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Certificate in Manufacturing Concepts

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its client work locations. Sharing of this document with any person other than a TCS

associate will tantamount to violation of confidentiality agreement signed by you while

joining TCS.

Certificate in Manufacturing Concepts TCS Business Domain Academy

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Chapter-1 Introduction to Manufacturing

Introduction

Manufacturing is defined as the conversion of raw materials into finished goods using tools.

Manufacturing is applicable to different industries such as automobile, aerospace, chemical,

and pharmaceutical, computers, and so on. The extent of manufacturing varies from a small

scale manufacturer to a large scale one. For example, Honda being the world’s largest

motorcycle manufacturer using more number of tools than a company called Electrotherm

Limited, which is a small scale manufacturer in India, who builds electric bikes.

Learning Objectives

After completing this chapter, you will be able to:

• Understand the definition of manufacturing

• Understand the different types of manufacturing classifications

• Know the essence of manufacturing

• Identify the different processes involved in value chain analysis

• Identify the business process and its classification

Topics covered

1.1 Manufacturing – Definition and Objectives .............................................................. 4

1.1.1 Definition .............................................................................................................. 4

1.1.2 Objectives of Manufacturers ................................................................................. 4

1.2 Types of Goods .......................................................................................................... 5

1.3 Manufacturing Classification ..................................................................................... 5

1.3.1 Based on End Product ...................................................................................... 6

1.3.2 Based On Strategy ........................................................................................... 7

1.3.3 Based on Variety and Volume .......................................................................... 7

1.3 Classification of Manufacturing based on Industry ................................................... 8

1.4 Value Chain Analysis.................................................................................................. 9

1.5 Business Processes .................................................................................................. 11

1.6 Changing World Competition.................................................................................. 13

Summary ....................................................................................................................... 16


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1.2 Types of Goods

The classification of physical goods is important to a business since it helps in formulating

the marketing strategies depending upon the usage of the product. Goods are classified

into two types; consumer goods and industrial goods.

Consumer Goods:

Consumer goods are finished goods which are available at retail stores for personal or

household use. Consumer goods are classified into durable goods and perishable goods.

Durable goods have long life and can be used more than once, such as a fan, a television and

a laptop. Perishable goods have shorter life time and are meant for single use, such as all

food items. Based on the buying behavior of the consumer, these goods are again

subcategorized into three types:

• Convenience goods

• Shopping goods

• Specialty goods.

Industrial Goods:

Industrial goods are used as components for manufacturing finished goods or final

products. Unlike consumer goods, these goods can be used either directly or indirectly.

Industrial goods can further be classified as capital items and expense items. Capital items

are durable industrial goods that are procured for long term use. On the other hand,

expense items are those which are generally consumed within a year. Based on their usage,

industrial goods are classified into the following five categories:

• Installation equipment

• Accessory equipment

• Raw materials

• Fabricated parts and materials

• Industrial supplies.

A few examples of industrial goods are tyres, semiconductors and so on.

1.3 Manufacturing Classification

Manufacturing can be classified based on various aspects such as end product produced,

strategy used, and variety and volume of the production.


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Figure 1.2 illustrates the classification of manufacturing based on these aspects.

Fig 1.2 Manufacturing Classifications

1.3.1 Based on End Product

Based on the end product produced, manufacturing is classified into two types:

1) Discrete Manufacturing:

In the industrial terminology, discrete manufacturing is the manufacturing of

finished product using dissimilar items that can be counted, touched and seen. It is

a reversible process. In discrete manufacturing, it is possible to get back the raw

materials by disassembling the finished product, stage by stage, in a reverse order.

For instance, by dissembling a finished automobile, most of the raw materials that

have gone into the manufacturing of the automobile can be recovered.

2) Process Manufacturing:

Process manufacturing produces multiple products in different stages of the

process. Process manufacturing involves the movement of materials among

operations such as screening, crushing, storing, mixing, milling, blending, cooking,

fermenting, evaporating and distilling. Process manufacturing produces multiple

products in different stages of the process. It results in irreversible changes to the

raw materials that take an entirely new form. For instance, the Oil and Gas industry

applies process manufacturing to manufacture petroleum. Process manufacturing is

widely applied in the cement, plastic, paper, chemical, steel and brewing industries.

Manufacturing Classification

End Product

1. Discrete

2. Process

Variety and Volume

1. Project

2. Job

3. Repetitive / Batch

4. Continuous / Flow

Strategy

1. MTS

2. ATO

3. MTO

4. ETO


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1.3.2 Based On Strategy

Based on strategy used, manufacturing is classified into four types:

1) Made to Stock:

In this type of manufacturing, the products are manufactured against a sales

forecast and these products are sold from the stock of finished goods.

2) Assemble to Order:

In this type of manufacturing, the basic components or the raw materials that are

necessary to assemble the product are procured and stored by the manufacturer.

The product is then assembled to suit the specifications of the customer.

3) Made to Order:

In this type of manufacturing, the underlying design of the product will be

standardized for all products. However, the components will be customized

according to customer specifications and availability of components in the factory

or in the market.

4) Engineered to order:

This type of manufacturing is undertaken to fulfill a unique order given by specific

customers. Engineers start designing the product according to requirements of the

customer or when product is ordered by the customer.

1.3.3 Based on Variety and Volume

Based on item variety and volume produced, the manufacturing can be broadly classified

into four types.

1) Project:

In this type of manufacturing, each product produced is unique. The quantity of the

product produced in a project is usually single or at the most in a single digit. For

instance: a missile or a bridge.

2) Job:

In this type of manufacturing, the number of items produced in terms of quantity

and volume are higher when compare to a project, for instance paper and pulp

machinery.

3) Repetitive / Batch:

This method is used in process manufacturing. Here production is done in small to

large batches based on variety and volume, for instance pharmaceutical products.

4) Continuous / Flow:


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This method is used in discrete manufacturing and is used for large scale

production, for instance vehicle assembly line.

1.3 Classification of Manufacturing based on Industry

The quality and nature of manufacturing that identifies it and gives a distinct identity can be

broadly divided into five major categories. These categories establish the most important

features of manufacturing. The categories are:

1. Factory – It is a place (also called plant) where the workers manufacture goods, i.e.

convert the raw material to finished product. The two main resources used in a

factory are manpower and capital.

Governing a factory has been one of the main concerns of senior management since

years. Managing the hierarchy involving unskilled, semi-skilled, skilled labor and

managers has always been a cumbersome task. Companies have now started using

scientific methods to govern factories.

2. Light industry – A light industry uses a moderate amount of resources and capital,

and is more consumer-oriented rather than being business oriented. It is consumer

oriented in the sense that its end products are used by the consumer, and are not

intermediate goods to be used for further production.

Clothes, shoes, furniture, household appliances, and so on fall under the light

industry category.

3. Heavy industry – It is a word used for capital-intensive industries or the tasks

requiring greater resources. The work carried out is similar to that of a light

industry, except that the scale of work is large. Construction of a large building,

chemical plant, production of cranes and bulldozers and so on are examples of

heavy industry.

4. Mass production – It refers to production of large amounts of some standardized

product/good. It is also called as flow production or series production. Mass

production is also capital-intensive and may use robots, heavy machines like

presses, and so on. Production of soft drinks and medicines are examples of mass

production.

5. Production line – It is a combination of a series of operations to convert a raw

material into a finished good, either for immediate consumption or for further use.

DID YOU KNOW? The concept of mass production was first popularized by Henry Ford in

the early 20th century in his Ford model.


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Any product is developed based on the market research and the customer needs.

Changes to the product features are made depending upon customer/service

feedback and market requirement.

2. Introduction of New Product:

Both the prototype and the pilot should be approved before launching the new

product into market.

3. Supplier:

Raw materials and other components are sourced from suppliers to the

organization.

4. Inbound Logistics:

It includes all the activities involving the procurement of raw materials, such as

bringing the raw materials into a manufacturing unit, storing them and maintaining

relationships with the suppliers.

5. Store:

It receives and accounts components / raw materials after inspection. It holds them

for further processing in factory.

6. Manufacturing:

In this, raw materials are converted into finished goods.

7. Warehouse:

It is a place were finished goods are stored till the goods reach the customer.

8. Outbound Logistics:

It includes all the activities involved in transporting the finished goods from the

manufacturing unit to dealers, retailers and finally to the customer.

9. Distributor and Retailers:

Goods are received by the distributors, retailers. These are stored and then

dispatched them to the customer.

10. Order completion:

It is final stage in the process. Customer receives the goods according to the

purchase order placed.

11. Marketing and Sales:

Marketing advertises the product to boost the demand. Price of the product is

based on actual selling activity to till the product is sold.

12. After Sales Services:


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It resolves customer complaints and collects feedback from them to enhance

product. It also includes activities to keep the product or service work effectively.

1.5 Business Processes

It is defined as any function within an organization that enables the organization to

successfully deliver its products and services. Business processes are divided into the

following two types: core process and supporting process.

Source: http://www.benchnet.com/datproc.htm

Core Processes

They are central to the functioning of a manufacturing organization and are of the following

four types:

1. Procure to Pay

It is the process of obtaining goods and services by processing requisition through

receipt and matching of the vouchers for the payment to suppliers. Briefly it

represents the transactions that take place between the suppliers and manufacturer

before and after purchase of raw materials, components and sub assemblies. The

major procurement functions are supplier selection, price negotiations, processing

of purchase order, and receipt of item and supplier payments.

2. Plan to Produce

It is the complete process of planning at various time horizons as per sales forecast

and sales orders, validating the plan with available capacity to produce items. Plan

to produce represents transactions linking demand and supply of product at various

levels. The major functions are planning at strategic, tactical and operational levels

considering sales forecast and sales orders and validating the plan against the

capacity.

3. Manufacturing Execution

It is the transformation of raw materials, components and purchased items into a

saleable product using assembly, subassemblies and mechanical or chemical

processes in different stages. It represents the actual process of transforming the

raw materials using components and sub assemblies into a final product. The major

functions are processing production orders at given time for give item and quantity,

issuing inventory, booking hours and completing order.

4. Order to Cash


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Complete processes of selling of goods and services, involving order entry, dispatch,

warehousing, invoicing and receipt of payment. It represents the transactions

between the manufacturer and customer. The sequence of activities would be,

receiving orders, delivering goods, and collecting payment from the customer. The

major function are creating sales order, allocating items, updating inventory, on

delivery, generating sales advice and collecting payment from the customer.

Support process

They enable the smooth flow of the core processes. The following are the eight support

processes:

1. Market Planning

It is the process of developing and implementing a plan to identify, anticipate and

satisfy customer demand; and to establish marketing objectives and decide

product mix. It represents transactions between the manufacturer and the

customer that take place before designing the product and services. The major

functions are market research, product mix, promotion and budgeting.

2. Product Development

It is an ongoing process of identifying and articulating market requirements that

define the features of a product. It represents the transactions between the

marketing and design functions to convert a concept to a product. The major

functions are product concept, design, prototype, testing, pilot lot, final design and

product enhancement till product obsolescence.

3. Logistics

It is the management of the flow of goods, information and other resources,

between the point of origin and consumption. It represents transaction between

delivery functions for moving materials between supplier, manufacture and

customer. The major functions are: inbound logistics, that include the movement of

materials between supplier and manufacturer, and outbound logistics, that include

the movement of goods from manufacture to retailer, and customer.

4. After Sales-services

It is a series of activities undertaken to maintain the promised level of quality of

goods and services. These activities are undertaken to guarantee customer

satisfaction using online support, warranties and return policies. It represents

activities by the service functions to ensure proper product functioning and


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minimal customer dissatisfaction. The major functions involved are receiving

customer complaints, assigning technician, resolving and testing and receiving

product feedback too.

5. Plant and Equipment Maintenance

It covers the activities necessary for retaining or restoring an equipment, machine

or plant to specified operable condition to achieve maximum useful life. It

represents activities within the maintenance functions to ensure the dissatisfactory

functioning of the plant and equipment in use. The major functions are resolving

complaints regarding manufacturing plant and machines, and undertaking annual

and preventive maintenance.

6. Quality Management

This support process is a Collection of policies, plans, practices and supporting

infrastructure aimed to reduce and eliminate non-conformance to specification,

standards and customer expectations in a cost effective and efficient manner. It

represents transactions by quality assurance functions, to ensure that the products

being manufactured meet the product design specifications. The major functions

are incoming and in process inspection, quality control, calibration and

certification.

7. Human Resources

It includes activities like recruitment, talent acquisition, orientation & training of

current employees, providing benefits and retention. The major functions are

managing the employee life cycle from recruitment to retirement, appraisal and

career planning.

8. Finance

A branch of economics concerned with resource allocation and management,

acquisition and investment. It represents transactions between various accounting

sections covering all cores and supporting processes. The major functions are

monitoring all transactions from supplier, customers, materials, machines and

human resources.

1.6 Changing World Competition

Today’s competition in manufacturing industry has led to invention of new strategies like

lean manufacturing. Lean manufacturing reduces wastage from procurement stage to

delivery stage. This strategy has the ability to reduce the production cost but puts


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tremendous pressure on employees to improve the responsiveness and efficiency in every

stage of lean manufacturing.

E-Manufacturing, a new strategy in manufacturing, overcomes this by reducing the total

life-cycle cost of the product with a transparent sustainable value. For organizations relying

on e-business to reach to a large customer base, E-manufacturing has become a core

competency. Today, Internet is a major platform for communication. Traditional

manufacturing was not transparent due to lack of information sharing between the supply

chain, plant floor and product development departments. E-manufacturing aims to

complete the gaps in the traditional manufacturing systems. By integrating all the business

functions including suppliers, supply chain, product development and plant floor, E-

Manufacturing meets the demands of the customers and improves the responsiveness and

efficiency of the product.

E-Manufacturing helps to:

• Cut the lead times to meet the demands of the customers,

• Promote efficient flow of information flow between customers,

manufacturer, and product development

• Achieve predictive, near-zero downtime

Fig 1.4 E-Manufacturing Information Flow

E-Manufacturing integrates Supply Chain Management (SCM), Enterprise Resource

Planning (ERP), and Customer Relation Management (CRM) systems to meet the customer

demands from different regions of the world.

Advantages of E-Manufacturing:

Supply

Chain

Product

Development

Plant

Floor

E-Manufacturing


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In E-Manufacturing, information will be updated dynamically. So when a customer places

an order, the information regarding this order is passed across the supply chain. At this

instant, the production starts. As this process is transparent, customers can get updated

information about the order at any time. This process reduces the excess inventory,

capacity and avoids uncertainties.


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Summary

• Manufacturing is defined as the transformation of raw materials, components and

purchased items into a sealable product (or) finished product using different

processes at different stages like assembly, mechanical and chemical.

• Fabrication is the process of designing a circuit or manufacturing a device, that act

as component parts / fabricated goods that is used for manufacturing the final

product.

• The classification of physical goods is important to business because, depending on

the usage of the product, marketing strategies are formulated. Goods are classified

into two types; consumer goods and industrial goods.

• Consumer goods are the finished goods which are available at retail store for

personal or household use. Industrials goods are used as components for

manufacturing finished goods or final products.

• Classification of Manufacturing is done on various aspects like end product,

strategy, variety and volume. Based on end product, it is classified into two types of

manufacturing: discrete manufacturing and process manufacturing.

• Based on strategy, it is classified into four types: made to stock, assemble to order,

made to order, and engineered to order. Based on item variety and volume

produced out of process, it can be broadly classified into four types: Project, Job,

Repetitive / Batch, Continuous / Flow.

• The quality and nature of manufacturing that identifies it and gives a distinct

identity can be broadly divided into five major categories. These categories

establish the most important features of manufacturing. These are Factory, Heavy

industry, Light industry, Mass production, and Production line.

• Value chain analysis describes the main activities that take place in an organization

to have better competitive strength for the organization. Value chain estimates

what each activity adds the value to the overall productivity of the organization.

• By integration of all the business functions including suppliers, supply chain,

product development and plant floor to meet the demands of the customers and

also to improve responsiveness and efficiency of the product.

• E-Manufacturing has tightly integrated supply chain management (SCM),

enterprise resource planning (ERP), and customer relation management (CRM)

systems to meet the customer demand from different regions of the world.

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Chapter -2 Role of Management in Manufacturing

Version4.0 For Associates






joining TCS.


Page 3 of 16

Chapter-2 Role of Management in Manufacturing

Introduction

During the days of Industrial Revolution, manufacturing was almost an isolated function in

many organizations. The main function of manufacturing in an organization was to take the

designers’ blueprint of the product and produce it. It was found that there were always

barriers in cooperation, coordination and communication among the manufacturing and

the other functions of the company. Manufacturing management has gained advantage in

the recent years. Role of management is very important in formulating the corporate

mission and strategy. Different facets of manufacturing management are planning,

operating and controlling.

Learning Objectives

After completing this chapter, you will be able to understand:

• The basic principles of management

• Importance of mission, vision and strategy for an organization

• Activities related to planning and operations

• The role of the management in manufacturing planning

Topics covered

2.1 Manufacturing Management ..................................................................................... 4

2.2 Corporate Mission, Objective and Strategy .............................................................. 6

2.2.1 Corporate Mission ................................................................................................ 6

2.2.2 Manufacturing Objective ...................................................................................... 6

2.2.3 Corporate Strategy ............................................................................................... 8

2.2.4 Key Points to Consider Before Formulating Strategy ........................................... 8

2.2.5 Manufacturing Policies ......................................................................................... 8

2.3 Manufacturing Functions ........................................................................................... 9

2.3.1 Planning ................................................................................................................ 9

2.3.2 Operating ........................................................................................................... 10

2.3.3 Controlling .......................................................................................................... 10

2.4 Role of the Operating Force .................................................................................... 11

2.5 Type of Managerial Decisions .................................................................................. 11

2.6 Business Process Reengineering ............................................................................. 13

2.7 Changing Concept of Manufacturing Management................................................ 14

Summary ....................................................................................................................... 15

Certificate in Basics of Manufacturing TCS Business Domain Academy

Page 4 of 16

2.1 Manufacturing Management

It is the process of performing and managing different tasks in an organization. It comprises

strategies, tactics, philosophies, methods and techniques which enable the management to

achieve higher quality, lower unit cost, greater flexibility and innovation. Manufacturing

Management builds on the concept of quality and the philosophy of continually striving to

achieve the highest possible organization-wide standards. Different processes that fall

under the ambit of Manufacturing Management are performed by different divisions in a

company, which operate independently. Management plays a vital role in integrating all the

activities performed in a company.

In the case of manufacturing machine parts, the first stage is prerequisite of material, then

procurement of material, vendor selection for purchasing the material, assigning the work

to different machine shops, packaging the final product, dispatching the product, invoice

management, and finally receiving payment for the parts. These activities have to be in the

sequence as shown in figure 2.1. It is important that people performing these activities work

coherently; Manufacturing Management plays a vital role in achieving this.

Fig 2.1 Stages in Manufacturing of Machine Parts

Prerequisite of material

Packaging

Work assignment

Dispatching

Invoice management

Cash management

DID YOU KNOW? Daimler can be considered as the founder of automobile industry. Daimler

formed the Daimler Motor Company in the year 1890.

Ford Henry created the first assembly line for automobiles.


Page 5 of 16

Manufacturing Management is often misunderstood by the decision-makers in the

organization. The purpose of Manufacturing Management is to ensure efficient use of all

the resources. It also controls all the aspects of the manufacturing process from product

design to product distribution and also minimizes the risk in the process. Consider the

scenario given below:

Company X produces machine parts which require raw material from their suppliers. As

company X keeps very less inventory, it places an urgent order for more raw materials.

Since the supplier company is not prepared for the order, it will force its workers to work

overtime in order to meet the order. Meanwhile company X is facing the risk of running into

loss due to the unavailability of the raw material. The distributor who has placed the order

with company X will have to wait for the shipments. In turn, the customers also have to wait

for the product. This will result in losses for the company in terms of business, money, and

credibility in market. Distributors also lose money due to decrease in customers. The above

problem can be sorted out by implementing a five-step approach:

Fig 2.2 Activities involved in Manufacturing of Machine Parts

Elimination phase involves analysis of operating cycle or manufacturing cycle, determining

what needs to be done to reduce the time of the manufacturing cycle.

Once the bottlenecks are found in the manufacturing cycle, next step is coordination of the

manufacturing activities between the organization and the suppliers. By doing this,

emergency order will become normal, and also can be rectified completely.

Elimination

Co-ordination

Co-operation

Integration

Communication


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Cooperative attitude of the organization towards the vendor and distributor is essential in

ensuring efficient supply chain management.

Integration of all the activities carried out in the organization is the most challenging job in

any management. There are many software packages available in the market which can

help in integrating organizational activities. For example: Enterprise Resource Planning

(ERP).

Communication of the company with its vendors and distributors should be regular and

clear to update them about the level of inventory in the company. This will help them in

planning their activities accordingly.

2.2 Corporate Mission, Objective and Strategy

A firm’s corporate mission and corporate strategy are about ends and means for a firm.

The main objectives of developing manufacturing strategy are:

• The competitive dimensions are typically obtained from the marketing team and

are converted into specific performance requirements for operations.

• Ensure some necessary plans are taken, so as the operations and enterprise

capabilities are sufficient to accomplish them.

2.2.1 Corporate Mission

Corporate mission outlines a firm’s corporate values, intended markets and products, broad

goals and objectives, core competencies, and strategic capabilities.

2.2.2 Manufacturing Objective

An organization’s manufacturing objective is to manufacture a quality product, on time and

at the lowest possible cost with maximum utilization of resources to achieve customer

satisfaction.

Manufacturing objective may be classified into:

DID YOU KNOW? China is the world’s fourth largest producer of manufacturing products.

Of the 500 top companies in world, 400 have either invested or manufactured goods in

China.


Page 7 of 16

• Ultimate goals

• Intermediate goals

• Functional goals

• Restrictive goals

• Integrated goals

Ultimate goals: These are product focused goals associated with manufacturing

operations. These goals are defined in terms of quality, cost, and availability of the product.

Primary responsibility of the manufacturing manager is to produce a product with pre-

established costs, specified characteristics of quality and within the defined time frame.

Variable cost per unit, total cost, rejections, number and rate, material yield percentage and

so on are some of the measures of ultimate goals.

Intermediate goals: These goals can be stated as the utilization targets of manufacturing

inputs, including energy, materials, machinery, equipment, facilities, methods, money and

manpower. Utilization of machines, operating cost and rates, machine capacity growth,

working capital needed for manufacturing activities, productivity per man-hour are some of

the measures of intermediate goals.

Functional goals: These are related to the effectiveness of the auxiliary and support

departments such as production control, inspection, maintenance, methods engineering,

wage incentives, work measurement, tool engineering etc. Inventory turnover rate,

machine utilization, percentage of stock outs, cost of holding inventories are some of the

measures of functional goals.

Restrictive goals: These represent manufacturing manager’s commitments towards other

functions in the organizations. Manufacturing organizations normally commit themselves

to goals associated with or imposed by sales and marketing, product design, finance, and

distribution operations. Few examples of restrictive goals are reducing number of written

customer complaints by 30 %, paint and clean up of the processing area for shops within 10

days etc.

Integrated goals: These are inherent in all organizations and are increasingly imposed to

optimize effort

DID YOU KNOW? National manufacturing growth of USA (2001-06) was 16.9 %. It is nearly

2/3rd of USA's total export.


Page 8 of 16

2.2.3 Corporate Strategy

This states how a firm will achieve its goals and objectives. Formulating a corporate

strategy is an iterative process that requires the input of all functional areas. Functional

strategies must support each other, as well as the corporate strategy.

2.2.4 Key Points to Consider Before Formulating Strategy

Management should focus on the following aspects before formulating a strategy:

1) The strategy should be customer oriented.

2) Competing on simultaneously cost, quality, flexibility, dependability, time, and

service.

3) It should provide for investment in R & D and advanced technology.

4) It should enable integration of the system with the people.

5) It should enable continuous improvement of the firm, its products and its processes.

2.2.5 Manufacturing Policies

The manufacturing policies that organizations follow are:

1) Selecting suitable, capable and experienced employees and continuously improving

their skills by providing training and advancement opportunities.

2) Carrying out full-time, continuous manufacturing developments in each division

and deriving benefits from the latest improvements in equipment techniques and

methods.

3) Providing new facilities to each employee.

4) Minimizing the product cost by implementing new technologies.

5) Expecting all employees to comply with the daily output standards .

6) Administering wage payment plans to reward employees fairly for skill, effort and

time.

7) Increasing production capacity by balancing various manufacturing operations to

minimize bottlenecks and thereby improving the production process.

8) Planning the layout of all plants based on products manufactured, and dividing the

facilities into self contained integrated units wherever possible.

DID YOU KNOW? The mission statement of Ford Motors Ltd. in early 1900's was "Ford will

democratize the automobile.”


Page 9 of 16

9) Controlling product quality to meet product specifications and to ensure the

delivery of a reliable product to the consumers.

10) Planning and controlling material, manpower and facilities.

11) Providing healthy working conditions to employees.

12) Maintaining and safeguarding company assets to maximize the return over the life

of the asset.

2.3 Manufacturing Functions

The three basic functions of manufacturing are:

1) Planning

2) Operating

3) Controlling

2.3.1 Planning

It is one of the major activities performed by the management in manufacturing

organizations. Planning includes finalizing plant layout, processes, methods, machines and

tools to be used. Planning also includes project management, estimation of costs,

aggregate sales and operational planning, plant location decision, capacity requirement

planning, Material Requirement Planning (MRP), material management etc.

Expansion is a major decision for managers as they have to decide whether to set up a new

plant or upgrade the existing facilities. These are high risk decisions, but are critical in

gaining competitive advantage..

Manufacturing Planning: This offers the opportunity for large scale innovations, whether

that task is about replacing machines, upgrading an old plant or planning a new one. It

requires a careful appraisal of what is economically practical and justifiable. Most of all,

however, planning requires an attitude that will inspire men to look beyond the traditional

ways of doing things, with the knowledge and judgment to blend the traditional with the

new.

Tremendous gains are possible through intelligent planning. By implementing the planning

actively a company can increase its sales up to 200 to 300 percent, and inventory can be

reduced to as minimum as 25 percent. Much of this improvement can be attributed to very

effective manufacturing planning.

Example: For metal cutting operation, many organizations use Computer Numerically

Controlled machines (CNC), which save time and reduce chances of errors.


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2.3.2 Operating

At the fundamental level, operations management is about getting day-to-day activities

done quickly, efficiently, without errors and at low cost.

The critical tasks of a manufacturing operations manager are training, motivating, and

improving the morale of the work force. Operating functions include activities involved in

the actual manufacturing of the products such as operational control, production

standardization, benchmarking, setting work standards, supervision, plant maintenance

etc. All the day-to-day activities are performed by the middle and lower management.

Consider the following scenario:

The foreman of a section or a plant has been replaced, and within a short duration, the plant

has become more productive. This is an indication that the attitude and morale of the

employees has improved drastically. These changes occur with little or no change in

physical assets.

A highly skilled first-line supervisor is the backbone of any manufacturing operation. Thus, it

is critical that there technical knowledge is in line with the industry standards. Also

decentralization, streamlining and simplification make the job critical for an operations

manager.

2.3.3 Controlling

The control functions of any manufacturing organization ensure that the product is of

consistent quality, and manufactured in time and in an efficient manner. Monitoring the

quality standard is a major part of controlling activities. Controlling activities also include

industrial engineering, production control, reliability and quality control.

In controlling functions, technological advancements inspire and sometimes force more

advanced technologies. In production control, data processing and computer equipment

are showing new and improved methods. Faster response levels and shorter manufacturing

cycles are the requirements of modern manufacturing industry.

DID YOU KNOW? Ireland is number one in high technology exports. Over 50% of

Ireland’s manufacturing exports are high end products.


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Note: Manufacturing cycle is defined as the time taken by a process or system to take the

raw material from the supplier and produce the finished product.

Reliability and quality control are also assuming entirely new dimensions. In companies

such as those of electric utilities and various process industries – like steel, automobile and

paper, reliability is no longer merely desirable, but essential. Add to this the increasing

complexity of the equipment used, and the need for stringent quality control in

manufacturing.

2.4 Role of the Operating Force

Operating force is the last and the most important link between the organization’s objective

and results. Corporate organizations depend on their operating force to implement a

manufacturing plan. Operating force is the human resource and may also be the final

controller of the physical resources like raw material, machinery etc. Thus, it is important

that the organization’s objectives are understood and accepted by the operating force. The

operating force must be deployed in a way such that it conducts the activities in a feasible

and effective manner. Change in technology will require re-deployment and training.

Smooth functioning of the operating force requires and effective communication link

between the individual and the manager or the concerned executive.. In recent years,

operations of the manufacturing sector have become more capital intensive and less labor

intensive. Communication between managers and the operating force about resource

utilization has become more important.

2.5 Type of Managerial Decisions

The management has to take decisions on the following aspects of the manufacturing

activity

1) Finance-budgeting and investment:

a) Cash flow analysis, long-term capital requirements, dividend policy,

and investment portfolio.

DID YOU KNOW? Total quality management’s basic concept came from a chapter titled

total quality control” in the book “Quality control: Principles, Practices and Administration

by Armand Feigenbaum’s.


Page 12 of 16

b) Credit policies, credit risk and delinquent account procedures.

c) Claim and complaint procedure

2) Purchasing, procurement and exploration:

a) Policies for buying, supplying and stabling or varying prices.

b) Determination of quantities and timing of purchases.

c) Bidding policies

d) Strategies for exploration and exploitation of raw material sources

e) Replacement policies.

3) Production management

a) Physical distribution

i) Location and size of the warehouse, distribution centre

and retail outlets.

ii) Distribution policies.

b) Facilities planning

i) Number of location of factories, warehouse and

hospitals.

ii) Loading and unloading facilities for railroads and

trucks determining the transport schedule.

c) Manufacturing

i) Production scheduling and sequencing.

ii) Stabilization of production and employment training,

layoffs and optimum product mix.

d) Maintenance and project scheduling


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i) Maintenance policies and preventive maintenance.

ii) Maintenance of crew sizes

iii) Project scheduling and allocation of resources.

4) Marketing

a) Product selection, timing and competitive actions.

b) Determination of number of salesmen, frequency of calling on

accounts per cent, and time spent on prospectus.

c) Selection of Advertising media with respect to cost and time.

5) Personnel management

a) Selection of suitable personnel on minimum salary.

b) Determination of Mix of age and skills.

c) Determination of Recruitment policies and assignment of jobs.

6) Research and development

a) Determination of the areas for research and development.

b) Project selection.

c) Determination of time-cost trade off and control of

development projects.

d) Determination of reliability and alternative design.

2.6 Business Process Reengineering

The need to become lean and remain competitive during the global economic recession in

the 1990s pushed companies to seek innovations in the process used to run their

operations. Business process reengineering is taking a fresh look at what the organization is

trying to do in all its business processes, and then eliminating the non-value-add steps and

computerizing the remaining ones to achieve the desired outcome.


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2.7 Changing Concept of Manufacturing Management

In earlier days a hard working young machine operator could work up the ladder of

manufacturing to become a manufacturing manager. However, in today’s organizations, it

is less likely unless the possibility seems even more remote in future. The machine

operators constantly upgrade their skills to keep pace with the complexity of the constantly

upgraded manufacturing machinery.

The manufacturing manager of the past tended to be insulated from other functions of the

company despite knowledge of shop problems. However, the manufacturing managers of

today and tomorrow must, in contrast, know and work along with all the other functions

that relate to manufacturing, including engineering, purchasing and marketing.

The traditional barriers between functions such as engineering and manufacturing are

breaking down, and even disappearing. In controlling product costs, for example, design

engineers, manufacturing engineers, and the purchasing executives are working as a team.

Personnel from manufacturing or purchasing may contribute design ideas. Example:

Purchasing personnel may well be able to suggest the use of less expansive bolts or a

substitute material with which the design engineer may not be familiar with.

The manufacturing personnel, with their knowledge of machines and work force, often can

suggest changes in design that will make the product simpler and easier to manufacture.

The net effect of all the changes discussed here is increased professionalism in all areas of

manufacturing. The manufacturing manager of the present must be aware of all the new

techniques available in the market and possess the necessary interpersonal skills to inspire

people constantly to seek better ways of doing things.

DID YOU KNOW? Michael Hammer was the first consultant to advocate eliminating non-

value-add steps and reengineering processes.


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Summary

• Manufacturing management is defined as performing and managing different tasks

in an organization. Different processes that fall under Manufacturing Management

are performed by the different divisions in the company. These departments

operate independently.

• Integrating all the activities of the organization is the most challenging job for any

management.

• The three manufacturing functions are planning, operating and controlling Planning

includes actions required to assure the use of the best plant layout, processes,

methods, machines and tools.

• Operating functions include all activities involved in the actual manufacturing of the

products.

• Control functions ensure that the product will be of consistent quality and

manufactured on time and in the most efficient manner.

• Corporate mission, objective and strategy are the ends and means of the

organization.

• Manufacturing objective may be classified as: Ultimate goals, Intermediate goals,

Functional goals, Restrictive goals, and integrated goals.

• Corporate organizations depend on their operating force to implement their

manufacturing plan.

• Operating force (the human resource) is the final controller of the physical

resources like raw material, machinery and so on.

• Business Process Reengineering takes a fresh perspective of the organization’s

business processes, and eliminates the non-value-add processes and computerizes

the remaining to achieve the desired outcome

• The manufacturing manager of the present must be knowledgeable in all the new

techniques that are available in the market.

of 20

Chapter-3 Manufacturing Systems Version4.0

For Associates





associate would tantamount to violation of confidentiality agreement signed by you while

joining TCS.


Page 3 of 20

Chapter-3 Manufacturing Systems

Introduction

A broad understanding of presently used manufacturing systems is helpful to the manager

interested in improving the excellence of his operations. It helps in solving problems that

are new to one’s competitors or one’s own industry. Manufacturing system is a broad

function that includes planning, analysis, selection, assembly, and utilization of the

company resources used to convert raw materials into stable products at optimum cost.

Learning objectives


• Manufacturing system and its components

• Types of manufacturing systems prevalent today

• Optimal utilization of the different manufacturing systems.

Topics covered

3.1 Manufacturing Systems-Purpose .............................................................................. 4

3.2 Manufacturing Systems Classification ...................................................................... 5

3.2.1 Processing ............................................................................................................ 5

3.2.2 Fabrication ........................................................................................................... 6

3.3 Other Manufacturing Systems .................................................................................. 9

3.3.1 Mass Production ................................................................................................... 9

3.3.2 Just In Time ........................................................................................................... 9

3.3.2.1 The Concept of JIT System ............................................................................... 10

3.3.2.1.1 People Involvement ....................................................................................... 11

3.3.2.1.2 Total Quality Control ..................................................................................... 11

3.3.3 Lean Manufacturing ............................................................................................ 12

3.3.4 Flexible Manufacturing ....................................................................................... 13

3.3.5 Mass Customization ............................................................................................ 14

3.4 Installation of the Manufacturing Process .............................................................. 14

3.5 Design of Manufacturing Systems .......................................................................... 15

3.6 Ordered Fulfillment ................................................................................................. 15

3.6.1 Engineer to Order (ETO) .................................................................................. 16

3.6.2 Make to Order (MTO) .................................................................................. 16

3.6.3 Assemble to Order (ATO) ................................................................................ 16

3.6.4 Make to Stock (MTS) ....................................................................................17

Summary ....................................................................................................................... 18


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3.1 Manufacturing Systems-Purpose

Manufacturing systems is a broad function that includes planning, analysis, selection,

assembly, and utilization of the company resources to convert raw materials into salable

products at optimum cost. The manufacturing system is designed to usually evolve with

over a span of time as a key segment of the business system used by the company, and is

the cumulative creation of many people under the general guidance of top manufacturing

management. It not only embodies past achievements and presents goals, but it also

channels the future progress of the company.

The manufacturing system extends into and overlaps the boundaries of other business

systems, especially those of marketing and engineering. The customer needs and the

product design are influenced by the manufacturing system. The system is not readily

analyzed in detail because of the system’s uniqueness and complexity and it is not readily

accepted because of the high investment costs. This issue can be resolved by reviewing the

industry classifications and the four key interdependent subsystems that are the essence of

any manufacturing system, the subsystems are:

• Types of production

• Manufacturing processes

• Installation of the manufacturing processes

• Production management

Each subsystem is interdependent on the others, and the selection of each is also influenced

by the following major considerations:

• The design of the products comprising size, shape, material composition and

intended function.

• The product marketing objectives comprising order quantities, order frequencies,

delivery responsiveness and product line configuration.

• The typical systems and subsystems of the industry comprising those typically used

new ones which are being generally adopted, experimental developments which are

still on trial and exciting new ideas which hold great promise.

• The present system and subsystem used by the company.


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There is no ranking implied by the order of any of the above. It is obvious that the

instantaneous relative importance of each is determined by dynamically changing

conditions.

3.2 Manufacturing Systems Classification

Manufacturing systems are broadly classified based on the material conversion techniques

into two types, they are:

1. Processing

2. Fabrication

In processing, the raw materials are chemically and physically changed into new materials

with different compositions and forms. These new materials, in turn, serve as raw materials

for further processing or for fabrication. The processing classification is further subdivided

into heavy processing and light or fine processing. In fabrication, the raw materials are

physically reshaped into parts. Usually, these parts are combined with others to make a final

product assembly. The fabrication subdivisions are heavy fabrication, light fabrication, and

bench operations.

3.2.1 Processing

Processing is an irrevocable activity, where if you once put it together, you can’t take it

back. For example, a cool drink cannot be converted back to its basic components such as

carbonated water, citric acid and other ingredients if it once processed. Processing refers to

an act of taking something from a usually identified and established set of activities and

converts it from one form to another. It is divided into two types:

(a) Heavy processing:

Both primary metals industries, such as steel and copper, and the heavy chemicals

industries, such as sulfuric acid and heavy alkalies, use heavy processing manufacturing

systems. The steel industry is an excellent example and can be used to illustrate the general

system design. About 90 percent of the total steel-making capacity is controlled by fully

integrated companies which mine the raw materials like iron ore, coal, and limestone; smelt

the pig iron; refine the steel; and roll or form the steel into semi finished or finished stock

products.

The significant cost factors in the heavy process industries are the basic raw materials and

the energy for heat and power. Labor is comparatively less costly because of the

tremendous batch sizes, the extent of material handling mechanization, and the general


Page 6 of 20

overall simplicity of the processes. The equipment for heating, shaping, and moving heavy

products result in correspondingly large fixed capital investments.

Geographically, the heavy process industries are usually located near their customers. In

addition, they are frequently located on large rivers or lakes or at ocean harbors where

seagoing ships can bring in the necessary raw materials and take away shiploads of finished

product.

(b) Light processing:

Most light processing is done by the industry the fine chemical industry. It produces the

more intricate chemical compounds, drugs, analytical chemicals, and metals like boron,

lithium, and titanium. These materials are carefully made to specification for special uses at

high unit price and in relatively small volume. These materials may be classified as products

of the fine chemical industry owing to their relatively high price, even though they are

produced in very large volume.

The growth in light processing resulted from the concept of the unit process, an individual

step involving a single chemical reaction, and the unit operation, an individual step involving

a single physical change. Chemical engineers who have studied these unit procedures

construct flow sheets which show the coordinated sequence required to manufacture the

desired product and by-products. The chemical engineer also supervises the skilled laborers

who later operate the manufacturing equipment.

After the chemical engineer has first tested his process sequence in the laboratory, he

constructs a pilot plant which replicates the planned production system but with the

smallest equipment available. The small-scale pilot plant is used to test the process design,

detect the corrosion and maintenance problems, and evaluate plant efficiency, and train

foremen and other skilled labor.

3.2.2 Fabrication

Fabrication is the process of building structures, machines or equipment for further work. It

usually deals with the cutting, welding and assembly aspects of manufacturing.


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Figure3.1 A Steel Fabrication Shop

Fabrication is of two types. They are:

(a) Heavy fabrication:

The products of the heavy fabrication manufacturing industries are large heavy parts or

assemblies, mostly made of iron and steel. The companies tend to specialize either by

making roughly formed shapes such as castings, forgings, weldments, and parts from plate

stock or by making large machinery or equipment. The facilities and equipment used by

each are essentially dissimilar. In many instances, the larger formed steel shapes are made

by a division of the primary steel producer, because the primary producer already has the

furnaces and metalworking and material handling equipment in addition to the starting

material. On the other hand, the assemblies are most often complex power-driven

machines of unique size and are custom built as a single order or as part of a fairly standard

product line. Examples of such products are railroad locomotives and cars, large farm

machinery and construction equipment, electric power generating equipment, and a wide

variety of industrial production equipment such as large machine tools and the huge

Fourdrinier papermaking machine.

The industry is characterized not only by the large, heavy products but also by the

correspondingly large plant facilities, production machines, and material handling

equipment. The manufacturing system is comparatively simple, because each job order is

usually treated as an entity, and little or no manufacturing action is taken until the

customer’s order is received. Heavy machinery and equipment are ordered singly or in small

quantities because individual pieces are expensive and because their solid long-lasting

construction makes replacement orders infrequent.


Page 8 of 20

Large parts for heavy machinery and equipment are made from castings, forgings, and

weldments whose bulk, weight, and rough irregular form make finishing operation setup

difficult and time consuming.

The facilities used for the fabrication machine assemblies are more extensive and varied.

Emphasis is on general purpose manufacturing equipment like horizontal and vertical

boring mills, planers, shapers, radial drills, and large-size lathes and milling machines.

(b) Light fabrication:

There are significant differences between light and heavy fabrication that are difficult or

impractical to express. There is no defined size or weight that classifies a product as being

specifically either light or heavy. In seeking such boundaries, it rapidly becomes apparent

that the variations present in light fabrication make any general discussion full of

exceptions. In brief, there are hundreds of different products for nearly every single material

made by a process industry, the work force ranges from the one-man shop to industrial

giants with over a quarter of a million employees, and the facilities and equipment numbers

correspond in proportion to workforce. The equipment itself ranges from small, simple

hand tools to very large, complex, fully automated process systems. A review of light

fabrication may only be made if one keeps both the variety and host of exceptions in mind.

(c) Bench operations:

In bench operations, the product is small and light enough for the manufacturing personnel

to stand or sit at a bench or table while working. The essential similarity in all the products is

the very high proportion of hand labor, particularly assembly. In most instances, the bench

worker stays at the work station. All needed parts and materials are arranged within easy

reach. Work functions include both making parts and placing them in the assembly. The

kinds of products that are frequently made in this fashion are tools and dies, instruments,

electronic assemblies, typewriters, and watches. It is obvious that there is a wide range of

worker skills in the various companies using this manufacturing technique so that in many

instances bench work is done in a single, small internal company department. The tool-and-

die maker will use several machine tools away from his bench, and he is one of the most

highly skilled and highly trained industrial workers. In many companies, he designs as well

as builds special tools. On the other hand, a worker assembling an electric toaster has a

relatively simple repetitive task, uses a few tools, and needs little skill or training.


Page 9 of 20

3.3 Other Manufacturing Systems

3.3.1 Mass Production

Fig 3.2 A typical mass production system

It is the process of producing large volumes of standardized products on the production line.

Generally, mass production is also called as flow production or repetitive production or

series production. Mass production uses the concept of moving belts or conveyors to move

the semi- finished product to the next stage. Another noticeable thing in mass production is

the use of robots and machine presses. One of the major advantages of mass production is

considerable reduction in non productive efforts.

3.3.2 Just In Time

The Just-In-Time (JIT) manufacturing system is a planning system that controls the

availability of material inventories at the manufacturing site to only what, when & how

much is strictly necessary. The JIT system is an integrated set of activities designed to

achieve high-volume production using minimal inventories, raw materials, work-in-process,

finished goods and other consumable goods. Now-a-days, many firms are successful in

implementing the JIT philosophy to improve their productivity by reducing unnecessary

inventory and avoiding delays in the execution of operations.

According to the JIT system, all components and other inventory items arrive when required

(i.e. just before the start of an operation). Items are picked up by the worker and fed directly

DID YOU KNOW? Mass production was popularized by Henry Ford in the early 20th century

for his Ford model.


Page 10 of 20

into the production process. Firms produce finished goods only when they are required for

sale.

The JIT system emphasizes the elimination of inventory of raw materials, work-in-progress,

and finished goods. Even though it is sometimes difficult to put into practice, firms target

the elimination of waste by the timely scheduling of inventory.

Implementation of the JIT system requires the total transformation of the methods of

designing products and services, assigning responsibilities to workers and organizing work.

Today, several major companies such as Hewlett-Packard, 3M Corporation, General

Electric, Harley-Davidson and General Motors use the JIT system and are enjoying its

benefits.

3.3.2.1 The Concept of JIT System

The concept of Just-In-Time states nothing is produced until it is required. The practice of

Just-In-Time aims at assembling finished products just before they are sold, and in the same

way the sub-assemblies are made just before products are assembled, and components are

fabricated just before the sub-assemblies are made. Thus, the system always keep work-in-

process inventory as low as possible, thereby reducing production lead times.

In order to ensure smooth flow of materials in JIT system, firms should achieve and maintain

high performance levels in all their operational areas. Organizations should consistently

maintain high quality in their products and processes. This is possible only when the

organization's various production processes are coordinated well. Firms can achieve such

quality and coordination only with the active participation, involvement, and cooperation of

all its employees.

Just-In-Time manufacturing is based on the concept of continuous improvement, which

includes two important and mutually supporting components:

• People involvement

• Total quality control

DID YOU KNOW? A series of signals called Kanban is used in JIT. This is a Japanese term,

and is used to tell production processes when to make the next part.


Page 11 of 20

3.3.2.1.1 People Involvement

A JIT manufacturing system requires a strong human resources management component

for its successful implementation. Firms impart the required skills to their workforce by

training them in the JIT philosophy, assigning them appropriate responsibilities,

coordinating their goal-directed efforts and motivating them. The JIT system aims at the

continuous improvement of the Program flexibility (or underutilization) of human capital.

Therefore, the JIT system encourages employees and suppliers to be innovative and make

use of their creative talents.

Firms look for the following three essential elements for the successful implementation of a

JIT program:

• Teamwork

• Discipline

• Supplier involvement

3.3.2.1.2 Total Quality Control

The quality of product is its ability to serve and satisfy the needs of its customers. To

produce high quality products, JIT firms conduct surveys, deploying their marketing

workforce to understand their customer needs and requirements. This information is useful

for designing the features of products in such a way that they fulfill customer needs. It is not

just the quality control department of the firm that is responsible for ensuring product

quality. High quality can be attained only through the collective and coordinated effort of all

the departments of the firm. For instance, the purchasing department works in

coordination with the quality control department and purchases only those supplies that

meet the quality requirements. The personnel department trains and motivates its workers

to produce products of the required specifications and quality. The concept of the

immediate customer followed by JIT firms helps them achieve the required levels of

quality.

A customer is considered as a person outside the firm who buys the products for

consumption. But JIT firms view customers in a different way. They use a concept known as

immediate customer in which each worker in the firm considers the next worker (who

continues the process of production) as the customer. Therefore it is the responsibility of

the worker to ensure the product is processed to meet certain specifications and quality


Page 12 of 20

requirements before passing it to the next worker, i.e. the immediate customer. In JIT

manufacturing systems, each worker is trained in quality principles and testing procedures.

Workers are made fully responsible for the work they carry out at their workstation and they

are entrusted with the job of inspecting their own work. Only items of acceptable quality

are delivered to the immediate customer.

JIT firms do not maintain separate departments for correcting defects. The employees have

to identify and correct their own mistakes and send the products to their immediate

customers. Every worker analyzes the types and sources of errors and then develops

methods to prevent them in the future. In case a worker delivers a defective item or an

improperly finished item to the worker's immediate customer, the worker who identifies

the defect is authorized to stop the process and take necessary actions thereafter.

3.3.3 Lean Manufacturing

The lean manufacturing or lean production system is defined with set of activities

comprising using least amount of inventories such as raw materials, work-in-process and

finished goods to attain high production volume. This system is also based on the principle

nothing is produced until it is needed, so the parts will come to the work station when they

are needed i.e. “Just-In-Time” and move through the process quickly.

Production need is created by actual demand for the product. When an item is sold, the

retailer pulls a replacement order to replace the item. This generates an order to the factory

production line, where a worker then pulls another unit from an upstream station in the flow

to replace the unit taken. From this station, they will pull order from the next station and so

on back to the release of raw materials. To allow this pull process flow to work smoothly,

lean production system demands strong merchant relationships, and a fairly predictable

demand for the end product, which finally leads to high levels of quality at each stage of the

process.

Lean manufacturing was developed in Japan and it is used by the Toyota Production System

– the benchmark for lean manufacturing. The system was developed to improve quality and

productivity and is predicated upon two philosophies that are central to the Japanese

culture: elimination of waste and respect for people.

The features of lean manufacturing are shown in fig 3.3


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Fig 3.3 Features of lean manufacturing

3.3.4 Flexible Manufacturing

A Flexible Manufacturing System (FMS) is a group of workstations (such as CNC machines)

integrated by automated materials handling equipment and controlled by a central

computer. These systems are designed to produce a family of parts and can produce

different parts simultaneously and in random order. The benefits of this system are:

• improved product quality and consistency

• increased productivity

• reduced work-in-progress and finished goods inventories

• reduced labor costs

• reduced floor space requirements

Flexible manufacturing systems and other applications of advanced technology are simply

islands of automation. Integrating these islands can magnify the strategic benefits

advanced technology offers. Firms such as Allen-Bradley are linking their manufacturing

systems to each other, with other production activities, and even with other departments.

DID YOU KNOW? The philosophy of Lean manufacturing is derived from Toyota Production

System.

What it is

Management philosophy

“Pull” system through the plant

What it assumes

Stable environment

What it requires

Employee participation

Industrial engineering / basics

Continuous improvement

Total quality control

Small lot sizes

What it does

Attacks waste (time, inventory, scrap)

Exposes problems and bottlenecks

Achieves streamlined production


Page 14 of 20

There are three types of flexibilities in manufacturing:

1. Basic flexibilities – Machine flexibility, material handling flexibility and operation

flexibility.

2. System flexibilities – Volume flexibility, expansion flexibility, routing flexibility, process

flexibility and product flexibility.

3. Aggregate flexibilities – Program flexibility, production flexibility and market flexibility.

3.3.5 Mass Customization

Mass customization is the mass production of customized goods and services. It is a fairly

new concept that is being recognized as the ultimate way to derive benefit from the

flexibility inherent in advanced technologies.

Firms pursuing a strategy of mass customization lower the cost of specialized products to a

point where conscious purchasers of the commodity product become value conscious

purchasers of the differentiated product. For example, the global market for semiconductor

chips. However, flexible manufacturing processes are giving a tough competition to the

concept of mass customization.

3.4 Installation of the Manufacturing Process

Once the technical manufacturing process is complete and operation decisions are made,

the next step is to plan the implementation of these decisions. In the fabrication industries,

it is common practice to make the plant layout decisions and treat them as a purely

technical specialist task. A creative and imaginative management, however, will recognize

the need for careful planning of manufacturing strategy in order to achieve company

objectives.

Of the management decisions that should be made, two are particularly important to plant

layout planning. The first is to define company growth objective: Checking whether the

company size is going to increase or decrease or stay the same. The second is the product

market plan: Checking whether the mass-production product is at a low price, a premium

DID YOU KNOW? The Japanese dominate the world market in mass customization with

their high-volume production of commodity chips sold in millions.


Page 15 of 20

product at a high price, or a product line at different quality and price levels. Although the

need for these decisions is evident, it is often erroneously assumed that the plant layout

specialist has all this information and has made the necessary provisions in the layout.

It is customary in the fabrication industries to designate three types of layout as line

production, process, and fixed position, depending on the elemental consideration of how

material moves through the plant during product manufacture.

3.5 Design of Manufacturing Systems

Design of the manufacturing system must include some means of steering it toward the

goal of efficient, low-cost production. The production management system provides this

means by cross-linking the manufacturing system components into a useful, effective unit.

Organizationally, production management is divided into production planning and

production control. Manufacturing management is usually well aware of the utility of

production control and normally takes an active part in frequently reviewing production

status, production problems, and corrective actions with production personnel.

Manufacture for inventory – In this system, companies manufacture for inventory and

store the products. They are released when there is sudden increase in demand or shortage

of raw material.

Manufacture for custom order – Products is customized in this system. Orders are taken

from the customers, and manufacturing is carried out accordingly.

3.6 Ordered Fulfillment

Oder fulfillment is the process of how a manufacturing firm services its customers from the

sale touch points to final delivery of product. For some business requirements, the order

fulfillment process might be complex as well as challenging for the firms to supply the

customized products. Depending upon the customers or business requirements, the order

fulfillment strategies are formulated. If the order fulfillment process is efficient, the steps to

finish the process and the cost to achieve the fulfillment will be less. Alternatively,

depending upon some special requirements of the customers, the order fulfillment process

might also end up with a high cost. Order fulfillment process is mostly used to describe the

logistics and distribution functions. Depending upon the customers’ specifications, one of

the following methods will be implemented by the firm:


Page 16 of 20

• Engineer to Order (ETO)

• Make to Order (MTO)

• Assemble to Order (ATO)

• Make to Stock (MTS)

3.6.1 Engineer to Order (ETO)

Engineer to Order is a unique order given by specific customers and these are mostly

business to business orders. In manufacturing, engineers start designing the product

according to customer’s requirements (or) when product is ordered by the customer. The

raw materials may be procured and stored, but will not be assembled unless the customer’s

order is placed because the product may require a unique set of item numbers, bill of

material, and routings which are complex and takes long lead times. For engineer to order

products, customers emphasize their involvement from the start of design till the product is

finished. For example, BHEL manufacturers heavy electrical products for companies such as

NTPC.

3.6.2 Make to Order (MTO)

Make to order is also called as Bill to Order. In Make to Order, the design will be

standardized to all the customers, but the components will be customized according to the

customer specifications and availability of components in the factory or in the market.

Though it makes the customer wait for the product, it allows the customer to have more

customization when compared to the ones available with retailers. This strategy is mostly

used when technology is the major constituent in the process of manufacturing. For

instance, this strategy is mostly used for high-end motor vehicles and aircrafts.

3.6.3 Assemble to Order (ATO)

In assemble to order, the basic components or raw materials which are necessary to

assemble the product are procured and stored by the manufactures. When the customer

places the order, based on the order specifications the components are assembled and

given to the customer quickly, where the manufacturer specifies a modular product

architecture that allows for the final product to be configured in this way. This strategy is

used where assembly is a major activity. For instance, this strategy is mostly used for Dell's

approach to customizing its computers.


Page 17 of 20

3.6.4 Make to Stock (MTS)

In Make to Stock, the products are manufactured against a sales forecast and these

products are sold-out from the stocked finished goods. This strategy is based on push-type

production, which depends on demand forecasting. Here the demand forecasting should be

done accurately to avoid excess inventory and stock outs. For instance, this approach is

common in the grocery and retail stores.


Page 18 of 20

Summary

• Manufacturing system is a broad function that includes all the planning, analysis,

selection, assembly, and utilization of the company resources used to convert raw

materials into saleable products at optimum cost.

• Manufacturing systems are broadly classified as either processing or fabrication;

Processing is further classified as heavy and light processing respectively, and

fabrication into heavy, light and bench operations.

• Mass production is the process of production of large volumes of standardized

products on the production line. It is also called flow production, repetitive

production or series production.

• The Just-In-Time (JIT) manufacturing system is a planning system for

manufacturing processes that minimizes the availability of material inventories at

the manufacturing site to only what, when and how much is strictly necessary. The

concept of just-in-time states nothing is produced until it is required.

• The lean manufacturing or lean production system are defined with set of activities

which use least amount of inventories such as raw materials, work-in-process and

finished goods to attain high production volume. This system is also based on the

principle nothing is produced until it is needed, so the parts are delivered to work

station when they are needed i.e. “just in time” and move through the process

quickly.

• A Flexible Manufacturing System (FMS) is a group of workstations (such as CNC

machines) integrated by automated materials handling equipment and controlled

by a central computer.

• Mass customization is the mass production of customized goods and services. It is a

fairly new concept that is being recognized as the ultimate way to derive benefit

from the flexibility inherent in advanced technologies.

• Design of the manufacturing system must include some means of steering it toward

the goal of efficient, low-cost production. The production management system

provides this means by cross-linking the manufacturing system components into a

useful, effective unit.

• Oder fulfillment is the process of how a manufacturing firm services its customers

from the sale touch points to final delivery of product to the customer.

• Engineer to Order is a unique order given by specific customers and these are

mostly business to business orders. In manufacturing, engineers start designing the


Page 19 of 20

product according to customer’s requirements (or) when product is ordered by the

customer.

• Make to Order is also called as Bill to Order. In Make to Order the design will be

standardized to all the customers, but the components will be customized

according to the customer specifications and availability of components in the

factory or in the market.

• In Assemble to Order, when the customer places the order, based on the order

specifications the components are assembled and given to the customer quickly,

where the manufacturer specifies a modular product architecture that allows for the

final product to be configured in this way.

• In Make to Stock the products are manufactured against a sales forecast and these

products are sold-out from the stocked finished goods.

of 15

Chapter-4 – Product Life Cycle Version4.0 For Associates






joining TCS.


Page 3 of 15

Chapter-4 Product Life Cycle

Introduction

With the invention of new technologies, it is necessary for organizations to update their

product portfolios and improve the quality of their existing products. Product Life Cycle

(PLC) covers the different phases in the life of a product. Every new product goes through

certain phases, namely introduction, growth, maturity and decline.

Learning Objectives


• The different phases in the life of a product

• The strategies adopted by management in different phases of PLC

• The limitations of the PLC

Topics covered

4.1 Product ............................................................................................................. 4

4.2 Classification of Product ..................................................................................... 4

4.3 Product Life Cycle (Plc) ....................................................................................... 4

4.3.1 Introduction Stage ................................................................................................ 6

4.3.1.1 Strategies for The Introduction Stage ................................................................ 7

4.3.2 Growth Stage ....................................................................................................... 7

4.3.2.1 Strategies for the Growth Stage ........................................................................ 8

4.3.3 Maturity Stage ...................................................................................................... 8

4.3.3.1 Strategies for the Maturity Stage ....................................................................... 8

4.3.4 Decline Stage ....................................................................................................... 9

4.3.4.1 Strategies for the Decline Stage ........................................................................ 9

4.4 Common Alternative Patterns of Product Life Cycle ............................................ 10

4.4.1 Growth-Slump-Maturity Pattern ........................................................................ 10

4.4.2 Cycle-Recycle Pattern ........................................................................................ 11

4.4.3 Scalloped Plc ...................................................................................................... 11

4.5 Limitations of Plc ............................................................................................. 12

4.6 Role of Technology in Plc .................................................................................. 13

Summary ............................................................................................................. 14


Page 4 of 15

4.1 Product

A product can be a good, a service, an idea or a combination of all these. It consists of a

bundle of tangible and intangible attributes that satisfy consumers and is received in

exchange for money.

Source: http://www.udel.edu/alex/chapt11.html

4.2 Classification of Products

Products are generally classified on the basis of their characteristics, for example, durability,

tangibility and usage. The Figure 4.1 will explain in detailed about the product classification.

Figure 4.1 Classification of products

4.3 Product Life Cycle

A new product typically goes through a sequence four stages in its life, which are as follows:

a) Introduction

b) Growth

c) Maturity

d) Decline

Classification

of Products

Durability and

Tangibility

(a) Non durable goods

(b) Durable Goods

(c) Services

Usage

Consumer Goods

(a) Convenience goods

(b) Shopping goods

(c) Specialty goods

(d) Unsought goods

Industrial Goods

(a) Material and parts

(b) Capital items

(c) Supplies and

business services


Page 5 of 15

This sequence of four stages is known as the product life cycle, which is linked with changes

in the marketing situation, thus impacting the marketing strategy and the marketing mix.

Product Life Cycle (PLC) analysis can be a very valuable tool in the hands of manufacturing

companies to gain a better understanding of how to better managing their profitable

products, while eliminating the unprofitable ones. As shown in the figure 4.2, the product

moves from one stage of its life cycle to another, marketers try to evaluate and adjust

strategies for promoting, pricing and distributing the product.

Fig. 4.2 Different Phases of Product Life Cycle

Both the manufacturing and R&D units of a company need to be aware of the progress on a

project from the day it is initiated. The degree of participation of manufacturing versus R&D

at any point in a new product life cycle almost exactly follows the quantity of that item

produced, from the inception of the idea to the point at which it is decided to remove the

product from the market.

Serious problems can arise when the R&D phase of a product finishes before manufacturing

begins. This means that there has been little or no coordination between the R&D and

manufacturing units in the determination of requirements for personnel, equipment or

space.

Many a time the manufacturing manager is faced with the need to revise an already

established product. This may be due to a marketing desire to revitalize a product

approaching obsolescence in its present form, a manufacturing desire to reduce the cost of

a product or a marketing desire to vary the product for competitive reasons. This requires


Page 6 of 15

the manufacturing unit to be closely connected with the R&D so that the changes

suggested by the R&D unit do not affect the design objective of the product. The

contribution of R&D in such instances can occur at any point during the marketing phase of

a given product. Properly coordinated marketing strategy would institute the need for such

a change in sufficient time to achieve this goal.

Fig. 4.3 PLC of a Manufacturing Industry Product

Role of Manufacturing Engineers

The manufacturing engineer is the one to consult for the techniques and processes used in

an organization. This knowledge can be most helpful in guiding R&D personnel towards a

design approach. The manufacturing engineer would know the capacities and capabilities of

the available equipment. Should new capabilities be required, the manufacturing engineers

should be notified in due time so that a thorough investigation of what can be purchased or

what needs to be developed can be made.

4.3.1 Introduction Stage

In the introduction stage, the product is introduced to the customer. Introduction of a new

product is difficult for the following reasons:


Page 7 of 15

• The high advertising and other costs

• The high risk of new product failure

The company needs to

• Inform the customer about the product

• Induce product trial

• Secure distribution in retail outlets

Advertising is one of the most effective tools at this stage of the PLC because marketers

must communicate their product’s features, uses and advantages to potential customers.

4.3.1.1 Strategies for the Introduction Stage

Following are the strategies for the introduction stage:

• Rapid skimming: In this strategy, the firm launches the new product at a higher

price with a higher promotional level to skim the market quickly. By using this

strategy firms builds brand preference in the customers’ minds. This strategy is

mostly successful when the potential market is not aware of the product.

• Slow skimming: In this strategy, the firm launches the new product at a higher

price and a low promotional level. This strategy is most successful when the

market is aware of the product, the market size is limited, competition is not

intense and customers are ready to pay a higher price for the product.

• Rapid penetration: In this strategy, the firm launches the new product at a

lower price and a high promotional level. This strategy is applied when the

market size is large, customers are unaware of the product, they are more price-

sensitive, there is a strong competition among firms, and the unit manufacturing

costs comes down with the company’s scale of production.

• Slow penetration: In this strategy, the firm launches the new product at a lower

price and low level of promotion. Marketers resort to this strategy when the

market size is large, customers are highly aware of the product, they are price-

sensitive, and there exists some potential competition in the market.

4.3.2 Growth Stage

The introduction stage is followed by the growth stage. The growth stage is crucial for the

product’s survival in the market because the reactions of the competitors to the product’s

success will affect its longevity. In this stage the firm generally sees a growth in sales, heavy


Page 8 of 15

demand for the product and a peak in the profits. Seeing these promising opportunities in

the market, new firms are attracted to enter the market in the growth stage. They introduce

new product features and a wider distribution network. Companies increase their

promotional expenditure to meet the competition.

The profit of the firm increases initially as

• The promotional costs are spread over a larger volume, and

• The unit manufacturing cost is less.

At a later phase in the growth stage, the profits begin to decline as competition increases,

forcing the lowering of prices and heavy spending on promotion.

4.3.2.1 Strategies for the Growth Stage

Marketers may adopt the following strategies during the growth stage of a product:

• Re-establishing aggressive pricing, lowering prices to attract price-sensitive

customers

• Highlighting the product’s benefits in order to create a competitive niche it in

the market.

• Improving / adding features, product quality and models. Other changes to the

product may include making it available in different sizes, flavors and so on.

• Introducing new distribution channels

• Entering new markets

4.3.3 Maturity Stage

This stage is marked by a steady decline in sales and a corresponding one in profits. As the

market reaches its saturation, the distribution channels get worn out and the growth rate of

sales starts slowing down. Then the sales tend to flatten or stabilize on a per capita basis.

Finally the sales start declining and customers start trying out new products and substitutes.

There is fierce competition at this stage as several brands try to compete with each other.

Weaker competitors and smaller firms are squeezed out of the market.

4.3.3.1 Strategies for the Maturity Stage

Marketers may adopt the following strategies during the maturity stage of a product


Page 9 of 15

• Concentrating on products which are profitable and abandoning the ones that

are not

• Increasing advertising and sales promotion, introducing fresh advertising

campaigns, new packaging and even product re-launches.

• Investing more in R&D to improve the existing product and extend product line.

4.3.4 Decline Stage

Eventually the sales and profits of all products and brands tend to decline, some declining

faster than others. The reason for decline in sales could be

• Technological advances

• Increase in competition

• Shift in consumers’ tastes and preferences etc.

As the sales begin to dwindle, firms start withdrawing their products from the market. The

size of the exit barriers influences the capacity of the firms to withdraw to a great extent.

Firms tend to leave the industry when the exit barriers are low and vice versa. Firms which

have high exit barriers stay on in the market, using it as an opportunity to attract the

withdrawing firm’s customers.

Exit barriers: Obstacles or impediments that prevent a company from exiting a market.

Typical barriers to exit include highly specialized assets, which may be difficult to sell or

relocate, huge exit costs, such as asset write-offs and closure costs, and inter-related

businesses, making it infeasible to sell a part of it

Source: http://www.investopedia.com/terms/b/barriers-to-exit.asp#ixzz1lyNvOrNF

4.3.4.1 Strategies for the Decline Stage

To tackle the decline stage, most firms indulge in strategies like:

• Reducing the number of products in a product line, especially those that are not

earning any profits

• Cutting promotional budgets and prices

• Ultimately withdrawing from the market or from the weaker segments and

trade channels

A company can adopt any of the following five strategies when its product is facing the

decline stage:


Page 10 of 15

• Firms tend to increase the investment to increase its competitive position and

lead the market.

• Firms tend to maintain constant investment level until the market reaches

stability.

• Investment is utilized in a correct way by dropping the unprofitable customer

groups and strengthening the firm’s investment in profitable niches.

• Harvest the firm’s investment to recover the cash quickly.

• Divest the business through disposal assets.

4.4 Common Alternative Patterns of Product Life Cycle

There are three common alternative patterns of product life cycle that exist. These are:

• Growth-slump-maturity pattern

• Cycle recycle pattern

• Scalloped pattern

4.4.1 Growth-Slump-Maturity Pattern

In this type of sales pattern, the product sales are high in the introduction stage

subsequently declining drastically. The sale of this product is sustained by the late adopters

and laggards while the early adopters of the product switch to newer products.

Fig. 4.3 Growth-slump-maturity pattern

DID YOU KNOW? Maruti 800 is at decline stage of product life cycle.


Page 11 of 15

4.4.2 Cycle-Recycle Pattern

Generally these sales patterns occur in the pharmaceutical industry. When a new drug is

introduced it is promoted aggressively to capture the market. This is called the first cycle.

The promotional push that is subsequently required to increase / sustain the sales of the

drug is called another cycle.

Fig. 4.4 Cycle recycle pattern

4.4.3 Scalloped PLC

In this cycle, whenever the sale of a new product begins declining an innovation to the

product is made to recapture the market. When the sale of this product too starts declining

an innovation is again introduced to retain market share. This cycle is repetitious in nature.

Fig. 4.5 Scalloped product life cycle

Example 1: The sale of nylon show a scalloped pattern because of the many new uses of it-

parachutes, hosiery, shirts, carpeting, boat sails, and automobile tires - that continued to be

discovered over time.


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Example 2: Bajaj has been synonymous with scooters in India, and scooters with the typical

family vehicle for the urban middle class. There was a time when the demand for Bajaj

scooters far outstripped the supply, and the brand enjoyed a near monopoly. The policy of

liberalization by the government and the changes in the competitive landscape

transformed the market for scooters. Further, the economic progress of the country, which

improved the income level of the people, and the rising aspiration of the middle class,

gradually made Maruti 800 a substitute / replacement for the scooter. In order to buckle the

trend in the market for scooters, the company introduced technologically superior

products. The four stroke engine and sleeker models introduced by the company helped to

slow down the decline in the demand for scooters. The company also introduced an array of

motorcycles. This took place at a time when motorcycles were becoming the “cool” vehicle

for the urban Indian youth. The adoption of this approach helped the brand remain

contemporary.

4.5 Limitations of PLC

The concept of PLC helps in manufacturing decision-making, but it needs to be

implemented with care. Manufacturing managers need to be aware of these limitations, so

that they are not misled by its prescriptions.

Some of the limitations of the PLC are:

• The sales of some products may rise and decline at the same rate. However some

products may continue at the same stage for long.

Example: Cadbury’s Dairy Milk chocolate has survived for decades in the mature

stage of the PLC.

• Increase in marketing activities such as promotion may alter the shape of the PLC

sales curve to a considerable extent.

Example: Increase in advertising at the maturity or decline stage may increase the

duration of these phases.

• The PLC outlines the phases but does not give any indication of the duration of the

stages (introduction, growth, maturity). This limits the use of PLC as a forecasting

tool since it is not possible to predict when maturity/decline will begin.


Page 13 of 15

4.6 Role of Technology in PLC

In recent years many software have been developed to manage the product life cycle. For

example, Product Life cycle Management Software supports the product development

process, integrating people, data, processes and business systems and providing a product

information backbone for companies and their extended enterprise. The benefits of PLM

software focus around time, cost and quality. So, technology has played a critical role in

product life cycle management in many ways.

Source: http://www.product-lifecycle-management.info/what-is-plm/plm-benefits.html

Advantages of Technology in PLC

• Product life cycle management improves the management of product at each stage

of PLC.

• Product life cycle management allows the business to respond quickly to the

customer’s demand. To sustain oneself in the fierce competition and meet the

customer’s expectations, it is necessary to manage the product portfolio.

• Product life cycle management helps in the achieving of realistic business benefit. It

increases the revenue, and leads to faster product production and enhanced profit

margins.

• Product life cycle management reduces the product’s risks.


Page 14 of 15

Summary

• A product can be a good, a service, an idea or a combination of all these.

• The stages that a typical product goes through are introduction, growth, maturity

and decline.

• In the introduction stage, the product is introduced into the market.

• The sale of the product is low at the time of its introduction into the market.

• Strategies adopted by management in introduction stage are rapid and slow

skimming, and high and low penetration.

• The growth stage is characterized by an increase in sales, a heavy demand for the

product and a peak in the profits.

• In maturity stage, the sales tend to grow at first, then reach a point of stability, and

then begin to decline.

• The sales and profits of all products and brands tend to decline in the decline stage

of the PLC.

• There are three common alternative patterns of product life cycle, namely Growth-

Slump-Maturity, Cycle Recycle and Scalloped PLC.

of 14

Chapter-5 Capacity Requirement Planning Version4.0 For Associates






joining TCS.


Page 3 of 14

Chapter - 5 Capacity Requirement Planning

Introduction

Capacity planning is one of the most important investment decisions. The purpose of

capacity planning is to match resource capabilities of the factory with its long-term demand

forecast. The factors to be considered while selecting capacity additions for manufacturing

are (a) effects of economies of scale (b) impact of changing facility focus (c) balance among

production stages (d) degree of flexibility of facilities and the workforce.

Learning objectives

After completing this session, you would be able to

• Capacity management in manufacturing sector

• Capacity planning concepts

• Determining capacity requirement

Topics covered

5.1 Capacity ......................................................................................................... 4

5.2 Capacity Planning Concepts ............................................................................. 4

5.3 Economies and Diseconomies of Scale .............................................................. 4

5.4 Capacity Focus ............................................................................................... 5

5.5 Capacity Flexibility ......................................................................................... 5

5.6 Capacity Planning ...........................................................................................6

5.7 Determining Capacity Requirements ................................................................ 7

5.8 Using Decision Trees to Evaluate Capacity Alternatives ................................... 11

Summary .......................................................................................................... 13


Page 4 of 14

5.1 Capacity

Capacity implies an attainable rate of output. Capacity is a relative term: in

manufacturing operations management context, it may be defined as the amount of

resource inputs available relative to output requirements over a particular period of time.

The objective of capacity planning is to provide an approach for determining the overall

capacity level of capital intensive resources like facilities, equipment, and labor force size.

Source: Operations supply chain Management by chase

Example: In manufacturing, capacity can be the number of products that may be produced

in a single shift.

5.2 Capacity Planning Concepts

The term capacity means, an attainable rate of output. For instance an automobile industry

is able to produce 300 cars per day, but the company didn’t mention how long that rate can

be sustained. Thus, we don’t understand whether it is manufacturing 300 cars per day is a

one-day or a six month average. So to avoid this ambiguity, “Best Operating Level” concept

is used. This is a process designed for finding the level of capacity and this is the volume of

capacity at which average unit cost is minimized. Difficult task is to find this minimum cost

because it entails a complex trade-off between the allocation of fixed overhead costs and

the cost of overtime, equipment wear, defect rates, and other costs. Capacity utilization

rate is an important measure, which discloses how close a firm is to its best operating point.

Capacity utilization rate= Capacity used/ Best operating level

Normally, capacity utilization rate is disclosed in percentage, so it requires that the

numerator and denominator must be measured in the same units and time approach.

5.3 Economies and Diseconomies of Scale

The basic idea of this concept is, whenever a plant gets larger, it automatically increases the

volume of output and decreases the average cost per unit. It partially happens due to lower

operating cost and capital cost, because a piece of equipment which has twice the capacity

of another typically does not cost either to purchase or to operate. Whenever plants gets

bigger it also gains efficiency to fully utilize the dedicated resources for tasks such as

material handling, computer equipment, and administrative support personnel.


Page 5 of 14

Example:

Jaguar is the luxury automobiles producer which recently found that, they had too many

plants and therefore employed 8560 workers in three plants that produced 1,26,122 cars,

about 14 cars per employee. Alternatively, Volvo’s plant in Torslanda, Sweden, was twice as

productive as Jaguar building 1,58,466 cars with just 5472 workers, rather 29 cars per

employee. At the same time, BMW AG’s mini unit has produced 1, 74,000 vehicles at a

single British plant with just 4500 workers or 39 cars per employee.

5.4 Capacity Focus

The capacity focus concept epitomizes the production concept of an organization which

focuses on a limited set of production objectives like cost, quality and flexibility etc. instead

of excelling in all the aspects. In this concept the organization selects those set of

production activities which fulfill most of the objectives. But with increase in technology,

there is a need for all aspects of production to do well and give a competitive advantage to

the organization.

To deal with these contradictions, a firm can justify its selection of objectives and

capabilities based on its level of operation. The capacity focus concept can also be

operationalized using a plant within plant strategy, where in, each plant may have several

sub organizations having their own objectives and policies made under the same roof. This

in turn helps to focus on different operating objectives at different level for each

department and thereby still carrying the Capacity focus concept in each level.

5.5 Capacity Flexibility

Capacity flexibility has a great advantage over production, it has the ability to either

increase or decrease the production levels drastically and it also has the great flexibility to

shift the production capacity quickly from one product to another product or service. This

type of flexibility is achieved only by following the strategies that use the capacity of other

organization.

DID YOU KNOW? The XEROX focused factory creates a flexible and efficient work

environment where teams of employees are responsible for the end to end manufacturing

or specific products. The factory was designed with input from the industrial staff, working

in tandem with engineers and management.


Page 6 of 14

Flexible plants

A flexible plant has an advantage that it can maintain zero-changeover-time. A plant can

quickly adapt to changes by using these methods like movable equipment, knockdown

walls, easily accessible and re-routable utilities. For example, in a circus it is easy to install

and easy to tear down and move.

Flexible processes

Flexible process is characterized by flexible manufacturing systems, where it is simple to set

up the equipment, and also by using these technological approaches there are advantages

like low cost switching from one product line to another, etc. This is sometimes referred to

as economies of scope. (By definition, economies of scope exist when multiple products can

be produced at a lower cost in combination than they can separately).

Source: Operations supply chain Management by chase

Flexible workers

These flexible workers have different skills sets. Where their abilities are, they can work on

any type of machinery and also they can easily switch from one kind of job to another.

These workers need boarder training than specialized training and for adapting the quick

changes these people need managers, supporting staff.

5.6 Capacity Planning

While adding capacity to the factories there are many issues to be considered. Three

important issues are maintaining system balance, frequency of capacity additions, and the

use of external capacity.

Maintaining System Balance

A perfectly balanced plant should always maintain exact input and output requirements at

all the stages. For instance, the output of department 1 should provide the exact input

requirements for department 2 and so on. It is not possible to achieve such “perfect” design

in practice because of two reasons; the first reason is that the best operating levels will

always differ from department to department. For instance, department 1 may operate at

their best over a range of 100 to 120 units per month, whereas the next stage in the process

or department 2 might operate at best over a range 80 to 95. The second reason is


Page 7 of 14

“variability in product demand” and if the production lines are not automated they might

lead to process imbalance.

To avoid this process imbalance there are three methods. In the first method, whenever

there is a bottleneck in the process add capacities to the process. Few of the measures

taken are scheduling overtime, leasing equipment or purchasing additional capacity

through subcontracting. In the second method, try to keep bottleneck process always in

working stage or zero downtime even by using buffered stock. In final method, by

duplicating the process in which there is bottleneck. By using these methods, delay-in

subsequent methods can be removed.

Frequency of capacity addition

While adding capacities to the factory, two types of cost should be considered. The first

type of cost is upgrading capacity too frequently, this type of capacities are too expensive

because it includes removing and replacing the old equipment with new one and also

training the workers on that equipment. Whenever new equipment is purchased additional

cost is incurred over selling price of old one. Finally some more costs are incurred like cost of

ideal time of the plant during changeover period. The second type of cost is upgrading

capacity too infrequently, this type of capacities are also expensive because capacities are

purchased in large amounts. This excess capacity must be carried until it is utilized.

External source of capacity

Sometimes, it is better not to add capacities at all. Instead, use some external source of

capacities to manage the demand. Outsourcing and sharing capacity are the two common

strategies used by the most of organizations. Airlines are best example for sharing

capacities, when there are two routes one is frequently used and the other is not. These

airline companies use the two flights in same route sharing the demand for that season.

5.7 Determining Capacity Requirements

While determining capacity requirements, it is necessary to identify the demands for

individual product lines, individual plant capabilities, and allocation of production through

the plant network. Typically this is done according to the following steps:

• Implement forecasting techniques to forecast sales for individual products within

each product line.


Page 8 of 14

• To forecast product depth, approximate measure of the equipments and labor

requirements.

• Direct and indirect cost should be planned for a period of time.

Sometimes firms decide to maintain capacity cushions between the projected requirements

and actual capacity. Capacity cushions can be defined as an amount of capacity in excess of

forecasted demand. For instance, if a company has forecasted the demand of the product

would be around 10 million per year and they designed the capacity for 12 million per year.

This 20 percent of excess capacity is called as capacity cushion.

Sometimes firms also decide to maintain a negative capacity cushion. Negative capacity

cushions can be defined as produced capacity less than the forecasted demand. For

instance, if a company has forecasted the demand of the product would be around 12

million per year and they produced the capacity for 10 million per year. They produced only

16.7 percent of the demand, which is called as negative capacity cushion.

Example of determining the capacity requirements

A detergent company produces two varieties of detergents: Surf and Surf-Ex. These

detergents are available in both bags and single serving pouches. For this factory,

management is willing to forecast the equipment and labor requirements for the next five

years.

Solution

Step 1: Implement forecasting techniques to forecast sales for individual products within

each product line. For running the promotional campaign for Surf-Ex, the marketing

department has provided data for the forecast demand values (in thousands) for the next

five years and this campaign is going to continue for the next two years.


Page 9 of 14

Table 5.1: Forecasted demands for the Surf, Surf-Ex bags and pouches

Step 2: To forecast product depth, approximate measure of the equipments and labor

requirements are made.

Presently there are three machines that can package up to 150,000 bags per machine per

year and each machine requires two operators to produce both bags of Surf and Surf-Ex.

Six bag machine operators are available.

There are five machines that can package up to 250,000 pouches per machine per year and

each machine requires three operators to produce both pouches of Surf and Surf-Ex.

Currently, 20 pouching machine operators are available.

From the preceding table, it is easy to calculate the forecast of total product line just by

adding the yearly demand of bags and pouches as follows:

Year

1 2 3 4 5

Surf

Bags (000s)

60 100 150 200 250

Pouches (000s) 100 200 300 400 500

Surf-Ex

bags (000s)

75 85 95 97 98

Pouches (000s) 200 400 600 650 680


Page 10 of 14

Table 5.2: Forecasted demands for the bags and pouches

Now it is easy to calculate equipment and labor requirements for the year 1. From the table,

the total available capacity for bags is 450,000 per year (3* 150,000 each), we will be using

135/450= 0.3 of the available capacity for the current year, or 0.3*3= 0.9 machine. In the

same way, we will need 300/1250= 0.24 of the available capacity for pouches bags for the

current year, or 0.24*5= 1.2 machines. The number of operators required to maintain our

forecasted demand for the first year will consist of the operators required for the bags and

the pouch machines.

The operator requirement for year 1’s bag operation is

0.9 bag machine* 2 operator= 1.8 operators

1.2 pouch machine* 3 operators= 3.6 operators

Step 3: Direct and indirect cost should be planned for a period of time. Repeat the previous

calculation for the remaining years.

Year

1 2 3 4 5

Bags 135 185 245 297 348

Pouches 300 600 900 1050 1180


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Table 5.3: Represents direct and indirect cost occurred

Year

1 2 3 4 5

POUCH OPERATIONS

Percentage

capacity

utilized

24 48 72 84 94

Machine

requirement 1.2 2.4 3.6 4.2 4.7

Labor

requirement 3.6 7.2 10.8 12.6 14.1

BAG OPERATIONS

Percentage

capacity

utilized

30 41 54 66 77

Machine

requirement .9 1.23 1.62 1.98 2.31

Labor

requirement 1.8 2.46 3.24 3.96 4.62

There is a positive capacity cushion for all five years because the available capacity for both

operations is always exceeding the expected demand. The detergent Company can now

begin to develop the intermediate- sales and operations plan for the two production lines.

5.8 Using Decision Trees to Evaluate Capacity Alternatives

Decision tree is an easy way to solve the capacity planning problem. It helps not only in

understanding the problem but also in finding a solution. A decision tree is a sequential


Page 12 of 14

problem solving method in which each step gives the conditions and the consequences of

the problem. To analyze the decision tree, recently many software packages have been

developed.

Decision trees consist of nodes and branches represented by squares and circles

respectively. Generally, there is a flow of information from the branches to the node or visa

versa. Circles show the probability of occurrence of an event and squares represent decision

point.

The process of solving the decision tree problem starts from the last branch and gradually

moving towards the start of the tree in reverse order. Expected values are calculated at each

step keeping in mind, the time value of money. It is important to consider the time value of

money while planning for long term.


Page 13 of 14

Summary

• Capacity implies an attainable rate of output. Capacity is a relative term: in

manufacturing operations management context, it may be defined as the amount

of resource inputs available relative to output requirements over a particular period

of time.

• The term capacity implies an attainable rate of output.

• The basic notion of economies of scale is that as a plant gets larger and volume

increases, the average cost per unit of output drops.

• The concept of the capacity focused factory holds that a production facility work

best when it focuses on a fairly limited set of production objectives.

• Capacity flexibility means having the ability to rapidly increase or decrease

production levels, or to shift production capacity quickly from one product or

service to another. Such flexibility is achieved through strategies that use the

capacity of other organizations.

• These strategies are related to flexible plants, flexible processes, and flexible

workers.

• Forecasting seeks to predict what is most likely to happen in future. By predicting

the most probable future value of a variable, managers take effective decisions and

carry out planning activities.

• The objective of selecting the right method is to maximize accuracy and minimize

biases. Therefore, the suitability of a forecasting method should be verified before it

is selected.

• The factors to be considered are time span, data availability, and cost & accuracy.

• In determining capacity requirements, we must address the demands for individual

product lines, individual plant capabilities, and allocation of production through the

plant network.

• A convenient way to lay out the steps of a capacity problem through the use of

decision trees. The tree helps not only in understanding the problem but also in

finding a solution. A decision tree is a schematic model of the sequence of steps in a

problem and the conditions and consequences of each step.

of 16

Chapter-6 Product Design and Development Version4.0 For Associates






joining TCS.


Page 3 of 16

Chapter - 6 Product Design and Development

Introduction

Increased competition in the global business environment is compelling operations

managers of from manufacturing industry to streamline their operations, and to develop

innovative products and designs. Product design is the description of the specific stages in

the production process and the relationships among the stages.

Learning objectives

After completing this chapter, you will be able to understand the:

• need for product design and its development

• different steps taken in the development process

• concept of prototyping

• various tools and technologies used for the design process

Topics covered

6.1 Product Design and Development – An Overview .................................................... 4

6.2 Factors Affecting Product Design Decisions ............................................................. 4

6.3 The Product Development Process ........................................................................... 5

6.4 Rapid Prototyping .....................................................................................................6

5.5 Automation in Design ................................................................................................ 7

6.5.1 Computer Aided Design ........................................................................................ 7

6.5.2 Computer Aided Manufacturing ........................................................................... 8

6.5.3 Flexible Manufacturing System .............................................................................9

6.5.4 Computer Integrated Manufacturing .................................................................. 10

6.6 Industrial Design ...................................................................................................... 11

6.7 Measuring Product Development Performance ..................................................... 11

6.8 Variants of Development Products ......................................................................... 12

Summary ........................................................................................................................ 15


Page 4 of 16

6.1 Product Design and Development – An Overview

Product design refers to the description of the specific stages in the production process and

the relationship among the stages that enable the production system to produce products

or services. The products or services should meet the desired quality standards, and should

also be produced at the right time (when the customer wants them) and within the

budgeted cost.

New product development (NPD) is the process of bringing a new product to the market.

NPD is the first phase in product life cycle management.

New products can be of the following types:

• Changes in the existing product

• Entire revision of the core product

• Line extension

• New product line

• Repositioning

• Completely new product

6.2 Factors Affecting Product Design Decisions

Operation managers take the following factors into consideration before deciding on a

product design.

•••• Nature of demand – The main objective of any production system is to fulfill

customer requirements. Therefore, an organization should schedule its production

to meet requirements and estimated future demand levels.

•••• Degree of vertical integration – Vertical integration refers to the extent to which

the production and the distribution chain (extending from the suppliers of raw

materials and components to the delivery of finished products) are brought under

the ownership of the organization. The degree of vertical integration determines

the extent to which a product and its components are produced internally.

•••• Flexibility – A flexible organization responds quickly to changing customer needs

and market conditions. Flexibility is essential for organizations to increase and

maintain their market shares, both in terms of product as well as in terms of

volume.


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•••• Degree of automation – If automation is not made a strategic weapon, it will be a

limitation for the operations. By automating their operations, organizations can

produce products/services of high quality within a short period and can also shift to

other products/services easily.

•••• Quality level and degree of customer contact – The product’s competitive position

in the market depends on its quality. Decisions taken on the desired quality level of

products/services affect the design of the product as well as its production process.

The desired level of quality has a direct implication on the degree of automation in

the production process.

6.3 The Product Development Process

A firm follows the below mentioned activities to conceive, design, and bring a product to

the market. The following are the six activities involved in the product development

process:

1. Planning – This is the initial activity or phase zero which gives approval to launch

the actual product development process. This activity starts with formulation of

corporate strategy and evaluation of technology developments and market

objectives. The output of this phase is the product mission statement that explains

the products’ target market, business goals, limitations and assumptions about the

product.

2. Concept development –This stage includes identification of the target market,

assessment of various product concepts, selection of a product concept for further

development and testing. The product concept describes the product’s form,

function, features and specification. This is followed by an analysis of competitive

products and the economic justification of the product.

3. System level design –This stage defines the architecture of the product and the

product is broken down into subsystems and components to define the assembly

scheme for the production system.

4. Design detail – This phase includes the design specification of the product like

geometry, materials, and tolerances of all the unique parts in the product. At this

stage suppliers are also identified for purchasing standard raw materials. A process

plan is prepared and tooling is also designed for the production system.

5. Testing and refinement –This stage involves assessment and construction of a

prototype of the original product. This prototype is usually built with the same


Page 6 of 16

materials and dimensions, but the procedure followed in the production may not be

the same.

6. Production ramp up – At this stage, the product is made and ready to be produced

in-large quantities at the factory. The main purpose of the production ramp up is,

when the new product is designed by R&D, they have to train the factory personnel

and also resolve the problems faced by them during the actual production.

6.4 Rapid Prototyping

A prototype is an original type, or (form instance, early sample, model) built to test a

concept/process or to act as a thing to be replicated or learned from or standard for later

stages. Rapid prototyping is building a model of the short-listed ideas to enable an

understanding of the idea. The process consists of three Rs: Rough, Rapid, and Right.

The first two Rs state that the models must be made roughly rapidly since, in the early

stages, a model need not be perfect. The third attribute, Right, refers to building a lot of

small models until a solution is reached.

Rapid prototyping, combined with Design for Manufacturing and Assembly (DFMA) tools,

can determine if a product will perform its desired functions. It also tells how well and for

how long rapid prototyping will work. Use of DFMA in the early stages of rapid prototyping

can reduce the expenses in the later stages (manufacture, assembly, and product use).

The speed with which a company can design and develop new products is a critical element

in its ability to introduce new products into the marketplace. A three-dimensional prototype

can help in identifying the problems, allowing the design, engineering, and production

people to provide their input and test the design early in the development cycle. The

models developed with three-dimensional prototype, results in higher quality products and

lower development costs.

DID YOU KNOW? When a design consultancy group called IDEO designed a phone, they

cut out dozens of pieces of foam and cradled them between their heads and shoulders to

find the best shape for a handset.


Page 7 of 16

5.5 Automation in Design

The use of computers can improve the speed and simplify the design process of a product.

The design process includes analyzing, evaluating and presenting a design for a product).

6.5.1 Computer Aided Design

Computer Aided Design (CAD) is a technique used for designing product and process on a

computer terminal. Computer systems assist in the creation, modification, analysis and

optimization of a design.

Source: Operation Supply Management by Chase

CAD system incorporates computer graphics and computer-aided engineering systems.

The physical attributes of the process or products can be illustrated using computer

graphics while computer-aided engineering systems can highlight the operational

capabilities of the proposed design. The designer working with a CAD system creates the

lines and surfaces that form the object (product, part, structure, etc.) and stores this model

in the computer database. Once the design procedure is completed, the CAD system

generates detailed drawings required to create a product or process. Using a CAD system, a

designer can generate various views of an assembly and its components. Several models

such as the wire frame model (illustrates the outline of the product structure in 3D space)

are used to represent the parts in desirable forms. The use of CAD systems in product

design enables production engineers and marketing personnel to view the items and

suggest changes in the design before the commencement of production. A few of the top-

end CAD packages allow testing at the drawing stages thus eliminating the need for costly

prototype testing at the initial stages of the product design. By introducing CAD, an

organization can improve the quality and functionality of a design. A CAD system provides

comprehensive tools for improving design process.

Some of the benefits of using CAD include:

• Increase in productivity

• Improvement in the quality of product or process design

• More standardized products and design documentations


Page 8 of 16

Fig 5.1 A digital multi-CAD view of a crane

Source: http://en.wikipedia.org/wiki/CAD

6.5.2 Computer Aided Manufacturing

In Computer Aided Manufacturing (CAM), computers are used either directly to control the

processing equipment or indirectly to support manufacturing operations. Based on the

sequential instructions given by the computer within operational specifications, a variety of

operations are performed by automated machines. Computer programs can be stored in a

database and can be retrieved, updated, and revised as components are added /

redesigned. They can also be transmitted electronically in-house or externally by satellite to

other divisions and facilities.

The use of computers to indirectly support manufacturing operations is often referred to as

indirect CAM. It involves capturing data regarding the flow of items through automatic

means such as bar coding, and using this information in planning and scheduling production

activities. Operation managers generally apply indirect CAM for activities such as capacity

planning, purchasing, inventory control, quality reporting and so on. Direct CAM links

computers directly to one or more machines such that the production processes are

monitored and controlled by computer signals.

For example, Computer Numeric Controlled (CNC) machines store operational instructions

on their on-board computers which control their operations.

DID YOU KNOW? The first milestone in the history of CAD was in the field of mathematical

work on curves developed by Robert Issac Newton in 1940s.


Page 9 of 16

Benefits of using CAM are:

• Reliable information inputs

• Consistent product quality

• Reduction in labor costs

• Better control and management of equipment materials

• Improvement in production rate

Fig 5.2 An exploded view of CAM generated moulding and tooling box

Source: http://en.wikipedia.org/wiki/Image:Ugs-nx5-mold-tooling.jpg

6.5.3 Flexible Manufacturing System

Early automation systems consisted of a transfer line, which was a fixed-path conveyor with

single-purpose equipment installed on either side of it. The conveyor moved the parts to

each workstation where the machines performed a predetermined task. This automation

was economical only for those organizations, which were involved in the production of large

volumes of a single product or similar products.

To overcome these inefficiencies, Flexible Manufacturing Systems (FMS) was introduced in

production lines. It is a form of flexible automation in which several machine tools are linked

to the material-handling system. A central computer controls all the aspects of the system.

This system is effective in producing different items that have similar processing

requirements.

The components that make up a typical FMS are:

• An automated loading system to load materials

DID YOU KNOW? Dassault Systems and UGS Corporation (now owned by Siemens) are

the world’s largest CAM software companies.


Page 10 of 16

• Two or more machining centers, which are automated to change tools by

themselves

• A system to move materials in between machining centers

• An unloading system

• A central computer to integrates the whole process

In comparison with the traditional automated systems, the FMS offers advantages such as

reduced direct labor, shorter response time, consistent quality of products and better

control over the manufacturing processes. However, FMS requires huge capital investments

in equipment, and planning and control systems. Hence, they are employed only by those

production organizations in which all the products produced utilize similar components or

different products manufactured are variations of the same basic design.

6.5.4 Computer Integrated Manufacturing

Computer integrated manufacturing (CIM) integrates all the functions of CAD/CAM and also

includes the business functions (order entry, cost accounting, maintenance of employee,

time records and payroll, and customer billing) of a firm. CIM is considered as an upgraded

technological progression for an organization.

For a normal CIM system, computer technology is applied from customer orders through

design and production (CAD/CAM) to product shipment and customer service. All

operational and information-processing functions help the company in fulfilling the

customer service. In many ways, CIM represents the highest level of integration in

manufacturing. Table 5.1 illustrates the components of CIM.

Table 5.1 Components of CIM

Computer Integrated Manufacturing (CIM)

Business activities CAD CAM

Procurement, order

entry, payroll,

billing and so on.

Engineering

analysis, drafting

design review

Planning Control

Capacity planning,

materials planning,

computer-aided

process planning

Process controls,

shop-floor control,

computer-aided

inspection

Manufacturing activities: Materials handling, fabrication, assembly,

inspection


Page 11 of 16

6.6 Industrial Design

Industrial design is an art where the aesthetics and usability of the products being

manufactured or to be manufactured can be improved for marketability and production.

The role of an industrial engineer is to create and implement the design solutions to the

problems of engineering, sales & marketing, and brand development.

In the present scenario, the definition of industrial design has been changed. Companies

concentrate much on developing their technology in-order to compete in the market. It

mostly happens in the field of electronics, with the negligible costs of computer chips,

companies are coming up with the more advanced technological features in their product

which are not fully operated by customers, who use only a small number of the available

features. This is actually deviating from the consumers end benefits.

For example: Setting the VCR, working on the car or adjusting a computerized furnace

thermostat, most of the customers have complaints regarding the use of the product or

service.

Note: IDEO is one of the most successful industrial design firms in the world.

6.7 Measuring Product Development Performance

Many studies reveal that continuous development of new products is important to sustain in

the competitive environment. Companies should concentrate on the changing customer

needs and activities of their competitors to identify the opportunities and growing needs of

the customer and bring the new product and processes quickly into action. With the fast

growing competition and varying model life styles , firms need to have much more

development projects than previously, with fewer resources.

In the US automobile market, the growth of models and market segments over the last 25

years indicates that an auto firm must increase its development projects to 4 times more

than their current projects to maintain its market share. But smaller volumes per model and

DID YOU KNOW? Quality function deployment is an approach for including the opinion of

the customer into the design specification of a product.


Page 12 of 16

shorter design lives mean resource requirements must drop dramatically. Remaining in the

competition requires efficient engineering, design, and development activities.

Measures of product development success can be categorized into:

• Speed and Frequency of bringing new products or introducing to the market.

• Productivity of the actual development process.

• Quality of the actual product introduced.

To determine the market impact of the product and its profitability, time, quality, and

productivity, along other activities like sales, manufacturing, advertising, and customer

service are taken into consideration.

6.8 Variants of Development Products

There are several variants of product development strategies existing today which have

been / can be developed by different techniques. These are:

1. Market pull products – The market pulls the development decisions, that is, when

there is an opportunity and a need, the firm begins the product development

strategies with all the requirements to satisfy the market needs.

2. Technology push products –A firm begins with a new proprietary and looks for an

appropriate market to apply this technology, i.e., the technology pushes

development.

Gore-Tex, an expanded Teflon sheet manufactured by W.L. Gore Associates, is an

example of technology push.

3. Platform products– A product with more additional features to the existing product

technology is considered to be a platform product.

For example, Instant film used in Polaroid cameras, tape transport mechanism in

Sony walkman, and the Apple Macintosh Operating system.

4. Process intensive products – These are mostly produced in large quantities because

it follows standard production procedure as the production process has an impact

on product. Hence the product design cannot be separated from the production

process design. Few examples of process intensive products are semiconductors,

foods, chemicals, and paper.


Page 13 of 16

5. Customized products– These products are developed to meet customer specific

order request and are modified versions of the standard products. Examples:

switches, motors, batteries, and containers.

6. High risk products– These products are entailed with large risk related to

technology and market. Hence, the product development process is planned to face

risk. This is possible by addressing the biggest risk in the initial stages of the product

development. The risks can be avoided by completing the required design and test

activities earlier in the process.

For example, building a highly uncertain technical product requires that its key

features are tested in the earlier stages of the process to avoid risk in the later

stages. This process explores multiple solutions simultaneously and ensures that

one of the solutions succeeds. Evaluation of the risk should be done at regular basis

without delay.

7. Quick build products– In the present scenario, building and testing prototype

models has become a rapid process. To further speed up the development process,

the product’s features are disintegrated into high, medium and low priority in the

design phase. This is followed by several cycles of design, build, integrate, and test

activities, beginning with the highest priority to medium priority features and if

time and budgets do not overrun, low priority features are also incorporated into

the evolving product. In most cases, the lack of budget or time, do not allow the

incorporation of the low priority features in the next generation of the product. For

example, electronics and software products of recent times use the design-built-

test cycle which can be repeated many times.

8. Complex systems– While developing a complex system, a modification in the

generic product deals with a number of system level issues. While considering the

architecture of the entire system, a number of subsystems architectures may be

considered as competing concepts for the overall system. Due to this, the entire

system level becomes critical; hence it is divided into subsystems and the

subsystems are further divided into components. Each of these components is

managed by different teams and special teams are assigned to integrate these

components into subsystems. These subsystems are, and then combined into the

overall system. As each of these processes is executed in parallel, it is often referred

to as concurrent engineering. The interactions across the components and

subsystems are managed by system engineering specialists. The testing and


Page 14 of 16

refinement phase includes not only system integration but extensive testing and

validation of the product. For example, all large scale products such as automobiles

and airplanes comprise many complex interacting subsystems and components.


Page 15 of 16

Summary

• Product design refers to the description of the specific stages in the production

process and the relationship between the stages that enable the production

system to produce products or services.

• New product development is the process of bringing a new product to the market.

• The six phases of the generic development process are planning, concept

development, system level design, design detail, testing & refinement, and

production ramp up.

• Rapid prototyping can quickly produce three-dimensional prototypes allowing

design, engineering, and production teams to provide input and test the design

early in the development cycle.

• CAD is a technique used for designing product and process on a computer terminal.

• Computer systems assist in the creation, modification, analysis and optimization of

a design. A CAD system incorporates computer graphics and computer-aided

engineering systems.

• In Computer Aided Manufacturing (CAM), computers are used either directly to

control the processing equipment or indirectly to support manufacturing

operations.

• Flexible manufacturing system (FMS) is a form of flexible automation in which

several machine tools are linked to the material-handling system. A central

computer controls all the aspects of the system.

• Computer Integrated Manufacturing (CIM) is the next step in the technological

progression of an organization. The system incorporates all the engineering

functions of CAD/CAM and the business functions of the firm.

• Industrial design is an art where the aesthetics and usability of the products being

manufactured or to be manufactured can be improved for marketability and

production.

• Measures of product development success can be categorized into those that relate

to the speed and frequency of bringing new products online, to the productivity of

the actual development process, and to the quality of the actual produced

introduced.

of 18

Chapter-7 Manufacturing Processes Version 4.0 For Associates


Confidentiality statement


its client work locations. The sharing of this document with any person other than TCSer

would tantamount to violation of confidentiality agreement signed by you while joining

TCS.


Page 3 of 18

Introduction

The term process structure has a broad perspective and includes issues like the plant

capacity, choice of equipment, process technology, production control, work force

management, etc. The design of a manufacturing process is an important part of the

structure of operations. Hence it becomes mandatory for an operations manager to be

aware of various manufacturing processes possible, so that the best fit can be used in his

organization.

Learning Objectives

After completing this session, you would be able to

• Understand the need of manufacturing processes

• Types of manufacturing processes existing today

• Which type is best suitable for what kind of operations

• Degree of control in the process used

• Tools used for selecting and designing a process

• The procedure for selecting the process

Topics Covered

7.1 Manufacturing Process .............................................................................................. 4

7.2 Types of Processes ..................................................................................................... 4

7.2.1 Product-Focused ................................................................................................... 4

7.2.1.1 Discrete Unit Manufacturing .............................................................................. 5

7.2.1.2 Process Manufacturing ...................................................................................... 6

7.2.1.3 Delivery of Services ............................................................................................ 6

7.2.2 Process-Focused ................................................................................................... 6

7.2.3 Group Technology ................................................................................................ 8

7.2.3.1 Cellular Manufacturing ....................................................................................... 9

7.3 Process Planning Aids .............................................................................................. 10

7.3.1 Assembly Charts ................................................................................................. 10

7.3.2 Process Charts .................................................................................................... 11

7.4 Selecting the Type of Process ................................................................................. 11

7.4.1 Variety and Volume ............................................................................................ 11

7.4.2 Investment ......................................................................................................... 13

7.4.3 Economic Analysis .............................................................................................. 13

7.5 Measuring Process Performance ............................................................................. 14

Summary ....................................................................................................................... 16


Page 4 of 18

7.1 Manufacturing Process

A manufacturing process is a set of activities that transform the resources and expertise of

an organization into higher value goods and services. This involves a series of discrete tasks

or activities performed by an integrated set of people and equipment. It takes input from

the market environment and the organization’s own technological capabilities and convert

them into an economically efficient and productive activity. It is essential for an

organization to decide, on the type of process design that should be used to produce each

product or service.

7.2 Types of Processes

The various types of processes that are generally used can be classified into three broad

categories:

• Product-focused

• Process-focused

• Group technology

7.2.1 Product-Focused

Product focused is also referred to as Line flow production system; this type of process is

used mostly in production departments that are organized according to the type of product

or service being produced. In this type of process, products or services tend to flow along

linear paths without backtracking or side tracking. Items follow a similar production

sequence, which can be anything from a pipeline (for oil) to an assemble line (for televisions

or radios).

Product-focused systems offer many advantages like low unit costs, high volumes of

production and ease of planning. However, they require higher initial investments because

of the use of specialized and expensive fixed position processing equipment in the

production process.

Figure 7.1 illustrates the direct, linear and continuous paths in which raw materials,

components, sub assemblies, assemblies and finished products flow in the production of a

hypothetical product.


Page 5 of 18

Fig 7.1 Schematic layout of a product focused system

Many managers prefer this system for the benefits it offer, like

• Low labor skill requirements

• Reduced worker training

• Reduced supervision and ease of control

A product-focused production system is generally designed for three forms of production:

discrete unit manufacturing, process manufacturing, and delivery of services.

7.2.1.1 Discrete Unit Manufacturing

Discrete manufacturing is reversible process. In industry terminology discrete

manufacturing is, Manufacturing of finished product using dissimilar items that can be

counted, touched and seen. In discrete manufacturing it is possible to get raw materials, by

disassembling the finished product stage by stage in exact reverse order. For instance all

the automobiles.

Raw materials Components Sub assemblies Assemblies Finished product

(Made)

Components Sub assemblies

(Procured)

Sub assemblies

(Procured)


Page 6 of 18

7.2.1.2 Process Manufacturing

Process manufacturing produces multiple products in stages. Process manufacturing

involves the movement of materials between operations such as screening, crushing,

storing, mixing, milling, blending, cooking, fermenting, evaporating and distilling. It is leads

to irreversible changes, for instance, the petroleum industry. It is widely applied in the

cement, plastic, paper, chemical, steel and brewing industries.

Fig 7.2 Process Manufacturing

7.2.1.3 Delivery of Services

Delivery of services can also use a product-focused process. In such a system, services are

administered to customers while they move in a sequence or in a linear route. Services

delivered by waiters in restaurants make use of this system.

7.2.2 Process-Focused

In a process-focused system, all the operations are grouped according to the type of

process. The system is also referred to as an intermittent production system, because

products undergo an intermittent process of production. The system is also referred to as

job shop, as the products move from department to department in batches (jobs) that are

usually determined by customers’ orders.

As the process focused systems produce different items in small quantities on general

purpose machines, this is also called as batch production. Personnel are allocated according

to their functions for processing the equipment and the products flows through the facilities

on irregular paths as these are customized products.


Page 7 of 18

Figure 7.2 illustrates the zigzag type of routes followed by products in products flow, in this

type of production system. This system allows both sidetracking and backtracking in the

product flow route. In the figure, Job A and Job B represent two different product designs.

As per their design requirements, they are routed through different design departments to

undergo different operations in different sequences.

Job A

Job B

Receiving

raw

materials

storage

Foundry Welding

and

soldering

Lathe

section

Quality

control

Painting

and

packaging

Fig 7.2 Process focused production – A schematic layout

The system has its own merits and demerits. Two or more jobs undertaken by a production

organization may come to the same department at the same time. If the department

cannot work on both the jobs simultaneously, one of them has to be kept waiting. This is a

simple case where one job waits for its turn in one department. In large production

organizations, several jobs are kept waiting in various departments. This system may lead

to loss of time, especially when major portion of production time actually comprises the

time in which jobs are waiting to be processed in different departments. Also, process-

focused production systems require greater employee skill, more employees training, more

supervision and complex production control.

On the plus side, process-focused production systems are more flexible because of their

ability to produce a wide spectrum of products in small batch sizes. They also require less

initial investment since they use general-purpose equipment that is less expensive.

Product-focused and process-focused production systems represent two types of

traditional approaches for organizing production activities. But, in practice, many


Page 8 of 18

organizations use blends of these two approaches. For instance, a typical factory producing

television sets uses a blend of the above two systems. In the upstream part of the factory,

where components and sub-assemblies are prepared, a process-focused approach is used

because of the great variety of component designs involved. But in the downstream part of

the factory that produces finished products, a product-focused approach is used because of

the relatively small variety of designs involved. Such practices have now become very

common, as the organizations put in greater efforts to cut production costs.

7.2.3 Group Technology

Group technology is most widely used for metal working applications. In this type of

process, dissimilar machines are grouped into work centers to work on products similar in

shape and processing requirements. A group technology layout is similar to both product

layout and process layout because each cell is dedicated to a limited range of products and

each cell is designed to perform specific set of processes respectively. It is also referred to as

the parts classification and coding system. In group technology, each part manufactured is

given a code. This code has several digits, each digit representing a physical characteristic of

the part.

Organizations draw the following benefits by implementing the coding system:

• Coding gives a clear picture of the steps that are involved in producing a part.

Hence, it is easy to route the parts in production.

• Coding results in standardization of part designs. A database can be maintained

with the design details of old parts. Whenever a new product is to be designed,

the codes of existing products can be accessed to identify similar parts present.

This simplifies the process of manufacturing new products.

• Parts with similar characteristics can be grouped into families as similar products

are generally produced in similar ways, i.e. similar parts are made on the same

machines with similar tooling. Suppose an organization produces mild steel (MS)

bolts of varying specifications. If all the bolts to be produced are processed on

similar lathe machines, they can be grouped into a part family, thus simplifying

the process of production.


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7.2.3.1 Cellular Manufacturing

Cellular manufacturing is a type of group technology in which the total production area is

conveniently divided into cells, each cell consisting of a group of similar machines. For

instance, a production organization can be divided into different cells such as lathe section,

boring section, drilling section, grinding section and so on. These cells can be used to

produce those parts that are needed more often in moderate batch sizes. Within each cell,

products are similar to one another, and the flow of parts within the cell is more like a

product-focused system.

Figure 7.3 illustrate an example of cellular manufacturing layout. Here each product is

manufactured in its own cell.

Fig 7.3 A typical cellular manufacturing layout

Source: http://en.wikipedia.org/wiki/Cellular_manufacturing

Cellular manufacturing offers many advantages for organizations. Some of the advantages

of cellular manufacturing are:

DID YOU KNOW? The concept of group technology was first used for production

processes in the late 1940s in the Soviet Union. Later, it was studied and applied in India,

Japan, the United States and many European countries.


Page 10 of 18

• As similar parts to a particular cell, the machine changeover times between

batches of parts are considerable reduced. This results not only in the increase of

production capacity, but also in the reduction of production costs.

• As the workers in a particular cell are made to work on a set of similar machinery,

their costs of training can be brought down significantly. Moreover, workers gain

specialized skills in production, as they are exposed to a smaller variety of

machinery. This improves the quality of output.

• The route of production through cells is more direct, as compared to that in non-

cellular group technology. There are many advantages in this, like reduction in

material handling costs and simplified production planning and control (PPC). It

also permits quicker shipment of products.

• Parts spend less time in waiting before they are processed. This results in a

significant decrease in in-process inventory levels.

These advantages may lead to group technology and cellular manufacturing being adopted

by many organizations in the future. But all job shop production should not be converted to

group technology production because this production system is economical only for those

parts that possess a degree of standardization and are produced in moderate batch sizes.

7.3 Process Planning Aids

Process planning is essential for designing and implementing a work system that will

produce the required quantity of goods and services. It is a continuous activity, as

production volumes have to be continuously adapted to the changing demand for goods

and services.

Managers generally use assembly charts and process charts to redesign, update and

evaluate their production processes.

7.3.1 Assembly Charts

Assembly charts are used to obtain a general understanding of the entire process involved

in producing products which involve assembly of a number of parts. They provide an overall

macro view of the movement of components and sub-assemblies in the process of

DID YOU KNOW? Cellular manufacturing is an integral part of lean manufacturing, it being

capable of managing the resources quite efficiently, thereby increasing productivity.


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producing a finished product. They also show the material requirements (i.e. the list of all

major components), sub-assembly operations, quality checks and assembly operations that

are involved in making a mechanical assembly. In these charts, it is a standard practice to

indicate operations by circles and inspections by squares.

7.3.2 Process Charts

Process charts are similar to assembly charts, except that they include extra information like

description of the various steps involved, their frequency of occurrence, the time for each

step, the distance traveled and so on. Non-productive activities like storage, delay, and

transport are also included.

Process charts are used to compare alternative way of performing operations. Each activity

can be reviewed by examining whether it can be improved by eliminating a task, combining

tasks, changing the sequence of tasks, or modifying the tasks.

Process charts can be used for process planning when new products are being planned or

when existing operations have to be improved. Thus, these charts help the manager

analyze the efficiency of operations.

7.4 Selecting the Type of Process

Operations managers consider several factors before choosing a production process for an

organization. Some of these factors are:

• Variety and volume

• Investment

• Economic analysis

7.4.1 Variety and Volume

The type of process design that is appropriate for a production system depends greatly on

the range of product i.e. variety, and the volume of demand for each product model.

Figure 7.4 demonstrates the effect of batch size and the diversity of product designs on an

organization’s selection of product design.


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Fig 7.4 Influence of product diversity and batch size on process design decisions

In the figure, as we move from point P to point S, unit production cost and product flexibility

decrease. Point P represents a case in which a variety of products is manufactured. In such a

case, similar products are produced in small batches, with sometimes a batch containing

just a single unit. Process-focused job shop production systems with very high flexibility are

appropriate in such cases. As the product variety decreases and the batch size of products

increases to point Q, cellular manufacturing for the production of parts in a job shop system

becomes more appropriate.

As the product varieties decrease further and the batch size of the product increases at

point R, a product-focused batch system can be implemented. This system in relatively

inflexible and necessitates special training for employees to shift their production activities

between various products.

The other extreme, point S, represents a case where there is not much scope for product

variety and the batch size is very large. At this point, a product-focused production system

that is dedicated to the production of a non-differentiated product is appropriate. This

production system helps managers reduce unit production costs to the lowest level.

However, it is inflexible and impractical to alter the equipment to make it possible to

produce other products.

Process focused

Job shop system

Product focused

Batch system

Cellular

Manufacturing

System

Product focused

Dedicated system

Batch size

D

i

v

e

r

s

i

t

P

Q

R

S


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Thus, the number of product models that is to be produced and the volume of demand that

is expected for each product model has a significant effect on the manager’s selection of

process design.

7.4.2 Investment

In general, huge investments are required for setting up a product-focused production

system that is dedicated to the production of a particular product. Such a system consists of

inflexible equipment that is specialized to the product, and necessitates specific training of

employees for producing the product.

The capital investment required also influences the decision maker’s choice of production

system for the organization. Many organizations adjust their business strategies to meet

their production targets by using the limited funds available.

7.4.3 Economic Analysis

Each type of process design requires a different amount of funds for its implementation,

because fixed and variable costs tend to differ from one production system to another. The

greater the investments in fixed assets, the greater are the fixed costs. Variable costs differ

with the volume of products produced in each period, say one month.

The product-focused system is associated with high fixed costs. These costs are related to

the expensive machinery, automated controls and fixed-position material handling

equipment. The variable costs associated with this system are relatively low as compared to

the other types of process design.

In the case of process-focused job shop system, a comparatively lower initial investment in

fixed assets is required, but there is a steep growth in variable costs when the production

volume is increased.

The fixed and variable costs of cellular manufacturing generally lie between these two

process designs. If the availability of funds is not a major constraint, managers can select

the process design on the basis of the targeted production volume of the product.

Hence, it can be inferred that for the given product, a process-focused job shop design is

preferable if the annual production volume is less than roughly two lakhs of units. If the

production volume ranges between approximately two lakhs and three lakhs, a cellular


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manufacturing system is preferable. For higher volume, a product-focused production

system that is totally dedicated to the product is preferable.

Though managers consider factors like the variety and volume of products and the amount

of initial investment required while selecting the process design, an important factor that

should be considered is the profitability associated with the selected process design.

7.5 Measuring Process Performance

There is a lot of variation in the way performance metrics are calculated in practice. These

metrics tells not only about the firms’ progress but also suggest the improvements to be

made for the firms’ progress. Metrics like process performance gives details about the

productivity of the process and also tells that the productivity is changing over time.

Operations managers need to improve the performance of a process frequently or project

the impact of a proposed change.

These are different types of metrics used to measure the performance of a process:

• Utilization – It is the ratio of the time that a resource is actually being used

relative to the time that it is available for use. Utilization is always measured in

reference to some resource – for instance, the utilization of machine resource in

a factory or the utilization of a direct labor for producing the goods.

• Productivity – It is the ratio of output to input. Total factor productivity is

usually measured in monetary units, dollars – for instance, by taking the value of

the goods and services sold and dividing by the cost of the material, labor, and

capital investment for producing the product. On the other hand, partial factor

productivity is measured based on an individual input, labor being the most

common.

• Efficiency – It is the ratio of the actual output of a process relative to some

standard. For instance, a machine is used to package cereal at a rate of 40 boxes

per minute. If during a shift the operators actually produce at a rate of 46 boxes

per minute, then the efficiency of the machine is 120 percent (46/40).

• Run time – It is the time required to produce a batch of parts. This is calculated

by multiplying the time required to produce each unit by the batch size. The

setup time is the time required to prepare a machine to make a particular item.

Machines that have significant setup time will typically run parts in batches. The


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operation time is the sum of the setup time and run time for a batch of parts

that are run on a machine.

Consider the cereal-boxing machine which can produce at a rate of 30 boxes per

minute. The run time for each box is 2 seconds. To switch the machine from 16-

ounce boxes to 12-ounce boxes requires a setup time of 30 minutes. The

operation time to make a batch of 10000 12-ounce boxes is 21800 seconds (30

minutes * 60 seconds per minute + 2 seconds per box * 10000 boxes) or 363.33

minutes.

• Cycle time – It is the elapsed time between starting and completing a job.

Another related term is throughput time. It includes the time that the unit

spends actually being worked on together with the time spent waiting in a

queue. For instance, consider an assembly line, which has 6 stations and runs

with a cycle time of 30 seconds. These stations are placed one right after

another and for every 30 seconds parts move from one station to other, and the

throughput time is 3 minutes because, according to cycle time (30 seconds * 6

stations – 60 seconds per minute). The throughput rate is the output rate that

the process is expected to produce over a period of time, throughput rate of the

assembly line is 120 units per hour that is (60 minutes per hour * 60 seconds per

minute / 30 seconds per unit). In this case, the throughput rate is the

mathematical inverse of the cycle time.

• Process velocity – It is also known as throughput ratio. It is the ratio of the total

throughput time to the value-added time. Value-added time is the time in

which useful work is actually being done on the unit.

The process velocity of an assembly line with 10 additional buffer positions, and

assuming the positions are used 100 percent of the time, is 2.66 (8 minutes / 3

minutes).

• Little’s Law – It states a mathematical relationship between throughput rate,

throughput time, and the amount of work-in-process inventory. Little’s Law

estimates the time that an item will spend in work-in-process inventory, which

can be useful for calculating the total throughput time for a process.

Using the terminology, Little’s Law is defined as follows:

Throughput time = Work-in-process / Throughput rate

Operations Management for competitive advantage by chase


Page 16 of 18

Summary

• A manufacturing process is a set of activities that transform the resources and

expertise of an organization into higher value goods and services

• The various types of processes that are generally used can be classified into

three broad categories:

o Product-focused

o Process-focused

o Group technology

• In product-focused type of process, products or services tend to flow along

linear paths without backtracking or side tracking. Items follow a similar

production sequence, which can be anything from a pipeline (for oil) to an

assemble line (for televisions or radios).

It is of three types viz discrete unit manufacturing, process manufacturing and

delivery of services.

• In a process-focused system, all the operations are grouped according to the

type of process. The system is also referred to as job shop as the products move

from department to department in batches (jobs) that are usually determined by

customers’ orders.

• In group technology, dissimilar machines are grouped into work centers to work

on products similar in shape and processing requirements.

Cellular manufacturing is a type of group technology in which the total

production area is conveniently divided into cells, each cell consisting of a group

of similar machines.

• Process planning is essential for designing and implementing a work system that

will produce the required quantity of goods and services. Managers generally use

assembly charts and process charts to redesign, update and evaluate their

production processes.

• Operations managers consider several factors before choosing a production

process for an organization. Some of these factors are:

o Variety and volume

o Investment

o Economic analysis


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• Comparing the metrics of one company to another, often referred to as

benchmarking, is an important activity. Metrics tell a firm if progress is being

made toward improvement.

• Various parameters that can be used to measure performance of a process are

utilization, productivity, efficiency, run time, cycle time and process velocity.

Little’s Law gives a mathematical relationship to measure performance.

of 23

Chapter-8 Supply Chain Management

Version4.0

For Associates




its client work locations. Sharing of this document with any person other than a TCSer will

tantamount to violation of confidentiality agreement signed by you while joining TCS.


Page 3 of 23

Chapter-8 Supply Chain Management

Introduction

Supply Chain Management (SCM) is gaining importance in today’s business scenario. SCM

applies a systems approach to managing the entire flow of information, materials, and

services from raw materials suppliers through factories and warehouses to the end

customer. The term supply chain is derived from a picture that depicts how different

functions in an organization are linked together.

Learning objectives

After completing this chapter, you would be able to understand: purpose of supply chain

• strategies used in SCM

• problems faced while implementing SCM forces that shape a supply chain

• concept of Electronic Supply Chain

Topics covered

8.1 Supply Chain Management – An Overview ............................................................... 4

8.2 Functions Involved in SCM ........................................................................................ 4

8.3 The Value of Supply Chain Management .................................................................. 5

8.4 Business Drivers and their Respective Performance Metrics in SCM ....................... 5

8.4.1 Facilities ............................................................................................................ 6

8.4.2 Inventory .......................................................................................................... 7

8.4.3 Transportation .................................................................................................. 8

8.4.4 Information ....................................................................................................... 9

8.4.5 Sourcing ............................................................................................................ 9

8.4.6 Pricing ............................................................................................................. 10

8.5 Principles of Supply Chain Management ........................................................... 11

8.6 Forces Shaping Supply Chain Management ........................................................... 13

8.7 Supply Chain Strategies .......................................................................................... 13

8.8 Supply Chain Management Framework ................................................................. 14

8.8.1 Supply Chain Management Components ........................................................... 15

8.8.2 Supply Chain Management Enablers .................................................................. 16

8.9 Electronic Supply Chain Management .....................................................................17

8.9.1 ESCM Advantages .............................................................................................. 17

8.9.2 ESCM Implementation ....................................................................................... 18

8.9.3 Issues Relating To ESCM..................................................................................... 18

8.10 Broad Trends and Misconceptions ........................................................................ 19

Summary ....................................................................................................................... 21


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8.1 Supply Chain Management – An Overview

Supply Chain is a network, which describes various stages involved in providing value added

goods or services to customers. It includes not only suppliers and manufacturers, but also

transporters, warehouses, distributors, retailers, and so on. The number of stages in the

supply chain depends on customers’ needs, and the role each stage plays in fulfilling those

needs.

SCM integrates procurement, operations and logistics to provide value added products or

services to customers. Effective management of the supply chain help organizations meet

customer requirements in time, with the desired quality specifications, in a cost-effective

manner, through the coordination of different activities which transform raw materials into

final products and services.

SCM can provide both tangible and intangible benefits to an organization. Tangible benefits

include revenue growth, improved facility utilization, and optimized inventory management

and so on. Intangible benefits include improvement in quality, customer satisfaction and

customer and supplier relationships.

8.2 Functions Involved in SCM

Supply chain is a network of activities in which raw materials are purchased, manufactured

into goods and finally delivered to customers. It involves different stake holders in the

network from suppliers, factories, warehouses to retailers who have their own share in the

network. The three supply chain management functions are strategic, tactical, and

operational. These three decision making functions are spread across the supply chain.

� Strategic Level: Includes activities like finalizing suppliers, warehouses,

manufacturing facilities, production levels and transportation routes in the supply

chain network.

� Tactical Level: Deals with planning and scheduling the supply chain activities to

meet the actual demand.

� Operational Level: Executes plans of the previous levels.

SCM should consider these three decision making functions before rescheduling or planning

the activities in the supply chain. Coordination is important between these three decision


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making functions for optimizing the performance of the supply chain. The efficient

management of tactical and operational levels of the supply chain is essential to achieve

timely dissemination of information and accurate coordination of decisions, which, in turn,

determines the efficient, coordinated achievement of enterprise goals.

New software applications have emerged in recent years, for administrating the supply

chain at the tactical levels and operational levels. It views the supply chain as a set of

intelligent (software) agents, each responsible for one or more activities in the supply chain

and each interacting with other agents in planning and executing their responsibilities.

8.3 The Value of Supply Chain Management

The concept Value of Supply Chain Management has been developed to meet the needs

of the customer at a low cost and within a short delivery time. Value of Supply Chain

Management involves shorter time to market (for new product), obsolescence and cash

commitments, lower stock and lower unit costs of purchasing and manufacturing.

Value = (shorter times to market for new products or lower stock or obsolescence / cash

commitments to lower unit costs of purchasing or manufacturing)

There is immense pressure on the manufacturing industries to deliver a large variety of

products through large distribution channels in quick responsiveness to market and at a low

cost. This wish list is universal to all manufacturing industries; only the prominence varies

according to the marketplace they operate in. The value of SCM helps in providing

indicators to tackle the above mentioned contradictory goals.

8.4 Business Drivers and their Respective Performance Metrics in SCM

Most organizations focus on supply chain management to reduce costs and improve

efficiency of the production process. To attract customers, organizations are concentrating

on cost efficiency and responsiveness. These activities pertaining to supply chain strategy

provide competitive advantage to the organization. So, to develop supply chain

performance in terms of cost efficiency and responsiveness, organizations must pay

attention to logistical and cross functional drivers of supply chain performance. The six key

drivers that measure performance of the supply chain performance are: facilities,

inventory, transportation, information, sourcing and pricing. These drivers interact with

each other to evaluate supply chain performance in terms of responsiveness and cost


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effectiveness. Mangers are forced to choose between responsiveness and cost efficiency by

considering these drivers within the supply chain.

Competitive Strategy

Supply Chain

Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

Fig 5.1 Supply chain decision-making framework

Source:http://www.umflint.edu/~weli/courses/mgt581/project/driver.pdf

8.4.1 Facilities

Facilities are the places where raw material or products are stored, assembled, or fabricated

in the supply chain.

The two types of facilities are:

1. Product sites

2. Storage sites

Facility decisions like location, flexibility, role and capacity have an important role in the

performance of the supply chain. For example, a distributor who is known for his

responsiveness has to maintain many warehousing facilities located within customer

vicinity even though this practice increases the cost of the product. Similarly, a distributor

who is well known for his cost efficiency would have fewer warehouses to reduce the cost of

the product even if it reduces his responsiveness.


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Performance Metrics:

Following are few metrics used by most of the organizations for measuring the

effectiveness of their Supply Chain.

� Production cost per unit measures the ratio of total cost of production to the

number of items produced / manufactured. The unit of measurement varies

depending on the type of the product. Ex: per unit/ case/ pound.

� Actual average flow / cycle time computes the average time taken to produce all

units over a period such as a month or a year. The actual flow /cycle time includes

the theoretical time and delays if any. This metric must be used while they are

setting due dates for orders.

� Flow time efficiency measures the ratio of the hypothetical flow time to actual

average flow time. Low values for flow time efficiency indicate that a large fraction

of time is spent waiting.

� Average production batch size quantifies the average amount produced in each

production batch. Large batch sizes reduce production cost but raises inventories in

the supply chain.

8.4.2 Inventory

Inventory is generally classified as raw materials, work in progress, and finished goods

within a supply chain. A series of inventory policies can significantly change the cost

efficiency and responsiveness of a supply chain. For instance, a shopkeeper can be more

responsive by holding large amounts of inventory. A large inventory, however, increases the

cost, making it less cost efficient.

Performance Metrics:



� Average Inventory measures the average amount of holding inventory. Average

inventory should be calculated in units, financial value and days of demand.

� Inventory Turns measures the number of times the order is placed (inventory turns)

over in a year. It is the ratio of average inventory to either the cost of goods sold or

sales.

� Average Replenishment Batch Size measures the average amount in each

replenishment order. The batch size should be calculated by Stock Keeping Unit


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(SKU) in terms of both units and days of demand. It can be predicted by averaging

over time the between the maximum and minimum inventory (measures in each

replenishment cycle) on hand.

� Average Safety Inventory measures the average amount of inventory on hand

when a replenishment order arrives. Average safety inventory should be calculated

by SKU in both days of demand and units. It can be predicted by averaging over

time the smallest inventory on hand in each replenishment cycle.

8.4.3 Transportation

Transportation incorporates moving raw materials, and finished goods (inventory) from one

point to other point in the supply chain. It may involve different combinations of modes

(road, rail, air and sea) and routes, each with its own performance characteristics.

Transportation preferences have a great impact on supply chain cost efficiency and

responsiveness. For instance, Dell has planned its supply chain to meet customer orders

with less lead time. They are able to satisfy customers with high level of responsiveness at

high cost.

Performance Metrics



� Average Inbound Transportation Cost normally determines the cost of

transporting the product into a facility as a percentage of sales or Cost of the Goods

Sold (COGS). Theoretically, this cost should be calculated per unit brought in a

facility, but this can be difficult. The inbound transportation cost is usually included

in COGS. It is helpful to separate this cost by supplier.

� Average Inbound Transportation Cost per Shipment measures the average

transportation cost of each lot received. Along with the shipment size (lot) received,

this metric classifies the opportunities for better economies of scale in inbound

transportation.

� Average Outbound Transportation Cost measures the cost of transporting

product out of a facility to customer. Normally, this cost should be calculated per

unit shipped, but it is frequently calculated as a percentage of the sales. It is useful

to separate this metric by customer.


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� Average Outbound Transportation Cost per Shipment determines the average

transportation cost of outgoing lot. Along with the outgoing lot or shipment size,

this metric classifies opportunities for better economies of scale in outbound

transportations.

8.4.4 Information

Information includes all data and analysis related to facilities, inventory, transportation,

costs and customers across the supply chain. It is one of the important drivers in total supply

chain because it directly affects the performance of other drivers. Accurate information

allows management to make supply chain more responsive and cost efficient. For instance,

a retailer will forecast the demand of the stock based on previous forecasts information,

and will stock the inventory to meet the demand. This is possible only when the information

for previous months or years is available.

Performance Metrics



� Frequency of Update recognizes how frequently each forecast is updated. The

forecast must be updated more frequently than a decision re-examined, so that

large changes can be identified and corrective action be taken.

� Forecast error determines the variation between the forecasted and actual

demand. The forecast error assists in measuring the uncertainty related to safety

inventory or excess capacity.

� Variance from Plan recognizes the variation between the planned inventories

/production and the actual values. These variances are used to identify shortages

and surpluses.

8.4.5 Sourcing

Sourcing is a means of designating the right roles and responsibilities to the right

person(s)/department(s). This also specifies the activities that are to be performed by the

firm and the activities that are to be outsourced.

Supply chain activities involve decisions related to production, storage, transportation, or

the management of information. These decisions are made at the strategic level, which

decides what functions to be performed by the firm and what functions should be


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outsourced. Sourcing decisions are considered very important as they affect both the

responsiveness and efficiency of the supply chain. For instance, Nokia outsourced much of

its production to contract manufactures in China, which improved its efficiency but its

responsiveness suffered because of the long distance.

Performance Metrics



� Range of Purchase Price determines the variation in purchase during a specific

period. The objective is to find out if the price is correlated to the quality purchased.

� Average Purchase Quantity determines the average quantity purchased per order.

The objective is to find out whether a sufficient level of aggregation is happening

across locations when buying an order.

� Supply Lead Time determines the average time elapsed between placing a stock

order with the supplier and receiving it.

8.4.6 Pricing

Pricing is the process of fixing a price for products or services. Pricing affects the behavior of

the buyer, and consequently affects the performance of the supply chain. For instance, a

logistic company maintains different sets of prices for different customer requirements.

Performance Metrics



� Days Sales Outstanding determines the average time elapsed between selling the

product and receiving the cash for it.

� Average Sale Price determines the average price at which a supply chain activity is

completed in a given period. The average price is calculated by weighting the price

with the quantity sold at that price.

� Average Order Size determines the average quantity per order. The average sale

price, order size, incremental fixed cost per order, and incremental variable cost per

unit help estimate the contribution from performing the supply chain activity.


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Supply Chain Management should focuses on both logistics and cross-functional drivers in

order to increase the supply chain surplus. In recent years, cross functional drivers have

become important in raising the supply chain surplus; however, logistics continues to be the

major contributor. Supply Chain Management focuses on the three cross functional drivers

to increase the supply chain surplus.

For more details about performance metrics and driver of SCM refer to “Supply chain management” by

sunil chopra, peter meindl and D.V kalra.

8.5 Principles of Supply Chain Management

Managers focus on improving the effectiveness of the supply chain in order to service the

needs of customers, fulfill their expectations and meet the organizations’ growth and

profitability objectives. If an organization follows the principles of Supply Chain

Management, it can attain a balance between customers’ expectations and its growth and

profitability objectives.

An organizations’ supply chain is based on the following principles:

1. Segment customers based on service needs – Most organizations segment

customers based on the industry, product or trade channel without

differentiating their specific requirements. In order to serve customers properly,

organizations should segment markets based on the specific needs of

customers. Once the market is segmented, organizations can develop a supply

chain plan that takes into account the specific requirements of the different

segments. Based on the segments, merchandising, distribution and other supply

chain plans are developed and implemented.

2. Customize the Supply Chain Management network – Companies usually

design their logistics system either to meet the average service requirements of

all customers or to satisfy the toughest requirements of a single customer.

However, both these approaches lead to poor resource utilization. For instance,

an organization may need to follow two different logistics networks to service

two different types of customers, whose lead times are significantly different. In

DID YOU KNOW? The earliest work in the history of supply chains was done by Geoffrion and

Graves in 1974, when they introduced a multi commodity logistics design model for optimizing

annual finished product flows.


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order to meet specific requirements, organizations have to customize their

logistics network so that they can supply items to customers based on their

specific requirements.

3. Monitor Demand Forecasts carefully and land Accordingly – Traditionally,

each department in an organization makes demand forecasts for the same set of

products independently. But the assumptions and measures made by each

department differ significantly from those of other departments. Therefore,

their forecasts also vary widely. Such forecasts make the supply chain inefficient.

Therefore, a process which can recognize the needs and demands of different

functional groups is required. The organization should ensure that every link in

the supply chain is involved in collaborative forecasting and should provide the

required capacity for all operations. The process should foresee surges and

slumps in demand, if any, from ordering patterns.

4. Differentiate product closer to the customer – Organizations traditionally set

their production goals on the basis of demand forecasts. They also kept a

cushion of extra inventories of finished products to offset forecast errors. They

assumed that the lead time to convert raw materials into finished goods was

constant. They could also cut costs by reducing their set up time, and by using

just-in-time techniques, and so on. Today, many manufacturers are recognizing

the greater potential of using non-traditional strategies like mass customization.

They are questioning the validity of assuming fixed lead-time for production.

Manufacturers can gain competitive advantage if they reduce the lead-time

along the supply chain and the conversion time (from raw material to finished

product) and tailor their products to the requirements of specific customers.

5. Strategically manage the sources of supply – Organizations can derive

significant cost advantages if they maintain strong and long-term relationships

with their suppliers, but they should not forget that their suppliers also play a

significant role in reducing cost. On the basis of market positions and industry

structure, manufacturers can decide how to approach suppliers – invite

competitive biddings, enter into long-term contracts, make strategic alliances,

outsource, and so on.

6. Develop a technology strategy across the supply chain– Information is very

important to any organization. Organizations should maintain information

technology system. With the help of IT systems, organizations can predict


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demand and satisfy the customers in time. Generally information systems are

classified into three types: short term, mid-term and long term. These

information systems create opportunities to change the supply chain, from

slashing transaction costs through electronic handling of orders, invoices, and

payments. Further they can also minimize inventories through vendor-managed

inventory programs.

7. Adopt channel-spanning performance measures – Instead of just having

inward-looking performance measures, organizations should develop a

comprehensive system to overhaul performance of the supply chain system. By

establishing common measures, organizations can assure that all the supply

chain entities are working towards common goals and objectives. As all the

activities in the supply chain are interdependent and interrelated, non-

performance of one entity of the supply chain is reflected in the entire supply

chain.

8.6 Forces Shaping Supply Chain Management

Various business and economic forces influence the effectiveness of a supply chain. They

include:

• Consumer demand

• Globalization

• Competition

• Information and communication

• Government regulation

• Environment

8.7 Supply Chain Strategies

The four broad types of supply chain strategies that exist today are:

• Efficient supply chain – This supply chain strategy is aimed at creating highest

cost efficiency. Strategies like optimization techniques are used for production,

non-value added activities and economies of scale are achieved for increasing

supply chain surplus. Also, information linkages are established to ensure the

most efficient, accurate, and cost-effective transmission of information across

the supply chain to bring cost efficiency.

• Risk – hedging supply chain – this supply chain strategy is aimed at collecting

and distributing resources in a supply chain so that the risks in supply disruption


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can be shared. A single entity in a supply chain can be easily exposed to supply

disruptions, but if there is more than one supply source or if substitute supply

resources are available, then the risk of disruption is reduced.

A company may, for example, increase the safety stock of its key components to

hedge against the risk of supply disruption, and by sharing the safety stock with

other companies who also need this key component, so that the cost of

maintaining this safety stock can be shared. This strategy is common in retailing,

where different retail stores or dealerships share inventory. Information

technology is important for the success of these strategies since real-time

information on inventory and demand allows for the most cost-effective

management and trans-shipment of goods between partners sharing the

inventory.

• Responsive supply chain – This supply chain strategy is intended at being

responsive and flexible to the altering and varied needs of the customers.

Companies use build-to-order and mass customization processes as a means to

meet the specific requirements of the customers.

• Agile supply chains – This supply chain strategy is intended at being responsive

and flexible to buyer needs, while the risks of supply scarcity or disruptions are

hedged by gathering inventory and other capacity resources. These supply

chains basically have strategies in place that join the strengths of hedged and

responsive supply chains. They are agile because they have the ability to be

responsive to the changing, diverse, and unpredictable demands of the

customers on the front-end, while minimizing the back-end risks of supply

disruptions.

8.8 Supply Chain Management Framework

The supply chain network is a well integrated system which helps an organization in

performing basic operational functions. Its framework involves several components and

enablers which define key functions, processes and best practices. The Supply Chain

Management framework is mainly dependent on:

DID YOU KNOW? The most commonly used supply strategy is Hub and spoke t in which

materials are brought to one central location and then sorted for delivery to respective

destinations.


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• SCM components

• SCM enablers

SCM components and enablers helps in defining the overall supply chain performance.

8.8.1 Supply Chain Management Components

SCM is mainly divided into seven components which represent business processes and

practices. They incorporate all the activities that are necessary for maintaining and

developing relationships with suppliers, keeping the organization’s marketing and financial

objectives in focus.

The seven SCM components are:

• SCM leadership – SCM leadership component provides SCM system direction,

and designs and assists in deployment and improvement of the SCM system.

• SCM strategy – A firm’s SCM strategy component focuses on how different

entities of the supply chain perform as a group. The firm’s resources are

allocated to different supply chain operations and these resources are aligned

with the firm’s strategies.

• Operational planning – This component describes about the operational

requirements for sustaining a supply chain. These requirements are specified in

terms of tasks, resource requirements and measurements.

• Business relationship management – Organizations are dependent on the

supply chain partners as much as these partners are dependent on them. Thus,

it is important to have an environment conducive for communication and

negotiation between the organization and its supply chain partners. The nature

of the communication varies depending on the organization’s relationship with

its key suppliers. Organizations normally share operational, financial and

marketing information with their supply chain partners. In this way, trust

develops between them.

• Order-to-delivery process – The order-to-delivery process defines how

effectively an organization can direct the flow of products from suppliers to the

company. It includes certain processes such as order releases, receiving,

inspection of incoming material, accounts payable, and materials handling.

• Quality and performance management – The quality and performance

component is concerned with the initiatives that organizations and suppliers

take towards improving, and maintaining the quality standards.


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• Human resources management – The human resources component deals with

the training of personnel in order to improve their skills, knowledge and

attitudes that help enhance the performance of supply chain. Employees should

understand the diverse supply chain activities and should be able to perform the

activities competently.

8.8.2 Supply Chain Management Enablers

The supply chain management enablers are responsible for the overall performance of the

SCM. These enablers are a group of well defined actions and techniques that encourages

and supports firm’s commitment for high performance of SCM practices.

The six SCM enablers are as follows:

• Alignment – Alignment refers to the matching of corporate and business unit

goals. It also includes consistency in processes, actions, and decisions across the

business units to support the supply chain management processes. It is a key

organizational behavior within the supply chain management system. As the

organizations function, with the help of the coordinated efforts of different

processes, it is of critical importance to have well-coordinated cross-functional

and inter-company activities. This ensures that stakeholders and business

processes work towards consciously determined and mutually recognized goals

and objectives.

• Customer-supplier focus – The basic objective of the customer-supplier focus is

to prepare an organization’s processes in such a way that they are able to

understand and react quickly to customer requirements. For organizations like

Boeing, which largely depends on the suppliers for their requirements, the

health and well-being of the suppliers is critical to provide value to the

customers.

• Design – For products, processes, systems and services, design is the important

thing that ensures their successfulness. Design is the comprehensive process

that, after considering feedback from customers and suppliers, defines the

overall requirements both external and internal to the organization. Designs

help organizations develop products, services and business processes that

satisfy the requirements of both customers and suppliers.

• Measurement – Measurement refers to the quantification of information about

inputs, outputs, and performance dimensions of products, process and services.


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Measurement is the tool used by organizations to evaluate the performance of

different processes and supplier activities.

• Participation involvement – Stakeholders must be involved in the decision-

making process in order to ensure the success of products, processes, systems,

and services. Utilization of available resources in terms of the talents and

energies of employees and external stakeholders improve organizational

efficiency and performance.

• Periodic review – Evaluation of the performance of the processes, programs

and systems, on a periodic basis, supports continuous improvement.

8.9 Electronic Supply Chain Management

In an organization, the SCM’s core focus is to integrate its suppliers, the manufacturing

process and its customers. As with most other aspects of business, information technology

has become a part of SCM. Internet has provided organizations the capability to integrate

the entire supply chain, from raw material sourcing to delivery of the product to the

customers. Electronic Supply Chain Management (ESCM) is business-to-business

integration through the internet.

8.9.1 ESCM Advantages

The advantages of ESCM include timely order-processing, improved inventory tracking and

management, improved accuracy in order fulfillment, support for JIT manufacturing, and so

on.

Other advantages are:

• Cost saving – By integrating different supply chain levels, organizations can

realize huge cost reductions. As the ESCM integrates supply chain partners with

the help of the Internet, the cost and time involved in communicating with

them is reduced significantly.

• Reduction in inventory levels – ESCM consequences in an extended

organization that summarizes the activities of the suppliers. The extended

organization structure provides instant information about the status of

inventory levels to the suppliers. As a result, inventory levels are replenished as

DID YOU KNOW? Major SCM vendors today are SAP, Oracle, JDA and Manhattan

Associates.


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and when required. In today’s business arena, suppliers are electronically

connected and get real time information about the inventory level ll. Therefore,

there is no need to carry high inventory.

• Reduction in procurement costs – An organization can reduce its procurement

costs significantly by providing its suppliers instant access to information. With

this the supplier can access the information regarding inventory and

procurement automatically. The purchasing department can reduce its

involvement in minor transactions and focus on higher value activities like

vendor selection, sourcing, and managing relationships with vendors/suppliers.

• Reduction in cycle time – ESCM ensures that the organizations get timely and

accurate forecasts with regard to product or service demand. This allows proper

production planning based on actual requirements, resulting in reduced cycle

time for production activities and reduction in stock-out costs.

8.9.2 ESCM Implementation

In order to improve the implementation of ESCM, the following activities should be

undertaken:

• Understand and evaluate the level of integration within the organization.

• Determine the number of suppliers who have direct influence over the products

or services that are delivered to the customers, across the entire supply chain.

• Divide suppliers into different categories, namely, first tier, second tier, and so

on.

• Define the customer base in term of sales, profitability, size, and so on.

• Improve the information infrastructure within the organization to accommodate

ESCM requirements.

• Constitute a team with representation from various functions within the

organization and with representatives from suppliers and customers to plan and

carry out the implementation.

• Identify leaders who are capable of guiding the implementation process

competently.

8.9.3 Issues Relating To ESCM

The purpose of ESCM is to allow effective sharing of information like forecasts and orders

among the supply chain partners. Utilization of data relating to customers and suppliers


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through internet technologies results in a virtual corporation that facilitates real time

information flow between various supply chain partners.

Although ESCM has many benefits, there are issues that must be addressed to improve its

efficiency. These issues include:

• Security issues – Security is the most sensitive issue when information is shared

or exchanged over the Internet. An organization has to ensure that only the

rightful recipient views the information. One way of doing this is to encrypt the

data as this ensures that the data is secure and members of supply chain can

view only that information which is relevant to them.

• Changes to existing business processes – An electronic supply chain transforms

a business process significantly. Changes arise in the way companies deal with

each other. All channel partners should be willing to exchange information such

as inventory levels, production schedules, forecasts, promotion plans, and so on.

Sometimes, partners may be apprehensive of sharing too much information. In

order to tide over such apprehensions, a culture of openness and trust should be

developed between all the channel partners.

8.10 Broad Trends and Misconceptions of SCM

When developing a demand chain, channel partners must be aware of broad demand trends

in consumer markets, which are based on demographics, lifestyle and other social factors.

For instance, due to the fall in the birth rate in industrialized nations, the size of the average

family has shrunk, thus bringing down the number of new consumers. Further, due to

increase in automation, the size of the workforce has also shrunk. As a result, organizations

in industrialized countries are looking for new markets and segments.

In new markets, organizations have to perform efficiently with few resources (time, money,

human resources, and so on.). Therefore, supply chain partners need to change their

operations and strategies. These changes influence the way in which consumers purchase

goods. Failure to acknowledge these changes lead to two common misconceptions about

the working of the demand chain. The first misconception is that customers will always buy

from retailers. This may be true in most cases, but the trend is changing. Now consumers

are actively looking for new sources to obtain products and services. In their endeavor to

get value for money, they are prepared to buy products and services from any channel


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member who can provide them with quality products, timely delivery and a reasonable

price. Therefore, through their buying habits, consumers are now determining which supply

chain entity would succeed and which would fail.

All members of the supply chain must work in unison to improve the profitability and

performance of all members. Consumers’ investments in terms of time, attention, and

money on a particular business indicate which business will succeed in the future. Channel

partners should realize that if consumers select a particular retail outlet for fulfilling their

needs and wants, they are affecting the whole supply chain.

The second misconception about demand chains is that business-to-business companies

need to monitor only their customers. In other words, since they are not dealing directly

with end-users, they do not need to be concerned about them. In industrial or business-to-

business organizations, solving your customers’ problems sometimes means solving your

customer’s customers’ problems. All customer/industrial demand for products or services

across the supply chain is derived from end-user demand. Business-to-business customers

will not order more parts if consumers are not buying their end products.


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Summary

• The supply chain is a network, covering the various stages in the provision of

products or services to customers. It includes not only manufacturers and

suppliers, but also transporters, warehouses, distributors, retailers, and so on.

• The supply chain is a network of suppliers, factories, warehouses, distribution

centers, and retailers through which raw materials are purchased, transformed,

and delivered to customers. The three supply-chain management functions are

strategic, tactical, and operational.

• Strategic Level: It deals with the selection of suppliers, transportation routes,

manufacturing facilities, production levels, and warehouses in the supply chain

network. Tactical Level: In the supply chain, tactical level plans and programs

are scheduled to meet actual demand. Operational Level: The operational level

executes the plans of the strategic and tactical levels.

• The major goal of supply chain strategy is to have balance between

responsiveness and cost efficiency that meets with the competitive strategy. So

to improve the performance of the supply chain in terms of cost efficiency and

responsiveness, organizations must give attention to logistical and cross

functional drivers of supply chain performance. They are six key drivers which

measures the supply chain performance are facilities, inventory,

transportation, information, sourcing and pricing.

• The principles on which an organizations’ supply chain is based are: segment

customers based on service needs customize the logistics network

a) plan based on market demand

b) enhance ability to meet customer requirements

c) improve relationships with the suppliers

d) devise a complete supply chain performance measure

• Various business and economic forces influence the effectiveness of a supply

chain. They include consumer demand, globalization, competition, information

and communication, government regulation, and environment.

• The four broad types of supply chain strategies that exist today are: efficient

supply chains, risk-hedging supply chains, responsive supply chains and agile

supply chains.


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• The SCM components represent business processes and practices. They

incorporate all the activities that are necessary for maintaining and developing

relationships with suppliers, keeping the organization’s marketing and financial

objectives in focus. The seven SCM components are SCM leadership, SCM

strategy, operational planning, business relationship management, order-to-

delivery process, quality and performance management, and human resources

management.

• Enablers are responsible for the overall performance of the SCM. The SCM

enablers are a group of carefully conceived and defined behaviors and

approaches that allow, encourage and reinforce a firm’s commitment to high

performance SCM practices. The six SCM enablers are alignment, customer-

supplier focus, design, measurement, participation/involvement, and periodic

review.

• Electronic Supply Chain Management (ESCM) is business-to-business

integration through the Internet.

• The advantages of ESCM are many, and include timely order-processing,

improved inventory tracking and management, improved accuracy in order

fulfillment, support for JIT manufacturing, etc.

• Although ESCM has many benefits, issues related to security and changes to

existing business processes must be addressed to improve the efficiency of

ESCM.

of 20

Chapter-9 Logistics Management

Version4.0

For Associates

Certificate in Basics of Manufacturing


Page 3 of 20

Chapter-9 Logistics Management

Introduction

Logistics management is of pivotal importance in business today. It plays a key role in

planning, implementing and controlling the effective flow, storage of goods and related

information from point of origin (Seller) to destination (Buyer) requirements. Logistics

management deals with different functions such as warehousing, transportation that are

linked together in-order to gain profit in business.

Learning objectives


• The purpose of Logistics management

• The various warehouse functions

• The warehouse technologies

• The concept of inventory

• The methodology to control inventory

• Different modes of transportation

Topics covered

9.1 Logistics ..................................................................................................................... 4

9.2 The Logistic Goals...................................................................................................... 4

9.3 Logistics Framework ................................................................................................. 4

9.4 Warehouse ................................................................................................................. 5

9.4.1 Needs of Warehouses ........................................................................................... 6

9.4.2 Warehouse Functions ........................................................................................... 7

9.4.3 Factors Impacting Site Selection of a Warehouse ................................................. 9

9.4.4 Warehouse Operations ......................................................................................... 9

9.4.5 Warehouse Technology Enablement .................................................................. 10

9.4.5 Advantages of Warehouse: ................................................................................. 12

9.5 Inventory .................................................................................................................. 12

9.5.1 Inventory Management ...................................................................................... 12

9.5.2 Inventory Management Objectives .................................................................... 13

9.5.3 Inventory System ................................................................................................ 14

9.5.4 Controlling Inventory.......................................................................................... 14

9.6 Transportation......................................................................................................... 16

9.7 Reverse Logistics ......................................................................................................17

Summary ....................................................................................................................... 18


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9.1 Logistics - Definition

Council of Logistics Management (1991) defined Logistics as: part of the supply chain

process that plans, implements, and controls the efficient, effective forward and reverse

flow and storage of goods, services, and related information between the point of origin

and the point of consumption in order to meet customers’ requirements.

The process of anticipating customer needs and wants; acquiring the capital, materials,

people, technologies, and information necessary to meet those needs and wants;

optimizing the goods- or service-producing network to fulfill customer requests; and

utilizing the network to fulfill customer requests in a timely way (Tilanus, 1997).

Source: http://www.siam.org/journals/plagiary/1657.pdf

9.2 Logistic Goals

The goals of logistics are as follows:

• To complete the activities of logistics in an economical manner

• To place and receive orders easily, accurately and satisfactorily

• To minimize the time between placing orders and receiving merchandise

• To coordinate shipments from various suppliers

• To hold enough merchandise to satisfy the customer demand and to avoid stock-

out situations

• To arrange merchandise on the sales floor efficiently

• To process customer orders efficiently

• To communicate and collaborate with other supply chain members

• To handle returns effectively and minimize damaged products

• To monitor logistics performance

• To arrange for backup plans in case of breakdown in the system

9.3 Logistics Framework

Logistics is the process of planning, implementing and controlling the flow and storage of

goods and related information from point of origin (Seller) to destination (Buyer) to

conform to customer requirements.

Logistics is the business planning framework for management of material, service,

information and capital flow. The framework includes inbound, outbound, external and


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internal movement and return of materials. Logistics is a tool to bridge the gap between

supply and demand where the origin and destination may be separated by long distance

and deliver the right goods at right time, right place and in a manner the consumer/buyer

wants it.

Figure No: 9.1 Logistics Framework

The term Logistics Management encompasses the total flow of materials starting from raw

materials procurement to the delivery of finished products to consumer. The efficiency of

Logistics depends on the following three concepts:

• Warehouse Management

• Inventory Management

• Transportation

9.4 Warehouse Management

A warehouse is required to:

• stock products,

• ensure inventory availability

• enable consolidated bulk buying

• make distribution efficient and cost effective

Earlier, warehouse was just a storage location to stock and distribute products. Its functions

were limited to being a buffer between the production and actual demand; which ultimately

led to a lot of inventory stocking at the warehouse, making it a huge cost centre. As the

methods of transportation began to evolve, organizations started viewing warehousing as a

means of optimizing their businesses. Today the speed of reaching a customer has become


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a competitive advantage and hence, the functions of distribution and storage are being

used to improve customer service.

Figure No: 9.2 Warehouse Blueprint

9.4.1 Need for Warehouses

Warehouses are used for storing of goods until a customer places an order. The need for a

warehouse arises because, production and consumption of products do not happen

simultaneously.

Warehousing is essential for the following reasons:

• Seasonal Demand

Some products have demand only in some seasons, for example: air conditioners in

summer, woolen wear in winter or raincoats in the rainy season. To meet the seasonal

demand of the product, an organization has to produce goods throughout the year and

these goods are stored in warehouses.

• Price Stabilization

Scarcity of raw materials or components may create price variations in the market. In order

to maintain price stability, organizations store sufficient quantities of goods and raw

materials in warehouses.


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• Large-scale Production

Manufacturers produce products in large scale to be cost-effective, these products are

stored in a warehouse.

• Quick Supply

Any product that is produced should be stocked in a warehouse, which is near to the place

of consumption, so that it is easy to the supply to consumers at the time of their need.

• Continuous Production

To enable continuous production, raw materials are procured beforehand and are stored in

a warehouse.

9.4.2 Warehouse Functions

The various functions involved in warehousing are as follows:

• Managing the in-flow of Goods

The activities involved are checking, recording of receipts, allotting storage space and

depending on the type of the goods, performing quality control checks, unpacking and

repacking.

• Reserve Storage

Reserve storage is back-up storage in a warehouse, which occupies large space in most of

the warehouses. When goods are delivered, they are moved into reserve storage and the

location of the storage place is entered into warehouse information system.

• Replenishment

The process of movement of goods from reserve storage to order picking location in a

warehouse for achieving high levels of order fill and avoid stock outs in warehouse is

replenishment of a warehouse.

• Order Picking

When customers place orders, the goods are selected from the order picking stock

according to their required quantities and time. Order picking is a time consuming process

as it involves splitting of large quantity into custom sizes to meet customers order

requirements. For effective customer service, it is important to design and establish a

mechanism of picking systems. In addition to this, a systematic operation of work force has

a major role in achieving higher warehouse performance in a cost effective way.


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Figure No: 9.3 Warehouse Layouts

• Secondary Sortation

When there are many small orders under a good or pallet category, the small orders are

considered to be one order and are divided into individual orders before dispatch. This

secondary sorting is done to achieve better lead time.

• Sortation

Information Technology (IT) has a prominent role in warehousing. It helps in keeping record

of information such as stored goods, ordered goods and goods yet to be received. Recent

developments in IT help in sorting the goods according to specific customers’ orders,

immediately on arrival. To meet the customers’ order in time, sometimes by using high-

speed sortation conveyors, goods directly go to order collation. For example, this type of

approach is used for grocery produce by major supermarkets.

• Collate

After completing the picking process, goods are brought together and are combined as

Completed Order (ready for dispatch to customers). Collate activities include packing the

goods into dispatch outer case/cartons, and labeling them.

• Dispatch

After completing the collate process, goods are loaded into outbound vehicles for onward

dispatch to the distribution centre. Finally, these are transported to customer.


Page 9 of 20

9.4.3 Factors Impacting Site Selection of a Warehouse

The following factors are considered while selecting a site for a warehouse:

1 Dependency on imports: If the imports constitute a major chunk of the items stocked in

the warehouse and are likely to grow in near future, it is better to have a warehouse

near a port along the coastline, depending upon the origin of goods and preferred route

of shipping goods for majority of importers.

• Infrastructure availability in terms of highways and rail.

• Available labor pool in the area.

• Investments made by port authorities to improve the port infrastructure (available

terminals, berths and so on) to cater to future demand.

• Expenses associated with transportation costs for transporting goods between

ports, terminals, DCs and so on.

Note: A Distribution Center (DC) is a warehouse where the products from various supply

points are received and (value added) processes like consolidation, break pack and re-

palletization and cross-docking are carried out to reduce the distribution costs and increase

supply chain efficiency. In simple terms, its main function is distribution rather than

storage.

• Political environment in the area.

Models such as Factor Rating model, Load-distance model, Transportation model and so on

are available to carry out location analysis.

9.4.4 Warehouse Operations

The presence of a warehouse in supply chain depends on forecasting at the store/ DC level,

purchase order placement and generation of replenishment plan. The warehouse personnel

thereafter plan scheduling and once the goods are received, the unloading and unpacking

operations are triggered. These goods are then put away in stocking area. Goods received

can be classified into two types; those which are to be stored and those which are to be

cross-docked immediately. The goods to be stored are then sent to the storage area where

they are stored depending on factors such as shelf life, dimensions and so on. Order picking

is the method of recovering items from storage locations as a reply to the customer order. It

forms a part of outbound operations of the warehouse and involves a lot of manual labor

and hence is considered an important activity. Warehouses use different types of order


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picking systems based on their requirements. There could also be goods which are cross

docked and kept in storing area before being shipped.

Figure No: 9.4 Warehouse Operations

The supply chain has altered into a network connecting various channels due to factors

such as customer awareness, mounting demands, shorter product life cycles and increased

quality requirements. This has lead to the retailer moving from bulk ordering to small

orderings and as a result the emphasis on DC has increased.

9.4.5 Warehouse Technology Enablement

Today, technology is not only being used to eliminate the paper work wherever possible,

but is also being used to improve the information and goods flow. This in turn helps in

improving service level, productivity, flexibility and accuracy. This section discusses the

effect of technology enablement on warehouses.

9.4.5.1 Warehouse Management System

Initially, Material Requirements Planning (MRP) was used for controlling and planning the

raw material. Later, MRP was replaced with Manufacturing Resource Planning (MRP-II)

incorporating all the crucial aspects. MRP II systems added new functions such as

scheduling and capacity planning. Soon after, MRP-II was replaced with Enterprise

Resource Planning (ERP), which comprised all the basics of MRP-II and added new

functionalities such as full-fledged financials, customer and vendor management. Today,

ERP is spread in all the functions of management. Earlier, a system was used to supervise

warehouse operations and functions such as storage and movement of materials. Later, this


Page 11 of 20

role was performed by Warehouse Management System (WMS) in all light manufacturing,

transportation management, order management, and complete accounting systems.

Various components of WMS cater to all the activities within a warehouse, from

appointment to scheduling, receiving, put-away and slotting, to picking, Value Added

Services (VAS), packing and labeling and so on. The WMS is flexible to handle full case, split

case or any other kind of shipment.

9.4.5.2 Radio Frequency Identification Device

Radio Frequency Identification Device (RFID) uses radio signals to transmit data between a

tag or transponder and a device (which is commonly called either reader or writer).

RFID tags are of two types:

• Active tags

• Passive tags

Active Tags: These tags consist of chips, antennas and battery with some protective

shields, attached to the item that is to be identified. It can transmit data and also receive

data with help of battery; hence, they are called active tags. It is used for Real-Time

Location Systems (RTLS). RTLS are a type of local positioning system that allows tracking

and identifying the location of objects in real time.

Passive Tags: A passive tag consists of an encoded label within the label material, with

printed text and bar code to support legacy operations. It is smaller in size and is less

expensive than active tags. These tags are preferred for most supply chain applications.

RFID tags are used in warehouses and distribution centers depending on the importance of

items and operations. For example, Smart labels or passive tags are attached to cases and

pallets of items, which convey information about the items in the warehouse. However,

items such as industrial solvents and other expensive machinery use active tags (with chips

and antenna) to provide information of permanent asset and location identification.

9.4.5.3 Barcode or Universal Product Codes

Barcode is a machine readable code. This code consists of information about the item to

which it is attached. They are represented by numbers, alphabet and linear parallel lines.

They are scanned by special optical scanners called barcode readers and with the help of

interpretive software, desktop and smart phones. Since barcodes are universally same for a


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product, these are called Universal Product Codes. These barcodes were initially used to

label railroad cars but today, they are used for retail outlets.

Retailers use barcodes not only for product identification and cost management, but also

for inventory control in warehouses. Hence, barcode came into use in warehouses. It is easy

to control the inflow and outflow of goods in warehouses and to identify types of goods

present through barcodes.

9.4.6 Advantages of Warehouse

Warehousing offers the following advantages:

• Protection and Preservation of goods

• Regular flow of goods

• Continuity in production

• Convenient location

• Easy handling

• Facilitates sale of goods

• Availability of finance

• Reduces risk of loss

9.5 Inventory Management

Inventory is the stock of any item or physical resource (raw materials, finished products,

component parts, supplies, and work-in-process) with the intent of selling it or transforming

it into a finished product. The purpose of inventory is to meet customer demand by

avoiding stock-out of materials which may cause stoppage of production. The real

challenge is to get right goods, at right time, at right quantity and right place.

9.5.1 Inventory Management

Inventory Management is a group of concepts, policies, practices and procedures for

determining what items to order, how much to order, when the items are needed, when to

order them and how to store them. The activities of Inventory Management are directed at

getting right product in the right quantity and the right condition, at the right place, at the

right time, for the right customer at the right cost. Inventories may consist of finished goods

ready for sale, parts or intermediate items, work-in-process or raw materials. The Inventory

system updates the database and captures the transactions whenever it happens, for


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reporting and audit purposes. Daily, weekly and monthly reports are generated based on

the transaction activity.

Figure No: 9.5 Inventory Management

9.5.2 Inventory Management Objectives

• Maximizing Customer Service

�� By increasing the percentage of orders shipped on schedule

�� By increasing the percentage of line items shipped on schedule

�� By reducing the idle time due to material and component shortages

• Increasing Production Efficiency

�� Maintaining buffer stock for smooth production flow

�� Maintain a level work force for smooth production flow

�� Allow longer production runs and quantity discounts

• Minimize Inventory Related Investments

�� Marinating good inventory turnover

�� Weeks (or days) of supply


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9.5.3 Inventory System

Inventory System is the set of policies and controls that monitor the levels of inventory and

determine what levels should be maintained, when the stock should be replenished, and

how large the orders should be.

Inventory system is used to:

• provide inventory reports to support shop floor, financial and managerial needs

• provide material tracking capabilities

• process engine assembly build-up and charge-off activity

• process components and sub-assembly build up

• develop interfaces with other systems to provide synchronization of files

9.5.4 Controlling Inventory

Controlling inventory is the primary objective of today’s competitive retailing because

inventory involves the majority of the finances of the organization. With proper planning

and forecasting, inventory can be controlled to increase the profit of the organization. The

following five step process has been designed to help businesses use the resources

optimally:

1. Plan Inventory

Inventory includes raw materials, goods in transit or goods stored in the plant that are to be

sold. The best way to plan inventory is to find out the Economic Order Quantity and

Reorder Point for a product so that the next lot arrives only after the last item has been used

or sold. Economic Order Quantity helps in availing discounts from the manufacturer, and to

reduce the amount of time goods spend in shipment.

2. Establish Order Cycles

Demand can be predicted when the ordering of quantities can be accurately forecasted by

deciding on regular ordering levels to avoid stock-outs and to minimize total costs. By

applying the principle of Economic Order Quantity, aggregate shipping costs, cost of

preparing an order and so on can be reduced. A customized system should be designed for

different businesses to include items critical to the organization.

On the other hand, if the business has seasonal demand, it is critical to identify these cycles

to avoid running out of products in the middle of a busy season. Such situations might result


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in extreme costs for both the supplier and the customers. Hence suppliers offer attractive

deals to induce forward buying. This leads to a shift of carrying costs and leads to

substantial savings for the supplier. Therefore, it is important that establishing these order

cycles have seasonable implications that must be built into the planning process in order to

support an effective inventory management system.

3. Balance Inventory Levels

Balancing the inventory levels is one of the major factors which determine a healthy profit

and efficient management of a business. The inventory should be maintained such that

products are available to customers when needed to stop customers from switching to

competitors. The ideal quantity of inventory meets the demand requirements which results

in profitable sales and justifies the investment.

4. Review Stocks

Shelf space is very valuable and hence obsolete inventory or inventory which is not in

demand should be avoided. This can be done by mark down of the merchandise. Even

though the margins are reduced, selling these goods will save shelf space by avoiding

storing of obsolete inventory. Usually, a novel product is marked up to generate more

profits. However, as the product turns into a common product, the sellers mark down their

merchandise drastically to avoid losses. In order to avoid inventory piling up, the retailer

must pay constant attention to the market trends. Inventory levels of seasonal goods or fad

merchandise must be maintained in a planned manner such that excess is not left stuck with

the retailer. Obsolete merchandise should in general be removed from inventory at any

cost.

It is the stock turnover that gives profit to a business as it is an estimate of the sales on

regular basis. Inventory turnover ratio or stock turnover ratio is the rate at which the

inventory is replaced or turned over, throughout a pre-defined standard operating period.

Turnover ratios act as an effective benchmark to compare with the business in question. If

the inventory turnover is too irregular, it indicates that the stock needs to be changed as it is

not catching the attention of the target customers whereas too frequent inventory turns

indicate overwork with a limited capital. Stock turns or inventory turnover can be calculated

using the following equation:

Stock Turn = (Cost of Goods Sold /Average Inventory at Cost)


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5. Follow-up and Control

Inventory reviews must be done on a regular basis to detect the obsolete and slow moving

stock and to keep up with the latest market trends. Stock should be properly measured and

maintained to prevent stock outs and to avoid stock piling.

Carefully planned inventory will serve the dual purpose of higher inventory turnover and

lower investment, thus adding to the organization’s profits.

9.6 Transportation Management

Transportation is one of the important sub functions of logistics. It is the backbone of the

entire supply chain that ensures the right product in the right quantity and the right

condition; reaches the right customer at the right place, at the right time, and at a right

cost. A well operated transportation system will provide benefits such as increased logistics

efficiency, reduced operation cost and improved service quality. There are different modes

of transportation such as road, rail, water and air.

Road: The road transportation is mostly done by trucks. Trucking is little expensive than rail

but it offers door to door delivery service with shorter delivery time. Trucking industry is

mainly divided into two types: Truck Load (TL) and Less than a Truck Load (LTL). The truck

load is appropriate for large shipment (full truck) with low cost. Whereas less than a truck

load is appropriate for small lots, which are too big to parcel. Sometimes it may end up with

equal cost of TL.

Rail: This mode of transportation is ideal for heavy shipment, high-density products.

Transportation time by rail is long but cost effective for goods like coal. This mode should

further be supported by other transport modes to get the goods to destination.

Water: Water transportation is appropriate for carrying very large loads at low cost.

However it is the slowest of all the modes and needs further support from other transport

modes to get the goods to destination.

Air: This transportation mode offers a fast delivery of goods but is expensive. This type of

transportation is best suited for small goods with high-value and emergency shipments

which have to travel a long distance.


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9.7 Reverse Logistics

Reverse Logistics can be defined as the process of planning, implementing and controlling

the efficient and cost effective flow of raw materials, in process inventory, finished goods,

packaging and related information from the point of consumption to the point of origin for

the purpose of recapturing value or proper disposal.

Categories of Reverse Logistics

Reverse Logistics can be classified into the following two categories:

• Activities involved in bringing back Returnable Packaging material

• Activities involved when there is wastage and returns

There could be returns from the store to the warehouse for reasons such as excess stock

and damages. In each of these cases, the items need to be segregated and stored in a

separate area before they can be sent back to the warehouse.

Depending on the Reverse Logistics Strategy of the retailer, all the returned material could

either be moved to a separate Return DC or to the same DC from which the store was

supplied.


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Summary

• Logistics is “part of the supply chain process that plans, implements, and controls the

efficient, effective forward and reverses flow and storage of goods, services, and related

information between the point of origin and the point of consumption in order to meet

customers’ requirements”.

• ”The process of anticipating customer needs and wants; acquiring the capital, materials,

people, technologies, and information necessary to meet those needs and wants;

optimizing the goods- or service-producing network to fulfill customer requests; and

utilizing the network to fulfill customer requests in a timely way”

• Logistics is the process of planning, implementing and controlling the efficient,

effective flow and storage of goods and related information from point of origin (Seller)

to destination (Buyer) to conform to customer requirements.

• Warehouse is a storage location to stock and distribute products. Traditionally, its

function was limited to just being a buffer between the production and actual demand.

• The need for a warehouse arises because, production and consumption of products do

not happen simultaneously. The various factors that make warehousing a vital activity

are: Seasonal Production, Seasonal Demand, Price Stabilization, Large-scale

Production, Quick Supply and Continuous Production.

• The functions of warehouses include managing inflow goods, reserve storage,

replenishment, order picking, secondary sortation, sortation, collate and dispatch.

• The role of a warehouse in supply chain starts with forecasting at the store/ DC level,

purchase order placement and generation of replenishment plan. The warehouse

thereafter plans scheduling and once the goods are received, the unloading and

unpacking operations are triggered.

• Various components of a WMS should cater to all the activities within a warehouse,

right from appointment scheduling, receiving, put-away and slotting, to picking, VASs,

packing and labeling and so on. The WMS should be flexible to handle full case, split

case or any other kind of shipment.

• Radio Frequency Identification Device (RFID) uses radio signals to transmit data

between a tag or transponder and a device (which commonly called either reader or

writer). Generally RFIDS are two types: Active tags and Passive tags.


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• A barcode is a machine readable code. This code consists of information about the item

to which it is attached to. They are represented by numbers, alphabet and linear parallel

lines.

• Inventory is stock of any item or physical resource (Raw Materials, Finished Products,

Component parts, Supplies, and Work-in-process) with intent of selling it or

transforming it into a finished product.

• Inventory management is group of concepts, policies, practices and procedures for

determining what items to order, how much to order, when the items are needed, when

to order them and how to store them.

• The set of policies and controls that monitor levels of inventory and determines what

levels should be maintained, when stock should be replenished, and how large orders

should be.

• With proper planning and forecasting, inventory can be controlled to increase the

organization’s profit. The steps to control inventory are Plan Inventory, Establish Order

Cycles, Balance Inventory Levels, Review Stocks and Follow-up and Control.

• Transportation is the backbone of the entire supply chain that ensures the delivery of

the right product in the right quantity and the right condition, at the right place, at the

right time, for the right customer at the right cost. The different modes of

transportation are road, rail, water and air.

of 18

Chapter-10 Aggregate sales and Operational planning

Version4.0

For Associates



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Chapter-10 Aggregate Sales and Operational Planning

Introduction

Demand and supply out of balance, dissatisfied customers, late shipments, finger pointing

cash flow problems, demand and supply out of balance, missing the business plan, high

inventories, etc has been the norms in many companies for years. To avoid these problems,

many companies are using a business process called sales and operations planning(S&OP).

The objective is to minimize the cost of resources required to meet the demand over that

period.

Learning objectives

After completing this chapter, you will understand:

• Sales and operations planning and its activities

• Aggregate Operations Plan

• Production Planning Strategies

• Implementing Aggregate Plans and Master Schedules

• Yield Management and Forecasting

Topics Covered

9.1 What Is Sales and Operations Planning ............................................................. 4

9.2 Overview of Sales and Operations Planning Activities ........................................ 4

9.3 The Aggregate Operations Plan ....................................................................... 6

9.4 Production Planning Strategies ....................................................................... 7

9.5 Level Scheduling ............................................................................................ 8

9.6 Relevant Costs ............................................................................................... 9

9.7 Implementing Aggregate Plans and Master Schedules ..................................... 10

9.8 Yield Management ....................................................................................... 11

9.9 Forecasting .................................................................................................. 13

Summary .......................................................................................................... 16


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9.1 What is Sales and Operations Planning

Sales and operation planning is a process of building on collaboration among sales,

operations, finance, and product development departments. The process is designed to get

balance between supply and demand and also to maintain them in balance over the time.

This balance is important for running a business well. The goals of sales and operations

planning is to provide a better customer service, lower inventory, shorten customer lead

times, and stabilize production rate.

This process consists of a series of meetings with various departments to make

intermediate-term decisions. The idea behind these meetings is not only to achieve optimal

balance between supply and demand but also to bring operational plan in line with the

business plan.

Organizations need to get this balance not only at aggregate level but also at detailed

individual product level. For calculating the demand for a product, it is important to monitor

the sales of the product from 3 to 18 months. By aggregating at the level of major groups of

products, organization can find out the demand and ensures, to maintain enough capacity

in-order to supply. If the organization is planning for long terms, it is difficult to find out the

demand of the product because of uncertainties. But organization should be able to know

how to sell a larger group of similar products (aggregate refers to this group of products) in

the long term.

9.2 Overview of Sales and Operations Planning Activities

The term sales and operations planning have been created by organizations to refer to the

process that keeps demand and supply in balance. In manufacturing management this

process is usually called as Aggregate Planning. This entails general management, sales,

operations, finance, and product development.

Aggregation should be done on both supply and demand sides. On the supply side it is done

by product families and on the demand side it is done by groups of customers. The

individual product, production schemes and matching customer orders can be handled

more readily as a result of the sales and operations planning process. Figure 10.1 explains

about sales and operations planning, which relates to other major operations planning

activities.


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Long range

Medium range

Short range

Fig 10.1 Overview of major operations planning activities

In the figure, the time dimension is shown as long, intermediate, and short range.

Long Range Planning: This is usually done annually, focusing on duration of greater than

one year.

Intermediate Range Planning: This is calculated on the periodic basis generally from 3 to

18 months, with time increments that are weekly, monthly, or sometimes quarterly.

Process planning

Strategic capacity

planning

Sales and operations

(aggregate) planning

Sales

plan

Aggregate

operations

plan

Master scheduling

Material

requirements planning

Order scheduling Weekly workforce and

customer scheduling

Daily workforce and

customer scheduling

Forecasting and

demand management


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Short Range Planning: This is calculated on the periodic basis generally from one day or

less than six months, with the time increment daily or weekly.

The aggregate production plan should be updated at least every quarter (13 weeks). Many

companies now update them every four weeks. In manufacturing, the planning process can

be summarized as follows:

The Master production schedule (MPS) will take production control groups’ forecast orders

as input and generate output as specific items required for each order, order quantity and

time. Basing on MPS output, Rough-cut capacity planning will start verifying production,

warehouse, facilities, and equipment and also check whether the vendors have allocated

sufficient capacity to provide material on time. By considering end product requirement

from the MPS, Material Requirement Planning (MRP) splits them into component parts

and sub-assemblies to create materials plan. This material plan specifies, when to place

production order and purchase order for each part which is required for sub-assembly to

complete the production order on the schedule time. Most MRP systems also allocate

production capacity to each other. This is called Capacity Requirements Planning (CRP).

The final planning activity is daily or weekly order scheduling of jobs to specific machines,

production lines, or work centers.

9.3 The Aggregate Operations Plan

The purpose of aggregate operations plan is to find out the production rate, by finding the

mean of product group or other broad categories. The aggregate plan is generally

calculated for an intermediate term of 3 to 18 months and provides optimal combinations of

production rate, workforce level, and inventory on hand.

• Production rate: This is calculated on the basis of number of units completed per

unit of time (such as per hour or per day).

• Workforce level: This is calculated on the basis of number of workers needed for

production (production = production rate * workforce level).

• Inventory on hand: This is calculated on the basis of unused inventory carried over

from the previous period.

The aggregate plans differ from company to company. Large companies, formulate their

plan based on company's objectives and goals and marketing strategies. Whereas smaller

companies, decide by making simple calculation of the workforce needs.


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9.4 Production Planning Strategies

The production planning strategies are tradeoffs between workforce size, work hours,

inventory and back logs. These strategies are chosen based on the firms requirement and

order time. The three production planning strategies are:

• Chase strategy – This strategy mainly depends on production rate and order rate.

When the order rate is high the organization will hire more people to fulfill the

order. Whereas, if the order rate is low they may lay-off the employees. This

strategy will be successful only if they have a pool of trained employees to hire from

to fulfill an order. This strategy also makes the employees to slow down the work,

out of the fear of being laid off as soon as existing order completes.

• Stable workforce-variable work hours – In this strategy, order rate is managed by

changing the number of working hours and reducing the down time of the machine

through flexible work schedules or overtime. This strategy also avoids hiring and

firing of employees and provides work force continuity.

• Level strategy – In this strategy, organization maintains constant output rate so

that they can maintain stable work force and also constant working hours. This

strategy manages the shortages and surpluses of production by fluctuating

inventory levels, order backlogs, and lost sales. By avoiding overtime there is an

advantage, the quality of the product increases. The disadvantage of this strategy is

the possibility of the products becoming obsolete and increase in the inventory

cost.

Basing upon the usage, these three strategies are divided into two types;

• Pure Strategy: When just one of these strategies is used to absorb demand

fluctuations then it’s named as pure strategy.

• Mixed Strategy: When two or more of these strategies are used to absorb demand

fluctuations. Then it is called as mixed strategy, this strategy is most widely

applied in industry.

Subcontracting

Subcontracting is also a widely used strategy of production planning. In subcontracting

some portion of the production is outsourced when the demand is more. This is similar to

chase strategy, but hiring and firing is transferred to the outsourced party. This is a high-risk


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strategy, if the relationship with the outsourced party is not strong, manufacturer can lose

control over schedule and quality. This is major disadvantage which should be considered

before subcontracting the production and this is high-risk strategy.

9.5 Level Scheduling

Level scheduling is a combination of production planning strategies. It holds constant

production for a period of the time. For every period, it maintains constant workforce, low

inventory and it also depends on the demand of the products.

Advantages of Level Scheduling:

• The entire system can be planned to minimize inventory and work-in-process.

• The system is planned to get minimum work-in-process and inventory.

• The low amount of work-in-process keeps up-to date product modifications.

• The production system has easy process flow.

• Production line receives the items or materials directly from the vendors.

Due to these advantages level scheduling is often know as backbone for JIT productions.

Example: Toyota Motor Corporation develops a yearly production plan that consists of

total number of cars to be made and sold. To produce this total number with a level

schedule, system requirements are important which are generated by aggregate production

plan. Production smoothing is the one of the secret of success for the Japanese level

scheduling. This plan is converted into monthly and daily, which helps to schedule the

sequence of products through the production system.

The essentially procedure is: Two months in advance, the car types and quantities needed

are established. This is converted to a detailed plan one month ahead. These quantities are

given to subcontractors and vendors so that they can plan on meeting Toyota’s needs. The

monthly needs of various car types are then translated into daily schedules.

To use level scheduling technique:

• Production system should be repetitive.

• The system must contain excess capacity.

DID YOU KNOW? Outsourcing became an integral part of business during the 1980s.


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• Output of the system must be fixed for a period of time (preferably a month).

• They should maintain a good relationship among purchasing, marketing, and

production.

• The cost of carrying inventory must be high.

• Equipment costs must be low.

• The workforce must be multi skilled.

9.6 Relevant Costs

Relevant costs are related to the production cost itself as well as the cost to hold inventory

and to have unfulfilled orders. For aggregate production plan, there are four relevant costs:

• Basic production costs-: The cost incurred while producing a given type of product

in a given time period. These costs include fixed, variable, direct and indirect labor

costs and also regular as well as overtime compensation.

• Costs associated with changes in the production rate – These costs are incurred in

hiring, training, and laying-off personnel.

• Inventory holding costs – This cost incurred in storing, insurance, taxes, spoilage,

and obsolescence of inventory which means capital is tied up in inventory.

• Backordering costs – These costs are usually very hard to measure like cost of

expediting, loss of customer goodwill, and loss of sales revenue.

Budgets

Operational managers have to submit annual budget reports, even sometimes quarterly

budget reports for receiving funding from the finance department. For preparing these

budget plans, aggregate plans help out in minimizing the total production-related costs

over the planning horizon by determining the optimum contribution of workforce levels and

inventory levels. Operational managers use aggregate plan as a key to successfully

complete the budgeting process. Thus, the aggregate plan provides the control for the

requested budget amount. Accurate medium range planning increases the likelihood of:

(a) Receiving the requested budget

(b) Operating within the limits of the budget.


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9.7 Implementing Aggregate Plans and Master Schedules

The process and technique for implementing an aggregate plan depends on the conditions

prevalent. Due to this reason, the implementation procedure can be segregated into two

ways. These are:

• Unplanned events

• Behavioral considerations

9.7.1 Unplanned Events

Aggregate plans are continuously updated to accommodate the effects of unplanned

events. Forecasted demand and actual demand for a product may differ significantly due to

unexpected events. Not achieving planned outputs for the month or the workforce not

being able to produce at its average capacity are unexpected events that may also disrupt

the plans. These unexpected events must be taken into account while developing aggregate

plan. But in this case, the difference will be that the actual demand is taken as input rather

than the forecasted demand.

As the aggregate plans are updated, the master production schedule is also altered to

incorporate these changes. But, sometimes the aggregate plan remains fixed, while the

master production schedule undergoes changes because of changes in demand for

individual products, the production process, and performance rates. The MPS transactions,

records and reports are updated and reviewed continuously to accommodate these

changes. This process of reviewing and updating, called “rolling through time”, shows the

dynamic nature of planning and scheduling activities in operations management.

9.7.2 Behavioral Considerations

Behavioral considerations are important in planning and implementing the aggregate plans.

Deciding the time horizon is the biggest issue in aggregate planning, as the complexities in

planning are dependent on the time horizon. If the plan is short-term and based on

judgment and experience, it might turn out to be costly. But long-term planning is a difficult

task. Therefore, the optimal time period for aggregate planning should be selected.

When an aggregate plan is implemented, it has an impact on almost all the functions and

departments of an organization. For example, the purchasing department has to make

arrangements to procure materials and hire subcontractors. The implementation of the


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aggregate plan initiates actions in various functions. It also affects organizational

environment. If the plan specifies reduced output, people may have to be removed from

their jobs. This may affect the level of motivation and job satisfaction of the workforce.

9.8 Yield Management

Yield management can be defined as the process of allocating the right type of capacity to

the right type of customer at the right price and time to maximize revenue or yield.

Source: Operation management for competitive advantage by chase

It is a powerful approach to predict the demand, which is important for preparing aggregate

planning. Example: Airlines, rental car agencies, cruise lines and hotels are the best

examples of yield management usage.

From an operational perspective, yield management is more effective when

• Demand can be segmented by customer

• Fixed costs are high and variable costs are low

• Inventory is perishable

• Product can be sold in advance

• Demand is highly variable

Examples: applying yield management to:

Barber shop – The first step is to determine the peak and off-peak times. A barber

shop, can offer lower prices during off-peak times such as days of the week, or times

of the day when demand is low. The second step is to offer a discount on an

appointment for people who walk-in, during off-peak time. Thus, transferring

demand to an off-peak time from peak time.

Soft drink vending machine – It is assumed that the lack of capacity would not be a

problem for a vending machine, so reallocating peak demand should not be an

issue. However, trying to increase consumption during non-peak times is difficult

because most vending machine can charge only one price. But new technology can

allow the prices to be changed based on time of day, or even the day of the week.

Therefore, during off-peak times, a lower price could be charged to stimulate sales.


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9.8.1 Operating Yield Management Systems

1. The following concerns can come up in managing yield: Ensure that pricing

structures appear logical to the customer and the different prices are justified. Such

justifications, commonly called rate fences, may have either a physical basis (such

as a room with a view) or a nonphysical basis (like unrestricted access to the

internet). Pricing should also relate to addressing specific capacity problems. If

capacity is sufficient for peak demand, price reductions stimulating off-peak

demand should be the focus. If capacity is insufficient, offering deals to customers

who arrive during non-peak periods (or creating alternative service locations) may

enhance revenue generation.

2. Handle variability in arrival or starting times, duration, and time between customers

effectively. This entails employing accurate forecasting methods (the greater the

accuracy in forecasting demand, the more likely yield management will succeed);

coordinated policies on overbooking, deposits, and no-show cancellation penalties;

and well-designed service processes that are reliable and consistent.

3. Manage the service process properly. Some strategies include scheduling additional

personnel to meet peak demand, increasing customer co-production(here

customers is also part production like in designing and so on), creating adjustable

capacity, utilizing idle capacity for complementary services, and cross-training

employees to create reserves for peak periods.

4. The fourth issue is the critical and important issue related to training workers and

managers to work in an environment where overbooking and price changes are

standard occurrences that directly impact the customer. Companies have to

develop creative ways for peace-making the overbooked customers.

Example: Any airlines company gives overbooked passengers free tickets for other flights.

A golf course company once offered $ 100 putters to players who had been overbooked at a

particular tee time.

DID YOU KNOW? The first widespread scientific application of yield management began

when American Airlines’ computerized reservation system (SABRE), was introduced in

the mid 1980s.


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9.9 Forecasting

Forecasting seeks to predict what is most likely to happen in future. By predicting the most

probable future value of a variable, managers take effective decisions and carry out

planning activities.

Organizations need to forecast the demand for their products and services so that all

relevant plans can be developed accordingly. Demand is the quantity of a product or a

service that buyers are able and willing to purchase during a particular time period, in a

specific market environment.

The market environment is influenced by following conditions:

� Price of a product

� Price of its substitute

� Complementary products

� The incomes of customers

� Their expectations regarding price changes

� Their tastes & preferences

� The number of customers

� Their travel costs to the point of purchase (PoP).

9.9.1 Forecasting In Operations

Forecasting involves making calculated predictions that can be used in the planning and

decision-making process. While forecasting cannot predict the future with absolute

accuracy, it can provide vital information for strategic, tactical and operational planning.

The main purpose of forecasting is to predict future customer demand for a product or

service. In includes both long-term estimates of overall demand and short-term estimates

of demand for each product or service. Forecasting is used in process design, capacity and

facilities planning, aggregate planning, scheduling, inventory management, etc.

Good forecasting is the foundation of good operations management. Operations managers

often try to forecast a wide spectrum of future events that could influence the performance

of their organizations. Short-term demand estimates for individual products are generally

very detailed, and are used to plan and schedule the production operations. But long-term,

aggregate product-demand forecasts, are used for making location, layout and capacity

decisions. Thus, forecasting time horizons (the future point in time to which forecasting is


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directed) provide different types of information, to help the managers make long-term or

short-term decisions.

On the basis of aggregate demand forecast (that is obtained in terms of sales volume)

individual forecasts are made for labor/or material requirements. These resource forecasts

are used to plan and control the operation subsystems. Forecasting is thus necessary for

planning, scheduling, and controlling the production system in order to deliver goods and

services effectively and efficiently.

9.9.2 Selecting a Forecasting Method

The objective of selecting the right method is to maximize accuracy and minimize biases.

Therefore, the suitability of a forecasting method should be verified before it is selected.

Operations managers should select a method on the basis of data available, the amount

and nature of available data, the amount of variation expected and the forecast accuracy

required. The costs and technical expertise involved in forecasting also affects the situation

of a method. Generally, the selection of a forecasting system depends on the following

factors: time period for which the forecast is needed, the amount and nature of data

available and the cost and accuracy of the method.

Time span

The time period for which the forecast is needed is one of the key issues in the selection of a

forecasting method. For short-range decisions like purchasing, job scheduling, project

assignment and machine scheduling, time series techniques such as moving averages (SMA

or WMA) and exponential smoothing are preferred. For decisions like capital and cash

budgeting, medium range forecasting method like regression analysis is used. Forecasting

for long range decisions like product planning, facility location and expansion, capital

planning is done through the use of regression analysis, the Delphi technique, market

research, etc.

Data availability

The selection of a forecasting method also depends on the amount and nature of data

available, if no data is available or it is too expensive to collect data, qualitative forecasting

methods such as the Delphi method or the nominal group technique is used. If

comprehensive historical data is available, then time series analysis such as moving


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averages and exponential smoothing methods is employed. If a relationship exists between

the different variables under review, causal methods (such as regression analysis) are used.

Cost and accuracy

No forecasting method can be hundred percent accurate. Generally, operations managers

make a tradeoff between cost and accuracy. Some low accuracy methods use less data

which is readily available. For these methods, the cost of forecasting is low. Due to

inaccuracies in the forecasts provided by these methods, organizations may end up with

high inventory holding costs and operating costs.


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Summary

• Sales and operations planning is a process to help give better customer services,

lower inventory, shorten customer lead times, stabilize production rates, and

give top management a handle on the business.

• Typically sales and operations planning involve general management, sales,

operations, finance, and product development.

• The aggregate operations plan is concerned with setting production rates by

product group or other broad categories for the intermediate term (3 to 18

months). The aggregate plan aims to specify the optimal combination of

production rate, workforce level, and inventory on hand.

• Chase strategy – Match the production rate to the order rate by hiring and

laying-off employees as the order rate varies.

• Stable workforce-variable work hours – Vary the output by varying the number

of hours worked through flexible work schedules or overtime.

• Level strategy – Maintain a stable workforce, working at a constant output rate.

Shortages and surpluses are absorbed by fluctuating inventory levels, order

backlogs, and lost sales.

• A level schedule holds production constant over a period of time. It is a

combination of the strategies mentioned above. For each period, it keeps the

workforce constant and inventory low, and depends on demand to pull products

through.

• Four costs are relevant to the aggregate production plan. These relate to the

production cost itself as well as the cost to hold inventory and to have unfulfilled

orders.

• The process and technique for implementing an aggregate plan depends on the

conditions prevalent. Due to this reason, the implementation procedure can be

segregated into two ways: unplanned events and behavioral considerations.

• Yield management can be defined as the process of allocating the right type of

capacity to the right type of customer at the right price and time to maximize

revenue or yield.

• Forecasting seeks to predict what is most likely to happen in future. By

predicting the most probable future value of a variable, managers take effective

decisions and carry out planning activities.


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• The main purpose of forecasting in operations is to predict future customer

demand for a product or service. In includes both long-term estimates of overall

demand and short-term estimates of demand for each product or service.

Forecasting is used in process design, capacity and facilities planning, aggregate

planning, scheduling, inventory management, etc.

scm

Documents

confidentiality agreement signed

store dc level

early 20th century

supply chain surplus

absorb demand fluctuations

client work locations

entire supply chain

agile supply chains