OPERATIONS STRATEGY AND PLANNING

Operations Management
 The management of processes taking place while converting/transforming
inputs into outputs
 Concerned with planning, designing and controlling the process of production
of goods and/or services
 Ensures that business processes are efficient and effective

Definition
 Conversion of land, labour, capital and management inputs into desired
outputs (goods and services)
 The systematic design, direction and control of processes that transform
inputs into services and products for internal, as well as, external customers
Process And Operation
 Process: Any activity or a group of activities that takes one or more inputs,
transforms them, and provides one or more outputs for its customers
 Operation: A group of resources performing all or a part of one or more
processes
Manufacturing vs. Service Organizations
 Tangibility
 Perishability
 Heterogeneity
 Inseparability
 Examples of services may include insurance, banking, healthcare, etc.
Functions Of
Operations Management
 Policy Formulation
 Planning
 Controlling Resources
 Communication
Operations Strategy
 Addresses how the major resources available to a firm should be configured
so as to achieve the desired corporate objectives
 An organization’s operations strategy provides a framework for determining
how it prioritizes and utilizes its resources to gain a competitive advantage in
the marketplace
 Development of a long-term plan for using the major resources of the firm for
a high degree of compatibility between these resources and the firm’s long-
term corporate strategy
 Some of the major long-term issues addressed in operations strategy include:
• How large do we make our facilities?
• What type of process(es) do we install to make the products
or provide services?
• How will our supply chain look like?
• What will be the nature of our workforce?
• How do we ensure quality?
 Vision: A statement that provides long-term direction and motivation for the
organization
 Mission: A statement about the organization’s business scope and methods of
competing
 Corporate Strategy: Overall strategy adopted by the parent corporation
 Strategic Business Unit: Stand-alone business within a conglomerate that
operates like an independent company
 Business Strategy: How a strategic business unit (SBU) addresses the specific
markets it serves and products it provides
  Market Requirements
• Customers’ needs and success criteria
 Environment
• Competition, technological advances, government regulations
 Organizational Competencies
• Core capabilities, organizational culture, strengths and weaknesses
 Mission and Vision
Three Generic Strategies
Suggested by Michael Porter
 Cost Leadership
 Differentiation
 Market Segmentation
Functional Strategies
 Production
 Marketing
 Human Resource
 Information Technology
 Finance
  Competitiveness
 Competitive Priorities
• Low cost
• High quality
• Fast delivery
• Flexibility
• Service
Operational Decision Making

Operations Strategy Adds Value

 Customers want their money’s worth
 From a manager’s point of view, customers actually want more than their
money’s worth
 The more customers receive for their money, the more value they perceive in
the products or services they are purchasing
 Perceived customer value=Total benefits-total
costs

Trends Affecting
Operations Strategy Decisions
 Globalization
• Lowering of trade barriers
• Decreasing transportation costs
 • Emergence of high growth markets
 Technology
• Connectivity
• Speed
• Intangibility
Competitive Priorities
 Cost
 Quality
 Delivery
 Flexibility
 Service
Core Capabilities
 Specific strengths that allow a company to achieve its competitive priorities
 Firms now tend to focus only on their core capabilities
 Sub-contracting
Forecasting
 The art and science of predicting future events
 May involve taking historical data and projecting them into the future
 May be subjective, intuitive or a combination of the two
Forecasting Time Horizons
 Short-range forecast: < 3 months
• Purchase planning, job scheduling, job assignments, etc.
 Medium-range forecast: 3 months > 3 years
• Sales planning, production planning, budgeting, etc.
 Long-range forecast: > 3 years
• New product planning, facility location or expansion, R&D, etc.
Types Of Forecasts
 Economic Forecasts
• Predicting inflation rates, money supplies and other planning indicators
 Technological Forecasts
• Rates of technological progress (resulting in new product development that
require new plants & equipment)
  Demand Forecasts
• Projections of demand for a company’s products or services
Forecasting Approaches
 Qualitative Methods
• Jury of executive opinion
• Delphi method
• Sales force composite
• Consumer market survey
 Quantitative Methods
• Naïve approach
• Moving averages method
• Exponential smoothing
• Trend projection
• Linear regression
Jury Of Executive Opinion
 Group of high level experts or managers
 E.g., Bristol-Meyers Squibb Company uses 220 well-known research scientists
as its jury of expert opinion to get a grasp on future trends in the world of
medical research
Delphi Method
 Decision makers, staff personnel and respondents
 Decision makers usually consist of a group of 5-10 experts who make the
actual forecast
 Staff personnel prepare, distribute, collect and summarize a series of
questionnaires and survey results
Sales Force Composite
 Sales forecasts in different regions
 Review of forecasts
 Combination of forecasts of different regions
Consumer Market Survey
 Inputs from customers or potential customers
 Helps in forecasting as well as improving product design and planning for new
products
  Data can be unrealistic giving rise to incorrect predictions
Quantitative Methods
 Time-series Models
• Naïve approach
• Moving averages method
• Exponential smoothing
• Trend projection
 Associative Model
• Linear regression
Naïve Approach
 Simplest way of forecasting
 This approach is the most cost-effective forecasting model
 Assumes that demand in the next period will be equal to the demand in the
most recent period
Moving Averages Method
 Uses a number of actual historical data values to generate a forecast
 Useful if it is assumed that market demands will stay fairly steady over time
 Moving Avg. = Σ Demand in previous n periods
n
where, n is the number of periods in the moving average
Weighted Moving Average
 Wt. Moving Avg.
= Σ(Wt. for period n)*(Demand in period n)
Σ Weights
Exponential Smoothing
 A sophisticated weighted moving average method
 New forecast = Last period’s forecast +
α(Last period’s actual demand –
Last period’s forecast)
Ft = Ft-1 + α(At-1-Ft-1)
where Ft = new forecast
Ft-1 = previous forecast
 α = smoothing constant (or weight)
At-1 = previous period’s actual demand

 In January, a car dealer predicted February demand for 142 Ford Mustangs.
Actual February demand was 153 autos. Using a smoothing constant of α =
0.20, calculate the demand forecast for the month of March.
Trend Projections
 Fits a trend line to a series of historical data points and then projects the line
into the future
 Least squares method
 Results in a straight line
 ŷ = a + bx
where ŷ = computed value of the variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = independent variable (time)
Linear Regression
 Sale of a product may just not be a factor of time
 Several other factors may also influence the sales of a particular
product/service
 ŷ = a + bx
where ŷ = computed value of the variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = independent variable
PROCESS DESIGN
Process Strategy
• The pattern of decisions made in managing processes so that they will achieve
their competitive priorities
• A process involves the use of an organization’s resources to provide
something of value
• Guides a variety of process decisions, and in turn, is guided by operations
strategy
• Major process decisions include:
 Process Structure
 Customer Involvement
 Resource Flexibility
 Capital Intensity
Major Decisions for
Effective Process Design

• Process Structure: Determines how processes are designed relative to the

kinds of resources needed, how resources are partitioned between them, and
their key characteristics
• Customer Involvement: Refers to the ways in which customers become part
of the process and the extent of their participation
 • Resource flexibility: The ease with which employees and equipment can
handle a wide variety of products, output levels, duties, and functions
• Capital intensity: The mix of equipment and human skills in a process
Process Structure In Services
• An effective service process strategy in one situation can be a poor choice in
another
• Strategy chosen for a fast food restaurant may not work for a five-star
restaurant, where customers seek leisurely dining experience
• A good process strategy for a service process depends first and foremost on
the type and amount of customer contact
• Customer contact is the extent to which the customer is present, is actively
involved, and receives personal attention during the service process
• At this stage, customer’s perceptions about the quality of the service provided
are shaped
Customer Contact
And Process Elements
• Active Contact: The customer is very much part of the creation of the service
and affects the service process itself
• Passive Contact: The customer is not involved in tailoring the process to meet
special needs or in how the process is performed
• Process Complexity: The number and intricacy (complication) of the steps
required to perform the process
• Process Divergence: The extent to which the process is highly customized with
considerable latitude as to how it is performed
• Flexible Flow: The customers, materials or information move in diverse ways,
with the path of one customer or job often crisscrossing the path that the next
one takes
• Line Flow: The customers, materials or information move linearly from one
operation to the next, according to a fixed sequence
Process Structure
In Manufacturing
• Since products differ from services, a different view on process structure is
needed
• Product-Process Matrix
• Synchronizes the product to be manufactured with the manufacturing process
itself
• Volume
• Product customization
• Process characteristics
• A good strategy for a manufacturing process first and foremost depends upon
the volume
• For many manufacturing processes, high product customization means lower
volumes
• Process Choice: The way of structuring the process by organizing resources
around the process or products
• Job Process: A process with the flexibility needed to produce a wide variety of
products in significant quantities
• Batch Process: A process that differs from the job process with respect to
volume, variety and quantity
• Line Process: A process in which the volumes are high and the products are
standardized allowing resources to be organized around particular products
• Continuous Flow Process: The extreme end of high volume standardized
production and rigid line flows, with production not starting and stopping for
long time intervals
Production And
Inventory Strategies
• Make-to-Order Strategy
• Assemble-to-Order Strategy
 Postponement
• Make-to-Stock Strategy
New Service/Product
Development Process

• Competitive priorities help managers develop products and services that

customers want
• Development of new products/services is vital to the long-term survival of the
firm
• New may either mean introducing a brand new concept or implementing
major changes to the existing products/services
I. Design Stage
• Critical stage as it links the creation of new services/products to the corporate
strategy of the firm
• The corporate strategy specifies the long-term objectives of the firm
• Ideas for new offerings are proposed and screened for feasibility and market
worthiness
• The ideas specify:
 how the customer connects with the service or manufacturing firm;
 the benefits and outcomes for the customer; and
 the value of the service/product
• The proposals also specify how the new offering will be delivered
II. Analysis Stage
• Involves critical review of the new offering and how it will be produced to
make sure that:
 it fits the corporate strategy;
 is compatible with regulatory standards;
 presents an acceptable market risk; and
 satisfies the needs of the intended customers
• The resource requirements for the new offering must be examined
• The firm must examine the need to acquire additional resources or expand
the supply chain by forming strategic partnership with other firms
• If the analysis reveals that the new offering has a good market potential and
the firm has the capability, the authorization is given to proceed to the
development stage

III. Development Stage

• Required competitive priorities are used as inputs to the design of the

processes that will be involved in delivering the new offering
• Each activity is designed to meet its required competitive priorities as well as
to add value
• After process designing, the market program can be designed
• Finally, personnel are trained and pilot runs are conducted

Concurrent Engineering
• Used in order to avoid costly mismatches between the design of a new
offering and the capability of the processes
• Brings product engineers, process engineers, marketers, buyers, information
specialists, quality specialists and suppliers together to design a product and
the processes that will meet customer expectations

IV. Full Launch Stage

• Involves coordination of many internal processes as well as those both

upstream and downstream in the supply chain
• Promotion for the new offering starts
• Briefing to sales personnel is done
• Distribution process is activated
• Withdrawal of old products/services
• Post-launch review (inputs from customers)
 Quality Function Deployment

• As described by Dr. Yoki Akao, QFD is a method to:

 transform user demands into design quality;
 deploy the functions forming quality;
 deploy methods for achieving the design quality into subsystems and
component parts, and ultimately to specific elements of the manufacturing
process
• Refers to both:
 determining what will satisfy the customer; and
 translating those customer desires into the target design
• The idea is to capture a rich understanding of customer wants and to identify
alternative process solutions
• Used early in the design process to help determine what will satisfy the
customer and where to deploy quality efforts
• A process for determining customer requirements (customer “wants”) and
translating them into the attributes (the “hows”) that each functional area can
understand and act on

House Of Quality

• One of the tools of QFD

• A graphic technique for defining the relationship between customer desires
and the product (or service)
• By defining this relationship, operations managers can build products and
processes with features desired by customers
• Defining this relationship is the first step in building a world-class production
system
Steps To Building House Of Quality

• Identify customer wants (what do prospective customers want in this

product?)
• Identify how the good/service will satisfy customer wants (identify specific
product characteristics, features, or attributes and show how they will satisfy
customer wants)
• Relate customer wants to product hows (building matrix)
• Identify relationships between the firm’s hows (how do our hows tie
together?)
• Develop importance ratings
• Evaluate competing products (how well do competing products meet
customer wants?)
• Determine the desirable technical attributes, your performance, and the
competitor’s performance against these attributes
House of Quality Example

You’ve been assigned temporarily to a QFD team. The goal of the team is
to develop a new camera design. Build a House of Quality.
 CAPACITY PLANNING
Capacity
 The “throughput” or the number of units a facility can hold, receive, store, or
produce in a period of time
 Determines a large portion of fixed cost
 Also determines if the demand will be satisfied or if facilities will be idle

 If the facility is too large, portions of it will sit idle and add cost to existing
production
 If the facility is too small, customers and perhaps the entire markets are lost
 Therefore, determining facility size, with an objective of achieving high levels
of utilization and a high ROI, is critical

Types Of Planning
Over A Time Horizon
 Long Range Planning (> 1 year)
• Adding facilities/equipment
 Intermediate Range Planning (3 to 18 months)
• Adding equipment, personnel and shifts
 Short Range Planning (up to 3 months)
• Job scheduling, personnel scheduling

Design And Effective Capacity

 Design Capacity
• Maximum theoretical output of a system in a given period under ideal
conditions
• Normally expressed as a rate such as tons of steel that can be produced per
week, per month or per year
• Measuring capacity can either be straightforward or difficult
 Effective Capacity
• Capacity that a firm expects to achieve given the current operating constraints
• Operating at a rate lower than the design capacity
• Resources are not stretched to their limits
• Often lower than the design capacity
 Utilization
• The degree (or extent) to which a resource such as equipment, space or
workforce is currently being used
• Actual output as a percent of design capacity
Utilization = Actual Output/Design Capacity
 Efficiency
• The degree (or extent) to which a resource such as equipment, space or
workforce can effectively be used
• Actual output as a percent of effective capacity
Efficiency = Actual Output/Effective Capacity
 A bakery has a plant for processing breakfast rolls. Last week the facility
produced 1,48,000 rolls. The effective capacity is 1,75, 000 rolls. The
production line operates 7 days a week with three 8-hour shifts per day. The
line was designed to process a nut-filled, cinnamon flavoured, sugar-coated
Deluxe roll at a rate of 1200/hr. Determine the design capacity, utilization, and
efficiency for this plant when producing the Deluxe roll.

Capacity And Strategy

 Sustained profits come from building competitive advantage, not just from a
good financial return on a specific process
 Capacity decisions must be integrated into the organization’s strategy
 Investments made must not be just expenditures but instead, must be able to
put the organization in an advantageous position

Capacity Considerations

 Four special considerations for a good capacity decision:

• Forecast demand accurately
• Understand the technology and capacity increments
• Find the optimum operating level (volume)
• Economies and Diseconomies of scale
• Build for change

Economies Of Scale

 The average unit cost of a service or good can be reduced by increasing its
output rate
• Fixed costs are spread over more units;
• Construction costs are reduced;
• Costs of purchased material are cut; and
• Process advantages are found

Diseconomies Of Scale

 The average cost per unit increases as the size of the facility increases
• Excessive size can bring complexity, loss of focus and inefficiencies
• Too many layers of employees and bureaucracy can cause management to
lose touch with employees and customers
 Managing Demand

 Poor match between the actual demand and the available capacity
 Demand exceeds capacity
• The firm may raise prices
 Capacity exceeds demand
• The firm may reduce prices
 Adjusting to seasonal demand
• Offering products with complementary demand patterns

Tactics For Matching

Capacity To Demand

 Making staffing changes;

 Adjusting equipment and processes, which might include purchasing
additional machinery or selling/leasing out existing equipment;
 Improving methods to increase capacity; and
 Redesigning the product to facilitate more capacity

Capacity Timing And Sizing Strategies

 Sizing capacity cushions;

 Timing and sizing expansion; and
 Linking process capacity and other operating decisions
 Capacity Cushions

 The amount of reserve capacity a process uses to handle sudden increases in

demand or temporary losses of production capacity
 Measures the amount by which the average utilization falls below 100 percent
Capacity cushion = 100% - Average utilization rate
(%)

Timing And Sizing Expansion

 When to adjust capacity levels and by how much?

 If the demand is increasing and the time between increments increases, the
size of the increments must also increase
 Expansionist strategy
 Wait-and-see strategy

Expansionist Strategy

 The expansionist strategy stays ahead of demand and minimizes the chance of
sales lost to insufficient capacity
 Expansion results in economies of scale, helping the firm reduce cost and
compete on price
 The strategy increases the firm’s market share

Wait-And-See Strategy

 Lags behind demand

 In order to meet any shortfalls, it relies on short-term options such as use of
overtime, temporary workers, subcontractors, stock-outs, and the
postponement of preventive maintenance on equipment
 Linking Capacity And Other Decisions

 Capacity decisions should be linked to processes and supply chains throughout

the organization
 Important issues are competitive priorities, quality, and process design

Capacity Planning

 Setting future capacity requirements

 Based on future demand
 Requires two phases:
• Future demand is forecast with traditional models
• The forecast is used to determine capacity requirements and the incremental
size of each addition to capacity

Leading Demand
With Incremental Expansion
Leading Demand
With One Step Expansion

Lagging Demand
With Incremental Expansion

Attempts To Have An Average Capacity That Straddles Demand With

Incremental Expansion
 LOCATION STRATEGIES

Strategic Importance Of Location

 One of the most importance strategic decisions made by companies is where

to locate their operations/facilities
 Location greatly affects both fixed and variable costs
 Has a major impact on the overall risk and profit of the company
 The objective of location strategy is to maximize the benefit of location to a
firm

 Transportation costs (as much as 25%)

 Taxes, wages, raw material costs and rents
 Location options include
• expanding an existing facility rather than moving;
• maintaining current sites while adding another facility elsewhere; or
• closing the existing facility and moving to another location
• Location decisions often depend on the type of business
• For industrial location decisions, the strategy is usually minimizing costs
• For retail and professional service organizations, the strategy focuses on
maximizing revenue
• Warehouse location strategies may be driven by a combination of cost and
speed of delivery
 Location and Costs
• Trade-off between cost and productivity
 Location and Innovation
• Relocating to locations that do not promote innovation is out of question,
even if the cost is low

Factors Affecting Location Decisions

 Selecting a facility location is becoming much more complex due to

globalization
 Reasons for globalization:
• market economies;
• better international communications;
• more rapid and reliable travel and shipping;
• ease of capital flow between countries; and
• high differences in labour costs
 Labour Productivity

 Management must consider the productivity in a particular region

 Combination of productivity and wage rate
 Employees with poor training, poor education, or poor work habits may not
be a good buy even at low wages

Exchange Rates And Currency Risk

 Unfavourable exchange rates may negate any savings

 Values of foreign currencies continually rise and fall
 Can make a location considered excellent in 2000 a disastrous one in 2010

Costs

 Tangible
• Readily identifiable and precisely measured
• Utilities, labour, material, taxes, depreciation, etc.
 Intangible
• Less easily quantified
• Quality of public transportation facilities, quality of education, quality and
attitude of prospective employees

Attitudes

 Attitudes of national, state and local governments toward zoning, pollution

and employment stability
 Attitudes of the workers may also vary from country to country, region to
region, and small town to city
 Some organizations may not choose to relocate their workers when moving to
some other location

Proximity To Markets

 For some firms, it is extremely important to locate near customers

 Drugstores, restaurants, barbers
 For a firm like Coca-Cola, it makes sense to set-up bottling plants in many
cities rather than shipping the glass bottles across cities
 Proximity To Suppliers

 Perishability
• Bakeries, dairy plants and frozen food
 Transportation costs
• Steel producers use coal and iron ore
 Bulk
• Lumber mills

Proximity To Competitors

 Clustering: The location of competing companies near each other, often

because of a critical mass of information, talent, venture capital, or natural
resources
 Software firms in Bangalore-talent resources of bright graduates in scientific
areas
 Fast food restaurants in markets-greater footfalls, more customers

Methods Of Evaluating
Location Alternatives

 Factor-Rating Method
 Locational Break-Even Analysis
 Centre-of-Gravity Method
 Transportation Model

Factor-Rating Method

 Develop a list of relevant factors called critical success factors

 Assign a weight to each factor to reflect its relative importance in the
company’s objectives
 Develop a scale for each factor
 Have management score each location for each factor and total the score for
each location

 Multiply the score by the weights for each factor, using the scale in step 3
 Make a recommendation based on the maximum point score, considering the
results of quantitative approaches as well
 Locational Break-Even Analysis

 Use of cost-volume analysis to make an economic comparison of location

alternatives
 Can be done mathematically or graphically
• Determine the fixed and variable cost for each location
• Plot the costs for each location, with costs on vertical axis and annual volume
on horizontal axis
• Select the location that has the lowest cost

Transportation Model

 The objective of this model is to determine the best pattern of shipments

from several points of supply to several points of demand so as to minimize
total production and transportation costs
 INVENTORY MANAGEMENT

 Stock of materials
 Stored capacity

 One of the most expensive assets of a company

 The objective of inventory management is to strike a balance between
inventory investment and customer service
 A firm can never achieve a low-cost strategy without good inventory
management

Functions Of Inventory

 To “de-couple” or separate various parts of the production process

 To provide a stock of goods that will provide a selection for customers
 To take advantage of quantity discounts
 To hedge against inflation and upward price changes

Types Of Inventory

 Raw material
 Work-in-progress
 Maintenance / repair / operating supplies
 Finished goods

The Material Flow Cycle

 Disadvantages Of Inventory

 Higher costs
– Item cost (if purchased)
– Ordering (or setup) cost
 Costs of forms, clerks’ wages etc.
– Holding (or carrying) cost
 Building lease, insurance, taxes etc.
 Risk of deterioration or obsolescence
 Hides production problems
• Yield / scrap variations
• Unscheduled downtime

Pressures On Inventory

 Pressure for lower inventory

• Inventory investment
• Inventory holding cost
 Pressure for higher inventory
• Customer service
• Other costs related to inventory

Inventory Management

 ABC Analysis: Divides on-hand inventory into three classes on the basis of
annual Amount volume – A, B, and C
• Amount volume = Annual demand x Unit cost
 Policies based on ABC analysis
• Develop class A suppliers more
• Maintain tighter physical control of A items
• Forecast A items more carefully

Feature ABC Analysis VED Analysis

Operational
Focus Financial value criticality

Cost control Ensuring

Primary Use and inventory operational
optimization efficiency

Value and Criticality to

Basis of
consumption operation
Classification
patterns
 Retail or Healthcare or
Application critical
manufacturing
Example industries
sector

Independent vs. Dependent Demand

 Independent Demand: demand for an item is independent of demand for any

other item
• Demand for refrigerators and demand for mobile phones
 Dependent Demand: demand for an item is dependent upon the demand for
some other item
• Demand for refrigerators and demand for refrigerator compressors

Inventory Costs

 Holding cost - associated with holding or “carrying” inventory over time

 Ordering cost - associated with costs of placing order and receiving goods
 Setup cost – costs incurred to prepare a machine or process for fulfilling an
order

Holding (Carrying) Cost

 Obsolescence
 Insurance
 Extra staffing
 Interest
 Damage

Setup Costs

 Clean-up costs
 Re-tooling costs
 Adjustment costs

Inventory Models For

Independent Demand.

 Basic Economic Order Quantity (EOQ) Model

 Quantity Discount Model
 EOQ Model

 Objective: Minimize cost (ordering cost + holding cost)

 Assumptions:
• Known, constant and independent demand
• Known and constant lead time
• Instantaneous receipt of material
• No quantity discounts
• Setup and holding costs are the only variable costs
• No stock-outs

Developing EOQ Model Equations

 Develop an expression for setup or ordering cost

 Develop an expression for holding cost
 Set setup cost equal to holding cost
 Solve the equation for optimal order quantity

1. Annual setup cost = (Number of orders placed per year) x (Setup/order

cost per order) = (D/Q) (S)
2. Annual holding cost = (Average inventory level)x (Holding cost per unit
per year) = (Q/2) (H)
3. Setting setup cost equal to holding cost (D/Q)S = (Q/2)H
2
4. 2DS = Q H

 Total annual cost = Setup (order) cost +Holding cost

TC = (D/Q) S + (Q/2) H

Reorder Point-When To Order?

 Inventory level at which order is placed

 Assumptions:
• A firm will place an order when the inventory level for that particular item
reaches zero; and
• The firm will receive the ordered items immediately
 ROP = (Demand per day) x (Lead time in days)
=dxL
where, d = Annual demand (D)/ No. of working
days
 Quantity Discount Model

 Answers how much to order and when to order

 Allows quantity discounts
• Reduced price when item is purchased in larger quantities
• Other EOQ assumptions apply
 Trade-off is between lower price and increased holding cost

MATERIAL REQUIREMENTS PLANNING

Material Requirements Planning (MRP)* is a systematic, computer-based

approach to manage manufacturing processes. It is used to ensure that the
right materials are available at the right time, in the right quantity, to meet
production schedules and customer demands. MRP focuses on planning
production schedules, inventory control, and procurement of materials.

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### *Key Objectives of MRP:*

1. *Ensure Material Availability:* Ensure that raw materials, components,
and subassemblies are available for production.
2. *Minimize Inventory Costs:* Avoid overstocking or understocking
materials.
3. *Optimize Production Schedules:* Create efficient schedules to meet
customer demands.
4. *Improve Customer Service:* Deliver products on time by aligning
production with demand.

---

### *Inputs of MRP:*

MRP requires three key inputs to function effectively:
1. *Master Production Schedule (MPS):*
- A detailed plan specifying what products need to be manufactured, in
what quantity, and by when.

2. *Bill of Materials (BOM):*

- A comprehensive list of raw materials, components, and assemblies
required to manufacture a product. It includes the quantity and structure
of each item.

3. *Inventory Records:*
- Up-to-date information about the current inventory levels, lead times,
and safety stock requirements.

---
### *Outputs of MRP:*
1. *Planned Orders:*
- Recommendations for when and how much to order or produce.

2. *Order Rescheduling:*
- Suggestions for delaying, expediting, or canceling orders based on
changes in demand or supply.

3. *Material Requirements Reports:*

- Detailed reports outlining raw material needs and availability.

---

### *MRP Process:*

The MRP process involves three main steps:

1. *Determine Gross Requirements:*

- Calculate the total quantity of each material required based on the
production schedule and BOM.

2. *Netting:*
- Determine the net requirements by subtracting the available inventory
and scheduled receipts from the gross requirements.

3. *Generate Action Plan:*

- Create a schedule for procuring or manufacturing the required
materials, ensuring they arrive just in time.

---

### *Benefits of MRP:*

1. *Improved Production Efficiency:*
- Ensures smooth production by eliminating material shortages.

2. *Reduced Inventory Costs:*

- Minimizes excess inventory and associated carrying costs.

3. *Better Planning and Control:*

- Helps manufacturers plan for future demand effectively.

4. *Enhanced Customer Satisfaction:*

- Enables timely delivery of products by aligning production with
customer orders.
5. *Flexibility in Operations:*
- Responds quickly to changes in demand or production schedules.

---

### *Challenges/Limitations of MRP:*

1. *Complexity:*
- Setting up and maintaining an MRP system requires significant effort
and expertise.

2. *Data Dependency:*
- The system relies heavily on accurate and timely data for inventory,
lead times, and demand forecasts.

3. *Initial Cost:*
- High implementation costs can be a barrier for small or medium-sized
businesses.

4. *Rigidity:*
- MRP systems may struggle to adapt quickly to unexpected changes, like
sudden shifts in demand.

### *Applications of MRP:*

1. *Manufacturing Industries:*
- Automotive, electronics, machinery, and textiles.

2. *Assembly Line Production:*

- Complex products like airplanes or appliances.

3. *Custom Production:*
- Tailored products with specific material requirements.

### *MRP vs ERP:*

MRP is often a subset of Enterprise Resource Planning (ERP) systems.
While MRP focuses solely on material planning and inventory control, ERP
integrates various business processes like finance, human resources, and
customer relationship management.

MRP is a powerful tool for businesses striving to balance supply and

demand, reduce costs, and improve operational efficiency. By ensuring
that the right materials are available at the right time, it lays the
foundation for smooth production and satisfied customers.
 QUALITY AND PRODUCTIVITY MANAGEMENT

Quality

 The ability of a product or service to meet customer needs

 A product or a service that is free from defects is said to possess quality
 Non-inferiority or superiority of something
 Also defined as the fitness for purpose

Defining Quality

 According to American Society for Quality, “The totality of features and

characteristics of a product or service that bears on its ability to satisfy stated
or implied needs.”
 The definition of quality can either be user based, product based or based
upon the views of production managers

User Based Definitions

 “Quality lies in the eyes of the beholder”

 To the users and marketing people, higher quality means better performance,
nicer features, and other improvements (sometimes costly)

Quality As Viewed
By Production Managers

 Quality is manufacturing based

 Production managers believe that quality means conforming to standards and
“making it right the first time”

Product Based Quality

 Quality is a precise and measurable variable

 A really good ice-cream will have high levels of butterfat

Costs Of Quality

 The costs of doing things wrong, i.e. the price of non-conformance

 Prevention costs: costs associated with reducing the potential for defects (e.g.
training, quality improvement programs)
 Appraisal costs: costs related to evaluating products, processes, parts and
services (e.g. testing, labs, inspection)

 Internal failure: costs that result from production of defective parts or services
before delivery to customers (e.g. rework, scrap, downtime)
 External costs: costs that occur after delivery of defective parts or services
(e.g. rework, returned goods, lost goodwill)

Six Sigma

 A set of tools and strategies for process improvement

 Developed by Motorola in 1985
 Used in different sectors of the industry
 Seeks to improve the quality of process outputs by identifying and removing
the causes of defects (errors) and minimizing variability in manufacturing and
business processes

 A measure of quality that strives for near perfection

 A disciplined, data-driven approach and methodology for eliminating defects
in any process – from manufacturing to transactional and from product to
service
 A six sigma process is one in which 99.99966% of the products manufactured
are statistically expected to be free of defects (3.4 defects per million)

 E.g., if 1 million passengers pass through the St. Louis Airport with checked
baggage each month, a Six Sigma program for baggage handling will result in
only 3.4 passengers with misplaced luggage
 It is a program designed to reduce defects to help lower costs, save time, and
improve customer satisfaction
 Six Sigma is a comprehensive system - a strategy, a discipline, and a set of
tools – for achieving and sustaining business success
 It is:
• a strategy because it focuses on total customer satisfaction
• a discipline because it follows the formal Six Sigma Improvement Model
known as DMAIC

DMAIC

 Defines the project’s purpose, scope, and outputs and then identifies the
required process information, keeping in mind the customer’s definition of
quality;
 Measures the process and collects data;
 Analyzes the data, ensuring repeatability (the results can be duplicated), and
reproducibility (others get the same result);
 Improves, by modifying or redesigning existing processes and procedures; and
 Controls the new process to make sure that the performance levels are
maintained
 STATISTICAL PROCESS CONTROL
 Application of statistical techniques to determine whether a process is
delivering what customers want
 Tools called control charts used primarily to detect defective
services/products
 Also used to indicate that the process has changed and that services/products
will deviate from their design specifications unless something is done to
correct the situation

 Can be used to inform the management of improved process changes

• A decrease in the average number of complaints per day at a hotel
• A sudden increase in the proportion of defective gear boxes
• An increase in time to process a mortgage application
• An increase in the number of claimants receiving late payment from an
insurance company

*Statistical Quality Control (SQC)* is a scientific method used to monitor,

control, and improve the quality of processes and products in
manufacturing and service industries. It employs statistical techniques to
identify variations in processes, determine whether these variations are
within acceptable limits, and ensure that the final product meets quality
standards.

### *Key Objectives of SQC:*

1. *Quality Improvement:* Enhance product and process quality by
reducing defects.
2. *Process Control:* Ensure processes are stable and predictable.
3. *Cost Reduction:* Minimize waste and rework, leading to cost savings.
4. *Customer Satisfaction:* Deliver consistent quality to meet customer
expectations.

### *Main Components of SQC:*

SQC is broadly classified into three categories:

#### 1. *Descriptive Statistics:*

- Tools like mean, median, mode, range, and standard deviation are used
to summarize and describe data from processes.

#### 2. *Statistical Process Control (SPC):*

- Focuses on monitoring processes during production to ensure they
operate within acceptable limits.
- *Control Charts:* Visual tools to track process performance over time
and detect variations (e.g., X-bar chart, R-chart, P-chart).
- *Types of Variations:*
- *Common Causes:* Inherent to the process; represent normal
variations.
 - *Special Causes:* Indicate problems or changes in the process
requiring correction.

#### 3. *Acceptance Sampling:*

- Involves inspecting a sample of products rather than every item in a
batch to determine if the lot meets quality standards.
- *Types:*
- Single Sampling Plan
- Double Sampling Plan
- Sequential Sampling Plan

### *Steps in Implementing SQC:*

1. *Define Quality Standards:* Establish criteria for acceptable
performance.
2. *Measure Performance:* Collect data on process or product
characteristics.
3. *Analyze Data:* Use statistical tools to interpret data and identify
variations.
4. *Control the Process:* Use SPC charts to monitor and maintain control
over processes.
5. *Improve Quality:* Implement corrective actions to address special
causes of variation.

### *Benefits of SQC:*

1. *Improved Quality:* Reduces defects and ensures product consistency.
2. *Early Problem Detection:* Identifies process issues before they
escalate.
3. *Enhanced Productivity:* Minimizes waste and downtime.
4. *Cost Efficiency:* Reduces costs associated with rework, scrap, and
returns.
5. *Customer Loyalty:* Increases satisfaction and trust in the brand.

### *Applications of SQC:*

1. *Manufacturing:* Monitoring production processes and improving
product quality.
2. *Service Industry:* Ensuring consistent delivery of services (e.g.,
banking, healthcare).
3. *Supply Chain:* Managing quality across the supply chain.
 ### *Limitations of SQC:*
1. Requires skilled personnel to interpret statistical data.
2. Initial setup of quality control systems may be costly.
3. Only provides insights into the process, requiring further action for
improvements.

SQC is an essential tool for modern businesses striving to maintain high-

quality standards and remain competitive in the market.

Variation Of Outputs

 No two products/services are always exactly alike

 Important to minimize variation in outputs
 Nothing can be done to eliminate variation in outputs completely, however,
the management must investigate the causes of variation in order to minimize
it

Performance Measurement

 Can be measured in two ways:

• Measuring variables (product/service characteristics that can be measured)
• Measuring attributes (product/service characteristics that can be quickly
counted for acceptable performance )

Complete Inspection

 Most thorough approach to inspect each service or product at each stage of

the process for quality
 Used when the costs of passing defects to an internal or external customer
outweigh the inspection costs

Sampling

 Sampling Plan: a plan that specifies a sample size, the time between
successive samples, and decision rules that determine when action should be
action
 Sample Size: a quantity of randomly selected observations of process outputs
 Range (R) Chart

 A chart used to monitor process variability

where, R = avg. of several past R values and the central line of the
control chart
D3, D4 = constants that provide three std. deviation limits for
a given sample size

X Bar Chart
 Used to see whether the process is generating output (which is on an average)
consistent with a target value set by the management
 Also used to see whether its current performance is consistent with its past
performance