OPERATIONS MANAGEMENT (UNIT-3)

(MBA 2nd Semester)

Production planning is the process of creating a plan for future production within a manufacturing
organization. This technique is essential for modern-day manufacturing operations as it establishes the
groundwork for how production should be running and identifying areas where productivity is lacking.
Without production planning, manufacturing facilities are unable to schedule their production
processes efficiently which limits the entire production output. When mistakes are made during the planning
process, the result is an inaccurate schedule leading to late orders, internal chaos, unhappy customers, and
lost business.
Types of Planning in Production
(1) Job-Based Planning-
Job-Based or Project-Based production focuses on manufacturing a single product and is either handled by a
single worker or by a group of people. The type of jobs that fall under this type of production planning can
be on a small scale, such as creating a customized piece of jewelry. Larger, more complex production
projects, such as building customized houses, also fall into this category.
(2) Batch Method-
Batch production is used when items are produced in groups, rather than individually or through continuous
production. For example, cookies are produced in batches which means that each production step occurs at
the same time on the batch of cookies. You will start by measuring the ingredients for the entire batch, then
mix them together, and finally bake them together so that the entire production process for the batch of
cookies starts and ends at the same time.
(3) Flow Method-
Flow manufacturing is a demand-driven method that is characterized by the continuous flow of units through
the production line. This technique is commonly used in the production of televisions and household
appliances where the product is manufactured by a number of collective operations in which materials move
from one stage to another without time lags or interruptions.
(4) Mass Production Method-
Mass Production is very similar to Flow Production. This technique is highly beneficial when producing a
large number of the same items in a short period of time.
This type of production is usually automated, which reduces the costs of labor required for production. Some
manufacturing facilities have assembly lines dedicated to a specific type of item which reduces the
changeover time required and increases the overall production output. This allows manufacturers to increase
their profits as the cost of production is greatly reduced.

1 By- Mr. Anil Kumar Yadav (Asst. Prof.)

(5) Process Manufacturing Method-
Process Production is a type of continuous process similar to Mass Production and Flow Production but is
characterized by the continuous flow of materials through the production line. Usually, the finished goods
produced in this type of production are not counted as discrete units. For example, the production and
processing of liquids, gases, or chemicals where the product is being produced in a uniform and standardized
sequence.
Production Planning and Control

Production planning and control is a device that regulates the movements of materials, performance of
machines and operation of labour in the best technical and economical manner; so as to obtain right quantity
of production of required quality – at a time which is promised for delivery of goods to customers.
Steps in Production Planning and Control:
(i) Planning
(ii) Routing
(iii) Scheduling
(iv) Dispatching
(v) Follow-up or checking the progress
(vi) Inspection
Out of these six steps involved in production control, the first three steps relate to planning;
the fourth relates to execution of plan and the last two refer to the control aspect of planning.
The above idea is depicted by means of the following diagram:

(1) Planning:
For planning of productive operations in detail, the
planning department will receive full information from
management about the quantity to be produced and the
dates when delivery has been promised to
customers. The planning department will also get the necessary engineering and drawing specifications from
the engineering department.

Broadly, at the stage of planning the following issues are considered on which bases charts and written
plans are prepared:
(a) What work should be done? (b) How shall the work be done? (c) Where shall the work be done?

2 By- Mr. Anil Kumar Yadav (Asst. Prof.)

(d) When shall the work be done?
(2) Routing:
Routing involves the determination of the path that work shall follow and the order in which various
operations will be carried out. The objective of routing is to find out the best and the cheapest sequence of
operations. While preparing the route card, it must be kept in mind that machines in the plant are operated at
their full capacity; and manpower and other facilities are best utilized.
(3) Scheduling:
Scheduling is the determination of the time that should be required to perform each operation and also the
time necessary to perform the entire series, as routed, making allowance for factors concerned. It involves the
preparation of a time-table, indicating the total time needed for the manufacture of a product as also the time
expected to be spent at each machine and process.
(4) Dispatching:
Dispatching literally means sending something towards a particular destination. Here, it means taking all
such steps, as are necessary to implement the programme of production chalked out as per routing and
scheduling steps.
In particular, dispatching refers to:
1. Procurement of necessary tools, jigs and fixtures etc.; before they are actually required by the workmen.
2. Giving workers the necessary work orders, instructions, drawings etc. for initiating the work.
(5) Follow-Up (or Checking the Progress):
Follow-up is the control aspect of production planning and control. It involves taking steps to check up
whether work proceeds according to plans and how far there are variances from standards; and also taking
necessary corrective steps to set things in order.
(6) Inspection:
Inspection is the quality control aspect of production planning and control. It ensures that goods produced are
of the right quality. The inspectors may inspect materials, semi-finished and finished products either at the
work bench or in special laboratories or testing rooms.
To ensure maintenance of high standards of quality, a programme of SQC (Statistical Quality Control) may
be fused with a system of production planning and control.

Master Production Schedule

The master production schedule (also commonly referred to as the MPS) is effectively the plan that the
company has developed for production, staffing, inventory, etc.

3 By- Mr. Anil Kumar Yadav (Asst. Prof.)

It has as input a variety of data, e.g. forecast demand, production costs, inventory costs, etc and as output a
production plan detailing amounts to be produced, staffing levels, etc for each of a number of time periods.
How Is The MPS Used In Manufacturing Company?
Today, manufacturing is a highly complex process that requires a considerable amount of planning. The
MPS is there to decide:
 What to produce
 What batch sizes to choose 
 When to produce
 What sequence should be adopted

To successfully implement the  MPS, there must be an understanding that the purpose of an MPS is not to
dictate the delivery times and quantities of the products. Instead, think of the MPS as a solid contract
between Production and Sales. The MPS merely formulates what Production will produce and should not
be considered a forecast. The manufacturing variables that the planner needs to account for when running
the MPS are:
 Sequence constraints
 Batch criteria
 Set-up times
 Capacity over-saturation

Benefits of Working With An MPS

There are many benefits for a manufacturing business to introduce an MPS. These benefits include:

 Providing a solid base to build, improve, and track the sales forecast
 Providing a solid base to calculate the quantities of subcomponents, parts, or raw materials to
purchase or produce, as part of the next stage of the MRP
 Providing a solid base to calculate the desired inventory levels
 Providing a solid base for figuring out the necessary amount of labor and shifts, as part of the MRP
next stage
 Allowing for optimizing the installed capacity and balancing the load of the plant.
 Manufacturing can predict the production and maintenance costs associated with the work centers.
 The manufacturing company’s financial department can attain income and expenses, which come
from the MPS, and produce a forecast of the cash flow in the company. The MPS helps build other

4 By- Mr. Anil Kumar Yadav (Asst. Prof.)

 financial statements, like the Balance sheets, Profit statements, Loss statements, and investment
plans.
 The Department of Human Resources can use the MPS to predict labor requirements and hiring
efforts.
Aggregate Production Planning
Aggregate production planning is concerned with the determination of production, inventory, and work force
levels to meet fluctuating demand requirements over a planning horizon that ranges from six months to one
year. Typically the planning horizon incorporate the next seasonal peak in demand. The planning horizon is
often divided into periods. For example, a one year planning horizon may be composed of six one-month
periods plus two three-month periods. Normally, the physical resources of the firm are assumed to be fixed
during the planning horizon of interest and the planning effort is oriented toward the best utilization of those
resources, given the external demand requirements.
Types of Aggregate Production Planning
While dealing with the production dilemma, the planning process is normally divided into three class
1. Long term planning deals with a strategic decision such as the purchase of facilities, Introduction of
new products, process, etc.
2. Short term Planning which deals with day to day work, scheduling and some time inventory
problems.
3. Intermediate or aggregate planning, which is in the long term and short term planning. Which is
concerned in generally acceptable planning taking the load on hand and facilities available into
consideration.
How to do aggregate planning?

The decisions are normally followed by the development of a few decision rules to plan aggregate output for
both the manufacturing and service industries.
Modification of demand
The demand for a product or service may be increased or decreased by adopting various strategies like

 Differential pricing
 Advertising and sales promotion
 Development of complementary products

Modification of supply

Some of the methods by which we can modify the supply to match the demand are

5 By- Mr. Anil Kumar Yadav (Asst. Prof.)

  Hiring and lay-off of employees
 Overtime and undertime
 Use of part-time or temporary labor
Inventory
Inventory is the term for the goods available for sale and raw materials used to produce goods available for
sale. Inventory represents one of the most important assets of a business because the turnover of
inventory represents one of the primary sources of revenue generation and subsequent earnings for the
company's shareholders.
Basic types of inventory
There are five fundamental types of inventory when it comes to the products a business might sell.
1. Raw materials.
2. Work-in-progress (WIP) inventory.
3. Finished goods.
4. Maintenance, repair & operations (MRO) goods.
5. Packing materials.
(1) Raw materials
Raw materials are any items used to manufacture finished products, or the individual components that go
into them. These can be produced or sourced by a business itself or purchased from a supplier.
For example: A business that makes its own bespoke furniture may purchase materials from a supplier.
While a small business supplying specialty herbs may actually grow these itself.
Either way, raw materials are still considered a type of inventory. And so must be managed,
stored and accounted for accordingly.
(2) Work-in-progress (WIP) inventory
Work-in-progress (WIP) inventory again refers to retailers that manufacture their own products. These are
unfinished items or components currently in-production, but not yet ready for sale. For our furniture
business, this may be products that have been put together without yet being painted or packaged.
(3) Finished goods
Finished goods are products that are complete and ready for sale. These may have been manufactured by the
business itself, or purchased as a whole, finished product from a supplier. Most retailers will either purchase
whole, finished products from a supplier, or have custom products manufactured for them by a third-party.
Finished goods are therefore often (but not always) one of the only types of inventory needing to be handled
within retail inventory management.

6 By- Mr. Anil Kumar Yadav (Asst. Prof.)

(4) Maintenance, repair & operations (MRO) goods
MRO goods are items used within the manufacture of products, but without directly making up any part of
a finished product.
This can include items such as:
 Production & repair tools.
 Uniforms & safety equipment.
 Cleaning supplies.
 Machinery.
 Batteries.
 Computer systems.
And all items that are consumed or discarded during the production process.
Small types of inventory like this may seem menial. But MRO is inventory that still needs to be purchased
from a supplier, stored somewhere and accounted for in financial records.
(5) Packing materials
Packing materials are anything you use for packing and protecting goods – either while in storage, or during
shipping to customers.
This is therefore particularly important for online retailers. And may include things like:

 Bubble wrap.
 Padding.
 Packing chips.
 A variety of boxes.
Many retailers don’t think about packing materials when managing their
inventory. But stocks of these items need to be used and maintained regularly – and it’s therefore important
to include them in overall inventory reporting and accounting.

7 By- Mr. Anil Kumar Yadav (Asst. Prof.)

 Inventory Control Techniques
1. ABC Analysis:
One of the widely used techniques of inventory control is the ABC (Always Better
Control) analysis. This analysis is based on the annual consumption of inventory items in a year.
It has been found that:
a. Only a small number of inventory items consume a very large share of inventory consumption during the
year.
b. A little larger number of inventory items covers a moderate share of annual inventory consumption.
c. A very large number of items just cover a very small share of annual inventory consumption.
These facts gave birth to the concept of ABC analysis. The ABC approach is a means of categorizing
inventory items into three classes ‘A’, ‘B’ and ‘C’.
a. Class A items: 10% of items have 70% of the annual inventory consumption.
b. Class B items: 20% of the items have 20% of annual inventory consumption.
c. Class C items: 70% of the items have only 10% of the annual inventory consumption.
2. V.E.D. Analysis:
This classification is applicable only for spare parts and is based on criticality. In general,
criticality of a spare part can be determined from the production downtime loss, due to spare being not
available when required. The VED analysis is done to determine the criticality of an item and its effect on
production and other services.
a. Vital (V):
A spare part will be termed vital, if on account of its non-availability there will be very high loss due to
production downtime and/or a very high cost will be involved if the part is procured on emergency basis.
b. Essential (E):
A spare part will be considered essential if, due to its non availability, moderate loss is incurred.
c. Desirable (D):
A spare part will be desirable if the production loss is not very significant due to its non-availability. Most of
the parts will fall under this category. The VED analysis helps in focusing the attention of the management
on vital items.
3. FSN Analysis:
FSN classification is based on frequency of issues/use. F, S and N stand for fast moving,
slow moving and non-moving items. This form of classification identifies the items frequently issued; less
frequently issued for use and the items which are not issued for longer period, say, 2 years.

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For instance, the items can be classified as follows:
a. Fast Moving (F): Items that are frequently issued say more than once a month.
b. Slow Moving (S): Items that are issued less than once a month.
c. Non-Moving (N): Items that are not issued\used for more than 2 years.
4. SDE Analysis:
It represents three levels of classification: Scarce, difficult and easy.
The classification is as follows:
a. Scarce (S): Items which are imported and those items which require more than 6 months’ lead time.
b. Difficult (D): Items which require more than a fortnight but less than 6 months’ lead time.
c. Easily Available (E): Items which are easily available; mostly local items, i.e. less than a fortnights’ lead
time.
This classification helps in reducing the lead time required at least in case of vital items. Ultimately, this will
reduce stock-out costs in case of stock-outs.
5. HML Analysis:
The cost per item (per piece) is considered for this analysis. The items of inventory should
be listed in the descending order of unit value and it is up to the management to fix limits for these
categories. High cost items (H), Medium Cost items (M) and Low Cost item (L) help in bringing controls
over consumption at the departmental level.
This classification is as follows:
a. High Cost items (H): Items whose unit value is very high
b. Medium Cost items (M): Items whose unit value is of medium value.
c. Low Cost items (L): Items whose unit value is low.
This type of analysis helps in exercising control at the shop floor level i.e., at the use point.
5. E.O.Q. Model
The economic order quantity (EOQ) refers to the ideal order quantity a company should
purchase in order to minimize its inventory costs, such as holding costs, shortage costs, and order costs. EOQ
is necessarily used in inventory management, which is the oversight of the ordering, storing, and use of a
company's inventory. Inventory management is tasked with calculating the number of units a company
should add to its inventory with each batch order to reduce the total costs of its inventory.
The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a
company does not have to make orders too frequently and there is not an excess of inventory sitting on hand.
It assumes that there is a trade-off between inventory holding costs and inventory setup costs, and total
inventory costs are minimized when both setup costs and holding costs are minimized.

9 By- Mr. Anil Kumar Yadav (Asst. Prof.)

KEY TAKEAWAYS
 The economic order quantity (EOQ) refers to the ideal order quantity a company should purchase in
order to minimize its inventory costs.
 A company's inventory costs may include holding costs, shortage costs, and order costs.
 The economic order quantity (EOQ) model seeks to ensure that the right amount of inventory is
ordered per batch so a company does not have to make orders too frequently and there is not an
excess of inventory sitting on hand.
 EOQ is necessarily used in inventory management, which is the oversight of the ordering, storing,
and use of a company's inventory. 

Advantage of EOQ Model

1: Minimizes Storage and Holding Costs

Storing inventory may be expensive for small business owners. The main advantage of the EOQ model is
the customized recommendations provided regarding the most economical number of units per order. The
model may suggest buying a larger quantity in fewer orders to take advantage of discount bulk buying and
minimizing order costs. Alternatively, it may point to more orders of fewer items to minimize holding
costs if they are high and ordering costs are relatively low.
2: Specific to the Business
Maintaining sufficient inventory levels to match customer demand is a balancing act for many small
businesses. Another advantage of the EOQ model is that it provides specific numbers particular to the
business regarding how much inventory to hold, when to re-order it and how many items to order. This
smooths out the re-stocking process and results in better customer service as inventory is available when
needed.

The Formula for Economic Order Quantity (EOQ)

EOQ = Economic Order Quantity,

RU = Annual Required Units,
OC    = Ordering Cost for one Unit
UC = Inventory Unit Cost,
CC = Carrying Cost as %age of Unit Cost

10 By- Mr. Anil Kumar Yadav (Asst. Prof.)

Numerical Problem on EOQ
Question 1. Calculate Economic Order Quantity (EOQ) from the following:
Annual consumption          6,000 units
Cost of ordering                 Rs. 60
Carrying costs                    Rs. 2

EOQ =600 Units

Question 2. From the following particulars, calculate the Economic Order Quantity (EOQ):
Annual requirements          1,600 units                         
Cost of materials per units                      Rs. 40
Cost of placing and receiving one order:      Rs. 50       
Annual carrying cost for inventory value       10%

EOQ = 200 Units

Question 3. Calculate EOQ from the following?

Consumption during the year = 600 units             
Ordering cost Rs. 12 per order
Carrying cost 20%                                                 
Selling Price per unit Rs. 20

Economic Order Quantity = 379 Units

Question 4. A manufacturer buys certain equipment form suppliers at Rs. 30 per unit. Total annual needs are
800 units. The following further data are available:
Annual return on investments 10%                   

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Rent, insurance, storing per unit per year Rs. 2
Cost of placing an order Rs. 100

EOQ = 200 Units

Just-In-Time Inventory System:
Just in Time (JIT) is a production and inventory control system in which materials are purchased and units
are produced only as needed to meet actual customer demand. In just in time manufacturing system
inventories are reduced to the minimum and in some cases are zero.

JIT is a philosophy of continuous improvement in which non-value-adding activities (or wastes) are
identified and removed for the purposes of reducing cost, improving quality, improving performance,
improving delivery and adding flexibility.

JIT applies primarily to repetitive manufacturing processes in which the same products and components are
produced over and over again. In JIT workers are multifunctional and are required to perform different tasks.
The just-in-time inventory system focus is having the right material, at the right time, at the right place, and
in the exact amount.

Advantages of JIT:
The main benefits of JIT system are:
a. Funds that were tied up in inventories can be used elsewhere.
b. Areas previously used, to store inventories can be used for other more productive uses.
c. The flows of goods from warehouse to shelves are improved.
d. Employees who possess multiple skills are utilized more efficiently.
e. Better consistency of scheduling and consistency of employee work hours.
f. Increased emphasis on supplier’s relationship.
g. Setup times are significantly reduced in the factory.
h. Defect rates are reduced, resulting in less waste and greater customer satisfaction.

12 By- Mr. Anil Kumar Yadav (Asst. Prof.)

 KANBAN - (History on KANBAN)
It all started in the early 1940s. The first KANBAN system was developed by Taiichi Ohno(Industrial
Engineer and Businessman) for Toyota automotive in Japan. It was created as a simple planning system, the
aim of which was to control and manage work and inventory at every stage of production optimally. A key
reason for the development of KANBAN was the inadequate productivity and efficiency of Toyota compared
to its American automotive rivals. With KANBAN, Toyota achieved a flexible and efficient just-in-time
production control system that increased productivity while reducing cost-intensive inventory of raw
materials, semi-finished materials, and finished products.
What is the Kanban Method?
The KANBAN Method is a process to gradually improve whatever you do – whether it is software
development, IT/ Ops, Staffing, Recruitment, Marketing and Sales, Procurement etc. In fact, almost any
business function can benefit from applying the principles of the KANBAN Methodology.
The KANBAN body of knowledge has abstracted and benefited from the works of various
thought leaders since the original book was written! People such as Don Reinertsen (author of Principles of
Product Development Flow), Jim Benson (pioneer of Personal Kanban ) and several others.
4 Foundational Principles:
1. Start with what you are doing now 2. Agree to pursue incremental, evolutionary change
3. Initially, respect current roles, responsibilities and job-titles 4. Encourage acts of leadership at all levels
1. Start with what you are doing now: The KANBAN Method (hereafter referred to as just KANBAN )
strongly emphasizes not making any change to your existing setup/ process right away. KANBAN must be
applied directly to current workflow. Any changes needed can occur gradually over a period of time at a pace
the team is comfortable with.
2. Agree to pursue incremental, evolutionary change: KANBAN encourages you to make small
incremental changes rather than making radical changes that might lead to resistance within the team and
organization.
3. Initially, respect current roles, responsibilities and job-titles: Unlike other methods, KANBAN does
not impose any organizational changes by itself. So, it is not necessary to make changes to your existing roles
and functions which may be performing well. The team will collaboratively identify and implement any
changes needed. 
4. Encourage acts of leadership at all levels: KANBAN encourages continuous improvement at all the
levels of the organization and it says that leadership acts don’t have to originate from senior managers only.
People at all levels can provide ideas and show leadership to implement changes to continually improve the
way they deliver their products and services.
6 Core Practices of the KANBAN Method:
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1. Visualize the flow of work
2. Limit WIP (Work in Progress)
3. Manage Flow
4. Make Process Policies Explicit
5. Implement Feedback Loops
1. Visualize the flow of work: This is the fundamental first step to adopting and implementing the
KANBAN Method. You need to visualize – either on a physical board or an electronic KANBAN Board, the
process steps that you currently use to deliver your work or your services. Depending on the complexity of
your process and your work-mix (the different types of work items that you work on and deliver), your
KANBAN board can be very simple to very elaborate. Once you visualize your process, then you can
visualize the current work that you and your team are doing.
2. Limit WIP (Work in Progress): Limiting work-in-progress (WIP) is fundamental to implementing
KANBAN – a ‘Pull-system’. By limiting WIP, you encourage your team to complete work at hand first
before taking up new work. Thus, work currently in progress must be completed and marked done. This
creates capacity in the system, so new work can be pulled in by the team. Initially, it may not be easy to
decide what your WIP limits should be. In fact, you may start with no WIP limits.
3. Manage Flow: Managing and improving flow is the crux of your KANBAN system after you have
implemented the first 2 practices. A KANBAN system helps you manage flow by highlighting the various
stages of the workflow and the status of work in each stage. Depending on how well the workflow is defined
and WIP Limits are set, you will observe either a smooth flow within WIP limits or work piling up as
something gets held up and starts to hold up capacity. All of this affects how quickly work traverses from
start to the end of the workflow (some people call it value stream). KANBAN helps your team analyze the
system and make adjustments to improve flow so as to reduce the time it takes to complete each piece of
work.
4. Make Process Policies Explicit: As part of visualizing your process, it makes sense to also define and
visualize explicitly, your policies (process rules or guidelines) for how you do the work you do. By
formulating explicit process guidelines, you create a common basis for all participants to understand how to
do any type of work in the system. The policies can be at the board level, at a swim lane level and for each
column. They can be a checklist of steps to be done for each work item-type, entry-exit criteria for each
column, or anything at all that helps team members manage the flow of work on the board well. Examples of
explicit policies include the definition of when a task is completed, the description of individual lanes or
columns, who pulls when, etc.

14 By- Mr. Anil Kumar Yadav (Asst. Prof.)

5. Implement Feedback Loops: Feedback loops are an integral part of any good system. The KANBAN
Method encourages and helps you implement feedback loops of various kinds – review stages in your
KANBAN board workflow, metrics and reports and a range of visual cues that provide you continuous
feedback on work progress – or the lack of it – in your system. While the mantra of “Fail fast! Fail often!”
may not be intuitively understood by many teams, the idea of getting feedback early, especially if you are on
the wrong track with your work, is crucial to ultimately delivering the right work, the right product or service
to the customer in the shortest possible time. Feedback loops are critical for ensuring that.

6. Improve Collaboratively, Evolve Experimentally (using the scientific method): The Kanban Method is
an evolutionary improvement process. It helps you adopt small changes and improve gradually at a pace and
size that your team can handle easily. It encourages the use of the scientific method – you form a hypothesis,
you test it and you make changes depending on the outcome of your test. As a team implementing Lean/
Agile principles, your key task is to evaluate your process constantly and improve continuously as needed
and as possible.

15 By- Mr. Anil Kumar Yadav (Asst. Prof.)