Production & Operations Management

Chapter 1
Introduction

Chapter outline
1.1 Scope and Importance of production/ operations management
- Important functions in Business organization
- Interface between Operations management, Marketing and Finance
- Hierarchy of Operations management decisions
- Production system and Classification of production systems
- History and Evolution of POM
1.2 Manufacturing process and process selection
- Types of Processes
- Process selection
- Vertical integration
- Service as Operation
- Manufacturing Vs. Services
1.3 Demand forecasting
- Patterns of demand
- Different methods of forecasting

Introduction
This subject production and operations management is very important and timely in the
present Indian context. Today manufacturing industry contributes significantly and has
changed its role in the context of globalization and accounts for 17% of the country’s
GDP. A sizable amount of service also forms part of manufacturing (e.g. GDP from
manufacturing software is not taken into account in arriving at the percentage).

We need to enhance the competitive edge through a twofold approach - one by

technological advancement & process innovation and second by management systems
approach. This book focuses mostly on the second approach.

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Manufacturing Excellence is of paramount importance in industry and economy of the
nation. Manufacturing is an important phase in the economic path and the only route to
economic prosperity. India can not skip manufacturing stage of development and focus
directly on services. This has been emphasized by our Honorable Prime Minister Dr.
Manmohan Singh in his message to National Manufacturing Competitiveness Council.
(NMCC). He has also expressed his concern about the stagnant percentage share of
manufacturing in National income i.e. around 17% and the need for enhancing it to 25 to
35%. This requires manufacturing to keep growing at the rate of 12 to 14% in the next
decade. Manufacturing is essential for maintaining a balanced growth of the country,
providing right type of employment and for effectively competing in global market.

Robust growth of manufacturing sector is necessary for creating overall growth and
employment possibilities in the country. Competitiveness is central to robust growth of
manufacturing. India possesses a competitive advantage in many respects like large pool
of scientists, engineers & managers, experienced workforce, reasonable natural resources
and large domestic market. India has the potential to emerge as a manufacturing hub for
the global market. Continuously raising the productivity levels is the key to maintain and
improve competitiveness in manufacturing.

Productivity, quality, flexible manufacturing, use of robots & automation are

contemporary issues in production / operations which forms part of Production and
Operations Management (POM). In the first chapter, an overview of the POM is given.
The issues addressed are: Importance of POM (manufacturing vs. services, classification
of production systems, demand forecasting). It is felt necessary to give a brief note on
manufacturing process to help / became aware of the process for the students without
technical background. For students with engineering background it should serve as a
review. Managers involved in optimization have to necessarily possess knowledge of
production processes.

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1.1 Scope and Importance of production/ operations management
In the past, production managers mostly focused on manufacturing. The emphasis was on
methods, time study, process selection etc. Currently, the scope of a production manger is
broadened considerably and the concept of production system is applied to a wide range
of activities outside manufacturing i.e. services. Health care, hotel management,
entertainment, banking, are some of the examples of services. In view of this the field is
named as production and operations management and no longer limited to production.
Operations management is responsible for converting a set of inputs into goods or
services (or both). Take the example of a hospital, it deals with purchase, stocking &
issues of drugs, carrying out pathological tests, scheduling operation theatres,
maintenance of the equipment, food service, transport service for patients& doctors, train
the new entrants (doctors & nurses),motivating the workforce etc

Consider the activities in a factory; we need to assign work, workers have to be recruited
& trained, set quality standards and maintain, purchase of material, motivating workers,
equipment break down & maintenance etc.

It may appear that a manufacturing factory and a hospital are different, but in reality both
have lot of common elements like equipment, work force, inventory, scheduling,
maintenance, quality control etc. the factory deals with finished goods and the hospital
deals with services.

The production function exists not only in manufacturing, which are finished goods
oriented but also in health care, transportation, retailing etc, which are service oriented.

Scope of Production and Operations

Production and operations management is concerned with the conversion of inputs into
outputs, using physical resources, so as to provide the desired utilities to the customer
while meeting the other organizational objectives of effectiveness, efficiency and
adaptability. It distinguishes itself from other functions such as personnel, marketing,

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finance etc., by its primary concern for ‘conversion by using physical resources.’
Following are the activities which are listed under production and operations
management functions:

1. Location of facilities
2. Plant layouts and material handling
3. Product design
4. Process design
5. Production planning and control
6. Quality control
7. Materials management
8. Maintenance management.

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 Table: Examples of Types of Operations

Important functions in a Business organization

The primary functions in a business organization are marketing, finance, and production /
operations. These functions cannot exist or function independent of one other. They can
be compared to the three sides of a triangle.

Marketing Production

Finance

Finance is the base of the triangle without which an organization cannot exist. Marketing
& production are the two sides of the triangle as shown in figure. Imagine a situation
where production of goods is high and the order book / sales are less. You end up with
finished goods stocks, blockage of capital in the inventory. This is depicted in the figure
below.

Sales Production
Finance

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Imagine another situation where the production is less and order book is high. Marketing
may be attempting to promote goods which production cannot profitably produce. You
will end up with no stock, cancellation of order by customers, loss of opportunities etc.
This is depicted in the figure below.

Sales Production

Finance
The success of a business enterprise depends not only how well each function performs
but also on how well they interface with each other. Unless finance and production work
closely, funds may not be available when required.
Operations:
The operations function is responsible for creation of products and services

Figure: Production System

Raw material, labor, power, technology / design drawings are the inputs used to obtain
finished goods or services by using a conversion process, there by adding value. The
output is compared to set standards, deviation, if any measured and corrective action
taken at input stage or with conversion process.

This production system lays down the frame work for all analytical tools in Production
and Operations Management (POM) and forms the basis.

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Finance:
The main functions of financing are sourcing & securing finance at a favorable price and
allocation of funds. Finance & operation cooperate and exchange information in respect
of costing, capital investment analysis, allocation of funds, preparing budgets etc.
Marketing:
The main concern of marketing is selling. However the primary functions are business
development, understanding the customer’s requirement and is a valuable source of
information to R&D for product development. Marketing function is now redefined as
‘Customer Engineering Services’. Marketing depends on operations for information on
delivery schedules, lead times, product cost, quality etc and operations depends basically
for information on demand forecasting.

Other supporting functions with the above three main functions are HR/ personnel
management, public relations, Industrial Engineering, Maintenance etc

Interface between Operations Management, Marketing & Finance:

The three functions finance, marketing and operations overlap. They do not exist or
function independently. Rather they interact to achieve the goals of the organization.
They are dependent on each other and each has a contribution to make. Success of
organization depends on how well they interface and integrate with one another. Interface
is a part of the total management. For example in manufacturing, production and
marketing should work together. Otherwise marketing may promote what production can
not profitably make and production may turnout items for which there is no demand.
Similarly finance & production need to work closely. Otherwise funds may not be
available for expansion or buying new equipment when needed.

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Operations management needs to interface continuously with marketing in respect of
demand forecast. Marketing needs to depend on operations for information on delivery
schedules to the customers, product costing data etc. Operations management needs to
interact with finance for making funds available for the working capital and capital
equipment for future expansion.

Organizational excellence and operations management function

Organizational Excellence is the resultant of innovation and resource efficiency.
Manufacturing is not confined to conversion process, nor limited to the activities of shop
floor but the whole spectrum of activities between identification of customer needs,
translation into product and satisfying them. Thus manufacturing is a more
comprehensive activity which includes various activities such as production planning,
materials management, production facilities and tooling, production processes, quality
management, material handing, maintenance, human resources, information systems etc.

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Total productivity growth is a composite of technological advancement and resource
efficiency. We need to be innovative in technology development (both product and
process technology), promotion of new policies, market development and manage
resources like materials, men, machines, money efficiently & effectively to achieve
optimal performance. Manufacturing involves both technology of product and process.
The technology of the product determines the features, performance customers look for in
the market place and process technology determine quality, cost, reliability etc

The two main objectives placed before the Operations manager are: Maximizing the
resource utilization and meeting the targeted / scheduled deliveries of product and
services to customer. Though in general, the emphasis is on productive use of resources;
the operation management has to strike a balance / tradeoff between both the objectives.
Of late there is shift in emphasis towards meeting the customer requirement from
resource utilization.

The operation management needs to take a decision relating to system design and system
operation. System design involves decisions that relate to system capacity, location,
facilities layout, product & service planning, procurement of capital equipment etc and
these decisions require long term commitments. Systems operation involves aggregate
planning, managing men, removing bottlenecks, inventory planning & control,
scheduling, quality control etc.

In many instances operation management is involved with day to day operations

decisions, than system design. However operation management has an important role to
play in system design because system design determines many parameters of system
operation. For example space, capacities, quality, cost. Though operations management is
not directly responsible for system design, it provides information necessary for system
design.

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Hierarchy of Operations Management Decisions

The decisions are hierarchical in nature. At the highest level, they are strategic in nature
having long term implication for the organization and next level are tactical decisions
involving allocation of resources, equipment selection, planning work force, output rates
& inventory levels. The lowest are operations decisions involving scheduling, adjust rate
of production, absenteeism, overtime, breakdown etc. Operations decisions are made
within the frame work of tactical, which in turn are within the guidance of strategic
decisions.

The operations manager is the key person as he is ultimately responsible for production
of goods & services. The type of jobs that Operations managers undertake may vary from
organization to organization depending on the nature of products and services. Managing
a hospital is different from electronic manufacturing as they require different expertise.
However the underlining job is primarily same i.e. management involving planning,
organizing, staffing, directing and controlling

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 Table: Responsibilities of Operations Management

Production system & classification of Production systems

The production system primarily deals with the conversion process or transformation
process which transforms the inputs (raw material) into output i.e. products and services
which are useful to the consumers.

Figure: Production System Diagram

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Production systems are generally classified based on type of operation, degree of
standardization, manufacturing vs. service operations.

Types of operations
This is based on nature of operation & volume. Continuous processes like oil refinery are
on one end of the scale and missile project on the other end. Between these extremes lies
mass production/ high volume of output e.g. automobiles, TVs, personal computers, mass
inoculation and small batch products like machine tools, specialized medical equipment
like CT scan, MRI etc.

Job Shop: Production of large variety of products, in quantities of one or few which
require different set or sequence of process steps. Examples are commercial printing of
form, custom built PCB.

Batch Production is essentially a standardized job shop. These structures are used for
relatively stable line of products, each produced periodically in batches either to customer
order or stock. Most of the items follow the same processes / flow pattern through the
plant.

Project is complex, time bound, unique, accompanied by uncertainties e.g. new product
like missile, setting up a new plant, construction of hospital, visit of foreign delegates etc.

Assembly line/Mass Production: Production of discrete parts moving from workstation

to workstation at a control rate, following the same sequence. Examples are assembly of
TV, toys, automated assembly (Insertion of components on PCB, automobiles)

Continuous production involves production of homogenous product or service e.g. oil

refinery, cement plant, chemical industries etc. Production follows predetermined
sequence of operations, but the flow is continuous rather than discrete. These are

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generally automated, constitute one integrated machine or few machines, operated 24
hours a day.

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 Classification of Production System

Basically there are four types of production process: (1) Continuous process, (2) Mass
production (3) Intermediate process (4) Project (includes job time).

Sl No Characteristics Job Type Batch Mass Continuous

Forecast or
1 Against Stock/Order Against Order Forecast Forecast
stcok

2 Variety Very high Limited Very few Single

Quantity
Large Quantity Very Large
3 Volume One or few (in the range of
Quantity
hundred )
General Fully Automated
4 Nature of Equipment used General Purpose Purpose/ SPM/ Dedicated Equipment.
Flexible No flexibility
5 Comparatively low Less Skilled
Operator Skills Highly Skilled Skilled
skilled operators Operators
6 Few days of
Inventory level Large Medium Low
Consumption
7 Detailed
Production Planning Complicated. Less complicated.
Planning. Line Flow system
system ( tools used) Bar Chart Line Balancing
of balance
8 Job to Job Different for
Standard (or) does Completely
Sequencing Different each batch
not differ much Standardized

9 Fixed
Layout position/Process Process Product Product layout
layout
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Lead Time More Relatively Less Much lesser Very less

11 Cost of Production (per

Very High High Low Very Low
unit)
12 Depends
Automate or semi
Material Handling whether product High Fully automated
automated
is Heavy / Light
13 As designed. As designed.
Limited because Relatively
Capacity Rate of Production is Rate of Production
of variety higher capacity
high much higher
14
Investments Low High Higher Very High

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Standardization means well established method of manufacturing, materials,
mechanization, which leads to higher volume, lower production costs. Examples are TVs,
automobiles, newspaper, PCs, canned food etc. On other hand a specialized, custom built
system, calls for higher skills of workers, slow pace of work, less prone for automation
etc. e.g. custom built security system for jail, airport, or sea port; eye glass; tailoring;
surgery etc.

History and Evolution of POM

History and development of operations management is important because they suggest
lessons for the future. History helps us to know the trends. We see that efforts have
always been on increasing productivity. During Taylor’s era production activities were
centered round individual. Hence Taylor initiated methods to standardize the work, work
measurement. Ford’s assembly line was an attempt to further improve the speed and
evenness of flow of work. Figure below depicts the progress of POM.

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 (Source: Operations Management by Dr. S.N. Chary)

Production/Operation management was considered very important in the last two

centuries for the economic growth of the country. Adam Smith viewed Production
management as specialization of labour. He recommended breaking the jobs into subtasks
so that the workers become specialized and efficient.

Scientific management is the early management approach which emphasized on

efficiency improvement. FW Taylor pioneered the philosophy of management, popularly
known as Taylorism. The following is the essence of FW Taylor’s philosophy.

1) Developing scientific laws that govern how much a worker can do per day and
best method of performing the task.

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 2) It is the function of manager to discover and use these laws in the operation of
production system

3) Scientific education & development of worker

4) Cooperation between workers and management. Workers’ function is to carry out

the work assigned.

F.W. Taylor’s major thrust was increasing efficiency in production, reduce the cost,
thereby leading to possible increase in pay of workers.

Till 1930 many techniques were developed based on this traditional view. Details of
contributions made by different management scientists are given below

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History & Evolution Production & Operations Management

There was some resentment by his contemporaries, particularly union. While managers of
that time liked the Taylor’s philosophy of time study, they failed to organize and
standardize the work to be done. Taylor’s ideas were accepted in contemporary Japan.
Gilberth and Henry Gantt are the coworkers of Taylor. Henry Gantt received a
presidential citation for his work on application of Gantt / Bar chart to ship building
during World War 1. Frank & Lillian Gilbreth also belong to that era. They contributed

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immensely to time & motions study. Even today the classification of motion study made
by Gilbreth is extensively used.

Moving assembly line: Ford cars chassis assembly took 12½hours. When a moving
assembly line was setup with chassis being moved mechanically, each worker performing
a small unit of work, the average time came down to 1½hours (8 times less).

Hawthorne studies: (1910 to 1940) - Mathematical and statistical development took place
in 1930 by Hawthorne and Elton mayo. Effect of changing levels of illumination was
studied. Increase in illumination led to increased output. When the illumination was
brought down also the output continued to increase because workers felt an obligation to
keep group output high in view of the concern expressed by management. This had
implication in work design and motivation.

Operations research: World War II with its complex problems of logistics, weapon design
provided importance to OR, bringing multiple disciplinary people together. This led to
many Quantitative techniques.

Emergence of Operations Management as a field of study: In late 1950’s and early 60’s
scholars began to deal with operations management instead of industrial engineering.
Writers such as Buffa (Modern production management – 1961), Edward Bowman-
Analysis of POM (Book 1957), noted the commonality of all the production operation as
a production system.

Computers and MRP: Major development in 1970 is use of MRP in materials

management function, which calls for massive data manipulation.

Just In Time, Theory Of Constraints (TOC) and factory automation: 1980 saw a
revolution in management philosophies and technologies. JIT (Japan) is a major break
through. TOC aims at eliminating causes of production bottlenecks. In the next decade
CIM, FMS came into practice

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Manufacturing strategy paradigm: In 1980, we saw the development of manufacturing
strategies paradigm by researchers at Harvard, progress emphasized how manufacturing
executives could use their factory capabilities as strategic competitive weapons. A factory
cannot excel on all performance measures; its management must devise a focused
strategy such as low cost, high quality, high flexibility etc.

ISO and TQM: Though practiced in 80’s, it became more popular in 1990. All
management executives are aware of the message of Quality gurus Deming, Juran, Philip
Crossby. Most European companies require that their vendors meet ISO standards as a
condition for getting orders.

Business Process Reengineering (BPR) (1990) is a fundamental & radical change and not
an incremental improvement.

Supply Chain Management (SCM): The idea is to apply a total system approach to
manage flow of information, materials and services from raw material suppliers through
factories, ware houses to the end customer
Current issues that the Operations Management Executives face are:
• Speeding up the time (Concurrency in all operations).
• To Develop Production System to enable mass customization.
• Managing global production network (design and quality standards need to be
maintained).
• Developing and integrating new process technology into existing production
system e.g. using dedicated expensive FMS.
• Achieving high quality quickly.
• Managing diverse work force: multiple languages, culture (In shop floor of USA,
twenty six different cultures existed among 400 workers).
• Conforming to environmental constrains, ethical standards, GOVT regulation,
corporate governance (corporate social responsibility) e.g. green strategies,
reduced CO2 levels.

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Post liberalization the growth in manufacturing is stagnant. There is over emphasis on
services. Before liberalization, the policy makers emphasized on small scale industries
(SSI) e.g. mini steel plant, mini cement plants. While service industry can survive &
thrive to an extent when it is small, any manufacturing organization must necessarily be
large to achieve economies of scale. Though protection was desirable in the early stages
of 1980’s, this gave negative effects. Choice of technology, expansion plan, PMP all
required government approval, before liberalization.

After liberalization the role of operations management increased manifold. It has become
more strategic due to increased competition from multinational companies. (Medical
service in India is very cost effective (1/10 of USA). Indian health care offers a holistic
approach – yoga / physiotherapy).

Initially production/operations manager’s focus was on labour efficiency & productive

utilization of resources. POM traveled through improved methods, management systems
– emphasis on HR, autonomy – globalization and environmental consideration and
service to society. In short it moved from efficiency to effectiveness which involves
optimum fulfillment of multiple objectives, with possible prioritization. The modern
operations manager has to serve large customer segment, people within the organization,
country and society at large.

1.2 Manufacturing process and process selection

The production analyst must necessarily have a thorough knowledge of the

manufacturing processes to enable him optimize the choice. While the amount of
information available is vast and the choices are diverse it would be appropriate to give a
brief survey of the processes currently in use. The purpose of the chapter is to familiarize
the student with the processes.

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The manufacturing process can be broadly classified into metallurgical, forming,
machining, finishing and assembly operations.

Types of Processes

Metallurgical operations:
The industrial growth has been characterized by the extensive use of metals and in
particular iron.

Iron smelting: Iron obtained in the free state as oxide has to be reduced and brought back
to the virgin state. Reduction is usually carried in blast furnace in the presence of coke
and lime stone; the first acts both as reducing agent and also fuel necessary for producing
the heat for melting and the latter as flux to remove impurities.

Figure: Blast Furnish

Steel making: The production of steel essentially consists in re melting the pig iron and
processing the molten iron to reduce the carbon content and add various alloying

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elements to improve upon the physical characteristic of the metal. The processes
followed are known as: simplex, duplex and triplex.

Steel rolling: Steel in the form of ingots is heated to a high temperature and is rolled into
different cross sections like square, angles, rods, flats, plates, sheets, T section etc. By
changing the gap and shape of rollers, different forms of steel are obtained.

Casting: If the shape is extremely complicated, the part can be produced by casting
process. This is an operation in which molten metal is poured into a mould and allowed
to solidify, thus taking the form of the cavity in the mould itself.

The metal can be cast under pressure as in pressure die casting or may be allowed to flow
in by gravity. Heavy machine beds, automobile cylinder blocks, valve body, piston are
typical example of cast parts.

Forming process: Forging, extrusion, stamping, embossing are some of the forming
processes.
Forging: In the forging process, the metal is heated to a plastic state and then formed to
desired shape by applying pressure (pneumatic or hydraulic) or impact. Typical examples
of forged parts are crank shaft, connecting rod, turn buckle in a wagon etc.

Extrusion: The process consists of forcing the metal through dies so that metal takes the
shape of the cross section of the die. Ex: angles, rails, flats etc.
Stamping: In the stamping process, force is applied on the metal to cause plastic flow and
alter the size and shape of the metal part to the desired shape and size. This is cold
working process.
Spinning: It is a process of shaping the metal by pressing it against a form or mandrel,
while it is rotating on a high speed lathe.

However, the technological breakthrough in plastics has superseded the use of iron &
steel. Load bearing, intricate parts of automobiles, gear etc are made of plastic.

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Heat treatment process:
Heat treatment is the process of heating metals or alloys to a certain temperature and
holding (soaking) it at that temperature for certain length of time and then cooling slowly
or rapidly in order to change the microstructure and get the desired mechanical
properties. It is possible to alter the properties of metals, alloys and make them more
suitable for a particular application. Steels are more suitable for heat treatment. The
important heat treatment processes for steels are hardening, tempering, annealing and
case hardening.

The purpose of heat treatment is to: Improve machinablility; relieve internal stress;
improve mechanical properties like hardness, toughness, strength etc; improve electrical
and magnetic properties; increase heat and corrosion resistance; refine the grain size and
structure.

Machining process:
In machining process, the material is removed from the work piece with the use of a
cutting tool. The process is primarily to alter the shape of the work piece or raw material,
provide necessary dimensional accuracy and surface finish. Some of the machining
processes are: Turning, Milling, Shaping, Grinding, Drilling, Electro discharge
machining, ultra sonic machining, etc.
Turning: This operation is carried out on lathe machine which has provision to hold the
stock to be machined in a horizontal axis in such a manner that one end of the stock is
held in a chuck or Head stock which is rotated at a desired speed by the prime mover, the
other end of the stock is usually provided with a study rest by the tail stock. The tool is
held in a tool holder positioned on the machine bed and can be brought in contact with
the rotating metal stock and there by metal can be removed from the stock. The different
kinds of operations that can be performed on the lathe are cylindrical turning, taper
turning facing, thread cutting, knurling, drilling, etc.

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 Figure: Lathe
(Source: All Machinery figures are from Production Management & Control by Prof.
Nikhil Bharat)

Milling: A milling machine consists of a shaped cutter which rotates on an arbor which is
coupled to a prime mover of the machine. The kinematics of the machine can be seen in
the diagram. The rotating milling cutter removes metal from the work piece which is fed
against the multi point cutting tool. Milling operation is best suited for machining gear
teeth, key ways, flat surface, V–grove etc.

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 Figure: Milling machine
Shaping and planning: A shaper is used to generate flat surfaces only. A single pointed
tool is rigidly held in a head & reciprocates and carries out the operation of stock
removal. The work piece tool arrangement can be seen in the diagram.

The planning process is similar to shaping except that the stock is held rigidly on the
bed, moves forward and back ward and the tool held in a holder is given transverse
motion.

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 Figure: Shaper

A drilling machine is designed to generate cylindrical holes. The machine uses a helical
fluted cutting tool which cuts the metal stock. The drill bit rotates on its axis and as it
linearly moves, cuts the material. The material removed is in the form of chips.

Figure: Drilling

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Grinding: A grinding machine uses an abrasive wheel for removal of material; this is
achieved by forcing the work piece against a rotating grinding wheel. This operation is
mostly used for finishing machined surfaces to achieve closer dimensional accuracy and
higher surface finish (5 – 10 microns).

Automats: Increased recent trends on economy of scale of manufacturing led to automatic

machines like transfers lines, Robots, flexible manufacturing systems etc. A piston
casting fed at one end of the transfer line is carried through a number of phases of
operations, all being carried out automatically to deliver a machined, ground piston at the
other end.

Electro discharge machine (EDM): This is a chip-less process using electrical energy for
metal removal. The operation involves striking an arc across the gap between the work
piece and tool. The work piece melts at the contact point of the spark and the molten
material is removed by the dielectric which also cools the work piece. This process is
extensively used in the manufacture of tools.

Ultra sonic machining, electron beam machining, laser machining, plasma cutting are
some of the modern trends in the machining processes.

The rate at which the material is removed by a machine usually depend upon three
factors, which are
(a) cutting speed
(b) feed
(c) depth of cut
The above three process variables are changed depending on work piece material,
dimensional accuracy and surface finish

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Plastic moulding:
Compression moulding is carried out under pressure of 300 / 400 kg per square
centimeter. Raw material will be in the form of granules.

Injection moulding: The moulding material is heated to a semi finished state in a loading
chamber and then injected into the cavity of the mould. The pressure will be in the range
of 1000-2000 kg per Sq cm

Very high dimensional accuracy and surface finish can be achieved in the plastic
moulding process. However, this calls for accurate mould/die making, besides control of
the process variables.

Metal finishing operation: Finishing operations can be extremely diverse; the parts may
be mechanically cleaned through fettling or sand blasting or chemically cleaned with
pretreatment of chemicals before electroplating and painting. The various electroplating
methods - cadmium, nickel, chromium, zinc, silver and gold plating are used for
industrial application.
Hot dip galvanizing is one of the protective coatings given to iron & steel against
corrosion.

Painting: The processes involved in painting are

(a) Surface preparation
(b) Chemical cleaning
(c) Apply primer coat (to improve adhesion of paint and serve as under coat)
(d) Application of paint
(e) Putty filling for any dents etc
(f) Finish paint
Application of paint can be through brush or spray. The article to be painted needs to be
baked at 120o F, if stoving paints are used.

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In case of mass production electrostatic spray painting is used. In this process the work
piece is on overhead or floor conveyer and maintained at positive potential and spray gun
maintained negative potential. The advantages of electrostatic spray painting are; Paint
loss is very less compared to spray gun, higher productivity due to automation, enhanced
capacity, reduction in operating cost, low power consumption and higher quality.

Assembly process:
The process involves joining of metal parts to produce a single component. Some of the
common assembly operations are welding, brazing, soldering, riveting, fastening with
bolts & nuts and joining with the use of adhesives.

Welding: In the welding process, two pieces of metal are joined into a single piece by
fusion due to heat or by a combination of heat and pressure.

Gas welding; arc welding; resistance welding –spot, seam and butt; electron beam
welding are different types of welding processes.

Brazing and soldering: Is a process of joining non ferrous alloys. The brazing alloy melts
at a lower temperature.

Electronic Manufacturing (PCB Assembly): Overview of the Critical Processes

The main activities involved in electronic manufacturing are: Receiving Inspection of

large variety of components, components screening, PCB manufacturing, Thermal
cycling & Power on Burn-in of assembled PCB, PCB assembly (component mounting
and soldering), unit assembly. Details of various key processes carried out are given
below:

Receiving/Incoming Inspection
Of the components received, approximately 80 percent are on dock-to-stock program
with supplier certification. The balance 20 percent are critical components, which consist

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mainly of build-to-order materials such as PCBs and electro-mechanical components,
integrated circuits are sample inspected, with the results monitored using statistical
quality control methods.

Automatic Insertion
Many world class manufacturers of electronic products require the use of both through-
hole and surface mount technologies. In case of through hole PCB with leaded
components, components are inserted either by hand or automatic component insertion
machines depending on volumes. In case of surface mount devices, the assembly line
includes an automatic screen printer of solder paste, Pick and Place (SMD equipment)
capable of mounting 30-40 thousands components (very fine pitch) per hour, Infra red
Reflow oven.

Semi-Automatic Insertion
This process point couples the precision of the equipment with high skill of the operator
to accomplish the through-hole assembly of PCB. These components consist primarily of

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radial lead devices, light emitting diodes, and transistors. The equipment indicates the
positioning of the component, inserts the component and performs the cut & clinches
function. The operator installs the component as specified and activates the cut and
clinches mechanism via a foot pedal.

Through-Hole Wave Soldering

The variables of this process are handled similar to all others. The speed, convection pre-
heat temperatures, angle of approach, wave height, and temperature are all considered
when developing the recipe for each module. The process is designed to utilize a low
residue flux that requires no secondary cleaning operation. The wave solder machine
holds 1,000 Kgs of molten solder at a temperature of 500 degrees Fahrenheit.

Post Wave Assembly

At this point, any components that cannot be installed prior to the wave soldering
process are hand assembled and soldered. These components consist of items such as
lithium batteries, insulated jumpers, and replaceable fuses that may be damaged by the
heat from the wave-soldering machine. The operators also visually examine the modules
for solder bridging and voids.

In-Circuit Test
This process point provides an electrical inspection on approximately 90 percent of the
modules manufactured in the plant. The operator selects and installs the appropriate
fixture onto the test bed. Once the fixture is in place, the module under test is placed
into the fixture and the automated test is activated. The tests are designed to check for
solder shorts & opens and to perform an active test on the analog and digital devices.

The equipment is also used to program some of the on-board programmable devices such
as the Erasable Programmable Read Only Memory (EPROM). From this point, the
modules are delivered to the System Assembly and Test Plant. The 10 percent that bypass
this point move directly to Functional Bench Test, which is described in the next
paragraph.

32
Functional Bench Test
In this test, previously certified product and operational software are used to perform the
initial power-up and calibration of approximately 10 percent of the modules
manufactured. The decision to route a module through this process point is made after
careful consideration of the circuit complexity, as well as the volume of modules being
manufactured. From this point, the modules are delivered to the System Assembly and
Test Plant.

Critical Processes in the System Assembly and Test Plant

The System Assembly and Test Plant create our customers systems by integrating the
populated PCBs with mechanical sub-assemblies and the appropriate software. All
systems are tracked using the customer’s order along with the bar code label applied to
the PCB. The following key process points utilize the “World Class” practices described
earlier in this document with special attention to continuous improvement and statistical
process control.

Electro-Mechanical Assembly
The task here is to integrate the mechanical components with the PCBs. Pneumatic tools
are used to assemble the systems as the work orders are received. From here, the system
is passed along to the final test area.

Functional Test
At this point, the system is subjected to a functional test, which confirms the operation of
the hardware. We use custom designed test fixtures and stations to perform these tests.

Final Assembly
In this area, final assembly and labeling work is done. The customer’s order is now
completely assembled and has passed the functional final test.

Final Inspection

33
This is a final process checkpoint. Personnel in this area visually inspect the physical
characteristics of each system, using a checklist to guide the inspection and to provide a
record of the results. Once completed, the barcode label is scanned and the packing slip
and a shipping label are automatically generated and placed with the system.

Packing and Shipping

At this point, the systems are packaged and shipped to customer’s site to meet the
required standards set by the International Association (IA).

World Class Practices in Electronic Manufacturing

The following are the practices to be followed to become a world class company

• A cross functional approach to product development, manufacturing, assembly

and testing.
• Material planning: Procurement of raw materials through partnerships, early
supplier involvement in product design, negotiated lead times, quantities and costs
based on customers requirements, reliability etc.
• Statistical Process Control (SPC): Quality control operators are trained in basic
sampling and SPC tools.
• ISO 9001: The quality management system confirms to ISO 9001. Operators are
trained for self inspection to minimize process variation and non value added
inspection stations. A detailed flow process chart is prepared with critical
characteristics written down and check lists are prepared.

• Maintenance: The accuracy of the equipment is very important to produce

repeatable results. The equipment users perform the daily or more minor
maintenance, with the major maintenance completed primarily by external
sources.

34
 • Electrostatic Discharge Prevention (ESD): The importance of ESD in the
production of high quality PCB assemblies is well understood by all the
employees. All employees and visitors who wish to interact with the
manufacturing process must go through a series of ESD preventative steps. They
must attach ground straps to their shoes and wear an appropriate lab coat. Our
facility is protected from this phenomenon by properly grounded and coated
floors, tables, and chairs, ESD preventive tape, bags, bins. The environment is
carefully controlled and internal inspections are conducted on a regular basis.

• Environmental Responsibility: The processes are redesigned to eliminate use of

hazardous chemicals.

• Delivery Performance: The key indicators we currently monitor are on-time

delivery and actual scheduled date versus the customer’s request date. We realize
that we have a great opportunity in this area and intend to maintain and implement
any new programs that are necessary to satisfy our customers’ requirements.

• Quality: At critical process like wave soldering SPC tools – control charts are
used for quality assurance. Inspections jigs are made for automatic inspection of
electro mechanical components. A higher level of RFT at each stage of process is
aimed at leading to zero defect at the final stage of inspection.

The above manufacturing practices are based on M/s. Andover Controls and my
experience at ECIL, Hyderabad.

Process selection
Process selection refers to the way an organization chooses to produce or provide its
goods and services. Essentially this involves choice of technology and has major

35
implication on capacity planning, layout of facilities, equipment selection and design of
work systems.

Technological advances in processing (methods of production) provide many new

options for competitive advantage. But they also pose numerous risks.

Facilities and
Demand equipment
forecasting

Capacity
Process
planning
selection

Product design Layout

Work design

The first step in process planning is ‘Make or Buy’ decision. This is based on several
factors like available capacity, expertise, quality consideration, demand, cost etc. Though
you may outsource a part, you need to know the process which enables selection of
vendors with adequate facilities and advice the vendor suitably.

Automation is substituting human labor with machinery. The machine will have a sensing
and control device to enable it operate automatically. The key question is ‘How much to
automate’. This can range from complete automation of factory to single operation.
Automation has both advantages and disadvantages.

Advantages: Human element is inherently variable both in performing the task repeatedly
and in amount of time. Machines don’t have monotony, don’t go on strike, ask more
wage and are relatively less costly.

36
Disadvantages: Technology changes, less flexible/ difficult to change, create fear to
workers.
Computer aided manufacturing (CAM): Refers to use of computers in process control
ranging from numerically controlled machines to robots, to automated assembly systems.
These replace human function with machine functions. The advantages are reduction in
labor, handling dangerous, monotonous tasks, yield is high and quality is consistent.

Numerical control (NC) machines are programmed to follow a set of processing

instructions based on a mathematical relationship. The instructions can be on floppy disc,
magnetic tape or micro processor (memory device). NC machines may have an individual
computer, this is called computerized NC (CNC) or one computer controlling a number
of machines. These machines are referred to as direct NC (DNC).

Robots: Use of robots in manufacturing is increasing .A robot consists of 3 parts:

mechanical arm, power supply and a controller. Industrial robots are stationary except for
movable arm. Robots are used to handle a wide variety of tasks like welding, assembly,
loading and unloading, painting and testing. They relieve human from heavy duty and
drudgery tasks. Robots range from simple to very complex. At the lowest level, robots
follow a fixed set of instructions. Next are programmable robots which can repeat a set of
movements after being lead through the sequence i.e. playback a sequence like video
recorder plays. At the next level, robots follow instructions from a computer. At higher
end robots can recognize object and make certain decisions.

Robots move in two ways a) point to point (predetermined points) b) continuous path
robot follows a continuous path while performing an operation.

Robots can be powered pneumatically (compressed air), hydraulic (fluids under pressure)
or electronically.

Industrial robots have arms like projections, grippers, and manipulators like human do in
factories.

37
Flexible manufacturing system (FMS): is a group of machines including supervisory
computer control, automatic material handling or other automated process equipments.
Reprogrammable controllers enable these systems to produce a variety of similar parts.
FMS may range from 3 to 4 machines to more than a dozen. These are designed with
some of the benefits of automation & with some of the flexibility of individuals or a stand
alone machine (e.g. NC machines)
Flexible Manufacturing Systems (FMS) offer.
1. Reduced labor cost compared to traditional manufacturing methods
2. Lower capital investment compared to full automation
3. More flexibility than full automation
4. Quick changeover/set uptimes
5. More consistent than traditional manufacturing method
Limitations
a. These systems can handle a relatively narrow range of variety of parts
b. Involves longer planning & development time than conventional processing
equipment because of complexity and cost.

Generally companies prefer gradual appropriate automation & FMS offers a suitable
technology.

Computer integrated manufacturing is a system of linking a broad range of manufacturing

activities through an integrated computer system including design & engineering,
purchase, PPC,QC etc. CIM might be as simple as linking two or more FMSs by a host
computer. CIM system can link scheduling, purchase, inventory control, shop control &
distribution.

The over all goal of using CIM is to link various areas of an organization to achieve rapid
response to customer orders, product changes, to allow rapid production and to reduce
indirect labor cost. The over all cycle time is reduced considerably.

38
Process involves the use of organization’s resources to provide a service or make a
product. Process management is the selection of the inputs, operations, work flows and
methods that transform inputs into outputs. Input selection is deciding what to buy &
make in house. Process selection / decision deal with proper mix of human skills and
equipment (process capability) and processes are to be performed by human and
machines.
Two principles concerning process management are:
1. Processes underline all the work activities. Accounting uses a certain process to
do pay roll, price ledger, revenue account. HR uses various processes to
administer recruitment of new employees, benefits, conduct training programmes.
Marketing uses its own process to do market research, order booking and
customer relations management. Operations use various processes in converting
inputs into finished goods.

2. Processes are nested within other processes in the organizations supply chain. A
firms supply chain (also called value chain) is the inter-connected set of linkage
among suppliers of materials & services that spans the transformation process to
convert ideas & raw materials into finished goods and services. Management must
coordinate to interface / link between the processes.

Major process decisions:

Process decisions directly affect the process itself and indirectly the products and services
that it provides. Whether dealing with processes or offices, service providers or
manufacturers, operations managers must consider the following five process decisions.
• Process choice: How resources are organized around product or process (batch /
mass / continuous). The process choice depends on standardization, customization
and volume.

• Vertical integration: The degree to which a firm’s own production system or

service facility handles the entire supply chain. If more processes are performed
in house rather than suppliers, the greater is the degree of vertical integration.

39
 • Resource flexibility is the ease with which employee & equipment can handle a
variety of products, output levels.

• Customer involvement reflects the ways in which customer becomes part of the
chain. (Customer gives special material, inspects at various stages etc).

• Capital intensity / labor intensive / level of automation.

Process choice: The first decision a manger takes is to choose a process that best
achieves the relative importance placed on quality, time, cost and flexibility.
The best choice of process depends on degree of standardization, customization, volume,
type of operation required. The process choice might apply to an entire process or just
one sub process within it. Quality, time, cost & flexibility are also kept in mind.

40
 * Indicates service processes

High Project process

-Setting new plant,
-installing ERP for a firm,
-introduction of new product
* Student teams field project
Make *
to order
Job process
-machining precision
metal tubes
* medical practice

Batch process
-Forging for pressure vessel
Customization -instrument manufacture,
-production of text books
* processing mortgage
loans, making component
kit to feed assembly line

Line / mass process

-Automobile assembly
-TV
-Bread line
Make
*cafeteria lane, mass
to stock
inoculation

Continuous process
-oil refinery,
-tooth paste making
*providing a
telephone line
Low

Low Volume High

41
Fig: Influence of customization and volume on process choice (Manufacturing/Service
organization)

Job design consideration

Process, resources, flexibility & capital intensity influence how a manager designs jobs.
A manager must decide how much the jobs should be specialized or enlarged. A job with
a high degree of specialization involves narrow range of task, high degree of repetition,
greater efficiency & quality. e.g. service engineer of specialized equipment.
Specialization results in faster work pace/output, lower wage because of repetition & low
skill, less training etc. but disadvantages are poor employee morale / monotony because
of repetition, less flexibility to change etc. This is more applicable in continuous & mass
production.

Some firms are having success with less specialization in job which call for having
alternate HR strategies
a) Job enlargement: Increasing the range of tasks at the same level e.g. machine
assembly (allied functions)

b) Job rotation: System where workers are exchanged periodically e.g. (1) Miller –
machinist (2) Assembly operation –Installation & commissioning

c) Job enrichment: Expansion of job duties. Workers have greater control &
responsibility for entire process, not specific skill. This increased job satisfaction
e.g. testing of equipment to design & development.

Vertical integration
All business organizations buy at least some inputs to their process such as raw material,
manufactured parts and professional services. Management decides the level of vertical
integration by looking at all processes between buying R M & delivery of FG or services.
The more processes the organization performs in the supply chain, the more it is
vertically integrated & has less outsourcing. After deciding this management must find
ways to coordinate & integrate the process & suppliers involved in supply chain

42
management e.g: Bakery – extending backward i.e. having is own flour mill or market
outlets.

Raw material
Eggs, flour, sugar

Back ward integration

In house operation
Bakery

Forward integration

Customers
Grocery stores

Back ward integration: A firm’s movement upstream towards manufacture of R M &

parts.

Forward integration: Firms movement downstream by acquiring more channels of

distribution such as warehouses, retail shops.

Vertical integration & outsourcing: Both have relative merits & demerits

Advantages of vertical integration: Firm can achieve saving if it has skill, volume &
perform the processes at lower cost & produce higher quality. Operation will be under the
control of the organization and leads to timely delivery, better quality and utilization of
firm resources. Management must identify alternatives & exploit its core competencies to

43
prevail in global competition. It the firm out sources critical process, there is danger of
losing control.

Advantages of outsourcing: Outsourcing is advantageous if the volumes are small & the
firm can take advantage of economies of scale of manufacture of other organization. e.g.
Hiring of an application service provider. Two factors are contributing towards this trend.
(a) Global competition creating more supplier options (b) Advances in information
technology which makes coordination with suppliers easier.

Virtual Corporations: competitors enter into short term partnerships to respond to market
opportunities.

Net work companies – An extreme source of out sourcing is network companies which
contract most of their operations.

Designing process
The five main process decisions are: process selection, vertical integration, resource
flexibility, customer involvement, capital intensity.

The next issue in process management is determining how exactly each process will be
performed. Systematic approach is to (a) analyze the process (b) spot areas for
improvement (c) Developing ways to improve & (d) Implementing desired changes. The
supporting techniques are flow diagram, process charts & simulation. The approaches to
designing process are (1) Process reengineering & (2) process improvement. Both are
complimentary .

Steps for process analysis

1) Value added capability of process can be evaluated

2) Identify important performance measures: quality, throughput time, cost, safety,

environmental measures, customer satisfaction, flexibility etc

44
 3) Document the process

4) Redesign or refine the process: Team should ask questions: what / when / who /
how is being done

5) Evaluate the changes & implement those that give better pay off

Techniques for documenting & evaluating process

1) Flow diagram 2) Process chart 3)Simulation

Flow Diagram: Traces the flow of work, equipment, material through a process.
Sometimes flow diagrams are over laid on facility layout.

Process chart: organized way of recording all the activities performed by a person, by
machine, at a work station. The activities can be categorized into the following.
Symbols:

Operation

Transportation

Storage

Delay

Inspection examining the quality, reading gauge

(Pressure, temperature) on boiler

Simultaneous operation

45
 1) Operation 2) Transportation / Material handling 3) Inspection 4)Delay 5) Storage

Information of time required to carryout the process is also provided.

Simulation: Simulation shows how to process / perform dynamically over time, once the
current process is modeled, the analyst can make changes & measures the impact on
certain performance measures such as response time, waiting time, resource utilization
etc
BEP analysis for process selection
The choice of equipment generally follows a selection structure. The decision variables
are: Initial cost, rate of output, process capability, operating requirement (ease of use,
safety), skill requirement of labour, flexibility (general purpose vs. special purpose
machine), special tooling, set up time, maintenance, obsolescence. Ex: an electronic firm
have single function module and multi function test unit. A standard approach is to
choose among alternative processes or equipment, which is called break even analysis.

Assume that we have a part requiring turning operations. Let us take the example of
process selection in the Lathe family. The turning operation can be carried out on a center
Lathe, semi automatic (Turret) Lathe, or an automatic Lathe. The most economic
selection depends on the volume we anticipate and the fixed & variable costs involved.
We must estimate the cost of setting up and tooling as well as variable costs for all the
three alternatives. The estimates of labor cost might be based on standard data (based on
the past of similar parts) or standard data developed. The basis for developing standard
data are dealt with in the chapter on work study.

We can use breakeven charts to compare different ways of doing jobs. Methods requiring
simple (General purpose) machines are usually easy to setup but costly to operate. But
when you make larger quantities, you can use master machines (Automatic), which are

46
less costly to operate but setup time is more and costlier. Each one of the process proves
to be most economical for a certain range of volume.

Fig: Costs of making products in three different ways

The figure given above indicates the cost details for making a shaft on 3 types of Lathes

Engine/Centre Lathe are easy to setup for new jobs, but not very efficient in production.
Turret Lathe requires more setup time but produce at lower cost. Automatic machines
takes more setup time/cost but produces at a very lower cost compared to semi automatic
(Turret) Lathe.

47
Table:

Type of Machine Cost Formula

Engine Lathe Rs. 25 + Rs. 4.5 x

Turret Lathe Rs.50 + Rs. 2x
Automate Lathe Rs. 150 + 0.4x

We can find out crossover points A, B, C by formulating equations and solve for x.

Rs. 25 + Rs. 4.5 x = Rs.50 + Rs. 2x-------------------------- (1)

2.5 x = 25, x = 10

Rs. 25 + Rs. 4.5 x = Rs. 150 + 0.4x -------------------------- (2)

4.1 x = 125, x = 30

Rs.50 + Rs. 2x = Rs. 150 + 0.4x --------------------------- (3)

1.6 x = 100, x = 62

From the equation (1) we can infer that for quantity 10 and lesser, we should use in
Engine Lathe and for quantities more than 10 use Turret Lathe. But if all the Turret
Lathes are engaged use up to 30 and then shift to Automate.

If Turret Lathe is available use for quantities more than 30 and less than 62. For
quantities more than 62 use Automate Lathe.

Cross over charts can also be used for taking make or buy decisions.

Manufacturing vs. Services

Characteristics of service:
• Services are intangible (not physical). Can be only felt by customers e.g. lecture
by a professor. Finished good production is physical in nature with laid down
specifications and out put is tangible.

48
 • Services are inspired by ‘JIT concept’. In JIT system, the production and service
starts as soon as customer arrives to avail the service. This is known as ‘pull’
production system in manufacturing. The production process is started only when
the customer places order for the product and raw material is pulled in to various
constituents (work centres) of the production process. President of Toyota
observed in US super markets, replenishment of an empty shelf on the rack
immediately due to visibility of same from anywhere in the store. This concept
was implemented along the assembly line of Toyota. Push cannot be applied to
because services cannot be stored. The idle time will be wasted, on the other hand
higher demand would result in waiting & customer may be attracted to
competitor.

• Quality of services cannot be measured like in manufacturing

• Measurement of productivity in services is difficult.
• Services are people / customer centric because services are labor intensive and
high customer involvement
Manufacturing Vs Service operations
Manufacturing implies production of tangible output such as automobile, TV which can
be seen. On the other hand, service implies an act e.g. doctor’s examination, maintain
lawn, auto repair etc.
The difference involve the following

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Labor Content Low High
Uniformity of output High Low
Measurement of Productivity Easy Difficult

Capital Equipment Very high Low

Products can be stocked Not possible

49
 Table: Difference between Manufacturing & Service

Service as Operations

Classification of services: services are categorized into four types as (1) service factory
(2) service shop (3) mass service (4) professional service

Degree of customer interaction & customization

Low High
Service factory Service shop
Low • Freight service(Airline) • Auto / electronic
• Hospitals • Hospitals nursing home
• Amusement parks
Mass service Professional service
Degree of
• Schools & colleges • Specialist doctor
labor intensity
• Retail shops • Lawyer, tax consultant
• Wholesale & distribution • Financial consultant
• Selling insurance policies • Engineers & architect
High

Service process matrix

In professional service, say by lawyer, every law suit / case involves different sections of
law & points to be considered.

The service factory & service shop labor intensity is low, but cost of capital equipment is
quite high. From service quality point of view, it is easy to manage in respect of service
factory, while it is most difficult to measure and manage service quality of professional
service. For low, high combination SERVQAL type methods can be used.

Service capacity planning:

• Appointment method: Constant capacity Strategy is used where service
differentiation is high e.g. medical specialist. Five patients called with the same

50
 appointment time. American embassy gives same time for 5 persons. The idea is
specialist time cannot go waste. However service quality is neglected to optimize
the service facility.
• Change strategy: e.g. restaurant with peak demand at times. In order to have
flexible capacity, there has to be extra infrastructure to support fluctuation e.g.
space, cash collection, part time employees (in morning / lunch time) or multiple
tasking. Single window banking.
• Demand smoothing: Induce customer to avail service in low demand period e.g.
cinema theatres offer 1/3 price for morning shows in week days; low price for
early dinner.
Combination of above also is used.

Service as Operations

The emerging model in industry is that every organization is in the service business. In
manufacturing, such services can be divided into core and value-added services that are
provided to internal and external customers.

The core service customers want are products that are made correctly, customized for
needs, delivered on time, and priced competitively.

Value-added services simply make the external customer’s life easier or, in the case of
internal customers, help them to better carry out their particular function. Value-added
factory services can be classified into four broad categories: information, problem
solving, sales support and field support.

1. Information is the ability to furnish critical data on product testing and

performance process parameters and cost to internal groups (such as R&D) and to
external customers.

2. Problem solving is the ability to help internal and external group solve problems
especially in quality. Companies send factory workers out with sales people to

51
 troubleshoot quality problems. Those factory workers then return to the factory
and join with shop-floor personnel on remedial efforts.

3. Sales support is the ability to enhance sales and marketing efforts by

demonstrating the technology, equipment, or production systems the company is
trying to sell.

4. Field support is the ability to replace defective parts quickly (for example to make
repair parts available anywhere in the world within 48 hours)

Value-added services provided to external customers yield two benefits. First they
differentiate the organization from the competition. Indeed, in many cases it is easier
to copy a firm’s product than to create the value-added service infrastructure to
support it. Second, these services build relationships that bind customers to the
organization in a positive way.

1.3 Demand forecasting

Forecasts help managers by reducing some of the uncertainty and enable them to develop
a meaningful plan. A forecast is a statement about the future and serves as a basis for
capacity planning, production and inventory planning, budgeting, manpower planning
etc. Forecasting plays a very important role in the planning process. The responsibility of
preparing demand forecast lies with marketing. However operations people and product
development people are also associated. It is necessary for operation managers to be
aware of demand forecasting techniques as it is major input to them.

Forecasting process: Forecasts are rarely perfect and the accuracy will be more as the
number of factors affecting the variables is large and as the time horizon increases.
Forecasting accuracy for the group of items tend to be greater than for individual
products.

52
The steps involved in the forecasting
1. Determine the purpose and level of accuracy
2. Planning period
3. Select a suitable technique
4. Collect data and analyze. Record the assumptions made
5. Monitor the forecast. If the actual is deviating reexamine the method, assumptions
& validity of data and prepare revised forecast.

The two general approaches to forecasting are qualitative and quantitative techniques.
Qualitative forecasts are based on judgment and opinion. Rely on analysis of subjective
inputs such as consumer surveys, sales staff, executives and panel of exports.

Patterns of demands
A time series is a sequence of observations taken at regular intervals over a period of
time. Ex: Measurement of demand, profits, shipments, output rate etc.

The repeated observations of demand for a product form a pattern known as “time
series”. Forecasting techniques that are based on time series data are predicted on the
assumption that future value of series can be estimated from the past values of the series.
Analysis of the time series data requires the analyst to identify underlying behavior of the
series. This can be accomplished by merely plotting the data & examining the data. One
of the following patterns of behaviors / demand might appear: trend, seasonal variation,
cycles and variation around average. In addition there can be random and irregular
variation.

Trend refers to gradual, long term movement in the data. Ex: Population shifts, changing
incomes, cultural changes often account for such changes.

Seasonality refers to short term, fairly regular variation that are generally related to
weather factors, holidays, festivals, restaurant cloth shop. Super market and theatres
experience seasonal variation.

53
Cycles: Wave like variations of more than one year’s duration. These are related to
political, economic and agricultural conditions.

Irregular variation: Severe weather condition, strike, major change in product or service.
These should be identified and removed from data. Random variations are the residual
variations that remain after all other behaviors have been accounted for. These are small
bumps in the plots.

Figure: Trend, Seasonal, Cyclical & Irregular Variations

54
Techniques for averaging: Historical data contain certain amount of random variation or
noise. Ideally it is desirable to remove randomness from data and leave real variations.
Random (small variations) have to be smoothened out. Averaging techniques are used for
this purpose.

Different methods of forecasting

Average techniques generate a forecast that reflects recent values of a time series (e.g. the
average value over the last several periods).
Three techniques based on averaging are
1) Naive forecast
2) Moving average
3) Exponential smoothing

55
Naïve forecasts: This is the simplest technique. A naïve forecast for any period equals
that of previous periods actual value. The main objection to this method is inability to
provide accurate forecast. The techniques offering higher accuracy are very costly. Naive
forecast can be used as a standard for comparison.

The naive concept can also be applied to a series that exhibits seasonality trend. For e.g.
If sales patterns exhibits seasonal pattern, demand for current year December can be
based on demand from preceding December.

Similarly if trend is present, the increase or decrease for next period can be estimated as
the same. Ex: if June demand is 90 mts higher than May demand, a naïve forecast for
July would be June actual demand plus additional 90 mts.

Moving averages: one weakness of naïve method is, it does not smoothen at all. The
moving average forecast uses a number of the most recent actual data values in
generating forecast. The moving average forecast can be computed using the following
equation
MAn = (n Σ i=1 Ai )/n
i= age of data (i= 1,2,3,..) n=number of periods in the moving average, Ai=actual value
with age i

56
For e.g. MA3 would imply a three period moving average
Example:
Compute a three period moving average forecast giving demand for shopping carts for
the last 5 periods
Period Age Demand
1 5 42
2 4 40
3 3 43
4 2 40
5 1 41

If actual demand for period 6 is 39, the moving average forecast for period 7 would be,
MA3 = (39+41+40) / 3 = 40. The advantage in this is, the forecast is computed taking the
latest and dropping the oldest and then re-computing the value.

The fewer the data points in an average, the more responsive the average tends to be.
Conversely moving average based on more data points will smooth more but be less
responsive to real changes.

The advantage is easy to compute, but disadvantage is data storage requirement can be
significant. A serious consideration is all values in the average are given equal weight
age. A decrease in the number of values in the average will increase the weight of recent
values, but we will lose potential information from less recent values.

Exponential smoothing: reduces these difficulties. Data storage requirements are minimal
(only the most recent must be stored) even though forecast is based on many of the values
in series. The weight given to previous values are not equal. They decrease with the age
of the data.

57
 Weights

8 7 6 5 4 3 2 1 0 most recent period

Each new forecast is based on the previous forecast plus percentage of the difference
between that forecast & actual of the series at that point.

New forecast = Previous forecast + α (demand for previous period – forecast for the
period)
Where α – is a % and actual – old forecast is forecast error
More concisely Ft = Ft-1 + α (At-1 – Ft-1)
Ft = forecast at period t and α = smoothing constant
Commonly used value of α range from 0.05 to 0.5
Exponential smoothing is one of the mostly widely used techniques because
- Minimal data storage requirement
- Ease of calculation
- Ease with which weight age scheme can be altered
-

Factors affecting demands can be categorized into external & internal

External factors are beyond management control. Booming economy, change in interest
rates & government regulations (environmental) are some of the external factors. Other

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external factors are change in consumer taste (e.g. clothing fashion, consumer image of
product (e.g. Tobacco – injurious to health).

Internal factors about product design, price & advertising promotion, incentives for sales
persons, expansion of geographic market area can affect the demand. E.g. automobile
manufacturers use rebates to boost car sales, telephone company encourages customers
make telephone calls to long distances after business hours, company quotes delivery
periods to suit the workload.

Deciding what to forecast: Although some demand forecasting is needed for individual
goods or services, forecasting for product group is accurate & advisable.

Choosing the correct type of forecasting techniques: When to choose time series method,
or casual or judgment methods.

Judgment method: A qualitative method that translates the opinions of manager, expert
opinions, consumer surveys and sales force estimates into qualitative elements.

Casual methods: Use historical data on independent variables such as promotional

campaigns, economic conditions and competitors to predict actual demand.

Time series analysis is a statistical approach that relies heavily on historical demand data
to project the future size of demand and recognize trends and seasonal patterns.

Then choice of the techniques depends on the time horizon for the decision requiring
forecast i.e. short term, medium & long term.

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 TIME HORIZON

Application Short term Medium term Long term

(0 - 3 Months) (3 Months – 2 (More than 2years)
years)
Forecast Individual products Total sales group or Total sales
quantity families of products
Decision area M.P.S, Inventory Production Facility location,
management , planning, MPS, Capacity planning,
Final assembly Staff planning, Process management.
scheduling, Purchasing,
Work force scheduling. distribution.
Fore casting Time series analysis, Qualitative Qualitative
techniques Casual, Judgment –
qualitative

Judgment methods: When adequate historical data is lacking, when new product is
introduced or technology is expected to change, firms rely on management experience
and judgments. Judgment methods are also used to modify the forecast generated by
qualitative methods.
(a) Sales force estimates: joint estimate made by sales forces working in various
territories. The disadvantages are individual bias (optimistic or pessimistic),
not able to understand and translate the customer needs, and sales people may
under estimate the requirement

(b) Executive opinion: A forecasting method in which opinions, experience,

technical / specialized knowledge of marketing, finance and manufacturing
managers are summarized to give single forecast after arriving at consensus
among executives. This needs to be done keeping in view of the latest
advances in technology.
(c) Market research: A systematic approach through designing questionnaire,
administering survey, selecting a representative sample, analyzing the
information to determine the consumer interest in a product or service on
future plans
(d) Delphi technique: A process of gaining consensus from a group of managers,
staff and outside consultants while maintaining anonymity. This is done

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 through questionnaires based on previous surveys. Delphi method has some
short comings

1) Process takes long time

2) Responses may be less meaningful if experts are not accountable
3) Poorly designed questionnaires may lead to false conclusions.

However this method is good in identifying turning points in new product

demand.
Use of judgment to adjust the forecast made by qualitative methods when the decision
maker has contextual / domain knowledge and compensate for specific events.

Casual methods
Linear regression: Casual methods are used when historical data is available &
relationship between the factor to be forecast and external &internal factors can be
identified. The relationships are expressed in mathematical terms. Casual methods are
very good for predicting turning points in demand & prepare long range forecasts. The
dependent variable (what we want to forecast) is related to one or more independent
variable by a linear equation.

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 Chapter 2

Design of Production system

Chapter Outline

2.1 Design of Production system

- Product / Service design
- Different phases of Product Design
-
2.2 Location planning
- Factors that affect location decision
- Globalization & geographical dispersion
- Different methods of location analysis

2.3 Facilities layout

- Objectives of facility layouts
- Different types of layouts and their applications
- Traditional Vs. Modern layout
2.4 Design of work system
- Job design
- Method study
- Work environment
2.5 Work Study
- Method study
- Work measurement
- Different methods of establishing time standards
- Compensation / Incentive schemes

2.1 Design and Production system

Production system design involves the following decisions:

1. Product and service design
2. Location planning
3. Process selection and capacity planning

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 4. Facilities layout
5. Design of work systems

Though these areas are not under direct control, operations manager has lot of say in
these matters since they play a major role in setting the stage on which the operations
manager must perform.

Product and service design is often the focal point of system design. Capacity decisions
create limits on the ability of the system to provide goods and services. Capacity and
location decisions both influence operating cost. Location decisions also affect
transportation cost, labor supply, material cost and access to markets. Layout decisions
affect the flow of work through the system. Work design focuses on human components
of production system and productivity improvements.

Design decisions are primarily of strategic nature and have a major impact on the
production systems.

Product / Service design:

Innovation and R&D is one of the core functions in industry and organization’s vital
stake is in product and service design. The primary concerns in product design are
functional and cost. Besides the functional design, aesthetics, ergonomics,
manufacturability, ease of servicing and maintainability also need to be considered during
the product design. Though it seems product /service design is a one time exercise, it is
practically not so. It is dynamic because of pressures from customers, competitors and
regulatory bodies. Improved specifications, product differentiations, environmental
compatibility, service complaints, product liability are some of the productive pressures
for the product / service design improvement.

E.g. A firm engaged in the manufacture of tractors had to call back, a large number of the
tractors supplied to customer because of the problems like clutch failure, problems of air
cooling leading to engine getting heated up. In view of this, products are to be free from

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defects in design. Another example is the recent failure of cars manufactured by Toyota
of Japan.

Consumer groups, business organizations and government agencies (like STC) often
work to develop standards to avoid hazards. There must be sufficient information to
determine what customer wants and communication among those responsible for
designing, producing and marketing.
Product life cycle is also based on the basic need for the item. E.g. slide rule took more
than fifty years before leading to technological change. However we have witnessed very
fast technology changes in respect of electronic devices: vacuum devices, transistor, ICs,
VLSI, microprocessor, BGA etc. Similarly in the field of medical, communication etc.

Basic research enhances scientific knowledge. State of art technology and applied
research will lead to providing commercial benefits. Time to market, frequency of new
product introduction, patents, investment in R&D are some of the R&D indicators. In
India, R&D expenditure is far below 3% of turnover in many industries, which is low by
any standard.

Different phases of Product Design

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Standardization:
Industrialized nations have achieved very high rates of productivity through
standardization of parts. Standardization means parts are made to conform to a standard
regardless of who is the manufacturer and parts are interchangeable. Standardization
leads to
• Economy of scale of manufacture

• Fewer parts to deal with, in manufacturing and procurement

• Provides for automation

• Stabilized production

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Resistance to design change due to cost factors, decreased variety leading to less
customer appeal, freezing designs with imperfections are some of the disadvantages of
standardization.
Modular design:
Essentially, modular design is also standardization. Modules represent group of parts e.g.
power supply, amplifier module, video circuit in a TV. Modular design is also found in
constructing prefabricated rooms with plumbing, and wiring. Even interior decorations
are made and moved to the site. Control panels also have lot of modules. The advantages
of modular design are easy to manufacture, purchase, service / repair and maintenance.
The disadvantage is - component level servicing is difficult and some times electronic
circuits are potted for confidentiality.

Computer aided design (CAD):

With the advent of CAD design, updation of design and documentation has become very
easy. Preparation of assembly drawings, mismatch between parts, stress analysis, cost
estimation are carried out easily. No prototype manufacturing is necessary and this leads
to reduction in time to market. This is very important in the present context of
globalization. MNCs and foreign companies insist on CAD documentation for award of
contracts and business tie-ups.

Reliability:
Measure of ability of product to perform to its intended requirements under prescribed
conditions is called reliability. The reliability of a system depends on reliability of
individual components. Example if 3 components with reliability 0.8, 0.9, 0.8 are used in
a system, the reliability of the system would be 0.8 x 0.9x 0.8 = 0.648. Mean time
between failures is an index of reliability.

Improved component design & selection, methods of manufacture in assembly, improved

testing, use of redundancy, preventive and predictive maintenance, educating the user and
improving the system design are the potential methods to improve reliability

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2.2 Location planning

Location is strategic decision. The choice of location for a business organization is very
important. This is an integral part of the strategic planning process for virtually every
organization. Although it may appear a onetime problem for a new organization, the fact
is that the existing organizations often have, a bigger stake in these kinds of decisions.

Need for location decision: Every organization becomes involved for a variety of reasons.
Banks, retail stores view location as a marketing strategy and they look for a location that
helps them to expand. Some firms get involved because of depletion of basic inputs (raw
material) like forests, mining, and petroleum operations over a longer horizon. Another
reason for relocation is other locations begin to look more attractive.

The primary reasons for location to be important are:

• Long term commitment which makes it difficult to change

• Important because of operating costs (both fixed & variable) – transportation cost,
shortage of skilled labor, supply of raw materials. A common approach is to
identify a range of alternative locations and then make a final decision based on
best location.

Location option: There are essentially four options

1. To expand an existing facility if there is adequate space, desirable facilities & less
costlier than the alternative.

2. To add new locations while retaining the existing.

3. Shut down the existing & move to another. Cost of moving etc have to be studied.

4. To maintain statuesque, at least in short run.

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The general procedure
1. Determine the criteria that will be used to evaluate location alternatives such as
increased revenues or community service.

2. Identify factors that are important, such as raw materials availability, skilled
labour.

3. Develop location alternatives

• Identify general region for location

• Identify a small number of community site alternatives

4. Evaluate alternatives and make a selection

Factors that affect location decisions

In manufacturing organizations the dominating factors usually are availability of power,
water supply and nearness to raw material e.g. nuclear power plants, steel & aluminum
plants. Transportation cost is a major factor. In no manufacturing organization, the
dominating factors are market related: convenience, competitor location, nearness to
market e.g. rental agency, location near to air port, mid city.

Regional factors: The primary regional factors involved are:

a) Raw material

b) Market

c) Labor consideration

d) Climate & taxes

e) Supply of low cost energy or labor

f) Community consideration: Revenue through taxes & job opportunities attract new
business. Communities don’t want firms creating pollution

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Factors affecting location of industries at the country, regional, community and site wise
are detailed below.

Level Factor Condition

Region /Country Location of raw material Proximity, mode & cost of
transportation, quantity available
Location of markets Proximity, Distribution costs, target
market, trade practices / restrictions.
Labor Availability (general & specific skills),
age distribution of work force, attitude
toward work, union, productivity, wage
scales, compensation laws.
Foreign location Government attitude to foreign country,
import restriction, language, culture
Community Facilities Schools, church, housing, transportation
shopping.
Services Medical, fire & police.

Taxes State /local, direct & indirect taxes.

Environmental regulation State /local.

Utilities (power, water, etc ) Cost & availability.

Development support Bond issues, tax abetment, low cost
loans, grants.
Site Land Cost, degree of development required,
soil characteristics, possibility of
expansion, drainage
Transportation Types (access to roads, rail, air)
Environmental / legal Zoning restrictions

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 Relative importance of Location factors in various types of Industries
Factors Affecting Mining, Light R&D and warehousing retailing Health and
Location Decision Quarrying, manufacturing High-Tech emergency
Heavy manufacturing services
manufacturing
1. Proximity to C C B B A A
concentrations of
customers or
constituents
2. Labor B A B B B B
availability
and costs

3. Attractiveness C B A C C C
of community
for recruiting
professionals

4. Degree of A A C B B B
unionization

5.Construction A B B B B B
and land costs

6.Proximity to A B C A B C
transportation
facilities

7.Incoming A B C A B C
transportation
costs

8.Outgoing B B C A C C
transportation
costs

9. Utilities A B C C C C
availability
and costs

10.Proximity to A B C C C C
raw materials
and supplies

11.Zoning A B C C C C
restrictions and
environmental
impact

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Note: A = very important, B: important, C = less important.

Trends in location & possible future studies reflect a combination of competitive &
technological factors. Foreign producers: Japanese setting up automotive firms in USA,
close to the market place is to cut lead time & transportation costs and avoid import
tariffs.

Another factor is JIT which encourage suppliers & customers to be close to each other to
reduce lead time. In case of light engineering industries: availability of low cost labor &
proximity to component supplier (electronics). In case of software industries: availability
of engineers at relatively less wage (like India) might attract foreigners to set up their
units.
Advancement in IT has made the world smaller. This may lead to setting up industry
close to market place rather than having engineers, purchase, marketing close to the unit.
Evaluating locating alternatives: There are two techniques.
1) Cost - volume analysis & return

2) Continue both qualitative & quantitative inputs in the decision framework

Globalization & geographical dispersion:

In the past industries tended to concentrate in specific areas. With globalization,
industries are geographically dispersed. This is owing to improved communication
technology with email, video conferencing, internet & overnight delivery.
Reasons for globalization:
1) Improved transportation & communication technologies .

2) Opened financial systems: Foreign banks have removed barriers. Financial

systems have become more open, making it easy for firms to locate where capital,
suppliers, &resources are cheapest.

3) Technology sourcing has also become relatively easy. Joint ventures, virtual
corporations have come into operation to utilize market opportunities.

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 4) Increased demand for imports: There is increased penetration by locating
production facility in foreign countries because local presence reduces
associated imports.

5) Reduced import quotas & other trade barriers: Producing in the country where
customer levies and reduce barriers. The recent development of trading block e.g.
European block, North American free trade agreement (between Mexico, Canada.
USA, other Latin America), WTO (world trade organization)

Disadvantage of globalization:
1) A firm may have to relinquish proprietary rights on technology

2) Political risks: Government may takeover assets without compensation

3) Employee skill may be lower in foreign countries

Different methods of Location analysis

Load - distance method
Several location factors relate directly to distance: Proximity to markets, average distance
to target customers, proximity to suppliers & resources. The load - distance (LD) method
is a mathematical model used to evaluate location based on proximity factors. The
objective is to select a location that minimizes the total weighted loads moving into and
out of the facility. The distance between two points is expressed by assigning the points
to grid coordinates on a map (similar approach is used in layout planning). Load may be
shipment from suppliers, between plants, or to customers. The firm seeks to minimize
load-distance or LD score generally by choosing a location so that large loads go short
distances. However other criteria like availability of school, hospitals etc also need to be
seen, or land may not be available at reasonable price. LD score is a better method &
systematic.

Centre of gravity: A good starting point is CG of target area. The x coordinate of CG is

denoted by x* is found by multiplying each coordinate x, by its load; summing the
product Σ xi li & then dividing by Σ li (sum of loads); similarly, calculate y* coordinates
of CG

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x* = Σ xi li / Σ li y* = Σ yi li / Σ li

Follow the iteration method till you find optimal solution.

Break even analysis: Alternate location can be compared on the basis of quantitative
factors that can be expressed in terms of total cost. It is particularly useful when the
manager wants to define the ranges over which, each alternate is best.
The basic steps for graphic & algebraic solution are as follows.
1) Determine the variable cost and fixed cost for each site. Fixed cost is that portion.
of total cost that remains constant regardless of output level & variable cost is one
which varies.
2) Plot the total cost lines for all sites as a single graph.
3) Identify the approximate range for which each location has lowest cost.
4) Solve algebraically for BEP over the relevant ranges.

Figure: Location Selection Using Break Even Analysis

Factor rating is a general approach that is useful for evaluating alternatives by estimating
a composite value for each alternative by summarizing all related factors.
The following procedure is used to develop a factor rating

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 1) Determine the factors that are relevant (e.g. location of market, water supply,
revenue potential)

2) Assign weight to each factor that indicates relative importance (sum of the
weightages should be equal to 1.0

3) Decide on a common scale for all factors (e.g. 0 to 100)for the alternatives

4) Score each location alternative

5) Multiply the factor weight by score of each factor & sum up the result for each
alternative

6) Choose the alternate with highest composite score

Transportation method is a quantitative approach that can solve multiple facility locations
and multiple warehouses. The problem is solved through linear programming for the
objective function -Minimize cost.

2.3Facilities layout
Layout concerns the configuration of departments, work centers and equipment with
particular emphasis on movement of work, materials through the system. Layout
decisions are important because
• Require investment in terms of both money and effort

• Have long term commitment which makes mistakes difficult to overcome

• Impact on cost and efficiency of short term operations

Ineffective operations, accidents, change in design of products, introduction of new

product, change in volume or mix of outputs, manufacturing methods give rise to the
need for layout decision.
Layout is the actual arrangement of conversion units

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Objectives of Facility Layouts

Manufacturing Operation Layouts

Provide enough production capacity
Reduce materials-handling costs
Conform to site and building constraints
Allow space for production machines
Allow high labor, machine, and space utilization and productivity
Provide for volume and product flexibility
Provide space for rest rooms, cafeterias, and other personal-care needs of employees
Provide for employee safety and health
Allow ease of supervision
Allow ease of maintenance
Achieve objectives with least capital investment

Additional Objectives for Warehouse Operation Layouts

Promote efficient loading and unloading of shipping vehicles
Provide for effective storage, stock picking, retrieval and unit loading
Allow ease of inventory counts
Promote accurate inventory record keeping

Additional Objectives for Service Operation Layouts

Provide for customer comfort and convenience
Provide appealing setting for customers
Allow attractive display of merchandise
Reduce travel of personnel or customers
Provide for privacy in work areas
Promote communication between work areas
Provide for stock rotation for shelf life

Additional Objectives for Office Layouts

Reinforce organization structure

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Reduce travel of personnel or customers
Provide for privacy in work areas
Promote communication between work areas
Types of layouts
There are three basic types of layouts
1) Product layouts are more conducive to repetitive, continuous and mass production
processing
2) Process layout are more suitable for batch, intermittent production
3) Fixed position layout: one off items, job orders

Other types of layouts are Cellular layouts & Hybrid or mixed layout

Different types of Layouts and their applications

Product layouts are used to achieve smooth and rapid flow of large volume of products or
services (cafeteria) through a system. The job is divided into a series of standardized
tasks, permitting specialization of both labor and equipment. The layout is determined by
the sequence of operations required to be carried out on the product. E.g. TV assembly
line, transfer line for the manufacture of pistons (automobile)

Main advantages are

1) High degree of both equipment and labor utilization and tends to offset the costs
usually associated with high capital investment.

2) Floor to floor time is minimal, leading to less work in progress (WIP)

3) Unit costs are low due to volume and cost of equipment is spread over large
quantity

4) Reduction in training costs because of specialized labor. Results in wide span of

supervision

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 5) Material handling costs are low

6) Routing and scheduling are encompassed in the initial system design

7) Purchase, inventory control, quality controls are fairly routine

Disadvantages are
1) Intensive division of labor leading to monotony / morale problems

2) System is fairly inflexible to changes in product design or process design

3) Susceptible to shut downs because of breakdowns or absenteeism

4) Calls for preventive maintenance, high spare parts inventory

Process layout
Layout is determined with respect to type of process being carried out in particular area.
Equipment carrying out same operation is grouped together e.g. turning, milling, drilling,
welding etc in manufacturing organization.
Process layouts exist in non manufacturing environment also e.g. Hospitals have
departments specially to handle surgery (cardiac, plastic surgery), maternity, pediatric,
psychiatric, etc. Similar to universities that deal with Business management, Engineering,
Science departments etc

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Advantages:
1. The system is less vulnerable to shutdown because of alternatives available

2. Can handle processing requirements of a variety of products

3. General purpose machines used in process layout are less costly compared to
specialized equipment in product layout

Disadvantages
1. In process inventory is high

2. Routing and scheduling calls for continuous attention

3. Equipment utilization is low

4. Material handling is slow

5. Job complexity calls for closer supervision. Span of control is small (more
supervisory staff)

6. Low volumes result in higher cost

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 7. Production planning / scheduling, inventory control, quality check are more
complex than product layout shops

Fixed position layout

The facilities are centered round the project. The product doesn’t move and facility is
brought to the job
e.g. ship building, power plants, aircraft, rockets, home building, farming, road building,
drilling for oil etc.

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Because of the diverse activities being carried out on large projects and wide range of
skills required, special efforts are needed to plan and coordinate the activities. Span of
control can be quite narrow. Projects might require earth moving machinery and trucks to
handle material.
Combination layout
The three basic types of layouts may be altered to satisfy the needs. We will find
combination of these basic types in such occasions.
Hospitals uses process arrangement, although frequently patient care involves a fixed
position approach particularly in emergency wards, cardiac cases etc
Process layout tends to be less efficient and manufacturers are moving from process to
product layouts. Ideally a system should be flexible and yet be efficient with low product
cost. Cellular manufacturing, group technology, and FMS represent efforts to move
towards this ideal.
Cellular layout
Parts are divided into part families based on their design and process characteristics. Parts
of similar design/process are called part families.
These are similar to product layouts and a can be called as “Mini product layouts”. Parts
are grouped based on the design and manufacturing characteristics. This is based on the
concept of Group technology. More details on Group technology are provided in the
chapter – Modern trends in POM.

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The cellular layout has the following advantages
• Changeover is simple. Reduced setup times
• Training is simpler and can be carried out in short period
• Faster throughput
• Material handling
• Less work in progress (WIP)
• Easy to automate
Use of Group technology at the design stage has led to cellular manufacturing.
Service facility layout:
Considering the nature of service and how these businesses deliver or convey their
services, service facility layouts are made. The interaction between customer and service,
easy entrance, free ways, amply lighted parking areas, lobbies, achieve customer

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movement throughout the stores (milk and bread must be placed away from entrance)
must be provided for in the preparation of service layouts. Customer becomes part of the
process operation. The degree of interaction between customer and service differs.
Example: It is more incase of hospital and less in the case of retail shop.
Soft ware packages are available for preparation of layouts.

A comparative statement of traditional layouts vs. world class layouts are given below.

Traditional Facility layouts vs. Modern layouts

Characteristics of Traditional Layouts

Chief objective: High machine and worker utilization.

Means of achieving objective: Long production runs, fixed job assignments for workers
in order to realize specialization-of-labor benefits, inventory to guard against machine
breakdowns, constant production rates and with defects set aside for later rework, and
large production machines being kept fully utilized.

Appearance of layouts: Very large manufacturing-plant floor plans, extensive areas

reserved for inventory, much space used for long conveyors and other materials-handling
devices, large production machines requiring much floor space, L-shaped or linear
production lines, and generally underutilized floor space.

Characteristics of Modern Layouts

Chief objective: Product quality and flexibility, the ability to modify production rates
quickly and flexibility to change to different production models.

Means of achieving objective: Workers trained at many jobs, heavy investment in

preventive maintenance, small machines easily changed over to different production
models, workers encouraged to exercise initiative in solving quality and other production
problems as they occur, workers and machines shifted as needed to solve production

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problems, production lines slowed down and machine breakdown or quality problems
solved as they occur, little inventory carried, and workstations placed close together.

Appearance of layout: Relatively small manufacturing-plant floor plans, compact and

tightly packed layouts, large percentage of floor space used for production, less floor
space occupied by inventory or materials-handling devices, and U-shaped production
lines.

2.4 Design of work system

work design involves job design, methods study, establishing time standards, work place
environment and worker compensation.

Job design:

Study of job design has become important, particularly because of the dissatisfaction of
many workers with their jobs and to improve productivity. Job design is concerned with
specifying the contents and methods of the jobs and the goal is to create a work system
that is productive and cost effective after considering all the alternatives. Practically job
designer is concerned with whom, how and where the job will be done.

In the past, job design has tended to focus on efficiency. However now there is increasing
awareness and an attempt to consider the behavioral aspects of work and worker
satisfaction. Jobs associated with high productivity are source of worker dissatisfaction
and these manifests in several ways: absenteeism, deliberate slow down, poor attention to
quality. In automotive industry absenteeism goes up to 20%.

Behavioral approach to job design: In order to make the jobs interesting, job designers
frequently consider job enlargement, job rotation and job enrichment.

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Job enlargement: Involves giving worker larger portion of total task. E.g. productive
worker is responsible for a sequence of tasks. In a super market, instead of being
responsible for vegetable sales, work in 2 or 3 departments; similarly a fitter assembling
two or three types of products instead of one.

Job rotation: Exchange the job of workers. More than this, transferring on a routine
basis allows workers to broaden the skills and learning experience. This will also take
care of absenteeism.

Job enrichment: Increase the level of responsibility of planning and coordination e.g.
Tool crib operator issuing tools day in day out, can be asked to plan consumable tools
(drill bits, turning tools, milling cutters, grinding wheels). This gives motivation &
enhances the potential of worker through job satisfaction. Fredrickherzberg carried out
studies in this area.

Increased automation & mechanization of respective work reduces monotony. Many

firms are seriously considering problems related to quality of work life through flexible
hours, quality circles, experimenting with location in medium sized cities, campus
atmosphere where feasible etc.

Automation: Use of mechanical or electrical devices in place of human effort is referred

to as automation. The benefits derived are avoiding monotony and human conflict;
uniform rate of output and high quality. Draw backs are resistance to change, involves
capital investment, inflexible and designed for narrow range of tasks, fear of losing jobs.

Methods analysis: Job design often begins with methods analysis. Methods analysis is
done for existing jobs and also for new jobs. For the existing job, the analysts observe the
way it is done and device ways to improve. For new job, visualize the operation. Method
study is dealt in more detail under the work study module.

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Work environment:
Working conditions are an important aspect of job design. Physical factors such as
temperature, humidity, ventilation, illumination, color, noise and vibration, work breaks,
safety have significant impact in terms of productivity, quality of output and accidents.

Temperature and humidity: Although human beings can function under a wide
temperature range, performance will be adversely affected outside a comfort band (65o-
72o F). For very strenuous condition, it can be 60-70◦ F with humidity ranging from 30%
- 50% for most conducive environment. Humans are more sensitive to temperature
changes at higher humidity.

Ventilation: Smoke and dust need to be periodically removed through exhaust; air
conditioning
Illumination: Depends on type of work. For more detailed work (design office), higher
level of illumination is required. Glare and contrast are also important considerations.
From safety stand point, good lighting in halls, stairs and dangerous points is important.
Natural light give good effect.

Color effects mood / feelings and visual discriminations

Red – Conveys action & stimulation, high visibility color, used for fire protection, danger
sign, emergency
Yellow – Impression of cheerfulness, high visibility color
Blue – Coolness and thoughtful, low visibility
Green –Calm and restfulness, low visibility
Purple – Radiation hazards
Color coding is also used in electrical wiring to trace wires
Noise and vibration: Noise is also pollution and can impair hearing. Noise control starts
with measurements
We can use vibration isolation, protective devices from noise (rubber mounting, shock
absorbers etc)

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Work breaks: Efficiency fall as the day goes on. But breaks can also increase efficiency.
Practice in Steel plants - 15minutes break every 1 hour.
Small study breaks also improve efficiency.

Safety is one of the basic issues in job design and needs constant attention from
management, employees and designers. Workers cannot be motivated if they feel they are
in danger.

5-S (Japanese Tool)

A simple tool adopted by Japanese to keep orderliness, house keeping and better work
environment. The simple practices followed by Japanese Industries as stated in their 5-S
process (SEIRI - throwing unwanted material, SEITON - arranging in an assigned place
for easy access and retrieval, SEISO – cleanliness, SEIKETSU – standardize the three
processes mentioned before, SHITSUKE – self discipline, constant practice of good
habits and monitoring the results) create a well organised workplace resulting in safer,
more efficient, more productive operations leading to enhanced morale of the employees
and sense of belonging to the organization.

2.5 Work Study

Work study constitutes both method study and time study (work measurement). Method
study concentrates on how a job is done. Work measurement is concerned with
determining the length of time it should take to complete the job. Time estimates are used
in manpower planning, estimation of labor cost, scheduling & designing incentive
schemes and also indicate expected out put.

Time study reflects the amount of time required for an average qualified worker to do a
given job (specific task) under standard / typical working condition. It also includes
allowance for probable delays.

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Method study:
Industry always strives hard to come out with a new method and techniques which help
providing goods of high quality and low cost. Search of this is the result of method study.

Method study involves examining critically the method being used or suggested for
carrying out the operation in question. Generate alternate method which could be adopted
and finally select amongst the alternatives generated, evaluate the alternative and listing
of feasibility to meet the objective.

Basic steps

The need for methods analysis can come from a number of different sources, such as
1. Changes in equipments & tools

2. Changes in product design

3. New product

4. Change in material & process

5. Govt regulation or contractual agreement

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The procedure in method analysis is:
1) Identify the operation (high labor content, done frequently, unsafe , tiring, quality
problems etc) and gather all pertinent information : tools, machine, material etc
2) Discuss with operator and supervisor, if the job is currently being done
3) Document the present method using process flow chart. For new jobs develop
process chart
4) Analyze the job. Flow process chart, cause and effect diagram, simulation are the
methods used. This will help in identifying nonproductive areas, delays
5) Propose new method.
6) Install the new method.
7) Follow up to assure improvements have been achieved.

Selecting the operations for study

As a part of productivity improvement, methods study is taken up by the production
analyst. Some times at the request of the shop supervisor also this is taken up. General
guidelines to take up / select methods study are:

a) High labor content in the job

b) Frequently carried out operation

c) Unsafe, tiring operation

d) Bottleneck operation, quality problem

Flow process charts are used to review / critically examine the overall sequence of
operations, & flow of material. These charts are helpful in identifying the non productive
parts of the process (e.g. delays, temporary storages, distance traveled etc)

Some examples of the uses of flow process charts are study of sequence of the documents
or forms in banks, purchase files: raising indent– sending enquiries by purchase – get
quotations –open the tenders & make competitive statement – send purchase file to

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indenter for recommendation – finalize recommendation – send file to purchase –
financial concurrence – release purchase order (PO) – receive order / acknowledge);
patient surgery, mail handling in post office etc.

An organization is taking an unduly long time for submitting quotations and at times
missing the due dates. When the process for preparing quotation is analyzed, it is found
that lot of time is lost in estimating the total price. It is found that every time an estimate
is made detailed costing of parts, subassemblies are carried out. When the method of
costing is changed to modular concept, the process of estimation is simplified resulting in
50% reduction in time. Similar examples could be found in purchase procedures; customs
clearance of imported goods.

Develop a check list of questions to generate ideas for improvement

Q 1. Why there is delay or storage at this point?
Q 2. Can travel be shortened?
Q 3. Can material handling be reduced?
Q 4. Would rearrangement of work place result in greater efficiency?
Q 5. Can similar activities be grouped?
Q 6. Use of additional or improved tools / jig & fixture be helpful?
Q 7. Does the worker have any ideas for improvement?

Worker machine chart is helpful for visualizing the portions of a work cycle. Classify
which operator & equipment are busy or idle. The analyst can see where the operator and
machine are working independently or interdependent or over lapping.

Gang process chart: useful in coordinating & analyzing the work of a team of workers.
E.g. hydraulic extrusion press

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Motion study is a system study of human motions used to perform an operation. The
purpose is to eliminate unnecessary motions and identify the best sequence of motion for
maximum efficiency. Frank Gilbreth has originated the concept from brick laying
(though it is not his trade). He improved the productivity by 3 times.
The techniques used in motion study are
1) Motion study principle
2) Analyze motions
3) Micro motion study
4) Charts

Motion study principles laid down by Gilbreth are the guidelines for designing the most
efficient work procedure. The guidelines are divided into

1. Principles of use of body

2. Principles of arrangement of work place
3. Principles for design of tools & equipment

In developing work method that are motion efficient, analysts

1) Eliminate unnecessary motions
2) Combine activities
3) Reduce fatigue
4) Improve arrangement of work place
5) Improve design of tools and equipment

Human Body:
a. Begin and end motion of both hands at the same time
b. Confine hand and body motion to the simplest movement that will do the
work
c. Use momentum to assist where helpful
d. Use smooth, continuous curve motion in preference to change
e. Keep eye fixed at few points

Work place

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 1. Keep tools, material in a definite and fixed place
2. Keep tools, material and controls close to the point of use
3. Use gravity feed bins and container to deliver materials close to
the point of use
4. Provide proper illumination, heating and ventilation
5. Provide chair that permits good position

Tools and equipments

1) Relieve hands of all work that can be done by jigs / fixture and foot
operated device
2) Combine two or more tools where possible
3) Prepare tools and materials to reduce motion of searching and selecting
4) Locate livers, cross bars / hand wheels so that the operator can manipulate
with least change of body position and greatest mechanical advantage

Therblig (Gilbreth spelled backward) are basic elemental motions. The idea behind
Therblig is break the job into minute elements and improve by eliminating, combining or
rearranging them. Examples of Therblig are search, - hunting with hand or eyes, select –
choose from group of objects, grasp – hold an object, hold – retain the object after grasp,
transport - movement of an object, release – deposit the object. Gilbreth and his scientist
wife Lillian are responsible for motion pictures for studying motions called micro motion
study. This is used not only in industry, but other areas of human effort like sports,
surgery. This helps analysts to study the motion and improve, keep record and train
operators.

“Standard time is the amount of time required by a qualified worker to complete the
specific task, working at a sustainable rate, using given methods, tools and equipments
and work place arrangement.” Periodic time studies may be used to update the standards.
It also includes allowances for probable delays.

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Work measurement
Job design and methods analysis concentrate on how the job design is done. Work
measurement is concerned with determining the length of time it should take. Time
standards are important inputs for manpower planning, estimating labor cost, scheduling,
design incentive schemes and indication of expected output.

Standard time is the amount of time it should take for a qualified / trainer worker to
complete a specific task, working at sustainable rate, using given method, tools and
equipment, raw material inputs and work place arrangement.
Commonly used methods of work measurement are

a) Past data based on earlier performance

b) Stopwatch time study
c) Predetermined time standards
d) Work sampling

Different methods of establishing time standards

Stop watch time study: This is introduced by F.W. Taylor in the last century. This
involves developing time standards based observation of one worker taken on number of
cycles. Steps involved are
1. Define the task and inform the worker who will be studied
2. Determine the number of cycles
3. Time the job & rate the worker’s performance
4. Compute the standard time
The analyst should be thoroughly familiar because workers will delay. Analyst should
break the task into very short jobs (reach, pick up, load, tighten, etc)
Observed time is simply the average of observed times taken during 10 to 15 iterations
OT = Σ xi / n (sum of observed times/ number of observations)
Normal time is the observed time adjusted for the performance of worker
NT = OT X performance rating

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For long jobs each element is rated, for short jobs a single rating may be made for an
entire cycle. Analysts are given training to provide consistency in the rating of analysts.

Standard time: Standard time is the length of time, worker should take after considering
the delays and allowances. (Say drinking water, talking to supervisor, rest break, waiting
for fork lift).Allowances are for personnel allowance, basic fatigue, use of muscular
energy (pulling, lifting ), inadequate light, heat & humidity, noise level, tediousness etc
Standard time = NT X AF , AF – allowance factor

AF can be computed in two ways

a) Allowance based on job time , AF = 1 + A (% allowance based on job)
b) AF based on time worked, AFday = 1/(1-A) (% of work time )

Past data: Over years, the Industrial engineering department can accumulate a file of
elemental times that are common to many jobs

The procedure followed is

1. Analyze the job & identify the elements of tasks
2. Check the records which elements have historical times; in case of others, carry
out time study
3. Sum the elemental time to get normal time & factor in allowance to get standard
time .

Advantages:
a) Effort is less & saves time and money
b) No disruption of work
c) Performance rating in not required because average times are recorded.

The disadvantage is we may not have records for all elemental tasks and (past data) time
could be biased.

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Predetermined Motion Time Standards (PMTS): This uses published data on standard
elemental times. Commonly used system is MTM (methods time measurement). MTM
tables are developed based on extensive research on basic elements of motion. To use this
analysis is required to divide the task into basic elements, say reach, move, turn, lift,
weigh etc. This requires considerable skill on the part of the analyst. The elemental times
are named as Therblig’ after the name of Gilbreth
Advantages of PMTS are
1. They are based on study of large number of workers under controlled conditions
2. Performance rating is not required
3. There is no disruption of work
4. Standard can be estimated before a job is done (first time)
Although PMTS claim much better accuracy than time study, many disagree with it.
Different analysts perceive break down of elemental activities in different ways. Degree
of difficulty they assign to a given task may differ with different analysts and time
estimates will differ.

Work sampling: is a technique for estimating the proportion of time that a worker or
machine spends on various activities. This was introduced by L.H.C.Tippet in 1934 in the
Textile Industry.

Unlike time study, work sampling does not require timing an activity. However this
involves continuous observation of an activity. Instead of time study, an observer is
required to make brief observation of a worker at random intervals over a period of time
and simply note the nature of activity.

For example in a group of 10 typists, following observation are made over a period of
800 minutes

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Tying 250 minutes 250/800= 31%
Not typing (could be filing, 550 minutes 550/800= 69%
attending phone or idle)
Total = 800
Average time spent per worker per day in typing =31% X 8 hours
= 2.5 hours (Approx)
The total letters typed by the group (of 10 typists) for the working day is 50.
The work content for average letter would be =2.5 /(50/10)
=2.5/5 =0.5 hour i.e., 30minutes per letter
Other allowances and leveling problems are not there. The larger the sample size, the
greater the accuracy of the estimate. Although, occasionally work sampling is used for
setting time standards, the primary uses are study of (1.) Delays or % utilization (2.)
Analysis of non repetitive jobs like taking dictation, typing, filing, attending telephone.
Time spent on skilled and low skilled jobs is known. This helps in developing job
description, deciding on wage / compensation.

Advantages of work sampling Disadvantages of work sampling

1) Observations are spread over long 1) Less detail as elements of job
time. No short term fluctuations 2) No record of method used
2) No disruption of work 3) Approximate
3) Workers are less resentful
4) Analyst skill requirement is less
5) Useful for non repetitive tasks

Compensation / Incentive schemes

An important issue related to design of work system/work study is worker compensation.
There are two basic systems.
1. Individual incentives plans (piece work on standard hours obtained)
2. Group incentive plans (all the employees in group share)

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Time based systems also known as hourly or day work systems. Employees are paid
based on the time they have worked. Output based systems compensate the employees
based on output/performance. Time based systems are widely used, reason being simple
and no need to pay incentives. In cases like research & development it would be difficult
to measure the output. Also in case of assembly lines, the individual incentives can
disrupt the workflow. Finally quality considerations may be more important.

Although incentive schemes involve considerable paper work, computation, setting,

measurement etc, there are many advantages. The advantages are greater output, lower
cost per unit, easy to administer - which offset the minor negative points.

The simplest plan is Piece rate system. Under this incentive plan the pay has direct linear
relation with output. As a result of the minimum wage plan legislation, the wages are
restructured into basic rate/minimum wage plus incentive after the worker exceeds the
minimum set target.

Group incentive plan: These plans stress sharing the productivity gains among the
employees. While some plans focus only on the output, others reward for output and
savings in material consumption & other value additions. There are also other incentives
like annual incentive and free allotment of stocks etc.

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 Chapter 3
Production System –Operations and Controlling

Chapter Outline
3.1 Planning process
- Planning process
- Planning Horizon (Long range, Aggregate & Short range planning)
- Master Production Schedule (MPS)
3.2 Capacity Planning
- Capacity Planning
- Capacity Requirement Planning (CRP)
- Manufacturing Resource Planning (MRP II): An Overview
- Synchronous manufacturing
3.3 Production planning and control
- Functions of production and planning
- Production planning tools
3.4 Scheduling
- Sequence problem (Johnson’s rule)
- Scheduling in high volume system and Line Balancing
- Scheduling in intermediate volume systems & Line of balance
- Day to day scheduling and shop floor decisions
- Scheduling in Service Systems
- Scheduling Multiple Resources

3.5 Maintenance management

- Breakdown maintenance
- Preventive maintenance
- Modern practices in maintenance

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Introduction
Production system design involves decisions related to Product and Service selection (in
coordination with marketing and product design), capacity planning, location, layout.
Product system operation and control involves aggregate planning, inventory
management, scheduling of operations, project management and quality assurance. While
operations manager is not directly responsible for production system design, he
contributes to decision making process by way of providing necessary data and
participating process.

3.1 Planning process

Planning is looking ahead, anticipating a problem and taking necessary action to avoid /
reduce its impact. Planning bridges the gap from where we are to where we want to go
and provides for the future.
Types of plans generated are purposes or missions, objectives or goals, strategies,
policies, procedures, rules, budgets, and programme.

• Mission or purpose identifies the basic function or task of an enterprise.

• Objectives or Goals are the end results towards which activities are aimed.
Objectives are verifiable at the end of the period, to determine whether or not they
have been accomplished.
Management by objectives (MBO) has been widely used in setting goals.
• Strategies are the basic long-term objectives of an enterprise & the adoption of
courses of action and allocation of resources necessary to achieve these aims.
• Policies are general statements or understandings that guide managers’ thinking in
decision making. Both strategies and policies give direction to plans.
• Procedure details the exact manner (sequence of actions) in which certain
activities must be accomplished.
• Rules spell out specific required actions or non actions, allowing no discretion.
“No smoking” is a rule

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 • A budget is a statement of expected results expressed in numerical terms. It may
be called a “numberized” programme.

Programmes are a combination of goals, policies, procedures, rules, task assignments.

Steps to be taken, resources to be employed, and other elements necessary to carry
out a given course of action; they are ordinarily supported by budgets.
Plans should have a) flexibility b) should be able to navigate in case of change / mid
term course of action

The steps involved in the process of planning are detailed below

Planning Horizon (Long range, Aggregate & Short range planning)

Long range planning: Business planning process coordinates the activities of each
function or department so that the activities and resources are focused on achieving
organization objectives. The processes used to address this are product development,
sales levels to be achieved, capital investment, manpower planning. There will be

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committees consisting of department heads focusing on medium term plan within the
framework of a long range business plan.

Long range plans are basically strategic in nature. The focus is on location, technology &
product selection, capital investment, layouts, long arrange capacity plans and level of
automation etc. Though operations manager is not directly involved, they are associated
with long range planning.

Short-range plans Intermediate-range plans Long-range plans

Detailed plans: General levels of: Long term capacity

Machine loading Employment Location
Job assignments Output Layout
Job sequencing Inventories Product design
Production lot size Subcontracting Work system design
Order quantities Backorders

Long range

Intermediate

Short
range

3 months 18 months 5years

Figure: Planning horizon

Aggregate Planning (AP)
Aggregate planning is medium range capacity planning that typically covers a time
horizon of anywhere from 3 to 18 months. The goal of AP is achieve/meet the production

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plan with effective utilization of resources and the expected demand. Planner must take
decision on output rate, employment level & work force, inventory level (raw material,
work in progress, finished goods), back orders (taking orders for later period) and
subcontracting. Each is associated with a cost.

Aggregate operational plan translates annual business plans into medium range plans
dealing with levels of employment (labour), output, inventories etc. The objective of
aggregate planning is to minimize the cost of resources required to meet the demand over
that period. By aggregate, we mean at the level of major group of products. When we say
we have aggregate capacity, our individual product planners, working within the
aggregate capacity constraints can handle weekly, daily production orders to meet the
short term demand.

Different approaches used in AP will be discussed- informal techniques (developing

tables) mathematical techniques (LP- linear programming, GP- goal programming)
Concepts of Aggregate Planning (AP)
AP is essentially a macro planning approach to planning i.e. focus on aggregate or over
all capacity & try to avoid focusing on individual product & service. For purpose of

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aggregate planning it is convenient to think of capacity in terms of labor hours, or
machine hours in various production shops like fabrication shop, machine shop, paint
shop, assembly shop without worrying about how much of each item & individual
products. This is a macro approach, while day to day scheduling is called micro planning.

Let us see how AP might work for an automobile manufacturer who makes a variety of
cars and trucks. For purpose of AP, decision on number of cars and trucks to be produced
will be made without specifying the breakdown of 2 doors vs. 4 doors, decision on 4
cylinder and 6 cylinder engine blocks etc.

Inputs to Aggregate Planning :

For effective AP, there are a number of information needs: The available resources over
the planning period, demand forecast and policies of the company on employment level,
overtime & layoffs, inventories, backlogging of orders etc.

Decision variables & cost

Management has a wide range of options for the purpose of AP, such as pricing, sales
promotion, backlogging of orders, overtime, using part time workers, subcontracting, and
adding/deleting shifts. Evaluate the plan based on various options and arrive at decisions.

Strategies for meeting uneven demand: Aggregate planners adapt some of the following
prominent strategies
• Maintain a level workforce
• Maintain study output rate
• Use combination of decision variables

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Steps involved in AP
1. Determine the demand

2. Determine capacity for each period (required time, OT, sub contract)

3. Company policies on safety stock 5 % extra of demand, stable work force

4. Determine limit cost for RT,OT,SC, holding inventory, back order & other
relevant costs

5. Determine alternate plan & complete cost

6. If satisfactory, release plan, otherwise return to step 5

Short range operations planning: Is that part of the business plan which defines how an
organization plans to produce parts / products, process, manufacture equipment,
inventory requirement etc. These plans have to be aligned with the business plan and
objectives of marketing, finance, HR etc. Short range plans deal with master production
schedules (MPS) for producing finished goods, parts & subassemblies, shop floor
schedules etc.

Master Production Schedule (MPS)

Based on annual sales forecast, shop capacities, product design status, material
availability, Master Production Schedule (MPS) is prepared.
MPS is prepared 2-3 months before the beginning of the financial year, depending on the
nature of production and lead times involved. The plan gives month wise breakup of the
first quarter and quarterly breakup for the next three quarters. The plan is reviewed every
quarter and redrawn giving the monthly details for the ensuing quarter. Typical format for
MPS is given below;

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 Annual
Product Plan Qty. April May June II Qtr. III IV Qtr.
Qtr.
Item A 10 5 5

Item B 20 10 10

Item C 50 10 10 10 20

This becomes the reference document for Production engineering/Methods departments,

Materials management, Production shops, Testing and Quality control to plan the
activities in each department. Based on the MPS materials planning/inventory level, tool
planning, capacity estimation, subcontract decisions, contract labour requirement (if any)
are carried out. Within the framework of MPS, weekly and daily schedules are drawn for
men & machines. Order schedules and machine load plans, regular time and overtime
plans are made based on this.

3.2 Capacity Planning

The term capacity refers to an upper limit or ceiling on the load that an operating unit can
handle. The operating unit can be a plant, a department, a store, a machine, a worker. The
load can be specified either in terms of inputs it can process or output which is a matter of
choice. Information on capacity is important for the purpose of planning.

Capacity refers to a system’s potential for producing goods or delivering services over a
specified time interval. Capacity decisions are doubly important: Capacity limitations act
as a ceiling on output, and capacity is a major determinant of operating costs.
As a general rule, a variety of factors interfere with capacity utilization, so that effective
capacity is somewhat less than design capacity. These factors involve such things as

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facilities design and layout, human factors, product / service design, equipment failures,
scheduling problems, and quality considerations.
Table: Examples of commonly used measures of capacity

Development of capacity alternatives is enhanced by taking a systems approach to

planning, by recognizing that capacity increments are often acquired in chunks, by
designing flexible systems, and by considering product service complements as a way of
dealing with various patterns of demand.

Evaluating capacity alternatives contains both quantitative and qualitative aspects.

Quantitative analysis usually reflects economic factors, and qualitative considerations
include such intangibles as public opinion and personal preferences of managers. Cost
volume analysis, financial analysis, decision theory, and queuing theory are possible tools
for analyzing alternatives
Capacity utilization factor = Average load (i.e Capacity utilize)/Installed or rated capacity
Demand factor = Average load / Peak demand

Capacity Planning:
Capacity planning involves long-term and short-term considerations. Long term concern
relates to the overall level of capacity, and short term concern relates to variations in
capacity requirements due to seasonal, random, and irregular fluctuations in demand.
Ideally, capacity will match demand, since it is typically most efficient to operate at or

105
close to full capacity. For this reason, there is a close link between forecasting and
capacity planning, particularly in the long term. In the short term, emphasis shifts to
describing and coping with variations in demand.

The various types of capacity planning are

Long term capacity planning: The capacity requirements are determined by forecasting
demand over a time horizon and then converting these forecasts into capacity
requirements. The fluctuations are complex patterns in the combination of cycles and
trends.
Short term capacity planning: The capacity requirements are less concerned with cycles
or trends and more with seasonal variations which can be identified by using standard
forecasting techniques.

Capacity planning is concerned with the basic questions such as:

1. What kind of capacity is needed
2. How much capacity is needed
3. When this capacity is needed
Capacity planning involves assessing existing capacity, forecasting the future capacity
requirement, identify & analyze sources of capacity for future needs, evaluate
alternatives, select a suitable alternative.

The important issues in capacity planning are

• Maintain system balance: Output of stage1 provides the exact input requirement
of stage 2 and so on
• Frequency of capacity addition: Costs involved in upgrading too frequently & that
of infrequently and finally cost of idling
• Use of external capacity: Outsourcing & sharing capacity (Ex: Two domestic
Airlines sharing the routes)

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Capacity Requirement Planning (CRP):
During the preparation of MPS, feasibility from the capacity point of view is studied at
gross level. While it appears feasible on the surface, CRP exercise has to be carried out to
determine the short range capacity requirements. The inputs required include existing
shop load, planned release of orders, expected orders, routing information and time
estimates. Output statements will be shop load plan – work center wise. The variance i.e.
under load & overload are examined. Alternative course of actions like: Change in
routing, lot size and lot splitting at different operations, overtime, backorder scheduling is
studied.
Capacity planning process is presented in the figure below:

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In determining the capacity requirements we must consider demands of various product
lines and plant capacity. This is then translated into load report for each work
center/department giving details of current load, planned order release and expected
orders for the plan period.

It is possible to meet the requirement by shifting the adjacent period. The firm should
decide on some capacity cushion to meet the unanticipated demand.
Capacity planning

The important issues in capacity planning are

• Maintain system balance: Output of stage I provides the existing input

requirement of stage II and so on
• Frequency of capacity addition: Costs involved in upgrading too frequently
and that of infrequently and finally cost of idling.
• Use of external capacity: Outsourcing and sharing capacity (two domestic
airlines sharing routes)

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Manufacturing Resource Plan (MRP II): An Overview
MRP II is a second generation approach to planning. It has a broader scope than Material
Resource Planning. It links business planning, production planning and master schedule.
A major purpose of MRP II is to integrate the primary functions: Marketing and Finance
as well as other functions such as personnel, engineering and purchase in the planning
process.

The rationale of having these functional areas work together is the increased possibility
of developing a plan that will work. Marketing and finance will have good knowledge of

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plan and work towards achieving it. Besides manufacturing resources, financial &
marketing resources will be needed throughout the process. After assessment of
availability of resources, the initial plan must be revised. As the plan is executed,
necessary adjustments have to be made. This is a continuing process. MRP II systems
have the capability of simulation thereby gaining a better appreciation of available
options and their consequences.

Synchronous manufacturing:
Goldratt refers to synchronous manufacturing as the entire production process
coordinated to work in harmony to achieve the profit goal of the firm. The emphasis is on
total system performance, not on localized measures such as labour or machine
utilization. The bottleneck is that resource whose capacity is less than the demand placed
upon it. Capacity constraints resource is a resource whose utilization is close to the
capacity and could become bottleneck if not scheduled carefully.
Goldratt has developed Theory of Constrains (TOC) which has become popular as a
problem solving approach that can be applied to many business areas. Steps to TOC are
given below.

Steps:
1. Identify the system constraints. (No improvement is possible unless the constraint or
weakest link is found.)
2. Decide how to exploit the system constraints. (Make the constraints as effective as
possible.)
3. Subordinate everything else to that decision. (Align every other part of the system to
support the constraints even if this reduces the efficiency of non-constraint resources.)
4. Elevate the system constraints. (If output is still inadequate, acquire more of this
resource so that it is no longer a constraint.)
5. If, in the previous steps, the constraints have been broken, go back to Step 1, but do
not let inertia become the system constraint. (After this constraint problem is solved,
go back to the beginning and start over. This is a continuous process of improvement:
identifying constraints, breaking them, and then identifying the new ones that result.)

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Synchronous Manufacturing emphasizes on the total system performance, not on
localized measures such as labor or machine utilization.
There are two performance measures
1. Financial measurement – Profit, ROI, Cash flow
2. Operational measurements
• Throughput – The rate at which money is generated by the system through
sales.
• Inventory – The money invested in purchasing material.
• Operating expenses – All the money the system is spending to turn inventory
to throughput.

From the operations standpoint the goal of the firm is to “Increase throughput while
simultaneously reducing inventory and operating expenses”.
Synchronous Manufacturing emphasizes on the total system performance, not on
localized measures such as labor or machine utilization.

Other Planning Techniques

Informal techniques
Consists of developing tables or graphs & compare demand requirement with existing
capacity. The disadvantage with this technique is that the results are not optimal.
Alternatives could be regular, steady output with inventory absorbing demand variations
or lower rate of regular output, supplemented by overtime.
Mathematical techniques: Mathematical models range from computer search models to
mathematical programs.
Linear programming models are methods for obtaining optimum solution to problems
involving allocation of scarce resource in terms of cost minimization / profit
maximization. In AP, the objective is minimize costs related to RT, OT, SC, Inventory
holding cost, change work force. Constraints involve capacity, inventories & sub-
contracting.
Goal programming permits user to specify multiple goals in priority. Simulation, trail &
error. Computerized model allow / examine models under a variety of conditions

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3.3 Production Planning & Control

The Organization Structure in respect of a manufacturing firm and service organization

are given below. It can be seen from the organization chart that various departments are
functionally organized.

The functions of production department can

be broadly classified as planning, execution
and control

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Planning is to look ahead, anticipate difficulties and take necessary steps to remove the
bottlenecks. The function also involves setting goals, scheduling, participating in demand
forecast etc
Execution: The functions involved are organizing resources (man material, machine and
funds) looking around, observe /monitor operations, follow up, remove bottle necks,
report results etc
Control: Look back, evaluate the performance, analyze the problems /short fall,
corrective action or rescheduling are some of the important control functions.

Information is needed at each step of the above activities. This leads to the important
function called Management Information System (MIS)

Production planning and control (PPC)

Effectiveness of production planning and control is the key to success of operations
management. It is like nervous system in the human body.

Production planning and control can be defined as the process of planning in advance,
setting the exact route / sequence of operations for each item, setting start, finish dates for
each item, release of production orders to the production shops and monitor the progress
of orders as per the delivery commitments made to the customer.
The main functions of PPC includes production planning, scheduling, routing,
dispatching and follow up with concerned departments and implement the production
plans.
Planning is deciding in advance what to do, how to do, when to do, who is to do.
Planning bridges the gap between “from where we are” to “where we intend to go”.
Planning enables thing to happen which other wise would not happen left to the normal
course of action. Preparation of Master Production Schedule based on demand forecast,
shop capacity, availability of design/ drawings and materials is part of the production
planning exercise. Capacity estimation, make or buy decisions are carried out by PPC.
Routing is defined as sequence of operations in which each part of the product will flow
during the transformation of raw material to finished parts /products

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Routing determines the most advantageous path to be followed from machine to machine
and department to department till the raw material gets transformed into finished product
Scheduling may be defined as setting time and date for each operation. Scheduling is
carried out for manufacture of parts, subassemblies, procurement of materials, equipment
maintenance, shipping of finished products to customer etc.
Dispatching is concerned with starting the processes and authorizing various
departments to start a particular work which is specified in the route sheet and schedules.
Follow up: This function involves monitoring the progress and reporting the daily
progress in each work centre. Liaison with concerned departments like engineering,
materials management, maintenance and removal of the bottlenecks are some of the
important activities carried out.
Control: This is one of the important functions of PPC. The reasons for deviations from
the schedules are examined and necessary corrective action taken

Functions of production and planning

1. Receive customer order, expected order / demand forecast for various products
2. Preparation of Master Production Schedule (MPS)
3. Make or buy decision
4. Explode the production plan to parts and operations needed
5. Estimate the capacity requirement to meet MPS
6. Determine the raw material requirements
7. Prepare process sheets / routing through various work centers
8. Release work order / production order authorizing the production shop to start the
job. Check stock in fabricated parts store before placing orders on production
shops
9. Make sure that everything required i.e., drawings, raw material, tools are available
10. Decide and assign jobs to particular men and machine and schedule the operations
i.e., setting dates- start and finish
11. Direct the transportation /movement of materials between work centers /
production shops
12. Follow up production shops and remove reasons for delays for production

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 13. Receive reports on work done and compare with schedule. Revise the plan in case
of deviation
14. Answer enquiries concerning progress of orders to marketing department
15. Associate with marketing and finance in preparation of cost estimates for sale
leads / prospective new orders
16. Preparation of work orders, material issue requisitions, inspection-cum-move
orders.

Production planning tools

The various planning tools used in production planning are
• Gantt chart / bar chart
• Milestone chart
• Flow process chart
• Line of balance
• Network planning (PERT & CPM)

Gantt chart: Henry Gantt of USA introduced this planning tool. The start and finish of
various activities are drawn on time scale and schedule is displayed with the help of bars.
This chart doesn’t indicate the effect of some work behind on project completion time /
ahead of schedules. This is because chart doesn’t show the inter relationship between
activities. Reporting progress involves estimating broadly the amount of work completed
in terms of percentages i.e., 40%, 50% of the total work. But this doesn’t give an idea of
what exactly is completed and what is not, the reason being the chart doesn’t show any
milestones or events with in horizontal bars.

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 Figure - Gantt chart

Milestone chart: This is an improvement on Gantt chart. The milestones or events are
inserted along tasks. This makes reporting more definite by virtue of identification that
can be made with these positive indices. Ex: the procurement of equipment may have the
following mile stones
a) Selection of equipment
b) Ordering of equipment
c) Building construction
d) Procurement of electrical equipment
e) Procurement of mechanical equipment
f) System testing

However, the milestone chart also doesn’t exhibit interrelationships between activities.

Flow process chart: this exhibits the sequential relation between tasks and the technique
is best used for method study. The advantages are
Work simplification,
Methods improvement and
Procedure analysis

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However the flow process chart does not provide information regarding time duration of
individual activities and doesn’t help in determining the product / project schedule.

Line of balance (LOB)

This is a combination of bar chart and flow process chart. Tasks / activities are plotted on
time scale according to sequential and lead time relationship leading to the final event.
This is good for batch production type programs on repetitive basis. Because of the
substantial subjectivity involved in estimating the progress achieved on individual
activities which are under progress, this chart can’t be used for R&D projects and non
repetitive operations.

Some production systems often commit to delivery schedules for their products that
stipulate how many products must be delivered to customers in each future week. If it is
important that actual product deliveries match with the planned delivery schedule, a
system must be devised to schedule and control all the production steps. Too often, the
production of a customer’s order seems to be on schedule because deliveries are and have
been on schedule. But things may already be happening in production that will result in

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late deliveries in the future. And corrective action may be impossible after deliveries are
late, because the production pipeline may have run dry. In such instances, line of balance
(LOB) has been used to schedule and control upstream production steps. Example
illustrates how a company uses LOB analysis to establish and control a delivery plan to a
customer.

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Solution
1. First, construct a cumulative delivery schedule as shown in Figure
2. Next, locate the review point on the cumulative delivery schedule in Figure. The
review point is at eight months. Proceed vertically upward until the cumulative
delivery schedule curve is reached; proceed horizontally to the right until the last
processing step, (8), on the progress chart is reached. Draw a short horizontal line
across the Processing Step (8) column at this level: This is the line of balance for
Processing Step (8). To locate the line of balance for Step (7), go forward (to the
right) a quarter-month from the previous review point on the cumulative delivery
schedule to 8¼ months and repeat the procedure. Why go forward in a schedule a
quarter-month when Step (7) is back upstream in the production process? Because
the units that are at Processing Step(7) now should be shipped a quarter-month
(the amount of lead time between Steps (7) and (8),) from now in the future, or 8
¼ months in the schedule. The line of balance is similarly drawn for all
processing steps.

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3. Next, draw a vertical bar for each processing step on the progress chart to indicate
the cumulative number of units that have passed each step.
4. Next, evaluate the progress chart: (a) Snowball is on its delivery schedule; the
vertical bar for units shipped (8), exactly meets the line of balance. However,
trouble looms ahead. (b) Processing Steps (2) and (1) are on schedule or ahead of
schedule; that is, their bars either meet or exceed the line of balance. (c)
Processing Steps(7), final assembly, and (6), chassis fabrication, are both 500
units behind schedule, probably because of engine assemblies and shell
assemblies deficiencies. (d) Processing Step E. subcontracted body finish, is 500

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 Figure: Cumulative Delivery Schedule

units behind schedule. The fault lies with the subcontractor and not purchased parts. (e)
Processing Steps (4) and (3)engine assemblies, are 500 and 1,000 units behind schedule,
respectively. Purchased parts are holding up engine test operation.

This evaluation suggests that management should immediately take corrective steps to
accelerate purchase of engines, engine test, and subcontracted body finish processing
steps. Deliveries will be deficient by 500 units during the next review period (a quarter-
month), unless progress is made to accelerate and 3 and 5, more serious deficiencies can
be expected in the coming periods.

Periodically, a new line of balance is drawn on the progress chart and vertical bars are
extended to reflect additional units passing each production step since the last review.
Thus, a snapshot evaluation of each production step is taken at regular intervals. These
periodic evaluations provide operations managers with information about the
performance of each step in relation to the schedule. This information is known before

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any production difficulties actually affect delivery schedules. Therefore, corrective action
may be taken to avoid late deliveries. LOB achieves its greatest benefits when products
or services are produced to specific delivery schedules, when production involves many
production steps, and when production lead times are long.
Computer packages for scheduling are growing in both number and frequency of
application in today’s production systems.
Network planning: This technique is basically used in project planning. Projects are
unique, one time operations designed to accomplish a specific objective in a limited time
frame. Examples of projects include design and manufacture of a prototype; introducing a
new product or service in the market place; constructing a shopping complex; launching a
space craft. PERT & CPM are the techniques used in project planning and dealt in more
detail in “Project Management” chapter.

Line balancing is a technique used in mass manufacturing / assembly operations. The

technique involves breaking the total task into elements of operation (technically
feasible) and assigning the tasks to work stations taking the precedence relationship
between activities and cycle time at each work station into consideration. The technique
is dealt in more detail under the heading “scheduling”.

3.4 Scheduling

Scheduling is setting start-finish dates for various operations. Such an activity is

fundamental to virtually to every organization. Scheduling includes equipment / facilities
and men. For Ex: a manufacturer must schedule workmen, purchases, production etc.
Hospitals must schedule admissions, surgery and service operations like pathology, meals
preparations, ambulance etc. Airlines need to schedule flights & crew, maintenance of
aircrafts etc.

Generally speaking, the objective of scheduling function is to achieve tradeoffs among

conflicting goals: utilization of men / machine and minimization of customer waiting
time, inventories and process times.

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Scheduling tasks are largely a function of volume of system output: high volume,
intermediate volume, job shops, project scheduling, etc. Scheduling problems are
complex in job shops because of variety of the jobs to be processed.
Scheduling techniques used in various types of production
• Scheduling in job shops/made to order: Gantt/Bar chart; Milestone chart
• Scheduling in high volume system (Mass production): Line balancing
• Scheduling in intermediate volume/batch production
a) Run out method
b) Line of balance
• Scheduling in service operations
a) Appointment system
b) Reservation system

Scheduling in job order shop (low volume): The job order shop is characterized by
products made to order. Orders usually differ in terms of process requirement, material
needed, processing time, processing sequence and setups. Because of this, scheduling of
job shops is fairly complex. The basic issues are
1. How to distribute the work load among work centers
2. What job processing sequence to use

Machine Loading
1) In cases where specific jobs can be processed only through specific work centers,
loading presents no difficulty
Sequencing rules
Although loading decisions determine the work centers / machines that will be used, they
don’t indicate the order in which jobs waiting at a machine are to be processed.
Sequencing is concerned with determining the job process order. Simple priority rules are
used
I. FCFS (First Cum First Served)
II. Shortest Processing Time (SPT) – This is to keep the work in progress for a
lesser amount of time.

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 III. Due Date (DD) - Earliest due date first
IV. Critical Ratio (ratio of due date / processing time)
V. Slack time per operation: (time until due date – time to process) / number of
remaining operations. This is called priority index. The lower the priority index,
job will be loaded first.
VI. Earliest due date
VII. Least changeover cost: Since some jobs logically follow each other (Ex: job
with the same design, process characteristics)
VIII. Run out time (finish goods stock/demand rate), i.e. number of days of expected
sales.
IX. Rush: emergency or preferred customer first

Other rules to be considered are valued customer, most profitable job; payment against
delivery; next work center is free.

2) Problems arise when two or more jobs have to be processed and there are a
number of work centers, capable of performing the required work. Operation
manager in making assignments to work centers will either
Minimize processing cost (depends on process time)
Minimize time among work centers (overlap schedule- no gap)
Minimize job completion time (cycle time – throughput time)

Sequence Problem: Johnson Rule

The Production analyst can also strive to achieve a reduction in the cost of production by
optimally planning the utilization of the facilities selected for use in the production
process against the calendar time. Whereas the investment analysis and allied techniques
lead to the selection of equipment expected to minimize operational costs, allocation &
programming algorithms, as discussed before, seek to determine the work programme
over a stated time period so as to optimize the objective function within known
constraints of available facilities. Neither of these approaches tackle problems which

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could arise from sequencing and adversely affect the total cost of production, nor do they
usually lead to the minimization of costs associated with ancillary activities which are
necessary adjuncts to the basic operations and essential for the performance of the
production function. Such costs arise usually from material handling, idle time, costs of
machines, etc. If overall optimization is to be achieved, these and similar costs have,
therefore, to be tackled and minimized. A simple illustration of the sequencing problem
could well highlight the issues involved.

Sequencing is concerned with determining job process order. We will examine some of
the ways in which jobs are sequenced. Typically a number of jobs will be waiting for
processing.

Suppose four products have to be manufactured and the process requirements are such
that each will have to be processed on machine A and B, with the processing on machine
A always preceding that on B. Suppose also that the time required for carrying out the
processing for each product on each machine is known and is given below
Hours required for processing
Jobs I II III IV
Machine A 6 8 5 2
Machine B 3 4 5 10

If it is desired to manufacture one each of the four products, and this may well be the
finding of the programming approach, the total capacity requirements for the machines A
and B would, therefore, be 21 hours and 22 hours respectively. Does this mean, therefore,
that the production analyst could well promise the delivery of all the four products within
22 hours of the starting time of production, taking for granted that both machines A and B
will have no other work scheduled on them during this period? Let this hypothesis be
tested, and let the sequence chosen for the test be I—II—III—IV. This order of
processing can be represented diagrammatically as shown.

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 Figure:
The sequence chosen reveals that the total calendar time requires -men for carrying out
the processing of all the four products would be as high as 34 hours instead of the 22
hours obtained by the straight addition of machine-hour requirements. Various other
sequences can be tried yielding different results. For instance a sequence of IV—I—III—
II would lead to a total cycle time requirement of 25 hours only, thus reducing the
calendar time requirement by 9 hours by changing the order in which the products are
manufactured.
Situations such as these are identified as sequencing problems and can be generalised as
follows

What should be the sequence of carrying out a series of jobs (say “m” in number) through
a number of machines or work stations (say “n” in number), where each job may have to
be processed on each of the “n” machines or on some of them in a fixed order of
precedence determined by technology or process considerations such that the total
calendar time (cycle time) required for the performance of all the jobs is minimised?

An algorithm for the general solution of the problem is beyond the scope of this book.
However, Johnson has evolved an optimality rule dealing with conditions involving only
two stations or machines and one restrictive precedence relationship A—B, i.e.,
processing on A precedes that on B.

Johnson Optimality Rule:

Johnson’s optimality rule runs as follows
1. Choose the lowest figure in the processing time requirement matrix. (In the
example chosen, the number is 2, time required for- processing product IV on
machine A).

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 2. If the figure appears on the first row, sequence the product to be processed first.
(The logic of this step is obvious, as by this decision lowest waiting time at the
start is ensured for machine B).
3. If the figure appears in the second row of the matrix, sequence the product last.
4. After sequencing, cancel out the product so sequenced from further allocation.
5. Search again for the lowest figure for processing amongst the remaining products,
and follow the same rules of sequencing as indicated above. (In the example
chosen, the lowest figure is 3 for product I and since it appears in the second row
of the matrix, the product in question has to be scheduled last).
6. Repeat the steps above till all jobs are scheduled. For the example, the algorithm
stated above would lead to an. optimum sequence of IV—III—II—I with a total
optimal cycle time. of 24 hours. It may be noted that the figure obtained (24
hours) is two hours more than the capacity requirement, i.e., 22 hours, because
machine B has. to wait a minimum of two hours before it can start processrng
product. IV as imposed by the precedence constraint.

Assignment model is a special purpose Linear Programming model used for assigning
tasks to resources, e.g. assigning job to machine, territories to sales people. The idea is to
obtain optimum making of tasks and resources (minimizing cost) job. Commonly used
criteria are cost, efficiency, profit etc.
The simpler method in use is Gantt chart. The two commonly used charts are
1. Load Chart which indicates the loading & idle time of group of machines
2. A Schedule chart which depicts operations schedule & actual progress of a
custom built product

The limitation of Gantt chart is it indicates only the percentage of works done and does
not indicate the interrelationship between various activities. If the processing time varies
depending on the work center, the scheduling will become more complex.

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Scheduling in high volume system:
High volume systems usually involve automated or specialized equipments for
processing. High volume, uniform output and standardized operations are the
characteristics. Ex: production of automobiles, TV, toys, process industries – petroleum
refinery, and service- cafeteria lines, mass inoculations etc.

High volumes are defined as flow systems. A major aspect in the design of flow system is
line balancing, which concerns dividing the work into relatively simple tasks, allocating
tasks to work stations, satisfying the technical constrains and balance the work-centers. In
setting up Flow systems product designers must consider the monotony of workers in
doing repetitive work.

To have smooth flow of work, the supply of materials and work must be synchronized.
Disruptions to some of the work centers due to equipment failure, material shortages,
absenteeism have to be taken care. This may call for overtime, subcontract on short term
notice etc. Process design, reliable supply of materials, least breakdown & quick response
to breakdowns of machines, predictive maintenance and least quality problems determine
the success of scheduling in flow systems.

Line Balancing
The advantage of product layout can best be derived by dividing the work into series of
elemental tasks that can be performed by a low skilled worker or specialized equipment.
The duration of these elemental tasks vary from few seconds to 10 minutes or more. It
would be impracticable to assign one elemental task to one person because most workers
would be bored. Alternatively for number workers, to individually complete a product
would be large and require multiple skills. In view of this tasks are grouped into
manageable bundles that are assigned to workstations manned by one or two operators.

The process of deciding how to assign tasks to work stations is referred to as Line
Balancing.

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The key aspect of assembly line is cycle time. This is the amount of time required at each
work station to complete a set of tasks before the product moves to next station e.g. If
cycle time is 5 minutes, every 5 minutes a unit is produced.

Cycle Time (CT) = Operating Time per day (OT) / Q (Daily output in number of units)
Number of Workstations
The number of stations that will be needed is a function of both the desired output rate
and our ability to combine elemental tasks into workstations. The theoretical minimum
number of workstation (K) necessary to provide a specified output can be calculated as
follows.
Kmin= Desired output X Sum of task times per unit / Operating time
= Q X ΣSi / OT
Where Kmin is Minimum number of workstations.
Q is Desired output rate
OT is Operating time (480 minutes per one shift operation))
ΣSi is Sum of task times

Example: Draw a precedence diagram and balance the line with the following data.
Compute the cycle time and number of workstations required.
Assume an eight hour working day and an output of 400 units per a day.

Task Immediate predecessor Task time

a ---- 0.2

b a 0.2

c a 0.8

d c 0.6

e b 0.3

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 f d,e 1

g f 0.4

h g 0.3

Σt 3.8

b e

a f g h

c d

Figure: Precedence diagram

Cycle time = Operating time per day (OT) = 480 = 1.2 minutes
Demand per day (D) 400
Number of workstations = D X Σt = 3.17 (rounded to 4)
OT

1.2 0.9 1.0 0.7

Fig: Balancing the Workstation
We find imbalance among the four workstations. Even in a “theoretically perfectly
balanced line” the actual performance may not reflect a perfect balance.

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Steps to be followed in balancing an Assembly/Fabrication line

1. Determine precedence diagram

2. Calculate the positional weight of each element (element time + all elemental
times which follow it)
3. Element of rank 1 is assigned to station 1
4. Procedure : only elements whose preceding elements assigned are considered
5. Elements time must be equal to (CT-a) where CT is the Cycle Time and ‘a’ is
Task time

This process will be continued keeping precedence relation and technical restriction in
mind.
Balance delay
Sm - maximum station time / cycle time,
K – number of work stations
Si – actual station time i – 1 to k

Balance delay = Sm X K – Σi=1to k Si /( Sm X K)

Reasons for imbalance:

1) Operator variability
2) Job is not infinitely divisible due to technical restrictions
3) Variability of input parts(say not interchangeable)
In a real time situation, line balancing is complex. So a heuristic approach may be
considered. Some of the rules in practice are:
1. Assign tasks to work station, longest task first and continue till all the tasks have
been assigned.
2. Assign tasks in the order of positional weights i.e. task which has most number of
following tasks. Positional weight is the sum of task time and times of all

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 following tasks. Although heuristic methods will not give optimal solution, they
often provide reasonably good solution. They are intuitively appealing.

Line balancing is also applicable to service operations like Banking (processing credit
card application, cash management operation), Insurance etc.Processing of credit card
includes operations like submission of credit card application, capturing application,
forwarding application, contact point verification, report to card operation, rechecking,
authentication and issue of card.

Scheduling in intermediate volume systems:

This falls between standardized high volume system production and job shop / made to
order. Like high volume, intermediate volume system typically produces standard
outputs. Products are made to stock than against order. However as volume is not large, it
is more economical to process intermittently.
E.g. are machine tools, consumer durables (compressor, special medical equipment – CT
scan, MRI. Two basic questions raised by the planner are:
1) What is the run quantity?
2) In what sequence job should be processed?

One approach is EOQ model – minimize setup cost and inventory carrying costs
Second approach is run out time (in conjunction with EOQ)

Run out time = current inventory / demand rate

Run out time indicates how long it will take for a given item to reach stock out.

Product Run out time (weeks)

X 2
Y 5
Z 4

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The processing order would be X-Z-Y

Planning is macro level such as M P S/monthly plan etc.

Scheduling: Detailed day to day planning is called scheduling and deals with questions
such as
• Which center (machine) will do what job?
• Setting start and finish date for operation
• At which machine and who will do?

Job shop production

Scheduling problems are particularly complex for job shops because of the variety of jobs
these systems are required to process.

The two major problems in scheduling job shops are assigning jobs to machines or work
centers and designating the sequence of job processing at a given machine or work
center. Gantt load charts are frequently employed to help managers visualize workloads,
and they are useful for describing and analyzing sequencing alternatives. In addition, both
heuristic and optimizing methods are used to develop loading and sequencing plans. For
the most part, the optimization techniques can be used only if certain assumptions can be
made.

There will be a variety of jobs / large variety of options to be performed. Generates

multiple semi finished and finished products. Scheduling involves basically:

• Assigning different jobs to different facilities. If 2 or more facilities / machines

are equally capable for performing the jobs; take different times to complete the
same job; have different capacities, the problem is that of assigning the job to
facilities. Assignment is called shop loading.

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If the choice doesn’t exist, then shop loading is to check the available capacity and
prioritize the jobs on hand (use priority rule)

Day to day scheduling and shop floor decisions

• Setting priorities of orders at each work center – (If only one machine can do)
• If orders can be assigned to several machines, then determine which order will go
to which machine
• Release of work orders to work centers, expedite order (say OT) if necessary,
revising schedule as conditions change
• Order scheduling: order wise schedule operations
• Priority setting or order sequencing: The objective is to determine the sequence
(or priority) of order at each work center
• Forward scheduling: jobs are assigned to the earliest available slot in work center.
The approach is product / jobs will be delivered as soon as possible. This results
in excess WIP (because of waiting). This is also called push system
• Backward scheduling: the starting date is promised delivery date to customer and
work backwards using lead time to determine when job should pass through a
work center. This method is called pull system. This reduces the WIP & this
scheduling is used in progressive companies.

Scheduling of Service Systems becomes more complex as it differs from manufacturing

in two respects.
1. Services can not be stored
2. Random request of customers for service

The objective in managing service systems is to match the flow of customers & service
capacity. This will happen if new customers arrive immediately after the service of the
preceding customers is completed. Unfortunately customers request for service is random
& the service times are subjected to variability. Ex: Physician, Dentist. In many cases,
appointments are not practical (Gas stations, emergency room-hospital, machine

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breakdown etc.). Analyzing the Queue will address these situations. The emphasis is on
intermediate decisions related to service capacity.
In scheduling services systems, we will limit to short term scheduling in which capacity
of the system is fixed and the goal is to achieve a certain degree of customer service by
efficient utilization of that capacity.

Appointment Systems
Appointment systems are intended to control the timing of customer arrivals in order to
minimize customer waiting while achieving a high degree of capacity utilization. A
doctor can use an appointment system to schedule patients during the afternoon, leaving
the mornings free for hospital duties. Similarly, an attorney can schedule clients around
court appearances. Even with appointments, however, problems can still arise due to lack
of punctuality on the part of patients or clients, and the inability to completely control the
length of contact time (e.g., a dentist might run into complications in filling a tooth and
have to spend additional time with a patient, thus backing up later appointments). Some
of this can be avoided— say, by trying to match the time reserved for a patient or client
with the specific needs of that case rather than setting appointments at regular intervals.
Even with the problems of late arrival, the appointment system is a tremendous
improvement over allowing random arrivals.

Reservation Systems
Reservation systems are designed to enable service systems to formulate a fairly accurate
estimate of the demand on the system for a given time period and to minimize customer
disappointment generated by excessive waiting or inability to obtain service. Reservation
systems are widely used by resorts, hotels, and restaurants as well as in some modes of
transportation (airlines, car rentals). In the case of restaurants, reservations enable
management to spread out or group customers so that demand matches service
capabilities.

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Scheduling Multiple Resources
In some situations, it is necessary to coordinate the use of more than one resource. For
example, hospitals must schedule surgeons, operating rooms, operating room staffs,
recovery room staffs, admissions, special equipment, nursing staffs, and so on. Similarly,
educational institutions must schedule faculty, classrooms, audiovisual equipment, and
students. As you might guess, the greater the number of resources that must be scheduled,
the greater the complexity of the problem, and the less likely it becomes that an optimum
schedule can be achieved. The problem is further complicated by the variable nature of
such systems. For example, educational institutions frequently change their course
offerings, student enrollments change, and students exhibit different course-selection
patterns. Some schools and hospitals are using computer programs to assist them in
devising acceptable schedules, although many appear to be using intuitive approaches,
with varying degrees of success.

Airlines are another example of service systems that require the scheduling of multiple
resources. Flight crews, aircraft, baggage handling equipment, ticket counters, gate
personnel, boarding ramps, and maintenance personnel all have to be coordinated.
Furthermore, government regulations on the number of hours a pilot can spend flying
place an additional restriction on the system. Another interesting variable is the fact that,
unlike most systems, the flight crews and the equipment do not remain in one location.
Moreover, the crew and the equipment are not usually scheduled as a single unit. Flight
crews are often scheduled so that they return to their base city every two days or more
often, and rest breaks must be considered. On the other hand, the aircraft may be in
almost continuous use except for periodic maintenance and repairs. Consequently, flight
crews commonly follow different trip patterns from that of the aircraft.

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3.5 Maintenance Management

Introduction:

Maintaining the productive capability of an organization is an important function.

Maintenance includes all the activities related to keeping facilities & equipment in good
operating condition and making necessary repairs. The goal is to minimize the cost.

There are two options of maintenance (1) Break down maintenance –which deals with
break downs or other problems when they occur (2) Preventive maintenance –this is to
reduce break down through a program of lubrication, cleaning , inspection & replacement
of worn out parts. With no preventive maintenance, repairs costs would be tremendous.
However beyond a certain point, PM would be a waste. Maintenance decisions typically
reflect a trade off between preventive & break down maintenance that will result in
minimizing the combined cost.

The age & conditions of facilities, the degree of technology involved, the type of
production process etc are the factors to arrive at how much preventive maintenance is
required.

Preventative maintenance: The goal of Preventive maintenance is to reduce the

incidence of break down or failure of equipment & avoid the associated costs, such as
loss of output, idle worker, schedule disruptions, stocking, spare parts, repair tools,&
employing repair specialists. Preventive maintenance is generally scheduled using some
or combination of the following
1. As a result of inspection that reveals need for maintenance
2. According to passage of time
3. After a predetermined number of operating hours

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Predictive maintenance is an attempt to determine when to perform preventive
maintenance activity. This is based on historical data & analysis of technical data to
predict when a piece of equipment is about to fail

In the broadest sense, PM extends back to design & selection stage of equipment.
Durability, ease of maintenance, training of employees in operation & maintenance are
important. Recently organizations are transferring maintenance to the users of the
equipment.

Break down maintenance

Even firms with good preventive maintenance practices have some need for break down
maintenance. So there is greater need for effective dealing with break downs.
Major approaches to deal with break down
a) Keep stand by or back up equipment
b) Keep inventory of spare parts
c) Training operator on minor repairs
d) Repair people who are well trained to readily diagnose & correct the problems

Breakdown programmes are most effective when they take into account the degree of
importance the equipment has in the productions system & ability of the system to do
without it for a period of time. Pareto phenomena tends to exist. A few equipment are
extremely important, some will require moderate effort/expense and some little effort or
expensive.

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The degree to which an organization pursues any of these approaches depends on the
importance of the piece of equipment in the over all production system e.g. printing press
for a news paper. The other extreme is the equipment rarely used, & substitute readily
available. Pareto phenomenon tends exist. A relatively few equipment will be extremely
important which justifies the effort & expense.

Planning & control spare parts:

Spare parts are required for maintenance. Spare parts are required both in case of
preventive & break down maintenance. In case of PM, the requirement can be easily
computed along with maintenance plan. Statistics are useful in calculating for both (a)
Spares for PM (b) Spares for BM. However the latter is uncertain. The concept of service
level or down time vs. under stocking cost is used.

Regular spares: Based on the service level & wear out of parts, the regular requirement of
spares in computed.

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Insurance spare: Spares of this class have a very high reliability & are required very
rarely and kept for life time of the equipment. These items are critical & non availability
has a very heavy down time cost. We should buy the part, if the probability of failure X
down time cost is greater than or equal to price of spare part.

Modern practices in maintenance:

1. Philosophical & theoretical shift: To achieve best practices in maintenance &
production there must be both a technological and organizational philosophical
shift. Failing which the organization will slip back into old base.
2. Understanding the change: Most people fear changes therefore resist change.
Maintenance and production managers must move boldly and swiftly to make the
changes as necessary and improvement in the plan.
3. Teamwork throughout the organization & realignment is critical to achieve success.
4. Training: A specific training programme must be developed covering all aspects of
the proposed changes being made. Basic methods must be presented so that
personnel will understand them. Workshops can be used to focus on the current and
day to day problems as they arise. Use practical training methods to assist the
development of solutions as the problems arise. Plant personnel need to be trained
in problem solving skills using formal methodology. People need this type of
training so that they can learn how to constructively analyze information. Groups
may also need the support of a qualified facilitator. Having a facilitator present is
beneficial while the groups are small and new to the process.
5. Asset Management: Realign the plant into major plant equipment configurations or
asset centers. An asset center can be a group of equipment designed to produce a
single product or components of a product. By associating all the costs: equipment,
personnel and the material required, the effectiveness of the asset management can
be done at its full potential.
6. Stores/Inventory Control: The nature of maintenance personnel is to hoard critical
individual parts and supplies until it is necessary to overhawl the entire system. The
store must be audited, inventoried in its entirety including the hoarded parts and
supplies. Selective control techniques like VED analysis must be used in spare part

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 planning. Create an equipment history analysis, identify dormant or excess stock
items. Once identified, excesses are tagged for salvage/scrap, keeping your
inventory viable.

7. Breakdown/Corrective maintenance: with assets and parts identified, corrective and

preventive maintenance can be carried out in a more meaningful fashion. Every one
associated with production and maintenance should know what is being done by
whom, where, when & while. Develop written procedures for the work as a whole.
Detailed responsibilities are assigned to specific personnel for the completion and
reporting of work.

Scheduling of operators to do routine maintenance tasks such as lubrication, minor

adjustment is essential.

8. Preventive Maintenance (PM): The preventive maintenance programme must also

undergo a total reevaluation to determine its adequacy and effectiveness. Too much
unscheduled down time and frequent equipment breakdowns indicate that PM’s are
not working as they should. Effective PM programme must be set to work hand in
glove with corrective/breakdown and predictive maintenance programme if it is to
be successful in the reduction of unnecessary equipment down time. It is essential
there be a coordination & cooperation between operations and maintenance
managers as a regular practice. Maintenance and operations need to realize that
without the asset center effectively producing products, outcome in all the areas is
adversely affected.

9. Predictive Maintenance (Pd.M): Predictive maintenance is an attempt to determine

when to perform preventive maintenance activities. It is based on historical records
and technical data to predict when an equipment is about to fail. The better the
predictions, more effective is preventive maintenance.

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 The effective use of good forecasting is also essential to prolong the useful
operational life of the given equipment. Through proper application of various
predictive maintenance tools, the maintenance personnel can easily identify the
failure patterns and effectively predicts eventual failure with some degree of
accuracy over time. The common predictive tools available are: Vibration analysis,
Lubrication analysis, Thermography & Ultrasonic.

All machines give early warning signs predicting their impending failure. The
common application and early uses of those predictive tools will greatly aid in the
identification of impending problems before they become catastrophic. With the
use of early detectives and effective alert mechanisms by the maintenance
department, failure patterns can be identified providing managers with information
necessary for planning. Effective use of failure trending, over time, indicates an
adverse effect in performance. Effective failure analysis data becomes a tool to
predict.

Predictive Maintenance must become a routine part of any regular production and
preventive programme to be effective.

10. Purchasing: Purchasing also plays an important role in the modern integrated
maintenance of an organization. The use of automated systems to trigger purchase
orders that are designed to facilitate stocking levels is essential. Adequate planning
and proper use of VED analysis & establishing workable stock levels can prevent
stock outs & over stocking.

Long term vendor relations, vendor managed inventory (finding a supplier who will
guarantee adequate supply of your items on his shelf to meet all the needs of your
maintenance operations), selective purchasing to be done by agreeing to purchase
all your supplies from a single supplier etc. will be helpful in getting the
maintenance spares in time and carry out effective maintenance.

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11. Pro-Active maintenance (PAM): Pro-active maintenance is a term to identify the
enhancement of both the preventive and predictive maintenance technologies. It is
absolutely necessary that mangers identify and document data gained from both the
PM and Pd.M programs so that they can develop the PAM portion of the equation.
To make this happen, establish and effectively use a documented history for every
cost center. Start charting each center’s uptime versus downtime, determine the
cause and effect factors. Make changes in the operation and maintenance functions
as they affect the overall uptime. Equipment histories must be accurate for them to
be useful. The effective PAM programme will ultimately lead to timely and
accurate implementation of plan of action. The PAM would provide managers a
vehicle to effectively reduce the downtime while maximizing the equipment
reliability and useful life.

12. Accountability: Accountability is required and must be built into the system.
Individuals and groups assigned need to be specifically challenging. Often
accountability is perceived as poor performance. It is critical that a reward
mechanism be built into the measurement system.

13. Total Productive Maintenance (TPM) : The approach is towards the concept of
TQM.
- Reduce variance through proper employee involvement & good maintenance
records
- Eliminate losses caused by breakdown and attack all causes
- Operators maintain their equipment
- Training production operators on maintenance
- Effective use of preventive & predictive maintenance
Total productive maintenance is a comprehensive system and focus on
- Zero down time
- Production workers share maintenance efforts
- Establish a thorough system of preventive maintenance during the entire span of
equipment life (acquisition to disposal)

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 - Regulate basic conditions: Cleanliness in shop floor
- Adhere to proper operating procedures
- Predict deterioration in equipment and eliminate variation in the system.
- TPM tries to identify and correct defects in design, that leads to breakdown
- Aims at change in corporate culture to maximize overall effectiveness of
production system
The practices as enunciated in 5S of Japanese management need to be implemented.

14. Reliability Centered Maintenance (RCM):

RCM is the final stage of maintenance realignment program. RCM totally
integrates PM, Pd.M and PAM with accountability in each major manufacturing
configuration.

Once RCM has been accomplished, the result will be a Totally Integrated
Maintenance (TIM) approach to problem solving and providing for equipment
reliability improvement. Preventive, Predictive and Proactive Maintenance must
work together with each established in place and fully functional, if RCM is to
become successful. When TIM is achieved the maintenance department will
become Reliability Centered Maintenance and personnel equipped to meet the
demands of the World Class Manufacturing Organization.

Long range benefits for the Totally Integrated Maintenance department can be far
reaching; included in the benefits are:
1) The overall reduction of equipment emergencies by as much as 75%.
2) Reduction in maintenance purchasing by as much as 25%.
3) Increasing Preventive Maintenance effectiveness by as much as 200%.

Industrial Maintenance Technology (IMT) is fast becoming an advanced science,

where and whenever implemented/integrated, the RCM Management Plan will
work. The plan does require hard work and dedication. It will be upsetting at first,

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ultimately it will aid in the establishment of or in the enhancement of a World Class
Organization in your plant.

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 Chapter 4
Materials management

4.1 Materials planning and Control

- Organization of Integrated Materials Management

- Identification system & Codification
- Inventory Control (P&Q systems)
- Selective Inventory Control
- Different types of Inventory models and Economic order quantity
- Reorder point (ROP)
4.2 Purchase
- Functions of Purchase
- Make or Buy
- Vendor rating
- Inventory Pricing
- Value analysis
4.3 What World Class Companies Do?
- Material Requirement Planning (MRP)
- Just-In-Time Technique (JIT)
- E-Purchase
4.4 Stores Management
- Objectives of Stores functions
- Types of Stores
- Store layouts

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4.1 Materials planning and Control

Organization of Integrated Materials Management

Materials management constitutes a major portion of the sales revenue. Average material
content in the Indian context is around 65%. Even in developed countries like USA, the
percentage material is as high as 55%. The percentage material depends on the nature of
products. In case of manufacturing intensive mechanical products like machine tools,
steel etc the percentage will be around 35-35%. The corresponding figure in electronic
products will be in the range of 60-70% and in case of computers this will be around 80 -
90%. Lot of emphasis is laid down in sourcing of materials, identifying alternatives,
indigenous development of composite materials (like FRP, plastic gears etc). The high
percentage of material to cost of production obviously calls for detailed planning and
close monitoring to keep the costs under control.

Integrated Materials management division is organized into planning, purchase, and

stores functions as shown below.

Materials
management
Division

Materials planning Purchase Stores

Traditionally materials management functions are decentralized as materials planning,

purchase and stores and all the three were reporting to the production head. This leads to
larger span of control and lack of accountability in making the materials available to
production. The integrated materials management overcomes this limitation and enhances
the organizational effectiveness and ensures supply of material to production and high
service level to customers.

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Materials planning:
The major functions are preparing material requirement plans based on demand forecast,
master production plan (MPS), stock level, lead times for various components. The main
objective is to maintain optimum level of inventory and has to necessarily tradeoff
between the service level and inventory.

Purchase:
Purchase is responsible for obtaining material inputs for the operation. Purchase
interfaces with various functional areas of the organization and suppliers.

Stores:
The function involves receiving of materials, offering to inspection, stocking, and issue
of materials to production. They also need to carry out age analysis of the various items
stocked.
Inventory is unutilized stock (asset) having value. It can be in the form of raw material or
processed material (WIP), or finished goods. This is required for continued production
operation.
Major distinction in inventory is whether the items are dependent on demand like raw
materials, parts, components required for production e.g. wheel required for cars (Bill of
material items). These are determined by production plan. Independent demand items are
capital goods, indirect materials, maintenance spares.
Types of inventory:
1. Raw material & purchased parts
2. Partially completed goods: work in progress (WIP)
3. Finished goods( in case of manufacturing firms or merchandise in case of retail
stores)
4. Replacement parts, tools etc
Reasons for holding inventories
1) To meet anticipated demand
2) To smoothen production and meet off seasonal demand

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 3) To decouple operations. Buffer of inventories between production or distribution
system
4) Protect against stock outs
5) To take advantage of order cycle: we need to order / buy in large quantities that
exceed immediate usage
6) To hedge against price increase
7) To take care of production cycle. This leads to pipe line inventories throughout
production, distribution system
Material (Inventory) manager job is to balance the conflicting costs & pressure that argue
for both low & high inventory
Pressure for low inventory Pressure for high inventory
• Interest or opportunity cost • Customer service, avoid back
• Storage & handling cost order
• Insurance, interest, taxes (on closing • Ordering cost
inventory) • Set up cost
• Shrinkage, pilferage, theft • Labor & equipment utilization
• Shelf life problem in case of food & • Quantity discounts
beverage

The objectives of material management are:

1) To ensure uninterrupted supply of material to production
2) To maximize the level of customer service (i.e. have right goods in sufficient
quantity)
3) To minimize the cost of providing customer service.
4) Reduce investment tied up in inventories by way of credit purchases etc.
Most inventory decisions are tradeoff between (3) & (4).

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Identification system & Codification
An identification system of inventory is mandatory. You need word description of each
item. But this is too long and numbering is resorted to. Coded number systems (or
number & letter system) are used for all items. Codes usually show kind of material (say
steel, brass, casting). The codes may be six or eight digits.

XX-XX-XX,

Ferrous nonferrous sub class: sheet, rod, casting, gears size ( coded )

Airplane companies have double numbering system. Every part has regular number &
another indent number to tell at what point it enters the aero plane. This helps to schedule
manufacture at right time. Codification reduces variety reduction and helps in
standardization of material.

Inventory control (P&Q Systems)

Inadequate control of inventories results in both under stocking and over stocking. The
inventory controlling systems can be periodic or continuous review systems. These are
called ‘P’ and ‘Q’ systems.
Periodic review system: Physically count each item and order the items depending on the
demand during the coming period. Advantage in this system is ordering many items at a
time. Disadvantages are:
a) Lack of control between reviews
b) Extra stocking to take care of a shortage during review period
c) Every time the planning exercise of how much to order has to be carried out

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Supermarkets and departmental stores have been the major users of periodic review
system.
Continuous inventory system (also known as perpetual system): Keeps track of inventory
on continuous basis. So the system can provide information on current level of inventory
for each item. The advantages are continuous maintaining of inventory accounting.
Management can arrive at economic order quantity. The order quantity is fixed, based on
EOQ and order is placed when the stock touches Reorder point (ROP). The time between
orders may vary. Disadvantage is cost of record keeping. This method is generally used
for high value items.
Continuous system range from a simple two bin (visual system) to very sophisticated
computer based system. Items are drawn from first bin, and when it is exhausted, it is
time to place an order.
ROP = expected demand during lead time + safety stock
Continuous system can be manual or online.

Difference between P and Q systems

Feature Q system (fixed order P system ( fixed time period

quantity model ) model)
Order quantity Constant (EOQ) Variable (based on requirement
during the coming period)

When to place order When inventory drops to When review period arrives
reorder level
Record keeping Continuous basis Only at the time of review
Size of inventory Less than P system More than Q system because
safety stock between review
periods
Type of items High priced, critical Class ‘B’ items

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Inventory costs
1. Holding or carrying cost include interest, insurance, obsolescence, ware housing,
pilferage, deterioration etc
2. Ordering cost includes cost associated with material planning, ordering, follow up
with supplier and receiving. When a firm produces the items, then it is called
setup cost which involves preparation of the machine, setting up tools and
changing jigs and fixtures etc
3. Shortage cost result when demand exceeds supply of inventory. Shortage cost
includes cost of lost opportunity in meeting customer order, loss of customer
good will, penalty for late delivery, machine down time etc

Selective inventory control

Depending on the importance / criticality, consumption value, different materials require
selective inventory planning and control methods. In view of this, it is desirable to
classify materials and apply suitable selective controls.
The various selective inventory control techniques are detailed below
Type of control Criteria Application
A B C analysis Annual consumption value Raw material
V E D analysis Criticality of the item Maintenance spare parts
F S N analysis Consumption pattern Obsolescence and age analysis
X Y Z analysis Inventory value of items in To review the actual inventory,
stores their use at periodic intervals
H M L analysis Unit price of the item To control purchases and
develop alternate vendors

ABC Classification system: All items in a product are not of equal importance. ABC
approach is usually based on usage / consumption. Planning and control system will be
according to the relative importance of items. ABC approach involves classifying
inventories based on the usage value. Generally they are classified as A B C

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 A- 10% of items used amount to 65% value of total material consumed
B- 20% of items used amount to 25% value of total material consumed
C- 70% of items used amount to 10% value of total material consumed
The percentages differ for various companies based on their inventory policies, but the
principle is in most instances small number of items account for large share of the value.

Obviously ‘A’ class items requires more focused planning and control and class ‘C’ items
lesser control.

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Different inventory models and economic order quantity
Basic Inventory model:

Basic EOQ model: The assumptions are

1) Only one product is involved
2) Annual usage requirements are known
3) Usage rate is constant
4) Lead time does not vary
5) Each order is received in single delivery
6) No quantity discount
D – Demand per year; Q – order quantity; Co – ordering cost, H-carrying cost

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Total cost = ordering cost + carrying cost
TC = (D/Q) Co + (Q/2) H
Differentiate total cost (TC) with respect to Q and equate to zero (condition for maximum
or minimum)
Qo = √ 2 D Co / H

(Check the Nomenclature)

Case (2): EOQ Model with Uniform delivery of order over time

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M is maximum inventory
P is procurement rate
D is demand / usage rate
Qo = √ [2 D Co / Cu i (1-d/p)]
Cu = cost per unit i = carrying cost per year

Case (3) Generalized model

S= shortage Cs= cost of shortage

Q = √ (2 D Co / Cu I ) √ [ (Cs + Cu I) /Cs ] √ (1-d/p)

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Holding and ordering cost are typically estimated values by the managers instead of
computed. Consequently, the EOU will be an approximate quantity rather than exact
quantity. The total cost curve is relatively flat near the EOQ and EOQ will be a zone.

Quantity Discounts:
Quantity discounts are price reduction for large orders offers to customer to induce them
to buy large quantity.
Total cost = carrying cost + ordering cost + cost of material purchased
= [(Q / 2) H] + [(D / Q) S] + P X D

Quantity discounts are price reductions for large orders offered to customers to induce
them to buy in large quantities. Note that the price decreases as order quantity increases.
If quantity discounts are offered, the customer must weigh the potential benefits of

reduced purchase price and fewer orders that will result from buying in large quantities
against the increase in carrying costs caused by higher average inventories. Hence, the

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buyer’s goal in the case of quantity discounts is to select the order quantity that will
minimize total cost, where total cost is the sum of carrying cost, ordering cost, and
purchasing cost:

where P = Unit price.

Recall that in the basic EOQ model, determination of order size does not involve the
purchasing cost. The rationale for not including unit price is that under the assumption of
no quantity discounts, price per unit is the same for all order sizes. Inclusion of unit price
in the total-cost computation will not alter the EOQ.

This is illustrated in Figure.

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When quantity discounts are present there is a separate U-shaped total cost curve for each
unit price. Again, including unit prices merely raises each curve by a constant amount.
However, because the unit prices are all different, each curve is raised by a different
amount: smaller unit prices will raise a total cost curve less than larger unit prices. In
addition, no one curve applies to the entire range of quantities; each curve applies to only
a portion of the range. This is illustrated in Figure. Hence, the applicable or feasible total
cost is initially on the curve with the highest unit price and then drops down.

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The objective of the quantity discount model is to identify an order quantity that will
represent the lowest total cost for the entire set of curves.

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There are two general cases of the model: in one carrying costs are constant and in the
other carrying costs are stated as a percentage of purchase prices. When carrying costs
are constant, there will be a single EOQ that is the same for all of the cost curves.
Consequently, the total-cost curves line up vertically.

When carrying costs are specified as a percentage of unit prices, each curve will have a
different EOQ. Since carrying costs are a percentage of prices, lower prices will mean
lower carrying costs and larger EOQs.

The procedure for determining the overall EOQ differs slightly, depending on which of
these two cases is relevant. For carrying costs that are constant, the procedure is: -

1. Compute the common EOQ.

2. Only one of the curves will have the EOQ in its feasible range since the ranges do not
overlap. Identify that curve.
a) If the feasible EOQ is on the lowest price curve, that is the optimal order quantity.
b) If the feasible EOQ is on any other curve, compute the total cost for the EOQ and
for the price breaks of all lower cost curves. Compare the total costs; the quantity
(EOQ or price break) that yields the lowest total cost is the optimal order quantity

When carrying costs are expressed as a percentage of prices, the procedure for
determining the best purchase quantity is:
1. Beginning with the lowest price, compute the EOQs for each price range until a
feasible EOQ is found (i.e., until an EOQ is found that falls in the quantity range
for its price).
2. If the EOQ for the lowest price is feasible, it is the optimal order quantity. If the
EOQ is not the lowest price range, compare the total cost at the price break for all
lower prices with the total cost of the feasible EOQ. The quantity that yields the
lowest total cost is the optimum.
WHEN TO REORDER

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EOQ models answer the question of how much to order, but they do not address the
question of when to order. The latter is the function of models that identify the reorder
point (ROP) in terms of a quantity: the reorder point occurs when the quantity on hand
drops to a pre specified amount. That amount generally includes expected demand during
lead time and perhaps an extra cushion of stock, which serves to reduce the probability of
experiencing a stock-out during lead time.

Safety stock: Depends on nature of operation. For process industry / mass production,
this is required because production line gets stopped. Here comes just in time (JIT)

There are four determinants of the reorder point quantity:

1. The rate of demand (usually based on a forecast).
2. The length of lead time.
3. The extent of demand and lead time variability.
4. The degree of stock-out risk acceptable to management.

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4.2 Purchasing
Purchase is responsible for obtaining material inputs for the operations. Purchase
interfaces with functional areas of the organization & with outside suppliers. Sourcing of
raw materials, examining price along with concept of value analysis, vendor rating,
vendor relations, contract negotiation are some of the important functions of purchase.
Presently logistics also form part of material management. Logistics involve movement
of materials within the organization; both incoming & out going shipment and
distribution. It ensures quality, delivery on time. Any change in specification, schedules /
quality must be communicated immediately to the supplier.
The interrelated activities between purchase and other functions are given below.
1. Operating units place the requisition for purchase of materials
2. Accounts is responsible for handling payment as per the contracts. In many firms,
data processing of Price Stores Ledger (PSL), inventory records, checking
invoices is handled by accounts.
3. Design & engineering prepares material specifications which are communicated
to purchase through Bill of materials (BOM). Information on new materials,
sources, improvements are provided to designers by purchase.
4. Inward receipt store: check in-coming shipment to determine quantity, quality
& timing.
5. Vendor /supplier: Purchase closely works with suppliers. Carries out vendor
rating based on price, quality, reliable / short lead times in delivery, flexibility for
minor changes in specifications & schedules and rush orders.
6. Purchase needs to project the cash flow requirement to accounts to enable them
make provisions.
Purchase objectives:
1) Best possible price
2) Good / long term relation with suppliers
3) Maintain information / knowledge on source of supply, price, new products,
new services that become available
4) Ensure supply of material at right time, in right quantity and at right price.

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Purchase cycle:
1. It begins with receiving requisition by purchase.
2. Selection of suppliers. Maintaining approved list of suppliers on continuous basis
3. Placing order on a vendor.
a) One time / first time purchase is carried out with designers’ assistance in
choosing supplier and negotiation.
b) Large volume & moderate volume – covered by purchase order involving
calling quotations, negotiation / rate contracts
c) Small orders: Some time operating unit (SBU) handle directly with in the
frame work of purchase rules.
4. Monitoring orders: Ask vendors for detailed schedules giving all the schedules
particularly in subcontracts of higher level & large volume orders.
5. Custom clearance of imported material
6. Receipt of materials: Incoming shipment must be checked for quality & quantity.
Inspection at source is one of the TQM principles.
Determining prices
There are essentially three ways prices are determined (a) Published price lists (b)
Competitive bidding and (c) Negotiation
a) In many instances, organizations buy products at fixed or predetermined price.
This is generally the case for standard items that are bought infrequently or in
small quantities.
b) For large orders of standard product or service competitive bidding is often used.
Government purchases of standard items are usually made by competitive bidding
c) Negotiated price in case of special items or customized few products and when
few potential suppliers exist.
Negotiation should be “Give & Take” and “Win–Win” situation rather than capitalizing
on weakness of somebody.
Centralized Vs decentralized purchasing
Centralized purchasing is handled by one department where as decentralized purchasing
means individual department or separate locations handle their own purchasing
requirements

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Centralized purchasing Decentralized purchasing
• Higher volumes are created by • Better response by decentralized
combining & lower prices are purchase as they know the local
obtained needs
• Closer attention from suppliers & • Saves on transportation
better service • Goodwill to community
• Enables to assign certain items to
specialists which improve
efficiency of suppliers

Some organizations can manage to take advantage of both centralized & decentralized
• Decentralized – for rush orders,
• Centralized – high value & volumes, where we can get discount & specialist
services
• Vendor relations: Good & long term relations as in case of Japanese.
Americans - short term relations with vendors and play against each other.
Early supplier involvement (ESI), vendor managed inventory (VMI), purchase in kit form
and few reliable vendors, quality ensured at source, flexible are the present trends in
material management.
Logistics: Refers to movement of materials within production facility (incoming &
outgoing of goods) of material.

Manage the supplier interface

The application of ERP has forced engineers to reengineer their enterprise processes
taking advantage of integrated information systems. This has changed the way the firms
deal with their suppliers.
E – Purchasing: The emergence of virtual market places, internet technology has
enabled firms to improve purchase processes.
Electronic data interchange (EDI) enables the transmission of routine business
documents having standard format from computer to computer, over telephone: direct or
leased line.

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Catalogue hubs: Suppliers post their catalogues on hub and buyers select what they need
& place PO electronically. The buying firm can negotiate with supplier.
Exchange is an electronic market place where buying & selling firms come together &
do business, without the aspects of contract negotiation or long term contract. More often
used for spot purchase for items like oil, steel, etc.
Auction is an extension of exchange in which firms place competitive bidding to buy
something. Bid can be closed or open e.g. site for particular industry, other items are
steel, chemicals.

Make or buy
The decision to make or buy can arise in several occasions: unreliable suppliers, idle
capacity in the organization, desire to achieve greater control over the production process,
increasing costs. The following factors are considered /taken into account in deciding
whether to make or buy
1) Cost to make vs. cost to buy including start up costs (design, engineering)
2) Stability of demand
3) Quality available compared to firms own Quality standards
4) Desire to maintain close control over operation
5) Idle capacity within the organization
6) Lead time for making Vs buying
7) Who has patent, expertise, etc
8) Technology changes (if changing, better to buy)
9) The degree to which the operations required are consistent with or in conflict with
current operations

Vendor rating
Evaluating sources of supply (vendor analysis)
Choosing vendors involves taking into account many factors like price, quality, the
supplier reputation, past experience with supplier, location and after sales service,
inventory policy of supplier in keeping spares, product support offered, flexibility etc.

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The main factors firms look at when they select vendors are:
1) Price: Important factor, (but not the most important factor) particularly in case of
engineering goods
2) Quality: A company may be willing to spend more money to obtain desired
quality
3) Service: Special services can some time be very important in choosing the
supplier e.g. warranty period, length of after sales service, keeping spare parts on
hand/ product support
4) Location: This can have impact on shipping time, transportation costs, and
response to rush orders. Local buying can create goodwill in the community by
helping local economy
5) Delivery period / lead time for supply: short and reliable supply
6) Flexibility: Willingness of supplier to respond to changes in quantity, accept
design changes could be important consideration.
7) Openness to costs & their manufacturing processes
Vendor rating is a continuous exercise. May be every half year, the vendors are rated &
list of approved suppliers are made. This is part ISO 9000 exercise also.
Japanese firms deal with few reliable suppliers where as US firms deal with more
vendors to play one against other. Reduced numbers of vendors are easy to deal. Keeping
good relation with vendors.
Inventory Pricing:
In view of the changing price levels, it is necessary to carry out inventory accounting.
The following are the different methods adopted.
FIFO: The practice of first in first out. All the issues are valued at the price of purchases
done in that sequence.
LIFO: The practice of last in first out. This system adopts a procedure radically different
from FIFO. The inventory issues are valued on the basis of price paid during the last
purchase and subsequent issues valued at subsequent purchase (till exhausted). It should
be noted under this system the manufacturing cost bears the increased price for purposes
of costing. However the stocks held are not unduly inflated.

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Weighted average: To avoid the difficulties faced above, accountants have been
advocating the method of weighted average costing. This method is best is used for
product costing.
The choice of inventory valuation technique is very much a matter of strategy of financial
management.

Value analysis:
Analyst will establish “Use function”, “Esteem function”, “Resale function”, “Cost
function” associated with each item. The value analysis (VA) exercise involves
examination of the function of purchased parts & materials with a view to reduce the cost
or improve performance of these items. In view of the technical knowledge required, a
team consisting of designer, production engineer, process/ manufacturing shop personnel
can be formed to carry out VA exercise. Purchase people can offer different perspective
to the analysis as they are in touch with suppliers and possess information not known to
people within the organization.

Value analysis is a systematic and organized approach that examines all aspects of the
problem adopting a questioning methodology.
Typical questions asked as part of this exercise are
• Could a cheaper part or material be used e.g. M.S chromium plated in place of
brass or stainless steel; silver plating with gold flash in place of gold plating for
contacts in electronic connectors
• Is the function necessary
• Can the function of two or more parts be done by a single part at lower cost
• Can a part be simplified (to reduced manufacturing cost)
• Could the product specifications be relaxed
• Can standard parts be substituted for nonstandard items
• Can hardware be replaced by software

The steps involved in value analysis are

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 1. General phase involving human relations and good team work on specifications
overcoming resistance.
2. Information phase involving technical specifications, securing facts (technical,
prototype/sample, cost data, quantity involved), development, testing, service etc.
3. Functional phase involving defining the function, determine relative importance
of functions
4. Creativity phase involving questions like what are the alternatives. Brain storming
is a good tool.
5. Evaluation phase involving selecting the most promising idea for preliminary
analysis (seeking a search for question like “will it work”? “is it less costly”?).
Define and combine ideas Ex: diesel engine + wheels = automobile, cell phone +
camera = cell phone with built in camera. Develop functional alternatives,
estimate the cost of all ideas and evaluate by comparison.
6. Investigation phase involving further refinement to a workable and acceptable
solution. Use standards and consult vendors.
7. Accommodation phase: This is the final phase of value analysis. Which involves
presentation of facts & analysis and final selection of alternative.
Value analysis technique aims at cost reduction through critical examination of design,
function & cost of material or service and final product. The objective of value analysis is
cost reduction which is achieved through the following
• Modification of design
• Standardization of parts
• Variety reduction
• Use of alternative material without affecting quality and performance
• Change of source of supply
• Elimination of parts
• Modifying the process (Ex: Jig boring operation changed to milling with suitable
fixture)
• Waste reduction (increase of yield)

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While this exercise cannot be done for every item, Value analysis should be conducted
periodically on large value items because of potential saving. Purchase does not have
authority to implement, but it can make suggestion to operational managers, designers.

4.3 What World Companies Do?

Performance measures of a world class company as compared to an ordinary one are

detailed below.

Performance Criteria Companies In World class

General Companies
No. of suppliers 34 5
Cost of purchase as % of purchase 3.3 0.8
Time required for evaluation of a supplier 3 weeks 0.4
(Vendor rating)
Time required to place an order with the 6 weeks Hours
supplier (E-procurement)

Percentage late delivers 33% 2%

Percentage of defects 1.5% 0.0001%
No. of Stock outs 400 per year 4 per year

• Forming partnership with suppliers / long term relationships

• Near perfect quality. When needed with little inventory
• Providing supplier with customer’s orders and train in manufacturing & quality
control
• Although price is important, ability to deliver in time, exceptional quality, trust
worthy & cooperative(flexibility)
• Nearby suppliers preferred. Even if located at a far off place, suppliers are
clustered together for combined shipment, find out innovative methods to deliver
just in time
• Extensive use of computers-tracking of materials

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 • Some world class companies are relying on third party logistics management
• Conducting B to B transactions via internet

Material Requirement Planning (MRP)

Material requirements planning (MRP) is an information system used to handle ordering

of dependent-demand items (i.e., components of assembled products). The planning
process begins with customer orders, which are used along with any backorders to
develop a master schedule that indicates the timing and quantity of finished items. The
end items are exploded using the bill of materials, and material requirements plans are
developed which show quantity and timing for ordering or producing components.

Materials Requirement Planning (MRP) is a computer based information system to

handle ordering and scheduling of dependent demand inventories (Ex: Raw material,
components and sub assemblies).

MRP is superior and overcomes the following defects of traditional systems

1. That the demand behaves around the average.
2. That the lead times are known with precision.
3. The unit cost varies linearly with volumes.
4. That ordering and carrying cost are fixed.
5. Planning for safety stocks

MRP overcomes all of the above, but not the variations in lead times. This can be
overcome through better monitoring and expediting wherever necessary.

MRP is as much an approach to scheduling as it is to inventory control. MRP is designed

to answer the question - What is needed, how much is needed and when it is needed.

MRP inputs and processing:

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The three major inputs to MRP system are, a master schedule, bill of materials and
inventory records

MRP processing involves taking the end requirements specified by the master schedule
and exploding them into time phased requirements for assemblies, parts, raw material
using the bill of materials offset by lead times. The quantity is generated by exploding the
bill of materials or gross requirement. The net requirements are arrived at taking the
stocks available into consideration, with adjustments for wastage and rejection.

For the system to succeed, what is needed?

• Management’s commitment and support.
• Effective data processing capability.
• Accuracy of all types data on BOM, lead times both for making and buying.
• A complete and realistic Master Production Schedule.

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 • Detailed and updated BOMs.
• Unique identification of inventory items (codification).
• Updated inventory records.

MRP System assumes that:

• Every item moves in and out of stock based on “requirement”.
• An order to manufacture is released if only when all the needed components are
available.
• Commencement of manufacturing a part is independent of the completion of
another part unless the latter is a component of the former.

Accuracy of BOM inventory records, material codes are important besides the necessary
hardware, software, training of personnel, etc. Implementation of the system is expected
to take a year. MRP data can be updated periodically say weekly or continuously.
Periodical updation is good for stable systems, whereas continuous updation is better
where changes are frequent.

MRP outputs: MRP System has the ability to provide management a broad range of
outputs. These are classified as primary reports which are main reports and secondary
reports which are optional.

Primary reports concern production, inventory planning & control.

They include
1. Plan of release of orders which indicate quantity and timing of future orders,
2. Order release, which authorize execution of planned orders, and
3. Changes to planned orders, which indicate revisions and cancellation of
orders, etc.
Secondary reports concern such things as performance control, planning & exception.
1. Performance control reports-Missed deliveries, stock outs, etc.
2. Planning reports - Useful in forecasting future material requirements.
3. Exception reports - Report on late and over due orders.

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Safety stock Theoretically inventory systems with dependent demand should not require
safety stock. This is one of the main advantage of MRP.

MRP offers a number of benefits to typical manufacturing or assembly type of operation.

They include (1) low level inventories, (2) ability to keep track of material requirements.

In the year 1980, MRP was expanded into a broader approach for planning the resources
of manufacturing firms, which refers to Manufacturing resources planning, MRPII. This
links Business planning, production planning & master schedule. The most important
feature of MRP II is its suitability in capacity requirement planning. The total capacity
requirement is present production load plus planned order release plus expected orders.

The main features of MRP are the time-phasing of requirements, the identification of
components, and planned—order releases. In order to be successful, MRP requires a
computer program and accurate master schedules, bills of materials, and inventory data.
Firms that have not had reasonably accurate records or schedules have experienced major
difficulties in trying to implement MRP.

Safety stock: When there are variations in the demand rate or lead time, the possibility of
stockouts occur. In order to compensate for uncertainties in either demand rate or lead
time, additional stock must be carried to reduce the risk of a stock out during the lead
time interval. This buffer or safety stock is stock that is held in excess of the expected
demand.

Because it costs money to hold safety stock, a manager must carefully weigh the cost of
carrying safety stock against the reduction in stock-out risk it provides, since the service
level increases as the risk of stock-out decreases.

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The risk of a stock—out is the complement of service level; a customer service level of
95 percent implies a stock—out risk of 5 percent. In general,

Service level = 100 percent — Stock-out risk

A little later we will see how the order cycle service level relates to the annual service
level.
The amount of safety stock that is appropriate for a given situation depends on the
following factors:
1. The average demand rate and average lead time.
2. Demand and lead time variabilities.
3. The desired service level.

Just-In-Time Technique (JIT):

JIT is often understood as inventory control system focusing on getting the material at the
right time. But JIT production system is much beyond this. JIT consultant Shingo
associated with Toyota defines JIT as “Producing what is necessary, when it is necessary,

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in the amount necessary”. The aim of JIT philosophy is to eliminate waste whether it is
OEM or supplier. The topic JIT is dealt in more detail in the last chapter.

4.4 Stores Management

Receiving, stocking and issue of raw material, bought out parts and components, spare
parts, consumables etc. are the basic functions of stores. Management of stores is not
simple stocking of material, but a package of services which enables smooth flow of
material through various production departments.
Objectives of Stores Management:

To ensure smooth flow of raw materials

To coordinate with materials planning in maintaining optimum stock of materials
to compensate for irregular supplies

To achieve efficient utilization of storage space

To optimize utilization of material handling equipment

Codify all materials for easy retrieval

To keep account of all material kept in stores

To prevent damage, wastage and deterioration

To Maintain record of all incoming materials and issue of materials

Ready accessibility of important materials to provide efficient service to the users

Storage System: There are three basic ways of locating stocks: Fixed location, Random
location, Zonal location.

The fixed position location of a particular type of material depends on

Similarity of items

Joint issue of items

Size and frequency of use

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Random location means the items can be stored in any available storage position. This
helps in better utilization of space and particularly used, where there are a large numbers
of product lines.

Zonal location means, items of particular product group are kept in a given area.

Stores Layouts
Irrespective of the storage system followed, stock may be kept on one side of the aisle.
This is called comb type of layout.

Enclosed stock room: Most materials are kept in enclosed room & issued when MIR is
presented. You need stock rooms (preferably separate stock rooms) for raw material;
semi fished parts & finished goods. You need more than one stock room for each kind of
material, so that one will be near the point of use. Sub stock rooms- one day consumption
will be stocked.
You can arrange stock rooms according to
1. Identification of materials
2. Frequency of use of items
3. Nature, size, & shape.
Except big items, parts are kept in storage bins & racks.

Open stock rooms: A great deal of paper work and handling of materials can be saved by
point of use storage, storing material right next to the operation where they are needed.
You can do this where some kinds of parts are used day after day & materials are
unlikely to be stolen. It can also be done with parts along assembly lines. As parts are
made or purchased, they are taken directly to point of use. The value of material is
charged off to the product on standard costing basis & no material issue requisition
(MIR) is required.

There is also another type of open stores. You may have several hundred large racks or
metal boxes. You may have one or several boxes loaded with the same part. Keep a

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cardex file of all locations in the store room office, next to storage area. When new
supplies come, you can store where ever there is place. When withdrawals are to be made
find the location from store office. With fork lifter you can put or take loads quickly. This
is a kind of random access storage, and saves tremendous space. Not possible to be stolen
because without fork lifter you cannot reach it.

The efficiency of stores depends on the service level, number of requisitions (MIR)
issued on time, least storage loss, analysis of fast and slow moving items / age analysis
and advise disposal, optimum utilization of space, efficient storage and retrieval system
etc.

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 Chapter 5
Project management
Chapter Outline

5.1 Project Planning

- Standard product vs. project
- Role of project manager & Matrix organization
- Project Life Cycle
- Project planning
- Developing PERT Network
- Difference between PERT & CPM
- Probability of meeting the PERT schedule
5.2 Project Appraisal
- Project appraisal: Different methods (NPV, IRR etc.)
- Pitfalls and importance points in Project Management
- Risk Management

Standard product Vs. Project

Standard products involve a series on going tasks, repetitive in nature with out change,
allows certainty e.g. manufacture of automobiles, TV, fridge etc.
Projects are unique, one time operations, designed to accomplish a specific objective in a
limited time frame. Examples of projects include design and manufacture of a prototype,
new model, introducing a new product or service in the market place, constructing a
shopping complex, launching a space craft etc.
Projects are characterized by
• Considerable cost
• Usually have along time horizon
• Complex in nature involving a large number of activities that must be carefully
planned

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 • One time in nature and have definite start - finish
• Probabilistic / uncertain

Role of project manager

Success of project depends on clear definition of scope, objectives & tasks and clear
understanding of its organization, how personnel work together and understanding of
their specific roles & responsibilities to complete the project.
Project management differs from management of traditional activities because of the
limited time frame giving rise to a series of problems. Project manager do not hold
resources themselves and so have to negotiate for resources with line mangers: Design &
engineering, manufacturing shops, purchase, quality control etc.
It is necessary to form project teams drawn from various functional disciplines. The
project team must be task & need based from all the functions such as: Design &
engineering, operations, marketing and finance. Cross functional approach and balancing
of power is very important.

Project manger must often function in an environment with uncertainties which can
create additional pressure. Project managers may not have authority and do not possess
specialized knowledge in all the functions and need to rely on persuasion and cooperation
of others to realize the project goals.
Rewards of project manger come from being associated with a successful project,
personal satisfaction, challenge of job and working with other people.

Matrix organization

In the dynamic business environment prevailing, speed/response to customer’s

requirements is very essential and hence the shift from traditional functional organization
to product and matrix organization. Persons drawn from various functions temporarily
report to matrix manager during the project execution. However they continue to take

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advice from the functional specialist mangers. This calls for dual reporting. However as a
child we are habituated to take instructions from two i.e. father and mother.
The advantages of matrix organization are:
• Motivation of people as they are affiliated to a big project
• Optimum use of resources with out hampering specialization in functional setup
• Trained for higher levels in the hierarchy of the organization

Project Life Cycle

According to the nature and purpose of the project, the size, length, and scope of projects
vary widely. All projects growth through a life cycle, which typically consists of four
phases.
1. Definition. This has two parts: (a) concept, the organization recognizes the need for a
project or responds to a request for a proposal from a potential customer or client, and
(b)feasibility analysis, which examine both the technical and financial angle i.e the
expected costs, benefits, and risks of undertaking the project.
2. Planning, which spells out the details of the work and provides estimates of the
necessary human resources, time, and cost.
3. Execution, during which the project is carried. This phase often accounts for the
majority of time and resources consumed by a project.

4. Termination, during which closure is achieved. Termination can involve reassigning

personnel and dealing with any leftover materials, equipment (e.g., selling or transferring
equipment), and any other resources associated with the project.

The phases can overlap, so that one phase may not be fully complete before the next
phase begins. This can reduce the time necessary to move through the life cycle, perhaps
generating some competitive advantage and cost saving. Although subsequent decisions
in an earlier phase may result in waste for some portion of the activity in a following
phase, careful coordination of activities can minimize that risk.

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Figure- illustrates the phases in a project life cycle.

Project planning
In view of the complexity and large number of activities involved, network planning
approach to project management is found necessary.
Steps involved in PERT preparation
1. Identify the goal or end objective
2. Define task or activities
3. Precedence relation /Sequence in which activities have to be performed
4. Estimate the time required
5. Draw the network diagram
6. Trace down the various paths between start and finish of the project
7. Identify the critical path (which takes longest duration)
8. Find out the slack time in the other paths (Slack = Duration of critical path –
Duration of path under consideration)
9. Prepare project schedule

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Developing PERT Network

As studied by us in the planning tools, the conventional planning tools, bar chart etc
suffer from the basic limitation of not being able to indicate the effect of delay of an
activity on the subsequent activities i.e. the interrelationship between activities is not
known. Because of this limitation, projects of complex nature need refinement on bar
chart and network planning techniques offer the solution.
Network Conventions:
The network diagram would look like the figure given below. Both activities “a” and “b”
have to be completed before activity “c” could begin. But “a” and “b” could be
performed simultaneously.

If activity “a” precedes “b” and “c”, the corresponding network would look like the
figure given below.

If multiple activities enter a node, it implies all those activities (a&b) must be completed
before any activities (c & d) that are to begin at the node can start.

When two activities (a &b) both have the same beginning and ending nodes, a dummy
activity is used to preserve separate identity of each activity.

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One of the main features of PERT / CPM is their use of a network or precedence diagram
to depict project activities and their sequential relationships.
Preparation of Project Network Diagram
One of the important features of PERT / CPM is the use of network or precedence
diagram to depict major project activities and their sequential relationships. There are two
slightly different conventions for constructing a network diagram. One denotes the
arrows as activities and the other denote nodes as activities (AON). To avoid confusion
we will follow the model –Activity on arrow (AOA). The task of developing a network
becomes complex for projects of even moderate size and often handled through computer
programmes which involve use of software packages like PROMAN,MS Project, HPM
etc. An example of preparing a PERT network for “developing a new product” is given
below.
Programme Evaluation and Review Technique (PERT) is a project planning technique
used where there are uncertainties and is probabilistic. Critical Path Method (CPM) is
also a project planning technique used where there is certainty of the time estimates and
is deterministic. Both the techniques use the principle of critical path. Although PERT /
CPM are developed independently they have lot of commonality for all practical
purposes. Both are same except that PERT is used when the project activities are
probabilistic in nature (time estimates allow variation), while CPM is deterministic(time
estimates are fairly certain).

An example of preparing a PERT network for “developing a new product” is given

below. The network is explained by constructing a simple project network diagram. Let

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us consider drawing a PERT network for the prototype development of electro-
mechanical equipment.

Activity Description of the Activity Immediate Time Estimates

Precedence (Weeks)
A Conceptual design - 3
B Electronic Circuit design A 6
C Mechanical Design A 3
D Electronic Process Engineering B 2
(PCB Layout etc.)
E Mechanical Process Engineering C 1
F Preparation of BOM (Electronics) B 1
G Procurement of Materials F 8
(Electronic components)
H Fabrication of parts & PCB E, D 3
I System software development B 4
J Prototype Assembly H, G 2
K Microprocessor Procurement I 6
L Prototype testing and Evaluation J 2

The details of various paths between start and finish, the corresponding durations and
slack are given below

Path Duration Slack

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 A-C-E-H-J-L 14 8
A-B-D-H-J-L 18 4
A-B-F-G-J-L 22 0
A-B-I-K-L 21 1

Activity wise Earliest start, Earliest finish, Latest start, Latest finish are worked out based
on the slack available in various activities.

Activities consume resources and time & nodes represent events

1) Represents starting of circuit design

2) Represents finish of circuit design

Denotes the activity circuit design

Difference between PERT & CPM

The main difference in PERT & CPM is in the way time estimates are made. If the time
estimate can be made to a high degree of accuracy / confidence i.e. the estimate & actual
will not differ significantly, we call the estimate as ‘deterministic’ and if estimates are
subjected to variation, we say the estimates are ‘probabilistic’
The probabilistic approach involves three time estimates for each activity
1. Optimistic represented by a
2. Most likely represented by b
3. Pessimistic represented by c

The time estimates must be made by the manger with knowledge about the project.
The expected time is computed as a weighted average of the three time estimates.
Te = (a+4b+c) / 6

Crashing
If the total time required to complete the project arrived at is not acceptable to the
management, the project manager will be advised to crash the activities and compress the
project duration. The activities lying in the critical path will be crashed to reduce the
overall project duration. The activities in the critical path having lowest cost slope;
meaning those activities that it would cost management least to crash with respect to

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other critical jobs will be crashed first. Crashing one particular activity would most likely
lead to rendering other jobs critical. This fact has to be taken into account when the
degree of crashing and the cost consequences are considered and decided upon.

Probability of meeting the PERT schedule:

This is the unique feature of PERT. To do this, look at only the critical path. Difference
between optimistic and pessimistic time. Square it and divide by 36 [square of (a+4b+c)
/6]. This gives the variation of each activity. Square root of sum of variances gives
standard deviation. Say σ is 3
Suppose the entire job is expected to take 65 weeks
65 ± σ = the probability is 68% for the project to be completed
between 62 to 68 week
65 ± 2σ =the probability is 95% for the project to be completed
between 59 to 71 week

65 ± 3σ = the probability is 99.7% for the project to be completed

between 56 to 74 week

Software packages used in project planning: HPM,PRISM,PROMAN,MS PROJECTS

Software packages help in
1) Drawing network and error spotting
2) Scheduling and resource leveling

Selection of package is based on number of tasks it can handle and ability to link
subprojects, memory, LAN support, resource leveling, reporting and display, cost
analysis (time / cost trade off) crash cost, multiple project scheduling .

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5.2 Project appraisal

Feasibility study:
1) Economic: cost benefit analysis; scale of operation, level of capacity utilization,
anticipated sales and expenses, volume of profit, Break even analysis,
Government policies (distribution of capacity & raw material, incentives & tax
benefits, specific location by government :social benefits like- employment)
2) Financial analysis
3) Technical analysis
4) Market analysis
5) Product life cycle segmentation analysis
6) Management competencies: Because of lack of management competencies, even
viable projects fail. More so in case of small scale units where proprietor is all in
all in an important role (i.e. why matching the ability and nature of project is
important)
7) Life cycle: Every product has its own life span and passes through life cycle. This
is precisely the reason why firms go for new products one after another to keep
the firm alive.

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Project Appraisal: Different methods (NPV, IRR etc,)
Project appraisal helps selecting best projects among available alternative projects.
Financial institutions do project appraisal to assess its credit worthiness and viability of
project before extending finance to a project and modify the scope to improve the
viability.

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Project evaluation (for general study) and project appraisal (selecting among alternatives)
are used. If there is no alternative, detailed project appraisals have no much significance.

Payback period: The most commonly used criteria is ‘pay back method’. Payback
period is the length of time required to recover initial cash outlay on the project. This is
good in case of technology obsolescence and high risk projects. But this has limitations
like the time dimension of the money and salvage value not being considered.

To overcome the conventional payback, discounted payback period has been suggested.
The shorter the payback period, the faster the uncertainty associated is resolved.

Accounting rate of return:

The accounting rate of return, also referred to as average rate of return on investment, is a
measure of profitability.
The commonly used measures are:
(Average income after tax for the span of project / Initial investment)
Or
(Average income after tax / average investment (i.e. investment / number of years)
The higher the accounting rates of returns, the better the project. Limitation of this
method is, it is based on profit / return and not cash flow and does not take time value of
money.

Discounting approach: Present value of future income taking interest into consideration
i.e. Net Present Value (NPV). Present value of the alternatives (project/machines) are
estimated and higher NPV is preferred.

Internal Rate of Return (IRR): This is rate of return criteria. Essentially this is also
based on discounting principle. Rate of return for each project i.e, the rate at which the
cash outflow is equal to inflow is calculated. Project with higher IRR is preferred.

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Pit fall in project management

Some of the usual pit falls in project management are mentioned below:
• Political factors affecting scientific and economic selection of site
• Taking decision to patch up the situation which leads to serious problems at later
stage. Neglecting problems because they do not affect work on hand
• Criticality of an activity – uncertainties not just duration e.g. (a) in house R&D or
technology collaboration (b) manufacturing of mould (India/ abroad) (c)
managing with contract labor

Few important points on project management:

• Project cost should include inflation and contingency cost
• We need to have a check on time estimates, introduce parallel action, provide
more resources on critical activities and reduce on low priority activities
• Regular, timely, format oriented and comprehensive monitoring is required
• Do not consume float / slack totally in the beginning. But spread for resource
leveling
• Criticality of each activity has to be looked at
• Contingency plans to take care of assumptions made
• Role of project manager and balancing the power among Project mangers and
Functional managers is very important
• Project team should be need based
• Man power planning based on experience and study of similar projects /
industries.
• Senior finance person to be involved in the team
• Matrix organization
• Sponsoring of the project depending on value, complexity, business potential by
CEO / Director / GM
Predictability, resource planning, monitoring and crashing (reducing time) are some of
the advantages of project planning.

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Risk management: Although over looked, it is important to identify as many risks to
your project as possible and be prepared if some thing unfavourable happens
a) Time and cost estimates too optimistic
b) Unexpected budget costs
c) Customer review and feed back cycle too slow
d) Lack of resource commitment
e) Poor communication
f) Unclear roles and responsibilities
g) Stake holder (supplier, customer) changing requirements after project is started
Risk can be tagged. Write down what you will do if they occur.

In case of entrepreneurs the problems are mostly with cycle time involved in project
implementation. Problem is not much with planning but availability of resources on time
poses difficulty.
If you take the problems of entrepreneurs in setting up an industry, the main issues are:

a) Selecting a wrong project

b) Occupational back ground of entrepreneur (Farming / Trading / Contracting /
Teaching / Consulting / Political)
c) Size of project, complexity and value
d) Loan disbursement – time taken by financial institutions because project reports
are not proper
e) Educational back ground of spouse
f) Technical problems

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 Chapter 6

Quality Management
6.1 Introduction to Quality Management
- What is quality?
- Evolution of quality management & Learning from Quality Gurus
- Functions of Quality Control
6.2 Statistical Quality Control (SQC)
- Sampling
- Statistical Process Control
- Control Charts: Attributes and Variables
- Procedure for developing x-bar & R charts
- SPC tools commonly used
- Tolerances, Control Limits, and Process Variability

6.3 Modern Quality Management Systems

- ISO 900 certification
- Total Quality Management (TQM)
- Quality Circles
- Six sigma quality
- Taguchi method

6.1 Introduction to Quality Management

Recent studies on various competitive priorities indicate that the product quality is
viewed as the most important driver of competitive success in today’s quality conscious
global market. The other factors in order of priority are dependable delivery, rapid
delivery, low cost production, flexible production, product innovation and process
innovation. Quality assurance starts from product / service design, input quality,
conversion process and extends to service after delivery. It must be all inclusive. This

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chapter deals with definition of quality, evolution of quality, functions of quality control,
sampling plans, statistical process control, total quality management, ISO etc.

Quality can have strong impact on differentiation among competitors. This is true
whether the firm is engaged in manufacturing or services (Banking, transportation,
tourism, healthcare or even non profit organizations such as colleges, local government
etc.)

Quality Assurance (Q.A) is concerned with entire range of production, beginning with
product design - conversion processes & extending to after sales service. In order for
Quality Assurance to be successful it must be all inclusive.

What is quality?
Quality is ‘Fitness for use’ i.e., conform to intent of design. Quality is fully satisfying
agreed customer requirements at the lowest internal cost. Not just satisfying we should
aim at delighting the customer i.e. in tune with Deming (one of the pioneers of quality).
Customer requirements include: conformance to specifications, reliability, value for
money and on time delivery, lowest internal cost. The quality process must be concerned
with cost control. Customers are not only external to the company but also internal
customers. In a manufacturing company the internal customer is the next person down the
line who builds the product, e.g. Shoe manufacture: Leather passes several stages from
start to finish of product, similarly software programme passes from one internal
customer to another until a bug free programme is offered to customer. This is to make
total quality process and create a quality culture.

Customer focus: The customer is king. Customers are the most important people in our
business. They do not depend on us, we depend on them. They are part of our business.
Consumer power: Part of the thrust for Total Quality Management (TQM) comes from
consumer demands that grow stronger & better. Never disregard the customer.
Relationship marketing is an attempt to broaden the role of customer service & integrate

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it with quality & marketing functions. Marketing is newly defined as “Customer
Engineering Service”. Relationship marketing has dual concept of ‘getting’ the customer
and keeping customers.
Evolution of quality management and learning from quality Gurus
Prior to industrial revolution, production was carried out by skilled craftsmen. Pride of
workmanship provided necessary motivation to see that job was done right.
The industrial revolution was accompanied by division of labor. The responsibility of
quality was shifted to foremen of the production shop. Inspection by separate personnel
started.
In 1930 acceptance sampling was introduced. Up to 1950, quality efforts were directed
towards inspection & correction. During 1950 & 60’s Deming introduced Statistical
Quality Control (SQC) methods to Japanese manufactures & spread the message
“Reduce the variation” to managers of industries.
Late ‘60s Professor Ishikawa “Father of Quality Circles” launched quality movement in
Japan. During 60 & ‘70s quality assurance methods spread to service organizations such
as Banks, Hospitals etc.
Late ‘70s Japanese acquired reputation of high quality in automobile, electronics,
appliances, steel etc.

Quality Gurus
Dr. W. Edwards Deming was the first American quality expert to teach Japanese
managers methodically about quality. He arrived in 1947 in Japan with a statistician’s
hat. Deming taught staff the use of sampling methods and statistical quality control
techniques & achieved fantastic productivity increase & cost saving in 1940 census. As a
result of this, he was asked to teach quality methods to US industrialists, engineers &
inspectors. His methods improved the quality, higher volumes of production, reduction in
scrap & rework.
Three years later (1950) he was doing in Japan what he did so well in America. His
sponsor was union of Japanese scientists, & industrialists, who started restructuring the
country’s war torn industry. Leaders of companies Sony, Nissan, Mitsubishi & Toyota
attended his quality programmes. Deming contribution to Japan is substantial. His

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message to managers in few words is “Reduce variation”. He aimed at understanding the
two causes of variations

Assignable variation which is due to assignable or specific causes: e.g. tool wear, change
of operation, procedures, or raw materials, human factors. Random variations are due to
un assignable / chance or random causes. If special causes are eliminated quality can be
improved by reworking or redesigning the system.

Walter Shewhart is the originator of statistical process control (S.P.C.) If you remove
the sources of variability from any process, you make it more predictable & therefore
more controllable. He is hostile to inspection. In addition to setting up better processes &
systems, he said involve employees in participative decision making. He also discouraged
numerical and targets performance appraisal as managers push the system out of order.

Joseph M Juran is author of ‘Quality control’ hand book, published in 1950, a

worldwide standard reference book on quality. Juran expressed his essential message
through three basic quality related processes: quality planning, quality control, quality
improvement which has become known as Juran triology.

Like Deming, he also believed in SQC. He also estimated that 15% is due to special
causes & 85% due to management disturbing the system.
Juran developed his TQM message around the following steps
1) Create awareness of the need & opportunity for quality improvement

2) Set goals for continuous improvement

3) Build an organization to achieve goals by establishing quality council, select a

project, appoint team & facilitator.

4) Give everyone training

5) Carryout project to solve problems

6) Communicate results

7) Show recognition

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 8) Keep record of success etc

Professor Ishikawa is known as the “Father of quality circles” for his role in launching
Japanese quality movement in 1960. He suggested blend of American flow line
production techniques and Japanese practices of craftsmanship i.e. Employing
craftsmanship in groups rather than individuals. His Fish bone diagram bears his name
Ishikawa diagram. It is used by Quality circle teams worldwide.
He said the seven basic tools indispensable for quality control are: Pareto analysis, Fish
bone diagram, Stratification (forming groups), Tally charts, Histogram, Scatter diagram
(correlation) & Control charts

Philp B Crosby Popularized TQM

Crosby listed four essentials of quality management which he calls absolutes
1. Quality is defined as “conformance to requirement, not as goodness”

2. Quality is achieved by “Prevention. Not appraisal”

3. Quality performance standard is zero defects

4. Quality is measured by the price of non conformances, not by indexes

William E Conway: a new comer to TQM

Definition of quality and general approach to quality management as perceived by the

quality Gurus: Philip Crossby, Deming, and Juran are given below

Parameter Philip Crossby Deming Juran

Definition of quality Conformance to A predicable degree Fitness for use;
requirements of uniformity & Satisfying customer
dependability at low needs; agreed customer
cost & suited to requirement
market
Degree of Responsible for Responsible for 95% Less than 20% quality
management quality of quality problems are due to
responsibility workers. More due to

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 engineering & design
problems
General approach Prevention; not Reduce variation by General management
inspection continuous approach to quality;
improvement; cease Project approach; Juran
mass inspection trilogy
SPC Wants 100% perfect SQC methods must be Recommend SPC; but
quality; Rejects used warns tool driven
statistical acceptable approach
quality levels
Team work Quality Employee Quality circles approach
improvement teams participation ( breaks
down barriers)
Cost of quality Cost of non No optimum; No optimum
conformance Continuous
improvement
Vendor rating Yes. No. Critical of most Yes. But help supplier
systems improve

Functions of quality control

The typical quality control department of a manufacturing organization has a variety
of functions to perform.

(a) Design control: This involves establishing specifications for quality of product in
terms of performance, safety, reliability, cost of the product

(b) Incoming material quality control; Vendor rating

(c) Product control: This involves control of product at the source of production (final
quality control) so that the deviation from quality specification can be corrected
before defective / non conformative product are dispatched to customer

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 (d) Special process studies: This involves investigation & tests to locate the causes
for non conforming products; possibility of improving quality characteristics & to
ensure improvement & corrective action

(e) Planning & budgeting QC programme in the plant

(f) Quality accomplishment through the following four steps

• Setting standards

• Appraising conformance

• Taking corrective actions

• Planning for improvement

g) Design & oversee QC systems and inspection procedures. Quality system alone
cannot bring success. Quality system coupled with creativity and implemented
intelligently by the people can lead to success and organization growth.

h) Process monitoring and inspection

There are three points in the production process where monitoring takes place
1. Before production to make sure inputs are acceptable
2. To conform that production processes are in acceptable manner
3. After production final verification of conformance before passing goods on to the
customer

Monitoring before & after production involves acceptance sampling & during production
process is referred to as process control. For both sampling & process control, inspection
provides key data for decision making.

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Factors affecting the quality
Quality affected by such factor as the capability of the equipment used to produce the
goods, the training & skills of operator, the extent to which design lends itself to
production, quality of inputs, process monitoring & control to assess conformance.
Inspection: The process of inspection is to provide information concerning the degree to
which item conform to standard/product specification.
The basic issues of inspection are
1. How much to inspect & how often
2. At what stages process inspection should occur
3. Whether to inspect at centralized place or onsite
4. Whether to inspect attributes or variables

How much to inspect & how often – No inspection of each item is carried out. In high
volume system automated inspection may be employed. As a rule, operations that have
higher proportion of human element need to be inspected, rather than automated /
machine operations because they tend to be more reliable.

The frequency of inspection depends largely on the rate at which process may go out of
control or number of lots processed. Unreliable process or that which has recently given
trouble will require more samples.
What are the stages to inspect: In manufacturing, some of the typical inspections stages
are
1) Raw material and purchase parts
2) Before costly operation
3) Before an irreversible process e.g. before potting a electronic sub assembly
4) Before finishing process – plating, painting
5) Finished products

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Centralized vs. Site inspection
Items requiring specialized equipment & testing environment (free from dust, vibration
etc) & workers helping inspectors need to be inspected at central places e.g. food
samples, testing metals, lubricants etc
Some situation require inspection at site e.g. inspecting hull of a ship for cracks,
structural work
In unit (one by one) production, some companies rely on self inspection by operators so
that error can be traced back to specific operator.

Statistical Quality Control (SQC)

Statistical Quality Control (SQC) is the application of statistical techniques to determine

how far products conform to standards & to what extent it deviates from standards. This
is applicable for products already produced or in process.

SQC

Sampling Process Control

• Acceptance sampling is for finished parts and products

• Control charts for process control (jobs in process)

Sampling:
Inspection of total lot in high volume production is monotonous & time consuming and
inspection by sampling method is resorted to. Acceptance sampling is a form of
inspection that is applied to lots or batches of items either before or after the process
instead of during the process. The purpose of acceptance sampling is to decide whether a
lot satisfies predetermined standards. Lots meeting the standards are accepted and lots not

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satisfying standards are rejected. Rejected lots are subjected to 100% inspection or they
may be returned to supplier for replacement.
Acceptance sampling procedures are most useful when one or more of the following
conditions exist
1) Large number of items must be processed in short time
2) The cost consequences of passing defectives are low
3) Destructive testing is required
4) Fatigue caused by inspecting large number of items leads to inspection errors

Acceptance sampling can be used to both attributes and variables inspection. Sampling
plans specify lot size, the sample size, the number of samples to be taken and acceptance
/ rejection criteria. There are varieties of sampling plans: single sample, two or multiple
sample.
Single sampling plan: One random sample is drawn from each lot & every item is
inspected & classified as good or defective. If any sample contains more than specified
defects ‘C’, the lot is rejected.

Double sampling plan allows for the opportunity to take a second sample if the result of
first sample is inconclusive. For e.g. if the quality of first sample is high, the lot can be
accepted without need for a second sample. If the quality of initial sample is poor,
sampling can be terminated and lot rejected. If the results are between the two cases, a
second sample must be taken & items inspected. A double sampling plan specifies the lot
size, size of initial sample, accept / reject criteria. Ex: C1=2, C2=5 if fewer than two
defects are found, accept the lot; if more than 5 defectives are found, reject the lot & if
C=3/4/5 take a second sample. The size of second sample and a single acceptance
number (e.g. C3=6 accept the lot if the total number of defectives found in both samples
is 6 or fewer, otherwise reject the lot).

Multiple sampling plans are very similar to double sampling plans except that more than
2 samples may be required. A sampling plan will specify each sample size & two limits
of number of defectives for each sample. The values increase with number of samples.

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Choosing plan:
Single sample plans involve only a single sample but the sample size is large relative to
the total number of observations taken under double or multiple sampling plans. If cost of
sample is high compared to analysis, single sample plan is better e.g. Gold Salts etc.
Operating characteristic curve:
An important feature of a sampling plan is how well it discriminates between lots of high
quality & lots of low quality. This is described by its operating characteristic curve.

A typical curve for a single-sampling plan is shown figure above. The curve shows the
probability that use of the sampling plan will result in lots with various fractions
defective being accepted. For example, we can see from the graph that a lot with 3
percent of defectives (i.e., a fraction defective of .03) would have a probability of about
.90 of being accepted (and, hence, a probability of 1.00 — 0.90 = 0.10 of being rejected).

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Note that there is a downward relationship: as lot quality decreases, the probability of
acceptance decreases, although the relationship is not linear. For instance, if a lot contains
20 percent defectives, the probability of acceptance drops to about 0.04.

It is interesting to note that even lots containing more than 20 percent defectives still have
some probability of being accepted, whereas lots with as few as 3 percent defectives
stand some chance of being rejected. In other words, a sampling plan does not provide
prefect discrimination between good and bad lots; some low quality lots will invariably
be accepted, and some lots with very good quality will invariably be rejected.

The degree to which a sampling plan discriminates between good and bad lots is a
function of the steepness of the graph OC curve: the steeper the curve, the more
discriminating the sampling plan. This is illustrated in Figure below.

For these reasons, consumers are generally willing to accept lots that contain small
percentages of defective items as “good,” especially if the cost related to a few defectives
is low. Often this percentage is in the neighborhood of 2 percent to 4 percent defective.
This figure is known as the acceptable quality level (AQL). Because of the inability of
random sampling to clearly

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identify lots that contain more than this specified percentage of defectives, consumers
recognize that some lots that actually contain more will be accepted. However, there is
usually an upper limit on the percentage of defectives that a consumer is willing to
tolerate in accepted lots. This is known as the lot tolerance percent defective (LTPD).
Thus, the consumer would like quality equal to or better than the AQL, and is willing to
live with some lots with quality as poor as the LTPD, but would prefer not to accept any
lots that have a defective percentage that exceeds the LTPD. The probability that a lot
containing defectives exceeding the LTPD will be accepted is known as the consumer’s
risk or a Type II error; the probability that a lot containing the acceptable quality level
will be rejected is known as the producer’s risk or a Type I error. Many sampling plans
are designed so that they have a producer’s risk of 5 percent and a consumer’s risk of 10
percent; although other combinations are also used. Standard references such as the /
government MIL-STD tables are widely used to obtain sample sizes and acceptance
criteria for sampling plans. Figure below illustrates an OC curve with the AQL, LTPD,
producer’s risk, and consumer’s risk.

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Figure: The AQL indicates “Good lots” & the LTPD indicates “Bad lots”

Statistical process control

Process control involves monitoring of ongoing process partly to check current quality,
but primarily to determine and assure the future quality. The main tool used is the control
chart which is a statistical aid for distinguishing between random variation in output &
those which can be traced to specific causes (assignable) and eliminated.

Effective Process control requires the following steps

1. Define what is to be controlled e.g. painted surface-thickness, adhesion /
resistance to chipping, hardness
2. Only those characteristics that can be measured, have to be chosen for control
3. Compare with standard

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 4. Evaluate: A certain amount of variation is inevitable. The main task of quality
assurance is to distinguish random and nonrandom variability, because
nonrandom means process is out of control
5. Take corrective action if necessary: This involves elimination of nonrandom
variability (worn equipment, incorrect methods, deviating from procedure and so
on)
6. Evaluate corrective actions- Closely monitor the output of a process for sufficient
period of time to verify that the problem is eliminated.

Process variation & control

All processes exhibit a certain amount of variation. Random or chance variability differs
from process to process e.g. older machines exhibit higher degree of variability than a
new machine. Second kind of variability is called assignable variation which can be
assigned to specific cause. Factors such as tool wear, disturbance in setup, defective
material, human factors like carelessness, untrained operator carrying out an operation,
fatigue, not following correct procedure are commonly encountered sources of assignable
variation. Process which exhibit random variation is said to be statistically in control.

Examples of process changes that can be detected by SPC are

1) Sudden increase in proportion of defective item

2) Decrease in average number of complaints per day in a hotel

3) Consistently low measurement in diameter of crank shaft

4) An increase in the number of clients receiving late payment from Insurance

Company. Proportion of complaints receiving late payment has risen from
average of 0.01 to 0.05 and as the rise is large it is necessary to find out the
reason, whether it is random or has special causes. If the number of complaints
have risen the reason could be a) we have hired people (b) procedure being used
is in effective or (c) Training of newly hired people is inadequate.

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Control Charts: Attributes and Variables

Control charts are graphical tools used to differentiate random and nonrandom process
output. There are different kinds of control charts (e.g., for means, for ranges) for
different kinds of situations.

Each chart has a center line, which represents the process average, and upper and lower
lines, called control limits, which define the range of random output.

For example, consider the control chart for means illustrated in Figure below. Because all
the sample means fall with in control limits, it appears the process is in control.

Control Chart (for Mean)

A second means chart is illustrated in figure given below. Unlike the previous one, this
chart has a sample mean that is beyond the upper control limit, which suggests that the
process is not “in control.”

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Attributes vs. variables:

Attributes yield pass / fail data. Attribute data is count data: acceptable, not acceptable.
Variables can be present in varying degrees (e.g. length, height, thickness). As such they
must be measured rather than counted. Often a normal distribution serves as basis for
statistical inference. Inspection & control procedure differ depending on whether the
quality characteristics of interest are an attribute or variable.

There are four commonly used control charts: mean, range, percent defective, and
number of defects. The first two pertain to variables, and the last two pertain to attribute.
Variables generate continuous data (e.g., thickness, length, weight) and that of attribute
data involves counting the number of occurrences in a sample (e.g., five defectives in a
sample of 200).

Control Charts

For Variables For Attributes

Control Charts for Variables

Mean and range charts are used to monitor variables. Control charts for means
reflect the central tendency of a process, and control charts for the range reflect
process dispersion.

Mean control charts, or (x-bar) charts, are based on a normal distribution. The
theoretical foundation for this is the central limit theorem, which states that the
distribution of sample means taken from a process will be normal if the process

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distribution is normal, and it will be approximately normal even if the process is non
normal, if the sample sizes large enough (in the range of 10 to 20 observations). Not only
is the sampling distribution of the means normal, but its variability is also less than the
variability of the process being sampled. These concepts are illustrated in the figure
below.

In selecting control limits, it is important to recognize that just because all observations
are within the limits, this does not guarantee that assignable variations are not present,
and that just because an observation appears outside one of the control limits, this does
not guarantee that assignable variations are present.

For example, if two-sigma limits are used, 95.44 % of the sample means should be within
the limits and 4.56 % should be outside of the limits, when only random variations are
present. Using wider limits (e.g., three—sigma limits) will reduce the risk of concluding
that the process is out of control when in fact only random variations account for points
outside the control limits. However, wider limits make it more difficult to detect
nonrandom variations when they occur. Thus, the process average might shift (assignable
cause of variation) enough to be readily apparent at the two—sigma level but not at the
three—sigma level. Hence, the risk with wide limits is that assignable variations may go
unnoticed. Concluding a process is out of control when it really isn’t is called a Type I
error, and concluding it is in control when it isn’t is called a Type II error.

If the process mean and standard deviation are known, control limits can be computed
using the formulae given below.

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If the process mean and/or process standard deviation are not known, an alternative
approach is available.

Table: Values of A2, D3 and D4 for 3 σ control limits for x-bar and R-chart.

Source: Production & Operations Management book by Stevenson.

A second approach is to use the sample range as a measure of process variability. The
appropriate formulae for control limits are

Values of A2 can be obtained from Table above.

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Procedure for developing x-bar chart:

Step1: Calculate x- bar for each sample and the centre line of the chart (x-bar)-bar
Step 2: Use table to determine the parameters for UCLx-bar and LCLx-bar and construct
x-bar chart
Step 3: Plot sample means. If all are in control the process is in statistical control in
terms of process average and process variability

Range Charts are used to monitor process variability; they are sensitive to changes in
process dispersion. The concepts for use of range charts are much the same as those for
use of means charts. Control limits for range charts are found using the average sample
range in conjunction with the formulae:

where values of D3 and D4 are obtained from the above Table.

Procedure for developing R charts:

Step1: Collect data on the variable quality measurement (such as weight, diameter, or
length) and organize the data by sample number. Preferably at least 20 samples
should be taken to construct a control chart
Step2: Compute the range for each sample and average range R-bar for the set of
samples
Step3: Use the table and take constants D3, D4 to determine the upper and lower
control limits of the R-chart
UCLR=D4(R bar),
LCLR=D3(R bar)
Step4: Plot the sample ranges. If all are in control, proceed to next step, otherwise find
assignable causes, correct them and return to step (1)

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Continue to take samples and monitor the process and analyze in case of out of control
(use fish bone diagram)
Terminology:
Mean is the sum of the observation divided by the total number of observations.

Mean x-bar = n Σ i=1 xi/n

xi – observation of quality characteristic (such as weight)
n = number of observations
x-bar= mean

Spread is the measure of observation about the mean. Two measures commonly used are
range and standard deviation.
Range is the difference between the largest observation and smallest of the sample.
Standard deviation is the square root of the variance of the distribution σ.

Standard deviation = √{[Σ (xi – x-bar)2 ]/n – 1}

Relative small values of range or σ imply that the observations are clustered near the
mean.

Using Mean and Range Charts: Mean control charts and range control charts provide
different perspectives on a process. Mean charts are sensitive to shifts in the process
mean, whereas range charts are sensitive to changes in process dispersion.

Control Charts for Attributes

Control charts for attributes are used when the process characteristic is counted
rather than measured. For example, the number of defective items in a sample
would be counted, whereas the length of each item would be measured. There
are two types of attribute control charts, one for the percentage of defective
items in a sample (a p-chart) and one for the number of defects (called a c-

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chart). A p-chart is appropriate when both the defectives and non defectives can
be counted. For instance, if glass bottles are inspected for chipping and
cracking, both the good bottles and the defective ones can be counted. However,
one can count the number of accidents that occur during a given period
of time but not the number of accidents that did not occur. Similarly, one can
count the number of scratches on a polished surface, the number of bacteria
present in a water sample, and the number of crimes committed during the
month of August, but one cannot count the number of non occurrences. In such
cases, a c-chart is appropriate.

A p-chart is used to monitor the proportion of defectives generated by a process. The

theoretical basis for a p-chart is the binomial distribution, although for large sample sizes,
the normal distribution provides a good approximation to it. Conceptually, a p-chart is
constructed and used in much the same way as a mean chart.

The center line on a p-chart is the average fraction defective in the population, p. The
standard deviation of the sampling distribution when p is known is:

Control limits are computed using the formulae:

If p is unknown, it can be estimated from samples.

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C-chart: When the goal is to control the number of defects per unit, a c- chart is used.
Units might be automobiles, hotel rooms, typed pages, or rolls of carpet. The underlying
sampling distribution is the Poisson distribution. Use of the Poisson distribution assumes
that defects occur over some continuous region and that the probability of more than one
defect at any particular spot is negligible. The mean number of defects per unit is c, and
the standard deviation is √c. For practical reasons, the normal approximation to the
Poisson is used. The control limits are:

If the process average is unknown, it can be estimated from sample data, using
= Number of defects/Number of samples.

SPC tools commonly used for problem solving and continuous improvement
The following are the commonly used SPC tools:
1. Data collection: Prepare in advance strategy for collecting and analyzing the data.
What? Why? Where? When? how? How long?
2. Flow process chart
3. Pareto analysis: A coordinated approach to identify, rank and work to
permanently eliminate defects. Pareto rule says 80% of defects are due to 20%
causes.
4. Run chart
5. Histogram: The frequency of occurrences between high and low range of data
6. Check/Tally sheet: An organized method of recording data.
7. Scatter diagram / Correlation chart: A graph of value of one characteristic vs.
another characteristic.
8. Cause and effect diagram: Diagrammatic representation to analyze potential
source of information.
9. Control charts
Brainstorming: Brainstorming is an effective technique to help the quality improvement
team identity a problem, sort out its causes and come up with solutions. Invented by Alex

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Osborn, an advertising executive in the 1930s, brainstorming makes use of lateral or
right-brain thinking. It is a way of getting a large number of ideas from a group of people
in a short time. It can be used effectively for the first three steps of the problem-solving
cycle 1) to identify problems 2) sort out causes from effects 3) come up with creative
solutions.

Figure: Problem Solving Process

For brain storming to be effective

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 • Give everybody a chance
• List the suggestions
• Right team / composition of team, leader of the team
• Allow time for thought
• Provide check list, format and organize data

There are certain rules for brainstorming which must be followed for the technique to be
effective, which are as follows:

1. No criticism: Participants should contribute ideas without fear of criticism from

others. Likewise, they should suspend their judgment on the ideas of others.
2. The process of brainstorming should promote the free flow of ideas without
analysis or evaluation. It allows apparently silly or far-fetched ideas which may
develop into something useful.
3. Go for quality: the aim is to get as many different ideas as possible in the allotted
time. Everyone should contribute something, however unimportant it may appear to
be.
4. Record: write down all ideas, even repetitions, on a flip chart for all to see. The
written words themselves will trigger other ideas from the team.
5. Cross-fertilize: use other people’s ideas as springboards for your own. Building on
ideas is an effective way of creating the best ideas.
6. Incubate: after the allotted time for generating ideas, each person should identify
those ideas he finds most useful. The team can then select the ideas which should be
developed.

The fishbone diagram

The fishbone diagram, or Ishikawa diagram, is a cause and effect diagram which when
completed resembles the skeleton of a fish. This diagram helps the team to separate out

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causes from effects and to see a problem in its totality. There are several uses for cause
and effect diagrams. For example, they can be used to:
1. Assist both individual and groups to see the full picture.
2. Serve as a recording device for ideas generated.
3. Reveal undetected relationships between causes.
4. Discover the origin of a problem.
5. Investigate the expected results of a course of action.
6. Call attention to important relationships.
7. Create a document or a map of a problem which can be posted in the work area.

Figure shows a partially completed fishbone diagram.

Another aspect of diagramming causes and their effects is that one can tell at a glance
whether the problem has been thoroughly investigated. A cause and effect diagram which
contains much detail, if that detail is legitimate, indicates how deeply a group has gone
into the process of investigation. On the other hand, a bare

Figure: Basic Fish Bone Diagram

cause and effect diagram might indicate that the problem was not significant or that the
solvers of the problem were not exhaustive in their search. Likewise, if the solution

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analysis diagram is complete, it will show the group’s concern for the impact of a
proposed solution.

The following guidelines show how to construct a fishbone diagram:

1. Write up the problem statement, which is the ‘effect’, on the extreme right of a
large piece of paper (flipchart, or several pieces of paper fastened together).
2. Draw in the main ribs of the fish and write a heading for each rib. There are general
headings which cover most problems, such as: people, environment, methods, plant,
equipment and materials; or there can be specific headings tailor-made to cover
special problems.
3. Review with the team the rules for brainstorming and post them on a wall where
they can be seen by everyone.
4. Brainstorm a list of causes on to the fishbone diagram. The brainstorming can be
done in a free-style manner in which all ribs of the diagram can be brainstormed
simultaneously, or the ribs can be taken one at a time and brainstormed in a more
structured way.
5. Incubate the diagram to get a feeling from the team as to the key causes of the
problem.
6. In a more formal way, apply the Pareto principle to determine the 20 per cent of the
causes that contribute to 90 per cent of the effect.

A more sophisticated/detailed cause and effect diagram for analysis of poor sales is
given below:

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The Pareto diagram

Vilfredo Pareto was an Italian economist who, between the world wars, conducted
extensive research on income distribution. He found that in his native country 80 per cent

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of the wealth was held by only 20 per cent of the population. In international comparative
research, he established the same ratio. He eventually realized that he had discovered a
universal law: 80 per cent of anything is attributed to 20 per cent of its causes. For
example, 80 per cent of road accidents occur on 20 per cent of the roads or some roads
are more dangerous than others. And 80 per cent of absenteeism in a company can be
assigned to only 20 per cent of the workforce or some people are off work and stay off
work longer than others. Also 80 per cent of the shopping that takes place is done in 20
per cent of the time stores are open or people try to shop at the same time. This 80-20 law
has come to be called the Pareto principle after its founder. In problem solving, it is
helpful to determine the key causes of those 20 per cent -which lead to 80 per cent of the
problem and cure them.

A separate diagram can be used to show the Pareto analysis. The framework of the Pareto
diagram is the vertical and horizontal lines for a column graph. The right vertica1 scale
will list the number of occurrences of problems. The left vertical scale is a percentage
scale (100 per cent should be opposite the total number of problems). Space should be
left on the horizontal axis to list the problems. Using the information from the data table,
construct a column graph for each of the problems. Plot the data on the diagram, making
one column for each of the problems. The data is plotted with the largest group or
category on the left. The remaining categories are plotted in descending order and the
‘other’ category is on the right-hand side. The diagram should be labelled so that each
axis is identified and so that each column is identified. A cumulative, or ‘cum’ line, can
be drawn by plotting each point at the right-hand corner of each column and then
connecting these points. A legend will provide useful information that will help others
understand the Pareto diagram.

The completed Pareto diagram supplies much information. As a column graph, it tells
about the relative sizes of the problems. The columns are in descending order and give
some indication of which problem needs attention first. The cumulative line conveys an
important message about the first few pro1ems. If the biggest two problems are corrected,
a large percentage of the total problems will have been determined. Such a visual display

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of the key causes helps a problem solver to prioritize so that he or she spends the time
attacking those causes that will eliminate most of the problems (see Figure).

Figure: Pareto Analysis

Data collection

Collecting data is another aspect of analysing problems. Facts, not opinions, fuel good
problem solving. Team members must be insistent on bypassing opinion-based
arguments to uncover the real facts of a problem. While it is difficult to collect reliable
facts about some problems, this tends not to be the case with most problems that quality
improvement teams tackle.

The teams have the task of carefully collecting the facts that demonstrate the dimensions
of the causes of a problem or point to potential solutions. The fact-based arguments these
teams develop are not only more powerful and likely to be accepted, but they are also
much easier to communicate. A very common tool for collecting data used by quality

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improvement teams is the ‘check sheet’, which is simply an organized way of recording
information.

The following guidelines will help you design check sheets:

1. Always state the full title of the data you intend to collect and the date or time
period covered. For example: partial title — ‘phone calls to Delhi branch’; full title
— ‘an analysis of incoming phone calls to the Customer service cell, Delhi branch
over the next four weeks’.
2. Ensure that check sheets are uniform so that everyone uses the same form to collect
comparable data.
3. Design Check sheets in such a way that writing is kept at a minimum.
4. Collect only necessary and relevant information.
5. Aim to get a full picture by covering all the variable that occur in the situation.

Tolerances, Control Limits, and Process Variability

There are three commonly used terms that refer to the variability of process output. Each
term relates to a slightly different aspect of that variability, so it is important to
differentiate these terms.

Tolerances are specifications established by engineering design or customer

requirements. They indicate a range of values in which individual units of output must
fall in order to be acceptable.

Control limits are statistical limits that reflect the extent to which sample statistics such
as means and ranges can vary due to randomness alone.

Process variability reflects the natural or inherent variability in a process.

It is also referred to as process capability.

Control limits and process variability are directly related. Control limits are
based on sampling variability, and sampling variability is a function of process
variability. This relationship can be seen in the way control limits are calculated.

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For example, control limits for an x-bar chart are computed using the
formula:

On the other hand, there is no direct link between tolerances and either
control limits or process variability. Tolerances are specified in terms of a
product or service, not in terms of the process by which the product of service is
generated. Hence, in a given instance, the output of a process may or may not
conform to specifications, even though the process may be statistically “in
control.” Therefore the process must be in control as well as give specifications.

Process is capable if it has a process distribution with huge extreme values and product
specifications (upper and lower) for a product or service fall within process variation. As
a general rule most values of a process distribution fall within ±3 standard deviation of
the mean. In other words the range of values of quality measure generated by the process
is approximately 6 times standard deviation.

Process capability, Cp = (upper specification – lower specification) / 6 σ

If the Cp is less than one, the process will produce products / services out side the
tolerance limits. Firms often choose Cp such as 1.33. The value Cp > 1 is to allow some
change in the process distribution before bad output is generated.

Data snooping: Each of the tools may be used independently for improving quality, but
their power is greater when used together. Manager need to act as a detective, deduce the
causes using the data. The first step is to collect the data on various operational details.

The various data analysis tools

a) Check list (frequency of occurrence)
b) Histogram and bar charts: data from characteristic can be presented in the form of
a histogram

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 c) Pareto charts: Prioritizing the problem, vital few have to be identified.
Pareto concept: 80% of activity is caused by 20% of factors. Ex. ABC analysis of
inventory, absenteeism in industry
d) Scatter diagrams is a plot of two variables showing whether they are related
E.g. casting defects is function of diameter (plot different diameters and defects)
e) Cause and Effect diagram
f) Graphs, Pie diagrams

6.3 Modern Quality Management Systems

ISO 9000 certification

To survive and remain competitive in the global market, goods and services offered
should not only be of high quality but also reliable, safe, environmental friendly and cost
effective. This requires implementation of quality standards and a systematic approach.
ISO 9000 is a set of standards governing documentation of a quality program. This has
become necessary to compete in the European / global market. Companies become
certified by proving through documentation to a qualified external examiner,
Standardization, Testing and Quality Certification (STQC) that they have complied with
all the requirements. Once certified, companies are listed in a directory so that potential
customers can see which companies have been certified to what level. Compliance with
ISO 9000 standards says nothing about the quality of the products. Rather it indicates to
the customers that companies can provide documentation to support whatever claims they
make about quality.
ISO is based on simple principle – ‘Say what you do’ & ‘Do what you say’
ISO 9000- is an over view document which provides guidelines for selection & use of the
standards.
ISO 9001-is a standard that focuses quality systems on 20 aspects of quality assurance
program for the company i.e. design, production, installation & servicing
ISO 9002-quality system model for quality assurance in production, installation &
servicing

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ISO 9003- quality system model for quality assurance in testing & final inspection
ISO 9000 & 9004 are guidelines giving management an understanding of quality system
requirements & importance of establishing & maintaining effective Quality assurance
system.
ISO 9001 has 20 clauses or elements of the quality system.
1. Management responsibility: The management will define & document its policy
& objectives and commitment to quality
2. Quality system: Prepare quality plans & manuals. Identify process, production
resources & skills to build quality. Study process capability and maintain quality
records
3. Contract review
4. Design control – Design input & output & verification review
5. Document control
6. Purchasing
7. Purchaser supplied product
8. Product identification & traceability
9. Process control
10. Inspection & testing
11. Measuring & test equipment
12. Inspection & test status- (Marking, tags, signature of inspection authority)
13. Control of non conformities (segregation)
14. Corrective action – technical solutions
15. Handling, storage, packaging and delivery
16. Quality records
17. Internal quality audits
18. Training
19. Servicing
20. Statistical techniques
Steps to be taken for ISO registration:
1) Management commitment: Policy
2) Company wide training

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 3) Prepare quality manual
4) Develop procedure, instructions & MIS
5) Develop internal audit capability/training of staff
6) Procedures & systems in place (install quality system)
7) Apply for registration
8) Adequacy and compliance audit
9) Pre assessment (Management review. Correct any deficiency, continue
internal audit and improve )
10) Final assessment and certification

Benefits of installing quality system (ISO 9000)

• Provides a documented system which control the activity / service / product
• Produces written procedure that define authority, responsibility and interface
• Ensures that service /product meets all specified requirements
• Provides reputation in the market place through customer satisfaction
• Provides a system which ensures that all non conformities (deficiencies, quality
problems) are immediately identified, controlled and dealt through feed back
loops
• Promotes efficiency
• Motivates staff towards a pride in carrying the job
• Shows commitment to quality
• Identify training needs
• Produces historical records to confirm levels of quality / system effectiveness
Quality can therefore be achieved through a management system.
Quality Management Systems (QMS) deals with the entire management which shall be
capable of ensuring specified quality levels of out coming products. The system has to
attack on four fronts.
1. Estimating assignable causes through set procedures which should be
documented. The procedure include
(a) updated documentation
(b) calibration of measuring equipment

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 (c) adequate training and education
2. Identify and controlling random variation
3. Continues quality improvements
4. Demonstrating the ability to make continued quality improvements
Quality systems alone cannot bring success. Quality system coupled with creativity and
intelligent implementations will bring results.
Total quality management (TQM)

TQM philosophy identifies quality values as a driving force behind leadership, design,
planning and improvement initiatives. For long term success, quality is essential. It is
more a conviction than a system. Continuous improvements in all parts of the
organization with a view to satisfy customer needs, involving all the people are the
principles / core concepts of TQM

I. Right first time

TQM is conviction that it is possible to achieve defect free work most of the time.
The emphasis is on prevention of defects. This serves as a goal for continuous
improvement

II. Competitive bench marking

The following are the steps in the bench marking process

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 a) Decide what is to be bench marked: products, services, business processes
b) Select competitors who are the best
c) Decide the most appropriate measurement to define the performance level
of a competitor and one’s own company. Collect the data needed for
comparison
d) Determine competitor strengths and assess against one’s own strength
e) Develop an action plan to gain or maintain superiority. Use the analyzed
data
III. Everyone is involved
Quality is every body’s task and responsibility of every function (right from
design stage)

Quality matters to all and not the job of quality control personnel alone

Every employee has internal customers

IV. Team work and synergy

No status difference. Consider themselves as partners and build teams

Team formation has to be task based considering knowledge and skill

Team members need to be valued as individuals and individuals need to feel

integrated within a team. Team must be confident, leader must be fair to all
members

The idea of synergy in the team is the key concept in TQM which is used to
promote collaboration in planning quality improvements, new systems, consensus
in dealing with conflicting views, creative conflict, team winning

V. Review of quality delivery process: Check list given below can be used to
review.
Steps to be followed:
1) Create mission statement
2) Determine the outputs (Tangible, internal customer find it acceptable)
3) Identify the customer: Has the end user been identified?

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 4) Define customer requirements. Are the requirements translated into output
specification?
5) Have the customer’s requirements been agreed to?
6) Develop output specification. Are the specifications measurable?
7) Define groups work process. Have the working group responsibilities been
identified to ensure the process is carried out satisfactorily?
8) Measure the output
9) Define the problem if there is deviation between actual and target and
keep improving continuously
10) Establish project team and leader
11) Measure customer satisfaction. Have the customers been asked whether
they are satisfied with sample output
12) Training

TQM aims at organized problem solving

Managing the entire organization so that it excels in all dimensions of product & service
that are important to customer

Philosophical Generic tools (specific tools) Quality control t

elements • Process •
• Customer flow chart, check list, Pareto analysis, cause & effect diagram plans
driven
• Run •
quality
chart, scatter diagram capability
• Leadership
• Control •
• Continuous chart methods
improveme
• QFD
nt (PDCA),
Deming
wheel

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• Employee
participatio
n&
developme
nt

• Quick
response

• Design
quality &
prevention

• Corporate
responsibil
ity

Reliability

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Reliability is a measure of the ability of s part/product to perform its intended function
under a prescribed set of conditions. It is one of the determinants of price and has impact
on repeat sales and reflects on producer’s image. There may be legal implications if
reliabilities are low.

There are three important dimensions of reliability

a) Reliability as probability
b) Definition of failure
c) Prescribed operating conditions – like load, temperature, humidity
If an item has 0.9 reliability, that means the probability it will function as intended is 90%
and fail is 10%. Failure is not to perform as intended and also includes performing
substandard e.g. smoke detector - feeble sound, false alarm.

Measuring reliability of overall product or system

1. The probability that the product or system will function on any given time
2. The probability that the product or system will function for a given length of time

The focus of (1) is the system must perform on any given trial and (2) focus on length of
service.

Probability to perform on a given time is a function of reliability of its components or

subsystems

Obviously systems have a large number of parts. To increase the overall reliability one
approach is to use redundancy in design. This involves providing back up for some items

A typical profile of product failure rate over time is given below, commonly called as
“Bath tub curve”. Failure rate is a function of time

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 Figure: Bath Tub

MTBF- Mean time between failures is an index of reliability

Potential ways of improve reliability:

1) Improve component design

2) Improve production and assembly technique
3) Improve testing
4) Use redundancy in design
5) Improve user education
6) Improve system design

Replacement policies

Equipment used by firm can be broadly divided into two classes (a) Diminishing
efficiency type (b) Constant efficiency. The former deteriorates over time period, but can
be reactivated by replacement or repair of components Ex: Trucks, Machine etc. The
latter group encompasses items like electrical bulb. The former has components having
latter characteristics.

The replacement decision for items which belong to class (b) depends on the life
expectancy based probabilistic inference.

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The replacement of the former depends on the following parameters.

1) Falling efficiency (η) of existing machine

2) Improvement in new machine design ensuring greater efficiency
3) Obsolescence caused by technological break through

Quality circles
To achieve constantly high level of quality in both goods and services, the current
thinking stresses on total approach to quality from design, procurement, production, after
sales services as well as consumer education. Quality Circles gave birth to TQM.

Competitive pressures, complaints from customers, professionalism and desire to

increase sales / market share, all emphasize improvement in quality. Some of the major
sources of improvements are R &D, competitors, customers, and employees

R &D: Exploring new or different design, processes

Competitor: Learning from competitors
Customer: Can be source of valuable ideas
Employees can provide best suggestion for improvement in design, manufacture,
servicing as they are part of organization and intimately familiar with processes.
Fortunately many organization are tapping this potential with the use of quality circles,
which are voluntary groups of employees who get together periodically to discuss ways
of improving quality of product and working conditions. This will also help in improving
worker attitude to quality. Japan is noted for quality circles and some US companies are
also using quality circles.

Management support and encouragement of these groups / circles will be communicated

to its employees. Employees also get a feeling that they are part of the system and their
opinions / suggestions are important.

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Though conceptually quality circle is simple, support structure consisting of steering
committee of top management of officials, facilitators, Quality Circle leaders & members
is required.

A few points on quality circles functioning and support structure

1. The team must be reasonably well educated and able to do statistical and
industrial engineering analysis and goes into details
2. Management must be willing to trust workers and provide with cost data and
information
3. Team must be willing to cooperate with each other, instead of individuals, team
gets rewarded
Steering Committee: Provide overall guidance, suggest problems to the Quality circles,
receive recommendations and follow up on implementation.
Facilitators: They provide necessary training and information for the leaders and
members.
Circle Leaders: Usually the area supervisor is a leader and prepares an effective
presentation of the problem to the management.
Circle Members: They are volunteers from the workforce and trained in techniques like
brainstorming to identify the causes and analyze. Based on the initial findings, the group
discusses the problem and works out a solution and strategy to be implemented.

One of the most important features of quality circles in Japan is that they do not originate
from top, rather they spring from voluntary grass root workers and middle managers.
Dr Edward Deming suggests a number of actions that management can take to improve
quality
1. Adopt long term perspective
2. Use statistical methods to identify sources of poor quality and take corrective
actions
3. Demand quality from vendors
4. Improve supervision
5. Don’t emphasize output at the expense of good quality

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 6. Make sure that employees have proper training
7. Top management commitment to quality and willingness to support
8. Make it (or do it) right the first time
Marketing is another key factor for quality improvement by way of giving feedback from
customers to operations manager.

In Japan more than 1.7 lakhs of Quality Circles are officially registered with in the Union
of Japanese Scientists and Engineers (JUSE) and twice the registered Circles are
operating independently. The Quality Circle activities are interconnected in a nation wide
network and members have access to others in various activities across the nation. In
India BEHL, BEL, BFW, Shriram Fibers Ltd., HMT, Telco are some of the organizations
practising Quality Circles.

Six sigma quality

Pioneered by Bill smith in 1986 while employed by Motorola, Six Sigma was originally
defined as a method for measuring defects and enhancing quality. It was originally
developed for production processes, but has subsequently been applied in banks,
insurance companies, restaurants, hospitals, schools and many other types of service
organizations around the world.

The statistical representation of Six Sigma describes quantitatively how a process is

performing. To achieve Six Sigma quality, a process must not produce more than 3.4
defects per million opportunities. In Six Sigma, a. defect is defined as anything that does
not comply with customer specifications.

Six Sigma and process variation

It is generally observed that customers judge a product or service based on the benefits
they derive from using that particular product or service. Therefore, it can be safely said
that overall customer satisfaction rests heavily on the consistency of the product or
service offered. To achieve this consistency, there must be a combination of improved
process capability and reduced process variation. The higher the variability in a process,

236
the greater is the probability that a defect will occur. A key element in achieving
operational excellence is to identify sources of variation which affect a process, product
or service. Once identified, the key sources can then be earmarked for attention.

Six Sigma is far more than simply another novel concept and can be regarded as a major
innovation in terms of the management of quality throughout the organization. As a
comprehensive methodology for process improvement, Six Sigma provides organizations
with a roadmap for long- term success through enhancement of the quality of services
and customer satisfaction.

The International Organization for Standardization defines Six Sigma as “a statistical

business improvement approach that seeks to find and eliminate defects and their causes
from an organization’s processes, focusing on outputs of critical importance to
customers”.

For a Six Sigma programme to produce the expected results, organizational roles and
responsibilities must be clearly defined and aligned. If training is limited and focused on
only a few people in the organization, the probability of success decreases to virtually nil.
It is also extremely important to have support from upper management and employees on
all levels. If any of these levels is not enthusiastic about using the Six Sigma
methodology, it can ultimately lead to failure. It is also important to keep in mind that the
successful implementation of Six Sigma requires perseverance from the top.

Six sigma specify the quality level and denotes specific measure of how well a process or
transaction is performing. Six sigma (6 σ) quality process produces extremely few defects
3.45 per million against an industrial average of 66,000 defects per million (3 σ). Six
sigma is a break through approach. Motorola, General Electronic, National
Semiconductors USA are some of the beneficiaries of 6 σ approach. In India companies
like Bajaj Auto, Godrej, Hero Honda, Modi Xerox, TVS, Wipro have already started
implementing. Six sigma interface well with TQM and is also a process approach.

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Deployment of 6 σ
On average any process is established but not 100% stable. The issues lie with controlling
variation. Break through strategy (BTS) is adopted for implementing 6 σ. Breaking away
from the status quo is adopted to eliminate the chronic problems associated with the
variation in critical-to-quality (CTQ) both to customer & company. Examples are: Defect
on arrival, time to respond to customer compliant, delivery period, Installation &
commissioning, product performance, availability of documentation.

CTQ (critical to company) example: Forecast accuracy, market share, time to bring new
products to market, order processing time, warranty cost, defects, variability, value
addition per employee, operating profit.

DMAIC Methodology
BTS in the form of DMAIC methodology is followed to achieve defect free service.

The earmarking of key sources of variation is accomplished through the use of the Six
Sigma: Define, Measure, Analyze, Improve, and Control (DMAIC) methodology. The
Six Sigma DMAIC methodology differs from conventional problem solving in one
significant way. There is a requirement for proof of a cause and effect relationship before
any improvement action is taken. If the true cause(s) of a problem can be discovered,
then by controlling or removing the cause(s), the problem can be reduced or removed.

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Thus, discovering the root cause scientifically is at the core of the Six Sigma DMAIC
methodology. In general, there are five steps in the methodology.

The foundation of Six Sigma initiatives lies in the rigorous application of the ‘define,
measure, analyze, improve and control” (DMAIC) methodology. This methodology
works well in a wide variety of situations, but it has been confirmed to be one of the best
problem-solving tools, especially in uncharted areas where no solution has been
suggested previously. The details of activities that generally occur when the DMAIC
methodology is applied are outlined below.

Steps in the six sigma DMAIC methodology

D – Define.
Define is the first phase of the DMAIC methodology of Six Sigma. The purpose is to
define the project team’s understanding of the problem to be addressed and the output is
stated in the project charter. In the charter, the team normally indicates the objectives of
the project, expected timeline, scope and members of the team. Also created during this
phase is supplier’s input, the inputs to and outputs of the process, and the relevant
suppliers and customers to ensure that team / members acquire a bird’s-eye view of the
project. Another important aspect of the define phase is the gathering of voice of the
customer data. The Six Sigma project team is focused on finding out directly from
customers what they want and how well the current process meets their needs.

Customer requirement, translate into your language, establish customer CTQ. Understand
and identify which processes to be improved and set a goal.

M – Measure.
The measure phase establishes techniques for collecting data on the current performance
of the process identified in the define phase. This phase is used to determine sources of
variation and serves as a benchmark to validate improvements. A detailed process map is
also created in this phase together with indications of possible variations existing within
the process. With a clear measurable (output), the process is studied to determine the key

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inputs for each process. After the key input list is drafted, the team considers the potential
impact that each input has with respect to the defects currently generated in the process.
Key inputs are prioritized to establish a shortlist to be evaluated in detail later. Process
capabilities can also be calculated once the performance data are available.

Measure the current status, Define performance variables, create process map, establish
measurement system, measure performance variables, establish performance / process
capability

A – Analyze.
The purpose of the analyze phase is to allow the project team to target improvement
opportunities by taking a closer look at the data to determine the root causes of the
process problems and inefficiencies. This involves discovering why defects are generated
by further probing into the key variables (identified in the previous measure phase) that
are most likely to cause process variation. Statistical analysis is a key component of this
phase and used to demonstrate and confirm these relationships.

Analyze, Select performance variable, bench mark performance, conduct gap analysis.
Identify success factor. Identify the cause of the problem and scientifically search for the
root cause.

I – Improve
In the improvement phase, the team develops, implements, and validates alternative
methods that will lead to improved performance. Once the root causes have been
determined and confirmed in the analyze phase, the team can easily find solutions for the
problems. As part of the normal Six Sigma methodology, there must also be a check to
ensure that the desired results are being achieved before total adoption can be carried out.
Some experiments and trials may be required to find the best solutions.

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C – Control.
Sustain the improvement and control.
The final phase is the control phase. The control phase of the methodology focuses on
continuous measurement to ensure that the process continues to achieve the intended
results of the improve phase. Performance tracking mechanisms and measurements are
put in place to prevent the gains from being lost over a period of time. Once all team
members are confident that the achievements will continue in place, the team normally
begins to transfer control of the process back to the original process owner(s).

Benefits of six sigma: Focus on customer requirement, improved market share, increased
profit & employee satisfaction.

Six Sigma teams are generally assigned to work on complex problems. The cause-and-
effect relationships and therefore the solutions are not immediately obvious. To find the
root causes of such problems, the DMAIC cycle must be followed painstakingly without
skipping any phase or suggesting ad- hoc solutions. A team that ventures into the
measure and analyze phase before gaining an overall understanding of their project in the
define phase is likely doomed to significant reworking or even project failure from the
outset.
Organizations that rely on Six Sigma realize that the methodology is most successful
when integrated into the overall business strategy and not deployed merely as an
occasional off-the-shelf tool kit. Six Sigma requires a corporate culture shift. The
ultimate measure of success is when the methodology becomes embedded and is applied
throughout the organization.
Case of ‘Dabba wallas’ at Mumbai:
Six sigma + service with no errors in six million deliveries, 5000 dabba wallas, 1.7 lakh
dabbas (Tiffin boxes) a day, charging Rs 250-300 per month is achieved. Simple
procedures like color coding for the area they pick the dubba and an alphabet for
identifying the person who collects etc, are used.

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Process, Pick dubba from the house – deliver to railway station – sort out according to
destination - alphabet written on tiffin box stand for the person who collects, the number
is for destination.
Critical to quality characteristics are the tiffin box must be delivered to customer in time
and empty box returned back to customer’s home, Disputes are settled by Panch
committee - mini government, Fine workers for being absent, alcoholic on duty. No
dispute has reached police. Services have to be flow charted & blue printed.
Service quality: quality of service is defined as the gap between perception of ‘what the
customer gets’ and expectation of what the customer wants.
S Q (SERVQUAL) = Σ Pi – E j
P – Perception of individual E- Expectation of service quality
This has been further modified by different authors as SERPERF containing only
perceived performance component alone
S Q (SERVPERF) = j=k Σ j=1 Pj K- number of attributes
The various attributes - scale of operation – bank / security, accuracy of record, operating
hours, prompt performance.
Fast food – pure good
Hospital – comfort factor, lab test accuracy, prescription- pharmacy accuracy,
promptness, flexibility (computer payment before admitting patient / not before surgery is
taken up)
General attributes – service quality, speed, flexibility, price
Quality improvement:
1) Dealing with dissatisfied customer: service recovery – refund, free coupons,
telephone from manger / senior official

2) Mystery shopper (employee pretend as customer) American express employ 250

quality control personnel across the world

3) Use of control charts

4) Customers are periodically surveyed. Area of deficiency identified, review polices

& corrective action taken

5) Quality circles

6) Encourage suggestion system

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 7) Kaizen mindset good practices

Cost of quality: Classified into 4 types

1. Appraisal cost: Inspection, testing to ensure product or process is acceptable

2. Prevention cost: all costs to prevent defects, such as cost identify the cause,
implement correction, train personnel, redesign the product

3. Internal failure cost: cost of defects – scrap, rework / repair

4. External failure cost: cost of defect passing through, warranty replacement, orders
lost, handling complaint, repair, loss of customer good will.

Taguchi method

Quality Engineering is an approach that involves combining engineering & statistical

methods to reduce cost and improve quality by optimizing product design &
manufacturing process. Design quality includes performance, (characteristic), features
(secondary characteristics), reliability, durability, service ability, aesthetics.

Managers should continually search for ways to reduce all variability from the target
value / specifications and not content with merely adhering to specified limits.
We have been focusing on process control, (reducing variation etc). Taguchi, Japanese
statistical method is extended to product & process design. In product design – fail safe,
redundancy, ruggedisation of components are taken into account.

Steps involved are

1) Develop product specification

2) Incorporate the specification in the process. For ex: if an accuracy of 5 microns

has to be achieved, we need to select jig boring operation

3) Obtain output that actually surpasses the specification

Taguchi advocates design of experiments as a way of determining the optimum product

or process. But this involves number of iterations with various combinations of variables.
Quality measurements

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There are generic ways in which the quality of output can be measured

1) Defects (work not to specification)

2) Rework
3) Scrap
4) Backlog (Behind schedule)

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