Introduction

Operation Management is the management of processes or systems that

create goods and/or provide services.

It encompasses:
• Work measurement
• Forecasting
• Capacity and aggregate planning
• Inventory control
• Scheduling
• Facility planning and layout
• Quality assurance
• Employee motivation and training

Why need to study OM

• Activities are the core of all business organization regardless of what business
they are in
• 50% or more of all jobs are in OM area
• Activities in all of the other areas of business organizations, e.g., finance,
accounting, human resources, logistics, marketing, MIS are interrelated with
OM

Organization

Finance Operation Marketing

Operation

Finance Marketing
 Value added
Transformation /
Inputs Conversion process Outputs

Land Goods
Labour Services
Capital Feedback
Information

Control
Feedback Feedback

Scope of Operations Management

Creation of Goods and Services

It encompasses:
• Acquisition of resources
• Conversion of inputs into outputs
• Using one or more transformation processes
• Involves:
▪ Planning
▪ Coordinating
▪ Controlling

Also includes:
• Product / service design
• Workers, equipment, facilities, allocation

Decision Making
• Quantitative approach
• Analysis of trade-offs
• System approach – set of interrelated parts that must work together
• Establishing priorities
• Ethics
Competitiveness

Companies must be competitive to sell their goods and services in the market
place.
Business organizations compete with one another in a variety of ways:
• Price
• Quality
• Product or service differentiation – special features
• Flexibility
• Time
• Service

Strategy

Strategies are plans for achieving goals. It affects the ability of an organization
to compete.

Mission – is the basis of organization – the reason for its existence.

• Mission varies from organization to organization depending on the nature of

their business
• Mission should have a clear and simple “statement” – what business are we
in?
A mission statement provides a general direction for an organization and gives
rise to organizational goals.

Operation Strategy – provides the overall direction for the organization.

• The approach, consistent with the organization strategy, which is used to

guide the operation function

Productivity

Productivity is a measure of output relative to input. This is a measure of the

effective use of resources.

Input -- labour, material, energy

Output -- goods, services

Productivity can be computed for

o A single operation
o A department
o An organization
o Entire country
Productivity is an important factor in determining how competitive a company is.

Productivity growth is the increase in productivity from one period to the next,
relative to the productivity in the preceding period.

Current Period Previous Period

Productivity Productivity Productivity
Growth Growth Growth
Previous Period
Productivity

Partial productivity -- Single input

Multifactor productivity -- more than one input
Total productivity -- All inputs

Inputs to be in calculation are labour, machine, capital, energy etc.

Steps to improve productivity:

• Measurement is the first step
• Looking into bottleneck operation – need to improve
• Employee involvement
• Establishing goals for improvement
• Management support

Efficiency vs. Productivity

Efficiency -- getting the most out of a fixed set of resources

Productivity -- effective use of overall resources
 Production Systems

Production is the process of producing economic goods, including tangible

goods and intangible services from factors of production.

Input Transformation Utility

Production Tangible
Material goods
process
Labour
Intangible
Equipment service
Information

Production Logistic System

Raw material Processor Finished goods Manufacturing

Customer Retailer Whole seller Marketing

Types of Production

1. Job shop:
• Low volume, large variety products
• General purpose equipment

2. Medium size:
Two types of medium sized production

➢ Batch: for hard product variety

• First produce, then change part type
• Need changeover time

➢ Cellular: for soft product variety

• Based on group technology
• Cellular manufacturing
3. High Volume:
Two types of high volume production

➢ Mass:
• Mass production of single part – stamping

➢ Flow:
• Multiple workstations arranged in sequence – parts move along

High
Volume

Medium

Job-shop

Production
volume

Production
rate
Skill level

General Special
Equipment
purpose purpose

Plant
Process Product
layout

Turning Milling

Drilling Assembly
Layout

Layout Type of production

Fixed Job shop
Process Job shop, batch, mass
Cell Cellular
Product Flow

Global Manufacturing Scene

• Frequent changing of customer preference

• Rising labour cost relative to manufacturing productivity

Batch production account for approximately 60 ~ 70% of manufacturing

o Inefficient, not very productive
o High changeover time

Need to improve the situation by:

▪ Reducing machining time
▪ Reducing changeover time
▪ Reducing manual labour

Customer ordering policy

❑ Make-to-stock -- generalised
❑ Make-to-order -- customised
❑ Assemble-to-order -- sub-assembly design
 Forecasting

Forecasting is a statement about the future. Forecasts affect decisions and

activities throughout an organization.

• Accounting -- - product/process cost estimate

- profit projection
• Finance -- - equipment replacement need
- timing and funding
• Human resources -- - recruitment
- interview
- training
- lay off
• Marketing -- - pricing and promotion
- competition strategy
• Manufacturing -- - schedule
- work assignment
- inventory planning
• Product/Service design -- - revision of current features
- design new products/services

Elements of good forecast

A properly prepared forecast should fulfil certain requirements:

▪ Accurate
▪ Timely
▪ Reliable
▪ Expressed in meaningful unit
▪ In writing
▪ Technique should be simple to understand and use

Steps in forecasting process

1. Determine the purpose of the forecast

2. Establish a time horizon
3. Select a forecasting technique
4. Gather and analyse relevant data
5. Prepare the forecast
6. Monitor the forecast
Approaches to Forecasting

1. Based on Judgement and Opinion:

• Executive opinion: developed by a small group of upper level managers
o For long range planning and new product development
o Brings together considerable knowledge and talents of various
managers

• Sales-force opinion: sales staff/customer service staff is often a good

resource of information due to direct contact with
customer
o Aware of customer’s consideration about future

• Consumer surveys: questionnaire to selected sample customers and take

direct inputs from them
o Expensive and time consuming

• Delphi method: circulating a series of questionnaire to individuals who

possesses knowledge and contribute meaningful contribution
o Each new questionnaire is developed using the extracted from
previous ones

2. Based on Time Series Data:

Analysis of time series data requires the analyst to identify the underlying
behavior of the series.
o Can be accomplished by plotting the data and visually examining the plot
o Different patterns might appear
▪ Trend: long term upward or downward movement of data
▪ Seasonality: short term regular variations related to the season
▪ Irregular: unusual circumstances, not reflective of typical behavior
▪ Random: residual variations after all other behavior are accounted
Averaging Techniques

Averaging techniques generate forecasts that reflect recent values of a time

series. This technique work best when a series tends to vary around an average.

Simple moving average: uses a number often most recent actual values in
generating a forecast.

A
i =1
i
Ft = n period moving average
n

Weighted moving average: similar to simple moving average except that it assigns
more weight to the most recent values in a time series.
Heaviest weights are assigned to the most recent values.

Aw
i =1
i i
Ft = n
w is the respective weight
w
i =1
i

Exponential Smoothing: is a sophisticated weighted average method. Each new

forecast is based on the previous forecast plus a
percentage of the difference between that forecast and the
actual value of the series at that point.

Next forecast = Previous forecast +  (Actual demand – Previous forecast)

Forecasting error

 Percentage of error / smoothing constant

Ft = Ft −1 +  ( At −1 − Ft −1 )

For smoother demand,  is less, the forecasting trend will be smoother

For fluctuating demand,  is more, the trend will be less smooth – approaches the
actual demand trend.
Example:

Period Demand Forecast

1 42
2 40 42
3 43
4 40
5 42

Simple moving average (4 months)

F6 = (40 + 43 + 40 + 42) / 4 = 41.25

Weighted moving average (4 months)

F6 = (42 * 0.4 + 40 * 0.3 + 43 * 0.2 + 40 * 0.1) = 41.4

Exponential smoothing ( = 0.1)

Ft = Ft-1 +  (At-1 – Ft-1)

F3 = F2 +  (A2 – F2)
= 42 + 0.1 (40 – 42) = 41.8

F4 = F3 +  (A3 – F3)
= 41.8 + 0.1 (43 – 41.8) = 41.92

F5 = F4 +  (A4 – F4)
= 41.92 + 0.1 (40 – 41.92) = 41.728
3. Associative Forecasting Techniques:

The technique relies on identification of related variables that can be used to

predict values of the variable of interest – predictor variables.

The primary method of analysis is known as regression analysis.

Simple Linear Regression:

The simplest and the most widely used form of regression

o Involves a linear relationship between two variables
o To obtain an equation of a straight line that minimizes the sum of
squared vertical deviations of data points from the line.

y = a + bx

n xy −  x y
b=
n x 2 − ( x )
2

a = y − bx

Assumptions

• Variations around the line are random

• Deviations around the line should be normally distributed
• Predictions are being made only within the range of observed values

Limitations

• Can be applied only to linear relationships with one independent variable

• Needs considerable amount of data
• Equal weightage on each data

Example:
Accuracy of Forecasts

Accuracy is an important factor when choosing among different techniques,

alongwith cost.
Accurate forecasts are necessary for the success of daily activities of every
business organization. This is the basis of organization’s schedule.
Forecast error is the difference between the value that occurs and the value
that was predicted for a given time period.

et = At − Ft

Forecast accuracy is a significant factor when deciding among forecasting

alternatives.
o Based on the historical error performance of a forecast

Two commonly used measures:

▪ Mean absolute deviation (MAD)

▪ Mean squared error (MSE)

MAD =
 Actual − Forecast
n

 ( Actual − Forecast )
2

MSE =
n −1
 Work Measurement

Work measurement is concerned with determining the length of time it should

take to complete the job.

Job times are vital inputs for:

❑ Manpower planning
❑ Reducing labour costs
❑ Scheduling
❑ Budgeting
❑ Designing incentive systems

Time standard provides an indication of expected output. It reflects the

amount of time it should take an average worker to do a given job working under
typical condition.

Standard Time

Standard time is the amount of time a qualified worker should spend to

complete a specified task, working at sustainable rate, using given methods, tools
and equipment, raw material and workplace arrangement.

To develop a time standard for a particular job, it is essential to provide a

complete description of the parameters of the job.
• Standard time is sensitive to all of the above mentioned factors
• Changes in any of the factors can materially affect time requirements

Most commonly used methods of work measurement are:

1. Time study
2. Historical times
3. Predetermined data
4. Work sampling

Time Study

Time study was formally introduced by Frederick Taylor in nineteenth century.

• Most widely used method of work measurement
• Especially appropriate for short, repetitive tasks

Time study is used to develop a time standard based on observations of one

worker taken over a number of cycles. However, it is very difficult to select the right
person who should perform the job. Hence, average of a few properly trained
workers’ performed time are taken as the standard.
 The standard time is then applied to the work of all others in the organization
who perform the same job.

Basic steps:
1. Define the task to be studied, and inform the worker(s) who will be studied
2. Determine the number of cycles to be observed
3. Time the job and rate the performance
4. Compute the standard time

➢ The analyst should be thoroughly familiar with the job

➢ Also need to check that the job is being performed efficiently before setting the
time standard

Breakdown of work into elements

• Some elements are not performed in every cycle, and the breakdown enables
the analyst to get a better perspective
• Workers’ proficiency may not be the same for all elements of the job
• Can build a file of elemental times that can be used to set times for other jobs

Number of cycles that must be timed is a function of:

▪ The variability of the observed times
▪ The desired accuracy
▪ Desired level of confidence for the estimated job time
The desired accuracy is often expressed as a percentage of the mean of the
observed time.

2
 zs 
n= 
e
z -- normal standard deviation needed for desired confidence level
s -- standard deviation – variability
e -- desired accuracy

Development of a time standard involves computation of 3 times:

1. Observed time (OT)
2. Normal time (NT)
3. Standard time (ST)
Observed Time (OT): simply the average of the recorded times.

OT =
x i

 xi = sum of recorded time

n = number of observations

Normal Time (NT): is the observed time adjusted for worker performance.
Computed by multiplying the observed time by a performance rating of the
concerned worker.

NT = OT * PR

If ratings are made on an element-by-element basis,

NT =  (xi * PRi )

xj – average time for element j

PRj – performance rating for element j

Standard Time (ST): is the normal time required for a job plus an allowance time for
different delays:
▪ Personal – drink, restroom
▪ Unavoidable – machine adjustment
▪ Material shortage

ST = NT * AF

Allowance can be based on

▪ Job time
▪ Time worked

For job time, AF job =1 + A

1
For time worked, AFday =
1− A
Standard Elemental Time (SET)

SET is derived from a firm’s own historical time study data.

▪ A time study department accumulate a file of elemental times that are

common to many jobs
▪ After a certain point, many elemental times can be retrieved from the file
▪ Eliminate need for analysts to go through a complete time study to obtain
those

Steps:
• Analyse the job to identify standard elements
• Check the file for elements that have historical times, and record them
• Use time study to obtain others
• Modify file time if necessary
• Sum the elemental times to obtain the normal time, and then standard time

Predetermined Time Standards (PDTS)

PDTS involves the use of published data on standard elemental times.

▪ Commonly used system is Method-Time Measurement (MTM)

o Developed in late 1940s
▪ MTM tables are based on extensive research of basic elemental motions and
times

The analyst must divide the job into its basic elements, rate the difficulty and then
refers to appropriate table.

Standard time is obtained by adding the times for all the basic elements.

Times are measured in TMU (Time measurement unit)

1 MTU = 0.0006 minute

Work Sampling

Work sampling is a technique for estimating the proportion of time that a

worker or machine spends on various activities and the idle time.

Work sampling does not require timing an activity – not even involve
continuous observation of the activity.
▪ An observer makes brief observations of a worker or machine at random
intervals and simply notes the nature of activity
▪ Resulting data are “counts” of the number of times activity or non-activity was
observed

Two primary uses:

• Ratio-delay studies: which concern the percentage of worker’s time that
involves unavoidable delays, e.g., proportion of time a machine is idle
• Analysis of non-repetitive jobs: percentage of time an employee spends doing
various jobs
 Capacity Planning

Capacity refers to on upper limit or ceiling on the load that an operating unit
can handle.
Capacity planning encompasses many basic decisions with long-term
consequences for the organization: machine, store, worker etc.
Capacity is a very important piece of information for planning purposes:
– Enables managers to quantify production capacity in terms of inputs or
outputs.

The basic questions in capacity planning are:

- What kind of capacity is needed?
- How much is needed?
- When it is needed?

Importance of Capacity Decisions

▪ Capacity decisions have a real impact on the ability of the organization to
meet future demands for products & services.
▪ Capacity decisions affect operating costs. In reality, capacity, & demand
cannot be matched.
o Decisions must be made to attempt to balance the cost of over & under
capacity
▪ Capacity is a major determinant of initial cost – greater the capacity, larger the
investment
▪ Capacity decision can affect competitiveness
o Excess capacity or flexible capacity
▪ Capacity affects the ease of management
o Appropriate capacity makes management easier.

Defining & Measuring Capacity

Capacity often refers to an upper limit on the rate of output. Problems identify
suitable measures for a specific situation.
In selecting a measure of capacity, it is important to choose one that does not
require updating. No single measure of capacity will be appropriate in every
situation.

Two useful definitions of capacity

• Design capacity – maximum output that can passably be attained
• Effective capacity – maximum possible output, given a product mix,
scheduling difficulties, machine maintenance & so on.
 Effective capacity is always less than the design capacity. Actual output is
again less than effective capacity – due to absenteeism, materials, shortage,
machine breakdown, quality factors etc.

Actual output
Efficiency =
Effective capacity

Actual output
Utilizatio n =
Design capacity

Effective capacity can be increased by correcting quality problems,

maintaining equipments in good operating condition, using fully trained employee,
fully utilizing bottleneck equipment – ultimately increase actual output.

Determinants of Effective Capacity

➢ Facilities
o Design – including size & provision of expansion.
o Location – transportation cost, distance to market, labor supply.
o Layout – smoothness of flow, as will as lighting & ventilation
➢ Product / services
o Design – easier the design, easier to produce
o Product Mix – varieties of product reduce capacity
➢ Process
o Quantity – obvious determinant of capacity
o Quality – low quality will require inspection & rework.
➢ Human factor
o Job content
o Training / experience
o Motivation
o Compensation
➢ Operational
o Scheduling differences in equipment capabilities
o Materials management – shortage of materials/ complaints
o Quality assurance – in process & incoming materials
➢ External
o Product standard – can restricts increasing capacity
o Safety regulations
o Unions
o Environment
Determining Capacity Requirement

Capacity planning involves both long term & short term considerations.
Long term – relates to overall level of capacity e.g., facility size.
Short term – relates to probable variations e.g., seasonal, random.

Long term capacity needs

Determined by forecasting demand over a time horizon, and then converting
those forecasts into capacity requirement.
o Growth
o Decline
o Cycle
o Stake

When trends are identified, the fundamental issues are.

- How long the trend might persist
- Slope of the trend

When cycles are identified, interest focuses on

- Approximate length of the cycle
- Amplitude of the cycle

Short term capacity needs

Needs are more concerned with seasonal variations. Deviations are important
as they can place severe strain to satisfy demand at sometimes & yet result in idle
capacity at other times.
Seasonal patterns can be identified using standard forecasting techniques.
Variation can be annual, monthly, weekly, and even daily.

Developing Capacity Alternatives

• Deign flexibility into systems
Provisions for futures expansions in the original design of a structure can be
obtained at a lower price compared to complete re-engineering.
Consideration in flexible design involve:
o Layout
o Scheduling
o Location
o Inventory polices
o Equipment
o Production planning
o Scheduling
o Inventory policies
 • Differentiate between new and mature products/services
Mature product/services tends to be more predictable in terms of capacity
requirements – less risk. But may have limited life span. This necessitates an
alternative use of additional capacity – high risk.

• Take a big picture approach to capacity change

When developing capacity alternative, it is important to consider how part of
the system interrelate.

• Prepare to deal with capacity chunks

Capacity increases are often acquired in fairly large chunks rather than
smooth increments which is difficult to achieve.

• Attempt to smooth out capacity requirement

Need to identify products which have complementary demand patterns – tend
to offset each other. Unevenness of demand can be handled this way.

• Identify the optimal operation level

Optimal level of operation in terms of unit cost of output.

Evaluating Alternatives
An organization needs to examine alternatives for future capacity – mainly for
economic feasibility.

Cost volume Analysis

Focuses on relationship between cost, revenue and value of output.
Purpose is to estimate the income of an organization under different operating
conditions.

Total cost TC = FC + VC
FC = Fixed cost
VC = Variable cost
Variable cost VC = Q * U
Q= Units to be produced
U= Variable cost per unit
Total revenue TR = Q * R
R= Revenue per unit
Total Profit P = TR − TC
= Q * R − ( FC + Q * U )
= Q * ( R − U ) − FC
P + FC = Q * ( R − U )
P + FC
Q=
R −U
For breakeven, P=0
FC
Q=
R −U

Example:

No of Machines Fixed Cost (Tk) Capacity (unit)

1 9600 300
2 15000 600
3 20000 900

Variable cost per unit, U = Tk. 10/unit

Revenue per unit, R = Tk. 40/unit
Total Demand D = 580 ~ 660 unit

FC 9600
BEP1 = = = 320 unit
R − U 40 − 10
FC 15000
BEP2 = = = 500 unit
R − U 40 − 10
FC 20000
BEP3 = = = 667 unit
R − U 40 − 10

Should select the option to buy 2 machines – capacity option.

Financial Analysis
Pay back period – total number of years to get the investment back
Net present value – calculate equivalent cash flow – taking time value of
money into account
Internal rate of return – equivalent interest rate that equals net cash flow and
investment.
 Facility Location

Where should a plant or service facility be located? In the age of global

economy, this is top concern of the strategic agenda.

• Need to produce close to supplier as well as customer due to time-based

competition, trade agreements and shipping costs
• Need to locate near the appropriate labor pool to take advantage of low
wage and high technical skills

As a general rule, profit-oriented organizations base their decisions on profit

potential, whereas non-profit organizations strive to achieve a balance between cost
and the level of customer service they provide.
Most organizations do not set out with the intension of identifying the one best
location; rather, they hope to find a number of acceptable locations from which to
choose.

Factors Affecting Location Decisions

• Proximity to customers: location close to customer is important to be
customer responsive.
• Proximity to suppliers: close to high quality and competitive supplier – this
also supports lean production methods.
• Business climate: can include the presence of similar sized business and the
companies in the same industry.
• Total costs: to select a site with the lowest total cost. This includes regional
costs, inbound distribution costs and outbound distribution costs.
• Infrastructure: Transport, utilities, as well as local government’s willingness to
invest in upgrading the infrastructure.
• Political risk
• Government barriers
• Trade blocks

Plant Location Methods

1. Factor-Rating System: most widely used location technique coz they can
provide a mechanism to combine diverse factors in an easy-to-understand
format.

2. Center of Gravity Method: technique of locating a single facility that considers

the existing facility, distance between them and the volume of goods to be
shipped. The technique is often used to locate distribution warehouses.
 Cx =
 d ixVi Cy =
 d iyVi
Vi Vi

where, C x = X coordinate of the center of gravity

C y = Y coordinate of the center of gravity
d ix = X coordinate of the ith location
d iy = Y coordinate of the ith location
Vi = Volume of goods moved to or from the ith location

Example:

500
A
400 B
D
300

200
C
100
Plant

0
0 100 200 300 400 500 600

Location Volume

Plant: (325, 75) 1500

Distributor A: (25, 450) 450

Distributor B: (350, 400) 350
Distributor C: (400, 150) 250
Distributor D: (450, 350) 450

325 *1500 + 25 * 450 + 350 * 350 + 400 * 250 + 450 * 450

Cx = = 307.9
1500 + 450 + 350 + 250 + 450

75 *1500 + 450 * 450 + 400 * 350 + 150 * 250 + 350 * 450

Cy = = 216.7
1500 + 450 + 350 + 250 + 450
Service Location Methods
Service facilities have multiple sites to maintain close contact with customers.
Location decision is closely tied to the market selection decision.

Ardalan Heuristic Method:

From Miles to Clinic Population

Relative Weight
Community A B C D (in thousand)
A 0 11 8 12 10 1.1
B 11 0 10 7 8 1.4
C 8 10 0 9 20 0.7
D 9.5 7 9 0 12 1.0

Step 1:

From To Clinic
Community A B C D
A 0 121 88 132
B 123.2 0 112 78.4
C 112 140 0 126
D 114 84 108 0
SUM 349.2 345 308 336.4
Select C
Step 2:

From To Clinic
Community A B C D
A 0 88 88 88
B 112 0 112 78.4
C 0 0 0 0
D 108 84 108 0
SUM 220 172 308 166.4
Select D
Step 3:

From To Clinic
Community A B C D
A 0 88 88 88
B 78.4 0 112 78.4
C 0 0 0 0
D 0 0 108 0
SUM 78.4 88 308 166.4
Select A
 Facility Layout

Layout refers to the configuration of departments, work centres and

equipment, with particular emphasis on movement of work through the system.
Layout decisions are important for 3 basics reasons:
- Require substantial investment of money & effort
- Involve long term commitment
- Have significant impact on the cost and /efficiency of operations

Three basic types of layout are

• Product
• Process
• Fixed position

Product Layout

Layout that uses standardized processing operations to achieve smooth,

rapid, high volume flow.
The work is divided into a series of standardized tasks, permitting
specialization of both labor and equipment.
Only one or a few very similar items are involved – Machine arrangement
forms a line.

R/M WS1 WS2 WS3 WS4 F/G

Lines are referred to as Production Lines or Assembly Lines –depending on

type of activity.
Production line – standardized layout arranged according to a fixed sequence of
tasks
Assembly line – standardized layout arranged according to a fixed sequence of
assembly tasks
Advantages
- High rates of output
- Low unit cost due to high volume
- Low material handling cost per unit – because same sequence of operations
- High utilization of labor & equipment
- Routing & scheduling do not require much attention once the systems in
operating

Disadvantages
- Repetitive work-boring & fatigue
- System is fairly inflexible in response changes in product or process design
- System is highly susceptible to breakdown or employee absenteesm
- Preventive maintenance & spare parts inventories are necessary expenses
- Incentive plans are impractical

U-shaped Layouts

- More compact-need half the length of a straight production line

- Increased communication among workers – facilitates teamwork
- Flexibility in work assignments is increased
o Worker can handle not only adjacent stations, but also stations on
opposite sides of line
o Minimizes material handling-same location of material in and out

Process Layout
Designed to process items or provide services that involve a variety of
processing requirements. Variety of jobs requires frequent adjustment of equipment
– Intermittent processing.
Layout features functional grouping where similar kinds of activities are
performed. Machine shop – separate departments for turning, milling, grinding,
drilling etc.
Items are frequently moved in batches to the departments in a sequence that
varies from job to job. Consequently, variable-path material-handling equipment is
needed to handle various routes.
General-purpose equipment provides flexibility necessary to handle a wide
range of processing requirements.
 A B
A
A Turning
B Milling
C Grinding
C D
D Drilling

Advantages
- Can handle a variety of processing requirements
- Not particularly vulnerable to equipment failures
- General-purpose equipment is easier & less costly to maintain.
- Possible to use incentive systems
Disadvantages
- High inventory costs for batch processing
- Routing & scheduling pose continual challenges
- Equipment utilization rates are low
- Slow material handling –also inefficient.

Fixed Position Layout

The items being worked on remains stationary, and workers, material and
equipment are moved about as needed.
Weight, size, bulk or some other factor makes it undesirable or extremely
difficult to move the product – normally used for large projects.

Cellular Layout
Machines are grouped into cells. Groupings are determined by operations
needed to perform work for a set of similar items – part families. Cells are miniature
versions of product layout.
In cellular layout, machine are arranged to handle all of the operations
necessary for a part family.

L M D G – family 1
M D G – family2
L D – family3
L M G - family 4
LINE BALANCING
Line balancing is the assignment of work to stations in a line as to achieve the
desired output rate with the smallest number of workstations. The goal is to obtain
workstations with well-balanced workload. Need to match the output rate to the
desired plan.

Steps:
1. Determine desired output rate: matching output to demand ensures on-time
delivery prevents unwanted inventory
2. Calculate Cycle Time: Cycle time is the maximum time allowed for work on a
unit at each station.
1
c= where, c = cycle time, r = desired output rate/hr
r
3. Find Theoretical Minimum: A benchmark or goal for the smallest number of
stations possible.

TM =
t where,  t = total time required to assemble each unit
c
4. Determine idle time: Idle time is the total unproductive time for all stations in
the assembly of each unit.
I = nc −  t where, n = number of stations, I = idle time

5. Calculate Efficiency: Efficiency is the ratio of productive time to total time.

e=
 t *100% where, e = efficiency
nc
6. Assign tasks to stations

Example:

Work Time D
Predecessor H
element (sec)
B
A 40 - E
B 30 A
C 50 A A
F
D 40 B I
E 6 B C
F 25 C G
G 15 C
H 20 D, E
I 18 F, G
Desired output rate = 2400 units/week
2400 unit
So, r = = 60 unit / hr
5 days / wk * 8 hrs / day
1 1
Cycle time, c = = hr / unit = 1 min/ unit
r 60

Theoretical minimum, TM =
 t = 244 sec = 244 sec = 4.067 or 5 stations
c 1 min 60 sec

Idle time, I = nc −  t = 5* 60 − 244 = 56 sec

Efficiency, e =
 t * 100 = 244
* 100 = 81.3%
nc 60 * 5

Clustering of the elements

1. Assign workstations moving from left to right according to diagram
2. Make sure that all preceding tasks have been assigned
3. Make sure that total time of assigned task does not exceed cycle time
4. Calculate reaming time after each assignment
5. Assign next task with the longest task time (or largest number of followers)
6. Take one task arbitrarily if that is a tie

D H
B
E
A
F I

C G

Station 1 Station 2 Station 3 Station 4 Station 5

 Aggregate Planning

Aggregate planning is intermediate-range capacity planning that typically

covers a time horizon of 2~12 months – may extend to as much as 18 months.
- Particularly useful for organizations that experience seasonal or other
fluctuations in demand or capacity.
Goal of aggregate planning is to achieve a production plan that will effectively
utilize the organization’s resources to satisfy expected demand.
Planners must make decisions on output rates employment levels and
changes, inventory levels and changes and subcontracting.

Long-term planning
• Product and service selection
• Facility size and location
• Equipment decision
• Facility layout

Intermediate planning
• General levels of
• Employment
• Output
• Finished goods inventories

Short-term planning
Details plans of
• Machine loading
• Job assignments
• Job sequencing
• Work scheduling
Concept of Aggregation
Essentially a “big picture” approach to planning. Planners usually focus on a
group of similar products or services – sometimes an entire product or service line.
Lump all models of a product together and deal with them as though they are
a single product – aggregate – overall capacity.
An aggregate approach permits planners to make general decisions about
intermediate-range capacity without dealing specific details.
It is convenient to think of capacity in terms of labor hrs or machine hrs per
period, or output rates, without worrying about how much of a particular item will
actually be involved.

Overview of Aggregate Planning

- Begins with a forecast of aggregate demand for intermediate range
- Followed by a general plan to meet demand requirements by setting
- Output
- Employment
- FG inventory level
Production plan is essentially the output of aggregate planning.

Aggregate plans are updated periodically, often monthly, to take into account
updated forecasts and other changes – results in a “rolling planning horizon”.

Purpose and scope of Aggregate Planning

Basic problem addressed by aggregate planning is the “balancing of capacity

and demand” along with the purposes, decision variables and associated costs.
If capacity & demand aren’t in balance, there will be added costs of adjusting
the system.

Demand and Capacity

Planners are concerned with the quantity and timing of expected demand.
If demand is much different from available capacity over the same period,
major approach is to try to achieve a balance by altering capacity, demand, or both.
Even approximately equal, may be uneven within planning interval – need to
achieve rough equality of demand and capacity over entire planning horizon.

Inputs to Aggregate Planning

Effective aggregate planning requires good information:
• Available resources over the planning period must be known
• A forecast of expected demand must be available
• Planners must take into account any policies regarding changes in
employment levels.
Demand and Capacity Options
Demand options

• Pricing – pricing differentials are commonly used to shift demand from peak
periods to off-peak periods.
• Promotion – advertising and other forms of promotions, e.g., displays, direct
marketing, sometimes are very effective in shifting demand.
Appropriate timing is needed.
• Back Orders – orders taken in one period and delivers promised for a later
period. Success depends on customer – how much they are
willing to take late deliveries.
• New demand – many organizations are faced with the problems of having to
provide products or services for peak demand in situations
where demand is very uneven. Creating new demand at off-
peak time would make use of excess capacity during slack
times.
Capacity options
• Hire and lay off workers – hiring & laying off workers has a great impact on
capacity. Union contracts may restrict hiring and laying off.
Skill level is another consideration – less available and higher
cost.
Both hiring & laying off operators cost the organization-may
be severe.
• Overtime/ Slack time – less severe method for changing capacity. Can be
easily & quickly implemented. Allow maintaining a steady
base of employees. Employees can also earn more – killed
workforce can be maintained.
• Part time workers – for seasonal work-requiring low to job skills. Cost less
than regular workers in hourly wages and fringe benefits.
Mainly department stores and supermarkets hire part-time
workers.
• Inventories – produce goods in one period & sell in another period. Involves
holding costs.
Not only storage costs & cost of money tied up, but also cost of
insurance, obsolescence, deterioration, breakage etc.
• Subcontracting – enables planers to acquire temporary capacity, although
affords less control over the output-may cost due to quality
problem. Whether to make or buy depends on
o Available capacity
o Relative expertise
o Quality consideration
o Cost
Techniques for Aggregate Planning

✓ Determining demand for each period

✓ Determining capacity for each period
✓ Identify company or departmental policies that are pertinent (e.g., maintaining
safety stock)
✓ Determine unit costs for regular time, overtime, subcontracting, holding
inventories, back order, layoff
✓ Develop alternative plans & compute cost for each
✓ If satisfactory plans emerge, select the one that best satisfies objectives.
 Inventory Management

Inventory is stock or store of goods. It is a vital part of business.

Different kinds of inventories are

Raw material
Work-in-process
Finished goods

Function of Inventory
To meet anticipated demand
To smooth production requirements – seasonal
To protect against stockouts
To take advantages of order cycles
To take advantages of quantity discounts
To permit operations – about WIP

Effective Inventory Management

- System to keep track of the inventory on hand and on order
- Reliable forecast of demand that includes an indication of possible forecast
error
- Knowledge of lead time & lead time variability
- Reasonable estimates of inventory holding cost, ordering cost and shortage
cost
- Classification system of inventory items

Inventory Costs

Three basic costs are associated with inventories:

Holdings costs: relate to physically having items in storage. Costs include interest,
insurance, taxes, depreciation, spoilage, breakage & rent.
- Cost to held an item in inventory for a length of time, usually a year
Ordering costs: cost of ordering & receiving inventory. The cost vary with the actual
placement of an order. Cost include preparing invoice, shipping cost, inspection cost
etc.
Shortage costs: result when demand exceeds the supply of inventory on hand. Costs
include the opportunity cost of not making a sale, loss of customer good will, late
charges. Difficult to measure & may be subjectively estimated.
Classification System
Items stored are not of equal importance in terms of value. Need to allocate control
efforts according to the relative importance of various items.
A-B-C approach classifies inventory items according to measure of importance, and
then allocates control efforts accordingly.
Class A
✓ Very important
✓ 10 to 15% items contribute to 60~70% of value usage
Class B
✓ 20~30% items contribute to 20~30% of value usage
Class C
✓ 60% items contribute to only 10% of value usage

B
Value

No of Items

Economic Order Quantity Models (EOQ)

EOQ is the order size that minimizes total cost

Unit price is generally not included as it is unaffected by the order size (no discount).

Assumptions for EOQ model

Only one product is involved
Annual demand requirements are known
Demand is spread evenly
Lead time does not vary
Each order is received in a single delivery
No quantity discounts
Inventory ordering & usage occur in cycles
- Begin with receipt of an order of Q units
- Withdrawn at constant rate over time
- When quantity is just sufficient to meet demand for lead time, order Q units
- Order will be received at the precise instant that the inventory on hand falls to
zero – based on assumptions

Q
Quantity

ROP

Time
LT

Holding cost increases as order quantity increase

Ordering cost decreases as order quantity increases.

Q
Annual holding cost = H H = holding cost per unit
2
D
Annual ordering cost = S S = cost per order
Q
D = total demand

Q D
= average inventory; = total number of orders
2 Q

Q D
Total cost, TC = H+ S
2 Q

(material cost has not been considered here)

 dTC
To minimize total cost, =0
dQ
H D
− 2 S =0
2 Q
2 DS
Q2 =
H
2 DS
Q=
H

Q 1
Length of order cycle = =
D number of orders

Total cost

Holding cost
Annual Cost

Ordering cost

EOQ Order Quantity

Quantity Discount

Quantity discount is the price reduction for large orders offered to customers to
induce them to buy in large quantities.

Q D
TC = H + S + PD P = price per unit
2 Q
 If no quantity discount, TC does not depend on size of order. But it is affected
by the price discount on order size.
Separate U-shaped curves for Total cost are generated with different unit
prices. Each curve is raised by different amounts compared to the price curve
without unit cost of product. Each curve applies to a portion of range.

Step to compute EOQ with quantity discount

- Compute common minimum point

- As the ranges of price discount do not overlap, only one of the unit prices will
have minimum point-identify that range
- If the feasible minimum point is on the lowest price range, that is the optimal
order quantity
- If the feasible minimum point in any other range, compute total cost for the
minimum point and for the price breaks of all lower unit costs
- Compare total costs – the quantity that yields the lowest total cost in the
optimal order quantity
Total Cost

Order Quantity

# Example

D = 816 unit for 1 ~ 49 pcs, unit price = Tk. 20/-

S = Tk. 12/order for 50 ~ 79 pcs, unit price = Tk. 18/-
H = Tk. 4/unit for 80 ~ 99 pcs, unit price = Tk. 17/-
for 100 and up, unit price = Tk. 16/-

Find EOQ and corresponding total cost.

 Material Requirement Planning (MRP)

A computerized information system developed specifically to aid in managing

dependant demand inventory and scheduling replenishment orders.

Dependant demand: a demand that occurs because the quantity required is a

function of the demand for other items held in inventory

Purposes of MRP
The main purposes of a basic MRP system are to control inventory levels,
assign operation priorities for items, and plan capacity to load the production system.
• Inventory
Order the right part
Order the right quantity
Order at right time

• Priorities
Order with the right due date
Keep the due date valid

• Capacity
Plan for a complete load
Plan for an adequate time to view future load

Main theme: “getting the right material to the right place at the right time”

Benefits
• Ability to price more competitively
• Reduce inventory
• Better customer service
• Better response to market price
• Reduced set up time
• Reduced idle time

Inputs to MRP

Inputs of an MRP system are:

▪ Bill of material (BOM)
▪ Master production schedule (MPS)
▪ Inventory record database
 An MRP system translates the master production schedule and other source
of demand into the requirements for all subassemblies, components and raw
material needed to produce the required parent items – which is called MRP
explosion.

Customer
Forecasts
orders
Master Production
Schedule (MPS)

Inventory MRP Bill of

Records Explosion Material

Material Requirement
Planning (MRP)

Bill of Material (BOM)

A Record of all the components of an item, the parent-component
relationships, and usage quantities derived from engineering and process designs.

Chair 1

Ladder back Seat Front Leg

1 Subassembly 1 2
Subassembly Legs Supports 4

Back Back Seat Seat

2 4 1 1
Legs Slats Frame Cushion

Seat frame
boards 4
Intermediate item
An item that has at least one parent and one component (subassemblies)

Subassembly
An intermediate item that is assembled from more than one component
Part commonality
The degree to which a component has more than one immediate parent – also
termed as modularity

Master Production Schedule (MPS)

Details of how many end items will be produced within specified
periods of time. This breaks aggregate production plan into specific product
schedules.

April May

Aggregate 670 670

Week number 1 2 3 4 5 6 7 8
Ladder-back
150 150
Chair
Kitchen chair 120 120

Desk chair 200 200 200 200

• Sum of the quantities in MPS must equal those in the aggregate production
plan.
• Aggregate production quantities must be allocated over time.
• Based on demand forecast and marketing and promotional considerations.
• Capacity limitations may determine the timing and size of MPS quantities.
Planners must acknowledge this and plan accordingly.

Inventory Record

A record that shows an item’s lot-size policy, lead time and various time-
phased data. It divides the future into time period called “ time buckets” –that can be
either weekly or monthly.
The time-phased information contained in the inventory record consists of
▪ Gross requirement
▪ Scheduled receipts
▪ Project on-hand inventory
▪ Planned receipts
▪ Planned order releases

Gross requirements
Total demand derived from all parent production plans

Scheduled receipts
Orders that have been placed but not yet completed

Projected on-hand inventory

An estimate of the amount of inventory available easy week after gross
requirements have been satisfied

Planned receipts
Orders that are not yet released to the shop or the supplier

Planned order releases

Indicates when an order for a specified quantity is to be issued

Week No. 1 2 3 4 5 6 7 8
Gross requirements 150 0 0 120 0 150 120 0
Scheduled
230 0 0 0 0 0 0 0
receipt
Projected on-hand
117 117 117 227 227 77 187 187
inventory (37)
Planned
0 0 0 230 0 0 230 0
receipt
Planned order
230 230
release

Lot size = 230 unit

Lead time = 2 wks
Example:
A C

B D D (2) F

Week No. 1 2 3 4 5 6
Gross requirements A 80
Gross requirements C 50

For A (LT = 1 wk; lot for lot)

Week No. 1 2 3 4 5 6
Gross requirements 80
Scheduled receipt
Projected on-hand inventory
Planned receipt 80
Planned order release 80

For C (LT = 1 wk; lot for lot)

Week No. 1 2 3 4 5 6
Gross requirements 50
Scheduled receipt
Projected on-hand inventory
Planned receipt 50
Planned order release 50

For D (LT = 2 wk, Lot size = 100)

Week No. 1 2 3 4 5 6
Gross requirements 80 100
Scheduled receipt 50
Projected on-hand
65 65 85 85 85 85
inventory (15)
Planned receipt 100 100
Planned order release 100 100
Manufacturing Resource Planning (MRPII )

A system that ties the basic MRP system to the company’s financial system.
Focus of MRPII is to aid the management of a firm’s resources by providing
information based on the production plan to all functional areas.

▪ Enables managers to test “ what if ” scenarios by using simulation

▪ Managers can project the dollar value of shipments, product costs, overhead
allocations, and inventories

Information from MRPII is used by managers in manufacturing, purchasing,

marketing, finance, accounting and engineering.
MRPII reports help managers develop and monitor overall business plan and
recognize sales objectives, manufacturing capabilities, and cash flow constraints.

Customer
Forecasts
orders
Master Production
Schedule (MPS)

Inventory MRP Bill of

Records Explosion Material

Material Requirement
Planning (MRP)

Manufacturing Resource Cost and

Planning (MRPII) Financial data

Purchasing Financial Marketing HRM Manufacturing

reports reports reports reports reports
 Scheduling

Scheduling refers to the order in which jobs at workstations will be processed.

Priority rules are simple heuristics used to selects the order in which jobs will
be processed.

Local rules for only single workstation

Local FCFS, SPT, EDD

Global rules for multiple workstations

Global CR – critical ratio

Effectiveness of any given sequence is frequently judged bases on the following

performance measures:
- Flow time – length of time a job is at particular workstation
- Job delay – length of time the job completion data is expected to exceed the
job due date
- Makespan – total time needed to complete a group of jobs
- Average no of jobs – ratio of total flow time to makespan

# Example: n job 1 work station

Jobs arrive in the order shown

Job Processing Time (days) Due date (days)

A 2 7
B 8 16
C 4 4
D 10 17
E 5 15
F 12 18
First Come First Serve (FCFS)

Job Processing Flow Time Due Date

Lateness
sequence Time (days) (days) (days)
A 2 2 7 0
B 8 10 16 0
C 4 14 4 10
D 10 24 17 7
E 5 29 15 14
F 12 41 18 23
41 120 54

120
Average flow time = = 20 days
6
54
Average delay = = 9 days
6

Shortest Processing Time (SPT)

Job Processing Flow Time Due Date

Lateness
sequence Time (days) (days) (days)
A 2 2 7 0
C 4 6 4 2
E 5 11 15 0
B 8 19 16 3
D 10 29 17 12
F 12 41 18 23
41 108 40

108
Average flow time = = 18 days
6
40
Average delay = = 6.67 days
6
 Earliest Due Date (EDD)

Job Processing Flow Time Due Date

Lateness
sequence Time (days) (days) (days)
C 4 4 4 0
A 2 6 7 0
E 5 11 15 0
B 8 19 16 3
D 10 29 17 12
F 12 41 18 23
41 110 38

110
Average flow time = = 18.33 days
6
38
Average delay = = 6.33 days
6

Johnson’s rule: n job 2 work stations

WS 1 WS 2

Processing Time (hrs)

Job
Work Station 1 Work Station 2
A 5 5
B 4 3
C 8 9
D 2 7
E 6 8
F 12 15

D E C F A B

WS 1

D E C F A B

D E C F A B

WS 2
 Johnson’s rule: n job 3 work stations

WS 1 WS 2 WS 3

Conditions:
The smallest processing time at station 1 is to be greater than or equal to the largest
processing time at station 2
or
The smallest processing time at station 3 is to be greater than or equal to the largest
processing time at station 2

Processing Time (hrs)

Job
Work Station 1 Work Station 2 Work Station 3
A 7 2 3
B 6 4 2
C 8 5 4
D 9 2 5
E 10 3 7

Combine WS1 & WS2 to form WC 1 and combine WS2 & WS3 to form WC 2

Processing Time (hrs)

Job
Work Center 1 Work Center 2
A 7+2=9 2+3=5
B 6 + 4 = 10 4+2=6
C 8 + 5 = 13 5+4=9
D 9 + 2 = 11 2+5=7
E 10 + 3 = 13 3 + 7 = 10

E C D B A

WS
E C D B A
1
WS
E C D B A
2
WS
E C D B A
3
 Just-in-Time (JIT)

JIT is used to refer a production system in which both the processing and
movements of goods occur just as they are needed, usually in small batches.

JIT is a characteristic of lean production system, which operates with very

little “fat” (e.g., excess inventory, extra workers, wasted space).

JIT has the benefits of

• Lower processing cost
• Fewer defects
• Greater flexibility

JIT Goals

• Eliminate disruption
• Make system flexible by reducing setup time and lead time
• Eliminate waste, especially excess inventory

Disruption: It has a negative impact on the system by upsetting the smooth flow of
products. Mainly caused by poor quality, equipment breakdown, schedule changes
etc.

Flexible System: This is a system which is robust enough to handle a mix of

products, to handle changes in output level maintaining balance and throughput
speed. Setup time and delivery time need to be reduced.

Waste Elimination: Overproduction, waiting time, unnecessary transport, waste

processing, product defects, inefficient work method etc.

BUILDING BLOCKS

The design and operation of a JIT system provide the foundation for accomplishing
the goals of JIT. The foundation is made up of four building blocks:
• Product design
• Process design
• Personnel/organizational elements
• Manufacturing planning & control

Product design

Three elements of product design are important for JIT:

• Standard parts: workers have fewer parts to deal with, and training time and
costs are reduced
 • Modular design: clusters of parts treated as a single unit. This greatly reduces
the number of parts to deal with, simplifying purchasing, handling, training and
so on
• Highly capable production system: poor quality can create major disruption.
Besides, machine breakdown or system shutdown need to be avoided.

Process design

Seven aspects of process design are particularly important for JIT system:
• Small lot size
• Setup time reduction
• Manufacturing cells
• Limited WIP
• Quality improvement – Autonomation
• Production flexibility
• Little inventory storage

Personnel/Organizational elements

There are five elements particularly important for JIT system:

• Workers as asset
• Cross-trained workers
• Continuous improvement
• Cost accounting
• Leadership

Manufacturing planning & control

There are six elements in manufacturing planning and control which are important in
JIT:
• Level loading
• Pull system
• Visual system
• Close vendor relationship
• Reduced transaction process
• Preventive maintenance

In pull system, work flow is dictated by “next-step demand”. Most commonly device
for this is “Kanban” card.

Kanban is a Japanese word – meaning “signal” or “visible record”. This is an

authorization to move or work on parts. No part can be moved or worked on without
one of these cards.
Kanban System

A card is attached to each container of items that have been produced. The
container holds a given percentage of daily requirements for an item. When an user
empties a container, card is removed from the container and place on a receiving
post. The empty container is taken to the storage area. The card on the receiving
post signals the need to produce another container of parts. When a container is
refilled, the card from the receiving post in attached to the container and returned to
storage area.

General operating rules for single-card system:

• Each container must have a card
• No work station is allowed to push parts to the next station
• Containers of parts must never be removed from a storage area without a
Kanban first being placed on receiving post
• Containers should always contain same number of good parts to smooth
production flow
• Only non-defective parts should be passed along to the assembly line to
make the best use of materials and workers’ time
• Total production should not exceed the total amount authorized on the
Kanbans in the systems
 Supply Chain Management

A supply chain is a sequence of organizations, their facilities, functions and

activities, which are involved in producing and delivering a product or service.
Sequence begins with basic suppliers of raw materials, and extends all the
way to the final customer.

Value chain vs supply chain

Supply chains are sometimes referred to as value chains; a term that reflects
the concept that value is added as goods and services progress through the chain.
The chain comprised of separate business organizations, rather than just a
single organization.
Two components for each organization
• A supply component
• A demand component
Supply component – starts at the beginning of the chain & ends with internal
operations
Demand component – starts at the point where the organizations output is delivered
to its immediate customer, and ends with final customers in
the chain.

Supplier

Supplier Storage Manufacturing Distribution

Supplier
Retailer

Customer
Need for supply Chain Management
- Improve operation
- Increased level of outsourcing
- Competitive pressure – new products
- Increasing globalization
- Need to manage inventories

Benefits
- Lower inventories
- Lower cost
- Higher productivity
- Improved ability to respond to fluctuations in demand
- Shorter lead time
- Higher profit
- Greater customer loyalty

Element of supply chain Management

- Customer – the driving force
- Forecasting – predicting demand
- Design – incorporating customers
- Processing – schedule, quality control
- Inventory
- Purchasing – evaluating potential suppliers
- Supplier – product quality, on time delivery
- Location
- Logistics – movement within facility

Integrated Supply Chain

Successful supply-chain management requires a high degree of functional
and organizational integration.
Internal departments
• Purchasing
• Production
• Distribution
External department
• Supplier
• Customer
Phase 1
- Suppliers & customers are considered to be independent of the firm
- Purchasing, production and distribution act independently
- Each external & internal entity controls its own inventories

Phase 2
- Firm initiates internal integration by creating material management
department
- Materials management in concerned with decisions about purchasing
materials & services, inventories, production level, schedules and distribution

Phase 3
- Supply chain integration
- Internal supply chain is extended to embrace suppliers & customers.
- Linking to external supply chain

Phase 1 Supplier Purchasing Production Distribution Customer

Supplier Purchasing Production Distribution Customer

Phase 2 Internal Supply Chain
Material Management Department

Supplier Internal Supply Chain Customer

Phase 3
Integrated Supply Chain
 Total Quality Management

TQM is a philosophy that makes quality values the driving force behind leadership,
design, planning and improvements initiatives.

In other words, TQM means managing the entire organization so that it excels in all
dimensions of product and services that are important to customer.

Three main elements of Total Quality Management are:

• Customer satisfaction
• Employee involvement
• Continuous improvement

Quality Product/Service
Function Design
Deployment

Employee Involvement

Customer
Satisfaction
Process
Purchasing Design
Continuous Improvement

Benchmarking

Cost of Poor Quality

• Prevention cost – cost associated with preventing defects before they happen
• Appraisal cost – cost incurred in assessing the level of quality attained by the
operating system
• Internal Failure cost – cost resulting from defects that are discovered during
production
• External Failure cost – cost arises when a defect is discovered after the
customer has received the product or service
Customer Satisfaction

Customer’s perception of quality:

1. Conformance to Specification: meet desired level of requirement
2. Value of Product: expensive or cheap
3. Fitness for Use: how well the product performs its intended purpose
4. Product Support: After sale support
5. Physiological Impression: Appearance, aesthetic

Employee Involvement
1. Individual development: on job training
2. Team: small group of people who have a common purpose, set their own
performance goals and approaches, and hold themselves accountable for
success.
• Problem-solving teams: small groups of supervisors and employees
who meet to identify, analyze and solve production and quality
problems
• Special purpose teams: groups consist of representatives from several
different departments that address paramount concerns
• Self-managing teams: small group of employees who work together to
produce a major portion, or sometimes all, of a product or service
3. Awards and Incentives: to enhance employee motivation

Continuous Improvement

1. Definition:
• Philosophy of continually seeking ways to improve operations, based
on Japanese concept called Kaizen
• The philosophy is based on the belief that virtually any aspect of an
operation can be improved and that the people most closely associated
with an operation are in the best position to identify the change that
should be made
2. Process of Starting Kaizen:
• Train employees in the method of SPC and other tools for improving
quality and performance
• Make SPC a normal aspect of daily operation
• Build work team and employee involvement
• Unitize problem-solving tools within work teams
• Develop sense of operator ownership in the process
 3. Problem solving Process:
• PDCA cycle or Deming wheel
• Identify non-value added operations and reduce or eliminate them

Plan

Action
Deming Do
wheel

Check
`

Improving Quality through TQM

1. Purchasing considerations:
• High quality at reasonable cost supplier
• Defect free parts
2. Product/Service design:
• Changes and associated testing
• Reliability
3. Process design:
• Sequence and way of production
4. Quality Function Deployment:
• A means of translating customer requirements into the appropriate
technical requirements for each stage of product development and
production
5. Benchmarking:
• A systematic procedure that measures a firm’s products, services and
processes against those of industry leaders
 PROJECT MANAGEMENT
Project:

▪ A temporary endeavor undertaken to accomplish a specific goal

▪ One time activity with a well-defined set of desired end results

“A complex, non-routine, one-time effort limited by time, budget, resources

and performance specifications designed to meet customer need.”

COMPLEX – need careful coordination and control in terms of

▪ Time
▪ Budget

Major characteristics of a Project:

▪ An established objective
▪ Defined life span
▪ Multifunctional
▪ Unique
▪ Interdependency
▪ Specific Time, cost and performance requirements
▪ CONFLICT

Project Life Cycle: “Slow start, Quick Momentum, Slow Finish”

Define Plan Execute Deliver

Level of
Effort

Time

Basic purpose of a project is to achieve specific goals. Need to organize the task as
a project focusing:
▪ Responsibility
▪ Authority

To achieve the goal (performance) within limited time and cost.

PROJECT PLANNING

The most important responsibilities of a PM are:

• Planning – need formal detailed plan with time and budget constraint
• Integrating – integration of planning is required among functional units
• Executing – implementing the plans through integration

Planning can be described as a function of selecting the enterprise objectives and

establishing the policies, procedures and programs necessary for achieving them.

“Establishing a pre-determined course of action within a forecasted environment”

Project Manager (PM) is the key to successful project planning.

Planning must be:

• systematic
• flexible to handle unique activities
• disciplined through review and control
• capable of accepting multifunctional inputs

Basic reasons for planning:

• To eliminate / reduce uncertainty

• To improve efficiency of the operation
• To obtain better understanding of the objectives
• To provide a basis for monitoring and controlling work

Important stages of effective planning:

• Statement of work
• Milestone schedule
• Action plan

Action Plan

A portion of a project plan detailing the activities, their schedules and resources,
including personnel.

To accomplish a specific project, number of major activities must be undertaken and

completed.

• make a list of these activities in general order

• breakdown into tasks and sub-tasks
CONFLICTS
Conflicts arise when people, working on the same project, have different ideas about
how to achieve project objectives.
Conflicts can occur at any level – any stage of the work.
PM is often described as “Conflict Manager”—Team members run the project.

PM needs to have the capability to handle conflicts – needs understanding of why

conflicts occur:
• What are the objectives?
• Can they be in conflict with other projects?
• Why do conflicts occur?
• How to resolve?
• Sense any indication / forecasting that conflicts arise

Plans to resolve conflicts

• Concede low intensity conflict if a high intensity conflict is expected later

• Different projects – if resource conflict, can be resolved by setting priority
based on customer opinion
• Resource allocation among different projects – internal meeting among
different PMs

Negotiation

Process through which two or more parties seek an acceptable rate of

exchange for items they own and control.

• Fulfillment of separate tasks

• Each unit activity should not have any conflict with other tasks
• Integration of all tasks
• Establish lateral relationship – decisions to be made horizontally

Need to optimize the outcome in terms of overall organizational goals.

Highest levels of negotiation skill are needed for:

• Partnering – use of subcontractors

• Chartering – use of inputs from functional units
• Change – management of changes once project is underway
NETWORK TECHNIQUES

PERT/CPM: Program evaluation and review techniques / Critical path method

PERT is for probabilistic activity time – more common to Research and Development
(R & D)

CPM is for deterministic activity time – controls both time and cost aspects of a
project – mainly for Construction and Production

CPM can be crashed or expedited at extra cost to speed up completion time

Critical path: path containing the activities that could not be delayed
Slack: activities that could be somewhat delayed without affecting project
completion time
Activity: specific task or set of tasks
Event: end state occurring at particular time
Network: arrangement of all activities in a project arrayed in logical sequence
Path: series of connected activities between any two events of a network

To build a network:
• Need to know all the activities comprise the project
• For each activity, need to know predecessor and/or successor
• Start and end time / date

Start Continue End

Two types of network can be drawn:

1. Activity on Node (AON)
2. Activity of Arrow (AOA)
Constructing a network

Task Predecessor Time Cost Person

a ---- 5
b ---- 4
c a 6
d b 2
e b 5
f c,d 8

Activity on Network

c
a f

Start d End
b

Activity on Arrow
c
2 4
a f

1 d
b 5

e
3

AOA sometimes need dummy; a

d
in comparison, AON is easier to draw
b
e.g.,
- a, b precede d c e
- a, b and c precede e
GANTT CHART

Introduced by Henry L. Gantt

• Another form to present the network
• Shows planned activities against horizontal time scale
• Easy to compare the actual performance against planned
• Help in expediting, sequencing and reallocating resources among tasks
• Keeping track as well

Main benefits of the Gantt chart are:

• Easy to construct
• Easily understandable
• Easy to maintain

Only problem: the chart is difficult to follow multiple activity paths in a complex
project with large set of activities

Comparison between Gantt chart and Network:

Gantt chart: powerful device for communication to senior management

Network: helpful in hand-on task of managing the project

Task Precedence Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

a ---- 5
b ---- 4
c a 6
d b 2
e b 5
f c, d 8
SOLVING NETWORK

Task Precedence Time

a ---- 20
b ---- 20
c ---- 10
d a 15
e b, c 10
f b, c 14
g b, c 4
h c 11
I g, h 18
j d, e 8

20 35
d
20 35
0 20 20 30
35 43
a e
j
0 20 25 35
35 43
0 0 0 20 20 34 43 43
Start b f End
0 0 1 21 29 43 43 43
24 42
0 10 20 24 i
c g 25 43
4 14 21 25

10 21
h
14 25

The critical path in the network is: a – d – j

All other activities have slack time – can be delayed without delaying the project.