BASIC CONCEPTS
OF OPERATIONS
PREP TEAM
List of Interns
Amazon
Tata Steel
Aditya Navali
Sayantan Das
Tanuj Madan
Bosch
Flipkart Abhishek Katiyar
Ravi Teja Palla
Phani Kiran
ABG
Global E-Procure Tejas Kulkarni
(GEP)
Rohit Mennon
BASIC CONCEPTS
OPERATIONS MANAGEMENT
PROCESS ANALYSIS
SUPPLY CHAIN MANAGEMENT
INVENTORY MANAGEMENT
THEORY OF CONSTRAINTS
Operations Management
Business function responsible for planning,
coordinating and controlling the resources needed
to produce products and services for a company.
Services Manufacturers
Intangible Product Tangible product
No inventory Inventory costs
High customer contact Low customer contact
Short response time Longer response time
Labor intensive Capital intensive
Difficulty in measuring output Quantifiable output
Operations and supply strategy
Setting broad policies and plan for using resources of a firm to best support
its long term competitive strategy.
Competition dimensions could be:
Cost or Price
Make the product or deliver the service cheap
Quality
Make a great product or deliver a great service
Delivery Speed
Make the product or deliver the service quickly
Delivery Reliability
Deliver it when promised
Coping with changes in demand
Change its volume
Flexibility & new product introduction speed
Change it
Order Qualifiers & Winners
Order qualifiers are the basic criteria that permit
the firms’ product to be considered as candidates
for purchase by customers
Order Winners are the criteria that differentiates
the products & services of one from another
Process Analysis – Basic Definitions
Bottleneck: Governs the output rate of the process
Setup Time: Time required to prepare a machine to make an item
Operation Time: Sum of the setup time and run time for a batch
of parts
Waiting Time: Time spent waiting to be taken up for operation
Throughput Time: It is the average time for a unit to move
through the system. Sum of operation time and waiting time.
Cycle Time: Time between completion of 2 units of output
Capacity: Maximum a system can produce in a given time period
Capacity Utilization: Actual output/Capacity
Output Rate: Total time/Cycle Time
Process Classification
Make to Order process is activated only in
response to an actual order (Job Shop)
Make to Stock process produces standard products
that can be delivered quickly (Assembly Line)
Hybrid process combines the above two such that
a generic product is made and stocked and then
finished based on actual orders
Process – Shop Floor
Job Shop: Marked by low volume of high variety of
goods & services. Work includes small jobs, each
with somewhat different processing requirements
Assembly Line: Used when higher volumes of
standardized goods or services are needed. Repetitive
processing
Project: Marked by a number of activities to be
performed in a defined sequence. End of all activities
mark the end of the project. Project is typically a one
shot affair
Lean Six Sigma
Reducing Variation
Classifications of Operations Planning
Long Range Planning : 5-10 years
Medium Range Planning : 1 year
Short Range Planning : less than 1 year (SKU
Level)
The medium range planning (critical) is termed as
Aggregate Production Planning (APP). In such
cases the demand is assumed to be dynamic.
The goal of aggregate planning is to achieve a
production plan that will effectively utilize the
organization’s resources to satisfy expected demand.
Production Planning Framework
APP MPS MRP
Demand
Aggregate Master Material Day to Day
Forecastin
Production Production Requireme Scheduling
g
Planning Scheduling nt Planning
Porter’s 5 Forces Porter’s Value
chain
• Framework to analyze • Chain of activities in a firm
competition • Strive for Competitive advantage
• To know attractiveness of a) Cost & b) Differentiation advantage
Industry
Supply Chain Management
Supply Chain (SC): the sequence of
business processes and information that
provides a product or service from suppliers
through manufacturing and distribution to
the ultimate customer.
Supply Chain Management (SCM): is a
set of approaches utilized to efficiently
integrate suppliers, manufactures,
warehouses, and stores, so that merchandise
is produced and distributed at right
quantities, to the right locations, and at the
right time, in order to minimize system wide
costs while satisfying service level
requirements
Evolution of Supply Chain Philosophy
SCM PHILOSOPHY
• The entire supply chain is a
single, integrated entity
• The cost, quality &
delivery requirements are
central
• Supply tuned to demand
• Need for system level
optimization
Issues in SCM
Decisions in SCM
A. Operational level : day to day decisions Ex : Scheduling, loading
B. Tactical level : Every quarter & year Ex : Purchasing, inventory
C. Strategic level : Long lasting effect Ex : Productdesign, outsourcing
Few Issues in SCM
o Distribution network configuration
o Inventory Control
o Supply Contracts
o Supply Chain Integration and Strategic Partnering
o Outsourcing and Off sourcing
o Information Technology and Decision- support systems
o Supply side and Demand side risks
New Concepts & Trends in SCM
ERP (MRP) Systems, Supplier Scorecards
Just In Time (JIT)
Offshore outsourcing
Vendor Managed Inventory
ISO certified suppliers
RFID ( Radio Frequency Identification)
Inventory Management : Why?
Economics involved in producing or purchasing in
batches
Uncertainty in both demand and supply
Seasonality in demand pattern
Availability of different transportation and
distribution models
Inventory Management : Types & Key Terms
Inventory in Supply Chain :
a) Raw Material Inventory
b) Work In Process (WIP) Inventory
c) Finished Product
Key Terms :
Service level
Safety stock
Cost of over stocking
Cost of under stocking
Effective Inventory Policy- Factors
Customer Demand – Forecasting, Variability
Replenishment lead time – certain or uncertain?
Number of different Products/SKUs
Service level requirements
The length of the planning horizon
Costs – a) Order cost –large order , smaller price
b) Inventory Holding Cost Ex : State taxes,
insurance on inventories, Maintenance costs &
opportunity costs
Inventory Control Policies
Inventory control answers the following questions
What should be the order quantity (Q)?
When should an order be placed, called reorder point
(ROP)?
How much safety stock (SS) should be maintained?
Two categories of Inventory control policies
Inventory Control Continuous Review Periodic Review
Policy
Order Quantity Constant Variable
Time between orders Variable Constant
When to Order? When inventory drops to At the end of T period
ROP
Economic Order Quantity (Q)
Order quantity of inventory that minimizes total cost
of inventory management
Balances two costs - inventory carrying costs and
ordering costs
Total inventory cost = Ordering cost + Carrying cost
Drives low ordering costs due to high batch sizes
May lead to high inventory levels that increase:
Rework costs
Lost or broken items
Obsolescence
Assumptions ?? Different Models ??
ABC Analysis
Classification of all consumption items, based on the
“Consumption Value”
Consumption Value = D X C
D= annual demand in units C= cost per unit in Rs.
Based on CV, inventory of a number of items can be
separated into A, B and C classes
A items: Top 10% items account for 70% of CV
B items: Next 20% items account for 20% of CV
C items: Bottom 70% items account for 10% of CV
Pareto Rule (80/20)
Named after the Italian economist, Vilfredo Pareto
● He observed that 80% of the income in Italy, was received by
20% of the Italian population.
● This became the famous 80/20 ‘rule’
● 20% of clients are responsible for 80% of sales volume
● 80% of stock movements are for 20% of our products
The assumption is that ‘most of the results in any situation are
determined by a small number of causes’.
● Are most of our problems (process variation) caused by a
limited number of things (variables)?
● Pareto analysis can help see if this is true
● Note: Don’t think that the percentages will always be 80/20
● You’re just looking for something ‘that stands out’
THEORY OF
CONSTRAINTS
Short-term Capacity Optimization 26
Theory of Constraints
27
Significance of bottlenecks
Maximum speed of the process is the speed of the
slowest operation
Any improvements will be wasted unless the
bottleneck is relieved
Bottlenecks must be identified and improved if the process
is to be improved
Theory of Constraints
28
Purpose is to identify bottlenecks or other constraints
and exploit them to the extent possible
Identification of constraints allows management to take
action to alleviate the constraint in the future
Reduce cycle time
Time from receipt of customer order to shipment
Improve manufacturing cycle efficiency (MCE)
Processing time / total cycle time
Assumes current constraints cannot be changed in the
short-run
What should be produced now, with current resources, to
maximize profits?
Theory of Constraints
29
Constraining resource must be maximized
All other operations must be geared toward this goal
May require sub-optimization in other areas
Upstream operations must provide only what the constraint can handle
Downstream operations will only receive what the constraint can put
out
Constraint must be kept operating at its full capacity
If not, the entire process slows further
Focus is on maximizing throughput
Sales – totally variable costs
All other costs treated as fixed operational expenses
Cannot vary much in the short-run
Theory of Constraints
30
Based on the concepts of drum, buffer and ropes
Drum
Output of the constraint is the drumbeat
Sets the tempo for other operations
Tells upstream operations what to produce
Tells downstream operations what to expect
Buffer
Stockpile of work in process in front of constraint
Precaution to keep constraint running if upstream operations are interrupted
Rope
Sequence of processes prior to and including the constraint
Want to “pull” the rope at the maximum speed
Speed of the constraint
Theory of Constraints
31
Steps in the TOC Process
1. Identify the system constraints
Internal External
Process constraints Material constraints
Machine time, etc. Insufficient materials
Policy constraints Market constraints
No overtime, etc. Insufficient demand
How is a constraint identified?
32
Steps in the TOC Process
33
2. Decide how to exploit the constraint
Produce the most profitable product mix
Want it working at 100%
How much of a buffer?
Holding costs
Including risk, quality costs
Stock-out costs
3. Subordinate everything else to the preceding decision
Plan production to keep constraint working at 100%
May need to change performance measures to conform
upstream activities to the “rope” speed
Steps in the TOC Process
34
Product 1 Product 2
Demand per month 1,000 600
Price per unit $ 900 $ 1,500
Material cost per unit $ 400 $ 800
Hours required per unit
Test components 0.25 0.40
Assemble components 1.00 1.50
Install electronics 0.50 0.50
Final inspection and test 1.25 1.00
Package and ship 0.10 0.10
Identify the constraint
Hours
available Slack
Product 1 Product 2 Total per month hours
Test components 250 240 490 640 150
Assemble components 1000 900 1900 2240 340
Install electronics 500 300 800 800 0
Final inspection and test 1250 600 1850 1760 (90)
Package and ship 100 60 160 160 0
Steps in the TOC Process
35
Identify the best use of the constraint
Price per unit $900 $1,500
Material cost per unit $400 $800
Throughput per unit $500 $700
Constaint time per unit 1.25 1.00
Throughput per hour $400 $700
Identify the most profitable product mix
Total demand 1,000 600
Units produced in best mix 928 600
Unmet demand 72 -
Throughput generated
Units produced 928 600
Throughput per unit $ 500 $ 700
Total throughput $ 464,000 $ 420,000 $ 884,000
Steps in the TOC Process
36
4. Alleviate the constraint
Determine how to increase its capacity
5. Repeat the process
Always a new constraint
Evaluation of TOC
37
Advantages
Improves capacity decisions in the short-run
Avoids build up of inventory
Aids in process understanding
Avoids local optimization
Improves communication between departments
Evaluation of TOC
38
Disadvantages
Negative impact on non-constrained areas
Diverts attention from other areas that may be the next
constraint
Temptation to reduce capacity
Ignores long-run considerations
Introductionof new products
Continuous improvement in non-constrained areas
May lead organization away from strategy
