Priory check quality control in mostly on the aspects that are having clear standards

Firms compete on various aspect like quality, price, technology, capacity, and delivery

speed.

b) Job Shop (Batch Shop): Job shop process operation produces small batches for different

products. Every batch is usually tailored to a specific customer need pertaining to specific

quantities, and each product requires different processing time and processing step. Examples

of batch shop can be a bakery that specializes in making decorative cakes for wedding, each

one is different and customized for a particular bride. Characteristics of job shop are as

follows:

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Facility of Custom Products i.e. each job is different.

Introduction of new products are easy.

Facility of flow is not clear.

General purpose equipment is used mostly.

Difficulty to balance capacities in line with demand i.e. equipment, will be idle.

Suitable for small to medium size operation.

Production runs time is short.

Work in process is typically large.

Highly skilled workers typically utilized Informal quality control mechanism through

final inspection over worker. Firms contend on technical proficiency and flexibility to

market changes more than its absolute price.

c) Assembly Line: This process produces diverse parts flowing at the controlled rate

through a definite process which is well planned. The assembly line moves parts to the

resource centre, and each resource centre must complete its task before line moves on

ahead. This requires line balancing, means that each operation completes its task in a similar

amount of time period. The line moves at the speed of the slowest operation, This is the

bottleneck.

Characteristics of assembly line are as follows:

Standardized products but in some cases opportunities for selected option are also

available.

Introduction of new product is infrequent.

Flow pattern in production is rigid.

Can be either mechanical or worker based.

Capacity balancing is easy.

Specialized equipment is used in production.

Generally capital intensive.

Suitable for large size operation.

Difficult to alter capacity of plant incrementally.

Work-in-process does not sit idle.

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Lower skilled workers are generally used.

Formal quality control manually.

Products have competition on quality aspect and price. (of consistency).

d).Continuous Process: As the name denotes, this process produce items continuously,

Generally in a high automated process. Examples are chemical plants, electric generation

plant and refineries,A continuous flow process sometimes have to run 24/7 because starting

the continuous process and stopping it is very difficult.

Features are as follows:

Standardized products are produced, very little room for customization of products.

Introduction of new products are expensive.

Rigid production flow pattern.

Specialized not general equipment is used.

Capacity is always balanced.

Capital investment is very huge.

Suitable for large business operation.

Measuring capacity is easy.

Difficult and costly to make alteration in capacity.

Lengthy production run.

Semi-skilled workers are involved, some technician are also involved.

Facility is operated as a cost centre not as a profit centre.

Formal procedure for quality control.

Products compete on price in the market alone.

1.6 Responsibilities of operations manager

1.6.1Understand the operation’s strategic objectives

Operation managers should comprehend the aim of the organisation clearly and build a

clear cut vision of exact operations that will help to achieve goal. This also involves

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turning these goals into actions, implications for the organizations‘ performance,

objectives achieved, quality, dependability, speed, cost and flexibility.

1.6.2 Developing an operation’s strategy for the organization

Making various decisions involved in operations are critical that require an operation

managers to set a framework or guidelines which are aligned with the organisation's

goals.

1.6.3 Designing the operation’s products, services and processes

Design involves making decision on the physical aspect like its shape and composition of

services, products and processes.

1.6.4 Planning and controlling the operation

This involves deciding about the operations are to be for and what kind of resources

should be needed to make sure that it is done properly.

1.6.5 Improving the performance of the operation.

Operations managers are responsible for monitoring continuously and improving the

performance of operation as per standard .

Check your progress

1. Decision taken by operation managers is ____________in nature.

2. --------------------is a key activity of an operations manager.

3.Service organization rely on physical inventory.(yes/no)

4. -----------------------function employs more people than any other function in

organization.

5. ----------------------activity guarantees that performance is in accordance with standard

planned performance.

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1.6 Contribution of henry ford to operation management

The concept of mass production and organized work stations into a conveyorized assembly

line was given to the world by Henry ford. This was known as moving assembly line. He

introduced automatic conveyor belt to move parts and components from here to there. He

reduced manual work and introduce automation requirement of that century. After

introducing moving assembly line he made tremendous hike in production rate. His

contribution accelerated industrial revolution. By this innovation Highland Park of henry

ford at Michigan automobile factory was run on a continuously moving assembly line for

first time, when the chassis were assembled using the revolutionary belt industrial

technique. A motor and rope dragged the chassis reducing the man-hours required to

complete one model T from 12-1/2 hours to six earlier which is done by workers and parts

on the factory floor. Within a year, improvement of assembly line reduced the time span

required to 93 man-minutes. The astounding increase in productivity rate affected by Ford‘s

use of the moving assembly line allowed him to drastically reduce the cost of the Model T,

thereby accomplishing his dream of making the car affordable to ordinary consumers.

1.7 Contribution of deming to operation management

Deming was quality guru in total quality management. He gave his 14 Points on quality

management to help organization to increase its quality and productivity.

1. Creation of constancy in purpose of improving products and services.

2. New philosophy adoption.

3. Stoppage of production dependent on inspection carefully to achieve standard quality.

4. Awarding business on the basis of minimizing cost in total not only on the price basis alone

with dealing with a single supplier.

5. Improvement should be done for every process of planning, service and production.

6. On the job training is required.

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7. Adopt institutional leadership.

8. Break down areas between staff.

9. Eliminate slogans, appeals and target of the job for the workforce.

10. Eliminate quotas for workforce goals for management.

11. Remove barriers that make people difficult to feel proud and eliminate the rating or merit

system on annual basis.

12. Institute a vigorous improvement program to educate everyone.

13. Involve everybody in the company to work accomplishing the transformation.

1.8 Contribution of Crosby

The Philip Crosby developed fourteen steps to develop an effective quality program for an

organization which are as follows:

1. Management is committed to quality: Communicate where management outlooks on quality

standard is necessary to steadily produce products and services at the resonable price and this

should be clear to all employees.

2. Create teams for quality improvement – with the representatives from all work areas and

functions ,organization should make quality teams who will take responsibility for run

the quality improvement program.

3. Measurement of the process to determine current and potential quality

issues: Communicate currently and potential quality problems to management so corrective

action should be taken on the right time.

4. Calculate the cost of (poor) quality: Define the constituents of the COQ and explain its

nature and use COQ as a tool for management.

5. Raise quality awareness among employees: All the personnel of an organization should be

aware of the product or service on its quality reputation of the company.

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6. Take actions to correct quality issues: Provide an organized system to permanently removal

of the problems that are identified in previous action steps.

7. Monitor progress for quality improvement – Formation of a zero defects

committee: Inspection of the various activities must be done or conducted in a formal way to

prepare zero defects program .In this program improvement team list all the individual action

steps to make defective products at zero level.

8. Train supervisors in quality improvement: It is concerned with defining the type of training

supervisors needed in order to actively carry out their job in the quality improvement program.

9. Hold zero defects days: Create an event for all employees to realize the change to make zero

defects through personal experience.

10. Encourage employees to create their own quality improvement goals: Take pledges and

commitments to take action by making aware every individuals to set individual improvement

goals for themselves and for their groups.

11. Encourage employee communication with management about obstacles to quality

Provide each individual employee chance to communicate all the situations that produce

obstacles for the employee to fulfil the pledge to improve to the top management. One of the

most difficult problems employees face is the lacking of proper communication channel

communicate problems to the management. Sometimes they are not ready to listen problems

because they consider them as unimportant enough to bother the supervisor. Suggestion

programs are sometimes very helpful, but in a suggestion program the worker find out the

problem and also suggest solution to the problem persist.

12. Recognise participants’ effort: Appreciate those employee who participate. Recognize their

contribution publicly and noisily.

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13. Create quality councils: Professionals are invited for planning over quality maintenance on

regular basis. They meet regularly to share their problems, feelings, and experiences on

common platform with each other.

14. Do it all over again – Quality improvement should be done over and again it does not end at

all so emphasizing over quality improvement is a continuous process. There is always a great

relief when goals are achieved. If care is not taken, the entire effort will go in vein. It is

necessary to build a new quality improvement team, and to let them work again and create their

own communication.

1.9 Contribution of Taguchi:

Taguchi is famous for his contribution towards (Taguchi method) methods of modern

quality control and low cost quality engineering which search for improvement in product

quality at the designing stage by integrating quality control into product design, by using

experiment and statistical analysis. Taguchi developed methods for both online (process

stage) and offline (design stage) quality control.

Quality loss function

Taguchi's approach is different from the traditional approach in a way that manufacturing a

product which is strict to its specification based on its tolerances standard value. He

developed a quality loss concept for deviation from the benchmark value, and worked in

terms of quality loss rather than just quality itself. Thus, it included both company costs such

as reworking schedules, scrapping unused items or substandard products and maintenance.

Signal to noise ratio

One of Taguchi's most innovative thoughts called the signal to noise ratio is to utilise a

'quality' measure which used by communication engineers to find the strength of an electrical

signal.

Robust quality of design

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He developed the concept of robustness, which enables a product to be designed to be less

affected by noise on the basis of the signal to noise measure.

Product design improvement

Taguchi set out three steps during the product design and production engineering phases, that

must be followed. These are as follows:

1. System design: This is concerned with the development of a sample design for the

materials, parts, and assembly system to be used.

2. Parameter design: Taguchi's parameter design aimed to find the most cost-effective

method of controlling noise by identifying easily controllable factors and settings that to

minimise performance variations. Uncontrollable factors are noise, or external variations,

and a higher signal to noise ratio means better quality.

3. Tolerance design: In case parameter design fails, Taguchi proposed using tolerance

design to identify the most affecting crucial noise factors.

Invest last not first

Taguchi positioned more stress on initially optimising the product and process to engineer

product quality in its parameter design into the system. Using low cost materials and

components was a vital feature of this, and money was spent on higher cost items only when

necessary at its tolerance design.

1.10 Summary

Operation management of any organization is one which produces its products or services.

The basic elements of this operation function includes input in the form of raw material,

machines and labour, output in form of product and services. The system is subjected to

random fluctuations which becomes a cause of deviation between planned and actual

output. The growing volume of service sector emphasised the need of broadening of the

term production to operations. With this vital function, the companies tried to gain a

competitive advantage. Thus an operations manager has a significant role to play in any

organisation.

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Ans.1 Strategic, tactical and operational.

Ans.2 Exploiting technology to produce goods and services.

Ans.3 Operation

Ans.4 Controlling

Ans.5 Controlling

1.13 Glossary

Operations management: This is fretful to the management for the resources and processes

required by an organization to make goods or services for customers.

Operations function: The part of the organization‘s function which are responsible for

operations management.

Operations facility: A collection of resources brought together at one geographic location for

the purpose of producing particular goods and/or services.

Operations strategy: This concerns the pattern of strategic decisions and actions which set the

role, objectives and activities of operations.

Goods: A good is a physical product that you can see, touch, or possibly consume. Examples are

oranges, flowers, televisions, soap, airplanes, fish, furniture, coal, timber, computers, paper, and

machines.

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Service: A service is any primary or complementary activity that does not directly produce a

product physical in nature.

Technology: The level of scientific sophistication in plant, equipment, and skills in the conversion

process.

Value added: Increased value of output as compared to input.


1. Describe Operations management process with a schematic diagram.

2. State the important objectives of operation management.

3. Briefly explain the important features of operations management.

4. Define operation processes and explain its key components.

5. What is the function of an operation manager? Is this function different from the function of a

marketing manager?

6. Mention any four limitations of continuous production.

7. How service producers differ from goods producers in operations.

8. What are the various decisions and their applications made by operations manager in system.

9. Define operating system.

10. Distinguish between manufacturing operations and service operation.

1.15 References

1. Everett, E. Adam, Jr.Ronald J.Ebert, Production and Operations Management, Prentice-Hall

of India Private Limited, 5th Edition, 1994.

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2. R. Pannerselvam, Production and Operations Management, Prentice-Hall of India Private

Limited, 9th

print, 2004.

3. Joseph, G. Monks, Theory and Problems of Operations Management, Tata McGraw-Hill

Publishing Company Limited, 2nd Edition, 2004.

4. Joseph, G. Monks, Operations Management, McGraw-Hill International Edition, 3rd Edition.

5. S. Anil Kumar,N. Suresh, Production and Operations Management, New Age International

(P) Limited Publishers, 2nd Edition, 2008.

6. Reid R.D., and Sanders N. R., (2005) Operations Management, 2nd

Edition, Wiley

Publication.

7. Slacks Nigel and Lewis Mike, (2002) Operations Management, Prentice Hall.

1.16 Suggested readings

1.Adam Jr Everetl E. R J – Production and Operations Management (Prentice-Hall, 1992), 2000

5th ed.

2. Chary- Production and Operations Management (Tata McGraw-Hill, 1997 9th ed.)

3. Goel,B.S., Production and Operation Management.

4. McGregor D – Operations Management (McGraw-Hill, 1960)

5. Morton- Production and Operations Management (Vikas)

7. Haleem A- Production and Operations Management (Galgotia books, 2004)

8.Chase & Production and operation Management, Richard Irwin London; 1995, 7th ed.

9. Production & Operations Management.- Kanishka Bedi, (Oxford University Press)

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Chapter 2

Facility Location

2.0 Learning Objectives

2.1 Introduction

2.2 Meaning

2.3 Importance

2.4 factors in location analysis

2.5 Location analysis technique

2.6 Summary

2.7 Glossary


2.9Terminal question

2.10References

2.11Suggested readings


After reviewing this lesson, you should be capable to:

Give detail on the concepts of plant location.

Describe how to select suitable facility location.

Explaining importance of choosing suitable facility location.

Discover various factors to be considered while selecting plant location.

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Describe location analysis technique

2.1 Introduction

Now a days each and every businessperson is facing the challenge of choosing the best location

for their factory. Any kind of business utilizes resources and amenities like warehouses,

machinery, and plant etc., while carrying out the task for manufacturing the products and

providing services, planning for these facilities in a proper manner would definitely help in

reducing operation cost and cost of maintenance. So decisions for situating of plant are an

important and strategic decision due to direct impact on various factors like patterns of

distribution, monetary assistance and employment. In future, repositioning of facilities may even

benefit the organization. But, It includes production stoppage, and cost for flowing all the

facilities for a new location. In accumulation of such resources, it definitely will make known to

some problem in the usual business operations. Therefore at the opening time of any business

concern , one should make numerous alternative sites for location of the plant. Afterward an

acute scrutiny, suitable place should be selected for assigning location to the plant. Location of

facilities and services of warehouses and other facilities influences performance of organization.

2.2 Meaning

Business utilizes resources and amenities like warehouses, machinery, and plant etc., while

carrying out the task for manufacturing the products and providing services, planning for these

facilities in a proper manner would definitely help in reducing operation cost and cost of

maintenance. So decision for situating of plant is an important and strategic decision due to

direct impact on various factors like patterns of distribution, monetary assistance and

employment. In future, repositioning of facilities may even benefit the organization. But, It

includes production stoppage, and cost for flowing all the facilities for a new location. In

accumulation of such resources, it definitely will make known to some problem in the usual

business operations. Therefore at the opening time of any business concern, one should make

numerous alternative sites for location of the plant. Afterwards an acute scrutiny is needed to

| 24 P a g e

select suitable place for assigning location to the plant. Location of services and facilities of

warehouses and other facilities influences performance of organization.

Plant location is an important strategic level decision involving a transformation process in the

manufacturing organization is the effectiveness by which the products or services are made

available to the consumers. This includes the decision regarding putting the facility.

The choice for plant location is the fundamental decision as it involves huge outlay in making

building for putting up the plant and heavy machines. It is not wise to change plant location

frequently.So inefficiency in locating plant may results into wasting money in all the investments

made. Prior to make plant location decision, proper forecasting should be prepared for long run

operation. The basis of plant location can be on the expansion of business plan and policy,

diversification of products planning, changes in market settings, the changing place of resources

i.e. raw materials, transportation and many more factors that has influence the choice for the

location decision. The motive of the study for location study is to discover an optimal location so

greatest benefit to the organization can be achieved.

When we need for selecting the appropriate location for business operation?

Answer to this lie on the following conditions:

When you are going to star new business ;

If the existing business firm has plan for expanding its original facilities and expansion is

not possible in that place so new location has to be found out;

Business volume or the extent of market requires the establishments of branches;

A lease of plant expired and the owner is not ready to renew the lease;

When a company thinks there is a possibility of reducing manufacturing cost by shifting

from one location to other location; and

Other social and economic reason for example inadequacy in labour supply, fluctuating

conditions of the market etc.

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Whatsoever be the cause, selection of the location for the plant has to be done after taking in to

account all the economic factors that have bearing on it. It may be impossible to find location

which abound all the facility abound in all the facility required for set up for plant but a search

has to be done for a suitable location, The regulatory principle for search of a location should be

where the cost of raw material, cost for fabrication plus cost of marketing of finished goods is as

minimum as possible.

2.3 Importance of Facility Location:

The major concern of an industrial establishment is to maximize profit by minimizing cost of

production. This objective can be achieved by choosing an appropriate location for facility

because it affect the profitability of business.

The following actions are very normal in any business circumstances like following:

• Novel venture formation

• Business enlargement

• Changing pattern of current demand, supply and marketing location.

• Cost structure changing.

•Policies made by government.

Due to the above business events, business firm will be acute in searching alternate sites for its

production operations. Therefore facility location turn out to be an important decision which

influences plant facilities and layout for operations. Similarly, it has an impact on operating cost

and capital investment decision. Example for this can be steel industry where, we integrate the

extracting ore unit to finally steel formation unit in a proximate places, so that transporting cost

can be concentrated slightly and the supplies availability to the initial and also final production

stage operation in the setup will be improved and it will help in improving the productivity of

the plant.

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Check your progress

2.4 Factors that affect location analysis

If the organization are able to configure the best location for the its manufacturing facility, then it

will have advantages of having sufficient access to the workers, customers, transportation etc.

For successful commercial activity, and to gain competitive advantage following are the two

main factors for facility location:

2.4.1. General factors (They are of two types of general factor i.e. controllable and

uncontrollable) in any type of organization.

2.4.2. Special factors for manufacturing as well as for service organisations.

2.4.1 General factors

General factors i.e. controllable and uncontrollable factors are required for considering location

of plant for all types of organisations.

1

.

1. A ____ location is decision concerning establishment of industry which affect

profitability of industry concern and costly if it will reverse and strategic in nature

which has long tern effect on business.

2

.

2.The location decision is both a ____ and ____ decision for many services.

3. Location decision should consider ------------cost.

4. Facility location decision affects profitability (yes/no).

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A.Controllable factors: Controllable factors under the category of general locational

factors are as follows:

1. Market proximity

2. Materials supply

3. Facilities for transportation

4. Availability of Infrastructure

5. Labour and their wages

6. External economies

7. Capital outlay.

8. .Uncontrollable factors

9. Government policy

10. Climatic condition

11. Ancillary industry

12. Attitudes of community and labour

13. Infrastructure for community.

A. Controllable factors

1. Market proximity: Every company wants to work for its consumers by giving goods and

services on the right time for reasonable price .To do this Organizations must trace all

facility in area near market or distant from the market be contingent on the features of the

product. In case where the consumers of the product are intense, it is worthwhile to locate

all the facility near market.

Locating plant close to the market is preferred when

• The goods are fragile and vulnerable to damage.

• The products which required after sales services very often.

• Transportation cost is higher.

• life span of the product is short.

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Market proximity safeguards a steady supply of products to consumers and reduces the

transporting cost.

2. Resource supplies: This is extremely important to an organization to acquire raw

materials in good conditions, in right quantities and at right time period to enjoy constant

production. This is very important in case where materials are likely to spoil and where

transportation cost is higher. Yaseen suggested course of action regarding raw materials

supplies. It effects on plant location in the following ways:

• Where particular raw material is in use without loss of weight to it, then location of the

plant is at the places of sources of raw material or at the market.

• When there is demand for raw material which is weight loosing in nature, locate the set-

up for industry near the raw material source.

• If availability of raw material is in ample amount at any location i.e. universal, then

locate facility near to the market area.

• If the processing of materials in process are from different –different location, then

plant should be located to minimize expense in transportation costs in total.

Propinquity to raw material source is important in case of industries like cement,

sugar,cotton textiles and jute.

3. Amenities for transportation: Fast transport services guarantee supply of raw

materials on the right time to the organization or industry and goods to the consumers.

The transport service is an essential for facility Layout and Location decision of plant.

There are mainly five physical transportation modes are available to us they are by air, by

road, by rail-track, by water and through pipeline. Finished goods that are largely

envisioned for exporting will demand locating plant near by the port and airport. The

choice among various transport method depend on cost structure, accessibility, and

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appropriateness. Hence transport facility cost is a value driven criteria for location of the

plant.

4. Availability of Infrastructure: Water, power and waste disposal facilities are the

basic infrastructure and become one of the noticeable factor for choosing the plant

location. Some power driven industries are highly power needy for example metal and

non-metal i.e. steel , aluminium industry and they had better to be positioned near power

station .The non-availability of power may cause trouble for its survival. Process oriented

industries like paper industry, chemical industry, cement industry, etc., require constant

supply of water in enormous amount and should be of good quality, and mineral content

in it come to be an important factor. A waste disposal facility for process inclined

industries too is an important factor that influences the plant location.

5. Labour supply and their wages: The cause of employing number of labour workforce and

possessing desired skills are undoubtedly an important issue that should be well-thought-out for

regional and at community through facility location decision. Importing workforce is generally

costly and time consuming and have too many organizational problem. Productivity of labour

workforce, Prevalent wage pattern, living cost and business relation and negotiating power of

union are also considerable factor in making location decision.

6. External economies of scale: Urbanization and locational economies of scale are designated

as external economies of scale. In urbanization economies of scale, firms originate from locating

firms in big city than in small city in a search of the admittance to a big pool of workforce,

transportation , and to upturn their market share to sell their products to a number of consumers.

Economies of scale in location on the other hand in manufacturing sector grown-up with the time

passes and competition have increased due to availability of production facilities and lower

production costs by this cheap cost for transportation and logistical services can be achieved.

This headed to manufacturing establishments where many related companies are located in the

same area. Big corporations have now known that inventories and warehouses are major cost

occurring factor, So they have tried to reduce it by induction ―Just in Time‖ production system.

This highly efficient production system was responsible for success of Japanese car industry. Just

in time make sure to obtain spare parts from various suppliers within few hours after making

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order for that. To fulfil these conditions companies must to be located in the same area for

increasing their market share and service in big corporations.

7.Capital: Capital considerations for location for facility condition is an important to extricate

the composition of fixed capital investment in buildings and machine equipment from financial

point of view. Fixed capital costs in constructing building really cost a lot but their magnitude

vary from region by region. But alternatively buildings can also be taken on rent and existing

plants can be expanded for operations. Finance is highly movable. For example, Multinational

Corporations say Coca Cola performs its operation in many countries and can raise capital from

there, where rate of interest are lowest available and conditions are most suitable.

B. Uncontrollable factors

8. Government policy: The strategy in the form of policy formulated by the central and state

administration and local regulatory bodies concerning building codes, labour laws and safety etc.

which are not in the control and that plea attention to maintain balanced regional growth for

industries, both central and state government in our country have proposition towards the

lucrative package of incentives to entrepreneurs in particular location. Some of these incentives

possibly will tempt to place its location for the plant to avail these facilities available.

9. Climatic conditions: The geographic area with its climatic condition (humidity, temperature)

are to be considered in some specific industries. Climatic condition have a great influence on

human efficiency and behaviour. Some industries are in requirement of specific climatic

conditions say in textile mill needs humidity.

10. Ancillary industries and services: In today‘s world the manufacturer will not make all the

components of products itself but outsource them by making subcontracts for the work to

vendors. Therefore, this ancillary services of source of supply of component or parts will be the

one factor that have an impact bearing on the facility location decision. The various services like

professional consultancy services, communication channel, banking and financial services and

other civil amenities services will play an important role in making selection of a location.

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11. Community and labour attitudes: The Attitude of community regarding their work role

and towards the approaching industries can build or ruin the industry. Labour and community

outlooks to the trade union activities in trade are the important criteria to take in to account.

Facility location at the specific place is not desirable even when all the factors are favouring yet

labour attitude towards organization is important so that the strikes and lockouts can be

minimized.

12. Amenity and Community infrastructure: All manufacturing actions require good

infrastructure for community and most noticeable amenities including roads, railway

connectivity, port facilities, power availability and service facilities and social amenities like

educational institutes and hospitals. These factors will be considered in making location

decisions.

2.4.2. Special factors (For industrial organisations)

A.Dominant factors

Factors dominating in organization in location decisions for new manufacturing plants can be

classified in six groups. They as follows:

1. Encouraging labour climate

An encouraging labour climate is an important factor for location decisions of labour-intensive

organization like textiles concerns, furniture manufacturing, electronics industry . Labour climate

comprises of wage rates, training and development requirements, attitudes toward their work-life

in the form of work-role, worker productivity and union power. Many business take weakness of

union as a distinct advantage.

2. Market Proximity

After making estimates for the demand of goods and services at any place and measured it as

many fold, management should choice a location for the facility that will make sure of smooth

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supply to that demand. Locating near market area is important particularly when the finished

goods are massive or heavy and exporting them have high transportation rates. For example,

makers of products such as plastic products, pipes and heavy metals all want proximity to

markets.

3. Life Quality

An attractive lifestyle having good schools, entertaining facilities, and traditional events

contribute to increase quality of life but this factor is not relatively important, but can do make

the alteration in locational decision.

4. Proximity to the resources and suppliers

In various companies, Facility supply components to other facility rely on other facilities for

management support and staff assistance. These necessitate regular coordination and

communication, which will become difficult as distance increases.

5. Taxes , utilities and real estate costs

Other factors that might arise include utility costs (as telephone, energy, and water bills), local

and state tax structure, financial incentives that local or state government body offer in land

costs and relocation costs.

B. Secondary factors

There are few additional factors to be considered, including business expansion cost ,

construction costs, availability of multiple transportation modes, the cost of hobbling people and

materials among plants, competition with other firms for the skilled workforce, attitudes of

community , and many more. For global operations,firms usually emphasizes skills of local

employee, education level and the local infrastructure.

2.4.3. Specific factors for location of service organisations

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Dominant factors

All the factors which are taken in to account in manufacture ring organization can also be useful

for service providers, with an important impact on location for sales and customer satisfaction.

Proximity to consumers

Location of plant is a significant factor in defining how appropriately we can approach to

customers. This can help in carrying on the business for a firm i.e., some people may like to go

to remote areas for locating dry cleaner or supermarket.

Transportation cost and market proximity

For services like warehousing and dispersal of operations; cost occurred in transportation and

near the markets are also important decisions. It helps in reducing time involved in delivery of

goods and promoting sales.

Competitors’ Location

Competitors‘ location put complexity in approximating likely sales at different location.

Management should not only study the current site of competitors but should also try to make

prediction about their reaction towards new location. The place where competitors have their

business well settled, those area should avoid. However, in certain industries, like new-

automobile showrooms and restaurants, locating facility near competitor‘s location is actually

favourable. The strategy is to generate a mass customer, where competing firms are huddled in

one location to attract numerous customers.

Secondary factors

Dealers also consider the retail activity level, housing density, flow of traffic, and visibility to

site. Selling activity in the retail market is important, because customer usually choose their own

to go for shopping or to eat in a restaurant frequently. Flow of road traffic and site visibility is an

important factor because for businesses usually customers arrive in their cars. Visibility is

distance from the street, road and size of neighbouring buildings and signs.

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Activity A

Speak to three industrialists (in manufacturing, in trade and one in service business). Discuss with

them to find out:

a) Factor considering in facility location.

b) How the availability of transportation and labour affected their facility location decision.

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

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2.5 General Procedures for Facility Location

Figure:1

The preliminary Screening: The foremost screening for preliminary recognize viable sites

starts process of planning for facility location. For some kind of facilities, particular

environmental conditions and labour conditions are needed for example, brewery industry

requires an ample amount of clean and fresh water. Aircraft manufacturers should be located

near a variety of subcontractors for providing aluminum ,electrical power etc.

Sources of information: After screening several key locational requirements, management

undertake research for finding out alternative location sites that matched those requirements.

Information can come from various sources like local body of chambers of commerce which

provide information on collected works for promoting possibilities for an expansion in various

state and local communities. The Journal of wall -street and numerous trade publications provide

advertisements placed by cities and communities hoping to attract new commerce avenues. So as

many trade journal available which provide information including geographic breakdowns of

Preliminary screening

Sources of information

Detailed Analysis

Factor rating

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labour availability, population, transportation facilities, commerce activity types, and useful

information.

Detailed Analysis: Once the preliminary screening done with narrowing alternative sites to a

few one and then more detailed analysis begins with that time. On each potential site a labour

survey should be done in research to assess the local available skills. Pilot study should be

solution to assessment where community and consumer response is not known towards products.

Response of community is important for every business to be successful .

Factor Ratings:

Factor ratings are often used to evaluate location alternative sites because:

• Its simplicity facilitates explanation about why one location site is better than other.

• It enables managers to take diverse location decision considerations into the

evaluation process.

• It fosters uniformity of judgment about location alternatives decisions.

Usually, the first and foremost step in factor ratings analysis is to list the most relevant factors in

the location decision then in next step, each factor is rated on scale from 1 = very low to 5 =very

high, based on its relative importance as compared with other factors. Then, each location is

rated on rated from 1 (very low) to 10 (very high), according to its merits on each aspect .

Finally, the multiplication of factor rating with the location rating for each factor and then sum of

the products give results in the total rating score for that location. The total scores indicate which

alternative locations are most promising, considering of all the various location factors.

2.6 Location analysis technique:

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It is a dynamic process where entrepreneur analyses alternative sites aiming to select best site.

Various different models are made available to have the best location in place.

Following are the prevalent models we have in place:

2.6.1 Factor rating method : Selection process of a new facility location includes a step

by step process; first discover important location factors, then rate it from high to

low based on importance, allocate each factor a rate based on merits ,do

multiplication of both factor and finally calculate sum total of rate and prefer high

rated factor location.

2. Weighted factor rating method:

This technique merges both qualitative as well as quantitative aspect, weights are assigned to the

factors counting at its comparative importance and then weightage rate of score for each location

site is calculated. The site having the maximum weighted score is selected .

3. Load-distance method

It is a technique including mathematics model to assess different location based on closeness of

distance to the factors. The objective behind this is to choose that site which minimizes the

assigned total weighted piles moving in and moving out from the facility. An alternative

approach can be using time rather than distance.

4. Centre of gravity method

This centre of gravity method takes cost considerations as primary factor. This method used to

assist directors in matching and maintaining cost and service. This method takes locations of

plants and markets, the number of goods moved, and transportation costs in reaching at the good

location for a single midway warehouse as factors. The centre of gravity is to select the location

that minimizes the weighted distance between the warehouse and its supply and distribution

points, where the distance is weighted by the number of tones supplied or consumed.

5. Break-even analysis

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Break even analysis states that total revenue equal to the total cost at some point. It deal with

finding the point at which revenues and costs are exactly same. It is called ‗Break-even Point‘.

Breakeven point is the volume of output at which no profit no -loss is incurred.

Activity B

You want to set up a production plant of electronic goods, which location factor you choose and

why ?

_____________________________________________________________________________

_____________________________________________________________________________

____________________________________________________________________

2.6 Summary

The above text discussed that facility location involves appropriate location of facility. Facility

location decision is an important managerial decision due to impact on cost of distribution and

production to a great extent. In some of the cases, you will get that location which contribute

more than 10% of the total cost of manufacturing and marketing. So, most suitable location is

essential to the efficient and economical working of a plant. Various factors when choosing

appropriate location of plant like availability of raw material, proximity to the market, labour

supply, transport and communication facility, fuel and power, climatic consideration, personal

references and government etc. are to be considered. A business can face failure due to wrong

location decision or its growth and efficiency may be restricted.

2.7 Glossary

Demographic: Population study aspects of total number of population, per capita income, age,

educational level and occupation level.

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Plant location: Plant location is the selection of place for setting up of business.

Competitive: as good as or better than others of a comparable nature.

Break-even point: It is the point at which output volume makes no profit no loss. Economies of

scale: Reductions in unit cost of output due to increasing production volumes. Unit costs savings

are achieved by spreading the fixed costs of production over an increased volume and from the

increased efficiency available from the division of labour and from using large-scale machinery.

Forecasting: The act of predicting the future likely level of demand for products and services.

Forecasting methods can be either quantitative or qualitative.


Ans.1.Facility

Ans.2.Fundamental,frequent

Ans.3.Product

Ans.4 Yes.

2.9 Terminal question

1. Explain the importance of location of facility or plant.

2. What are the available methods for effective decision of facility location?

3. What do you mean by globalization and what is its impact on the choice of a facility?

4. In what ways multinational company take decision regarding the location for industrial set-up?

Give example in Indian context.

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5. Mention the factors that should be considered in deciding the location for plant.

6. What do you mean by locational analysis?

7. Explain the reasons for selecting location in foreign location?

8. Illuminate the need to select a suitable location?

9. What kind of physical facilities is required for an organisation?

10. Elaborate the factors which are considered for an industrial building?

2.10 References

1. Adam Jr Everet l E. R J – Production and Operations Management (Prentice-Hall, 1992), 2000

5th ed.

2. Hill T- Operations Management (Palgrave, 2000)



2. Johnston R et al – Cases in Operations Management (Pitman, 1993)




6. Chase & Production and operation Management, Richard Irwin London; 1995, 7th ed.


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Chapter 3

Facility Layout


3.1 Introduction

3.2 Meaning

3.3Facility layout Objectives

3.4 Characteristics of efficient facility layout:

3.5 Factors affecting the facility layout decision

3.6 Advantages of facility layout

3.7 Types of Facility layout

3.7.1 Process or functional layout

3.7.2 Product or line layout

3.7.3 Combination of product and process layout

3.7.4 Project or fix position

3.7.5 Group layout or cellular layout

3.8 Problems in facility layout

3.8.1 Facility Layout Designing Problem:

3.8.2 Reasons for the problems

3.9 Summary

3.10 Glossary


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3.12 Self-assessment questions

3.13 References



After reading this chapter you will be able to

Define facility layout planning and explain its importance.

Describe and identify different types of facility layouts.

Explore the steps involved in designing a facility layout.

Explain advantages and disadvantages of different types of layout.

3.1 Introduction

In an organization it is important to put in place an operative and efficient manufacturing unit,

This is very imperative to pay special devotion towards facility/ plant layout. Facility/plant

layout is a systematic organization of diverse phases of manufacturing in an efficient and proper

mode as to achieve results in terms of production as per our desire. Facility layout considers

available space, final production, and user protection suitability of operations. A good facility

layout safeguards that there is a non-interrupted and smooth drift of production material,

equipment and desired workforce at least cost. Facility/plant layout has to do with physical

apportionment of cosmos for economic activity in the plant. Therefore, the prime objective of the

facility layout planning is the planning for operational work flow.

3.2 Meaning

Facility layout means the systematic arrangement of production facilities physically. This refers

to the alignment of divisions, centres of work and equipment needed in the transformation

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process. It is also included floor planning for the physical amenities, which are supposed to be

utilized in production process.

As per the definition given by Moore ―Plant layout is a plan of an optimum arrangement of

facilities including personnel, operating equipment, storage space, material handling equipment

and all other supporting services along with the design of best structure to contain all these

facilities‖

According to James Lundy, ―Layout identically involves the allocation of space and the

arrangement of equipment in such a manner that overall operating costs are minimized‖.

Definition given by K.G.LOCKYER for facility planning, ―the disposition of the various parts of

a plant along with all the equipment used there in, is known as the plant layout, which should be

designed to enable the plant to function most effectively‖.

Facility layout is the repositioning of machinery and equipment of plant for better and economic

plant production. Facility layout begins with the selection of a worksite for the facilities required

for operations. In addition to this plant/facility layout includes arrangement of workforce,

material, storage space and all the other supporting services such as design and maintenance of a

plant.

3.3 Objectives of facility layout

An operative and good facility layout should have following objectives:

It should arrange for finest space to organization of equipment and enable mobilty of

goods from one operation to another and to make safe and comfortable work

environment.

It should encourage production in terms of order towards a single objective

It helps in reducing unnecessary movement of workers, raw material required and

equipment needed.

To uphold plant safety space as well as its workers.

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To ease addition of or change in the layout to accommodate new product line or

technology up-gradation when needed.

It should able to increase organization‘s production capacity.

Economic material handling and finished goods.

Improvement in work condition.

Unidirectional flow of production operation.

An organization can attain the above-mentioned objectives to make sure the following :

Enhanced training of the workers and supervisors.

Making aware all its employees about the health hazard and safety standards in facility

premises.

Best possible utilization of workforce‘s potential and equipment.

Reassuring employee empowerment and plummeting executive work and other indirect

work

3.4 Characteristics of efficient facility layout: There are some principle that follows for an

ideal facility layout. These principles are describes as follows:

1. Principle of integration: A facility layout can be better if it assimilates men, materials,

machines and all supporting services and other things in order to achieve best results from

resources to get maximum organization‘s effectiveness.

2. Principle of minimum travelling distance: This mainly refers to the least travelling distance

of materials and man. Arrangement of all facilities are like that, the whole distance travelled by

the workmen and materials should be as lowest as possible and as far as possible straight line

movement must give preference when compared to any other movement.

3. Principle of cubic space utilisation: The facility layout when utilises both vertical and

horizontal space in a workplace is called cubic space utilisation. It is not only sufficient when we

utilize the floor space only is but the third dimension should also be utilized, i.e., the height

(vertical space) is also to be applied effectively and efficiently.

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4. Principle of flow: The noble facility layout creates the movement of materials in forward

direction i.e. in the direction of the completion stage, there should not be any back-pedaling

movement. Material should always move in the stages ahead of every stage, no backward

movement is to be followed.

5. Principle of maximum flexibility: Any facility layout can be good if it can be manipulated

without spending far cost and time. For this the requirements for future must be considered while

formulating the present facility layout at present time period.

6. Principle of 3S (satisfaction safety and security): A good facility layout gives due

importance to the worker‘s safety and satisfaction and protections to the plant and machinery

against fire, theft, etc. or any other circumstances.

7. Principle of minimum handling: A facility layout should reduces the handling of materials to

as minimum as possible so cost occurring in the managing material can be reduced to some

extent.

3.5 Factors affecting the facility layout decision

Following are the factors that must be considered while making facility layout decision

1. Production types: - The facility layout of an engineering firm is rather different from a floor

factory layout. So production type does matter in making facility layout.

2. Types of production system: - The facility layout for continuous production system is

completely diverse as facility layout under the un-continuous production system. So production

system affect facility layout decision.

3. Production scale: - Equipment in any facility layout for material handling in the large

organization is somewhat not the same as that in the small-scale organization. For large scale

operation to medium to small have different facility layout.

4. Machine’s type: - The use of machine whether it is simple-purpose or multipurpose machines

has substantially impact on the decision of the plant/facility layout. Similarly section attention

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should be given to loud and vibrating machines in the facility layout decision as it affect

environment and community to large extent.

5. Building facility type: - The facility layout for single story building will be very different

from multi-story building.

6. Floor area availability: - Availability of floor area for production operation and allocation of

the available space for equipment like work benches , machines etc. is based on the available

floor area for production and operation. Overhead spaces should be taken for use in case space

shortage.

7. Future expansion possibility:- The facility layout is made taking view point of expansion in

requirements and installation of additional facilities in future

8. Systematic organization of material handling equipment: - Services for material handling

and facility layout are closely associated with each other, material handling has a significant

effect on the organization of production process and plant services.

Activity

Discourse to two entrepreneurs, one in manufacturing and one in service business. Talk over with

them to find out:

a)Factor considered in facility layout

b) How have availability of transportation and labour affected their layout.

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

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_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

3.6 Advantages of facility layout

A good facility layout results in reduced cost and profitable production .A good facility layout

has following advantages:

Better work conditions for workmen:

In any production facility labour play an important role therefore labour‘s job satisfaction

is necessary to control unwanted movement of labour. Facility layout deals with deep

study of work, evaluation of job and managing incentives. When all these factor are

implemented in the workplace then there will be better work conditions. Safety of

workers is another very important factor in facility planning .A good facility places

machines to appropriate number of workers and at right place .So there should be no

congestion around machines and equipment to allocate spaces for working properly.

Minimization in material handling:

In a good facility layout, material, raw materials, semi -finished goods and finished goods

are important one to functioning of the organization. Their handling in a proper manner is

must for smooth movement of materials. For proper handling of material machinery and

equipment should be placed in such a manner so that movement of material will be easy

.In addition to this stores and cranes are provided in adequate number for material storage

and transferring them from one place to another.

Minimization in damage and spoilage materials.

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In a good facility layout materials are handled in such a manner so that damage and

spoilage of materials. Minimization in damage and spoilage leads to profit in production.

Reduction in overcrowding of materials, machinery and workmen:

A good facility layout means well organized workspace with proper facility for workmen.

In a facility layout adequate space is provided for every activity for example stores are

available for production , operations are placed in the operation department whereas the

materials required for packing are placed in the packing department. All the workmen are

also distributed among respective departments so that there is no confusion in work.

Flexibility in changing production conditions:

Higher flexibility in changing the work condition is a requirement for a good facility

layout. The workplace can be changed according to the volume of production increase

and decrease. All such problems are considered beforehand so that when the situation

arises, there is no interruption in the daily work routine.

3.7 Types of Facility layout

Facility layout has different aspect for different kind of operation as the operation function in

both manufacturing and service organization which can be divided into two traditional operation

types that are intermittent and continuous based on volume and standardizing of the product and

services.

Un-continuous operations –Operation categorized by make to order, low in volume, labour

intensive products; by a big product mix; by common purpose equipment; by changes in

schedule frequently changes or interrupted product flow.

Continuous operations--- These operation are regarded as standardized products, capital

intensive products and high volume that are finished to store in inventory, small product mix;

specific purpose equipment; and continuous product flow.

3.7.1 Functional or Process layout

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In the functional or process layout all equipment that performs similar task and those which are

similar in nature are band together .In the functional layout, as all the material and machines

required are assembled be contingent upon their functions. For example: In the milling

machines, machines are grouped together with the grinding machines.

Advantages

o In the process layout higher degree for variety of products can be products can be

manufactured.

o It can able to adopt flexibility change in future.

o It is not affected by breakdown of any machine in process.

o It is at ease to inculcate satisfaction regarding job among the workers.

o Supervision and coordination and is simple.

Disadvantages

o Time flow for the products is higher because of zigzag pattern of flow over the system.

o Machine set-ups required in large number.

o Machine utilization is not at its fullest usage.

o Material handling is more in this type of layout.

3.7.2 Product or line layout

In the product or line layout all equipments are arranged in the sequence according to their use

sequence i.e. in line with the usage that‘s why product layout is known as the line layout too, as

all the resource i.e. materials needed and machineries required are placed in logical sequence.

This layout type is beneficial to industries like automobiles industries where assembling of

materials and all parts takes place. In this type of industries, process need to start by providing

for the raw materials and the process finishes with the production of the final product. In the line

layout, less numbers of workers are required as a result it automatically minimizes the cost and

results in to higher productivity, because entire the process is not manual instead it is automatic.

Advantages

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o flow time for the product is very low.

o There are no as such interruption to the flow as a result output rate is very high.

o Planning for production is simple .

o Monitoring is not as much required.

Disadvantages

o In this layout variety is not possible.

o It cannot able to adopt flexibility is regard to changes taken place in design.

o Investment is higher and so is cost.

o Labours have lower satisfaction in their job.

Dissimilarity between production layout and process layout

BASE PRODUCT LAYOUT PROCESS LAYOUT

1. Replication of

equipment

More replication of plant

and equipment

Less replication of plant and

equipment.

2. Control in

production

More actual due to pre

planning

Difficult because of

involvement of various

department.

3. Material handling

cost

Less High

4. Production time

involved

Less High

5. Accretion in work in

progress

Low High

6. Occupancy for floor

area

Less More

7. Higher rate of

utilization of

machine

Less High

8. Flexibility Low High

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9. Applicability In industries which are

engaged in manufacturing

standardized products i.e.

Operations having a

monotonous process.

In industries which are

engaged in manufacturing

goods as per requirement

i.e. where non-repetitive

process.

3.7.3 Combination of process and product layout

In practical approach, implementation of an only product layout or an only process layout in

rarely seen, because it is not possible to adopt only one isolated layout in practicality. Therefore,

In practice we usually adopt a combination of process and product layout, especially in factory

premises those are engaged in the processes of making standardized products. This is so adopted

in deriving the extreme benefits ensuing from both types of layout, there by disabling the

disadvantages of any of these layouts. A combination of process and product layouts cartels the

plus points of both types of layouts. This is suitable for making items which are to be completed

in different types of sizes and types. Here equipments are organized in a process layout but the

process combination is formerly arranged in a particular sequence to manufacture products of

various types and sizes. This is to be noted here that the arrangement of operations rests same

with all the variety of products and different sizes. But now there is a trend to fetch flexibility in

regards to variation occur with sequence and batch type of operation in the manufacturing

process.

3.7.4 Project or fix position

In the project layout, position of all the raw materials required are fixed means raw material are

put in a fixed position. That is why the project layout is referred as the fixed position layouts,

because of the operation of production is performed at one fixed position. This is useful for

producing equipment less in number. For example, aeroplane making industries, ship

manufacturing industries etc.

Advantages

o It helps in reduces movement of machineries and equipment.

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o It also helps in minimizing damage or cost involved in moving.

o Due to less movement of material more continuity in operation can be achieved .

Disadvantages

o In this type of layout workers are involved in many operations remains same so many skilled

and multipurpose workers demand fulfilling is difficult. The combination of skills and pay is

difficult to maintain.

o Due to involvement of heavy machines and their fixed position nature, movement is expensive.

o Utilization of equipments are low.

3.7.5 Group layout or cellular layout

Group Technology (GT) refers to the examination and assessments of objects to assemblage

them into families having similar features in it. Group Technology (GT) is used to develop a

hybrid layout system between pure form of process layout and pure product layout. This

technique is very useful in case where production of variety of parts in small batches are

done.This hybrid layout allow companies to gain economies and advantage of product layout.

The applicability of group technology comprises of two main steps; first step is to define

component of groups. The second step is to arrange the equipment in the plants used to process a

particular family of components. This signifies smaller plants within the larger plants. The group

technology helps in reduction of time involved in production operation planning for jobs. This

also reduces the set time for production operation. If there are m machines with n components, in

a group layout, the m machines with n components will be alienated into discrete number of

machine-component cells in a way all the components allocated to a cell are processed within

that cell itself. Here, the main objective is to minimize movements among cells i.e. inter-cell

movement. The simple objective of a group technology layout is to identify families of

components that require similarity for filling all the requirements of the machines are grouped

into cells. Each cell has capability of satiating all the requirements of the component family

consigned to it. This type of layout scheme process takes in to account a single objective while

revising layouts. In process layout, main objective is to minimize the cost involved in material

handling. Because of this nature of the layout, the cost of equipment remains minimum in this

type of layout. In product layout, the cost of materials handling will be at the absolute minimum.

But the equipment‘s cost would not be at the minimum if the equipment are not fully utilized.

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Advantages of Group Technology Layout

Group Technology layout can helps in the increment of following —

1. Standardization and rationalization of components.

2. Reliability over estimates.

3. Active machine operation and productivity.

4. Customer service.

It helps in decreasing the—

1. Document work and overall production time.

2. Work movement or work-in-progress.

3. Overall cost.

Disadvantages of Group Technology Layout

This type of layout cannot be practicable for all types of production circumstances. When the

product mix is totally dissimilar, then we may not have meaningful cell formation.

3.8 Problems in facility layout

In deciding over to make facility layout one would definitely face some problems as many future

decision is based on facility layout decision here we are describing some kind of problems which

comes in front while making facility layout and their reason one by one :

3.8.3 Facility Layout Designing Problem:

The foremost problem which is faced by many production and operation managers are its

designing .Facility layout designing problem is overwhelming as it presents in small, medium as

well as large organization. This facility design problem occurs because of following factors:

Location of activities:

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Activity location in the work space is crucial task to get done. It includes various decision

like distribution of labor, task, machines, assignment of workforce to workplace station

so on .Activity should be located at the right place and right time , in the hand of

qualified personnel .It will help in coordination of all activities.

Dimensions: Considering all the dimensions while making facility layout is important

but this is a big problem to manager who is responsible for production and operation.

Dimension like factor affecting facility layout already discussed earlier in this chapter are

to be viewed for appropriate facility layout. Considering all the dimensions is a big

problem as all the dimension rarely fit to any particular layout type whether it is product

layout or process layout and fixed position layout. All the types of layout has their own

advantages and disadvantages.

Configurations : Suitable configuration of all the resources are also a big challenge to

facility layout decision.

Goals: There are several goals which are to be achieved by making facility layout like

minimum cost in material handling, minimum investments, minimum throughput time,

flexibility, efficient use of space. All these goals are very difficult to achieve at one time.

3.8.4 Reasons for the problems

Reasons for the above problems are as follows:

Arrival of new products

Changes in demand pattern

Variations in product design

Availability of machines

Restricted access

Too large buffers

Too long transfer times

No overall algorithm exists for coping and solving all the problems in facility layout.

Check your progress 1

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1.Which of the following industries should be located near the vicinity of raw materials?

a. Cycles

b. Televisions

c. Sewing machines

d. Steel mills

2.If all the processing equipment and machines are arranged based on the sequence of

operations of a product the layout is known as

a. Product layout

b. Process layout

c. Fixed position layout

d. Combination layout

3.The mentioned type of layout is preferred to manufacture a standard product in large

quantity

a. Product layout

b. Process layout



4 .The subsequent type of layout is preferred for low volume production of nonstandard

products

a.Product layout

b.Process layout

C.Fixed position layout

d.Combination layout

5.In ship manufacturing, the type of layout preferred is

a.Product layout

b.Process layout

c.Fixed position layout

d.Combination layout

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3.9 Summary

Decision about facility layout are through only period basis, but affect long term decision effect

and magnitudes therefore it should be ended with careful and efficient planning. The facility

layout have a major impact on the cost in producing goods and bringing services for long years

in the future. We discussed basic layout of facility i.e. Process, product and fixed position.

Process layout organize work centres as per their functionality. In Product layout work centres

and equipment are arranged in a set- line so that a particular sequence of tasks will result in

product build-up. In a fixed position layout remains in fixed one location and all the resources

are carried to it. From the text we learnt that facility layout is one of the entrepreneurial

decisions as it influences cost of production and distribution to large extent. Therefore, facility

layout should be optimum considering all the factors in operation management.


1.The profit of an enterprise can be increased by

i. Reducing total costs of production

ii. Increasing sales value

iii. Increasing capital cost

iv. Increasing manpower

Which of the statements above are true?

a.Only i

b.i & ii

c.I, ii & iii

d.All of the above

2. Space available in vertical and horizontal directions is most effectively utilized‖ is known as

principle of

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a. Cubic space utilization

b. Flexibility

c. Flow

d. Minimum distance

3.If all the processing equipment and machines are arranged according to the arrangement of

operations of a product the layout is known as

a. Product layout

b. Process layout



4.The following type of layout is preferred to manufacture a standard product in large quantity

a. Product layout

b. Process layout



5.In ship manufacturing, the type of layout preferred is

a. Product layout

b. Process layout



6. The main aim of a facility layout is to confirm a even work flow (in a factory) or a particular traffic

pattern in a service organization (yes/no).

7.Among the various layouts mentioned in the chapter, it is rare and unprofitable for one company to

utilize a combination of one or more of these layouts in one operation.(true/false)

8. Office of a professor is an example of a:

a) Process layout

b) Product layout

c) Group technology layout

d) Fixed-position layout

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9.Assembly lines is most closely to a

a) Process layout

b) Product layout

c) Group technology layout

d) None of the above.

10.Among the following types of manufacturing layout which is considered as hybrid:

a) Product layout

b) Fixed position layout

c) Process layout

d)Cellular layout

11. What type of process would a fertilizer plant be most likely to use

a. Continuous process

b. Project process

c. Job process

d. Flow shop process

12.Product layout is if at all possible is used for:

a) Repetitive processing

b) Intermittent processing

c) (a) and (b) Both

d) Neither (a) nor (b)

13.Two basic types of production systems are ?

a. Automated and manual process

b. Intermittent and non-intermittent process

c. Normal and continuous process

d. Continuous process and batch.

14. Among the following layouts which is most suitable for processing sugar from sugar cane?

a. process layout

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b. fixed-position layout

c. focused factory

d. product layout

15.In which of the following the flow of materials is variable is most suitable,

a)layout by process

b) layout by product

c) layout by fixed position

d) line balancing

3.10 Glossary

Facility layout: It considers available production space, final production, user safety and facility

and suitability of operations.

Hybrid – This type of layout combines the features of both make-to-order and make-to-stock.

Typically, a standard product is finished and kept in a stock at some point in the process. The

standard product thus produced is customized according to customer‘ wants and needs before

delivery.

Process – It is a set of activities accomplished by an organization that receipts inputs and

transmutes them into outputs preferably of greater value to the organization than the original

inputs.

Project – A group of interrelated tasks with unique characteristics, separate resources which help

in achieving predetermined objectives.

Cellular layout---The arrangement of a facility such that equipment used to make alike parts and

families of parts is assembled together.

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Un-continuous operations –Operation considered by make to order, low volume, labour

intensive products; by a large product mix; by general purpose equipment; by interrupted product

flow; by frequent schedule changes.

Continuous operations---- Operation described by standardized, high volume ,capital intensive

products that are made to store in inventory form, by smaller product mix; by special purpose

equipment; and by continuous product flow.

3.11 Answer to check your progress1

Answer to check your progress1

Ans1: d

Ans2: a

Ans3: a

Ans4: b

Ans5: c

Answer to check your progress 2

Ans1: b

Ans2: a

Ans3: a

Ans 4: a

Ans5: c

Ans.6 Yes

Ans.7 True

Ans.8 d

Ans.9 b

Ans.10 d

Ans.11 a

Ans.12 a

Ans.13 b

Ans.14 a

Ans.15 a


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1. Explain the importance of layout planning.

2. Describe the different layout types.

3. Contribute explanation of process and product layout.

4. Explicate different operations approaches in case of layout choice for existing organisation?

5.Mention the different factors to be considered when making selection about the layout for the

new organisation?

6. Explain the need of selecting a suitable location.

7. Elucidate the principles of plant layout?

8. Explain the hybrid types of layout?

9. What are the characteristics of good plant layout?

10. Explain briefly about the types of problems related to plant layout

11. Compare process layout with product layout.

3.13 References:

1.Adler, P.S; A. Mandelbaum; V. Nguyen; and ElizabethSchwerer. ―Getting the most out of your

product development process‖ Harward Business Review, March- April 1996,pp. 134- 52

2. Ulrich, Karl T., and Steven D. Eppinger. Product Design and Development . New york: Mc

Graw Hill/Irwin, 2004

3. Richard B Chase, F Robert Jacobs, Nicholas J Aquilano, Nitin K Agarwal, McGraw hills

Companies( 11th edition) New Delhi 2006.

4. Operations Management, ICMR September 2003.




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6. Chase & Production and operation Management, Richard Irwin London; 1995, 7th ed.


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Chapter 4

Capacity Planning


4.1 Introduction

4.2 Concepts of capacity planning

4.3 Importance of capacity planning

4.4 Classification of capacity planning

4.4.1 Long range Capacity

4.4.2 Medium Term Capacity

4.4.3 Short range Capacity

4.5 Factor affecting capacity planning

4.6 Problems in capacity planning

4.7 Capacity planning process(CPP)

4.7.1Long-term capacity strategies

4.7.2. Short-term capacity strategies

4.8 Capacity planning decision

4.9 Importance of Capacity planning decision

4.10 Capacity measures

4.11 Determinants of effective capacity planning

4.12 Summary


4.14 Glossary


4.16 References



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Completing this lesson enable you to:

Know that what is capacity and what kind of decisions involved in determining capacity.

Explore options for increasing and maintaining capacity for operations.

Examine the approaches and factors to capacity planning which need to be considered

while making plan for a company‘s capacity planning.

Explain the steps involve in capacity planning process.

Know the importance of capacity planning for a company and how it affect profitability

of a company.

4.1 Introduction

This lesson concerns with the planning systems that is required for production of goods and

delivering services known as capacity planning. Before products are available in the market,

there must be someone who is responsible for designing and investing in the facilities and

organization resources needed to produce. Capacity planning for both ,manufacturing and service

organizations are not same but is quite different. Capacity planning should be designed keeping

limitations of capacity in mind. This deals with the tracking down of productive resources.

Capacity can be defined as a level of output of the conversion process i.e. transformation of

inputs in to outputs over a period of time. Full capacity indicates optimum level of output in

terms of product and services. Capacity is planned for long term as well as for short-term period.

Process industries tells us about challenging problems in planning capacity, requirement in the

long run, expansion and contraction of facilities in the conversion process. So after analyzing the

requirement of input, the transformation process for the output is designed. After that forecasting

of long term planning and capacity planning should be designed. In this lesson we will study this

in detail.

4.2 Concepts of capacity planning

Dictionary meaning of Capacity is the ability to receive, store, hold or accommodate.

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But in business terminology capacity is the highest possible output of a system under ideal

working conditions in a certain time period. For example Bajaj‘s annual capacity is eight lacs

scooters in current period that means their production is restricted to this eight lacs sccoters. But

the capacity can be changed depending on the facilities available and its use. Suppose a

transformation process with many sub processes and these sub processes are inter-linked. So by

the subsystem which produces lowest output overall capacity can be determined. In order to

enhance the capacity, harmonization among all the equipment and processes are required to

create a better balance. Thus we can conclude that capacity is customarily connected with the

weakest link in the chain. That‘s why even the full utilization of the capacity there may be some

possibilities of individual processes that may remain underutilized.

Capacity is defined as the ability of an organization to achieve, store or produce. For an

organization, capacity is the ability of a given system to produce output in terms of product and

services within the predetermined time frame. In operations, management capacity is referred as

an amount of the input resources available to produce desired output over period of time

Capacity planning is a long term decision and strategic in nature that establishes a firm‘s overall

level of resources. For example, Reliance company decided to invest Rs. 500 to open various

petrol pumps. Capacity planning decisions are expensive to maintain because these expenditures

are usually tied with fixed assets (plant and equipment) they or even more expensive to

incorporate any changes in to it. Similarly, large investments are required to invest in building a

refinery plant or a caustic soda plant. Capacity decisions affect product lead time, operating cost,

customer responsiveness and capability of firm to compete in the competitive environment

effectively. They also have an impact on the firm survival; too A company on the same time

cannot have much capacity and too little capacity because much capacity results in low return

on assets, low morale, lay-offs damages and facility closures which are too expensive; while too

little capacity results into lost sales and high operating cost. From economic view point,

capacity planning is the level of capacity provides at each stage of production or service delivery

systems. It forms bases of planning decisions regarding how much money should be employed in

total assets by the firm. The management should invest that much money in assets that equals

interest rate to capital employed in productivity and marginal efficiency.

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4.3 Importance of capacity planning

Capacity decisions really have an impact on the organisation‘s ability to come across

future requirements for their services and products.

Capacity planning put limits on the rate of output produced.

Ideally, demand requirements and capacity should be matched. Capacity decisions have

an impact on operating costs to large extent, which minimizes operating costs.

Practically this is not possible always, because expected demand and actual demand are

not matched, they are different usually.

Capacity of any organization is usually considered as major determinant factor of initial

cost. Usually, the greater capacity of a productive unit will results in to higher cost.

Capacity decisions requires long-term commitment and involvement of resources. It may

be very difficult or sometimes impossible to modify those decisions without incurring

heavy expenses once they are implemented.

Competitiveness affect capacity decisions. If a firm has excess capacity to quickly add

more capacity as per market competition , that will serve as a barrier to entry‘s of other

firms.

Capacity planning decision affect delivery speed, which is a competitive advantage for a

firm.

Capacity affects working of management.

4.4 Classification of capacity planning

Based on the time line capacity planning can be classified into following classification i.e. long

range, medium range and short range capacity.

4.4.1 Long range Capacity: Other capacities like production capacity, sustainable capacity,

design capacity and effective capacity affect long range capacity.

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Production capacity is the maximum output which can be possible from normal working

condition of equipment in a day.

Sustainable capacity is the maximum production level which is achievable in real

working condition after considering maintenance , machine breakdown etc in normal.

Design capacity is the maximum output possible under ideal working condition of the

organization as indicated by equipment manufacturer.

Effective capacity is the optimum production level under work-schedules, pre-defined job

with normal machine breakdown, maintenance, etc.

4.4.2 Medium range Capacity: The strategic capacity planning undertaken by organization

for two to three years is referred to as medium term capacity planning.

4.4.3 Short range Capacity: The strategic planning undertaken by organization for daily

weekly or quarterly is referred to as short term capacity

Activity A

Explain the approaches of Reliance for capacity planning in short-term, mid-term or long -

term and why they adopt that particular approach?

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4.5 Factor affecting capacity planning

Following are the factors that influence the capacity of an organization:

Product and service factor:

The capacity of an organization depends on the type of product and services that the product

provides. For example, the capacity in terms of output will be higher if any manufacturing

organization manufactures spare parts of automobile while in the case of manufacturing

organization produces trucks, car then capacity will be low.

Processes:

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The manufacturing process of an organization determine the capacity of the organization for

example where processes are done manually capacity will be different as in case of

production where machines are used.

Availability of facility:

Use of advanced technology and improved means of production definitely affect capacity

.Availability for all the facility results in to more capacity.

Human factors:

Human factor like workers affect the capacity planning of a company for example skilled

worker can produce a better quality of good as compared to unskilled workers.

Supply factor:

Supply of raw material, unfinished goods and finished goods affects the capacity of a

company. Timely and assured supply of material improves the ability to produce goods e.g. if

a company imports raw material from a far places then delay in getting raw material due to

any reason say lack of proper transportation affect the capacity planning of a company.

External Factors:

External factors like investors and government policies affect capacity planning of a

company. The amount invested affect amount of production and capacity. Capacity

planning also affects by the rules such as, maximum limit of production and tax limits as set

by the government for an organization.

4.6 Problems in the capacity planning

Lacking of standard terminology

Every vendor uses different terminology in the context of capacity planning. Different

vendor has different meaning for capacity management, capacity definition and for

capacity planning. Some vendor includes both capacity tuning and planning under one

term i.e. capacity management while for some of the vendor capacity planning is capacity

tuning only.

Lack of standard definition of capacity

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One definition of capacity define capacity in jobs per second, Transaction per second

(TPS), Instruction per second (IPS) or bits per second (BPS). Another definition of

capacity refers to the maximum number of consumers that are supported by the system

while accomplishing production towards set performance objectives. Capacity planning is

expressed in terms of workload units for example tasks .users, sessions, and activities,

program, jobs, accounts, project and so on.

There are many different capacities exists for the same system

There are so many different capacities in the same system like nominal capacity, usable

capacity(practical capacity), and theoretical capacity (nominal capacity).

There is no standard workload units

In case of users and sessions it is difficult to describe workload that varies from one

working environment to another working environment. So various independent measures

of workload can also be used in like forecasting like MIPS .

Difficulty in forecasting future application.

There is a presumption that future will follow past trends and most of the forecasting is

based on this assumption but if new technology emerges this assumption will no longer

valid.

There is no uniformity among systems among different vendors.

On the different system in the organization same workload takes different amount of

resources. This non uniformity requires on the part of different vendors to develop

independent standard set and running it on different system.

Model inputs is difficult to be measured

Simulation and various analytical models are used to foretell about the performance of

different alternatives. The inputs are sometimes not accurately measurable for the model.

Think time which is used in analytical model is very difficult to measure.

Difficult to validate model projection

There are basically two types of model projection one is baseline model validation and

another is projection validation.

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In a baseline validation current workload and configuration of the model is judged to

verify whether model output matches the observed system performance or not.

In a projection validation changing the workload and configuration is judged to verify

that the model output matches with the changing performance of real system or not. But it

rarely happens in terms of performance.

Distribution of the environment are too complex to get it modelled

Initially computer systems are composed of only a few components and justifying the

each component‘ s cost was so simple but with the distribution of the environments of in

today‘s system consists of numerous semi-autonomous servers , clients and networks

links, and input output devices. Usage of the workstation is very different and interaction

among them are very complex rather. Justification of each component cost is very

difficult to give.

Activity B

You often see notices at the entrance to hospital that, ‗The capacity is 200 bed‘. What does this really

mean?

___________________________________________________________________________

___________________________________________________________________________

____________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

___________________________________________________________________

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4.7 Capacity planning process(CPP)

Capacity planning process determines the short-term and long-term capacity needs of an

organisation and determines the ways to satisfy those needs.

Decisions about capacity planning are truly based on the consumer demand and this is fused

with the financial resources, material and human resources of the organisation. Capacity

requirements can be assessed from two strategy perspective i.e. Short- term and long-term

capacity strategies.

4.7.1 Short-term capacity strategies: Managers have to look ahead up to at-least 12

months, which forecast output requirements of products, and services. After that

managers compare that requirements with the capacity which exists in the facility

currently and then take decisions about the capacity amendments as per desired.

Managers often use demand forecasting for the product demand to estimate the

workload facility for short-term period i.e. term periods from six months to one

year but one capacity should be fixed i.e. fundamental capacity. Fundamental

facilities will not be changed. Sometimes decreasing or increasing capacity for

short-term adjustments in capacity can be made possible and these adjustments in

operation facility depend on the types of conversion process like whether it is

capital intensive conversion process or labour intensive conversion process or

whether product can be stored as inventory or not .Capital-intensive conversion

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processes depend availability of physical facilities, plant capacity and equipment.

Adoption of operation of these facilities made less or more intense in short-term

capacity. Short term capacity in labour intensive processes can be altered by

laying off workers or hiring more people or by giving overtime work to workers

accordingly. The strategies for changing capacity also depend upon duration of

holding products as inventory.

The short-term capacity strategies are as follows:

1. Inventories: Inventory is defined as stock of finished goods or semi-finished goods during

slack periods to meet the demand during peak period.

2. Backlog: During peak periods, customers are requested to wait as per their will and their

orders are fulfilled after satisfying peak demand period.

3. Employment level (hiring or firing): Hire more and more employees during peak

demand period and lay-off some employees when demand decreases.

4. Employee training: Develop program to make employees versatile and multi- skilled

through proper training so that they can feel comfort zone in job rotation in different jobs.

Multi-skilled employees provides an alternative to hiring more employees.

5. Subcontracting: During peak periods, hire additional capacity from other firms

temporarily to make the component and parts of the products.

4. Process design: It includes changing job content by redesigning the job again.

4.7.2 Long-term capacity strategies: Determining long-term capacity is more difficult

because future is uncertain and so are technology and future demand.

Forecasting for five or ten years is more risky and difficult. Even sometimes

company‘s today‘s products may not be in demand in the future in this global

world. Requirements of long-range capacity are totally depend on product

development process, life-cycle of the product and marketing plans a. Long-term

capacity planning involves accommodation of major or minor fluctuations that

affect overall output level in long-term. Assessment of marketing environment

and implementing the plans for long-term in a systematic manner are the major

responsibilities of management.

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Following parameters have an impact on long-range capacity decisions.

Multiple products:

Company‘s produce more than one product using the similar facilities in order to increase the

profit. The manufacturing of multiple products will reduce the risk of failure.Having more

than on product helps the capacity planners to do a better job. Because products are in

different stages of their life cycles, it is easy to schedule them to get maximum capacity

utilisation.

Phasing in capacity:

In high technology industries, and in industries where technology developments are very fast,

the rate of outmodedness is high. The products should be brought into the market quickly.

The time to construct the facilities will be long and there is no much time, as the products

should be introduced into the market quickly. Here the solution is phase in capacity on

modular basis. Some commitment is made for building funds and men towards facilities over

a period of three to five years. This is an effective way of capitalizing on technological leap

forward.

Phasing out capacity:

The old and outdated manufacturing facilities cause excessive plant cessations and down

time. The impact of cessations is not limited to only fixed costs of plant and machinery.

Thus, the phasing out here is done with humanistic way without affecting the community.

The phasing out options makes alternative arrangements for men like shifting them to other

locations or to other jobs , compensating the employees, etc.

Irrespective of size of the organization whether large, medium and small generally common

capacity planning process is followed. The steps in the CPP are as follows:

Determine requirements at service level:

The first step in CPP is to categorize work done through systems and quantify expectation of

users for how can work be done. To do all this following steps should be followed:

Define workload.

Determine the work unit.

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Identify service levels for each workload

Analyze current capacity

The existing capacity of the system must be analysed to determine how it will meet the user

needs. For this following steps should be followed:

Measure at service level requirement and compare with objectives.

Measure overall usages of resources.

Measure resource usages by workload

Identify response time components

Future Planning

Using forecasting techniques for future business activity, system requirements are determined it

will ensure that to maintain level of service is up to the mark or not. For this we follow

Determine requirements for future processing.

Plan future system configuration accordingly.


1. All of the following factors are part of determining effective capacity except:

a. Human

b. External

c. Facility

d. Design

e. all of the above are factors

2. The capacity planning process DOES NOT include which of the following?

a. Estimate future requirements

b. Implement selected alternative

c. Access key quantitative issues

d. Identify alternatives

e. Both a & d

3. Which of the following industries measure capacity?

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a. Farming

b. Theater

c. Retail Sales

d. Hospital

e. All of the above

4. Which of the following is NOT a determinant of effective capacity planning?

a. supply chain

b. external forces

c. human considerations

d. operational factors

e. all the above are determinants of effective capacity planning

4.8 Capacity planning decision

Although every business will have different needs regarding capacity, the following four-step

procedure is to be followed for capacity planning decisions:

First estimate capacity requirements for future

Identify gaps after comparing actual and forecasted requirements with available production

capacity

Develop various alternative plans and strategy to reduce the gaps

Evaluate each alternative qualitatively as well as quantitatively to make a final choice.

Step 1: Estimation of capacity requirements

Capacity requirement of process is determining that what is the production capacity of a plant in

near future to meet future demand for the product. Capacity requirements can be estimated by

either measuring an output or measuring an input measure.

Step 2: Identifying gaps

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A capacity gap is the difference between projected capacity requirements and existing capacity,

which can be either positive or negative. When taking long-term capacity decision involves

several resource inputs and multiple operations it will become very complex. For example, if you

decide for certain operations to expand its capacity then overall capacity may be increased. On

the other hand, if you put constraint on one of the operations, then your overall process capacity

will only increase if the that constrained operation is increased.

Step 3: Develop alternatives

Once you are done with estimation of an organisation's capacity requirements and identified

gaps, now you should design various alternative plans to correct that projected identified gaps.

One alternative which is known as the base case, this is to do nothing means if demand for any

orders is out of current capacity and costs a lot then drop orders for that demand. Other

alternatives are various timing and sizing options for this such as the expansion and wait-and-

watch strategies. Some alternatives for reducing capacity also include the closing of some of the

less necessary facilities, lay -off , or reducing working hours of operation.

Step 4: Evaluate the alternatives

The final step is evaluating each alternative in both terms quantitatively and qualitatively.

Quantitatively, you must have to make estimation about cash flow changes in each alternative

over the time horizon of forecasting as compared to the base. Undertaking of this task is only

depends on the projected cash flow to that particular projects.

Qualitatively, you should evaluate each alternative in terms of its fit with the overall capacity

strategy. Some of the more important issues also consider technological changes, competitive

reaction uncertainties of demand and cost estimation. Having considerable experience and good

knowledge will definitely help in this process design. In this way we can also make use of

‗what-if' analysis for evaluating implications of each alternative's before reaching to a final

choice.

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4.9 Importance of capacity decisions

Following are the major importance of capacity decision

Capacity decision affect the ability of the organization to meet its future demands in

terms of services and products.

Capacity affect operating costs.

Capacity decision affect lead time receptiveness.

Capacity decision is a major determinant for setting initial costs

Capacity decision involve long-term involvement of resources

Capacity decisions have an impact on competitiveness

Capacity decision affect working of management

Capacity decision are complex in nature but are very important to the organization.

Capacity decision involves consumption of financial and other resources so it has to be

planned .

4.10 Capacity measures

Design capacity

Maximum output rate or service capacity an operation, process, or facility is designed for.

Effective capacity

Effective Capacity of a firm makes firm to attain its product mix, methods of scheduling for

that, maintenance and standards of quality. Effective capacity is determined after substracting

allowances such as scrap time, personal time and maintenance from design capacity minus

Terminology used in Capacity measures

Actual output

Actual rate of output realized and remember one thing it cannot be higher than effective

capacity.

Utilization

Actual output as a percent of design capacity

Efficiency

Actual output as a percent of effective capacity

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Efficiency measures:

Measurement of how well machines or facility is performing when used

Efficiency (Expressed in percentage) = Actual output/ Effective Capacity

Utilization measures:

Utilization measure is a measurement of a capacity actually use by facilities available, work

center, or machine.

Utilization (Expressed in percentage) = Actual output/ Design Capacity

ILLUSTRATION 1: As per given information below, compute the utilization and efficiency of

the machine repair Department: Design capacity = 60 machines per day Effective capacity = 50

machines per day Actual output = 40 machines per day

SOLUTION

Efficiency rate = Actual output /Effective capacity

= 40 machines per day /50 machines per day

= 80%

Utilisation rate =Actual output /Design capacity

= 40 machines per day/ 60 machines per day

= 67%

ILLUSTRATION 2: As per given information below, compute the utilization and efficiency of

the machine repair Department: Design capacity = 50 machines per day Effective capacity = 60

machines per day Actual output = 45 machines per day

SOLUTION

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Efficiency = Actual output /Effective capacity

= 45 machines per day /60 machines per day

= 75%

Utilisation =Actual output /Design capacity

= 45 machines per day/ 50 machines per day

= 90 %


1. All of the following are true for taking decisions regarding firm’s

capacity except:

a. impact of the capability of the organization to meet its future demands for your

product.

b. affect cost of operation.

c. are a major determinant of initial cost

d. are a major determinant of variable cost

e. Usually involve long term involvement of resources.

2. Which answer(s) defines why capacity decisions are important?

a. capacity decisions have a considerable impact on whether or not a company will

meet future demands

b. capacity decisions affect operating costs

c. capacity decisions are generally a major determinant of initial cost

d. capacity decisions affect competitiveness and management

e. all of the above are components of capacity decision importance

4.11 Summary

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Capacity planning helps managers to decide total unit of goods that organization can produce

to meet organizational goals in current as well as future period. Capacity planning is one of

the key decisions in operations management as it determines the number of output which can

be produced within a given time frame. Capacity planning helps in finding out the capacity

for an organization.Having too little capacity means; customers are not satisfied and too

much capacity means; the operations are under-utilizing with resultant high fixed costs and

momentous effects on breakeven point and profitability. When a company is in need to

increase its capacity after considering degree of ranges from overtime working to build a new

plant or site. Demand forecasting play an important role in planning capacity of a firm and

then after considering demand forecasting, companies can adopt different capacity strategies

to have satisfied customer and maintain operations within their budget and other constraints

i.e. lag, lead or average,.



Ans1. (d)

Ans2. (c)

Ans3. (e)

Ans4. (e)


Ans. 1(d)

Ans.2 (e)

4.13 Glossary:

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Capacity: Capacity is the maximum rate of output which can be achieved by current

available resources, product specifications, maintenance strategies, i.e. maximum number

of units per year ,per quarter or per year.

Capacity planning: Capacity planning is a long term decision and strategic in nature that

set firm‘s overall level of resources.

Capacity cushion: It is the amount of reserve capacity a process uses to handle sudden

increases or decrease of production.

Capacity planning decision: Capacity planning decision is a long term decision and

strategic in nature that establishes a firm‘s overall level of resources.

Actual output: Actual output is the rate of output achieved in reality and it cannot exceed

effective volume.

Utilization: is the defined as percentage of actual output out of design capacity.

Efficiency: is the defined as percentage of actual output out of effective capacity.

4.14 Terminal questions:

1. Why capacity management is being a strategic issue and to what extent it is affected by tactical

and operational factors of the capacity?

2. Capacity is a measure of management performance. Comment on this?

3. Discuss the importance of capacity planning.

4. Having frequent smaller changes in capacity is better or not?

5. Nobody would seriously consider limiting demand for a product, but would always look for

ways of increasing process capacity. Is this true?

6. Explain the process of capacity planning?

7. What are the main factors that affect capacity planning?

8. What is meant by ‗phasing in‘ capacity?

9. Capacity of a teller at Punjab National Bank is handling 5,000 entries as per regular banking

day. But due to some limitations imposed by banking operations access, the teller is only

available to 60 per cent of the time. It is actually able to attend 1000 entries per day. Determine

its system efficiency

http://www.businessdictionary.com/definition/current-resources.html

http://www.businessdictionary.com/definition/current-resources.html

http://www.businessdictionary.com/definition/product-specification.html

http://www.businessdictionary.com/definition/maintenance-strategy.html

http://www.businessdictionary.com/definition/unit.html

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10. Explain measures for capacity of the plant?

4.15 References





1.Adam Jr Everetl E. R J – Production and Operations Management (Prentice-Hall, 1992), 2000

5th ed.







8. Production and operation Management, Richard Irwin London; 1995, 7th ed.


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Chapter 5

Production Planning & Control (PPC)


5.1 Introduction

5.2 Concepts of Production Planning and Control

5.3 Concept of Production planning

5.4 Objectives of Production Planning (PP)

5.5 Levels of Production Planning

5.6 Concept of Production Control

5.7 Objectives of Production Control

5.8 Factors Determining Production Control Operations

5.9 Integration of Production planning and control

5.10 Objectives of Production Planning and Control

5.11 Importance of Production Planning and Control

5.12 Functions of PPC

5.13 Benefits of production planning and control:

5.14 Work Study

5.14.1 Methods study Approach

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5.14.2 Work measurement

5.15 Summary


5.17 Glossary

5.18Terminal questions

5.19 References

5.20 Suggested Readings


After reading this lesson you will be able to

Understand complete concepts of production planning.

Understand production control concepts such as product planning, work study, process

planning, Productivity: Method study; Work measurement.

Explain importance of production planning and control.

5.1 Introduction

In this chapter we will spend time in understanding production planning and control process .

this function is necessary for economic and efficient production. Once the decision has taken by

an entrepreneur about the product design and processes of production and system, then next is

the production planning and production control. One of the big problem for small enterprises is

the low productivity but planned production is an important feature in small business.

.Production planning and Control can be defined as is planning and organization of the

manufacturing processes. It brings together materials and labour for production to get the

desired manufacturing results of desired quality ,quantity, time and place whereas production

control is the process of maintaining a balance between variety of activities involved in

production. Production planning implies formulation of the production policy, determination and

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coordination among activities in a manufacturing system and these all are necessary in reaching

towards desired goals.

5.2 Concepts of PPC (Production Planning and Control)

Production planning and control are two prime parts of the management process. Planning

comprise considering all input variables so as to achieve predetermined output. Control raises to

provision of a corrective action for prevention of the variation of actual output from the desired

out.

Gorden and Carson observe in production that planning and control generally involve

organizing and planning manufacturing process. The prime objective of the organization is the

supply of materials and labour and its movement in various steps, machine‘s utilization and

related activities. Generally it consists of the planning for routing, scheduling, dispatching ,

inspection, and coordination and controlling includes controlling methods in manufacturing

,control over materials, machineries, tools and operating times. Production planning without

production control cannot exists.

Production planning is a managerial function which is mainly fretful with the production

facilities required and how these production facilities should be laid down and how they should

be used for desired level of production.

Planning initiates action while control makes adjustment in the process and provides corrective

measures as per development planned. Production control regulates the sequence of material‘s

flow in the manufacturing process from the start to the end. Broadly, production planning is

concerned with two main aspects:

(i) Planning work tasks.

(ii) Establishment of spatial relationship between the resources.

Production control on the other hand is a way to monitor the execution of the plans as per set

objectives. It does several important functions:

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Ensure that operations required for production are started at planned places and

on time planned.

Monitoring progress of the operations and recording it properly.

Analysing the recorded data according to the plans and measuring the deviations.

Taking corrective actions immediately to minimize the adverse impact of

deviations from the plans if any.

Communicating feedback to the planning authorities in order to make

improvements in future plans.

5.3 Concept of Production planning

Production planning deal with the answer to questions like what kind of product is to be

produced for whom, where to make production ,when to be produced, and how it is to be

produced. It also involves determining all steps of production in advance so as to elude all

bottlenecks and inefficiencies in all the operation process to make production better. Production

planning is defined as a forecasting technique of each and every step in a production‘s

operations, each step should be taken in the right place, on the right time and in the right degree.

Each operation has to be done at its maximum efficiency.

In simple words, production planning makes prediction about flaws and the take steps to correct

and ensuring uninterrupted flow of production. It defines exactly the requirements of materials,

man-power and machinery; and establishes the proper sequence of operations for each individual

product item and formulate time schedule for its complete process.

5.4 Objectives of PP (Production Planning)

The objectives of production planning are as follows:

(i) After an engineering analysis for its sale forecast production planning makes estimation

about various resources like men, machines, materials, and methods etc. It tells about

when and where these resources will be deployed so that the production can be

economically done.

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(ii) It makes all necessary arrangement to achieve targeted output as per mentioned in

production budget and accordingly master schedules are extended when needed. In order

to achieve these targets sometimes, alterations are made according to the demand

fluctuation.

For an effective production planning ,executives are to get all the information regarding on

following aspect:

(i) Data after complete analysis of the products to be manufactured related operations,

processes, methods, required inspection and assembly method.

(ii) Analysis of machine in all aspect i.e. working speed, maximum capacity to perform and

their rate of production in terms of output per day, per week, or per month.

(iii) Analysis of raw material in terms of type, quality and quantity to be used in each

operation and production. Information of availability of raw material in stores and how

much is needed and how much inventory should be kept all these information are really

important .

(iv) Types and classes of equipment and tools for production.

(v) The job description and job specification is required for performance effectiveness of

each job. Only after knowing the skills required in production facility ,qualified

personnel can be hired.

(vi) Information about power consumption, internal and external transport and material

handling service is also needed.

(vii) Job analysis to provide information on what kind of methods of operation will harvest

uniformity in output, ease of production and reduction in cost.

(viii) Information about customer order in hand ,methods of delivery to the customer also

required.

It is the responsibility of the department of production planning to make arrangements to run

current production i.e. the routing and scheduling process for machines, tools, work,

workplaces, materials and workers.

An efficient production planning increases operating efficiency by stabilizing activities in

production, facilitating selling and providing good customer service. All this help in reducing

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production cost. Reliably ,it provides basis for investment in raw materials and tools needed. It

promotes full utilisation of labour available ,plant, and equipment by controlling time and

efforts in manufacturing means to plan production facilities in the best possible manner ;

Provide 3 M s( men, machines, materials ). All these should be of right quality, quantity and also

providing them at the right time ; To inform about the difficulties in operations or the various

awkward positions expected to crop up later for better management to the top management

beforehand.

5.5 Levels of Production Planning

Production planning can be done at various level like factory ,process and at operation level;

below is the description of these three are as follows:

(i) Factory Planning: This stage deals with facility location and layout. At this level the

sequence of working is planned as number of machines required and what type of

equipments are needed to manufacture goods. Factor level planning also determine

about workplace relationship in terms of departments, also availability of space is

also considered.

(ii) Process Planning: There are so many operations which are done at factory planning

stage to transform inputs into desired end product i.e. output. At process planning

stage these operations are placed and the systematic arrangement of these operations

is determined in the production process. Planning for work layout of work centres in

each process can also be made at this stage.

(iii) Operation Planning: Detailing of methods required in operation for various

operations is done in operation planning like selecting work centres, designing tools

required ,Then the sequences of process involved in each operation are planned.

Requirements for transfer, allocating work centres, nature of tools required and the

time necessary for the completion of each stages in operation are prescribed at

operation planning stage.

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5.6 Concept of Production Control

All organizations use this production control to some or large extent irrespective of their

size,. In small organizations, One person controls the production function but in large

industries there is production control department for this .This department is highly

specialised and well-organised. Production plan usually form the basis of production control.

This ensure production performance as per plans by using various control techniques.

Integration of 3 Ms are necessary for accomplishment of the task of production control.

Production control is ―the process of planning production in advance of operations;

establishing the exact route of each individual item, part of assembly; setting, starting and

finishing dates for each important item, assembly, and the finished products, and releasing

the necessary orders as well as initiating the required follow-up to effectuate the smooth

functioning of the enterprise.‖ According to Henry Fayol, ―production control is the art and

science of ensuring that all which occurs is in accordance with the rules established and the

instructions issued‖. Production control aims at achieving production targets, increasing

profits, making goods better and delivering more economic services etc by optimum use of

available resources, .Thus, production control makes flow of materials in particular order in

the manufacturing process from acquiring raw material as input to the finished product as

output. Reliable information, better organization structure with standardisation , highly

qualified personnel these all are the ingredients of an effective production control system .

For an efficient operation of plant sound production control systems is required. Production

control assures completion of customer‘s order in time. Delivering all the order in time is

certainly important to the customer and also for company‘s goodwill. This will make

workplace environment pleasant .It is well recognized that employees prefer to work under

well planned and controlled working environment. Effective production control also works

for keeping inventory at minimum level, saving both labour cost and material investment.

5.7 Objectives of Production Control

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The success of any business firm depends on the performance of its department of production

control to large extent. It has following function to do:

(i) Organizing production schedule in conformance to the demand forecasts.

(ii) Use resources in best possible manner so that production cost can be minimized.

(iii) Determining economic production runs to reduce production setup cost.

(iv) Co-ordinating inter-departmental operations for production.

(v) Ensure timely supply of material in mentioned quantity and desired quality to avoid

delay in production.

(vi) Performing inspection of goods whether finished or semi-finished to check quality.

(vii) Using quality control techniques to make certain that all the items are produced

having items required specifications and quality.

(viii) Responsibility of product design and development.

Thus we can deduce from above text that the fundamental objective of production control is

to regularize various operations in production process and control them , in an orderly flow

manner at different stages and the items are produced in right quantity and of right quality at

the right time with minimum cost.

Production Control starts with setting goals and formulation of strategy from general to

specific strategy to achieve set goals. There are three control level in production i.e.

programming control, ordering control and dispatching control.

Programming controls all the output produced in a factory as a whole.

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Ordering control controls the components needed to produce finished goods from the

processing and supply departments.

Dispatching control makes each processing department to lay plans for the output from

available machines, tools and related work centres to complete the orders in time.

5.8 Factors affecting production control operations

The factor affecting production control are different in different organisation .Factors that

affect the nature and level of production control methods in an organisation are explained

below:

(i) Nature of production: In job process manufacturing, products and operations are

designed according to the specific order. Usually it takes longer time in production,

however in a continuous process of production system inventory maintenance is

complex but controlling operations are quiet simple due to fixed sequence process. In

hybrid manufacturing systems production control is problematic due to involvement

of concurrent scheduling of various process.

(ii) Nature of operations: In an un-continuous production system, operations are mark

ably varies in terms of duration, characteristics, and sequence. Due to this, controlling

procedure also requires some modifications to be made to suit the requirements for

each order.

(iii) Magnitude of operations: Centralized control system ensures most effective

coordination in small organizations but in the big organisation, some production

control system requires decentralisation according to the operations‘ scope and

suitability of their locations to determine degree of decentralization.

5.9 Integration of Production planning and control

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Planning and control are interrelated and interdependent. Planning is meaningless unless

control action is taken to ensure the success of the plan. Control also provides

information feedback which is helpful in modifying the existing plans and in making new

plans. Similarly, control is dependent on planning as the standards of performance are

laid down under planning. Therefore, production planning and control should be

considered an integrated function of planning to ensure the most efficient production and

regulation of operations to execute the plans successfully. Production planning and

control may be defined as the direction and coordination of the firm‘s material and

physical facilities towards the attainment of pre-specified production goals in the most

efficient available way. It is the process of planning production in advance of operations,

establishing the exact route of each individual item, part or assembly, setting starting and

finishing dates for each important item or assembly and finished products, and releasing

the necessary orders as well as initiating the required follow up to effectuate the smooth

functioning of the enterprise. Thus, production planning and control involves planning,

routing, scheduling, dispatching and expediting to coordinate the movements of

materials, machines and manpower as to quantity, quality, time and place. It is based

upon the old adage of ―first plan your work and then work your plan‖.

5.10 Objectives of Production Planning and Control

The main objective of production planning and control is to ensure the coordinated flow of

work so that the required number of products are manufactured in the required quantity and

of required quality at the required time at optimum efficiency. In other words, production

planning and control aims at the following purposes:

(i) Continuous Flow of Production: It tries to maintain production flow in a

continuous manner by eliminating all kind of flaws in the process of production

carefully through well-planned scheduling and routing.

(ii) Planned Requirements of Resources: This objective makes sure about planned

requirement and availability of all the inputs i.e. machines, materials, equipment

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,tools and manpower in the required number, of the required skills and at the right

time to achieve desired level of production can be achieved.

(iii) Co-ordinated work Schedules: All production activities are planned and executed

in a manufacturing organizations according to the master schedule.PPC makes sure

that communication of master schedules to the various departments, units, and to all

supervisors can be established.

(iv) Optimum Inventory: This maintains inventory consistent with continuous flow of

production. So that inventory cost can be minimized.

(v) Increased Productivity: Productivity can be increased by increasing efficiency and

economy in production .This can be achieved by fully utilization of resources in a

productive way and eliminating spoilage and wastage.

(vi) Customer Satisfaction: Satisfied customer in a need of an hour for any kind of

business and to have customer satisfied needs right time of delivery of products by

co-ordinating all the production activities operations in-line with customer orders.

(vii) Production and Employment Stabilization: Production and employment should be

relatively stable and consistent in quality.

(viii) Evaluation of Performance: Evaluation of performance in the process of

production planning and control is monitoring operations to judge the performance of

various workers and work-centre and taking appropriate corrective measures if any

deviation occurs in between planned operation and actual operations.

5.11 Importance of Production Planning and Control

Production planning and control system is like the central nervous system of an organization.

It is an agency to co-ordinate all the activities composed of purchasing, production,

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engineering, selling and stock controlling. Sound production planning and control provides at

reasonable price more economic goods to customers.

Main advantages of PPC are summarized as following:

(i) Better Service to Customers: Through proper expediting of work and proper

scheduling production planning and control helps in delivering better services to

customers by providing better quality products at reasonable prices on promised

delivery dates. Delivery of quality goods on right time help in securing customer‘s

assurance, making better relations with them and promoting profitable repeated

orders.

(ii) Fewer Rush Orders: To have fewer rush orders in plant there should be effective

system which smoothly does all the operation as per original plan and providing order

on set delivery date .

(iii) Better inventory control: A effective system of production planning and control

maintains inventory at minimum level and in that way helps in minimising investment

in inventory. It also exercises a sound level of control over inventory, which leads to

more effective purchasing.

(iv) More Effective Use of Equipment: An effective production planning and control

system uses equipment effectively and provides feedback on regular basis concerning

to the position of all orders in process, equipment and also personnel requirements

for workers in coming future to the management. Workers should be well informed in

advance about retrenchment, transfer and lay-offs, etc. Purchases of any equipment

when it is not required at that time and materials should be avoided..

(v) Reduced Idle Time: Idle time is the lost time due to waiting for materials and other

facilities by workers, it costs a lot to company. Reducing this idle time as per the

production schedule makes availability materials and other facilities to the workers

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when they are in need. So in this way we can reduce lost man-hours which minimize

cost of production.

(vi) Improved morale: Production planning and control effectively co-ordinates all

inter-departmental activities needed for un-interrupted production for even flow of

work and avoid order rush. It maintains good and healthy working environment in

the plant. Thus, Morale of plant can be improved as a by-product.

(vii) Better Public Image: If an organisation meets its orders in time to satisfy its

customers then it will enjoy increased sales, industrial harmony, increased profits and

finally, better public image of the enterprise.

(viii) Lower Capital Requirements: Schedule provides input requirement before the

actual production process starts which ensures evenly flow of production without any

hurdles. For a sound PPC system, everything about production should be planned

well in advance so facilities can be used effectively and the level of inventory should

be kept as per schedule neither more nor less.

5.12 Functions of PPC

The main functions of PPC is to coordinate all activity during production phase.

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Materials: Material function ensures timely availability of raw material, standard finished parts

and parts of products within the time while starting the operation.

Methods: This function analyses all manufacturing alternative methods implied in the

manufacturing process and selecting the best available technique to the given set of conditions .

Machines and Equipment: This function relates manufacturing method to the available

facilities for production and its detailed assessment for maintenance procedures and equipment

policy of the production facilities,

Routing: Routing is the determination of sequence of operation followed in producing the

particular product. It determines manufacturing operation and its sequence.

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Estimating: This refers to the estimation of operations time after fixing overall method and

sequence of operation.

Scheduling and Loading: It is concerned with preparing loads for machine and fixing its

starting and end dates for a particular sequence of operation. But remember to load machine

according to the capacity.

Dispatching: Priority and sequence of operation in production of particular product is

determined in scheduling process. Now it is the time to assign work to different work station or

machines to start production activities in order of their priority , this is the work of dispatching.

Expediting: It is closely related with dispatching and takes follow up which keeps control on

the progress of the production process.

Inspection: It is a kind of a control tool and it can also be used as a basis for future

investigations in to method and process involved . which is useful for evaluating phase. It is

important for the execution of current program.

Evaluating: Evaluating is the process of providing a feedback and integrated with control

function so that the past experience can be evaluated for improvement in methods applied on

the long run basis.

5.13 Benefits of production planning and control:

Optimum capacity utilization

Production Planning and Production Control [PPC] helps the entrepreneur to make schedule for

tasks and production and run it accordingly based on its capacity. This process ensure that

productive capacity of any machine does not stay idle and there is no piling up of tasks and no

unattended order and no machine remains idle.

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Inventory control

Resorting to JIT(just in time) , PPC enables the entrepreneur to reduce the overall inventory

and to make sure availability of all the supplies on the right time.

Economic production time:

PPC helps in reducing cycle time and increasing its turnover through proper scheduling.

Ensure quality:

A sound PPC relies on strict following the quality standards so that quality of output can be

produced.


1. Production Planning and Control department acts as a link between company's sales and

________ department.

2. ________ is used for planning capacity.

Correct Answer.

3. Proper Production Planning and Control can reduce cost in :-

Correct Answer

Activity A

A milk powder tin is being weighed as it is filled is an example of?????

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

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5.14 Work Study

Work study is the analysis of finding out preferred method of doing task or work. It is concerned

with determining standard time for preferred method. Work Study is the organized inspection of

the activities to use available resources effectively and to set some performance standards for the

activities undertaken. This has to do with Improvement in Productivity, Quality and Safety.

Work study has two components

Method study also known as motion study

Work measurement also known as time study

5.14.1 Methods study – It is an analysis of ways of doing work. It involves following stages:

1. Selection of the tasks to study

2. Recording facts about it

3. Examining recorded information

_________________________________________________________

_________________________________________________________

_________________________________________________________

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4. Developing new method

5. Installing or implementing new method

6. Maintaining the new method.

So we can conclude that it is a systematic way of improving effectiveness of human resources

and optimum utilization of equipments.

5.14.2 Work measurement (Time study), on the other hand, determines standard time of

different jobs .It is necessary in proper estimation of

machinery, manpower and equipment requirements.

monthly , weekly or daily requirement of materials

labour budget

Improve worker's efficiency and make incentive wage payments.

Basically it analyses jobs in terms of time taken to finish it.Similar steps are involved as to

method study i.e.

1. Task selection

2. Recording facts

3. Analyzing recorded facts

4. Calculation of basic and standard times for the task

5. Agreement on the method and its related time

The application of method study and time study in any organization tends to achieve greater

output of better quality at lesser cost to achieve higher productivity.


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1.Work study consists of

a. Using plant and equipment effectively

b. Using human effort effectively

C. Evaluation of human work

D. All of the above

2. Work study examines

a. Method

b. Duration of work

c. Both ‗a‘ and ‗b‘

d. None of the above

3. Work study is also recognised as

a. Time study

b. Motion study

c. both ‗a‘ and ‗b‘

d. None of the above

4. The following factor(s) must be considered while selecting the work for method study

a. Economic considerations

b. Technical considerations

c. Human reactions

d. All of the above

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5.15 Summary

Production planning and Control in simple terms can be viewed as planning and organization of

the manufacturing processes. It brings together materials and labour in production process to

achieve the desired outputs in terms of quality, quantity, time and place. Production planning

means formulation, coordination and determination of production activities for the

accomplishment of organizational goal in a manufacturing system necessary whereas in

production control is balancing among variety of activities involved in production process is

maintained. Work study measures work completion and establishes performance standards.

Work study is an important component of PPC. Operations managers can introduce reasonable

accuracy through systematic technique in setting time limit for production. Whether or not the

worker likes or dislikes they forced them to work hard to complete a job within set time limit

with very tightly measured work standards .


Answer to check your progres1

Ans.1- Manufacturing

Ans.2- Standard Time.

Ans.3- Overtime cost

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Ans.4 d

5.17 Glossary:

Production planning: Production planning is a forecasting technique of every step in the series

of operations .

Production control: It is a controlling technique which monitors all the production process.

Work study: Work study is the analysis of finding out preferred method of doing task or work.

It is concerned with determining standard time for preferred method.

Method study: It is the determination and analysis of method of doing work. It adds value and

increase efficiency by discarding any delays, unnecessary operations, and other forms of waste.

Work measurement: Determines standard time of different jobs .

5.18Terminal questions

1.Give definition of PPC.

2. List out the objectives of PPC.

3. List the phases of PPC ?

4. What are the various functions of PPC?

5. What do you mean by work study?

6. List the objectives involved in work study?

7. List out the features of method study.

8. What do you mean by work measurement?

9. List the techniques of work measurement.

Answer to check your progres2

Ans.1 d

Ans.2 c

Ans.3 c

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10. Discuss the steps involved in production control.

5.19 References

1. Adler, P.S; A. Mandelbaum; V. Nguyen; and ElizabethSchwerer. ―Getting the most out of

your product development process‖ Harward Business Review, March- April 1996,pp. 134- 152

2. Ulrich, Karl T., and Steven D. Eppinger. Product Design and Development . New york: Mc

Graw Hill/Irwin, 2004

3. Richard B Chase, F Robert Jacobs, Nicholas J Aquilano, Nitin K Agarwal, McGraw hills

Companies( 11th edition) New Delhi 2006.

4. Operations Management, ICMR September 2003.


1. Samson Eilon, ―Elements of production planning and control‖, Universal Book Corpn.1984

2. Elwood S.Buffa, and Rakesh K.Sarin, ―Modern Production / Operations Management‖, 8th

Ed. John Wiley and Sons, 2000.

3. K.C.Jain & L.N. Aggarwal, ―Production Planning Control and Industrial Management‖,

Khanna Publishers, 1990.

4. N.G. Nair, ―Production and Operations Management‖, Tata McGraw-Hill, 1996.

5. S.N.Chary, ―Theory and Problems in Production & Operations Management‖, Tata McGraw

Hill, 1995.

6. S.K. Hajra Choudhury, Nirjhar Roy and A.K. Hajra Choudhury, ―Production Management‖,

Media Promoters and Publishers Pvt. Ltd., 1998.

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LESSON-6

INVENTORY MANAGEMENT

Structure

6.0 Objective

6.1 Introduction

6.2 Definitions of Inventory

6.3 Classification of Inventory

6.4 Definition of Inventory Management

6.5 Objectives of Inventory Management

6.6 Factors Affecting Inventory Control Policy

6.7 Inventory Costs

6.8 Basic EOQ Model

6.9 Re order Level

6.10 ABC Analysis

6.11 Concept of Logistic

6.12 Concept of Franchising

6.13 Summary

6.14 Glossary

6.15 Answers to Check Your Progress

6.16 References


6.18 Terminal and Model Questions

6.0 OBJECTIVES

After reading this lesson, you should able to –

To understand the basic concept of inventory

To explain various types of inventory

To elaborate the importance of inventory management

To understand various technique of inventory management

To explain the concept of logistic and franchising

6.1 INTRODUCTION

Inventory constitutes one of the important items of current assets of the business which

permits smooth operation of production process of an orgnisation. Inventory management is that

aspects of working capital management, which is concerned with maintaining optimum

investment in inventory to minimize total inventory cost and availability of sufficient material as

and when required in the orgnisation.

6.2 DEFINITION OF INVENTORY

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The term inventory means the goods or material used by an enterprise for the purpose of

production and sale. It also includes the items, which are need as supportive materials to

facilitate production. Inventories consist of raw material work in progress and finished goods

which are held by an organization in ordinary course of business for sale or production.

International Accounting Standard Committee (ASC) defines Inventory as, ―As tangible

property held for sale in the ordinary course of business in the process of production for such

sale or to be consumed in the production of goods or services for sale.‖

Fred Hannomman defines inventory as, ―An idle resource of any kind provided such

resources have economic value‖

Inventory can be defined in many ways according to different perspectives. For better

understanding of its concept, it can be defined as follows:

6.3 CLASSIFICATION OF INVENTORY

Inventories can be classified on the basis of functions and on the basis of nature of items.

1. Raw Material: Raw material is the basic constituents of a product. It is something on

which some activities are done to create some product or structure. For example. Wood is

raw material for manufacturing furniture; cotton is raw material for cloth production

Definition of Inventory

In a General sense it

means the stock of

goods held for sale or

production in ordinary

course of business

In Economic terms it

means the stock of

goods which have

demand and supply in

the market and have

economic value.

In Business terms, it

includes raw material in

warehouse, work in

progress in process of

production and finished

goods for sale.

On the Basis of Nature of Items

Raw Material Work in Progress Finished Goods Consumables

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2. Work in progress: The works in progress are the semi finished goods which are in the

process of production. These are the goods on which some activities are yet to perform

for the completion stage of production. The work in progress depends upon the speed of

production process. For example after weaving of cotton, cloth is ready but dyeing and

finishing process yet to be done.

3. Finished Goods: These are the inventories which are ready to sale in the market.

Finished goods are the stock of completed products. For example- Cloth ready to sale in

the market after dying, printing and finishing.

4. Consumables: These, items do not form part of finished goods i.e they do not directly

enter into production process. These are needed for smooth running of production

process. For example lubricating oil is needed for running the plant and machinery.

1. Transit Inventories: The need of transit inventories arises due to transport time. A lot of

time is involved in movement of inventories from one place to another and require

inventory it is also called pipeline inventories.

2. Buffer Inventories: The Inventories which are held to meet the fluctuations in demand

and supply. In case actual demand exceeds the average demand, the inventories kept as

cushion to meet Excessive demand is Buffer stock or safety stock.

3. Cycle Inventories: As regular demand of certain inventories, orders are placed in lots

instead of purchasing the exact quantity required at a certain time. If large quantities are

ordered, inventory carrying costs are increased but ordering cost decreased. On the other

hand, where less quantity are ordered the holding costs are decreased but ordering cost is

increased. When both these cost are equal that is called economic order quantity and total

cost of inventory will be minimum at that point. The cycle inventories are kept to meet

the requirement of inventories when orders are placed in batches.

4. Seasonal Inventories: These inventories are held to meet the seasonal fluctuations in

demand. For examples stock of crackers before Diwali and stock of heaters and gysers

before winter.

5. Decoupling Inventories: Decoupling inventories acts as cushion or shock observers for

regular production. It means the existence of enough inventories at major connecting

points of production so that no irregularity occurs in the production process. In

production process one machine may work faster than a machine in front or behind that

machine. To smoother the production process decoupling inventories are held in the

organization.

6. MRO Inventories: Maintenance, Repair and operating supplies are items which do not

form part of finished goods but these are required to support and maintain the smooth

production process. For example oil, nuts, bolts, screws and packing materials etc.

On the Basis of Function

Buffer

Inventories

Transit

Inventories

Anticipation

Inventories

MRO

Inventories

Decoupling

Inventories

Seasonal

Inventories

Cycle

Inventories

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7. Anticipation Inventories: These are held in excess of their current requirement in

anticipation of future events. Such events may be increase in seasonal demand , increase

in prices or anticipated strike of workers etc.

6.4 DEFINITION OF INVENTORY MANAGEMENT

Inventory Management consists of two words i.e. inventory + Management. Inventory

means stock of goods held for sale or production whereas management includes planning,

directing, controlling and ordination. Thus inventory management is applying these functions of

management on inventory for smooth production process and minimum cost of inventory

Inventory Management is the process of economically acquiring the needed inventory by

an organization and effectively maintaining various levels of inventory and proper utilization of

their inventories to enhance the profit ability of business.

6.5 OBJECTIVES OF INVENTORY MANAGEMENT

The basic objectives of inventory management are to ensure uninterrupted flow of production

and investment in inventories should be minimum. Therefore the overall objective of inventory

management is to provide desired customer service at minimum cost. The following are the

objectives of inventory management.

1. To provide continuous supply of material: Inventory management ensures the

availability of required quantity of inventory at right time to ensure smooth flow of

production.

2. To avoid over stocking and under stocking: Inventory management estimate in

advance the quantity required to avoid over stocking and under stocking of inventory.

3. To minimize capital investment in inventory: Inventory management helps to

minimize investment in inventory by eliminating excessive stock.

4. To provide protection against demand and supply fluctuation: Demand for the

product is uncertain and safety stock helps to meet the fluctuation of demand and

supply.

5. To maintain proper record of inventory: It helps to protect against various types of

risks as thefts, pilferage and obsolescence with proper records and timely

replenishment of stock.

6. To maintain various level of inventory: The main aim of inventory management to

keep the stock within desired limit and to place orders at regular intervals.

7. To provide scientific base for planning: The objective of inventory management to

provide scientific basis to plan short term and long term inventory requirement of the

organization

8. To minimize the total cost of Management: In order to minimize the total cost of

inventory, proper control over material from the placement of order till effective

utilization of material. Efficient purchasing, storage and consumption of materials in

an important objective of inventory cost.

9. To allow flexibility in production process: To maintain proper level of finished

goods relieves the pressure on production system. It gives flexibility in production

process, reduces production cost and gives more customer service.

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10. To provide safe guard against lead time variations: Inventory management by

helping proper level of stock overcomes the problem of variation in raw material

delivery time.

6.6 FACTORS AFFECTING INVENTORY CONTROL POLICY

Inventory control means the function of planning and maintaining right quantity and quality

of material at right time for smooth production process with minimum amount of investment.

Inventory control policy means the various activities performed by an organization to

maintaining and control movement of stock. Inventory control policy varies from one

organisation to another depending upon nature of product, production process, lead time and

many other factors. The factors affecting inventory control policy are as follow:-

1. Type of product: - The basic factors that influence the inventory control policy is

nature of product. In case of perishable products the inventory control policy will be

different than durable products.

2. Type of manufacture: - Incase of continuous production the rate of production is key

factor and inventory control becomes very important.

3. Volume of production: - When volume of production is high, there are many

difficulties in controlling inventory.

4. Quality requirement: - The quality requirements of material have major impact on

inventory control policy. The higher the quality requirements the strict the inventory

control system.

5. Degree of specialization and differentiation of products: - The degrees of changes in

nature of product at various stages i.e from raw material to finished goods also have

impact of inventory control policy.

6. Other factors: - Some other factors that affect inventory control policy are:-

I. The qualification of staff who are involved in this system

II. Cost associated with failure to meet demands.

III. Fluctuations in demands of product

IV. Changes in size and number of order

V. Amount of capital available for stock

VI. Protection against breakdown or other interruption in production.

6.7 INVENTORY COSTS

Inventory costs are the costs related to acquiring, storing and maintaining its inventory over a

certain period of time. Inventory costs are not only the price that paid to purchase an item but

also include amount spend on storage and maintenance of that item for the period it tables to sell.

The inventory sects caw be classified into following categories –

1. Purchase cost: It is the price at which something is actually purchased or acquired.

Purchase cost is the nominal cost of inventory, it is amount spent to acquire an item in

case of purchase and production cost in case of manufactured in the organization.

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2. Ordering cost: Ordering cost is cost associated with placing an order. It includes all

expenses relating to personnel in purchase department, transportation, quality inspection

and communication and paper work regarding placement of order it is also brown as set

up cost.

3. Carrying cost/Holding cost: Carrying cost are the costs that are related to keeping

inventory in stores. It is the cost associated with storage of inventory and includes

insurance, rent and depreciation of warehouse store men‘s salary, financial cost of money

inventory in inventory obsolescence and deterioration cost etc. it is expressed as rate per

unit or percentage of value of inventory.

4. Shortage/stock out cost: Stock out cost simply means the cost associated with not

serving the customers and occurred when a business run out of stock. It consists of

internal cost i.e idle labour time, delay in work and cost of storage of work etc, where

external costs are result in loss of potential sales, loss of profit and loss of goodwill etc. in

order to avoid such situations, the concept of safety stock is followed in the

organizations.

6.8 THE BASIC EOQ MODEL

Economic order quantity (EOQ) is one the important techniques of inventory control.

Economic order quantity refers to that quantity for which order is to place so that total cost of

acquisition is minimum and contributes towards maintaining optimum level of inventory and

lowest cost. Total cost of inventory includes acquisition cost, ordering cost and carrying cost.

Ordering costs includes cost of personnel for ordering of goods, transportation cost inspection

costs of incoming material and cost of paper work etc involved in placing the order.

Carrying costs include cost of capital locked in inventories, storage cost, insurance, loss

due to obsolescence and spoilage etc.

Assumptions of economic order quantity

1. The prices of goods are stable

2. The quantity of goods to be purchased during a particular period is certain

3. The supply of goods in satisfactory and goods can be purchased whenever these are

required.

E.O.Q Model can present in figure 12.1

Cost

(Rs.)

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Figure 12.1: Graphical Method of E.O.Q

Allegorically EOQ can be calculated as follow

E.O.Q = √

(In units)

= Annual Demand

= Ordering cost per order

= Carrying cost per unit

For example: Calculate EOQ if annual requirement 80000 units cost of playing as order Rs.

1200, cost per unit? Rs. 50 carrying cost 6% of unit cost

E.O.Q = √

= √

= 8000 units

6.9 RE-ORDER LEVEL

Re-order level is that level of inventory at which you send new order of buying inventory.

In simple words, it is the level between minimum and maximum level. It is fixed on the basis of

demand and supply of inventory. It should neither be very low nor very high. Efficient inventory

management requires that a firm should maintain optimum level of inventory.

Where inventory is optimum, there is no stock out cost which may lead to stoppage of

production. The following are the formulas to calculate reorder level:-

Formula-1.

Reorder level= Maximum Consumption X

Total Cost

Carrying Cost

Ordering Cost

Size of

Order O

E.O.Q

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Maximum re-order period

Formula-2.

Reorder level= Minimum level + Consumption

during the time required to get fresh delivery.

Formula-3

Reorder level= Safety stock consumption +

lead time consumption

Example-Calculate the re-order level from the following information

Minimum level= 150, maximum level= 1500, average

Consumptions of units= 60 units daily or lead time required for fresh delivery= 10 days

Solution- Reorder level= minimum level + consumption during the time required to get fresh

delivery

= 150+ (60 x 10)

= 150+600

Re-order = 750 units

Level

The following are the Characteristics of this system-

A pre-determined re-order level is get for each stock item.

Once the stock falls below the order level, a replenishment order is issued.

This is like a two kin where stock is decided into two bins, once the stock from bin No.1

is finished them re-order level is given for fresh supply.

Advantages of re-order level are as given below;

It is very simple and convenient system to control material.

It is suitable for widely different type of stock within the same business.

It is applicable where there is a fluctuation in demand.

The disadvantages of re-order level are followings:-

It is less accurate then Economic Order Quantity (EOQ).

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Sometime it leads to overloading of stock.

6.10 ABC ANALYSIS

ABC stands for always better control. In this analysis is grouped into categories depending upon

their contribution in total value of consumption and percentage of items in total quantity. In an

organization, a small percentage of items contribute a large percentage of value of consumption

falls in ‗A‘ category. Whereas items having a large percentage of items of material contribute a

small percentage of value are comes in category ‗B‘ and material which falls in between these

two categories having all most equal percentage of value of material falls in categories ‗C‘.

This analysis is applied to have strict control over the items in ‗A‘ category, stringent control for

category B and very little control is needed for category C items.

The categorization of ABC analysis of various items can be represented as follow;

Class % of items % of Value

A 10 80

B 20 15

C 70 5

Total 100 100

In this analysis the control of inventory can be made as per table given below:

A Class Items

High Value Items B Class Items

Moderate Value Items C Class Items

Low value items

1. Very strict control 1. Moderate control 1. Loose Control

2. No safety stocks or

very low safety stocks

2. Low Safety stock 2. High Safety stocks

3. Maximum follow-up 3. Periodical follow-up 3. Follow-up and expediting

in exceptional cases

4. Handled by senior

officers

4. Handled by middle

management

4. Can be fully delegated

Benefits of ABC Analysis

1. Minimize inventory cost: With strict control on high value goods and little control over

less value goods, the overall inventory cost canbe minimized.

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2. Optimum investment in stock: By helping lower level of safety stock for high value

inventory, other investment of capital in inventory can be minimized.

3. Less chances of obsolescence: ABC analysis helps you to control over stocking of of

material thus reduced losses arising due to obsolescence.

4. Proper accounting records: Proper accounting regards regarding received, issued and

balance are maintained for items falis in ‗A‘ category of items whereas no detailed record

for category C are maintained.

5. Eliminates unnecessary paper work: selective approach of inventory controls helps to

eliminate unnecessary paper work and procedure and saves variable time and cost

involved in inventory control.

The following are the limitations of ABC analysis

1. In case of big organization it is very difficult to classify the items and calculation of value

is also time consuming.

2. Importance of item ignored while categorization, the importance of each item is not

considered which may create obstacles in production process.

3. Not considering demand, seasonal and price fluctuations:- ABC and analysis only

consider the value of items whereas price, demand and seasonal fluctuations are know.

Check Your Progress A

1. State which of the following alternative is correct

i. Reorder level= Maximum Consumption x_ _ _ _ _ _ _

(a) Maximum lead time (b) Minimum consumption

(c) Reorder Quantity (d) Lead period consumption

ii. The Quantity of material to be order at one time is known as _ _ _ _ _ _ _ _

(a) Reorder Quantity (b) Maximum Quantity

(b) Economic Order Quantity (d) Abnormal Quantity

iii. __ _ _ _ _ _ is used for selective control of inventory

(a) ABC Analysis (b) VED Analysis

(b) XYZ Analysis (d) FSN Analysis

iv. Transit inventory is also known as

(a) Buffer stock (b) Pipeline inventory

(b) Cycle inventory (d) Seasonal inventory

6.11 LOGISTICS

Logistics is the movement of raw material from supplier to manufacturer and finished

goods to the consumer. It is the process of managing the procurement, movement and storage of

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material and finished goods through proper organization and marketing channels to minimize the

cost and maximize the profits.

According to Robert A. Novack defines Logistic as ―An activity involving the creation of time,

place, from and possession of utilities within and among firms and individuals through strategic

management with the good of creating product/services that satisfy customer through attainment

of value‖

Objectives of Logistic Management:

The main objectives of logistic management as follows:-

1. To have quick response: The main aim of logistic is to satisfy the requirement of

customer quickly. Spread of information technology made logistic operations rapid to

deliver required inventory without any delay.

2. To maximize customer satisfaction: An efficient management of logistic can help you

to improve customer satisfaction and finagling in maximization of profits.

3. To minimize total cost of distribution: cost of physical distribution includes various

activities like transportation, warehousing and inventory maintenance. Logistic

management aims to reduce total distribution cost of the product.

4. To minimize product damages: Proper logistical packaging and material handling will

reduce the product damages and ultimately the logistical cost.

5. To create time and place utilities: The aim of logistic system to create time and place

utilities. The movement of product from place of production to place of consumption and

making availability of product at the time of requirement is made through efficient

logistic management.

6. To stabilize the prices: Logistic management also aim to stabize the prices of product by

regular supply of products to market with transport facilities and proper warehouse

operations.

Various components of logistics

Transporting Materia

l

Handlin

Ware

Housin

g

Purchasing

Components

of logistics

Order

Sizing Order

Sizing

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1. Purchasing: Purchasing is the most important function of logistic. It includes various

activities such as finding out new suppliers, matring negotiations, comparing the terms

and conditions, deciding the payment mode and placing the order to purchases the goods.

2. Material handling: Material handling is the movement, protection, storage and control

of material during manufacturing, warehousing distribution and consumption. An

efficient material handling system helps to improve customer service, reduce delivery

time, lower distribution and transportation cost.

3. Transporting: It creates time and place utility and important component of logistics. It

will also affect other components like warehousing, inventory control and marketing.

4. Warehousing: Warehousing is an important element of logistic management an

organization can other have it own network of warehouses or can share space with others.

5. Order sizing: Deciding the size of order is also component of logistic as it is an

important decision. Order of less quantity will increase the ordering cost and ordering

more quantity will increase the storage and handling cost.

6. Inventory Management: Inventory management is important elements of logistic

fixation of various levels of material, deciding the quantity to be ordered are essential for

proper distribution of goods.

7. Packaging: Proper packaging helps in efficient physical distribution of inventory and

reduces the chances of damage and losses.

ACTIVITY

Inventory

Mgt.

Suggest the method of inventory control in Automobile Industry. Give reasons in

support of method suggested by you.

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_________________________________________________________________

_

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6.12 Franchising

Franchising is an arrangement where one party (The Franchiser) grants another party

(The Franchisee) legal right to use branding, trademark as well as certain business system and

processes, to produce and market good or service according to certain specification. The

franchiser provides assistance in operation and exercises proper control over the method of

franchisee‘s operation and charges a franchise fee.

Types of Franchising System

The different types of franchising systems are:

1. Product Franchise: It is a agreement in which manufacturer allow retailers to distribute

products and allows him to use it name and trademarks.

To obtain these right store owner have to pay a minimum fees or to buy a minimum

amount of products. For example – some clothing companies and car dealership etc.

2. Manufacturing Franchise: In this a franchiser grants a manufacturer the right to

produce and sell goods by using its name and trade marks for example coca-cola

company produces syrup concentrate and sells the right to use it to bottling company,

who mines these ingredients with water and bottles the product and sells in the market.

3. Business format Franchise: In a business format franchise, the franchisor offers a wide

range of services to franchisee which include marketing, training, production operations,

advertising, strategic planning and quality control guidance. For example- McDonalds,

Burger King and Pizza Hut etc.

Benefits of franchising: The main benefits of franchising are

1. Easy to start a business: Because franchisor has already tested market and franchising

makes the task of starting the nature easier. So, franchising is safer to start a new

business.

2. Cost effective growth: It is ability of franchisor to expand business by utilizing the

manpower and capital of others. The rishs associated with expansion are less where as

franchisees contribute in capital requirement in start cost makes the cost effective growth

possible.

3. Helps to get services from an established business: Franchising offers various services

under well established business banner. Franchiser provide services like selection of

location, purchase of building and equipment, provision for financing, standardized

operating method and advertising of product or service.

4. Establishing quality control standards: The franchisors fix certain quality control

standards and a franchise has to follow these standards. A higher quality control standard

helps to attract and maintain a large number of clients which increase the sales and

profits.

5. Less likely to fail: Franchisors provide the support and security of business. They offer

training to new franchises and management of accounts, sales, advertising and more.

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Such facilities help to proper management of business and less chances of failure of

business.

6. Wide spread brand name and recognition:- A franchise provides you an established

product or service which is already enjoying widespread publicity and brand recognition.

Getting a franchise help you to enter into business for yourself but not business by

yourself.

Limitations of Franchising: Limitation of Franchising is as follow:

1. Lack of Independence: Franchises are required to operate their business according to

procedure and restrictions in franchisee agreement. They have to supply goods and

services which as offered, their prices and market territory thus franchisee is not

completely independent business.

2. Inadequate Assistance: Sometimes franchisors are not able to fulfill their promises to

provide services of training, management and advertising effectively which leads to

difficulty in managing the business.

3. Expensive: Franchisee agreement includes an initial fee and continuing royalties based

on working. In addition to these fees, construction, supplies, acquiring equipments and

many other costs associated with opening the location which makes. Franchisee

agreements exposure.

4. Limited line of business: Franchisee agreements any not offer to sale complete line of

products or to provide complete line of services, it allows only dealing in line of product

or service proved in agreement.

5. Difficulty in Renewal and termination of contract: Franchises agreements also require

a renewal after particular period of time. You have to go through an in depth process

renewal process and heavy fees similarly for termination of contract you have to pass

through a detailed process with heavy penalties.

Thus, Franchising is a secure and easy way of starting business with certain advantage

like support, security well established brand recognition and cost effective growth.

Check Your Progress B

1. State whether the following statements are true or false:

(i) The purpose of inventory management is to keep stock in a way to avoid over

stocking and under stocking.

(ii) Carrying cost of inventory also called stock out cost.

(iii) EOQ is the amount of quantity to be ordered at one time for minimizing

inventory cost.

(iv) ABC is the selective approach where material in divided into three categories.

6.13 SUMMARY

Inventory is the stock of items kept for production or sales. It includes raw material, work

in progress and finished goods. Inventory control is the function of planning, maintaining and

controlling the right quantity of material at right to smoother the production process with

minimum investment. To achieve these objective, there are certain techniques like Economic

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order Quantity, Reorder level, ABC Analysis and Stock Turnover ratios etc. Good inventory

control system helps an organization to purchase material in economic lots, continuous

production process and ensures quick delivery of finished goods at minimum cost.

6.14 GLOSSARY

Reorder level: It is the level of inventory where a new order is to place.

Economic order Quantity: It is the quantity of material to be ordered at each order point so that

total material cost is minimum.

Carrying cost: Cost of financing warehousing, storage cost and other cost directly related to

holding of inventory.

Inventory Management: It is the process of acquisition of material, proper maintenance and

utilization of material at least cost.

6.15 NSWER TO CHECK YOUR PROGRESS

A (i) (c) Maximum lead time

(ii) (c) Economic order Quantity

(iii) (a) ABC Analysis

(iv) (b)Pipeline inventory

B (i) True

(ii)False

(iii)True

(iv)True

6.16 REFERENCES

1. Mahadevan,B., Operations Management: Theory and Practice , Pearson, New Delhi.

2. Krajewski& Ritzman, Operations Management, McGraw Hill, New Delhi.

3. McGregor,D., Operations Management, McGraw Hill, New Delhi.

6.17 SUGGESTED READING

1. Adam and Elbert, Production &Operation Management, Prentice Hall, New Delhi.

2. Nair, N.G., Production and operation Management Tata Mc Graw Hill, New Delhi

3. Greene,J .H., Production and Inventory Control Handbook, McGraw Hill, New Delhi.

6.18 TERMINAL AND MODEL QUESTIONS

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1. Define Inventory Management. Also discuss various objectives of inventory

Management.

2. Explain various factors affecting inventory policy of an organization.

3. What do you mean by ABC Analysis? What are its advantages?

4. What is Economic Order Quantity? How is it calculated? Discuss various

assumption of E.O.Q.

5. What is meant by franchising? Discuss various types of franchising.

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LESSON - 7

JIT AND LEAN PRODUCTION SYSTEM

Structure

7.0 Objectives

7.1 Introduction

7.2 Definition of JIT

7.3 Features of JIT management

7.4 Components of JIT system

7.5 Elimination of waste

7.6 JIT Implementation Requirements

7.7 Difference between JIT and Traditional manufacturing

7.8 Advantages of JIT

7.9 Limitations of JIT

7.10 Definition of Lean Production System

7.11 Steps in Lean Production

7.12 Lean Operation In Service

7.13 Benefits Of Lean Production System

7.14 Concept of Kanban System

7.15 Measurement of Kanban

7.16 Types of Kanban Cards

7.17 Guidelines On usage Of Kanban Card

7.18 Advantages of Kanban System

7.19 Summary

7.20 Glossary

7.21 Answers to Check Your Progress

7.22 References

7.23 Suggested Reading

7.24 Activity


7.0 OBJECTIVES

After reading this lesson, you should be able:

To understand the basic concept of JIT and Lean production system.

To explain the Kanban system.

To bring out features and benefits of JIT and Lean system.

To comprehend Lean operation in service

To bring out requirement for implementation of JIT.

7.1 INTRODUCTION

Just in time (JIT) is an inventory strategy applied by companies to increase efficiency and

eliminate wastages by receiving goods only when they are needed in the production process, thus

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reducing the cost of inventory. JIT technique was developed by Japanese company, Toyota

Motor Company emphasizing the delivery from supplier immediately before requirement in the

manufacturing process by keeping zero inventory system. A lean operation supplies the

customer with exactly as per requirement of customer through continuous improvement and

reducing waste. These are driven by workflow initiated by the pull of customer‘s order.JIT was

developed by Taiichi Ohno of Toyota and adopted after World War II to eliminate wastages.

7.2 DEFINITION OF JIT

JIT is an inventory system where material is purchased or manufactured only when is

needed and just in time to be used in production process. It focuses the eliminations of wastes by

purchasing right quantity of material, right quality and at the right place and at the right time. It

is also called zero inventory system.

According to Moden, ―JIT is a production system to produce kind of units needed at the time

needed and in quantities needed‖

Basic elements of JIT system are

Zero inventory

Zero defects

Reduction in lead time

Elimination of non value time

Elimination of non value added activities

Minimum cost

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Just In Time Philosophy

The basis of Just-In-Time (JIT) is the concept of ideal production. It centers on the elimination of

waste in the whole manufacturing environment. Just-In-Time is defined as "the production of the

minimum number of different units, in the smallest possible quantities, at the latest possible time,

thereby eliminating the need for inventory. JIT can offer organization a competitive advantage

which can take the form of offering consumers higher quality.

JIT system helps organization to have advantage over the competitors by providing superior

quality products at economical prices or better services at lesser cost. The following methods can

assist an organization to get competitive advantage:

1. Understanding the customer needs, by providing quality goods and reducing the cost of

production.

2. Integrating and optimizing the production process leads to reduction in operations and

resources.

3. Continuous improvement in production process leads to more customer satisfaction.

7.3 FEATURES OF JIT MANAGEMENT

The features of JIT management are

No wastage,

variability in

production

process

Fewer

supplier with

long term

Lower Inventory

Level

Total Quality

Management

‘Pull’ system

of working

plants

Just in Time

Guaranteed

delivery time

Employee

empowerment

Support from

Management

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1. Pull System: JIT is based on the consumer Pull strategy that is demand by consumer pull

the final stage of production, which pulls the output of various stages of production .Each

production stage, is pulled by the requirement of proceeding stage.

2. Quality: JIT implementation requirements are high quality raw material, production

process and production design. JIT system is based on multi skilled workers for which

proper quality of workers is essential .Such system can be developed with adequate tools,

training and authority for pursuing production of high quality goods.

3. Quick Step ups: Standardization and simplification of procedure leads to reduction in set

up time and quick set ups result in continuous flow of production.

4. Small Lot Sizes: JIT systems maintain inventory with small lot sizes that are as small as

possible. Small lot sizes have three benefits. First, small lot sizes reduce inventory, the

inventory in excess of the safety stock carried between orders. Small lot sizes cycle help

cut lead times. A decline in lead-time in turn cuts pipeline (WIP) inventory because the

total processing time at each workstation is greater for large lots than for small lots.

5. Uniform Work Loads: JIT system will be effective if the work load on individual

workstations is relatively uniform. Uniform workload can be maintained by creation of

same demand at all workstations and by creating demand of same type and number of

units every day.

6. Close Relationship with Suppliers: Because JIT systems operate with very low levels of

inventory, close relationships with suppliers are necessary. Short lead times, arrival of

inventory on schedule, and be of high quality are the basis for success of this system.

Purchase manager has to concentrate on reducing the number of suppliers; developing

relations with local suppliers and maintain good relations with suppliers. This system

emphasis on the ways to improve efficiency and reduce inventory. It will create win win

situation for both suppliers and the company.

7. Multi skilled Employees: In this system employees are developed to perform more than

one job instead of performing one job. Multi skilled employees help to create flexibility in

the organization. Employees become more flexible as they can be shifted from one job to

another in case of need. Flexibility of employees has many benefits. Multi skilled workers

can help in smooth flow of production as employees can be shifted from one job to

another in case of vacation and sickness of an employee. Although Assigning another task

may reduce efficiency but Rotation of workers from one job to another refreshes the

workers and relieves them from boredom.

8. Line Flow Strategy: A line flow strategy may reduce the step up frequency of machines.

In case volumes of specific products are large, groups of machines and workers can be

organized into a product layout to eliminate setups. On the other hand when volume is

insufficient to keep a line of similar products busy, group technology can be used to

design small production lines that manufacture, in volume, families of components with

common attributes. Changes from a component in one product family to the next

component in the same family are very less.

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9. Preventive Maintenance: Preventive maintenance will reduce the breakdown and

downtime of the machinery. Maintenance of machinery from specialists leads to smooth

flow of production and reduce the maintenance cost. Making workers responsible for

routine maintenance can improve the condition of machinery. Even simple timely

maintenance may help to improve machine performance.

10. Continuous Improvement with Just-In-Time Systems: In this system, there is

continuous improvement in quality and productivity. During production to eliminate

problem of too much scrap require continuous improvement in methods of production and

quality of employees and suppliers. With proper maintenance of machinery and improving

production methods will improve the quality of production.

7.4 COMPONENTS OF JIT

In a manufacturing organization, there is need to coordinate various function for

successful implementation of any system. Similarly just in time includes various elements like

people, plants design, procedures, total quality management, parallel processing and system

design etc. These components are as follow

People

Stockholders

Management

Supplier

network

Employees

Product and system design

Standardization

Total quality

management

Regular flow of

production

Reducing

inventories

Eliminating

waste

Plant Design

Parallel

processing

Layout of

plant

Demand pull

production

Kanbans

Multi skilled

work

Just in

Time

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1. People: Involvement of various interested parties is essential for success of JIT system

support from owners and management is required for working of this system. On the

other hand for maintaining quality standards, there is need of training and development of

multi skilled workers for which support of employees and unions is required. A group of

quality suppliers and good relations with them gore timely and quality goods are the key

element of JIT system.

2. Plant Design: Plant layout, parallel processing, multi function machines, demand pull

production and production of goods according to need of material (Kanban system) are

the basic elements of just in time management.

3. Product and System Design: It includes the procedures working in the organization,

integration of various activities for procurement and usage of material in production. It

must help in continuous flow of production reducing inventory, standardization of jobs

and total quality which are basic element are of this system.

7.5 ELIMINATION OF WASTE

According to Shigeo Shingo, authorities at Toyota Motor Company, there are

seven kinds of wastes and JIT targets to eliminate these wastes for continuous

improvement in production process.

1. Waste of over production: Caused due to producing more than asked by market,

reducing set up time, demand pull production and kanban system etc.

2. Waste of waiting: Reduced by smooth and continuous flow of production, multi skilled

workers and multi functional machines.

3. Waste of transportation: Rationalization of transport and effective material handling

can control waste of transportation.

4. Waste of processing: By eliminating excess processing steps which are non value added

activities and controlling the speed of production.

5. Waste of stock: It can be eliminated by reducing set up time and lead time. Continuous

flow of production and production according to demand eliminate the waste of stock.

6. Waste of motion: By standardization, TQM and better relation with vendors, the waste

of movements can be reduced.

7. Waste of defects: TQM and smooth product process eliminates various defects in

manufacturing products.

7.6 JIT IMPLEMENTATION REQUIREMENTS

Implementation of JIT is not a short term affair. It takes long term planning and

fulfillment of many requirements, these requirements are as follow;

1. Training to manpower: Manpower is vital asset of an organization and quality

production is possible through proper training and multi skills development in employees.

2. Stockholders: There is need to change attitude of stockholders, the must focus on long

term gains in form of standardization of viral quality management.

3. Management Support: Top management support is required for implementation of just

in time system in the organization.

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4. Support from Labour Unions: Requirement of multi skilled and flexibility of employee

for which support from labour unions in essential.

5. Long term planning: There is need of continuous improvement and long term planning

for acquiring the benefits.

6. Government Support: Relaxation of government regulations in JIT, supportive

industrial laws are also required for implementation of this system.

7. Supplier Management: Availability of reliable suppliers and good quality vendors are

basic element in JIT implementation.

8. Management and labour responsibility: Openness of management to face criticism and

cooperative problem solving facilities are required.

9. Reduced set up time: Reduction in set up time is basic requirement for implementing

demand full strategy of this system.

10. Modification in departmental functions: Industries has to bring major changes for

implementation of just in time. For example training of workers to development multi

skills, quality consciousness among all departments etc.

11. Functional layout and work flow: Technology based cellular layout is essential group

with proper flow of material and functioning of machinery.

7.7 DIFFERENCE BETWEEN JIT AND TRADITIONAL MANUFACTURING

The difference between JIT and Traditional Manufacturing are as follows:

1. Approach: JIT is based on demand pull approach and traditional manufacturing methods are

based on demand push approach. The basic idea in JIT system is to produce a product when

it is needed and only in the quantities demanded by customers. It is only demand which pull

the production in manufacturing. Production in each operation is based on the requirement of

succeeding operation and no operation will work until a signal is received form succeeding

operation. Whereas in traditional manufacturing system the products are manufactured

according to production capacity and production will push the demand.

2. Reduction in Inventories: The basic goal of JIT system is to reduce the inventories to zero

level and to produce according to requirement. In traditional manufacturing, whenever

production exceeds demand, it will to pile up of inventories. On the other hand, inventories

are required when production does not meet expected demand.

3. Manufacturing Cells and Multi skilled Labour: In traditional manufacturing, the machines

with similar functions are placed together in a particular area or department and products are

moved from one group of machines to another group. Workers are also specialized to operate

only one kind of machine or similar kinds of machines. In JIT system, machines are grouped

in families to operate for many operations and they can manufacture similar type of products.

These machines are arranged in such a way that they can be used to perform a variety of

operations in sequence. Thus, labour in this system is multi skilled and perform many jobs

instead of specialized in one job only.

4. Total Quality Control The main emphasis of JIT system is on total quality control. As

defective part can harm the production process and commitment to total quality control is

the basic element of just in time system. Whereas acceptable quality level (AQL) is the

element of traditional manufacturing system. It allows the defects in the production up to

acceptable level with in predetermined limits.

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5. Decentralization: In JIT production system, the decentralization of service will lead to

easy and quick access of services. In this system centralized service departments must be

scaled down and their personnel assigned to work directly to support production.

Whereas in traditional manufacturing methods the processing is done through centralized

departments.

6. Relation with Supplier: JIT system gives emphasis on maintaining good relations with

supplier as to place order as per requirement. In this system as no buffer stock is kept and

the success of this system mainly depends on suppliers. Suppliers are treated as outside

partners who can contribute for smooth working of the organization. In traditional

manufacturing techniques no much emphasis on good relations with suppliers in given.

7. Cost Control Policies: JIT system simplifies the procedures of cost accounting and the

policies of zero inventory level, total quality control and continuous improvement will

help managers to control the cost of production. In traditional manufacturing system the

cost accounting procedures are very complex which will help in decision making of

management but not result in cost control.

Thus JIT system has advantages of less cost of production, total quality control, better

management, continuous improvement and good relations wiyh suppliers over the

traditional system of manufacturing.

7.8 ADVANTAGE OF JIT SYSTEM

Advantages of JIT system are as given below:

1. Due to zero inventory and production according to need, less blockage of capital is

stock.

2. Supplier management leads to closer relationships with supplier.

3. Less inventory needs will reduce storage cost of material and total cost of product.

4. Exact delivery schedule helps in image building of the company.

5. Reduction in lead time enables meeting customer requirement at low cost.

6. Helps in improvement of quality of production.

7. Helps in reductions of waiting time, which results in less work in progress.

8. Employers are trained for multi skills thus flexibility in vitalization of manpower.

9. Better utilization of machines and facilities.

10. Reduction in waste rejects and rework by detecting errors at source.

7.9 LIMITATIONS OF JIT SYSTEM

Limitations of JIT system are:

1. Culture differences are main difficulty in success of JIT and it is difficult to change

culture of organization in a short time.

2. Traditional approach in manufacturing is to store huge amount of inventory and

companies which rely on traditional approach may face problem with use of JIT.

3. Lack of individual autonomy is another limitation of JIT.

4. Successes of JIT vary from organization to organization as more successful in Japanese

environment.

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5. This system is effective only when demands are certain

7.10 DEFINITION OF LEAN PRODUCTION SYSTEM

Lean production system is a way to eliminate waste and improve efficiency in a

manufacturing environment. Lean focuses on continuous flow, the value stream and

eliminating muda, the Japanese word for waste. It means identifying customer value by

analyzing all the activities required to produce the product and then optimizing the entire

process from customer perspective.

Lean denotes a system developed by Toyota Company that utilizes less in teams

of input compared to traditional mass production, less wastage, human effort,

manufacturing space, investment in tales inventory and less engineering time to develop a

new product. It helps the organization to achieve continual gain in productivity, low cost

of production which gives superior satisfaction of customer in form of superior quality

and prompt delivery.

7.11 STEPS IN LEAN PRODUCTION

Five essential steps in lean production are

1. Specify value: Value is expressed in terms of how specific product meets customers

need. Specify value is evaluating the features that add value to product or service.

2. Identify value stream: once value is specified the next step is to identify the entire

sequence of activities that contribute value. Only value added activities are too per

performed and non value added activities are eliminated.

3. Make value flow: Flow is the uninterrupted movement of activities. Reduction in non

value added activities lead to improvement in flow of activities.

4. Allow customer pull: Once waste is removed and value flow is improved company will

able to provide product or services only when customers need it.

5. Continuous improvement of quality and productivity: Lean focuses on reduction of

waste and improvement in flow as a result produce spends less time in process reducing

chances of obsolescence. Ultimately these are improvement in quality and productivity.

7.12 LEAN OPERATION IN SERVICES

The following are the example where lean operation are applied in services

1. Suppliers: In food business, every hotel or restaurant supplies food items as per order of

the customer that is on JIT system. Those who do not follow this system are not

successful. They have to face complaint from the customers or may result in waste of

food ultimately result in customer dissatisfaction.

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2. Layout: In Lean System, specialized layouts are required for efficiency on service. For

example in restaurants the proper layout is required for supplying hot food items hot and

cold food items cold and to save the serving and preparation time of ordered food items.

3. Inventory: Lean system in service will lead to zero inventory level on every day. Under

this system everybody accept the items as per orders and most dealings are based on buy

or sell immediately. For example by keeping finished goods inventory only for 10

minutes Mc Donald‘s reduce inventory loss.

4. Scheduling: At the counter of airline ticket, the emphasis is on the requirement of the

customer but rather than being satisfied by inventory availability. Through detail

scheduling, person at ticket counter show just in time to cover peak order of customer.

7.13 BENEFITS OF LEAN PRODUCTION SYSTEM

The benefits of lean production system are as follow

1. It helps in reduction of manufacturing time.

2. It increases the manufacturing productivity of the business.

3. It helps companies to reduce physical floor space requirement.

4. It I develops good relations with customers.

5. It helps to eliminate wastes of all find.

6. It helps to increase profits in organization.

7. It develops standardized culture in the organization and eliminates conflicts between

management and employees.

Check your progress A

1. State whether the following statements are true or false

(i) JIT reduces cost associated with excess inventory, cuts variability and waste.

(ii) Supportive supplier relationship is not required for success of JIT.

(iii) A Kanban system moves parts through production via ‗pull‘ from a signal.

(iv) Lean operations use JIT technique to eliminate virtually all inventories

7.14 CONCEPT OF KAN BAN SYSTEM

Kan Ban is a Japanese word for card. At the core of JIT manufacturing at Toyota is Kanban. It is

the means of signaling to upstream workstation that the downstream is ready to produce another

batch of parts. The Japanese system that pull inventory through work centers to reduce inventory.

They often use a ‗card‘ to signal the need of another container of material that is called Kanban.

The card is authorization for next container of material to be ordered. Kanban became an

effective tool to support the running of production process as a whole.

Its aim is to improve system productivity and to secure operator involvement and participation in

achieving this high productivity by providing a highly visible means to observe the flow of

products through the production system and the build-up of inventory levels within the system.

Later it was further developed as a means of production activity control to achieve the goals of

JIT and to manage the operation of just in time production. Kanban also serves as an information

system to monitor and help control the production quantities at every stage of the manufacturing

and assembly process.

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7.15 MEASUREMENT OF KAN BAN

The number of Kanban cards or containers in JIT system fixes the authorize inventory. In

order to calculate number of Kanban moving back and forth between the production area,

management first set size of each container based on production order quantity Model.

Number of Kanbans = Demand during lead time + Safety stock

(containers) Size of container

7.16 TYPES OF KANBAN CARDS

Main Types of Kanban are

1. Conveyance Kanban(C-Kanban): It is used to convey the authorization for the

movement of parts from one stage to another stage. It is usually carries the information

i.e part name, number, lot size, routing process, location and name of next and

proceeding process, container capacity. These can be designed to display this

information.

2. Production Kanban (P-Kanban): A production Kanban when received authorizes the

work station to produce fixed amount of products. It is carried on containers associated

with it.

3. Vendor Kanban: It Signals an external supplier to send material to a stage.

7.17 GUIDELINES ON USAGE OF KANBAN CARD

For efficient operation of Kanban system, there is need of strict discipline in usage of kanban

cards. There is also a need of proper documentation of manufacturing procedures and well

trained group of operators to follow those procedures. The following are the guidelines on usage

of the kanban to achieve JIT production:

1. A work centre must withdraw only number of items it requires from preceding work centre.

The work centre should withdraw these items at the required time.

2. Withdrawal of material is allowed only when there is availability of withdrawal Kanban or

Empty container. Withdrawal of more parts than indicated on the withdrawal kanban is not

allowed.

3. A work centre is not allowed to produce more items than requirement of succeeding work

centre or process. A final assembly schedule is to release before initiating production, the

schedule is passed back through the production system by the release of production kanbans.

4. Substandard of defective item should never be transferred to the next work centre. There must

be rigorous quality control checks at each step as by keeping defective items in the production

process will badly affect the later stages of production process.

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5. Each Kanban indicates the standard quanitity contained and the level of inventory is indicated

by the number of kanbans. The number of kanbans should therefore be minimized. By reducing

the number of kanbans and the size of each container the level of inventories can be reduced.

The Kanban system is suitable only when the demand in certain and there are only small

fluctuations in demand pattern. This system in only effective in repetitive manufacturing

situations and major fluctuation in demand cannot accommodated in this system.

7.18 ADVANTAGES OF KANBAN SYSTEM

Advantages of Kanban are as follow:

1. Eliminates Over Production: It eliminates over production as components are

manufactured only when the needed. The production will begin with requirement of

container from proceeding process.

2. Reduces Wastes And Storage Cost: It reduces wastes and storage cost as material is

delivered only when it is required. No inventory is kept without requirement so this

system avoids overstocking which leads to reduction in storage cost.

3. Reduce Cost Of Obsolescence: It helps to reduce cost of obsolescence. Production

according need avoid overstocking so reduction in cost of obsolescence.

4. Continuous Flows Of Production: It provides continuous flows of production.

5. Optimum cost of Production: It helps to increase production and optimize total cost

of production.

Check your Progress B

1. State which of the following alternative is correct.

(i) A ―pull‖ system

(a) Dumps order on next down stream

(b) Defines the time between arrival and shipping.

(c) Is the time it takes to move an order?

(d) Produces material only when requested.

(ii) Lean produces remove waste by

(a) Focusing on inventory reduction.

(b) Using JIT techniques

(c) Reading space requirements.

(d) Developing partnership with suppliers.

(e) All of the above.

(iii) Supplying the customer needs without waste best describes

(a) Lean operations

(b) JIT

(c) Toyota production system

(d) 5S‘s of home keeping

(iv) Kanban is ______________ word for card

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(a) Japanese

(b) Indian

(c) American

7.19 SUMMARY

Lean operations and just in time are the process of continuous improvement in production

process. Lean operation focus on customer desires and JIT focuses on eliminating waste by

reducing inventory. But both these approaches reduce waste in the organization. The emphasis is

to implement value added activities and eliminate non value added activities. The success of

these techniques dependent upon committed management, multi shelled employees and good

relations with vendors which results in providing customer low cost and good quality

products/services

7.20 GLOSSARY

1. Just in Time: It is an inventory system where material is purchased or manufacturer only

when it is required.

2. Lean Operations:It is a system that utilizes the less in terms of input i.e wastage human

efforts, manufacturing space and engineering time to develop a new product.

3. Kanban:It is a Japanese word often use as a card to signal need of another container of

material.

7.21 ANSWERS TO CHECK YOUR PROGRESS

A. (i) True

(ii) False

(iii)True

(iv) True

B. (i) d Produces material only when requested

(ii) e (all of the above)

(iii) a(Lean Operation)

(iv) a (Japanse)

7.22 REFERENCES

1. Carry, S.N., Production and Operations Management, MC Graw Hill, New Delhi

2. Pannerselvam,R., Production and Operations Management, PHI, New Delhi

3. Heizer, J. and Render, and Rajashekar, J., Operations Management, Persons on

Publication, New Delhi

7.23SUGGESTED READING

1 Khann, R.B., Production and Operation Management, PHI, New Delhi

2 Rama Murthy, P., Production and Operation Management, New Age International, New

Delhi

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3 Nair, N.G., Production and Operation Management Tata Mc Graw Hill, New Delhi

7.24 ACTIVITY

In aircraft manufacturing industry which system of inventory is used to control blockage of

Capital in inventory? Give reasons to support your answer.


1. What do you mean by Just in Time? What are the components of Just in Time?

2. What are the requirements for Just in Time implementation?

3. Describe the benefits of JIT production process.

4. Define Kanban System also state the benefits of Kanban.

5. Explain the steps in Lean Production.

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LESSON- 8

QUALITY MANAGEMENT

STRUCTURE

8.0 Objectives

8.1 Introduction

8.2 Quality: Meaning and Definition

8.3 Quality Characteristics of Goods and Services

8.4 Quality Management

8.4.1 Juran‘s Quality Trilogy

8.4.2 W. Edwards Deming‘s 14 Principles

8.5 Tools and Techniques for quality improvement

8.6 Statistical Process Control Charts

8.6.1 Objective of control charts

8.6.2 Types of control charts

8.7 Quality Assurance

8.8 Total Quality Management

8.8.1 Primary Elements of TQM

8.9 Concept of Six Sigma

8.9.1 Six Sigma Strategy

8.9.2 Application of Six Sigma Process

8.10 Summary

8.11 Glossary

8.12 Answers to check your progress

8.13 References



8.16 Activity

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8.0 OBJECTIVES

After reading this chapter, you will be able to

understand the concept of Quality and Quality Management.

bring out Juran‘s Quality Trilogy and Deming‘s 14 Principles.

differentiate among Quality Improvement, Quality Assurance and Quality control.

describe Total Quality Management.

analyze the Six Sigma Process and its applications.

8.1 INTRODUCTION

No doubt quality is important to businesses and manufacturing concerns but it is a

relative term and hence quite hard to describe. In simple words, quality is about meeting

the needs and expectations of customers. A good quality item is one which adheres to

specifications. Quality is infact the starting point as well as the ending point of any

product and service. As per ISO definition,‖ Quality is the totality of features and

characteristics of a product or service that bear on its ability to satisfy stated or implied

needs.‖

The term ‗Quality‘ has different meaning from customer point of view and from

manufacturer‘s point of view. For a customer quality is value i.e. ability of product or

service to serve the intended purpose at a price he is willing to pay. In other words,

customer perceives quality as fitness for use.

has to focus on quality because it is the base for creating demand, having an edge over

competitor, fixing competitive price and securing market share.

8.2 QUALITY : MEANING AND DEFINITION

In modern scenario, quality is everything that an organization does, in the eyes of

its customers. Quality is measured in terms of customer satisfaction.

According to American Society of Quality Control, ―Quality is the totality of features and

characteristics of a product or service that bear on its ability to satisfy a given need.‖

According to Abott,L ,‖ Differences in quality amount to differences in the quality of

some desired ingredient or attribute.‖

According to Junan J.M ,‖ Quality is fitness for use.‖

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According to Broh. R.A. , ― Quality is the degree of excellence at an acceptable price and

the control of variability at an acceptable cost.‖

8.3 DIMENSIONS OF QUALITY/ QUALITY CHARACTERISTICS OF GOODS

AND

SERVICES

For the elaborative description of quality, there are eight dimensions of quality as

described by David Garvin:-

1) Performance Products Primary operating characteristics

2) Features More/Extra characteristics that increase need of product

or service to the consumer

3) Reliability Probability that product will not stop working within a

certain period of time

4) Conformance Ability of Product/Service to meet specifications

5) Durability Span of Product life

6) Serviceability Rapidity with which product can be made workable when

it becomes disordered.

7) Aesthetic The look of the product

8) Perceived Quality Quality related to a good or service measured indirectly

e.g. services provided by installation or field technicians

In context of services, the unique features that describe quality diverge from

manufacturing/production. The main aspects that describe quality of a service include.

1) Time How much time a customer has to wait

2) Timeliness Will the service be rendered at predecided time

3) Completeness Does the order include all the items

4) Courtesy Is each customer gladly greeted by front line employees

5) Consistency Are services rendered to every customer without any bias

6) Accessibility and Does the customer find it easy to obtain the service

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Convenience

7) Accuracy Is the service rendered in proper manner in the very first

time

8) Responsiveness Are the servicemen capable to resolve unforeseen

problems of customers rapidly

Select the right alternative.

(i) The color, appliance panel design and hand controls placement in a vehicle are the

examples of which quality dimension.

(a) Performance

(b) Feature

(c) Aesthetics

(d) Perceived Quality

(ii) The most acceptable definition of quality from machinist‘s point of view is .

(a) Fitness for use

(b) Conformance to specification

(c) Customer satisfaction

(d) Loss to society

(iii) Which component of quality dimension describes that the product should possess primary

operating characteristics.

(a) Features

(b) Performance

(c) Conformance

(d) Perceived Quality

(iv) Eight dimensions of quality were described by.

(a) Abott L.

(b) Louis Allen

(c) Peter F. Ducker

(d) David Garvin

8.4 QUALITY MANAGEMENT

Quality is never an accident but is always the result of high intention, sincere effort,

intelligent direction and skillful execution. It also involves proper decision making. So,

Quality management is the managing the whole organization to achieve quality

CHECK YOUR PROGRESS A

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continuously, economically and in entirety. It is wrong to say that quality can be ensured

only by focusing on production process. Infact quality management requires proper

quality or quality improvement in purchasing, marketing, after sales service and many

other factors. It requires effective coordination of various aspects relating to purchase,

production and sale.

Quality management ensures that an organization, product or service is consistent. It has

four components: quality planning, quality control, quality assurance and quality

improvement. Quality management is focused not only on product and service quality but

also on means to achieve it.

There have been many quality management Gurus focusing on quality management. The

four best known and major contributor Gurus are

Dr W. Edward Deming

Joseph M. Juran

Dr Genichi Taguchi and

Philip B. Crospy

8.4.1 JURAN’s QUALITY TRILOGY

Joseph M. Jordan‘s message on quality covers number of different aspects. He focused

on the wider issues of planning and organization, managerial responsibility for quality

and the importance of setting targets for improvement. His book on Quality Control

Handbook (1951) became an essential reference for every manager. Juran was an

Engineer by profession. He was invited by the union of Japanese Scientists and Engineers

to Japan in 1954 and helped in rebuilding the war torn industry. His lectures to the

Japanese introduced the managerial dimensions of planning, organizing and controlling

which were focused on the responsibility of top management to achieve quality and the

need for setting goals. Juran proposed three managerial processes (TRILOGY) for the

effective implementation of total quality programme:

Planning

Improvement

Control

Trilogy states that every aspect in an organization can be improved by understanding an

association among processes that are related with planning, controlling and improving

quality and ultimately organizational results. He suggested various ways to achieve this

trilogy.

(A) Quality Planning

Ascertain quality goals

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Identify the customers

Determine what the customers want

Build up product features that meet customer‘s requirements

Develop processes that can manufacture the product features

install controls for processes; delegate the plans to the executive forces

(B) Quality Control

Assess actual performance

Evaluate actual performance with quality standards

Take corrective actions

(C) Quality Improvement

Determine the requirement and build up the infrastructure

Ascertain the projects for improvement

Constitute project teams

Equip the teams with resources, requisite training and enthusiasm

Find out the causes, encourage remedies at proper time

Set up controls to maintain gains

STRENGTH OF JURAN’s TRILOGY

The Trilogy focuses on regular quality improvement in every aspect

of business.

The methodology permits the application of various quality tools to

cover the Trilogy process by understanding the association of all

stages of organization.

The methodology is properly planned and allows better

understanding and application of trilogy in the business

organizations.

WEAKNESS OF JURAN’s TRILOGY

To exercise quality control it is must to have trained person well

equipped with statistical processes or impart training to a special

person who will be appointed as quality incharge.

It focuses only on process and not on work force.

The complex level of organization is presented by trilogy

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requirements.

The results of application of Juran‘s trilogy are visible in long run

only.

8.4.2 W. EDWARDS DEMING

William Edward Deming (1900-1993) was an American Engineer, Statistician, Professor,

Author, Lecturer and Management Consultant. Educated initially as an electrical engineer

and later specializing in mathematical physics, he helped develop the sampling

techniques still used by the U.S. Department of the census and the Bureau of labor

Statistics. Deming is best known for his work in Japan after world war II, particularly his

work with the leaders of Japanese Industry. He is also known as Father of Quality

Evolution.

W. Edward Deming offered 14 key principles of management to follow for significantly

improving the effectiveness of a business or organization. Many of the principles are

philosophical. Other are more programmatic. These 14 principles were first presented in

his book ‗Out of Crisis‘.

1) Constancy of Purpose

Create constancy of purpose for continual improvement of products and service to society

with a plan to become competitive, to stay in business and to provide jobs.

2) The New Philosophy

We can no longer live with commonly accepted levels of delay, mistakes, defective

materials and defective workmanship. The new philosophy is necessary to halt the

continued decline of business and industry.

3) Cease dependence on mass inspection

For achieving quality ,build up quality into the product in the first place instead of doing

mass inspection.

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4) End up contracts with lowest tenders

End the practice of awarding business solely on the basis of price tag. Instead require

meaningful measure of quality along with price. The aim is to minimize total cost, not

merely initial cost.

5) Improve every process

Improve constantly and forever every process for planning, production and service.

Search continually for problems in order to improve every activity in the company, to

improve quality and productivity and thus to constantly decreases costs.

6) Introduce training on the job

Modern methods of training on the job to be introduced in the business for each and

every person in the organization including management for the effective use of human

resources.

7) Institute Leadership

Adopt and institute leadership aimed at helping people do a better job. The responsibility

of managers and supervisors must be changed from sheer numbers to quality.

8) Drive out fear

Encourage effective two way communication and other means to drive out fear

throughout the organization so that everyone work effectively and more productively for

the company.

9) Break Down Barriers

Break down barriers between departments and staff areas. People in different areas such

as leasing, maintenance, administration must work in teams to tackle problems that may

be encountered with products or service.

10) Eliminate Exhortations

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Eliminate the use of slogans, posters and exhortations for the work force, demanding zero

defects and new levels of productivity without providing methods. Such exhortations

only create adversial relationships.

11) Eliminate arbitrary numerical targets

Eliminate work standards that prescribe quotas for the work force and numerical goals for

people in management. Substitute numerical targets with aids and helpful leadership.

12) Permit pride of workmanship

From hourly workers to management people , every person must be given the right to get

recognition for efficient workmanship to develop a feeling of pride among performers.

13) Promote Education

Introduce a enthusiastic program of education and provide opportunity of self

improvement to everyone.

14) Top management commitment and actions

Clearly outline top management‘s evergreen commitment to improve quality and

productivity and their responsibility to put all of these principles into actual practice.

Fill in the Blanks

(i) Quality management has four components: Quality Planning, Quality Control,

Quality Assurance and _______________________________.

(ii) Juran proposed three managerial processes _____________ for the effective

implementations of total quality programme.

CHECK YOUR PROGRESS B

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(iii) The limitation of Juran trilogy is that it focuses on company process and not in

___________________.

(iv) W. Edward Deming is also known as father of _______________________.

(v) W. Edward Deming‘s 14 key principles of management for improving the

effectiveness of a business were first presented in his book______________.

8.5 TOOLS AND TECHNIQUES FOR QUALITY IMPROVEMENT

Quality improvement is a formal approach to the analysis of performance and systematic

efforts to improve it. In other words, it is the systematic approach to reduction or

elimination of waste, rework and losses in production process. There are certain simple

tools and techniques which can be effectively used for quality Management and quality

improvement.

1) Bar Chart/ Histograms

A Histogram is a graphic summary of variations in a set of data. It enables to see patterns

that are difficult to see in a simple table of numbers. Using this information, further

investigation could be carried to find out the reasons of variations.

2) Cause and Effect Diagram

This technique enables to identify the most probable causes affecting problem, a

condition or a project. The technique employs effective ways of recording the probable

causes of a particular effect with the help of cause and effect diagram. These are also

called Ishikawa diagram, Fishbone diagram or Fishikawa.

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Cause Effect

Secondary

Causes

Primary Causes

3) Control Chart

A control chart is the graphic presentation of expected variation in quality. There are two

lines on each graph which indicate the tolerance limits within which the variations of

quality will be permitted.

4) Flow Chart

Flow chart is a pictorial demonstration of various stages in the process to break down the

complex procedure into the manageable parts for examination and better understanding

Upper Control Limit Out of Control

Average

Lower Control Limit Out of Control

OUTLINE OF CONTROL CHART

Equipment Process People

Material Environment Management

Problem

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so that sources of trouble and wastages can be put to light. The important symbols used in

flow chart are:-

5) Pareto Analysis

This technique is used for ordering causes or problems from the most to the least

significant. It involves creating a preliminary list of problem classifications( Types of

Defect- Crack, Scratch, Stain, Dent, Gap, Hole, Others), find out the occurrence in each

problem classification, arranging each classification from highest to lowest and then

constructing bar chart.

Start/Stop Process

Data Alternate Process

Decision Point Predefined Process

Merge Preparation

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6) Scatter Diagrams

A scatter diagram shows the correlation between two variables in a process. It can

highlight possible relationship and provides indication as to what can be expected in the

future.

7) Check Sheet

The check sheet is a form (document) used to collect data in real time at the location

where the data is generated. The data it captures can be quantitative or qualitative. When

the information is quantitative, the check sheet is sometimes called a tally sheet.

NEW TOOLS FOR QUALITY IMPROVEMENT

In 1976, the union of Japanese scientists and Engineers(JUSE) saw the need for tools to

promote innovation, communicate information and successfully plan major projects. A

team researched and developed the seven new quality control tools often called the seven

tools listed in an order that moves from abstract analysis to detailed planning.

1) Affinity Diagram

0

20

40

60

80

100

120

Dent(104) Scratch(42) Hole(20) Others(14) Crack(10) Stain(6) Gap(4)

Qu

an

tity

Defects

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The affinity diagram method (KJ method) describe natural relationship of large number

of ideas.

2) Relations Diagram

A technique developed to show casual relationship and helps to link various aspects of a

complicated situation.

3) Tree Diagram

It breaks down the main subject i.e. broad category into basic elements of finer and finer

levels of details.

4) Matrix Diagram

It depicts the relationship among groups of information. Matrix diagram involves

arrangement of elements in a problem situation in rows and columns on a chart that

highlights the existence or non existence of relationship among the collected pairs of

elements.

5) Matrix Data Analysis

Out of the seven new quality tools, it is the only mathematical technique for analyzing

matrices. The matrix diagram sorts out the relationship between the elements which is

further quantified by getting mathematical data for intersection cell. The outcome of

these analyses is presented through a diagram.

6) Arrow Diagram

Arrow diagram depicts the requisite order of activities in a project or process and the best

time framework for the entire project; such diagrams are used by PERT and CPM.

7) Process Decision Program Chart

PDPC scientifically identifies what might go wrong in a plan under progress. PDPC

method anticipates possible outcomes in response to various kinds of problems and

prepares counter measures that will lead to best possible solution.

8.6 STATISTICAL PROCESS CONTROL CHART

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Statistical quality control has assumed a lot of importance in industrial technology in the

recent past. Statistical quality control has got momentum use in highly industrialized

countries. The credit of Statistical quality control goes to Walter S. Schewhart and Harold

F. Dodge of the Bell Laboratories U.S.A. Statistical quality control is the term used to

describe the set of statistical tools used by quality professionals for control of quality. It

involves establishing acceptable limits of variation in sizes, weight for products and

services and of maintaining the resulting goods within these acceptable limits. The

variations in quality within the acceptable limits indicate that variations are due to chance

causes (which can not be prevented). However variations beyond the acceptable limits

signals the presence of assignable causes which are detected and corrective actions are

taken immediately to bring quality within acceptable limits.

There are two important tools of Statistical quality control:

i) Statistical Process Control Charts

ii) Acceptable Sampling

Here we will discuss control charts in brief. The detailed explanations of Acceptance

Sampling and Control charts is given in Lesson-10.

Statistical Process control charts were first developed by Walter A. Schewhart in 1924. A

control chart is the graphic presentation of expected variation in quality. A control chart

has two control limits i.e. Upper control limit (UCL) and Lower control limit (LCL) that

separate chance causes from assignable causes of variations. The process is said to be out

of control when plotted data shows that one or more sample falls outside the control

limits.

A control chart has three horizontal lines:-

(a) Central line or Control Line or Average Line

It indicates the desired or standard level of quality.

(b) Upper Line

This line indicates the upper quality level and is also called upper control limit.

(c) Lower Line

This line indicates the lower quality level and is also called Lower Control limit.

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Outline of Control Chart

UCL

Average Line

LCL

1 2 3 4 5 6 7 8

Sample Number

8.6.1 OBJECTIVES OF CONTROL CHARTS

To ensure quality level

To indicate whether the process is under control or beyond control

To determine the process variability and to detect assignable causes if variation is

beyond limits.

To provide information above the selection of process and setting the tolerance limits.

8.6.2 TYPES OF CONTROL CHARTS

Controls charts can be used for the measurable data as well as for quality characteristics

which can not be measured. Thus, control charts are of two types.

Control Charts

Control Chart for Variables Control Chart for Attributes

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8.7 QUALITY ASSURANCE

Quality Assurance is an assurance to the customers that products, parts, components,

tools etc. contain specified characteristics and are fit for the intended use. There are

various International standards as well as equivalent Indian standards for providing

quality assurance to customers.

International organization for standardization (ISO) laid down ISO standards in 1987, to

be reviewed every five years for determining whether they should be confirmed, revised

or withdrawn. These standards have been accepted by various Countries though many

have changed their numbers. In India, Bureau of Indian standards (BIS) has published

IS:14000 service as quality standard equivalent to ISO: 9000.

These standards give assurance about the quality products and services and provide

following benefits.

Competitive edge both domestically and internationally.

Ensure consistency, economy and cost effectiveness through standardization of

operation.

Reduces the need for inspection by buyers increases customer‘s satisfaction in

product and suppliers.

A marketing tool for globalised business.

ISO 9000 is very clear that there should be proper documentation. The documentation

will include quality manual (permanent reference for implementation of quality

management system), Quality procedures (guidelines to company personnel at all levels

for adherence to policies and objectives), work instructions, forms and records. These

documents identify all quality assurance activities in the organization.

8.8 TOTAL QUALITY MANAGEMENT

Total Quality Management (TQM) is a corporate management philosophy which

considers customer requirements and business objectives as inseparable. A core

definition of TQM describes it as a management philosophy whereby customer

satisfaction is considered as keystone to long term success. In a TQM approach, all the

stakeholders of an organization make active participation in improving processes,

products, service and the organizational culture.

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According to Indian statistical institute,‖ Total quality management is an integrated

organizational approach in delighting customers (both internal and external) by meeting

their expectations on a continuous basis through everyone involved with the organization

working on continuous improvement in all products, services and processes along with

proper problem solving methodology.‖

8.8.1 PRIMARY ELEMENTS OF TQM

The primary elements of TQM are:

1) Customer Focussed

All the efforts, processes and products of the organization must have a sole aim i.e.

customer satisfaction.

2) Management by Facts

THE TQM SYSTEM

Objective

Principle

Elements

Continuous Improvement

Customer

Focus

Process

Improvements

Total

Improvement

Leadership Education and Training

Supportive Structure Communication

Reward and Recognition Measurement

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Every employee in the organization can contribute about how things should be done.

Hence, these employees can act as important source of the input for solving the problem.

3) Principle of PDCA cycle

The PDCA also known as the ‗Deming Wheel‘ is the principle of constant improvement.

The plan-do-check–act is another element for effective implementation of TQM.

4) Principle of Employee involvement

Employer should admire and optimally use employee‘s intelligence along with their

mechanical skills and physical powers to promote creativity.

5) Principle of cross functional management

Cross functional management is a process to ensure that product or service meet quality

specifications with the help of effective interaction and co-operation across functional

organizational boundaries.

6) Process centered

The steps to carry out the process are defined and the actual performance is continuously

monitored to detect unpredicted deviation.

7) Strategic and Systematic Approach

A critical part of TQM is the strategic and organized arrangement to achieve an

organizations vision, mission and goals.

8) Communication

Effective communication plays an important role in maintaining morale and in

motivating employees during the times of organization change as well as an element of

daily operations.

8.9 CONCEPT OF SIX SIGMA AND ITS APPLICATIONS

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The introduction of six sigma into the manufacturing area in the early 1980s by Motorola

was a step in revolutionizing the scope and use of quality systems in business. Six sigma

is an overall strategy to improve processes, products and services. It is a statistical tool

that advocates to design, operate and control every process in such a way that none of

them yield more than 3.40 defects out of every million units of output. Its philosophy is

the same as that of TQM but six sigma concept is more rigorous than TQM which is

conventional. Six sigma concept actually measures the output of the process.

Thus six sigma provides a quantitative statistical notion of quality useful in

understanding, measuring and reducing variations.

A product is said to be six sigma (6 ) quality if there are no more than 3.4 non

conformities per million opportunities at the part and process step level.

According to Jack Weich,‖ Six sigma ( 6 ) is a disciplined quality improvement

methodology that focuses on moving every process that touches the customers-every

produce and service- towards near perfect quality. It is a measure of the Company‘s

quality.‖

8.9.1 SIX SIGMA STRATEGY

Sigma i.e. is used to designate the spread of any process about the mean. Sigma value

indicates the performance of the process. The higher the sigma value ( 2 ,

the better is the process. In simple words, sigma is the ability of the process to perform

defect free work. With increase in sigma value, cost decreases, cycle time reduces and

customer satisfaction increases.

Six sigma concept enables to find deviation from average value ( ̅ ) which is measured

by standard deviation. Six sigma concept measures the output of the process.

Defect Rate per Million Cost of poor

Quality (1% of

Competitive Level

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Sigma

6

5

4

3

2

1

Source: Millenium Cover Story- Business Today, Sept 22-Oct 6-1999 P.66

8.9.2 APPLICATION OF THE SIX SIGMA PROCESS

The following four steps are involved in the application of six sigma strategy:-

1) Measurement

It requires selection of significant to quality attributes of the process. The output of the

process measured as multiples of sigma under each critical to quality characteristics has

to be recorded so that defect per opportunity and defect per million opportunities can be

calculated.

2) Analysis

Opportunities sale)

3.4 < 10%

World Class

233.00 10% - 15%

6,210.00 15% - 20%

Industrial Average

66,808.00 20% - 30%

3,08,538.00 30% - 40%

Non competitive

6,90,000.00 > 40%

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The measured information is analyzed to determine the causes of defects in each sub

process.

3) Improvement

Corrective actions are taken to decrease the number of defects by recognizing the product

or reengineering the process.

4) Control

The new process conditions are documented and frozen into systems so that the gains are

permanent. Timely follow up is done to ensure that improvements are sustained or not.

State whether the following statements are true or false:

(i) Cause and Effect diagram is also called Fishbone diagram.

(ii) Control chart is one of the tool of statistical quality control and are used after the final

production of goods.

(iii) The objective of total quality management is maximum profits at the cost of

customers.

(iv) Six sigma concept provides a quantitative statistical notion of quality.

(v) The higher the sigma value, the better is the process.

8.10 SUMMARY

Due to stiff competition in the market, only the quality products can be sold in the

market. The customers want durable, good looking items at economical rates.

Manufacturers have to put sincere efforts, intelligent direction and skillful excession to

ensure proper quality management. The need of the time is quality planning, quality

control, quality improvement and quality assurance through the use of various tools and

techniques.

CHECK YOUR PROGRESS C

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8.11 GLOSSARY

Deming Cycle :- Another name for the never ending Plan-Do-

Check-Act cycle.

Total Quality Management :- Management for quality in all aspects of an

organization with focus on employee involvement

and customer satisfaction.

Quality Management :- That aspect of the overall management function

that describes and executes the quality policy.

8.12 ANSWERS TO CHECK YOUR PROGRESS

CHECK YOUR PROGRESS A

(i) Aesthetic

(ii) Conformance to specifications

(iii) Performance

(iv) David Gravin

CHECK YOUR PROGRESS B

(i) Quality improvement

(ii) Trilogy

(iii) Labor Force

(iv) Quality evolution

(v) Out of crisis

CHECK YOUR PROGRESS C

(i) True

(ii) False

(iii) False

(iv) True

(v) True

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8.13 REFERENCES

1) Halpin J.F, Zero Defects, McGraw- Hill N.Y., 1966

2) Nancy R. Tague, The Quality Tool Box, second edition, ASQ quality press 2004

3) Jain P.L, Quality Control and Total Quality Management , Tata McGraw- Hill,2001

4) Nair N G, Production and Operation Management, Tata McGraw- Hill, 2007

8.14 SUGGESTED BOOKS

1) Chary, Production and Operations Management, Tata McGraw Hill

2) McGregor D- Operation Management, McGraw Hill

3) Buffa & Sarin, Modern Production/ Operations Management, 8th

John Wiley


1) Define TQM. Describe various fundamentals of TQM.

2) Explain the philosophy of W. Edwards Deming towards total quality improvement.

3) Discuss Joseph M. Juran‘s Trilogy for Quality improvement process.

4) Explain the six sigma strategy and its applications.

5) Discuss the tools and techniques of quality improvement.

8.16 ACTIVITY

Banks play an important role for mobilizing the savings of the people and granting loans.

What are the quality expectations of customers when they deposit money and when they

take loan from the Bank.

________________________________________________________________________

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I.K. Gujral Punjab Technical University Jalandhar

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