INTRODUCTION TO PRODUCTION

AND OPERATION MANAGEMENT

Sub-Themes

1.1 Introduction1.2 Historical Evolution of P&O Management

1.3 Concept of Production 1.4 Production System
1.5 Production Management 1.6 Operating System
1.7 Operations Management 1.8 Managing Global
Operations
1.9 Scope of Production and Operations Management
 INTRODUCTION
• Production/operations management is the process, which
combines and transforms various resources used in the
production/operations subsystem of the organization into
value added product/services in a controlled manner as per
the policies of the organization.
• Therefore, it is that part of an organization, 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, which are
involved in manufacturing certain products, is called as
production management. If the same concept is extended to
services management, then the corresponding set of
management activities is called as operations management.
 HISTORICAL EVOLUTION OF PRODUCTION AND
OPERATIONS MANAGEMENT
• The traditional view of manufacturing management began in
eighteenth century (1776) when Adam Smith recognised the
economic benefits of specialisation of labour. He recommended
breaking of jobs down into subtasks and recognises workers to
specialised tasks in which they would become highly skilled and
efficient.
• In the early twentieth century (1901), F.W. Taylor implemented
Smith’s theories and developed scientific management. From then
till 1930, many techniques were developed prevailing the
traditional view.
• Production management becomes the acceptable term from
1930s to 1950s. As F.W. Taylor’s works become more widely
known, managers developed techniques that focussed on
economic efficiency in manufacturing. Workers were studied in
great detail to eliminate wasteful efforts and achieve greater
• At the same time, psychologists, socialists and other social
scientists began to study people and human behaviour in
the working environment. In addition, economists,
mathematicians, and computer socialists contributed
newer, more sophisticated analytical approaches.
• With the 1970s emerges 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’ emphasized the broadening of our field to
service organizations. The second, more suitable change
was the beginning of an emphasis on synthesis, rather
than just analysis, in management practices.
Date Contribution Contributor

1776 Specialization of labour in manufacturing Adam Smith

1900 to 1930 Scientific management time study and work study Frederick W. Taylor
developed; dividing planning and doing of work

1940 Operations research applications in World War II P.M. Blacker and others

1946 Digital computer John Mauchlly and

J.P. Eckert

1970 Integrating operations into overall strategy and W. Skinner J. Orlicky and G. Wright
policy, Computer applications to manufacturing,
Scheduling and control, Material requirement
planning (MRP)

1980. Quality and productivity applications from Japan: W.E. Deming and J. Juran.
robotics, CAD-CAM
 CONCEPT OF PRODUCTION

• Production function is that part of an organization, which is

concerned with the transformation of a range of inputs into the
required outputs (products) having the requisite quality level.
• Production is defined 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.
• At each stage of processing, there will be value addition.
• Some examples of production are: manufacturing custom-made
products like, boilers with a specific capacity, constructing flats,
some structural fabrication works for selected customers, etc.,
and manufacturing standardized products like, car, bus, motor
cycle, radio, television, etc.
 PRODUCTION SYSTEM
• It is that activity whereby resources, flowing within a
defined system, are combined and transformed in a
controlled manner to add value in accordance with the
policies communicated by management.
• Inputs: men, materials, machines, information and capital
• Transformation process: product design, process planning,
production control, maintenance
• Outputs: products, services
• Feedback information: continuous inventory, quality and
cost.
• The production system has the following
characteristics:
1. Production is an organized activity, so every
production system has an objective.
2. The system transforms the various inputs to
useful outputs.
3. It does not operate in isolation from the other
organization system.
4. There exists a feedback about the activities, which
is essential to control and improve system
performance.
 Classification of Production System

• Production systems can be classified as Job Shop, Batch, Mass and Continuous Production
systems.
1. JOB SHOP PRODUCTION
• Job shop production are characterised by manufacturing of one or few quantity of
products designed and produced as per the specification of customers within prefixed
time and cost. The distinguishing feature of this is low volume and high variety of
products. A job shop comprises of general purpose machines arranged into different
departments. Each job demands unique technological requirements, demands processing
on machines in a certain sequence.
Characteristics
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of
uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
Advantages
1. Because of general purpose machines and facilities variety
of products can be produced.
2. Operators will become more skilled and competent, as
each job gives them learning opportunities.
3. Full potential of operators can be utilised.
4. Opportunity exists for creative methods and innovative
ideas.
Limitations
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher
inventory cost.
3. Production planning is complicated.
4. Larger space requirements.
2. BATCH PRODUCTION
• Batch production is defined by American Production and
Inventory Control Society (APICS) “as a form of manufacturing in
which the job passes through the functional departments in lots or
batches and each lot may have a different routing.” It is
characterised by the manufacture of limited number of products
produced at regular intervals and stocked awaiting sales.
Characteristics
• Batch production system is used under the following
circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of
item in a batch and change of set up is required for processing the
next batch.
4. When manufacturing lead time and cost are lower as compared
to job order production.
Advantages
• Following are the advantages of batch production:
1. Better utilisation of plant and machinery.
2. Promotes functional specialisation.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.
Limitations
• Following are the limitations of batch production:
1. Material handling is complex because of irregular and longer
flows.
2. Production planning and control is complex.
3. Work in process inventory is higher compared to continuous
production.
4. Higher set up costs due to frequent changes in set up.
3. MASS PRODUCTION
• Manufacture of discrete parts or assemblies using a continuous process are
called mass production. This production system is justified by very large
volume of production. The machines are arranged in a line or product
layout. Product and process standardisation exists and all outputs follow the
same path.
Characteristics
• Mass production is used under the following circumstances:
1. Standardisation of product and process sequence.
2. Dedicated special purpose machines having higher production capacities
and output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any
back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Advantages
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilisation due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Limitations
1. Breakdown of one machine will stop an entire
production line.
2. Line layout needs major change with the changes in
the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.
4. CONTINUOUS PRODUCTION
• Production facilities are arranged as per the sequence of production operations from the
first operations to the finished product. The items are made to flow through the sequence
of operations through material handling devices such as conveyors, transfer devices, etc.
Characteristics
• Continuous production is used under the following circumstances:
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
Advantages
1. Standardisation of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilisation due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Limitations
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.
 Objectives of Production Management
• The objective of the production management is ‘to produce goods services of right
quality and quantity at the right time and right manufacturing cost’.
1. RIGHT QUALITY
The quality of product is established based upon the customers needs. The right
quality is not necessarily best quality. It is determined by the cost of the product and
the technical characteristics as suited to the specific requirements.
2. RIGHT QUANTITY
The manufacturing organization should produce the products in right number. If they
are produced in excess of demand the capital will block up in the form of inventory
and if the quantity is produced in short of demand, leads to shortage of products.
3. RIGHT TIME
Timeliness of delivery is one of the important parameter to judge the effectiveness
of production department. So, the production department has to make the optimal
utilization of input resources to achieve its objective.
4. RIGHT MANUFACTURING COST
Manufacturing costs are established before the product is actually manufactured.
Hence, all attempts should be made to produce the products at pre-established cost,
so as to reduce the variation between actual and the standard (pre-established) cost.
 Concept of Operations

• An operation is defined in terms of the mission it

serves for the organization, technology it employs
and the human and managerial processes it
involves. Operations in an organization 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.
 Objectives of Operations Management

• Objectives of operations management can be categorised

into customer service and resource utilisation.
1. CUSTOMER SERVICE
• The first objective of operating systems is the customer
service to the satisfaction of customer wants. Therefore,
customer service is a key objective of operations
management. The operating system must provide
something to a specification which can satisfy the
customer in terms of cost and timing. Thus, primary
objective can be satisfied by providing the ‘right thing at a
right price at the right time’.
2. RESOURCE UTILISATION
• Another major objective of operating systems
is to utilise resources for the satisfaction of
customer wants effectively, i.e., customer
service must be provided with the
achievement of effective operations through
efficient use of resources. Inefficient use of
resources or inadequate customer service
leads to commercial failure of an operating
system.
SCOPE OF PRODUCTION AND OPERATIONS MANAGEMENT

• Production and operations management concern with the conversion

of inputs into outputs, using physical resources, so as to provide the
desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adoptability.
It distinguishes itself from other functions such as personnel,
marketing, finance, etc., by its primary concern for ‘conversion by
using physical resources.’ Following are the activities which are listed
under production and operations management functions:
1. Location of facilities
2. Plant layouts and material handling
3. Product design
4. Process design
5. Production and planning control
6. Quality control
7. Materials management
8. Maintenance management.
1. LOCATION OF FACILITIES
• Location of facilities for operations is a long-term capacity
decision which involves a long term commitment about the
geographically static factors that affect a business
organization. It is an important strategic level decision-making
for an organization. It deals with the questions such as ‘where
our main operations should be based?’
• The selection of location is a key-decision as large investment
is made in building plant and machinery. An improper location
of plant may lead to waste of all the investments made in
plant and machinery equipments. Hence, location of plant
should be based on the company’s expansion plan and policy,
diversification plan for the products, changing sources of raw
materials and many other factors.
• The purpose of the location study is to find the optimal
location that will results in the greatest advantage to the
organization.
2. PLANT LAYOUT AND MATERIAL HANDLING
• Plant layout refers to the physical arrangement of facilities. It is the
configuration of departments, work centres and equipment in the
conversion process. The overall objective of the plant layout is to design
a physical arrangement that meets the required output quality and
quantity most economically.

• ‘Material Handling’ refers to the ‘moving of materials from the store

room to the machine and from one machine to the next during the
process of manufacture’. It is also defined as the ‘art and science of
moving, packing and storing of products in any form’. It is a specialised
activity for a modern manufacturing concern, with 50 to 75% of the cost
of production. This cost can be reduced by proper section, operation and
maintenance of material handling devices.

• Material handling devices increases the output, improves quality, speeds

up the deliveries and decreases the cost of production. Hence, material
handling is a prime consideration in the designing new plant and several
existing plants.
3. PRODUCT DESIGN
• Product design deals with conversion of ideas into reality. Every
business organization have to design, develop and introduce new
products as a survival and growth strategy. Developing the new
products and launching them in the market is the biggest challenge
faced by the organizations.
• The entire process of need identification to physical manufactures
of product involves three functions: marketing, product
development, manufacturing. Product development translates the
needs of customers given by marketing into technical specifications
and designing the various features into the product to these
specifications.
• Manufacturing has the responsibility of selecting the processes by
which the product can be manufactured. Product design and
development provides link between marketing, customer needs
and expectations and the activities required to manufacture the
product.
4. PROCESS DESIGN
• Process design is a macroscopic decision-making
of an overall process route for converting the
raw material into finished goods.
• These decisions encompass the selection of a
process, choice of technology, process flow
analysis and layout of the facilities.
• Hence, the important decisions in process
design are to analyse the workflow for
converting raw material into finished product
and to select the workstation for each included
in the workflow.
5. PRODUCTION PLANNING AND CONTROL
• Production planning and control can be defined as the process of planning the production in
advance, setting the exact route of each item, fixing the starting and finishing dates for each
item, to give production orders to shops and to follow up the progress of products according
to orders.
• The principle of production planning and control lies in the statement ‘First Plan Your Work
and then Work on Your Plan’. Main functions of production planning and control includes
planning, routing, scheduling, dispatching and follow-up.
• Planning is deciding in advance what to do, how to do it, when to do it and who is to do it.
Planning bridges the gap from where we are, to where we want to go. It makes it possible for
things to occur which would not otherwise happen.
• Routing may be defined as the selection of path which each part of the product will follow,
which being transformed from raw material to finished products. Routing determines the
most advantageous path to be followed from department to department and machine to
machine till raw material gets its final shape.
• Scheduling determines the programme for the operations. Scheduling may be defined as
‘the fixation of time and date for each operation’ as well as it determines the sequence of
operations to be followed.
• Dispatching is concerned with the starting the processes. It gives necessary authority so as
to start a particular work, which has already been planned under ‘Routing’ and ‘Scheduling’.
• Therefore, dispatching is ‘release of orders and instruction for the starting of production for
any item in acceptance with the route sheet and schedule charts’.
• The function of follow-up is to report daily the progress of work in each shop in a
prescribed prof orma and to investigate the causes of deviations from the planned
performance.
6. QUALITY CONTROL
• Quality Control (QC) may be defined as ‘a system that is used to maintain a
desired level of quality in a product or service’. It is a systematic control of
various factors that affect the quality of the product. Quality control aims at
prevention of defects at the source, relies on effective feed back system and
corrective action procedure.
• Quality control can also be defined as ‘that industrial management
technique by means of which product of uniform acceptable quality is
manufactured’. It is the entire collection of activities which ensures that the
operation will produce the optimum quality products at minimum cost.
• The main objectives of quality control are:
– To improve the companies income by making the production more acceptable to
the customers i.e., by providing long life, greater usefulness, maintainability, etc.
– To reduce companies cost through reduction of losses due to defects.
– To achieve interchangeability of manufacture in large scale production.
– To produce optimal quality at reduced price.
– To ensure satisfaction of customers with productions or services or high quality
level, to build customer goodwill, confidence and reputation of manufacturer.
– To make inspection prompt to ensure quality control.
– To check the variation during manufacturing.
7. MATERIALS MANAGEMENT
• Materials management is that aspect of management function
which is primarily concerned with the acquisition, control and
use of materials needed and flow of goods and services
connected with the production process having some
predetermined objectives in view.
• The main objectives of materials management are:
– To minimise material cost.
– To purchase, receive, transport and store materials efficiently and
to reduce the related cost.
– To cut down costs through simplification, standardisation, value
analysis, import substitution, etc.
– To trace new sources of supply and to develop cordial relations
with them in order to ensure continuous supply at reasonable rates.
– To reduce investment tied in the inventories for use in other
productive purposes and to develop high inventory turnover ratios.
8. MAINTENANCE MANAGEMENT
• In modern industry, equipment and machinery are a very
important part of the total productive effort. Therefore,
their idleness or downtime becomes are very expensive.
Hence, it is very important that the plant machinery should
be properly maintained.
• The main objectives of maintenance management are:
– To achieve minimum breakdown and to keep the plant in good
working condition at the lowest possible cost.
– To keep the machines and other facilities in such a condition
that permits them to be used at their optimal capacity without
interruption.
– To ensure the availability of the machines, buildings and
services required by other sections of the factory for the
performance of their functions at optimal return on investment.
Characteristic of modern Production & Operations function
• The production management of today presents certain characteristics which make it look
totally different from what it was during the past. Specifically, today’s production system is
characterised by at least four features.
1. Manufacturing as Competitive Advantage
• In the past production was considered to be like any other function in the organisation. When
demand was high and production capacities were inadequate, the concern was to somehow
muster all inputs and use them to produce goods which would be grabbed by market. But
today’s scenario is contrasting. Plants have excess capacities, competition is mounting and
firms look and gain competitive advantage to survive and succeed. Interestingly, production
system offers vast scope to gain competitive edge and firms intend to exploit the potential.
Total Quality Management (TQM), Time-Based Competition, Business Process Re-engineering
(BPRE), Just-in-Time (JIT), Focused Factory, Flexible Manufacturing Systems (FMS), Computer
Integrated Manufacturing (CIM), and The Virtual Corporation are but only some techniques
which the companies are employing to gain competitive advantage.
2. Services Orientation
• As was stated earlier, service sector is gaining greater relevance these days. The production
system, therefore, needs to be organised keeping in mind the peculiar requirements of the
service component. The entire manufacturing needs to be geared to serve (i) intangible and
perishable nature of the services, (ii) constant interaction with clients or customers, (iii) small
volumes of production to serve local markets, and (iv) need to locate facilities to serve local
markets. There is increased presence of professionals on the production, instead of
technicians and engineers.
3. Disappearance of Smokestacks
• Protective labour legislation, environmental movement and gradual
emergence of knowledge based organisations have brought total
transformation in the production system. Today’s factories are
aesthetically designed and built, environment friendly - in fact, they are
homes away from homes. Going to factory everyday is no more
excruciating experience, it is like holidaying at a scenic spot. A visit to
ABB, L & T or Smith Kline and Beecham should convince the reader about
the transformation that has taken place in the wealth creation system.
4. Small has Become Beautiful
• It was E.F. Schumacher who, in his famous book Small is Beautiful,
opposed giant organisations and increased specialisation. He advocated,
instead, intermediate technology based on smaller working units,
community ownership, and regional workplaces utilising local labour and
resources. For him, small was beautiful. Businessmen, all over the world,
did not believe in Schumacher’s philosophy. Inspired by economies of
scale, industrialists went In for huge organisations and mass production
systems.
 Recent trends in Production/Operations Management

1. Global Market Place : Globalisation of business has compelled many

manufacturing firms to have operations- in many countries where they
have certain economic advantage. This has resulted in a steep increase
in the level of competition among manufacturing firms throughout the
world.
2. Production/Operations Strategy : More and more firms are recognising
the importance of production/operations strategy for the overall success
of their business and the necessity for relating it to their overall business
strategy.
3. Total Quality Management (TQM) : TQM approach has been adopted by
many firms to achieve customer satisfaction by a never-ending quest for
improving the quality of goods and services.
4. Flexibility : The ability to adapt quickly to changes in volume of demand,
in the product mix demanded, and in product design or in delivery
schedules, has become a major competitive strategy and a competitive
advantage to the firms. This is sometimes called as agile manufacturing.
5. Time Reduction : Reduction of manufacturing cycle time and speed to
market for a new product provide competitive edge to a firm over other
firms. When companies can provide products at the same price and quality,
quicker delivery (short lead times) provide one firm competitive edge over
the other.
6. Technology : Advances in technology have led to a vast array of new
products, new processes and new materials and components. Automation,
computerisation, information and communication technologies have
revolutionised the way companies operate. Technological changes in
products and processes can have great impact on competitiveness and
quality, if the advanced technology is carefully integrated into the existing
system.
7. Worker Involvement : The recent trend is to assign responsibility for
decision making and problem solving to the lower levels in the
organisation. This is known as employee involvement and empowerment.
Examples of worker involvement are quality circles and use of work teams
or quality improvement teams.
8. Re-engineering : This involves drastic measures or break-through
improvements to improve the performance of a firm. It involves the
concept of clean-slate approach or starting from scratch in redesigning the
9. Environmental Issues : Today’s production managers are concerned
more and more with pollution control and waste disposal which are key
issues in protection of environment and social responsibility. There is
increasing emphasis on reducing waste, recycling waste, using less-toxic
chemicals and using biodegradable materials for packaging.
10. Corporate Downsizing (or Right Sizing) : Downsizing or right sizing has
been forced on firms to shed their obesity. This has become necessary
due to competition, lowering productivity, need for improved profit and
for higher dividend payment to shareholders.
11. Supply-Chain Management : Management of supply-chain, from
suppliers to final customers reduces the cost of transportation,
warehousing and distribution throughout the supply chain.
12. Lean Production : Production systems have become lean production
systems which use minimal amounts of resources to produce a high
volume of high quality goods with some variety. These systems use
flexible manufacturing systems and multi-skilled workforce to have
advantages of both mass production and job production (or craft
production).
 Production and Operations Planning
1. Forecasting
• Forecasting means peeping into the future. As future is unknown
and is anybody’s guess but the business leaders in the past have
evolved certain systematic and scientific methods to know the
future by scientific analysis based on facts and possible
consequences. Thus, this systematic method of probing the
future is called forecasting.
• In this way forecasting of sales refers to an act of making
prediction about future sales followed by a detailed analysis of
facts related to future situations and forces which may affect the
business as a whole.
• As far as the marketing manager is concerned the sales forecast
is an estimate of the amount of unit sales for a specified future
period under the proposed marketing plan or program.
• When we consider the function of production and operations
management, no doubt Production and Operation departments will
produce goods as per the sales program given by the sales department,
but it has to prepare forecast regarding machine capacity required,
materials required and time required for production and so on. This
needs the knowledge of what exactly happened in the production shop in
previous periods.
• Making of a proper forecast requires the assessment of both controllable
and uncontrollable factors (both economic and non economic) inside and
outside the organisation.
• All business and industrial activities revolve around the sale and its future
planning. To know what a business will do we must know its future sales.
So, sales forecasting is the most important activity in the business
because all other activities depend upon the sales of the concern.
• Sales forecasting as a guiding factor for a firm because it enables the firm
to concentrate its efforts to produce the required quantities, at the right
time at reasonable price and of the right quality. Sales forecasting is the
basis of planning the various activities i.e.; production activities, pricing
policies, programme policies and strategies, personnel policies as to
recruitment, transfer, promotion, training, wages etc.
• The period of forecasting, that is the time range selected for forecasting depends
on the purpose for which the forecast is made. The period may vary from one
week to some years.
• Depending upon the period, the forecast can be termed as ‘Short range
forecasting’, medium range forecasting’ and ‘Long range forecasting’. ‘Short
range forecasting period may be one week, two weeks or a couple of months.
Medium range forecasting period may vary from 3 to 6 months. Long range
forecasting period may vary from one year to any period. The objective of above
said forecast is naturally different.
• In general, short term forecasting will be of more useful in production planning.
The manager who does short range forecast must see that they are very nearer
to the accuracy.
• In long range forecast, the normal period used is generally 5 years. In some
cases it may extends to 10 to 15 years also. The purpose of long range forecast
is:
(i) To work out expected capital expenditure for future developments or to acquire new
facilities,
(ii) To determine expected cash flow from sales,
(iii) To plan for future manpower requirements,
(iv) To plan for material requirement,
(v) To plan for Research and Development. Here much importance is given to long range
growth factor.
• In case of medium range forecasting the period may extend over
to one or two years. The purpose of this type of forecasting is:
(i) To determine budgetary control over expenses,
(ii) To determine dividend policy,
(iii) To find and control maintenance expenses,
(iv) To determine schedule of operations,
(v) To plan for capacity adjustments.
In case of short-term forecast, which extends from few weeks to
three or six months and the following purposes are generally
served:
(i) To estimate the inventory requirement,
(ii) To provide transport facilities for finished goods,
(iii) To decide work loads for men and machines,
(iv) To find the working capital needed,
(v) To set-up of production run for the products,
(vi) To fix sales quota,
(vii) To find the required overtime to meet the delivery promises.
• Management scientists have developed
various methods for forecasting. One has to
decide which method has to be used to suit
the information available with him and to suit
his needs. The manager, who is concerned
with forecasting, must have knowledge of
factors influencing forecast. Various factors
that influence the forecast are:
(i) Environmental changes,
(ii) Changes in the preference of the user,
(iii) Number of competitive products,
(iv) Disposable income of the consumer.
• In forecasting the production important
factors to be considered are:
(i) Demand from the marketing department,
(ii) Rate of labours absenteeism,
(iii) Availability of materials,
(iv) Available capacity of machines,
(v) Maintenance schedules,
(vi) Delivery date schedules.
 Steps in forecasting

(a) Determine the objective of forecast: What for you are making forecast? Is it
for predicting the demand? Is it to know the consumer’s preferences? Is it to
study the trend? You have to spell out clearly the use of forecast.
(b) Select the period over which the forecast will be made? Is it long-term
forecast or medium-term forecast or short-term forecast? What are your
information needs over that period?
(c) Select the method you want to use for making the forecast. This method
depends on the period selected for the forecast and the information or data
available on hand. It also depends on what you expect from the information
you get from the forecast. Select appropriate method for making forecast.
(d) Gather information to be used in the forecast. The data you use for making
forecasting to produce the result, which is of great use to you. The data may
be collected by:
(i) Primary source: This data we will get from the records of the firm itself.
(ii) Secondary source: This is available from outside means, such as published data,
magazines, educational institutions etc.
(e) Make the forecast: Using the data collected in the selected method of
forecasting, the forecast is made.
 Forecasting Methods:
1. Survey of buyer’s inventions or the user’s expectation method: Under
this system of sales forecasting actual users of the product of the
concern are contacted directly and they are asked about their intention
to buy the company’s products in an expected given future usually a
year. Total sales forecasts of the product then estimated on the basis of
advice and willingness of various customers. This is most direct method
of sales forecasting.
The chief advantages of this method are:
(i) Sales forecast under this method is based on information received or collected
from the actual users whose buying actions will really decide the future demand.
So, the estimates are correct.
(ii) It provides a subjective feel of the market and of the thinking behind the buying
intention of the actual uses. It may help the development of a new product in the
market.
(iii) This method is more appropriate where users of the product are numbered and
a new product is to be introduced for which no previous records can be made
available.
2. Collective opinion or sales force composite method:
Under this method, views of salesmen, branch
manager, area manager and sales manager are
secured for the different segments of the market.
Salesmen, being close to actual users are required to
estimate expected sales in their respective territories
and sections. The estimates of individual salesmen are
then consolidated to find out the total estimated sales
for the coming session. These estimates are then
further examined by the successive executive levels in
the light of various factors like proposed changes in
product design, advertising and selling prices,
competition etc. before they are finally emerged for
forecasting.
3. Group executive judgement or executive judgement method: This
is a process of combining, averaging or evaluating, in some other
way, the opinions and views of top executives. Opinions are sought
from the executives of different fields i.e., marketing; finance;
production etc. and forecasts are made.
4. Experts’ opinions: Under this method, the organisation collects
opinions from specialists in the field outside the organisation.
Opinions of experts given in the newspapers and journals for the
trade, wholesalers and distributors for company’s products,
agencies or professional experts are taken. By analysing these
opinions and views of experts, deductions are made for the
company’s sales, and sales forecasts are done.
5. Market test method: Under this method seller sells his product in a
part of the market for sometimes and makes the assessment of
sales for the full market on the bases of results of test sales. This
method is quite appropriate when the product is quite new in the
market or good estimators are not available or where buyers do not
prepare their purchase plan.
6. Trend projection method: Under this method, a trend of
company’s or industry’s sales is fixed with the help of
historical data relating to sales which are collected, observed
or recorded at successive intervals of time. Such data is
generally referred to as time series. The change in values of
sales is found out. The study may show that the sales
sometimes are increasing and sometimes decreasing, but a
general trend in the long run will be either upward or
downward. It cannot be both ways. This trend is called secular
trend. The sales forecasts with the help of this method are
made on the assumption that the same trend will continue in
the future. The method which is generally used in fitting the
trend is the method of least squares or straight line trend
method. With this method a straight line trend is obtained.
This line is called ‘line of best fit’. By using the formula of
regression equation of Y on X, the future sales are projected.
• The trend can be calculated by the least square
method as follows:
(i) Find time deviations (X) of each period from a certain
period and then find the sum of time deviation (ΣX).
(ii) Square the time deviation of each period (X2) and
then find the sum of squares of each period (ΣX2).
(iii) Multiply time deviations with the sales of each
period individually (XY) and add the product of the
column to find (ΣXY).
(iv) To find the trend (Y) this is equal to a + bX. The value
of a and b may be determined by either of the
following two ways:
(a) Direct method. This method is applicable only when ΣX = 0. To
make ΣX = 0, it is necessary that the time deviations should be
calculated exactly from the mid point of the series. Then, the
values of a and b will be calculated as follows:
a (average) = ΣY and b (rate of growth)= ΣXY
n X2
• T his method is simple and direct.
(b) Indirect method. This method is somewhat difficult. This method
can be applied in both the cases where ΣX has any positive or
negative values or ΣX is not equal to zero. The values of a and b are
calculated by solving the following two equations:
– ΣY = na + bΣX
– ΣXY = aΣX + bΣX2
• By calculating the values of a and b in the above manner, the sales
can be forecasted for any future period by applying the formula
Y = a + bX.
7. Moving average method: This is another statistical
method to calculate the trend through moving averages.
It can be calculated as follows:
• A n appropriate period is to be determined for which the
moving average is calculated. While determining the
period for moving averages, the normal cycle time of
changes in the values of series should be considered so
that short-term fluctuations are eliminated. As far as
possible, the period for moving averages should be in
odd numbers such as period of 3, 5 or 7 years. The
period in even numbers will create a problem in
centralising the values of averages. The calculated values
of moving averages present the basis for determining
the expected amount of sale.
Criteria of a good forecasting method:
• The suitability of a method depends on various factors such as nature of the product,
available time and past records, wealth and energy, degree of accuracy and the forecaster
etc. of an enterprise. However, in general, a good forecasting method must possess the
following qualifications.
(i) Accuracy: Accuracy of the forecasting figures is the life blood of the business because many
important plans and programmes, policies and strategies are prepared and followed on the
basis of such estimates. If sales forecasts are wrong, the businessman suffer a big loss.
Hence, the method of forecasting to be applied must amount to maximum accuracy.
(ii) Simplicity: The method for forecasting should be very simple. If the method is difficult or
technical, then there is every possibility of mistake. Some information are collected from
outside and that will remain unanswered or inaccurate replies will be received, if the
method is difficult. Management must also be able to understand and have confidence in
the method.
(iii) Economy: The method to be used should be economical taking into account the importance
of the accuracy of forecast. Costs must be
(iv) Availability: The method should be such for which the relevant information may be available
immediately with reasonable accuracy. Moreover, the technique must give quick results and
useful information to the management.
(v) Stability: The data of forecasting should be such wherein the future changes are expected to
be minimum and are reliable for future planning for sometime.
(vi) Utility: The forecasting technique must be easily understandable and suitable to the
 Illustration 1.
From the following time series data of
sale, project the sales for the next three
years.

Year 2001 2002 2003 2004 2005 2006 2007

Sales 80 90 92 83 94 99 92
(`000
units)
 Computation of Trend Values
Years Time deviation Sales in (‘000 Squares of Product of
from 2004 units) time dev. time
X Y X2 deviations and
sales
XY
2001
2002
2003
2004
2005
2006
2007
n=7 ΣX = 0 ΣY = 630 ΣX² = 28 ΣXY = + 56
• Hence regression equation comes to
Y = 90 + 2X.
With the help of this equation we can project
the trend values for the next three years, i.e.
2008, 2009 and 2010.
• Y2008 = 90 + 2(4) = 90 + 8 = 98 (000) units.
• Y2009 = 90 + 2(5) = 90 + 10 = 100 (000) units.
• Y2010 = 90 + 2(6) = 90 + 12 = 102 (000) units.
 CAPACITY PLANNING
• The effective management of capacity is the most important
responsibility of production and operations management. The
objective of capacity management i.e., planning and control of
capacity is to match the level of operations to the level of demand.
• Capacity planning is concerned with finding answers to the basic
questions regarding capacity such as:
(i) What kind of capacity is needed?
(ii) How much capacity is needed?
(iii) When this capacity is needed?
• Capacity planning is to be carried out keeping in mind future
growth and expansion plans, market trends, sales forecasting, etc.
Capacity is the rate of productive capability of a facility. Capacity is
usually expressed as volume of output per period of time.
• Capacity planning is required for the following:
• Sufficient capacity is required to meet the customers demand in time,
• Capacity affects the cost efficiency of operations,
• Capacity affects the scheduling system,
• Capacity creation requires an investment,
• Capacity planning is the first step when an organisation decides to
produce more or new products.
• Capacity planning is mainly of two types:
(i) Long-term capacity plans which are concerned with investments in
new facilities and equipments. These plans cover a time horizon of
more than two years.
(ii) Short-term capacity plans which takes into account work-force size,
overtime budgets, inventories
• Capacity refers to the maximum load an operating unit can
handle. The operating unit might be a plant, a department, a
machine, a store or a worker. Capacity of a plant is the maximum
rate of output (goods or services) the plant can produce.
• The production capacity of a facility or a firm is the maximum
rate of production the facility or the firm is capable of
producing. It is usually expressed as volume of output per
period of time (i.e., hour, day, week, month, quarter etc.).
Capacity indicates the ability of a firm to meet market demand -
both current and future.
• Effective Capacity can be determined by the following factors:
 Facilities - design, location, layout and environment.
 Product - Product design and product-mix.
 Process - Quantity and quality capabilities.
 Human factors - Job content, Job design, motivation, compensation,
training and experience of labour, learning rates and absenteeism and
labour turn over.
 Operational factors - Scheduling, materials management, quality
assurance, maintenance policies, and equipment break-downs.
 External factors - Product standards, safety regulations, union
attitudes, pollution control standards.
 Measurement of capacity

• Capacity of a plant is usually expressed as the rate

of output, i.e., in terms of units produced per
period of time (i.e., hour, shift, day, week, month
etc.).
• But when firms are producing different types of
products, it is difficult to use volume of output of
each product to express the capacity of the firm. In
such cases, capacity of the firm is expressed in
terms of money value (production value) of the
various products produced put together.
 Capacity Planning Decisions
• Capacity planning involves activities such as:
(i) Assessing the capacity of existing facilities.
(ii) Forecasting the long-range future capacity needs.
(iii) Identifying and analysing sources of capacity for future needs.
(iv) Evaluating the alternative sources of capacity based on financial, technological and
economical considerations.
(v) Selecting a capacity alternative most suited to achieve strategic mission of the firm.
• Capacity planning is necessary when an organisation decides to increase its
production or introduce new products into the market or to increase the volume
of production to gain the advantages of economies of scale.
• Once the existing capacity is evaluated and a need for new or expanded facilities
is determined, decisions regarding the facility location and process technology
selection are undertaken.
• When the long-range capacity needs are estimated through long-range forecasts
for products, a firm may find itself in one of the two following situations:
(i) A capacity shortage situation where present capacity is not enough to meet the forecast
demand for the product.
(ii) A n excess or surplus capacity situation where the present capacity exceeds the expected
future demand.
Factors affecting determination of plant capacity

(i) Capital investment required,

(ii) Changes in product design, process design, market conditions and product
life cycles,
(iii) Flexibility for capacity additions,
(iv) Level of automation desired,
(v) Market demand for the product,
(vi) Product obsolescence and technology obsolescence and
(vii) Type of technology selected.
Forms of capacity planning:
• Based on time-horizon
(i) Long-term capacity planning and
(ii) Short-term capacity planning
• Based on amount of resources employed
(i) Finite capacity planning and
(ii) Infinite capacity planning
 Factors Affecting Capacity Planning
• Two kinds of factors affecting capacity planning are:
(i) Controllable Factors: amount of labour employed,
facilities installed, machines, tooling, shifts of work
per day, days worked per week, overtime work,
subcontracting, preventive maintenance and number
of production set ups.
(ii) Less Controllable Factors: absenteeism, labour
performance, machine break-downs, material
shortages, scrap and rework, strike, lock-out, fire
accidents etc.
 Capacity Requirement Planning
• Capacity requirement planning (CRP) is a technique which determines what equipment
and labour/personnel capacities are required to meet the production objectives (i.e.,
volume of products) as per the master production schedule and material requirement
planning (MRP-I).
• Capacity Requirement Planning Strategies:
Two types of capacity planning strategies used are:
(i) “Level capacity” plan and
(ii) “Matching capacity with demand” plan.
• Level capacity plan is based in “produce-to-stock and sell” approaches wherein the
production systems are operated at uniform production levels and finished goods
inventories rise and fall depending upon whether production level exceeds demand or
vice versa from time period to time period (say every quarter
• “Matching capacity with demand” Plan: In this plan, production capacity is matched
with the demand in each period (weekly, monthly or quarterly demand). Usually,
material flows and machine capacity are changed from quarter to quarter to match the
demand. The main advantages are low levels of finished goods inventory resulting in
lesser inventory carrying costs. Also, the back-ordering cost is also reduced. The
disadvantages are high labour and material costs because of frequent changes in
workforce (hiring, training and lay-off costs, overtime or idle time cost or subcontracting
costs).
• Optimum Plant Capacity: Plant capacity has a great influence on cost of
production with increasing volume of production, economies of scale
arises which results in reduction in average cost per unit produced.
• For a given production facility, there is an optimum volume of output
per year that results in the least average unit cost. This level of output is
called the “best operating level” of the plant. As the volume of output
increases outward from zero in a particular production facility, average
unit costs fall.
• These declining costs are because of the following reasons:
(i) Fixed costs are spread over more units produced,
(ii) Plant construction costs are less,
(iii) Reduced costs of purchased material due to quantity discounts for higher
volume of materials purchased and
(iv) Cost advantages in mass production processes. Longer production runs (i.e.,
higher batch quantity of products produced) have lesser setup cost per unit of
product produced, lesser scrap etc., resulting in savings which will reduce the
cost of production per unit. This is referred to as “economies of scale”. But this
reduction in per unit cost will be only upto certain volume of production.
Additional volumes of outputs beyond this volume results in ever-increasing
average unit production cost.
• Balancing the Capacity: In firms manufacturing many products (a product
line or a product-mix) the load on different machines and equipments vary
due to changes in product-mix. When the output rates of different
machines do not match with the required output rate for the products to
be produced, there will be an imbalance between the work loads of
different machines. This will result in some machine or equipment
becoming a “bottleneck work centre” thereby limiting the plant capacity
which wills in-turn increase the production costs per unit.
• To overcome problem of imbalance between different machines,
additional machines or equipments are added to the bottleneck work-
centre to increase the capacity of the bottle-neck work centre to match
with the capacity of other work centres. Adding new machines or
equipments to bottleneck work centres to remove the imbalance in
capacity between various work centres is found to be economical than
giving excessive overtime to workers working in bottle-neck centres which
increases production costs. Another method to remove imbalance is to
subcontract excess work load of bottleneck centres to outside vendors or
subcontractors. Another way to balance capacities is to try to change the
product mix by manipulating the sales for different products to arrive at a
suitable product-mix which loads all work centres almost uniformly.
 Factors influencing Effective Capacity

• The effective capacity is influenced by (1) Forecasts of demand, (2) Plant and labour efficiency, (3)
Subcontracting, (4) Multiple shift operation, (5) Management policies.
• Forecasts of demand: Demand forecast is going to influence the capacity plan in a significant way. As
such, it is very difficult to forecast the demand with accuracy as it changes significantly with the product
life-cycle stage, number of products. Products with long lifecycle usually exhibit steady demand growth
compared to one with shorter life-cycle. Thus the accuracy of forecast influences the capacity planning.
• Plant and labour efficiency: It is difficult to attain 100 per cent efficiency of plant and equipment. The
efficiency is less than 100 percent because of the enforced idle time due to machine breakdown, delays
due to scheduling and other reasons. The plant efficiency varies from equipment to equipment and from
organisation to organisation. Labour efficiency contributes to the overall capacity utilisation. The
standard time set by industrial engineer is for a representative or normal worker. But the actual workers
differ in their speed and efficiency. The actual efficiency of the labour should be considered for
calculating efficiency. Thus plant and labour efficiency are very much essential to arrive at realistic
capacity planning.
• Subcontracting: Subcontracting refers to off loading, some of the jobs to outside vendors thus hiring the
capacity to meet the requirements of the organisation. A careful analysis as to whether to make or to
buy should be done. An economic comparison between cost to make the component or buy the
component is to be made to take the decision.
• Multiple shift operation: Multiple shifts are going to enhance the firm’s capacity utilisation. But
especially in the third shift the rejection rate is higher. Specially for process industries where investment
is very high it is recommended to have a multiple shifts.
• Management policy: The management policy with regards to subcontracting, multiplicity of shifts
(decision regarding how many shifts to operate), which work stations or departments to be run for third
shift, machine replacement policy, etc., are going to affect the capacity planning.
 Facility location

• Plant location may be understood as the function of determining

where the plant should be located for maximum operating economy
and effectiveness. The selection of a place for locating a plant is one of
the problems, perhaps the most important, which is faced by an
entrepreneur while launching a new enterprise. A selection on pure
economic considerations will ensure an easy and regular supply of raw
materials, labour force, efficient plant layout, proper utilisation of
production capacity and reduced cost of production. An ideal location
may not, by itself, guarantee success; but it certainly contributes to the
smooth and efficient working of an organisation. A bad location, on
the other hand, is a severe handicap for any enterprise and it finally
bankrupts it. It is, therefore, very essential that utmost care should be
exercised in the initial stages to select a proper place. Once a mistake
is made in locating a plant it becomes extremely difficult and costly to
correct it.
 Steps in Location Selection
• To be systematic, in choosing a plant location, the entrepreneur would
do well to proceed step by step, the steps beinfc
• 1. Within the country or outside;
• 2. Selection of the region; The following factors influence such selection:
– (i) Availability of Raw Materials
– (ii) Nearness to the Market
– (iii) Availability of Power
– (iv) Transport Facilities
– (v) Suitability of Climate
– (vi) Government Policy
• 3. Selection of the locality or community; Factors include:
– (i) Availability of Labour
– (ii) Civic Amenities for Workers
– (iii) Existence of Complementary and Competing Industries
– (iv) Availability of Water and Fire-fighting Facilities
• 4. S election of the exact site. Soil, Size and Topography
 Facility layout
• Plant Layout, also known as layout of facility refers to the configuration of
departments, work-centres and equipment and machinery with focus on the flow of
materials or work through the production system.
• Plant layout or facility layout means planning for location of all machines,
equipments, utilities, work stations, customer service areas, material storage areas,
tool servicing areas, tool cribs, aisles, rest rooms, lunch rooms, coffee/tea bays,
offices, and computer rooms and also planning for the patterns of flow of materials
and people around, into and within the buildings. Layout planning involves decisions
about the physical arrangement of economic activity centres within a facility. An
economic activity centre can be anything that consumes space, a person or group of
people, a machine, a work station, a department, an aisle, a store room and so on.
The goal or layout planning is to allow workers and equipments to operate more
effectively.
• The questions to be addressed in layout planning are:
– How much space and capacity does each centre need?
– How should each centre's space be configured?
– What centres should the layout include?
– Where should each centre be located?
• The location of a centre has two dimensions:
– Absolute location or the particular space that the centre occupies within the facility.
Plant Layout- Principles:
• The layout selected in conformity with layout principles should be an ideal one.
These principles are:-
• Principle of Minimum Travel: Men and materials should travel the shortest
distance between operations so as to avoid waste of labour and time and
minimise the cost of materials handling.
• Principle of Sequence: Machinery and operations should be arranged in a
sequential order. This principle is best achieved in product layout, and efforts
should be made to have it adopted in the process layout.
• Principle of Usage: Every unit of available space should be effectively utilised.
• Principle of Compactness: There should be a harmonious fusion of all the
relevant factors so that the final layout looks well integrated and compact.
Principle of Safety and Satisfaction: The layout should contain built in provisions
for safety for the workmen. It should also be planned on the basis of the
comfort and convenience of the workmen so that they feel satisfied.
• Principle of Flexibility: The layout should permit revisions with the least difficulty
and at minimum cost.
• Principle of Minimum Investment: The layout should result in savings in fixed
capital investment, not by avoiding installation of the necessary facilities but by
an intensive, use of available facilities.
Types of Layout:
• A layout essentially refers to the arranging and
grouping of machines which are meant to produce
goods. Grouping is done on different lines. The
choice of a particular line depends on several factors.
The methods of grouping or the types of layout are:
(i) Process layout or functional layout or job shop layout;
(ii) Product layout or line processing layout or flow-line
layout;
(iii) Fixed position layout or static layout;
(iv) Cellular manufacturing (CM) layout or Group
Technology layout and
(v) Combination layout or Hybrid layout.
Importance of layout:
• The importance of a layout can be described as under:
• Avoidance of Bottlenecks: Bottlenecks refer to any, place in a production process where
materials tend to pile up or produced at rates of speed less rapid than the previous or
subsequent operations. Bottlenecks are caused by inadequate machine capacity,
inadequate storage space or low speed on the part of the operators. The results of
bottlenecks are delays in production schedules, congestion, accidents and wastage of
floor area. All these may be overcome with an efficient layout.
• Avoidance of Unnecessary and Costly Changes: A planned layout avoids frequent
changes which are difficult and costly. The incorporation of flexibility elements in the
layout would help in the avoidance of revisions.
• Better Production Control: Production control is concerned with the production of a
product of the right type at the right time and at reasonable cost. A good plant layout
is a requisite of good production control and provides the plant control officers with a
systematic basis upon which to build organisation and procedures.
• Better Supervision: A good plant layout ensures better supervision in two ways: (a)
Determining the number of workers to be handled by a supervisor and (b) Enabling the
supervisor to get a full view of the entire plant at one glance. A good plant layout is,
therefore, the first step in good supervision.
• Economies in Handling: Nearly 30 per cent to 40 per cent of the manufacturing costs are
accounted for by materials handling. Every effort should, therefore, be made to cut
down en this cost. Long distance movements should be avoided and specific handling
operations must he eliminated.
• Effective Use of Available Area: Every unit of the plant area is valuable, especially
in urban areas. Efforts should be therefore, be made to make use of the available
area by planning the layout properly.
• Improved Employee Morale: Employee morale is achieved when workers are
cheerful and confident. This state of mental condition is vital to the success of any
organisation. Morale depends on better working conditions; better employee
facilities; reduced number of accidents; and increased earnings.
• Improved Quality Control: Timely execution of orders will be meaningful when the
quality of the output is not below expectations. To ensure quality, inspection
should be conducted at different stages of manufacture. An ideal layout provides
for inspection to ensure better quality control.
• Improved Utilisation of Labour: A good plant layout is one of the factors in
effective utilisation of labour. It makes possible individual operations, the process
and flow of materials handling in such a way that the time of each worker is
effectively spent on productive operations.
• Minimisation of Production Delays: Repeat order and new customers will be the
result of prompt execution of orders. Every management should try to keep to the
delivery schedules.
• Minimum Equipment Investment: Investment on equipment can be minimised by
planned machine balance and location, minimum handling distances, by the
installation of general purpose machines and by planned machine loading. A good
plant layout provides all these advantages.
 Production Design
• Production or operations strategy is directly influenced by product design for the
following reasons:
(i) As products are designed, all the detailed characteristics of each product are established.
(ii) Each product characteristic directly affects how the product can be made or produced (i.e.,
process technology and process design) and
(iii) How the product is made determines the design of the production system (production
design) which is the heart of production and operations strategy.
• Further, product design directly affects product quality, production costs and
customer satisfaction. Hence, the design of product is crucial to success in today’s
global competition.
• A good product design can improve the marketability of a product by making it easier
to operate or use, upgrading its quality, improving its appearance, and/or reducing
manufacturing costs.
• A distinctive design may be the only feature that significantly differentiates a product.
An excellent design includes usability, aesthetics, reliability, functionality, innovation
and appropriateness.
• An excellent design provides competitive advantage to the manufacturer, by ensuring
appropriate quality, reasonable cost and the expected product features. Firms of
tomorrow will definitely compete not on price and quality, but on product design.
What Does Product Design Do?
• The activities and responsibilities of product design
include the following:
(i) Translating customer needs and wants into product and
service requirements (marketing).
(ii) Refining existing products (marketing).
(iii) Developing new products (marketing, product design
and production).
(iv) Formulating quality goals (quality assurance,
production).
(v) Formulating cost targets (accounting).
(vi) Constructing and testing prototype (marketing,
production).
(vii) Documenting specifications (product design).
• Objectives of Product Design
(i) The overall objective is profit generation in the long run.
(ii) To achieve the desired product quality.
(iii) To reduce the development time and cost to the minimum.
(iv) To reduce the cost of the product.
(v) To ensure producibility or manufacturability (design for manufacturing and assembly).
• Factors Influencing Product Design
(i) Customer requirements: The designers must find out the exact requirements of the
customers to ensure that the products suit the convenience of customers for use. The
products must be designed to be used in all kinds of conditions.
(ii) Convenience of the operator or user: The industrial products such as machines and
tools should be so designed that they are convenient and comfortable to operate or
use.
(iii) Trade off between function and form: The design should combine both performance
and aesthetics or appearance with a proper balance between the two.
(iv) Types of materials used: Discovery of new and better materials can improve the
product design. Designers keep in touch with the latest developments taking place in
the field of materials and components and make use of improved materials and
components in their product designs.
(v) Work methods and equipments: Designers must keep abreast of improvements in
work methods, processes and equipments and design the products to make use of the
latest technology and manufacturing processes to achieve reduction in costs.
(vi) Cost/Price ratio: In a competitive market, there is lot of pressure on designers to
design products which are cost effective because cost and quality are inbuilt in the
design. With a constraint on the upper limit on cost of producing products, the designer
must ensure cost effective designs.
(vii) Product quality: The product quality partly depends on quality of design and partly
on quality of conformance. The quality policy of the firm provides the necessary
guidelines for the designers regarding the extent to which quality should be built in the
design stage itself by deciding the appropriate design specifications and tolerances.
(viii) Process capability: The product design should take into consideration the quality of
conformance, i.e., the degree to which quality of design is achieved in manufacturing.
This depends on the process capability of the machines and equipments. However, the
designer should have the knowledge of the capability of the manufacturing facilities and
specify tolerances which can be achieved by the available machines and equipments.
(ix) Effect on existing products: New product designs while replacing existing product
designs, must take into consideration the use of standard parts and components,
existing manufacturing and distribution strategies and blending of new manufacturing
technology with the existing one so that the costs of implementing the changes are kept
to, the minimum.
(x) Packaging: Packaging is an essential part of a product and packaging design and
product design go hand in hand with equal importance. Packaging design must take into
account the objectives of packaging such as protection and promotion of the product.
Attractive packaging enhances the sales appeal of products in case of consumer
products (nondurable).
• Characteristics of Good Product Design
(i) F unction or performance: The function or performance is what the
customer expects the product to do to solve his/her problem or offer
certain benefits leading to satisfaction. For example, a customer for a
motor bike expects the bike to start with a few kicks on the kick peddle and
also expects some other functional aspects such as pick-up, maximum
speed, engine power and fuel consumption etc.
(ii) A ppearance or aesthetics: This includes the style, colour, look, feel, etc.
which appeals to the human sense and adds value to the product.
(iii) R eliability: This refers to the length of time a product can be used before
it fails. In other words, reliability is the probability that a product will
function for a specific time period without failure.
(iv) M aintainability: Refers to the restoration of a product once it has failed.
High degree of maintainability is desired so that the product can be
restored (repaired) to be used within a short time after it breaks down. This
is also known as serviceability.
(v) A vailability: This refers to the continuity of service to the customer. A
product is available for use when it is in an operational state. Availability is
a combination of reliability and maintainability. High reliability and
maintainability ensures high availability.
(vi) Productibility: This refers to the ease of manufacture with minimum cost (economic production).
This is ensured in product design by proper specification of tolerances, use of materials that can be
easily processed and also use of economical processes and equipments to produce the product
quickly and at a cheaper cost.
(vii) Simplification: This refers to the elimination of the complex features so that the intended function
is performed with reduced costs, higher quality or more customer satisfaction. A simplified design
has fewer parts which can be manufactured and assembled with less time and cost. “
(viii) Standardisation: Refers to the design activity that reduces variety among a group of products or
parts. For example, group technology items have standardised design which calls for similar
manufacturing process steps to be followed. Standard designs lead to variety reduction and results in
economies of scale due to high volume of production of standard products. However, standardised
designs may lead to reduced choices for customers.
(ix) Specification: A specification is a detailed description of a material, part or product, including
physical measures such as dimensions, volume, weight, surface finish etc. These specifications
indicate tolerances on physical measures which provide production department with precise
information about the characteristics of products to be produced and the processes and production
equipments to be used to achieve the specified tolerances (acceptable variations). Interchangeability
of parts in products produced in large volumes (mass production and flow-line production) is
provided by appropriate specification of tolerances to facilitate the desired fit between parts which
are assembled together.

(x) Safety: The product must be safe to the user and should not cause any accident while using or
should not cause any health hazard to the user. Safety in storage, handling and usage must be
ensured by the designer and a proper package has to be provided to avoid damage during
transportation and storage of the product. For example, a pharmaceutical product while used by the
patient, should not cause some other side effect threatening the user.
MEASUREMENT OF PRODUCTIVITY
• Productivity is the quality or state of being productive. It is some relationship of
outputs to inputs. It is a concept that guides the management of a production
system, and measures its success. It is the quality that indicates how well
labour, capital, materials and energy are utilised.
• Productivity improvement is sought everywhere because it supports a higher
standard of living, helps control inflation, and contributes towards a stronger
national economy.
• Productivity is an indicator reflecting the changes in the performance of the
enterprise and having some sort of input-output comparisons relating to various
activities of an organisation. It also facilitates the management to control and
plan its future operations of the enterprise.
• A productivity index is a device of expressing the ratio between outputs and the
inputs of the resources numerically. These indices are prepared by comparing
the volume of output of goods with the labour employed on that job or the
profits of the firm with the capital employed. If the comparison shows an
upward trend in indices, it is a sign of improved or better productivity or vice-
versa.
• The productivity is a measure of how much input is required to achieve a given
• Symbolically:
• P=O
I , where P = Productivity;
O = Output, I = Input.
• The output may be measured in terms of the units of goods produced
or the value of goods and services produced.
• The input, on the other hand, can be referred to as the combination of
different factors, i.e., raw materials, machinery, worker’s time, power,
efforts and imagination of entrepreneur and the managers. A unit of
input, therefore, can be expressed as one worker, or one hour of labour
time or one tonne of raw materials, or one kw of electricity and so on.
• Thus, it is very clear from the above description that the productivity
can be calculated or measured for each one of the factors comprising
the input or of all the factors together. The productivity of labour, for
example, can be found out by ascertaining the ratio between the
quantity of goods produced and the number of workers or man-hours
employed on the production of such output.
• The importance of the concept of productivity can be viewed from the following points:
1. To beat the competition: It is an age of cut-throat competition. There may be other
commodities which can serve as the substitutes of the terms ‘product’ and can attract the
consumers’ purchasing power. The firm whose productivity is higher can only beat the
competition and can exist in the market for long.
2. Guide to Management: The productivity indices are very useful for the management and
can be used for different purposes. These indices can serve as a valuable guide to the
management for improving the performance of its enterprise. The productivity measures
can be used for the following purposes:
(a) Strategic : With the help of productivity indices, the efficiency of different firms can
be measured, analysed and compared. The necessary steps can be taken to improve the
productiveness of the firm taking in view the productiveness of the other competitive
firms.
(b) Tactical: Different units or the sectors of the firm can also be compared as regards to
their productivity and the productivity of the less productive units or sectors can be
improved.
(c) Planning: A firm uses different inputs in producing the goods. A comparison of
relative benefits accruing from the use of different inputs can be had and the most
beneficial input can be used in production. It helps the management to plan for the future.
(d) Administration: Productivity indices indicate the progress of the firm over a period of
years. The productivity of different inputs, including labour, can be measured individually.
The individual productivity indices help the management in bargaining with the labour
leaders, trade unions and the Government in case of labour disputes regarding welfare
activities. Thus administration can be improved with the help of productivity indices.
3. An Indicator of Progress: In economically backward countries, productivity movement is
basic aspect of progress. It implies the development of an attitude of mind and a constant
urge to better, cheaper, quicker and safer ways of doing a job, manufacturing a product and
providing a service. In an urge to improve the productivity, new inventions take place. This
productivity is an aspect of basic progress.
4. Maximum utilisation of Scarce Resources: In order to provide the articles or commodities to
the consumers at the lowest possible cost, the productivity urges to utilise the available
resources to the maximum to the satisfaction of customers. The productivity processes and
techniques are designed to facilitate more efficient work involving less fatigue to workers by
improvements in the layout of the plant and work, better working environment and
simplification of works.
5. Key to National Prosperity: The productivity, in fact, has become the synonymous to
progress. Higher productivity is an index of more production with the same inputs at lower
cost. It enables industry to offer goods to the general public at cheaper rates and results in
expansion of markets. The working conditions and wages of workers will improve and
industrialists too will get larger profits. Thus higher productivity is the key to national
prosperity. The secrets of Japan and Western countries’ prosperity lie in increased
productivity.
6. Prosperity to Labour: The higher productivity is a boon to labour also. It brings improved
working conditions, better wages and salaries to workers, better labour welfare activities to
labourers. Thus their standard of living is improved.
7. Other Uses:
(i) Higher productivity increases the profits and reserve funds of the industry that can be
used for expansion and modernisation.
(ii) It increases the goodwill of the firm due to cheaper goods to the public, well-off staff and
Measurement of Productivity: The productivity or the performance of various
input and output factors can be measured in many ways. These measures are
mainly based on the following two criteria:
(i) Change in output per unit of input: indicates the change in the performance
of corresponding input during the given period, e.g., change in output per
worker or per man-hour will signify the change in performance of labour.
(ii) Change in input per unit of output: during the given period signifies the
change in the performance of the corresponding input factor, e.g., change in
man-hour or workers’ per unit of output will also indicate the change in the
performance of the labour input.

• Productivity measurement implies the use of standards set for each input
factor in terms of output. In circumstances where standards are not in use,
productivity can be measured only when the output is converted into ‘units
or work’ which is defined as the amount of work that can be performed by
one unit of input. Thus productivity can be measured by dividing the output
by the performance of each input factor taken together.
• Some of the well-known indices of productivity are given below:
(A) Man-hour output: The most widely used index of productivity is to work out the output per manhour it can
be put as –
Productivity = Units of output / Total man-hours
(B) Productivity Ratio: The rate of return on capital employed is a valuable and widely used guide to many types
of business decisions. This ratio of profit to capital employed is a valuable means of measuring the
performance of divisions, sections, plants, products and other components of a business, and can be
calculated as—
Productivity = Net Profit / Capital employed
(C) Use of Financial Ratios: There are many situations when time standards cannot be set and therefore, it is
very difficult in such cases to measure the productivity by a direct method. In these cases, financial ratios can
be used to measure the productivity by using its sales turn-over. But ‘added value’ is a more useful approach
for measuring productivity. ‘Added value’ means output - inputs. The most common financial ratio of
productivity is—
Productivity = Added Value / Labour Costs
Productivity = Added Value / Conversion Costs
• The first ratio gives the financial productivity of labour force and the second ratio gives the financial
productivity of all the resources of the company put together.
(D) Other Useful Measures: There are many other useful productivity ratios to measure the productivity of
various input factors. These are:
(i) Manpower Productivity = Value of output of goods or services
No. of workers or man hours used
(ii) Materials Productivity = Value of output of goods or services
Units (or cost) of materials used
(iii) Capital Productivity = Value of output of goods or services
Capital assets employed
(iv) Energy Productivity = Value of output of goods or services
Units (or cost) of energy used
• A combined measure of productivity can be
taken as
Productivity = Value of output of goods or services
Values of (labour+ capital + materials
+ others inputs)
• There may be other input factors such as
insurance, taxes, advertising etc. and their
productivity can be measured likewise.
• Each measure requires different kinds of data
and only rarely such information is available for
all commodities in an industry on continuous
basis.
 Production and Productivity:
• Production and productivity are not synonymous. Production refers to the
volume, value or quantity of goods and services produced during a given
period by a worker, plant, firm or economy. It is the sum total of results
achieved by the various factors used together. Productivity, on the other
hand, is not concerned with the volume of production. It is the ratio of
output and input factors of an enterprise.
• It shows the efficiency of production or the efficiency level of input
factors. In other words, productivity is relative to the resources used in
turning out a certain amount of physical output, while production is used,
more or less, in absolute sense. The distinction between (lie two terms
becomes more clear when we find that increase in production does not
necessarily mean the increase in productivity.
• If increase in production is attributed to the increase in the inputs of
production in the same proportion, the production will have increased but
productivity may have declined or may remain constant because the ratio
of output and inputs has shown a decline or has not shown any
improvement.
 Example
• Bluegill Furniture makes kitchen chairs. The
weekly dollar value of its output, including
finished goods and work-in-progress, is
$14,280. The value of inputs (labor, materials,
capital) is approximately $16,528. What is the
total productivity measure for Bluegill?
• Total productivity = output/input
= $14,280/$16,528 = .864 or 86.4%
Interpreting Productivity Measures
• Productivity measures must be compared to
something, i.e. another year, a different company
• Raw productivity calculations do not tell the
complete story unless there are no major
structure differences.
• Other productivity measure questions;
– Is this partial productivity measurement enough to make an
investment decision?
– Should you also look at productivity measures for the two
major competitors for comparison?
• Productivity measure provides information on how the
firm is doing relative to what is critical to the firm
Measuring productivity in service sector
• Measuring service sector productivity is a
unique challenge
– Traditional measures focus on tangible outcomes
– Service industries primarily produce intangible
outcomes
– Measuring intangibles is challenging
Operations Strategy and Competitiveness
• Companies often do not understand the differences between
operational efficiency and strategy
– Operational efficiency is performing tasks well, even better than
competitors
– Strategy is a plan for competing in the marketplace
• Operations strategy is to ensure all tasks performed are the
right tasks
• A business strategy on the other hand is developed after taking
into many factors and following some strategic decisions such
as;
– What business is the company in (mission)
– Analyzing and understanding the market (environmental scanning)
– Identifying the companies strengths (core competencies)
 Developing operations strategy
• Operations Strategy is a plan for the design and
management of operations functions
• Operation Strategy developed after the business
strategy
• Operations Strategy focuses on specific capabilities
which give it a competitive edge – competitive
priorities i.e cost, time, quality and flecibility
• N/B: DRAW THE STRATEGY LEVELS ; Corporate,
Business and Functional and Link Business to
Operation Strategies
• Business strategy defines long-term plan
• Operations strategy support the business
strategy
• Marketing strategy needs to fully understand
operations capability
• Financial plans in effect support operations
activities.
 Steps in Developing a Manufacturing
Strategy
1. Segment the market according to the product
group.
2. Identify product requirements, demand
patterns, and profit margins of each group.
3. Determine order qualifiers and winners for
each group.
4. Convert order winners into specific
performance requirements
 Competitive Priorities- The Edge
• Four Important Operations Questions: Will
you compete on –
Cost?
Quality?
Time?
Flexibility?
• All of the above? Some? Tradeoffs?
 Competing on cost?
• Offering product at a low price relative to competition
– Typically high volume products
– Often limit product range & offer little customization
– May invest in automation to reduce unit costs
– Can use lower skill labor
– Probably use product focused layouts
– Low cost does not mean low quality
 Competing on quality?
• Quality is often subjective
• Quality is defined differently depending on who is defining it
• Two major quality dimensions include
– High performance design:
• Superior features, high durability, & excellent customer service

– Product & service consistency:

• Meets design specifications
• Close tolerances
• Error free delivery
• Quality needs to address
– Product design quality – product/service meets requirements
– Process quality – error free products
 Competing on time?
• Time/speed one of most important competition priorities
• First that can deliver often wins the race
• Time related issues involve
– Rapid delivery:
• Focused on shorter time between order placement and delivery
– On-time delivery:
• Deliver product exactly when needed every time
 Competing on flexibility?
• Company environment changes rapidly
• Company must accommodate change by being flexible
– Product flexibility:
• Easily switch production from one item to another
• Easily customize product/service to meet specific requirements of a
customer

– Volume flexibility:
• Ability to ramp production up and down to match market demands
 Need for Trade-offs?
• Decisions must emphasis priorities that support business strategy
• Decisions often required trade offs
• Decisions must focus on order qualifiers and order winners
– Which priorities are “Order Qualifiers”?
e.g. Must have excellent quality since everyone expects it

– Which priorities are “Order Winners”?

e.g. Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility
• Specific Operation requirements include two general
categories
– Structure – decisions related to the production process,
such as characteristics of facilities used, selection of
appropriate technology, and the flow of goods and services
– Infrastructure – decisions related to planning and control
systems of operations
 Strategic role of Technology
• Technology should support competitive priorities
• Three Applications: product technology, process technology, and information technology
– Products - Teflon, CD’s, fiber optic cable
– Processes – flexible automation, CAD
– Information Technology – POS, EDI, ERP, B2B
• Technology has positive and negative potentials
– Positive
• Improve processes
• Maintain up-to-date standards
• Obtain competitive advantage
– Negative
• Costly
• Promotes dependency
• Risks such as overstating benefits
 Technology for competitive advantage
• Technology should
– Support competitive priorities
– Can require change to strategic plans
– Can require change to operations strategy

• Technology is an important strategic decision

• Technology can be sued by companies to gain a
competitive advantage and should be acquired to
support the company’s chosen competitive
priorities
 Class Assignments
1. Flexible Manufacturing Systems
 Computer Integrated Manufacturing -CIM
 Just In Time Manufacturing –JIT
2. Inventory Management in Manufacturing Systems
 Economic Order Quantity- EOQ
 Management of Lead Times

3.