Dba1651 production management anna univ entire notes

DBA 1651 PRODUCTION MANAGEMENT

UNIT - I NOTES

INTRODUCTION TO PRODUCTION AND
OPERATION MANAGEMENT
1.1 Introduction
1.2 Learning objectives
1.3 System
1.3.1 Business System
1.3.2 Production System
1.3.3 Production and Operations Managements
1.4 History of operations Management
1.5 Types of operation system
1.5.1 Flow Shop
1.5.1.1Continuous Production
1.5.1.2Mass Production
1.5.1.3Batch Production
1.5.2 Job Shop
1.5.3 Project Production
1.6 Production activities and communication link
1.7 Computer Integrated Manufacture ring (CIM)
1.7.1 CIM sub systems
1.7.2 Functional Areas of CIM
1.7.2.1 Computer aided production planning
1.7.2.2 Computer aided process planning
1.7.3 Conceptual frame work of CIM
1.7.4 Group Technology
1.7.4.1 Definition
1.7.4.2 History of GT
1.7.4.3 Advantages of GT
1.7.4.4 Organizational Suitability for GT
1.7.4.5 Group technology in CIM
1.8 Global Supply Chain
1.8.1 Global Complexities
1.8.2 How to transform into Global Supply Chain

1 Anna University Chennai


NOTES UNIT - I

INTRODUCTION TO PRODUCTION AND
OPERATION MANAGEMENT

1.1 INTRODUCTION

This unit starts with a definition of a system. In this unit production system and
its objectives are explained along with the components of a system. The history of
operations management is portrayed. The various functions of production system and
their interlinking are explained through a flow chart. The components of computer,
integrated manufacturing and their purpose are dealt. Finally, the recent trend in the
operations, namely, Global Supply Chain is introduced in this unit.

1.2 LEARNING OBJECTIVES

• To know the importance of the production system in an organization.

• To understand the link between various activities of the production system.

• To comprehend the history of operations management.

• To understand the components of computer integrated manufacturing

1.3 SYSTEM

It consists of elements or components. The elements or components are
interlinked together to achieve the objective for which it exists. Eg: human body,
educational institutions, business organizations.

Components of a system:

The input, processing, output and control of a system are called the components
of a system.

Anna University Chennai 2


Figure 1.1 - Components of a system NOTES
Input Output

Processing

Feedback
Control

Control:

There are two types of control, namely Proactive Control and Reactive
Control.

Proactive Control:

When an operation is carried out on a product in a workstation, the quality
inspector goes to the workstation and inspects the product. When the samples that he
has taken for the inspection are not confirming to the quality, he stops the machine and
identifies the reason for the deviation and corrects the problem, so that the produced
product thereafter conform to the specifications. This type of control prevents any
major quality setback after the production. This is an example for proactive control.

Reactive Control:

In a planning period, usually the quality target is fixed. Suppose, an organization
feels to fix 5% defective is safe in the targeted production quantity and assumes that at
the end of the planning period it finds that the defective output exceeds the targeted
defective products. Then, it has to find out the reason for the deviations, namely, whether
the problem is due to the method of doing the work or the resources used in the process.
Then the planner uses this knowledge to prevent any problem in the future. Thus a
Reactive Control is a post morterm case.

1.3.1 Business System:

The business organization is classified into different subsystems based on the
functions like marketing, production/operation, finance and human resource etc.



Figure 1.2 – Business System
NOTES
Marketing Finance

Human Resource Production/Operation

Each subsystem will have more sub subsystems.
1.3.2 Production / Operation System

Figure 1.3 – Production / Operation System

Input Transformation Output Objectives
Process
1. To produce the required quantity.
Capital
Man Power Goods 2. To achieve the required quantity.
Material
3. To meet the delivery time.
Information Services
4. Economical way of doing

Operations Management

Operation system is either manufacturing sector or service sector. The input
requirements are shown in figure1.3 The transformation process, in which part of the
value addition takes place to get the required quantity of the product or services with
the targeted quality within the specified time period, is carried out in a most economical
way. Operation Management Plan coordinates and controls all the activities in the
operation system to achieve the stated objectives.
Thus (the activities listed in the diagram) the Operations Management activities,
ensure the objective of quantity, quality, delivery time and economical way of doing
work. The communication link between the various activities are shown in the figure1.3.
Each activity is dealt in detail in different sections of this material. This figure
(figure1.3) will be very much appreciated after getting a clear understanding of all the
activities.



1.3.3 What is operation management (OM)?
NOTES
Operation Management is a way or means through which the listed objectives
of an operating system is achieved. There is always a confusion between the word OM
& PM (Production Management). It is accepted norm that OM includes techniques
which are enabling the achievement of operational objectives in an operation system.
The operation system includes both manufacturing sector as well as service
sector, but when you use the word PM, you should be careful to note that it refers to
the manufacturing sector but not the service sector. Suppose, you are designing a layout
for the hospital you should say that you are applying Operations Management Technique
not the Production Management Technique.

When you design a layout for a manufacturing sector you can say that you are
applying Production Technique or Operation Technique or vice versa.
From, the above discussion we can come to a conclusion that production
management is a subset of Operations Management.
Review questions –
1. What are the components of a system?
2. What are the differences between the Production Management and the Operations
Management?
3. List the objectives to be fulfilled by an Operation System.

1.4 HISTORY OF OM
Table 1.1 – History of OM
Year /
Period of Concept/Tools and System Used Developers/
Concept Originators

(14-16) Evolution of Production system
Century

18th New Technology for Production Process Adam Smith and
Century Management harles Babbage

1895 Scientific Management Principles (Work Study) F.W.T. Taylor
Motion Study for Psychological Factors Frank & Lillian
Activity Scheduling Chart Gilbreth Henry
Gantt

1935 Hawthrone Studies of Worker Motivation Elton Mayo

1950’s Operation Research for Decision Making Long Many Researcher
term Medium term, Short term decision by



Critical Path Method (CPM), Program Evaluation
NOTES and…… Technique (PERT), Waiting-Line Theory

1970’s Computers for Inventory Control Material IBM, Joseph
Resource Planning (MRP) Orlicky,
Oliver Wieght

1980’s Just In Time (JIT), Total Quality Control (TQC) Toyota
Kanban System, CAD/CAM, Computer
Integrated Manufacturing (CIM) Flexible
Manufacturing System (FMS)

1990’s 1.Total Quality Asqc(U.S.). IOS
Management (TQM), Concurrent (CIM), (England),
Engineering, Value Engineering Michael Hammer
2. Business Process Engineering Oracle, SAP
3. Supply Chain Management (Germany)

2000’s Logistics, Enterprise Resource Planning (ERP),
E-Commerce, E-Business
Review questions -
1. What is the contribution of GANTT?
2. Who is the father of Scientific Management?
1.5 TYPES OF OPERATION SYSTEM
The type of Operation System to be adopted should be known to the people,
and then only you may choose the system based on the nature of the product that you
are going to manufacture. The types of operation system are classified based on the
following criteria.

Product flow pattern in conversion system
Output of the product
Specification of the output

Figure 1.5 - Types of Operation System

Production Flow Pattern Output of the product Specification of the output

Customized Standard
Flow shop Job shop Flow shop

Continuous Batch Mass Goods
Production Production Production Services



The characteristics of the Operation System based on the product flow pattern: NOTES
1.5.1 Flow Shop
In this kind of production, the productive resources are arranged according to
the sequence of operation required by the product design.
Assume that you are engaged in the ready to wear clothing, if you want to
adopt the flow shop production, then the productive resources are kept according to
the sequence of operations required by the product like
Cutting
Joining by sewing
Adding, buttons, zippers etc
Quality checking
Packaging
Mostly Flow shop production are adopted when there is untapped market for the
product, customers are price sensitive and more competition in the market.
Flow shop production as shown in the figure is further divided into Continuous
Production, Mass Production and Batch production.
1.5.1.1 Continuous Production
The industries involved in the following activities are classified as Continuous Production
• Oil refining.
• Fertilizer production.
• Chemical processing etc.
• In this type of production the product flows continuously without much
interruption.
• This type of production lacks in flexibility.
1.5.1.2 Mass Production
The industries involved in the following activities are classified as the Mass Production
Industries:
Auto Manufacturing
TV Manufacturing
Cigarettes
This kind of flow shop produces the same type of output, it has little flexibility compared
to Continuous Production.
1.5.1.3 Batch Production
The industries involved in the following activities are classified as the Intermittent
Production.
• Shoe manufacturing
• Bottling plant
• Cloth manufacturing



Here the basic design of the product is the same but the specification of the product
NOTES differs. The production gets interrupted when the system switches over to other type
of the product specification. The products are similar in nature but not identical.

The Characteristics of Flow Shop Production:

Refer Table1.2
Table 1.2 - The Characteristics of Flow shop Production
Product The products are standardized.
Conversion Special purpose equipments, designed for the specific
Resources process of the product.
Work force Specialized people, doing the repetitive jobs.
Workforce Job satisfaction among the employee is low because of
Job satisfaction the repetitive nature of job, results in boredom, more
turnover and absentees.
Work-in-progress Productive resources are balanced that result in less work
inventory in progress inventory.
Cycle time Cycle time per unit is relatively low
Cost of production Cost of production per unit is relatively low.
Quantity of production Comparatively quantity of production is more
Varieties Products to be produced of less variety.
Flexibility This kind of production lacks in flexibility.
Small change in the product design needs the change in
production system abnormally.
Production planning and Since less varieties of product are produced for longer
control period, the production planning and control activities are
inbuilt in the system itself, so the production planning and
control activities are not a complex one.

1.5.2 Job Shop

In the case of Job Shop Production, the products are mostly customized
products. Based on the customer requirements, the products are produced. The
productive resources are kept according to the function.



The industries involved in the following activities are classified as the Job Shop production: NOTES
• Auto repairing
• Hospital
• Machine shop
The Characteristics Of Job Shop Production.
Table 1.3

Product The products are of order based mostly non standardized.

Conversion of Resources General purpose equipment, grouped according to their
functions.

Work Force Skilled people, doing multi skilled work.

Work force satisfaction Job satisfaction among the employee is high because the
operator role is multifaceted.

Work in Progress There is lot of waiting time for the product to be
Inventory manufactured in the system that results in more in process
inventory.

Cycle time Because of more waiting time for the product in the
production line that results more manufacturing cycle time
comparatively.

Cost of Production Cost of production per unit is relatively high.

Quantity of production Since it is order based production, quantity produced per
unit type is relatively less.

Varieties The production system capable of producing more type of
products.

Flexibility This system has more flexibility any change in the design
of the product could be incorporated without much problem.

Production Planning The arrival, the operations demanded and the operations
and Control time required by the order mostly uncertain. This makes
the jobs of production planning and control difficult.

1.5.3 Project Production
This refers to the industries involved in the production of one type of complex
products like, ship construction, dam construction, bridge construction, research and
development etc.



NOTES Project production consists of many activities where the activities are interlinked,
time phased and resources committed.

In this kind of production, scheduling the activities is important so that you can
complete the project within the time and budget constraint. The resources, namely,
manpower, machines, material are brought to the workplace where the product is
manufactured. There is no movement of the product.

Review Questions

1. Which type of the production system in the process inventory is less?
2. In which type of production system flexibility is more?
3. Tell the important characteristic of Batch Production about the product?
4. In which type of production system there is no product movement?

1.6 COMMUNICATION IN POM

As it is mentioned in the above section, operation management is meant to
achieve the objectives for which the operation system is intended for. Based on the
objective set by the top management, the system design is established. The system
design involves designing the product and process, designing the methods, measuring
the work, identifying the location, and designing the layout. By keeping the system
design as a framework in the aggregate planning various production alternatives are
analyzed and the best feasible production alternatives are chosen.

Then keeping the aggregate planning as a input, resource allocation and
sequencing of day to day activities are done. The inventory also kept at minimum to
satisfy the organization’s inventory objectives. The maintenance activity ensures the
availability workstations. Quality control ensures the quality in the input, processing and
output stages of production system. (See figure 1.4- Communication in POM).

Review Questions-

1. List the activities in system design?
2. What are the phases of scheduling?



Figure 1.4- Communication in POM NOTES
External: Socio, Political, Economic environment Figure1.4

Top Management Strategy

Top M ana ge me nt
Marketers Financial
Policy Policy

Human Production
Resource Policy Policy

Forecasting
Long term forecast System Design

Medium term forecast
Product Design Capacity Planning
Short term

O p e r a tio n M a n a g e m e n t
Forecasting Aggregate Planning

Process Design Plant location & layout

Inventory Control
Work Design and measurement

Scheduling Maintenance Quality Control
P r o d u c tio n S y s te m

Material
Product
Capital
Information Service
Manpower

1.7 COMPUTER INTEGRATED MANUFACTURINGAND SERVICE SYSTEM

Computer Integrated Manufacturing (CIM), a strategic thrust, is an operating
philosophy. Its objective is to achieve greater efficiencies within the business, across
whole cycle of product design, manufacturing and marketing. International competition
has intensified the requirement for high quality products that can compete in the global
market place. As a result of this increased competition, the pace of development has
been quickened and thus forcing manufacturers to enter into an era where the continuous



NOTES quality improvement is maintained as a matter of survival, not simply being competitive
As the time scale of product life cycle has decreased and the demand for the quality
increased, attention has focused on improving the product quality and promoting the
competitive ability of industries through better design, manufacturing, management and
marketing.

Global manufacturing industry is now undergoing a rapid structural change. As
this process is continuous, manufacturing industry is encountering difficulties as it confronts
with a more changed and more competitive environment and also the market place. In
order to share the international market, manufacturers need to implement two strategies.
The first is, to improve the Enterprise Management. The second one is, to develop and
apply a Systematic and Scientific Technology, i.e.., CIM.

With the rapid growth of the complexity of manufacturing process and the
demand for high efficiency, greater flexibility, better product quality and lower cost,
industrial practice has approached the more advanced level of automation. Nowadays,
much attention has been given by both industry and academia to CIM.

Currently, most of the industries have highly automated facilities. To stimulate
industrial companies for utilizing the newest manufacturing technology, this has compelled
to develop a system architecture that does not only replace the existing manufacturing
facilities, operational environments, but effectively utilizes the knowledge and facilities
that are available in the industry.

To overcome the difficulties and solve the problems mentioned above automatic
techniques and methodologies should be Introduced into real industrial manufacturing.

1.7.1 CIM Subsystems

Significant progress has been made in the manufacturing technology in recent
years. Numerically control machine tools, automated material handling systems and
controlled systems have been widely used in industrial companies. The Flexible
Manufacturing System (FMS), Computer Integrated Manufacturing (CIM) or Systems
or Automated Manufacturing Systems (AMS) can be attributed to and increasing number
of companies. The advancing manufacturing and computer technology has brought new
challenges to the designers of products, processes and system as well as to the managers.
The traditional design and management tools can not effectively cope with problems
arising in the modern manufacturing systems.



1.7.2 Functional areas of CIM NOTES
CIM system has emerged as a result of the development in manufacturing and
computer technology. The computer plays an important role integrating the following
areas of CIM system.
• Part (component) and product design
• Tool and fixture design
• Process planning
• Programming of numerically controlled (NC) machines, material
handling system (MHS), etc.
• Production planning
• Machining
• Assembly
• Maintenance
• Quality control
• Inspection
• Storage and retrieval
To emphasis the computer aspects, the terms Computer Aided Design (CAD),
Computer Aided Process Planning (CAPP), Computer Aided Manufacturing
(CAM), Computer Aided Quality Control (CAQC), Automatic Storage Retrieval
(ASR), have used. Each term refers to one or more of the listed functional areas. CAD
refers to the part and product design and tool and fixture design, CAPP refers to Process
Planning, CAM refers to the programming of manufacturing hardware, production
planning machining, assembly and maintenance, CAQC refers to the quality control
and inspection and ASR involves the storage and retrieval of raw materials, finished
products work in process inventory.
The computer plays a leading role in the automation and integration of hardware
component i.e. machines, material handling carriers and the software components of
manufacturing systems. In order to understand the CIM subsystems and the importance
of integrating them, it is first necessary to explore the functional areas by these subsystems.
1.7.2.1 Computer Aided Production Planning
Production planning involves establishing production levels for a known length
of time. This forms the basis for the following two functions:
1. Material requirement planning
2. Loading and scheduling
Based on the information regarding the type and quantity of parts or products
to be manufactured, the materials required to produce the parts or products must be
ordered with an appropriate lead time to ensure their availability for production. This
function constitutes material requirement planning. Based on the material required,
capacity- for example, machine hours and labor hours can be calculated.



NOTES Machine loading involves assignment of parts and products to machines and
machine cell in order to distribute the production loads. Scheduling determines the
sequence in machines perform the operations.
1.7.2.2 Computer Aided Process Planning
Process planning for a part involves the preparation of a plan that outlines the
routes, operations, machines and tools required to produce the component. Since the
process is a tedious task, there has been a trend to automate it. As a result, a number
systems have been developed. There are three basic approaches to the automated
process planning. They are -
a. Variant Approach
b. Generative Approach
c. All based Approach
CIM Subsystems
Intelligent Manufacturing
Development in artificial intelligence has had an impact on the manufacturing
systems. All most all the areas of the computer integrated manufacturing have been
effected by the artificial intelligence. Researchers and engineers are developing the
intelligent systems ranging from application in machining and assembly to long term
planning.
1.7.3 Conceptual framework of CIM
The conceptual framework of CIM is shown in Figure.1.6 are six major being
integrated by computing technology. Note that one of these is Group Technology (GT).
Figure 1.6 – Conceptual framework of CIM
GROUP
TECHNOLOGY
[GT]

MANUFACT.
COMPUTER PLANNING &
AIDED CONTOL
DESIGN [MPC]
COMPUTER
[CAD]
TECHNOLOGY

AUTOMATED
ROBOTICS MATERIALS
HANDLING
[AMH]
COMPUTER
AIDED
MANUFACT.
[CAM]



According to Arthur D.Little and Co., GT is the important technology among NOTES
the others and it will play a major role in the factory of the future. The GT concept is
considered a center road towards a higher level of CIM.

1.7.4 Group Technology

Group technology (GT) is a concept that is currently attracting a lot of attention
from the manufacturing community. GT offers a number of ways to improve productivity
in the batch manufacturing. The essence of GT is to capitalize on similarities on recurring
tasks. GT is, very simply, a philosophy to exploit similarities and achieve efficiencies
grouping like problems.

1.7.4.1 Definition of GT

“Group technology is the realization that many problems are similar and that,
by grouping similar problems, single solution can be found to a set of problems, thus
saving time and effort”

1.7.4.2 History of GT

Prior to 1913, the era of Henry Ford and his model T, all machining models
were similar to our present job shop techniques with machines laid out usually in lines or
blocks of similar machines. The work was loaded onto the machines usually by the
manual progress control system. Ford introduced the assembly line and that, in turn, led
to automated transfer machines. However, the majority of engineering do not produce
items in quantity that justify such methods and so the jobbing shop philosophy continued.
GT is mainly a coordination of normal good engineering practices. It is impossible to
say who first practiced GT. There are reports of it having been used in Germany in the
1930s.

In an international Conference held in Stockholm in 1947, the basic groups
were explained by C.B.Nanthorst. In Italy M. Patrignany was an early exponent of this
technology. However, little of this appears to have been in English. First published
work was from the USSR by S.P.Mitrofanov in 1959 and there after subsequent books
were published by F.S.Denyanyuk and E.K. Ivanov.The first reported work on GT
outside Russia was done by a French Forges et Ateliers de Construction Electriques de
Jeurmont - and this was about in Machinery in 1962. Subsequently, several British
companies conducted considerable work in this field. There have also been considerable
studies done by various consultants in the Universities. The significant contribution by
J.L.Burbidge in the 1 960s led to GT as A total Manufacturing Philosophy.



NOTES 1.7.4.3 Advantages of GT

According to Burbidge, following are the advantages after introducing GT in
manufacturing.

a. Short throughput times because machines are closed together.

b. Better quality because groups complete parts and the machines are closed together
under one foreman.

c. Lower material handling costs because machines are closed together under one
foreman.

d. Better accountability because machines complete parts. The foreman can be made
responsible for costs, quality, and completion by due date.

e. Training for promotion for promotion since GT provides a line of succession, because
a group is a mini-department.

f. Automation GT is a first evolutionary step in automation.

g. Reduced set up time since similar parts brought together on the same

h. Morale and job satisfaction since most workers prefer to work in groups.

Studies undertaken by N.L.Hyer indicate the following significant savings after
implementing GT Snead prepared a summary matrix, listing the benefits listing benefits
achieved for the various GT.

Table1.4 - Advantages of GT

Applications implemented set up time 20-60%

Planned labor 15-25%

Tooling 20-30%

Rework & scrap 15-75%

Machine tool expenditures 15-75%

WIP carrying costs 20-50%

1.7.4.4 Organizational suitability for GT

The suitability of a firm for the introduction of GT depends on several factors.
The survey of Willey and Dale give a tentative description of a company profile likely to
achieve the greatest benefits from GT, some of these are:



a. The company must be a relatively small organization with a reasonably small machine NOTES
tools, and manufacturing equipment.

b. The company should not be typified by either large or small component variety.

c. The batch sizes and the batch size range of products of the companies it is relatively
small.

Athersmith and Crookall Rajagopal and Smith Gupta Andand Grayson have
suggested another way of finding out the suitability of GT for a batch production industry.
Computer simulation has been used by the effect of introduction of GT in the batch
production industries based on the parameters such as throughput time, WIP inventory
and plant utilization Further GT is considered a desirable stepping stone for establishing
Just-In-Time production.

1.7.4.5 Group Technology in CIM

One may question whether a cellular concept is applicable to CIM systems.
Some studies have shown that grouping machines to machine cells may limit the
manufacturing system flexibility. However, industrial applications have proven that it is
virtually impossible to implement a large scale CIM subsystem using a cellular concept.
Here after, the automated manufacturing systems that cellular approach can be called
as, Cellular Automated Manufacturing (CAMS). Four crucial factors of CAMS as
identified by Kusiak are:

1. Volume of information

Volume of information a large-scale CIM subsystem is typically large, and it is
too expensive to effectively process information without the system’s decomposition.

2. Material handling system

In a typical CIM subsystem, automated material handling carriers are used
(AGVs and Robots). Each of the two carriers can tend a limited number of machines.

3. Technology Requirement

Some machines have to be grouped together due to technological requirements.
For example, a forging machine and a heat treatment section.

4. Management

Although in most of the currently CIM subsystems, the degree of automation is
higher than in classical manufacturing systems, humans will be, for a long time, an integral



NOTES part of these new manufacturing systems. Due to limited size of each machine cell, a
CAMS is easier to manage than the entire system.

Review Question:

Following stands for :

1. CRM 2. FMS 3. AMS

4. AS/RS 5. CAD 6. GT

1.8 GLOBAL SUPPLY CHAIN

Even though the countries fought for border issues, but there is no trade barrier
for the trade is concerned. GATT agreements and WTO paves the way for the Global
Supply Chain in trading. (See Figure1.7).

Overall Objective of Global Supply

The objective of global supply chain configuration is in meeting or exceeding
worldwide customer (internal and/or external) expectations at the lowest cost.

Specific Objectives and Expectations of Global Supply

Achievement of the transformation of supply chains into value chains will normally
include some combination of the following objectives and expectations:

• Leverage spend (across business units and geographic boundaries).

• Align Incentives for integration of activities (buyers, suppliers, end-users) to support
organizational goals and strategies.

• Optimize supply chain operation (no. of members, capabilities, costs).

• Reduce inventories across the chain.

• Reduce all costs (item costs and supply chain operational costs).

• Assurance of supply of right quality items to support operations.



Figure 1.7- Global Supply Chain in trading NOTES
Country A
Country B

Supplie Manufacturer Custom Supplie Manufacturer Custom
r er r er
Manufacturer Manufacturer

r er r er

r er r er

Supplie Manufacturer Custom
r er
Manufacturer

r er
Manufacturer

r er
Manufacturer

Country C

For simplicity only one supplier, manufacturer and customer of each country is
taken in the above diagram, same can be possible for others.

1.8.1 Global Complexities

If the supply/value chain involves sourcing in multiple countries, additional
considerations need to be addressed. Some of these include:



NOTES ~ Currency exchange and risk.
~ Counter trade opportunities and requirements.
~ Varying laws and jurisdictional questions.
~ Cultural differences.
~ Language differences.
~ Labor and training availability, practices, laws, regulations.
~ Transportation, packing, shipping, storing, import, export, customs.
~ Security: materials, products, personnel, intellectual property.

Challenges and Barriers to Transforming Global Supply Chains into Value
Chains

In the varying environments encountered internationally, there are a number of
challenges and barriers involved in building global supply chains. Many of these are
rarely concerned with the domestic supply chains. Some of these include:

~ Uncertain political stability, self-serving governments.
~ Lack of infrastructure in some countries (roads, port facilities, trained labor,
utilities, communications).
~ Lack of critical market mass in particular countries.
~ High transaction costs.
~ Requirements to use in-country agents or partners and local content
requirements.
~ Lack of potential for repeat purchases.
~ Slower adoption of e-business than in the domestic market.
~ No or limited free trade zone availability.
~ Partner/contract limitations requiring bidding for all procurement activities and
alliance-building.
~ High logistics and transportation costs.
~ Different time zones (communication difficulties).
~ Financial risks are higher, e.g. potential for war, terrorism, government changes.
~ The nature of global activity (may be fragmented and/or scattered).
~ Long/unpredictable supplier lead times.
~ Protectionism (tariffs, duties, quotas, inspections).
~ Limited number of qualified global suppliers.
~ Difficult to link global project work to “run and maintain” global activities.
~ Limited availability of trained personnel for purchasing or supply management
positions inhibiting.



1.8.2 How to Transform Global Supply Chains NOTES
Improve the quality/cost ratio of your supply chain. Strive for the highest quality
at the lowest cost.

Leverage value across the supply chain

Understand what constitutes value and to whom it is valuable in your supply
chain. Identify and evaluate trade-offs between value added and profitability. Leverage
knowledge to create and deliver the value. Where commodity markets are involved, be
proactive in initiating change that will benefit you.

Redefine the boundaries of business

Redefine the boundaries of your business in the context of what provides
continuing competitor and customer advantage. Evaluate any existing vertical integration
structures and replace with virtual sourcing if value can be added by doing so. Evaluate
what to insource and what to outsource. Use all capabilities of existing or potential
supply chains in the development of new products.

Develop relational competence

View relationships with other members of your supply chains as a continuum
ranging from spot relationships to strategic alliance or co-ownership but recognizing
that most relationships will be somewhere between these extremes. Determine where
more competition will add value and where more collaboration will add value and seek
the best combination of competition and collaboration.

Manage at the right level

Determine which strategies and activities best add value with global management
and which best add value with local management. Determine the best level of autonomy
for local management within supply chain activities. Analyze supply chains for each
category of material or service that is significant to the organization to determine the
best value -adding approach for management and control.

Develop supply chain responsiveness

Determine how the degree of responsiveness to customer needs such as re-
supply time or product mix adjustment matches with customer requirements in each
such area. Consider techniques such as supplier managed inventory, supplier integration,



NOTES and consignment stocking. Pay particular attention to the quality of demand forecasts
throughout the supply chain. Drive down purchase costs. Capture cost saving
opportunities and share benefits with contributing supply chain members. Pay attention
to the differing cost management and purchase strategy needs of various categories of
purchases. For example, commodities, specialty items, custom-made items, MRO
materials. Service purchases can be similar.

Bring About Change

Change Management 1-1. It refers to transforming supply chains which involves
a collateral change management. Consider purchases in the broadest possible sense -
do not exclude anything which is purchased by the organization, material or service
effort. This includes the following activities:

~ Seek Top Management mandate with visible support.
~ Identify the local sponsors and supporters of the supply chain, change early in
the transformation process.
~ Use coordinated communication efforts to develop a dialog about the benefits
and obstacles for implementation.
~ Target quick wins and immediate opportunities.
~ Focus on overcoming obstacles to implementation by creating a cross functional
approach (Team) to address issues.
~ Perform a competitive advantage review in order to leverage the core
competencies of the supply chain members .
~ Develop a supply chain agenda, manage the overall program and frame goals
to address major gaps in supply chain performance.
~ Develop a business plan that will integrate the activities of the supply chain
members.
~ Formulate key performance metrics and measurements, tracking quarterly.
~ Review results and make modifications as necessary to achieve supply chain
optimization.



Summary NOTES
• This unit helps the reader to understand the importance of the production /
operation system in an organization.
• Characteristics of the different production / operation system are detailed out
in addition to when one should prefer what type of system.
• The components of computer integrated manufacturing system and the
introduction of Global supply chain network are highlighted.

Review Questions:
1. State any five Global Complexity.
2. Give any three steps to develop Global Value Chain?



NOTES UNIT II
MATERIAL AND INVENTORY
MANAGEMENT
2.1 Introduction
2.2 Learning objectives
2.3 Materials Management
2.3.1 Definition and Scope
2.3.2 Objectives
2.3.2.1 Primary objectives
2.3.2.2 Secondary Objectives
2.4 Material Handling
2.4.1 Introduction
2.4.2 Robotics
2.4.2.1 Advantages of Robots in Industry
2.4.2.2 Components of a robot
2.4.2.3 Industrial applications of robotics
2.4.2.4 Applications of robotics in other fields
2.4.2.5 Dangers and disadvantages
2.4.3 Automatic Storage and Retrieval system (AS/RS)
2.4.3.1 Types of AS/RS
2.4.3.2 Technical and Economic benefits of AS/RS
2.4.4 Automated Guided Vehicle
2.4.4.1 Component of AGV
2.4.4.2 Applications of AGV
2.5 Just In Time (JIT)
2.5.1 Problems of Conventional Production System
2.5.2 Conventional vs. JIT attributes
2.5.3 JIT as a waste elimination tool
2.5.4 KANBAN production control system
2.5.4.1 Working of KANBAN
2.5.5 Uniform loading
2.5.6 Quality Control
2.6 ABC analysis
2.6.1 Kind of Control



2.7 Inventory models NOTES
2.7.1 Need for Inventory
2.7.2 Types of Inventory
2.7.3 Inventory costs
2.7.4 Deterministic model
2.7.4.1 EOQ model
2.7.4.2 EBQ model
2.7.4.3 Quantity discount model
2.7.5 Probabilistic model
2.7.5.1 ‘Q’ model
2.8 Material Requirement Planning (MRP)
2.8.1 Introduction
2.8.2 Overview of MRP system
2.8.3 Inputs of MRP system
2.8.4 MRP Process
2.8.5 MRP output
2.9 Manufacturing Resource Planning (MRPII)
2.9.1 Introduction
2.9.2 Closed loop MRP system
2.9.3 Master Production Schedule
2.9.4 Capacity planning
2.9.5 Forward scheduling and backward scheduling
2.9.6 Benefits of MRPII
2.9.7 Drawbacks of MRPII
2.10 Enterprise Resource Planning (ERP)
2.10.1 Need for ERP
2.10.2 Evolution of ERP
2.10.3 Advantages of ERP system
2.10.4 Disadvantages of a ERP system
2.10.5 Limitation of ERP
2.11 E-Business and E-Commerce



NOTES UNIT - II

MATERIAL AND INVENTORY
MANAGEMENT
2.1 INTRODUCTION
In this unit the productivity of material resources is discussed. The role of
materials management in an organization and the latest material handling devices like
Automated Guided Vehicle (AGV), Automatic Storage and Retrieval System (AS /
RS) and Robots are illustrated. The deterministic and probabilistic inventory models
are illustrated with examples. Detailed discussions are carried out about material
requirement planning and manufacturing resource planning. The evolution of ERP system
is dealt. In addition, introduction about e-business and e-operation strategies are also
explained.
• To know the importance of material resources.
• To understand functions of materials management.
• To understand the computer controlled material handling devices.
• To know the importance of deterministic and probabilistic inventory models.
• To know the working of MRP – I and MRP – II systems.
• To highlight the E-business and e-operation strategies.
2.3 MATERIAL MANAGEMENT
2.3.1 Definition and Scope
We can define Materials Management as the function responsible for the
coordination of planning, sourcing, purchasing, moving, storing and controlling materials
in an optimum manner so as to provide a pre-decided service to the customer at a
minimum cost.
2.3.2 Objectives
However, within the broader management objectives of any industry or business,
Materials Management’s contribution towards objectives may be divided into two
categories:



1) Primary and NOTES
2) Secondary.
The former contributes directly to the Materials Management function and the
latter, helps other departments to achieve their objectives.
2.3.2.1 Primary Objectives
Purchasing:
Materials play a vital part in the field of cost-control and operating expenditure
of any organization and therefore, materials have a direct bearing on the cost of a
product, manufactured. If the Materials Department can reduce the overall materials
cost through an efficient system of buying, it can directly contribute its share to the
enhancement of profit. Thus lower prices, lower procurement and possession costs are
important objectives of Materials Management. Price consciousness or less materials
cost means more profit as embodied in the phrase, “Purchasing for Profit” which is
readily recognized by Management. It is therefore a prime functional responsibility of
the Materials Management department.
Stores and inventory management:
Arriving at the right balancing point in the inventory investment like investment
in any other capital assets has always been a perplexing problem to industries. Inventory
Management function is more complex, more subtle and the balance of costs and gains
is much more difficult to find out. Briefly, Materials Management objective here is to
have the correct quantity and right quality of material on hand at the time required with
a minimum of investment expenditure, consistent with business experience. When
inventory turnover is high, storage and carrying costs are low.
Continuity of supply:
This is an other important objective of Materials Management. Specially in
automated processes, where costs are rigid and are not easily amenable to reduction
due to lack of production materials, the question of continuity of supply gains prominence.
This foreshadows all other objectives, because idle-time costs of men and machines
push up overall costs of production and expediting supply means additional transport
costs.
Quality of materials:
Where quality of materials presents cost plus production engineering problems,
it may well become one of the prime objectives of Materials Management, where other
objectives are sacrificed at quality-cost.
Good supplier relations:
A good supplier relation, on which depends much of the product-reputation of
the company, is also one of the key objectives of Materials Managers. Suppliers respond



NOTES to fair treatment but are uncooperative and unwilling if indifferently treated. The Materials
Management department can improve relations by providing the required stimuli for
their better performance.
2.3.2.2 Secondary Objectives
Secondary objectives are so varied that they limit the possibility of listing
exclusively in one breath. In one way or the other, they help to achieve the primary
objectives, but different organizations put different emphasis on them. The following
are a few examples.
Make-or-Buy decisions:
Since the Materials Management department is immediately concerned with
the selection of supply sources, materials-cost, procurement-cost and the availability of
materials. it influences heavily the Make-or-Buy decision. Often, this is a Committee
action where other departments are also involved. However, the Materials’ department’s
contribution is still substantial and more direct.
Value analysis and Value engineering:
Any item that is produced or bought is to serve a specific purpose. Before
making or buying any material or equipment, engineers and buyers must decide what
purpose they are to serve in order to find out whether a lower-cost design would work
well or a less costly item could fill the need. Both engineering department and purchase
department may watch the specifications for the best value of the money spent.
‘Value engineering’ and Value Analysis’ are close to the same thing. They are
approaches to cost-saving goals that deal primarily with product design. The first
usually refers to what the engineering department is doing in this direction and the second
usually refers to the work that the buyer is doing in this area. If value analysis is designed
to reduce the cost of an item, standardization may often eliminate the item entirely.
Standardization:
Standardization is essential to a mass production system which is defined as
“that which has been established as a model to which an object or action can be
compared”. However, one should take note that even when a substitute is technically
feasible, it is not always economical to use it. The economics of standardization is not
necessarily so complex.
All that is required is to compare costs of acquisition and carrying before the
substitution was made with the costs after it was made. A standardized program is
primarily designed to root out unneeded inventories. The buyer who knows who made
the original components, need not pay a premium price for it to another equipment
manufacturer for the same thing.



The Engineering department is primarily responsible for standards and NOTES
specifications. However, the Materials department can promote incorporation of
standard components into product design to reduce cost. The fewer the items that
need be managed, the simpler and more efficient is the Materials Management process,
so that the Materials Management department can periodically review the stock to
suggest weeding out of non-standard items.
Product development and new products:
Since the discovery and improvement of materials frequently lead to a new
product and lower costs on existing products, the Materials department can suggest
materials and components that will do better or equivalent jobs at lower cost. Product
efficiency is basically a compromise between engineering design and economic objective
of Management. The Materials Manager’s economic knowledge can supplement the
technical skill of engineering through a product change for bigger profits. Again, a
program designed to find ways and means of utilizing the by-products or wastes is
always profitable and here the Materials department can render substantial help by
adding new products to the existing product-line.
Price, demand and requirements forecasting:
In large concerns this is a functional responsibility of economists. They make
forecasts both for sales and purchases. Materials Management personnel translate
them into specific purchase actions. Because of their intimate knowledge of the market
conditions through daily contacts with suppliers, in medium or small-size organizations,
Materials Management departments do this job. By analyzing and interpreting data of
past sales, seasonal variations in prices, availability and demand for materials, they
forecast future trends and plan material requirements accordingly.
An organization structure is an essential tool of management:
As a system of responsibility and of formal interrelations, it is concerned with
two of the elements, namely, planning and coordination. Its chief purpose is to ensure
smooth and balanced working of the organization. Obviously the size of the unit must
affect the way in which management and other activities are carried out. Clearly, a large
organization will be able to use and will need to use techniques and procedures of a
different kind and higher degree of complexity than those of the medium or smaller firm.
In other words, there will be differences in methods or routines according to differences
in size, but the fundamental principles of management and the approach necessary for
the attainment of effective management are the same, irrespective of size.
1. The determination of the basic objectives:
The basic objectives of an organization determine the organization structure for
they determine the type, stability, structure and permanency of the organization. The



NOTES objectives of an organization play, therefore, a vital part in determining how quickly the
structure should be developed, what it should look like, its operating cost and
permanency. What we want to accomplish should be kept clearly in mind while
determining and setting up its structure. Obviously, the organization structure of a large
corporation is much more complex, and therefore, slowly developed. Here too,
objectives affect the structure. Once the objectives are clearly determined, the
development of structure will follow the natural path dictated by the desire to reach
these objectives. An organization structure should never hinder the achievement of
these objectives; instead it should facilitate the mechanism that will enable the organization
to accomplish things more easily and effectively than when left in unorganized things
more easily and effectively than when left in an unorganized fashion. Thus, if it is decided
that the company should add to a new line of product, and therefore, expand its marketing
territory, such an objective and its concomitant Materials Management activities would
necessarily affect the final structure of the organization.
2. Determination of the areas of activity:
Organization itself is nothing but the application of the universal law of
specialization. Through organization, a person’s actions and responsibilities are narrowed
to one or a few functions, specializing in these few and thereby, increasing efficiency.
Specialization by division of work into functional areas enables one to understand
his job more thoroughly. Therefore, effective organization must include specialization
as an element of efficiency for the performance of one or a very few leading functions.
As far as possible, similar functions should be combined into one position. Although its
advantages are universally recognized, yet it has its limits which should not be exceeded.
3. Determination of the ideal structure to accomplish the desired activities:
Physical listing of activities will in itself suggest possible areas within which it
needs to consolidate work. Each of the groupings will then lead to an ‘ideal’ organization
structure to carry out the functions. Products, tools and processes may be considered
as possible areas of functional activities. This ‘ideal’ structure may then represent the
long range or ultimate organization with available personnel, funds, etc., so as to reconcile
the ‘ideal’ with the ‘working’ organization.
4. Authority and Responsibility:
Authority is the right to give orders and the power to exact obedience. Authority
is not to be conceived apart from responsibility, that is, apart from sanction – reward or
penalty, which goes with the exercise of that power. Delegation of authority is the key
point of organization. Without delegation there would be no organization and this is the
core of all formal processes of organization. A major task of top management is the
delegation of authority to proper individuals in order to secure appropriate actions. But
often, we hear of responsibility being delegated without power to command or act.



Such an organization set-up makes for ease and efficiency in determining responsibility NOTES
and delegating necessary authority. Since it would not be just to hold a person responsible
for performance of a task without first giving him the authority, responsibility should
always be coupled with commensurate authority. Here, authority can be delegated,
responsibility cannot.
5. Span of Control:
By span of control, we mean the number of individuals one supervises and
directs. There is a definite limit to this number and this, to a great extent, determines the
units of an organization. There may be a tendency to over supervise and this may, in
effect, mean scant or ineffective supervision.
On the other hand, when too few report to one supervisor, his time is not
effectively used. However, no hard and fast rule can be established and it depends
upon the type of work performed.
6. Personal Ability:
Simply assigning jobs to individuals does not mean that they will be accomplished.
Individuals differ in capacity and ability and these differences as well as personal
limitations should be considered before placing an individual in an organization. In
developing an organization, therefore, proper regard should be paid to the personal
ability of individuals assigned to various components. An organization is referred to the
people and its structure reflects the ability of its members which again largely determines
the structure.
7. Unity of Command:
For any action whatsoever, an employee should receive orders from one superior
only. Such is the rule of unity of command. No one in any organization should report
to more than one line supervisor and everyone should know to whom he reports and
who reports to him. In fact, receiving directions from more than one individual may
easily result in confusion, conflict, lack of action and poor morale. Each member of an
organization, therefore, should receive directions from only one boss, his immediate
superior and should be responsible to him alone.
8. Job Assignment:
Logical groupings or related functions should be made in developing the
organization structure. It is often desirable to have the responsibility for each of these
functions assigned to specific individuals with these persons turning to the leader charged
with the accomplishment of the overall function.
9. Regulations:
Rules and regulations aid improper operation of an enterprise. A complete
statement of the operating objective of an enterprise as well as the responsibility and



NOTES the authority of each individual should be formulated and should be made available in
writing to all personnel in the organization. They may be broad and specific. Even
detailed methods manuals to describe how the tasks are to be carried out may be
valuable. They define the authority which certain individuals have over particular functions.
10. Two way communication:
Despite the fact that line of authority provides channels downward and upward,
they are often used only to pass directives downward and never as a means of
communicating attitudes, feelings or ideas upward. Such blocks in communication
occur in a great many organizations. In fact, one of the most immediate and costly
results of poor organization is the breakdown of intra-organizational communication.
In as much as an organization is developed to aid in accomplishing an objective, good
communication is necessary if all employees are to know what to do to reach this
objective.
11. Flexibility:
The environment in which an organization exists and the individuals who make
it up are constantly changing. Organizations change because of technological, economic
or personnel changes or changes in the objectives. An organization possessing flexibility
withstands minor pressures, but gives way to the demand for genuine change permitting
their expansion or contraction without seriously altering the basic functions of various
segments of the structure.
12. Line and Staff activity:
Line and staff functions should not be combined in one individual where
separation of functions is possible. Line functions, as has been said before, are those
which directly affect the product or service. Staff functions are those that aid the line or,
are auxiliary to the line function. Because confusion may result, line and staff functions
should be separate wherever possible. Staff specialists are useful and there will always
be a need for them. Especially in large materials organizations, where materials
management is treated as an integrated activity, there should be less need for staff
experts in a variety of functions. Among the major staff services value analysis, economic
forecasting and administrative planning may be essential. A staff expert on ‘trade relations’
is also a common feature in large-scale industrial purchasing.
Leadership Question:
Leadership is obviously more than personal ability and skill. Leadership is
important to the effective set up and operation of every organization because leadership
is the one force that charts and makes possible the economic accomplishment of the
objectives. A ‘weak’organization structure with effective leaders will probably accomplish
more than a so called ‘strong’ organization with weak leaders.



Structural balance: NOTES
An organization conceived and developed along the principles detailed above,
will more than reward its leaders, as well as its members. In the process of forming a
new organization structure or of reorganizing an existing one, these principles should be
considered. But the consideration of these principles, rules and types will not in itself
result in the development of a new organization. Instead a new organization structure
must be visualized and developed step by step. Although no series of rules can assure
an effective organization, this objective can be approached in a systematic fashion without
much difficulty. In a balanced organization, each function of the structure should be
large enough, but not overly developed in relation to other functions of the organization.
Without such a balance, the objective of the organization cannot be achieved
economically.
Review Questions:
1. List any two Primary functions.
2. List any two Secondary functions.
2.4 MATERIAL HANDLING
2.4.1 Introduction
For an ideal operation system, material handling is not a desirable activity.
The reason is it does not add any value to the product but it adds only cost to the
product. So when you design a layout you should see that the movement of materials
should be minimum. The material handling equipment used mostly depends upon the
type of production system to be adopted. In the case of flow line production system,
the following material handling equipments are used.
Conveyors
1. Slat conveyor
2. Pusher bar conveyor
3. Roller conveyor
4. Belt conveyor
5. Wheel conveyor
6. Screw conveyor
7. Pivoted bucket conveyor
8. Apron conveyor
9. Spiral chute
10. Pneumatic conveyor
11. Trolley conveyor



NOTES In the case of job order/intermittent type production systems, the material
handling equipment used are

1. Fork Truck
2. Platform Truck
3. Industrial Truck
4. Straddle carrier
5. Hand operated vehicles

In addition, CRANES and HOISTS are also used in the production system.
Thus is not specifically related to particular system. All types of production system
uses/this kind of material handling equipment.
The types of CRANES and HOISTS are :
1. Overhead traveling bridge cranes
2. Jib crane
3. Gantry crane
4. Air hoist
5. Electric Hoist
6. Chain hoist
There is no hard and fast rule that particular material handling system used only
by the particular production system. But you can find that the trucks used in the flow
ıline. Production as well as the conveyors used in the job order and intermitted production
system.
Diagram 2.1 – Material handling equipments



NOTES



NOTES

2.4.2 Robot
The word “robot” is also used in a general sense to mean any machine that
mimics the actions of a human, in the physical sense or in the mental sense. It comes
from the word robota, labor or work. The word robot first appeared in Karel Capek’s
science fiction play R.U.R. (Rossum’s Universal Robots) in 1921. The word was brought
into popular Western use by famous science fiction writer Isaac Asimov.
A robot is an electro-mechanical or bio-mechanical device or group of devices
that can perform autonomous or preprogrammed tasks. A robot may act under the
direct control of a human or autonomously under the control of a programmed computer.
Robots may be used to perform tasks that are too dangerous or difficult for humans to
implement directly, such as radioactive waste clean-up, or may be used to automate
mindless repetitive tasks that should be performed with more precision by a robot than
by a human, such as automobile production. Robot can also be used to describe an
intelligent mechanical device in the form of a human, a humanoid robot.
The word robot is used to refer to a wide range of machines, the common
feature of which is that they are all capable of movement and can be used to perform
physical tasks. Robots take on many different forms, ranging from humanoid, which
mimic the human form and way of moving, to industrial, whose appearance is dictated
by the function they are to perform.



Asimov proposed three ‘laws’ which for many years were recognized as NOTES
principles in the use of robotics:
A robot must not harm a human being or, through inaction, allow a human to
come to harm.
A robot must always obey human beings unless this is in conflict with the first
law.
A robot must protect itself from harm unless this is in conflict with the first or
second law.
Robots can be grouped generally
Mobile robots (e.g. autonomous vehicles)
Manipulator robots (e.g. industrial robots)
Self reconfigurable robots, which can conform themselves to the task at hand.
An industrial robot has been defined as:
“A reprogrammable multifunctional manipulator designed to move material,
parts, tools, or specialized devices through various programmed motions for the
performance of a variety of tasks”.
The definition says the robot is a reprogrammable and multifunctional. The
reprogrammability means, through computer the programmed instructions can be written
fed and also can be edited. Multifunctional is in the sense of its versatility. It can perform
various activities.
2.4.2.1 Advantages of Robots in Industry:
We can analyze the various advantages of robots in three perspectives.
Technical factors:
When comparing robot and human performance it is generally considered that
humans cannot match the speed, quality, reliability, endurance and predictability of
robotics systems. However, robots cannot compete with hard automation if the cycle
times are short and flexibility is not an important factor. Robots therefore provide a link
between the rigidity of dedicated automation and the flexibility of the human operator,
in that they offer:
High flexibility of product type and variation.
Lower preparation time than hard automation.
Better product quality.
Fewer rejects and less waste than labor-intensive production.



NOTES Economic factors:
Major factors in considering the possible implementation of robotics systems
include:
• The need to increase production rates to remain competitive.
• Pressure from the marketplace to improve quality.
• Increasing costs.
• Shortage of skilled labor.
In general, robotics can increase profitability by:
• Providing maximum utilization of capital-intensive production facilities for
up to 24 hours per day, seven days per week;
• Reducing production losses due to absenteeism and skilled labor shortage,
reducing the amount of inventory which is being processed with resulting
savings in work in progress.
• Reducing the manufacturing lead time of the product or processes;
• Reducing scrap and increasing product quality, with resulting reduction in
the number of customer complaints.
Social factors:
• Robots are employed to do mindless, repetitive tasks so that the human
capital can be utilizied in more interesting work.
• Many low-level tasks can be carried out by robots.
• Robots can be utilized to perform undesirable work in dangerous or
hazardous environments and work requiring heavy physical effort.
E.g.: spot-welding car bodies, applying spray paint.
• Robots are successfully implemented in the nuclear industry for carrying
out the maintenance work on reactors and for the handling of dangerous
waste products.
2.4.2.2 Components of a robot:
A robot has many components which include:
A base- fixed or mobile.
A manipulator with several degrees of freedom (DOF).
An end-effector or gripper for holding a part or a tool.
Drives or actuators causing the manipulator arm or end-effector move in a space.
Controller with hardware and software support for giving commands to drivers
Sensors to feed back the information for subsequent actions of the arm as well as to
interact with the environment in which the robot is working.
Interfaces connecting the robotic subsystems to the external world.



Figure 2.2 – Movements of a Robot NOTES

2.4.2.3 Industrial applications of robotics:

Material handling:
Depalletizing/palletizing
Transporting components
Transfer of components/tools
Bottle loading
Parts handling
Machine loading and unloading components:
Loading parts to CNC machine tool
Loading a punch press
Loading a die casting machine
Loading electron beam welding and laser beam welding machines
Loading/orientating parts to transfer machines
Spray painting
Loading parts on the test machine
Painting of trucks/automobiles
Painting of agricultural equipment
Painting of appliance components
Arc welding
Spot welding
Arc welding
Seam welding of variable width
Machining
Drilling



NOTES Deburring
Sanding
Grinding
Cutting
Forming
Assembly
Mating components
Riveting small assemblies
Inspection
In-process measuring and quality control, searching the missing parts
Others
Heat-treatment, applications of adhesives etc.
2.4.2.4 Applications of robotics in other fields:
1. Hazardous environments
Mining
Exploration
Search and rescue
Tunneling for main roadways
Operations in short passages
Municipal services
Fire fighting
Underground (dangerous gas-filled)
Sewer clearing
Maintenance of atomic reactors
Space
Space vehicles
Undersea
Oil/mineral exploration
Salvage operations

2. Medical
Rehabilitation engineering for handicapped
Non-invasive diagnostics
Surgery

3. Distribution
Warehousing
Retailing (for food industry or for retail industry)



4. Agriculture NOTES
5. Hobby/household purposes

6. Military applications of robots may be in both manufacturing and non-manufac-
turing areas.
2.4.2.5 Dangers and disadvantages:
Although robots have not developed to the stage where they pose any threat or
danger to society, fears and concerns about robots have been repeatedly expressed in
a wide range of books and films. The principal theme is the robots’ intelligence and
ability to act could exceed that of humans that they could develop a conscience and a
motivation to take over or destroy the human race.
Currently, malicious programming or unsafe use of robots may be the biggest
danger. Although industrial robots may be smaller and less powerful than other indus-
trial machines, they are just as capable of inflicting severe injury on humans. However,
since a robot can be programmed to move in different trajectories depending on its
task, its movement can be unpredictable for a person standing in its reach. Therefore,
most industrial robots operate inside a security fence which separates them from human
workers.
Even without malicious programming, a robot, especially a future model mov-
ing freely in a human environment, is potentially dangerous because of its large moving
masses, powerful actuators and unpredictably complex behavior.
Designing and programming robots to be intrinsically safe and exhibit safe be-
havior in a human environment is one of the great challenge in robotics. Some people
suggest that developing a robot with a conscience may be helpful in this regard.
2.4.3 Automated Storage and Retrieval System (AS/RS)
An integrated FMS, AGVS, and AS/RS system provides an efficient and ef-
fective production system for manufacturing. Receiving, identification and sorting, dis-
patching, placing in storage, retrieving from storage, packing, shipping, and record
keeping have traditionally been considered the functions of storage systems. An AS/RS
attempts to achieve these functions by automating most of these procedures in a cost-
effective and efficient manner.
An automated storage and retrieval system is defined as:
A combination of equipment and controls, which handles, stores and retrieves materials
with precision, accuracy and speed under a defined degree of automation.
Different operations of AS/RS:
• Automatic removal of an item from a storage location
• Transportation of this item to a specific processing or interface point



NOTES • Automatic storage of an item in a predetermined location, having received an
item from a processing or interface point.
An automated storage and retrieval system comprises the following:
• A series of storage aisles having storage racks.
• Storage and retrieval (SIR) machines, normally one machine per aisle, to
store and retrieve materials
• One or more pickup and delivery stations where materials are delivered for
entry to the system and materials are picked up from the system.
2.4.3.1 Types of AS/RS
Several types of AS/RSs are distinguished based on certain features and
applications.
Some of the important categories include:
1. Unit load
2. Miniload
3. Person-on-board
4. Deep-lane
5. Automated item retrieval system
1. Unit Load AS/RS
The unit load AS/RS is used to store and retrieve loads that are palletized or
stored in standard-size containers. In general, a unit load system is computer con-
trolled; having automated machines designed to handle unit load containers. Each ma-
chine is guided by rails in the floor. These are the load-supporting mechanisms that
moves loads to and from storage locations and the pickup-and-deposit stations.

2. Miniload AS/RS:
A miniload system is designed to handle small loads such as individual parts,
tools, and supplies. The system is suitable for use where there is a limit on the amount of
space that can be utilized and where the volume is too low for a full-scale unit load
system and too high for a manual system. A smaller investment and flexibility of handling
small items make it a popular choice in industry.
3. Person-on-Board Systems
The person-on-board system allows storage of items in less than unit load
quantities. A person rides on a platform with the S/R machine to pick up individual
items from a bin or drawer. This provides in-aisle order-picking ability, which can reduce
the time it takes to fill an order. The operator can select the items and place them in a
tote or module, which is then carried by the S/R machine to the end of the aisle or to a
conveyor to reach its destination.



4. Deep-Lane AS/RS: NOTES
The deep-lane AS/RS is another variation on the unit load system. The items
are stored in multideep storage with up to 10 items per row rather than single or double
deep. This leads to a high density of stored items, permitting high usage of the unit.
Each rack permits flow-through of items; that is, an item is deposited on one
side of the storage rack and removed from the other side. The S/R machine is similar to
the unit load S/R machine, except that S/R machines have specialized functions such as
controlling rack-entry vehicles.
5. Automated Item Retrieval System:
This system is designed for automatic retrieval of individual items or cases for
storage. The storage system consists of items stored individually in a flow-through system
that can be automatically released from storage and automatically brought to a required
point. The items are stored from the rear, as in the deep-lane system, and are retrieved
from the front.
2.4.3.2 Technical and Economic Benefits of AS/RS
There are several benefits of AS/RS for an organization, which include:
• An AS/RS is highly space efficient. Space now occupied by raw stock, work in
process, or finished parts and assemblies can be released for valuable manufacturing
space.
• Increased storage capacity to meet long-range plans.
• Improved inventory management and control.
• Quick response time to locate, store, and retrieve items.
• Reduced shortages of inventory items due to real-time information and control.
• Reduced labor costs due to automation.
• Improved stock rotation.
• Improved security and reduced pilferage because of closed storage area.
• Flexibility in design to accommodate a wide variety of loads.
• Flexibility in interfacing with other systems such as AGVS, FMS, and inspection
systems such as coordinate measuring machines.
• Reduced scrap and rework due to automatic handling of parts.
• Reduced operating expenses for light, power, and heat.
• Helps implement just-in-time (JIT) concepts by getting the right parts, tools, pallets,
and fixtures to the right place at the right time because of automatic control of
storage and retrieval functions and accurate inventory management.



NOTES 2.4.4 Automated Guided Vehicle
Automated Guided Vehicles (AGV), popularly known as battery-powered
driverless vehicles. AGVs are becoming an integral part of automated manufacturing
systems. They are with programming capabilities for destination, path location, and
positioning. The AGVS belong to a class of highly flexible, intel1igent versatile material-
handling systems used for materials loading and unloading throughout the facility.
Automated Guided Vehicle (AGV) is the advanced material handling
applications. AGV play an important part in automating the manufacturing unit because
they not only connect all faces of the factory by the horizontal movement of materials,
but allow management to control and direct manufacturing processes.
The AGV can be defined as a vehicle equipped with automatic guidance
equipment, either electromagnetic or optical. Such a vehicle is capable of following
prescribed guidepaths and may be equipped for vehicle programming and stop selection,
blocking, and any other special functions required by the system.
One of the interesting feature of AGVs is the collision avoidance capability.
That is, the vehicle comes to a dead stop before any damage is done to personnel,
materials, or structures.
2.4.4.1 The Components of AGV
There are four main components of an automated guided vehicle system:
1. The vehicle: It is used to move the material within the system without a human
operator.
2. The guide path: It guides the vehicle to move along the path.
3. The control unit: It monitors and directs system operations including feedback on
moves, inventory, and vehicle status.
4. The computer interface: It interfaces with other computers and systems such as the
mainframe host computer, the automated storage and retrieval system (AS/RS),
and the flexible manufacturing system (FMS).
AGV’s Control Systems
There are three types of AGVS control systems. They are 1-1
• Computer-controlled system:
In this system, all the transactions and AGVS vehicle movements are controlled
and monitored by the system controller. The guide path controller controls the guide
path of the AGVS and transfers the information to the AGVS process controller. The
AGVS process controller directs the movement of the AGVS vehicles.



• Remote dispatch control system: NOTES
In this system a human operator is required to issue instructions to the vehicle
through a remote control station. The control system sends destination instructions directly
to the vehicle. Therefore, the human operator does not have any direct control over the
AGVS vehicle.
• Manual control system:
In the manually controlled system, the operator gives commands to AGVS.
The operator gives instructions like loading the vehicle, entering a destination and
unloading. A manually controlled system is simple and the least expensive of all control
systems. The efficiency of the system depends on the skill and performance of the
operator.
2.4.4.2 Applications of AGVS
AGVS have numerous applications and have already been applied by many
manufacturing plants and companies. New applications are being developed as
technology improves and as experience is gained. Some of the most common applications
of the AGVS are:
• Raw material storage
• Finished goods storage
• Assembly operations
• Flexible manufacturing systems
• Manufacturing operations
Technical and Economic Benefits of AGVs
• Economic Justification: AGV systems are proving to be the most economical
method of moving material.
• Interface with Other Systems: AGV systems are designed to interface with other
material-handling systems including conveyors, automatic storage/retrieval systems,
production lines, and other devices.
• System Accountability: Computer control means planned delivery, transaction audit
records, on-line interface to production and inventory control systems and
management information on the vehicle and workstation production.
• Reduced Labor/increased Productivity: In cases where driverless vehicles are
used, substantial savings are realized due to labor reduction.
• Guide path Easily Expanded: As material movement needs change or plant size
increases, AGV systems can be expanded or modified quickly and at low cost.



NOTES • Expandable System Capacity: As material movement needs an increase, load
movement capacity in the AGV system is easily accomplished by adding one or
more vehicles.
• Unobstructed Aisles: Control wires for AGV systems are installed in the floor and
therefore, leave no ‘above-floor obstructions’.
• Destinations Unlimited: AGV systems can be designed with an unlimited number
of pick-up and delivery points.
• Less Equipment Damage: There is less product and equipment damage when
AGV systems are used to move material because the vehicles travel on a
predetermined route.
• Reliable System Control: All automatic guided vehicles are equipped to allow
manual override for the special material or vehicle movement situations.
• Energy Conservation: AGV systems require very little energy to operate.
• Ease of Installation: AGV systems can be installed in less time than most other
material handling systems.
• Installation in Existing Buildings: AGV systems can be installed in existing buildings
with minimum interference to ongoing operations.
Review Questions:
1. Name any two Conveyors.
2. List any two component of Robotics.
3. Name any two trucks.
4. Name any two cranes.
5. State any two advantages of Robots in Industry.
6. Name any two components of Robots.
7. List three benefits of AS/RS.
8. Expand AGV.
2.5 JUST IN TIME
Just In Time (JIT) is a philosophy, wherever an organization adopts this
philosophy to strive for excellence in their activities. JIT is considered to be a production
strategy which enables to identify the non value added activities and eliminate those
activities. The activities include the activities starting from the design to delivery of the
product. JIT helps in achieving the listed objectives like.
Zero defects
Zero lead time
Zero Breakdowns
Zero Handling
Zero Set uptime
Zero lot excesses
Zero Surging



2.5.1 Problems of Conventional Production Systems: NOTES
The well known Conventional Production Systems like Continuous Production
System and the Intermittent Production System have their own limitations as you have
read in the previous sections. The continuous production system has the shortcomings
like for eg; this kind of system is not suitable for variety production. If there is a change
in the product design, this system needs to be changed as it lacks in flexibility. The
work forces are specialized work forces. But the workstations are properly balanced,
comparatively you need less work in progress inventory. The manufacturing cycle time
is comparatively low. In the case of intermittent production system, the system is more
of process based. Since, it does the variety of products. The product has to wait for
long time in the queue for the processing. This results in more in process inventory. But
this system has the advantage of producing more no of variety production. Flexibility is
in built in this system.
Since the traditional system have these kinds of problems, so we need a system
incorporating flexibility, balanced work station with multi skilled work force, with less
waiting time of the products.
JIT provides solution for the problems of conventional production system.
2.5.2 Conventional Vs. JIT Attitudes
Table2.1 - Conventional Vs. JIT Attitudes

Conventional Attitudes JIT Attitudes
Some defects are acceptable Zero defects are necessary and attainable
Large lots are efficient (more better) Ideal lot size is one (less is better)
Fast production is efficient Balanced production is efficient
Inventory provides safety Safety stock is a waste
Inventory smoothes production Inventory is undesirable
Inventory is an asset Inventory is a liability
Queues are necessary Queue should be eliminated
Suppliers are adversaries Suppliers are partners.
Supply sources lead to safety Sources of supply lead to control
Breakdown maintenance is enough Preventive maintenance is essential
Long lead time is better Short lead time is better
Setup time is given Setup time should be zero
Management is by edict Management is by consensus
Work force is specialized Work force is multifunctional



NOTES The above table illustrates the difference between Conventional System and
JIT system. JIT is also considered as Inventory System in addition to considering it as
production strategy. The reason for considering JIT as an Inventory System is that the
main emphases of the JIT is the product, should flow in the production system without
any impediments.
But Inventory hides much type of impediments like:-
Bad raw materials-
Machine break downs-
Poor quality-
Worn tools-
Delayed deliveries
Unavailable material handling equipment
Unavailable inspectors or setup persons
If you have Inventory, the above problem will not come to the lime light very
much. So JIT focus on mainly on inventory reduction to pave the way for the smooth
flow of product in the system.
2.5.3 JIT as a waste elimination tool
As it is mentioned, JIT emphasis on the inventory reduction. You can see in this
section what re-engineering by the JIT requires in the input, processing and output
sides of an operation system.
Figure 2.3 - JIT as a waste elimination tool

Input Processing Output

- Customer order - Group Technology - Customer order
- Accurate Forecasting - Uniform plant loading - Accurate forecasting
- Reliable supplier - Kanban type production
- Control system
- Quality Control
Raw Material inventory reduction:
The following situations lead the organization to invest less in Raw Material inventory.
• The exact proportion of the input requirement is known, provided the organi-
zation produces the product based on customer order.
• Accurate finished good forecasting enables the organization to stock less.
• Fewer but better suppliers.
• Partnership with the supplier.



• More local suppliers to reduce lead time. NOTES
• Frequent delivery of parts directly to the point of use.
• Quality at the source by preventing defects and doing it right the first time.
Work in Progress reduction:
Work in Progress is the result of long manufacturing lead time, improper bal-
ance of the workstations. First let us analyze the constituents of manufacturing lead
time. Manufacturing lead time consists of

Figure 2.4 - Work in Progress reduction

Process time Wait time Move time Queue time

Manufacturing lead time

Except process time, all other times are non value added times. The organization
should re-engineer first to reduce non value added times.

Setup time:

It is the time to setting up the machine. It involves the time included

- in bringing the raw material and tools to the work place.
- in cleaning and lubricating the machines.
- in changing the die and jigs & fixture etc.

The relationship between setup time, setup cost and production is given below:

Setup time is Proportional to Setup cost.

Production quantity = f (Setup cost)

So, reduction the set up time in enables the reduction in set up cost. This in turn
reduces the economic production quantity to be produced. So JIT advocates one unit,
is the economic production quantity. The setup time reduction is Possible through
adopting the following means:

- Method analysis
- Quick disconnects
- Tinged bolts
- Clamps
- Roller platforms
- Tool carouses



NOTES Process time:

It is the actual operation time on a product. This usually contributes less than
10% of the total manufacturing time.

Wait time:

This is the waiting time of the product to be moved for the next operation.
This time is reduced provided the movement of material and the completion of
operation are synchronized. This time is reduced through proper material handling
planning.

Move time:

This is the movement time from one work station to another work station.
This time is lessened if the work stations are adjacent.

Queue time:

This represents major portion of the manufacturing cycle time. This is the
idle time of the product, waiting for the operations because the machine center
from which the processing sought for, engaged by another product. This time
depends upon the routing procedure adopted, priority rule assigned for the product.

If you reduce the non value added times by the way and means mentioned
above, the investment on, namely, the material, labor and manufacturing overhead
in work in progress, inventory gets reduced. This is possible by adopting the group
technology principle, Kanban production control, assuming machine reliability
through preventive maintenance.

Finished Good Inventory Reduction:

Finished good inventory is reduced if you reduce the uncertainty related with
the timing and the quantity of the customer requirement. The means for the uncertainty
reduction:
• Production based on the customer orders.
• Accurate forecasting or free from errors .
• Through better customer relationship, retaining the customer helps in executing
agreement.
• To fulfill the customers future requirement.
• Retaining the customer through better customer relationship enables the
organization in executing agreement to fulfill his future requirement.



Group Technology: NOTES
This is already explained in the previous unit‘s section (1.7.4 Group Technology)

2.5.4 KANBAN Production control system:

KANBAN is a Japanese word, meaning, CARD. There are two types of
KANBAN one is called CONVENANCE KANBAN and the other one is
PRODUCTION KANBAN CONVENANCE KANBAN acts as a move order
authorizing the movement of material from one center to another work center.
PRODUCTION KANBAN acts as a work order authorizing the work center to
start production. You can understand the working of KANBAN Production control
systems by considering intermediary work centers n-1, n and n+1 in a manufacturing.

2.5.4.1 Working of KANBAN

1. The production centers know in advance the production schedule.
2. The operator in the production center ‘n+1’ goes with conveyance KANBAN to
the production center ‘n’. Where a container have the parts required for the
production center ‘n+1’. Then he removes the production KANBAN and keeps
it in the rack of the production center ‘n’.
3. Then he keeps the conveyance KANBAN in the container and move with the
container to his work station n+1.
4. The order in which the production KANBAN in the rack gives indication to the
operator in the work center ‘n’ about the priority based on which the product have
to be processed in the centre ‘n’.
5. In the production center ‘n’ based on the production schedule, when the time for
starting his operation reaches.

- He goes with conveyance KANBAN to the production center ‘n-1’.
- Remove the production KANBAN in the container and keep it in the rack of
center n-1 and keep the conveyance KANBAN in the container and move
with the container to the workstation ‘n’ to start further processing on the product.
The whole sequences of activities are portrayed in the figure2.5.



NOTES Figure2.5 - Working of KANBAN

From the above sequence you can understand that the JIT operates in the pull
system basis. That is the down stream pulls the components from the upper stream for
the production. But, in the case of traditional production system, it operates, based on



the push system. In this case, whether the down stream requires the component at the NOTES
time or not, the upper stream simply pushes the component to down stream as and
when it completes the component that results in comparatively more work in progress
inventory.

2.5.5 Uniform Loading:

You can understand the concept of uniform loading through an example, suppose
a product ‘x’ of 2000 quantity is required in a month. Assume that the organization
works for 20 days in a month, then 2000/20 = 100 units, the organization has to produce
in a day. Uniform loading means, the organization never produces the product excess
of 100 units in a day even though there is an idle capacity available in a day. This means
that JIT insists not on the efficiency (Utilization of resources) because if the product is
produced faster than the required, then it adds more costs to the organization through
the following:

- Containers are needed to hold them.
- Trucks are needed to move them.
- Warehouse space is needed to store them.
- Money is needed to finance the inventory.
- Accountants are needed to keep track of it.
- Schedulers are needed to indicate when to produce more.

Quality Control:

In JIT, as par as in process inspection concerned, the worker act as a inspector
and he is responsible for the quality. As it is mentioned, the work force is a multi 1-1
skilled workforce. The worker is trained in the inspection process also, if there is any
problem regarding the quality, the whole production stops. After, the quality problem is
rectified, the production starts. In JIT, the quality improvement is done through Total
Employee Involvement (TEI), quality circles. The emphasis is more on the quality
but not on the quantity. Workers are responsible for feeding only good quality parts to
the downstream operations. The machines are kept in good working conditions so that
it produces good quality part. The worker acts as a maintenance man to get defect free
product. JIT operates on the policy of prevention better than cure.

Review Questions:

1. What does JIT aim for?
2. How do you achieve flexibility and less work in progress inventory?



NOTES 3. What is meant by wait time?
4. What is meant by queue time?
5. What does KANBAN stand for?
2.6 ABC ANALYSIS (ALWAYS BETTER CONTROL)
Any organization usually deals with lots of items. It is very difficult to
exercise control over all the items. Controlling means transactions related to
inventory, degree of control, type of records to be maintained, lot sizes, frequency
of review, size of safety stock to be maintained etc.
ABC analysis helps to classify the thousands or even millions of individual
items into three groups namely items belonging to A group, B group, C group
items respectively. ABC analysis is done based on the Pareto’s principle.
Consumption value is the basis for ABC classification. Consumption value is the
product of unit price and consumption.
Mechanism of doing ABC classification:
Steps involved:
1. Collect previous year consumption and unit price for each item.
2. Multiply the consumption and unit price for each item to get the consumption
value.
3. Rank the items corresponding to the consumption value.
4. Calculate cumulative consumption value against each item.
5. Find the percentage of cumulative consumption value.
Usually to classify the items into ‘A’ class there is leverage available. The
leverage is 60 to 70 percentage of the consumption value. This means the cut-off
value can be fixed in between 60 to 70 percentage of consumption and the
corresponding items which contribute up to the cut-off value are classified as a
class items.
Similarly, to classify the items into B class, there is a leverage of the
consumption value to the extent of 10 to 20 percentage of the consumption value.
To classify the items into C class, there is a leverage of the consumption
value to the extent of 10 to 20 percentage of the consumption value.
Table 2.1
Class of items Cut-off % of Consumption Value

A 60-75
B 10-20
C 5-10



Illustrated Example: 2.1 NOTES
1. Bulchand & Co. company inventories 20 items. The company decides to setup
an ABC inventory system with 10 % of A items, 20% of B items and 70% of C
items. The company records provides the information, which is as follows:

Table 2.2
Item Code Annual usage in units Cost per unit (Rs)
G 2,500 150
H 15,000 90
I 12,000 100
J 8,000 50
K 1,00,000 50
L 25,000 300
M 80,000 500
N 2,000 300
O 3,000 70
P 6,500 60
Q 10,000 75
R 6,000 20
S 20,000 50
T 40,000 90
U 1,20,000 350
V 20,000 200
W 1,500 350
X 4,000 100
Y 4,500 200
Z 7,000 40

Analyze the above items into ABC categories on the basis of the information and
prepare a report showing your findings with comments.



Solution
NOTES Table 2.3
Item code Annual usage Cost per unit Consumption Ranking
in units (Rs.) Value
G 2,500 150 3,75,000 17
H 15,000 90 13,50,000 7
I 12,000 100 12,00,000 8
J 8,000 50 4,00,000 14
K 1,00,000 50 50,00,000 4
L 25,000 300 75,00,000 3
M 80,000 500 400,00,000 2
N 2,000 300 6,00,000 12
O 3,000 70 2,10,000 19
P 6,500 60 3,90,000 16
Q 10,000 75 7,50,000 11
R 6,000 20 1,20,000 20
S 20,000 50 10,00,000 9
T 40,000 90 36,00,000 6
U 1,20,000 350 420,00,000 1
V 20,000 200 40,00,000 5
W 1,500 350 5,25,000 13
X 4,000 100 4,00,000 15
Y 4,500 200 9,00,000 10
Z 7,000 40 2,80,000 18

Table2.4
Ordered Item Consumption Cumulative Percentage of
Ranking Code Value consumption Cumulative Class
value consumption value
1 U 420,00,000 420,00,000 37.90 A
2 M 400,00,000 820,00,000 74.14
3 L 75,00,000 895,00,000 80.92 B
4 K 50,00,000 945,00,000 85.44



5 V 40,00,000 985,00,000 89.05 NOTES
6 T 36,00,000 1021,00,000 92.31
7 H 13,50,000 1034,50,000 93.53 C
8 I 12,00,000 1046,50,000 94.62
9 S 10,00,000 1056,50,000 95.52
10 Y 9,00,000 1065,50,000 96.33
11 Q 7,50,000 1073,00,000 97.01
12 N 6,00,000 1079,00,000 97.55
13 W 5,25,000 1084,25,000 98.03
14 J 4,00,000 1088,25,000 98.39
15 X 4,00,000 1092,25,000 98.75
16 P 3,90,000 1096,15,000 99.10
17 G 3,75.000 1099,90,000 99.44
18 Z 2,80,000 1102,70,000 99.70
19 O 2,10,000 1104,80,000 99.89
20 R 1,20,000 1106,00,000 100

Table2.5
Class No. of items % of items Consumption Cut-off % of
Value in Lac Rs. Consumption
value

A 6 30 450 73.48

B 7 35 120 19.59

C 7 35 42.25 6.9



Figure 2.6 - Graphical representation of ABC analysis
NOTES

92

74

% of
Consumption
value

C
A B

10 30
% of items
2.6.1 Kinds of Control
Purpose of classifying the items into ABC is to control over each item. The degree
of control required for A class is not same for B and C class items. The following table
helps the material manager in the kind of control to be exercised on these items.
Advantages of ABC Analysis:
1. Better exercise of control over all materials.
2. The capital invested in inventory can be reduced to minimum levels.
3. Warehouse and storage costs can be reduced.
Limitations of ABC Analysis:
• ABC analysis mainly provides a guideline for inventory management. It needs
to be supplemented by basic understanding and judgment as there are certain
items which may fall into category C or category B due to their low usage value
but are otherwise very critical for the production process of the firm. Their
inventory levels have to be carefully monitored.
• The ABC analysis, to be effective, needs to be constantly undertaken and pe-
riodically reviewed by the management, as the number of items and value of
items keep on undergoing changes.
• The practical problem in the usage of ABC analysis is that generally, thousands
of items fall in category C, as a result, a lot of time is spent on managing inventory
of items of this category (even if it needs simple control). The time left for
controlling the inventory stocks of categories A is therefore much shorter than
that required for their effective management.



Review Questions: NOTES
What is consumption value?
2.7 INVENTORY MODELS
Inventory:
Organizations spend lot of money in materials. Material cost represent 20 to
60 percent of the cost of production, even a small saving in material will reflect in profit.
Idle scarce material resource is called inventory. Since we invest lot of money in materials
and if materials are idle for long time, it is not good for the health of the organization. So
it is a must to exercise a control over Idle Scarce Resources, otherwise, lot of money
is tied in inventory. So had you not invested this money on material, it would have
fetched return from the other source. Therefore, an opportunity of earning the return is
lost by investing in the inventory, you can see now how can you control the inventory.
Figure 2.7 – Inventory System

Constraint
Inventory Policy
- Demand
Objective
- Inventory Costs Minimize Cost
2.7.1 Need for Inventory Decision
- Lead time 1. How much to
Inventory is required for taking care of uncertainty in business, Ex: raw material
order ?
inventory is required because of the uncertainty of supply .i.e. .supplier may not be
2. When to order?
prompt in supplying goods or the supply may also be lesser than expected. Therefore,
to take care of these, you need raw material inventory.
2.7.2 Types of inventory
1. Raw material inventory.
2. Work in process inventory.
3. Finished goods inventory.
4. Supplies.
5. Pipeline inventory.
6. Buffer stock or Safety stock.
7. Decoupling inventory.



NOTES 1,2,3,4 are the basic types of Inventory whereas others are named based on their
usage.
Supplies:
Materials which are used other than those used for production of finished goods.
Ex: lubricants, pencil, pen, paper, spare parts.
Pipeline inventory:
It can be raw material, work in progress or finished goods inventory. Ex: Assume
supplier is far away. Consumption per day is 20 units, 5 days for transportation
20X5= 100 units are required for the period of transportation.
So if you keep 100 units in your stock it becomes your pipeline inventory.
Decoupling inventory
Inventory “decouples” in different stages. It might be raw material, WIP, finished
goods inventory. Ex: customer has inventory for 10 days for the consumption. For 10
days the customer is decoupled from the producer.
So, decoupling inventory is the one which decouples the customer and the producer.
Safety stock:
This stock may be raw material, WIP or finished goods which are extra stock
required to take care of fluctuation or uncertainties in the demand or lead time.
Usually in a business organization two things are uncertain namely,
· Demand
· Lead time
Inventory models adopted by organizations depend upon the level of uncertainty
with the lead time or demand. The following table portrays the type of inventory model
of organizations has to be adopted against the lead time and demand situations.
Table 2.6 – Demand and lead time in different types of model to be adopted

Situations Demand Lead time Type of Model to be adopted
1 Constant Constant Deterministic Model
2 Constant Variable Probabilistic Model
3 Variable Constant Probabilistic Model
4 Variable Variable Probabilistic Model



Lead time:
NOTES
There are two types of leadtime
- Supply lead time
- Manufacturing lead time
Supply lead time:
This time refers to the time lapse between placing of order with the supplier and
receiving it by the customer.
Manufacturing Lead time:
The average time consumed by the product in the plant.
Supply lead time (l)

L=T1+T2+T3+T4+T5
T1= order genesis time and transit time (selection of supplier).
T2= manufacturing time of the product by suppliers.
T2= 0 If the product is readily available with the supplier.
T3= inspection time.
T4= transit time.
T5=receiving time.
If L is high, more inventory is needed to take care of high lead time.
2.7.3 Inventory cost:
Types of inventory cost are
-Ordering cost / setup cost.
-Carrying cost.
- Shortage cost / Back ordering cost.
- Purchase cost.
Inventory cost varies according to decisions namely.
Ordering quantity
Ordering cost: (Co)
It is measured per order.
Fig: Ordering Cost behavior against the Ordinary Quantity.

Figure 2.8 – Ordering Cost Curve

Component of Ordering Cost
• Tender and Bidding Cost
• Purchase negotiations
• Selection of vendor
• Preparation and sending of order
etc.



Suppose we produce internally without ordering, then there is no ordering cost . It
NOTES becomes Setup cost.
Setup cost: (Co)
It is measured per setup.
Figure 2.9 – Setup cost Curve

Component of setup cost are
• Cost of cleaning and adjusting production
equipment
• Inspection
• Bringing required raw materials.
• Changing dies etc.

As we have seen in both cases, it varies with decision making i.e. how much to
order?

Carrying cost: (Cc)

It is the penalty cost which organization incurs because of carrying inventory.
Components of carrying cost:

• Capital Cost
• Storage Cost
• Insurance
• Obsolescence
• Deterioration
• Tax etc

Cc = cost of holding one unit per unit time* avg. amount of inventory held per unit time.
Carrying cost is measured in terms of percentage.

Example 2.2

Assume that the average inventory in a year for an item = 2000 units
Price of the item = Rs. 100
Average Investment on Inventory = 2000X100
= Rs. 2, 00,000



By having the average inventory, the organization involves the following additional Cost. NOTES
Capital Cost (Opportunity Cost) = 500
Storage = 1000
Insurance = 5000
Obsolescence = 1000
Deterioration = 4000
Tax = 4000
Total = 20,000
Rs. 20,000 contributes 10 percent of the Average investment of Rs, 2,00,000.
So the inventory carrying cost for this organization is valued at 10 percent ( 10 percent
of Rs. 100) per unit per year.

Figure 2.10 – Carrying Cost Behavior

Carrying Cost Behavior
against the
ordering cost

Shortage Cost (Cs)
Shortage cost is the result of the customers demand not met from the existing
stock. Shortage costs are of two types, the one is lost sale and another is the back
ordered. In the case of the lost sale the customers demand is not mate. But in the
case of the back ordering the customers demand is met at delayed date.
The components of shortage cost are the –
1. cost involved in taking steps to expedite the procurement of the purchased material.
2. cost involved in rearranging the shop schedule to permit the earlier completion of
order under consideration.
3. cost involved in working overtime and so on.
4. loss of customers goodwill because of not meeting the customer requirement (future
profit loss).
5. present profit loss etc.



NOTES Some of the components of the shortage cost is difficult to quantify but roughly it
is possible to estimate the shortage cost.
Shortage cost = [shortage cost per unit time] * [average shortage per unit time]
= Cs .Is
Cs = shortage cost per unit time
Is = average shortage per unit time
Example2.3
Assume that the average shortage cost is calculated per ordering cycle
Figure 2.11 – Inventory level fluctuations for determining average shortage

Excess Inventory

2/3t
0
Minimum
1/3t Shortage

Shortage

500 Maximum
Shortage

Suppose t is the ordering cycle.
Assume that in that ordering cycle 2/3t time the i demand is not met from the stock.
The average shortage in the cycle =
[(minimum shortage during cycle + maximum shortage during cycle)/2]X [Proportion
of time shortage occurs during cycle]
= (0+500)/2X (2/3t)/t
=500/3
Assume that shortage cost per unit time = Rs. 9
Shortage cost = 9X500/3
=1500
Purchase Cost (Cp)
Purchase cost is the cost of purchase/price of product to be produced. Cp
becomes the production cost if it is produced inside the organization.



Decision NOTES
The decision regarding inventory will be mostly of how much to order?, and when
to order? How much to order is related with ordering the quantity but when to order is
related with the frequency of ordering and reorder level.
Relevant Cost
The relevant costs, namely, ordering cost, carrying cost, shortage costs are relevant
cost. A cost is said to be relevant cost, provided the cost varies with the decision. If the
ordering quantity (Q) is more that results in less shortage cost and ordering cost but the
inventory carrying cost will be high. The purchase price is considered to be relevant
only when the supplier offers discount.
The purchase cost becomes relevant because the decision, namely, the ordering
quantity varies according to the offers provided by the supplier.
1.7.4 Deterministic Model
2.7.4.1 Figure below portrays EOQ model the deterministic inventory model. This is
shown time vs. inventory Level.
Figure 2.12 - Deterministic Model

D e t e r m i n s t ic m o d e l ( E O Q m o d e l )
Inventory Level

R e o rd e r L e ve l

q u a n t i ty
L e a d t im e
Demand (D)

Demand rate is uniform and is known. D is the annual demand.

Lead time (L)

Lead time is known and constant.

Costs

Ordering cost, carrying cost are known. Purchase cost is irrelevant it means no
price discount is offered. Shortage cost is not permitted.



Decision to be taken:
NOTES
How much to order? - Ordering quantity (Q)
When to order? - Reorder Level
To answer for the questions related with the decisions, you have to proceed as follows:
• Any organization, it has to minimize the total inventory cost.
• Total annual inventory cost = ordering cost +carrying cost+ purchase cost
+short age cost
• With regard to this model, the shortage cost is not permitted.
• Total annual inventory cost = ordering cost + carrying cost + purchase
cost
Since you should find the ordering quantity and re-order level, next you should consider
relevant cost.
(i.e.) total annual relevant cost = ordering cost + carrying cost
= (no. of orders) (ordering cost per order)
+ (average inventory) (Carrying Cost)
D/Q=No. of Orders
Average inventory according to the figure = (min. inventory+ max. inventory)/2
= (0+Q)/2
= Q/2
Total annual relevant inventory cost = (D/Q)×Co+ (Q/2)×Cc
Since you have to establish ‘Q’
Differentiating w.r.t. Q and equate it to zero.
= - (D/Q)×Co+ Cc/2=0s

Or

Or = 2DCo/Cc

Or Q=?[2DCo/Cc] Answer to the question how much to order



Total annual relevant inventory cost
NOTES
= (D/Q)Co+(Q/2)Cc
Substituting q=?[2DCo/Cc]
=(D/?[DCoCc/Cc])Co + (?[DCoCc/Cc]/2)Cc
=
=(?[DCoCc])/?2+?[DCoCc]/?2
=(2/?2) ?[DCcCO]
=?[2DCoCc]
Total annual inventory cost

= Total annual ordering cost + Total annual carrying cost + Total annual purchase cost

D Q
TC= Co + CC + D.C
Q 2

= Purchase cost + total annual relevant inventory cost
= DCp+ ?[2DCoCp]
Graphically also you can approximate, find out EOQ as follows.
Figure 2.13 – Economic Order Quantity

Example 2.4

The demand for a certain item is 4800 unit per year. Each unit cost Rs.100.
Inventory cost charges are estimated at 15%. No shortage cost is allowed. The order-
ing cost Rs. 400 per order. Lead time is one day. Assume 250 working days.
Find the following:

1. EOQ
2. Time between the orders.



NOTES 3. Number of orders required each year.
4. Minimum relevant Inventory cost.
5. Minimum total inventory cost.
6. Reorder Level.
7. Plot a graph for inventory level fluctuation with time.

Solution
(i) EOQ=v (2DCo/Cc)
=v (2×48000×400)/ (.15×100)
Cc=(15/100) ×100 =1600
(ii) To determine reorder level
= L× (D/12)
=2×(48000/12250)=192 units

(iii) Time between orders
Q/t =D
t =Q/D
Figure 2.14 – Inventory Level

=1600/48000
=.033 years
=.033 ×250
=8.33 days

(iv) Number of orders
=D/Q
=48000/1600
=30 orders

(v) Total minimum relevant cost
Inventory cost=v2DcoCc
=v2×48000×400× .15× 100
=Rs. 24,000

(vi) Total minimum inventory cost
= DCp+v(2CoCc)
=48000×100+24000
=4824000 Rs.



Figure 2.15 – Inventory level vs. Time
NOTES

Above problem is solved scientifically, but this problem can be also be solved graphically.

Table 2.2



Figure 2.16 – Graphical Calculation of EOQ
NOTES

2.7.4.2 Economic Batch Quantity Model:
1. Demand:
-It is known and constant.
-It is nothing but the annual production requirement.
2. Production rate:
-It is known and is estimated based on the capacity of the plant.
3. Lead time:
It is known and constant.
4. Cost:
Setup/ordering cost: Since there is no purchase there is no ordering cost. Only setup
cost comes into picture in the place of ordering cost .this is known.
Carrying cost: It is known and constant.
Product cost: assume that product cost per unit does not vary with the production i.e.
unit is irrelevant of the quantity of production.

Decision

How much to produce?
When to produce?

The inventory model for this case will be as shown in the figure2.16.



Figure 2.17 – Inventory Model (Economic Batch Quantity)
NOTES

tp - It is the production period.
t - It is the time interval between the two productions.

From the fig. it is concluded that up to the period, both production and consumption
take place and inventory is built up at the rate of (p-d). Where ‘d’ is the demand rate.

Once the tp period is reached there is no production, there is only consumption at the
rate of ‘d”. Next production starts after ‘tth’ period.

To find the quantity of production ‘Q’, production time period tp and time interval
between production ‘t’. The following procedure is carried out.
Total inventory cost= setup cost+ carrying cost + production cost + shortage cost.
Total relevant inventory cost= setup cost + carrying cost.
Shortage and production costs are zero because no shortage is allowed and the pro-
duction cost becomes an irrelevant cost.

From the fig. the average inventory is calculated as follows:

Avg.inventory = (Imax +Imin)/2.
= (Imax+0)/2
= Imax/2.



NOTES To find Imax , from the fig.
Imax/tp = (p-d).
So, Imax=(p-d)tp.

To find tp,
tp×p=Q
tp=Q/p
Imax = (p-d) Q/p
Imax = (1-d/p) Q.
Total relevant inventory cost =setup cost + carrying cost
Setup cost = (number of setup ) × setup cost per setup
= (D/Q) Co
Carrying cost = (Average inventory)× carrying cost per unit
= [(Imax+Imin)/2 ]×Cc
=(1-d/p)×(Q/2) Cc

Total relevant inventory cost = (D/Q)Co+(1-d/p)(Q/2)Cc
For cost minimization, differentiate w.r.t. Q and equate it to zero.

DC0/Q2=(1-d/p)Cc

Q=?[2DCo/Cc(1-d/p)
Total annual relevant inventory cost = D/v [2DCo/ (1-d/p) Cc] +
v [2DCO/ (1-d/p] Cc)/2

=v [DCoCc(1-d/p)/v2 + v[DCoCc(1-d/p)]/v2
= (2/v2) v[DCoCc(1-d/p)]
=v[2DCoCc(1-d/p)]
Total annual inventory cost =v2DCcCo(1-d/p)+CpD

Deducing EOQ from EBQ model

It is known that in case of EOQ model, the production rate is infinity i.e. there
is an instantaneous replenishment.
Now
EBQ=v [(2DCo)/(1-d/p)Cc]
So when p = 8
EBQ=EOQ



Example 2. 5 NOTES
ABC Power Company has planned to cover the demand for electricity using
coal. Annual demand for the coal input is estimated to be 8lakh tones. It is used uni-
formly throughout the year. Coal can be strip mined at the rate of 5000 tonnes per day.
The setup cost for mining is 200 rupees per run. The inventory holding cost is 5 rupees
per tone per day. The total numbers of working days are given as 250. Determine.

1. EBQ.
2. Duration of mining run.
3. Time between runs.
4. Minimum relevant inventory cost.
5. Plot graph showing whole inventory fluctuation Vs time.

Solution:

To find EBQ,
EBQ = v[2DCo/Cc(1-d/p)]
Where
D = 8.00,000 tones per year
D = 8, 00,000/250
= 3200 tones per day
p = 5000 tones/day
Co = Rs2000 /run
Ch = Rs 5 /tones/day

(i) EBQ = v[(2×8,00,000×2500)/(5×(1-3200/5000))]

(ii)Duration of each mining run Q/p = tp
tp = 42164/5000
= 8.43
= 8.5 days (approx)

(iii) Time between runs
Q=t*d
T = Q/d
= 42164/3200
= 13.17 days.

(iv) Minimum relevant inventory cost = v [2DCoCc (1-d/p)
= v [2×8,00,000×2500×5×(1-3200/5000)]
= Rs. 84853



Figure 2.18 – Graphical representation of above the example
NOTES

2.7.4.3 Quantity Discount Model

As it is mentioned already, the purchase cost becomes relevant with respect to
the quantity of order only when the supplier offers discounts.

Discounts means if the ordering quantity exceeds particular limit supplier offers
the quantity at lesser price per unit.

This is possible because the supplier produces more quantity. He could achieve
the economy of scale, the benefit achieved through the economy of scale, he wants to
pass it onto the customer. This results in lesser price per unit if the customer orders
more quantity.

If you look at in terms of the customer’s perspective, the customer should also
see that whether it is advisable to avail the discount offered. This is done through a
trade off between his carrying inventory by the result of acquiring more quantity and the
benefit achieved through purchase price.



Figure 2.19 – Quantity Discount Model
NOTES

Solution:

Start with the lowest price i.e. Rs 9 and to find whether Q is more than or equals to
5000.

EOQ= v(2DCo/ Cc)
= v(2×25000×60)/ 2.7)
= 1054.06 approx. 1055 units
This is not a feasible solution because we expected that Q will be more than or equals
to 5000 but the EOQ came as 1055.
By taking the next least value i.e. Rs 11 and to find whether Q is more than 1000 and
less than 5000.
EOQ=v (2×25000×60)/ 3.3)
=956 units

This is also not a feasible solution because we expected Q will be more than 1000 and
less than 5000 but the EOQ came as 956.
By taking the next least value i.e. Rs 12 and to find whether Q is equals to 1000.



NOTES EOQ=v (2×25000×60)/ 3.6)
=912.87 approx. is 913units
This is a feasible solution

The total cost of inventory at EOQ is
TC=v (2×D×Cc×Co) + D×P
= v (2×25000×60×3.6) + (25000×12)
= Rs 303286.33
Total inventory cost at other ordering quantities are -
Total inventory cost for Q equals to 5000

TC= (D/Q) ×Co + (Q/2) ×Cc + D×P
= (25000/5000) 60 + (5000/2) 2.7 + (25000*9)
= 232000
Total inventory cost for Q between = 1000 and 5000

TC= (D/Q)*Co + (Q/2)*Cc + D*P
= (25000/1000) 60 + (1000/2) 3.3 + (25000*11)
= 278150.
The possible savings is equal to total inventory cost at feasible EOQ, total inventory
cost at 5000 units.

The possible savings are = 303286-232000
= 71,286
A ordinary quantity 5000, the total annual inventory cost is 2, 32,000

2.7.5 Probabilistic Models

In the previous section, it is assumed that the lead time and demand are constant.
But in real life situations it is not so. The demand is always uncertain because it is
difficult to exactly estimate the required quantity by the customer and the supplier is
also usually not reliable. In the sense, he doesn’t supply in the specified time period.
Considering this kind of situation, the decision should be taken regarding the quantity of
ordering, time at which the order to be placed, the time between the orders and how
much inventory to be kept against the uncertainty of demand and the lead time become
cumbersome.
To deal with the above scenarios, the inventory model to be adopted is known as
Probabilistic Inventory Model.



The inventory models called probabilistic inventory model because the demand NOTES
or lead time or both are random variables. The probability distribution of demand and
lead time should be estimated..

The inventory models answers for questions related to the decision raised above
are called Probabilistic Inventory Model.

2.7.5.1 One such model is Fixed Order Quantity Model (FOQ).

In this model,

1. The demand (D) is uncertain, you can estimate the demand through any one of
the forecasting techniques and the probability of demand distribution is known.

2. Lead time (L) is uncertain, probability of lead time distribution is known.

3. Cost(C) all the costs are known.

-Carrying costs Cc

-Ordering costs Co

Stock out Cost

It is difficult to calculate stock out cost because it consists of components diffi-
cult to quantify so indirect way of handling stock out cost is through service levels.
Service levels means ability of organization to meet the requirements of the customer as
on when he demands for the product. It is measured in terms of percentage.

For example: if an organization maintains 90% service level, this means that 10% is
“stock out” level. This way the stock out level is addressed.

Safety stock

It is the extra stock or buffer stock or minimum stock. This is kept to take care
of fluctuations in demand and lead time.

If you maintain more safety stock, this helps in reducing the chances of being
“stock out”. But at the same time it increases the inventory carrying cost. Suppose the
organization maintains less service level that results in more stock out cost but less
inventory carrying cost. It requires a tradeoff between inventory carrying cost and stock
out cost. This is explained through the following figure2.19



Figure 2.20 – Safety Stock
NOTES

Safety stock (S.S*) is to be stocked by the organization.

Working of fixed order quantity model

Fixed order quantity system is also known as continuous review system or
perpetual inventory system or Q system. In this system, the ordering quantity is con-
stant. Time interval between the orders is the variable.

The system is said to be defined only when if the ordering quantity and time inter-
val between the orders are specified. EOQ provides answer for ordering quantity.
Reorder level provides answers for time between orders. The working and the fixed
order quantity model is shown in the figure2.20 (next page).



Figure 2.21 – Fixed Order Quantity Model NOTES



Application of fixed order quantity system
NOTES
1. It requires continuous monitoring of stock to know when the reorder point is
reached.
2. This system could be recommended to” A” class because they are high
consumption items. So we need to have fewer inventories. This system helps in
keeping less inventory comparing to other inventory systems.
Advantages
1. Since the ordering quantity is EOQ, comparatively it is meaningful. You need to
have less safety stock. This model relatively insensitive to the forecast and the
parameter changes.
2. Fast moving items get more attention because of more usage.
Weakness
1. We can’t club the order for items which are to be procured from one supplier
to reduce the ordering cost.
2. There is more chance for high ordering cost and high transaction cost for the
items, which follow different reorder level.
3. You can not avail supplier discount. While the reorder level fall in different time
periods.
Illustrative Example 2.7
1. ABC company requires components at annual usage rate of 1200 units. The
cost of placing an order is Rs 100 and has a five day lead time. Inventory
holding cost is estimated as Rs 30 per unit per year. The plant operates 250
days per year. The daily demand is normally distributed with a standard deviation
of 1.2 units. It has been decided at to use fixed quantity inventory system based
on a 95% service level. Specify the following
1. Ordering quantity
2. Re order level
Solution:
Given data
Demand 1200 units
Ordering Cost Rs 100
Carrying cost Rs 30 per unit per year
Lead Time 5 days
Operating days 250 per year.
Standard deviation of demand
per day is 1.2 units.



To determine the ordering quantity
EOQ = v(2DCo/ Cc)
NOTES
= v2×1200×100/30
= 89.4 approx. = 90 units
To determine the reorder level
Reorder level = average demand during lead time +safety stock.
Safety stock calculations:
To find out the safety stock as it is mentioned already that you need to use the
service level. As per this problem it is given 95% service level that means 5% stock out
level. We need to have safety stock level against this 5% stock level. It is also given in
the problem that consumption of items follows normal distribution.
The mean lead time demand distribution is = (1200/250) ×5=24 units = XL
The mean of the distribution is (1200/250) ×5
= 24 units
Variance of the distribution, since per day standard deviation is given. First it is to be
converted into variance by taking the square
(1.2)*(1.2)= 1.44 units
From the per day variance, the five days variance determined as follows because leadtime
equal to 5 days.
If V is the variance of one day then the five day variance is
V+V+V+V+V=5*V
Standard deviation = ?(5V) = ?5?v=?5ó
For 5 days = ?(5 ó
ó = standard deviation per day
In common, to convert the per unit standard deviation into lead time standard deviation,
Based on above calculation it could be deduced that
óL=vL × ó
Where is the standard deviation of demand during lead time.
? is the standard deviation of demand per unit time
Since the demand during lead time follows the normal distribution.

It is given that 95% service level and 5%stock out level.
For 5% stock out level, the safety level is estimated as follows:
From the distribution you can calculate the safety stock using the formula

K×

K is the safety factor for 5% stock out level; the K value is calculated using the standard
distribution table.



To calculate K at 5% stock out level
NOTES

K=1.65 from the table
Safety stock= K ×

= 1.65*2.68
= 4.42
To find the re order level
= 24+4.42
= 28.42 units

Figure 2.22 – Graphical Presentation of Example 2.7

Review Questions:

1. Define Inventory
2. What is pipe line inventory?
3. Give formulae for EOQ?
4. Give formulae for EBQ
5. When purchase cost become relevant?
6. In which situations one has to adopt probabilistic model?



2.8 MATERIAL REQUIREMENT PLANNING
NOTES
2.8.1 Introduction
Material Requirements Planning (MRP) is a computer-based production planning
and inventory control system. MRP is concerned with both production scheduling and
inventory control. It is a material control system that attempts to keep adequate inventory
levels to assure that required materials are available when needed. MRP is applicable in
situations of multiple items with complex bills of materials.
The major objectives of an MRP system are to simultaneously:-
1. ensure the availability of materials, components and products for planned
production and for customer delivery,
2. Maintain the lowest possible level of inventory,
3. Plan manufacturing activities, delivery schedules and purchasing activities.
MRP is especially suited to the manufacturing settings where the demand of
many of the components and subassemblies depend on the demands of items that face
external demands. Demand for end items is independent. In contrast, the demand for
components used to manufacture end items depend the on the demands for the end
items. This is known as Derived Demand. The distinctions between the independent
and derived demands are important in classifying the inventory items and in developing
systems to manage items within each demand classification. MRP systems were
developed to cope better with derived demand items.

2.8.2 Overview of MRP system

The following figure shows the general overview of an MRP system.
Figure 2.23 – MRP system

MRP Inputs MRP Processing MRP Outputs

Changes
Order releases
Master
Schedule Planned-order
Schedules
Primary
Reports
Exception
Bill of Material Planning reports
Materials Requirements Secondary
Reports Performance-
Planning
Control
Reports

Inventory
Records Inventory
Transaction



NOTES 2.8.3 Inputs to MRP system

There are three major inputs for an MRP system. They are
1. Master production schedule,
2. Bill of Material
3. Inventory status records

Without these basic inputs the MRP system cannot function.

1. Master production schedule

The demand for end items is scheduled over a number of time periods and
recorded on a master production schedule (MPS). The master production schedule
expresses how much of each item is wanted and when it is wanted. The MPS is devel-
oped from forecasts and firm, the customer orders for end items, safety stock require-
ments and internal orders. MRP takes the master schedule for end items and translates
it into individual time-phased component requirements.

Overview of the Master Production Schedule

Figure 2.24 - Overview of Master Production Schedule

Forecasted
Demand

Capacity Master
Planning Production
Schedule

Customer Order
(Delivery Time)



Master Production Schedule- Example NOTES
Table 2.7

2. Bill of Materials
A bill of materials (BOM) file gives the complete product descriptions and
documents quantities of each component, part, ingredient, or raw material needed
to make that product or sub-assembly. It is also called as the product structure tree.
A sample product structure tree is shown below.
For producing 1 unit of product A, 4 units of B and 2 units of C are re-
quired. For producing 1 unit of product B, 2 units of D and 1 unit of E are required.
For producing 1 unit of product C, 3 units of D and 2 units of F are required
Product Structure Tree.
Figure 2.25 - Product Structure Tree

A

B C
(4) (2

D E D F
(2) (1) (3 (2



NOTES Explosion
If 20 nos. of product A is required then we require 80 nos. of B, 40 nos. of C,
280 nos. of D, 80 nos. of E and 80 nos. of F. This process of finding out the require-
ment of sub components based on the requirement of final product is known as Explo-
sion.
3. Inventory status records
The following inventory status records goes as input to the MRP system
1. Item
2. Supplier
3. Lot size
4. Safety stock
5. Lead time
6. On hand inventory
7. Allotted

8. Level
i) Item: Name or number for the item being scheduled.
ii) Supplier: Name or number for the of the supplier for the scheduled item.
iii) Lot size: Several lot sizing techniques are available. Few of them are listed below.
a) Lot-For-Lot (LFL) ordering.
The lot-for-lot (LFL) is the simplest approach and it calls for producing in period t the
net requirements for period t. The LFL approach minimizes the holding cost by pro-
ducing just-in-time.
b) Economic Ordering Quantity (EOQ):
EOQ is a fixed quantity which is ordered whenever the inventory level reaches prede-
termined level.

2 ×D × Cs
Q= Cc (1- d/p)

Where,
Q – Economic ordering quantity
D – Annual demand
Co – Ordering Cost (Rs. /Order)



Cc – Holding cost (Rs./Unit/Unit time) NOTES
Economic Production Quantity (EPQ)
EOQ is a fixed quantity which is produced whenever the inventory level reaches a
predetermined level.

2 ×D × Cs
Q=
Cc (1- d/p)

Where,
Q – Economic Production quantity
D – Annual demand
Cs – Setup Cost (Rs. /Setup)
Cc – Holding cost (Rs./Unit/Unit time)
d – Demand rate
p – Production rate
There are also other algorithms available for lot sizing like Wagner-Whitin (WW)
algorithm, Silver-Meal (SM) heuristic, part period balancing (PPB) heuristic etc. The
lot sizing technique which incurs the lowest cost is chosen.
1. Safety Stock: It is the additional stock carried in order to protect against
any uncertainty in demand.
2. Lead time: It is the time gap between placing an order and receiving the
order.
3. On hand inventory: It is the actual quantity on hand during scheduling
period.
4. Allotted: It the quantity of inventory allocated to other orders from the on
hand inventory.
5. Level: It indicates the level occupied by the particular product/component
in the product structure file.

Figure 2.26 – Levels in the product structure file



NOTES If a component comes in more than one level then it should be assigned the
lowest level code. For example, in the above figure R comes in both level 2 and level
3. But it should be assigned level code 3 as it is the lowest level.
MRP Process

The process of scheduling the Production of all items is done using an MRP
Matrix. The MRP matrix is as shown below.
MRP Matrix
Table 2.8 – MRP matrix

Item: Low-Level Code: PD 1 2 3 4 5
Lot Size: Lead Time:
Gross Requirements

Scheduled Receipts

Projected on Hand

Net Requirements

Planned Order Receipts

Planned Order Releases

Gross Requirements is the anticipated usage of demand for each period.
Scheduled Receipts is the existing replenishment orders at the beginning of period.
Projected on Hand is the projected inventory status at the end of period after taking
into account the inventory to be provided for safety stock and already allotted for other
orders.
Net Requirements is the actual number of items to be provided and when it is to be
provided. This is calculated taking into account scheduled receipts and projected on
hand inventory.
Planned Order Receipts shows when actually net requirements are expected to be
received.
Planned Order Releases shows when the order has to be released if the order has to be
received as per planned order receipt.



Process Flow NOTES
Calculate the exact requirements for each item managed by the MRP system by
the explosion process explained previously, and proceed as follows:
1. Retrieve level 0 item requirements (gross requirements) from the master schedule.
2. Use projected on-hand balances and schedule receipts to calculate net
requirements. This process is called Netting.
3. Calculate when orders should be received to meet net requirements, developing
planned-order receipts schedule.
4. Planned-order release schedule is calculated by offsetting the planned-order
receipts by the items’ lead times.
5. Repeat steps 1-4 for level 1 items.

6. Repeat steps 1-4 for all items in each subsequent level of the bill of materials.

MRP Output

The primary outputs of MRP are the following:
1. Recommendations of planned order releases.
2. Rescheduling notices changing open-order due dates.
3. Notices to cancel or suspend open orders.
4. Item-status-analysis backup data.
5. Future planned order schedules.
A variety of secondary or byproduct outputs can be generated by MRP at the
user’s option. It is not practical to list and describe all possible outputs and formats
generated by MRP found in industry; MRP lends itself to tailoring, individualization, and
infinite modification of outputs. MRP files (database), particularly inventory status records,
contain a wealth of data, providing almost unlimited opportunities for the supplying of
these data to a whole spectrum of possible outputs. Here are some of the common
secondary outputs:
1. Exception notices, reporting errors, incongruities, and out-of-limits situations.
2. Inventory-level projections (inventory forecasts).
3. Purchase commitment reports.
4. Tracers to demand sources (pegged requirements reports).
5. Performance reports for people and functional groups.
Six categories of outputs by functional use are:

1. Inventory order action.
2. Replanning order priority.



NOTES 3. Safeguarding priority integrity.
4. Capacity requirements planning.
5. Performance control.
6. Reporting errors, incongruities, and out-of-limits situations.
Inventory order action outputs occur when planned orders appear in current
time-buckets. Other types of order action are increases, reductions, or cancellations of
order quantities.
Re-planning order priority outputs alert inventory planners to cases of diver-
gence between open-order due dates and dates of actual need, resulting from changed
timing of net requirements.
Outputs to help Safeguard priority integrity aims at keeping order priorities
honest, revealing inventory status problems caused by overstated MPS. Some compa-
nies use these reports to provide guidance for planners when accepting customer or-
ders for guaranteed delivery. A “trialfit” of the order as an MPS item enables a net
change MRP program to determine potential component shortages. If the order does
not fit (too many shortages), the planner can recommend an alternative delivery date.

Capacity requirements planning outputs of MRP are open and planned shop
orders in individual time periods, which are input into the load projection program. To
keep load projections up-to-date and valid, they must be recomputed as MRP order
schedules change.

Performance control outputs are comparisons of MRP plans with actual
performance, enabling management to monitor the performance of inventory planners,
buyers, the shop, suppliers, and cost accounting.

Outputs reporting errors, incongruities, and out-of-limits situations are called
exception or action reports. Some examples:

1. Date of gross requirement is beyond the planning horizon.
2. Number of digits of quantity in gross requirement exceeds size of the field.
3. Planned order is offset into a past period but placed in current period.
4. Number of digits of quantity of open order exceeds size of the field.
5. Number of digits of quantity of net requirements exceeds size of the field.
6. Number of digits of quantity of receipt overflows size of quantity-on hand
field.
7. Due date of open order is outside of planning horizon.
8. Allocated on-hand quantity exceeds current quantity on hand (potential
shortage).
9. Past-due gross requirement has been included in the current period.



In addition to such exception reports, individual exception messages can be NOTES
generated at the time inventory transaction are entered, listing reasons for transaction
rejections. Some typical messages are
1. Part number is nonexistent.
2. Transaction code is nonexistent.
3. Part number is incorrect (using self checking digits).
4. Actual receipt exceeds quantity of scheduled receipt by x percent (test of
reasonableness).
5. Quantity of reported scrap exceeds quantity on hand.
6. Quantity of disbursement exceeds quantity on hand.
7. Order being released exceeds planned quantity.
Sample MRP Problem:
Orders have been received for 20 units of product A and 50 units of product R
with the product structures shown below for period 8. The on hand stock levels are
A=1, R=4, B=74, C=19, D=190 and E=160. What is the low level code for each
item? If the components are ordered as required (no fixed lot sizes), what should be the
size of each order? When should the orders be released for each item?
Figure 2.27

A
LT=3 R
LT=4

B (2) C (3) E (4) B (4)
LT=2 LT=3 LT=1 LT=2

D (2) E (3) D (2) E (3)
LT=1 LT=1 LT=1 LT=1
Solution
Table2.8

Item Low Level Code
A 0
R 0
B 1
C 1
D 2
E 2



NOTES Figure 2.28
A R Level 0
LT=3 LT=4

B (4) Level 1
B (2) C (3) E (4) LT=2
LT=2 LT=3 LT=1

D (2) E (3) Level 2
D (2) E (3) LT=1 LT=1
LT=1 LT=1
Table 2.9
Item Lot Lead Safety Allotted Level Period
Sizing time Stock PD 1 2 3 4 5 6 7 8
Gross
Requirements 20
Scheduled
Receipts
A Lot 3 — — 0 Projected
for Lot on Hand 1 1 1 1 1 1 1 1 1
Net Require-
ments 19
Planned Order
Receipt 19
Planned Order
Release 91

Table 2.10

Gross
Requirements 50
Scheduled
Receipts
R Lot 4 — — 0 Projected
for Lot on Hand 4 4 4 4 4 4 4 4 4
Net Require-
ments 46
Planned Order
Receipt 46
Planned Order
Release 46



Table 2.11 NOTES
Gross
Requirements 184 38
Scheduled
Receipts
B Lot 2 — — 1 Projected
for Lot on Hand 74 74 74 74 74 0
Net Require-
ments 110 38
Planned Order
Receipt 110 38
Planned Order
Release 110 38

Table 2.12

Gross
Requirements 57
Scheduled
Receipts
C Lot 3 — — 1 Projected
for Lot on Hand 19 19 19 19 19 19
Net Require-
ments 38
Planned Order
Receipt 38
Planned Order
Release 38

Table 2.13

Gross
Requirements 220 76
Scheduled
Receipts
D Lot 1 — — 2 Projected
for Lot on Hand 190 190 190 0
Net Require-
ments 30 76
Planned Order
Receipt 30 76
Planned Order
Release 30 76



NOTES Table 2.14
Gross
Requirements 330 114 76
Scheduled
Receipts
E Lot 1 — — 2 Projected
for Lot on Hand 160 160 160 0 0 0
Net Require-
ments 170 114 76
Planned Order
Receipt 170 114 76
Planned Order
Release 170 114 76

Review Questions:

1. List input of MRP system.
2. List two MRP outputs.
2.9 MANUFACTURING RESOURCE PLANNING (MRP II)
2.9.1 Introduction
Till the early sixties, reorder point (ROP) systems was used by many
manufacturing organizations. In this system the component stocks were reordered
whenever stock fell to a pre-defined reorder level. Components were often ordered
when not actually needed, and because of which ROP systems resulted in very high
inventory levels.
In the sixties, customers became demanding, competition became tougher and
the interest rates began to increase. This made organizations to realize the necessity to
develop a much better response to the customer needs. At the same time the increase
in interest rates made money tied up in inventory into a serious financial burden for
manufacturing organizations.
In this period, computers were brought into planning and production systems.
As a result, several new manufacturing systems were developed. They were.
• Material requirements planning systems.
• Heavily reliant on computers and most frequently applied to batch or mass
production. Comprising of:
• Material requirements planning (MRP or MRP I).
• Closed loop material requirements planning (Closed Loop MRP).
• Manufacturing resource planning (MRP II).



• Just-in-time (JIT). NOTES
• Optimized Production Technology / Theory of Constraints (OPT/TOC)
• Project control
• Evolution of Manufacturing Resource Planning (MRP II)

Figure 2.29- Evolution of Manufacturing Resource Planning (MRP II)

Materials Closed loop Manufacturing
Requirement MRP Resource
Planning Planning

2.9.3 Closed Loop MRP System
In an open loop MRP system the plans are sent to buyers and production
personnel but it is not possible to get feedback. As a result of which the adjustments
could not be made to plans in order to keep schedules valid. For example, it assumed
that infinite capacity was available, and that suppliers always delivered correctly and on
time. And when there is a change in sales demand it will take excessive amount of re-
planning.
Also, much of the demands from other sources are left out of the system and
shortages become inevitable. Material requirements planning generates valid schedule
that follow logically from the demand. But after planned orders are launched, some of
the planning factors may begin to stray off course. Some of the examples that cause
problem because of using MRP systems are shown below:
Lead time estimates differ if: machine breaks down, deliveries are delayed,
goods are damaged, power fails etc.
If the system plans for 1000 of a component but 200 fail a quality inspection,
this shows that the orders are arrived on time but there will be a shortage of
material.
The demand that drives material requirements planning consists of both forecast
orders and actual customer orders. The forecasts may turn out to be wrong
and customers may change their actual orders, for example, by asking for earlier
or later delivery. This throws out all component orders.

In summary, ‘open loop’ material requirements planning could result in some
or all of these problems:
• Uncontrollable costs.
• Late deliveries to customers.
• Late deliveries from suppliers.
• Unplanned overtime/offloading.



• High work-in-progress levels.
NOTES • Mismatched inventories.
• Over- or under-utilized resources.
• Disruptions on the shop floor.
• Many full-time expeditors.
• Customer complaints.
• High ‘past dues’.
• Long queues.
This is clearly not a list that any manufacturing organization could regard as
acceptable.Something had to change, and so open loop MRP evolved into closed loop
MRP.
Closed loop MRP
Material requirements planning is useful but due to the problems that are faced
by the organization after implementation of MRP and lack of awareness of other re-
lated production and business functions, the organization started to shift towards closed
loop MRP system. The diagram below shows the much wider data horizon that is now
opened up for organizations which have started using better information technology to
upgrade their MRP system.
Closed loop MRP
Figure 2.30 – Closed loop MRP



Closed loop MRP has made feedback possible by including new functions NOTES
such as file control, a master production schedule, rescheduling actions and shop floor
control. It thus ‘closed the loop’, overcoming the fundamental weakness of ‘open loop’
material requirements planning.
The closed loop diagram shows several additions to the open loop diagram:
The long-term production plan. This feeds information into the master
production schedule about the organization’s long-term manufacturing
expectations.
The master production schedule passes information to a separate rough
cut capacity planning module, which estimates the amount of work
achievable in a given time period.
Orders generated by MRP are split into purchase orders and work orders.
Manufacturing orders are passed to the capacity requirements planning
module to see if there is sufficient labor and machine time available to carry
them out in the time proposed by the master production schedule. This is a
more detailed evaluation than rough cut capacity planning; it looks at
individual work centers and their proposed workloads.
The shop-floor execution phase is also shown; this is used to control the
on-time completion of work orders.
2.9.4 Manufacturing Resources Planning (MRP II)
Manufacturing resources planning (MRP II) is an extended form of closed
loop MRP that also incorporates strategic planning processes, business planning, and a
number of other business functions such as human resources planning, profit calculation
and cash flow analysis. MRP II uses the master production schedule as the basis for
scheduling capacity, shipments, tool changes, some design work, and cash flow. Hence
it requires several additions to the reference files. One is a bill of resources, which
details key resources needed to produce one unit of product. These resources may
include labour, machinery, tools, space and materials.
The MRP II system can use the bill of resources to project shortages at specific
times, giving departments advance notice of required remedial action: for example, of
the need to hire or train labour. MRP II can also project needs for support resources;
for example, design engineering support if a customer order entails prior design work.
This additional resource is added to the bill of resources. Given still more reference
data, MRP II can keep track of tool wear and recommend when to replace or reshape
tooling. It can also keep track of machine loads and project machine capacity shortages,
which may signal a need for more machines or a subcontractor.



NOTES For financial planning, MRP II treats cash flow almost like materials. The MPS
is first exploded into component parts requirements; the system then calculates the cost
and payment dates of all planned order releases, effectively creating a cash flow forecast.
This includes not just payments to suppliers, but also wages, power and other
consumables associated with production. Cash outflows may be projected for a year
or more by expense category, work centre or department, making budgeting much
simpler than it would be without an MRP II system.
Figure 2.31 - Framework of MRP II

2.9.3 Master Production Schedule
The MPS is a statement of the planned production of finished products that will
meet the demand on time, within the organization’s capacity. The master production



schedule expresses. What we intend to make, how much we intend to make and when
we intend to make.
NOTES
The demand for end items is scheduled over a number of time periods and recorded
on a master production schedule (MPS).The MPS is developed from forecasts and
firm customer orders for end items, safety stock requirements and internal orders. MRP
takes the master schedule for end items and translates it into individual time-phased
component requirements.

Overview of Master Production Schedule:

Figure 2.32 - Overview of Master Production Schedule

Forecasted
Demand

Capacity Master
Planning Production
Schedule

Customer Order
(Delivery Time)

Capacity Planning:

Capacity planning essentially involves the following categories.

Resource Requirements Planning:

Resource requirements planning refers to the planning of the overall capacities
of the firm. This planning is done to validate the aggregate production plans of the firm.

Rough Cut Capacity Planning (RCCP):

Rough cut capacity planning (RCCP) involves planning capacities at key /
bottleneck work centers and broadly balancing workloads. It thus validates the MPS.
Material requirements planning (MRP) uses a master production schedule (MPS) of
end items to determine the quantity and timing of component part production. MRP is
capacity insensitive; it implicitly assumes that sufficient capacity is available to produce
components at the time they’re needed.

A problem commonly encountered in operating MRP systems is the existence
of an overstated MPS. An overstated master production schedule is one that orders



NOTES more production to be released than production can complete. An overstated MPS
causes raw materials and WIP inventories to increase because more materials are
purchased and released to the shop than are completed and shipped. It also causes a
buildup of queues on the shop floor. Since jobs have to wait to be processed, actual
lead times increase, causing ship dates to be missed. As lead times increase, forecast
accuracy over the lead-time gets affected because forecasts are more accurate for
shorter periods than for longer ones. Thus, overstated master production schedules
lead to missed due dates and other problems. Validating the MPS with respect to
capacity is an extremely important step in MRP. This validation exercise has been termed
rough cut capacity planning (RCCP).

For example: consider the man hour requirement for three components over a three
week period as follows:
Table 2.15

Week 1 Week 2 Week 3
Component A 70 70 70
Component B 100 100 120
Component C 80 75 80

Let us now check the total man hours required to produce this master produc-
tion schedule. From the above illustrated resource requirements, a rough cut analysis
can be done as follows:

Table 2.16

Week 1 Week 2 Week3
Required standard hours 250 245 270
Available standard hours 250 250 250
Negative deviation -20
Positive deviation +5

RCCP DECISIONS
In this section, we discuss how to determine the amount of capacity that is
available, how to compare the capacity available to the capacity required and the options
that exist for adjusting the capacity available and/or the capacity required.



Determining the Capacity Available NOTES
The plastic molding department of Al’s Lamps, presented in the previous sec-
tion, has three plastic molding machines. Since Al’s works one eight-hour shift each day
and there are 21 working days in an average month, it might seem that the capacity
available to the plastic molding department is 504 hours per month (3 machines times 8
hours/day/machine times 21 days/month).
However, two additional factors must be considered. First, the plastic molding
machines may not be available all the time. The machines may break down, the worker
may be absent, and the mold needed or the material needed may not immediately be
available. Second, there must be an adjustment between the time standard average and
the actual average production rate of the department. The first adjustment factor is
known as utilization. Utilization is a number between 0 and 1 that is equal to 1 minus the
proportion of time typically lost due to machine, worker, tool, or material unavailability.
The second adjustment factor is known as efficiency. Efficiency is formally defined to
be the average of standard hours of production per clock hour actually worked. If a
time standard is exactly right, efficiency is 1. If the time actually required to perform the
work is less than the standard, efficiency is more than 1. If the time actually required to
perform the work is more than the standard, efficiency is less than 1. As mentioned
previously, time standards tend to be slightly pessimistic due to continual improvement
in production methods.
Capacity available is found by multiplying time available times utilization and times time
efficiency:
Capacity Available = Time Available x Utilization x Efficiency
Assume that for the plastic molding department of Al’s Lamps, utilization is 0.756 and
efficiency is 1.05. The time available in a month having 168 working hours (21 eight-
hour days) is 504 (3 machines times 168 hours/month/ machine). Thus,
Capacity Available = 504 x 0.756 x 1.05 = 400 hours (rounded to the nearest hour).
When capacity is inadequate, four basic options are available to increase capacity:
overtime, subcontracting, alternate routing, or adding personnel. If no combination of
the four options can provide sufficient capacity, the MPS will have to be reduced.
Options to adjust capacity required or available are discussed next.
• Increase Capacity
– Additional shifts
– Overtime
– Additional resources



NOTES • Reduce Load
– Subcontract
– Reduce lot sizes if possible
• Redistribute Load
– Use alternate work centers or routings if possible
– Shift production to earlier periods that have additional capacity
– Temporarily use safety stocks and shift load to later period
• If all else fails, revise MPS
2.9.4 Capacity Requirements Planning
Capacity requirements planning (CRP) is a computer-based extension of the MRP
process that uses the results of MRP along with detailed production information and
labor information to calculate planned workloads. It is a detailed capacity analysis that
helps in validating the MRP schedule. CRP arises mainly due to batching of production
work orders in the course of MRP. It is thus a computerized system that projects load
from material requirements plan.
CRP Inputs & Outputs
Figure 2.33
MRP planned
order
releases

Capacity Open
Routing requirements orders
file planning file

Load profile for
each machine center



Key Inputs
NOTES
• Schedule of open orders and planned order releases (from MRP).
A typical example would be as follows:
Table 2.17

Release date Due date Planned orders Number of batches of 20
week 5 week 7 40 2
week 8 week 10 80 4

• BOM with routing data:
Table 2.18

• Work center data

Table 2.19
Work centre 201
Queue time 2.5 hours
Available capacity 440.0 hours
• Work order status
Key Outputs
• Work center load report.
• Possible revised schedule of planned order releases.



NOTES 2.9.5 Forward Scheduling And Backward Scheduling
Forward scheduling:
In forward scheduling, we identify the earliest start date for the operation in
question through consideration of the planned order release date generated by MRP.
We then use the lead time to calculate the completion date. If the completion time is
prior to the due date then we have slack time available. If completion date is after due
date, we have a delay.
Backward scheduling:
In backward scheduling, we identify the due date for the operation in question
and use the operation lead time to calculate the latest operation start date. If the latest
start time is after the earliest start date then we have slack time available. If the operations
start time is prior to the earliest start date then we have negative slack.
An Illustration of Capacity Requirements Planning:
Consider a component-A which has a planned order as follows:
Table 2.20
Release date Due date Planned orders Number of batches of 20
week 5 week 7 60 3
This component has to undergo three process namely assembly, painting and
inspection. the data for these work centers is as follows:
Table 2.21
Work center Assembly
Set up time 0.40 hours
Processing time 0.30 hours
Transport time 1.30 hours
Table2.22
Work center Painting



Table 2.23 NOTES
Work center Inspection

Calculation of department loads:
Assembly department:
Load from component-A
(Batch size X processing time) + Set-up
60 X 0.30 + 0.4 = 18.4 Hours
Painting department:
60 X 0.45 + 0.6 = 27.6 Hours
Inspection department:
60 X 0.30 + 0.04 = 18.04 Hours
Calculations of operation lead time:
Operation lead time is calculated as
Operation lead time = Load from component + Queue time + Transport time
For assembly,
Operation lead time = 18.4 + 10 + 1.3 =29.7
For Painting,
Operation lead time = 27.6 + 18 + 1.3 =46.9
For Inspection,
Operation lead time = 18.04 + 42+ 1.3 =61.34



Now we use backward scheduling .The inspection has a lead time of 61.34 hours and
NOTES hence is loaded for the due date, which is week 7.Therefore the previous operation
(painting) is scheduled for the previous week (week 6).Painting only has a lead time of
46.9 hours, which means the assembly operation can be scheduled for completion in
week 6.
These load projections can be represented as follows:
Figure 2.34
Load projection for assembly work center

18.4

week1 week2 week3 week4 week5 week6 week7

Figure 2.35 -

load projection for painting work center

27.6




Figure2.36
NOTES
Load projection for inspection work center

18.04


Shop floor control
The system is provided with information on how many units were sent onwards
and the date as each work centre completes a job. This information enables the MRP
system to provide each work centre with daily notices of priority changes. After
rescheduling, new due dates and quantities go out to the factory and supplier companies,
who must act on them so that the previous schedule, with the jobs in progress, is
updated. The shop floor control thus provides information on the reschedules with the
help of which the existing schedules can be updated.
Production Activity Control (PAC)
PAC, Production Activity Control, is concerned with converting plans into action,
reporting the results achieved and revising plans and actions as required achieving desired
results. Thus, PAC converts plans into action by providing the required direction. This
requires the appropriate prior master planning of orders, work force personnel, materials,
and capacity requirements. They are useful in the management of lead-time, queue
length, work center idle time, and scheduled order completion. The three primary
functions of PAC
Order release
Dispatching
Progress reporting



NOTES Order Release
Order release initiates the execution phase of production; it authorizes production
and/or purchasing. The planned order becomes a released (open) order. Placement of
a purchase order or the initiation of manufacturing follows shortly. Order release planning
may take place until the moment of order release.
Authorization of order release is based on the planned orders in the MRP
output, the current priority, the availability of materials and tooling, and the loads specified
by I/O planning. Release of an order triggers the release of the following:
1. Requisitions for material and components required by the order. If some of
these items are not required immediately and have not been allocated previously, they
are allocated now.
2. Production order documentation to the plant. This documentation may include
a set of both engineering drawings and manufacturing specifications and a manufacturing
routing sheet.
3. Requisitions for tools required in the first week or so of production. Tooling,
including tapes for numerically controlled machines, required in later operations is
reserved for the appropriate period. Tooling can be included in the master production
schedule and the bill of material. Its availability is thus coordinated with material and
equipment availability.
The time required to deliver production order documentation, tooling and
materials to the first operation is included in the normal planned lead time for the order.
An order is released by adding it to the dispatch list.
Dispatching
Dispatching informs first-line supervision of the released orders and their priority,
that is, the sequence in which orders should be run. This information can be transmitted
via a hard copy (handwritten, typed, or computer printout) or via video output on a
cathode ray tube (CRT). In a job shop a dispatch list should be prepared for each
work center with the frequency of updating depending on the typical order-processing
time. If orders take a day or less to process, dispatch lists usually are prepared daily. If
orders take a few days, lists may be prepared weekly with midweek revisions handled
on an exception basis with on-line processing.
In a flow line process environment, a single list indicating the rate of flow (or in
a batch flow line, the sequence in which orders are to be started) will control work on
the entire line, which may be viewed as a single work center. An example of simple
dispatch list information identifies the date, the plant, and the work center; it includes
the work center capacity; and it lists the orders, their quantity, their capacity requirements,
and their priority. Orders usually are listed in descending priority for a specified period.



The list also may include jobs at upstream work centers to provide the supervisor NOTES
with information concerning orders that will arrive shortly and an indication of their
priority upon arrival. A computerized system may produce relative rankings on the
basis of criteria such as critical ratio and earliest due date, as described earlier, but
review by a planner is required to determine if other considerations are overriding.

The planner determines the final dispatch list ranking of orders on the basis of
the multiple criteria including a formal priority index such as, the critical ratio or the due
date, input control at downstream work centers, the availability of tooling, the status of
other parts required in the same assembly, energy consumption patterns, and sequencing
and assignment criteria.

Production Reporting

Reports describing the actual production status are necessary for control.
Dynamic response to the changing conditions is possible only if timely, accurate, and
adequate information is available. The information must enable management to take
meaningful corrective action concerning production schedules.

The production environment influences the design of the production reporting
system. Reporting in a line flow environment with long production runs, may take place
on an exception basis with feedback occurring only when the output rate falls below an
acceptable level. All reporting systems should have an exception reporting capability to
inform management whenever machine failure, material shortages, or similar events
threaten planned output.

2.9.6 Benefits of MRP II

In the narrow sense, the main benefit of MRP II is its ability to generate valid
schedules and keep them valid. But valid schedules have broader benefits for the whole
organization. These include, more or less in order of importance:

1. Improved on-time completion

A typical manufacturing organization using MRP II should be able to achieve
on-time completion rates of 95 per cent or more, because completion of a parent item
is less likely to be delayed for lack of a component. On-time completion helps improve
customer service.

2. Reduced inventories

Inventory falls - typically by 20-35 per cent - because parts are not ordered
until needed.



NOTES 3. Capacity requirements planning data
Work centre capacity requirements can be planned for many periods into the
future.
4. Improved direct labour productivity
Fewer shortages mean significantly less lost time and overtime, and less disruption
to accommodate shortage-list jobs.
5. Improved productivity of support staff
MRP II cuts expediting (or ‘firefighting’) and allows more time for planning.
For example, purchasing can start looking for alternative or better suppliers; materials
management can plan inventory needs better.
6. Total business planning
The ability to use one common set of data to help plan and control the whole
business.
2.9.7 Drawbacks of MRPII
Though Manufacturing Resource Planning has a number of benefits, it has a
few limitations too. They are:-
· MRP II system is complex.
· MRP II implementation programmer, takes a lot of time, effort and commitment
at all levels of the organization to set up a successful MRP II system.
The benefits, however, should very quickly make the exertion worthwhile.
Review Questions:
1. MRPII stand for?
2. List the various phases of evaluation of MRPII
3. Discuss the input requirement of the capacity requirement planning.
4. What is dispatching?
5. List any two benefits of MRP
2.10 ENTERPRISES RESOURCE PLANNING
It is a system which integrates all the procesess and data of an organization.
It uses the hardware and software to integrate the activities of manufacturing, supply
chain, Financials, Customer Relationship Management (CRM), Human Resources and
Warehouse Management.



2.10.1 Need for ERP NOTES
In the past, then available software applications that don’t talk to each other
and do not effectively interfaces, so the organizations were in the pursuit of identifying a
new software to eliminate the above limitation that result in the invention of ERP system.

ERP acts as a single database that includes all data for the software modules,
which would include manufacturing, supply chin management, finance, projects, customer
relationship management, data warehouse. This is shown in figure 2.36.

Manufacturing:

Engineering, Bills of Material, Scheduling, Capacity, Workflow Management,
Quality Control, Cost Management, Manufacturing Process, Manufacturing Projects,
Manufacturing Flow.

Supply Chain Management:

Inventory, Order Entry, Purchasing, Product Configurator, Supply Chain
Planning, Supplier Scheduling, Inspection of goods, Claim Processing, Commission
Calculation etc.

Finance:

General Ledger, Cash Management, Accounts Payable, Accounts Receivable,
Fixed Assets.

Projects:

Costing, Billing, Time and Expense, Activity Management

Human Resources:

Human Resources, Payroll, Training, Time & Attendance, Benefits

Customer Relationship Management:

Sales and Marketing, Commissions, Service, Customer Contact and Call Center
Support etc.

Data Warehouse:

Various Self-Service interfaces for Customers, Suppliers, and Employees.
The framework of ERP is shown in the figure 2.36



NOTES Figure 2.36 - ERP System



2.10.2 Evolution of ERP:
NOTES
MRP – Material Requirement planning focused mostly in the plant production level,
started, emphasizing the controlling of inventory for the dependent items. It acts as a
production scheduling system also. Because of change in business scenario like more
competition, more Global suppliers, warehousing, Global product demand, at different
count, changing environment business currency complexities etc. Focus has been shifted
from beyond the production level, to include all the activities that results in the development
of manufacturing resource planning, MRP II includes the sub modules manufacturing,
logistics, distribution, inventory, shipping, involving and accounting for a company. Then
further, improvement in the MRP II leads to the birth of ERP.
2.10.3 Advantages of ERP system
1. ERP effectively interfaces all the activities of the organization.
2. Computer security is included within an ERP to protect against both outsider crime,
such as industrial espionage and insider crime, such as embezzlement.
2.10.4 Disadvantages of ERP system
1. High investment required in buying and implementing the ERP system.
2. Problem due to a lack of corporate policy protecting the integrity of the data in the
ERP system and how it is used.
2.10.5 Limitations of ERP include
1. There are compatibility problem with the various legacy system of the
implementing organizations.
2. Hesitance in sharing sensitive internal information between departments can
reduce the effectiveness of the software.
3. The blurring of company boundaries can cause problems in accountability,
lines of responsibility, and employee morale.
4. ERP system can be difficult to use
5. ERP system is considered to be too rigid and too difficult to adapt to the
specific work flow and business process of some companies.
6. Annual license renewal change is constant irrespective of the size of the
company using the ERP.
7. Re-engineering of business processes to fit the “Industry Standard”
prescribed by the ERP system may lead to lots of competitive advantages.
8. Customization of ERP software is limited.
9. The success of an ERP system depends on the skill and experience of the
workforce.
10. Lack of training to the workforce result in failure of the ERP system.



Review Questions:
NOTES
1. What does ERP stands for?
2. List the Major phases in evaluation of ERP.
2.11 E-BUSINESS AND E-COMMERCE
Like any emerging field, e-business is changing fast and so is the thinking behind
it. A firm’s e-commerce strategy should aim to help organizations establish stronger ties
with customers and business partners. These strategies should also focus on helping
organizations acquire and retain customers efficiently. An electronic market not only
offers a cheaper, more cost effective way to transact business but also brings about a
more efficient market clearing mechanism, because it is not constrained by geographical
distance or time.
The beginning of the second millennium will almost certainly be remembered
as a time of unprecedented change in the business world. In the space of a few years
entire industries have been radically transformed. New technologies such as Internet,
digital televisions, intelligent home appliances have all reached critical mass at the same
time and are poised to revolutionize business. To begin it’s useful to describe what is
meant by electronic business and electronic commerce. It is defined as ‘the conduct of
business on the Internet, not only buying and selling but also servicing customers and
making strategic alliances with business partners.’
At this stage of development of e-commerce, everything that constitute a market
products, industrial structure, trade is in the process of being redefined. This raises the
issues of developing new strategies to answer questions like, how will the new networks
affect industries and the economy at large, how should firms compete in the new market
places that are developing, how can firm integrate the network into existing business
operations and how they should manage the new organizations. This makes business
strategy specialists to understand the networks and their business implications.
One of the advantages of using an electronic channel is the efficiency gain.
E-business can generate tremendous efficiencies through reduced transaction costs,
faster through out and better information to all members of the chain. Traditional strategy
development process is difficult to be followed in the case of e-businesses, as it has to
contend with additional issues of virtual transactions, unstable market, highly
interconnected firm and high uncertainty in the markets. The most striking features of
competitive strategies in e-business is that often new entrants have been able with limited
resources to undermine existing competitions in the industry through the use of new
business models. Strategy is driven by what is valued by the customer without being
constrained by existing industry rules. E-business strategy makers build on the powerful
commonalities in the features that customers value. This ensures these companies to
capture the core of the market, even if it means that they lose some of the customers.
Apart from the instability of the market, one of the greatest challenges for e-
business strategies is the sheer speed of change. Two processes are critical in time
pacing. The first one is managing transitions or the shifts from one activity to the next.
The second is managing rhythm, or the pace at which organizations change. Another



area where e-strategists should concentrate is the ability to connect individuals, groups
and organizations worldwide. Complementary product providers and allies play a
NOTES
significant role in determining success in the industry.
Uncertainty is another characteristic which the e-business strategies maker has
to cop up with. A firm’s posture in state of uncertainty defines the intent of a strategy
relative to the current and future state of an industry. Strategies are aimed at creating
new opportunities in a market, either by shaking up relatively stable industries or by
trying to control the direction of the market in industries with higher level of uncertainty.
Many e-commerce firms adopt the strategic posture of reserving the right to play, which
involves making incremental investments now that will put a company in a position of
advantage in the future. This allows the company to wait until the environment becomes
less uncertain before formulating a strategy.
As e-business technologies, coupled with continued advances in voice
recognition and artificial intelligence, become more commonplace, even more radical
changes in the use of information are expected. Just as there has been a paradigm shift
in e-business strategy, this requires a shift from information management to knowledge
management. This will require systems that move beyond simply capturing past
experiences to using that information creatively. Another strategy that can be adopted
to cop with the speed of change and uncertainty of e-business is to establish a separate
e-business unit. Speed and flexibility are required to compete successfully in e-business,
something that is difficult to achieve in large organizations. The strategies of dot.com
business are best seen as a tradeoff between operational decisions and financial
decisions.
We are on the verge of a revolution that is just as profound as the change in the
economy that came with the industrial revolution named ‘E-revolution’. So the e-
strategies should be formulated such that it allows people to rise above the barriers of
time and distance and take advantage of global markets and business opportunities.
SUMMARY
• This unit helped the reader to know the importance of one of the inputs of
production system, namely, the material resource.
• The functions of materials management is dealt.
• Types of computer controlled material handling devices and their applications
are discussed.
• The operation of Just in Time (JIT) system and the prerequisites to implement
JIT in an organization are discussed.
• The deterministic inventory models and probabilistic inventory model and
when do you adopt which model is elaborated.
• The working of MRP – I and MRP – II is illustrated with examples.
• Introduction of ERP, e-business and e-operation strategies are outlined.
Review Question:
What is e-business and e-commerce?



NOTES UNIT III
PLANNING AND FORECASTING
3.1 Introduction
3.1.1 Learning Objectives
3.2 Forecasting
3.2.1 Importance of forecasting
3.2.2 Forecasting model:
3.2.3 Forecasting methods:
3.2.3.1 Quantitative methods:
3.2.3.1.1 Time Series Analysis
3.2.3.1.2 Econometric models
3.2.3.1.3 Economic Indicators
3.2.3.2 Qualitative Methods
3.2.3.2.1 Market Survey
3.2.3.2.2 Expert Opinion
3.2.3.2.3 Delphi Technique
3.2.4 Forecasting evaluation
3.3 Capacity Planning
3.4 Aggregate Production Planning
3.4.1 Introduction
3.4.2 Objectives of Aggregate Planning
3.4.3 Strategies to Meet Demand Fluctuations
3.4.4 Aggregate Planning Methods
3.4.4.1 Error Method
3.4.4.2 Linear programming Model
3.4.4.3 Transportation Model
3.5 Product Design and Development
3.5.1 Product life cycle
3.5.2 New Product development process
3.5.2.1 Concept Generation
3.5.2.2 Concept testing
3.5.2.3 Technical Development
3.5.2.4 Standardization and Inter-changeability
3.5.2.5 Commercialization
3.6 Expert System in Product Development
3.6.1 Expert System Development
3.6.2 Putting System Together
3.7 Computer Aided Design and Drawing
3.7.1 Introduction
3.7.2 What to Expect from CADD?
3.7.3 A Look at the CADD Industry



UNIT - 3 NOTES

PLANNING AND FORECASTING
3.1 INTRODUCTION

In this unit the three levels of management are discussed. Product design and
development activities are also discussed. The enablers of product design and
development namely Expert system, Computer Aided Design (CAD) are also elaborated.
Forecasting activity is dealt to provide the input for the capacity planning and aggregate
planning activities. Capacity planning overview is done with the explanations of aggregate
planning.

3.1.1 Learning Objectives

1. You should understand the three levels of the management and their
characteristics.

2. Different forecasting methods and forecasting evaluation tools are to be
understood.

3. To understand the capacity planning and the strategies for aggregate planning
and then different methods of aggregate planning.

4. To comprehend the new product development process and the utility of
computer aided design and the expert system in the new product
development process.

3.1.2 Levels of Management

Generally, business activities can be classified into strategic, tactical and
operational level activities. All the three levels are involved in all the subsystems, namely,
production, finance, personnel and marketing. The characteristics of the decisions to
be taken in all the three levels are shown in the table 3.1.2



NOTES Table 3.1.2 - Characteristics of decision making at Strategic, Tactical and
Operational Levels of Management

Level of Management
Characteristics
Strategic Tactical Operational

Time frame to “future” – Extremely “Current” – Year, quarter, “Instant” – day
which decisions long time or month to day, or real-time
apply

Persons primarily Executive management Middle management First line manage
involved and staff ment

Focus of decision On one aspect of the On organization only, On small part of
organization/environ- either in its entirely or the organization
ment relationship at a major portion of it
a time

Complexity of Numerous variables, Moderate number of Small number of
decisions most of which cannot variables; most of variables, all of
be quantified which can be quantified which can be
quantified

Degree of struc- Occurs at irregular Rhythmic; specifically Rhythmic; specifi
ture in decision- intervals, based prescribed procedures; cally prescribed
making process almost exclusively repetitive problems procedures; repeti-
on judgment; each tive problems
problem differs.

Nature of infor- External; predictive; Internal; Historical or Internal; historical
mation qualitative; not real-time; often non- or real-time; often
particularly accurate financial; precise non-financial;
precise

Use of information Prediction Action Action

You can see how the type of activities to be carried out in the strategic,
tactical and operational levels of production system is shown below for your
clarity.

Strategic level decisions in the production system are :

• Plant location decision
• New product introduction
• Technology Selection
• Supply chain network strategy



Tactical level decisions in the production system are : NOTES
• Markets to be supplied
• Aggregate planning
- overtime estimation
- inventory decision
- subcontracting decision
- hiring and firing decision
Operational level decisions in the production system are :
- deciding about the individual customer order
- allocation of inventory or production to individuals order
- deciding a date that an order is to be filled
- allocated can order to a particular shipping mode
- set delivery schedule of trucks
Review Questions :
1. What are the three levels of management?
Give an example in each level of the management
3.2 FORECASTING
Forecasting activity is an important activity in the business. This is considered
to be an important input for many activities in the organization. Forecasting is of two
types, namely, long ranges forecasting and short range. The Long range forecast goes
as input for long range decision making like technology selection, capacity planning.
From the long range forecasts, the medium term forecasts are derived and used as
input for the activity like aggregate planning. From the medium term forecasts the short
range forecasts are outlined and go as input for activity like scheduling. Selection and
usage of forecasting method differs according to whether the company needs forecast
to the existing product or for a new product. When you forecast for the existing product,
the past demand data is taken into consideration, the pattern for the demand is analyzed,
then appropriate forecasting technique is chosen to predict the future. From the predicted
demand the manager adds his own intuitions and experience based on the situation to
change the estimated demand to suit the real life situation.
In the case of new product, since there is no past data available, the organization
depends upon the qualitative methods of forecasting. Experts, customers, sales persons
opinions are solicited.
3.2.1 Importance of forecasting
Forecasting activity plays major role in activities like budget preparation, cash
flow preparation, balance sheet and income statement. In marketing it does play a role
in product life, pricing and promotional decisions. In production it provides information
in capacity planning, aggregate planning and scheduling activities.



NOTES 3.2.2 Forecasting model
Figure 3.1 - Forecasting model

Constraint
1. Advertisement Budget
2. Management Policies
3. Available Resources
4. Technology

Inputs Output
1. Past Data 1. Demand Estimation
2. Demand Pattern a. Long Range
3. Market Situation b. Medium Range
4. Market Research c. Short Range

Environmental Factors for
Considering Long-term
Forecast
1. Social
2. Economical
3. Political

Before selecting any forecasting methods, you should see that whether you
require forecasting for long range; then whole frame work given in the model is useful
that is in addition to market and internal analysis you need to consider the environmental
factors like social, economic and political factors for the long term forecasting.

3.2.3 Forecasting methods

In this material the forecasting methods are classified into quantitative and
qualitative type. The past data and demand pattern play key role in selecting the best
quantitative method and providing good forecasting results. Quantitative methods are
very much used for forecasting the existing products. Qualitative method used for the
new product forecast.
The classification of different methods is shown below figure 3.1
Figure 3.2 - Classification of forecasting method

Forecasting Methods

Quantitative Qualitative

Time Series Economic Econometric
Analysis Indicators Models

Expert Market Delphi
Options Survey



3.2.3.1 Quantitative methods: NOTES
The method is called quantitative methods because forecasting is done based on
the data.
Time series analysis:
In this method, the past data is analyzed against time scale.

Figure 3.3 - Time series analysis

5

4

2 3
Past
demand
1

Time

If you analyze the demand pattern against a time scale, usually it consists of the following
components.

1. Level
2. Trend
3. Seasonal
4. Cyclic
5. Random

Before selecting a particular forecasting, the past data is plotted against their
respective year or month or week the pattern analyzed in terms of what component the
pattern posses, then the appropriate forecasting technique is chosen.

The combination of components is shown in figure3.4.

Figure 3.4

Data

(Level + Random) (Level+ Trend+ Random)



NOTES

(Level+Seasonal+Random) (Level+Trend+Seasonal+Random)

Cycle component usually considered for the long term forecasting. The cycle
means business cycle or economy cycle. The different phases of this cycle are growth,
maturity and depression. Usually each phase may prevail for at least more than three
years.
3.2.3.1.1 Time Series Analysis
For after analyzing the pattern of data, you can choose relevant method for
forecasting. In this material important and complicated time series analysis methods
are discussed.
Moving Average

The moving average technique generates the next period’s forecast by averaging the
actual demand for the last ‘n’ time periods.

n

∑Y t −1
ˆ Y + Y + ......Yt − n =
Yt = t −1 t − 2 i =1
n n
Where = forecast for period ‘t ’

=
actual demand in period ‘t ’
n = Number of periods included in each average
Moving average problem – 1
From the data below, determine the forecast for period 7 using two month moving
average technique.
Table 3.2
Month 1 2 3 4 5 6
Demand 20 30 40 30 50 58

Solution:
Moving average period (n) = 2
50 + 58
Forecast for period 7 would be = = 54
2



Moving Average – Problem 2 NOTES
From the data below, determine MAD for the following forecasting techniques:
(a) last period demand, (b) arithmetic average, and (c) three month moving average.
What is the forecast for period 13?

Table 3.3
Period Demand Period Demand
1. 93 7. 100
2. 105 8. 101
3. 114 9. 81
4. 111 10. 118
5. 106 11. 103
6. 116 12. 114

Last Period Demand Arithmetic Average Three Month
Moving Average
Month Demand Forecast Absolute Forecast Absolute Forecast Absolute
demand deviation demand deviation demand deviation

1 93 - - 105.16 12.16 - -

2 105 93 12 105.16 0.16 - -

3 114 105 9 105.16 8.84 - -

4 111 114 3 105.16 5.84 104.00 7.00

5 106 111 5 105.16 0.84 110.00 4.00

6 116 106 10 105.16 10.84 110.33 5.67

7 100 116 16 105.16 5.16 111.00 11.00

8 101 100 1 105.16 4.16 107.33 6.33

9 81 101 20 105.16 24.16 105.67 24.67

10 118 81 37 105.16 12.84 94.00 24.00

11 103 118 15 105.16 2.16 100.00 3.00

12 114 103 11 105.16 8.84 111.67 13.30

13 114 Total 105.16 Total 111.67 Total

139 96.00 98.97



NOTES 139
= = 12.63
11

n ˆ
Yi − Yi 96
MAD = ∑ = =8
i =1 n 12

n Yi − Yˆ 98.97
MAD = ∑
i
= = 10.99
i =1 n 9
Forecast for period 13 using last period demand = 114
Forecast for period 13 using arithmetic average = 105.16
Forecast for period 13 using three month moving average = 111.67

Exponentially weighted moving average
In the simple moving average technique, recent ‘n’ data have to be taken while
calculating the forecast. ‘n’ represents, ‘n’ month moving average’, exponentially weighted
moving average gives more weightage to the recent data and less weightage to the old
data moreover if you apply this technique to forecast the future, there is no need to store
recent ‘n’ data as you did in the moving average method. Because all the data will be in
one single value that is the previous forecast value.

Simple exponentially moving weightage average model
Forecast for period t = α (Actual demand of period t-1) + (1- α ) (forecasted
value of t-1)
This model is applicable only when the past data follows a horizontal pattern with error
component.

Figure 3.5 - Simple exponentially moving weightage average model

Sales

Time

Where ‘ α ’ is the exponential smoothening constant, α varies between 0 to 1.let us
analyze why this method is called exponential weighted moving average.



Forecast for period t
NOTES
= (actual demand for period t-1) + (1- α ) (forecasted value for t-1)

ˆ
X t = forecast for the level component for period t

Xˆ
t [
= Y t − 1α + (1 − α ) Y t − 2 α + (1 − α ) Xˆ
t−2 ]
= α Y t − 1 + α (1 − α ) Y t − 2 + (1 − α ) 2 Xˆ
t−2

[ ˆ
= α Y t −1 + α (1 − α )Y t − 2 + (1 − α ) 2 Y t − 3 α + (1 − α ) X t − 3 ]
From the above expressions, you can easily understand that the past data gets less
weightage than the recent data as follows:

DATA WEIGHTAGE FOR α =0.4
Yt-1 α 0.4
Yt-2 α (1- α ) 0.24
Yt-3 α (1- α )^2 0.144

αˆ = Xˆ If you plot the weightage against the time data, it follows exponential pattern,
βt ˆ t −
ˆ
Yˆ t −= Y1 ˆ
t −1α + (1 − α ) X t −1
X X
X so the method is called as exponentially weighted moving average.
t

Exponentially weighted moving average with trend correction (Level + Trend)
When you analyze the past data and if you have a feeling that the past data
contains both the level(X) and trend component (T), then the model is used for adjusting
trend and level component is
= α Yt-1 + (1 - α ) ( -1
+ Tt-1)
Tt = β ( ) + (1 - β ) Tt-1
Tt = Trend adjustment for period‘t’.
β is a smoothing constant for trend. This varies between 0 and 1.
Now the forecast for period t
+ Tt
If you want to forecast for ‘n’ period from the period‘t’ where in the forecast value
ˆ
available are X t and Tt, then the formula to be used
ˆ ˆ
Yt +n = X t + (n + 1) Tt
Exponentially weighted moving average Problem - 3
Using exponential smoothing and the data in the previous problem, forecast
monthly demand if α = 0.2 and = 0.4. Assume that the actual demand in the first



month is the same as the forecasted demand and the initial level and the initial trend for
NOTES month 1 both are 10. From these results forecast the demand for period 8.

Table 3.5
Month Yt Demand Forecast Level Tt Trend Forecast

1 20 10 10 20
2 30 20 10 30
3 40 30 10 40
4 30 40 10 50
5 50 46 8.4 54.4
6 58 53.52 8.048 61.568
7 54 60.85 7.752 68.602
8 65.68 6.583 72.263

α = 0.2, = 0.4

Table 3.6

Month Yt Tt Trend ˆ
Yt Forecast
Demand Forecast Level

1 20 10 10 20
2 30
3 40
4 30
5 50
6 58
7 54
8
ˆ
X t = α Yt-1 + (1 - α ) ( + Tt-1)
-1

Tt = β ( ˆ
- X t -1) + (1 - β ) Tt-1
Tt = Trend adjustment for period‘t’.
ˆ
= X t + Tt
Forecast demand level for the 2nd month is obtained in the following manner
ˆ
X 2 = 0.2 * (20) + 0.8 * (10 + 10)
= 4 + 16
= 20



Trend for the 2nd month is obtained in the following manner: NOTES
T2 = 0.4 * (20 - 10) + 0.6 * (10)
=4+6
= 10
Forecast for month 2 is
ˆ
Y2 = X 2 + T2
= 20 + 10
= 30
Forecast demand level for the 3rd month is obtained in the following manner:
ˆ
X 3 = 0.2 * (30) + 0.8 * (20 + 10)
= 6 + 24
= 30
Trend for the 3rd month is obtained in the following manner:
T3 = 0.4 * (30 - 20) + 0.6 * (10)
=4+6
= 10
ˆ ˆ
Y3 = X 3 + T3
= 30 + 10
= 40
Forecast demand level for the 4th month is obtained in the following manner:
ˆ
X 4 = 0.2 * (40) + 0.8 * (30 + 10)
= 8 + 32
= 40
Trend for the 4th month is obtained in the following manner:
T4 = 0.4 * (40 - 30) + 0.6 * (10)
=4+6
= 10
ˆ ˆ
Y4 = X 4 + T4
= 40 +10
= 50
ˆ
X 5 = 0.2 * (30) + 0.8 * (40 + 10)
= 6 + 40
= 46



NOTES Trend for the 5th month is obtained in the following manner:
T5 = 0.4 * (46 - 40) + 0.6 * (10)
= 2.4 + 6
= 8.4
ˆ ˆ
Y5 = X 5 + T5
= 46 + 8.4
= 54.4
ˆ
X 6 = 0.2 * (50) + 0.8 * (46 + 8.4)
= 10 + 43.52
= 53.52
T6 = 0.4 * (53.52 - 46) + 0.6 * (8.4)
= 3.008 + 5.04
= 8.048
ˆ ˆ
Y6 = X 6 + T6
= 53.52 + 8.048
= 61.568
ˆ
X 7 = 0.2 * (58) + 0.8 * (53.52 + 8.048)
= 11.6 + 49.25
= 60.85
T7 = 0.4 * (60.85 - 53.52) + 0.6 * (8.048)
= 2.932 + 4.82
= 7.752
ˆ ˆ
Y7 = X 7 + T7
= 60.85 + 7.752
= 68.602
ˆ
X 8 = 0.2 * (54) + 0.8 * (60.85 + 7.752)
= 10.8 + 54.88
= 65.68



Trend for the 8th month is obtained in the following manner: NOTES
T8 = 0.4 * (65.68 - 60.85) + 0.6 * (7.752)
= 1.932 + 4.651
= 6.583
ˆ ˆ
Y8 = X 8 + T8
= 65.68 + 6.583
= 72.263

Exponentially weighted moving average with seasonal correction (Level +
Seasonal)
When you analyze the past data, if you identify that the past data contains
level and seasonal pattern. The seasonal pattern means that you can find the similarity in
the demand pattern with respect to each period. This similarity occurs within a year.

(e.g.).Demand of Air-conditioning equipment, Heating equipment, Ice Cream, Etc...
The last year demand in the month of January may have the similarity with the
demand of January of this year. If you have monthly data, then the seasonal period =
γY
Xtt 12, if you have quarterly data, then the seasonal period = 4.
ˆ
Xt When there is no trend, the model used for forecasting
ˆ ˆ
Yt = X t It

Where

ˆ
Yt = forecast for the period‘t’
ˆ
X t = level forecast for the period‘t’
It = seasonal index for the period‘t’
The seasonal index also are updated by the following model:

It+m = γ + (1 - γ ) It
Where is the seasonal smoothing constant, it varies between 0 and 1.
If you want to forecast for the ‘n’ period, where in you have then the forecast for
the period ‘n’ after t
ˆ ˆ
Y t+n = X t It+n

Exponentially weighted moving average Problem -4
Quarterly data for 12 periods is given below:



NOTES Table 3.7
Quarter Demand Quarter Demand
1. 497 7. 821
2. 454 8. 1017
3. 624 9. 709
4. 764 10. 715
5. 631 11. 1794
6. 624 12. 1242

Using the data from the first eight quarters, compute the quarterly seasonal indices.

Solutions -

Table 3.8

Period Demand Average of same quarter Seasonal Index
of each year
1 497 564 0.83
2 454 539 0.793
3 624 722.5 1.064
4 764 890.5 1.311
5 631 564 0.83
6 624 539 0.793
7 821 722.5 1.064
8 1017 890.5 1.311
Total 5432 7.996
5432
Overall quarterly average = = 679
8
Average of same quarter of each year
Seasonal Index =
Overall quarterly average
564
Seasonal Index for Quarter 1 = = 0.83
679
539
679



Seasonal Index for Quarter 3 =
722.5
= 1.064
NOTES
679
890.5
679

Exponentially moving average with seasonal and trend corrections (Level
+ Trend + Seasonal)
If the past data consists of the level, seasonal and trend pattern, then you
need three expressions to estimate the three components:-

ˆ
Xt = α + (1 - α ) ( + Tt-1)
-1

Tt = β ( ˆ
- X t -1) + (1 - β ) Tt-1

It+m = + (1 - γ ) It

The forecast model
ˆ
=(X +T )I t t t

To forecast for the ‘n’ period
γY
β ˆ ˆ
Y = [ X + ( n + 1) T ] I
Yˆtt−1
ˆ
Yt t
X t +n t t t+n

It −t1
X
Exponentially moving average Problem – 5

Using the data from the last four quarters in the previous problem and
the initial seasonal indices computed in the previous problem, determine MAD
and bias of an Exponential weighted moving average with α = 0.2, = 0.4,
= 0.5, an initial forecast of 720, an initial trend of 65, and an initial level of 801.
What is the forecast for quarter 13? For quarter 15? (Assume period 9 as the
initial period).
Given
Table 3.9
Quarter Yt Tt Trend Seasonal
Demand Forecast Index Forecast
Level It I t+m
9 709 801 65 0.83 720
10 715 0.793
11 1794 1.064
12 1242 1.311



NOTES = 0.2, = 0.4, = 0.5
New seasonal Index, It+m 9th quarter is obtained as follows:

New seasonal Index, It+m = γ + (1 - γ ) It

= + 0.5 * 0.83
= 0.4425+0.415
= 0.8575
Forecast demand level for the 10th quarter is obtained in the following manner:

ˆ
Xt = α + (1 - α ) ( + Tt-1)
-1

0.2 * 709
= + 0.8 * (801+65)
0.83
= 170.84 + 692.8
X 10 = 863.64
Trend for the 10th quarter is obtained as follows:
ˆ
Tt = β ( - X ) + (1 - β ) Tt -1 t-1

= 0.4 * (863.64 - 801) + 0.6 * (65)
T10 = 64.056
Forecast for quarter 10 is
ˆ
=(X +T )I
t t t

= (863.64 + 64.056) * 0.793
ˆ
Y10 = 735.66

ˆ
Xt = α + (1 - α ) ( + Tt-1)
-1

0.2*715
= + 0.8* (863.64 + 64.056)
0.793
= 180.32 + 742.156
ˆ
X 11 = 922.47
ˆ
Tt = β ( - X ) + (1 - β ) T
t -1 t-1

= 0.4 * (922.47 - 863.64) + 0.6 * (64.056)
T11 = 61.96



Forecast for quarter 11 is NOTES
ˆ
= ( X t + Tt ) It
= (922.47 + 61.96) * 1.064
ˆ
Y11 = 1047.43

ˆ
Xt = α + (1 - α ) ( + Tt-1)
-1

0.2 *1794
= + 0.8 * (922.47+61.96)
1.064
= 337.21 + 787.54
X 12 = 1124.75
ˆ
Tt = β ( - X ) + (1 - β ) T
t -1 t-1

= 0.4 * (1124.75 – 922.47) + 0.6 * ( 61.96)
T12 = 118.08
ˆ
=(X +T )I
t t t

Yˆt −1
ˆ
Yt t
X = (1124.75 + 118.08) * 1.311
It −1 ˆ
Y12 = 1629.35

ˆ
Xt = α + (1 - α ) ( + Tt-1)
-1

0.2 *1242
= + 0.8 * (1124.75 + 118.08)
1.311
= 189.47 + 994.26
ˆ
X 13 = 1183.73
ˆ
Tt = β ( - X ) + (1 - β ) T
t -1 t-1

= 0.4*(1183.73 – 1124.75) + 0.6 * (118.08)
T13 = 93.43
ˆ
=(X +T )I
t t t

= (1183.73 + 93.43) * 0.8575
ˆ
Y13 = 1096.02



Forecast for quarter 13 is 1096.02
NOTES New seasonal Index, It+m for 10th quarter is obtained as follows:

New seasonal Index, It+m = γ + (1 - γ ) It

= + 0.5* 0.793
= 0.413 + 0.396
= 0.809
It+m for 11th quarter,

It+m = γ + (1 - γ ) It

= + 0.5 * 1.064
= 0.972 + 0.532
= 1.504
It+m for 11th quarter,

It+m = γ + ( 1 - γ ) It

= + 0.5 * 1.311
= 0.552 + 0.655
= 1.207
Table 3.10
Quarter Yt ˆ
Xt Tt Trend Seasonal
Demand Forecast Index Forecast
Level It It+m

9 709 801 65 0.83 0.8575 720
10 715 863.64 64.056 0.793 0.809 735.66
11 1794 922.47 61.96 1.064 1.504 1047.43
12 1242 1124.75 118.08 1.311 1.207 1629.35
13 1183.73 94.43 0.8575 1096.02
Forecast for Quarter 15 is
t+2
= [1183.73 + 3 * (94.43) ] * 1.504
= 1467.02 * (1.504)
ˆ
Y15 = 2206.39



Forecast for quarter 15 is 2206.39
NOTES
n ˆ
Yi − Yi
Mean Absolute Deviation, MAD = ∑
i =1 n
11 + 20.66 + 746.57 + 387.35
MAD =
4
1165.58
=
4
MAD = 291.39

∑
n
ˆ
(Yi − YI )
i =1
Bias =
n
(−11 − 20.66 + 746.57 − 387.35)
=
4

=
Bias = 81.89

327.56 3.2.3.1.2 Econometric models
4
Econometric models may be designed as social science in which the tools of
economic theory, mathematics, and statistical inference are applied to the analysis of
economic phenomena.
The traditional econometric methodology proceeds along the following steps:
1. Statement of theory.
2. Development of model.
3. Specification of econometric model.
4. Obtaining the data.
5. Estimation of the parameters of the econometric model.
6. Hypothesis testing.
7. Forecasting.
8. Using the model for central or policy purpose.
The above steps can be explained by an example:-



NOTES 1. Economic theory says, other things remaining the same, a reduction of price of
a commodity results in increase of quantity demanded for that commodity.
2. You can find an inverse relationship and a mathematical model can be developed.
3. Use of mathematical model which enables you to develop an economical
equation.
4. Get the past data for the price and quantity.
5. Estimate the parameters for the economic model.
6. Use the model as well as parameters.
7. The predicted data further used for decision making purpose.
Thus econometric models are developed and used for decision making purpose.
3.2.3.1.3 Economic Indicators
In this kind of model the independent and dependents variables are economic
indicators. The variables may be GNP, Personal income, Bank deposits, Inflation,
Pre-capita income, Purchasing Power Parity, Wholesale price index, Consumer price
index, etc. You should develop a relationship .
Y = f (x1, x2, …., xp)
Then develop a model using the variable and treat the problem as simple
linear regression or multiple regression model. Then use the model to forecast for the
future and test the model and parameters using ANOVA and ‘t’ test. The difference
between econometric models and economic indicators are, in econometric model you
may have more than one equation which you may get to show the relationship between
the economic variables and the parameters estimated and it is used for forecasting, but
in the case of economic indicator model you will be having single regression model to
predict the future.
3.2.3.2 Qualitative Methods
Qualitative methods of forecasting are adopted where you don’t have past
data for projections. But, these techniques are adopted to forecast for new products.
These techniques also adopted to validate the forecast which is derived from the
quantitative methods mentioned in the early sections.
3.2.3.2.1 Market Survey is a technique, where the market / consumer are surveyed to
estimate the potential market through various techniques like direct survey, questionnaire,
interview methods etc.
3.2.3.2.2 Expert Opinion has a method in which the experts are called and they are
allowed to discuss to arrive at the decisions related to market potential. This method
has a disadvantage of the dominating expert – who may sway away the whole discussion
in his way. The docile expert view may not find a remarkable place in the discussion.



3.2.3.2.3 Delphi Technique - the short coming of the expert opinion method is NOTES
eliminated in the Delphi technique method. In this method, the experts are not invited for
the discussion, instead the questions is prepared for which is indented and circulated to
all experts. The responses of experts are collected and then the reasoning for their
response will also be collected and then same such process is continued until the consensus
is arrived at. The whole task is carried out by a person called Facilitator.
Review Questions:
1.List the techniques under qualitative methods.
2.List the different techniques used in the quantitative methods.
3.2.4 Forecasting evaluation
Forecasting evaluation tools are many. But each tool is the function of forecast
error that is the difference between the actual sales and the forecasted value. The
forecasting methods are evaluated based on the forecasting evaluation tool.
The best method is chosen where the forecast error is minimum.Different
forecasting evaluation tools are:
1. Sum of squared error
2. Mean squared error
3. Mean absolute deviation
4. Tracking signal
Let us assume that
Ft Forecast for the period‘t’
At Actual for the period‘t’
n number of observation
1. Sum of Squared Error (SSE)
n
= ∑ ( Ft − At ) 2
t =1

2. Mean Squared Error (MSE)
n
= ∑ ( Ft − At ) 2 / n
t =1

3. Mean Absolute Deviation (MAD)
n
= ∑ Ft − At / n
t =1



| Ft – At | is the absolute value
NOTES Tracking Signal (TS)
n

∑F
t =1
t − At
TS =
MAD

3.3 CAPACITY PLANNING

Capacity planning is a process, which is to be carried out after deciding the
product and the long range demand for the product. Suppose if you produce custom
made product, the demand is not estimated through the product but in terms of hours.
Once if you know the long range demand, the effort needed to determine the amount of
resources needed to meet the demand requirement is all about capacity planning.
Capacity Measure
In this section, you can learn a method of measuring a capacity of system.
Consider anything for which you need to measure the capacity, as a system.
Figure 3.6 – Capacity Measures

Analyze the system into input, processing and output. When you analyze, see to that,
where there is a less variability, choose that side and identify the product, process-
resources, the input resources and attach time frame to provide the capacity measure.
Measure of Capacity through output
Consider an automobile mass production industry. You can’t find much variation
in the output side compared to the input resources and processing parts. So the number
of cars/time is considered as the measure. Mostly in the case of mass production industry,
the output side is considered to measure the capacity.
Measure of the capacity through Input
Consider an educational institution; here the output side is not taken into
consideration because the number of outgoing students per time may vary depending
upon the pass result. But the intake is always constant because the intake depends
upon the government approved. So, the capacity of educational institution is measured
through the input, namely, the number of students intake.



Measure of the capacity through processing NOTES
Consider a sugarcane industry, the capacity of that industry is not measured in
terms of the output and input. There is a variability in terms of yield rate that means
some times “y” tons of sugarcane may give “x” tons of sugar or some times same “y”
may give more than or less than the “x” tons of sugar. Since variability is existing in both
the input side and output side. Inputs and outputs are not considered for measuring the
capacity. But in the processing side there is a less variability namely the crushing capacity
or the number of tons of sugarcane could be crushed by the crushing machine is
considered to be a best measure to measure the capacity of the sugarcane industry
from the processing point of view.
In summary, if you want to fix the measure for the capacity, then see the
system as input, processing and output. Find where there is a less variability choose
that side and correspondingly choose the product or the resources to estimate the
measure. The table- 3.11 provides some of the systems and their corresponding measure
to measure the capacity.
Table 3.11 - Capacity planning involves three stages of planning.

System Components of Unit of Measure
System considered
for capacity measure

Automobile Industry Output Number of Automobiles
Bottling Plant Output Gallons / Day
University Input Number of students intake
per year
Auto repair shop Processing Number of machines hour per
day

Restaurant Processing Seating Capacity

Stage 1 involves resource planning this is considered to be long range planning.
In the long range planning, mostly the type and amount of man power requirement, the
capital equipment requirements are to be decided.
Stage 2 is by considering the resource planning; the rough cut capacity
planning is carried out. Here it is not discussed in detail because it has been discussed
in unit II.
Stage 3 is capacity requirement planning this is lower level planning. This is
carried out with the input of rough cut capacity planning. This is also discussed in the
unit II.



NOTES Review Questions:
1. How do you measure the capacity planning?
2. Give an example for the capacity measure based on output?
3.4 AGGREGATE PRODUCTION PLANNING
3.4.1 Introduction
In the operational planning, the long range planning involves capacity planning
which involves the determination of long range capacity needs of an organization. Next
to the capacity planning is the process of aggregate planning which comes under
intermediate range planning. Aggregate planning is done considering capacity planning
as a framework.
Aggregate Planning
Aggregate Planning includes identifying different feasible production alternatives
and selecting the best one in order to reduce the production cost to minimum. First let
us analyze what is meant by aggregate planning? And why this is called aggregate
planning? There are organizations which involve the production of various products
and each product has its own measurable dimension. For e.g. Assume that an organization
produces three products – Product A, Product B and Product C. Product A is measured
in terms of tons, product B is measured in terms of length and Product C in terms of
number of units. As you know aggregate planning is a medium range planning, you need
not plan the capacity of individual products. Instead you should plan the capacity for
aggregate demand by converting the different product demand into an aggregate demand.
For doing so, you need to find out a common unit, for the above mentioned three
products. If possible you can convert into total hours of production. Here the dimension
becomes time. Hence time becomes the aggregate unit. After finding the aggregate
requirement then you should plan the capacity for the aggregate requirement. This is a
planning done at a broader level and does not include details of individual product.
Aggregate planning includes:
Staffing plan – related to staff and labor related factors.
Production plan – related to production level and inventory.
3.4.2 Objectives of Aggregate Planning
The main objective is to minimize the cost. The others include:

To maximize
1. customer service and.
2. utilization of resources.



To minimize
1. changes in workforce and.
NOTES
2. changes in production.

3.4.3 Strategies to Meet the Demand Fluctuations

Suppose the annual requirement is 1200 units, then you can establish a constant
capacity for production as 1200/12 = 100 units per month.

Figure 3.7 Figure 3.8

In reality, the demand fluctuates. It could follow seasonal, trend pattern. To
meet these demand fluctuations there are certain strategies to be adopted with regard
to capacity to meet the demand. They are:

Inventory carrying through constant workforce.
Subcontracting.
Variable workforce.
Variable Working hours.
Promotional Activities.
Backordering.

a. Inventory Carrying Through the Constant Workforce

In this strategy a constant workforce is maintained throughout the planning
period, because of which there is a constant output. But the demand may vary. So
during certain periods there will be excess output and at certain times decreased output.
The excess demand is met through excess output produced through constant workforce
in the previous demands by carrying the inventory.



NOTES Figure 3.9 - Inventory Carrying Through Constant Workforce
Inventory carrying through constant workforce
Subcontracting
Variable workforce
Variable Working hours
Promotional Activities
Backordering
a. Inventory Carrying Through Constant Workforce
In this strategy a constant workforce is maintained throughout the planning
period, because of which there is a constant output. But the demand may vary. So
during certain periods there will be excess output and at certain times decreased output.
The excess demand is met through excess output produced through constant workforce
in the previous demands by carrying the inventory.
Figure 3.9 - Inventory Carrying Through Constant Workforce

Advantages:

This method provides a stable workforce who can give better quality products
because of their experience.
The employees feel secured about their job and hence high productivity level is
maintained.
It avoids hiring and firing cost.

Disadvantages

There will be inventory carrying cost when there is excess output during a
period.



There is a difficulty in finding a stable workforce that will keep the inventory
cost at its minimum.
NOTES
This strategy cannot be followed for perishable goods.

b. Subcontracting

This is one of the strategies to meet demand fluctuation in which a portion of the
production is placed with a subcontractor or subcontractors.

Figure 3.10 - Subcontracting

Advantages

During the period of the peak demand this is a good alternative if the company
is unable to produce the demand needs in a given time period.

Disadvantages

Unless the company has good relations with the suppliers it cannot have much
a control on the product quality and delivery time.
If practiced extensively it will result in increased competition among
subcontractors which in turn leads to subcontractors becoming competitors for
the firm.

c. Variable Workforce

This strategy involves hiring and firing of employees based on demand
fluctuations. When the demand increases workforce is hired and when the demand
decreases some amount of workforce is fired.



NOTES

Advantages

Variable workforce enables to match between production quantity and demand
because of which inventory cost can be kept at minimum.

Disadvantages

There is a cost involves in hiring and firing the employees.
Newly hired employees need training and hence initially productivity might be
lowered.
Workers might feel unsecured about their job which may in turn affect
productivity.

d. Variable Working Hours

Under this strategy, workforce remains constant but working hours would vary
as per the demand. During periods of increased demand employees are made to work
overtime. If the demand is low workers are idle but the firm would be paying them full
salary. This is a loss to the company.
Figure 3.13 - Variable Working Hours



Advantages
NOTES
It helps to maintain a stable workforce.
The company can save the cost on inventory.
Disadvantages
In case of very large demand it is difficult to follow this strategy.
Overtime wages are higher than regular time wages.
Employees are idle during periods of low demand.
During overtime, if the employees are very much stressed, it will lead to a
decrease in their efficiency of working.
e. Promotional Activities
During off seasons, there is a decrease in demand. At such times firms can promote
the sales by offering discounts, selling at a lower price, “buy one get one free” sales,
etc. This can be adopted to sell the excess inventory.

Example: Giving off-season discounts for soft drinks during winter season.

f. Backordering

Here products are supplied to the customers only after a period of waiting time.
i.e., customers are made to wait for the product. As soon as the goods are produced
they are first supplied to back orders. It is the same as shortage of a product.

Figure 3.14 - Backordering



If any one of the above strategies is used it is called pure strategy. If a combination of
NOTES the above strategies are used it is then called mixed strategy.
The Cost Aspects
Various costs are associated with aggregate planning strategies. They are explained
as follows:
Production cost
This includes the fixed cost and variable cost associated with production activities
Fixed cost – Cost such as rent for the building, salaries, property tax,
insurance etc. These cost that does not vary with the volume pf production.
Variable cost – The cost of labor, material or overhead and this changes
according to the change in volumes of unit produced.
Hiring and Firing cost
The cost associated with variable workforce size. Costs involved with termination
of employee will come under firing cost. Similarly if an employee is recruited temporarily
during increased demand there will be cots of training, wages to the new employees.
These come under the hiring cost. Hiring cost would include employer expenses on job
advertising, screening cost and training of newly hired employees.
For employee lay-off, the firm incurs certain cost such as compensation, expenses on
legal advice for settlement, counseling of fired employees, etc.
Back-order cost
This is nothing but the shortage cost, when the demand for a product is met
later. In other words, customer is made to wait for the product. This may result in any
one of the following
The customer may wait for the product, but there is a cost associated with
this which is proportional to the waiting time of the customer.
The customer may be dissatisfied, and the cost associated with this is
independent of waiting time. This is called fixed shortage cost.
The customer may also switch to competitor’s products and hence the sale
is lost. This may result in loosing the goodwill of the customer also.
Overtime Cost
In case of variable work hours, the employees may be asked to work overtime
during periods of peak demand. This results in paying the employee for the overtime.
This cost is usually much more than the regular time cost.
3.4.4 Aggregate Planning Methods
In this section you can see about the different methods used for aggregate
planning. The methods are classified based on the above discussed cost varying linearly



or non- linearly against the activities to be measured. It is also based on whether you
need optimal solution or non-optimal solution. NOTES
The aggregate planning methods can be represented as follows:

Table 3.12 - Aggregate Planning Methods
Cost Behavior
Solution Requirement
Linear Non-Linear
Optimal Linear Programming Linear Decision rule
- Transportation model Dynamic Programming
- Simplex method
Non-Optimal Trial and Error method Heuristic method
Computer research

Real life aggregate planning problem consist of more complex interacting variable and
constraints. So it is difficult to formulate the optimal model. Here, planner resorts to
non-optimal solution. In this section you can understand the Trial and Error method,
Simplex method and Transportation model. Other methods are out of scope and thus
not included.
3.4.4.1 Error Method
The following example is solved through the Trial and error method. This method
is called as the Trial and Error method because you are following a particular logic to
solve the problem, but there is no guarantee that whether the solution that you got is
optimal or not.
Example 3.1
A company has estimated the demand for each product for 12 months as follows:

Table 3.13

Month Demand
1 1200
2 2400
3 3000
4 3200
5 3500
6 4000
7 4500
8 4700
9 3200
10 2900
11 4800
12 5000



These demands can be met through Regular Time, Overtime and Subcontracting.
NOTES
Regular Time capacity – 200 units
Overtime capacity – 1500 units
Subcontracting capacity – infinity
Regular Time cost, rt = Rs.30 per unit per period
Overtime cost, ot = Rs.50 per unit per period
Subcontracting cost, ut = Rs.100 per unit per period
It is possible to carry inventory from one period to another and carrying cost Cc = Rs.
10 per unit. Provide feasible production alternatives.
Solution:
Table 3.14

Month Demand RT OT ST
(2000) (1500) (infinity)
1 1200 1200, 500 (6), 300 (7) - 500 700 (7), 800 (8) 700 units
units required in 6th month is required in 7th month is
produced in 1 month and carried produced in 1st month
st

as inventory. 300 (7) - 300 units and carried as inventory.
required in 7th month is produced 800 (8) - 800 units
in 1st month. required in 8th month is
st
produced in 1 month.
2 2400 2000 1400, 400 (8), 700 (11)
400 units required in 8th month
is produced in 2nd month and
carried as inventory. 700 (11) -
700 units required in11th month
is produced in 2nd month.

3 3000 2000 1000, 500(11) 500 units required
in11th month is produced in 3rd
month and carried as inventory.

4 3200 2000 1200, 100(11), 200(12)
100 units required in11th month is
produced in 4th month and carried
as inventory. 200 (12) - 200 units
required in12th month is produced
in 4th month.

5 3500 2000 1500

6 4000 2000 1500

7 4500 2000 1500

8 4700 2000 1500



9 3200 2000 1200, 300 (12) 300 units
required in 12th month is
NOTES
produced in 9th month and
carried as inventory.

10 2900 2000 900, 600 (12) 600 units
required in 12th month is
produced in 10th month
and carried as inventory.

11 4800 2000 1500

12 5000 2000 1500 400

12

Total production cost = ∑ C t, where Ct is the cost incurred for the month ’t’.
t=1

C1 = (2000*30) + (1500*50) = Rs. 135000
C2 = (2000*30) + (1500*50) = Rs. 135000
C3 = (2000*30) + (1500*50) = Rs. 135000
C4 = (2000*30) + (1500*50) = Rs 135000
C5 = (2000*30) + (1500*50) = Rs 135000
C6 = (2000*30) + (1500*50) + (500*50) = Rs 160000
C7 = (2000*30) + (1500*50) + (300*60) + (700*60) = Rs 195000
C8 = (2000*30) + (1500*50) + (800*70) + (400*60) = Rs 215000
C9 = (2000*30) + (1500*50) = Rs 135000
C10 = (2000*30) + (1500*50) = Rs 135000
C11= (2000*30) + (1500*50) + (700*90) + (500*80) + (100*70) = Rs 245000
C12 = (2000*30) + (1500*50) + (200*80) + (300*30) + (600*20) + (400*100)
= Rs 212000
Total Production cost = Rs.19, 721,000

3.4.4.2 Linear programming Model
The aggregate planning problem can be formulated as a Linear Programming
Model when cost behavior is linear and the optimal solution is required you can Two
kinds of linear programming model. One is for constant workforce and the other for
variable workforce as shown below.

Fixed Work Force Model

The following notation is used to describe the above model.
vit = unit production cost for product I in period t (exclusive of labor cost)
cit = inventory carrying cost per unit of product I held in stock from period



t to t+1
NOTES rt = cost per man hour of regular labor in period t
ot = cost per man hour of overtime labor in period t
d it = forecast demand for product i in period t
ki = man hours required to produce one unit of product i
(r m) t = total man hours of regular labor available i period t
(o m) t = total man hours of overtime labor available i period t
Iio = initial inventory level for product i
Wo = initial regular work force level
T= time horizon, in periods
N = total number or products

Decision variables

Xit = units of product i to be produced in period t
Iit = units of product to be left over as inventory in period t
Wit = man hours of regular labor used during period t
Ot = man hours of overtime labor used during period t

Fixed work force cost model is:
N T T
Minimize Z = ? ? (vit Xit+cit Iit) + ? (rt Wt + o tOt )
i =1 t = 1 t=1

Subject to:
Xit + Ii, t-1 - Iit = dit
N
? ki Xit – Wt – Ot = 0
i =1

0 ?Wt ? (rm) t
0 ? Ot ? (om) t
Xit, Iit ? 0

The objective function expresses minimization of variable production, inventory,
regular and overtime labor costs.

Constraint one represent production – inventory balance. Second constraint
defines total manpower to be used in every period. Last two constraints impose lower
and upper bounds on the use of regular and overtime man hours in every time period.

Variable workforce models

When there is a change the workforce level to meet demand fluctuations, the
workforce becomes a decision variable and hiring and firing cost will be part of objective



function. The model below also includes backordering cost.
NOTES
Ht = man hours of regular work force hired in period t
Ft = man hours of regular work force laid off in period t
I+t = units ending inventory of product I in period t
I-t = units of product I backordered at the end of period t
bt = cost per unit of backorder of product i carried from period t to t+1
ht = cost of hiring one man hour in period t
ft = cost of laying off one man hour in period t
p = overtime allowed as a fraction of the regular hours

Variable workforce model can be formulated as follows:
N T T
Minimize Z = ? ? (vit Xit+cit I+it+bit I-it) + ? (rt Wt + o tOt + ht Ht + ft Ft)
i =1 t = 1 t=1

Subject to
Xit + I+i, t-1 – I-i, t-1 + I+it+ I-it= dit
N
? Ki Xit – Wt – Ot ? 0
i =1

Wt – Wt-1– Ht + Ft = 0
-pWt + Ot ? 0
Xit, I+it, I-it ? 0
Wt, Ot, Pt, Ht, Ft ? 0
i = 1,….N
t = 1,…N
The first constraint represents the production inventory balance equation.
The Second constraint limits the production to variable man power. It is possible
at some point regular work force Wt will be partially idle therefore is justified.
The Third constraint define the change in workforce during period t i.e. Wt -
Wt-1= Ht - Ft. Labor is added when Ht>0 or subtracted whenever Ft > 0.
The Fourth constraint imposes an upper bound on the total overtime available
in period t as a function of regular work force size.

Example 3.2

The following data pertain to demand forecast, production alternatives, and costs
for the XYZ Company which manufactures a cleaning fluid used in hospitals.



NOTES Table 3.15

Capacity Limit, tons
Quarter Estimated Regular Overtime Unit cost
Demand Production production per ton
1 210 210 15 rt = Rs.2000
2 200 210 15 ot= Rs.3000
3 170 180 10 Cc = Rs.200 per period
4 230 210 15

Furthermore, the cost of hiring is Rs.4800 per unit increase in output (ht= Rs.4800 per
unit) while the cost of firing is Rs.72000 per unit decrease in output ( ft = Rs.72000 per
unit). The starting regular production rate is Po = 220 tons from the work-force level of
the previous period.
Formulate the aggregate planning problem as a linear programming problem using simplex
method and solve it if computer program is available.

Solution:

Demand data Regular Time Capacity Overtime Capacity

D1 = 210 X1 = 210 O1= 15
D2 = 200 X2 = 250 O2 = 15
D3 = 170 X3 = 180 O3 = 10
D4 = 230 X4 = 210 O4 = 15

Regular time cost per unit, rt = Rs. 2000
Over Time cost per unit, ot = Rs. 3000
Carrying cost per unit per period, Cc = Rs.200
Hiring cost per unit, ht = Rs. 4800
Firing cost per unit, ft = Rs. 72000
Starting regular production rate P0 = 220 tons
Initial inventory I0= 0 (assume)

A linear programming problem for the above aggregate planning problem is presented
below.
Xt, Ot = Units produced during regular time and overtime respectively.
At, Rt = Number of units increased or decreased respectively during consecutive periods.
Dt = Sales forecast

Minimize z = 2000 (X1+ X2+ X3) + 4800 (A1+ A2+ A3+ A4) + 7200 (R1+ R2+ R3+
R4) + 3000 (O1+ O2+ O3+ O4) + 200 (I1+I2+ I3+ I4)



Subject to constraints:
NOTES
X1 ? 210
X2 ? 250
X3 ? 180
X4 ? 210
O1 ? 15
O2 ? 15
O3 ? 10
O4 ? 15
R1 + O1 - I1 = 210
X2 + O2 + I1 - I2 =200
X3 + O3 + I2 - I3 = 170
X4 + O4 + I3 - I4 = 230
X1 - A1 ? 220
-X1 + X2 - A2 ? 0
-X2 + X3 - A3 ? 0
-X3 + X4 - A4 ? 0
X1 + R1 ? 220
-X1 + X2 + R2 ? 0
-X2 + X3 + R3 ? 0
-X3 + X4 + R4 ? 0 Xt, R t, A t, O t, I t ?0 where t = 1,2,3,4

The results are given below :

Table 3.16

Quarter I Quarter II Quarter III Quarter IV
P1 = 210 P2 = 210 P3 = 180 P4= 180
O1 = 0 O2 = 5 O3 =10 O4 =15
I1=0 I2 = 15 I3 = 35 I4 = 0
A1 = 0 A2 = 0 A3 = 0 A4 = 0
R1 = 10 R2 = 0 R3 = 30 R4 = 0

Minimum Cost is = Rs. 19,48000
The above results are shown diagrammatically as follows:



NOTES

Figure 3.14

3.4.4.3 Transportation Model
A generalized transportation model for more than one alternative (for production)
can be represented as follows:

Table 3.17 - Aggregate Planning Methods

I II III IV Cost Supply

I r rt + Cc rt+2 Cc rt+3 Cc rt S1

o ot+ Cc ot+2 Cc ot+3 Cc ot

u ut+ Cc ut+2 Cc ut+3 Cc ut

II rt + Cs rt rt+ Cc ot+2 Cc rt S2

o t + Cs ot ot+ Cc vt+2 Cc ot

ut + Cs ut ut+ Cc ut+2 Cc ut

III rt + 2Cs rt + Cs rt ot + Cc rt S3

Ot
+ 2Cs Ot
+ Cs ot vt + Cc ot

ut+ 2Cs ut + Cs ut ut + Cc ut

IV r t+ 3Cs rt+ 2Cs R t+ Cs rt rt S4

Ot
+ 3Cs ot + 2Cs o t + Cs ot ot

ut+ 3Cs ut+ 2Cs ut + Cs ut ut

Demand D1 D2 D3 D4

Where
rt = regular time cost
ot = over time cost



ut = subcontracting cost
Cs = shortage cost
NOTES
Cc = carrying cost
In case of back ordering, for three periods in advance the shortage cost will be
three times. i.e. 3Cs will be added to the existing labor cost. Similarly for two periods
backordering 2Cs will be added to the existing labor cost.
Cc represents carrying cost. Products produced during a period for usage in
subsequent periods will have a carrying cost. For e.g. 3Cc indicates that product had
been carried over three months.
Example 3.3
A producer is considering either producing or procuring a certain part. The
relevant data are as follows:

Table 3.18
PERIOD
I II III IV
Production capacity
In house 20 20 20 20
Outside Vendor 40 40 40 40
∞
Unit cost
In House 12 13 15 16
Outside vendor 15 15 18 20
Demand 70 40 60 90

Initial inventory is 20 units and the holding cost is Rs.8 per unit per period. What
is the optimal aggregate plan?

Solution:
Table 3.19
I II III IV Supply

Initial Inventory 8 16 24 32 20
I 12 20 28 36 20
15 23 31 39 40
II ∞ 13 21 29 20
15 23 31 40
III 15 23 20
18 26 40
IV 16 20
20 40
Demand 70 40 60 90



The holding cost is Rs. 8 per period. Therefore for the second, period it will be
NOTES Rs.16 (8+8), for third period it will be Rs. 24 (8+8+8) and for the fourth period it will
be Rs 32.
In a similar manner it is calculate for subsequent periods.
Infinity symbol indicates that product produced during a period is sold during
that period or subsequent periods and not in previous periods. i.e. there is no back
order.

Solving the above, using Vogel’s approximation method

Table 3.20

Initial feasible solution:

Transportation cost = (20*8) + (12*20) + (30*15) + (23*10) + (13*20) + (10*15) +
(23*30) + (15*20) + (18*10) + (26*30) + (16*20) + (40*20)
= Rs. 4560

Optimality Test – Modi Method

Conditions:

Individual allocated cells should be equal to m+n-1
m – number of rows
n – number of columns



Test for optimality on initial feasible solutions NOTES
Write the matrix of the cost of allotted cells
Determine a set of m+n numbers
Ui = 1,2….m
Vj = 1,2,….n
Crs = ur+vs, r- supply, s-demand

Table 3.21

I II III IV Ui
Initial Inventory 8 U1 = 0
12 U2 = 4
I 15 23 U3 = 7
13 U4 = -3
II 15 U5 = -1
15 U6 = -9
III 18 26 U7 = -6

IV 16 U8 = -16
20 U9 = -12
∞ Vj V1 = 8 V2 = 16 V3 = 24 V4 = 32

Cost (Cij) of un-allotted cells

Table 3.22

I II III IV
Initial Inventory 16 24 32
I 20 28 36
31 39
II ∞ 21 29
31
III 23

IV

Ui + Vj for un-allotted cells



NOTES Table 3.23

I II III IV
I 20 28 36
31 39
II 5 21 29
7 31
III -1 7 23
-2 10
IV -8 0 8
-4 4 12

Cij – (Ui + Vj) for un-allotted cells

Table 3.24

I II III IV
I 0 0 0
0 0
II 0 0
0
III 0

IV

Since there are no negative values in the above table the initial feasible solution
is the optimal solution i.e. The optimal transportation cost = (20*8) + (12*20) +
(30*15) + (23*10) + (13*20) + (10*15) + (23*30) + (15*20) + (18*10) + (26*30)
+ (16*20) + (40*20) = Rs. 4560.

Review Questions:

1. When do you go for the aggregate planning?

2. Discuss the optimal method when the cost behaves linearly?

3 .Discuss the optimal methods when the cost behaves non linearly?



3.5 PRODUCT DESIGN AND DEVELOPMENT NOTES
The Activity namely the new product design or development in the existing
product arises because of an opportunity available to tap the untapped market or a
thing required to solve the problem. Like medicine to cure the AIDS or Cancer, these
are opportunities to solve the problem. These kind of opportunity problem leads the
organization to manufacture new product. Sometimes the demand for the existing
product declining. The organization thinks of reviving the product by adding some
improvement or the features in the existing product. Both the functions come under the
process of product design and development.

3.5.1 Product life cycle

Understating in which phase of the product life cycle, the product is there is the
basis for the any product design and development activity. As you know any product
has many brands, example, if you consider refer generator. You have Samsung, brands.
Each brand has the demand pattern the summation of the entire brand’s demand pattern
provides information in which phase the product is,

Figure 3.15 - The Pattern of PLC

Introduction
In this phase there is a more risk involved there is possibility that the product is
not accepted by the customers. This results in early exit of the product. This is all
about the acceptability of the product.
In this phase the competition will be less if the product in the introduction phase,
you should not think about going for heavy investment because of more chance for
infant mortality of the product.
Growth
In this phase the people know more about the product that increases the
potentiality of the demand. The competition gradually picks up here you should



NOTES concentrate more on the attributes like quality, performance, delivery time, serviceability
that helps the organization to establish the product as a leader among the players. At
present in Indian cell phone is in the growth stage of PLC. Comparatively the profit the
maturity stage will be high.
Maturity Stage
In this phase more competitors will be there and here all well established facilities
were available and everyone is enjoy is the economy scale. But profit margins of the
competitor are less. Because the facilities may be in reality at the end of their life cycle.
Because markets are matured, organization finds it difficult to capture a small increase
in market share. Packed mass consumption goods, soap are for examples which are in
the maturity state of the PLC.
Decline
After maturity phase, the product enters into the declining phase. The reasons
may be attributed to people would have found another alternative for the product,
usually for the most of the time the business cycle and product cycle go together. In this
case, if the economy is in the declining stage then there is a chance that product may
enter into the declining stage. In such a case the organization has to make all effort to
revive the product by adding some features in the product or family declining stage
early then this becomes big problem for the organization because you can not utilize
facility available. This problem is made in the case of mass production industry. This
problem is severe if the industry is of the mass production type because the less demand
the investment made in technology becomes turtle. At present the black and white TV
is in the declining phase of PLC.
Because of Organization and lot of development in the field of electronic goods
the product life cycle is so short may be three or four gems. The organization should be
more vigilant in introducing more number of products within short span of time.
With this understanding of product life cycle curve, another activity inter turned
with the use product life cycle namely the new product development process in this
next section.
3.5.2 New Product development process
In the last section you have studied about the product life cycle. Suppose the
produce is in the declining stage of life cycle course, if you allow the situation to continue
the demand for the product decline and the organizational resources are under utilized.
The cost of the product increases and your market share declines at faster rate and you
may have to close down the plant soon.
But as soon as the demand for the product starts declining, the organization has
to face different problems like-



1. Under utilization of resources. NOTES
2. Cost of the product increase.
3. Price of your product increases.
4. More inventory.
5. Overhead burden etc.
These problems are converted into an opportunity in terms of developing an
existing product by adding some features according to the requirement of the customers
or you can go for introducing a new product which could use the available facilities. So
the starting point for the new product development process is the concept generation.
3.5.2.1 Concept Generation
To solve the problem or utilize the opportunity available the idea may come
from different sources, the sources may be-
1. The basic research in the field of physics, chemistry and biology etc.
2. Technology innovations.
3. Ideas from the staff in R & D Production, quality control etc.
4. Ideas from competitors consumers.
The above ideas should be in line with the first organization’s mission statement,
or it should not disturb much the on going marketing or the idea should utilize the
existing state of inventory.
3.5.2.2 Concept testing
A preliminary analysis different project ideas are screened using scoring models
ATR techniques etc.
In the preliminary analysis different product ideas are screened using the
techniques
Table 3.25



NOTES ATR MODEL (Awareness – Trial – Repeat) model:
The basic formula is given below:
Profits = Buying units x percent aware x percent trial x percent availability x
percent repeat x annual units bought (revenue per unit – costs per unit).
For e.g: Assume that an organization is developing a new cleaning powder for washing
sports can
1. Number of owners: 1,00,000
2. Percentage who will become aware of the power: 30 percent
3. Percentage of those aware who will buy it: 10 percent
4. Percentage of the retail outlet store the powder : 30 percent
5. Percentage of the triers who like the product and but more : 40 percent
Number of pockets a typical user will but in a year: 10 pocket
Revenue the unit Rs.1000
Cost Per unit Rs.700
Profit according to ATR model
= 1, 00,000 x .3 x .10 x .3 x .4 x 10m (1000 – 700)
= 10,800
like ATR, scoring model and the best ideas are chosen for
The outcome of the screening is the product definition or the benefits the new item is to
yield.
3.5.2.3 Technical Development
After concept testing is over, ‘you should see that whether you have technical
capacity and resources appropriate to produce or provide the product / service.
In technical development, the output is the prototype of the product. In general, in
any product design & development activity the product specifications for the product
are to be arrived through market survey, for example, the product specification for a
car represent the color, the size of the car, fuel efficiency power of the engine. Product
specification usually collected from the customer. The customer may not be knowing
the technical details about the product, so his/her requirement is obtained through the
word of the mouth.
Then the product specifications are converted into engineering specification.
To start with, first what kind of material is to be purchased when you purchase the
material, it should be economical and the purchased material do not hamper the
performance, reliability of the final product were lot of value analysis and value
engineering application helps to choose the right material without affecting the function
for which it is indented for economically. Here you should see the product where it is



positioned. For example: if you are manufacturing car for luxury purpose then you may NOTES
prefer the leather seat rather than vinyl seat. So, when you design a product. To whom
the product is targeted for according the material selection and supplier selection take
place. When you select the material you should see the process or the resources
available because selecting the high quality material may demand high processing
requirement that results in high production cost which allows your product to become
less competitive.
It is mentioned in the process paragraph now we can develop some time on the
product specification, tolerance and allowances.
Allowable deviation from the targeted value is the tolerance, example, shaft
diameter designed by the designer to satisfy the final requirement of product aims a
target value of 2 cm but you can not produce 2 cm diameter consistently. So because
of in built nature of the processing system, there exists variety in the processing. For
that you need data like process capability input to fix the tolerance limit etc. for example:
the existing process capability of a productive system is to produce 2 ±.05 cm, then it
is the design demands for more than 2.05 and less 1.95 cms (10) 2 ±.10. This is the
specification required then there is no problem but if you design a shaft of 2 ±.03 cm,
then the productive system may produce more back quality product. So in the engineering
design one should have the input like process capability to fix tolerance engineering
specification.
3.5.2.4 Standardization and Inter-changeability
When you design a product you should not design in such a manner that all the
parts sustainability are of your own design because after your product has been
purchased by the customer put into use, if there is a problem in the product, it is difficult
to service the product because of the components are of you own design and availability
of the components become problem. Even there is an availability you need to have
more components that result in more inventory cost at the same time the customers also
put into lot of trouble in terms of idle time of the product. The problem is a complex
one if your product is a capital equipment product. In this case your product design
consists of components subassembly of standard product available.
In your product suppose if you have came to use standard components like tin
and steel sheets, nuts, bolts, washers transistors, capacitors etc. You try to use the
same. Instead you need not design on your own for those components you design
should be in such manner that the above mentioned standard products could be transit
may use. Usage of the standardized components or products lower the cost of production
reduces the inventory cost. It case the maintenance and repair that result in less cost. It
also helps in more easier and effective quality control.
The concept of standardization spread to the service industry also, because
nowadays for fast food restaurant the standard mix is always speedy according to the



NOTES type of order they mix. Different mix and service requires food at lesser time. Even in
the house you need not prepare all the cooking ingredients as it was done in the olden
day. Nowadays standard ingredients are available and only mix with less time you can
get what you want.
Here we are not saying that all the time your should use the standard components
if your product requires. If possible any new design of the components reduces the
cost of the product, and then instead of going for standard component you can use your
newly designed components. This serves the purpose of continuing innovation and design
of the organization.
3.5.2.5 Commercialization
In commercialization you must decide to whom this item will be targeted, what
will be the value of the product and how do we get the value into it, how it will be
positioned relative will be the product’s brand, building support around the organization
for the marketing actions to follow and overcoming problems that arise in the field and
which might cause the firm to fail to achieve the necessary awareness, that and repeat
use which are discussed in the concept testing phase.
Once market trial is over, then the products are produced according to the
plan. This involves detailed production plan, quality plan, and story and distribution
strategy. All the actions are carried out by keeping in the company’s strategy objectives
and goals.
The above explained new product development process is shown in a flow chart.

Figure 3.16 : Commercialization



Review Question:
NOTES
1. Highlight the stages of Product Life Cycle.
2. Why products fall into maturity stage?
3. How would you expand the life time of saturated product?
3.6 EXPERT SYSTEM IN PRODUCT DEVELOPMENT
Strategy planning plays a vital role in defining where a corporation wants to be
in the near and long terms, how they will get there, and how they will monitor their
progress in getting there. These are derivations of the Total Manufacturing Assurance
three C’s: Create, Control, and Critique.
The same applies to the product development test program. The test program
strategy must reflect the overall corporate business strategy.
Combining strategic planning with expert system technology enables the engineer
or manager to quickly define the “best” or “optimal” test program for a given product
development effort. The expert system makes this happen by using “expert” knowledge
derived from its knowledge base of engineering, marketing, and customer requirements.
To make money and enjoy long term survival, a company must be productive
and efficient. That statement is very simple and acceptable in light of the evermore
competitive business environments being experienced. It thus is imperative to eliminate,
or minimize, company bureaucracy. Bureaucracy causes aggravation. It directly
correlates to unnecessary company overhead. It is impractical to think that overhead
can ever be completely eliminated. It can be optimized and in this case that means
minimized. There is still overhead, but it is value-added overhead. To make this happen
three things must be readily available in the planning process:
1. Expert knowledge about testing,
2. Expert knowledge about customer market requirements and
3. A mechanism to get all this expert knowledge into one room to quickly
make good decision(s).
The expert system facilitates “Optimized strategic test program planning”. An
engineer or manager defines the “best’ or “optimal” test program for a given product
development effort. The expert system forces this by using “expert” knowledge derived
from its knowledge base of engineering, marketing, and customer requirements.
3.6.1 Expert System Development
Product reliability, safety, and quality requirements are a key element of a strategic
business plan since they reflect what the customer needs. These product design
performance parameters in turn provide a basis for defining the test program necessary
as part of the overall product assurance strategy. The product assurance strategic plan
balances many interrelated variables and factors.



These include:
NOTES
1. Establishing quantitative performance goals (LWBF, MTTR, service-life,
defect level, etc.).
2. Implementing a product development management control and tracking
activity to ensure timely outputs consistent with major design and program
milestones.
3. Performing and implementing analyses and quality checks, audits, and controls
to ensure that all test, inspection, and screen data are complete.
4. Performing a fully coordinated product development program, which
emphasizes failure analysis and corrective action, and provides growth/
verification of specified design requirements.
5. Exposing design deficiencies and initiating corrective action in a timely manner.
6. Maximizing achieved availability to minimize overall life cycle costs and
enhance the probability of commercial success.
7. Identifying, evaluating and eliminating design hazards and risks.
8. Applying historical data and lessons learned into the design process.
9. Minimizing unforeseen impacts on overall project cost and schedule.
It is desirable to assure that the above factors (and others) are adequately
considered during a product development test program. It is through the strategic planning
that it is possible to initiate the “best” program. That is, one that ensures critical project
decisions involving significant investment of resources are keyed to the achievement of
specific reliability, safety, and quality requirements, as well as other performance
requirements. Obviously, specific test program objectives are dependent on the
technology under consideration, the nature of the product, the customer, and other
factors as appropriate. But merely defining a test program strategy orients product
development, and ultimately manufacture, toward a practical, serviceable, and affordable
commercial product.
The expert system output is a baseline test program structure which includes
characteristic parameter values and ranges for each of the basic test categories. This
strategically defined test program is then tailored, as necessary, to meet the specific
product development project’s needs while adhering to cost and time constraints.
Regardless of which baseline structure is selected, the basic concept of a strategically
well-planned, logically structured and phased test program, where each subsequent
test is designed to reflect the knowledge gained during the proceeding test and design
effort, applies. The expert system provides assurance that the cornerstone (i.e., test
program) of a successful product development project is put in place.
3.6.2 Putting System Together
The very first task in the expert system development process is to identify the
domain, the domain expert and the knowledge expert. The domain of the system must



be properly scoped out, well defined, sufficiently focused, and capable of solution by
the use of expertise. A domain expert, or experts, must be found; either a person who
NOTES
can solve the task, a collection of well documented case studies, or perhaps a good
textbook. A knowledge engineer, or someone willing to learn to become one, must be
appointed to the task. Finally, the appropriate development platform must be acquired
which can be an expert system shell with some sort of development environment. The
physical expert system is then developed via the following steps.
Step I—Structural Design
Step 2—Knowledge Acquisition
Step 3—Coding
Step 4—Validation
Step 5—Growth
The result is a working expert system
Review Questions:
1. Expand 3C’s.
2. Discuss the steps through which the Physical Expert System is developed.
3.7 COMPUTER AIDED DESIGN AND DRAWING
3.7.1 Introduction
When we think of Computer Aided Design and Drafting (CADD), certain
questions arise that we never think of while working on the drawing board. We do not
use the essential drawing board tools: paper, pencil, T-square, compass, eraser or
scale, yet still have to design or make a drawing. When even one of these tools is
missing we know how aggravating it can be. With CADD we don’t need even one of
them!
CADD is an electronic tool that enables you to make quick and accurate
drawings with the use of a computer. Unlike the traditional methods of making drawings
on a drawing board, with CADD you can sit back in an easy chair and create wonderful
drawings just by clicking the buttons of a keyboard. Moreover, drawings created with
CADD have a number of advantages over drawings created on a drawing board.
CADD drawings are neat, clean and highly presentable. Electronic drawings can be
modified quite easily and can be presented in a variety of formats.
A decade ago, CADD was used only for specific engineering applications that
required high precision. Due to CADD’s high price, only a few professionals could
afford it. In recent years, however, computer prices have decreased significantly and
more and more professionals are taking advantage of CADD.



NOTES There are hundreds of CADD programs available in the CADD industry today.
Some are intended for general drawing work while others are focused on specific
engineering applications. There are programs that enable you to do 2D drawings, 3D
drawings, renderings, shadings, engineering calculations, space planning, structural design,
piping layouts, plant design, project management, etc. There is a CADD program for
virtually every engineering discipline you can think of.
CADD is primarily intended for single-line drafting. It has very limited capabilities
to create artistic impressions. However, CADD’s 3D and rendering features are
fascinating. You can create a 3D model of an object and view it from any angle. With
proper shading and rendering, it can be made to look picture perfect!
3.7.2 What to Expect from CADD?
You can do amazing things with CADD that you never thought possible while
creating drawings with a pen or pencil. The following are some of the important
capabilities that make CADD a powerful tool:
o Presentations
o Flexibility in editing
o Units & accuracy levels
o Storage and access for drawings
o Sharing CADD drawings
o Project reporting
o Engineering analysis
o Computer Aided Manufacturing (CAM)
o Design
o Add-on programs
Presentations
You can create fine drawings with hundreds of colors, line types, hatch patterns,
presentation symbols, text styles, etc. Even if you don’t like something about your
presentation after you have finished it, you can instantly change it. It takes only a few
simple steps to change the text style, color or line type and you can print a fresh copy of
the drawing every time. This kind of luxury is available only when working with CADD.
There are a number of ready-made presentation symbols and hatch patterns
available in CADD that can be used to enhance the look of drawings. For example, a
site planner can instantly add tree symbols, shrubs, pathways, human figures, and other
landscape elements to create a site plan. Similarly, an architect can use ready-made
symbols of doors, windows, furniture, etc., to make a presentation.
In addition to preparing impressive presentations on paper, you can use CADD
to make on-screen presentations. You can plug your computer into a projector and
present your ideas on-screen. Advanced CADD programs allow you to created animated



images as well. You can illustrate how a building would appear while walking through it, NOTES
or how a machine assembly will operate when different machine parts move.
Flexibility in Editing
CADD provides the flexibility to make quick alterations to drawings. You can
erase any portion of a drawing with pinpoint accuracy. It takes only seconds to do a
job that could take hours on a drawing board. In many cases, you do not even have to
erase to make the change. You can rearrange the existing components of the drawing to
fit the new shape. This enables you to analyze design options with minimal effort.
The following are some of the editing capabilities of CADD:
o Move or copy drawing elements.
o Enlarge or reduce parts of a drawing.
o Add one drawing to another.
o Stretch a drawing to fit new dimensions.
o Make multiple copies of a drawing element.
o Change the size, style and fonts of text.
o Change units of measure of dimensions.
Units & Accuracy Levels
CADD allows you work with great accuracy. If you need to create highly
accurate geometrical shapes, CADD is the answer. It can help avoid time-consuming
mathematical calculations.
You can work with different units of measure, such as architectural units, engineering
units, scientific units and surveyor’s units. These units can be represented in various
formats commonly used by professionals.
Example 3.4: When working with engineering units, you can specify whether all the
dimensions should be represented in inches, feet-inches, centimeters, or meters. Similarly,
you can choose angular units of measurement such as decimal degrees, minutes, seconds
or radians.
You can set an extremely high accuracy for the units of measurement. You can
work with as high precision as 1/1000th of an inch! However, such accuracy is seldom
required; you will often need to set it to a lesser accuracy to avoid unnecessary fractions.
In general, when you need to work on a large scale drawing such as a plan of
a township, you may want to set a lesser degree of accuracy, say 1'-0". The computer
will round off all the measurements to the next foot and you won’t see any fractions less
than a foot. When you need to work on a minute detail, you can set a higher degree of
accuracy such as 1/8th or 1/64th of an inch.



NOTES Storage and Access of Drawings
It is quick and convenient to organize for a CADD drawing in the computer.
You can have thousands of drawings on a computer’s hard disk and can open any one
of them within seconds.
A computer’s electronic filing system has the following advantages over the
traditional filing system:
o It enables you to create a highly organized environment
o It contributes to large savings in working space
o An electronic drawing never gets old and faded. Any time you need a
drawing, you can print a new copy from disks.
Sharing CADD Drawings
The electronic drawings can be shared by a number of users, allowing them to
coordinate their tasks and work as a team. This is accomplished by connecting different
computers via a network.
Example 3.5: In a building project, different professionals such as architects, engineers
and construction managers can use the same electronic drawings to coordinate building
services. If a change is made to the drawings, this information becomes available to all
the team members instantly.
With the use of modems and the Internet, it has become far easier to share
information. Professionals located in different cities can instantly send electronic drawings
via telephone lines.
You can publish your drawings on the Internet for anyone to see. Most CADD
programs include special functions that allow you to export drawings in a format that
can be viewed on the Internet.
Project Reporting
The computer can be used to prepare project reports such as records of areas,
quantities and cost estimates. Using the database capabilities of CADD, you can link
specific non-graphic information (such as text or value) with the graphic elements of the
drawing. The non-graphic information is stored in a database and can be used to prepare
reports.
Example 3.6: An architect can attach text attributes associated with the symbols of
doors and windows in a drawing. The attributes can describe the size of the door,
material, hardware, cost, etc. Later on the computer can automatically prepare a door
schedule listing all the doors and windows in the drawing!



The non-graphic information is directly linked with the graphics on the screen. NOTES
When a change is made to the drawing, the values in the reports are updated automatically.
This provides a useful means to manage large projects from design through project
completion.
There is a special category of software called Computer Aided Facility Management
(CAFM) designed for project management. These programs can import information
from CADD drawings and allow you to add attributes to drawing elements to build a
database. The database can be used to prepare project reports in a number of formats.
Engineering Analysis
CADD drawings can be used to perform specific engineering analysis. There is
a separate category of programs called Computer Aided Engineering (CAE) that can
use CADD drawings for engineering analysis.
Example3.7: A structural engineer can use a CAE program to test the design of structural
components in different conditions. The engineer can instantly analyze the impact on
structural members when a different load is applied to the structure or the spacing
between the members is changed. Similarly, there are programs for mechanical engineers
to test machine assemblies. The mechanical engineer can create a prototype electronic
model and test it without building a physical model.
The advanced engineering programs even provide the ability to link calculations
with the geometry on the screen. This capability is known as “parametric design” that
allows the computer to automatically update the graphics when the associated calculations
are changed and vice versa.
Computer Aided Manufacturing (CAM)
CADD extends its power to yet another branch of engineering called Computer
Aided Manufacturing (CAM). CAM is a common method of manufacturing used by
large corporations. CADD and manufacturing programs are often integrated into one
system called CAD-CAM. These systems import CADD drawings into CAM programs
to automate the manufacturing process.
Example 3.8: An engineer can draw a machine part using CADD. The CADD drawing
is brought into a computer aided engineering (CAE) program for engineering analysis.
When the design is finalized, the drawing is brought into a CAD-CAM system that uses
numerical data from the CADD drawing for actual manufacturing.
Design
CADD provides a convenient means to create designs for almost every
engineering discipline. It can be used for architectural design, landscape design, interior
design, civil and surveying, mechanical design, electrical engineering, plant design,



NOTES industrial design, duct design, electronic circuit design, plumbing design, textile design
and product design.
CADD’s drafting capabilities provide ample means to create a design scheme.
You can create designs with great accuracy and have the flexibility to easily edit them.
This allows you to quickly prepare design alternatives.
In addition to the drafting capabilities of CADD, there are special programs
that can analyze designs or even create new ones. These programs use artificial intelligence
to “think” and make design decisions.
The design capabilities of CADD are available only in advanced CADD
programs. There are only a few such programs available. Design programs are usually
not generic. They often need to be custom-written to accomplish a specific task. See
Chapter 9 “Maximizing CADD” for discussion on design programs.
Add-on Programs
There are a number of separate programs available that can enhance the power
of CADD. The add-on programs work as an extension of CADD to accomplish specific
tasks. Today, there are hundreds of add-on programs available for popular CADD
programs.
An architectural add-on program can allow you to instantly draw symbols of
doors, windows, kitchens, bathrooms, staircases, etc. Shading and rendering program
can be used to enhance the look of 3D images. A plumbing design program includes
special functions to draw pipes, drains and plumbing joints. A civil engineering program
includes special features to work with contours and land development; the list goes on
and on.
Most manufacturers market CADD programs in separate modules. They sell a
basic drafting module for a certain price with the options to add on other modules.
There are a number of add-on programs available from independent vendors as well.
3.7.3 A Look at the CADD Industry
There are hundreds of CADD programs available in the CADD industry today.
Most of them are simply drafting programs, while some offer certain engineering analysis,
design or database capabilities. Some programs are more elaborate than others. You
can purchase a CADD program with just the basic drawing capabilities for as little as
$200. These are called low-end programs and are commonly used for general drawing
work.
Another category of software is mid-range. This category offers advanced
drafting techniques such as layers, 3D, basic database capabilities, advanced
dimensioning and many automated drawing features. Architecture and engineering design



firms commonly use mid-range software. About 80% of all the CADD programs fall NOTES
into this category and there is immense competition in this market. Their prices vary
significantly.
There are a few advanced CADD programs available, which are commonly
used by large corporations for manufacturing. These programs include integrated features
such as solid modeling, engineering analysis, design, database and project management.
These are called high-end programs. Most of the time they are customized to meet the
specific requirements of the corporation. These programs are priced quite high.
Summary
You would have now understood the differences between the 3 levels of
management and usage of CAD and Expert System in the strategic level activity, namely
product design and development. In this unit the exponential weighted average method,
for all the components of Time series analysis are discussed. In addition your exposed
to qualitative technique like Market survey, Expert opinion, Delphi technique. In this
section, the different methods of aggregate planning are elucidated for your understanding.
Review Questions:
1. What is CADD?
2. List the major capabilities of CADD.



NOTES UNIT IV
SCHEDULING AND
PROJECT MANAGEMENT METHODS

4.1 Introduction
4.2 Learning Objective
4.3 Scheduling
4.3.1 Resources Allocation
4.4 Sequencing
4.4.1 Sequencing “n” jobs / single machine problem
4.4.2 Sequencing “n” jobs / two machines problem - Johnson’s Algorithm
4.4.3 Extension of Johnson’s Rule
4.4.4 M machines and N jobs:
4.5 Project Scheduling
4.5.1 Planning
4.5.2 Project network scheduling
4.6 Resource scheduling



UNIT - 4 NOTES

SCHEDULING AND
PROJECT MANAGEMENT METHODS
4.1 INTRODUCTION
This unit deals with the operations levels of management namely scheduling
activity. The job shop scheduling and project scheduling are also discussed in detail.
4.2 LEARNING OBEJECTIVE
1. To understand the phases of scheduling namely resource allocation and
scheduling.
2. To comprehend the resources allocation techniques.
3. To know the various sequencing technique to different job shop types.
4. To understand the project management techniques and their application.
4.3 SCHEDULING
This is the lower level activity in the operation planning and control. The output
of aggregate planning goes as input to the scheduling activity. The aggregate demand is
broken down into individual product requirement.
Figure 4.1 - Scheduling



NOTES Based on the information mentioned in the figure, resource allocation and se-
quencing activities are carried out.
Scheduling is considered to be an important activity because if this activity is
not carried out properly, there is more waiting time that results in delayed delivery time
which in turn affects the customer satisfaction. The through put time increases because
of the more waiting time. Thus the longest through put time may be due to the more
waiting time of the product for the operation because the workcenter where the pro-
cess is demanded is engaged by the other product. The above situation paves the way
for more work in progress (WIP) inventory. Thus the scheduling activities determine
many important objectives of the organization. So, this is the activity which is getting lot
of importance nowadays.
4.3.1 Resources Allocation
Based on the process requirement and the available resources, in the first phase
of scheduling, resources are allocated for different jobs based on the availability and
time requirement when there is no splitting of the orders. This process may be carried
out using the Assignment method.
Assignment Model
Assignment model is considered to be one of the resource allocation tech-
niques. If you want to apply assignment model for resource allocation, the number of
process centers should be equal to the number of jobs to be assigned. This problem
could be treated as a maximization or minimization problem, based on the type of entry
in the cell. If the entry in the cell is profit etc., then it should be considered as a maximi-
zation problem. If the entry is processing time etc., then the problem is considered as a
minimization problem. In this model, once a job is assigned to a work center, then the
job and the assigned work center should not be considered for further assignment. This
kind of problem can be solved by a well known method called Hungarian method. You
would have studied Hungarian model in Operation research. Consider the following
resource allocation problem.
4.4 SEQUENCING
4.4.4.1 Sequencing “n” jobs / single machine problem
Normally, the total number of jobs exceeds the number of work centers.
Therefore, Priority Rules should be developing to determine the sequencing of ma-
chining operations. The Priority Rules come into picture when many jobs or opera-
tions are chasing for the same capacity.
Factors to be considered in setting priorities for jobs include:
a. Customer satisfaction.
b. Order urgency
c. Order profitability



d. Impact on capacity utilization
NOTES
e. Shop performance
The most popular priority rules are
• First come fist served (FCFS)
• Shortest processing time (SPT)
• Earliest due date (EDD)
• Least slack (LS)
An example for working of these rules.
Example 4.1
The following table is the required time and due time in days attached to Five
jobs waiting in queue to share a same work center.

Table 4.1

Job Required Time (Days) Due Date (Days hence)
A 2 4
B 5 5
C 1 3
D 4 6
E 6 7

Solution
• First come first served rule (FCFS)
According to this principle, the job which comes first to the workcenter will occupy
the machine first.

Table 4.2

Job Required Due Date Processing Period Completion Days Late
Time (Days) (Days hence) (Start+Req.) date

A 2 4 0+2 2 0
B 5 5 2+5 7 2
C 1 3 7+1 8 5
D 4 6 8+4 12 6
E 6 7 12+6 18 11
Sum 18 47 24



NOTES Average throughput time = 47/5 = 9.4 days
Average number jobs in the work center = 47/18 = 2.611 jobs
Average number of days late= 24/5 = 4.8 days
• Shortest processing time (SPT)
According to this principle, the job which is having shortest processing time will
occupy the machine first.
Table 4.3


C 1 3 0+1 1 0
A 2 4 1+2 3 0
D 4 6 3+4 7 1
B 5 5 7+5 12 7
E 6 7 12+6 18 11
Sum 18 41 19
Average throughput time = 41/5 = 8.2 days
Average number of days late= 19/5 = 3.8 days
• Earliest due date (EDD)
According to this principle the job with earliest due date will occupy the ma-
chine first regardless of job arrival or processing time.

Table 4.4


C 1 3 0+1 1 0
A 2 4 1+2 3 0
B 5 5 3+5 8 3
D 4 6 8+4 12 6
E 6 7 12+6 18 11
Sum 18 42 20

Average throughput time = 42/5 = 8.4 days
Average number of days late= 20/5 = 4 days

• Least slack (LS)



Least slack is the time difference between time remaining and work time required.
According to this principle, the job with least slack time will occupy the machine first.
NOTES
Slack = time remaining until due date - process time remaining

Table 4.5

Job Required Due Date Slack Time Processing Period Completion Days
Time (Days) (Days hence) (Days) (Start+Req.) date Late
B 5 5 0 0+5 5 0
E 6 7 1 5+6 11 4
C 1 3 2 11+1 12 9
A 2 4 2 12+2 14 10
D 4 6 2 14+4 18 12
Sum 18 60 35
Average throughput time = 60/5 = 12 days
Average number of days late= 35/5 = 7 days

Summary Table:
Scheduling with Priority Rules
Table 4.6

Performance Dimension FCFS SPT EDD LS
Average throughput time 9.4 8.2 8.4 12
Average number jobs in the work center 2.611 2.277 2.333 3.333
Average number of days late 4.8 3.8 4 7

Research has shown that Shortest processing time (SPT) has the good priority
rule to follow for job scheduling. This rule results in the shortest manufacturing lead
time, therefore, lowest work-in process inventory. It will often minimize the average
throughput time so minimum number jobs in the system. The queue position changes
with the arrival of new jobs, this makes to follow the Shortest processing time (SPT) in
real time scenario. First come first served (FCFS) becomes the only practical solution
to the scheduling. Earliest due date (EDD) might prefer when jobs must meet up with
other outputs later in an assembly.

Critical ratio
Critical ratio is one of the priority rule which helps the scheduler to know about
which job should be given priority for the production in a job shop. The informations
required for using the technique are:

1. The number of jobs to be processed.



2. The production calendar.
NOTES 3. The requirement date for the jobs.
4. The processing time remaining.

From the above information, you can calculate the critical ratio-

Critical ratio = (date required – today’s date) / days needed to complete the job.
This ratio tells you about the urgency attached with the each job. If the critical ratio
is a dimensionless index. If the index = 1, that means the job is on schedule, if the index
is less than 1 that means that the job is behind the schedule. It needs much attention and
priority should be given for the job. If the index is greater than 1 then the job is ahead of
the schedule.

Problem

1. Suppose there are 6 jobs. Today is the 40th day on production calendar
other information are given in the table. Provide the sequence in which the
jobs are to be processed using critical ratio technique.

Table 4.7
Job Days required Processing time remaining
(days)
1 50 3
2 48 4
3 45 3
4 43 2
5 42 4
6 41 3
Solution
Table 4.8

Job Critical ratio

1 (50-40)/3 = 3.3

2 (48-40)/3 = 2.0

3 (45-40)/3 = 1.6

4 (43-40)/3 = 1.0

5 (42-40)/3 = 0.5
6 (41-40)/3 = 0.3

From the above problem, you can conclude that jobs 1,2 and 3 are ahead of
schedules. Job 4 is on schedule. But job 5 and 6 are behind the schedules. So job 6
should be given first priority than job 5 should be given next priority.



4.4.2 Sequencing “n” jobs / two machines problem - Johnson’s Algorithm NOTES
The two machine flow shop problem with the objective of minimizing makespan
is also known as Johnson’s problem. The results originally obtained by Johnson are
now standard fundamentals in the theory of scheduling. In the formulation of this prob-
lem, job j is characterized by processing time tj1, required on machine 1, and tj2, required
on machine 2 after the operation on machine 1 is complete. An optimal sequence can
be characterized by the following rule for ordering pairs of jobs.
Johnson’s Rule:

Job i proceeds job j in an optimal sequence if
Min (ti1, tj2) <= min (ti2, tj1)

In practice, an optimal sequence is directly constructed with an adaptation of this result.
The positions in sequence are filled by a one- pass mechanism that identifies, at each
stage, a job that should fill either the first or last available position.

Algorithm:

STEP 1 : Find min (ti1, ti2).
STEP 2a: If the minimum processing time requires machine 1, place the associated
job in the first available position in sequence. Go to step3.
STEP 2b : If the minimum processing time requires machine 2, place the associated
job in the last available position in sequence. Go to step3.

STEP 3 : Remove the assigned job from consideration and return to step 1 until
all positions in sequence are filled. (Ties may be broken arbitrarily.)
To illustrate the algorithm, consider the five – job problem shown in table as
follows. The accompanying work- sheet shows how an optimal sequence is constructed
in five stages using the Algorithm. At each stage, the minimum processing time among
unscheduled jobs must be identified. Then step 2 assigns one or more positions in the
sequence, and the process is repeated.
Problem statement:
The following table shows the five jobs to be allocated in two machines and
their respective processing time in the two machines.

Table 4.9

Job j 1 2 3 4 5
Tj1(min) 3 5 1 6 7
Tj2(min) 6 2 2 6 5



NOTES Solution:
Table 4.10
Stages Unscheduled jobs Minimum tik Assignment Partial schedule
1 1,2,3,4,5 T31 3=[1] 3xxxx
2 1,2,4,5 T22 2=[5] 3xxx2
3 1,4,5 T11 1=[2] 3-1 x x 2
4 4,5 T52 5=[4] 3-1 x 5-2
5 4 T41= T42 4=[3] 3-1-4-5-2

The sequence that emerges is 3-1-4-5-2.
4.4.3 Extension of Johnson’s Rule
Johnson’s Rule to Three machines:
Consider a three machines and n jobs problem.

Table 4.11
Job 1 2 3 . . i . n
Machine1 t11 t21 t31 . . ti1 . tn1

Johnson rule can be applied to three machines when the problem exhibits ‘Domi-
nance’.

Dominance can be understood when a situation of n jobs with three machines
and a processing order requirement of M1, M2, M3 follows for all the jobs, with the
following condition holds good

Minimum of
or
Minimum of

Where is the operation time for job i in machine j.

If any one of the above conditions satisfied then we say the problem exhibited
Dominance.

We will combine the operating times of machines as follows



are the new operating time of machine1 and machine2. NOTES
The optimal solution for the above problem is obtained through Johnson’s rule.
Converting the three machine problem into a two machine problem.

Table 4.12
Job 1 2 3 . . i . n
Machine1 t11+t12 t21+t22 t31+t32 . . ti1+ti2 . tn1+tn2
Machine2 t12+t13 t22+t23 t32+t33 . . ti2+ti3 . tn2+tn3

Now apply Johnson’s rule to machine-1 and machine-2 to obtain optimal
sequence.
Practice problem:
Table 4.13

1. A company is faced with five tasks that have to be processed through
three work centers. Assume work centers works continuously and that
they are using Johnson’s rule. Data appear below in minutes:

Task A B C D E
Workstation 1 10 8 15 7 12

Johnson rule can be applied to three machines when the problem exhibits ‘Domi-
nance’.
So check for Dominance.

Minimum of
or
Minimum of
Minimum of =7
Minimum of =6
=6

The above conditions satisfied and the problem exhibited Dominance.
We will combine the operating times of machines as follows:

Converting a three machine problem into a two machine problem.



Table 4.14
NOTES
Task A B C D E

By applying Johnson’s rule the optimal sequence is as follows:
D - B - A - E - C (or) D - B - E - A - C
Finding of Make span is as follows :

Table 4.15

Task Time D B A E C
Workstation1 In 0 7 15 25 37
Out 7 15 25 37 52
Out 9 19 31 42 55
Out 19 30 39 51 61
Idle Time of Total Idle time
W/S 2 7 6 6 6 10 35
W/S 3 9 0 1 3 4 17

The Make span of the above optimal sequence is 61 minutes.

4.4.4 M machines and N jobs:
Johnson’s algorithm and Multiple Machines

Johnson’s method only works optimally for two machines. However, since it is
optimal, and easy to compute. Johnson’s rule can be tried to adopt it for M machines,
(M > 2). All the methods developed for the m machines and n jobs are heuristic in
nature. The heuristics methods are based on a logic based and thumb rules.

Which may not be an optimal solution, but a better solution will be provide.
For jobs scheduled in flow shop of more than three machines, no optimal solu-
tion except exhaust search has ever been proposed. Campbell, Dudek and Smith
proposed a heuristic method named CDS algorithm to achieve a nearly minimum make
span in the CDS method.



Assumptions:
NOTES
1. Jobs are not preemptive.
2. Each job has m tasks to be executed in sequence on m.
3. Given a set of n independent jobs, each having m executed in the same se-
quence on m machines
(PI, Pz, ...,P,.), scheduling seeks the minimum completion time of the last job.

Algorithm:
1. Create (m-1) stages.
2. Each stage should have 2 workstations.
3. Apply Johnson’s rule for each pair of workstations created by certain
conditions.
4. From all the (m-1) sequences find out the make span of each sequence.
5. Choose the best among the (m-1) sequences which yields low make span or
flow time.

NOTE: We should be careful in determining the make span. The original processing
time required by the job on m machines are to be taken into consideration in evaluating
the make span but not the converted time for the workstations.

Let us consider a four machines and n jobs problem.

Table 4.16

Job 1 2 3 . . i . n

Follow the CDS algorithm step by step.
In this problem the numbers of machines are 4.
We should generate (4-1) =3 sequences.

The first sequence will come from workstation-1 and workstation2. Here workstation-
1 is equals to machine-1 and workstation-2 equals to machine-4 in operating time.

Table 4.17

Job 1 2 3 . . i . n
Workstation1 t11 t21 t31 . . ti1 . tn1
Workstation2 t14 t24 t34 . . ti4 . tn4



The second sequence will come from workstation-1 and workstation2. Here worksta-
NOTES tion-1 is equals to machine-1&2 and workstation-2 equals to machine-4&3 in operat-
ing time.
Table 4.18

Job 1 2 3 . . i . n
Workstation 1 t11+t12 t21+t22 t31+t32 . . ti1+ti2 . tn1+tn2
Workstation 2 t14+t13 t24+t23 t34+t33 . . ti4+ti3 . tn4+tn3

The third sequence will come from workstation-1 and workstation2. Here
workstation-1 is equals to machine-1+2+3 and workstation-2 equals to machine-4+3+2
in operating time.

Table 4.19

Job 1 2 3 . . i . n

Workstation1 t11+t12+t13 t21+t22+t23 t31+t32+t33 . . ti1+ti2+ti3 . tn1+tn2+tn3

Workstation2 t14+t13+t12 t24+t23+t22 t34+t33+t32 . . ti4+ti3+ti2 . tn4+tn3+tn2

Apply Johnson’s rule to the above feasible sequences. Choose the least make span
among the above sequences.
Practice problem:
1. A company is faced with four jobs that have to be processed through four
machines. Assume machines works continuously. Data appear below in min-
utes

Table 4.20

Job A B C D
Machine1 3 2 1 4
Machine2 3 2 4 3
Machine3 3 1 4 3
Machine4 3 2 2 2

Follow the CDS algorithm step by step.
This problem is a 4 of machines. So we should generate (4-1) =3 sequences.
The first sequence will come from workstation-1 and workstation2. Here work-
station-1 is equals to machine-1 and workstation-2 equals to machine-4 in operating
tim.



Table 4.21
NOTES
Job A B C D
Workstation1 3 2 1 4

By applying Johnson’s rule the optimal sequence for the above setup is

C - B -A– D
The second sequence will come from workstation-1 and workstation2. Here work-
station-1 is equals to machine-1&2 and workstation-2 equals to machine-4&3 in
operating time.

Table 4.22

Job A B C D



C -A– D – B
The third sequence will come from workstation-1 and workstation2. Here worksta-
tion-1 is equals to machine-1+2+3 and workstation-2 equals to machine-4+3+2 in
operating time.

Table 4.23

Job A B C D

B -A– C – D
Find out the make span of each sequence obtained above.
For the first sequence C - B - A – D



Table 4.24
NOTES
Job Time C B A D
Machine1 In 0 1 3 6
Out 1 3 6 10
Machine2 In 1 5 6 10
Out 5 7 9 13
Out 9 10 13 16
Out 11 13 16 18

The make span time is 18. For the second sequence C - A – D – B

Table 4.25

Job Time C A D B
Machine1 In 0 1 4 8
Out 1 4 8 10
Out 5 8 11 13
Out 9 12 15 16
Out 11 15 17 19

The make span time is 19. For the third sequence B - A – C - D

Table 4.26

Job Time B A C D
Machine1 In 0 2 5 6
Out 2 5 6 10
Out 4 8 12 15
Out 5 11 16 19
Out 7 14 18 21

The make span time is 21.



Decision Table
NOTES
Table 4.27
S.no. sequence Make span Selection
1 C-B-A-D 18 v
2 C-A-D-B 19 Õ
3 B-A-C-D 21 Õ

Among the feasible sequences C-B-A-D is the best sequence with the make span of
18 minutes.
Review Question:

1. Explain the two phases of scheduling.

2. Which priority rule is the best rule for sequencing for a single machine problem
where the customer satisfaction is an important objective?
4.5 PROJECT SCHEDULING
In the previous sections you have seen how do you schedule the mass produc-
tion, job shop production. In this section you can see how do you schedule project
type of production. To schedule project type of production, during the World War II
US defense people developed a technique known as PERT, stands for Program Evalu-
ation and Review Technique to develop a missile.
Here the development of a missile is a project and to plan and schedule the
above said project, US defense personnel developed a PERT technique. After devel-
oping PERT technique, US defense people developed another technique known as
CPM. CPM stands for Critical Path Method to plan and schedule of certain type of
projects.
PERT techniques is a applied mainly for new project at which you don’t have
any experience that is why the time estimate for each activity of the project revolves
around three time estimate (e.g.) PERT usually applied for the following projects,
- Planning and scheduling of new product.
- Development of missile.
- Development of launching of rockets.
But CPM is applied for known projects like
- The construction of building.
- The manufacture and assembly of motors.
- The maintenance project.



Difference between PERT and CPM
NOTES
Table 4.28

S.No Characteristics CPM PERT
1. Type of projects Known Unknown
2. Time estimate Single time estimate Three time estimate
3. Time Non random variable Random variable
4. Nature of the time estimate Deterministic Probabilistic
5. Type of network Activity oriented network Event oriented network

A project as already mentioned consists of many activities. The activities are
interlinked together to achieve the common objectives like time, cost and standard of
performance. CPM and PERT techniques are considered to be project management
techniques which enable the project manager to plan and schedule the project. They
are also called project network planning and scheduling technique. In the next section
you can know about the network planning and scheduling.

4.5.1 Planning
Jobs to be carried out in the planning
1) List the activities involved in the project,
2) Estimate the time requirement and cost requirement for each activity,
3) Find the relationship between the activities,
4) Based on the relationship draw the precedence diagram,
5) Draw the network based on the precedence diagram.
The output of the planning activities will be as follows :
Precedence relation with time and cost data

Table 4.29

Activities Immediate predecessor Cost Time

a. - 5000 4

b. - 4000 5

c. - 10,000 1

d. a, b 7000 3
e. c 6000 2

f. e 10,000 5

In a project, the activity is represented as follows:



Figure 4.2
NOTES
Activity description
1 2
Time

Suppose an activity consists of test marketing. This is represented as

Figure 4.3
Test Marketing
1 2
Time

1. The tail node of the arrow should carry small number than the head of the
arrow. In this case tail node carry number1 and the head node carry num-
ber2.
2. Two activities should not have common initial node and common end node.

Figure 4.4
a

1 2

b

This is not permitted if this kind of situation arises, then you should introduce a
dummy activity as follows:

Figure 4.5

d
1 3

‘d’ is the dummy ,it does not consume any resources. It is introduced just to show
the relationship.

1. When you draw the network, all the starting activities should start at one start-
ing node. Similarly at the end all the ending activities should culminate at one
node.



Figure 4.6
NOTES
2

1
3 5 6

4

In the above network, all the starting activities are emanating from node 1 and
all the ending activities are namely (2 - 6, 5 - 6, 4 - 6) are culminated at node 6.

4.5.2 Project network scheduling

In this phase, you should decide about whether the network is treated as an
activity oriented network or event oriented network.

An event is nothing but, a milestone of a network. A project network could
be treated as an activity oriented network, only when, as a project manger, you should
know in detail about the every activity of the project, namely, the estimated time of the
each activity, and how to complete each activity etc. Otherwise, if you are not so
experienced with the project, then you should treat the project as an event oriented
project. In the event oriented project, you don’t bother about the progress of the activity.
You should bother about the starting and completion time of the activity and then the
project. For example- Test marketing. If you treat this job as an activity then the
description is test marketing. Then you should find out the earliest starting time, latest
starting time, earliest finishing time and latest finishing time. Suppose you treat the test
marketing as an event oriented one, then you should find out the earliest and latest
starting time, the earliest and latest finishing time of the test marketing event.

With this information, now you can see what you should do in the scheduling
of the project network.

Steps:

1. Find the earliest starting time, earliest finishing time for activity, and latest starting
time and latest finishing time for activity oriented network.
2. Find the earliest starting time, earliest finishing time for event, and latest starting
time and latest finishing time for event, for event oriented network.



Forward pass Method NOTES
In forward pass method, the earliest starting time and earliest finishing time are
calculated.
EFij = ESij + tij

= Earliest finish time of activity i,j
ESij = Earliest starting time of activity i,j
tij = Time duration of the activity i,j

You may have problem in calculation of ES of scheduled activity only when many
activities lead into a particular node and one or many activities emanating from that
particular node as shown below:

Figure 4.7

14
5

13

15
7
EFij
9

Assume
Table 4.30

Activity Earliest Start Earliest Finish Time Duration
(ES) (EF)
5-13 4 7 3
7-13 7 11 4
9-13 6 8 2

Earliest start of activity 13 – 14

 EF5−3  7 
   
ES13−14 = max  EF7−13  = max 11 = 14
(i.e)
 EF  14
 9−13   



NOTES The reason for considering the maximum time is that as per the technological
constraint the succeeding activity will be started only after the completion of all the
preceding activities.

Backward pass method

In the backward pass method, from the end node of the project the latest
start and the latest finish are calculated. You should start with the earliest completion
time of the project as the latest completion time of the project then you should work
backward, so that you can deduce the latest starting time for each activity.
LS IJ = LFij − tij
LS IJ = Latest starting time for the activity i-j
LFij = Latest finishing time for the activity i-j
tij = Time duration of the activity i-j

In the latest finish time calculated, you may face some problem because many activities
may emanate from a particular node as shown in the diagram.

6
2 4

3

5

Assume
Table 4.31

Activity Latest Start (LS)
4-6 15
4-7 20
4-5 18

Now, to find the latest finish of activity 2-4 and 3-4, consider all the latest start time of
all the activities emanating from the node four and consider the minimum latest starting
time because, In the worst case, if all the succeeding activities starts at the latest starting
time then the lowest latest starting time of the succeeding activity becomes latest finish-
ing time of the preceding activities.



NOTES
(i.e)

 LS 4−6 = 15 
 
LF34 = min  LS 4−7 = 20 = LF2−4 = 15
Similarly
 LS = 18 
 4 −5 
3. Identify the critical path. The critical path is the longest path in the net-
work.
4. Identify the float or slack for each activity/ event of the network.
5. Carry out the time- cost trade off and if possible crash the project.
6. Carry out the resource scheduling.
In scheduling to carry out the above activity, you need to apply (PERT/ CPM)
techniques. First you can see the application of the critical path method in the following
example. Why a manger should know about latest start and latest finish of each
activity of a project? This is because sometimes more than one activity may compete
for one resource. In this case, if you know the latest start and latest finish, the resource
which is in question will be immediately allocated to the activity which could not be
delayed, rather than to the activity which could be delayed. This is one of the reasons
for the usage of float.
LS 4−6 = 15 
 
Identification of float:
LF2− 4 = min LS 4−7 = 20 = LF2− 4 = 15
LS = Float is the leeway available for the manager to schedule the scarce re-

sources to18 activity based on the float availability. This means, if an activity has zero
 4−5 the
float, that activity should be given preference in terms of allocating the resources, that
too, when the other activities which possess float compete for the same resources.
Now, you can see how the above explained project network planning and
scheduling is elucidated with an example.
Problem statement
Table 4.32

Consider the product development project. This project consists of following activities.
Activity Symbol Preceding Activity Time estimate (days)
Demand estimation A - 3
Development of pricing strategy B - 1
Product design C - 5
Conduct, promotional cost analysis D - 1
Manufacture prototype model E C 6
Perform product cost analysis F E 1
Perform final pricing analysis G B,D,F 2
Conduct Market test H G 8



Solution
NOTES Figure 4.9

Earliest starting and finishing time calculation using forward pass method:
ESi = max [ 0, ES(i-1)], EFi = ESi + time duration.

Table 4.33
Activity Early start (ESi) Early finish (EFi)
A 0 3
B 0 1
C 0 5
D 0 1
E 5 11
F 11 12
G 12 14
H 14 22

Since three activities B,F and D are to be completed before G, we have to
select the maximum of all the three early finish time of the predecessors. ESg = max [
EFb, EFf, EFd]
Latest starting and finishing time calculation using forward pass method:
LSa = Total completion time of the project - Ta, LFa = TCa

Table 4.34
Activity Latest start (LSi) Latest finish (LFi)
A 19 22
B 10 11
C 0 5
D 10 11
E 5 11
F 11 12
G 12 14
H 14 22



Total float for each activity ‘i’ = LSi – ESi (or) LFi - EFi NOTES
Table 4.35
Activity Total Float
A 19
B 10
C 0
D 10
E 0
F 0
G 0
H 0

The above method of planning and scheduling a network is called Critical
Path Method. The critical path for the mentioned problem is C- E- F-G-H. (The path
in the project which has the maximum completion time).

PERT:

Suppose, if a project planner treats the problem, which is discussed in the
previous section, as an unknown project in some other new product launch, the project
planner has to estimate “three time estimate”, instead of “one time estimates”. The three
time estimates for each activity are called optimistic time (to), the most likely time (tm),
pessimistic time (tp).

Optimistic time(to): It is the minimum time taken to complete the activity,
if every thing goes well.

Pessimistic time(tm): This is the maximum time to complete an activity, if
most of the things go wrong.

Most likely time (tp): In real life situation, not everything goes completely
right or wrong. The most likely is the time with a more chance to complete
the activity.

For example, consider the following activity.



NOTES Figure 4.10
Demand generation

2, 4, 6

Table 4.36

Symbol Activity Probability
to 2 0.2
tm 4 0.7

tp 6 0.1

Beta distribution
Figure 4.11

It is proved that the time estimate in the PERT method follows a Beta distribution.
So the mean of the Beta distribution is

Texpected = Te = (to + 4 x tm + tp) / 6

Variance for the activity,
á2 = ((tp – to) / 6)2
2
A project planner, in addition to the estimation of standard, should know the
variance of each activity; variance is a measure to measure the uncertainty about that
activity. If the variance is high, this means that the project manager may not have much
idea about the progress and completion of the activity.
Let us see the application of PERT – model for the previous problem, with the informa-
tion provided in the following table.



Table 4.37
NOTES
Activity Symbol Time estimate (days)
Optimistic (to) Most likely (tm) Pessimistic (tp)
Demand estimation A 1 3 4
Development of B 1 1 2
pricing strategy
Product design C 4 5 9
Conduct, promotional
cost analysis D 1 1 1
Manufacture
prototype model E 4 6 12
Perform product cost
analysis F 1 1 2
Perform final pricing
analysis G 1 2 3
Conduct Market test H 6 8 10
Step 1: Estimate the expected time and variance for each activity. Using 1 and 2
Table 4.38
Table 4.38
Activity ET VT
A 2.834 0.25
B 1.167 0.027
C 5.5 0.694
D 1 0
E 6.67 1.78
F 1.167 0.027
G 2 0.11
H 8 0.44

Step 2: Network model:
Figure 4.12



NOTES Step 3:
Earliest starting and finishing time calculation using forward pass method:
ESi = max [0, ES (i-1)], EFi = ESi + time duration.

Table 4.39
Activity Early start (ESi) Early finish (EFi)
A 0 2.834
B 0 1.167
C 0 5.5
D 0 1
E 5.5 12.17
F 12.17 13.34
G 13.34 15.34
H 15.34 23.34

Since three activities B,F and D are to be completed before G, we have to
select the maximum of all the three early finish time of the predecessors. ESg = max
[EFb, EFf, EFd]
Latest starting and finishing time calculation using forward pass method:

Latest starting and finishing time calculation using backward pass method:

Table 4.40
Activity Latest start (LSi) Latest finish (LFi)
A 20.50 23.34
B 11.00 12.17
C 0 5.5
D 11.17 12.17
E 5.5 12.17
F 12.17 13.34
G 13.34 15.34
H 15.34 23.34

Step 4:
Identify the critical path. The critical path is the longest path in the network. The
expected critical path is C – E - F – G – H. The duration is 23.34 days. The variance
of the critical path is 3.051 days. Therefore standard deviation is equal to 1.746.



Step 5:
NOTES
Identify the float or slack for each activity/ event of the network.
Identification of float:
Total float for each activity ‘i’ = LSi – ESi (or) LFi - EFi

Table 4.41
Activity Total Float
A 20.50
B 11.00
C 0
D 11.17
E 0
F 0
G 0
H 0

You cannot claim that, the completion time of the project is 23.34 days in this
case, because this is the expected completion time attached with the probability. The
expected completion time is the sum of the expected completion time of the activity C,
E, F, G and H. But timing of each activity follows beta distribution. Now the summation
of all the time follows the normal distribution with the summation of all variance. This
principal is arrived based on the central limit theorem. It is shown in the figure4.13.

Figure 4.13

From this above figure; you can answer for the following questions.

1. What is the probability that the project will be completed within the mean
time?
2. What is the probability that the project will be completed within the specified
time period?
3. What is the probability that the project will be completed above the specified
time period?
4. To complete within the particular probability, how much time will be
required?



NOTES 5. To complete above the particular probability, how much time will be
required?
Let us determine the following probabilities for the above mentioned
problem.
A. The project will be completed in 22 days or less.
B. The project will be completed by its earliest expected completion date.
C. The project will be completed in more than 30 days.
D. The project will be completed between 25 and 30 days.
To answer the above problems you should find the Z- values using normal
distribution tables as follows.
Solution:
A. Xi = 22, (Xi = Project due date)
= 23.34 ( = Project completion time)
= 1.746 ( = standard deviation of the project completion time)
Z = (Xi - ) /
Z = (22 – 23.34) / 1.746
= -1.053

Corresponding value for this Z from the normal tables is 0.1469
So the probability of completing the project with in 22 days is 14.69%

B. Xi = 23.34,
= 23.34
= 1.746
Z = (Xi - ) /
Z = (23.34 – 23.34) / 1.746
= 0.00

Corresponding value for this Z from the normal tables is 0.5
So the probability of completing the project with in expected completion
time is 50 %.

C. Xi = 30,
= 23.34
= 1.746
Z = (Xi - ) /
Z = (30 – 23.34) / 1.746
= 3.5281

Corresponding value for this Z from the normal tables is 0.99978.
Therefore to complete the project beyond 30 days = 1-0.99978 (ie) =
0.00022
So the probability of completing the project beyond 30 days is 0.022%



D. Xi = 30,
= 23.34
NOTES
= 1.746
Z = (Xi - ) /
Z = (25 – 23.34) / 1.746
= 0.66437

Corresponding value for this Z from the normal tables is 0.7357.
Therefore to complete the project between 25 and 30 days = 0.99978 –
0.7357 = 0.26408
So the probability of completing the project beyond 30 days is 26.41%

4.6 RESOURCE SCHEDULING
As it is mentioned in the project scheduling, resource scheduling is another
important activity of project scheduling. As resource are scares, the project manager
efficiency and effectiveness can be measured through the way in which he allocate the
resource in various activities of the project but not much extending the completion time
of the project. Resource scheduling consists of two phases. Phase 1, deals about the
resource allocation and Phase 2 deals about the resource leveling.
Resource allocation
It is the allocation of the resources for the activities that are critical in nature. If
some resources are required by more than one activity at a time, the resources are to
be allocated to the activity which is critical in nature and thereby delaying non critical
activity. Any how you should see that the critical activities are getting importance in
allocating the resources rather than the non critical activity. This is done based on the
availability of the float for each activity and this does not effect the project completion
time. If you proceed in this manner you will come across the situation in which all
activities become critical and resources allocation becomes a problem. In such a situa-
tion, the efficiency of a project manager even could be measured through how judi-
ciously he allocates the resources and at the some time without much extending the
completion time of the project.
Resource leveling
As the name indicates if you draw a curve between the time Vs resource re-
quirement, the profile of the curve is almost constant then you need not carry out the
leveling of the resources because all the time almost you need to make use of a constant
resource requirement. This paves the way for continuous employment for the people
involved in the project. Suppose the profile of the resource requirement Vs time has
more peak & valley then you have to level the peak & valley of the resource require-
ment in such a manner that throughout the project period you are going to use constant



NOTES resources with little variation. The process of doing so is called Project leveling. In this
the case of project leveling the project completion time should not be extended but the
objective of allocating constant workforce in all the days is achieved through a simple
logic that the activities which are having floats are to be moved front and back without
violating the precedence relationship. This is done with an objective of having constant
resource in all the project days. When you move the activity front and back based on
the availability of free float of each activity, that means the highest free float activity is
moved front and back to ensure constant
resources in all the days.

Free float for an activity is calculated as follows

Figure 4.14
Lij
i j

Free float for activity i-j= tj- (ti+Lij)

Where ti- is the earliest end time of the event i
tj- is the earliest end time of the event j
Lij- time duration of the activity i and j

Example 4.2
Consider the following network
Table 4.42

Activity Immediate Manpower Time duration
predecessor requirement
A - 9 4
B - 3 2
C - 6 2
D - 4 2
E B 8 3
F C 7 2
G F, D 2 3
H E, G 1 4

Step1: -Draw the network and post the network in a time scale.



Figure 4.15
NOTES
A
4
2 E
B 3
2

C F G H
0 2 4 7 11
2 2 3 4 1
D

You can verify that the path C-F-G-H is the critical path. Next you should draw it in
time scale. To draw this, first you should post the critical path.

Figure 4.16
A
9 E 8

B 2
2

Time 0 1 2 3
C
4 F5 6 7 8
G
9 10 11
H
0 2 4 7 11
Manpower 22 22 24 152 10 2 2 2 1 1 1 41 1
7 3
Requirement D 4

The number appears above the arrow indicates that the manpower requirement.

Step2: - Draw the resource requirement Vs time profile



Figure 4.17
NOTES
24
22

15

10

2
1

1 2 3 4 5 6 7 8 9 10 11
If you see the above resource requirement profile, this profile has more peak & valley.
So this is to be leveled to have constant work force requirement.

Step3: - Find the float using the formula mentioned already for all the activities .This is
shown in the table.

Table 4.43

Activities Free float
A 7
B 0
C 0
D 2
E 2
F 0
G 0
H 0

Step 4: - Find the total requirement for all the days, this is equal to 101.Now
divide this by the number of days to find constant resource requirement
Constant resource requirement = 101/11=9.1
Every day you should see that the number of resources requirement should not exceed 10.
For doing so, you should give preference for the activity which has least free float.



Day1
Table 4.44
NOTES
Activity Free float Resource Action to be
requirement performed
B 0 3 Scheduled
C 0 6 Scheduled
D 2 4 Postponed
A 7 4 Postponed

In the day1, even though the free float for activity D is more than B. You should give
preference to D because if you allot ‘D’ and ‘C’ on day1 it perfectly matches the
maximum resources requirement 10.
Day2
Table 4.45
B 0 3 Postponed
C 0 6 Continued
D 2 4 Continued
A 6 9 Postponed

Day3
Table 4.46
F 0 7 Scheduled
B 0 3 Scheduled
E 2 8 Postponed
A 5 9 Postponed

Day4
Table 4.47

F 0 7 Continued
B 0 3 Continued
E 1 8 Postponed
A 4 9 Postponed



Day5
NOTES Table 4.48

E 0 8 Scheduled
G 0 2 Scheduled
A 3 9 Postponed

Day6
Table 4.49

E 0 8 Continued
G 0 2 Continued
A 2 9 Postponed

Day 7
Table 4.50

E 0 8 Continued
G 0 2 Continued
A 2 9 Postponed

Day 8
Table 4.51

A 0 8 Scheduled
H 0 2 Scheduled

Day 9
Table 4.52

A 0 8 Continued
H 0 2 Continued



Day10
Table 4.53
NOTES
A 0 8 Continued
H 0 2 Continued

Day11
Table 4.54

A 0 8 Continued
H 0 2 Continued

Since for all the days the resources are scheduled as per the procedure men-
tioned. The requirement Vs time profile graph is as follows:
Figure 4.18

Resource
requirement

10

11 days
Time



NOTES Summary
In this unit, the job shop scheduling for single machine n jobs, two machine n
jobs, 3 machine n jobs and n job m machine are discussed. The project scheduling
techniques namely the critical path method, program evaluation review technique are
elaborated. The application of float is interpreted and appreciated. The resource level-
ing is also highlighted.

Review Questions:
1. Draw the network for the given precedence diagram.

Table 4.55

Activities Immediate predecessor
a -
b -
c b
d a,c

2. How would you calculate the expected time and variance in the PERT model?
3. Expand CPM and PERT?



UNIT V
NOTES

FACILITY, LAYOUT LOCATION AND
WORK MEASUREMENT
5.1 Introduction
5.2 Learning Objectives
5.3 Facility Location:
5.3.1 Selection of location:
5.3.1.1 Phase 1:
5.3.1.2 Phase – II
5.4 Plant location selection
5.4.1 Rating Plan Method To Evaluate The Factors For Plant Location:
5.4.2 Cost analysis method:
5.5 Types of Layout
5.5.1 Fixed Product Layout
5.5.2 Product Layout
5.5.3 Group Layout
5.5.4 Process Layout
5.5.5 Design of Process Layout
5.6 Line Balancing
5.7 Time Study and Work Measurement
5.7.1 Time Study
5.7.2 Work sampling
5.8 Learning Curve
5.9 Productivity



NOTES UNIT - 5

FACILITY, LAYOUT LOCATION AND
WORK MEASUREMENT
5.1 INTRODUCTION

The unit deals about one of the strategic decisions in the operations
management, namely plant location decision, the characteristics of different layouts are
discussed. The different techniques available to design the layout are also introduced.
Work measurement technique like time study, work sampling and methods time
measurement are elaborated to fix the standards for organizational activities. The impact
of learning curve on the standard and productivity improvement is also discussed.


1. To comprehend the factors to be considered for selecting the location.

2. To know the characteristics of different types of layout.

3. Understand the techniques to be adopted in designing the layout.

4. To establish the standards for different activities using standard techniques.

5. To construct learning curve and to comprehend the impact of learning curve
in standards and productivity.

5.3 FACILITY LOCATION

Facility location i.e. identifying the best location is a strategic decision in operation
management. This is a decision like any other strategic decisions like identifying the
product, choosing the technology, deciding the capacity etc. It is a long term decision.
Once the resources are committed taken back the resources involves more cost because
of change in the decision later. So you should be careful while identifying the various
locations and choosing the best one.

Need for the Decision

1. Research and development department of an organization come up with a new
product, to manufacture the product you need to incur the decision.



2. For the existing product, there is a lot of market potential so to tap the untapped NOTES
market you have to expand the capacity. To expand the capacity, you have to
identify the location.
3. Markets are served in a particular region, more competitions and high escalation
of cost. It is difficult to survive then identifying the location where there is
untapped market in the different regions.
4. Relocation required because of Tsunami, fire, flood, earthquake natural holocaust
etc.
5.3.1 Selection of location
Selection of the best location involves two phases:
5.3.1.1 Phase 1
In the phase I a preliminary feasibility study is carried out to assess the production
input, process technology, infrastructural facilities, social and cultural conditions and
legal and government considerations.
Production Input:
Raw material:
It is important to assess the availability of raw material. The assessing is to be
carried out in the point of view of the transportation cost and the amount or deposit.
Suppose if you start a cement or aluminium industry the deposit of ore and how long it
will be lost, that is to be assessed. You have to see the present requirements and future
requirements and choose the place where the above conditions are fulfilled. The raw
material supplier is for away then the transportation cost dominates the price that makes
you less competitive.
Labour inputs:
When you assess the labour input, the quality of the labour is important. You
may find the labours with fewer wages but the productivity of that labour may be low.
So in addition to bothering about that wages, you should assess then the skill level also.
You can see now more foreign IT companies sources India. The main reasons
are those companies identify abundant IT skills in India at comparatively lesser cost. So
they sources India.

Process Technology:

Some times the technology restricts the choice of location e.g. to start a pulp
and paper mills. You need water for processing so most of the pulp and paper mill
industry are started in the river banks.



NOTES Infrastructural facilities:

A study is very much required to asses well connected and land roads, parts,
out parts, railway lines telecommunication facilities etc. This is important because it
reduces the transportation cost and lead time. Lend time reduction show lot of saving
in other costs. It helps the organization to be a cost competitive.

Legal and political considerations:

Governments woo the corporate to start industry in their respective countries
or state through providing free land, exemption of taxes, subsided power tariffs, less
cumbersome licensing procedures. In addition, the prospective person has to see that
the legal formalities and complication. He / she has to study the government stipulation
about the pollution standards to be exercised, zoning codes to be adopted import and
export regulations prescribed and construction specifications etc.

Social and cultural conditions:

This is the process of exploring the attitude of the people towards the plant to
be started over there. This study involves the skill availability and accessibility.

This study also involves the study about their demographic variables like the
age distribution, income distribution, their status, their life conditions their tradition.
Here, you should explain in detail to make them aware of the usefulness of plant to up
lift them both economically and socially. At present, in India, since this process not
carried out systematically and scientifically, many important projects are stalled by the
people in many states like West Bengal, Orissa, Tamil Nadu, to state a few.

5.3.1.2 Phase – II

It there is a problem in the first phase, the second phase may not see the lime
light. In the phase 1 macro analysis is over, in the second phase the region, community
and site selection take place. Region include country to country or state-to-state within
a country or within a state different regions. The factors to be considered in the selection
of region, community and site are shown in the table.

The factors are considered under different major heading like infrastructure,
market, supply, and environment and internal. You should note that most of the factors
are considered in all the regional, community and site selection. For example, customer
concentration and trends are considered in all region, community and site selection.



Table 5.1
Regional selection Community Decision Site Decision
NOTES
Infrastructure

Transportation network and Transportation network Proximity to transpor
their costs and their costs tation system
Utilities supply and costs Utilities supply and costs Utilities supply and costs
Market
Customer concentration and Customer concentration Customer concentration
trends. and trends. and trends.
Supply
Materials and supplies Materials and supplies Materials and supplies
availability & accessibility availability & accessibility availability & accessibility
Labour availability & Labour availability &
accessibility accessibility
Land and construction cost Site availability cost &
construction cost
Size of the site
Site costs
Environment
The intensity of unionization Community attitudes Zoning restrictions
towards the new facilities
Climate Community service & Proximally to related
taxes industry
Banking services Environmental impact
Government SOPS Government SOPS
Environmental regulations Environmental regulations
Internal
Preference of the
management

5.4 PLANT LOCATION SELECTION

The selection of the plant is characterized by the subjective factors as well as
the objective factors. But it is very difficult to quantify subjective factors. The plant
location evaluation is done by considering both subjective and objective factors through
a subjective evaluation known as Rating Plan Method. You can see in the following
section, how the rating plan is applied to choose a place, where to start a Bio technol-
ogy plant, in India.



To start a biotechnology plant what factors you consider and how do you evalu-
NOTES ate the same using rating plan method.

Selection Criteria

The important considerations for selecting a suitable location are given as follows:

a. Natural or climatic conditions.
b. Availability and nearness to the sources of raw material.
c. Transport costs-in obtaining raw material and also distribution or market-
ing finished products to the ultimate users.
d. Access to market: small businesses in retail or wholesale or services should
be located within the vicinity of densely populated areas.
e. Availability of Infrastructural facilities such as developed industrial sheds or
sites, link roads, nearness to railway stations, airports or sea ports, avail-
ability of electricity, water, public utilities, civil amenities and means of com-
munications are important, especially for small scale businesses.
f. Availability of skilled and non-skilled labour and technically qualified and
trained managers.
g. Banking and financial institutions are located nearby.
h. Locations with links: to develop industrial areas or business centers result
in savings and cost reductions in transport overheads, miscellaneous ex-
penses.
i. Strategic considerations of safety and security should be given due impor-
tance.
j. Government influences: Both positive and negative incentives to motivate
an entrepreneur to choose a particular location are made available. Posi-
tive includes cheap overhead facilities like electricity banking transport, tax
relief, subsidies and liberalization. Negative incentives are in form of re-
strictions for setting up industries in urban areas for reasons of pollution
control and decentralization of industries.
k. Residence of small business entrepreneurs want to set up nearby their home-
lands.

One study of the locational considerations from the small-scale units revealed
that the native place or homelands of the entrepreneur was the most important factor.

Heavy preference to homeland suggests that small-scale enterprise is not freely
mobile. Low preference for Government incentives suggests that concessions and in-
centives cannot compensate for poor infrastructure.

In the rating plan method, ideal rating is considered for the factors, then how
much rating each location scores against each factor is assessed and best location is
chosen based on the highest total point.



Table 5.2 - Rating Plan Method To Evaluate The Factors For Plant
Location:
NOTES
Factors Ideal Point Lucknow Bangalore Pune
Availability of technically
qualified skilled labor. 30 25 28 20

Availability and nearness to
the source of material. 20 15 17 15

Market Potential 15 13 11 10

Access to the market 5 4 5 4

Competitive Analysis 5 5 2 3

Site Economics 10 10 5 6

Positive Govt. Influences 10 10 6 6

Strategic consideration of
safety and security 2 2 2 2

Rent or buy the property 3 3 2 1

TOTAL POINT 100 87 78 67

In the above table, Lucknow scores more than the Pune and Bangalore.
5.4.2 Cost analysis method:

In the previous section, you saw how the rating plan method is applied, to
choose the location. In this section, you can see a method, where only the objective
factor is considered, namely the cost factors i.e., to start a plant in a particular location,
based on the labour availability and accessibility, material availability and accessibility,
you may have different variable cost as well as fixed cost for each location. Now based
on the estimated fixed cost and variable cost, you can formulate for each location, a
different a total cost equation. Once the total cost equation is arrived for each location
by applying the cost volume profit analysis, you can estimate the range of production
quantity at which the locations are preferred. You can understand above method through
exapmle5.1.

Example 5.1

Consider a corporate office, which wants to identify the best location. They
have identified 3 locations after a preliminary survey. They are locations A, B and C.
The corporate has estimated the variable cost and fixed cost and then the total cost for
the each location against the production quantity. This is shown in the table.



Table 5.3
NOTES
SITE Fixed cost Variable cost
(Rupees in lakhs) (Rupees per unit)
A 2.5 1000
B 3 750
C 4 500
Solution:

Considering site A and B,

the total cost for site A for ‘x’ quantities = 250000 + 1000x. —— (1)
the total cost for site B for ‘x’ quantities = 300000 + 750x. —— (2)
Therefore from (1) and (2),
x = (300000 – 250000)/(1000-750)
= 200 units.
Considering site B and C,

the total cost for site B for ‘x’ quantities = 300000 + 750x. ——— (3)
the total cost for site C for ‘x’ quantities = 400000 + 500x. ——— (4)
Therefore from (3) and (4),
x = (400000 – 300000)/(750-500)
= 400 units.
Result,

If ‘x’ < 200 units, select site A as it has minimum fixed value.
If 200 < ’x’ < 400 units, select site B as it has minimum variable cost
compared to A and minimum total cost compared to C.
If ‘x’ > 400 units, select site C as it has the least variable cost.
Graphical representation:
Figure 5.1



Review Questions:
1) Define facility location.
NOTES
2) When will you go for facility location?
3) What are the phases in the facility location?
4) What the methods used for plant location selection?

1.3 TYPES OF LAYOUT

After selecting the plant location, based on the type of production system to
be adopted, the layout has to be decided. The types of layout are:
1. Fixed product layout
2. Product layout
3. Group (flexible) layout
4. Process layout

5.5.1 Fixed Product Layout

The fixed product layout is developed by locating the workstations or produc-
tion centers on the fixed job. Fixed layout type is used when the job size is large.
Logistics are involved in ensuring that the right processes are brought to the product at
the right time and at the right place. This has been mainly used in electronic industry to
support computer systems integration and test; materials, sub assemblies, components,
peripherals are brought to the single workstation where finished system is built. This
type of layout requires generally higher number of personnel and equipments than the
other types, since the work piece remains stationary.

Figure 5.2 – Fixed Product Layout



Advantages:
NOTES
1. This method is highly flexible and any changes in product design and product
mix can be easily accommodated.
2. Since work centers are independent, scheduling results in achieving minimum
total production time.
3. The teams of personnel are responsible for continuity of operations.
4. Movement of materials is reduced.
5. Job enlargement could be promoted by allowing individuals or teams to per-
form the whole job.

Limitations:

1. Skilled labour is required.
2. Supervision is required.
3. Positioning of material and machinery is costly and complex.
4. Equipment duplication may occur.
5. Utilization of equipment is required.

5.5.2 Product Layout

In this layout the machines are arranged according to the processing sequence of
the product. Material flows directly from one workstation to other workstation. Ma-
chines are not shared by the products. This type of layout is used for high volume
production. For proper utilization of machines sufficient production volume is required.
Since the processes are located closed together in the production sequence, the layout
minimizes the distance between the work center.

Figure 5.3 – Product Layout

Advantages:
1. The total production time is short.
2. The material handling is reduced because of the location of the machines to
minimize the distances between the consecutive operations.



3. Less skilled operator is required. Thus training is simple and short.
4. Less space is occupied by work in transit and temporary storage.
NOTES
5. The flow is smooth and logical flow line results.
6. Small in process inventory as the work is directly fed from one process to
other.
Limitations:

1. The production time is determined by the slowest machine.
2. A general supervision is required.
3. Since identical machines are arranged at various locations, initial investment
is high.
4. A change in the product design requires an entire change in the layout.
5. A break down of one machine lead to complete stoppage of entire production.

1.5.3 Group Layout

When production volume is not sufficient for product layout, group layout is used.
Here products are grouped in to logical product families. The groups of processes are
called cells. So it is also called as cellular layout. It is a compromise between product
and process layout. Since products are grouped into families this technology is also
called as group technology with each individual cells are called GT cells.

Figure 5.4 – Group Layout

Advantages:

1. This supports the use of general purpose equipments.
2. This is a compromise between product and process layout.
3. Shorter travel distances and smoother flow lines than process layout.



4. Team attitude and job enlargement tend to occur.
NOTES 5. Utilization of each machine is increased.

Limitations:

1. Higher skilled employees are required
2. General supervision is required.
3. It depends on the balanced material flow through the cell otherwise buffers
and WIP storage are required.

1.5.3 Process Layout

In this type the machine are grouped and the product passes from one group to
other group based on the sequence of production. The groups of processes are called
cells. The process layout is used in the rapid changes in the product mix or production
volume as well as when both product and group layout cannot be used. Typically job
shop employs process layout due to the variety of products manufactured and their low
production volume. It has high degree of inter departmental flow.

Figure5.5 – Process Layout

Advantages:

1. Since the machines are grouped, only fewer machines are required; thus mini-
mum investment is required.
2. Better utilization of machines could be achieved.
3. High degree of flexibility exists.
4. Supervision could be specialized.
5. The working personnel find the job more satisfying and interesting since there
is a diversity of tasks.

Limitations:

1. Highly skilled labour is required.
2. Work in process inventory is increased.



3. Total production time is longer
4. Planning and control of production system turns out to be tedious.
NOTES
5. Space and capital are tied up by the work in process.
6. Material handling is more expensive because of longer flow line.

5.5.5 Design of Process Layout

To design a process layout there are some computerized techniques avail-
able. Computerized techniques are classified into:
• Techniques which select the best process layout based on the material
cost comparison.
• Other computerized techniques which select the best process layout based
on the qualitative factors namely the closeness between the departments.

Closeness ratings are as follows:

A – Absolutely essential
E - Ordinary closeness
I – Important
O – Ordinary importance
U – Un important
X – Not desirable.

CRAFT (Computerized Relationship Allocation of Facilities Techniques)

CRAFT algorithm was originally developed by Armour and Buffa. CRAFT is
more widely used than ALDEP and CORELAP. It is an improvement algorithm. It
starts with an intial layout and improves the layout by interchanging the departments
pairwise so that the transportation cost is minimized. The algorithm continues until no
further interchanges are possible to reduce the transportation cost. The result given by
CRAFT is not optimum in terms of minimum in majority of applications. Hence, CRAFT
is mainly a heuristic algorithm.Unfortunately, plant layout problem comes under
combinatorial category. So, usage of efficient heuristic like CRAFT is inevitable for
such problem.

CRAFT Requirements:

1. Initial layout.
2. Flow data.
3. Cost per unit distance.
4. Total number of departments.
5. Fixed departments.
Number of such departments
Location of those departments
6. Area of departments.



CRAFT Procedure
NOTES
The steps of CRAFT algorithm are summarized below:

Step 1. Input: 1. Number of departments
2. Number of interchangeable departments
3. Intial layout
4. Cost matrix
5. Flow matrix
6. Area of departments

Step 2. Compute centroids of departments in the present layout.
Step 3. Forum distance matrix using the centroids.
Step 4. Given data on flow, distance and cost, compute the total handling cost of
the present layout.
Step 5. Find all the possible pairwise interchanges of departments based on
common border or eqal area criterion. For each possibility, interchange
the corresponding centroids and compute approximate costs.
Step 6. Find the pair of departments corresponding to the minimum handling cost
from among all the possible pairs of interchanges.
Step 7. Is the cost in the previous step less than the total cost of the present
layout? If yes, go to step 8.If not go to step 11.
Step 8. Interchange the selected pair of departments.Call this as the NEW
LAYOUT. Compute centroids, distance matrix and total cost.
Step 9. Is the cost of new layout less than the cost of the present layout?
If yes, go to Step 10.If not, go to Step 11.
Step 10.The new layout is hereafter considered as the present layout.its data on
centroids, layout matrix and the total cost is retained. Go to step 5.
Step 11. Print the present layout as the FINAL LAYOUT.
Step 12. Stop

LAYOUT:
Figure 5.6



NOTES

1) Iteration 1: calculate the distance matrix.
Distance between two departments = |x1-x2| + |y1-y2|
Where,
(X1, y1) is the centre of department 1

Centroids of A,B and C,
A(50,125)
B(25,50)
C(75,50)

DISTANCE MATRIX:
Figure 5.9

1) Determine the total cost for all possible movements between each depart-
ment.
Cost between two departments = Distance matrix X Cost matrix



Figure 5.10
NOTES

1) Re allocation of departments,
In this step the departments are interchanged. For interchanging
1. Both departments should have the same area (or)
2. Both departments should share common boundary
2) After reallocating find the new centroid and repeat step 2 and 3.

ITERATION 2
Interchange A and C (Because A and C have common border and same area)
Therefore new Centroids are,
C (50,125)
B (25,150)
A (75, 50)

Figure 5.11



DISTANCE MATRIX:
Figure 5.12
NOTES

COST MATRIX:
Figure 5.13

ITERATION 3:
Interchange B and C (Because B and C have common border and same area).
Therefore new centroid are,
B (50,175)
C (25, 50)
A (75, 50)
Figure 5.14



DISTANCE MATRIX:
NOTES Figure 5.15

COST MATRIX:
Figure 5.16

TOTAL COST: 975

5) Check total cost for all the possible reallocations and select the layout with
minimum total cost.
6) Repeat the iterations till the least total cost is achieved. This layout is optimum
solution.

In the given problem layout seems to be optimal compared to other two
layouts. Now taking layout 2 as base layout, continue further iterations to
find the least cost. That layout is the optimal solution.
Corelap Algorithm

Input data requirement
1. Relationship chart and closeness rating.
2. Building description is given by maximum length to width ratio.



Objective
1. Maximizing overall closeness rating.
NOTES
How the software programs works

First he found out the closeness rating between the departments. It has to be placed
in layout. If there is any type select the department which is high in closeness rating.
If there is again tie select the department which is larger in area. If the tie still exists
then select any department randomly.

Output

Computer printout shows final layout.

Determination of placement order of department:

For the purpose of finding the order of placing the departments the following
data are needed.

REL- chart and closeness ratings:

REL –chart:

Table 5.4

CLOSENESS VALUES:

A=6, E-5, I=4, O=3, U=2, and X=1

Using the closeness rating TCR (total closeness rating) is calculated thus:



Table 5.5
NOTES

The following steps are carried out to select the placement order of the departments.

1. Department with the largest TCR is selected for the first placement. In case
of ties, the department with the largest area is selected. Department 5 is
selected.
2. Review the closeness relationship of department 5 with other departments to find
the department that has the highest closeness relationship with department 5.

Table 5.6

Department 6 has the highest closeness relationship with the department 5.
So it has to be placed next to department 5.

3. Check the closeness relationship for both the departments.

Table 5.7



In the above study department 7 has high closeness rating with 6. Thus it
has to be placed in the layout next.
NOTES
Similarly, if there is a tie in closeness rating, then select the department
with the highest TCR.

If there is a tie again, then select a department with larger area. In case of tie in
both conditions, then select a department randomly. Order of placement:

5 6 7 2 1 4 3

PLACEMENT OF DEPARTMENTS IN THE LAYOUT:
Table 5.8

5

1. The first department to be placed is 5. it is placed in the centre of a (7x 15)
layout. Each cell has an area of 6000 sq.mt.
2. The second department from the list is department 6. It is thus placed.

Table 5.9

6 6
5

(Department 6 has two squares. It can be placed thus…)



3. Department 7 has to be placed. It has two squares. It can be placed thus in three
NOTES ways.

Table 5.10 Table 5.11 Table 5.12

7 7
6 6 6 6 7 6 6
5 5 7 7 7 5

In the above case we have to find the weighted rating for each department.

WEIGHTED DEPARTMENT RATING

Table 5.13

Closeness relationship Weighted rating.
A 243
E 81
I 27
O 9
U 1
X -729

a. Department 7 with department 6 = E = 81,
Therefore placement rating = 81.
b. Weighted rating of 7 with 6 = 81
Weighted rating of 7 with 5 = 27
—————
Total = 108
—————
Similarly, for the other layout also, the rating is 108.
Thus we have to select either b. or c. layouts… let us take c. layout…

1. Next department 2 has to be placed.

Table 5.14

2 6 6
7 7 5



PLACEMENT RATING = (27+1) = 28.
No other allocation has maximum placement rating…
NOTES
2. Next department 1 has to be placed. It has the following four possibilities.

Table 5.15 Table 5.16

Table 5.17 Table 5.18

PLACEMENT RATING:

A. Weighted rating with department 6 and 2 = 82
B. Weighted rating with department 6 and 5 = 10
C. Weighted rating with department 7 and 5 = 10
D. Weighted rating with department 7 and 2 = 82

Table 5.19

1 1
2 6 6
7 7 5

The above arrangement is selected randomly (between A. & D.)

6. Next department 4 has to be placed. It has the following five possibilities.



Table 5.20 Table 5.21 Table 5.22 Table 5.23
NOTES
4 1 1 1 1 1 1 1 1
4 2 6 6 4 2 6 6 2 6 6 2 6 6 4
7 7 5 4 7 7 5 7 7 5 7 7 5 4
4 4

Table 5.24
1 1 4 4
2 6 6
7 7 5

e.

PLACEMENT RATING:

A. Weighted rating with department 1 and 2 = 108
B. Weighted rating with department 2 and 7 = 82
C. Weighted rating with department 7 and 5 = 28
D. Weighted rating with department 6 and 5 = 28
E. Weighted rating with department 1 and 6 = 28

Table 5.25
4 1 1
4 2 6 6
7 7 5

The above arrangement is selected.(A.)

1. The last department to be placed is department 3.

Table 5.26

4 1 1 3
4 2 6 6
7 7 5



The above placement of department 3 has maximum placement rating. (Based NOTES
on REL). Thus the layout is allocated with all the departments as follows.

Table 5.27

4 1 1 3
4 2 6 6
7 7 5

Total Score of The Layout:

Total score of the layout is the sum of the products found by multiplying the
length of the shortest path between all departments and the numerical closeness value
for the pairs.

Total score = ΣFor all pairs (Closeness rating x length of shortest path)

The path is calculated by the rectilinear distance from the border of one depart-
ment to the border of the other one.

Therefore, if two departments are adjacent, they will have common border. The
path length will be zero.

Total score of the above layout is given as follows:



Table 5.28
NOTES
Department to Distance Closeness Score
1 2 0 - -
1 3 0 - -
1 4 0 - -
1 5 2 3 6
1 6 0 - -
1 7 1 2 2
2 3 2 2 4
2 4 0 - -
2 5 2 4 8
2 6 0 - -
2 7 0 - -
3 4 2 2 4
3 5 1 2 2
3 6 0 - -
3 7 2 2 4
4 5 3 4 12
4 6 1 2 2
4 7 1 2 2
5 6 0 - -
5 7 0 - -
6 7 0 - -
Total 46

Thus the procedure to find the total score ends with this step. One can repeat
the procedure with different scales and pick up the best layout with the MINIMUM
TOTAL SCORE…

ALDEP (Automated layout Programming):

ALDEP is a construction type algorithm .This algorithm uses basic data on
facilities and builds a design by successively placing the departments in the layout. After
placing all the departments in the layout, a score is computed .This is nothing but the
sum of the closeness rating values of different neighbouring departments in the layout.
This algorithm is repeated for a prespecified number of times and the best layout is
selected based on the maximum layout score.



The basic data required for this algorithm are listed below.
NOTES
1. Total number of departments.
2. Area of each department .
3. Length and width of layout.
1. Closeness ratings of various pairs of departments in the form of Relationship
Chart.
2. Minimum department preference (MDP) value.
3. Sweep width.
4. Number of iterations to be performed.
5. Location and size of each restricted area in the layout if present.

Steps to be followed:

Step 0.INPUT:
1) Number of departments in the layout.
2) Area of each department.
3) Length and width of the layout.
4) REL-CHART (Relationship chart).
5) MDP value.
6) Sweep width.
7) Number of iterations to be carried (N).
8) Current iteration number(I),1.
9) 9.Locations and sizes of fixed departments if present.
10) 10.score of the current layout (It is assumed as a very high negative value
before performing the first iteration).

Step 1. Select a department randomly and place it in the layout.
Step 2. Scan the relationship (REL) – chart and classify the unselected departments
into two lists, namely List A and List B.

List A contains the unselected departments whose relationship values in relation to the
lastly selected department are less than the MDP value.
List B contains the unselected departments whose relationship values in relation to the
lastly selected department are greater than or equal to the MDP value.
Step 3. Is the List B empty? If so , go to step 4;otherwise,go to step 5.
Step 4. Select a department randomly from List A and place it in the layout.
go to step 6
Step 5. Select a department from List B which has the maximum REL value in relation
to the lastly selected department and place it in the layout.
Step 6. Whether all the departments are placed in the layout? If not go to step 2; if yes,
go to step 7.
Step 7. Compute the score of the layout.



NOTES Step 8. Is the score of the layout more than the score of the current best layout? If yes,
update the new layout as the current best layout and store the corresponding
score. otherwise, drop the new layout.
Step 9. Is the current iteration number I =N? if yes, go to step 10; otherwise, increment
the iteration number by one (I =I+1) and then go to step 1.
Step 10. Print the current best layout and the corresponding score.

STEPS OF ALDEP:

1. Get the inputs. (REL chart, Department area, layout plan)
(A=64, E=16, I=4, O=1, U=0, X=-1024)
The REL diagram for a plant with 11 departments is as follows:

Table 5.29

1) Based on the area of all the departments, fix an appropriate scale. Based on the
scale divide the departments in to number of square blocks.



Table 5.30
NOTES
DEPARTMENT AREA NO. OF SQUARES
1 600 12
2 400 8
3 350 7
4 150 3
5 350 7
6 150 3
7 200 4
8 800 16
9 200 4
10 350 7
11 5000 50

(SCALE: 1: 50, i.e. each cell in the layout is assumed to be a square of area 50 sq.
units).

1. Draw an initial layout based on the layout area or based on the total area of all
the departments. Divide the departments in to the basic number of squares.
(Sum of all department squares).

1) ITERATION-1:
a. Initially assume a closeness rating of “0”.
b. Fix a cut-off value for the department selection. (i.e.) “A” or “E”
or “I”...
c. Initially place a department randomly or the department with the
max. area.
d. Then from the candidate (remaining) departments, select a de-
partment with the maximum cut-off value with the previously
placed department.

2) SERPENT TYPE ALLOCATION:
While allocating/placing each department in the layout, it has to be
laid out in the following sequence. (Each cell is area of 50 in sq. units…
based on the scale).



Table 5.31
NOTES

Table 5.32

11 11 11 9 10 2 2 7 7 0 0
11 11 11 9 10 2 2 7 0 0 0
11 11 11 9 10 2 2 7 0 0 0
11 11 11 9 10 2 2 8 0 0 0
11 11 11 6 10 1 3 8 0 0 0
11 11 11 6 10 1 3 8 0 0 0
11 11 11 6 10 1 3 8 0 0 0
11 11 11 4 5 1 3 8 0 0 0

11 11 11 4 5 1 3 8 0 0 0
11 11 11 4 5 1 3 8 0 0 0
11 11 11 11 5 1 3 8 0 0 0
11 11 11 11 5 1 8 8 0 0 0
11 11 11 11 5 1 8 8 0 0 0
11 11 11 11 5 1 8 8 0 0 0
11 11 11 11 1 1 8 8 0 0 0

6) If in there is a tie or no department satisfies the cut-off value during the selection of
candidate department, then place a department randomly.
7) Calculation of TCR (Total Closeness Rating):
a. Once all the departments are placed, then the next step is to calculate
TCR.



b. Make a note of all the pair of departments sharing common border with NOTES
each other. (Note a pair only once i.e. either 1-3 or 3-1).
c. Now add up all the pairs’ REL points…
d. Then multiply it by 2.
Table 5.33
Pairs REL points
11-1 0
11-9 16
11-6 16
11-4 64
11-5 4
9-10 1
9-64
6-10 1
6-4 16
4-5 1
10-2 0
10-5 4
5-1 1
2-8 0
2-3 16
2-1 64
1-3 16
1-8 0
3-8 1
7-8 64
2-7 0
290

Thus the Total Closeness Rating is (290*2) = 580

7) This is the TCR value for the initial layout.
8) Keeping this as the minimum value continue the steps (4-7) for all the possible
layouts and calculate the TCR value for all the layouts. Once iteration results in a TCR
value less than the immediately previous layout’s TCR value then that layout is the
optimal solution.



Table 5.34
NOTES
11 11 11 8 8 6 9 1 1 0 0

11 11 11 8 8 6 9 1 0 0 0

11 11 11 8 8 6 9 1 0 0 0

11 11 11 8 8 4 9 1 0 0 0

11 11 11 8 8 4 3 1 0 0 0

11 11 11 8 8 4 3 1 0 0 0

11 11 11 7 8 5 3 1 0 0 0

11 11 11 7 8 5 3 1 0 0 0

11 11 11 7 8 5 3 1 0 0 0

11 11 11 7 8 5 3 1 0 0 0

11 11 11 11 10 5 3 1 0 0 0

11 11 11 11 10 5 2 2 0 0 0

11 11 11 11 10 5 2 2 0 0 0

11 11 11 11 10 10 2 2 0 0 0

11 11 11 11 10 10 2 2 0 0 0

Total Closeness Rating:

Table 5.35

Pairs REL points
11-8 64
11-7 64
11-10 4
8-7 64
8-10 1



8-6 1 NOTES
8-4 1
8-5 0
10-5 4
10-2 0
6-9 4
6-4 16
4-5 1
4-9 1
4-3 0
5-2 0
5-3 1
9-1 0
9-3 1
3-2 16
3-1 16
1-2 64

319

Thus the Total Closeness Rating is (319*2) = 638.

Thus Iteration 2 shows that layout 2 has high TCR value compared to layout 1.
Thus layout 2 is an optimal one compared to layout 1. Similarly, iterations are continued
to find the optimal layout.

a. LINE BALANCING

This is a technique applied to design workplace of a plant, which adopts
flow line production system. You know that the productive system of flow line produc-
tion produces less variety and standardized products. So the capacity of the system is
to be established first or the no. of units produced per day.



Figure 5.17 – Line Balancing
NOTES

Objective: To design an effective and efficient workplace.

Input:
Capacity:

The capacity as it is mentioned already that the capacity is measured through
the output. In an automobile industry it may be number of cars to be produced in a day.
To decide the capacity you need to have the information about the demand for the
product. Yearly demand has been converted into day to day capacity requirement.

Technological constraints:

Technological constraint that means when you are manufacturing a product,
there is a sequence in which the operation on the components is to be carried out then
the produced components are assembled according to the particular sequence. For
example in the case of electric motor manufacturing activity the activities and immediate
predecessor activity to be carried out are given below:

Table 5.36

Activities ImmediateActivities Min

A Axile manufacturing - 700
B Rotar manufacturing - 800
C Rotar assembly A, B 400
D Stator manufacturing - 200
E Stator cashing manufacturing - 400
F Stator assembly D, E 300
G Protective shield manufacturing - 500
H Final assembly C, E, F 300

The above relationship could be shown in a network form as follows for clear under-
standing.



Figure 5.18
NOTES

Available Working time:

The available working time is the total working hours available based on the
time frame. Example: if the capacity calculation is done for the day then the available
hour’s calculation is done for day. If there is one shift of 8 hours duration then the
available time in seconds is calculated as 8 x 60 x 60 second.

= 28,800 seconds

Technological constraint continuation:

Each activity is considered to be an element. An element is a distinct that of
a specified job. This is done for the purpose of observation, measurement and analysis.
Against each element the time for completing the activity is also estimated.

Output:
Number of stations:

Based on the available working time per day, the no. of units to be manufac-
tured, and the total work content, the no. of stations are calculated as follows:

No. of stations = 3600 x 35 units

[Total work content per unit] [Desired no. of units per day]
= ————————————————————————
Total productive time available per day

= 8 x 60- x 60

= 4.375

= 5 stations



Maximum allowable time:
NOTES
From this you can calculate the maximum allowable time for each station

Total available hours
= ———————————————————
Desired no. of units per day

= 8 x 60 x 60 /35
= 823 seconds.

Minimum Allowable time:

This is the highest elemental time. In this example the highest elemental time is
800 seconds. The maximum and minimum allowable time helps you to assess the
efficiency and effectiveness of the proposed designs.

Assignment of the job elements to the workstations:

A method is to be adopted to assign the jobs to workstations. The method
may be an optimal method or heuristic method. In heuristic method, you may get best
solution but there is no guarantee that you may get a solution. But it helps to get nearer
to best solution. One such a procedure is the longest operation time (LOT) Remaining.
Longest Operation time remaining means after assigning a particular task to a work
station. You should find out the remaining unassigned elements and choose the element
with highest operation time. Then add the element with the already assigned element.
You should be careful enough that the total element time in a particular workstation
should not exceed the cycle time established. Suppose the element considered for
assigning could not be assigned because the total elemental time at the workstation
increased beyond the cycle time, then in such case, you should look for the next highest
remaining elemental time. The above mentioned caution is to be followed before as-
signing the element to the work station. Thus process is continued till all the elements
are assigned.

Assignment of elements for 823 seconds work station cycle time

Table 5.37

B A C&E D&F G&H
I WS II III IV V
WS WS WS WS

WS – Work



Station I:
NOTES
Consider the highest elemental time. This is element B it could be straight away
assigned to station because it does not have any predecessor. Next 5 highest elemental
time is 700 that is element A. But element A could not be assigned because if you
assigned A the stations sum of elemental time exceeds the time cycle time 823 seconds.
This reason holds good for other remaining elemental times.

Station II:

In Station II you can assign element A. This has elemental time of 700
second. You can not assign any remaining elements to station II because the total
elemental time exceeds the cycle time.

Station III:

In Station III the remaining highest elemental time is 500 minutes that is of
element G. But before assigning the activities, you should complete other activities as
per the technological constraints. So next highest operational elements are C & E, so
C & E are
assigned to station III. No. other elemental could be assigned to station III.

Station IV:
Table 5.38

Line design for 800 seconds

1 2 3 4 5 Effectiveness Efficiency
B A C&D E&F G&H Goal accomp- Utilization
lishment of employee
Time requi-
red per unit 800 700 600 720 800 28800/800 = 36 3620
in each Units
station

Available
time each 800 800 800 800 800 4000 Utilization =
work station 3620/4000 =
90.5%

Idle time per 0 100 200 80 0 380 Idle time =
cycle 380/4100 =
9.26%

Next highest unassigned element is G. For the same reason spelt out previously. They
are not allotted to station IV then you can go for allocating next highest elements namely
D & F.



Station IV:
NOTES
Then In the remaining unallotted elements, element G is allotted first and then H.
The efficiency and effectiveness

The efficiency and effectiveness of the LOT method is shown below:

Suppose if you adopt minimum allowable cycle time 800 seconds. On the basis for the
allocation of elements, then the elements to be assigned will be as shown as below:

Next highest unassigned element is G. For the same reason spelt out previously.
They are not allotted to station IV then you can go for allocating next highest elements
namely D & F.

Station V:

Then In the remaining un allotted elements, element G is allotted first and then H.

The efficiency and effectiveness

The efficiency and effectiveness of the LOT method is shown below:

Suppose if you adopt minimum allowable cycle time 800 seconds. On the basis for the
allocation of elements, then the elements to be assigned will be as shown as below:

Table 5.40

B A C&D E&F G&H
I II III IV V

Table 5.41

Line design for 800 seconds

1 2 3 4 5 Effectiveness Efficiency
B A C&D E&F G&H Goal accomp- Utilization
lishment of employee
Time requi-
red per unit 800 700 820 500 800 28800/800 = 35 3620
in each Units
station

Available
time each 820 820 820 820 820 4100 Utilization =
work station 3620/4100 =
88.29%
Idle time per 20 120 0 320 20 480 Idle time =
cycle 480/4100 =
11.71%



As you have seen the second design consists of 800, as the cycle time stands
better in terms of efficiency and effectiveness compound to the first design. Employee
NOTES
idleness could be reduced tasks. Thus results in reduction in no. of the employee.

Till now it is assumed that the elemental time is deterministic but there is a
possibility that the more manual elements involved in the task you can’t get the single
elemental time, in this case usually the elemental time follows certain distribution. You
can design the workplace or product layout by considering the stochastic time elements
also.

Review Question:

1. What are the types of layout?
2. What are the techniques used in layout planning?
3. Define line balancing and why is it required?
4. What is minimum allowable time?

5.7 TIME STUDY AND WORK MEASUREMENT

Work study consists of two major phases namely method study and work
measurement. In an industry method study is applied with an objective of simplifying
the job and finding the best method of doing work. Method study paves the way to
reduce the work content due to bad working methods, bad layout, wrong selection of
tools etc. Work measurement is applied with an objective to reduce the ineffective time
and to set the standards. Usually in the industry the method study is applied to ensure
the correct methods, process etc. Then, for the best method - the measurement of the
method is carried out.

According to ILO, Work measurement is defined as follows:

“Work measurement is the application of techniques designed to estab-
lish the time for a qualified worker to carry out the job at a defined level of
performance” Now each key term requires a kind of explanation:

Who is qualified worker?

Qualified worker is one who has the requisite physical attributes, requisite in-
telligence and education, requisite skill and knowledge. With the above mentioned
qualities, he can complete the work to meet the satisfactory standards of safety, quality
and quantity.

Average worker:

All the recruited workers are qualified workers. But if you analyze their perfor-
mance. The performance may be the time taken per unit by the worker. Assume that



there are 500 workers; if you analyze their performance; the performance against the
NOTES frequency mostly follows the normal distribution.

Figure 5.19

The shaded portion represents the majority of the worker that means more
workers take time to produce one unit between t1 and t2. The no. of employee fall in
the region you can consider as the qualified average workers. The unshaded portions
in the left side represent above average performance and the unshaded portion of the
right side represent the below average performer. Since most of the workers performance
falls in the shaded area. The organization has to set the time standard for the average
workers.

Work Measurement Techniques

There are many techniques available to measure the work. The techniques are listed
below:

Figure 5.20

Procedures to conduct work measurement technique: According to ILO



SELECT : Select the job to be studied. NOTES
RECORD : Record all the relevant facts by direct observations or by means of
suitable recording technique.
EXAMINE : Examine critically the recorded elements.
MEASURE : Measure each element by time measurement.
COMPILE : Arrive at the normal time and standard time by adding allowance.
INSTALL : Implement the established standard time.

5.7.1 Time Study

Select:

First you should select the job to be studied. Situations may lead you to conduct
the time study to fix the time standard.

a) SITUATION:

1. Organization requires time standard to introduce incentive scheme
2. To determine the no. of equipment and no. of workers, you need to conduct
work measurement technique.
3. To fix the standard cost, particularly to determine the labor cost, you need time
standard.
4. To determine the selling price, tender price and to promise the delivery time
you need to have time standard.
Record:

After selecting the job you should note down the surrounding conditions like
working place, layout condition and see to that the worker adhere to the methods
suggested by the method study.

Examine:

Next you should divide the job into different elements. Suppose you have to
fix time standard for the job which involves drilling operation. The elements are:

1. Selecting the work piece and placing it in jig.
2. Tightening the screw.
3. Advancing the drill towards the work piece.
4. Drilling.
5. Withdrawing the drill from the operation.
6. Loosening the screw.
7. Removing piece from jig.
8. Removing the chips.



NOTES The purposes of the dividing jobs into different elements are to time the elements accu-
rately and also to have a distinguishable starting and ending points for each element.

Measure:

After dividing the jobs into different elements, the number of observations to
be made on each elements is to be determined. Here a trade off is to be made between
the accuracy of the result and the cost of the time / study. If you take more observa-
tions, results in more accuracy in the result. You can know now, how do you determine
the sample size statistically.

To determine the sample size statistically you have to specify the desired
accuracy and the confidence level. Suppose you need 5 % accuracy result and 95 %
confidence level. Assume that the sampling mean follows normal distribution. t is the
mean.

Figure 5.21

Of the elemental time, t is the standard error of the sampling distribution. A 95
% confidence level and ± 5% accuracy level means that the changes are at
least 95 out of 100 that the average value for the element will not be in error
when you allow more or less 5 % of true element time.

The above bold statements showed pictorially as below:



NOTES

From the above figure, you can arrive Z σ t = (accuracy level) X ( t )

At 95% confidence limit and 5% accuracy level, the Z value from the normal distribu-
tion is 1.96.
σ
t
1.96 σ t = .05 t ————— 1

You know the relationship between the population standard deviation and standard
error of the sampling distribution.

σ t =σ/ n ————— 2

Where n is the sample size, σ is the population standard deviation. Substitute the
value of in equation 1.

1.96 σ / n = .05 t

1.96 σ / .05 t = n

n = (1.96 σ / .05 t )2

Here, usually the population standard deviation is not known. In this cases is estimated
from the pilot study. Suppose the number of samples to be taken is less than pilot
study, then you need not go for further sample collection. But the number of samples to



NOTES be determined is more than the pilot study samples, then more sample need to be
collected.

This process is continued for each element. But there is a possibility that in each
element you may end up with different sample size requirements. In this case you can
fix the number of cycles for the all the elements based on the element which demands
the highest sample size requirement.

Measure:

In this phase, the elemental time is recorded using stop watch which is specifically
designed for the time study.

Rating:

While measuring the time for each element, the time study person has to take note of
the pace in which the operator does the job. The accuracy of the judgment towards
the pace of the operator depends upon the experience and training of the time study
person. Rating is defined as the workers rate of working relative to the time
study person’s concept corresponding to the standard pace.

Rating is an adjustment factor, because when a time study person choose a quali-
fied, experience, trained worker there is a possibility that the operator may belong to
the below average group of that company in this case he may take more time to com-
plete the element. So to bring the time related to the average worker, which observed
time has to be multiplied with the adjustment factor i.e. or other wise to lessen the
observed time. In this case rating will be less than 1. This case becomes opposite
while the supposed selected operator is above average worker. In this case the rating
factor takes more than 1 to have higher observed time than what is available.

Rating = Observed rating / standard rating
Standard rating = 100

Compile:

After obtaining the observed time, rating for each element Normal time is calculated.

Normal time for element = observed time for the element x rating factor

All the normal elemental times are added to arrive at the normal time for the operation.

You should not consider this time as standard time because you should add
allowances with the normal time. Because allowances are to be given to compensate
for the energy that the operator spent while doing the job and also allowances are to be
added for meeting his / her personal needs like going for toilets etc. Allowance for these
reasons is beyond his control.



Allowances are personal allowances, fatigue allowances and delay allowances. NOTES
Personal allowances for meeting his / her personal needs, fatigue allowances are al-
lowed for physical exertion. Delay allowances are due to lack of materials, random
inspection visits etc.

Now the standard time is arrived as follows:
Standard time = Normal time x 100 / [100 - % allowance]

5.7.2 Work sampling:

Work sampling is another work measurement technique for measuring the following:

• To measure & control the percentage of idle time of an activity or
productive resource
• To established the standard time
• To determine the performance index of the operator / department / unit

When do you apply work sampling technique:

• Jobs consists of longer lead time
• To measure the team work

Let us consider the first application namely to measure & control the percent-
age of idle time of an activity or productive resources.

Usually in any organization, the management bothers very much about the utili-
zation of key productive resources. Work sampling study used to identify the percent-
age of idle time and it helps the management to correct the excessive idle time. It helps
in fixing idle time control chart so that management can control the idle time percentage
of the so called critical resources every time.

Consider in a hospital X- ray equipment is very critical. The management of the
hospital wants to establish a control chart to monitor and control the idleness of the
X- ray machine.

To fix this standard, first nothing has to determine how many observations to be
made. To determine the no. of observations you should analyze the process of
conducting this study. This study is nothing but a random process. There are two out
comes of this random process, one is the X ray machine is working, and another out-
come is X- ray machine is not working. So there is every possibility that the outcome to
follow a binomial distribution. Based on the percentage of occurrence of activity (in
this case idle) ‘P’ and the no. of trails ‘n’ binomial distribution is approximated into a
normal distribution.



Figure 5.23
NOTES

σ p is the stand error of this sampling distribution
σ p = ? P (1-P)/n
n = sample size
p = percentage of occurrence of the activity to be measured.

As it is required in the Time study, here also to determine the no. of cycles to be
determined, you need to specify the two parameters namely the confidence interval and
accuracy. Assume 95% confidence limit and 10% accuracy value. ‘P’ is estimated
from the past record that p = 20% suppose ‘P’ is not available, then you should con-
duct a pilot study to determine the ‘P’ then the sample size is determined as follows:

Figure 5.24



General formula NOTES
Z . σ p = SP
Where S = accuracy level
Z . ? P (1 – p) / n = SP
n = Z2 P (1- p) / P2S2
= [Z2/S2] (1-p) / p

For 95% confidence limit and 10% accuracy value

n = [1.96/.10]2 [1 - .20/.20]
n = 1537 observation

Timing of the activity to be measured

Next you should decide to schedule the timing of the observation to be mea-
sured. For this you should generate random numbers through the computer or random
number tables. Assume that the hospital is working for 16 hours. Then generate three
digit random numbers. Working time of the hospital is given as below:

Table 5.42
Shifts Starting time Break Ending time
I 8 A.M. 12- 1 P.M. 5 P.M.
II 5 P.M. 9- 10 P.M. 2 A.M.

First digit represents the number of hours after 8 A.M. Second and third digit
help us to find the minutes. The following table shows the conversion of random num-
bers in to timing.

Table 5.43

Random Hours after start Observation Chronological
Number time order
712 7.12 3.07 3
473 4.73 12.44 Lunch hour
482 4.82 12.49 Lunch hour
116 1.16 9.01 1
311 3.11 11.07 2



NOTES You can know how do you convert the random number 712 into 3.07 AM. 7
represents the time after the starting of the factory. Namely, 8 AM then it is 3’o clock.
Second and third digit represents 1 and 2 represents 0.12 X 60 minutes 7.2 minutes,
that means the observer has to observe the position of X ray machine after 3.07 Hrs.
Similarly the no. of random numbers are converted into observer observable time.
Suppose you have got the results as shown in the table

Table 5.44

Activity No.of observation
X Ray machine is working 1227
X Ray machine is not working 310
Total Observation 1537

The percentage of idle time is calculated as follows:

‘p’ = 310/1537 = 20%

In this case you need not go for further observations. Suppose the obtained ‘p’
value is more than the allowable limit, then you need to rework to find the no. of obser-
vations to be taken. Suppose, if it comes around 1600,m then further (1600 -1537) so
63 observations has to be taken to fix the standard

− 2X .8
Now σ p = = 0.1
1537
You can fix the control limit using P and σ p value as follows:

Figure 5.25
Upper control limit P + 3 σ p = 0.23

Mean = P =2

Lower control limit P – 3 σ p = 17



This is kept as a standard and any particular day, proportion of idle time ex-
ceeds the limit you have fixed, then the reasons has to be analyzed and corrected. Thus
NOTES
the work sampling techniques used to fix the standard to monitor and control the key
resources.
Establishing Time Standard by Work sampling:
Work sampling study in addition to finding the performance index, fixing the
control limits for delay and percentage of utilization of activities, it also used for estab-
lishing the time standard for operation or for the job.
Data required to be collected:
Assume that an operator does a turning operation in a part. By work-sampling
study to determine the time standards the following information is to be collected.
The percentage of working.
The total working time.
The Number of pieces to be produced.
The average performance index.
The allowance.
The normal time per unit is calculated using the following formula.
Normal Time = (The percentage of working) (Total working time) / No. of
Pieces product) x Average performance index.
Then standard time is calculated follow as:
Standard time
= Normal time (100/100 - % Allowances)
E.g.: An operator does a turning operation in a product. An observer collected the
following information.
The percentage of working = 85%
The total working time = 480 min.
The no. of pieces produced = 300 units
The average performance index = 120
Allowances from the time study manual is arrived at 15%
Normal time = (0.85 x 480)/300 (120/100)
= 1.632 min.
Standard time = 1.632 x 100/ (100-15) = 1.632 x 100/85
= 1.92 min.
Work Sampling study to establish the performance index:
This study is applied to establish the average performance index. This average
performance index of the labour or department helps the management to control the



NOTES labour cost. Let us see how you calculate the average performance index. The work
sampling study may be carried out for many periods for data collection. Then from the
data collected you can calculate the average performance index as follows:
Average Data per period from the data collected during the study.
Average no. of pieces produced during the period
Standard time per unit.
Average working time.
Performance index = [(Average no. of pieces produced during the period x Standard
time
per piece in minutes) / Average hours worked during the
period x 60] x 100
E.g. Assume that a drilling operation is carried out on a product. The organization
interested in knowing the average performance index of the operator who does the
drilling operation. Work sampling study has been conducted for several weeks. The
average data collected from the study are given below:

Average no of pieces produced during a week = 1500
Standard time per piece per min. = 5 min.
Average hours worked during the period = 36 hours
Performance index = [500 x 5 /36 x 60] x 100
= 115 %
The average performance index helps the organization to control the labour cost.
a. LEARNING CURVE
In the case of more labour intensive mass production industry, mostly the labour
do repetitive type of job, that results in more learning due to experience of doing the
same job because of this, the time taken to produce subsequent units gets reduced
compared to the previous units. This phenomenon will not lose for longer period, at
some point of the time this learning effect ceases. After the learning effect ceases, the
time required to produce one unit or one batch will be the same irrespective of the
number of units or batches. The organization has to cash in the relevant range period,
the period in which the learning effect is there. During the learning effect period, the
standard time per unit is not constant it varies depends upon the quantity of the order
you get. Since the learning effect has impact on the standard time that is the reason to
study this concept in this section .
Learning Curve Model:
Consider the past data of a company manufacturing Aircraft components. For
a particular component the data are taken for ten situations.



Table 5.45
NOTES
Situation Quantity Production Cumulative Cumulative Cumulative
(Q) Time (tp) batches (1) Production Average Time
Time (2) (3)=(2) / (1)

1 20 164 20 164 8.2
2 30 228 50 392 7.84
3 50 340 100 732 7.32
4 80 453 180 1185 6.58
5 120 655 300 1840 6.13
6 150 767 450 2607 5.79
7 210 863 660 3470 5.26
8 260 1115 920 4595 5
9 330 1488 1250 6083 4.86
10 380 1311 1630 7394 4.37

Using (1) and (3) if you draw the curve, it appears as follows

Figure 5.26

Since the nature of the curve is exponential, the general equation for exponential curve
is
Y= a × X b
Y= cumulative average time
X= Cumulative production quantity
a = The time required to produce the first quantity
b = Exponent



NOTES ‘b’ depends upon the operating condition. In the above model, for the particular cu-
mulative production quantity what will be the cumulative average time? This could be
easily calculated provided, if you know the two parameters namely ‘a’ and ‘b’. Since
the curve is exponential in nature, if you take the logarithm for the X value and Y value
then you can get a linear curve as follows:
Log (Y) = Log (a) + b × Log(X)
Thus the curve is of the form
Y = a + bx
Where
y= Log (Y)
x= Log(X)
So using the simple regression analysis you can find the values of ‘a’ and ‘b’. For the
given data, shown in the table, let us try to estimate the regression model,

Table 5.46
log X log Y
2.995 2.104
3.401 2.059
3.912 1.99
4.382 1.884
4.787 1.813
5.01 1.756
5.347 1.66
5.56 1.609
5.799 1.581
5.94 1.513

If we solve
Figure 5.27



log Y = 2.7555 – 0.263 ln x. NOTES
Where,
R2 = Coefficient of determination = 0.985
R2adjusted = 0.983

Since R2 value is approximately 99%, which means 99% of the variations in the original
data have been captured by the estimated regression line. Thus show that the estimated
line is the best fit for the original data.

Cumulative average time
ln Y = 2.7555 – 0.203 ln X

You know that
b = ln learning curve percent / ln2.
-0.203 = ln learning curve percent / ln 2.

ln learning curve percent = ln 2 * (-0.203)
= 0.6931 * (-0.203)
= -0.1407.

Learning curve percent = Antilog of [-0.1407]
= 86.88%
= 87%.

The practical meaning of learning effect or the learning curve percent is that if
the production quantity becomes double, then corresponding required time to produce
one unit of that doubled quantity gets reduced to that extent of (1- learning curve per-
cent). This is shown in the following table for the problem discussed already.
Table 5.47

UNIT
Assume 20 units = 1 units Cumulative average time
(Y = a * b)
20 = 1 units Y = 164 (1-0.203)
40 = 2 units Y = 164 (2-0.203)
60 = 3 units Y = 164 (3-0.203)
80 = 4 units Y = 164 (4-0.203)



From the above table you can easily identify that when the production quantity
NOTES becomes double; the average time per unit gets reduced to the extent of 13%. So this
is to be taken into account while calculating the standard time for the product. Thus
way the standard time gets reduced.
Application of learning curve:
As it is mentioned already the reduced standard time could be made use of
estimating the following,
1. Learning curve concept could be applied in pricing the product.
2. This concept could be applied in standard costing.
3. This is applied in budgeting and production planning.
5.9 PRODUCTIVITY
Productivity is the ratio between the output and input. This is an index, the
output may be sales and input is the recourses utilized for getting the output. Example:
the output is sales value and the input is cost of goods sold.

If the Productivity Index is more than one, you can say that the performance of
the organization is good. If it is less than one you can say that the organization is not
doing well.

Impact of Learning Curve on the Productivity

Cost of the goods sold is the function of labour, material and overhead cost
because of learning effect the time required to produce one unit in the relevant range
decreases as the number of units produce is more. The result is less labour and variable
over heads. So the denominator decreases that leads to higher productivity. There are
many reasons for the improvement in the productivity. The increase may due to quality,
methods, materials, better management etc. in addition learning effect also have a source
for the productivity improvement.



Summary NOTES
This unit would have helped you to know the factors to be considered while
selecting a location. The kind of system design, like layout design, work measurement
standards are exposed with an objective of complete understanding the nuances of the
system design techniques. At last, you are exposed to the construction and the impact
of the learning curve on the productivity.

Review Questions:

1. List the various work measurement techniques.
2. List out the procedures to carry out the work measurement.
3. What is time study?
4. Define work sampling?
5. What is impact of learning curve on productivity?



NOTES


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