1
Course Module
Operation Management
Addis Ababa, Ethiopia
September
, 2021
2
Unit One
An Overview of Operations and Production Management
Contents
1.0
Aims and Objectives
1.1
Introduction
1.2
Definitions
1.3
Operations System
1.4
Operations Function and its Environment
1.5
Operations Decision Making
1.6
Difference between Manufacturing and Serv
ices Operations
1.7
Historical Development of Production Management
1.8
The Role of Operations Personnel
1.9
Productivity Measurement
1.10
Operations Strategy
1.11
Summary
1.12
Answers to Check Your Progress
1.0
AIMS AND OBJECTIVES
After reading this unit, you should be able to do the
following:
•
define operations management
•
describe the operations system
•
outline the difference between manufacturing and service operations
•
calculate productivity ratios (partial, multifactor and total)
•
explain operations strategy.
1.1
INTRODUCTION
Efficient
and effective management of production resources (human resource, raw materials,
etc) is a critical success factor in this global economy. It is a source of strategic growth and
competitiveness in the market. One of the responsible functions to this end is
Operation and
production management which involves the design and control of a system responsible for the
productive use of resources in the development of products or services.
Operations management is the managing of these reproductive resources .It ent
ails the design
and control of systems responsible for the productive use of human resource, raw materials,
equipment and facilities in the development of a product or service. The way how we manage
productive resources is critical to strategic growth and
competitiveness.
To many people, the term production creates an image of factories, machines and assembly
lines. Because the field of production management in the past focused almost exclusively on
manufacturing sector. Heavy emphasis was placed on methods
and techniques that dealt with
3
operating a factory .In recent years, the scope of production management has broadened
considerably . Currently production concepts and techniques are being applied to a wide range
of activities and situations outside of man
ufacturing, that is in services as well as in
manufacturing. In other words, production management is applicable in all types of
organization be it public or private, manufactory or services. Among the service organization
that apply production management
are health care, food service recreation, banking, hotel
management, retail sales, education, transportation and government. Because of this broadened
scope, the field has taken on the name production /operations management (POM) or more
simply Operations
Management (OM), a term that more closely reflects the diverse nature of
activities to which its concepts and techniques are applied .
In this unit, you will learn the meaning of operations management, operations system, the
environment of OM, operations d
ecision making and productivity measurement.
1.2.
DEFINITIONS
There is no one single definition given to the term operations and production management.
The following are few of the definitions given by different writers.
❖
Operation management deals with the prod
uction of goods and services that people
buy and use every day. It is a function that enables organization to achieve their
goals through efficient acquisitions and utilization of resources.
❖
OM refers to the interaction and control of the process that tran
sform input into
finished goods and services.
❖
OM may be defined as the design, operation and improvement of the production
systems that create the firm‟s primary products or services.
❖
OM may be defined as the management of the direct resources required to
produce
the goods and services provided by an organization. It is the derivative of the
organization strategy and mission .
The following model summarize the field of
OM in a broad business context.
Market Place
—
r~
Corporate Strategy
4
Market place
includes the form‟s customers for its products or services which drives the
corporate strategy of the
firm. This strategy is based on the corporate mission and in essence
reflects how the firm plans to use all its resources and functions to gain competitive advantage.
As it is shown in figure 1.1, production management is involved with the selection,
organization, and control of resources to produce the desired product or services. Its most
fundamental characteristics are the processes that convert resources such as raw materials,
labor, buildings, managerial skills, knowledge and machines into outputs
that can be exchanged
for money through the marketing process.
The process used in operation system to transform inputs is to some desired outputs consists the
five P’s
of operation management, that is,
❖
People (the direct and indirect workforces,
❖
Plants (
factories or service branches)
❖
Parts (materials or incase of services, the supplies)
❖
Processes (equipment and steps by which production is accomplished)
❖
Planning and control (procedures and information management uses to operate the
system.
In a net shell,
operations management is concerned with the activities, concepts and techniques
employed is producing goods and services. When emphasis was on the production of goods
alone, the term production management was used to describe these managerial responsibili
ties.
The term “Operations Management” is more applicable today because of the equal emphasis on
Operations Strategy
Finance
strategy
HRM
strategy
Marketing
strategy
5
producing both goods and services.
1.3.
OPERATIONS SYSTEM
6
Operation management is the core of most business organization. It is
responsible for the
creation of an organization is goods or services. Inputs are used to obtain finished goods or
services using one or more transformation process. To ensure that the desired outputs are
obtained , measurements /assessment/evaluation/are
taken at various points in the
transformation process (feedback) and then compared to previously established standards to
determine if corrective action is needed (control). Figure 1.2 given on page 4, shows the
input
-
output relationship clearly.
1.4.
OPERATION FUNCTION AND ITS ENVIRONMENT
In every business organization there are three basic functions, that is, finance, marketing
Fig. 1.2
The conversation process
Value added is the term used to describe the difference between the costs of inputs and the value or price of out
puts. Typical examples are given in the table
1 below.
Table 1. Input transformation output relationship for typical systems
System
Primary
input
Resources
Primary
transformation
Desired output
Hospital
Patient
MDS, nurses medical
supplies, equipment,
food, bed etc
Health
care
(physiological)
Healthy
individuals
Restaurant
Hungry
customer
Food, chief waiters
Well prepared well
served food
Satisfied
customers
Automobile
factory
Sheet steel
engine parts
Tools,
equipment,
workers
Fabrication
and
assembly of car
High
quality
cars
College
University
High school
graduate
Teachers,
books,
class rooms
Imparting
knowledge
and
skills, information
Educated
individuals
Department
Store
Shoppers
Displays, stocks of
goods, sales, clerks
Attract
shoppers
promote products
Sales
to
satisfied
customers
7
production/operation and others such as information system. However, production and
operations function is the foundation
of any business. Today‟s competitive and economic
realities demand companies upgrade their skill in production. Because, no matter how other
functions are effective, if it is difficult to think of success without having a product that can fit
the requirem
ents of customers. Doing so requires knowledge and application of operations
management techniques.
In most organizations, operations is an internal function that is buffered form the external
environment by other organizational functions such as marketing
, finance, human resource
management, purchasing, R and D departments etc. The following figure depicts this
relationship
This interface with other functions buffer the production fun
ction (or technical core) form the
direct environmental influence. This situation has been traditionally seen as desirable for the
following reasons:
1.
Interactio n with the enviro nm e nt could have a distributing manner on the operation
or production proce
ss.
2.
In certain situations maximum efficiency can be achieved by making production
continuous.
3.
The management skill that could be required to carry out successful operation of the
production processes are often different form those required for successful o
peration
of the boundary system of marketing , personnel and other functions.
8
1.5.
OPERATIONS DECISION MAKING
Hundreds of decisions are made every day in the operation activity. Even minor decisions
determine the company‟s success or failure. It ranges form
simple judgmental to complex
analysis which can also involve judgment (past experience & common sense). They involve a
way of blending objective and subjective data to arrive at a choice. The use of quantitative
methods of analysis adds to the objectivity
of such decisions.
The major areas in which operations managers make decisions are:
1.
Strategic decision
•
Product and service plan
•
Competitive priorities (TQM, statistical process,
•
Location, capacity and layout decision
2.
Design decisions
•
Deals with actual
production system
•
Process design technology
•
Job design
3.
Operating Decision
-
deals with operating the factory the system once it is in place. It
includes forecasting, materials management, inventory management, aggregate planning,
scheduling.
1.5.1.
Quantitative App
roaches
Quantitative approaches to problem solving often embody an attempt to obtain
mathematically optimum solutions to managerial problems. The functions are commonly used
quantitative approaches like, Linear programming, Queuing techniques, Inventory mo
dels,
Forecasting techniques, Statistical models.
Operation decision become more complex when: it involves many variables, the variable are
highly interdependent or related, and the data describing the variables are incomplete or
uncertain. The necessity o
f working with incomplete and uncertain data has always been a
problem for decision maker. The following figures depicts the information environment
decisions.
Fig. 1.4 Quantitative meth
ods available to operations manag
ers
How much certainty exists?
9
Framework for Decisions (process)
An analytical and scientific framework for decisions implies several systematic steps for
decision makers. They are:
Step 1.
Define the problem and its parameters
Step 2.
Establish the decision criteria and
set the objective
Step 3.
Formulating a relationship (model) between the parameters and the criteria
Step 4.
Generate alternatives by varying the values of the parameters
Step 5.
Choose the course of action, which most closely satisfies the organization.
Step 6.
Implement the decision and monitor the result
In the following section of this unit you will learn how to apply the quantitative tools in
solving operations related problems. Since it is difficult to illustrate the entire models only
one model, whi
ch can be used under the three situations of decision
-
making are discussed.
A.
Decision Making under Certainty
As it is shown in the figure 1.4 above different approaches to decision making are available to
decision makers. The most widely used decision rule
under the certainty situation is break
-
even analysis (cost
-
profit
-
volume analysis), cost
-
benefit analysis and mathematical
programming. In the next section break
-
even analysis in illustrated.
1.
Breakeven Analysis (BE A)
BEA is a widely used decision making t
ool. It helps to make a decision whether to produce or
not a certain level of output. Breakeven point is a level of output at which, profit is zero or no
loss or no gain. Production or operation level below this point results in a loss, whereas
(All information)
(Some information
)
(No information)
The following are quantitative tools used under the three situations.
Certainty
Risk
uncertainty
Algebra, Breakeven analysis,
Statistical analysis
-
Game theory
Cost benefit analysis,
Quelling theory
-
Decision theory
Calculus, mathematical
Simulation
Programming, linear and
Net Work analysis;
Non linear, integer, dynamic
PERT/CPM
Programming etc.
Decision tree, Utility
theory etc
10
This can be depicted graphically as follows:
level of
output above this point helps the company to enjoy some level of profit. Therefore,
knowing this point helps the company to take appropriate action.
Example 1.
The cost and revenue information of ABC Company are as follows:
Fixed Cost = Br 120,000
Unit Pri
ce = Br. 50
Variable Cost/unit (Vc/unit) = Br. 30
Find the break
-
even point in terms of unit and sales in Birr.
Solution:
BEP (In Birr) = 6,000 X Br. 50 =
Br. 300,000.
Inte
r
preta
ti
on
The company, if it
wants to be profitable, should produce and sale more than 6, 000 units of output. For
example, If the external and internal environment force it to produce only 3,000 units of the product the
company will incur a lose. So it has to take some short
-
term as
well as long term measures to correct the
situation.
B.
Decision making under Risk
Decision Tree
Break Even Point
-
BEP (quantity)
BEP
120,000
50
-
30
6,000
units
Fixed Cost
Price/unit
-
VC/unit
=
120,000
20
11
Decision tree is a schematic diagram used to determine expected value. It shows the alternative
outcomes and independence of choice. It is used in risk situation
where there is only probabilistic
information stated in probabilistic value.
Example.
ABC manufacturing firms wants to meet the excess demand to its products. The firm‟s
management is concerning three alternative courses of action.
A.
Arrange for subcontract
ing
B.
Begin overtime production
C.
Construct new facilities
The correct choice depends largely on future demand, which may be low, medium or high. Management
ranks the respective probabilities as 10%, 50% and 40% to low, medium and high product demand in
the
future respectively. A cost analysis reveals the effect on profit of each alternative under a given
state. This is given in the payoff table below.
Required• Which alte
r
na
t
ive is
t
he viable
c
hoice?
We can use expected monetary value approach and decision tree to answer this
question.
1. Expected monetary value (EMV)
—
Determine the expected payoff of each alternative and
choose the alternative that has the best expected payoff.
EMV (A
1
) =10,000X0.1+0.5X 50,000+0.4X50, 000 =1000+25,000+20,000 =
46,000
EMV (A
2
) =
-
20,000X0.1+60,000X0.5+100,000X0.4 =
-
2,000+30,000+40,000 =
Br. 68,000
EMV (A
3
) = 150,000X0.1+20,000X0.5+200,000X0.4 =
-
15,000+10,000+80,000
= Br.75, 000 (highest expected value)
Decision:
The best alternative is to construct new facilities because it
has the highest expected value.
You can also use decision tree two depict this information to make a decision as shown below.
Pay off table
Alternatives
Profit if Demand is (Birr)
Low (0.1)
Medium (0.5)
High (0.4)
Arrange for sub
contract (A
1
)
10,000
50,000
50,000
Over time (A
2
)
-
20,000
60,000
100,000
New facilities (A
3
)
-
150,000
20,000
20,000
12
r.
10,000
Decision: Construct new facility because it have a better return than other two alternatives
C.
Decision making
under uncertainty
At the opposite extreme is complete uncertainty, no information is available on how likely the various
states of nature are under these condition, four possible decision criteria are :
A.
Minimax regret
-
determine the worst regret for each
alternative , and choose the alternative
with “ best worst”
B.
Maximax
-
determine the best possible payoff and choose the alternative with that payoff.
C.
Laplace
-
determine the average payoff, and choose the alternative with the best average.
D.
Maximin
-
determine the worst possible pay off for each alternative, and then choose the
alternative that has the “ best worst”
Example:
Based on the above pay off table and assuming that there is not probability value of
occurrence of each outcome, determine which
alternative would be chosen under each of these
strategies.
a.
Maximin
b.
Maximax
c.
Laplace
Solution:
13
a)
Maximin criteria
The worst pay off for the alternatives are Br. 10,000 for subcontracting, Br.
-
20,000 for overtime and
Br.
-
150,000 for new facilities and
10,000 is the best out of the worst, hence, the decision is to choose
subcontracting as an alternative using the maximin criteria.
b)
Maximax criteria
The best pay off for each alternative, that is, for Sub contractiing is 50,000, over time Br. 100,000, and
N
ew facilities is Br. 2000,000. The decision is to construct new facility which is an alternative with the
best payoff value i.e., Br. 200,000
C) Laplace criteria
The average payoff of each alternative is;
A
1
= 10,000+50,000+50,000/3 = 36,667 A
2
=
-
20,000 +
60,000 + 100000 /3 = 46,667 A
3 ==
-
150,000 + 20,000 +
200000 / 3 = 23,333
Decision: use overtime to absorb the excess demand.
1.6.
DIFFERENCE BETWEEN MANUFACTURING AND SERVICE OPERATIONS
Operations management may be defined as the design, operations and
improvement of the production
systems that creates the firm‟s primary products or services. The essential difference between the two is
that service is an intangible process, while a goods is the physical output of a process. To put it another
way a servic
e is something that “ If you drop it on your food it won‟t hurt you” Other differences are
that in service, location of the service facility and direct customer involvement in creating the out put
are often essential factors; in goods production, they usua
lly are not.
Manufacturing and service are often similar in terms of what is done but differ in terms of how it is
done. For example, both involve design and operating decision. Most of the difference between
manufacturing and service operations is that ma
nufacturing is product
-
oriented and service is act
oriented. The difference involve following.
1.
Customer Contact
By its very nature, service involves a much higher degree of customer contact than manufacturing does.
The performance of service typically occ
urs at the point of consumption; that is the two often occur
simultaneously. For example surgery requires the presence of the surgeon and the patient. Repairing a
leaky roof must take place where the roof is on the other hand manufacturing, allows a separa
tion
between production and consumption so that manufacturing often occurs in an insolated environment
away form the customer.
2.
Uniformity of inputs
Service operations are subject to more variability of inputs than manufacturing operations are. Each
patient
, each TV repair presents a specific problem that often must be diagnosed before it can be
remedied. Low variability of inputs requirements for manufacturing are generally more uniform than for
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service.
3.
Labor content of Jobs.
Service by its nature is labor
intensive whereas manufacturing is
capital intensive
4.
Uniformity of out put.
Service is variable but manufacturing is low variable or highly
(uniform).
5.
Measurement of productivity.
Productivity measurement in manufacturing is straightforward
and easy but
Service productivity measurement is more difficult because, there are certain
intangible variables in service that are difficult to measure objectively.
In reality most firms are not selling purely services or goods rather manufacturers provide many
services as part of their product and many services often manufacture
the physical product that they
deliver to their customers or consume goods is creating the services. In essence goods are considered as
vehicles for services. To put in an another way:
❖
In services outputs cannot be inventoried while for goods products can
be invigorated
❖
There is extensive customer contact for service white for goods production customer contact is
little
❖
The lead
-
time is short for services (delivered immediately on spot e.g. doctor) while for goods
it is long.
❖
Service quality determined with
difficulty (customer service and customer satisfaction are
difficult to measure.) while product quality can easily be determined.
1.7.
HISTORICAL DEVELOPMENT OF OPERATIONS MANAGEMENT
OM has existed since people start to produce. The concern for efficiency and
the essence of productivity
can be traced back through history to long before. Aside from individual and family concern for
personal or small group productivity, large organizations such as governmental units, armies, and
organized religious institutions w
ere concerned with productivity and employed managerial techniques
that would increase worker output.
Table2. Difference between manufacturing and service operations (Summary)
Characteristic
Manufacturing
Service
Out put
Tangible
Intangible
Contact with customer
Low
High
Uniformity of input
High
Low
Labor content
Low
High
Uniformity of output
High
Low
Measurement of productivity
Easy
Difficult
Storage
Output can be inventoried
Not
Delivery time
Long
lead times
Short lead time
Quality
Objectively determined
Subjectively determined
15
The impetus for change and partial success in throwing off the yoke of feudalism resulted in
developments, which permanently changed the shape and scope o
f governmental, and commercial
organizations. Some of these changes, which shaped the role and importance of production and
operation management and administration are:
1
-
The Five Revolutions
A series of events beginning in the fifteenth century and conti
nuing to the present were, in great part,
responsible for shaping our modern world. These events are often referred to as a series of
“revolutions”
which are highly interrelated. They were not violent reactions to the social order yet they
deserve to be ca
lled revolutions because they represented marked changes from the past. These
revolutions include:
a)
The Commercial Revolution
Beginning in the 15
th
century, represented a change in the volume and variety of trade as well as the
length and extension of trade
routes. These changes brought by a number of factors including;
■
Population growth
■
The consolidation of populations in to countries or nation
-
states
■
The availability of economic surpluses, which allowed population concentration.
■
Political, military and
technological factors including the increased power of central
governments were applied to consolidating governmental control at home, building empires
abroad designing larger and more seaworthy ships, and developing navigational aids to
support the expans
ion of sea trade routes.
b)
The agricultural Revolution
The existence of cities depended on the existence of economic surplus to feed, to wear cloth, and
provide shelter for nonagricultural urban population. The revolutionary improvements in
agriculture inclu
ded selected breeding of livestock, crop rotation, and seed selection to produce
larger crops.
c)
The Scientific Revolution
The Scientific Revolution was an intellectual awakening, which began with the questions left
undressed during and immediately after the
dark ages. It was reasoned that if the physical world was
governed by rational and explainable laws, then problems faced by society including economic
ones, might also be explained and managed. The scientific revolution marked the beginning of a
new era o
f thought and brought new views on science, mathematics, anatomy and philosophy.
d)
The Religious
-
political revolution
The religious political revolutions known as reformation, marked the end of church dominance over
European society and the emergence of
political institutions. Though greatly influenced of church
doctrine, the new political arrangements did not act solely as an agency of the church.
e)
The industrial revolution
Began in England about the middle of the 18
th
c, it was distinguished by the concen
tration of
16
workers, materials, equipments, and management in factory buildings constructed specifically for
production, centralized control of resources; the clear distinction between employer and worker and
the employment of central mechanical power. It d
ominantly transferred agrarian society into a
commercial
-
industrial one.
2.
Scientific Management /1911/
The advent of scientific management around the tern of the 20
th
century is probably the major historical
landmark for the field. F.W. Taylor was known as
a “father of scientific management” and his
philosophy was:
-
Scientific laws govern how much a worker can produce per day. /Time study/
-
It is the function of management to discover and use these laws in the operation of productive
systems, and
-
It is the
function of the worker to carry out management‟s wishes with out question.
Herry L. Gantts (scheduling and motion study), industrial psychology and the Gelberth‟s has also
contributed towards the development of scientific management that was much concerned
about
productivity of factories.
3.
Moving assembly line
The year 1931 introduced the machine age‟s greatest technological innovations_ the moving assembly
line for the manufacture of ford cars. Each performing a small unit of work and the chassis being
move
d. Mechanically the average labor time per chassis was drastically reduced (to 93 minutes from 12
1/2 hours) this brings labor specialization.
4.
Howthorne Studies
It was conducted in 1930‟s supervised by Elton Mayo. The experiment was designed to study the e
ffects
of certain environmental changes on assembly workers out put at the Western Electric Plant in
Hawthorne. Conditions in the factory like illumination have implications for work design and
motivation. This led to the establishment of personnel managem
ent and Human Relations Departments
in the factories.
5.
Operations Research
World War II with its complex problems of logistics control and weapons systems design, provided the
impetus for the development of the inter
-
disciplinary, mathematically oriented f
ield of operations
research (OR). OR brings practitioners in diverse fields as mathematics, psychology and economics
together. They form a team to structure and analyze a problem in quantitative terms so that they can
obtain a mathematically optimal soluti
on.
Operations research (Management Science) now provide may of the quantitative tools used in OM as
well as other business disciplines.
6.
Operations Management’s Emergence as a field
In the late 1950s and early 1960s, scholars began to deal specifically
with operations management as
opposed to industrial engineering and operation research. May writers noted the commonality of
17
problems faced by all productive systems and emphasized the importance of viewing production
operations as a system. They also stre
ssed the use of waiting line theory, simulation, linear
programming and the like.
7.
Computers and the Materials Requirement Planning (MRP) Crusade.
The major development of the 1970s was the broad use of computers in solving operations problems.
The big brea
kthrough was the application of materials requirements planning (MRP) to production
control. This approach ties together in a computer program all the parts that go into complicated
products, this program enables production planners to quickly adjust produ
ction schedules and
inventory purchases to meet changing demands or final products.
8.
JIT, TQC and Factory Automation
The 1980s saw a revolution in the management philosophies and the technologies by which production
is carried out. Just
-
in
-
time (JIT) produc
tion is the major breakthrough in manufacturing philosophy. JIT
is an integrated set of activities designed to achieve high
-
volume production using minimal inventories
of parts that arrive at the work station just in time.
Coupled with TQC (total quality
control), which aggressively seeks to eliminate causes of production
defects, JIT is now the corner stone in many manufacturer‟s practice. As profound as JIT‟s impact has
been, factory automation in its various forms promises to have even greater impact on
operations
management in the coming decades.
9.
Manufacturing Strategy Paradigms
Developed during late 1970s and early 1980s emphasized how manufacturing executives could use their
factories capabilities as strategic competitive weapons. The paradigm identif
ies how the five P‟s of
operations management can be analyzed as strategic and tactical decision variables. Because a factory
cannot excel on all performance measures, its management must derive a focused strategy.
Creating a focused factory that does a li
mited set of tasks extremely well. This raised the need for
making trade
-
offs among such performance measures as low cost, high quality, and high flexibility in
designing and managing factories.
10.
Service quality and Productivity
This is about how to deliver
high
-
volume of standardized services. McDonald‟s operating
system is successful and stands as a reference for a unique approach to quality and productivity.
11.
Total quality management (TQM) and quality certification.
TQM, though practiced by many
companies in the 1980‟s, it become truly pervasive in the 1990s.
The ISO 9000 certification standards put forth by the International Organization for Standardization
(ISO) now play a major role in setting quality standards for global manufacturers in parti
cular.
12.
Other recent trends.
This includes global competition; increasing emphasis on quality;
integrating technology in to production systems; increasing worker involvement in problem
solving and decision making, increasing emphasis on flexibility and time
reduction; increasing
attention to environmental issues; supply chain management; and lean production.
18
12. Business Process Reengineering
This approach seeks to make revolutionary changes as opposed to evolutionary changes. It does this by
taking a fresh
look at what the organization is trying to do in all its business processes, and then
eliminating non
-
value
-
added steps and computerizing the remaining ones to achieve the desire out
come.
1.8.
THE ROLE OF OPERATION MANAGEMENT EXECUTIVES
The issues facing OM
executives are many and interrelated. From operations strategies view, the roles
can be summarized as cost (Economy), quantity, speed of delivery, and flexibility.
The production phase of the overall management system begins at the point at which capital i
s to be
converted into physical or operational resources and ends at the point at which those resources have
been converted into goods or services.
In this process the major concern of operation personnel includes:
1.
To produce a good or service in quantitie
s and at times which will satisfy the demand item
(Quantity)
, concerned personnel will have to engage in production planning and control. This requires
forecasting the future demand for a product, translate the future demand for various operation resources
,
procure the required operation resources, and utilize those resources to produce the product.
The above step include techniques of sales forecasting, learning curve, MRP, inventory, control,
purchasing, facility lay out, material handling, work Schedulin
g, plant location, operation control and
the like.
2.
To produce a good or service at the lowest possible cost
(economy
), concerned personnel will have
to carryout:
❖
Ascertain the most economical work methods
❖
Established work standards
❖
Motivate employees to ad
here to efficient work methods and to satisfy to existing work
standard.
The techniques to be employed include method analysis, process charts, safety, maintenance, time
study, work sampling, standard date, job enrichment, non financial and wage
incentives, (such as profit
sharing).
3.
To produce a good or service of satisfactory quality (
Quality)
concerned personnel have to work the
following:
❖
Develop appropriate product specification
❖
Maintain conditions, which are conducive to satisfactory quality.
❖
Introduce inspection procedures, which will reveal the quality of past out, put.
❖
Apply methods which are designed to control the quality of future output
Techniques involved here include:
❖
Product design
19
❖
Inspection methods, types of inspections
❖
Acceptance
sampling
❖
Sampling by attributes and by variables
❖
Control charts for attributes and variables.
4.
Speed of delivery
. The ability of a firm and provide dependable and fast delivery. This allows the
firm to charge a premium price for its product.
5.
Flexibility.
The ability of a company to offer a wide variety of products to its customers. It‟s a
measure of how fast a company can convert its processes from making an old line of products to
producing a new product line.
6.
Speed up the time
it takes to get new product
s is to production or integration of all activities to
avoid the common „silo effect‟.
7.
Making global production networks.
Global production network decisions involve:
-
Assuring that components produced abroad meet design and quality requirements. (This enta
ils
carefully selection of suppliers and anticipating local labor and government actions)
-
managing the logistics of shipping and receiving parts
-
Developing the information system to track and monitor the first two.
8.
Developing and integrating new process te
chnologies into existing production systems.
9.
Achieving high quality quickly and keeping it up in the face of restructuring.
Companies do
not have the luxury of the long development periods to achieve quality party with the
competition.
10.
Managing a diverse w
orkforce,
with different multiple cultures and multiple languages
11.
Confirming to environmental constraints ethical standards and government regulation.
-
issues of social responsibility affect all parts of the organization, but
-
operations is often the focal
point because it is the prime user of physical resources that may
lead to pollution and other safety hazards.
1.9.
PRODUCTIVITY MEASUREMENT
Productivity is a common measure of how well a country, industry or business unit is using its resources
(or factors of p
roduction). In its broadest sense, productivity is defined as:
Outputs
Productivity =
-----
-
—
Input
To increase productivity, we want to make this ratio of output to inputs as large as practical.
Productivity is what we call a relative measure. In other words,
to be meaningful, it needs to be
compared with something else. Comparison can be made with similar operations within its industry, or
it can measure productivity over time within the same operation.
Productivity may be expressed as
partial measures, multif
actor measures,
or
total measures.
If we are
concerned with the ratio of output to a single input; we have a partial productivity measure. If we want
to look at the ratio of out put to a group of inputs (but not all inputs), we have a manufacture
20
productiv
ity measure. If we want to express the ratio of all outputs to all inputs, we have a total factory
measure of productivity that might be used to describe the productivity that might be used to describe
the productivity of an entire organization or even a n
ation.
„
. , „,
Output
Output
Output
Output
Partial Measure =
or
-
or
-
■ or
-
Labor
Capital
Material
energy
Output
Output
Multifactor Measure =
or ■
L + K + E L + K + Rm
^
„,
Output
Goods and service produced
Total Measure =
or ■
Inputs
All resource used
Where: L = Labor K = Capital E =
Energy Rm = Raw materials
Example 1
ABC Co. produces apple pies sold to supermarkets has been able to work with his current
equipment, to produce 24 pies per bushel of apples. He currently purchases 100 bushel per day and e
ach
gallon requires 3 labor
-
hours to process. He believes that he can hire a professional food broker, who
can buy better
-
quality apple at the same cost. If this is the case he can increase his production to 26
pies per bushel. This labor hour will have
the impact on productivity (pies labor hours) if the food
broker is hired. The professional food broker works 8 hours per day. Calculate:
1.
The current labor productivity
2.
Labor productivity with food broker
Solution:
24 pies x 100 bushel
Current Labor
productivity =
100 bushel x 3 hour =
8
pies /labor hour
26 pies x 100 bushel
Labor productivity with food broker =
(100 bushel x 3 hrs) + 8 hours
=
2600
308
= S.M
=
pks
=
Zlaho£
=
Lours
Using last year (i.e. 8 as a base, the increase is 5.5%= 8.44/8 =1.055 or
5.5% increase over last year.
Example 2
A) Determine the productivity of four workers who installed 640 square yards of carpeting
in 8 hours per day.
B) Calculate the productivity of a machine that produces 60 units in two hours
Solution:
Yards of carpet i
nstalled
Productivity =
Labor hours worked
_
640 yards
21
4 workers x 8 hours
=
640 32
=
20 vards/hour
Outputs (in
units)
Productivity =
Production time
_ 60 units 2 hours
=
30 pieces /hour
Example 3
A company that produces fruits and vegetable is able to
produce 400 cases of canned
peaches in one half hour with two workers. What is labor productivity?
Solution
Labor productivity =
Quantity produced
Labor hours
=
400 cases
2workers X1/2 hour /workers =
400
cases per hour
Examples 4
A wrapping paper Company
produced 2000 rolls of paper one day at a standard price of Br.
1 per roll. Labor cost was Br. 160, material cost was Br. 50, and overhead was Br. 320. Determine the
(multifactor and total) productivity.
Solution
Multifactor productivity =
quantity produce
d @standard price
Labor cost + material cost + overheads
=
2,000 rolls X Br. 1 /roll
Br. 160
+ Br 50 + 320
=
2000
530
= 3.77
Improving Productivity
Factors Affecting Productivity and Improving
• Numerous factors affect productivity. Among them are methods,
capital, quality,
technology, and management.
22
There are a number of key steps that a company or a department can take toward improving
productivity:
1.
Develop productivity measures for all operations
2.
Look at the system as a whole in deciding which
operations 40 concentrate on; it is overall
productivity that is important.
3.
Develop methods for achieving productivity improvements
4.
Establish reasonable goals for improvement.
5.
Make it clear that management supports and encourage productivity improvement.
6.
M
easure improvements, and publicize then
1.10
COMPETITIVENESS AND OPERATIONS STRATEGY
Companies must be competitive to sell their goods and services in the market place. Competitiveness is
an important factor in determining whether a company prospers, barely get
s by, or fails. Business
organizations compete with one another in variety of ways i.e. by identifying operating priorities.
Scholars have identifying operating priorities. A few basic operations priorities include:
1.
Cost:
-
within every industry, there is u
sually a segment of the market that buys strictly on the
basis of low cost. To successfully compete in this niche, a firm must be the low
-
cast producer,
but even doing this not always guarantee profitability and success.
2.
Product quality and process
reliability
.
• Product quality, Process quality
3.
Delivery speed (time
)
4.
Flexibility:
-
ability
to respond to changes. The better a company as able to respond to changes,
the greater the competitive education over another company that is not able to respond.
5.
New product introduction speed
etc.
Over the years, the top three priorities have included conformance quality (ability to build a product to
designed specifications), product reliability, and delivery dependability, low price, and speedy new
product intro
duction.
Operations Strategy
Operations strategy is concerned with setting broad policies and plans for using the resources of the firm
to best support the firm‟s long
-
term competitive strategy. It has a long
-
term impact on the nature and
characteristics o
f the organization. In large measure, strategies affect the ability of and organization to
compete.
Strategies
:
-
are plans for achieving goals. The organization strategy provides the overall direction for
the organization. It is broad in scope, covering
the entire organization. Operations strategy is narrower
in scope, dealing primarily with the operations aspect of the organization.
Operations Strategy relates to products, processes, methods, operating resources quality, costs, lead
times, and scheduling
.
23
New Strategies:
Traditional strategies of business organizations have tended to emphasize cost minimization or product
differentiation. While not abandoning these strategies, many organizations are adopting new strategies that are
based on
quality and/or
time.
1.
Time Based Strategies
This strategy focus on reducing the time required to accomplish various activities (such as the time taken to
develop new products or services and to market them, the time needed to respond to a change in customer
demand, or th
e time needed to deliver a product or perform a service). By doing so, organizations seek to improve
service to the customer, and to gain a competitive advantage over rivals who take more time to accomplish the
same tasks.
The rational is that by reducing
time; costs are generally less, productivity is higher, quality tends to be higher,
product innovations appear on the market earlier, and customer services improved.
Some of the areas in which organizations have achieved time reduction are:
•
Planning time
•
Product/service design time
•
Processing time
•
Change over time
•
Delivery time
•
Response time for complaints.
2.
Quality
-
based Strategies
(will be discussed in later chapters)
This strategy focuses on satisfying the customer by integrating quality in to all phases
of the organization. This
includes not only the final product or service that is provided to the customer, but also the processes related to the
design, production, or service after the sale.
Check Your Progress Exercise
1.
Define the term operations managem
ent and discuss briefly the transformation processes of operations
management.
2.
Operations management is the phenomenon of the 20
th
century. Do you agree? Why or why not? In your
answer discuss briefly the evolution of operations management.
3.
Compare and con
trast manufacturing operation and service operation.
4.
What are the common operations strategies?
5.
Compute the multifactor productivity measure for each of the weeks shown. What do the productivity
figures suggest? The standard price is Br. 140 per unit. Assu
me 40
-
hour weeks and an hourly wage of
Br. 12. Overhead is 1.5 times weekly labor cost. Material cost is Br. 6 per pound. (Hint: use raw
materials, labor and overhead cost in your calculation by assuming that there are also other resources)
Week
Output
(units)
Workers
Material (Ibs
)
24
6.
ABC Co. is a manufacturing firm, which starts operation in the year 1996 E.C to produce and sale
soft a drink. It incurs a set up cost of Br. 500,000
for the acquisition of machines and other
necessary equipments. The marketing and finance managers has estimated the cost and set price of
the soft dirk. Thus, price per unit is decided to be Br. 3 and variable cost per bottle of drink is Br
1.75.
Required
1.
Determine the break
-
even quantity
2.
Determine the break
-
even sales
3.
If the company wants to generate a profit of Br.100, 000 what will be the sales level?
1.11
SUMMARY
This unit has provided you an overview of operations management. The main points covered in thi
s unit
are as below.
•
Operations management refers to the direction and control of the process that transform inputs
into finished goods and services. This function is essential to systems producing goods and
services in both profits and non for profit orga
nizations.
•
Types of decisions with which operations managers are involved include design and operating
decisions. Design decisions relate to capacity planning, product design, process design, layout
of facilities, and selecting locations for facilities. Op
erating decisions relate to quality assurance,
scheduling, inventory management, and project management.
•
This unit also provides a brief discussion of the historical evolution of production or operations
management and recent trends in the field. Some of t
hese changes that shaped the role and
importance of production/operations management are: the different revolutions that took place
at different time in history of mankind; scientific management, Hawthorne studies, operations
research, JIT, TQM etc.
•
Operations require utilization of a variety of skills and technologies. They play a key, role in
determining productivity, which is a prime determinant of productivity. Productivity is a ratio of
output to input or it is given by the formula productivity =
output/Input.
1.12
ANSWER TO CHECK YOUR PROGRESS EXERCISE
1.
Refer section 1.2
2.
Refer section 1.7
3.
Refer section 1.6
4.
Refer section 1.10
1
300
6
45
2
338
7
46
3
322
7
46
4
354
8
48
5
222
5
40
6
265
6
42
25
5.
You can state the output and input in different ways; that is
Multifactor productivity =
Output
Labor + Material + Overhead costs
Output (for week one) = 300 units@ Br. 140
Input (week one):
Labor = 6 workers x Br. 12/hour x 40 hours =
Material = 45 pound x Br. 6 per pound Overhead = 1.5
x labour cost
= 1.5 x 6 x Br. 12/hour x 40 hours
300 units x 140 Br.
Multifactor productivity fo
r week 1 =
2880Br. + 270Br. + 2880 x 1.5Br. or
_
300 units
2880 + 270 + 2880 x1.5 Br.
Do the same thing to the remaining weeks as well.
6.
A Break
-
even revenue = 2,000,000 bottles
B.
Break
-
even revenue = 2,000,000 bottles * Br. 3
C.
Sales in birr = Br. 2,400,000
UNIT 2: PRODUCT DESIGN AND PROCESS SELECTION
Contents
2.0
Aims and Objectives
2.1
Introduction
2.2
Factors Affecting Product Design
2.3
The Structure/ Process of Product Design
2.4
Other Design Considerations
2.5
Process Planning and Design
2.5.1
Types of Process
2.5.2
Types of Process Flow
and Structure
2.5.3
Process Alternative Decision
2.6
Service Design
2.7
Summary
2.8
Answers to Check Your Progress
2.0
AIMS AND OBJECTIVES
The aim of this unit is to introduce you about the process of product design and the alternative operations
processes.
After studying this
unit, you should be able to:
•
outline and briefly describe the steps of product design and development
•
describe the alternative operations processes
•
understand the factors that affect process design and selection.
26
2.1
INTRODUCTION
The essence of any organizatio
n is the products or services it offers. There is an obvious link between the design
of those products or services and the success of the organization that have well
-
designed products or services.
Firms that have well
-
designed products or services are more
likely to realize their goals than those with poorly
designed products or services. Hence, organizations have a vital stake in a good product and service design. This
unit presents the major aspects of product and services design and how the process to pr
oduce them is designed
and selected.
Product and service design plays a strategic role in the degree to which an organization is able to achieve its
goals. It is a major factor in customer satisfaction, product and service quality, and production costs (pr
ice).
Because product design is concerned with the functional (use) and aesthetic requirements necessary to meet the
demands of the market place and at the sometime achieve an acceptable rate of return. Decisions related to
product designs have far reachin
g effect on the future of an organization. Therefore, great care must be taken
while designing a product/service.
In a competitive environment getting new or improved products or services to the market a head of competitors
gives an organization a competitive advantage that can lead to increased profits as well increased market share
and can create an image of the org
anization as a leader.
2.2.
FACTORS AFFECTING PRODUCT DESIGN
Decision pertaining to the final product design will influence or determine; the firm‟s image profitability,
opportunities and the problems it may face in the future.
The product chosen for the firm‟s
market will also determine:
-
The need for capital
-
The size and composition of the organizational structure
-
The type of quantity of processing equipments
-
The type quantity and quality of material and supply used
-
The size and skill requirements of its work
force.
Product design can require the input of different functional managers. The following discussion will
help you to understand the decisions and roles of the different managers pertaining to product design.
1.
Product design
-
a production manager’s viewp
oint
The production manager makes decision concerning process employed, quality, quantity, and type of
The objectives of product and service design may vary form situation to situation. Generally,
however, the objectives/reasons are:
1. To
introduce new or revised products or service to the market as quickly as possible;
2. To design product or service that have customer appeal;
3.
4.
To increase the level of customer satisfaction;
To reduce costs and;
5.
To increase quality
27
materials that will go into it and the required supervision.
2.
Product design
-
a marketing viewpoint
Marketing‟s optimal product design would be an innova
tive product that leads to high volume of sales,
complements the firm‟s general product line, enhance the firms image in the market place, and available
in any desired quantities at an attractive cost.
3.
Product design
-
A Financial manager’s view point
The
concern of financial manager is to have a product that help to achieve the maximum return on
investment, maintain the firm‟s financial liquidity and assures its survival. The strategic choice of a
design becomes an important decision, which will materially
affect the firm‟s profitability, growth and
survival.
4.
Product design
-
a top management view point.
The product decision represents one of the major decision top managers must make. However top
managers must make a careful analysis and evaluation of the f
irm‟s strengths, weaknesses, interests,
financial strength, managerial abilities and environment and numerous other factors prior to making the
final product design decision
5.
Product design
-
Quality Control View Point
Quality control, and indirect cost, wil
l often be greatly affected by the product design choice. Designs
will increase both production and quality control cost, if they are difficult to manufacture and require
close process monitoring and numerous quality control checks to determine whether the
product is in
conformance with product specifications. These higher costs may come from a combination of higher
reject and rework levels and high quality control costs, primarily from inspection.
2.3.
T
H
E STRUCTURE/ PROCESS OF PRODUCT DESIGN
The three major fu
nctions involved in product and service design are marketing, product development
and manufacturing.
Marketing
has the responsibility for suggesting ideas for new product and for
providing product specification for existing product lines.
Product developme
nt
has the responsibility
for moving the technical concept for the product to its final design and
manufacturing/operation
function has the responsibility for selecting and/or configuring the process by which the product is to be
manufactured.
The product
development activity provides the link between the customer needs and expectations and
the activity required to manufacturing the product. This will take you to the discussion of new product
design processes.
The design process begins with motivation for
design. For a new business or a new product, the
motivation may be obvious to achieve the goals of the organization and realize new opportunities.
However, making them happen /utilized them is a demanding challenge. New product development
entails a comple
x set of activities that cut across most functions in business.
28
There are also specific external factors to consider, such as government regulations, competitive
pressures, customer needs, the appearance of new technologies etc. Ultimately, the customer is
the
challenging force for product and service design.
Product or service design follows seven consecutive steps. They are briefly explained as follows.
Step 1. Idea/concept stage
For product design and development the starting point is product idea. It co
mes form a variety of
sources. The most obvious source is the customer. Marketing can tape this source of ideas in a number
of ways such as the use of focus groups, surveys, and the analyses of buying pattern. Other sources of
idea include:
•
concept or crea
tion of an inventor
•
a product already conceived and available from outside the firm.
•
the results of individual designers or design teams employed by the firms for that specific
purpose(employees)
•
research and development department (R&D)
•
distribution
channel members
•
Government agencies such as patent and copyright office
•
Competitors or
•
Any combination of the above sources
Product design research
is the major source of product idea for most firms. It can be applied or basic.
Product design research basi
cally is search for ideas, information or relationships. If its purpose is the
advancement of knowledge irrespective of short
-
term results, it is generally
referred to as pure or basic
research. The term “
applied research
” has Commercial overtones. Becaus
e it seeks to answer real or
anticipated problems, applied research has short range objectives compared to those of basic research. Applied
research projects includes the study of one‟s own product line for functional or aesthetic improvement, the
analysis
of competitor‟s product to determine how it was manufactured, the analysis of one‟s own manufacturing
processes to improve output or reduce cost, and the analysis of the firm‟s organizational structure to increase
efficiency. All of these research project
s would be undertaken with the expectation of increasing profitability.
Innovation is an omnipresent in product development, the continual search for improvement takes place at each
step or phase, from idea to finalize design. Design improvements may inclu
de a new product shape, color or
texture while processing improvement may include that make a product or service economically attractive by
increasing process efficiency, eliminating the number of conversion steps required or change packaging needs.
Step 2
. Preliminary product design evaluation /Initial feasibility analysis/
In this stage of the product deign process responsible personnel are involved in screening and evaluation of the
product idea and they should:
•
ensure that there is market potential or s
uffices demand
•
ensure that the product can be produced with the existing resources and/or check what additional
resources are required
•
check financial feasibility implications by estimating the approximate cost and return or investment
29
•
Finally, it may be
necessary to consider the product is appropriate as to the company‟ s policy and
fulfills legal and environmental requirements.
Step 3 Product development and prototype stage.
The process of converting a set of ideas and invention, or a new product concept
into the final form for
manufacturing is called product development. The specification for material, processing tolerance, functional
performance, maintainability, structural shape, reliability and appearance will be embodied in a set of blue prints,
draw
ings, lists, diagrams to supplement the prototype and parallel its development through preproduction and
production phases. The first physical embodiment is the prototype. Prototype is a phipical model of a proposed
product or service and it should serve m
any purposes:
-
It demonstrates the functional requirements or its
manufacturing feasibility.
-
It illustrates or demonstrates some aesthetic or style requirements.
-
It allows a firm to determine the need for specific processes or equipment to produce the pro
ducts;
-
Determine the functional reliability, ship ability, reparability, and packaging requirement of the
proposed product,
-
The probable sequence of manufacturing steps
-
The feasibility of using standard parts,
-
The identification of assembly problems and
-
The need for and feasibility of refinement of design features.
Step 4 Economic Evaluation of the design
Designers should develop criteria for evaluation of alternative designs. The following are the four
commonly used criteria
-
Product performance /how well
the product meets customer needs and requirements
-
Development speed /how long it takes to get the product to market.
-
Product cost/ the total cost to the customer/including manufacturing cost and
-
Development program expense /one time development costs for
the development project
Step 5 Preparation of product design speci
fi
cation
.
The fundamental structure of the production process to be employed in producing a product is
determined largely by the design specifications that are defined is blue prints,
drawings, diagrams and
material lists. These describe in detail the required dimensions, tolerances, finishes and materials of the
parts or product.
Step 6. The pilot production Run
Small
-
scale production run or pilot production run is important for the fo
llowing reasons.
Some of these are:
1.
If the product requires new technology or processes not commonly used by the firm, the output
rate a process lay out envisioned may be less than that anticipated.
2.
To reveal problems not anticipated or planned
3.
To know yie
ld, the percentage of acceptable product from a specific process step, may be less
than what is required to match the output from another process step.
30
4.
To provide a quantity of product for further studying market acceptance, developing better
production, c
ost figures, evaluate labor and maintenance requirements, and determining reject
levels more accurately.
5.
To provide an opportunity to observe the manufacturing process more or less as they will occur if
the decision for full
-
scale production is approved.
6.
To reveal unidentified process problems, coordination requirements, needed quality control
techniques difficulties in material handling and storage, and physical environmental factors such
as noise or heat and other possible safety hazards.
A pilot run oft
en employees scaled
-
down or modified equipment or use presently owned equipment or
lease others. Some new product development programs do not include a pilot run if the product is
similar to those already made or if the processes are very similar.
Step 7 F
inal product design selection decision
Few ideas will reach the final product selection stage. The process of searching ideas and evaluating
their profit potential in light of the limits on the technological ability of the firm, the required financial
inve
stment, and the competitive and market conditions will eliminate all but a few when the design staff
reaches this point, the final decision rests with top management.
Management based on their judgments, experience and additional information that point to
better
investment opportunities will accept or reject the design.
2.4.
OTHER DESIGN CONSIDERATIONS
1.
Consumer Quality level.
The design process should be aware of the market segment which the
product is designed to serve and determine tolerance level with its
cost implication. Four specific
characteristics are related to quality in product design:
i.
Functionality
. It is the degree to which a product performs its intended functions /use/.
ii.
Maintainability.
Maintainability refers to the ease of performing maintenanc
e on the product such
as (lubricating, repairing hoses).
iii.
Reliability.
It is the ability of a product to perform as expected under normal conditions with out
excessive frequency of failure.
iv.
Reproducibility.
Refers to the ability of the production system to
consistently produce products of
the desired quality.
2.
Standardization
Standardization is a means of achieve lower production. and assembly costs through reducing variety.
The choice of standardized parts is aimed at reducing unnecessary or economically unj
ustifiable variety
in a group of products or parts.
Through standardization the hidden costs of unnecessary product controls; additional paper work, near
duplicate designs; and the inefficient use of space, equipment, and tools can be reduced.
31
3.
Value analys
is and value engineering
Value analysis is a systematic organizational effort to reduce the costs of materials and purchased parts
for producing a product, without sacrificing aesthetic or functional requirements, which is the
(responsibility purchasing).
Value engineering, closely related to value analysis, directs efforts at
ensuring the functional ability of a product at minimum cost. It is the responsibility of engineering
department.
4.
Product Diversification and Simplification
Product diversification
is
the proliferation of product designs or an increase in the types, qualities,
sizes, and colors of a particular product. There are economic reasons for caution in expanding product
lines. These are:
-
Smaller manufacturing runs
32
Demand of the
product
Capacity
planning
Product/service
Design
Facilities and
equipment
Process Design and Selection
Technology
advancement
Layout of
facilities
-
Less efficient use of proce
sses
-
Higher labor, material, and set up costs.
-
Higher level of inventory for the producer, distributor, and retailer.
Product Simplification
on the other hand, is the elimination of the complex features of a product so that
the intended function is perform
ed but with reduced costs, higher quality and more custom satisfaction.
6.
Modular Design /use of modules/ standardized block/
It is used to identify basic functional or aesthetic requirements for one or a number of products and
designs a standard part,
component, or subassembly that will meet the specification requirement of all
the products in which it will be used.
7.
CAD and Robotics
Design and redesign capabilities of such technology computerized design /CAD/ allow
specifications to be tested singly or
as part of a system for aesthetic or functional analysis.
-
Use of robots
-
Repetitive assembly
-
Loading and unloading machines
-
Painting and welding operations
2.5.
PROCESS PLANNING AND PROCESS DESIGN
Process planning and design is the complete delineation and
description of the specific steps in
production. The design and redesign of products and the design or redesign of processes are interrelated.
Process planning and selection also involves choice of technology and related issues and it has major
implication
s for capacity planning, layout of facilities, equipment, and design of work systems. This
relationship
can be
best
understood
by
having a look
at on
the following
figure.
Process selection occurs as a matter of course when new products or services are being planned.
However, it also occurs periodically due to technological changes in
equipment as well as changes in
33
existing product or services.
34
2.5.1
Types of Processes
At the basic level, the types of process can be categorized into three main categories:
1.
Conversion Processes
Under this process the reaction under specific controlled conditi
ons yields products that may hardly
resemble their parents. For example, changing iron ore into steel sheets or making all the ingredients
listed on the box of toothpaste into tooth paste are conversion processes.
2.
Fabricating Processes
This process
involves changing raw materials into some specific form. For example making sheet metal
into car fender and making chair out of wood are fabricating processes.
3.
Assembly processes
Assembly processes brings together necessary raw materials or components that
makeup a product. For
examples, assembly automobiles, building construction, house appliances etc.
2.
Types of Process Design /process flow structure
Production system exists to produce product/ services of a kind that customers want and like a
process
flow
structure
refers to how a factory organizes material flow using one or more of the process
technologies.
Major factors affecting choice of process designs decisions include:
1.
Nature ofproduct demand pattern of demand and price
-
volume relationship.
Productio
n processes
must have adequate capacity to produce the volume of the product that consumers want.
Seasonality, growth trends, and other patterns of demand affect the amount of production capacity
needed. /to meet quantities during peak demand seasons/. The
refore, provisions must be made for
expanding or contracting capacity to keep pace with the growth trends of sales.
Different types of production processes provide a different mix of competitive advantage therefore the
choice of price and the choice of the
design of production processes must be synchronized.
2.
Degree of Vertical Integration.
Vertical integration is the amount of the production and distribution
chain, from suppliers of components to the delivery of products to customers, that is brought under the
ownership of accompany. There two types of vertical integration, that is forward
and backward
integration.
Forward integration
is expanding ownership of the production and distribution chain
toward the market whereas,
backward integration
means expanding ownership of the production and
distribution chain backward towards the source of
supply. The degree to which a company decides to be
vertically integrated determines now many production processes need to be planned and designed.
3.
Production flexibility.
It refers to the ability to respond fast to customer's needs. Flexibility is of two
types. The first is
Product flexibility,
which refers to the ability of the production system to quickly
change from producing one product to producing another. For such cases, production process must be
designed to include general
-
purpose equipment and cr
oss
-
trained employees. The second type of
flexibility is
volume flexibility.
It is the ability to quickly increase or reduce the volume of products
produced. Volume flexibility is needed when demand is subject to peaks and valleys and when it is
35
impractica
l to inventory products in anticipation of customer demands. In this case production process
must be designed with production capacities that can be quickly and inexpensively expanded and
contracted. The fundamental nature of service creates the need for f
lexibility.
4.
Degree of Automation.
Automation is the substitution of machinery for human labor. The
machinery includes sensing, the control devices that enable it to operate automatically. A key question
in process planning is whether to automate or not; an
d how much to automate, (fully or partially).
Advantages of Automation
Automation offers a number of advantages over human labor. Some of these are:
1.
It has low variability, it is difficult for a human to perform as fast in exactly the same way, and
in the
same amount of time on a repetitive basis.
2.
Machines do not get bored or distracted nor do they go out on strike, ask for higher wages, or
file labor grievances.
3.
It is taken as a necessary strategy for competitiveness.
Disadvantages/limitations
1.
Automation
can be costly because the acquisition of new technology can be expensive
2.
Usually, it requires high volumes of output to offset high costs of initial investment.
3.
Automation is much less flexible than human beings are.
4.
Once process has been automated, there
is substantial reason for not changing it
5.
It often becomes an emotional issue with workers because of the fear of job loss.
Therefore, the degree of automation must be carefully examined so that its limitation can be minimized
and its benefits can be explo
ited.
5.
Level of Product quality
The choice of design of production processes is certainly affected by the desired level of product
quality.
6.
Degree of customer contact
For most services and for some manufacturers, customers are an active part of the process
of producing
and delivering products. The extent to which customers become involved in the production systems has
important implications for the design of production processes. In this
case every element of the equipment,
employee training, and building mu
st be designed with the customer in mind. Also courteous attention,
comfortable surrounding must be provided to receive, hold, process and release customers.
At the other extreme of customer involvement, the design is little affected by interaction with
customers.
2.5.2
Types of Process Flow Structure
There are basically, four (4) types of processing systems: continuous, assembly line, intermittent and project
processing. These major operation processes are described briefly as follows:
36
1.
Continues process (produ
ct
-
focused)
A form of production processing organization in which production departments are organized according to the
type of product being produced. All of the production operation required to produce a product are ordinarily
grouped in to one productio
n department. It is also called line flow production or continuous production because;
the product follows a pre
-
determined sequence of steps. In line flow production, products tend to follow along
direct linear paths without backtracking or side tracking.
Continuous processing systems produce high volume of standardized output. The ultimate continues processing
systems produce a single product such as flour, sugar, chemicals, liquid, powder, detergents, gasoline, oil, and the
like. Generally, these product
s are measured on continues basis rather than counted as discrete units.
Characteristics of continues or product
-
focused process
•
The system produce highly uniform or standardized output
•
uses highly standardized machine/equipments and methods, and operated
for 24 hours to avoid
expensive shutdowns and startups.
•
the skills requirements of workers are usually fairly low because of division of labour
•
equipment tends to be highly specialized which tends to make it expensive relative to more general
purpose
equipment, but the high volume of output result in a low cost per unit
•
product of such process are generally made for stock/inventory rather than customer order
•
the process is inflexible, it handles only one product
•
Product focused systems usually require
high initial investment because it uses expensive, fixed
-
position material
-
handling equipment e.g. Overhead conveyors.
In continuous production products tend to proceed through production without stopping.
This figure shows the flow of raw material from o
ne end of production process to the other end following a
straight line.
2.
Assembly line process (Repetitive process)
Assembly line process refers to production of discrete parts moving
from workstation to
workstation at a controlled rate, following the sequence steps needed to build the product. This
part of continuous process produces output that allows for some variety; products are highly
similar but not identical. Examples include as
sembly of automobiles, televisions, computers
calculators, cameras, appliances etc. Typically, these products are produced in discrete units.
This form of processing is often referred to as repetitive manufacturing.
37
The application of this process in
service area is less common because services tend to be
more customized on a per
-
unit basis. But still it can be applied in car washes, mechanical
caressers, mail service, fast
-
food operations etc.
3.
Intermittent Processing (Process
-
focused)
Intermittent pro
cessing is used when systems handle a variety of processing requirements on a
start
-
and stop basis. This system is characterized by:
>
A low volume of output than continuous process
>
Use general
-
purpose equipment that can satisfy a variety of processing requi
rements.
>
Require semiskilled or skilled workers who operate the general equipment
>
The system is relatively flexible.
>
Span of supervision is narrow than the low in the case of continuous process
system.
Intermittent Processing takes two forms:
1.
Batch
Processing
-
Produces the same item again and again, usually in a specified lot
sizes. Such system is generally employed when a business has a relatively stable line
of products, each of which is produced in periodic batches, either to customers order
or fo
r inventory.
2.
Job shop process
-
Used to handle/produce small batches/lots of a large number of
different products most of which require a different set or sequence of processing
steps.
Examples
>
Commercial printing firms, publication
>
airplane manufacturers
>
M
achine tool shops, Educational system
In job shops products do not follow continuous routes through production. On the contrary,
the system is:
-
highly irregular stop and go
-
zigzag type routs with side tracking and backtracking
-
Jobs spend the majority of
this time waiting to be processed in production
departments. Process focused production systems include hospitals, automobile repair
shop machine shop and manufacturing plants.
The advantages of job shop
-
Product flexibility /able to produce small batches o
f a wide variety of products
-
Less initial investment/they use general purpose equipment.
Problems
-
greater employee skill
-
more employee training
-
more supervision
The following flow structure illustrates the process
-
focused production system.
38
Founding Rough
Fabricating
Painting Packaging
What makes this system different from batch process is that the job requirements often vary
considerably form job to job, so that the sequence of
processing steps and the job content of
the steps, vary considerably, for example, Auto repair shops.
2. Projects
Projects are set up to handle complex jobs consisting of unique sets of activities that must be
completed in a limited time span. Examples of
application include large or unusual
construction projects, new product development or promotion and so on. This process in
characterized by:
-
high variable cost
-
fixed costs are negligible or non existent
-
High skilled manpower
-
the process requires manpower
who can work independently without much
supervision and guidance.
-
Involves the manufacture of a single, one
-
of
-
a kind product.
2.5.3
Processing Alternative decision
In deciding on a particular type of production processing organizations, several factors must be
considered. Some these factors are:
1.
Batch size and product variety.
This factor includes the amount of product variety and the
volume to be demanded of each product model
If the demand for a single product is high, product
-
focused is appropriate because c
ost/unit is very low
but not flexible. Whereas, if products are many and one
-
of
-
kind job shop/ process focused is
appropriate. Because this process flow structure allows companies to take the advantage of product
flexibility.
2.
Capital requirements for proc
ess Designs
The second factor that affects the choice of production process is capital requirements for the process
design. The amount of capital required for the production system tends to differ for each type of
production processing organization. If a f
irm has only a little capital available for a particular product,
process focused may be the only type of process design that can be planned.
3.
Economic analysis
Commonly used to compare alternative processing plans for the production of products, four (4)
i
mportant considerations include:
a.
Cost function ofprocessing alternatives
.
Each type of process design tends to require a
39
different amount of capital. The greater that initial cost of equipment, buildings, and other
fixed assets, the gr
eater one the fixed costs. The cost function of a job shop usually exhibits
very low fixed cost and very high variable costs.
40
If capital availability is not a factor and annual production costs are the predominate
consideration, the process design that is
preferred depends on the production volume
of the product.
b.
Concept of operating leverage.
Operating leverage is a measure of the
relationship between a firm'
s annual cost and its annual sales. If a high
percentage of a firms total costs are fixed then the firm is said to have a high
degree of operating leverage.
Other things being equal /held constant/, a high degree of operating leverage implies that a
relati
vely small percentage change in sales will result in a large percentage change in
operating income (the difference between annual sales and annual production costs).
The concept of operating leverage has the following important implications for the choice
of
process design.
1.
creator long rage profits can be realized from production processes with greater
operating leverage once the production volume reaches a certain level.
2.
Greater long
-
range losses can result from operation processes with greater operating
leverage if the production volume is less than the break even point.
3.
The high the operating leverage of a production process, the greater is uncertainty of
future volume.
4.
The great the uncertainty of sales forecasts, the great is the risk of losses using
p
roduction processes with high operating leverage.
If there is a substantial amount of uncertainty concerning the forecast of number of
products to be produced, process design with lower levels of operating leverage tend
to be performed.
Sales
41
(revenue)
42
C.
Break even Analysis
(BEA)
Break Even Analysis (BEA) is commonly used to choose between processing alternatives. It does
have some weaknesses,
however, when compared to other methods:
1.
A primary weakness is the techniques inability to deal in a direct way with uncertainty.
All of the costs, volumes and other information used in the technique must be assumed to
be known with certainty.
2.
The costs ar
e assumed to hold over the entire range of possible volumes.
3.
It does not take into account the time value of money.
Example
: Three production processes, automated (A), Cellular(C) and job shop (J) have the
following cost structure.
Process
Fixed cost per
year
Variable cost per unit
A
110,000
2
C
80,000
4
T
75,000
5
a)
What is the most economical process for a volume of 10,000 units per year?
b)
At what volume would each of processes be preferred?
Solution
P = Price/unit
Q = quantity
produced and sold/period
V = Variable cost/unit
P = Profit/period
Fc = Fixed cost/period
TR = total revenue/period
TVC = Total Variable cost/period
TC = Total cost/period
C = Contribution /period
C = Contribution/unit
At BEP, profit is equal to zero (0)
TR
= PQ
FC = P.Q
-
V.Q = Q(P.V)
Number of
units
produced
/Yr
43
C = Pu
-
Vu
C
A
Q
F
%P
-
V
)
C = Q(Po
-
V) = TR
-
VQ = Fc + Pp TVC = TR
-
FC = PQ
-
FC TC = FC + TVC TVC = VQ
P = TR
-
TC = PQ
-
(FC + VQ)
(P + Fc)
_
TR
-
TC
_
PuQ
-
FC
_
p
FC
Pu
-
Vu
Q ~ Q ~ Q
TR = FC + TVC = FC + VQ
p
=
(
FC
+
V
Q)
=
FC +
V
V
Q Q
a)
TC = FC + V(Q)
TCA = FCA + VA(10,000)
= 110,000 + 2(10,000) = 130,000 TCc
= FCc + Vc(10,000)
= 80,000 + 4(10,000) = 120,000 TCT
= FCT + VT (10,000)
= 75,000 + 5(10,000) = 125,000
The cellular manufacturing production process has the lowest co
st when Q = 10,000
b)
TCJ = TCc
FCJ + VJ(Q) = FCc + Vc(Q)
75,0
+ 5(Q) = 80,000 + 4(Q) Q =
5.000 units
TCc = TCA
FCc + Vc(Q) = FCA + VA(Q)
80000 + 4(Q) = 110000 + 2(Q)
Q = 15000 units
44
low volume
-
low
standardization
High volume
-
standardization
products
The job shop process would be preferred in the annual volume rate of 0
-
5000 units, cellular
manufacturing in the 5000
-
15000 range and automated at 15000 or above
D Financial Analysis
The great amount of money to be invested in production processing alternative and the length of time these
assets are expected to last make
the time value of money an important concept. The payback period, RPu,
IRT and profitability under are aced to analyze POM problems involving long periods of time.
2.6 SERVICE DESIGN
Because of the difference between services and products, the design of se
rvices must take in to account
different elements than the design of products. Consider these differences:
1.
Products are generally tangible; service is generally intangible. Consequently service design often
focuses more on intangible factors such as peace
of mind, ambiance than does product design.
2.
Series are often produced and received at the same time. (e.g. Haircut, a car wash, repair etc),
Because of this there is less latitude in finding and correcting errors before the customer has a
chance to discove
r them. Consequently, training, process design; the customer relations are
particularly important.
3.
Service cannot be inventoried. This posse restriction on flexibility, and makes capacity design very
important.
4.
Services are highly visible to customers, and
must be designed with that in mind; this adds an extra
dimension to process design usually not present in product design
5.
Some services have low barriers to entry and exit. This posse another burden on service design to
continually be aware of what competi
tors are offering.
6.
Location is often important in service design with convenience as a major factor. Hence, design of
services and choice of location are often closely linked.
Matching the Process and the Product
A key concept in process selection is the n
eed to match market requirements with process capabilities. The
distance between success and failure in production can sometimes be traced to choice of process. Products
range from highly customized to highly standardized. Generally, volume requirements te
nd to increase as
standardization increases; customized products tend to be low volume, and standardized products then to be
high volume. Theses factors should be considered in determining the process to be used. This can be
understood using a product
-
proc
ess matrix given below.
Product Structure (PLC)
multiple product
few level product
low volume
high volume high
45
Job shop..
Batch
Commercial
printer
Heavy
equipment
Assembly.
Process flow Design
Process flow design
focuses on the specific processes that raw materials, parts, and subassemblies
follow as they move through the plant. The most common production management tools used in
planning the process flow are:
1.
Assembly drawings
2.
Assembly Charts
3.
Route Sheets
4.
flow pro
cess Chart
Each of these charts is useful diagnostic tool and can be used to improve operations during the steady
state of the productive system. Indeed, the standard first step in analyzing any production system is to
map the flows and operations using on
e or more of these techniques. These are the “organizations
charts” of the manufacturing system.
Assembly Drawing
-
is an exploded view of the product showing its component parts. The relative
location of components is drawn in relation to each other to sho
w how to assemble the unit.
Assembly Chart
:
-
Uses the information presented in the assembly drawing and defines how parts go
together their order of assembly, and often the overall managerial flow pattern. It lists all major
materials, operations, inspect
ion etc.
Table 2.1. Summarizes the difference and similarities of the basic processes.
Types of
Production
Processes
Product
Volume
Product
Variety
Automation &
Specialized
equipment
Frequency of
machine set up
& changes
Labor
Skill
Unit
Cost
1.
Continuous
High
low
High
low
low
low
2.
Assembly
Medium
medium
high
low
low
low
3. Batch
Medium
medium
medium
medium
medium
medium
4.
Job Shop
low
high
high
high
high
high
5. Project
low
low
low
low
high
high
46
Operation and route sheet:
-
As its name implies, it specifies operations and processes routing for a
particular part. It conveys such information as the type of equipment, tooling, and operations required
to complete the part.
Check Your Progress
Questions
1.
Outline and briefly discuss the steps of product/service design.
2.
Define the following terms:
i.
standardization
ii.
simplification
iii.
value analysis and value engineering
3.
Compare and contrast the alternative production process
2.7 ANSWERS TO CHECK YOUR
PROGRESS QUESTIONS
1.
1.
Idea/concept stage.
2.
Preliminary product design.
3.
Product development and prototype.
4.
Economic Evaluation of the design.
5.
Preparation of the product specification.
6.
Pilot production run.
7.
Final product design.
2.
Refer section 2.4
3.
Refer
section 2.5.2
4.
Refer section 2.6
47
UNIT 3 CAPACITY PLANNING, PLANT LAYOUT AND LOCATION ANALYSIS
Contents
3.0
Aims and Objectives
3.1.
Introduction
3.2
Capacity
Planning
3.2.1
Important Concepts of Capacity Planning
3.2.2
Factors Influencing Effective Capacity
3.2.3
Capacity and Level of Operation
3.2.4
Capacity Planning Decisions
3.2.5
Ways of Changing Long Range Capacity
3.2.6
Evaluating Capacity Alternatives
3.3
Facility Layout
3.3.1
Objectives of Facility
Layout
3.3.2
Basic Types of Facility Layout
3.3.3
Developing and Analyzing Facility Layouts
3.4. Facility Location
3.4.1
The Need for Location Decisions
3.4.2
Characteristics of Location Decision
3.4.3
Factors Affecting Location Decisions
3.4.4
Facility Location Methods /Models
3.4.5
Locating Ser
vice Outlets
3.5
Summary
3.6
Answers to Check Your Progress
3.0
AIMS AND OBJECTIVES
After reading this unit, you should be able to:
^ understand the long term impact of capacity planning, facility layout and location ^
describe the factors affecting capacity planning
^ explain the different types of facility layout and their strength and weakness ^ evaluate
alternative capacity, layout and locations using quantitative tools ^ identify the factors
affecting location decision.
3.1.
INTRODUCTION
How much should a plant be able
to produce, where should it be located? Are important strategic
question that must be addressed when a firm is starting out, when it expands and when it contracts
because these decisions have long
-
term consequences for the organization. In this unit, you
will
examine capacity planning, location analysis and layout of facilities.
48
3.2.
CAPACITY PLANNING
How many units of equipment do we need to achieve our production forecast? This is the concept of
capacity planning. Capacity can be defined as ability to produce
certain out put with in a specified time
period or the rate of out put that can be achieved from a process. Capacity is related to the equipment
and process selection decision in that a selection of specific equipment and processes represents a
selection
of both technological flexibility and capacity. Capacity is also a product design specification.
Decisions related to capacity have to answer:
a.
How much capacity do we have and how much future capacity should we provide (process)
b.
What form should capacity t
ake?
c.
How should people or processes be physically related to one another within the facility?
d.
What is the optimal location for the facilities
3.2.1. Important Concepts of Capacity Decisions
A.
Design Capacity
The design capacity represents the maximum output
that can be achieved in a specific time period under
ideal condition. Design capacity values are stared by the manufacturer of the equipment. It may and
commonly does include recognition of the need for routine maintenance but does not include
recognition
of delays caused by factors like scheduling, conflicts, defective products, low quality
material, or change in product mix. In other words, manufacturers cannot anticipate the actual
conditions of use. Therefore, this level of capacity cannot to be achieve
d under the real situation.
B.
Effective Capacity
Effective capacity represents the maximum output per unit time given a particular product mix, labour
skills, supper vision, product quality level, material quality, available maintenance, and time between
set
ups. Effective capacity is rarely equivalent to design capacity and is frequently much lower.
C.
Actual or Operating Capacity
Operating capacity is defined as the average output per unit of time over a preceding time period
adjusted to reflect actual reject l
evels and scheduling and maintenance losses.
D.
Capacity Measures
Though, there is no single measure of capacity, the two measures frequently cited to justify investments
in equipment and processes are:
1)
Efficiency and
2)
Utilization
Efficiency
is a measure of
the use of effective capacity in producing a particular result. It is
given by the formula:
Efficiency =
actual output per time period
Effective capacity per time period
49
Utilization
is a measure relating design capacity to output. It is calculated as follows:
Utilization =
actual output per time period
Design capacity per time period
These measures will be modified for service industries. It tell you the degree to which the
resources
, that is, machine, labour etc are utilized.
3.2.2
Factors Influencing Effective Capacity
Effective capacity determines upper limit for actual capacity, which inurn determines actual out
put. Narrowing the difference between design capacity and effective capacit
y is a managerial
opportunity because it may result in lower total investment.
Low effective capacity may indicate poor management practice, inadequate supervision, poor
equipment choice, obsolete equipment etc. The major factors affecting effective
capacity are
the following.
a)
Product Design
Product design affects capacity by determining the total work content or processing
requirements for producing a product changes in design or a greater variety of products will
generally affect capacity adversely
by requiring more frequent changes in setups, rework, and
solution.
-
simplify product design
-
changes infrequent
-
Long production run
b)
Layout of facilities
It affects on the flow of materials in the process production and the effectiveness of labour.
c)
Job
design
-
by establishing a lower time limit for operator controlled jobs.
d)
Out put standards:
Differences in expected performance speeds and allowances for such
necessities as personal time and fatigue alter effective capacity. This is four both operator
-
c
ontrolled and mechanic controlled jobs.
50
Volume
e)
The
quality of and variation
in the materials used by altering the number of process adjustment
required, scrap and rework and material quality as well as by the number of setups required.
f)
Employee attitude and moti
vation
through labor turnover, absenteeism, and employees
being busy but not productive.
g)
Operational factors.
Inventory stocking decisions, late deliveries, acceptability of purchased
materials, quality of inspection and control procedures also can have an
impact on effective capacity.
h)
External factors.
Product standards, especially minimum quality and performance standards, and
government regulation can restrict management‟s option for increasing and using capacity. Thus,
pollution standards on products
and equipment often reduce effective capacity, as does paper work
required by engaging employees in non
-
productive activities. A similar effect occurs when a union
contract limits the member of hours and type of work an employee may do.
3.2.3
Capacity and Level
of Operation
The best operating level is the level of capacity for which the average unit cost is at a
minimum. This level of operation is shown in the figure below:
Average
cost/unit
As we move down the curve, we achieve economies of scale until we reach the best operating level and we
encounter diseconomies of scale as we exceed this point. The upward swing of unit cost as volume
increases results from:
-
using less efficient
machines
-
working overtimes
-
increasing the cost of maintenance or
-
using inexperience or less skilled employees
3.2.4
Capacity planning decisions
51
Capacity planning normally involves the following steps.
1.
Assessing existing capacity
2.
Forecasting capacity needs
3.
Identifying alternative ways to modify capacity
4.
Evaluating financial, economical and technological capacity alternatives.
5.
Selecting a capacity alternative most suited to achieving strategic mission.
Following these steps, organization should design the rig
ht capacity, that is, the capacity best matches with the demands of
the product. However, there are several reasons why the production capacity to be provided does not necessarily equal the
amount of products and services expected to be demanded. First eno
ugh capital and other resources may not be
economically available to satisfy all of the demand. Secondly, because of the uncertainty of forecasts and the need to link
production capacity to operations strategy interns of competitive priorities, a capacity
cushion may be provided. A capacity
cushion is an additional amount of production capacity added onto the expected demand to allow;
1.
Extra capacity incase more demand than expected occurs
2.
The ability to satisfy demand during peak demand seasons.
3.
Lower produ
ction costs; production facilities operated to close to capacity experience higher costs.
4.
Product and volume flexibility responding to customers‟ needs for different products and high volumes is possible
because of the extra capacity.
5.
Improved quality of
products and services; production facilities operated close to capacity experience deteriorating
quality.
3.2.5
Ways of changing long range capacity
A.
Expansion.
Expansion would take either or a combination of the ways;
-
Sub
-
contract with other companies to become
suppliers of the expanding firm‟s
components or entire products.
-
Acquire other companies, facilities or resources
-
Develop sites, build buildings, by equipment
-
Expand, update, or modify existing facilities or
-
Reactivate facilities on stand by status.
B.
Reduction
. This strategy requires managers to take the following actions when expansion
is not appropriate due low demand or any other internal and external factors.
-
Sell of existing facilities, sell inventories, and lay off or transfer employees.
-
Mothball
facilities and standby status, sell inventories, and layoff or transfer employees.
-
Develop and produce new products as other products decline.
3.2.6
Evaluating Capacity Alternatives
An organization needs to examine alternatives for future capacity from a number
of different perspectives. Most obvious are
economic considerations. Such as; will an alternative be economically feasible? How much will it cost? How soon can we
have it? What will the operating and maintenance costs be? What will its useful life be? Wil
l it be compatible with present
personnel and present operations?
52
A number of techniques are useful for evaluating capacity alternatives from an economic standpoint. Some of the more
common are cost
-
volume analysis (Break
-
even analysis), financial analysis
, decision theory, and waiting line analysis. Only
cost volume analysis and decision tree are described in this unit.
1.
Break
-
Even Analysis
Though different tactics can be used to adjust demand to existing facilities, the strategic issue is, of course, how t
o have
facility of the correct size. Break
-
even analysis may help with that decision.
Breakeven can aid capacity decisions by identifying the processes with the lowest total cost for the volume expected. The
objective of break
-
even analysis is to find the
point, in dollars and units, at which cots equal revenues
-
which is the break
-
even point. Break
-
even analysis requires an estimation of
fixed costs, variable cost,
and
revenue.
Fixed costs are costs that continue even if no units are produced such as depreci
ation, taxes, debt and mortgage payments
where as variable costs are those that vary with the volume of units produced. The major components of variable costs are
labour and materials and other costs such as the portion of the utilities that varies with vo
lume.
Another element in break
-
even analysis is the revenue function that begins at the origin and proceeds upward to the right
increasing by the selling price of each unit. Where the revenue function crosses the total cost line is the break
-
even point,
wi
th a profit corridor to the right and a loss corridor to the left. Break
-
even analysis assumes that costs and revenue increase
in direct proportion to the volume of units being produced. However, neither fixed costs nor variable costs (nor, for that
matter
, the revenue function) need be a straight line.
Example:
XYZ Company is now contemplating to adding new line of product, which require leasing new machine for a monthly
payment of Br. 6000. Variable costs would be Br.2.00 per unit, and the product would b
e sold for Br.7.00 each.
Required:
1. What should be the monthly production capacity of a machine for achieving a breakeven point?
2.
What should be a production capacity so that a firm can achieve a profit target of Br. 4000?
Solution:
1.
Given:
Fixed cost (FC)
= Br.6000 Variable cost
per unit (V) = Br. 2.00 Price per unit (P) =
Br.7.00 Breakeven point (Q) =?
At a breakeven point, a firm earns zero normal profit. That is total revenue equals total cost and hence
profit becomes zero. Thus,
Total profit = total re
venue (TR)
-
Total cost (TC)
Total profit = TR
-
TC
TR = P X Q
TC = Total variable cost (which is V x Q) + FC, hence Total profit =
(P X Q)
-
(V X Q + FC)
At break
-
even point total profit is zero. Thus,
53
0 = PQ
-
VQ
-
FC 0 = Q (P
-
V)
-
FC FC =
Q (P
-
V)
Q
= FC
-
(P
-
V)
Q = FC
-
(p
-
v) = Br. 6000
-
(7.00
-
2.00) = 1,200 units of pies per month. In order to achieve the break
even goal a firm must lease a machine that has a monthly production capacity of 1,200 units.
2. Given:
Total profit = Br.4000 P = Br.7.
00 V =
Br.2.00 FC = Br. 6000
The quantity level required to achieve any profit level is obtained as follows:
Total profit (TP) = TR
-
TC TP =
PQ
-
VQ
-
FC TP + FC =
PQ
-
VQ TP + FC = Q(P
-
C)
Q = (TP + FC)
-
(P
-
V)
Q = (Br.4000 + Br.6000)
-
(Br.7.00
-
Br.
2.00) = 2,000 units.
To achieve this profit level per month, a firm must lease a machine with the monthly production capacity of
2,00 units.
The following graph depicts the example just presented above.
As a figure illustrates, total revenue and total curve crosses each other at the quantity level 1,200
units and that is a breakeven point. Once the quanti
ty produced exceeds that level, a company
starts to earn point and the size of profit increases with the quantity of output (production). As
stated above, for this particular example a machine under consideration must have monthly
production capacity of 2,
000 units for a company to achieve the stated level of profit (Br.4,000).
To utilize the concept of breakeven analysis for capacity planning decision, we first define out
goal such as a profit level, and then work back to determine the size of facility to
be owned so that
its production capacity can effectively lead to the production level required (i.e., quantity) to
achieve a goal.
Figure 3.2 Breakeven analyses
54
2.
Decision Tree
Decision tree is a tree like diagram that depicts alternatives and their possible outcomes. This tool
can be
used to evaluate alternative capacities and enable managers make appropriate decisions.
Example.
A firm that plans to expand its product line must decide whether to build a small or a
large facility to produce the new products. If it builds a small facilit
y and demand is low, the net
present value (NPV) after deducting for building costs will be Br. 400,000. If demand is high, the
firm can either maintain the small facility or expand it. Expansion would have a net present value
of Br. 450,000 and maintainin
g the small facility would have a net present value of Br. 50,000.
If a large facility is build and demand is high, the estimated NPV is Br. 800,000. If demand turns
out to be low, the NPV will be Br. 10,000.
The problem that demand will be high is estimat
ed to be 0.60, and the problem of low demand is
estimated to be 0.4.
Required:
55
A.
476,000
Br. 450,000
Br.
-
10,000
Decision point
i. Build small facility:
High demand = 0.6 x 450,000
=
480,000
Low demand = 0.4
-
10,000
=
-
4,000
Expected value =
476,000 Br
A.
Draw the tree diagram.
B.
Which alternative capacity should be build? What is the expected NPV of the alternative
chosen?
Solution:
Chance event B.
The expected NPV
ii.
Build large facility
High demand = 0.6 x 800,000
=
270,000
Low demand = 0.4 x 400,000
=
160.000
Expected value = 270,000 + 160,000 =
430,000 Br
Decision:
The firm should build the large facility with the highest expected profit
i.
e., Br. 476,000.
3.3
FACILITY LAYOUT
The general objective of facility layout is to locate
people, machines, and processes in an optimal
time
-
saving and money saving relationship that meets the anticipated production level and the
products functional and aesthetic requirements as embodied in the design specification. Layout
refers to the configu
ration of departments, work centers and equipment with a particular emphasis
on movement of work through the system.
3.3.1
Objectives of Facility layout
56
The overall objective in designing a layout is to provide a smooth work flow and control; reducing cost of m
aterial through
the factory or uncomplicated pattern for both consumers and workers in a service organization. Specific objectives of layout
decision in service and manufacturing operations are outlined in the following section.
1.
For manufacturing firm.
-
Pro
vide enough production capacity
-
Minimize material handling cost and effort
-
Minimize labour requirements
-
Provide a smooth flow of materials and product
-
Maximize the use of available space
-
Provide for volume and product flexibility and avoid bottleneck
operations and contested areas
-
Minimize health hazards
-
Maximize the uses of machine
tools.
-
Provide communication opportunities for employees by positioning equipment and processes appropriately
-
Maximize output
-
Minimize supervisory and control requirements
-
Ease of maintenance
-
Provide space for personal
-
care needs and others
2.
For service operations layout serves the following purposes.
-
provide for customer comfort and convenience
-
allow attractive display
-
reduce travel of personnel
and
customers
-
provide for
private in work areas
-
promote communication
-
provide for stock rotation for shelf life.
3.3.2
Basic Types of Layouts
There are four basic types of plant or facility layouts. The basic difference among these layouts is in their handling of the
flow of materials an
d product. They are discussed as follows.
1.
Process layout /for job
-
shops/
It is concerned with the grouping of machines, processes or services according to their function i.e. similar equipments or
functions are grouped together. For example, Drilling, mill
ing, routing, typing, shipping etc are activities that require such
types of arrangements. The primary efficiency criterion for evaluating process layout designs is material and product
handling cost.
Advantages
a.
Process layouts are less vulnerable to
breakdowns or absenteeism than other types of layouts since work can be
shifted to other operating machines, and substitute for absent employees are more readily available because
employees have multiple skills.
b.
Lower capital costs use. Because this layout
uses a general
-
purpose machines, which are less likely to become
obsolete than special
-
purpose machines.
57
c.
Lower labour costs /training and scheduling employees to operate more than one type of machine.
d.
Lower installation and maintenance costs since exces
s capacity is often available.
Disadvantages
b.
Work scheduling is complicated by the difficulty of determining process workloads, by the different processing
sequence required for different products, and by bottleneck operations and conflicts in completion t
ime
requirements.
c.
Low output rates result from material handling inefficiencies and from the number of special setups and fear downs
necessitated by changes in the pattern of demand.
d.
If the number of in
-
process products is large, process confession may res
ult as efforts are made to meet schedule
completion dates.
e.
Material
-
handling requirements are a major problem because they are costly and time consuming. Conveyors are
expensive to install and difficult to design since there may be many destinations for
materials or products in process.
Materials used in manufacturing are many, some of these are: raw materials, purchased components, materials
-
in
-
process, finished goods, packing materials, maintenance and repair supplies, scrap and waste and rejects or rew
orks.
The layout of these facilities is directly affected by the nature /characteristics/ of materials such as: Large or bulky mate
rials;
heavy materials; solids; fluids or flexible and inflexible. Special materials for heat, cold, light, humidity, flame,
vibration
also will affect the layout of facilities for handling, storing, and processing of this materials.
2.
Product or Line Layout
Product layout focuses on the sequence of production or assembly operation required for producing a part or a product of
cement, oil refining, auto assembly and the so on. In contrast to process layouts, product layouts are not flexible since the
y
are designed specifically for making one product.
Major Advantages
1.
If there is adequate output volume, processing and assembly un
it costs are low because of the high utilization rates
of plant equipment and processes.
2.
Raw materials and parts inventory control requirements are lower because inputs are required for only one
product.
3.
Production scheduling is simpler
4.
High volume of outp
ut and high labour efficiency result when the sequential tasks performed require
approximately the same amount of time.
5.
Material
-
handling costs are low because of the wide use of conveyors and other mechanical or automated transfer
equipment.
6.
Supervisory
and control costs are low because of the repetitive and routine nature of the tasks and the uniformity
of the processing result.
Disadvantages
1.
High volume is required to justify the large investment in special or modified equipment.
2.
Product
standardization is required with in close limits because of the inflexibility of specialized equipment and
transfer mechanisms.
3.
High interchangeability of product parts is required because the time and the space available to work on a given
58
unit of product
ion are limited.
4.
Good maintenance is crucial since the failure of one piece of equipment requires stopping the entire line while it is
being repaired.
5.
Quality control inspection must be strategically located and must be capable of detecting undesirable
variances.
The inspection system must feed the information „upstream‟ efficiently to signal the need to correct processing or
assembly failures and to prevent the production of a large volume of non standard product.
6.
Highly skilled behind
-
the
-
scenes labour
is required for quick and efficient machine maintenance.
7.
Scheduling and conditioning of materials, parts and subassemblies with line requirements is crucial because any
bottleneck will result in products being incompletely fabricated or assembled or will
require that the line be shut
down.
3.
Cellular Manufacturing (CM) Layouts’
Machines are grouped into cells and the cells function somewhat like a product layout is land within a larger shop or
process this layout groups dissimilar machines into work centers
(or cells) to work on products that have similar shapes
and processing requirements. Since machines are frequency able to perform more than one operation on a particular part
or product they take on some of the characteristics of a production line but with
out its rigidity and it is similar to process
layout in that cells are designed to perform a specific set of processes. The reasons why a CM layout would be attempted
are:
-
Machine changeovers are simplified.
-
Training periods for workers are shortened
-
Mater
ial handling costs are reduced
-
Parts can be made faster and shipped more quickly
-
Less
-
in
-
process inventory is required
-
Production is easier to automate
4.
Fixed position Layout
Unlike the three other basic layout options, fixed position layouts require that
both people and machine be brought to the
product being made, assembled, or tested. The product by virtue of its bulk or weight remaining at one location, For
example, Shipbuilding, dam construction, power generating (steam) turbines, bridge etc which are
(bulky, large, heavy, and
fragile). The fixed position nature of the layout minimizes the amount of product movement required.
3.3.3
Developing and Analyzing Facility Layouts
Important inputs to the layout decision are:
1.
Specification of objectives of the system
in terms of output and flexibility
2.
Estimation of product or service demand on the system
3.
Processing requirements in terms of number of operations and amount of flow between departments and work
centers.
4.
Space availability with in the facility itself.
Facility Layout Techniques
There are four major layout techniques that can be used to make a layout decision. These are operations sequence analysis,
block diagram analysis, systematic layout planning and load distance analysis. The following section descr
ibes these
59
techniques.
1.
Operations Sequence Analysis
This approach develops a good scheme for the arrangement of departments by graphically analyzing the layout problem. It
determines the location of operating departments relative to one another when the ex
ternal shape and dimensions of the
building are not limiting factors.
To make a process layout of a plant or department we must have information on the movement of material within the plant
and on the in process goods moving from department to department,
i.e., the number of moves and the cost of making these
moves.
N.B. 1000 units of material being moved from location A to B at one time constitutes one move not 1000.
The following table shows the flow of materials and in process productio
n for a period of months. The data represents all the
firms‟ products whose fabrication or assembly requires some or all of the same process steps in the same sequence or a
different sequence.
60
Step 1.
Line up departments like nodes on a string, connect them by arrows that show the direction of movement of
the load
Step 2.
Then post the cost of each movement (number of loads x cost per load) adjacent to the arrow.
The above 1
st
layout reveals a number of costly nonadjacent loads. The non adjacent load cost is as follows.
From Department
To Department
Cost
1
4
Br. 1,200
2
7
1,500
2
4
200
5
3
600
6
2
600
Table 2.1 Interdependent flow of in process
production.
From department
To Department
Name
Number 1
2
3
4
5
6
7
Assembly
1
350
400
1
3
Inspection
Painting
2
100
500
Stamping
T.
3
son
2
3
Casting
5 00 1
Drilling
4
300
Shipping and
1
Receiving
5
300
2
6
300
250
100
2
2
1
7
400
3
cannot improve on the position of two departments that are adjacent to each other, we can measure improvements on
the basis of the cost of non
-
adjacent loads.
61
6
4
500
7
5
1,200
Total cost of nonadjacent loads
Br.
5,800
N.B.
Further analysis of the above layout reveals some possible improvements.
The cost of moving loads between adjacent departments is a minimal cost where as moving loads between nonadjacent
departments always involves a greater cost.
From Department
To Department
Cost
2
4
Br. 200
6
2
600
7
5
1200
Total cost for
nonadjacent loads
Br. 2,000
The comparison between the first and second layout attempts shows that we have potentially reduced the costs of
moving the products between departments form Br. 5800 to Br. 2000.
If we move department 5 between department 7 and
3 we can further reduce interdepartmental transportation cost by
1200. If we do this, however, department 5 and 6 will not be adjacent, and we shall incur an additional cost of 100.
Since our cost advantage will be 1200
-
100= 1100 the move of department 5 b
etween department 3 and 7 will be cost
advantageous.
The final effort is the following
2
nd
attempt
600
Cost of nonadjacent loads
62
Department
Minimal ai
Assembly
800
Inspection
1800
Painting
1500
Stamping
2400
Casting
1500
Drilling
1500
Shipping ad receiving
1500
2.
Block Diagram Analysis
Block diagram analysis sets the
general shape and dimensions of the
building and the location of the interior
departmental boundary. For the
above
layout assume the following area for
each department.
Minimal Dimension
20 x 40 30 x 60 30 x 50 40 x 60
30 x 50 30 x 50 30 x 50
Now substitute functional areas for the nodes to indicate departmental processing centers. Consider the floor plan 80 x 150.
We
have to meet the constraint of space and minimal dimensions for the individual departments. The
analysis will be more difficult
when it is necessary to layout an existing building with different side dimension.
63
7
1
9
6
3
4
10
2
5
8
3.
Systematic Layout Planning (SLP)
In some production systems, such as service systems, the amount of material that flows between departments.
May not be critical to
developing a good facility layout. In these systems systematic layout planning can be used. The application of systematic lay
out
planning (SLP) requires you to follow the following steps.
Step I
. Develop a chart to rate the relative
importance of each department being close to every other department. The rating range
from the extremes of absolutely necessary to undesirable. The ratings are based on various reasons such as:
-
types of customers
-
ease of supervision
-
common personnel
-
commo
n equipment etc.
Step II
An initial schematic diagram, similar to the one is operation sequence analysis is developed. This initial schematic diagram
is
modified through trial and error until departments with high closeness ratings are adjacent to one anot
her and department and space
limitations are satisfied SLP is quite similar to operation sequence and block diagram analysis is both procedures and end re
sults.
The only significant difference between these approaches is that SLP allows many reasons for as
signing a closeness rating between
departments, whereas operation sequence and block diagram analyses allow a single reason product or material travel per time.
4.
Load Distance Analysis
Load distance Analysis is useful in comparing alternative layouts to ide
ntify the one with the least product or material travel per
time period.
Example
: Two layout alternatives are shown below. The facilities products, their travel between departments and the distance
between departments. For each layout alternative are also
displayed. Which layout alternative minimizes the monthly product travel
through the facility?
Layout A
Layout B
8
4
10
2
5
3
7
1
9
6
Department
Movement
Combination
Distance between
Departments Layout A
Department
movement
Combination
Layout B
1
-
5
30
30
1
-
7
10
10
1
-
9
10
10
1
-
10
10
10
64
Table: Products and their processing sequences in the facility
Solution:
To answer the questions follow the
following steps.
1.
Compute the total travel for each product through each layout alternative.
Distance Per Product
Product
Dept. processing
sequence
Layout A
Layout B
a
1
-
5
-
4
-
10
30 + 30 + 10= 70
30 + 30 + 10 = 70
b
2
-
6
-
3
-
9
20 + 40 + 30= 90
20 + 10 + 20
= 50
c
2
-
10
-
1
-
9
10 + 10 + 10= 30
10 + 10 + 10 = 30
d
1
-
7
-
8
-
10
10 + 20 + 20 = 50
10 + 50 + 30 = 90
e
2
-
5
-
6
-
9
10 + 10 + 10 = 30
10 + 10 + 10 = 30
f
1
-
7
-
4
-
10
10 + 10 +10 = 30
10 + 10 + 10 = 30
65
3.
Choose the layout alternative that minimizes total travel distance. Based on the above analysis, Layout B results are the lea
st
total distance traveled per month
through the facility by the products.
3.4. FACILITY LOCATION
Choice of location for business organization is an important issue in the design of the production system. Where should a pla
nt or
service facility be located? This is a top question on the
strategic agendas of contemporary manufacturing and service firms,
particularly in this age of global markets and global production. Globalization allows companies greater flexibility in their
location
choices. However, in practice, the question of locatio
n is very much linked to two competitive imperatives.
1.
The need to produce close to the customer due to time based competition, trade agreements, and shipment costs.
2.
The need to locate near the appropriate resource pool to take advantage of low costs.
Location decision is an integral part of the strategic planning process of every organization. Although it might appear that
location
decision are mostly one
-
time problem pertaining to new organization, the fact is that existing organization often have a b
igger stake
in these kinds of decisions than new organization. In other words, location problems are common to new and existing businesse
s.
3.4.1
The Need for location Decisions
Existing organization become involved in location decision for a variety of reasons.
The following are some of the reasons for such
decisions (other than the need for greater capacity).
1.
Opportunity for expanding market share
From such as banks, fast food chains, supermarkets, and retail stores view location as part of marketing strategy,
and they
look for locations that will help them to expand their markets. Basically, the location decisions in those cases reflect
additional new location to existing suppliers.
2.
Business growth in demand
A similar situation occurs when an organization
experiences a growth in demand for its products or service that can not be
satisfied by expansion at an existing location. The addition of a new location to complement an existing system is often a
realistic alternative.
2) Compute the total distance traveled per month for each
product through each layout alternative.
Distance Per Product
Distance Per Month
Product
Number Product
Processed per month
Layout A
Layout B
Layout A
Layout B
a
1000
70
70
7000
70000
b
2000
90
50
180000
10000
c
3000
30
30
90,000
90000
d
1000
50
90
50000
90000
e
2000
30
30
60000
60000
f
4000
30
30
120000
120000
570000
530000
66
3.
Depletion of Basic resources
Some f
irms become presented with location decision because of the depletion of basic inputs. For example fishing and
logging operations are forced to relocate due to the temporarily exhaustions of fish or forest at a given location. Mining an
d
petroleum organiza
tion face the same sort of situation, although usually over a longer time horizon.
4.
Shift in Market /demand
If the demand for the product does not exist in the existing location, it is a good reason to consider and find out a better
location.
5.
Operating Cost
s
Cost of doing business in a particular location reach a point where other location begin to look more attractive. In this cas
e,
the company may shift to a cost effective location.
6.
Merge of companies
Merger of companies changes the ownership titles and ma
y require change in management and operation of the merging
firms, and then leading to location decisions.
7.
Introduction of new product.
This may require to a new resource, labour or material which may not exist in the existing location. Therefore, firms ma
ke a
location decision to produce a sell their new product.
3.4.2
Characteristics of location decision
1. Location decisions entail a long
-
term commitment, which makes mistakes difficult to overcome. In addition, location
decision often has an impact on
operating costs both fixed and variables and revenues as well as an operation. Example, a
poor choice of location might result in excessive transportation cost, shortage of qualified labour, loss of competitive
advantage, shortage of raw materials and loca
tion of customer (operation problem).
2.
Location decision requires the selection of location form a number of acceptable location instead of identifying the “One bes
t”
location. If one site is clearly superior to all others in all respects,
the location decision is an easy one. However, several site
candidates, each with its
67
strengths and weaknesses emerge as good choice and the location decision becomes a trade off decision.
3.
Location decision involves four options that mangers can consider
in location planning. These are:
A.
Expanding an existing facility
-
These options can be attractive if there is adequate room
for expansion, especially if the location has desirable features that are not readily available
elsewhere. Expansion costs are often
less than those of other alternatives.
B.
Addition new location
.
Another option is to add new location while retaining existing ones,
as it is done in many retail operations. The advantage of this option are: it draws /attracts
customers who are already look
ing for an existing business, and used as a defensive strategy
designed to maintain a market share or prevent competitors form entering a market.
C.
Shutting down.
The third option is to shut down at one location and move to another. An
organization must weig
ht the cost of a move and the resulting benefits against the costs and
benefits and remaining in an existing location. This option is considered when market shifts,
exhaustion of raw materials and the cost of operation often cause firms to seriously consid
er this
option.
D.
Doing nothing.
If is a detailed analysis of potential locations fails to uncover benefits that
make one of the previous three alternatives attractive, a firm may decide to maintain a status of at
least for the time being
3.4.2
Factors Affecting
Location Decisions
Many factors influence location decisions. Managers must identify the relevant factors to make decisions that involve
a sequence of decisions. This sequence can include a national, a regional, community and site decisions.
First manageme
nt must decide whether the facility will be located internationally or domestically. (Where in the world
political, military, social and economic instability can make such decision risky.)
The location
Decision sequence
1
2
3
4
National
Regional
Community
Site
Decision
Decision
Decision
Decision
Relative importance of location factors in types of outgoing transportation cost Retailing facilities
Facilities affecting
decision
Mining
quarrying
Heavy
manufacturing
Light
manufacturing
Warehousing
Retailing
Customer service
for
profit
Local
government
service
Health
and
emergenc y
service
1. Proximity to
constituents
C
C
B
A
A
A
A
68
were: A is very important B important C less important
Types of facilities and this dominant location factors. Each type of facility under consideration
has a few dominant factors that
ultimately determine its location decision.
A.
Mining, heavy manufacturing.
They are capital intensive, cover large geographic areas, use great quantities of heavy and bulky raw materials,
population processes disead large
amount of wastes, total finished outputs weight much less than raw material input,
enormous utilities are absorbed and products are shipped to a few customers.
B.
Light Manufacturing/Making electronic components, small mechanical parts,
assembly etc.
-
do not
necessary locate near either raw material or market.
-
They ship products to a few regional warehouses of wholesalers
-
Availability and cost of labour is important
2.
Labour
availability and cost
B
A
B
B
A
B
B
3. Degree of
unionization
A
A
B
B
B
C
B
4. Construction
and
land costs
A
B
B
B
B
B
B
5. Proximity to
transportation
facilities
A
B
A
B
C
C
C
6.
Incoming
transportation
cost
A
B
A
B
C
C
C
7.
Outgoing
transportation
cost
B
B
A
C
C
C
C
8. Utilities and
availability and cost
A
B
C
C
C
C
C
9. Proximity to raw
materials and supplies
A
B
C
C
C
C
C
10.
Zoning
restriction
of
governmental impact
A
B
C
C
B
C
C
69
C.
Warehouses
Dominant factors are those affecting incoming and outgoing transportation cost
retailing facilities
D.
Retailing facilities
The studies involve the identification of target customer because it should be located near concentration of customers.
Residential concentration, traffic data on nearby streets growth trends and of communities and
suburbs, spending level
and other demographic information.
E.
Facilities for customer service organizations such as dry cleaning, banks, hotels, welding
shops, photo processors like retailing shops target this customers
-
Can discharge large quantities of wast
e paper, chemical and spent supplies,
F.
Local government service
-
Often grouped together so that constituents can economize in their time, effort, and transportation cost
-
Are grouped to allow interagency interactions
G.
Health and emergency services (Fire
station, ambulances, hospitals, etc)
-
lowest overall response times between the constituent and the service
-
Minimize property and loss of life
-
The type of facility
-
The number of its products and services
-
The nature of its daily activities
The national, regi
onal, community and side related factors are briefly all explained in the next section.
(A)
Regional factors
1.
Proximity to customers
A location close to the customer is important because of the ever increasing need to be customer responsive. This
enables faster
delivery of goods to customers. In addition, it ensures that customers‟ needs are incorporated into the
products being developed and built.
2.
Business Climate.
A favorable business climate can include the presence of similar sized business, the presence of
companies in the same
industry, and in the case of international location, the presence of other foreign companies. Government legislation
and local Government intervention to facilitate business locating in an area etc are also factors.
3.
Total Costs. The o
bjective is to select a site with the lowest total cost. This includes regional costs, inbound
destruction costs, and an outbound distribution costs comprise the
regional costs. In addition, there are
hidden costs that are difficult to measure such as loss
of customer responsiveness arising form
locating away form the main customer base.
4.
Infrastructure
Adequate road, rail, air and sea transportation is vital. Energy & telecommunications requirements
must also be met. In addition, the local government willin
gness to invest in upgrading infrastructure to
the level required may be an incentive to select a specific location.
5.
Quality of Labor
The educational and skill levels of the labor pool must match the company‟s needs. Primary labor
70
consideration relate to
the cost and availability of labor , wage relates in an area, labour productivity,
attitude , and towards work.
6.
Suppliers
A high quality and competitive supplier base makes a given location suitable.
7.
Location of raw materials
Firm‟s location near or at the
source of raw materials for three primary reasons; necessity, perishablity, and
transportation costs
For example, mining and frosty firms must locate at the source of necessity. Those firms that produce
short shelf
-
life products take perishability as
primary criteria when consider location.
B.
Community Considerations
From a company standpoint, a number of factors determine the desirability of a community as a peace
for its workers and mangers to live. They include:
•
Facilities for education, shipping, rec
reation transportation , religious workshop,
entertainment, the quality of policy, fore and medical services
•
attitude towards the company
•
The size of the community
•
Cost and availability of utilities
•
Environmental regulations
•
Taxes and
•
Existence of
development support or incentive.
C.
Site related factors.
The primary consideration related to site involves land, transpiration, and zoning or other restrictions, utilities
etc.
Service location Vs manufacturing facilities
Service facilities are more common
than new factories and warehouses because of their low cost of
establishing a service facility compared to one for manufacturing e.g. restaurants, hotels entertaining
facilities retail shops etc. Typically has multiple sites to maintain close contact with
customers. The
location decision is closely tied to the market selection decision.
Whereas manufacturing location decisions are often make by minimizing costs, but profit maximizing for service
location.
3.4.4
Facility Location Methods /Models
Various
quantitative models are used to help determine the best location of facilities. Evaluation of alternative regions,
sub regions, and community is termed micro analysis. Evaluation of specific sites in the selected community is termed
micro analysis.
Techniq
ues used to support macro analysis include:
1.
Breakeven analysis (cost
-
profit
-
volume analysis)
2.
Factor rating method
71
3.
The Center of gravity method and
4.
Linear programming (transportation model)
1.
Cost Profit Volume Analysis
The economic comparison of location
alternatives is facilitated by the use of cost
-
volume profit
analysis. The analysis can be done numerically or graphically.
Graphical assumptions:
1.
Fixed costs are constant for the range of probable output.
2.
Variable costs are linear for the range of proba
ble output.
3.
The required level of output can be closely estimated
4.
Only one product is involved.
Graphical procedure
Step 1. Determine the fixed and variable costs associated with each location alternative.
Step 2. Plot the total
-
cost lines for all location
alternatives on the same graph.
Total cost = FC + VC x Q
where
FC = fixed cost
VC = variable cost per unit
Q = quantity or volume of output
Step 3. Determine which location will have the lowest total cost for the expected level of output. Alternatively,
determine which location will have the highest profit.
Example. Fixed (land, property taxes, insurance, building etc) and variable costs (labor, raw materials, transportation,
overhead) for four potential plant locations are shown below.
b.
Identify a range of output for which each alternative is superior (i.e., has the
lowest total cost)
c.
If expected output at the selected location is to be 8,000 units per year,
which location would provide the lowest total cost?
Solution
a) To plot the total cost
-
lines, select an output that is approximately equal to the expected output
level (e.g., 10,000
units per year). Compute the total cost for each location at that level.
Location
Fixed cos
t per year
Variable cost per year
A
$150,000
$62
B
300,000
38
C
500,000
24
C
600,00
30
Required a. Plot the total cost lines for these locations on a single graph
72
Plot each location‟s fixed cost (at output = 0) and the total cost at 10,000; and connect the two points with a straight
line. See the accompanying graph.
Fixed cost
+ Variable cost
= Total cost
A
---------------
--
$250,000
$11(10,000)
$360,000
B
----------------
--
100,000
30(30,000)
400,000
C
---------------
--
150,000
20(10,000)
350,000
D
----------------
--
200,000
35(10,000)
550,000
shown
on the graph. Note that location D is never superior. The exact ranges can be determined by finding the output
level at which line B and C and A cross. To do this set their total cost equations equal and solve for Q, the breakeven
output level. Thus, for B
and C.
73
(B)
(C)
$100,000 + $30Q = $150,000 + $20Q Solving, you find Q = 5, 000 units per year.
For C and A:
(C)
(A)
$150,000 + $20Q = $250,000 + $11Q Solving, Q = 11,111 units per year.
C. From the graph, you can see that, 8,000 units per year,
location C provides the lowest total cost.
For a profit analysis, compute total profit using the following formula:
Total profit = QR
-
(FC + VC x Q) = Q(R
-
VC)
-
FC,
Where:
R = revenue per unit.
FC = total fixed cost
Q = total units of products
(quantity)
VC = variable cost per unit
2.
Factor rating method
Factor ratings are frequently used to evaluate location alternatives because
1.
their simplicity facilitates communication about why one site is better than another
2.
they enable mangers to bring
diverse location consideration into the evaluation process
3.
Then faster consistency and judgment about location alternatives.
Procedures:
1.
List the most relevant factors in the location decision
2.
Assign a weigh to each factors that indicates its relative impo
rtance compared with all other factors. The
weight sum should be 1.00
3.
Decide on a common scale for all factors. Each factors should be rated, say form 1 (very low ) to 5 (very
high) , according to its relative importance
4.
Score rate each location
alternative (1
-
100)or (1
-
10)
5.
Multiply factor weight or rate by the score (location rate for each factor , and sum the results for each
location alternatives
6.
Choose the location that has the highest composite score. The score indicates alternative locations
are most
promising.
Example 1:
ABC shoe factory intends to open a new branch store. The exhibit below contains information on two potential
locations, A and B. Which location is promising?
74
Note: Factor rating scale = 1
-
5 and location rating scale =1
-
10
B is better than A because it has the
higher composite score (211) mangers some times may set a minimum standard, if
it goes below that they can reject all alternatives.
Example 2
Using the following factors ratings, determine which location alternatives should be chosen on the basis of
maximum
composite score A, B or C.
3.
Center
of gravity method:
For locating single facilities that considers the existing facilities, the distance between them, and the volumes of goods
that need to be shipped.
It is used to locate intermediate or distribution warehouses.
Factor
Location
Product
of
rating
rating
rating
Factors
A
B
A
B
A
B
Tax advantage
4
3
8
9
32
27
suitability of labor skills
3
4
2
7
6
28
Proximity to customers
3
4
6
8
18
32
Proximity to suppliers
5
3
2
5
10
15
Adequacy of water
1
2
3
2
3
4
Receptivity of community
5
4
4
8
20
32
Quality of education system
4
1
1
2
4
2
Access to transpiration
3
5
10
3
30
15
Suitability of climate
2
5
7
10
14
50
Availability of power
1
1
6
6
12
6
Total Score
149
211
Factor
(100 pts. each)
Weight
Locations
(max score 100)
Weighted score
A
B
C
A
B
C
1. Convenient
0.15
80
70
60
12.0
10.5
9
2. Parking facilities
0.20
72
76
92
14.4
15.2
18.4
3. Display area
0.18
88
90
90
15.84
16.2
16.2
4. Shopper traffic
0.27
94
86
80
25.38
23.22
21.6
5. Operating costs
0.10
98
90
82
9.8
9
8.2
6. Neighborhood
0.10
96
85
75
9.6
8.5
7.5
Sum
1.00
87.02
79.92
73.6
Decision:
-
Location A is better because it results in a highest score.
75
This method begins by
locating the existing locations on a coordinate grid system. The purpose is to establish relative
distance between locations. The center of gravity is found by calculating the X and Y coordinates that will result is the
minimal transportation cost. This is
given by the following weighted formula.
Cx =
X.dix Vi
ZVi
Cy
=
Z
diyVi
Z
v
2
where:
Cx
=
X coordinate
of the center of gravity
Cy
=
Y coordinate
of the center of gravity
Dix
=
X coordinate
of the i
th
location
Diy
=
Y coordinate
of the i
th
location
Vi =
Volume of goods moved to or from the i
th
location
Example 1:
A refining company needs to locate an intermediate holding facility between its refining plant and its major
distributors. The coordinate map is the following.
500
400
300
200
100
O
D
L(450
350)
o
C(308^217)^
A(400 150)
Plant
o
Distributor
(325, 75)
Plant
summarized as
follows:
Location
X
Y
Gallons of Gasoline/month (000')
Plant
325
75
1500
A
400
150
250
L
450
350
450
G
350
400
350
T
25
450
450
dix = 325 diy = 75 Vi = 1500
Cx = (325x1500) + (1400x250) + (450x450) + (350x350) + (25x450)
100
200
300
400
500
Shipping Volumes and the coordinates of the destinations shown in map is
76
(
x
y
)
—
2
xi
2
di
2
yi
di
2
di
‟ 2
di
A
2
xi di
5 x 15 + 6 x 20 + 3 x 25 + 9 x 30
X
—
2
di
15 + 20 + 25 + 30
Y
660
90
7.33
1500 + 250 + 450 + 350 + 450
C
x
=
925,750
=
307.9
3000
Cy=
(75x1500) + (150 +250) + (350x450) + (400x350) + (450x450)
3000
=
216.7
X and Y coordinate are approximately 308 and 217 respectively. Therefore, the location of the
intermediate
holding facility should be at (x, y) = (308 217). On the map it is represented by
point C.
Example 2
A clothing manufacturing produces children's cloth at four locations in northern Ethiopia.
Relative locations have been determined, as shown in the table
below. The location of a central
shipping point for bolts of cloth must now be determined. Weekly quantities to be shipped to
each location are shown below. Determine the coordinates of the location that will minimize
distribution costs.
Solution
Coordinate point is given by the formula:
540
,
= = 6
90
“
2
Yi di
_
9 x 15 + 9 x 20 + 9 x 25 + 4 x
30
2
di
~
15 + 20 + 25 + 30
Location
(X, Y)
We
ekly Ouantitv
A
5, 9
15
B
6, 9
20
C
3, 9
25
D
9, 4
30
77
(x
y
)=
(6
7.33)
3.4.5
Locating Service outlets
A Heuristic Method Example
Suppose that a medical consortium wishes to establish two clinics to provide medical care for
people living in four
communities. Assume that the sites under study are in each community and that the population of each community is
evenly distributed within the community‟s boundaries. Further, assume that the potential use for the clinic members of
t
he various communities has been determined and weighting factors reflecting the relative importance of serving
members of the population of each community have been developed.
Find the two clinics that can serve all communities at the lowest weighted trave
l distance cost. Distances, population and
relative weights are given below.
To answer this question, you can follow the following processes/steps.
Steps:
Steps I. Construct a weighted population distance table the above data table (multiplying distance times weighting
factors)
Step II. Add the amounts in each column. Choose the community with the lowest cost and locate the facility there.
Based on the weighted
score, community C is the first choice.
NB. Costs are expressed is weighted population distance units
Step III. For each raw compare the cost of each column entry to the communities already located if the cost is also do
not change them. If the cost is gre
ater reduce the cost to the lowest of the communities already selected.
Step IV. If additional locations are required, choose the community with the lowest cost form those not already selected.
From
Community
Miles to clinic
Population of
Community
Relative weighting of
population
A
B
C
D
A
0
11
8
12
10,000
1.1
B
11
0
10
7
8,000
1.4
C
8
10
0
9
20,000
0.7
D
9.5
7
9
0
12,000
1.0
To clinic located in community
From Community
A
B
C
D
A
0
121
88
132
B
123.2
0
112
78.4
C
112
140
0
126
D
114
84
108
0
Total
349.2
345
308
338
78
Continue repeating step 4 and 5 until the desired number of location is selected. Final table
The problem has now solved for all
four possible location.
1
st
C
2
nd
D
3
rd
A
4
th
B
Community
To clinic located is community
A
B
C
D
A
0
88
88
88
B
112
0
112
78.4
C
0
0
0
0
D
108
84
108
0
Total
220
172
308
166.4
Step V. Repeat step 3 reducing each raw entry that
exceeds the entry in the columns just selected to
clinic.
From
Community
To clinic located is
community
A
B
D
A
0
88
88
B
78.4
0
78.4
C
0
0
0
D
0
0
0
Total
78.4
88
166.4
From
To clinic
A
B
A
0
88
B
78.4
0
C
0
0
D
0
0
Total
78.4
88
79
A
B
C
9
5
5
7
6
7
3
8
7
5
6
5
4
7
8
5
5
4
6
7
8
Check Your Progress Exercise
1.
Define and briefly explain the following terms
A.
Capacity
B.
Facility layout
C.
Capacity utilization and efficiency.
2.
Identify and discuss the basic types of
facility layout.
3.
Discuss the factors that affect location decisions.
4.
A manger has conducted an analysis of several cites being considered for a new office
complex. The data (10 points maximum) are given in the following table.
Factors
1.
Business services
2.
Community services
3.
Real estate cost
4.
Construction cost
5.
Cost of leaving
6.
Taxes
7.
Transpiration
Required:
If a manger weights the factors equally, how would the locations compared?
5.
A retired auto mechanic hoes to open his
own restoring shop. Customers would be area new
-
car dealers. Two
locations are being considered, one in the center of the city and one on the outskirts of the city. The in
-
city
location would involve fixed monthly cost of Br.7000 and labour, materials, and
transportation cost of Br 30 per
car. The outside location would have fixed monthly costs of Br.4, 700, and labour, materials and transpiration
cost of Br. 40/car. Dealer price at ether location will be Br. 90 per car.
Required
a.
Which location will yield
the greatest profit it monthly demand is i)200 cars ii) 300 cars
b.
At what volume of output will the two sites yield the same monthly profit?
3.6
ANSWER TO CHECK YOUR PROGRESS EXERCISE
1.
Refer sections 3.2 and 3.3
2.
Refer section 3.3.2
The types of layouts are:
-
process layout
-
cellular manufacturing layout
-
fixed position layout
80
3.
Refer section 3.4.3
Factors that affect location decisions are:
-
proximity to customers
-
proximity to raw materials
-
infrastructure
-
quality of labour
-
community facilities
-
cost of land,
-
utilit
ies etc.
UNIT 4: INVENTORY PLANNING AND CONTROL
Contents
4.
Aims and Objectives
4.1
Introduction
4.2
Inventory Models for Independent Demand
4.3
Functions/Purposes of Inventories
4.4
Inventory Management Models
4.4.1
Model I (Economic Order Quantity Model)
4.4.2
EOQ for Production Lot
Model II
4.4.3
Model III, EOQ with Quantity Discount
4.5
Summary
4.6
Answers to Check Your Progress
4.0
AIMS AND OBJECTIVES
After reaching this unit, you should be able to:
-
explain the objective/purposes of inventories
-
describe the inventory management models
-
understand ABC
inventory models.
4.1
INTRODUCTION
Good inventory management is essential to the successful operation of most organizations for a number of reasons. One
is the amount of money inventory represents and the other is the impact that inventories have on the daily
operations of
an organization. An inventory is a stock or store of goods. Firms typically stock hundreds or even thousands of items in
inventory, ranging from small things such as pencils, paper clips, screws, and bolts to large items such as machines,
tr
ucks and airplanes. Naturally, many of the items a firm carries in inventory relate to the kind of business it engages in.
This unit focuses on management of inventories, objective/purpose of inventories, costs of inventories and techniques
for determining
how much to order (EOQ models) and when to reorder (Reorder point) are explained.
4.2.
INVENTORY MODELS FOR INDEPENDENT DEMAND
81
A major distinction in the way inventory planning and control are managed is whether demand for items in inventory is
independent or dependent.
Dependent demand
exists in instances in which the orders, plans and schedules can be
assumed to be known with co
nsiderable certainty.
Independent Demand
exists when the quantity that will be
demanded for a period is not known for certain but can be reasonably forecasted even though the exact demand for a
shorter period can fluctuate widely.
4.3
FUNCTIONS/ PURPOSES OF IN
VENTORIES
Organizations keep a sock of inventories for the following major reasons:
1)
Decoupling production processes
After each production and distribution stage, inventories serve to increases the rationality of the production and
distribution system by de
coupling its parts.
By providing inventories at selected steps in the manufacturing
-
distribution system, a firm obtains a certain degree of
independence for the steps following or down stream form those inventories. If one production operation becomes in
o
perative because of breakdown, the succeeding operation can continue as long as the in process inventory ahead of it
exists. Even though the firm that makes a product is closed, retail customer service can be maintained if there are
inventories at the reta
il level. Decoupling or uncoupling (especially for process focused production) increases flexibility.
2)
Stabilizing Employment
Inventory mitigates the problem of minimizing major changes in the size of the work
-
force under conditions of
fluctuating demand.
If it is believed that demand for a firm‟s product will decrease in the near future, the additional cost involved in
inventorying excess production may be entirely or act impart offset by avoiding layoffs which could adversely affect the
firms layoff cost
(compensation
...
) and result in a loss of employee skills and experience that will be needed when
product demand picks
-
up. Cost of recalling back, recruitment and training new employees can be minimized.
3)
Production stoppage protection
Inventories can serve
as temporary protection against interruptions in supplies. Inventories may provide the firm
sufficient time to find alternative sources of supply or allow the firm to continue production until the cause of the
stoppage has bean removed. (E.g. Labour strik
e, transportation facility problem, war etc
.
.
.
)
4)
Taking advantage of quantity discounts
Larger inventories of supplies and purchased parts may gain the firm the advantage of lower prices. Price discounts,
reduced freight and handing costs are advantages.
The fixed cost of ordering will also be shared by a larger number of units if price increases are imminent.
5)
Protection against stock
-
outs
Holding inventories can often provide protection against unexpected increases in demand for products. This protects th
e
firm from losing customers.
82
6.
Essential in produce
-
to stock positioning strategy
Enable the firm to capture market share by enabling it to ship customers‟ orders fast
7.
Level capacity plans
In factories that produce many products (as in printing, household
appliance, and clothing industries) when a product is
introduced into production the stages of production must be changed over form the preceding product to that next
product. Production at a uniform rate will reduce setup costs and wastage.
8.
To display pr
oducts to customers Why we do not
want to hold inventories.
Inventories can be indispensable to the efficient and effective operation of production systems. But there are good
reasons why we don not want to hold inventory. The following are some:
1.
Carrying
or holding cost. Interest on debt, (interest is income foregone,) warehouse rent, cooing, heating,
lighting, repairing, protecting, shipping, receiving, materials handling taxes, insurance and management are
some of the costs incurred to insure, finance, s
tore, handle and manage larger inventories. Obsolescence,
depreciation and pilferage also add cost to inventory.
2.
Cost of customer responsiveness: Large in
-
process inventories clog production systems. The time required to
produce and deliver customer orders
is increased and our ability to respond to changes in customer orders
diminishes.
3.
Cost of coordinating production: Because large inventories clog the production process more people are
needed to solve congestion related production problems and coordinate
schedules.
4.
Cost of diluted return on investment (ROI): Inventories are assets. Assets can not generate into me and large
inventories reduce return on investment through increasing interest or redlining stock price/
5.
Reduced
-
capacity costs: Inventory represe
nts a form of waste. Materials that are ordered held and produced
before they are needed waste production capacity.
6.
Large
-
lot quality cost: On rare occasions, something goes wrong and a large part of a production lot is
defective. Especially high
-
automated
systems can yield large volume of waste and defects.
7.
Cost of production problem: Higher in process inventories camouflage underlying production problems.
Problems and material shortage never get solved.
4.4
INVENTORY MANAGEMENT MODELS
1
2
3
4
The fundamental issues underline all inventory planning are
1)
How much to order of each material when orders are placed with either outside suppliers or production
departments within the organization.
2)
When to place the order
The determination of
order quantities and when to place these orders determine in large measure the amount of materials
in inventory at any given time.
The answer to the question how much should we order depends on the cost of ordering too much and the cost of
ordering too li
ttle.
83
Annual stocking cost curve demonstrate an important concept in inventory planning. There exists for every material held
in inventory an optimal order quantity order quantity where total annual stocking costs are at a minimum.
2
Fixed order quantity i
nventory management A fixed, predetermined quantity of an inventoried item is ordered when
the stock on hand reaches a level called reorder point. The order point is determined by estimating how much we expect
to use of a material before we order and recei
ve another batch of that material.
4.4.1
Model I (Economic order Quantity Model)
Assumptions
1.
Annual demand, carrying cost and ordering cost for a material can be estimated.
3
Average inventory level for a material is order quantity divided by 2. This simply
assumes that no safety stock
is utilized, orders are received all at once, materials are used at a uniform rate, and materials are entirely used
up when the next order arrives.
4
Stock out, customer responsiveness and other costs are inconsequential
84
Cost Formulas
Annual Carrying Cost
= Average inventory level X Carrying cost
Annual ordering cost
= Orders per year x ordering cost per order
Total
Annual Stocking cost = Annual Carrying cost + annual ordering cost
Variable definition
D = annual demand for a material (units per year)
Q = quantity of material ordered at each order point (units per order)
C = cost of carrying one unit in inventory for
one year (Br/unit/year)
S = average cost of completing an order for a material (Br/order)
TSC = total annual stoking costs for a material (Br/year)
TSC = (Q/2) c + (D/Q) s
Derivation of the economic order quantity (EOQ)
TSC is minimum when annual ordering
cost equals annual carrying cost
i.
e. (D/Q)s = Q/2(c)
DS/Q = QC/2 Q
2
C
= 2DS Q
2
=
2DS/C
Q = 2DS/C = Economic order quantity.
Example 1
A firm purchases 10000 parts per year from a manufacture at a per unit cost of Br. 3. The ordering costs have been
estimated
to be Br 4 per order. And the annual per unit holding costs are br1 what EOQ should the firm use?
D = Br 4/older
S = 10000/year
EOQ = 2DS/C = 2(4)10000/1 = 282.8 units/order.
4. Quantity discounts do not exist
85
Example 2
A supply Co. stocks thousands of plumbing items sold to regional
plumbers, contractors, and retailers. The firm‟s
general manager wonders how much money could be saved annually if EOQ were used instead of the firm‟s present
rules of thumb. The manager instructs the inventory analyst to conduct an analysis of one materia
l to see if significant
savings might result from using the EOQ. The analyst develops the following estimates from accounting information.
D = 10,000 valves per year Q = 400 per
order C = 0.4 Br per valve per year and S =
5.50 per order
Present Total Stock
ing
Cost;
TSC
1
= (Q/2)(c) + (D/Q)s
= 400/2(0.4) + 10000/400(5.5) = 88 + 137.50 =
217.50
EOQ =
JlDSlC
=
V
2(10000)(5.5)/0.4 =
V
275000 =
524.4
values
TSc
2
(if EOQ were employed)
TSc
2
= (Q/2)c + (Q/D)s = s24.4/2 (0.4) + (10000/524.4)5.5 = 104.88 +
104.88 =
209.76
Estimated annual saving
= TSc
1
-
TSc
2
= 217.50
-
209.78 = 774 for one material
4.4.2
EOQ for production lot /Model II
This model is applied for planning the size of production lots for in house manufacturing of products. It can also be used
to plan order
quantities for certain materials ordered form suppliers for inventory.
This model is based on the following assumptions, which are slight modification on the assumptions of Model I.
-
Orders are assumed to be supplied or produced at a uniform rate rather t
han all at once.
i.
e. partial shipments or receipts are common. The producer may not want to schedule production sufficiently
ahead of the delivery date to accumulate the total order, or the consumer may want to avoid having to provide
warehouse space suffic
ient to store the whole order. Such an arrangement would usually be preferred because
larger order quantities and lower TSC. Production occurs and flow into inventory at a rate (P) that is greater than
the usage or demand rate (d) at which the material is
following out of inventory.
86
P = rate at which units are supplied to inventory Cost formula
Maximum inventory Level = inventory build up rate X period of delivery
= (P
-
d) (Q/p)
Minimum inventory level = 0
Average inventory level =
'
A (maximum (p
-
d) (q/p)+
0) = q/2 (p
-
d)/p Annual carrying cost =
Average inventory level X carrying cost =
Q/2 (
p
-
d)/
p
) c
Annual ordering cost = orders per year X ordering cost = (D/Q)S
Total annual stocking cost = annual carrying cost + Annual ordering cost
= Q/2 [(p
-
d)/p] c +
(D/Q) s
EOQ =
yj2DS
/ C
.[p
/(p
-
d
)]
= V(2DS /
C)(P
/
P
-
d
)
Example 1
A plumbing supply Co. has an adjacent production department that could produce a brass valve. If the valves were
produced in house in production lots, they would flow gradually into
inventory at the main warehouse for use. The
caring cost, ordering (setup) cost, and annual demand would remain the same. Because the values actually flow into
inventory rather than being received all at once as a batch, the manager wonders how this would
affect the order
quantity and annual stocking cost. The inventory analyst develops these estimates.
D = 10,000 C = 0.4 S = 5.5
d = 40 valves/day p = 120 valves/day
87
i.
e.
10000 per year
250 working days/year
Calculate the EOQ:
EOQ =
y/2DS
/
C
(
P/P
-
d
) = ^
2(1QQ
0
Q
°
(5
.
5)
=
642.26
values
The new TSc (3)
= Q/2 (P
-
d/p)c + (D/Q)s =
642.26 (120
-
40)
0.4 +
(10000)
5.5 2
120
642.26
= 85.63 + 85.63 =
171.26/
vear
Estimated saving
TSc
2
-
TSc
3
= 209.76
-
171.26 =
38.50/
vear
4.4.3
Model III, EOQ with quantity Discount
Suppliers ma
y offer goods at lower unit prices if larger quantities are ordered. Large order quantities are less expensive
to produce and ship. A critical concern in most decisions of order Quantities is ordering enough material to qualify for
the best price possible,
but not buying so much that carrying costs consume the savings in purchase costs. The classic
model of EOQ does not consider discounts.
Assumptions
1.
Annual demand, carrying cost and ordering cost for a material can be estimated
2.
Average inventory level can
be estimated to be Q/2 if the assumptions of Model I Prevail no safety stock,
orders are received all at once, materials are used at a uniform rate, and material are entirely used up when the
next order arrives. And Q/2 (p
-
d/p)
-
if the assumption of model
II prevails (production lot size) no safety
stock, materials are supplied at a uniform rate (p) and used at a uniform rate (d) and materials are entirely used
up when the next order arrives partial shipment is possible. That is
1.
If deliveries of orders occ
ur all at once, Model I formulas are used
2.
If deliveries are gradual (partial shipment) Model II formulas are used.
3.
Stock out, customer responsiveness and other costs are inconsequential
4.
Quantity discount do exist. As large quantities are order, price
breaks apply to all units ordered.
The EOQ and TSC formulas from either model II or I are applied to model III depending on which assumptions best fit
the inventory situation.
Annual acquisition cost = Annual demand X Acquisition cost
= D (ac); where ac
-
acquisition cost
88
Model II
EOQ = V
2DS
/
C(P
/
p
-
d
) TMC = Q/2
(c) + (D/Q)s + D(ac)
EOQ = 2DS/C(P/p
-
d)
TMC = Q/2 (p
-
d/p)c + D/Q(s) + D(ac)
2.20
2.00
1.80
2
(
1000
°)
5
-
5
= 524A
Total annual material costs (TMC) = Total annual stocking cost + Annual acquisition cost
=
T
SC+D (ac)
Model
I
Procedures
1.
Compute the EOQ using each of the sales price (usually C may be defined as percentage of sales price).
Therefore EOQ well change as C and ac changed
2.
Determine which EOQ is feasible. Is the computed EOQ in the quantity range of its price?
3.
The T
MC is computed for the feasible EOQ and the quantity at any price break with lower sales price
4.
The order quantity with the lowest TMC is the EOQ for the material
Example
The manufacturer of plumping material (brass value) has offered a distributor quantity
discounts if he will
purchase more than his present order quantities.
The new volume and price are
Range of order quantities
Acquisition cost per value (ac)
1
-
399
400
-
699
Greater than 700
The inventory analyst investigate the prices
under two sets of assumptions
1)
Orders are received all at once and
2)
Deliveries are gradual
1)
Orders received all at once
The analyst has developed the following estimates
0.2(2)
TMC
TMC (ac = 220)
89
Q = 700
TMC
EOQ
2.00
2(10000)(5.5)
0.2(1.8)
120
120
-
40
677.10
The analyst note that only EOQ 2.00 is feasible because 524.4 valves per order can be purchased
at 2Br/valve.
The TMC at two quantities is investigated
Q = 524.4
TMC = Q/2(c) + D/Q (s) + D(ac)
=
524.4
(0.4) +
10000
(5.5) + 100000(20 2
524.4
= 104.88 + 104.88 + 20000 = 20209.70/year
700 (0.2 x 1.8) +
10000
(5.5) + 100000 (1.8) 2
700
126
+ 78.57 + 18000 = 18,204.57/year
If orders are delivered all at once, 700 valves should be ordered at each inventory replenishment.
2.
Partial shipment (Gradual delivery)
The analyst has developed the following estimates
D = 10000 S = 5.5
C = 0.2(ac) P =
120/day d = 40/day
EOQs;
2DS
(P)
^0
0
0
0
0
ui
(120 )
C p
-
d
\
0.2(2.2)
120
-
40
■352.
8
TMC (ac = 2)
TMC (ac = 80)
700
Order quantity
90
Note that 642.3 valves per order can be purchased at Br 2/value. The quantities are
investigated that is 642.3 and 7000
units per order.
Q = 642.3
TMC = Q/2 (p
-
d/p)c + D/Q(s) + D(ac)
=
642.4 (120
-
40)
+
100000
(5.5) + 10000(2)
2
120
642.4
= 85.63 + 85.63 + 2000 = 20,171.26
If orders are delivered all at once, 700 valves should be ordered
at each inventory replacement.
Q = 700
TMC = 700/2 (120
-
40/120) (0.2 x 1.8) + (10000/7000) (5.5) + 100000 (1.8)
= 84 + 78.57 + 18,000 =
18162.57/vear
If gradual deliveries are used 700 units per order should be purchased
Given choice the manager
would pre
fer to have gradual deliveries of the valve in quantities of 700 units per order because the TMC of gradual
deliveries is less than that for orders delivered at once.
4.4.4
ABC Inventory Management Method
An analysis of inventories commonly reveals that a small
percentage of items accounts for a major portion of the inventory
investment. With few exceptions, no company maintaining large number of items in inventory uses EOQ formula to
analyze its purchase decisions for every item, part, or product it buys. From t
his analysis we can conclude that selective
control procedures rather than equal treatment of all inventory items will yield adequate control at a lower cost.
Under the ABC inventory management method all inventories are classified on the basis of relative
value to the firm‟s
total inventory investment.
In addition to the assumption that it is uneconomical to manage each item in the inventory, this approach also assumes that
efficient and effective inventory management can be achieved only by managing group
s of items instead of individual
items.
There are several reasons for such selective control of inventories
-
minimizing investment
-
maximizing service
-
preventing or mitigating the consequences of stock
-
outs,
-
minimizing transportation costs
In classifying
individual items in inventory, all items must be first be listed. The total yearly usage and production cost is
computed for each item (units/year X cost/unit). The items and
the yearly cost are then rearranged in descending order and are separated into cl
ass of categories.
The ABC classification method suggests that inventories should be grouped into three categories A, B and C.
If more than three groups can be justified in a particular case, they should be used.
A typical application of ABC inventory mana
gement would classify.
-
75 to 80% of the value and 20% of the materials into class A
91
-
15 to 20% of the value and 30% of the materials into class B
-
5 to 10% of the value and 50% of the materials in to class C
Class A items represent the majority of inventory
investment but account for only 15 to 20% of the items. These items
justify the employment of inventory models and closer management controls. While class B and class C can justify less
costly inventory control methods.
Although the emphasis of the ABC classification method is on concentrating
financial concern and control in proportion to
the investment value of an inventory item, it should be acknowledge that criteria other than investment may be used to
determine inventory classification.
Among these other criteria are the following
1.
The item
is absolutely necessary for manufacturing or fabricating the firm’s products
.
Larger inventories may be justified not to disrupt operation.
2.
The item is critical for maintaining operation
Because stock outs of these materials can select
down production line
s, larger inventories may be justified
3.
The item has a short shelf life
Because these materials may be subject to very fast deteriorate, smaller
inventories may be justified.
4.
The item has very long or with highly erratic lead times
.
Larger orders for these
materials
reduce the number of orders during the year and mitigate the uncertainty of supply.
5.
The item is likely to pilferage, theft
.
To reduce risk of loss smaller inventories may be justified
6.
The item is very large and bulky or heavy
.
Because these mater
ials require so much storage space,
smaller inventories may be justified.
7.
The item has highly erratic demand
.
Larger order quantities and order points may be justified for
materials with unpredictable demands.
8.
The item is apt to become Obsolete because of
model changes and the like
Smaller
inventories may be justified.
9.
The item required special storage or employee protection
.
The item can be toxic gas or poison or
has radiation. Smaller inventories may be justified.
10.
Standard packaging, shipping container,
or vehicle size
.
Quantities other than the EOQ may be
justified because of extra costs if order size departs from the norm.
Check Your Progress Questions
1.
Differentiate the dependent and independent demand.
2.
Discuss the purpose of holding inventory.
3.
What are
the factors that favor low and those factors that push managers to keep more inventories?
4.
A toy manufacturer uses 48,000 rubber wheels per year for its popular dump truck series. The firm makes its
Inventory control parameters for ABC
classification methods
Class
Control
Lot size
Buffer stock
Inventory Audit
A
Close
Small
Small
Frequent
B
Moderate
Medium
Moderate
Occasional
C
Loose
Large
Large
infrequent
92
own wheels, which it can produce at a rate of 800 per day
. The toy trucks are assembled uniformly over the
entire year. Carrying cost is Br 1 per wheel a year. Set up cost for a production run of wheels is Br. 45. The firm
operates 240 days per year. Determine the;
A.
Optimal run size
B.
Minimum total cost for
carrying and set up.
C.
Cycle time for the optimal run size
D.
Run time
4.5
SUMMARY
Good inventory management is essential to the successful operation of most organizations for a number of
reasons. Two most important ones are the amount of money inventory represents
and the impact of inventories on
operations of an organization.
An inventory is a stock or store of goods. Firms typically stock hundreds or even thousands of items in inventory, ranging
from small things such as pencils, paperclips; screws to large item
such as machines, trucks. Manufacturing inventory is
typically classified into raw materials, finished goods, component parts, supplies and work in process. In services,
inventory generally refers to the tangible goods to be sold and supplies necessary to
provide the service.
All firms (including J IT operations) keep a supply of inventory for the following reasons:
1.
To meet un anticipated customer demand variation in product demand.
2.
To smooth production requirements
3.
To decouple operations
4.
To protect against
stock outs /shortage
5.
To take advantage of order cycles
6.
To hedge against price increase.
The above purposes of holding inventory can be categorized in to three major motives:
-
the transactional motives
-
the
perceptional motives
-
the
speculative motives
In making any decision that affects inventory size, the following costs must be considered.
1.
Holding ( carrying) costs.
2.
Ordering Costs
3.
Shortage costs
In inventory management, it is important to understand the difference between dependent and independent dem
and. The
reason is that the entire inventory systems are predicted on whether demand in derived from an end item or is related to the
item itself.
The question of how much to order is frequently determined by using an economic order quantity (EOQ) model. E
OQ
models identify the optimal order quantity by minimizing the sum of certain annual costs that vary with order size. There
are three order size models:
1.
EOQ model. It assumes orders are delivered as a whole units at a single point in time (Instantaneous
replenish)
2.
EQO model with non
-
instantaneous delivery. Inventories are replenished over time instead of instantaneously.
93
3.
The quantity discount model.
4.6
ANSWERS TO CHECK YOUR PROGRESS QUESTIONS
1.
Refer section 4.2
2.
Refer section 4.3
3.
Refer section 4.3
Solution
D=
48,000 wheels per year S= Br 45
H= Br. 1 per wheel per year
P= 800 wheels per day
U= 200 wheels per day ^
48,000/240
B TC min = carrying cost + set up costs = (Imax/ 2) H + (D. Q o ) S
Imax= Qo/ P ( P
-
U) = 2400 / 800 ( 800
-
200)
=
1800 wheels
TC = 1800/ 2 X 1 + (48,000/ 2400 ) 45 = 900 + 900 =
1800 B
r.
C.
Cycle time = Qo/ U = 2400
w
/ 200 w/d =12 days Thus, the wheels will be
made every 12 days.
D.
Run time = Qo/ P = 2400 wheels/ 800 wheels/day =3 days. Thus, each run
will require three days to compute
.
UNIT 5 PRODUCTION PLANNING AND CONTROL
Contents
5.
Aims and Objectives
5.1
Introduction
5.2
Forecasting
5.3
Production Planning
5.3.1
Planning Strategies
5.3.2
Aggregate Planning Techniques
5.4
Master Production Scheduling (MPS)
5.5
Production Control for Job Shops
5.6
Production Control
Function
5.7
Paper Communications for Authorization and Control
5.8
Summary
5.9
Answers to Check Your Progress
5.0
AIMS AND OBJECTIVES
2, 400 wheels
94
After reading this unit, you should be able to:
^ discuss the elements of good forecasting
^ understand the methods of forecasting and
their application in assisting planning. ^ explain the strategies of
aggregate planning.
^ understand the aggregate planning techniques ^ explain master scheduling
5.1
INTRODUCTION
Planning is an integral part of a manager‟s job. If uncertainties cloud the pla
nning horizon, it can be quite difficult for a
manager to plan effectively. Forecasts can help managers by reducing some of the uncertainty, thereby enabling them to
develop more meaningful plans than they might otherwise. This unit deals with business for
ecasting and aggregate
planning. It covers basic forecasting techniques, how to monitor a forecast, the necessary steps in preparing a forecast, and
elements that are common to forecasts, techniques of forecasting. Moreover, it addresses the concept of agg
regate
planning, techniques of aggregate planning, master scheduling and controlling.
5.2.
FORECASTING
Forecasting is an integral port of planning. Forecasting is estimating the future demand for products and the resources
necessary to produce these outputs. Sa
les forecasts are the starting point for all other forecasts is production and operations
activities. It becomes an input of both business strategy and production strategy.
Why forecasting?
1.
New facility planning /build new factory or design and important
new production process.
2.
Production planning /demands vary form month to month production rats must
3.
Work force scheduling/ demand very from walk to week
5.2.1. What is Forecasting?
Forecasting is the art and science of predicting future events. It may invol
ve taking historical data and projecting them into
the future with some sort of mathematical model. It may be a subjective or intuitive prediction (subjective) or a
combination of mathematical model adjusted by a manager's good adjustment. In a summarized
form a forecast:
1.
Is a statement of the future
2.
Is a basis for planning
3.
Is not for forecasting demand only, it can be used in forecasts such as economic, technological and the like.
4.
Requires a skillful blending of art and science.
5.
Assumes that the underlying
system will continue to exist in the future.
6.
Is rarely perfect i.e., actual results usually defer from predicted values. Perfect forecast is usually impossible.
Too many factors in the business environment cannot be predicted with certainty.
-
Do not to b
e accurate but
improve the system.
7.
Forecast accuracy decreases as the time period covered by the forecast increases.
Production and operations managers use forecasts to made periodic decisions involving:
-
process selection
-
capacity planning
-
facility layout
and
95
-
continual decisions about production planning, scheduling and inventory
-
budgeting
-
sales planning
5.2.2.
Elements of a Good Forecast
-
The forecast horizon must cover the sufficient time necessary to implement possible changes.
-
The degree of accuracy should be
stated
-
The forecast should be reliable: it should work consistently.
-
The forecast should be expressed in meaningful units
-
The forecast should in writing
-
The forecast should be simple to understand and use, or consistent with historical data intuitively.
5.2.3.
Steps in Forecasting Process
There are certain basic steps in the process of forecasting.
1.
Determine the purpose of the forecast.
2.
Select the item to be forecasted.
3.
Establish a time horizon.
4.
Select a forecasting technique.
5.
Gather and analyze the appropriate
data.
6.
Prepare a forecast.
7.
Monitor a forecast.
5.2.4.
Approaches to Forecasting
Which forecasting model a firm should choose depends on:
•
Time horizon to forecast
•
Data availability
•
Accuracy required
•
Size of forecasting budget
•
Availability of qualified personnel
•
Degree of flexibility
There are two general approaches to forecasting. There are Qualitative and Qualitative approaches.
A. Qualitative approach
-
Qualitative methods consist mainly of subjective inputs, which often disregard precise numerical
description.
It permits inclusion of soft information (human factors, personal opinions, etc) in the forecasting process.
Those factors are often omitted or downplayed when quantitative techniques are used because they are difficult or
impossible to quantify.
96
-
they ar
e difficult to express precisely by number
-
they are based on personal estimates or opinions or judgment
Qualitative techniques include:
1.
Jury of executive opinions
A small group of upper
-
level managers may meet and collectively develop a forecast. This
approach is often used as a part
of long
-
range planning and new product development. It helps to bring together the considerable knowledge and talents of
top management people, simple, inexpensive. However, there is the risk that the view of one person wil
l prevail and it is
based on opinion only.
2.
Sales for composite
The sales staff is often a good source of information because of its direct contact with customers and experience.
3.
Delphi method
-
used to develop consumers of expert opinion
4.
Customer analysis
/Evaluation/
B. Quantitative approaches
Involves either the extension/projection of historical data or the development of associative models that attempt to utilize
causal (explanatory) variables to make a forecast. They include:
1.
Time series forecasts
Is a
technique that uses a series of past data points to make a forecast. A time series is a time ordered sequence of
observations taken at a regular interval over a period of time (e.g. Hourly, weekly, monthly, quarterly or annually). The
observation or the d
ata may be the measurements of demand, earnings, profits, productivity etc.
Forecasting techniques based on time series data are made on the assumption that future values of the series can be
estimated from the past.
This technique requires analysts to ide
ntify the underlying behavior of the series. The time series typically has four
components
1.
Trends
3. Cycles
2.
Seasonal variations
4. Random variation
Trend
-
refers to a gradual, long
-
term upward or downward movement in data
97
where: Y
t
= forecast at time t
Y
t
-
1
= actual data at time t
Techniques for Averaging
When
historical data typically contain a certain amount of random variation or disturbance that
tends to affect the systematic movements in the data. This randomness arises from the combined
influence of many relative unimportant factors and cannot be reliably
predicted.
-
To reduce the impact of such random variations, different averaging techniques are used.
These are:
1.
Naive forecasts
2.
Moving averages
-
Simple or weighted
3.
Exponential smoothing
1.
Naive forecast
It is Simple forecasting technique that assumes
demand in the next period is equal to demand in
the most recent period i.e., the forecast for
any period equals the
previous period's
actual
value.
Example
: If last week
demand was 100 units, the naive forecast for
the upcoming week is 100 units.
-
The for
ecast can be represented by the following formula:
Advantage:
1. Less cos
r
2.
quick
3.
easy to prepare and
4.
easy to understand
Limitations:
unable to provide highly accurate forecasts
2. Moving
Average
-
simple or weighted
A moving average uses a number of the most recent actual data values in generating a forecast.
One weakness of the naive method is that the forecast must trace the actual data, with a lag of
one period; it doe snot smooth at al
l. However, by expanding the amount of historical data a
forecast is based, this difficulty can be overcome using a moving average.
The moving average (MA) forecast can be computed using the following equation: (simple
moving average)
n
Z
MA
n
=
---
n
98
Period
Age
Demand
1
5
42
2
4
40
3
3
43
4
2
40
5
1
41
Solution
MA
3
39
+
41
+
40
3
40
where: i = refers to the most recent period (i = 1, 2, 3,
...
, n) n
= number of periods in the moving average yi = actual
value with period i
MA
n
= moving average of the most recent n actual forecast
For example MA
3
would refer to a 3 period moving
average.
Example 1
. Compute a three period moving average forecast for period six given demand for
shipping a product for the last five periods.
MA
3
= (41 + 40 + 43)/3 =
41.33
If actual demand in period
6
turns out to be 39, the moving average forecast for period 7 would
be:
Note
: In a moving average, as each new actual value becomes available, the forecast is updated by
adding the newest value and
dropping the oldest and then re computing the average.
Consequently, the forecast "moves" by reflecting only the most recent values.
Selecting the number of period to include:
There are several conflicting effects of different period lengths.
1
. The longer
the moving
-
average period, the greater the random elements are smoothed. However, 2. The few the data in
an average, the more responsive the average trends to be. Hence, if responsiveness is important, a
moving average with relatively few data points sho
uld be used. Moving average based on more
data points will smooth more but be less responsive to "REAL" changes. Hence, the decision
maker weigh the cost of responding more slowly to changes in the data against the cost of
responding to what might simply b
e random variations.
The advantage of moving average is that it is
easy to compute and understand. It limitations are:
-
Data storage requirements can be significant
-
Extensive records of data
-
Can not pickup trends very well
-
Increasing the site of n does smoo
th out fluctuations better, but it makes the method less
sensitive to real changes.
99
mA
ii.
Weighted moving average
Weighted moving (WA) average is similar to MA, except that it assigns more weight to the most recent values in a time
series. It may be expressed m
athematically as:
n
^
m Yi
i=1
^ (weigh for period n) (demand in period n)
^ weights
Example 3. You are given the following data:
a)
Compute a weighted average forecast using a weight of 0.40 for the most recent period, 0.30 for the next most
recent,
0.20 for the next, and 0.10 for the next.
b)
If the actual demand for period
6
is 39, forecast demand for period 7 using the same weights as in a
Period
Demand
1
42
2
40
3
43
4
40
5
41
Solution
a) Forecast = 0.4 x 41 + 0.3 x 40 + 0.2 x 45 +
0.1(40)
= 41
b) Forecast = 0.4 x 39 + 0.3(41) + 0.2 (40) + 0.1(43)
= 402
Note: the advantage of WA over a simple MA is that the WA is more reflective of the most recent occurrences.
5
5
Expo
nential smoothing
It is a sophisticated weighted averaging method that is still relatively easy to use and understand. In this technique each
new forecast is based on the previous forecast plus a percentage of the difference between that forecast and the a
ctual
value of the series at that point. That is:
New forecast = old forecast + a(Actual
-
old forecast)
Where =
a
= (Alpha) is a percentage
i.e., smoothing constant (Actual
-
old forecast) represents the forecast error.
Ft = Ft
-
1 + a (At
-
i
-
Ft
-
i)
Ft =
forecast for period t Ft
-
1
= forecast for
period t
-
1
100
b =
n
a =
a = Smoothing constant
At
-
i = actual demand for sales for period t
-
1
The smoothing constant
a
represents a percentage of forecast error. Each new forecast is equal to the previous forecast
plus a percentage of the previous error.
Example 1. Suppose the previous forecast was 42 unit, actual demand was 40 units, and
a
=
10
% w
hat is the new forecast?
Ft = 42 + 0.1(40
-
42)
=
41.8
Then, if the actual demand turns out to be 43, the next forecast would be:
Ft = 41.8 + 0.1 (43
-
41.8)
=
41.92
4.
Simple linear regression analysis
The following section of this unit illustrates simple
linear regression method. This technique is used to predict or project
the value of the dependent variable based on the actual or predicted value of the independent variable. The cause and effect
relationship of the variables is given by a linear equation:
Y = a + bx The variables used in the formula are defined as:
Y= dependent variable values n = number of
observations a = vertical axis intercept b = slope of the
regression line
Y
= average value of n observations of the dependent variable
X
= average value of
„n‟ observation of the
independent variable
>Z
xY
-
£
x^Y
n
Z
x
2
-
Z
(x)2
Z
Y
-
b
Z
X
n
=
Y
-
bX
If the date is a time series, the independent variable is time and the dependent variable is usually sales. The regression
equation is Y= a
+ bx
Example 1. A Company produces electronic motors for the construction industry. The plant has operated at near capacity
for over a years. The plant manager thinks that the growth in sales will continue and he wants to develop a long
-
range
forecast to b
e used to plan facility requirements for the next three years. Sales records for the past ten years have been
accumulated in the following table.
Years (x)
Annual Sales (y)
Time Period X _X
Y X
1
1000
1
1
1000
101
b
2
1300
2
4
2600
3
1800
3
9
5400
4
2000
4
16
8000
5
2000
5
25
10000
6
2000
6
36
12000
7
2000
7
49
15400
8
2600
8
64
20800
9
2900
9
81
26100
10
3200
10
100
32000
E
y
=21000
E
x = 55
E
x
2
385
E
xy = 133,300
E
y = 25,000
E
x = 55
E
x
2
= 385
E
xy = 133,300
n
E
xy
~E
x
E
Y
n
E
x
2
-
E
(x)2
10 X
133,300
-
55 x 21,000
10 x 385
-
(55
)
2
_
1,333,000
-
1,155,000
_
825
= 215.76
_
E
Y
-
b
E
x _
21000
-
215.8 x
55
n
10
=
913.3
Now the regression equation can be used to forecast future years‟ sales
Y = a+bx= 913.333+215.758x
The forecast for the next three
years 11, 12, 13 would be:
Y11= 913.333 + 215.758(11) = 3299 thousand units Y12= 913.333 +
215.758(12) = 3500 Y13= 913.333+ 215.758(13) = 3720
Simple linear regression can also be used when the
independent variable
Y represents variable
other than time. In this case linear regression representative of a class of forecasting models
called
casual forecasting model.
Example 2
The manager of an engineering corporation thinks that his firm‟s engineering services
supplied
are directly related to the amount of construction contracts.
102
The following date are prepared to develop a regression equation and to predict the level of demand for services for the
next four quarters and how closely demand is related to the amount of c
onstruction contracts released.
Therefore, the regression equation is:
Y=
-
9.671+ 0.1173x
Forecast
the level of demand for the next four quarters. The manager prepares estimates of the next four quarters‟ contract
releases. These were 260,290,300 and 270 .
Y1 =
-
9.671 + 01173 (260)
=
20.827
Y2 =
-
9.671 + 0.1173 (290)
24.346
Y3 =
-
9.671 +0.1173(300)
6
Business forecasts
Year
Ouarter
Sales (in thousands)
Amount of contact released (
000
‟)
1
Q1
8
150
Q2
10
170
Q3
15
190
Q4
9
170
2
Q1
12
180
Q2
13
190
Q3
12
200
Q4
16
220
Solution:
Develop the totals required to perform the
regression analysis
Time period
Sales(y)
contracts(x)
X
6
XY
Y
2
1
.
8
150
22,500
1200
64
2
.
10
170
28,900
1700
100
3.
15
190
36,100
2850
225
4.
9
170
28,900
1530
81
5.
12
180
32,400
2160
144
6
.
13
190
36,100
2470
169
7.
12
200
40,000
2400
144
8
.
16
220
48.400
3520
256
Total
95
1470
273,300
1183
b =
n
I
xy
-
I
x
I
y
_ 8(17830)
-
(1470)(95) _
0.1173
n
I
x
2
-
I
(
x
)
2
25500
a =
I
y
-
bI x
95
-
o.
117
3(
147
o) =
9671
n
8
103
=
25.519
Y4 =
-
9.671+ 0.1173(270)
=
22.000
The total forecast for the next year is the total of the four
-
quarter forecasts i.e. 20.827+24.346+25.519+22.000 = 92.7
thousand
5.3. PRODUCTION PLANNING
7
8
2
9
10
11
Specific plan in long
-
range plans include;
1.
Facility plans
-
Plant location
-
Layouts
-
Size
-
Capacities
Firms plan their manufacturing and service operations activities at various levels and operate these as a system. Based on
time dimension planning can be long range, medium range an
d short range.
8
Long
-
range planning. Begins with a statement of organizational objective and goal for the next two to ten years. It
includes:
1.
Corporate strategic planning articulates how these objectives and goals are to be achieved in light of the
compan
ies‟ capabilities and its economic and political environment as projected by its business forecasting.
Elements of the strategic plan include
-
production line delineation.
-
quality and pricing level and
-
market penetration goals
9
Product and market planning. Translates these into individual market and product line objectives and includes a
long range production plan of items to be manufactured for
2
years or more in the future.
10
Financial planning analyzes the financial feasibility
of these objectives relative to capital requirements and
return on investment goals.
11
Resource planning identifies the facilities, equipment, and personnel needed to accomplish the long range
production run and thus is frequently referred to as long run
capacity planning
104
ii.
Major supplier plans
-
Vertical integration plans
-
Identification of components to
delicate to suppliers
iii.
Process plans
-
Development of new production technology
-
New production processes
-
New system of automation
iv.
Product plans
-
quality
-
price
2.
Medium Range Planning
Usually covers the period of 6 to 18 months. With time increments that are
monthly or some
times quarterly. It includes aggregate production planning, item forecasting, master production
scheduling, rough cut capacity planning etc.
Aggregate planning
is the process of devising a plan for providing production capacity to
support m
edium range sales forecasts. It is concerned with setting production rates by product
group or other broad categories for the intermediate term.
Main purpose of aggregate planning is to Specify the optimal combination of production rate, work force level,
and
inventory on hand. Aggregate planning is necessary in production and operations management because:
1.
It facilities fully loaded facilities and minimizes overloading and under loading, thus keeping production cost
low.
2.
It provides adequate production cap
acity to meet expected aggregate demand
3.
It facilitates the orderly and systematic transition of production capacity to meet the peaks and valleys of
expected customer demand and;
4.
In times of scarce production resources, it enhances the probability of getti
ng the most output for the amount of
resources available.
Steps in aggregate Planning
1.
Begin with a sales forecast for each product that indicates the quantities to be sold in each time period (usually
weeks, months or quarters) over the planning horizon
(6
to 18months)
2.
Total all of the individual product or service forecasts into one aggregate demand for a factory.
If the products are not additive because of heterogeneous unit, a homogeneous unit of measurement must be selected that
both allows the forecast
s to be added and links aggregate outputs to production capacity.
3.
Transform the aggregate demand for each time period into works, materials, machines, and other elements of
production capacity required to satisfy aggregate demand.
4.
Develop alternative resou
rce schemes for supplying the necessary production capacity to support the cumulative
aggregate demand.
5.
Select the capacity plan from among the alternatives considered that satisfies aggregate demand and best meets
the objectives of the organization.
5.3.1
Planning Strategies
105
There are four alternative strategies that deal with the workforce, work time, inventory and backlogs.
1.
Vary the work force size by hiring and lying off employees as demand fluctuates.
2.
Maintain a stable workforce, but vary the output rat
e by varying the number of hours worked through variable
work weeks or overtime.
3.
Maintain a stable workforce and constant output rate, but absorb demand fluctuations by allowing inventory to
vary.
4.
Allow backlogs (delivery lead time) to increase during peri
ods of increased demand and decrease during periods
of decreased demand.
The strategies can be applied independently or used in combination. This is known as mixed strategy which is common
than individual strategies..
Proper Strategy is selected based on:
1)
how much of each production resource is available
2)
How much capacity is provided by each type of resource. The amount of resource required to produce
a single unit of a particular product or service allows the translation of demand into production capacity
plans.
3)
At what step in production we determine capacity /labour hour available, or machine hour available
4)
How much does it cost to scale capacity up or down cost of hiring, laying off, recalling/
Determining production capacity of a production system diffe
rs among the type of systems.
Product focused
-
capacity is determined by the gateway operation that is the first operation in a production line
-
Process focused capacity is determined by bottle neck operation/operation with the least capacity for a product
/
-
Other systems/number of machine hour or labour hour.
How quickly production capacity can be scaled up or down and what the relative costs will determine the strategy.
Given that machine capacities are too inflexible to allow for variation in production
capacities in the planning horizon for
aggregate production plans here are the ways that operation managers can supply production capacity.
1.
Straight
-
time labour
Current production of products by workers paid at
Straight
-
time labor rates. /increasing shi
ft by hiring new employees /
2.
Overtime labour
Current production of products or services by workers paid at overtime labor rates.
-
Expensive because of worker fatigue lowered worker moral, especially if the additional capacity is planned for
attended periods
and premium labor rate
3.
Inventory
-
production in previous time periods that is held for shipment in later time periods
4.
Subcontracting
-
production of products or services by suppliers
Relevant costs for aggregate production planning
1.
Basic production costs
Fixed and variable costs direct and indirect labour cost
2.
Costs associated with changes in the production rate /hiring, training, layoff/
106
3.
Inventory holding cost
Capital cost, storing, insurance, taxes, spoilage, obsolescence ...
4.
Backlogging Costs
Cost of ex
pediting, loss of customer goodwill, loss of sales revenues. Such cost are usually very hard to measure
5.3.2
Aggregate planning techniques
1)
Matching Demand
In matching demand type aggregate plan, production capacity in each time period is varied to exactly match
the forecasted
aggregate demand in that time period. Such an approach varies the level of the workforce in each time period by hiring
new workers, laying off workers or recalling workers.
Number of workers =
unit per time period X labour standard per unit
Working day per time period per worker X hrs per day
Advantage
-
Almost no inventories of finished goods inventories are needed and therefore much of the cost of carrying
inventory is avoided.
Disadvantage
Labor and material costs tend to be higher
because of the disruptions caused by frequently
scaling the workforce and material supplies capacities up and down
2.
Level capacity /production capacity
is held constant over the planning horizon.
The difference between the constant production rate and th
e varying demand rate is made up by inventory, backlog,
overtime or subcontracting
a)
Buffering with inventory.
An advantage of level capacity with inventory is that it usually promotes low production cost. Because:
1.
Cost of hiring and laying of workers and
using overtime are practically eliminated.
2.
Cost of locating and developing new sources of material supplies is minimized.
3.
Only the most efficient production machinery is used
4.
labour and material cost per product are low as rhythmic operation of the product
ion system has eliminated the
continual startup and shut down of operation
5.
Supervision is simplified and scrap rates are low since workers are experienced is their jobs
6.
Voluntary turnover and absenteeism may be lower /life time employment /
Disadvantage
-
Tying up cash and increasing the cost of carrying these inventories.
b)
Buffering with Backlog
In produce
-
to
-
order firms, backlog serves the purpose of buffering the difference between varying demand rate and a
constant production rate.
Advantages
-
services
as level capacity with inventory
107
Disadvantage
Difficulty in developing aggregate plan. Because it is often difficult to specify the detail designs of the product before th
e
customers orders are received
C) Buffering with overtime or subcontracting
Another
approach to aggregate capacity planning is to use straight time labour to provide a production capacity that equals
the minimum forecasted demand rate during the planning horizon. Then overtime or subcontracting is used to supply any
demand above the mini
mum. This approach can be used in either produce to stock or produce to order firms.
Advantages
1)
No finished goods inventory is carried i.e. no cost of holding inventory.
2)
No cost of hiring, laying off, or recalling of workers i.e.,
These result in low
inventory carrying cost and stable work force
Disadvantages
1)
The amount of overtime available may be insufficient to meet demand if demand peaks are too high.
2)
Continual use of overtime can exhaust workers which can in turn lead to deteriorating moral, probl
ems with
product and service quality, and other difficulties.
Criteria for selecting aggregate plan
-
Basically comparing the cost of inventory and hiring layouts recall, overtime determine the type of aggregate plan.
5.4
MASTER PRODUCTION SCHEDULING (MPS)
The
master production schedule is a disaggregating on more inclusive plan formulated from forecast and covering a short
time period. The master production schedule lists the specific production commitments by product type, size, and other
variables and the ti
me period in which the products are to be produced.
For example, an auto manufacturer can plan to produce one million cars in a year. No mention or note is made in such
forecasts as to whether the cars are red, green, two door, four door and so an. MPS is
a short range planning usually spans
from a few weeks to months.
Time Fences in MPS
There are four sections
Section I.
-
frozen (includes the first few weeks)
Frozen means this early part of the MPS cannot be changed except under extra ordinary circumstanc
es and only with
authorization of highest levels. It is because it would be costly to reverse the plans to purchase materials and produce the
parts that go into the product more over it will create customer dissatisfactions.
Section II. Firm (Next few
weeks)
Firm means that changes can occur, but only in exceptional kind of situation customer satisfaction will be affected.
10
8
Section III Full (next few weeks)
Full means that all of the available production capacity has been allocated to orders.
Changes can
be made and production costs will be only slightly affected but the effect on customer satisfaction is
uncertain.
Section IV Open (the last section of a few weeks)
Open means that not all of the production capacity has been allocated. It is in this
section that new orders are ordinarily
slotted.
Procedures
Working form customer orders, forecasts, inventory status reports, and production capacity information, schedulers place
the most urgent orders in the earliest available slot of the MPS.
1.
The schedu
ler estimates the total demand for products form all customers
2.
Assign orders to production slots.
3.
Make delivery promises to customers and
4.
Make the detail calculations for the MPS. This includes:
-
Determine whether the MPS under loads or overloads capacity
-
Compute the actual labour hr. required to produce the MPS for both products. (load)
-
Compare the load to the final capacity available and total the weeks
-
Balance overloads and under loads
Once a master production schedule is complete when and how many produ
cts are to be shipped to customer is known.
How a production organization plans and controls the purchase of materials, the production of parts and assemblies, and
all of the other work necessary to produce the products depends on the type of production pl
anning and control system
used.
5.5
PRODUCTION CONTROL FOR JOB SHOPS
Scheduling and control in the job shop.
A schedule is a time table for performing activities, using resources or allocating facilities the purpose of operations
scheduling in the job shop is
to disaggregate the master production schedule into phased weekly, daily, or hourly activity,
i.e. to specify the planned workload on the production system in the very short run.
Operation control entails monitoring job order progress and where necessary,
expediting orders or adjusting system
capacity to make sure that the master schedule is met.
In designing a scheduling and control system provision must be made for efficient performance of the following functions.
1.
Allocating orders, equipment and personne
l to work centers or other specified locations. /this is essentially
short
-
run capacity planning/
2.
Determine the sequence of order performance (that is establish job priorities).
3.
Initiating performance of the schedule work, (dispatching of orders)
4.
Shop floo
r control (or production activity control)
5.
Revising the schedule in light of changes in order
109
Elements of the job shop scheduling problem
-
scheduling
focuses on the following six elements.
1)
Job arrival pattern
Jobs can arrive in a batch or over a time
interval for scheduler
-
static arrival
Schedule made at one time, say once a week, and does not dispatch any job until all the previous incoming orders are on
hand.
-
dynamic arrival
Jobs are dispatched as they arrive, and the over all schedule is updated to
reflect their effect on the production facility.
2)
Number and variety of machines in the shop.
As the number and variety of machines increase, the more
complex the scheduling problem is likely to become
3)
Ratio of workers to machines in the shop
-
machine limite
d system (more or equal number of workers than machine)
-
labour limited system( more machine than workers). Concern is on labour limited system to the
utilization of the worker on several machine and determination of the best way to allocate workers to
mach
ine.
4)
Flow patterns to jobs through the shop
flow ranges from Flow Shop (all the jobs follow the same path from
one machine to the next) to a Randomly Routed job Shop(no similar pattern of movement of jobs from one machine
to the next.
5)
Priority Rules for
allocating jobs to machines
rule for selecting which job is started first
on some machine or work center. It can be simply according to one piece of data (processing time, due date, or order
of arrival other complex techniques.
6)
Schedule Evaluation Criteria
standard measures of schedule performance used to evaluate
priority rules. This includes:
-
meeting due dates of customers
-
minimizing flow time (the time a job spends in the shop)
-
minimizing work in progress
-
minimizing idle time of machines and workers
5.6
PRODUCTION CONTROL FUNCTION
The role of production control in any organization producing goods or services is to separate those directly responsible for
operating the production function from the none operating function of planning, scheduling, coordinatin
g and record
keeping.
The pervasive nature of the production control function can be clearly appreciated by enumerating its major
responsibilities. These include the need to:
1. Initiate orders and provide authorization to produce the quantity and quality
of goods required. To carry out this
responsibility the production control department or group must.
a)
Analyze orders to determine resource requirements and match these requirements with available
capacity. Production control will, having made such an analys
is, inform the sales department what
fabrication or assembly and delivery dates are flexible for customer‟s orders.
b)
Provide the production department with routing information specifying manufacturing service,
machine and process setup requirements, applica
ble work standard and machine or processing times.
110
c)
Initiate production orders that authorize and direct production personnel to make the required parts or
products.
2) Assist in the efficient utilization of material resources, people, and facilities. To
achieve this objective, production
control would seek to:
a)
Provide the requisite order scheduling information to the production department on raw material, tooling, labor
and machine requirements by synthesizing information obtained from process design and
the mechanical and
industrial engineering departments.
b)
Maintain and control raw material inventories.
c)
Initiate purchaser order for raw materials and parts and send them to the purchasing department.
d)
Coordinate the transportation of raw materials or parts,
in process products, and finished goods through the
production system.
e)
Make, or assist others in making, cost and time estimates for order scheduling.
f)
Provide detailed instructions for fabricating or assembling products. Information for this would come fro
m the
design and industrial engineering departments.
3)
Provide coordination and control for manufacturing activities. This responsibility includes monitoring
production activities, analyzing production problems, and communicating any need for corrective
action to
production or operation person in a timely fashion.
These responsibilities specifically requires that production control.
a)
Initiate the paper controls (reports) to provide feedback information on the status of orders.
b)
Compare work accomplishments
with schedule requirements to identify orders falling behind schedule or
underutilization of facilities.
c)
Prepare labor, machine, and process schedules for production personnel to inform them as to what they should be
doing and in what sequence and when eac
h specific step should began and accomplished.
4)
Assume a leadership role in providing reliable customer services with in the content of a low cost production
function. This broad responsibility can be broken down in to more discrete responsibility such as:
a)
Receive orders for parts, products or services from the sales department
b)
Assist in developing master schedules that serves to allocate the firm‟s production capacity to individual orders
with in a specified time period.
c)
Provide customer information on orde
r progress or problems.
d)
Initiate corrective action in cooperation with production personnel for orders failing behind schedule.
5.7
PAPER COMMUNICATIONS FOR AUTHORIZATION AND CONTROL 1
-
The production order
The actual conveyances of authority from production
control to production is the production order. It is initiated by
production control and is based on information taken from costumers order or by orders to replenish inventories.
The production order authorizes the production dept to start production. The
actual form and content of a production order
can vary but the typical production order form will provide information on: order quantity, specification, delivery date,
charge codes, order number (customers and firm‟s) and reference to drawings and material
s required
2.
The Route Sheet
The route sheet provides step by step instruction to the production group assigned to produce a part or product for
111
converting materials or parts in to the finished product. They usually originate form the engineering dept (since
the task is
an engineering concern)
A typical route sheet includes: order number, number units to make, part identification, reference drawing number,
material requirements and specification, setup time and teardown time, operations data
-
list and sequence
of required operation
-
description of each operation
-
work center assigned to perform the operation
-
machine (s) assigned
-
machine settings or special instruction
-
Inspection data
3.
Bill of material (BOM)
Originate in the engineering department and lists the
specific parts, components or subassemblies and the number of each
required to make up a unit of a product. Each subassembly in turn has its own BOM.
4.
The job Ticket or production card
While the production order conveys authority to the operations departmen
t to proceed with production of the items listed,
and route sheet provides a detailed step by step instruction for completing the whole job, the job ticket authorizes an
individual operator to produce the results requested.
The job ticket would include typ
ically the following information for both customer orders and orders to stock
1.
order number
2.
operation number and description
3.
quantity to be made
4.
scrap allowance
5.
machine to be used
6.
starting date and time
7.
standard time per unit
8.
setup time allowance
The job
ticket /production card/ may be designed to also service as an inspection ticket and as an input data source for cost
control.
Some basic of production control
routing
scheduling
dispatching and control
Check Your Progress Questions
1.
Discus the
characteristics of effective forecasting.
2.
What is an aggregate production planning?
3.
What are the objectives of aggregate production planning?
112
4.
Discuss the concept of scheduling and Controlling.
5.
The number of Heart Surgeries performed at HAYAT Hospital has i
ncreased steadily over the past years. The
hospital‟s administration wants to forecast the demand for surgeries for the year 2005 and 2006 so that they can plan
the number of specialists and materials required for the two years. The data foe the past five
years are shown in the
table below.
A. Develop a simple linear regression equation and develop a forecast for the year 2005 and 2006.
B. How much is the demand for surgeries for the year
2005 using:
i.
Naive approach
ii.
Exponential smoothing approach assuming the forecast for 2004 was 55 patients and alpha is 10%.
iii.
A four
-
year moving average.
5.8. SUMMARY
Forecasting is a base for planning. Though it has many application areas in business,
forecasting refers to estimating the
future demand for products and the resources necessary to produce these outputs. Sales forecasts are the starting point for
all other forecasts is production and operations activities, which is used to develop business
and production strategy. It
may involve taking historical data and projecting them into the future with some sort of mathematical model. It may be a
subjective or intuitive prediction (subjective) or a combination of mathematical model adjusted by a manage
r's good
adjustment..
Production and operations managers use forecasts to made periodic decisions involving process selection, capacity
planning, facility layout and, continual decisions about production planning, scheduling and inventory management,
budge
ting, and sales planning.
-
Firms plan their manufacturing and service operations activities at various levels and operate these as a system.
Based on time dimension planning can be long range, medium range and short range.
Aggregate production planning is
a medium term production planning. It is concerned with setting production rates by
product group or other broad categories for the intermediate term. Its main purpose of aggregate planning is to specify the
optimal combination of production rate, work fo
rce level, and inventory on hand. Aggregate planning is necessary in
production and operations management because:
There are four alternative strategies that deal with the workforce, work time, inventory and backlogs. These are a) Vary the
work force size
by hiring and lying off employees as demand fluctuates, b) Maintain a stable workforce, but vary the
output rate by varying the number of hours worked through variable work weeks or overtime, c) Maintain a stable
workforce and constant output rate, but abs
orb demand fluctuations by allowing inventory to vary, and d) allow backlogs
(delivery lead time) to increase during periods of increased demand and decrease during periods of decreased demand.
Year
Den
2000
30
2001
35
2002
38
2003
45
2004
50
Required:
113
The strategies can be applied independently or used in combina
tion. This is known as mixed strategy which is common
than individual strategies..
The master production schedule is a disaggregating and more inclusive plan formulated from forecast and covering a short
time period. The master production schedule lists th
e specific production commitments by product type, size, and other
variables and the time period in which the products are to be produced.
5.9
ANSWERS TO CHECK YOUR PROGRESS QUESTIONS
1.
Refer section 5.2.
2.
Refer section 5.3
3.
Refer Section 5.4
4.
Refer section 5.5
b=
n
Z
-
Z
x
Z
y
=
„
Z
x
J
-
(Z
x
)
2
=
5
X
644
-
15
X
198
5
X
55
-
(15)2
=
3220
-
2970
_ 250
275
-
225
_
50 = 5
a =
Y
-
bX
Y = a + bx
= 39.6
-
5 x 3
=
24.6 + 5x
=
24.6
Demand forecast for the year 2005 & 2006
Y
2005
= 24.6 + 5(6)
x =
6
, 7
= 24.6 + 30
= 55
Y
2006
= 24.6 + 5(7)
= 60
b) Forecast for the year 2005 using:
i)
Exponential smoothing. Ft
-
1
= 55, a = 0.1 Ft = Ft
-
1
+
a(At
-
1
-
Ft
-
1
)
= 55 + 0.1(50
-
55)
= 54.5
5.
a)
X
Y
X
2
XY
Ex =
15
1
30
1
30
Ey =
198
2
35
4
70
3
38
9
114
Exy
:
= 644
4
45
16
180
Ex
2
= 55
5
50
25
250
55 = 3
x =
1
Total
15
198
55
644
y
= 39.6 n =_5
114
UNIT 6: TOTAL QUALITY MANAGEMENT
Contents
6.
Aims and Objectives
6.1
Introduction
6.2
Different Views of Quality
6.3
Statistical concepts in Quality Control (SCQC)
6.4
Summary
6.5
Answers to Check Your
Progress
6.0 AIMS AND OBJECTIVES
After reading this unit, you should be able to:
-
the concept of quality
-
describe the total quality management programs
-
understand the different views of quality
-
apply the quality chart
6.1
INTRODUCTION
Fundamental to any quality
program is the determination of quality specification and the cost of achieving and not
achieving those specification.
-
Quality can be derived as conformance to specification. “ Fitness for use (satisfies customer needs).
-
Managing the entire organization s
o that it excel on all dimensions of products and services that are important to
customers.
-
Quality management begins before products and services delivered to customers. Raw materials must meet the
appropriate specification, strength, size, color, finish,
appearance, chemical content and other characteristics. As
the materials proceed through production, the quality of partially completed Work In Progress (WIP) products
monitored to determine whether the production processes are operating as intended. The
finished products and
services are inspected to determine their acceptability.
6.2
DIFFERENT VIEWS OF QUALITY
In the traditional view of quality control, the way to ensure that customer receives quality products and services is to have
rigorous system of
inspection. The idea is if there is sufficient inspection, the defective product in will be identified and
discarded, leaving only good products to be shipped to customers. In this approach the main decision is how many product
to inspect and this decision
is a question of economies. As more and more outputs are inspected, the cost of inspection
increases while the cost of undetected defects decline. At some level of inspection and optimum trade
-
off is achieved
when total quality controls cost are minimized
.
Inspection costs include such costs as personnel training, inspection and testing labour, maintenance of testing and
inspection facilities, scrap and rework. The cost of undetected defects includes such costs as customer complaints, loss of
customer good
will, product warranty and replacement cost, product liability suits and returned products. Operations
managers are some what supposed to balance these costs in deciding how many products to inspect.
The fundamental wrong in this traditional view is quali
ty can be inspected into products. Enlighten operation managers
115
today know that superior quality is not attained through more inspection. They know that manufacturers must go back to
production and make fundamental change in the way that they produce produ
cts and do it right the first time. That way,
products of superior quality will be coming out of production and inspections job will shift from discarding bad products
to providing feedback on how production can continue to improve product quality.
Phlip
B. Crosby wrote quality is defect free in 1977 and set traditional thinking about “acceptable level of defect is too
high and companies should put programs into place that will move them continuously towards the goal of zero defects.
The main idea behind f
ree quality is that the traditional trade off between the cost of improving quality and the cost of
poor quality is erroneous. The cost of poor quality include all of the costs of not doing the job right the first time. Scrap
,
rework, lost labour hours, an
d machine hours, the hidden cost of customer ill will, lost sales and warranty costs. He
states that the cost of poor quality is so understated that unlimited amounts can be profitably spent on improving quality.
A.V Feigenbaum developed the concept of tot
al quality control (TQC) in 1983. Feigenbeaum contended that the
responsibility for quality must rest with the person who do the work. The concept is referred to as quality at the source,
and means every worker, secretary, engineer and sales person must be
responsible for performing his or her work with
perfect quality. In TQC where product quality is more important than production rates, workers are given the authority
to stop production whenever quality problems occur.
Quality drives the productivity mach
ine:
-
the traditional view of quality control was that it cost more to get higher
product quality. But this is no longer the prevalent view. If production does it right the first time and produce products
and services that are defect free, waste is elimina
ted and costs are reduced.
Quality Circle
-
is a small group of employees, the average number is nine
-
who volunteer to meet regularly to
undertake work related projects designed to advance the company, improve working conditions, and spur mutual self
deve
lopment, all by using quality control concepts.
Continuous improvement (CI) is a management philosophy that approaches the challenge of products and process
improvement as never ending process of achieving small wins. It is an integral part of total qualit
y Management. CI
seeks continual improvement of machinery, material, labour utilization and productions methods through application of
suggestion and ideas from team members.
One of the techniques assisting in continuous improvement is by generating new id
eas. This is achieved by 5W2H
method. The 5W2H method is described below.
Typ
e
5W2H
Description
Counter measure
Subject matter
What?
What is being done?
Can this task being eliminated?
Eliminate in necessary tasks
Purpose
Why?
Why is the task necessary?
Clarify the
purpose
Location
Where?
where is it being done?
Does it have to be done there?
116
Other
aspects of quality picture
-
Product standardization with fewer product design and repetitive production, the same standard products are
produced every day, worker job assignments are well understood, workers are familiar with their tasks, and
product qualit
y may be improved.
-
Purchasing:
-
Suppliers should deliver perfect quality material
-
Automated equipment:
-
it play major role in attaining superior product quality
-
Preventive maintenance
-
minimize machine repairs.
Total Quality Management (TQM) Programs:
-
The
underlying principle of TQM is to produce products of high quality
in the first place, rather than depend on detecting defective product later through inspection . Elements of TQM include
i.
)
Top management policy:
-
top management should issue statement
about how
business strategy is tied to superior quality of its products and services.
ii.
)
Quality control for everyone
iii.
)
Product design
iv.
)
Quality material from suppliers
v.
)
control in production;
-
production organization must be committed to produce
perfect p
roduct.
vi.
)
distribution, installation and use:
-
packaging, shipping and installation must be
included in TQM.
6.3
STATISTICAL CONCEPTS IN QUALITY CONTROL (SCQC)
SCQC is divided into acceptance sampling and statistical process control. Acceptance sampling
involves testing a
random sample of existing goods and deciding whether to accept the entire lot based on the quality of the random
sample. It is useful for purchasing and receiving.
Statistical process control
-
involves testing a random sample of output
form a process to determine whether the
process is producing items within a pre
-
selected range. In producing goods, the flow of products is broken into discrete
batches called lots. A quality control lot has been produced under the same operating condition
s.
A random sample is one which each unit in the lot has an equal chance of being included in the sample, thus the sample is
likely to be representative of the lot. Either variables or attribute can be measured and compared to standard.
Sequence
When?
When it is the best time to doit? does it have
to be done then?
Change the sequence or
combination
People
Who?
who is doing it?
Should someone
else doit? Why I am doing
it?
Method
how?
How is it being done?
Is this the best method? Is there some other
way?
Simplify the task
Cost
how
much?
How much does it cost now? What will the
cost be after improvement?
Select an improvement method
117
-
Attributes are char
acteristics that are classified into defective and non
-
defective, (good or bad)
-
Variables are characteristics that can be measured on a continuous scale Eg. Size of a bearing.
-
What should be the size and frequency of sample? Generally, there is the argumen
t that as the percentage of lots
in sample is increased, there are two effects,
1
) the sampling and testing cost increase, and (
2
) the quality of
products going to customers increases.
-
Sample size for attributes are usually larger than variables.
-
When to
inspect? During production process when to inspect is usually determined by following these general
principles:
-
i)
Inspect after operation that are likely to produce faulty items
ii)
Inspect before costly operation
iii)
Inspect before operations that cover up defects
iv)
Inspect before assembly operation that can not be undone
v)
On automatic machines, inspect first and last pieces of production runs but few in between pieces.
vi)
Inspect finished products
The reason behind these principles is largely economic.
Control Charts;
-
The primary purpose of control chart is to indicate when production process may have changed
sufficiently to affect product quality, while the product is being produced. An investigation will then be conducted into the
causes of the change. If the indicati
ons that product quality is deteriorated or is likely to deteriorate in the future, then the
problem would be corrected by taking action such as replacing worn machine parts, making machine adjustment, machine
overhauled, finding new material supplier and
train and instruct workers.
If on the other hand, the indication is that product quality is better than the expected, then it is important to find out wh
y so
that the high quality can be maintained.
6.4
SUMMARY
In its simplest form quality refers to the
ability of product or service to consistently meet or exceed customer expectations.
That is, quality means getting what we pay for. However, people argue that the term quality has several meanings and tend
to give different decisions. It is user, manufactu
ring, product or value based.
Total quality management refers to a quest for quality that involves every one in an organization. Its basic elements are:
-
continual improvement
-
competitive benchmarking
-
employee empowerment
-
team approach
-
decision based on
facts rather than opinions etc.
The purpose of quality control is to assure that processes are performing in acceptable manner. Companied accomplish this
by monitoring process out put using statistical techniques.
Check Your Progress Question
1.
Define the
term quality and explain the different views of quality.
2.
Explain the statistical quality control.
3.
What are the elements of a successful total quality management program?
118
6.5
ANSWERS TO CHECK YOUR PROGRESS QUESTIONS
1.
Refer section 6.1
2.
Refer section 6.3
3.
Refer sec
tion 6.2