Production and Operations

Management
PGDM-2018-20
Great Lakes Institute of Management
Gurgaon
S.K.Palhan
 Introduction- Chatushtaya
1. Subject of study –(VISHAYA )
– Production and Operations Management---
Converting inputs into outputs; Product / services
2. Need for the study-(PRAYOJAN )
– To add value to society and to make the organization
competitive
3. How is it related to other areas-(SAMBANDH)
– Related to all products and services and also
functional areas in an organization
4. Prerequisite for study –(ADHIKARI)
– Those managers who want to be effective
 Course outline
• Introduction to operations management
• Operations strategy
• Conversion process
• Forecasting
• Capacity planning strategy
• Location planning
• Layout planning
• Mid-term exam
• Scheduling
• Inventory management
• Quality management
• Modern trends ,Five-S ,JIT ,Theory of Constraints ,Supply
Chain Management
 Course plan
• 3. Prescribed text Book
• Operations Management Theory and Practice
by B. Mahadevan ; Pearson India Education
Services
• Components of Evaluation for the Course
– Quizzes and class tests -25
– Project work -15
– Mid Term Examination -20
– End Term Examination -40
– Total 100
 Operations Management
Functions &Scope
• Operations management is applicable to
– production of goods
– as well as rendering of services
• Operation may be defined as the process of
converting inputs into outputs , thereby
adding value to some entity
 Relevance of
Operations Management
• Operations make an organization competitive
through
– Quality –product performance
– Cost efficiency – low product cost
– Dependability – reliability, timely delivery
– Flexibility – responding rapidly with new products
or changes in output volume
• Japan as an example
 Japan example
• Historically Japan was devasted in 2nd world
war.
• Japan does not have key industrial raw
materials .It did not have technology of its
own for long time
• Japan was known for low quality products in
past
• How Japan has captured the world & US
market in automobile & electronics etc ?
 Operations Management
Functions
• Planning
– Product selection & its design
– Process
– Facility location
– Facility layout& material handling
– Capacity
– forecasting
– Production
 Operations Management
Functions
• Organizing
– Manpower scheduling
– Inputs ; raw materials, equipment ,manpower,
technology etc
– Work study & job design
 Operations Management
Functions
• Controlling
– Production
– Inventory
– Quality
– Maintenance
– cost
 Historical Developments in
Operations Management
• Industrial revolution
–Steam engine—1769----James Watt
–Division of labor –1776---Adam Smith
–Interchangeable parts—1790----Eli
Whitney
 Historical Developments in
Operations Management
• Scientific management
– Principles of scientific management ---
1911—F.W.Taylor

– Time & motion study---1911---Gilbreth

– Scheduling charts-------1912----Henry
Gantt
– Moving assembly line ---1913---Henry Ford
 Historical Developments in
Operations Management
• Human relations
–Hawthorne study---1930----Elton Mayo
–Motivation theories----1940 Maslow
1950Herzberg
1960McGregor
 Historical Developments in
Operations Management
• Operations research
–Linear programming 1947 George
Dantzig
–Digital computer 1951 Remington
Rand
–Simulation ,waiting line
–PERT / CPM,MRP,CIM---1960s
 Historical Developments in
Operations Management
• Quality
– JIT-----------------------------1970
– TQM---------------------------1980
– BPR ----------------------------1990
• Internet revolution
– Internet, WWW--------1990s
– ERP , Supply chain
management----------2000s
– E-commerce ----------2000s
 Operations
A key functional area in an Organization

Finance

Operations

Marketing HRM
 Operations Management
A systems Perspective
Forecasting

PROCESSING
Labour Process & Purchasing & Goods

OUTPUT
Product Inventory
INPUT
Design Control
Material

Capital Operations Material & Services

Planning & Capacity
Control Planning

Feedback
Quality Maintenance Process
Management Management Improvement
Operation as a conversion Process

• Random fluctuations— internal/external

Monitor
output
adjustment
Inputs
Manpower Conversion
Output
materials process
Equipment Goods&
Technology services
management

Compare
Actual v/s
planned
 Conversion Process In
•
Cylinder Manufacture
Random fluctuations— internal/external

Conversion Monitor
process output
adjustment
Inputs
Manpower Cutting
Steel
Output
Valve Bending
Gas
Welding rods Welding cylinders
paint
machines testing
electricity Compare
Technology
management Actual v/s
planned
 Video Insight 1.2
Manufacturing of Mahindra’s XUV 500

Right click on the URL below to open the hyperlink in the web browser…

http://www.youtube.com/watch?v=q5-7ZeORixk
 Operations Management
Challenges-1/4
• Competitive Pressures due to economic reforms
– Falling Prices
• The on road price of a Hyundai Santro has not changed much
between 2000 and 2014
– Shrinking Delivery Quote
• Textile Manufacturers are expected to cut their lead time from
order placement to final delivery down to 2 months
– Build-to-Order Requirements
• Need systems that allows customers to self-configure, customize
and visualize their own version of products & services
 Operations Management
Challenges-2/4
• Growing customer expectations
– Examples: Tariff plans and options provided by mobile
operators, options in passenger car
– Customers tend to demand more and refine their
expectations
– Manufacturing & Service organizations must learn to
respond to these expectations
– Need to develop capabilities to bring newer products and
services faster and yet profitably
 Operations Management
Challenges 3/4
• Today’s businesses are constantly challenged by the
rapid technological advancements
– Example 1: ATMs & Internet Banking. Customers need not visit a bank branch.
Drafts and cheques replaced with electronic payment gateways & fund
transfer mechanisms.
– Example 2: Buying a train ticket. By visiting a Web site like
http://www.irctc.co.in/, a customer can accomplish all tasks pertaining to
ticket booking and cancellation at leisure.
– Example 3: Procurement of goods & services. A manufacturing organization
can procure goods & services by organizing a reverse auction on the Internet.
In 3 to 4 hours, the best price for a component and the supplier willing to
provide the component at a desired quality can be located.
– Example 4: New Product Development. A team of design personnel from
across different geographical locations can participate in new product
development using technological tools.
 Operations Management
Challenges 4/4
• Environmental Issues
– When Government of India announced a scheme for special economic zones
(SEZs), it generated controversies and social concerns.
– Growing industrialization raises concerns regarding the depletion of natural
resources and the waste generated from production systems and end-of-life
products.
– Growing urbanization creates societal problems arising out of scarcity of
available resources and generation of solid wastes.
– Consumption of energy and water in countries like India is on the rise. Such
a situation requires better practices and newer methods of addressing these
requirements using better operational practices.
– Increasingly, firms are under pressure to take responsibility of restoring,
sustaining, and expanding the planet’s ecosystem instead of merely
exploiting it.
• OM practices must address environmental concerns in order
to ensure a sustainable world
 Operations Management
Implications & Priorities
• Relate operations system to Customer/ Market
• Acquire Capabilities to tolerate product proliferation
• Develop systems and procedures that promote
learning
• Develop Green Manufacturing Practices
Operations Management: Trends & Issues
Chapter Highlights
• Operations Management is a systematic approach
to address all issues pertaining to the
transformation process that converts some inputs
into useful output
• Globally, India is emerging as an important
manufacturing base.
• Several recent studies point to emerging
opportunities for Indian manufacturing to grow and
attain a global presence.
• From an operations management perspective, the
notion of a ‘pure product’ and ‘pure service’ is just
the two ends of the spectrum.
– In reality, a vast majority of operations share a
continuum of products and services.
 Product Life Cycle
• Stages

Startup rapid growth maturation decline

Time
 Technology Life Cycle
in Computers
• -

PENTIUM
486
386
VOLUME 286

80 85 90 95 2000
Year
 Strategy
• Mission
– The reason for existence for an organization
• Mission Statement
– States the purpose of an organization
• Goals
– Provide detail and scope of mission
• Strategies
–Plans for achieving organizational goals
• Tactics
– The methods and actions taken to accomplish strategies
 Examples of Operations Strategies
Price Low Cost U.S. first-class postage
Motel-6, Red Roof Inns
Nirma ,Indigo
Quality High-performance design Sony TV
or high quality Consistent Lexus, Cadillac
quality Pepsi, Motorola

Time Rapid delivery Express Mail, Fedex,

On-time delivery One-hour photo, UPS

Flexibility Variety Burger King , Big Bazar

Volume Supermarkets

Service Superior customer Disneyland

service Nordstroms , PVR cinema

Location Convenience Banks, ATMs

 Global Strategy
• Strategic decisions must be made with respect
to globalization
• What works in one country may not work in
another
• Strategies must be changed to account for
these differences
• Other issues
– Political, social, cultural, and economic differences
 Strategy Formulation
• Distinctive competencies
• Environmental scanning
• SWOT
• Order qualifiers
• Order winners
 Strategy Formulation

• Order qualifiers
– Characteristics that customers perceive as
minimum standards of acceptability to be
considered as a potential purchase
• Order winners
– Characteristics of an organization’s goods or
services that cause it to be perceived as better
than the competition
 Product Development
• Technology is an important component for
developing new products or services
• Technology options
– Through own research & development
– Acquire through collaboration
 Components Of Innovation
• Basic research
• Applied research
• Product / process development
• Implementation
– Designing
– Prototype / pilot plant
– Production
– Marketing
 Green Product Design
• Inputs
– Health hazards
– Pollution during production
– Over exploitation of nature /people
 Green Product Design
• Process used
– Hazards in process of manufacture
– By-products
– Solid wastes
• Consumption / use problems
– Health
– Safety
– Pollution in air/ water / earth
 Green Product Design
• Biodegradable products
• Renewable resources
• Ozone depletion
• Green house effect
• Pollutants
– Sulfur,mercury,heavy metals,asbestos,freon
gases,co,nxo etc
 Manufacturing &Services Operation
• Both have conversion process and add value
 Manufacturing &Services Operation
• Manufacture yields a tangible output
– Car
– Soap
– cloth
• Services are intangible
– Medical
– Transportation
– Teaching
– programming
Goods vs Service
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Shelf life High perishable
 Manufacturing & Service
Similarities & Differences
Manufacturing Organizations Service Organizations
Differences
Physical durable product Intangible, perishable product
Output can be inventoried Output can’t be inventoried
Low customer contact High customer contact
Long response time Short response time
Regional, national, Intl. markets Local markets mostly, exceptions in IT SERVICES
Large facilities Small facilities
Capital intensive Labour intensive

Quality easily measured Quality not easily measured

Similarities
Is concerned about quality, productivity & timely response to its customers
Must make choices about capacity, location, layout
Has suppliers to deal with
Has to plan its operations, schedules and resources
Balance capacity with demand by a careful choice of resources
Has to make an estimate of demand
 Manufacturing &Services
THEATRE NURSING
TEACHING
TV
AIR TRAVEL
FAST FOOD

TAILORED
HOUSE
SUIT
NECKTIE
SALT
 Class assignment -20 minutes
• Draw a fully labeled model of operations in a
restaurant like Haldiram that sells & serves
fast food to customers.
• Clearly identify
– Inputs ( all major categories – and specific items )
– Outputs
– Conversion processes used ( > 12 )
– Variables to be monitored (> 7)
– Random factors affecting the operations
SESSION 3,4

Forecasting
 Forecasting
• Forecasting
– A process of estimating future event by carrying
forward the past data.the past data are
systematically combined in a predetermined way
to obtain the estimate of the future
• Prediction
– A process of estimating future based on subjective
consideration other than just the past data
 Need for Forecasting
• For production / Material planning
• Capacity planning /capital budgeting
• Manpower planning for operations
• Administrative planning
• To develop policies
 Need for Forecasting
• To maximize gains from events external to the
organization
• To maximize gains from events which are the
outcome of actions taken by the organization(
e.g advertising campaign)
 Need for Forecasting
• To minimize losses associated with
uncontrollable events external to the
organization(competitor’s strategy or change
in policies )
• To offset the actions of competing
organizations
 Role of Demand Forecasting in
Operations
•
Demand forecast

Facility
&capacity Production Transport
planning schedules logistics

Personnel Personnel Material planning

hiring scheduling

Better forecasting,Reduces uncertainty, decisions and higher

profits
Product Demand fluctuation with
Trend and Seasonality

Seasonal peaks Trend component

Demand for product or service

Actual
demand line

Average demand
over four years
Random
variation
Year Year Year Year
1 2 3 4
 Forms of Forecast Movement
Trend Cycle

Demand
Demand

Random
movement
Time Time

Seasonal
pattern

Demand
Demand

Trend with
seasonal pattern
Time Time

52
 Successful Forecasting= Science + Art

• "Science" implies that the body of the forecasting

knowledge lies on the solid ground of quantitative
forecasting methods and their correct utilization for
various business situations.
• "Art" represents a combination of a decision maker's
experience, logic, and intuition to supplement the
forecasting quantitative analysis.
• Both the science and art of forecasting are essential
in developing accurate forecasts.
• All managers are forecasters!
 Forecast Horizon
For 3-5 years
or more (On
annual basis)

Long-term

Medium- Short-
term term
Upto one year
Upto 3 years (On daily or
(Quarterly or weekly basis)
monthly basis)
Seven Steps in Forecasting
• Determine the use of the forecast

• Select the items to be forecast

• Determine the time horizon of the forecast

• Select the forecasting model(s)

• Gather the data

• Make the forecast

• Validate by measuring error and implement results

 Forecasting Techniques
• Qualitative • Quantitative
– Field sales force – Causal-regression
– Jury of executives – Time series
• Smoothing
– User’s expectations – Moving average
– Delphi method – Single exponential
– Double exponential
• Time series
decomposition
– Additive
– multiplicative
 Delphi Forecasting
• A qualitative technique in which a panel of
experts,working separately & not meeting together,
arrive at a consensus through the summarizing of
ideas by a skilled coordinator
• Examples
– CNC machine tool demand forecast in1980-90
– Demand for CNG in year 2015
– Demand for computers in India
 Delphi Forecasting
• Steps in Delphi technique
– A coordinator poses a question to each expert on a panel
and each expert writes a brief prediction
– The coordinator brings the written replies together ,edits
them and makes a brief summary
– The coordinator writes a new set of question to the
experts on the panel along with a scenario paper and
requests the experts to revise their prediction in light of
the scenario paper
– The written replies are further edited by the coordinator
.The process may be repeated until the coordinator is
satisfied with the over all prediction synthesized from the
experts
 Quantitative Methods
• Simple average
• Simple moving average
• Weighted moving average
• Exponential smoothing
– An averaging method that exponentially decreases the
weightage of old demands
F(t) =α (actual demand of most recent period )+
(1-α) x(demand forecast for the most recent period )
α = smoothing coefficient( its value is more than 0 but
less than 1)
 Simple average
• =average of demands occurring in all the
previous periods
month Demand of a product
Jan 50
Feb 150
March 300
April 500
May 700
June 600
July ?

Forecast based on simple average=(50+150+300+500+700+600)/6

=2300/6 = 383.33
 Simple moving average
• =average of demands occurring in several of
the most recent periods
month Demand of a product
Jan 50
Feb 150
March 300
April 500
May 700
June 600
July ?

Moving average of last three periods=(500+700+600)/3= 600

Moving average of last two periods=(700+600)/= 650
 weighted moving average
• An averaging method that allows for varying
weightage to old demands
month Demand of a product

Jan 50
Feb 150
March 300
April 500
May 700
June 600
July ?

If the weights decided are 0.5,0.3 and0.2 for last three periods
Then weighted Moving average for july
=(600*0.5+700*0.3+500*0.2)= 610
How would you decide the weights to different periods ?
Disadvantages of Moving
Average Methods
 Increasing n makes forecast less sensitive to
changes
 Do not forecast trend well due to the delay
between actual outcome and forecast
 Difficult to trace seasonal and cyclical patterns
 Require much historical data
 Weighted MA may perform better
Exponential Smoothing
Method
 Form of weighted moving average
 Weights decline exponentially

 Most recent data weighted most

 Requires smoothing constant ()

 Ranges from 0 to 1

 Subjectively chosen

 Involves little record keeping of past data

Exponential Smoothing Equations
 Ft = Ft-1 + (At-1 - Ft-1)
= At-1 + (1 - ) Ft-1
 Ft = Forecast value
 At = Actual value

  = Smoothing coefficient

 Ft = At - 1 + (1-)At - 2 + (1- )2·At - 3

+ (1- )3At - 4 + ... + (1- )t-1·A0
Exponential Smoothing Example
You’re organizing annual meeting of the
company. You want to forecast
attendance for 2000 using exponential
smoothing coefficient ( = .10). The
1995 forecast (made in 1994) was 175.
Actual data:
1995 180
1996 168
1997 159
1998 175
1999 190 © 1995 Corel Corp.
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, F t
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 +
1997 159
1998 175
1999 190
2000 NA
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, F t
Time Actual
( α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(
1997 159
1998 175
1999 190
2000 NA
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, Ft
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 -
1997 159
1998 175
1999 190
2000 NA
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, Ft
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 - 175.00)
1997 159
1998 175
1999 190
2000 NA
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, Ft
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 - 175.00) = 175.50
1997 159
1998 175
1999 190
2000 NA
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, F t
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 - 175.00) = 175.50
1997 159 175.50 + .10(168 - 175.50) = 174.75
1998 175
1999 190
2000 NA
Exponential Smoothing
Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, F t
Time Actual
( α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 - 175.00) = 175.50
1997 159 175.50 + .10(168 - 175.50) = 174.75
1998 175 174.75 + .10(159 - 174.75)= 173.18
1999 190
2000 NA
Exponential Smoothing Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, F t
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 - 175.00) = 175.50
1997 159 175.50 + .10(168 - 175.50) = 174.75
1998 175 174.75 + .10(159 - 174.75) = 173.18
1999 190 173.18 + .10(175 - 173.18) = 173.36
2000 NA
Exponential Smoothing Solution
Ft = Ft-1 +  · (At-1 - Ft-1)
Forecast, F t
Time Actual
(α = .10)
1995 180 175.00 (Given)
1996 168 175.00 + .10(180 - 175.00) = 175.50
1997 159 175.50 + .10(168 - 175.50) = 174.75
1998 175 174.75 + .10(159 - 174.75) = 173.18
1999 190 173.18 + .10(175 - 173.18) = 173.36
2000 NA 173.36 + .10(190 - 173.36) = 175.02
Exponential Smoothing
Graph
Sales
190 Actual
180
170 Forecast
160
150
140
93 94 95 96 97 98
Year
Guidelines for Selecting Forecasting
Model

 Smallest forecast error

 Mean square error (MSE)

^
 Mean absolute deviation (MAD)

 No pattern or direction in forecast error

 Error = (Yi - Yi) = (Actual - Forecast)

 Seen in plots of errors over time

How to Choose 
Seek to minimize the Mean Absolute Deviation (MAD)

If: Forecast error = demand - forecast

 forecast errors
Then: MAD 
n
Note that the sum of all weights in exponential
smoothing equals to 1. It is popular because of the
simplicity of data keeping.
 Measuring Forecast Accuracy
• Root Mean Squared Error (MSE)
represents the Standard Deviation of errors in a forecast. This
criterion is most useful if you want to minimize the
occurrence of a major error(s).

n
 (A t - F t ) 2
RMSE = t = 1
n
Exponential Smoothing with Trend
Adjustment

Ft = (Actual demand this period) + (1- )(Forecast

last period+Trend estimate last period)
or
Ft = (At-1) + (1- )Ft-1 + Tt-1

Tt = (Forecast this period - Forecast last period)

+ (1-)(Trend estimate last period
or
Tt = (Ft - Ft-1) + (1- )Tt-1
Exponential Smoothing with
Trend Adjustment

 Ft = exponentially smoothed forecast of the

data series in period t
 Tt = exponentially smoothed trend in period t
 At = actual demand in period t
  = smoothing constant for the average
  = smoothing constant for the trend
Comparison of Forecasts
Exponential smoothing +
40
35 Actual Demand Trend
30
Product Demand

25
20
15
10
5
Exponential smoothing
0
Jan Feb Mar Apr May Jun Jul Aug Sep
Month
 Exponential smoothing
• Exponential smoothing
– An averaging method that exponentially decreases the
weightage of old demands
F(t) =α (actual demand of most recent period )+
(1-α) x(demand forecast for the most recent period )
α = smoothing coefficient( its value is more than 0 but
less than 1)
– Ft = α *Dt-1 + (1- α)Ft-1
– =0.7*300 + (1-.7) *200 =270
 Linear Regression
• Linear regression forecasting is based on
relationship between two variables in the past
data

sales

advertising
 Linear Regression
• Limitations of application
– When there is good correlation between the two
variables
– The relationship is approximately linear in nature
– The forecasting beyond the available data range
may not be very reliable ( because the linear
relationship may not be valid in that region )
 Choice of Forecasting method ?
• What should be the criteria ?
 Forecast Errors
• Forecast error is the numeric difference between
forecasted demand and actual demand
• MAD—mean absolute deviation
= Σ І forecast - actual demand І / n
• BIAS—A forecast error measure which can have
positive & negative value
=Σ( forecast - actual demand) / n
BIAS is + if forecast is greater than actual demand
• When to use MAD or Bias ?
 Important
Ke y Point
• Forecast may not be accurate

• Forecast must be measured for accuracy!

• The most common means of doing so is by

measuring either the mean absolute
deviation or the standard deviation of the
forecast error!

88
 Exponential smoothing
Month Actual demand forecast
Sept 300 200
Oct 350 ?
Nov ?

Ft = α *Dt-1 + (1- α)Ft-1

F(OCT..) =0.7*300 + (1-.7) *200 =270
F(NOV.) =0.7*350 + 0.3*270 =326
 CLASS WORK
A company applied three different methods of
forecasting as tabulated below. Which one is
the best method; give your quantitative
justification
Week Method -A Method B Method C Actual
demand
1 90 80 65 70
2 105 120 70 100
3 95 90 100 100
4 120 111 100 105
5 110 110 105 118
6 115 125 118 114
7 120 115 114 112
A company has option of 3 different methods of
forecasting as tabulated below. Do the forecasting by
method A & B. Which one is the best method; give
your quantitative justification
Wee Method –A Method –B Method C Actual demand
k simple moving Weighted moving
average 2 periods average of 3 periods
with weights-.5 , .3 ,.2

1 65 70

2 70 100

3 100 100

4 100 105

5 105 118

6 118 114

7 114 112
 Session 5-6

Capacity planning
 Capacity Planning
• Capacity –A facility’s maximum productive
capability, usually expressed as volume of
output per period of time
• Capacity planning is the first step when an
organization decides to produce more or a
new product
 Capacity Planning
• Capacity planning decisions
– Assessing existing capacity
– Forecasting capacity needs
 Capacity Planning
• Measuring capacity
– Output
– Input (installed)
 Strategy for modifying capacity
• Temporary capacity changes through
– Inventories
– Backlog
– Employment levels
– Identifying alternative ways to modify the capacity
– Evaluating financial, economical , and
technological capacity alternatives
– Selecting a capacity alternative most suitable to
achieving strategic mission of the organization
 Strategy for modifying capacity
– Work force utilization
– Employee training
– Process design
– Subcontracting
– Maintenance postponement -temporarily
• Long term response-expansion
 Product cost related to facility
capacity
•

•
Cost per unit of output

p1 p2 p3
Output rate
 Economy 0f scale
Economies of Scale and the Learning Curve working

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Diseconomies of Scale start working

Volume
 Strategies for capacity planning
• Capacity leading demand
• Capacity lagging demand
• Capacity averaging
• Multiple step expansion
• Large step expansion
 Capacity leading demand

• capacity expansion
Capacity

Demand curve

•
• Time
 Capacity lagging demand

• capacity expansion
Capacity

Demand curve

•
• Time
 Average Capacity

• capacity expansion
Capacity

Demand curve

•
• Time
 Multiple / single large step

• single step capacity

Capacity

Demand curve

•
• Time
BEPx = Break-even point in units, BEP$ = Break-even point in dollars
P =Price per unit (after all discounts), x = Number of units produced
TR = Total revenue = Px, F = Fixed costs
V = Variable costs, TC = Total costs = F + Vx
Then, break-even point occurs when TR = TC or Px = F+ Vx.
BEPx = F/ (P – V)
 Decision tree analysis applied to
capacity decision
• Decision tree
– -a diagram used to structure and analyze a
decision problem
– A systematic sequential laying out of decision
points, alternatives and chance events
• Chance event
– An event leading potentially to several different
outcomes, only one of which will definitely occur,
decision maker has no control over which
outcome wil occur
 Decision tree analysis -steps
1. Tree diagramming
– Identify all decision points and order in which
they occur. Represented by a small square—
– Identify alternative decisions for each decision
point
– Identify the chance events that can occur after
each decision; represented by a circle----
– Develop a tree diagram showing the sequence of
decisions and chance events
 Decision tree analysis -steps
2. Estimation
– Estimate the probability for each possible
outcome of each chance event
– Estimate the financial consequences of each
possible outcome and decision alternative
3. Evaluation and selection
– Calculate the expected value of each decision
alternatives
– Select the decision alternative offering the most
attractive expected value
 Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a

substantial backlog, and the firm's management is considering
three courses of action:

A) Arrange for subcontracting

B) Construct new facilities
C) Do nothing (no change)

The correct choice depends largely upon demand, which may

be low, medium, or high. By consensus, management
estimates the respective demand probabilities as 0.1, 0.5, and
0.4.
 Example of a Decision Tree Problem (Continued): The Payoff Table

The management also estimates the profits when choosing from

the three alternatives (A, B, and C) under the differing probable
levels of demand. These profits, in thousands of dollars are
presented in the table below:

0.1 0.5 0.4

Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the
three decisions

A
B

C
Example of Decision Tree Problem (Continued): Step 2. Add our possible states of
nature, probabilities, and payoffs

High demand (0.4) $90k

Medium demand (0.5) $50k
Low demand (0.1) $10k

A High demand (0.4) $200k

B Medium demand (0.5) $25k
Low demand (0.1) -$120k
C
High demand (0.4) $60k
Medium demand (0.5) $40k
Low demand (0.1) $20k
Example of Decision Tree Problem (Continued): Step 3. Determine the
expected value of each decision

High demand (0.4) $90k

Medium demand (0.5) $50k
$62k Low demand (0.1) $10k

A
EVA=0.4(90)+0.5(50)+0.1(10)=$62k
 Example of Decision Tree Problem (Continued): Step 4. Make decision

High demand (0.4) $90k

Medium demand (0.5) $50k
$62k Low demand (0.1) $10k

A $80.5k
High demand (0.4) $200k
B Medium demand (0.5) $25k
Low demand (0.1) -$120k
C
High demand (0.4) $60k
$46k Medium demand (0.5) $40k
Low demand (0.1) $20k
Alternative B generates the greatest expected profit, so our choice is
B or to construct a new facility
 Planning Service Capacity vs. Manufacturing Capacity

• Time: Goods can not be stored for later use and

capacity must be available to provide a service
when it is needed

• Location: Service goods must be at the customer

demand point and capacity must be located
near the customer

• Volatility of Demand: Much greater than in

manufacturing
Service Utilization and Service Quality
 Capacity Utilization &
Service Quality

• Best operating point is near 70% of

capacity

• From 70% to 100% of service capacity,

what do you think happens to service
quality?
Session 6,7

Plant location
 Location of facilities
• Effects of location
– Revenues
– Fixed costs
– Variable costs
 Facility Location models
• Factor rating
• Simple median model
• Transportation model
 Factor rating method
• Factor rating is a decision procedure in which
each alternative location is rated according to
each factor relevant to the decision , and each
factor is weighted according to its importance
 Factor rating method
• There nay be many factors which may affect
the choice of location
• Different industries / service facilities may
have different factors of location e.g.
 Location factors
• For Cement industry
important location
factors are
– Proximity to raw
materials
– Availability of power
– Availability of transport
facilities
– Taxes
• For ready made
garments for export ,
important factors are
– Availability of skilled
manpower
– Proximity to airport
– Environment laws
 Factor rating method
• The factors for location of a service facility like
bank or restaurant would be different
 Factor rating method
• For a particular facility all the location factors
are not equally important.
• The factors are rated on a scale of 1 to 5. If
the factor is extremely important then it
would be rated as 5. If the rating is least
important , then it may be rated as 1
 Factor rating method
• After rating of the different location factors,
we identify the alternative locations.
• Each location is rated for the different factor
on a scale of 1 to 10.
 Factor rating method
• If a location is excellent for a factor then we
may rate the location as 9 or 10. If the location
is not good , then it would be rated low.
• Factor rating is multiplied by the location
rating to give the product of rating.
 Factor rating method
• The products of ratings are added for all the
locations separately.
• The location which give the highest product
ratings is chosen as the best location
 Factor rating method steps
1. Identify the factors important for locating a
specific facility e.g. cement plant or LPG
warehouse
2. Rate the identified factors on a scale of 1to5.
1. Most important rated….. 5
2. Least important rated….. 1
 Factor rating method steps
1. Identify alternative locations and rate each
location for different factors on a scale of 1 to
10
1. Best are rated high at 10 or 9
2. Worst are rated low as 1 or 2
 Factor rating method steps
1. Compute Σ(factor rating x location factor),
for all location
2. Higher the computed value, better is the
location
 Cement factory location
Location Factor Udaipur Udaipur Faridabad Faridabad
factor rating Location x*y Location x*y
x rating, y rating
Raw 5 10 5*10=50 2 5*2= 10
material
infrastructur 4 5 4*5= 20 8 4*8=32
e
market 4 3 4*3=12 6 4*6= 24
labour 2 6 2*6= 12 5 2*5= 10
transportati 3 5 3*5= 15 7 3*7= 21
on
incentives 3 8 3*8=24 4 3*4= 12
total 133 109

Conclusion- Udaipur is a better location for cement factory

 Centroid And
Simple Median Model

C-8T
A-5T

D-6T
B-3T
 Plant location
• Which location would you choose if the
capacity planned is
 A,B &C are cost total cost curves for 3 locations
black line is the revenue curve
and if capacity decided is 800 , 2000 , 2500 ,3500
what location would you choose
350000

300000

250000

200000
Rs

A
3
B
150000 2 C

100000
1

50000

0
0 500 1000 1500 2000 2500 3000 3500 4000 4500

Volume of production
 A,B &C are cost total cost curves for 3 locations
black line is the revenue curve
and if capacity decided is 800,2000,2500 ,3500
what location would you choose
350000

300000

250000

200000
Rs

A
3
B
150000 2 C

100000
1

50000

0
0 500 1000 1500 2000 2500 3000 3500 4000 4500

Volume of production
Session 8,9

Layout planning
Planning
 Layout Planning
• Layout deals with physical location of
– Departments
– Work centres
– Equipments
– Raw material inputs
• In the conversion process
 Layout Planning
• Operations may be
– Intermittent (made to order products ,low
volume, general purpose equipments, interrupted
work flow , large product mix)e.g. cars, furniture,
job work
– Continuous operations(standard product, high
volume, special purpose equipments, continuous
product flow ), e.g. oil refinery, textile, paper
 Basic Layouts
• Process oriented
• Product oriented
• Fixed position
• Combination
Cellular Layout / Group Technology

•
• This layout is a combination of the layouts and is
more commonly seen in the industry today.
Group technology or cellular manufacturing has
the advantages of both process layout as well as
line layout. In group technology, parts are
grouped into families. The layout consists of
groups of different machines (called cells) that
are necessary for the production of families of
parts.
layouts
 Process layout
• The arrangement of a facility so that work
centres or departments are grouped together
according to their functional type e.g.
machine shop, welding , painting shop in an
automobile plant.
• Typical process layout examples are
– Hospitals, university, bank
 Process layout
– milling Drilling
Lathes

• Grinding Painting

• Assembly
• receiving
• BY
Process layout
 Product Layout

Lathe Drill#2

Start production Packaging

• Drill#1 Painting FINISH

machine PRODUCTION
 Fixed Position Layout
• Ship yard
• Fly over construction
• Small car repair shop
SHIPYARD LAYOUT
Aero plane Assembly Layout
 Criteria of good layout
• Feasible
• Less movement & cris- cross
• Safe
• Economical , Energy efficient
• Less cycle time for production
• Suitable for quality production
 Relationship chart-Example
• Casting
A
U
• Boring
• Drilling E
X
U
• CNC lathe I
O
• Milling
• Fitting A-absolutely essential
A
• A Assembly E-essential
A I-important
• Inspection O-ordinary
U-unimportant
X-not desirable