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OPERATIONS MANAGEMENT

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 OPERATIONS MANAGEMENT

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 Syllabus
Operations Management

Syllabus Mapping
Unit - I: Introduction to Operations Management Lesson 1: Introduction to
Definition, need, key decisions in OM, Operations as key functional area in Operations Management
an organization; Operations Strategies: Definition, Relevance and Process (Pages 1–20)
of strategy formulation. Lean production: Definition of lean production,
Lean demand, Pull logic, waste in operations, 2-card Kanban Production
Control system.
Unit - II: Forecasting and Inventory Management Lesson 2: Forecasting
Forecasting: Meaning, Significance and Limitations, types, qualitative (grass Techniques
roots, market research and Delphi method) and quantitative approach (simple (Pages 21–33)
moving average method, weighted moving average and single exponential
Lesson 3: Inventory
smoothing method), forecast error, MAD, Forecasting in relation to services.
Management
Inventory: Introduction, Types of Inventories, Costs Associated with Inventory,
Selective Inventory control Techniques- ABC, VED, FNSD, XYZ; Inventory (Pages 34–56)
Model: Deterministic Models – Finite and Infinite Replenishment, Price Break
Quantity Discount Models.
Unit - III: Scheduling and Layout Planning Lesson 4: Process
Process Selection: Definition, Characteristics that influence the choice of al- Selection and Scheduling
ternative processes (volume and variety), Type of processes- job shop, batch, Techniques
mass and continuous processes. Scheduling: Operation scheduling, Goals of (Pages 57–75)
short-term scheduling, Job sequencing (FCFS, SPT, EDD, LPT, CR) & Johnson’s
Lesson 5: Layout
rule on two machines, Gantt charts, Processing n jobs through 3 machines,
Planning
Processing n jobs through k machines. Layout planning, Benefits of good layout,
importance, different types of layouts (Process, Product, Group technology and (Pages 76–91)
Fixed position layout). Assembly line balancing by using LOT rule.
Unit - IV: Location and Capacity Planning Lesson 6: Location and
Facility Location: Objective, factors that influence location decision, Location Capacity Planning
evaluation methods – factor rating method, centre of gravity method, Ana- (Pages 92–116)
lytical Hierarchical Process. Capacity planning: Definition, input and output
measures of capacity; types of capacity planning over time horizon; Decision
trees analysis for capacity planning.

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 Contents

PAGE
Lesson 1: Introduction to Operations Management 1–20

Lesson 2: Forecasting Techniques 21–33

Lesson 3: Inventory Management 34–56

Lesson 4: Process Selection and Scheduling Techniques 57–75

Lesson 5: Layout Planning 76–91

Lesson 6: Location and Capacity Planning 92–116

Glossary 117–123

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 L E S S O N

1
Introduction to Operations
Management
Dr. Rajat Arora
Assistant Professor
School of Open Learning
Email-Id: rajat.arora@sol.du.ac.in

STRUCTURE
1.1 Learning Objectives
1.2 Introduction
1.3 Key Decisions in Operations Management
1.4 Strategies in Operations
1.5 2-Card Kanban Production Control System
1.6 Summary
1.7 Answers to In-Text Questions
1.8 Self-Assessment Questions
1.9 References
1.10 Suggested Readings

1.1 Learning Objectives

‹ Comprehend the fundamental principles, scope, and importance of Operations
Management in various sectors, such as manufacturing and services.
‹ Acquire the knowledge necessary to optimise operational performance and productivity
by developing efficient processes and implementing process improvement strategies.
‹ Understand the fundamentals of capacity planning and the effective management of
resources to accommodate fluctuating demand.
‹ Investigate inventory management strategies, such as methods for balancing supply
and demand, reducing costs, and preventing stockouts and excess situations.

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 OPERATIONS MANAGEMENT

Notes ‹ Employ quality management practices to guarantee that products and

services adhere to predetermined standards and acquire knowledge
regarding frameworks for ongoing quality enhancement.
‹ Comprehend the fundamentals of supply chain management, which
include the coordination and optimization of the supply chain to
enhance efficiency and performance.
‹ Acquire the ability to develop and execute operations strategies
that are consistent with the primary business objectives, with an
emphasis on competitive advantage through a variety of strategic
approaches.

1.2 Introduction
Operations Management (OM) is an essential discipline in business that
concentrates on the planning, execution, and supervision of activities
related to the manufacturing and distribution of products and services.
It includes a wide variety of tasks with the goal of ensuring that orga-
nizational operations are conducted smoothly and efficiently. OM aims
to efficiently utilize resources, including human capital, technology, and
materials, to generate superior products or services while minimizing
expenses and maximizing value. The field encompasses various crucial
domains, such as process design, capacity planning, inventory manage-
ment, and quality control elaborated as follows:
Process design is the creation of efficient workflows and the careful
selection of equipment to optimise production and service delivery.
This facet of Operations Management is crucial in the development of
efficient systems that effectively fulfil client requests while minimizing
inefficiencies and duplications. Capacity planning, however, guarantees
that an organisation has the appropriate quantity of resources to fulfil
fluctuating levels of demand. Efficient capacity planning entails predicting
demand and modifying production capabilities to avoid constraints and
guarantee punctual supply of goods or services.
Inventory management is a crucial aspect of operations management that
aims to maintain the ideal amount of stock to ensure a balance between
supply and demand. Effective inventory management prevents the negative
consequences of having too much inventory, such as tying up cash and
incurring holding fees, as well as the negative consequences of running
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 Introduction to Operations Management

out of stock, such as missed sales and customer unhappiness. Methods Notes
like Just-In-Time (JIT) inventory and Economic Order Quantity (EOQ)
are used to achieve a balance between maintaining enough inventory and
reducing storage expenses.
Quality management is an essential aspect of OM, since it guarantees that
products and services adhere to predetermined criteria and fulfil consumer
expectations. This entails developing quality assurance protocols, doing
routine inspections, and utilising statistical methodologies to oversee and
improve quality. Frameworks such as Total Quality Management (TQM)
and Six Sigma are extensively employed to cultivate a culture of ongoing
enhancement and minimise flaws.
Supply Chain Management (SCM) expands the scope of OM to en-
compass the wider network of suppliers, manufacturers, and distributors
that are engaged in the process of getting items to the market. Efficient
supply chain management entails the organisation and control of the
movement of items, information, and funds throughout a network in order
to maximise performance and minimise expenses. The primary objectives
of SCM strategies are to optimise operational efficiency, reduce delivery
lead times, and effectively adapt to fluctuations in customer demand.
The strategic component of OM is crucial since it entails the synchro-
nisation of operational actions with the predominant corporate strategy.
This alignment guarantees that operations provide a valuable contribution
to the organization’s competitive advantage, whether it is through cost
leadership, product differentiation, or targeting certain market groups. This
strategic alignment serves as a guiding principle for making decisions on
technology adoption, process enhancements, and resource management.
Emerging trends and technologies have had a considerable impact on the
field of OM in recent years. The incorporation of cutting-edge technolo-
gies, such as automation, Artificial Intelligence (AI), and data analytics,
has completely transformed conventional operational procedures. These
technologies improve accuracy, velocity, and decision-making abilities,
revolutionizing how organizations handle their operations. In addition, the
increasing focus on sustainability has resulted in the implementation of
measures aimed at minimizing the negative effects on the environment,
including waste reduction, energy preservation, and the utilization of
sustainable materials.

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Notes Globalisation has broadened the reach of operations management, as or-

ganisations now oversee intricate worldwide supply chains and production
networks. Effective coordination across many locations and cultures is
necessary to maintain a global perspective. However, this also presents
opportunities and challenges in terms of increasing operational efficiency
and controlling risks.

1.3 Key Decisions in Operations Management

For Operations Management to work, crucial decisions must be made to
guarantee that production and service delivery are effective, efficient,
and in line with long-term objectives.
Operations managers commonly encounter many significant decisions as
presented in Figure 1.1.

Figure 1.1: Key Decisions in Operations Management

(Source: Operations Management Software - Effivity)

The Key Decisions are discussed in detail as under:

1. Process Design: This includes responsibilities such as choosing
equipment, designing workflows, and figuring out facility layout.
Important factors to take into account are flexibility, scalability,
efficiency, and alignment with service or product requirements.
Selecting between job-shop, batch, assembly line, or continuous
flow processes is one example of this.

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 Introduction to Operations Management

2. Decision-Making: The decision-making is required in different areas Notes

such as capacity planning; to calculate the production or service
capacity required to meet demand, balancing short-term and long-
term capacity, demand forecasting, operational scalability, resource
allocation, purchasing more machinery, building out existing spaces,
or recruiting more personnel are all possible decisions, Inventory
Management-controlling inventory levels to minimise expenses while
balancing supply and demand, Decision-Making in Supply Chain
Management.
3. Quality Management: Guaranteeing that goods and services live up
to consumer expectations and quality requirements. The significant
contributions include managing quality assurance procedures,
choosing quality improvement techniques (such as Six Sigma and
Total Quality Management), and putting quality control measures into
practice. Creating quality checks and establishing quality standards
are major decisions in quality control.
4. Innovation and Technology Decision: Related to adoption of new
technology to improve operations through adoption and integration.
These include weighing the advantages and disadvantages of emerging
technologies like automation, AI, and data analytics. Choosing the
appropriate technology, overseeing its deployment, and providing
staff training are all decisions.
5. Workforce Management Decision: The aim of this decision is
maximising performance and productivity through human resource
management. Significant considerations include hiring, training,
planning, and performance management. Workforce planning,
designing efficient work shifts, and building skill-enhancing training
programs are among the major decisions that need to be made.
6. Cost Management Decision: Reducing and controlling operating
expenses while preserving effectiveness and quality. It includes
examining cost structures, putting cost-cutting strategies into
action, and keeping an eye on performance indicators. Budgeting,
cost analysis, and locating areas for cost cutting are all part of the
decision-making process.
7. Facility Layout and Design Decision: It aims at organizing and
creating a facility’s physical layout to maximize productivity. It

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 OPERATIONS MANAGEMENT

Notes takes care of critical factors viz. safety, regulatory compliance,

workflow optimization, and space utilization. Making decisions
entails selecting from a variety of layout styles (such as process,
product, or fixed-position layout).
8. Designing and developing products and services with the needs
and preferences of the consumer in mind is the decision-making
focus. Important factors to consider are market demand, production
costs, and design elements. Managing product life cycles, designing
for manufacturing, and incorporating user feedback into designs are
some of the decisions that need to be made.
These choices have an effect on one another and are connected to
one another. In order to achieve operational excellence and support
organizational goals, managers must adopt a holistic approach to
operations management. This involves balancing multiple elements
and making well-informed decisions.

1.4 Strategies in Operations

Strategies play a crucial role in operations management by ensuring that
an organization’s activities are in line with its overall objectives and
by maximizing efficiency and effectiveness in the delivery of products
or services. The Key strategic decisions in operations management are
presented in Figure 1.2 and are described in detail below:

Process and Capacity Design

Quality

Scheduling

Selection of Location Facility and Layout Design

Inventory Management

Human and Resource Requirement

Supply Chain Management

Figure 1.2: Key Strategic Decisions in Operations Management

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 Introduction to Operations Management

1. Efficient Production: This aims at reducing waste and optimizing Notes

value. The principles of this approach are centred around prioritizing
the customer’s perspective, eliminating any unnecessary activities
that do not contribute value, and consistently enhancing processes.
The tools utilized in this context include 5S (Sort, set in order,
Shine, Standardise, Sustain), Kaizen (continuous improvement),
Value Stream Mapping, and Just-in-Time (JIT).
2. Six Sigma: It aims at enhancing the quality by identifying and
eliminating the root causes of defects and variability in processes.
This strategy strives to achieve a high process performance level.
To accomplish this, we make use of DMAIC (Define, Measure,
Analyze, Improve, and Control), Statistical Process Control (SPC)
and Root Cause Analysis.
3. Total Quality Management (TQM): Its goal is to improve quality
and increase customer satisfaction by engaging all personnel of an
organization. The principles that guide an organization are continuous
improvement, client focus, and employee involvement.
Tools utilised in this context include Quality Circles, the PDCA
(Plan-Do-Check-Act) cycle, and Benchmarking. The Theory of
Constraints (TOC) aims to identify and address the most significant
bottleneck in a process in order to enhance overall performance.
4. Efficient Operations: This strategy aims at improving adaptability
and quickness in order to effectively respond to shifts in consumer
needs and market dynamics. The strategy gives priority to flexibility,
close cooperation with customers, and swift delivery.
Different software development methodologies include Kanban, and
Agile Project Management.
5. Just-in-Time (JIT) is a strategy aimed at minimizing inventory costs
and enhancing efficiency by manufacturing things just when they
are required. This strategy aims at minimizing surplus inventory,
decrease the time it takes to complete a process, and align production
with customer demand. Tools used under this strategy are Kanban
systems, Pull Production, and Just-in-Time (JIT) inventory systems.
6. Capacity Management: It ensures that an organisation possesses
the appropriate level of capacity to satisfy both present and future

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 OPERATIONS MANAGEMENT

Notes demand. This confirms a harmonious equilibrium between available

resources and the level of demand, anticipate and prepare for changes
in capacity, and effectively handle any limitations in capacity.
7. Supply Chain Management: The objective here is to enhance the
efficiency of the movement of products and services from suppliers
to customers. It involves coordinating activities among suppliers,
manufacturers, distributors, and customers in order to improve total
efficiency.
The strategy incorporates efficient Supply chain network design,
vendor management, and inventory optimization.
8. Sustainability and Green Operations: This strategy aims at minimizing
ecological footprint and advance sustainable methodologies. It
emphasize on energy efficiency, minimize waste, and employ
environmentally-friendly procedures. The procedures followed in
this context are Life Cycle Assessment, Sustainable Supply Chain
Management, and Green Lean.
9. Technology Integration: It aims at utilizing technology to enhance
operational efficiency and effectiveness. This aims at incorporating
sophisticated technologies, including automation, data analytics,
and digital tools into operational processes including Enterprise
Resource Planning (ERP) systems, Internet of Things (IoT), and
Artificial Intelligence (AI).
Each strategy possesses distinct tools and procedures, and the selection
of a strategy is contingent upon the organization’s objectives, industry,
and particular operational obstacles.
Lean Production
Lean production, commonly referred to as Lean Manufacturing or just
Lean, is a methodical strategy aimed at enhancing efficiency and effec-
tiveness in manufacturing processes. The primary objective is to reduce
waste while simultaneously maximizing the value delivered to the client.
Derived from the Toyota Production System, Lean has gained widespread
acceptance as a methodology in operations management. A summary of
the main ideas and fundamental principles in lean manufacturing is pre-
sented in Figure 1.3.

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 Introduction to Operations Management

Notes

Figure 1.3: Strategies Adopted in Lean Manufacturing

Key Tenets of Lean Production

Value: Value is determined based on the customer’s viewpoint. Activities
or procedures that do not contribute to the creation of value are regarded
as wasteful. Here, the customer’s priorities are kept in mind to ensure
that all actions are in line with providing the desired value.
Value Stream: The value stream encompasses all the necessary activities
involved in the complete process of taking a product or service from
the first idea to its final delivery to the consumer. To achieve this, a
comprehensive analysis of the value stream is conducted to identify and
differentiate between activities that contribute value and those that do not.
Flow or Movement: Flow is the term used to describe the seamless and
continuous movement of items or information throughout the production
process.
It aims at eradicating obstacles and interruptions in order to maintain an
uninterrupted progression of tasks.

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 OPERATIONS MANAGEMENT

Notes Extract or Pull: Pull refers to the practice of manufacturing products

in response to demand, rather than proactively pushing them through the
system based on predictions.
It deploys methodologies such as Kanban to initiate production in response
to real-time demand rather than relying on stockpile-driven approaches.
Flawlessness: Lean is a methodology that strives for perfection by con-
stantly enhancing processes and reducing inefficiencies. It cultivates an
environment of perpetual enhancement, wherein each employee is moti-
vated to propose and execute changes.
Categories of Waste:
Lean categorizes waste into seven distinct forms as represented in Figure
1.4 and explained in detail below. These should be eradicated from the
process.

Figure 1.4: Categories of Waste in Lean

(Source: https://digitalelearnings.com/wp-content/uploads/2021/06/
8-waste-of-lean-600x338.jpg)

1. Excessive Production: Over-production refers to the act of generating

an excess amount of goods or services beyond the required quantity
or before the demand arises.
2. Awaiting Downtime: It refers to the period of time that is wasted
while waiting for goods, information, or equipment to become
available.

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 Introduction to Operations Management

3. Motion: Any movement that is unnecessary in a process, such as Notes

bending, reaching, lifting, strolling, or moving, is referred to as
motion waste. A workspace that is inadequately designed for process
flow is the primary source of motion waste.
4. Transportation: Excessive (surplus which is not necessary) transportation
of resources or products.
5. Additional Processing: It refers to excessive/surplus stages in the
manufacturing procedure or an excess of labour beyond what is
necessary.
6. Stock/Inventory: It includes surplus raw materials, partially completed
work, or completed products.
7. Imperfections/Defects: Deficiencies or imperfections that necessitate
additional effort or lead to the disposal of the product.
The following steps are undertaken to analyze the root causes of issues
in order to successfully resolve them.
‹ Staff Participation: Involve employees at every level in the Lean
transformation process.
‹ Education and Growth: Deliver instruction on Lean ideas, tools,
and methodologies.
‹ Experimental Initiatives: Commence with pilot initiatives to
evaluate Lean principles (presented in Figure 1.5) and showcase
their advantages prior to a comprehensive deployment.

Figure 1.5: Lean Principles

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 OPERATIONS MANAGEMENT

Notes ‹ Iterative Enhancement: Lean is a continuous process. Consistently

strive for feedback and seek out possibilities to enhance performance.
Organizations can attain substantial enhancements in efficiency, cost re-
duction, product quality enhancement, and ultimately, increased customer
value by implementing lean production concepts.
Push Pull
System System

Just-in-Case Just-in-Time

Based on
Based on Demand
Assumption

Anticipated use Actual use

(large lots) (small lots)

High Inventory Low Inventory

Risk of Waste Reduced Waste

Poor Better
Communication Communication

Figure 1.6: Pull vs. Push System

Now we discuss plan of action for minimizing the waste as discussed
above:
1. 5S: One of the key lean tools and techniques is 5S. These are defined
as under:
Sort: Eliminate superfluous things.
Set in Order: Systematize and categorize tools and materials.
Shine: Ensure the workspace is kept clean and well-maintained.
Standardize: Establish uniform practices.
Sustain: Guarantee the continuity of practices over an extended period.

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 Introduction to Operations Management

2. Kaizen: Continuous progress achieved by making minor, gradual Notes

modifications.
It promotes employee engagement and fosters proactive resolution
of issues.
3. Kanban: An optical scheduling system for managing the movement
of tasks and stock.
Utilizes cards or signals to initiate the manufacture or transportation
of resources.
4. Value Stream Mapping: A visual instrument employed for the
examination and creation of the movement of materials and information.
Facilitates the identification of inefficiencies and areas for enhancement.
5. Just-in-Time (JIT): It involves efficiently manufacturing and
distributing products precisely when needed to satisfy consumer
requirements. It minimizes stock and decreases the time it takes to
complete a process.
6. Jidoka: This principle aims at combining automation with human
intervention.
Machines are engineered to identify issues and halt automatically,
enabling prompt rectification.
7. Poka-Yoke: Implementing error-proofing strategies is crucial for
preventing faults. This tool implements techniques to prevent human
errors. It analyzes the fundamental cause or causes of a problem
or issue.
The above discussed techniques are employed to minimize waste
and improve overall efficiency in an organization.

1.5 2-Card Kanban Production Control System

The 2-card Kanban system is a straightforward and efficient technique
employed in operations management to regulate production and inventory
levels. It aids in the management of work-in-progress (WIP) and guaran-
tees a seamless flow in manufacturing operations. Below is an in-depth
examination of the functioning, advantages, and implementation of the
2-card Kanban system. Pictorially, 2-card Kanban system is presented
below in Figure 1.7.

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Notes How 2-Card Kanban System Operates?

The 2-card Kanban System operates by utilizing two distinct types of cards.
A manufacturing Kanban: It is a card that grants authorization for the
manufacturing of a defined quantity of parts or goods. When a workstation
or process needs to refill its inventory, it is sent to the production area.
Retrieval Kanban: This card is utilized to indicate the demand for parts
or items to be retrieved from inventory for use in production or assem-
bly. The item is transferred from the production or assembly area to the
inventory or storage area.
Process: When a workstation or process exhausts its supply of compo-
nents, it dispatches the withdrawal Kanban card to the inventory area.
The inventory area utilizes the withdrawal Kanban to choose and transport
the necessary components to the workstation. When the production pro-
cess depletes the parts, it generates a production kanban card, indicating
the requirement for additional parts to be manufactured. The production
kanban card is dispatched to the production area, granting permission for
the manufacturing of the specified amount. Typically, each Kanban card
includes essential details like the part number, description, quantity, and
the source or destination.
Further, the cards are frequently colour-coded or labelled to facilitate
identification and monitoring.

Inventory in front Full back bin

bin is used. replaces depleted
front bin.

When front bin is empty, Replenished bin is

it is removed and sent to returned to factory and
supplier for replenishment. placed in back.

Figure 1.7: 2-Card Kanban System

(Source: https://www.creativesafetysupply.com/template/images/custom/articles-lean/
kanban-2-bin-system.png)

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Advantages of the 2-Card Kanban System Notes

‹ Enhanced Inventory Management: It optimizes inventory levels
by ensuring that parts are created or ordered solely when necessary,
hence minimising surplus inventory and associated expenses.
‹ Minimized Waste: Reduces waste related to overproduction and
surplus inventories by synchronising production with real-time demand.
‹ Enhanced Continuity: Optimizes the movement of materials and
information inside the production process, resulting in increased
operational efficiency.
‹ Increased Adaptability: Its sensitive nature enables swift adaptations
to fluctuations in demand or production requirements.
‹ Streamlined Communication: Enhances communication between
various stages of the production process by offering distinct and
easily understandable visual signals for production and inventory
replenishment.
Implementing the 2-Card Kanban System involves the establishment
and utilisation of Kanban Cards:
1. Develop and produce kanban cards that provide essential details such
as part numbers, descriptions, quantities, and locations. Ensure that
the cards are readily discernible.
2. Calculate the appropriate size for the Kanban system.
3. Determine the specific number of items that each Kanban card
represents. This entails examining past data and demand patterns
in order to establish suitable levels.
4. Create a visual representation of the entire process from start to
finish, highlighting the flow of value and identifying areas of waste
or inefficiency.
5. Analyze and chart the complete value stream to determine the
specific locations where kanban cards will be used and the manner
in which they will move through the system.
6. Allocate distinct positions for Kanban cards and ensure they are
prominently displayed and easily reachable by appropriate staff.
7. Provide comprehensive training to employees on the utilization
of the kanban system, encompassing instructions on completing,
transmitting, and handling kanban cards.
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Notes 8. Regularly check the functioning of the system, keep track of important
metrics, and make improvements wherever required. Identify any
potential problems, such as delays or inefficiencies, and make
necessary improvements to the system.
9. Ensure seamless integration of the Kanban system with other inventory
management and production control systems to uphold consistency
and precision.
Illustration:
Consider a manufacturing corporation specialising in the production of
electronic components. The 2-card Kanban system is utilized in the fol-
lowing manner:
Production Line: Each production line is equipped with a specific set of
materials required for the assembly of components.
A Withdrawal Kanban card is sent to the inventory area when a produc-
tion line exhausts its resources.
The inventory section is responsible for receiving the Withdrawal Kan-
ban card, retrieving the necessary goods, and transporting them to the
manufacturing line.
The Production Kanban card is dispatched to the production area, where
it is scheduled and used to manufacture the necessary supplies.
The production line generates a Production Kanban card to indicate the
number of materials that need to be replaced as it consumes them.
Through the use of the 2-card Kanban system, the company adeptly
manages inventory levels, minimises wastage, and enhances the overall
efficiency of its production process.

IN-TEXT QUESTIONS
1. Which of the following is the most accurate description of the
primary objective of operations management?
(a) Maximising shareholder value
(b) Optimising resource utilisation and ensuring customer
satisfaction
(c) Minimising production costs exclusively
(d) Increasing market share through marketing strategies

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 Introduction to Operations Management

2. In which production system are products commonly manufactured Notes

in limited quantities and according to customer specifications?
(a) Continuous production
(b) Batch production
(c) Job shop output
(d) Production on an assembly line
3. What is the primary objective of inventory management in
operations management?
(a) To reduce employee turnover
(b) To guarantee the availability of materials while reducing
transporting costs
(c) To increase production speed
(d) To improve marketing strategies
4. Which of the following is not a principle of lean manufacturing?
(a) Waste elimination
(b) Continuous enhancement
(c) Increasing the quantity of batches
(d) Production that is produced only when it is needed
5. What is the most frequently employed technique for quality
control in operations management?
(a) SWOT analysis
(b) PERT chart
(c) Statistical Process Control (SPC)
(d) Market segmentation

1.6 Summary
In this lesson, we discussed the key decisions of Operations Management
and elaborated on the various strategies employed in the process. Oper-
ations Management is a complex and versatile discipline that is crucial

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 OPERATIONS MANAGEMENT

Notes in maintaining the efficient and successful functioning of organisations.

Operations Management (OM) enables organisations to achieve operational
excellence and give value to consumers by emphasising process design,
capacity planning, inventory management, quality control, and supply
chain management. With the advancement of technology and changes in
global dynamics, OM constantly adjusts to meet the demands, offering
novel opportunities and obstacles for enhancing corporate performance.

1.7 Answers to In-Text Questions

1. (b) Optimising resource utilisation and ensuring customer satisfaction
2. (c) Job shop output
3. (b) To guarantee the availability of materials while reducing
transporting costs
4. (c) Increasing the quantity of batches
5. (c) Statistical Process Control (SPC)

1.8 Self-Assessment Questions

1. What is the principal goal of operations management within an
organisation?
2. What is the importance of “Value Stream Mapping” in the context
of Lean Manufacturing?
3. What is operations management, and why is it crucial for businesses?
4. How is the concept of supply chain management integrated with
operations management?
5. What is the function of inventory management in operations
management, and what are some of the most frequently employed
inventory management strategies?
6. In what ways can operations managers enhance production efficiency
by employing process optimisation techniques?
7. How is the concept of supply chain management integrated with
operations management?

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 Introduction to Operations Management

8. What is the importance of quality control in operations management, Notes

wand what are some of the methods employed to guarantee product
quality?
9. What are the main principles of lean manufacturing and how does
it contribute to operations management?

1.9 References
‹ Heizer, J., & Render, B. (2021). Operations management (12th
ed.). Pearson.
‹ Heizer, J., Render, B., & Munson, C. (2023). Operations management:
Sustainability and supply chain management (13th ed.). Pearson.
‹ Chase, R. B., Jacobs, F. R., & Aquilano, N. J. (2022). Operations
management for competitive advantage (15th ed.). McGraw Hill
Education.
‹ Bozarth, C. C., & Handfield, R. B. (2022). Introduction to operations
and supply chain management (6th ed.). Pearson.
‹ Sanders, N. R. (2022). Operations management: An integrated
approach (4th ed.). Wiley.
‹ Goldratt, E. M. (2022). The goal: A process of ongoing improvement
(30th anniversary ed.). North River Press.
‹ Womack, J. P., & Jones, D. T. (2003). Lean thinking: Banish waste
and create wealth in your corporation. Free Press.
‹ Johnston, R., & Clark, G. (2020). Service operations management:
Improving service delivery (4th ed.). Pearson.
‹ Russell, R. S., & Taylor, B. W. (2021). Operations management:
Creating value along the supply chain (10th ed.). Wiley.
‹ Chase, R. B., Jacobs, F. R., & Aquilano, N. J. (2021). Fundamentals
of operations management (7th ed.). McGraw Hill Education.

1.10 Suggested Readings

‹ Mahadevan, B. (2015). Operations management: Theory and practice.
Pearson Education India.

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 OPERATIONS MANAGEMENT

Notes ‹ Jay, H. and Barry, R. (2017). Operations Management: Sustainability

and Supply Chain Management, 12th ed. Pearson Education India.
‹ Jacobs, F. R., Chase, R. B. & Ravi Shankar. (2018). Operations and
Supply Chain Management, 14th ed. McGraw Hill Education India.
‹ Swarup, K., Gupta, P. K. & Manmohan. (2010). Operations Research,
19th ed. Sultan Chand & Sons.
‹ Kapoor, V. K. (2020). Operations Research: Quantitative Techniques
for Management, 9th ed. Sultan Chand & Sons.
‹ Sharma, J. K. (2017). Operations Research: Theory and Applications,
6th ed. Trinity.
‹ Russell, R. S., & Taylor, B. W. (2019). Operations and supply
chain management, 10th ed. John Wiley & Sons.1. Economic Order
Quantity (EOQ).

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 L E S S O N

2
Forecasting Techniques
Dr. Rajat Arora
Assistant Professor
School of Open Learning
Email-Id: rajat.arora@sol.du.ac.in

STRUCTURE
2.1 Learning Objectives
2.2 Introduction
2.3 Significance of Forecasting
2.4 Types of Forecasting
2.5 Errors in Forecasting
2.6 Forecasting in Relation to Services
2.7 Summary
2.8 Answers to In-Text Questions
2.9 Self-Assessment Questions
2.10 References
2.11 Suggested Readings

2.1 Learning Objectives

‹ Define forecasting and explain the significance of forecasting in operations management.
‹ Distinguish between various categories of forecasts (e.g., quantitative versus qualitative).
‹ Discuss prominent qualitative forecasting techniques.
‹ Provide an explanation of quantitative forecasting methods, such as causal models
and time series analysis.
‹ Comprehend the elements of time series data, including seasonality, trend, noise,
and cyclic patterns.
‹ Employ fundamental time series forecasting models, such as exponential smoothing
and moving averages.

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 OPERATIONS MANAGEMENT

Notes ‹ Compute and interpret forecast accuracy metrics, such as the Mean
Absolute Error, Mean Squared Error, and Mean Absolute Percentage
Error.

2.2 Introduction
Expanding upon the fundamental principles outlined in the introduction to
operations management, forecasting methodologies are crucial in connecting
strategic planning with daily operational implementation. Forecasting is the
process of using historical data and analytical techniques to predict future
demand, trends, and behaviours. The ability to forecast future outcomes
is essential for making well-informed decisions in managing inventories,
planning capacity, and coordinating supply chains. Organisations can op-
timize resource allocation, save expenses, and boost customer satisfaction
by making precise predictions about future requirements.
Forecasting is a deliberate strategy that helps firms align their operational
activities with market conditions. It ensures that businesses are prepared
to handle changes in demand and minimize any potential disruptions.
As we examine different forecasting strategies, we will investigate both
qualitative and quantitative methodologies, each providing distinct ben-
efits. By employing time series analysis to study past trends and causal
models to include influencing factors, organisations can effectively predict
and take proactive measures to address future issues and opportunities.
Comprehending and proficiently utilizing these prediction techniques is
crucial for attaining operational efficiency and sustaining a competitive
advantage in the current dynamic business landscape.

2.3 Significance of Forecasting

Following upon the introduction to forecasting techniques, the importance
of forecasting in operations management becomes more evident. Forecasting
is not just a means of anticipating future trends, but also a crucial element
that directly impacts multiple facets of operations. The main purpose of
this is to improve the decision-making processes, enabling organisations
to predict changes in demand and make necessary preparations.
Precise forecasting is crucial in operations management to synchronize
supply and demand, optimize inventory levels, and ensure efficient and

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 Forecasting Techniques

cost-effective production schedules. By utilising forecasting strategies, Notes

firms may prevent the drawbacks of producing too much or too little,
which can result in unnecessary inventory expenses or missed chances
for sales. Efficient prediction aids in the management of lead times and
the synchronisation of procurement plans with projected requirements,
hence reducing instances of inventory depletion and enhancing customer
contentment.
Furthermore, forecasting is of utmost importance in capacity planning
and resource allocation. Through the act of forecasting future demand,
organisations are able to make well-informed decisions regarding the
expansion of production, investment in new technology, or the expansion
of infrastructure. This proactive strategy guarantees the effective utilisa-
tion of resources and the timely resolution of operational bottlenecks to
prevent any negative influence on performance.
Forecasting plays a crucial role in operations management by offering a
proactive viewpoint that guides strategic planning and operational imple-
mentation. By ensuring that operations are sensitive to market dynamics
and consumer needs, it allows organisations to optimise processes, min-
imise costs, and preserve a competitive advantage. As we delve deeper
into the study of forecasting methodologies, it becomes evident that their
successful implementation is crucial for attaining operational excellence
and maintaining long-term success.

2.4 Types of Forecasting

Forecasting, within the field of operations management, is a complex
science that utilizes several techniques to anticipate forthcoming events
and trends. It is imperative to comprehend the various forms of forecast-
ing in order to determine the most suitable approach for an organisation,
taking into account its unique requirements and characteristics. In general,
forecasting methods are classified into two primary categories: qualitative
and quantitative. Qualitative forecasting is particularly advantageous when
dealing with novel situations or when historical data is limited, as it is
predicated on expert judgement, intuition, and market research. Conversely,
quantitative forecasting employs statistical methods and historical data

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Notes to identify patterns and trends, providing a more data-driven approach.

The selection of a particular type of forecasting technique is contingent
upon the nature of the forecast, the level of precision required, and the
availability of data. Each form of forecasting has its own strengths and
limitations. The details of each of these forecasting techniques are given
in the following sub-sections.

2.4.1 Qualitative Forecasting Techniques

Qualitative forecasting approaches refer to methods that rely on sub-
jective judgement, intuition, and understanding of the issue rather than
solely relying on quantitative data to anticipate future events or trends.
These strategies are especially valuable in situations where there is a lack
of historical data or where future conditions are anticipated to deviate
markedly from the past. Below are few frequently employed qualitative
forecasting techniques:
The Delphi Method is a process that entails gathering a group of knowl-
edgeable individuals who provide responses to questions in several it-
erations. Following each round, a concise overview of the responses is
given, allowing experts to modify their answers. This procedure persists
until a unanimous agreement is achieved.
The Nominal Group Technique involves experts generating ideas or
forecasts independently, which are subsequently discussed in a group
context. This strategy facilitates the attainment of a consensus.
Surveys and questionnaires are used to gather the opinions of potential
consumers, clients, or stakeholders in order to assess future demand or
preferences.
Focus groups involve the active participation of small groups of indi-
viduals in talks aimed at gathering insights into their attitudes, beliefs,
and expectations regarding future developments.
Scenario analysis involves the creation and examination of multiple
potential future scenarios, taking into account different assumptions and
uncertainties. This facilitates organisations in anticipating and preparing
for a range of probable outcomes, enabling them to strategize and adapt
accordingly.

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Intuitive forecasting refers to the practice of making predictions based Notes

on the forecaster’s expertise, intuition, and comprehensive knowledge of
the industry or topic area.

2.4.2 Quantitative Forecasting Techniques

Quantitative forecasting techniques employ past data and mathematical
models to anticipate future patterns. These methods usually rely on statis-
tical and numerical analysis, which makes them especially valuable when
there is a substantial amount of historical data available. The commonly
used quantitative forecasting methods are given below:
1. Time Series Analysis
‹ The Simple Moving Average (SMA) determines the average value
of a time series over a defined number of previous periods.
‹ The Weighted Moving Average (WMA) is a method that is similar to
the Simple Moving Average (SMA), but it applies varying weights
to different data points. This means that more recent data points
are given greater priority in the calculation.
‹ The Exponential Smoothing assigns greater significance to recent
observations, resulting in a higher level of responsiveness to fresh
data.
‹ The Autoregressive Integrated Moving Average (ARIMA) model is
a combination of autoregression (AR), differencing (I), and moving
average (MA) components. The method is employed to predict time
series data that does not exhibit significant changes over time, and
it is capable of handling diverse patterns and seasonal variations.

2. Regression Analysis
Linear regression is a basic statistical technique used to model the rela-
tionship between two variables. It assumes a linear relationship between
the dependent variable and one or more independent variables.
A linear regression model is a statistical model that represents the rela-
tionship between a dependent variable and one independent variable by
fitting a straight line. It utilises this linear relationship to forecast future
values. On the other hand, multiple regression model is an extension of

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Notes simple linear regression that incorporates numerous independent variables to

predict the dependent variable. Further, a Polynomial Regression Model is
used to accurately represent non-linear connections between the dependent
and independent variables by fitting a polynomial equation to the data.
3. Exponential Smoothing is a statistical method used to forecast future
values by assigning exponentially decreasing weights to past observations.
Simple Exponential Smoothing (SES) is a technique that applies a
smoothing factor to assign greater importance to recent observations. It
is particularly useful for data that lacks a distinct pattern or seasonality.
Holt’s Linear Model is an extension of the SES model that includes an
additional component to account for trends in the data. It accounts for
both the level and trend in the time series.
Further, the Holt-Winters Model incorporates seasonal components into
Holt’s model, allowing it to effectively analyse data that exhibits both
trends and seasonal patterns. The components comprise of seasonal
smoothing, trend smoothing, and level smoothing.

2.5 Errors in Forecasting

Forecast Error: The forecast error is calculated by subtracting the fore-
casted value from the actual value. Understanding and examining forecast
inaccuracy is vital for evaluating the precision of forecasting models and
enhancing their effectiveness.
The Mean Absolute Error (MAE) is calculated as the sum of the ab-
solute differences between the actual values and the forecasted values,
divided by the total number of observations (n).
Mean Squared Error (MSE) is calculated as taking the mean of the
squared discrepancies between the predicted values and the actual values.
The squaring of the errors results in a greater penalty for larger errors.
Root Mean Squared Error (RMSE)
The square root of the mean squared error is a mathematical measure
that quantifies the average deviation between predicted and actual values.
It quantifies the accuracy of a forecast using the same units as the data.

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 Forecasting Techniques

Mean Absolute Percentage Error (MAPE): Notes

The Mean Absolute Percentage Error (MAPE) is a measure used to assess
the accuracy of a forecast. It is calculated by taking the average of the
absolute differences between the actual values and the forecasted values,
divided by the actual values, and then multiplying by 100.
By analysing the distribution of forecast errors, one can uncover any
patterns or biases in the forecasting model. For instance, if there is a
consistent bias in the forecast, such as continuously over- or under-pre-
diction, it may suggest that the model needs to be adjusted.
Varying sectors or applications may have distinct tolerance thresholds for
forecast inaccuracies. For example, in the field of financial forecasting,
even minor inaccuracies might result in substantial consequences, yet in
the retail industry, a greater degree of forecast inaccuracy may be tolerable.
Through a methodical analysis and comprehension of prediction mistakes,
organisations may enhance their decision-making process, fine-tune their
forecasting techniques, and ultimately enhance their planning and oper-
ational effectiveness.

2.6 Forecasting in Relation to Services

Forecasting is a crucial aspect of operations management for services,
as it enables organisations to anticipate future demand and efficiently
allocate resources. Precise prediction allows service providers to improve
customer satisfaction, control operational expenses, and optimise resource
utilisation. Here is an in-depth examination of how forecasting is utilized
in the context of services within the field of operations management:

1. Significance of Forecasting in Services

Resource Allocation: Accurate predictions provide optimal distribution
of resources, including personnel, machinery, and infrastructure, guaran-
teeing their availability at the required time and location.
Demand Planning: Forecasting aids in anticipating consumer demand for
services, enabling organisations to strategically allocate resources such
as capacity, manpower, and inventory.

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Notes Enhancing customer happiness can be achieved by synchronising service

delivery with consumer demand, resulting in improved service quality
and quicker response times.
Cost Management: Forecasting aids in optimizing operating expenses by
mitigating the risks of overstaffing or understaffing, as well as minimising
the occurrence of excess capacity or shortages.

2. Methods used in Forecasting Services

Multiple regression is a statistical technique that utilises many predictors
to predict or forecast demand. It takes into consideration various aspects
that influence the demand for a particular service.
Econometric Models: Structural Equation Modelling is a statistical tech-
nique used to examine intricate interactions among various variables and
their influence on service demand.
Market research is the collection of data through surveys, focus groups,
and other ways to assess the anticipated demand for future services.
Utilisations of Forecasting in Service Operations
1. Resource Allocation and Optimization
Staffing Levels: Forecasting assists in determining the appropriate
staffing levels needed to manage expected client volumes at various
periods.
Facility Utilisation: Anticipates periods of high demand and modifies
the allocation of resources to avoid excessive crowding or insufficient
utilisation.
2. Preparing Employee Scheduling: Matches work schedules with
predicted demand to guarantee sufficient coverage during busy and
slow periods.
Appointment scheduling for services such as healthcare or consulting
can be optimised by using forecasting techniques. This can aid in
efficiently allocating appointment slots and minimising waiting periods.
3. Management of Service Inventory: Forecasting is essential for
managing stock levels of consumables in services such as restaurants,
to avoid shortages or excessive inventory.
4. Queue Management: Forecasting facilitates the anticipation of client
arrival patterns, allowing for more effective administration of service
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 Forecasting Techniques

queues and minimising wait times. Service Level Agreements ensure Notes
that service levels align with customer expectations by proactively
predicting demand and making necessary resource adjustments.
5. Optimal Methodologies
Consistent Updates: Continuously revise projections with fresh data
and modify models as per need.
Operational Integration: Integrate forecasts with operational planning
processes to ensure efficient implementation.
Collaboration: Interact with different departments (such as marketing
and finance) to integrate a range of viewpoints and enhance the
precision of forecasts.
Through the appropriate utilization of forecasting techniques, service
organisations can optimise their operational efficiency, enhance customer
happiness, and more effectively allocate their resources.
Factors to be considered while Forecasting
Data Quality is a crucial factor in accurate forecasting, as it relies
on the accuracy and comprehensiveness of past data. Inaccurate
forecasts might result from inadequate data quality.
Uncertainty and Variability are common in services, as their demand
can fluctuate due to reasons such as seasonality, economic fluctuations,
or market trends. Forecasting must consider and include this variability.
Customer Behaviour: Alterations in customer preferences and
behaviour can have an impact on demand projections. Ongoing
surveillance and fine-tuning are essential.
IN-TEXT QUESTIONS
1. Which method is classified under qualitative forecasting?
(a) Moving Average (b) Exponential Smoothing
(c) Delphi Method (d) Linear Regression
2. What is the primary objective of the Moving Average forecasting
technique?
(a) Utilise historical data to forecast future values
(b) Eliminate short-term fluctuations and emphasise long-term
trends

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 OPERATIONS MANAGEMENT

Notes (c) Evaluate the influence of external factors on future values

(d) For the purpose of testing, generate random future values
3. What is the smoothing constant (α) used to determine in
exponential smoothing?
(a) The significance of the most recent observation in the
forecast
(b) The aggregate number of periods to be averaged
(c) The extent of the data’s trend
(d) The number of data points utilised in the calculation
4. What is the slope coefficient typically used to represent in
regression analysis?
(a) The change in the dependent variable as a result of a
one-unit change in the independent variable
(b) The regression line’s intercept
(c) The model’s total variance explained
(d) The correlation coefficient between the variables
5. What is a fundamental premise of the ARIMA (Auto Regressive
Integrated Moving Average) model?
(a) The data must be periodically adjusted
(b) The data must be non-stationary
(c) The data must exhibit a linear trend
(d) The data must be stationary
6. Which of the following forecasting methods is most appropriate
for data that has a significant seasonal component?
(a) Holt-Winters Exponential Smoothing
(b) Simple Moving Average
(c) Naive Forecasting
(d) Box-Jenkins ARIMA

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 Forecasting Techniques

Notes
2.7 Summary
In this chapter, we discussed how forecasting techniques play a vital role
in operations management by enabling organisations to anticipate future
trends and make well-informed decisions. The techniques can be rough-
ly classified into qualitative and quantitative methodologies. Qualitative
methodologies, such as expert assessment and market investigation, are
employed in situations when there is a scarcity of past data or when
there is a need to anticipate substantial alterations in forthcoming cir-
cumstances. They depend on subjective insights and expert judgements
to predict demand and trends. On the other hand, quantitative procedures
make use of past data and statistical models to forecast future results.
Time series analysis, which involves the utilisation of moving averages
and ARIMA models, is employed to detect patterns and trends within
past data. Regression analysis is a statistical technique used to model the
relationships between variables in order to predict future values. On the
other hand, exponential smoothing methods are used to alter projections
by taking into account prior data trends and seasonal patterns. Further-
more, it is crucial to comprehend and quantify prediction mistakes, such
as Mean Absolute Error (MAE) and Root Mean Squared Error (RMSE),
in order to assess and enhance forecast precision. Efficient prediction
enables organisations to optimally utilize the resources, improve customer
happiness, and make strategic choices, eventually enhancing operational
efficiency and planning.

2.8 Answers to In-Text Questions

1. (c) Delphi Method
2. (b) Eliminate short-term fluctuations and emphasise long-term trends
3. (a) The significance of the most recent observation in the forecast
4. (a) The change in the dependent variable as a result of a one-unit
change in the independent variable
5. (d) The data must be stationary
6. (b) Simple Moving Average

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 OPERATIONS MANAGEMENT

Notes
2.9 Self-Assessment Questions
1. If the historical data is unavailable or unreliable, which qualitative
forecasting methods are employed? Give examples of how expert
judgement could be employed in this context.
2. Why might the Delphi Method be particularly beneficial for forecasting
complex or ambiguous scenarios, and how does it operate?
3. In which circumstances would quantitative forecasting techniques be
preferred over market research methods, such as surveys and focus
groups?
4. Explain the distinction between weighted moving averages and
simple moving averages. In which circumstances would each be
most suitable?
5. What are the benefits of employing exponential averaging techniques,
such as Holt’s Linear Trend Model, to forecast data that exhibits
seasonality and trends?
6. Compare and contrast simple linear regression with multiple linear
regression.
7. What information does the Mean Absolute Error (MAE) provide
regarding the accuracy of a forecast, and how is it calculated? What
distinguishes MAE from Mean Squared Error (MSE)?
8. What is the importance of Root Mean Squared Error (RMSE) in
the assessment of forecast accuracy? For what reasons might RMSE
be preferred over other error metrics in the following situations?
9. Give an explanation of the concept of Mean Absolute Percentage Error
(MAPE). In what ways does the representation of forecast error as
a percentage contribute to the comprehension of forecast accuracy?
10. What are the methods by which accurate forecasting can enhance
service operations, including capacity planning and scheduling?
11. Examine the significance of integrating operational processes with
forecasting techniques. In what ways can the consistent updating
of forecasts facilitate more informed decision-making?

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Notes
2.10 References
‹ Heizer, J., Render, B., & Munson, C. (2022). Operations Management
(13th ed.). Pearson.
‹ Krajewski, L. J., Malhotra, M. K., & Ritzman, L. P. (2022). Operations
Management: Processes and Supply Chains (12th ed.). Pearson.
‹ Hanke, J. E., & Wichern, D. W. (2014). Business Forecasting (9th
ed.). Pearson.
‹ Armstrong, J. S. (2001). Principles of forecasting: A handbook for
researchers and practitioners. Springer. https://doi.org/10.1007/978-
1-4615-0563-7

2.11 Suggested Readings

‹ Mahadevan, B. (2015). Operations management: Theory and practice.
Pearson Education, India.
‹ Jay, H. and Barry, R. (2017). Operations Management: Sustainability
and Supply Chain Management, 12th ed. Pearson Education India.
‹ Jacobs, F. R., Chase, R. B. & Ravi Shankar. (2018). Operations and
Supply Chain Management, 14th ed. McGraw Hill Education India.
‹ Swarup, K., Gupta, P. K. & Manmohan. (2010). Operations Research,
19th ed. Sultan Chand & Sons.
‹ Kapoor, V. K. (2020). Operations Research: Quantitative Techniques
for Management, 9th ed. Sultan Chand & Sons.
‹ Sharma, J. K. (2017). Operations Research: Theory and Applications,
6th ed. Trinity.
‹ Russell, R. S., & Taylor, B. W. (2019). Operations and supply
chain management, 10th ed. John Wiley & Sons.1. Economic Order
Quantity (EOQ).

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 L E S S O N

3
Inventory Management
Dr. Rajat Arora
Assistant Professor
School of Open Learning
Email-Id: rajat.arora@sol.du.ac.in

STRUCTURE
3.1 Learning Objectives
3.2 Introduction
3.3 Types of Inventories
3.4 Different Costs Associated with Inventory
3.5 Selective Inventory Control Techniques
3.6 Deterministic Inventory Models
3.7 Summary
3.8 Answers to In-Text Questions
3.9 Self-Assessment Questions
3.10 References
3.11 Suggested Readings

3.1 Learning Objectives

‹ Distinguish between different types of inventory, including raw materials, Work-In-
Progress (WIP), and finished goods.
‹ Understand the role and significance of inventory in supply chain and operations
management.
‹ Utilise different inventory management techniques, such as Just-In-Time (JIT),
Economic Order Quantity (EOQ), and ABC analysis.
‹ Calculate the economic order quantity for deterministic inventory control models.
‹ Comprehend the significance of safety stock levels and reorder points in order to
avoid stockouts and maintain seamless operations.

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 Inventory Management

‹ Evaluate the trade-offs between the expenses associated with holding Notes
inventory and the costs incurred due to supply shortages when
determining the appropriate levels of safety stock.

3.2 Introduction
In the preceding chapter, we examined forecasting techniques, investi-
gating different approaches to anticipate future demand with enhanced
precision. Expanding on this basis, the attention now turns to inventory
management, a crucial aspect in operations management that directly
influences the efficiency of these forecasting endeavours. Inventory man-
agement is the process of supervising and regulating the inventory of
items in an organisation. Its goal is to ensure that the appropriate amount
of products is accessible at the correct time to fulfil consumer needs,
while avoiding unnecessary expenses. Effective inventory management is
crucial for maintaining optimal inventory levels, reducing carrying costs,
and preventing stockouts or overstocking. Organisations can boost overall
supply chain efficiency by combining forecasting data with inventory
control techniques, which allows them to optimise their inventory and
streamline processes. This chapter will examine fundamental principles,
methodologies, and approaches in inventory management, utilising the
previously established forecasting principles to construct a smooth and
economical inventory system.

3.3 Types of Inventories

A comprehensive grasp of the various categories of inventory is essential
for efficient management and optimisation in inventory control. Below is
an in-depth examination of the many categories of inventory, accompanied
by illustrative examples:
1. Raw Materials: These refer to fundamental substances utilised in
the manufacturing of final products. They are obtained before to the
start of the production process. Examples include raw materials for
a furniture producer encompass wood, fabric, and metal components.
In the context of a bakery, the raw materials typically consist of
flour, sugar, and eggs.

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Notes 2. Work-In-Progress (WIP): WIP inventory comprises of partially

completed commodities that are still in the process of being produced.
This inventory is at different phases of the production process.

In the context of an automotive assembly facility, Work-In-Progress
(WIP) inventory refers to cars that have been partially constructed and
have certain components installed, but are not yet fully completed.
Within a textile manufacturing facility, Work-In-Progress (WIP) may
encompass unprocessed fabric rolls that have undergone dyeing
but have not yet undergone the cutting and sewing processes to be
transformed into garments.
3. Finished Goods: Finished goods refer to the items that have undergone
the entire manufacturing process and are now prepared for sale to
clients. For example, within a consumer electronics corporation,
the term “finished goods” refers to products such as smartphones,
laptops, and headphones that have completed the manufacturing
process and are now prepared for sale at retail outlets. Within a
clothing establishment, finished products refer to the completed
articles of clothing such as shirts, dresses, and jeans that are prepared
for sale.
Maintenance, Repair, and Operations (MRO) Inventory comprises of
things necessary for the upkeep and repair of machinery and equipment,
as well as supplies essential for supporting the manufacturing process.
For example, in the context of a manufacturing plant, the MRO inventory
encompasses lubricants, cleaning supplies, spare parts for machinery, and
tools. In a typical office environment, essential products such as printer
cartridges, cleaning agents, and office supplies constitute MRO inventory.
Transit inventory refers to the inventory that is currently being transferred
from one location to another. It denotes merchandise that is in transit
between the supplier and the manufacturer, or between the manufacturer
and the retailer. Transit inventory refers to products that are in the process
of being transported from a warehouse to a retail store, or raw materials
that are being delivered from a supplier to a production plant.
Cycle stock refers to the inventory that is specifically allocated to
meet the regular demand of customers within a specific timeframe. It
is restocked by frequent orders. Cycle stock refers to the inventory of

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common products such as milk, bread, and eggs in a grocery shop. For Notes
an e-commerce retailer, cycle stock refers to the inventory of popular
consumer electronics or fashion items that are regularly sold.
Safety stock refers to an extra amount of inventory that is kept to protect
against uncertainties in demand or supply, such as delays in procurement
or sudden increases in demand. Illustrations include: To mitigate potential
shortages caused by disruptions in the supply chain, a pharmaceutical
business may maintain surplus inventory of essential pharmaceuticals.
During periods of high sales, an electronics merchant may choose to
keep additional inventory, known as safety stock, for popular items such
as cellphones.
Anticipation inventory refers to the stock of goods that is held in prepa-
ration for expected future increases in demand or imminent events that
may lead to a sudden rise in demand. For instance, a toy maker may
accumulate stock in advance of the Christmas season in order to fulfil
expected increased demand. In a similar vein, a clothing retailer may
opt to augment their stock of summer apparel in advance just before
beginning of the season.
Decoupling inventory is maintained to create a separation between sev-
eral stages of production, enabling each stage to function autonomously
without being dependent on the completion of the preceding stage. For
example: In a production line where one machine handles components and
another puts them together, separating inventories enables uninterrupted
operation even if one element of the process is momentarily stopped.
Comprehending these inventory categories enables organisations to effi-
ciently control their stock, guaranteeing they can fulfil client needs while
reducing expenses related to inventory holding and storage.

3.4 Different Costs Associated with Inventory

1. Inventory Carrying Cost or Holding Cost
Carrying costs refer to the expenditures associated with the storage and
upkeep of inventories. The following components constitute the holding cost:
‹ Storage Costs: Expenses associated with the storage of goods,
including fees for renting warehouse space, utility bills, and the

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Notes upkeep of the property. For instance, a corporation may remunerate

monthly lease expenses for a warehouse facility utilised for inventory
storage.
Insurance Costs refer to the amount of money spent as premiums
to protect inventory against potential hazards such as theft, fire, or
damage. This guarantees the preservation of the monetary worth of
inventory.
‹ Spoilage and Obsolescence Costs: These costs result from inventory
that becomes unsellable owing to expiration, damage, or technical
advancements. For example, perishable items may deteriorate,
resulting in financial losses.
Opportunity costs refer to the capital that is used to hold invento-
ries, which could have been invested in other ventures to potentially
generate profits. For instance, the funds allocated towards main-
taining surplus inventory may have been utilised for capitalising
on expansion projects or generating interest.
‹ Handling Costs: The costs incurred for the movement of inventory
inside the warehouse, which include expenses related to labour and
equipment. This may entail expenses for the employment of labour
for stocking purposes, and the maintenance of equipment.
2. Ordering Cost/Set-up Cost
‹ Ordering costs refer to the expenses that arise from the process
of placing and receiving orders for inventory. The following items
are included:
‹ Purchase Order Processing Costs: Expenses related to the
creation, processing, and administration of purchase orders. This
could also entail the allocation of administrative resources and
the utilisation of order processing systems.
‹ Receiving Costs: Expenses associated with the examination and
acceptance of inventory, encompassing labour costs for verifying
incoming shipments, conducting quality control measures, and
performing administrative duties.

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‹ Transportation Costs refer to the expenditures incurred in the Notes

process of shipping and delivering merchandise from suppliers to
the warehouse. This encompasses expenses such as transportation
charges, shipment fees, and operational expenditures related to the
management of goods.
Order set-up costs refer to the expenses associated with the preparation
and execution of an order. These costs include administrative
overheads and any necessary adjustments to the inventory system.
3. Costs Incurred Due to Stockouts
Stockout costs arise when inventory levels are inadequate to satisfy de-
mand. The following components are included:
‹ Lost Sales: The amount of money that is not earned because the
company is unable to meet consumer demands and satisfy their
orders. For example, in the event that a merchant exhausts their
stock of a highly sought-after item, they could experience a decline
in sales and potentially jeopardise client loyalty.
‹ Back Order Cost: When goods are not available, clients are
asked to come again in near future to purchase the goods. This
leads to client dissatisfaction. Client dissatisfaction refers to the
negative effect on client satisfaction and the potential loss of future
business, resulting in associated costs. Unsatisfied clients may seek
out alternative options, which can have a negative impact on the
company’s long-term income.
‹ Expedited Shipping Costs refer to the extra expenses that arise
when orders need to be rushed from suppliers in order to swiftly
replace inventories. For instance, one might choose to pay for
expedited shipping in order to prevent a situation where a product
is out of stock.
4. Acquisition Expenses
Acquisition costs refer to the expenses incurred when obtaining inventory.
The items encompass:
‹ Cost of Products Purchased: The explicit expense incurred in
procuring inventories from suppliers, encompassing the actual cost
of the products.

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Notes ‹ Order Quantity Discounts: Possible cost reductions achieved through

purchasing large quantities or entering into long-term agreements.
For instance, purchasing larger numbers may lower the cost per
unit but raise the expenses associated with keeping the inventory.
5. Expenses Related to Managing Inventory
These expenses are associated with the management and regulation of
inventory. The following components are included:
‹ Inventory Management System Costs: Expenses associated with
the acquisition, deployment, and upkeep of software and systems
utilised for monitoring and controlling inventory levels.
‹ Labour Costs: Expenditures associated with the personnel engaged
in the administration of inventory, including warehouse personnel
and supply chain managers.
‹ Training Costs: Expenses associated with providing instruction and
education to personnel regarding inventory management systems
and practices. This guarantees optimal functionality and minimises
mistakes.
6. Costs Associated with Obsolescence
Obsolescence expense arise when inventory becomes obsolete or ceases
to be in demand. These include:
‹ Depreciation: It refers to the decline in the value of inventory as a
result of technological advancements or shifts in market preferences.
For example, electronic devices may rapidly become outdated.
‹ Discounting Costs: These are the expenses incurred while reducing
prices to sell off obsolete inventory. This may entail reducing the
prices of commodities in order to create space for newer ones.

3.5 Selective Inventory Control Techniques

Selective inventory control entails the prioritisation and management of
inventory based on its significance and impact on the business. Organ-
isations can enhance their inventory management by prioritising their
efforts on the most crucial things, hence optimising resources. Below
are few fundamental strategies employed in selective inventory control:

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1. ABC Analysis refers to a method of categorising items or activities Notes

based on their importance or value. It refers to ‘Always better control’.
ABC Analysis is a widely used technique for selectively controlling in-
ventory. The inventory is classified into three groups based on its annual
consumption value/annual usage value(obtained by multiplying price per
unit and demand of an item.
‹ A Items: Valuable things that are sold infrequently. These products
necessitate stringent monitoring and regular evaluation due to their
substantial influence on overall inventory expenses. For instance,
the top-tier models of a luxury watch company are classified as A
items. 10-15% of the number of items accounting for 75% of the
annual usage value constitute A class items.
‹ B Items: Items of moderate worth that are sold with a regular
frequency. These items are of lower importance than A items but
nevertheless necessitate regular monitoring. For instance, electronic
devices such as tablet computers that are priced in the middle
range may be classified inside this particular category. 15-30% of
the number of items accounting for 15% of the annual usage value
constitute B class items.
‹ C Items: Items that have a low monetary worth yet are sold
frequently. These elements are of lesser importance and can be
handled using less complex control mechanisms. Office supplies
including pens and notepads are classified as C goods. 70% of the
number of items accounting for 10% of the annual usage value
constitute C class items.
Advantages:
‹ Allocates resources towards optimising the management of high-
value goods.
‹ Assists in prioritising inventory control initiatives and minimising
carrying expenses.
2. Vital, Essential and Desirable (VED) Analysis
The VED Analysis categorises inventory according to its level of impor-
tance in relation to operations.

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Notes ‹ Vital (V): Items that are crucial for manufacturing or operations,
and shortages of which can bring the process to a halt. For instance,
an essential element in a manufacturing facility.
‹ Essential (E): Items that are crucial for operations but not absolutely
necessary; a lack of these items can create discomfort but will
not completely stop production. As an illustration, consider basic
replacement components.
‹ Desirable (D): Items that are optional and enhance operations but
are not essential for fundamental functions. For instance, high-end
or discretionary accessories.
Advantages:
‹ Aids in identifying crucial inventory items that necessitate enhanced
control and management.
‹ Ensures the constant availability of essential items to prevent any
interruptions in operations.
3. Fast, Slow and Non-moving Items (FSN) Analysis
FSN Analysis classifies inventory according to its frequency of movement:
‹ Fast-moving (F): Items that are sold and restocked rapidly. For
instance, fast-moving consumer goods (FMCG) such as bottled water.
‹ Slow-moving (S): Items that have a lower pace of sales and are
less frequently in demand. For instance, decorations that are specific
to a certain season.
‹ Non-moving (N): Items that have remained unsold or unused for an
extended period of time. For instance, products that are no longer
in use or have reached their expiration date.
Advantages:
‹ Assists in inventory management by prioritising fast-moving items.
‹ Facilitates the identification and resolution of slow-moving and
non-moving material to minimise surplus inventory.
4. High, Medium, Low (HML) Analysis
The HML Analysis categorises inventory according to its cost:
‹ High-priced (H): Items having the highest cost per unit. For instance,
machinery that is specifically designed for a certain purpose or
sophisticated technological devices of superior quality.

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‹ Medium-cost (M): Items that have a modest price per unit. For Notes
instance, typical office machinery.
‹ Low-cost (L): Items with the most economical price per unit. For
instance, common office supplies.
Advantages:
‹ Inventory control is prioritised depending on its cost impact.
‹ Assists in directing resources towards efficiently managing high-
cost goods to decrease total expenditures.
5. Analysis of XYZ
The XYZ Analysis classifies inventory according to its closing inventory
value.
‹ X Items: High closing inventory value
‹ Y Items: Moderate closing inventory value
‹ Z Items: Low closing inventory value
Advantages:
‹ Assists in modifying inventory strategy according to fluctuations
in demand.
‹ Facilitates more effective strategic planning and prediction for
products with uncertain demand.
6. Just-In-Time (JIT) Inventory refers to a system where inventory is
acquired and used precisely when it is needed, minimising the amount
of excess inventory being held.
Just-In-Time (JIT) is a methodology that seeks to minimise inventory
levels by placing orders and receiving items only when they are required
in the production process:
‹ Objective: Optimise inventory management by closely working with
suppliers and production schedules, aiming to minimise carrying
costs and waste.
‹ Implementation: Relies on robust supplier partnerships and streamlined
logistics. Automotive manufacturers frequently employ Just-In-
Time (JIT) methodology to synchronise the delivery of parts with
production schedules.

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Notes Advantages:
‹ Minimizes expenses associated with inventory holding and storage
space.
‹ Improves productivity and minimises inefficiency.
Concluding above, organisations utilise several selective inventory control
approaches such as ABC Analysis, VED Analysis, FSN Analysis, HML
Analysis, XYZ Analysis, and Just-In-Time (JIT) to concentrate their in-
ventory management efforts on the most crucial items. By implementing
these strategies, firms can maximise their inventory levels, minimise
expenses, and enhance overall operational efficiency.
Below is a tabular comparison of the inventory control techniques:

Basis of
Technique Classification Categories Focus Benefits Example
ABC Anal- Value and im- A (High- Focus on Prioritizes Luxury
ysis pact value, low managing resources watches (A)
frequency) high-value for high-im- Mid-range
B (Moder- items pact items electronics
ate-value, closely Reduces (B)
moderate carrying Office sup-
frequency) costs plies (C)
C (Low-
value, high
frequency)
VED Anal- Criticality to Vital (Es- Emphasiz- Ensures Critical
ysis operations sential for es control availability components
operations) based on of crucial (Vital)
operational items
criticality
Essential Prevents Standard
(Important operational parts (Es-
but not crit- disruptions sential)
ical) Accessories
Desirable (Desirable)
(Nice to
have)

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Basis of Notes
Technique Classification Categories Focus Benefits Example
FSN Anal- Movement Fast-moving Manages Helps in FMCG
ysis frequency (High sales inventory inventory (Fast-mov-
frequency) based on turnover ing)
Slow-mov- sales fre- Identifies Season-
ing (Low quency slow-mov- al items
sales fre- ing and (Slow-mov-
quency) non-moving ing)
Non-moving stock Obso-
(No sales) lete items
(Non-mov-
ing)
HML Cost per unit High-cost Focuses on Prioritizes Specialized
Analysis (Expensive) cost impact management machinery
Medi- of inventory of high-cost (High-cost)
um-cost items Office
(Moderately Reduces equipment
priced) overall ex- (Medi-
Low-cost penses um-cost)
(Inexpen- Stationery
sive) (Low-cost)
XYZ Anal- Closing In- X (High Adjusts Helps to re- Imported
ysis ventory values closing in- inventory duce capital goods (X)
ventory) strategy investments fashion
Y (Moder- based on in high val- items (Y)
ate closing tied up cap- ue items
ital New prod-
inventory) ucts (Z)
Z (Low
closing in-
ventory)
Just-In- Timing of in- N/A (Fo- Minimizes Reduces Automotive
Time (JIT) ventory orders cuses on inventory carrying parts (JIT)
reducing levels by costs
inventory ordering as Enhances
levels) needed efficiency
Reduces
waste

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Notes Every technique has distinct advantages and is appropriate for various
areas of inventory management, based on the specific requirements and
objectives of the organisation.

3.6 Deterministic Inventory Models

Deterministic inventory models are mathematical methodologies employed
to effectively control inventory by assuming that all characteristics, in-
cluding demand, lead time, and costs, are known with absolute certainty
and remain constant. These models are specifically created to assist firms
in determining the most efficient inventory strategies that will minimise
costs and enhance overall efficiency. Below are few frequently employed
deterministic inventory models.
Deterministic inventory models offer systematic approaches to inventory
management by assuming certainty in crucial parameters. Every model
possesses distinct assumptions, uses, and advantages.
The selection of the appropriate model depends on the characteristics of
the inventory system.

3.6.1 Basic EOQ Model

1. Economic Order Quantity (EOQ) Model
Objective: To identify the most efficient order quantity that minimises
the overall inventory expenses, encompassing both ordering costs and
holding costs.
Assumptions: This model is based on the following assumptions:
1. Demand is known and uniform.
2. Shortages are not permitted.
3. Supply is instantaneous.
4. Lead time is zero.
The following notations will be used:
‹ Demand (D): The quantity of item needed for a particular timeframe.
‹ Ordering Cost/Set up Cost(S): The expense linked to initiating
an order.

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‹ Holding Cost (H): The expense incurred for storing one unit of Notes
goods for a specific time period.
‹ Order Quantity (Q): The specific amount to be ordered on each
occasion.
The formula for the Economic Order Quantity (EOQ) is given by EOQ =
√(2DS/H), Where, D represents the demand rate, S represents the setup
cost per order, and H represents the holding cost per unit per year.
Example: To compute the Economic Order Quantity (EOQ) for a company
that needs 10,000 units per year, with an ordering cost of $100 per order
and a holding cost of $2 per unit per year, the following formula is used:
The Economic Order Quantity (EOQ) can be calculated using the formula
EOQ = √(2DS/H)
EOQ = 2 × 10,000 × 1002, which results in 1,000,000.
EOQ = √(2 × 10,000 × 100 ÷ 2) = √1,000,000 = 1,000 units.
Advantages
‹ Optimizes the trade-off between ordering costs and holding expenses.
‹ Simple to execute and comprehend.
Constraints:
‹ Assumes that the demand and lead time remain constant.
‹ May not consider the impact of quantity discounts or changes in
demand.
Reorder Point (ROP) and Reorder Level (ROL)
Reorder Point (ROP): It is the optimal inventory threshold at which a
fresh order should be initiated in order to restock before depletion occurs.
Essential Elements:
‹ Demand Rate (D): The rate at which inventory is used or depleted.
‹ Lead Time (L): The duration between the placement of an order
and its receipt.
‹ The Reorder level (ROL) is the specific inventory level that
signals the need to initiate a reorder. It is the quantity in hand at
the time of placing the order. The formula for ROL is calculated
by multiplying the demand (D) by the lead time (L).

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Notes Example: Given a daily demand of 50 units and a lead time of 10 days,
the Reorder Point (ROP) can be calculated as follows:
The result of multiplying 50 by 10 is 500 units.
Advantages:
‹ Aids in avoiding inventory shortages.
‹ Easy to compute and execute.
Constraints:
‹ Assumes a consistent and unchanging level of demand and lead
time. It does not account for fluctuations in demand or the time it
takes to fulfil an order.

3.6.2 Model with Finite Replenishment

Purpose: To ascertain the most efficient manufacturing lot size that min-
imises the overall cost of production and inventories, taking into account
simultaneous production and consumption.
Assumptions: This model is based on the following assumptions:
1. Demand is known and uniform.
2. Shortages are not permitted.
3. Supply is finite.
4. Lead time is zero.
The following notations will be used:
‹ Production Rate (P): The speed at which inventory is manufactured
or created.
‹ Demand Rate (D): The rate at which inventory is consumed.
‹ Ordering Cost (S): The expense associated with initiating manufacturing.
‹ Holding Cost (H): The expense incurred for keeping one unit of
inventory during a specific time period.
The formula for EPQ is given by EPQ = √(2DS/H × P/(P - D)).
Example: Assume that Annual demand (D): 12,000 units, Production
rate (P): 1,200 units per week, Setup cost (S): $100 per setup, Holding
cost per unit per year (H): $1.50, Production time per lot (T): 3 weeks,
determine the economic production quantity that minimizes the total cost.

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Solution: The demand and production rate should be in the same units. Notes
Given the production rate is per week, convert the annual demand to
weekly demand:
Annual Demand = 12,000 units/year
As there are 52 weeks/year, Weekly demand =12000/52≈231 units/week
The EPQ formula =√(2DS/H × P/(P - D)).
Substituting the values given, we get EPQ = 1408 units
Advantages:
‹ Accounts for the concurrent occurrence of production and consumption.
‹ Valuable in industrial environments.

3.6.3 Model with Shortages (Back-order)

When working with inventory models that allow for infinite replenish-
ment but also account for the potential for shortages, the objective is
to effectively control both the expenses of maintaining inventory and
the expenses related to stockouts. These models are generally created to
achieve a balance between inventory levels and minimise overall costs,
which includes the costs associated with shortages. Below are several
essential models that account for shortages:
Economic Order Quantity (EOQ) Model with Backordering
Objective: To identify the most efficient order quantity that minimises
the overall inventory expenses, encompassing both holding costs and
backordering costs. This model implies that replenishment occurs imme-
diately, although it accommodates for instances where there is a shortage
and backordering is necessary.
This Model is based on the following Assumptions:
1. Demand is known and uniform.
2. Shortages are allowed.
3. Supply is instantaneous.
4. Lead time is zero.

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Notes The formula for the EOQ with backordering is:

2DS B
Q*
= ×
H H +B

Where:
D = Annual Demand
S = Order Cost
H = Holding Cost Per Unit Per Year
B = backordering Cost Pet Unit Per Year
Example:
Given the following:
‹ Annual Demand (D): 20,000 units
‹ Order Cost (S): $100 per order
‹ Holding Cost Per Unit Per Year (H): $2
‹ Backordering Cost Per Unit Per Year (B): $5.
Find the optimal order quantity (Q) that minimizes the total cost.
Substituting the values in the given formula,
2DS B
Q*
= ×
H H +B

we obtain, EOQ = 1195 units

Advantages:
‹ Optimizes the trade-off between the expenses of retaining inventory
and the costs of backordering.
‹ Offers a pragmatic approach to inventory management that accounts
for potential shortages.
Constraints:
‹ Assumes a consistent and unchanging level of demand and lead time.
‹ Necessitates precise calculation of costs associated with backorders.

3.6.4 Price Break Quantity Discounts Model

The Price Break Quantity discounts Model is utilised in inventory man-
agement to ascertain the most advantageous order quantity in situations

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when price reductions are offered for purchasing larger quantities. This Notes
approach assists organisations in determining the optimal order quantity
to maximise the benefits of bulk purchase discounts while minimising the
overall cost, which encompasses the expenses associated with purchasing,
ordering, and maintaining inventory.
The terminology used is explained below:
1. Price Breaks: Suppliers give volume discounts, which means that
the price per unit falls as the quantity of the order rises. Distinct
price tiers are applicable to varying order quantities.
Example of Price Tiers: For quantities ranging from 0 to 99 units,
the price is $10 per unit.
For quantities ranging from 100 to 499 units, the price is $9 per
unit.
For quantities over 500 units, the price is $8 per unit.
Here, price breaks are quantity =100 units and quantity = 500 units.
2. Breakdown of Total Costs:
Purchase Cost: The expense incurred when acquiring inventory,
which fluctuates based on the different price break thresholds.
Ordering Cost refers to the expenses incurred when placing and
receiving orders.
Holding Cost: The expense associated with keeping inventory in
storage.
Order Quantity (Q): The quantity of inventory that has to be ordered.
The price tiers vary depending on the order size.
Price breaks refer to the specific price points at which discounts are
implemented.
The solution to quantity discounts model is obtained in the following steps:
Step 1: Determine the specific quantity ranges at which different prices
are applicable, known as price break points.
Step 2: Determine the total cost for each price level starting from the
lowest price, till we get the optimal quantity in feasible range.

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Notes The formula for calculating the total cost is as follows:

The formula to calculate TC is given by the expression (P × Q) + (QD
× S) + (2Q × H), Where:
P stands for Price per unit, Q refers to the quantity of items that are
being ordered, D represents the yearly demand, S represents the expense
associated with placing an order, and H represents the cost of holding
each unit each year.
Calculate the most efficient quantity to order.
Compare the overall expenses associated with various price levels and
price breaks.
Select the quantity that provides the lowest overall cost.
This technique is very advantageous for organisations that can gain advan-
tages from bulk discounts but require to accurately manage the expenses
related to acquiring and maintaining inventory.

IN-TEXT QUESTIONS
1. What is the primary purpose of inventory management?
(a) To minimize the number of products in stock
(b) To balance inventory levels to meet customer demand
while minimizing costs
(c) To maximize the space used in the warehouse
(d) To ensure that products are always in stock
2. Which inventory model assumes that demand and lead time are
constant?
(a) Economic Order Quantity (EOQ)
(b) Just-In-Time (JIT)
(c) Reorder Point (ROP)
(d) Economic Production Quantity (EPQ)
3. In the EOQ model, what is the effect of increasing the order
cost (S) on the optimal order quantity (Q)?
(a) Increases the optimal order quantity
(b) Decreases the optimal order quantity

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(c) No effect on the optimal order quantity Notes

(d) Increases the holding cost

4. Which of the following is a key advantage of the Just-In-Time
(JIT) inventory system?
(a) Reduces the risk of stockouts
(b) Minimizes inventory holding costs
(c) Increases order quantities
(d) Ensures excess inventory is always available
5. The Reorder Point (ROP) is calculated based on which of the
following factors?
(a) Economic Order Quantity (EOQ)
(b) Lead time demand
(c) Holding cost per unit
(d) Order cost per unit
6. Which inventory cost is incurred when there is a shortage of
inventory and customers are not able to purchase the product
immediately?
(a) Holding cost
(b) Ordering cost
(c) Shortage cost
(d) Setup cost
7. In a model with price breaks, what is the primary consideration
when determining the optimal order quantity?
(a) The discount rate for bulk purchases
(b) The holding cost per unit
(c) The lead time for delivery
(d) The number of items in the inventory

3.7 Summary
Inventory management plays a critical role in operations management by
supervising the flow of goods and materials within an organization to

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Notes ensure that inventory levels are optimized to meet customer demand while
minimizing associated costs. Effective inventory management involves
balancing various types of inventory, including raw materials, Work-In-
Progress (WIP), finished goods, and Maintenance, Repair, and Operating
(MRO) supplies. Each type requires distinct management strategies to
ensure smooth production and customer satisfaction.
Key costs associated with inventory management include holding costs,
ordering costs, stockout costs, and carrying costs. Holding costs en-
compass expenses related to storing inventory, such as warehousing and
insurance. Ordering costs involve the costs of placing and receiving
orders, including administrative and transportation expenses. Stockout
costs arise from running out of stock, leading to lost sales and customer
dissatisfaction, while carrying costs include the total cost of maintaining
inventory, which also involves opportunity costs. Several models are used
to manage inventory effectively. The Economic Order Quantity (EOQ)
model helps determine the optimal order quantity that minimizes the total
cost of ordering and holding inventory, assuming constant demand and
instantaneous replenishment. The Economic Production Quantity (EPQ)
model optimizes production lot sizes when production and consumption
occur simultaneously.
When dealing with price breaks and discounts, the Price Break Quantity
Discounts Model helps determine the most cost-effective order quantity by
comparing total costs across different price levels. This model considers
the impact of discounts on bulk purchasing.
For inventory models that account for shortages, the EOQ with Back-
ordering model integrates the cost of backorders into the EOQ formula to
minimize total costs. The Continuous Review Model with Backordering
manages inventory while allowing for stockouts, balancing ordering and
holding costs with the cost of backorders.

3.8 Answers to In-Text Questions

1. (b) To balance inventory levels to meet customer demand while
minimizing costs
2. (a) Economic Order Quantity (EOQ)
3. (a) Increases the optimal order quantity

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Notes
4. (b) Minimizes inventory holding costs
5. (b) Lead time demand
6. (c) Shortage cost
7. (a) The discount rate for bulk purchases

3.9 Self-Assessment Questions

1. What distinguishes carrying costs from ordering costs in inventory
management?
2. What is the mechanism behind the Price Break Quantity Discounts
Model?
3. What is the Economic Order Quantity (EOQ) model? State its
assumptions.

3.10 References
‹ Heizer, J., Render, B., & Munson, C. (2021). Principles of operations
management: Sustainability and supply chain management (11th
ed.). Pearson.
‹ Stevenson, W. J. (2022). Operations management (14th ed.). McGraw
Hill Education.
‹ Toomey, J. W. (2008). Inventory control and management (3rd ed.).
Wiley.

3.11 Suggested Readings

‹ Mahadevan, B. (2015). Operations management: Theory and practice.
Pearson Education India.
‹ Jay, H. and Barry, R. (2017). Operations Management: Sustainability
and Supply Chain Management, 12th ed. Pearson Education India.
‹ Jacobs, F. R., Chase, R. B. & Ravi Shankar. (2018). Operations and
Supply Chain Management, 14th ed. McGraw Hill Education India.

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Notes ‹ Swarup, K., Gupta, P. K. & Manmohan. (2010). Operations Research,

19th ed. Sultan Chand & Sons.
‹ Kapoor, V. K. (2020). Operations Research: Quantitative Techniques
for Management, 9th ed. Sultan Chand & Sons.
‹ Sharma, J. K. (2017). Operations Research: Theory and Applications,
6th ed. Trinity.
‹ Russell, R. S., & Taylor, B. W. (2019). Operations and supply chain
management, 10th ed. John Wiley & Sons.

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 L E S S O N

4
Process Selection and
Scheduling Techniques
Dr. Rajat Arora
Assistant Professor
School of Open Learning
Email-Id: rajat.arora@sol.du.ac.in

STRUCTURE
4.1 Learning Objectives
4.2 Introduction
4.3 Process Selection
4.4 Characteristics Influencing Choice of Processes (Volume and Variety)
4.5 Types of Processes
4.6 Scheduling
4.7 Summary
4.8 Answers to In-Text Questions
4.9 Self-Assessment Questions
4.10 References
4.11 Suggested Readings

4.1 Learning Objectives

‹ Distinguish between several types of processes, including job shops, batch production,
assembly lines, and continuous processes.
‹ Evaluate the attributes of each process category, encompassing their adaptability,
manufacturing capacity, and time required.
‹ Match the suitable process with various types of products according to parameters
such as customisation, volume, and production complexity.

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Notes ‹ Assess the capacity needs of various processes and analyse their
influence on production efficiency.
‹ Acquire an understanding of the objectives of scheduling, which
encompass reducing the time required for completion, maximising
the utilisation of resources, and adhering to deadlines.
‹ Utilize diverse scheduling techniques, including Gantt charts, Critical
Path Method (CPM), Program Evaluation and Review Technique
(PERT).
‹ Employ appropriate techniques and tools to resolve scheduling
challenges, including job prioritisation, resource allocation, and
time constraints.

4.2 Introduction
Expanding on the fundamental principles of inventory management, which
centre around maintaining the most efficient stock levels and guarantee-
ing product availability, we now shift our focus to “Process Selection
and Scheduling Techniques” in operations management. This section
explores the crucial choices and techniques necessary to efficiently plan
and implement manufacturing operations. Inventory management assures
the availability of resources, while process selection and scheduling
procedures enable their effective utilisation to achieve production goals.
Process selection is identifying the optimal manufacturing or service
delivery approach, taking into account variables such as product char-
acteristics, production quantity, and customisation needs. This can en-
compass a wide spectrum of manufacturing environments, ranging from
adaptable job shops that are well-suited for individual customised orders
to streamlined assembly lines specifically engineered for large-scale pro-
duction of standardised goods. Selecting the appropriate procedure is of
utmost importance, as it directly influences the efficiency of production,
expenses, and the capacity to fulfil consumer requirements.
After selecting a process, scheduling strategies are used to effectively
control the timing and allocation of resources during the production cycle.
Efficient scheduling guarantees the appropriate distribution of resourc-
es, adherence to production schedule, and minimisation of bottlenecks.
Methods such as Gantt charts, Critical Path Method (CPM), and Project

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Evaluation and Review Technique (PERT) are used to organise and man- Notes
age production schedules. These methods take into account aspects such
as work priority, resource availability, and project deadlines in order to
achieve a balanced schedule.
Process selection and scheduling approaches play a crucial role in con-
necting inventory management and production execution. They establish
and implement appropriate procedures to properly manage inventory and
coordinate production schedules to match inventory levels, thereby max-
imising operational performance and improving the capacity to promptly
meet market demands.

4.3 Process Selection

Process selection in operations management is the strategic decision-mak-
ing process of selecting the most suitable way for manufacturing things
or providing services. This decision is crucial as it directly affects the
effectiveness, expenses, excellence, and adaptability of production, hence
directly effecting an organization’s capacity to meet market needs and
gain competitive edge. Here is a more comprehensive exploration of the
components involved in process selection:

1. Process Categories
Job Shop: Appropriate for customized small-scale manufacturing. Processes
exhibit a high degree of adaptability, but generally entail more expenses
and longer durations. Examples encompass specialised machine shops.
Batch Production is a suitable method for manufacturing moderate quan-
tities of products that share similar attributes. This strategy achieves a
harmonious combination of adaptability and productivity, commonly em-
ployed in sectors such as food manufacturing or medicines. An assembly
line is specifically created for the purpose of efficiently producing large
quantities of standardised products. It provides a high level of efficiency
and a low cost per unit, yet it lacks flexibility. Some examples are the
manufacturing of automobiles or consumer gadgets.
Continuous Flow: Employed in situations of exceptionally high production
volumes, where items are standardised and manufactured continuously
without interruption. This approach is characterised by its great efficiency
and is commonly employed in industries such as chemicals or oil refining.
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Notes 2. Determinants of Process Selection

Product characteristics, including the type of product, its complexity,
and volume requirements, play a crucial role in determining the appro-
priate manufacturing method. Highly customised products may necessitate
a job shop approach, whereas standardised products such as automobiles
are advantageous for an assembly line.
High-volume production is best suited for continuous flow or assembly
line processes, while low-volume production is better suited for job shop
or batch manufacturing.
Products that require frequent changes or customisation benefit from
flexible processes such as workshops, whereas processes with stable
product designs benefit from more streamlined procedures.
Cost Considerations: Various processes include different expenses as-
sociated with equipment, workforce, and materials. The objective is to
balance these expenses with the advantages of effectiveness and product
excellence.
3. Alignment of Strategic Objectives
The selection of processes should be in accordance with the overall
business strategy and objectives. For example, a company that desires
quick and tailored service may choose to prioritise a job shop method,
whereas a company that emphasises cost leadership and efficiency may
opt for an assembly line or continuous flow process.
Selecting the appropriate procedure involves considering not just imme-
diate requirements but also future expansion and flexibility. Companies
should evaluate the scalability and adaptability of their selected process
to effectively accommodate future changes in product lines, technological
improvements, and market conditions.

4.4 Characteristics Influencing Choice of Processes (Volume

and Variety)
Volume and variety are key qualities in operations management that
greatly impact process selection. These attributes dictate the optimal
manufacturing techniques and influence overall effectiveness, expense,

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and adaptability. Here is a comprehensive analysis of how volume and Notes

variety impact the selection of processes:
1. Volume: Volume is the measure of the quantity of products or services
that are produced within a specific time frame. It has a pivotal function
in determining which method to implement. The classification based on
volume is characterised as follows:
High Volume:
Process Type: Continuous Flow or Assembly Line
Characteristics: Processes tailored for large-scale production are opti-
mised for maximum efficiency and cost-effectiveness. These processes
are frequently automated and consist of standardised activities to optimise
productivity and minimise the cost per unit.
Advantages: The benefits include a low cost per unit, excellent efficiency,
and a consistent level of product quality. Well-suited for products that
have consistent demand and low fluctuations.
Examples of industries include automotive manufacturing, consumer
electronics, and large-scale food production.
Low to Moderate Volume:
Process Type: Batch Production
Characteristics: Batch production is appropriate for moderate quantities
and offers a certain level of adaptability. The process entails manufactur-
ing a predetermined quantity of units in each batch before transitioning
to a different product.
Advantages: Achieves an equilibrium between efficiency and adaptabil-
ity, enabling periodic modifications in production without significant
disruptions.
Examples of industries include pharmaceuticals, textile manufacture, and
seasonal foods.
Extremely Low Volume:
Process Type: Job Shop
Characteristics: Job shops are specifically tailored for the creation of
highly customised products with very low production volumes. Although

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Notes they provide great flexibility, these options usually come with greater
costs per unit and prolonged waiting periods.
Advantages: Offers extensive customisation and adaptability to a wide
range of applications, although it may be less efficient when dealing
with huge volumes.
Examples of specialised products include customised machinery and
personalised furniture.
2. Variety
Variety encompasses the range of diverse items or services available and
the extent to which they can be tailored to individual preferences. The
selection of a process is influenced by the requirement for flexibility
and adaptability.
Huge Variety:
Process Type: Job Shop or Batch Production
Characteristics: Processes that can support high variation are specifically
intended to handle a large range of product kinds or frequent changes in
product design. Job shops exhibit a great degree of flexibility and has
the ability to effectively handle a wide range of items that have diverse
specifications. Batch production enables the intermittent switching between
different types of products.
Advantages: The ability to adapt to a wide range of product parameters
and accommodate frequent modifications.
Examples include customised design services, specialized metal working,
and seasonal product lines.
Low Variety:
Process Type: Assembly Line or Continuous Flow.
Characteristics: Processes that are well-suited for low variability are
optimised for standardised and repeated output. Assembly lines and con-
tinuous flow processes are specifically engineered to maximise efficiency
in manufacturing consistent goods with minimal deviation.
Advantages: The benefits include a high level of efficiency, which leads
to reduced manufacturing costs, and the ability to maintain constant
quality for standardised items.

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Examples of mass-produced consumer items include standardised elec- Notes

tronic devices.
Optimising the Trade-off between Volume and Variety: Process flexi-
bility refers to the ability of companies to efficiently manage the balance
between volume and variety in order to meet market needs. For instance,
a corporation may utilise batch production to manage moderate quanti-
ties with certain diversity, or implement Flexible Manufacturing Systems
(FMS) to adapt to fluctuating production demands.
The Trade-off between Customisation and Efficiency: The need for a
wide range of options requires adaptable procedures, but large quantities
call for processes that optimise productivity.
Volume and variety are important factors in determining process selection
in operations management. Organisations can enhance efficiency, flexi-
bility, and overall operational performance by understanding the impact
of these elements on production requirements and selecting the most
suitable methods accordingly.

4.5 Types of Processes

In operations management, choosing the suitable process type is essential
for maximising production efficiency, cost-effectiveness, and adaptability.
The principal categories of processes include job shops, batch production,
assembly lines, continuous flow, project-based systems, and Flexible
Manufacturing Systems (FMS), each addressing distinct production
requirements. Job shops are intended for highly tailored, low-volume
manufacturing. They provide considerable flexibility and accommodate
diverse range of products; yet they generally involve elevated per unit
costs and diminished efficiency due to complex setups and fluctuating
manufacturing periods. Batch production harmonises flexibility and ef-
ficiency by manufacturing goods in groups or batches. This method is
appropriate for moderate volumes and provides cost effectiveness relative
to job shops; nevertheless, it necessitates intermediate setup durations and
may result in elevated inventory levels. Assembly lines are designed for
the mass manufacture of standardised goods, attaining great efficiency
and reduced per-unit costs via repetitive activities and minimal setup

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Notes alterations. Nevertheless, they provide restricted flexibility and may result
in employee monotony.
Continuous flow processes are optimal for high-volume, standardised
manufacturing characterised by uninterrupted operations and considerable
automation, yielding minimal per-unit costs and enhanced efficiency.
Nevertheless, they exhibit inflexibility and necessitate considerable up-
front capital.
Project-based processes address distinct, focussed initiatives, frequently
entailing intricate and tailored tasks. They provide significant versatility
and concentration; yet they can be expensive and necessitate careful plan-
ning. Flexible Manufacturing Systems (FMS) include advanced technology
to manage diverse products and production volumes with considerable
flexibility and efficiency, however they need complex system design and
substantial investment. The selection of each process type must correspond
with the product attributes, volume, diversity, and principal strategic ob-
jectives to enhance operational efficiency and efficiently satisfy market
expectations.

4.6 Scheduling
Following the establishment of fundamental principles in process selection
within operations management, scheduling becomes a vital subsequent
component, guaranteeing the efficient and successful execution of select-
ed processes. Scheduling entails the careful organisation of production
activities to correspond with the chosen process type, whether it is job
shop, batch production, assembly lines, or continuous flow systems. It
emphasises the strategic allocation of resources—such as labour, ma-
chinery, and materials—timely and in the correct sequence to achieve
production objectives and deadlines. Organisations can coordinate work,
monitor progress, and manage restrictions affecting the production time-
line by employing scheduling tools such as Gantt charts, Critical Path
Method (CPM), and Program Evaluation and Review Technique (PERT).
Effective scheduling optimises process performance, balances workloads,
reduces lead times, and enhances overall efficiency. Essentially, process
selection dictates the manufacturing methods, while scheduling guarantees
the timely and resource-efficient execution of these processes, directly

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influencing the organization’s capacity to satisfy customer requests and Notes

sustain competitive advantage.

4.6.1 Operation Scheduling

Operation Scheduling is an essential aspect of operations management
that emphasises the planning and coordination of the sequence and time
of production activities to guarantee efficient and effective operations.
It involves the distribution of resources—such as labour, machinery,
and materials—over time to achieve production objectives and satisfy
customer expectations.

Essential Elements of Operation Scheduling

Task Sequencing: Establishing the sequence of jobs to facilitate efficient
workflow and reduce delays. This entails prioritising jobs according to
their urgency, dependencies, and resource needs.
Resource Allocation: Distributing available resources among diverse tasks
to guarantee sufficient support for each task. This entails organising labour
shifts, machine use, and material accessibility to prevent bottlenecks and
optimise productivity.
Time Management: Establishing start and end periods for each task to
guarantee adherence to production deadlines. Efficient time management
decreases lead times and enhances overall production efficacy.
Control and Regulation: Assessing the advancement of planned tasks
and modifying strategies as necessary to rectify any discrepancies from
the timeline. This entails utilising instruments such as Gantt charts, Crit-
ical Path Method (CPM), and Program Evaluation and Review Technique
(PERT) to assess performance and implement requisite modifications.
Flexibility and Adaptation: Modifying schedules in reaction to unfore-
seen alterations, like equipment malfunctions, supply chain interruptions,
or fluctuations in client demand. This necessitates a proactive strategy to
mitigate risks and ensure production continuity.
Significance of Operational Scheduling:
Operation scheduling is crucial for various reasons:
Efficiency: Effective scheduling maximises resource utilisation, dimin-
ishes idle time, and eliminates production delays, resulting in enhanced
efficiency.
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Notes Cost Control: Efficient scheduling aids in managing operating expens-

es by decreasing overtime, minimising setup durations, and preventing
resource wastage.
Customer Satisfaction: Timely production and delivery facilitated by
scheduling contribute to fulfilling customer expectations and improving
their satisfaction.
Resource Utilization: Effective scheduling optimises resource utilisation,
thereby enhancing total production.
Thus, operation scheduling is crucial for coordinating and optimising
production processes, guaranteeing effective resource utilisation, and
achieving production targets. It functions as a channel between process
selection and real production implementation, directly influencing oper-
ational efficacy and business success.

4.6.2 Goals of Short-term Scheduling

Short-term scheduling emphasises on efficient planning and coordination
of production processes within a limited time window, usually spanning
from days to weeks. The principal objectives of short-term scheduling are:
Enhance Resource Allocation: Effectively distribute and employ
resources—such as workforce, equipment, and materials—over brief intervals
to reduce downtime and increase output. This entails the proper allocation
of resources to tasks according to their availability and capabilities, hence
preventing bottlenecks and overutilization.
Adhere to Production Deadlines: Guarantee the timely completion of
production activities to satisfy immediate deadlines and client require-
ments. Effective short-term scheduling seeks to synchronise production
timelines with delivery deadlines and immediate production objectives,
ensuring operational continuity and customer contentment.
Minimise Setup and Changeover Durations: Decrease the time and
effort necessary for setup and transitions between various jobs or produc-
tion cycles. Effective planning and scheduling of these processes reduces
downtime and enhances overall production efficiency.
Address Immediate Production Challenges: Quickly identify and rectify
any immediate production challenges, including equipment failures, material
deficiencies, or labour shortages. Short-term scheduling facilitates swift

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modifications and redistribution of resources to resolve these challenges Notes

and maintain production efficiency.
Optimise Workflow and Coordination: Refine the alignment of tasks
and activities to guarantee a seamless workflow within the production
setting. This entails overseeing the task sequence, distributing workloads
among several workstations, and guaranteeing the smooth flow of supplies
and resources throughout the production process.
Regulate Inventory Levels: Effectively regulate and manage inventory
levels by synchronising production schedules with inventory needs. Short-
term scheduling facilitates the maintenance of ideal inventory levels,
mitigates surplus stock, and prevents stockouts.
Augment Flexibility and Responsiveness: Improve the capacity to adjust
to abrupt alterations in production demands, including urgent requests or
unexpected interruptions. Short-term scheduling offers the adaptability
to modify plans and reassign resources swiftly in reaction to evolving
circumstances.
The objectives of short-term scheduling focus on optimising resource util-
isation, adhering to production deadlines, minimising downtime, resolving
immediate production issues, enhancing workflow, controlling inventories,
and augmenting flexibility. These objectives are essential for sustaining
efficient and responsive manufacturing processes in the short term.

4.6.3 Job Sequencing (FCFS, SPT, EDD, LPT, CR)

Job sequencing is an essential component of operations management that
entails establishing the sequence in which jobs or tasks are executed to
enhance various performance indicators. Various sequencing rules are uti-
lised according to the distinct objectives and limitations of the production
setting. Below are essential task sequencing principles:
1. First-Come, First-Served (FCFS): Tasks are executed in the sequence
of their arrival, regardless of job length or deadlines.
Benefits: Easy to execute, as tasks are processed in the order of their
arrival.
Limitations: May cause inefficiencies if brief tasks are postponed by
lengthy ones, leading to heightened average waiting times and possible
bottlenecks.

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Notes 2. Shortest Processing Time (SPT): Tasks are arranged based on their
processing durations, prioritising the shortest tasks.
Benefits: Reduces the mean task completion time and average waiting
time, hence significantly decreasing overall delays.
Limitations: May result in prolonged job delays, perhaps leading to
dissatisfaction if deadlines are not achieved.
3. Earliest Due Date (EDD): Tasks are arranged according to their due
dates, prioritising those with the earliest deadlines.
Benefits: Facilitates adherence to deadlines and diminishes the incidence
of delayed tasks, hence enhancing customer satisfaction and fulfilling
delivery obligations.
Limitations: It does not inherently reduce the average task completion
or waiting time and may result in prolonged overall processing time if
not integrated with additional regulations.
4. Longest Processing Time (LPT): Tasks are arranged according to
their processing durations, prioritising the lengthiest tasks.
Benefits: Effective for balancing workloads when tasks differ markedly
in duration, potentially resulting in more uniform resource utilisation.
Limitations: May result in delays for brief tasks, thereby elevating the
average waiting period and causing inefficiencies if not effectively handled.
5. Critical Ratio (CR): Jobs are prioritised according to the critical ratio,
determined by the time left before the due date divided by the processing
time. Jobs with the lowest critical ratio are prioritised. Mathematically,
it is computed as follows:
Time Remaining Until Due Date
Formula: CR =
Processing Time
Benefits: Harmonises job urgency with processing duration, seeking to
reduce the incidence of delayed jobs and enhance schedule compliance.
Limitations: Demands precise prediction of deadlines and processing
durations, and may be complex to execute in fluctuating settings.
In conclusion, FCFS is simple, although it may not consistently yield
ideal performance. SPT effectively reduces average completion and
waiting times, although it may prolong the duration of lengthy tasks.
EDD emphasises deadlines, facilitating adherence to due dates without

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necessarily enhancing completion timeframes. LPT optimises workload Notes

distribution but may postpone shorter tasks. CR seeks to reconcile urgency
with task duration, which may enhance compliance with deadlines but
necessitates comprehensive scheduling data. Thus, every task sequencing
rule possesses distinct advantages and disadvantages, and the selection
of a rule is contingent upon the particular objectives of the operation,
including the minimisation of waiting times, adherence to deadlines, or
the optimisation of resource utilisation.

4.6.4 Johnson’s Rule on Two Machines

Johnson’s Rule is a recognised scheduling algorithm employed to ascertain
the ideal task sequence in a two-machine flow shop, aimed at minimis-
ing overall completion time. It is especially beneficial in a production
scenario where tasks must sequentially traverse two separate machines.
The rule facilitates the formulation of a schedule that reduces the make
span (the cumulative time necessary to finish all tasks).
Johnson’s Rule is relevant in scenarios where each task necessitates pro-
cessing on two machines, specifically Machine 1 followed by Machine 2.
The objective is to arrange the tasks to minimise total completion time
and decrease machine idle time.
Procedure for Implementing Johnson’s Rule
1. Document the processing durations for each job on Machine 1 and
Machine 2.
2. Make Two Lists:
List 1: Positions where the processing duration on Machine 1 is less
than or equal to that on Machine 2.
List 2: Positions where the processing duration on Machine 1 exceeds
that on Machine 2.
3. Organise Lists as follows:
Arrange List 1 in ascending order according to the processing times
on the Machine 1.
Arrange List 2 in descending order according to the processing
times on the Machine 2.

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Notes 4. Consolidate Lists: Organise the positions by prioritising the sorted

jobs from List 1, followed by the sorted jobs from List 2.
Numerical Illustration for Johnson’s Rule
Consider four tasks with the subsequent processing durations.
The following table shows the processing times of four tasks on two
machines:
Time Taken on Machine 1 Time Taken on Machine 2
Job (in hours) (in hours)
Task 1 3 5
Task 2 6 2
Task 3 4 3
Task 4 2 4

Formulate Two Lists:

List 1 (Machine 1 ≤ Machine 2): Job 1, Job 3, Job 4
List 2 (Machine 1 ≥ Machine 2): Job 2
That is,
List 1 (Sorted in Ascending Order on Machine 1): Job 4, Job 1, Job 3
List 2 (In Descending Order on Machine 2): Job 2
Combining lists, we get the following job sequence:
Job Sequence: Job 4, Job 1, Job 3, Job 2

Advantages of Johnson’s Rule

Optimality: Johnson’s Rule offers an optimal sequence to minimise
makespan and overall completion time in a two-machine flow shop setting.
Simplicity: Its ease of application and comprehension make it practical
for scheduling challenges in manufacturing.
Limitations
Applicability: Johnson’s Rule is explicitly formulated for two-machine
flow shops and can be extended to 3 machines with some algorithmic
modifications but may not be suitable for more intricate situations having
varying routing sequences.
In conclusion, Johnson’s Rule is an effective scheduling method for
two-machine flow shops, facilitating the organisation of task sequences
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and enhancing overall production efficiency. By adhering to the prescribed Notes

systematic technique, organisations can achieve diminished completion
durations and enhanced scheduling efficacy.

4.6.5 Processing n Jobs through k Machines

The scheduling problem of processing n tasks through k machines is more
intricate than that of the two-machine case due to the number of machines
and the variability in job routing, which introduces additional challeng-
es. This issue is frequently encountered in manufacturing environments,
where jobs must be run through a succession of machines, each with its
own processing time. The following is a comprehensive examination of
the method for scheduling n tasks through k machines:
1. Scheduling of Flow Shops with Multiple Machines (k Machines)
The problem can be approached using the following method for more
complex circumstances involving k machines:
Mixed-Integer Programming and Linear Programming
Formulate the scheduling problem as an optimisation problem and solve
it by employing linear or mixed-integer programming techniques. The
computational complexity of this approach renders it appropriate for small
to medium-sized problems.
The scheduling of n tasks through k machines is influenced by the fact
that the jobs may follow the same or different routes through the ma-
chines. This results in a variety of scheduling challenges. The methods
employed vary from basic dispatching rules to sophisticated optimisation
algorithms. In complex production environments, scheduling efficiency and
effectiveness can be significantly enhanced by understanding the nature
of the task flow and implementing the appropriate techniques.

IN-TEXT QUESTIONS
1. Which production process is most appropriate for highly
customised, low-volume products?
(a) Batch Production
(b) Continuous Flow
(c) Job Shop
(d) Assembly Line

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Notes 2. Which scheduling strategy is employed to identify the longest

path in a project, emphasising critical tasks?
(a) Gantt Chart
(b) Program Evaluation and Review Technique (PERT)
(c) Critical Path Method (CPM)
(d) Load Chart
3. What is a defining feature of an Assembly Line process?
(a) High flexibility and low volume
(b) Low cost per unit and high efficiency
(c) Frequent setup changes
(d) High customization and adaptability
4. In which process type is manufacturing is conducted in groups
or batches, typically resulting in moderate inventory levels?
(a) Continuous Flow
(b) Job Shop
(c) Batch Production
(d) Flexible Manufacturing System (FMS)
5. What tool is employed to visually depict the start and end dates
of various tasks in a project?
(a) Load Chart
(b) Gantt Chart
(c) Histogram
(d) Scatter Diagram
6. Which production process is defined by extensive automation
and is appropriate for extremely high-volume, homogeneous
products?
(a) Job Shop
(b) Batch Production
(c) Continuous Flow
(d) Project-Based

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7. Which scheduling method facilitates the coordination and Notes

scheduling of work to guarantee timely project completion?
(a) Critical Path Method (CPM)
(b) Program Evaluation and Review Technique (PERT)
(c) Gantt Chart
(d) Fishbone Diagram
8. What is the principal benefit of a Flexible Manufacturing System
(FMS)?
(a) High cost and complexity
(b) Low volume and high customization
(c) High efficiency and ability to handle a variety of products
(d) Low setup times and minimal flexibility

4.7 Summary
In operations management, the selection of processes and scheduling ap-
proaches are essential for maximising production efficiency and meeting
market expectations. Process selection entails identifying the best ap-
propriate production technique based on variables such as product type,
volume, and customisation requirements. Key process types include job
shops, which offer high flexibility for low-volume, customized production
but come with higher costs and lower efficiency due to frequent setup
changes; batch production, which balances efficiency and flexibility for
moderate volumes and some variety but may lead to higher inventory
levels and requires intermediate setup times; assembly lines, designed for
high-volume, standardized products, providing high efficiency and low
per-unit costs but limited flexibility; continuous flow, optimal for very
high-volume production of uniform products with extreme cost efficiency
and high productivity but requiring significant investment and lacking
flexibility; project-based processes, which cater to unique, one-time
projects with high adaptability and focus but can be costly and require
careful planning; and Flexible Manufacturing Systems (FMS), which in-
tegrate advanced technology to handle a variety of products and volumes
with high efficiency and flexibility, though they involve complex system

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Notes design and significant costs. Scheduling methodologies are essential for
overseeing production time and resource distribution. The effective inte-
gration of process selection and scheduling strategies promotes operational
efficiency, saves costs, and improves responsiveness to market needs,
resulting in a more efficient and adaptable production system.
Thus, the process selection in operations management is a crucial deci-
sion that determines an organization’s production capability and overall
success. Through meticulous analysis of product requirements, demand
trends, and strategic objectives, organisations can select the most suitable
approach to maximise efficiency, manage expenses, and strengthen their
competitive standing in the market.

4.8 Answers to In-Text Questions

1. (c) Job Shop
2. (c) Critical Path Method (CPM)
3. (b) Low cost per unit and high efficiency
4. (c) Batch Production
5. (b) Gantt Chart
6. (c) Continuous Flow
7. (b) Program Evaluation and Review Technique (PERT)
8. (c) High efficiency and ability to handle a variety of products

4.9 Self-Assessment Questions

1. Evaluate the impact of selecting job shops, batch production, assembly
lines, and continuous flow processes on production efficiency and
total costs.
2. Explain the determinants that affect the selection of process type for
the introduction of a new product.
3. Examine how elements such as product volume, diversity, customisation
demands, and budgetary limitations affect the choice of a suitable
production method for a new product.

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4. Analyse the job shop and assembly line procedures regarding Notes
flexibility, cost, and efficiency.

4.10 References
‹ Heizer, J., & Render, B. (2020). Operations management: Sustainability
and supply chain management (13th ed.). Pearson.
‹ Gaither, N., & Frazier, G. (2009). Production and operations
management (11th ed.). Cengage Learning.
‹ Bozarth, C., & Handfield, R. (2019). Introduction to operations and
supply chain management (4th ed.). Pearson.
‹ Stevenson, W. J. (2021). Operations management (14th ed.). McGraw
Hill Education.
‹ Higham, P. A. (2009). The complete guide to scheduling: A comprehensive
guide to planning and control. CRC Press.
‹ Thompson, R. (2007). Manufacturing processes for design professionals.
Thames & Hudson.

4.11 Suggested Readings

‹ Mahadevan, B. (2015). Operations management: Theory and practice.
Pearson Education India.
‹ Jay, H. and Barry, R. (2017). Operations Management: Sustainability
and Supply Chain Management, 12th ed. Pearson Education India.
‹ Jacobs, F. R., Chase, R. B. & Ravi Shankar. (2018). Operations and
Supply Chain Management, 14th ed. McGraw Hill Education India.
‹ Swarup, K., Gupta, P. K. & Manmohan. (2010). Operations Research,
19th ed. Sultan Chand & Sons.
‹ Kapoor, V. K. (2020). Operations Research: Quantitative Techniques
for Management, 9th ed. Sultan Chand & Sons.
‹ Sharma, J. K. (2017). Operations Research: Theory and Applications,
6th ed. Trinity.

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 L E S S O N

5
Layout Planning
Dr. Rajat Arora
Assistant Professor
School of Open Learning
Email-Id: rajat.arora@sol.du.ac.in

STRUCTURE
5.1 Learning Objectives
5.2 Introduction
5.3 Benefits of Good Layout
5.4 Different Types of Layouts
5.5 Assembly Line Balancing Using LOT Rule
5.6 Summary
5.7 Answers to In-Text Questions
5.8 Self-Assessment Questions
5.9 References
5.10 Suggested Readings

5.1 Learning Objectives

‹ Learn about the concept of layout planning and its significance in operations
management.
‹ Identify and discuss distinct types of layouts, encompassing process layouts, product
layouts, fixed-position layouts, and cellular layouts.
‹ Acquire the skills to evaluate and optimise spatial utilisation to improve efficiency.
‹ Comprehend the principles of optimising the flow of materials and persons to minimise
delays and bottlenecks.
‹ Assess the adaptability of layouts in response to fluctuations in production volume
or diversity of products.

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‹ Evaluate the expenses linked to various layout alternatives and their Notes
advantages regarding efficiency and production.
‹ Acquire knowledge regarding the practical considerations of executing
a new layout, encompassing change management, training, and
possible disruptions.

5.2 Introduction
In operations management, layout planning is a vital extension of pro-
cess design and scheduling, effectively connecting theoretical planning
with practical implementation. After creating effective process designs
and establishing scheduling rules, layout planning aims to optimise the
physical arrangement of resources and workstations within a facility. This
strategic initiative is crucial for converting abstract process flows into
concrete, functioning environments that improve operational efficiency and
productivity. The principal objective of layout planning is to establish an
environment that minimises superfluous movement, decreases production
time, and enhances the overall flow of goods and staff.
Effective layout planning entails several critical considerations, including
the characteristics of industrial processes, the movement of materials, and
the incorporation of technology. By matching the layout with the precise
requirements of the process design, organisations may ensure that work-
stations and equipment are strategically positioned to promote seamless
and efficient operations. This entails choosing the suitable layout type—be
it process, product, fixed-position, or cellular—according to the charac-
teristics of the production system and the intended results. Furthermore,
layout planning must include elements such as space optimisation, safety,
and scalability to accommodate future variations in production capacity
or product diversity.
A well-structured layout ultimately facilitates the operational objectives
set during process design and scheduling by promoting an organised, effi-
cient workflow. It improves the capacity to achieve production objectives,
minimise expenses, and uphold superior quality standards. Consequently,
layout planning is not solely a logistic issue but a strategic factor that
greatly influences the entire efficiency of an organization’s activities.
Integrating layout planning with process design and scheduling ensures

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Notes a unified strategy for optimising performance and achieving operational

excellence.

5.3 Benefits of Good Layout

A well designed layout in operations management provides several ad-
vantages that substantially influence the efficiency and efficacy of or-
ganisational processes. Below are the few key advantages:
‹ Streamlined Workflow: An effective layout facilitates a seamless
and rational progression of materials and staff, minimising the time
and effort needed to transition between various stages of production.
‹ Minimized Handling Time: Strategic organisation of workstations
and equipment reduces superfluous handling and transportation,
expediting production cycles and enhancing output.
‹ Optimized Space Utilisation: A proficient plan enhances the
utilisation of available space, facilitating more efficient storage and
operations within the facility.
‹ Adaptability for Growth: A meticulously designed layout can
facilitate future expansion or alterations in production requirements
without considerable disturbance or reconfiguration.
‹ Minimized Transportation Expenses: An effective plan decreases
the distance materials and goods must traverse, hence reducing
transportation costs and overall operational expenditures.
‹ Reduced Inventory Levels: Optimised layouts frequently enhance
inventory management and diminish stock levels, hence decreasing
carrying costs and mitigating the danger of obsolescence.
‹ Enhanced Work Environment: A deliberate design may optimise
ergonomics, mitigate workplace dangers, and bolster safety, resulting
in a reduction of accidents and increased employee satisfaction.
‹ Enhanced Quality Control: Optimised procedures and diminished
handling facilitate the maintenance of uniform quality and promote
more efficient quality control techniques.
‹ Enhanced Working Conditions: An effective layout fosters a more
organised and less stressful work environment, hence augmenting
staff morale and productivity.

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‹ Efficient Communication: Enhances communication and coordination Notes

among team members by strategically arranging workstations and
departments.
‹ Faster Response Times: Optimised operations can result in expedited
order processing and delivery, hence improving customer happiness
and service quality.
‹ Enhanced Order Precision: Reduced mistakes and optimised handling
procedures lead to increased order correctness and dependability.
A meticulously designed layout in operations management optimises
production processes, minimises costs, and improves safety, quality, and
overall operational efficiency, resulting in enhanced organisational per-
formance and competitiveness.

5.4 Different Types of Layouts

In operations management, facility layout is essential for optimising
workflow, efficiency, and production. Various layout types—Process,
Product, Group Technology, and Fixed Position—fulfill certain functions
and are appropriate for diverse production settings. Below is a detailed
discussion of each.
1. Process Layout (Functional Layout)
Process Layout arranges workstations and equipment according to the
specific processes they execute. Analogous processes or functions are
consolidated, which is optimal for settings with a variety of products or
services necessitating distinct activities.
Benefits
‹ Flexibility: Facilitates seamless adaptation to alterations in product
design or production volumes by clustering analogous equipment
or workstations.
‹ Effective for Small Batch Manufacturing: Especially advantageous
for work shops or settings where items are tailored in small volumes.
‹ Specialization: Promotes the cultivation of distinct abilities and
competence in particular domains.

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Notes Drawbacks
‹ Complex Flow: May lead to complicated material handling and
stretched transport distances between workstations, resulting in
increased transportation costs and prolonged lead times.
‹ Potential Bottlenecks: The workflow may be delayed by bottlenecks
in specific procedures, impacting overall efficiency.
2. Product Layout (Assembly Line Layout)
The Product Layout organises workstations and equipment in a sequential
manner according to the stages necessary for the production of a particular
product. This configuration is frequently employed in mass manufacturing
and assembly line settings.
Benefits
‹ High Efficiency: Minimises movement and handling, as each
workstation is tailored for a specific segment of the production
process, resulting in elevated production rates and reduced unit costs.
‹ Streamlined Production: Optimises operations, facilitating training
and diminishing the probability of errors.
‹ Uniform Quality: Standardises production processes, hence ensuring
consistent product quality.
Drawbacks
‹ Limited Adaptability: Reduced responsiveness to alterations in
product design or manufacturing quantities; modifying the layout
may incur significant costs and require considerable effort.
‹ Substantial Set up Expenses: The initial investment in equipment can
be considerable, and interruptions for reconfiguration or maintenance
may hinder output.
3. Group Technology Layout (Cellular Layout)
Group Technology Layout entails the arrangement of workstations into
cells dedicated to the manufacture of analogous items or components.
Each cell is equipped with all necessary tools and resources for the
manufacturing of a particular product family.

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Benefits Notes
‹ Enhanced Efficiency: Minimises the time and expenses related to
the transportation of materials across several zones, as each cell
manages all requisite processes for a product family.
‹ Flexibility: Facilitates customisation and rapid adaptation to alterations
in production requirements while sustaining an efficiency comparable
to product layouts.
‹ Improved Collaboration: Promotes teamwork and cooperation
within teams, resulting in enhanced communication and problem-
solving capabilities.
Drawbacks
‹ Complex Design: The design and implementation of cells can be
complicated, especially in ascertaining which goods or components
should be clustered together.
‹ Potential Underutilisation: Certain cells may experience underutilisation
due to significant fluctuations in product demand, resulting in
inefficiencies.
4. Fixed Position Layout
Fixed Position Layout entails the product or project being immobile while
personnel, materials, and equipment are transported to the location. This
configuration is generally employed for substantial, weighty, or cumber-
some items such as vessels, aircraft, or construction activities.
Benefits
‹ Appropriate for Large Products: Optimal for projects or items
that are excessively huge or unwieldy to relocate, facilitating work
around the immobile product.
‹ Operational Flexibility: Facilitates the management of extensive
projects and intricate assembly procedures.
Drawbacks
‹ Coordination Challenges: Necessitates meticulous synchronisation
of materials, equipment, and labour to guarantee timely and accurate
delivery to the designated locations.
‹ Potential for Inefficiencies: The relocation of personnel and equipment
may be laborious and result in delays if not managed efficiently.
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Notes Consequently, each layout type possesses distinct advantages and is

appropriate for various production settings and operating requirements.
Selecting the appropriate layout is dependent on elements such the product
type, production volume, and necessary flexibility. Comprehending these
patterns enables organisations to configure their facilities to maximise
performance, minimise expenses, and improve overall efficiency.

5.5 Assembly Line Balancing Using LOT Rule

Assembly line balancing is a vital component of operations management
focused on enhancing production efficiency and facilitating a seamless
workflow along an assembly line. It entails allocating jobs among several
workstations to minimise idle time and ensuring an equitable distribution
of workload across each workstation. The objective is to establish a bal-
anced workflow in which the burden at each workstation is as equitable
as possible, hence enhancing production efficiency and reducing bottle-
necks. The LOT (Largest Operation Time) rule is a mechanism employed
to attain balanced manufacturing lines. This is an in-depth examination
of assembly line balancing utilising the LOT rule.
The LOT rule, which denotes Largest Operation Time, is a heuristic
approach employed in assembly line balancing. This rule facilitates the
allocation of jobs to workstations according to their operational durations,
prioritising those with the longest timeframes first.
Procedure for Implementing the LOT Rule:
1. Enumerate all Tasks and Their Durations: Begin by cataloguing all
tasks necessary for product completion along with their corresponding
durations. Every task must possess a specific duration that specifies
the time required for completion.
2. Ascertain Task Sequence: Organise the tasks in descending order
according to their operational durations. Tasks having the greatest
durations are prioritised in the assignment process.
3. Calculate the Cycle Time: Ascertain the cycle time of the assembly
line, defined as the maximum duration permitted to manufacture
a single unit of product. The calculation is performed by dividing
the total available time by the necessary manufacturing output.

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4. Allocate Responsibilities to Workstations: Assign the Lengthiest Notes

assignment: Commence with the assignment that requires the most
extended duration and allocate it to the initial workstation.
5. Populate the Workstation: Persist in allocating supplementary tasks
to the workstation until the cumulative duration of the tasks at that
workstation is less than or equal to the cycle time. The objective
is to distribute the workload evenly among workstations.
6. Transition to the Subsequent Workstation: Advance to the next
workstation and reiterate the procedure with the outstanding jobs,
consistently prioritising the lengthiest tasks first.
7. Modify and Enhance: Following the preliminary allocation, assess
the distribution of tasks. Modify as necessary to guarantee that the
workload at each workstation is aligned as closely as feasible with
the cycle time, ensuring that no workstation is either overburdened
or underutilised.
Benefits of Employing the LOT Rule
The LOT rule is straightforward to comprehend and apply, rendering it
a pragmatic option for preliminary line balancing endeavours.
‹ Concentrate on Principal Bottlenecks: By emphasising the most
prolonged tasks, the LOT rule aids in mitigating critical bottlenecks
in the production process, hence enhancing overall efficiency.
Drawbacks of Employing the LOT Rule
‹ May Result in Suboptimal Solutions: Although the LOT rule is
uncomplicated, it may not consistently yield the most equitable line,
as it prioritises individual job durations above the comprehensive
workload distribution.
‹ The LOT rule fails to account for task dependencies or precedence
relationships, which are essential in intricate assembly processes.
‹ The LOT rule is sometimes employed alongside other techniques,
such as the Ranked Positional Weight approach, to attain a more
balanced production line. Consistent evaluation and modification of the
assembly line are essential to sustain equilibrium and accommodate
fluctuations in production demands or task durations.
In conclusion, the LOT rule serves as an effective heuristic for assembly
line balance, especially for straightforward production lines or preliminary
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Notes balancing initiatives. It concentrates on tasks with the longest operation

durations, seeking to alleviate bottlenecks and enhance efficiency. For
intricate manufacturing processes, it is frequently advantageous to com-
bine the LOT rule with additional balancing approaches to attain optimal
outcomes.
We will examine a numerical example of assembly line balance utilising
the LOT (Largest Operation Time) rule.

Numerical Illustration
Assume you are assigned the responsibility of balancing an assembly
line for the production of a product that necessitates the completion of
the following five tasks:
Task Duration (in minutes)
A 15
B 10
C 8
D 12
E 5
The entire duration every shift is 48 minutes. Calculate of the appropriate
number of workstations and the allocation of jobs to each workstation
according to the LOT rule.
Solution:
1. Enumerate Tasks and Durations (as provided in the above table)
2. Ascertain the Cycle Time: The cycle time represents the maximum
duration permitted for each workstation to fulfil its tasks to achieve
the production objective. The available time every shift is 48 minutes.
3. Organize Tasks by Duration of Operation (in decreasing order):
Task A: 15 minutes
Task D: 12 minutes
Task B: 10 minutes
Task C: 8 minutes
Task E: 5 minutes

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4. Allocate Responsibilities to Workstations: Notes

Workstation 1: Commence with the task that requires the most
time.
Assign Task A for a duration of 15 minutes.
Add Task D (12 minutes) to this workstation.
Total time equals 15 plus 12, resulting in 27 minutes, which is less
than the 60-minute cycle duration.
Continue to Incorporate Tasks: Incorporate Task B (10 minutes).
Total time equals 27 plus 10, resulting in 37 minutes.
Add Task C (8 minutes).
Total duration = 37 + 8 = 45 minutes.
Task E (5 minutes) will surpass the 48-minute restriction if included
here; thus, defer it to the subsequent workstation.
Workstation 1: Tasks A, D, B, and C (Total Duration = 45 minutes).

The outstanding task is Task E (5 minutes).
Workstation 2: Task E (Total Duration = 5 minutes).
5. Evaluate and Modify: The assignments are structured to ensure that
the load on each workstation remains within the cycle time limits.
Workstation 1: 45 minutes, compliant with the 48-minute threshold.
Workstation 2: 5 minutes, which is within the acceptable limit,
suggests that more task consolidation is feasible if other tasks or
workstations are accessible.
Utilising the LOT rule, we have allocated the work as follows:
‹ Workstation 1: Tasks A (15 minutes), D (12 minutes), B (10
minutes), and C (8 minutes). Aggregate duration = 45 minutes.
‹ Workstation 2: Task E (5 minutes). Total duration = 5 minutes.
Required Number of Workstations: 2
The LOT rule facilitates the prioritisation of more time-intensive tasks,
hence potentially equilibrating the burden. This example illustrates that
further modifications may be required for practical implementations,
particularly if jobs are disproportionately allocated among workstations
or if subsequent adjustments are essential.

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Notes All workstations should be employed as efficiently as possible to prevent

substantial underutilisation. Workstation 2 exhibits much lower use than
Workstation 1.
This example illustrates the fundamental application of the LOT rule. In
practical situations, more factors such as task interdependencies may be
required for optimal equilibrium.
IN-TEXT QUESTIONS
1. What is the principal aim of layout planning in operations
management?
(a) Increasing inventory levels
(b) Reducing production speed
(c) Optimizing space utilization and workflow
(d) Increasing the number of workstations
2. Which layout type organises workstations in a sequence according
to the steps necessary to produce a particular product?
(a) Process Layout
(b) Product Layout
(c) Fixed-Position Layout
(d) Group Technology Layout
3. In a Group Technology Layout, workstations are organized into
cells based on:
(a) Product design
(b) Process type
(c) Equipment type
(d) Product families
4. Which of the following is NOT an advantage of a process
layout?
(a) Flexibility in handling various products
(b) High efficiency in mass production
(c) Specialization of equipment and personnel
(d) Adaptability to changes in production requirements

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5. What is the purpose of assembly line balancing? Notes

(a) To increase the total production time

(b) To evenly distribute tasks across workstations to reduce
idle time
(c) To minimize the number of workstations needed
(d) To assign more tasks to workers
6. What does the LOT rule stand for in assembly line balancing?
(a) Least Operation Time
(b) Largest Operation Time
(c) Longest Operational Task
(d) Latest Operation Time
7. In the context of the LOT rule, which of the following statements
is true?
(a) The LOT rule balances workstations by assigning tasks
with the shortest operation times first
(b) The LOT rule aims to minimize the number of workstations
required by prioritizing tasks with the longest durations
(c) The LOT rule does not consider task times but focuses
on the sequence of tasks
(d) The LOT rule is used to calculate cycle time based on
the average task duration
8. Which of the following best describes a potential drawback of
the LOT rule?
(a) It may result in an imbalanced line if task dependencies
are not considered
(b) It requires complex calculations to determine the optimal
number of workstations
(c) It automatically handles changes in task times without
requiring adjustments
(d) It is primarily useful for environments with highly standardized
tasks

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Notes
5.6 Summary
This chapter addresses the crucial significance of layout planning in oper-
ations management and its effect on enhancing production efficiency. We
started the chapter by analysing the fundamental aims of layout planning,
which encompass optimising space utilisation, augmenting workflow, and
minimising operational expenses. Efficient layout planning is crucial for
establishing a productive work environment that aligns with operational
goals and strategic objectives. We examined many layout styles, including
process layouts that cluster comparable jobs and product layouts that or-
ganise workstations in a sequential manner to optimise the manufacture of
standardised goods. Furthermore, we examined group technology layouts,
wherein workstations are arranged into cells according to product families,
and fixed-position layouts, in which the product remains immobile while
workers and materials are transported to it. Each layout type possesses
unique features and is appropriate for various manufacturing contexts.
Further, the chapter discussed assembly line balancing, an essential com-
ponent of layout planning. We examined how assembly line balance seeks
to equitably allocate duties among workstations to facilitate a seamless
and efficient manufacturing process. We demonstrated the allocation of
jobs according to their operation timings using the Largest Operation
Time (LOT) criterion to equilibrate the burden among workstations. This
equilibrium is essential for minimising downtime, reducing bottlenecks,
and achieving optimal production rates.
We emphasised the advantages of proficient layout planning and assembly
line optimisation, such as increased efficiency, diminished handling and
transportation expenses, and improved safety. In a nutshell, layout design
and assembly line balance are critical elements of operations manage-
ment that profoundly affect an organization’s efficiency, productivity, and
overall performance. Through meticulous layout design and assembly line
optimisation, organisations can enhance operational efficiency, minimise
expenses, and more effectively satisfy production requirements.

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Notes
5.7 Answers to In-Text Questions
1. (c) Optimizing space utilization and workflow
2. (b) Product Layout
3. (d) Product families
4. (b) High efficiency in mass production
5. (b) To evenly distribute tasks across workstations to reduce idle
time
6. (b) Largest Operation Time
7. (b) The LOT rule aims to minimize the number of workstations
required by prioritizing tasks with the longest durations
8. (a) It may result in an imbalanced line if task dependencies are
not considered

5.8 Self-Assessment Questions

1. What are the main goals of layout planning in operations management?
2. In what manner does the selection of layout type influence the overall
efficiency of a production process?
3. Analyse the similarities and differences between process layouts
and product layouts. In which circumstances would each be most
suitable?
4. What considerations must be evaluated while choosing a layout for
a manufacturing facility?
5. In what ways can layout planning influence material handling and
transportation expenses within a facility?
6. Analyse the merits and drawbacks of employing a fixed-position
layout for extensive projects.
7. What is assembly line balance, and why is it crucial for attaining
an efficient production line?

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Notes
5.9 References
‹ Heizer, J., & Render, B. (2017). Operations management (12th
ed.). Pearson.
‹ Stevenson, W. J. (2018). Operations management (13th ed.).
McGraw Hill Education.
‹ Jacobs, F. R., & Chase, R. B. (2018). Operations and supply chain
management (15th ed.). McGraw Hill Education.
‹ Gou, X., & Zhang, Y. (2016). A survey of assembly line balancing
methods and their applications. International Journal of Production
Research, 54(10), 2951-2972. https://doi.org/10.1080/00207543.20
15.1121048
‹ Kumar, S., & Garg, P. (2017). A comprehensive review of assembly
line balancing techniques and algorithms. Computers & Industrial
Engineering, 105, 148-165. https://doi.org/10.1016/j.cie.2017.01.015
‹ Mousavi, S. H., & Kianfar, S. (2019). Optimization of assembly line
balancing with constraints: A case study of the LOT rule. Journal
of Manufacturing Systems, 52, 40-50. https://doi.org/10.1016/j.
jmsy.2019.05.004

5.10 Suggested Readings

‹ Mahadevan, B. (2015). Operations management: Theory and practice.
Pearson Education India.
‹ Jay, H. and Barry, R. (2017). Operations Management: Sustainability
and Supply Chain Management, 12th ed. Pearson Education India.
‹ Jacobs, F. R., Chase, R. B. & Ravi Shankar. (2018). Operations and
Supply Chain Management, 14th ed. McGraw Hill Education India.
‹ Swarup, K., Gupta, P. K. & Manmohan. (2010). Operations Research,
19th ed. Sultan Chand & Sons.
‹ Kapoor, V. K. (2020). Operations Research: Quantitative Techniques
for Management, 9th ed. Sultan Chand & Sons.

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‹ Sharma, J. K. (2017). Operations Research: Theory and Applications, Notes

6th ed. Trinity.
‹ Russell, R. S., & Taylor, B. W. (2019). Operations and supply chain
management, 10th ed. John Wiley & Sons.

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 L E S S O N

6
Location and Capacity
Planning
Dr. Rajat Arora
Assistant Professor
School of Open Learning
Email-Id: rajat.arora@sol.du.ac.in

STRUCTURE
6.1 Learning Objectives
6.2 Introduction
6.3 Factors Influencing Location Decision
6.4 Location Evaluation Methods
6.5 Capacity Planning
6.6 Input and Output Measures of Capacity
6.7 Types of Capacity Planning Over Time Horizon
6.8 Decision Tree Analysis for Capacity Planning
6.9 Summary
6.10 Answers to In-Text Questions
6.11 Self-Assessment Questions
6.12 References
6.13 Suggested Readings

6.1 Learning Objectives

‹ Discuss in detail the essential principles of location and capacity planning.
‹ Identify and assess the determinants that impact location decisions, including cost,
market accessibility, infrastructure, and labour availability.
‹ Employ instruments and techniques such as Geographic Information Systems (GIS),
cost-benefit analysis, and market research to identify appropriate sites.

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‹ Explain several methodologies for capacity planning, encompassing Notes

capacity predictions, gradual expansion, and flexible capacity
management.
‹ Discuss in detail various location evaluation methods.
‹ Understand different Input and output measures of capacity.
‹ Comprehend different types of capacity planning over time horizon.
‹ Discuss the significance of Decision tree analysis for capacity
planning.
‹ Develop capacity plans that correspond with corporate objectives
and operational needs.

6.2 Introduction
In the last chapter on layout design in operations management, we ex-
amined the complex process of organising physical resources within a
facility to optimise workflow, reduce waste, and improve operational
efficiency. Having created the groundwork for an effective layout, we
now direct our attention to location and capacity planning—two essential
elements that profoundly impact a company’s overall performance and
strategic orientation.
Location planning entails the strategic selection of a geographic place for
operations, incorporating factors such as market proximity, access to raw
materials, labour availability, transportation infrastructure, and economic
incentives. The selection of location significantly influences a company’s
cost framework, operational efficacy, and responsiveness to market needs.
A manufacturing may prioritise proximity to essential suppliers to min-
imise transportation expenses and lead times, whilst a retail enterprise
would concentrate on high foot traffic locations to enhance consumer
accessibility and sales opportunities.
Capacity planning, conversely, pertains to the necessity of synchronising
an organization’s production capacities with its demand projections. It
entails assessing the ideal production capacity necessary to satisfy present
and future market demands while considering costs, resource availability,
and technology capabilities. Efficient capacity planning enables an or-
ganisation to expand operations effectively, preventing both overcapacity,

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Notes which results in resource wastage, and undercapacity, which may lead to
lost revenue opportunities and customer unhappiness.
The integration of location and capacity planning formulates a unified
strategy that enhances operational efficiency and competitive advantage.
Location decisions influence supply chain logistics and market accessibil-
ity, whereas capacity planning guarantees that resources are synchronised
with corporate goals and demand variations. By including these compo-
nents into layout planning, organisations may develop a comprehensive
operational strategy that improves efficiency, minimises costs, and fosters
sustainable growth. Comprehending and adeptly managing these elements
is essential for attaining operational excellence and sustaining a compet-
itive advantage in the current dynamic business landscape.

6.3 Factors Influencing Location Decision

In operations management, firms evaluate multiple aspects to choose the
optimal location for their activities. These elements can be classified into
economic, strategic, and operational aspects. Below is given a compre-
hensive analysis of these factors.
‹ Acquisition or Leasing Expenses (Land or Structures): The
expense of acquiring or leasing real estate can fluctuate considerably
based on geographic location. Businesses must assess whether
the expense aligns with their budget and how it correlates with
prospective revenue.
‹ Wages: Labour costs may vary according to geographic area.
Regions with elevated living expenses may necessitate greater wage
expectations, whereas those with reduced living costs may provide
less expensive labour. The local labour market’s capacity to supply
skilled people is essential. A location with a robust reservoir of
pertinent skills may be more advantageous.
‹ Regional Taxation: Distinct areas possess diverse tax frameworks,
encompassing property taxes, income taxes, and sales taxes.
‹ Incentives and Subsidies: Certain regions provide tax concessions,
grants, or additional incentives to entice enterprises.

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‹ Utility Expenses: The expense and dependability of services such Notes

as power, water, and gas can influence operational expenditures.
‹ Communication Services: The accessibility and expense of
telecommunications and internet services are also significant. The
site must accommodate the particular infrastructural demands of
the enterprise, encompassing spatial requirements and facility
configuration. The quality of local transport infrastructure, including
roads, railways, and public transit, affects the efficiency of transporting
goods and personnel.
‹ Employee Preferences: Locations that provide a superior quality of
life may be more appealing to prospective employees, influencing
recruitment and retention efforts.
‹ Cost of Living: Employees may favour regions with a reduced cost
of living, impacting their satisfaction and productivity.
‹ Compliance Requirements: Various regions have distinct requirements
that firms must adhere to, including environmental restrictions,
labour laws, and health and safety standards.

6.4 Location Evaluation Methods

Evaluating diverse methodologies is essential for making a sound choice
when analysing potential business sites. Location assessment techniques
entail the methodical analysis and comparison of various sites based
on multiple criteria, encompassing economic, strategic, and operational
variables. These methodologies assist enterprises in identifying the opti-
mal location by measuring factors such as expenses, accessibility, labour
availability, and market closeness. Methods such as cost-benefit analysis,
weighted scoring models, and Geographic Information Systems (GIS) are
frequently utilised to evaluate the advantages and disadvantages of each
location. Utilising these evaluation methodologies enables organisations
to reduce risks, enhance operational efficiency, and connect their location
selection with long-term strategic goals.

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Notes 6.4.1 Factor Rating Method

The Factor Rating Method is a systematic technique employed to assess
and compare prospective business locations based on several factors. This
approach aids organisations in making objective decisions by allocating
weights and scores to numerous aspects pertinent to the location selec-
tion. This is a comprehensive explanation of the Factor Rating Method
as given in the following steps:
1. Identify Appropriate Factors
(i) Economic Factors: These include expense of land and structures,
personnel expenses, utility expenses and fiscal obligations and
incentives.
(ii) Strategic Considerations: These comprise of closeness to markets/
customers, closeness to suppliers and availability of transportation
and infrastructure.
(iii) Operational Considerations: These incorporates caliber of the
local labour force, regulatory framework and regional commercial
environment.
(iv) Long-term Implications: They include prospects for further expansion,
environmental ramifications and technological innovations.
2. Allocate Weights to Each Factor
Each component is allocated a weight according to its significance in the
entire decision-making process. The aggregate of all weights must equal
100% or 1.0. For instance, Expense of Land and Structures: 20%; Labor
Expenses: 15%; Closeness to Markets: 25%; Transportation Accessibility:
10%; Workforce Quality: 15%; Regulatory Framework: 10%; Potential
for Future Growth: 5%.
3. Evaluate Each Location Based on Each Criterion
Assess each prospective site according to the specified criteria. This is
generally conducted on a scale from 1 to 10, with 1 indicating bad per-
formance and 10 denoting exceptional performance. For example:
‹ Location A: Land/building cost = 7
‹ Location B: Land/building cost = 5

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4. Compute the Weighted Scores Notes

Multiply the rating of each place by the weight allocated to each factor.
This assigns a weighted score to each factor for every site. For instance:
Location A:
Cost of Land/Buildings: 7 (rating) × 20% (weight) = 1.4
Labour Expenses: 8 multiplied by 15% is 1.2
Proximity to Markets: 9 multiplied by 25% is 2.25
Total weighted score for Location A is 1.4 + 1.2 + 2.25 = 4.85.
Location B:
Cost of Land/Buildings: 5 multiplied by 20% equals 1.0
Labour Expenses: 7 multiplied by 15% equals 1.05
Proximity to Markets: 8 multiplied by 25% equals 2.0
The cumulative weighted score for Location B is 1.0 + 1.05 + 2.0 = 4.05.
5. Evaluate the Aggregate Weighted Scores
Calculate the aggregate of the weighted scores for each location to derive
a total score. The site with the highest score is deemed the most advan-
tageous according to the established criteria and weights.
The preliminary results must be evaluated to confirm that all pertinent
factors have been accounted for and that the weights appropriately rep-
resent their significance.
Advantages:
‹ Objectivity: Offers a systematic method for assessing places,
minimising bias.
‹ Comparative Analysis: Enables the evaluation of several sites
based on uniform criteria.
‹ Customisation: Facilitates the incorporation of diverse elements
adapted to the individual requirements of the business.
Limitations:
‹ Subjectivity in Evaluation: Ratings may be subjective and can
differ based on the evaluator.

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Notes ‹ Weight Assignment: The procedure of allocating weights might be

subjective and may not consistently represent real-world importance
accurately.
‹ Complexity: Necessitates comprehensive data and analysis, which
can be laborious and complicated.

6.4.2 Centre of Gravity Method

The Centre of Gravity Method is a quantitative technique employed in
operations management to ascertain the ideal site for a facility, such as a
warehouse or manufacturing plant, by minimising transportation expenses.
This approach determines a central site that minimises the distance to
a collection of demand points, taking into account the volume of com-
modities to be delivered from various locations. Below is the step-wise
procedure for the functioning of the Centre of Gravity Method.
1. Identify and Define the Problem: The objective of the Centre
of Gravity Method is to identify a site that minimises overall
transportation costs by determining a central position in relation
to various demand areas. This approach is especially advantageous
for logistics and supply chain management, where transportation
efficacy is paramount.
2. Determine Demand Points and Weights
(i) Demand Locations: Identify the locations of all demand points.
These are the sites from which items will be dispatched or
to which things will be received.
(ii) Assign Weights to Individual Locations: Allocate a weight to
each demand point, generally reflecting the quantity of items
to be moved to or from that location.
3. Collect Geographic Coordinates: Gather the geographic coordinates,
often latitude and longitude, of each demand point. These coordinates
will be utilised to compute distances and ascertain the centre location.
4. Compute the Weighted Average Coordinates: The Centre of Gravity
Method entails computing a weighted average of the coordinates
of all demand locations. The equations for the x and y coordinates
of the centroid are:

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Notes

Where,
xi and yi are the coordinates of each demand point.
wi is the weight (e.g., volume of goods) of each demand point.
∑ denotes the sum over all demand points.
Advantages:
‹ Quantitative Approach: Offers a definite numerical foundation for
making location decisions.
‹ Cost Minimisation: Aids in reducing transportation expenses by
identifying a central position in relation to demand sites.
‹ Simplicity: The methodology is uncomplicated and readily applicable
using fundamental geographic and weight data.
Limitations:
‹ Topographical Accuracy: Presumes that distances can be estimated
linearly, potentially overlooking actual travel routes and topographical
obstructions. The approach is most effective when demand points
are uniformly dispersed. It may be less effective for densely packed
or skewed demand areas.
‹ Practical Constraints: The theoretical site may not always be
feasible due to variables such as land availability, infrastructure,
and regulatory considerations.
The Centre of Gravity Method is an essential instrument in operations
management for optimising facility locations to reduce transportation ex-
penses. Nevertheless, it must be employed alongside alternative approaches

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Notes and practical considerations to guarantee the most successful location

option.

6.4.3 Analytic Hierarchical Process

The Analytic Hierarchy Process (AHP) is an advanced decision-making
framework employed in operations management to assess and rank several
alternatives according to diverse criteria. The Analytic Hierarchy Process
(AHP), created by Thomas Saaty, aids in organising intricate decisions,
such as assessing prospective sites for a facility, by decomposing the
issue into a hierarchical framework of sub-problems. A comprehensive
description of the AHP approach for site evaluation is given below:
1. Clearly State the Issue and Objective: Begin by explicitly outlining
the decision problem and the objective of the evaluation. The
objective may be to identify the optimal site for a new warehouse
from multiple contenders.
2. Define Criteria and Sub-Criteria: Establish the criteria for assessing
the places. These criteria must encompass the aspects that are crucial
for the decision-making process such as Economic determinants (e.g.,
land expenses, labour expenditures); Strategic considerations (e.g.,
market proximity, transit accessibility); Operational considerations
(e.g., infrastructure quality, regional regulations). Every criterion
may possess sub-criteria for example the “cost of land” can be
delineated into “purchase cost” and “taxes.”
3. Organize the Hierarchy: Develop a hierarchical framework with
the objective positioned at the apex, succeeded by criteria and sub-
criteria at intermediate tiers, and prospective sites at the base level.
The hierarchy facilitates the organisation of the decision-making
process and enables a clear comparison of various elements.
4. Comparative Analysis: Conduct pairwise comparisons to assess
the relative significance of criterion and sub-criteria. This entails
evaluating each criterion pair to ascertain their relative significance
and the extent of their importance. This comparison is generally
conducted on a scale of relative significance, such as: 1: Equivalent
significance; 3: Moderate significance of one relative to the other;

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5: Significant predominance of one over the other; 7: Extremely Notes

significant; 9: Paramount significance.
If proximity to markets is deemed more significant than labour costs,
it may be assigned a rating of 3 in favour of proximity.
5. Develop Comparison Matrices: Utilize the pairwise comparison
values to create a comparison matrix for each hierarchical level.
For every matrix, The matrix is square, possessing an equal number
of rows and columns corresponding to the criteria or sub-criteria.
The element located at position (i, j) signifies the comparative
significance of criterion i in relation to criterion j.
6. Compute Eigenvalues and Priorities: Resolve the comparison matrices
to determine the eigenvalues and eigenvectors. The eigenvector
denotes the relative weights or priorities of the criteria and sub-
criteria. This encompasses (i) Normalizing the matrix by adding the
values in each column and (ii) dividing each item by the respective
column total. Then, the mean of the values in each row is calculated
to obtain the priority vector.
7. Execute Consistency Verification: Verify the uniformity of the
pairwise comparisons utilising the Consistency Ratio (CR). A CR
rating below 0.1 is typically deemed acceptable. If the consistency
ratio (CR) is elevated, the pairwise comparisons need to be re-
evaluated.
8. Assess Options: Evaluate each prospective location according to the
criteria and sub-criteria through a comparable pairwise comparison
method. Construct a matrix for each criterion to facilitate the
comparison of places.
9. Cumulative Scores: Aggregate the weighted scores for each place
to derive a cumulative score. This encompasses (i) Calculating the
product of each location’s score and the corresponding priority
weight of each criterion. (ii) Calculating a composite score for each
place by aggregating the weighted scores.
10. Evaluate Outcomes and make Decision: Examine the composite
scores for every location. The site with the highest score is deemed
the most advantageous according to the weighted criteria.

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Notes Advantages:
‹ Organized Methodology: Offers a coherent, methodical framework
for assessing intricate decisions involving several criteria.
‹ Consistency Verification: Incorporates a consistency verification
to ascertain the reliability of assessments.
‹ Flexibility: Facilitates the integration of both qualitative and
quantitative criteria.
Limitations:
‹ Subjectivity: The approach depends on subjective evaluations for
pairwise comparisons.
‹ Complexity: May get complicated and time-consuming with numerous
criteria and alternatives.
‹ Consistency Challenges: Necessitates scrupulous management to
ensure uniformity in comparisons.
The AHP technique is an effective instrument for assessing locations or
alternatives in operations management, providing a systematic approach
to decision-making that considers diverse criteria and goals.

6.5 Capacity Planning

Capacity planning in operations management involves assessing the pro-
duction capacity required by an organisation to satisfy fluctuating demands
for its products or services. It entails guaranteeing that a company has the
appropriate resources—such as equipment, facilities, and personnel—to
fulfil future demand without incurring unnecessary costs. Efficient capacity
planning enables enterprises to optimise resources, reduce expenses, and
sustain elevated customer satisfaction levels.
Essential Elements of Capacity Planning
1. Classification of Capacity
(i) Design Capacity: The optimal output a system can attain under
ideal circumstances.
(ii) Operational Capacity: The greatest output a system may attain
under practical conditions, considering maintenance, delays,
and other inefficiencies.

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(iii) Current Capacity: The actual output attained during operations, Notes
illustrating real-world conditions and operating challenges.
2. Capacity Planning Procedure
(i) Anticipating Demand: Forecast future demand for products
or services utilising past data, market analysis, and trends.
Forecasting methods may encompass quantitative techniques,
such as time-series analysis, and qualitative approaches, such
as expert judgement.
(ii) Evaluating Existing Capacity: Assess present resources,
including equipment, workforce, and infrastructure, to ascertain
existing capacity. This entails examining present utilisation
rates and pinpointing bottlenecks or limitations.
(iii) Recognising Capacity Deficiencies: Assess projected demand
against existing capacity to pinpoint any discrepancies. Assess
the adequacy of current resources and identify the necessity
for supplementary capacity.
(iv) Formulating Capacity Plans: Devise solutions to mitigate
capacity deficiencies, which may encompass:
‹ Enhancing Capacity: Acquire new equipment, enlarge
facilities, or recruit additional personnel.
‹ Capacity Reduction: Diminish operations or enhance
processes to accommodate decreased demand.
‹ Flexibly Adjusting Capacity: Employ tactics like as
outsourcing or utilising temporary labour to modify capacity
in response to variable demand.
(v) Executing Capacity Plans: Implement the capacity plans, ensuring
that all requisite modifications are executed successfully and
efficiently.
(vi) Assessment and Evaluation: Consistently assess capacity
utilisation and performance to verify the efficacy of the
capacity plans. Consistently evaluate and modify strategies
according to real outcomes and fluctuations in demand.

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Notes 3. Capacity Planning Strategies

(i) Lead Strategy: This strategy allocates resources to enhance
capacity in anticipation of rising demand. This proactive strategy
facilitates market share acquisition and guarantees capacity
availability during demand surges. Nevertheless, it entails
elevated initial expenses and hazards related to overcapacity.
(ii) Lag Strategy: Under this strategy, resources are allocated
to capacity following an increase in demand. This reactive
strategy mitigates risk but may result in missed opportunities
if demand escalates more rapidly than expected.
(iii) Alignment Strategy: Gradually modify capacity to closely
correspond with fluctuations in demand. This method reconciles
lead and lag methods, striving to align capacity with demand
as accurately as feasible.
(iv) Adaptive Capacity Strategy: Employ adaptable capacity strategies,
including modular apparatus, cross-trained personnel, or flexible
production timelines, to swiftly respond to demand variations.
4. Tools and Techniques
(i) Capacity Requirements Planning (CRP): A method for
assessing the capacity required to fulfil production timelines
and guarantee the availability of adequate resources.
(ii) Queueing Theory: A mathematical methodology for analysing
and optimising processes related to waiting lines, facilitating
the management of bottlenecks and enhancement of service
levels.
(iii) Simulation: Utilisation of simulation models to evaluate various
scenarios and analyse the effects of capacity alterations on
overall performance.
(iv) Workload Analysis: Evaluating the burden on current resources to
ascertain the necessity for additional capacity or modifications.
5. Challenges in Capacity Planning
(i) Variations in Demand: Volatile fluctuations in client demand
might complicate capacity planning. Precise forecasting and
adaptable capacity techniques can alleviate this problem.

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(ii) Financial Oversight: It is essential to balance the expenses of Notes

augmenting capacity with the advantages of satisfying demand.
Excessive investment in capacity may incur elevated costs,
whereas insufficient investment might lead to lost opportunities.
(iii) Limitation of Resources: The restricted availability of resources,
including skilled labour and raw materials, can hinder the
successful scaling of capacity.
(iv) Technological Advancements: Accelerated technological
improvements might influence capacity planning by altering
manufacturing processes or integrating new machinery.
(v) Integration of Supply Chains: Synchronising capacity planning
with supply chain partners is crucial to guarantee that resources
and materials correspond with production requirements.
Thus, capacity planning is an essential component of operations management
that entails guaranteeing that an organisation possesses the appropriate
resources to satisfy present and future demand. By predicting demand,
evaluating existing capacity, recognising deficiencies, and formulating and
executing capacity strategies, enterprises may enhance their operations and
adapt proficiently to fluctuating market dynamics. Utilising techniques
such as lead, lag, match, or flexible capacity, alongside tools like CRP,
queueing theory, and simulation, enables organisations to effectively
manage their capacity requirements and sustain operational efficiency.

6.6 Input and Output Measures of Capacity

In capacity planning and operations management, assessing capacity is
essential for comprehending the efficiency of resource utilisation and the
adequacy production for demand fulfilment. Capacity can be evaluated
by diverse input and output metrics, each offering insights into distinct
facets of operational performance. This is a comprehensive examination
of both input and output capacity measures:
Input Capacity Metrics
Input metrics concentrate on the resources utilised in the production
process. These include:

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Notes 1. Machinery Capacity: The maximum workload a machine can manage

within a specified timeframe. Typically quantified by units produced
per hour or available operational hours.
2. Workforce Capacity: The utmost quantity of work that employees
are capable of executing within a specified timeframe. Generally
quantified in labour hours available or the product of the number
of workers and their available working hours.
3. Capacity of the Facility: The aggregate quantity of manufacturing
space or facility resources accessible. Quantified in square footage
or cubic meters of accessible space, or by the count of production
lines and stations.
4. Material Capacity: The maximum quantity of raw materials or
inputs that can be processed or utilised during a specified timeframe.
Usually quantified in tonnes, litres, or units of materials manageable
by production processes.
5. Energy Capacity: The quantity of energy resources (e.g., electricity,
gas) accessible to facilitate production. It is quantified in kilowatt-
hours (kWh) or alternative units of energy use.
Capacity Output Metrics
Output measures concentrate on the outcomes of the industrial process.
These encompass:
1. Production Yield: The aggregate quantity of units generated by a
system within a certain time interval. It is usually quantified in
units per hour, day, or month.
2. Service Delivery: The quantity of services rendered, encompassing
metrics such as the number of transactions, customers attended, or
service requests fulfilled. It is quantified in transactions per hour
or customer service enquiries addressed.
3. Efficiency Ratio: The proportion of actual output to the maximum
potential output. It is determined by the formula (Actual Output/
Design Capacity) × 100%. This metric evaluates the efficiency of
capacity utilisation.
4. Utilisation Ratio: The degree to which existing capacity is utilised.
It is computed by the formula (Actual Output/Effective Capacity) ×

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100%. This metric reflects the extent of utilisation of the available Notes
capacity.
5. Output: The proportion of production that adheres to quality standards
relative to the overall output. It is determined by the formula (Good
Units Produced / Total Units Produced) × 100%. This metric indicates
the efficacy and calibre of industrial processes.
Illustrations on Utilising Input and Output Metrics
1. Equipment Utilisation:
‹ Input Measure: The total operational hours of a machine
available each month.
‹ Output Measure: The precise quantity of units manufactured
by the machine each month.
‹ Example Calculation: If a machine operates for 160 hours and
produces 1,000 units, with a maximum capacity of 1,200 units,
the efficiency rate is calculated as (1,000/1,200) × 100% = 83.3%.
2. Workforce Efficiency:
‹ Input Measure: Aggregate labour hours accessible for production.
‹ Output Measure: Aggregate quantity of units manufactured by
the workforce.
‹ Example Calculation: If 1,000 labour hours yield 5,000 units,
labour productivity is 5 units per labour hour.
3. Utilisation of Facility Space:
‹ Input Metric: Total square footage of the facility.
‹ Output Measure: The extent of production space utilised for
manufacturing.
‹ Example Calculation: For a facility encompassing 10,000 square
feet, with 8,000 square feet allocated for manufacturing, the space
utilisation rate is calculated as (8,000/10,000) × 100% = 80%.
Advantages of Assessing Input and Output Capacity
‹ Resource Allocation: Facilitates the efficient distribution of resources,
including labour, machinery, and supplies.
‹ Performance Monitoring: Facilitates the assessment of operational
performance and the detection of inefficiencies.

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Notes ‹ Decision Making: Facilitates strategic choices concerning expansion,

investment, or process enhancements.
‹ Operational Efficiency: Facilitates the optimisation of productivity
and the reduction of waste via enhanced capacity management.
In summary, input measures of capacity concentrate on the resources ac-
cessible for production, whereas output measures evaluate the outcomes
attained through the utilisation of those resources. Both metrics are crucial
for comprehending and enhancing capacity in operations management.

6.7 Types of Capacity Planning Over Time Horizon

Capacity planning is forecasting and regulating the capacity needs of a
system to satisfy forthcoming demands. Various forms of capacity plan-
ning cater to distinct timeframes, spanning from short-term to long-term
requirements.
Short-Term Capacity Planning: Concentrates on immediate operational
modifications and resource allocation to address daily or weekly demand
variations.
Medium-Term Capacity Planning: Entails tactical modifications and
investments to synchronise capacity with projected demand fluctuations
over several months to years.
Long-Term Capacity Planning: Focuses on strategic investments and
infrastructure development to facilitate sustained growth and fit with fu-
ture company objectives. A detailed discussion of the diverse categories
of capacity planning across various timeframes is provided below:
1. Immediate Capacity Planning: Generally spans from several days
to a few months.
It aims at overseeing daily operations and respond to immediate variations
in demand or capacity.
Essential Activities include:
‹ Scheduling: Modifying production timelines to accommodate
fluctuations in short-term demand. This include the daily or weekly
allocation of labour, equipment, and materials.
‹ Resource Allocation: Administering resources such as personnel
and equipment utilisation to accommodate fluctuations in demand.
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‹ Workforce Management: Managing shift alterations, overtime, Notes

and temporary staffing to accommodate short-term demand surges.
‹ Inventory Management: Modifying inventory levels to guarantee
the availability of supplies for prompt manufacturing requirements.
The following methods are used for Immediate capacity planning:
‹ Capacity Utilization Analysis: Monitoring how well present resources
are being used and making modifications as necessary.
‹ Load Levelling: Equally allocating workloads among available
resources to prevent bottlenecks and underutilisation. A manufacturing
facility modifies its daily production timetable to address an
unexpected surge in orders or reallocates staff to manage pressing
client demands.
2. Intermediate Capacity Planning: It generally ranges from several
months to several years. Its objective is to synchronise capacity with
projected demand fluctuations and implement strategic modifications to
enhance efficiency and resource allocation.
Principal Activities include:
‹ Capacity Forecasting: Evaluating trends and generating predictions
based on historical data and market conditions to strategise for
medium-term demand fluctuations.
‹ Resource Planning: Determining medium-term investments in
equipment, technology, or personnel to satisfy anticipated demand.
‹ Facility Planning: Evaluating alterations or extensions of current
facilities to meet evolving industrial requirements.
‹ Process Optimisation: Enhancing current processes and operations to
increase efficiency and accommodate projected demand fluctuations.
Methods under Intermediate Capacity Planning include:
‹ Aggregate Planning: Formulating strategies for production, inventory,
and workforce to satisfy anticipated demand. This entails reconciling
capacity and demand over a medium-term timeframe.
‹ Scenario Analysis: Assessing multiple scenarios contingent upon
probable fluctuations in demand and capacity to strategise for diverse
outcomes. A corporation intends to augment its production line and
recruits supplementary personnel to accommodate projected demand
surges in the forthcoming year.
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Notes 3. Prolonged Capacity Forecasting: It generally spans from multiple

years to decades. Its objective is to guarantee the fulfilment of the orga-
nization’s long-term strategic objectives by synchronising capacity with
anticipated growth and strategic initiatives.
Essential Activities include:
‹ Strategic Forecasting: Anticipating future demand by analysing
long-term trends, market expansion, and primary business objectives.
‹ Infrastructure Development: Strategising significant investments in
new facilities, technologies, and equipment to facilitate future expansion.
‹ Technological Enhancements: Assessing and investing in innovative
technologies to augment capacity and sustain competitive edge.
‹ Expansion Strategy: Identifying new sites or facility enhancements
to facilitate sustained growth and market development.
Methods under Prolonged Capacity Forecasting include:
‹ Capacity Planning Models: Employing sophisticated modelling
methodologies to forecast future capacity requirements and inform
strategic investment choices.
‹ Strategic Resource Allocation: Formulating a blueprint for significant
investments and resource distribution to facilitate long-term goals.
A corporation constructs a new production facility to accommodate
projected demand increases over the forthcoming decade, integrating
cutting-edge technology and adaptable design.
By managing capacity planning across various time frames, organisations
may secure the requisite resources and infrastructure to satisfy present re-
quirements while anticipating future expansion and fluctuations in demand.

6.8 Decision Tree Analysis for Capacity Planning

Decision Tree Analysis is an effective instrument employed in capacity
planning to assess and make decisions amid uncertainty. It aids in visual-
ising many potential outcomes, evaluating risks, and facilitating informed
decisions regarding capacity investments or modifications. Here, we will
discuss the application of Decision Tree Analysis in capacity planning.
A Decision Tree is a visual depiction of probable choices and their asso-
ciated outcomes. It comprises of nodes and branches. Various components
of decision tree are explained below:
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Nodes: Indicate decision points or probabilistic events. Notes

Branches: Indicate the potential choices or results at each node.
Leaves: Terminal points of the tree denoting the ultimate results or payoffs.
Steps in Decision Tree Analysis for Capacity Optimisation
Step 1: Clearly Define the Decision Problem: Explicitly discuss the de-
cision to be taken concerning capacity planning. This may entail decisions
such as facility expansion, investment in new equipment, or modification
of production capacity.
Step 2: Determine Decision Alternatives: Enumerate all potential options
or acts that may be undertaken. For instance, acquire new machinery,
augment current facilities, delegate certain production tasks to external
entities etc.
Step 3: Identify Potential Outcomes
For each option, ascertain possible outcomes and their associated proba-
bilities. These impacts may encompass alterations in demand, cost ram-
ifications, or operational efficiencies.
Step 4: Develop the Decision Tree: Construct the decision tree with
nodes and branches as defined below:
Decision Nodes: Locations at which decisions are taken.
Chance Nodes: Points denoting uncertain outcomes accompanied by
corresponding probabilities.
Branches: Indicating various options or results originating from each node.
Step 5: Assess Financial Returns and Expenditures: Allocate project-
ed expenses, advantages, or returns to each result. These estimates must
represent the financial consequences of each chosen possibility.
Step 6: Compute Anticipated Values: Calculate the anticipated value
for each branch by considering the probability of each occurrence and
the corresponding payoffs.
The formula for expected value (EV) is:
EV = ∑(Probability × Payoff)
Expected Value (EV) equals the summation of the product of probability
and payoff.

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Notes For decision nodes, compute the anticipated value of each alternative by
evaluating the expected values of resulting outcomes.
Step 7: Evaluate the Tree: Evaluate the expected values of several option
alternatives to identify the ideal selection. This entails selecting the option
with the greatest expected value or the most advantageous risk profile.
Step 8: Choose the Appropriate Decision: Select the solution that best
matches with the organization’s capacity planning objectives and risk
tolerance based on the study.

Numerical Illustration:
A corporation is contemplating an investment in new machinery to en-
hance production capacity. The decision tree may encompass:
1. Decision Node: Invest in new machinery or refrain from investment.
2. Probability Nodes: In the context of investing, two potential demand
scenarios exist:
Elevated Demand (60% likelihood): Substantial rewards on investment.
Reduced Demand (40% probability): Diminished returns or losses.
3. Results and Returns: Significant Demand with Capital Investment:
Return: $500,000 profit
Reduced Demand with Investment: Outcome: $50,000 deficit
No Investment: Payoff: $0 (no supplementary earnings or losses)
4. Build the Tree: Create a choice node (Invest or Not Invest). Add
chance nodes for High Demand and Low Demand to the “Invest” branch.
Allocate probabilities and payoffs to each result.
5. Compute Anticipated Values:
Expected Value of Investing: E(V) Invest = (0.60 × 500,000) + (0.40 ×
(−50,000)) = 300,000 − 20,000 = 280,000
EV Invest = (0.60 × 500,000) + (0.40 × (−50,000)) = 300,000 − 20,000
= 280,000
Expected Value of Not Investing: EV Not Invest = 0
6. Assess and Conclude:
Evaluate the Anticipated Values: Investing yields an expected value of
$280,000, but refraining from investment results in an expected value
of $0.
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The decision tree analysis indicates that investing in new machinery is Notes
the superior option based on computed value.
Advantages
‹ Visual Representation: Offers a lucid depiction of decisions, results,
and uncertainties.
‹ Risk Assessment: Assists in appraising the risks and advantages
of various alternatives among uncertainty.
‹ Quantitative Analysis: Employs quantitative methodologies to assess
prospective outcomes and facilitate informed decision-making.
Limitations
‹ Complexity: May become intricate due to numerous choice nodes
and chance nodes, making interpretation difficult.
‹ Assumptions depend on estimations and probabilities that may
not consistently be precise or represent actual situations.
‹ Static Character: Fails to consider alterations in the environment
or assumptions over time.
In conclusion, Decision Tree Analysis is an essential instrument in capac-
ity planning for assessing many possibilities and addressing uncertainty.
By visualising actions and their possible repercussions, organisations can
make better informed and purposeful choices concerning their capacity
investments and modifications.
IN-TEXT QUESTIONS
1. What is the primary goal of location planning in operations
management?
(a) Minimizing labour costs
(b) Maximizing production efficiency
(c) Reducing transportation costs
(d) Choosing the optimal site for a facility
2. Which of the following factors is NOT typically considered in
location planning?
(a) Proximity to suppliers
(b) Climate conditions

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Notes (c) Local tax rates

(d) Marketing strategies
3. What does capacity planning primarily focus on?
(a) Estimating future demand
(b) Selecting a facility location
(c) Designing the layout of a production facility
(d) Forecasting sales revenue
4. Which method helps in determining the optimal location by
comparing various quantitative factors like cost and distance?
(a) Break-even analysis
(b) Transportation model
(c) SWOT analysis
(d) PERT chart
5. Which of the following is a quantitative factor often used in
location planning?
(a) Employee satisfaction
(b) Community quality of life
(c) Utility costs
(d) Brand reputation
6. In capacity planning, what does the term “economies of scale”
refer to?
(a) The ability to reduce costs by increasing production volume
(b) The need to increase facility size due to market growth
(c) The strategy to outsource production to other companies
(d) The practice of diversifying product lines
7. Which factor would be most relevant in capacity planning for
a new factory?
(a) Current employee skills
(b) Existing market trends
(c) Potential future demand
(d) Historical production methods

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Notes
6.9 Summary
This chapter examines the essential elements of location and capacity
planning, expanding on the principles outlined in the preceding chapter
regarding layout design. Layout design emphasises on the ideal configura-
tion of workstations and resources within a facility to improve operations
and productivity, whereas location and capacity planning pertain to more
extensive strategic decisions. Location planning entails the selection of
a site that strategically corresponds with criteria including proximity to
suppliers and consumers, transportation infrastructure, labour availability,
and regulatory constraints. Capacity planning ascertains the operational
size necessary to fulfil present and future demand, guaranteeing that the
facility can expand as required. Location and capacity planning, together
with an effective layout design, formulate a comprehensive approach that
optimises operating efficiency and aligns with long-term corporate goals.

6.10 Answers to In-Text Questions

1. (d) Choosing the optimal site for a facility
2. (d) Marketing strategies
3. (a) Estimating future demand
4. (b) Transportation model
5. (c) Utility costs
6. (a) The ability to reduce costs by increasing production volume
7. (c) Potential future demand

6.11 Self-Assessment Questions

1. What criteria should be evaluated while choosing a site for a new
manufacturing facility?
2. In what ways can geographical location influence a business’s
operational expenses?
3. What significance do labour availability and skill levels hold in
location and capacity planning?

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Notes 4. Elucidate the importance of environmental rules and zoning laws in

influencing the site selection of a new facility.
5. Discuss different types of Capacity Planning with respect to time
horizon.

6.12 References
‹ Heizer, J., Render, B., & Munson, C. (2020). Operations management
(13th ed.). Pearson.
‹ Harris, J. M. (2019). The role of location planning in strategic
business operations. Harvard Business Review. https://hbr.org/2019/03/
the-role-of-location-planning-in-strategic-business-operations
‹ Miller, M. (2021). Capacity planning: A practical guide. Journal of
Operations Management, 67(2), 112-123. https://doi.org/10.1016/j.
jom.2021.06.003

6.13 Suggested Readings

‹ Mahadevan, B. (2015). Operations management: Theory and practice.
Pearson Education, India.
‹ Jacobs, F. R., Chase, R. B. & Ravi Shankar. (2018). Operations and
Supply Chain Management, 14th ed. McGraw Hill Education India.
‹ Swarup, K., Gupta, P. K. & Manmohan. (2010). Operations Research,
19th ed. Sultan Chand & Sons.
‹ Kapoor, V. K. (2020). Operations Research: Quantitative Techniques
for Management, 9th ed. Sultan Chand & Sons.
‹ Sharma, J. K. (2017). Operations Research: Theory and Applications,
6th ed. Trinity.
‹ Russell, R. S., & Taylor, B. W. (2019). Operations and supply
chain management, 10th ed. John Wiley & Sons.1. Economic Order
Quantity (EOQ).

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 Glossary

ABC Analysis: A technique used to categorize inventory items into three groups (A, B,
and C) based on their annual consumption value, with ‘A’ being the most valuable and
‘C’ the least.
Accuracy: The degree to which a forecast matches the actual outcome.
Assembly Line Balancing: The process of assigning tasks to workstations in such a way
that each workstation has approximately the same amount of work, minimizing idle time
and ensuring smooth production flow.
Assembly Line: A manufacturing method engineered for the mass manufacture of uniform
products. It attains efficiency and cost-effectiveness via recurring tasks and minimal setup
modifications.
Auto-Regressive Integrated Moving Average (ARIMA): A time series forecasting model
that combines autoregressive (AR) and moving average (MA) components and integrates
differencing to make the data stationary.
Backordering: The practice of allowing orders to be fulfilled at a later date when stock
is available, rather than cancelling them due to stockouts.
Batch Production: A manufacturing process where products are produced in discrete
groups or batches, rather than in a continuous flow.
Batch Production: A production method in which goods are produced in groups or batch-
es. This approach permits a degree of flexibility and is appropriate for moderate numbers,
although entails setup delays between batches.
Bias: The systematic error that occurs when a forecasting method consistently overesti-
mates or underestimates the actual values.
Bottleneck: A bottleneck refers to a point in a system or process where the flow of in-
formation or resources is restricted or slowed down, causing a delay or inefficiency. A
bottleneck is a point of congestion or limitation in a process that hinders overall system
performance and decreases throughput.
Capacity Planning: Capacity planning is the procedure of ascertaining the production
capacity required by an organisation to fulfil fluctuating demands for its products.

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Notes Capacity: Capacity refers to the highest level of production that a process
or system is capable of achieving within a specific timeframe.
Carrying Cost: The total cost of holding inventory, including storage,
insurance, depreciation, and opportunity costs.
Causal Forecasting Models: Forecasting models that use independent
variables (predictors) to forecast a dependent variable. Examples include
Linear Regression and Multiple Regression.
Continuous Flow: A manufacturing technique in which products prog-
ress uninterruptedly through the production process. It is utilised for
extremely high-volume, standardised items, providing elevated efficiency
and reduced per-unit expenses.
Continuous Improvement: Continuous improvement is a persistent
endeavour to enhance products, services, or processes gradually over a
period of time, commonly linked with lean management.
Continuous Review Model: An inventory control system where inventory
levels are continuously monitored, and orders are placed as soon as the
stock level reaches the reorder point.
Cycle Time: Lead time refers to the overall duration of a process, en-
compassing both the time spent on actual processing and any waiting
time involved.
Delphi Method: A qualitative forecasting technique that gathers expert
opinions through iterative surveys to reach a consensus forecast.
Demand Forecasting: The process of estimating future customer demand
for products or services to ensure adequate inventory levels.
Demand Management: It includes demand forecasting, planning, and
management to synchronise supply with market needs.
Economic Order Quantity (EOQ): A model used to determine the op-
timal order quantity that minimizes the total cost of inventory, including
ordering and holding costs.
Economic Production Quantity (EPQ): A model used to determine the
optimal lot size for production when production and consumption occur
simultaneously, considering the rate of production and demand.

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 Glossary

Exponential Smoothing: A forecasting technique that applies decreasing Notes

weights to past observations, with the most recent observations receiving
the highest weights.
Fixed-Position Layout: A layout where the product remains stationary,
and workers, materials, and equipment are brought to the product location.
This layout is used for large or bulky products like ships or airplanes.
Flexible Manufacturing Systems (FMS): Automated production systems
engineered to accommodate diverse goods and varying production volumes.
FMS incorporates sophisticated technologies to deliver more flexibility
and efficiency in industrial operations.
Forecast Error: The difference between the forecasted value and the ac-
tual value. It is used to evaluate the performance of a forecasting method.
Forecasting: Forecasting future demand for items or services by utilising
historical data and analysis.
Gantt Chart: A graphical scheduling instrument that illustrates the
commencement and conclusion dates of diverse tasks or phases within
a project. It facilitates the monitoring of development and the efficient
management of time.
Group Technology Layout (Cellular Layout): A layout that organizes
workstations into cells, where each cell focuses on a specific group of
similar products or product families, aiming to improve efficiency and
flexibility.
Holding Costs (Carrying Costs): The costs associated with storing
unsold goods. These include warehousing, insurance, depreciation, and
opportunity costs.
Holt-Winters Exponential Smoothing: An extension of Exponential
Smoothing that includes components for trend and seasonality, suitable
for data with a seasonal pattern.
Inventory Management: The oversight of non-capitalized assets, such
as inventory, encompassing the processes of procurement, storage, and
utilization of inventory.
Inventory Turnover Ratio: A measure of how efficiently inventory is
used, calculated by dividing the cost of goods sold by the average in-
ventory level during a period.

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Notes Job Shop: A production process tailored for low-volume, highly custom-
ised goods. It provides flexibility; yet, it generally incurs more expenses
and exhibits reduced efficiency owing to frequent setup modifications.
Just-in-Time (JIT) Inventory: An inventory management strategy aimed
at reducing inventory levels and associated costs by ordering and receiving
inventory just as it is needed for production or sales.
Just-in-Time (JIT): It is an inventory management system that synchro-
nises raw-material orders from suppliers with production schedules in
order to minimize inventory levels.
Kanban: A visual system for optimising workflow by managing work as
it progresses through a process, commonly employed in lean and agile
techniques.
Layout Planning: The process of arranging physical facilities and
equipment in a manner that supports efficient workflow, optimal space
utilization, and effective operation of a production or service process.
Lead Time: The time interval between placing an order and receiving
the goods, including processing, shipping, and handling time.
Lean Manufacturing: Lean production is a methodology that views the
utilization of resources in any area other than the direct generation of
value for the final consumer as wasteful and therefore aims to eliminate it.
Logistics: Logistics refers to the efficient coordination and control of the
movement of commodities, information, and resources from their starting
point to their final destination.
Longest Operation Time (LOT) Rule: A heuristic method used in as-
sembly line balancing that prioritizes assigning tasks with the longest
operation times first, aiming to balance the workload across workstations
and reduce bottlenecks.
Mean Absolute Error (MAE): A measure of forecast accuracy that cal-
culates the average of the absolute errors between forecasted and actual
values.
Moving Average: A forecasting technique that calculates the average
of a fixed number of past observations to smooth out fluctuations and
identify trends.

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 Glossary

Operations Strategy: A strategic plan outlines how an organisation Notes

will distribute its resources to support its business strategy and attain a
competitive edge.
Ordering Costs: The expenses incurred when placing and receiving or-
ders, including administrative costs, shipping, and inspecting.
Periodic Review Model: An inventory control system where inventory
is reviewed at fixed intervals, and orders are placed to bring inventory
up to a predetermined level.
Price Break Quantity Discounts: A pricing strategy where unit prices
decrease as the order quantity increases, encouraging bulk purchasing.
Process Design: It refers to the strategic organisation and arrangement
of workflows and activities with the aim of enhancing efficiency, effec-
tiveness, and the overall quality of output.
Process Layout (Functional Layout): A layout where workstations and
equipment are grouped by function or process type, such as grouping all
drilling machines together, which is ideal for environments with varied
products and small batch sizes.
Process Selection: The decision-making procedure for identifying the
best suitable production technique, considering aspects such as product
type, volume, and customisation requirements.
Product Layout (Assembly Line Layout): A layout where workstations
are arranged in a sequential order according to the steps required to pro-
duce a specific product, commonly used in mass production environments
for standardized items.
Product Life Cycle: The product life cycle refers to the stages that a
product goes through from its introduction to its eventual decline in
the market. It encompasses the various stages that a product undergoes,
starting from its inception and progressing through introduction, growth,
maturity, and ultimately decline.
Quality Control: Quality assurance is the systematic process of verifying
that items adhere to predetermined quality standards and specifications
by conducting inspections and tests.
Rebalancing: The process of adjusting the distribution of tasks among
workstations to correct imbalances and improve the efficiency of the

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Notes assembly line, often necessary when there are changes in production
volume or task times.
Reorder Point (ROP): The inventory level at which a new order should
be placed to replenish stock before it runs out, ensuring that demand is
met without interruption.
Resource Planning: Resource allocation planning is the systematic pro-
cess of determining how to distribute staff, equipment, and supplies in
order to achieve production and operational objectives.
Safety Stock: Extra inventory held to protect against uncertainties in
demand or supply. It acts as a buffer to prevent stockouts.
Scheduling: The systematic arrangement and management of scheduling
and resource allocation in production. Efficient scheduling guarantees
timely completion of production operations and optimal resource utilisation.
Seasonal Component: The predictable pattern in data that repeats at
regular intervals, such as monthly or quarterly, often addressed using
seasonal adjustments in forecasting.
Service Operations Management: Service delivery includes the plan-
ning, implementation, and enhancement of the procedures involved in
providing services to clients.
Simple Exponential Smoothing: A forecasting technique that smooths
data by applying a weighted average to past observations, with the weights
declining exponentially.
Six Sigma: Process improvement methodologies and tools are utilised to
minimise flaws and variability in processes.
Stockout Costs: Costs incurred when inventory levels are insufficient
to meet customer demand, including lost sales, customer dissatisfaction,
and potential loss of future business.
Supply Chain Management (SCM): It refers to the efficient coordination
and oversight of a complex network of interrelated enterprises that work
together to deliver the necessary products and services to end customers.
Task Assignment: The process of allocating specific tasks to worksta-
tions or workers in an assembly line, aiming to balance workload and
meet production goals.
Task Time: The duration required to complete a specific task.

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 Glossary

Throughput: It refers to the speed at which a system generates its out- Notes
put or the quantity of material or product that flows through a system.
Time Series Analysis: A forecasting method that uses historical data
points, ordered in time, to identify trends, cycles, and seasonal patterns.
Total Quality Management (TQM): It is a comprehensive method im-
plemented by organisations to consistently enhance the quality of their
products and services. This is achieved by actively engaging all employees
in the process of improving quality.
Trend Component: The long-term movement or direction in a time series
data set, indicating a general increase or decrease over time.
Utilization: The extent to which workstations or resources are used
effectively compared to their total available capacity. High utilization
indicates efficient use of resources and minimal idle time.
Value Stream Mapping: Value stream mapping is a lean management
technique that is employed to analyse and optimise the movement of
materials and information necessary for delivering a product or service
to the end consumer.
Weighted Moving Average: A forecasting technique that assigns differ-
ent weights to past observations, with more recent observations typically
receiving higher weights.
Workforce Management: It is the systematic coordination and super-
vision of employees’ job activities with the goal of achieving maximum
productivity and efficiency.
Workload: The amount of work or number of tasks assigned to a work-
station or worker, which should be balanced to ensure efficient production
and minimize idle time.
Workstation: A designated area within the production process where
specific tasks or operations are performed. In assembly line balancing,
workstations are arranged to ensure each has a balanced amount of work.

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