MBA GC 204 all unit ppt presentation pro

204 GCOSCM
Operations & SupplyChain
Management
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SemesterII

Unit :I
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•Introduction to Operations and Supply Chain Management:
Definition, Concept, Significance and Functions of Operations
and SCM.
•Evolution from manufacturing to operations management,
Physical distribution to Logistics to SCM, Physical Goods and
ServicesPerspectives.
•Quality: Definitions from various Perspectives, Customers view
and Manufacturer's view, Concept of Internal Customer,
Overview of TQM and LEANManagement,
•Impact of Global Competition, Technological Change, Ethical
and Environmental Issues on Operations and Supply Chain
functions.

OperationsManagement
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What isoperations?
•The part of a business organization that is
responsible for producing goods orservices
How can we define operationsmanagement?
•The management of systems or processes that
create goods and/or provideservices

OperationsManagement
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The planning, scheduling, and control
of the activities that transform inputs
into finished goods andservices.

DecisionMaking
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Mostoperationsdecisionsinvolvemanyalternativesthatcan
havequitedifferentimpactsoncostsorprofits.Typical
operationsdecisionsinclude:
What: What resources are needed, and in whatamounts?
When: When will each resource be needed? When should the work be
scheduled? When should materials and other supplies beordered?
Where: Where will the work bedone?
How: How will he product or service be designed? How will the work be
done? How will resources beallocated?
Who: Who will do thework?

Scope of OperationsManagement
The scope of operations management ranges across theorganization.
The operations function includes many interrelated activities
suchas:
Forecasting
Capacityplanning
Facilities andlayout
Scheduling
Managinginventories
Assuringquality
Motivatingemployees
Deciding where to locatefacilities
And more . ..
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OperationsFunction
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The collection of people, technology, and
systems within a company...
… that has primary responsibility...
… for providing the organization’s products
and/orservices.

7’Ms ofOperations
anpower
aterial
achine
oney
easurement
ovement
ethods
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The TransformationProcess
Inputs
Land Labor
Capital
Information
Outputs
Goods
Services
Transformation/
Conversion
Process
Control
Measurement
andFeedback
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Measurement
andFeedback
Measurement
andFeedback
Value-Added
Feedback = measurements taken at various points in the transformationprocess
Control = The comparison of feedback against previously established standards to determine if
corrective action isneeded.

ProductionSystem
Inputs Outputs
Conversion
Subsystem
Control
Subsystem
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Viewing Operations asa
TransformationProcess
Transformation
Process
Manufacturingoperations
Serviceoperations
Inputs
Materials
People
Equipment
Intangibleneeds
Information
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Outputs
Tangiblegoods
Fulfilledrequests
Information
SatisfiedCustomers

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Good orService?
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Goodsare physical
items that include raw
materials, parts,
subassemblies, and
final products.
•Automobile
•Computer
•Oven
•Shampoo
Servicesare activities
that provide some
combination of time,
location, form or
psychologicalvalue.
•Airtravel
•Education
•Haircut
•Legalcounsel

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Manufacturing Vs.Services
Manufacturing
Tangibleproduct
Keydecisionsdrivenby
physicalcharacteristics
oftheproduct:
•Howistheproduct
made?
•How do we storeit?
•How do we moveit?
Services
Intangible“Product”or
Service
Keydecisions:
•How muchcustomer
involvement?
•How much
customization?
Location, Exchange, Storage, Physiological,Information

Manufacturing vs.Service
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Factors Manufacturing Services
Degree of customercontact LOW HIGH
Uniformity of input
HIGH
LOW
Labor content ofjobs
LOW HIGH
Uniformity of output HIGH LOW
Measurement ofproductivity LOW HIGH
Production anddelivery HIGH LOW
Quality assurance HIGH
LOW
Amount ofinventory HIGH
LOW
Evaluation ofwork HIGH LOW
Ability to patentdesign HIGH LOW

Supply ChainManagement
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Activemanagement of supply chain activities and
relationships to maximize customer value and achieve
a sustainable competitiveadvantage

Suppliers’
suppliers
Direct
suppliers
Producer Distributor
Final
Customers
SupplyChain
Supply Chain –a sequence of activities and
organizations involved in producing and delivering a
good orservice
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The Need forSupply
ChainManagement
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In the past, organizations did little to manage
the supply chain beyond their own operations
and immediate suppliers which led to numerous
problems:
•Oscillating inventorylevels
•Inventory stockouts
•Latedeliveries
•Qualityproblems

PhysicalDistribution
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“The activities associated with the movement of
material, usually finished goods or service
parts, from the manufacturer to thecustomer”
•APICS 11th EditionDictionary

PhysicalDistribution
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PhysicalSupply
•goods moving from supplier tomanufacturer
•“inbound”
PhysicalDistribution
•goods moving from manufacturer tocustomers
•“outbound”

PhysicalDistribution
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Alcoa
FirstTier
Supplier DistributorRetailer
Transportationcompanies
Final
customers
Upstream Downstream
SecondTier
Supplier
MaterialFlows
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Channels ofDistribution
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Any series of firms or individuals that
participates in the flow of goods and services
from the raw material supplier and producer to
the final user orconsumer.”

Channels ofDistribution
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Company may deliver directly to customers
Use other companies or individuals to deliver
goods
Intermediaries
•wholesalers –agents
•transportation companies –warehouses

Channels ofDistribution
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Supply ChainIssues
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Length of the chain
Complexity
Stability
Physical, informational, and monetaryflows

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FocalFirmSupplier(s) Customer(s)
MaterialFlow
CashFlow
Basic SCstructure
Upstream Downstream
InformationFlow
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Supply Chain: ManufacturingExample
30
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Supply Chain: ServiceExample
31
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SCM forMilk
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Cross-FunctionalLinkages
Operations &
SupplyChain
Finance
Budgeting.
Analysis.
Funds.
Marketing
Whatproducts?
Whatvolumes?
Costs?Quality?
Delivery?
Human
Resources
Skills? Training?
# ofEmployees?
Accounting
Performance measurement systems.
Planning andcontrol.
MIS
WhatITsolutions
tomakeitallwork
together?
Design
Sustainability.
Quality.
Manufacturability.
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Historical Milestonesin
OM
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The Industrial Revolution
Post-Civil War Period
ScientificManagement
Human Relations and Behaviorism
OperationsResearch
The ServiceRevolution

The IndustrialRevolution
1700’s Cottage
Industry....
Machine power for
humanpower....
Factory system which
resulted in greater
productivity.
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The IndustrialRevolution…Contd.
The industrial revolutiondeveloped in England in the1700s.
The steam engine, invented by James Watt in 1764, largely replacedhuman
and water power forfactories.
Adam Smith’s The Wealth of Nations in 1776 touted the economic benefits
of the specialization oflabor.
Thus the late-1700s factories had not only machine power but also ways of
planning and controlling the tasks ofworkers.
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The IndustrialRevolution
The industrial revolution spread from Englandto
other European countries and to the UnitedSates.
In 1790 an American, Eli Whitney, developed the
concept of interchangeableparts.
The first great industry in the US was thetextile
industry.
In the 1800s the development of the gasoline engine
and electricity further advanced therevolution.
By the mid-1800s, the old cottage systemof
production had been replaced by the factorysystem.
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Post-Civil WarPeriod
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During the post-Civil War period great
expansion of production capacityoccurred.
By post-Civil War the following developments
set the stage for the great production explosion
of the 20th century:
•increased capital and productioncapacity
•the expanded urbanworkforce
•new Western USmarkets
•an effective national transportationsystem

ScientificManagement
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•Incentive pay systems wereinitiated.
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Frederick Taylor is known as the father of scientific
management. His shop systememployed these
steps:
•Each worker’s skill, strength, and learning ability were
determined.
•Stopwatch studies were conducted to precisely set
standard output per worker on eachtask.
•Material specifications, work methods, and routing
sequences were used to organize theshop.
•Supervisors were carefully selected andtrained.

ScientificManagement
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In the 1920s, Ford Motor Company’s operation
embodied the key elements of scientific
management:
•standardized productdesigns
•massproduction
•low manufacturingcosts
•mechanized assemblylines
•specialization oflabor
•interchangeableparts

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Human Relations and
Behavioralism
In the 1927-1932 period, researchers in the
Hawthorne Studies realized that human factors
were affectingproduction.
Researchers and managers alike were
recognizing that psychological and sociological
factors affectedproduction.
Fromtheworkofbehavioralistscameagradual
changeinthewaymanagersthoughtaboutand
treatedworkers.

OperationsResearch
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During World War II, enormous quantities of resources
(personnel, supplies, equipment, …) had to bedeployed.
Military operations research(OR) teams were formed to
deal with the complexity of thedeployment.
After the war, operations researchers found their way
back to universities, industry, government, and
consultingfirms.
OR helps operations managers make decisions when
problems are complex and wrong decisions arecostly.

The ServiceRevolution
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The creation of services organizations accelerated sharply after
World WarII.
Today, more than two-thirds of the US workforce is employed in
services.
About two-thirds of the US GDP is from services.
There is a huge trade surplus inservices.
Investment per office worker now exceeds the investment per
factoryworker.
Thus there is a growing need for service operations
management.

The ComputerRevolution
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Explosive growth of computer and communication technologies
Easy access to information and the availability of more
information
Advances in software applications such as Enterprise Resource
Planning (ERP)software
Widespread use ofemail
More and more firms becoming involved in E-Business using
theInternet
faster, better decisions over greaterdistances

Today's FactorsAffecting
OM
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GlobalCompetition
Quality, Customer Service, and Cost
Challenges
Rapid Expansion of Advanced Technologies
Continued Growth of the Service Sector
Scarcity of OperationsResources
Social-ResponsibilityIssues

Comparison
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Period Key Points toRemember
1760-1820
The Industrial
Revolution
Cottage Industry.to Factory System, Steam Engine,
Specialization of Labor, InterchangeableParts
1865-1877
Post-Civil War
Period
increasedcapital&productioncapacity,urban
workforce,newWesternUSmarkets,national
transportationsystem
1880-1900
Scientific
Management
standardized product designs, mass production, low
manufacturing costs, mechanized assemblylines
1900-1920
Human Relations
andBehaviorism
psychological and sociological factors affected
production
1945-1960
Operations
Research
OR –LPP, Transportation,Assignment
1070-1980
The Service
Revolution
Investment per office worker now exceeds the
investment per factoryworker.
Today’s Global competition , Social Responsibility, AI &IOT

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Quality
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Quality is conformance to specifications.
Assuring manufacturing quality entails three
principalfunctions:
1.Quality design andengineering,
2.Quality control,and
3.Qualitymanagement.

The Three QualityGurus
1.Deming
2.Juran,
3.PhilipCrosby:
Quality is defined as conformance to requirements, not“goodness”.
The system for achieving quality is prevention, notappraisal.
.
The performance standard is zero defects, not “that’s closeenough”
Themeasurementofqualityisthepriceofnon-conformance.Thecostof
poormanufacturingqualityishigh.Rework,scrap,productfailuresand
recallscanseverelydamageamanufacturerthroughinefficiencies,delays,
directcosts,customerdissatisfactionandlowshareholderconfidence.
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Q A is aimed to
avoid the defect,
QA provides
assurance
that quality request
ed will beachieved
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QC is aimed to
identify and fix
the defects. It is
a procedure
that focuses on
fulfilling
the quality
requested
QMS is a set of policies,
processes and
procedures required for
planning and execution
in the core business area
of anorganization.

Dimensions of Quality:
ManufacturedProducts
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Performance
•Basic operating characteristics of a product; how well a
car is handled or its gasmileage.
Features
•“Extra” items added to basic features, such as a stereo CD
or a leather interior in acar
Reliability
•probability that a product will operate properly within an
expected time frame; that is, a TV will work without repair
for about sevenyears

Dimensions of Quality:
Manufactured Products(cont.)
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Conformance
degree to which a product meets pre–established
standards
Durability
how long product lasts beforereplacement
Serviceability
ease of getting repairs, speed of repairs, courtesyand
competence of repairperson

Dimensions of Quality:
Manufactured Products(cont.)
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Aesthetics
how a product looks, feels, sounds, smells, ortastes
Safety
assurance that customer will not suffer injury or harm
from a product; an especially important consideration for
automobiles
Perceptions
subjective perceptions based on brand name, advertising,
and thelike

Dimensions of Quality:
Service
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Time andTimeliness
How long must a customer wait for service, and is it
completed ontime?
Is an overnight package deliveredovernight?
Completeness:
Is everything customer asked forprovided?
Is a mail order from a catalogue company complete when
delivered?

Dimensions of Quality:
Service(cont.)
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Courtesy:
How are customers treated byemployees?
Are catalogue phone operators nice and are their voices
pleasant?
Consistency
Is the same level of service provided to each customer
eachtime?
Is your newspaper delivered on time everymorning?

Meaning of Quality:
Producer’sPerspective
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Quality ofConformance
Making sure a product or service is produced
according todesign
if new tires do not conform to specifications, they
wobble
if a hotel room is not clean when a guest checks in, the
hotel is not functioning according to specifications of its
design

Meaning of Quality:
Customer’sPerspective
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Quality ofDesign
Degree to which it matches to the expectation of
customer
if a hotel room is not clean when a guest checks in, the
hotel is not functioning according to customers
expectation

Meaning ofQuality
Fitness for
ConsumerUse
Producer’sPerspective Consumer’sPerspective
Quality ofConformance
•Conformanceto
specifications
•Cost
Quality ofDesign
•Qualitycharacteristics
•Price
MarketingProduction
Meaning ofQuality
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Total QualityManagement
What isTQM?
TQMistheintegrationofallfunctionsandprocesseswithin
anorganizationinordertoachievecontinuousimprovement
ofthequalityofgoodsandservices.Thegoaliscustomer
satisfaction.
T Q M
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TQM
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Focus on the customer and their requirements
Right firsttime
Competitive benchmarking
Minimisation of cost ofquality
•Preventioncosts
•Appraisalcosts
•Internal / external failurecosts
•Cost of exceeding customerrequirements

The TQMApproach
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1.Find out what the customer wants
2.Design a product or service that meetsor
exceeds customerwants
3.Design processes that facilitates doing thejob
right the firsttime
4.Keep track ofresults
5.Extend these concepts tosuppliers

Elements of
TQM
Continual
improvement
Team
approach
Employee
empowerment
Suppliers
Quality at the
source
Champion
Supplier
quality
Knowledge of
tools
Decisions
based onfacts
Competitive
benchmarking
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Leanmanagement
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Lean management is an approach to managing
an organization that supports the concept of
continuous improvement, a long-term approach
to work that systematically seeks to achieve
small, incremental changes in processes in
order to improve efficiency andquality.

Lean Manufacturinggoals
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Impact ofglobal
competition
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PrimaryFactors
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Availability of raw materials
Nearness to the market
Availability of labor
Transport facilities
Availability of fuel and power
Availability ofwater

Secondaryfactors
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Suitability of climate
Government policies
Availability of finance
Competition between states
Availability of facilities
Disposal ofwaste

TechnologicalChanges
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Ethical and Environmental Issues on
Operations and Supply Chainfunctions
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The product life cycle is the basis of
green supply chainmanagement.
Raw Retail/
Material TransportManufactureTransportConsumer TransportDisposal
Extraction Use
Design
Typical Supply ChainScope
Concept
Supply Chain in the Environmental LifeCycle
Designing the supply chain concurrently
with the product is a supply chain
management bestpractice.
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Raw
Material
Extraction
Retail/
Transport ManufactureTransportConsumer
Use
TransportDisposal
Air
Water
Waste
Air
Air
Water
Waste
Air
Air
Water
Waste
Air
Air
Water
Waste
Impacts
Water
Energy
Inputs
Water
Energy
Design
Stage
Concept
The environmental impacts of each LC
stage are examined forreduction.
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Historically, GSC management focused on
the upstream supplychain.
practices, environmental
management systems,
etc.
Focus is on the material
content and
environmental practices
ofsuppliers.
Typical Green Supply ChainAnalysis
Manufacturer encourages
suppliers to adoptgreen
Manufacturer
Supplier
Supplier
Supplier
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SourceReduction
Recycle/Reuse
Control
Technology
Disposal
Companies are starting to viewGSC
as a strategic analysistool.
Pollution PreventionHierarchy
Strategic
Tactical
Long
Term
Short
Term
The Pollution
PreventionHierarchy
gauges the value of
environmental
programs.
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Waste Reduction Opportunities in the LifeCycle
Raw
Material
Extraction
Retail/
Transport Manufacture Transport Consumer Transport Disposal
Use
DesignConcept
Reduce Reuse/Recycle Dispose
Control
Technology
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What benefits Working with environmental
supply chain management?
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-Improved business & publicimage
-Reduced risk of legalnon-compliance
-Attraction of environmentally awarecustomers
-Improved productivity andefficiencies
-Improvedquality
-Reduced number ofdefaults
-Improved environmentalmanagement
-More sustainableproducts

End of Unit1
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OperationsProcesses
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Unit2

Unit2
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Operations Processes: Process Characteristics in Operations: Volume
Variety andFlow.
Types of Processes and Operations Systems -Continuous Flow
system and intermittent flowsystems.
Process Product Matrix: Job Production, Batch Production,
Assembly line and Continuous Flow, Process and Product Layout.
Service System Design Matrix : Design of Service Systems, Service
Blueprinting.

INPUTS
People
Energy
materials
information
fixedassets
Transformationprocess
Method(s) ofconversion.
Support function to
provide controlsand
feedback and to improve
theprocess
OUTPUTS
Goods
services
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LearningObjectives
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Explain the strategic importance of process
selection.
Explain the influence that process selection has
on anorganization.
Describe the basic processingtypes.
Discuss automated approaches to processing.
Explain the need for management ofTechnology.

LearningObjectives
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List some reasons for redesign of layouts. Describe the basic
layouttypes.
List the main advantages and disadvantages of product layouts and
processlayouts.
Solve simple line-balancing problems. Develop simple
processlayouts.

Factors Affecting The Choice Of Manufacturing
Process
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1.Effect ofvolume/variety
2.Capacity of theplant
3.Leadtime
4.Flexibility andefficiency
Following factors need to be considered before making
a choice of manufacturingprocess:

FourV’s
All operations processes haveone
thing in common, they all taketheir
„inputs‟like,raw materials,
knowledge,capital,equipmentand
timeandtransformthemintooutputs
(goodsandservices).\Theydothisis
differentwaysandthemainfourare
knownastheFourV‟s,,
olume
ariety,
ariation
isibility.
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The VolumeDimension
AgreatexampleofthisisMcDonalds,theyare
awellknownexampleofhighvolumelowcost
hamburgerandfastfoodproduction.
repeatabilityof the tasks, systemizationof the
work, where standardsand procedures drive
the way in which each part of the job is carried
out.…
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The VarietyDimension
A common example used to describe the
variety dimension is the contrast between a taxi
and a busservice.
Both offer hired transportation services but a
taxi service has a much higher variety
dimension as they will basically pick you up and
drop you off wherever it is you need to go.…
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The VariationDimension
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Consider two home building companies. One offers
prefabricated homes that you choose from a
catalogue or online. It is transferred to site and
erected over the course of a fewdays.
The second building company offers customized
homes they have display homes they have built that
you can walk through.…

The VisibilityDimension
This dimension refers to a customers ability to
see, track their experience or order through the
operations process. A high visibility dimension
includes courier companies where you can
track your package online or a retail store
where you pick up the goods and purchase
them over the counter.…
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Facilitylayout
Process & ProductLayout
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Facilitylayout
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Facility layout refers to the arrangementof
•machines,
•departments,
•workstations,
•storageareas,
•aisles, and
•common areas within an existing or proposed
facility.

Implications
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•Layouts have far-reaching implicationsfor
•the quality,
•productivity,and
•competitiveness of afirm.
•Layout decisions significantly affect how efficiently workers can
do theirjobs,
•how fast goods can beproduced,
•how difficult it is to automate a system,and
•how responsive the system can be to changesin
•product or servicedesign,
•product mix,and
•demandvolume

Objective of the layoutdecision
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Ensure a smooth flow of work, material, people, and information through thesystem
Effective layoutsalso:
•Minimize material handlingcosts;
•Utilize spaceefficiently;
•Utilize laborefficiently;
•Eliminatebottlenecks;
•Facilitate communication and interaction between workers, between workers and their supervisors,
or between workers andcustomers;
•Reduce manufacturing cycle time and customer servicetime;
•Eliminate wasted or redundantmovement;
•Facilitate the entry, exit, and placement of material, products, andpeople;
•Incorporate safety and securitymeasures;
•Promote product and servicequality;
•Encourage proper maintenanceactivities;
•Provide a visual control of operations oractivities;
•Provide flexibility to adapt to changingconditions.

BasicLayouts
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Process,
Product, and
Fixed-position
Three hybridlayouts:
•cellularlayouts,
•flexible manufacturing systems,and
•mixed-model assemblylines

ProcessLayout
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Dept.A
Dept.B Dept.D
Dept.C
Dept.F
Dept.E
Used for Intermittent processing
Job Shop or BatchProcesses
Process Layout
(functional)

Processlayouts
It is also known as functional layouts, group similar activities together in
departments or work centers according to the process or function they
perform.
•For example, in a machine shop, all drills would be located in one work
center, lathes in another work center, and milling machines in still another
work center.
•In a department store, women's clothes, men's clothes, children's clothes,
cosmetics, and shoes are located in separatedepartments.
A process layout is characteristic of intermittent operations, service shops,
job shops, or batch production, which serve different customers with
differentneeds.
The volume of each customer's order is low, and the sequence of
operations required to complete a customer's order can varyconsiderably.
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Process Layout -worktravels
to dedicated processcenters
Milling
Assembly
&Test
Grinding
Drilling Plating
ProcessLayout
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Can handle a variety of processing
requirements
Not particularly vulnerable to equipment
failures
Equipment used is lesscostly
Possible to use individual incentiveplans
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Advantages of ProcessLayouts

In-process inventory costs can be high
Challenging routing and scheduling
Equipment utilization rates are low
Material handling slow andinefficient
Complexitiesoftenreducespanofsupervision
Specialattentionforeachproductorcustomer
Accountingandpurchasingaremoreinvolved
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Disadvantages of Process
Layouts

Rawmaterials
orcustomer
Finished
item
Station
2
Station
3
Station
4
Material
and/or
labor
Station
1
Material
and/or
labor
Material
and/or
labor
Material
and/or
labor
Used for Repetitive or ContinuousProcessing
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ProductLayout

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Productlayouts
•It is, better known as assembly lines, arrange activities in a line according to thesequence
of operations that need to be performed to assemble a particularproduct.
•Each product has its own "line" specifically designed to meet itsrequirements.
•The flow of work is orderly and efficient, moving from one workstation to another down the
assembly line until a finished product comes off the end of the line. Since the line is set up
for one type of product or service, special machines can be purchased to match a product's
specific processingrequirements.
•Product layouts are suitable for mass production or repetitive operations in whichdemand
is stable and volume ishigh.
•The product or service is a standard one made for a general market, not for a particular
customer.
•Because of the high level of demand, product layouts are more automated than process
layouts, and the role of the worker is different. Workers perform narrowly defined assembly
tasks that do not demand as high a wage rate as those of the more versatile workers in a
process layout.
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1 2 3 4
5
6
78910
In
Out
Workers
A U-Shaped ProductionLine
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-1111 -1111
222222222 -2222
Assembly
3333333333 -3333
44444444444444 -4444
Lathe MillDrill
Heat
treat
Gear
cut
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MillDrill
Gear
cut
Mill Drill
Heat
treat
Grind
Lathe Mill
Heat
treat
Grind

High rate of output
Low unitcost
Laborspecialization
Low material handlingcost
High utilization of labor and equipment
Established routing and scheduling
Routing accounting andpurchasing
6-
10
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Advantages of ProductLayout

Creates dull, repetitivejobs
Poorly skilled workers may not maintain
equipment or quality ofoutput
Fairly inflexible to changes in volume
Highly susceptible to shutdowns
Needs preventivemaintenance
Individual incentive plans areimpractical
6-
10
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Disadvantages of Product Layout

Fixed-positionlayouts
It is typical of projects in which the product produced is too fragile, bulky, or heavy tomove.
Ships, houses, and aircraft areexamples.
In this layout, the product remains stationary for the entire manufacturing cycle.Equipment,
workers, materials, and other resources are brought to the productionsite.
Equipment utilization is low because it is often less costly to leave equipment idle at a location
where it will be needed again in a few days, than to move it back andforth.
Frequently, the equipment is leased or subcontracted, because it is used for limited periodsof
time.
The workers called to the work site are highly skilled at performing the special tasks they are
requested todo.
For instance, pipefitters may be needed at one stage of production, and electricians or
plumbers at another. The wage rate for these workers is much higher than minimum wage.
Thus, if we were to look at the cost breakdown for fixed-position layouts, the fixed cost would
be relatively low (equipment may not be owned by the company), whereas the variable costs
would be high (due to high labor rates and the cost of leasing and movingequipment).
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Hybrid -CellularLayout
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What isProcess
Selection?
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Processselection
•Deciding on the way production of goods or
services will beorganized
Majorimplications
•Capacityplanning
•Layout offacilities
•Equipment
•Design of worksystems

Process Selection andSystem
Design
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ProcessStrategy
•Key aspects of processstrategy
–Capital intensive –equipment/labor
–Processflexibility
–Technology
–Adjust tochanges
–Design
–Volume
–technology
6-33
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Technology
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Technology: The application of scientific
discoveries to the development and
improvement of products and services and
operationsprocesses.
Technology innovation: The discovery and
development of new or improved products,
services, or processes for producing or
providingthem.

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6-35
Kinds ofTechnology
Operations management is primarily concerned with three kinds of
technology:
•Product and servicetechnology
•Processtechnology
•Informationtechnology
All three have a major impacton:
•Costs
•Productivity
•Competitiveness

TechnologyCompetitive
Advantage
Innovationsin
•Products andservices
•Cellphones
•PDAs
•Wirelesscomputing
•Processingtechnology
•Increasingproductivity
•Increasingquality
•Loweringcosts
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TechnologyAcquisition
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Technology can have benefits but …
Technology risksinclude:
•What technology will and will notdo
•Technicalissues
•Economicissues
•Initial costs, space, cash flow,maintenance
•Consultants and/or skilledemployees
•Integration cost, time resources
•Training, safety, jobloss

Variety
•Howmuch
Flexibility
•Whatdegree
Volume
•Expectedoutput
JobShop
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Batch
Repetitive
Continuous
ProcessSelection

Jobshop
•Smallscale
Batch
•Moderatevolume
Repetitive/assemblyline
•High volumes ofstandardized
goods orservices
Continuous
•Very high volumes of non-
discretegoods
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ProcessTypes

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PQRelationships
JobShop
BatchProduction
Assembly Line&
ContinuousFlow
Q
P
Fixed Position
Layout
ProcessLayout
ProductLayout
100 100000010000
ProductionQuantity
Product
Variety

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Product and Service
Processes
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ProcessType
JobShop
Appliance repair
Emergencyroom
Batch
Commercial
baking
Classroom
Lecture
Repetitive
Automotive
assembly
Automatic
carwash
Continuous
(flow)
SteelProduction
Waterpurification

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Product and Service
Processes
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ProcessType Jobvariety
Process
flexibility
Unitcost
Volumeof
output
JobShop VeryHigh VeryHigh VeryHigh Verylow
Batch Moderate Moderate
Moderateto
High
Moderate
Repetitive Low Low Low Moderate toHigh
Continuous
(flow)
Verylow Verylow Verylow VeryHigh

Inefficient operations
ForExample:
High Cost
Bottlenecks
The introduction of new
products or services
Changes in the
design of products
orservices
Accidents
Safety
hazards
The Need for LayoutDecisions
6-
12
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Changes in
environment
al or other
legal
requirements
Changes in
methods and
equipment
6-
12
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Changes in volume of
output or mix of
products
Moraleproblems
The Need for Layout Design(Cont’d)

Warehouse and storage layouts
Retaillayouts
Officelayouts
Service layouts must be aesthetically
pleasing as well asfunctional
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ServiceLayouts

How are ServicesDifferent?
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Everyone is an expert onservices
What works well for one service provider doesn‟t necessarily
carry over toanother
Quality of work is not quality ofservice
“Service package” consists of tangible and intangible
components
Services are experienced, goods are consumed
Mgmt of service involves mktg, personnel
Service encounters mail, phone,F2F

Degree of CustomerContact
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More customer contact, harder to standardize
and control
Customerinfluences:
•Time ofdemand
•Exact nature ofservice
•Quality (or perceived quality) ofservice

What do PeopleWant?
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Amount of friendliness and helpfulness
Speed and convenience of delivery
Price of theservice
Variety ofservices
Quality of tangible goods involved
Unique skills required to provide service
Level ofcustomization

Service-System DesignMatrix
(none) (some) (much)
Mailcontact
Phone
Contact
Face-to-face
tightspecs
Face-to-face
loosespecs
Face-to-face
total
customization
High
LowHigh
Low
Degree of customer/servercontact
Internet &
on-site
technology
Sales
Opportuni
t
y
Production
Efficiency
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Permeable ReactiveBuffered

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CustomerJourney
Line ofInteraction
Front stage
Human-To-Human
Human-To-Computer
Line ofVisibility
Backstage
Line ofInternal
Interaction
SupportProcess
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UNIT3
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UNIT3
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1.ProductionPlanning&Control(PPC):RoleandFunctionsofPPC
2.DemandForecasting:ForecastingasaPlanningTool,Forecasting
TimeHorizon,SourcesofDataforforecasting,Accuracyof
Forecast,CapacityPlanning.
3.ProductionPlanning:AggregateproductionPlanning,Alternatives
forManagingDemandandSupply,
4.MasterProductionSchedule,CapacityPlanning-Overviewof
MRP,CRP,DRP,MRPII.
5.ProductionControl:Scheduling,Loading,SchedulingofJobShops
andFloorShops,GanttCharts.

PRODUCTION
PLANNING&CONTROL
(PPC)
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Learning
Objectives
1.Production Planning andcontrol
2.Objectives ofPPC
3.The factors determining production planningprocedures.
4.The scope ofPPC
5.Phases in PPCfunctions
6.Benefit of PPCfunction
7.Limitations of PPCfunction
8.PPC in Different Productionsystems
PartI
PartII
Session should help us to understandfollowing
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Sessionoutline
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Session
Outline
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Introduction Production Planning andcontrol
•Definition
•3 phases ofPPC
•Production(Transformation)
Factors determining production planningprocedures.
Role &scope
Benefit & Limitations of PPCfunction
PPC in Different Productionsystems

IntroductiontoPPC
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Production Planning and
Control
Planning, direction and co-ordination of
the firm’s facilities to achieve the
predetermined Productionobjectives in
the most economical manner.
Designing
Product
Determining
Eqpmnts.
DeterminingCapacity
rqmnt.
Designinglayout
DeterminingMaterial
HandlingEqpmnt.
Specifying quality&
quantitylevel
Sequenceof Natureof
opns. opns.
TimeManagement
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Three Stages Of
PPC
Planning
Operation
Control
Utilization of resourcesavailable fromthebest
possiblealternatives
Performance in accordance with the details set out
in the productionplan
Monitoring of Performance and comparing with
planned
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Objectives of
PPC
1.Deliver Quality goods in required Quantity to the customer in
the required Delivery Schedule to achieve maximum Customer
Satisfaction and Minimum PossibleCost
2.Ensure maximum Utilization ofRecourses
3.Minimize product Through Put Time (Mfg. cycletime)
4.Maintain Optimum Inventorylevels
5.Coordination between labour and machines and various
supportingdepartments
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Objectives of PPC
…contd.
ProductionPlanningistoprovideaphysicalsystemwithasetof
operatingguidelinesforefficientconversionofrawmaterials,
humanskillsandotherinputsintofinishedproducts
6.Remove bottle neck at all stages of production and to solve
problems related toproduction
7.Ensure effective cost reduction and costcontrol
8.Plan for plant capacity for futurerequirements
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Factors Determining
Production
Planning
Procedures
1. Volume ofProduction-
2. Nature of ProductionProcesses-
3. Nature ofOperations
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Factors Determining
Production
Planning
Procedures
1.Volume ofProduction-
Intensity of Production planning varies and depend
upon volume ofproduction
i.Custom order Job shop-AirBuses,
ii.High volume operations-fasteners
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Factors Determining Production Planning
Procedures…Contd.
2.Nature of ProductionProcesses-
i.Continues
ii.Intermittent ( batchwise)
iii.JobProduction
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Factors Determining
Production Planning
Procedures…Contd.
3. Nature ofOperations
i.Manufacturing to order (may or may not berepeated)
ii.Stock and sell ( Batch or mass production-automobile,
watches, TVetc.)
iii.Stock and sell ( Continues production-sugar, chemicals,
yarn etc. )
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Scope of Production
Planning
Materials Raw Material, Spare parts ,Components
Methods Best sequence of operations with in the limitations of existinglayout
Machines&
Equipments
Routing
Estimating
selection of m/c, tools, maintenance policy , replacement policyetc.
Flow of work, layout, temporarystorageofraw materials,material
handlingsystems
Process time (set up & Opn time), standard time (Labour & m.ctime)
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Scope of Production
Planning…(contd.)Loading &
Scheduling
Capacity & Capability ofm/c.
Starting & Completion time of each and everyoperations
Dispatching
execution of planning functions. Orders, instruction, releaseof
material and tools to instruction, release of material and toolsto
operators
Progressing ,
Evaluatingor
Controlling
Feed back, followup
Evaluation forimprovement
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PPC Function is Concerned With Decision-
makingRegarding
What to produce?
Product planning and development including product
design.
How to produce? Process planning, material planning, tool planningetc.
Where to produce?
When to produce?
Who will produce?
Facilities planning, capacity planning andsub-
contractingplanning.
Production scheduling and machineloading
Man powerplanning
How muchto
produce?
Planning for quantity, Economic batch sizeetc.
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Role of PPC-There are varieties of production
management responsibilitiesviz:
Productdesign
Job design & processdesign
Equipment selection andreplacement
Labour skills and trainingprograms
Raw material selection and subcontracting
Plant selection andlayout
Scheduling steps of theplan
Implementing and controlling theschedule
Operating the productionsystem
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Benefit of PPC
function
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Efficient PPC resultsin
•high qualityproduction
•Better utilization ofresources
•Reduced inventories
•Reduced through puttime
•Better customerservice
Lower production cost and lower capitalinvestment

Benefit of PPC
function…contd.
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Timelydelivery
Minimum breakdown of machines ,plant and equipment
Minimizing idle time of machine and labour ensuring even flow of
work through the plantfacilities
Higher customer satisfaction, improve sales turnover, market share
and profitability and provide competitiveadvantage

Limitations of PPC
function
PPCfunctionisbasedoncertainassumptionsorforecastsof
customer’sdemand,plantcapacity,availabilityofmaterials,
poweretc.Iftheseassumptionsgowrong,PPCbecomes
ineffective.
Employeemayresistchangesisproductionlevelssetper
productionplansifsuchplansarerigid.
Theproductionplanningprocessistimeconsumingwhenitis
necessarytocarryoutroutingandschedulingfunctionsforand
complexproductionconsistingofalargenoofpartsgoingintothe
product.
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Limitations of PPC
function…contd.
PPC function becomes extremely difficult when the
environmental factors changes very rapidly suchas
•Technology,
•Customer’s taste regarding fashion or style of productneeded,
•Government policy and control changefrequently,
•Stoppage of power supply by electricity board due to power cuts,
•Break in supply chain due to natural calamities such asfloods
earthquakes warsetc.
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PPC in DifferentProduction
systems
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PPC in Job
Production
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•Mfg. of products to meet specific customer requirements of
specialorders
•Qty. is usuallysmall
•Examples: large turbo generators, boilers, steam engines,
processing equipments , material handling equipments, ship
buildingetc.
•Types
•Small no. of products produced onlyonce
•Small no. of products intermittently when the needarises
•Small no. of products produced periodically at known interval oftime

PPC in Job
Production…contd.
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PPC function is relativelydifficult
•Every job order is of different nature and has different
sequence of operations. There is no standardization routing
for joborders.
•Specific job orders are assigned to different workstations as
per availability ofcapacity.
•Production schedules drawn depend on the relative priority
assigned to several joborders.
•Scheduling is dependent on assessment of production times
and estimating is based onjudgment

PPC in Batch
Production
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•Mfg. no. of identical articles either to meet a specific order
or satisfy continuousdemand
•Decision regarding tooling and jigs and fixtures are
dependant on the quantities involved in productionbatch
•Type
•Batch produced onlyonce
•At repeatedly at irregular interval, when thearises
•Periodically at known intervals, to satisfy continuousdemand

PPC in Batch
Production…contd.
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Here PPC is more simplified as quantities increase andas
manufacture becomes moreregular.
Two problems that may arise in batch production are due
to size of batch and due to scheduling ofproduction
Solutions:
•External customer ordersonly
•Whether the plant is producing for internal consumption i.e.
subassembly used in the finalproduct

PPC in Continuous
Production
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It is normally associated with large no. of quantitiesof
production and with high rate ofdemand.
Types
•Mass Production–
•FlowProduction-

Summar
y
Production Planning is the key activity for the
organization's
efficiency,
effectiveness,
timelydelivery,
quality productand
customersatisfaction.
This is just like the steering wheel of running vehicle, which
drives youdestination.
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DemandForecasting
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1.Forecasting as a PlanningTool,
2.Forecasting TimeHorizon,
3.Sources of Data forforecasting,
4.Accuracy ofForecast,
5.CapacityPlanning.
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An estimate of futuredemand.
A forecast can be determined by mathematical
means using historical, it can be created
subjectively by using estimates from informal
sources, or it can represent a combination of both
techniques.
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Why Forecast
?
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•To plan for the future by reducinguncertainty.
•To anticipate and managechange.
•To increase communication and integration of planningteams.
•To anticipate inventory and capacity demands and manage lead
times.
•To project costs of operations into budgetingprocesses.
•Toimprovecompetitivenessandproductivitythroughdecreased
costsandimproveddeliveryandresponsivenesstocustomer
needs.

Decisions that Need
Forecasts
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Which markets to pursue?
What products to produce?
How many people to hire?
How many units to purchase?
How many units to produce?
And soon……

Common Characteristics of
Forecasting
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Forecasts are rarelyperfect
Forecasts are more accurate for aggregated data
than for individualitems
Forecast are more accurate for shorter than longer
timeperiods

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Constructing Demand
Forecasting System.
1.Determine the information that needs to beforecasted.
1.This includes defining the source of the historical data to be provided and
the periods over which the data will becollected.
2.Assign responsibility for the forecast to a person which
performance will be measured on the accuracy of actual sales to
theforecast.
3.Setup forecast system parameters:
1.Forecasthorizon.
2.Forecast level : Business unit, Product family, Model and brand, orSKU.
3.Forecast period andfrequency.
4.Forecast revision : The way in which changes to the forecast will be
recorded, such as original forecast, revised forecast, subsequently
revised forecast, currentforecast.

Demand Forecasting
System
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4.Select appropriate forecasting models andtechniques.
5.Collect data for input to forecasting models and test models for
forecastaccuracy.
6.Run the forecasting model and generatingforecasts.
7.Record actual demand information againstforecast.
8.Report forecast accuracy and determine the root cause for
variance between forecast and actual data. Periodically assess
the forecast system for performance, so that changes can be
made to the forecasting approach wherenecessary.

Types of Forecasting
Models
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Qualitative (technological)methods:
•Forecasts generated subjectively by theforecaster
Quantitative (statistical)methods:
•Forecasts generated through mathematicalmodeling

General Methods of
Forecasting
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1.QualitativeTechniques.
•They are based on expert or informed
opinion regarding future product
demands.
•This information is intuitive and based on
subjective judgment.
•Qualitative techniques include gathering
information from customer focus groups,
groups of experts, think tanks, research
groups, etc.

Qualitative
Methods
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MarketResearch.
Marketresearchisusedmostlyforproductresearchinthesenseof
lookingfornewproductideas,likeanddislikesaboutexistingproducts,
whichcompetitiveproductswithinaparticularclassarepreferred,and
soon.
PanelConsensus.
Inapanelconsensus,theideathattwoheadsarebetterthanoneis
extrapolatedtotheideathatapanelofpeoplefromavarietyof
positionscandevelopamorereliableforecastthatanarrowgroup.
Panelforecastsaredevelopedthroughopenmeetingswithfree
exchangeofideafromalllevelsofmanagementandindividuals.

HistoricalAnalogy.
In trying to forecast demand for a new product, an ideal situation
would be where an existing product or generic product could be used
as a model. There are many ways to classify such analogies -for
example, complementary products, substitute or competitive products,
and products as a function ofincome.
DelphiMethod.
The Delphi method conceals the identity of the individuals participating
in the forecasting. Everyone has the same weight. Procedurally, a
moderate creates a questionnaire and distributes it to participants.
Their response are summed and given back to the entire group along
with a new set ofquestions.
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Statistical
Forecasting
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Time SeriesModels:
Assumes the future will follow same patterns as thepast
CausalModels:
Explores cause-and-effectrelationships
Uses leading indicators to predict thefuture
E.g. housing starts and appliancesales

Time Series
Analysis.
Timeseriesanalysisis
basedontheideathat
datarelatingtopast
demandcanbeusedto
predictfuturedemand.
Pastdatamayinclude
severalcomponents,
such as trend,
cyclical seasonal,or
influences
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140
120
100
80
60
40
20
0
1 2 3 4 5 6 7 8 9 10
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Composition of Time Series
Data
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Data = historic pattern + random variation
Historic pattern mayinclude:
•Level (long-termaverage)
•Trend
•Seasonality
•Cycle

Time Series
Patterns
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Methods of Forecasting theLevel
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Naïve Forecasting
Simple Mean
MovingAverage
Weighted Moving Average
ExponentialSmoothing

Naïve
Forecasting
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Next period forecast = Last Period’sactual:
F
t1A
t

Naïve
Month Period Orders(A) Forecast
January 1 122
February 2 91 122
March 3 100
91
April 4 77
100
May 5 115
77
June 6 58
115
July 7 75
58
August 8 128
75
September 9 111
128
October 10 88
111
November 11
88OSCM-Iftekhar khan :
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Simple Average
(Mean)
Next period’s forecast = average of all historical
data
F
A
tA
t1A
t2............
n
t1
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SimpleAvg
Month Period Orders(A) Forecast
January 1 122
February 2 91 122
March 3 100
107
April 4 77
104
May 5 115
98
June 6 58
101
July 7 75
94
August 8 128
91
September 9 111
96
October 10 88
97
November 11
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Moving
Average
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An arithmetic average of a certain number n of the
most recent observations. As each new observation is
added, the oldest observation is dropped. The value of
n (the number of periods to use for the average)
reflects responsiveness versus stability in the same
way that the choice of smoothing constant does in
exponentialsmoothing.

Moving
Average
Next period’s forecast = simple average of the
last Nperiods
F
t1

A
tA
t1.........A
tN1
N
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Moving Avg.(N=3)
Month Period Orders(A) Forecast
January 1 122
February 2 91
March 3 100
April 4 77
104
May 5 115
89
June 6 58
97
July 7 75
83
August 8 128
83
September 9 111
87
October 10 88
105
November 11
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Moving Avg.(N=5)
Month Period Orders(A) Forecast
January 1 122
February 2 91
March 3 100
April 4 77
May 5 115
June 6 58
101
July 7 75
88
August 8 128
85
September 9 111
91
October 10 88
97
November 11
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Weighted Moving
Average
Whereas the simple moving average gives equal
weight to each component of moving average
database, a weighted moving average allows any
weights to be placed on each element, providing, of
course, that the sum of all weights equals1.
F
t= w
1A
t -1+ w
2A
t -2 +.....+ w
nA
t -n
where w
i= Weight to be given to the actual occurrence for the period
(t –n)
n = Total number of periods in theforecast.
∑ n
i= 1
= 1, The sum of all the weight must equal1.

WeightedMoving
Avg. (N=3),.2,.3,.5
Month Period Orders(A) Forecast
January 1 122
February 2 91
March 3 100
April 4 77
102
May 5 115
87
June 6 58
101
July 7 75
79
August 8 128
78
September 9 111
98
October 10 88
109
November 11
103
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Exponential
Smoothing
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A type of weighted moving average forecasting techniques in which
past observations are geometrically discounted according to their
age. The heaviest weight is assigned to the most recentdata.
The techniques makes use of a smoothing constant to apply the
difference between the most recent forecast and the critical sales
data.
F
t= α A
t -1 + ( 1 -α ) F
t -1
where F
t= New forecast.
A
t-1 = Latestdemand.
F
t-1= Previousforecast.
α = Smoothing factor. (0 ≤ α ≤1)

ExponentialSmoothing
Month Period Orders(A) (α= 0.2)Forecast
January 1 122 122
February 2 91
122
March 3 100
116
April 4 77 113
May 5 115
106
June 6 58
108
July 7 75
98
August 8 128
93
September 9 111
100
October 10 88
102
November 11
99OSCM-Iftekhar khan :
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Time Series Problem
Solution Simple Simple WeightedExponentialExponential
NaïveSimpleMoving Moving Moving SmoothingSmoothing
Perio
d
Orders(A)ForecastAverageAverage(N=3)Average(N=5)Average(N=3)(=0.2)(=0.5)
1 122 122 122
2 91 122 122 122 122
3 100 91 107 116 107
4 77 100 104 104 102 113 104
5 115 77 98 89 87 106 91
6 58 115 101 97 101 101 108 103
7 75 58 94 83 88 79 98 81
8 128 75 91 83 85 78 93 78
9 111 128 96 87 91 98 100 103
10 88 111 97 105 97 109 102 107
11 88 97 109 92 103 99 98OSCM-Iftekhar khan :
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Causal
Forecasting
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Causal forecasting assumes that demand is related
to some underlying factor for factors in the
environment.
Causal forecasting methods develop forecasts after
establishing and measuring an association between
the dependent variable and one or more
independentvariables.

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CasualModels
Often, leading indicators hint can help predict
changes indemand
Causal models build on these cause-and-effect
relationships
A common tool of causal modeling is linear
regression:
Yabx
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Regressio
n
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A method of fitting an equation to a data set. Simple
regression involves one independent variable and one
dependent variable. Least squares is the most common
method ofregression.

Linear
Regression
b
XYXY
X2XX
aYbX
Identify dependent (y)and
independent (x)variables
Solve for the slope of theline
Solve for the yintercept
Develop your equation forthe
trendline
Y=a +bX
2
nXX
2
XYnXY
b
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OSCM-Iftekhar khan :2020
Linear Regression Problem: A maker of golf shirts has been tracking the
relationship between sales and advertising dollars. Use linear regression to
find out what sales might be if the company invested $53,000 inadvertising
nextyear.
10533451.25
2
aYbX1 4 7 . 2 53.5851.25
a -3 6 . 2 0
YabX-3 6 . 2 03 . 5 8 x
Y
5-3 6 . 2 03.58531 5 3 . 5 4
b
30282451.25147.25
3 . 5 8
2
2
XnX
b
XYn X Y
Adv.$
(X)
Sales$
(Y)
1 48 130
2 52 151
3 50 150
4 55 158
53 153.85
Tot 205 589
Avg51.25 147.25
XY X
2 Y
2
4240 2304 16,900
7852 2704 22,801
7500 2500 22,500
8690 3025 24964
3028210533 87165

Decisions that Need Forecasts
Why Forecast?
Types of Forecasting Models
Qualitative (technological)methods:
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Market Research.
PanelConsensus.
Historical Analogy.
DelphiMethod.
Quantitative (statistical) methods:
Time SeriesModels:
Naïve Forecasting
Simple Mean
MovingAverage
Weighted Moving Average
ExponentialSmoothing
CausalModels:
Regression

CapacityPlanning
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Facilities
Process
Finance
Manpower
Capacity
Location
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What is
Capacity?
•The upper limit or ceiling on the load that an operating unit can handle is called its
capacity.
•Capacity is the rate of productive capability of afacility.
•The operating unit might be a plant, department, machine, store, orworker.
•The load can be specified in terms of either inputs or outputs.
Available Seat
Miles(ASMs)
number of
bedsavailable
Amachineisableto
process120Kgs.of
rawmaterialsinevery
houritworks,soits
inputcapacityis120-
Kgs/hour.
Amachinecanproduce
20unitsoffinished
goodsineveryhourit
works,soitsoutput
capacity is 20
units/hour
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Doyouthinkintheoperationsmanagementshould
measurethehumancapacityandthemachinecapacity
withthesamemeasurement?
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MeasuringCapacity
Examples
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There is no one best
way to measure
capacity
Output measures
like kegs per day are
easier to understand
With multiple
products, inputs
measures work
better
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82
Measuring Capacity
Examples
C a rm a n u f a c t u r e r
R e t a i ls t o r e
T y p e ofB u s i n e s s
I n p u t M e a s u r e so f
C a p a c i t y
O u t p u tM e a s u r e s
ofC a p a c i t y
C a r s pers h i f tLabor h o u r s
P a t i e n t s perm o n t hA v a i l a b l ebeds
Labor h o u r s
P i z z a s perday
H o s p i t a l
P i z z ap a r l o r
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R e v e n u e perf o o t
F l o o r space i n
s q u a r ef e e t

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Measuring Available
Capacity
Designcapacity:
•Maximum output rate under idealconditions
•A bakery can make 30 custom cakes per day when pushed at
holidaytime
Effectivecapacity:
•Maximum output rate under normal (realistic)conditions
•On the average this bakery can make 20 custom cakes perday
ActualOutput:
•The rate of output actually achieved. It cannot exceed effective
capacity and is often less than effective capacity due to breakdowns,
defective outputs, shortage of materials, and similarfactors.

84
Measuring Effectiveness
of CapacityUse
Measures how much of the available capacity is actually
beingused:
•Measureseffectiveness
•Use either effective or design capacity indenominator
capacity
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Utilization 
actualoutputrate
100%

Example of Computing Capacity Utilization: A bakery’s design capacity is 30
custom cakes per day. Currently the bakery is producing 28 cakes per day. What
is the bakery’s capacity utilization relative to both design and effective
capacity?
actual output
designcapacity
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actual output
effectivecapacity
(100%) 
28
(100%) 93%
30
Utilization design
(100%)
28
(100%)140%
20
Utilization effective
The current utilization is only slightly below its design capacity and considerably above
its effectivecapacity
The bakery can only operate at this level for a short period oftime

Example:
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Design capacity = 50 trucks per day
Effective capacity = 40 trucks per day
Actual output = 36 units perday
Efficiency= Actual output / Effectivecapacity
= 36 units per day/ 40 units perday
=90%
Utilization= Actual output / Designcapacity
= 36 units per day/ 50 units perday
=72%
Thus, compared with the effective capacity of 40 units per day, 36
units per day (90%) looks prettygood.
However, compared with design capacity of 50 units per day, 36
units per day (72%) is much less impressive although probably more
meaningful.

Why term efficiency and utilization are important to measure
the capacity of any business related issue? Choose any
business issue of your choice and based on that justify your
argument?
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Capacity
Planning
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CapacityPlanningorAggregatePlanningisdefinedastheprocessof
aggregating(i.e.,consolidatingorgrouping)alltherequirementsfor
fulfillingcapacityrequirementsforeachperiodanddeterminingthe
bestwaytoprovidetheneededcapacity.
Theobjectivesofcapacityplanningarefeasibilityi.e.,theinternal
needsmustbewithinthecapabilityoftheoperationssystemand
optimalityi.e.,itisdesirabletodeterminetheleastcostlywaytomeet
the capacityneeds.

•Adjustablecapacityaretheworkforcesize,
•Theproductionrate-thenumberofhoursworkedperdayorweek
(thisamountstotheuseofovertimeworkoridletime),and
•Inventoryifitcanbeusedtostorecapacityinoneperiodsoitcan
servedemandinlateroneperiod(Servicesusuallycannotstore
inventoryoftheiroutput).Sometimesback-orderingand
subcontractingareused.
•Ifonlyonevariableisadjustedtodealwithanon-uniformdemand
withintheplanninghorizon,itiscalledthepurestrategy;the
adjustmentofmorethanonevariableiscalledamixedstrategy.
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Basic questions in capacity
planning
• What kind of capacity isneeded?
• How much isneeded?
• When is itneeded?
Is there any relationship between consumer demand and
production capacity of any manufacturing firm? Discuss from
the point of any manufactured products of yourchoice.
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Capacity planning normally
involves the following
activities:
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Assessing
existing
capacity
Forecasting
capacity
needs
Identifying
alternative ways
to modifycapacity
Evaluating
financial,
economical,
and
technological
capacity
alternatives
Selecting a capacity
alternative most
suited to achieve
strategic
mission
Efficiency andUtilization
Short term and
long-term
capacity
Present Value
Analysis,
Aggregate Planning
Models.
BreakevenAnalysis
DecisionTree
Analysis
Make or buy
New Plant
Shifting theplant
Various
Alternatives
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FromthepointofcurrentmarkettrendsofIndianCarManufacturingsectordo
youthingthemanufacturershouldthinkaboutthemodificationoftheircapacity
ofproduction?Whyorwhynot?Discuss.
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Importance of Capacity
Planning
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•Potential impact on the ability of the organization to meet future demand for
products and services; capacity essentially limits the rate of outputpossible.
•Relationship between capacity and operating costs. Ideally, capacity and
demand requirements will be matched, which will tend to minimize operating
costs.
•The initial cost involved, Typically the greater the capacity of a productive unit,
the greater itscosts.
•Required long term commitment of resources and the fact that, once they are
implemented, it may be difficult or impossible to modify those decisions without
incurring majorcosts.
•Other-
•Sales VsCapacity
•Cost & Price

Do you think Country like SriLanka should manufacture automobile in the
country? Why or why not? Discuss your opinion incorporating the concept of
public demand and capacity of production inSriLanka.
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Discussion
questions
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1.Define and describe the operating capacity of a college of business
administration. How should its capacity bemeasured?
2.Discuss the fundamental differences between long term and short termcapacity
decisions.
3.Capacity will be modified in response to demand. Demand will be modified in
response to capacity. Which statement is correct?Why?
4.What is capacityplanning?

Aggregate Productionplanning
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Frito-Lay
•More than three dozen brands, 15 brands sell
more than $100 million annually, & sell over $1
billion
•Planning processes covers 2 to 18months
•Unique processes and speciallydesigned
equipment
•High fixed costs require high volumes of
production and high utilization ofequipment
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Aggregate
Planning
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Theobjectiveofaggregateplanningis
tomeettheforecasteddemandwhile
minimizingthetotalcostoverthe
planningperiod

Planning
HorizonAggregate planning: Intermediate-range capacity planning, usually covering 2to
12 months. The goal of aggregate planning is to achieve a production plan that will
effectively utilize the organization’s resources to satisfy expecteddemand.
Short
range
Intermediaterange
Longrange
Now 2months 1Year
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Planning
Horizons
Long-range plans (over oneyear)
Research and Development
New productplans
Capitalinvestments
Facilitylocation/expansion
•Short-range plans (up to 3months)
•Jobassignments
•Ordering
•Jobscheduling
•Dispatching
•Overtime
•Part-timehelp
Topexecutives
Intermediate-range plans (2 to 12months)
Salesplanning
Production planning andbudgeting
Setting employment, inventory, subcontracting levels
Analyzing operatingplans
Operationsmanagers
Operations managers,
supervisors,foremen
Responsibility Planning tasks andhorizon
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AggregatePlanning
Aggregate planning is a big picture approach to production planning.
It is a production plan to meet the demand throughout theyear.
It is not concerned with individual products, but with a single
aggregate product representing allproducts.
For example, in a TV manufacturing plant, the aggregate planning
does not go into all models and sizes. It only deals with a single
representative aggregateTV.
All models are lumped together and represent a single product;hence
the term aggregate planning isused.
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Aggregate Planning
Inputs
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Demand
forecasting for
aggregateunit
Resources
•Workforce/productionrate
•Facilities andequipment
Policies
•Subcontracting
•Overtime
•Inventorylevels
•Back orders
Costs
•Inventorycarrying
•Back orders
•Hiring/firing
•Overtime
•Inventorychanges
•subcontracting

ProcessPlanning
and
CapacityDecisions
ProductDecision
Aggregate Plan
forProduction
MasterProduction
Schedule
and MRPSystems
Detailed WorkSchedules
Research &Technology
Supply ChainSupport
Inventory onHand
External CapacitySubcontracting
Market Place &Demand
Demand Forecast andOrder
WorkForce
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Aggregate Planning
Strategies
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1.LevelProduction:
2.ChaseDemand:
3.MixedStrategies

Level Production (Constant
Workforce)
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1.Maintaining a steady rate of production while meeting variations in
demandby a combination ofoptions
2.Using part-timers, overtime, or idle time to absorbchanges
3.Using subcontractorsand maintain a stableworkforce
4.Backordering, satisfying the demand of one period in one or more
periodslater.
5.Daily production isuniform
6.Use inventory asbuffer
7.The underlying philosophy is that stable employment leads to better
quality, less turnover, less absenteeism, and more employee
commitment.
8.This strategy works well when demand isstable

© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt3/e
Level
Production
Time
Demand
Production
Units
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Example1
Month ExpectedDemand ProductionDays
Demand Per
Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
= = 50 units perday
124
Average
requirement
=
Total expecteddemand
Number of production days
6,200
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Example1
70–
60–
50–
40–
30–
0–
Jan Feb Mar Apr May
June
 
2
2
18 21
2
1 22 20
=Month
= Numberof
workingdays
Production
rate per
working
day
Level production using averagemonthly
forecastdemand
ForecastDemand
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Example2
70–
60–
50–
40–
30–
0–
Jan Feb Mar Apr May
June
 
2
2
18 21
2
1 22 20
=Month
= Numberof
workingdays
Production
rate per
working
day
Level production using
lowest monthly forecast
demand
Forecastdemand
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Chase
Demand
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1.-Matching capacity to demand by keeping production in each period
equal to the expected demand for thatperiod.
2.Match output rates to demand forecast for each period bychanging
workforce levels or productionrate
3.-The disadvantages: a ready supply of skilled labor may not always
available, newly hired personnel must be trained, and layoffs negatively
affect the morale of all employees and maylead to a decrease in overall
productivity.
4.-Favored by many serviceorganizations

© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt3/e
Chase
Demand
Time
Units
Demand
Production
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Mixed
Strategies
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Two or more options, such as overtime, subcontracting, hiring and layoff,etc.,
areused.
There are both inventory changes and work force and production rate changes
over the planninghorizon.
Typically, mixed strategies are better (result in lower costs) thanpure
strategies

Master Production
Schedule
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Master Production
Schedule
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It indicates the quantityand timingof planned
production by taking into account desired delivery
quantity and timing as well as on-handinventory.
The MPS is one of the primary outputs of the master
schedulingprocess.

Disaggregating the aggregate
plan
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For example, televisions manufacturer may have an aggregate planthat
calls for 200 television in January, 300 in February, and 400 inMarch.
This company produces 21, 26, and 29 inch TVs, therefore this three-
month aggregate plan must be translated into specific numbers of TVs of
each type (Master Schedule) prior to actually purchasing the appropriate
materials and parts, scheduling operations, and planning inventory
requirements.

Aggregate Plan to Master
Schedule
JanFebMar.
200300 400
Aggregate
Planning
Disaggregation
Master
Schedule
TypeJan.Feb.Mar
21inch100 100 100
26inch75 150 200
29inch25 50 100
Total200 300 400
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Master
scheduling
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The result of disaggregatingthe aggregate plan
is a master scheduleshowing:
thequantityandtimingofspecificenditemsfor
ascheduledhorizon,whichoftencoversabout
sixtoeightweeksahead.

Master Scheduling
Process
Master
Scheduling
Beginninginventory
Forecast
Customerorders
Inputs
Outputs
Projectedinventory
Master ProductionSchedule
MPS
Uncommittedinventory
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Master
schedule
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Inputs:
•Beginning inventory; which is the actual inventory on
hand from the preceding period of theschedule
•Forecasts for each perioddemand
•Customer orders; which are quantities already committed
tocustomers.
Outputs
•Projectedinventory
•Production requirements(MPS)

Example: Master
Schedule
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A company that makes industrial pumpswantsto
prepare a Master Production Schedule (MPS) for
June andJuly.
Marketing has forecasted demand of 120 pumps for
June and 160 pumps forJuly.
These have been evenly distributed over the four
weeks in each month: 30 per week in Juneand 40 per
week inJuly.

Example: Master
Schedule
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Now suppose that there are currently 64 pumps in
inventory (i.e., beginninginventory),
There are customer orders that have been committed
for the first five weeks (booked) and must be filled
which are 33, 20, 10, 4, and 2respectively.
Suppose a production lot size of 70 pumps is used.
Prepare the Master ProductionSchedule

641 2 3 4 5 6 7 8
Forecast 3030303040404040
CustomerOrders
(committed) 332010 4 2
Projected on-hand
inventory 31 1-29
JUNE JULY
Beginning
Inventory
Customer orders arelarger
than forecast in week1
Forecast is larger than
Customer orders in week2
Forecast is larger than
Customer orders in week3
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The master schedule before MPS

Solution: The master
schedule
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Week Inventory from
previousweek
RequirementsNet
inventory
before
MPS
MPS Projected
inventory
1 64 33 31 31
2 31 30 01 01
3 01 30 -29 70 41
4 41 30 11 11
5 11 40 -29 70 41
6 41 40 01 01
7
01 40 -39 70 31
8 31
40 -09
70
61

MRP
Material RequirementsPlanning
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Material RequirementsPlanning
•Materials requirements planning (MRP) is the logic
for determining the number of parts, components,
and materials needed to produce aproduct.
•MRP provides time scheduling information
specifying when each of the materials, parts, and
components should be ordered orproduced.
•Dependent demand drivesMRP.
•MRP is a softwaresystem.
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Material Requirements PlanningSystem
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•Based on a master production schedule, a material
requirements planningsystem:
–Creates schedules identifying the specific parts and
materials required to produce enditems.
–Determines exact unit numbersneeded.
–Determines the dates when orders for those materials
should be released, based on leadtimes.

Firmorders
fromknown
customers
Forecasts
ofdemand
fromestimates
Aggregate
ProductPlan
Master
Production
Schedule
(MPS)
Engineering
DesignChanges
Bill of
Materialfile
Inventory
Transactions
Inventory
Recordfile
Reports
Material
Planning
(MRP)
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50
250

Example of MRP Logic andProduct
StructureTree
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A
Product Structure Tree for AssemblyA
LeadTimes
A 1day
B 2days
C 1day
D 3days
E 4days
F 1day
Demand
Day10 50 A
Day8 20 B (Spares)
Day6 15 D(Spares)
Given the product structure tree for “A” and the lead time and demand information below, provide
a materials requirements plan that defines the number of units of each component and when they
will beneeded.
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Next, we need to start scheduling the components that makeup“A”.In
the case of component “B” we need 4 B’s foreachA.Since we need
50 A’s, that means200B’s.And again, we back the schedule up for the
necessary 2 days of leadtime.
Day: 1 2 3 4 5 6 7 8 9 10
AR e q u i r e d 50
O r d e rP l a c e m e n t 50
BR e q u i r e d 20 200
O r d e rP l a c e m e n t 20 200
SparesLT =2
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A
4x50=200
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Day: 1 2 3 4 5 6 7 8 9 10
A
LT=1
Required 50
OrderPlacement 50
B
LT=2
Required 20 200
OrderPlacement 20 200
C
LT=1
Required
OrderPlacement
D
LT=3
Required
OrderPlacement
E
LT=4
Required
OrderPlacement
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LT=1 OrderPlacement 200
B(4)
E(1)D(2)
C(2)
F(2)D(3)
Day: 1 2 3 4 5 6 7 8 9 10
ARequired 50
LT=1OrderPlacement 50
BRequired 20 200
LT=2OrderPlacement 20 200
CRequired 100
LT=1OrderPlacement 100
DRequired 55 400 300
LT=3OrderPlacement 55 400 300
ERequired 20 200
LT=4OrderPlacement 20 200
FRequired 200
A
40 + 15spares
Part D: Day6
Finally, repeating the process for all components, we have the final materials requirementsplan:

Bill of Materials (BOM)File
A Complete ProductDescription
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•Materials
•Parts
•Components
•Productionsequence
•ModularBOM
–Component or SubassembliesBOM
•Planning BOM orkits
–create an artificial parent to the BOM used for inexpensive items like washers or pins
togroup.
•Explosion: revealing the requirements for eachcomponent.

ManufacturingResource
Planning (MRPII)
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This is a development that seeks to address some of the shortcomings of MRP. It
includes all of the elements of MRP, it: is based around the Bill ofMaterials,
uses a Master Production Schedule(MPS)
MRP II includes feedback from the shop floor on how the work has progressed, to all
levels of the schedule so that the next run can be updated on a regular basis. For
this reason it is sometimes called 'Closed LoopMRP'.

Distribution
resource planning
(DRP)
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Distribution resource planning (DRP) is a method used
in business administration for planning orders within a
supply chain. DRP enables the user to set certain
inventory control parameters (like a safety stock) and
calculate the time-phased inventory requirements.

Capacity
Requirements
Planning(CRP)
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Capacity Requirements Planning (CRP) is the process
of determining what personnel and equipment
capacities (times) are needed to meet the production
objectives embodied in the master schedule and the
material requirementsplan.

Schedulin
g
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Processofarranging,controllingandoptimizingworkandworkloadsin
aproductionprocessormanufacturingprocess.
Allocateplantandmachineryresources,planhumanresources,plan
productionprocessesandpurchasematerials.
Minimizetheproductiontimeandcosts,bytellingaproductionfacility
whentomake,withwhichstaff,andonwhichequipment.Production
schedulingaimstomaximizetheefficiencyoftheoperationandreduce
costs.

Loading
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A load means the quantity of work, and allocating the
quantity of work to the processes necessary to
manufacture each item is calledloading.

GanttChart
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AGanttchart,orharmonogram,isatypeofbarchartthatillustratesa
projectschedule.
This chart lists the tasks to be performed on the vertical axis, and time
intervals on the horizontalaxis.
The width of the horizontal bars in the graph shows the duration of
eachactivity.
Ganttchartsillustratethestartandfinishdatesoftheterminal
elements and summary elements of aproject..

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UNIT4:InventoryManagement
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Inventorymanagementisthebranchof
businessmanagementthatcoversthe
planningandcontroloftheinventory.
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Controlling
InventoryLevels
Forecasting
Parts/Product
Demand
Planning on What
Inventory to Stockand
How to AcquireIt
Feedback Measurements to
Revise Plans andForecasts
Inventory planning andcontrol
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Introduction
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Inventory is an expensiveand important asset to manycompanies.
Inventory is any stored resource used to satisfy a current or futureneed.
Common examples are raw materials, work-in-process, and finishedgoods.
Most companies try to balance high and low inventory levels withcost
minimization as agoal.
Lower inventory levels can reducecosts.
Low inventory levels may result in stock outs and dissatisfiedcustomers.

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Introduction
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All organizations have some type of inventory controlsystem.
Inventory planning helps determine what goods and/or services need to be
produced.
Inventory planning helps determine whether the organization produces the
goods or services or whether they are purchased from anotherorganization.
Inventory planning also involves demandforecasting.

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InventoryClasses
customersmanufacturingsuppliers
Materialsflow
rawmaterials
The progressive states of amaterial
SEMI-FINISHEDgoods
finishedgoods work-in-process(WIP).
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Maintenance, Repair, and Operational Supplies(MRO)
Items used in support of general operations and maintenance
such as maintenance supplies, spare parts, and consumables
used in the manufacturing process and supporting operations.
These items are used in production but do not become part of
theproduct.
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InventoryFunctions
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Safety Stock –Safety stock is also called bufferstock.
Lot-size Inventory-quantity price discounts, reduce shipping and setup costs
De-couplingstock
PipelineInventory
Anticipation Inventory
HedgeInventory

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Importance of InventoryControl
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Five uses ofinventory:
The decouplingfunction
Storingresources
Irregular supply anddemand
Quantitydiscounts
Avoiding stockouts andshortages
Decouple manufacturingprocesses.
Inventory is used as a buffer between stages in a manufacturingprocess.
This reduces delays and improvesefficiency.

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Importance of InventoryControl
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Storingresources.
Seasonal products may be stored to satisfy off-seasondemand.
Materials can be stored as raw materials, work-in-process, or finished
goods.
component of partially completedsubassemblies.
Compensate for irregular supply anddemand.
Demand and supply may not be constant overtime.
Inventory can be used to buffer thevariability.

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Importance of InventoryControl
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Take advantage of quantitydiscounts.
Lower prices may be available for largerorders.
Extra costs associated with holding more inventory must be
balanced against lower purchaseprice.
Avoid stockouts andshortages.
Stockouts may result in lostsales.
Dissatisfied customers may choose to buy from anothersupplier.

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InventoryDecisions
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There are two fundamental decisions in controllinginventory:
How much toorder.
When toorder.
The major objective is to minimize total inventorycosts.
Common inventory costsare:
Cost of the items (purchase or materialcost).
Cost ofordering.
Cost of carrying, or holding,inventory.
Cost ofstockouts.

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Inventory CostFactors
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ORDERING COSTFACTORS CARRYING COSTFACTORS
Developing and sending purchaseorders Cost ofcapital
Processing and inspecting incominginventory Taxes
Billpaying Insurance
Inventoryinquiries Spoilage
Utilities, phone bills, and so on, for thepurchasing
department
Theft
Salaries and wages for the purchasing department
employees
Obsolescence
Supplies, such as forms and paper, for thepurchasing
department
Salaries and wages for warehouseemployees
Utilities and building costs for thewarehouse
Supplies, such as forms and paper, for thewarehouse

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Inventory CostFactors
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Ordering costs are generally independent of orderquantity.
Many involve personneltime.
The amount of work is the same no matter the size of theorder.
Carrying costs generally varies with the amount of inventory, or the
ordersize.
The labor, space, and other costs increase as the order sizeincreases.
The actual cost of items purchased can vary if there are quantity
discountsavailable.

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Economic OrderQuantity
The economic order quantity (EOQ) model is one of
the oldest and most commonly known inventory
controltechniques.
It is easy to use but has a number of important
assumptions.
Objective is to minimize total cost ofinventory.
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Economic OrderQuantity
Assumptions:
1.Demand is known andconstant.
2.Lead time is known andconstant.
3.Receipt of inventory isinstantaneous.
4.Purchase cost per unit is constant throughout theyear.
5.The only variable costs are the cost of placing an order, ordering cost, and
the cost of holding or storing inventory over time, holdingor carrying cost,
and these are constant throughout theyear.
6.Orders are placed so that stockouts or shortages are avoidedcompletely.
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Inventory Usage OverTime
Time
Inventory
Level
Minimum
Inventory
0
Order Quantity = Q = Maximum
InventoryLevel
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Inventory Costs in the EOQSituation
2
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Averageinventorylevel
Q
INVENTORYLEVEL
DAY BEGINNING ENDING AVERAGE
April 1 (orderreceived) 10 8 9
April2 8 6 7
April3 6 4 5
April4 4 2 3
April5 2 0 1
Maximum level April 1 = 10units
Total of daily averages = 9 + 7 + 5 + 3 + 1 =25
Number of days = 5, Average inventory level = 25/5 = 5units

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Inventory Costs in the EOQSituation
Annualorderingcost 
Q = number of pieces toorder
EOQ = Q
* = optimal number of pieces toorder
D = annual demand in units for the inventoryitem
C
o = ordering cost of eachorder
C
h = holding or carrying cost per unit peryear
Number oforders
placed peryear
Ordering
cost per
order
o
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Q

D
C

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Inventory Costs in the EOQSituation
Mathematical equations can be developedusing:
Annual holding cost 
Average
inventory
Q = number of pieces toorder
EOQ = Q
* = optimal number of pieces toorder
D = annual demand in units for the inventoryitem
C
o = ordering cost of eachorder
C
h = holding or carrying cost per unit peryear
Carrying costper
unit peryear
h
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2

Q
C

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Inventory Costs in the EOQSituation
Minimum
TotalCost
OptimalOrder
Quantity
Curve of Total Costof
Carrying and
Ordering
Carrying Cost Curve
Ordering CostCurve
Cost
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OrderQuantity
Total Cost as a Function of Order
Quantity

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Finding theEOQ
According to the graph, when the EOQ assumptions are met,
total cost is minimized when annual ordering cost equals annual
holdingcost.
o
Q
D
C
2
Solving forQ
hh o

Q
C 2DCQ
2
C
C
h
2DC
o
Q
2
C
h
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QEOQQ
*
2DC
o

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Economic Order Quantity (EOQ)Model
h
2
Annualholdingcost
Q
C
o
Q
Annualorderingcost
D
C
C
h
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2DC
o
EOQQ
*

Summary ofequations:

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Sumco PumpCompany
Sumco Pump Company sells pump housings to othercompanies.
The firm would like to reduce inventory costs by findingoptimal
orderquantity.
Annual demand = 1,000 units and cost of per unit is $100
Ordering cost = $10 perorder
Average carrying cost per unit per year =$0.50
 40,000 200units
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C
h 0.50
2DC
o 2(1,000)(10)
Q
*


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Sumco PumpCompany
2
1000100
1,000
(10)
200
(0.5)
200
1000005050
100100
Total cost Material cost + Ordering cost + Holdingcost
h
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o
Q 2
TotalcostDC
D
C
Q
C

h
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o
Q 2
TotalcostDC
D
C
Q
C
80000*50+80000/8000*1200+8000/2*3

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ABC Ltd. uses EOQ logic to determine the order quantity
for its various components and is planning its orders. The
Annual consumption is 80,000 units, Cost to place one
order is Rs. 1,200, Cost per unit is Rs. 50 and carrying cost
is 6% of Unit cost. Find EOQ, No. of order per year,
Ordering Cost and Carrying Cost and Total Cost of
Inventory.
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MidwestPrecisionControlCorporationistryingtodecidebetweentwo
alternateOrderPlansforitsinventoryofacertainitem.Irrespectiveoftheplan
tobefollowed,demandfortheitemisexpectedtobe1,000unitsannually.
UnderPlan1
st,Midwestwoulduseateletypeforordering;ordercostswould
beRs.40perorder.Inventoryholdingcosts(carryingcost)wouldbeRs.100
perunitperannum.UnderPlan2
ndordercostswouldbeRs.30perorder.And
holdingcostswould20%andunitCostisRs.480.FindoutEOQandTotal
InventoryCostthandecidewhichPlanwouldresultinthelowesttotalinventory
cost?
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A local TV repairs shop uses 36,000 units of a part each year (A maximum consumption
of 100 units per working day). It costs Rs. 20 to place and receive an order. The shop
orders in lots of 400 units. It cost Rs. 4 to carry one unit per year ofinventory.
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Requirements:
(1)Calculatetotalannualorderingcost
(2)Calculatetotalannualcarryingcost
(3)Calculatetotalannualinventorycost
(4)Calculate the Economic OrderQuantity
(5)Calculate the total annual cost inventory cost using EOQ inventory Policy
(6) How much save usingEOQ
(7) Compute ordering point assuming the lead time is 3 daysd*L

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Purchase Cost of InventoryItems
Inventory carrying cost is often expressed as an annual percentage
of the unit cost or price of theinventory.
This requires a newvariable.
Annual inventory holding charge asa
percentage of unit price orcost
I
The cost of storing inventory for one year isthen
C
hIC
thus,
IC
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2DC
o
Q
*

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Sensitivity Analysis with the EOQModel
The EOQ model assumes all values are know and fixed overtime.
Generally, however, some values are estimated or maychange.
Determining the effects of these changes is calledsensitivity
analysis.
Because of the square root in the formula, changes in theinputs
result in relatively small changes in the orderquantity.
C
h
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2DC
o
EOQ

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Sensitivity Analysis withthe
EOQModel
In the Sumco Pumpexample:
0.50
2(1,000)(10)
200unitsEOQ
If the ordering cost were increased four times from $10 to $40, the order quantity would only
double
0.50
2(1,000)(40)
400unitsEOQ
In general, the EOQ changes by the square root of the change to any of theinputs.
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Reorder Point: Determining When ToOrder
Once the order quantity is determined, the next decision is when toorder.
The time between placing an order and its receipt is called the lead time(L)
or deliverytime.
When to order is generally expressed as areorder point(ROP).
Lead time for a neworder
indays
ROP 
Demandper
day
d L
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Procomp’s ComputerChips
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Demand for the computer chip is 8,000 per year.
Daily demand is 40units.
Delivery takes three workingdays.
ROP d L 40 units per day 3days
120units
An order based on the EOQ calculation is placed when the inventory reaches
120units.
The order arrives 3 days later just as the inventory isdepleted.

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Quantity DiscountModels
Quantity discounts are commonlyavailable.
The basic EOQ model is adjusted by adding in the purchase or materialscost.
Total cost Material cost + Ordering cost + Holdingcost
h
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o
Q 2
TotalcostDC
D
C
Q
C
where
D annual demand inunits
C
oordering cost of eachorder
Ccost perunit
C
hholding or carrying cost per unit peryear

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Quantity DiscountModels
s
c
To
Quantity discounts are commonlyavailable.
The basic EOQ model is adjusted by adding in the purchase ormaterial
ost.
tal cost Material cost + Ordering cost + Holdingcost
ho
Q 2
TotalcostDC
D
C
Q
C
where
D annual demand inunits
C
oordering cost of eachorder
Ccost perunit
C
hholding or carrying cost per unit peryear
Because unit cost is now variable,
Holding cost C
h IC
I holding cost as a percentage of the unit cost(C)
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Quantity DiscountModels
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A typical quantity discount schedule can look like the tablebelow.
However, buying at the lowest unit cost is not always thebest
choice.
DISCOUN
T
NUMBER
DISCOUNT QUANTITY DISCOUNT (%) DISCOUNT COST($)
1 0 to999 0 5.00
2 1,000 to1,999 4 4.80
3 2,000 andover 5 4.75

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Brass DepartmentStore
Brass Department Store stocks toy racecars.
Their supplier has given them the quantity discountschedule
shown
Annual demand is 5,000 cars, ordering cost is $49, and holding cost is20%
of the cost of thecar
The first step is to compute EOQ values for eachdiscount.
1
(0.2)(5.00)
EOQ 
(2)(5,000)(49)
700carsperorder
2
(0.2)(4.80)
(2)(5,000)(49)
714carsperorderEOQ 
3
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(0.2)(4.75)
(2)(5,000)(49)
718carsperorderEOQ 

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Brass Department StoreExample
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The second step is adjust quantities below the allowablediscount
range.
The EOQ for discount 1 isallowable.
The EOQs for discounts 2 and 3 are outside the allowablerange
and have to be adjusted to the smallest quantity possible to
purchase and receive thediscount:
Q
1 700
Q
2 1,000
Q
3 2,000

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Brass DepartmentStore
The third step is to compute the total cost for eachquantity.
DISCOUN
T
NUMBE
R
UNIT
PRIC
E (C)
ORDER
QUANTITY
(Q)
ANNUAL
MATERIA
L COST
($)
=DC
ANNUAL
ORDERIN
G COST
($)
=(D/Q)C
o
ANNUAL
CARRYIN
G COST
($)
=(Q/2)C
h
TOTAL($)
1 $5.00 700 25,000 350.00 350.00 25,700.00
2 4.80 1,000 24,000 245.00 480.00 24,725.00
3 4.75 2,000 23,750 122.50 950.00 24,822.50
The final step is to choose the alternative with the lowest totalcost.
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BIKO is a bike retailer located in the outskirts ofParis.
BIKO purchases bikes from PMX in orders of 250 bikes which is the current economic order quantity.
PMX is now offering the following bulk discounts to itscustomers:
2% discount on orders above 200units
4% discount on orders above 500 units
6% discount on orders above 600units
BIKO is wondering if the EOQ model is still the most economical and whether increasing the order size would actually
be morebeneficial.
Following information is relevant to forming thedecision:
Annual demand is 5000 units
Ordering cost is $100 perorder
Annual holding cost is comprised of thefollowing:
•5% insurance premium for the average inventory held during the year calculated using the net purchaseprice
•Warehousing cost of $6 perunit
Purchase price is $200 per unit beforediscount
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ABCAnalysis
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The purpose of ABC analysis is to divide the inventory intothree
groups based on the overall inventory value of theitems.
Group A items account for the major portion of inventorycosts.
Typically about 70% of the dollar value but only 10% of the quantity of
items.
Forecasting and inventory management must be donecarefully.
Group B items are more moderatelypriced.
May represent 20% of the cost and 20% of thequantity.
Group C items are very low cost but highvolume.
It is not cost effective to spend a lot of time managing theseitems.

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ABC
A
HighlyImportant
B
ModeratelyImportant
C
LessImportant
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70%%Value
%Quantity 10%
20%
20%
10%
70%

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Summary of ABCAnalysis
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INVENTORY
GROUP
DOLLARUSAGE
(%)
INVENTORY
ITEMS(%)
ARE QUANTITATIVE CONTROLTECHNIQUES
USED?
A 70 10 Yes
B 20 20 In somecases
C 10 70 No

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Products Value inRs.
Product1 20
Product2 76
Product3 90
Product4 320
Product5 120
Product6 10
Product7 400
Product8 25
Product9 43
Product10 16
Product11 32
Product12 60
Product13 78
Product14 234
Product15 154
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ItemNo.
Consumption
Qty Price/unit
R-016 2500 200.00
R-004 1400 325.00
R-012 5000 200.00
R-006 2000 320.00
R-007 4500 50.00
R-009 900 325.00
R-019 2000 100.00
R-010 3000 44.00
R-011 1300 100.00
R-003 400 320.00
R-013 600 200.00
R-014 2000 50.00
R-015 2000 325.00
R-008 2346 200.00
R-017 5200 320.00
R-018 2000 200.00
R-005 450 325.00
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FSNAnalysis:-
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FSN stands for FAST MOVING , SLOW MOVING andNON-MOVING. Here,
classification is based on the pattern of issues from stores and is useful in
controllingobsolescence.
To carry out an FSN analysis, the date of receipt or the last date of issue, whichever is
later, is taken to determine the number of months, which have lapsed since the last
transaction. The items are usually grouped in periods of 12months.
FSN analysis is helpful in identifying active items which need to be reviewed regularly
and surplus items which have to be examined further. Non-moving items may be
examined further and their disposal can beconsidered.

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SOSClassification:-
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Raw materials, especially agricultural inputs are generally classified by the seasonal, off-
seasonal systems since the prices during the season would generally belower.
The seasonal items which are available only for a limited period should be procured and
stocked for meeting the needs of the full year. The prices of the seasonal items which are
available throughout the year are generally less during the harvestseason.
Thequantityrequiredofsuchitemsshould,therefore,bedeterminedaftercomparing
thecostsavingsonaccountoflowerprices,ifpurchasedduringseason,withthehighercost
ofcarryinginventoriesifpurchasedthroughouttheyear.
A Buying and stocking strategy for seasonal items depend on a large number of factors and
more and more sophistication is taken place in this sphere and operational techniques are
used to obtain optimumresults.

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XYZAnalysis:-
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While the ABC analysis is based on the assumption on value, XYZ
analysis is based on the value of inventory undertaken during the
closing of annual accounts. X items are those having high value, Y
items are those whose inventory values are medium and Z items
are those whose inventory values arelow.
The percentages are similar to ABC analysis. This analysis helps
find items with heavystock.

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GOLFClassification:-
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The letter stands for
Government,
Ordinary,
Localand
Foreign.
There are mainly imported items which are canalized through the State Trading Corporation
(STC) Minerals and Metals Trading Corporation, etc. Indian Drugs and Pharmaceutical Ltd
(IDPL), Mica trading corporation etc. These are special procedures of inventory control which
may not applicable to ordinary items as they require specialprocedures.

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MNGAnalysis:-
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The grouping of inventory items in this analysis takes placeas:
M-Moving items –The items which are consumed from time to time are normally referred to as
movingitems.
N-Non moving items –These items which are not and consumed in last one year arecovered
under thisgroup.
G-Ghostitems–Thisgroupreferstosuchitemswhichneitherhavebeenreceivednorissued
duringtheyear.Thebalanceofsuchitemsshowninstockregistersoftheorganizationwillbe
nil,bothatthebeginningandattheendofthepreviousfinancialyear.

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VED
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Basis of Criticality
Vital
Essential
Desirable

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HML
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High Value
Medium Value
LowValue

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Inventory turnsratios
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An efficient company keeps the least inventory on hand to make the sales itdoes.
Goods are available when required and spend the least amount of time waiting in a
warehouse.
Capital & opportunitycost,.
Michael Dell revolutionized the computer industry with his made-to-order business model-zero
inventories
Inventory is a make or break item in the financials of a company, there is obviously an interest
amongst analysts and investors who want to have a close watch on itsperformance.
Hence, the inventory turnover ratio is amongst theirfavorites.

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Inventory Turnover Ratio=
Instead of Sales, Cost of Goods Sold is used to calculate this specific turnover
ratio. This is because inventories are stored at costprice.
2
Average Inventory =
(Beginning Inventory + EndingInventory)
Cost Of GoodsSold
AverageInventory
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Inventoryturnoverrationeedsto
becomparedwiththeperformance
ofothers.Usuallythecomparison
isdonebetween:
OSCM-Iftekhar khan :
2020
Thecompany’sowninventoryturnoverratioforpreviousyears.
Theinventoryturnoverratioofothercompaniesinthesameordifferentindustry.
Differentindustriesareusuallyconsideredinthecalculationofinventoryturnover
ratio.
Thisisbecausethebestpracticescanusuallybeappliedregardlessoftheindustry.
Dell’smadetoorderbusinessmodelhasbeenreplicatedcountlesstimesindifferent
industries.

OSCM-Iftekhar khan :2020
“Inventory Turnover Ratio helps in evaluating
HOW WELL THE MANAGEMENT ISWORKING
in managing the inventory and generating sales
fromit”
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
It is the measure of HOW QUICKLY
YOUR BUSINESS SELLS through its
inventory in a given period of time and
needs to replace itagain
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
Inventory turnover is a financial
ratio which dependson
Cost of Goods
Sold
(COGS)
Average
Inventory
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
Deciding the InventoryTurnover
Period
OSCM-Iftekhar khan :
2020
The time period can range from one single day or an
entire year or it can be a particularweek.
We cannot CALCULATE INVENTORY TURNOVER
AT A PARTICULARINSTANT

OSCM-Iftekhar khan :2020
Calculating the Cost ofGoods
Sold(COGS)
OSCM-Iftekhar khan :
2020
Cost of goods sold is the direct total expense associated
with the production of goods sold or the cost of the goods
you ACQUIRE TO SELL TO THECUSTOMERS

OSCM-Iftekhar khan :2020
Inventory turnoverperiod
OSCM-Iftekhar khan :
2020
Inventoryturnoverperiodinsimplewordsisalsoknownas
theAVERAGENUMBEROFDAYSREQUIREDTOSELL
APRODUCT

OSCM-Iftekhar khan :2020
inventory turnover Ration
Interpretation
OSCM-Iftekhar khan :
2020
High inventory turnover indicates fast moving
inventories and efficientoperations
Low inventory turnover indicates that the company’s
goods are spending a lot of time being stored in the
warehouse
Items with high turnover are good because there are MANY
PRODUCTS THAT TEND TO EXPIRE SOON or get out of
season quickly

OSCM-Iftekhar khan :2020
Republican Manufacturing Co. has a cost of goods soldof
$5M for the current year. The company’s cost of beginning
inventory was $600,000 and the cost of ending inventory
was $400,000.
inventory turnover is rated at 10 times ayear.
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
inventory turnoverdays
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??????&#3627408476;&#3627408480;&#3627408481;&#3627408476;&#3627408467;??????&#3627408476;&#3627408476;&#3627408465;&#3627408480;&#3627408454;&#3627408476;??????&#3627408465;
??????&#3627408483;&#3627408466;&#3627408479;??????&#3627408468;&#3627408466;??????&#3627408475;&#3627408483;&#3627408466;&#3627408475;&#3627408481;&#3627408476;&#3627408479;??????
x365
5000000
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60000+40000)/2
365
OSCM-Iftekhar khan :
2020
??????&#3627408475;&#3627408483;&#3627408466;&#3627408475;&#3627408481;&#3627408476;&#3627408479;??????&#3627408455;&#3627408482;&#3627408479;&#3627408475;&#3627408476;&#3627408483;&#3627408466;&#3627408479;&#3627408465;????????????&#3627408480;36.5Days

OSCM-Iftekhar khan :2020
Openinginventories $25,000
Closinginventories $30,000
Cost of goodsmanufactured $245,000
OSCM-Iftekhar khan :
2020
Calculate inventory turnover and days inventories on hand for ABC,Inc.
based on the information givenbelow:

OSCM-Iftekhar khan :2020
InventorySystems/Model
OSCM-Iftekhar khan :
2020
Inventory systems answer the questions: When to order and how much to
order
There are twocategories:
Fixed-Order Quantity System –an order of fixed quantity,
Q, is placed when inventory drops to a reorder point,
ROP
Fixed-Time Period System –inventory is checked in fixed
time periods, T, and the quantity orderedvaries

OSCM-Iftekhar khan :2020
Fixed Order quantityModel
OSCM-Iftekhar khan :
2020
–assumes a constant demand rate ofd
–the inventory position, IP, is reduced by a rate ofd
–order placed when the reorder point, ROP isreached
–when inventory is received, the IP is increased by the
order quantity,Q

OSCM-Iftekhar khan :2020
–there is a lead time, L, during which we have to wait for
theorder
–inventory is checked on a continualbasis
–Q is computed as the economic order quantity,EOQ
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020

OSCM-Iftekhar khan :2020
Fixed-Time PeriodSystem
OSCM-Iftekhar khan :
2020
–inventory levels checked in fixed time periods,T
–a target inventory level, R, is restored when order
received
–sometimes called Periodic ReviewSystem
–quantity ordered varies: Q = R –IP where: Q = order
quantity R = target inventory level IP = inventoryposition

OSCM-Iftekhar khan :2020

OSCM-Iftekhar khan :2020
OSCM-Iftekhar khan :2020
Vendor Managed Inventory(VMI)
VMI arrangements have the vendor responsible for managing the inventory
located at a customer’sfacility
Thevendor:
–stocksinventory
–places replenishmentorders
–arranges the display
–typically owns inventory untilpurchased
–is required to work closely withcustomer

UNIT5:
Supply Chain
Management
OSCM-Iftekhar khan :2020

OSCM-Iftekhar khan :2020
Supply chainconcept,
Generalized Supply Chain Management Model–
Key Issues in SCM –Collaboration, Enterprise Extension,responsiveness,
Cash to CashConversion.
Customer Service: Supply Chain Management and customer service linkages,
Availability service reliability perfect order, customersatisfaction.
Enablers of SCM -Facilities, Inventory, Transportation, Information, sourcing,
Pricing.
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
What is a Supply
Chain?
Flow of Products and Servicesfrom:
Raw Material
Manufacturers
Intermediate
Products
Manufacturers
End Product
Manufacturers
Wholesalers &
Distributors
Retailers
Transporters
Storage
Activities
Information
Planning
Integration
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
What Is Supply Chain
Management?
OSCM-Iftekhar khan :
2020
Asetofapproachesutilizedtoefficientlyintegrate
suppliers,manufacturers,warehouses,andstores,
sothatmerchandiseisproducedanddistributedat
therightquantities,totherightlocations,andatthe
righttime,inordertominimizesystemwidecosts
whilesatisfyingservicelevelrequirements.

OSCM-Iftekhar khan :2020
Suppliers
Manufacturers
Warehouses
Stores
RightQuantity
RightLocation
RightTime
Max.Customer
Satisfaction
MinimumCost
Merchandise
Produce Distributed
OSCM-Iftekhar khan :
2020

OSCM-Iftekhar khan :2020
Two Other Formal
Definitions
OSCM-Iftekhar khan :
2020
The design and management of seamless, value added process
across organizational boundaries to meet the real needs of the end
customer.-Institute for SupplyManagement
Managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory tracking,
order entry and order management, distribution across all
channels, and delivery to the customer.-The Supply ChainCouncil

OSCM-Iftekhar khan :2020
OSCM-Iftekhar khan :2020

Component
Makers
Contract
Manufactures
/OEM
Distributors
Local
Assemblers
Retailers
Final
Customers
Component
Distributors
PC
Companies
Global
Logistic
Companies
SoftwareCompanies
Strategic
Focus
OSCM-Iftekhar khan :2020
Activities
Companies
and
Product
Flow
CustomerRelations ProductInnovationOperation
Assembly ManufacturingR&D Distribution Sales, Services,Support

OSCM-Iftekhar khan :2020
Key Observations in
SC
OSCM-Iftekhar khan :
2020
•Every Facility that impact cost need to beconsidered.
•Supplier's –Supplier
•Customer’s -Customer
•Efficiency and Cost –effectiveness through out the system isrequired
•System LevelApproach
•Multiple level ofactivities
•Strategic-Tactical-Operational

OSCM-Iftekhar khan :2020
Other Related
Observations
OSCM-Iftekhar khan :
2020
•Supply chain strategy cannot be determined in isolation.
Supply chain strategy linked to the DevelopmentChain.
•Challenging to minimize system costs and maximize
system service levels. The chain has manyplayers.
•Inherent presence of uncertainty and risk; demand
forecasts and lead times are oftenuncertain.

OSCM-Iftekhar khan :2020
The Development
Chain
OSCM-Iftekhar khan :
2020
•Set of activities and processes associated with new
product introduction.Includes:
•product designphase
•associated capabilities andknowledge
•sourcingdecisions
•productionplans

OSCM-Iftekhar khan :2020

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