3. Operations and Supply Chain
Management
Meaning of Operations Management:
• It is an area of business concerned with the production of
products and services.
• It involves the responsibility of ensuring that execution is
effective (Customer satisfaction) as well as efficient (Cost
effective)
• It is execution of process that converts input resources into
final output.
• Initially it was production process only later on services
processes evolved rapidly.
Input(Resources) Process Output(Goods and
Services)
Operations System
4. Definition of Operations Management
• APICS, The American Association for Operations
Management: “ the field of study that focuses on the
effectively planning, scheduling, use and control of
manufacturing or service organization through the
study of concepts from design engineering, industrial
engineering, MIS, QM, production management,
inventory management, accounting and other
functions as they affect the organization.”
• Production and Operations Management(POM) is
defined as the design, operations and improvement of
the transformation process, which converts the various
inputs into the desired outputs of products and
services.
5. 1900 1950
E-Commerce
SCM and TQM
Deming and
Juran
MRP
OB
Computation
Digital
Computer
OR in WW II
Inspection
Sampling
Quality
control charts
Scheduling
Scientific
Management,
Motion Study
Specialization
of labors
1737/031/2016 2000
4
6. 6
Scope of Operations Management
In earlier days of manufacturing, production
activity was handled by person alone
doing repetitive work the operators
hence
were
mastering some of the skills also rate of
production was less. To counter the quantum of
reduced production the division of labor came
into existence.
7. Scope of Operations Management
Activities Relating to Production System Design
• Production Engineering
• Tools, Jigs and Fixtures
• Design, Development and Installation of equipments.
Activities Relating to Analysis and Control of Activities
• Production Planning
• Production Control
• Quality Control
7
8. Objectives of Operations Management
• Right Quality
• Right Quantity
• Right Time
• Pre-Established Cost
• Machinery and Equipment
• Materials
• Manpower
• Manufacturing Services
Ultimate
Objectives
Intermediate
Objectives
8
10. Functions of Operations Management:
Case of Retail shop
Industrial Engineering
Work Measurement
Inventory Control
Quality Control
Production Planning
Production Control
Facilities Layout and Material Handling
Capacity Planning
Facilities Location
Method Study
Product Selection and Design
Production System Design
3/31/2016 9
11. E-War in India based on Operations
Management: The Caselet
July 2014
12. Operations Management: Systems
Perspective
Input (Labor,
Material, Capital)
Processing
- Process and Product Design
- Purchasing and Inventory Control
-Operations Planning and Control
Output
(Goods
and
Services)
Forecasting
Feedback
Quality Management Maintenance Management Process Improvement
13. Meaning and Definition of SCM
Supply Chain Management is management of a
network of interconnected businesses involved in the
ultimate provision of product and services packages
required by end customers. SCM deals with planning,
execution, control and monitoring of supply chain
activities with the objective of creating the value.
According to Christopher “ SCM is the management of
upstream and downstream relationship with suppliers
and customers to deliver superior customer value at
less cost to the supply chain as a whole.
14. Development of SCM: Physical
Distribution to Logistics to SCM
1900 1960 1980 1990
-
Operational activities
split among Marketing,
Manufacturing,
Finance.
Physical Distribution:
Warehousing+ MH+
Freight transportation
During 1970’s
operational
and cost
inefficiencies
Uncoordinated
functions into
a single cost
focused
integrated
department
Earlier
Logistics
Secondary
Function: -
Ranked After
Marketing,
Sales,
Production
now logistics
Management
conceived as
internal
strategic
advantage
SCM Phase:
Global
competition,
Emergence
of ICT,
Internal as
well as
external
competitive
advantage
15. Features of SCM
• Mutually sharing information: Making suppliers as a
partners by sharing non-core information. E.g. Sharing
of production plans, design of components.
• Focus on serving customers: Synergy and goal
congruence of supply chain members. E.g. Domino’s
Pizza.
• Integration: From Supplier’s suppliers to ultimate
customers. Integration can be accomplished through
CFT, in plant supplier personnel, third party services
provider. E.g. Courier tracking services.
• Mutually sharing channel risks and rewards: Sharing
of profit margins also sharing risk E.g. Obsolescence.
16. Scope of Supply Chain
Functional
Scope
All traditional
Business
Functions included
in the process of
SCM to get a
specific output.
Finance
+Marketing+
Operations+
Support Functions
Organizational
Scope
Inter firm
relationships are
relevant to the
participating firms
in the
implementation
and the process of
SCM
17. Objectives of SCM
Systems orientation: synergy due to cooperation
and coordination.
Minimizing the time: Reduces the time required
to convert orders into cash.
Service to the customer: Delivering Values.
Minimizing WIP: Reduces total WIP.
Improving Quality: Improving operations
Reducing logistics cost: Efficient supply chain
reduces overall logistics cost and improving value.
20. Functions of Supply Chain
Management
Strategic
• Supply chain Network Design
• Strategic partnerships
• IT Infrastructure
• Make or Buy decisions
Tactical
• Purchasing Decisions
• Inventory Decisions
• Transportation Strategy
• Production related decisions
Operational
• Daily Production and distribution planning
• Production scheduling
• Inbound and Outbound Operations
• Constraints Management
21. Issues on Operations and Supply Chain
Functions
1. Impact of Global Competition: Global view to gain
competitive advantage. How companies gone global:
Transportation & Communication (Internet), Reduced
Financial Regulations(FDI),Increased demand for
imported goods and services (Thyrocare labs)
2. Technological Change: Disruptive changes ( Mobile
phones in 2000 and 2014)
3. Ethical and Environmental: Some countries are more
concerned about these issues. Ethical treatment
includes bribery, conflicts of interests, discrimination
against minorities and women etc. E.g. Reliance Vs.
Tata Environmental issues includes quality of natural
resources, quality of life etc. E.g. Areva in Jaitapur,
Hybrid cars.
22. Challenges in Operations Management
Competitive Pressure due to economic Reforms
Falling Prices
Shrinking Delivery Quote
Build to Order Requirements
Growing Customer Expectation
23. Quality Revolution
• Fitness for use or purpose is a definition of quality that
evaluates how well product perform for its intended use.-
Joseph Juran (24 Dec. 1904-2008)
• Quality should be aimed at the needs of the customers
present and future.- Dr.Edwards Deming (1900-1993)
• Quality as an umbrella concept which integrates whole
spectrum of all improvement initiatives such as service
enhancement(Same day delivery), cost reduction (Tata
Nano), value analysis(Value stream mapping, E.g.
Smartphone applications)
• Quality is positioned as an input which accelerates
business improvements by shifting focus from Inspection
to quality control.
24. Definition of Quality from various
perspectives
Customers View: Meeting the requirements of the
customers ultimate goal of any business.
Quality =Maximum Satisfaction (Wants and Needs)
External customers and Internal customers concept
(Traditional business functions)
Customers are ultimate judge of quality.
Manufactures View: Supply based and concerned with
engineering and manufacturing practices.
• Weight of Sugar specification could be 500 grams with
tolerance of 10 gram (Applicable to Gold/Silver?)
25. Definition of Quality from various
perspectives
Transcendent View: People learn to recognize
quality through the experience gained from
repeated exposure. Decision about the quality of
goods and services after used/consumed. E.g.
using transportation medium Volvo/MSRTC
Product View: Attributes of the product must have
something in terms of attributes that other
similar and competing products do not have. E.g.
RAM of the Computer
• A Quality product must be a market differentiator
and customers take pride in owning it.
26. Total Quality Management
• Total (Everyone) + Quality (Requirements Fulfilled)+
Management (Commitment) Customer driven QM.
• Fosters continuous improvement in an organization.
• TQM philosophy stresses a systematic integrated,
consistent, organization wide perspective involving
everyone & everything.
• TQM is totally integrated efforts for gaining
competitive advantage by continuously improving
every facet of an organization.
• Total quality can be viewed as a strategy itself as it
focuses on cost as well as differentiation.
29. Features of TQM
4C’s of
TQM
Commitment
Competence
Communica
tion
Continuous
Improvement
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6
29
Satisfying
Customers
Systems/
Processes
People
Improvement
Tools
Innovation
30. Principles of Total Quality
• Customer Focus
• Leadership
• Employee Involvement
• Process Approach
• Systems Approach
• Continual Improvement
• Fact based decision making
• Mutually beneficial supplier relationships
31. Benefits of TQM
• Creates good corporate culture: TQM philosophy focus on
developing a culture that advocates total commitment to
customer satisfaction through continuous improvement.
• Better Employee Relations: Highly involved and motivated
workforce. How to Measure it? (Employee satisfaction,
attendance, retention rate, OHSAS, No. of suggestions
made {Japanese- Transparency: suggestion box})
• Increased Profitability: Market share can be increased
through improved quality/ value which in turn increases
Profitability. Also measured by sales per sales person, sales
made by each shop, return on assets etc.
• Improves operational performance: Quality and the costs
by mapping reliability, quality costs, adherence to delivery
schedules, defects and defectives, Inventory turnover etc.
32. Obstacles to TQM
1
• Lack of Top Management Commitment
2
• Should be Taken seriously by everyone.
3
• Removal of functional silos
4
• Lack of structure for TQM activities.
5
• Difficulty in implementation (Clear Understanding)
6
• Awards E.g. ISO 9000 should be a start point for quality
33. Quality Tools
5 S KANBAN
KAIZEN LEAN
FISHBONE
DIAGRAM
QUALITY
CIRCLE
34. Lean Philosophy
Value=Utility/Cost
Eg. Smart phone for youth
and basic phone for
adults.
Lean Management=
Identify the wastes
(Muda) and eliminate in
order to map value
added activities
involved in the process.
37. Operations Process
• Process is the mechanism behind transforming
inputs into output.
• A Process is an arrangement of resources that
produces some mixture of goods and services.
• Operation=Process 1+Process2 +…+Process N
• Each Process is an internal supplier and
internal customer for other processes.
• Satisfying Internal customer will lead to
satisfying ultimate consumer.
39. Operations Process: Inputs
Planning
Involves forecasting, identification, alternatives,
selection . Etc. (Itself is a Process has I/P- Forecasting
models, decision tree, operations research models)
Technology
Involves attainment, up gradation, adaptation,
improvement of technology. (R & D , Tech Ma Dept. uses
inputs such as technology forecasting, PLC etc.)
Time
Very critical while making business promise, E.g. Same
day delivery. (Processing time, lead time, waiting time,
Schedule of delivery Etc.)
40. Transformation Process
It is the conversion process that converts inputs
into output. Management should make these
as per the
The factors
processes efficient and effective
requirement to maximize profits.
influencing processors are:
• Location: At which conversion processes are
carried out. Eg. Plant, here plant location, layout,
buildings, plant facilities etc. factors affects the
conversion process.
• MHS: Selection, Capacity, layout, accounting and
replacement.
41. Transformation Process
• Product-Mix: The primary concern of the
processors is the product-mix. Decisions on
product mix are influenced by market potential ,
capacity, competition. Managers uses various
tools to determine optimum product mix. E.g.
Operations research tools.
• Cost related to labor, inventory, production: To
calculate labor cost method study, work study
techniques are used, production costs are
associated with production cost & overheads.
Inventory cost are highest contributor to product
cost (60% +) hence tight control is essential.
42. Outputs
• It is the end result in terms finished goods or
consumable services for immediate customers
and then it processed into final finished form. E.g.
concept of internal customer in hotels.
• Some factors influence output are:
Price
Delivery
Quality
Profitability
43. Transformation Process for Manufacturer
Inputs
Material, equipments, labor, technology
Transformation
Process
Quality of inputs monitored
Random Disturbances: Strikes, riots,
power failure, environment.
Quality of outputs monitored
Outputs
Machines, chemicals, consumer goods, scrap
Feedback Mechanism: Customer satisfaction survey, Increase in demand, customer complaints
44. Volume Variety Flow
Volume:
• Volume refers to the average quantity of
products produced in the manufacturing
system.
• Low volume: Buildings, Film production agency.
• Medium Volume: Automobile, Auto component
• High Volume: Pharma, FMCG etc.
45. Volume Variety Flow
Variety:
• No. of alternatives and variants of each product
that are produced in a manufacturing systems.
Variants of Samsung grand, neo etc. similarly for
services hotels improves variety of offerings with
respect to increasing popularity.
• Variety in various process in the system.
• Planning and scheduling
complex on account of
can become more
these choices in the
operating system.
46. Volume Variety Flow
Flow:
• Flow
phenomenon of transformation process,
indicates the nature and intensity of
and
provides an understanding of how materials gets
converted into finished goods stage.
• Understanding flow of process provides clues for
production planning and control involved in
complex operation processes.
• E.g. Flow involved in operations of making the
tea, flow involved in Supply Chain of Thyrocare.
47. Volume Variety Flow
Volume-Variety Relationship:
• Volume high, fewer varieties of products.
• Wide variety of flow and services, volume is low.
• Volume and variety affects flow patterns in a
manufacturing system, process design choices
available to an operations manager by studying
flow patterns and choosing the optimum
pattern.
48. Types of processes and operations
system
Continuous Flow System
• Assembly lines
• Mass Production
• Continuous Flow
– Synthetic Production
– Analytic Production
Intermittent flow system
• Project
• Batch Production
• Job/Job shop production
3/31/2016 46
Video:
https://www.youtube.com/watch?v=m62whN6CWBM
49. Process Product Matrix
Not Economical
Not Flexible
The Product-Process Matrix was first introduced by Robert Hayes and Steven
Wheelwright in the Harvard Business Review in 1979.
50. Operations Vs. Supply Chain
Discussion on LinkedIn forum:
https://www.linkedin.com/groups/Is-Supply-
Chain-part-Operations-
2060573.S.5954449886039597060?view=&ite
m=5954449886039597060&type=member&gi
d=2060573&trk=eml-b2_anet_digest-hero-1-
hero-disc-disc-
0&midToken=AQFNcGJJp4Qm1w&fromEmail=
fromEmail&ut=1v0qUDP5l4gCA1
SCM is more wider than operations Management
51. Facility Location
• The goal is to choose a
location that minimizes costs
while increasing operational
efficiencies and product
quality.
• To accomplish this goal,
management must consider
such regional costs as land,
construction, labor, local
taxes, energy, and local living
standards.
• In addition, management
must consider whether the
local labor pool has the skills
that the firm needs.
52. Objectives of Facility Layout
• A facility layout problem may have many
objectives. In the context of manufacturing
plants, minimizing Material handling costs is
the most common one.
• Includes efficient utilization of labor and
space. (Per sq. ft area of plant)
• Eliminate waste or redundant movement and
bottlenecks.(Weakest element in the link, Eg.
Chain, CPM-PERT in projects)
53. • Facilitate: Organization structure (According to
trade), communication and interaction between
workers, manufacturing process and visual
control( Andon signals, visual factory)
• Provide: convenience, safety and comfort of the
employees, flexibility to adapt to changing
conditions( Change in technology)
• Minimize: Manufacturing cycle time or
customer flow time, accidents, investment
(Unidirectional flow and lesser cross trafficking
and linkages)
Objectives of Facility Layout
54. Importance of Facility Layout
• Economical MHS: Material handling is major
contributor for higher manufacturing costs.
Minimization of long distance movements best
handling principle is no handling.
• Improved quality control: Specific quality control
and inspection check required for particular
operations. E.g. operation specific for drilling
operation quality check in terms of measuring the
bore size.
• Better Supervision: Better/ full view of the plant
and better control over manpower handling.
55. Importance of Facility Layout
• Effective use of floor area: every sq. cm area
is to be utilized in such a manner which will
maximize labor utilization (calculation of
every single minute spent Work/Method study
techniques) by multiple operations handled
by them at a time.
• Minimum equipment investment: Planned
machine balance and loading and location ( in
order to minimize the MHS).
56. Factors Affecting facility layout changes
Layout
Changes
Management
Policy
Manufacturing
process
Nature of
product
Volume of
Production
Type of
equipment and
infrastructure
Arrangement
of MHS
57. Basic types of Layouts
A. Process Layout
A. Used in a job shop for a low volume, customized
products
B. Product Layout
A. Used in a flow shop for a high volume, standard
products
60. Basic Types of Layouts
C. Fixed Position Layout
C. Used in projects for large products e.g., airplanes,
ships and rockets
D. Cellular layouts
C. A cell contains a group of machines dedicated for a
group of similar parts
D. Suitable for producing a wide variety parts in moderate
volume
Hybrid or Combined Layout: Combination of layouts.
63. 61
Factors T y p e of Layout
F i x e d Position P r o d u c t (Line) Cellular ( G T ) P r o c e s s (Functional)
1. T yp e of
O p e r a t io n
S h i p building,
L a r g e scale
project,
Construction or
Industrial project
C o n t in u o u s a n d
repetitive
S m a l l to m e d i u m
b a t c h
J o b or s m a ll b a t c h
2.
A r r a n g e m e n t of
facilities
Facilities m o v e s to
a f ix e d product/
project
P l a c e d a lo n g the
line of product f lo w
S im ila r parts a r e
g r o u p e d in part-
f am ily. F o r e a c h
part-f am ily o n e
m a c h i n e cells is
f o r m e d wh ic h
contains all
facilities n e e d e d b y
corresponding part-
f am ily.
G r o u p e d b y
specialty
3. C o s t of
layout
M o d e r a t e to l o w M o d e r a t e to h ig h M o d e r a t e to h ig h M o d e r a t e to l o w
4. Material
handling
M o d e r a t e L e s s L e s s H i g h
5. Material
travel
Variable p a t h F i x e d p a t h F i x e d p a t h Variable p a t h
6.
Utilization of
facilities
M o d e r a t e V e r y h ig h H i g h L o w
7.
O p e r a t in g facilities
G e n e r a l p u r p o s e Special p u r p o s e Special p u r p o s e G e n e r a l p u r p o s e
8.
E m p l o ye e skill
Unskilled/skilled Unsk illed Multi-skilled a s o n e
operator m a y
h a n d le m o r e t h a n
o n e operation
Sk illed
9. ( Q / P )
ratio : Q is
production
Quantit y P is
n u m b e r of products
or variety
N o r m a l l y I a s
single product
production
L a r g e ( Q / P ) M o d e r a t e ( Q / P ) S m a l l ( Q / P )
3/3h1t/t2p0:/1/6www.transtutors.com/homework-help/industrial-management/plant-layout/comparison-of-plant-
layouts.aspx
64. Activity Relationship Chart: Beyond the syllabus
• An activity relationship chart is a graphical tool
used to represent importance of locating pairs
of operations near each other.
• Importance is described using letter codes
defined below:
A - absolutely necessary
E- especially important
I- important
O - ordinarily important
U - unimportant
X- undesirable
65. Production area
Office rooms
Storage
Dock area
Locker room
Tool room
A A
A
O
O
U
O
O
U
U
U
U
E
X
I
Activity Relationship Chart
Example: It’s ordinarily important
to locate office rooms near
loading/unloading area
66. Services System Design
• Designing Service system is a creative process.
It is the way in service concept and service
package are provided to the consumer. E.g.
Thyrocare pathology labs or visit to the BBQ.
(Attempt to give special / standardized
Experience to the customer)
• The service delivery system is dictated by and
defined by the service concept includes core
service (food), supporting good and services
(ambience), facilitating goods and services
3/31
e
/20
x
16
perience
(billing), role of staff (waiter), consumer
64
67. Service System Design
• Two dimensions that affects the design of an
appropriate delivery system are as follows:
1. Characteristic of the Market:
Technical
comprises in
Dimension: What exactly
services (specification by
thyrocare labs related to blood sample)
Business Dimension: How operations decide
to provide a service (No. of vehicles to handle
the cargo)+ criteria to get considered by
customers (Cost and Service levels)related
3 PL services provided.
3/31t
/2o
016 65
68. Service System Design
• Two dimensions that affects the design of an
appropriate delivery system are as follows:
2. Service Complexity: The complexity of a
service itself will directly impacts the number
of steps to complete it. Some services are
simple in nature e.g. Experience of eating food
in canteen and some are very complex
processes. E.g. Experience of eating food in
Five star hotel.
3/31/2016 66
69. Service System Design Matrix
67
Low
High
Labor
Intensity
Low
High
Professional
Service
Service Shop
Mass
Service
Doctor,
FinancialAnalyst
Customization
College,
Hospitals
Service
Factory
Banking
Trucking
Designing service system is function of Location, facility design
and layout, Quality, equipment selection, service capacity etc.
one of the major factor is Frequency of the contact.
3/31/2016
70. Factors involved in Service System Design
Service
System
Design
Technology/
People Mix
Complexity
of Services
Categories
of Services
Volumes
Order
winningvs.
Order
qualifying
Nature of
the services
delivered
71. Design of Services System
Two types of design:
A. OverallDesign
The Market: External factors that affects
services. Eg. Toy Library in emerging zone.
The Services Encounter (Where and what is
delivered - setting expectations) and
Experience(The reality)
Retention. (Repetitively providing same
experience without fail)
72. Design of Services System
Two types of design:
B. Detailed Design: Two principal phases are
1. Back office or front office: Canteen
2. The delivery system
73. Elements of Services System Design
• Facility layout and locations
• Servicescape
• Service process and Design
• Technology and IT support
• Organizational Support
Stages in services delivery design?
74. Tools for Designing Service System
• Services Blueprinting: Designing Services That
Deliver written by G. Lynn Shostack in Jan
1984 issue.
• The blueprint is most useful to managers
developing new services, others can apply the
same principles to test the quality of services
for which they contract/ existing.
• The issues
Identifying
involved
processes
are
B. Isolating the
points C. Establishing the time frame
disused as A.
fail
D
.Analyzing the Profitability
78. Tools for Designing Service System
• QFD: Quality Function Deployment is, a focused
methodology for carefully listening to the voice of
the customer and then effectively responding to
those needs and expectations. It has four phases
namely Product Planning, Part Development, Process
Planning, Production Planning.
• The house of quality is a kind of conceptual map that
provides the means for inter-functional planning and
communications.
• People with different problems and responsibilities
can thrash out design priorities while referring to
patterns of evidence on the house’s grid.
79. House Of Quality
Technical Descriptors
(Voice of the organization)
Prioritized Technical
Descriptors
Interrelationship
between
Technical Descriptors
Customer
Requirement
s
(Voice
of
the
Customer)
Prioritized
Customer
Requirements
Relationship between
Requirements and
Descriptors
QFD is converting the customers requirement into technical specification
80. Tools for Designing Service System
• Servicescape: Concept developed by Booms and
Bitner to emphasize the impact of the physical
environment in which service process takes place. It
includes facilities exterior and interior environment.
E.g. Eating the food in McDonalds and local burger
shop. Framework follows SOR Theory:
1.Stimulus=Physical Evidence
2. Organisms=Customers and employee’s response
to stimuli
3.Response=
depending on
Changed/ unchanged
customer and employees
behavior
internal
reactions to physical evidence.
3/31/2016
Same as landscape development
77
81. Tools for Designing Service System
• Waiting line analysis: Customer enters into
the system wait in for queue for next available
server as per queue discipline customer is
selected for service and customer leaves the
system. System should be such that
discourage customers should be minimized.
E.g. Waiting in restaurants
3/31/2016 78
Source: http://www.ini740.com/F14/lectures/class_8.html
84. Why do we Forecast?
• Dynamic
control
and Complex Environments: No
over market forces and product
• Short term fluctuations in production: To
avoid knee-jerk effect. E.g. Strikes of
demand. E.g. FMCG products.
transports
• Better Materials Management: Inventory
optimization can be achieved. E.g. Restaurant
3/31/s
20t
16
ocking of grains.
purchasing manager will use forecast for
82
85. Why do we Forecast?
• Rationalized manpower decisions: Resource
allocation can be improved with the use of
forecasting tools. E.g. Event Management
• Basis for planning and scheduling: Planning
and scheduling on rational basis. E.g.
Purchasing decisions for seasonal business.
• Strategic Decisions: Unfolding future is a key
factor in decision making. E.g. Purchasing of
oil barrels on long term contract.
89. Forecasting as a planning tool
• Every organization engages in annual planning
exercise wherein HoD’s of
departments (Marketing,
various
Finance,
Production, Materials etc.) share the data as
an input.
• Managerial decision making is often
complicated due to an element of uncertainty
in the variables affecting the decision making
process. E.g. Whenever the restaurant opens
start offering new cuisine the demand for its
3/31/
p
201
r
6
oduct is not known with certainty. 87
90. Forecasting as a planning tool
• Forecasts are estimates of the timing and
magnitude of the occurrence of future event.
• Since these decisions involves cash flow and
time, accurate estimates of the future events
for which decision has been made is crucial.
• Forecasting is the branch of (OM) operations
management that addresses these issues and
provides the manager with a set of tools and
techninuques for Estimation process.
91. Functions of Forecasting
An Estimation Tool.
A way of addressing complex and uncertain
environment surrounding business decision
making.
A tool for predicting events related to
operations planning and control.
A vital pre-requisite for planning process in
organization.
92. Design of Forecasting Systems
Develop the forecasting logic by identifying the
purpose, data and models to be used.
Establish control mechanisms to obtain reliable
forecasts
Incorporate managerial consideration in using the
forecasting system.
94. Accuracy of Forecasts
Forecasting model predicted the demand as
2500 units.
Case I: Actual demand 3500 Units- Severe
Shortages , Last minute rescheduling of
production, rush purchasing and expediting
deliveries.
Case II: Actual demand 1000 Units- Excessive
build up of raw materials and non-moving
inventory.
95. Accuracy of Forecasts
Forecast Error (FE): Forecast error for period t
έi = Dt-Ft ( Period 1: 100-50, Period 2: 100-145)
Positive value of έi will indicate underestimation
of demand and vice versa.
Sum of errors: Sum of errors during the period
of consideration. Even when system is not
performing well SFE value will be near to 0.
SFE= Σ έi (limits for i is from 1 to n)
96. Accuracy of Forecasts
Mean Absolute Deviation: (MAD) Take the
absolute value of έt and average it over
the n periods to get alternate and better
picture of the forecast.
Mean Absolute % error : (MAPE) Each
absolute error term could be expressed
as a percentage of the demand and new
measure computed.
97. Accuracy of Forecasts
Mean squared error: (MSE) This measure
is obtained by taking mean of the
squares of the error terms.
Tracking Signal :(TS) It is the ratio of SFE
and MAD.
No numerical is expected on the topic of
forecasting. Refer to Excel Link
98. Planning Hierarchies in Operations
Source: Operations Management: Theory and Practice, B.Mahadevan , Page
Number 430
99. Sources of Data
• Forecasting is often only as good as the
quality and quantity of data available.
• Extrapolative methods of forecasting make
use of past data to prepare future estimates.
Eg. Analyzing the demand pattern.
• Causal methods of forecasting analyze the
data from the view point of cause and effect
relationship. E.g. increase in repo rate and
effect on stock prices.
100. Sources of Data
Sources of data for forecasting are:
• Sales Force Estimates: Field executives will
give input on actual/ factual demand.
• Point of sales (POS) data: ITES and bar-coding
enables organizations e.g. Wal-Mart, Big
Bazaar to capture real time data.
• Forecast from supply chain partners: Supply
chain partners provide critical info on market
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ntiments and projections etc.
trends, competitors performance, market
98
101. Sources of Data
Sources of data for forecasting are:
• Trade Industry association/ journals: The
journals provides syndicated and researched
data on industry trends and forecasts.
http://www.asa.in/pdfs/surveys-reports/auto-
and-auto-ancillaries-sector-in-india.pdf
• B2B Portals / Market places: Digital versions
of Trade Industry association publications/
journals.
http://indiaautoreport.com/category/forecast
-update/
3/31/2016 99
102. 102
Sources of Data
Sources of data for forecasting are:
• Economic Surveys and Indicators: E.g. Mobile
data traffic can
research based
be forecasted with
on TRAI and
joint
Cisco
http://www.cisco.com/assets/sol/sp/vni/forec
ast_highlights_mobile/index.html
• Subjective Knowledge: Experience and
knowledge of senior management should be
used as insights for planning
103. 103
Capacity Planning
(No numerical is expected)
• Demand=250
• Hours/ unit of production= 100
• Demand (hours)=250 X100 =25000
• No. of Working days=23
• No. of Workers =125
• Capacity Available= 125 X 23 x 8 =23000
• Supply –Demand=23000-25000=I -2000 I
• Calculate for Q= 350, Q=100.
104. 104
Aggregate Production Planning
Aggregate Production Planning (APP)
decisions deals with the amount of resources
to be committed, the rate at which goods and
services need to be produced during the
period, the inventory to be carried forward
form one period to the next.
APP exercise is done in an organizations to
match the demand with the supply on a
period by period basis in a cost effective
manner
105. 105
The Need for Aggregate Production
Planning
• Demand Fluctuations
• Capacity Fluctuations
• Difficulty level in altering production rates
• Benefits of multi period Planning
Resources Production Inventory Aggregate
June to
September
100 Operators
one shift only
100
Engines/Days
Carry 5% Manpower?
October to
January
100 Operators
two shifts
150 Engines/
Day
Carry 10% Inventory?
February to May 100
Three Shifts
240 Engines/
Day
Carry 20% Production?
106. Framework for APP Exercise
Alternatives to managing demand: Reservation of
capacity, Influence Demand
106
107. 107
Alternatives for Managing supply
• Inventory based alternatives:
Build Inventory
Back log / Shortage
• Capacity adjustments:
Hiring/ Lay off of workers
Varying shifts
Varying Working Hours
• Capacity augmentation:
Subcontract/ Outsource
De-bottleneck
Add new capacity
108. Basic strategies for APP Exercise
Beyond the syllabus
Do not disturb
existing production
system
Mismatch is addressed
by variety of capacity
related alternatives
108
109. Master Production Schedule
Master Production Schedule (MPS) is the
process by which disaggregation of varieties is
done.
At APP level forecast demand is normally
taken for the purpose of estimating the
capacity required however actual orders when
received gives better visibility for planning.
MPS uses actual and most recent information
while revisiting the planning problem and
sures specific resources available.
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n
6 107
110. 110
Master Production Schedule
As customers get amended and/or cancelled,
marketing dept. is interested to know scope
for accepting new enquiries and delivery
commitment.
MPS module serves the important purpose of
computing capacity available to promise.
MPS determines what needs to be ultimately
produced and not what is demanded.
111. 111
Master Production Schedule
First Stage: Update the projected demand
based on earlier forecast and current market
information.
Second Stage: Disaggregation of product
information and relating it to specific material
and capacity requirements.
Based on this, plans are re-worked in iterations
and executable/ viable plan is prepared.
112. Product Structure
Level 0
Level 1
Level 2
Level 3
110
Can you discuss levels of Car, Mobile as a product?
Levels of product Bill of Materials
114. Dependant Demand
• The Product structure depicts the dependency
relationships among various items that make
up the final product. E.g. Demand for pens is
independent demand while demand for refills
required for a pen is dependant demand.
• Due to causal relationship with other items in
the system demand estimation can be done
through simple planning methodologies. Due
to uncertainty independent demand items
can not be made available to 100% service
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115. 115
MRP
• Material requirement planning is a structured
approach
launching
that develops
orders for materials
manufacturing system and ensures
schedules for
in any
the
availability of these at right time and at the
right place.
116. 116
CRP
• Capacity requirement planning is a technique
that applies the MRP logic to address the
capacity issues in an organization. ( Refer slide
of capacity planning)
• Inputs for this are capacity status, process
plans, planned orders released by MRP.
• Outcome of this activity is loading schedule
for each resource.
117. 117
DRP
• DRP exercise will help organizations and their
supply chain partners to jointly plan and
reduce investment in the supply chain, they
will be in position to respond to changes in
the demand (surges and drops) and have a
cost effective operations.
118. 118
MRP II
• MRP II (1980) is extended version of MRP and
consists of different modules related to
different business functions.
Refer the topic evolution of SCM
123. 123
What is Inventory
• Any idle resource that can be put to some
future use. (Lower or Higher???)
• Inventory is nothing but stock of fixed and
consumable items required for operations,
aggregate of these items which are either held
for sale or yet to be consumed in production
process.
• Inventory looked by Management- Marketing:
High, Finance::Low, Production: Enough
Stores::Low (Why?)
124. 124
High or Low Inventory?
Encouraging Factors
• Minimize Backorders
• Demand Fluctuations
• Economies of Scale
• Discounts
• Purchase Costs
• Transportation
• Material Handling
• Economies of Scope
Discouraging Factors
• Seasonal Goods
• Fluctuations
• Carrying Costs
• Shorter PLC
• Obsolescence
• Theft
• Storage Space
125. 125
Inventory Planning
Continuous Demand
• Independent demand items
are continuous demand
items. Eg. Bike, Pen
• Continuous demand for an
item will require constant
availability of items and
•
periodic replenishments
Non availability will lead to
backorders
goodwill,
, loss of
extra cost for
delivery commitments
• In
Intermittent Demand
case of dependant
demand items the demand is
always derived. Eg. No. of
engines required pr month.
• Definite demand for spare
parts is to determined on
some basis. Eg. Tail lamp.
• Hence planning
independent demand
for
items
should include some cushion
for handling uncertainty
126. Why to Control Inventory
ROI= Profit
Fixed Assets+ Current Assets (CA)
CA :Materials+ Bills Receivable+ Cash in hand
Materials cost is are almost 60-70% of total
cost, hence Inventory is called as a gold mine
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127. 127
Types of Inventory
• Raw Materials
• Semi-Finished Goods
• Work in Process
• Finished Goods
• Tools
• Consumable
• Machinery Spares
128. 128
Types of Inventory
5 Basic types of inventory are:
1. Cyclic Inventory: Cyclic inventory goes
through a saw toothed pattern each cycle
begins with replenishment and ends with
complete depletion of the inventory.
2. Decoupling Inventory: Based on workstation
capabilities , resource availability and
bottlenecks; buffer inventory is created at
every process to enable decentralized
planning and control of operations.
129. 129
Types of Inventory
5 Basic types of inventory are:
3.Seasonal Inventory: Organizations carry
inventory to meet fluctuations in demand.
4.Pipeline Inventory: Inventory carried because
of non-zero lead time for order, transport and
receipt of material from suppliers.
5.Safety Stock: carrying average inventory will
take care of demand 50% of the time
(Stochastic demand- Probability Distribution)
130. Inventory Costs
Inventory Carrying Cost:
• All the cost element
involved in storage and
warehousing activities.
• Eg. Cost of warehousing,
Salary of the stores.
• It is denoted as Cc and
has linear
graphically it
relationship with level of
inventory held.
= Cc Q/2
Cost of ordering:
• Many of the ordering costs
are fixed in nature hence
larger order quantity
require fewer orders.
• Eg. Cost
supplier search till
generation, Travel
associated with
PO
to
supplier and communicate,
Salaries of Purchase officer.
• It is denoted as Co
=CO (D/Q)
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131. 120
Inventory Costs
• Setup Cost: Whenever the component is
produced in house. The time taken in setting
up the machine, consumables and tools used
for this purpose are major elements of the
setup cost. Denoted by Co (Similar as ordering
cost concept of internal supplier)
• Cost of Shortage: Because of sudden surge in
demand, Lot is rejected delivery schedules not
met by the customers, shortage arises. Similar
as opportunity costs. Denoted by Cs
132. 130
EOQ Model
• There are two costs involved when an item is
procured and stored.
I. Ordering Cost: Procuring activity controlled
by no. of orders/year/item.
II. Carrying costs: Storage activity cost
proportionate to quantity received.
• It can be seen that these two costs oppose
each other. It is essential to find out quantity
which balances these two costs such quantity
is called as EOQ.
134. 134
Assumptions in Basic EOQ model
• The demand is known with certainty and is
continuous over time.
• There is an instantaneous replenishment of items.
• The items are sourced from external suppliers.
• There are no restriction on quantity ordered.
• There are no preferred item quantities for the
items
• No price discounts is offered when order size is
large.
135. 135
Following notations are used
• Q = Quantity ordered each time
• Q* = Optimum quantity of inventory ordered
for minimum total cost= EOQ
• D = Annual demand of parts (in unit)
• C/Cu = Cost of inventory per unit item
• CC = Carrying cost per unit of individual item,
expressed as a percentage of unit cost
• CO = Ordering, set-up or procurement cost per
order
• TC = Total annual costs
136. 136
Formula for EOQ
• Carrying Cost =(Q/2) X Cc
Average inventory carried during the year = Q +
O/2 = Q/2
•Ordering Cost= (D X Co)/ Q
No. of orders per year = D/Q
In ideal case Co=Cc
D X Co = Q X Cc
Q 2
137. Formula for EOQ
For total cost minimization;
DCO ( - 1/q2) + cc/2 = 0
cc/2 DCo/q2
Or,
Or,
Or, Q = √2DCo/cc
d2/dq2 (TC) = COD ( - -2/qs ) =2CoD/q3 (a positive quantity)
For total inventory cost minimization, we have defined
Q as Q* and we will call it as economic order quantity
EOQ= Q* = √2DCo/cc
TC= D X Co + Q X Cc + D X Cu………. (Cu= Per unit Cost)
Q 2
3/31/2016 135
138. 138
Example
Q. 1 A grocery store sells 10 cases of Green
Tea each week. Each case costs Rs.80. The cost
of ordering is Rs.10 per order. Holding or
carrying cost is estimated to be 30% of the
inventory value per year.
I. How often is the Green Tea ordered?
II. Calculate the EOQ
139. 139
Solution
D = 520 (Cases/Year)…… (10 cases/week * 52 weeks/year)
Co= Rs 10 (per order)
Cc= 30% (or 0.30) of Cu (per unit/annum)= .30 X 80=24
Cu = Rs 80 percase
EOQ=√2 Co D/Cc=√2*10*520/24
= 20.8= 21cases per order (How Much Decision)
How often is the coffee ordered? (When Decision)
520/21 » 25 orders per year.
Or every 15 days ( 365/25 =15 )
140. 140
Example
Annual Demand for the item (D)=2500 Boxes
No. of Working Days=250
Average Daily Demand=2500/250 = 10 Boxes
Unit Cost of the item= Rs. 750
Inventory Carrying Cost Cc=18% per unit/ annum
Cc= .18 X 750 = 135 per unit per year
Ordering Cost Co= Rs. 1080 per order
141. 141
Solution
• The How Much decision
Q* = √2DCo/Cc
=√2 X 1080 X2500 / 135 =200 Boxes
No. of orders placed
= D/ Q = 2500 /200 = 12.5 = Aprox. 13
• The When Decision
Time between orders= Q/D = 200/2500 = 0.08
=> 0.08 X 250 = 20 Days
142. 140
Solution
Total Cost of the Plan
TC= D X Co + Q X Cc + D X Cu
Q 2
=2500 X 1080 / 200 + 200/2 X 135 + 2500 X 750
= 13500+ 13500 + 1875000
=Rs. 1902000
143. 143
EOQ with Quantity Discounts
• Annual Demand = 5000 units
• Ordering cost = $49
• Annual carrying charge = 20%
• Unit price schedule:
Quantity Unit Price
0 to 999 $5.00
1000 to 1999 $4.80
2000 and over $4.75
146. 146
Inventory Control System
The Continuous Review System (Q System):
Also called as two-bin system. As the material
getting consumed the larger bin is emptied
first as soon as larger bin is empty, order is
placed with the supplier for predetermined
quantity. During lead time material from
smaller bin (equal to reorder point) is
consumed and during replenishment smaller
bin is filled first.
147. Inventory Control System
The Periodic Review System (P System):
• After every specific time interval inventory is
reviewed and replenished up to certain level.
• The P-system does not have an economic order
quantity since it varies according to demand.
• The P-system requires a larger safety stock for
the same service level because protection from
shortage for longer period of time.
• The P system is responsive to demand and
enables ordering multiple items from the same
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148. Order up to level
148
(P System):
(Q System):
149. 149
Selective Control of Inventory
• Selective control is essential because uniform
control is A. Expensive B. Gives diffused results.
• Selective control means variation in method of
control from item to item based on selective
basis.
Two major categories other than ABC analysis:
I. Procurement Basis: VED, SDE, SOS, GOLF
II. Storage Basis: HML, FSN, XYZ
156. Step IV : Draw Pareto Chart
•The boundary between class A
and class B and Similarly Class B
and Class C might not be as
sharply defined.
•The purpose of ABC classification
is to ensure that purchasing dept.
use resources to maximum
efficiency by concentrating on
those items that have the greatest
potential savings.
•Ideal ratio is 70% consumption
value by 5-10% of items are called
as A class items. Practically it
varies based on inventory policy of
an organization.
156
161. 161
Four forces of that drives SCM
Integrative Management
1. Collaboration: Sharing of operating information,
technology and risks as ways to increase
competitiveness. Collaborative Competitiveness
2. Enterprise Extension: Information Sharing
paradigm and process specialization paradigm
3.Integrated Services Providers: 3PL(Assets are
owned) and 4 PL (Non asset based)
3PL means third party logistics= Transportation+
Warehousing
162. 160
Four forces of that drives SCM
Responsiveness
1. Push (Anticipatory) Business Model
2. Pull (Responsive) Business Model
Forecast Buy Material Manufacture Warehouse Sell Deliver
Sell Buy Material Manufacture Deliver
163. 163
Four forces of that drives SCM
Responsiveness
3. Postponement: It is a business strategy that
maximizes possible benefits and minimizes
risks by delaying further investment into the
product. Form postponement – Eg. Fitting
accessories to the car. Logistics
postponement- Eg. packaging of sugar at the
supermall that differentiates the product.
164. 164
Four forces of that drives SCM
Globalization: With the emergence of global
Businesses complexity,
Uncertainty,
Risks improved drastically.
165. Four forces of that drives SCM
Financial Sophistication
1. Cash to Cash Conversion (CCC)
CCC= Days Outstanding of following factors
(Inventory + Sales-Payable)
Cash in purchasing inventory to Cash received
upon selling the inventory.
2. Dwell Time Minimization: If assets are sitting
idle instead adding value to SCM processes.
3. Free Cash Spin: Minimize the cash committed to
3/31/201
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he SCM performance. Eg. Inventory 163
170. 170
Customer Service
7 R’s of Customer Service:
I. Product
II. Price
III. Place
IV. Quantity
V. Quality
VI. Customer
VII.Condition
171. Customer Satisfaction
Measuring quality in services set up is inherently
complex and heterogeneous.
Suggested by A. Parasuraman, V
.A. Zeitthamal
and L.L. Berry
Called as PZB Model/ SERVQUAL model.
Paper Title “ A Conceptual model of service
quality and its implication for future research”
Journal of Marketing: 1985
Dimensions of SERVQUAL are Reliability,
A
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172. PZB- GAP model
How to
reduce
service gaps
Gap 4:
Brochures
Pamphlets
Gap 1:
Frequent
Feedback
Gap 3:
Training
Programs
173. Gap
Number
Description Feature 1 Feature 2 Feature 3 Example
1 Service firm What are the What features What levels of Hot and Spicy
executive may not Consumer a services performance Food
understand wants must have should be
delivered
2 Means to meet the Knowledge of Means are Management Decoration,
expectation are consumer known but commitment Pots
absent expectation they are is lacking
exists but not expensive
the perceived
means to
deliver
3 Variability in SOP and Lack of skills Behavioral Mood,
employees Policies are training and attitude Perception,
performance absent difference. Health
4 There are problems More Firm tend to Poor quality
arising out of promises that neglect back of Oil, Dal,
communication are not office quality Potato etc.
delivered
5 3/31/201 6
Is a function of four gaps. 170
184. Suggested Text Books
1. Operations Management Theory & Practice,
B.Mahadevan , Pearson.
2. Operations Now - Supply Chain Profitability &
Performance, Byron J. Finch, McGraw Hill.
3. Production and Operations Management, R B
Khanna, PHI, New Delhi.
4. Production & Operations Management, S N
Chary, McGraw Hill.
5. Supply Chain Management - Strategy, Planning &
Operation,Sunil Chopra, Peter Meindl, D. V. Kalra,
Pearson Education.
185. Suggested Reference Books
1. Supply Chain Logistics Management, Donald
Bowersox, David Closs, M Bixby Cooper, Tata
McGraw Hill.
2. Operations Management, William J. Stevenson,
TMGH.
3. Operations Management, Lee Krajewski, Larry
Ritzman, Manoj Malhotra, Pearson Education.
4. Introduction to Materials Management , J.R.
Tony Arnold, Stephen Chapman, Ramakrishnan,
Pearson.
186. Audio Visual Link (Case/Best Practice)
1. Industrie 4.0 - The Fourth Industrial
Revolution, Siemens, https://www.youtube.com/watch?v=
HPRURtORnis
2. Markus Lorenz: Industry 4.0: how intelligent machines
will transform everything we know, TED
Institute, https://www.youtube.com/watch?v=uBZmJOHIN
8E
3. In Depth: Industrial Revolution 4.0, Rajya Sabha
TV,https://www.youtube.com/watch?v=RO4GNVQMQnM
4. Future Manufacturing 4.0: Toyota innovation, robotics,
AI, Big Data. Futurist keynote speaker, Futurist Keynote
Speaker Patrick Dixon -
FUTURE, https://www.youtube.com/watch?v=rt65167tZlQ
187. Journal
1. Industry 4.0 Concept: Background and Overview -
Online-Journals.org, online-journals.org/index.php/i-
jim/article/view/7072
2. Industry 4.0 implies lean manufacturing - Journal of
Industrial, www.jiem.org › Home › Vol 9, No 3 (2016) ›
Sanders
3. Special Issue on Industry 4.0 and Smart, Journals –
Elsevier, https://www.journals.elsevier.com/.../special
-issue-on-industry-40-and-smart-manufact
4. Industry 4.0 – JOURNALS of Scientific Technical
Union of
Mechanical, https://stumejournals.com/i4.htm