Note Buad802

DISTANCE
LEARNING CENTRE
AHMADU BELLO UNIVERSITY
ZARIA, NIGERIA
COURSE MATERIAL
MASTER IN BUSINESS ADMINISTRATION (MBA)
BUAD 802: PRODUCTION AND OPERATION MANAGEMENT
COPYRIGHT PAGE
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© 2016 Distance Learning Centre, ABU Zaria, Nigeria
All rights reserved. No part of this publication may be reproduced in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise without the prior
permission of the Director, Distance Learning Centre, Ahmadu Bello University, Zaria,
Nigeria.
First published 2016 in Nigeria.
ISBN:
Published and printed in Nigeria by:
Ahmadu Bello University Press Ltd.
Ahmadu Bello University,
Zaria, Nigeria.
Tel: +234
E-mail:
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COURSE WRITERS/DEVELOPMENT TEAM
Yusuf Abdullahi (Subject Matter Experts)
Sandra Ekpot

Prof. Abiola Awosika (Subject matter Reviewers)
Halima Shuaibu

Enegoloinu Adakole (Language Editor)

Prof. Adamu Z. Hassan (Formatting Editor)
Nasiru Tanko
Graphics
Ibrahim Otukoya

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QUOTE
“Open and Distance Learning has the exceptional ability of meeting the challenges of the three
vectors of dilemma in education delivery – Access, Quality and Cost”
- Sir John Daniels
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TABLE OF CONTENT
Title Page
Copyright
Quote
1.0 Course Information
2.0 Course Description
3.0 Course Introduction
4.0 Course Outcome
5.0 Activities to Meet Course Objectives
6.0 Grading Criteria and Scale
7.0 Course Structure and Outline
8.0 Discussion Forum
8.1 Topical Discussions
8.2 Discussion Questions
9.0 Study Modules
9.1 Module 1:
Introduction
9.1.1 Objectives
9.1.3 Study Sessions
9.1.3.1 Study Session 1: Operations management
Discussion Question(s)
9.1.3.2 Study Session 2: Operations strategy
9.1.3.3 Study Session 3: Process analysis
9.1.3.4 Study Session 4: Data Protection Policy and Basic Economic Decisions
9.2 Module 2
Introduction
9.2.1 Objectives
9.2.3.1 Study Session 5: Plant Location and layout
9.2.3.2 Study Session 6: Inventory Management
9.2.3.3 Study Session 7: Forecasting
9.2.3.4 Study Session 8: Business forecasting
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9.3 Module 3
Introduction
9.3.1 Objectives
9.3.3.1 Study Session 9: Network Analysis
9.3.3.2 Study Session 10: Critical Path Method (CPM)
9.3.3.3 Study Session 11: Project Evaluation and Review Technique (PERT)
Discussion Question(s
9.3.3.4 Study Session 12: Linear Programming (LP)
9.3.3.5 Study Session 13: Developments in Operations Management
10.0 Further Reading
11.0 Glossary
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PREAMBLE
Welcome to Operations/Production Management (BUAD 802)! This document is
base on the past practices and current directions of research into current course
design and quality assurance practices. Feel free to compare with other institutions
and contact me for any input into this document.

1.0 COURSE INFORMATION
Course Code: BUAD 802
Course Title: Production and Operations Management
Credit: 3 Credit Units
Semester: Two

Lecturer Information
Instructor: Yusuf Abdullahi

2.0 COURSE DESCRIPTION
This course involves an analysis of the theory and practice of operations
management in organisations. Included are the issues in operations strategy,
process analysis and the use of data and managerial opinion in making effective
propositions to address the questions in the cases. This course introduces you to
problems and analyses related to the enhancement of modern and service
operations. Class sessions involve explaining concepts, working examples, and
discussing cases. A wide range of topics are covered, including: process analysis,
quality management, procurement, and product development. Major economic
decision, problems of production and operations management; aggregate
production and workforce scheduling; multi-plant allocation of product; large scale
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project control (CPM and PERT); Production and Inventory control; Demand
forecasting, Quality control and short run job – shop scheduling; the interaction of
production. Toward the end of the course, you will work in teams to manage a
virtual factory.

3.0 COURSE INTRODUCTION
Production and operations management is the process, which combines and
transforms various resources used in the production and operations subsystem of
the organisation into value added product/services, in a controlled manner as per
the policies of the organisation. Therefore, it is that part of an organisation, which
is concerned with the transformation of a range of inputs into the required
(products/services) having the requisite quality level.
The set of interrelated management activities that are involved in manufacturing

certain products is called “Production Management.” If the same concept is
extended to Services Management, then the corresponding set of management
activities is called “Operations Management”. Slack, Chambers, & Johnston
(2007) ask, how does an organisation… create and deliver products at lower cost
and with higher revenue? Meet the challenges posed by changes in customer
preferences, internet-based technologies and global supply networks? Promote
creativity, manage knowledge and innovation, and encourage social responsibility
in finding solutions to those challenges? The answer is through effective operations
management. Managing operations is important, exciting and challenging.
I. Academic Honesty
It is expected that you behave according to the highest standards of academic
discipline and acknowledge the works of others cited and also be sure that the
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work submitted for assessment as individuals or as team members is theirs.
Anyone found to engage in any form of academic dishonesty in this course will be
penalised.
II. Participatory Learning
You are advised to have academic firmness at the back of your minds as you play a
part in this course. Please, familiarise yourself with course contents and
assignments.

4.0 COURSE OUTCOME
On successful completion of this course, you should be able to:
1. Explain theories, concepts, and cutting-edge developments in the global
business environments (economic, technological, competitive, operations
and management).
2. Synthesise logistics and transportation of raw materials: the processes of
just-in-time logistics, transportation by rail, shipping, etc.
3. Compare and contrast different production and service operations.
4. Assess the operations, functions and the nature of the operations manager's
job.
5. Utilise the key aspects of operations management in decision making.

5.0 ACTIVITIES TO MEET COURSE OBJECTIVES
This is a theoretical as well as a practical course; there will be a significant amount
of reading, writing and researching, and case analyses involved in acquiring
knowledge. Research will be applied, meaning working jointly with others and
sharing the outcome of your work in short essays. Many of the topics we cover
may provide new ideas for use, both in our organisations and at home.
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You are expected to work together on team/group assignments. This mimics the
typical team-based nature of operations/production management case analysis.
Please remember the basics of group assignments (Forming, Storming, Norming
and Performing) and try to quickly adjust in your teams, so you can begin to
perform for success. For a comprehensive understanding of the material, keeping
current with the reading is strongly encouraged. Assignments are to be completed
and submitted or posted as the case may be.
Classroom activities will be conducted primarily as a seminar/video conferencing,

focusing on the discussion of assigned readings and other problems. Issues for
discussion will be the basis for much of the work in this course. You are expected
to get questions and be prepared to discuss them before the deadline. Academic
freedom will be observed and encouraged. Your participation on topical questions
raised, will be judged by what you contribute. Group discussion will be run
primarily as assignments too. One topic each shall be assigned to group of you and
your colleagues.
The Study Session Activities and Discussion Question(s) are presented under the
appropriate Modules. Group responses to each module assignment are to be
uploaded within the stipulated time indicated in the modules. Indicate clearly
whose post you are responding to and what specific point you are addressing.
Bringing in additional outside resources and knowledge as well as related life
experiences would enhance your response and command additional points. Also,
tutorials will be arranged within the two weeks on campus activities in which
questions will be clarified to enable you understand fully what you’ve learnt.
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6.0 GRADING CRITERIA AND SCALE
6.1 Grading Criteria
Grades will be based on the following Percentages:
Individual assignments 10%
Group Assignment/Discussion Question(s) 10%
Discussion Topic Participation 10%
Quizzes/Other Assignments 10%
Semester Examination 60%
TOTAL 100%

6.2 Grading Scale
The following is the grading scale as recommended by the Board of Examiners of
the Centre:
A = 70–100
B = 60–69
C = 50-59
F = 0-49

As you work on your research in this course and throughout your
graduate programme, here are some examples of open education
resources that will serve you well.
Open education resources

OSS Watch provides tips for selecting open source, or for procuring free or open software.
School Forge and Source Forge are good places to find, create, and publish open software. Source
Forge, for one, has millions of downloads each day.
Open Source Education Foundation and Open Source Initiative, and other organisations like
these, help disseminate knowledge.
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Creative Commons has a number of open projects from Khan Academy to Curriki where teachers
and parents can find educational materials for children or learn about Creative Commons licenses.
Also, they recently launched the School of Open that offers courses on the meaning, application,
and impact of "openness."
Numerous open or open educational resource databases and search engines exist. Some examples
include:
 OEDb: over 10,000 free courses from universities as well as reviews of colleges and rankings of
college degree programmes
 Open Tapestry: over 100,000 open licensed online learning resources for an academic and
general audience
 OER Commons: over 40,000 open educational resources from elementary school through to
higher education; many of the elementary, middle, and high school resources are aligned to the
Common Core State Standards
 Open Content: a blog, definition, and game of open source as well as a friendly search engine
for open educational resources from MIT, Stanford, and other universities with subject and
description listings
 Academic Earth: over 1,500 video lectures from MIT, Stanford, Berkeley, Harvard, Princeton,
and Yale
 JISC: Joint Information Systems Committee works on behalf of UK higher education and is
involved in many open resources and open projects including digitising British newspapers from
1620-1900!
Other sources for open education resources
Universities
 The University of Cambridge's guide on Open Educational Resources for Teacher Education
(ORBIT)
 Open Learn from Open University in the UK
Global
 Unesco's searchable open database is a portal to worldwide courses and research initiatives
 African Virtual University (http://oer.avu.org/) has numerous modules on subjects in English,
French, and Portuguese
 https://code.google.com/p/course-builder/ is Google's open source software that is designed to
let anyone create online education courses
 Global Voices (http://globalvoicesonline.org/) is an international community of bloggers who
report on blogs and citizen media from around the world, including on open source and open
educational resources
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Individuals (which include OERs)
 Librarian Chick: everything from books to quizzes and videos here, includes directories on open
source and open educational resources
 K-12 Tech Tools: OERs, from art to special education
 Web 2.0: Cool Tools for Schools: audio and video tools
 Web 2.0 Guru: animation and various collections of free open source software
 Livebinders: search, create, or organise digital information binders by age, grade, or subject
(why re-invent the wheel?)
Legal help
 New Media Rights is trying to help digital creators use public domain or open materials legally.
They have guides on how to use free and open software materials in various fields.
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7.0 COURSE STRUCTURE AND OUTLINE
7.1 Course Structure:
WEEK/DATE MODULE STUDY ACTIVITY INDIVIDUAL ASSIGNMENT

SESSIONS
Week 1 & 2 RESUMPTION, REGISTRATION, ORIENTATION & REVIEW OF THE COURSE SITE
Week 3 Study Session 1: 1.Study the course material of this 1. What is operations management?
Operations session 2. Prepare a short biography including
management your current work status, management
2.Watch the video of this study experience, “have you ever been an
session operations manager?” and any other
3.Listen to the audio of this study information you’d like to share.
session
MODULE 1
4. Read chapters one & two of;
Operations Management by; Nigel
Slack, Stuart Chambers, Robert
Johnston
Week 4 Study Session 2: 1.Study the course material of this Demonstrate operations strategy using
Operations session your place of employment?
strategy
2.Watch the video of this study
session
3.Listen to the audio of this study
session
4. Review the posted response to
last week’s Discussion Question(s)
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Study Session 3: 1.Study the course material of this Using your place of employment/your
Process analysis. session Department, identify and explain the
steps of process analysis.
Week 5 2.Watch the video of this study
session
session
4. Read chapters one, two & three of
Introduction to Analysis by; Wade
4th Edition: Chegg solutions.
Week 6 Study Session 4: 1.Study the course material of this Explain the key aspects of operations
Data Protection session management decision making.
Policy and Basic
Economic 2.Watch the video of this study
Decisions session
session.
4.Read chapters one, two & three of
Introduction to Analysis by; Wade
4th Edition: city Chegg solutions.
5 Review the posted response to
Study Session 5: 1.Study the course material of this 1. Visit a real-life plant location.
Week 7 Plant Location and session Describe their plant layout and assess
layout the efficiency of the layout.
session
session.
4.Read chapters seven & eight of
MODULE 2 “Production and Operations
Management” by; Norman Gaither
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2nd Edition: USA; Duxbury press.
5. Read: chapters six, seven & eight

of “Operations Management” by
Mark A. Vonderembse & Gregory P.
White 2nd Edition: New York; West
Publishing Company.
Study Session 6: 1.Study the course material of this 1. Explain the following:
Week 8 Inventory session Stock level, Inventory, Buffer stock,
Management EOQ, Lead Time
2.Watch the video of this study Reorder Level
session
3.Listen to the audio of this study 2. BASH runs a business outfit for gym
session equipment. Annual demand for the
fitness machines is N160, 000. The
4. Read chapters eleven, twelve,
annual holding cost per unit is N3, 750
thirteen & fourteen of Quantitative
and the cost place an order is N7, 500.
Techniques by; T. Lucey third
Calculate the economic order quantity
Edition: city ELBS series.
(EOQ)
5. Review the uploaded response to
WEEK 9 Study Session 7: 1.Study the course material of this Create any question under forecasting
Forecasting session and solve it.
session
session
4.Read chapter three of; Production
and Operations Management by;
Norman Gaither 2nd Edition: USA;
Duxbury Press.
Study Session 8: 1.Study the course material of this
Week 10 Business session
forecasting.
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session
session
the week’s Discussion Question(s)
Week 11 M I D S E M E S T E R B R E A K
Study Session 9: 1.Study the course material of this Solve the questions at the end of the
Week 12 Network Analysis session chapters.
session
session
4.Read chapters twenty three,
twenty four & twenty five of;
Quantitative Techniques by T. Lucey
third Edition: ELBS series.
MODULE 3 Study Session 10: 1.Study the course material of this
Week 13 Critical Path session
Method (CPM)
session
session
4.Read chapters, twenty three,
twenty four & twenty five of;
third Edition: ELBS series.
5.Review the posted response to the
week’s Discussion Question(s)
Study Session 1.Study the course material of this Solve the questions at the end of the
11: Project session chapters
Week 14 Evaluation and
Review Technique 2.Watch the video of this study
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(PERT) session
session
4. Read chapters, twenty three,
twenty four & twenty five of,
third Edition: ELBS series
Week 15 Study Session 12: 1.Study the course material of this What is a linear equation? Relate it to
Linear session the population census of Nigeria.
Programming (LP)
session
session
4. Read chapters, seventeen &
eighteen of; Quantitative Techniques
by T. Lucey third Edition: ELBS
series
Week 16 Study Session 13: 1.Study the course material of this Review and critique the current efforts
Developments in session of two authors in the area of operations
Operations management.
management 2.Watch the video of this study
session
session
4. Review the site:
www.jstor.com
Week 17
Week 18 ON CAMPUS ACTIVITIES/TRAINING/PRACTICALS
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Week 19 REVISION/ TUTORIALS
Week 20
Week 21 SEMESTER EXAMINATION
N.B: Discussion Topics shall be uploaded weekly while Discussion Question(s) is/are presented in the appropriate units.
You are to submit all individual, Topical Discussion or Discussion Question assignments via your programme dashboard on or before the
prescribed date.
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7.2 Course Outline
MODULE 1: Review of Fundamental Concepts of Operations Management
Study Session 1: Operations management
Study Session 2: Operations strategy
Study Session 3: Process analysis
Study Session 4: Data protection policy and basic economic decisions
MODULE 2: Plant Location and Layout, Inventory Management and

Forecasting
Study Session 5: Plant location and layout
 Definition of plant location
 Definition of plant layout
 Layout of physical facilities
Study Session 6: Inventory management:
 Definition of inventories
 Types of inventories
 Economic order quantity (EOQ)
 EOQ with discounts
Study Session 7: Forecasting
 Definition of 'forecasting'
 Pivot forecasting
 Types of forecasting methods/techniques
Study Session 8: Business forecasting
MODULE 3: Evaluation and Review Techniques

Study Session 9: Network analysis
 Introduction
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Study Session 10: Critical Path Method (CPM)
 The key rules of a CPM
 What can a business do if a project is delayed?
Study Session 11: Project evaluation and review technique (PERT)
Study Session 12: Linear programming (LP)
Study Session 13: Developments in operations management
8.0 DISCUSSION FORUM

You will be required to participate in two types of discussions:

8.1 Topical Discussions
These are weekly topics which I shall post on the MBA dashboard. The topics will
centre on contemporary issues and/or current events in the discipline at the time of
posting. You are expected to study and contribute to such discussions. Contribution
at these sessions is necessary.

8.2 Discussion Question(s)
These are pre-determined topics to be assigned to groups you and your colleagues,
who would develop a thesis around the topics, submit the thesis to an assigned
forum where all participants will interact and pass comments, to add to the
knowledge and move the conversation forward.
Relevant Discussion Question(s) is/are presented under the corresponding Study

session while the schedule of response is available on the MBA page of the DLC
ABU Website.
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9.0 STUDY MODULES
9.1 MODULE 1: Review of fundamental concepts of Operations Management

Introduction
Operations Management is essential, stimulating, demanding, and is everywhere
you look. Essential, because it is concerned with creating all of the products and
services upon which we depend. Stimulating: because it is at the centre of so many
of the changes affecting the world of business. Demanding: because the solutions
that we find need to be accepted globally and responsibly within society and the
environment. And everywhere because; every service and product that you use –
the banquet you eat at breakfast, a problem you solve with the computer, the chair
you sit on, and the radio station you listen to while you relax – is the result of an
operation or process.
ITQ: Why is operation management important?
ITA: It is important because it is essential or vital in every aspect of human endeavour.

9.1.1 Objectives
After completing this session, you should be able to:
a) Demonstrate operations strategy using your place of employment,
b) Identify and explain the steps of process analysis using your place of
employment/your Department,
c) Explain the key aspects of operations management decision making.
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STUDY SESSIONS
9.1.2.1 STUDY SESSION 1: The Concept of Operation Management
Section and Subsection Headings
Introduction
Learning Outcome
(A) Operations Management
(B) Distinction between Manufacturing Operations and Service Operations
(C) A Framework for Managing Operations

i Planning
ii Organising
iii Controlling
iv Behaviour
v Models
Summary
(D) Discussion Questions
Introduction
The concept of production as a function in an organisation is concerned with the
transformation of inputs, into the required outputs (products) having the required
quality level. Production is defined by Kumar and Sunesh (2008) as “the step-by-
step conversion of one form of material into another form, through chemical or
mechanical process to create or enhance the utility of the product to the user.” Thus
production is a value addition process. This function focuses on the creation of
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physical product which can be managed by a set of interrelated management
activities called production management. When this concept is extended to services
management, then the corresponding set of management activities is called
operations management.
Learning Outcome
At the end of this session, you should be able to
a. Define the concept of production and operation management
b. Distinguish between manufacturing and service operations
(A) Operations Management

Operations management differs from other forms of organisational management,
because it applies specifically to the management of the productive or
transformational process. Operations management is the strategy used to achieve
this objective. Operations management, therefore, is at the heart of the success of
all organisations.
The operations management function has a considerable influence on the
quality, cost and availability of an organisation’s goods or services. These, in turn,
have a direct bearing on whether the organisation achieves its other main
objectives – specifically, to increase profitability, to increase market share, to
provide a reasonable return for investors or to contribute to the wellbeing of the
community.
Production involves the skillful bringing together of a number of resources, such as

finance, equipment, management, technology and people, to create finished goods
and services through a series of operations. The nature and type of operations vary
considerably from one type of goods or services to another. However, how the
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operations management function is carried out will directly affect an organisation’s
competitive position, because it will:
o Establish the level of quality of the goods or services
o Influence the overall cost of production, given that the operations
function is responsible for the largest part of an organisation’s capital
and human expenses.
o Determine whether sufficient products are available to satisfy
consumer demand.
Operations in an organisation can be categorised into manufacturing operations

and service operations as earlier mentioned. Manufacturing operation is a
conversion process that includes manufacturing of tangible output like a product,
whereas, a conversion process that includes service is an intangible output in the
form of an effort. By way of summary, one can say that the set of interrelated
management activities, which are involved in manufacturing certain products are
called production management and for service management, then corresponding
set of management activities is termed operation management.
Production management was the acceptable term in the period between 1930 and
1950. In the 1970s emerged a new name ‘operations management’ which was a
shift to the service from manufacturing sectors of the economy. As service sector
became more prominent, the change from ‘production’ to ‘operations’ emphasised
the broadening of the field to service organisations. Production/operations
management is therefore the process, which combines and transforms various
resources used in the production/operations of the organisation into value added
product/services. Operations management uses the organisation’s resources to
create outputs that fulfil defined market requirements. This is the fundamental
activity of any type of enterprise, Slack, Chambers and Johnston (2010).
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ITQ: What is operations management?
ITA: Operations management is the heart of the success of the organisation. It is the
strategy used to achieve productive or transformational process of an organisation.
With the 1970s emerge two distinct changes in our views. The most obvious of
these, reflected in the new name operations management was a shift in the service
and manufacturing sectors of the economy. As service sector became more
prominent, the change from ‘production’ to ‘operations’ emphasised the
broadening of our field to service organisations. The second, more suitable change
was the beginning of an emphasis on synthesis, rather than just analysis, in
management practices.
Production/Operation management is the process which combines and transforms

various resources used in the production/operation subsystem of the organisation
into value added products/services in a controlled manner as per the policies of the
organisation. Operations management is about how organisations produce goods
and services. Everything you wear, eat, sit on, use, read or knock about on the
sports field comes to you courtesy of the operations managers who organised its
production
(B) Distinction between Manufacturing Operations and Service Operations

An operation is defined in terms of the mission it serves for the organisation,
technology it employs and the human and managerial processes it involves.
Operations in an organisation can be categorised into manufacturing operations
and service operations. Manufacturing operations is a conversion process that
includes manufacturing yields a tangible output: a product, whereas, a conversion
process that includes service yields an intangible output: a deed, a performance, an
effort, Slack, Chambers and Johnston (2010).
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Operations management is a large segment, which is concerned with the existence
of any organisation. Every organisation has an operations function to produce
some type of products and/or services. It is well-known that manufacturing differs
from service provision in many aspects. The main difference between products and
services might be the tangibility. While the outputs of manufacturing are tangible,
the outputs of service provision are intangible. Some industries are the mixture of
both manufacturing and service provision, which provide both products and
services. Likewise, the operations managements which different industries apply
are also very different.
The distinction can be summarised thus:
c. Tangible/Intangible nature of output

d. Consumption of output
e. Nature of work (job)
f. Degree of customer contact
g. Customer participation in conversion
h. Measurement of performance.
Manufacturing is characterised by tangible outputs (products), outputs that

customers consume overtime, jobs that use less labour and more equipment, little
customer contact, no customer participation in the conversion process (in
production), and sophisticated methods for measuring production activities and
resource consumption as product are made.
Service is characterised by intangible outputs, outputs that customers consumes

immediately, jobs that use more labour and less equipment, direct consumer
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contact, frequent customer participation in the conversion process, and elementary
methods for measuring conversion activities and resource consumption. Some
services are equipment based, namely; rail-road services, telephone services and
some are people based, namely; tax consultant services, hair styling.
While manufacturing has to do with the physical tangible outputs that consumers
consume, uses more labour and equipment, has little customer contact and has no
customer participation in the production conversion process, service is
characterised by intangible outputs, outputs that consumers consumes immediately,
jobs that use more labour and less equipment and has direct consumer contact.
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 organisation, particularly those relating to development,
production, and manufacturing. Operations management is the activity of
managing the resources, which produce and deliver products and services.
Operations management is about how organisations produce goods and services.
ITQ: What is the difference between manufacturing and service?
ITA: While manufacturing has to do with the physical tangible outputs that
consumers consume, Service is characterised by intangible outputs.
Everything you wear, eat, sit on, use, read or knock about on the sports field comes
to you courtesy of the operations managers who organised its production. Every
book you borrow from the library, every treatment you receive at the hospital,
every service you expect in the shops and every lecture you attend at university –
all have been produced.
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The operations function is the part of the organisation that is responsible for this
activity. Every organisation has an operations function, because every organisation
produces some form of products and/or services. However, not all types of
organisation will necessarily call the operations function by this name. (Note that
we also use the shorter terms ‘the operation’ and ‘operations’ interchangeably with
the ‘operations function’).
Operations managers are the people who have particular responsibility for
managing some, or all, of the resources, which compose the operations function.
Again, in some organisations the operations manager could be called by some
other name. For example, he or she might be called the ‘fleet manager’ in a
distribution company, the ‘administrative manager’ in a hospital, or the ‘store
manager’ in a supermarket, the production manager in a publishing house.
In some types of organisation, it is relatively easy to visualise the operations

function and what it does, even if we have never seen it. For example, most people
have seen images of automobile assembly. What about an advertising agency? We
know vaguely what they do - they produce the advertisements that we see in
magazines and on television – but what is their operations function? The clue lies
in the word ‘produce’.
Operations management programmes typically include instruction in principles of

general management. Hence, operation management is not for profit organisations
only. Terms such as competitive advantage, markets and business, which are used
mostly in business environment, are usually associated with companies in the
profit sector.
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Yet operations management is also relevant to organisations whose purpose is not
primarily to earn profits. Managing the operations in an animal welfare charity,
hospital, research organisation or government department is essentially the same as
in commercial organisations. Operations have to take the same decisions – how to
produce products and services, invest in technology, contract out some of their
activities, devise performance measures, and improve their operations performance
and so on.
(C) A Framework for Managing Operations

Managing operations can be enclosed in a frame of general management function
as operation managers are concerned with planning, organising, and controlling the
activities which affect human behaviour through models.
Planning
Activities that establishes a course of action and guide future decision-making is
planning. The operations manager defines the objectives for the operations
subsystem of the organisation, and the policies, and procedures for achieving the
objectives. This stage includes clarifying the role and focus of operations in the
organisation’s overall strategy. It also involves product planning, facility designing
and using the conversion process.
Organising
These are activities that establish a structure of tasks and authority. Operation
managers establish a structure of roles and the flow of information within the
operations subsystem. They determine the activities required to achieve the goals
and assign authority and responsibility for carrying them out.
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Controlling
Activities that assure the actual performance in accordance with planned
performance. To ensure that the plans for the operations subsystems are
accomplished, the operations manager must exercise control by measuring actual
outputs and comparing them to planned operations management. Controlling costs,
quality, and schedules are the important functions here.
Behaviour
Operation managers are concerned with how their efforts to plan, organise, and
control affect human behaviour. They also want to know how the behaviour of
subordinates can affect management’s planning, organising, and controlling
actions. Their interest lies in decision-making behaviour.
Models
As operation managers plan, organise, and control the conversion process, they
encounter many problems and must make many decisions. They can simplify their
difficulties using models like aggregate planning models for examining how best to
use existing capacity in short-term, break even analysis to identify break even
volumes, linear programming and computer simulation for capacity utilisation,
decision tree analysis for long-term capacity problem of facility expansion, simple
median model for determining best locations of facilities
ITQ: What are the general management functions?
ITA: They are Planning, Organising, Controlling, Behaviour and Models.
31
Summary
In this session, we have discussed about operations management concept
consisting of manufacturing and service operations and their definitions. We have
also distinguish between manufacturing operations comprising of tangible output
which customers consume with less labour, using more equipment with no
customer contact and participation from service operations having intangible
outputs with more labour and less equipment use. We have also discussed the
framework of operations management.

1. Write an essay on the concept of operations management.
2. Summarise Chapters one, two & three of “Introduction to Analysis by;
Wade 4th Edition: Chegg solutions.
3. Identify the basic features of operations management.
4. Explain the contributions of production management and operations
management to the success of a business operation.
5. Discuss why operations management is relevant to managers in other
organisation functions.
6. Briefly describe the historical evolution of operations management and the
significance of the key events.
7. Decisions in management are an important tool to an executive in an
organisation. Discuss.
8. Detect the three major functional areas of organisations and describe how
they interrelate.
9. Compare the similarities and differences between production and service
operations.
10. Elucidate the operations, function and the nature of the operations
manager's job.
32
11. Explain the differences between micro and macro operations. Describe
some of the micro operations in a university and discuss the relationships
between their internal and external customers and suppliers.
12. Draw the hierarchy of operations for a small manufacturing company, and
discuss the various positions.
REFERENCES
Ambrose, S. E. (1996) Undaunted Courage: Meriwether Lewis Thomas Jefferson
and the Opening of the American West. New York: Simon & Schuster.
Hindle, T (1994) Field Guide to Strategy. Cambridge, Mass: Harvard Business

School Press.
33
9.1.2.2 STUDY SESSION 2:
Operations Strategy
Introduction
Learning Outcome
(A) The Evolution of Strategy
(B) Operational Effectiveness
(C) Strategy Hierarchy
Marketing
Operations
Finance
Summary
Introduction
Over time, strategies and processes do change with changes in the company’s
industry or in its technology. In particular, the historical evolution of operations
and process management is linked intimately to technological changes and their
role in the development of industrialisation.
Learning Outcome
At the end of this session, you should be able to:
34
a. Narrate the evolution of operations strategy
b. Discuss on operational effectiveness
c. Identify strategy hierarchy
(A) The Evolution of Strategy

Until 1765, the world of commerce and technology had changed very little from
the one known to the Greeks and the Romans. Although advances had been made
in the textile, printing, and construction industries, the commercial world of 1765
still faced the same physical limitations as ancient cultures. Transportation speed -
whether of people, of goods, or of information - was limited on land by the speed
of the fastest horse and on water by the most favourable winds. About the end of
the 16th century, for example, the trip from New York to Boston - a distance of
288 kilometers, took three days (Ambrose, 1996).
ITQ: Define operations management?
ITA: It refers to the administration of business practices to create the highest level
of efficiency possible within the organisation.
No organisation can plan in detail every aspect of its current or future actions, but
all organisations need some strategic direction and so can benefit from some ideas,
of where they are heading and how they can get there. Once the operations
function has understood its role in the business and after it has articulated its
performance objectives, it needs to formulate a set of general principles which will
guide its decision-making. This is the operations strategy of the company (Slack,
Chambers and Johnston 2010).
The word strategy derives from the Greek military term stratégia - “the general’s
art.” It is the art or science of planning a war, and much of the original
management thinking on strategy, treated business as something of a war and the
35
goal was to win. However, times have changed. Chief executive officers are no
longer generals, and workers are not soldiers. Today, strategy is a plan to achieve
an objective (Hindle, 1994).
Strategic Planning is a Process that brings to life the Mission and Vision of the
Enterprise. A strategic plan, well-crafted and of value, is driven from the top
down; considers the internal and external environment around the business; is the
work of the managers of the business; and is communicated to all the business
stakeholders, both inside and outside of the company.
As a company grows and as the business environment becomes more complex, the
need for strategic planning becomes greater. There is a need for all people in the
corporation to understand the direction and mission of the business. Companies
consistently applying a disciplined approach to strategic planning are better
prepared to evolve as the market changes and as different market segments require
different needs for the products or services of the company.
The benefit of the discipline that develops from the process of strategic planning,
leads to improved communication. It facilitates effective decision-making, better
selection of tactical options and leads to a higher probability of achieving the
owners’ or stakeholders’ goals and objectives.
ITQ: What is strategic planning?
ITA: Strategic planning is a process that brings to life the mission and vision of the
enterprise
36
The plan specifies precisely what managers must do in order to reach corporate
objectives. Often, the implicit objective of a business strategy is to deliver
sustained superiority, not just average, performance relative to the competition. To
outperform one’s rivals, one must be - and remain - different from and better than
them. This is because similar firms, especially those in the same industry, perform
in much the same way, a sustainable competitive advantage requires some form of
differentiation. Operations Strategy is the total
pattern of decision which shapes long-term
capacities of any type of operation and their
contribution to the overall strategy through the
reconciliation of market requirements with
operation resources.
(B) Operational Effectiveness

To deliver superior performance, a firm must strive to select product attributes
that are distinct from those of its competition and create business processes that
are more effective than its competition. Operational effectiveness means
developing processes and operating policies that support the strategic
position, better than the processes and policies of competitors. “Operational
effectiveness includes but is not limited to efficiency. It refers to any number of
practices that allow a company to better utilise its inputs by; for example,
reducing defects in products or developing products faster” (Porter, 1996). It is
important to understand that operational effectiveness does not necessarily mean
the lowest-cost process.
A firm such as FedEx (courier company), with a strategic position focused on

speed and reliability, develops operational effectiveness with processes having
37
competencies in speed and reliability, not low cost. In practice, gaining and
sustaining a competitive advantage requires that a firm have a good strategic
position and operational effectiveness to support that position.
ITQ: What is operation effectiveness?
ITA: Operational effectiveness refers to any number of practices that allow a company to
better utilise its inputs by reducing defects in products or developing products faster”
(C) Strategy Hierarchy

Strategic planning spans different levels in an organisation. At the highest level of
a diversified company, corporate strategy defines the businesses in which the
corporation will participate and specifies how key corporate resources will be
acquired and allocated to each business. Corporate strategy formation is thus like
portfolio selection - choosing a mix of divisions or product lines so as to ensure
synergy and competitive advantage. At the next level, business strategy defines the
scope of each division or business unit in terms of the attributes of the products
that it will offer and the market segments that it will serve. Here, strategy includes
what we describe as strategic positioning: selecting the key product attributes on
which the business unit will compete.
Since the goal is to differentiate the firm from its competition by establishing
competitive priorities in terms of the four product attributes, business strategy
entails a two-pronged analysis:
 Competitive analysis of the industry in which the business unit will
compete.
 Critical analysis of the unit’s competitive skills and resources.
38
At the next level, we have functional strategies that define the purpose for
marketing, operations, and finance—the three main functions in most
organisations:
B. Marketing identifies and targets customers that the business unit wants to
serve, the products that it must supply in order to meet customer needs, and
the competition that it will face in the marketplace.
C. Operations designs, plans, and manages processes through which the

business unit supplies customers with desired products.
D. Finance acquires and allocates the resources needed to operate all a unit’s
business processes.
Each of these functions must translate midlevel

business strategy into its own functional
requirements by specifying what it must do well
in order to support the higher level strategy.
In particular, operations strategy configures and develops business processes that

best enable a firm to produce and deliver the products specified by the business
strategy. This task includes selecting activities and resources and combining them
into a network architecture that, defines the key elements of a process, such as
inputs and outputs, flow units, and information structure. Operation is also
responsible for developing or acquiring the necessary process competencies -
process cost, flow time, flexibility, and quality - to support the firm’s business
strategy. Whereas business strategy involves choosing product attributes on which
39
to compete, operations strategy focuses on the process competencies required to
produce and deliver those product attributes.
ITQ: What are the three key functional areas in an organisation?
ITA: Marketing, operations and finance,
Thus, business strategy is concerned with selecting external output markets

and the products with which to supply them, whereas operations strategy
involves designing internal processes and interfaces between input and output
markets. An operations strategy must establish operational objectives that are
consistent with overall business goals and develop the processes that will
accomplish them. For example, a business strategy based on product cost as a top
competitive priority, calls for an operations strategy that focuses on efficient and
lean business processes. Similarly, if a firm seeks competitive advantage through
product variety, its business processes must be flexible enough to produce and
deliver customised products.
If the goal is to provide short response times, processes must include greater
investment in inventories (for manufactured goods) or greater process availability
through excess capacity (for both manufacturing and service operations).
Finally, a strategy that calls for producing and delivering high-quality products
requires high quality processes with precision equipment and highly trained
workers. In every case, process competencies must be aligned with desired product
attributes - operations strategy must be consistent with business strategy.
The introduction to business and strategy simulation will give you a sample of
what the study of business offers without swamping them in details. If they are
40
looking for a taste of the business world, something to excite them, that is what this
simulation will do. It introduces the participant to the basic concepts of business
and strategy, providing them with broad exposure to many concepts, yet keeping
the fine points to a minimum.
You will work within a multifunctional business setting where

they start up and manage a new venture. The decision content
includes the basics of marketing, distribution, human resources,
manufacturing, finance and accounting. Because the simulation
is highly integrated, it provides an ideal platform from which I can discuss and
illustrate the fundamentals of business and strategy.
ITQ: What is introduction to business all about?

ITA: It introduces the one to basic concepts of business and strategy and how to take basic
decisions in regards to marketing, distribution, human resources, manufacturing, finance
and accounting.
The introduction to business and strategy game is a short exercise, with just 6
decision rounds, each taking only thirty minutes to one hour to complete. You can
play against your peers or against computer-generated competitors. The "play
against computer" version allows everyone to work at his or her own pace and
there is no need to coordinate the play of all of you.
Grading is based on the balanced scorecard that measures profitability, customer

satisfaction, market share in the targeted market segments, human resource
management, asset management, financial risk, preparedness for the future and
wealth.
41
Summary
In this session, we have discussed the operations strategy of operations
management. Its evolution, strategy hierarchy, and operational effectiveness were
also discussed in details.

1. Discuss the concept of operation strategy.
2. How can operation strategy be used to achieve organisational objectives?
3. Differentiate between operational strategy and strategic management.
4. Explain the difference between corporate strategy, business strategy and
functional strategy. Illustrate with any company of your choice.
5. Illustrate how the four perspectives would operate in a ‘not-for-profit’
organisation such as a charity, which provides hostel accommodation and
other welfare services for the homeless.
6. Explain how an individual branch of a large supermarket chain can:
a. contribute directly to the strategic aims of the whole company;
b. help other parts of the company to contribute.
7. Identify what you think might be the order-winning, qualifying and less
important objectives for a music store, selling compact discs. Discuss how
the organisation might go about changing its operation by focusing on the
less important objectives to give itself an advantage in the market place.
8. Assuming that video cassette recorders (VCRs) are in the maturity stage of
the lifecycle, how might the main performance objectives of a VCR
manufacturer have changed, over the life of the product type so far?
9. ‘When a company is introducing a totally novel product or service, it is
competing exclusively on the technical specification of the product or
service. This operation function therefore has no significant role to play.’
Discuss.
42
10. ‘A Rolls Royce motor car will always cost more than a Skoda.’ Does this
mean that manufacturing cost is unimportant to Rolls Royce?
11. Sketch out what you think an ‘operational strategy matrix’ would look like
for a convenience store.
REFERENCES


School Press.
43
Process Analysis
Section & Subsection Headings
Introduction
Learning Outcome
(A) Process Analysis
Summary
(B) Discussion Questions
Introduction
The aim of the analysis phase of a business process design project is to understand
how the processes of a business function and interact; the aim of the design phase
is to improve the way that those processes operate and interact.
Learning Outcome
a. Identify the aims of process analysis
b. Types of process analysis
c. Identify the steps of process analysis
(A) Process Analysis

The purpose of the analysis phase is to:
E. Understand the organisation and its purpose or “mission” and relate this to
the organisation’s current business processes.
F. Identify and analyse the collection of processes and activities currently
44
operational within the organisation, and ascertain how far they achieve the
business objectives.
The results of the analysis phase are then fed into the design phase, whose
purpose is to:
G. Investigate options for achieving improvement by redesigning the
processes currently in operation.
H. Identify and prioritise areas for improvement.
I. Implement process design according to an agreed schedule.
One of the decisions that needs to be made early in the project is, what kind of
analysis is needed – strategic (top down) or tactical (bottom up):
J. A strategic perspective is higher level (i.e. managers) and seeks to
understand the processes that make up the business and deliver its value.
K. A tactical perspective is lower level (i.e. practitioners) and seeks to
understand the activities that support processes. It is driven by the task
requirements for operational efficiency.
ITQ: identify one of the purpose of analysis phase
ITA: Understand the organisation and its purpose or “mission” and relate this to
the organisation’s current business processes.
According to Accenture Consultant, Jeanne Harris, a full 40% of organisations still

rely on their guts, not data analysis, to make important business decisions. Why is
that? For one thing, many companies have simply been relying on gut instinct to
make decisions for so long, that giving up the habit is easier said than done. And
even those that want to make the transition to data analysis often do not know
45
where to start. This is according to Harris, who recently co-authored the book
‘Analytics at Work: Smarter Decisions, Better Results’.
ITQ: What does 40% of organisations relies on guts mean?
ITA: It means that 40% of organisations depend on their instincts when taking important
business decisions, instead of using proper data analysis.
But it can be done, Harris says. SearchBusinessAnalytics.com recently sat down

with Harris to discuss some of the key benefits of data analysis, how to identify
areas in which to get started with analysis, and why she says, “The unexamined
decision is not worth making.” In this 15 minute show, appropriate for both
business and IT professionals, listeners will:
a) Learn why Harris thinks “the unexamined decision is not worth making”
b) Find out how data analysis can make a concrete impact on the bottom line.
c) Understand why it is proving very difficult for some organisations to
implement data analysis.
d) Learn how to identify areas where data analysis can be most beneficial for
companies.
e) Discover how to use both qualitative and quantitative management
techniques around data analytics.
46
Summary
In this session, the aims of process analysis had been highlighted. Also, the types
of analysis were discussed and the steps for process analysis were also considered.
(B) Discussion Questions

1. Identify and explain the steps of process analysis.
2. Outline the major aspects of process management.
3. What role could the use of data analytics play in your work environment?
4. Apply qualitative and quantitative techniques to an issue in your work
environment.
5. Explain various manufacturing process technologies.
6. Distinguish between product design and process design.
7. Write short note on:
a. Process design.
a. Product design.
b. Product lifecycle.
8. Discuss the key areas of product and process development.
9. What is process improvement?
10. List and explain four major types of process decision.
REFERENCES

School Press.
47
9.1.2.4 Study Session 4:
Data Protection Policy and Basic Economic Decisions
Introduction
Learning outcome
(A) Data Protection
i What is Data?
ii Data
iii Information
iv Knowledge
v Understanding
vi Wisdom:
(B) The Data Protection Act
(C) Basic Economic Decisions

Summary
Introduction
Personal data is defined as any information related to an identifiable person. For
example, a data subject home address, e-mail address, telephone number, or
government-issued identification numbers would constitute Personal Data.
Learning Outcome
48
a. Talk about data.
b. Discuss on the data protection policies.
c. Discuss on basic economic decisions.
(A) Data Protection

What is Data?
In computing, data is information that has been translated into a form that is more
convenient to move or process. Russell Ackoff writes that the content of the human
mind can be classified into five categories:
a. Data: symbols.
b. Information: data that are processed to be useful; provides answers to
"who," "what," "where," and "when" questions.
c. Knowledge: application of data and information; answers "how" questions.
d. Understanding: appreciation of "why".
e. Wisdom: evaluated understanding.
Ackoff indicates that the first four categories relate to the past; they deal with what
has been or what is known. Only the fifth category, wisdom, deals with the future
because it incorporates vision and design. With wisdom, people can create the
future rather than just grasp the present and past. But achieving wisdom isn't easy;
people must move successively through the other categories.
Data is raw. It simply exists and has no significance beyond its existence (in and
of itself). It can exist in any form, usable or not.
Information... information is data that has been given meaning by way of
relational connection. This "meaning" can be useful, but does not have to be.
49
Knowledge... knowledge is the appropriate collection of information, such that it's
intent is to be useful. Knowledge is a deterministic process. When someone
"memorises" information, then they have amassed knowledge. This knowledge has
useful meaning to them, but it does not provide for, in and of itself, an intergration
such as would infer further knowledge. For example, elementary school children
memorise, or amass knowledge of, the "times table." They can tell you that "2 x 2
= 4" because they have amassed that knowledge (it being included in the times
table). But when asked what is "1267 x 300," they cannot respond correctly
because that entry is not in their times table. To correctly answer such a question
requires a true cognitive and analytical ability that is only encompassed in the next
level... understanding.
Understanding... understanding is an interpolative and probabilistic process. It is

cognitive and analytical. It is the process by which I can take knowledge and
synthesise new knowledge from the previously held knowledge. The difference
between understanding and knowledge is the difference between "learning" and
"memorising." People who have understanding can undertake useful actions
because they can synthesise new knowledge, or in some cases, at least new
information, from what is previously known (and understood). That is,
understanding can build upon currently held information, knowledge and
understanding itself.
(B) The Data Protection Act

The data protection Act of 1998 provided certain exceptions, which allow private
data to be used for exploration purposes (as well as historical or statistical
research), where the data were originally gathered fairly and lawfully for other
purposes. Data collected for one purpose or piece of research can be used for other
research, and can be kept indefinitely.
50
By way of summary, the Data Protection Act 1998 states that personal data shall:
 Be obtained and processed fairly and lawfully and shall not be processed
unless certain conditions are met.
 Be obtained for a specified and lawful purpose and shall not be processed in
any manner incompatible with that purpose.
 Be adequate, relevant and not excessive for those purposes.
 Be accurate and kept up to date.
 Not be kept for longer than is necessary for that purpose.
 Be processed in accordance with the data subject's rights.
 Be kept safe from unauthorised access, accidental loss or destruction.
 Not be transferred to a country outside the European Economic Area, unless
that country has equivalent levels of protection for personal data.
This policy does not form part of the formal contract of employment, but it is a
condition of employment that employees will abide by the rules and policies made
by the organisation from time to time. Any failure to follow the policy can
therefore result in disciplinary proceedings. Any employee, who considers that the
policy has not been followed in respect of personal data about themselves, should
raise the matter with the designated data controller at the initial stage. If the matter
is not resolved, it should be raised as a formal grievance.
51
ITQ: What is data protection act?
ITA: It is the main piece of legislation that governs the protection of personal data within a
country.
(C) Basic Economic Decisions

Decision making is the process of identifying alternative course of action and
selecting an appropriate alternative in a given decision situation. This definition
presents two important parts:
 Identifying alternative courses of action means that an ideal solution may not
exist or might not be identifiable.
 Selecting an appropriate alternative implies, that there may be a number of
appropriate alternatives and that inappropriate alternatives are to be
evaluated and rejected. Thus, judgment is fundamental to decision making.
Choice is implicit in our definition of decision making. We may not like the
alternatives available to us, but we are seldom left without choices.
Economic decision making, refers to the process of making business decisions
involving money. All economic decisions of any consequence require the use of
some sort of accounting information, often in the form of financial reports. Anyone
using accounting information to make economic decisions must understand the
business and economic environment in which accounting information is generated,
and they must also be willing to devote the necessary time and energy to make
sense of the accounting reports.
ITQ: What is decision making?
ITA: Decision making is the process of identifying alternative course of action and
selecting an appropriate alternative in a given decision situation
52
In any organisation, state or nation, it is expected that for certain decision to be
precise, economic is important for it to remain relevant in its existence. We will
look at the different types of economic decisions and how they are used for
organisational relevance.
ITQ: Why do we need basic economic decisions?
ITA: Basic economic decision making is all about maximising value, almost everyone
in the society engage in economic decision making at one point or the other.
Summary
In this session, we have discussed about data. The definition has been given, data
protection policies has been discussed as well as basic economic decisions
discussed.
1. How could unfair use of data be detrimental to a company’s bottom-line?
2. Explain the key aspects of operations management decision making.
3. Describe a major decision in your work environment or in Nigeria as a
whole that could benefit from operations management decision making.
REFERENCES

School Press.
53
MODULE TWO;
Plant Location and Layout, Inventory Management and Forecasting
Introduction
In this module, the understanding of major decision making
component in a manufacturing/production process will be
highlighted. Three basic economic decisions that any country
needs to make include: knowing the commodities to
manufacture or produce, second; the process of
manufacturing the best quality and last; the market
availability and the competitive advantage.
9.2.1 Objectives
Upon completion of this module, you should be able to:
a) explain the stages in the location decision,
b) describe the location criteria for retail and service businesses,
c) outline the basic location options for retail and service businesses,
d) explain the site selection process for manufacturers,
e) discuss the benefits of locating a start-up company in a business incubator,
f) describe the criteria used to analyse the layout and design considerations of a
building, including the Americans with Disabilities Act,
g) explain the principles of effective layouts for retailers, service businesses,
and manufacturers,
h) Evaluate the advantages and disadvantages of building, buying, and leasing
a building.
ITQ: What are the three basic economic decisions that any country needs to make?
ITA: They include; knowing the commodities to manufacture or produce, second, the
process of manufacturing the best quality and last, the market available and the
competitive advantage.
54
9.2.2. STUDY SESSIONS
9.2.2.1 STUDY SESSION 5: Plant Location and Layout
Introduction
Learning Outcome
(A) Plant Location

i What is an ideal location
(B) Locational Analysis

ii Selection Criteria
(C) Plant Layout
(D) Importance of Plant Layout
Summary
(E) Discussion Questions
Introduction
What is plant location? - A plant location is a location where a plant should be
established, while determining the maximum effectiveness and operating economy.
The place of the plant should offer the lowest cost when the costs of production
and delivering the goods to consumers have been calculated.
Learning Outcome
55
a. Discuss the meaning of plant location
b. Discuss ideal location
c. Give the definition of plant layout
d. Identify the layout of physical facilities
(A) Plant Location

Plant location consists of picking a region for the plant, as well as the selection
of the locality and the site. Plant location is needed when a brand new plant is
being started or when an old plant is being expanded. Sometimes, old locations are
unable to renew a lease and the plant needs to find a new location within that area.
(www.du.ac.in).
But the choice of the place is made only after

considering cost and benefits of different alternative
sites. It is a strategic decision that cannot be changed
once taken. If at all changed, it is only at considerable
loss, the location should be selected as per its own requirements and
circumstances. Each individual plant is a case in itself. The businessman should try
to make an attempt for optimum or ideal location.
ITQ: When do we need the plant location?
ITA: Plant location is needed when a brand new plant is being started or when an old plant
is being expanded.
What is an ideal location? - An ideal location is one where the cost of the product
is kept to minimum, with a large market share, the least risk and the maximum
social gain. It is the place of maximum net advantage or which gives lowest unit
56
cost of production and distribution. For achieving this objective, small-scale
entrepreneur can make use of locational analysis for this purpose (Kumar ND).
(B) Locational Analysis
Locational analysis is a dynamic process where entrepreneur analyses and compare
the appropriateness or otherwise of alternative sites with the aim of selecting the
best site for a given enterprise. It consists the following:
 Demographic Analysis: It involves study of population in the area in

terms of total population (in no.), age composition, per capita income,
educational level, occupational structure etc.
 Trade Area Analysis: It is an analysis of the geographical area that

provides continued clientele to the firm. He would also see the feasibility
of accessing the trade area from alternative sites.
 Competitive Analysis: It helps to judge the nature, location, size and

quality of competition in a given trade area.
 Traffic analysis: To have a rough idea about the number of potential

customers passing by the proposed site, during the working hours of the
shop, the traffic analysis aims at judging the alternative sites in terms of
pedestrians and vehicular traffic passing a site.
 Site economics: Alternative sites are evaluated in terms of establishment
costs and operational costs under this. Costs of establishment is basically
cost incurred for permanent physical facilities but operational costs are
incurred for running business on day to day basis, they are also called
running costs.
57
II. Selection Criteria
The important considerations for selecting a suitable location are given as
follows:
 Natural or climatic conditions.
 Availability and nearness to the sources of raw material.
 Transport costs-in obtaining raw material and also distribution or marketing
finished products to the ultimate users.
 Access to market: small businesses in retail or wholesale or services should
be located within the vicinity of densely populated areas.
 Availability of Infrastructural facilities such as developed industrial sheds or
sites, link roads, nearness to railway stations, airports or sea ports,
availability of electricity, water, public utilities, civil amenities and means of
communication are important, especially for small scale businesses.
 Availability of skilled and non-skilled labour and technically qualified and

trained managers.
 Banking and financial institutions are located nearby.
 Locations with links: to develop industrial areas or business centres result in

savings and cost reduction in transport overheads, miscellaneous expenses.
 Strategic considerations of safety and security should be given due
importance.
 Government influences: Both positive and negative incentives to motivate an

entrepreneur to choose a particular location are made available. Positive
includes cheap overhead facilities like electricity, banking, transport, tax
58
relief, subsidies and liberalisation. Negative incentives are in form of
restrictions for setting up industries in urban areas, for reasons of pollution
control and decentralization of industries.
 Residence of small business entrepreneurs want to set up nearby their

homelands.
ITQ: What is plant location?

ITA: Plant location consists of picking a region for the plant, as well as selecting a locality for
the site. Plant location means where a plant should be located while determining the
maximum effectiveness and operating economy.
(C) Plant Layout

A plant layout study is an engineering study used to analyse different physical
configurations for a manufacturing plant. It is also known as facilities planning and
layout. Modern industrial manufacturing plants involve a complex mix of functions
and operations.
According to Riggs, “the overall objective of plant layout is to design a physical

arrangement that most economically meets the required output – quantity and
quality.” According to J. L. Zundi “Plant layout ideally involves allocation of
space and arrangement of equipment in such a manner that overall operating costs
are minimised.
59
(D) Importance of Plant Layout
Plant layout is an important decision as it represents long-term commitment. An
ideal plant layout should provide the optimum relationship among output, floor
area and manufacturing process. It facilitates the production process, minimises
material handling, time and cost, and allows flexibility of operations, easy
production flow, makes economic use of the building, promotes effective
utilisation of manpower, and provides for employees convenience, safety, comfort
at work, maximum exposure to natural light and ventilation. It is also important
because it affects the flow of material and processes, labour efficiency, supervision
and control, use of space and expansion possibilities etc.
Essentials
An efficient plant layout is one that can be instrumental in achieving the following
objectives:
a. Proper and efficient utilisation of available floor space.
b. To ensure that work proceeds from one point to another point without any
delay.
c. Provide enough production capacity.
d. Reduce material handling costs
e. Reduce hazards to personnel.
f. Utilise labour efficiently.
g. Increase employee morale.
h. Reduce accidents.
i. Provide for volume and product flexibility.
j. Provide ease of supervision and control.
k. Provide for employee safety and health.
l. Allow ease of maintenance.
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m. Allow high machine or equipment utilisation.
n. Improve productivity.
Various techniques exist, but general areas of concern include the following:
a) Space (adequate area to house each function)
b) Affinity (functions located in proximity to other related functions)
c) Material handling
d) Communications (telephone, data, telemetry and other signal items)
e) Utilities (electricity, gas, water and other utility services)
f) Buildings (structural and architectural forms; site work)
ITQ: What is plant layout?

ITA: Plant layout is primarily concerned with the internal setup of an enterprise in a
proper manner.
Summary
In this session, we have discussed on plant location. Plant location and layout were
defined, the location analysis was done, selection criteria were specified, plant
layout was discussed, the importance of plants layout were highlighted and the
essentials of a plant layout were listed.
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1. Identify and explain the various factors that determine plant location and
layout.
2. Write an explanatory note on layout of physical facilities.
3. A juice manufacturing company is thinking of where to locate its new
production facility. Using the location factor rating method, decide which of
the three sites has the most location advantage, given the information in the
following table:
Location Factor Weight Makurdi Minna Lokoja

Labour Pool and Climate 0.32 71 99 88
Proximity to Suppliers 0.18 100 83 110
Wages Rates 0.15 105 80 66
Community Environment 0.13 88 88 83
Proximity to Customers 0.11 99 105 71
Shipping Modes 0.06 100 72 94
Air Service 0.05 72 100 55
4. Expatiate on the following:

a) Global Location Factors.
b) Regional Location Factors.
c) Investment Incentives in Nigeria.
d) Objectives of Plan Layout.
5. Determine the best location site using the centre-of-gravity method and the
data in the table below:
A B C D
X 240 120 300 600
Y 240 600 720 360
W 90 126 162 72
6. What are the factors that are to be considered in the location of facilities?
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7. Elaborate the factors for selecting an appropriate location.
8. Identify a case that you know (preferably in your country of residence)
where good location impact on an organisation. Explain the features of this
location as well as how they impacted on the organisation.
9. Sketch the principles of a good plan layout.
10. Explain the principles of effective layouts for retailers, service businesses,
and manufacturers.
References
Gor, Ravi Mahendra (2009) “Industrial Statistics and Operational Management”.
http://nsdl.niscair.res.in/jspui/bitstream/123456789/829/1/Chapter-
6%20forecasting%20techniques-%20Formatted.pdf
Kumar, Abhu (ND). “Plant Location And Layout.”

http://www.iqsoft.co.in/iem/LayoutLesson_7.pdf
www.springer.com/cda/content/.../cda.../9788132219699-c2.pdf...
www.du.ac.in /fileadmin/du/academics/course material/ep_07.pdf
63
Inventory Management
Introduction
Learning Outcome
(A) What is an Inventory?
(B) Types of Inventory

(i) Merchandise Inventory
(ii) Manufacturing Inventory
a) Raw materials
b) Work in process
Finished goods:
(D) Why Do We Need Inventories?
(E) Economic Order Quantity (EOQ)
(F) EOQ with Discounts
(G) Financial Consequence of Discounts

i Beneficial Effects:
ii Adverse Effects Summary
64
Introduction
It is necessary to have physical stock in the system to take care of the anticipated
demand because non-availability of materials when needed will lead to delays in
production or projects or services delivered. However, keeping inventory is not
free because there are opportunity costs of “carrying” or “holding” inventory in the
organisation. Thus, the paradox is that we need inventory, but it is not desirable to
have inventory. It is this paradoxical situation that makes inventory management a
challenging problem area in materials management. It also makes a high inventory
turnover ratio as a desirable performance indicator.
Learning Outcome
a. Define inventory.
b. Know types of inventory.
c. Discuss the need for inventory.
d. Describe Economic Order Quantity (EOQ).
e. Discuss Economic Order Quantity with Discounts.
(A) What is an Inventory?

An inventory or stock (in common terms) is considered to be the central theme in
managing materials. The inventory turnover ratio (ITR) is a barometer of
performance of materials management function. In the general understood term,
inventory means a physical stock of goods kept in store to meet the anticipated
demand. However, from materials management perspective, an apt definition of
inventory is “a usable but idle resource having some economic value.” By way of
summary, inventory is:
ITQ: What are the two basic types of inventory?

ITA: They are; merchandise inventory and manufacturing industry.
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 A detailed, itemised list, report, or record of things in one's possession,
especially a periodic survey of all goods and materials in stock.
 The process of making such a list, report, or record.
 The items listed in such a report or record.
 The quantity of goods and materials on hand; stock.
 An evaluation or a survey, as of abilities, assets, or resources.
ITQ: Define inventory management?

ITA: It is a science primarily about specifying the shape and percentage of stocked goods.
(B) Types of Inventory

Here is a quick guide to the different types of inventory.
There are two basic types: merchandising and
manufacturing. Manufacturing is further divided into
three more components: raw material, work in process
and finished goods.
(i) Merchandise Inventory

If you buy items from other artists and crafters to sell in your own gallery or
shop, you will have a merchandise inventory. Remember though, any items in
your shop on consignment are not part of your inventory.
(ii) Manufacturing Inventory
If you make your own arts and crafts, you'll have a manufacturing inventory.
The term 'manufacturing' might not seem to fit a hand crafted type of business,
but a quick review of the classifications within the term, will make the
relationship clearer.
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A manufacturing inventory consists of three different parts: raw materials, work in
process and finished goods. Using a leather crafting business as my sample craft
company, here are definitions and examples of the three:
 Raw materials: Everything the crafter buys to make the product is classified
as raw materials. That includes leather, dyes, snaps and grommets. The raw
material inventory only includes items that have not yet been put into the
production process.
 Work in process: This includes all the leather raw materials that are in
various stages of development. For the leather crafting business, it would
include leather pieces cut and in the process of being sewn together and the
leather belts and purse etc., that are partially constructed.
In addition to the raw materials, the work in process inventory includes the
cost of the labour directly doing the work and manufacturing overhead.
Manufacturing overhead is a catchall phrase for any other expenses the
leather crafting business has that indirectly relate to making the products. A
good example is depreciation of leather making fixed assets.
 Finished goods: When the leather items are complete and ready to sell at
craft shows or other venues, they are finished goods. The finished goods
inventory also consists of the cost of raw materials, labour and
manufacturing overhead, now for the entire product.
(D) Why Do We Need Inventories?

From the resource management point of view, we should not have inventories as
these constitute the idle resources. However, if we do not have inventories, there
67
will be shortages, production delays, and project delays. Some of the reasons for
having inventories in the production/service system are as follows:
 Time lag between placing orders and getting supplies at the point of
consumption – Whenever we place a replenishment order, there is a time lag
between placing the order and getting the materials at the point of use. This
is called “replenishment lead time.” In most cases the lead time is nonzero,
and at times it is quite high. This necessitates holding of inventory to take
care of demand during the lead times.
 Variability of lead times – In most cases, particularly in Indian supply

environment, there is some degree of variability in lead times because the
supply environment is perhaps “just-in-case” (JIC) type. Inventory has to be
maintained as a shield to cope with the supply uncertainty. Inventory is the
premium an organisation pays for operating in a just-in-case supply
environment. If there was no such uncertainty and if demand and supply are
deterministic, then in just-in-time (JIT) - type environment, no or low
inventory will be required. The greater the amount of supply uncertainty, the
greater the amount of additional inventory required.
 Demand variability – If either we are unable to estimate the demand

correctly or if there are uncertainties in demand, additional inventory will be
required to act as a shield to absorb the demand variability. The greater the
demand variability, the greater the amount of additional inventory required.
 Seasonal inventory – If the demand is cyclic or seasonal, then sometimes

building inventory in the lean period to meet the peak period demand is
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employed as a strategy in aggregate production planning. This strategy
results in inventory in some part of the year.
 Pipeline inventory – This is the inventory due to the distribution of a product

or a commodity over long distances, so that the “goods in transit” become
substantially important. This constitutes the pipeline inventory. In the
context of production processes, this is called in-process inventory or work
in progress (WIP), which is also inventory in terms of idle resource blocked
in the nonproductive form. This can be reduced by making the supply chain
move faster.
 Other factors – Sometimes inventory is maintained to take care of other

situational parameters such as inflationary pressures, shortage of materials in
the markets, and quantity discounts to encourage bulk purchasing or simply
the desire to spend the budget allocated for materials before the end of the
financial year, resulting in large and at times unnecessary purchases which
eventually become dead stock.
TQ: What are the three categories of manufacturing inventory?
ITA: They include raw material, work in process and finished goods.
(E) Economic Order Quantity (EOQ)
Economic order quantity is the order quantity that minimises total

inventory holding costs and ordering costs. It is one of the oldest
classical production scheduling models. The framework used to determine this
order quantity is known as Wilson EOQ Model or Wilson Formula. The model was
69
developed by Ford W. Harris in 1913, but R. H. Wilson, a consultant who applied
it extensively, is given credit for his in-depth analysis.
ITQ: Define Economic Order Quantity?

ITA: It is the order quantity of inventory that minimises the total cost of inventory management.
EOQ applies only when demand for a product is constant over the year and each
new order is delivered in full when inventory reaches zero. There is a fixed cost for
each order placed, regardless of the number of units ordered. There is also a cost
for each unit held in storage, commonly known as holding costs, sometimes
expressed as a percentage of the purchase cost of the item. We want to determine
the optimal number of units to order, so that we minimise the total cost associated
with the purchase, delivery and storage of the product.
The required parameters to the solution are the total demand for the year, the
purchase cost for each item, the fixed cost to place the order and the storage cost
for each item per year. Note that the number of times an order is placed will also
affect the total cost, though this number can be determined from the other
parameters.
Reasons for holding inventory:

 Customer service: Ensure high service level.
 Demand uncertainty: Buffer against larger than expected demands.
 Supply uncertainty: Delay and uncertainty in transportation.
 Psychological impact: Consumer behaviours are affected by
inventory.
 Economies of scale: Allocate setup cost over a larger number of
quantities.
70
 Quality issues: Defective parts and workstation breakdowns.
 Working-In-Process (WIP) inventory: Necessary for production.
The decisions to be made;

One of the most frequent decisions faced by operations managers is “how much”
or “how many” of something to make or buy in order to satisfy external or internal
requirements for some item. Many times, this decision is made with little or no
thought about its cost consequences.
 EOQ is useful for minor stock items of low values with known steady prices,
demands and supply lead times;
 Where there is demand variability, such as seasonality, EOQ can still be

calculated but using shorter time period.
ITQ: When can economic order quantity be applied?

ITA: EOQ applies only when demand for a product is constant over the year and each new order
is delivered in full when inventory reaches zero.
(F) EOQ with Discounts

A practically unrealistic assumption with the basic EOQ
calculation is that the price per item remains constant.
Usually some form of discount can be obtained by
ordering increased quantities. Such price discounts can be
incorporated into the EOQ formula, but it becomes much more complicated. A
simpler approach is to consider the costs associated with the normal EOQ and
71
compare these costs with the costs at each succeeding discount point and so
ascertain the best quantity to order.
ITQ: What usually remains constant when calculating EOQ?

ITA: The price is usually constant
(G) Financial Consequence of Discounts

Price discounts for quantity purchases have three financial effects, two of which
are beneficial and one adverse.
I. Beneficial Effects: Savings come from:

a) Lower price per item,
b) The larger order quantity means that fewer order need to be placed, so that
ordering costs is reduced.
II. Adverse Effects
Increased costs arise from the extra stockholding costs caused
by the average stock level being higher, due to the larger order
quantity.
ITQ: Does price discount for quantity purchased have any disadvantage?
ITA: Yes. Refer to the note above.
Summary
In this session, we have studied inventory management. The definition of inventory
management was given to you. We discussed Economic Order Quantity, types of
inventory and the reasons why we need inventory.
72
1. Explain in detail what “Inventory Management” is.
2. Identify and explain the different types of Inventories in relation to an
organisation you are familiar with.
3. Explain the types of simulation. Discuss clearly the various costs that are
involved in inventory problems with suitable examples. How are they
interrelated?
4. Contrast between independent and dependent demand.
5. What is single period model? Describe situations in which the single period
model would be appropriate.
6. What is economic run size model? Explain with an appropriate example.
7. Discuss quantity discount model with an example in which it can be
applicable.
8. List and explain four types of inventory cost structures.
9. What are the requirements for effective inventory management?
10. Explain inventory counting system.
References
%20forecasting%20techniques-%20Formatted.pdf
Kumar, Abhu (ND) “Plant Location And Layout.”

http://www.iqsoft.co.in/iem/LayoutLesson_7.pd f
www.du.ac.in /fileadmin/du/academics/course material/ep_07.pd f
73
Forecasting
Introduction
Learning Outcome
A. What is Forecasting?
a) Purpose
b) Time
(B) Pivot Forecasting
(C) General Steps in the Forecasting Process
(D)Forecasting Methods/Techniques
i Qualitative Forecasting Methods

ii Quantitative Methods:
iii Explanatory Methods
iv Time-series Methods
Summary
Introduction
Investors utilise forecasting to determine if events affecting a company, such as

sales expectations, will increase or decrease the price of shares in that company.
74
Forecasting also provides an important benchmark for firms which have a long-
term perspective of operations.
Learning Outcome
a. Understand the meaning of forecasting.
b. Understand pivot forecasting.
c. Discuss the general steps in the forecasting process.
d. Forecasting Methods/Techniques.
B. What is Forecasting?
Forecasting is a process of estimating a future event by casting forward past
data. The past data are systematically combined in a predetermined way, to
obtain the estimate of the future (Gor, 2006). Prediction is a process of
estimating a future event based on subjective considerations
other than just past data; these subjective considerations
need not be combined in a predetermined way. In other
words, forecasting refers to the use of historic data to
determine the direction of future trends. Forecasting is used
by companies to determine how to allocate their budgets for
an upcoming period of time. This is typically based on demand for the goods
and services it offers, compared to the cost of producing them. Business
forecasting generally attempts to predict future customer demand for a firm’s
goods or services, while macroeconomic forecasting attempts to predict future
behaviour of the economy and identify business cycle turning points.
75
There are two basic reasons for the need for forecast in any field:
 Purpose – Any action devised in the present to take care of some
contingency accruing out of a situation, or set of conditions set in the
future. These future conditions offer a purpose / target to be achieved so
as to take advantage of or to minimise the impact of (if the foreseen
conditions are adverse in nature) these future conditions.
 Time – To prepare plan, to organised resources for its implementation, to

implement; and complete the plan; all these need time as a resource. Some
situations need very little time; some other situations need several years of
time. Therefore, if future forecast is available in advance, appropriate
actions can be planned and implemented ‘in time’.
ITQ: Define forecasting?

ITA: Forecasting is a planning tool that helps management in its attempts to cope with the
uncertainty of the future, relying mainly on data from the past and present and analysis
from the trends.
(B) Pivot Forecasting

Pivot Forecasting is a proprietary demand works technology that is at the core of
our demand and supply management solutions. It is what makes it possible to
seamlessly work at any level of aggregation and along any dimension like product,
channel or customer with ease and performance yet without rigid "forecast
pyramids."
(C) General Steps in the Forecasting Process

The general steps in the forecasting process are as follows:
a. Identify the general need.
76
b. Select the period (Time Horizon) of forecast.
c. Select forecast model to be used: For this, knowledge of various forecasting
models, in which situations these are applicable, how reliable each one of
them is; what type of data is required. On these considerations; one or more
models can be selected.
d. Data Collection: With reference to various indicators identified-collect data
from various appropriate sources-data which is compatible with the model(s)
selected in step (3). Data should also go back that much in past, which meets
the requirements of the model.
e. Prepare forecast: Apply the model using the data collected and calculate the
value of the forecast.
f. Evaluate: The forecast obtained through any of the model should not be
used, as it is, blindly. It should be evaluated in terms of ‘confidence interval’
– usually all good forecast models have methods of calculating upper value
and the lower value within, which the given forecast is expected to remain
with certain specified level of probability. It can also be evaluated from
logical point of view, whether the value obtained is logically feasible? It can
also be evaluated against some related variable or phenomenon. Thus, it is
possible, sometimes advisable to modify the statistically forecasted’ value
based on evaluation.
(D) Forecasting Methods/Techniques

Qualitative Forecasting Methods: Qualitative forecasting
methods attempt to use actual data to determine a
qualitative or actual market trend toward a certain position
or function in the market. These methods involve looking at
non-numerical data. For example, if you were attempting to forecast whether a
77
new product would be successful, you could review customer surveys in which
customers have described their views of the ideal product function. Qualitative
forecasting methods are not as effective as quantitative methods, which are the
most common methods and which come in a variety of different formats. They
are often applied when a great deal of data are available on the target market. It
is also useful for long forecast horizons and/or when the amount of historical
data is limited.
Quantitative Methods: In general, quantitative methods use numbers – sales

numbers, web traffic numbers, the amount of new accounts or cancellations of
existing accounts for a specific period, depending on the breadth of the forecast
being performed. Quantitative methods can be further broken down into
explanatory methods and time-series methods.
ITQ: What are the methods of forecasting?
ITA: We have qualitative forecasting, quantitative forecasting, explanatory forecasting and time
series forecasting.
Explanatory Methods: Explanatory forecasting methods use data to attempt to

explain trends and to predict future market direction based on existing data. These
consider past performance and marketing trends, such as consumer spending
reports and consumer confidence indexes, to attempt to determine the future path
for a certain product, website or company. Explanatory methods involve looking at
market activity to explain how and why trends occurred, not just to predict what
will occur. Because the "how" is important here, this method is different from a
time-series method, which just considers what the future trends will be.
ITQ: What is the main function of explanatory forecasting?
ITA: Its main function is to use data to attempt to explain trends and to forecast future market
direction based on existing data.
78
Time-series Methods
Time-series methods are used only with historical data to predict future
performance. For example, if N6 million in sales were made over the last year, a
time-series method might predict that N6 million in sales could be achievable this
year, with a slight increase allowed for additional business. If a website was hit
340 times on Sunday last week, a time-series method might predict a similar influx
on a future Sunday.
In many forecasting situations enough historical consumption data are available.

The data may relate to the past periodic sales of products, demands placed on
services like transportation, electricity and telephones. There are available to the
forecaster a large number of methods, popularly known as the time series methods,
which carry out a statistical analysis of past data to develop forecasts for the future.
The underlying assumption here is that, past relationships will continue to hold in
the future. The different methods differ primarily in the manner in which the past
values are related to the forecasted ones.
A time series refers to the past recorded values of the variables under
consideration. The values of the variables under consideration in a time-series are
measured at specified intervals of time. These intervals may be minutes, hours,
days, weeks, months, etc. In the analysis of a time series the following four time-
related factors are important.
ITQ: Explain time series method of forecasting.

ITA: Time series methods make forecast based solely on historical patterns in the data.
79
Summary
In this unit, we have discussed about furcating. The definition of forecasting was
given. Reasons of furcating were given to include purpose and time. The steps to
take in forecasting were also enlisted as well as the methods highlighted and
discussed.
1. Differentiate between planning and business forecasting as it relates to your

organisation or any organisation you are familiar with.
2. Assuming that the following data relates to the sales of a company for the
period Jan-Dec 2013:
Month Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Sales 240 270 290 310 210 250 180 290 305 360 320 300
(N)
i. Develop a three month moving for average for the data and use it to
forecast sales for Jan., 2014.
ii. Assume that the forecast for the current period is given to be 200 and
alpha = 0.36. Develop an exponential smoothing indices needed to
forecast sales for Jan., 2014.
iii. Discuss the forecast accuracy under (a) and (b), and determine which
one is the best.
3. What do you understand by business forecasting? Discuss a classic case in
your organisation or any organisation you have studied.
4. Describe four qualitative forecasting techniques.
5. Discuss the advantages and limitations of the four forecasting techniques
you know.
6. Compare and contrast qualitative and quantitative approaches to forecasting.
7. Discuss your understanding of time horizon in forecasting.
80
8. What is the importance of forecasting in productions and operations
management?
9. Choose an appropriate forecasting technique of any problem of your choice.
10. Identify the five basic demand patterns that combine to produce some series.
References
Kumar, Abhu (ND). “Plant Location And Layout.”

www.du.ac.in /fileadmin/du/academics/course material/ep_07.pdf
81
Business Forecasting
Introduction
Learning Outcome
(A) What is Forecasting?
(B) Business Forecasting

(C) Applications of forecasting
(D) Sales Forecasting
-Forecasting the need for raw materials and spare parts
-Forecasting Economic Trends
-Forecasting Staffing Needs
-Forecasting in education environment

-Forecasting in a rural setting
(E) General Steps in the Forecasting Process
(F) Qualitative Techniques in Forecasting
- Grass Roots
- Market Research:
- Panel Consensus:
- Historical Analogy:
- Delphi Method:
Summary
Discussion Questions
82
Introduction
In general, when business people speak of forecasts, they usually mean some
combination of both forecasting and prediction. Forecasts are often classified
according to time period and use. In general, short-term (up to one year) forecasts
guide current operations. Medium-term (one to three years) and long-term (over
five years) forecasts support strategic and competitive decisions.
Learning Outcome
At the end of this session, you should be able to know:
a. Forecasting.
b. Business forecasting.
c. Application of forecasting.
d. General steps in forecasting process.
e. Qualitative techniques in forecasting.
(A) What is Forecasting?
 A forecast is an estimate of a future event achieved by systematically

combining and casting forward in predetermined way data about the past. It is
simply a statement about the future. It is clear that we must distinguish between
forecast per se and good forecasts. Good forecast can be quite valuable and
would be worth a great deal. Long-run planning decisions require consideration
of many factors: general economic conditions, industry trends, probable
competitor’s actions, overall political climate, and so on.
 Forecasts are possible only when a history of data exists. An established TV

manufacturer can use past data to forecast the number of picture screens
83
required for next week’s TV assembly schedule. But suppose a manufacturer
offers a new refrigerator or a new car, he cannot depend on past data. He
cannot forecast, but has to predict. For prediction, good subjective estimates
can be based on the manager’s skill experience, and judgment. One has to
remember that a forecasting technique requires statistical and management
science techniques.
Bear in mind that a perfect forecast is usually impossible. Too many factors in the
business environment cannot be predicted with certainty. Therefore, rather than search
for the perfect forecast, it is far more important to establish the practice of continual
review of forecasts and to learn to live with inaccurate forecasts. This is not to say
that we should not try to improve the forecasting model or methodology, but that we
should try to find and use the best forecasting method available, within reason.
Because forecasts deal with past data, our forecasts will be less reliable the further
into the future we predict. That means forecast accuracy decreases as time horizon
increases. The accuracy of the forecast and its costs are interrelated. In general, the
higher the need for accuracy translates to higher costs of developing forecasting
models.
So, how much money and manpower is budgeted for forecasting? What possible
benefits are accrued from accrued from accurate forecasting? What are the possible
costs of inaccurate forecasting? The best forecasts are not necessarily the most
accurate or the least costly. Factors as purpose and data availability play important
role in determining the desired accuracy of forecast.
ITQ: Why is perfect forecasting usually impossible?
ITA: Too many factors in the business environment cannot be predicted with certainty.
Therefore, rather than search for the perfect forecast, it is far more important to establish
the practice of continual review of forecasts and to learn to live with inaccurate
forecasts. 84
When forecasting, a good strategy is to use two or three methods and look at them
for the commonsense view. Will expected changes in the general economy affect
the forecast? Are there changes in industrial and private consumer behaviors? Will
there be a shortage of essential complementary items? Continual review and
updating in light of new data are basic to successful forecasting. In this chapter we
look at qualitative and quantitative forecasting and concentrate primarily on
several quantitative time series techniques.
(B) Business Forecasting

It is not unusual to hear a company's management speak about forecasts "Our sales
did not meet the forecasted numbers," or "we feel confident in
the forecasted economic growth and expect to exceed our
targets." In the end, all financial forecasts, whether about the
specifics of a business, like sales growth, or predictions about
the economy as a whole, are informed guesses. We will look at
some of the methods behind financial forecasts, as well as the actual process and
some of the risks that crop up when we seek to predict the future.

(C) Applications of forecasting
 Operations management: forecast of product sales; demand for services
 Marketing: forecast of sales response to advertisement procedures, new
promotions etc.
 Finance and Risk management: forecast returns from investments
 Economics: forecast of major economic variables, e.g. GDP, population
growth, unemployment rates, inflation; useful for monetary and fiscal
policy; budgeting plans & decisions
85
 Industrial Process Control: forecasts of the quality characteristics of a
production process
 Demography: forecast of population; of demographic events (deaths, births,
migration); useful for policy planning
(D) Sales Forecasting

Any company in selling goods needs to forecast the demand for those goods.
Manufactures need to know how much to produce. Wholesalers and retailers need to
know now much to stock. Substantially understanding demand is likely to lead to
many lost sales, unhappy customers, and perhaps allowing the competition to gain the
upper hand in the marketplace. On the other hand, significantly overestimating
demand also is very costly due to: (i) excessive inventory costs, (ii) forced price
reductions, (iii) unneeded production or storage capacity, and (iv) lost opportunities to
market more profitable goods. Successful marketing and production managers
understand very well the importance of obtaining good sales forecasts.
For the production managers these sales forecast are essential to help trigger the
forecast for production which in turn triggers the forecasting of the raw materials
needed for production.
-Forecasting the need for raw materials and spare parts
Although effective sales forecasting is a key for virtually any company, some
organisations must rely on other types of forecasts as well. A prime example
86
involves forecasts of the need for raw materials and spare parts. Some companies
need to maintain an inventory of spare parts to enable them to quickly repair either
own equipment or their products sold or leased to customers.
-Forecasting Economic Trends
With the possible exception of sales forecasting, the most extensive forecasting effort
is devoted to forecasting economic trends on a regional, national, or even international
level.

-Forecasting Staffing Needs
Every employee that comes into an organisation to sign an employment contract

has certain needs and expectations that they expect will be met in the course of
their work in the organisation as well as contributing their quota towards the
achievement of organisational goals. The organisation as well also has both the
need to achieve its organisational goals as well as maintain adequate number of
staff to bring to bear the needed goals. A proactive organisation therefore must
ensure to forecast on the staffing needs of the organisation. This is to ensure that at
every given point in time, there are optimum numbers of employees to effectively
and efficiently carry out the operations of the organisation. For economically
developed countries there is a shifting emphasis from manufacturing to services.
Goods are being produced outside the country (where labor is chapter) and then
imported. At the same time, an increasing number of business firms are
specialising in providing a service of some kind (e.g., travel, tourism,
entertainment, legal aid, health services, financial, educational, design,
maintenance, etc.). For such a company forecasting “sales” becomes forecasting
the demand for services, which then translates into forecasting staffing needs to
provide those services.
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-Forecasting in education environment
A good education institute typically plans its activities and areas concentration for the
coming years based on the forecasted demand for its different activities. The institute
may come out with a forecast that the future requirements of its students who graduate
may be more in particular sector. This may call for the reorientation of the syllabus
and faculty, development of suitable teaching materials/cases, recruitment of new
faculty with specific sector-oriented background, experience and teaching skills.
Alternatively, the management may decide that the future is more secure with the
conventional areas of operation and it may continue with the original syllabus, etc.
-Forecasting in a rural setting

Cooperative milk producers’, union operates in a certain district. The products it
manufactures, the production capacities it creates, the manpower it recruits, and
many more decisions are closely linked with the forecasts of the milk it may
procure and the different milk products it may see. Milk being a product which has
a ready market is not difficult to sell. Thus demand forecasting for products may
not be a very dominant issue for the organisation.
However, the forecast of milk procurement is a crucial issue as raw milk is a

highly perishable commodity and building up of adequate processing capacity is
important for the dairy. The milk procurement forecast also forms an important
input to the production planning process which includes making decisions on what
to produce, how much and when to produce.
(E) General Steps in the Forecasting Process

The general steps in the forecasting process are as follows:
a. Identify the general need.
b. Select the Period (Time Horizon) of Forecast.
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c. Select Forecast Model to be used: For this, knowledge of various
forecasting models, in which situations these are applicable, how reliable
each one of them is; what type of data is required. On these
considerations; one or more models can be selected.
d. Data Collection: With reference to various indicators identified-collect

data from various appropriate sources-data which is compatible with the
model(s) selected in step (3). Data should also go back that much in past,
which meets the requirements of the model.
e. Prepare forecast: Apply the model using the data collected and calculate
the value of the forecast.
f. Evaluate: The forecast obtained through any of the model should not be
used, as it is, blindly. It should be evaluated in terms of ‘confidence
interval’ – usually all good forecast models have methods of calculating
upper value and the lower value within which the given forecast is
expected to remain with certain specified level of probability. It can also
be evaluated from logical point of view whether the value obtained is
logically feasible? It can also be evaluated against some related variable
or phenomenon. Thus, it is possible, sometimes advisable to modify the
statistically forecasted’ value based on evaluation.
(F) Qualitative Techniques in Forecasting

Grass Roots
Grass roots forecasting builds the forecast by adding successively from the bottom.
The assumption here is that the person closest to the customer or end use of the
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product knows its future needs best. Though this is not always true, in many
instances it is a valid assumption, and it is the basis for this method.
Forecasts at this bottom level are summed and given to the next higher level. This
is usually a district warehouse, which then adds in safely stocks and any effects of
ordering quantity sizes. This amount is then fed to the next level, which may be a
regional warehouse. The procedure repeat until it becomes an input at the top level,
which, in the case of a manufacturing firm, would be the input to the production
system.
Market Research:
Firms often hire outside companies that specialise in market research to conduct
this type of forecasting. You may have been involved in market surveys through a
marketing class. Certainly you have not escaped telephone calls asking you about
product preferences, your income, habits, and so on.
Market research is used mostly for product research in the sense of looking for new
product ideas, likes and dislikes about existing products, which competitive
products within a particular class are preferred, and so on. Again, the data
collection methods are primarily surveys and interviews.
Panel Consensus:
In a panel consensus, the idea that two heads are better than one is extrapolated to
the idea that a panel of people from a variety of positions can develop a more
reliable forecast than a narrower group. Panel forecasts are developed through
open meetings with free exchange of ideas form all levels of management and
individuals. The difficulty with this open style is that lower employee levels are
intimidated by higher levels of management. For example, a salesperson in a
particular product line may have a good estimate of future product demand but
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may not speak up to refute a much different estimate given by the vice president of
marketing.
The Delphi technique (which we discuss shortly) was developed to try to correct
this impairment to free exchange. When decisions in forecasting are at a broader,
higher level (as when introducing a new product line or concerning strategic
product decisions such as new marketing areas) the term executive judgment is
generally used. The term is self-explanatory: a higher level of management is
involved.
Historical Analogy:
The historical analogy method is used for forecasting the demand for a product or
service under the circumstances that no past demand data are available. This may
specially be true if the product happens to be new for the organisation. However,
the organisation may have marketed product(s) earlier which may be similar in
some features to the new product. In such circumstances, the marketing personnel
use the historical analogy between the two products and derive the demand for the
new product using the historical data of the earlier product. The limitations of this
method are quite apparent. They include the questionable assumption of the
similarity of demand behaviors, the changed marketing conditions, and the impact
of the substitutability factor on the demand.
Delphi Method:
As we mentioned under panel consensus, a statement or opinion of a higher-level
person will likely be weighted more than that of a lower-level person. The worst
case is where lower level people feel threatened and do not contribute their true
beliefs. To prevent this problem, the Delphi method conceals the identity of the
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individuals participating in the study. Everyone has the same weight. A moderator
creates a questionnaire and distributes it to participants. Their responses are
summed and given back to the entire group along with a new set of questions.
The Delphi method was developed by the Rand Corporation in the 1950s. The
step-by-step procedures are;
a. Choose the experts to participate. There should be a variety of
knowledgeable people in different areas.
b. Through a questionnaire (or e-mail), obtain forecasts (and any premises
or qualification captions for the forecasts) from all participants.
c. Summarise the results and redistribute them to the participants along with
appropriate new questions.
d. Summarise again, refining forecasts and conditions, and again develop
new questions.
e. Repeat Step 4 if necessary. Distribute the final results to all participants.
The Delphi technique can usually achieve satisfactory results in three rounds. The
time required is a function of the number of participants, how much work is
involved for them to develop their forecasts, and their speed in responding.
ITQ: What are the quantitative techniques in forecasting?
ITA: Grass roots, Market research, Panel consensus, Historical Analogy, Delphi
Method.
Summary
In this session, the definition of business forecasting has been given. Different
forecasting areas in the organisation were identified to include sales, raw materials,
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staffing needs, forecasting in education environment, and in the rural settings.
Steps in forecasting were given as well as the qualitative techniques in forecasting.
1. Define and explain the different types of forecasting methods/techniques.
2. How do forecasting and planning affect a business operation?
3. What is sales forecast?
4. Explain the importance of sales forecast.
5. What do you understand by sales forecasting methods?
6. Discuss user’s expectations. Its advantages and disadvantages.
7. Explain sales force composite. List the merits and demerits.
8. Write on “jury of executive opinion method” and highlight the advantages
and disadvantages.
9. What is “Delphi Technique”? Enumerate its merits and demerits.
10. What is “Market Test”? Point out its advantages and disadvantages.
References
www. Kumar, Abhu (ND) “Plant Location And Layout.”
du.ac.in /fileadmin/du/academics/course material/ep_07.pdf
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9.3 MODULE 3
Evaluation and Review Techniques
Introduction
The central technique available to Project Managers for planning and controlling
their projects is Network Analysis. This short guide will provide you with a basic
understanding of networking principles before applying them. The critical path
method-CPM, which is a network based method, is useful in practice and control
of complex projects. The CPM introduces you to the concept of precedence which
reflects the partial ordering that exists among activities of a project, due to
technical or other reasons.
The critical path analysis is based on the computation of latest starting times of
activities from the knowledge of the earliest ending time of the project. The
activity durations in the CPM are deterministic and known, although precise
information about the durations of activities is seldom available. To deal
quantitatively with imprecise durations, the Programme Evaluation and Review
Technique-PERT based on the probability theory can be employed. The originators
of PERT modeled each activity’s duration as a stochastic variable with an
appropriated beta distribution and proposed an approximate method to calculate
the expectation and the variance of the make - span of the project.

9.3.1 Objectives
Upon completion of this module, you will be able to:
1. Appreciate what tasks are, nods, activity time, project completion time, etc.
2. Identify critical path and know which activity to delay without affecting the
project completion time.
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40
t=1mo D F t=3mo
10
t = 2 mo 30
t = 3mo 50
A D
t= 4mo
B C
20
t=3mo
The Programme (or Project) Evaluation and Review Technique, commonly

abbreviated as PERT, is a model for project management designed to analyse and
represent the tasks involved in completing a given project.
PERT is a method use to analyse the involved tasks in completing a given project,
especially the time needed to complete each task, and identifying the minimum
time needed to complete the total project. PERT was developed primarily to
simplify the planning and scheduling of large and complex projects.
PERT is more of an event-oriented technique rather than start- and

completion-oriented, and is used more in projects where time, rather than
cost, is the major factor. It is applied to very large-scale, one-time, complex,
non-routine infrastructure and Research and Development projects.
PERT network chart is for a seven-month project with five milestones (10 through
50) and six activities (A through F).
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Conventions
A PERT chart is a tool that facilitates decision making: The first draft of a PERT
chart will number its events sequentially in 10s (10, 20, 30, etc.) to allow the later
insertion of additional events.
 Two consecutive events in a PERT chart are linked by activities, which are
conventionally represented as arrows (see the diagram above).
 The events are presented in a logical sequence and no activity can
commence until its immediately preceding event is completed.
 The planner decides which milestones should be PERT events and also
decides their ―proper sequence.
 A PERT chart may have multiple pages with many sub-tasks.
PERT is valuable to manage where multiple tasks are going simultaneously to

reduce the redundancy.
Terminology
 A PERT event: is a point that marks the start or completion of one or more
tasks. It consumes no time, and uses no resources. It marks the completion
of one or more tasks, and is not ―reached until all of the activities leading
to that event have been completed.
 A predecessor event: an event (or events) that immediately precedes some
other event without any other events intervening. It may be the consequence
of more than one activity.
 A successor event: an event (or events) that immediately follows some other
event without any other events intervening. It may be the consequence of
more than one activity.
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 A PERT activity: is the actual performance of a task. It consumes time, it
requires resources (such as labour, materials, space, machinery), and it can
be understood as representing the time, effort, and resources required to
move from one event to another. A PERT activity cannot be completed until
the event preceding it has occurred.
 Optimistic time (O): the minimum possible time required to accomplish a

task, assuming everything proceeds better than is normally expected.
 Pessimistic time (P): the maximum possible time required to accomplish a

task, assuming everything goes wrong (but excluding major catastrophes).
 Most likely time (M): the best estimate of the time required to accomplish a
task, assuming everything proceeds as normal.
 Expected time (TE): the best estimate of the time required to accomplish a
task, assuming everything proceeds as normal (the implication being that the
expected time is the average time the task would require if the task were
repeated on a number of occasions over an extended period of time).
TE = (O + 4M + P) ÷ 6
 Float or Slack is the amount of time that a task in a project network can be
delayed without causing a delay - Subsequent tasks – (free float) or Project
Completion – (total float).
 Critical Path: the longest possible continuous pathway taken from the initial
event to the terminal event. It determines the total calendar time required for
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the project; and, therefore, any time delay along the critical path will delay
the reaching of the terminal event by at least the same amount.
 Critical Activity: An activity that has total float equal to zero. Activity with
zero float does not mean it is on the critical path.
 Lead time: the time by which a predecessor event must be completed in

order to allow sufficient time for the activities that must elapse before a
specific PERT event reaches completion.
 Lag time: the earliest time by which a successor event can follow a specific
PERT event.
 Slack: the slack of an event is a measure of the excess time and resources
available in achieving this event. Positive slack would indicate ahead of
schedule; negative slack would indicate behind schedule; and zero slack
would indicate on schedule.
 Fast tracking: performing more critical activities in parallel.
 Crashing critical path: Shortening duration of critical activities.
Implementation
The first step to scheduling the project is to determine the tasks that the project
requires and the order in which they must be completed. The order may be easy to
record for some tasks (e.g. When building a house, the land must be graded before
the foundation can be laid) while difficult for others (there are two areas that need
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to be graded, but there are only enough bulldozers to do one). Additionally, the
time estimates usually reflect the normal, non-rushed time. Many a time, the time
required to execute the task can be reduced for an additional cost or a reduction in
the quality.
In the following example there are seven tasks, labeled A through G. Some tasks
can be done concurrently (A and B) while others cannot be done until their
predecessor task is complete (C cannot begin until A is complete). Additionally,
each task has three time estimates: the optimistic time estimate (O), the most likely
or normal time estimate (M), and the pessimistic time estimate (P). The expected
time (TE) is computed using the formula (O + 4M + P) ÷ 6.
Activity Predecessor Time Expected

estimates time
Opt. (O) Normal (M) Pess. (P)

A — 2 4 6 4.00
B — 3 5 9 5.33
C A 4 5 7 5.17
D A 4 6 10 6.33
E B, C 4 5 7 5.17
F D 3 4 8 4.50
G E 3 5 8 5.17
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9.3.2 STUDY SESSIONS
9.3.2.1 Study Session 9: Network Analysis
Introduction
Learning Outcome
(A) Network Analysis
(B) Critical Path
Summary
Introduction
Network Analysis or Critical Path Analysis (CPA) or the “Programme, Evaluation

and Review Technique” (PERT) is one of the classic methods of planning and
controlling the progress of projects. For you to effectively plan a project, requires
careful thought and the application of logic. To illustrate this planning tool, we
shall consider the manufacture of a small item. Some typical processes might be:
cutting, finishing, assembling, purchasing, machining, testing and designing.
Learning Outcome
a. Understand the meaning of Network analysis.
b. Appreciate processes in network analysis.
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(A) Network Analysis
To illustrate this planning tool, let's consider the manufacture of a small

item. Some typical processes might be:
Cutting, Finishing, assembling, purchasing, machining, testing, and designing
All these processes are called ‘ACTIVITIES’ or ‘TASKS’.
Step 1
List WHAT has to be done.

Hint: try thinking of verbs ending in “...ing”, like machining or testing.
Do not consider at this stage who is going to do what, concentrate on WHAT.
Step 2
Decide the ORDER in which it is to be done.

Some steps are obvious: we, perhaps, cannot test until assembly has been
completed, which cannot be done until the various parts have been made.
So we have a logical relationship between the start of one task and the
beginning of the next. We could order our list of tasks thus: designing,
purchasing, cutting, machining, assembling, testing, and finishing.
Logic Network or PERT Chart
Writing this out as a network:
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Design purchase cut machine assemble test finish
We put the tasks into rectangles and join them with arrows to show the
sequence or precedence: the logical relationships between them.
Suppose that once we have bought the materials, some need cutting to
size and others need turning on a lathe. The tasks of machining and
cutting could run in parallel rather than consecutively, assuming we have
the appropriate resources. But let's add a bit more.
Time Analysis
Duration
Having completed the network, we can begin the analysis. First, we need
to know the duration of each task and write it into the network. For
convenience, we can write the durations in days.
The Forward Pass

Now we can calculate how long the project will take. We start by
calculating the shortest time or 'earliest finish'. So if we start at time '0'
the earliest day that design can be finished is day 10. Purchasing
therefore cannot start until day 10: i.e. the earliest we can start
purchasing is day 10 and thus the earliest finish for purchasing is 10 +
21 = day 31. We write the earliest start time in the top left-hand corner of
the task box, and the earliest finish time over the right-hand corner of the
task box.
0 10 10 10 21 31
DESIGN PURCHASE
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For the purchasing task, we thus say the Earliest Start Time (EST) is
10 and the Earliest Finish Time (EFT) is 31
(B) Critical Path

The next part of the analysis of the network is to find the CRITICAL
PATH. By definition the Critical Path is the shortest time path through
the network. In such a simple network, it is easy to calculate the amount
of slack available for each task, but in a complicated network, it is not
easy to 'see' which tasks have slack and which have none.
The Backward Pass
So far we have calculated the Earliest Start Time (EST) and the Earliest
Finish Time (EFT) for each task. The next step in calculating the critical
path is to re-time the network starting at the end and calculate the Latest
Start Time (LST) and Latest Finish Time (LFT) for each task.
ITQ: What is critical path?
ITA: It is the shortest time path through the network.
Summary
In this session, we have discussed the Network Analysis. The definitions were
given to you. The steps were also given to include design-purchase-cut-machine-
assemble-test-finish.
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References
Baker, Samuel L. (2009) “Linear Programming I: Maximisation.”
http://hspm.sph.sc.edu/Courses/J716/pdf/71610%20Linear%20Programmin
g%20I.pdf
Knoke, J. R. and Garza, J. d. l. (2003) Practical cost/schedule modeling for CIP

management AACE International Transactions, PM61.
Lowe, C. W. (1966) Critical path analysis by bar chart: the new role of job
Progress Charts. London: Business Publications.
Mind Tools (2004) Critical Path Analysis & PERT Charts. Accessed on August 21
2004 from: http://www.mindtools.com/pages/article/newPPM_04.htm
Moder, J. J and Phillips, C. R (1964) Project management with CPM and PERT.
New York: Reinhold Pub. Corp,.
Newbold, R. C. (1998) Project management in the fast lane: applying the theory
of constraints. Boca Raton: Fla. St. Lucie Press.
Peters, T. F. (2003) “Dissecting the Doctrine of Concurrent Delay.” AACE

International Transaction, CD11.
Stelth, Peter and Guy Le Roy (2009) “Projects’ Analysis through CPM (Critical

Path Method). School of Doctoral Studies; European Union Journal, 1.
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Critical Path Method (CPM)
Introduction
Learning Outcome
(A) Critical Path Method
(B) Advantages of Using the Critical Path Method
(C) Disadvantages of Critical Path Method
(D) The key rules of a CPM:
(E) What can a business do if a project is delayed?
Introduction
CPM as a management methodology has been used from the mid 50s. The main
objective of the CPM implementation was to determine how best to reduce the
time required to perform routine and repetitive tasks that are needed to support an
organisation. Initially, this methodology was identified to conduct routine tasks
such as plant overhaul, maintenance and construction (Moder and Phillips, 1964).
Newbold (1998) defines CPM a technique for analysing projects by
determining the longest sequence of tasks (or the sequence of task with the
least slack) through a project network.”
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Learning Outcomes
At the end of this study session, you should be able to:
1. Define critical path method
2. Explain the advantages and disadvantages of critical path method
3. Understand the key rules of a critical path method
4. Know what a business should do when a project is delayed.
(A) Critical Path Method

Critical path analysis is an extension of the bar chart. The CPM uses a work
breakdown structure, where all projects are divided into individual tasks or
activities.
According to C. W. Lowe (1966), for any project there is a sequence of events that
have to be undertaken. Some tasks might be dependent on the completion of the
previous tasks while others might be independent of the tasks ahead and can be
undertaken at any given time. Job durations and completion times also differ
significantly. CP analysis helps decision makers and project execution members to
identify the best estimates (based on accurate information) of the time that is
needed to complete the project.
Critical Path Method or Critical Path Analysis is also defined as a

mathematically based algorithm for scheduling a set of project activities. It is
106
an important tool for effective project management, Commonly used with all forms
of projects, including construction, software development, research projects,
product development, engineering, and plant maintenance, among others. Any
project with interdependent activities can apply this method of scheduling.
ITQ: What does a CP analysis helps decision makers and project execution members to do?
ITA: It helps them to identify the best estimates (based on accurate information) of the
time that is needed to complete the project.
By way of summary, Critical path method is a project management tool that:

a) Set out all the individual activities that make up a larger project.
b) Shows the order in which activities have to be undertaken.
c) Shows which activities can only take place once other activities have been
completed.
d) Shows which activities can be undertaken simultaneously, thereby, reduce
the overall time taken to complete the whole project.
e) Shows when certain resources will be needed – for example, a crane to be
hired for a building site.
The essential technique for using CPM is to construct a model of the project that
includes the following:
 A list of all activities required to complete the project (also known as Work
Breakdown Structure).
 The time (duration) that each activity
will take to completion.
 The dependencies between the
activities.
107
Then the CPM is drawn up based on dependencies such as:
a) The availability of labour and other resources.
b) Lead times for delivery of materials and other services.
c) Seasonal factors – such as dry weather required in a building project.
Once the CPM is drawn up, it is possible to see the CRITICAL PATH itself – this
is a route through the CPM, which has no spare time (called ‘FLOAT’ or ‘slack’)
in any of the activities.
In other words, if there is any delay to any of the activities on the critical path, the
whole project will be delayed, unless the firm makes other changes to bring the
project back on track. The total time along this critical path is also the minimum
time in which the whole project can be completed. Some branches on the CPM
may have FLOAT, which means that there is some spare time available for these
activities.
ITQ: What is critical path method?
ITA: The critical path method (CPM) is a step-by-step project management technique for
process planning that defines critical and non-critical tasks with the goal of preventing
time-frame problems and process bottlenecks.
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(B) Advantages of Using the Critical Path Method
In the age where tools available to management are constantly changing, and
improving the ability of CPM to still command respect among the project teams
and managers, is testimony to the fact that this tools have proven very valuable and
beneficial. The following are some of the major reasons CPM is still being used in
organisations today, as presented by Peter Stelth and Guy Le Roy (2009):
 CPM encourages managers and project members to graphically draw and

identify various activities that need to be accomplished for project
completion.
 The network diagram also offers a prediction of the completion time of the
project, and can help in the planning and scheduling of the activities needed
for the completion of the project.
 Identifying the critical path for the project is the next stage of the analysis of
the network diagram. In doing this, the management of the project has a
reasonable estimate of the potential problems that might occur and the
activities at which these problems might occur. In many cases the critical
path also determines the allocation of resources.
 CPM also encourages a disciplined and logical approach to planning,

scheduling and managing a project over a long period of time. Often, the
root cause of many project overruns is the failure to identify the factors that
have the potential to seriously impact the project. By forcing individuals in
the project team to identify activities, attention to details can be achieved.
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 A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of
the organisation is also an important task to be undertaken at this point. In an
organisation, SWOT analysis should be undertaken at the corporate level
and at the department level. Carrying out an analysis using the SWOT
framework will reveal changes that can be accomplished; as opposed to
those changes that appear to be optimal solutions initially but would not be
as effective in the long run.
 Optimisation of the time-cost relationship in project management is also

possible using the CPM, as managers can visually identify the activities that
can pose a problem if not managed and monitored effectively over a period
of time.
 Based on the time-cost variables, the project can be tweaked to best satisfy
the goals and aims of the organisation. For example, if a project team is able
to identify that they need more time, if the project has to be within a certain
budget or vice versa this fact is clear right from the start of the project.
While it is presumptuous to aver that every factor affecting activities can be
identified at the initial stages, a large portion of the factors and variables can
be understood and the risks and uncertainties associated with each are
known prior to starting of the project.
 Tracking the CPM is also helpful. Managers can identify areas where
attention needs to be focused. Critical paths do not remain static for the life
of the project; rather, there is a very high chance that the CP might changes
due to internal and external factors affecting the organisation. The
insurgency attacks in the North East, for example, shutdown several routes
110
and organisation. CP that estimated for example seven days for delivery of
raw material from out of the area had to change their critical paths. In some
cases, the internal factors such as union issues and sudden equipment failure
might also impact the critical path.
 Scheduling of activities is possible. The CPM identifies the entire chain of
activities. Often, during the initials stages of the project the number of
activities and the cost requirements might be high; but as the project
progresses the activities might sort themselves out into routine or critical.
Project managers, instead of tracking the entire issue, can focus their
attention to groups of activities that are immediate and have the ability to
impact the next downstream activity.
 The CPM also identifies slack and floats time in the project. Thus, project
managers can identify when resources can be reallocated to different
activities and the shifting and moving of activities to best optimise the
utilisation of the resources.
 In many large projects, there can be more than one critical path in the
network diagram mapped out. When such a situation arises, CPM can help
managers identify suitable plan of actions to handle these multiple critical
paths.
 “Critical Path Analysis formally identifies tasks which must be completed

on time for the whole project to be completed on time, and also identifies
which tasks can be delayed for a while if resource needs to be reallocated to
catch up on missed tasks” (Mind Tools, 2004).
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(C) Disadvantages of Critical Path Method
Many disadvantages are as a result of the technical and conceptual factors involved
in the CP analysis (CPA) process:
 The CPA process can become complicated as the scope and extent of the
project increases. Too many interconnecting activities can result in the
network diagram becoming very complicated.
 According to J. R. Knoke and J. d. l.Garza (2003), the CPA depends on the

fundamental concept that the managers and personnel involved in the project
team are well versed with the various activities. “Unfortunately, practical
experience has shown that the principal assumption underlying CPM
techniques, i.e., the project team’s ability to reasonably predict the scope,
schedule, and cost of each project, is frequently far beyond control.”
 The task of understanding the needs of the critical path get more
complicated when there is more than one critical path in the project. In many
situations, these paths might be parallel and feed into a common node in the
network diagram. It becomes difficult in these situations to identify the best
utilisation of technology and resources for the critical paths.
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 In many cases, as the project progresses, the critical paths might change and
evolve and past critical paths may no longer be valid and new CP have to be
identified, for the project at regular intervals. This implies that the project
manager and project members have to constantly review the network
diagram initially created and identify the shifting and movement of the
critical path over time.
 “The use of total float as a measure for assigning activities to their

representative paths can become problematic, when analysing as built
schedules. CPM is unable to calculate total float on an as built schedule in
which estimated dates have been replaced by actual dates” (Peters, 2003).
 As critical paths and floats change, the scheduling of personnel also changes.
Reallocation of personnel is often very tricky as the individual might be
working on more than one project at a time, and if the services of the
individual are required on more than one critical path, the identification and
distribution of the labour time can cause overloading of the personnel -
creating a stressed out worker.
 Very often, critical paths are not easy to identify, especially if the project is
unique and has never been undertaken by the organisation in the past. The
ability to provide estimates of time and cost for every activity in a traditional
CPM process depends on historical data maintained by the company. In the
absence of this data, decision makers are forced to speculate and assume
time and cost requirements for the projects.
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 Traditionally, any good CPA requires that the process is understood and
evaluated using the forward and the backward pass to determine slack or
float times. In reality, however, the time constraints often result in decision
makers using only one method, to find the time and cost requirements. As a
safety measure, however, these individuals often ‘crash’ the project during
the planning stage and determine the maximum cost that would be needed to
complete a project.
 CPA and network diagrams are highly dependent of information technology

and computer software. The cost of set up of software systems in the
organisation can have high initial cost. Maintaining the software also
requires expertise and monitoring that can quickly become very expensive, if
the organisation does not have in house capabilities for this task.
 Planning and strategising for the project based on

the final expectation and the internal culture and
values of the organisation is also very important.
 Although the CPM method is very valuable in the extent of details that it
provides, modifying the system constantly can be cumbersome especially if
it involves reallocation of resources and time.
(D) The key rules of a CPM:

 Nodes are numbered to identify each, and show the Earliest Start Time
(EST) of the activities that immediately follow the node, and the Latest
Finish Time (LFT) of the immediately preceding activities.
 The CPM must begin and end on one ‘node’ – see below.
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 There must be no crossing activities in the CPM.
 Each activity is labelled with its name e.g. ‘print brochure’, or it may be
given a label, such as ‘D’, below.
 The activities on the critical path are usually marked with a ‘//’.
In the example below, note that:

i. The Node is number 3
ii. The EST for the following activities is 14 days
iii. The LFT for the preceding activities is 16 days
iv. There is 2 days’ float in this case (difference between EST and LFT)
v. The activity that follows the node is labelled ‘D’ and will take 6 days.
For example, – baking a loaf of bread:

Here is a simple example in which some activities depend on others, having been
undertaken in order, whereas others can be done independently:
Activity Preceded By Elapsed Time (Minutes)

A weigh ingredients - 1
B mix ingredients A 3
C dough rising time B 60
D prepare tins - 1
E pre-heat oven - 10
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F knock back dough and place in tins C&D 2
G 2nd dough rising time F 15
H cooking time E&G 40
In this example, there is a clear sequence of events that have to happen in the right
order. If any of the events on the critical path is delayed, then the bread will not be
ready soon. However, tasks D (prepare tins) and E (heat the oven) can be started at
any time as long as they are done by the latest finish time in the following node.
So, we can see that the oven could be switched on as early as time 0, but we can
work out that it could be switched on at any time before 71 – any time later than
this; it won’t be hot enough when the dough is ready for cooking. There is some
‘float’ available for tasks D and E as neither is on the critical path. This is a fairly
simple example, and we can see the LST and LFT are the same in each node.
In a more complex CPM, this will not necessarily be the case, and if so, will
indicate that there is some ‘float’ in at least one activity leading to the node.
However, nodes on the critical path will always have the same EST and LFT.
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(E) What can a business do if a project is delayed?
 First, the CPM is helpful because it shows the likely impact on the whole
project if no action were taken.
 Second, if there is float elsewhere, it might be possible to switch staff from
another activity to help catch up on the delayed activity.
 As a rule, most projects can be brought back on track by using extra labour –
either by hiring additional people or overtime. Note that there will usually be
an extra cost. Alternative suppliers can usually be found – but again, it might
cost more to get urgent help.
In this session, we have discussed on the critical

path method. The definition of the critical path
method has been given. The advantages of critical
path method, as well as the disadvantages have been
highlighted. The key rules of critical path method as
what businesses can do if a project is delayed has
been discussed.

1. Solve the questions at the end of chapters twenty three, twenty four &
twenty five.
2. What can a business do if a project is delayed
3. What are the advantages and disadvantages of critical path method?
4. Discus the key rules of a critical path method
117
References
Baker, Samuel L. (2009). “Linear Programming I: Maximisation.”
g%20I.pdf

progress charts. London: Business Publications.
MindTools (2004) Critical Path Analysis & PERT Charts. Accessed on August 21
Moder, J. J. and Phillips, C. R. (1964) Project management with CPM and PERT,
Reinhold Pub. Corp., New York.
Newbold, R. C. (1998) Project management in the fast lane : applying the theory
of constraints, St. Lucie Press, Boca Raton, Fla.

International Transactions, CD11.
Stelth, Peter and Guy Le Roy “Projects’ Analysis through CPM (Critical Path
Method) School of Doctoral Studies, European Union Journal, 1; ( July, 2009).
118
Project Evaluation and Review Technique (PERT)
Introduction
Learning Outcome
(A) What is a project?
(B) Project Evaluation and Review Technique
(i) Objective
(ii)Field Application
(iii) Description
a) Identify the specific activities and milestones.
b) Determine the proper sequence of the activities
c) Construct a network diagram
d) Estimate the time required for each activity
e) Project management charts; Beyond Gantt:

Summary.
C) Discussion Questions
Introduction
Programme (Project) Evaluation and Review Technique (PERT) is a project
management tool used to schedule, organise, and coordinate tasks within a project.
Learning Objectives
a. Define PERT.
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b. State the objectives of PERT.
c. Discuss the field application of PERT.
d. Describe PERT.
e. Know how to get started in PERT.
(A) What is a project?

A project is a set of activities with a defined start point and a defined end state,
which pursues a defined goal and uses a defined set of resources. Technically
many small-scale operations management endeavours, taking minutes or hours,
conform to this definition of a project. However, in this chapter we will be
examining the management of larger-scale projects taking days, months or years.
Large-scale (and therefore complex) undertakings consume a relatively large
amount of resources, take a long time to complete and typically involve
interactions between different parts of an organisation. Projects come in many and
various forms, including the following:
● organising emergency aid to earthquake victims,
● producing a television programme,
● constructing the Channel Tunnel,
● designing an aircraft,
● running a one-week course in project management,
● relocating a factory,
● refurbishing a hotel,
● installing a new information system.
ITQ: What is a project?
ITA: A project is a set of activities with a defined start point and a defined end state,
which pursues a defined goal and uses a defined set of resources.
120
To a greater or lesser extent, all the projects listed above have some elements in
common. They all have an objective, a definable end result or output that is
typically defined in terms of cost, quality and timing. They are all unique.
There are some points of commonality in project success and failure, which allow
us to identify some general points which seem to minimise the chances of a project
failing to meet its objectives. The following factors are particularly important:
● clearly defined goals: including the general project philosophy or general
mission of the project, and a commitment to those goals on the part of the project
team members.
● competent project manager: a skilled project leader who has the necessary
interpersonal, technical and administrative skills.
● Top-management support: top-management commitment for the project that has
been communicated to all concerned parties.
● competent project team members: the selection and training of project team
members, who between them have the skills necessary to support the project.
● sufficient resource allocation: resources, in the form of money, personnel,
logistics, etc. which are available for the project in the required quantity.
● adequate communications channels: sufficient information is available on project
objectives, status, changes, organisational conditions and client’s needs.
● control mechanisms: the mechanisms which are in place to monitor actual events
and recognise deviations from plan.
● feedback capabilities: all parties concerned with the project are able to review
the project’s status and make suggestions and corrections.
● responsiveness to clients: all potential users of the project are concerned with
and are kept up to date on the project’s status.
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● project staff continuity: the continued involvement of key project personnel
through its life. Frequent turnover of staff can dissipate the team’s acquired
learning.
(B) Project Evaluation and Review Technique

PERT is a methodology developed by the U.S. Navy in the 1950s to manage the
Polaris submarine missile programme. A similar methodology, the Critical Path
Method (CPM) was developed for project management in the private sector at
about the same time. It is basically a method used to analyse the tasks involved in
completing a given project, especially the time needed to complete each task, and
to identify the minimum time needed to complete the total project.
(i) Objective -The main objective of PERT is to facilitate decision making and
to reduce both the time and cost required to complete a project.
(ii) Field Application - PERT is intended for very large-scale, one-time, non-
routine, complex projects with a high degree of inter-task dependency, projects
which require a series of activities, some of which must be performed sequentially
and others that can be performed in parallel with other activities.
(iii) Description - PERT planning involves the following steps which are
described below:
I. Identify the specific activities and milestones. The activities are the tasks
required to complete a project. The milestones are the events marking the
beginning and the end of one or more activities. It is helpful to list the tasks
in a table that in later steps can be expanded to include information on
sequence and duration.
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II. Determine the proper sequence of the activities. This step may be
combined with the activity identification step, since the activity sequence is
evident for some tasks. Other tasks may require more analysis to determine
the exact order in which they must be performed.
III. Construct a network diagram. Using the activity sequence information, a

network diagram can be drawn showing the sequence of the serial and
parallel activities. Each activity represents a node in the network, and the
arrows represent the relation between activities. Software packages simplify
this step by automatically converting tabular activity information into a
network diagram.
IV. Estimate the time required for each activity. Weeks are a commonly used
unit of time for activity completion, but any consistent unit of time can be
used. A distinguishing feature of PERT is its ability to deal with uncertainty
in activity completion time. For each activity, the model usually includes
three time estimates:
 Optimistic time – generally the shortest time in which the activity can
be completed. It is common practice to specify optimistic time to be
three standards deviations from the mean so that there is an
approximately a 1% chance that the activity will be completed within
the optimistic time.
 Most likely time – the completion time having the highest probability.
Note that this time is different from the expected time.
 Pessimistic time – the longest time that an activity might require.
Three standard deviations from the mean are commonly used for the
pessimistic time.
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PERT assumes a beta probability distribution for the time estimates. For a
beta distribution, the expected time for each activity can be approximated using the
following weighted average:
 Expected time = ( Optimistic + 4 x Most likely + Pessimistic ) / 6
 This expected time may be displayed on the network diagram.
 To calculate the variance for each activity completion time, if three standard
deviation times were selected for the optimistic and pessimistic times, then
there are six standard deviations between them, so the variance is given by:
[(Pessimistic - Optimistic) / 62]
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A PERT chart presents a graphic illustration of a project as a network
diagram, consisting of numbered nodes (either circles or rectangles)
representing events, or milestones in the project linked by
labeled vectors (directional lines), representing tasks in the project. The
direction of the arrows on the lines indicates the sequence of tasks. In the diagram,
for example, the tasks between nodes 1, 2, 4, 8, and 10 must be completed in
sequence. These are called dependent or serial tasks. The tasks between nodes 1
and 2 and nodes 1 and 3 are not dependent on the completion of one to start the
other and can be undertaken simultaneously.
These tasks are called parallel or concurrent tasks. Tasks that must be
completed in sequence but that do not require resources or completion time are
considered to have event dependency. These are represented by dotted lines with
arrows and are called dummy activities. For example, the dashed arrow linking
nodes 6 and 9 indicates that the system files must be converted before the user test
can take place, but that the resources and time required to prepare for the user test
(writing the user manual and user training) are on another path. Numbers on the
opposite sides of the vectors indicate the time allotted for the task.
ITQ: What is a PERT?
ITA: A PERT chart presents a graphic illustration of a project as a network diagram,

consisting of numbered nodes (either circles or rectangles) representing events, or
milestones in the project linked by labeled vectors (directional lines), representing
tasks in the project.
PERT planning involves the following steps:

 Identify the specific activities and milestones.
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 Determine the proper sequence of the activities.
 Construct a network diagram.
 Estimate the time required for each activity.
 Determine the critical path.
 Update the PERT chart as the project progresses.
The PERT chart is sometimes preferred over the Gantt Charts. While another
popular project management charting method clearly illustrates task dependencies,
on the other hand, the PERT chart can be much more difficult to interpret,
especially on complex projects. Frequently, project managers use both techniques.
Getting Started with PERT Charts

Source: www.ask.com/net
Here are some additional resources for learning about how PERT charts and other
project management tools are used in the enterprise:
126
Project Management tools and strategy
The Gantt chart and the PERT chart are probably the two best known charts in
project management. Each of these can be used for scheduling, but because Gantt
charts do not illustrate task dependencies and PERT charts can be confusing, PMs
often use both.
Project management charts; Beyond Gantt: Gantt charts are good for certain
purposes, explains project management expert David Christiansen, but there are
other charts PMs have at their disposal.
Source: www.ask.com/net
Summary
In this unit, we have discussed about the project evaluation and review technique.
The objectives were stated, the field application was made, a description of how to
evaluate a project
ITQ: What was
is project made and
evaluation and how totechnique?
review get started with PERT chart was illustrated.
ITA: The project evaluation and review technique commonly abbreviated as PERT, is a
statistical tool used in project management which was designed to analyse and represent
the tasks involved in completing given project. It was a methodology developed by the US
navy in the 1950's to manage the polarised submarine missile programme.
C) Discussion Questions
1. Consider the following information; the following relates to the construction
of an ultra-modern lecture theatre for the Department of Business
127
Administration. All the preliminary studies have been conducted and the
following activities, their times (weeks) and order of precedence have been
identified:
Optimistic time Normal time Pessimistic time
A - 2 3 6
B A 2 4 6
C A 1 2 3
D A 5 6 8
E C 1 2 4
F B 3 5 8
G D 3 4 6
H D 1 2 3
I F,H 1 2 5
J E,G,I 1 2 4
K J 2 3 6

2. Find the expected time for each activity and set up the PERT network for the
project.
3. Identify the critical path.
4. What is the expected completion time?
5. What is the probability of completing this project 4 weeks ahead of
schedule?
6. What is the probability of completing this project 3 weeks behind schedule?
7. What is the probability of completing this project in 25 weeks?
8. a. write the difference between CPM and PERT.
b. let the value of the money be assumed to be 10% per year and supposed
that machine A is replaced after 3 years whereas, machine B is replaced
after six years.
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9. A project has the following activities with the time as shown.
Activity Immediate Predecessor Duration (days)
Most likely Optimistic Pessimistic
A - 3 1 7
B A 6 2 14
C A 3 3 3
D B,C 10 4 22
E B 7 3 15
F D,E 5 2 14
G D 4 4 4
d. Draw the network, find the critical path, the expected project
completion time.
e. What project duration will have 95% confidence of completion?
10 The following table gives data on normal time, and cost of crash time and cost
of a project.
Activity Normal Crash
Time (weeks) Cost (Rs) Time (weeks) Cost (Rs)
1-2 3 300 2 400
2-3 3 30 3 30
2-4 7 420 5 580
2-5 9 720 7 810
3-5 5 250 4 300
4-5 0 0 0 0
5-6 6 320 4 410
6-7 4 400 3 470
6-8 13 780 10 900
7-8 10 1000 9 1200
Indirect cost is Rs per week
a. Draw the network diagram and identify the critical path.
b. What are the normal project duration and associated cost?
Determine which machine should be purchased.
129
References
g%20I.pdf

management AACE International Transactions, PM61,
MindTools (2004) Critical Path Analysis & PERT Charts. Accessed on August 21
Moder, J. J. and Phillips, C. R. (1964) Project management with CPM and PERT,
Reinhold Pub. Corp., New York.
Newbold, R. C. (1998) Project management in the fast lane: applying the theory of
constraints, Boca Raton, Fla. St. Lucie Press.

Stelth, Peter and Guy Le Roy. “Projects’ Analysis through CPM (Critical Path
Method) School of Doctoral Studies, European Union Journal, 1: ( July, 2009).
130
9.3.2.4 STUDY SESSION 12 :
Linear Programming (LP)
Introduction
Learning Outcome
(A) Linear Programming
(B) Classic applications:
(C) Enumeration method of solution
Summary
Introduction
“Linear programming is constrained optimisation, where the constraints and the
objective function are all linear. It is called "programming" because the goal of the
calculations help you choose a "programme" of action” (Baker, 2009). Linear
programming is the process of taking various linear inequalities relating to some
situation, and finding the "best" value obtainable under those conditions.
Learning outcome
a. Define the linear programming.
b. Make a classic application of linear programming.
c. Identify the constraint of linear programming.
d. List the functions of linear programming.
e. Make a graphical method of solutions to linear programming problems.
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(D) Linear Programming
The methods of Linear Programming were originally developed by American
mathematicians, to solve problems arising in industry and economic planning.
Some of such problem involves constraint on the size of workforce, the quantity of
raw material available, the number of working machines, etc. Today, it is a
standard tool that saves millions of dollars for many companies, or even moderate
sizes in many industrialised countries.
If a real-world problem can be represented accurately by the mathematical

equations of a linear programme, the method will find the best solution to the
problem. Of course, few complex real-world problems can be expressed perfectly
in terms of a set of linear functions. Nevertheless, linear programmes can provide
reasonably realistic representations of many real-world problems - especially if a
little creativity is applied in the mathematical formulation of the problem.
What is the nature of this tool and what type of problems would it be useful in
providing solution for? The most common type of application involves those of
allocating limited resources among competing activities, in a best possible and
optimal way. Precisely, this problem involves selecting the level of certain
activities that compete for scares resources that are necessary to perform such
activities.
A typical example of its use would be taking the limitations of materials and
labour, and then determining the "best" production levels for maximal profits under
those conditions. In "real life", linear programming is part of a very important area
of mathematics called "optimisation techniques." This field of study (or at least the
132
applied results of it) is used every day in the organisation and allocation of
resources.
ITQ: What is linear programming?
ITA: Linear programming is a mathematical technique used in computer modelling

(simulation) to find the best possible solution in allocating limited resources (energy,
machines, materials, money, personnel, space, time etc.) to achieve maximum profit or
minimum cost.
(E) Classic applications:

Manufacturing - product choice
 Several alternative outputs with different input requirements
 Scarce inputs
 Maximise profit
Agriculture - feed choice
 Several possible feed ingredients with different nutritional
content
 Nutritional requirements
 Minimise cost
"The Transportation Problem"

 Several depots with various amounts of inventory
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 Several customers to whom shipments must be made
 Minimise cost of serving customers
Scheduling
 Many possible personnel shifts
 Staffing requirements at various times
 Restrictions on shift timing and length
 Minimise cost of meeting staffing requirements
Finance
 Several types of financial instruments available
 Cash flow requirements over time
 Minimise cost
The linear programming model, for a manufacturing problem, involves: processes
or activities that can be done with different amounts.
Constraints – resource limits

The constraints describe the production process – how much output
you get for any given amount of the inputs.
The constraints say that you cannot use more of each resource than you have of
that resource.
A linear constraint means no diminishing or increasing returns. Adding more

input gives the same effect on output regardless of how much you are already
making.
Non-negativity constraints – the process levels cannot be less than 0.

This means that you cannot turn your products back into resources.
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Objective function - to be maximised or minimised
A linear objective function means that you can sell all you want of your
outputs without affecting the price. You have elastic demand, in economics
jargon.
These "real life" systems can have dozens or hundreds of variables, or more. In
algebra, though, you will only work with the simple (and graph table) two-variable
linear case.
The general process for solving linear programming exercises is to graph the
inequalities (called the "constraints") to form a walled-off area on the x, y-plane
(called the "feasibility region"). Then you figure out the coordinates of the corners
of this feasibility region (that is, you find the intersection points of the various
pairs of lines), and test these corner points in the formula (called the "optimisation
equation") for which you are trying to find the highest or lowest value.

Graphical method of solution – for maximisation

One way to solve a linear programming problem is to use a graph. The graph
method lets you see what is going on, but its accuracy depends on how careful a
draftsman you are.
135
(Source: Baker, 2009)
a. Plot the constraints. Express each constraint as an equation. (Change the # or

$ to an =.)
b. Find the feasible region. It is below all lines for constraints that are # and
above all lines for constraints that are $.
Here, the feasible region is below the 2.5x+y=20, 3x+3y=30, and x+2y=16 lines –
those are the # constraints. It’s above the y=0
line (the x-axis), and to the right of the x=0
line (the y-axis) – those are the $ constraints
Isoprofit lines at 45 and 36 profit.

The optimum is at x=4, y=6, profit=36.
136
(Source: Baker, 2009)
Superimpose isoprofit lines.

To get an isoprofit line, set the objective function equal to some arbitrary number.
That gives you a linear equation in X and Y that you can plot on your graph. “Iso”
means “the same.” All the points on an isoprofit line give the same profit.
As a first try, in the diagram to the right, I drew an isoprofit line for a profit of 45.
The equation for the line is 3x+4y=45. That is because we make $3 for each desk
and $4 for each table. 3x+4y=45 is a line containing all the points that have a profit
of exactly 45.
That 45 is profit line happened to be higher than the feasible region in the lower
left corner, bounded by the constraints (Baker, 2009).
Find the highest value isoprofit line that touches the feasible region. Imagine
moving that 3x+4y=45 line, parallel to itself, down and to the left.
137
Move it down a little bit and you might have the line 3x+4y=44. Move it some
more and you might have the line 3x+4y=43. Keep going until your line just
touches a corner of the feasible area. Stop there, and you have the line 3x+4y=36,
which is shown in the diagram.
All isoprofit lines have the same slope. They differ only in how high they are. The
slope of an isoprofit line depends on the ratio of the x good’s profit-per-unit to y
good’s profit-per-unit. The profit amount for the isoprofit line that just touches the
feasible area is the most profit you can make. The X and Y coordinates of the point
where the isoprofit line touches tells you how much of x and y to make.
Why do you stop with the isoprofit line that just touches the feasible area? Higher
isoprofit lines have no feasible points on them. We cannot use those. Lower
isoprofit lines that touch more of the feasible area, have less profit than the one that
just touches a corner. We want the most profit that is feasible, so we want the line
that just touches a corner. The solution is x = 4, y = 6, and the profit is 36.
ITQ: What is the difference between a linear constraint and an objective function?
ITA: A linear constraint means no diminishing or increasing returns. Adding more input
gives the same effect on output regardless of how much you are already making. While
A linear objective function means that you can sell all you want of your outputs without
affecting the price.
(F) Enumeration method of solution

The enumeration method is another way of solving a linear programming problem.
It gives an exact answer that does not depend on your drawing ability.
138
However, it can involve a lot of calculation. To understand the enumeration
method, we start with the graph method.
The feasible region in the diagram above is convex with straight edges. This is
always true in linear programming problems. This implies the extreme point
theorem: If a feasible region exists, the optimal point will be a corner of the
feasible region. When the isoprofit line just touches the feasible region, it
will be touching at a corner. (It is possible for the isoprofit line to touch a whole
edge, if one of the constraint lines is parallel to the isoprofit lines. That whole edge
will include two corners, so the general theorem about corners still applies.)
The corners of the feasible region are points where constraints intersect. If we can
find all of the intersections of the constraints, we know that one of those
intersections must be an optimal point. Some jargon: Each point where the
constraints intersect is called a basic solution.
A basic solution for a 2-product problem like ours is where any two of the
constraint lines intersect.
(If our problem had three products, each basic solution would be where three of the
constraint planes intersect. For a problem with n products, where n is more than 3,
each basic solution would be where n of the constraint hyperplanes intersect.)
The non-negativity equations count as constraints, too, when identifying basic

solutions. Example 1 has 5 constraints, and therefore 10 basic solution
intersections. They are shown in the diagram.
Some of the basic solutions are corners of the feasible region. Other basic solutions
are outside of the feasible area.
139
A basic feasible solution is a basic solution that satisfies all the constraints. In
other words, a basic feasible solution is a corner of the feasible area. In Example 1
there are 5 basic feasible solutions, and the five corners of the feasible region.
The extreme point theorem implies that one of the basic feasible solutions is the
optimal point. To get the solution to this linear programming problem, we just have
to test all of the basic solutions to see which are feasible and which are not. Once
we have the basic feasible solution, we calculate the profit for each one and pick
the highest.
Summarising the enumeration method (for n dimensions, representing n different

products):
 Make all possible groups of n equations from the constraints.
 Solve each group of equations. This gives you all the basic solutions.
 Test each solution against the other constraints.
 Throw out any solutions that are not feasible. The ones that are left are
the basic feasible solutions.
 Calculate the profit for each basic feasible solution.
 Pick the highest profit point as your answer.
Summary
In this unit, we discussed about linear programming. The definition was given, the
applications were listed, the constraints were identified as well as graphical
solutions made of the problems.
B) Discussion Questions
1. What is a linear equation? Relate it to the population census of Nigeria.
2. Define linear programming. What are its applications and limitations?
140
3. Explain the characteristics and assumption of linear programming model.
4. Discuss the meaning of sensitivity analysis on the objective function co-
efficient and right hand side parameters.
5. What is sensitivity analysis in linear programming?
6. Perform graphic analysis of two-variable problems and find the algebraic
solution for the corner point found to be optimal.
7. What are the components of a linear programming model?
8. What is a simplex method in linear programming?
9. What is a “Dual”?
10. What are the procedures of “Dual” in linear programming?
References
Baker, Samuel L. (2009) “Linear Programming I: Maximisation.”
http://hspm.sph.sc.edu/Courses/J716/pdf/71610%20Linear%20Programming%20
I.pdf

progress chart. London: Business Publications.
Mind Tools (2004) Critical Path Analysis & PERT Charts. Accessed on August
21 2004 from: http://www.mindtools.com/pages/article/newPPM_04.htm
Moder, J. J. and Phillips, C. R. (1964) Project management with CPM and PERT.
Newbold, R. C. (1998) Project management in the fast lane: applying the theory
of constraints. Boca Raton, Fla. St. Lucie Press.

International Transaction, CD11.
141
Stelth, Peter and Guy Le Roy. “Projects’ Analysis through CPM (Critical Path
Method) School of Doctoral Studies, European Union Journal, 1: ( July,
2009).
142
Developments in Operations Management
Introduction
Learning Outcome
(A) Developments in Operations Management
(B) Conformance to Specification
i Step 1 – Define the quality characteristics
ii Step 2- Variables and attributes
iii Step 3 – Set quality standards
iv Step 4 – Control quality against those standards
v Where should the checks take place?
vi Check every product and service or take a sample?
(C) Total Quality Management (TQM)
(D) What is TQM?
(E) TQM means meeting the needs and expectations of customers
(F) TQM means covering all parts of the organisation
(G) Service-level agreements
Summary
143
Introduction
This area will dwell heavily on the recent or current work in progress, in the area
of operation and production management. Quality is the only one important fact in
‘operations performance criteria’. There are two reasons for this. First, in some
organisations a separate function is devoted exclusively to the management of
quality. Second, quality is a key concern of almost all organisations. High-quality
goods and services can give an organisation a considerable competitive edge. Good
quality reduces the costs of rework, waste, complaints and returns and, most
importantly, generates satisfied customers. Some operations managers believe that,
in the long run, quality is the most important single factor affecting an
organisation’s performance relative to its competitors.
Learning Outcome
At the end of this session, you should be able to
a. Define quality.
b. Know how to diagnose a quality problem.
c. Identify and discuss steps towards conformance to specification.
d. Define and discuss total quality management.
A. Developments in Operations Management
There are several benefits that organisations stand to gain from high quality. This
will explain why quality is seen as being so important by most operations. The
various ways in which quality improvements can affect other aspects of operations
performance are given below.
1. Revenues can be increased by better sales and enhanced prices in the
market.
2. At the same time, costs can be brought down by improved
efficiencies.
144
3. Productivity and
4. The use of capital.
So, a key task of the operations function must be to ensure that it provides quality
goods and services, to both its internal and external customers. If the perceived
quality gap is such that customers’ perceptions of the product or service fail to
match their expectations, then the reasons lie in other gaps elsewhere as follows.
Gap 1: The customer’s specification–operation’s specification gap: Perceived
quality could be poor because there may be a mismatch between the organisation’s
own internal quality specification and the specification which is expected by the
customer.
Gap 2: The concept–specification gap: Perceived quality could be poor because

there is a mismatch between the product or service concept and the way the
organisation has specified quality internally.
Gap 3: The quality-specification–actual-quality gap: Perceived quality could be

poor because there is a mismatch between actual quality and the internal quality
specification (often called ‘conformance to specification’).
Gap 4: The actual-quality–communicated-image gap: Perceived quality could be
poor because there is a gap between the organisation’s external communications or
market image and the actual quality delivered to the customer. This may be
because the marketing function has set unachievable expectations or operation is
not capable of the level of quality expected by the customer.
ITQ: What is seen as an important aspect in operations and why?
ITA: QUALITY. There are several benefits that organisations stand to gain from high
quality.
145
B. Conformance to Specification
After having diagnosed the quality problem, there is need to have conformance to
specification. Conformance to specification means producing a product or
providing a service to its design specification. It is usually seen as the most
important contribution that operations management can make to the customer’s
perception of quality. We shall examine how it can be achieved by describing
quality management as six sequential steps. They are:
Step 1: Define the quality characteristics of the product or service.
Step 2: Decide how to measure each quality characteristic.
Step 3: Set quality standards for each quality characteristic.
Step 4: Control quality against those standards.
Step 5: Find and correct causes of poor quality.
Step 6: Continue to make improvements.
Step 1 – Define the quality characteristics

Much of the ‘quality’ of a product or service will have been specified in its design.
But not all the design details are useful in controlling quality. For example, the
design of a television may specify that its outer cabinet is made with a particular
veneer. Each television is not checked, however, to make sure that the cabinet is
indeed made from that particular veneer. Rather it is the consequences of the
design specification which are examined – the appearance of the cabinet, for
example. These consequences for quality planning and control of the design are
called the quality characteristics of the product.
Step 2 – Decide how to measure each characteristic

These characteristics must be defined in such a way as to enable them to be
measured and then controlled. This involves taking a very general quality
146
characteristic such as ‘appearance’ and breaking it down, as far as one can, into its
constituent elements. ‘Appearance’ is difficult to measure as such, but ‘colour
match’, ‘surface finish’ and ‘number of visible scratches’ are all capable of being
described in a more objective manner. They may even be quantifiable. Other
quality characteristics pose more difficulty. The ‘courtesy’ of airline staff, for
example, has no objective quantified measure.
Variables and attributes

The measures used by operations to describe quality characteristics are of two
types: variables and attributes. Variable measures are those that can be measured
on a continuously variable scale (for example, length, diameter, weight or time).
Attributes are those which are assessed by judgement and are dichotomous, i.e.
have two states (for example, right or wrong, works or does not work, looks OK or
not OK).
Step 3 – Set quality standards

When operations managers have identified how any quality characteristic can be
measured, they need a quality standard against which it can be checked; otherwise
they will not know whether it indicates good or bad performance. The quality
standard is that level of quality which defines the boundary between acceptable
and unacceptable. Such standards may well be constrained by operational factors
such as the state of technology in the factory, and the cost limits of making the
product. At the same time, however, they need to be appropriate to the
expectations of customers.
147
Step 4 – Control quality against those standards
After setting up appropriate standards the operation will then need to check that the
products or services conform to those standards: doing things right, first time,
every time. This involves three decisions:
1 Where in the operation should they check that it is conforming to standards?
2 Should they check every product or service or take a sample?
3 How should the checks be performed?
Where should the checks take place?

At the start of the process incoming resources may be inspected to make sure that
they are correct with the specification. For example, a car manufacturer will check
that components are of the right specification. A university will screen applicants
to try to ensure that they have a high chance of getting through the programme.
During the process checks may take place before a particularly costly process,
prior to, immediately after a process with a high defective rate, before potential
damage or distress might be caused, and so on. Checks may also take place after
the process itself to ensure that customers do not experience non-conformance.
Check every product and service or take a sample?

While it might seem ideal to check every single product or service, a sample may
be more practical for a number of reasons.
● It might be dangerous to inspect everything. A doctor, for example, checks just a
small sample of blood rather than taking all of a patient’s blood! The
characteristics of this sample are taken to represent those of the rest of the patient’s
blood.
● checking everything might destroy the product or interfere with the service. Not
every light bulb is checked for how long it lasts – it would destroy every bulb.
148
● Checking everything can be time-consuming and costly. It may not be feasible to
check all output from a high-volume machine or to check the feelings of every bus
commuter every day. Also, 100 per cent checking may not guarantee that all
defects will be identified. Sometimes it is intrinsically difficult. For example,
although a physician may undertake the correct testing procedure, he or she may
not necessarily diagnose a (real) disease.
C. Total Quality Management (TQM)

This was one of the earliest of the current wave of management ‘fashions’. Its peak
of popularity was in the late 1980s and early 1990s. As such, it has suffered from
something of a backlash in recent years and there is little doubt that many
companies adopted TQM in the simplistic belief that it would transform their
operations performance overnight. Yet the general precepts and principles that
constitute TQM are still the dominant mode of organising operations improvement.
The approach we take here is to stress the importance of the ‘total’ in total quality
management and how it can guide the agenda for improvement.
TQM can be viewed today as a logical extension of the way in which quality-
related practice has progressed. Originally, quality was achieved by inspection –
screening out defects before they were noticed by customers. The quality control
(QC) concept developed a more systematic approach to not only detecting, but also
treating quality problems. Quality assurance (QA) widened the responsibility for
quality to include functions other than direct operations. It also made increasing
use of more sophisticated statistical quality techniques. TQM included much of
what went before but developed its own distinctive themes. We will use some of
these themes to describe how TQM represents a clear shift from traditional
approaches to quality.
149
D. What is TQM?
TQM is ‘an effective system for integrating the quality development, quality
maintenance and quality improvement efforts of the various groups in an
organisation so as to enable production and service at the most economical levels
which allow for full customer satisfaction’. However, it was the Japanese who first
made the concept work on a wide scale and subsequently popularised the approach
and the term ‘TQM’. It was then developed further by several, so-called, ‘quality
gurus’. Each ‘guru’ stressed a different set of issues, from which emerged the
TQM approach.
It is best thought of as a philosophy of how to approach quality improvement. This

philosophy, above everything, stresses the ‘total’ of TQM. It is an approach that
puts quality at the heart of everything that is done, by an operation and including
all activities within an operation. This totality can be summarised by the way TQM
lays particular stress on the following:
● meeting the needs and expectations of customers;
● covering all parts of the organisation;
● including every person in the organisation;
● examining all costs which are related to quality, especially failure costs and
getting things right first time’;
● developing the systems and procedures which support quality and improvement;
● developing a continuous process of improvement.
ITQ: What is total quality management?
ITA: TQM is ‘an effective system for integrating the quality development, quality
maintenance and quality improvement efforts of the various groups in an organisation
so as to enable production and service at the most economical levels which allow for
full customer satisfaction’
150
E. TQM means meeting the needs and expectations of customers
In TQM this customer perspective is particularly important. It may be referred to
as ‘customer-centricity’ or the ‘voice of the customer’. However it is called,
TQM stresses the importance of starting with an insight into customer needs,
wants, perceptions and preferences. This can then be translated into quality
objectives and used to drive quality improvement.
F. TQM means covering all parts of the organisation

For an organisation to be truly effective, every single part of it, each department,
each activity, and each person at each level, must work properly together, because
every person and every activity affects and in turn is affected by others. One of the
most powerful concepts that has emerged from various improvement approaches is
the concept of the internal customer or supplier. This is recognition that everyone
is a customer within the organisation and consumes goods or services
provided by other internal suppliers, and everyone is also an internal supplier
of goods and services for other internal customers. The implication of this is
that errors in the service provided within an organisation will eventually
affect the product or service which reaches the external customer.
ITQ: Any new developments in operations management?
ITA: There have been a number of innovative developments in operations management that
have sought to organise resources in a significantly new manner in order to make a big
chance in performance.
G. Service-level agreements
Some organisations bring a degree of formality to the internal customer concept by
encouraging (or requiring) different parts of the operation to agree service-level
151
agreements (SLAs with each other). SLAs are formal definitions of the
dimensions of service and the relationship between two parts of an
organisation. The type of issues which would be covered by such an agreement
could include response times, the range of services, dependability of service
supply, and so on. Boundaries of responsibility and appropriate performance
measures could also be agreed. For example, an SLA between an information
systems support unit and a research unit in the laboratories of a large company
could define such performance measures as:
● the types of information network services which may be provided as ‘standard’;
● the range of special information services which may be available at different

periods of the day;
● The minimum ‘up-time’, i.e. the proportion of time the system will be available
at different periods of the day;
● The maximum response time and average response time to get the system fully
operational should it fail;
● The maximum response time to provide ‘special’ services, and so on.
Summary
In this session, quality development in operations management has been
discussed. The definition of quality has been given, stressing on the “total” in the
new operations management. How quality can be diagnosed, what steps leads
152
towards conformity and total quality management were all discussed in this
session.
1. Discuss the developments in operations management
2. What is conformance to specification?
3. Discuss what you understand by total quality marketing
4. Total quality marketing means covering all aspects of the

organization. Discuss
5. What is service level agreements?
6. Total quality marketing means meeting the needs and the expectations
of the customers. Do you agree? discuss
153
REFERENCES
g%20I.pdf

Mind Tools (2004) Critical Path Analysis & PERT Charts. Accessed on August 21
Moder, J. J. and Phillips, C. R. (1964) Project management with CPM and PERT.
Newbold, R. C. (1998) Project management in the fast lane: applying the theory of
constraint., Boca Raton: Fla. St. Lucie Press.

Stelth, Peter and Guy Le Roy “Projects’ Analysis through CPM (Critical Path
Method) School of Doctoral Studies, European Union Journal, 1: ( July, 2009).
154
10.0 FURTHER READING
Hindle, T. (1994) Field Guide to Strategy, Cambridge Mass: Harvard Business School
Press.
Lucey T. (1989). Quantitative Techniques: An Instructional Manual. Third Edition:
United Kingdom; Guermey Press vale.
Operations Management (2007) By Nigel Slack, Stuart Chambers, Robert Johnston
Prentice Hall/Financial Times.
Operations Management for Competitive Advantage (2002) By Richard B. Chase,
Nicholas J. Aquiliano F. Robert Jacobs McGraw-Hill Irwin.
Operation Management (2007) Contemporary Concepts and Cases Roger G. Schroeder
McGraw-Hill College.
Operations Management(2002) By William J. Stevenson McGraw-Hill Irwin
Operation and Supply Management (2009) By Robert Jacobs, Richard B. Chase,
Nicholas J. Aquilano F. McGraw-Hill.
Operations management (2007) By Nigel Slack, Stuart Chambers, Robert Johnston
Prentice Hall/Financial Times.
www.jstor.com.
www.ask.com/net.
11.0 GLOSSARY
Production: According to Elwood Butta “production is a process by which goods or services are
created”.
Critical Path: is the shortest time path through the network.
Safety Stock: Remaining inventory between the times that an order is placed and when new
stock is received.
Product management: is an organisational lifecycle function within a company dealing with

the planning, forecasting, or marketing of a product.
155

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DISTANCE

MASTER IN BUSINESS ADMINISTRATION (MBA)

BUAD 802: PRODUCTION AND OPERATION MANAGEMENT

First published 2016 in Nigeria.

Published and printed in Nigeria by:

Ahmadu Bello University Press Ltd.

Ahmadu Bello University,

- Sir John Daniels

The set of interrelated management activities that are involved in manufacturing

Classroom activities will be conducted primarily as a seminar/video conferencing,

Open education resources

Other sources for open education resources

WEEK/DATE MODULE STUDY ACTIVITY INDIVIDUAL ASSIGNMENT

5. Read: chapters six, seven & eight

MODULE 2: Plant Location and Layout, Inventory Management and

MODULE 3: Evaluation and Review Techniques

8.0 DISCUSSION FORUM

Relevant Discussion Question(s) is/are presented under the corresponding Study

9.1 MODULE 1: Review of fundamental concepts of Operations Management

9.1.2.1 STUDY SESSION 1: The Concept of Operation Management

Section and Subsection Headings

(A) Operations Management

(B) Distinction between Manufacturing Operations and Service Operations

(C) A Framework for Managing Operations

(D) Discussion Questions

(A) Operations Management

Production involves the skillful bringing together of a number of resources, such as

Operations in an organisation can be categorised into manufacturing operations

Production/Operation management is the process which combines and transforms

(B) Distinction between Manufacturing Operations and Service Operations

The distinction can be summarised thus:

c. Tangible/Intangible nature of output

Manufacturing is characterised by tangible outputs (products), outputs that

Service is characterised by intangible outputs, outputs that customers consumes

According to the U.S. Department of Education, operations management is the

ITQ: What is the difference between manufacturing and service?

In some types of organisation, it is relatively easy to visualise the operations

Operations management programmes typically include instruction in principles of

(C) A Framework for Managing Operations

ITQ: What are the general management functions?

ITA: They are Planning, Organising, Controlling, Behaviour and Models.

(D) Discussion Questions

Hindle, T (1994) Field Guide to Strategy. Cambridge, Mass: Harvard Business

Section and Subsection Headings

(A) The Evolution of Strategy

(B) Operational Effectiveness

(C) Strategy Hierarchy

(D) Discussion Questions

(A) The Evolution of Strategy

ITQ: What is strategic planning?

(B) Operational Effectiveness

A firm such as FedEx (courier company), with a strategic position focused on

ITQ: What is operation effectiveness?

(C) Strategy Hierarchy

C. Operations designs, plans, and manages processes through which the

Each of these functions must translate midlevel

In particular, operations strategy configures and develops business processes that

ITQ: What are the three key functional areas in an organisation?

ITA: Marketing, operations and finance,

Thus, business strategy is concerned with selecting external output markets

You will work within a multifunctional business setting where

ITQ: What is introduction to business all about?

Grading is based on the balanced scorecard that measures profitability, customer

(D) Discussion Questions