MBA-IB 2021-23

PRE-READ
MATERIAL

OPERATIONS

Compiled by
Prep Comm, IIFT
Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

INDEX

Sr. Topic Pg. No.

1 Supply Chain Basics 1

2 Inventory Management 3

3 Logistics Management 5

4 Production Systems 7

5 Six Sigma 9

6 5S 12

7 OpSigma – Operations Club at IIFT 13

8 References 14
Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

1. Supply Chain Basics

“Management is the effective utilization of available resources to achieve organisational

objectives. Resources are limited and hence need to be utilized effectively.”

Supply Chain

Purchasing A Supply Chain is a network of facilities and distribution options that performs
the functions of procurement of materials, transformation of these materials
into intermediate and finished products and distribution of these finished
products to customers.
Evolution of SCM

Stores

Purchase Materials Supply Supply Chain

Management Management Management Management
Inventory
Management

Supply Chain Management

Material
Management It is a cross-functional approach that includes the movement of raw
materials into an organization and their processing, certain aspects of the
internal processing of materials into finished goods, and the movement of
these finished goods out of the business and towards the final consumer.
Supply
chain
Management

Volume Flexibility: Ability of an organization to change volume

levels in response to changing socio-economic conditions

Variety Offering: Developing suppliers and channel

partners for postponement strategy

Velocity: Total time it takes to move products and

Supply Chain materials from one end of the supply chain. It
requirements should be best-in-class
for Business
Variability Reduction: Final output should have
Excellence minimum variability. Key processes should be 6
(5V) sigma capable

Value Enhancement: There will be a continuous

Velocity decrease of material related costs and continuous
increase in value addition for key processes
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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

Lean Supply Chain Lean manufacturing

Producing what the customer wants at the
A set of Organizations directly right time with minimum resources
linked by upstream and
Lean Suppliers
downstream flows of products,
services, finances and information Who can respond to changes, maintain
that collaboratively work to lower prices, improve quality and
reduce cost and wastes by deliver on time
efficiently and effectively pulling Lean Logistics Covering Warehousing &
what is needed to meet the needs Distribution
of individual customers. Eliminating waste in product, storage and
processes, transportation and
distribution, creating synchronized flow

Components of Lean Supply Chain

Vertical and Horizontal integration in Supply Chain

Horizontal Integration: It is the process of acquiring or merging with industry competitors through
acquisitions and mergers

Vertical Integration: It is the process of expanding operations backward into an industry that
produces inputs for the company or forward into an Industry that distributes the company’s products

Component
Raw Materials Part Final Assembly Retail Customer
Manufacturing

Upstream Industries Downstream Industries

Vertical Integration: Stages in the raw material to consumer value chain
What are various activities of Supply chain Manager?

a) It involves the daily planning, production and scheduling of the various processes so as to improve
their efficacy

b) Another function of supply chain manager is demand planning and forecasting, coordinating the
demand forecast of all customers and sharing the forecast with all suppliers. This helps both the
suppliers and the producers be aware of the exact requirements and hence prepare accordingly so
as to minimize the inventory storage costs

c) Inbound operations and outbound operations where the inbound operations involve the
transportation from suppliers and receipt of inventory and the outbound operations involve
transportation to customers

d) Effective supply chain management is impossible without proper communication. Supply chain
managers need to have the ability to professionally communicate with all types of people via
phone, email, face-to-face and videoconference interactions.
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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

2. Inventory Management

Inventory

Inventory refers to the materials in stock. It is also called the idle resource of an enterprise.
Inventories represent those items which are:

a. Either stocked for sale or

b. They are in the process of manufacturing or
c. They are in the form of materials, which are yet to be utilized.
Why to Keep Inventory?

1. To stabilize production: The demand for an item fluctuates because of the number of factors,
e.g., seasonality, production schedule etc. The inventory is kept to take care of this fluctuation so
that the production is smooth.
2. To meet the demand during the replenishment period: The lead time for procurement of
materials depends upon many factors like location of the source, demand supply condition, etc.
So, inventory is maintained to meet the demand during the procurement (replenishment) period.
3. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying
and to gain this price advantage the materials are bought in bulk even though it is not required
immediately. Thus, inventory is maintained to gain economy in purchasing.
4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the delivery
schedules at 100 per cent service level, means they cannot afford to miss the delivery schedule
which may result in loss of sales.

Material Cost

Materials cost is proportional to inventory carrying cost since ordering costs are fixed costs and small.

Inventory
Cost of Ordering Material
Carrying
Material Cost Cost
Cost

Inventory Carrying Cost

• Inventory carrying cost is the total cost of holding inventory.

expressed as a percentage of inventory value, it includes capital or
opportunity cost, warehousing, depreciation etc.

• With an opportunity cost of around 20%, inventory carrying cost

can be as high as 25% per year of the inventory held.

Therefore, we need to minimise inventory to reduce input

costs. Page |3
Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

Techniques of Inventory Control

No. Analysis Criterion
1. ABC (Always Better Control) Usage Value
2. HML (High, Medium, Low) Unit Price
3. VED (Vital Essential Desirable) Criticality
4. SDE (Scarce Difficult Easy) Procurement Difficulty
5. SOS (Seasonal Off-seasonal) Seasonality
6. FSN (Fast , Slow & Non-moving) Issue from Stores
7. XYZ Analysis Inventory Investment

Pareto Principle

The Pareto Principle, named after esteemed economist

Consequences
Vilfredo Pareto, specifies that 80% of consequences come
from 20% of the causes, asserting an unequal relationship
20%

80%
between inputs and outputs. This principle serves as a
general reminder that the relationship between inputs and Causes
outputs is not balanced. The Pareto Principle is also known
as the Pareto Rule or the 80/20 Rule.

Pareto Principle + Inventory = ABC Analysis

Generally, the top 80% of dollars are from approximately

20% of the items.
Economic Order Quantity

Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing
any material and ultimately contributes towards maintaining the materials at the optimum level and
at the minimum cost.

In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one
time for purposes of minimizing annual inventory cost.
The quantity to order at a given time must be determined by balancing two factors:

1. The cost of possessing or carrying materials and

2. The cost of acquiring or ordering materials.

Formula of Economic Order Quantity (EOQ):

EOQ = √2CO/S
where, C = Annual consumption of the material
O = Ordering cost per order
S = Annual storage cost per unit Page |4
Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

3. Logistics Management
Logistics management typically involves inbound and outbound transportation management,
warehouse supervision, materials handling, orders fulfilment, inventory management and overseeing
the third party logistics providers. It also includes procurement of raw materials, production planning
and scheduling , packaging as well as customer service. In a nutshell, coordinating every activity of an
optimal supply chain process comes under the purview of Logistics.
First-Party Logistics (1PL)
A firm or an enterprise sending goods from one place to another using its own freight/cargo. They are
the specifically the consigner of different goods and products and organizes the transport of products
to their respective destinations.

It mainly consists of two parties that get benefit from the transaction. The manufacturer or the
supplier and the person buying it. There are no other middlemen involved in the whole process.

Second-Party Logistics (2PL)

It’s an asset based transportation of goods from one place to another. The enterprise has its own
fleet of cargo to do the necessary transportation. In this case, the provider only handles the
transportation aspect in the supply chain.

e.g. The firm hiring a 2PL logistics provider to shift goods from location A to location B.

Third-Party Logistics (3PL)

•Here, management over-sight is made by the firm whereas entire operations of transportation as
well as logistics is outsourced. Also additional services in the form of packaging and ordering may be
performed by the service providers.

•This category manages both outbound and inbound transportation requests in addition to
warehousing. It is common for these providers to lease warehouse space and they also do not own a
fleet of trucks. Instead, they outsource these aspects to other carriers for purposes of shipping and
freight. This approach is popular today with both small and larger businesses.

e.g. The 3PL enterprise is responsible for packaging the farm produce in cartons apart from
transporting the same.
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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT
Fourth-Party Logistics (4PL)
An advanced form of 3PL, here in a 4PL model, the logistics provider is entrusted with the
responsibility of keeping a track of inventory for effective communication with the producer. This is
done to boost the supply chain and provide robust logistical support to the firm.

e.g. The 4PL enterprise will direct the producer to raise production so as to satiate the growing
demand and keep inventory healthy
Fifth-Party Logistics (5PL)
Here with the deployment of latest technologies such as blockchain, automation, Bluetooth beacons
and RFID enabled tags, an optimal supply chain is obtained by the 5PL logistics provider.

e.g. 5PL enterprise putting RFID tags on mode of transportation to keep a check on supply of final
produce to the ware-house.
Purpose of Logistics Management
Inventory • A robust logistics help in frequent supplies thereby keeping inventory
Reduction at optimum level resulting in lower holding cost for the firm.

Economical • With proper selection of freight, long-distance shipments can be

Freight achieved with minimum cost allocation.

• Enhanced reliability in terms of delivery performance can be achieved

Reliability
with proper route planning by the logistics providers.

Damage • With proper logistical packaging coupled with mechanized material

Reduction handling equipment, damage to goods can be significantly minimised.

• With careful deployment of state-of-the-art technologies such as

Faster
block-chain and RFID enabled tags, faster outbound shipments can be
Response
ascertained to our customers.
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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

4. Production Systems

Systematic conversion of one form of material to another form through mechanical or chemical proc-
ess and increasing the utility in tandem is called production system. Here, resources are combined &
transformed in a coordinated manner in line with the policies of the management.

Inputs Process Output

Men Design Product

Material Planning Service
Machine Control
Capital Maintenance
Production System Classification

Production
System

Continuous Intermittent

Mass (Flow) Processing Batch Job

Production Production Production Production

Continuous Production: Here facilities of production

are arranged as per the proper sequence of operations
from first process to the last. The items are made to
flow through material handling devices including
conveyor belts, transfer devices , chutes etc.

Job-shop production: Manufacturing a few or specific

quantity of products designed as per the specification
of customers within prefixed time and cost. It’s a low
volume high variety production system.

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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

Mass production:-This production system is adopted

when there is large volume of production. Here, there
is standardization of product and process and all
outputs follow the same path.

Batch production: It’s a form of production wherein job

passes through various functional departments in
batches/lots with a different routing for each lot. Here
limited quantity of products are produced at regular
intervals which then await sales.

Continuous
Production/Operations Volume

Production
Mass
Production
Batch
Production

Job-shop
Production

Output Product Variety

The above chart shows the difference in different production systems and how they can be used for
different setups depending on the need viz. more quantity or more variety.

Whereas job-shop production offers the most variety as each unit can be customized, the output
volume is low. On the other hand, mass production can churn out high volume but little variation
between different products.

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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

5. Six Sigma
Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects. To achieve
Six Sigma, a process must not produce more than 3.4 defects per million opportunities. A Six Sigma
defect is defined as anything outside of customer specifications.

Sigma represents the population standard deviation, which is a measure of the variation in a data set
collected about the process. This simply means that if a process has achieved Six Sigma, it will
produce 3.4 defects per million times that process is run.

For example, if a product must have a thickness between 10.32 and 10.38 inches to meet customer
requirements, then the process mean should be around 10.35, with a standard deviation less than
0.005 (10.38 would be 6 standard deviations away from 10.35), assuming a normal distribution.

Are you a Six Sigma Golfer?

Specification: Hit golf ball between 150 and 250 yards to avoid sand traps

250 yards

1σ 3σ 6σ
About 30% About 93% About
within within 99.9997%
correct correct within correct
distance distance distance

150 yards

Defects per Six Sigma can also be thought of as a measure of

Sigma Level Yield
Million process performance, with Six Sigma being the goal,
based on the defects per million. Once the current
6 3.4 99.99966 %
performance of the process is measured, the goal is
5 230 99.977 % to continually improve the sigma level striving
towards 6 sigma.
4 6,210 99.38 %

3 66,800 93.32 % Even if the improvements do not reach 6 sigma, the

improvements made from 3 sigma to 4 sigma to 5
2 308,000 69.15 % sigma will still reduce costs and increase customer
1 690,000 30.85 % satisfaction.

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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

What are the Six Sigma Principles?

Depending on where you look, you’ll find some slight variation on Six Sigma principles. In general, these
are the thoughts that guide the approach:

• Continuous efforts to achieve stable and predictable process results are crucial to business success

• Manufacturing and business processes have characteristics that can be defined, measured, analyzed,
improved, and controlled

• Achieving sustained quality improvement requires commitment from the entire organization,
including and perhaps especially upper and middle management

• All processes can be defined and analyzed in detail, and therefore improved: if you control the inputs,
you can control the outputs

• Continual evaluation is crucial. Stop what you’re doing and consider what went right or wrong.

• Eliminating variation saves money and reduces defect

The Six Sigma Methodologies

The principles of Six Sigma are executed through methodologies, or roadmaps to improvement, like a
workflow. Two main methodologies are DMAIC and DMADV

DMAIC focuses on incrementally improving existing processes. It is the most widely known
methodology and the one most associated with Six Sigma. Here’s a breakdown of the acronym:

D: Define customer needs, requirements, and

project goals

M: Measure the key aspects of the current process. Define

This is when you start to understand your process
and collect data on it

A: Analyze data. You really dig into what types of

errors occur and where they occur so you can target
the big ones. It’s always looking at that 80/20 rule. DMAIC
Let’s see if we can find 20 percent of the
reasons that give us 80 percent of the defects and
let us reduce those

I: Improve processes. Test and verify that the

improvements work

C: Control future implementations of the processes

to ensure that errors don’t creep in again
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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

DMADV focuses on optimizing new products or processes to Six Sigma standards. Here’s a breakdown
of the acronym:

D: Define customer or company goals

M: Measure CTQs (characteristics that are Define

Critical To Quality), measure product
capabilities, production process capability, and
risks

A: Analyze data from your measurements DMADV

D: Design the new process based on the
analysis in the previous step

V: Verify the design through a pilot run,

implement the new process, and hand off to the
process owner

Some examples of six sigma at industry level are:

General Electric: Despite hiring the best specialized personnel available

and using the latest technology, GE has had issues with product quality
and overall service. It employed Six Sigma on a trial basis, and
streamlined its product assurance process

Wipro: As a leader in the software development industry,

consumer goods production and customer service were
lacking. Its defects were soon neutralized with the help of Six
Sigma implementation.

Microsoft: The secret behind their stellar service record

and product line is Six Sigma. The software and products
leader is now considered a poster child for Six Sigma
implementation.

Motorola: As one of the first large companies to use Six

Sigma, it implemented it on a trial basis to streamline
product quality and services to increase revenues.

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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

6. 5S

5S is defined as a methodology that results in a workplace that is clean, uncluttered, safe, and well
organized to help reduce waste and optimize productivity. It's designed to help build a quality work
environment, both physically and mentally.

The 5S philosophy applies in any work area suited for visual control and lean production. The 5S
condition of a work area is critical to employees and is the basis of customers' first impressions.

To put it simply, it is a tool for improving the organization. It lays down a clear 5 point guideline for
helping the analysis of processes running on the workplace. Its result is the effective organization of
the workplace, reduction of work’s environment, elimination of losses connected with failures and
breaks, improvement of the quality and safety of work.

The Five S’s

The 5S quality tool is derived from five Japanese terms beginning with the letter "S" used to create a
workplace suited for visual control and lean production. The pillars of 5S are simple to learn and
important to implement.

1S Seiri: To separate needed tools, parts, and instructions from unneeded materials and to remove the unneeded ones.

2S Seiton: To neatly arrange and identify parts and tools for ease of use

3S Seiso: To conduct a cleanup campaign

4S Seiketsu: To conduct seiri, seiton, and seiso daily to maintain a workplace in perfect condition.

5S Shitsuke: To form the habit of always following the first four S’s.

5S in Lean Manufacturing
Lean Manufacturing is a way of thinking about productive systems with a focus on reducing the
unnecessary — that is, eliminating wasted materials, effort, and time. This approach helps to improve
overall productivity, quality, and profits. 5S fits naturally here, because it works toward a streamlined,
organized, and clean workplace.

Some of the other tools under the Lean Manufacturing umbrella work particularly well in cooperation
with 5S. For example:

• Kaizen – Make many small changes in the pursuit of continual improvement. The cumulative
results can be major improvements in quality, safety, and profit. The ongoing cycle of
improvement matches perfectly with the Sustain step of 5S.

• Kanban – Use a demand-driven production chain to refocus on customer needs and reduce
unnecessary supply stocks, inventory, and work-in-progress. Streamlining work processes in this
way is essentially applying the Sort step of 5S to the entire business, instead of just a work area.

• Total Productive Maintenance – Use preventive maintenance and autonomous maintenance to

improve productive use of all equipment. Reducing downtime and eliminating errors will result
in better productivity and profitability. The Shine step of 5S can play a key part.
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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

OpSigma – The Supply Chain, Operations & Energy Club at IIFT

Operations and supply chain management includes a broad area that covers both manufacturing and
service industries. OpSigma (Operations, Supply Chain and Energy Club) was an endeavour to bring
together IIFTians with a common interest in operations and supply chain management and provide a
platform to engage in a spirited discussion on the various aspects of operations.
In this purview, OpSigma organized the following activities for the benefit of senior-junior batch
across the year –
1. Organized a Knowledge Transfer session for the first-year students where the second-year
students try to introduce the domain of Operations, Supply chain to the juniors. Basic
terminology and concepts of the domain are introduced to them which can help them convert
coveted roles arriving in the domain at IIFT in summer placements.

2. Provided a reference doc with important definitions, concepts needed for Corporate
competitions that opened for IIFT first-year students. The document helped to bridge the
knowledge gap between the lack of domain knowledge and case in the students which can help
them excel better in the competition.

3. Traditionally, at the club, we organize industrial visits to big production plants and/or
warehouses in/around Delhi-NCR which can help students visualize the real-life application of
the domain concepts.

4. Conducting National Operations Summit and publishing Operations magazine – Opulence to

help students of IIFT hear and read about current industry trends of the domain. The last edition
of the summit was organized on the topic – “The Role of Data Analytics and Digitization in
Operations Management” where we heard from leaders coming from IKEA, PWC, etc.

5. Organization of special training certifications like Green Belt Six Sigma certification at
discounted prices can help students earn a certification to gain talking points in the placement
process and also gain the subject matter knowledge.

6. Coming up with weekly social media posts on a specific theme to educate and disburse the
recent happening of the domain to the batch. This year we ran the series of “OpSights” where
we captured the success story and explained the business model of the Indian startups which
are transforming the domain of Operations and Supply Chain Management.

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Indian Institute of Foreign Trade Pre-Read Material - Operations Prep Comm, IIFT

References

https://www.leandna.com/supply-chain-management/

https://www.tradegecko.com/inventory-management

https://www.ilearnlot.com/types-of-production-systems-continuous-system-and-intermittent-
system/59608/

https://www.abivin.com/post/what-are-1pl-2pl-3pl-4pl-and-5pl

https://asq.org/quality-resources/six-sigma

https://asq.org/quality-resources/lean/five-s-tutorial

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