Operations Management

By Prof Haresh
Course Content :
a) Introduction / Operations strategy / Competitive advantage / Time based
competition.
b) Product Decision and analysis/ Product Development
c) Process selection / Process Design / Process Analysis
d) Facility location
e) Facility layout
f) Capacity planning, Capacity decisions / Waiting lines
g) Aggregate Planning
h) Basics of MRP / ERP
i) Basics of scheduling
j) Basics of Project Management
k) Basics of work study/ job design / work measurement
l) Basics of Quality control / SQC / TQM
m) Basics of Environmental management and ISO 14000 / 9000.
n) Value Engineering and Analysis.

Reference Text :
1. Production and OM – S.N. Chary
2. Production and OM – James B. Dilworth
3. Modern Production management – Buffa
4. Production and OM – Norman Gaither
 a

Introduction /
Operations Strategy /
Competitive Advantage /
Time based Competition
Definitions of Operations management :
Some terms to be understood before,
Efficiency and effectiveness :
-Efficiency means doing something at the lowest possible
cost.
-Effectiveness means doing right things to create the most
value for the company.
- Often Maximizing effectiveness and efficiency at the same
time creates a conflict and hence a trade off is always sought.

Value : It can be understood as QUALITY in comparison with

PRICE.
eg Better car at same price …Value has gone up
Better car at lower price …value goes way up.
It is a challenge for management to achieve higher
levels of value on continuous basis.
Why study Operations Management ?
– A business education is incomplete without an understanding of modern
operations tools used for managing operations: Supply chain
management, TQM, BPR , JIT, Six sigma etc fall under the OM umbrella
– Operations management provides a systematic way of looking at
organisational processes. It develops analytical frame of mind to deal
with real world problems may it be global expansion or traffic at bank
teller window.
– Operations management presents interesting career opportunities.
– The concepts, models , tools of OM are widely used in managing other
functions of a business.

What is Operations Management ?

– It is the design, operation and improvement of the systems that create
and deliver the firm’s products or services
– Tools like OR ( operation research) , IE ( industrial Engg) , MS ( Management
science) etc are used in OM.
Supply chain of typical OEM

V
a
Web site Retailer r
Warehouse i
o
u
Retail s
OEM

Manufacturing Dealer C
company U
s
t
o
Tier 1 suppliers Distributor m
Retail
e
r
s
Direct sales

Tier 2 & 3 suppliers force

- OM is concerned with effective management of
all the individual processes involved in the
supply chain.

- With in operations function, management decisions can

be divided into three broad areas :
1. Strategic ( Long Term ) decisions
2. Tactical ( Intermediate term) decisions
3. Operational planning and control ( Short term)
decisions
Production systems :
- A production system uses resources to transform inputs into
some desired output
- Transformation processes can be categorised as follows:
1. Physical ( Manufacturing)
2. Location ( Transportation)
3. Exchange ( Retail)
4. Storage ( Warehousing)
5. Physiological ( Health Care)
6. Informational ( Telecommunication)

- Next 2 slides are ,

1. “Input- transformation- output” for some typical systems
2. Historical development of OR
System Primary Resources Primary Typical
Inputs Transformation Desired
functions Output
Hospital Patients Doctors, Nurses, Health care Healthy
Medical equipment Individuals
etc.
Restaurant Hungry Chefs, Food, Well prepared , Satisfied
customers ambience, etc served, food , etc customers

Automobile Sheet steel, Tools, equipments, Fabrication and High quality cars
factory engine parts workers, etc assembly of cars,
etc
College or High school Teachers, books, Imparting Educated
university graduates classrooms, etc knowledge and individuals
skills, etc
Departmental Shoppers Goods, Sales staff, Attract shoppers, Sales to satisfied
store Displays, etc get orders, etc customers

Distribution Stock keeping Storage space, bins, Storage and Fast delivery,
Centre units ( SKUs) stock keepers redistribution availability of
SKUs
Air line Travelers Airplanes, crews, Move to destination On time, safe
ticketing systems , etc delivery to
destinations
Year Concept Tools Originator

1910s Principles of scientific Time study, work study, motion Frederick Taylor, Henry Ford, Frank
management, Industrial study, activity scheduling chart, Gilberth ( USA)
psychology, Economic lot inventory control
size
1930s Quality Control Sampling inspection, SQC, Walter Shewhart, Elton Mayo ( USA)
Worker Motivation activity sampling

1940s Multidisciplinary team Linear Programming OR group ( UK), George Dantzig

approach to complex ( USA)
problems
1950- Extensive development of Simulation, waiting line, decision Many groups in USA & Europe
60 s OR research tools theory, PERT, CPM

!970s Widespread use of Shop scheduling, inventory IBM,

computers, Service quality control, forecasting, project Joseph Orlicky &Oliver Wight – MRP,
and productivity management, MRP, mass McDonald's restaurant
production in service sector
1980s Manufacturing strategy, Manufacturing as competitive Harvard faculty ,
JIT, TQC, Factory tool, Kanban, CAD/CAM, Robots, Toyota motors
automation Bottleneck analysis, TOC
1990s TQM, BPR, Electronic ISO 9000, Value engg, National society of standards ,
enterprise, Supply chain concurrent engg, Internet, www, American society of quality control,
management Client server software Netscape, Microsoft, Oracle
2000s E - Commerce Internet, www Amazon, Yahoo, Google, Online
shopping sites
• Current issues in operations management:
1. Effectively consolidating the operations resulting
from mergers and acquisitions.
2. Developing flexible supply chains to enable mass
customization of products and services.
3. Managing global supplier, production and
distribution networks.
4. Increased “commoditization” of suppliers.
5. Achieving the “service factory”
6. Enhancing value added services
7. Making efficient use of internet technology
8. Achieving good service from service firms.
Competitive Strategy :
– It is about being different from the competition in the local or
global market place.
Competitive operations strategy breaks down into 3 components ,
– Operations effectiveness : Relates to the core business
processes that are needed to run the business. It gets
reflected in the costs associated with doing business.
– Customer Management : It relates to understanding and
leveraging customer relationships better.
– Product Innovation : It involves the development of new
products, markets and relationships to sustain growth.
It is concerned with setting broad policies and plans for using the
resources of a firm to best support its long term competitive
strategy
Operations competitive dimensions :
Since different customer are attracted by different
attributes, it gives rise to different competitive positions
of a company or different competitive dimensions,
1. Cost – “ Make it Cheap”
2. Product Quality and reliability- “Make it Good” – goal is proper
level of product quality as per the requirements of customer, no
over design nor under design. Also “Process Quality” goal is to
produce error free products.
3. Delivery speed – “ Make it fast” , compared to competition
4. Delivery reliability – Deliver it when promised.
5. Coping with changes in demand – “ Change its volume”
6. Flexibility and new product introduction speed – “ Change it” –
ability to offer a wide variety to customers and time required to
develop new product and change its processes to offer the new
product to customers.
7. Other Product specified Criteria – “ Support It” eg Technical
liaison and support , Meeting a launch date, Supplier after sale
support , Product mix options etc.
The Notion of Trade-offs:
– Generally an operation can not excel simultaneously on all
competitive dimensions and has to decide which parameters
of performance are critical to the success of the business
and then concentrate the resources on it. Eg trade off of high
quality vs. low cost.
Time based competition :
– Time is an important factor from operations point of view.
– Important from “availability of product when required” point of
view which demands need to manage the operations to meet
time targets.
– Catching up with the launch dates of promotional campaigns
– Very crucial in case of NPD.
 b

Product decisions &

Analysis /
Product Development
• 1) PRODUCT CLASSIFICATIONS
• A product is a article in commerce and it is
exchanged for some value for utility by consumer.
• Product: branded / store labeled viz. Tata Tea,
Basmati Rice (Kohinoor brand), Shopper Shirt (store
label) etc.
• Classifications (Marketing Aspect)
1) Consumer Products : Very short life and low
value viz. garments, pharma, plastic articles etc.
2) Consumer durable : Medium value and medium
life viz cars, frig, electrical appliances etc.
3) Industrial products : Products which produces
consumer and durable goods (High Value and long
life) viz. motors, switch gear , Lathe , Extruder, furnace
etc.
 PRODUCTIONWISE CLASSIFICATION
Sr Production Product Character Product Variety Examples
No. system
1 Continuous Homogenous Single product Sugar,
paper,
cement
2 Mass Heterogeneous Few products/ Plastic
varieties goods
3 Batch Heterogeneous Several Motors,
product/varieties switchgears
, pharma
4 Jobbing Custom Built Few Jobs Furnace,
Ship , etc

• Above terminology, classifications, characterictstics , etc.,

are important ingredients of production / operation management.
• PRODUCT LIFE CYCLE (PLC CURVE)
• Life period of model / brand of product is referred as PLC
curve. Physical life of product is different than this. Since
production process / technology also requires alignment, for
new model, PLC curve is important curve for operation
strategy.
• Product life cycle –
series of changing
product demand
• Consider product
life cycle stages
– Introduction
– Growth
– Maturity
– Decline
• Facility & process
investment depends
on life cycle
• Some typical PLCs,
a) PLC curve of consumer product is few
months viz. fashion garments 12 months.
b) PLC curve of consumer durable product few
years viz. 3 –5 years for fan, frig, car etc.
c) PLC curve of Industrial products several
years viz. 5 – 10 years lathe machine.
• PLC stages of TV industry for various
technological products, in Indian city / urban area,
are,
1. Plasma TV – introduction stage.
2. LCD TV – Growth stage
3. Colour T.V. - maturity stage
4. Black & White – Declination
3) PRODUCT DECISION
• Product decisions are required due to following circumstances:-
a) Due to decline in product life stage, new product required
(or modify existing product )
b) For corporate expansions new products are required.
• Following approaches may be used :-
(i) Vertical Expn : Forward integration of existing product viz.
compressor manufacturer like Kirloskar can go from production
of Refrigerator, Air Conditioner etc. By backward integration viz.
Frig, manufacturer like Godrej has already made backward
integration by manufacturer compressor in house.
(ii) Horizontal Expn : Similar product manufacturer like Godrej
, producing Refrigerator as well bottle coolers
(iii) Concentric Expn : Expn. In same type of product class
viz. ONIDA is producing Colour T.V. and Air conditioner for the
luxurious products.
• Above approaches have synergy of market
strength as well as using / modifying existing
production facility.
• Realignment looks into,
1. Increase existing plant capacity.
2. Add / remove machineries.
3. New Product design to use existing parts/
components.
4. Train existing staff for new product
technology
5. Possible use of existing tools, jigs and
fixture.
GOOD DESIGN FACTORS
A good design of product should incorporate following factors :
1. Function : Design should lead to a product which must
perform functional benefits to consumer.
Illustration : A gas lighter mfd. from design must instantly
ignite gas stove.
2. Reliability : The product should smoothly function
throughout it’s stated life span. This is called reliability of design
functions.
Thus in above illustration of gas lighter, say 10,000 nos. of
successful ignition function must be performed during the uses.
3. Quality : A design must specify good quality of parts,
components, etc., used in Product. Wherever required Indian
Standard specification no. should be stipulated for inputs. Also
for final products if ISI is available, if should be stipulated.
Illustration : For PVC coated copper wire (electric house
wiring) manufacturer states conformance to Indian Standard
No. 694. This is as per Govt. directive for domestic use for
electric wire. ISI states specification of conductivity of tensile
strength of Copper wire (input) and also final product’s PVC
coating Voltage strength etc.
4. Producibility : Design drawings, specifications etc., should be
simple and technically feasible for smooth production from
existing / proposed machines, tools, dies etc., Also production
cycle time should be reasonable short.
Thereby plant and machinery will produce full capacity of
product viz. production of 200 nos. of gas lighters per day.

5. Standardization : Design should specify maximum use of

standard available input parts, components, raw material etc.
Further it should also specify minimum variety and regular lot
quantity of such inputs available in the market.

6. Minimum Production Cost : Cost of raw material, labour

charges, overheads, etc. should be as minimum as possible.
Thus when product margin is added to product cost, sales price
should be competitive.
• Product design – specifies and takes
care of characteristics like,
• appearance,
• materials,
• dimensions,
• tolerances, and
• performance standards
• Product design must support product
manufacturability (the ease with which
a product can be made)
• Product design affects,
– Product quality
– Product cost
– Customer satisfaction
– Overall manufacturability – the ease with which
the product can be made
• Since the product design stage is the starting
point and any errors made in this stage proves
very costly and time consuming to correct at
later stages, product design is done giving
much importance to all minute details involved
in designing of the product.
Product Design Process, 4 major steps,
Step 1 - Idea Development
- Someone thinks of a need and a product/service design
to satisfy it
e.g. customers, marketing, engineering, competitors,
benchmarking, reverse engineering
Step 2 - Product / idea Screening
- Every business needs a formal/structured evaluation
process
e.g. fit with facility and labor skills, size of market,
contribution margin, break-even analysis, return on sales
Step 3 - Preliminary Design and Testing
- Technical specifications are developed, prototypes built,
testing starts
Step 4 – Final Design
- Final design based on test results, facility, equipment,
material, & labour skills defined, suppliers identified
 Product Screening Tool –
Break-Even Analysis
Break-even analysis , includes calculating
A) Total cost –> sum of fixed and variable cost
Total cost = F + (VC)*Q

B) Revenue –> amount of money brought in from sales

Revenue = (SP) * Q
Where,
Q = number of units sold
SP = Selling price per unit
VC = Variable cost per unit
F= Fixed cost
To compute the Break Even Quantity i.e. the
quantity of goods company needs to sell to
cover its costs, we equate the Total costs and
Revenue at that quantity ie, Q BE.

We get by rearranging,

QBE = F/ (SP - VC)

QBE = Break even quantity

F =Fixed costs
SP = selling price/unit
VC = Variable cost / unit
Break-Even Analysis: Graphical Approach

• Plot the total revenue line and

the total cost line
• Intersection is break-even
– Estimate graphically
– Solve exactly
• Profit for any quantity Q is
Total Revenue – Total Cost
• Sensitivity analysis can be
done to examine changes in
all of the assumptions made
Example : Given that the selling price is $ 20 per unit and the
variable cost is $ 8 per unit and the fixed cost is $ 70,000 . Find
the BEQ. The actual sale quantity at this price is 12000 units, Find
the profit or loss in this case. Examine the strategy which assures
the drop in price by $ 2 per unit can raise the demand to 15000
units.
Solution :-
a) Total Revenue = 20Q; Total Cost = 70,000+8Q
Breakeven Analysis for Fine Mfg.

180000
160000
140000
d o lla rs

120000
100000 Total Revenue
80000 Total Cost
60000
40000
20000
0
0 2000 4000 6000 8000 10000
Quantity produced
 Breakeven Quantity
= Fixed Cost / (Selling Price-Variable Cost)

= 70,000/(20-8) = 5,833.3

B. Given that, At selling price of $20/unit, demand is

12,000 units and we need to find out the profit or loss in
this situation,
Profit = Total Revenue-Total Cost

= 20(12,000) - [70,000+8(12,000)] = $74,000

C. Given that , At selling price of $18/unit, demand is
15,000 units and we need to find the total profit or loss
at this selling price, then, we have,
Profit = Total Revenue-Total Cost

= 18(15,000) - [70,000+8(15,000)] = $80,000

The strategy that sets the unit price at $18 has a

larger profit by $6000, and hence can be considered.
 Factors Impacting Product Design

• Need to Design for Manufacturing –

DFM
• Series of guidelines to follow in
order to produce a product easily
and profitably
– Simplification - Minimize parts
– Standardization
• Design parts for multiple
applications
– Use modular design
– Simplify operations
 Remember the Tucker!

The Tucker automobile of the late 1940s stands out as

one of the most celebrated failures in the annals of
American business. With its aerodynamic sheet metal,
rear-mounted engine, and a Cyclops headlight that
turned in tandem with the steering wheel, the
prototype “Tucker 48” shown to the public in 1947
generated quite a bit of excitement. But the Tucker 48
never made it into mass production. Only 51 models
were produced, all largely fabricated by hand at
tremendous expense.
 Remember the Tucker!

Existing equipment and processes were not capable of

executing the relatively sophisticated design of the
Tucker 48 on a large scale. Thus the Tucker 48
provides an object lesson in the need to design for
manufacturing (DFM). DFM is part of the concurrent
engineering movement that blossomed in the 1980s.
DFM stresses the need to incorporate the perspective
of manufacturing engineering into the earliest stages of
product design.
 c

Process selection ,
Design &
Process Analysis
• I) PRODUCTION SYSTEMS
• Broadly there are 2 types of Production Systems viz.
Product focused & Process focused. Each classification is
further divided into 2 systems on the basis of nature and
volume of products.
• 1. PRODUCT FOCUSSED (Continuous) :
• In this system, processing is completely adapted to
product. Individual processes are physically arranged in the
sequence required, and the entire system is integrated for
single purpose (product dedicated machines). Hence this
continuous system is called Product focused.
• This system is suitable for highly standardised product
which is required in large volume. viz. Paper Mill, Sugar Mill,
Cement Plant, Chemical Plant, Refinery etc. Thus this system
has huge investment, large inventory, high degree of
automation etc. But limited use of PPC. Exhibit I Edible oil
refinery Production Process.
• Exhibit 1: Edible oil refinery process

Chemical refining
Crude oil tank Physical refining using sulphuric
acid and
centrifuges

Bleacher using
Bleaching earth
Deodorizer SHE & Hot oil
and bleacher
furnace
screens

Polish filter Refined oil tank

• 2. PRODUCT FOCUSSED (Mass
Production) :
• In this system, main components / parts are
produced by continuous production system but
thereafter assembled, tested and packed. Due
to this nature of production it is called 'Mass
Production System'. This System is suitable for
Product with varieties and medium in volume
viz. Fan, Computer, Refrigerator, Automobiles
etc. It has a medium investment and inventory,
semi-automation, & PPC applied. Exhibit II
shows Production of Refrigerator.
• Exhibit II: Refrigerator Manufacturing

Compressor Evaporator coil

Body and door
manufacturing fabrication and
moulding unit
and testing unit testing unit

Refrigerator
assembly unit

Refrigerator Refrigerator
electrical final testing
wiring/ controls unit
unit
• 3. PROCESS FOCUSSED (Batch Production) :
• In this production system machines are general
purpose and they are organized around (focused)
production processes. Investments & Inventory are
medium value but no much automation (some
mechanisation exists.) Machines are medium values
viz. Lathe, Milling machine, ovens, bottling machines
etc.
Though operations are in sequence but the path may
be zig-zag leading. The production comes out in
batches eg Electric motors, pumps, switchgears,
biscuit, soft drinks etc.
The final product is traceable up to the raw material
batch which helps for trouble shooting.
Exhibit III shows process production of Biscuit making.
• Exhibit III: Biscuit making ( Handling Marie, Snax, Good
day, Digestive etc on one line in batches)
Layering and biscuit
Dough making facility cutting or moulding
Baking section with
which mixers, voutator etc unit, which can be
oven which can
general purpose machines adopted to different
bake all types of
which is required in all types of biscuits by
biscuits
biscuits changing mould or
cutter cylinder

Packing section with different packing

machines arranged for different biscuits Cooling conveyor and
and the biscuits are diverted using metal detector which
diverting guide to the required machines can handle various
biscuits

Cartons to storage
section
• 4. PROCESS FOCUSEED (Jobbing work) :
• In jobbing work, parts are manufactured at
various work stations in the plant like forging
station, machining shop etc. and assembled /
machined at site. Examples of jobs are
furnace, extruder, pressure vessel, reactor,
crane, conveyor belt etc. which are generally
supplied to product producing plants (described
above.
 Process Selection

• Product design considerations must

include the process
• Two broad process classifications
include
– Intermittent operations – produce a
variety of products in lower volumes
– Repetitive operations – produce one or a
few standardized products in high volume
 Process Selection

• Process selection is based on five

considerations
– Type of process; range from intermittent to
repetitive
– Degree of vertical integration
– Flexibility of resources
– Mix between capital & human resources
– Degree of customer contact
 Process Selection
• Process types can be:
– Project process – make a one-at-a-time product
exactly to customer specifications

– Batch process – small quantities of product in groups

or batches based on customer orders or
specifications

– Line process – large quantities of a standard product

– Continuous process – very high volumes of a fully

standard product
Underlying Process Relationship Between
Volume and Standardization Continuum
• It is seen from the above diagram that stages
of product & process development are
interdependent and feed on each other.
• Though volume depends on type of production
system, volume also depends on price/cost and
quality competitiveness.
• But organisation experience curve for
improved PPC, inventory, product / process
design, layout, economy of scale etc. leads the
organisations to its own competitive strategy.
• III. PRODUCT - PROCESS INNOVATIONS MODEL
• The competitiveness and profitability of firm depend in part
on the design and quality of products and on the cost of
production. Therefore there exists a relationship of product
innovation to process technology and process innovation. It is
described in 3 stages of model below.
R Process Innovations
a Product Innovations
t
e

o
f Technology stimulated
Need
Cost Stimulated
Stimulated
I
n
n
0
v Output rate stimulated
a
t
i Un coordinated processes ---------------------------------------------------------- Integrated Processes
o Performance Maximization -------------------------------------------------------- Cost Minimization
n
Stages Of Development
 IV. PROCESS SELECTION
• Process Selection is based on the following factors :
• (i) Type of Product
• (ii) Volume of Product
• (iii) Automation desired
• Please recall, as the 'Product Life Cycle' proceeds
'Process Life Cycle' follows it. Though stages may
take several years, productive system is required to be
repositioned / realigned.

• Production of gear for motors, engines, etc. was

once upon a time custom built product. But now with
the course of time, in advancement of technology, it
has become Mass Production.
Manual / Mechanized and Automated processes.
Manual Technology

Mechanized Technology

Low – Volume
High – Volume
Variety Products
Standardized products
General Purpose Machines
Special Purpose machines

Automated Technology
•Robots
Automated Technology
•NC Machines
•Hard Automation
•CAD/ CAM
•Robots
•FMS
•CIM
Hard Automation : Means the automation is built in , eg
automated assembly lines, Giant transfer machines
used in auto industry to handle engine blocks,
equipments in? oil refineries etc. In later stages of
product life cycle process becomes highly integrated
and it may incorporate flexible or inflexible robots. This
usually takes place in cost stimulated portion of
product life cycle.

FMS : Flexible Manufacturing system

 V) PROCESS DESIGN
• Process design is based on the following factors.
• (i) Product Specification
• (ii) Availability of Input
• (iii) Plant Capacity desired
• (iv) Availability of Machines / Equipments from Manufacturer

Following are design stages:

• I) Operation Design :
• Firstly operation is selected on the basis of raw material and availability
of machine/equipment. On the similar line subsequent machines are
selected for intermediate as well as final steps to achieve the product
specification viz. Cutting, Welding, Forging, Casting, Forming etc.
• II) Special Processes :
• Special Processes are required to be custom-built with machinery
manufacturer. viz. Heat Treatment Plant, special coating etc.
• III) Process Integration :
• Sequential arrangement of operations and processes is called process
integration. This also involves design of plant layout. Further it includes
design of material handling equipments, conveyor belt, other automation
equipments etc.
• IV) Capacity Design :
• Based on Project Report Plant output
capacity must be produced.
• V) Design Flexibility :
• Design should be flexible for variation in
specification of product and also for additional
capacity for future.
• VI) Environmental Equipment Design :
• If the process is involving hazardous gases,
affluent etc., then suitable selection of
Environmental equipment should be made.
(Thereby Pollution Control Laws are obeyed).
 Designing Processes
• Process design tools include
– Process flow analysis
– Process flowchart
• Design considerations include
– Make-to-stock strategy
– Assemble-to-order strategy
– Make-to-order strategy
 Process Design Tools

• Process flow analysis is a tool used to analyze

and document the sequence of steps within a
total process. Usually first step in Process
Reengineering.
• Process Re-engineering is a structured
approach used when major business changes
are required as a result of:
– Major new products
– Quality improvement needed
– Better competitors
– Inadequate performance
 Flowchart Symbols
Purpose and Examples
Examples:
Examples: Giving
Givinganan
admission ticket to a
Tasks or operations admission ticket to a
customer,
customer,installing
installingaa
engine
enginein
inaacar,
car,etc.
etc.

Examples:
Examples: How
Howmuch
much
Decision Points change
changeshould
shouldbebe
given
givento
toaacustomer,
customer,
which
whichwrench
wrenchshould
should
be
beused,
used,etc.
etc.

Source: Chase, Jacobs & Aquilano, Operations Management for Competitive Advantage , 11/e
 Flowchart Symbols
Purpose and Examples
Examples:
Examples: Sheds,
Sheds,
Storage areas or lines
linesofof people
peoplewaiting
waiting
queues for
for aaservice,
service,etc.
etc.

Examples:
Examples: Customers
Customers
moving
movingto toaaseat,
seat,
Flows of
mechanic
mechanicgetting
gettingaa
materials or
tool,
tool, etc.
etc.
customers

Source: Chase, Jacobs & Aquilano, Operations Management for Competitive Advantage , 11/e
Process Choice strategies
Decisions for the two types of
operations
 VI) PROCESS ANALYSIS
• Performance of process can be analysed on
the following criteria:
• 1. Quality Achievement :
• Eg. If the process produces the products
with less than 2-3% rejection rate, then it is
considered to be good process design.
• 2. Plant Capacity Achievement :
• Eg. If the Plant can reach about 98-99% of
installed capacity, then it is considered to be
good achievement.
• 3. Flexibility :
• If the process has ability to meet the variation in
specifications and also enhanced speed of production,
then process is said to be good design.
• 4. Economic Analysis :
• When Product Investment is apportioned on
Product cost along with variable cost, then profitability
should give Return on Investment (ROI) which should
substantially exceed the opportunity cost of fund.
• 5. Compliance to Environmental Laws :
• Design of Production Process must comply to the
relevant to Pollution Control Board of Government to
the satisfaction.
Process Technology in service and nonmanufacturing operations
In Service sectors also there is a clear trend in adopting more
advanced process technologies to get the competitive
advantage…some examples can be as below,
1. Containerization : By standardization of container sizes it has been
possible to develop national and international systems for efficient
handling of large quantities of goods. Sophisticated computer and
telecommunication systems are used to support the need of container
systems. Both sea and air freight reaps benefits from containerization.
2. Reservation systems in airline, railways etc, the interconnections
between national and international carriers etc. Systems for check in,
baggage check in and handling, seat allocation, special meals etc.
3. Warehousing: Advanced designs with computerized systems will store
and retrieve materials on command using controlled conveyors,
storage and retriever stackers etc.
4. Point of sale systems : Bar coding and scanner systems, inventory
control systems etc.
5. Banking operations : ATMs, Electronic funds transfer, Check clearing
using MICR ( Magnetic ink character recognition)
Evaluation of alternatives and decisions : Use of Decision Tree
Example : A firm is in situation of making a choice between “
Technology A” . “ Technology B” and “ Do Nothing”. In both the
alternatives A and B there is a ,chance of breakthrough as
below,
Technology A : Chance of breakthrough 40%
Technology B : Chance of breakthrough 80%
The investments and annual operating costs are shown below.
The do nothing alternative is a Manual technology and has no
investment required .
A horizon of 5 years is adopted as representing the reasonable
economic lives of technologies A and B, interest is at 10% and
the criteria is Expected Monetary value.
( from the present value table for a five year annuity at 10%
interest is 3.79).
Evaluate the economic aspects of the 3 alternatives.
 Investment and operating costs for Technology choices

Technology A Technology B Do Nothing

Investment $ 60,000 $ 40,000 -

Annual operating $ 30,000

costs
If breakthrough 1000 -
If No breakthrough 2000 -

If Breakthrough - 4000

If No breakthrough - 8000
Solution : Decision tree Breakthrough successful, p= 0.4, Annual
operating cost = $ 1000,
Present value = 3.791 X 1000 = $ 3791

Breakthrough unsuccessful, p= 0.6, Annual

A, investment operating cost = $ 2000,
- $ 60,000
Present value = 3.791 X 2000 = $ 7582

Breakthrough successful , p= 0.8, Annual

B: operating cost = $ 4000,
Investment -
$ 40,000 Present value = 3.791 X 4000 = $ 15164

Breakthrough unsuccessful, p= 0.2, Annual

C : Do Nothing,
operating cost = $ 8000,
No investment
Present value = 3.791 X 8000 = $ 30328

Annual op cost = $ 30,000

Present value = 3.791 X 30,000 = $ 113,730
In order to evaluate the economic aspects of the 3 alternatives we
proceed as follows,
1. Branches associated with A, the present value of the
annual operating expenses will be, considering the chance
aspect using related probabilities ,
1. Breakthrough successful = $ 3791 X 0.4 = $ 1516.4
2. Breakthrough unsuccessful = $ 7582 X 0.6 = $ 4549.2
EMV = $ 6065.6
Present value of investment for A = $ 60,000.
Total expected monetary value for alternative A is = $ 66,065.60

2. Similar calculations for alternative B will give us,

Total expected monetary value of alternative B is = $
58196.8.
3. The do nothing alternative has a present value = $ 113,730
Expected Monetary values for the rolled back decision tree are,
A, $ 66,065.6

B, $ 58,196.8

Do nothing, $
113,730.00

In this case alternative B has lower EMV over a period of 5 yrs by

$ 7868.8.
(After this calculations if Manager is of the opinion that this
difference is not substantial in comparison to the advantage of
meeting higher quality standard which can be achieved by
adopting technology A then he can justify the choice of
alternative A over B.)
 d

Facility Location
1) NEW FACILITY LOCATION :
– WHY?

1. New Venture
2. Expansion
3. Industry & Environment Laws
4. Industrial Unrest
5. Political Instability
6. STRATEGIC DECISION
2) DOMINANT FACTORS
1) Raw Material Based Mfg. : Facilities
using huge natural resources
2) Electric Power Based : Mfg. Facility using
large Electric Power
3) Good Infrastructure :
4) Market Based :
5) Govt. Policy : Govt. Incentives & Political
willingness
6) Land Cost , topography, etc.
7) Environmental Laws : Pollution Control
Board Policy for location.
3) GENERAL APPROACH FOR SITE SELECTION
1. Analysing Environment w.r.t. your business
2. Location Decision :National or International :
Dabur’s factory for Herbal products in California,
U.S.A.
3. Regional Decision : Multi region or single
region, for example Pepsi had 19 plant spread
over India.
4. Sub Region Decision :Transportation, Banking,
Port nearness etc
5. Site Selection : Land cost, size, soil,
topography, Vastushastra
6. Techno commercial analysis, ROI analysis of
proposed location
4) BROWN & GIBSON ANALYTICAL MODEL (For
Site Selection)
In 1972, Brown & Gibson developed Analytical
Model for Site Selection for Multiattribute Plant
characteristics. It has following 3 criteria.
1. Critical Criteria : A criteria which is absolutely
essential for plant location.

2. Objective Criteria : Monetarily measurable criteria

for raw material, labour, utilities, taxes etc. is
called Objective criteria. This criteria can also
become Critical criteria.

3. Subjective Criteria : Non-measurable criteria like

Community attitude and support, degree of
recreation facility etc. are subjective factors. It
can be both critical & subjective.
LOCATION MEASUREMENT FORMULA
LM = CFM x (X OFM + (1-X) x SFM)
WHERE,
CFM = Critical Factor Measure (CFM = 0 OR 1)
OFM = Objective Factor Measure (0<OFM<1)
SFM = Subjective Factor Measure (0<OFM<1)
Since CFM is 0 or 1, it leads either adequacy of Critical Factor
or not. If 0 then such site is eliminated.
OFM = (Max. OFC – OFC) .
( Max. OFC - Min. OFC.)
where OFC is Objective Factor Cost
SFM = Σ(SFWK x SWK), Where,

SFWK = Wt. of Subjective Factor K w.r.t. all subjective

factors.
SWK = Evaluation of Site, relative to all potential sites.
X = Objective factor decision weight selected by
management.
** Illustrates decision location example, refer excel sheet.
5) SERVICE FACILITY CHARACTERISTICS
Service Facility is classified as follows :
I) Fixed Services : Here consumers come to Service
facility for using services. Eg Restaurant, Hospitals,
Banks, Theatres, Hair Cutting Saloons etc.
- Fluctuating Demand
- Known Customers
II)Delivered Services : Here services are provided at
Customer's premises. Eg Ambulance Service, Fire
Brigade Calls, Police calls, Cleaning services etc.
- Random Requirements (more idle time)
- Costlier
6) SERVICE FACILITY TO LOCATION
Single Service facility & multiple customers-
Weber problem , Solution is given by Kuhn &
Kuenne in 1962.
Criteria : 1) Minimum cost of travel , or
2) Minimum time for transportation.
Single Facility Location & 5 Users –
Illustration.
Distance = di = √(xi - x)2 + (yi -y)2
If wi is a cost (Rs.) per KM. then
Total cost of service for location facility at
(x,y) is,
C(x,y) = Σ (wi x di)
= Σ wi x √(xi - x)2 + (yi -y)2,
This Equation is to be solved for Minimization.
In special case where all wi are equal for
“m” customer locations, the ideal location
will be given by,
x = Σxi / m , &
y = Σyi / m
7) DISTRIBUTION METHODS
Distribution goods from facility to depot /
warehouse can be tackled by Linear
Programming. Any one of the following 3
methods can be used.
1.North-West Corner.
2.Least-Cost Method. (LCM)
3.Vogel's Approx. Method (VAM)
Let us understand with example one of these
methods….