Supp Textbook Icfai

Operations Management
Supplement to Textbook
Icfai Center for Management Research

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 Icfai, March 2007. All rights reserved.
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Ref. No. SOM – 03 2K7 35

For any clarification regarding this book, the students may please write to Icfai giving the above
reference number, and page number.
While every possible care has been taken in preparing this book, Icfai welcomes suggestions
from students for improvement in future editions.
ii
SUPPLEMENT TO OPERATIONS MANAGEMENT
(Ref. No. of Supplement: SOM - 03 2K7 35)
y
NOTE:
• The 1st Edition of the Operations Management textbook (Ref. No.: OM - 052K3 35 or OM - 09 2K3 35) should be read
op
along with this supplement (Ref. No.: SOM – 03 2K7 35).
• The 1st Edition of the textbook, along with this supplement, is equivalent to the 2nd Edition of the Operations
Management textbook (Ref. No.: OM – 03 2K7 35).
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• H1, H2, H3 refers to first level, second level and third level headings in the text book.
CHAPTER TITLE TEXT ADDED PROBLEMS ADDED
Chapter 1 Operations Management – An Overview None None
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Chapter 2 Operations Strategy ! Financial and Economic None
Analysis in Operations (H1)
Chapter 3 Forecasting Demand ! Forecast Components (H1) ! Simple moving average (SMA) (H3)
! Demand Forecasting ! Weighted moving average (H3)

Do
Process (H1) ! Trend adjusted exponential smoothing
! Time Series Methods (H2) (double smoothing) (H3)
! Least square method (H3)
Chapter 4 Allocating Resources to Strategic ! Corrections in the 1st ! Graphical method (H2)
Alternatives Edition (Errata)
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Chapter 5 Design of Production Processes None None
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Chapter 6 Facility Location and Layout ! Steps in assembly line ! Cost-Profit-Volume or Break-Even
balancing (H3) Analysis (H2)
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! Corrections in the 1st
Edition (Errata)
Chapter 7 Job Design (Chapter 10 in the 1st Edition) None None
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Chapter 8 Work Measurement (Chapter 11 in 1st None None
Edition)
Chapter 9 Aggregate Planning and Capacity ! Measuring capacity (H2) ! Varying the size of inventory (H3)
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Planning ! Determining capacity ! Make-to-order items (H3)
st
(Chapter 7 in the 1 Edition) requirements (H2)
! Economies of scale (H2)
Chapter 10 Fundamentals of Inventory Control ! Inventory Classification ! Optimal Order Quantity (H2)
Do
st
(Chapter 8 in the 1 Edition) Models (H1)
Chapter 11 Purchase Management (Chapter 9 in the None ! Make-or-Buy Decisions (H1)

st
1 Edition)
Chapter 12 Materials Management (Chapter 13 in the ! Corrections in the 1st None

st
1 Edition) Edition (Errata)
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Chapter 13 Materials Requirement Planning (Chapter None ! Bills of material (H3)

14 - Inventory Management: Dependent !
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Offsetting (H3)
st
Demand - in the 1 Edition)
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Chapter 14 Operations Scheduling (Chapter 17 in the ! Scheduling Consecutive ! Backward Scheduling (H2)
st
1 Edition) Days Off (H2) ! Johnson’s rule for n-jobs and m-
! Scheduling Daily Work machines (H2)
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Times (H2) ! Critical Ratio Method (H2)
! Scheduling Hourly Work
Times (H2)
Chapter 15 Enterprise Resource Planning None None
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Chapter 16 Supply Chain Management None None
Chapter 17 Just-In-Time (JIT) Manufacturing System None None

(Chapter 18 in the 1st Edition)
Chapter 18 Productivity and Quality Management ! Productivity (H1) ! Control charts for variables (H2)
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(Chapter 19: Quality Management in the ! Control charts for variables ! Control charts for attributes (H2)
st
1 Edition) (H2)
! Control charts for attributes

(H2)
! TQM Principles (H2)
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Chapter 19 Facilities and Maintenance Management ! Facilities Management (H1) ! Evaluation of Preventive Maintenance
(Chapter 20 in the 1st Edition)
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! Maintenance Planning (H1) Policies (H1)
Chapter 20 Project Management (Chapter 21 in the 1st None ! Computation of latest times: backward
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Edition) pass (H3)
! PERT (H2)
Chapter 21 Trends in Operations Technology None None
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st
(Chapter 12 in the 1 Edition)
Chapter 22 Globalization and Operations None None

Management
No
Do
vi
Contents
Supplement to Textbook
Operations Strategy 1-2
Forecasting Demand 3-16
Allocating Resources to Strategic Alternatives 17-20
Facility Location and Layout 21-27
Aggregate Planning and Capacity Planning 28-32
Fundamentals of Inventory Control 33-34
Purchase Management 35-36
Materials Management 37-38
Materials Requirement Planning 39-41
Operations Scheduling 42-51
Productivity and Quality Management 52-63
Facilities and Maintenance Management 64-74
Project Management 75-77
vii
Operations Strategy
• Operations Strategy as a Competitive Weapon
• Elements of Operations Strategy
• Developing an Operations Strategy
• Financial and Economic Analysis in Operations (New)
FINANCIAL AND ECONOMIC ANALYSIS IN OPERATIONS
(Added after ‘Developing an Operations Strategy’ in page 16 of the first edition)

Operations managers have to take both financial and economic decisions. Economic
and financial analysis is used to evaluate the costs of operation and profit potential of
an investment. Operations managers should be familiar with conditions and factors
affecting costs and the methods of measuring and controlling costs.
Operations costs are divided into direct costs and indirect costs. Direct costs or prime
costs are those cost components, which can be identified individually for each product
or service produced, e.g. the cost of direct material, the cost of direct labor etc.
Indirect costs or operations overhead are those which cannot be tied to specific
product or service e.g. administrative costs, maintenance costs. In addition, an
operations manager should be aware of the fixed and variable components of the
costs. Fixed costs are those which do not change with a minor change in scale of
production e.g. rent on premises, depreciation on equipment, insurance etc. Variable
costs denote direct costs like wages of workers, and direct material cost which vary
with the change in the scale of production.
Operations managers have many methods at their disposal to evaluate the cost
effectiveness of an investment. Two of the most commonly used techniques are the
payback method and net present value (NPV) method.
Payback Method
One of the basic methods used to compare investment alternatives is by calculating
the payback period for each investment alternative. The payback period is the time
taken (usually in years) to recover the initial investment. The payback takes into
consideration the initial investment and the resulting annual cash flow.
Mathematically the payback period is denoted by:
Net investment
Payback period =
Net annual income from investment
Where,
Payback period = Time taken to recover initial investment (usually in years)
Net Investment = purchase and installation costs minus its anticipated future salvage
value
Net Annual income = Anticipated annual revenue minus expenses
In spite of its popularity, the payback method has a few inherent drawbacks - it
ignores cash flow beyond the payback period, and does not take into account the time
value of money. These deficiencies are overcome in the net present value method.
For example, let us calculate the payback period for a project with an initial
investment of Rs 10 lakh that is expected to generate an income of Rs 2 lakh per
annum. The payback period or the time taken to recover the initial investment can be
calculated using the formula given below
10 lakh (Net Investment)
Payback =
2 lakh (expected annual income)
When a firm needs to decide on a particular investment from various alternatives, the
payback period for each investment alternative is calculated. The alternative with the
shortest payback period is preferred.
Net Present Value (NPV) Method

The NPV method is used to calculate present value of future returns, discounted at the
marginal cost of capital, minus the present value of the cost of the investment. The net
present value method takes into account the time value of money. It is employed for
ranking and comparing the profitability of project alternatives. NPV for a project can
be determined by using the equation:
Where,
CF
n
i
NPV = ∑ −I
i =1 (1 − r) i
CFi = the cash flow at time i
r = discount rate
t = time horizon
I = Initial investment
If the net present value of an investment is greater then one then the project is
acceptable. If the net present value is less than zero, the project is rejected. The greater
the NPV value of the project the better is its profitability. Incase, where multiple
projects are compared the project alternative with the largest NPV is selected.
Suppose the net present value of a project is calculated as Rs 1lakh, this implies that
undertaking the project is expected to increase the value of the firm by Rs 1 lakh.
NPV is a useful method for comparing investment alternatives, with comparable
initial investments.
2
Forecasting Demand
• Forecasting in Operations
• Forecast Components (New)
• Demand Forecasting Process (New)
• Forecasting Methods (Modified)
• Selecting a Forecasting Method
• Measures of Forecasting Accuracy
• Monitoring and Controlling Forecasts
[
FORECAST COMPONENTS
(After ‘Forecasting in Operations’ in page 20 of the first edition)

For forecasting purposes, firms need to take into consideration various factors, or
components. For any product, there are six major forecast components: base demand,
seasonal factors, trends, cyclical factors, promotions, and the irregular component.
All the components need not be included in each forecast – however, all of them have
to be monitored and considered. Let us examine each of the six components and their
characteristics.
Base demand: Base demand is the average of sales over a given time period. This
figure can be taken as the right forecast if the products' demand is not impacted by the
seasonal, trend, cyclic and promotional factors.
Seasonal component: This refers to the repeated pattern of increase and decrease in
demand over a period of time. For example, the demand for cool drinks and ice
creams peaks during summer and remains low during the rest of the year. In this case,
the demand pattern shows high seasonal variability during summer and low seasonal
variability during rest of the year.
Trend component: The trend component refers to the long term pattern of movement
of demand over a period of time. The trend may be positive, negative or neutral. In
any given time period, a positive trend implies that the demand is increasing, while a
negative trend indicates that the demand is decreasing. A neutral trend implies that
changes in the demand are negligible over a period of time. For example, the motor
bikes sales in India have been showing a positive trend since the late 1990's due to
changes in customer preferences. On the other hand, the trend in scooter sales in India
has changed from positive to negative during the same time period.
Cyclic component: Cyclic component refers to changes in the demand patterns,
which exist for more than one year. These changes could either show an upward or a
downward movement. A good example of the cyclic component would be the
business cycle, which changes every few years (from recession to boom and vice-
versa). The demand for luxury products may be linked with the business cycle, since
sales usually increase during the boom phase and slow down during recessions.
Promotional component: The promotional component is one of the key factors that
impact demand, especially for FMCG and consumer appliances companies, whose
sales are more dependent on promotions. It refers to the changes in demand that occur
due to the promotional campaigns undertaken by the firm. Promotions can be for the
end customers and/or for the distributors and retailers. Their impact on the forecast
also depends on their regularity. A regular promotion is run at the same time every
year. Discount sale by a refrigerator manufacturer during the lean season can be an
example here. The regular promotion component can be termed as seasonal
component from the forecasting perspective. Irregular promotions are those
promotions which are run as per the market conditions and do not have a specific time
frame. Such promotions need to be monitored carefully and considered separately.
Unlike other forecasting components, the promotional component is controllable by
the firm.
Irregular component: The irregular component refers to all those variations in
demand that cannot be attributed to any of the above five factors. This factor is
difficult to predict because of its random nature. Any forecasting exercise involves
efforts to reduce the impact of this component by accurately monitoring and
predicting the other components.
Exhibit 3.1
Collaborative Forecasting
To fully realize the benefits of forecasting, the different departments of an organization should
integrate their forecasting objectives. Separate forecasting methods, technologies and objectives for
each functional department (like finance, marketing, sales and production) can lead to a waste of
resources, missed opportunities, etc. due to multiple forecasts. An organization can improve its
overall forecast by adopting a collaborative approach. Collaborative forecasting involves the
synchronization of the different forecasting objectives and systems employed by various functional
entities.
An organizational forecasting system should contain a central database that gathers information
from enterprise systems like ERP, SCM, and CRM. These systems do not have an in-built
functionality that caters to the requirements of collaborative forecasting. In order to obtain a single
forecast that meets the needs of all the departments, information from these systems should be
utilized to generate a forecast that meets the overall requirements of the organization and its
different functions. In order to ensure that the single forecast takes into account the specific
requirements of different departments or functions, a consensus methodology is used.
According to the Gartner Group, “Enterprises that collaboratively integrate disparate forecasting
systems will improve revenue predictability by 10% to 25% and decrease inventory carrying costs
by more than 30% over a three year period.”
Adapted from Michael J Hennel, “Forecasting Demand Begins with Integration” B to B, 11/11/2002,
Vol. 87 Issue 11, p9, 1p.
DEMAND FORECASTING PROCESS
(After ‘Forecast Components’ given above)
Understand the Objective of Forecasting

It is extremely important for a firm to be clear about the objectives of the forecasting
process. For every firm, the motive behind carrying out a forecasting exercise is to
implement decisions which are based on the forecast. Thus, first the firm should
identify the decisions that need to be implemented. It should also appraise all the
supply chain members concerned about these decisions. For example, if HP plans to
run a discount sale, then the dealers and logistics partners need to be aware of this
plan, so that they can meet the demand effectively. All the participants should arrive
4
Forecasting Demand
at a consensus about the forecast for the promotion period and decide upon a common
action plan. If the members are not able to plan jointly, then mismatches between the
demand and supply would arise at various levels of the supply chain. This could also
result in logistics problems since transporters and warehouse operators would not have
timely access to the promotion plan, resulting in a shortage of transportation vehicles
and/or warehouse space to meet the increasing customer demand.
Integrate Demand Planning and Forecasting

The forecast is the basis for most of the planning activities such as capacity planning,
production planning, promotion planning and various other functions like
procurement and distribution. Hence, the firm has to integrate all these aspects right
from the initial stages of working out the forecast. The above can be achieved both at
the information systems level as well as at the human resource management level. To
facilitate easy integration of various functional areas, the firm can form cross-
functional teams representing all the departments. Many firms adopt collaborative
forecasting so as to integrate the planning and forecasting of different functions like
marketing, production, etc. This is done through integrating the objectives and
systems employed by these functions. Refer Exhibit 3.1 for further details on
collaborative forecasting.
Identify Major Factors that Influence the Demand Forecast

The next step in the forecasting process is to determine the key factors that influence
the demand forecast. These factors have already been discussed in the forecasting
considerations section. The key task for the firm here would be to identify the major
components that impact the forecast. For instance, if the firm is dealing with seasonal
products, then seasonal factors would have a larger influence on the demand.
Similarly, if the firm is dealing in FMCG products, then the promotional factor would
play a greater role in influencing the demand.
Understand and Identify Customer Segments

The next step is identifying the customer segments. Under this, firms identify
customers with similar service requirements, demand pattern, seasonality etc., and
cluster them into segments. For each such customer segment, the most appropriate
forecasting method should be selected.
Determine the Appropriate Forecasting Technique

Selecting an appropriate forecasting technique is a crucial step in the demand
forecasting process, where the firm has to analyze various issues. These may include
the stage of product life cycle, the geographical region and the customer group etc. If
the product is in the early stages of its life cycle (i.e., when the product has been
launched recently), then it would have little or no sales history. In such cases,
judgmental techniques would be more appropriate. But if the product is in the
maturity stage, time series techniques can be used since a lot of data would be easily
available. If detailed sales related data is available for a product, then causal
techniques can be a right option.
5
FORECASTING METHODS
Time-Series Methods
(Added under ‘Time Series Methods’ in page 23 of the first edition)
Time-series forecasting methods assume that past data is a good indicator of the
future. Instances where this assumption is not true are rare and not significant enough.
Some relevant data can always be found. Hence, many operations managers use a time
series model to forecast the demand for their goods or services.
Time series is a widely used forecasting method, largely because it is simple and
inexpensive to use. Forecasts obtained from this method can be a good basis for
further analysis. The term 'time series' refers to a collection of well-defined data,
which is obtained through repeated measurement over a period of time. Weekly or
monthly sales at each retail outlet of a company would qualify under this definition.
The collected data is said to be well defined because it is collected at regular time
intervals. Thus, data collected randomly or irregularly cannot be called as a time
series.
Time series analysis can be categorized into two broad categories, based on the
complexity involved: static and adaptive.
Static forecasting methods

These methods are also known as basic time series forecasting techniques. Static
forecasting methods assume that the estimates of trend and seasonal components do
not vary from year to year. In this method, estimates of the trend and seasonal
components are determined based on historical data, which is projected to obtain
future demand data. Static forecasting methods follow the procedure given below to
obtain forecasts:
• Deseasonalizing or decomposing the time series
• Identifying the trend and seasonal components
• Making the forecasts based on trend and seasonal components
Let us explore the static forecasting technique with the help of an example.
Consider a consumer appliances company, ABC Limited that is planning to forecast
future sales based on the analysis of past demand data. The firm has collected sales
information for the past five years on a quarterly basis, as given in Table 3.2.
Table 3.2: Quarterly Sales of ABC Limited in ‘000 units
Year I II III IV
1998 40 25 15 30
1999 38 26 13 28
2000 43 22 18 33
2001 45 29 14 30
2002 41 26 18 29
As mentioned earlier, in order to forecast the future demand, the following steps need
to be performed: deseaonalizing the time series, estimating the trend and seasonal
components and making the forecast.
6
Forecasting Demand
Deseasonalizing the time series

Deseasonlizing or decomposing the time series refers to identifying the seasonal
variations in the time series and removing those effects. For this, first calculate the
seasonal index. Later, using the seasonal indices, the effects of seasonality are
removed from the time series.
Calculating seasonal index: Steps involved in calculating the seasonal index are as
follows:
Step1: First the four quarter moving total for the time series is calculated. The sum of
four quarters of the year 1998 i.e. 40+25+15+30 = 110 is calculated and placed at the
mid data point of four values of the year 1998, between the II quarter and III quarter
(See the column four of Table 3.3). Then the moving total is calculated for the next set
of four values by dropping the first value i.e. the value of quarter-I of 1998 and adding
the value of quarter-I of 1999. So, the sum of the four values i.e. 25+15+30+38 is 108
and placed between the values of III and IV quarters of 1998. The next sets of four
values are III and IV quarters of 1998 and I and II quarters of 1999. The total i.e., 25 +
15 + 30 + 38 = 108, is placed between the IV quarter of 1998 and I quarter of 1999.
This process of moving the four quarters and calculating the total is continued till the
last value of the time series is included in the calculation. The values of four quarters
of 2002 are the last set of values. The total of these four quarters is placed between the
II and III quarters of 2002.The resultant values are shown in column four of Table 3.3.
Table 3.3: Calculation of 4-Quarter Center Moving Averages
Year (1) Quarter Actual 4-quarter 4-quarter 4-quarter Percentage
(2) Sales (3) moving moving centered of actual to
totals averages moving moving
(4) (5)= (4)/4 averages average
(6) values
(7)
1998 I 40
II 25
110 27.5
III 15 27.25 55.05%
108 27
IV 30 27.125 110.60%
1999 109 27.25
I 38 27 140.74%
107 26.75
II 26 26.5 98.11%
105 26.25
III 13 26.875 48.37%
110 27.5
IV 28 27 103.70%
2000 106 26.5
I 43 27.125 158.53%
7
111 27.75
II 22 28.375 77.53%
116 29
III 18 29.25 61.54%
118 29.5
IV 33 30.375 108.64%
2001 125 31.25
I 45 30.75 146.34%
121 30.25
II 29 29.875 97.07%
118 29.5
III 14 29 48.28%
114 28.5
IV 30 28.125 106.67%
2002 111 27.75
I 41 28.25 145.13%
115 28.75
II 26 28.625 90.83%
114 28.5
III 18
IV 29
Step 2: Then the 4-quarter moving average is calculated. This is obtained by dividing
the values of moving totals (obtained in column four of Table 3.3) by four. So moving
average of first set of values is 110/4 = 27.5. Similarly, moving averages are
calculated for the rest of the values in column four of Table 3.3. These values are
shown in column five of Table 3.3.
Step 3: Then the moving averages are centered. The moving averages in column five
fall halfway between the quarters of each year. Average of two four-quarter moving
averages falling just above and below the quarter is calculated to center out the
averages. For quarter-III of 1998, the resulting four-quarter centered moving average
is 27.25. This was obtained by taking average of two moving averages i.e. (27.5 +
27)/2 = 27.25. Similarly, the other values of column five of Table 3.3 are centered out
which are shown in column six of Table 3.3. (Step 3 is not required if the number of
values is odd as the values will be centered out in the step 2 itself.)
Step 4: For each quarter which is having a 4-quarter centered out moving average, the
percentage of actual value to the moving average is calculated. The step is performed
to regain the seasonal component of the quarters. The percentage is obtained by
dividing the actual quarter value with each associated 4-quarter centered moving
average value. Then the resulting value is multiplied by 100.
Therefore, for quarter III of 1998, the value is (15/27.25) × 100 = 55.05%. Similarly,
other values are calculated and shown in column seven of Table 3.3.
8
Forecasting Demand
Step 5: The values obtained in column seven are arranged by quarter (as shown in
Table 3.4), and the modified mean is calculated. The modified mean is obtained by
removing the highest and lowest values for each quarter and taking average of the
remaining values.
For example, for quarter I, the highest and lowest values are 158.53 and 140.74
respectively. By canceling these and totaling the remaining values we get the modified
sum as 291.47. Then, the modified mean of quarter I is 291.47/2 = 145.74
Similarly for quarter II, the highest and lowest values are 98.11 and 77.53
respectively. By canceling and totaling the remaining values we get the modified sum
as 187.9. Thus modified mean of quarter II is 187.9/2 = 93.95
Table 3.4: Calculating Modified Mean
Year Quarter I Quarter II Quarter III Quarter IV
1998 -- -- 55.05 110.60
1999 140.74 98.11 48.37 103.70
2000 158.53 77.53 61.54 108.64
2001 146.34 97.07 48.28 106.67
2002 145.13 90.83 -- --
Modified sum 291.47 187.90 103.42 215.31
Modified mean 145.74 93.95 51.71 107.65
By removing the highest and lowest values for each quarter, the extreme irregular
variations are removed. By averaging the rest of the values, the time series is further
smoothed. Thus the modified mean represents the seasonality component.
Step 6: In the final step, the modified mean is further adjusted to obtain the seasonal
index.
From Table 3.4, the total of 4 indices = 145.74 + 93.95 + 51.71 + 107.65 = 399.
But 100 is the base for the index. Hence the total of four quarterly indices should be
400, and mean of the indices needs to be 100. In order to rectify the error, the seasonal
indices are adjusted by multiplying each index by an adjusting constant. The adjusting
constant is obtained by dividing the desired index total i.e. 400 by actual total of 399.
The value obtained is 400/399 = 1.0025.
The process of adjusting the modified mean and obtaining seasonal index is shown in
Table 3.5.
Table 3.5: The Calculation of Seasonal Indices
Quarter Index Adjusting Seasonal Index
(1) (2) constant (3) (4) = (2) x (3)
I 145.74 1.0025 146.10
II 93.95 1.0025 94.18
III 51.71 1.0025 51.83
IV 107.65 1.0025 107.92
Seasonal indices for different quarters are shown in the column four of Table 3.5. The
next step is calculating the deseasonalized time series values. To obtain
deseasonalized time series values, the actual sales values are divided by the resultant
value achieved by dividing corresponding seasonal indices with 100. Deseasonalized
sales are calculated for various quarters in Table 3.6
9
Table 3.6: Calculating Deseasonalized Sales Values

Year Quarter Actual Sales Seasonal Index/100 Deseasonalized Sales
(1) (2) (3) (4) (5) = (3)/(4)
1998 I 40 1.461 27.38
II 25 0.942 26.54
III 15 0.518 28.96
IV 30 1.079 27.80
1999 I 38 1.461 26.01
II 26 0.942 27.61
III 13 0.518 25.10
IV 28 1.079 25.95
2000 I 43 1.461 29.43
II 22 0.942 23.36
III 18 0.518 34.76
IV 33 1.079 30.58
Year Quarter Actual Sales Seasonal Index/100 Deseasonalized Sales
(1) (2) (3) (4) (5) = (3)/(4)
2001 I 45 1.461 30.80
II 29 0.942 30.79
III 14 0.518 27.03
IV 30 1.079 27.80
2002 I 41 1.461 28.06
II 26 0.942 27.61
III 18 0.518 34.76
IV 29 1.079 26.87
Developing trend component

After depersonalizing the time series, a trend component of the time series is
calculated. This can be done using the least squares method. The time variable (years
1999, 2000, etc. in this case) is converted into a form which would simplify the
calculation. This conversion of the time variable is accomplished using a technique
called coding. In this technique, mean of all the sample times is calculated, and then
the resultant value is subtracted from each of the sample times.
Table 3.7: Calculations for Developing the Trend Equation
Year Quarter y Translating or x xy x2
(1) (2) Deseasonalized Coding the Coded (6) = (5) × (3) (7) = (5)2
Sales (Column Time Variable Time
5 of Table 3.6) (4) Variable
(3) (5) = (4) × 2
1998 I 27.38 -9 ½ -19 -520.22 361
II 26.54 -8 ½ -17 -451.18 289
10
Forecasting Demand
III 28.96 -7 ½ -15 -434.4 225

IV 27.80 -6 ½ -13 -361.4 169
1999 I 26.01 -5 ½ -11 -286.11 121
II 27.61 -4 ½ -9 -248.49 81
III 25.10 -3 ½ -7 -175.7 49
IV 25.95 -2 ½ -5 -129.75 25
2000 I 29.43 -1 ½ -3 -88.29 9
II 23.36 -½ -1 -23.36 1
Mean 0
III 34.76 ½ 1 34.76 1
IV 30.58 1½ 3 91.74 9
2001 I 30.80 2½ 5 154 25
II 30.79 3½ 7 215.53 49
III 27.03 4½ 9 243.27 81
IV 27.80 5½ 11 305.8 121
2002 I 28.06 6½ 13 364.78 169
II 27.61 7½ 15 414.15 225
III 34.76 8½ 17 590.92 289
IV 26.87 9½ 19 510.53 361
∑ y = 567.2 ∑ xy = ∑x 2
=
206.58 2,660
The idea behind this exercise is to eliminate the need for squaring large numbers like
year 2000, 2001. By setting the mean as zero, the calculations are simplified to a great
extent. Suppose we are dealing with three time points - year 2000, 2001 and 2002. We
assign the codes -1, 0, 1 to the respective years, where zero represents the mean (year
2001), -1 represents the last or previous year (2000) and 1 represents the next year
(2002). This translation process will differ depending upon the number of time
periods. If the problem consists of an odd number of time periods, the mean can be
easily found out. For instance, if there are 7 time points, then the mean would be the
middle of the time points i.e. 4. However, if the time points are even in number, then
the mean would contain a ‘½ fraction,’ which if subtracted from each time point,
would make the calculations cumbersome. To overcome this problem, each time
variable is multiplied with 2. The coded variable is denoted by x. In this problem, the
time points are 20, the mean is 9½ which falls between the II quarter and III quarter of
2001. The first value i.e., Quarter I of 1998 is assigned as -9½ and the last value i.e.
quarter IV of 2002 is assigned as 9½. The translating time variable is shown in
column four of Table 3.7, and the coded time points, which are obtained by
multiplying the translating variables with two, are shown in column five of Table 3.7.
Now using the least squares method, trend component is developed. The trend
component is obtained using the equation:
11
∧
y = a + bx -----------Equ 3.1
∧
Where y = estimated value of the dependent variable
x = independent variable (time in trend analysis)
a = y-intercept (the value of y when x = 0) = y = y/n
b = slope of the trend line =

∑ xy
∑x 2
By substituting the values of xy, x2, y and n, the values of a and b are 28.36 and
0.08 respectively.
∧
Therefore, y = 28.36 + 0.08x ------------------Equ 3.2
∧
Now, various values of x can by substituted in Equ 3.1 and the estimated values of y
for each value of x. The calculation is shown in Table 3.8.
Making the forecast
The final step in the static forecasting method is to forecast the demand for future
periods. The following steps are followed in forecasting the demand.
Step 1: Calculate the trend level for the periods for which forecast needs to be made
using the trend equation.
Step 2: Next step is to multiply the trend level from Step 1 with the period seasonal
index to include seasonal effects.
Step 3: Then multiply the result of Step 2 by the projected cyclic index to include
cyclic effects and get the final forecast result.
Suppose the firm wants to forecast for all the four quarters of year 2003.
First, all the four quarters of year 2003 need to be coded. The coded value after
multiplying by two for the last quarter (IV) of 2002 is 19. Looking at the trend in
Table 3.7, it can be easily estimated that the coded time variable for the four quarters
of 2003 will be 21, 23, 25 and 27 respectively.
∧
Substituting these values in Equ 3.2, we get y for I, II, III and IV quarter of 2003 is
30.04, 30.2, 30.36 and 30.52 respectively.
Next step is to calculate the seasonalized estimates by multiplying the deseasonalized
sales estimates with the respective seasonal indices and expressing them as a fraction
of 100. Seasonal indices for the four quarters are shown in Table 3.5.
Seasonalized estimates for quarter I of 2003: 30.04 × (146.1/100) = 43.89
Seasonalized estimates for quarter II of 2003: 30.2 × (94.18/100) = 28.44
Seasonalized estimates for quarter III of 2003: 30.36 × (51.83/100) = 15.72
Seasonalized estimates for quarter IV of 2003: 30.52 × (107.92/100) = 32.94
12
Forecasting Demand
Table 3.8: Trend Component Calculation

x (From column 5 of Table 3.7) ∧
y = a +bx = 28.36 + 0.08x
-19 28.36+0.08(-19) =26.84
-17 28.36+0.08(-17) = 27
-15 28.36+0.08 (-15) = 27.16
-13 28.36+0.08 (-13) = 27.32
-11 28.36+0.08 (-11) = 27.48
-9 28.36+0.08 (-9) = 27.64
-7 28.36+0.08 (-7) = 27.8
-5 28.36+0.08 (-5) = 27.96
-3 28.36+0.08 (-3) = 28.12
-1 28.36+0.08 (-1) = 28.28
1 28.36+0.08 (1) = 28.44
3 28.36+0.08 (3) = 28.6
5 28.36+0.08(5) = 28.76
7 28.36+0.08(7) = 28.92
9 28.36+0.08(9) = 29.08
11 28.36+0.08(11) = 29.24
13 28.36+0.08(13) = 29.4
15 28.36+0.08(15) = 29.56
17 28.36+0.08(17) = 29.72
19 28.36+0.08(19) = 29.88
Adaptive forecasting
Adaptive forecasting is an advanced form of time series analysis, where the trend and
seasonal components are adjusted after each demand observation.
There are three widely used adaptive forecasting methods. They are simple moving
average, weighted moving average, and exponential smoothing.
FORECASTING METHODS
Simple moving average (SMA)

(Added under Simple Moving Average in page 24 of the first edition)
Problem
A company’s demand for liquid crystal displays (LCDs) for the 12 months from
January 2006 to December 2006 has been given in the following table. Calculate the
demand forecast for LCDs for January 2007 using a six-month simple moving average
forecasting technique.
13
Months Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec
Demand (in lakhs) 53 53 56 57 58 56 58 58 60 61 59 60
Solution
Using a six-month simple moving average technique, the forecast for the seventh
month can be calculated as the average of the first six months. Thus, the forecast for
July 2006 is the average demand of LCDs during January, February, March, April,
May, and June. Similarly, the forecast for January 2007 would be the average of the
demand during July, August, September, October, November, and December 2006.
Forecast for January 2007 = (58 + 58 + 60 + 61 + 59 + 60) / 6 = 356/6 = 59.3 lakhs
Thus, by using moving averages for six months, we obtain the demand for the month
of January 2007 as 59.3 lakhs.
FORECASTING METHODS
Weighted moving average

(Added under ‘Weighted Moving Average’ in page 25 of the first edition)
Problem
The demand for tuna fish for the months of April, May, June, July, August, and
September are 150, 155, 158, 162, 164, and 163 metric tons respectively. Calculate
the demand for October using the three-month weighted moving average technique.
Assign the following weights to the data: 50% weight for September, 30% for August,
and 20% for July.
Solution
Using the three-month weighted moving average, the demand for October can be
calculated as follows:
Forecast for October (WMA3) = (demand in July x 0.20) + (demand in August x
0.30) + (demand in September x 0.50)
= (162 x 0.20) + (164 x 0.30) + (163 x 0.50)
= 32.4 + 49.2 + 81.5
= 163.1 metric tons
Thus, the demand for tuna fish for October arrived at by using the three-month
weighted moving average is 163.1 metric tons.
FORECASTING METHODS
Trend adjusted exponential smoothing (double smoothing)
(Added under ‘Trend adjusted exponential smoothing (double smoothing)’
in Pg 27 of the first edition)
Problem
Hansa Cycles Ltd. manufactures cycles of different models for children, men, and
women. The sales for its high-end sports model for children averaged 2500 units for
the last 3 years. The average increase in sales was 100 units per year for the model.
Last year, 2650 units were sold. Forecast the sales for this year, using the trend
14
Forecasting Demand
adjusted exponential smoothing method. Take smoothing constants as α = 0.3 and β =

0.25.
Solution
From the information given, A0 = 2500 and T0 = 100
D1 = 2650
To forecast sales for this year, we will use the equations
At = αDt + (1−α)(At-1+Tt-1)
Tt = β(At−At-1) + (1−β)(Tt-1)
Ft+1 = At + Tt
A3 = 0.3(2650) + (1 − 0.3)(2500 + 100) = 795 + 0.7(2600) 795 + 1820 = 2615
T3 = 0.25(2615 − 2500) + (1 - 0.25)(100) = 28.75 + 75 = 103.75
F4 = 2615 + 103.75 = 2718.75
Hence, the demand for the sport cycle model for children in the current year would be
2718.75 (2719) units.
FORECASTING METHODS
Causal Quantitative Models
Least square method
(Added under ‘Least square method’ in page 29 of the first edition)
Problem
A firm would like to forecast the cost of raw materials needed to manufacture 50,000
units of product A. Help the firm calculate the cost of raw materials using regression
analysis. The production for the last three years and the corresponding costs of raw
materials are given in the following table. Here, sample size ‘n’ = 3.
Product A (in `000) 40 44 48
Cost of Raw Materials (in Rs.`000) 12 13 16
Solution
Let us first calculate the values of ‘a’ and ‘b’ using the least square method. Consider
production units as X and cost of raw materials as Y.
X (in `000) Y (in Rs.`000) XY X2 Y2
40 12 480 1600 144
44 13 572 1936 169
48 16 768 2304 256
132 41 1820 5840 569
∑X
X = n = 132 / 3 = 44 (n =3)
15
∑Y
Y = n = 41 / 3 = 13.67
n( ∑ XY) − ( ∑ X)( ∑ Y)
b=
n ( ∑ X 2 ) - (∑ X) 2
Now, substituting the values of ∑XY, ∑X2, and ∑Y2 from the table, we get
b = 3(1820) – [(132)(41)] / (3(5840) – (132)(132))
b = (5460 – 5412) / (17520 – 17424)
b = 48/96
b = 0.5
Next, we calculate the value of constant ‘a’ using the equation:
a = Y − bX = 13.67 – 0.5(44)
a = -8.33
Substituting the values of ‘a’ and ‘b’ in the straight line equation, we can obtain the
value of the dependent variable on the basis of the independent variable. Then, we can
find the costs of raw materials required (dependent variable) for producing 50,000
units of product A.
Y = a + bX
Y = -8.33 + 0.5 × 50
Y = 16.67
Thus, for producing 50,000 units, the cost of raw materials would be Rs.16,670.
16
Allocating Resources to
Strategic Alternatives
• Allocation Decisions in Operations Strategy
• Linear Programming in Operations Management
• Formulation of Linear Programming Problems
• Solution of Linear Programming Problems (Modified)
• The Transportation Problem in Linear Programming
SOLUTION OF LINEAR PROGRAMMING PROBLEMS
Graphical Method
Added under ‘Graphical Method’ in page 45 of the first edition)
Problem
The plant manager of a plastic pipe manufacturer has the opportunity of using two
different routings for a particular type of plastic pipe. Routing 1 uses Extruder A and
routing 2 uses Extruder B. Both the routings require the same melting process. The
following table shows the time requirements and capacities of these processes.
Time Requirements (hr/100ft)
Process Routing 1 Routing 2 Capacity (hr)
Melting 1 1 45
Extruder A 1 0 80
Extruder B 0 1 120
Each 100ft of pipe processed on routing 1 uses 3kg of raw material, whereas that on
routing 2 uses 2kg of raw material. The difference results from differing scrap rates of
the extruding machines. Consequently, the profit per 100ft of pipe processed on
routing 1 is Rs.300 and on routing 2 is Rs.400. A total of 180 kg of raw material is
available.
a. Create a set of linear equations to describe the objective function and the
constraints.
b. Use graphic analysis to find the visual solution
c. What is the maximum profit?
Solution
a) As the objective is to maximize profit, the objective function for this problem
would be
Max Z = 300x + 400y
where x and y are decision variables representing the length of pipe produced using
routing 1 and routing 2 respectively.
In the melting process, a maximum of 45 hrs is available for both the routings. Hence,
x(1) + y(1) ≤ 45
x + y ≤ 45
In routing 1, Extruder A can use a maximum of 80hrs, which means
x(1) + y(0) ≤ 80
x ≤ 80
Similarly, in routing 2, Extruder B can use a maximum of 120 hrs leading to
x(0) + y(1) ≤ 120
y ≤ 120
The available raw material is 200kg and routing 1 consumes 3kg while routing 2
consumes 2 kg for every 100ft. Thus, 3x + 2y ≤ 180
Hence, the objective function is Max Z = 300x + 400y
The constraints are
x + y ≤ 45
x ≤ 80
y ≤ 120
3x + 2y ≤ 180
where, x ≥ 0 and y ≥ 0
b) To get the visual solution, the data has to be plotted on a graph. To plot the graph,
the inequalities in the constraints have to be converted into equalities.
Thus,
x + y = 45
x = 80
y = 120
3x + 2y = 180
In x + y = 45, when x = 0, y = 45 and when y = 0, x = 45
In 3x + 2y = 180, when x = 0, y = 90, and when y = 0, x = 60
c) To find the maximum profit, the coordinates of the corner points of the feasible
region have to be substituted in the objective function.
Corner point A (0,100) Æ 300 x 0 + 400 x100 = 40,000
Corner point B (60,0) Æ 300 x 60 + 400 x 0 = 18,000
Corner point C (80,0) Æ 300 x 80 + 400 x 0 = 24,000
Corner point S (80,120) Æ 300 x 80 + 400 x 120 = 24,000 + 48,000 = 72,000
Corner point D (0, 100) Æ 300 x 0 + 400 x 100 = 40,000
Hence, Corner point S gives the maximum profit of Rs.72,000.
18
Allocating Resources to Strategic Alternatives
Figure 4.2: Graphical Method

Y
x = 80
D
y=120
120
S
100 Feasible 3x + 2y = 180

A region
80
60
40 x + y = 45
20
B C
O (0,0) 40 60 100 120
20 80 X
ERRATA
Graphical Method
In Figure 4.1 in page 44 of the first edition, the optimum solution at the point
B was not correctly represented.
The graphical method explains the process of obtaining a solution of a linear
programming problem in a simple way. The procedure can be explained in the
following steps:
Step 1: Formulate the linear programming problem by identifying the decision
variables, the objective function and the constraints.
Step 2: Convert the inequality constraints to their equalities and plot them on a graph
(in linear form).
Step 3: Using the inequalities in each constraint, determine the feasible region.
Step 4: Write down the corner points of the solution area. Substitute the values in the
objective function. The optimum solution is obtained at any of these points.
The feasible solution area for the problem formulated in the Table 4.3 is shown as
OABC in the Figure 4.1. From the figure, we can understand that the optimum
solution is at the point (2000/3, 5000/3).
19
Figure 4.1: Optimum Solution (Graphical Method)
20
Facility Location and Layout
• Importance of Location
• Factors Affecting the Location Decisions
• General Steps in Location Selection and Location Decision Process
• Location Evaluation Methods (Modified)
• Facility Layout
• Basic Layout Formats
• Developing a Process layout
• Developing a Product Layout (Modified)
• Developing a Cellular Manufacturing Layout
• Japanese Approaches and Trends in Manufacturing Layouts
• Service Facility Layouts
LOCATION EVALUATION METHODS
Cost-Profit-Volume or Break-Even Analysis

(Added under ‘Cost-Profit-Volume or Break-Even Analysis’ in page 83 of
the first edition)
Problem
Atlas Ancillaries plans to set up a manufacturing unit for ‘100 HP’ motors. The
management has identified Gurgaon and Delhi as the potential areas to set up the unit.
The fixed costs per year and the variable costs per unit for Gurgaon are Rs.6,00,000
and Rs.750 respectively. The costs for Delhi are Rs.7,50,000 and Rs.650. Each motor
is priced at Rs.1500 and the expected sales are 9000 units per year. Which of the two
locations will be more profitable for Atlas?
Solution
Let us calculate the total costs (sum of the fixed and variable costs) at both the
locations when 9000 units of goods are sold.
Total cost at Gurgaon = Rs.6,00,000 + (750 × 9000)
= Rs.127,50,000
Total cost at Delhi = Rs.7,50,000 + (650 × 9000)
= Rs.133,50,000
Total sales revenues of the firm per year = 1500 × 9000 = Rs.135,00,000.
Therefore, the profits of the company if they were set up in the given locations would
be as follows:
Profit at Gurgaon = Rs.135,00,000 − Rs.127,50,000
= Rs.750,000
Profit at Delhi = Rs.135,00,000 − Rs.133,50,000
= Rs.150,000
From these calculations, it is clear that Gurgaon will the more profitable location to
set up the new plant for producing 9000 motors per year.
DEVELOPING A PRODUCT LAYOUT

Line Balancing
Steps in assembly line balancing
Added under ‘Steps in assembly line balancing’ in page 90 of the first
edition)
The following steps are needed to balance an assembly line:
i. The sequential relationship among different tasks is specified by using a precedence
diagram.
The cycle time is determined by using the following formula:
Production time per day
Cycle time =
Required output per day
ii. The theoretical minimum number of workstations required to satisfy the cycle time
is determined using the following formula:
T
Nt =
C
Where Nt = Theoretical number of workstations
T = Sum of task times
C = Cycle time
iii. A set of rules is identified to shortlist and select the tasks to be assigned to
workstations. A sample set of rules is given below.
a) Identification of feasible (remaining) tasks for the same station:
From the unassigned tasks, identify the task(s) which can be assigned next to the same
station, subject to two constraints:
• The precedence rules should not be violated.
• The individual time required for each of these feasible (remaining) tasks should
be less than the unassigned time for the station, where
Unassigned time for a station = Cycle time – (Sum of the time required for all
previous tasks that have been assigned to the station)
Note:
• When there is no feasible (remaining) task for the same station, move on to the
next station.
• When there is exactly one feasible remaining task for the same station, assign it
as the next task for the same station.
• When there are multiple feasible remaining tasks for the same station, use the
following tiebreaker rules to shortlist/select the next task for the same station.
b) Shortlist the tasks with most followers, among the feasible (remaining) tasks for the
same station:
22
From the feasible (remaining) tasks for the same station, shortlist the task(s) which
has (have) the most followers.
c) Select the task with the longest operation time:
From the shortlisted tasks with most followers, select the task which has the longest
operation time, and assign it as the next task for the same station.
Sometimes, there may be multiple such tasks. In this case, one of these tasks with the
longest operation time can be (arbitrarily) assigned as the next task for the same
station.
iv. This set of rules is applied iteratively till all the tasks are assigned. At the end of
this process, the actual number of work stations (Na) required may be greater than or
equal to the theoretical number of work stations (Nt).
The efficiency of the balance is calculated by using the following formula.
T
Efficiency =
Na ×C
Where, T = Sum of task times
Na = Actual number of workstations
C = Cycle time
v. The balance is accepted if the efficiency is satisfactory, otherwise balancing is done
using a different decision rule.
ERRATA
LOCATION EVALUATION METHODS
Cost-Profit-Volume or Break-Even Analysis
In the Figure 6.1 in page 81 of the first edition, TCA (total cost at location
A) and TCB (total cost at location B) were incorrectly represented.
Figure 6.2: Higher Cost Locations Providing Higher Profits
23
DEVELOPING A PRODUCT LAYOUT
Line Balancing
Steps in assembly line balancing
(Problem 3 in page 91 of the first edition has been reworked as follows)
Problem
The desired daily output for an assembly line is 500 units. The assembly line operates
for a period of 420 minutes a day. The process involves the tasks A, B, C, D, E, F, G,
H, I, J and K. Balance the assembly line and calculate the cycle time and efficiency of
the assembly line.
Task Task Time (seconds) Tasks that must precede
A 45 -
B 11 A
C 9 B
D 50 -
E 15 D
F 12 C
G 12 C
H 12 E
I 12 E
J 8 F,G,H,I
K 9 J
195
Solution
24
Following is the precedence diagram of all the tasks. The time required (in seconds)
for completion of each of the tasks is given below.
11 9 sec 12 sec
B C F
45 sec
A
G
12 sec 12
sec
J K
D E H
8 sec 9 sec
15 sec
50 sec
I
12 sec
Given that the operation time per day is 420 min, i.e. (420×60) sec.
The sum of the task times of the process, T
= (45 + 11 + 9 +50 + 15 + 12 + 12 +12 + 12 + 8 + 9)
= 195 sec.
Operation time per day
Cycle time =
output per day
420 × 60
=
500
= 50.4 sec.
Theoretical minimum number of workstations required,
T 195
Nt = =
C 50.4
= 3.87
Therefore, a minimum of 4 workstations are required to balance the assembly line.
We arrange tasks in order of the largest number of following tasks.
25
Task Number of Following Tasks

A 6
B or D 5
C or E 4
F, G, H, I 2
J 1
K 0
Now, we assign tasks as shown in the table below, following the rules given below:
A) Identification of feasible (remaining) tasks for the same station:
From the unassigned tasks, identify the task(s) which can be assigned next to the same
station, subject to two constraints:
a. The precedence rules should not be violated.
b. The individual time required for each of these feasible (remaining) tasks should be
less than the unassigned time for the station, where
Unassigned time for a station = Cycle time – (Sum of the time required for all
previous tasks that have been assigned to the station)
Note:
When there is no feasible (remaining) task for the same station, move on to the next
station.
When there is exactly one feasible remaining task for the same station, assign it as the
next task for the same station.
When there are multiple feasible remaining tasks for the same station, use the
following tiebreaker rules to shortlist/select the next task for the same station.
B) Shortlist the tasks with most followers, among the feasible (remaining)
tasks for the same station:
From the feasible (remaining) tasks for the same station, shortlist the task(s) which
has (have) the most followers.
C) Select the task with the longest operation time:
From the shortlisted tasks with most followers, select the task which has the longest
operation time, and assign it as the next task for the same station.
Sometimes, there may be multiple such tasks. In this case, one of these tasks with the
longest operation time can be (arbitrarily) assigned as the next task for the same
station.
Application of the above rules for balancing the assembly line given in the
problem:
To begin with, no tasks are assigned to any station. So, the unassigned time for Station
1 is 50.4 seconds. Subject to the precedence rules and the time constraints, A or D can
be considered as the feasible remaining tasks. Since A has the most followers, we
assign Task A to Station 1, as shown below.
26
Station Task Time Unassigned Feasible remaining Task with Task with
Time tasks (for the same most longest
station) followers operation
time
Station 1 - 0 50.4 A, D A A
Station 1 A 45 5.4 None None None
Now, the unassigned time for Station 1 is only 5.4 seconds and neither of the potential
next task (B or D) can be assigned next to this station, because of the time constraint.
So we move on to Station 2. Following the same rules described above, the entire
table can be filled as shown below.
Station Task Time Unassigned Feasible Task with Task with
Time remaining tasks most longest
(for the same followers operation
station) time
Station 1 - 0 50.4 A, D A A
A 45 5.4 None None None
Station 2 - 0 50.4 B, D B, D D
D 50 0.4 None None None
Station 3 - 0 50.4 B, E B B
B 11 39.4 C,E C,E E
E 15 24.4 C,H,I C C
C 9 15.4 F,G,H,I F,G,H,I F,G,H,I
F 12 3.4 None None None
Station 4 - 0 50.4 G,H,I G,H,I G,H,I
G 12 38.4 H,I,J H,I H,I
H 12 26.4 I,J I I
I 12 14.4 J J J
J 8 6.4 None None None
#
Station 5 - 0 50.4 K K K
K 9 41.4 All tasks have been assigned.
# The last task (Task K) could not be assigned to Station 4, since the unassigned time
(6.4 seconds) was less than the time required for Task K. So, we need a fifth
workstation to perform Task K.
Therefore, actual number of workstations, Na = 5
T
Efficiency of the assembly line =
NaC
195
= = 0.77
5 × 50.4
27
Aggregate Planning and
Capacity Planning
• Overview of Planning Activities
• The Aggregate Planning Process
• Strategies for Developing Aggregate Plans (Modified)
• Aggregate Planning Techniques
• Master Production Schedule (Modified)
• Implementing Aggregate Plans and Master Schedules
• Capacity Planning (Modified)
STRATEGIES FOR DEVELOPING AGGREGATE PLANS
Pure Planning Strategies

Varying the size of inventory:
(Added after Problem 2 in page 104 of the first edition)
Problem
Aggregate demand for product X for the next four months is given in the following
table:
Jun Jul Aug Sept
Demand 5000 4600 5200 4800
Working Days 23 24 22 23
Given:
Opening stock of inventory = 500 units
Inventory holding cost = Rs. 40
Worker productivity = 20 units/day
Worker strength = 10
Shortage cost (due to lost sales) = Rs. 30/unit
Based on the above information, generate a production plan with varying inventory
levels.
Solution
The aggregate production plan with varying inventory is given in Table 9.2.
In aggregate planning with varying inventory level, the workforce is kept constant.
Actual production in a month is calculated as = (Number of working days) × (Number
of workers) × (worker productivity in units/day)
Aggregate Planning and Capacity Planning
Table: 9.2: Production Plan with Varying Inventory Level

Jun July Aug Sep
Opening stock of inventory 500 100 300 0
Working days 23 24 22 23
Actual Production 4600 4800 4400 4600
Demand Forecast 5000 4600 5200 4800
Shortage in Supply 0 0 500 200
(unmet demand)
Shortage Cost 0 0 15000 6000
(due to lost sales)
Safety Stock 0 0 0 0
Closing Inventory 100 300 0 0
Inventory carrying costs 4000 12000 0 0
Case 1: If (Opening inventory + actual production) >= Demand forecast, then
a. Closing inventory = Opening inventory + actual production – Demand
forecast
b. Shortage in supply = 0
Case 2: If (Opening inventory + actual production) < Demand forecast, then
a. Shortage in supply = Demand forecast – (Opening inventory + actual
production)
b. Closing inventory = 0
Shortage cost (due to lost sales) = (Units short) × (Per unit shortage costs)
Inventory carrying costs = (Closing inventory) × (Per unit inventory holding costs)
Closing inventory in one month is taken as the opening inventory for the next month.
MASTER PRODUCTION SCHEDULE
Master Schedule Formation

Make-to-order items
Problem
Develop a master production schedule for the following data:
Forecasted demand for the next 8 weeks: 24, 25, 23, 26, 25, 27, 26, 27
Orders booked: 28, 26, 22, 22, 23, 25, 29, 27
Inventory on hand = 30
Lead time = 1 week
Production lot size = 50 units
Solution
First week:
Requirement for the first week based on the existing order is 28 units (given). This
requirement can be satisfied by using the on-hand inventory.
29
Projected inventory on hand at the end of first week is

= On-hand inventory + MPS quantity - projected requirements for the week
= 30 + 0 - 28
=2
Second week:
Forecast for second week is 25 units but the orders received are for 26 units. Inventory
on hand at the end of first week is 2 units, which is not sufficient to satisfy the second
week’s requirements. So to make up for the deficiency, organization schedules for
MPS quantities. As the lead time is one week, the production should commence in the
first week itself to satisfy the requirements of the second week. As can be seen from
Table 9.4, MPS start quantity for first week is 50 units (production lot size).
Now at the end of second week projected inventory on hand
= On hand inventory + MPS quantity - Projected requirements for the week
= 2 + 50 - 26
= 26 units
Similarly, projected inventory at the end of each week and MPS quantities is
calculated.
Table 9.4: MPS for 8 weeks
1 2 3 4 5 6 7 8
Forecast 24 25 23 26 25 27 26 27
Orders 28 26 22 22 23 25 29 27
MPS quantity 0 50 0 50 0 50 50 0
Projected on-hand 2 26 3 27 2 25 46 19
inventory
MPS start 50 50 50 50
The company has to schedule production in the first, third, fifth, and sixth weeks.
CAPACITY PLANNING
(Added under ‘Capacity Planning’ in page 113 of the first edition)

Measuring Capacity
Capacity can be measured in terms of the inputs or outputs of the conversion process.
For a company with single product or similar products in its portfolio, capacity is
given as the number of units per month. But for an organization with a multitude of
products in its product portfolio, capacity is measured in a common unit such as sales
in a monetary unit per week, month, or year. In service organizations measuring
output is not possible, so the input rate capacity is used to measure the capacity. For
example, a hospital measures capacity in terms of the number of beds available,
airline use the number of seats available in a particular time period, etc. Measuring
available capacity exactly is not always possible as capacity is dependent on many
factors. For example, machine breakdown, employee absence, and other similar
factors can lead to disruption in production, affecting the final capacity. So, decisions
on capacity availability are taken after considering unavoidable interruption in
productions.
To measure capacity, we use the following formula:
Capacity = Available time × Utilization × Efficiency
30
Aggregate Planning and Capacity Planning
The capacity utilization rate measures the capacity level at which a production process
is operating.
Capacity used
Capacity utilization rate = × 100
Capacity avaialable
Capacity available indicates the capacity level for which the process is designed (i.e.
designed capacity). Capacity utilization rate is measured in percentage terms.
Determining Capacity Requirements
Future capacity requirements need to be accurately determined to ensure good
performance in the future. Required capacity is determined on the basis of the
specifications of individual product lines, production capabilities in existing facilities,
etc.
The steps for determining capacity requirements are as follows:
1. Employ forecasting methods and find the individual product demand within the
planning horizon.
2. Identify the equipment and human resource requirements to meet the forecasted
demand. In case of multiple products or services, identify the time required for
switching from one product or service to another.
3. Compare capacity required with available capacity for the required time period
and identify the gaps.
4. As determining exact capacity requirements is difficult, organizations in general
allocate extra capacity to meet any contingencies in the future. The extra capacity
allocated for uncertain future requirements is known as the capacity cushion.
Economies of Scale
The basic theory behind the economies of scale is that as the size of an operation
increases, per unit cost of production decreases. The reasons include decrease in the
fixed costs of production per unit of output, and adoption of efficient process and
technologies like automation, which are not economically feasible for small-scale
operations. But when the firm expands beyond a point, diseconomies of scale become
apparent, because the expenditure incurred for maintaining large operations becomes
uneconomical.
Economies Diseconomies
Average unit of scale of scale
cost of
output (Rs.)
O
Production volume (units)
31
The reasons for diseconomies include increased distribution and storage costs,
complexities in operations, and high costs of modification and replacement of existing
facilities. So, an organization has to determine capacity required to achieve economies
of scale. In Figure 9.6, the relationship between the production level and the average
unit cost is shown. The resulting economies/diseconomies of scale are apparent. Point
O shows the optimum level of output where an organization can take full advantage of
economies of scales without facing diseconomies of scale.
Planning Service Capacity
In a service organization, planning for capacity should take into consideration when
and where the capacity is needed. Services can neither be produced in anticipation of
demand nor stored as inventories. The service capacity should be located near the
customers because most service delivery process involves customers. Unlike
manufacturing organizations, a service organization based in one geographical
location usually cannot efficiently serve customers in other geographical area. As a
result, service organizations generally operate through branches or franchises because
of the nature of the services, which involves customer participation in the service
delivery process. As customers cannot come to single location to avail services,
services organizations tend to increase capacity by establishing new branches and
facilities. There are few exceptions to these rules; many educational institutions,
hospitals, holiday resorts, etc. tend to concentrate on increasing capacities in one
location itself. Further with the expansion of the Internet, many retailers are taking up
the option of providing service online from a single location rather than establishing
brick and mortar outlets.
32
Fundamentals of
Inventory Control
• Purpose of Inventories
• Inventory Costs
• Inventory Systems
• Economic Order Quantity Model (Modified)
• Inventory Classification Models (New)
ECONOMIC ORDER QUANTITY MODEL
Optimal Order Quantity

Problem
A telecom distributor stocks a certain kind of electrical switch relay system that costs
Rs.50 per unit and has an annual demand of 10,000 units. The ordering costs are
estimated at Rs.80 per order and carrying costs are estimated at 20% of the cost of the
item. Calculate the EOQ.
Solution:
Given :
Cost of the switch = Rs.50
Demand = 10,000 units
Ordering cost = Rs.80 per order
Carrying cost = (20/100)50 = 0.2 x 50 = Rs.10
2C o D 2 × 80 × 10000
EOQ= = = 400 units
Ch 10
So the optimal order quantity for the firm is 400 units. The firm would be able to
minimize total cost i.e. carrying and ordering cost if it orders in lots of 400 units.
INVENTORY CLASSIFICATIONS MODELS
(New Heading added after ‘Economic Quantity Order Model’ in page 126 of the
first edition)
To exercise proper control over the inventory items, organizations classify and
categorize these items. This classification allows operations managers in devising
control plans relevant and effective for items with similar attributes. These methods
are sometimes called selective control methods.
ABC Classification
ABC is one of the most widely used inventory classification models otherwise known
as “Always Better Control” model. As per ABC classification, items are classified on
the basis of their annual consumption value. In an organization, few items have
maximum turnover in terms of annual consumption or usage value. Annual usage
value of an item is given by the relationship
Annual usage value = annual requirement × per unit cost
Category ‘A’ includes items that account for approximately 10% of the total inventory
items and 75% of the inventory investment. These items need high level of control.
Category ‘B’ includes items that account for approximately 15% of total inventory
items and inventory investments.
Category ‘C’ includes items that account for approximately 75% of the total inventory
items with approximately 10% of the total inventory investment. The ABC
classification method is described in detail in Chapter 12.
VED Classification
VED classification is based on the importance of a particular item in the production
process. Under VED, the items, which are critical for production are classified as V
(vital), the items, which are important in the production process but not critical are
classified as E (essential) and the items, which consists of non essential and do not
influence the production process are classified as D (desirable). Items categorized as
V need maximum control and investment. V items may not be the most expensive but
are critical to the production process. ABC classification of items is based on the
annual usage value whereas VED method is based on the criticality of the item in the
production process.
FSND Classification
Under FSND classification, goods are classified on the basis of their turnover. F items
are fast moving, S items are slow moving and N items are non-moving items and D
items are dead or the items which have not been issued for few years. In most cases,
the items identified as D are normally sent for disposal. The classifications of items as
FSND are based on the number of issues or withdrawal of items from stores over a
period of time. This period is decided based on the kind of inventory a firm is holding.
Time period for the movement of inventory in a steel factory may be different from
that of an electronics firm.
34
Purchase Management
• Importance of Purchasing
• Organizing Purchasing
• Responsibilities of a Purchase Manager
• Purchasing Process
• Duties of Buyers
• Make-or-Buy Decisions (Modified)
• Ethics in Buying
MAKE-OR-BUY DECISIONS
(Added under ‘Make or buy Decisions’ in page 136 of the first edition)
Problem 1
Raj Metals can purchase brass plates for Rs.30 per unit or produce it in-house where
the associated fixed and variable costs are Rs.50,000 and Rs.20 respectively. If the
demand for this component is 5000 units per annum, ascertain whether it is
economical to make the product in-house rather than sourcing it.
Solution
Given:
Demand = 5000 units
F = Rs. 50,000
V = Rs. 20
P = Rs.30
Q = 5000
If the item is made in-house, the organization incurs a fixed cost, say F, on installing
the necessary equipment and facilities. It also incurs a variable production cost, which
is equal to the unit variable cost (V) times the number of units demanded (Q).
Total Cost to manufacture = (VQ) + F
= (23 x 5000) + 50000
= 115,000 + 50000 = 165,000
The total cost of buying is the product of price per unit (P) and the number of units
procured (Q), i.e. Total Cost if purchasing = P × Q
= 5000 x 30 = 150,000
As the cost to produce the item is more than the cost of purchasing it, it is not
economical for the company to produce the component in-house.
Problem 2
An automobile company plans to utilize its existing manufacturing facility to produce
gears that the company is now buying for Rs.250 per unit. If the company produces
the gears, it will incur materials costs of Rs.75, labor costs of Rs.100, and overhead
costs of Rs.25 per unit. The annual fixed cost associated with the unused capacity is
Rs.200,000. Demand over the next year is estimated at 25,000 units. Would it be
profitable for the company to make the gears?
Solution
Demand (Q) = 25,000 units
Variable cost (V) = material costs + labor costs + overhead costs
= 75 + 100 + 25
= 200
Fixed cost (F) = Rs. 200,000
Price per unit (P) = Rs. 250
Total cost to purchase = P × Q
= Rs.250 x 25000 = 6,250,000
Total cost to produce = Fixed cost + (Variable cost x demand)
= 200,000 + (200 x 25000)
= 200,000 + 5,000,000
= 5,200,000
As the total cost of producing the gears is less than the total cost of purchasing them
by Rs.10,50,000, the firm can produce the gears in-house.
36
Materials Management
• Necessity of Materials Management
• Functions of Materials Management
• Materials Management Technology
• Materials Management Techniques (Modified)
ERRATA
MATERIALS MANAGEMENT TECHNIQUES
Kanban Systems
Figure 13.3 in page 183 of the first edition was incorrectly represented
A dual-card Kanban system
The dual-card Kanban system makes use of two Kanban cards. The two Kanbans are a
conveyance card and a vendor card. In a single-card Kanban system, we assume that
the required quantity of inventory is available in the inventory department. In the dual
card system, the required inventory is obtained from a vendor and a vendor
authorization Kanban is used in the transactions.
The functioning of a dual card system is shown in Figure 12.3 and can be described in
the following steps:
• The process of working of a conveyance card in this system is similar to that in
the single-card system. A conveyance Kanban is put in an empty tray at point A
and a material handling agent moves it to point B in the inventory department.
The tray is collected at point C and sent to point D in the assembling area similar
to the single card system.
• In this system, the vendor Kanban is introduced at point X, authorizing a vendor
(at point Y) to deliver the materials that are specified in the card.
• After receiving the card, the vendor delivers the materials into the empty trays
that are available at point Z.
• The filled container is placed in the bins at the position X. It remains at this
position till a conveyance card arrives from Point B to Point C, authorizing the
movement of material from Point C to Point D.
• Once the container is authorized to move, the vendor Kanban is removed and sent
to the vendor and cycle repeats itself
Figure 12.3: Dual-Card Kanban System
Source: Sang M Lee and Marc J Schniederjans, Operations Management (Chennai:

All India Publishers and Distributors, 1997) 258.
.
38
Materials Requirement Planning
• Fundamentals of Materials Requirement Planning
• Components of an MRP System (Modified)
• Advantages and Disadvantages of an MRP System
• Problems in Implementing MRP Systems
• Manufacturing Resource Planning
COMPONENTS OF AN MRP SYSTEM
MRP System Inputs

Bills of material
(Added after Problem 1 under ‘Bill of Material’ in page 194 of the first edition)
Problem
Given the product structure tree shown in Figure 13.4, how many units of F overall
are required to manufacture 200 units of A? The on-hand inventory available is 100
units of subassembly D and 100 units of subassembly B.
Figure 13.4: Bill of Material for Product A
B (3) C (1) D (2)
E (1) F (3) H (4) I (2) J (1) F (4)
G (2)
F (1) G (3)
Solution
Quantity of A to be produced = 200 units
Quantity of D required to produce 200 units of A = 400 units
Available inventory of D = 100 units.
Quantity of D to be produced = 300 units
4 units of F are required to produce one unit of D. Hence, 1200 units are required to
produce 300 units of D.
Quantity of B required to produce 200 units of A = 600 units
Available inventory for B = 100 units
Quantity of B to be produced = 500 units
3 units of F are required to produce one unit of B. Hence, 1500 units are required to
produce 500 units of B.
For every unit of A, one unit of C is required and for every unit of C, two units of F
are required. Hence, for 200 units of C, 400 units of F are required.
The total quantity of F required to produce 200 units of A = 1200 + 1500 + 400 =
3100 units.
MRP System Information Processing

Offsetting
(Added after Problem 2 under ‘Offsetting’ in page 196 of the first edition)
Problem
The BOM for product X is given in Figure 13.6. Develop an MRP schedule for items
P, Q, R, and S so that 300 units of X can be produced in the 6th week. On-hand
inventory of component Q is 100 units.
Figure 13.6: BOM for Product X
X
LT=2
P (2) LT=2 Q (2) LT=1
R (2) LT=1 S (3) LT=2
Solution
From the given data, the MRP schedule for items P, Q, R, and S are as shown in the
table 13.3.
Here, the lead times for X = 2 weeks, P = 2 weeks, Q = 1 week, R = 1 week, and S = 2
weeks
Table 13.3: MRP Schedule for Item P, Q, R, and S
Week Number 1 2 3 4 5 6
Item: P Gross requirements 600
Quantity =2 Quantity on Hand 0
LT =2 Net requirements 600
40
Materials Requirement Planning
Week Number 1 2 3 4 5 6
Lot Size =1 Planned-order receipts 600
Planned-order releases 600
Item: R Gross requirements 1200
Item: Q Gross requirements 600
Item: S Gross requirements 1500
From the BOM file, we can see that 2 units of P are required for producing 1 unit of
X. Thus 300 units of X would require 600 units of P in the sixth week. Similarly, 2
units of Q are required to produce 1 unit of X. Hence, 300 units of X would require
600 units of Q in the sixth week. As the on-hand inventory of component Q is 100
units, the net requirement for Q is 500. The lead-time to acquire Q is 1 week, so 500
units planned-order release are placed in week 3. Similarly we can deduce the
schedule for R and S as shown in Table 13.3.
41
Operations Scheduling
• Purpose of Scheduling
• Scheduling Methods (Modified)
• Scheduling Activities
• Scheduling by Type of Operations
• Scheduling Personnel in Service Operations (Modified)
• Scheduling Techniques (Modified)
SCHEDULING METHODS
Backward Scheduling
(Added after Problem 1 under ‘Backward Scheduling’ in page 35 of the first
edition)
Problem
National Machines Limited has two job orders, X to produce 1000 nuts and Y to
produce 500 screws. Both orders have to be processed on two machines 1 and 2. The
route sheets for the jobs are given in the following table. Both the jobs should be
ready in the next nine hours and both the machines are to start processing from now
onward. Develop schedules for both the jobs using forward and backward scheduling.
Job X Route Sheet Job Y Route Sheet
Routing Machine Processing Routing Machine Processing

Sequence Time Sequence Time
(Hours) (Hours)
1 1 1 1 2 2
2 2 2 2 1 2
3 1 2 3 2 2
Total 5 Total 6
Solution
Forward Scheduling:
Time 1 2 3 4 5 6 7 8 9
Machine 1 X1 Y2 Y2 X3 X3
Machine 2 Y1 Y1 X2 X2 Y3 Y3
Here, 1000 nuts along with 500 screws can be produced using the given sequence and
machines earliest by the end of 6th hour.
Backward Scheduling:
Time 1 2 3 4 5 6 7 8 9
Machine 1 X1 Y2 Y2 X3 X3
Machine 2 Y1 Y1 X2 X2 Y3 Y3
Here, the job of producing 1000 nuts can start latest in the 5th hour, and for 500 screws
using the given sequence and machines by the 4th hour so as to finish by the end of 9
hours.
SCHEDULING PERSONNEL IN SERVICE OPERATIONS

(Added after ‘Scheduling by Type of Operations’ in page 242 of the first edition)
Service firms have to develop weekly, daily and hourly personnel schedules. Some of
the approaches that firms can follow in this regard are discussed below.
Scheduling Consecutive Days Off

A weekly schedule for each employee two consecutive days off in a week can be
drawn up as shown in the following example.
Suppose an educational institute wants to develop a schedule for its teaching faculty.
The table gives the number of faculty required on each day of the week.
Monday 3
Tuesday 4
Wednesday 4
Thursday 2
Friday 2
Saturday 2
Sunday 1
Now we assign each faculty consecutive days off using the method given below.
1. Assign Faculty A to all the days that require staffing.
2. Then identify the two consecutive days with the lowest numbers (lowest pair) and
these days become off for Faculty A. The lowest pair is the pair in which the
highest number of the pair is less than or equal to the highest number of any other
pair. The numbers against Sunday and Monday are also considered as a pair.
3. If a tie occurs, choose the pair with the lowest number (or requirement) on an
adjacent day (before or after the pair).
4. If a tie occurs again, select the first of the tied pairs.
Faculty A:
Mon Tue Wed Thu Fri Sat Sun
3 4 4 2 2 2 1
So Faculty A is assigned offs on Saturday and Sunday, as the lowest pair is (2, 1).
Now we assign the days off to the remaining faculty. The row for Faculty B is
developed by subtracting 1 from all the days that Faculty A works.
43
Faculty B:
2 3 3 1 1 2 1
Here, the lowest pair is (1, 1) and it exists on Thursday and Friday. So Faculty B gets
offs on Thursday and Friday.
Now the row for Faculty C is,
1 2 2 1 1 1 0
Now there is a tie for the least pair. The pair is (1, 1) and it occurs on Thursday and
Friday; as well as Friday and Saturday. We select Friday and Saturday as the lowest
pair, as the adjacent value to this pair is the lowest.
So Faculty C is off on Friday and Saturday.
Since there is no requirement of faculty, Faculty C will also be off on Sunday.
Now the row for Faculty D is,
0 1 1 0 1 1 0
So, Faculty D is off on Sunday and Monday. He also gets off on Thursday as there is
no requirement of faculty on that day.
So the Institute can take two employees, Faculty A and Faculty B on a permanent
basis and take Faculty C and Faculty D on a part-time basis. Faculty A and Faculty B
handle one session each and they can be engaged in the other activities of the institute
like content development, research and placement activities.
Faculty C and Faculty D take 4 sessions every week on a part-time basis.
Scheduling Daily Work Times

One can also determine the least number of workers required to accomplish the daily
work load.
This is explained in the following example. A firm is engaged in manufacturing four
types of toys A, B, C and D. Each toy is manufactured through three functions: set up
work, fabrication, and decorating work.
The following table provides the production rate (number of units per hour) of each
function for each type of product.
Product Vol. Production Rate (units per hour)
Setup work Fabrication Decorating work
A 100 3.3 2.5 5
B 75 2.5 1.5 2.5
C 150 2.5 1.5 3.75
D 200 5 2.5 5
44
Based on the above information, we calculate the time required for completing each
function of all types of products.
Product Processing times Total time

Setup work Fabrication Decorating work
A 30 40 20 90
B 30 50 30 110
C 60 100 40 200
D 40 80 40 160
Total 160 270 130 560

By assuming each employee works for eight hours a day, we obtain the number of
employees required by dividing the total number of hours with 8.
Therefore, the number of employees required for setup work is 160/8 = 20, fabrication
work is 270/8 = 33.75, and decorating work is 130/8 = 16.25.
In total, 70 employees are required to complete all the work.
So, the firm should engage 20 employees for setup work, 33 employees for fabrication
and 16 employees for decorating work; and one employee can be engaged in
fabrication work for 75 percent of time (6 hours a day) and decorating work for 25
percent of time (2 hours a day).
Scheduling Hourly Work Times

Service requirements may vary from hour to hour in service firms such as hotels and
restaurants. So these firms engage more workers when the demand is high. This type
of personnel scheduling uses a rule called the ‘first hour principle.’ According to this
principle, in the first period, the number of workers required in that period is assigned.
Subsequently, additional workers are assigned as and when required. This approach is
explained in the following example.
A hotel works from 5 a.m. to 11 p.m. everyday and the requirements of the workers
for each 2- hour period is given below.
5 a.m. – 7 a.m. 8
7 a.m. – 9 a.m. 14
9 a.m. – 11 a.m. 12
11 a.m. – 1 p.m. 18
1 p.m. – 3 p.m. 16
3 p.m. – 5 p.m. 12
5 p.m. – 7 p.m. 12
7 p.m. – 9 p.m. 16
9 p.m. – 11 p.m. 14
45
At 5 a.m., we assign 8 workers to work from 5 a.m. to 1 p.m.

At 7 a.m., we assign 6 new workers to work from 7 a.m. to 3 p.m.
Since the requirement of workers came down, we do not assign any new workers at 9
a.m. Therefore, 2 workers will remain idle for the period 9 a.m. – 11 a.m.
Again at 11 a.m., we assign 4 new workers to work from 11 a.m. to 7 p.m.
At 1 p.m., we assign 6 new workers, as 8 workers who stated working from 5 a.m.
will leave by 1 p.m. These people will work from 1 p.m. to 9 p.m.
At 3 p.m., we assign 2 new workers to meet the requirement of 12 workers, as 6
workers among the present 16 workers will leave by 3 p.m.
Since there is no further increase in the requirement of workers, we do not assign any
new workers at 5 p.m.
Therefore, the management of the hotel can recruit (8+6+0+4+6+2+0) = 26 workers
on a permanent basis and 12 workers on a part-time basis. Of the 12 part-time
workers, 8 workers work from 7 p.m. to 11 p.m. and 4 workers work from 9 p.m. to
11 p.m. The above description is summarized in Table below.
Time period Workers Newly On Workers Workers
required assigned duty who leave at left
the end of
the period
5 a.m. – 7 a.m. 8 8 8 - 8
7 a.m. – 9 a.m. 14 6 14 - 14
9 a.m. – 11 a.m. 12 0 14 - 14
11 a.m. – 1 p.m. 18 4 18 8 10
1 p.m. – 3 p.m. 16 6 16 6 10
3 p.m. – 5 p.m. 12 2 12 - 12
5 p.m. – 7 p.m. 12 0 12 4 8
7 p.m. – 9 p.m. 16 8 16 6 10
9 p.m. – 11 p.m. 14 4 14 2 12*
* Part time workers.

The management of the hotel can also opt for splitting of shifts. In this example, two
workers remain idle from 9 a.m. to 11 a.m. Therefore, the management of the hotel
can assign two workers to work from 5 a.m. to 9 a.m. and again from 7 p.m. – 11 p.m.
If the management opts for splitting of shifts, it can reduce the number of part time
workers to 10. The following table shows scheduling of the personnel if the
management opts for splitting of shifts.
46
Time period Workers Newly On duty Workers who Workers left

required assigned leave at the end
of the period
5 a.m. – 7 a.m. 8 8 8 - 8
7 a.m. – 9 a.m. 14 6 14 2+ 12
9 a.m. – 11 a.m. 12 0 12 - 12
11 a.m. – 1 p.m. 18 6 18 6 12
1 p.m. – 3 p.m. 16 4 16 6 10
3 p.m. – 5 p.m. 12 2 12 - 12
5 p.m. – 7 p.m. 12 0 12 6 6
7 p.m. – 9 p.m. 16 8+2 16 4 12
9 p.m. – 11 p.m. 14 2 14 4 10*
+ These workers will again join the work at 7 p.m. * Part time workers
SCHEDULING TECHNIQUES
Johnson’s Job Sequencing Rules

Johnson’s rule for n-jobs and m-machines
Problem
Determine the optimum sequence of processing for the given sequencing problem of
four jobs: A, B, C, and D and five machines: P, Q, R, S, and T. Also find the total
elapsed time and idle time on each machine.
Machines
Job
P Q R S T
A 9 3 3 5 10
B 12 6 6 7 7
C 7 4 5 2 8
D 13 7 3 4 9
Solution
Here, minimum time on P = 7 hrs,
Maximum time on Q, R, and S are 7, 6, and 7 hrs respectively.
Since the minimum on machine P is equal to and less than the maximum time on
machines Q, R, and S respectively, the problem can move further.
47
Now we take into account two fictitious machines, G and H, whose processing times
are as follows
Job G=P+Q+R+S H=Q+R+S+T

A 20 21
B 31 26
C 18 19
D 27 23
Now we consider this as an n-job, 2-machine problem.
The optimum sequence is obtained using the steps given by Johnson and Bellman
(mentioned earlier) as:
Job G=P+Q+R+S H=Q+R+S+T

A 20 21
B 31 26
C 18 19
D 27 23
The calculation of total elapsed time is shown below.
Machine P Q R S T
Job C 0-7 7-11 11-16 16-18 18-26
Job D 7-20 20-27 27-30 30-34 34-43
Job B 20-32 32-38 38-44 44-51 51-58
Job A 32-41 41-44 44-47 51-56 58-68
The total elapsed time is 68 hrs.

The idle time of Machine P is, (68-41) = 27 hrs.
The idle time of Machine Q is, 7 + (20-11) + (32-27) + (41-38) + (68-44) = 48 hrs
The idle time of Machine R is, 11 + (27-16) + (38-30) + (68-47) = 51 hrs
The idle time of Machine S is, 16 + (30−18) + (44-34) + (68-56) = 50 hrs
The idle time of Machine T is, 18 + (34-26) + (51-43) = 34 hrs
Critical Ratio Method

(Added after Problem7 in page 251 of the first edition)
Problem
Dang Electronics has six different jobs in process with delivery requirements as
shown in the table. Today is Day 60, and the company uses the critical-ratio
scheduling technique. Rank the jobs according to priority. Which jobs have the
highest and lowest priority?
48
A B C D E
Planned days 75 65 73 74 68
Work remaining in days 14 5 18 17 10
Solution
The critical ratios and the priority order are as shown in the following table.
Job Critical Ratio Priority Order
A (75-60)/14 =1.07 5
B (65-60)/5 = 1 4
C (73-60)/18 =0.72 1
D (74-60)/17= 0.82 3
E (68-60)/10 =0.80 2
From the table it can be observed that job C has the lowest critical ratio and hence the
highest priority while job A has the highest critical ratio (ahead of schedule) and thus
the lowest priority.
ERRATA
There has been a mistake in the table 17.2 in the first edition. The time out for Row
2 of Machine C is 61. As a result the Time in Row 3 of Machine C will also be 61.
The Time out in Row 3 would be 75.
Johnson’s rule for three-stage production
Problem
A firm is involved in five types of jobs, each of which must be processed on three
machines, A, B and C in the order ABC.
The processing time of each job (in hours) on the three machines is given below:
Job Processing Times

Ai Bi Ci
1 18 10 8
2 19 12 18
3 12 5 16
4 16 6 14
5 21 9 10
Determine the sequence for the five jobs that minimizes the total operation time. Also
find the idle time of each machine; A, B and C.
49
Solution
First we check whether the problem satisfies the conditions discussed above.
The smallest processing time on machine A is 12 and it is greater than or equal to the
largest processing time on machine B, i.e. 12.
Therefore, we can use Johnson's n-jobs, 3 - machine procedure to solve the problem.
Job Processing Times
Gi = Ai + Bi Hi = Bi + Ci
1 28 18
2 31 30
3 17 21
4 22 20
5 30 19
The optimum sequence is, 3, 2, 4, 5 and 1.

Now, we calculate the total operation time with the optimum sequence obtained.
Thus, the total operation time is 104 hours.
Job MACHINE A MACHINE B MACHINE C

Sequence
Time Processing Time Time Processing Time Time Processing Time
in Time out in Time out in Time out
3 0 12 12 12 5 17 17 16 33
2 12 19 31 31 12 43 43 18 61
4 31 16 47 47 6 53 61 14 75
5 47 21 68 68 9 77 77 10 87
1 68 18 86 86 10 96 96 8 104
Idle time on Machine A = 104 – 86 = 18 hours.

Idle time on Machine B = 12 + [(31 – 17) + (47 –43) + (68 – 53) + (86 – 77)] + (104 –
96)
= 12 + 14 + 4 +15 + 9 + 8 = 62 hours.
Idle time on Machine C = 17 + (43 – 33) + (61 – 61) + (77 – 75) + (96 – 87)
= 17 + 10 + 0 + 2 + 9 = 38 hours.
50
Critical Ratio Method

Problem
Zenith Manufacturing Ltd. has started three jobs that require 28, 31 and 21 days to
complete, respectively. The managing director of the company has engaged three
teams to execute each of these jobs.
After the lapse of 18 days, the operations managers of the three jobs states that the
times required to complete the jobs are 11, 14 and 8 days respectively.
Calculate the critical ratio of each job and find out which job is to be given priority.
Solution
The critical ratios and priorities are as follows:
Job Critical Ratio Priority Order

1 (28 − 18)/11 = 0.91 2
2 (31 − 18)/14 = 0.93 3
3 (21 − 18)/8 = 0.375 1
The lower the critical ratio, the higher the priority need in sequencing the job in the
next day’s production activities. Here job 3 has the highest priority.
51
Productivity and
Quality Management
• Productivity (New)
• The Strategic Role of Quality
• Role of Inspection in Quality Control
• The Cost of Quality
• Statistical Concepts in Quality Control (Modified)
• Computers in Quality Control
• Concept of TQM (Modified)
PRODUCTIVITY
(New heading added)

Productivity is a measure of the efficiency of an organization in terms of the ratio of
the outputs to inputs. The higher the numerical value of this ratio, the greater the
efficiency. Productivity measures the efficiency of the employees (teams or
departments) in using the organization’s scarce resources to produce goods and
services. It is an important tool for managers because it helps them track progress in
terms of the efficient use of resources in producing goods and services. It helps them
identify inefficient activities (if any) in the production process in terms of man-hours
spent, material consumed, etc. Thus, productivity can be used as a controlling tool to
ensure that all the resources are utilized judiciously and efficiently.
This section focuses on defining productivity, measuring productivity, and describing
the factors that affect productivity in an organization.
Productivity Defined
The term ‘productivity’ was first used by French mathematician Quesnay in 1776. He
defined it as the relation of output to input. In 1883, another Frenchman Littre defined
productivity as the “faculty to produce”. In 1950, the Organization of European
Economic Cooperation formally defined productivity as “the quotient obtained by
dividing output by one of the factors of production. In this way, it is possible to speak
of productivity of capital, investment, or raw materials, according to whether output is
being considered in relation to capital, investment, or raw materials respectively.”
In general, productivity can be defined as the relationship between output from the
system and inputs used to produce the output (products and services). In mathematical
terms, it is the ratio of output to input.
Output
Productivity =
Input
Inputs
Inputs are all those factors of production like capital, men, material, machinery, etc.
Inputs can be quantified into different categories like number of man-hours worked,
quantity of material used, tons of raw material consumed, and power consumed in
kilowatts (kW) or megawatts (MW). They can also be viewed in terms of costs
associated like material costs, transportation costs, direct costs, overheads, etc. Input
Productivity and Quality Management
can also be categorized into tangible and intangible assets. Tangible assets include raw
material consumed, components used, and machinery used, while intangible assets
include leadership skills, knowledge of the workers, and training provided.
Outputs
Output may be in terms of the number of customers served in a restaurant, the number
or volume of products produced in a factory, or the number of customer requests
processed in a bank. It can also be tangible or intangible. The number of goods
produced, tons of cement produced, etc., are tangible outputs while customer
satisfaction is intangible. Operations managers need to develop means to quantify the
intangible output to determine productivity accurately.
Components of Productivity
Productivity can be improved in many ways such as by procuring quality raw material
at the lowest possible cost, adopting an optimal mix of production factors, and training
the workers. These different factors/components independently influence the
productivity in different ways. The components can be categorized to include price
efficiency, allocative efficiency, technical efficiency, and scale efficiency.
Price efficiency
Organizations always try to achieve a trade-off between the quality of the material
purchased and the associated costs. Procuring good quality material at the lowest
possible costs would reduce the overall cost of the product. Price efficiency comes in
when such cost reductions are possible without compromising on the quality of the
material purchased.
Allocative efficiency
Operations managers do consider an optimal mix of factors of production. For
instance, a trade-off between capital and labor is necessary to maximize productivity
due to constraints arising in utilizing either of them in a given situation. Hence, the
adoption of an optimal mix of factors of production leads to allocative efficiency.
Technical efficiency
Productivity can be increased either by increasing the output with the same number of
inputs or by producing the same output using fewer inputs. For instance, if 100 units
are produced using 80 units of raw material, then productivity can be increased either
by producing more than 100 units (say 110 units) by using the same number of inputs
(80 units), or by producing 100 units by using less than 80 units of input (say 75 units
of raw material). Either way, the productivity increases and this increase is termed as
technical efficiency. Technical efficiency can be gained by modifying the existing
production processes, introducing automation in production processes, etc.
Scale productivity
This component is concerned with the activity volume. The volume or size of
operations has an impact on the productivity of the organization. For example, let us
assume that the ordering cost for a raw material is fixed irrespective of the quantity
ordered. In this situation, a small organization whose volume of output is low may
find this ordering cost (input) more than a large organization, which has higher output
volumes.
53
Factors affecting Productivity

Productivity is one of the major concerns of managers as it helps organizations
survive in a competitive environment. As productivity helps measure the efficiency
and competitiveness of employees, departments, or organizations, it is considered an
essential element in the control process. Although the need to improve productivity is
felt in organizations, there is little consensus about the fundamental causes of low
productivity and the ways in which they can be dealt with. Productivity in
organizations is believed to be affected by several factors, some of which are
mentioned here:
• Bottlenecks in the production process can hamper productivity. Poor layout
design can be one of the reasons for bottlenecks. Further, productivity depends on
the capacity of the slowest processing equipment. If steps are taken to improve
the capacity of such equipment, it leads to a corresponding increase in the
productivity.
• Training programs affect productivity. Rapid technological changes are taking
place in organizations across the world. Therefore, employers have to train their
employees to constantly upgrade their skills. However, the time (unproductive)
spent by the employees in learning new technology reduces their productivity as
the time spent on training eats into the total effective work time. Exhibit 18.1
details the National Productivity Council of India, a non-profit organization,
which offers training and consulting to the firms on ways to improve
productivity.
• The total production cycle time has an impact on total productivity. The
production cycle time is the sum of the actual production time and idle time i.e.
time spent by the material between processing. Hence, operations managers need
to adopt proper scheduling in the plant to increase productivity by reducing idle
time.
• The productivity of an organization may also suffer if social and legal obligations
(for example, government policies) make it necessary for it to employ people
without adequate skills.
• Workers often believe that their employers are exploiting them by increasing their
workload from time to time on the pretext of improving productivity. Therefore,
they resort to strikes, thereby leading to loss of productivity.
Exhibit 18.1
NPC and Productivity Improvement
The National Productivity Council of India (NPC) was established by the
Government of India in 1958 as a registered society. It is an autonomous and non-
profit organization where equal interests are held by the government, the
employers, and the workers’ organizations. NPC provides training and consultation
to organizations in different industries on ways to improve productivity, apart from
undertaking research in the area of productivity. In addition, it also actively
implements the productivity promotion plans and programs of the Tokyo-based
Asian Productivity Organization (APO).
NPC provides productivity training in various disciplines like Human Resource
Management, Information Technology, Process Management, Technology
Management, and Disaster Management. These training modules aim at improving
the existing production methods and implementing new methods. For example,
54
under the discipline of technology management, NPC provides training on spare

parts management, maintenance management, etc. Team building, stress & time
management, Six sigma work culture, etc. are the focus areas under Human
Resource Management.
NPC offers consultation services to the industry, agriculture, and services sectors in
a wide spectrum of domains. They include System/Industrial engineering,
Agricultural productivity, Plant engineering, Energy management, Environment
management, and Information technology. It also provides training and
consultation services to firms under the Small Scale and Informal Sector (SIS) that
includes associated government and non-governmental organizations.
Adapted from http://www.npcindia.org.
Measuring Productivity
Productivity can be measured in relation to a single factor (single factor productivity),
a combination of factors (multifactor productivity), or all the factors taken together
(total productivity). Single factor productivity and multifactor productivity can also be
termed as partial productivity as all the factors of production are not considered while
calculating productivity. Kendrick and Creamer defined partial productivity (single
factor productivity) in 1965 as the ratio of gross or net output to one class of input. An
example of single factor measurement of productivity is labor productivity, which
typically measures output per unit of labor. Multifactor productivity takes into
consideration more than one factor of production such as labor and materials. Total
factor productivity includes all the factors of production (labor, materials, process,
energy, and other inputs). According to Kendrick and Creamer, total factor
productivity is the ratio of the real products originating in the economy, industry, or
firm to the sum of the associated labor and capital (factor) inputs. In this section, we
will focus on productivity measurement for tangibles (production) and intangibles
(knowledge workers, services organizations).
Traditional approach to measurement of productivity
Productivity is measured in terms of partial productivity and total productivity. As
labor is one of the major sources of production costs for organizations, most
productivity ratios are calculated by considering labor as the specific input. This
partial productivity ratio is referred to as the labor productivity index or output per
work-hour ratio.
Goods and/or services produced (output)
Labor productivity =
Labor hours/man − hours spent (input)
Material costs also affect productivity as they add up to 30% to 40% of the overall
costs. Hence, operations managers also measure productivity in terms of material
used.
Material productivity =
Quantity of material used (output)
In addition, managers often develop specific ratios that gauge productivity for
particular outputs and inputs, such as sales per square foot of floor space, return on
investment, amount of scrap for certain units of output, etc.
Multifactor productivity =
Quantity of raw material and components used (input)
55
Many organizations measure productivity in terms of partial productivity (single

factor or multi-factor). This is because it is difficult to measure total productivity due
to the difficulty in identifying/understanding the particular input variable(s) (among
many variables) that has led to lower productivity. Another problem with total
productivity is that all the variables (inputs and outputs) must be expressed in the
same units. But it is difficult to add the number of labor hours to the number of units
of energy or any other units of an input.
Total productivity =
[Labor + capital + energy + technology + materials] (inputs )
Measurement of productivity of knowledge workers
It is easy to measure the productivity of quantifiable tasks (e.g., the number of units
produced by an individual working on a machine during a given time period). But it is
difficult to measure the productivity of tasks (such as pharmaceutical research) that
cannot be measured in units. In fact, measuring the productivity of skilled workers is
difficult because of its dependence on many intangible and qualitative factors.
However, in order to improve planning and control at the organizational level, it is
essential to quantify the work and keep track of the productivity of the organization.
The productivity of a knowledge worker is much more difficult to measure than that
of industrial workers for the following reasons:
• The quality of a knowledge worker’s output cannot be determined immediately.
For example, the effects of a strategic decision may not be evident for several
years and even then the positive or negative effect of the strategic decision
depends on various external factors beyond the control of those responsible for
taking the decision.
• Often, the output of knowledge workers contributes only indirectly to the
achievement of the end result, and is, therefore, difficult to measure. For example,
a human resources manager solves the employees’ problems and attempts to
improve the quality of work life of employees. These efforts contribute indirectly
to an increase in productivity.
• Knowledge workers often assist other organizational units/departments indirectly
and this contribution is usually difficult to measure. For example, a scientist in
the R&D department may give a suggestion to the marketing department to
highlight a specific attribute of the product while marketing it. In this case, it is
difficult to measure the actual contribution of the scientist in the increase in sales
of the product.
Measurement of productivity in service organizations
Measuring productivity in a service organization is difficult due the intangible nature
of the product. Service companies base productivity on the number of tasks
performed, or the number of customers served in any given time period. Other
measures include a comparison of the service provided with established company,
industry, or customer quality standards. Since it is often difficult to establish a
standard time for a task in the service industry, usually, only a probable time for a task
can be established. For example, the time taken to approve a loan varies from bank to
bank. As a result, banks sometimes focus on the speedy approval of loans as a
function of their operational efficiency.
In order to measure productivity, service professionals maintain time-sheets to
indicate the amount of time spent on a given task. In cases where the task is routine
and involves minimal customization, the quantity of work, as for example, the number
of service calls made per day, the number of queries handled, or the number of
customers served, is used as a measure.
56
Productivity and Quality

As discussed earlier, productivity and quality are two components of performance.
Quality, like productivity, is a key to the well-being of an organization. Quality is
complementary to productivity and vice versa. Neglecting one of these can lead to the
organization performing poorly. Thus, there should not be any compromise on quality
when trying to increase productivity. Just by producing more products or serving more
customers, an organization cannot expect to increase profits or retain customers. The
product or service should be able to satisfy the requirements of the customers. By
improving the quality of a product or service, the organization can improve its
competitive position in the market. Many organizations have thus shifted from the
production-oriented approach to the marketing oriented one.
A focus on quality in the production processes can contribute to improved
productivity by reducing wastage in production, reducing the number of rejects, and
optimizing the process and procedure. The quality of the product or service can ensure
that the organization retains its customers and is simultaneously able to attract new
customers. With properly designed operating systems and procedures, an operations
manager can improve the quality of the products and the productivity of the factors of
production. As opposed to this, an inefficient design leads to a decline in quality and
productivity, resulting in overall inefficiency and sub-optimal performance.
The following sections will focus on the concept of quality and its role in
organizational success.
STATISTICAL CONCEPTS IN QUALITY CONTROL

(Added under ‘Control Chart for Variables’ in page 268 of the first edition)
Control charts for variables
Control charts for variables are used to maintain quality standards for a process by
evaluating measurable product or service variables like thickness, length, tensile
strength, and queue waiting time. These charts are used to evaluate the mean and
variability of the process distribution. Control charts for variables include X-Chart and
R-Chart.
X-Chart
X-Chart illustrates the central tendency of the inspected samples. For a meaningful
analysis, both the X and R-charts are used simultaneously. The upper and lower
control limits for X-chart are given by the following equations:
UCL = x + A2 R
LCL = x – A2 R
Where, x = Mean of means of all the inspected samples

R = Mean of ranges
A2 = Constant whose value is dependent on the sample size.
R-Chart or range chart
R-Charts show the variability of the process. A process is said to be in control when
both the accuracy (mean) and precision are in control. The range chart is used to
check the process variability. Range for a sample is given by the difference in the
highest and lowest values in the sample.
R = xmax - xmin
57
Control limits for R-chart is given by the formula:
CL = R
UCL=D3 R
LCL= D4 R
D3 and D4 are constants whose values are based on the sample size.
Problem 18.1
Table 18.1 gives the means ( x ) and range (R) of ten samples each of size 5.
Table 18.1
Sample 1 2 3 4 5 6 7 8 9 10
x 40 47 38 42 46 42 51 39 41 46
R 6 7 4 8 7 3 6 4 8 6
(Conversion factors for sample size 5 are given as A2 = 0.59, D3 = 2.34, D4 = 0.16)
Comment on the state of the process by using mean and range charts.
Solution
The mean of means is given by:
∑ x 432
x= = = 43.2
n 10
The mean of range
∑ R 59
R= = = 5.9
n 10
The control limits for the X-chart
UCL = x + A2 R = 43.2 + 0.59 × 5.9 = 46.68

Figure 18.1: R-Chart
58
LCL = x - A2 R = 43.2 - 0.59 × 5.9 = 39.7

CL = 43.2
Control limits for the range charts
UCL = D3 × R = 2.34 × 5.9 = 13.8
LCL = D4 × R = 0.16 × 5.9 = 0.944
CL = 5.9
Based on the control limits, R-charts and X-charts are plotted as shown in Figures
18.1 and 18.2 respectively.
Figure 18.2: X-Chart
The process control state is commented on after analyzing both the charts. In range
chart all the sample ranges fall within the control limits indicating that the process in
control. But the process cannot be assumed to be in control because by observing
X-chart we can see the sample means are outside the control limits indicating out of
control process. An in control process must satisfy the requirements of both the
X-chart and R-chart.
STATISTICAL CONCEPTS IN QUALITY CONTROL

(Added under ‘Control Chart for Variables’ in page 268 of the first edition)
Control Charts for Attributes
In control charts for variables, a measurable variable is used like weight, length, width,
etc., in the inspection process. But if the quality characteristics are not quantifiable
then the items after inspection are identified either as defective or non-defective. In
such situations, control charts for attributes are used. Two types of control charts for
attributes – the P-chart and the C-chart - are described below.
P-Chart or fraction defective chart
p-Chart is employed to find out the proportion of defective items in a selected sample.
It is used to control the proportion of defective items being produced by a production
process.
59
Total number of defective items in a sample

P=
Total number of units inspected
The control limits are given by
P (1 − P )
UCL= P +3
n
P(1 − P)
LCL= P - 3
n
Where n= Number of sample inspected, and
P = Average of proportion of defective items
In case the LCL is negative, it is taken as zero.
Problem 18.2
Based on data given in Table 18.2, construct a p-chart or fraction defective chart. Size
of sample is given as 30.
Table 18.2
Sample 1 2 3 4 5 6 7 8 9 10
Number of 3 2 2 1 4 2 1 4 2 1
defectives
Solution
Fraction defective for each sample is given by
p = c/n = number of defective/sample size
Fraction defective for Sample 1 = 3/30 = 0.1
Fraction defective for Sample 2 = 2/30 = 0.067
Similarly, calculate the fraction defective for all ten samples
Sample Fraction Defective
1 0.1
2 0.07
3 0.07
4 0.03
5 0.13
6 0.07
7 0.03
8 0.13
9 0.07
10 0.03
P= ∑P = 0.73/10=0.073
N
P(1− P) 0.073(1− 0.073) 0.073(0.927)

3 =3 =3 = 3 × 0.0475 = 0.142
n 30 30
Substituting these values in the equations for control limits for the p-chart, we get
60
CL=0.073
UCL =0.073 + 0.142 = 0.215
LCL =0.073 - 0.142 = -0.069 = 0, as the value obtained for LCL is negative.
The Figure 18.3 of p-chart indicates that the process is in control as all the values are
within the control limits.
Figure 18.3: P-Chart
C-Chart or Number of Defects Chart

C-Chart is used to illustrate the total number of defect in an item when the item may
contain more than one defect. C-Charts are used to find the total number of defects or
average number of defects per unit in an inspected sample.
Control limits for a c-chart is given by the equations
UCL = c + 3 c
LCL = c - 3 c
Where,
c is the average number of defects produced by a process. If LCL value is negative
then it is taken as zero, because the number of defects cannot be negative.
Problem 18.3
The number of defects in a process was noted after observing 10 samples of a painting
job. The errors in these samples are given in Table 18.3.
Table 18.3
Sample Number 1 2 3 4 5 6 7 8 9 10
Number of 3 7 2 0 4 6 1 2 4 3
Defects
Using c-chart determine whether the process is in control or out of control.
61
Solution
First we have to find the average ( c ), which will be the central limit.
∑ c 32
c = = = 3.2
n 10
Control limits for this process is given by:
UCL = 3.2 + 3 3.2 = 8.57
LCL = 3.2 – 3 3.2 = -2.17
CL = 3.2
As LCL for this sample is negative, it is taken as zero.
Now the C-chart can be obtained by plotting the number of defects on the Y-axis and
sample number on the X-axis.
As we see in Figure 18.4 the defects are within the control limits. Hence, the process
is treated as in control.
Figure 18.4: C-Chart
CONCEPT OF TQM
(Added under ‘Concept of TQM’ in page 272 of the first edition)
TQM Principles
A list of TQM principles is given below that act as a framework for overall
improvement in quality standards.
Systematic improvement
TQM as a philosophy involves improvement in every aspect of an organization’s
functioning, and is not limited to a single product or process. It is a systematic process
of improving and maintaining quality standards in an organization. Systematic
improvement involves identifying and managing the relationships between various
processes and systems to achieve organizational objectives.
62
Customer focused
The customer is the focus of the total quality management approach, and not an
individual product or service. TQM evaluates customers’ requirements, needs and
wants and then, provides requisite products and services that satisfy their requirements
or exceed their expectations. Customer focus enables an organization to respond
effectively, and on time to any changes in markets. TQM also leads to increased
customer loyalty, which in turn brings repeat business to an organization.
Continuous improvement
Quality is not an end item, but an ongoing process of improvement. Continuous
improvement results in improved organizational capabilities, which enable the
organization to take advantage of upcoming opportunities. By continuous
improvement in the production process, products and employees skills, organizations
can maintain their competitive position in the market.
Problem prevention
TQM philosophy is proactive rather than reactive. It emphasizes on the prevention of
problems rather than the use of remedial measures. This is achieved by employing
statistical process control tools, problem solving, system failure analysis, etc. By
applying problem prevention principle, an organization can reduce wastages,
minimize rejects and improve production process.
Universal responsibility
Maintaining quality is not just a prerogative of the top management or quality
inspection department but every employee at all levels is equally responsible for its
implementation. Quality responsibilities result in the employees being more
committed, motivated and creative in performing assigned tasks.
Designing quality for products
Total quality management principles advocate the integration of quality initiatives
with all business processes. Design, the first phase of production, has a significant
affect on the overall quality of the end product. Quality in design is important not only
for the development of products and services, but also for the development of
processes. Genichi Taguchi advocated the importance of quality in design. According
to him, activities such as process control, inspection, and defects removal, alone do
not improve quality. The three important aspects of design quality are:
Meeting customer requirements: During the design process, an organization should
focus on meeting customer requirements. As mentioned earlier, making a quality
product or service involves providing value to customers, not increasing the number
of features. So the design team must either know the exact customer requirements or
should be able to estimate them fairly accurately. During the design phase, the design
team must be kept informed of any changes in customer requirements, which might
influence the design objectives.
Capability of process: The product design should take into consideration the
capability of the process. During the initial stages of product or service design,
operations managers and designers should work together to ensure that production
requirements match process capability.
Standardization to improve quality: To ensure the quality of products during the
design stage, designers should use standard procedures, materials, and processes that
have proven quality. Standardization allows easy acceptance of the product in the
market.
Environment friendly features and attributes in a product or process have become
another quality benchmark. For instance, one of the quality benchmarks for
automobiles is emission and noise levels.
63
Facilities and
Maintenance Management
• Facilities Management (New)
• Necessity of Maintenance Management
• Types of Maintenance
• Economics of Maintenance
• Evaluation of Preventive Maintenance Policies (Modified)
• Maintenance Planning (New)
• Modern Approaches to Preventive Maintenance
• Recent Trends in Maintenance
FACILITIES MANAGEMENT
(New Heading added at the beginning of the chapter)
According to Sheila Sheridan, Chairperson (2002-2004), International Facility
Management Associationi, in the 1980s, facilities management used to be a practice
that involved coordinating the physical facilities, people, and work of the organization
using the principles of business administration, architecture, and behavioral and
engineering sciences. By the early 2000s, the whole concept had changed and
facilities management became a distinct function in management that spanned
multiple management disciplines to ensure the smooth and efficient functioning of the
workplace and a work environment that integrated people, process, place, and
technology.
The primary objective of facilities management is to provide a clean and conducive
work environment to enable efficient and effective progress of the core functions of an
organization, be it manufacturing, distribution, or research. For example, CMC
Limited, a leading IT solutions company in India, provides facilities management
services to its clients. It undertakes operations and maintenance of IT infrastructure on
the clients’ premises. Indian Railways, Indian Oil Corporation Limited, Bank of
Baroda, Kodak India, Bombay Stock Exchange, and OTTO India are some of its
clients.
This section highlights the nature of facilities management, functions of facilities
managers, the rationale behind outsourcing of the facilities management function,
facilities management and its relationship with maintenance management, and
facilities management in India.
Nature of Facilities Management

Facilities management has evolved into a distinct function with many organizations
across the world creating separate facilities management departments. The facilities
management departments carry out the managerial functions of planning, organizing,
staffing, coordinating, and controlling with a focus on the activities related to
managing the organization’s facilities. The range of activities that is part of the
facilities management department is detailed here.
Facilities planning and forecasting: Facilities planning, an important function in
facilities management is defined as the process of identifying the characteristics of the
physical facilities and developing detailed action plans to carry out facilities
management activities in the most cost effective way. It includes developing long-
term and short-term plans, space forecasting, and financial forecasting.
Facilities and Maintenance Management
Lease administration: This function involves property management. The facilities

management department manages all issues regarding leasing out or taking property
on lease.
Space planning and management: All the activities relating to space allocation, space
utilization, space forecasting, and management of space in the facilities are carried out
under this function. The space management function ensures that the available space
in all the facilities of the organization is utilized properly.
Architectural/Engineering planning and design: This function encompasses activities
of planning and designing of physical facilities (building, manufacturing plants,
showrooms, outlets, etc).
Workplace planning, allocation, and management: This function includes workplace
planning and design of the workplace based on equipment specification, type of
furniture, etc. It also involves estimating the costs involved. This function aims to
achieve optimal workplace conditions in order to maximize the work output.
Budgeting and Accounting: Financial accounting and budgeting activities (financial
forecasting, budget formulation, and execution) are performed under this function.
The department looks after the administrative budgets, capital budgets, operations and
maintenance budgets, etc. of the various facilities.
Real estate management: Activities like site selection, acquisition, building purchase,
lease, and disposal are carried out under this function.
Construction and project management: Construction activities and project
management activities are performed under this function. Construction of facilities
like plants, buildings, offices, (storage tanks in case of petroleum and chemical
companies) are some examples.
Alteration, renovation and workplace installation: Existing facilities have to be
upgraded or modified with the changing business environment and strategies of the
organizations. These alteration and renovation works are managed by the facilities
management department.
Communication management: Installation of telecommunication networks, their
operations, and maintenance are carried out under this function. Installation of LAN,
maintenance of communication systems like EPABX, Internet connectivity, etc., are
some examples in this function.
Operations, maintenance and repair: Activities like preventive maintenance and
remedial maintenance fall under facilities maintenance. Other activities under this
function include trash removal, hazardous waste removal and management, energy
management, inventory management, repairs, disaster recovery planning &
management, and purchase management.
Usually, these functions are outsourced to external agencies to reduce the cost of
operations. But some organizations retain the discretion to perform certain functions
in-house to avoid the involvement of external agencies.
Functions of Facilities Managers

Facilities managers perform a wide array of functions. Their basic function, like that
of managers of other functional departments, is to develop and execute strategies that
fall in line with the organizational goals and objectives and help in achieving them.
The primary function of a facilities manager is to organize the necessary services for
all facilities of the organization at reasonable costs. Services to provide a conducive
work environment through tidy and hygienic surroundings include: housekeeping,
maintenance services, plumbing, communication networks, inventory management,
and waste management, which have been mentioned earlier (Exhibit 19.1 describes
how waste management has become an important function in healthcare institutions).
Facilities managers are expected to be flexible as they have to work overtime or at odd
65
hours to fix problems that arise in the facilities. For example, leaks in the pipelines or
a short circuit leading to fire accidents may disrupt work in the organization. Facilities
managers have to see that such problems are corrected as and when they are detected.
The following are some of the important functions of a facilities manager.
• Conducting and participating in planning activities along with architects,
production engineers, and the top management while performing alterations to
facilities or expanding the facilities. This helps in designing better facilities.
• Reviewing the techniques that are used to reduce costs and raising maintenance
levels in the facilities. Reduced costs result in improved profits. Better
maintenance levels help increase the life of assets and ensure a productive work
environment.
• Recruiting and/or hiring people for carrying out various facilities management
functions. Manning the department with the right kind of people is an important
function of the facilities manager, because the right people in the right jobs help
to increase efficiency, and lower wastage and costs.
• Measuring the work performance of the facilities management teams using work
measurement techniques and motivating them to raise their performance levels. A
highly motivated team always produces better performance and higher
productivity
• Developing and maintaining a controlling center that acts as a strategic support to
the facilities management department. Such a center acts as the center-point of
activity from where the facilities managers can execute and control decisions in
the facilities management department.
• Communicating with other department heads and personnel and understanding
their nature of work. Also, maintaining good rapport with them as the success of
the facilities management department’s functions is dependent on other
departments.
• Developing good relationships with the service providers and maintaining a
congenial work atmosphere in the facilities by applying sound management
principles.
• Guiding employees and the top management in developing innovative ways of
improving the work atmosphere in the facilities.
• Acting as change managers in situations where existing processes or
infrastructure is modified or replaced with new ones to suit the organizational
goals. Facilities managers should make the workers understand the necessity of
the changes brought about in the organization and make them work toward
achieving the organizational goals.
Exhibit 19.1
Waste Management in Healthcare Industry
Waste management in healthcare institutions is an important and critical activity. Most of the
healthcare institutions in India do not have waste management centers nor do they maintain standards
in managing the waste in their facilities. Waste management is one of the functions of facilities
management. It includes removal of waste from the premises, segregating the waste, disposing it of,
and/or treating it to make it harmless to society. Waste in healthcare institutions like hospitals,
clinics, etc., include used dressings, disposable syringes, outdated drugs, empty drug bottles, etc. This
function helps keep the hospital premises neat and tidy to ensure a cleaner environment and the
speedy recovery of patients.
66
Bangalore-based Health Care Waste Management Cell (HCWMC) is in the process of educating
healthcare institutions to set up in-house waste management centers. It is necessary to have a waste
management center in every healthcare institution to manage the waste effectively. According to the
HCWMC, healthcare institutions lack the required information and support to manage healthcare
wastes. Realizing this, the HCWMC has set up a resource center in Bangalore to train healthcare
institutions in waste management, capacity building, and providing access to required information.
The mission of the HCWMC is to advocate the cause of managing medical waste, disseminating
information, training, research, capacity building, and networking. The training programs and
supporting information aim at encouraging and helping the institutions to set up their in-house waste
management centers. The HCWMC feels that it is necessary to bring about an attitudinal change
toward waste management in the people managing these institutions and it has worked to bring in
institutional commitment and participation from all levels of people in these institutions.
Further, stringent rules from the government regarding waste management and growing demand for
quality from insurance companies (for accreditations) have also forced the healthcare institutions to
take up in-house waste management in their facilities.
Adapted from Vijaya, K. “In-House Systems for Waste Segregation is Critical: Interview with Dr.D.
Gopinath.” Express Healthcare Management. January 15, 2002, October 3, 2006.
Outsourcing the Facilities Management Function
Facilities managers use out-tasking/outsourcing to carry out the various tasks in
facilities management. Out-tasking (i.e. hiring of individual, specialized vendors) is
used more frequently than outsourcing (i.e. hiring of full-service, single source
vendors). Out-tasking supplements in-house delivery capability with sub-contracted
expertise or capacity. Outsourcing seeks to integrate the expertise and capacity of a
service provider toward a strategic objective. Outsourcing the facilities management
function has become a part of the strategic planning of organizations to gain long-term
benefits. There are many reasons as to why facilities management services are
outsourced, one major one being to concentrate on the core competencies and leaving
the additional functions to external sources specializing in this field. For example,
Punj Lloyd, an engineering construction and facilities management company, provides
operational and maintenance services for the power plants of the Oil and Natural Gas
Commission (ONGC). By outsourcing these services to Punj Lloyd, ONGC can focus
on its core activities of oil exploration and extraction. Another reason why
organizations outsource facilities management services is that they don’t have
employees with requisite skills. Outsourcing is also done when the organization feels
that it is costly to handle the services in-house.
Services that are most commonly outsourced are architectural design, trash and waste
removal from the premises, housekeeping, landscape maintenance, property
appraisals, hazardous material removal, furniture movement, and food and
refreshment services. Johnson Controls is a global operator in this domain and
provides a comprehensive list of such services. They include services ranging from
budget management and risk management, performance management, operations and
maintenance services, product and facility design services. (Refer to Exhibit 19.2 for
further details on Johnson Controls).
Generally, the need to outsource facilities management originates from the facilities
management department itself. Facilities managers do this to reduce their cost of
operations and improve the quality of tasks performed. The benefits and costs accrued
are not accepted by everyone. Some sections accept outsourcing as a means to reduce
costs while some believe that it increases costs. Let us look at the costs and benefits
associated with outsourcing of services in facilities management.
67
Exhibit 19.2
Johnson Controls – One Stop Shop for All Facilities
Management Needs
Johnson Controls is a global player in the field of electrical and electronic control systems like
thermostats, actuators, sensors, valves, etc. Facilities management is one of the services that the
company offers. It provides various services of facilities management at the strategic level as well as
at the operational level, under one roof. Strategic level services include Account/Budget
Management, Supply Chain/Supplier Diversity, Performance Management, Triple Bottom Line
Reporting, Risk Management, Transition Management, Strategy Development, Subcontractor
Management, Capital Planning, and Benchmarking. Operational level services are classified into
three broad categories – business site services, business critical and technical services, and workplace
and infrastructural design services. Several services are performed under each of these. For example,
reception, conference services, surveillance, reprographics (duplication of printed material), and
waste management services are under business site services.
Johnson Controls has developed support mechanisms to ensure quality services to clients enhance
efficiency, and reduce costs. They include:
Center for Excellence: As part of offering account/budget management services, the company has
established a global center for excellence where experts from different fields analyze the client’s
existing accounts and industry benchmarks to reduce operational costs.
Training Programs: Johnson Controls provides training to its employees as well as those of clients
in the areas of leadership, ethics, safety, and technical skills.
Customer Reports: In addition to the various services offered, it also provides reports on daily,
monthly, and quarterly basis to all levels in the client’s organization. This is to ensure that the client
can see the return on investment gained in outsourcing various services to the company. The reports
essentially contain Johnson Controls’ performance on the client’s premises that enable the client to
make effective business decisions.
Clients for Life: It is a customer relationship management program which focuses on account
management and creativity workshops so that clients’ needs and requirements are identified and
understood in the face of the ever changing work environment.
Adapted from www.johnsoncontrols.com.
Costs associated with outsourcing
Outsourcing of facilities management to external agencies is not always as profitable
as the facilities managers and the top management expect. There are also different
associated costs, which can hinder the expected savings from the outsourcing
contracts and reduce the quality of performance. Some of these costs are listed here:
Loss of Control: If the client organization passes over control of its facilities to an
external agency, it is like inviting the agency to gain monopoly over its facilities. This
can lead to loss of control over crucial decisions like alterations or expansion of
facilities or cost savings. Also, the client may lose the power to control any deviations
in the performance of the vendors. Loss of control can lead to strained relationships
between the client and vendors and become the cause for serious conflicts. To avoid
such situations, client organizations generally enter into a contract with multiple
vendors to restrict the monopoly situation and to have better control over the vendors’
performance.
Decrease in flexibility: Switching costs arise when a client enters into a contract with
the vendor(s) and hands over control. For instance, when the facility management of a
manufacturing plant is outsourced, the client organization first decommissions all the
machinery and then the vendor takes over. As a result, the initial costs are very high
68
for the service provider. To make up these costs and gain profits in the operations, the
service providers need some time. Thus, they would normally prefer long-term
contracts with the client organizations (as long-term contracts would be profitable to
the vendors). But such long-term contracts are usually less flexible for the client
organizations, especially if they want to regain control. Also, the cost to the client will
increase in a long-term contract as the vendors have the flexibility to raise or revise
prices.
Decrease in staffing quality: The vendors bring in their own staff and workers who
are trained to work in multiple work places (to perform the facilities management
activities in different client organizations). Sometimes vendors employ skilled
workers in the initial period of the contract. Once the client is satisfied with the
performance of the vendor, these skilled personnel will be replaced with semi-skilled
or unskilled personnel to reduce the direct operating costs. This can lead to an increase
in costs for the client and a decrease in the quality of work.
Increase in costs over time: The goals and objectives of the client and service provider
differ widely and may not be in line with each other. The service providers’ need to
raise profits can lead to exploitation of the client’s resources or a reduction in the
quality of work. They may also exclude some of the processes from the contract with
the excuse of raising costs and charging for them separately. This will increase the
costs of the client and eventually decrease the quality of work.
Benefits of outsourcing
Despite these costs associated with outsourcing the facilities management function,
there are also certain advantages or benefits that accrue to the client organizations.
The increasing popularity of outsourcing is evidence of the associated benefits. Hence,
many organizations (large and small) have outsourced the management of their
facilities to specialized vendors in this field. Given here are some of the benefits that
clients derive by outsourcing the management of their facilities.
Reduced costs: When the management of facilities is outsourced to external vendor(s),
the cost of operations go down considerably as the organization (client) need not pay
regular salaries for the employees and the wages of the workers involved in these
activities. The client has to just pay the pre-agreed price for the services offered by the
service provider. Generally this is lower than the sum of the actual costs of operations.
Besides, the client need not spend money on training the workers and that also leads
to cost savings.
Increased quality: Services are usually outsourced to specialized service providers.
They bring in staff and workers who are trained to carry out the tasks. Hence, the
quality of work performed by these trained workers is usually far superior to that of
the client.
Focus on core competencies: This is one of the major reasons for the increasing
popularity of outsourcing. The basic goal of any organization is to satisfy their
respective customers. By outsourcing the functions of facilities management,
organizations can focus more attention on their core competencies, and this leads to
better customer service. It also increases their competitive advantage in the respective
markets.
Facilities Management in India

The scope of facilities management in India has changed a lot in the period between
1980 and 2000. Earlier, facilities management meant only keeping the premises clean
and most organizations, whether public or private sector, had their own departments to
69
look after this function. This changed with the entry of multinational companies in the
1990s after the liberalization of the economy, especially with the entry of
multinational software companies, which had their own views on cleanliness levels.
The next change occurred with the entry of multinational facilities management
companies like C B Richard Ellisii, Hadeniii, Knight Frankiv, and Sodexov.
Higher levels of cleanliness have become the norm now and many facilities
management service providers specializing in various services have entered the
market. The market for outsourcing facilities management services has also grown.
Apart from janitorial and maintenance services, other complex services like waste
management, water treatment and management, asset protection services, health
facilities management, etc. have come under the scope of facilities management.
Updater Servicesvi (UDS) and Integrated Property Management & Servicesvii (IPMS)
are some examples of Indian companies that provide such services.
Facilities management services are required by different clients both in the
manufacturing sector as well as in the services sector. Facilities management services
in the manufacturing and services sectors vary in terms of scope. The presence of
heavy machinery and equipment in manufacturing companies’ calls for preventive
maintenance services and safety & security services, while service oriented companies
like banks and BPOs may see janitorial services as the prime service under facilities
management. But many services are common like waste removal, food and catering,
landscape maintenance, janitorial services, security services, etc. As a result, many
companies provide services to both manufacturing and service organizations. For
example, UDS, specializes in providing janitorial services to manufacturing as well as
service organizations like Godrej, Reliance, Infosys, American Express Bank and
Saint-Gobain.
Facilities Management and Maintenance

The facilities maintenance is a component of facilities management. When facilities
maintenance is done by in-house staff, it is the duty of the facilities manager to see
that the facilities are properly maintained. In large organizations, facilities managers
recruit dedicated maintenance staff or bring in outsourced staff to perform
maintenance tasks throughout the year at different locations. In smaller organizations,
the regular staff is assigned the additional work of maintenance as there is not enough
maintenance work to keep a dedicated team busy throughout the year. People with
specific talents in carpentry, plumbing, gardening, troubleshooting of equipment, etc.,
are recruited to be part of the maintenance teams in various organizations.
Maintenance of facilities can also be outsourced as part of the facilities management
strategy.
The functions of facilities managers under the maintenance function include carrying
out periodical preventive maintenance checks on machinery, checking for safety in the
work environment, and allocating budgets for upgrading the environment of the
facilities. Preventive maintenance (discussed in the later part of the chapter), is
outsourced by many organizations to service providers who are specialists in this
field. A facilities manager should have proper knowledge of all the facilities in the
organization and the machinery and equipment that are installed in various
departments.
70
EVALUATION OF PREVENTIVE MAINTENANCE POLICIES

Added under ‘Evaluation of Preventive Maintenance Policies’ in page 283 of the
first edition)
Problem 1
A workshop has 50 identical machines. The failure pattern of these machines has been
observed as follows over a year.
Elapsed time 1 2 3 4 5 6 7 8 9 10 11 12
after last
maintenance
in months
Probability 0.05 0.05 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.05 0.05
of failure
If the yearly cost of servicing the failed machines is Rs.7000, what is the average cost
of repairs per machine per occasion?
Solution
Mean time between failure = ∑ i.P(i)
= (1 x 0.05) + (2 x 0.05) + (3 x 0.10) + (4 x 0.10) + (5 x 0.10) + (6 x 0.10) + (7 x 0.10)
+ (8 x 0.10) + (9 x 0.10) + (10 x 0.10) + (11 x 0.05) + (12 x 0.05)
= 6.5 months
Number of breakdowns per year = 12/6.5 = 1.846
Number of breakdowns per year for 50 machines = 1.846 x 50 = 92.3
Average cost of repairs per machine per occasion = 7000/92.3 = Rs.75.84
Problem 2
The probabilities of failure after maintenance for a machine are given in the following
table
Quarters after maintenance 1 2 3 4 5
Probabilities of break-down 0.1 0.1 0.2 0.3 0.3
If there are 30 identical machines in the plant, what is the expected number of
breakdowns in the 3rd quarter? If the average cost of preventive maintenance is Rs.500
and the cost of remedial maintenance per machine is 4000, calculate the average total
cost of maintenance per month.
Solution
Expected number of breakdowns Bt = N (P1 + P2 + P3 +…+ Pt) + Bt-1 P1+ Bt-2 P2+…+
B1 Pt-1
Given N=30 and t=3
B1 = N P1 = 30 x 0.1 = 3
B2 = N(P1 + P2) + B1P1
= 30(0.1 +0.1) + 3 x.0.1
= 6 + 0.3 = 6.3
B3 = N(P1 + P2 + P3) + B2P1 + B1P2
= 30(0.1 + 0.1 + 0.2) + 6.3 x 0.1 + 6 x 0.1
71
= 12 + 0.63 + 0.6
= 13.23
Hence, the expected number of breakdowns in the 3rd quarter = 13.23
Total cost of maintenance for every 3 quarters = CP x N + CR x Bt
= 500 x 30 + 4000 x 13.23
= 15000 + 52920
= Rs.67920
Average total cost per quarter = 67,920/3 = Rs.22,640
Average total cost per month = 22,640/3 = Rs.7546.67
MAINTENANCE PLANNING
New Heading added after ‘Evaluation of Preventive Maintenance Policies’ in page
283 of the first edition)
As the production costs are increasing and the manufacturing processes are becoming
more complex, the need for maintenance has increased manifold. Planned
maintenance helps organizations reduce the expenditure on maintenance and the costs
associated with failures. Preventive maintenance activities are repetitive in nature and
performed according to a schedule. On the other hand, remedial maintenance is not
repetitive and is performed on a need-to-do basis, as future breakdowns cannot be
predicted. Preventive maintenance activities involve identification of probable
problems and estimation of the amount and type of work that is required to keep the
systems working in optimal working condition. This estimation enables maintenance
managers to schedule and plan their maintenance programs. Subsequently, they
determine the sequence in which various maintenance activities are carried out.
Managers use the available information to determine the labor hours, tools,
equipment, materials and other accessories required to implement the maintenance
plan. The maintenance tasks are prioritized on the basis of their significance in
maintaining a continuous production process when maintenance resources are scarce.
These priorities help organizations allocate resources to those critical systems whose
failure will have disastrous effect on the production process. Besides, maintenance
managers often maintain inventories of equipment and materials required for
maintenance activities to reduce the lead-time before a repair can begin. Organizations
with production facilities in more than one location reduce inventory costs by storing
basic and frequently used maintenance materials at each location, and occasionally
used materials at a centralized location.
Many organizations use computerized maintenance management systems to improve
their maintenance planning. Maintenance is carried out throughout the life of a piece
of equipment. The bathtub curve assists in decisions regarding maintenance
requirements. If organizations are not able to fulfill the maintenance requirements,
they outsource maintenance activities from outside vendors.
Bathtub Curve
It would be of great help to operations mangers if they were able to predict when the
probability of equipment failure will be highest. The bathtub curve illustrates the
different stages a piece of equipment goes through in its lifetime and the probability of
failure during a particular stage. Figure 19.2 illustrates the structure of a bathtub
72
curve. During the first stage of infant mortality, the probability of failure is very high
but it decreases rapidly. The reason for these failures can be attributed to improper
design and installation. This stage is also known as the ‘burn in’ stage where the
functional defects in the products come to fore. Once this stage is passed, the
equipment enters into the adult or useful life stage where the failure rate is constant,
and to some extent, predictable. Proper maintenance of equipment can ensure the
longevity of this stage. Most of the causes of failure during this stage are attributed to
external causes or accidents, for example, a mistake by an operator, or usage of
improper materials. Then finally, the equipment reaches old age or wear out stage,
where the failure rate increases. During this stage, organizations go in for a complete
overhaul of the system or replacement of the system. The failure rate in each of these
stages depends on the reliability of the equipment installed and on the amount of
maintenance effort spent on it. The bathtub curve can be used not only to study the
failure rates characteristic of new equipment but can also be applied for old
equipment, which has undergone servicing under preventive maintenance. After the
preventive maintenance is completed, the equipment again goes through the stages
defined in the bathtub curve. The bathtub curve may not always be an effective
indicator of the failure rates of equipment. For example, present day manufacturers
dispatch equipment only after the ‘burn in’ period is over, so that they can identify
and rectify the problem before it reaches the end users. So the initial stage of the
bathtub curve will not be applicable to such machines.
Figure 19.2: Bathtub Curve
Contract Maintenance
In order to reduce the costs incurred in maintenance, many organizations outsource
their maintenance activities. The process of outsourcing an organization's maintenance
activities to external vendors is known as contract maintenance. Contract maintenance
is useful for seasonal or irregular maintenance activities, which do not warrant the
involvement of the in-house maintenance department. Further, external maintenance
personnel have the requisite training and expertise to service complex systems. By
outsourcing non-core activities like maintenance, an organization can concentrate on
its core business activities.
73
i
International Facility Management Association (IFMA) is a professional association for
facility management with more than 18,500 members. The members represent 125 chapters
in 60 countries. IFMA conducts research, provides educational programs, certifies facilities
managers and conducts international conferences on facilities management.
ii
CB Richard Ellis is a global full-service real estate company. It has operations in 58 countries
with headquarters in California, USA.
iii
Haden, based in England, was established in 1816 as a heating and ventilating company.
Later it began to provide facilities management services. It is a specialty provider in building
management services.
iv
Knight Frank is an international real estate and property consultant having operations in over
30 countries with 165 offices.
v
Headquartered in France and with operations in 76 countries, Sodexo is an international
facilities management services operator. Its services include Food and management services,
Service vouchers and cards, River and harbor cruises.
vi
Updater Services is a Chennai-based integrated facilities management service provider.
It specializes in building maintenance services, M&E services, HVAC maintenance services,
and garden & lawn maintenance services.
vii
Integrated Property Management & Services is a subsidiary of Infrastructure Leasing and
Financial Services Limited (IL&FS), which focuses on facilities management.
74
Project Management
• Necessity of Project Management
• Network Modeling
• Project Planning Methods (Modified)
• Project Crashing
PROJECT PLANNING METHODS
Critical Path Method (CPM)

Computation of latest times: backward pass
(Added under ‘Computation of latest times: backward pass’ in page 294 of the first
edition)
Problem
The time estimates for completing the construction of a facility project are shown in
the figure below. Determine the critical path of the project.
Figure 20.4: Network Diagram for Problem 20.2
Solution
The critical path can be computed by knowing the earliest and latest times for each of
the activities mentioned in Figure 20.4. The following table shows the earliest and
latest times.
The earliest start time (EST) for event 1 in the network will be 0 or E1 = 0, E2 =
E1+D1-2, E3 = E1+D1-3, etc.
Earliest finish time (EFT) = Activity duration + EST
Table 20.3: Calculation of Earliest and Latest Time for an Activity
Activities Duration Earliest Starting Earliest Finish Latest Finish Latest Float
(Days) Time (E) Time (E+D) Time Starting Time (L-D)-E
(D) (L) (L-D)
1-2 6 0 6 6 0 0
1-4 4 0 4 6 2 2
2-3 3 6 9 9 6 0
3-5 5 9 14 12 7 -2
3-6 3 9 12 8 5 -3
3-7 6 9 15 15 9 0
4-6 6 4 8 8 2 -2
5-7 3 14 17 15 12 9
6-7 7 10 17 15 8 -2
7-8 3 15 18 18 15 0
In this problem, the float value is zero for activity 1-2, 2-3, 3-7, and 7-8. Hence, the
critical path for this network problem is 1-2-3-7-8.
PROJECT PLANNING METHODS

PERT
(Added after Problem 2 under PERT in page 298 of the first edition)
Problem
For the network diagram given in Figure 20.4, the optimistic, pessimistic, and most
likely times are given as under. What is the probability of the project taking more than
20 weeks for completion?
Activities Optimistic Pessimistic Most likely
time to time tp time tm
1-2 4 8 6
1-4 4 6 5
2-3 2 5 4
3-5 5 7 6
3-6 3 6 4
3-7 5 9 6
4-6 4 9 6
5-7 2 5 4
6-7 6 9 7
7-8 3 6 5
Solution
To find out the probability, one has to find the expected mean time Te and standard
deviation.
Activities Optimistic Pessimistic Most likely Expected mean Variance
time to time tp time tm time te 2
tp − to 
(t o + t p + 4t m )  
 6 
6
1-2 4 8 6 6 0.4444
1-4 4 6 5 5 0.1089
2-3 2 5 4 3.83 0.25
3-5 5 7 6 6 0.1089
76
Project Management
3-6 3 6 4 4.17 0.25

3-7 5 9 6 6.33 0.4356
4-6 4 9 6 6.17 0.6889
5-7 2 5 4 3.83 0.25
6-7 6 9 7 7.17 0.25
7-8 3 6 5 4.83 0.25
Completion time TE = sum of the all the (expected mean times (te) on the critical path
as determined in problem 2 (1-2-3-7-8) = 6 + 3.83 + 6.33 + 4.83 = 20.99 (21 weeks
approx)
Standard deviation (of critical path) = √variance = √ 0.4444 + 0.25 + 0.4356 + 0.25 =
√1.1747
Probability of project extending over 20 weeks = (20 – 20.99) / (√1.1747) = 0.99/1.17
= 0.846
Thus, there is a very high probability of the project going on beyond 20 weeks.
77

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Operations Management

Icfai Center for Management Research

Ref. No. SOM – 03 2K7 35

CHAPTER TITLE TEXT ADDED PROBLEMS ADDED

Chapter 1 Operations Management – An Overview None None

! Demand Forecasting ! Weighted moving average (H3)

! Least square method (H3)

Chapter 5 Design of Production Processes None None

Chapter 7 Job Design (Chapter 10 in the 1st Edition) None None

! Economies of scale (H2)

Chapter 11 Purchase Management (Chapter 9 in the None ! Make-or-Buy Decisions (H1)

Chapter 12 Materials Management (Chapter 13 in the ! Corrections in the 1st None

Chapter 13 Materials Requirement Planning (Chapter None ! Bills of material (H3)

Chapter 15 Enterprise Resource Planning None None

Chapter 17 Just-In-Time (JIT) Manufacturing System None None

! Control charts for attributes

! TQM Principles (H2)

Chapter 21 Trends in Operations Technology None None

Chapter 22 Globalization and Operations None None

Forecasting Demand 3-16

Allocating Resources to Strategic Alternatives 17-20

Facility Location and Layout 21-27

Aggregate Planning and Capacity Planning 28-32

Fundamentals of Inventory Control 33-34

Purchase Management 35-36

Materials Management 37-38

Materials Requirement Planning 39-41

Operations Scheduling 42-51

Productivity and Quality Management 52-63

Facilities and Maintenance Management 64-74

Project Management 75-77

FINANCIAL AND ECONOMIC ANALYSIS IN OPERATIONS

(Added after ‘Developing an Operations Strategy’ in page 16 of the first edition)

Net Present Value (NPV) Method

(After ‘Forecasting in Operations’ in page 20 of the first edition)

DEMAND FORECASTING PROCESS

(After ‘Forecast Components’ given above)

Understand the Objective of Forecasting

Integrate Demand Planning and Forecasting

Identify Major Factors that Influence the Demand Forecast

Understand and Identify Customer Segments

Determine the Appropriate Forecasting Technique

Static forecasting methods

Deseasonalizing the time series

Table 3.6: Calculating Deseasonalized Sales Values

Developing trend component

III 28.96 -7 ½ -15 -434.4 225

a = y-intercept (the value of y when x = 0) = y = y/n

b = slope of the trend line =

Table 3.8: Trend Component Calculation

Simple moving average (SMA)

Weighted moving average

adjusted exponential smoothing method. Take smoothing constants as α = 0.3 and β =

SOLUTION OF LINEAR PROGRAMMING PROBLEMS

Figure 4.2: Graphical Method

100 Feasible 3x + 2y = 180

Figure 4.1: Optimum Solution (Graphical Method)

LOCATION EVALUATION METHODS

Cost-Profit-Volume or Break-Even Analysis

DEVELOPING A PRODUCT LAYOUT

DEVELOPING A PRODUCT LAYOUT

Task Number of Following Tasks

STRATEGIES FOR DEVELOPING AGGREGATE PLANS