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International School of Buisness & Media


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One Year Certificate Program in Sales & Marketing


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Module III (February 200~) Operations Management


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Course Material

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INDEX

Chapter Name
1. Introduction to Operations Management 2. Plant Location and Layout -,-" .. 3. Manufacturing System 4. Ellara Time's Manufacturing Woes 5. Quality Management: SPC

Page No.
1 4 12 17 26

Chapter I:

Introduction to Operations Management


The true goal of any organisation is to profit from its operations. If the company is not able to generate profit from operations, its existence in the . future is at stake. Like a living organism cannot live through without air, light and water, similarly an organisation cannot exist without m,aking profit. No organisation on this mother earth can be propped up and:sustained from outside support. Temporary and initial outside support - may at times be required, but such support cannot be on long-term basis. The company has to stand on its own legs and walked to make progress. nlis is possible only when the company has been able to clock profits. After India gained political independence, l{nder the Stewardship of J awaharlal Nehru, Government of India participated directly in nation building by setting up several Public Sector Undertakings( PSUs ). These units, most of them, were not able to make profits, and were supported by GOI by offering outside financial support. However, today these are being sold off to the private entrzp,2.ileurs on a disinvestments spree. ~~o body can, therefore, support a loss-making company from outside. To sustain its operations the organisation has to make profits. In order to makE; profits, the compcmy's sales must be mere than its COSfS. Operatioils Manugement (OM) is definc:.d as the design, oper'ation arK1 improvement of the systems that create and deiiver the firm's primary products and services, at its lov/est costs so as to maximise the firm's profits, which is a prime or'ganisational organisation exists tomorrow. Like marketing objective, io 'ensure that the

arid finance, OM is a functional

field of business with

clear line management operations management

respor;sibdities. This point is importC1nt because is fr'equently confused with Operat!ons Research

,and, Management Science (OR/MS) and Industrial Engineering (IE). The essential difference is that OM is a field of management, wher'eas OR/M5 is the application of q~~C',r\titat!ve tT\(,1hods to decision making in 0.1\fields, and IE, is on engineer'ing discipline, Thus, while operations managers use the decision making tools of OR/MS (such as cr'itical path scheduling) and are

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concerned with may of the same issues as IE (such as factory automation),

OM's distinct management role distinguished it from these other disciplines. As shown in Figj, OM, is concerned with the management of the entire system that produces a good, or delivers a product. Producing a product such as a cell phone or providing a service such as a cellular phone account, involves a complete service of transformation processes. Fig. 1 is a supply networ.k for an Original Equipment Manufacturer (OEM) such the

finish make of cell phones.


Fig. 1: Supply Chain of a Typical Original Equipment Manufacturer:-

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Web site

Customer

\Vave house

Customer
Retailer

Dealer OEM
Distributor
lvlanufactunng CCffinanv Tier t Supplier:;
Ti~r 2 & :3SUDplicrs

Customer Retailer CustOrller Customer


'm__-

Retailer
Direct SaleS Force

Customer

To actually
transformGtions

produce
must take

the phones and get them to the CUSTomer, many


p\clce.

For e.xample the suppliers

purchase

rew

materials and produce the parts for the phone. The Nokia manufacturing plant takes these parts and assembles the various cell phones that have become popular. Orders for the phones are taken over the Internet from all the distributors, dealers an9 warehouse sites around the world. Local
reta!lers

work directly

with customers

accounts. OM is concerned . effectively as possible.

in setting up and managing ce.11phone with managing all of these individual processes as

Within the operations in three broad areas:


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function,

management

decisions UJn be divided

Strategic (Long-term)decisions. Tactical (intermediate-term) decisio"ns. Operational planningand control (short-term) decisions.
The strategic issLes are usually abroad, addressing such questions as these: ,How will we make the product? Where do we locate the facility, or, facilities? How much capacity do we need? When should we add more capacity? Thus, by necessity, the timeframe for strategic decisions is typically long-usually several years, or more, depending upon the specific industry. Operations management decisions at the strateqic level impact the company's long-range effectivene.ss 'in terms of how it can address its 'customers' needs'. Thus for a firm to succeed, these decisions must be in alignment with the corporate strategy. Decisions made. at the strategic level become the fixed conditions, or, operating constraints under which the firm must operate in both the int2imediate and short term. At the next level in the decision-making process, tactical planning primarily addresses how to efficiently schedule material Gnd labour within the constraints of previously made strategic concentrates on this levp.!ir.c\ude these:
How many workers do VJe need? When do VJeneed -:-hcrn) Should we work ovei,tirne, or put on a second shift? When do we have materiell delivered? should we have (l finished goods inventory? in turn, become the op.zrating constraints planning and control rlecisions are made. These tactical decisions, under which operational

decisions.. Issues on which OM .

Management decisions with r'espect to operational planning and control Gr'e narrow and short-term by comparison. Issues at this level include these:
What jobs do v.w wor-k o~, today, or, this week? Whom do we assion to what tasks")
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What jobs no':.. pr'ior"ty")

Chapter II

Plant Location and Layout


Plant Location: Plant location decisions concern both manufacturing and
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assembly units (for example, fertiliser, plants, steel plants, cement factories, textile sugar mills, automobile factories etc.) as well as service organisations (for example, banks, hospitals, hotels, retail supermarket etc.). Plant location decisions being strategic, long-term and non-respective require detailed analysis of long-term consequences because:
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Poor location of the plant can be constant source of higher cost, different transportation and marketing, frequent disturbances of production, dissatisfied employees and customers, etc. Once a plant is set up at a particular locat:on, it is comparatively immobile and can be shifted and relocated only at a considerable cost and interruption of production. The investment in land and buildings is quite large in case of bigger firms and economics of one location agClinst another needs to be evaluated carefully to ensure fair return on such investment.
Decision arise?:

II.

III.

When Does a Locational

Locational decisions generally arise when:


I.

II. III. IV. v.


VI.

A new manufacturing, or, service unit, is to be set-up. Existing plant operations are difficult to be expanded, selection of the earlier site.

due to poor additioilal

The growth of the business makes it advisable to establish facilities in new territories. There is emergence

of new social, political, or, economic conditions, of the

which suggest a cha.nge in the location of the existing plant. The product developments have outweighed the advantages existing plant. To stt'ot8gico\ly enl'er' new mOI'kets.

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b. Fa<..'"tor Governing Plant Location: Plant location studies are conducted in 3 phases: i. General territory select;on, ii. Community selection, anu Iii. Site selection, and the locational factors may be grouped under three heads: a. Regiona\ factors. b. Community factors. c. Site factors.

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a) Regional factors decide the overall area (or, region) within the. country. Such factors are: proximity to markets, proximity to raw

materials, availability of utilities.

b) Community factors influence selection of the plant location within the region. Su<:hfactors are: availability of labour, industrial and labour attitudes, social structure, service facilities, etc. c) Site factors favour specific site within the community. Such factors are availability and cost of land, suitability of bnd etc.
Factors Influencing the plant location: Location Factors Tt:rritory Selection \ X J---~
I Communitv./ Selection

I Site
Selection i

I. Proximity to raw materials , 2. Proximity to markets 3. InfTastructural facilities

L~~~ansportation [acilities I 5. Labour & Wages

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Legislation

& Taxatiorl

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Climatic Condition

8. Industrial and labour attitudes 9. Safety requirements


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: I.Community attitudes
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Suitability of Land
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I. Decision to put-up new plant. Ii. Relay-out of facilities machines.

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to meet changes in demand, like adding more

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Iii. Introduction of new product. iv. Withdrawal of absolute facilities. v. Change in product design. vi. Adoption of new safety standa.rds. vii. Overcoming the deficiencies of the existing layout. Principles of a Good Layout: It may not be possible to define a good layout in a few words, but there are criteria, which can be used to judge whether, or, not the layout is good. Some of them are as follows:
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a'

Overall

Inteqration

of

factors:

A good layout is one that integrates

men, materials, machines and supporting activities in a way thc.t the b2St mix is obtained. ~. Minimum Movement:

permits the minimum movementof men, materials and e.quipments betweerl operations.
Un! -directional without

A good layout is one that

c.

flow:

A good layout direction,

is one that towards the

makes the matet'fnlS stage or comple';-ion,

move only in the

forward

any bCicktracki ng.

d,

Effective

Use

of available

space:

A good layout is one that

makes

effective
e, Maximum

used of a'.'aibble space both horizontc.\ c.:ldverticc.\.


visibility:
readily

A good layout is one that makes men, machines and


at all times. A good !ayout is one that makes ail servIcing

materials

observable

f.

Maximum accessibility:

and mCiintenance points readdy accessible.

g. Minimum hand~inq: A good layout is one that


handling activity at its minimum.

reduces

the material

h. Inh:3rent

Safet'[

A good layout is one thot rnoKes the picni sofer

for

the workmen,

Related Numerical: Problem 1: A medium scale industrial unit wants to select one of the thre1 .j,

locations, for putting up its far.tory. The data or both tangible arii:~ intangible factors collected by them are given below: Item A
Site (Rs.in Millions)

(a) Total investment

250

315

(b) Total Sales 340 390 (c) Expenses on Raw Materials 85 100 (d) Expenses on distribution 50 50 (e) Expenses on utilities 50 40 (f) Salaries and wages 25 30 (9) Community facilities Poor ~ Good (h) Community attitudes Indifferent Good Suggest the most suitable site and justify your selection.

C 250 350 120 80 25 25 Bad Indifferent

Plant Layout /Facilities

Layout.

Plant layout is the placing of right equipment coupled with right method in the right place to permit the processing of a product in the most effective manner through the shortest possible distance and through the shortc:st
.

possible time.
Since a layout once made can bG changed/ modified only ot considerable cost, time and disruption of production, plant layout decisions are strategic decisions. A good layout results in comforts, convenience, appearance, safety, efficiency and profits while a poor loyou1- couscs congestion, disruption in material flow, unnecessary material handling more scrap and rework, higher throughput time, wasted movements and inefficiency.

Wh2n Does a Layout Decision arise? Layout decision developments: arises because of one, or r.~ar'e of the follov.%1

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I. Decision to put-up new plant. .:


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Ii. Relay-out of facilities machines.

to meet changes in demand, like adding more

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Iii. Introduction of new product. iv. Withdrawal of absolute facilities. v. Change in product design. vi. Adoption of new safety standards. vii. Overcoming the deficiencies of the existing layout. Principles of Q Good Layout: It may not be possible to define a good layout in a few words, but there are criteria, which can be used to judge whether, or, not the. layout is good. Some of them are as follows: a. Overall Integration

. )

of factors:

A good layout is one that

integrates

men, materials, machines and supporting activities in a way that the bzst mix is obtained.
~. Minimum Movement: A good layout is one that permits the minimum

movement of men, materials c. Un! -directional move only in the without

and equipments between operations. is one that makes the matei'iois

flow:

A good layout direction,

forward

towards the stage or comple'i'ion,

any backtracking, makes

d,

Effective Use of available space: A good layout. is one that effective used of available space both horizontal and vertical. visibility:
readily A good layout is one that at all times, A good !ayout is one that

e. Maximum materials

makes men, machines and

observable

f.

Maximum accessibility:
and maintenance

makes ail servIcing

points readdy accessible. A good layout is one that reduces the material

g. Minimum

handlinq:

handlinq activity

at its minimum. A good layout is one thot


rnOKCS

h. Inh~rent
the

Safety:

the picni safer for

workmen.

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Product type of layout is suitable when:


I.
II.

There are many products to be produced in batches. There is wide variation operations. Advantaqes in the reprocessing til,les of individual

of process Layout: investment due to lower cost of general-purpose

1) Lower capital machines.

2) Greater flexibility workers.

in regard to allocation of work to equipment and

3) Breakdown of equipment, absenteeism of workmen and/or nonavailability of materials do not dislocate the manufacturing activity on the shop floor. 4) Workers attain greater skills since they have to attend to one type of machines and operation. 5) Imbalance of work in on~ section does not affect other sections. the ...!orkingof the

6) New jobs with varying work co~tents and different sequences can be taken up without any difficulty. 7) Variety of jobs make the work interesting to the workmen.
Disadvantages: 1) For the volume of production, 2) Materials
material

opc.r'otiorls

space requirements

are higheT.

handling cannot be mechanised,


fI\vveli'oent..

which adds to enter' cost fa,

3) Vv'or'k-in-pr'ogress

Inventory is higher.

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I. Safe an-d improved environments: A good layout is one that-makes work centres and the areas around them satisfying to the workers ah~ employees. j. Maximum Feasibility: A good layout is one that' can be altered without much cost. later

k. Maximum security: A good layout is the one that safeguards the plant and machinery against fire, theft etc. Types of Layout: Layouts are basically of 5 types: Process, or, Functional Layout. Product, or, LineLayout. Mixed, or, Combination Layout. Project Layout. Cellular, or Group Technology Layout.

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1. 2. 3. 4. 5.

Process, or, Functional Layout: Process layout also called, "layout by function" is generally associated with batch production. The factory is divided into process units (or, departments) and within these process units (or, departments); o.!\simila.r facilitie.s are 9rouped together. A simple sketch of a process layout is shown i!l Fig. 2 as below.
Fig.2: Process, or, Functional
TUl1lil1g
) ' n)(

Layout:
Mzchining
'Centres

Product C
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Fig.3: Product,. or Line Layout. Suitabilit~ Product type of layout is suitable when: and are required to be producec

a. . The products are standardised

in large quantities. b. The products have reasonably stable demand. c. The processing times of individual operations are more, or less . equal.
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d. Uninterrupted supply of materials can be maintained. Typical examples of product layout are: Assembly line of automobiles, refrigerators, TVs, consumer electronic products, washing machines and consumer durable. products etc.

4) Routing and scheduling is difficult since different operations sequence.

jobs have differ~~

5) Inspection requires to be done after each operation as material'j passes from one department to the next department. This causes delays and increases cost.
6) Set-up costs are higher because of frequent changes of jobs. Product, or, Line Layout:- Product layout is also ca!led "layout by sequence". The layout of plant is such that material flows unidirectionaHy and at a steady rate. Special purpose machineries and equipments with built-in con-;-rolsystems are used here. The equipments, if necessary, are duplicated to avoid backtracking and to ensure that material alV'Crys flow in the forward direction towards their stage of completion.
Fig. 3 shows the sketch of a typical product layout.

i Product A

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Operation Management-I (llnd Supplement)
Advantages of ProdHct-type of Layout:

Manufacturing cycle is small which reduces the work-in -progress. Material handling is minimumand automatic. For the same volume of production, the space required is less. The work is simplified which are mechanized wherever possible, reducing the requirement of skill by the operators by Qconsiderable extent.
. It is easier to implement Statistical

Process Control and Six Sigma.

. Production control is simplified due to less product variety, simpler routings, and lower WIP. . Delivery commitments to customers are more reliable and easy to conform.

~) Disadvantaqe: L. The changes in products and work contents ,layout of machineries. necessitate the change in the

2. All machines may not be used to their full capacity. 3. Manufacturing cost is heavi Iy dependent upon the volume of production.

4. Breakdown of any machine, operator absenteeism on any machine, nonavailability of material Otlany machine dislocate the etltire line. 5. Expansion of capacity by the addition of a few machines is not possible.
6- Specialization creates monotony among workers.

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3) Mb<eJ, or, Combination

Layout:

A mixed layout is the combination of process and product type of ~(lyouts.Mixed layout are generally used when the company's i) Product contains a lot many components and parts.

ii)

Product requires to be produced in different

types and sizes.

Here

the Components can be produced in a process type of layout and assembly of the final product may be done in a product type of layout. Conversely, in some industry, the components may be produced in a product type of layout (e.g., automat department of a company) and the assembly may be in a process type of layout. 4) Project Type of Layout:
In project (arge turbines, assemblies material operation. type of industries like ship-building, etc. heavy aircraft materials industries, and whereus subthe

boile.rs manufacturing

are required to be processed. moves from one operation However, as in project stationary

In both product and process-type combination) to another are so heavy, and move to the materials

of layouts, the machine / equipment and man are stationary (man-machine industry, the materials

are, therefore,

and the men/machines

according to the sequence of operations to be conducted on the materia\s. This type of layout is suitable for project industries i) When one, or, few pieces manufactured, ii) When assembly consists of a large number of heavy parts. the cost of transportation oT which is very high. of an identical products are to be

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3) Celiular Type of Layout: Cellular manufacturing through cellular layout is the order of the day Ind this makes use of Group Techn'Jlogy (GT). The approac~ followed i~ to ,~e9roupdissimilar machines .into ceils capabl~ of performing the entire set
::>foperations required to produce a particu1ar component from a b\ank. The

machines used are typically inexpensive, medium capacity machines designed in-house. Low capacity utilization of these machines is tolerated. Fig. 4. Shows a typical Cellular layout using the concept of ceHu\o.rmanufacturing.
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Out-bounding Fil' d
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Stock Point

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1.:I'I.'Ollt

Stock Point

The main advantage of Cellular layout is the wider variety of product that can be produced by the production system. It is arranged like the producttype of layout, without having high capital investment, but has the flexibiiity of a process - type of layout.

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Qperations Managements: I
(Vth& Last Supplement):
4

Japanese firms use a bottom round man'agement style made up of consensus . management by committees or teams. This decision process is slow but attempts to reach a consumers (not a compromise) by involving all parties, seeking informution, and making a decision at the lowest level possible. Unlike in the United State, Japanese top management makes very few operating decisions, but concentrates on strategic' planning. This system is effective in the smaller, focused factories of Japan. Quality circles of employees meet weekly to discuss their jobs and problems. These small group improvement activities (SGIA) attempt to devise solutions to problems and share the solutions with management. They are led by a supervisor, or, production worker and typically include

. ..employees

a given production area. Others lead by a trained group leader, or, facilitator.
from

'are multidiscipline

teams

'f
pter III

Manufacturing. System
1anufacturingorganization
ch goo'ds and services nprises of three
can be looked upon as a production system by

are

produced.

A typical

rroduction

system

main components: inputs, transformation

process (or,

wersion process) and .output. The manufacturing system needs to interact rh both internal and external environment. The internal environment is the mbination of engineering, 1ereas the external marketing, personnel and accounts activities

environment

comprises of customers, competitors,

Ippliers, labour unions etc. A manufacturing system in the combination of

Jerations and activities employedto create the output g?odsand services.


The selection of the manufacturing system is a strategic decision for r10storganizations

...

since change at a later date are very expensive to make. it can give the desired output,

rhe system selected should be such that ~equired quality and is cost- effective.

Factors

Influencinq

Choice of Manufacturinq

System:

There

is no best manufacturing depends namely: on various

system

for

any product.

The choice or

the system objectives,

circumstances,

but it must meet two basic

i)

it must be able to meet the specifications it must be cost effective.

of the fi nal product,

ii)

The

major

factors

influencing

the

choice

of appropriate

manufacturing

system are as fol1ows:

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(a) Effect

of Volume.o.Variety: One of the majcr- considerations industry are shown as below:


Proiect Industries

in.~

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process selection is the volume I variety of the products. Their relationsH'!~ "'. across different

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~ Mass Production lndustri

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a
(in Log Scale)
industry profile.

200

2000

2,00,000

~. Volume
Fig.S The i'elationship of volume & variety across different

High product variety (i.e., r:1any products in one, or, few numbers) require highly skilled labour, gener'cl-purpose ti1achines detailed and sophisticated production planning ano coni-rol systems. (b) Capacity of the Plant: "1 projected sales vo:um2. is a major h influencing factor in de~ermin\n9 whether the firm should go in fo( intermittent, or, conti nuous process. Fixed process costs are hich for . . ..) continuous process and low fon. intermittent process while vGriab!e costs are more for the inter'mittent process and less for continuous process. Intermittent process, therefore, wil! b cnec.pe: to insta\1 and operate at low volumes and continuous process will be economical to use at high volumes, as shown in Fig. 6 below:

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Fig.6
Variable Cost (htermittcnt)
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VariableCost (lllcnnittcnt)
TOt<ll Cost (Continuous)

Cost
(Rs.)
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Variable Cost (Continuous)


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Fixed Cost (Continuous)


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Fixed Cost (wemliUent)

H
. Inleffilittenl ;

~ Continuous Manufacturing Range

Manufacturing Range Volume.

Break Even Volum

c) Flexibility:

Flexibility implies the ability of the company to satisfy varied

customer's requirements. Flexibility and product variety are inter- related. d) Lead time: Lead-times are more appropriately called delivery lead times expected competitive competitive by the customers in another major influencing factor in a market. As a gener'al rule, faster deliveries are expected in c. markeT. The product may be required to be produced to stoc:-:

using principles of batch production I mass production. Effici~ncy: Efficiency measures the speed and the cost of the conversion when the product is mass-produced. But
sales are required. rnass-produce a product, greater

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process. Efficiency is the greatest

.to

fJ.~vironment: adoption gr'oduolly

Environment

brings

in i1ew technologies

and forces

the is

of new process of manufacturingbeing replaced

For example, wooden furniture A furniture-manufacturing

by metals cr:d plastic.

unit will have to change In technology to fall in line v/ith changing times.

Classification

of the Mariufactut'ing Process: The manufacturjng

can basically be classified into five groups: i) Pro ject Production, where a single assignment of complex nature is undertaken ii) Jobbing for completion within the given period and cOST. Production, where one, or, few units of a product are

produced to customer's requirements within the given data and price. iii) Batch Production, where limited quantity of each type of product is authorized for manufacture at a time. iv) Mass and flow production, where a production run is conducted either on a single machine, or, on a number of machines, arranged according to the sequence of operations and several nulnber of a product are manufactured at a time and stocked in warehouse awaiting sales. v) Process production, where production run is conducted for an infinite, period. The above mentioned manufacturing methods are now detailed below and shown in chart form c.s below:
Type of Production

l:::tennittent Production

Continuous Production

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Project Production

Jobbing Production

Batch Production

iviass ,U\d
nO\\' t
!

Process Production

~
Fig. 7 Classification of Mallllf:tctllrin~

production

p(.ocess.

,
.
.
.

:'1
Selection of the Manufacturing Process: Break-even analysis is the most suitable technique for selecting the optima.l manufacturing process. At the

'

<

c-~.-.

.~=

~ introduction stage, the product is produced on general-purpose equ pments . with little, or, no commitment on fixed cost. Labour intensive methods are used to keep fixed cost of the project growth phase, general-purpose Finally, when the production. product form. As the product enters the are organized enters the to have batch phase the maturity machines

manufacturing

is organized on special purpose machines in mass and flow

form to have lower cost per unit of output. Fig. 8 shows the least cost process at any stage of life cycle,
Mass & Flow

Continuous

Cost (Rs.) A

Inirooucti0Il (use projCd form)

.
< < < <

Growth Phase

~..
I .

r
<

Maturity Pi13Si:'(use

Pm",,,; [om,)

(use b3lch foml)

1I.bturily Phase (u~ tv1ass ProduCtion form) to the Product Life Cycle (PLC)

Fig.8: Selection

of Manufacturing

Process according

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