Operations Management NOTES MBA-025

UNIT-1
OPERATIONS MANAGEMENT Operations management is an area of management concerned with overseeing, designing, and controlling the process of production and redesigning business operations in the production of goods and/or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed, and effective in terms of meeting customer requirements. It is concerned with managing the process that converts inputs (in the forms of materials, labor, and energy) into outputs (in the form of goods and/or services). The relationship of operations management to senior management in commercial contexts can be compared to the relationship of line officers to highest-level senior officers in military science. The highest-level officers shape the strategy and revise it over time, while the line officers make tactical decisions in support of carrying out the strategy. In business as in military affairs, the boundaries between levels are not always distinct; tactical information dynamically informs strategy, and individual people often move between roles over time. According to the U.S. Department of Education, operations management is the field concerned with managing and directing the physical and/or technical functions of a firm or organization, particularly those relating to development, production, and manufacturing. Operations management programs typically include instruction in principles of general management, manufacturing and production systems, plant management, equipment maintenance management, production control, industrial labor relations and skilled trades supervision, strategic manufacturing policy, systems analysis, productivity analysis and cost control, and materials planning[1][2][3]. Management, including operations management, is like engineering in that it blends art with applied science. People skills, creativity, rational analysis, and knowledge of technology are all required for success.

Introduction

The very essence of any business is to cater needs of customer by providing services and goods, and in process create value for customers and solve their problems. Production and operations management talks about applying business organization and management concepts in creation of goods and services.
Production

Production is a scientific process which involves transformation of raw material (input) into desired product or service (output) by adding economic value. Production can broadly categorize into following based on technique: Production through separation: It involves desired output is achieved through separation or extraction from raw materials. A classic example of separation or extraction is Oil into various fuel products. Production by modification or improvement: It involves change in chemical and mechanical parameters of the raw material without altering physical attributes of the raw material. Annealing process (heating at high temperatures and then cooling), is example of production by modification or improvement. Production by assembly: Car production and computer are example of production by assembly.

Importance of Production Function and Production Management

Successful organizations have well defined and efficient line function and support function. Production comes under the category of line function which directly affects customer experience and there by future of organization itself. Aim of production function is to add value to product or service which will create a strong and long lasting customer relationship or association. And this can be achieved by healthy and productive association between Marketing and Production people. Marketing function people are frontline representative of the company and provide insights to real product needs of customers. An effective planning and control on production parameters to achieve or create value for customers is called production management.

Operations Management

As to deliver value for customers in products and services, it is essential for the company to do the following:
1. Identify the customer needs and convert that into a specific product or service (numbers of products required for specific period of time) 2. Based on product requirement do back-ward working to identify raw material requirements 3. Engage internal and external vendors to create supply chain for raw material and finished goods between vendor production facility customers.

Operations management captures above identified 3 points.

Production Management v/s Operations Management

A high level comparison which distinct production and operations management can be done on following characteristics:

Output: Production management deals with manufacturing of products like (computer, car, etc) while operations management cover both products and services. Usage of Output: Products like computer/car are utilized over a period of time whereas services need to be consumed immediately Classification of work: To produce products like computer/car more of capital equipment and less labour are required while services require more labour and lesser capital equipment. Customer Contact: There is no participation of customer during production whereas for services a constant contact with customer is required.

Production management and operations management both are very essential in meeting objective of an organization.

Integrated Product and Process Development - Meaning, Advantages and Key Factors
Introduction

Objective of any organization is to provide customer satisfaction by building product and services, which not only satisfy needs and want but also create value for them. This requires product design based on the customer feedback and production process which not only minimizes cost but also provides a competitive advantage. However, most organizations tend to follow conventional production method and process. However, in the global age of new technology and competition organization have to re-invent the way they cater to needs of customer, focus on specialization and customization is ever increasing. Given this scenario it is imperative for the organization to integrate technology and innovation within the framework of integrated product and process development.
Integrated Product and Process Development(IPPD)

Integrated product and process development combines the product design processes along with the process design process to create a new standard for producing competitive and high-quality products. Integration of new technologies and methods provide a complete new dimension to product design process. This process starts with defining of the requirements of products based on the customer feedback while considering the design layout and other constraints. Once the finer details are finalized, they are fed into CAD models where extensive testing and modeling are done to get the best product. With integration of production method and technology with product design, it is natural for integration of product design and process design. Therefore, integrated product and process development can be defined as a process starting from product idea to development of final product through modern technology and process management practices while minimizing cost and maximizing efficiency.
Advantages of Integrated Product and Process Development (IPPD)

Organization stands to benefit greatly from the implementation of IPPD. Some of the advantages are as follows:

Using modern technologies and implement logical steps in production design, the actual production is likely to come down, thereby reducing product delivery time. Through optimum usage of resources and using efficient process, organizations are able to minimize cost of production thus improving profitability of the organization. Since extensive uses of CAD model are employed chances are of product or design failure are greatly reduced thus reducing risk for organization. As the focus is solely in delivering value to customer, quality is paramount importance and achieved through technology and methods.

Key Factors for IPPD

There are certain factors, which can vastly improve IPPD. These factors are as follows:

IPPD success is greatly dependent on agreement on the end objective which is the successful address to customer requirements. All the stakeholders and management should be aligned to the single objective. Since this is a scientific approach, its success dependent on building up of plan, implementation of plan and constant review of the implemented plan. With implementation of modern methods and technology comes usage of modern tools and systems. This tools, and systems need to be integrated within the organization framework. Skilled manpower is another essential; therefore, organization need to make investment in human capital.

Customer is the focal point of IPPD. Therefore, constant feedback from them is essential for IPPD to be a success. Therefore, IPPD is approach design to address all the concern of modern organization in the globalized world.

Classification of Manufacturing (Production) System

A. Continuous Production- In this system the item are produced for the stocks and not for specific orders. In this system the inputs are standardized and a standard set of process and sequence of process can be adopted. Features of Continuous Production

Continuity in demand Standardize production Appropriate plant and equipment Specific material Balanced process

MASS PRODUCTION Manufacture of discrete parts or assemblies using a continuous process are called mass production. This production system is justified by very large volume of production. The machines are arranged in a line or product layout. Product and process standardization exists and all outputs follow the same path.

Characteristics of Mass Production 1. Standardization of product and process. 3. Larger volume of products. 4. Shorter production cycle time. 5. Low process inventory. 6. Production lines are perfectly balanced. 7. Flow of materials, components and parts is continuous 8. Easy production planning and control Advantages of Mass Production 1. Higher rate of production 2. Reduced production cycle time. 2. line balancing lead to higher capacity utilization 3. Requirement of less skill operator 4. Lower process inventory. 5. Low manufacturing cost per unit Limitations of Mass Production 1. Breakdown of one machine will stop an entire production line. 2. Line layout needs major change with the changes in the product design. 3. High investment in production facilities.

4. The cycle time is determined by the slowest operation.

PROCESS PRODUCTION A production process, that runs for very long periods without the start-and-stop behavior associated with intermittent production such as those used by chemical plants or refineries. High capital investments are required for highly automated facilities that use special-purpose equipment designed for high volumes of production and little or no variation in the type of outputs. Characteristics of Process Production 1. Extended form of mass production system 2. More automatic machines 3. One basic raw material is transferred into several products at several stages. 4. Less highly skilled workers required 5. More human problems foreseen 6. Highly standardized system

Intermittent Production System - Production is performed on a start-and-stop basis, such as for the manufacture of made-to-order products. The goods are manufacture especially to full fill order by customer rather than for keeping stock. Characteristics of Intermittent Production System

Production in smaller quantities Machine and equipment are aligned as requirement of process High skill labor required Larger in-process inventory Flexible

JOB SHOP PRODUCTION Job shop production are characterized by manufacturing of one or few quantity of products designed and produced as per the specification of customers within prefixed time and cost. The distinguishing feature of this is low volume and high variety of products. A job shop comprises of general purpose machines arranged into different departments. Each job demands unique technological requirements, demands processing on machines in a certain sequence. Characteristics 1. High variety of products and low volume. 2. Highly skilled operators required. 3. Large inventory of materials, tools, parts. 4. High capital investment 5. High per unit cost of production 5. Detailed planning is for required of each product, capacities for each work center and order priorities.

Advantages 1. Because of general purpose machines and facilities variety of products can be produced. 2. Operators will become more skilled and competent, as each job gives them learning opportunities. 3. Full potential of operators can be utilized. 4. Opportunity exists for creative methods and innovative ideas. Limitations 1. Higher cost because of regular changes 2. Higher inventory cost due to higher level of inventory at all levels 3. Production planning is difficult 4. Larger space requirements. BATCH PRODUCTION It is a form of manufacturing in which the job passes through the functional departments in lots or batches and each batch may have a different routing. It is characterized by the manufacture of limited number of products produced at regular intervals and stocked awaiting sales. Characteristics Highly specialized Human resource is required Highly specialized multitasking machines Machines are shared. Production in batches Production lots are based on customer demand or order.

No single sequence of operation Finished goods are heterogeneous

Advantages 1. Plant and machinery are better utilized 2. Functional specialization. 3. Lower cost per unit of production as compare to job production 4. Lower investment required 5. Flexibility in process Limitations 1. Material handling is complex due to irregular an larger flow of material 2. Production planning and control is difficult

Here is the Comparative study of different production systems

Effective Product Design

Introduction

Organization success is dependent on customer satisfaction and delight. Customer satisfaction is achieved through development of product and service, which have all attributes required by the customer. A success product or services do not only have attractive package design but should be also able to provide robust performance. Thus, product design must be practical enough for production and powerful enough to provide a competitive advantage.
Product Design

A good product design has following common features:

Utility: The product design should make product utility as per expectation of customers and provide steady performance through the product life. Aesthetics: Product aesthetics is important in success of the product. The product aesthetics is dependent on market and end customer. Producible: Product design should enable effective production of product through available production methods. Profitability: Product design should make economic sense as to deliver value to customer and sustainability to the organization. Differentiable: A good product design should enable product to be differentiate among its competition. This can be achieved by attractive packaging and also by providing additional service on the product.

Objectives of Product Design

The essence of product design is to satisfy customer and maximizes the value for the customer at minimum cost. The product or service should also be able to meet primary needs and desire of the customer. This may not require development of new product, but enhancement to existing product or service.
Stages of Product Design

Product design is a creative process which looks at all the available options and beyond. The process is can be divided into three stages:
1. First stage: His stage involves brainstorming, bringing ideas and analysis of customer and market feedback. 2. Second Stage: Idea is converted into a feasible solution to satisfy the customer expectation, using available resource and technology. 3. Third Stage: This is the last stage in which the product is introduced in the market.

Factors Affecting Product Design

A successful product design is combination factors as follows: Correct Team Selection: This is very essential to get the correct team in place which has expert designers who are not only aware and comfortable with technology but also understanding of customer expectation. Customer Involvement: Involvement of customer in product design and testing can provide insight into the direction of the project Prototyping and testing: Product design is high risk concept as it involves commitment of capital and man-power; therefore, it is imperative that extensive prototyping and testing are done with customer and market. Raw Material: It is essential that raw material to be used in the production meets the quality standards of the end product. Furthermore, procurement system needs to be in place to ensure continuous, cost effective supply. Production method and process layout: Feasibility of production method and process layout determines future success of the product. External Factors: Environmental and government regulations plays an important part in product design. And these norms are updated from time to time, so product design should have the flexibility to adapt.
Product Selection

Production selection process is done through a combination of financial analysis, risk analysis, existing product portfolio, raw material supply and pre-determined product criteria.

Process Design and Analysis

Introduction

The objective of organization is to provide service and product, which satisfy customer and create value for them. A product and service designed is based on the customer feedback and requirement of the market. Process design is where the product is broken down into parts, which further can be helpful in the actual manufacturing process. A product, for example, has attractive packaging to provide the right aesthetics plus has function and features, which provide value to customers. Process design ensures that there is smooth and continuous relationship between required output and all the intermediate process. For example, manufacturing of Air-Conditioners, process design has to be such that maximum supply is achieved during the hot months of summer when demand of the product is at the highest. So people, process and machines need to align to give continuous production throughout the year as to satisfy seasonal demand.
Process Planning

Process development for process design can be summarized through following steps:
1. Process Requirement: The very 1st step is to collect and gather information to give structure with the end objective. That is to make process requirement document highlighting various stages, risk and stakeholders for production. This will include assessment of available technology, raw material requirement, factory/plant layout and demand forecast. 2. Team Building: Once the process requirements are finalized, for each objective, a team is finalized based on skill level and experience. Function of the team is to get familiarize with the whole process. 3. Planning and Implementation: Process planning team will develop module; policies and procedure require for production, which are after required approval internal as well as external is implemented. 4. Audit: A regular audit is carried out to ensure that process thus implemented is in line and delivering value to customers. 5. End of Life: Over a course of time there may be enhancement of the product or product may get discontinued in these circumstances, process thus develop is discontinued. Production Process

Based on the nature of product and service production or conversion process can be divided into two broad categories, continuous production (assembly line, oil refinery) and intermittent production (job work, service). Production process for both manufacturing industry and service industry can be classified into broad categories based on standardization of product or service. It can range from single project

assignment like a building or bridge (manufacturing) to interior design (service) and mass production project like a car (manufacturing) to a fast-food joint (Services).
Process Design

A successful process design has to take into account the appropriateness of the process to overall organization objective. Process design requires a broad view of the whole organization and should not have a myopic outlook. And the process should deliver customer value with constant involvement of the management at various stages. In order to achieve a good process design, effective process strategy is required, which deals with a singular line items required to manufacture the end product. Effective process strategy deals with raw material procurement, customer participation, technology investment, etc. Over a period of time process design has undergone change and new concepts like Flexible Manufacturing Systems have been developed, which delivers efficient and effective production design and analysis.

Facility Location - Factors Influencing the Location

Facility Location is the right location for the manufacturing facility, it will have sufficient access to the customers, workers, transportation, etc. For commercial success, and competitive advantage following are the critical factors: Overall objective of an organization is to satisfy and delight customers with its product and services. Therefore, for an organization it becomes important to have strategy formulated around its manufacturing unit. A manufacturing unit is the place where all inputs such as raw material, equipment, skilled labors, etc. come together and manufacture products for customers. One of the most critical factors determining the success of the manufacturing unit is the location. Facility location determination is a business critical strategic decision. There are several factors, which determine the location of facility among them competition, cost and corresponding associated effects. Facility location is a scientific process utilizing various techniques.
Location Selection Factors

For a company which operates in a global environment; cost, available infrastructure, labor skill, government policies and environment are very important factors. A right location provides adequate access to customers, skilled labors, transportation, etc. A right location ensures success of the organization in current global competitive environment.

Industrialization

A geographic area becomes a focal point for various facility locations based on many factors, parameters and issues. These factors are can be divided into primary factors and secondary factors. A primary factor which leads to industrialization of a particular area for particular manufacturing of products is material, labor and presence of similar manufacturing facilities. Secondary factors are available of credit finance, communication infrastructure and insurance.
Errors in Location Selection

Facility location is critical for business continuity and success of the organization. So it is important to avoid mistakes while making selection for a location. Errors in selection can be divided into two broad categories behavioral and non-behavioral. Behavioral errors are decision made by executives of the company where personal factors are considered before success of location, for example, movement of personal establishment from hometown to new location facility. Non-behavioral errors include lack of proper investigative practice and analysis, ignoring critical factors and characteristics of the industry.
Location Strategy

The goal of an organization is customer delight for that it needs access to the customers at minimum possible cost. This is achieved by developing location strategy. Location strategy helps the company in determining product offering, market, demand forecast in different markets, best location to access customers and best manufacturing and service location.
Factors Influencing Facility Location

If the organization can configure the right location for the manufacturing facility, it will have sufficient access to the customers, workers, transportation, etc. For commercial success, and competitive advantage following are the critical factors: Customer Proximity: Facility locations are selected closer to the customer as to reduce transportation cost and decrease time in reaching the customer. Business Area: Presence of other similar manufacturing units around makes business area conducive for facility establishment. Availability of Skill Labor: Education, experience and skill of available labor are another important, which determines facility location. Free Trade Zone/Agreement: Free-trade zones promote the establishment of manufacturing facility by providing incentives in custom duties and levies. On another hand free trade agreement is among countries providing an incentive to establish business, in particular, country. Suppliers: Continuous and quality supply of the raw materials is another critical factor in determining the location of manufacturing facility.

Environmental Policy: In current globalized world pollution, control is very important, therefore understanding of environmental policy for the facility location is another critical factor.

Facility Layout - Objectives, Design and Factors Affecting the Layout

Introduction

For an organization to have an effective and efficient manufacturing unit, it is important that special attention is given to facility layout. Facility layout is an arrangement of different aspects of manufacturing in an appropriate manner as to achieve desired production results. Facility layout considers available space, final product, safety of users and facility and convenience of operations. An effective facility layout ensures that there is a smooth and steady flow of production material, equipment and manpower at minimum cost. Facility layout looks at physical allocation of space for economic activity in the plant. Therefore, main objective of the facility layout planning is to design effective workflow as to make equipment and workers more productive.
Facility Layout Objective

A model facility layout should be able to provide an ideal relationship between raw material, equipment, manpower and final product at minimal cost under safe and comfortable environment. An efficient and effective facility layout can cover following objectives:

To provide optimum space to organize equipment and facilitate movement of goods and to create safe and comfortable work environment. To promote order in production towards a single objective To reduce movement of workers, raw material and equipment To promote safety of plant as well as its workers To facilitate extension or change in the layout to accommodate new product line or technology upgradation To increase production capacity of the organization

An organization can achieve the above-mentioned objective by ensuring the following:

Better training of the workers and supervisors. Creating awareness about of health hazard and safety standards Optimum utilization of workforce and equipment Encouraging empowerment and reducing administrative and other indirect work

Factors affecting Facility Layout

Facility layout designing and implementation is influenced by various factors. These factors vary from industry to industry but influence facility layout. These factors are as follows:

The design of the facility layout should consider overall objectives set by the organization. Optimum space needs to be allocated for process and technology. A proper safety measure as to avoid mishaps. Overall management policies and future direction of the organization

Design of Facility Layout

Principles which drive design of the facility layout need to take into the consideration objective of facility layout, factors influencing facility layout and constraints of facility layout. These principles are as follows:

Flexibility: Facility layout should provide flexibility for expansion or modification. Space Utilization: Optimum space utilization reduces the time in material and people movement and promotes safety. Capital: Capital investment should be minimal when finalizing different models of facility layout.

Design Layout Techniques

There are three techniques of design layout, and they are as follows:
1. Two or Three Dimensional Templates: This technique utilizes development of a scaled-down model based on approved drawings. 2. Sequence Analysis: This technique utilizes computer technology in designing the facility layout by sequencing out all activities and then arranging them in circular or in a straight line. 3. Line Balancing: This kind of technique is used for assembly line. Types of Facility Layout

There are six types of facility layout, and they are as follows:

Line Layout Functional Layout Fixed Position Layout Cellular Technology Layout Combined Layout, and Computerized Relative Allocation of Facility Technique

Capacity Planning
The production system design planning considers input requirements, conversion process and output. After considering the forecast and long-term planning organization should undertake

capacity planning. Capacity is defined as the ability to achieve, store or produce. For an organization, capacity would be the ability of a given system to produce output within the specific time period . In operations, management capacity is referred as an amount of the input resources available to produce relative output over period of time. In general, terms capacity is referred as maximum production capacity, which can be attained within a normal working schedule. Capacity planning is essential to be determining optimum utilization of resource and plays an important role decision-making process, for example, extension of existing operations, modification to product lines, starting new products, etc.
Strategic Capacity Planning

A technique used to identify and measure overall capacity of production is referred to as strategic capacity planning. Strategic capacity planning is utilized for capital intensive resource like plant, machinery, labor, etc. Strategic capacity planning is essential as it helps the organization in meeting the future requirements of the organization. Planning ensures that operating cost are maintained at a minimum possible level without affecting the quality. It ensures the organization remain competitive and can achieve the long-term growth plan.
Capacity Planning Classification

Capacity planning based on the timeline is classified into three main categories long range, medium range and short range. Long Term Capacity: Long range capacity of an organization is dependent on various other capacities like design capacity, production capacity, sustainable capacity and effective capacity. Design capacity is the maximum output possible as indicated by equipment manufacturer under ideal working condition. Production capacity is the maximum output possible from equipment under normal working condition or day. Sustainable capacity is the maximum production level achievable in realistic work condition and considering normal machine breakdown, maintenance, etc. Effective capacity is the optimum production level under pre-defined job and work-schedules, normal machine breakdown, maintenance, etc. Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3 years of a time frame is referred to as medium term capacity planning.

Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or quarterly time frame is referred to as short term capacity planning.
Goal of Capacity Planning

The ultimate goal of capacity planning is to meet the current and future level of the requirement at a minimal wastage. The three types of capacity planning based on goal are lead capacity planning, lag strategy planning and match strategy planning.
Factors Affecting Capacity Planning

Effective capacity planning is dependent upon factors like production facility (layout, design, and location), product line or matrix, production technology, human capital (job design, compensation), operational structure (scheduling, quality assurance) and external structure ( policy, safety regulations)
Forecasting v/s Capacity Planning

There would be a scenario where capacity planning done on a basis of forecasting may not exactly match. For example, there could be a scenario where demand is more than production capacity; in this situation, a company needs to fulfill its requirement by buying from outside. If demand is equal to production capacity; company is in a position to use its production capacity to the fullest. If the demand is less than the production capacity, company can choose to reduce the production or share it output with other manufacturers.

What is Aggregate Planning ? - Importance and its Strategies

Introduction

An organization can finalize its business plans on the recommendation of demand forecast. Once business plans are ready, an organization can do backward working from the final sales unit to raw materials required. Thus annual and quarterly plans are broken down into labor, raw material, working capital, etc. requirements over a medium-range period (6 months to 18 months). This process of working out production requirements for a medium range is called aggregate planning.
Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization as it looks to balance long-term strategic planning with short term production success. Following factors are critical before an aggregate planning process can actually start;

A complete information is required about available production facility and raw materials. A solid demand forecast covering the medium-range period Financial planning surrounding the production cost which includes raw material, labor, inventory planning, etc. Organization policy around labor management, quality management, etc.

For aggregate planning to be a success, following inputs are required;

An aggregate demand forecast for the relevant period Evaluation of all the available means to manage capacity planning like sub-contracting, outsourcing, etc. Existing operational status of workforce (number, skill set, etc.), inventory level and production efficiency

Aggregate planning will ensure that organization can plan for workforce level, inventory level and production rate in line with its strategic goal and objective.
Aggregate planning as an Operational Tool

Aggregate planning helps achieve balance between operation goal, financial goal and overall strategic objective of the organization. It serves as a platform to manage capacity and demand planning.

In a scenario where demand is not matching the capacity, an organization can try to balance both by pricing, promotion, order management and new demand creation. In scenario where capacity is not matching demand, an organization can try to balance the both by various alternatives such as.

Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until demand decrease/increase. Including overtime as part of scheduling there by creating additional capacity. Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrator.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving long-term objectives of the organization. Aggregate planning helps in:

Achieving financial goals by reducing overall variable cost and improving the bottom line Maximum utilization of the available production facility Provide customer delight by matching demand and reducing wait time for customers Reduce investment in inventory stocking Able to meet scheduling goals there by creating a happy and satisfied work force

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for organization to choose from. They are as follows.
1. Level Strategy

As the name suggests, level strategy looks to maintain a steady production rate and workforce level. In this strategy, organization requires a robust forecast demand as to increase or decrease production in anticipation of lower or higher customer demand. Advantage of level strategy is steady workforce. Disadvantage of level strategy is high inventory and increase back logs.
2. Chase Strategy

As the name suggests, chase strategy looks to dynamically match demand with production. Advantage of chase strategy is lower inventory levels and back logs. Disadvantage is lower productivity, quality and depressed work force.
3. Hybrid Strategy

As the name suggests, hybrid strategy looks to balance between level strategy and chase strategy.

UNIT-2
Forecasting
Introduction

Forecasting is the estimation of the value of a variable (or set of variables) at some future point in time. In this note we will consider some methods for forecasting. A forecasting exercise is usually carried out in order to provide an aid to decision-making and in planning the future. Typically all such exercises work on the premise that if we can predict what the future will be like we can modify our behaviour now to be in a better position, than we otherwise would have been, when the future arrives. Applications for forecasting include:

inventory control/production planning - forecasting the demand for a product enables us to control the stock of raw materials and finished goods, plan the production schedule, etc investment policy - forecasting financial information such as interest rates, exchange rates, share prices, the price of gold, etc. This is an area in which no one has yet developed a reliable (consistently accurate) forecasting technique (or at least if they have they haven't told anybody!) economic policy - forecasting economic information such as the growth in the economy, unemployment, the inflation rate, etc is vital both to government and business in planning for the future.

Think for a moment, suppose the good fairy appeared before you and told you that because of your kindness, virtue and chastity (well - it is a fairy tale) they had decided to grant you three forecasts. Which three things in your personal/business life would you most like to forecast? Personally I would choose (in decreasing order of importance):

the date of my death the winning numbers on the next UK national lottery the winning numbers on the UK national lottery after that one

As you can see from my list some forecasts have life or death consequences. Also it is clear that to make certain forecasts, e.g. the date of my death, we could (in the absence of the good fairy to help us) collect some data to enable a more informed, and hence hopefully more accurate, forecast to be made. For example we might look at life expectancy for middle-aged UK male academics (non-smoker, drinker, never exercises). We might also conduct medical tests. The point to emphasise here is that collecting relevant data may lead to a better forecast. Of course it may not, I could have been run over by a car the day after this written and hence be dead already. Indeed on a personal note I think (nay forecast) that companies offering Web (digital) immortality will be a big business growth area in the early part of the 21 st century. Remember you saw it here first!

Types of forecasting problems/methods

One way of classifying forecasting problems is to consider the timescale involved in the forecast i.e. how far forward into the future we are trying to forecast. Short, medium and long-term are the usual categories but the actual meaning of each will vary according to the situation that is being studied, e.g. in forecasting energy demand in order to construct power stations 5-10 years would be short-term and 50 years would be long-term, whilst in forecasting consumer demand in many business situations up to 6 months would be short-term and over a couple of years longterm. The basic reason for the above classification is that different forecasting methods apply in each situation, e.g. a forecasting method that is appropriate for forecasting sales next month (a shortterm forecast) would probably be an inappropriate method for forecasting sales in five years time (a long-term forecast). In particular note here that the use of numbers (data) to which quantitative techniques are applied typically varies from very high for short-term forecasting to very low for long-term forecasting when we are dealing with business situations. Forecasting methods can be classified into several different categories:

qualitative methods - where there is no formal mathematical model, often because the data available is not thought to be representative of the future (long-term forecasting) regression methods - an extension of linear regression where a variable is thought to be linearly related to a number of other independent variables multiple equation methods - where there are a number of dependent variables that interact with each other through a series of equations (as in economic models) time series methods - where we have a single variable that changes with time and whose future values are related in some way to its past values.

We shall consider each of these methods in turn.

Qualitative methods

Methods of this type are primarily used in situations where there is judged to be no relevant past data (numbers) on which a forecast can be based and typically concern long-term forecasting. One approach of this kind is the Delphi technique. The ancient Greeks had a very logical approach to forecasting and thought that the best people to ask about the future were supernatural beings, gods. At the oracle at Delphi in ancient Greece questions to the gods were answered through the medium of a woman over fifty who lived apart from her husband and dressed in a maiden's clothes. If you wanted your question answered you had to:

provide some cake;

provide an animal for sacrifice; and bathe with the medium in a spring.

After this the medium would sit on a tripod in a basement room in the temple, chew laurel leaves and answer your question (often in ambiguous verse). It is therefore legitimate to ask whether, in the depths of a basement room somewhere, there is a laurel leaf chewing government servant who is employed to forecast economic growth, election success, etc. Perhaps there is! Reflect for a moment, do you believe that making forecasts in the manner used at Delphi leads to accurate forecasts or not? Recent scientific investigation (New Scientist, 1st September 2001) indicates that the medium may have been "high" as a result of inhaling hydrocarbon fumes, specifically ethylene, emanating from a geological fault underneath the temple. Nowadays the Delphi technique has a different meaning. It involves asking a body of experts to arrive at a consensus opinion as to what the future holds. Underlying the idea of using experts is the belief that their view of the future will be better than that of non-experts (such as people chosen at random in the street). Consider - what types of experts would you choose if you were trying to forecast what the world will be like in 50 years time? In a Delphi study the experts are all consulted separately to avoid some of the bias that might result were they all brought together, e.g. domination by a strong willed individual, divergent (but valid) views not being expressed for fear of humiliation. A typical question might be "In what year (if ever) do you expect automated rapid transit to have become common in major cities in Europe?". The answers are assembled in the form of a distribution of years, with comments attached, and recirculated to provide revised estimates. This process is repeated until a consensus view emerges. Plainly such a method has many deficiencies but on the other hand is there a better way of getting a view of the future if we lack the relevant data (numbers) which would be needed if we were to apply some of the more quantitative techniques? As an example of this there was a Delphi study published in Science Journal in October 1967 which tried to look forward into the future (now, of course, we are many years past 1967 so we can see how well they forecast). Many questions were asked as to when something might happen and a selection of these questions are given below. For each question we give the upper quartile answer, the time by which 75% of the experts believed something would have happened.

Automated rapid transit, upper quartile answer 1985, i.e. 75% of the experts asked in 1967 thought that by 1985 there would be widespread automated rapid transit in most urban areas, tell that to anyone who lives in London! Widespread use of sophisticated teaching machines, upper quartile answer 1990, i.e. 75% of the experts asked in 1967 thought that by 1990 there would be widespread use of sophisticated teaching machines, tell that to anyone who works in a UK school/university

Widespread use of robot services, upper quartile answer 1995, i.e. 75% of the experts asked in 1967 thought that by 1995 there would be widespread use of robot services

It is clear that these forecasts, at least, were very inaccurate. Indeed looking over the full set of forecasts many of the 25 forecasts made (about all aspects of life/society in the future after 1967) were wildly inaccurate. This brings us to our first key point, we are interested in the difference between the original forecast and the final outcome, i.e. in forecast error. However, back in 1967 when this Delphi study was done, what other alternative approach did we have if we wished to answer these questions? In many respects the issue we need address with regard to forecasting is not whether a particular method gives good (accurate) forecasts but whether it is the best available method - if it is then what choice do we have about using it? This brings us to our second key point, we need to use the most appropriate (best) forecasting method, even if we know that (historically) it does not give accurate forecasts.
Regression methods

You have probably already met linear regression where a straight line of the form Y = a + bX is fitted to data. It is possible to extend the method to deal with more than one independent variable X. Suppose we have k independent variables X1, X2, ..., Xk then we can fit the regression line Y = a + b1X1 + b2X2 + ... + bkXk This extension to the basic linear regression technique is known as multiple regression. Plainly knowing the regression line enables us to forecast Y given values for the X i i=1,2,...,k.

Multiple equation methods

Methods of this type are frequently used in economic modelling (econometrics) where there are many dependent variables that interact with each other via a series of equations, the form of which is given by economic theory. This is an important point. Economic theory gives us some insight into the basic structural relationships between variables. The precise numeric relationship between variables must often be deduced by examining data. As an example consider the following simple model, let:

X = personal income Y = personal spending I = personal investment r = interest rate

From economic theory suppose that we have

Y = a1 + b1(X-a1) (spending a linear function of disposable income) I = a2 + b2r (investment linearly related to the interest rate)

and the balancing equation

X=Y+I (income = spending + investment)

where a1,a2,b1,b2 are constants. Here we have 3 equations in 4 variables (X,Y,I,r) and so to solve these equations one of the variables must be given a value. The variable so chosen is known as an exogenous variable because its value is determined outside the system of equations whilst the remaining variables are called endogenous variables as their values are determined within the system of equations, e.g. in our model we might regard the interest rate r as the exogenous variable and be interested in how X, Y and I change as we alter r. Usually the constants a1,a2,b1,b2 are not known exactly and must be estimated from data (a complex procedure). Note too that these constants will probably be different for different groups of people, e.g. urban/rural, men/women, single/married, etc. An example of an econometric model of this type is the UK Treasury model of the economy which contains many variables (each with a time subscript), complicated equations, and is used to look at the effect of interest rate changes, tax changes, oil price movements, etc. For example the UK Treasury equation [New Scientist, 31st October 1993] to predict consumer spending looks like: DlogeCt = -0.018 + 0.0623DDlogeUt - 0.00448logeCt-1 + 0.004256logeYt-1 + 0.0014336loge[(NFWt-1 + GPWt-1)/(Pt-1Yt-1)] + etc where:

t = time period (quarter) in question D = change in variable between this quarter and last quarter C = consumer non-durable spending for the quarter in question U = unemployment rate Y = real disposable income adjusted for inflation loss on financial assets P = inflation index for total consumer spending NFW = net financial assets of the personal sector GPW = gross physical wealth of the personal sector

If you click here you will find a model that enables you to play with the UK economy. Historically econometric techniques/methods tend to have large forecast errors when forecasting national economies in the medium-term. However recall one of our key points above: we need to

use the most appropriate (best) forecasting method, even if we know that (historically) it does not give accurate forecasts. It can be argued that such techniques are the most appropriate/best way of making economic forecasts.

Time series methods/analysis

Methods of this type are concerned with a variable that changes with time and which can be said to depend only upon the current time and the previous values that it took (i.e. not dependent on any other variables or external factors). If Yt is the value of the variable at time t then the equation for Yt is Yt = f(Yt-1, Yt-2, ..., Y0, t) i.e. the value of the variable at time t is purely some function of its previous values and time, no other variables/factors are of relevance. The purpose of time series analysis is to discover the nature of the function f and hence allow us to forecast values for Y t. Time series methods are especially good for short-term forecasting where, within reason, the past behaviour of a particular variable is a good indicator of its future behaviour, at least in the shortterm. The typical example here is short-term demand forecasting. Note the difference between demand and sales - demand is what customers want - sales is what we sell, and the two may be different. In graphical terms the plot of Yt against t is as shown below.

The purpose of the analysis is to discern some relationship between the Y t values observed so far in order to enable us to forecast future Yt values. We shall deal with two techniques for time series analysis in detail and briefly mention a more sophisticated method.

Moving average

One, very simple, method for time series forecasting is to take a moving average (also known as weighted moving average). The moving average (mt) over the last L periods ending in period t is calculated by taking the average of the values for the periods t-L+1, t-L+2, t-L+3, ..., t-1, t so that mt = [Yt-L+1 + Yt-L+2 + Yt-L+3 + ... + Yt-1 + Yt]/L To forecast using the moving average we say that the forecast for all periods beyond t is just mt (although we usually only forecast for one period ahead, updating the moving average as the actual observation for that period becomes available).

Consider the following example: the demand for a product for 6 months is shown below calculate the three month moving average for each month and forecast the demand for month 7.
Month 1 2 3 4 5 6 Demand (100's) 42 41 43 38 35 37

Now we cannot calculate a three month moving average until we have at least 3 observations i.e. it is only possible to calculate such an average from month 3 onward. The moving average for month 3 is given by: m3 = (42 + 41 + 43)/3 = 42 and the moving average for the other months is given by: m4 = (41 + 43 + 38)/3 = 40.7 m5 = (43 + 38 + 35)/3 = 38.7 m6 = (38 + 35 + 37)/3 = 36.7 We use m6 as the forecast for month 7. Hence the demand forecast for month 7 is 3670 units. The package input for this problem is shown below.

The output from the package for a three month moving average is shown below.

Choosing between forecasts

One problem with this forecast is simple - how good is it? For example we could also produce a demand forecast for month 7 using a two month moving average. This would give the following: m2 = (42 + 41)/2 = 41.5 m3 = (41 + 43)/2 = 42 m4 = (43 + 38)/2 = 40.5 m5 = (38 + 35)/2 = 36.5 m6 = (35 + 37)/2 = 36 Would this forecast (m6 = 3600 units) be better than our current demand forecast of 3670 units? Rather than attempt to guess which forecast is better we can approach the problem logically. In fact, as will become apparent below, we already have sufficient information to make a logical choice between forecasts if we look at that information appropriately. In an attempt to decide how good a forecast is we have the following logic. Consider the three month moving average given above and pretend for a moment that we had only demand data for the first three months, then we would calculate the moving average for month 3 (m3) as 42 (see above). This would be our forecast for month 4. But in month 4 the outcome is actually 38, so we have a difference (error) defined by:

error = forecast-outcome = 42-38 = 4

Note here that we could equally well define error as outcome-forecast. That would just change the sign of the errors, not their absolute values. Indeed note here that if you inspect the package output you will see that it does just that.

In month 4 we have a forecast for month 5 of m4 = 40.7 but an outcome for month 5 of 35 leading to an error of 40.7-35 = 5.7. In month 5 we have a forecast for month 6 of m5 = 38.7 but an outcome for month 6 of 37 leading to an error of 38.7-37 = 1.7. Hence we can construct the table below:
Month 1 2 3 4 5 6 7 Demand (100's) 42 41 43 38 35 37 ? Forecast - - - m3 m4 m5 m6 - - - 42 40.7 38.7 36.7 Error - - - 4 5.7 1.7 ?

Constructing the same table for the two month moving average we have:
Month 1 2 3 4 5 6 7 Demand (100's) 42 41 43 38 35 37 ? Forecast - - m2 m3 m 4 m5 m6 - - 41.5 42 40.5 36.5 36 Error - - -1.5 4 5.5 -0.5 ?

Comparing these two tables we can see that the error terms give us a measure of how good the forecasting methods (two or three month moving average) would have been had we used them to forecast one period (month) ahead on the historical data that we have. In an ideal world we would like a forecasting method for which all the errors are zero, this would give us confidence (probably a lot of confidence) that our forecast for month 7 is likely to be correct. Plainly, in the real world, we are hardly likely to get a situation where all the errors are zero. It is genuinely difficult to look at (as in this case) two series of error terms and compare them. It is much easier if we take some function of the error terms, i.e. reduce each series to a single (easily grasped) number. One suitable function for deciding how accurate a forecasting method has been is:

average squared error

The logic here is that by squaring errors we remove the sign (+ or -) and discriminate against large errors (being resigned to small errors but being adverse to large errors). Ideally average squared error should be zero (i.e. a perfect forecast). In any event we prefer the forecasting method that gives the lowest average squared error. We have that for the three month moving average:

average squared error = [4 + 5.7 + 1.7]/3 = 17.13

and for the two month moving average:

average squared error = [(-1.5) + 4 + 5.5 + (-0.5)]/4 = 12.19

The lower of these two figures is associated with the two month moving average and so we prefer that forecasting method (and hence prefer the forecast of 3600 for month 7 produced by the two month moving average). Average squared error is known technically as the mean squared deviation (MSD) or mean squared error (MSE). Note here that we have actually done more than distinguish between two different forecasts (i.e. between two month and three month moving average). We now have a criteria for distinguishing between forecasts, however they are generated - namely we prefer the forecast generated by the technique with the lowest MSD (historically the most accurate forecasting technique on the data had we applied it consistently across time). This is important as we know that even our simple package contains many different methods for time series forecasting - as below.

Question - do you think that one of the above forecasting methods ALWAYS gives better results than the others or not?

Single exponential smoothing

One disadvantage of using moving averages for forecasting is that in calculating the average all the observations are given equal weight (namely 1/L), whereas we would expect the more recent observations to be a better indicator of the future (and accordingly ought to be given greater weight). Also in moving averages we only use recent observations, perhaps we should take into account all previous observations.

One technique known as exponential smoothing (or, more accurately, single exponential smoothing) gives greater weight to more recent observations and takes into account all previous observations. Define a constant where 0 <= <= 1 then the (single) exponentially smoothed moving average for period t (Mt say) is given by Mt = Yt + (1- )Yt-1 + (1- )Yt-2 + (1- )Yt-3 + ... So you can see here that the exponentially smoothed moving average takes into account all of the previous observations, compare the moving average above where only a few of the previous observations were taken into account. The above equation is difficult to use numerically but note that: Mt = Yt + (1- )[Yt-1 + (1- )Yt-2 + (1- )Yt-3 + ...] i.e. Mt = Yt + (1- )Mt-1 Hence the exponentially smoothed moving average for period t is a linear combination of the current value (Yt) and the previous exponentially smoothed moving average (Mt-1). The constant is called the smoothing constant and the value of reflects the weight given to the current observation (Yt) in calculating the exponentially smoothed moving average Mt for period t (which is the forecast for period t+1). For example if = 0.2 then this indicates that 20% of the weight in generating forecasts is assigned to the most recent observation and the remaining 80% to previous observations. Note here that Mt = Yt + (1- )Mt-1 can also be written Mt = Mt-1 - (Mt-1 - Yt) or current forecast = previous forecast - (error in previous forecast) so exponential smoothing can be viewed as a forecast continually updated by the forecast error just made. Consider the following example: for the demand data given in the previous section calculate the exponentially smoothed moving average for values of the smoothing constant = 0.2 and 0.9. We have the following for = 0.2. M1 = Y1 = 42 (we always start with M1 = Y1) M2 = 0.2Y2 + 0.8M1 = 0.2(41) + 0.8(42) = 41.80 M3 = 0.2Y3 + 0.8M2 = 0.2(43) + 0.8(41.80) = 42.04 M4 = 0.2Y4 + 0.8M3 = 0.2(38) + 0.8(42.04) = 41.23 M5 = 0.2Y5 + 0.8M4 = 0.2(35) + 0.8(41.23) = 39.98 M6 = 0.2Y6 + 0.8M5 = 0.2(37) + 0.8(39.98) = 39.38 Note here that it is usually sufficient to just work to two or three decimal places when doing exponential smoothing. We use M6 as the forecast for month 7, i.e. the forecast for month 7 is 3938 units.

We have the following for = 0.9. M1 = Y1 = 42 M2 = 0.9Y2 + 0.1M1 = 0.9(41) + 0.1(42) = 41.10 M3 = 0.9Y3 + 0.1M2 = 0.9(43) + 0.1(41.10) = 42.81 M4 = 0.9Y4 + 0.1M3 = 0.9(38) + 0.1(42.81) = 38.48 M5 = 0.9Y5 + 0.1M4 = 0.9(35) + 0.1(38.48) = 35.35 M6 = 0.9Y6 + 0.1M5 = 0.9(37) + 0.1(35.35) = 36.84 As before M6 is the forecast for month 7, i.e. 3684 units. The package output for =0.2 is shown below.

The package output for =0.9 is shown below.

In order to decide the best value of (from the two values of 0.2 and 0.9 considered) we choose the value associated with the lowest MSD (as above for moving averages). For =0.2 we have that

MSD = [(42-41)+(41.80-43)+(42.04-38)+(41.23-35)+(39.98- 37)]/5 = 13.29

For =0.9 we have that

MSD = [(42-41)+(41.10-43)+(42.81-38)+(38.48-35)+(35.35- 37)]/5 = 8.52

Note here that these MSD values agree (to within rounding errors) with the MSD values given in the package output above. Hence, in this case, =0.9 appears to give better forecasts than =0.2 as it has a smaller value of MSD. Above we used MSD to reduce a series of error terms to an easily grasped single number. In fact functions other than MSD such as:

MAD (mean absolute deviation) = average | error |

and

bias (mean error) = average error, also know as Cumulative Forecast Error

exist which can also be used to reduce a series of error terms to a single number so as to judge how good a forecast is.

For example, as can be seen in the package outputs above, the package gives a number of such functions, defined as:

In fact methods are available which enable the optimal value of the smoothing constant (i.e. the value of which minimises the chosen criteria of forecast accuracy, such as mean squared deviation (MSD)) to be easily determined. This can be seen below where the package has calculated that the value of which minimises MSD is =0.86 (approximately).

Note here that the package can be used to plot both the data and the forecasts as generated by the method chosen. Below we show this for the output above (associated with the value of which minimises MSD of 0.86.

Note here that the choice of criterion can have a large effect on the value of e.g. for our example the value of which minimises MAD is =0.59 (approximately) and the value of which minimises bias is =1.0 (approximately). To illustrate the change in MAD, bias and MSD as changes we graph below MAD and bias against the smoothing constant ,

and below MSD against .

Below we graph the value of the forecast against . One particular point to note is that, for this example, for a relatively wide range of values for the forecast is stable (e.g. for 0.60 <= <= 1.00 the forecast lies between 36.75 and 37.00). This can be seen below - the curve is "flat" for high values.

Note here that the above graphs imply that in finding a good value for the smoothing constant it is not usually necessary to calculate to a very high degree of accuracy (e.g. not to within 0.001 for example).

More advanced time series forecasting

Time series forecasting methods more advanced than those considered in our simple package do exist. These are based on AutoRegressive Integrated Moving Average (ARIMA) models. Essentially these assume that the time series has been generated by a probability process with future values related to past values, as well as to past forecast errors. To apply ARIMA models the time series needs to be stationary. A stationary time series is one whose statistical properties such as mean, variance and autocorrelation are constant over time. If the initial time series is not stationary it may be that some function of the time series, e.g. taking the differences between successive values, is stationary.

Materials and Resource Requirement Planning

success of an operation department of any organization is dependent upon an efficient production plan. One of the key essential of a production plan is material and manufacturing planning system. Material requirement planning plays a pivotal role in assembly-line production. Material requirement planning is a system based approach, which organizes all required production material. Material requirement planning is an information system for production planning based on inventory management. The basic components of material planning are:

Material planning provides information that all the required raw material and products are available for production. Material planning ensures that inventory level are maintained at its minimum levels. But also ensures that material and product are available whenever production is scheduled, therefore, helping in matching demand and supply. Material planning provides information of production planning and scheduling but also provides information around dispatch and stocking.

Objective of Material Requirement Planning

Material requirement planning is processed which production planning and inventory control system, and its three objectives are as follows:

Primary objective is to ensure that material and components are available for production, and final products are ready for dispatch. Another primary objective is not only to maintain minimum inventory but also ensure right quantity of material is available at the right time to produce right quantity of final products. Another primary objective is to ensure planning of all manufacturing processes, this scheduling of different job works as to minimize or remove any kind of idle time for machine and workers.

Advantages and Disadvantages of Material Resource Planning

As with every system based process, material resource planning also has its advantages and disadvantages, and they are as follows:
Advantages of Material Resource Planning

It helps in maintain minimum inventory levels. With minimum inventory levels, material planning also reduces associated costs. Material tracking becomes easy and ensures that economic order quantity is achieved for all lot orders. Material planning smoothens capacity utilization and allocates correct time to products as per demand forecast.

Disadvantages of Material Resource Planning

Material planning is highly dependent on inputs it receives from other systems or department. If input information is not correct than output for material planning will also be incorrect. Material planning requires maintenance of robust database with all information pertaining inventory records, production schedule, etc. without which output again would be incorrect. Material planning system requires proper training for end users, as to get maximum out of the system. Material resource planning system requires substantial investment of time and capital.

Material Resource Planning Inter dependency of Business Function

Material planning not only benefits operation department but is also beneficial to the other department of organization. They are as follows:

Material planning is useful in determining cash flow requirement based on material requirements and final dispatch schedules. It helps procurement team in scheduling purchase of necessary material. It helps the sales team in determining delivery dates for final products.

Implementation of Material Resource Planning

Implementation and success of material resource planning dependent on following factors:

Acceptability of by top management about advantages and benefits Proper training and participation of all workers and personnel Precision and accuracy of input data for accurate and reliable results

UNIT-3

Production Planning and Control

Introduction

For efficient, effective and economical operation in a manufacturing unit of an organization, it is essential to integrate the production planning and control system. Production planning and subsequent production control follow adaption of product design and finalization of a production process. Production planning and control address a fundamental problem of low productivity, inventory management and resource utilization. Production planning is required for scheduling, dispatch, inspection, quality management, inventory management, supply management and equipment management. Production control ensures that production team can achieve required production target, optimum utilization of resources, quality management and cost savings. Planning and control are an essential ingredient for success of an operation unit. The benefits of production planning and control are as follows:

It ensures that optimum utilization of production capacity is achieved, by proper scheduling of the machine items which reduces the idle time as well as over use. It ensures that inventory level are maintained at optimum levels at all time, i.e. there is no overstocking or under-stocking. It also ensures that production time is kept at optimum level and thereby increasing the turnover time. Since it overlooks all aspects of production, quality of final product is always maintained.

Production Planning

Production planning is one part of production planning and control dealing with basic concepts of what to produce, when to produce, how much to produce, etc. It involves taking a long-term view at overall production planning. Therefore, objectives of production planning are as follows:

To ensure right quantity and quality of raw material, equipment, etc. are available during times of production. To ensure capacity utilization is in tune with forecast demand at all the time.

A well thought production planning ensures that overall production process is streamlined providing following benefits:

Organization can deliver a product in a timely and regular manner. Supplier are informed will in advance for the requirement of raw materials. It reduces investment in inventory. It reduces overall production cost by driving in efficiency.

Production planning takes care of two basic str ategies product planning and process planning. Production planning is done at three different time dependent levels i.e. long-range planning dealing with facility planning, capital investment, location planning, etc.; medium-range planning deals with demand forecast and capacity planning and lastly short term planning dealing with day to day operations.
Production Control

Production control looks to utilize different type of control techniques to achieve optimum performance out of the production system as to achieve overall production planning targets. Therefore, objectives of production control are as follows:

Regulate inventory management Organize the production schedules Optimum utilization of resources and production process

The advantages of robust production control are as follows:

Ensure a smooth flow of all production processes Ensure production cost savings thereby improving the bottom line Control wastage of resources It maintains standard of quality through the production life cycle.

Production control cannot be same across all the organization. Production control is dependent upon the following factors:

Nature of production( job oriented, service oriented, etc.) Nature of operation Size of operation

Production planning and control are essential for customer delight and overall success of an organization.

Operations Scheduling and Workplace Planning

Introduction

Scheduling and workplace planning is the final step in operation planning and design. Operations scheduling and workplace planning is implemented during transformation of input to output. Scheduling deals with production of required quantity of product within the required time frame. Workplace planning deals with allocation of resources with priority to work job with first delivery date.
Operations Planning

Scheduling deals with both time allocations as well resource allocation for production of required quantity. Operations planning is done as part of short term planning. High level objective of operations planning is to decide the best way of allocation of labor and equipment as to find balance between time and use of limited resources within the organization. In modern age of competition and global market importance is given to Just In Time and the lean production concepts. This has led to importance of operations scheduling. There are three important task performed by operations scheduling:

Allocation of resources Workforce scheduling Production equipment scheduling

Operations planning ensures that proper workflow is established by ensuring allocation of job on appropriate machines before the advent of production activities. Scheduling is production timetable highlighting sequence of job, timing and quantity for allocation of resources as to help an organization in cash flow planning. Therefore, there are three main objectives of production scheduling:

Due importance to delivery date and avoiding delays in completion Reducing time of job on machines Proper utilization of work centers

Operation scheduling is arrived at base on the following principles.

Ensure continuous job schedule End to end completion of job Remove the bottleneck Ensure feedback as to make adjustment Skill set of workforce Enhancement of product and process Scheduling helps in capacity planning as to reduce bottlenecks. Scheduling helps in streamlining order production based on due date. Scheduling helps in sequencing of various job works.

Scheduling is done with two approaches, and they are as follows:

Forward scheduling is type of scheduling where the planner considers order received date as the starting point for forward planning of all the activities. Backward scheduling is type of scheduling where the planner considers the order delivery date as the starting point and does backward planning of all activities.

Workplace Planning

Workplace planning ensures optimum productivity by ensuring proper utilization of limited resources and priorities job order at different work centers . Workforce control ensures that maximum output is achieved from machines, raw material and workforce. All production-related information is recorded as to establish input-output control as to achieve overall efficiency and optimum utilization of raw materials. The main objectives of workforce planning and control are as follows:

Priorities various job orders Record data related to process quantities Providing status of workplace orders to control panel Record output data to monitor capacity control Provide measurement of efficiency and productivity

Therefore operations scheduling and workplace planning play an pivotal role in success of an organization.

Waiting Line (Queue) Management

Introduction

The waiting line or queue management is a critical part of service industry. It deals with issue of treatment of customers in sense reduce wait time and improvement of service. Queue management deals with cases where the customer arrival is random; therefore, service rendered to them is also random. A service organization can reduce cost and thus improve profitability by efficient queue management. A cost is associated with customer waiting in line and there is cost associated with adding new counters to reduce service time. Queue management looks to address this trade off and offer solutions to management.
Waiting Line Problems

Waiting in line is common phenomena in daily life, for example, banks have customers in line to get service of teller, cars queue up for re-filling, workers line up to access machine to complete their job. Therefore, management needs to work on formulae, which will reduce wait time and create delighted customers without incurring an additional cost . Generally, queue management problems are trade offs situation between cost of time spent in waiting v/s cost of additional capacity or machinery.
Finite and Infinite Population

In a waiting line scenario, there are cases of finite population of customers and infinite population of customers. A finite population scenario considers a fixed or limited size of customers visiting the service counter. It also assumes that customer once served will leave the line thus reducing overall population of customers. However finite population model also considers a scenario where the customer after getting served will re-visit the service counter for re-service, leading to increase in finite population. An infinite population theory looks at a scenario where subtractions and addition of customer do not impact overall workability of the model.
Queuing System

To solve problems related to queue management it is important to understand characteristics of the queue. Some common queue situations are waiting in line for service in super-market or banks, waiting for results from computer and waiting in line for bus or commuter rail. General

premise of queue theory is that there are limited resources for a given population of customers and addition of a new service line will increase the cost aspect to the business. A typical queue system has the following: Arrival Process: As the name suggests an arrival process look at different components of customer arrival. Customer arrival could in single, batch or bulk, arrival as distribution of time, arrival in finite population or infinite population. Service Mechanism: this looks at available resources for customer service, queue structure to avail the service and preemption of service. Underlining assumption here is that service time of customers is independent of arrival to the queue. Queue Characteristics: this looks at selection of customers from the queue for service. Generally, customer selection is through first come first served method, random or last in first out. As a result, customers leave if the queue is long, customer leave if they have waited too long or switch to faster serving queue.
Service Configuration

Another aspect of waiting line management is the service configuration. There are four types of service configuration, and they are as follows:

Single Channel, Single Phase (e.g. ship yards and car wash) Single Channel, Multi Phase (e.g. bank tellers) Multi Channel, Single Phase (e.g. separate queue of man and women for single ticket window) Multi Channel, Multi Phase (e.g. Laundromat, where option of several washers and several dryers)

Inventory Management
In any business or organization, all functions are interlinked and connected to each other and are often overlapping. Some key aspects like supply chain management, logistics and inventory form the backbone of the business delivery function. Therefore these functions are extremely important to marketing managers as well as finance controllers. Inventory management is a very important function that determines the health of the supply chain as well as the impacts the financial health of the balance sheet . Every organization constantly strives to maintain optimum inventory to be able to meet its requirements and avoid over or under inventory that can impact the financial figures. Inventory is always dynamic. Inventory management requires constant and careful evaluation of external and internal factors and control through planning and review. Most of the organizations have a separate department or job function called inventory planners who continuously monitor,

control and review inventory and interface with production, procurement and finance departments.
Defining Inventory

Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time. Any organization which is into production, trading, sale and service of a product will necessarily hold stock of various physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may be noted that the organizations hold inventories for various reasons, which include speculative purposes, functional purposes, physical necessities etc. From the above definition the following points stand out with reference to inventory:

All organizations engaged in production or sale of products hold inventory in one form or other. Inventory can be in complete state or incomplete state. Inventory is held to facilitate future consumption, sale or further processing/value addition. All inventoried resources have economic value and can be considered as assets of the organization.

Different Types of Inventory

Inventory of materials occurs at various stages and departments of an organization. A manufacturing organization holds inventory of raw materials and consumables required for production. It also holds inventory of semi-finished goods at various stages in the plant with various departments. Finished goods inventory is held at plant, FG Stores, distribution centers etc. Further both raw materials and finished goods those that are in transit at various locations also form a part of inventory depending upon who owns the inventory at the particular juncture. Finished goods inventory is held by the organization at various stocking points or with dealers and stockiest until it reaches the market and end customers. Besides Raw materials and finished goods, organizations also hold inventories of spare parts to service the products. Defective products, defective parts and scrap also forms a part of inventory as long as these items are inventoried in the books of the company and have economic value.
Types of Inventory by Function

INPUT Raw Materials Consumables required for processing. Eg : Fuel, Stationary, Bolts & Nuts etc. required in manufacturing

PROCESS Work In Process Semi Finished Production in various stages, lying with various departments like Production, WIP Stores, QC, Final Assembly, Paint Shop, Packing, Outbound Store etc. Production Waste and Scrap Rejections and Defectives

OUTPUT Finished Goods Finished Goods at Distribution Centers through out Supply Chain

Maintenance Items/Consumables Packing Materials

Finished Goods in transit

Finished Goods with Stockiest and Dealers Spare Parts Stocks & Bought Out items Defectives, Rejects and Sales Returns Repaired Stock and Parts Sales Promotion & Sample Stocks

Local purchased Items required for production

Need for Inventory Management - Why do Companies hold Inventories ?

Inventory is a necessary evil that every organization would have to maintain for various purposes. Optimum inventory management is the goal of every inventory planner. Over inventory or under inventory both cause financial impact and health of the business as well as

effect business opportunities. Inventory holding is resorted to by organizations as hedge against various external and internal factors, as precaution, as opportunity, as a need and for speculative purposes.
Reasons why organizations maintain Raw Material Inventory

Most of the organizations have raw material inventory warehouses attached to the production facilities where raw materials, consumables and packing materials are stored and issue for production on JIT basis. The reasons for holding inventories can vary from case to case basis.
1. Meet variation in Production Demand

Production plan changes in response to the sales, estimates, orders and stocking patterns. Accordingly the demand for raw material supply for production varies with the product plan in terms of specific SKU as well as batch quantities. Holding inventories at a nearby warehouse helps issue the required quantity and item to production just in time.
2. Cater to Cyclical and Seasonal Demand

Market demand and supplies are seasonal depending upon various factors like seasons; festivals etc and past sales data help companies to anticipate a huge surge of demand in the market well in advance. Accordingly they stock up raw materials and hold inventories to be able to increase production and rush supplies to the market to meet the increased demand.
3. Economies of Scale in Procurement

Buying raw materials in larger lot and holding inventory is found to be cheaper for the company than buying frequent small lots. In such cases one buys in bulk and holds inventories at the plant warehouse.
4. Take advantage of Price Increase and Quantity Discounts

If there is a price increase expected few months down the line due to changes in demand and supply in the national or international market, impact of taxes and budgets etc, the companys tend to buy raw materials in advance and hold stocks as a hedge against increased costs. Companies resort to buying in bulk and holding raw material inventories to take advantage of the quantity discounts offered by the supplier. In such cases the savings on account of the discount enjoyed would be substantially higher that of inventory carrying cost.

5. Reduce Transit Cost and Transit Times

In case of raw materials being imported from a foreign country or from a far away vendor within the country, one can save a lot in terms of transportation cost buy buying in bulk and transporting as a container load or a full truck load. Part shipments can be costlier. In terms of transit time too, transit time for full container shipment or a full truck load is direct and faster unlike part shipment load where the freight forwarder waits for other loads to fill the container which can take several weeks. There could be a lot of factors resulting in shipping delays and transportation too, which can hamper the supply chain forcing companies to hold safety stock of raw material inventories.
6. Long Lead and High demand items need to be held in Inventory

Often raw material supplies from vendors have long lead running into several months. Coupled with this if the particular item is in high demand and short supply one can expect disruption of supplies. In such cases it is safer to hold inventories and have control. Holding inventories help the companies remain independent and free from vendor dependencies.

Factors affecting Inventory Operations

Inventory management operations are increasingly being outsourced to third party service providers, thereby ensuring that the investments and costs in managing the inventories are reduced. This is a welcome trend provided the companies focus on overseeing and reviewing both inventory management as well as inventory operations periodically to ensure proper controls are maintained and processes followed. Inventory management entails study of data on movement of inventory, its demand pattern, supply cycles, sales cycles etc. Active management calls for continuous analysis and management of inventory items to target at lean m inventory Management. Inventory Management function is carried out by the inventory planners in the company in close co ordination with procurement, supply chain logistics and finance, besides marketing departments. The efficiencies of inventory management are largely dependent upon the skills and knowledge of the inventory planners, the focus and involvement of management and the management policies coupled with the inventory management system. However inventory operations management is not under the control of the inventory management team but rests with the third party service providers. In this section of the article we

aim to uncover few of the critical areas and action points on the part of operations that can impact the inventory of the company. 1. Unskilled Labor and Staff: Inventory operations management is a process-oriented operation. Every task and action required to be carried out by the operatives will impact the inventory as well as the delivery lead times and other parameters. Therefore knowledge of what one is required to do and the effect of the action should be known to the operatives who are on the shop floor. For Example: If an operative is given a put away task, he should know how and where he should put away the pallet, how to scan the pallet ID and confirm it back to the system. Besides he should also know the impact of not completing any of these actions or doing some thing wrong. The impact his action will have on the system as well as physical inventory should be clear to the operative. Secondly different inventory items would have to be handled differently. Operatives who are carrying out the task should know why and what is required to be done. They should also know the consequences of not following the process. A pallet might have to be scanned for the pallet id and put away on a floor location, while a carton might have to be opened and scanned for individual boxes inside and put away into a bin. The operatives should be trained on the entire process and understand why and what he is doing. The WMS systems are quite operational and task intensive. Where the warehouses are being managed on RF based systems, the operatives should be able to manage the RF readers, understand how to access and complete transactions through the RF Guns. Often it is noticed that when the warehouse operations are being managed by a third party service provider and the principle customer is not present at the location, the quality of staff and operatives is compromised and people are not given adequate training before being allocated their responsibility. Such situations can lead to inventory discrepancies. 2. In adequate SOP, Training and emphasis on processes compliance: When a inventory management project kicks off at a third party warehouse location, both the principle customer as well as the third party service provider work on the project and setup basic processes, document them in Standard Operating Procedures and conduct training as a part of the project management methodology. However over a period of time, the nature of business requirements changes, resulting in change in the operating processes. These do not get documented in terms of amendments and the SOPs become outdated. Thereafter one finds that the new comers who are introduced on the shop floor are required to learn the processes by working along with others where as no training or SOP document is provided to him for reference. With the result they often have half-baked knowledge of the processes and carry on tasks not knowing why they are doing and what they are required to do. This situation is very dangerous for the health of the inventory and it shows slackness in the attitude of the third party service provider. Continuation of such a situation will lead

to bad housekeeping, inventory mismatches, discrepancies and also affect the service delivery. If left unchecked can lead to theft, pilferage and misuse of inventory. In any third party owned inventory operations warehouse, the principle client should ensure that periodic review and training is conducted for all staff. Inventory operations should be periodically reviewed and inventory counts and audits carried out regularly.

Inventory Management and Just In Time (JIT)

Introduction

Supply-chain management plays a pivotal role in ensuring goods, and services are delivered on time to customers. Within supply-chain management, inventory management plays a central role. Inventory involves various cost, investment, space management, etc. Also there are chances that stored inventory may get damaged or get stolen adding to extra cost to the company. Therefore, it is important to have a robust inventory management for an organization.
Inventory Holding

For an organization, it becomes important to hold inventory for the following reason:

Inventory holding ensures that operation delay do not impact delivery to customers. It also ensures that company can meet spikes or fluctuation in product demand. It ensures that there is flexibility in production. It ensures that any delay by suppliers do not affect working of the company.

Considering the above inventory holding objectives, next step for the company is to make inventory related decision. Inventory decision involves two major considerations, first is the order quantity of the raw material and second is timing for placing those orders.
Inventory Models

Inventory management is based upon two basic models i.e independent demand inventory model and dependent demand inventory model.

Independent Demand Inventory Model talks about raw material demand which is dependent upon prevailing market conditions and is not correlated to any raw material currently used by the organization. Finished goods is an appropriate example for independent demand inventory model.

Dependent Demand Inventory Model talks about raw material demand which are integral parts of production and form important part of material resource planning. For example, demand for raw material can be established as the basis of demand of finished products.

Inventory Costs

There are three broad categories of cost associated with inventory; holding cost, ordering cost and set up cost.

Holding costs are carrying cost associated with inventory over a period of time. They include insurance, warehousing, interest, extra head-count, etc. Ordering costs are cost associated with purchasing of raw material and receiving raw materials. They include forms, order processing, office maintenance supplies and staff associated with ordering. Set Up Cost are cost associated with installation of machine for production. They include cleanup cost, re-tooling cost and adjustment cost.

Inventory management ensures that organizations are able to minimize cost and maximize profit.
Just In Time (JIT)

Just In Time is set of strategic activities, which are formulated to achieve maximum production with minimal maintenance of inventory. JIT as philosophy is applicable to various types of organization but on implement side it is more relevant with manufacturing operations. For JIT system to be successful, there are two critical elements, attitude of workers/management and practice.
Fundamentals of JIT

JIT is based on the following fundamentals:

JIT manufacturing and ordering Elimination of waste Lean management Signal System (Kanban) Push-Pull System

With the above fundamentals in place, JIT delivers the following:

Continuous improvement of production and order processing. Elimination of non-value added activities and procedures. Simplification and advancement of the existing systems. Creation of safety environment and ensuring total quality management. Creation crossed skilled workers.

The INVENTORY CONTROL

simplest language, inventory control may be said to be a planned method whereby investment in inventories held in stock is maintained in such a manner that it ensures proper and smooth flow of materials needed for production operations as 'well sales, while at the same time, the total costs of investment in inventories is kept at a minimum. From the above definition it follows that a comprehensive inventory control system must be closely coordinated with other planning and control activities, such as, (planning, capital budgeting, sales forecasting, including production planning, production scheduling and control. This impinges on a wide range of operations, operating decisions and policies for production, sales and finance. The finance controller of a company regards inventory as a necessary evil, since it drains off cash which could he used elsewhere to earn some profits. The marketing manager always wants enough of ready stock of finished goods inventories in order to give better customer service to ensure the company's goodwill and would not like to see a sales opportunity lost for want of saleable ready stock. The production manager does not want an out-of. Stock condition for which production might be held up. It will, therefore, he seen that everyone- has some objectives which arc connecting in nature. The basic problem is, therefore, to strike a balance between operating efficiency and the costs of investment and other associated costs with large inventories, with the object to keep the basic conflicts at the minimum while optimizing the inventory holding. TYPES OF INVENTORIES Inventories may be classified as under:(1) Raw materials and production inventories: These are raw - materials, parts and components which enter into the product Direct during the production process and generally form part of the product. (2) In-process inventories: Semi-finished parts, work-in-process and partly finished products formed at various stages of production. (3) M.R.O. Inventories: Maintenance, repairs and operating supplies which are consumed during the production process and generally do not form part of the prod.uct itself (e.g.POL, Petroleum products like petrol, kerosene, diesels, various oils and ubricants, machinery and plant spares, tools, jibs and fixtures, etc.) (4) Finished goods inventories: Complete finished products ready for sale. Inventories may also be classified according to the function they serve, such as, (a) Movement and transit inventories: This arises because of the time necessary to move stocks from one place to another. The average amount can be determined mathematically thus-I=S x T Where, S represents the average rate of sales (say, weekly or monthly average)and T the transit time required to move from one place to another, and I the movement inventory needed. As for example, if it takes three weeks to move materials to aware house from The plant and if the warehouse sells 110 per week, then the average inventory needed will be 110 units x 3 weeks = 330 units. In fact, when a unit of finishedproduct is manufactured and ready for sale, it must remain idle for three weeks for movement to warehouse. Therefore, the plant stock on an average must be equal to three weeks' sale in transit.

(b) Lot-size inventories: In order to keep costs of buying, receipt, inspection and transport and handing charge slow, larger quantities are bought than are necessary for immediate use .It is common practice to buy some raw materials in large quantities in order to Avail of quantity discounts. ( c)Fluctuation inventories: In order to cushion against unpredictable demands these are maintained, butthey are not absolutely essential in the sense that such stocks are always sun economical. Rather than taking what they can get, general practice of serving the customer better is the reason for holding such type of inventories. (d) Anticipation inventories: Such inventories are carried out to meet predictable changes in, demand. Incase of seasonal variations in the availability of some raw materials, it is of inventory and also to some extent economical to build up stocks where consumption pattern may be reasonably uniform and predictable. of the types of inventories discussed above, the Lot-size, Fluctuation and Anticipation Inventories may be said to he 'Organization Inventories'. As more of these, basic types of inventories are carried into stock, less coordination and planning are required. Also less clerical and administrative efforts are needed and greater economies can be obtained in handling, manufacturing and dispatching .But the difficulty is that gains are not directly proportional to the size of inventories maintained. As the size increases, even if they are efficiently maintained, handled and properly located, gains from additional stock become less and less prominent The cost of warehousing, obsolescence and capital costs associated with maintenance of large quantities grow at a faster rate than the inventories themselves. As such, the basic problem is to strike a balance between the increase in costs and the decline in return from holding additional inventories .Striking a balance in a complex business situation through intuition alone is not easy. Costs, and to be sure, the balancing of opposite costs, lie at the heart of all inventory control problems, for which cost analyses are necessary to which we shall turn in this chapter now .As has already been said that even a typically medium-size industrial organization may use 10,000 to 15,000 different items which are carried in Inventory. Initial planning and subsequent control of such inventories can only be accomplished on the basis at knowledge about them. Consequently, the starting point in inventory management and control is the development of a stores catalogue, which is more or less comprehensive and complete in all respects . All inventories should be fully and carefully described and a code number should be allotted. Similar items should be grouped together and standard codification should be adopted.

ABC ANALYSIS OR SELECTIVE INVENTORY CONTROL (SIC) 80 per cent of the income and wealth were concentrated in the hands of about20 per cent of the population. This 80-20 relationship also holds good in most cases of inventories where it may be found that about 20 per cent of the total number of items are responsible for about 80 per cent of the value. The idea of studying such, inventory value is to find out 'where the money lies'. AS this '20per cent of items, 80 per cent of value' rule holds good in many inventory situations, high value items need more stringent control, which may be termed' A' class items, and the remaining

ones can be classified as 'B' and 'c' class items according to descending order of value. Thus, the principle of graduated control may be affected and the degree of control may be equated with the frequency of reviews. Controlling tightly means reviewing frequently, and frequency in turn tends to determine the order quantity, A items would be reviewed frequently, and because of their high value they will be ordered in small quantities in order to keep the inventory investment minimum. B items will be renewed less frequently and C items still less, The following graphical illustration will make the meaning of ABC Analysis more clear, which is based on selective control technique. CLASS A B C TOTAL NO OF ITEMS IN USE (%) 20 30 50 100 VALUE (%) 80 15 5 100

Inventory Classification - ABC Classification, Advantages & Disadvantages

Inventory is a necessary evil in any organization engaged in production, sale or trading of products. Inventory is held in various forms including Raw Materials, Semi Finished Goods, Finished Goods and Spares. Every unit of inventory has an economic value and is considered an asset of the organization irrespective of where the inventory is located or in which form it is available. Even scrap has residual economic value attached to it. Depending upon the nature of business, the inventory holding patterns may vary. While in some cases the inventory may be very high in value, in some other cases inventory may be very high in volumes and number of SKU. Inventory may be help physically at the manufacturing locations or in a third party warehouse location.
Inventory Controllers are engaged in managing Inventory. Inventory management involves several critical areas. Primary focus of inventory controllers is to maintain optimum inventory levels and determine order/replenishment schedules and quantities. They try to balance inventory all the time and maintain optimum levels to avoid excess inventory or lower inventory, which can cause damage to the business. ABC Classification

Inventory in any organization can run in thousands of part numbers or classifications and millions of part numbers in quantity. Therefore inventory is required to be classified with some logic to be able to manage the same.

In most of the organizations inventory is categorized according to ABC Classification Method, which is based on pareto principle. Here the inventory is classified based on the value of the units. The principle applied here is based on 80/20 principles. Accordingly the classification can be as under: A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend. B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend. C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend. The above is only an illustration and the actual numbers as well as percentages can vary. Example: Table of Inventory Listing by Dollar Usage Percentage.
Item Annual Usage in No. Units 5,000 1,500 10,000 6,000 7,500 6,000 5,000 4,500 7,000 3,000 Unit Cost$ 1.50 8.00 10.50 2.00 0.50 13.60 0.75 1.25 2.50 2.00 Usage in Dollars 7,500 12,000 105,000 12,000 3,750 81,000 3,750 5,625 17,500 6,000 $254,725 Percentage of Total Dollar Usage 2.9% 4.7% 41.2% 4.7% 1.5% 32.0% 1.5% 2.2% 6.9% 2.4% 100.0%

1 2 3 4 5 6 7 8 9 10 Total

Advantages of ABC Classification

This kind of categorization of inventory helps one manage the entire volume and assign relative priority to the right category. For Example A Class items are the high value items. Hence one is able to monitor the inventory of this category closely to ensure the inventory level is maintained at optimum levels for any excess inventory can have huge adverse impact in terms of overall value. A Category Items: Helps one identify these stocks as high value items and ensure tight control in terms of process control, physical security as well as audit frequency. It helps the managers and inventory planners to maintain accurate records and draw managements attention to the issue on hand to facilitate instant decision-making. B Category Items: These can be given second priority with lesser frequency of review and less tightly controls with adequate documentation, audit controls in place. C Category Items: Can be managed with basic and simple records. Inventory quantities can be larger with very few periodic reviews.

Example: Take the case of a Computer Manufacturing Plant; the various items of inventory can be broadly classified as under:
SKU Description Classification of Inventory A Class Remarks

Processor Chips

Kept under High Value Storage/Asset Tracking / Access Control required Kept under High Value Storage/Asset Tracking / Access Control required Kept under High Value Storage/Asset Tracking / Access Control required Kept under High Value Storage/Asset Tracking / Access Control required Normal Storage / Access Control Required Normal Procedures Normal Procedures Normal Storage / Access Control Required

Memory Chips

A Class

Hard Disk / Storage Media Software License

A Class

A Class

Disk Drives Cabinet / Case Battery Pack Monitor

A Class B Class B Class A Class

Keyboard Training Manuals Mouse Stickers Screws & Nuts Power Cord Starter Assembly PackInstructions

B Class C Class B Class C Class C Class C Class C Class

Normal Procedures Minimal Procedures Normal Procedures Minimal Procedures Minimal Procedures Minimal Procedures Minimal Procedures

Disadvantages

Inventory Classification does not reflect the frequency of movement of SKU and hence can mislead controllers. B & C Categories can often get neglected and pile in huge stocks or susceptible to loss, pilferage, slackness in record control etc.

THE TWO-BIN SYSTEM One of the earliest systems of stock control is two-bin system, which is a simple method of control exercised by two simple rules. One is when the order should be placed, and the other is what quantity should be covered. The following diagram shows this simple method. The bins contain, say, mild-steel bolts and nuts. The bolts and nuts are issued from the first bin as and when required, and as soon as the first bin is empty, more bolts and nuts are ordered. The replenishment arrives just when the second bin is empty. While delivery is awaited, the nuts and bolts from the second bin are issued. When the delivery Arrives, then both the bins are again filled in.BIN NO 1 BIN NO 2Use till Bin no 1 is empty Use Bin No 2 when Bin no 1 is empty Such a method is appropriate only when consumption rate is constant, that is to say, it is a deterministic system. We know from our experience what quantity of bolts and nuts are necessary for a given period as well as we know their rate of consumption.

M AX MINI SYSTEM

Under this method, maximum level and minimum level are fixed. Re-ordering is done after a period of review and order or re-order is placed when the quantity touches a certain level. Suppose you have an item in inventory for which maximum is fixed at 1,000and minimum quantity to be held in stock is 250units. Previous experience shows that a safety stock of 250 units is quite sufficient. If during the past two months consumption rate has been 300 units per month on an average, and if the lead time is taken to be two months time, then you will run out soon, if either delivery is not received just after two months or if during the subsequent months consumption rate increases. The weakness of this system is:(a) Stock levels are actually fixed at lower levels since managers have no time to study inventory levels of individual items.(b) Reorder points and safety levels once fixed are not frequently changed after study.(c) Delay in postings makes the records useless for control as often even a critical item can be held up for want of posting which otherwise would have been shown that the re-order point has been touched. Thus, we may conclude that in any inventory management and control system, control is exercised Through various levels, and the order point and the order quantity. :i. Maximum level ii. Minimum level iii.Order level or re-order level or the order point iv.Order quantity There are two basic control systems: 1. Periodic review system. 2. Fixed order quantity system.

1.Periodic review system: This is a time-bound system which requires periodic reviews of the stock-levels of all items. Here, period of review is fixed either at three months, six months or once in a year, when requirements of all items are worked out ,afresh, and the quantity varies. This system works well for production raw materials and components for which long lead times are necessary.

2.Fixed order quantity system: Under this system, order quantity is fixed but the time varies. This system recognizes the fact that each item in inventory possesses its own characteristics and optimum order quantity requirements. Designing of this system requires consideration of many factors, such as, price, usage ratend other pertinent factors. Maximum and minimum levels are determined for each inventory item and an order or re-order point is established in between the two levels. The order point is computed in such a manner that by the time new supplies is received, the stock balance will fall to the minimum and it will be replenished again to the maximum The major advantages are: (i) Each item can be procured at the most economical price and quantity,(ii)

Purchasing and inventory control people automatically pay attention to the items when they need it. Thus, in order to devise a good inventory control system, we have to consider the following: (a) What to order. (b) When and how much. The first involves planning with due regard to production and marketing requirements. The second has two aspects: (i) Order point (ii) (ii) Order or re-order quantity Order quantity will be discussed along with safety stock or buffer stock since subtle influence of time in transit on .total inventory is closely related to the safety stock provisioning to create an impact on inventory control. At this point, it would be better to draw a distinction between Accounting costs and operational costs. The former is based on historical cost concept used for financial reporting and the latter is, by and large, used for day-to-day decision-making and insensitive to small variations. Accounting system typically distinguishes three types of costs, viz., direct cost, indirect cost and overheads. As against the principles and consistency of accounting costs, the definition of costs in an inventory system may vary from time to time, depending upon the length of time being planned and other circumstances. However, the objective underlying inventory control is to minimize the total cost of procurement, storage ,handling, distribution and other charges. Economic ordering starts with ananalysis of these various components of costs. (iii) ECONOMIC ORDER QUANTITY OR EOQ FORMULA The inventory costs may be broadly divided components :A -PROCUREMENT COST (this includes administrative and provisioning costs.) B-. STORAGE. COST (this includes carrying, handling, etc.) C.- STOCK-OUT COST (this may be laid down by management according to itspolicy.) The first two may be broken down into a number of components. Typically they are: A.(i) Requisitioning (ii) Order-placing Processing and progress-chasing (iv) Receiving, checking and inspection B.(i) Interest on capital (ii) Expected return on capital (imputed cost)(Hi) Warehousing (this includes insurance, lighting and other maintenancecosts).A point of minimum cost is reached at which the ordering cost will be justequal to the carrying cost so that the tota1 cost is minimum at that point In other words, neither excess quantity of material is ordered, nor too fr6quentlytoo many orders are placed for the same material during a period of time. We assume, however, that no stock-out or idle-time cost has to be accounted for.Also, where

quantity discounts are allowed on lot-purchases or where there are price-breaks, this will not hold true. In such cases, linear relationship of the unit price with purchase quantity breaks down and distorts the formula given below as we shall presently see, When unit price is same regardless of the quantity purchased, we can use the following formula when we find that the order quantity varies in proportion to the square root of the demand. These are indices given on scientific basis to order quantity, keeping in view position states of inventories, viz., the set of costs, ordering cost and carrying cost. This is known as Economic Order Quantity

(EOQ) or Square Root Formula developed by R.H Wilso .EOQ = (2Qa) C Where Q= Annual requirements in units (estimated demands) a = Unit cost of placing an order (in Rupees) c = Annual carrying cost (this is generally expressed in percent) In determining the EOQ, this mathematical model has assumed that the costs of managing. an inventory item consist solely of two parts: (1) Ordering cost and (2) Carrying cost, ignoring the idle time or stock-out cost, which cannot bealtogether ruled out.

Ordering cost: This is the additional cost of placing an order or re-order. Its characteristic is that it is independent of the order size. It increases with the number of orders and is not influenced by the size of the order. Carrying cost: On the other hand, the characteristic of the carrying cost is that it increases with the volume of inventory irrespective of the number of orders. It is linearly related with the quantum of inventory. The cost of inventory carrying is generally expressed as an annual percentage of the unit purchase cost. From the above graph, it will thus be noticed that the above two costs are opposite in nature. The former varies with the number of orders and the latter varies directly with the volume of inventory. Thus, if purchases are made frequently and in small lots, carrying cost can be kept low, but the order or re-order cost will be higher. It will, therefore, be appreciated that when the slope of the order cost curve meets the rising carrying cost curve, that is to say, where the marginal ordering cost is equal to the marginal carrying cost, the total

minimum cost point is reached. In other words, this is the point where we hold the optimum inventory meet this point the order cost curve begins to rise again. Limitations of the EOQ formula However, the very restrictive nature of the assumptions made in the EOQ formula restrains the use of the formula in many cases of practical inventory situations. The cost-analyses on the basis Of which the formula has been developed are merely notional rather .than actual in some cases. In practice, unit cost of purchase of an item varies, lead times are uncertain and also requirements or demands of inventory items are not perfectly predictable in advance. Rate of consumption varies greatly in many cases. As such, the Application of the formula often becomes difficult and complicated. Price Breaks or Quantity Discounts. In many cases, quantity discounts are allowed by firms in order to boost their sales and it becomes preferable to purchase in some bulk quantities to avail of the discounts. In such cases, it is only worthwhile to calculate the EOQ for an item in order to see that if it is really profitable to order in EOQ quantity. This will also mean that the usage rate must be steady. Again, if the, unit cost of purchase fluctuates greatly from time to time, then the EOQ for that particular item will also not hold good. Lead time variation The formula was' also developed on the basis of invariant lead time, that is, the time interval between placement of an order and actual replenishment will not vary for all practical purposes. Often this supposition is invalid, because schedule of deliveries varies for many reasons. Moreover, some items have longer lead times than others and even for the same items, it will differ from one lot purchase to another. For this reason also, it is difficult to use EOQ for many times Order or re-order Point Thus, while EOQ tells us something about how much to order, it tells us almost nothing about when to order or re-order, for, this depends upon the level of inventory in question. The order or reorder point should be set at such a level that the stock on hand plus on orders should last till fresh supplies are received. This will require ascertaining the usage rate of that particular item. If the rate of consumption greatly varies and there is an upward surge in the consumption pattern suddenly, this will lead ultimately to stock-out condition. For this reason only, for many items additional stocks have to be maintained in order to meet unanticipated demand due to variation in usage rate due to normal consumption and during lead times.

SAFETY OR BUFFE R STOCK Some additional stocks are always provided in order to meet contingencies of unanticipated, demand due to both (a) lead time variations usage pattern during lead time. This additional stock, safety or buffer stock as it is called will, however, depend upon the service level desired on the one hand, and, the risk of stock-out, on the other. If the rate of consumption remains fairly constant, the suppliers' delivery times do not vary, there are no rejections during inspection, it would have been a simple matter to place a new order when ever stock on hand reaches the quantity equal to the lead time usage. A hundred percent service level can be easily .attained in

such circumstances when there will be no occasion for stock-outs as fresh supplies would always be arriving before the existing stock out. The EOQ was developed on the presumption that such an ideal situation holds true and the average inventory holding during the twelve-month period is 1/2during the year. So, the inventory level is equal to Q or EOQ intermediately Upon receipt of the order quantity and is reduced at a constant rate of depletion until it reaches a zero-level again. But such an ideal situation is hard to come across. In practice, demands vary greatly, supplies are uncertain, prices do not remain constant and a host of other variables and seen circumstances and difficulties are experienced, which may lead to occasional stock out conditions. On the other hand, unnecessary apprehension about stock shortages leads to holding of a building up of huge stock piles. So, an inventory control system should be provided that can absorb the shocks or bumps up and down, the system itself not being too costly at the same time. In designing such a system, we have already stressed the importance of service level desired by management. Some additional stocks are kept on hand always in reserve to avoid temporary shortages or stock-out conditions. As more and more safety or buffer stocks are provided, this eliminates the changes of shortages and means holding of unnecessary additional inventories. But when less are provided, this means there are chances of occasional stock-outs and management has to run the risk or production hold ups. Thus the provisioning of safety stock assumes great importance in the face of uncertainties. The following illustration depicts the situation. The problem of determining safety stock of buffer stock is a comparatively simple matter, where the rate of consumption fairly constant or can be accurately forecast. At this point mill be appreciated that variations in future consumption are not only cause of stock-outs. The variations in lead time use ages and related uncertainties of delivery time must also be taken into account, which make the calculation of safety stock a complicated affair. It involves numerous repeated trials or tests of the combined effect of variations in demand and in lead time use ages to arrive at an ideal safety stock level. FSN/VED analysis A-B-C Analysis was evolved on the principle of graduated control stringency. The degree of control was equated with the frequency of reviews of a given inventory record. Controlling tightly means reviewing frequently, which tends to determine order quantity. A-items would be reviewed frequently and order in small quantities to keep inventory investment low. B-items less, C-items still less. But this approach does not take into account the fact that sometimes a lowvalued small item of critical nature needs as much attention as high-valued A-class item, so that inventories also need to be classified according to Vital, Essential and Desirable (V -E-D), which in essence means that stress is more on importance rather than on value. . Again, inventories may also be classified according to Fast-moving, Slow-moving and Nonmoving items in order to see the rapidity of their use and to weed out the unnecessary ones. This is aimed at keeping the total inventory size down and reduces investment. Thus, selective control may be exerted under different types of classification according to necessity. A single-type approach may not prove fruitful under all circumstances.

UNIT-4
Introduction to Quality and Total Quality Management (TQM)
Quality Definitions

According to industry and users quality has many definitions some of them are as follows:

Customer Oriented Industry: Meeting customer expectation Manufacturing Industry: Meeting technical specification and working with no defects Product Oriented Industry: Product has additional value compared to similar products available in the market. Value Oriented Industry: Product is perfect combination of features in the given price band.

Accordingly, Customers look at quality in different areas as follows:

Airline Industry: On time, low cost, comfortable Railways: On time, low cost, secure and safe Postal Service: Accurate delivery and cost effective

Quality is a very subjective thing. Sometimes it is easily visible, sometimes you require an expert to tell the difference. There are various definitions of quality given by various authorities organizations. Every definition gives a unique perspective about quality. ISO 9000: "Degree to which a set of inherent characteristics fulfills requirements." The standard defines requirement as need or expectation. Six Sigma: "Number of defects per million opportunities." Philip B. Crosby: "Conformance to requirements." The requirements may not fully represent customer expectations; Crosby treats this as a separate problem.

These definitions talk about quality meeting pre-set criteria. It is all about conforming to known requirements. Following definitions talk about consumers perspective. And a consumers top priority is always to get some functionality from the product. Joseph M. Juran: "Fitness for use." Fitness is defined by the customer. Noriaki Kano and others, present a two-dimensional model of quality: "must-be quality" and "attract Definitions Robert Pirsig: "The result of care." Genichi Taguchi: a. "Uniformity around a target value." b. "The loss a product imposes on society after it is shipped." Taguchi talks about lack of variations against set parameters. As attaining 100% perfection is impossible in real life situations, so Taguchi talks about getting as closer to perfection as possible. Moreover, Taguchi harps on the issue of cost to the society in the long run if there is bad quality in a product or service. Let us take an example of a spurious quality electric iron. The iron may lead to spoiling the cloth, higher electricity bill, and even electric shock. American Society for Quality: "A subjective term for which each person has his or her own definition. In technical usage, quality can have two meanings: a. The characteristics of a product or service that bear on its ability to satisfy stated or implied needs; b. A product or service free of deficiencies." The definition by American Society talks about subjectivity of quality. For a rural person traveling in a rickety bus can mean comfort, while for the jet-set people an AC taxi will give the bare minimum comfort. Quality of a product or service refers to the perception of the degree to which the product or service meets the customer's expectations. Quality has no specific meaning unless related to a specific function and/or object. Quality is a perceptual, conditional and somewhat subjective attribute. In totality quality means conformance to pre-set criteria as well as ability to satisfy the end user. If a pen is unable to write then the diamond studded on it is of no use. Dimensions of Quality Performance: Basic Functional Aspect Features: Cant give core benefit

Aesthetics: Look, finish, etc. Reliability: Lineage Durability: Optimum life span Serviceability: Ease of getting serviced Safety: Air Bags User-friendliness: Windows Vs Linux Customizability: Lens attachment Nikon Environmental-friendliness: Less pollution from CFC free refrigerators. The top most dimension of quality is the functionality of a product. For example a mixer grinder should be able to grind the hard turmeric, otherwise three speed gear box is of no use to the end user. Features are like add on benefits, like fancy attachments provided with the mixer grinder. A pleasant look will always add value to the product. If the mixer is from USHA or PHILIPS then it will help the customer in buying decision. Take the example of Maruti service centre advt which talks about the possibility of finding one in the remotest corner of India. This is about reliability and ser viceability. The product should be safe and can be handled with kids gloves. Popularity of Windows over other operating systems is a good example of user friendliness winning over customers. Apple i-Pod has options of changing skin which is ideal for the target group shows the power of customizability in winning over customers.

Quality Planning
1. Set quality objectives and targets 2. Take into account customers wants 3. Plan about marketability of the products. 4. Carry out pre-production process capability or quality deliverability studies. 5. Establish the relative importance of the quality characteristics and specifications. 6. Communicate to the production line people and vendors supplying the raw materials. 7. Establish statistical control techniques, charts and sampling plans. 8. Establish training programmes. Planning for quality starts with setting quantifiable and measurable targets. While doing this the organization needs to keep customers wants in mind. Once the quality objective is d ecided it is important to think about the market feasibility of the product. TATA Nano can prove if Ratan Tata was wrong or right when he planned for the peoples car of India. Once everything is planned the organization needs to asses its capability to deliver the target quality. If there is gap in capability then the organization needs to fill that gap by upgrading to the required technology and skill sets.

Before planning for Chandrayan ISRO must have thought about its capabilities to build and deliver such a spacecraft. A ranking chart should be developed to finalize the most important aspect of quality planning and more focus should be given to that aspect. Communicating the target and plan to frontline people is important because they are the people who will implement everything in the real life situation. They should be properly convinced before starting the new course. Plan to monitor the progress of quality programme is important. This can be done by devising ways and means to monitor progress and finding and correcting deviations. Costs of Quality: Maintaining the quality at least possible cost. The ultimate goal of an organization is to earn profits. So keeping the cost at minimum possible level is important. Otherwise the higher input cost may not permit the ultimate aim of the organization. Cost of quality involves following aspects:

Costs of Appraisal: Inspection, Testing, Monitoring Control This is about assessing the current situation. This will involve man-hour and resources. Costs of Prevention: Prevention requires man-hour as personnel need to be deployed to inspect the raw material and finished goods. As per an old saying prevention is always better than cure, so the organization should strive to prevent bad quality product from going down the supply chain. Costs of Failure: Cost of failure needs to be planned out in advance as no matter how much precautions are taken failures are part of life. Analysis of Costs of Quality Category to category comparison: Comparing the relative amounts spent on each of the above mentioned cost categories. Time to time comparison: Comparing one quarters operations with the previous quarters operations. The comparative analysis of cost of quality can give an idea about where to focus more to improve further.
Total Quality Management (TQM)

The two main objectives of Total Quality Management are 100% customer satisfaction and zero defects. TQM is a process beyond quality of product or services; it deals with the business philosophy of the organization. TQM propagates the concept of doing right things right and at first time itself. In TQM:

Total means involvement of top management as well as workers

Quality means meeting expectation of the customers Management means management of quality across the organization

The main focus of the total quality management is as follows:

Involvement of all employees in the process Selection of suppliers Organization structure to support the process Maximum customer satisfaction Appropriate reward for quality improvement and suggestions

Considering above focus points, scope of TQM can be defined as follows:

Organization should encourage building of culture promoting TQM. Organizational resources, including infrastructure should be dedicated in TQM. Top management decision and structure should support the TQM process. Proper training and environment should be created before implementation of TQM.

Total Quality Management gives a great importance to customers and suppliers. Here customers and supplier both can be internal as well external. The relationship of organization with customers as well supplier is critical in continuation of TQM. Therefore, it is important to understand customers and suppliers.
Principles of Total Quality Management

The main principles of Total Quality Management are as follows:

TQM proactively works towards prevention of quality problems. TQM strives to achieve a state with zero defects or minimal defects. TQM aims at producing right quality products at the first instance itself. TQM pushes the concept that quality is not the responsibility of production department but of organization as a whole. TQM encourages continuous improvement of business and production process. TQM encourages award and recognition for worker's pro-actively working towards quality. TQM decisions are fully based by research and data. TQM should be always systematic and logical in the process.

Total Quality Management Objective:

 products, services, processes, people, resources and interactions. internal as well as external

ng everyone in the organization in the attainment of the said objective. objective. Total means 100%, so TQM is about managing all aspects of quality and ultimate goal should be the Total Customer Satisfaction. Every functional area should stick to the quality plan of the organization and strive to attain the planned quality target. Each offering from the organization should be of optimum quality. Because, one rotten apple can spoil the whole basket. TQM is about addressing all aspects of dimensions of quality. If there is a good product in bad packaging it is not going to give the desired returns to the organization. A good car with a bad bumper will tarnish the image of the company. An ill tempered receptionist can turn away potential customers from a nice 5-star hotel. So people and process should match the quality of the product being offered by the organization. A satisfied employee will always bring a satisfied customer, so internal customers are also important. All hygiene factors and motivation factors should be maintained to satisfy the needs of the internal customer. Retaining internal customer is important for better knowledge management and continuity of the process. Retaining external customer is important to get repeat sales. It is always easier to get repeat sales from existing customers than to get sales from a new customer. Everybody, right from the shop-floor employee to the top management, should have total commitment to the predetermined quality goals.

History of TQM
Effect of Industrialisation on workmanship

Bell. Quality 960s Japanese management started quality control circles. Think about quality concept which a road side trinket seller may be having. Think about the quality concept your neighbourhood barber may be having. Let us assume there are two haircut salons. One is a roadside one which uses the nearby tree to hang the mirror and gets its own set of customer. Another is a swanky air-conditioned one, which charges premium on every service. Both kinds have their own niches but having a big difference in quality. Think about the quality concept which the nearby Dominos may be having. One can get every bit of history of quality in a wonderful country like India.

Barriers to TQM Implementation

iques

11. Failure to Continually Improve If the top management takes quality as a form of window dressing then the organization is not going to attain the desired goal. Companies which maintain quality only during the time of inspection by ISO personnel cant achieve quality goals. It is difficult but important to change the culture of the organization. Paradigm change is needed to force people to strive for the new quality goal. The way Jack Welch managed change in GE is a very good example of people involvement in change management. As quality is a continuous and never ending process, so is the training. Even the whole lifetime is not enough for complete learning. So training should go on forever. This is important because customers preferences keep on changing. SONY can be a good example of an organization keeping pace with customers preference change. SONY tape recorder made the gramophone an obsolete product. Later on WALKMAN changed the way for portable music. At present even WALKMAN is an obsolete product and SONY sells MP3 players by the same brand name. People should not live in silos. They should come out to facilitate better interactions to share knowledge. People should be empowered to sort out issues. This will reduce the throughput time. Obviously accountability is important along with empowerment. If a frontline personnel is empowered to sort out customers problems then it will save precious time of the top management.

Quality Control Techniques

Introduction

Quality of product and services determines success or failure of the organization. Consumers expect the company to maintain high-level of quality and consider it an important aspect of satisfaction. Quality management, therefore, becomes very important as far as any organization is concerned. Quality management can be accomplished through various quality control techniques. Quality assurance and quality control are objective oriented and can be achieved through statistical quality control. Statistical quality control requires usage of acceptance sampling and process control techniques. Statistical quality control extensively uses chart to measure the acceptance level of the product samples. Objective is to ensure that products fall within pre-decided upper control and lower control limits. Any sample falling outside the limits is inspected further for corrective action.
Quality Control

The quality of product or service is ensuring if proper designing process is followed. This designing process needs to be backed by appropriate process design supported by a suitable technology which confirms to requirements of customers. Quality control ensures that defects and errors are prevented and finally removed from the process or product. Therefore, quality control should include; planning, designing, implementation, gaps identification and improvisation. If organization can implement a stringent quality control than following benefits are possible:

Reducing product defects lead to less variable cost associated with labor and material. Reduction in wastage, scrap and pollution. Ability to produce quality products over longer period of time With quality maintenance needs for inspection reduces leading to decrease in maintenance cost Large pool of satisfied customers. Increase in employee motivation and awareness of quality. Increase in productivity and overall efficiency.

Above mentioned points are relevant not only for production stage but are equally important for input material, manufacturing process, delivery process, etc.
Statistical Quality Control

Quality control techniques require extensive usage of statistical methods. The advantages of the statistical analysis are as follows:

Statistical Tools are automated and therefore, require less manual intervention, leading cost reduction Statistical tools work on a model thus are very useful where testing requires destruction of products.

Statistical Quality tools can broadly be classified into following categories:

Acceptance sampling is an important part of quality control wherein quality of products is assessed post production. Statistical process control helps in confirming whether the current process is falling within predetermined parameters.

Acceptance Sampling

Acceptance sampling is done on samples post production to check for quality parameters as decided by the organization covering both attributes as well as variables . If the sample does not meet the required parameters of quality than that given lot is rejected, and further analysis is done to identify the source and rectify the defects. Acceptance sampling is done on the basis of inspection, which includes physical verification of color, size, shape, etc. The major objectives of inspection are:

To detect and prevent defects in products and process. To identify defected parts or product and prevent it from further consumption or usage. To highlight the product or process defect to appropriate authorities for necessary and corrective actions.

Scope of inspection covers input materials, finished material, plant, machinery etc. To sustain quality of product and services it is important to have in place robust quality control techniques. DEMING CYCLE AND QUALITY TRILOGY Deming Cycle Deming cycle is a tool for continuous improvement and it is a tool for an ongoing effort to improve products, services or processes. These efforts can seek "incremental" improvement over time or "breakthrough" improvement all at once. Among the most widely used tools for continuous improvement is a four-step quality model-the plando-check-act (PDCA) cycle, also known as Deming Cycle or Shewhart Cycle: Plan: Identify an opportunity and plan for change.

 Do: Implement the change on a small scale. Check: Use data and facts to analyze the results of the change and determine whether it made a difference. Act: If the change was successful, implement it on a wider scale and continuously assess your results. If the change did not work, begin the cycle again. Deming cycle was developed to link the production of a product with consumer needs and focus the resources of all departments (research, design, production, and marketing) in a cooperative effort to meet those needs. The Deming Cycle proceeds as follows: 1.Conduct consumer research and use it in planning the product (PLAN). 2.Produce the product (DO). 3.Check the product to make sure it was produced in accordance with the plan (CHECK). 4.Market the product (ACT). 5.Analyze how the product is received in the marketplace in terms of quality, cost, and other criteria (ANALYZE). Other widely used methods of continuous improvement -such as Six Sigma, Lean Production, and Kaizen -- emphasize employee involvement and teamwork; measuring and systematizing processes; and reducing variation, defects and cycle times. Continuous or Continual?

The terms continuous improvement and continual improvement are frequently used interchangea bly. But some quality practitioners make the following distinction: Continual improvement: a broader term preferred by W. Edwards Deming to refer to general processes of improvement and encompassing "discontinuous" improvements--that is, many different approaches, covering different areas. Continuous improvement: a subset of continual improvement, with a more specific focus on linear, incremental improvement within an existing process. Some practitioners also associate continuous improvement more closely with techniques of statistical process control. Juran's Contribution Joseph M. Juran ranks near Deming in the contributions he has made to quality and the recognition he has received as a result. His Juran Institute. Inc., in Connecticut, USA is an international leader in conducting training, research, and consulting activities in the area of quality management. Quality materials produced by Juran have been translated into 14 different languages. Juran holds degrees in both engineering and law. The emperor of Japan awarded him the Order of the Sacred Treasure medal, in recognition of his efforts to develop quality in Japan and to promote friendship between Japan and the United States. Juran is best known for the following contributions to the quality philosophy: Juran's Three Basic Steps to Progress

 Juran's Ten Steps to Quality Improvement The Juran Trilogy Juran's Three Basic Steps to Progress Juran's Three Basic Steps to Progress are broad steps that, in Juran's opinion, companies must tak e if they are to achieve world-class quality. He also believes there is a point of diminishing return that applies to quality and competitiveness. An example illustrates his observation: Say that an automobile maker's research on its cars reveals that buyers drive them an average of 50,000 kms before trading them in. Applying Juran's theory, this automaker should invest the resources necessary to make this line of cars run trouble free for perhaps 60,000 kms. According to Juran, resources devoted to improving quality beyond this point will run the cost up higher than the typical buyer is willing to pay. Total Quality Management MGT510 VU I. Achieve structured improvements on a continual basis combined with dedication and a sense of urgency. II. Establish an extensive training program. III. Establish commitment and leadership on the part of higher management Juran's Ten Steps to Quality Improvement Examining Juran's Ten Steps to Quality Improvement, you will see some overlap between them and Deming's Fourteen Points. They also mesh well with the philosophy of other quality experts. 1.Build awareness of both the need for improvement and opportunities for improvement.

2.Set goals for improvement. 3.Organize to meet the goals that have been set. 4.Provide training. 5.Implement projects aimed at solving problems. 6.Report progress. 7.Give recognition. 8.Communicate results. 9.Keep score. 10.Maintain momentum by building improvement into the company's regular systems. The Juran Trilogy The Juran Trilogy summarizes the three primary managerial functions.
Joseph Juran has explained his model of quality improvement on the basis of the basis of three universal processes which have been popularly named a Juran Trilogy. The processes are: 1. Quality Planning: As per Juran Triology quality planning is a concurrent exercise which involves all the affected parties related to the product and services, so that they can provide inputs and give early warnings during the planning processes. The steps of the quality planning exercise are: Definition of the project. Identification of the customers those who will be impacted by the actions that are taken to complete the project. Discovery of customer needs. Development of the product and processes to meet the customers needs. Establishment of the quality objectives. Development of the plans for meeting these objectives.

2. Quality Control: According to Juran Triology Quality control involves the developing and maintaining of operational methods in order to assure that the processes work as they are designed to work and that the target levels of performance being are being achieved. Quality control does not concern itself with improving a process, but rather with the execution of plans. It is primarily to control that occasional spike in error in the process. Quality control is a short term process to check that spike. Quality control entails the following steps: Clear definitions of quality. Knowledge of the expected performance or targets. Evaluation of the actual operating performance. Comparison of the actual performance to goals. Action of the difference.

3. Quality Improvement: As per Juran Triology, quality improvement is a disciplined approach that improves the level of performance of the process. This is achieved by a breakthrough improvement in performance; when a new

innovation or a completely fresh idea is brought into improve the current performance levels. This ensures that the new levels of performance are achieved, and then quality control mechanisms are in place to sustain that effectively. Also See:

JURANs quality triology Juran was invited by the Union of Japanese Scientists and Engineers to Japan in 1954. His lectures to the Japanese introduced the managerial dimensions of planning, organizing, and controlling which were focused on the responsibility of top management to achieve quality and the need for setting goals. According to him quality as a fitness for use in terms of design, conformance, availability, safety and field use. Juran was focused on top-down management and technical methods rather than worker pride and satisfaction. Jurans ten steps for quality improvement 1. build awareness of opportunities to improve 2. Set goals for improvement 3. Organize to reach goals (Committee must be formed to identify problems, select project, employ teams and assign facilitators. 4. Provide training 5. Carry out projects to solve problems 6. To Report Progress 7. Give recognition to those who deserve 8. Communicate results to team members 9. Keep score and be quantitative 10. Maintain a consistent momentum by making annual enhancement , it must be a regular part of the system and processes of the company. Jurans Quality Trilogy This was illustrated by his "Juran trilogy", an approach to cross-functional management, which is composed of three managerial processes: quality planning, quality control and quality improvement. Without change, there will be a constant waste, during change there will be

increased costs, but after the improvement, margins will be higher and the increased costs get recouped. Jurans Quality Trilogy consists of quality planning, quality control, and quality improvement. Quality Planning provides a system that is capable of meeting quality standards. Quality Control is used to determine when corrective action is required. Quality Improvement seeks better ways of doing things. Source: Juran, J. The Quality Trilogy. Quality Progress, 10,8, 1986.

Deming 14 principle
W. Edward Deming defines quality as a predictable degree of uniformity and dependability, at low costs and suited to the mark et. He was the one, who popularized quality control in the early 1950s in Japan. He Developed a System of statistical quality control. Deming stresses on workers pride and satisfaction rather than establishment of quantifiable goals. According to him improvement of process in the system rather than the worker, is the cause of process variation. Deming developed that as quality improves, cost will decrease and productivity will increase, resulting in more jobs, greater market share, and long-term survival. After returned to US he spent some time in obscurity and finally published his book " Out of the Crisis " in 1982. He set out 14 points known as Deming 14 points, according to him if US manufacutring industry apply these points will save the US from industrial doom at the hand of Japanese.

Deming 14 Points of Quality Management

W. Edward Deming 14 points for quality management are following: 1. 2. 3. 4. 5. Create consistency of purpose with a plan. Adopt the new philosophy of quality Cease dependence on mass inspection End the practice of choosing suppliers based solely price Identify problems and work continuously to improve the system

6. 7. 8. 9.

Adopt modern methods of training on the job Change the focus from production numbers (quantity) to quality Drive out fear Break down barriers between departments

10. Stop requesting improved productivity without providing methods to achieve it 11. Eliminate work standards theta prescribe numerical quotas 12. Remove barriers to pride of workmanship 13. Institute vigorous education and retraining 14. Create a structure in top management that will emphasize the preceding thirteen points every day.

From problem-faced to problem-solved

The PDCA Cycle is a checklist of the four stages which you must go through to get from `problem-faced' to `problem solved'. The four stages are Plan-Do-Check-Act, and they are carried out in the cycle illustrated below.

The concept of the PDCA Cycle was originally developed by Walter Shewhart, the pioneering statistician who developed statistical process control in the Bell Laboratories in the US during the 1930's. It is often referred to as `the Shewhart Cycle'. It was taken up and promoted very effectively from the 1950s on by the famous Quality Management authority, W. Edwards Deming, and is consequently known by many as `the Deming Wheel'.

Use the PDCA Cycle to coordinate your continuous improvement efforts. It both emphasises and demonstrates that improvement programs must start with careful planning, must result in effective action, and must move on again to careful planning in a continuous cycle. Also use the PDCA Cycle diagram in team meetings to take stock of what stage improvement initiatives are at, and to choose the appropriate tools to see each stage through to successful completion. How to use the PDCA Cycle diagram to choose the appropriate tool is explained in detail in the `How to use it' section below.

Plan-Do-Check-Act
Here is what you do for each stage of the Cycle: Plan to improve your operations first by finding out what things are going wrong (that is identify the problems faced), and come up with ideas for solving these problems. Do changes designed to solve the problems on a small or experimental scale first. This minimises disruption to routine activity while testing whether the changes will work or not. Check whether the small scale or experimental changes are achieving the desired result or not. Also, continuously Check nominated key activities (regardless of any experimentation going on) to ensure that you know what the quality of the output is at all times to identify any new problems when they crop up. Act to implement changes on a larger scale if the experiment is successful. This means making the changes a routine part of your activity. Also Act to involve other persons (other departments, suppliers, or customers) affected by the changes and whose cooperation you need to implement them on a larger scale, or those who may simply benefit from what you have learned (you may, of course, already have involved these people in the Do or trial stage).

Six Sigma
Six Sigma is a set of tools and strategies for process improvement originally developed by Motorola in 1986.[1][2] Six Sigma became well known after Jack Welch made it a central focus of his business strategy at General Electric in 1995,[3] and today it is used in different sectors of industry.[4] Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes.[5] It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Champions", "Black Belts", "Green Belts", "Orange Belts", etc.) who are experts in these very complex methods. [5] Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction and/or profit increase). [5] The term Six Sigma originated from terminology associated with manufacturing, specifically terms associated with statistical modeling of manufacturing processes. The maturity of a manufacturing process can be described by a sigma rating indicating its yield or the percentage

of defect-free products it creates. A six sigma process is one in which 99.99966% of the products manufactured are statistically expected to be free of defects (3.4 defects per million), although, as discussed below, this defect level corresponds to only a 4.5 sigma level. Motorola set a goal of "six sigma" for all of its manufacturing operations, and this goal became a byword for the management and engineering practices used to achieve it.