BBA – 305 PRODUCTION & OPERATION MANAGEMENT (V-Semester : Indraprastha University)

UNIT - I : Introduction to Operation Management & Forecasting of Demand- – Why study O.M. ; 5 P’s of Production ; Types of Transformation ; Forecasting ; Qualitative & Quantitative Techniques in Forecasting.

Effective management of internal operations is increasingly being recognized as crucial to the growth of the organization. In a situation where substantial investments are made for establishing an industry the need for optimum utilization of the resources becomes extremely important.

1. Historical Evolution of Operations Management:

Production management is more than 200 years old and has passed through various stages from original concept to reach the present level.This was initiated by Adam Smith in 1776 in his book titled “The Wealth of Nation”.He advocated division of labour for following major benefits-(i) Performing work in repetition lead to attaining higher skill and getting speed. (ii) Results in time saving as changing from one activity to other are avoided.(iii) Being engaged in one task specialization acquired leads to improvement in production methods.

Charles Babbage in 1883 in his book titled “The economy of Machinery & Manufacture” agreed to the principals of Adam Smith. He further stressed on the benefits of specializations.

F.W.Taylor known as father of scientific management gave the concept of “Functional Management”, in early nineteenth century. From the concept forwarded by him - method study, work measurement, selection, training, placement & industrial relations were subsequently developed. Taylor also did remarkable work on direct advantage to production management. He envisaged motion study as a complimentary technique of time study.

Frank Gilbreth is considered to be father of work study. He emphasized the importance of relationship between operators output & physical efforts in his book titled “Motion Study” in 1911 and “Applied Motion Study” in 1917.

Henry Ford furnished the concept of mass production & workstation in 1913.

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Henry Gantt introduced a visual diagrammatic tool popularly known as Gantt chart that is in use even today for charting production schedules & machine load schedules.Harrington Emeson emphasized labour efficiency as a basis of payment of wages that were forwarded in his book titled “Efficiency as a basis for Operation & Wages” in 1911 & “The Twelve Principles of Efficiency” in 1917.F.W Haris developed the first economic order quantity model in 1914 which are till popular in inventory control system.

Walter Shewhart introduced the concept of Statistical Quality Control to the industry in 1924. He pioneered the concept of control charts for monitoring the quantity of production processes.

L.H.C. Tippett developed the concept of work sampling to determine the machine and manpower utilization for setting performance standards.

During the later half of nineteenth century lot of major developments including Operation Research (OR) & Value Engineering (VE) revolutionized the concept. OR is the application of scientific methods to study & devise solutions to managerial problems in decision areas of resource allocation, production schedule etc.VE is an organized approach to identify unnecessary costs of products for elimination without affecting the quality, reliability & acceptability.

Application of computer in Industrial Engineering started to handle large data efficiently & quickly. The concept of CPM & PERT were introduced for analysis of large projects. The service sector was also embraced in operation management without restricting only to production facilities. More recently there has been a major thrust on adoption of Japanese system like JIT for production scheduling & inventory problems. Besides TQM is introduced to involve all levels & department of employees.

Nature / Scope / Introduction :

Know the production & operation function as process of value addition. Recognize the distinction between product & services. Understand all organizations as conversion system whether in

manufacturing or service sectors. Identify problems of decision making in operations management. Distinguish functions & requirements of different departments. Facilities required for production & operation.

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Definition: Conversion of inputs to outputs using resources with the purpose of value addition to achieve desired utilities / products with minimum cost.The essential features of the production & operation function are to deploy Men, Machines & Materials to provide goods & services satisfying the needs of the people.

Transformation Process Model : Inputs, Process & Outputs

Adjustment_

Output Goods & ServicesProductivity of Conversion Process=---------=---------------------------------

Conversion

Process

Output Goods Services

Inputs- Land - Labour-CapitalManagement

Comparison Actual Desired

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Input Capital, Men, Machines & Materials The higher the productivity the more efficient is the production system.Another way of looking at the concept of productivity is the amount of waste generated in the system. Typical examples of wastes of the conversion process are:

Idling of the Resources (e.g. materials waiting in the form of inventory in stores, machines waiting to be loaded, job orders awaiting processing, etc.)

Production of Defective Goods & Services (e.g. products not conforming to specifications, wrongly delivered letters, etc.)

Higher conversion costs (e.g. inefficient methods, poor quality of tools, bad conditions of machines, wrong selection of materials, poorly trained operators, ineffective supervision, etc.)

In an efficient production system, wastes should be eliminated or at least reduced.

Every organization or system has a purpose, certain objectives and goals to achieve. It is important that these objectives are clearly identified, properly structured & explicitly stated. In general terms, the objective of an organization may be to produce the goods or services in required quantity & of quality as per schedule and at a minimum cost. Thus quality, quantity and time schedule are the objectives that determine the extent of customer satisfaction. Various objectives can be grouped as – performance objectives and cost objectives.

The performance objectives may include: Efficiency or Productivity as output per unit of input. Effectiveness concerns whether a right set of outputs is being produced.Where efficiency may refer to doing things right, effectiveness may mean doing the right things. Quality is the extent to which a product or service satisfies the

customer needs. The output has to conform to quality specifications laid down prior to acceptance.

Capacity utilization may be defined as the actual capacity achieved against the rated or designed capacity.

Flexibility of producing a combination of outputs which may satisfy variety of customer needs.

Attaining high degree of customer satisfaction on performance front must be coupled with lower cost of the goods or rendering the services. Thus cost minimization is an important parameter.

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The cost objective may include explicit ( visible ) or implicit ( invisible or hidden)

1. Explicit costs Material cost Direct & indirect labour cost Scrap / rework cost Maintenance cost

2. Implicit costs Inventory carrying cost Cost of shortages, lost sales, etc. Cost of delayed deliveries Material handling cost Cost of inspection Cost of dissatisfaction, grievances Downtime cost Opportunity cost

Management can be considered as a process of Planning, Organizing, Monitoring & Control. Production & Operation Management is essentially a function concerning decision making with respect to a production / operation system so as to render the necessary customer satisfaction at lower cost. All the decisions concerning the production system may be divided as:

Periodic decisions which include selection, design and updating of resources, structures, systems & procedures with respect to Products, Processes, Equipment, Workforce, Location, Layout, Wage-payment, Operating & Control systems, etc.

Continual decisions which are required in day to day operation & control of production systems with respect to Setting targets, Scheduling & Monitoring, Inventory control, Quality control, Production control, Cost control, Maintenance, etc.

Another way to group these decisions are: Strategic decisions have a long term impact, influences a larger part of

the system & is difficult to undo once implemented. Some examples are furnished below:

1. Product selection & design: What products or services are to be offered constitute a crucial decision. A wrong choice or poor design of the product may render system operations ineffective & non-competitive. A careful evaluation of product/service alternatives on the multiple objective basis can help in choosing right products.

2. Process selection & planning: Choosing optimal process of conversion systems is an important decision concerning choice of technology, equipment & machines including automation.

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3. Facilities location: It concerns decision regarding location of production system or services. A poor location may spell operating disadvantage on a permanent basis.

4. Facilities layout & material handling: These are concerned with relative location of one department (activity center) with another in order to facilitate material flow, reduce handling cost, delays & congestion, provide good house-keeping, facilitate co-ordination, etc. A detailed layout plan indicates how actual factors of production are to be integrated.

5. Capacity planning: Capacity is the maximum available amount of output over some specified time span. This is decided by projection of market demand of the product selected. Capacity planning includes expansion & contraction of major facilities required in conversion process in case of seasonal demands, economics of multiple shift operation, etc. which is dependent on break even analysis.

Operational decisions are directed to short term planning & control problems.

1. Production planning, scheduling & control : The optimum schedule, sequence of operations, economic batch quantity machine alignment, dispatching priorities, etc.

2. Inventory planning & control : Determination of optimal inventory levels of raw material, goods in process and finished goods stages of the production system. How much to order, when to order and where to order are some typical decision involving inventories.

3. Quality assurance: Quality is an important aspect of production system. Ensure that whatever product or service is generated satisfy the quality requirements of the customer at lowest cost.

4. Work & job design: These are concerning with design of work methods, systems & procedures, methods improvement, elimination of avoidable delays, work measurement, etc.

5. Maintenance & replacement: These involves decisions regarding optimal policies for preventive, scheduled and breakdown maintenance of the machines, repair policies & replacement decisions. The capacity utilization can be improved only through a effective maintenance management.

6. Cost reduction & control: The role of cost reduction is prominent because through effective control of total cost of production, more competitive products & services can be offered.

7. Monitoring & control : In every system, the actual accomplishment of objectives may not be as planned for various reasons. It is therefore very important to monitor the actual

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performance with standard parameters. Following steps can be taken---

Establish standards of performance or output Measure actual performance Compare the difference between actual with standard/planned Take appropriate remedial actions by changing inputs, revising

plans, reallocating priorities, expediting progress, etc.

Need for Review & Up-dating decisions: When we plan or design our production system, the process of planning assumes certain external & internal environment of work. In a dynamic system there may be changes in external parameters which may make previous decisions out of date or even irrelevant. In such a situation, the previous decisions are to reviewed, revised & up-dated.

Five – P’s of Production

PLANT : Locating New Plants ; Adding or Expanding Existing Ones.PEOPLE : Setting or Revising work Standards ; Quality Improvement ;

Learning Curve Analysis.PARTS : Make or Buy decisions ; Vendor Selection.PROCESSES : Technology Evaluation & Selection ; Process Improvement ; Re-engineering.PLANNING & CONTROL : Supply Chain Management ; Material Requirement Planning ; Shop Floor Control ; Warehousing & Control.

Types of Transformation / Production System / Classification of Operations:

It is the process of changing inputs to outputs with value addition at minimum cost meeting customer requirements. However this depends on the type of products, capacity of production, availability of skills, technology, infrastructure, resources, etc. Thus, on the basis design of the system the production system can be grouped into following categories:

Types of Operation

Intermittent Operation Continuous Operation ______________________ _____________________

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Project Job Batch Mass & Flow Process Production Production Production Production Production

Intermittent Production – The goods are manufactured specially to fulfill specific orders made by customers. Here the flow of materials is intermittent & production facilities are flexible enough to handle a wide variety of products.

Features of Intermittent Production – Products are manufactured in quantities as per demand, which can be

discontinuous. All operational stages may not be balanced. Flexible to suit production varieties. Large work in progress. Cost per unit of production is more. Elaborate sequencing & scheduling is required.

Project Production - Where a single assignment of complex nature is undertaken for completion within the given period and cost viz. bridge construction, setting up a factory, dam construction, ship building, etc.

Job Production – Where one or few units of a product are produced specific to customer’s requirement within the given date & price fixed prior to contact.

Batch Production – Where limited quantity of each type of product is authorized for manufacture at a time. New batch is undertaken for production when entire jobs of earlier batch are complete. As for example: Pharmaceutical industry where different types of medicines are manufactured, Printing press, etc.

Continuous Production – involves continuous physical flow of material producing standardized items in large quantities. Before manufacturing sales forecast based on market demand, inventory level, etc. are estimated.

Characteristics of Continuous Production – Standard products are manufactured having large demand throughout the

year. Standardized - inputs, sequence of operations, equipments & tools are

used. Balanced flow of work & minimum material handling. Reduced labour cost & less supervision. Better & uniform quality resulting to less wastage. Higher maintenance cost.

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Mass & Flow Production - Where a production run is conducted to manufacture large number of a product at a time and stacked in warehouse awaiting sales e.g. car assembly, T.V. sets, etc.

Process production : Where production run is conducted continuously for an identical product using same set of machineries. However these plants are shut-down either for preventive or breakdown maintenance viz. power plants, steel plants, fertilizer plants, etc.

Comparison between Intermittent & Continuous Production systems:

1. Manufacturing Costs – The increasing order of costs can be arranged as process, mass, batch & job systems.

2. Capital Investment – The requirement of capital varies according to the nature & capacity of the product. The ascending order of investment are job, batch, mass & process systems.

3. Size of the Plant – In job & batch system same equipment / machine can be used to manufacture different types of items. So the size of the plant is likely to be smaller than mass & process systems where production process is arranged in a predetermined sequence of operations.

4. Flexibility of Production – Job & batch systems using general purpose machines can easily adjust to changes in the requirement of the consumers without incurring any heavy expenditure. But in mass & process systems using special purpose machines we can produce one single product and with change in demand of products the system cannot be adjusted easily.

Sl.No.

Intermittent System Continuous System

1. Wide range of products can be Same product is produced continuously. manufactured. _________________________________________________________________ 2. Items produced against specific Items produced against sales forecast Orders. and stocked. _________________________________________________________________ 3. Flexible Inflexible _________________________________________________________________ 4. Smaller scale Larger scale 5. Planning & control operation Planning & control operation complicated & tedious simple & easy. _________________________________________________________________ 6. Low capital investment. High capital investment.

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7. Higher unit cost of production. Lower unit cost of production. 8. Lower accuracy as products less Higher accuracy as products more standardized. standardized.

Responsibilities of Operation Manager :

The operations manager may be at different levels depending on the type & size of the organization. The responsibilities of operation manager broadly encompass production scheduling within budget & time, manpower allocation including over-time or extra shift necessity, arranging equipment & machineries, quality control to avoid any deviations from specification, identify the reasons of any deviations and rectify them at shortest possible time to minimize rejections, monitor inventory level to eliminate stoppage of production for non- availability of raw-materials & keeping inventory carrying cost within a reasonable figure, co-ordination of production activities with other departments, etc.

Thus the role of operations manager can be broadly defined as follows : - Defines the policies, programs & procedures for achieving the objectives

of the organization including product planning, facilities designing, and using the conversion process.

Co-ordinates the resources & activities to meet production & services targets.

Establishes a structure of roles & flow of information. Assigns authority & responsibility for carrying out the defined goals.

Exercise control by measuring actual outputs & comparing them to planned outputs including quality, quantity, cost, etc.

Maintain good human relations and seek employee participation in attaining the set objectives.

New Product Development: Product Development may be divided into 2 categories – Introduction of new products with the purpose:

Fill the gap in the incomplete range of products viz. intermediate capacity refrigerator.

Utilize the idle resources. Meet new requirements of customers.

Improvement of existing product which is a continuous activity towards:10

Provide new look to the product. Stimulate sales by providing new advantages. Increase market share. Reduced cost of manufacture.

Selection & Design of Products / Services:

Selection of Products / Services are to be carefully done as this being a long-term decision cannot be changed easily. This will depend on number of factors like –

Supply & demand position in the market. Availability of resources – capital, raw materials, etc. Technology, Manpower, Infrastructure, etc. considerations. Detail feasibility / project report indicating cost of production, cash flow,

price structure, break-even point, etc. Facilities location. Capacity planning. Marketing zone.

Product design & service design involve development of detail specification / description of a product / services encompassing research & development.The manufacturing activities can be initiated based on design. In other words the task of manufacturing is to convert the design into physical entities.

Requirement of good design: Function - the product must meet customers expectations & perform

the function for which it is designed. Reliability – products are to be designed to be reliable meeting

customer satisfaction and function normally without failure for the expected duration.

Cost – Good product design must ensure minimum manufacturing cost considering target customer.

Quality – quality of the new design should be high within cost constraints. Quality cost money & excessive quality will increase the cost & reduce the demand whereas inadequate quality will affect the performance leading to complaints and fall in demand.

Maintainability – a good product should be easy to repair with minimum down time.

Simplification – simpler the design of the product the easier it is to produce with lower cost & higher reliability i.e. producible with ease & speed.

Standardization – depend on market forces as variety is essential to meet different market segments.

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Environmental impact – design should be such that the environment is not deteriorated.

Timing – available as per requirement of the customer. Accessibility – can be obtained without difficulty.

Stages in the Design : Conception – the purpose is to translate market requirements into basic

inputs of design. Minimum information to be provided on design specification are requirements of performance – reliability – maintainability – safety - delivery, estimated quantity, price limitations, etc.

Acceptance – the specification may be accepted to proceed to the next stage, modified from a realistic angle.

Execution – the proposal is converted to a physical entity with check on manufacturing feasibility & the different requirements.

Evaluation – this concerns with economic review of the design. Production – the production may be started based on the accepted design

specification.

Forecasting:

A forecast is an estimate of an event which will happen in future. The event may be demand of a product, rainfall, population, etc. The forecast value is not a deterministic quantity as it is only an estimate based on past data related to a particular event. As such proper care should be taken in estimation.In any industrial enterprise, forecasting is the first level of decision activity i.e. the demand of a particular item must be available before taking up other decisions like material planning, scheduling, type of production system to be adopted, etc. by functional managers.The correctness of data is very vital for forecasting which may be obtained from company records, published literature, journal, surveys, internet, etc.

Techniques in Forecasting:Can be classified as Qualitative & Quantitative techniques:

Qualitative techniques used subjective approaches. These are useful when no data is available and are useful for new products. This can be divided to –

1. Delphi Method : In Delphi method several knowledgeable persons are asked to provide subjective estimate of demand or forecast based on their experiences. Based on the opinions of the experts, a consensus will be arrived about the demand of the product.

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The essential precautions are – Panel members must be unknown to each other Questionnaire must be unambiguous

After getting the opinions from the panel members, they are compared for similarity. The panel members whose opinions differ significantly will be asked to reconsider their opinions. So the Delphi method is a repetitive process until the panel converges on a specific value or a range of values as defined by the required accuracy.

2. Nominal Group Technique : A panel of experts working together in a meeting, arrive at a consensus through discussion & ranking of ideas.Unlike Delphi technique, this provides opportunity for discussion among the experts. The keys of this technique are clearly identifying the question, allowing creativity, encouraging discussion & ultimately heading for consensus.

3. Market Surveys : Collect data in a variety of ways like interview, questionnaire, survey & so on to know about the market trend. This is popular for new products.

Quantitative techniques – 1. Simple Moving Average (SMA) Method :

The formula for computing is y + y + + y + y + y y = ---------------------------------------------------------------------- n

Where y = Simple moving average at the end of period t+1 i.e. forecast for period t + 1

y = Actual demand in period t

n = Number of periods included in each average However, equal weights are assigned to all periods in the computation.

2. Weighted Moving Average (WMA) Method :

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Equal weights were assigned to all demands in the computation of the simple moving average. Weighted moving average assigns more weight to some demand values (usually more recent ones) than to others.In the earlier example – assigning 50 % weightage for year 1998, 30 % for year 1997 & 20 % for year 1996: 0.5 X 14 + 0.3 X 12 + 0.2 X 11The forecast for 1999 = -------------------------------------------- = 12.8 0.5 + 0.3 + 0.2

3. Exponential Smoothening :

Here the forecast for next month (new forecast) is based on the forecast of the previous month (old forecast) and actual value of the previous month.New estimate= Old estimate + (Latest demand -- Old estimate of last actual demand) F = F (D -- F ) = F + e

Where F = Smooth average forecast for period t or Forecast for next period demand F = Previous period forecast or Forecast for most recent period. = Smoothing Constant (0 < < 1) D = Previous period demand or Actual demand for most recent period If = 1, Then latest forecast is equal to previous period demand The preferred range of = 0.1 to 0.3

4. Regression Analysis:It determines the relationship between a dependent variable (e.g. demand for an item) and an independent variable (e.g. time).The simplest form of regression model assumes that the dependent variable varies linearly with the independent variable : y = a + bx

y

y = Dependent variable x = Independent variable a = Intercept b = Slope (trend)

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a --------------------------------------------- ______________________________ x

The formula to compute the constants are : x y -- n x y x y a = y – b x ; b = -------------------- where x = --------- ; y = ------ x -- n x n n

n = number of pairs of observations made

In simple regression, only one independent variable is used whereas in multiple regression two or more independent variables are involved.

(Numerical Examples Separately Prepared)

5. Time Series Analysis :This is based on the idea that data relating to past demand can be used to predict future demand.Analysts plot demand data on a time scale, study the plots & look for consistent shapes or patterns such as trend, seasonal or cyclical influences.

Linear

SeasonalDemandUnits

------------------------------------------------------------ Constant

________________________________________ Time Demand Pattern

Forecast Error :

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This is the numeric difference of Forecasted demand & Actual demand. Mean absolute deviation (MAD) is a average forecast error measure without regard to direction. Sum of absolute value of forecast -- Error for all period MAD = ------------------------------------------------------------------------------ Number of periods

(Forecast error) ! (Forecast demand -- Actual demand ) = ------------------------------ = ------------------------------------------- n n

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