Operations and Supply Chain Management

Unit I:Operations and Supply
Chain Management
By- Prof. Sarang
3/31/2016 1

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 System3/31/2016 2

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.
3/31/2016 3

Specialization
of labors
1770 1900 1950 2000
E-Commerce
Scientific
Management,
Motion Study
Quality
control charts
OR in WW II
Digital
Computer
SCM and TQM
Deming and
Juran
MRP
Scheduling
Inspection
Sampling
OB
Computation
3/31/2016 4

Scope of Operations Management
In earlier days of manufacturing, production
activity was handled by person alone hence
doing repetitive work the operators 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.
3/31/2016 5

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
3/31/2016 6

Objectives of Operations Management
• Right Quality
• Right Quantity
• Right Time
• Pre-Established Cost
Ultimate
Objectives
• Machinery and Equipment
• Materials
• Manpower
• Manufacturing Services
Intermediate
Objectives
3/31/2016 7

Significance of Operations
Management
Organization
Consumer
Investors
EmployeeSuppliers
Community
Nation
3/31/2016 8

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

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.
3/31/2016 10

Efficiency Vs. Effectiveness
3/31/2016 11

E-War in India based on Operations
Management: The Caselet
July 2014
3/31/2016 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
3/31/2016 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.
3/31/2016 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
3/31/2016 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.
3/31/2016 16

Scope of Supply ChainFunctionalScope
All traditional
Business
Functions included
in the process of
SCM to get a
specific output.
Finance
+Marketing+
Operations+
Support Functions
OrganizationalScope
Inter firm
relationships are
relevant to the
participating firms
in the
implementation
and the process of
SCM
3/31/2016 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.
3/31/2016 18

Supply Chain Participants
 Raw Materials Suppliers
 Manufacturers
 Distributers
 Resellers
 Franchisers
 Sales Representative
 Logistics Providers
 Financiers
 Credit Support Providers
 End Users: Consumers
 Lessors: Leasing
3/31/2016 19

Significance of Supply Chain
• Collaboration
• Lowered Costs
• Precise Purchasing
• Cycle Time
• Improved Alliances
• Increased Profits
• Increased Efficiency
• Minimum Delay
• Increased productivity
3/31/2016 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
3/31/2016 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.
3/31/2016 22

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.
3/31/2016 23

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?)
3/31/2016 24

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.
3/31/2016 25

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.
3/31/2016 26

Quality Revolution
1950
Japan-
Quality
movement
1970 Developed
1980 Europe
1990: Developing countries.
TQM
TQq
QA,
TQC, SQ
3/31/2016 27

Quality Costs
Conformance Non-Conformance
Prevention
Appraisal
Internal Failure
External Failure
67.7
7.8
6.9
14.1
3.5
Basic Work
Prevention
Appraisal
Internal Failure
External Failure
Total cost of production3/31/2016 28

Features of TQM
4C’s of
TQM
Commitment
Competence
Communica
tion
Continuous
Improvement
3/31/2016 29
Satisfying
Customers
Systems/
Processes
People
Improvement
Tools
Innovation

Principles of Total Quality
• Customer Focus
• Leadership
• Employee Involvement
• Process Approach
• Systems Approach
• Continual Improvement
• Fact based decision making
• Mutually beneficial supplier relationships
3/31/2016 30

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.
3/31/2016 31

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
3/31/2016 32

Unit II: Operations Processes
By-Prof. Sarang
3/31/2016 34

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.
3/31/2016 35

Operations Process: Inputs
Input
M’s
Manpower
Machine
MethodMaterial
Money
3/31/2016 36

Operations Process: Inputs
3/31/2016 37
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.)

Transformation Process
It is the conversion process that converts inputs
into output. Management should make these
processes efficient and effective as per the
requirement to maximize profits. The factors
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.
3/31/2016 38

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.
3/31/2016 39

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
3/31/2016 40

Transformation Process for Manufacturer
Inputs
Material, equipments, labor, technology
Transformation
Process
Outputs
Machines, chemicals, consumer goods, scrap
3/31/2016 41
Quality of inputs monitored
Quality of outputs monitored
Random Disturbances: Strikes, riots,
power failure, environment.
Feedback Mechanism: Customer satisfaction survey, Increase in demand, customer complaints

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.
3/31/2016 42

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 can become more
complex on account of these choices in the
operating system.
3/31/2016 43

Volume Variety Flow
Flow:
• Flow indicates the nature and intensity of
phenomenon of transformation process, 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.
3/31/2016 44

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.
3/31/2016 45

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

Process Product Matrix
3/31/2016 47
Not Economical
Not Flexible
The Product-Process Matrix was first introduced by Robert Hayes and Steven
Wheelwright in the Harvard Business Review in 1979.

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 Management3/31/2016 48

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.
3/31/2016 49

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)

• 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

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.
3/31/2016 52

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).
3/31/2016 53

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
3/31/2016 54

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
3/31/2016 55

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.
3/31/2016 58

Fixed Position
3/31/2016 60
http://www.scrigroup.com/limba/engleza/105/Production-of-Quality-Goods-an65429.php

3/31/2016 61
Factors
Fixed Position Product (Line) Cellular (GT) Process (Functional)
1. Type of
Operation
Ship building,
Large scale
project,
Construction or
Industrial project
Continuous and
repetitive
Small to medium
batch
Job or small batch
2.
Arrangement of
facilities
Facilities moves to
a fixed product/
project
Placed along the
line of product flow
Similar parts are
grouped in part-
family. For each
part-family one
machine cells is
formed which
contains all
facilities needed by
corresponding part-
family.
Grouped by
specialty
3. Cost of
layout
Moderate to low Moderate to high Moderate to high Moderate to low
4. Material
handling
Moderate Less Less High
5. Material
travel
Variable path Fixed path Fixed path Variable path
6.
Utilization of
facilities
Moderate Very high High Low
7.
Operating facilities
General purpose Special purpose Special purpose General purpose
8.
Employee skill
Unskilled/skilled Unskilled Multi-skilled as one
operator may
handle more than
one operation
Skilled
9. (Q/P)
ratio : Q is
production
Quantity P is
number of products
or variety
Normally I as
single product
production
Large (Q/P) Moderate (Q/P) Small (Q/P)
Type of Layout
http://www.transtutors.com/homework-help/industrial-management/plant-layout/comparison-of-plant-
layouts.aspx

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

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

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
(billing), role of staff (waiter), consumer
experience3/31/2016 64

Service System Design
• Two dimensions that affects the design of an
appropriate delivery system are as follows:
1. Characteristic of the Market:
 Technical Dimension: What exactly
comprises in 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
to 3 PL services provided.3/31/2016 65

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

Service System Design Matrix
3/31/2016 67
Low
High
LaborIntensity
LowHigh Customization
Professional
Service
Service Shop
Mass
Service
Service
Factory
Doctor,
Financial Analyst
College,
Hospitals
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.

Factors involved in Service System Design
Service
System
Design
Technology/
People Mix
Complexity
of Services
Categories
of Services
Volumes
Order
winning vs.
Order
qualifying
Nature of
the services
delivered
3/31/2016 68

Design of Services System
Two types of design:
A. Overall Design
 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)
3/31/2016 69

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
3/31/2016 70

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?
3/31/2016 71

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 involved are disused as A.
Identifying processes B. Isolating the fail
points C. Establishing the time frame D
.Analyzing the Profitability3/31/2016 72

Service Blueprint for Shoeshine
services
3/31/2016 73Source: https://hbr.org/1984/01/designing-services-that-deliver/ar/1

Profitability Analysis for given
example
3/31/2016 74

• 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.
3/31/2016 75

House Of Quality
Technical Descriptors
(Voice of the organization)
Prioritized Technical
Descriptors
Interrelationship
between
Technical Descriptors
Customer
Requirements
(Voiceofthe
Customer)
Prioritized
Customer
Requirements
Relationship between
Requirements and
Descriptors
QFD is converting the customers requirement into technical specification

• 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= Changed/ unchanged behavior
depending on customer and employees internal
reactions to physical evidence.
Same as landscape development
3/31/2016 77

• 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

Unit III: Production Planning and
Control
By-Prof. Sarang
3/31/2016 80

Why do we Forecast?
• Dynamic and Complex Environments: No
control over market forces and product
demand. E.g. FMCG products.
• Short term fluctuations in production: To
avoid knee-jerk effect. E.g. Strikes of
transports
• Better Materials Management: Inventory
optimization can be achieved. E.g. Restaurant
purchasing manager will use forecast for
stocking of grains.3/31/2016 82

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.
3/31/2016 83

Crude oil Prices March 2013- February 2015
3/31/2016 84

Price Fluctuations
Appreciation and depreciation of USD-INR
3/31/2016 85
Date Open High Low Change %
1-Feb-15 62.02 62.58 61.56 0.27%
1-Jan-15 63.17 63.63 61.26 -1.61%
1-Dec-14 62.05 63.89 61.76 1.33%
1-Nov-14 61.5 62.25 61.29 1.31%
1-Oct-14 61.82 61.97 60.9 -0.86%
1-Sep-14 60.51 61.94 60.2 2.35%
1-Aug-14 60.74 61.76 60.35 -0.06%
1-Jul-14 60.07 60.56 59.53 0.82%
1-Jun-14 59.1 60.53 58.97 1.46%
1-May-14 60.26 60.27 58.25 -1.91%
1-Apr-14 59.93 61.19 59.57 0.55%
1-Mar-14 61.95 62.14 59.68 -2.88%
1-Feb-14 62.7 62.83 61.75 -1.42%
1-Jan-14 61.82 63.32 61.32 1.42%
1-Dec-13 62.35 62.53 60.83 -0.94%
1-Nov-13 61.5 63.9 61.5 1.26%
1-Oct-13 62.55 62.56 60.93 -1.54%
1-Sep-13 66.1 68.6 61.65 -4.74%
1-Aug-13 60.75 68.8 60.23 7.97%
1-Jul-13 59.46 61.21 58.69 2.22%
1-Jun-13 56.5 60.76 56.3 5.22%
1-May-13 53.8 56.76 53.63 5.39%
1-Apr-13 54.26 54.94 53.65 -1.11%
1-Mar-13 54.36 55.13 53.89 0.00%

Forecasting Time Horizon
3/31/2016 86
Source: Operations Management: Theory and Practice, B.Mahadevan , Page Number 398

Forecasting as a planning tool
• Every organization engages in annual planning
exercise wherein HoD’s of various
departments (Marketing, 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
product is not known with certainty.3/31/2016 87

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.
3/31/2016 88

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.
3/31/2016 89

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.
3/31/2016 90

Formulas to Calculate Forecast
errors
3/31/2016 91
Forecast errors=114-118=-4
SFE=11-4=7
Absolute Deviation= I-4I =4
Cumulative Absolute deviation=11+4=15
MAD=15/2=7.5
Absolute Error= Actual-Forecast/ Actual =114-118/114= 3.5%
MAPE=(9.17%+3.5%)/2= 6.35%
Squared Error= 4 X 4 =16
MSE =(121+16)/2 = 68.5
TS= SFE/MAD =7/7.5=0.93

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.
3/31/2016 92

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)
3/31/2016 93

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.
3/31/2016 94

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
3/31/2016 95

Planning Hierarchies in Operations
3/31/2016 96
Source: Operations Management: Theory and Practice, B.Mahadevan , Page
Number 430

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.
• Casual 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.
3/31/2016 97

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
trends, competitors performance, market
sentiments and projections etc.3/31/2016 98

Sources of Data
• 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

Sources of Data
• Economic Surveys and Indicators: E.g. Mobile
data traffic can be forecasted with joint
research based on TRAI and 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
3/31/2016 100

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.
3/31/2016 101

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
3/31/2016 102

The Need for Aggregate Production
Planning
• Demand Fluctuations
• Capacity Fluctuations
• Difficulty level in altering production rates
• Benefits of multi period Planning
3/31/2016 103
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?

Framework for APP Exercise
3/31/2016 104
Alternatives to managing demand: Reservation of
capacity, Influence Demand

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
3/31/2016 105

Basic strategies for APP Exercise
Beyond the syllabus
3/31/2016 106
Do not disturb
existing production
system
Mismatch is addressed
by variety of capacity
related alternatives

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
ensures specific resources available.3/31/2016 107

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.
3/31/2016 108

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.
3/31/2016 109

Product Structure
3/31/2016 110
Level 0
Level 1
Level 2
Level 3
Can you discuss levels of Car, Mobile as a product?
Levels of product Bill of Materials

3/31/2016 111
http://dowap.eu/drp/

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
level.3/31/2016 112

MRP
• Material requirement planning is a structured
approach that develops schedules for
launching orders for materials in any
manufacturing system and ensures the
availability of these at right time and at the
right place.
3/31/2016 113

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.
3/31/2016 114

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.
3/31/2016 115

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
3/31/2016 116

ERP
3/31/2016 117
RAMCO Case Study

Scheduling and Loading
Job Shops and
Scheduling of Flow Shops
Johnson’s Rule
Gantt Charts
Self Study Topics: Refer B. Mahadevan,
Operations Management, Page no. 510 -525
3/31/2016 118

Unit IV: Inventory Planning and
Control
3/31/2016 119

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?)
3/31/2016 121

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
3/31/2016 122

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 , loss of
goodwill, extra cost for
delivery commitments
Intermittent Demand
• In 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 for
independent demand items
should include some cushion
for handling uncertainty
3/31/2016 123

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
for savings3/31/2016 124

Types of Inventory
• Raw Materials
• Semi-Finished Goods
• Work in Process
• Finished Goods
• Tools
• Consumable
• Machinery Spares
3/31/2016 125

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.
3/31/2016 126

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)
3/31/2016 127

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
graphically it has linear
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 associated with
supplier search till PO
generation, Travel to
supplier and communicate,
Salaries of Purchase officer.
• It is denoted as Co
=CO (D/Q)
3/31/2016 128

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
3/31/2016 129

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.3/31/2016 130

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.
3/31/2016 132

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 costs3/31/2016 133

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
3/31/2016 134

Formula for EOQ
 For total cost minimization;
 Or, DCO ( - 1/q2) + cc/2 = 0
 Or, cc/2 DCo/q2
 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 23/31/2016 135

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
3/31/2016 136

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 per case
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 )
3/31/2016 137

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
3/31/2016 138

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
3/31/2016 139

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
3/31/2016 140

EOQ with Quantity Discounts
• Annual Demand = 5000 units
• Ordering cost = $49
• Annual carrying charge = 20%
• Unit price schedule:
3/31/2016 141
Quantity Unit Price
0 to 999 $5.00
1000 to 1999 $4.80
2000 and over $4.75

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.
3/31/2016 144

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
supplier at the same time.3/31/2016 145

3/31/2016 146
Order up to level
(P System):
(Q System):

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
3/31/2016 147

Industrial Example
3/31/2016 150

Step I: Calculate Annual
Consumption
3/31/2016 151

Step II: Descending value+
Cumulative Value + Define Classes
3/31/2016 152

Step III: Summarize
3/31/2016 153
Close day to day control
Regular Review
Infrequent Review

Step IV : Draw Pareto Chart
3/31/2016 154
•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.

Unit V: Generalized Supply Chain
Management and Customer Service
By- Prof. Sarang
3/31/2016 156

Integrated Supply Chain
Management
3/31/2016 157
Integrated supply chain Framework: Integration of value creation processes
Page no.6 SCLM, Tata McGraw Hill, Bowersox and Closs

Achieving Strategic Fit
3/31/2016 158

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+
Warehousing3/31/2016 159

Responsiveness
1. Push (Anticipatory) Business Model
2. Pull (Responsive) Business Model
3/31/2016 160
Forecast Buy Material Manufacture Warehouse Sell Deliver
Sell Buy Material Manufacture Deliver

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.
3/31/2016 161

Globalization: With the emergence of global
 Businesses complexity,
 Uncertainty,
 Risks improved drastically.
3/31/2016 162

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
the SCM performance. Eg. Inventory3/31/2016 163

Cycle View of Supply Chains
Integration
3/31/2016 164

Key Issues in SCM
Key
Issues
in SCM
Improving
Flexibility
Lead Time
Reduction
Minimizing
Uncertainty
Focusing on
A category
Minimizing
Variety
3/31/2016 165

Enablers of SCM
Sourcing Transportation Facility Inventory Information Pricing
3/31/2016 166

Customer Service
7 R’s of Customer Service:
I. Product
II. Price
III. Place
IV. Quantity
V. Quality
VI. Customer
VII.Condition
3/31/2016 167

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,
Assurance, Tangibles, Empathy, Responsiveness3/31/2016 168

PZB- GAP model
3/31/2016 169
Gap 1:
Frequent
Feedback
Gap 3:
Training
Programs
Gap 4:
Brochures
Pamphlets
How to
reduce
service gaps

Gap
Number
Description Feature 1 Feature 2 Feature 3 Example
1 Service firm
executive may not
understand
What are the
Consumer
wants
What features
a services
must have
What levels of
performance
should be
delivered
Hot and Spicy
Food
2 Means to meet the
expectation are
absent
Knowledge of
consumer
expectation
exists but not
the perceived
means to
deliver
Means are
known but
they are
expensive
Management
commitment
is lacking
Decoration,
Pots
3 Variability in
employees
performance
SOP and
Policies are
absent
Lack of skills
training
Behavioral
and attitude
difference.
Mood,
Perception,
Health
4 There are problems
arising out of
communication
More
promises that
are not
delivered
Firm tend to
neglect back
office quality
Poor quality
of Oil, Dal,
Potato etc.
5 Is a function of four gaps.3/31/2016 170

Thank You and All the Best!
Prof. Sarang Dani, Assistant Professor, Operations and Supply Chain Management
LinkedIn: Sarang Dani Cell:9762347883
3/31/2016 171

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