Hawassa University

College of Business and Economics

Department of Management

Operation Management Hand out

Course code: (MGMT 3183)

Prepared by: Amanuel SH. (MBA)

1
 CHAPTER ONE
NATURE OF OPERATIONS MANAGEMENT
Chapter Outline:
1.1. Introduction
 What is operations?
 What is operations Management?
 Organizing to produce goods and service
 Why study OM?
1.2. Historical Development of OM
1.3. Manufacturing Operations and Service Operations
 Manufacturing Operations
 Service Operations
1.4. Operations Decision Making
1.5. Productivity Measurement
Learning Objectives
When you complete this chapter, you should be able to:
 Define operations management
 Identify the three major functional areas of organizations and describe how they
interrelate
 Compare and contrast service and manufacturing operations
What is Operations?
 Describe the key aspects of operations management decision making
What is Operations Management?
 Briefly describe the historical evolution of operations management
 understand single and multifactor productivity

1.1. Introduction
1.1.1. Definition

2
Operations (production): is that part of a business organization that is responsible for
producing goods and/ or services. Goods are physical items that include raw materials, parts,
and subassemblies. Operations is those activities concerned with the acquisition of raw
materials their conversation into finished product, and the supply of that finished product to the
customer. Services are activities that provide some combination of time, location, form, or
psychological value. Operation is what the company does.
Examples: goods and services are found all around you. Every book you read, every video you
watch, every e-mail you send, every telephone conversation you have, and every medical
treatment you receive involves the operations function of one or more organizations. So does
everything you wear, eat, travel in, sit on, and access the Internet with. The operations function
in business can also be viewed from a more far-reaching perspective.
Operations management: is the set of activities that creates value in the form of goods and
services by transforming inputs into outputs. In manufacturing firms, the production activities
that create goods are usually quite obvious. In them, we can see the creation of a tangible product
such as Sony TV or a Harley-Davidson motorcycle. In an organization that does not create a
tangible good or product, the production function may be less obvious. We often call these
activities services.
Operation Management: is the management of systems or processes that create goods and/or
provide services. Or Operation Management- is the design, operation, and improvement of
those systems that create and deliver the firms primary products and services, like marketing and
finance.
Operation Management is functional field of business with clear line management
responsibility. The business function responsible for planning, coordinating, and controlling the
resources needed to produce a company’s products and services. Every organization has OM
function Service or Manufacturing, For profit or Not for profit.
Operation Management Adds Value which means the difference between the costs of inputs
and the value of prices of outputs.
Value added

Inputs Outputs

Land Transformation/ Goods

Labor Conversion process Services
Capital
3
 Feedbac
k
Feedback Feedback
Control
1.1.2. Organizing to produce goods and services
To create goods and services, all organizations perform three basic functions. These functions
are the necessary ingredients not only for production but also for an organization’s survival.
They are:
1. Marketing: which generates the demand, or at least takes the order for a product or
service (nothing happens until there is sale).
2. Production/operation: which create product
3. Finance/accounting: which tracks how well the organization is doing, pays the bills, and
collects the money.

Manufacturing
Organization

Operation/Production Marketing

Facilities Sales promotion

Finance /accounting
Construction; maintenance Advertising
Production and inventory control Disbursements/ credits
Scheduling; materials control Sales Receivables
Payables
Quality assurance and control Market research General ledger
Supply chain management Capital requirements
Manufacturing
Stock issue
Tooling; fabrication; assembly
Bond issue and recall
Design
Product development and design Detailed
product specifications Industrial
engineering
Efficient use of machines, space, and
personnel

4
 operation/
production

Marketi
Finance ng

Figure 1.2: The three basic functions of business organizations

1.1.3. Why study OM?

We study OM for the following reasons:

1. OM is one of the three major functions (marketing, finance, and operations) of any
organization, and it is integrally related to all the other business functions. All organization
market (sell), finance (accounting), and produce (operation), and it is important to know how
the OM activity functions. Therefore, we study how people organize themselves for
productive enterprise.
2. We want (and need) to know how goods and services are produced.
3. We want to understand what operations managers do. By understanding what these managers do, you
can develop the skills necessary to become such a manager. Operation managers have basic
management function (planning, organizing, staffing, directing, and controlling This will help you
explore the numerous and lucrative career opportunities in OM. These career opportunities are:
 Operations manager  Time study analyst
 Production analyst  Inventory manager
 Production manager  Quality analyst
 Industrial engineer  Quality manager
4. OM is such a costly part of an organization

Example:

Fisher technologies is a small firm that must double its dollar contribution to fixed cost and profit in order
to be profitable enough to purchase the next generation of production equipment. Management has
determined that if the firm fails to increase contribution, its bank will not make the loan and the
equipment cannot be purchased. If the firm cannot purchase the equipment, the limitations of the
old equipment will force fisher to go out of business and, in doing so, put its employees out of
work and discontinue producing goods and services for its customers. Three strategic option
(marketing, finance/accounting, and operations) proposed for the firm.

5
• The first option is a marketing option, where good marketing management may increase sales
by 50%.
• The second option is a finance/ accounting option, where finance costs are cut in half through
good financial management.
• The third option is an OM option, where management reduces production costs by 20%.
Which one is the best option that yield the greatest improvement in contribution?

Given: Current financial contribution

Sales $100,000
Cost of Goods – 80,000
Gross Margin 20,000
Finance Costs – 6,000
Subtotal 14,000
Taxes at 25% – 3,500
Contribution $ 10,500
Solution:
Options for Increasing Contribution
Marketing Financial/ OM Option
option Accounting
Option
Current Increase Sales Reduce Finance Reduce Production
Revenue 50% Costs 50% Costs 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000
Gross Margin 20,000 30,000 20,000 36,000
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

1.1.4. The Activities of Operations Management

Operations managers have some responsibility for all the activities in the organization which
contribute to the effective production of goods and services. And while the exact nature of the
operations function’s responsibilities will, to some extent, depend on the way the organization

6
has chosen to define the boundaries of the function, there are some general classes of activities
that apply to all types of operation.

 Understanding the operation’s strategic objectives. The first responsibility of any

operations management team is to understand what it is trying to achieve. This means
developing a clear vision of how the operation should help the organization achieve its long-
term goals. It also means translating the organization’s goals into their implications for the
operation’s performance objectives, quality, speed, dependability, flexibility and cost.
 Developing an operations strategy for the organization. Operations management involves
hundreds of minute-by-minute decisions, so it is vital that operations managers have a set of
general principles which can guide decision making towards the organization’s longer-term
goals. This is an operations strategy.
 Designing the operation’s products, services and processes. Design is the activity of
determining the physical form, shape and composition of products, services and processes.
Although direct responsibility for the design of products and services might not be part of the
operations function in some organizations, it is crucial to the operation’s other activities.
 Planning and controlling the operation. Planning and control is the activity of deciding
what the operations resources should be doing, then making sure that they really are doing it.
 Improving the performance of the operation. The continuing responsibility of all
operations managers is to improve the performance of their operation.
1.1.5. Operation Management Critical Decisions
 Design of goods and services: What good or service should we offer?
How should we design these products and services?
 Managing quality: How do we define quality? Who is responsible for quality?
 Process and capacity design: What process and what capacity will these products require?
What equipment and technology is necessary for these processes?
 Location strategy: Where should we put the facility? On what criteria should we base the
location decision?
 Layout strategy: How should we arrange the facility? How large must the facility be to meet
our plan?

7
 Human resources and job design: How do we provide a reasonable work environment?
How much can we expect our employees to produce?
 Supply chain management: Should we make or buy this component? Who are our suppliers
and who can integrate into our e-commerce program?
 Inventory, material requirements planning, and JIT: How much inventory of each item
should we have? When do we re-order?
 Intermediate and short–term scheduling: Are we better off keeping people on the payroll
during slowdowns? Which jobs do we perform next?
 Maintenance: Who is responsible for maintenance? When do we do maintenance?
1.2. Historical Development of operation Management

The field of OM is relatively young, but it history is rich and interesting. Our lives and the OM
discipline have been enhanced by the innovations and contributions of numerous individuals.

Eli Whitney (1800) is credited for the early popularization of interchangeable parts, which was
achieved through standardization and quality control. Through a contract he signed with the U.S.
government for 10,000 muskets, he was able to command a premium price because of their
interchangeable parts.

Frederick W. Taylor (1881), known as the father of scientific management, contributed to

personnel selection, planning and scheduling, motion study, and the now popular field of
ergonomics. One of his major contributions was his belief that management should be much be
more resourceful and aggressive in the improvement of work methods. Taylor and his
colleagues, Henry L. Gantt and Frank Lillian Gilbreth, were among the first to systematically
seek the best way to produce.

Another of Taylor’s contributions was the belief that management should assume more
responsibility for:

1. Matching employees to the right job.

2. Providing the proper training.
3. Providing proper work methods and tools
4. Establishing legitimate incentives for work to be accomplished.

8
By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized parts
with the quasi – assembly lines of the meatpacking and mail – order industries and added the
revolutionary concept of the assembly line, where men stood still and material moved.

Quality control is another historically significant contribution to the field of OM. Walter
Shewhart (1924) combined his knowledge of statistics with the need for quality control and
provided the foundations or statistical sampling in quality control.

Table 1.1: summarize the historical development of OM.

Era Events/Concepts Dates Originator

Industrial Steam engine 1769 James Watt
Revolution Division of labor 1776 Adam Smith
Interchangeable parts 1790 Eli Whitney
Principles of scientific management 1911 Frederick W. Taylor
Scientific Time and motion studies 1911 Frank and Lillian Gilbreth
Managemen Activity scheduling chart 1912 Henry Gantt
t Moving assembly line 1913 Henry Ford
Hawthorne studies 1930 Elton Mayo
Human Motivation theories 1940s Abraham Maslow
Relations 1950s Frederic Herzberg
1960s Douglas McGregor
Operations Linear programming 1947 George Dantzig
Research Digital computer 1951 Remington Rand
Simulation, waiting line theory, 1950s Operations research groups
decision theory, PERT/CPM
JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (total quality management) 1980s W. Edward Deming,
Quality Joseph Juran
Revolution Strategy and operations 1980s Wickham Skinner, Robert
Hayes
Business process reengineering 1990s Michael Hammer, James
Champ
Six Sigma 1990s GE, Motorola

9
 1.3. Manufacturing Operations and Service Operations

Production of Goods Versus Delivery of Services

 Goods are physical items that include raw materials, parts, subassemblies, and final
products. E.g. Automobile, Computer, Oven, Shampoo
 Services are activities that provide some combination of time, location, form or
psychological value. E.g. Air travel, Education, Haircut, Legal counsel
 Production of goods –tangible output
 Delivery of services –an act
 Service job categories-Government, Wholesale/retail, Financial services, Healthcare,
Personal services, Business services, Education.

Characteristics of Goods
Tangible product
Can be inventoried
Consistent product definition
Low customer interaction
Production usually separates from consumption
Characteristics of Service
Intangible product: services are usually intangible (for example, your purchase of a ride in
an empty airline seat between two cities) as opposed to a tangible good.
Produced and consumed at same time: there is no stored inventory. For instance, the
beauty salon produces haircut that is “consumed” simultaneously, or the doctor produces an
operation that is “consumed” as it is produced. We have not yet figured out how to inventory
haircuts or appendectomies.
Often unique: your mix of financial coverage, such as investments and insurance policies
may not be the same as anyone else’s just as the medical procedure or a haircut produced for
you is not exactly like anyone else’s.
High customer interaction: services are often difficult to standardize, automate, and make
as efficient as we would like because customer interaction demands uniqueness.
Often knowledge-based: as in the case of educational, medical, and legal services, and
therefore hard to automate.

10
 Frequently dispersed: Dispersion occurs because services are frequently brought to the
client/customer via local office, a retail outlet, or even a house call.
Having made the distinction between goods and services, we should point out that in many cases,
the distinctions is not clear – cut. In reality, almost all services and almost all goods are a mixture
of a service and a tangible product. Even services such as consulting may require a tangible
report. Similarly, the sale of most goods includes a service. For instance, many products have the
service components of financing and delivery (e.g., automobile sales). Many also require after –
sale training and maintenance (e.g., office copiers and machinery). “service” activities may also
be an integral part of production. Human resource activities, logistics, accounting, training, field
service, and repair are all service activities, but they take place within a manufacturing
organization.
When a tangible product is not included in the service, we may call it a pure service. Although
there are not very many pure services, in some instances counselling may be an example. Figure
1.2 shows the range of services in a product. The range is extensive and shows the pervasiveness
of service activities.

Goods Services

Automobile
computer
Installed carpeting
Fast food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/investment management
Consulting services/teaching
Counseling

100% 75 50 25 0 25 50 75 100%

Percent of product that is good Percent of product that is service

Figure 1.2 most goods contain a service, and Most services contain a Good
Attributes of goods and services

11
Attributes of Goods Attributes of Services
(tangible product) (intangible product)
Product can be resold Reselling a service is unusual.

Product can be inventoried. Many services cannot be inventoried

Some aspects of quality are measurable Many aspects of quality are difficult to
measure.

Selling is distinct from production Selling is often a part of the service

Product is transportable Provider, not product, is often

transportable

Site of facility is important for cost Site of facility is important for customer
contact

Often easy to automate Service is often difficult to automate.

Revenue is generated primarily from Revenue is generated primarily from the

the tangible product Service

Table 1.2 attributes of Goods and

service

1.4. Operation Decision Making

Thousands of business decisions are made every day. Not all the decisions will make or break
the organization. But each one adds a measure of success or failure to the operations. Hence
decision-making essentially involves choosing a particular course of action, after considering the
possible alternatives.
Operations decision range from simple judgments to complex analyses, which also involves
judgment. Judgment typically incorporates basic knowledge, experience, and common sense.
They enable to blend objectives and sub-objective data to arrive at a choice.
1.4.1. Framework for Decision-Making
An analytical and scientific framework for decision implies the following systematic steps:
 Defining the problem
Defining the problem enables to identify the relevant variables and the cause of the problem.
Careful definition of the problem is crucial. Finding the root cause of a problem needs some
questioning and detective work. If a problem defined is too narrow, relevant variable may be
omitted. If it is broader, many tangible aspects may be included which leads to the complex
relationships.

12
  Establish the decision criteria
Establish the decision criterion is important because the criterion reflects the goals and purpose
of the work efforts. For many years’ profits served as a convenient and accepted goal for many
organizations based on economic theory. Nowadays organization will have multiple goals such
as employee welfare, high productivity, stability, market share, growth, industrial leadership and
other social objectives.
 Formulation of a model
Formulation of a model lies at the heart of the scientific decision-making process. Model
describes the essence of a problem or relationship by abstracting relevant variables from the real-
world situation. Models are used to simplify or approximate reality, so the relationships can be
expressed in tangible form and studied in isolation. Modeling a decision situation usually
requires both formulating a model and collecting the relevant data to use in the model.
Mathematical and statistical models are most useful models for understanding the complex
business of the problem. Mathematical models can incorporate factor that cannot readily be
visualized. With the aid of computers and simulation techniques, these quantitative models
flexible.
 Generating alternatives
Alternatives are generated by varying the values of the parameters. Mathematical and statistical
models are particularly suitable for generating alternatives because they can be easily modified.
The model builder can experiment with a model by substituting different values for controllable
and uncontrollable variable.
 Evaluation of the alternatives
Evaluation of the alternatives is relatively objective in an analytical decision process because the
criteria for evaluating the alternatives have been precisely defined. The best alternative is the one
that most closely satisfies the criteria. Some models like LPP model automatically seek out a
maximizing or minimizing solution. In problems various heuristic and statically techniques can
be used to suggest the best course of action.
 Implementation and monitoring
Implementation and monitoring are essential for completing the managerial action. The best
course of action or the solution to a problem determined through a model is implemented in the
business world. Other managers have to be convinced of the merit of the solution. Then the

13
follow-up procedures are required to ensure about appropriate action taken. This includes an
analysis and evaluation of the solution along with the recommendations for changes or
adjustments.
1.4.2. Decision Methodology
The kind and amount of information available helps to determine which analytical methods are
most appropriate for modeling a given decision. The degree of certainty is classified as complete
certainty, risk, and uncertainty.

1. Decision making under certainty: Under complete certainty conditions, all relevant
information about the decision variables and outcomes is known or assumed to be known.
State of nature is known. Some of methods which used to decision making under certainty
are: Algebra, Calculus, Mathematical programming.
2. Decision making under risk: information about the decision variables or the outcomes is
probabilistic. Several states of nature may occur and Each has a probability of occurring.
Some approaches which used to decision making under risk are: Statistical analysis, queuing
theory, simulation, Network analysis technique.
3. Decision making under uncertainty: Under extreme uncertainty, no information is
available to assess the likelihood of alternative outcomes. Four possible decision criteria are
Maximin, Maximax, Laplace, and Minimax regret. These approaches can be defined as
follows:
 Maximin: Determine the worst possible pay-off for each alternative, and choose the
alternative that has the “best worst.” The Maximin approach is essentially a pessimistic one
because it takes into account only the worst possible outcome for each alternative. The actual
outcome may not be as bad as that, but this approach establishes a “guaranteed minimum.”
 Maximax: Determine the best possible pay-off, and choose the alternative with that pay-off.
The Maximax approach is an optimistic, “go for it” strategy; it does not take into account any
pay-off other than the best.
 Laplace: Determine the average pay-off for each alternative, and choose the alternative with
the best average. The Laplace approach treats the states of nature as equally likely.

14
 Minimax regret: Determine the worst regret for each alternative, and choose the alternative
with the “best worst.” This approach seeks to minimize the difference between the pay-off
that is realized and the best pay-off for each state of nature.
Example:
ILLUSTRATION 1: Referring to the pay-off table, determine which alternative would be chosen
under each of these strategies: (a) Maximin, (b) Maximax, and (c) Laplace.
Possible future demand in Rs.
Alternatives Low Moderate High
Small facility 10 10 10
Medium facility 7 12 12
Large facility (4) 2 16
Solution
(a) Using Maximin, the worst pay-offs for the alternatives are:
Small facility: Rs.10 million
Medium facility: 7 million
Large facility: –4 million
Hence, since Rs.10 million is the best, choose to build the small facility using the maximum
strategy.
(b) Using Maximax, the best pay-offs are:
Small facility: Rs.10 million
Medium facility: 12 million
Large facility: 16 million
The best overall pay-off is the Rs.16 million in the third row. Hence, the Maximax criterion
leads to building a large facility.
(c) For the Laplace criterion, first find the row totals, and then divide each of those amounts by
the number of states of nature (three in this case). Thus, we have:
Alternatives Raw total (Rs. Raw average
Million) (Rs. Million)
Small facility 30 10
Medium facility 31 10.33
Large facility 14 4.67
Because the medium facility has the highest average, it would be chosen under the Laplace
criterion.

15
 1.5. Productivity Measurement
Productivity is defined in terms of utilization of resources, like material and labor. In simple
terms, productivity is the ratio of output to input. For example, productivity of labor can be
measured as units produced per labor hour worked. Productivity is closely linked with quality,
technology and profitability. Hence, there is a strong stress on productivity improvement in
competitive business environment. Productivity can be improved by (a) controlling inputs, (b)
improving process so that the same input yields higher output, and (c) by improvement of
technology. Productivity and production are not the same thing. Productivity takes into account
output in relation to input, whereas in production we consider only the output and not the input.
Productivity can be measured at firm level, at industry level, at national level and at international
level. Productivity ratios are used for:
 Planning workforce requirements
 Scheduling equipment
 Financial analysis
 Tracking an operating unit’s performance over time
 Judging the performance of an entire industry or country
The measurement of productivity can be quite direct. Such is the case when productivity is
measured by labor – hours per ton of a specific type of steel. Although labor – hours is a
common measure of input, other measures such a capital (dollars invested), materials (tons of
ore), or energy (kilo watts of electricity) can be used. Productivity is the relationship between
the outputs generated from a system and the inputs that are used to create those outputs. An
example of this can be summarized in the following equation:
units produced
productivity= (1 -1)
input used
 Single – factor productivity (Partial Measure): is use just one resource input to measure
productivity.
output output output
∂ measure= , ,
machine labor Capital

 Multifactor Productivity (multifactor measure): includes all inputs (e.g., capital, labor,
material, energy). Multifactor productivity is also known as total factor productivity.
Multifactor productivity is calculated by combining the input units as shown here:

16
 output output
Multifactor measures= ,
labor+machine labor+Capital+ Energy

Goods∨Services Produced
Total measures= produce them ¿
All inputs used ¿
Example1 1:
For example, if units produced = 1,000 and labor – hours used is 250, then:

1,000
labor productivity= = 4 units per labor – hour
250

One resource input single-factor productivity

Example 2:
if 7040 Units Produced and sold for $1.10/unit and
Cost of labor: $1,000
Cost of materials: $520 What is the total factor or multifactor
productivity?
Cost of overhead: $2000
Solution:

output ( 7040 units )∗($ 1.10)

TFP= ¿ = 2.20
labor+ material+ overhead $ 1000+ $ 520+ $ 2000
Multiple resource inputs multi-factor productivity
Example 3:

Collins title wants to evaluate its labor and multifactor productivity with a new computerized
title-search system. The company has a staff of four, each working 8 hours per day (for a payroll
cost of $640/day) and overhead expenses of $400 per day. Collins processes and closes on 8 title
each day. The new computerized title-search system will allow the processing of 14 title per day.
Although the staff, their work hours, and pay are the same, the overhead expenses are now $800
per day. Determine labor and multifactor productivity for both the old and new system.

Solution:
1. Labor productivity of old and new system
Old System: New System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 14 titles/day
Payroll cost = $640/day Payroll cost = $640/day
17
Overhead = $400/day Overhead = $800/day
8 titles /day 14 titles /day
labor productivity= labor productivity=
2. Multifactor Productivity
Old system: New system :
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 14 titles/day
Payroll cost = $640/day Payroll cost = $640/day
Overhead = $400/day Overhead = $800/day
8 titles /day 14 titles /day
multifactor productivity= multifactor productivity=
$ 640+400
If labor productivity growth $ 640+800
is entirely the result of capital spending, measuring just labor
distorts the ¿results.
.0077 titles /dollar productivity is usually better, but
Multifactor ¿ .0097 titles
more /dollar
complicated. Labor
productivity is the more popular measure. The multifactor productivity measures provide better
information about the trade – offs among factors, but substantial measurement problems remain.
Some of these measurement problems are listed here:
1. Quality: may change while the quantity of inputs and outputs remains constant.
2. External elements: may cause an increase or decrease in productivity.
3. Precise units of measure: may be lacking
1.5.1. Productivity Variables
Productivity increases are dependent on the three productivity variables:
1. Labor: which contributes about 10% of the annual increase.
2. Capital: which contributes about 38% of the annual increase.
3. Management: which contributes about 52% of the annual increase.
These three factors are critical to improve productivity. They represent the broad areas in which
managers can take action to improve productivity.
Labor: improvement in the contribution of labor to productivity is the result of a healthier better
– educated, and better – nourished labor force. Some increase may also be attributed to a shorter
workweek. Historically, about 10% of the annual improvement in productivity is attributed to
improvement in the quality of labor. Three key variables for improved labor productivity are:

18
 - Basic education appropriate for an effective labor force.
- Diet of the labor force
- Social overhead that makes labor available, such as transportation and sanitation.

Illiteracy and poor diets are a major impediment to productivity, costing countries up to 20% of
their productivity. Infrastructure that yields clean drinking water and sanitation is also an
opportunity for improved productivity, as well as an opportunity for better health, in much of the
world.

Capital: Human beings are tool – using animals. Capital investment provides those tools.
Inflation and taxes increase the cost of capital, making capital investment increasingly expensive.
When the capital invested per employee drops, we can expect a drop in productivity. Using labor
rather than capital may reduce unemployment in the short run, but also makes economies less
productive and therefore lowers wages in the long run. Capital investment is often a necessary,
but seldom a sufficient ingredient in the battle for increased productivity.

Management: management is a factor of production and an economic resource. Management is

responsible for ensuring that labor and capital are effectively used to increase productivity.
Management account for over half of the annual increase in productivity. This increase includes
improvements made through the use of knowledge and the application of technology.

1.5.2. Service productivity

The service sector provides a special challenge to the accurate measurement of productivity and
productivity improvement. The traditional analytical framework of economic theory is based
primary goods – producing activities.

Productivity of the service sector has proven difficult to improve because service – sector work
is:

- Typically, labor – intensive (for example, counselling, teaching).

- Frequently focused on unique individual attributes or desires (for example, investment
advice).
- Often an intellectual task performed by professionals (for example, medical diagnosis)
- Often difficult to mechanize and automate (for example a haircut).

19
The more intellectual and personal the task, the more difficult it is to achieve increases in
productivity. Low – productivity improvement in the service sector is also attributable to the
growth of low – productivity activities in the service sector. These include activities not
previously a part of the measured economy, such as child care, food preparation, house cleaning,
and laundry service. These activities have moved out of the home and into the measured
economy as more and more women have joined the workforce.

However, in spite of the difficulty of improving productivity in the service sector, improvements
are being made. and this text presents a multitude of ways to make these improvements.

CHAPTER TWO

OPERATIONS STRATEGY AND COMPETITIVENESS

After completing this unit, students will be able to:
 Define mission and strategy
 Identify and explain three strategic approaches to competitive advantage
 Identify and explain four global operations strategy options.
2.1. Developing Missions and Strategies
An effective operations management effort must have a mission so it knows where it is going
and a strategy so it knowns how to get there. This is the case for a small or domestic
organization, as well as a large international organization.
Mission
Economic success, indeed survival, is the result of identifying missions to satisfy a customer’s
needs and wants. We define the organization’s mission as its purpose – what it will contribute to
society. Mission statements provide boundaries and focus for organizations and the concept
around which the firm can rally. The mission states the rationale for the organization’s existence.
Developing a good strategy is difficult, but it is much easier if the mission has been well defined.
Once an organization’s mission has been decided, each functional area within the firm
determines its supporting mission. By functional area we mean the major disciplines required by
the firm, such as marketing, finance/accounting, and production/operations. Missions for each

20
function are developed to support the firm’s overall mission. Then within that function lower –
level supporting missions are established for the OM functions. The following are some of
sample missions.

Table 2.1 sample mission for company, the operations functions, and major OM departments
Sample Company Mission
To manufacture and service an innovative, growing, and profitable worldwide microwave
communications business that exceeds our customers’ expectations.
Sample Operations Management Mission
To produce products consistent with the company’s mission as the worldwide low-cost
manufacturer.
Sample OM Department Missions
Product Design To design and produce products and services with outstanding quality and
inherent customer value.
Quality To attain the exceptional value that is consistent with our company mission
management and marketing objectives by close attention to design, procurement,
production, and field service operations
Process design To determine and design or produce the production process and equipment
that will be compatible with low-cost product, high quality, and good quality
of work life at economical cost.
Location To locate, design, and build efficient and economical facilities that will yield
high value to the company, its employees, and the community.
Layout design To achieve, through skill, imagination, and resourcefulness in layout and
work methods, production effectiveness and efficiency while supporting a
high quality of work life.
Human To provide a good quality of work life, with well-designed, safe, rewarding
resources jobs, stable employment, and equitable pay, in exchange for outstanding
individual contribution from employees at all levels.
Supply chain To collaborate with suppliers to develop innovative products from stable,
management effective, and efficient sources of supply.
Inventory To achieve low investment in inventory consistent with high customer
service levels and high facility utilization.
Scheduling To achieve high levels of throughput and timely customer delivery through
effective scheduling.
Maintenance To achieve high utilization of facilities and equipment by effective
preventive maintenance and prompt repair of facilities and equipment.
Strategy

21
With the mission established, strategy and its implementation can begin. Strategy is an
organization’s action plan to achieve the mission. Each functional area has a strategy for
achieving its mission and for helping the organization reach the overall mission. These strategies
exploit opportunities and strengths, neutralize threats, and avoid weaknesses. Operations
strategy is a long term plan for the production of a company’s products/rendering services and it
provides a road map for what the production/operations function must do if business strategies
are to be achieved.
Operations strategy is the decisions which shape the long-term capabilities of the company’s
operations and their contribution to overall strategy through the on-going reconciliation of
market requirements and operations resources.

Firms achieve missions in three conceptual ways: 1). Differentiation, 2) cost leadership, and 3).
Response. This means operations managers are called on to deliver goods and services that are
(1) better, or at least different, (2) cheaper, and (3) more responsive. Operations managers
translate these strategic concepts into tangible tasks to be accomplished. Any one or combination
of these three strategic concepts can generate a system that has a unique advantage over
competitors.

Operations strategy consists of goals, plans and a direction for the operations function that are
linked to the business strategy and other functional strategies, leading to a competitive advantage
for the firm. The approach, consistent with organization strategy, that is used to guide the
operations function. The operations manager’s job is to implement an OM strategy, provide
competitive advantage, and increase productivity
Tactics and Operations
Tactics: is the methods and actions taken to accomplish strategies. The “how to” part of the
process. Operation: is the actual “doing” part of the process.
2.2. Achieving Competitive Advantage Through Operations
Each of the three strategies provides an opportunity for operations manager to achieve
competitive advantage. Competitive advantage implies the creation of a system that has a unique
advantage over competitors. The idea is to create customer value in an efficient and sustainable
way. Pure forms of these strategies may exist, but operations managers will more likely be called
on to implement some combination of them.

22
 A. Competing on Differentiation
Differentiation is concerned with providing uniqueness. A firm’s opportunities for creating
uniqueness are not located with a particular function or activity but can arise in virtually
everything the firm does. Moreover, because most products include some service, and most
services include some product, the opportunities for creating this uniqueness are limited only by
imagination. Indeed, differentiation should be thought of as going beyond both physical
characteristics and service attributes to encompass everything about the product or service that
influences the value that the customers derive from it. Therefore, effective operations managers
assist in defining everything about a product or service that will influence the potential value of
the customer. E.g. Convenience of product features or convenience of location distribution…
In the service sector, one option for extending products differentiation is through an experience.
Differentiation by experience in services is a manifestation of the growing “experience
economy.” The idea of experience differentiation is to engage the customer – to use people’s five
senses so they become immersed, or even an active participant, in the product.

B. Competing on Cost
Low – cost leadership entails achieving maximum value as defined by your customer. To the
companies which compete directly on price, cost will clearly be their major operations objective.
The lower the cost of producing their goods and services, the lower can be the price to their
customers. Even those companies which compete on things other than price, however, will be
interested in keeping their costs low. Every euro or dollar removed from an operation’s cost base
is a further euro or dollar added to its profits. Provide the maximum value as perceived by
customer. Does not imply low quality.
C. Competing on Response
The third strategy option is response. Response is often thought of as flexible response, but it
also refers to reliable and quick response. Indeed, we define response as including the entire
range of values related to timely product development and delivery, as well as reliable
scheduling and flexible performance.
Flexible performance: Flexibility means being able to change the operation in some way.
Flexibility is matching market changes in design innovation and volumes.

23
Product/service flexibility: the operation’s ability to introduce new or modified products and
services.
Mix Flexibility: the operation’s ability to produce a wide range or mix of products and services.
Volume Flexibility: the operation’s ability to change its level of output or activity to produce
different quantities or volumes of products and services over time.
Delivery Flexibility: the operation’s ability to change the timing of the delivery of its services or
products.
The second aspect of response is the reliability of scheduling. Doing things in time for
customers to receive their goods or services exactly when they are needed, or at least when they
were promised.
The third aspect of response is quickness. is quickness in design, production, and delivery. The
elapsed time between customers requesting products or services and their receipt of them.

2.3. Operations Strategy Issues

Operations managers consider a number of issues while developing operations strategies. These
issues are examined in three ways: (1) Research, (2) preconditions, and (3) dynamics.

1. Research
Research has provided the following characteristics as impacting strategic OM decisions:
– High product quality as compared to competitors
– High capacity utilization
– High operating effectiveness (the ratio of expected to actual employee productivity)
– Low investment intensity (the amount of capital required to produce a dollar of sales)
– Low direct cost per unit (relative to competitors).
2. Preconditions
The following need to be understood in developing an effective OM strategy:
 Present and changing environment- the economic & technological environment in which
the strategy is to be executed.
 Competitive demands- requires to understand about competitors’ strengths and
weaknesses
 Knowing the company’s strategy.

24
  Product life cycle (PLC)-an understanding of where each product stands in the PLC
3. Dynamics
Strategies change for two reasons. First, strategy is dynamic because of changes within the
organization. All areas of the firm are subject to change. Changes may occur in a variety of
areas, including personnel, finance, technology, and product life. All may make a difference in
an organization’s strengths and weaknesses and therefore its strategy. Strategy is also dynamic
because of changes in the environment.
2.4. Strategy Development and Implementation
One firm understands the issues involved in developing an effective strategy, they evaluate their
internal strengths and weaknesses as well as the opportunities and threats of the environment.
This is known as SWOT analysis (Strength, Weakness, Opportunities, and Threats). Beginning
with SWOT analyses, firms position themselves, through their strategy, to have a competitive
advantage. The firm may have excellent design skills or great talent at identifying outstanding
locations. However, the firm may recognize limitation of its manufacturing process or in finding
good suppliers. The idea is to maximize opportunities and minimize threats in the environment
while maximizing the advantages of the organization’s and minimize threats in the environment
while maximizing the advantages of the organization’s strengths and minimizing the weaknesses.
In the process of development and implementation of strategy, critical success factors are
identified, build and staff the organization, and integrating OM with other activities.
Critical Success Factors and Core Competencies
Because no firm does everything exceptionally well, a successful strategy requires determining
the firm’s critical success factors and core competencies. Critical success factors (CSFs) are
those activities that are necessary for a firm to achieve its goals. Critical success factors can be so
significant that a firm must get them right to survive in the industry. CSFs are often necessary,
but not sufficient for competitive advantage. On the other hand, core competencies are the set of
unique skills, talents, and capabilities that a firm does at a world – class standard. They allow a
firm to set itself apart and develop a competitive advantage. A core competencies may be a
subset of CSFs or a combination of CSFs. The operations manager begins this inquiry by asking:
 “what tasks must be done particularly well for a given strategy to succeed?”
 Which activities will help the OM function provide a competitive advantage?”

25
  Which elements contain the highest likelihood of failure, and which require additional
commitment of managerial, monetary, technological, and human resources?”
Only by identifying and strengthening critical success factor and core competencies can an
organization achieve sustainable competitive advantage.
Build and staff the organization
The operations manager’s job is a three – step process. once a strategy and critical success
factors have been identified, the second step is the group the necessary activities into an
organizational structure. The third step is to staff it with personnel who will get the job done. The
manager works with subordinate mangers to build plant, budgets, and programs that will
successfully implement strategies that achieve missions.
Integrate OM with other activities
The operations function is most likely to be successful when the operations strategy is integrated
with other functional areas of the firm, such as marketing, finance, information technology, and
human resources. In this way, all of the areas support the company's objectives. The operations
manager transforms inputs into outputs. The transformations may be in terms of storage,
transportation, manufacturing, dissemination of information, and utility of the product or service.
The operations manager's job is to implement an OM strategy, provide competitive advantage,
and increase productivity.

26
 CHAPTER THREE
DESIGN OF OPERATIONS SYSTEM
Outline:
3.1. Product (Service) Design and Development
3.2. Process Selection
3.3. Capacity Planning
3.4. Facility Location
3.5. Facility Layout
3.6. Job Design and Work Measurement
Introduction

Products and services are often the first thing that customers see of a company, so they should
have an impact. And although operations managers may not have direct responsibility for
product and service design, they always have an indirect responsibility to provide the
information and advice upon which successful product or service development depends. But
increasingly operations managers are expected to take a more active part in product and service
design. Unless a product, however well designed, can be produced to a high standard, and unless
a service, however well conceived, can be implemented, the design can never bring its full
benefits.

3.1. Product (Service) Design and Development

3.1.1. What is Design?
Design is the process of structuring of component parts /activities of products so that as a unit it
can provide value for the customer. Product is designed in terms of size, colour, shape, content
and other related dimensions. Design greatly affects operation by specifying the products that
will be made and it is the prerequisite for operations to occur.
Who is responsible for design? It is not only operations department but also an interactive
decision of marketing (4P’s), purchasing (what materials are required to produce the products),
finance (return on investment, financial liquidity), engineering, legal (warranty and liability
issues), quality control (conformance with product specifications), government, top management
(decision used for a long period of time) and other stakeholders, etc.

27
 3.1.2. Objectives of Design
The objectives of design may vary from situations to situations and from organization to
organization. An obvious reason includes:
 To be competent (by offering new products or services).
 To reduce cost and increase profit.
 To develop new products or services as alternatives to downsizing.
 To design products/services that have customer appeal
 To increase quality and level of customer satisfaction
NB: Sometimes product or service design is actually redesign for a number of reasons such as
customer complaints, excessive warranty claims, low demand etc.
3.1.3. Product Design
Product design is the process of defining all the features and characteristics of just
about anything you can think of. Consumers respond to a product‘s appearance, color, texture,
and performance. All of its features, summed up, are the product‘s design. Someone came up
with the idea of what this product will look like, taste like, or feel like so that it will appeal to
you. This is the purpose of product design.
Product design is also defined as: ‘a product‘s characteristics, such as its appearance, the
materials it is made of, its dimensions and tolerances, and its performance standards’.
3.1.3.1. Philosophies Towards Product Design and Development
There are three fundamentally different ways to introduce new products.
i. Market pull: the market is the primary basis for determining the products a firm should
make with little regard to the existing technology. Customer’s wants and needs play the
primary role for new product development and design. A firm should make what it can sell.
So it is required to undertake customers’ survey and market research to determine customer’s
need.
ii. Technology push philosophy: technology is the primary determinant of the product that the
firm should make with little regard for the market. One should sell what can be produced i.e.
the existing technology determine what kind of product to be produced .The assumption is
that the firm should pursue a technology based advantages by developing superior
technology and products. The products are pushed to the market and the marketing’s job is to
create demand for these superior products.

28
iii. Inter functional philosophy: stated that product design and development is neither market
pull nor technology push. Rather it is inter functional and interactive process of customers,
marketing, finance, engineering and other related functional areas.

3.1.3.2. Product Development Process (Phases)

To get to a final design of a product or service, the design activity must pass through several key
stages. These form an approximate sequence, although in practice designers will often recycle or
backtrack through the stages. The basic stages of product/service design are the following
1. Idea generation 5. Prototype Testing
2. Feasibility analysis 6. Final Product Design
3. Initial (Preliminary) Product 7. Product introduction
Design 8. Follow-up evaluation
4. Prototype development
Let’s discuss each of them
1. Concept (idea) Generation
The ideas for new product or service concepts can come from sources outside the organization,
such as customers or competitors, and from sources within the organization, such as staff (for
example, from sales staff and front-of-house staff) or from the R&D department.
a) Ideas from customers: Marketing, the function generally responsible for identifying
new product or service opportunities, may use many market research tools for gathering data
from customers in a formal and structured way, including questionnaires and interviews.
Listening to the customer, in a less structured way, is sometimes seen as a better means of
generating new ideas. Focus groups, for example, are one formal but unstructured way of
collecting ideas and suggestions from customers.
b) Ideas from competitor activity: All market-aware organizations follow the activities of
their competitors. A new idea may give a competitor an edge in the marketplace, even if it is
only a temporary one, then competing organizations will have to decide whether to imitate or
alternatively to come up with a better or different idea.
Sometimes this involves reverse engineering that is, taking apart a product to understand how a
competing organization has made it.

29
c) Ideas from staff: The contact staff in a service organization or the salesperson in a
product-oriented organization could meet customers every day. These staff may have good ideas
about what customers like and do not like.
d) Ideas from research and development: One formal function found in some
organizations is research and development. Research usually means attempting to develop new
knowledge and ideas in order to solve a particular problem or to grasp an opportunity.
Development is the attempt to utilize and operationalize the ideas that come from research.
2. Concept Screening (Feasibility Analysis)
Not all concepts which are generated will necessarily be capable of further development into
products and services. The purpose of the concept-screening stage is to take the flow of concepts
and evaluate them. Evaluation in design means assessing the worth or value of each design
option, so that a choice can be made between them. This involves assessing each concept or
option against a number of design criteria. Major criteria are the following:
• Market feasibility: evaluate the new ideas in terms of whether the product has market or not,
• Financial (economic) feasibility: how well the product quality performance and costs
confirm to the design objectives and,
• Technical feasibility: availability of technology and skilled labor.
At last, the most feasible and viable product concept is selected for the next stages.
3. Initial (Preliminary) Product Design
This stage of the product-design process is concerned with developing the best design for the
new product ideas. It is the translation of ideas in to products. Preliminary product design must
specify the product completely. At the end of the product design phase, the firm has a set of
product specifications and engineering drawing (or computer image) specified in sufficient
detail that production prototype can be built and tested. In the preliminary design tradeoffs
between cost, quality and product performances are considered.
4. Prototype Construction
If the preliminary product design is approved, a prototype/s may be built for further testing and
analysis. Several prototypes which closely resembles with the final products may be made by
hand from some artificial materials such as plastics, mud, clay, wood etc. For example, the auto
industry regularly makes clay models of new automobiles.
5. Prototype Testing:

30
A model is tested for its physical properties or uses under actual operating conditions. Testing of
prototypes is aimed at verifying marketing and technical performance. The purpose of a test
market is to gather quantitative data on customer acceptance of the new product. Prototype is
also tested for technical product performance. In general, such testing is important in uncovering
any problems and correcting them prior to full scale production. For example, auto manufacturer
perform extensive road tests on new models; similar experiments are performed on tires,
airplanes, and sports equipment.
6. Final Product Design
Prototype testing may indicate certain changes in the preliminary product design. If changes are
made the product may be tested further to ensure final product performance. Market test is used
to determine the extent of consumer acceptance. If this market test is unsuccessful, return to the
design review phase (this phase is handled by marketing). During the final phase these changes
are incorporated in to the design specification. Drawing and specifications for the product are to
be developed at this stage. And go for full scale operations.
7. Product Introduction: this stage is used to promote the product; handled by marketing
8. Follow-up Evaluation: it helps to determines if changes are needed & refine forecasts;
handled by marketing.
3.1.3.3. Issues in Product and Service Design
This sub unit addresses factors (techniques) to be considered while designing the product.

Legal and Ethical Considerations Robust Design

Strategies for product or service life cycle Cultural difference
Degree of standardization Degree of newness
Designing for mass customization Modular Design
Reliability Concurrent Engineering
Group technology (GT) Quality Function Deployment QFD
Virtual Reality technology Computer-Aided Design (CAD)
Value Analysis & value Engineering Computer-Aided Manufacturing (CAM)

31
 Legal and Ethical Considerations
Designers are often under pressure to Speed up the design process and Cut costs. These pressures
force trade-off decisions.
- Product Liability - A manufacturer is liable for any injuries or damages caused by a
faulty product.
- Uniform Commercial Code – Says that products carry an implication of
merchantability and fitness; i.e., a product must be usable for its intended purpose.
Designers Adhere to Guidelines
• Produce designs that are consistent with the goals of the company
• Give customers the value they expect
• Make health and safety a primary concern
• Consider potential harm to the environment
Strategies for product or service life cycle
Another factor in+ product design is the stage of the life cycle of the product. Most products go
through a series of stages of changing product demand called the product life cycle. There are
typically four stages of the product life cycle: introduction, growth, maturity, and decline.
The product life cycle can be quite short for certain products, as seen in the computer industry.
For other products it can be extremely long, as in the aircraft industry. A few products,
such as paper, pencils, nails, milk, sugar, and flour, do not go through a life cycle. However,
almost all products+ do, and some may spend a long time in one stage.

+
Figure 3.1: product life cycle
 Introduction

 Weigh trade-offs between

eliminating ‘defects’ and getting
the product or service to the
market at an advantageous time

 Accurate deman+d forecasts are

important to ens++++++++++
+uring adequate capacity
availability

Growth

 Demand forecasts are important to

ensuring a continued adequate
capacity availability
 Design improvements
 Emphasis on improved product or
service reliability and lower cost

 Maturity
 Relatively few design changes

 Emphasis is on high productivity

and low cost

33
 Decline
 Continue or discontinue product
or service
 Identify alternative uses for
product or service
 Continued emphasis on high
productivity and low cost

Design for Manufacturability (DFM)

DFM is a product development approach that explicitly considers the effectiveness with which
an item can be made during the initial development of the product design. Manufacturability
refers to the ease with which the product can be manufactured. Three concepts are closely
related to designing for easy of production. These are: simplification, specification, and
standardization.

• Simplifications: is a design or redesigns strategy that improves the manufacturability,

serviceability, or reliability of a product or service by reducing the complexity of its design.
Specifications: is a detail description of material, parts, or products including physical
dimensions. These specifications profiled production department with precise information
about the characteristics of products to be produced.
• Standardization: refers to a design activity that reduce variety amount a group of product or
parts. Extent to which there is an absence of variety in a product, service or process.
Standardized products are immediately available to customers. Standardization of groups of
products or parts usually results in higher volume for each product or part model which can
leads to lower production costs, higher product quality, greater ease of automation, and lower
inventory investment.
Advantages of Standardization
 Fewer parts to deal with in inventory & manufacturing
 Design costs are generally lower
 Reduced training costs and time

34
  More routine purchasing, handling, and inspection procedures
 Orders fillable from inventory
 Opportunities for long production runs and automation
 Need for fewer parts justify increased expenditures on perfecting designs and
improving quality control procedures.
Designing for mass customization
A strategy of producing standardized goods or services, but incorporating some degree of
customization. Tactics make it possible are:
 Delayed differentiation: is a postponement tactic; producing but not quite completing a
product or service until customer preferences or specifications are known
 Modular Design: is a form of standardization in which component parts are subdivided into
modules that are easily replaced or interchanged. It allows: Easier diagnosis and remedy of
failures, easier repair and replacement, simplification of manufacturing and assembly. It
makes possible to have relatively high product variety and low component variety at the
same time. The basic idea is to develop a series of basic product components (or modules)
which can be assembled in to a large number of different products..
Reliability
Reliability: The ability of a product, part, or system to perform its intended function under a
prescribed set of conditions
Failure: Situation in which a product, part, or system does not perform as intended.
Normal operating conditions: The set of conditions under which an item’s reliability is
specified.
Range of Operating Condition
 Robust Design: Design that result in products or services that can function over a broad
range of conditions. Product is designed so that small variations in production or assembly
do not adversely affect the product. Typically results in lower cost and higher quality.
 Cultural difference: designer must take into account any differences of different country.
 Degree of newness: product design change can range from modification of an existing to
an entirely new product.
1. Modification of an existing product/service

35
 2. Expansion of an existing product/service
3. Clone of a competitor‘s product/service
4. New product/service
Degree of Design Change

Type of Design Newness to the Newness to the market

Change organization
Modification Low Low
Expansion Low Low
Clone (copy) High Low
New High High
i.e. newness for organization in transition process
 Newness to the market degree of acceptance to new product
 Their effect on cost and pricing
Concurrent Engineering/ Simultaneous development

It is an approach that brings many people together in the early phase of product design in
order to simultaneously design the product and the process. In its narrowest sense,
concurrent engineering means bringing engineering design and manufacturing people together
early in the design phase to simultaneously develop the product and the processes for creating
the product. Using concurrent engineering is preferable than sequential/hierarchical engineering.
This type of approach has been found to achieve a smooth transition from the design
stage to actual production in a shorter amount of development time with improved quality
results.

Group Technology (GT)

GT is parts or products with similar characteristics in to families, and sets aside groups of
machines for their productions. Families may be based on size, shape, manufacturing, (or
routing) requirement or demand. The goal is to identify a set of products with similar processing
requirements and minimize machine changeovers or setups. For example all bolts might be
assigned to the same family because they all require the same basic processing steps regardless
of the size or shape. GT is an engineering and manufacturing strategy based on the development
and exploitations of commonalities among parts, equipment, or processes.

Value Analysis and Value Engineering

36
The term VA and VE are used almost interchangeably but they are not identical. Value
engineering focuses on pre- production design improvement while VA (even though is a related
techniques) takes place during the production process when it is clear that a new product is a
success. The basic objective of VE &VA is to achieve equivalent or better performance at a
lower cost while maintaining all functions and quality requirements. It does this largely by
identifying and eliminating hidden, invisible, and unnecessary cost. VE & VA should not be
treated as a mere cost reduction techniques or cheapening of the product. It is more
comprehensive and the improvement in value is attained without any sacrifices in quality,
reliability, maintainability, availability, aesthetics etc.
Hence, Value Analysis focuses on design improvement during production, examination of the
function of parts and materials in an effort to reduce cost and/or improve product
performance and seeks improvements leading either to a better product or a product which
can be produced more economically.
Computer Aided Design (CAD) & Computer Aided Manufacturing (CAM)
 CAD is an electronic system for designing new parts or products or altering existing ones,
replacing drafting traditionally done by hand. The heart of CAD is a powerful computer and
graphics software that allow a designer to manipulate geometric shapes and create visual
display. Using the design data stored in the computer’s memory, manufacturing engineers
and other users can quickly obtain print outs of plan and specifications for a part or product.
CAD cut the cost of product development and sharply reduces the time to market for new
products. Hence Computer-Aided Design (CAD) will have the following benefits: 1)
increases productivity of designers, 3 to 10 times; 2) creates a database for manufacturing
information on product specifications; 3) provides possibility of engineering and cost
analysis on proposed designs.
 CAM is an electronic system which is used to design production process and control
machine tools and material flow through programmable automation. CAM is utilizing
specialized computers and program to control manufacturing equipment. CAM is often
driven by the CAD system.
 CAD /CAM integrate the design and manufacturing functions by translating final design
specification in to detailed machine instruction for manufacturing an item. CAD/CAM is
quicker, less error prone than human, eliminate duplications between engineering and

37
 manufacturing, allow engineers to see how the various parts of a design interact with each
other without having to build a prototype.
Virtual Reality Technology
Computer technology used to develop an interactive, 3-D model of a product from the basic
CAD data. Allows people to see the finished design before a physical model is built. 3- D is Very
effective in large-scale designs such as plant layout.
Quality Function Deployment (QFD)
The key purpose of quality function deployment is to try to ensure that the eventual design
of a product or service actually meets the needs of its customers. It is a technique that was
developed in Japan at Mitsubishi‘s Kobe shipyard and used extensively by Toyota, the motor
vehicle manufacturer, and its suppliers. It is also known as the house of quality‘ (because of
its shape) and the voice of the customer‘ (because of its purpose).
The technique tries to capture what the customer needs and how it might be achieved.
The QFD matrix is a formal articulation of how the company sees the relationship
between the requirements of the customer (what‘s) and the design characteristics of the new
product (the how‘s).

38
 3.2. PROCESS SELECTION AND CAPACITY PLANNING

Introduction

Another major decision for the operation manager is finding the best way to produce. It is clear
that no product can be made and no service provided without a process, and no process can exist
without a product or service. Process selection refers to the way an organization chooses to
produce its goods or provide its service. Essentially it involves choice of technology and related
issues, and it has major implications for capacity planning, layout of facilities, equipment and
design of work systems.
A process strategy is an organization’s approach to transform resources into goods and services.
We use terms, process and transformation, to describe this strategy. The objective of a process
strategy is to find a way to produce goods and services that meet customer requirements and
product specifications within cost and other managerial constraints. The process selected will
have a long term effect on efficiency and production, as well as the flexibility, cost, and quality
of goods produced. This part of the course looks at the ways managers design a process.
Phases in process planning
3.2.1. Make or Buy Decision

The very first step in process planning is to consider whether to make or buy some or all of a
product or to subcontract some or all of a service. A manufacturer might decide to purchase
certain parts rather than make them; sometimes all parts are purchased, with the manufacturer
simply performing assembly operations. Many firms contract out janitorial services, and some
contact for repair services. If a decision is made to buy or contract, this lessens or eliminates the
need for process selection. In make or buy decisions, a number of factors are usually considered:

Available capacity The nature of demand

Expertise Cost
Quality considerations
In some cases, a firm might choose to perform part of the work itself and let others handle the
rest in order to maintain flexibility and to hedge against loss of a subcontractor. Moreover, this
provides a bargaining tool in negotiations with contractors, or a head start if the firm decides

39
later to take over the operation entirely. If the organization decides to perform some or all of the
processing, then the issue of process selection is important.

3.2.2. Process Choice

One of the first decisions a manager makes in designing a well functioning process is to choose a
process type that best achieves the relative importance placed on quality, time flexibility and
cost. The manager has five process types, which form a continuum, to choose from:

Project Line, and

Job Continuous
Batch
The figure below shows the types of processes found in manufacturing and services
organizations alike. The fundamental message here is that the best choice for a process depends
on the volume and the degree of customization required of the process. A process choice might
apply to an entire process or just one sub process within it.

1. Project Process
A project process deals with one-of-a kind products that are tailored to the unique requirement of
each customer. Projects are set up to handle complex jobs that involve unique sets of activities.
Examples of a project process are building a shopping center, planning a major event, running a

40
political campaign, doing management consulting work, or developing a new technology or
product. A project process is characterized by a high degree of job customization, the large scope
of each project, and the release of substantial resources once a project is completed. A project
process lies at the high customization low volume end of the process choice continuum. The
sequence of operations and the process involved in each are unique to the project, creating one-
of-a-kind products or services made specifically to customer orders.

2. Job process
Next in the continuum of process choices is the job process. It is appropriate for manufacturers
of small batches of many different products, each of which is custom designed and,
consequently, requires its own unique set of processing steps, or routing, through the production
process. Examples are providing emergency room care, handling special delivery mail or making
customized cabinets. Customization is relatively high and volume for any one product or service
is low. However, volumes are not as low as for a project process, which by definition does not
produce in quantity. The work force and equipment are flexible and handle various tasks.

As with a project process, companies choosing a job process often bid for work. Typically, they
make products to order and do not produce them ahead of time. A job process primarily
organizes all like resources around itself; equipment and workers capable of certain types of
work are located together. These resources process all jobs requiring that type of work. Because
customization is high and most jobs have a different sequence of processing steps, this process
choice creates jumbled flows through the operations rather than a line flow.

Characteristics of Job process

Small production runs Highly skilled labor

Discontinuous flow of materials Highly competent knowledgeable
Disproportionate manufacturing cycle supervision
time Large work-in-progress
General purpose machines and process Limited functions of production
layout planning and control
3. Batch Process
Batch process is a step up from job process in terms of product standardization, but it is not as
standardized as line process. Example of a batch process are scheduling air travel for a group,

41
making components that feed an assembly line, processing mortgage loans, and manufacturing
capital equipment. A batch process differs from the job process with respect to volume, variety
and quantity.

The primary difference is that volumes are higher because the same or similar products or
services are provided repeatedly.
Another difference is that a narrow range of products and services is provided. Variety is
achieved more through an assemble-to-order strategy than the job process’s make-to-order or
customized services strategy. Some of the components going into the final product or service
may be processed in advance.
A third difference is that production lots or customer groups are handled in larger quantities
(or batches) than they are with job processes. A batch of one product or customer grouping is
processed, and then production is switched to the next one. Eventually, the first product or
service is produced again. A batch process has average or moderate volumes, but variety is
still too great to warrant dedicating a separate process for each product service.
Characteristics of Batch process

 Short runs  Manual materials handling

 Skilled labor in specific trades  Manufacturing cycle time affected
 Supervisor to possess knowledge of a due to queues
specific process  Large work-in-progress
 Limited span of control  Flexibility of production schedules
 General purpose machines and process  Need to have production planning
type of layout and control
4. Line Process
Line Process is characterized by a linear sequence of operations used to make the product or
service. Products created by a line process include automobiles, appliances and toys. Services
based on a line process are fast food restaurants and cafeterias. A line process lies between the
batch and continuous processes on the continuum, volumes are high, and products or services are
standardized, which allows resources to be organized around a product or service. There are line
flows, with little inventory held between operations. Each operation performs the same process

42
over and over, with little variability in the products or services provided. Production orders are
not directly linked to customer orders, as is the case with project and job process.
Characteristics of Line process
 Continuous flow of material  Short manufacturing cycle time
 Special purpose machines and  Easy supervision
product type layout  Limited work-in-progress
 Mechanized materials handling  Lesser flexibility in production
 Low skilled labor schedules
5. Continuous Process
Continuous processes systems are sometimes referred to as flow systems because of the rapid
rate at which items move through the system. This form of processing is used when highly
standardized products are involved. Examples are petroleum refineries, chemical plants, and
plants making beer, steel, and food. Firms with such facilities are also referred to as the process
industry. A continuous process is the extreme end of high volume, standardized production with
rigid line flows. Its name derives from the way materials move through the process.

Characteristics of Continuous Process

 Special purpose machines with built-in controls  Low skilled labor

 Highly mechanized/automated materials  Supervisor to be processes specialist
handling  Negligible work-in-progress
 Virtually zero manufacturing cycle time  Limited production planning and
./control functions

After considering the process options, managers still face a number of issues. Because determining
the size of a facility is critical to a firm’s success, we now investigate the concepts and techniques
of capacity planning. Capacity is the maximum output of a system in a given period. It is not
normally expressed as a rate, such as the number of tons of steel that can be produced per week,
per month, or per year. For many companies, measuring capacity can be straight forward. It is the
maximum number of units that can be produced in a specific time. However, for some
organization, determining capacity can be more difficult. Capacity can be measured in terms of

43
beds (a hospital) or, active members (a church). Other organizations use total work time available
as a measure of overall capacity.
Design Capacity: the maximum output that can possibly attained.
Effective capacity: It is the maximum output rate that can be sustained under normal
conditions. These conditions include realistic work schedules and breaks, regular staff
levels, scheduled machine maintenance, and none of the temporary measures that are used
to achieve design capacity. Note that effective capacity is usually lower than design capacity.
Actual Output: the rate of output actually achieved. It cannot exceed effective capacity and is
often less than effective capacity due to breakdowns, defective output, shortages of materials, and
similar factors.
Capacity utilization: It simply tells us how much of our capacity we are actually using. Capacity
utilization can simply be computed as the ratio of actual output over design capacity:
Designing capacity is the maximum rate of output achieved under ideal conditions. Effective
capacity is usually less than design capacity ( it cannot exceed design capacity) owing to realities
of changing product mix, the need for periodic maintenance of equipment, lunch breaks, coffee
breaks, problems in scheduling and balancing operations, and similar circumstances. Actual output
cannot exceed effective capacity and is often less because of machine breakdowns, absenteeism,
and other problems outside the control of the operations managers. These different measures of
capacity are useful in defining two measures of system effectiveness: efficiency and utilization.
Efficiency is the ratio of actual output to effective capacity. Utilization is the ratio of actual output
to design capacity.

It is common for managers to focus exclusively on efficiency, but in many instances, this
emphasis can be misleading. This happens when effective capacity is low compared with design
capacity. In those cases, high efficiency would seem to indicate effective use of resources when it
does not.

Example: Given
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

44
Required: Calculate efficiency and capacity utilization and forward your observation on these two
measures of capacity tools?
Solution
Actual Output 36
Efficiency= = = 0.90=90%
Effective capacity 40
Actual Output 36
Capacity Utilization= = =0.72=72 %
Design Capacity 50

Hence, utilization is much lower than efficiency implies that mangers need to work on closing the
gap as much as possible.

1.4. Facility Location and Layout

1.4.1. Facility location
The selection of location is a key-decision as large investment is made in building plant and
machinery. It is not advisable or not possible to change the location very often. So, an improper
location of plant may lead to waste of all the investments made in building and machinery,
equipment. Facility Location is the process of identifying the best geographic location for a
service or production facility. The purpose of the location study is to find an optimum location
one that will result in the greatest advantage to the organization.

i) Location Decision
The location decision often depends on the type of business. For industrial location decisions, the
strategy is usually minimizing costs, although innovation and creativity may also be critical. For
retail and professional service organizations, the strategy focuses on maximizing revenue.
Warehouse location strategy, however, may be driven by a combination of cost and speed of
delivery. A poor choice of location might result in excessive transportation costs, a shortage of
qualified labor, loss of competitive advantage, inadequate supplies of raw materials, or some
similar condition that is detrimental to operations. For service, a poor location could result in
lack of customers and/or high operating costs. For both manufacturing and services, location
decisions can have a significant impact on competitive advantage.
ii) Need for Location Decisions
Location decisions arise for a variety of reasons:
 As part of a marketing strategy to expand markets

45
  Addition of new facilities
 Growth in demand that cannot be satisfied by expanding existing facilities
 Depletion of basic inputs/resources (e.g. mining & fishing)
 Cost advantage

iii) Location Options

There are essentially four options that managers can consider in location planning.
1. Expand an existing facility: This option can be attractive if there is adequate room for
expansion, especially if the location has desirable features that are not readily available
elsewhere. Expansion costs are often less than those of other alternatives.
2. Add new locations: while retaining existing ones, as is done in many retail operations. In
such case, it is essential to take into account what the impact will be on the total system.
3. Shut down at one location and move to another: An organization must weigh the costs of
a move and the resulting benefits against the costs and benefits of remaining in an existing
location. A shift in markets, exhaustion of raw materials, and the cost of operations often
cause firms to consider this option seriously.
2. Doing nothing: If a detailed analysis of potential locations fails to uncover benefits that
make one of the previous three alternatives attractive, a firm may decide to maintain the
status quo, at least for the time being.
iv) Factors that Affect Location Decisions

Many factors influence location decisions. However, if often happens that one or a few factors are so
important that they dominate the decision. For example, in manufacturing, the potentially dominating
factors usually include availability of an abundant energy and water supply and proximity to raw
materials. In service organizations, possible dominating factors are market related and include traffic
patterns, convenience, and competitors’ locations, as well as proximity to the market. This section
presents you a brief description of some of these important factors.

a) Regional Factors:
The primary regional factors involve raw materials, markets, and labor considerations.
Location of Raw Materials: Firms locate near or at the source of raw materials for three primary
reasons: necessity, perishability, and transportation costs. Mining operations, farming, forestry, and
fishing fall under necessity. Obviously, such operations must locate close to the raw materials. Firms
involved in canning or freezing of fresh fruit and vegetables, processing of dairy products, baking,

46
 and so on must consider perishability when considering location. Transportation costs are important
in industries where processing eliminates much of the bulk connected with a raw material, making it
much less expensive to transport the product or material after processing.
Location of Markets: Profit-oriented firms frequently locate near the markets they intend to serve as
part of their competitive strategy, whereas nonprofit organizations choose locations relative to the
needs of the users of their services. Other factors include distribution costs or the perishability of a
finished product. Retail sales and services are usually found near the center of the markets they serve.
Some firms must locate close to their markets because of the perishability of their products. Examples
include bakeries, flower shops, and fresh seafood stores. Locations of many government services are
near the markets they are designed to serve.
Labor Factors: Primary labor considerations are the cost and availability of labor, wage rates in an
area, labor productivity and attitudes toward work, and whether unions are serious potential problems.
Skills of potential employees may be a factor, although some companies prefer to train new
employees rather than rely solely on previous experience. Workers attitude toward turnover,
absenteeism, and similar factors may differ among potential locations- workers in large urban centers
may exhibit different attitudes than workers in small towns and rural areas.
Other Factors: Climate and taxes sometimes play a role in location decisions.

b) Community Considerations
Many communities actively try to attract new businesses because they are viewed as potential sources of
future tax revenues and new job opportunities. However, communities do not, as a rule, want firms that
will create pollution problems or otherwise lessen the quality of life in the community. From a company
standpoint, a number of factors determine the desirability of a community as a place for its workers and
managers to live. They include facilities for education, shopping, recreation, transportation, religious
worship, and entertainment; the quality of police, fire, and medical services; local attitudes toward the
company; and the size of the community. Other community-related factors are the cost and availability of
utilities, environment regulations, taxes (state and local, direct and indirect).
c) Site Related Factors:
The primary considerations related to sites are land, transportation, and zoning or other restrictions.
Because of the long-term commitment usually required, land costs may be secondary to other site-related
factors, such as room for future expansion, current utility and sewer capacities- and any limitations on
these that could hinder future growth- and sufficient parking space for employees and customers. In
addition, for many firm’s access roads for trucks or rail spurs are important.
d) Global Locations:
Factors relating to foreign locations are:

47
 Policies of foreign ownership of production facilities (local content requirements, import
restrictions, currency restrictions, environmental regulations and local product standards.
Stability issues
Cultural differences: living circumstances for foreign workers and their dependents
Customer Preferences: possible buy locally sentiment
Labor: level of training and education of workers, work practices, possible regulations limiting number
of foreign employees and etc…
Resources: availability and quality of raw materials, energy, transportation
1.4.2. FACILITY LAYOUT DECISIONS

Layout is defined as the most effective physical arrangement of machines, processing equipment, and
service departments to have the best co-ordination and efficiency of man, machine and material in an
organization. It is the spatial arrangement of physical resources used to create the product. It also means
how the space needed for material movement, storage, indirect labor, etc is arranged in a factory. For a
factory which is already in operation, this may mean the arrangement that is already present. However,
for a new factory this means the plan of how the machines, equipment, etc will be arranged in the
different sections or shops. These should be arranged in such a way that material movement cost, cost of
storage in between processes, the investment on machines and equipment etc should be optimal and the
product is as cheap as possible.

The objective of layout strategy is to develop an economic layout that will meet the firm’s competitive
requirements. In any cases, layout design must consider how to achieve the following:

Higher utilization of space, equipment, and people

Improved flow of information, materials, or people
Improved employee morale and safer working conditions
Improved customer/client interaction
Flexibility (whatever the layout is now, it will need to change)
1.4.2.1. Types of layout
i. Fixed Position Layout:
In this, the major part of the product remains in a fixed place. All the tools, machines, workers and
smaller pieces of materials are brought to it and the product is completed with the major part staying in
one place. Very heavy assemblies (e.g. ship, aircraft, cranes, rail coaches, highway, a bridge, a house, an
oil well, etc) requiring small and portable tools are made by this method. The techniques to deal with
fixed-position layout are not well developed and are complicated by three factors:

48
 There is limited space at virtually all sites.
At different stages in the process, different materials are needed; therefore, different items
become critical as the project develops.
The volume of materials needed is dynamic. For example, the rate of use of steel panels for the
hull of a ship changes as the project progresses.
Because problems with fixed-position layouts are so difficult to solve on-site, an alternative strategy is to
complete as much of the project as possible off-site. This approach is used in the ship-building industry
when standard units (e.g., pipe-holding brackets) are assembled on a nearby assembly line (a product-
oriented facility). Some ship-buildings are also experimenting with group technology to group
components.

ii. Process-oriented or Functional Layout:

It is a layout that deals with low-volume, high-variety production. In this type, all the machines and
equipment of the same type are grouped together in one section or area or department. For example, all
welding equipment are kept in one section; all drilling machines in other; all lathes in third section, and so
on. It is used in intermittent (discontinuous) type of production. It is most efficient when making products
with different requirements or when handling customers, patients, or clients with different needs.
In this job-shop environment, each product or each small group of products undergoes a different
sequence of operations. When designing a process layout, the most common tactic is to arrange
departments or work centers so that the cost of material handling is minimum. For this, departments with
large flows of parts or people between them should be placed next to one another.
iii. Repetitive or Product-Oriented Layout:

This is also called assembly line layout because it was first used for assembling automobiles in the USA.
This layout is organized around products or families of similar high-volume, low-variety products. In this
type of layout, one product or one type of product is produced in a given area. This is used in case of
repetitive and continuous production or mass production type industries. The machines and equipment are
arranged in the order in which they are needed to perform operations on a product. The raw material is
taken at one end of the line and goes from one operation to the next very rapidly with little material
handling required.

Two types of product layout are fabrication and assembly lines. The fabrication line builds components
on a series of machines. An assembly line puts the fabricated parts together at a series of workstations.
Both are repetitive processes, and in both cases, the line must be ‘balanced’- that is, the time spent to

49
perform work on one machine must equal or ‘balance’ the time spent to perform work on the next
machine in the fabrication line.

Assembly lines can be balanced by moving tasks from one individual to another. The central problem
then in product layout planning, is to balance the output at each workstation on the production line so that
it is nearly the same, while obtaining the desires amount of output. A well-balanced assembly line has the
advantage of high personnel and facility utilization and equity between employees’ workloads.

iv. Cellular Layouts:

Cellular manufacturing is a type of layout in which machines are grouped into what is referred to as a
cell. Groupings are determined by the operations needed to perform work for a set of similar items, or
part families that require similar processing. The cells can consist of one machine, a group of machines
with no conveyorized movement of parts between machines, or a flow line connected by a conveyer. In
the cellular layout, machines are arranged to handle all of the operations necessary for a group of similar
parts. Thus, all of the parts follow the same route, although minor variations are possible.

CHAPTER FOUR
OPERATIONS PLANNING AND CONTROL

4.1. Aggregate Planning

Introduction:

Aggregate planning is intermediate range capacity planning that typically covers a time horizon
of 2 to 12 months, although in some companies it may extend to as much as 18 months. It is
particularly useful for organizations that experience seasonal or other fluctuations in demand or
capacity. The goal of aggregate planning is to achieve a production plan that will effectively
utilize the organization’s resources to satisfy expected demand. Planners must make decisions on
output rates, employment levels and changes, inventory levels and changes, back orders, and
subcontracting.

1.1.1. An Overview of Aggregate Planning

Aggregate planning begins with a forecast of aggregate demand for the intermediate range. This is
followed by a general plan to meet demand requirements by setting output, employment, and finished

50
goods inventory levels. Managers might consider a number of plans, each of which must be examined in
light of feasibility and cost. The production plan is essentially the output of aggregate planning.
Aggregate planners are concerned with the quantity and the timing of expected demand. If total expected
demand for the planning period is much different from available capacity over that same period, the major
approach of planners will be to try to achieve a balance by altering capacity, demand, or both. On the
other hand, even if capacity and demand are approximately equal for the planning horizon as a whole,
planners may still be faced with the problem of dealing with uneven demand within the planning interval.
In some periods, expected demand may exceed projected capacity, and in some periods the two may be
equal. The task of aggregate planners is to achieve rough equality of demand and capacity over the entire
planning horizon. Moreover, planners are usually concerned with minimizing the cost of the production
plan, although cost is not the only consideration.
1.1.2. Aggregate Planning Strategies
Aggregate planning strategies can be described as proactive, reactive, or mixed. Proactive
strategies involve demand options: They attempt to alter demand so that it matches capacity.
Reactive strategies involve capacity options: They attempt to alter capacity so that it matches
demand. Mixed strategies involve an element of each of these approaches.

v. Strategies for Adjusting Capacity

If demand for a company’s products or services is stable over time, then the resources necessary
to meet demand are acquired and maintained over the time horizon of the plan, and minor
variations in demand are handled with overtime or undertime. Aggregate planning becomes more
of a challenge when demand fluctuates over the planning horizon. For example, seasonal demand
patterns can be met by:

1. Producing at a constant rate and using inventory to absorb fluctuations in demand

(level production)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels
4. Increasing or decreasing working hours (overtime and undertime)
5. Subcontracting work to other firms
6. Using part-time workers

When one of these alternatives is selected, a company is said to have a pure strategy for meeting
demand. When two or more are selected, a company has a mixed strategy.

51
LEVEL PRODUCTION

The level production strategy, sets production at a fixed rate (usually to meet average demand)
and uses inventory to absorb variations in demand. During periods of low demand,
overproduction is stored as inventory, to be depleted in periods of high demand. The cost of this
strategy is the cost of holding inventory, including the cost of obsolete or perishable items that
may have to be discarded.

CHASE DEMAND

The chase demand strategy, matches the production plan to the demand pattern and absorbs
variations in demand by hiring and firing workers. During periods of low demand, production is
cut back and workers are laid off. During periods of high demand, production is increased and
additional workers are hired. The cost of this strategy is the cost of hiring and firing workers.
This approach would not work for industries in which worker skills are scarce or competition for
labor is intense, but it can be quite cost-effective during periods of high unemployment or for
industries with low-skilled workers. A variation of chase demand is chase supply. For some
industries, the production planning task revolves around the supply of raw materials, not the
demand pattern.

PEAK DEMAND

Maintaining resources for peak demand levels ensures high levels of customer service but can be
very costly in terms of the investment in extra workers and machines that remain idle during
low-demand periods. This strategy is used when superior customer service is important or when
customers are willing to pay extra for the availability of critical staff or equipment.

OVERTIME AND UNDERTIME

Overtime and undertime are common strategies when demand fluctuations are not extreme. A
competent staff is maintained, hiring and firing costs are avoided, and demand is met temporarily
without investing in permanent resources. Disadvantages include the premium paid for overtime
work, a tired and potentially less efficient workforce, and the possibility that overtime alone may
be insufficient to meet peak demand periods. Undertime can be achieved by working fewer hours
during the day or fewer days per week.

52
SUBCONTRACTING

Subcontracting or outsourcing is a feasible alternative if a supplier can reliably meet quality and
time requirements. This is a common solution for component parts when demand exceeds
expectations for the final product. The subcontracting decision requires maintaining strong ties
with possible subcontractors and first-hand knowledge of their work. Disadvantages of
subcontracting include reduced profits, loss of control over production, long lead times, and the
potential that the subcontractor may become a future competitor.

PART-TIME WORKERS

Using part-time workers is feasible for unskilled jobs or in areas with large temporary labor
pools (such as students, homemakers, or retirees). Part-time workers are less costly than full-time
workers—they receive no health-care or retirement benefits—and are more flexible—their hours
usually vary considerably. Part-time workers have been the mainstay of retail, fast-food, and
other services for some time and are becoming more accepted in manufacturing and government
jobs.

INVENTORIES
The use of finished goods inventories allows firms to produce goods in one period and sell or
ship them in another period, although this involves holding or carrying those goods as inventory
until they are needed. The cost includes not only storage costs and the cost of money tied up that
could be invested elsewhere, but also the cost of insurance, obsolescence, deterioration, spoilage,
breakage and so on. In essence, inventories can be built up during periods when production
capacity exceeds demand and drawn down in periods when demand exceeds production capacity.
This method is more amenable to manufacturing than to service industries since manufactured
goods can be stored whereas services generally cannot.
vi. Strategies for Managing Demand

Management has a wide range of decision options at its disposal for purposes of aggregate
planning. These include:

o Pricing: Pricing differentials are commonly used to shift demand from peak periods to off-
peak periods. Some hotels, for example, offer lower rates for weekend stays, and some airlines
offer lower fares for night travel. Movie theaters may offer reduced rates for matinees. An

53
 important factor to consider is the degree of price elasticity for the product or service; the more
the elasticity, the more effective pricing will be in influencing demand patterns.
o Promotion: Advertising and other forms of promotion, such as displays and direct marketing,
can sometimes be very effective in shifting demand so that it conforms more closely to
capacity. Obviously, timing of these efforts and knowledge of response rates and response
patterns will be needed to achieve the desired results. Unlike pricing policy, there is much
control over the timing of demand; there is always the risk that promotion can worsen the
condition it was intended to improve.
o Back orders: An organization can shift demand to other periods by allowing back orders.
Hence, orders are taken in one period and deliveries are promised for a later period. The
success of this approach depends on how willing customers are to wait for delivery. Moreover,
the cost associated with the backorders can be difficult to pin down since it would include lost
sales, annoyed or disappointed customers, and perhaps additional paperwork.
o New demand: Many organizations are faced with the problem of having to provide products or
services for peak demand are very uneven. For instance, demand for bus transportation tends to
be more intense during the morning and late afternoon rush hours but much lighter other times.
Creating new demand for buses at other times (e.g., trips by schools, clubs, and etc ….) would
make use of the excess capacity during those slack times. Manufacturing firms that experience
seasonal demands for certain products are sometimes able to develop a demand for a
complementary product that makes use of the same production processes. They thereby
achieve a more consistent use of labor, equipment, and facilities.
vii. Mixing Options to Develop a Plan

Although each of these capacity and demand options might produce an effective aggregate
schedule, some combination of capacity options and demand options may be better. Many
manufacturers assume that the use of the demand options has been fully explored by the
marketing department and those reasonable options incorporated into the demand forecast. The
operations manager then builds the aggregate plan based on that forecast. However, using the
five capacity options at his command, the operations manager still has a multitude of possible
plans. These plans can embody, at one extreme, a chase strategy and, at the other, a level-
scheduling strategy. They may, of course, fall somewhere in between.

54
 Techniques for Aggregate Planning
Numerous techniques help decision makers with the task of aggregate planning. Generally, they
fall into one of two categories: informal trial and error techniques and mathematical techniques.
In practice, informal techniques are most commonly used. A general procedure for aggregate
planning consists of the following steps:
1. Determine demand for each period
2. Determine capacity (regular time, overtime, subcontracting) for each period
3. Identify company or departmental policies that are pertinent
4. Determine unit costs for regular time, overtime, subcontracting, holding inventories,
backorders, layoffs, and other relevant costs.
5. Develop alternative plans and compute the cost for each
6. If satisfactory plans emerge, select the one that best satisfies objectives.
i. Informal Techniques: Trial -and -Balance using graphs
Informal approaches consist of developing simple tables or graphs that enable planners to
visually compare projected demand requirements with existing capacity. Alternatives are usually
evaluated in terms of their overall costs. The chief advantage of such techniques is that they do
not necessarily result in the optimal aggregate plan.
Example:
Planners for a company that makes several models of skateboards are about to prepare the
aggregate plan that will cover six periods. They have assembled the following information:
Month Jan. Feb. Mar. Apr. May June Total
Forecast 200 200 300 400 500 200 1,800

Cost Information:
Regular time = $2 per skateboard
Overtime = $3 per skateboard
Subcontract = $6 per skateboard
Inventory = $1 per skateboard per period on average inventory
Back orders = $5 per skateboard per period
They now want to evaluate a plan that calls for a steady rate of regular-time output, mainly using
inventory to absorb the uneven demand but allowing some backlog. Overtime and subcontracting

55
are not used because they want steady output. They intend to start with zero inventory on hand in
the first period. Prepare an aggregate plan and determine its cost using the preceding
information. Assume a level output rate of 300 units (skateboards) per period with regular time
(i.e., 1,800/6 = 300). Note that the planned ending inventory is zero. There are 15 workers, and
each can produce 20 skateboards per period.

Solution:
Plan1: constant workforce (regular – time )
Month Jan. Feb. Mar. Apr. May June Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular time 300 300 300 300 300 300 1,800
Overtime - - - - - -
Subcontracting - - - - - -
Output - Forecasting 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100

Based on the given input and forecasting information above, the cost is calculated as follows:
Cost
Month Jan. Feb. Mar. Apr. May June Total
Output
Regular time $600 600 600 600 600 600 $3,600
Overtime - - - - - -
Subcontracting - - - - - -
Inventory $50 150 200 150 50 0 $600
Back orders $0 0 0 0 500 0 $500
Total $650 750 800 750 1,150 600 $4,700

Note that the total regular-time output of 1,800 units equals the total expected demand. If
insufficient inventory exists, a backlog equal to the shortage amount appears, as in May. This is
taken care of using the excess output in June. The total cost for this plan is $4,700.

56
very often, graphs can be used to guide the development of alternatives. Some planners prefer
cumulative graphs while others prefer to see a period-by-period breakdown of a plan.
Example:
Plan 2: using overtime
after reviewing the plan developed in the preceding example, planners have decided to develop
an alternative plan. They have learned that one person is about to retire from the company.
Rather than replace that person, they would like to stay with the smaller workforce and use
overtime to make up for the lost output. The reduced regular-time output is 280 units per period.
The maximum amount of overtime output per period is 40 units. Develop a plan and compare it
to the previous one.

57
Solution

Month Jan. Feb. Mar. Apr. May June Total

Forecast 200 200 300 400 500 200 1,800
Output
Regular time 280 280 280 280 280 280 1,680
Overtime 0 0 40 40 40 0 120
Subcontract - - - - - -
Output - Forecasting 80 80 20 (80) (180) 80 0
Inventory
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520
Backlog 0 0 0 0 80 0 80
cost
regular time $560 560 560 560 560 560 3,360
over time 0 0 120 120 120 0 360
subcontract - - - - - -
Inventory $40 120 170 140 50 0 $520
Backorders 0 0 0 0 400 0 $400
Total $600 680 850 820 1,130 560 $4,640

overall, the total cost for this plan is $4,640, which is $60 less than the previous plan. Regular-
time production cost and inventory cost are down, but there is overtime cost. However, this plan
achieves savings in backorder cost, making it somewhat less costly overall than the plan in
Example 1.
ii. Mathematical Techniques:
A number of mathematical techniques have been developed to handle aggregate planning. They
range from mathematical programming models to heuristics and computer search models. The
followings are the best-known techniques:

58
Linear Programming: linear programming models are methods for obtaining optimal solutions
to problems involving the allocation of scarce resources in terms of cost minimization and profit
maximization. With aggregate [planning, the goal is usually to minimize the sum of costs related
to regular labor time, overtime, subcontracting, inventory holding costs, and costs associated
with changing the size of the workforce. Constraints involve the capacities of the workforce,
inventories, and subcontracting.

Linear Decision Rule: seeks to minimize the combined costs of regular payroll, hiring and
layoffs, overtime, and inventory using a set of cost-approximating functions.
Simulation Models: computerized models that can be tested under different scenarios to identify
acceptable solution to problems.
Aggregate Planning in Services
Aggregate planning for manufacturing and aggregate planning for services share similarities in
some respects, but there are some important differences- related in general to the differences
between manufacturing and services:
Services occur when they are rendered
Demand for service can be difficult to predict
Capacity availability can be difficult to predict
Labor flexibility can be an advantage in services
1.2. OPERATIONS SCHEDULING
Scheduling deals with the timing of operations. Scheduling begins with capacity planning, which
involves facility and equipment acquisition. In the aggregate planning stage, decisions regarding
the use of facilities, inventory, people, and outside contractors are made. Then the master
schedule breaks down the aggregate plan and develops an overall schedule for outputs. Short-
term schedules then translate capacity decisions, intermediate planning, and master schedules
into job sequences and specific assignment of personnel, materials, and machinery.
Scheduling Criteria
The correct scheduling technique depends on the volume of orders, the nature of operations, and
the overall complexity of jobs, as well as the importance placed on each of four criteria. Those
four criteria are:

59
 i. Minimize completion time: this criterion is evaluated by determining the average
completion time per job.
ii. Maximize utilization: this is evaluated by determining the percent of the time the facility is
utilized.
iii. Minimize work in process (WIP) inventory: this is evaluated by determining the average
number of jobs in the system.
iv. Minimize customer waiting time: this is evaluated by determining the average number of
late days.
Good scheduling approaches should be simple, clear, easily understood, easy to carry out,
flexible and realistic. Given these considerations, the objective of scheduling is to optimize the
use of resources so that production objectives are met. In this part, we examine scheduling in
process-focused (intermittent) production.

Scheduling Process-focused Work Centers

Process-focused facilities (also known as intermittent or job shop facilities) are high-variety,
low-volume systems commonly found in manufacturing and service organizations. It is a
production systems in which products are made to order. Items made under this system usually
differ considerably in terms of materials used, order of processing, processing requirements, time
of processing, and set up requirements. Because of these differences, scheduling can be complex.
To run a facility in a balanced and efficient manner, the manager needs a production planning
and control system.

Loading Jobs in Work Centers

Loading means the assignment of jobs to work or processing centers. Operations manager assign
jobs to work centers so that costs, idle time, or completion time are kept to a minimum. Loading
work centers takes two forms. One is oriented capacity; the second is related to assigning
specific jobs to work centers. First, we examine loading from the perspective of capacity via a
technique known as input-output control.

a) Input-output control is a technique that allows operations personnel to manage facility work
flows. If the work is arriving faster than it is being processed, we are overloading the facility
and a backlog develops. Overloading causes crowding in the facility, leading to inefficiencies

60
 and quality problems. If the work is arriving at a slower rate than jobs are being performed, we
are under loading the facility and the work center may run out of work. Underloading the
facility results in idle capacity and wasted resources. The options available to operations
personnel to manage facility work flow include:

Correcting performances Routing work to or from other work

Increasing capacity centers
Increasing or reducing input to the work Increasing or decreasing subcontracting
center by Producing less or more
b) Gantt charts: are visual aids that are useful in loading and scheduling. The name is derived from
Henry Gantt, who developed them in late 1800s. The charts help show the use of resources, such
as work centers and overtime. The two most common Gantt charts that used for loading and
scheduling are Load chart and Schedule chart.
When used in loading, Gantt charts show the loading and idle times of several departments, or
facilities. They display the relative workloads in the system so that the manager knows what
adjustments are appropriate. For example, when one work center becomes overloaded,
employees from a low-load center can be transferred temporarily to increase the workforce.

A Gantt schedule chart is used to monitor jobs in progress. It indicates which jobs are on
schedule and which are ahead of or behind schedule

The Assignment Method: involves assigning tasks or jobs to resources. Examples include
assigning jobs to machines, contractors to bidders, people to projects, and salespeople to
territories. The objective is to minimize total costs or time required to perform the task at hand.

61
One important characteristic of assignment problems is that only one job (or work) is assigned to
one machine (or project).
Hungarian method is the method of assigning jobs by a one for one matching to identify the
lowest cost solution.
1. Acquire the relevant cost information and arrange it in tabular form
2. Obtain the Row Reduction; this is obtained by subtracting the smallest number in each row
from every number in the row. Enter the results in a new table.
3. Obtain the Column Reduction by subtracting the smallest number in each column of the
new table from every number in the column.
4. Test whether an optimum assignment can be made. You do this by determining the
minimum number of lines needed to cover ( i.e.) cross out all zeros. If the number of lines
equal the numbers of row, an optimum assignment is possible. In this case move to final
step.
5. If the numbers of lines are less than the number of rows, modify the table in the following
manner
 Subtract the smallest uncovered number from every uncovered number in the table.
 Add the smallest uncovered number to the numbers at the intersections of covering lines
 Numbers crossed out but not at intersections of cross out lines carry over unchanged to the next
table.
6. Repeat steps fourth and fifth unless an Optimal table is obtained
7. Make the assignments. Begin with rows or columns with only one zero. Match items that
have zeros, using only one match for each row and each column. Cross out both the row and
column for each row.

Example: Determine the optimal assignment of jobs to machines for the following data.

MACHINE

JOB A B C D
1 8 6 2 4
2 6 7 11 10
3 3 5 7 6
4 5 10 12 9

62
Solution:
1.Select the Raw minimum and Subtract in each row,

MACHINE MACHINE

JOB A B C D ROW JOB A B C D

MIN
1 6 4 0 2
1 8 6 2 4 2
2 0 1 5 4
2 6 7 11 10 6 3 0 2 4 3
3 3 5 7 6 3 4 0 5 7 4
4 5 10 12 9 5 COL
MIN
0 1 0 2

Determine the minimum number of lines needed to cross

Subtract the smallest number in each column Out all zeros. Here we have three lines only and rows are
4, so the solution is not optimal

MACHINE MACHINE

JOB A B C D JOB A B C D

1 6 3 0 0 1 6 3 0 0

2 0 0 5 4 2 0 0 5 2

3 0 2 4 3 3 0 1 4 1

4 0 5 7 4 4 0 4 7 2

MACHINE

JOB A B C D
1 6+1= 3 0 0
7
2 0+1= 0 5 2
1
3 0 0 3 0
4 0 3 6 1

MACHINE
Job A B C D
1 7 3 0 0
2 1 0 5 2
63 3 0 0 3 0
& Enter 4 0 3 6 1
 Determine the minimum number of lines
needed to cross Out all 0 ( 4), since this
equals the number of rows , we obtain the
optimum assignment.
Subtract the smallest value that has not been crossed out
from every number that has not been crossed out (1 here)
and add this to numbers that are at intersections of
covering lines

Step-7 Make the assignments, start with rows and columns with Only one 0.

Match jobs with machines that have 0 costs

MACHINE Assignments Cost (From the original cost table)

JOB A B C D 1-C $2
2-B 7
1 7 3 0 0 3-D 6
2 1 0 5 2 4-A 5
$20
3 0 0 3 0 If the objective is maximization instead of minimization
subtract the largest value from all values in the table and
4 0 3 6 1
continue as usual

Sequencing Jobs in Work Centers

Scheduling provides a basis for assigning jobs to work centers. Loading is a capacity control technique
that highlights overloads and under loads. Sequencing specifies the order in which jobs should be done at
each center. Priority rules are the rules used in obtaining a job sequence. These can be very simple,
requiring only that jobs be sequenced according to one piece of data, such as processing time, due date, or
order of arrival.
The most common priority rule are the following:
 FCFS – (First Come, First Served): Jobs are processed in the order in which they arrive at a
machine or work center.
 SPT- (Shortest Processing Time): Jobs are processed according to processing time at a
machine or work center, shortest job first.
 EDD – (Earliest Due Date): Jobs are processed according to due date, earliest due date first.

64
 CR – (Critical Ratio): Jobs are processed according to smallest ratio of time remaining until
due date to processing time remaining.
 LCFS (Last Come, First Served): occurs frequently by default. As orders arrive they are
placed on the top of the stack; the operator usually picks up the order on top to run first.

Assumptions of Priority Rules

65
1. The set of jobs is known, no new jobs arrive after processing begins and no jobs are canceled.
2. Setup time and Processing times is deterministic(static) rather than variables.
3. There will be no interruptions in processing such as machine breakdowns , accidents or worker
illnesses.

Performance Measures
The effectiveness of any given sequence is frequently judged in terms of one or more
performance measures:
 Job Flow Time: The length of time a job is in the shop at a particular workstation or
work center (cumulative value of processing time).
Total flow time
Average flow time (completion time) =
Number of Jobs
 Job Lateness: This is the length of time the job completion date is expected to exceed
the date the job was due or promised to a customer.
total late days
Average job tardiness =
Number of Jobs
 Makespan (total processing time): This is the total time needed to complete a group
of jobs. It is the length of time between the start of the first job in the group and the
completion of the last job in the group.
 Average Number of Jobs: Jobs that are in a shop are considered to be work-in-process
inventory. The average work-in-process for a group of jobs can be computed as:
Total flow time
Average Number of Jobs=
Makespan
makespan
 Utilization of facility =
∑ of job flow time
 The objective of the scheduler to minimize processing time, job lateness, number of work in
process , while maximizing utilization of facilities
Example: Processing times (including setup times*) and due dates for six jobs waiting to be processed at
a work center are given in the following table. Determine the sequence of jobs, the average flow time,
average tardiness, and average number of jobs at the work center, for each of these rules: FCFS, SPT,
EDD. Assume jobs arrived in the order shown

Job Processing Time (days) Due Date (days)

A 2 7

66
 B 8 16
C 4 4
D 10 17
E 5 15
F 12 18
Solution:
a) (FCFS) sequence A-B-C-D-E-F Total flow time
Average Flow time=
Job Processing Flow Time Due Days Tardy Number of Jobs
Sequence Time (days) (cumulative Date (0 if negative)
(1) processing time) (2) (3) (2)-(3)
120
= = 20days
A 2 2 7 0 6
B 8 10 16 0
C 4 14 4 10
Average Tardiness=54/6=9 days
D 10 24 17 7 The makespan =41 days
E 5 29 15 14
F 12 41 18 23 Average Number of Jobs at workstation=
41 120 54 120/41=2.93 jobs per workstation
Utilization = 41/120= 0.34 0r 34 %
b) STP sequence is A-C-E-B-D-F

Job Processing Flow Time Due Days Tardy Average Flow time =
Sequence Time(days) (cumulative Date (0 if
(1) processing (3) negative) Total Flow Time/Number of Jobs =108/6 =18
time) (2) (2)-(3) days

A 2 2 7 0 Average Tardiness = 40/6 = 6.67days

C 4 6 4 2 The makespan = 41 days
E 5 11 15 0
Average Number of Jobs at workstation
B 8 19 16 3
D 10 29 17 12 =108/41=2.63 jobs per workstation
F 12 41 18 23
Utilization = 41/ 108 = 0.379 0r 38%
41 108 40

c) (EDD) sequence is C-A-E-B-D-F.

Average Flow time=
Job Processing Flow Time Due Days Tardy
Sequence Time (days) (cumulative Date (0 if negative) Total Flow Time/Number of Jobs=110/6=18.33
(1) processing (3) (2)-(3)
time) (2) days
C 4 4 4 0
Average Tardiness=38/6=6.33 days
A 2 6 7 0
E 5 11 15 0 The makespan =41 days
B 8 19 16 3
D 10 29 17 12 Average Number of Jobs at
F 12 41 18 23 workstation=110/41=2.68 jobs per workstation
Utilization = 41/ 110 = 0.372 0r 37%

67
 41 110 38

CHAPTER FIVE
5 QUALITY MANAGEMENT AND CONTROL
1.1. Meaning and Nature of Quality

Different meaning could be attached to the word quality under different circumstances. The word quality
does not mean the quality of manufactured product only. It may refer to the quality of the process (i.e.,
men, material, and machines) and even that of management. Where the quality manufactured product
referred as or defined as “Quality of product as the degree in which it fulfils the requirement of the
customer. It is not absolute but it judged or realized by comparing it with some standards”.

Quality begins with the design of a product in accordance with the customer specification further it
involved the established measurement standards, the use of proper material, selection of suitable
manufacturing process etc., quality is a relative term and it is generally used with reference to the end use
of the product.

Crosby defined as “Quality is conformance to requirement or specifications”. Juran defined as “Quality is

fitness for use”. “The Quality of a product or service is the fitness of that product or service for meeting
or exceeding its intended use as required by the customer.” According to American Society for Quality
“Quality is the totality of features and characteristics of a product or service that bears on its ability to
satisfy stated or implied needs.”
51.1. The Dimensions of Quality
The dimensions of quality primarily for manufactured products a consumer looks for in a product include
the following:
 Performance: The basic operating characteristics of a product; for example, how well a car handles
or its gas mileage.
 Features: The “extra” items added to the basic features, such as stereo CD or a leather interior in a
car.

68
 Reliability: The probability that a product will operate properly within an expected time frame; that
is, a TV without repair for about 7 years.
 Conformance: The degree to which a product meets pre established standards.
 Durability: How long the product lasts; its life span before replacement.
 Serviceability: The ease of getting repairs, the speed of repairs, and the courtesy and competence of
the repair person.
 Aesthetics: How a product looks, feels, sounds, smells, or tastes.
 Safety: Assurance that the customer will not suffer injury or harm from a product; an especially
important consideration for automobiles.
 Other perceptions: Subjective perceptions based on brand name, advertising and the like.

These quality characteristics are weighed by the customer relative to the cost of the product. In general,
consumers will pay for the level of quality they can afford. If they feel they are getting what they paid for,
then they tend to be satisfied with the quality of the product.

The dimensions of quality for a service differ somewhat from those of a manufactured product. Service
quality is more directly related to time, and the interaction between employees and the customer. Evans
and Lindsay identify the following dimensions of service quality.

 Time and timeliness: How long a customer must wait for service, and if it is completed in time. For
example, is an overnight package delivered overnight?
 Completeness: Is everything the customer asked for provided? For example, is a mail order from a
catalogue company complete when delivered?
 Courtesy: How customers are treated by employees. For example, are catalogue phone operators nice
and are their voices pleasant?
 Consistency: Is the same level of service provided to each customer each time? Is your newspaper
delivered on time every morning?
 Accessibility and convenience: How easy it is to obtain the service. For example, when you call BPL
Mobile, does the service representative answer quickly?
 Accuracy: Is the service performed right every time? Is your bank or credit card statement correct
every month?
 Responsiveness: How well the company reacts to unusual situations, which can happen frequently in
a service company. For example, how well a telephone operator at a catalogue company is able to
respond to a customer’s questions about a catalogue item not fully described in the catalogue.

69
All the product and service characteristics mentioned previously must be considered in the design process
to meet the consumer’s expectations for quality. This requires that a company accurately assess what the
consumer wants and needs.
5.1.2. The Costs of Quality
Any serious attempt to deal with quality issues must take into account the cost associated with quality.
Those costs can be classified into four categories:
Failure costs: are incurred by defective parts or products, or faulty services. Internal failures are those
discovered during the production process; external failures are those discovered after delivery to the
customers. Internal failures occur for a variety of reasons, including defective material from vendors,
incorrect machine settings, faulty equipment, incorrect methods, and etc..the cost of internal failures
include lost production time, scrap and rework, investigation costs, possible equipment damage, and
possible employee injury. External failures are defective or poor services that go undetected by the
producer. Resulting costs include warranty work, handling of complaints, replacements,
liability/litigation, payment to customers or discount used to offset the inferior quality, loss of customer
goodwill, and opportunity costs related to lost sales.
Appraisal Costs: relate to inspection, testing, and other activities intended to uncover defective products
or services, or to assure that there are no defectives. They include the cost of inspectors, testing, test
equipment, labs, quality audits, and field testing.
Prevention Costs: relate to attempts to prevent defects from occurring. They include costs such as
planning and administration systems, working with vendors, training, quality control procedures, and
extra attention in both the design and production phases to decrease the probability of defective
workmanship.
5.1.3. International Quality Standards
Quality is so important globally that a number of quality standards have been developed. Japan, the
European Community, and the United States have each developed their own quality standards.
Japan’s Industrial Standard: the Japanese specification for quality management is published as
industrial Standard Z8101 – 1981. It emphasizes continuous improvement and stresses the role of
organization-wide coordination and commitment.
Europe’s ISO Standard: the European community has developed quality standards called ISO 9000,
9001, 9003, and 9004. The focuses of the EC standard are to force the establishment of quality
management procedure, through detailed documentation, on firms doing business in EC.
ISO 9000: The purpose of the International Organization for Standardization (ISO) is to promote
worldwide standards that will improve operating efficiency, improve productivity, and reduce costs. The
ISO is composed of the national standards bodies of 91 countries. The work of the ISO is conducted by

70
some 180 technical committees. ISO 9000 is the work of the Quality Management and Quality Assurance
Committee. The ISO series is a set of international standards on quality management and quality
assurance. These standards are critical to doing business internationally, particularly in Europe. They
must go through a process that involves documenting quality procedures and on-site assessment. A key
requirement for registration is that a company review, refine, and map functions such as process control,
inspection, purchasing, training, packaging, and delivery.
5.2. TOTAL QUALITY MANAGEMENT

As the 20th century ends, business organizations are involved in what has become a “quality revolution.”
It began in Japan and has now spread to North America and other parts of the world. It involves an
entirely new way of thinking about, and dealing with, quality that encompasses the entire organization.
This new approach has been given a variety of names, but the one we shall use is total quality
management, or TQM.
The term TQM refers to a quest for quality that involves everyone in an organization. There are two key
philosophies in this approach. One is a never-ending push to improve, which is referred to as continuous
improvement; the other is a goal of customer satisfaction, which involves meeting or exceeding customer
expectations. We can describe the TQM approaches as follows:
 Find out what customers want
 Design a product or service that will meet or exceed what customer want
 Design a production process that facilitates doing the job right the first time. Determine where
mistakes are likely to occur and try to prevent them. Strive to make the process “mistake-proof”
 Keep track of results, and use those to guide improvement in the system. Never stop trying to
improve.
 Extend these concepts to suppliers and to distribution
 Successful TQM programs are built through the dedication and combined efforts of everyone in the
organization. As noted, top management must be committed and involved.
5.2.1. The Major Elements of TQM
 Continual Improvement: the philosophy that seeks to make never ending improvements to the
process of converting inputs into outputs. The Japanese use the term kaizen to refer to continuous
improvement.
 Competitive Benchmarking: this involves identifying companies or other organizations that are the
best at something and studying how they do it to learn how to improve your operation. The company
need not be the same line of business.

71
 Employee Empowerment: giving workers the responsibility for improvements and the authority to
make changes to accomplish them provides strong motivation for employees.
 Team Approach: the use of teams for problem solving and to achieve consensus takes advantage of
group synergy, gets people involved, and promotes a spirit of cooperation and shared values among
employees.
 Decisions based on facts rather than opinion: management gathers and analyzes data as a basis for
decision making.
 Knowledge of Tools: employees and managers are trained in the use of quality tools.
 Supplier Quality: suppliers must be included in quality assurance and quality improvements efforts
so that their processes are capable of delivering quality parts and materials in a timely manner.

QUALITY TOOLS
A major cornerstone of the commitment to quality improvement prescribed by Deming and the
other early quality gurus is the need to identify and prevent the causes of quality problems, or
defects. These individuals prescribed a number of “tools” to identify the causes of quality
problems that are still widely used today. These are :
1. Check Sheets: is a fact-finding tool used to collect data about quality problems. A typical
check sheet for quality defects tallies the number of defects for a variety of previously
identified problem causes. When the check sheet is completed, the total tally of defects for
each cause can be used to create a histogram or a Pareto chart.
2. Flowchart: is a visual representation of a process. It helps investigators in identifying
possible points in a process where problems occur.
3. Scatter Diagram: a graph that shows the degree and direction of relationship between two
variables.
4. Histogram: a chart of an empirical frequency distribution. It can be useful in getting a sense
of the distribution of observed values.
5. Pareto Analysis: technique for classifying problem areas according to degree of importance,
and focusing on the most important.
6. Control Chart: a statistical chart of time-ordered values of a sample statistic. It can help
detect the presence of correctable causes of variation. It can also indicate when a problem
occurred and give insight into what caused the problem.

72
7. Cause-and-Effect Diagram: offers a structured approach to the search for the possible
cause(s) of a problem. It is also known as a fishbone diagram.
5.3. STATISTICAL PROCESS CONTROL
Quality control is concerned with the quality of conformance of a process: Does the output of a
process conform to the intent of design? Variations in characteristics of process output provide the
rationale for process control. Statistical process control (SPC) is used to evaluate process output to
decide if a process is “in control” or if corrective action is needed.
The best companies emphasize designing quality into the process, thereby greatly reducing the need for
inspection or control efforts. Quality assurance that relies primarily on inspection after production is
referred to as acceptance sampling. Quality control efforts that occur during production are referred to as
statistical process control.
Process Control
Quality control is concerned with the quality of conformance of a process of a process: Does the output of
a process conform to the intent of design? Toward that end, managers use statistical process control to
evaluate the output of a process to determine its acceptability. To do this, they take periodic samples from
the process and compare them with a predetermined standard. If the samples results are not acceptable,
they stop the process and take corrective action. If the samples results are acceptable, they allow the
process to continue. Two statistical tools are used for quality control: control charts and run tests.
Control Charts:
There are two basic categories of variation in output: Common Causes and Assignable Causes
Common causes of variation are purely random, unpredictable sources of variation that are unavoidable
with the current process. For example, a machine that fills cereal boxes will not put exactly the same
amount of cereal in each box.
The second category of variation, assignable causes of variation, also known as special causes, includes
any variation –causing factors that can be identified and eliminated. Assignable causes of variation
include an employee needing training, or a machine needing repair.
Control charts are used to control in-process quality. Acceptance sampling plans are aimed to control the
quality of incoming raw material, semi-finished products and finished products .

73
Above figure shows the generalized representation of control chart. The x-axis shows the observation
number in sequence. The y-axis shows the sample values of the observations.
There are three lines, namely upper control limit (UCL), lower control limit (LCL) and central line. The
central line is with respect to the average of the observations.
The UCL and LCL jointly specify the range over which each sample observation can lie. After plotting all
the sample observations on the chart, we should look for the pattern of those plots. If any sample
observation is outside of these two limits, then we can conclude that the process is out of control and
definitely requires corrective action.
Control limits are the boundaries within which sample statistic can be expected to vary due simply to the
randomness of the sample used. They are computed from the relatively tight sampling distributions and
are typically set at 3 (or possibly 2) standard errors away from the process average. When a process is “in
control,” 99.7 % of the sample average should be within ±3 standard errors of the centre line. If the
sample average fall outside the control limit limits, some assignable cause is probably responsible and
corrective action should be taken.
Control Charts for Variables:
As the name indicates, these charts will use the variable data of a process. X Chart gives an idea of the
central tendency of the observations. These charts will reveal the variations between sample observations.
R chart gives an idea about the spread (dispersion) of the observations. This chart shows the variations
within the samples.
Mean Chart: A mean control chart, sometimes referred to as an X (“x-bar”) chart, can be constructed in
one of two ways. The choice depends on what information is available. Although the value of the
standard deviation of a process, , is often unknown, if a reasonable estimate is available, one can
compute control limits using these formulas:
Upper control limit (UCL): = x + z X
Lower control limit (LCL): = x - z X
Where:

74
  X =  / n

 X = standard deviation of distribution of sample means

 = Process standard deviation
n = Sample size
z = Standard normal deviate
x = Average of sample means
The following example illustrates the use of these formulas.
Example: A quality inspector took five samples, each with four observations, of the length of time to
process a loan application at a credit union. The analyst computed the mean of each sample and then
computed the grand mean. All values are in minutes. Use this information to obtain three-sigma (i.e. z =
3) control limits for means of future times. It is known from previous experience that the standard
deviation of the process is 0.02 minutes.
Observati Sample
on 1 2 3 4 5
1 12.11 12.15 12.09 12.12 12.09
2 12.10 12.12 12.09 12.10 12.14
3 12.11 12.10 12.11 12.08 12.13
4 12.08 12.11 12.15 12.10 12.12
Mean 12.10 12.12 12.11 12.10 12.12
Solution:
x = (12.10 + 12.12 + 12.11 + 12.10 + 12.12)/5 = 12.11
With z = 3, n = 4 observations per sample, and  = 0.02, we find
UCL: 12.11 + 3(0.02/√4) = 12.14
LCL: 12.11 - 3(0.02/√4) = 12.08
If one applied these control limits to this data, one would judge the process to be in control because the
entire sample means have values that fall within the control limits. The fact that some of the individual
measurements fall outside of the control limits is irrelevant.
A second approach is to use the sample range as a measure of process variability. The appropriate
formulas for control limits are:
UCL = X = A2 R
LCL = X – A2 R
Where:
R = Average of sample ranges
Example: Twenty samples of n = 8 have been taken from a cleaning operation. The average sample range
for the 20 samples was 0.016 minutes, and the average mean was 3 minutes. Determine three-sigma
control limits for this process.

75
Solution:
X = 3 cm R = 0.016 A2 = 0.37 for n = 8
UCL = 3 + 0.37(0.016) = 3.006 minutes
LCL = 3 - 0.37(0.016) = 2.994 minutes
Note that this approach assumes that the range is in control.
Range Charts: Range control charts (R- Charts) are used to monitor process dispersion; they are sensitive
to changes in process dispersion. Although the underlying sampling distribution is not normal, the
concepts for use of range charts are much the same as those for use of mean charts. Control limits for
range charts are found using the average sample range in conjunction with these formulas:

UCLR = D4 R
LCLR = D3 R
Example: Twenty-five samples of n = 10 observations have been taken from a milling process. The
average sample range was 0.01 centimeter. Determine upper and lower control limits for sample ranges.

Solution:
R = 0.01 cm, n = 10
UCL R = 1.78(0.01) = 0.0178 or 0.018
LCL R = 0.22(0.01) = 0.0022 or 0.002
Mean control charts and range control charts provide different perspective on a process. As we have
seen, mean charts are sensitive to shifts in the process mean, whereas range charts are sensitive to changes
in process dispersion. Because of this difference in perspective, both types of charts might be used to
monitor the same process. Once control charts have been set up, they can serve as a basis for deciding
when to interrupt a process and search for assignable causes of variation. To determine initial control
limits, one can use the following procedure.

 Obtain 20 to 25 samples. Compute the appropriate sample statistics for each sample.
 Establish preliminary control limits using the formulas, and graph them.
 Plot the sample statistics on the control chart(s)
 If you find no out-of-control signals, assume that the process is in control. If not, investigate and
correct assignable causes of variation. Then resume the process and collect another set of
observations upon which control limits can be based.

76