GAGE UNIVERSITY COLLEGE

FACULTY OF BUSINESS AND ECONOMICS

OPERATIONS MANAGEMENT

(MGTM 4025)

Address

https://gagecollege.net/

Tel: +251 11 465 2067 /09 05818181 / 09 88415600

P.O. Box: 23115

Email: - [email protected]

ADDIS ABABA, ETHIOPIA

JANUARY, 2024
Contents Page No

UNIT 1: OPERATION MANAGEMENT................................................................................................. 4

1.1 Operation management general concept…………………………………………………………………………………………..3

1.2 Concept of production……………………………………………………………………………………………………………………….4

1.3 Production System…………………………………………………………………………………………………………………………….4

1.4 Product Management………………………………………………………………………………………………………………………..8

1.5 Manufacturing Operation……………………………………………………………………………………………………………….…9

1.6 Production Measurement……………………………………………………………………………………………….………….……12

UNIT 2 OPERATION STRATEGY, COMPETETIVENESS & OPERATIONS DECISION MAKING ..... 15

2.1 What is the operation strategy…………………………………………………………………………………………………………15

2.2 Order winners and quantifiers…………………………………………………………………………………………………………16

2.3 Competitive advantage and competitive priorities………………………………………………………………………….17

2.4 Characteristics of decision………………………………………………………………………………………………………………19

2.5 Frame work of decision…………………………………………………………………………………………………………………20

2.6 Decision making method……………………………………………………………………………………………………………….21

UNIT 3 CAPACITY PLANNING, PLANT LAYOUT AND LOCATION ANALYSIS .......................... …27
3.1 Introduction…………………………………………………………………………………………………………………………………….27

3.2 Capacity planning…………………………………………………………………………………………………………………….………27

3.3 Facility layout…………………………………………………………………………………………………………………………….….…35

3.4 The need for location……………………………………………………………………………………………………………………….45

UNIT 4 PRODUCTION PLANNING AND CONTROL ....................................................................... 64

4.1 Introduction…………………………………………………………………………………………………………………………………….64

4.2 Forecasting………………………………………………………………………………………………………………………………………64

4.3 Production planning………………………………………………………………………………………………………………………..77

4.4 Production control function……………………………………………………………………………………………………………84

Page 2
4.5 Proper communication for authorization………………………………………………………………………………………..85

UNIT 5: TOTAL QUALITY MANAGEMENT....................................................................................... ..90

5.1 Introduction…………………………………………………………………………………………………………………………………….90

5.2 Different view of quality………………………………………………………………………………………………………………….90

5.3 Statistical concept in quality control……………………………………………………………………………………………….94

Answer key………………………………………………………………………………………………………………………………………….97

Page 3
 UNIT 1: OPERATION MANAGEMENT

1.1. OPERATION MANAGEMENT GENERAL CONCEPT

What is operation?
Operation is where the organizations goods & services produced. Operation is common to all
Organization-be it small or large, private or government, local or international, manufacturing
or service giving.
What is management? Management is the process of planning, organizing, leading, and
controlling an organization’s human and capital resources in order to accomplish its objectives.
What is operations management?
By bringing the above definitions of operation and management together, operations
management can be defined as:
 The administration of process that transforms inputs of labor, capital and materials in
to output bundles of products and services that are valued by customers.
 The coordination of an organization’s resources and a transformation process that will
end up with the production of goods and services.
 The essential features of the production functions are to bring together people, machine,
and materials to provide goods or services there by satisfying the wants of the people.
 An activity which deals with processes that produce goods and services that people use
every day. Process is any activity or group of activities that takes one or more inputs,
transforms and adds value to them, and provides one or more outputs for its customers.
 Operation management refers to the direction and control of the processes that
transform inputs in to products and services. Broadly interpreted, OM underlies all
functional areas, because processes are found in all business activities.
In nut shell, all definitions consider operations management as the management of
transformation process that converts input into output. By and large, managing operation is
crucial to each area of an organization because only successful management of resources.

1.2. 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.

Page 4
 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. Edwood Buffa defines production as ‘a process by which goods and services
are created’. 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.
1.3. PRODUCTION SYSTEM

The production system of an organization is that part, which produces products of an

organization. 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. A simplified production system is shown above.
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.
1.3.1. Classification of Production System
Production systems can be classified as Job Shop, Batch, Mass and Continuous Production
systems.
A. JOB SHOP PRODUCTION
Job shop production are characterized by manufacturing of one or few quantities 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:

Page 5
 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 center and order priorities.
 Advantages
Following are the advantages of job shop production:
1. Because of general purpose machines and facilities variety of products can be
produced.
2. Operators will become more skilled and competent, as each job gives them learning
opportunities.
3. Full potential of operators can be utilized.
4. Opportunity exists for creative methods and innovative ideas.
 Limitations
Following are the limitations of job shop production:
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.
B. 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 characterized 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.

Page 6
 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 utilization of plant and machinery.
2. Promotes functional specialization.
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.
C. MASS PRODUCTION
Manufacture of discrete parts or assemblies using a continuous process are called mass
production. This production system is justified by very large volume of production. The
machines are arranged in a line or product layout. Product and process standardization exists
and all outputs follow the same path.
 Characteristics
Mass production is used under the following circumstances:
1. Standardizations 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.

Page 7
 9. Material handling can be completely automatic.
 Advantages
Following are the advantages of mass production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilization due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
 Limitations
Following are the limitations of mass production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.

D. 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 are a routine action.
 Advantages
Following are the advantages of continuous production:
1. Standardizations of product and process sequence.
2. Higher rate of production with reduced cycle time.

Page 8
 3. Higher capacity utilization 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
Following are the limitations of continuous production:
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.
1.4 PRODUCTION MANAGEMENT

Production management is a process of planning, organizing, directing and controlling the

activities of the production function. It combines and transforms various resources used in the
production subsystem of the organization into value added product in a controlled manner as per
the policies of the organization. E.S. Buffa defines production management as, “Production
management deals with decision making related to production processes so that the resulting goods
or services are produced according to specifications, in the amount and by the schedule demanded
and out of minimum cost.”

1.4.1. 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 customer’s
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.

Page 9
 3. RIGHT TIME: Timeliness of delivery is one of the important parameters 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

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.
1.5. MANUFACTURING OPERATION Vs. SERVICE OPERATION

 Similarities between manufacturing and services

Every organization whether manufacturing or service giving, has processes (transform input
in to output) that must be designed and managed effectively. Some type of technology is
manual or computerized must be used in each process. Every organization is concerned about
quality, productivity, and the timely response to customers. A service provider, like a
manufacturer, must make choices about the capacity, location, and lay out of its facility. Ever
organization deals with suppliers of outside services and materials, as well as scheduling
problems. Finally, matching staffing levels and capacities with forecasted demand is
universal problems.
 Differences between manufacturing and services
The difference between manufacturing and service operations are shown as follows
 More like a manufacturing organization
 Tangible, durable product
 Output that can be inventoried
 Low customer contact
 Long response time
 Regional, national or international market
 Large facilities
 Capital intensive

Page 10
  Quality and productivity easy to measure
 High degree of uniformity of input& output
 Ease to automate etc.
 More like a service organization
 intangible perishable product
 output that can’t be inventoried
 high customer contact
 short response time
 local market
 small facilities
 labor intensive
 quality and productivity is difficult to measure
 high degree of variety of input and
 high degree of variety of input and
 Difficult to automate etc.
The first distinction arise from the physical nature of the product: manufacturing goods are
tangible and durable products whereas services are intangible, perishable products often being
ideas, concepts or information.
The second distinction also relates to the physical nature of the product: manufactured goods
are output that can be produced, stored, and transported in anticipation of future demand.
Creating inventories allow managers to cope with fluctuation in demand by smoothing output
levels. By contrast, service cannot be pre-produced.
A third distinction is related to customer contact: Most customers for manufactured products
have little or no contact with the production system.
Primary customer contact is left to distributors and retailers. However, in many service
organizations the customers themselves are inputs and active participants in the process. At a
college, for example, the student studies, attends lectures, takes exams, and finally receives a
Diploma. Hospitals and entertainment centers are other places where the customer is present
during the provision of most of the services.
Some service operations have low customer contacts at one level of the organization and high
customer contact at other levels. For example, the branch offices of parcel delivery, banking,

Page 11
 and insurance organizations deal with customers daily, but their central offices have little direct
customer contact.
Still a related distinction is response time to customer demand. While manufacturers generally
have days or weeks to meet customer demand, many services must be offered within minutes
of customer arrival. The purchase of fork lift may be willing to wait 16 weeks for delivery. By
contrast, a grocery store customer may grow impatient after waiting five minutes in a checkout
line. Because customers for services usually arrive at times of their choosing, service operation
may have difficulty matching capacity with demand. Furthermore arrival patterns may
fluctuate daily or even hourly, creating even more short term demand uncertainties.
 Two other distinctions concern the location and size of operation. Manufacturing
facilities often serve regional, national, or even international markets and therefore,
generally requires larger facilities, more automations and greater capital investment.
In general, service cannot be shifted to distant locations. For example, a hairstylist in
Adama cannot give a haircut to someone in Bule Hora. Thus, service organization
requires direct customer contact and must locate relatively near their customers.
 Still other distinction is the measurement of quality and productivity. As
manufacturing system tends to have tangible products quality and productivity is
relatively easy to measure. The quality of service system, which generally produces
intangibles, is harder to measure.
1.6. PRODUCTIVITY MEASUREMENT

It has been said, “If you can’t measure it, you can’t manage it”. This is particularly true of
productivity.
Productivity is used for making comparison or to measure improvement. Productivity is a
relative term i.e. it gives sense only when we compare it with: company’s previous
performance, with other similar company’s performance or with the performance of leader of
the industry.
Many measures of productivity are possible, and all are rough approximations. Values of
output may be measured by: what the customers pay (dollar values of the output) or simply by
the number of units produced (in manufacturing industry) or customers served (in service
industry).
The values of inputs can be measured by: their cost or simply by the number of hours worked.

Page 12
 Productivity may be expressed as:
 Total factor productivity measure:-is the ratio of all output to all input i.e. total
outputs/total inputs. Total inputs include all resources used in the production of goods
and services: labor, capital, raw materials, and energy.
 Multi factor productivity: - measures only a sub set of these inputs .I.e. output/ (labor
+ capital), output/ (labor+ capital + materials), output/ (materials + energy)
 Single factor (partial productivity) measure:-is the ratio of output to a single resource
(inputs). I.e. output/labor, output/capital, output/material, output/energy etc.
1.6.2. Factors that affect productivity
In this section a comprehensive view of all the factors which might affect the productivity of
operations will be explained.
Factors which might affect productivity can be categorized in to: external and internal.
 External factors which affect productivity include: Government regulation, government
investment policy, competition from other firms, suppliers’ capacity and customers demand
etc. These factors are outside the control of the firm. These factors may affect both volume
of output and the availability of scarce inputs. Even though external factors are difficult to
control, firms can do much to improve productivity within the external constraints.
Internal factors that affect productivity includes: product, process, capacity and inventory, and
work force.
Product: is factor which can greatly affect productivity. Let us see three points here.
It is generally recognized that R&D leads to new product technology which improve
productivity. On the other hand too much product innovation may slow down process
innovation and lead to productivity decline.
Product diversity may leads to greater productivity through increased sales and economics of
scale. But product diversity may reduce productivity too, by not focusing the process and
spreading operation too thin.
Value engineering is a product improvement approach used to produce the product more
cheaply. The idea is to simplify the product or substitute material so the product performs the
same function at lower cost.
Process: process design also affects productivity. The improvement factors related to process
includes process flow, automation, lay out and selection of process types.

Page 13
 Within a given process there are many ways to organize the flow of information, materials and
customers. This flow can be improved by better lay out or by process flow analysis that results
in improved productivity.
Automation is the key method to improve productivity. It appears that the substitution of
capital for labor is a powerful key to improve productivity.
Management of capacity and inventory: this is still other factor that affects productivity.
Capacity can almost never be matched exactly to demand, but careful capacity planning can
reduce both excess capacity and bottlenecks due to insufficient capacity. These result in
productivity improvement. Along the same lines, inventory can be a hindrance or a help to a
firm’s productivity. Too little inventory will leads to lost sales. Too much inventory will leads
to higher cost of capital. Both lead to reduce productivity.
Work force: is perhaps the most important of all, and it is receiving a greater deal of attention
today. Productivity is determined by workers health, education, and better nourished labor
force.

1.6.3. Improving productivity

There are several ways in which operations manager can improve productivity. These may be
classified as:
 increasing output while keeping input constant
 decreasing input while keeping output constant
 increasing output at higher rate than increasing input
 decreasing output at lower rate than decreasing input
 Increasing output while decreasing input (Most challenging but effective).

Review Exercise

Part one: TRUE/FALSE

1. Total factor of productivity measure is the ratio of all output to all input.
2. Service is intangible perishable product.
3. Higher rate of production with reduced cycle time is one of the advantages of mass
production.

Page 14
 4. Breakdown of one machine will stop an entire production line is limitation of batch
production.
5. Continuous production are characterized by manufacturing of one or few quantities of
products designed and produced as per the specification of customers within prefixed time
and cost.

UNIT 2 OPERATION STRATEGY, COMPETETIVENESS &

OPERATIONS DECISION MAKING

2.1 WHAT IS OPERATIONS STRATEGY

Operations strategy is concerned with setting broad polices and plans for using the resources of
the firm to best support the firm’s long term competitive strategy. In short, OM strategy specifies
the means by which operations implements the firm’s corporate strategy. Operations strategy links
long and short term operation decisions to corporate strategy. Operation strategy is derived from
business strategy which in turn is derived from corporate strategy.

 Corporate strategy is the set of decisions that answer the questions, what business are we
in?
 Business level strategy is the set of decisions that answers the question, how will we
compete in this business?

Page 15
  Operations strategy:-any business strategy needs to be translated downward in to
operations strategy. Operation strategy has a narrower focus and covers the breadth of the
operations functions-input, transformation and output. In developing an operations
strategy, the identification of relevant order winners and qualifiers for specific products is
a key step.
2.2 ORDER WINNERS & QULIFIERS

The terms ‘order winner’ and ‘order qualifier’ were coined by Terry Hill, professor at the
London business school, and refers to the process of how internal operational capabilities are
converted to criteria that may lead to competitive advantage and market success. In his
writings, Hill emphasized the interactions and co-operations between operations and
marketing. The operations people are responsible for providing the order winning and order
qualifying criteria-identified by marketing – that enables products to win orders in the market
place. This process starts with the cooperatives strategy and ends with the criteria that either
keeps the company in the running (i.e. order qualifier) or wins the customers’ business. Terry
Hill has coined the terms order winner and qualifies to describe marketing-oriented priorities
that are key to competitive success.
 An order winner is a criterion that differentiates the products or services of one firm
from another. In general, order winner is a characteristic of a firm that distinguishes it
from its competition so that it is selected as the source of purchase.
 An order qualifier is a screening criterion that permits a firm’s products to even be
considered as possible candidates for purchase. In short, order qualifier can be defined
as the minimum elements or characteristics that a firm or its products must have in
order to even be considered as a potential supplier or source.

In net shell, an order winner is a characteristic that will win the bid or customers purchase.
Therefore customers must provide the qualifiers in order to get in to or stay in a market. To provide
qualifiers they need only to be as good as their competitors. Failure to do so may results in los of
sales. However to provide order winners, firms must be better than their competitors.

It is important to remember that the order winning and order qualifying criteria may change over
time .Order winner and order qualifiers are both market specific and time specific. They work in

Page 16
different combination in different ways in different markets and with different customers. While,
some general trends exist across the markets, these may not be stable over time. For example, in
the late 1990s, delivery speed and product customization were frequent order winner while product
quality and price, which previously were frequent order winners, tend to be order qualifiers. Hence,
firms need to develop different strategies to support different marketing needs and this strategy
will change over time. When a firm’s perception of order winners and qualifiers matches the
customer’s perception of the same, there exist “FIT” between the two perspectives. When a fit
exist one would expect a positive sales performance and this is the reason for having a strategy.

When very few firms offer specific characteristics, such as high quality, customization, or
outstanding services that characteristics can be defined as an order winner. However, over time as
more and more firms begin that same enhancement, the order winner becomes an order qualifier.
In other words, it becomes the minimum acceptable level for all competitors. As a result, the
customer uses some other enhancement or characteristics to make the final purchase.

In Europe, for example, the vast majority of companies today require that their vendors be ISO-
9000 certified. (This certification ensures that a firm has documented all of its processes). Thus,
ISO-9000 certification is an order qualifier in Europe. In contrast, most companies in the United
States at this time are not ISO-9000 certified. As a consequence ISO-9000 certified company in
the United States uses their certification as an order winner i.e. ISOO-9000 distinguishes them as
being better than their competition.

From the manufacturing future survey, it would appear that in general, conformance quality, on
time delivery, and product reliability are now order winners for most large manufacturers. Low
price is emerging as the order winner.
2.3 COMPETETIVE ADVANTAGE & COMPETITIVE PRIORITIES

Many firms strive for competitive advantage, but few truly understand what it is or how to achieve
and keep it.

Competitive advantage can be viewed as any activity that creates superior value above its rivals.
The strongest competitive advantage is a strategy that can’t be imitated by other companies. In
general, a competitive advantage can be gained by offering the customer a greater value than the
competitors.

Page 17
The key to developing an effective operations strategy lies in understanding how to create or add
value for customers i.e. how to gain competitive advantage. Specifically, competitive advantage
can be gained (value can be added) through the competitive priority (priorities that are selected to
support a given strategy). Generally there are 3 possible competitive priorities for process which
fall in to four groups:

Cost: With in e Cost: With in every industry, there is usually a segment of the market that buys
strictly on the basis of low cost. To successfully compete in niche market, firm must necessarily,
be the low cost producers and even doing this does not always guarantee profitability and success.
Products sold strictly on the basis of cost includes commodity like flour, petroleum, sugar etc. In
other words, customers can’t easily distinguish the products made by one firm from those of
another. As a result customers use cost as the primary determinant in making a purchase. To
compete based on cost, operations managers must address labor, materials, scrap, overhead and
other cost to design a system that lower the cost per units of the product or service. Low cost
operation /make it cheap is thus, one of the competitive priority.

A. Quality: quality is a dimension of a product or services that is defined by the customer. Today,
more than ever, quality has important implications. As for operations, two competitive priorities
deal with quality.

I. High performance design: - is determination of the level of operations performance required

in making a products or performing a services. This may include:

 Superior features, close tolerance, and greater durability.

 Helpfulness, courteousness and availability of service employees.
 Convenience of access to service locations
 Safety of product or service.

II. Consistent quality: measurement of the frequency with which the product or service meets
design specifications. Customers wants product or service that consistently meets the
specifications they contracted for, have come to expect or saw advertised. For example, bank
customers expect that the bank will not make errors when recording transactions. To compete on
the basis of consistent quality, managers need to design and monitor operations to reduce errors.
A firm that does not have consistent quality does not last long in a competitive global market place.

Page 18
B. Time: As the saying goes,” time is money”. Three competitive priorities deals with time
include:

I. Fast delivery time (delivery speed): is the elapsed time between the customer’s order and
filling it. An acceptable delivery time depends on the nature of the products. For example
an acceptable lead time can be a year for a complex customized machine, several weeks
for scheduling elective surgery and minutes for ambulance. Manufacturers can shorten
delivery time by storing inventory or by having excess capacity.
II. On time delivery: measurement of the frequency with which delivery time promises is
met.
III. Development speed: measures how quickly a new product or service is introduced,
covering the elapsed time from idea generation through final design and production.
Development speed is especially important in the fashion apparel industry.

C. Flexibility: flexibility is a characteristic of a firm’s operations that enables it to react to

customer needs quickly and efficiently. Some firms give top priority to two types of flexibility:
customization and volume flexibility.

I. Customization: is the ability to satisfy the unique needs of each customer by changing product
or service design. For example, a hairdresser works with the customer to design a hair style that
may be unique to the individual. Customization typically implies that the operating system must
be flexible to handle specific customer needs and changes in design.

II. Volume flexibility: is the ability to accelerate or decelerate the rate of production quickly to
handle large fluctuations in demand. Volume flexibility is an important operating capability that
often supports the achievement of other competitive priorities.
2.4 MANAGEMENT FOR SCIENCE

Management scientists hold that, education, scientific training and experience can improve a
person’s ability to make decisions. Scientific decision-making rests upon organized principles of
knowledge and depends largely upon the collection of empirical data and analysis of the data in a
way that repeatable results will be obtained.

The association of management with the scientific method involves drawing objective
conclusions from the facts. Facts come from the analysis of data, which must be gathered, compiled

Page 19
and digested into meaningful form, such as graphs and summary statistics. Computers are helpful
in these tasks because they can easily store data and us with the more sophisticated and statistical
analysis. But not all variables are quantifiable, so decision-makers must still use some value-based
judgments in a decision process.

Thus management as a science is characterized by

 Organized principle of knowledge.

 Use of empirical data.
 Systematic analysis of data.
2.4 CHARACTERISTICS OF DECISION

Operations decision range from simple judgments to complex analyses, which also involves
judgment. Judgment typically incorporates basic knowledge, experience, and common sense. They
enable to blend objectives and sub-objective data to arrive at a choice.

The appropriateness of a given type of analysis depends on:

 The significant or long lasting decisions,

 The time availability and the cost of analysis, and
 The degree of complexity of the decision.

The significant or long lasting decisions deserve more considerations than routine ones. Plant
investment, which is a long-range decision, may deserve more thorough analysis. The time
availability and the cost of analysis also influence the amount of analysis. The degree of
complexity of the decision increases when many variables are involved, variables are highly
independent and the data describing the variables are uncertain.

Business decision-makers have always had to work with incomplete and uncertain data. Fig.
2.1 below depicts the information environment of decisions. In some situations a decision maker
has complete information about the decision variables;

Fig. 2.1 Information continuum

Page 20
2.5 FRAME WORK FOR DECISION MAKING

An analytical and scientific framework for decision implies the following systematic steps

 Defining the problem.

 Establish the decision criteria.
 Formulation of a model.
 Generating alternatives.
 Evaluation of the alternatives.
 Implementation and monitoring.

DEFINING THE PROBLEM

Defining the problem enables to identify the relevant variables and the cause of the problem.
Careful definition of the problem is crucial. Finding the root cause of a problem needs some
questioning and detective work. If a problem defined is too narrow, relevant variable may be
omitted. If it is broader, many tangible aspects may be included which leads to the complex
relationships.

ESTABLISH THE DECISION CRITERIA

Establish the decision criterion is important because the criterion reflects the goals and purpose of
the work efforts. For many years profits served as a convenient and accepted goal for many
organizations based on economic theory. Nowadays organization will have multiple goals such as
employee welfare, high productivity, stability, market share, growth, industrial leadership and
other social objectives.

FORMULATION OF A MODEL

Formulation of a model lies at the heart of the scientific decision-making process. Model describes
the essence of a problem or relationship by abstracting relevant variables from the real world
situation. Models are used to simplify or approximate reality, so the relationships can be expressed
in tangible form and studied in isolation.

GENERATING ALTERNATIVES

Alternatives are generated by varying the values of the parameters. Mathematical and statistical
models are particularly suitable for generating alternatives because they can be easily modified.
The model builder can experiment with a model by substituting different values for controllable
and uncontrollable variable.

EVALUATION OF THE ALTERNATIVES

Page 21
Evaluation of the alternatives is relatively objective in an analytical decision process because the
criteria for evaluating the alternatives have been precisely defined. The best alternative is the one
that most closely satisfies the criteria. Some models like LPP model automatically seek out a
maximizing or minimizing solution. In problems various heuristic and statically techniques can be
used to suggest the best course of action.

IMPLEMENTATION AND MONITORING

Implementation and monitoring are essential for completing the managerial action. The best course
of action or the solution to a problem determined through a model is implemented in the business
world. Other managers have to be convinced of the merit of the solution. Then the follow-up
procedures are required to ensure about appropriate action taken.

2.6 DECISION MAKING METHOD

The kind and amount of information available helps to determine which analytical methods are
most appropriate for modeling a given decision. Figure 2.2 illustrates some useful quantitative
methods that are classified according to the amount of certainty that exists with respect to the
decision variables and possible outcomes. These analytical techniques often serve as the basis for
formulating models, which help to reach operational decisions.

Page 22
The degree of certainty is classified as complete certainty, risk and uncertainty and extreme
uncertainty.

2.6.1 Complete certainty method

Under complete certainty conditions, all relevant information about the decision variables and
outcomes is known or assumed to be known. Following are some of the methods used:

 Algebra: This basic mathematical logic is very useful for both certainty and uncertainty
analysis. With valid assumptions, algebra provides deterministic solutions such as break-
even analysis and benefit cost analysis.
 Calculus: The branch of mathematics provides a useful tool for determining optimal value
where functions such as inventory costs, are to be maximized or minimized.
 Mathematical programming: Programming techniques have found extensive applications
in making a product mix decisions; minimizing transportation costs, planning and
scheduling production and other areas.

2 6.2 EXTREME UNCERTAINTY METHOD

Under extreme uncertainty, no information is available to assess the likelihood of alternative

outcomes. Following are some of strategies to solve this:

Game theory: Game theory helps decision-makers to choose course of action when there is no
information about what conditions will prevail.

Decision Making: is the process of selecting a feasible course of action from a set of alternative,
so as to solve problems.
“The life of manager is a perpetual decision making activities”.
Peter Ferdinand Drucker
Decision making types
A .Decision under certainty

In a situation involving certainty, people are reasonably sure about what will happen when they
make a decision. The information is available and is considered to the reliable, and the cause and
effect relationships are known.

B. maxi-min decision criterion (criterion of pessimism)

 Unlike the maxi-max criterion, this criterion is pessimistic.

Page 23
  The decision maker selects the decision that will reflect the maximum of the minimum
payoffs.
 Of these minimum payoffs, the maximum is selected.

C. mini-max regret decision criterion

 Mini-max is just the opposite of maxi-max.

 Decision maker is conservative but not pessimist.
 The decision maker attempts to avoid regret or loss by selecting the decision alternative
that minimizes the maximum regret.
 The mini-max regret criterion minimizes the maximum regret.
 Regret is the difference between the payoff from the best decision and all other decision
payoffs.
 To use the mini-max regret criterion, a decision maker first selects the maximum payoff
under each state of nature then subtracted from these amounts
D. Hurwicz alpha criterion

 This method is a combination of maxi-max criterion and maxi-min criterion.

 The decision maker is neither totally optimistic nor totally pessimistic.

E. Laplace criterion (equally likelihood)

 The equal likelihood, or Laplace, criterion weights each state of nature equally, thus

assuming that the states of nature are equally likely to occur.

 The equal likelihood criterion multiplies the decision payoff for each state of nature by

an equal weight

2.6.3 Decision making under risk

 In this situation the decision maker has to face several states of nature.

 But he has some knowledge or experience which will enable him to assign probabilities to

the occurrence of each state of nature.

 The objective is to optimize the expected profit or to minimize the opportunity loss.

 Methods to make decision under risk

Page 24
  EMV (Expected monetary value) criterion,

 EOL ( expected Opportunity loss) criterion or

 EVPI ( expected value of perfect information)

a. Expected Monetary Value (EMV)

 The decision maker must first estimate the probability of occurrence of each state of
nature.
 Then, the expected value is computed by multiplying each outcome (of a decision) by
probability of its occurrence.
 Max EMV will be selected

b. Expected Opportunity Loss (EOL)

 The difference between the greater payoff and actual payoff is known as opportunity
loss.
 Under this criterion the strategy which has minimum expected opportunity loss (EOL)
is chosen.
 The calculation of EOL is similar to that of EMV.
 It is the expected value of the regret for each decision

C. Expected Value of Perfect Information (EVPI)

 It is the maximum amount a decision maker would pay for additional information.

 In order to calculate EVPI, we choose the best alternative with the probability of their state

of nature.
 The expected value of perfect information minus the outcome with max EMV.

 Therefore, EVPI= Expected value with perfect information –Max EMV

2.7 DECISION ON SUPPORT SYSTEM

Decision support system (DSS) is computer-based systems designed to aid decision-makers of any
stage of the decision process in the development of alternatives and evaluation of possible course
of action. Their purpose is to provide the information and analytical support that enables managers
to better control and guide the decision process. Emphasis is given for giving useful information
and appropriate quantitative models that support the manager’s skills. Thus, DSS are a logical
extension of the managerial decision processes. This helps the managers to learn better, how to
apply data processing and modeling capabilities of computers to the analysis of ill-structured and
value based decisions

2.8 ECONOMIC MODELS

Page 25
Break-even Analysis is an economic model describing cost-price-volume relationships. It is a
complete certainty type of model because costs and revenues are known quantities.

2.8.1 BREAK EVEN ANALYSIS

One of the techniques to study the total cost, total revenue and output relationship is known as
Break-even Analysis. ‘A Break-even Analysis indicates at what level of output, cost and revenue
are in equilibrium’. In other words, it determines the level of operations in an enterprise where the
undertaking neither gains a profit nor incurs a loss.

NOTATIONS AND TERMINOLOGY AS USED IN BREAK-EVEN ANALYSIS

Break-even chart (BEC): It is a graph showing the variation in total costs at different levels of
output (cost line) as well as the variation in the total revenues at various levels of output.

Break-even point: It is that point of activity (sales volume) where total revenues and total
expenses are equal. It is point of zero profit, i.e. stage of no profit and no loss. BEP can be used to
study the impact of variations in volume of sales and cost of production on profits.

Angle of incidence: It is an angle at which total revenue line intersects total cost line. The
magnitude, of this angle indicates the level of profit. Larger the angle of incidence, higher will be
the profits per unit increase in sales and vice versa.

Margin of safety: It is excess of budgeted or actual sales over the break-even sales volume i.e.
margin of safety = (actual sales minus sales at BEP)/actual sales. A high margin of safety would
mean that even with a lean period, where sales go down, the company would not come in loss area.
A small margin of safety means a small reduction in sale would take company to cross BEP and
come in red zone.

Margin of safety (MOS) is defined as the ratio between Operating Profit and Contribution
Margin. It signifies the fractional reduction in the current activity level required to reach the
breakeven point.

Sales turnover (STO) is defined as ratio between Sales Revenue and the Capital Employed. It
represents the number of times capital employed is turned over to reach the sales revenue level
that is called Operating management performance [OMP]

Review Exercise

Part One: true/false

1. Volume flexibility is the ability to accelerate or decelerate the rate of

production quickly to handle large fluctuations in demand

Page 26
 2. One of the techniques to study the total cost, total revenue and output
relationship is known as Break-even Analysis.
3. Margin of safety (MOS) is defined as the ratio between Operating Profit
and Contribution Margin.
4. Flexibility is a characteristic of a firm’s operations that enables it to react
to customer needs quickly and efficiently
5. High performance design is determination of the level of operations
performance required in making a products or performing a service

UNIT 3 CAPACITY PLANNING, PLANT LAYOUT AND LOCATION

ANALYSIS

3.0 Aims and Objectives

After reading this unit, you should be able to:

 understand the long term impact of capacity planning, facility layout and location
 describe the factors affecting capacity planning
 explain the different types of facility layout and their strength and weakness
 evaluate alternative capacity, layout and locations using quantitative tools
 Identify the factors affecting location decision.

3.1. INTRODUCTION

How much should a plant be able to produce, where should it be located? Are important strategic
question that must be addressed when a firm is starting out, when it expands and when it contracts

Page 27
because these decisions have long-term consequences for the organization. In this unit, you will
examine capacity planning, location analysis and layout of facilities.

3.2. Capacity Planning

How many units of equipment do we need to achieve our production forecast? This is the concept
of capacity planning. Capacity can be defined as ability to produce certain output within a specified
time period or the rate of output that can be achieved from a process. Capacity is related to the
equipment and process selection decision in that a selection of specific equipment and processes
represents a selection of both technological flexibility and capacity. Capacity is also a product
design specification. Decisions related to capacity have to answer:
a. How much capacity do we have and how much future capacity should we provide (process)
b. What form should capacity take?
c. How should people or processes be physically related to one another within the facility?
d. What is the optimal location for the facilities

3.2.1. Important Concepts of Capacity Decisions

A. Design Capacity
The design capacity represents the maximum output that can be achieved in a specific time period
under ideal condition. Design capacity values are stared by the manufacturer of the equipment. It
may and commonly does include recognition of the need for routine maintenance but does not
include recognition of delays caused by factors like scheduling, conflicts, defective products, low
quality material, or change in product mix. In other words, manufacturers cannot anticipate the
actual conditions of use. Therefore, this level of capacity cannot to be achieved under the real
situation.

B. Effective Capacity
Effective capacity represents the maximum output per unit time given a particular product mix,
labor skills, super vision, product quality level, material quality, available maintenance, and time
between setups. Effective capacity is rarely equivalent to design capacity and is frequently much
lower.

Page 28
C. Actual or Operating Capacity
Operating capacity is defined as the average output per unit of time over a preceding time period
adjusted to reflect actual reject levels and scheduling and maintenance losses.

D. Capacity Measures
Though, there is no single measure of capacity, the two measures frequently cited to justify
investments in equipment and processes are:

1) Efficiency and
2) Utilization

Efficiency is a measure of the use of effective capacity in producing a particular result. It is given
by the formula:

Efficiency = actual output per time period

Effective capacity per time period

Utilization is a measure relating design capacity to output. It is calculated as follows:

Utilization = actual output per time period

Design capacity per time period

These measures will be modified for service industries. It tells you the degree to which the
resources that is, machine, labor etc. are utilized.

3.2.2 Factors Influencing Effective Capacity

Effective capacity determines upper limit for actual capacity, which inurn determines actual
output. Narrowing the difference between design capacity and effective capacity is a managerial
opportunity because it may result in lower total investment.
Low effective capacity may indicate poor management practice, inadequate supervision, poor
equipment choice, obsolete equipment etc. The major factors affecting effective capacity are the
following.
a) Product Design

Page 29
Product design affects capacity by determining the total work content or processing requirements
for producing a product changes in design or a greater variety of products will generally affect
capacity adversely by requiring more frequent changes in setups, rework, and solution.
simplify product design
changes infrequent
Long production run

b) Layout of facilities: It effects on the flow of materials in the process production and the
effectiveness of labor.
c) Job design – by establishing a lower time limit for operator controlled jobs.

d) Output standards: Differences in expected performance speeds and allowances for such
necessities as personal time and fatigue alter effective capacity. This is four both operator-
controlled and mechanic controlled jobs.
e) The quality of and variation in the materials used by altering the number of process adjustment
required, scrap and rework and material quality as well as by the number of setups required.
f) Employee attitude and motivation through labor turnover, absenteeism, and employees being
busy but not productive.
g) Operational factors. Inventory stocking decisions, late deliveries, acceptability of purchased
materials, and quality of inspection and control procedures also can have an impact on effective
capacity.
h) External factors. Product standards, especially minimum quality and performance standards,
and government regulation can restrict management’s option for increasing and using capacity.
Thus, pollution standards on products and equipment often reduce effective capacity, as does paper
work required by engaging employees in non-productive activities. A similar effect occurs when
a union contract limits the member of hours and type of work an employee may do.
3.2.3 Capacity and Level of Operation
The best operating level is the level of capacity for which the average unit cost is at a minimum.
This level of operation is shown in the figure below:
As we move down the curve, we achieve economies of scale until we reach the best operating level
and we encounter diseconomies of scale as we exceed this point. The upward swing of unit cost
as volume increases results from:

Page 30
 using less efficient machines
working overtimes
increasing the cost of maintenance or
using inexperience or less skilled employees
3.2.4 Capacity planning decisions
Capacity planning normally involves the following steps.
1. Assessing existing capacity
2. Forecasting capacity needs
3. Identifying alternative ways to modify capacity
4. Evaluating financial, economic and technological capacity alternatives.
5. Selecting a capacity alternative most suited to achieving strategic mission.
Following these steps, organization should design the right capacity, that is, the capacity best
matches with the demands of the product. However, there are several reasons why the production
capacity to be provided does not necessarily equal the amount of products and services expected
to be demanded. First enough capital and other resources may not be economically available to
satisfy all of the demand. Secondly, because of the uncertainty of forecasts and the need to link
production capacity to operations strategy interns of competitive priorities, a capacity cushion may
be provided. A capacity cushion is an additional amount of production capacity added onto the
expected demand to allow;
1. Extra capacity incase more demand than expected occurs
2. The ability to satisfy demand during peak demand seasons.
3. Lower production costs; production facilities operated to close to capacity experience
higher costs.
4. Product and volume flexibility responding to customers’ needs for different products and
high volumes is possible because of the extra capacity.
5. Improved quality of products and services; production facilities operated close to capacity
experience deteriorating quality.
3.2.5 Ways of changing long range capacity
A. Expansion. Expansion would take either or a combination of the ways;
Sub-contract with other companies to become suppliers of the expanding firm’s
components or entire products.

Page 31
 Acquire other companies, facilities or resources
Develop sites, build buildings, by equipment
Expand, update, or modify existing facilities or
Reactivate facilities on standby status.

B. Reduction. This strategy requires managers to take the following actions when expansion is
not appropriate due low demand or any other internal and external factors.
- Sell of existing facilities, sell inventories, and lay off or transfer employees.
- Mothball facilities and standby status, sell inventories, and layoff or transfer employees.
- Develop and produce new products as other products decline.
3.2.6 Evaluating Capacity Alternatives
An organization needs to examine alternatives for future capacity from a number of different
perspectives. Most obvious are economic considerations. Such as; will an alternative be
economically feasible? How much will it cost? How soon can we have it? What will the operating
and maintenance costs be? What will its useful life be? Will it be compatible with present personnel
and present operations?
A number of techniques are useful for evaluating capacity alternatives from an economic
standpoint. Some of the more common are cost-volume analysis (Break-even analysis), financial
analysis, decision theory, and waiting line analysis. Only cost volume analysis and decision tree
are described in this unit.
1. Break-Even Analysis
Though different tactics can be used to adjust demand to existing facilities, the strategic issue is,
of course, how to have facility of the correct size. Break-even analysis may help with that decision.
Breakeven can aid capacity decisions by identifying the processes with the lowest total cost for
the volume expected. The objective of break-even analysis is to find the point, in dollars and units,
at which costs equal revenues-which is the break-even point. Break-even analysis requires an
estimation of fixed costs, variable cost, and revenue.
Fixed costs are costs that continue even if no units are produced such as depreciation, taxes, debt
and mortgage payments whereas variable costs are those that vary with the volume of units
produced. The major components of variable costs are labor and materials and other costs such as
the portion of the utilities that varies with volume.

Page 32
Another element in break-even analysis is the revenue function that begins at the origin and
proceeds upward to the right increasing by the selling price of each unit. Where the revenue
function crosses the total cost line is the break-even point, with a profit corridor to the right and a
loss corridor to the left. Break-even analysis assumes that costs and revenue increase in direct
proportion to the volume of units being produced. However, neither fixed costs nor variable costs
(nor, for that matter, the revenue function) need be a straight line.
Example:
XYZ Company is now contemplating to adding new line of product, which requires leasing new
machine for a monthly payment of Br. 6000. Variable costs would be Br.2.00 per unit, and the
product would be sold for Br.7.00 each.
Required:
1. What should be the monthly production capacity of a machine for achieving a breakeven
point?
2. What should be a production capacity so that a firm can achieve a profit target of Br. 4000?
Solution:
1. Given:
Fixed cost (FC) = Br.6000
Variable cost per unit (V) = Br. 2.00
Price per unit (P) = Br.7.00
Breakeven point (Q) =?
At a breakeven point, a firm earns zero normal profit. That is total revenue equals total cost and
hence profit becomes zero. Thus,
Total profit = total revenue (TR) – Total cost (TC)
Total profit = TR – TC
TR = P X Q
TC = Total variable cost (which is V x Q) + FC, hence
Total profit = (P X Q) – (V X Q + FC)
At break-even point total profit is zero. Thus,
0 = PQ – VQ – FC
0 = Q (P – V) – FC
FC = Q (P – V)

Page 33
 Q = FC (P – V)
Q = FC (p – v) = Br. 6000 (7.00 – 2.00) = 1,200 units of pies per month. In order to achieve
the break even goal a firm must lease a machine that has a monthly production capacity of 1,200
units.
2. Given:
Total profit = Br.4000
P = Br.7.00
V = Br.2.00
FC = Br. 6000
The quantity level required to achieve any profit level is obtained as follows:
Total profit (TP) = TR – TC
TP = PQ – VQ – FC
TP + FC = PQ – VQ
TP + FC = Q(P – C)
Q = (TP + FC) (P – V)
Q = (Br.4000 + Br.6000) (Br.7.00 – Br. 2.00) = 2,000 units.
To achieve this profit level per month, a firm must lease a machine with the monthly production
capacity of 2, 00 units.
The following graph depicts the example just presented above.
As a figure illustrates, total revenue and total curve crosses each other at the quantity level 1,200
units and that is a breakeven point. Once the quantity produced exceeds that level, a company starts
to earn point and the size of profit increases with the quantity of output (production). As stated
above, for this particular example a machine under consideration must have monthly production
capacity of 2,000 units for a company to achieve the stated level of profit (Br.4,000). To utilize
the concept of breakeven analysis for capacity planning decision, we first define our goal such as
a profit level, and then work back to determine the size of facility to be owned so that its production
capacity can effectively lead to the production level required (i.e., quantity) to achieve a goal.

2. Decision Tree
Decision tree is a tree like diagram that depicts alternatives and their possible outcomes. This tool
can be used to evaluate alternative capacities and enable managers make appropriate decisions.

Page 34
Example. A firm that plans to expand its product line must decide whether to build a small or a
large facility to produce the new products. If it builds a small facility and demand is low, the net
present value (NPV) after deducting for building costs will be Br. 400,000. If demand is high, the
firm can either maintain the small facility or expand it. Expansion would have a net present value
of Br. 450,000 and maintaining the small facility would have a net present value of Br. 50,000.

If a large facility is build and demand is high, the estimated NPV is Br. 800,000. If demand turns
out to be low, the NPV will be Br. 10,000.

The problem that demand will be high is estimated to be 0.60, and the problem of low demand is
estimated to be 0.4.
Required:
A. Draw the tree diagram.
B. Which alternative capacity should be build? What is the expected NPV of the alternative
chosen
Solution

B. The expected NPV

i. Build small facility: ii. Build large facility
High demand = 0.6 x 450,000 High demand = 0.6 x 800,000
= 270,000 = 480,000
Low demand = 0.4 x 400,000 Low demand = 0.4 – 10,000
= 160,000 = -4,000
Expected value = 270,000 + 160,000 Expected value = 476,000 Br
= 430,000 Br

Decision: The firm should build the large facility with the highest expected profit
i.e., Br. 476,000.

3.3 Facility Layout

The general objective of facility layout is to locate people, machines, and processes in an optimal
time-saving and money saving relationship that meets the anticipated production level and the
products functional and aesthetic requirements as embodied in the design specification. Layout

Page 35
refers to the configuration of departments, work centers and equipment with a particular emphasis
on movement of work through the system.
3.3.1 Objectives of Facility layout
The overall objective in designing a layout is to provide a smooth work flow and control; reducing
cost of material through the factory or uncomplicated pattern for both consumers and workers in a
service organization. Specific objectives of layout decision in service and manufacturing
operations are outlined in the following section.
1. For manufacturing firm.
 Provide enough production capacity
 Minimize material handling cost and effort
 Minimize labor requirements
 Provide a smooth flow of materials and product
 Maximize the use of available space
 Provide for volume and product flexibility and avoid bottleneck operations and contested
areas
 Minimize health hazards
 Maximize the uses of machine tools.
 Provide communication opportunities for employees by positioning equipment and
processes appropriately
 Maximize output
 Minimize supervisory and control requirements
 Ease of maintenance
 Provide space for personal – care needs and others
2. For service operations layout serves the following purposes: provide for customer
comfort and convenience
 allow attractive display
 reduce travel of personnel and customers
 provide for private in work areas
 promote communication
 Provide for stock rotation for shelf life.
3.3.2 Basic Types of Layouts

Page 36
There are four basic types of plant or facility layouts. The basic difference among these layouts is
in their handling of the flow of materials and product. They are discussed as follows.
1. Process layout /for job-shops/
It is concerned with the grouping of machines, processes or services according to their function
i.e. similar equipment’s or functions are grouped together. For example, Drilling, milling, routing,
typing, shipping etc. are activities that require such types of arrangements. The primary efficiency
criterion for evaluating process layout designs is material and product handling cost.
Advantages
a. Process layouts are less vulnerable to breakdowns or absenteeism than other types of layouts
since work can be shifted to other operating machines, and substitute for absent employees
are more readily available because employees have multiple skills.
b. Lower capital costs use. Because this layout uses a general – purpose machines, which are
less likely to become obsolete than special-purpose machines.
c. Lower labor costs /training and scheduling employees to operate more than one type of
machine.
d. Lower installation and maintenance costs since excess capacity is often available.
Disadvantages
b. Work scheduling is complicated by the difficulty of determining process workloads, by the
different processing sequence required for different products, and by bottleneck operations
and conflicts in completion time requirements.
c. Low output rates result from material handling inefficiencies and from the number of special
setups and fear downs necessitated by changes in the pattern of demand.
d. If the number of in-process products is large, process confession may result as efforts are
made to meet schedule completion dates.
e. Material – handling requirements are a major problem because they are costly and time
consuming. Conveyors are expensive to install and difficult to design since there may be
many destinations for materials or products in process.
Materials used in manufacturing are many, some of these are: raw materials, purchased
components, materials-in-process, finished goods, packing materials, maintenance and repair
supplies, scrap and waste and rejects or reworks.

Page 37
The layout of these facilities is directly affected by the nature /characteristics/ of materials such
as: Large or bulky materials; heavy materials; solids; fluids or flexible and inflexible.
Special materials for heat, cold, light, humidity, flame, vibration also will affect the layout of
facilities for handling, storing, and processing of these materials.
2. Product or Line Layout
Product layout focuses on the sequence of production or assembly operation required for producing
a part or a product of cement, oil refining, auto assembly and the so on. In contrast to process
layouts, product layouts are not flexible since they are designed specifically for making one
product.
Major Advantages
1. If there is adequate output volume, processing and assembly unit costs are low because of
the high utilization rates of plant equipment and processes.
2. Raw materials and parts inventory control requirements are lower because inputs are
required for only one product.
3. Production scheduling is simpler
4. High volume of output and high labor efficiency result when the sequential tasks performed
require approximately the same amount of time.
5. Material – handling costs are low because of the wide use of conveyors and other
mechanical or automated transfer equipment.
6. Supervisory and control costs are low because of the repetitive and routine nature of the
tasks and the uniformity of the processing result.
Disadvantages
1. High volume is required to justify the large investment in special or modified equipment.
2. Product standardization is required with in close limits because of the inflexibility of
specialized equipment and transfer mechanisms.
3. High interchangeability of product parts is required because the time and the space
available to work on a given unit of production are limited.
4. Good maintenance is crucial since the failure of one piece of equipment requires stopping
the entire line while it is being repaired.
5. Quality control inspection must be strategically located and must be capable of detecting
undesirable variances. The inspection system must feed the information ‘upstream’

Page 38
 efficiently to signal the need to correct processing or assembly failures and to prevent the
production of a large volume of nonstandard product.
6. Highly skilled behind-the-scenes labor is required for quick and efficient machine
maintenance.
7. Scheduling and conditioning of materials, parts and subassemblies with line requirements
is crucial because any bottleneck will result in products being incompletely fabricated or
assembled or will require that the line be shut down.
3. Cellular Manufacturing (CM) Layouts’
Machines are grouped into cells and the cells function somewhat like a product layout is land
within a larger shop or process this layout groups dissimilar machines into work centers (or cells)
to work on products that have similar shapes and processing requirements. Since machines are
frequency able to perform more than one operation on a particular part or product they take on
some of the characteristics of a production line but without its rigidity and it is similar to process
layout in that cells are designed to perform a specific set of processes. The reasons why a CM
layout would be attempted are:
 Machine changeovers are simplified.
 Training periods for workers are shortened
 Material handling costs are reduced
 Parts can be made faster and shipped more quickly
 Less-in-process inventory is required
 Production is easier to automate
4. Fixed position Layout
Unlike the three other basic layout options, fixed position layouts require that both people and
machine be brought to the product being made, assembled, or tested. The product by virtue of its
bulk or weight remaining at one location, For example, Shipbuilding, dam construction, power
generating (steam) turbines, bridge etc. which are (bulky, large, heavy, and fragile). The fixed
position nature of the layout minimizes the amount of product movement required.
3.3.3 Developing and Analyzing Facility Layouts
Important inputs to the layout decision are:
1. Specification of objectives of the system in terms of output and flexibility
2. Estimation of product or service demand on the system

Page 39
 3. Processing requirements in terms of number of operations and amount of flow between
departments and work centers.
4. Space availability with in the facility itself.
 Facility Layout Techniques
There are four major layout techniques that can be used to make a layout decision. These are
operations sequence analysis, block diagram analysis, systematic layout planning and load distance
analysis. The following section describes these techniques.
1. Operations Sequence Analysis
This approach develops a good scheme for the arrangement of departments by graphically
analyzing the layout problem. It determines the location of operating departments relative to one
another when the external shape and dimensions of the building are not limiting factors.
To make a process layout of a plant or department we must have information on the movement of
material within the plant and on the in process goods moving from department to department, i.e.,
the number of moves and the cost of making these moves.
N.B. 1000 units of material being moved from location A to B at one time constitutes one move
not 1000.
The following table shows the flow of materials and in process production for a period of months.
The data represents all the firms’ products whose fabrication or assembly requires some or all of
the same process steps in the same sequence or a different sequence.
Step1. Line up departments like nodes on a string; connect them by arrows that show the direction
of movement of the load
Step2. Then post the cost of each movement (number of loads x cost per load) adjacent to the
arrow. This is the first attempt at pursuing the optimum criteria of no nonadjacent loads. Since we
cannot improve on the position of two departments that are adjacent to each other, we can measure
improvements on the basis of the cost of non-adjacent loads.
The above 1st layout reveals a number of costly nonadjacent loads. The non-adjacent load cost is
as follows.
From Department To Department Cost
1 4 Br. 1,200
2 7 1,500
2 4 200

Page 40
 5 3 600
6 2 600
6 4 500
7 5 1,200

Total cost of nonadjacent loads Br. 5,800

N.B.: Further analysis of the above layout reveals some possible improvements.
The cost of moving loads between adjacent departments is a minimal cost whereas moving
loads between nonadjacent departments always involves a greater cost.
Cost of nonadjacent loads

From Department To Department Cost

2 4 Br. 200
6 2 600
7 5 1200
Total cost for nonadjacent loads Br. 2,000
The comparison between the first and second layout attempts shows that we have potentially
reduced the costs of moving the products between departments form Br. 5800 to Br. 2000.
If we move department 5 between department 7 and 3 we can further reduce interdepartmental
transportation cost by 1200. If we do this, however, department 5 and 6 will not be adjacent, and
we shall incur an additional cost of 100. Since our cost advantage will be 1200-100= 1100 the
move of department 5 between department 3 and 7 will be cost advantageous.
The final effort is the following
The cost for transporting materials or in process product has been reduced from Br. 8500 to Br.
800
2. Block Diagram Analysis
Block diagram analysis sets the general shape and dimensions of the building and the location of
the interior departmental boundary. For the above layout assume the following area for each
department.

Department Minimal area Minimal Dimension

Assembly 800 20 x 40

Page 41
Inspection 1800 30 x 60
Painting 1500 30 x 50
Stamping 2400 40 x 60
Casting 1500 30 x 50
Drilling 1500 30 x 50
Shipping and receiving 1500 30 x 50

Now substitute functional areas for the nodes to indicate departmental processing centers. Consider
the floor plan 80 x 150. We have to meet the constraint of space and minimal dimensions for the
individual departments. The analysis will be more difficult when it is necessary to layout an
existing building with different side dimension.

3. Systematic Layout Planning (SLP)

In some production systems such as service systems, the amount of material that flows between
departments, May not be critical to developing a good facility layout. In these systems systematic
layout planning can be used. The application of systematic layout planning (SLP) requires you to
follow the following steps.
Step I. Develop a chart to rate the relative importance of each department being close to every
other department, The rating range from the extreme of absolutely necessary to undesirable. The
ratings are based on various reasons such as:
 types of customers
 ease of supervision

Page 42
  common personnel
 Common equipment etc.

Step II
An initial schematic diagram, similar to the one is operation sequence analysis is developed. This
initial schematic diagram is modified through trial and error until departments with high closeness
ratings are adjacent to one another and department and space limitations are satisfied SLP is quite
similar to operation sequence and block diagram analysis is both procedures and end results. The
only significant difference between these approaches is that SLP allows many reasons for
assigning a closeness rating between departments, whereas operation sequence and block diagram
analyses allow a single reason product or material travel per time.
4. Load Distance Analysis
Load distance Analysis is useful in comparing alternative layouts to identify the one with the least
product or material travel per time period.
Example: Two layout alternatives are shown below, the facilities, products, their travel and the
distance between departments. For each layout alternative are also displayed. Which layout
alternative minimizes the monthly product travel through the facility?
Layout A

Layout B
8 4 10 2 5
3 7 1 9 6

Distance between Department

Department Departments movement
Movement Layout A Combination
Combination Layout B
1-5 30 30
1-7 10 10
1-9 10 10
1-10 10 10
2-5 10 10

Page 43
 2-6 20 20
2-10 10 10
3-6 40 10
3-9 30 20
4-5 30 30
4-7 10 10
4-10 10 10
5-6 10 10
6-9 10 10
7-8 20 50
8-10 20 30

Product Dept. processing Number of products

sequence processed per month
A 1-5-4-10 1000
B 2-6-3-9 2000
C 2-10-1-9 3000
D 1-7-8-10 1000
E 2-5-6-9 2000
F 1-7-4-10 4000
Table: Products and their processing sequences in the facility

Solution: To answer the questions follow the following steps.

1. Compute the total travel for each product through each layout alternative.

Distance Per Product

Product Dept. processing Layout B
sequence Layout A
A 1-5-4-10 30 + 30 + 10= 70 30 + 30 + 10 = 70
B 2-6-3-9 20 + 40 + 30= 90 20 + 10 + 20 = 50
C 2-10-1-9 10 + 10 + 10= 30 10 + 10 + 10 = 30
D 1-7-8-10 10 + 20 + 20 = 50 10 + 50 + 30 = 90
E 2-5-6-9 10 + 10 + 10 = 30 10 + 10 + 10 = 30
F 1-7-4-10 10 + 10 +10 = 30 10 + 10 + 10 = 30

2) Compute the total distance traveled per month for each product through each layout
alternative.
Distance Per Product Distance Per Month

Page 44
 Product Number Product
Processed per Layout A Layout B Layout A Layout B
month
A 1000 70 70 70000 70000
B 2000 90 50 180000 100000
C 3000 30 30 90000 90000
D 1000 50 90 50000 90000
E 2000 30 30 60000 60000
F 4000 30 30 120000 120000
570000 530000

3. Choose the layout alternative that minimizes total travel distance. Based on the above
analysis, Layout B results are the least total distance traveled per month through the facility by the
products.

3.4. Facility Location

Choice of location for business organization is an important issue in the design of the production
system. Where should a plant or service facility be located? This is a top question on the strategic
agendas of contemporary manufacturing and service firms, particularly in this age of global
markets and global production. Globalization allows companies greater flexibility in their location
choices. However, in practice, the question of location is very much linked to two competitive
imperatives.
1. The need to produce close to the customer due to time based competition, trade
agreements, and shipment costs.
2. The need to locate near the appropriate resource pool to take advantage of low costs.
Location decision is an integral part of the strategic planning process of every organization.
Although it might appear that location decision are mostly one-time problem pertaining to new
organization, the fact is that existing organization often have a bigger stake in these kinds of
decisions than new organization. In other words, location problems are common to new and
existing businesses.
3.4.1 The Need for location Decisions
Existing organization become involved in location decision for different of reason. The following
are some of the reasons for such decisions (other than the need for greater capacity).
1. Opportunity for expanding market share

Page 45
From such as banks, fast food chains, supermarkets, and retail stores view location as part of
marketing strategy, and they look for locations that will help them to expand their markets.
Basically, the location decisions in those cases reflect additional new location to existing suppliers.
2. Business growth in demand
A similar situation occurs when an organization experiences a growth in demand for its products
or service that cannot be satisfied by expansion at an existing location. The addition of a new
location to complement an existing system is often a realistic alternative.
3. Depletion of Basic resources
Some firms become presented with location decision because of the depletion of basic inputs. For
example fishing and logging operations are forced to relocate due to the temporarily exhaustions
of fish or forest at a given location. Mining and petroleum organization face the same sort of
situation, although usually over a longer time horizon.
4. Shift in Market /demand
If the demand for the product does not exist in the existing location, it is a good reason to consider
and find out a better location.
5. Operating Costs: Cost of doing business in a particular location reaches a point where other
location begins to look more attractive. In this case, the company may shift to a cost effective
location.
6. Merge of companies: Merger of companies changes the ownership titles and may require
change in management and operation of the merging firms, and then leading to location
decisions.
7. Introduction of new product.
This may require to a new resource, labor or material which may not exist in the existing location.
Therefore, firms make a location decision to produce a sell their new product.
3.4.2 Characteristics of location decision
1. Location decisions entail a long-term commitment, which makes mistakes difficult to
overcome. In addition, location decision often has an impact on operating costs both fixed and
variables and revenues as well as an operation. Example, a poor choice of location might result
in excessive transportation cost, shortage of qualified labor, loss of competitive advantage,
shortage of raw materials and location of customer (operation problem).

Page 46
2. Location decision requires the selection of location form a number of acceptable location
instead of identifying the “One best” location. If one site is clearly superior to all others in all
respects, the location decision is an easy one. However, several site candidates, each with its
strengths and weaknesses emerge as good choice and the location decision becomes a tradeoff
decision.
3. Location decision involves four options that mangers can consider in location planning. These
are:
A. Expanding an existing facility – These options can be attractive if there is adequate
room for expansion, especially if the location has desirable features that are not readily
available elsewhere. Expansion costs are often less than those of other alternatives.
B. Addition new location. Another option is to add new location while retaining existing
ones, as it is done in many retail operations. The advantage of this option are: it draws
/attracts customers who are already looking for an existing business, and used as a
defensive strategy designed to maintain a market share or prevent competitors from
entering a market.
C. Shutting down. The third option is to shut down at one location and move to another.
An organization must weigh the cost of a move and the resulting benefits against the
costs and benefits and remaining in an existing location. This option is considered
when market shifts, exhaustion of raw materials and the cost of operation often cause
firms to seriously consider this option.
D. Doing nothing. If is a detailed analysis of potential locations fails to uncover benefits
that make one of the previous three alternatives attractive, a firm may decide to
maintain a status of at least for the time being

3.4.2 Factors Affecting Location Decisions

Many factors influence location decisions. Managers must identify the relevant factors to make
decisions that involve a sequence of decisions. This sequence can include a national, a regional,
community, and site decisions.

Page 47
 First management must decide whether the facility will be located internationally or domestically.
(Where in the world political, military, social and economic instability can make such decision
risky.)

Relative importance of location factors in types of outgoing transportation cost

Retailing facilities
Facilities affecting Mining Light Warehousing Retailing Customer service Local Health
decision quarrying Heavy manufacturing for profit government and
manufacturing service emergency
service
1. Proximity to C C B A A A A
constituents
2. Labor availability B A B B A B B
and cost
3. Degree of A A B B B C B
unionization
4. Construction and A B B B B B B
land costs
5. Proximity to A B A B C C C
transportation facilities
6. Incoming A B A B C C C
transportation cost
7. Outgoing B B A C C C C
transportation cost
8. Utilities and A B C C C C C
availability and cost
9. Proximity to raw A B C C C C C
materials and supplies
10. Zoning restriction A B C C B C C
of governmental
impact

Where: A is very important

B important

C less important: Types of facilities and this dominant location factors. Each type of facility
under consideration has a few dominant factors that ultimately determine its location decision.

A. Mining, heavy manufacturing.

Page 48
They are capital intensive, cover large geographic areas, use great quantities of heavy and bulky
raw materials, population processes disadvantaged large amount of wastes, total finished outputs
weight much less than raw material input, enormous utilities are absorbed and products are shipped
to a few customers.

B. Light Manufacturing/Making electronic components, small mechanical parts, assembly

 Do not necessary locate near either raw material or market.

 They ship products to a few regional warehouses of wholesalers
 Availability and cost of labor is important

C. Warehouses: Dominant factors are those affecting incoming and outgoing transportation cost
retailing facilities

D. Retailing facilities: The studies involve the identification of target customer because it should
be located near concentration of customers. Residential concentration, Traffic data on nearby
street, Growth trend and of community and suburb, Spending level and other demographic
information.

E. Facilities for customer service organizations such as dry cleaning, banks, hotels, welding
shops, photo processors like retailing shops target this customers

 Can discharge large quantities of waste paper, chemical and spent supplies,

F. Local government service

 Often grouped together so that constituents can economize in their time, effort, and
transportation cost
 Are grouped to allow interagency interactions

G. Health and emergency services (Fire station, ambulances, hospitals, etc.)

 Lowest overall response times between the constituent and the service
 Minimize property and loss of life

Page 49
  The type of facility
 The number of its products and services
 The nature of its daily activities

The national, regional, community and side related factors are briefly all explained in the next
section.

(A) Regional factors

1. Proximity to customers

A location close to the customer is important because of the ever increasing need to be customer
responsive. This enables faster delivery of goods to customers. In addition, it ensures that
customers’ needs are incorporated into the products being developed and built.

2. Business Climate.

A favorable business climate can include the presence of similar sized business, the presence of
companies in the same industry, and in the case of international location, and the presence of other
foreign companies. Government legislation and local Government intervention to facilitate
business locating in an area etc. are also factors.

3. Total Costs. The objective is to select a site with the lowest total cost. This includes regional
costs, inbound destruction costs, and an outbound distribution costs comprise the regional
costs. In addition, there are hidden costs that are difficult to measure such as loss of customer
responsiveness arising from locating away from the main customer base.
4. Infrastructure: Adequate road, rail, air and sea transportation is vital. Energy &
telecommunications requirements must also be met. In addition, the local government
willingness to invest in upgrading infrastructure to the level required may be an incentive to
select a specific location.
5. Quality of Labor: The educational and skill levels of the labor pool must match the company’s
needs. Primary labor consideration relates to the cost and availability of labor, wage relates in
an area, labor productivity, attitude, and towards work.

Page 50
6. Suppliers: A high quality and competitive supplier base makes a given location suitable.

7. Location of raw materials: Firm’s location near or at the source of raw materials for three
primary reasons; necessity, perishability, and transportation costs

For example, mining and frosty firms must locate at the source of necessity. Those firms that
produce short shelf –life products take perishability as primary criteria when consider location.

B. Community Considerations: From a company standpoint, a number of factors determine the

desirability of a community as a peace for its workers and managers to live. They include:

 Facilities for education, shipping, recreation transportation , religious

workshop, entertainment, the quality of policy, fore and medical services
 attitude towards the company
 The size of the community
 Cost and availability of utilities
 Environmental regulations
 Taxes and
 Existence of development support or incentive.

C. Site related factors: The primary consideration related to site involves land, transpiration, and
zoning or other restrictions, utilities etc.

 Service location vs. manufacturing facilities

Service facilities are more common than new factories and warehouses because of their low cost
of establishing a service facility compared to one for manufacturing e.g. restaurants, hotels
entertaining facilities retail shops etc. Typically have multiple sites to maintain close contact with
customers. The location decision is closely tied to the market selection decision. Whereas
manufacturing location decisions are often make by minimizing costs, but profit maximizing for
service location.

3.4.4 Facility Location Methods /Models

Page 51
Various quantitative models are used to help determine the best location of facilities. Evaluation
of alternative regions, sub regions, and community is termed micro analysis. Evaluation of specific
sites in the selected community is termed micro analysis.

Techniques used to support macro analysis include:

1. Breakeven analysis (cost – profit - volume analysis)

2. Factor rating method
3. The Center of gravity method and
4. Linear programming (transportation model)

1. Cost Profit Volume Analysis

The economic comparison of location alternatives is facilitated by the use of cost-volume profit
analysis. The analysis can be done numerically or graphically.

Graphical assumptions:

1. Fixed costs are constant for the range of probable output.

2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated
4. Only one product is involved.

Graphical procedure

Step1. Determine the fixed and variable costs associated with each location alternative.

Step2. Plot the total-cost lines for all location alternatives on the same graph.

Total cost = FC + VC x Q

Where

FC = fixed cost

Page 52
 VC = variable cost per unit

Q = quantity or volume of output

Step3. Determine which location will have the lowest total cost for the expected level of output.
Alternatively, determine which location will have the highest profit.

Example: Fixed (land, property taxes, insurance, building etc.) and variable costs (labor, raw
materials, transportation, overhead) for four potential plant locations are shown below.

Location Fixed cost per year Variable cost per year

A $150,000 $62
B 300,000 38
C 500,000 24
C 600,00 30

Required

a. Plot the total cost lines for these locations on a single graph

b. Identify a range of output for which each alternative is superior (i.e., has the lowest total cost)

c. If expected output at the selected location is to be 8,000 units per year, which location would
provide the lowest total cost?

Solution

b) To plot the total cost-lines, select an output that is approximately equal to the
expected output level (e.g., 10,000 units per year). Compute the total cost for each
location at that level.

Fixed cost + Variable cost = Total cost

A --------------$250,000 $11(10,000) $360,000
B --------------100,000 30(30,000) 400,000

Page 53
 C --------------150,000 20(10,000) 350,000
D --------------200,000 35(10,000) 550,000

Plot each location’s fixed cost (at output = 0) and the total cost at 10,000; and connect the two
points with a straight line. See the accompanying graph.

b) the approximate ranges for which the various alternatives will yield the lowest costs are shown
on the graph. Note that location D is never superior. The exact ranges can be determined by finding
the output level at which line B and C and A cross. To do this set their total cost equations equal
and solve for Q, the breakeven output level. Thus for B and C

(B) (C)

$100,000 + $30Q = $150,000 + $20Q

Solving, you find Q = 5, 000 units per year.

For C and A:

(C) (A)

$150,000 + $20Q = $250,000 + $11Q

Solving, Q = 11,111 units per year.

C. From the graph, you can see that, 8,000 units per year, location C provides the lowest total cost.

For a profit analysis, compute total profit using the following formula:

Total profit = QR – (FC + VC x Q) = Q(R – VC) – FC,

Where:

R = revenue per unit. FC = total fixed cost

Page 54
 Q = total units of products (quantity)

VC = variable cost per unit

2. Factor rating method

Factor ratings are frequently used to evaluate location alternatives because

1. their simplicity facilitates communication about why one site is better than another
2. they enable mangers to bring diverse location consideration into the evaluation process
3. Then faster consistency and judgment about location alternatives.

Procedures:

1. List the most relevant factors in the location decision

2. Assign a weigh to each factors that indicates its relative importance compared with all
other factors. The weight sum should be 1.00
3. Decide on a common scale for all factors. Each factors should be rated, say form 1
(very low ) to 5 (very high) , according to its relative importance
4. Score rate each location alternative (1-100)or (1-10)
5. Multiply factor weight or rate by the score (location rate for each factor , and sum the
results for each location alternatives
6. Choose the location that has the highest composite score. The score indicates
alternative locations are most promising.

Example 1:

ABC shoe factory intends to open a new branch store. The exhibit below contains information on
two potential locations, A and B. Which location is promising?

Factor Location Product of

rating rating rating
Factors A B A B A B
Tax advantage 4 3 8 9 32 27

Page 55
 suitability of labor skills 3 4 2 7 6 28
Proximity to customers 3 4 6 8 18 32
Proximity to suppliers 5 3 2 5 10 15
Adequacy of water 1 2 3 2 3 4
Receptivity of community 5 4 4 8 20 32
Quality of education system 4 1 1 2 4 2
Access to transpiration 3 5 10 3 30 15
Suitability of climate 2 5 7 10 14 50
Availability of power 1 1 6 6 12 6
Total Score 149 211

Note: Factor rating scale = 1-5 and location rating scale =1-10

B is better than A because it has the higher composite score (211) mangers some times may set a
minimum standard, if it goes below that they can reject all alternatives.

Example 2
Using the following factors ratings, determine which location alternatives should be chosen on the
basis of maximum composite score A, B or C.

Factor Locations (max score 100) Weighted score

(100 pts. each) Weight A B C A B C
1. Convenient 0.15 80 70 60 12.0 10.5 9
2. Parking facilities 0.20 72 76 92 14.4 15.2 18.4
3. Display area 0.18 88 90 90 15.84 16.2 16.2
4. Shopper traffic 0.27 94 86 80 25.38 23.22 21.6
5. Operating costs 0.10 98 90 82 9.8 9 8.2
6. Neighborhood 0.10 96 85 75 9.6 8.5 7.5
Sum 1.00 87.02 79.92 73.6

Page 56
Decision: - Location A is better because it results in a highest score.
3. Center of gravity method:
For locating single facilities that considers the existing facilities, the distance between them, and
the volumes of goods that need to be shipped.
It is used to locate intermediate or distribution warehouses.

This method begins by locating the existing locations on a coordinate grid system. The purpose is
to establish relative distance between locations. The center of gravity is found by calculating the
X and Y coordinates that will result is the minimal transportation cost. This is given by the
following weighted formula.
Cx = dix Vi
Vi
Cy = diyVi
v2
Where:
Cx = X coordinate of the center of gravity
Cy = Y coordinate of the center of gravity
Dix = X coordinate of the ith location
Diy = Y coordinate of the ith location
Vi = Volume of goods moved to or from the ith location
Example 1:
A refining company needs to locate an intermediate holding facility between its refining plant and
its major distributors. The coordinate map is the following.

Shipping Volumes and the coordinates of the destinations shown in map is summarized as follows:
Location X Y Gallons of Gasoline/month (000')
Plant 325 75 1500
A 400 150 250
L 450 350 450
G 350 400 350
T 25 450 450
dix = 325

Page 57
diy = 75
Vi = 1500
Cx = (325x1500) + (1400x250) + (450x450) + (350x350) + (25x450)
1500 + 250 + 450 + 350 + 450
Cx= 925,750 = 307.9
3000
Cy= (75x1500) + (150 +250) + (350x450) + (400x350) + (450x450)
3000
= 216.7

X and Y coordinate are approximately 308 and 217 respectively. Therefore, the location of the
intermediate holding facility should be at (x, y) = (308 217). On the map it is represented by point
C.
Example 2
A clothing manufacturing produces children's cloth at four locations in northern Ethiopia. Relative
locations have been determined, as shown in the table below. The location of a central shipping
point for bolts of cloth must now be determined. Weekly quantities to be shipped to each location
are shown below. Determine the coordinates of the location that will minimize distribution costs.
Location (X, Y) Weekly Quantity
A 5, 9 15
B 6, 9 20
C 3, 9 25
D 9, 4 30

Solution
Coordinate point is given by the formula:

Page 58
 = =6

= = 7.33

= (6 7.33)
3.4.5 Locating Service outlets
A Heuristic Method
Example
Suppose that a medical consortium wishes to establish two clinics to provide medical care for
people living in four communities. Assume that the sites under study are in each community and
that the population of each community is evenly distributed within the community’s boundaries.
Further, assume that the potential use for the clinic members of the various communities has been
determined and weighting factors reflecting the relative importance of serving members of the
population of each community have been developed.
Find the two clinics that can serve all communities at the lowest weighted travel distance cost.
Distances, population and relative weights are given below.

From Miles to clinic Population of Relative weighting of

Community Community population
A B C D
A 0 11 8 12 10,000 1.1
B 11 0 10 7 8,000 1.4
C 8 10 0 9 20,000 0.7
D 9.5 7 9 0 12,000 1.0

To answer this question, you can follow the following processes/steps.

Steps:
Steps I. Construct a weighted population distance table the above data table (multiplying
distance times weighting factors)
To clinic located in community
From Community A B C D
A 0 121 88 132
B 123.2 0 112 78.4

Page 59
 C 112 140 0 126
D 114 84 108 0
Total 349.2 345 308 338

Step II. Add the amounts in each column. Choose the community with the lowest cost and locate
the facility there. Based on the weighted score, community C is the first choice.
NB. Costs are expressed is weighted population distance units
Step III. For each raw compare the cost of each column entry to the communities already located
if the cost is also do not change them. If the cost is greater reduce the cost to the lowest of the
communities already selected.
Step IV. If additional locations are required, choose the community with the lowest cost form those
not already selected.
Community To clinic located is community
A B C D
A 0 88 88 88
B 112 0 112 78.4
C 0 0 0 0
D 108 84 108 0
Total 220 172 308 166.4

Step V. Repeat step 3 reducing each raw entry that exceeds the entry in the columns just
selected to clinic.

From To clinic located is

Community community
A B D
A 0 88 88
B 78.4 0 78.4
C 0 0 0
D 0 0 0
Total 78.4 88 166.4

Continue repeating step 4 and 5 until the desired number of location is selected.
Final table

Page 60
 To clinic
From A B
A 0 88
B 78.4 0
C 0 0
D 0 0
Total 78.4 88
The problem has now solved for all four possible location.
1st C
2nd D
3rd A
4th B

Review Exercise
Part One: MULTIPLE CHOICE QUESTIONS
1. Which of the following explain the need for facility location selection?
(a) When the existing business unit has outgrown its original facilities and expansion is not
possible.
(b) When a business is newly started.
(c) When the lease expires and the landlord does not renew the lease.
(d) All of these.
2. Which of the following is the first step in making a correct location choice?
(a) Develop location alternatives
(b) Decide the criteria for evaluating location alternatives
(c) Evaluate the alternatives
(d) Make a decision and select the location
3. Which of the following technique emphasizes transportation cost in the determination of facility
location?
(a) Location rating factor technique
(b) Transportation technique
(c) Centre-of-gravity technique
(d) Both (b) and (c)
4. Transportation cost mainly depends on which of the following factors?
(a) Distance

Page 61
(b) Weight of merchandise
(c) Time required for transportation
(d) All of the above
5. In which of the following site selection techniques, a weightage between ‘0’ to ‘1’ is provided
to factors that influence its location decision?
(a) Location rating factor technique
(b) Transportation technique
(c) Centre-of-gravity technique
(d) None of these
6. Which of the following does not cause to production delay?

(a) Shortage of space

(b) Long distance movement of materials

(c) Spoiled work

(d) Minimum material handling

7. Process layout is also known as ________.

(a) Functional layout

(b) Batch production layout

(c) Straight line layout

(d) Both (a) and (b)

8. Which of the following facility layout is best suited for the intermittent type of production,
which is a method of manufacturing several different products using the same production line?

(a) Product layout

(b) Process layout

(c) Fixed position layout

(d) Cellular manufacturing layout

9. In which of the following layout type, materials are fed into the first machine and finished
products come out of the last machine?

(a) Product layout

Page 62
(b) Process layout

(c) Fixed position layout

(d) Cellular manufacturing layout

10. Which of the following is not an advantage of using product layout?

(a) Minimum material handling cost

(b) Minimum inspection requirement

(c) Specialized supervision requirement

(d) None of these

Page 63
 UNIT 4
PRODUCTION PLANNING AND CONTROL
4.0 AIMS AND OBJECTIVES

After reading this unit, you should be able to:

o discuss the elements of good forecasting

o Understand the methods of forecasting and their application in assisting planning.
o Explain the strategies of aggregate planning.
o understand the aggregate planning techniques
o explain master scheduling

4.1 Introduction

Planning is an integral part of a manager’s job. If uncertainties cloud the planning horizon, it can
be quite difficult for a manager to plan effectively. Forecasts can help managers by reducing some
of the uncertainty, thereby enabling them to develop more meaningful plans than they might
otherwise. This unit deals with business forecasting and aggregate planning. It covers basic
forecasting techniques, how to monitor a forecast, the necessary steps in preparing a forecast, and
elements that are common to forecasts, techniques of forecasting. Moreover, it addresses the
concept of aggregate planning, techniques of aggregate planning, master scheduling and
controlling.

4.2. Forecasting

Forecasting is an integral part of planning. Forecasting is estimating the future demand for products
and the resources necessary to produce these outputs. Sales forecasts are the starting point for all
other forecasts is production and operations activities. It becomes an input of both business strategy
and production strategy.

Why forecasting?

1. New facility planning /build new factory or design and important new production process.

Page 64
2. Production planning /demands vary from month to month production rats must

3. Work force scheduling/ demand very from walk to week

4.2.1. What is Forecasting?

Forecasting is the art and science of predicting future events. It may involve taking historical data
and projecting them into the future with some sort of mathematical model. It may be a subjective
or intuitive prediction (subjective) or a combination of mathematical model adjusted by a
manager's good adjustment. In a summarized form a forecast:

1. Is a statement of the future

2. Is a basis for planning
3. Is not for forecasting demand only, it can be used in forecasts such as economic,
technological and the like.
4. Requires a skillful blending of art and science.
5. Assumes that the underlying system will continue to exist in the future.
6. Is rarely perfect i.e., actual results usually defer from predicted values. Perfect forecast is
usually impossible. Too many factors in the business environment cannot be predicted with
certainty. - Do not to be accurate but improve the system.
7. Forecast accuracy decreases as the time period covered by the forecast increases.

Production and operations managers use forecasts to make periodic decisions involving:

 process selection
 capacity planning
 facility layout and
 continual decisions about production planning, scheduling and inventory
 budgeting
 sales planning

4.2.2. Elements of a Good Forecast

 The forecast horizon must cover the sufficient time necessary to implement possible
changes.
 The degree of accuracy should be stated

Page 65
  The forecast should be reliable: it should work consistently.
 The forecast should be expressed in meaningful units
 The forecast should in writing
 The forecast should be simple to understand and use, or consistent with historical data
intuitively.

4.2.3. Steps in Forecasting Process

There are certain basic steps in the process of forecasting.

1. Determine the purpose of the forecast.

2. Select the item to be forecasted.
3. Establish a time horizon.
4. Select a forecasting technique.
5. Gather and analyze the appropriate data.
6. Prepare a forecast.
7. Monitor a forecast.

4.2.4. Approaches to Forecasting

Which forecasting model a firm should choose depends on:

 Time horizon to forecast

 Data availability
 Accuracy required
 Size of forecasting budget
 Availability of qualified personnel
 Degree of flexibility

There are two general approaches to forecasting. There are Qualitative and Qualitative approaches.

A. Qualitative approach - Qualitative methods consist mainly of subjective inputs, which

often disregard precise numerical description. It permits inclusion of soft information
(human factors, personal opinions, etc.) in the forecasting process. Those factors are often

Page 66
 omitted or downplayed when quantitative techniques are used because they are difficult or
impossible to quantify.

 they are difficult to express precisely by number

 they are based on personal estimates or opinions or judgment

Qualitative techniques include:

1. Jury of executive opinions

A small group of upper-level managers may meet and collectively develop a forecast. This
approach is often used as a part of long-range planning and new product development. It helps to
bring together the considerable knowledge and talents of top management people, simple,
inexpensive. However, there is the risk that the view of one person will prevail and it is based on
opinion only.

2. Sales for composite: The sales staff is often a good source of information because of its
direct contact with customers and experience.

3. Delphi method - used to develop consumers of expert opinion

4. Customer analysis /Evaluation/

B. Quantitative approaches: Involves either the extension/projection of historical data or the

development of associative models that attempt to utilize causal (explanatory) variables to make a
forecast. They include:

1. Time series forecasts

Is a technique that uses a series of past data points to make a forecast. A time series is a time
ordered sequence of observations taken at a regular interval over a period of time (e.g. Hourly,
weekly, monthly, quarterly or annually). The observation or the data may be the measurements of
demand, earnings, profits, productivity etc.

Page 67
Forecasting techniques based on time series data are made on the assumption that future values of
the series can be estimated from the past. This technique requires analysts to identify the
underlying behavior of the series. The time series typically has four components

1. Trends 3. Cycles
2. Seasonal variations 4. Random variation

Trend - refers to a gradual, long-term upward or downward movement in data

Techniques for Ave rage: When historical data typically contain a certain amount of random
variation or disturbance that tends to affect the systematic movements in the data. This randomness
arises from the combined influence of many relative unimportant factors and cannot be reliably
predicted.

 To reduce the impact of such random variations, different averaging techniques are used.
These are:

1. Naïve forecasts
2. Moving averages - Simple or weighted
3. Exponential smoothing

1. Naive forecast

It is Simple forecasting technique that assumes demand in the next period is equal to demand in
the most recent period i.e., the forecast for any period equals the previous period's actual value.

Example: If last week demand was 100 units, the naïve forecast for the upcoming week is 100
units.

Yt = Yt-1

Where: Yt = forecast at time t

Page 68
 Yt-1 = actual data at time t he forecast can be represented by the following formula:

Advantage:
1. less cost
2. Quick
3. Easy to prepare and
4. easy to understand

Limitations: unable to provide highly accurate forecasts

2. Moving Average - simple or weighted: A moving average uses a number of the most recent
actual data values in generating a forecast. One weakness of the naïve method is that the forecast
must trace the actual data, with a lag of one period; it does not smooth at all. However, by
expanding the amount of historical data a forecast is based, this difficulty can be overcome using
a moving average.

The moving average (MA) forecast can be computed using the following equation: (simple moving
average)

∑𝑖𝑦
MAn = Where: i = refers to the most recent period (i = 1, 2, 3, …, n)
𝑛

n = number of periods in the moving average

yi = actual value with period i

MAn = moving average of the most recent n actual forecast

For example MA3 would refer to a 3 period moving average.

Example1. Compute a three period moving average forecast for period six given demand for
shipping a product for the last five periods.

Page 69
Period Age Demand

1 5 42

2 4 40

3 3 43

4 2 40

5 1 41

Solution

MA3 = (41 + 40 + 43)/3 = 41.33

If actual demand in period 6 turns out to be 39, the moving average forecast for period 7 would
be: MA3 =?

Note: In a moving average, as each new actual value becomes available, the forecast is updated by
adding the newest value and dropping the oldest and then re computing the average. Consequently,
the forecast "moves" by reflecting only the most recent values.

Selecting the number of period to include:

There are several conflicting effects of different period lengths. 1. The longer the moving-average
period, the greater the random elements are smoothed. However,2. The few the data in an average,
the more responsive the average trends to be. Hence, if responsiveness is important, a moving
average with relatively few data points should be used. Moving average based on more data points
will smooth more but be less responsive to "REAL" changes. Hence, the decision maker weigh the
cost of responding more slowly to changes in the data against the cost of responding to what might
simply be random variations.

The advantage of moving average is that it is easy to compute and understand. It limitations are:

Page 70
 o Data storage requirements can be significant
o Extensive records of data
o Cannot pickup trends very well
o Increasing the site of n does smooth out fluctuations better, but it makes the method
less sensitive to real changes.

ii. Weighted moving average

Weighted moving (WA) average is similar to MA, except that it assigns more weight to the most
recent values in a time series. It may be expressed mathematically as:

𝜔𝐴 = ∑𝑛𝑖=1 𝜔𝑖𝑌𝑖 =

Example3. You are given the following data:

a. Compute a weighted average forecast using a weight of 0.40 for the most recent
period, 0.30 for the next most recent, 0.20 for the next, and 0.10 for the next.
b. If the actual demand for period 6 is 39, forecast demand for period 7 using the same
weights as in a

Period Demand

1 42

2 40

3 43

Page 71
 4 40

5 41

Solution

a. Forecast = 0.4 x 41 + 0.3 x 40 + 0.2 x 45 + 0.1(40)

= 41

b. Forecast = 0.4 x 39 + 0.3(41) + 0.2 (40) + 0.1(43)

= 40.2

Note: the advantage of WA over a simple MA is that the WA is more reflective of the most recent
occurrences.

3. Exponential smoothing

It is a sophisticated weighted averaging method that is still relatively easy to use and understand.
In this technique each new forecast is based on the previous forecast plus a percentage of the
difference between that forecast and the actual value of the series at that point. That is:

New forecast = old forecast + (Actual - old forecast)

Where =  = (Alpha) is a percentage

i.e., smoothing constant (Actual-old forecast) represents the forecast error.

Ft = Ft-1 +  (At-1 - Ft-1)

Ft = forecast for period t

Ft-1 = forecast for period t -1

 = Smoothing constant

Page 72
At-1 = actual demand for sales for period t-1

The smoothing constant  represents a percentage of forecast error. Each new forecast is equal to
the previous forecast plus a percentage of the previous error.

Example1. Suppose the previous forecast was 42 unit, actual demand was 40 units, and

 = 10% what is the new forecast?

Ft = 42 + 0.1(40 - 42)

= 41.8

Then, if the actual demand turns out to be 43, the next forecast would be:

Ft = 41.8 + 0.1 (43 - 41.8)

= 41.92

4. Simple linear regression analysis

The following section of this unit illustrates simple linear regression method. This technique is
used to predict or project the value of the dependent variable based on the actual or predicted value
of the independent variable. The cause and effect relationship of the variables is given by a linear
equation: Y = a + bx

The variables used in the formula are defined as:

Y= dependent variable values

n = number of observations

a = vertical axis intercept

b = slope of the regression line

Page 73
 = average value of n observations of the dependent variable

= average value of ‘n’ observation of the independent variable

If the date is a time series, the independent variable is time and the dependent variable is usually
sales. The regression equation is Y= a + bx

𝑛 ∑ 𝑋𝑌− ∑ 𝑋 ∑ 𝑌
b= 𝑛 ∑ 𝑥2−∑(𝑥)2

∑ 𝑌−𝑏 ∑ 𝑋
a= 𝑛

Example1. A Company produces electronic motors for the construction industry. The plant has
operated at near capacity for over years. The plant manager thinks that the growth in sales will
continue and he wants to develop a long-range forecast to be used to plan facility requirements for
the next three years. Sales records for the past ten years have been accumulated in the following
table.

Years (x) Annual Sales (y) Time Period X X2 YX

1. 1000 1 1 1000
2. 1300 2 4 2600
3. 1800 3 9 5400
4. 2000 4 16 8000
5. 2000 5 25 10000
6. 2000 6 36 12000
7. 2000 7 49 15400
8. 2600 8 64 20800
9. 2900 9 81 26100
10. 3200 10 100 32000

y = 21000 x = 55 x2 385 xy = 133,300

Page 74
y = 25,000

x = 55

x2 = 385

xy = 133,300

= 215.76

= 913.3

Now the regression equation can be used to forecast future years’ sales

Y = a+bx= 913.333+215.758x

The forecast for the next three years 11, 12, 13 would be:

Y11= 913.333 + 215.758(11) = 3299 thousand units

Y12= 913.333 + 215.758(12) = 3500

Y13= 913.333+ 215.758(13) = 3720

Simple linear regression can also be used when the independent variable Y represents variable
other than time. In this case linear regression representative of a class of forecasting models called
casual forecasting model.

Example 2 The manager of an engineering corporation thinks that his firm’s engineering services
supplied are directly related to the amount of construction contracts.

The following date are prepared to develop a regression equation and to predict the level of demand
for services for the next four quarters and how closely demand is related to the amount of
construction contracts released.

Year Quarter Sales (in thousands) Amount of contact released (000’)

Page 75
1 Q1 8 150

Q2 10 170

Q3 15 190

Q4 9 170

2 Q1 12 180

Q2 13 190

Q3 12 200

Q4 16 220

Solution:

Develop the totals required to perform the regression analysis

Time period Sales(y) contracts(x) X2 XY Y2

1. 8 150 22,500 1200 64

2. 10 170 28,900 1700 100
3. 15 190 36,100 2850 225
4. 9 170 28,900 1530 81
5. 12 180 32,400 2160 144
6. 13 190 36,100 2470 169
7. 12 200 40,000 2400 144
8. 16 220 48,400 3520 256

Total 95 1470 273,300 1183

Therefore, the regression equation is:

Y= -9.671+ 0.1173x

Page 76
Forecast the level of demand for the next four quarters. The manager prepares estimates of the next
four quarters’ contract releases. These were 260,290,300 and 270 .

Y1 = -9.671 + 01173 (260)

= 20.827

Y2 = - 9.671 + 0.1173 (290)

= 24.346

Y3 = - 9.671 +0.1173(300)

= 25.519

Y4 = -9.671+ 0.1173(270)

= 22.000

The total forecast for the next year is the total of the four-quarter forecasts i.e.

20.827+24.346+25.519+22.000 = 92.7 thousand

4.3. Production Planning

Firms plan their manufacturing and service operations activities at various levels and operate these
as a system. Based on time dimension planning can be long range, medium range and short range.

1. Long-range planning: Begins with a statement of organizational objective and goal for the next
two to ten years. It includes:

1. Corporate strategic planning articulates how these objectives and goals are to be achieved
in light of the companies’ capabilities and its economic and political environment as
projected by its business forecasting. Elements of the strategic plan include

 Production line delineation.

Page 77
  quality and pricing level and
 market penetration goals

2. Business forecasts
3. Product and market planning. Translates these into individual market and product line
objectives and includes a long range production plan of items to be manufactured for 2years
or more in the future.
4. Financial planning analyzes the financial feasibility of these objectives relative to capital
requirements and return on investment goals.
5. Resource planning identifies the facilities, equipment, and personnel needed to accomplish
the long range production run and thus is frequently referred to as long run capacity
planning

Specific plan in long-range plans include;

i. Facility plans

 Plant location
 Layouts
 Size
 Capacities

ii. Major supplier plans

 Vertical integration plans

 Identification of components to delicate to suppliers

iii. Process plans

 Development of new production technology

 New production processes
 New system of automation

iv. Product plans

Page 78
  quality
 price

2. Medium Range Planning

Usually covers the period of 6 to 18 months. With time increments that are monthly or sometimes
quarterly. It includes aggregate production planning, item forecasting, master production
scheduling, rough cut capacity planning etc.

Aggregate planning is the process of devising a plan for providing production capacity to support
medium range sales forecasts. It is concerned with setting production rates by product group or
other broad categories for the intermediate term.

Main purpose of aggregate planning is to specify the optimal combination of production rate,
work force level, and inventory on hand. Aggregate planning is necessary in production and
operations management because:

1. It facilities fully loaded facilities and minimizes overloading and under loading, thus
keeping production cost low.
2. It provides adequate production capacity to meet expected aggregate demand
3. It facilitates the orderly and systematic transition of production capacity to meet the peaks
and valleys of expected customer demand and;
4. In times of scarce production resources, it enhances the probability of getting the most
output for the amount of resources available.

Steps in aggregate Planning

1. Begin with a sales forecast for each product that indicates the quantities to be sold in each
time period (usually weeks, months or quarters) over the planning horizon (6 to 18months)
2. Total all of the individual product or service forecasts into one aggregate demand for a
factory.

Page 79
If the products are not additive because of heterogeneous unit, a homogeneous unit of measurement
must be selected that both allows the forecasts to be added and links aggregate outputs to
production capacity.

3. Transform the aggregate demand for each time period into works, materials, machines, and
other elements of production capacity required to satisfy aggregate demand.
4. Develop alternative resource schemes for supplying the necessary production capacity to
support the cumulative aggregate demand.
5. Select the capacity plan from among the alternatives considered that satisfies aggregate
demand and best meets the objectives of the organization.

4.3.1 Planning Strategies

There are four alternative strategies that deal with the workforce, work time, inventory and
backlogs.

1. Vary the work force size by hiring and lying off employees as demand fluctuates.
2. Maintain a stable workforce, but vary the output rate by varying the number of hours
worked through variable work weeks or overtime.
3. Maintain a stable workforce and constant output rate, but absorb demand fluctuations by
allowing inventory to vary.
4. Allow backlogs (delivery lead time) to increase during periods of increased demand and
decrease during periods of decreased demand.

The strategies can be applied independently or used in combination. This is known as mixed
strategy which is common than individual strategies.

Proper Strategy is selected based on:

1. how much of each production resource is available

2. How much capacity is provided by each type of resource? The amount of resource
required producing a single unit of a particular product or service allows the
translation of demand into production capacity plans.

Page 80
 3. At what step in production we determine capacity /labor hour available, or machine
hour available
4. How much does it cost to scale capacity up or down cost of hiring, laying off,
recalling/

Determining production capacity of a production system differs among the type of systems.

Product focused - capacity is determined by the gateway operation that is the first operation in a
production line

 Process focused capacity is determined by bottle neck operation/operation with the least
capacity for a product/
 Other systems/number of machine hour or labor hour.

How quickly production capacity can be scaled up or down and what the relative costs will
determine the strategy.

Given that machine capacities are too inflexible to allow for variation in production capacities in
the planning horizon for aggregate production plans here are the ways that operation managers can
supply production capacity.

1. Straight – time labor

Current production of products by workers paid at

Straight –time labor rates. /increasing shift by hiring new employees /

2. Overtime labor

Current production of products or services by workers paid at overtime labor rates.

- Expensive because of worker fatigue lowered worker moral, especially if the additional
capacity is planned for attended periods and premium labor rate

3. Inventory

 production in previous time periods that is held for shipment in later time periods

4. Subcontracting

Page 81
  production of products or services by suppliers

Relevant costs for aggregate production planning

1. Basic production costs

Fixed and variable costs direct and indirect labor cost

2. Costs associated with changes in the production rate /hiring, training, layoff/
3. Inventory holding cost

Capital cost, storing, insurance, taxes, spoilage, obsolescence …

4. Backlogging Costs

Cost of expediting, loss of customer goodwill, loss of sales revenues. Such cost are usually
very hard to measure

4.3.2 Aggregate planning techniques

1) Matching Demand

In matching demand type aggregate plan, production capacity in each time period is varied to
exactly match the forecasted aggregate demand in that time period. Such an approach varies the
level of the workforce in each time period by hiring new workers, laying off workers or recalling
workers.

Number of workers = unit per time period X labor standard per unit

-Working day per time period per worker X hrs. Per day

Advantage

 Almost no inventories of finished goods inventories are needed and therefore much of the
cost of carrying inventory is avoided.

Page 82
Disadvantage

Labor and material costs tend to be higher because of the disruptions caused by frequently scaling
the workforce and material supplies capacities up and down

2. Level capacity /production capacity is held constant over the planning horizon. The
difference between the constant production rate and the varying demand rate is made up
by inventory, backlog, overtime or subcontracting

a. Buffering with inventory: An advantage of level capacity with inventory is that it usually
promotes low production cost.

Because:

1. Cost of hiring and lying of workers and using overtime are practically eliminated.
2. Cost of locating and developing new sources of material supplies is minimized.
3. Only the most efficient production machinery is used
4. labor and material cost per product are low as rhythmic operation of the production
system has eliminated the continual startup and shut down of operation
5. Supervision is simplified and scrap rates are low since workers are experienced is their
jobs
6. Voluntary turnover and absenteeism may be lower /life time employment /

Disadvantage: Tying up cash and increasing the cost of carrying these inventories.

b) Buffering with Backlog: In produce-to- order firms, backlog serves the purpose of buffering
the difference between varying demand rate and a constant production rate.

Advantages – services as level capacity with inventory

Disadvantage: Difficulty in developing aggregate plan. Because it is often difficult to specify the
detail designs of the product before the customers’ orders are received

Page 83
C) Buffering with overtime or subcontracting: Another approach to aggregate capacity planning
is to use straight time labor to provide a production capacity that equals the minimum forecasted
demand rate during the planning horizon. Then overtime or subcontracting is used to supply any
demand above the minimum. This approach can be used in either produce to stock or produce to
order firms.

Advantages

1. No finished goods inventory is carried i.e. no cost of holding inventory.

2. No cost of hiring, laying off, or recalling of workers i.e. These result in low inventory
carrying cost and stable work force

Disadvantages

1. The amount of overtime available may be insufficient to meet demand if demand peaks are
too high.
2. Continual use of overtime can exhaust workers which can in turn lead to deteriorating
moral, problems with product and service quality, and other difficulties.

Criteria for selecting aggregate plan

o Basically comparing the cost of inventory and hiring layouts recall, overtime
determine the type of aggregate plan.

4.4 Production Control Function

The role of production control in any organization producing goods or services is to separate those
directly responsible for operating the production function from the none operating function of
planning, scheduling, coordinating and record keeping.

The pervasive nature of the production control function can be clearly appreciated by enumerating
its major responsibilities. These include the need to:

1. Initiate orders and provide authorization to produce the quantity and quality of goods
required. To carry out this responsibility the production control department or group must.
Page 84
 a. Analyze orders to determine resource requirements and match these requirements
with available capacity. Production control will, having made such an analysis,
inform the sales department what fabrication or assembly and delivery dates are
flexible for customer’s orders.
b. Provide the production department with routing information specifying
manufacturing service, machine and process setup requirements, applicable work
standard and machine or processing times.
c. Initiate production orders that authorize and direct production personnel to make
the required parts or products.

2) Assist in the efficient utilization of material resources, people, and facilities. To achieve this
objective, production control would seek to:

a. Provide the requisite order scheduling information to the production department on raw
material, tooling, labor and machine requirements by synthesizing information obtained
from process design and the mechanical and industrial engineering departments.
b. Maintain and control raw material inventories.
c. Initiate purchaser order for raw materials and parts and send them to the purchasing
department.
d. Coordinate the transportation of raw materials or parts, in process products, and finished
goods through the production system.
e. Make, or assist others in making, cost and time estimates for order scheduling.
f. Provide detailed instructions for fabricating or assembling products. Information for this
would come from the design and industrial engineering departments.

3) Provide coordination and control for manufacturing activities. This responsibility includes
monitoring production activities, analyzing production problems, and communicating any
need for corrective action to production or operation person in a timely fashion. These
responsibilities specifically require that production control:

a. Initiate the paper controls (reports) to provide feedback information on the status of orders.

Page 85
 b. Compare work accomplishments with schedule requirements to identify orders falling
behind schedule or underutilization of facilities.
c. Prepare labor, machine, and process schedules for production personnel to inform them as
to what they should be doing and in what sequence and when each specific step should
began and accomplished.

4) Assume a leadership role in providing reliable customer services with in the content of a low
cost production function. This broad responsibility can be broken down in to more discrete
responsibility such as:

a. Receive orders for parts, products or services from the sales department
b. Assist in developing master schedules that serves to allocate the firm’s production capacity
to individual orders within a specified time period.
c. Provide customer information on order progress or problems.
d. Initiate corrective action in cooperation with production personnel for orders failing behind
schedule.

4.5 Paper communications for authorization and control

1. The production order

The actual conveyances of authority from production control to production are the production
order. It is initiated by production control and is based on information taken from costumers order
or by orders to replenish inventories.

The production order authorizes the production dept. to start production. The actual form and
content of a production order can vary but the typical production order form will provide
information on: order quantity, specification, delivery date, and charge codes, order number
(customers and firm’s) and reference to drawings and materials required

2. The Route Sheet

Page 86
The route sheet provides step by step instruction to the production group assigned to produce a
part or product for converting materials or parts in to the finished product. They usually originate
from the engineering dept. (since the task is an engineering concern)

A typical route sheet includes: order number, number units to make, part identification, reference
drawing number, material requirements and specification, setup time and teardown time,
operations data

o list and sequence of required operation

o description of each operation
o work center assigned to perform the operation
o machine (s) assigned
o machine settings or special instruction
o Inspection data

3. Bill of material (BOM)

Originate in the engineering department and lists the specific parts, components or subassemblies
and the number of each required to make up a unit of a product. Each subassembly in turn has its
own BOM.

4. The job Ticket or production card

While the production order conveys authority to the operations department to proceed with
production of the items listed, and route sheet provides a detailed step by step instruction for
completing the whole job, the job ticket authorizes an individual operator to produce the results
requested.

The job ticket would include typically the following information for both customer orders and
orders to stock

1. order number
2. operation number and description
3. quantity to be made

Page 87
 4. scrap allowance
5. machine to be used
6. starting date and time
7. standard time per unit
8. setup time allowance

The job ticket /production card/ may be designed to also service as an inspection ticket and as an
input data source for cost control.

Some basic of production control

o routing
o scheduling
o dispatching and control

Review Questions

Part One: True/False

1. When shop floor scheduling problem larger than 3 machines arise the analytical solution
procedures leading to optimality are complex and difficult.

Part Two:

1. Which of the following functions of Production Planning and Control is related to the timetable
of activities?
A. Scheduling
B. Dispatching
C. Expediting
D. Routing
2. Which of the following processes is not a part of the Production Planning and Control system?
A. Integration of processes
B. Routing

Page 88
 C. Expediting and follow up
D. All of the above
3. The objectives of Production Planning and Control are ______.
A. Timely delivery of goods and services
B. Improving customer satisfaction
C. Coordinating with multiple departments to ensure that the production process is on track
D. All of the above
4. The correct sequence of operations in the Production Planning and Control process is
________.
A. Routing – Scheduling – Follow up – Dispatching
B. Scheduling – Follow up – Dispatching – Routing
C. Routing – Scheduling – Dispatching – Follow up
D. Dispatching – Routing – Scheduling – Follow up
5. Production Planning and Control function is crucial for ensuring cost savings and efficiency in
___________.
A. Planning
B. Production
C. Promotion
D. None of the above

Page 89
 UNIT 5: TOTAL QUALITY MANAGEMENT
5.0 Aims and objectives

After reading this unit, you should be able to:

o the concept of quality

o describe the total quality management programs
o understand the different views of quality
o apply the quality chart

5.1 Introduction

Fundamental to any quality program is the determination of quality specification and the cost of
achieving and not achieving those specifications:

 Quality can be derived as conformance to specification. “Fitness for use (satisfies customer
needs).
 Managing the entire organization so that it excels on all dimensions of products and
services that are important to customers.
 Quality management begins before products and services delivered to customers. Raw
materials must meet the appropriate specification, strength, size, color, finish, appearance,
chemical content and other characteristics. As the materials proceed through production,
the quality of partially completed Work In Progress (WIP) products monitored to determine
whether the production processes are operating as intended. The finished products and
services are inspected to determine their acceptability.

5.2 Different Views of Quality

In the traditional view of quality control, the way to ensure that customer receives quality products
and services is to have rigorous system of inspection. The idea is if there is sufficient inspection,
the defective product in will be identified and discarded, leaving only good products to be shipped
to customers. In this approach the main decision is how many product to inspect and this decision
is a question of economies. As more and more outputs are inspected, the cost of inspection

Page 90
increases while the cost of undetected defects decline. At some level of inspection and optimum
trade-off is achieved when total quality controls cost are minimized.

Inspection costs include such costs as personnel training, inspection and testing labour,
maintenance of testing and inspection facilities scrap and rework. The cost of undetected defects
includes such costs as customer complaints, loss of customer good will, product warranty and
replacement cost, product liability suits and returned products. Operations managers are somewhat
supposed to balance these costs in deciding how many products to inspect.

The fundamental wrong in this traditional view is quality can be inspected into products. Enlighten
operation managers today know that superior quality is not attained through more inspection. They
know that manufacturers must go back to production and make fundamental change in the way
that they produce products and do it right the first time. That way, products of superior quality will
be coming out of production and inspections job will shift from discarding bad products to
providing feedback on how production can continue to improve product quality.

Phlip B. Crosby wrote quality is defect free in 1977 and set traditional thinking about “acceptable
level of defect is too high and companies should put programs into place that will move them
continuously towards the goal of zero defects.

The main idea behind free quality is that the traditional tradeoff between the cost of improving
quality and the cost of poor quality is erroneous. The cost of poor quality includes all of the costs
of not doing the job right the first time. Scrap, rework, lost labor hours, and machine hours, the
hidden cost of customer ill will, lost sales and warranty costs. He states that the cost of poor quality
is so understated that unlimited amounts can be profitably spent on improving quality.

A.V Feigenbaum developed the concept of total quality control (TQC) in 1983. Feigenbeaum
contended that the responsibility for quality must rest with the person who does the work. The
concept is referred to as quality at the source, and means every worker, secretary; engineer and
sales person must be responsible for performing his or her work with perfect quality. In TQC where
product quality is more important than production rates, workers are given the authority to stop
production whenever quality problems occur.

Page 91
Quality drives the productivity machine:- the traditional view of quality control was that it cost
more to get higher product quality. But this is no longer the prevalent view. If production does it
right the first time and produce products and services that are defect free, waste is eliminated and
costs are reduced.

Quality Circle- is a small group of employees, the average number is nine – who volunteer to
meet regularly to undertake work related projects designed to advance the company, improve
working conditions, and spur mutual self-development, all by using quality control concepts.

Continuous improvement (CI) is a management philosophy that approaches the challenge of

products and process improvement as never ending process of achieving small wins. It is an
integral part of total quality Management. CI seeks continual improvement of machinery, material,
labor utilization and productions methods through application of suggestion and ideas from team
members.

One of the techniques assisting in continuous improvement is by generating new ideas. This is
achieved by 5W2H method. The 5W2H method is described below.

Type 5W2H Description Counter measure

Subject matter What? What is being done?

Can this task being eliminated?

Purpose Why? Why is the task necessary?
Eliminate in necessary
tasks
Clarify the purpose
Location Where? Where is it being done?

Does it have to be done there?

Sequence When? When it is the best time to doit?

Does it have to be done then?

Change the sequence or
People Who? Who is doing it? combination

Should someone else do it?

Page 92
 Why I am doing it?
Method How? How is it being done?

Is this the best method? Simplify the task

Is there some other way?

Cost How How much does it cost now? Select an improvement
much? method
What will the cost be after
improvement?

Other aspects of quality picture

 Product standardization: - with fewer product design and repetitive production, the same
standard products are produced every day, worker job assignments are well understood,
workers are familiar with their tasks, and product quality may be improved.
 Purchasing:- Suppliers should deliver perfect quality material
 Automated equipment:- it play major role in attaining superior product quality
 Preventive maintenance- minimizes machine repairs.

Total Quality Management (TQM) Programs: - The underlying principle of TQM is to produce
products of high quality in the first place, rather than depend on detecting defective product later
through inspection. Elements of TQM include

i. Top management policy:- top management should issue statement about how business
strategy is tied to superior quality of its products and services.
ii. Quality control for everyone
iii. Product design
iv. Quality material from suppliers
v. Control in production;- production organization must be committed to produce perfect
product.
vi. Distribution, installation and use:- packaging, shipping and installation must be included
in TQM.

Page 93
5.3 STATISTICAL CONCEPTS IN QUALITY CONTROL (SCQC)

SCQC is divided into acceptance sampling and statistical process control. Acceptance sampling
involves testing a random sample of existing goods and deciding whether to accept the entire lot
based on the quality of the random sample. It is useful for purchasing and receiving.

Statistical process control - involves testing a random sample of output form a process to
determine whether the process is producing items within a pre-selected range. In producing goods,
the flow of products is broken into discrete batches called lots. A quality control lot has been
produced under the same operating conditions.

A random sample is one which each unit in the lot has an equal chance of being included in the
sample, thus the sample is likely to be representative of the lot. Either variables or attribute can be
measured and compared to standard.

 Attributes are characteristics that are classified into defective and non-defective, (good or
bad)
 Variables are characteristics that can be measured on a continuous scale Eg. Size of a
bearing.
 What should be the size and frequency of sample? Generally, there is the argument that as
the percentage of lots in sample is increased, there are two effects, 1) the sampling and
testing cost increase, and (2) the quality of products going to customer’s increases.
 Sample size for attributes is usually larger than variables.
 When to inspect? During production process when to inspect is usually determined by
following these general principles:-

i. Inspect after operation that are likely to produce faulty items

ii. Inspect before costly operation
iii. Inspect before operations that cover up defects
iv. Inspect before assembly operation that cannot be undone
v. On automatic machines, inspect first and last pieces of production runs but few in
between pieces.
vi. Inspect finished products

Page 94
The reason behind these principles is largely economic.

Control Charts;- The primary purpose of control chart is to indicate when production process
may have changed sufficiently to affect product quality, while the product is being produced. An
investigation will then be conducted into the causes of the change. If the indications that product
quality is deteriorated or is likely to deteriorate in the future, then the problem would be corrected
by taking action such as replacing worn machine parts, making machine adjustment, machine
overhauled, finding new material supplier and train and instruct workers.

If on the other hand, the indication is that product quality is better than the expected, then it is
important to find out why so that the high quality can be maintained.

REVIEW QUESTIONS

PART ONE: CHOOSE

1. A successful quality strategy features which of the following elements?

A. An organizational culture that fosters quality
B. An understanding of the principles of quality
C. Engaging employees in the necessary activities to implement quality
D. a and c
E. a, b, and c

2. Which of the following is not an element of TQM?

A. Continuous improvement
B. Competitive benchmarking
C. Employee empowerment
D. Team approach
E. Quality management as a specialized function within the firm

3. Which of the following is not a manager quality?

A. Maintains stability
B. Organizes
C. Analyzes
D. Rational
E. Personal power

Page 95
4. Who has primary responsibility for assuring product or service quality?
A. Contractor
B. Contracting officer
C. Requesting office
D. Government
E. Quality assurance representative

5. A distinguishing feature of the total quality management approach is

A. Attention to rewards
B. Development of problem solving skills
C. The improvement of processes
D. Training

ANSWERS KEY

Question Chapters

Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5

T/F T/F Choose choose choose

1 T T D A E

2 T T A B D

3 T T D D E

4 F T D C E

5 F T A A B

6 C

7 A

8 A

9 B

Page 96
10 C

Page 97